FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-7812
PENNSYLVANIA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1920170
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
(Address of principal executive offices) (Zip Code)
(717) 829-8843
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 10,195,434 shares of common stock, no par value, outstanding
as of October 30, 1998.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
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, 1998 and 1997............................... 2
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997........................................... 3
Consolidated Statements of Cash Flows for
the nine months ended September 30, 1998 and 1997............... 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..................... 18
<PAGE>
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,
---------------------------- ---------------------------
1998 1997* 1998 1997*
------------- ------------ ------------- ------------
(Thousands of Dollars)
OPERATING REVENUES:
Energy products and services -
<S> <C> <C> <C> <C>
Regulated ......................................... $ 15,177 $ 16,276 $ 105,187 $ 129,425
Nonregulated ...................................... 8,112 4,589 25,254 18,015
Pipeline construction and services .................... 3,611 3,344 9,219 8,124
------------ ------------ ------------ ------------
Total operating revenues ...................... 26,900 24,209 139,660 155,564
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Cost of gas and other energy .......................... 13,105 11,089 77,752 90,523
Operation and maintenance ............................. 11,681 11,088 34,038 32,396
Depreciation .......................................... 2,691 2,367 7,902 7,045
Income taxes .......................................... (2,098) (2,064) 1,365 3,618
Taxes other than income taxes ......................... 1,780 2,020 8,757 9,684
------------ ------------ ------------ ------------
Total other operating expenses .................... 27,159 24,500 129,814 143,266
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) .................................... (259) (291) 9,846 12,298
OTHER INCOME, NET .......................................... 635 667 1,570 1,395
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES ............................. 376 376 11,416 13,693
------------ ------------ ------------ ------------
INTEREST CHARGES:
Interest on long-term debt ............................. 2,668 2,238 7,701 6,379
Other interest ......................................... 138 230 407 631
Allowance for borrowed funds used during construction .. (38) (45) (90) (144)
------------ ------------ ------------ ------------
Total interest charges .............................. 2,768 2,423 8,018 6,866
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS ........................................ (2,392) (2,047) 3,398 6,827
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS ..................... 319 320 961 991
------------ ------------ ------------ ------------
NET INCOME (LOSS) .......................................... $ (2,711) $ (2,367) $ 2,437 $ 5,836
============ ============ ============ ============
BASIC EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Before discount on repurchase of subsidiary's preferred
stock ............................................. $ (0.27) $ (0.24) $ 0.25 $ 0.61
Discount on repurchase of subsidiary's preferred stock -- -- -- 0.08
------------ ------------ ------------ ------------
Earnings (loss) per share of common stock ............. $ (0.27) $ (0.24) $ 0.25 $ 0.69
============ ============ ============ ============
DILUTED EARNINGS (LOSS) PER SHARE OF
COMMON STOCK:
Before discount on repurchase of subsidiary's preferred
stock ............................................. $ (0.27) $ (0.24) $ 0.24 $ 0.60
Discount on repurchase of subsidiary's preferred stock -- -- -- 0.08
------------ ------------ ------------ ------------
Earnings (loss) per share of common stock ............. $ (0.27) $ (0.24) $ 0.24 $ 0.68
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic ........................................... 10,062,702 9,669,614 9,906,282 9,643,088
============ ============ ============ ============
Diluted ......................................... 10,141,608 9,800,192 9,989,804 9,711,219
============ ============ ============ ============
CASH DIVIDENDS PER SHARE ................................... $ 0.30 $ 0.30 $ 0.90 $ 0.89
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
* Restated to conform to 1998 presentation.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
<S> <C> <C>
At original cost ................................. $ 369,232 $ 351,106
Accumulated depreciation ......................... (94,826) (88,129)
--------- ---------
274,406 262,977
--------- ---------
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment ................ 29,144 16,335
Accumulated depreciation ......................... (5,475) (4,875)
Other ............................................ 2,352 2,171
--------- ---------
26,021 13,631
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents ........................ 432 2,202
Restricted cash - common stock subscribed (Note 3) 487 --
Accounts receivable -
Customers .................................... 15,056 28,681
Others ....................................... 876 850
Reserve for uncollectible accounts ........... (1,521) (1,340)
Unbilled revenues ................................ 3,111 12,108
Materials and supplies, at average cost .......... 3,419 3,110
Gas held by suppliers, at average cost ........... 26,482 21,933
Deferred cost of gas and supplier refunds, net ... 11,540 6,316
Prepaid expenses and other ....................... 4,022 1,686
