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, 1997 and 1996. . . . . . . . . 2
Consolidated Balance Sheets as of September 30, 1997,
and December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1997 and 1996 . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Thousands of Dollars, Except for Share Amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated $ 16,276 $ 13,998 $ 129,425 $ 108,870
Nonregulated -
Gas sales and services 4,523 2,210 17,889 7,086
Pipeline construction and services 3,344 3,095 8,124 7,634
Other 66 51 126 108
Total operating revenues 24,209 19,354 155,564 123,698
OPERATING EXPENSES:
Cost of gas 11,089 7,628 90,523 63,335
Operation and maintenance 11,088 10,777 32,396 31,816
Depreciation 2,367 2,108 7,045 6,214
Income taxes (2,064) (2,043) 3,618 2,610
Taxes other than income taxes 2,020 1,635 9,684 8,380
Total operating expenses 24,500 20,105 143,266 112,355
OPERATING INCOME (LOSS) (291) (751) 12,298 11,343
OTHER INCOME, NET 667 736 1,395 2,096
INCOME (LOSS) BEFORE INTEREST CHARGES 376 (15) 13,693 13,439
INTEREST CHARGES:
Interest on long-term debt 2,238 2,469 6,379 7,660
Other interest 230 166 631 623
Allowance for borrowed funds used
during construction (45) (73) (144) (169)
Total interest charges 2,423 2,562 6,866 8,114
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,047) (2,577) 6,827 5,325
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS - - - (386)
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (2,047) (2,577) 6,827 4,939
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 320 363 991 1,383
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (2,367) (2,940) 5,836 3,556
EXTRAORDINARY LOSS (NET OF TAX BENEFIT
OF $575,000) (Note 2) - (1,117) - (1,117)
NET INCOME (LOSS) $ (2,367) $ (4,057) $ 5,836 $ 2,439
COMMON STOCK (Note 3):
Earnings (Loss) Per Share of Common Stock:
Continuing operations $ (.24) $ (.31) $ .61 $ .38
Discontinued operations - - - (.04)
Income (loss) before discount (premium) on
repurchase of subsidiary's preferred
stock and extraordinary loss (.24) (.31) .61 .34
Discount (premium) on repurchase of
subsidiary's preferred stock - (.01) .08 (.13)
Extraordinary loss - (.11) - (.11)
Earnings (loss) per share of common stock $ (.24) $ (.43) $ .69 $ .10
Weighted average shares outstanding 9,699,614 9,621,126 9,643,088 10,428,032
Cash dividends per share $ .30 $ .275 $ .89 $ .825
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,
1997 1996
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost $ 344,242 $ 319,205
Accumulated depreciation (86,933) (79,783)
257,309 239,422
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment 14,115 12,502
Accumulated depreciation (4,742) (4,674)
Other 1,734 1,720
11,107 9,548
CURRENT ASSETS:
Cash and cash equivalents 1,101 1,126
Accounts receivable -
Customers 16,420 22,464
Others 889 565
Reserve for uncollectible accounts (1,452) (1,233)
Unbilled revenues 3,374 12,966
Materials and supplies, at average cost 3,201 2,865
Gas held by suppliers, at average cost 25,970 20,265
Natural gas transition costs collectible 1,512 2,525
Deferred cost of gas and supplier refunds, net 9,207 19,316
Prepaid expenses and other 1,513 1,438
61,735 82,297
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,712 29,771
Other 4,329 4,274
Unamortized debt expense 1,329 1,498
Other 457 -
36,827 35,543
TOTAL ASSETS $ 366,978 $ 366,810
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,
1997 1996
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common shareholders' investment $ 117,538 $ 117,651
Preferred stock of PGE -
Not subject to mandatory redemption, net 15,848 18,851
Subject to mandatory redemption 640 739
Long-term debt 125,000 75,000
259,026 212,241
CURRENT LIABILITIES:
Current portion of long-term debt 14,720 38,721
Preferred stock subject to repurchase or
mandatory redemption 80 115
Notes payable 4,500 10,000
Accounts payable 14,064 19,945
Accrued general business and realty taxes 1,691 2,350
Accrued income taxes 2,966 14,525
Accrued interest 1,470 1,243
Accrued natural gas transition costs 1,154 2,095
Other 2,807 3,904
43,452 92,898
DEFERRED CREDITS:
Deferred income taxes 51,250 49,270
Unamortized investment tax credits 4,639 4,767
Operating reserves 2,805 3,086
Other 5,806 4,548
64,500 61,671
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 366,978 $ 366,810
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,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends $ 5,836 $ 3,942
Effects of noncash charges to income -
Depreciation 7,095 6,266
Extraordinary loss, net of tax benefit - (1,117)
Deferred income taxes, net 715 530
Provisions for self insurance 630 742
Other, net 902 1,861
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and unbilled revenues 16,221 18,751
Gas held by suppliers (5,705) (10,299)
Accounts payable (6,568) (3,583)
Deferred cost of gas and supplier refunds, net 10,316 (16,801)
Other current assets and liabilities, net (39) 992
Other operating items, net (335) (4,583)
Net cash provided by (used for) continuing operations 29,068 (3,299)
Net cash used for discontinued operations, principally
for the payment of income taxes (13,655) (35,470)
Net cash provided by (used for) operating activities 15,413 (38,769)
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (22,810) (18,501)
Proceeds from the sale of discontinued operations - 261,752
Acquisition of regulated business (2,019) -
Other, net (1,429) (1,285)
Net cash provided by (used for) investing activities (26,258) 241,966
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 1,861 555
Repurchase of common stock - (39,663)
Dividends on common stock (8,583) (8,533)
Repurchase/redemption of subsidiary's preferred stock (3,137) (15,364)
Issuance of long-term debt 25,000 -
Repayment of long-term debt - (81,906)
Net decrease in bank borrowings (5,021) (56,034)
Other, net 700 (1,390)
Net cash provided by (used for) financing activities 10,820 (202,335)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25) 862
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,126 629
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,101 $ 1,491
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,000 $ 8,700
Income taxes $ 15,197 $ 34,584
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) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is a
holding company which, through its subsidiaries, is engaged in both regulated
and nonregulated activities. The Company's regulated activities are conducted
by its principal subsidiary, PG Energy Inc. ("PGE"), a regulated public utility,
and PGE's wholly-owned subsidiary, Honesdale Gas Company ("Honesdale"), also a
regulated public utility which was acquired on February 14, 1997. Together PGE
and Honesdale distribute natural gas to a thirteen-county area in northeastern
Pennsylvania, a territory that includes 130 municipalities, in addition to the
cities of Scranton, Wilkes-Barre and Williamsport.
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), formerly known as Pennsylvania Energy Resources, Inc.,
Theta Land Corporation ("Theta") and Keystone Pipeline Services, Inc.
