PART I
ITEM l. BUSINESS
GENERAL
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 130 municipalities, in
addition to 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. Until February 16, 1996, when its water utility
operations were sold, PG Energy was also engaged in the distribution of water
(See "-Sale of Water Utility Operations.")
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), formerly known as Pennsylvania Energy Resources, Inc., 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 which was acquired effective December
4, 1995, is engaged in various nonregulated activities, including the sale of
natural gas, propane and electricity and other energy-related services, as well
as the construction, maintenance and rehabilitation of natural gas distribution
pipelines and the sale of property for residential, commercial and other
development. Additionally, commencing in mid-1998, the Company expects to begin
generating and selling electricity and steam produced by the cogeneration
facility which Power Corp acquired in November, 1997. Prior to 1996, the
Company's nonregulated subsidiaries did not constitute a significant portion of
either its assets or operations. However, it is anticipated that in 1998 the
revenues of these subsidiaries will account for 25-30% of the Company's
operating revenues and 20-25% of its capital expenditures.
Both PG Energy, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water
Company, and Honesdale (collectively referred to as the "Regulated
Subsidiaries") are regulated by the Pennsylvania Public Utility Commission (the
"PPUC"). As of December 31, 1997, PG Energy provided service to approximately
147,000 natural gas customers and Honesdale provided service to approximately
3,300 customers.
The Company and its subsidiaries employed approximately 815 persons as of
December 31, 1997.
Restructuring of Natural Gas Industry
The natural gas industry, which historically has included producers,
interstate pipelines and local distribution companies ("LDCs"), is undergoing
significant restructuring. The industry is rapidly progressing from a highly
regulated environment to one in which there is competition, customer choice and
only partial regulation. The same change is also beginning to occur in the
electric industry which competes with the natural gas industry for many of the
same energy uses.
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The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PG Energy, are
presently responsible for procuring competitively-priced gas supplies and
arranging for the appropriate transportation capacity and storage services with
the interstate pipelines. Additionally, in accordance with regulations
promulgated by the PPUC, PG Energy currently offers transportation service to
certain customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PG Energy
charged all its customers bundled rates. These rates included a commodity
charge based on the cost, as approved by FERC, which PG Energy paid the
pipelines for natural gas delivered to the entry point on its distribution
system. Except for the approximately 560 customers currently receiving
transportation service, PG Energy's customers continue to be charged bundled
rates as approved by the PPUC, which include a commodity charge based on the
costs prudently incurred by PG Energy for the purchase of natural gas and for
interstate pipeline transportation capacity and storage services. Customers
receiving transportation service, which accounted for approximately 48% of PG
Energy's total gas deliveries in 1997, are charged rates approved by the PPUC,
which exclude the commodity cost that is reflected in the bundled rates charged
to other customers.
Although the regulations promulgated by the PPUC only require LDCs to offer
transportation service to individual customers having an annual consumption of
at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more
than ten customers having a combined consumption of at least 5,000 MCF per year,
the PPUC has allowed certain LDCs to make transportation service available to
other customers, regardless of their consumption. One of these companies is
Honesdale which, with the approval of the PPUC, began offering transportation
service to all of its some 3,300 customers effective November 1, 1997. As of
February 1, 1998, approximately 1,250 of Honesdale's customers had elected to
receive transportation service and to purchase their natural gas supplies from
Energy Services, the only marketer currently selling gas to customers served by
Honesdale. PG Energy is also planning to file tariffs with the PPUC in the near
future seeking approval to make transportation service available to all of its
147,000 customers. Moreover, as noted below, the Company and PG Energy
currently believe that Pennsylvania may enact legislation in 1998 requiring that
all customers of LDCs have the right, within the next several years, to receive
transportation service and to choose the supplier of their natural gas.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania are required to unbundle generation charges
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from the other charges included in their currently bundled rates and customers
can contract with qualified suppliers of their choosing, including the utility
currently serving them, to purchase electric energy at nonregulated rates. The
electric utilities will continue to utilize their transmission and distribution
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
The Company and PG Energy believe that Pennsylvania may enact similar
legislation with respect to the natural gas industry in 1998. As currently
envisioned, such legislation would require that PG Energy provide all of its
customers with unbundled transportation service within one to two years. While
the rates for the transportation of natural gas through PG Energy's distribution
system and the storage services offered by PG Energy would continue to be price
regulated by the PPUC, the commodity cost of gas purchased from suppliers other
than PG Energy would not be so regulated. Customers could, however, continue to
receive a bundled sales service from PG Energy which would be subject to price
regulation by the PPUC. Essentially, the legislation would extend the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier other than PG Energy, based on nonregulated market
prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PG Energy will be faced with significant
competition from marketers and brokers for the sale of natural gas to its
customers. However, under current regulations of the PPUC, PG Energy does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas. Moreover, PG Energy would not expect the pending legislation to result in
the bypass of its distribution system by any significant number of customers
because of the nature of its customer base and the cost of any such bypass.
Additionally, based on various provisions of the legislation currently being
considered, PG Energy does not believe that the legislation will result in any
significant amount of transition costs (such as the negotiated buyout of
contracts with interstate pipelines, the recovery of deferred purchased gas
costs or the recovery of regulated assets). Further, PG Energy believes that
any transition costs it may incur would generally be recoverable through rates
or other customer charges. Accordingly, although it cannot be certain, because
the terms of such legislation have not been finalized and the ultimate effect on
PG Energy cannot be determined, PG Energy does not believe that the enactment of
legislation providing for customers to purchase their natural gas from third
parties would have any material adverse impact on its earnings or financial
condition despite the increased competition to which PG Energy would be subject
regarding the sale of natural gas to its customers.
Expansion of Nonregulated Activities
The Company intends to continue its focus to position its nonregulated
subsidiaries as leading suppliers of energy and energy-related products and
services. The Regulated Subsidiaries will actively market the use of natural
gas and will continue to aggressively add customers to their distribution
systems. Additionally, the Company plans to further expand the activities of
Energy Services. Energy Services, in alliance with CNG Energy Services, a
subsidiary of Consolidated Natural Gas Company, markets a broad array of energy
and energy-related products and services under the name PG Energy PowerPlus.
Presently, PG Energy PowerPlus offers the sale of natural gas and electricity to
residential, commercial and industrial users, as well as the sale of propane on
both a retail and wholesale level, in central and northeastern Pennsylvania; and
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the inspection, maintenance and servicing of residential and small commercial
gas-fired equipment. Also, Energy Services, through its subsidiary Keystone,
provides specialized pipeline distribution services for utilities, including
keyhole vacuum excavation, camera inspection and bridge pipeline rehabilitation,
as well as the conventional installation of mains and services for the natural
gas, water and sewer industries. In addition, the Company, through its
subsidiary Theta, is presently marketing Company-owned land parcels for
residential and commercial development under the guidance of the Watershed Land
Use Plan developed by the independent PG Energy Land Use Committee in
association with the Company. Theta is also developing plans to conduct timber,
sand and gravel operations on the Company's land and to increase the value being
realized from the Company's extensive land holdings through a more active
management of those resources. Commencing in mid-1998, Power Corp expects to
begin generating and selling electricity and steam provided by a cogeneration
facility it acquired in November, 1997. The facility, located in Archbald,
Pennsylvania, initially will be fueled by a combination of natural gas and
methane recovered from a nearby landfill. The output produced by this
25-megawatt facility is intended to be marketed by PG Energy PowerPlus.
Sale of Water Utility Operations
On February 16, 1996, PG Energy sold its regulated water operations and
certain related assets to Pennsylvania-American Water Company ("Pennsylvania-
American"), a wholly-owned subsidiary of American Water Works Company, Inc.
("American"), for $414.3 million, consisting of $262.1 million in cash and the
assumption of $152.2 million of PG Energy's liabilities, including $141.0
million of its long-term debt. (See Note 2, Discontinued Operations, of the
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K).
The cash proceeds from the sale of approximately $205.4 million, net of
$56.7 million of income taxes, were used by the Company and PG Energy to retire
debt, to repurchase stock, for construction expenditures and for working capital
purposes. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-Sale of Water Utility
Operations" in Item 7 of this Form 10-K).
GAS BUSINESS
The Regulated Subsidiaries distribute natural gas to an area in northeastern
Pennsylvania lying within the Counties of Luzerne, Lackawanna, Lycoming,
Wyoming, Northumberland, Wayne, Columbia, Union, Montour, Snyder, Susquehanna,
Pike and Clinton, a territory that includes the cities of Scranton, Wilkes-Barre
and Williamsport. The total estimated population of the Regulated Subsidiaries'
natural gas service area, based on the 1990 U.S. Census, is 760,000.
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Number and Type of Customers. At December 31, 1997, the Regulated
Subsidiaries had approximately 150,300 natural gas customers, from which the
Company derived total natural gas revenues of $190.5 million during 1997. The
following chart shows a breakdown of the types of customers and the percentages
of gas revenues generated by each type of customer in 1997:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 90.8% 66.4%
Commercial 9.0 24.3*
Industrial 0.2 7.8*
Other Users - 1.5
Total 100.0% 100.0%
* Includes the 2.7% of total gas revenues derived from interruptible
customers.
During 1997, the Regulated Subsidiaries delivered an estimated total of
48,300,000 MCF of natural gas to their customers, of which 51.2% was sold at
normal tariff rates, 47.5% represented gas transported for customers and 1.3%
was sold under the Alternate Fuel Rate (as described below).
The Regulated Subsidiaries sell gas to "firm" customers with the
understanding that their supply will not be interrupted except during periods of
supply deficiency or emergency conditions. "Interruptible" gas customers are
required to have equipment installed capable of using an alternate energy form.
Interruptible customers, therefore, do not require a continuous supply of gas
and their supply can be interrupted at any time under the conditions set forth
in their contracts for gas service. In 1997, a total of 5,484,000 MCF of
natural gas was sold to interruptible customers, of which 5,042,000 MCF was
transported for such customers, which together represented 11.4% of the total
deliveries of natural gas to the Regulated Subsidiaries' customers during 1997.
PG Energy's largest natural gas customer accounted for less than 1% of its
operating revenues in 1997.
Transportation and Storage Service. In accordance with current regulations
of the PPUC, PG Energy provides transportation service to natural gas customers
who consume at least 5,000 MCF of natural gas per year, meet certain other
conditions and execute a transportation agreement. In addition, groups of up to
ten customers, with a combined consumption of at least 5,000 MCF per year, are
eligible for transportation service. The PPUC has, however, allowed certain
LDCs to make transportation service available to other customers, regardless of
their consumption. One of these companies is Honesdale which, with the approval
of the PPUC, began offering transportation service to all of its some 3,300
customers effective November 1, 1997. As of February 1, 1998, approximately
1,250 of Honesdale's customers had elected to receive transportation service and
to purchase their natural gas supplies from Energy Services, the only marketer
currently selling gas to customers served by Honesdale.
Transportation service is provided on both a firm and an interruptible basis
and includes provisions regarding over and under deliveries of gas on behalf of
the respective customer. In addition, firm transportation customers are offered
a "storage service" pursuant to which such customers may have gas delivered
during the period from April through October for storage and redelivery during
the winter period. The Regulated Subsidiaries also offer firm transportation
customers a "standby service" under the terms of which the customer will be
supplied with gas in the event the customer's transportation service is
interrupted or curtailed by its broker, supplier or other third party.
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Set forth below is a summary of the gas transported by the Regulated
Subsidiaries and the number of customers using transportation service from 1995
to 1997:
[CAPTION]
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
[S] [C] [C] [C] [C]
1997 1,244 (a) 22,584,000 99,000 22,683,000
1996 503 15,959,000 4,459,000 20,418,000
1995 480 14,543,000 5,054,000 19,597,000
(a) Includes 729 residential and commercial customers of Honesdale receiving
transportation service as of December 31, 1997.
During 1998, the Regulated Subsidiaries expect to transport approximately
25,676,000 MCF of natural gas.
The rates charged by the Regulated Subsidiaries for the transportation of
interstate gas are essentially equal to their tariff rates for the sale of gas
with all gas costs removed. Accordingly, the transportation of interstate gas
has had no significant adverse effect on earnings. Prior to January 15, 1997,
the rates charged for the transportation of Pennsylvania-produced natural gas
("Pennsylvania gas") were lower than those charged for the transportation of
interstate gas. As a result, the rates charged for the transportation of
Pennsylvania gas yielded considerably less revenue than the gross margin (gas
operating revenues less the cost of gas) that would be realized from sales under
normal tariff rates. However, as of January 15, 1997, in connection with PG
Energy's rate increase which was effective on such date (see "-Rates"), the
lower rates charged for the transportation of Pennsylvania gas were eliminated
and those rates were conformed with the rates charged for the transportation of
interstate gas. The elimination of such differential was the primary reason for
the dramatic decrease in the volume of Pennsylvania-produced gas transported by
the Regulated Subsidiaries in 1997.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PG Energy offers an Alternate Fuel Rate for
eligible customers. This rate applies to large commercial and industrial
accounts that have the capability of using No. 2, 4 or 6 fuel oil or propane as
an alternate source of energy. Whenever the cost of such alternate fuel drops
below the cost of natural gas at PG Energy's normal tariff rates, PG Energy is
permitted by the PPUC to lower its price to these customers so that PG Energy
can remain competitive with the alternate fuel. However, in no instance may PG
Energy sell gas under this special arrangement for less than its average
commodity cost of gas purchased during the month. PG Energy's revenues under
the Alternate Fuel Rate amounted to $2.4 million in 1997, $1.8 million in 1996
and $2.0 million in 1995. These revenues reflected the sale of 651,000 MCF,
491,000 MCF and 603,000 MCF in 1997, 1996 and 1995, respectively. It is
anticipated that approximately 666,000 MCF will be sold under the Alternate Fuel
Rate in 1998. The change in volumes sold under the Alternate Fuel Rate reflects
the switching by certain customers between alternate fuel service and
transportation service as a result of periodic changes in the relative cost of
natural gas and alternate fuels.
FERC Order 636. On April 8, 1992, FERC issued Order No. 636 ("Order 636"),
requiring interstate pipelines to restructure their services and operations in
order to enhance competition and maximize the benefits of wellhead price
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decontrol. The objectives of Order 636 were to be accomplished primarily by
unbundling the services provided by the interstate pipelines and by making those
services available to end users on the same terms as LDCs.
Pursuant to Order 636, the interstate pipelines have been required to: (1)
unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified fixed-
variable rate designs. The interstate pipelines have been granted a blanket
sales certificate to make unbundled sales in competition with non-pipeline
merchants and are being permitted recovery of all reasonable and prudent
transition costs incurred in order to comply with Order 636. Such transition
costs include: (1) the cost of renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included
in the interstate pipelines' purchased gas adjustment accounts at the time they
adopted market-based pricing for gas sales ("Account 191 Costs"); (3)
unrecovered costs of assets that cannot be assigned to customers of unbundled
services ("Stranded Costs"); and (4) costs of new facilities to physically
implement Order 636 ("New Facility Costs"). Additionally, the interstate
pipelines have been allowed pre-granted abandonment of sales and transportation
services to customers upon expiration of applicable contracts, subject to
customers' rights of first refusal.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of Order 636 transition costs.
The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PG Energy and other larger LDCs.
As of February 1, 1994, PG Energy began to recover the Gas Transition Costs
billed by its interstate pipelines through an increase in its PGC rate. As of
December 31, 1997, PG Energy had been billed a total of $1.3 million of Gas
Transition Costs by its interstate pipelines, which is the entire amount of such
billings that PG Energy expects. Of this amount, $857,000 was recovered by PG
Energy over a twelve-month period ended January 31, 1995, through an increase in
its PGC rate, $252,000 was recovered by PG Energy in its annual PGC rate that
the PPUC approved effective December 1, 1995, and the remaining $213,000 was
recovered by PG Energy in its PGC rate that was effective December 1, 1996.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by LDCs through the filing of a tariff pursuant to either the existing
surcharge or base rate provisions of the Pennsylvania Public Utility Code (the
"Code"). By Order of the PPUC entered August 26, 1994, PG Energy began
recovering the Non-Gas Transition Costs that it estimates it will ultimately be
billed pursuant to Order 636 through the billing of a surcharge to its customers
effective September 12, 1994. It is currently estimated that $10.7 million of
Non-Gas Transition Costs will be billed to PG Energy, generally over a five-year
period extending through January 1, 1999, of which $9.6 million had been billed
to PG Energy and $9.5 million had been recovered from its customers as of
December 31, 1997. In addition, during 1997 $1.1 million of take-or-pay costs
refunded to PG Energy by its suppliers were applied as a reduction of the total
Non-Gas Transition Costs recoverable from customers. The remaining balance of
Non-Gas Transition Costs, which is presently estimated to be $134,000, is
expected to be recovered by PG Energy from its customers during 1998.
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Sources of Supply. The Regulated Subsidiaries purchase natural gas from
marketers, producers, and integrated energy companies, generally under the terms
of supply arrangements that extend for the heating season (i.e., November
through March) or for periods of one year or longer. These contracts typically
provide for an adjustment each month in the cost of gas purchased pursuant
thereto based on the then current market prices for natural gas. The largest
individual supplier, an integrated energy company, accounted for 21% of the
Regulated Subsidiaries' total purchases of natural gas in 1997. Two other
suppliers accounted for 20% and 17%, respectively, of the Regulated
Subsidiaries' total purchases of natural gas in 1997. No other suppliers
accounted for more than 10% of the Regulated Subsidiaries' purchases during
1997.
The purchases of natural gas by the Regulated Subsidiaries during 1997 and
by PG Energy during 1996 and 1995 are summarized below:
[CAPTION]
Volume Average
Year Purchased (MCF) Cost per MCF
[S] [C] [C]
1997 25,831,000 $3.27
1996 27,955,000 $3.35
1995 24,173,000 $2.62
The higher average cost for 1996 reflected the increase in the wellhead
price of natural gas during much of the year that resulted from the unusually
cold weather experienced in the northeastern United States during the winter of
1995/96 and the associated reduction in the volumes of gas held in storage to
abnormally low levels in the spring of 1996. The average cost decreased only
slightly in 1997 because of market demand and concerns regarding the adequacy of
storage levels.
During 1998, the Regulated Subsidiaries expect to purchase approximately
29,306,000 MCF of natural gas under seasonal or longer-term contracts at a
currently projected average cost of $2.82 per MCF.
The Regulated Subsidiaries presently have adequate supplies of natural gas
to meet the demands of existing customers through October, 1998, and the Company
believes that the Regulated Subsidiaries will be able to obtain sufficient
supplies to meet the demands of their existing customers beyond October, 1998,
and to serve new customers (of which approximately 4,000 are expected to be
added in 1998).
Energy Services purchases natural gas from marketers, producers, and
integrated energy companies at variable and fixed prices for various terms.
