SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 0-7812
PENNSYLVANIA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1920170
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (570) 829-8843
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant amounted to $201,586,303 as of February 24, 1999. For the purposes of
the foregoing calculation, all directors and/or officers have been deemed to be
affiliates, but the registrant disclaims that any of such directors and/or
officers is an affiliate.
The number of shares of Common Stock, no par value, outstanding as of
February 24, 1999: 10,667,483 shares
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
Part III - Items 10(a), 11, 12 and 13 - Portions of the Definitive Proxy
Statement for the Annual Meeting of Shareowners to be held on May 5, 1999.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS............................................... 1
Item 2. PROPERTIES............................................. 14
Item 3. LEGAL PROCEEDINGS...................................... 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 14
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................... 15
Item 6. SELECTED FINANCIAL DATA................................ 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 19
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.
<PAGE>
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 the cities of Scranton,
Wilkes-Barre and Williamsport. In 1998, PG Energy and Honesdale collectively
accounted for approximately 77% 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"), PEI Power Corporation ("Power Corp") which was formed in
October, 1997, Theta Land Corporation ("Theta") and Keystone Pipeline Services,
Inc. ("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in
various nonregulated activities. These activities include the sale of natural
gas, propane, electricity and other energy-related products and services; the
construction, maintenance and rehabilitation of utility facilities, primarily
natural gas distribution pipelines; and the sale of property for residential,
commercial and other development. In the fourth quarter of 1997, Energy Services
began marketing electricity and other products and services, under the name PG
Energy PowerPlus (a trademark of Energy Services), principally in northeastern
and central Pennsylvania. Power Corp, an exempt wholesale generator (within the
meaning of the Public Utility Holding Company Act of 1935, as amended), began
generating and selling electricity in July, 1998, upon completion of
modifications to its cogeneration facility that enable it to burn both natural
gas and methane. In 1998, the revenues of the nonregulated subsidiaries
accounted for approximately 23% of the Company's operating revenues and 37% 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, 1998, PG Energy provided service to approximately
148,900 natural gas customers and Honesdale provided service to approximately
3,300 customers.
The Company and its subsidiaries employed approximately 825 persons as of
December 31, 1998.
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 occurring in the electric industry,
which competes with the natural gas industry for many of the same energy uses.
<PAGE>
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 600 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 54% of PG Energy's total gas
deliveries in 1998, 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 its customers effective November 1, 1997.
During 1998 approximately 1,150 of Honesdale's customers received transportation
service and purchased 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 148,900 customers.
However, the actual timing of such filing may be influenced by the terms of the
legislation, as discussed below, which the Company and PG Energy currently
believe that Pennsylvania may enact in 1999 requiring that all customers of LDCs
have the right, within the next one to two 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 1999. 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 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 the
transition costs it would incur in offering choice to all its customers
(including those involving information systems and customer education) 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 on positioning 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 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, primarily 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,
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 and the installation of fiber optic cable. 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. In July, 1998, Power Corp
began generating and selling electricity provided by a cogeneration facility it
acquired in November, 1997. This 25-megawatt facility, located in Archbald,
Pennsylvania, is fueled by a combination of natural gas and methane recovered
from a nearby landfill.
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).
OPERATING SEGMENTS
The Company has three principal operating segments:
o Regulated Energy Products and Services, principally the purchase,
distribution and sale, subject to regulation of the PPUC, of natural
gas in thirteen counties in northeastern Pennsylvania by the
Regulated Subsidiaries ("Energy Products and Services - Regulated")
o Nonregulated Energy Products and Services, principally the sale of
natural gas, propane, electricity and other energy-related products
and services by Energy Services, principally in a twenty-six county
area in northeastern and central Pennsylvania and by Power Corp
("Energy Products and Services - Nonregulated")
o Pipeline Construction and Services, principally the construction,
maintenance and rehabilitation of utility facilities throughout the
eastern United States by Keystone ("Pipeline Construction and
Services").
Financial information relative to the Company's operating segments can be
found in Note 13 of the Notes to Consolidated Financial Statements in Item 8 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.
<PAGE>
Number and Type of Customers. At December 31, 1998, the Regulated
Subsidiaries had approximately 152,200 natural gas customers, from which the
Company derived total natural gas revenues of $158.7 million during 1998. The
following chart shows a breakdown of the types of customers and the percentages
of gas revenues generated by each type of customer in 1998:
Type of Customer % of Customers % of Revenues
Residential 90.8% 66.7%
Commercial 8.9 24.1*
Industrial 0.2 7.7*
Other Users 0.1 1.5
Total 100.0% 100.0%
* Includes the 2.6% of total gas revenues derived from interruptible customers.
During 1998, the Regulated Subsidiaries delivered an estimated total of
45,969,700 MCF of natural gas to their customers, of which 45% was sold at
normal tariff rates, 54% represented gas transported for customers and 1% 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 1998 a total of 5,461,250 MCF of natural
gas was sold to interruptible customers, of which 5,210,078 MCF was transported
for such customers, which together represented 12% of the total deliveries of
natural gas to the Regulated Subsidiaries' customers during 1998.
PG Energy's largest natural gas customer accounted for less than 1% of
its operating revenues in 1998.
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 approximately 3,300 customers effective November 1, 1997. During
1998, approximately 1,150 of Honesdale's customers received transportation
service and purchased 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.
Set forth below is a summary of the gas transported by the Regulated
Subsidiaries and the number of customers using transportation service from 1996
to 1998:
Volume of Gas Transported (MCF)
--------------------------------------------------
Number of Interstate Pennsylvania
Year Customers Gas Gas Total
- ------- ------------ ------------- ------------- --------------
1998 1,736 (a) 24,669,000 - 24,669,000
1997 1,244 (a) 22,584,000 99,000 22,683,000
1996 503 15,959,000 4,459,000 20,418,000
(a) Includes 1,148 and 729 residential and commercial customers of
Honesdale receiving transportation service in 1998 and 1997,
respectively.
During 1999, the Regulated Subsidiaries expect to transport approximately
28,000,000 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 and its elimination in 1998.
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 $1.7 million in 1998, $2.4 million in 1997 and
$1.8 million in 1996. These revenues reflected the sale of 582,000 MCF, 651,000
MCF and 491,000 MCF in 1998, 1997 and 1996, respectively. It is presently
anticipated that approximately 600,000 MCF will be sold under the Alternate Fuel
Rate in 1999. 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 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, 1998, 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 billed pursuant to Order
636 through the billing of a surcharge to its customers effective September 12,
1994. As December 31, 1998, $10.6 million of such Non-Gas Transition Costs had
been billed to PG Energy and recovered from its customers. PG Energy does not
presently anticipate that it will be billed for any additional amount of Non-Gas
Transition Costs by its interstate pipelines.
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 varying periods of more or less than one
year, but frequently for the following heating season (i.e., November through
March). Depending upon their terms, these contracts may or may not 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 28% of the Regulated Subsidiaries'
total purchases of natural gas in 1998. Three other suppliers accounted for 23%,
20% and 10%, respectively, of the Regulated Subsidiaries' total purchases of
natural gas in 1998. No other suppliers accounted for more than 10% of the
Regulated Subsidiaries' purchases during 1998.
<PAGE>
The purchases of natural gas by the Regulated Subsidiaries during 1998 and
1997 and by PG Energy during 1996 are summarized below:
Volume Average
Year Purchased (MCF) Cost per MCF*
- ----------------- ------------------ ------------
1998 22,763,000 $3.86
1997 26,540,000 $3.78
1996 27,955,000 $3.83
* At the entry points on the distribution systems of the Regulated Subsidiaries.
During 1999, the Regulated Subsidiaries expect to purchase approximately
27,500,000 MCF of natural gas under seasonal or other contracts of more or less
than one year at a currently projected average cost of $3.63 per MCF.
The Regulated Subsidiaries presently have adequate supplies of natural
gas to meet the demands of existing customers through October, 1999, 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, 1999, and to serve new customers (of which approximately 2,500 are
expected to be added in 1999).
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 (i.e. at the entry point
on the LDC's system).
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:
<PAGE>
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
- ------------- ----------------- ------------------- ------------------
Transco Various through 2015 74,100 (b) 61.2%
Tennessee 1999 and 2000 35,983 (c) 29.7
Columbia 2004 11,016 9.1
------------------- ------------------
121,099 100.0%
==================== ==================
(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 3,416 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:
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline/Party Date (a) (MCF) (b) From Storage (MCF)
- -------------- ---------------------- ---------------- ------------------
Transco Various through 2013 6,200,000 86,884
Tennessee November 1, 2000 3,700,000 25,310 (d)
Columbia October 31, 2004 1,100,000 16,036
NYSEG (c) March 31, 2002 290,000 28,093
---------------- -----------------
11,290,000 156,323
================ =================
(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.
(d) Includes 2,279 MCF that may be delivered to Honesdale under the terms
of the storage contract with Tennessee.
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:
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
- --------- -------------- --------------- -------------- ------------
Transco 74,100 (a) 114,977 (c) 189,077 68.2%
Tennessee 35,983 (b) 25,310 (d) 61,293 22.1
Columbia 11,016 16,036 27,052 9.7
-------------- ---------------- -------------- ------------
121,099 156,323 277,422 100.0%
============== ================ ============== ============
(a) Includes 3,300 MCF that may be transported by PG Energy during the
period December through February.
(b) Includes up to 3,416 MCF that may be transported by Honesdale during
the period November through January.
(c) Includes 28,093 MCF that may be delivered under the terms of the
storage contract with NYSEG and the abandonment of Transco's LGA
storage service.
(d) Includes 2,279 MCF that may be delivered to Honesdale under the terms
of the storage contract with Tennessee.
<PAGE>
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 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 1998, the average daily
capacity so released was 32,674 MCF, and the maximum capacity released on any
one day in 1998 was 41,473 MCF. Through December 31, 1998, the Regulated
Subsidiaries had not, however, released any storage capacity on the open market
via the pipeline electronic bulletin boards.
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 354,000 MCF, of which
257,000 MCF would be required for customers to whom the Regulated Subsidiaries
provide retail sales service and 97,000 MCF would be required for customers for
whom the Regulated Subsidiaries provide transportation service through their
distribution systems. The Regulated Subsidiaries' historic maximum daily sendout
is 313,446 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.
Capital Expenditures. Capital expenditures totaled $44.8 million during
1998, including $28.2 million for the construction of utility plant, $8.7 for
the conversion of Power Corp's cogeneration facility and the construction of the
related methane recovery facility and $4.8 million for the development of an
industrial site adjacent to Power Corp's cogeneration facility. Capital
expenditures are estimated to be $22.5 million during 1999, consisting of $18.4
million relative to utility plant and $4.1 million with respect to the Company's
nonregulated activities.
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. PG Energy paid $175,000 to the party performing the
remediation in settlement of a claim for PG Energy's share of such remediation
costs. 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.
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.
Power Corp is an exempt wholesale generator pursuant to Section 32 of the
PUHCA, and both Power Corp and Energy Services are licensed power marketers
pursuant to Section 205 of the Federal Power Act and rules and regulations of
the FERC.
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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
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.
<PAGE>
In accordance with these procedures PG Energy has been permitted to
make the following changes since January 1, 1996, to the gas costs contained in
its tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- ------------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
September 1, 1998 4.18 4.25 1,900,000
June 1, 1998 3.95 4.18 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
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 refunding approximately $11,000 of decreased 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 $7.5 million during the period January 1 through February 15, 1996.
<PAGE>
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 $815,000 during the period January 1 through
February 15, 1996.
EXECUTIVE OFFICERS OF THE COMPANY
Positions and
Officer Offices with the
Name Age Since Company
- ------------------- ------ --------- -------------------------------
Thomas F. Karam 40 1995 President and Chief Executive
Officer
Vincent A. Bonaddio 49 1995 Vice President, Operations and
Engineering Services
Harry E. Dowling 49 1984 Vice President, Customer
Services
John F. Kell, Jr. 61 1978 Vice President, Financial
Services
Donna M. Abdalla 39 1998 Corporate Secretary
Richard N. Marshall 41 1993 Treasurer and Assistant
Secretary
Thomas J. Koval 46 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 1999 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 seven-year period ending September 1, 2003, there are no
arrangements or understandings between any officer and any other person pursuant
to which he was selected as an officer.
<PAGE>
ITEM 2. PROPERTIES
Gas. The gas systems of the Regulated Subsidiaries consist of
approximately 2,439 miles of distribution lines, eleven city gate and 81 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 from PG
Energy to U.S. Bank Trust, National Association, as Trustee.
Land. As of February 24, 1999, PG Energy owned approximately 44,000 acres
of undeveloped land, while Theta owned approximately 1,000 acres of land and
Power Corp. owned approximately 150 acres of land, certain of which is being
prepared for development. All such land is situated in northeastern
Pennsylvania, primarily Luzerne and Lackawanna Counties.
Cogeneration Facility. Power Corp owns a 25-megawatt cogeneration
facility located in Lackawanna County, Pennsylvania which it acquired in
November, 1997. This facility, which became operational in July, 1998, burns
both methane and natural gas. Power Corp also owns a methane recovery facility
at a nearby landfill which supplies methane gas burned at its cogeneration
facility.
Other than the aforementioned facilities owned by Power Corp, neither the
Nonregulated Energy Products and Services operating segment nor the Pipeline
Construction and Services segment has materially important physical properties.
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 1998, there were no matters submitted to a
vote of security holders of the registrant through the solicitation of proxies
or otherwise.
<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 24, 1999, there were
approximately 8,300 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,
1998 and 1997. The prices shown represent the high and low transaction prices
for the respective quarters without retail mark-up, mark-down or commission.
Price Range Cash
-------------------------------
High Low Dividends
------------- ------------- -------------
1998
First quarter $ 26.563 $ 23.125 $ .30
Second quarter 29.000 22.813 .30
Third quarter 27.688 21.125 .30
Fourth quarter 25.938 21.688 .30
Total $ 1.20
1997
First quarter (1) $ 24.063 $ 21.375 $ .29
Second quarter 27.750 21.250 .30
Third quarter 30.500 25.250 .30
Fourth quarter 32.750 24.250 .30
Total $ 1.19
(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.
