PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
months ended September 30, 1996 and 1995. . . . . . . . . 2
Consolidated Balance Sheets as of September 30, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1996 and 1995 . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 21
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995* 1996 1995*
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales and services $ 16,208 $ 13,298 $ 115,956 $ 111,403
Pipeline construction and services 3,095 155 7,634 220
Other 51 94 108 203
Total operating revenues 19,354 13,547 123,698 111,826
OPERATING EXPENSES:
Cost of gas 7,628 5,660 63,335 63,549
Other operation expenses 9,398 5,471 27,731 17,528
Maintenance 1,379 1,452 4,085 3,732
Depreciation 2,108 1,787 6,214 5,367
Income taxes (2,043) (2,750) 3,486 757
Taxes other than income taxes 1,635 1,421 8,380 7,999
Total operating expenses 20,105 13,041 113,231 98,932
OPERATING INCOME (LOSS) (751) 506 10,467 12,894
OTHER INCOME, NET 736 33 2,972 233
INCOME (LOSS) BEFORE INTEREST CHARGES (15) 539 13,439 13,127
INTEREST CHARGES:
Interest on long-term debt 2,469 3,384 7,660 10,232
Other interest 166 642 623 1,485
Allowance for borrowed funds used
during construction (73) (18) (169) (40)
Total interest charges 2,562 4,008 8,114 11,677
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,577) (3,469) 5,325 1,450
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
(Note 2) - - (386) (3,704)
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (2,577) (3,469) 4,939 (2,254)
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 363 690 1,383 2,073
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (2,940) (4,159) 3,556 (4,327)
EXTRAORDINARY LOSS (NET OF TAX BENEFIT
OF $575,000) (Note 3) (1,117) - (1,117) -
NET INCOME (LOSS) $ (4,057) $ (4,159) $ 2,439 $ (4,327)
COMMON STOCK
Earnings (loss) per share of common stock:
Continuing operations $ (.61) $ (.72) $ .75 $ (.11)
Discontinued operations - - (.07) (.65)
Net income (loss) before premium on
repurchase/redemption of subsidiary's
preferred stock and extraordinary loss (.61) (.72) .68 (.76)
Premium on repurchase/redemption of
subsidiary's preferred stock (.02) - (.27) -
Extraordinary loss (.23) - (.21) -
Earnings (loss) per share of common stock $ (.86) $ (.72) $ .20 $ (.76)
Weighted average shares outstanding 4,810,518 5,754,607 5,214,001 5,715,294
Cash dividends per share $ .55 $ .55 $ 1.65 $ 1.65
*Reclassified to conform with 1996 consolidated financial statement presentation.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995*
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost $ 311,363 $ 295,895
Accumulated depreciation (80,708) (76,882)
230,655 219,013
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment 12,785 11,553
Accumulated depreciation (5,655) (5,394)
Other 1,223 983
8,353 7,142
CURRENT ASSETS:
Cash and cash equivalents 1,491 629
Accounts receivable -
Customers 10,461 21,066
Others 576 815
Reserve for uncollectible accounts (932) (788)
Unbilled revenues 2,556 10,319
Materials and supplies, at average cost 3,220 2,876
Gas held by suppliers, at average cost 25,439 15,140
Natural gas transition costs collectible 3,134 4,612
Deferred cost of gas and supplier refunds, net 17,545 -
Prepaid expenses and other 1,900 3,486
65,390 58,155
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,687 30,015
Other 4,331 3,013
Unamortized debt expense 1,578 2,630
35,596 35,658
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $ 339,994 $ 524,218
*Reclassified to conform with 1996 consolidated financial statement presentation.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995*
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (Note 4):
Common shareholders' investment $ 116,153 $ 162,739
Preferred stock of PGE -
Not subject to mandatory redemption, net 19,192 33,615
Subject to mandatory redemption 739 1,680
Long-term debt 75,000 106,706
211,084 304,740
CURRENT LIABILITIES:
Current portion of long-term debt 20,130 116,001
Preferred stock subject to mandatory redemption 80 80
Notes payable - 10,180
Accounts payable 14,765 18,531
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 541 1,493
Accrued income taxes 27,004 526
Accrued interest 885 2,307
Accrued natural gas transition costs 2,292 2,278
Other 4,322 3,534
70,019 155,364
DEFERRED CREDITS:
Deferred income taxes 46,094 48,835
Accrued natural gas transition costs 384 1,144
Unamortized investment tax credits 4,810 4,938
Operating reserves 3,113 3,709
Other 4,490 5,488
58,891 64,114
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 339,994 $ 524,218
*Reclassified to conform with 1996 consolidated financial statement presentation.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations, net of
subsidiary's preferred stock dividends $ 3,942 $ (623)
Effects of noncash charges to income -
Depreciation 6,266 5,395
Extraordinary loss, net of tax benefit (1,117) -
Deferred income taxes, net 530 205
Provisions for self insurance 742 889
Other, net 1,861 1,945
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and unbilled revenues 18,751 19,838
Gas held by suppliers (10,299) (130)
Accounts payable (3,583) (3,696)
Deferred cost of gas and supplier refunds, net (16,801) 7,207
Other current assets and liabilities, net 992 (10,243)
Other operating items, net (4,583) 1,027
Net cash provided (used) by continuing operations (3,299) 21,814
Net cash provided (used) by discontinued operations (35,470) 3,764
Net cash provided (used) by operating activities (38,769) 25,578
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (18,501) (14,907)
Net proceeds from sale of discontinued operations 261,752 -
Other, net (1,285) 2,560
Net cash provided (used) by investing activities 241,966 (12,347)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 555 3,376
Repurchase of common stock (39,663) -
Dividends on common stock (8,533) (9,430)
Repurchase/redemption of preferred stock of PGE (15,364) (80)
Repayment of long-term debt (81,906) (3,535)
Net decrease in bank borrowings (56,034) (3,125)
Other, net (1,390) (5)
Net cash used for financing activities (202,335) (12,799)
NET INCREASE IN CASH AND CASH EQUIVALENTS 862 432
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 629 330
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,491 $ 762
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 8,700 $ 19,634
Income taxes $ 34,584 $ 10,018
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
Nature of the Business. Pennsylvania Enterprises, Inc. ("the Company") is a
holding company whose principal subsidiary, PG Energy Inc. ("PGE"), a regulated
public utility formerly known as Pennsylvania Gas and Water Company, distributes
natural gas to a ten-county area in northeastern Pennsylvania, a territory that
includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre
and Williamsport. The Company, through its other subsidiaries, Pennsylvania
Energy Resources, Inc. ("PERI"), Theta Land Corporation and Keystone Pipeline
Services, Inc. ("Keystone"), a wholly-owned subsidiary of PERI, is also engaged
in various non-regulated activities, including energy-related services and
pipeline construction and service activities, which prior to 1996 were not
significant to the operations of the Company as a whole. Pennsylvania Energy
Marketing Company, which was also a subsidiary of the Company, was merged into
PERI on May 31, 1996.
On October 30, 1996, PGE signed a purchase agreement to acquire all of the
capital stock of Honesdale Gas Company, which distributes natural gas to
approximately 3,200 customers in portions of Wayne and Pike Counties in
northeastern Pennsylvania. This acquisition, which is subject to approval of
the Pennsylvania Public Utility Commission ("PPUC"), is expected to be
consummated in early 1997.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries, PGE, PERI and
Theta. The consolidated financial statements also include the accounts of
Keystone beginning December 4, 1995, the date Keystone was acquired by PERI.
All material intercompany accounts have been eliminated in consolidation.
PGE is a regulated public utility subject to the jurisdiction of the PPUC
for rate and accounting purposes. The financial statements of PGE that are
incorporated in these consolidated financial statements have been prepared in
accordance with generally accepted accounting principles, including the
provisions of Financial Accounting Standards Board ("FASB") Statement 71,
"Accounting for the Effects of Certain Types of Regulation," which give
recognition to the rate and accounting practices of regulatory agencies such as
the PPUC.
Interim Financial Statements. The interim consolidated financial statements
included herein have been prepared by the Company without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather on PGE. However, in the opinion of management, all adjustments,
consisting of only normal recurring accruals, necessary to present fairly the
results for the interim periods have been reflected in the consolidated
financial statements. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto included in the Company's latest annual report on Form 10-K.
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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.
(2) DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among the Company, PGE, American Water Works Company, Inc.
("American") and Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, the Company and PGE sold substantially
all of the assets, properties and rights of PGE's water utility operations to
Pennsylvania-American on February 16, 1996. Under the terms of the Agreement,
Pennsylvania-American paid PGE $414.3 million consisting of $262.1 million in
cash and the assumption of $152.2 million of PGE's liabilities, including $141.0
million of its long-term debt. PGE continued to operate the water utility
business until February 16, 1996.
The sale price reflected a $6.5 million premium over the book value of the
assets sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996). The sale involved a gain for income tax
purposes primarily because of the accelerated depreciation that had been claimed
by PGE with respect to the water utility plant that was sold. It is estimated
that the income taxes payable on the sale, for which deferred income taxes had
previously been provided, will be approximately $58.6 million, of which $33.5
million had been paid as of September 30, 1996.
The cash proceeds from the sale of approximately $203.5 million, net of the
estimated $58.6 million of income taxes, have been used by the Company and PGE
to retire debt, to repurchase stock (see Note 4 of these Notes to Consolidated
Financial Statements), for construction expenditures and for other working
capital purposes. With the sale of PGE's water utility operations, the
principal assets of the Company and PGE now consist of PGE's gas utility
operations and approximately 46,000 acres of land.
The accompanying consolidated financial statements reflect PGE's water
utility operations as "discontinued operations" effective March 31, 1995.
Interest charges relating to indebtedness of PGE were allocated to the
discontinued operations based on the relationship of the gross water utility
plant that was sold to the total of PGE's gross gas and water utility plant.
This is the same method as was utilized by PGE and the PPUC in establishing the
revenue requirements of both PGE's gas and water utility operations. None of
the dividends on PGE's preferred stock nor any of the Company's interest expense
were allocated to the discontinued operations.
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Selected financial information for the discontinued operations is set forth
below:
[CAPTION]
Net Assets of Discontinued Operations
As of December 31, 1995
(Thousands of Dollars)
[S] [C]
Net utility plant $ 368,742
Current assets (primarily accounts
receivable and accrued revenues) 12,756
Deferred charges and other assets 25,752
Total assets acquired by
Pennsylvania-American 407,250
Liabilities assumed by
Pennsylvania-American -
Long-term debt 141,097
Other 5,983
147,080
Net assets acquired by
Pennsylvania-American 260,170
Estimated liability for income taxes on
sale of discontinued operations (56,710)
Estimated net income of discontinued operations
during the remainder of the phase-out period 790
Total net assets of discontinued operations $ 204,250
<TABLE>
<CAPTION>
Loss With Respect to Discontinued Operations
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income from discontinued operations,
net of related income taxes of
$1,403,000* $ - $ - $ - $ 2,127
Estimated loss on disposal of
discontinued operations, net of
income during the phase-out period - - (386) (5,831)
Loss with respect to discontinued
operations $ - $ - $ (386) $(3,704)
</TABLE>
* Reflects income only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(3) EXTRAORDINARY LOSS
On September 30, 1996, the Company defeased the $28.7 million outstanding
principal amount of its 10.125% Senior Notes (the "Senior Notes"), due June 15,
1999, and recorded an extraordinary loss of $1.1 million ($1.6 million, net of
$575,000 of related income tax benefits). The loss on the defeasance represents
the interest expense on the Senior Notes from the date of defeasance through
June 15, 1997, the date on which the Senior Notes will be redeemed, plus the
writeoff of the unamortized balance of issuance expenses related to the Senior
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Notes, less (i) the interest income that will be earned on the funds that were
deposited with the Trustee for the Senior Notes in connection with their
defeasance and (ii) the related income tax benefit.
(4) REPURCHASES OF STOCK
During the nine-month period ended September 30, 1996, the Company
repurchased 1,011,539 shares of its common stock for an aggregate consideration
of $39.7 million, and PGE repurchased 132,988 shares of its 9% cumulative
preferred stock for an aggregate consideration of $14.4 million and 18,591
shares of its 4.10% cumulative preferred stock for an aggregate consideration of
$947,000, largely pursuant to self tender offers conducted during March and
April, 1996. Additionally, on June 17, 1996, PGE repurchased 9,408 shares of
its 5.75% cumulative preferred stock (including 800 shares redeemed in
accordance with annual sinking fund provisions) for an aggregate consideration
of $838,000.