--------- ---------
63,904 75,546
--------- ---------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible .................... 31,109 30,592
Other ......................................... 6,579 4,415
Unamortized debt expense .......................... 1,101 1,361
Other ............................................. 250 308
--------- ---------
39,039 36,676
--------- ---------
TOTAL ASSETS ........................................... $ 403,370 $ 388,830
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---------- ---------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
<S> <C> <C> <C>
Common shareholders' investment (Note 3) .... $125,167 $122,105
Preferred stock of PG Energy -
Not subject to mandatory redemption, net 4,839 15,864
Subject to mandatory redemption ........ 560 640
Long-term debt .............................. 95,000 127,000
-------- --------
225,566 265,609
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt ........... 67,697 24,776
Preferred stock subject to repurchase or
mandatory redemption .................... 11,057 80
Notes payable ............................... 3,270 2,170
Accounts payable ............................ 20,164 18,448
Accrued general business and realty taxes ... 646 2,953
Accrued income taxes ........................ 1,362 4,618
Accrued interest ............................ 1,221 1,783
Accrued natural gas transition costs ........ 281 1,087
Other ....................................... 1,868 1,722
-------- --------
107,566 57,637
-------- --------
DEFERRED CREDITS:
Deferred income taxes ....................... 55,364 52,511
Unamortized investment tax credits .......... 4,467 4,596
Operating reserves .......................... 2,578 2,825
Other ....................................... 7,829 5,652
-------- --------
70,238 65,584
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES .............. $403,370 $388,830
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ---------
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ............................................................... $ 2,437 $ 5,836
Gain on sales of nonutility property ..................................... (2,275) (701)
Effects of noncash charges to income -
Depreciation ......................................................... 7,970 7,095
Deferred income taxes, net ........................................... 2,336 715
Provisions for self insurance ........................................ 560 630
Other, net ........................................................... 1,576 1,603
Changes in working capital, exclusive of cash and current portion of
long-term debt and preferred stock -
Receivables and unbilled revenues ............................... 22,777 16,221
Gas held by suppliers ........................................... (4,549) (5,705)
Accounts payable ................................................ (373) (6,568)
Deferred cost of gas and supplier refunds, net .................. (6,030) 10,316
Other current assets and liabilities, net ....................... (8,624) (39)
Other operating items, net ............................................... (1,954) (335)
-------- --------
Net cash provided by continuing operations ..................... 13,851 29,068
Net cash used for discontinued operations, principally for the payment
of income taxes ..................................................... -- (13,655)
-------- --------
Net cash provided by operating activities ....................... 13,851 15,413
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ............................................... (19,955) (22,810)
Additions to nonutility property ......................................... (13,179) (2,172)
Proceeds from the sales of nonutility property ........................... 2,855 746
Acquisition of regulated business ........................................ -- (2,019)
Other, net ............................................................... 55 (3)
-------- --------
Net cash used for investing activities .......................... (30,224) (26,258)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt ............................................... -- 25,000
Issuance of common stock ................................................. 9,049 1,861
Common stock subscribed, net ............................................. 487 --
Repurchase of subsidiary's preferred stock ............................... (128) (3,137)
Dividends on common stock ................................................ (8,926) (8,583)
Net increase (decrease) in bank borrowings ............................... 14,110 (5,021)
Other, net ............................................................... 11 700
-------- --------
Net cash used for financing activities .......................... 14,603 10,820
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (1,770) (25)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 2,202 1,126
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 432 $ 1,101
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) .................................. $ 8,178 $ 6,000
======== ========
Income taxes .......................................................... $ 2,679 $ 15,197
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is
a holding company 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. ("PG Energy"), a regulated public
utility, and PG Energy's wholly-owned subsidiary, Honesdale Gas Company
("Honesdale"), also a regulated public utility which was acquired on February
14, 1997. Together PG Energy and Honesdale distribute natural gas to a
thirteen-county area in northeastern Pennsylvania, a territory that includes the
cities of Scranton, Wilkes-Barre and Williamsport. In 1997, PG Energy and
Honesdale collectively accounted for approximately 84% of the Company's
operating revenues.