Transportation is arranged via the interstate pipeline electronic bulletin board
or contracting with suppliers for a city gate delivery.
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Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, the Regulated Subsidiaries have entered into agreements with their
former interstate pipeline suppliers providing for the firm long haul
transportation by those pipelines on a daily basis of the following quantities
of gas:
[CAPTION]
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
[S] [C] [C] [C]
Transco Various through 2015 74,100 (b) 59.8%
Tennessee 1999 and 2000 38,894 (c) 31.4
Columbia 2004 11,016 8.8
124,010 100.0%
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and the Regulated Subsidiary agrees to such
termination. In no event may any of the agreements be unilaterally
terminated by the pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PG Energy can transport during the
period December through February pursuant to an agreement with
Transco that extends through 2011.
(c) Includes up to 2,300 MCF per day that Honesdale can transport during
the period November through January pursuant to an agreement with
Tennessee that extends through November, 2000.
The Regulated Subsidiaries have also contracted with their former interstate
pipeline suppliers and the New York State Electric and Gas Company ("NYSEG") for
the following volumes of gas storage and storage withdrawals:
<TABLE>
<CAPTION>
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline/Party Date (a) (MCF) (b) From Storage (MCF)
<S> <C> <C> <C>
Transco Various through 2013 6,500,000 131,044
Tennessee November 1, 2000 3,800,000 25,885
Columbia October 31, 2004 1,100,000 16,036
NYSEG (c) March 31, 2002 290,000 29,000
11,690,000 201,965
</TABLE>
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and the Regulated Subsidiary agrees to such
termination. In no event may any of the agreements be unilaterally
terminated by the pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
(c) Storage gas is delivered via Transco.
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Based on their present pipeline transportation and storage entitlements, the
Regulated Subsidiaries are entitled to a maximum daily delivery of the following
quantities of gas:
[CAPTION]
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
[S] [C] [C] [C] [C]
Transco 74,100 (a) 160,044 (c) 234,144 71.8%
Tennessee 38,894 (b) 25,885 64,779 19.9
Columbia 11,016 16,036 27,052 8.3
124,010 201,965 325,975 100.0%
(a) Includes 3,300 MCF that may be transported by PG Energy during the
period December through February.
(b) Includes up to 2,300 MCF that may be transported by Honesdale during
the period November through January.
(c) Includes 29,000 MCF that may be withdrawn under the terms of the
storage contract with NYSEG.
In accordance with the provisions of Order 636, the Regulated Subsidiaries
may release to customers and other parties the portions of firm pipeline
transportation and storage entitlements which are in excess of their
requirements. Such releases may be made upon notice in accordance with the
provisions of Order 636 and for a consideration not in excess of the cost of the
respective entitlement. Releases may be made for periods ranging from one day
to the remaining term of the entitlement.
Since September 1, 1993, PG Energy has released portions of its firm
pipeline transportation capacity to certain of its customers and third parties
for varying periods extending up to three years. Honesdale has also released
portions of its firm pipeline transportation capacity since August 1, 1997.
During 1997, the average daily capacity so released was 42,296 MCF, and the
maximum capacity released on any one day in 1997 was 55,114 MCF. Through
December 31, 1997, the Regulated Subsidiaries had not, however, released any
storage capacity.
The Company believes that the Regulated Subsidiaries have sufficient firm
pipeline transportation and storage entitlements to meet the demands of their
existing customers and to supply new customers.
Peak Day Requirements. The Regulated Subsidiaries plan for peak day demand
on the basis of a daily mean temperature of 0 degrees Fahrenheit. Requirements
for such a design peak day, assuming the curtailment of service to interruptible
customers, are currently estimated to be 338,000 MCF, of which 247,000 MCF would
be required for customers to whom the Regulated Subsidiaries sell gas and 91,000
MCF would be required for customers for whom the Regulated Subsidiaries provide
transportation service. The Regulated Subsidiaries' historic maximum daily
sendout is 307,237 MCF, which occurred on January 17, 1997, when service to
interruptible customers and select industrial users was curtailed. The mean
temperature in its gas service area on that day was 5 degrees Fahrenheit.
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Capital Expenditures. Capital expenditures totaled $34.3 million during
1997, including $30.2 million for the construction of utility plant, and are
estimated to be $47.6 million during 1998, consisting of $36.3 million relative
to utility plant and $11.3 million with respect to the Company's nonregulated
activities, including $8.1 million to convert the cogeneration facility acquired
by Power Corp in November, 1997, to burn both natural and methane gas and, in
connection therewith, to construct a methane gas recovery facility at a nearby
landfill.
Regulation. The natural gas utility operations of the Regulated
Subsidiaries are regulated by the PPUC, particularly as to utility rates,
service and facilities, accounts, issuance of certain securities, the
encumbering or disposition of public utility properties, the design,
installation, testing, construction, and maintenance of pipeline facilities and
various other matters associated with broad regulatory authority.
In addition to those regulations promulgated by the PPUC, the Regulated
Subsidiaries must also comply with federal, state and local regulations relating
generally to the discharge of materials into the environment or otherwise
relating to the protection of the environment. Compliance with such regulations
has not had any material effect upon the capital expenditures, earnings or
competitive position of the Regulated Subsidiaries' gas business. Although it
cannot predict the future impact of these regulations, the Company believes that
any additional expenditures and costs made necessary by them would be fully
recoverable by the Regulated Subsidiaries through rates.
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 material
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.
-11-
<PAGE>
The Company is a "holding company" within the meaning of the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to
Section 3(a) of the PUHCA, from all the provisions of the PUHCA (except Section
9(a)(2) thereof) and the rules and regulations promulgated thereunder. The
Company files an annual exemption statement on Form U-3A-2 pursuant to Rule U-2
promulgated under the PUHCA. Pursuant to the PUHCA, certain acquisitions by the
Company or its subsidiaries of the stock or assets of gas or electric public
utilities are subject to prior approval by the Securities and Exchange
Commission.
The gas distribution and transportation activities of the Regulated
Subsidiaries are not subject to the Natural Gas Act, as amended.
Rates. 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.
The provisions of the Code require that the tariffs of 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. The procedure is limited to purchased gas costs,
to the exclusion of other rate matters, and requires a formal evidentiary
proceeding conducted by the PPUC, the submission of specific information
regarding gas procurement practices and specific findings of fact by the PPUC
regarding the "least cost fuel procurement" policies of the utility.
In accordance with these procedures PG Energy has been permitted to make the
following changes since January 1, 1995, to the gas costs contained in its
tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
[S] [C] [C] [C]
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
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
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)*
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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.
-12-
<PAGE>
FERC Order 636, among other matters, requires that the Regulated
Subsidiaries contract for sufficient gas supplies, pipeline capacity and storage
for their annual needs. These added responsibilities have resulted in increased
scrutiny by the PPUC as to the prudence of gas procurement and supply
activities. However, to date, the PPUC has permitted the Regulated Subsidiaries
to recover their gas supply costs in the rates charged to customers.
Additionally, although it cannot be certain, the Company believes that the
Regulated Subsidiaries will be able to continue demonstrating to the PPUC the
prudence of their gas supply costs and, therefore, will be allowed to recover
all such costs in its future purchased gas cost rates.
Tax Surcharge Adjustments. Regulations of the PPUC provide for the
Regulated Subsidiaries to apply a state tax adjustment surcharge tariff to bills
for gas service to recoup any increased taxes or pass through any decreased
taxes resulting from changes in the law with respect to the Pennsylvania Capital
Stock Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty
Tax. Honesdale is currently recovering approximately $20,000 of increased taxes
on an annual basis in accordance with these regulations, while no state tax
adjustment surcharge is presently being applied to PG Energy's bills for gas
service.
WATER BUSINESS
Prior to the sale of its water operations to Pennsylvania-American on
February 16, 1996, PG Energy distributed water to an area lying within the
Counties of Lackawanna, Luzerne, Susquehanna and Wayne, which included the
Cities of Scranton and Wilkes-Barre and 63 other municipalities. The total
estimated population of the water service area, based on the 1990 U.S. Census,
was 373,000.
Number and Type of Customers. At December 31, 1995, PG Energy had
approximately 133,400 water customers from which it derived total water revenues
of $66.3 million during 1995 and $7.5 million during the period January 1
through February 15, 1996.
Filtration of Water Supplies. All of PG Energy's water customers were
supplied with filtered water (except for several hundred who were supplied with
ground water from wells). The filtration of PG Energy's water supplies was
performed at ten water treatment plants, located throughout PG Energy's water
service area, which had an aggregate daily capacity of 101.1 million gallons.
Construction Expenditures. PG Energy's construction expenditures for water
utility plant totaled $15.3 million in 1995 and $815,000 during the period
January 1 through February 15, 1996.
-13-
<PAGE>
[CAPTION]
EXECUTIVE OFFICERS OF THE COMPANY
Positions and
Officer Offices with the
Name Age Since Company
[S] [C] [C] [C]
Kenneth L. Pollock 77 1987 Chairman of the Board of
Directors
Thomas F. Karam 39 1995 President and Chief Executive
Officer
Vincent A. Bonaddio 48 1995 Vice President, Operations and
Engineering Services
Harry E. Dowling 48 1984 Vice President, Customer
Services
John F. Kell, Jr. 60 1978 Vice President, Financial
Services
Thomas J. Ward 47 1988 Vice President, Administrative
Services, and Secretary
Richard N. Marshall 40 1993 Treasurer and Assistant
Secretary
Thomas J. Koval 45 1992 Controller and Assistant
Treasurer
Each of the Executive Officers has been elected to serve until the first
meeting of the Board of Directors of the Company following the 1998 Annual
Meeting and until his successor has been duly elected. Each of these Officers
holds the same position with PG Energy. Other than with respect to Mr. Karam,
who has an employment agreement with the Company as President and Chief
Executive Officer for a five-year period ending September 1, 2001, and Mr.
Pollock, who has an employment agreement with the Company as Chairman of the
Board of Directors for a three-year period ending June 26, 1999, subject to his
re-election by the Company's shareholders, there are no arrangements or
understandings between any officer and any other person pursuant to which he was
selected as an officer.
-14-
<PAGE>
ITEM 2. PROPERTIES
Gas. The gas systems of the Regulated Subsidiaries consist of approximately
2,400 miles of distribution lines, eleven city gate and 80 major regulating
stations and miscellaneous related and additional property. The Regulated
Subsidiaries believe that their gas utility properties are adequately maintained
and in good operating condition in all material respects.
Most of PG Energy's gas utility properties are subject to a first mortgage
lien pursuant to the Indenture of Mortgage and Deed of Trust dated as of March
15, 1946, as supplemented by thirty supplemental indentures (collectively, the
"Indenture") from PG Energy to First Trust of New York, National Association, as
Trustee.
Land. As of February 25, 1998, PG Energy owned approximately 45,000 acres
of undeveloped land and Theta owned approximately 1,000 acres of land, certain
of which is being prepared for development, situated in northeastern
Pennsylvania.
Cogeneration Facility. Power Corp owns a 25-megawatt cogeneration facility
located in Lackawanna County, Pennsylvania which it acquired in November, 1997.
This facility, which is currently being converted to burn both methane and
natural gas, is expected to be operational in mid-1998. Power Corp is also
presently constructing a methane recovery facility at a nearby landfill which
will supply the methane gas that will be burned at its cogeneration facility.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business of the Company or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1997, there were no matters submitted to a vote
of security holders of the registrant through the solicitation of proxies or
otherwise.
-15-
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange under
the symbol "PNT." Quotations are shown in the Wall Street Journal as "PennEntr"
and in The New York Times as "PennEnt." As of February 25, 1998, there were
approximately 6,400 holders of record of the Company's common stock.
Listed below are the price ranges of the Company's common stock and the
dividends per share of common stock paid during the years ended December 31,
1997 and 1996. The prices shown represent the high and low transaction prices
for the respective quarters without retail mark-up, mark-down or commission.
[CAPTION]
Price Range(1) Cash
High Low Dividends(1)
1997
[S] [C] [C] [C]
First quarter $24.063 $21.375 $ .290
Second quarter 27.750 21.250 .300
Third quarter 30.500 25.250 .300
Fourth quarter 32.750 24.250 .300
Total $ 1.190
1996
First quarter $20.000 $18.313 $ .275
Second quarter 21.313 18.813 .275
Third quarter 21.438 19.875 .275
Fourth quarter 22.938 20.500 .275
Total $ 1.100
(1) After restatement for the two-for-one split of the Company's common
stock effective March 20, 1997, as more fully discussed in Note 4 of
the Notes to Consolidated Financial Statements in Item 8 of this Form
10-K.
Information relating to restrictions on the payment of dividends by the
Company is set forth in Note 7 of the Notes to Consolidated Financial Statements
in Item 8 of this Form 10-K.
-16-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Selected consolidated financial data for the Company and its subsidiaries
for each of the five years in the period ended December 31, 1997, is set forth
below. This data should be read in conjunction with the Consolidated Financial
Statements contained in Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(Thousands of Dollars, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Regulated $190,533 $160,594 $152,756 $167,992 $153,325
Nonregulated -
Gas sales and services 26,004 13,028 8,094 8,838 6,216
Pipeline construction
and services 11,210 10,733 826 44 38
Other 299 125 259 223 194
Total operating
revenues 228,046 184,480 161,935 177,097 159,773
OPERATING EXPENSES:
Cost of gas 134,502 98,475 90,478 105,832 91,252
Operation and maintenance 43,385 42,930 29,551 28,569 26,899
Depreciation 9,464 7,833 7,018 6,671 6,389
Income taxes 7,374 5,800 3,955 4,541 5,159
Taxes other than income
taxes 11,766 11,182 9,982 10,852 10,110
Total operating
expenses 206,491 166,220 140,984 156,465 139,809
OPERATING INCOME 21,555 18,260 20,951 20,632 19,964
OTHER INCOME (DEDUCTIONS),
NET 1,221 1,726 355 111 (540)
INTEREST CHARGES (1) (9,634) (10,192) (15,422) (13,791) (12,886)
INCOME FROM CONTINUING
OPERATIONS 13,142 9,794 5,884 6,952 6,538
INCOME (LOSS) WITH RESPECT
TO DISCONTINUED
OPERATIONS, NET OF
RELATED INCOME TAXES (2) - (363) (3,834) 10,504 7,909
INCOME BEFORE SUBSIDIARY'S
PREFERRED STOCK
DIVIDENDS AND
EXTRAORDINARY LOSS 13,142 9,431 2,050 17,456 14,447
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (1) 1,312 1,730 2,763 4,639 6,462
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS 11,830 7,701 (713) 12,817 7,985
EXTRAORDINARY LOSS (NET OF
RELATED TAX BENEFIT) - (1,117) - - -
NET INCOME (LOSS) $ 11,830 $ 6,584 $ (713) $ 12,817 $ 7,985
See page 19 for an explanation of footnotes.
</TABLE>
-17-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
(Thousands of Dollars, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C>
COMMON STOCK INFORMATION:
Weighted average number
of shares outstanding in
thousands (3) 9,661 10,222 11,459 10,913 8,790
Basic and diluted earnings
(loss) per share of
common stock: (3)
Continuing operations (1)$ 1.22 $ .79 $ .27 $ .21 $ .01
Discontinued operations - (.04) (.33) .96 .90
Net income (loss) before
discount (premium) on
repurchase/redemption
of subsidiary's
preferred stock and
extraordinary loss 1.22 .75 (.06) 1.17 .91
Discount (premium) on
repurchase/redemption
of subsidiary's
preferred stock .08 (.13) - (.09) -
Extraordinary loss - (.11) - - -
Earnings (loss) per
share of common stock $ 1.30 $ .51 $ (.06) $ 1.08 $ .91
Cash dividends per share
of common stock $ 1.19 $ 1.10 $ 1.10 $ 1.10 $ 1.10
CAPITALIZATION AT END
OF PERIOD:
Amounts -
Common shareholders'
investment $122,105 $117,651 $162,739 $172,012 $165,775
Preferred stock of
PG Energy -
Not subject to mandatory
redemption, net 15,864 18,851 33,615 33,615 33,615
Subject to mandatory
redemption 640 739 1,680 1,760 31,840
Long-term debt 127,000 75,000 106,706 220,705 155,388
Total capitalization $265,609 $212,241 $304,740 $428,092 $386,618
Ratios -
Common shareholders'
investment 46.0% 55.4% 53.4% 40.2% 42.9%
Preferred stock of
PG Energy -
Not subject to mandatory
redemption, net 6.0 8.9 11.0 7.8 8.7
Subject to mandatory
redemption 0.2 0.4 0.6 0.4 8.2
Long-term debt 47.8 35.3 35.0 51.6 40.2
Total 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
See page 19 for an explanation of footnotes.
-18-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
UTILITY PLANT AT END OF
PERIOD:
Total utility plant $351,106 $319,205 $295,895 $284,080 $269,819
Accumulated depreciation 88,129 79,783 76,882 74,408 70,954
Net utility plant $262,977 $239,422 $219,013 $209,672 $198,865
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations $388,830 $366,810 $319,968 $321,236 $318,057
Discontinued operations,
net (4) - - 204,250 203,196 193,002
Total $388,830 $366,810 $524,218 $524,432 $511,059
</TABLE>
(1) None of the Company's interest charges and none of PG Energy's Preferred
Stock dividends was allocated to the discontinued operations through
February 15, 1996, the date of disposition. Prior to that time interest
charges relating to indebtedness of PG Energy were allocated to the
discontinued operations based on the relationship of the gross water
utility plant of the discontinued operations to the total of PG Energy's
gross gas and water utility plant. This was the same method as was
utilized by PG Energy and the PPUC in establishing the revenue requirements
of its utility operations.
(2) See Note 2 of the Notes to Consolidated Financial Statements in Item 8 of
this Form 10-K.
(3) Reflects a two-for-one stock split of the Company's common stock effective
March 20, 1997, as more fully discussed in Note 4 of the Notes to
Consolidated Financial Statements in Item 8 of this Form 10-K.
(4) Net of (i) liabilities assumed by Pennsylvania-American (ii) estimated
liability for income taxes on sale of discontinued operations, (iii) with
respect to the year ended December 31, 1995, the anticipated income from
the discontinued operations during the phase-out period for financial
statement purposes of April 1, 1995, through February 15, 1996, and (iv)
with respect to the years 1994 and 1993, other net assets of the
discontinued operations (which were written off as of March 31, 1995). See
Note 2 of Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K.
-19-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTRUCTURING OF NATURAL GAS INDUSTRY
The Company's principal operating subsidiary, PG Energy Inc. ("PG Energy"),
and PG Energy's wholly-owned subsidiary, Honesdale Gas Company ("Honesdale")
(collectively referred to as the "Regulated Subsidiaries"), are regulated public
utilities engaged in the sale and distribution of natural gas which accounted
for approximately 84% of the Company's operating revenues in 1997. The natural
gas industry, which historically has included producers, interstate pipelines
and local distribution companies ("LDCs"), is undergoing significant
restructuring. The industry is rapidly progressing from a highly regulated
environment to one in which there is competition, customer choice and only
partial regulation. The same change is also beginning to occur in the electric
industry which competes with the natural gas industry for many of the same
energy uses.