<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, 1998, 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,
---------------------------------------------------------------
1998 1997* 1996* 1995* 1994*
---------- ----------- ---------- ---------- -----------
(Thousands of Dollars, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Energy products and services -
Regulated ..................... $ 158,724 $ 190,533 $ 160,594 $ 152,756 $ 167,992
Nonregulated .................. 36,393 26,303 13,153 8,353 9,061
Pipeline construction and services 12,215 11,210 10,733 826 44
Total operating revenues ... 207,332 228,046 184,480 161,935 177,097
OPERATING EXPENSES:
Cost of gas and other energy ..... 117,689 134,622 98,475 90,478 105,832
Operation and maintenance ........ 45,623 43,265 42,930 29,551 28,569
Depreciation ..................... 10,446 9,464 7,833 7,018 6,671
Income taxes ..................... 3,947 7,374 5,800 3,955 4,541
Taxes other than income taxes .... 11,428 11,766 11,182 9,982 10,852
Total operating expenses ...... 189,133 206,491 166,220 140,984 156,465
OPERATING INCOME ..................... 18,199 21,555 18,260 20,951 20,632
OTHER INCOME, NET .................... 1,661 1,221 1,726 355 111
INTEREST CHARGES (1) ................. (11,159) (9,634) (10,192) (15,422) (13,791)
INCOME FROM CONTINUING
OPERATIONS ....................... 8,701 13,142 9,794 5,884 6,952
INCOME (LOSS) WITH RESPECT
TO DISCONTINUED
OPERATIONS, NET OF
RELATED INCOME TAXES (2) ......... -- -- (363) (3,834) 10,504
INCOME BEFORE SUBSIDIARY'S
PREFERRED STOCK
DIVIDENDS AND
EXTRAORDINARY LOSS ............... 8,701 13,142 9,431 2,050 17,456
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (1) .............. 1,191 1,312 1,730 2,763 4,639
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS ............... 7,510 11,830 7,701 (713) 12,817
EXTRAORDINARY LOSS (NET OF
RELATED TAX BENEFIT) ............. -- -- (1,117) -- --
NET INCOME (LOSS) .................... $ 7,510 $ 11,830 $ 6,584 $ (713) $ 12,817
</TABLE>
See page 18 for an explanation of footnotes.
*Reclassified to conform with 1998 consolidated financial statement
presentation.
<TABLE>
<CAPTION>
<PAGE>
Year Ended December 31,
1998 1997 1996 1995 1994
------- ------ ------- -------- -------
(Thousands of Dollars, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK INFORMATION:
Weighted average number of shares
outstanding in thousands (3) .... 9,997 9,661 10,222 11,459 10,913
Basic and diluted earnings
(loss) per share of
common stock: (3)
Continuing operations (1) ..... $ .75 $ 1.22 $ .79 $ .27 $ .21
Discontinued operations ....... -- -- (.04) (.33) .96
Net income (loss) before
discount (premium) on
repurchase/redemption of
subsidiary's preferred stock
and extraordinary loss ..... .75 1.22 .75 (.06) 1.17
Discount (premium) on
repurchase/redemption of
subsidiary's preferred stock (.10) .08 (.13) -- (.09)
Extraordinary loss ............ -- -- (.11) -- --
Earnings (loss) per share of
common stock ................ $ .65 $ 1.30 $ .51 $ (.06) $ 1.08
Cash dividends per share of
common stock .................... $ 1.20 $ 1.19 $ 1.10 $ 1.10 $ 1.10
CAPITALIZATION AT END
OF PERIOD:
Amounts -
Common shareholders' investment . $132,326 $ 122,105 $ 117,651 $ 162,739 $172,012
Preferred stock of
PG Energy -
Not subject to mandatory
redemption, net .............. 4,831 15,864 18,851 33,615 33,615
Subject to mandatory redemption 240 640 739 1,680 1,760
Long-term debt .................. 98,000 127,000 75,000 106,706 220,705
Total capitalization ......... $ 235,397 $ 265,609 $ 212,241 $ 304,740 $ 428,092
Ratios -
Common shareholders' investment . 56.2% 46.0% 55.4% 53.4% 40.2%
Preferred stock of PG Energy -
Not subject to mandatory
redemption, net .............. 2.1 6.0 8.9 11.0 7.8
Subject to mandatory redemption 0.1 0.2 0.4 0.6 0.4
Long-term debt .................. 41.6 47.8 35.3 35.0 51.6
Total ........................ 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
See page 18 for an explanation of footnotes.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- -------- -------- ---------
(Thousands of Dollars, Except Per Share Amounts and Ratios)
<S> <C> <C> <C> <C> <C> <C>
UTILITY PLANT AT END OF
PERIOD:
Total utility plant .... $376,685 $351,106 $319,205 $295,895 $284,080
Accumulated depreciation 95,735 88,129 79,783 76,882 74,408
Net utility plant .. $280,950 $262,977 $239,422 $219,013 $209,672
TOTAL ASSETS AT END OF
PERIOD:
Continuing operations .. $426,202 $388,830 $366,810 $319,968 $321,236
Discontinued operations,
net (4) .............. -- -- -- 204,250 203,196
Total ............... $426,202 $388,830 $366,810 $524,218 $524,432
</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 the
February 15, 1996, date of disposition of the discontinued operations.
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.
<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 collectively accounted for approximately 77% of the Company's operating
revenues in 1998. 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 occurring 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 600 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 54% of PG Energy's total gas
deliveries in 1998, 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 its customers effective November 1, 1997.
During 1998, approximately 1,150 of Honesdale's customers received
transportation service and purchased 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 148,900 customers.
However, the actual timing of such filing may be influenced by the terms of the
legislation, as discussed below, which the Company and PG Energy currently
believe that Pennsylvania may enact in 1999 requiring that all customers of LDCs
have the right, within the next one to two 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 1999. 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 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 the
transition costs it would incur in offering choice to all its customers
(including those involving information systems and customer education) 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.
<PAGE>
EXPANSION OF NONREGULATED ACTIVITIES
The Company intends to continue its focus on positioning 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 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 and the installation of fiber optic cable. 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. In
July, 1998, PEI Power Corporation ("Power Corp"), a subsidiary of the Company
formed in October, 1997, began generating and selling electricity produced by a
cogeneration facility it acquired in November, 1997. This 25-megawatt facility
is fueled by a combination of natural gas and methane recovered from a nearby
landfill.
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" 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.
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 4 of the accompanying Notes to Consolidated
Financial Statements. All per share data included in this Item 7 for the year
1996 has been restated to reflect this two-for-one split.
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating revenues for each of the
calendar years ended December 31, 1998, 1997 and 1996:
Percentage of Operating Revenues
--------------------------------
Year Ended December 31,
--------------------------------
1998 1997 1996
--------- --------- --------
OPERATING REVENUES:
Energy products and services -
Regulated ...................... 76.6% 83.6% 87.1%
Nonregulated ................... 17.5 11.5 7.1
Pipeline construction and services 5.9 4.9 5.8
Total operating revenues ...... 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of gas and other energy ...... 56.8 59.0 53.4
Operation and maintenance ......... 22.0 19.0 23.3
Depreciation ...................... 5.0 4.2 4.2
Income taxes ...................... 1.9 3.2 3.1
Taxes other than income taxes ..... 5.5 5.2 6.1
Total operating expenses ...... 91.2 90.6 90.1
OPERATING INCOME ...................... 8.8 9.4 9.9
OTHER INCOME, NET ..................... 0.8 0.6 0.9
INTEREST CHARGES ...................... (5.4) (4.2) (5.5) (1)
INCOME FROM CONTINUING OPERATIONS ..... 4.2 5.8 5.3
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS ........................ -- -- (0.2)
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS ................... 4.2 5.8 5.1
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (0.6) (0.6) (0.9)
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS 3.6 5.2 4.2
EXTRAORDINARY LOSS (NET OF TAX BENEFIT
OF $575,000) ...................... -- -- (0.6)
NET INCOME (LOSS) ..................... 3.6% 5.2% 3.6%
(1) None of the Company's interest expense and none of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.
<PAGE>
o Year Ended December 31, 1998, Compared With Year Ended December 31, 1997
Operating Revenues. Operating revenues decreased $20.7 million (9.1%)
from $228.0 million for 1997 to $207.3 million for 1998 largely as a result of a
$31.8 million (16.7%) decrease in operating revenues from Regulated Energy
Products and Services, namely, the sale and transportation of natural gas. The
impact of this decrease was partially offset by a $10.1 million (38.4%) increase
in revenues from Nonregulated Energy Products and Services, largely comprised of
a $7.7 million (29.8%) increase in gas sales and services by Energy Services,
$1.2 million attributable to the generation and sale of electric energy by Power
Corp, which began generating and selling electricity in July, 1998, and a $1.0
million (9.0%) increase in operating revenues relative to the Pipeline
Construction and Service activities of Keystone.
Operating revenues from Regulated Energy Products and Services decreased
$31.8 million (16.7%) from $190.5 million for 1997 to $158.7 million for 1998,
primarily as a result of a 3.9 billion cubic feet (17.0%) decrease in natural
gas sales by PG Energy to its residential and commercial heating customers. This
reduction in sales was attributable to warmer than normal temperatures during
1998 and colder than normal temperatures during 1997, as well as lower levels in
PG Energy's gas cost rate (see "-Rate Matters"). The number of heating degree
days decreased by 1,202 (18.5%) from 6,498 (103.3% of normal) during 1997 to
5,296 (84.2% of normal) during 1998.
The $8.9 million (34.2%) increase in Energy Services' nonregulated gas
sales and services, from $26.0 million for 1997 to $34.9 million for 1998, was
primarily the result of a 3.4 million cubic feet (45.2%) increase in sales of
natural gas by Energy Services during the year.
Operating Expenses. Operating expenses, including depreciation and income
taxes, decreased $17.4 million (8.4%) from $206.5 million for 1997 to $189.1
million for 1998. As a percentage of operating revenues, total operating
expenses increased from 90.6% during 1997 to 91.2% during 1998.
The cost of gas and other energy decreased $16.9 million (12.6%) from
$134.6 million for 1997 to $117.7 million for 1998 primarily because of the
aforementioned decrease in sales by PG Energy to its residential and commercial
heating customers and lower levels in PG Energy's gas cost rate (see "-Rate
Matters"). The effects of these decreases were partially offset by the increase
in Energy Services' gas sales described above and the sales of Power Corp since
it began operating in July, 1998.
Other than the cost of gas and other energy and income taxes, operating
expenses increased by $3.0 million (4.7%) from $64.5 million for 1997 to $67.5
million for 1998. This increase was largely attributable to a $2.4 million
(5.5%) increase in operation and maintenance expense, primarily as a result of
increased payroll and other costs associated with the expansion of the Company's
nonregulated activities and increased amortization of computer software. The
effects of these increases were partially offset by the reversal of $1.9 million
of previously expensed other postretirement benefit costs relative to the period
January 1, 1993, through January 15, 1997, recovery of which was approved by the
PPUC over a fifteen year period beginning November 1, 1998. Also contributing to
the higher operating expenses was a $982,000 (10.4%) increase in depreciation
expense, primarily because of additions to utility plant. The effects of these
increases were partially offset by a $338,000 (2.9%) decrease in taxes other
than income taxes resulting from a lower level of gross receipts tax because of
the decreased sales by PG Energy and Honesdale.
Income taxes decreased $3.4 million (46.5%) from $7.4 million in 1997 to
$3.9 million in 1998 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges).
Operating Income. Operating income decreased by $3.4 million (15.6%) from
$21.6 million for 1997 to $18.2 million for 1998 and decreased as a percentage
of total operating revenues for such periods from 9.4% in 1997 to 8.8% in 1998
primarily because of the lower level of operating revenues from Regulated Energy
Products and Services.
<PAGE>
Operating income attributable to the Company's three operating segments:
Regulated Energy Products and Services, principally the purchase, distribution
and sale of natural gas by the Regulated Subsidiaries ("Energy Products and
Services - Regulated"); Nonregulated Energy Products and Services, principally
the sale of natural gas, propane, electricity and other energy-related products
and services by Energy Services and Power Corp ("Energy Products and Services -
Nonregulated"); and Pipeline Construction and Services, principally the
construction, maintenance and rehabilitation of utility facilities by Keystone
("Pipeline Construction and Services"), for the years ended December 31, 1998
and 1997, was as follows:
Year Ended December 31,
----------------------------------
Increase
1998 1997 (Decrease)
Energy Products and Services -
Regulated ..................... $ 18,028 $ 21,963 $ (3,935)
Nonregulated .................. 190 (373) 563
Pipeline Construction and Services 231 95 136
Intercompany eliminations and
corporate expenses ............. (250) (130) (120)
Total ......................... $ 18,199 $ 21,555 $ (3,356)
The decrease in operating income from Regulated Energy Products and
Services is primarily related to the aforementioned decrease in sales to PG
Energy's residential and commercial heating customers. The increase in operating
income from Nonregulated Energy Products and Services is primarily the result of
the increased sales by Energy Services.
Other Income, Net. Other income, net increased $440,000 (36.0%) from $1.2
million for 1997 to $1.7 million for 1998 largely as a result of the sale of
certain nonutility property during 1998.
Interest Charges. Interest charges increased by $1.5 million (15.8%) from
$9.6 million for 1997 to $11.2 million for 1998. This increase was largely
attributable to a higher level of long-term debt outstanding in 1998.
Income From Continuing Operations. Income from continuing operations
decreased $4.4 million (33.8%) from $13.1 million for 1997 to $8.7 million for
1998. This decrease was largely the result of the matters discussed above,
principally the decrease in operating income and the increase in interest
charges.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $121,000 (9.2%) from $1.3 million for 1997 to $1.2 million for 1998,
primarily as a result of the repurchase by PG Energy in 1998 of all its
remaining 9% cumulative preferred stock as of December 1, 1998.
Net Income (Loss). The decrease in net income of $4.3 million (36.5%)
from $11.8 million for 1997 to $7.5 million for 1998 was the result of the
reduced operating income and increased interest charges as discussed above.
These same factors, along with premiums of $.10 per share during 1998 and
discounts of $.08 per share during 1997 on the repurchase of preferred stock,
accounted for the decrease in basic and diluted earnings per share of common
stock of $.65 from $1.30 per share for 1997 to $.65 per share for 1998. Also
contributing to the decrease in basic and diluted earnings per share of common
stock was a 3.5% increase in the weighted average number of shares outstanding
as a result of the issuance of shares during 1998 in connection with the
Company's Dividend Reinvestment and Stock Purchase Plan, Customer Stock Purchase
Plan, 1992 Stock Option Plan and Employees' Savings Plan. (See Liquidity and
Capital Resources - Long-Term Debt and Capital Stock Financings).
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 operating revenues from Regulated Energy
Products and Services and a $13.1 million (100.0%) increase from Nonregulated
Energy Products and Services.
The $29.9 million (18.6%) increase in operating revenues from Regulated
Energy Products and Services 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 129 (1.9%) heating degree days from 6,627 (105.3% of normal)
during 1996 to 6,498 (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 $13.1 million (100.0%) increase in operating revenues from
Nonregulated Energy Products and Services from $13.2 million for 1996 to $26.3
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 and other energy.
The cost of gas and other energy increased $36.1 million (36.7%) from
$98.5 million for 1996 to $134.6 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 other energy and income taxes, operating
expenses increased by $2.6 million (4.1%) from $61.9 million for 1996 to $64.5
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 $335,000 (0.8%) 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).
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 and other energy to operating
revenues.
