PENNSYLVANIA GAS AND WATER COMPANY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three and nine
months ended September 30, 1993 and 1994. . . . . . . . . 2
Balance Sheets as of December 31, 1993,
and September 30, 1994. . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the nine
months ended September 30, 1993 and 1994. . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 29
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas $ 13,015 $ 14,356 $ 104,006 $ 121,157
Water 14,944 17,506 39,522 50,473
Total operating revenues 27,959 31,862 143,528 171,630
OPERATING EXPENSES:
Cost of gas 5,722 6,552 58,009 71,366
Other operation expenses 9,654 9,712 29,175 29,755
Maintenance 2,704 2,639 7,090 7,675
Depreciation 3,090 3,652 9,263 10,956
Deferred treatment plant costs, net (390) 145 (1,916) 436
Income taxes (551) 209 4,700 9,130
Other taxes 2,968 2,728 13,458 12,541
Total operating expenses 23,197 25,637 119,779 141,859
OPERATING INCOME 4,762 6,225 23,749 29,771
OTHER INCOME (DEDUCTIONS), NET
(Note 4) 949 (156) 477 (129)
INCOME BEFORE INTEREST CHARGES 5,711 6,069 24,226 29,642
INTEREST CHARGES:
Interest on long-term debt 5,138 5,282 15,280 15,520
Other interest 501 384 1,771 1,295
Allowance for borrowed funds used
during construction 69 (102) (1,345) (241)
Deferred treatment plant carrying
charges (112) - (627) -
Total interest charges 5,596 5,564 15,079 16,574
NET INCOME 115 505 9,147 13,068
DIVIDENDS ON PREFERRED STOCK 1,621 1,025 4,863 3,669
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $ (1,506) $ (520) $ 4,284 $ 9,399
COMMON STOCK:
Earnings (loss) per share of common
stock:
Before premium on redemption of
preferred stock $ (.37) $ (.10) $ 1.06 $ 1.84
Premium on redemption of
preferred stock - - - (.10)
Earnings (loss) per share of
common stock $ (.37) $ (.10) $ 1.06 $ 1.74
Weighted average number of
shares outstanding 4,027,119 5,385,580 4,023,233 5,101,613
Cash dividends per share $ .71 $ .425 $ 2.13 $ 1.13
The accompanying notes are an integral part of the financial statements.
</TABLE>
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PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994
(Thousands of Dollars)
<S> <C> <C>
ASSETS
UTILITY PLANT:
Gas plant, at original cost less
acquisition adjustments of $386,000 $ 245,969 $ 256,327
Water plant, at original cost plus
acquisition adjustments of $14,577,000 and
$14,581,000, respectively 360,996 373,570
Common plant, at original cost 26,212 27,162
633,177 657,059
Accumulated depreciation (86,287) (94,853)
546,890 562,206
OTHER PROPERTY AND INVESTMENTS:
Restricted funds held by trustee 12,853 5,896
Other 3,291 3,020
16,144 8,916
CURRENT ASSETS:
Cash and cash equivalents 2,714 227
Accounts receivable -
Customers 20,533 15,294
Others 1,258 1,250
Reserve for uncollectible accounts (1,223) (1,706)
Accrued utility revenues 16,123 6,237
Materials and supplies, at average cost 3,549 3,875
Gas held by suppliers, at average cost 26,650 21,993
Deferred cost of gas and supplier refunds, net 12,752 14,120
Prepaid expenses and other 2,026 2,875
84,382 64,165
DEFERRED CHARGES:
Deferred taxes collectible 51,382 51,610
Natural gas transition costs collectible - 7,372
Unamortized debt expense 5,745 5,287
Deferred treatment plant costs
and carrying charges 10,129 9,693
Deferred water utility billings 3,885 7,780
Other 7,751 7,254
78,892 88,996
TOTAL ASSETS $ 726,308 $ 724,283
The accompanying notes are an integral part of the financial statements.
</TABLE>
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PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1993 1994
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's investment $ 188,011 $ 211,860
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 31,840 16,760
Long-term debt 266,259 219,357
519,725 481,592
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 38,664 76,883
Notes payable -
Bank 2,000 -
Parent 3,680 -
Accounts payable -
Suppliers 22,401 14,562
Affiliates, net 1,888 632
Accrued general business and realty taxes 3,574 1,810
Accrued income taxes 4,984 3,078
Accrued interest 4,042 5,255
Accrued natural gas transition costs - 3,408
Other 2,440 3,746
83,673 109,374
DEFERRED CREDITS:
Deferred income taxes 87,005 91,639
Accrued natural gas transition costs - 5,479
Unamortized investment tax credits 9,183 9,007
Advances for construction 10,985 11,427
Contributions in aid of construction 9,810 9,861
Operating reserves 1,863 1,955
Other 4,064 3,949
122,910 133,317
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 726,308 $ 724,283
The accompanying notes are an integral part of the financial statements.