("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in
various nonregulated activities, including the marketing and sale of natural gas
and propane and other energy-related services, as well as the construction,
maintenance and rehabilitation of natural gas distribution pipelines.
Commencing in the fourth quarter of 1997, Energy Services will also begin
marketing electricity and other products and services in 26 counties in
northeastern and central Pennsylvania pursuant to a retail marketing alliance
agreement with CNG Energy Services, a subsidiary of Consolidated Natural Gas
Company. Additionally, Theta is initiating several residential and commercial
real estate development projects on Company-owned land for which construction is
currently expected to commence in the fourth quarter of 1997.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries, PGE, Energy Services
(including Keystone) and Theta. The consolidated financial statements also
include the accounts of Honesdale beginning February 14, 1997, the date
Honesdale was acquired by PGE. All material intercompany accounts have been
eliminated in consolidation.
Both PGE and Honesdale are subject to the jurisdiction of the Pennsylvania
Public Utility Commission ("PPUC") for rate and accounting purposes. The
financial statements of PGE and Honesdale 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
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weather on energy sales and services. However, in the opinion of management,
all adjustments, consisting of only normal recurring accruals, necessary to
present fairly the results for the interim periods have been reflected in the
consolidated financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
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) EXTRAORDINARY LOSS
Defeasance of Senior Notes. 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 represented the interest expense on the Senior Notes from
the date of defeasance through June 15, 1997, the date on which the Senior Notes
were scheduled to be redeemed, plus the writeoff of the unamortized balance of
issuance expenses related to the Senior Notes, less (i) the interest income
expected to 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.
(3) COMMON STOCK
Common Stock Split. Pursuant to resolutions adopted by the Company's Board
of Directors on February 19, 1997, a Certificate of Amendment was filed with the
Secretary of State of the Commonwealth of Pennsylvania on March 20, 1997,
amending the Company's Restated Articles of Incorporation to (i) increase the
number of authorized shares of its common stock from 15 million shares to 30
million shares and (ii) reduce the stated value of such shares from $10.00 per
share to $5.00 per share. This amendment had no effect on the Company's capital
accounts. On February 19, 1997, the Board of Directors also declared a two-for-
one split of the Company's common stock effective March 20, 1997. The number of
shares of common stock reflected in these consolidated financial statements and
the earnings per share of common stock for both the three and nine-month periods
ended September 30, 1996, were restated to give retroactive effect to this stock
split.
(4) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
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Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures PGE has been permitted to make the
following changes since January 1, 1996, to the gas costs contained in its gas
tariff rates:
[CAPTION]
Change in
Effective Rate per MCF Calculated Increase
Date From To in Annual Revenue
[S] [C] [C] [C]
March 1, 1997 $4.18 $4.49 $ 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
(5) ACCOUNTING CHANGES
Earnings Per Share. In February, 1997, FASB Statement 128, "Earnings per
Share" was issued. The provisions of this statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", simplify the
computation of earnings per share. FASB Statement 128 will be effective for
financial statements for both interim and annual periods ending after December
15, 1997. The Company does not expect the adoption of FASB Statement 128 to
have a material effect on its calculation of earnings per share.
Reporting Comprehensive Income. In June, 1997, FASB Statement 130
"Reporting Comprehensive Income", was issued. The provisions of this statement,
which are effective for fiscal years beginning after December 15, 1997,
establish standards for reporting and display of comprehensive income and its
components in financial statements. The reporting provisions of FASB Statement
130, which the Company will adopt in 1998, are not expected to have a material
impact on the reported results of operations of the Company.
Disclosures about Segments of an Enterprise and Related Information. In
June, 1997, FASB Statement 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. The provisions of this statement, which are
effective for fiscal years beginning after December 15, 1997, establish
standards for reporting information about operating segments in annual financial
statements and selected segment information in interim financial reports issued
to shareholders. The Company expects to adopt the reporting provisions of FASB
Statement 131 in 1998.
(6) COMMITMENTS AND CONTINGENCIES
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 1972, and several
of the plant sites are no longer owned by PGE. Pursuant to the Comprehensive
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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. Notwithstanding this determination by
the EPA, some of the sites may ultimately require remediation. One site that
was owned by PGE from 1951 to 1967 and at which it operated a manufactured gas
plant from 1951 to 1954 was subject to remediation in 1996. The remediation at
this site, which was performed by the party from whom PGE acquired the site in
1951, required the removal of materials from two former gas holders. The cost
of such remediation is purported to have been approximately $525,000, of which
the party performing the remediation is seeking to recover a material portion
from PGE. PGE, however, believes that any liability it may have with respect to
such remediation would be considerably less than the amount that the other party
is seeking. While the final resolution of the matter is uncertain, PGE does not
believe that it will have any material impact on its financial position or
results of operations. Although the conclusion by the EPA that it anticipates
no further remedial action with respect to the sites at which PGE operated
manufactured gas plants 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.
Subsequent Event. On October 3, 1997, the Company signed an agreement to
acquire a 25-megawatt cogeneration plant and related facilities located on an
approximate 260 acre site in Lackawanna County, Pennsylvania. The Company plans
to convert the plant, which was closed in July, 1997, from burning anthracite
culm to natural gas. The consideration to be paid for the facilities and real
estate will consist of approximately 33,500 shares of the Company's common
stock. In addition, approximately $8.0 million will be expended by the Company
in converting the plant so that it can burn natural gas. The closing on this
acquisition is expected to occur in November, 1997.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
STOCK SPLIT
On February 19, 1997, the Board of Directors of Pennsylvania Enterprises,
Inc. (the "Company") declared a two-for-one split of the Company's Common Stock
effective March 20, 1997, as more fully discussed in Note 3 of the accompanying
Notes to Consolidated Financial Statements. The appropriate per share data
included in this Form 10-Q has been restated to reflect this two-for-one split.
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, 1997, and September 30, 1996:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated.................................. 67.2% 72.3% 83.2% 88.0%
Nonregulated -
Gas sales and services................... 18.7 11.4 11.5 5.7
Pipeline construction and services....... 13.8 16.0 5.2 6.2
Other.................................... 0.3 0.3 0.1 0.1
Total operating revenues............... 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of gas................................ 45.8 39.4 58.2 51.2
Operation and maintenance.................. 45.8 55.7 20.8 25.7
Depreciation............................... 9.8 10.9 4.6 5.0
Income taxes............................... (8.5) (10.6) 2.3 2.1
Taxes other than income taxes.............. 8.3 8.5 6.2 6.8
Total operating expenses................. 101.2 103.9 92.1 90.8
OPERATING INCOME (LOSS)...................... (1.2) (3.9) 7.9 9.2
OTHER INCOME, NET............................ 2.7 3.8 0.9 1.7
INTEREST CHARGES (1)......................... (10.0) (13.2) (4.4) (6.6)
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (8.5) (13.3) 4.4 4.3
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - - (0.3)
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS............................ (8.5) (13.3) 4.4 4.0
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... (1.3) (1.9) (0.6) (1.1)
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... (9.8) (15.2) 3.8 2.9
EXTRAORDINARY LOSS........................... - (5.8) - (0.9)
NET INCOME (LOSS)............................ (9.8) (21.0) 3.8 2.0
(1) None of the Company's interest expense nor any of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.