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), PEI Power Corporation ("Power Corp") which was formed in
October, 1997, Theta Land Corporation ("Theta") and Keystone Pipeline Services,
Inc. ("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in
various nonregulated activities. These activities include the sale of natural
gas, propane, electricity and other energy-related products and services; the
construction, maintenance and rehabilitation of utility facilities, primarily
natural gas distribution pipelines; and the sale of property for residential,
commercial and other development. In the fourth quarter of 1997, Energy Services
began marketing electricity and other products and services, under the name PG
Energy PowerPlus, in 26 counties in northeastern and central Pennsylvania. Power
Corp, an exempt wholesale electricity generator, began generating and selling
electricity in July, 1998, upon completion of modifications to its cogeneration
facility that enable it to burn both natural gas and methane.
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its subsidiaries, PG Energy, Energy
Services (including Keystone), Power Corp and Theta. The consolidated financial
statements also include the accounts of Honesdale beginning February 14, 1997,
the date Honesdale was acquired by PG Energy. All material intercompany accounts
have been eliminated in consolidation.
Both PG Energy and Honesdale (collectively referred to as the "Regulated
Subsidiaries") are subject to the jurisdiction of the Pennsylvania Public
Utility Commission (the "PPUC") for rate and accounting purposes. The financial
information of the Regulated Subsidiaries that is incorporated in these
consolidated financial statements has 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 the sale of natural gas. 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 and regulatory matters which
are difficult to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
(2) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PG Energy'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
PG Energy'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 PG Energy,
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 PG Energy has been permitted to make
the following changes since January 1, 1997, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- ------------------- ---------- ----------- -------------------------
September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000
June 1, 1998 3.95 4.18 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
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.
(3) RESTRICTED CASH - COMMON STOCK SUBSCRIBED
The Company reinstated its Customer Stock Purchase Plan (the "Customer
Plan") effective February 4, 1998. The Customer Plan provides the residential
customers of all the Company's subsidiaries with a method of purchasing
newly-issued shares of the Company's common stock at a 5% discount from the
market price. On October 1, 1998, the Company issued 20,401 shares of its common
stock for an aggregate consideration of $483,000 with respect to payments
received pursuant to the Customer Plan during the subscription period ended
September 30, 1998. Such payments are reflected under the captions "Restricted
cash - common stock subscribed" and "Common shareholders' investment" in these
consolidated financial statements as of September 30, 1998.
(4) ACCOUNTING CHANGES
Reporting Comprehensive Income. Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting Comprehensive Income."
However, because there were no items comprising other comprehensive income, the
adoption of FASB 130 has no effect on the Company's financial statements for the
periods ended September 30, 1998.
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 will adopt the reporting provisions of FASB
Statement 131 in the fourth quarter of 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, FASB Statement 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. The provisions of this statement, which are effective
for fiscal quarters beginning after June 15, 1999, establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. While the
Company generally has not used derivative instruments, it expects to adopt, to
the extent necessary, the provisions of FASB Statement 133 in the third quarter
of 1999. The impact of such adoption on the Company's future financial condition
and results of operations will depend upon a number of factors, including the
extent to which the Company may use derivative instruments, and the designation
and effectiveness of such derivative hedging market risk.