The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PG Energy, are
presently responsible for the procurement of competitively-priced gas supplies
and arranging for the appropriate transportation capacity and storage services
with the interstate pipelines. Additionally, in accordance with regulations
promulgated by the Pennsylvania Public Utility Commission (the "PPUC"), PG
Energy currently offers transportation service to certain customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PG Energy
charged all its customers bundled rates. These rates included a commodity
charge based on the cost, as approved by FERC, which PG Energy paid the
pipelines for natural gas delivered to the entry point on its distribution
system. Except for the approximately 560 customers currently receiving
transportation service, PG Energy's customers continue to be charged bundled
rates as approved by the PPUC, which include a commodity charge based on the
costs prudently incurred by PG Energy for the purchase of natural gas and for
interstate pipeline transportation capacity and storage services. Customers
receiving transportation service, which accounted for approximately 48% of PG
Energy's total gas deliveries in 1997, are charged rates approved by the PPUC,
which exclude the commodity cost that is reflected in the bundled rates charged
to other customers.
Although the regulations promulgated by the PPUC only require LDCs to offer
transportation service to individual customers having an annual consumption of
at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more
than ten customers having a combined consumption of at least 5,000 MCF per year,
the PPUC has allowed certain LDCs to make transportation service available to
other customers, regardless of their consumption. One of these companies is
Honesdale which, with the approval of the PPUC, began offering transportation
-20-
<PAGE>
service to all of its some 3,300 customers effective November 1, 1997. As of
February 1, 1998, approximately 1,250 of Honesdale's customers had elected to
receive transportation service and to purchase their natural gas supplies from
PG Energy Services Inc. ("Energy Services"), a subsidiary of the Company and the
only marketer currently selling gas to customers served by Honesdale. PG Energy
is also planning to file tariffs with the PPUC in the near future seeking
approval to make transportation service available to all of its 147,000
customers. Moreover, as noted below, the Company and PG Energy currently
believe that Pennsylvania may enact legislation in 1998 requiring that all
customers of LDCs have the right, within the next several years, to receive
transportation service and to choose the supplier of their natural gas.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania are required to unbundle generation charges
from the other charges included in their currently bundled rates and customers
can contract with qualified suppliers of their choosing, including the utility
currently serving them, to purchase electric energy at nonregulated rates. The
electric utilities will continue to utilize their transmission and distribution
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
The Company and PG Energy believe that Pennsylvania may enact similar
legislation with respect to the natural gas industry in 1998. As currently
envisioned, such legislation would require that PG Energy provide all of its
customers with unbundled transportation service within one to two years. While
the rates for the transportation of natural gas through PG Energy's distribution
system and the storage services offered by PG Energy would continue to be price
regulated by the PPUC, the commodity cost of gas purchased from suppliers other
than PG Energy would not be so regulated. Customers could, however, continue to
receive a bundled sales service from PG Energy which would be subject to price
regulation by the PPUC. Essentially, the legislation would extend the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier other than PG Energy, based on nonregulated market
prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PG Energy will be faced with significant
competition from marketers and brokers for the sale of natural gas to its
customers. However, under current regulations of the PPUC, PG Energy does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas. Moreover, PG Energy would not expect the pending legislation to result in
the bypass of its distribution system by any significant number of customers
because of the nature of its customer base and the cost of any such bypass.
Additionally, based on various provisions of the legislation currently being
considered, PG Energy does not believe that the legislation will result in any
significant amount of transition costs (such as the negotiated buyout of
contracts with interstate pipelines, the recovery of deferred purchased gas
costs or the recovery of regulated assets). Further, PG Energy believes that
any transition costs it may incur would generally be recoverable through rates
or other customer charges. Accordingly, although it cannot be certain, because
the terms of such legislation have not been finalized and the ultimate effect on
PG Energy cannot be determined, PG Energy does not believe that the enactment of
legislation providing for customers to purchase their natural gas from third
-21-
<PAGE>
parties would have any material adverse impact on its earnings or financial
condition despite the increased competition to which PG Energy would be subject
regarding the sale of natural gas to its customers.
EXPANSION OF NONREGULATED ACTIVITIES
The Company intends to continue its focus to position its nonregulated
subsidiaries as leading suppliers of energy and energy-related products and
services. The Regulated Subsidiaries will actively market the use of natural
gas and will continue to aggressively add customers to their distribution
system. Additionally, the Company plans to further expand the activities of
Energy Services, a nonregulated affiliate of PG Energy. Energy Services, in
alliance with CNG Energy Services, markets a broad array of energy and energy-
related products and services under the name PG Energy PowerPlus. Presently, PG
Energy PowerPlus offers the marketing and sale of natural gas and electricity to
residential, commercial and industrial users, as well as the sale of propane on
both a retail and wholesale level, in central and northeastern Pennsylvania; and
the inspection, maintenance and servicing of residential and small commercial
gas-fired equipment. Also, Energy Services, through its subsidiary, Keystone
Pipeline Services, Inc. ("Keystone"), provides specialized pipeline distribution
services for utilities, including keyhole vacuum excavation, camera inspection
and bridge pipeline rehabilitation, as well as the conventional installation of
mains and services for the natural gas, water and sewer industries. In
addition, the Company, through its subsidiary Theta Land Corporation ("Theta"),
is presently marketing Company-owned land parcels for residential and commercial
development under the guidance of the Watershed Land Use Plan developed by the
independent PG Energy Land Use Committee in association with the Company. Theta
is also developing plans to conduct timber, sand and gravel operations on the
Company's land and to increase the value being realized from the Company's
extensive land holdings through a more active management of those resources.
Commencing in mid-1998, PEI Power Corporation ("Power Corp"), a subsidiary of
the Company formed in October, 1997, expects to begin generating and selling
electricity and steam produced by a cogeneration facility it acquired in
November, 1997. The facility initially will be fueled by a combination of
natural gas and methane recovered from a nearby landfill. The output produced
by this 25-megawatt facility is intended to be marketed by PG Energy PowerPlus.
DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among the Company, PG Energy, American Water Works Company,
Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-
American"), a wholly-owned subsidiary of American, the Company and PG Energy
sold substantially all of the assets, properties and rights of PG Energy's water
utility operations to Pennsylvania-American on February 16, 1996 (see "Liquidity
and Capital Resources - Sale of Water Utility Operations").
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements reflect PG Energy's water utility operations
as "discontinued operations" effective March 31, 1995, and the following
sections of Management's Discussion and Analysis generally relate only to the
Company's continuing operations. For additional information regarding the
discontinued operations, see Note 2 of the accompanying Notes to Consolidated
Financial Statements.
-22-
<PAGE>
STOCK SPLIT
On February 19, 1997, the Board of Directors of the Company declared a two-
for-one split of the Company's Common Stock effective March 20, 1997, as more
fully discussed in Note 5 of the accompanying Notes to Consolidated Financial
Statements. All per share data included in this Item 7 for the years 1996 and
1995 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 operating revenues for each of the
calendar years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Year Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
OPERATING REVENUES:
Regulated.................................. 83.6% 87.1% 94.3%
Nonregulated -
Gas sales and services................... 11.4 7.0 5.0
Pipeline construction and services....... 4.9 5.8 0.5
Other.................................... 0.1 0.1 0.2
Total operating revenues............... 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of gas................................ 59.0 53.4 55.9
Operation and maintenance.................. 19.0 23.3 18.3
Depreciation............................... 4.2 4.2 4.3
Income taxes............................... 3.2 3.1 2.4
Taxes other than income taxes.............. 5.2 6.1 6.2
Total operating expenses................. 90.6 90.1 87.1
OPERATING INCOME............................. 9.4 9.9 12.9
OTHER INCOME, NET............................ 0.6 0.9 0.2
INTEREST CHARGES (1)......................... (4.2) (5.5) (9.5)
INCOME FROM CONTINUING OPERATIONS............ 5.8 5.3 3.6
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS................................. - (0.2) (2.3)
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS............................ 5.8 5.1 1.3
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS....... (0.6) (0.9) (1.7)
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... 5.2 4.2 (0.4)
EXTRAORDINARY LOSS (NET OF TAX BENEFIT
OF $575,000)............................... - (0.6) -
NET INCOME (LOSS)............................ 5.2% 3.6% (0.4)%
(1) None of the Company's interest expense and none of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.
</TABLE>
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o Year Ended December 31, 1997, Compared With Year Ended December 31, 1996
Operating Revenues. Operating revenues increased $43.6 million (23.6%) from
$184.5 million for 1996 to $228.0 million for 1997, largely as a result of a
$29.9 million (18.6%) increase in regulated operating revenues and a $13.0
million (99.6%) increase in nonregulated gas sales and services by Energy
Services.
The $29.9 million (18.6%) increase in regulated operating revenues from
$160.6 million for 1996 to $190.5 million for 1997 was primarily the result of
higher levels in PG Energy's gas cost rate and the effect of the rate increase
granted PG Energy by the PPUC which became effective on January 15, 1997 (see
"Rate Matters"). The effect of the increases in rates was partially offset by a
749,000 cubic feet (2.9%) decrease in deliveries to PG Energy's residential and
commercial heating customers. There was a decrease of 130 (2.0%) heating degree
days from 6,627 (105.3% of normal) during 1996 to 6,497 (103.3% of normal)
during 1997. Operating revenues of Honesdale totaling $3.0 million from its
February 14, 1997, acquisition date through December 31, 1997, also contributed
to the increased regulated operating revenues.
The $13.0 million (99.6%) increase in nonregulated gas sales and services
from $13.0 million for 1996 to $26.0 million for 1997 was primarily the result
of a 5.5 million cubic feet (307.5%) increase in sales of natural gas by Energy
Services during the period.
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $40.3 million (24.2%) from $166.2 million for 1996 to $206.5
million for 1997. As a percentage of operating revenues, total operating
expenses increased from 90.1% during 1996 to 90.6% during 1997, largely as a
result of an increase in the cost of gas.
Cost of gas increased $36.0 million (36.6%) from $98.5 million for 1996 to
$134.5 million for 1997, primarily because of higher levels in PG Energy's gas
cost rate (see "-Rate Matters"), and the aforementioned increase in sales by
Energy Services. Also contributing to the increase was $2.0 million of gas
costs related to Honesdale from its February 14, 1997, acquisition date through
December 31, 1997.
Other than the cost of gas and income taxes, operating expenses increased by
$2.7 million (4.3%) from $61.9 million for 1996 to $64.6 million for 1997. This
increase was partially attributable to a $1.6 million (20.8%) increase in
depreciation expense, primarily as a result of additions to utility plant. Also
contributing to the higher operating expenses was a $584,000 (5.2%) increase in
taxes other than income taxes resulting from a higher level of gross receipts
tax because of the increased sales by PG Energy and the sales by Honesdale from
its acquisition date. Operation and maintenance expense increased $455,000
(1.1%) largely as a result of $678,000 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.
Income taxes increased $1.6 million (27.1%) from $5.8 million in 1996 to
$7.4 million in 1997 due to an increase in income before income taxes (for this
purpose, operating income net of interest charges).
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Operating Income. As a result of the above, operating income increased by
$3.3 million (18.1%) from $18.3 million for 1996 to $21.6 million for 1997.
However, as a percentage of total operating revenues, operating income decreased
for such periods from 9.9% in 1996 to 9.4% in 1997, largely as a result of the
proportionately higher ratio of cost of gas to operating revenues.
Other Income, Net. Other income, net decreased $505,000 (29.3%) from $1.7
million for 1996 to $1.2 million for 1997, largely because 1996 included income
from the temporary investment of certain proceeds from the sale of PG Energy's
regulated water utility operations in February, 1996.
Interest Charges. Interest charges decreased $558,000 (5.5%) from $10.2
million for 1996 to $9.6 million for 1997. This decrease was largely
attributable to the the Company's defeasance of its 10.125% Senior Notes on
September 30, 1996.
Income From Continuing Operations. Income from continuing operations
increased $3.3 million (34.2%) from $9.8 million for 1996 to $13.1 million for
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 $418,000 (24.2%) from $1.7 million for 1996 to $1.3 for 1997,
primarily as a result of the repurchase by PG Energy 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 30,560 shares of the 4.10% cumulative preferred stock in 1997.
Income (Loss) Before Extraordinary Loss. The increase in income before
extraordinary loss of $4.1 million (53.6%) from $7.7 million for 1996 to $11.8
million for 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.
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 increase in net income of $5.2 million (79.7%) from
$6.6 million for 1996 to $11.8 million for 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 1996 and discounts of $.08
per share during 1997 on the repurchase of preferred stock, accounted for the
increase in basic and diluted earnings per share of common stock of $.79 from
$.51 per share for 1996 to $1.30 per share for 1997. Also contributing to the
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increase in basic and diluted earnings per share of common stock was the 5.5%
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 PG Energy's water utility operations in February,
1996.
o Year Ended December 31, 1996, Compared With Year Ended December 31, 1995
Operating Revenues. Operating revenues increased $22.5 million (13.9%) from
$161.9 million for 1995 to $184.5 million for 1996 largely as a result of $10.7
million of operating revenues relative to the pipeline construction and services
activities of Keystone, which was acquired in December, 1995, and a $4.9 million
increase in operating revenues relative to nonregulated gas sales and services
by Energy Services. Also contributing to the increase in operating revenues was
a higher level of revenues attributable to PG Energy's gas sales and services
which increased by $7.8 million, primarily as a result of a 1.5 billion cubic
feet (6.8%) increase in sales to residential and commercial heating customers.
There was a 598 (9.9%) increase in heating degree days from 6,029 (95.8% of
normal) during 1995 to 6,627 (105.3% of normal) during 1996. The effects of the
increased sales to heating customers were partially offset by lower levels in PG
Energy's gas cost rate. See "-Rate Matters."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $25.2 million (17.9%) from $141.0 million for 1995 to $166.2
million for 1996. As a percentage of operating revenues, total operating
expenses increased from 87.1% during 1995 to 90.6% during 1996.
The cost of gas increased $8.0 million (8.8%) from $90.5 million for 1995 to
$98.5 million for 1996 primarily because of a $4.1 million increase in the cost
of gas relative to Energy Services' gas sales and services and a $3.9 million
increase resulting from the aforementioned increase in sales by PG Energy to
residential and commercial heating customers, the effects of which were
partially offset by lower levels in PG Energy's gas cost rate (see "-Rate
Matters").
Other than the cost of gas and income taxes, operating expenses increased by
$15.4 million (33.1%) from $46.6 million for 1995 to $61.9 million for 1996.
This increase was largely attributable to a $12.8 million (52.2%) increase in
other operation expenses, primarily as a result of $9.5 million of expenses
relative to Keystone's pipeline construction and services activities, and a $2.6
million (11.7%) increase in expenses with respect to PG Energy's operations,
which was principally the result of higher payroll and payroll-related costs.
Payroll and payroll-related costs increased largely because of charges, which
had formerly been allocated to PG Energy's discontinued operations, being
absorbed by its continuing operations. Also contributing to the higher
operating expenses was an $815,000 (11.6%) increase in depreciation expense as a
result of $170,000 of depreciation relative to Keystone and $641,000 of
depreciation attributable to additions to PG Energy's utility plant.
Income taxes increased $1.8 million from $4.0 million in 1995 to $5.8
million in 1996 due to an increase in income before income taxes (for this
purpose, operating income net of interest charges).
Operating Income. As a result of the above, operating income decreased by
$2.7 million (12.9%) from $21.0 million for 1995 to $18.3 million for 1996 and
decreased as a percentage of total operating revenues for such periods from
12.9% in 1995 to 9.4% in 1996, primarily because of the higher level of
operating expenses.
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<PAGE>
Other Income, Net. Other income, net increased $1.4 million from $355,000
for 1995 to $1.7 million for 1996 largely as a result of investment income
totaling $2.5 million relative to the temporary investment of a portion of the
proceeds from the sale of PG Energy's regulated water utility operations. The
effects of this increase were partially offset by charges of $548,000 relative
to the sale and abandonment of PG Energy's interest in certain gas rights and
properties in western Pennsylvania.
Interest Charges. Interest charges decreased by $5.2 million (33.9%) from
$15.4 million for 1995 to $10.2 million for 1996. This decrease was largely
attributable to the lower level of indebtedness resulting from the repayment of
PG Energy's $50.0 million term loan and all of its then outstanding bank
borrowings on February 16, 1996, with proceeds from the sale of its regulated
water utility operations on such date and the Company's defeasance of its
10.125% Senior Notes on September 30, 1996.
Income From Continuing Operations. Income from continuing operations
increased $3.9 million (66.5%) from $5.9 million for 1995 to $9.8 million for
1996. This increase was largely the result of the matters discussed above,
principally the increase in operating revenues and other income, net and the
decrease in interest charges, the effects of which were partially offset by
increased operating expenses.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $1.0 million (37.4%) from $2.8 million for 1995 to $1.7 million for
1996, primarily as a result of the repurchase by PG Energy 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 the year.
Income (Loss) Before Extraordinary Loss. The increase in income before
extraordinary loss of $8.4 million from a loss of $713,000 for 1995 to income of
$7.7 million for 1996 was largely the result of the increase in income from
continuing operations and the lower level of dividends on subsidiary's preferred
stock, as discussed above, and the reduction of $3.5 million, from $3.8 million
to $363,000, in the loss with respect to discontinued operations.
Extraordinary Loss. On September 30, 1996, the Company defeased the $28.7
million outstanding principal amount of its 10.125% Senior Notes, due June 15,
1999, and recorded an extraordinary loss of $1.1 million ($1.6 million, net of
$575,000 of related income tax 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 increase in net income of $7.3 million from a loss
of $713,000 for 1995, to income of $6.6 million for 1996, as well as the
increase in basic and diluted earnings per share of common stock of $.57 from a
loss of $.06 per share for 1995 to earnings of $.51 per share for 1996 (after a
$.13 per share charge for the premium on repurchase of subsidiary's preferred
stock and an $.11 per share charge relative to the extraordinary loss), were the
result of the higher income from continuing operations and the reduced dividends
on subsidiary's preferred stock, as discussed above, and the decrease of $.29
per share, from $.33 per share for 1995 to $.04 per share for 1996, in the loss
with respect to discontinued operations.