</TABLE>
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Three Months Ended September 30, 1997, Compared
With Three Months Ended September 30, 1996
Operating Revenues. Operating revenues increased $4.9 million (25.1%) from
$19.4 million for the three-month period ended September 30, 1996, to $24.2
million for the three-month period ended September 30, 1997, largely as a result
of a $2.3 million (16.3%) increase in regulated operating revenues and a $2.3
million (104.7%) increase in gas sales and services by PG Energy Services Inc.
("Energy Services"), a nonregulated affiliate of the Company formerly known as
Pennsylvania Energy Resources, Inc.
The $2.3 million (16.3%) increase in regulated operating revenues from $14.0
million for the quarter ended September 30, 1996, to $16.3 million for the
quarter ended September 30, 1997, was primarily the result of the rate increase
granted PG Energy Inc. ("PGE") by the Pennsylvania Public Utility Commission
(the "PPUC") which became effective on January 15, 1997 (see "Rate Matters"),
higher levels in PGE's gas cost rate and the operating revenues of Honesdale Gas
Company ("Honesdale"), which was acquired by the Company on February 14, 1997,
totaling $323,000. Also contributing to the increase was a 56 million cubic
feet (3.7%) increase in deliveries to PGE's residential and commercial heating
customers that was largely attributable to cooler weather. There was an
increase of 47 heating degree days from 163 (135.8% of normal) during the third
quarter of 1996 to 210 (175.0% of normal) during the third quarter of 1997.
The $2.3 million (104.7%) increase in nonregulated gas sales and services
from $2.2 million for the quarter ended September 30, 1996, to $4.5 million for
the quarter ended September 30, 1997, was primarily the result of an 877,000
cubic feet (146.3%) increase in sales of natural gas by Energy Services during
the quarter.
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $4.4 million (21.9%) from $20.1 million for the three-month
period ended September 30, 1996, to $24.5 million for the three-month period
ended September 30, 1997. As a percentage of operating revenues, total
operating expenses decreased from 103.9% during the third quarter of 1996 to
101.2% during the third quarter of 1997, largely as a result of a proportionally
greater increase in revenues.
The cost of gas increased $3.5 million (45.4%) from $7.6 million for the
three-month period ended September 30, 1996, to $11.1 million for the three-
month period ended September 30, 1997, primarily because of the aforementioned
increase in sales by both PGE and Energy Services, the higher levels in PGE's
gas cost rate (see "-Rate Matters") and $194,000 of gas costs related to
Honesdale.
Other than the cost of gas and income taxes, operating expenses increased by
$955,000 (6.6%) from $14.5 million for the three-month period ended September
30, 1996, to $15.5 million for the three-month period ended September 30, 1997.
This increase was partially attributable to a $385,000 (23.5%) increase in taxes
other than income taxes resulting from a higher level of gross receipts tax
because of the increased sales by PGE and the sales of Honesdale. Operation and
maintenance expense increased $311,000 (2.9%) as a result of $206,000 of costs
relative to Honesdale in the third quarter of 1997, as well as increased payroll
and other costs attributable to the expansion of the Company's nonregulated
activities. Also contributing to the higher operating expenses was a $259,000
(12.3%) increase in depreciation expense, primarily as a result of additions to
utility plant.
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Operating Income (Loss). As a result of the above, the operating loss
decreased by $460,000 (61.3%) from a loss of $751,000 for the three-month period
ended September 30, 1996, to a loss of $291,000 for the three-month period ended
September 30, 1997, and decreased as a percentage of total operating revenues
for such periods from a negative 3.9% in 1996 to a negative 1.2% in 1997.
Other Income, Net. Other income, net decreased $69,000 (9.4%) from $736,000
for the three-month period ended September 30, 1996, to $667,000 for the three-
month period ended September 30, 1997, largely because the third quarter of 1996
included income from the temporary investment of certain proceeds from the sale
of PGE's regulated water utility operations in February, 1996. The absence of
such investment income was partially offset by an inducement fee paid to Energy
Services relative to its participation in a retail marketing alliance.
Interest Charges. Interest charges decreased by $139,000 (5.4%) from $2.6
million for the three-month period ended September 30, 1996, to $2.4 million for
the three-month period ended September 30, 1997. This decrease was largely
attributable to the Company's defeasance of its 10.125% Senior Notes on
September 30, 1996.
Income (Loss) From Continuing Operations. The loss from continuing
operations decreased $530,000 (20.6%) from $2.6 million for the quarter ended
September 30, 1996, to $2.0 million for the quarter ended September 30, 1997.
This decrease was largely the result of the matters discussed above, principally
the increase in operating revenues and the decrease in interest charges, the
effects of which were partially offset by the increased operating expenses.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $43,000 (11.8%) from $363,000 for the three-month period ended
September 30, 1996, to $320,000 for the three-month period ended September 30,
1997, primarily as a result of the repurchase by PGE in 1997 of 30,375 shares of
its 4.10% cumulative preferred stock.
Income (Loss) Before Extraordinary Loss. The decrease of $573,000 (19.5%)
in the loss before extraordinary loss, from $2.9 million for the three-month
period ended September 30, 1996, to $2.4 million for the three-month period
ended September 30, 1997, 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 represented the interest expense on the
Senior Notes from the date of defeasance through June 15, 1997, the date on
which the Senior Notes were scheduled to be redeemed, plus the writeoff of the
unamortized balance of issuance expenses related to the Senior Notes, less (i)
the interest income expected to 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 $1.7 million (41.7%) in the net loss,
from $4.1 million for the three-month period ended September 30, 1996, to $2.4
million for the three-month period ended September 30, 1997, as well as the
decrease in the loss per share of common stock of $.19 from a loss of $.43 per
share for the third quarter of 1996 to a loss of $.24 per share for the third
quarter of 1997, were primarily the result of the decrease in loss from
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<PAGE>
continuing operations and the recording in the third quarter of 1996 of the
extraordinary loss on the defeasance of the Company's Senior Notes, as discussed
above. Also contributing to the decrease in the loss per share of common stock
was the inclusion in the third quarter of 1996 of a $.01 per share premium of
the repurchase of shares of preferred stock by PGE. While discounts and
premiums on the repurchase of preferred stock are reflected in retained earnings
and are not a determinant of net income, the discounts and premiums associated
with repurchases must be taken into account in calculating the earnings (loss)
per share of common stock.