(5) ACCOUNTING CHANGES
Long-Lived Assets. In March 1995, FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets", was issued. The provisions of this statement,
which are effective for fiscal years beginning after September 15, 1995, require
that long-lived assets, identifiable intangibles, capital leases and goodwill be
reviewed for impairment whenever events occur or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. In
addition, FASB Statement 121 requires that regulatory assets meet the recovery
criteria of FASB Statement 71, "Accounting for Effects of Certain Types of
Regulation", on an ongoing basis in order to avoid a writedown. The provisions
of FASB Statement 121, which the Company and PGE adopted effective January 1,
1996, did not have a material impact on the financial position or results of
operations of either the Company or PGE since the carrying amount of all assets,
including regulatory assets, are considered recoverable.
Accounting for Stock-Based Compensation. In October, 1995, FASB Statement
123, "Accounting for Stock-Based Compensation," was issued. The Company adopted
this statement in the first quarter of 1996, but will continue to use the
intrinsic value based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," supplemented
by the required footnote disclosures of FASB Statement 123. Adoption of FASB
Statement 123 had no effect upon the Company's financial position or results of
operations.
(6) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PGE to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PGE for complying with the Emergency Order. The
Company does not believe that PGE's compliance with the terms of such Order will
have a material adverse effect on its financial position or results of
operations.
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Environmental Matters
PGE, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants has been in operation since 1960, and several of the plant sites are no
longer owned by PGE. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PGE filed notices with the
United States Environmental Protection Agency (the "EPA") with respect to the
former plant sites. None of the sites is or was formerly on the proposed or
final National Priorities List. The EPA has conducted site inspections and made
preliminary assessments of each site and has concluded that no further remedial
action is planned. While this conclusion does not constitute a legal
prohibition against further regulatory action under CERCLA or other applicable
federal or state law, the Company does not believe that additional costs, if
any, related to these manufactured gas plant sites would be material to its
financial position or results of operations since environmental remediation
costs generally are recoverable through rates over a period of time.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among the Company, PG Energy Inc. ("PGE"), American Water
Works Company, Inc. ("American") and Pennsylvania-American Water Company
("Pennsylvania-American"), a wholly-owned subsidiary of American, the Company
and PGE sold substantially all of the assets, properties and rights of PGE's
water utility operations to Pennsylvania-American on February 16, 1996. Under
the terms of the Agreement, Pennsylvania-American paid PGE $414.3 million
consisting of $262.1 million in cash and the assumption of $152.2 million of
PGE's liabilities, including $141.0 million of its long-term debt. PGE
continued to operate the water utility business until February 16, 1996.
The sale price reflected a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996.)
The cash proceeds from the sale of approximately $203.5 million, net of an
estimated $58.6 million of income taxes, have been used by the Company and PGE
to retire debt, to repurchase stock, for construction expenditures and for other
working capital purposes. With the sale of PGE's water utility operations, the
principal assets of the Company and PGE now consist of PGE's gas utility
operations and approximately 46,000 acres of land.
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements reflect PGE's water utility operations as
"discontinued operations" effective March 31, 1995, and the following sections
of Management's Discussion and Analysis generally relate only to the Company's
continuing operations. For additional information regarding the discontinued
operations, see Note 2 of the accompanying Notes to Consolidated Financial
Statements.
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RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of total operating revenues for each of the
three and nine-month periods ended September 30, 1996, and September 30, 1995:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales and services..................... 83.7% 98.2% 93.7% 99.6%
Pipeline construction and services......... 16.0 1.1 6.2 0.2
Other...................................... 0.3 0.7 0.1 0.2
Total operating revenues................. 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of gas................................ 39.4 41.8 51.2 56.8
Other operation expenses................... 48.6 40.4 22.4 15.7
Maintenance................................ 7.1 10.7 3.3 3.3
Depreciation............................... 10.9 13.2 5.0 4.8
Income taxes............................... (10.6) (20.3) 2.8 0.7
Taxes other than income taxes.............. 8.5 10.5 6.8 7.2
Total operating expenses................. 103.9 96.3 91.5 88.5
OPERATING INCOME (LOSS)...................... (3.9) 3.7 8.5 11.5
OTHER INCOME, NET............................ 3.8 0.2 2.4 0.2
INTEREST CHARGES (1)......................... (13.2) (29.5) (6.6) (10.4)
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (13.3) (25.6) 4.3 1.3
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - (0.3) (3.3)
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS............................ (13.3) (25.6) 4.0 (2.0)
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... (1.9) (5.1) (1.1) (1.9)
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... (15.2) (30.7) 2.9 (3.9)
EXTRAORDINARY LOSS........................... (5.8) - (0.9) -
NET INCOME (LOSS)............................ (21.0) (30.7) 2.0 (3.9)
</TABLE>
(1) None of the Company's interest expense nor any of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.
Three Months Ended September 30, 1996, Compared
With Three Months Ended September 30, 1995
Operating Revenues. Operating revenues increased $5.8 million (42.9%) from
$13.5 million for the three-month period ended September 30, 1995, to $19.4
million for the three-month period ended September 30, 1996. Slightly more than
half of the increase was the result of $3.1 million of revenues in the third
quarter of 1996 from the pipeline construction and services activities of
Keystone Pipeline Services, Inc. ("Keystone"), which was acquired in December,
1995. Also contributing to the higher revenues was a $1.9 million increase in
PGE's gas sales and services primarily as a result of price increases due to
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increases in the purchased gas cost component of PGE's tariffs (the "gas cost
rate") (See "-Rate Matters") and a 79 million cubic feet (6.8%) increase in
consumption by PGE's residential and commercial heating customers largely caused
by customer growth and slightly cooler weather.
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $7.1 million (54.2%) from $13.0 million for the three-month
period ended September 30, 1995, to $20.1 million for the three-month period
ended September 30, 1996. As a percentage of operating revenues, total
operating expenses increased from 96.3% during the third quarter of 1995 to
103.9% during the third quarter of 1996.
The cost of gas increased $2.0 million (34.8%) from $5.7 million for the
three-month period ended September 30, 1995, to $7.6 million for the three-month
period ended September 30, 1996, primarily because of the aforementioned
increases in PGE's gas cost rate (see "-Rate Matters") and increased sales to
PGE's residential and commercial heating customers.
Other than the cost of gas and income taxes, operating expenses increased by
$4.4 million (43.3%) from $10.1 million for the three-month period ended
September 30, 1995, to $14.5 million for the three-month period ended September
30, 1996. This increase was largely attributable to a $3.9 million (71.8%)
increase in other operation expenses, primarily as a result of $3.0 million of
expenses relative to Keystone's pipeline construction and services activities,
and a $654,000 (12.9%) increase in expenses with respect to PGE's operations,
which was principally attributable to payroll and payroll-related costs.
Payroll and payroll-related costs increased largely because of charges, which
had formerly been allocated to PGE's discontinued operations, now being absorbed
by its continuing operations. Also contributing to the higher operating
expenses were increased depreciation expense of $321,000 (18.0%), primarily as a
result of $137,000 of depreciation relative to Keystone and $184,000
attributable to additions to PGE's utility plant.
Income taxes for the three-month period ended September 30, 1996, increased
by $707,000 (25.7%) from a credit of $2.7 million in 1995 to a credit of $2.0
million in 1996 due to a lower level of loss before income taxes (for this
purpose, operating income net of interest charges).
Operating Income (Loss). As a result of the above, operating income
decreased by $1.3 million from income of $506,000 for the three-month period
ended September 30, 1995, to a loss of $751,000 for the three-month period ended
September 30, 1996, and decreased as a percentage of total operating revenues
for such periods from 3.7% in 1995 to a negative 3.9% in 1996.
Other Income, Net. Other income, net increased $703,000 from $33,000 for
the three-month period ended September 30, 1995, to $736,000 for the three-month
period ended September 30, 1996, largely as a result of investment income
totaling $743,000 relative to the temporary investment of a portion of the
proceeds from the sale of PGE's regulated water utility operations.
Interest Charges. Interest charges decreased by $1.4 million (36.1%) from
$4.0 million for the three-month period ended September 30, 1995, to $2.6
million for the three-month period ended September 30, 1996. This decrease was
largely attributable to the lower level of indebtedness resulting from the
repayment of PGE's $50.0 million term loan and all of its then outstanding bank
borrowings on February 16, 1996, with proceeds from the sale of its regulated
water utility operations on such date.
-13-
<PAGE>
Income (Loss) From Continuing Operations. The loss from continuing
operations decreased $884,000 from $3.5 million for the quarter ended September
30, 1995, to $2.6 million for the quarter ended September 30, 1996. This
decrease was largely the result of the matters discussed above, principally the
increase in operating revenues and other income, net and the decrease in
interest charges, the effects of which were partially offset by the increased
operating expenses.
Subsidiary Preferred Stock Dividends. Dividends on preferred stock
decreased $327,000 (47.4%) from $690,000 for the three-month period ended
September 30, 1995, to $363,000 for the three-month period ended September 30,
1996, primarily as a result of the repurchase by PGE in 1996 of 132,988 shares
of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative
preferred stock and 18,591 shares of its 4.10% cumulative preferred stock,
largely during the second quarter of the year.
Income (Loss) Before Extraordinary Loss. The decrease of $1.2 million
(29.3%) in the loss before extraordinary loss, from $4.2 million for the three-
month period ended September 30, 1995, to $2.9 million for the three-month
period ended September 30, 1996, was largely the result of the decrease in the
loss from continuing operations and the reduced dividends on preferred stock, as
discussed above.
Extraordinary Loss. On September 30, 1996, the Company defeased the $28.7
million outstanding principal amount of its 10.125% Senior Notes (the "Senior
Notes"), due June 15, 1999, and recorded an extraordinary loss on such
defeasance of $1.1 million ($1.6 million, net of $575,000 of related income tax
benefits). The loss on the defeasance represents the interest expense on the
Senior Notes from the date of defeasance through June 15, 1997, the date on
which the Senior Notes will be redeemed, plus the writeoff of the unamortized
balance of issuance expenses related to the Senior Notes, less (i) the interest
income that will be earned on the funds that were deposited with the Trustee for
the Senior Notes in connection with their defeasance and (ii) the related income
tax benefit.
Net Income (Loss). The decrease of $102,000 in the net loss, from $4.2
million for the three-month period ended September 30, 1995, to $4.1 million for
the three-month period ended September 30, 1996, as well as the decrease of $.11
in the loss per share of common stock before the premium on the
repurchase/redemption of subsidiary's preferred stock and the extraordinary
loss, from $.72 per share for the quarter ended September 30, 1995, to $.61 per
share for the quarter ended September 30, 1996, were largely the result of the
factors discussed above. While the net loss from continuing operations
decreased by $.11 per share, the $.23 per share charge for the extraordinary
loss and the $.02 per share charge for the premium on the repurchase of
subsidiary's preferred stock acted to increase the loss per share of common
stock for the quarter ended September 30, 1996, to $.86 per share. Although
premiums on the repurchase of preferred stock are charged to retained earnings
and are not a determinant of net income, the premiums associated with
repurchases must be taken into account in calculating the earnings (loss) per
share of common stock.
Nine Months Ended September 30, 1996, Compared
With Nine Months Ended September 30, 1995
Operating Revenues. Operating revenues increased $11.9 million (10.6%) from
$111.8 million for the nine-month period ended September 30, 1995, to $123.7
million for the nine-month period ended September 30, 1996, largely as a result
-14-
<PAGE>
of $7.6 million of operating revenues relative to the pipeline construction and
services activities of Keystone, which was acquired in December, 1995. Also
contributing to the increase in operating revenues was a higher level of
revenues attributable to PGE's gas sales and services, primarily as a result of
a 1.9 billion cubic feet (13.0%) increase in sales to residential and commercial
heating customers. There was a 660 (17.9%) increase in heating degree days from
3,696 (90.7% of normal) during the first nine months of 1995 to 4,356 (106.9% of
normal) during the first nine months of 1996. The effects of the increased
sales to heating customers were partially offset by lower levels in the
purchased gas cost component of PGE's tariffs (the "gas cost rate"). See "-Rate
Matters."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $14.3 million (14.5%) from $98.9 million for the nine-month
period ended September 30, 1995, to $113.2 million for the nine-month period
ended September 30, 1996. As a percentage of operating revenues, total
operating expenses increased from 88.5% during the nine-month period ended
September 30, 1995 to 91.5% during the nine-month period ended September 30,
1996.