</TABLE>
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PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
[CAPTION]
Nine Months Ended
September 30,
1993* 1994
(Thousands of Dollars)
[S] [C] [C]
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 9,147 $ 13,068
Gain on sale of non-watershed land (35) (291)
Effects of noncash charges (credits) to income -
Depreciation 9,280 10,976
Deferred income taxes, net 1,002 4,375
Provisions for self insurance 1,480 1,064
Deferred treatment plant costs and carrying
charges, net (2,996) 436
Allowance for equity funds used during construction (667) (44)
Deferred water utility billings (421) (4,329)
Other, net 3,333 2,659
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 16,798 16,014
Gas held by suppliers (9,500) 4,657
Accounts payable (2,013) (8,552)
Deferred cost of gas and supplier refunds, net (10,973) 147
Other current assets and liabilities, net (2,492) (2,134)
Other operating items, net (2,807) (2,193)
Net cash provided by operating activities 9,136 35,853
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (35,917) (26,884)
Other, net 1,101 888
Net cash used for investing activities (34,816) (25,996)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 347 20,884
Redemption of preferred stock (80) (15,080)
Dividends on common and preferred stock (13,430) (9,569)
Issuance of long-term debt 1,635 695
Repayment of long-term debt (12,175) (8,458)
Repayment of note payable to parent - (3,680)
Utilization of restricted funds held by trustee 12,357 7,203
Net increase (decrease) in bank borrowings 39,524 (3,463)
Other, net (995) (876)
Net cash provided by (used for) financing
activities 27,183 (12,344)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,503 (2,487)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 570 2,714
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,073 $ 227
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 14,465 $ 14,698
Income taxes $ 4,815 $ 5,751
*Reclassified to conform with 1994 financial statement presentation.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements included herein have been prepared by
Pennsylvania Gas and Water Company ("PG&W"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although PG&W
believes that the disclosures are adequate to make the information presented not
misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather. However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for the
interim periods have been reflected in the financial statements. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in PG&W's latest annual
report on Form 10-K.
(2) RATE MATTERS
Gas Utility Operations
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code (the "Code"), which require that the tariffs of larger gas
distribution companies, such as PG&W, be adjusted on an annual basis to reflect
changes in their purchased gas costs, the Pennsylvania Public Utility Commission
(the "PPUC") ordered PG&W to make the following changes during 1992 and 1993 to
the gas costs contained in its gas tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
[S] [C] [C]
December 1, 1992 $2.46 $2.79 $ 9,500,000
December 1, 1993 2.79 3.74 28,800,000
Such changes in gas rates on account of purchased gas costs have no effect
on PG&W's earnings since the change in revenue is offset by a corresponding
change in the cost of gas.
Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC
adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition
costs. The PGC Order stated the PPUC believes that the recovery of 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&W and other larger
local gas distribution companies. The PGC Order also indicated that while Gas
Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") were not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
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such costs were subject to full recovery by local distribution companies through
the filing of a tariff pursuant to either the existing surcharge or base rate
provisions of the Code. The PGC Order further stated that all such filings
would be evaluated on a case-by-case basis. As of February 1, 1994, PG&W began
to recover the Gas Transition Costs that are being billed to PG&W by its
interstate pipelines through an increase in its PGC rate. It is currently
estimated that these costs, which will be billed to PG&W over a nineteen-month
period extending through March 31, 1995, will aggregate $1.2 million, of which
$1.1 million had been billed to PG&W and $456,000 had been recovered from its
customers as of September 30, 1994. Additionally, on January 14, 1994, PG&W
filed tariffs pursuant to the surcharge provisions of the Code seeking the full
recovery of the Non-Gas Transition Costs that it estimates it will be billed by
its interstate pipelines. On February 24, 1994, the PPUC suspended the
effectiveness of these proposed tariffs for six months (i.e., until August 28,
1994) in order to institute an investigation into the reasonableness of such
tariffs. On June 30, 1994, the PPUC Administrative Law Judge assigned to
conduct this investigation issued a decision recommending, among other things,
that the PPUC allow PG&W full recovery of its Non-Gas Transition Costs, which
decision was approved by Order of the PPUC entered August 26, 1994. Effective
September 12, 1994, PG&W began recovering the Non-Gas Transition Costs that it
estimates it will ultimately be billed pursuant to FERC Order 636 through the
billing of a surcharge to its customers. It is currently estimated that $11.9
million of Non-Gas Transition Costs will be billed to PG&W, generally over a
four-year period extending through the fourth quarter of 1997, of which $2.9
million had been billed to PG&W and $67,000 had been recovered from its
customers as of September 30, 1994. PG&W has recorded a liability for the $8.9
million of such estimated transition costs that remain to be billed to it as of
September 30, 1994, and both a current asset and a deferred asset (which
together totaled $12.4 million as of September 30, 1994) representing the
transition costs remaining to be recovered from PG&W's customers.