(5) COMMITMENTS AND CONTINGENCIES
Environmental Matters. PG Energy, 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 PG Energy. Pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), PG Energy 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 PG Energy 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 PG Energy 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 portion from PG Energy. PG Energy, 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, PG Energy 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 PG Energy 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.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating revenues for each of the three
and nine-month periods ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ------------ -----------
OPERATING REVENUES:
Energy products and services -
<S> <C> <C> <C> <C>
Regulated 56.4 % 67.2 % 75.3 % 83.2 %
Nonregulated 30.2 19.0 18.1 11.6
Pipeline construction and services 13.4 13.8 6.6 5.2
----- ----- ----- -----
Total operating revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Cost of gas and other energy 48.8 45.8 55.7 58.2
Operation and maintenance 43.4 45.8 24.4 20.8
Depreciation 10.0 9.8 5.6 4.6
Income taxes (7.8) (8.5) 1.0 2.3
Taxes other than income taxes 6.6 8.3 6.3 6.2
----- ----- ----- -----
Total operating expenses 101.0 101.2 93.0 92.1
----- ----- ----- -----
OPERATING INCOME (1.0) (1.2) 7.0 7.9
OTHER INCOME, NET 2.4 2.7 1.1 0.9
INTEREST CHARGES (10.3) (10.0) (5.7) (4.4)
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (1.2) (1.3) (0.7) (0.6)
----- ----- ----- -----
NET INCOME (LOSS) (10.1)% (9.8)% 1.7% 3.8%
====== ===== ===== =====
</TABLE>
o Three Months Ended September 30, 1998, Compared With Three Months Ended
September 30, 1997
Operating Revenues. Operating revenues increased $2.7 million (11.1%)
from $24.2 million for the quarter ended September 30, 1997, to $26.9 million
for the quarter ended September 30, 1998, largely as a result of a $3.5 million
(76.8%) increase in revenues from nonregulated energy products and services,
including a $2.2 million (49.7%) increase in gas sales and services by PG Energy
Services Inc. ("Energy Services"), a nonregulated affiliate of the Company, and
$832,000 attributable to the generation and sale of electric energy by PEI Power
Corporation ("Power Corp"), a nonregulated affiliate of the Company which began
generating and selling electricity in July, 1998. The impact of these increases
was partially offset by a $1.1 million (6.8%) decrease in operating revenues
from regulated energy products and services, namely, the sale and transportation
of natural gas.
Operating revenues from regulated energy products and services decreased
$1.1 million (6.8%) from $16.3 million for the quarter ended September 30, 1997,
to $15.2 million for the quarter ended September 30, 1998, primarily as a result
of a 50 million cubic feet (4.0%) decrease in natural gas sales by PG Energy
Inc. ("PG Energy") to its residential and commercial heating customers. This
reduction in sales was attributable to warmer than normal temperatures during
the third quarter of 1998 and colder than normal temperatures during the same
period in 1997, as well as lower levels in PG Energy's gas cost rate (see "-Rate
Matters"). The number of heating degree days decreased by 97 (46.2%) from 210
(175.0% of normal) during the third quarter of 1997 to 113 (94.2% of normal)
during the third quarter of 1998.
The $2.2 million (49.7%) increase in Energy Services' nonregulated gas
sales and services, from $4.5 million for the quarter ended September 30, 1997,
to $6.8 million for the quarter ended September 30, 1998, was primarily the
result of a 1.1 million cubic feet (73.2%) increase in sales of natural gas by
Energy Services during the quarter.
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $2.7 million (10.9%) from $24.5 million for the third quarter
of 1997 to $27.2 million for the third quarter of 1998. As a percentage of
operating revenues, total operating expenses decreased slightly from 101.2%
during the third quarter of 1997 to 101.0% during the third quarter of 1998.
The cost of gas and other energy increased $2.0 million (18.2%) from
$11.1 million for the third quarter of 1997 to $13.1 million for the third
quarter of 1998, primarily because of the aforementioned increase in sales by
Energy Services and the sales of Power Corp since it began operating in July,
1998. The effects of these increases were partially offset by the decrease in
the volume of natural gas sold by PG Energy to its residential and commercial
heating customers and lower levels in PG Energy's gas cost rate (see "-Rate
Matters").
Other than the cost of gas and other energy and income taxes, operating
expenses increased by $677,000 (4.4%) from $15.5 million for the third quarter
of 1997 to $16.2 million for the third quarter of 1998. This increase was
largely attributable to a $593,000 (5.3%) increase in operation and maintenance
expense, primarily as a result of increased payroll and other costs associated
with the expansion of the Company's nonregulated activities. Also contributing
to the higher operating expenses was a $324,000 (13.7%) increase in depreciation
expense, primarily because of additions to utility plant. The effects of these
increases were partially offset by a $240,000 (11.9%) decrease in taxes other
than income taxes resulting from a lower level of gross receipts tax because of
the decreased sales by PG Energy and Honesdale Gas Company ("Honesdale"), a
wholly-owned regulated subsidiary of PG Energy.