The cost of gas decreased $214,000 (0.3%) from $63.5 million for the nine-
month period ended September 30, 1995, to $63.3 million for the nine-month
period ended September 30, 1996, primarily because of the aforementioned lower
levels in PGE's gas cost rate (see "-Rate Matters"), the effects of which were
largely offset by the increased sales to residential and commercial heating
customers.
Other than the cost of gas and income taxes, operating expenses increased by
$11.8 million (34.0%) from $34.6 million for the nine-month period ended
September 30, 1995, to $46.4 million for the nine-month period ended September
30, 1996. This increase was largely attributable to a $10.2 million (58.2%)
increase in other operation expenses, primarily as a result of $7.5 million of
expenses relative to Keystone's pipeline construction and services activities,
and a $2.2 million (13.2%) increase in expenses with respect to PGE's
operations, which was principally the result of higher payroll and payroll-
related costs. Payroll and payroll-related costs increased largely because of
charges, which had formerly been allocated to PGE's discontinued operations, now
being absorbed by its continuing operations. Also contributing to the higher
operating expenses was a $847,000 (15.8%) increase in depreciation expense as a
result of $370,000 of depreciation relative to Keystone and $477,000 of
depreciation attributable to additions to PGE's utility plant.
Income taxes increased $2.7 million from $757,000 in the first nine months
of 1995 to $3.5 million in the first nine months of 1996 due to an increase in
income before income taxes (for this purpose, operating income net of interest
charges).
Operating Income (Loss). As a result of the above, operating income
decreased by $2.4 million (18.8%) from $12.9 million for the nine-month period
ended September 30, 1995, to $10.5 million for the nine-month period ended
September 30, 1996, and decreased as a percentage of total operating revenues
for such periods from 11.5% in 1995 to 8.5% in 1996, primarily because of the
higher level of operating expenses.
Other Income, Net. Other income, net increased $2.7 million from $233,000
for the nine-month period ended September 30, 1995, to $3.0 million for the
nine-month period ended September 30, 1996, largely as a result of investment
income totaling $2.5 million relative to the temporary investment of a portion
of the proceeds from the sale of PGE's regulated water utility operations.
-15-
<PAGE>
Interest Charges. Interest charges decreased by $3.6 million (30.5%) from
$11.7 million for the nine-month period ended September 30, 1995, to $8.1
million for the nine-month period ended September 30, 1996. This decrease was
largely attributable to the lower level of indebtedness resulting from the
repayment of PGE's $50.0 million term loan and all of its then outstanding bank
borrowings on February 16, 1996, with proceeds from the sale of its regulated
water utility operations on such date.
Income (Loss) From Continuing Operations. Income from continuing operations
increased $3.9 million (266.7%) from $1.5 million for the nine months ended
September 30, 1995, to $5.3 million for the nine months ended September 30,
1996. This increase was largely the result of the matters discussed above,
principally the increase in operating revenues and other income, net and the
decrease in interest charges, the effects of which were partially offset by
increased operating expenses.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $690,000 (33.3%) from $2.1 million for the nine-month period ended
September 30, 1995, to $1.4 million for the nine-month period ended September
30, 1996, primarily as a result of the repurchase by PGE in 1996 of 132,988
shares of its 9% cumulative preferred stock, 9,408 shares of its 5.75%
cumulative preferred stock and 18,591 shares of its 4.10% cumulative preferred
stock, largely during the second quarter of the year.
Income (Loss) Before Extraordinary Loss. The increase in income before
extraordinary loss of $7.9 million from a loss of $4.3 million for the nine-
month period ended September 30, 1995, to income of $3.6 million for the nine-
month period ended September 30, 1996, was largely the result of the increase in
income from continuing operations and the lower level of dividends on
subsidiary's preferred stock, as discussed above, and the reduction of $3.3
million, from $3.7 million to $386,000, in the loss with respect to discontinued
operations.
Extraordinary Loss. On September 30, 1996, the Company defeased the $28.7
million outstanding principal amount of its 10.125% Senior Notes, due June 15,
1999, and recorded an extraordinary loss of $1.1 million ($1.6 million, net of
$575,000 of related income tax benefit). The loss on the defeasance represents
the interest expense on the Senior Notes from the date of defeasance through
June 15, 1997, the date on which the Senior Notes will be redeemed, plus the
writeoff of the unamortized balance of issuance expenses related to the Senior
Notes, less (i) the interest income that will be earned on the funds that were
deposited with the Trustee for the Senior Notes in connection with their
defeasance and (ii) the related income tax benefit.
Net Income (Loss). The increase in net income of $6.8 million from a loss
of $4.3 million for the nine-month period ended September 30, 1995, to income of
$2.4 million for the nine-month period ended September 30, 1996, as well as the
increase in earnings per share of common stock of $.96 from a loss of $.76 per
share for the nine months ended September 30, 1995, to earnings of $.20 per
share for the nine months ended September 30, 1996 (after a $.27 per share
charge for the premium on repurchase of subsidiary's preferred stock and a $.21
per share charge relative to the extraordinary loss), were the result of the
higher income from continuing operations and the reduced dividends on
subsidiary's preferred stock, as discussed above, and the decrease of $.58 per
share, from $.65 per share for the nine-month period ended September 30, 1995,
to $.07 per share for the nine-month period ended September 30, 1996, in the
loss with respect to discontinued operations.
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<PAGE>
RATE MATTERS
Proposed Rate Increase. On May 24, 1996, PGE filed an application with the
PPUC seeking an increase in its base gas rates, designed to produce $14.1
million in additional annual revenue, to be effective July 23, 1996. On June
20, 1996, the PPUC suspended this rate increase for seven months (until February
23, 1997) in order to investigate the reasonableness of the proposed rates. On
November 7, 1996, PGE and certain parties filing objections to the rate increase
request filed a "Settlement Agreement and Joint Petition for Settlement of Rate
Investigation" (the "Settlement Petition") with the Administrative Law Judge
("ALJ") assigned to conduct the investigation of the rate increase request.
This Settlement Petition provides for an overall 5.3% rate increase that is
designed to produce $7.5 million of additional annual revenue. The Settlement
Petition requests PPUC approval for the rate increase to become effective by
January 15, 1997. Additionally, under the terms of the Settlement Petition, to
the extent the proposed rate increase is approved and permitted to become
effective no later than January 31, 1997, billing for the impact of the rate
increase relative to PGE's residential heating customers (which it is estimated
will total $6.6 million on an annual basis) will be deferred, without carrying
charges, until July, 1997. It is not presently possible to determine what
action either the ALJ or the PPUC will ultimately take with respect to this rate
increase request or the Settlement Petition.
Gas Cost Adjustment. The provisions of the Pennsylvania Public Utility Code
(the "Code"), 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. In addition,
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 quarterly 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. In accordance with these
procedures, PGE has been permitted to make the following changes since January
1, 1995, 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, 1996 $3.01 $4.18 $35,500,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)
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.
Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC
adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition
costs. The PGC Order stated that Account 191 and New Facility Costs ("Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PGE and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs ("Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
-17-
<PAGE>
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 is being recovered by PGE in its annual PGC rate that the PPUC has
approved effective December 1, 1995, and the remaining $213,000 will be
recovered by PGE in its PGC rate that the PPUC has approved 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 $10.0 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 $7.3 million had been
billed to PGE and $6.8 million had been recovered from its customers as of
September 30, 1996. PGE has recorded the estimated Non-Gas Transition Costs
that remain to be billed to it and the amounts remaining to be recovered from
its customers.
LIQUIDITY AND CAPITAL RESOURCES
Sale of Water Utility Operations
On February 16, 1996, PGE sold its regulated water operations and certain
related assets to Pennsylvania-American for $414.3 million, consisting of $262.1
million in cash and the assumption of $152.2 million of PGE's liabilities,
including $141.0 million of its long-term debt. The Company and PGE used the
$203.5 million of cash proceeds from the sale, after the payment of an estimated
$58.6 million of federal and state income taxes (of which $33.5 million had been
paid as of September 30, 1996), to retire debt, to repurchase stock, for
construction expenditures and for other working capital purposes. In this
regard, PGE repaid its $50.0 million term loan due 1996 and all of its then
outstanding bank borrowings on February 16, 1996, and the Company and PGE
temporarily invested the balance of the proceeds.
During the nine months ended September 30, 1996, the Company repurchased
1,011,539 shares of its common stock for an aggregate consideration of $39.7
million, of which 890,602 shares were acquired in April pursuant to a self
tender offer and 120,937 shares were acquired from time to time through open
market transactions and an oddlot buyback program. PGE also repurchased 132,988
shares of its 9% cumulative preferred stock for an aggregate consideration of
$14.4 million and 18,591 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $947,000, largely pursuant to self tender offers
conducted during March and April, 1996. Additionally, on June 17, 1996, PGE
repurchased 9,408 shares of its 5.75% cumulative preferred stock (including 800
shares redeemed in accordance with annual sinking fund provisions) for an
aggregate consideration of $838,000.
Liquidity
The primary capital needs of the Company are the funding of PGE's
construction program and the seasonal funding of PGE's gas purchases and
increases in its customer accounts receivable. PGE's revenues are highly
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<PAGE>
seasonal and weather-sensitive, with approximately 75% of its revenues normally
being realized in the first and fourth quarters of the calendar year when the
temperatures in its service area are the coldest.
Additionally, as the Company's non-regulated activities expand, capital will
be required for those activities, especially the residential and commercial
development that is planned for certain Company-owned land. The two projects
that are currently planned by the Company are in the initial planning and design
phases, and the amount and type of funding that those projects will require has
not yet been finalized. Nonetheless, it is expected that they will be funded by
a combination of capital provided by the Company, bank borrowings and other debt
financing.
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.
With the repayment of its term loan and all its bank borrowings on February
16, 1996, and the availability of cash proceeds from the sale of its regulated
water operations, PGE terminated its $60.0 million bank credit agreement.
However, in order to finance construction expenditures and to meet its seasonal
borrowing requirements, PGE has since made arrangements for a total of $55.5
million of unsecured revolving bank credit, which is deemed adequate for its
immediate needs. Specifically, PGE currently has five bank lines of credit with
an aggregate borrowing capacity of $55.5 million which provide for borrowings at
interest rates generally less than prime and which mature during mid-1997. As
of November 7, 1996, PGE had $25.7 million of borrowings outstanding under these
bank lines of credit. In addition, PGE can borrow up to $70.0 million from the
Company during 1996, and also 1997 (at interest rates generally less than
prime), to repay bank borrowings and for construction expenditures and other
working capital requirements, to the extent that the Company has funds available
for lending to PGE. As of November 7, 1996, PGE had $37.3 million outstanding
under its borrowing arrangement with the Company. Such interim borrowings by
PGE from the Company will be repaid with proceeds from bank borrowings by PGE.
PGE plans to arrange new and replacement bank lines of credit when the funds
that are available for borrowing from the Company are no longer available and as
it requires additional funding for working capital and other purposes.
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. Likewise, the Company believes that its
non-regulated subsidiaries will be able to raise such funds as are required for
their needs, including that required for the residential and commercial real
estate development that is planned.
Long-Term Debt and Capital Stock Financings
Both the Company and PGE periodically engage in long-term debt and capital
stock financings in order to obtain funds required for construction
expenditures, the refinancing of existing debt and various working capital
purposes. No long-term debt or capital stock financings were consummated by
either the Company or PGE during the nine-month period ended September 30, 1996.