Water Utility Operations
Scranton Area Water Rate Increase. On September 25, 1992, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$9.9 million in additional annual revenue. This rate increase request involved
the approximately 56,000 customers in PG&W's Scranton Water Rate Area at such
date. By Order entered June 23, 1993, the PPUC rejected the proposed rate
increase in its entirety "due to inadequate service" (i.e., water quality).
However, by the same Order, the PPUC granted PG&W the alternative of a rate
increase designed to produce an additional $5.0 million in annual revenue,
provided that PG&W dedicate the entire increase to augment the improvements to
its water distribution system until "...the demonstration by [PG&W] to [the
PPUC] that it is providing adequate service." PG&W accepted this alternative
and placed such $5.0 million rate increase into effect as of June 23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement resolving
certain disputed issues relating to its June 23, 1993, Order. This settlement
agreement provided, among other things, for (i) modification by the PPUC of its
June 23, 1993, Order to reduce the amount of the revenue increase that it
ordered be dedicated to distribution system improvements by the related income
taxes and other expenses and the $319,000 additional expense for retiree health
care and life insurance benefits that the PPUC allowed PG&W in its revenues
(which resulted in the requirement for an additional annual expenditure for
distribution system improvements by PG&W of $2.5 million), (ii) the agreement by
PG&W (with which it was in compliance as of September 30, 1994) to spend a total
of $4.9 million annually (an additional $2.5 million over its actual average
annual expenditure of $2.4 million during the three-year period ended June 30,
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1993) for distribution system improvements in the Scranton Water Rate Area until
the PPUC is satisfied that PG&W is providing adequate service, (iii) the
modification by the PPUC of its June 23, 1993, Order to restore the Hollister
Reservoir to PG&W's rate base, and (iv) the withdrawal by PG&W and the Office of
Consumer Advocate of their appeals to the Commonwealth Court of Pennsylvania
regarding the PPUC's June 23, 1993, Order.
Spring Brook Water Rate Increases. Crystal Lake Service Area. On June 30,
1992, PG&W filed an application with the PPUC seeking a water rate increase,
designed to produce $4.4 million in additional annual revenue, to be effective
August 29, 1992. This rate increase request involved the approximately 5,000
customers in the Spring Brook Water Rate Area served exclusively by the Crystal
Lake Water Treatment Plant, which became fully operational in August, 1992. On
December 15, 1992, PG&W and certain parties filing objections to the rate
increase request reached a settlement providing for an approximate 130% rate
increase designed to produce $2.0 million of additional annual revenue to be
phased-in over a two-year period under the terms of a qualified phase-in plan,
pursuant to Financial Accounting Standards Board ("FASB") Statement 92 entitled
"Regulated Enterprises-Accounting for Phase-in Plans." The settlement further
provided that $1.1 million of the increased revenue (an approximate 72% increase
in rates) was to be realized through an immediate rate increase and that the
remaining $900,000 in increased revenue (an additional 58% increase in rates)
was to be realized through another rate increase one year later (i.e., at the
beginning of year two of the phase-in period). The settlement also specified
that the $900,000 in revenue that would be deferred during the first year of the
phase-in period, as well as an approximate $243,000 in carrying charges, was to
be collected from customers in the form of a surcharge in years three through
five of the phase-in period. By Order adopted February 25, 1993, the PPUC
approved the settlement effective March 9, 1993. In accordance with the
provisions of FASB Statement 92, PG&W commenced recording the entire $2.0
million increase in annual revenue allowed by the PPUC as additional revenue
beginning March 9, 1993, along with the related carrying charges on revenue
deferred in accordance with the phase-in plan. However, pursuant to the terms
of the settlement, PG&W deferred the billing of approximately $900,000 of the
increased revenue recorded during the first year of the phase-in period (i.e.,
the period March 9, 1993, through March 8, 1994). Effective March 9, 1995, PG&W
will begin to bill, by means of the surcharge that will be in effect in years
three through five of the phase-in period, the approximate $900,000 that has
been so deferred, as well as the related carrying charges.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue. This rate increase request involved
approximately 59,300 customers in PG&W's Spring Brook Water Rate Area,
principally those customers (i) served by the Ceasetown Water Treatment Plant
which was placed in service on March 31, 1993, (ii) served by the Watres Water
Treatment Plant which was placed in service on September 30, 1993, (iii) served
jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are
served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993,
PG&W and certain parties filing objections to the rate increase request reached
a settlement providing for an overall 119% rate increase involving approximately
44,900 customers, principally those served either exclusively or jointly by the
Ceasetown and Watres Water Treatment Plants, designed to produce $11.9 million
of additional annual revenue to be phased-in over a two-year period under the
terms of a qualified phase-in plan, pursuant to FASB Statement 92. Under the
terms of the settlement, except for approximately 200 customers who were
previously served jointly by the Hillside and Nesbitt Water Treatment Plants,
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none of the approximately 14,600 customers served exclusively by the Nesbitt
Water Treatment Plant would receive an increase. The settlement further
provided that $6.4 million of the increased revenue (an approximate 65% increase
in rates) was to be realized through an immediate rate increase and that the
remaining $5.5 million of the increased revenue (an additional 54% increase in
rates) was to be realized through a further rate increase one year later (i.e.,
at the beginning of year two of the phase-in period). The settlement also
specified that the $5.5 million in revenue to be deferred during the first year
of the phase-in period, as well as an approximate $1.3 million in related
carrying charges, is to be collected from customers in the form of a surcharge
in years three through five of the phase-in period. By Order adopted December
15, 1993, the PPUC approved the settlement effective December 16, 1993. In
accordance with the provisions of FASB Statement 92, PG&W commenced recording
the entire $11.9 million increase in annual revenue allowed by the PPUC as
additional revenue beginning December 16, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan. However,
pursuant to the terms of the settlement, PG&W will defer the billing of
approximately $5.5 million of the increased revenue recorded during the first
year of the phase-in period (i.e., the period December 16, 1993, through
December 15, 1994). Effective December 16, 1995, PG&W will begin to bill, by
means of the surcharge that will be in effect in years three through five of the
phase-in period, the approximate $5.5 million that is estimated will be so
deferred, as well as the related carrying charges.