Operating income from Regulated Energy Products and Services increased
$5.2 million (31.4%), primarily as a result of aforementioned increase in sales
to PG Energy's residential and commercial heating customers. Operating income
from Nonregulated Energy Products and Services decreased $1.3 million
principally as a result of the increased expenses relative to the expansion of
Energy Services' activities.
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 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
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.
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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of 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, 1996, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- --------------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
September 1, 1998 4.18 4.25 1,900,000
June 1, 1998 3.95 4.18 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
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.
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 continue to
expand, further capital will be required for those activities. It is currently
anticipated that such expenditures will be funded by a combination of capital
provided by the Company, bank borrowings and other debt financing.
The cash flow from PG Energy's operations is generally sufficient to fund
a portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG Energy to use bank borrowings to
fund such expenditures, pending the periodic issuance of stock and long-term
debt. Bank borrowings are also used by PG Energy for the seasonal funding of its
gas purchases and increases in customer accounts receivable.
<PAGE>
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, PG Energy has made arrangements for a total of
$64.0 million of unsecured revolving bank credit, which is deemed adequate for
its immediate needs. Specifically, PG Energy currently has seven bank lines of
credit which provide for borrowings at interest rates generally less than prime
and which mature at various times during 1999 and 2000 and which PG Energy
intends to renew or replace as they expire. As of February 24, 1999, PG Energy
had $31.0 million of borrowings outstanding under these bank lines of credit.
In order to finance the conversion of its cogeneration facility, the
construction of a methane recovery facility and initial phases of the
development of an industrial site adjacent to its cogeneration facility, Power
Corp has borrowed $10.0 million pursuant to two bank lines of credit as of
February 24, 1999. These bank lines of credit provide for borrowings at interest
rates less than prime and which mature during 1999 and 2000. Power Corp intends
to renew or replace these lines of credit as they expire.
The Company believes that its Regulated Subsidiaries and Power Corp 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 other nonregulated subsidiaries will be
able to raise such funds as are required for their needs.
Long-Term Debt and Capital Stock Financings
Both the Company and its subsidiaries, most notably PG Energy,
periodically engage in long-term debt and capital stock financings in order to
obtain funds required for construction expenditures, the refinancing of existing
debt and various working capital purposes. Set forth below is a summary of such
financings consummated since the beginning of 1997, 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 (5.440% as of February 24, 1999). 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.
The Company also obtains external funds from the sale of common stock
through its Dividend Reinvestment and Stock Purchase Plan, its Customer Stock
Purchase Plan, its 1992 Stock Option Plan and its Employees' Savings Plan.
During 1998 the Company realized $15.3 million from the issuance of common stock
under these plans.
Capital Expenditures and Related Financings
Capital expenditures totaled $44.8 million during 1998, including $28.2
million of expenditures for the construction of utility plant, $8.7 million for
the conversion of Power Corp's cogeneration facility and the construction of the
related methane recovery facility, and $4.8 million for the development of an
industrial site adjacent to Power Corp's cogeneration facility. During 1997 and
1996, respectively, capital expenditures totaled $34.3 million and $32.0
million. Such expenditures were financed with internally-generated funds and
bank borrowings.
The Company estimates that its capital expenditures will total $22.5
million during 1999, consisting of $18.4 million relative to utility plant and
$4.1 million with respect to the Company's nonregulated activities. Capital
expenditures are currently expected to range from $20-25 million in each of the
years 2000 and 2001, of which approximately $18.0 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
As of December 31, 1998, $81.3 million of long-term debt was required to
be repaid within twelve months. The $81.3 million of long-term debt includes
$20.0 million outstanding under the Company's Term Loan Agreement which is due
on May 31, 1999, $51.3 million outstanding under PG Energy's bank lines of
credit which is due at various times during 1999, and $10.0 million of PG
Energy's 9.23% series first mortgage bonds which are due September 1, 1999.
PG Energy and the Company are each intending to finance their respective
current maturities of long-term debt with internally generated funds and bank
borrowings pending the periodic issuance of long-term debt and capital stock.
Year 2000 Readiness Disclosure
The Company has performed an inventory and assessment of its computer
systems and applications, as well as devices with embedded technology, to
identify year 2000 issues and to develop a plan for addressing those issues.
This plan, which was initiated in 1996, is scheduled to be completed by March
31, 1999, for all applications and devices that could have a material effect on
the Company's operations, and by June 30, 1999, with respect to all other
issues. The plan involves the replacement of certain systems with purchased
software, the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule.
It is estimated that the total cost of the Company's plan to address year
2000 issues will be approximately $2.0-2.5 million. This amount, which had been
largely expended as of December 31, 1998, includes costs for the purchase of
hardware and software, external contractors and internal resources. The internal
resources, which are estimated to account for approximately $1.0 million of the
total cost, involved the redeployment of existing personnel and did not
represent an incremental cost. In view of the estimated cost and the substantial
progress that has been made to date, management does not anticipate the
expenditures necessary to carry out the plan to address year 2000 issues will be
material relative to the Company's financial position or results of operations.
As key elements of its plan to address year 2000 issues, the Company
replaced its financial and human resource systems with purchased software. The
installation of these new systems, along with modifications currently being made
to the Company's customer information system and upgrading of its operating
system software, will resolve the primary year 2000 issues. The modifications
and testing of the customer information system and the upgrading of the
Company's operating system software are now anticipated to be completed by March
31, 1999.
<PAGE>
The Company's plan to address year 2000 issues includes an assessment of
its critical suppliers and vendors, and also its largest customers, to determine
their status relative to year 2000 compliance. The Company is in the process of
surveying approximately 200 such suppliers, vendors and customers and to date
has not identified any situations that would appear to pose a significant risk
to the Company. The Company intends to continue monitoring the progress being
made by its suppliers, vendors and largest customers relative to year 2000
compliance and will promptly make any changes in its contingency planning as the
occasion warrants.
The Company is subject to potential disruptions in its operations as a
result of year 2000 related failures of its critical suppliers and vendors.
Although there is presently no basis for suggesting such situation would occur,
management believes the worst case scenario in such regard might involve the
temporary disruption in the gas service of certain of its customers. To provide
for this and other possible contingencies related to year 2000 issues, the
Company is currently evaluating its existing emergency and disaster recovery
plans. These plans will be modified, as deemed appropriate, based, among other
considerations, on the Company's assessment of the year 2000 compliance of its
critical suppliers and vendors. These plans, as so modified, will attempt to
mitigate, to the extent reasonably possible, the effect of any year 2000 related
failures by a third party. However, the Company is dependent on its suppliers of
natural gas, interstate gas pipelines and utility and telecommunication
companies, over which it has no control, to serve its customers. Any disruption
in service by one of these key suppliers could, depending upon its nature and
extent, have a material adverse effect on the Company's operations.
Market Risk Disclosures
The Company's primary market risk exposures relate to market prices for
natural gas and changes in long-term interest rates.
While neither the Company nor any of its subsidiaries utilize derivative
commodity instruments for trading purposes, PG Energy, Honesdale, Energy
Services and Power Corp each purchase natural gas for periods of more or less
than one year which, depending upon the terms of such contracts, may or may not
provide for an adjustment each month in the cost of gas purchased pursuant
thereto, based on the then current market prices for natural gas. Pursuant to
regulations of the PPUC, both PG Energy and Honesdale are permitted to recover
prudently incurred gas costs from their customers. Accordingly, the commodity
price risks associated with those companies is limited. Energy Services
generally structures its sales commitments to customers in a manner that permits
it to adjust the prices charged to the customers for any change in the cost of
the gas which it purchases for those customers. In addition to the methane
produced at a nearby landfill, Power Corp has commitments for the purchase of
natural gas that are subject to market price risk but those commitments are not
material relative to the Company's financial position or results of operations.
The Company utilizes long-term debt as a primary source of its capital
and, therefore, is exposed to changes in interest rates. At December 31, 1998,
the Company had fixed-rate long-term debt aggregating $83.0 million. In
addition, the Company had $96.3 million of variable rate long-term debt,
including long-term borrowings under its bank lines of credit, for which the
interest rates are generally set, at the Company's option, for periods of one,
two or three months. If market interest rates were to average 50 basis points
(0.50%) more in 1999 than in 1998, it is estimated that the Company's interest
expense would increase by approximately $350,000. This amount has been
calculated by considering the impact of the hypothetical interest rates on the
Company's variable-rate debt and also the fixed-rate debt that matures in 1999.
In the event of a significant change in interest rates, which would primarily
affect PG Energy, the Company would take such action, including the filing of
rate increase requests with the PPUC as it considers necessary, to mitigate the
impact of the change. The Company has not historically employed derivative
financial instruments, except for the use, in one instance, of an interest rate
cap.
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives
and economic performance go beyond historical information and may provide an
indication of future results. To that extent, such statements are
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, and each is subject to factors that could cause actual
results to differ from those in the forward-looking statement. The Company
cautions that assumptions, projections, expectations, intentions or beliefs
about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: the nature of
Pennsylvania legislation restructuring the natural gas industry; the impact of
year 2000 disruption; industrial, commercial and residential growth in the
service territories of the Company and its subsidiaries; the weather and other
natural phenomena; the timing and extent of changes in commodity prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its subsidiaries are subject or other external factors over
which the Company has no control; growth in opportunities for the Company's
nonregulated activities; and general economic conditions and uncertainties
relating to such growth during the periods covered by the forward-looking
statements. The Company undertakes no obligation to publicly release any
revision to these forward-looking statements to reflect events or circumstances
after the date of this filing.
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 year 1996 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.
<PAGE>
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, 1998 and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998, 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 year ended December 31, 1996 were audited by other
independent accountants whose report dated February 19, 1997, expressed an
unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 17, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Enterprises, Inc.:
We have audited the consolidated statements of income and cash flows of
Pennsylvania Enterprises, Inc. (a Pennsylvania corporation) and subsidiaries
(the "Company") for the year ended December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Pennsylvania Enterprises, Inc. for the year 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 financial
statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying
Accounts for the year 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 financial statements.
This schedule has been subject to the auditing procedures applied in the audit
of the basic 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 financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 19, 1997
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
-------------------------------------------
1998 1997* 1996*
-------------- -------------- --------------
--------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Energy Products and Services -
Regulated .......................................... $ 158,724 $ 190,533 $ 160,594
Nonregulated ....................................... 36,393 26,303 13,153
Pipeline construction and services .................... 12,215 11,210 10,733
------------ ------------ ------------
Total operating revenues ........................ 207,332 228,046 184,480
------------ ------------ ------------
OPERATING EXPENSES:
Cost of gas and other energy ........................... 117,689 134,622 98,475
Operation and maintenance .............................. 45,623 43,265 42,930
Depreciation ........................................... 10,446 9,464 7,833
Income taxes ........................................... 3,947 7,374 5,800
Taxes other than income taxes .......................... 11,428 11,766 11,182
------------ ------------ ------------
Total operating expenses ............................ 189,133 206,491 166,220
------------ ------------ ------------
OPERATING INCOME ........................................... 18,199 21,555 18,260
OTHER INCOME, NET .......................................... 1,661 1,221 1,726
------------ ------------ ------------
INCOME BEFORE INTEREST CHARGES ............................. 19,860 22,776 19,986
------------ ------------ ------------
INTEREST CHARGES:
Interest on long-term debt ............................. 10,681 9,055 9,609
Other interest ......................................... 572 810 760
Allowance for borrowed funds used during construction .. (94) (231) (177)
------------ ------------ ------------
Total interest charges .......................... 11,159 9,634 10,192
------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS .......................... 8,701 13,142 9,794
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS (Note 2) ...... -- -- (363)
------------ ------------ ------------
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS ....... 8,701 13,142 9,431
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS ..................... 1,191 1,312 1,730
------------ ------------ ------------
INCOME BEFORE EXTRAORDINARY LOSS ........................... 7,510 11,830 7,701
EXTRAORDINARY LOSS (NET OF TAX BENEFIT OF $575,000) (Note 6) -- -- (1,117)
------------ ------------ ------------
NET INCOME ................................................. $ 7,510 $ 11,830 $ 6,584
============ ============ ============
COMMON STOCK: (Notes 1 and 4)
Basic and diluted earnings per share of common stock:
Continuing operations ............................. $ 0.75 $ 1.22 $ 0.79
Discontinued operations ........................... -- -- (0.04)
Discount (premium) on repurchase/redemption
of subsidiary's preferred stock ................ (0.10) 0.08 (0.13)
Extraordinary loss ................................ -- -- (0.11)
------------ ------------ ------------
Earnings per share of common stock ................ $ 0.65 $ 1.30 $ 0.51
============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic ............................................. 9,996,586 9,661,056 10,222,002
============ ============ ============
Diluted ........................................... 10,076,273 9,735,809 10,242,686
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
* Reclassified to conform with 1998 consolidated financial statement
presentation.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------------
1998 1997
---------- -----------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost ............................. $ 376,685 $ 351,106
Accumulated depreciation ..................... (95,735) (88,129)
------- -------
280,950 262,977
------- -------
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment ............ 31,816 16,335
Accumulated depreciation ..................... (5,460) (4,875)
Other ........................................ 2,296 2,171
------ ------
28,652 13,631
------ ------
CURRENT ASSETS:
Cash and cash equivalents .................... 807 2,202
Restricted cash - common stock subscribed .... 452 --
Accounts receivable -
Customers ................................. 26,259 28,681
Others .................................... 811 850
Reserve for uncollectible accounts ........ (1,465) (1,340)
Unbilled revenues ............................ 12,247 12,108
Materials and supplies, at average cost ...... 3,053 3,110
Gas held by suppliers, at average cost ....... 22,676 21,933
Deferred cost of gas and supplier refunds, net 6,058 6,316
Prepaid income taxes ......................... 2,090 --
Prepaid expenses and other ................... 2,713 1,686
------ ------
75,701 75,546
------ ------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible ................ 31,097 30,592
Other ..................................... 8,598 4,415
Unamortized debt expense ..................... 1,014 1,361
Other ........................................ 190 308
------ ------
40,899 36,676
------ ------
TOTAL ASSETS ..................................... $ 426,202 $ 388,830