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<PAGE>
The Company also obtains external funds from the sale of its common stock
through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992
Stock Option Plan and its Employees' Savings Plan. The Company has, however,
temporarily suspended the sale of stock to both the DRP and Employees' Savings
Plan as a result of the proceeds received from the sale of PGE's water utility
operations, and the two plans are currently obtaining shares of Company common
stock for participants through open market purchases. During the nine-month
period ended September 30, 1996, the Company realized $340,000, $555,000 and
$195,000 from the issuance of common stock under the DRP, 1992 Stock Option Plan
and Employees' Savings Plan, respectively.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant by PGE totaled $18.2
million during the first nine months of 1996 and are currently estimated to be
$11.4 million during the remainder of the year. Such expenditures are being
financed with proceeds from the sale of PGE's regulated water operations,
internally-generated funds, loans from the Company and bank borrowings, pending
the periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1996, $80,000 of PGE's preferred stock and $20.1 million
of PGE's bank borrowings were required to be repaid within twelve months.
On September 30, 1996, the Company defeased the $28.7 million outstanding
principal amount of its 10.125% Senior Notes, due June 15, 1999 (the "Senior
Notes"). Specifically, on that date, the Company deposited $29.9 million with
the trustee for the Senior Notes, which will be used, together with interest
earned on the funds so deposited, to pay the Company's interest and principal
obligations through June 15, 1997, the date on which the Senior Notes will be
redeemed. The deposit of such funds acted to discharge all of the Company's
obligations with respect to the Senior Notes. Of the $29.9 million required to
defease the Senior Notes, $17.2 million was obtained through the liquidation of
the Company's temporary cash investments and $12.7 million was obtained through
the repayment of loans that had been made by the Company to PGE.
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.
-20-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Employment Agreement dated as of June 26, 1996, by and among the
Company, PGE and Kenneth L. Pollock -- filed herewith.
10-2 Employment Agreement dated as of August 28, 1996, by and among the
Company, PGE and Thomas F. Karam -- filed herewith.
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: November 12, 1996 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 12, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF INCOME AND CASH FLOW AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS
</LEGEND>
<CIK> 0000077231
<NAME> PENNSYLVANIA ENTERPRISES INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 230,655,000
<OTHER-PROPERTY-AND-INVEST> 8,353,000
<TOTAL-CURRENT-ASSETS> 65,390,000
<TOTAL-DEFERRED-CHARGES> 35,596,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 339,994,000
<COMMON> 48,052,000
<CAPITAL-SURPLUS-PAID-IN> 20,431,000
<RETAINED-EARNINGS> 47,670,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 116,153,000
739,000
19,192,000
<LONG-TERM-DEBT-NET> 75,000,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 20,130,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 108,700,000
<TOT-CAPITALIZATION-AND-LIAB> 339,994,000
<GROSS-OPERATING-REVENUE> 123,698,000
<INCOME-TAX-EXPENSE> 3,486,000
<OTHER-OPERATING-EXPENSES> 109,745,000
<TOTAL-OPERATING-EXPENSES> 113,231,000
<OPERATING-INCOME-LOSS> 10,467,000
<OTHER-INCOME-NET> 2,972,000
<INCOME-BEFORE-INTEREST-EXPEN> 13,439,000
<TOTAL-INTEREST-EXPENSE> 8,114,000
<NET-INCOME> 4,939,000
1,383,000
<EARNINGS-AVAILABLE-FOR-COMM> 2,439,000
<COMMON-STOCK-DIVIDENDS> 8,533,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> (38,769,000)
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
W6-NY960780.213
V2
V2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of the 28th day
of August, 1996, by and among PENNSYLVANIA ENTERPRISES, INC.
("PEI"), PG ENERGY, INC. ("PGE") and Thomas F. Karam (the
"Executive"), an individual residing at 331 Glenburn Road, Clarks
Summit, Pennsylvania 18411.
W I T N E S S E T H:
WHEREAS, PEI and PGE each desires to employ Executive
in the capacity of its President and Chief Executive Officer in
connection with the conduct of its business; and
WHEREAS, PEI and PGE are offering Executive this
Employment Agreement as an inducement to remain in their employ;
and
WHEREAS, Executive desires to accept such employment on
the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants contained herein, the parties hereto agree
as follows:
1. Employment.
PEI and PGE each hereby employs Executive as its
President and Chief Executive Officer, and Executive hereby
accepts such employment, upon the terms and conditions
hereinafter set forth.
2. Term.
The term of employment of Executive under this
Agreement (the "Term") shall commence on September 1, 1996 and
shall end on the date which is the fifth anniversary thereof
unless terminated in accordance with Section 6 or 7 hereof.
3. Office and Duties.
During the Term, Executive shall serve as the
President and Chief Executive Officer of PEI and PGE and shall
report to the Boards of Directors of PEI (the "PEI Board") and
PGE (the "PGE Board"). Executive shall perform such duties as
are customary for the President and Chief Executive Officer of a
company engaged in natural gas distribution and energy-related
services in the United States and consistent with such position
and status, and such other executive and administrative duties
consistent therewith as may from time to time be assigned to him
by the PEI Board and the PGE Board. During the Term, Executive
shall devote his full business time and best efforts to the
business of PEI and PGE; provided, however, that Executive may
engage in other activities to the extent that such other
activities do not inhibit or prohibit the performance of
Executive's duties under this Agreement, or conflict in any
material way with the business of PEI, PGE or any of their
respective affiliates.
4. Compensation.
As compensation for the services to be rendered
hereunder by Executive, PEI and PGE collectively agree to pay to
Executive,
(a) an aggregate salary payable in cash in
accordance with PGE's usual payroll practices of $212,880 for the
first year of the Term and, $225,000 for the second year of the
Term. Thereafter the Compensation Committee of the PEI Board
shall conduct periodic salary and performance reviews for
Executive in accordance with PEI's usual practices and, based
upon such reviews, Executive's annual salary may be increased
above but may not be decreased below the amount paid to Executive
for the second year of the Term.
(b) a grant of options under PEI's 1992 Stock
Option Plan (the "Option Plan") to purchase 75,000 shares of
PEI's common stock, no par value, stated value $10.00 per share
("Common Stock") to be made on September 1, 1996. Such options
shall become exercisable, subject to acceleration in the event of
a "Change of Control" of PEI (as defined in the Option Plan)
pursuant to the terms of the Option Plan, as follows: options to
purchase 15,000 shares shall become exercisable on
September 1, 1997, options to purchase an additional 15,000 shares
shall become exercisable on September 1, 1998, options to
purchase an additional 15,000 shares shall become exercisable on
September 1, 1999, options to purchase an additional 15,000
shares shall become exercisable on September 1, 2000 and options
to purchase an additional 15,000 shares shall become exercisable
on September 1, 2001. Such options shall be exercisable for the
three years following the termination of Executive's employment
for any reason except for termination by PEI pursuant to Section
7(a) hereof for "Cause" (as defined in Section 7(a) hereof) or
termination by Executive pursuant to Section 7(d) hereof without
"Good Reason" (as defined in Section 7(c) hereof).
5. Benefits.
(a) Executive shall be entitled during the Term
to participate in (i) all employee benefit plans and programs as
are currently available and as shall become available from time
to time to other employees of PEI and/or PGE, including, without
limitation, any health, accident, disability or hospitalization
insurance and (ii) all executive plans and programs in each case,
to the extent that his position, tenure, compensation, age,
health and other qualifications make him eligible to participate,
and to continue to receive all perquisites as are currently
available to Executive. In addition, Executive shall be eligible
for 4 weeks paid vacation during each calendar year of the Term.
(b) PEI and/or PGE shall pay for any further
education or annual training or licensing requirements of
Executive and training or educational seminars as may be required
by PEI and/or PGE.
(c) PEI and PGE shall each promptly reimburse
Executive for all business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the
Term in accordance with its then current reimbursement policies.
6. Termination for Death or Disability.
At the election of PEI and/or PGE, the employment
of Executive shall terminate in the event that Executive shall
fail to render and perform the services required of him under
this Agreement on a full-time basis because of any physical or
mental incapacity or disability as determined by a physician or
physicians acceptable to Executive and PEI and/or PGE for a total
of 180 days or more during any consecutive 12 month period
("Disability"). In the event Executive dies during the Term or
in the event PEI and/or PGE elects to terminate the employment of
Executive for Disability, all obligations of PEI and/or PGE under
this Agreement will cease as of the date of death or termination,
except that PEI and/or PGE collectively shall pay, and Executive
or his personal representative, as the case may be, shall be
entitled to receive (i) the unpaid portion of his salary accrued
through the end of the month in which such Disability is finally
determined, to be paid in accordance with Section 4(a) hereof and
(ii) vested, nonforfeitable amounts owing or accrued under any
benefit plans or programs set forth or referred to in
Section 5(a) hereof in which Executive participated as of his
termination under the terms and conditions of the plan or program
pursuant to which such benefits were granted.
7. Termination of Employment Other Than for Death or
Disability.
(a) Cause. PEI and/or PGE may terminate the
employment of Executive for "Cause" at any time in accordance
with the provisions of this Section 7. Termination for "Cause"
shall mean discharge by PEI and/or PGE on the grounds of
(i) Executive's willful misconduct or gross negligence in the
performance of his obligations under this Agreement, (ii) the
habitual intoxication of Executive, (iii) inexcusable repeated or
prolonged absence from work by Executive (other than pursuant to
the Disability of Executive), (iv) the commission by Executive of
an act of fraud or embezzlement, (v) any intentional or grossly
negligent unauthorized disclosure of Confidential Information (as
defined in Section 8(b) hereof) of PEI, PGE or any of their
respective affiliates, (vi) a conviction of Executive (including
entry of a guilty or nolo contendere plea) involving dishonesty
or moral turpitude or (vii) the willful failure of Executive to
perform faithfully the lawful duties which are assigned to him
which are within the scope of PEI's and/or PGE's respective
businesses and such failure is not cured by Executive within 14
days after written notice thereof from PEI and/or PGE to
Executive. Upon a termination for Cause, all obligations of PEI
and/or PGE under this Agreement will cease as of the date of
termination, except that PEI and/or PGE collectively shall pay
Executive, and Executive shall be entitled to receive, (x) the
unpaid portion of his salary pro rated through the date of
termination, to be paid in accordance with Section 4(a) hereof
and (y) vested, nonforfeitable amounts owing or accrued under any
benefit plans or programs set forth or referred to in Section
5(a) hereof in which Executive participated as of his termination
under the terms and conditions of the plan or program pursuant to
which such benefits were granted.
(b) Without Cause. In the event the Executive's
employment is terminated by PEI and/or PGE without Cause, other
than by reason of the death or Disability of Executive, all
obligations of PEI and/or PGE under this Agreement will cease as
of the date of termination, except that PEI and/or PGE
collectively shall pay Executive, and Executive shall be entitled
to receive either (i) in the event such termination does not
occur within three years following the date on which a "Change in
Control" (as defined below) of PEI occurs (A) the unpaid portion
of his salary to the end of the Term, to be paid in accordance
with Section 4(a) hereof, and (B) vested, nonforfeitable amounts
owing or accrued under any benefit plans or programs set forth or
referred to in Section 5(a) hereof in which Executive
participated as of his termination under the terms and conditions
of the plan or program pursuant to which such benefits were
granted or (ii) in the event such termination occurs within three
years following the date on which a Change in Control of PEI
occurs (A) a Severance Payment equal to two times (2x)
Executive's annual salary for the year in which such termination
occurs to be paid in a lump sum within 10 days of such
termination, (B) the unpaid portion of Executive's salary with
respect to any additional years (other than the year in which
such termination occurs) remaining in the Term to be paid in
accordance with Section 4(a) hereof, (C) a continuation for a
period of three years following the date on which a Change in
Control of PEI occurs or until such time as Executive has
obtained new employment and is covered by equivalent benefits,
whichever is sooner, of Executive's coverage at the expense of
PEI and/or PGE under life insurance, hospitalization and medical
plans providing benefits which are substantially comparable to
benefits provided to Executive under benefit plans of PEI, PGE
and their respective subsidiaries in effect immediately prior to
the Change in Control of PEI and (D) vested nonforfeitable
amounts owing or accrued under any other benefit plans or
programs set forth or referred to in Section 5(a) hereof in which
Executive participated as of his termination under the terms and
conditions of the plan or program pursuant to which such benefits
were granted.