Nine Months Ended September 30, 1997, Compared
With Nine Months Ended September 30, 1996
Operating Revenues. Operating revenues increased $31.9 million (25.8%) from
$123.7 million for the nine months ended September 30, 1996, to $155.6 million
for the nine months ended September 30, 1997, largely as a result of a $20.6
million (18.9%) increase in regulated operating revenues and a $10.8 million
(152.5%) increase in nonregulated gas sales and services by Energy Services.
The $20.6 million (18.9%) increase in regulated operating revenues from
$108.9 million for the nine months ended September 30, 1996, to $129.4 million
for the nine months ended September 30, 1997, was primarily the result of higher
levels in PGE's gas cost rate and the effect of the rate increase granted PGE by
the PPUC which became effective on January 15, 1997 (see "Rate Matters"). The
effect of the increases in rates was partially offset by an 896 million cubic
feet (5.0%) decrease in deliveries to PGE's residential and commercial heating
customers. There was a decrease of 192 (4.4%) heating degree days from 4,356
(106.9% of normal) during the first nine months of 1996 to 4,164 (102.2% of
normal) during the first nine months of 1997. Operating revenues of Honesdale
totaling $1.9 million from its February 14, 1997, acquisition date through
September 30, 1997, also contributed to the increased regulated operating
revenues.
The $10.8 million (152.5%) increase in nonregulated gas sales and services
from $7.1 million for the nine months ended September 30, 1996, to $17.9 million
for the nine months ended September 30, 1997, was primarily the result of a 3.4
million cubic feet (214.6%) increase in sales of natural gas by Energy Services
during the period.
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $30.9 million (27.5%) from $112.4 million for the first nine
months of 1996 to $143.3 million for the first nine months of 1997. As a
percentage of operating revenues, total operating expenses increased from 90.8%
during the first nine months of 1996 to 92.1% during the first nine months of
1997, largely as a result of an increase in the cost of gas.
Cost of gas increased $27.2 million (42.9%) from $63.3 million for the first
nine months of 1996 to $90.5 million for the first nine months of 1997,
primarily because of higher levels in PGE's gas cost rate (see "-Rate Matters"),
and the aforementioned increase in sales by Energy Services. Also contributing
to the increase was $1.3 million of gas costs related to Honesdale from its
February 14, 1997, acquisition date through September 30, 1997.
Other than the cost of gas and income taxes, operating expenses increased by
$2.7 million (5.9%) from $46.4 million for the first nine months of 1996 to
$49.1 million for the first nine months of 1997. This increase was partially
attributable to a $1.3 million (15.6%) increase in taxes other than income taxes
resulting from a higher level of gross receipts tax because of the increased
-13-
<PAGE>
sales by PGE and the sales of Honesdale from its acquisition date. Operation
and maintenance expense increased $580,000 (1.8%) largely as a result of
$470,000 of expenses relative to Honesdale since its acquisition date, as well
as increased payroll and other costs attributable to the expansion of the
Company's nonregulated activities. Also contributing to the higher operating
expenses was an $831,000 (13.4%) increase in depreciation expense, primarily as
a result of additions to utility plant.
Income taxes increased $1.0 million (38.6%) from $2.6 million in the first
nine months of 1996 to $3.6 million in the first nine months of 1997 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
increased by $955,000 (8.4%) from $11.3 million for the nine-month period ended
September 30, 1996, to $12.3 million for the nine-month period ended September
30, 1997. However, as a percentage of total operating revenues, operating
income decreased for such periods from 9.2% in the nine-month period ended
September 30, 1996, to 7.9% in the nine-month period ended September 30, 1997,
largely as a result of the proportionately higher ratio of cost of gas to
operating revenues.
Other Income, Net. Other income, net decreased $701,000 (33.4%) from $2.1
million for the nine-month period ended September 30, 1996, to $1.4 million for
the nine-month period ended September 30, 1997, largely because the first nine
months of 1996 included income from the temporary investment of certain proceeds
from the sale of PGE's regulated water utility operations in February, 1996.
The absence of such investment income in 1997 was partially offset by an
inducement fee paid to Energy Services relative to its participation in a retail
marketing alliance.
Interest Charges. Interest charges decreased $1.2 million (15.4%) from $8.1
million for the first nine months of 1996 to $6.9 million for the first nine
months of 1997. This decrease was largely attributable to the the Company's
defeasance of its 10.125% Senior Notes on September 30, 1996.
Income (Loss) From Continuing Operations. Income from continuing operations
increased $1.5 million (28.2%) from $5.3 million for the nine-month period ended
September 30, 1996, to $6.8 million for the nine-month period ended September
30, 1997. This increase was largely the result of the matters discussed above,
principally the increase in operating revenues and decrease in interest charges,
the effects of which were partially offset by increased operating expenses and
the lower level of other income, net.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $392,000 (28.3%) from $1.4 million for the nine-month period ended
September 30, 1996, to $991,000 for the nine-month period ended September 30,
1997, primarily as a result of the repurchase by PGE in 1996 of 134,359 shares
of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative
preferred stock and 20,330 shares of its 4.10% cumulative preferred stock,
largely during the second quarter of that year, as well as its repurchase of an
additional 30,375 shares of the 4.10% cumulative preferred stock in 1997.
Income (Loss) Before Extraordinary Loss. The increase in income before
extraordinary loss of $2.3 million (64.1%) from $3.6 million for the nine-month
period ended September 30, 1996, to $5.8 million for the nine-month period ended
September 30, 1997, was largely the result of the increase in income from
continuing operations and the reduced dividends on preferred stock, as discussed
above, and the absence of any loss with respect to discontinued operations.
-14-
<PAGE>
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 represented the interest expense on the
Senior Notes from the date of defeasance through June 15, 1997, the date on
which the Senior Notes were scheduled to be redeemed, plus the writeoff of the
unamortized balance of issuance expenses related to the Senior Notes, less (i)
the interest income expected to 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. The increase in net income of $3.4 million (139.3%) from $2.4
million for the first nine months of 1996 to $5.8 million for the first nine
months of 1997 was the result of the higher income from continuing operations,
the reduced dividends on subsidiary's preferred stock and the extraordinary loss
in 1996, as discussed above, as well as the absence of any loss with respect to
discontinued operations. These same factors, along with premiums of $.13 per
share during the first nine months of 1996 and discounts of $.08 per share
during the first nine months of 1997 on the repurchase of preferred stock,
accounted for the increase in earnings per share of common stock of $.59 from
$.10 per share for the first nine months of 1996 to $.69 per share for the first
nine months of 1997. Also contributing to the increase in earnings per share of
common stock was the reduction in the weighted average number of shares
outstanding as a result of the repurchase of shares, largely during the second
quarter of 1996, with proceeds from the sale of PGE's water utility operations
in February, 1996.
RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
-15-
<PAGE>
In accordance with these procedures, PGE has been permitted to make the
following changes since January 1, 1996, 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, 1997 $4.49 $3.95 $(15,700,000)
March 1, 1997 4.18 4.49 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
Recovery of FERC Order 636 Transition Costs. By Order of the PPUC entered
August 26, 1994, PGE began recovering the Non-Gas Transition Costs (i.e. Gas
Supply Realignment and Stranded Costs) that it estimates it will ultimately be
billed pursuant to Federal Energy Regulatory Commission Order 636, through the
billing of a surcharge to its customers effective September 12, 1994. It is
currently estimated that $10.7 million of Non-Gas Transition Costs will be
billed to PGE, generally over a six-year period extending through January 1,
1999, of which $9.3 million had been billed to PGE and $9.2 million had been
recovered from its customers as of September 30, 1997. 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
Liquidity
The primary capital needs of the Company continue to be the funding of PGE's
construction program and the seasonal funding of PGE's gas purchases and
increases in its customer accounts receivable. PGE's revenues are highly
seasonal and weather-sensitive, with approximately 75% of its revenues normally
being realized in the first and fourth quarters of the calendar year when the
temperatures in its service area are the coldest.
Additionally, as the Company's nonregulated activities expand, increased
capital will be required for those activities, especially the cogeneration plant
the Company has agreed to acquire and the residential and commercial real estate
development projects that are planned for certain Company-owned land. The real
estate development projects that are currently planned by the Company are in
their initial phases, and the amount and type of funding that those projects
will require has not yet been finalized. Likewise, the costs which the
cogeneration plant will involve are still being finalized. However, it is
currently anticipated that the expenditures for both the real estate development
projects and the cogeneration plant 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.
-16-
<PAGE>
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, PGE has made arrangements for a total of $68.5
million of unsecured revolving bank credit, which is deemed adequate for its
presently anticipated needs. Specifically, PGE currently has seven bank lines
of credit with an aggregate borrowing capacity of $68.5 million which provide
for borrowings at interest rates generally less than prime and mature at various
times during 1998 and 1999 and which PGE intends to renew or replace as they
expire. As of November 3, 1997, PGE had $21.2 million of borrowings outstanding
under these bank lines of credit.
The Company believes that PGE, as well as Honesdale, will be able to raise
in a timely manner such funds as are required for their future construction
expenditures, refinancings and other working capital requirements. Likewise,
the Company believes that its nonregulated 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 which is planned.
Long-Term Debt and Capital Stock Financings
Both the Company and its subsidiaries, most notably 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.
On September 12, 1997, PGE borrowed $25.0 million pursuant to a five-year
term loan agreement dated August 14, 1997 (the "Term Loan Agreement"), which
matures on August 14, 2002. Borrowings under the Term Loan Agreement bear
interest at LIBOR ("London Interbank Offered Rates") plus one-quarter of one
percent (5.875% as of November 3, 1997). Under the terms of the Term Loan
Agreement, PGE can choose interest rate periods of one, two, three or six
months. PGE utilized the proceeds from such loan to repay $25.0 million of its
bank borrowings.
On September 30, 1997, PGE issued $25.0 million of its 6.92% Senior Notes
due September 30, 2004 (the "Senior Notes"). The proceeds from the issuance of
the Senior Notes were used by PGE to repay $25.0 million of its bank borrowings.
No capital stock financings were consummated by either the Company or PGE
during the nine-month period ended September 30, 1997.
The Company also obtains external funds from the sale of common stock
through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992
Stock Option Plan and its Employees' Savings Plan. During the nine-month period
ended September 30, 1997, the Company realized $1.3 million, $51,000 and
$547,000 ($1.9 million in total) from the issuance of common stock under the
DRP, 1992 Stock Option Plan and Employees' Savings Plan, respectively.
Capital Expenditures and Related Financings
Capital expenditures totaled $25.5 million during the first nine months of
1997, including $22.7 million of expenditures for the construction of utility
plant.
The Company estimates that its capital expenditures will total $16.7 million
for the remainder of the year, consisting of $10.9 million relative to utility
plant and $5.8 million with respect to the Company's nonregulated activities.
It is anticipated that such capital expenditures will be financed with
internally generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.
-17-
<PAGE>
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1997, $14.7 million of PGE's long-term debt and $80,000
of its preferred stock was required to be repaid within twelve months.
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, such as the nature of Pennsylvania
legislation restructuring the natural gas and electric industries and general
economic conditions and uncertainties relating to new projects like the
residential and commercial development projects on Company-owned land.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its Officers -- filed herewith.
10-2 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its non-employee directors -- 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.
-19-
<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 7, 1997 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 7, 1997 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-20-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11-1
PENNSYLVANIA ENTERPRISES, INC.
Statement Re Computation of Per Share Earnings for the
Three and Nine Month Periods Ended September 30, 1997 and 1996
Three Months Ended Nine Months Ended
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income (loss) before subsidiary's
preferred stock dividends $ (2,047,000) $ (3,694,000) $ 6,827,000 $ 3,822,000
Subsidiary's preferred stock
dividends 320,000 363,000 991,000 1,383,000
Net income (loss) $ (2,367,000) $ (4,057,000) $ 5,836,000 $ 2,439,000
Earnings (loss) per share of
common stock* $ (.24) $ (.43) $ .69 $ .10
Computations of additional common
shares outstanding
Average shares of common stock 9,699,614 9,621,126 9,643,088 10,428,032
Incremental common shares
applicable to options, based on
the daily average market price 102,522 17,168 68,779 15,926
Average common shares as adjusted 9,802,136 9,638,294 9,711,867 10,443,958
Average shares of common stock 9,699,614 9,621,126 9,643,088 10,428,032
Incremental common shares
applicable to options, based on
the more dilutive of daily
average or ending market price 102,993 19,148 67,892 17,434
Average common shares fully
diluted 9,802,607 9,640,274 9,710,980 10,445,466
Earnings (loss) per share of
common stock*
Average common shares as adjusted $ (.24) $ (.43) $ .68 $ .10
Average common shares fully
diluted $ (.24) $ (.43) $ .68 $ .10
* Earnings (loss) per share of common stock reflect the effects of (premiums)/discounts
totaling $(48,261), $773,034, ($89,775) and ($1,383,771) on the redemption/repurchase of
subsidiary's preferred stock in the three and nine month periods ended September 30, 1997
and 1996, respectively,, that were charged to retained earnings and not included in the
determination of net income.