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
1998 1997
--------- ---------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholders' investment .................. $132,326 $122,105
Preferred stock of PG Energy -
Not subject to mandatory redemption, net ....... 4,831 15,864
Subject to mandatory redemption ................ 240 640
Long-term debt ................................... 98,000 127,000
------- -------
235,397 265,609
------- -------
CURRENT LIABILITIES:
Current portion of long-term debt ................ 81,348 24,776
Preferred stock subject to repurchase or mandatory
redemption ..................................... -- 80
Notes payable .................................... 6,200 2,170
Accounts payable ................................. 22,370 18,448
Accrued general business and realty taxes ........ 1,764 2,953
Accrued income taxes ............................. -- 4,618
Accrued interest ................................. 1,811 1,783
Accrued natural gas transition costs ............. -- 1,087
Other ............................................ 1,924 1,722
------- ------
115,417 57,637
------- ------
DEFERRED CREDITS:
Deferred income taxes ............................ 60,923 52,511
Unamortized investment tax credits ............... 4,424 4,596
Operating reserves ............................... 2,836 2,825
Other ............................................ 7,205 5,652
------ ------
75,388 65,584
====== ======
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES ................. $426,202 $388,830
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends ................. $ 7,510 $ 11,830 $ 8,064
Gain on sales of nonutility property ...................... (2,784) (701) --
Effects of noncash charges to income -
Depreciation ........................................... 10,536 9,519 7,896
Deferred income taxes, net ............................. 3,252 2,210 2,104
Provisions for self insurance .......................... 1,184 898 1,042
Extraordinary loss, net of tax benefit ................. -- -- (1,117)
Other, net ............................................. 496 2,039 2,335
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues .............. 2,447 (4,847) (3,350)
Gas held by suppliers ................................. (743) (1,668) (5,125)
Accounts payable ...................................... 2,476 (2,532) 2,057
Deferred cost of gas and supplier refunds, net ........ (829) 14,397 (18,493)
Other current assets and liabilities, net ............. (8,637) 1,997 2,235
Other operating items, net ................................. 1,037 (986) (5,458)
--------- --------- ---------
Net cash provided by (used for) continuing operations 15,945 32,156 (7,810)
Net cash used for discontinued operations .................. -- (13,655) (45,173)
--------- --------- ---------
Net cash provided by (used for) operating activities 15,945 18,501 (52,983)
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ................................ (29,003) (30,971) (29,312)
Additions to nonutility property .......................... (16,041) (3,560) (1,991)
Proceeds from the sale of discontinued operations ......... -- -- 261,752
Proceeds from the sales of nonutility property ............ 3,460 746 --
Acquisition of regulated business ......................... -- (2,019) --
Other, net ................................................ 3 (101) 188
--------- --------- ---------
Net cash provided by (used for) investing activities (41,581) (35,905) 230,637
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock .................................. 15,301 2,491 1,291
Common stock subscribed ................................... 452 -- --
Repurchase of common stock ................................ -- -- (40,452)
Repurchase/redemption of preferred stock of PG Energy ..... (12,124) (3,121) (15,670)
Dividends on common stock ................................. (12,020) (11,501) (11,174)
Issuance of long-term debt ................................ -- 26,000 --
Repayment of long-term debt ............................... -- -- (81,906)
Net increase (decrease) in bank borrowings ................ 33,048 4,053 (27,903)
Other, net ................................................ (416) 558 (1,343)
--------- --------- ---------
Net cash provided by (used for) financing activities 24,241 18,480 (177,157)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........... (1,395) 1,076 497
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................. 2,202 1,126 629
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................... $ 807 $ 2,202 $ 1,126
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) ................. $ 10,588 $ 8,337 $ 10,423
========= ========= =========
Income taxes ......................................... $ 2,713 $ 15,728 $ 46,605
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
------------ ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
COMMON SHAREHOLDERS' INVESTMENT:
Common stock, no par value
(stated value $5 per share)
Authorized - 30,000,000 shares
Outstanding - 10,407,933 shares and
9,744,272 shares, respectively .................... $ 52,040 $ 48,721
Additional paid-in capital .............................. 35,523 23,089
Retained earnings ....................................... 44,763 50,295
------- --------
Total common shareholders' investment ................ 132,326 56.2% 122,105 46.0%
------- --------
PREFERRED STOCK of PG Energy, par value $100 per
share Authorized - 997,500 shares:
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
48,310 and 49,110 shares outstanding,
respectively ................................... 4,831 4,911
9% cumulative preferred, 115,641 shares outstanding
at December 31, 1997, net of issuance costs .... -- 10,953
------ ------
Total preferred stock not subject to
mandatory redemption, net ........................ 4,831 2.1% 15,864 6.0%
------ ------
Subject to mandatory redemption -
5.75% cumulative preferred, 2,396 and
7,200 shares outstanding, respectively ......... 240 720
Less current redemption requirements .............. -- (80)
-------- ------
Total preferred stock subject to mandatory redemption 240 0.1% 640 0.2%
------- ------
LONG-TERM DEBT:
First mortgage bonds .................................... 55,000 55,000
Notes ................................................... 124,348 96,776
Less current maturities and sinking fund requirements ... (81,348) (24,776)
Total long-term debt ................................. 98,000 41.6% 127,000 47.8%
--------- ------ -------- ------
TOTAL CAPITALIZATION ........................................ $ 235,397 100.0% $265,609 100.0%
========= ====== ======== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
Common Additional
Common Stock Paid-in Retained
Stock Subscribed Capital Earnings Total
--------- --------- --------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
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
Net income for 1998 ........... 7,510 7,510
Issuance of common stock ...... 3,319 452 11,982 -- 15,753
Premium on repurchase of
preferred stock of PG Energy -- -- -- (1,022) (1,022)
Cash dividends on common stock
($1.20 per share) .......... -- -- -- (12,020) (12,020)
------- - -------- -------- -------- ---------
Balance at December 31, 1998 .. $ 52,040 $ 452 $ 35,071 $ 44,763 $ 132,326
========= ======== ======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is
a holding company which, through its subsidiaries, is engaged in both regulated
and nonregulated activities. The Company's regulated activities are conducted by
its principal subsidiary, PG Energy Inc. ("PG Energy"), a regulated public
utility, and PG Energy's wholly-owned subsidiary, Honesdale Gas Company
("Honesdale"), also a regulated public utility which was acquired on February
14, 1997. Together PG Energy and Honesdale distribute natural gas to a
thirteen-county area in northeastern Pennsylvania, a territory that includes the
cities of Scranton, Wilkes-Barre and Williamsport. In 1998, PG Energy and
Honesdale collectively accounted for approximately 77% of the Company's
operating revenues.
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), PEI Power Corporation ("Power Corp") which was formed in
October, 1997, Theta Land Corporation ("Theta"), and Keystone Pipeline Services,
Inc. ("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in
various nonregulated activities. These activities include the sale of natural
gas, propane, electricity and other energy-related products and services; the
construction, maintenance and rehabilitation of utility facilities, primarily
natural gas distribution pipelines; and the sale of property for residential,
commercial and other development. In the fourth quarter of 1997, Energy Services
began marketing electricity and other products and services, under the name PG
Energy PowerPlus, principally in northeastern and central Pennsylvania. Power
Corp, an exempt wholesale electricity generator, began generating and selling
electricity in July, 1998, upon completion of modifications to its cogeneration
facility that enable it to burn both natural 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
information of the Regulated Subsidiaries that is incorporated in these
consolidated financial statements has been prepared in accordance with generally
accepted accounting principles, including the provisions of Financial Accounting
Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain
Types of Regulation," which give recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors
<PAGE>
and regulatory matters (see "Management's Discussion and Analysis of Financial
Condition 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 both 1998 and 1997 and 9% in 1996.
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 2.65% in 1998, 2.81% in 1997 and 2.60% in 1996.
When depreciable utility 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 utility
property, other than in the case of significant involuntary conversions or
extraordinary retirements.
Nonutility Property and Equipment and Depreciation. Nonutility property
and equipment is recorded at cost, including applicable construction period
interest. When nonutility property and equipment is sold or retired, the asset
and applicable accumulated depreciation are eliminated from the accounts and a
gain or loss is reflected in other income, net.
The units-of-production method is used to depreciate both Power Corp's
cogeneration facility and its methane recovery facility. The straight-line
method is used for all other nonutility property and equipment.
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 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 $15.3 million, $17.0 million and $29.6 million as of December 31, 1998,
1997 and 1996, respectively. Energy Services records its gas costs as incurred.
<PAGE>
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
recorded because of the regulatory rate practices of the PPUC, the following
deferred charges are included as "Other" regulatory assets as of December 31,
1998 and 1997:
1998 1997
------------ -----------
(Thousands of Dollars)
Other postretirement benefits $ 2,887 $ 174
Computer software costs 2,007 1,945
Early retirement plan charges 1,961 618
Rate case expense 554 356
Low income usage reduction program 470 432
Extraordinary charges due to flooding 262 348
Other 457 542
------------- ---------
Total $ 8,598 $ 4,415
============= =========
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, 1998 and 1997, are shown below:
1998 1997
--------------- ---------------
(Thousands of Dollars)
Utility plant basis differences $ 58,922 $ 55,497
Pension benefits 766 341
Deferred charges 629 602
Postretirement benefits (1,230) (700)
Operating reserves (969) (1,181)
FERC Order 636 transition costs - (394)
Other 2,805 (1,654)
------------- ------------
Net deferred income tax liability $ 60,923 $ 52,511
============= ============
<PAGE>
The provision for income taxes relative to continuing operations consists
of the following components:
1998 1997 1996
-------- ---------- ----------
(Thousands of Dollars)
Included in operating expenses:
Currently payable -
Federal .............................. $ 359 $ 3,894 $ 2,513
State ................................ 139 1,359 1,519
------- ------- -------
Total currently payable ............ 498 5,253 4,032
------- ------- -------
Deferred, net -
Federal .............................. 3,011 2,186 2,059
State ................................ 610 107 (119)
------- ------- ------
Total deferred, net ................ 3,621 2,293 1,940
------- ------- ------
Amortization of investment tax credits .. (172) (172) (172)
------- ------- ------
Total included in operating expenses 3,947 7,374 5,800
------- ------- ------
Included in other income, net:
Currently payable -
Federal .............................. 634 34 806
State ................................ 227 12 (19)
------- ------ ------
Total currently payable ............ 861 46 787
------- ------ ------
Deferred, net -
Federal .............................. (280) (6) --
State ................................ (89) -- --
------- ------ ------
Total deferred, net ................ (369) (6) --
------- ------ ------
Total included in other income, net 492 40 787
------- ------ ------
Total provision for income taxes ... $ 4,439 $ 7,414 $ 6,587
======= ======= ======
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:
<TABLE>
<CAPTION>
1998 1997 1996
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes ..................... $ 13,140 $ 20,556 $ 16,381
======== ======== ========
Tax expense at statutory federal income tax rate $ 4,599 $ 7,195 $ 5,733
Increases (reductions) in taxes resulting from -
State income taxes, net of federal income
tax benefit ............................... 577 961 898
Amortization of investment tax credits ...... (172) (172) (172)
Other, net .................................. (565) (570) 128
--------- -------- --------
Total provision for income taxes ............... $ 4,439 $ 7,414 $ 6,587
========= ======== ========
</TABLE>
<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, 1998, 1997 and 1996, respectively, follows:
<TABLE>
<CAPTION>
Income Shares Earnings
1998 (Numerator) (Denominator) Per Share
- ------------------------------------------------- ---------- ------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before subsidiary's preferred stock dividends $ 8,701
Less subsidiary's preferred stock dividends 1,191
Basic EPS on income from continuing operations ----------
available to common shareholders 7,510 9,997 $ .75
Effect of dilutive stock options - 79 -
---------- ---------- ------------
Diluted EPS on income from continuing operations
available to common shareholders after assumed
issuance of stock options $ 7,510 10,076 $ .75
========== ========== ============
Income Shares Earnings
1997 (Numerator) (Denominator) Per Share
- ------------------------------------------------- --------- -------------- --------------
(In Thousands)
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
========= ========== ==========
Income Shares Earnings
1996 (Numerator) (Denominator) Per Share
- ------------------------------------------------- ------------- ------------ -----------
(In Thousands)
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
=========== ========= ==========
</TABLE>
<PAGE>
Reporting Comprehensive Income. Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting Comprehensive Income."
However, because there were no items comprising other comprehensive income, the
adoption of FASB 130 has no effect on the Company's financial statements for the
periods ended December 31, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, FASB Statement 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. The provisions of this statement, which are effective
for fiscal quarters beginning after June 15, 1999, establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. While the
Company generally has not used derivative instruments, it expects to adopt, to
the extent necessary, the provisions of FASB Statement 133 in the third quarter
of 1999. The impact of such adoption on the Company's future financial condition
and results of operations will depend upon a number of factors, including the
extent to which the Company may use derivative instruments, and the designation
and effectiveness of such derivative hedging market risk.
(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." 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.
(3) RATE MATTERS
Rate Increases. 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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PG Energy,
on an interim basis when circumstances dictate, to reflect changes in their
purchased gas costs. The procedure includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
<PAGE>
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1996, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- -----------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
September 1, 1998 4.18 4.25 1,900,000
June 1, 1998 3.95 4.18 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
(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 year 1996 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 - Restricted Cash - Common Stock Subscribed.
The Company reinstated its Customer Stock Purchase Plan (the "Customer Plan")
effective February 4, 1998. The Customer Plan provides the residential customers
of all the Company's subsidiaries with a method of purchasing newly-issued
shares of the Company's common stock at a 5% discount from the market price. On
January 1, 1999, the Company issued 19,177 shares of its common stock for an
aggregate consideration of $446,000 with respect to payments received pursuant
to the Customer Plan during the subscription period ended December 31, 1998.
Such payments are reflected under the captions "Restricted cash - common stock
subscribed" and "Common shareholders' investment" in these consolidated
financial statements as of December 31, 1998. Under the terms of the Customer
Plan, 81,134 shares of the Company's common stock were issued during 1998 for a
total consideration of $2.0 million.
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, 544,496 shares ($12.5 million), 68,678 shares ($1.7 million) and 17,664
shares ($340,000) of common stock were issued during 1998, 1997 and 1996,
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 30,711 shares ($769,000) in 1998, 30,436 shares ($750,000) in 1997
and 10,198 shares ($195,000) in 1996.
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.
<PAGE>
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
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 1998 or 1997
and for the year ended December 31, 1996, 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:
1996
-------------------
Net income:
As reported $6.6 million
Pro forma $5.9 million
Earnings per common share:
As reported $ .51
Pro forma $ .44
<PAGE>
A summary of the stock option activity during each of the three years in
the period ended December 31, 1998, pursuant to the terms of the Plan, all of
which were Nonqualified Stock Options, is set forth below:
Number of Weighted
shares subject average exercise
to option Price
-------------- ---------------
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
Cancelled during 1998 (30,000) 20.75
Exercised during 1998 (7,000) 15.00
-------------
Outstanding at December 31, 1998 341,600 19.85
=============
Options exercisable at December 31, 1998 251,600 $ 19.53
Options available for future grant at
December 31, 1998 30,800
There were no options granted under the Plan in 1998 or 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.