For purposes of this Agreement, a "Change in Control"
of PEI shall be deemed to have occurred if and when:
(w) there shall be consummated either (i) any
consolidation or merger of PEI in which PEI is not the
continuing or surviving corporation or pursuant to which shares
of PEI's Common Stock are converted into cash, securities or
other property, other than a consolidation or merger of PEI in
which each holder of PEI's Common Stock immediately prior to the
merger has upon consummation of the merger the same proportionate
ownership of common stock of the surviving corporation as such
holder had of PEI's Common Stock immediately prior to the merger,
or (ii) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged
by any party as a single plan) of all or substantially all of the
assets of PEI;
(x) the shareholders of PEI shall approve any
plan or proposal for the liquidation or dissolution of PEI;
(y) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than any trustee under any
employee benefit plan of PEI or any of its subsidiaries, and
persons (as such term is so used) who are then affiliates (as
defined on August 28, 1996 in Rule 12b-2 under the Exchange Act)
of such person, or any one of them, shall after the date hereof
become the beneficial owner or owners (as defined on August 28,
1996 in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, of securities of PEI representing in the aggregate
20% or more of the voting power of all then outstanding
securities of PEI having the right under ordinary circumstances
to vote in an election of the PEI Board (without limitation, any
securities of PEI having such voting power that any such person
has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise,
shall be deemed beneficially owned by such person); or
(z) during any period of 13 consecutive months,
individuals who at the beginning of such period constitute the
entire PEI Board and any new directors whose election by the PEI
Board, or whose nomination for election by PEI's shareholders,
shall have been approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination
for election shall previously have been so approved shall cease
for any reason to constitute a majority of the members of the PEI
Board.
(c) For Good Reason. Executive may terminate his
employment for "Good Reason" upon 90 days' written notice to PEI
and/or PGE. For purposes of this Agreement "Good Reason" shall
mean (i) an adverse change in Executive's title, (ii) an
assignment of duties to Executive which are inconsistent with his
status as President and Chief Executive Officer of PEI and/or
PGE, (iii) a substantial adverse alteration in Executive's
status, nature of responsibilities or authority within PEI and/or
PGE, (iv) following a Change in Control of PEI, a failure by PEI,
PGE or any of their respective subsidiaries either to continue in
effect any incentive or compensation plan or arrangement in which
Executive shall be participating at the time of the Change in
Control of PEI or to provide other plans or arrangements
providing Executive with substantially comparable benefits or the
taking by PEI, PGE or any of their respective subsidiaries of any
action which would directly or indirectly materially adversely
affect Executive's participation in or materially reduce
Executive's benefits under any such plan or arrangement, (v) any
relocation of Executive's base of employment more than 25 miles
from Wilkes-Barre, Pennsylvania without Executive's written
consent, (vi) following a Change in Control of PEI, any failure
by PEI and/or PGE to provide Executive with the number of paid
vacation days per year to which Executive was entitled
immediately prior to the Change in Control of PEI, (vii) any
breach by PEI and/or PGE of any material provision of this
Agreement or (viii) following a Change in Control of PEI, any
failure by PEI and/or PGE to obtain from any successor to PEI a
satisfactory agreement to assume and perform this Agreement. In
the event that Executive terminates his employment for Good
Reason, all obligations of PEI and/or PGE under this Agreement
will cease as of the date of termination, except that PEI and/or
PGE collectively shall pay Executive and Executive shall be
entitled to receive either (x) in the event such termination does
not occur within three years following the date on which a Change
in Control of PEI occurs (A) the unpaid portion of his salary to
the end of the Term, to be paid in accordance with Section 4(a)
hereof, and (B) vested, nonforfeitable amounts owing or accrued
under any benefit plans or programs set forth or referred to in
Section 5(a) hereof in which Executive participated as of his
termination under the terms and conditions of the plan or program
pursuant to which such benefits were granted or (y) in the event
such termination occurs within three years following the date on
which a Change in Control of PEI occurs (A) a Severance Payment
equal to two times (2x) Executive's annual salary for the year in
which such termination occurs to be paid in a lump sum within 10
days of such termination, (B) the unpaid portion of Executive's
salary with respect to any additional years (other than the year
in which such termination occurs) remaining in the Term to be
paid in accordance with Section 4(a) hereof, (C) a continuation
for a period of three years following the date on which a Change
in Control of PEI occurs or until such time as Executive has
obtained new employment and is covered by equivalent benefits,
whichever is sooner, of Executive's coverage at the expense of
PEI and/or PGE under life insurance, hospitalization and medical
plans providing benefits which are substantially comparable to
benefits provided to Executive under benefit plans of PEI, PGE or
any of their respective subsidiaries in effect immediately prior
to the Change in Control of PEI and (D) vested nonforfeitable
amounts owing or accrued under any other benefit plans or
programs set forth or referred to in Section 5(a) hereof in which
Executive participated as of his termination under the terms and
conditions of the plan or program pursuant to which such benefits
were granted.
(d) Without Good Reason. Executive may terminate
his employment without Good Reason by giving PEI and/or PGE 90
days' written notice. Upon termination by Executive without Good
Reason, all obligations of PEI and/or PGE under this Agreement
will cease as of the date of termination except that PEI and/or
PGE collectively shall pay Executive and Executive shall be
entitled to receive (i) the unpaid portion of his salary pro
rated through the date of termination to be paid in accordance
with Section 4(a) hereof and (ii) vested,, nonforfeitable
amounts owing or accrued under any benefit plans or programs set
forth or referred to in Section 5(a) hereof in which Executive
participated as of his termination under the terms and conditions
of the plan or program pursuant to which such benefits were
granted.
8. Covenant Not to Compete; Confidentiality;
Litigation Support.
In consideration for PEI's and PGE's execution and
delivery of this Agreement:
(a) Executive hereby agrees that during the
period from the date of this Agreement through the end of the
first year after the termination of Executive's employment with
PEI and/or PGE for any reason other (x) than termination by PEI
and/or PGE without Cause or (y) termination by Executive for Good
Reason, Executive will not:
(i) carry on or engage in any business that
competes, directly or indirectly with the business of
distributing natural gas, or any other business being conducted
by PEI and/or PGE at the date of Executive's termination
(collectively, a "Competing Business") anywhere in the United
States;
(ii) become a stockholder of a corporation or
a member of a partnership or act as a consultant to or provide
any assistance to any enterprise which carries on or engages in a
Competing Business or which otherwise competes with PEI and/or
PGE anywhere in the United States; provided, however, that
Executive may own shares of stock of a corporation that is
engaged in a Competing Business provided, that (A) Executive does
not own more than one-half of one percent of the outstanding
shares of stock of such corporation, (B) such shares are publicly
traded on a United States natural securities exchange, NASDAQ or
any over-the-counter public securities market and (C) Executive
does not directly or indirectly acquire or assume any management
responsibilities in such corporation;
(iii) solicit, raid, entice or induce any
person, firm or corporation that presently is or at any time
during the Term shall be a client or customer of PEI, PGE or any
of their respective affiliates to become a client or customer of
any other person, firm or corporation engaged in a Competing
Business anywhere in the United States; or
(iv) solicit, raid, entice or induce any
person who presently is or at any time during the Term shall be
an employee of PEI, PGE or any of their respective affiliates to
become employed by any other person, firm or corporation engaged
in a Competing Business anywhere in the United States.
(b) Executive acknowledges that during the Term
he will have access to confidential information of PEI, PGE and
their respective affiliates, including plans for future
developments and information about costs, customers, profits,
markets, key personnel, pricing policies, operational methods,
and other business affairs and methods and other information not
available to the public or in the public domain (hereinafter
referred to as "Confidential Information"). In recognition of
the foregoing, Executive covenants and agrees that, except as
required by his duties to PEI and/or PGE, or as required by law
or pursuant to legal process, Executive will keep secret all
Confidential Information of PEI, PGE and their respective
affiliates and will not, directly or indirectly, either during
the Term of his employment hereunder or at any time thereafter,
disclose or disseminate to anyone or make use of, for any purpose
whatsoever, any Confidential Information, and upon termination of
his employment, Executive will promptly deliver to PEI and/or PGE
all tangible Confidential Information (including all copies
thereof, whether prepared by Executive or others) which he may
possess or control.
(c) Executive acknowledges that the restrictions
contained in this Section 8 are a reasonable and necessary
protection of the immediate interests of PEI and PGE, that any
violation of these restrictions would cause substantial injury to
PEI and PGE and that PEI and PGE would not have entered into this
Agreement without receiving the additional consideration offered
by Executive by binding himself to these restrictions. In the
event of a breach or threatened breach by Executive of any of
these restrictions, PEI and/or PGE shall be entitled to apply to
any court of competent jurisdiction for an injunction restraining
Executive from such breach or threatened breach; provided,
however, that the right to apply for an injunction shall not be
construed as prohibiting PEI and/or PGE from pursuing any other
available remedies for such breach or threatened breach. In the
event that, notwithstanding the foregoing, a covenant included in
this Section 8 shall be deemed by any court to be unreasonably
broad in any respect, it shall be modified in order to make it
reasonable and shall be enforced accordingly. Without limitation
of, and notwithstanding, the foregoing, in the event that, in any
judicial proceeding, a court shall refuse to enforce any of the
covenants contained in this Section 8, then the unenforceable
covenant shall be deemed eliminated from the provisions of this
Section 8 for the purpose of those proceedings to the extent
necessary to permit the remaining covenants to be enforced. If
any one or more of the provisions of this Section 8 shall be held
to be invalid, illegal or unenforceable, the validity, legality
or enforceability of the remaining provisions of this Section
shall not be effected thereby. To the extent permitted by
applicable law, each party hereto waives any provision of law
which renders any provision of this Section 8 invalid, illegal or
unenforceable in any respect.
(d) Executive agrees that during the Term and
thereafter Executive shall be available to PEI and PGE and shall
assist PEI and PGE in connection with any litigation brought by
or against PEI and/or PGE relating to the period during which
Executive was employed by PEI and/or PGE; provided, however, that
all costs and expenses in connection with the foregoing shall be
borne by PEI and/or PGE .
(e) The provisions of this Section 8 shall
survive the termination or expiration of this Agreement in
accordance with the terms hereof.
9. Governing Law.
This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the
Commonwealth of Pennsylvania without regard to conflicts of law
principles. If under such law, any portion of this Agreement is
at any time deemed to be in conflict with any applicable statute,
rule, regulation or ordinance, such portion shall be deemed to be
modified or altered to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of
any such portion shall not affect the force, effect and validity
of the remaining portion hereof.
10. Arbitration.
If a dispute arises between the parties respecting
the terms of this Agreement or Executive's employment by PEI
and/or PGE , such dispute shall be settled by binding arbitration
in Wilkes-Barre, Pennsylvania, in accordance with the rules of
the American Arbitration Association. Each party shall bear its
own expense of any such arbitration; provided, however, that
Executive shall be entitled to receive reimbursement of his
reasonable legal fees and out-of-pocket expenses from PEI and/or
PGE with respect to any claim or dispute relating to the
interpretation or enforcement of this Agreement promptly after
invoices for such fees and expenses are rendered unless the
position taken by Executive is determined by a court of competent
jurisdiction to be frivolous.
11. Additional Payments.
(a) In the event that any payment or benefit
(within the meaning of Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code")), to Executive or for his
benefit paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise in connection with,
or arising out of, his employment with PEI and/or PGE (a
"Payment" or "Payments"), would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties
are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive will be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by
Executive of all taxes (including any interest or penalties,
other than interest and penalties imposed by reason of
Executive's failure to file timely a tax return or pay taxes
shown due on his return), imposed with respect to such Gross-Up
Payment and the Excise Tax, including any Excise Tax imposed upon
the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) An initial determination as to whether a
Gross-Up Payment is required pursuant to this Agreement and the
amount of such Gross-Up Payment shall be made at PEI's and/or
PGE's expense by an accounting firm selected by PEI and PGE and
reasonably acceptable to Executive which is designated as one of
the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed
supporting calculations and documentation, to PEI and/or PGE and
Executive within five days of the date on which Executive's
employment with PEI and/or PGE is terminated if applicable, or
such other time as requested by PEI and/or PGE or by Executive
(provided Executive reasonably believes that any of the Payments
may be subject to the Excise Tax) and if the Accounting Firm
determines that no Excise Tax is payable by Executive with
respect to a Payment or Payments, it shall furnish Executive with
an opinion reasonably acceptable to Executive that no Excise Tax
will be imposed with respect to any such Payment or Payments.