Deferred Treatment Plant Costs and Carrying Charges. Pursuant to an Order
of the PPUC entered September 5, 1990, PG&W deferred all operating expenses,
including depreciation and property taxes, and the carrying charges (equivalent
to the allowance for funds used during construction ("AFUDC")) relative to the
four new Scranton Area water treatment plants and related facilities from the
dates of commercial operation of the plants until March 23, 1991, the effective
date of the Scranton Area water rate increase approved by the PPUC on March 22,
1991. By its Order entered June 23, 1993, relative to the Scranton Water Rate
Area, the PPUC granted PG&W's request to recover $5.8 million of costs deferred
relative to the Scranton Area water treatment plants and related facilities over
a ten-year period beginning June 23, 1993, of which $740,000 had been recovered
as of September 30, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W has deferred all operating expenses, including depreciation and property
taxes, and the carrying charges relative to the Crystal Lake Water Treatment
Plant and related facilities from August 3, 1992 (the date of commercial
operation of that plant), until March 9, 1993, the effective date of the water
rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's
Spring Brook Water Rate Area served exclusively by the Crystal Lake Water
Treatment Plant. Additionally, in accordance with an Order of the PPUC entered
July 28, 1993, PG&W deferred all expenses and the carrying charges relative to
the Ceasetown and Watres Water Treatment Plants and related facilities until
December 16, 1993, the effective date of the water rate increase for customers
served by the Ceasetown and Watres Water Treatment Plants approved by the PPUC
on December 15, 1993.
A total of $4.6 million of costs, consisting of $424,000 of operating
expenses and $745,000 of carrying charges relative to the Crystal Lake Water
Treatment Plant and related facilities, and $1.7 million of operating expenses
and $1.7 million of carrying charges relative to the Ceasetown and Watres Water
Treatment Plants and related facilities, had been so deferred pursuant to the
respective PPUC Orders permitting the deferral of such costs.
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As contemplated by the PPUC's Orders of September 24, 1992, and July 28,
1993, PG&W will seek recovery of the costs relative to the Crystal Lake,
Ceasetown and Watres Water Treatment Plants that have been deferred pursuant to
such Orders in its next rate increase request relative to the Spring Brook Water
Rate Area. Although it cannot be certain, PG&W believes that the recovery of
such costs by PG&W will be allowed by the PPUC in future rate increases,
particularly in view of the PPUC's action allowing the recovery of the costs
deferred with respect to the Scranton Area water treatment plants and related
facilities.
(3) ACCOUNTING CHANGES
Postemployment Benefits
In December, 1992, FASB Statement 112, "Employers' Accounting for
Postemployment Benefits," was issued. The provisions of this statement require
the recording of a liability for postemployment benefits (such as disability
benefits, including workers' compensation, salary continuation and the
continuation of benefits such as health care and life insurance) provided to
former or inactive employees, their beneficiaries and covered dependents. PG&W
consistently recorded liabilities for benefits of this nature prior to the
effectiveness of FASB Statement 112 and, as a result, the provisions of FASB
Statement 112, which PG&W adopted effective January 1, 1994, did not have a
material impact on its financial position or results of operations.