The following table summarizes information regarding the stock options
outstanding at December 31, 1998, pursuant to the terms of the Plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------- --------------------------------
At Remaining At
December 31, Exercise contractual December 31, Exercise
1998 price life 1998 price
- ------------------------- ---------------- -------------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
24,600 $ 15.00 4.27 Years 24,600 $ 15.00
7,000 15.00 4.16 Years 7,000 15.00
50,000 19.50 0.93 Years 50,000 19.50
50,000 19.50 7.29 Years 50,000 19.50
150,000 20.75 7.67 Years 60,000 20.75
60,000 20.75 2.93 Years 60,000 20.75
-------- --------
341,600 251,600
======== ========
</TABLE>
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 1998, nonqualified Stock Options for
the purchase of 195,000 shares of stock were issued to certain officers and
directors. 130,000 options were granted subject to the achievement of specified
financial and operational goals for the Company during 1998 and 1999. 60,000
options were granted subject to the achievement of specified financial and
operations goals for the Company during 2001 and 2002. 5,000 options were
cancelled during 1998. In addition, since certain of these goals were not met in
1998, 65,000 of 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.
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. 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 1998, 1997
and 1996, PG Energy repurchased 4,804, 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 $444,000 in 1998, $99,000 in 1997 and $838,000 in
1996.
As of December 31, 1998, 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 2000 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 ($244,392 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. On December 1, 1998, PG Energy redeemed the remaining 115,641
outstanding shares of its 9% cumulative preferred stock at a price of $104 per
share, which included a voluntary redemption premium of $4.00 per share
($463,000 in the aggregate), plus accrued dividends.
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. During the year ended December 31, 1998,
PG Energy repurchased 800 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $53,000, pursuant to unsolicited offers from
shareholders. 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 $5,096,705.
<PAGE>
Dividend Information. The dividends on the preferred stock of PG Energy
in each of the three years in the period ended December 31, 1998, were as
follows:
Series 1998 1997 1996
- --------------- --------------- --------------- -------------
(Thousands of Dollars)
4.10% $ 200 $ 228 $ 348
5.75% 36 44 72
9.00% 955 1,040 1,310
------------ -------------- ------------
Total $ 1,191 $ 1,312 $ 1,730
============ ============== ============
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.
<PAGE>
(6) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Indebtedness of the Company:
Term loan, due 1999 ................................. $ 20,000 $ 20,000
Less current maturities ............................. (20,000) --
--------- ---------
Total long-term debt of the Company .............. -- 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 25,000
Term loan, due 2002 .............................. 25,000 25,000
Bank borrowings, at weighted average interest
rates of 5.99% and 6.11%, respectively (Note 8) 51,348 25,776
-------- -------
101,348 75,776
-------- -------
Less current maturities and sinking fund requirements (61,348) (24,776)
-------- -------
Total long-term debt of PG Energy ................ 95,000 106,000
-------- -------
Indebtedness of Power Corp:
Bank borrowings, at weighted average interest
rates of 7.12% and 7.50%, respectively (Note 8) .. 3,000 1,000
Less current maturities ............................. -- --
-------- --------
Total long-term debt of Power Corp ............... 3,000 1,000
-------- --------
Total consolidated long-term debt ................ $ 98,000 $127,000
======== ========
</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.
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).
<PAGE>
Maturities and Sinking Fund Requirements. As of December 31, 1998, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
Year Amount
1999 $ 81,348,000 (a)
2000 $ 3,000,000 (b)
2001 $ -
2002 $ 55,000,000 (c)
2003 $ -
(a) Represents the $20.0 million of borrowings outstanding as of
December 31, 1998, under the Company's Term Loan Agreement due May
31, 1999, PG Energy's 9.23% Series First Mortgage Bonds in the
principal amount of $10.0 million due September 1, 1999, and $51.3
million of PG Energy's bank borrowings outstanding as of December
31, 1998.
(b) Represents the $3.0 million of Power Corp's bank borrowings
outstanding as of December 31, 1998.
(c) Represents the $25.0 million of borrowings outstanding as of
December 31, 1998, 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, 1998, $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.
(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 $74.0 million which provide for borrowings at
interest rates generally less than prime and which mature at various times
during 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 no borrowings due on demand or within one year from issuance
outstanding as of December 31, 1998.
Information relating to the Company's bank lines of credit and borrowings
under those lines of credit is set forth below:
As of December 31,
-------------------------------
1998 1997 1996
(Thousands of Dollars)
Borrowings under lines of credit
Short-term ............................... $ 6,200 $ 2,170 $10,000
Long-term ................................ 54,348 26,776 38,721
------- ------- -------
$60,548 $28,946 $48,721
======= ======= =======
Unused lines of credit
Short-term ............................... $ 1,800 $ 5,830 $ --
Long-term ................................ 11,652 35,724 16,779
------- ------- -------
$13,452 $41,554 $16,779
======= ======= =======
Total lines of credit
Prime rate ............................... $ -- $ 1,000 $ --
Less than prime rate ..................... 74,000 69,500 65,500
------- ------- -------
$74,000 $70,500 $65,500
======= ======= =======
Short-term bank borrowings
Maximum amount outstanding ............... $ 6,300 $10,000 $10,000
Daily average amount outstanding ......... $ 2,510 $ 3,740 $ 1,392
Weighted daily average interest rate ..... 6.275% 6.343% 6.241%
Weighted average interest rate at year-end 5.804% 6.536% 6.206%
Range of interest rates .................. 5.577- 5.800- 5.875-
8.500% 8.500% 6.438%
<PAGE>
(9) POSTEMPLOYMENT BENEFITS
The Company has 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.
In addition to pension benefits, the Company provides certain health care
and life insurance benefits ("other postretirement 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.
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 addition, the PPUC Order adopted December 19, 1996,
specified that any excess or deficiency in other postretirement benefits costs
over the amount of such costs included in rates be deferred and included in a
future rate filing. As of December 31, 1998, all other postretirement benefits
costs relative to 1998 and prior years, including $1.9 million of other
postretirement benefits costs incurred during the period January 1, 1993,
through January 15, 1997, are being recovered by PG Energy in its base gas rates
which the PPUC approved effective October 17, 1998.
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 pension benefit obligations and
the obligation to provide retiree health and life insurance benefits relating to
employees of PG Energy who accepted employment with Pennsylvania-American (the
"Transferred Employees"), as well as the obligation to provide retiree health
care and life insurance benefits to 45% of PG Energy's retired employees as of
that date. In this regard, pension 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. In addition, other postretirement benefits
plan assets in an amount proportional to the actuarial present value of
accumulated plan benefits relative to the Transferred Employees and 45% of PG
Energy's retired employees as of February 16, 1996, were transferred to trusts
established by Pennsylvania-American in 1997.
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
would be at least 59 years of age or older as of March 31, 1998, and had a
minimum of five years of service as of February 28, 1998. A total of 27
employees elected to accept this offer and retire as of March 1, 1998, resulting
in the recording, as of March 1, 1998, of an additional pension liability of
$1.4 million and an additional other postretirement benefits liability of
$563,000. These liabilities, which reflect increased costs associated with the
1998 ERP, were offset by assets representing the future rate recovery of such
liabilities which was granted by the PPUC in connection with PG Energy's rate
increase that became effective October 17, 1998.
The assumptions used in determining pension and other postretirement
benefit obligations were:
1998 1997 1996
Discount rate 7.00% 7.00% 7.75%
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%
<PAGE>
The following items were the components of net pension and other
postretirement benefits costs, relative to continuing operations, including
amounts capitalized:
<TABLE>
<CAPTION>
Other
Pension Costs Postretirement Benefits
1998 1997 1996 1998 1997 1996
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Present value of benefits earned
during the year ............... $ 845 $ 622 $ 799 $ 261 $ 282 $ 253
Interest cost on projected benefit
obligations ................... 2,965 2,697 2,731 593 673 506
Expected return on plan assets ... (3,969) (3,444) (3,066) (43) (13) --
Amortization of:
Transition obligation (asset) . (215) (215) (215) 314 314 314
Prior service cost ............ 268 133 136 450 -- --
Actuarial (gain) loss ......... -- (40) -- (162) -- --
------- ------- ------- ------- ------- -------
Net benefit cost .......... $ (106) $ (247) $ 385 $ 1,413 $ 1,256 $ 1,073
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth the funded status and change in funded
status for the pension and other postretirement benefits plans:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Costs Benefits
-------------------------------------------
1998 1997 1998 1997
-------------------------------------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year .. $45,106 $39,00 $ 580 $ 169
Actual return on plan assets .................... 4,123 7,321 (2) (12)
Employer contributions .......................... 977 1,080 1,167 1,092
Participant contributions ....................... -- -- 66 30
Benefits paid ................................... (2,641) (2,295) (663) (699)
------- ------- -------- -------
Fair value of plan assets at end of year ........ 47,565 45,106 1,148 580
------- ------- -------- -------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year 42,384 35,567 9,712 6,944
Service cost .................................... 845 622 261 283
Interest cost ................................... 2,965 2,697 593 673
Participant contributions ....................... -- -- 66 30
Plan amendments ................................. 1,111 2,013 2,981 --
Actuarial (gain) loss ........................... 293 3,780 (3,622) 2,481
Benefits paid ................................... (2,641) (2,295) (663) (699)
------- ------- -------- ------
Projected benefit obligation at end of year ..... 44,957 42,384 9,328 9,712
------- ------- -------- ------
Funded status ....................................... 2,608 2,722 (8,180) (9,132)
Unrecognized net transition obligation (asset) ...... (1,508) (1,724) 4,394 4,708
Unrecognized prior service cost ..................... 4,981 4,138 2,532 --
Unrecognized net actuarial (gain) loss .............. (4,177) (4,315) (2,025) 1,391
------- ------- -------- ------
Prepaid (accrued) benefit cost at end of year ....... $ 1,904 $ 821 $ (3,279) $(3,033)
======= ======= ======== =======
</TABLE>
<PAGE>
It was also assumed that the per capita cost of covered health care
benefits would increase at an annual rate of 7 1/2% in 1999 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 has a significant effect
on the amounts reported for health care plans. To illustrate, assuming that the
health care cost trend rate changed by one percentage point each year would have
the following impact:
One Percentage Point
Increase Decrease
(Thousands of Dollars)
Effect on total service and
interest cost components $ 36 $ 34
Effect on other postretirement
benefits obligation 371 359
(10) CAPITAL EXPENDITURES
The Company estimates the cost of its 1999 capital expenditure program
will be $22.5 million, consisting of $18.4 million relative to the construction
programs of the Regulated Subsidiaries and $4.1 million with respect to the
Company's nonregulated activities. 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
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. PG Energy paid $175,000 to the party
performing the remediation in settlement of a claim for PG Energy's share of
such remediation costs. Although the conclusion by the EPA that it anticipates
no further remedial action with respect to the sites at which PG Energy operated
manufactured gas plants does not constitute a legal prohibition against further
regulatory action under CERCLA or other applicable federal or state law, the
Company does not believe that additional costs, if any, related to these
manufactured gas plant sites would be material to its financial position or
results of operations since environmental remediation costs generally are
recoverable through rates over a period of time.
<PAGE>
(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, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt (including current portion):
Company $ 20,000 $ 20,000 $ 20,000 $ 20,000
Regulated Subsidiaries 156,348 166,313 130,776 136,914
Power Corp 3,000 3,000 1,000 1,000
Preferred stock of PG Energy subject to
mandatory redemption (including
current portion) 240 244 720 734
</TABLE>
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) OPERATING SEGMENTS
During the fourth quarter of 1998, the Company adopted the reporting
provisions of FASB Statement 131, "Disclosures about Segments of an Enterprise
and Related Information." The Company has three principal operating segments:
o Regulated Energy Products and Services, primarily the purchase,
distribution and sale of natural gas in thirteen counties in
northeastern Pennsylvania by the Regulated Subsidiaries ("Energy
Products and Services - Regulated")
<PAGE>
o Nonregulated Energy Products and Services, primarily the sale of
natural gas, propane, electricity and other energy-related
products and services by Energy Services generally in a twenty-six
county area in northeastern and central Pennsylvania, and by Power
Corp. ("Energy Products and Services - Nonregulated")
o Pipeline Construction and Services, primarily the construction,
maintenance and rehabilitation of utility facilities throughout the
Eastern United States by Keystone ("Pipeline Construction and
Services").
The accounting policies of the segments are the same as those described
in Note 1 to these consolidated financial statements.
<PAGE>
1998 1997 1996
(Thousands of Dollars)
Operating revenues:
Energy products and services -
Regulated ...................... $ 158,951 $ 190,567 $ 160,594
Nonregulated ................... 37,517 26,343 13,192
Pipeline construction and services 12,215 11,210 10,733
Intercompany eliminations ......... (1,351) (74) (39)
--------- --------- ---------
Total ......................... $ 207,332 $ 228,046 $ 184,480
--------- --------- ---------
Operating income (loss):
Energy products and services -
Regulated ...................... $ 18,028 $ 21,963 $ 16,716
Nonregulated ................... 190 (373) 961
Pipeline construction and services 231 95 180
Intercompany eliminations and
corporate expenses ............. (250) (130) 403
--------- --------- ---------
Total ......................... $ 18,199 $ 21,555 $ 18,260
--------- --------- ---------
Depreciation expense:
Energy products and services -
Regulated ...................... $ 9,627 $ 8,986 $ 7,612
Nonregulated ................... 214 69 11
Pipeline construction and services 605 409 210
--------- --------- ---------
Total ......................... $ 10,446 $ 9,464 $ 7,833
--------- --------- ---------
Income tax expense (benefit):
Energy products and services -
Regulated ...................... $ 4,237 $ 7,321 $ 6,364
Nonregulated ................... 2 456 544
Pipeline construction and services 34 (40) 99
Corporate and other ............... (326) (363) (1,207)
--------- --------- ---------
Total ......................... $ 3,947 $ 7,374 $ 5,800
--------- --------- ---------
Capital expenditures:
Energy products and services -
Regulated ...................... $ 28,189 $ 30,225 $ 29,231
Nonregulated ................... 14,768 480 387
Pipeline construction and services 1,368 2,635 1,347
Corporate and other ............... 486 929 629
--------- --------- ---------
Total ......................... $ 44,811 $ 34,269 $ 31,594
--------- --------- ---------
Identifiable assets:
Energy products and services -
Regulated ...................... $ 390,797 $ 371,140 $ 354,579
Nonregulated ................... 29,352 14,130 9,522
Pipeline construction and services 8,125 7,096 5,306
Intercompany eliminations and other (2,072) (3,536) (2,597)
--------- --------- ---------
Total ......................... $ 426,202 $ 388,830 $ 366,810
--------- --------- ---------
<PAGE>
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 76,889 $ 35,871 $ 26,900 $ 67,672
Operating income (loss) 8,587 1,518 (259) 8,353
Income (loss) from continuing
operations 5,539 (391) (2,711) 5,073
Net income (loss) 5,539 (391) (2,711) 5,073
Basic earnings (loss) per share of common stock:
Continuing operations .57 (.04) (.27) .49
Net income (loss) .57 (.04) (.27) .39
Diluted earnings (loss) per share of common stock:
Continuing operations .56 (.04) (.27) .49
Net income (loss) $ .56 $ (.04) $ (.27) $ .39
QUARTER ENDED
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
(Thousands of Dollars, Except Per Share Amounts)
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
</TABLE>
(a) The total of the earnings per share for the quarters does not equal
the earnings per share for the year, as shown elsewhere in the
consolidated financial statements and supplementary data of this
report, as a result of the 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.