</TABLE>
<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-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 257,309,000
<OTHER-PROPERTY-AND-INVEST> 11,107,000
<TOTAL-CURRENT-ASSETS> 61,735,000
<TOTAL-DEFERRED-CHARGES> 36,827,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 366,978,000
<COMMON> 48,428,000
<CAPITAL-SURPLUS-PAID-IN> 21,865,000
<RETAINED-EARNINGS> 47,245,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 117,538,000
640,000
15,848,000
<LONG-TERM-DEBT-NET> 125,000,000
<SHORT-TERM-NOTES> 4,500,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 14,720,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 88,652,000
<TOT-CAPITALIZATION-AND-LIAB> 366,978,000
<GROSS-OPERATING-REVENUE> 155,564,000
<INCOME-TAX-EXPENSE> 3,618,000
<OTHER-OPERATING-EXPENSES> 139,648,000
<TOTAL-OPERATING-EXPENSES> 143,266,000
<OPERATING-INCOME-LOSS> 12,298,000
<OTHER-INCOME-NET> 1,395,000
<INCOME-BEFORE-INTEREST-EXPEN> 13,693,000
<TOTAL-INTEREST-EXPENSE> 6,866,000
<NET-INCOME> 6,827,000
991,000
<EARNINGS-AVAILABLE-FOR-COMM> 5,836,000
<COMMON-STOCK-DIVIDENDS> 8,583,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> 15,413,000
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
</TABLE>
EXHIBIT 10-1
Form of Stock Option Agreement with
certain officers of the Company, dated
June 20, 1997
7
STOCK OPTION AGREEMENT
UNDER THE PENNSYLVANIA ENTERPRISES, INC.
STOCK INCENTIVE PLAN
Option No.: __________
THIS AGREEMENT dated as of June 20, 1997 (the "Date of
Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC.
(the "Company") and ____________ (the "Optionee").
WHEREAS, the Company has adopted the Pennsylvania
Enterprises, Inc. Stock Incentive Plan (the "Plan"); and
WHEREAS, the purpose of the Plan is to enable the Company
and its subsidiaries to attract and retain key employees; and
WHEREAS, the Stock Option Committee of the Company's Board
of Directors (the "Committee") has determined that it would be in
the best interests of the Company to enter into this Agreement.
NOW, THEREFORE, the Company hereby grants an option (the
"Option") under the Plan to the Optionee on the following terms
and conditions:
1. AMOUNT OF STOCK SUBJECT TO OPTION:
The Company hereby grants to the Optionee, subject to the
terms and conditions set forth in this Agreement, the Option to
purchase Four Thousand (4,000) shares of authorized and unissued
common stock of the Company (without nominal or par value, with a
stated value of $5.00 per share) or shares reacquired by the
Company and held in treasury (the "Stock"), which Stock is to be
issued by the Company upon the exercise of the Option as
hereinafter set forth.
2. PURCHASE PRICE:
The purchase price per share of Stock subject to the Option
shall be twenty-five dollars and seventy-five cents ($25.75), the
fair market value of a share of Stock on the Date of Grant, as
determined by the Committee.
3. TYPE OF OPTION:
The Option is intended to be a Non-Qualified Stock Option
that is not an Incentive Stock Option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.
4. EARN-OUT OF OPTION:
The Option will become exercisable on the first anniversary
of the Date of Grant to the extent set forth below, depending on
the conditions set forth in this Section 4 that have been
satisfied. The Committee will notify the Optionee, prior to the
first anniversary of the Date of Grant, of the number of shares
of Stock as to which the Option will be exercisable in accordance
with this Section 4.
(a) The maximum number of shares with respect to which the
option shall be exercisable shall be determined in accordance
with the provisions of this Section 4(a), subject to the
remaining provisions of this Section 4.
(1) If PEI earnings per share for 1997 reaches the
outstanding level of $[ ] per share ([ ]% of budget), the
Option will be exercisable with respect to 1,000 shares, and
will be exercisable with respect to an additional 600 shares
for each of the performance goals set forth on Exhibit A
(the "Performance Goals") which is satisfied (for a maximum
total of 4,000 shares). (Exhibit B illustrates this
relationship.)
(2) If PEI earnings per share for 1997 reaches the
target level of $[ ] per share ([ ]% of budget) but does not
reach the outstanding level, the Option will be exercisable
with respect to 750 shares, and will be exercisable with
respect to an additional 450 shares for each of the
Performance Goals which is satisfied (for a maximum total of
3,000 shares).
(3) If PEI earnings per share for 1997 reaches the
threshold level of $[ ] per share ([ ]% of budget) but does
not reach the target level, the Option will be exercisable
with respect to 500 shares, and will be exercisable with
respect to an additional 300 shares for each of the
Performance Goals which is satisfied (for a maximum total of
2,000 shares).
(4) If PEI earnings per share for 1997 does not reach
the threshold level of $[ ] per share, no portion of the
Option shall be exercisable.
(5) For purposes of Section 4(a) the Committee
reserves the right to review and adjust ,as it deems
appropriate, earnings per share results for one-time, non-
operating gains or losses, such as those resulting from
accounting changes, one-time asset sales, early
retirement/severance programs, other extraordinary expenses
or transactions, and also for temperature variations from
normal degree days.
(b) Notwithstanding the provisions of Section 4(a), no
portion of the Option will be exercisable unless the Optionee (i)
remains employed by the Company or a Related Company (as defined
below) until the first anniversary of the Date of Grant in at
least the same or a similarly responsible position and (ii)
achieves at least a "meets standards" personnel performance
rating on all performance evaluations of Optionee made during
such period. For purposes of this Agreement, the term Related
Company means a corporation, partnership, joint venture or other
entity in which the Company owns, directly or indirectly, at
least a 50% beneficial ownership interest.
(c) The Compensation Committee shall determine, in its
discretion, the level of earnings per share which has been
attained, the extent to which the Performance Goals have been
satisfied, and the extent to which the Optionee has satisfied the
conditions set forth in paragraph 4(b). Notwithstanding the
foregoing provisions of this Section 4, the Committee may, in its
discretion, declare all or any portion of the Option to be
exercisable.
5. PERIOD OF OPTION:
The Option is granted as of the Date of Grant. The Option
shall expire at the earliest to occur of (a) three months after
termination of the Optionee's Employment (as defined below) for
any reason except death, disability, or retirement; (b) one year
after termination of the Optionee's Employment by reason of death
or disability; (c) five years after termination of the Optionee's
Employment by reason of retirement, on or after age 55, under the
Employees' Retirement Plan of Pennsylvania Enterprises, Inc.; or
(d) June 20, 2007 (ten years after the Date of Grant). In no
event shall the term of the Option be greater than ten years.
For purposes of this Agreement, "Employment" shall mean
employment with the Company or any Related Company.
6. EXERCISE OF OPTION:
(a) To the extent the Option has become exercisable
pursuant to Section 4, the Option may be exercised in whole or in
part with respect to full shares (and no fractional shares shall
be issued) until it expires in accordance with Section 5.