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<PAGE>
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 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, 1995, to the gas costs contained in its
tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
[S] [C] [C] [C]
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
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
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)*
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, the Company will incur replacement costs in amounts
that due to the effects of inflation would materially exceed either the original
cost or the accrued depreciation of such property as reflected on its books of
account. However, the cost of such replacement property would be includable in
rate base, and the Company would be entitled to recover depreciation expense and
earn a return thereon, to the extent that its investment in such property was
prudently incurred and the property is used and useful in furnishing public
utility service.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Sale of Water Utility Operations
On February 16, 1996, PG Energy sold its regulated water operations and
certain related assets to Pennsylvania-American for $414.3 million, consisting
of $262.1 million in cash and the assumption of $152.2 million of PG Energy's
liabilities, including $141.0 million of its long-term debt. The Company and PG
Energy used the $205.4 million of cash proceeds from the sale, net of $56.7
million of income taxes, to retire debt, to repurchase stock, for construction
expenditures and for other working capital purposes. In this regard, PG Energy
repaid its $50.0 million term loan due 1996 and all of its then outstanding bank
borrowings on February 16, 1996, and the Company and PG Energy temporarily
invested the balance of the proceeds. A portion of these proceeds were
subsequently used by the Company to repurchase 2,025,928 shares of its common
stock during 1996 for an aggregate consideration of $39.8 million, of which
1,781,204 shares were acquired in April pursuant to a self tender offer and
241,874 shares were acquired from time to time through open market transactions
and an oddlot buyback program. Also during 1996 and using proceeds from the
sale, PG Energy repurchased 134,359 shares of its 9% cumulative preferred stock
for an aggregate consideration of $14.5 million and 20,330 shares of its 4.10%
cumulative preferred stock for an aggregate consideration of $1.0 million,
largely pursuant to self tender offers conducted during March and April, 1996,
and utilized approximately $31.4 million for its working capital needs.
Additionally, on June 17, 1996, PG Energy repurchased 9,408 shares of its 5.75%
cumulative preferred stock (including 800 shares redeemed in accordance with
annual sinking fund provisions) for an aggregate consideration of $838,000.
Liquidity
The primary capital needs of the Company 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 expand, increased
capital will be required for those activities, especially to convert the
cogeneration facility Power Corp acquired in November, 1997, to burn both
natural and methane gas and, in connection therewith, to construct a methane gas
recovery facility at a nearby landfill. It is currently anticipated that the
expenditures for the expansion of the Company's nonregulated activities 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
$68.5 million of unsecured revolving bank credit, which is deemed adequate for
its immediate needs. Specifically, PG Energy currently has seven bank lines of
credit with an aggregate borrowing capacity of $68.5 million which provide for
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<PAGE>
borrowings at interest rates generally less than prime and which mature at
various times during 1998 and 1999 and which PG Energy intends to renew or
replace as they expire. As of February 25, 1998, PG Energy had $15.5 million of
borrowings outstanding under these bank lines of credit.
The Company believes that the 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 needs, including that required relative to
Power Corp's cogeneration facility and related methane gas recovery facility.
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. Set forth below is a summary of such
financings consummated since the beginning of 1996, exclusive of interim bank
borrowings.
On September 12, 1997, PG Energy 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 (5.880% as of February 25, 1998). Under the terms of the Term Loan
Agreement, PG Energy can choose interest rate periods of one, two, three or six
months. PG Energy utilized the proceeds from such loan to repay $25.0 million
of its bank borrowings.
On September 30, 1997, PG Energy issued $25.0 million of its 6.92% Senior
Notes due September 30, 2004 (the "6.92% Senior Notes"). The proceeds from the
issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million
of its bank borrowings.
Under the terms of its Customer Stock Purchase Plan (the "Customer Plan"),
which then provided the residential customers of PG Energy with a method of
purchasing newly-issued shares of the Company's common stock at a 5% discount
from the market price, 176,462 shares ($2.4 million) of the Company's common
stock were issued in 1995. Effective May 9, 1995, the Company suspended the
Customer Plan because of the significant reduction in its capital requirements
resulting from the sale of PG Energy's water utility operations to Pennsylvania-
American and because of the proceeds received from such sale. However, based on
its currently-anticipated funding requirements and in order to help maintain an
appropriate capital structure, the Company reinstated the Customer Plan
effective February 4, 1998. Upon such reinstatement, the Customer Plan was
amended to provide the residential customers of all the Company's subsidiaries,
including PG Energy, with a method of purchasing newly-issued shares of the
Company's common stock at a 5% discount from the market price.
The Company also obtains 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. Effective May 9, 1995, the Company
suspended the supplemental cash investment feature of the DRP and the 5%
discount from the market price on the reinvestment of dividends under the DRP
because of the significant reduction in its capital requirements resulting from
the sale of PG Energy's water utility operations to Pennsylvania-American and
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<PAGE>
because of the proceeds received from such sale. The supplemental cash
investment feature was, however, reinstated effective June 1, 1996.
Additionally, from June 14, 1996, through December 31, 1996, the Company
temporarily suspended the sale of newly-issued stock to both the DRP and
Employees' Savings Plan as a result of the proceeds received from the sale of PG
Energy's water utility operations, and during that period the two plans obtained
shares of Company common stock for participants through open market purchases.
Effective January 1, 1997, the Company resumed selling newly-issued stock to
both the DRP and Employees' Savings Plan. On January 30, 1998, the DRP was
amended to reinstate the provision whereby the Company's shareholders may
reinvest cash dividends and make supplemental cash investments to purchase
newly-issued shares of the Company's common stock at a 5% discount from the
market price.
Under the DRP, 68,678 shares ($1.7 million), 17,664 shares ($340,000), and
232,610 shares ($3.3 million) of common stock were issued during 1997, 1996 and
1995, respectively. Under the Company's Employees' Savings Plan (a section
401(k) plan) which became effective January 1, 1992, the Company issued an
additional 30,436 shares ($750,000) in 1997, 10,198 shares ($195,000) in 1996
and 38,936 shares ($628,000) in 1995. Additionally, under the Company's 1992
Stock Option Plan 3,600 shares ($54,000), 37,400 shares ($561,000) and 9,600
shares ($144,000) were issued in 1997, 1996 and 1995, respectively.
Capital Expenditures and Related Financings
Capital expenditures totaled $34.3 million during 1997, including $30.2
million of expenditures for the construction of utility plant. During 1996 and
1995, respectively, expenditures for the construction of utility plant totaled
$29.2 million and $21.1 million. Such expenditures were financed with
internally-generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.
The Company estimates that its capital expenditures will total $47.6 million
during 1998, consisting of $36.3 million relative to utility plant and $11.3
million with respect to the Company's nonregulated activities, including $8.1
million to convert the cogeneration facility acquired by Power Corp in November,
1997, to burn both natural and methane gas and, in connection therewith, to
construct a methane gas recovery facility at a nearby landfill. Capital
expenditures are currently expected to range from $40-43 million in each of the
years 1999 and 2000, of which approximately $37.0 million per year will involve
utility plant and the balance will relate to the Company's nonregulated
activities. It is anticipated that such capital expenditures will be financed
with internally generated funds and bank borrowings, and by the periodic
issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1997, $24.8 million of PG Energy's long-term debt, and
$80,000 of PG Energy's preferred stock was required to be repaid within twelve
months.
On September 30, 1996, the Company defeased the $28.7 million outstanding
principal amount of its 10.125% Senior Notes, due June 15, 1999 (the "Senior
Notes"). Specifically, on that date, the Company deposited $29.9 million with
the trustee for the Senior Notes, which was used, together with interest earned
on the funds so deposited, to pay the Company's interest and principal
obligations through June 15, 1997, the date on which the Senior Notes were
scheduled to be redeemed. The deposit of such funds acted to discharge all of
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the Company's obligations with respect to the Senior Notes. Of the $29.9
million required to defease the Senior Notes, $17.2 million was obtained through
the liquidation of the Company's temporary cash investments and $12.7 million
was obtained through the repayment of loans that had been made by the Company to
PG Energy.
Year 2000
The Company is currently replacing its financial and customer information
systems with purchased software packages. In connection with the installation
of these new systems, the primary year 2000 issues will be resolved. The new
financial systems are anticipated to be operational in mid-1998 and the new
customer information system is anticipated to be operational in early 1999.
The Company has completed a review of the program coding of other
significant in-house developed applications and determined that they are
presently year 2000 compliant. Additionally, the Company is reviewing its
installed base of personal computers to identify non-compliant machines that
would be in service at year 2000.
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 industry and general economic
conditions and uncertainties relating to the expansion of the Company's
nonregulated activities. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and its subsidiaries
and the reports of independent accountants thereon are presented on pages 33
through 61 of this Form 10-K. All basic and diluted per share data included in
this Item 8 for the years 1996 and 1995 has been restated to reflect the two-
for-one split of the Company's Common Stock effective March 20, 1997, as more
fully discussed in Note 4 of the Notes to Consolidated Financial Statements
contained herein.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Pennsylvania Enterprises, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page 64 present fairly, in all
material respects, the financial position of Pennsylvania Enterprises, Inc., and
its subsidiaries at December 31, 1997, and the results of their operations and
their cash flows for the year ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. The
consolidated financial statements of Pennsylvania Enterprises, Inc. and its
subsidiaries for the two years in the period ended December 31, 1996, were
audited by other independent accountants whose report dated February 19, 1997,
expressed an unqualified opinion on those statements.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
February 18, 1998
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Pennsylvania Enterprises, Inc.:
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Pennsylvania Enterprises, Inc. (a Pennsylvania
corporation) and subsidiaries (the "Company") as of December 31, 1996, and the
related consolidated statements of income, common shareholders' investment, and
cash flows for each of the two years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pennsylvania
Enterprises, Inc. and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for each of the two years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Supplemental Schedule II,
Valuation and Qualifying Accounts for the two-year period ended December 31,
1996 (see index of financial statements) is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 19, 1997
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES:
Regulated $ 190,533 $ 160,594 $ 152,756
Nonregulated -
Gas sales and services 26,004 13,028 8,094
Pipeline construction and services 11,210 10,733 826
Other 299 125 259
Total operating revenues 228,046 184,480 161,935
OPERATING EXPENSES:
Cost of gas 134,502 98,475 90,478
Operation and maintenance 43,385 42,930 29,551
Depreciation 9,464 7,833 7,018
Income taxes 7,374 5,800 3,955
Taxes other than income taxes 11,766 11,182 9,982
Total operating expenses 206,491 166,220 140,984
OPERATING INCOME 21,555 18,260 20,951
OTHER INCOME, NET 1,221 1,726 355
INCOME BEFORE INTEREST CHARGES 22,776 19,986 21,306
INTEREST CHARGES:
Interest on long-term debt 9,055 9,609 13,672
Other interest 810 760 1,844
Allowance for borrowed funds used
during construction (231) (177) (94)
Total interest charges 9,634 10,192 15,422
INCOME FROM CONTINUING OPERATIONS 13,142 9,794 5,884
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS (Note 2) - (363) (3,834)
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS 13,142 9,431 2,050
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 1,312 1,730 2,763
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 11,830 7,701 (713)
EXTRAORDINARY LOSS (NET OF TAX BENEFIT
OF $575,000) (Note 6) - (1,117) -
NET INCOME (LOSS) $ 11,830 $ 6,584 $ (713)
COMMON STOCK: (Notes 1 and 4)
Basic and diluted earnings (loss) per share
of common stock:
Continuing operations $ 1.22 $ .79 $ .27
Discontinued operations - (.04) (.33)
Net income (loss) before discount (premium)
on repurchase/redemption of subsidiary's
preferred stock and extraordinary loss 1.22 .75 (.06)
Discount (premium) on repurchase/redemption
of subsidiary's preferred stock .08 (.13) -
Extraordinary loss - (.11) -
Earnings (loss) per share of common stock $ 1.30 $ .51 $ (.06)
Weighted average number of shares outstanding 9,661,056 10,222,002 11,458,872
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost $351,106 $319,205
Accumulated depreciation (88,129) (79,783)
262,977 239,422
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment 16,335 12,502
Accumulated depreciation (4,875) (4,674)
Other 2,171 1,720
13,631 9,548
CURRENT ASSETS:
Cash and cash equivalents 2,202 1,126
Accounts receivable -
Customers 28,681 22,464
Others 850 565
Reserve for uncollectible accounts (1,340) (1,233)
Unbilled revenues 12,108 12,966
Materials and supplies, at average cost 3,110 2,865
Gas held by suppliers, at average cost 21,933 20,265
Natural gas transition costs collectible 134 2,525
Deferred cost of gas and supplier refunds, net 6,182 19,316
Prepaid expenses and other 1,686 1,438
75,546 82,297
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,592 29,771
Other 4,415 4,274
Unamortized debt expense 1,361 1,498
Other 308 -
36,676 35,543
TOTAL ASSETS $388,830 $366,810
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholders' investment $122,105 $117,651
Preferred stock of PG Energy -
Not subject to mandatory redemption, net 15,864 18,851
Subject to mandatory redemption 640 739
Long-term debt 127,000 75,000
265,609 212,241
CURRENT LIABILITIES:
Current portion of long-term debt 24,776 38,721
Preferred stock subject to repurchase or mandatory
redemption 80 115
Notes payable 2,170 10,000
Accounts payable 18,448 19,945
Accrued general business and realty taxes 2,953 2,350
Accrued income taxes 4,618 14,525
Accrued interest 1,783 1,243
Accrued natural gas transition costs 1,087 2,095
Other 1,722 3,904
57,637 92,898
DEFERRED CREDITS:
Deferred income taxes 52,511 49,270
Unamortized investment tax credits 4,596 4,767
Operating reserves 2,825 3,086
Other 5,652 4,548
65,584 61,671
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES $388,830 $366,810
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends $ 11,830 $ 8,064 $ 3,121
Effects of noncash charges to income -
Depreciation 9,519 7,896 7,018
Deferred income taxes, net 2,210 2,104 (251)
Provisions for self insurance 898 1,042 2,652
Extraordinary loss, net of tax benefit - (1,117) -
Other, net 1,338 2,335 5,572
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (4,847) (3,350) (219)
Gas held by suppliers (1,668) (5,125) 4,885
Accounts payable (2,532) 2,057 321
Deferred cost of gas and supplier refunds, net 14,397 (18,493) 5,715
Other current assets and liabilities, net 1,997 2,235 (6,509)
Other operating items, net (986) (5,458) 2,628
Net cash provided by (used for) continuing
operations 32,156 (7,810) 24,933
Net cash provided by (used for) discontinued
operations (13,655) (45,173) 3,764
Net cash provided by (used for) operating
activities 18,501 (52,983) 28,697
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (30,971) (29,312) (20,615)
Proceeds from the sale of discontinued operations - 261,752 -
Acquisition of nonregulated business - - (3,169)
Acquisition of regulated business (2,019) - -
Other, net (2,915) (1,803) (4,934)
Net cash provided by (used for) investing
activities (35,905) 230,637 (28,718)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 2,491 1,291 4,045
Repurchase of common stock - (40,452) -
Repurchase/redemption of preferred stock
of PG Energy (3,121) (15,670) (80)
Dividends on common stock (11,501) (11,174) (12,605)
Issuance of long-term debt 26,000 - 52,000
Repayment of long-term debt - (81,906) (53,535)
Net increase (decrease) in bank borrowings 4,053 (27,903) 10,500
Other, net 558 (1,343) (5)
Net cash provided by (used for) financing
activities 18,480 (177,157) 320
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,076 497 299
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,126 629 330
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,202 $ 1,126 $ 629
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 8,337 $ 10,423 $ 27,951
Income taxes $ 15,728 $ 46,605 $ 8,748
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-38-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
COMMON SHAREHOLDERS' INVESTMENT:
Common stock, no par value
(stated value $5 per share)
Authorized - 30,000,000 shares
Outstanding - 9,744,272 shares and
9,607,972 shares, respectively $ 48,721 $ 48,040
Additional paid-in capital 23,089 20,391
Retained earnings 50,295 49,220
Total common shareholders' investment 122,105 46.0% 117,651 55.4%
PREFERRED STOCK of PG Energy, par value $100 per share
Authorized - 997,500 shares:
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
49,110 and 79,670 shares outstanding,
respectively 4,911 7,967
Less current repurchases - (35)
9% cumulative preferred, 115,641 shares
outstanding, net of issuance costs 10,953 10,919
Total preferred stock not subject to
mandatory redemption, net 15,864 6.0% 18,851 8.9%
Subject to mandatory redemption -
5.75% cumulative preferred, 7,200 and
8,192 shares outstanding, respectively 720 819
Less current redemption requirements (80) (80)
Total preferred stock subject to
mandatory redemption 640 0.2% 739 0.4%
LONG-TERM DEBT:
First mortgage bonds 55,000 55,000
Notes 96,776 58,721
Less current maturities and sinking
fund requirements (24,776) (38,721)
Total long-term debt 127,000 47.8% 75,000 35.3%
TOTAL CAPITALIZATION $ 265,609 100.0% $ 212,241 100.0%
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-39-
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Common Additional
Common Stock Paid-In Retained
Stock Subscribed Capital Earnings Total
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $55,539 $ 2,515 $ 45,493 $ 68,465 $172,012
Net loss for 1995 - - - (713) (713)
Issuance of common stock 2,304 - 4,256 - 6,560
Common stock subscribed, net - (2,515) - - (2,515)
Cash dividends on common stock
($1.10 per share) - - - (12,605) (12,605)
Balance at December 31, 1995 57,843 - 49,749 55,147 162,739
Net income for 1996 - - - 6,584 6,584
Issuance of common stock 328 - 963 - 1,291
Repurchase of common stock (10,131) - (30,321) - (40,452)
Premium on repurchase of
preferred stock of PG Energy - - - (1,337) (1,337)
Cash dividends on common stock
($1.10 per share) - - - (11,174) (11,174)
Balance at December 31, 1996 48,040 - 20,391 49,220 117,651
Net income for 1997 - - - 11,830 11,830
Issuance of common stock 681 - 2,698 - 3,379
Discount on repurchase of
preferred stock of PG Energy - - - 746 746
Cash dividends on common stock
($1.19 per share) - - - (11,501) (11,501)
Balance at December 31, 1997 $48,721 $ - $ 23,089 $ 50,295 $122,105
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
-40-
<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.
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), formerly known as Pennsylvania Energy Resources, Inc., 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, including the marketing and sale of natural gas, propane and
electricity and other energy-related services, as well as the construction,
maintenance and rehabilitation of 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 pursuant to a retail marketing alliance
agreement with CNG Energy Services, a subsidiary of Consolidated Natural Gas
Company. Power Corp is expected to begin generating and selling electricity and
steam, which will be marketed by PG Energy PowerPlus, in mid-1998 upon the
completion of modifications to its cogeneration facility that will enable it to
burn both natural and methane gas.
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
statements of the Regulated Subsidiaries 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.
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
-41-
<PAGE>
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters (see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult to predict and are beyond the control of the Company.