<PAGE>
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.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item concerning directors of the Company
has been omitted from this Form 10-K since the Company expects to file its
definitive proxy statement not later than 120 days after the close of its fiscal
year covered by this Form 10-K.
(b) Identification of Executive Officers
Information concerning the Company's executive officers is set forth in
Part I of this Form 10-K under the heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information has been omitted from this Form 10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, notes to
consolidated financial statements and reports of independent
accountants for the Company and its subsidiaries are presented in
Item 8 of this Form 10-K.
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C> <C> <C> <C>
Report of Independent Accountants on the Consolidated Financial
Statements as of December 31, 1998 and 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, 1998.......................... 35
Consolidated Balance Sheets as of December 31, 1998 and 1997....... 36
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998.................... 38
Consolidated Statements of Capitalization as of December 31,
1998 and 1997.................................................. 39
Consolidated Statements of Common Shareholders' Investment
for each of the three years in the period ended December
31, 1998....................................................... 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, 1998........................... 67
</TABLE>
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.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K - continued
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
(c) Executive Compensation Plans and Arrangements
The following listing includes the Company's executive compensation plans
and arrangements in effect as of December 31, 1998:
Exhibit
Number
10-23 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.
10-24 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.
10-25 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.
10-26 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.
10-27 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.
10-28 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.
10-29 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.
10-30 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.
10-31 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.
<PAGE>
Exhibit
Number
10-32 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.
10-33 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.
10-34 Amended Employment Agreement dated as of May 6, 1998, by and
among the Company, PG Energy and Thomas F. Karam -- filed as
Exhibit 10-4 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998, File No. 0-7812.
10-35 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.
10-36 First Amendment to the Director Deferred Compensation Plan,
amended and restated effective as of November 19, 1997 -- filed
as Exhibit 10-40 to the Company's Annual Report on Form 10-K for
1997, File No. 0-7812.
10-37 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.
10-38 First Amendment to the 1995 Directors' Stock Compensation Plan,
amended and restated effective as of November 19, 1997 -- filed
as Exhibit 10-42 to the Company's Annual Report on Form 10-K for
1997, File No. 0-7812.
10-39 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.
10-40 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.
10-41 Stock Option Grant, dated as of May 6, 1998, between the Company
and Thomas F. Karam -- filed as Exhibit 10-3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, File No. 0-7812.
10-42 Director Retirement Plan, effective as of January 1, 1999
-- filed herewith.
(d) Statements Excluded from Annual Report to Shareholders Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: March 1, 1999 By: /s/ Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 1, 1999 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.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C>
/s/ Ronald W. Simms Chairman of the Board of Directors March 1, 1999
Ronald W. Simms
/s/ William D. Davis Vice Chairman of the Board of Directors March 1, 1999
William D. Davis
/s/ Thomas F. Karam Director, President and Chief Executive Officer March 1, 1999
Thomas F. Karam
/s/ Robert J. Keating Director March 1, 1999
Robert J. Keating
/s/ John D. McCarthy Director March 1, 1999
John D. McCarthy
/s/ John D. McCarthy, Jr. Director March 1, 1999
John D. McCarthy, Jr.
/s/ Kenneth M. Pollock Director March 1, 1999
Kenneth M. Pollock
/s/ Richard A. Rose, Jr. Director March 1, 1999
Richard A. Rose, Jr.
/s/ James A. Ross Director March 1, 1999
James A. Ross
</TABLE>
<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 20,
1999 -- filed herewith.
(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.
<PAGE>
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.
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.
<PAGE>
Exhibit
Number
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 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.
10-2 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.
10-3 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.
10-4 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.
10-5 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.
10-6 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.
10-7 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.
10-8 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.
10-9 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.
Exhibit
Number
10-10 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.
10-11 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.
10-12 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.
10-13 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.
10-14 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.
10-15 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.
10-16 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.
10-17 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.
10-18 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.
10-19 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.
<PAGE>
Exhibit
Number
10-20 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.
10-21 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.
10-22 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.
10-23 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
10-24 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.
10-25 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.
10-26 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.
10-27 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.
10-28 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.
10-29 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.
10-30 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.
<PAGE>
Exhibit
Number
10-31 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.
10-32 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.
10-33 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.
10-34 Amended Employment Agreement dated as of May 6, 1998, by and
among the Company, PG Energy and Thomas F. Karam -- filed as
Exhibit 10-4 to the Company's Quarterly report on Form 10-Q
for the quarter ended June 30, 1998, File No. 0-7812.
10-35 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.
10-36 First Amendment to the Director Deferred Compensation Plan,
amended and restated effective as of November 19, 1997 --
filed as Exhibit 10-40 to the Company's Annual Report on Form
10-K for 1997, File No. 0-7812.
10-37 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.
10-38 First Amendment to the 1995 Directors' Stock Compensation
Plan, amended and restated effective as of November 19, 1997
-- filed as Exhibit 10-42 to the Company's Annual Report on
Form 10-K for 1997, File No. 0-7812.
10-39 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.
10-40 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.
10-41 Stock Option Grant, dated as of May 6, 1998, between the
Company and Thomas F. Karam -- filed as Exhibit 10-3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, File No. 0-7812.
10-42 Director Retirement Plan, effective as of January 1, 1999 --
filed herewith.
<PAGE>
(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,
1998 and 1997, Consolidated Financial Statements --
filed herewith.
23-2 Consent of Independent Accountants relative to December 31,
1996, Consolidated Financial Statements -- filed herewith.
(27) Financial Data Schedule:
27-1 Financial Data Schedule -- filed herewith.
<PAGE>
<TABLE>
<CAPTION>
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
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> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1998 .......... $1,340 $2,174 $ -- $2,049(a) $1,465
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
Shown as operating reserves on the consolidated balance sheets:
Insurance -
Year ended December 31, 1998........... $2,825 $1,050 $ -- $1,039(b) $2,836
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
</TABLE>
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
PENNSYLVANIA ENTERPRISES, INC.
B Y L A W S
-----------
ARTICLE I
STOCKHOLDERS
Section 1. Place of Holding Meetings. Meetings of stockholders
shall be held within the State of Pennsylvania, and, unless otherwise determined
by the Board of Directors, all meetings of the stockholders shall be held at the
office of the Company.
Section 2. Voting.
(a) Voting Rights of Stockholders. - Unless otherwise provided
in the articles, every stockholder of the Company shall be
entitled to one vote for every share standing in the name
of the stockholder on the books of the Company.
(b) Voting and Other Action by Proxy.
(1) Every stockholder entitled to vote at a meeting of
stockholders may authorize another person to act for
the stockholder by proxy.
(2) The presence of, or vote or other action at a
meeting of stockholders by a proxy of a stockholder
shall constitute the presence of, or vote or action
by the stockholder.
(3) Where two or more proxies of a stockholder are
present, the Company shall, unless otherwise
expressly provided in the proxy, accept, as the vote
of all shares represented thereby the vote cast by a
majority of them and, if a majority of the proxies
cannot agree whether the shares represented shall be
voted or upon the manner of voting the shares, the
voting of the shares shall be divided equally among
those persons.
(c) Execution and Filing. - Every proxy shall be executed in
writing by the stockholder or by the duly authorized
attorney-in-fact of stockholder and filed with the
Secretary of the Company. A telegram, telex, cablegram,
datagram or similar transmission from a stockholder or
attorney-in-fact, or a photographic, facsimile or similar
reproduction of a writing executed by a stockholder or
attorney-in-fact:
(1) may be treated as properly executed for purposes of
this subsection; and
(2) shall be so treated if it sets forth a confidential
and unique identification number or other mark
furnished by the Company to the stockholder for the
purposes of a particular meeting or transaction.
(d) Revocation. A proxy, unless coupled with an interest, shall
be revocable at will, notwithstanding any other agreement
or any provision in the proxy to the contrary, but the
revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the
Company. An unrevoked proxy shall not be valid after three
years from the date of its execution unless a longer time
is expressly provided therein.
A proxy shall not be revoked by the death or incapacity of
the maker unless, before the vote is counted or the
authority is exercised, written notice of the death or
incapacity is given to the Secretary of the Company.
(e) Expenses. The Company shall pay the reasonable expenses of
solicitation of votes, proxies or consents of stockholders
by or on behalf of the Board of Directors or its nominees
for election to the Board, including solicitation by
professional proxy solicitors and otherwise.
(f) Voting by Fiduciaries and Pledgees. Shares of the Company
standing in the name of a trustee or other fiduciary and
shares held by an assignee for the benefit of creditors or
by a receiver may be voted by the trustee, fiduciary,
assignee or receiver. A stockholder whose shares are
pledged shall be entitled to vote the shares until the
shares have been transferred into the name of the pledgee,
or a nominee of the pledgee, but nothing in this section
shall affect the validity of a proxy given to a pledgee or
nominee.
(g) Voting by Joint Holders of Shares. Where shares of the
Company are held jointly or as tenants in common by two or
more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in
person or by proxy, all of the shares standing in
the names of such persons shall be deemed to be
represented for the purpose of determining a quorum
and the Company shall accept as the vote of all the
shares the vote cast by a joint owner or a majority
of them; and
(2) if the persons are equally divided upon whether the
shares held by them shall be voted or upon the
manner of voting the shares, the voting of the
shares shall be divided equally among the persons
without prejudice to the rights of the joint owners
or the beneficial owners thereof among themselves.
(3) However, if there has been filed with the Secretary
of the Company a copy, certified by an attorney at
law to be correct, of the relevant portions of the
agreement under which the shares are held or the
instrument by which the trust or estate was created
or the order of court appointing them or of an order
of court directing the voting of the shares, the
persons specified as having such voting power in the
document latest in date of operative effect so
filed, and only those persons, shall be entitled to
vote the shares but only in accordance therewith.
(h) Voting by Corporations. Any corporation that is a
stockholder of the Company may vote at meetings of
stockholders of this Company by any of its officers or
agents, or by proxy appointed by any officer or agent,
unless some other person, by resolution of the Board of
Directors of the other corporation or a provision of its
articles or bylaws, a copy of which resolution or provision
certified to be correct by one of its officers has been
filed with the Secretary of this Company, is appointed its
general or special proxy in which case that person shall be
entitled to vote the shares.
Section 3. Quorum. Any number of stockholders together holding at
least a majority of the stock issued and outstanding of the class or classes
entitled to vote, who shall be present in person or represented by proxy at any
meeting (other than an adjourned meeting as specified in Article I, Section 8,
herein) duly called, shall constitute a quorum for the transaction of business,
except as may be otherwise provided by law. The stockholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Section 4. Adjournment of Meetings. If less than a quorum shall be
in attendance at the time for which the meeting shall have been called, the
meeting may be adjourned from time to time by a majority vote of the
stockholders present or represented, without any notice other than an
announcement at the meeting, until a quorum shall attend. Any meeting at which a
quorum is present may also be adjourned, in like manner, for such time, or upon
such call, as may be determined by vote.
Section 5. Annual Election of Directors. The Board of Directors
may fix and designate the date and time of the Annual Meeting of Stockholders
for the election of directors and the transaction of other business. If no such
date and time is fixed and designated by the Board, the meeting for any calendar
year shall be held on the second Wednesday in May at an hour to be named in the
notice. At each Annual Meeting, the stockholders entitled to vote shall, as
provided in Section 2 of this Article, by ballot, elect a Board of Directors,
and they may transact such other corporate business as shall come before the
meeting. The candidates receiving the highest number of votes from each class or
group of classes, if any, entitled to elect directors separately up to the
number of directors to be elected by the class or group of classes shall be
elected. If at any meeting of stockholders, directors of more than one class are
to be elected, each class of directors shall be elected in a separate election.
Section 6: Special Meetings. How Called. Special meetings of the
stockholders for any purpose or purposes, may be called at any time by the
Board, upon written request delivered to the Secretary of the Company. In
addition, an "interested stockholder" (as defined in section 2553 of the
Pennsylvania Business Corporation Law as it may from time to time be amended)
may, upon written request delivered to the Secretary of the Company, call a
special meeting for the purpose of approving a business combination under either
subsection (3) or (4) of section 2555. Any request for a special meeting of
stockholders shall state the purpose or purposes of the proposed meeting. Upon
receipt of any such request, it shall be the duty of the Secretary to give
notice, in a manner consistent with these Bylaws, of a special meeting of the
stockholders to be held at such time as the Secretary may fix, which time may
not be, if the meeting is called pursuant to a statutory right, more than sixty
(60) days after receipt of the request. If the Secretary shall neglect or refuse
to fix the date of the meeting and give notice thereof, the person or persons
calling the meeting may do so. Business transacted at any special meeting shall
be confined to the business stated in the notice.
Section 7. Manner of Voting at Stockholders' Meetings. At all
meetings of stockholders, all questions, except the question of an amendment to
the Bylaws, and the election of directors, and all such other questions, the
manner of deciding which is especially regulated by statute, shall be determined
by a majority vote of the stockholders entitled to vote present in person or
represented by proxy; provided, however, that any qualified voter may demand a
stock vote, and in that case, such stock vote shall immediately be taken.
Section 8. Notice of Stockholders' Meetings. Written notice of
every meeting of the stockholders stating the place, the date and hour thereof
and the matters to be acted on at such meeting, shall be given in a manner
consistent with the applicable provisions of section 14 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder, or
any successor act or regulation (the "Exchange Act"), by, or at the direction
of, the Secretary of the Company or, in the absence of the Secretary of the
Company any Assistant Secretary of the Company, at least twenty (20) days prior
to the day named for a meeting, to each stockholder entitled to vote thereat on
the date fixed as a record date in accordance with these Bylaws or, if no record
date be fixed, then of record at the close of business on the 50th day next
preceding the day of the meeting, at such address as appears on the transfer
books of the Company. Any notice of any meeting of stockholders shall state
that, for purposes of any meeting that has been previously adjourned for one or
more periods aggregating at least fifteen (15) days because of an absence of a
quorum, the stockholders entitled to vote who attend such a meeting, although
less than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall
nevertheless constitute a quorum for the purpose of acting upon any matter set
forth in the original notice of the meeting that was so adjourned. Notice or
other communications need not be sent to any stockholder with whom the Company
has been unable to communicate for more than twenty-four (24) consecutive months
because communications to the stockholder are returned unclaimed or the
stockholder has otherwise failed to provide the Company with a current address.
Whenever the stockholder provides the Company with a current address, the
Company shall commence sending notices and other communications to the
stockholder in the same manner as to the other stockholders.