Within ten days of the delivery of the Determination to
Executive, Executive shall have the right to dispute the
Determination (the "Dispute"). The Gross-Up Payment, if any, as
determined pursuant to this Section 11(b) shall be paid by PEI
and/or PGE collectively to Executive within five days of the
receipt of the Determination. The existence of the Dispute shall
not in any way affect Executive's right to receive the Gross-Up
Payment in accordance with the Determination. If there is no
Dispute, the Determination shall be binding, final and conclusive
upon PEI and/or PGE and Executive subject to the application of
Section 11(c) below.
(c) As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it is possible
that a Gross-Up Payment (or a portion thereof) will be paid which
should not have been paid (an "Excess Payment") or a Gross-Up
Payment (or a portion thereof) which should have been paid will
not have been paid (an "Underpayment"). An Underpayment shall be
deemed to have occurred (i) upon notice (formal or informal) to
Executive from any governmental taxing authority that Executive's
tax liability (whether in respect of Executive's current taxable
year or in respect of any prior taxable year) may be increased by
reason of the imposition of the Excise Tax on a Payment or
Payments with respect to which PEI and/or PGE has failed to make
a sufficient Gross-Up Payment, (ii) upon a determination by a
court, (iii) by reason of determination by PEI and/or PGE (which
shall include the position taken by PEI and/or PGE, together with
its consolidated group, on its federal income tax return) or (iv)
upon the resolution of the Dispute to Executive's satisfaction.
If an Underpayment occurs, Executive shall promptly notify PEI
and/or PGE and PEI and/or PGE shall promptly, but in any event,
at least five days prior to the date on which the applicable
government taxing authority has requested payment, pay to
Executive an additional Gross-Up Payment equal to the amount of
the Underpayment plus any interest and penalties (other than
interest and penalties imposed by reason of Executive's failure
to file timely a tax return or pay taxes shown due on Executive's
return) imposed on the Underpayment. An Excess Payment shall be
deemed to have occurred upon a Final Determination (as
hereinafter defined) that the Excise Tax shall not be imposed
upon a Payment or Payments (or portion thereof) with respect to
which Executive had previously received a Gross-Up Payment. A
"Final Determination" shall be deemed to have occurred when
Executive has received from the applicable government taxing
authority a refund of taxes or other reduction in Executive's tax
liability by reason of the Excise Payment and upon either (x) the
date a determination is made by, or an agreement is entered into
with, the applicable governmental taxing authority which finally
and conclusively binds Executive and such taxing authority, or in
the event that a claim is brought before a court of competent
jurisdiction, the date upon which a final determination has been
made by such court and either all appeals have been taken and
finally resolved or the time for all appeals has expired or (y)
the statute of limitations with respect to Executive's applicable
tax return has expired. If an Excess Payment is determined to
have been made, the amount of the Excess Payment shall be treated
as a loan by PEI and/or PGE to Executive and Executive shall pay
to PEI and/or PGE on demand (but not less than 10 days after the
determination of such Excess Payment and written notice has been
delivered to Executive) the amount of the Excess Payment plus
interest at an annual rate equal to the Applicable Federal Rate
provided for in Section 1274(d) of the Code from the date the
Gross-Up Payment (to which the Excess Payment relates) was paid
to Executive until the date of repayment to PEI and/or PGE.
(d) Notwithstanding anything contained in this
Agreement to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or
Payments, PEI and/or PGE collectively shall pay to the applicable
government taxing authorities as Excise Tax withholding, the
amount of the Excise Tax that PEI and/or PGE has actually
withheld from the Payment or Payments.
12. Allocation of Responsibility to Make Certain
Payments.
Responsibility for payment of the amounts payable
pursuant to Sections 4(a), 5(b), 6, 7, 8(d), 10 and 11 of this
Agreement shall be allocated between PEI and PGE as agreed upon
from time to time by PEI and PGE.
13. Miscellaneous.
(a) This Agreement cancels and supersedes any and
all prior agreements and understandings between or among any or
all of the parties hereto with respect to the employment of
Executive by PEI and PGE. This Agreement constitutes the entire
agreement among the parties with respect to the matters herein
provided, and no modification or waiver of any provision hereof
shall be effective unless in writing and signed by the parties
hereto.
(b) Neither this Agreement nor the rights or
obligations hereunder of any party hereto shall be assignable
without the written consent of (i) PEI and PGE, with respect to
an assignment or attempted assignment by Executive and
(ii) Executive, with respect to an assignment or attempted
assignment by PEI and/or PGE; provided, however, that no consent
of Executive shall be required for any assignment by PEI and/or
PGE whereby the assignee, by operation of law or otherwise,
continues to carry on substantially the business of PEI and/or
PGE, as the case may be, prior to the assignment. This Agreement
shall be binding upon and inure to the benefit of the successors
and permitted assigns of PEI and PGE.
(c) Whenever under this Agreement it becomes
necessary to give notice, such notice shall be in writing, signed
by the party or parties giving or making the same, and shall be
served on the person or persons for whom it is intended or who
should be advised or notified, by Federal Express or other
similar overnight service or by certified or registered mail,
return receipt requested, postage prepaid and addressed to such
party at the address set forth below or at such other address as
may be designated by such party by like notice:
If to PEI:
Pennsylvania Enterprises, Inc.
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Secretary
If to PGE:
PG Energy, Inc.
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Secretary
If to Executive:
Thomas F. Karam
331 Glenburn Road
Clarks Summit, Pennsylvania 18411
In the case of Federal Express or other similar overnight
service, such notice or advice shall be effective when sent, and,
in the cases of certified or registered mail, shall be effective
2 days after delivery to the U.S. Post Office.
(d) The invalidity of any portion of this
Agreement shall not be deemed to render the remainder of this
Agreement invalid.
(e) The headings of this Agreement are for
convenience of reference only and do not constitute a part
hereof.
(f) The failure of any party at any time to
require performance by any other party of any provision hereof or
to resort to any remedy provided herein or at law or in equity
shall in no way affect the right of such party to require such
performance or to resort to such remedy at any time thereafter,
nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent
breach of such provisions. No such waiver shall be effective
unless in writing and signed by the party against whom such
waiver is sought to be enforced.
(g) The amounts required to be paid by PEI and/or
PGE to Executive pursuant to this Agreement shall not be subject
to offset.
(h) In the event that Executive's employment with
PEI and/or PGE is terminated for any reason, Executive shall not
be required to seek other employment or otherwise to mitigate
Executive's damages under this Agreement.
IN WITNESS WHEREOF, Executive has hereunto set his hand
and PEI and PGE have caused this instrument to be duly executed
as of the day and year first above written.
PENNSYLVANIA ENTERPRISES, INC.
By:
Name: Kenneth L. Pollock
Title: Chairman of the Board of Directors
PG ENERGY, INC.
By:
Name: Kenneth L. Pollock
Title: Chairman of the Board of Directors
Executive
Thomas F. Karam
APPROVED:
COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS OF
PENNSYLVANIA ENTERPRISES,
INC.
By:
Name: John D. McCarthy
Title: Chairman
13
W6-NY960920.111
V2
V2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is dated as of the 26th day
of June, 1996, by and among PENNSYLVANIA ENTERPRISES, INC.
("PEI"), PG ENERGY, INC. ("PGE") and Kenneth L. Pollock (the
"Executive"), an individual residing at 4050 Bayview Drive, Ft.
Lauderdale, Florida 33308.
W I T N E S S E T H:
WHEREAS, PEI and PGE each desires to employ Executive
in the capacity of Chairman of its Board of Directors in
connection with the conduct of its business; and
WHEREAS, PEI and PGE are offering Executive this
Employment Agreement as an inducement to remain in their employ;
and
WHEREAS, Executive desires to accept such employment on
the terms and conditions herein set forth.
NOW, THEREFORE, in consideration of the foregoing and
the mutual covenants contained herein, the parties hereto agree
as follows:
1. Employment.
PEI and PGE each hereby employs Executive as
Chairman of its Board of Directors, and Executive hereby accepts
such employment, upon the terms and conditions hereinafter set
forth.
2. Term.
The term of employment of Executive under this
Agreement (the "Term") shall commence on June 26, 1996 and shall
end on the date which is the third anniversary thereof unless
terminated in accordance with Section 6 or 7 hereof; provided,
however, that this Agreement shall terminate if and when
Executive is no longer a member of the Boards of Directors of PEI
(the "PEI Board") and PGE (the "PGE Board").
3. Office and Duties.
During the Term, Executive shall serve as the
Chairman of the PEI Board and as the Chairman of the PGE Board.
Executive shall preside at meetings of the PEI Board and the PGE
Board, play an active role in the management of PEI as assigned
to him by the PEI Board and in the management of PGE as assigned
to him by the PGE Board and in each case, perform such other
duties as are customary for the Chairman of the board of
directors of a company engaged in natural gas distribution and
energy-related services in the United States and consistent with
such position and status.
4. Compensation.
As compensation for the services to be rendered
hereunder by Executive, PEI and PGE collectively agree to pay to
Executive:
(a) an aggregate salary payable in cash in
accordance with PGE's usual payroll practices of $97,500 for the
first year of the Term, $97,500 for the second year of the Term
and $97,500 for the third year of the Term; and
(b) a grant of options under PEI's 1992 Stock
Option Plan (the "Stock Option Plan") to purchase 45,000 shares
of PEI's common stock, no par value, stated value $10.00 per
share ("Common Stock") to be made on September 1, 1996. Such
options shall become exercisable, subject to acceleration in the
event of a "Change of Control" of PEI (as defined in the Option
Plan) pursuant to the terms of the Option Plan, as follows:
options to purchase 15,000 shares shall become exercisable on
September 1, 1997, options to purchase an additional 15,000
shares shall become exercisable on September 1, 1998 and options
to purchase an additional 15,000 shares shall become exercisable
on September 1, 1999. Such options shall be exercisable for the
three years following the termination of Executive employment for
any reason, except for termination by PEI pursuant to Section
7(a) hereof for "Cause" (as defined in Section 7(a) hereof) or
termination by Executive pursuant to Section 7(d) hereof without
"Good Reason" (as defined in Section 7(c) hereof).
5. Benefits.
(a) Executive shall be entitled during the Term
to participate in (i) all employee benefit plans and programs as
are currently available and as shall become available from time
to time to other employees of PEI and/or PGE, including, without
limitation, any health, accident, disability or hospitalization
insurance and (ii) all executive plans and programs in each case,
to the extent that his position, tenure, compensation, age,
health and other qualifications make him eligible to participate,
and to continue to receive all perquisites as are currently
available to Executive.
(b) PEI and PGE shall each promptly reimburse
Executive for all business expenses and disbursements incurred by
Executive in the performance of Executive's duties during the
Term in accordance with its then current reimbursement policies.
6. Termination for Death or Disability.
At the election of PEI and/or PGE, the employment
of Executive shall terminate in the event that Executive shall
fail to render and perform the services required of him under
this Agreement on a full-time basis because of any physical or
mental incapacity or disability as determined by a physician or
physicians acceptable to Executive and PEI and/or PGE for a total
of 180 days or more during any consecutive 12 month period
("Disability"). In the event Executive dies during the Term or
in the event PEI and/or PGE elects to terminate the employment of
Executive for Disability, all obligations of PEI and/or PGE under
this Agreement will cease as of the date of death or termination,
except that PEI and/or PGE collectively shall pay, and Executive
or his personal representative, as the case may be, shall be
entitled to receive (i) the unpaid portion of his salary accrued
through the end of the month in which such Disability is finally
determined, to be paid in accordance with Section 4(a) hereof and
(ii) vested, nonforfeitable amounts owing or accrued under any
benefit plans or programs set forth or referred to in
Section 5(a) hereof in which Executive participated as of his
termination under the terms and conditions of the plan or program
pursuant to which such benefits were granted.
7. Termination of Employment Other Than for Death or
Disability.