Therefore, actual amounts could differ from these estimates.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll, administrative
and general costs, and an allowance for funds used during construction.
The allowance for funds used during construction ("AFUDC") is defined as the
net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as a reduction of interest expense (with respect to
the cost of borrowed funds) in the accompanying consolidated statements of
income. AFUDC varies according to changes in the level of construction work in
progress and in the sources and costs of capital. The weighted average rate for
such allowance was approximately 8% in 1997, 9% in 1996 and 8% in 1995.
The Company provides for depreciation on a straight-line basis. Exclusive
of transportation and work equipment, the Regulated Subsidiaries' annual
provision for depreciation, as related to the average depreciable original cost
of utility plant, was 2.81% in 1997, 2.60% in 1996 and 2.75% in 1995,
respectively.
When depreciable property is retired, the original cost of such property is
removed from the utility plant accounts and is charged, together with the cost
of removal less salvage, to accumulated depreciation. No gain or loss is
recognized in connection with retirements of depreciable property, other than in
the case of significant involuntary conversions or extraordinary retirements.
Revenues and Cost of Gas. The Regulated Subsidiaries bill customers monthly
based on estimated or actual meter readings on cycles that extend throughout the
month. The estimated unbilled amounts from the most recent meter reading dates
through the end of the period being reported on are recorded as accrued
revenues. Energy Services also bills its customers on a monthly basis at its
contractual rates.
The Regulated Subsidiaries generally pass on to their customers increases or
decreases in gas costs from those reflected in its tariff charges. In
accordance with this procedure, the Regulated Subsidiaries defer any current
under or over-recoveries of gas costs and collect or refund such amounts in
subsequent periods. The Regulated Subsidiaries had underrecoveries of gas costs
totaling $17.0 million, $29.6 million and $10.4 million as of December 31, 1997,
1996 and 1995, respectively. Energy Services records its gas costs as incurred.
Deferred Charges (Regulatory Assets). The Regulated Subsidiaries generally
account for and report costs in accordance with the economic effect of rate
actions by the PPUC. To this extent, certain costs are recorded as deferred
charges pending their recovery in rates. These amounts relate to previously-
issued orders of the PPUC and are of a nature which, in the opinion of the
Company, will be recoverable in future rates, based on such rate orders. In
addition to deferred taxes collectible, which represent the probable future rate
recovery of the previously unrecorded deferred taxes primarily relating to
certain temporary differences in the basis of utility plant not previously
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<PAGE>
recorded because of the regulatory rate practices of the PPUC, the following
deferred charges are included as "Other" regulatory assets as of December 31,
1997 and 1996:
[CAPTION]
1997 1996
(Thousands of Dollars)
[S] [C] [C]
Computer software costs $ 1,945 $ 1,293
Early retirement plan charges 618 664
Low income usage reduction program 432 492
Rate case expense 356 588
Extraordinary charges due to flooding 348 426
Customer assistance program 181 219
Other postretirement benefits 174 -
Corrosion control costs 46 194
Other 315 398
Total $ 4,415 $ 4,274
The Company also records, as deferred charges, the direct financing costs
incurred in connection with the issuance of long-term debt and equitably
amortizes such amounts over the life of the securities.
Cash and Cash Equivalents. For the purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
purchased, which generally have a maturity of three months or less, to be cash
equivalents. Such instruments are carried at cost, which approximates market
value.
Income Taxes. The Company provides for deferred taxes in accordance with
the provisions of FASB Statement 109. The components of the Company's net
deferred income tax liability relative to continuing operations as of
December 31, 1997 and 1996, are shown below:
[CAPTION]
1997 1996
(Thousands of Dollars)
[S] [C] [C]
Utility plant basis differences $55,497 $53,132
FERC Order 636 transition costs (394) 181
Postretirement benefits (700) (726)
Take-or-pay costs, net - (467)
Operating reserves (1,181) (1,406)
Other (711) (1,444)
Net deferred income tax liability $52,511 $49,270
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<PAGE>
The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
1997 1996 1995
(Thousands of Dollars)
[S] [C] [C] [C]
Included in operating expenses:
Currently payable -
Federal $ 3,894 $ 2,513 $ 3,129
State 1,359 1,519 1,284
Total currently payable 5,253 4,032 4,413
Deferred, net -
Federal 2,186 2,059 198
State 107 (119) (463)
Total deferred, net 2,293 1,940 (265)
Amortization of investment tax credits (172) (172) (193)
Total included in operating expenses 7,374 5,800 3,955
Included in other income, net:
Currently payable -
Federal 34 806 126
State 12 (19) 44
Total currently payable 46 787 170
Deferred, net -
Federal (6) - -
State - - -
Total deferred, net (6) - -
Total included in other income, net 40 787 170
Total provision for income taxes $ 7,414 $ 6,587 $ 4,125
The total provision for income taxes relative to continuing operations shown
in the accompanying consolidated statements of income differs from the amount
which would be computed by applying the statutory federal income tax rate to
income before income taxes. The following table summarizes the major reasons
for this difference:
[CAPTION]
1997 1996 1995
(Thousands of Dollars)
[S] [C] [C] [C]
Income before income taxes $20,556 $16,381 $10,009
Tax expense at statutory federal
income tax rate $ 7,195 $ 5,733 $ 3,503
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 961 898 562
Amortization of investment tax
credits (172) (172) (193)
Other, net (570) 128 253
Total provision for income taxes $ 7,414 $ 6,587 $ 4,125
-44-
<PAGE>
Earnings Per Share. The Company adopted the provisions of FASB Statement
128, "Earnings per Share" in December, 1997. The following tables present a
reconciliation of the calculations of basic and diluted earnings per share
("EPS") from continuing operations for the each of the three years ended
December 31, 1997, 1996 and 1995, respectively, follows:
[CAPTION]
Income Shares Earnings
1997 (Numerator) (Denominator) Per Share
(In Thousands)
[S] [C] [C] [C]
Income from continuing operations
before subsidiary's preferred stock
dividends $ 13,142
Less subsidiary's preferred stock
dividends 1,312
Basic EPS on income from continuing
operations available to common
shareholders 11,830 9,661 $ 1.22
Effect of dilutive stock options - 75 -
Diluted EPS on income from continuing
operations available to common
shareholders after assumed issuance
of stock options $ 11,830 9,736 $ 1.22
[CAPTION]
Income Shares Earnings
1996 (Numerator) (Denominator) Per Share
(In Thousands)
[S] [C] [C] [C]
Income from continuing operations
before subsidiary's preferred stock
dividends and extraordinary loss $ 9,794
Less subsidiary's preferred stock
dividends 1,730
Basic EPS on income from continuing
operations available to common
shareholders 8,064 10,222 $ .79
Effect of dilutive stock options - 21 -
Diluted EPS on income from continuing
operations available to common
shareholders after assumed issuance
of stock options $ 8,064 10,243 $ .79
[CAPTION]
Income Shares Earnings
1995 (Numerator) (Denominator) Per Share
(In Thousands)
[S] [C] [C] [C]
Income from continuing operations
before subsidiary's preferred stock
dividends $ 5,884
Less subsidiary's preferred stock
dividends 2,763
Basic EPS on income from continuing
operations available to common
shareholders 3,121 11,459 $ .27
Effect of dilutive stock options - 5 -
Diluted EPS on income from continuing
operations available to common
shareholders after assumed issuance
of stock options $ 3,121 11,464 $ .27
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<PAGE>
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.
(2) DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among the Company, PG Energy, American Water Works Company,
Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-
American"), a wholly-owned subsidiary of American, the Company and PG Energy
sold substantially all of the assets, properties and rights of PG Energy's water
utility operations to Pennsylvania-American on February 16, 1996. Under the
terms of the Agreement, Pennsylvania-American paid PG Energy $414.3 million
consisting of $262.1 million in cash and the assumption of $152.2 million of PG
Energy's liabilities, including $141.0 million of its long-term debt. PG Energy
continued to operate the water utility business until February 16, 1996. The
cash proceeds from the sale of approximately $205.4 million, net of $56.7
million of income taxes, were used by the Company and PG Energy to retire debt,
to repurchase stock (see Note 4 of these Notes to Consolidated Financial
Statements), for construction expenditures and for other working capital
purposes.
The sale price reflected a $6.5 million premium over the book value of the
assets sold. However, after transaction costs and the net effect of other
items, the sale resulted in an after tax loss of approximately $6.2 million, net
of the income from the water operations during the phase-out period (which for
financial reporting purposes was April 1, 1995, through February 15, 1996).
The accompanying consolidated financial statements reflect PG Energy's water
utility operations as "discontinued operations" effective March 31, 1995.
Interest charges relating to indebtedness of PG Energy were allocated through
the date of disposition to the discontinued operations based on the relationship
of the gross water utility plant that was sold to the total of PG Energy's gross
gas and water utility plant. This is the same method as was utilized by PG
Energy and the PPUC in establishing the revenue requirements of both PG Energy's
gas and water utility operations. None of the dividends on PG Energy's
preferred stock nor any of the Company's interest expense were allocated to the
discontinued operations.
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<PAGE>
Selected financial information for the discontinued operations for the year
ended December 31, 1995, is set forth below:
[CAPTION]
Income From Discontinued Operations*
(Thousands of Dollars)
[S] [C]
Operating revenues $ 15,640
Operating expenses, excluding income taxes 8,875
Operating income before income taxes 6,765
Income taxes 1,403
Operating income 5,362
Other income 9
Allocated interest charges (3,244)
Income from discontinued operations $ 2,127
Net Cash Provided by Discontinued Operations*
(Thousands of Dollars)
[CAPTION]
[S] [C]
Income from discontinued operations $ 2,127
Noncash charges (credits) to income:
Depreciation 1,946
Deferred treatment plant costs, net 145
Deferred income taxes 447
Changes in working capital, exclusive
of long-term debt 1,648
Additions to utility plant (2,276)
Net increase (decrease) in long-term debt 1,010
Other, net (1,283)
Net cash provided by discontinued operations $ 3,764
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG Energy's water utility operations for financial
statement purposes.
(3) 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.
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<PAGE>
In accordance with these procedures PG Energy has been permitted to make the
following changes since January 1, 1995, to the gas costs contained in its
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 $4.05 $(12,100,000)
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
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)*
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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. On October 15, 1993, the PPUC
adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition
costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") were subject to recovery through the annual PGC rate filings
made with the PPUC by PG Energy and other LDCs. The PGC Order also indicated
that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition
Costs") were not natural gas costs eligible for recovery under the PGC rate
filing mechanism, such costs were subject to full recovery by LDCs through the
filing of a tariff pursuant to either the existing surcharge or base rate
provisions of the Code. The PGC Order further stated that all such filings
would be evaluated on a case-by-case basis.
PG Energy was billed a total of $1.3 million of Gas Transition Costs by its
interstate pipelines. Of this amount, $857,000 was recovered by PG Energy over
a twelve-month period ended January 31, 1995, through an increase in its PGC
rate, $252,000 was recovered by PG Energy in its annual PGC rate that the PPUC
approved effective December 1, 1995, and the remaining $213,000 was recovered by
PG Energy in its PGC rate that was effective December 1, 1996.
By Order of the PPUC entered August 26, 1994, PG Energy began recovering the
Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant
to FERC Order 636 through the billing of a surcharge to its customers effective
September 12, 1994. It is currently estimated that $10.7 million of Non-Gas
Transition Costs will be billed to PG Energy, generally over a six-year period
extending through January 1, 1999, of which $9.6 million had been billed to PG
Energy and $9.5 million had been recovered from its customers as of December 31,
1997. In addition, during 1997 $1.1 million of take-or-pay costs refunded to PG
Energy by its suppliers were applied as a reduction of the total Non-Gas
Transition Costs recoverable from customers. The remaining balance of Non-Gas
Transition Costs, which is presently estimated to be $134,000, is expected to be
recovered by PG Energy from its customers during 1998.
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<PAGE>
(4) COMMON STOCK
Common Stock Split. On February 19, 1997, the Board of Directors adopted
resolutions to amend 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 upon the filing of a Certificate of
Amendment with the Secretary of the State of Pennsylvania on March 20, 1997.
Such actions had no effect on the Company's capital accounts. On February 19,
1997, the Board of Directors also declared a two-for-one stock 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 presented for the years 1996 and 1995 have been restated
to give retroactive effect to this stock split.
Repurchase of Common Stock. During 1996, the Company used proceeds it
received in connection with PG Energy's sale of its water utility operations to
Pennsylvania-American on February 16, 1996, to repurchase shares of its common
stock. Specifically, a portion of these proceeds were used by the Company to
repurchase 2,025,928 shares of its common stock during 1996 for an aggregate
consideration of $39.8 million, of which 1,781,204 shares were acquired in April
pursuant to a self tender offer and 244,724 shares were acquired from time to
time through open market purchases and an oddlot buyback program.
Customer Stock Purchase Plan. On July 28, 1994, the Company implemented a
Customer Stock Purchase Plan (the "Customer Plan") which provided the
residential customers of PG Energy with a method of purchasing newly-issued
shares of the Company's common stock at a 5% discount from the market price.
Under the terms of the Customer Plan, 176,462 shares ($2.4 million) of the
Company's common stock were issued during 1995. Effective May 9, 1995, the
Company suspended the Customer Plan because of the significant reduction in its
capital requirements resulting from the sale of PG Energy's water utility
operations to Pennsylvania-American and because of the proceeds received from
such sale.
Dividend Reinvestment and Stock Purchase Plan. Through the Company's
Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of the
Company's common stock may reinvest cash dividends and/or make cash investments
in the common stock of the Company at a 5% discount from the market price.
Under the DRP, 68,678 shares ($1.7 million), 17,664 shares ($340,000) and
233,010 shares ($3.3 million) of common stock were issued during 1997, 1996 and
1995, respectively.
Employees' Savings Plan. Under the Company's Employees' Savings Plan (a
section 401(k) plan) which became effective January 1, 1992, the Company issued
an additional 30,436 shares ($750,000) in 1997, 10,198 shares ($195,000) in 1996
and 38,936 shares ($628,000) in 1995.
1992 Stock Option Plan. On June 3, 1992, the Company's shareholders
approved the Pennsylvania Enterprises, Inc. 1992 Stock Option Plan (the "Plan").
Under the terms of the Plan, a total of 430,000 shares of authorized but
unissued shares of the Company's common stock have been reserved and made
available for distribution to eligible employees. Stock options awarded under
the Plan may be either Incentive Stock Options or Nonqualified Stock Options.
In October, 1995, FASB Statement 123, "Accounting For Stock-Based
Compensation," was issued. The Company adopted the disclosure provisions of
FASB Statement 123 in 1996, but opted to remain under the expense recognition
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<PAGE>
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for stock option and stock award
plans. No options were granted under the 1992 Stock Option Plan in 1997 and for
the years ended December 31, 1996 and 1995, no compensation expense was
recognized for options granted under the Plan. Had compensation expense for
stock options granted under the Plan been determined based on fair value at the
grant dates consistent with the method required by FASB Statement 123, the
Company's net income and earnings per share for the year 1996 would have been
reduced to the pro forma amounts shown below:
[CAPTION]
1996
[S] [C]
Net income:
As reported $6.6 million
Pro forma $5.9 million
Earnings per common share:
As reported $ .51
Pro forma $ .44
A summary of the stock option activity during each of the three years in the
period ended December 31, 1997, pursuant to the terms of the Plan, all of which
were Nonqualified Stock Options, is set forth below:
[CAPTION]
Number of Weighted
shares subject average exercise
to option price
[S] [C] [C]
Outstanding at December 31, 1994 89,200 $ 15.00
Exercised during 1995 (9,600) 15.00
Outstanding at December 31, 1995 79,600 15.00
Granted during 1996 340,000 20.38
Exercised during 1996 (37,400) 15.00
Outstanding at December 31, 1996 382,200 19.79
Exercised during 1997 (3,600) 15.00
Outstanding at December 31, 1997 378,600 19.83
Options exercisable at December 31, 1997 198,600 $ 19.00
Options available for future grant at
December 31, 1997 800
There were no options granted under the Plan in 1997. The weighted average
fair value of options granted in 1996 of $3.66 was estimated as of the date of
grant using the Black-Scholes stock option pricing model, based on the following
weighted average assumptions: quarterly dividend yield of 1.25%, annual
expected return of 5.3%, annual standard deviation (volatility) of 20.5%, risk
free interest rate of 6.91%, and expected term of 7 years.
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<PAGE>
The following table summarizes information regarding the stock options
outstanding at December 31, 1997, pursuant to the terms of the Plan:
[CAPTION]
Options outstanding Options exercisable
At Remaining At
December 31, Exercise contractual December 31, Exercise
1997 price life 1997 price
[S] [C] [C] [C] [C]
38,600 $ 15.00 5.27 Years 38,600 $ 15.00
100,000 19.50 8.29 Years 100,000 19.50
240,000 20.75 8.67 Years 60,000 20.75
378,600 198,600
Stock Incentive Plan. On May 14, 1997, the Company's shareholders approved
the Pennsylvania Enterprises, Inc. Stock Incentive Plan (the "Incentive Plan").
Under the terms of the Plan, a total of 460,000 shares of authorized but
unissued shares of the Company's common stock have been reserved and made
available for distribution to eligible employees, officers, and directors.
Awards under the Incentive Plan may take the form of stock options, restricted
stock, and other awards where the value of the award is based upon the
performance of the Company's stock. During 1997, nonqualified Stock Options for
the purchase of 42,000 shares of stock were issued to certain officers and
directors. The options were granted subject to the achievement of specified
financial and operational goals for the Company during 1997. However, because
certain of these goals were not met, these options will not vest or become
exercisable and have not been included in either the stock option tables above
or the diluted earnings per share calculations included in Note 1 of these Notes
to Consolidated Financial Statements.
Shareholder Rights Plan. The Company has a Shareholder Rights Plan under
which each holder of a share of common stock is granted a right ("Right or
"Rights"), under certain circumstances, to purchase from the Company one-half of
a share of common stock. No less than two Rights, and only integral multiples
of two Rights, may be exercised by holders of Rights at an exercise price of $50
per share of common stock (equivalent to $25 for each one-half share of common
stock), subject to certain adjustments. The Rights will become exercisable only
if a person or group acquires 15% or more of the Company's common stock, or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning at least 15% of the common stock. Prior to that time,
the Rights will not trade separately from the common stock.
If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the $50
exercise price upon the exercise of two Rights, the Company's common stock (or a
common stock equivalent) with a value of twice the exercise price. In addition,
at any time after a 15% position is acquired and prior to the acquisition by any
person or group of 50% or more of the outstanding common stock, the Company's
Board of Directors may, at its option, require each outstanding Right (other
than Rights held by the acquiring person or group) to be exchanged for one share
of common stock (or one common stock equivalent).