Section 9. Nominations of Directors. (Effective immediately after
the 1995 Annual Meeting) Nominees for election to the Board shall be selected by
the Board or a committee of the Board to which the Board has delegated the
authority to make such selections pursuant to these Bylaws. The Board or such
committee, as the case may be, will consider written recommendations from
stockholders for nominees for election to the Board provided any such
recommendation, together with (i) such information regarding each nominee as
would be required to be included in a proxy statement filed pursuant to the
Exchange Act, (ii) a description of any arrangements or understandings among the
recommending stockholder and each nominee and any other person with respect to
such nomination, and (iii) the consent of each nominee to serve as a director of
the Company if so elected, is received by the Secretary of the Company, in the
case of an annual meeting of stockholders, not later than the date specified in
the most recent proxy statement of the Company as the date by which stockholder
proposals for consideration at the next annual meeting of stockholders must be
received, and, in the case of a special meeting of stockholders, not later than
the tenth day after the giving of notice of such meeting. Only persons duly
nominated for election to the Board in accordance with this Section 9 and
persons with respect to whose nominations proxies have been solicited pursuant
to a proxy statement filed pursuant to the Exchange Act shall be eligible for
election to the Board.
ARTICLE II
DIRECTORS
Section 1. First Meeting. The newly elected directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the Annual Meeting of
Stockholders, or the time and place of such meeting may be fixed by consent in
writing of all the directors.
Section 2. Election of Officers. At such meeting the directors
shall elect a President, one or more Vice Presidents, a Treasurer and a
Secretary, who need not be directors. The directors may also elect such other
officers as provided in Article III, Section 1. of these Bylaws. Such officers
shall hold office until the next annual election of officers and until their
successors are elected and qualify, unless removed by the Board of Directors as
provided in Section 8 of Article III of these Bylaws.
Section 3. Regular Meetings. Regular meetings of the
directors may be held without notice at such places and
times as shall be determined from time to time by resolution of the directors.
Section 4. Special Meetings. How called. Notice. Special
meetings of the Board may be called by either the President, the Secretary,
the Chairman of the Executive Committee or by the Secretary pursuant to the
written request of any two directors, upon forty-eight (48) hours' notice
afforded by either telephone, telegraph, facsimile or personal notice, or
upon three (3) days' notice afforded by mail.
Section 4A. Chairman of the Board of Directors. The Chairman of
the Board of Directors shall be a member of the Board of Directors. He shall
preside as Chairman at all meetings of the stockholders and of the Board of
Directors, and shall perform such other duties as are specified in these Bylaws
or as are usually performed by a Chairman of the Board of Directors, or as from
time to time shall be assigned to him by the Board of Directors. In the absence
of, or at the request of, the Chairman of the Board of Directors, the Board of
Directors is authorized to designate a Chairman for the Annual Meeting or
special meetings.
Section 5. Number and Quorum. The number of directors shall be not
less than three (3) nor more than fifteen (15). Within such limits, the number
of directors may be increased or decreased by the Board of Directors from time
to time without a vote of the stockholders. The directors shall be elected by
the stockholders, at the Annual Meeting of stockholders, in each year, to hold
office for the term of one year and until their successors are chosen. A
majority of the directors in office shall constitute a quorum for the
transaction of business. Directors need not be stockholders.
Section 6. Place of Meeting. The directors may hold their meetings
and have one or more offices, and keep the books of the Company, outside the
State of Pennsylvania, at any office or offices of the Company, or at any other
place, as they may from time to time by resolution determine.
Section 7. Powers of Directors. The Board of Directors shall have
all the necessary powers for the management of the business of the Company, and
subject to the restrictions imposed by law, or by these Bylaws, may exercise all
the powers of the Corporation.
Section 8. Vacancies. Vacancies occurring in the membership of the
Board of Directors, from whatever cause arising, shall be filled by a majority
vote of the remaining directors, and in case of any increase in the number of
directors, the additional directors authorized by such increase shall be elected
by a majority vote of the directors in office, although less than a quorum.
Section 9. Removal of Directors. Any one or more of the directors
may be removed, either with or without cause, at any time, by a majority vote of
the stockholders entitled to vote at any regular or special meeting. The
successor or successors of any director or directors so removed shall be elected
by the remaining directors.
Section 10. Compensation of Directors. Directors and members of
any committee of the Board of Directors, except full-time officers and employees
of the Company, shall be entitled to such reasonable compensation for their
services as directors and members of any such committee as shall be fixed from
time to time by resolution of the Board of Directors, and shall also be entitled
to reimbursement for any reasonable expenses incurred in attending such
meetings. The compensation of directors may be paid on such basis as is
determined in the resolution of the Board of Directors.
Section 11. Executive Committee and Other Committees. How
Appointed. The directors may by a resolution adopted by a majority of the
directors in office appoint from their number an Executive Committee of three or
more members and other Committees of one or more members. The Committees may
make their own rules of procedure and shall meet where and as provided by such
rules, or by a resolution of the directors. A majority shall constitute a
quorum, but in every case the affirmative vote of a majority of all the members
of the committee shall be necessary to the adoption of any resolution.
Section 12. Executive Committee. Powers. During the intervals
between the meetings of the directors, the Executive Committee shall have and
may exercise all the powers of the directors in the management of the business
and affairs of the Company, including power to authorize the seal of the Company
to be affixed to all papers which may require it, in such manner as such
committee shall deem best for the interests of the Company, in all cases in
which specific directions shall not have been given by the directors. Neither
the Executive Committee or any other committee of the Board of Directors created
by these Bylaws nor the Board of Directors shall have any power or authority as
to the following:
(i) the submission to stockholders of any action requiring
approval of stockholders under the Pennsylvania Business Corporation Law.
(ii) the creation or filling of vacancies in the Board of
Directors.
(iii) the adoption, amendment or repeal of the Bylaws.
(iv) the amendment or repeal of any resolution of the Board that
by its terms is amendable or repealable only by the Board.
(v) action on matters committed by the Bylaws or resolution of
the Board of Directors to another committee of the Board.
Section 13. Meeting by Telephonic Conference. Any meeting of the
Board of Directors or of a committee thereof, including the Executive Committee,
may be held in which any one or more or all of the directors or participants may
participate as if present in person, by means of conference telephone or similar
communication equipment in a manner by which all persons participating in the
meeting can hear each other.
Section 14. Substitute Committee Members. The Board may designate
one or more directors as alternate members of any committee who may replace any
absent or disqualified member at any meeting of the committee or for the
purposes of any written action by the committee. In the absence or
disqualification of a member and alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another director to act at the meeting in the place of the absent or
disqualified member.
Section 15. Personal Liability of Directors. To the fullest extent
that the laws of the Commonwealth of Pennsylvania, as now in effect or as
hereafter amended, permit elimination or limitation of the liability of
directors, no director of the Company shall be personally liable for monetary
damages as such for any action taken, or any failure to take any action, as a
director. Further, any amendment or repeal of this Section 15 which has the
effect of increasing director liability shall operate prospectively only, and
shall not affect any action taken, or any failure to act, prior to its adoption.
Section 16. Action by Consent of Directors. Any action required or
permitted to be taken at a meeting of the Board or of a committee of the Board
may be taken without a meeting if, prior or subsequent to the action, a consent
or consents in writing setting forth the action so taken shall be signed by all
of the directors in office or the members of the committee, as the case may be,
and filed with the Secretary of the Company.
ARTICLE III
OFFICERS
Section 1. Required Officers of the Company. The officers of the
Company shall be a President, one or more Vice Presidents, a Secretary and a
Treasurer, one or more Assistant Secretaries, and one or more Assistant
Treasurers. One person may hold any two offices except the office of President
and Vice President. The Board of Directors may appoint such other officers as
from time to time they may determine. All officers of the Company, as between
themselves and the Company, shall have such authority and perform such duties in
the management of the Company as may be provided by or pursuant to the Board of
Directors, or as may be determined by or pursuant to these Bylaws.
Section 2. President. The President shall be the Chief Executive
Officer of the Company and shall have general management and control of the
business and affairs of the Company, subject to the direction of the Board of
Directors, and he shall generally do and perform all acts incident to the office
of the President, or which are authorized or required by law. The President
shall have power to call special meetings of the stockholders or directors for
any purpose or purposes, and when authorized by the Board of Directors or these
Bylaws shall make and sign contracts and agreements in the name of and on behalf
of the Company.
Section 3. Vice Presidents. Each Vice President shall have such
powers and shall perform such duties as may be assigned to him by the President
or the Board of Directors. In case of the absence or disability of the
President, the duties of the office of the President shall be performed by the
Vice Presidents in the order of priority established by the Board, and unless
and until the Board of Directors shall otherwise direct.
Section 4. Secretary. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors, and all other
notices required by law or by these Bylaws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the President, or by the directors or stockholders upon
whose request the meeting is called, as provided in these Bylaws. He shall
record all the proceedings of the meetings of the stockholders and of the
directors in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him by the directors or the President. He shall
have custody of the seal of the Company and shall affix the same to all
instruments requiring it, when authorized by the directors or the President, and
attest the same.
Section 5. Assistant Secretary. The Board of Directors may appoint
an Assistant Secretary or more than one Assistant Secretary. Each Assistant
Secretary shall have such powers and shall perform such duties as may be
assigned to him by the Board of Directors or the President.
Section 6. Treasurer. The Treasurer shall have the custody of all
funds, securities, evidences of indebtedness and other valuable documents of the
Company; he shall receive and give or cause to be given receipts and
acquittances for moneys paid in on account of the Company and shall pay out of
the fund on hand all just debts of the Company, of whatever nature upon maturity
of the same; he shall enter or cause to be entered in books of the Company to be
kept for that purpose full and accurate accounts of all moneys received and paid
out on account of the Company, and he shall perform all the other duties
incident to the office of the Treasurer. If the Board of Directors so determine,
he shall give the Company a bond for the faithful discharge of his duties in
such amount and with such security as the Board shall prescribe.
Section 7. Assistant Treasurer. The Board of Directors may appoint
an Assistant Treasurer or more than one Assistant Treasurer. Each Assistant
Treasurer shall have such powers and shall perform such duties as may be
assigned to him by the Board of Directors or the President.
Section 8. Removal of Officers and Agents. Any officer or agent of
the Company may be removed by the Board of Directors with or without cause. The
removal shall be without prejudice to the contract rights, if any, of any person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
<PAGE>
ARTICLE IV
CAPITAL STOCK
Section 1. Issue of Certificates of Stock. Certificates of the
shares of the capital stock of the Company shall be in such form as shall be
approved by the Board of Directors. Each stockholder shall be entitled to a
certificate of his stock under the seal of the Company, executed, by facsimile
or otherwise, by or on behalf of the Company, by the President or a Vice
President, and also by the Treasurer or an Assistant Treasurer. In case any
officer who has signed or whose facsimile signature has been placed upon any
share certificate shall have ceased to be such officer, because of death,
resignation or otherwise, before the certificate is issued, it may be issued by
the Company with the same effect as if the officer had not ceased to be such at
the time of issue. No stock certificate shall be valid unless countersigned and
registered in such manner, if any, as the directors shall by resolution
prescribe.
Section 2. Transfer of Shares. The shares of stock of the Company
shall be transferable upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the Company by the delivery thereof
to the person in charge of the stock and transfer books and ledgers, or to such
other person as the directors may designate, by whom they shall be cancelled,
and new certificates shall thereupon be issued. A record shall be made of each
transfer, and a duplicate thereof mailed to the Pennsylvania office of the
Company.
Section 3. Dividends. The directors may declare dividends from the
surplus or net profits arising from the business of the Company as and when they
deem expedient. Before declaring any dividend, there may be reserved out of the
accumulated profits such sum or sums as the directors from time to time, in
their discretion, think proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends, or for such other purposes as the
directors shall think conducive to the interest of the Company.
Section 4. Lost Certificates. If the owner of a share certificate
claims that it has been lost, destroyed, or wrongfully taken, the Company shall
issue a new certificate in place of the original certificate if the owner so
requests before the Company has notice that the certificate has been acquired by
a bona fide purchaser and if the owner has filed with the Company an indemnity
bond and an affidavit of facts satisfactory to the Board or its designated
agent, and has complied with such other reasonable requirements, if any, as the
Board may deem appropriate.
Section 5. Rules as to Issue of Certificates. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock of the
Company.
Each and every person accepting from the Company certificates of
stock therein shall furnish the Corporation a written statement of his or her
residence or post office address.
Section 6. Holder of Record to be deemed Holder in Fact. The
Company shall be entitled to treat the holder of record of any share or shares
of stock as the holder in fact thereof, and accordingly shall not be bound to
recognize any equitable or other claim to, or interest in, such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, save as expressly provided by law or by Section 7 of this
Article.
Section 7. Shares of Stock Held for Account of Another. The Board
of Directors is authorized to adopt a procedure whereby a stockholder of the
Corporation may certify in writing that all or part of the shares of stock
registered in the name of the stockholder are held for account of a specified
person or persons. The resolution of the Board of Directors that adopts this
certification procedure may include the following:
(1) The class of stockholder who may qualify.
(2) The purpose or purposes for which the certification may be
made.
(3) The form of certification and the information that it should
contain.
(4) The time after the record date within which the
certification must be received by the Corporation, if the
certification concerns a record date.
(5) Any other provisions regarding the certification procedure
that the Board of Directors deems necessary or desirable.
On receipt by the Corporation of a certification that complies
with the procedure adopted by the Board of Directors, the person specified in
the certification is deemed, for the purpose set forth in the certification, to
be the holder of record of the shares of stock indicated in the certification in
place of the stockholder making the certification.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Company shall
end on the 31st day of December of each year.
Section 2. Checks, etc. All checks, drafts or orders for the
payment of money shall be signed by such officer(s) or agent(s) as the directors
may designate.
Section 3. Notice and Waiver of Notice. Except as provided in
Article 1 Section 8 of these Bylaws, whenever, under the provisions of the
Pennsylvania Business Corporation Law or of the Articles or of these Bylaws or
otherwise, written notice is required to be given to any person, it may be given
to such person either personally or by sending a copy thereof by first class or
express mail, postage prepaid, telegram (with messenger service specified),
telex, TWX (with answerback received), courier service (with charges prepaid) or
facsimile transmission to his or her address (or to his or her telex, TWX, or
facsimile number) appearing on the books of the Company or, in the case of
directors, supplied by the director to the Company for the purpose of notice. If
the notice is sent by mail, telegraph or courier service, it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person. A notice given by telex or TWX shall be deemed to have been given when
dispatched. If mailed at least twenty (20) days prior to the meeting or
corporate action to be taken, notice may be sent by any class of postpaid mail
(including bulk mail). Whenever any notice is required to be given by the
Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
nor the purpose of a meeting need be specified in the waiver of notice of the
meeting. Attendance of a person at any meeting shall constitute a waiver of
notice of the meeting, except where any person attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting was
not lawfully called or convened, and the person so objects at the beginning of
the meeting.