(4) OTHER INCOME (DEDUCTIONS), NET
Other income (deductions), net was comprised of the following elements:
[CAPTION]
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993 1994
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Allowance for equity funds used
during construction $ 667 $ 18 $ 667 $ 44
Equity component of deferred
treatment plant carrying charges 453 - 453 -
Gain on sale of non-watershed land,
net of related income taxes - - 20 166
Net interest expense on proceeds
remaining in construction fund (179) (64) (633) (289)
Amortization of capital stock
expense, net of related income
taxes (17) (8) (50) (112)
Premium on the redemption of debt - - (61) 2
Other 25 (102) 81 60
Total $ 949 $ (156) $ 477 $ (129)
(5) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W by January 31,
1994, to survey its gas distribution system to verify the location and spacing
of its gas shut off valves, to add or repair valves where needed and to
establish programs for the periodic inspection and maintenance of all such
valves and the verification of all gas service line information. The Emergency
Order was issued following the occurrence of two gas incidents (one concerning
an explosion and the other a fire) in PG&W's service area in June and October,
1993, respectively, involving nearby gas shut off valves that had been paved
over by third parties and that could not be readily located due to alleged
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inaccurate service line records. The Emergency Order also cited four additional
incidents occurring since January 31, 1991, in which shut off valves had been
paved over or records were inaccurate. In connection with these incidents, the
PPUC has alleged that PG&W has violated certain federal and state regulations
related to gas pipeline valves. The PPUC has the authority to assess fines for
such violations. The PPUC ordered PG&W to develop a plan, including a
timetable, by December 30, 1993, for compliance with the terms of the Emergency
Order. PG&W met the December 30, 1993, deadline for submission of this plan.
However, PG&W included in such plan, a timetable, which, in effect, requested an
extension of the January 31, 1994, deadline contained in the Emergency Order,
which PG&W viewed as unrealistic. On February 2, 1994, the PPUC staff notified
PG&W that it considered the plan submitted by PG&W "only a general plan of
action to address the problem with valving in [PG&W's] system" and that the plan
"is lacking in detail and more information is needed." By letter dated February
2, 1994, the PPUC staff indicated that it would initiate an informal
investigation of the matter, including PG&W's responsibility for the incidents
referred to in the Emergency Order. Following discussions between the PPUC
staff and PG&W regarding the development of a mutually acceptable plan, PG&W
submitted a detailed plan of action for complying with the Emergency Order to
the PPUC on April 11, 1994, which plan has been subsequently revised. This plan
is presently being reviewed by the PPUC staff. While it is not presently
possible to determine what action the PPUC will ultimately take with respect to
alleged violations of law and the matters raised by the Emergency Order, PG&W
does not believe that compliance with, or any liability that might result from
such violations or the Emergency Order will have a material adverse effect on
its financial position or results of operations.
Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants has been in operation since 1960, and several of the plant sites are no
longer owned by PG&W. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed notices with the
United States Environmental Protection Agency (the "EPA") with respect to the
former plant sites. None of the sites is or was formerly on the proposed or
final National Priorities List. The EPA has conducted site inspections and made
preliminary assessments of each site and has concluded that no further remedial
action is planned. While this conclusion does not constitute a legal
prohibition against further regulatory action under CERCLA or other applicable
federal or state law, PG&W does not believe that additional costs, if any,
related to these manufactured gas plant sites would be material to its financial
position or results of operations since environmental remediation costs
generally are recoverable through rates over a period of time.
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PENNSYLVANIA GAS AND WATER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table expresses certain items in PG&W's statements of income
as percentages of total operating revenues for each of the three and nine-month
periods ended September 30, 1993, and September 30, 1994:
[CAPTION]
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1993 1994 1993 1994
[S] [C] [C] [C] [C]
OPERATING REVENUES:
Gas................................. 46.6% 45.1% 72.5% 70.6%
Water............................... 53.4 54.9 27.5 29.4
Total operating revenues.......... 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Cost of gas......................... 20.5 20.6 40.4 41.6
Other operation expenses............ 34.5 30.5 20.3 17.3
Maintenance and depreciation........ 20.7 19.7 11.4 10.9
Deferred treatment plant costs, net. (1.4) 0.5 (1.3) 0.3
Income and other taxes.............. 8.7 9.2 12.7 12.6
Total operating expenses.......... 83.0 80.5 83.5 82.7
OPERATING INCOME...................... 17.0 19.5 16.5 17.3
OTHER INCOME (DEDUCTIONS), NET........ 3.4 (0.5) 0.3 (0.1)
INTEREST CHARGES...................... 20.0 17.4 10.5 9.6
DIVIDENDS ON PREFERRED STOCK.......... 5.8 3.2 3.3 2.1
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK........................ (5.4)% (1.6)% 3.0% 5.5%
Three Months Ended September 30, 1993, Compared
With Three Months Ended September 30, 1994
Operating Revenues. PG&W's operating revenues increased $3.9 million
(14.0%) from $28.0 million for the three-month period ended September 30, 1993,
to $31.9 million for the three-month period ended September 30, 1994.