If, following an acquisition of 15% or more of the Company's common stock,
the Company is acquired by any person in a merger or other business combination
transaction or sells more than 50% of its assets or earning power to any person
(other than the sale of PG Energy's water utility operations to Pennsylvania-
American), all other holders of Rights will then be entitled to purchase, by
payment of the $50 exercise price upon the exercise of two Rights, common stock
of the acquiring company with a value of twice the exercise price.
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<PAGE>
The Company may redeem the Rights at $.0025 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend rights
and, until they become exercisable, have no dilutive effect on the earnings per
share of the Company.
(5) PREFERRED STOCK
Preferred Stock of PG Energy Subject to Mandatory Redemption. The holders
of the 5.75% cumulative preferred stock have a noncumulative right each year to
tender to PG Energy and to require it to purchase at a per share price not
exceeding $100, up to (a) that number of shares of the 5.75% cumulative
preferred stock which can be acquired for an aggregate purchase price of $80,000
less (b) the number of such shares which PG Energy may already have purchased
during the year at a per share price of not more than $100. During 1997 and
1996, PG Energy repurchased 992 and 9,408 shares, respectively, of its 5.75%
cumulative preferred stock (including 800 shares redeemed in each of the years
in accordance with annual sinking fund provisions) for an aggregate
consideration of $99,000 in 1997 and $838,000 in 1996. Eight hundred such
shares were acquired and cancelled by PG Energy in the year ended December 31,
1995, for an aggregate purchase price of $80,000.
As of December 31, 1997, the sinking fund requirements relative to PG
Energy's 5.75% cumulative preferred stock (the only series of preferred stock
subject to mandatory redemption that was outstanding as of such date) were
$80,000 for each of the years 1998 through 2002. At PG Energy's option, the
5.75% cumulative preferred stock may currently be redeemed at a price of $102.00
per share ($734,400 in the aggregate).
Preferred Stock of PG Energy Not Subject to Mandatory Redemption. During
the year ended December 31, 1996, PG Energy repurchased 134,359 shares of its 9%
cumulative preferred stock, $100 par value, for an aggregate consideration of
$14.5 million, largely pursuant to a self tender offer conducted during March
and April, 1996. The 9% cumulative preferred stock is redeemable at the option
of PG Energy, in whole or in part, upon not less than 30 days' notice, at $100
per share plus accrued dividends to the date of redemption and at a premium of
$8 per share if redeemed on or before September 14, 1998, and a premium of $4
per share if redeemed from September 15, 1998, to September 14, 1999.
During the year ended December 31, 1996, PG Energy repurchased 20,330 shares
of its 4.10% cumulative preferred stock, $100 par value, for an aggregate
consideration of $1.0 million, largely pursuant to a self tender offer conducted
during March and April, 1996. During the year ended December 31, 1997, PG
Energy repurchased 30,560 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $2.1 million, largely pursuant to a self tender offer
conducted during April and May, 1997. At PG Energy's option, the 4.10%
cumulative preferred stock may currently be redeemed at a redemption price of
$105.50 per share or for an aggregate redemption price of $5,181,105.
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<PAGE>
Dividend Information. The dividends on the preferred stock of PG Energy in
each of the three years in the period ended December 31, 1997, were as follows:
[CAPTION]
Series 1997 1996 1995
(Thousands of Dollars)
[S] [C] [C] [C]
4.10% $ 228 $ 348 $ 410
5.75% 44 72 103
9.00% 1,040 1,310 2,250
Total $1,312 $1,730 $2,763
Dividends on all series of PG Energy's preferred stock are cumulative and PG
Energy may not declare dividends on its common stock if any dividends on shares
of preferred stock then outstanding are in default.
(6) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
1997 1996
(Thousands of Dollars)
<S> <C> <C>
Indebtedness of the Company:
Term loan, due 1999 $ 20,000 $ 20,000
Less current maturities - -
Total long-term debt of the Company 20,000 20,000
Indebtedness of PG Energy:
First mortgage bonds -
8.375% Series, due 2002 30,000 30,000
9.23 % Series, due 1999 10,000 10,000
9.34 % Series, due 2019 15,000 15,000
55,000 55,000
Notes -
6.92% Senior Notes, due 2004 25,000 -
Term loan, due 2002 25,000 -
Bank borrowings, at weighted average interest
rates of 6.11% and 6.18%, respectively (Note 8) 25,776 38,721
75,776 38,721
Less current maturities and sinking
fund requirements (24,776) (38,721)
Total long-term debt of PG Energy 106,000 55,000
Indebtedness of Power Corp:
Bank borrowings, at weighted average interest
rate of 7.50% 1,000 -
Less current maturities - -
Total long-term debt of Power Corp 1,000 -
Total consolidated long-term debt $127,000 $ 75,000
</TABLE>
Term Loan Agreements. Borrowings under the Company's $20.0 million term
loan dated May 31, 1994, which matures on May 31, 1999, bear interest at London
Interbank Offered Rates ("LIBOR") plus one-half of one percent. Under the terms
of the loan, the Company can choose interest rate periods of one, two, three or
six months.
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<PAGE>
On September 12, 1997, PG Energy 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 plus one-quarter of one percent. Under the terms of the Term
Loan Agreement, PG Energy can choose interest rate periods of one, two, three or
six months. PG Energy utilized the proceeds from such loan to repay $25.0
million of its bank borrowings.
PG Energy 6.92% Senior Notes. On September 30, 1997, PG Energy issued $25.0
million of its 6.92% Senior Notes due September 30, 2004 (the "6.92% Senior
Notes"). The proceeds from the issuance of the 6.92% Senior Notes were used by
PG Energy to repay $25.0 million of its bank borrowings.
10.125% Senior Notes/Extraordinary Loss. On May 26, 1996, the Company
repurchased $1.3 million principal amount of its 10.125% Senior Notes due June
15, 1999 (the "Senior Notes") which the holders thereof elected pursuant to
terms of the Senior Notes to require the Company to repurchase as a result of
the sale of PG Energy's water utility operations on February 16, 1996. On
September 30, 1996, the Company defeased the remaining $28.7 million principal
amount of the Senior Notes and recorded an extraordinary loss of $1.1 million
($1.6 million, net of $575,000 of related income tax benefits).
Maturities and Sinking Fund Requirements. As of December 31, 1997, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
Year Amount
[S] [C]
1998 $ 24,776,000 (a)
1999 $ 32,000,000 (b)
2000 $ -
2001 $ -
2002 $ 55,000,000 (c)
(a) Represents the $24.8 million of PG Energy bank borrowings outstanding as
of December 31, 1997.
(b) Includes the $20.0 million of borrowings outstanding as of December 31,
1997, under the Company's Term Loan Agreement due May 31, 1999, and PG
Energy's 9.23% Series First Mortgage Bonds in the principal amount of
$10.0 million due September 1, 1999.
(c) Represents the $25.0 million of borrowings outstanding as of December
31, 1997, under PG Energy's Term Loan Agreement due August 14, 2002, and
PG Energy's 8.375% Series First Mortgage Bonds in the principal amount
of $30.0 million due December 1, 2002.
(7) DIVIDEND RESTRICTIONS
There are no dividend restrictions in the Company's Restated Articles of
Incorporation. However, the preferred stock provisions of PG Energy's Restated
Articles of Incorporation and certain of the agreements under which the Company
and PG Energy have issued long-term debt provide for certain dividend
restrictions. As of December 31, 1997, $5,416,000 of the consolidated retained
earnings of the Company were restricted against the payment of cash dividends on
common stock under the most restrictive of these covenants.
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<PAGE>
(8) BANK NOTES PAYABLE
The Company, through certain of its subsidiaries, primarily PG Energy,
currently has arrangements for nine revolving bank lines of credit with an
aggregate borrowing capacity of $70.5 million which provide for borrowings at
interest rates generally less than prime and which mature at various times
during 1998 and 1999.
Because of limitations imposed by the terms of PG Energy's preferred stock,
PG Energy is prohibited, without the consent of the holders of a majority of the
outstanding shares of its preferred stock, from issuing more than $12.0 million
of unsecured debt due on demand or within one year from issuance. PG Energy had
$2.0 million due on demand or within one year from issuance outstanding as of
December 31, 1997.
Information relating to the Company's bank lines of credit and borrowings
under those lines of credit is set forth below:
<TABLE>
<CAPTION>
As of December 31,
1997 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C>
Borrowings under lines of credit
Short-term $ 2,170 $ 10,000 $ 10,000
Long-term 26,776 38,721 65,801
$ 28,946 $ 48,721 $ 75,801
Unused lines of credit
Short-term $ 5,830 $ - $ -
Long-term 35,724 16,779 4,699
$ 41,554 $ 16,779 $ 4,699
Total lines of credit
Prime rate $ 1,000 $ - $ -
Less than prime rate 69,500 65,500 80,500
$ 70,500 $ 65,500 $ 80,500
Short-term bank borrowings
Maximum amount outstanding $ 10,000 $ 10,000 $ 10,000
Daily average amount outstanding $ 3,740 $ 1,392 $ 2,581
Weighted daily average interest rate 6.343% 6.241% 6.513%
Weighted average interest rate at year-end 6.536% 6.206% 6.334%
Range of interest rates 5.800- 5.875- 6.290-
8.500% 6.438% 6.660%
</TABLE>
(9) POSTEMPLOYMENT BENEFITS
Pension Benefits. The Company's retirement plan is a trusteed,
noncontributory, defined benefit pension plan which covers substantially all
employees of the Company, except those of Keystone and Honesdale. Pension
benefits are based on years of service and average final salary. The Company's
funding policy is to contribute an amount necessary to provide for benefits
based on service to date, as well as for benefits expected to be earned in the
future by current participants.
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<PAGE>
Under the terms of the agreement regarding the sale of PG Energy's water
utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-
American assumed the accumulated benefit obligations relating to employees of PG
Energy who accepted employment with Pennsylvania-American (the "Transferred
Employees"). In this regard, plan assets in an amount equal to the actuarial
present value of accumulated plan benefits relative to the Transferred
Employees, with interest from February 16, 1996, were transferred to the
American pension plan in June, 1996. As a result of this and other actions, the
Company recognized, as of December 31, 1995, an estimated settlement loss of
$200,000 ($117,000 net of the related income tax benefit) and curtailment gain
of $2.7 million ($1.6 million net of related income taxes) in its determination
of the estimated loss on the disposal of PG Energy's water utility operations.
In December, 1995, the Company offered an Early Retirement Plan (the "1995
ERP") to its employees who would be 59 years of age or older and had a minimum
of five years of service as of December 31, 1995. Of the 63 eligible employees,
50 elected to accept this offer and retired as of December 31, 1995, resulting
in the recording, as of December 31, 1995, of an additional pension liability of
$1.6 million reflecting the increased costs associated with the 1995 ERP. Such
amount was charged to the estimated loss on the disposal of PG Energy's water
utility operations.
In January, 1998, as part of its cost reduction efforts, the Company offered
an Early Retirement Plan (the "1998 ERP") to its 41 active employees who are or
will be at least age 59 on or before March 31, 1998, and have a minimum of five
years of service on or before February 28, 1998. A total of 27 employees
elected to accept this offer and retire as of March 1, 1998. The Company is not
presently able to estimate the related termination benefits expected to be paid
as a result of the 1998 ERP. However, in accordance with FASB Statement 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," the Company will record, as of
March 1, 1998, an additional pension liability not expected to exceed $1.4
million. This liability will reflect the increased costs associated with the
1998 ERP. Since this liability will be offset by an asset representing the
probable future rate recovery of such liability, the provisions of FASB
Statement 88 are not expected to have a significant effect on the Company's
results of operations.
Net pension costs relative to continuing operations, including amounts
capitalized, were a credit of $247,000 in 1997 and costs of $385,000 and
$353,000 in 1996 and 1995, respectively. The following items were the
components of such net pension costs:
[CAPTION]
1997 1996 1995
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned
during the year $ 622 $ 799 $ 430
Interest cost on projected benefit
obligations 2,697 2,731 1,459
Return on plan assets (7,231) (5,875) (1,502)
Net amortization and deferral (122) (79) (34)
Deferral of investment gain 3,787 2,809 -
Net pension cost $ (247) $ 385 $ 353
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<PAGE>
The funded status of the plan as of December 31, 1997 and 1996, was as
follows:
<TABLE>
<CAPTION>
1997 1996
(Thousands of Dollars)
<S> <C> <C>
Actuarial present value of the projected
benefit obligations:
Accumulated benefit obligations
Vested $ 32,843 $ 28,613
Nonvested 15 21
Total 32,858 28,634
Provision for future salary increases 9,526 6,933
Projected benefit obligations 42,384 35,567
Approximate market value of plan assets,
primarily invested in equities and bonds 45,106 39,000
Plan assets in excess of projected benefit
obligations 2,722 3,433
Unrecognized net transition asset as of
January 1, 1986, being amortized over 20 years (1,724) (1,939)
Unrecognized prior service costs 4,138 2,258
Unrecognized net gain (4,315) (4,259)
Prepaid (accrued) pension cost at year-end $ 821 $ (507)
</TABLE>
The assumptions used in determining pension obligations were:
[CAPTION]
1997 1996 1995
[S] [C] [C] [C]
Discount rate 7.00 % 7.75 % 7.00 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00 % 5.00 % 5.00 %
Other Postretirement Benefits. In addition to pension benefits, the Company
provides certain health care and life insurance benefits for retired employees.
All of the Company's employees, except those of Keystone and Honesdale, may
become eligible for those benefits if they reach retirement age while working
for the Company. The Company records the cost of retiree health care and life
insurance benefits as a liability over the employees' active service periods
instead of on a benefits-paid basis.
Under the terms of the agreement regarding the sale of PG Energy's water
utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-
American assumed the Company's obligation to provide retiree health care and
life insurance benefits to the Transferred Employees, as well as 45% of PG
Energy's retired employees as of that date. In this regard, plan assets in an
amount proportional to the actuarial present value of accumulated plan benefits
relative to the Transferred Employees and 45% of the retired employees as of
February 16, 1996, were transferred to trusts established by Pennsylvania-
American in 1997. As a result of the transfer, early retirement and
displacement of employees, the Company recognized an estimated settlement and
curtailment loss of $385,000 ($225,000 net of the related income tax benefit) as
part of the loss on the disposal of PG Energy's water utility operations.
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In conjunction with the 1995 ERP offered by the Company to certain of its
employees, PG Energy recorded, as of December 31, 1995, an additional liability
of $805,000, ($471,000 net of the related income tax benefit) reflecting the
cost of future health care benefits required to be recognized in conjunction
with the 1995 ERP. Such amount was charged to the estimated loss on disposal of
PG Energy's water utility operations.
The Company is not presently able to estimate the cost of the related future
health care benefits required to be recognized as a result of the 1998 ERP.
However, in accordance with FASB Statement 88 the Company will record, as of
March 1, 1998, an additional other postretirement benefit liability not expected
to exceed $600,000. This liability will reflect the increased costs resulting
from the 1998 ERP. Since this liability will be offset by an asset representing
the probable future rate recovery of such liability, the provisions of FASB
Statement 88 are not expected to have a significant effect on the Company's
results of operations.
The following items were the components of the net cost of postretirement
benefits other than pensions relative to continuing operations for the years
1997, 1996 and 1995:
[CAPTION]
1997 1996 1995
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned during
the year $ 282 $ 253 $ 127
Interest cost on accumulated benefit
obligation 673 506 577
Return on plan assets 23 - (69)
Net amortization and deferral 278 314 391
Net cost of postretirement benefits other
than pensions 1,256 1,073 1,026
Less disbursements for benefits (669) (501) (555)
Increase in liability for postretirement
benefits other than pensions $ 587 $ 572 $ 471
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1997 and 1996, follow:
[CAPTION]
1997 1996
(Thousands of Dollars)
[S] [C] [C]
Accumulated benefit obligation:
Retirees $ 5,682 $ 4,359
Fully eligible active employees 1,722 1,033
Other active employees 2,307 1,552
9,711 6,944
Plan assets at fair value 580 169
Accumulated benefit obligation
in excess of plan assets 9,131 6,775
Unrecognized transition obligation
being amortized over 20 years (4,708) (5,022)
Unrecognized net gain (loss) (1,390) 1,116
Accrued liability for postretirement
benefits other than pensions $ 3,033 $ 2,869
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<PAGE>
The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
1997 1996 1995
[S] [C] [C] [C]
Discount rate 7.00 % 7.75 % 7.00 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00 % 5.00 % 5.00 %
It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 8% in 1998 and that this rate would decrease
gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The
health care cost trend rate assumption had a significant effect on the amounts
accrued. To illustrate, increasing the assumed health care cost trend rate by 1
percentage point in each year would increase the transition obligation as of
January 1, 1998, by approximately $493,000 and the aggregate of the service and
interest cost components of the net cost of postretirement benefits other than
pensions for the year 1997 by approximately $58,000.
Effective with its January 15, 1997, base rate increase (see Note 3 of these
Notes to Consolidated Financial Statements), PG Energy began funding and
recovering in rates its accumulated benefit obligations with respect to other
postretirement benefits. In this regard, the PPUC Order adopted December 19,
1996, specified that any excess or deficiency in other postretirement benefit
costs over the amount of such costs included in rates be deferred and included
in PG Energy's next rate filing. As of December 31, 1997, $174,000 of such
costs relative to the year 1997 had been so deferred. In addition, $442,000
($259,000 net of related income taxes) and $441,000 ($258,000 net of related
income taxes) of additional cost incurred in 1996 and 1995, respectively, as a
result of the adoption of the provisions of FASB Statement 106 were expensed
without any adjustment being made to PG Energy's gas rates.
(10) CAPITAL EXPENDITURES
The Company estimates the cost of its 1998 capital expenditure program will
be $47.6 million, consisting of $36.3 million relative to the construction
program of the Regulated Subsidiaries and $11.3 million with respect to the
Company's nonregulated activities, including $8.1 million to convert the
cogeneration facility acquired by Power Corp in November, 1997, to burn both
natural and methane gas and, in connection therewith, to construct a methane gas
recovery facility at a nearby landfill. It is anticipated that such
expenditures will be financed with internally generated funds and bank
borrowings and by the periodic issuance of stock and long-term debt.