(b) In order to exercise the Option or any part thereof,
the Optionee shall give notice in writing to the Company at its
headquarters address (on a form acceptable to the Company) of the
Optionee's intention to purchase all or part of the shares
subject to the Option, and in said notice the Optionee shall set
forth the number of shares as to which he/she desires to exercise
his/her Option. The notice must be accompanied by payment in
full of the exercise price for such shares in such manner as may
be permitted by the Company. Such payment may be made in cash,
through the delivery to the Company of full shares of Stock which
have been owned by the Optionee for at least six months having a
value equal to the total exercise price of the portion of the
Option so exercised, or through a combination of cash and such
shares of Stock. Any shares of Stock so delivered shall be
valued at the average of the high and low trading prices for the
day prior to the date on which the option is exercised. The
Option will be deemed exercised on the date a proper notice of
exercise (accompanied as described above) is hand delivered, or,
if mailed, postmarked.
(c) The Optionee shall, no later than the date of exercise
of the Option, make payment to the Company in cash or its
equivalent of any federal, state, local or other taxes of any
kind required by law to be withheld with respect to the Option.
The obligations of the Company under the Plan shall be
conditional on such payment, and the Company (and, where
applicable, any Related Company) shall, to the extent permitted
by law, have the right to deduct any such taxes from any payment
of any kind otherwise due to the Optionee.
7. NON-TRANSFERABILITY OF OPTION:
The Option is not transferable otherwise than by will or by
the laws of descent and distribution. To the extent the Option
is exercisable at the time of the Optionee's death, it may be
exercised by the executor or administrator of the Optionee's
estate or by the person designated by will or entitled by the
laws of descent and distribution, upon such death, to any
remaining rights arising out of the Option.
8. CHANGE OF CONTROL:
Notwithstanding the provisions of Section 4, the Option
shall become fully exercisable upon the occurrence of a Change of
Control (as defined in the Plan).
9. CHANGE IN CAPITAL:
If prior to the expiration of the Option, there shall be any
changes in the Stock structure of the Company by reason of the
declaration of stock dividends, recapitalization resulting in
stock split-ups or combinations or exchanges of shares by reason
of merger, consolidation, or by any other means, then the number
of shares subject to the Option and the exercise price per share
of Stock shall be equitably and appropriately adjusted as the
Committee in its sole discretion shall deem just and reasonable
in light of all the circumstances pertaining thereto.
10. RIGHT TO TERMINATE EMPLOYMENT:
The Option shall not confer upon the Optionee any right to
continue in the employ of the Company or a Related Company or
interfere in any way with the right of the Company or any Related
Company to terminate the Optionee's employment at any time, nor
shall it interfere in any way with the right of the Optionee to
terminate the Optionee's employment.
11. REGISTRATION AND OTHER REQUIREMENTS:
The Option is subject to the requirement that, if at any
time the Committee shall determine that (a) the listing,
registration or qualification of the Stock subject or related to
the Option upon any securities exchange or under any state or
federal law, (b) the consent or approval of any governmental
regulatory body or (c) an agreement by the Optionee with respect
to the disposition of Stock is necessary or desirable (in
connection with any requirement or interpretation of any federal
or state securities law, rule or regulation) as a condition of,
or in connection with, the issuance, purchase or delivery of
Stock under the Option, the Option shall not be exercised, in
whole or in part, unless such listing, registration,
qualification, consent, approval or agreement shall have been
effected or obtained free of any conditions not acceptable to the
Committee.
12. SUBJECT TO THE PLAN:
The Option evidenced by the Agreement and the exercise
thereof are subject to the terms and conditions of the Plan,
which are incorporated herein by reference and made a part
hereof. In addition, the Option is subject to any rules and
regulations promulgated by the Committee.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto:
PENNSYLVANIA ENTERPRISES, INC.
By: ______________________________
Name: Thomas F. Karam
Title: President and CEO
Accepted and agreed to as
of the Date of Grant:
__________________________
Optionee
Exhibit A
Performance Goals
With respect to fiscal 1997:
[Listing of Goals]
Exhibit B
Options that become exercisable based upon achievement of
earnings and performance goals as set forth in Section 4(a) of
the Stock Option Agreement.
Goals Satisfied
PEI Earnings 5 4 3 2 1 0
Equal to or 4,000 3,400 2,800 2,200 1,600 1,000
Greater Than
Outstanding
Equal to or 3,000 2,550 2,100 1,650 1,200 750
Greater Than
Target but
Less Than
Outstanding
Equal to or 2,000 1,700 1,400 1,100 800 500
Greater Than
Threshold but
Less Than
Target
Less Than 0 0 0 0 0 0
Threshold
EXHIBIT 10-2
Form of Stock Option Agreement with
certain non-employee directors of the
Company, dated June 20, 1997
3
STOCK OPTION AGREEMENT
UNDER THE PENNSYLVANIA ENTERPRISES, INC.
STOCK INCENTIVE PLAN
Option No.: __________
THIS AGREEMENT dated as of June 20, 1997 (the "Date of
Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC.
(the "Company") and ____________ (the "Optionee").
WHEREAS, the Company has adopted the Pennsylvania
Enterprises, Inc. Stock Incentive Plan (the "Plan"); and
WHEREAS, the purpose of the Plan is to pay a portion of the
compensation of the Company's non-employee directors in options
to purchase Common Stock of the Company; and
WHEREAS, the Company's Board of Directors (the "Board") has
determined that it would be in the best interests of the Company
to enter into this Agreement.
NOW, THEREFORE, the Company hereby grants an option (the
"Option") under the Plan to the Optionee on the following terms
and conditions:
1. AMOUNT OF STOCK SUBJECT TO OPTION:
The Company hereby grants to the Optionee, subject to the
terms and conditions set forth in this Agreement, the Option to
purchase Two Thousand (2,000) shares of authorized and unissued
common stock of the Company (without nominal or par value, with a
stated value of $5.00 per share) or shares reacquired by the
Company and held in treasury (the "Stock"), which Stock is to be
issued by the Company upon the exercise of the Option as
hereinafter set forth.
2. PURCHASE PRICE:
The purchase price per share of Stock subject to the Option
shall be twenty-five dollars and seventy-five cents ($25.75), the
fair market value of a share of Stock on the Date of Grant, as
determined by the Board.
3. TYPE OF OPTION:
The Option is intended to be a Non-Qualified Stock Option
that is not an Incentive Stock Option within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended.
4. EARN-OUT OF OPTION:
The Option will become exercisable on the later of (i) the
first anniversary of the Date of Grant or (ii) the date of the
shareowner meeting to be held in 1998, to the extent set forth
below, depending on the conditions set forth in this Section 4
that have been satisfied. The Board will notify the Optionee,
prior to the date the Option becomes exercisable, of the number
of shares of Stock as to which the Option will be exercisable in
accordance with this Section 4.
(a) The maximum number of shares with respect to which the
option shall be exercisable shall be determined in accordance
with the provisions of this Section 4(a), subject to the
remaining provisions of this Section 4.