Gas operating revenues increased by $1.3 million (10.3%) from $13.0 million
for the three-month period ended September 30, 1993, to $14.4 million for the
three-month period ended September 30, 1994, primarily as a result of a price
increase averaging 19.0% effective December 1, 1993, due to increased costs of
purchased gas. Also contributing to the increase in gas operating revenues in
1994 was a 35 million cubic feet (2.8%) increase in sales to residential and
commercial heating customers, primarily as a result of the addition of new
customers, and the implementation of surcharges to recover Order 636 transition
costs, as more fully discussed below under "-Rate Matters-Gas Rate Filings."
The effects of these factors were partially offset by the switching of certain
customers from sales to transportation service.
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Water operating revenues increased by $2.6 million (17.1%) from $14.9
million for the three-month period ended September 30, 1993, to $17.5 million
for the three-month period ended September 30, 1994. This increase in revenues
was largely the result of an $11.9 million annual rate increase which the
Pennsylvania Public Utility Commission (the "PPUC") allowed PG&W effective
December 16, 1993, for customers in the Spring Brook Water Rate Area served by
the Ceasetown and Watres Water Treatment Plants, as more fully explained below
under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $2.4 million (10.5%) from $23.2 million for the three-month
period ended September 30, 1993, to $25.6 million for the three-month period
ended September 30, 1994. As a percentage of operating revenues, total
operating expenses decreased from 83.0% during the third quarter of 1993 to
80.5% during the third quarter of 1994. Operating expenses related to gas
utility operations increased by $962,000 (7.3%) from $13.2 million in the three-
month period ended September 30, 1993, to $14.1 million in the three-month
period ended September 30, 1994, primarily as a result of an $830,000 increase
in the cost of gas and increased depreciation and other taxes. Operating
expenses related to water utility operations increased by $1.5 million (14.7%)
from $10.0 million in the third quarter of 1993 to $11.5 million in the third
quarter of 1994, primarily as a result of increases in depreciation, net
deferred treatment plant costs and income taxes.
The cost of gas increased $830,000 (14.5%) from $5.7 million for the three-
month period ended September 30, 1993, to $6.6 million for the three-month
period ended September 30, 1994. The effect of this increase, which was the
result of higher costs for purchased gas and the implementation of surcharges to
recover Order 636 transition costs (see "-Rate Matters-Gas Rate Filings"), was
partially offset by a 5.7% (110 million cubic feet) decrease in the volume of
gas sold during the three-month period ended September 30, 1994, compared to the
similar period in 1993. This decreased volume was largely attributable to the
aforementioned switching of certain customers from sales to transportation
service. The gross margin on gas operations (gas operating revenues less the
cost of gas) increased $511,000 (7.0%) in the third quarter of 1994, primarily
as a result of a higher level of sales to residential and commercial heating
customers.
Other than the cost of gas and income taxes, operating expenses increased by
$850,000 (4.7%) from $18.0 million for the three-month period ended September
30, 1993, to $18.9 million for the three-month period ended September 30, 1994.
This increase was largely attributable to a $535,000 increase in net deferred
treatment plant costs during 1994, as more fully discussed below, as well as a
$562,000 increase in depreciation (primarily as a result of capital additions
and the change in December, 1993, from a 4% compound interest to a straight-line
method of depreciation with respect to water plant in the Ceasetown and Watres
Service Areas). The effects of these increases were partially offset by a
$240,000 decrease in other taxes.
Income taxes increased by $760,000 from a credit of $551,000 in the third
quarter of 1993 to an expense of $209,000 in the third quarter of 1994 due to
increased income before income taxes (for this purpose, operating income net of
interest charges).
Deferred Treatment Plant Costs, Net and Carrying Charges. Pursuant to an
Order of the PPUC entered September 5, 1990, PG&W deferred all operating
expenses, including depreciation and property taxes, and the carrying charges
(equivalent to the allowance for funds used during construction ("AFUDC"))
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relative to the four new Scranton Area water treatment plants and related
facilities from the dates of commercial operation of the plants until March 23,
1991, the effective date of the Scranton Area water rate increase approved by
the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the
Scranton Water Rate Area, the PPUC granted PG&W's request to recover $5.8
million of costs deferred with respect to the Scranton Area water treatment
plants and related facilities over a ten-year period beginning June 23, 1993, of
which $740,000 had been recovered as of September 30, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges relative to the Crystal Lake Water Treatment Plant and
related facilities from August 3, 1992 (the date of commercial operation of that
plant), until March 9, 1993, the effective date of the water rate increase
approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant.
Additionally, in accordance with an Order of the PPUC entered July 28, 1993,
PG&W deferred all expenses and the carrying charges relative to the Ceasetown
and Watres Water Treatment Plants and related facilities incurred prior to
December 16, 1993, the effective date of the water rate increase approved by the
PPUC on December 15, 1993, for customers served by the Ceasetown and Watres
Water Treatment Plants.