Operating Income (Loss). As a result of the above, the operating loss
decreased by $32,000 (11.0%) from $291,000 for the three-month period ended
September 30, 1997, to $259,000 for the three-month period ended September 30,
1998, and also decreased as a percentage of total operating revenues for such
periods from 1.2% in the three-month period ended September 30, 1997, to 1.0% in
the three-month period ended September 30, 1998.
Interest Charges. Interest charges increased $345,000 (14.2%) from $2.4
million for the third quarter of 1997 to $2.8 million for the third quarter of
1998. This increase was largely attributable to a higher level of long-term debt
outstanding in 1998.
Net Income (Loss). The increase of $344,000 in the net loss, from $2.4
million for the third quarter of 1997 to $2.7 million for the third quarter of
1998, and the $.03 per share increase in both the basic and diluted loss per
share of common stock, from $.24 per share for the third quarter of 1997 to $.27
per share for the third quarter of 1998, were principally the result of
operating income remaining relatively static while interest charges increased.
o Nine Months Ended September 30, 1998, Compared With Nine Months Ended
September 30, 1997
Operating Revenues. Operating revenues decreased $15.9 million (10.2%)
from $155.6 million for the nine-month period ended September 30, 1997, to
$139.7 million for the nine-month period ended September 30, 1998, largely as a
result of a $24.2 million (18.7%) decrease in operating revenues from regulated
energy products and services, the impact of which was partially offset by a $7.2
million (40.2%) increase in operating revenues from nonregulated energy products
and services, including a $5.5 million (30.6%) increase in gas sales and
services by Energy Services, $832,000 of electric energy sales by Power Corp
since July, 1998, when it began generating and selling electricity, and a $1.1
million (13.5%) increase in the pipeline construction and services revenues of
Keystone Pipeline Services, Inc., a nonregulated subsidiary of Energy Services.
Operating revenues from regulated energy products and services decreased
$24.2 million (18.7%) from $129.4 million for the nine-month period ended
September 30, 1997, to $105.2 million for the nine-month period ended September
30, 1998, primarily as a result of a 2.5 billion cubic feet (16.7 %) decrease in
natural gas sales by PG Energy to its residential and commercial heating
customers. This reduction in sales was attributable to warmer than normal
weather during the period and lower levels in PG Energy's gas cost rate (see
"-Rate Matters"). The number of heating degree days decreased by 867 (20.8%)
from 4,165 (102.2% of normal) during the first nine months of 1997 to 3,298
(80.9% of normal) during the first nine months of 1998.
The $5.5 million increase in Energy Services' nonregulated gas sales and
services from $17.9 million for the nine-month period ended September 30, 1997,
to $23.4 million for the nine-month period ended September 30, 1998, was
primarily the result of a 2.4 million cubic feet (47.5%) increase in sales of
natural gas by Energy Services during the period.
Operating Expenses. Operating expenses, including depreciation and income
taxes, decreased $13.5 million (9.4%) from $143.3 million for the nine-month
period ended September 30, 1997, to $129.8 million for the nine-month period
ended September 30, 1998. As a percentage of operating revenues, total operating
expenses increased from 92.1% during the nine-month period ended September 30,
1997, to 93.0% during the nine-month period ended September 30, 1998, because of
the lower level of operating revenues.
The cost of gas and other energy decreased $12.8 million (14.1%) from
$90.5 million for the nine-month period ended September 30, 1997, to $77.8
million for the nine-month period ended September 30, 1998, primarily because of
the aforementioned decrease in sales to PG Energy's residential and commercial
heating customers and lower levels in PG Energy's gas cost rate (see "-Rate
Matters"). The effects of these factors were partially offset by the increased
sales of Energy Services and the sales by Power Corp.
Other than the cost of gas and other energy and income taxes, operating
expenses increased by $1.6 million (3.2%) from $49.1 million for the nine-month
period ended September 30, 1997, to $50.7 million for the nine-month period
ended September 30, 1998. This increase was largely attributable to a $1.6
million (5.1%) increase in operation and maintenance expense, primarily because
of increased payroll and other costs associated with the expansion of the
Company's nonregulated activities and an $857,000 (12.2%) increase in
depreciation expense, primarily as a result of additions to utility plant. The
impact of these increases was partially offset by a $927,000 (9.6%) decrease in
taxes other than income taxes resulting from a lower level of gross receipts tax
because of the decreased sales by PG Energy and Honesdale.