(a) Cause. PEI and/or PGE may terminate the
employment of Executive for "Cause" at any time in accordance
with the provisions of this Section 7. Termination for "Cause"
shall mean discharge by PEI and/or PGE on the grounds of
(i) Executive's willful misconduct or gross negligence in the
performance of his obligations under this Agreement, (ii) the
habitual intoxication of Executive, (iii) inexcusable repeated or
prolonged absence from work by Executive (other than pursuant to
the Disability of Executive), (iv) the commission by Executive of
an act of fraud or embezzlement, (v) any intentional or grossly
negligent unauthorized disclosure of Confidential Information (as
defined in Section 8(b) hereof) of PEI, PGE or any of their
respective affiliates, (vi) a conviction of Executive (including
entry of a guilty or nolo contendere plea) involving dishonesty
or moral turpitude or (vii) the willful failure of Executive to
perform faithfully the lawful duties which are assigned to him
which are within the scope of PEI's and/or PGE's respective
businesses and such failure is not cured by Executive within 14
days after written notice thereof from PEI and/or PGE to
Executive. Upon a termination for Cause, all obligations of PEI
and/or PGE under this Agreement will cease as of the date of
termination, except that PEI and/or PGE collectively shall pay
Executive, and Executive shall be entitled to receive, (x) the
unpaid portion of his salary pro rated through the date of
termination, to be paid in accordance with Section 4(a) hereof
and (y) vested, nonforfeitable amounts owing or accrued under any
benefit plans or programs set forth or referred to in Section
5(a) hereof in which Executive participated as of his termination
under the terms and conditions of the plan or program pursuant to
which such benefits were granted.
(b) Without Cause. In the event the Executive's
employment is terminated by PEI and/or PGE without Cause or the
Executive is no longer a member of the PEI Board or the PGE
Board, other than by reason of the death or Disability of
Executive or his resignation from the PEI Board or the PGE Board,
all obligations of PEI and/or PGE under this Agreement will cease
as of the date of termination, except that PEI and/or PGE
collectively shall pay Executive, and Executive shall be entitled
to receive either (i) in the event such termination does not
occur within three years following the date on which a "Change in
Control" (as defined below) of PEI occurs (A) the unpaid portion
of his salary to the end of the Term, to be paid in accordance
with Section 4(a) hereof and (B) vested, nonforfeitable amounts
owing or accrued under any benefit plans or programs set forth or
referred to in Section 5(a) hereof in which Executive
participated as of his termination under the terms and conditions
of the plan or program pursuant to which such benefits were
granted or (ii) in the event such termination occurs within three
years following the date on which a Change in Control of PEI
occurs (A) a Severance Payment equal to two times (2x)
Executive's annual salary for the year in which such termination
occurs to be paid in a lump sum within 10 days of such
termination, (B) the unpaid portion of Executive's salary with
respect to any additional years (other than the year in which
such termination occurs) remaining in Term to be paid in
accordance with Section 4(a) hereof, (C) a continuation for a
period of three years following the date on which a Change in
Control of PEI occurs of Executive's coverage at the expense of
PEI and/or PGE under life insurance, hospitalization and medical
plans providing benefits which are substantially comparable to
benefits provided to Executive under benefit plans of PEI, PGE
and their respective subsidiaries in effect immediately prior to
the Change in Control of PEI, and (D) vested, nonforfeitable
amounts owing or accrued under any other benefit plans or
programs set forth or referred to in Section 5(a) hereof in which
Executive participated as of his termination under the terms and
conditions of the plan or program pursuant to which such benefits
were granted.
For purposes of this Agreement, a "Change in Control"
of PEI shall be deemed to have occurred if and when:
(w) there shall be consummated either (i) any
consolidation or merger of PEI in which PEI is not the continuing
or surviving corporation or pursuant to which shares of PEI's
Common Stock are converted into cash, securities or other
property, other than a consolidation or merger of PEI in which
each holder of PEI's Common Stock immediately prior to the merger
has upon consummation of the merger the same proportionate
ownership of Common Stock of the surviving corporation as such
holder had of PEI's common stock immediately prior to the merger,
or (ii) any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged
by any party as a single plan) of all or substantially all of the
assets of PEI;
(x) the shareholders of PEI shall approve any
plan or proposal for the liquidation or dissolution of PEI;
(y) any person (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), other than any trustee
under any employee benefit plan of PEI or any of its
subsidiaries, and persons (as such term is so used) who are then
affiliates (as defined on June 26, 1996 in Rule 12b-2 under the
Exchange Act) of such person, or any one of them, shall after the
date hereof become the beneficial owner or owners (as defined on
June 26, 1996 in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of securities of PEI representing in the
aggregate 20% or more of the voting power of all then outstanding
securities of PEI having the right under ordinary circumstances
to vote in an election of the PEI Board (without limitation, any
securities of PEI having such voting power that any such person
has the right to acquire pursuant to any agreement, or upon
exercise of conversion rights, warrants or options, or otherwise,
shall be deemed beneficially owned by such person); or
(z) during any period of 13 consecutive months,
individuals who at the beginning of such period constitute the
entire PEI Board and any new directors whose election by the PEI
Board, or whose nomination for election by PEI's shareholders,
shall have been approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination
for election shall previously have been so approved shall cease
for any reason to constitute a majority of the members of the PEI
Board.
(c) For Good Reason. Executive may terminate his
employment for "Good Reason" upon 90 days' written notice to PEI
and/or PGE. For purposes of this Agreement "Good Reason" shall
mean (i) an adverse change in Executive's title, (ii) an
assignment of duties to Executive which are inconsistent with his
status as Chairman of the PEI Board or the PGE Board, (iii) a
substantial adverse alteration in Executive's status, nature of
responsibilities or authority within PEI and/or PGE,
(iv) following a Change in Control of PEI, a failure by PEI, PGE
or any of their respective subsidiaries either to continue in
effect any incentive or compensation plan or arrangement in which
Executive shall be participating at the time of the Change in
Control of PEI or to provide other plans or arrangements
providing Executive with substantially comparable benefits or the
taking by PEI, PGE or any of their respective subsidiaries of any
action which would directly or indirectly materially adversely
affect Executive's participation in or materially reduce
Executive's benefits under any such plan or arrangement, (v) any
breach by PEI and/or PGE of any material provision of this
Agreement or (vi) following a Change in Control of PEI, any
failure by PEI and PGE to obtain from any successor to PEI a
satisfactory agreement to assume and perform this Agreement. In
the event that Executive terminates his employment for Good
Reason, all obligations of PEI and/or PGE under this Agreement
will cease as of the date of termination, except that PEI and/or
PGE collectively shall pay Executive and Executive shall be
entitled to receive either (x) in the event such termination does
not occur within three years following the date on which a Change
in Control of PEI occurs (A) the unpaid portion of his salary to
the end of the Term, to be paid in accordance with Section 4(a)
hereof and (B) vested, nonforfeitable amounts owing or accrued
under any benefit plans or programs set forth or referred to in
Section 5(a) hereof in which Executive participated as of his
termination under the terms and conditions of the plan or program
pursuant to which such benefits were granted or (y) in the event
such termination occurs within three years following the date on
which a Change in Control of PEI occurs (A) a Severance Payment
equal to two times (2X) Executive's annual salary for the year in
which such termination occurs to be paid in a lump sum within 10
days of such termination, (B) the unpaid portion of Executive's
salary with respect to any additional years (other than the year
in which such termination occurs) remaining in the Term to be
paid in accordance with Section 4(a) hereof, (C) a continuation
for a period of three years following the date on which a Change
in Control of PEI occurs of Executive's coverage at the expense
of PEI and/or PGE under life insurance, hospitalization and
medical plans providing benefits which are substantially
comparable to benefits provided to Executive under benefit plans
of PEI, PGE or any of their respective subsidiaries in effect
immediately prior to the Change in Control of PEI and (D) vested
nonforfeitable amounts owing or accrued under any other benefit
plans or programs set forth or referred to in Section 5(a) hereof
in which Executive participated as of his termination under the
terms and conditions of the plan or program pursuant to which
such benefits were granted.
(d) Without Good Reason. Executive may terminate
his employment without Good Reason by giving PEI and/or PGE 90
days' written notice. Upon termination by Executive without Good
Reason, all obligations of PEI and/or PGE under this Agreement
will cease as of the date of termination except that PEI and/or
PGE collectively shall pay Executive and Executive shall be
entitled to receive (i) the unpaid portion of his salary pro
rated through the date of termination to be paid in accordance
with Section 4(a) hereof and (ii) vested,, nonforfeitable amounts
owing or accrued under any benefit plans or programs set forth or
referred to in Section 5(a) hereof in which Executive
participated as of his termination under the terms and conditions
of the plan or program pursuant to which such benefits were
granted.
8. Covenant Not to Compete; Confidentiality;
Litigation Support.
In consideration for PEI and PGE's execution and
delivery of this Agreement:
(a) Executive hereby agrees that during the
period from the date of this Agreement through the end of the
first year after the termination of Executive's employment with
PEI and/or PGE for any reason other than (x) termination by PEI
and/or PGE without Cause or (y) termination by Executive for Good
Reason, Executive will not:
(i) carry on or engage in any business that
competes, directly or indirectly with the business of
distributing natural gas, or any other business being conducted
by PEI and/or PGE at the date of Executive's termination
(collectively, a "Competing Business") anywhere in the United
States;
(ii) become a stockholder of a corporation or
a member of a partnership or act as a consultant to or provide
any assistance to any enterprise which carries on or engages in a
Competing Business or which otherwise competes with PEI and/or
PGE anywhere in the United States; provided, however, that
Executive may own shares of stock of a corporation that is
engaged in a Competing Business provided, that (A) Executive does
not own more than one-half of one percent of the outstanding
shares of stock of such corporation, (B) such shares are publicly
traded on a United States natural securities exchange, NASDAQ or
any over-the-counter public securities market and (C) Executive
does not directly or indirectly acquire or assume any management
responsibilities in such corporation;
(iii) solicit, raid, entice or induce any
person, firm or corporation that presently is or at any time
during the Term shall be a client or customer of PEI, PGE or any
of their respective affiliates to become a client or customer of
any other person, firm or corporation engaged in a Competing
Business anywhere in the United States; or
(iv) solicit, raid, entice or induce any
person who presently is or at any time during the Term shall be
an employee of PEI, PGE or any of their respective affiliates to
become employed by any other person, firm or corporation engaged
in a Competing Business anywhere in the United States.
(b) Executive acknowledges that during the Term
he will have access to confidential information of PEI, PGE and
their respective affiliates, including plans for future
developments and information about costs, customers, profits,
markets, key personnel, pricing policies, operational methods,
and other business affairs and methods and other information not
available to the public or in the public domain (hereinafter
referred to as "Confidential Information"). In recognition of
the foregoing, Executive covenants and agrees that, except as
required by his duties to PEI and/or PGE, or as required by law
or pursuant to legal process, Executive will keep secret all
Confidential Information of PEI, PGE and their respective
affiliates and will not, directly or indirectly, either during
the Term of his employment hereunder or at any time thereafter,
disclose or disseminate to anyone or make use of, for any purpose
whatsoever, any Confidential Information, and upon termination of
his employment, Executive will promptly deliver to PEI and/or PGE
all tangible Confidential Information (including all copies
thereof, whether prepared by Executive or others) which he may
possess or control.
(c) Executive acknowledges that the restrictions
contained in this Section 8 are a reasonable and necessary
protection of the immediate interests of PEI and PGE, that any
violation of these restrictions would cause substantial injury to
PEI and PGE and that PEI and PGE would not have entered into this
Agreement without receiving the additional consideration offered
by Executive by binding himself to these restrictions. In the
event of a breach or threatened breach by Executive of any of
these restrictions, PEI and/or PGE shall be entitled to apply to
any court of competent jurisdiction for an injunction restraining
Executive from such breach or threatened breach; provided,
however, that the right to apply for an injunction shall not be
construed as prohibiting PEI and/or PGE from pursuing any other
available remedies for such breach or threatened breach. In the
event that, notwithstanding the foregoing, a covenant included in
this Section 8 shall be deemed by any court to be unreasonably
broad in any respect, it shall be modified in order to make it
reasonable and shall be enforced accordingly. Without limitation
of, and notwithstanding, the foregoing, in the event that, in any
judicial proceeding, a court shall refuse to enforce any of the
covenants contained in this Section 8, then the unenforceable
covenant shall be deemed eliminated from the provisions of this
Section 8 for the purpose of those proceedings to the extent
necessary to permit the remaining covenants to be enforced. If
any one or more of the provisions of this Section 8 shall be held
to be invalid, illegal or unenforceable, the validity, legality
or enforceability of the remaining provisions of this Section
shall not be effected thereby. To the extent permitted by
applicable law, each party hereto waives any provision of law
which renders any provision of this Section 8 invalid, illegal or
unenforceable in any respect.