(11) 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
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<PAGE>
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 material 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.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
o Long-term debt. The fair value of long-term debt has been estimated based
on the quoted market price as of the respective dates for the portion of
such debt which is publicly traded and, with respect to the portion of such
debt which is not publicly traded, on the estimated borrowing rate as of the
respective dates for long-term debt of comparable credit quality with
similar terms and maturities.
o Preferred stock subject to mandatory redemption. The fair value of PG
Energy's preferred stock subject to mandatory redemption has been estimated
based on the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of financial instruments at
December 31, 1997 and 1996, were as follows:
[CAPTION]
1997 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Long-term debt (including current
portion):
Company $ 20,000 $ 20,000 $ 20,000 $ 20,000
Regulated Subsidiaries 130,776 136,914 93,721 99,222
Power Corp 1,000 1,000 - -
Preferred stock of PG Energy subject to
mandatory redemption (including
current portion) 720 734 819 836
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The Company believes that the regulatory treatment of any excess or
deficiency of fair value relative to the carrying amounts of these items, if
such items were settled at amounts approximating those above, would dictate that
these amounts be used to increase or reduce the Regulated Subsidiaries rates
over a prescribed amortization period. Accordingly, any settlement would not
result in a material impact on the financial position or the results of
operations of either the Company or the Regulated Subsidiaries.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
QUARTER ENDED
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C]
Operating revenues $ 89,491 $ 41,864 $ 24,209 $ 72,482
Operating income (loss) 10,227 2,362 (291) 9,257
Income (loss) from continuing
operations 8,052 151 (2,367) 5,994
Net income (loss) 8,052 151 (2,367) 5,994
Basic earnings (loss) per
share of common stock (a):
Continuing operations .84 .02 (.24) .62
Net income (loss) .84 .10 (.24) .62
Diluted earnings (loss) per
share of common stock (a):
Continuing operations .83 .02 (.24) .61
Net income (loss) $ .83 $ .10 $ (.24) $ .61
[CAPTION]
QUARTER ENDED
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C]
Operating revenues $ 74,087 $ 30,257 $ 19,354 $ 60,782
Operating income (loss) 10,443 1,611 (751) 6,957
Income (loss) from continuing
operations 7,337 (455) (2,940) 4,122
Loss with respect to
discontinued operations (365) (21) - 23
Extraordinary loss, net - - (1,117) -
Net income (loss) 6,972 (476) (4,057) 4,145
Basic earnings (loss) per
share of common stock (a):
Continuing operations .63 (.05) (.30) .43
Net income (loss) .60 (.18) (.42) .43
Diluted earnings (loss) per
share of common stock (a):
Continuing operations .63 (.05) (.30) .43
Net income (loss) $ .60 $ (.18) $ (.42) $ .43
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in the consolidated
financial statements and supplementary data of this report, as a result
of the activity related to the issuance and/or repurchase of shares of
common stock at various dates during 1997 and 1996.
Because of the seasonal nature of the Regulated Subsidiaries gas heating
business, there are substantial variations in operations reported on a quarterly
basis.
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ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In its Form 8-K dated May 22, 1997, the Company reported a "Change in
Registrant's Certifying Accountant" for its fiscal year beginning January 1,
1997. Because the Form 8-K dated May 22, 1997, did not include a reported
disagreement on any matter of accounting principles or practices or financial
statement disclosure, no disclosure pursuant to Item 304 of Regulation S-K of
the Commission's Rules and Regulations is required in Item 9.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item concerning directors of the Company
has been omitted from this Form 10-K since the Company expects to file its
definitive proxy statement not later than 120 days after the close of its fiscal
year covered by this Form 10-K.
(b) Identification of Executive Officers
Information concerning the Company's executive officers is set forth in Part
I of this Form 10-K under the heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, notes to
consolidated financial statements and reports of independent
accountants for the Company and its subsidiaries are presented in Item
8 of this Form 10-K.
Page
Report of Independent Accountants on the Consolidated
Financial Statements as of December 31, 1997 . . . . . . . . 33
Report of Independent Accountants on the Consolidated
Financial Statements as of December 31, 1996 . . . . . . . . 34
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1997. . . . . . . . . . . . 35
Consolidated Balance Sheets as of December 31, 1997 and 1996 . 36
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997. . . . . . . . . 38
Consolidated Statements of Capitalization as of December 31,
1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . 39
Consolidated Statements of Common Shareholders' Investment
for each of the three years in the period ended December
31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Notes to Consolidated Financial Statements . . . . . . . . . . 41
2. Financial Statement Schedules
The following consolidated financial statement schedule for the
Company and its subsidiaries is filed as a part of this Form 10-K.
Schedules not included have been omitted because they are not
applicable or the required information is shown in the consolidated
financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1997 . . . . . . . . . . . . 67
3. Exhibits
See "Index to Exhibits" located on page 69 for a listing of all
exhibits filed herein or incorporated by reference to a previously
filed registration statement or report with the Securities and Exchange
Commission.
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<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
<S> <C>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
(c) Executive Compensation Plans and Arrangements
The following listing includes the Company's executive compensation plans
and arrangements in effect as of December 31, 1997.
Exhibit
10-27 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-28 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between the Company and certain of its Officers --
filed as Exhibit 10-29 to the Company's Annual Report on Form 10-K
for 1995, File No. 0-7812.
10-29 Agreement, dated as of March 15, 1991, by and between the Company,
PG Energy and Robert L. Jones -- filed as Exhibit No. 10-38 to the
Company's Annual Report on Form 10-K for 1990, File No. 0-7812.
10-30 Employment Agreement effective September 1, 1995, between the
Company and Dean T. Casaday -- filed as Exhibit 10-2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-7812.
10-31 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-32 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed as Exhibit 10-37 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
10-33 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
10-34 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its Officers -- filed as Exhibit 10-1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 0-7812.
10-35 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its non-employee directors -- filed as
Exhibit 10-2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 0-7812.
10-36 Pennsylvania Enterprises, Inc. Stock Incentive Plan, effective May
14, 1997 -- filed as Exhibit A to the Company's 1997 definitive
Proxy Statement, File No. 0-7812.
</TABLE>
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<PAGE>
10-37 Employment Agreement dated as of June 26, 1996, by and among the
Company, PG Energy and Kenneth L. Pollock -- filed as Exhibit 10-1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 0-7812.
10-38 Employment Agreement dated as of August 28, 1996, by and among the
Company, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 0-7812.
10-39 Director Deferred Compensation Plan dated as of April 23, 1997 --
filed as Exhibit 10-1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, File No. 0-7812.
10-40 First Amendment to the Director Deferred Compensation Plan, amended
and restated effective as of November 19, 1997 -- filed herewith.
10-41 1995 Directors' Stock Compensation Plan, effective January 18, 1995
-- filed as Exhibit A to the Company's 1995 definitive Proxy
Statement, File No. 0-7812.
10-42 First Amendment to the 1995 Directors' Stock Compensation Plan,
amended and restated effective as of November 19, 1997 -- filed
herewith.
(d) Statements Excluded from Annual Report to Shareholders
Not applicable.
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SCHEDULE II
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
[CAPTION]
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
[S] [C]
Date: March 5, 1998 By: /s/ Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 5, 1998 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[CAPTION]
Signature Capacity Date
[S] [C]
/s/ Kenneth L. Pollock Chairman of the Board of March 5, 1998
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 5, 1998
William D. Davis of Directors
/s/ Thomas F. Karam Director, President and March 5, 1998
Thomas F. Karam Chief Executive Officer
/s/ Paul R. Freeman Director March 5, 1998
Paul R. Freeman
/s/ Robert J. Keating Director March 5, 1998
Robert J. Keating
/s/ John D. McCarthy Director March 5, 1998
John D. McCarthy
/s/ John D. McCarthy, Jr. Director March 5, 1998
John D. McCarthy, Jr.
/s/ Kenneth M. Pollock Director March 5, 1998
Kenneth M. Pollock
/s/ Richard A. Rose, Jr. Director March 5, 1998
Richard A. Rose, Jr.
/s/ James A. Ross Director March 5, 1998
James A. Ross
/s/ Ronald W. Simms Director March 5, 1998
Ronald W. Simms
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<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2-1 Asset Purchase Agreement dated as of April 26, 1995, among the
Company, PG Energy, American Water Works Company, Inc., and
Pennsylvania-American Water Company -- filed as Exhibit 2-1 to PG
Energy's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, File No. 1-3490.
(3) Articles of Incorporation and By-Laws:
3-1 Restated Articles of Incorporation of the Company, as amended --
filed as Exhibit 3-1 to the Company's Senior Note Form S-2,
Registration No. 33-47581.
3-2 By-Laws of the Company, as amended and restated on January 18, 1995
-- filed as Exhibit 3-2 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
(4) Instruments Defining the Rights of Security Holders, Including Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
between Scranton-Spring Brook Water Service Company (now PG Energy)
and First Trust of New York, National Association, as Successor
Trustee to Morgan Guaranty Trust Company of New York -- filed as
Exhibit 2(c) to PG Energy's Bond Form S-7, Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed
as Exhibit 2(d) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
Exhibit 2(e) to PG Energy's Bond Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
as Exhibit 2(f) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed
as Exhibit 2(g) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 --
filed as Exhibit 2(h) to PG Energy's Bond Form S-7, Registration No.
2-55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 --
filed as Exhibit 2(i) to PG Energy's Bond Form S-7, Registration No.
2-55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
as Exhibit 2(j) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
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Exhibit
Number
4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 --
filed as Exhibit 2(k) to PG Energy's Bond Form S-7, Registration No.
2-55419.
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed
as Exhibit 2(1) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
as Exhibit 2(m) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
as Exhibit 2(n) to PG Energy's Bond Form S-7, Registration No. 2-
55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
filed as Exhibit 4-16 to PG Energy's Annual Report on Form 10-K for
1982, File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-22 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-23 to the Company's Annual Report on Form 10-K
for 1989, File No. 0-7812.
4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991
-- filed as Exhibit 4-3 to the Company's Common Stock Form S-2,
Registration No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992
-- filed as Exhibit 4-17 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992 --
filed as Exhibit 4-18 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992
-- filed as Exhibit 4-19 to the Company's Annual Report on Form 10-K
for 1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993
-- filed as Exhibit 4-20 to PG Energy's Annual Report on Form 10-K
for 1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994 --
filed as Exhibit 4-21 to PG Energy's Annual Report on Form 10-K for
1994, File No. 1-3490.
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<PAGE>
Exhibit
Number
4-22 Thirtieth Supplemental Indenture, dated as of December 1, 1995 --
filed as Exhibit 4-22 to PG Energy's Annual Report on Form 10-K for
1995, File No. 1-3490.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
4-23 Rights Agreement dated as of April 26, 1995, between the Company and
Chemical Bank, as Rights Agent -- filed as Exhibit 4-1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995, File No. 0-7812.
(10) Material Contracts:
10-1 Service Agreement for storage service under Rate Schedule LGA, dated
August 6, 1974, between PG Energy and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-3 to PG Energy's Annual Report on
Form 10-K for 1984, File No. 1-3490.
10-2 Service Agreement for transportation service under Rate Schedule FT,
dated February 1, 1992, by and between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-4
to PG Energy's Annual Report on Form 10-K for 1991, File No. 1-3490.
10-3 Service Agreement for storage service under Rate Schedule SS-2,
dated April 1, 1990, between PG Energy and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-8 to the Company's Common
Stock Form S-2, Registration No. 33-43382.
10-4 Service Agreement for sales service under Rate Schedule FS, dated
August 1, 1991, between PG Energy and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-6 to the Company's Annual Report
on Form 10-K for 1991, File No. 0-7812.
10-5 Service Agreement for transportation service under Rate Schedule FT,
dated August 1, 1991, between PG Energy and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-10 to the Company's
Common Stock Form S-2, Registration No. 33-43382.
10-6 Service Agreement for transportation service under Rate Schedule IT,
dated January 31, 1992, between PG Energy and Transcontinental Gas
Pipeline Corporation -- filed as Exhibit 10-8 to the Company's
Annual Report on Form 10-K for 1991, File No. 0-7812.
10-7 Service Agreement for storage service under Rate Schedule LSS, dated
October 1, 1993, by and between PG Energy and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-7 to PG Energy's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-8 Service Agreement for storage service under Rate Schedule GSS, dated
October 1, 1993, by and between PG Energy and Transcontinental Gas
Pipeline Corporation Company -- filed as Exhibit 10-8 to PG Energy's
Annual Report on Form 10-K for 1993, File No. 1-3490.
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<PAGE>
Exhibit
Number
10-9 Service Agreement for transportation service under Rate Schedule FT,
dated April 1, 1995, by and between PG Energy and Transcontinental
Gas Pipe Line Corporation -- filed as Exhibit 10-1 to PG Energy's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995,
File No. 1-3490.
10-10 Service Agreement for transportation service under Rate Schedule
FTPO, dated July 10, 1997, effective November 1, 1997, by and
between PG Energy and Transcontinental Gas Pipe Line Corporation --
filed as Exhibit 10-10 to PG Energy's Annual Report on Form 10-K for
1997, File No. 1-3490.
10-11 Service Agreement for transportation service under Rate Schedule
FTS, dated November 1, 1993, by and between PG Energy and Columbia
Gas Transmission Corporation -- filed as Exhibit 10-9 to PG Energy's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate Schedule
SST, dated November 1, 1993, by and between PG Energy and Columbia
Gas Transmission Corporation -- filed as Exhibit 10-10 to PG
Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.
10-13 Service Agreement for storage service under Rate Schedule FSS, dated
November 1, 1993, by and between PG Energy and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-11 to PG Energy's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-14 Service Agreement for transportation service under Rate Schedule
FTS-1, dated November 1, 1993, by and between PG Energy and Columbia
Gulf Transmission Company -- filed as Exhibit 10-12 to PG Energy's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-15 Service Agreement for transportation service under Rate Schedule
ITS-1, dated November 1, 1993, by and between PG Energy and Columbia
Gulf Transmission Company -- filed as Exhibit 10-13 to PG Energy's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-16 Service Agreement for transportation service under Rate Schedule
ITS, dated November 1, 1993, by and between PG Energy and Columbia
Gas Transmission Corporation -- filed as Exhibit 10-14 to PG
Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.
10-17 Service Agreement (Contract No. 946) for transportation service
under Rate Schedule FT-A, dated September 1, 1993, by and between PG
Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1
to PG Energy's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-18 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG Energy and Tennessee Gas Pipeline Company -- filed as
Exhibit 10-2 to PG Energy's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, File No. 1-3490.
-72-
<PAGE>
Exhibit
Number
10-19 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG Energy and Tennessee Gas Pipeline Company -- filed as
Exhibit 10-3 to PG Energy's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1993, File No. 1-3490.
10-20 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG Energy and Tennessee Gas Pipeline -- filed as Exhibit 10-
4 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-21 Service Agreement (Contract No. 2289) for storage service under Rate
Schedule FS, dated September 1, 1993, by and between PG Energy and
Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PG Energy's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1993, File No. 1-3490.
10-22 Service Agreement for storage service, dated April 15, 1997,
effective November 1, 1997, by and between PG Energy and New York
State Electric & Gas Corporation -- filed as Exhibit 10-22 to PG
Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.
10-23 Service Agreement for transportation service under Rate Schedule FT,
dated April 30, 1997, effective November 1, 1997, by and between PG
Energy and CNG Transmission Corporation -- filed as Exhibit 10-23 to
PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.
10-24 Bond Purchase Agreement, dated September 1, 1989, relating to PG
Energy's First Mortgage Bonds 9.23% Series due 1999 and First
Mortgage Bonds 9.34% Series due 2019 among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York and PG Energy
-- filed as Exhibit 10-34 to the Company's Annual Report on Form 10-
K for 1989, File No. 0-7812.
10-25 Term Loan Agreement dated August 14, 1997, among PG Energy, the
Banks parties thereto and PNC Bank, National Association, in its
capacity as Agent for the Banks -- filed as Exhibit 10-25 to PG
Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.
10-26 6.92% Senior Notes Purchase Agreement, dated September 30, 1997,
between PG Energy and the Purchasers -- filed as Exhibit 10-26 to PG
Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.
10-27 Form of Change in Control Agreement between the Company and certain
of its Officers -- filed as Exhibit 10-38 to the Company's Annual
Report on Form 10-K for 1989, File No. 0-7812.
10-28 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between the Company and certain of its Officers --
filed as Exhibit 10-29 to the Company's Annual Report on Form 10-K
for 1995, File No. 0-7812.
-73-
<PAGE>
Exhibit
Number
10-29 Agreement, dated as of March 15, 1991, by and between the Company,
PG Energy and Robert L. Jones -- filed as Exhibit 10-38 to the
Company's Annual Report on Form 10-K for 1990, File No. 0-7812.
10-30 Employment Agreement effective September 1, 1995, between the
Company and Dean T. Casaday -- filed as Exhibit 10-2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 0-7812.
10-31 Supplemental Retirement Agreement, dated as of December 23, 1991,
between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
the Company's Common Stock Form S-2, Registration No. 33-43382.
10-32 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between the Company and Dean T. Casaday --
filed as Exhibit 10-37 to the Company's Annual Report on Form 10-K
for 1994, File No. 0-7812.
10-33 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to the Company's 1993 definitive
Proxy Statement, File No. 0-7812.
10-34 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its Officers -- filed as Exhibit 10-1 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 0-7812.
10-35 Form of Stock Option Agreement, dated as of June 20, 1997, between
the Company and certain of its non-employee directors -- filed as
Exhibit 10-2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997, File No. 0-7812.
10-36 Pennsylvania Enterprises, Inc. Stock Incentive Plan, effective May
14, 1997 -- filed as Exhibit A to the Company's 1997 definitive
Proxy Statement, File No. 0-7812.
10-37 Employment Agreement dated as of June 26, 1996, by and among the
Company, PG Energy and Kenneth L. Pollock -- filed as Exhibit 10-1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 0-7812.
10-38 Employment Agreement dated as of August 28, 1996, by and among the
Company, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 0-7812.
10-39 Director Deferred Compensation Plan dated as of April 23, 1997 --
filed as Exhibit 10-1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, File No. 0-7812.
10-40 First Amendment to the Director Deferred Compensation Plan, amended
and restated effective as of November 19, 1997 -- filed herewith.
-74-
<PAGE>
Exhibit
Number
10-41 1995 Directors' Stock Compensation Plan, effective January 18, 1995
-- filed as Exhibit A to the Company's 1995 definitive Proxy
Statement, File No. 0-7812.
10-42 First Amendment to the 1995 Directors' Stock Compensation Plan,
amended and restated effective as of November 19, 1997 -- filed
herewith.
(21) Subsidiaries of the Registrant:
21-1 Subsidiaries of the Registrant -- filed herewith.
(23) Consents of Experts and Counsel:
23-1 Consent of Independent Accountants relative to December 31, 1997,
Consolidated Financial Statements -- filed herewith.
23-2 Consent of Independent Accountants relative to December 31, 1996,
Consolidated Financial Statements - filed herewith.
-75-
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C>
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 15
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . 16
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . 20
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . 32
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . . 62
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . 63
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . 63
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . 63
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . 63
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . 64*
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . 68
________________________
* The "Index to Exhibits" is located on page 69.