Income taxes decreased $2.3 million (62.3%) from $3.6 million for the
nine-month period ended September 30, 1997, to $1.4 million for the nine-month
period ended September 30, 1998, due to a decrease in income before income taxes
(for this purpose, operating income net of interest charges).
Operating Income. As a result of the above, primarily the decrease in
sales by PG Energy, operating income decreased by $2.5 million (19.9%) from
$12.3 million for the nine-month period ended September 30, 1997, to $9.8
million for the nine-month period ended September 30, 1998, and also decreased
as a percentage of total operating revenues for such periods from 7.9% in the
nine-month period ended September 30, 1997, to 7.0% in the nine-month period
ended September 30, 1998.
Interest Charges. Interest charges increased $1.2 million (16.8%) from
$6.9 million for the nine-month period ended September 30, 1997, to $8.0 million
for the nine-month period ended September 30, 1998. This increase was largely
attributable to a higher level of long-term debt outstanding in 1998.
Net Income (Loss). The decrease in net income of $3.4 million (58.2%)
from $5.8 million for the nine-month period ended September 30, 1997, to $2.4
million for the nine-month period ended September 30, 1998, was the result of
the matters discussed above, principally the decrease in sales by PG Energy and
the increase in interest charges, the effects of which were partially offset by
decreased operating expenses. The same factors, along with the inclusion of a
$.08 per share discount on the repurchase of preferred stock in 1997, accounted
for the decrease in both basic and diluted earnings per share of common stock of
$.44 per share for the nine-month period ended September 30, 1998.
<PAGE>
RATE MATTERS
Rate Increases. By Order adopted December 19, 1996, the Pennsylvania
Public Utility Commission (the "PPUC") approved an overall 5.3% increase in PG
Energy'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 PG Energy's residential heating
customers, which totaled $2.4 million through June 30, 1997, was deferred,
without carrying charges, until July, 1997.
On March 16, 1998, PG Energy filed an application with the PPUC seeking
an increase in its base gas rates, designed to produce $15.0 million in
additional annual revenue, to be effective May 15, 1998. On September 29, 1998,
PG Energy and certain parties filing objections to the rate increase request
filed a Settlement Petition with the Administrative Law Judge assigned to
conduct the investigation of the rate increase request. By Order adopted October
16, 1998, the PPUC approved the Settlement Petition and granted PG Energy an
overall 4.1% increase in its base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
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 PG Energy,
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, PG Energy has been permitted to make
the following changes since January 1, 1997, to the gas costs contained in its
gas tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- --------------------- ----------- ---------- -------------------------
September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000
June 1, 1998 3.95 4.18 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of the Company continue to be the funding of PG
Energy's construction program and the seasonal funding of PG Energy's gas
purchases and increases in its customer accounts receivable. PG Energy'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 continue to
expand, further capital will be required for those activities. It is currently
anticipated that such expenditures will be funded by a combination of capital
provided by the Company, bank borrowings and other debt financing.
The cash flow from PG Energy's operations is generally sufficient to fund
a portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG Energy to use bank borrowings to
fund such expenditures, pending the periodic issuance of stock and long-term
debt. Bank borrowings are also used by PG Energy for the seasonal funding of its
gas purchases and increases in customer accounts receivable.
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, PG Energy has made arrangements for a total of
$63.0 million of unsecured revolving bank credit, which is deemed adequate for
its needs. Specifically, PG Energy currently has six bank lines of credit with
an aggregate borrowing capacity of $63.0 million which provide for borrowings at
interest rates generally less than prime and which mature at various times
during 1999 and which PG Energy intends to renew or replace as they expire. As
of October 30, 1998, PG Energy had $38.7 million of borrowings outstanding under
these bank lines of credit.
The Company believes that its regulated subsidiaries 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 future needs.
Long-Term Debt and Capital Stock Financings
Both the Company and its subsidiaries, most notably PG Energy,
periodically engage in long-term debt and capital stock financings in order to
obtain funds required for construction expenditures, the refinancing of existing
debt and various working capital purposes. No long-term debt or capital stock
financings were consummated by either the Company or PG Energy during the
nine-month period ended September 30, 1998.