(d) Executive agrees that during the Term and
thereafter Executive shall be available to PEI and PGE and shall
assist PEI and PGE in connection with any litigation brought by
or against PEI and/or PGE relating to the period during which
Executive was employed by PEI and/or PGE; provided, however, that
all costs and expenses in connection with the foregoing shall be
borne by PEI and/or PGE .
(e) The provisions of this Section 8 shall
survive the termination or expiration of this Agreement in
accordance with the terms hereof.
9. Governing Law.
This Agreement is governed by and is to be
construed and enforced in accordance with the laws of the
Commonwealth of Pennsylvania without regard to conflicts of law
principles. If under such law, any portion of this Agreement is
at any time deemed to be in conflict with any applicable statute,
rule, regulation or ordinance, such portion shall be deemed to be
modified or altered to conform thereto or, if that is not
possible, to be omitted from this Agreement. The invalidity of
any such portion shall not affect the force, effect and validity
of the remaining portion hereof.
10. Arbitration.
If a dispute arises between the parties respecting
the terms of this Agreement or Executive's employment by PEI
and/or PGE, such dispute shall be settled by binding arbitration
in Wilkes-Barre, Pennsylvania, in accordance with the rules of
the American Arbitration Association. Each party shall bear its
own expense of any such arbitration; provided, however, that
Executive shall be entitled to receive reimbursement of his
reasonable legal fees and out-of-pocket expenses from PEI and/or
PGE with respect to any claim or dispute relating to the
interpretation or enforcement of this Agreement promptly after
invoices for such fees and expenses are rendered unless the
position taken by Executive is determined by a court of competent
jurisdiction to be frivolous.
11. Additional Payments.
(a) In the event that any payment or benefit
(within the meaning of Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code")), to Executive or for his
benefit paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise in connection with,
or arising out of, his employment with PEI and/or PGE (a
"Payment" or "Payments"), would be subject to the excise tax
imposed by Section 4999 of the Code or any interest or penalties
are incurred by Executive with respect to such excise tax (such
excise tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
Executive will be entitled to receive an additional payment (a
"Gross-Up Payment") in an amount such that after payment by
Executive of all taxes (including any interest or penalties,
other than interest and penalties imposed by reason of
Executive's failure to file timely a tax return or pay taxes
shown due on his return), imposed with respect to such Gross-Up
Payment and the Excise Tax, including any Excise Tax imposed upon
the Gross-Up Payment, Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.
(b) An initial determination as to whether a
Gross-Up Payment is required pursuant to this Agreement and the
amount of such Gross-Up Payment shall be made at PEI's and/or
PGE's expense by an accounting firm selected by PEI and PGE and
reasonably acceptable to Executive which is designated as one of
the five largest accounting firms in the United States (the
"Accounting Firm"). The Accounting Firm shall provide its
determination (the "Determination"), together with detailed
supporting calculations and documentation, to PEI and/or PGE and
Executive within five days of the date on which Executive's
employment with PEI and/or PGE is terminated if applicable, or
such other time as requested by PEI and/or PGE or by Executive
(provided Executive reasonably believes that any of the Payments
may be subject to the Excise Tax) and if the Accounting Firm
determines that no Excise Tax is payable by Executive with
respect to a Payment or Payments, it shall furnish Executive with
an opinion reasonably acceptable to Executive that no Excise Tax
will be imposed with respect to any such Payment or Payments.
Within ten days of the delivery of the Determination to
Executive, Executive shall have the right to dispute the
Determination (the "Dispute"). The Gross-Up Payment, if any, as
determined pursuant to this Section 11(b) shall be paid by PEI
and/or PGE collectively to Executive within five days of the
receipt of the Determination. The existence of the Dispute shall
not in any way affect Executive's right to receive the Gross-Up
Payment in accordance with the Determination. If there is no
Dispute, the Determination shall be binding, final and conclusive
upon PEI and/or PGE and Executive subject to the application of
Section 11(c) below.
(c) As a result of the uncertainty in the
application of Sections 4999 and 280G of the Code, it is possible
that a Gross-Up Payment (or a portion thereof) will be paid which
should not have been paid (an "Excess Payment") or a Gross-Up
Payment (or a portion thereof) which should have been paid will
not have been paid (an "Underpayment"). An Underpayment shall be
deemed to have occurred (i) upon notice (formal or informal) to
Executive from any governmental taxing authority that Executive's
tax liability (whether in respect of Executive's current taxable
year or in respect of any prior taxable year) may be increased by
reason of the imposition of the Excise Tax on a Payment or
Payments with respect to which PEI and/or PGE has failed to make
a sufficient Gross-Up Payment, (ii) upon a determination by a
court, (iii) by reason of determination by PEI and/or PGE (which
shall include the position taken by PEI and/or PGE, together with
their respective consolidated groups, on their respective federal
income tax returns) or (iv) upon the resolution of the Dispute to
Executive's satisfaction. If an Underpayment occurs, Executive
shall promptly notify PEI and/or PGE and PEI and/or PGE shall
promptly, but in any event, at least five days prior to the date
on which the applicable government taxing authority has requested
payment, pay to Executive an additional Gross-Up Payment equal to
the amount of the Underpayment plus any interest and penalties
(other than interest and penalties imposed by reason of
Executive's failure to file timely a tax return or pay taxes
shown due on Executive's return) imposed on the Underpayment. An
Excess Payment shall be deemed to have occurred upon a Final
Determination (as hereinafter defined) that the Excise Tax shall
not be imposed upon a Payment or Payments (or portion thereof)
with respect to which Executive had previously received a Gross-
Up Payment. A "Final Determination" shall be deemed to have
occurred when Executive has received from the applicable
government taxing authority a refund of taxes or other reduction
in Executive's tax liability by reason of the Excise Payment and
upon either (x) the date a determination is made by, or an
agreement is entered into with, the applicable governmental
taxing authority which finally and conclusively binds Executive
and such taxing authority, or in the event that a claim is
brought before a court of competent jurisdiction, the date upon
which a final determination has been made by such court and
either all appeals have been taken and finally resolved or the
time for all appeals has expired or (y) the statute of
limitations with respect to Executive's applicable tax return has
expired. If an Excess Payment is determined to have been made,
the amount of the Excess Payment shall be treated as a loan by
PEI and/or PGE to Executive and Executive shall pay to PEI and/or
PGE on demand (but not less than 10 days after the determination
of such Excess Payment and written notice has been delivered to
Executive) the amount of the Excess Payment plus interest at an
annual rate equal to the Applicable Federal Rate provided for in
Section 1274(d) of the Code from the date the Gross-Up Payment
(to which the Excess Payment relates) was paid to Executive until
the date of repayment to PEI and/or PGE.
(d) Notwithstanding anything contained in this
Agreement to the contrary, in the event that, according to the
Determination, an Excise Tax will be imposed on any Payment or
Payments, PEI and/or PGE collectively shall pay to the applicable
government taxing authorities as Excise Tax withholding, the
amount of the Excise Tax that PEI and/or PGE has actually
withheld from the Payment or Payments.
12. Allocation of Responsibility to Make Certain
Payments
Responsibility for payment of the amounts payable
by PEI and/or PGE pursuant to Sections 4(a), 6, 7, 8(d), 10 and
11 of this Agreement shall be allocated between PEI and PGE as
agreed upon from time to time by PEI and PGE.
13. Miscellaneous.
(a) This Agreement cancels and supersedes any and
all prior agreements and understandings between or among any or
all of the parties hereto with respect to the employment of
Executive by PEI and PGE. This Agreement constitutes the entire
agreement among the parties with respect to the matters herein
provided, and no modification or waiver of any provision hereof
shall be effective unless in writing and signed by the parties
hereto.
(b) Neither this Agreement nor the rights or
obligations hereunder of any party hereto shall be assignable
without the written consent of (i) PEI and PGE, with respect to
an assignment or attempted assignment by Executive and
(ii) Executive, with respect to an assignment or attempted
assignment by PEI and/or PGE; provided, however, that no consent
of Executive shall be required for any assignment by PEI and/or
PGE whereby the assignee, by operation of law or otherwise,
continues to carry on substantially the business of PEI and/or
PGE, as the case may be, prior to the assignment. This Agreement
shall be binding upon and inure to the benefit of the successors
and permitted assigns of PEI and PGE.
(c) Whenever under this Agreement it becomes
necessary to give notice, such notice shall be in writing, signed
by the party or parties giving or making the same, and shall be
served on the person or persons for whom it is intended or who
should be advised or notified, by Federal Express or other
similar overnight service or by certified or registered mail,
return receipt requested, postage prepaid and addressed to such
party at the address set forth below or at such other address as
may be designated by such party by like notice:
If to PEI:
Pennsylvania Enterprises, Inc.
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Secretary
If to PGE:
PG Energy, Inc.
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, Pennsylvania 18711-0601
Attention: Secretary
If to Executive:
Kenneth L. Pollock
4050 Bayview Drive
Ft. Lauderdale, Florida 33308
In the case of Federal Express or other similar overnight
service, such notice or advice shall be effective when sent, and,
in the cases of certified or registered mail, shall be effective
2 days after delivery to the U.S. Post Office.
(d) The invalidity of any portion of this
Agreement shall not be deemed to render the remainder of this
Agreement invalid.
(e) The headings of this Agreement are for
convenience of reference only and do not constitute a part
hereof.
(f) The failure of any party at any time to
require performance by any other party of any provision hereof or
to resort to any remedy provided herein or at law or in equity
shall in no way affect the right of such party to require such
performance or to resort to such remedy at any time thereafter,
nor shall the waiver by any party of a breach of any of the
provisions hereof be deemed to be a waiver of any subsequent
breach of such provisions. No such waiver shall be effective
unless in writing and signed by the party against whom such
waiver is sought to be enforced.
(g) The amounts required to be paid by PEI and/or
PGE to Executive pursuant to this Agreement shall not be subject
to offset.
(h) In the event that Executive's employment with
PEI and/or PGE is terminated for any reason, Executive shall not
be required to seek other employment or otherwise to mitigate
Executive's damages under this Agreement.
IN WITNESS WHEREOF, Executive has hereunto set his hand
and PEI and PGE have caused this instrument to be duly executed
as of the day and year first above written.
PENNSYLVANIA ENTERPRISES, INC.
By:
Name: Thomas F. Karam
Title: Executive Vice President
PG ENERGY, INC.
By:
Name: Thomas F. Karam
Title: Executive Vice President
Executive
Kenneth L. Pollock
Approved:
Compensation Committee of
the Board of Directors of
Pennsylvania Enterprises,
Inc.
By:
Name: John D. McCarthy
Title: Chairman
<TABLE>
<CAPTION>
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings for the
Three and Nine Month Periods Ended September 30, 1996 and 1995
Three Months Ended Nine Months Ended
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Income (loss) before subsidiary's
preferred stock dividends $ (3,694,000) $ (3,469,000) $ 3,822,000 $ (2,254,000)
Subsidiary's preferred stock
dividends 363,000 690,000 1,383,000 2,073,000
Net income (loss) $ (4,057,000) $ (4,159,000) $ 2,439,000 $ (4,327,000)
Earnings (loss) per share of
common stock* $ (.86) $ (.72) $ .20 $ (.76)
Computations of additional common
shares outstanding
Average shares of common stock 4,810,518 5,754,607 5,214,001 5,715,294
Incremental common shares
applicable to options, based on
the daily average market price 8,584 3,418 7,963 1,194
Average common shares as adjusted 4,819,102 5,758,025 5,221,964 5,716,488
Average shares of common stock 4,810,518 5,754,607 5,214,001 5,715,294
Incremental common shares
applicable to options, based on
the more dilutive of daily
average or ending market price 9,574 5,963 8,717 3,121
Average common shares fully
diluted 4,820,092 5,760,570 5,222,718 5,718,415
Earnings (loss) per share of
common stock
Average common shares as adjusted $ (.86) $ (.72) $ .20 $ (.76)
Average common shares fully
diluted $ (.86) $ (.72) $ .20 $ (.76)
* Earnings (loss) per share of common stock reflect the effects of premiums totaling
$89,775 and $1,383,771 on the redemption/repurchase of subsidiary's preferred stock in
the periods ended September 30, 1996, that were charged to retained earnings and not
included in the determination of net income.
</TABLE>
<PAGE>