</TABLE>
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1997 $ 1,233 $ 2,202 $ 4 $ 2,099(a) $ 1,340
Year ended December 31, 1996 $ 788 $ 2,103 $ - $ 1,658(a) $ 1,233
Year ended December 31, 1995 $ 937 $ 1,538 $ - $ 1,687(a) $ 788
Shown as operating reserves on the consolidated
balance sheets:
Insurance -
Year ended December 31, 1997 $ 3,086 $ 711 $ - $ 972(b) $ 2,825
Year ended December 31, 1996 $ 3,709 $ 1,042 $ - $ 1,665(b) $ 3,086
Year ended December 31, 1995 $ 2,383 $ 2,652 $ - $ 1,326(b) $ 3,709
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
</TABLE>
<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
DIRECTOR DEFERRED COMPENSATION PLAN
(Amended and Restated Effective as of November 19, 1997)
Section 1. Purpose and Effective Date
(a) Purpose. The purpose of the Pennsylvania Enterprises, Inc.
Director Deferred Compensation Plan (the "Plan") is to enable Pennsylvania
Enterprises, Inc. (the "Company") to attract and retain directors of
outstanding ability by allowing them to defer and accumulate Director's Fees
and to strengthen the existing mutuality of interests between such Directors
and the Company's stockholders by enabling the Directors to defer their
Director's Fees in the form of Stock Units valued by reference to the market
price of the Company's common stock ("Stock"). For purposes of this Plan,
(i) "Director's Fees" means (A) the retainer fee for service as a director
and fees for attendance at meetings of the Boards of Directors and committees
of the Boards of the Company and those of its subsidiaries that elect to
participate in the Plan, and (B) shares of Stock awarded under the Company's
1995 Directors' Stock Compensation Plan; and (ii) "Director" means a member
of the Board of Directors of the Company who is not a full-time employee of
the Company or any of its subsidiaries.
(b) Effective Date. The Plan is effective as of April 1, 1997.
The Plan as amended and restated is effective as of November 19, 1997.
Section 2. Deferral of Payments
(a) Deferral Election. At any time prior to the beginning of a
calendar year, a Director may elect (the "Deferral Election") that (1) in
lieu of payment in cash, all or any specified portion of the Director's Fees
to be earned by him as retainer and meeting fees during such calendar year,
and/or (2) in lieu of delivery under the Company's 1995 Directors' Stock
Compensation Plan, all of the Directors' Fees to be earned by him in the form
of a Stock award under such plan during such year shall be credited in the
form of Stock Units to a bookkeeping account maintained by the Company on
such Director's behalf. A Director shall also have the right to make a
Deferral Election during the 30 days following (i) the effective date of the
Plan, or (ii) the date on which he first becomes eligible to receive
Director's Fees. Any Deferral Election made pursuant to the preceding
sentence shall be made with respect to all or any specified portion of the
Director's Fees to be earned as retainer and meeting fees in the remainder of
the calendar year following such Deferral Election. At the time of making a
Deferral Election, a Director shall specify whether settlement of the Stock
Units credited to his account with respect to the particular Deferral
Election shall be made in cash or in Stock (as described in Section 4(b)).
<PAGE>
(b) Renewal of Elections. Once a Deferral Election has been made,
it shall be automatically renewed from year to year unless the Director
elects to change or revoke such election. However, each Deferral Election
shall be irrevocable as to Director's Fees earned prior to the commencement
of the calendar year next following any change or revocation. The Director's
account shall be maintained in subaccounts to the extent necessary to reflect
different settlement options elected in different years.
Section 3. Credits to Account
(a) Crediting of Stock Units. Director's Fees which are the
subject of a Deferral Election shall not be paid currently in cash or in
Stock , but shall instead be converted into a number of Stock Units
(expressed to three decimal places) determined (1) in the case of Director's
Fees payable in cash, by dividing the amount of Director's Fees that would
have been paid to the Director on the particular day by the Market Price of a
share of Stock on such day, and (2) in the case of Director's Fees payable in
Stock, as the number of shares of Stock that would have been paid to the
Director on the particular day. For purposes of the Plan, the "Market Price"
of the Company's Stock shall be the mean between the highest and lowest
quoted selling price of the Stock, on the principal exchange on which the
Stock is listed, on the date in question, or, if no such sale of Stock occurs
on such day, the mean between the high and low prices of the Stock on the
nearest trading date before such date.
(b) Crediting of Additional Stock Units in lieu of Dividends. Each
Director's account shall be credited with additional Stock Units with respect
to each cash dividend paid on outstanding shares of Stock, as follows. The
number of additional Stock Units to be credited to the Director's account
shall be the aggregate number derived by (1) multiplying the declared
dividend rate per share of Stock by the number of Stock Units then credited
to the Director's account under the Plan as of the dividend record date for
such dividend, and (2) dividing the resulting figure by the Market Price of a
share of Stock on the dividend payment date.
Section 4. Payment of Deferred Amounts
(a) Settlement Date. Settlement of the Stock Units credited to a
Director's account shall be made as of the first business day following the
Director's termination of service as a director.
<PAGE>
(b) Form of Settlement. With respect to Stock Units which the
Director has elected to have settled in cash, there shall be delivered to the
Director, within 30 days of the settlement date, cash in an amount equal to
the number of full and fractional Stock Units being settled multiplied by the
Market Price on the settlement date. With respect to Stock Units which the
Director has elected to have settled in Stock, there shall be delivered to
the Director, within 30 days of the settlement date, a number of shares of
Stock equal to the number of full Stock Units being settled (with cash in
lieu of any fractional Stock Unit based on the Market Price on the settlement
date).
Section 5. Change of Control
(a) Settlement upon Change of Control. Notwithstanding any other
provision of the Plan or of any Deferral Election, in the event of a Change
of Control, all Stock Units credited to a Director's account shall be settled
as of the date of the Change of Control for cash based on the Change of
Control Price.
(b) Change of Control Definition. A "Change of Control" shall be
deemed to occur on:
(i) the date that any person or group deemed a person
under Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934 (the "Exchange Act") other than the company and its
subsidiaries as determined prior to that date, in a transaction or
series of transactions has become the beneficial owner, directly or
indirectly (with beneficial ownership determined as provided in Rule
13d-3, or any successor rule, under the Exchange Act) of 20% or more
of the outstanding securities of the Company having the right under
ordinary circumstances to vote at an election of the board;
(ii) the date on which one-third or more of the members
of the Board shall consist of persons other than Current Directors
(for these purposes, a "Current Director" shall mean any member of
the Board as of the effective date of the Plan and any successor of
a Current Director whose nomination or election has been approved by
a majority of the Current Directors then on the Board); or
(iii) the date of approval by the stockholders of the
Company of an agreement providing for the merger or consolidation of
the Company with another corporation where (A) the stockholders of
the Company, immediately prior to the merger or consolidation, would
not beneficially own, immediately after the merger of consolidation,
shares entitling such stockholders to 50% or more of all votes
(without consideration of the rights of any class of stock to elect
directors by a separate class vote) to which all stockholders of the
<PAGE>
corporation issuing cash or securities in the merger of
consolidation would be entitled in the election of directors, or (B)
where the members of the Board, immediately prior to the merger or
consolidation, would not, immediately after the merger or
consolidation, constitute a majority of the board of directors of
the corporation issuing cash or securities in the merger; or
(iv) the date of approval by the stockholders of the
Company of the sale or other disposition of all or substantially all
of the assets of the Company.
(c) Change of Control Price. "Change of Control Price" means the
highest price per share of Stock paid in any transaction reported on any
national securities exchange where the Stock is traded, or paid or offered in
any transaction related to a Change of Control, at any time during the 90-day
period ending with the Change of Control.
Section 6. Unfunded Arrangement
Neither this Plan nor the account established on behalf of any
Director shall be funded. Rather, all accounts established under the Plan
and all entries thereto shall constitute bookkeeping records only and shall
not relate to any specific funds of the Company. Settlement with respect to
Stock Units credited to a Director's account shall be made from the general
assets of the Company. Notwithstanding the foregoing, the Company shall have
the right in its sole discretion to provide for the funding of its
obligations under the Plan through a trust or otherwise.
Section 7. Administration and Other Matters
(a) Administration. The Plan shall be administered by the Board of
Directors of the Company, who shall have full authority to interpret the Plan
and make all factual determinations necessary therefor. No member of the
Board of Directors shall be liable for any act done or determination made in
good faith. The construction and interpretation of any provision of the Plan
by the Board of Directors, and any determination by the Board of Directors of
amounts to which a Director is entitled under the Plan, shall be final and
conclusive.
(b) Amendments. The Board of Directors may terminate, modify or
amend this Plan, effective prospectively, provided, however, that, except as
provided in Section 7(h), the Plan shall not be subject to termination,
modification or amendment with respect to the Stock Units credited to any
Director's account, including the right to the crediting of additional Stock
Units pursuant to Section 3(b), unless the affected Director consents.
<PAGE>
(c) Non-Alienation. No Director (or estate of a Director) shall
have the power to transfer, assign, anticipate, mortgage or otherwise
encumber any rights or any amounts payable hereunder; nor shall any such
rights or payments be subject to seizure for the payment of any debts,
judgments, alimony, or separate maintenance, or be transferable by operation
of law in the event of bankruptcy, insolvency, or otherwise.
(d) Expenses. The expenses of administering the Plan shall be
borne by the Company and shall not be charged against any Director's account.
(e) Withholding. The Company shall have the right to deduct from
all payments any taxes required to be withheld with respect to such payments.
(f) Effect of Determination. If any amounts deferred pursuant to
the Plan are found in a "determination" (within the meaning of Section
1313(a) of the Internal Revenue Code of 1986, as amended) to have been
includable in gross income by a director prior to payment of such amounts
under the Plan, such amounts shall be immediately paid to such Director,
notwithstanding his Deferral Elections.
(g) Effect on Other Plans. All amounts which are credited to a
Director's account with respect to Directors' Fees payable in cash pursuant
to Section 3(a) (but not section 3(b)) shall, solely for purposes of
calculating benefits under the Company's Director Retirement Plan, be deemed
to have been paid to the Director on the date such amounts would have been
paid absent a Deferral Election.
(h) Adjustment in Certain Events. In the event of any Stock
dividend, Stock split, spin-off, distribution of assets, or other change in
corporate structure affecting the Stock, appropriate adjustment, as may be
determined by the Board of Directors of the Company in its sole discretion,
shall be made in the number of Stock Units credited to accounts under the
Plan and the securities and/or cash to be delivered in settlement of such
Stock Units.
IN WITNESS WHEREOF, this Plan has been duly executed by an
authorized officer of the Company on this _______ day of __________________,
1997.
PENNSYLVANIA ENTERPRISES, INC.
/s/ Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
<PAGE>
PENNSYLVANIA ENTERPRISES, INC.
1995 DIRECTORS' STOCK COMPENSATION PLAN
(Amended and Restated Effective as of November 19, 1997)
1. Purpose
The purpose of the Pennsylvania Enterprises, Inc. Stock Compensation
Plan for Directors (the "Plan") is to advance the interests of Pennsylvania
Enterprises, Inc. and its shareholders by providing an additional means to
attract and retain persons of exceptional ability to serve as Directors, by
providing an additional incentive to such persons for superior performance,
and more closely aligning their interests with those of other shareholders.
This Plan shall be interpreted and implemented in a manner so that awards
of shares of Common Stock to Directors will be exempt under Rule 16b-3 of
the Exchange Act, as such Rule and the Exchange Act may from time to time
be amended.
2. Definitions
Unless the context clearly indicates otherwise, the following terms
when used in this Plan shall have the meanings set forth in this section:
a. "Board of Directors" shall mean the Board of Directors of the
Company.
b. "Company" shall mean Pennsylvania Enterprises, Inc., a
Pennsylvania corporation, or its successor.
c. "Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
d. "Eligible Director" shall mean any member of the Board of
Directors who is not also a full-time employee of the Company
or of any of its affiliates.
e. "Common Stock" shall mean shares of common stock of the
Company, no par value, stated value $5 per share.
3. Shares of Common Stock to be Awarded Under the Plan
Common Stock awarded pursuant to the Plan may be shares of the
Corporation's authorized but unissued Common Stock or may be shares of
Common Stock reacquired by the Company and held in treasury.
4. Eligibility
Only Directors who are not full-time employees of the Company or any
of its affiliates shall be eligible to receive awards of shares of Common
Stock under this Plan.
<PAGE>
5. Awards of Shares of Common Stock
a. Each year, at the organizational meeting of the Board of
Directors held immediately following the annual meeting of
shareholders, 400 shares of Common Stock shall automatically be
awarded to each person who is a continuing Eligible Director
and has completed at least one year of service, for his or her
services as a Director, being in addition to any retainer,
attendance or other fees or expenses.
b. If, prior to the beginning of the calendar year, the Director
has elected to defer receipt of the shares of Common Stock
until his or her termination of service as a Director, the
number of shares set forth above shall not be delivered as
provided in this Plan, but shall instead be credited to the
Director's account under the Director Deferred Compensation
Plan in the form of Stock Units, which thereafter shall be
subject to the terms of such Director Deferred Compensation
Plan.
c. If, prior to the beginning of the calendar year, the Director
has not made an election to defer receipt of the shares of
Common Stock, the Company shall deliver to the Director stock
certificates for such shares as soon as practicable after the
meeting of the Board of Directors referred to in paragraph 5.a.
Such shares shall thereafter be subject to the terms of this
Plan.
6. Adjustments
In the event of any reorganization, recapitalization, stock split,
stock dividend, combination of shares, merger, consolidation, issuance of
rights or any other change in the capital structure of the Company, the
number and kind of shares of Common Stock or other securities or property
to be awarded hereunder shall be equitably adjusted to reflect the
occurrence of such event; provided, however, that no adjustment shall be
made except as shall be necessary to preserve, rather than enlarge, the
value of future awards under the Plan.
7. General Provisions
a. No Eligible Director or other person claiming under or through
an Eligible Director shall have any right, title or interest by
reason of the Plan to any particular assets of the Company.
The Company shall not be required to establish any fund or make
any other segregation of assets to assure the award of shares
of Common Stock hereunder.
b. All shares awarded under the Plan are non-forfeitable but are
non-transferable for a period of three (3) years following the
applicable award date, except that shares shall become
immediately transferable in the case of death, disability, or
retirement from the Board on or after age 65 [or in the event
of a Change of Control as such term is defined in the Director
Deferred Compensation Plan].
<PAGE>
c. No right under this Plan shall be transferable or otherwise
subject to anticipation, sale, assignment, pledge, encumbrance
or charge.
d. Notwithstanding any other provision of this Plan, the Company
shall not be required to award or deliver any certificate for
shares of Common Stock under this Plan prior to fulfillment of
all of the following conditions:
1. Any required listing or approval or notice of issuance of
such shares on any securities exchange on which the Common
Stock may then be traded;
2. Any registration or other qualification of such shares under
any state or federal law or regulation or other
qualification which the Board of Directors shall upon the
advice of counsel deem necessary or advisable; or
3. The obtaining of any other required consent or approval or
permit from any state or federal government agency.
e. In no event shall the Company be required to issue a fractional
share hereunder.
f. The issuance of shares of Common Stock under the Plan shall be
subject to any applicable taxes or other laws or regulations of
the United States of America and any state or local authority
having jurisdiction thereover.
8. Effective Date; Termination and Amendment
a. The Plan shall be effective as of January 18, 1995, the date of
its approval by the Board of Directors; provided, however, that
awards shall not be made under the Plan prior to its approval
by the affirmative votes of the holders of the majority of the
Company's Common Stock present, or represented, and entitled to
vote on the Plan, at a duly constituted meeting of the
shareholders of the Company. The Plan as amended and restated
shall be effective as of November 19, 1997.
b. The Plan shall terminate on January 18, 2005. The Board of
Directors may also terminate the Plan or make such
modifications or amendments to the Plan as it may deem
advisable; provided, however, that the Board of Directors may
not amend the Plan without shareholder approval by the
affirmative votes of the holders of the majority of the
Company's Common Stock present, or represented, and entitled to
vote on the Plan, at a duly constituted meeting of the
shareholders of the Company for any of the following purposes:
(i) increase the number of shares of Common Stock which
may be awarded annually to each Eligible Director
under the Plan;
(ii) extend the term of the Plan;
<PAGE>
(iii) modify the requirements as to eligibility to receive
awards of shares of Common Stock under the Plan;
(iv) make any other amendment to the Plan for which
approval by the shareholders of the Company is
required by any law, rule or stock exchange
requirement.
IN WITNESS WHEREOF, this Plan has been duly executed by an authorized
officer of the Company on this day of , 1997.
PENNSYLVANIA ENTERPRISES, INC.
/s/Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
<PAGE>
EXHIBIT 21-1
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
The following are subsidiaries of the Registrant. Their voting securities
are owned 100% by the Registrant or a wholly-owned subsidiary of the Registrant,
as noted. All of the subsidiaries are incorporated in Pennsylvania, except for
Keystone Pipeline Services, Inc., which is incorporated in Delaware.
PG Energy Inc.
PG Energy Services Inc. (1)
Pennsylvania Energy Resources, Inc. (2)
PEI Power Corporation (Formed in October, 1997)
Theta Land Corporation
Penn Gas Development Co. (3)
Keystone Pipeline Services, Inc. (4)
Honesdale Gas Company (5)
(1) On April 8, 1997, the then existing subsidiary Pennsylvania Energy
Resources Inc. changed its name to PG Energy Services Inc. ("Energy
Services"). Energy Services has also registered the following fictitious
names under which it may do business: PG Energy PowerPlus, PG Energy
Propane, PERI Propane Services, and Pennsylvania Energy Marketing Company.
(2) On April 8, 1997, a new subsidiary named Pennsylvania Energy Resources,
Inc., which is an inactive name-holding corporation, was formed.
(3) A subsidiary of PG Energy Inc. accounted for on the equity method which has
not been consolidated since it is insignificant.
(4) A subsidiary of Energy Services included in the consolidation of Energy
Services into the Registrant.
(5) A subsidiary of PG Energy Inc. acquired on February 14, 1997, and included
in the consolidation of PG Energy Inc. into the Registrant.
<PAGE>
Exhibit 23-1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the
Prospectuses constituting part of the Registration Statements on Form S-3
(Nos. 333-23659, 33-53435, 333-23653, 333-04813, 333-53501, and 2-76135)
and in the Registration Statements on Form S-8 (Nos. 333-23981, 333-23645,
333-12827, 33-62892, 333-23655, and 33-43838) of our report dated February
18, 1998, appearing on page 33 of Pennsylvania Enterprises, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
March 5, 1998
<PAGE>
Exhibit 23-2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the Company's
previously filed Registration Statements (File Nos. 2-76135, 33-53501,
33-43838, 33-53435, 33-62892, 333-04813, 333-12827, 333-23981, 333-23659,
333-23653, 333-23645 and 333-23655).
ARTHUR ANDERSEN LLP
New York, N.Y.
March 5, 1998
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1997
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