As of September 30, 1994, a total of $4.6 million of costs, consisting of
$424,000 of operating expenses and $745,000 of carrying charges relative to the
Crystal Lake Water Treatment Plant and related facilities and $1.7 million of
expenses and $1.7 million of carrying charges relative to the Ceasetown and
Watres Water Treatment Plants and related facilities, had been deferred pursuant
to the PPUC's Orders of September 24, 1992, and July 28, 1993. PG&W will seek
recovery of the costs that have been so deferred in its next rate increase
request relating to the Spring Brook Water Rate Area. Although it cannot be
certain, PG&W believes that the recovery of such costs will be allowed by the
PPUC in future rate increases, particularly in view of the PPUC's action
allowing the recovery of the costs deferred with respect to the Scranton Area
water treatment plants and related facilities.
Operating Income. As a result of the above, total operating income
increased by $1.5 million (30.7%) from $4.8 million for the three-month period
ended September 30, 1993, to $6.2 million for the three-month period ended
September 30, 1994, and increased as a percentage of total operating revenues
for such periods from 17.0% in 1993 to 19.5% in 1994. Operating income from gas
utility operations increased $379,000 from a loss of $147,000 in the third
quarter of 1993 to income of $232,000 in the third quarter of 1994, primarily as
a result of a $511,000 increase in the gross margin, the effect of which was
partially offset by higher levels of depreciation and other taxes. Operating
income from water utility operations increased $1.1 million (22.1%) from $4.9
million in the third quarter of 1993 to $6.0 million in the third quarter of
1994. This increase was primarily the result of a rate increase effective
December 16, 1993, the effects of which were partially offset by increases in
depreciation, net deferred treatment plant costs and income taxes, as discussed
above.
Other Income (Deductions), Net. Other income (deductions), net decreased
$1.1 million from income of $949,000 for the three-month period ended September
30, 1993, to a deduction of $156,000 for the three-month period ended September
30, 1994, primarily as a result of the recalculation by PG&W, in September,
1993, of its AFUDC and deferred treatment plant carrying costs for 1993 based on
its overall capital structure. Prior to 1993, PG&W had calculated both the
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AFUDC and deferred treatment plant carrying charges based on the interest rates
of its bank borrowings and other relevant indebtedness. As a result of such
recalculation, during the three-month period ended September 30, 1993,
approximately $508,000 of PG&W's allowance for borrowed funds used during
construction recorded during the first two quarters of 1993 was reclassified as
an allowance for equity funds used during construction, which is a component of
other income (deductions), net. Similarly, approximately $276,000 of PG&W's
deferred treatment plant carrying charges, which had been recorded as a
reduction in interest charges during the first two quarters of 1993, was
reclassified as the equity component of such carrying charges and reported as
other income (deductions), net in these financial statements during the three-
month period ended September 30, 1993.
Also contributing to the decrease in other income (deductions), net for the
quarter ended September 30, 1994, was a lower level of allowance for equity
funds used during construction (which exclusive of the aforementioned adjustment
decreased $141,000, primarily because of the completion of the Watres Water
Treatment Plant on September 30, 1993) and the absence of any deferred treatment
plant carrying charges. See "-Deferred Treatment Plant Costs, Net and Carrying
Charges." The effects of these items were partially offset by a reduction in
the net interest expense associated with the unutilized portion of the proceeds
from the issuance on December 22, 1992, of the Luzerne County Industrial
Development Authority (the "Authority") Exempt Facilities Revenue Bonds, 1992
Series B (Pennsylvania Gas and Water Company Project) (the "1992 Series B
Bonds"). See "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock
Financings." The proceeds from the issuance of the 1992 Series B Bonds were
deposited in a construction fund held by PNC Bank (formerly Northeastern Bank of
Pennsylvania), as trustee for the 1992 Series B Bonds (the "IDA Trustee"),
pending their utilization to finance the construction of various additions and
improvements to PG&W's water facilities for which construction commenced
subsequent to September 23, 1992. Interest expense relative to the funds so
utilized for the benefit of PG&W is reflected as interest on long-term debt.
The interest expense relating to the portion of the funds held by the IDA
Trustee, net of the income earned on the temporary investment of such funds, is
reflected in other income (deductions), net.
Interest Charges. Interest charges decreased by $32,000 (0.6%) during the
quarter ended September 30, 1994, after the effect of the aforementioned
reclassifications in September, 1993 (to other income (deductions), net),
involving AFUDC and deferred treatment plant carrying charges. Interest on
long-term debt increased $144,000 (2.8%) from $5.1 million for the three-month
period ended September 30, 1993, to $5.3 million for the three-month period
ended September 30, 1994 (as more fully described in the following paragraph).