Section 4. Inspection of Books. Every stockholder shall, upon
written verified demand stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business for any
proper purpose, the share register books and records of account, and records of
the proceedings of the incorporators, stockholders and directors and to make
copies or extracts therefrom. A proper purpose shall mean a purpose reasonably
related to the interest of the person as a stockholder. In every instance where
an attorney or other agent is the person who seeks the right of inspection, the
demand shall be accompanied by a verified power of attorney or other writing
that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand shall be directed to the Company at its registered
office in the Commonwealth of Pennsylvania or at its principal place of business
wherever situated.
Section 5. Record date. The Board of Directors may fix a time
prior to the date of any meeting of stockholders as a record date for the
determination of the stockholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of stockholders. Only
stockholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Company after any record date fixed
as provided in this subsection. The Board of Directors may similarly fix a
record date for the determination of stockholders of record for any other
purpose. When a determination of stockholders for a record date has been made as
provided in this Section for the purpose of a meeting, such determination shall
apply to any adjournments thereof unless the Board fixes a new record date for
the adjourned meeting.
ARTICLE VI
AMENDMENT AND REPEAL
Section 1. Amendment and Repeal of Bylaws. The stockholders by the
affirmative vote of the holders of a majority of the stock issued and
outstanding of the class or classes entitled to vote, may at any meeting,
provided the substance of the proposed amendment shall have been stated in the
notice of the meeting, amend, alter or repeal any of these Bylaws.
Section 2. Amendments By Directors. Except as prohibited by
law, the directors, by the affirmative vote of a majority of the Board,
may at any meeting amend, alter or repeal these Bylaws, in whole or in part.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Except as prohibited by law,
every director and officer of the Company shall be entitled as of right to be
indemnified by the Company against reasonable expense and any liability paid or
incurred by such person in connection with any actual or threatened claim,
action, suit or proceeding, civil, criminal, administrative, investigative or
other, whether brought by or in the right of the Company or otherwise, in which
he or she may be involved, as a party or otherwise, by reason of such person
being or having been a director or officer of the Company or by reason of the
fact that such person is or was serving at the request of the Company as a
director, officer, employee, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or other
entity (such claim, action, suit or proceeding hereinafter being referred to as
"Action"). Such indemnification shall include the right to have expenses
incurred by such person in connection with an Action paid in advance by the
Company prior to final disposition of such Action, subject to such conditions as
may be prescribed by law. Persons who are not directors or officers of the
Company may be similarly indemnified in respect of service to the Company or to
another such entity at the request of the Company to the extent the Board of
Directors at any time designates such person as entitled to the benefits of this
Section. As used herein, "expense" shall include fees and expenses of counsel
selected by such person; and "liability" shall include amounts of judgments,
excise taxes, fines and penalties, and amounts paid in settlement.
Section 2. Right of Claimant to Bring Suit. If a claim for
indemnification by any person eligible to be indemnified under Section 1 is not
paid in full by the Company within 30 days after a written claim has been
received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim, and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim. It shall be a defense to any such suit
that the conduct of the claimant was such that under Pennsylvania law the
Company would be prohibited from indemnifying the claimant for the amount
claimed, but the burden of proving such defense shall be on the Company. Neither
the failure of the Company (including its Board of Directors, independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the claimant is proper in the
circumstances because the conduct of the claimant was not such that
indemnification would be prohibited by law, nor an actual determination by the
Company (including its Board of Directors, independent legal counsel or its
stockholders) that the conduct of the claimant was such that indemnification
would be prohibited by law, shall be a defense to the suit or create a
presumption that the conduct of the claimant was such that indemnification would
be prohibited by law.
Section 3. Insurance and Funding. The Company may purchase and
maintain insurance to protect itself and any person eligible to be indemnified
hereunder against any liability or expense asserted or incurred by such person
in connection with any Action, whether or not the Company would have the power
to indemnify such persons against such liability or expense by law or under the
provisions of this Article VII. The Company may create a trust fund, grant a
security interest, cause a letter of credit to be issued or use other means
(whether or not similar to the foregoing) to ensure the payment of such sums as
may become necessary to effect indemnification as provided herein.
Section 4. Non-exclusivity; Nature and Extent of Rights. The right
of indemnification provided for herein (1) shall not be deemed exclusive of any
other rights, whether now existing or hereafter created, to which those seeking
indemnification hereunder may be entitled under any agreement, by-law or charter
provision, vote of stockholders or directors or otherwise, (2) shall be deemed
to create contractual rights in favor of persons entitled to indemnification
hereunder, (3) shall continue as to persons who have ceased to have the status
pursuant to which they were entitled or were designated as entitled to
indemnification hereunder and shall inure to the benefit of the heirs and legal
representatives of persons entitled to indemnification hereunder and (4) shall
be applicable to Actions commenced after the adoption hereof, whether arising
from acts or omissions occurring before or after the adoption hereof. The right
of indemnification provided for herein may not be amended, modified or repealed
so as to limit in any way the indemnification provided for herein with respect
to any acts or omissions occurring prior to the effective date of any such
amendment, modification or repeal.
ARTICLE VIII
EXCEPTIONS TO PENNSYLVANIA BUSINESS CORPORATION LAW
Section 1. Control Share. Pursuant to Section 2561(b)(2), the
provisions of Subchapter G - Control Share Acquisitions of Chapter 25 of the
Pennsylvania Business Corporation Law shall not be applicable to PEI.
Section 2. Disgorgement of Profits. Pursuant to Section 2571(b)
(2), the provisions of Subchapter H - Disgorgement by Certain Controlling
Shareholders Following Attempts to Acquire Control of Chapter
DATED: January 20, 1999
PENNSYLVANIA ENTERPRISES, INC.
DIRECTOR RETIREMENT PLAN
(Adopted effective as of January 1, 1999)
Pennsylvania Enterprises, Inc. (the "Company") establishes this Director
Retirement Plan (the "Plan") to provide retirement benefits for members of its
Board of Directors (the "Board of Directors") and/or the Board of Directors of
PG Energy, Inc. (the "PGE Board" and "PGE," respectively) who are not employees
of the Company or any of its subsidiaries, in order to provide appropriate
compensation for their services, to help assure the Company's and PGE's
continued ability to attract and retain individuals with superior talent,
achievement and experience to serve as directors, and to help promote continued
loyalty and goodwill among directors after retirement from the Board.
Section 1. Eligibility: Each director of the Company and/or PGE
(including each current director but excluding directors who retire prior to the
date set forth in Section 16) who is not an employee of the Company or any of
its subsidiaries who retires from the Board of Directors and/or the PGE Board
after attaining age 60 and completion of five or more years of service on the
Board of Directors and/or the PGE Board shall be entitled to receive retirement
benefits under this Plan. Notwithstanding the foregoing, if a director accepts a
position with any competing institution (as determined by the Board of Directors
in its sole discretion) during or after the director's term on the Board of
Directors and/or the PGE Board without approval of the Board of Directors, then
such director shall forfeit any interest or right to benefits under this Plan.
In addition, if the Board of Directors determines (in its sole discretion) that
a retired director has acted against the best interests of the Company or PGE,
such retired director shall forfeit any interest or right to benefits under this
Plan. As used in this Plan, "retirement" means termination of service as a
director under circumstances which entitle the director to a benefit under this
Plan.
Section 2. Retainer: The annual benefit payable pursuant to this Plan
shall be determined as a percentage of the aggregate of the annual retainers for
directors in effect at the Company and PGE on the date of the director's
retirement (or, if the director served on the Board of only one of such
companies, the annual retainer in effect at such company) (the "Retainer").
Section 3. Annual Benefit: A director's annual retirement benefit shall
be equal to 50% of the Retainer if he retires after completion of five years of
service, increasing 5% per year to a maximum of 75% of the Retainer if the
director retires after ten years of service.
Section 4. Service: Length of service shall be measured from the date a
director is elected to the Board of Directors or the PGE Board (or, if the
director is or was an employee of the Company or any of its subsidiaries at the
time of election to the Board, ceases to be an employee), and shall include
service before the effective date of the Plan. Whole years only shall be used.
(Whole years shall be measured in 12-month periods beginning on the date that
the director is elected to the Board of Directors or the PGE Board or ceases to
be an employee, as the case may be.) In the event service is interrupted, all
complete months of service shall be aggregated to determine the number of whole
years of service. Service shall not include periods of service as a director
with a subsidiary or affiliated company unless the director was at the same time
serving as a director of the Company and/or PGE, nor shall service include
periods during which the director was an employee. Service on the Boards of both
the Company and PGE in the same year shall entitle the director to credit for
only one year of service.
Section 5. Terms of Payment: The annual benefit as determined under
Section 3 will be payable for a term equal to the number of whole years of
service determined under Section 4, provided such term shall not exceed ten
years. The annual benefit will be paid on a quarterly basis starting with the
first day of the calendar quarter next following the day on which the director
retires from the Board of Directors or the PGE Board (or, if the director is
then serving on the Board of both the Company and PGE, both such Boards).
Section 6. Event of Death or Disability: If a director dies prior to
retirement or prior to the completion of the payments to which he is entitled
under Section 5, no benefits or further payments shall be due under this Plan.
If a director's service on the Board of Directors and/or the PGE Board ceases
due to the director's disability (as determined by the Board of Directors in its
discretion) after the effective date of the Plan and after the director has
served five or more years as a director, the director shall be entitled to
benefits under the Plan commencing with the first day of the quarter next
following the director's cessation of service (based on his actual years of
service) even if the director's service ceased before he had attained age 60
and/or before January 1, 2000.
Section 7. Change of Control: In the event of a Change of Control (as
defined below), (i) a director who has previously retired with an entitlement to
benefits under the Plan shall be paid a cash lump sum equal to the remaining
benefits that would be payable to the director under Section 5 if the director
had lived to receive all benefits payable to such director under this Plan, and
(ii) a director then serving on the Board of Directors and/or the PGE Board
shall be paid a cash lump sum equal to the benefits that would be payable to him
under Section 5 as if he had retired on the date of the Change of Control and
lived to receive all benefits payable to him under this Plan. If a director has
less than five years of service (as determined pursuant to Section 4) at the
time of a Change of Control, such director shall be paid a cash lump sum benefit
equal to the product of 10% of the Retainer for each of his whole years of
service multiplied by the number of such years of service. For purposes of this
Section 7, payments shall be made even if the Change of Control occurs before
the director attains age 60 and/or before January 1, 2000. For purposes of this
Plan, 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 of Directors of the
Company; or
(ii) the date on which one-third or more of the
members of the Board of Directors of the Company shall consist of
persons other than Current Directors (for these purposes, a "Current
Director" shall mean any member of the Board of Directors 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 of Directors); 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 or 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 corporation
issuing cash or securities in the merger or consolidation would be
entitled in the election of directors, or (B) where the members of the
Board of Directors, 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.
Section 8. Director Retirement Policy: Each director who begins service
on the Board of Directors or the PGE Board after January 1, 1999 shall be
required to retire from such Board effective as of the date of the Company's
first annual meeting after his attainment of age 70.
Section 9. Nature of the Benefit: The benefit provided by this Plan is
a contractual obligation of the Company which is payable from the general assets
of the Company and/or PGE that are subject to the claims of creditors of the
Company. It is not intended that the Plan be funded, but the Company may in its
sole discretion designate or segregate certain of its assets for the purposes of
funding its obligations under the Plan.
Section 10. Benefit Plan Only: Nothing contained in this Plan
shall be construed to affect a director's status as a director or to give any
director a right to be renominated or reelected to the Board of Directors or
the PGE Board.
Section 11. Assignability: No right to receive payments hereunder shall
be transferable or assignable by a director. No right to receive payments
hereunder shall be subject to seizure for the payment of any debts, judgments or
other obligations of the director or shall be transferable by operation of law
or otherwise to the creditors of a director.
Section 12. Plan Administration: The Plan shall be administered by the
Board of Directors. The Board of Directors shall have the authority to adopt
rules and regulations for carrying out the Plan and to interpret, construe and
implement the provisions of the Plan. The Board of Directors may delegate
ministerial and recordkeeping functions for the Plan to officers and employees
of the Company. Decisions of the Board of Directors shall be final and binding
on all directors.
Section 13. Allocation of Responsibility to Pay Benefits:
Responsibility for payment of amounts payable under the Plan shall be allocated
between the Company and PGE in proportion to the allocation of Retainer used in
determining the annual benefit payable.
Section 14. Amendment: The Plan may be amended, modified or terminated
by the Board of Directors of the Company at any time. No amendment, modification
or termination shall, without the consent of a director participating in the
Plan, adversely affect such director's accrued benefits under the Plan as of the
date of such amendment or termination. For purposes of this provision, a
director's accrued benefits shall mean the benefits to which such director would
be entitled under the Plan based on his years of service and the amount of the
Retainer as of the date of the amendment or termination, regardless of whether
the director had attained age 60 as of such date.
Section 15. Governing Law: This Plan shall be interpreted and
enforced in accordance with the laws of the Commonwealth of Pennsylvania.
Section 16. Effective Date: The Plan was adopted effective January 1,
1999. Except as provided in Sections 6 and 7, no benefits shall be paid under
this Plan to directors of the Company or PGE who retire prior to January 1,
2000.
IN WITNESS WHEREOF, this Plan has been duly executed by an authorized officer of
the Company and of PGE on this 25th day of January 1999.
PENNSYLVANIA ENTERPRISES, INC.
By
Thomas F. Karam
President and Chief Executive Officer
PG ENERGY, INC.
By
Thomas F. Karam
President and Chief Executive Officer
EXHIBIT 21-1
PENNSYLVANIA ENTERPRISES INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
The following are subsidiaries of the Registrant. Their voting
securities are owned 100% by the Registrant. All of the subsidiaries are
incorporated in Pennsylvania.
PG Energy Inc.
Pennsylvania Energy Resources, Inc.
Theta Land Corporation
Pennsylvania Energy Marketing Company
Penn Gas Development Co.*
Keystone Pipeline Services, Inc.**
Honesdale Gas Company***
* A subsidiary of PG Energy Inc. accounted for on the equity method which
has not been consolidated since it is insignificant.
** A subsidiary of Pennsylvania Energy Resources, Inc. ("PERI") included in
the consolidation of PERI into the Registrant.
*** A subsidiary of PG Energy Inc. acquired on February 14, 1997.
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 17, 1999, appearing on
page 33 of Pennsylvania Enterprises, Inc's Annual Report on Form 10-K for the
two years in the period ended December 31, 1998 and 1997.
PricewaterhouseCoopers LLP
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, 333-23655, 333-23645, 333-23981, 333-23659 and
333-23653).
ARTHUR ANDERSEN LLP
New York, N.Y.
March 1, 1999
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THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
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<NAME> PENNSYLVANIA ENTERPRISES INC.
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