(1) If PEI earnings per share for 1997 reaches the
outstanding level of $[ ] per share ([ ]% of budget), the
Option will be exercisable with respect to 500 shares, and
will be exercisable with respect to an additional 300 shares
for each of the performance goals set forth on Exhibit A
(the "Performance Goals") which is satisfied (for a maximum
total of 2,000 shares). (Exhibit B illustrates this
relationship.)
(2) If PEI earnings per share for 1997 reaches the
target level of $[ ] per share ([ ]% of budget) but does not
reach the outstanding level, the Option will be exercisable
with respect to 375 shares, and will be exercisable with
respect to an additional 225 shares for each of the
Performance Goals which is satisfied (for a maximum total of
1,500 shares).
(3) If PEI earnings per share for 1997 reaches the
threshold level of $[ ] per share ([ ]% of budget) but does
not reach the target level, the Option will be exercisable
with respect to 250 shares, and will be exercisable with
respect to an additional 150 shares for each of the
Performance Goals which is satisfied (for a maximum total of
1,000 shares).
(4) If PEI earnings per share for 1997 does not reach
the threshold level of $[ ] per share, no portion of the
Option shall be exercisable.
(5) For purposes of Section 4(a) the Board reserves
the right to review and adjust, as it deems appropriate,
earnings per share results for one-time, non-operating gains
or losses, such as those resulting from accounting changes,
one-time asset sales, early retirement/severance programs,
other extraordinary expenses or transactions, and also for
temperature variations from normal degree days.
(b) Notwithstanding the provisions of Section 4(a), no
portion of the Option will be exercisable unless the Optionee
continues to serve on the Board until the Company's annual
meeting of shareowners held in 1998.
(c) The Board shall determine, in its discretion, the level
of earnings per share which has been attained, the extent to
which the Performance Goals have been satisfied, and whether the
Optionee has satisfied the conditions set forth in paragraph
4(b). Notwithstanding the foregoing provisions of this Section
4, the Board may, upon a determination that there were
extraordinary circumstances, declare all or any portion of the
Option to be exercisable.
5. PERIOD OF OPTION:
The Option is granted as of the Date of Grant. The Option
shall expire at the earliest to occur of (a) two years after
termination of the Optionee's service on the Board for any
reason; or (b) June 20, 2007 (ten years after the Date of Grant).
In no event shall the term of the Option be greater than ten
years.
6. EXERCISE OF OPTION:
(a) To the extent the Option has become exercisable
pursuant to Section 4, the Option may be exercised in whole or in
part with respect to full shares (and no fractional shares shall
be issued) until it expires in accordance with Section 5.
(b) In order to exercise the Option or any part thereof,
the Optionee shall give notice in writing to the Company at its
headquarters address (on a form acceptable to the Company) of the
Optionee's intention to purchase all or part of the shares
subject to the Option, and in said notice the Optionee shall set
forth the number of shares as to which he/she desires to exercise
his/her Option. The notice must be accompanied by payment in
full of the exercise price for such shares in such manner as may
be permitted by the Company. Such payment may be made in cash,
through the delivery to the Company of full shares of Stock which
have been owned by the Optionee for at least six months having a
value equal to the total exercise price of the portion of the
Option so exercised, or through a combination of cash and such
shares of Stock. Any shares of Stock so delivered shall be
valued at the average of the high and low trading prices for the
day prior to the date on which the option is exercised. The
Option will be deemed exercised on the date a proper notice of
exercise (accompanied as described above) is hand delivered, or,
if mailed, postmarked.
(c) The Optionee shall, no later than the date of exercise
of the Option, make payment to the Company in cash or its
equivalent of any federal, state, local or other taxes of any
kind which may be required by law to be withheld with respect to
the Option. The obligations of the Company under the Plan shall
be conditional on such payment, and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the Optionee.
7. NON-TRANSFERABILITY OF OPTION:
The Option is not transferable otherwise than by will or by
the laws of descent and distribution. To the extent the Option
is exercisable at the time of the Optionee's death, it may be
exercised by the executor or administrator of the Optionee's
estate or by the person designated by will or entitled by the
laws of descent and distribution, upon such death, to any
remaining rights arising out of the Option.
8. CHANGE OF CONTROL:
Notwithstanding the provisions of Section 4, the Option
shall become fully exercisable upon the occurrence of a Change of
Control (as defined in the Plan).
9. CHANGE IN CAPITAL:
If prior to the expiration of the Option, there shall be any
changes in the Stock structure of the Company by reason of the
declaration of stock dividends, recapitalization resulting in
stock split-ups or combinations or exchanges of shares by reason
of merger, consolidation, or by any other means, then the number
of shares subject to the Option and the exercise price per share
of Stock shall be equitably and appropriately adjusted as the
Board in its sole discretion shall deem just and reasonable in
light of all the circumstances pertaining thereto.
10. RIGHT TO TERMINATE EMPLOYMENT:
The Option shall not confer upon the Optionee any right to
continued service as a Director of the Company.
11. REGISTRATION AND OTHER REQUIREMENTS:
The Option is subject to the requirement that, if at any
time the Board shall determine that (a) the listing, registration
or qualification of the Stock subject or related to the Option
upon any securities exchange or under any state or federal law,
(b) the consent or approval of any governmental regulatory body
or (c) an agreement by the Optionee with respect to the
disposition of Stock is necessary or desirable (in connection
with any requirement or interpretation of any federal or state
securities law, rule or regulation) as a condition of, or in
connection with, the issuance, purchase or delivery of Stock
under the Option, the Option shall not be exercised, in whole or
in part, unless such listing, registration, qualification,
consent, approval or agreement shall have been effected or
obtained free of any conditions not acceptable to the Board.
12. SUBJECT TO THE PLAN:
The Option evidenced by the Agreement and the exercise
thereof are subject to the terms and conditions of the Plan,
which are incorporated herein by reference and made a part
hereof. In addition, the Option is subject to any rules and
regulations promulgated by the Board.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto:
PENNSYLVANIA ENTERPRISES, INC.
By: ______________________________
Name: Thomas F. Karam
Title: President and CEO
Accepted and agreed to as
of the Date of Grant:
__________________________
Optionee
Exhibit A
Performance Goals
With respect to fiscal 1997:
[Listing of Goals]
Exhibit B
Options that become exercisable based upon achievement of
earnings and performance goals as set forth in Section 4(a) of
the Stock Option Agreement.
Goals Satisfied
PEI Earnings 5 4 3 2 1 0
Equal to or 2,000 1,700 1,400 1,100 800 500
Greater Than
Outstanding
Equal to or 1,500 1,275 1,050 825 600 375
Greater Than
Target but
Less Than
Outstanding
Equal to or 1,000 850 700 550 400 250
Greater Than
Threshold but
Less Than
Target
Less Than 0 0 0 0 0 0
Threshold