The Company also obtains external funds from the sale of common stock
through its Dividend Reinvestment and Stock Purchase Plan, its Customer Stock
Purchase Plan, its 1992 Stock Option Plan and its Employees' Savings Plan.
During 1998 (through October 30) the Company realized $10.7 million from the
issuance of common stock under these plans.
Capital Expenditures and Related Financings
Capital expenditures totaled $33.3 million during the first nine months
of 1998, including $20.0 million of expenditures for the construction of utility
plant and $9.1 million for the conversion of Power Corp's cogeneration plant and
construction of the related methane recovery facility.
The Company estimates that its capital expenditures will total $12.0
million for the remainder of the year, consisting of $10.0 million relative to
utility plant and $2.0 million with respect to the Company's nonregulated
activities. These capital expenditures will be financed with internally
generated funds and bank borrowings, pending the periodic issuance of stock and
long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1998, $67.7 million of long-term debt and $11.1
million of PG Energy's preferred stock was required to be repaid within twelve
months. The $67.7 million of long-term debt includes $20.0 million outstanding
under the Company's Term Loan Agreement which is due on May 31, 1999, $36.7
million outstanding under PG Energy's bank lines of credit which is due at
various times during 1999, $10.0 million of PG Energy's 9.23% series first
mortgage bonds which are due September 1, 1999, and $1.0 million outstanding
under a Power Corp bank line of credit which is due March 30, 1999. The $11.1
million of PG Energy preferred stock includes $11.0 million relative to all of
the outstanding shares of PG Energy's 9% cumulative preferred stock, $100 par
value, which have been called for redemption on December 1, 1998, at a price of
$104 per share, plus accrued dividends.
PG Energy, the Company and Power Corp are each intending to finance their
respective current maturities of long-term debt and preferred stock with
internally generated funds and bank borrowings pending the periodic issuance of
long-term debt and capital stock.
Year 2000
The Company has performed an inventory and assessment of its computer
systems and applications, as well as devices with embedded technology, to
identify year 2000 issues and to develop a plan for addressing those issues.
This plan, which was initiated in 1996, is scheduled to be completed by March
31, 1999, for all applications and devices that could have a material effect on
the Company's operations, and by June 30, 1999, with respect to all other
issues. The plan involves the replacement of certain systems with purchased
software, the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule. In view of the
substantial progress that has been made to date, management does not anticipate
the expenditures necessary to carry out the plan will be material relative to
the Company's financial position or results of operations.
As key elements of its plan to address year 2000 issues, the Company is
in the process of replacing its financial and human resource systems with
purchased software. The installation of these new systems, along with
modifications currently being made to the Company's customer information system
and upgrading of its operating system software, will resolve the primary year
2000 issues. The new financial and human resource systems are anticipated to be
fully tested and operational by January, 1999, while the modifications and
testing of the customer information system and the upgrading of its Company's
operating system software are now anticipated to be completed by March 31, 1999.
The Company's plan to address year 2000 issues includes an assessment of
its critical suppliers and vendors, and also its largest customers, to determine
their status relative to year 2000 compliance. The Company is in the process of
surveying approximately 200 such suppliers, vendors and customers and to date
has not identified any situations that would appear to pose a significant risk
to the Company. The Company intends to continue monitoring the progress being
made by its suppliers, vendors and largest customers relative to year 2000
compliance and will promptly initiate appropriate contingency planning should
the occasion warrant.
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, such statements 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. The Company
cautions that assumptions, projections, expectations, intentions or beliefs
about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: the nature of
Pennsylvania legislation restructuring the natural gas industry; the impact of
year 2000 compliance; industrial, commercial and residential growth in the
service territories of the Company and its subsidiaries; the weather and other
natural phenomena; the timing and extent of changes in commodity prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its subsidiaries are subject or other external factors over
which the Company has no control; growth in opportunities for the Company's
nonregulated activities; and general economic conditions and uncertainties
relating to such growth during the periods covered by the forward-looking
statements. The Company undertakes no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this filing.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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.
<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 5, 1998 By: /s/ Donna M. Abdalla
Donna M. Abdalla
Acting Secretary
Date: November 5, 1998 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
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