Other interest decreased $117,000 (23.4%) from $501,000 for the three-month
period ended September 30, 1993, to $384,000 for the three-month period ended
September 30, 1994, largely as a result of the recording of carrying charges
(which are credited against other interest) relative to deferred water utility
billings. See "-Rate Matters-Water Utility Operations-Crystal Lake Service Area
and -Ceasetown and Watres Service Areas." The allowance for borrowed funds used
during construction increased by $171,000 from a charge of $69,000 in the three-
month period ended September 30, 1993, to a credit of $102,000 in the three-
month period ended September 30, 1994, largely because of the aforementioned
reclassification of $508,000 to other income (deductions), net in September,
1993. Absent such reclassification, the allowance for borrowed funds would have
decreased $337,000 from $439,000 for the three-month period ended September 30,
1993, to $102,000 for the three-month period ended September 30, 1994,
reflecting a lower level of construction, primarily as a result of the
completion of the Watres Water Treatment Plant on September 30, 1993. The
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discontinuance of the deferral of the carrying charges associated with the
Ceasetown and Watres Water Treatment Plants (see "-Deferred Treatment Plant
Costs, Net and Carrying Charges"), which totaled $112,000 during the third
quarter of 1993, acted to partially offset the decrease in interest charges.
Interest on long-term debt increased by $144,000 (2.8%) from $5.1 million
during the three-month period ended September 30, 1993, to $5.3 million during
the three-month period ended September 30, 1994. The increase was principally
the result of an additional $205,000 of interest expense relative to the 1992
Series B Bonds being reflected as interest on long-term debt (see "-Other Income
(Deductions), Net") and an increase in the weighted average interest rate on
indebtedness from 7.63% during the third quarter of 1993 to 7.90% during the
third quarter of 1994. Partially offsetting the effect of these items was a
$14.9 million (5.0%) decrease from $298.0 million during the third quarter of
1993 to $283.1 million in the third quarter of 1994 in the weighted average
indebtedness outstanding and reductions in the letter of credit and commitment
fees paid to certain of PG&W's lenders.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$596,000 (36.8%) from $1.6 million for the three-month period ended September
30, 1993, to $1.0 million for the three-month period ended September 30, 1994,
as a result of the redemption by PG&W on December 23, 1993, of 100,000 shares
($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its
9.50% cumulative preferred stock, $100 par value.
Earnings (Loss) Applicable to Common Stock. The loss applicable to common
stock decreased $986,000 (65.5%) from $1.5 million for the quarter ended
September 30, 1993, to $520,000 for the quarter ended September 30, 1994. The
decreased loss in 1994 was the result of the matters discussed above,
principally the increases in water operating revenues resulting from the rate
increase which the PPUC allowed PG&W effective December 16, 1993, and the
increase in gross margin on gas operations resulting primarily from the higher
level of sales to residential and commercial heating customers. The effects of
these factors were partially offset by increased operating expenses.
<TABLE>
<CAPTION>
<S> <S>
PG&W's loss per share of common stock decreased $.27, from $.37 per share for
the quarter ended September 30, 1993, to $.10 per share for the quarter ended
September 30, 1994. This improvement was the result of the $986,000 decrease in
loss applicable to common stock and occurred despite a 33.7% increase in the
weighted average number of shares outstanding in 1994 that was caused primarily
by PG&W's sale of common stock to Pennsylvania Enterprises, Inc. (PEI), the
parent company of PG&W, at various times during 1993 and 1994.
</TABLE>
Nine Months Ended September 30, 1993, Compared
With Nine Months Ended September 30, 1994
Operating Revenues. PG&W's operating revenues increased $28.1 million
(19.6%) from $143.5 million for the nine-month period ended September 30, 1993,
to $171.6 million for the nine-month period ended September 30, 1994.
Gas operating revenues increased by $17.2 million (16.5%) from $104.0
million for the nine-month period ended September 30, 1993, to $121.2 million
for the nine-month period ended September 30, 1994, primarily as a result of a
price increase averaging 19.0% (designed to total $28.8 million on an annual
basis) effective December 1, 1993, due to increased costs of purchased gas (see
"-Rate Matters-Gas Rate Filings"). Also contributing to the increase in gas
operating revenues in 1994 was a 1.3 billion cubic feet (9.2%) increase in sales
to residential and commercial heating customers, primarily as a result of
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heating degree days* that were 6.4% higher than normal during the first nine
months of 1994 and 10.0% higher than during the similar period in 1993.
Additionally, the implementation of surcharges to recover Order 636 transition
costs (as more fully discussed below under "-Rate Matters-Gas Rate Filings")
acted to increase gas operating revenues by $547,000 in 1994. The effects of
the price increase, colder weather and surcharges on gas operating revenues were
partially offset by the switching of certain commercial and industrial customers
from sales to transportation service.
Water operating revenues increased by $11.0 million (27.7%) from $39.5
million for the nine-month period ended September 30, 1993, to $50.5 million for
the nine-month period ended September 30, 1994. This increase in revenues was
largely the result of rate increases which the PPUC allowed PG&W, including a
$2.0 million annual rate increase effective March 9, 1993, for customers in the
Spring Brook Water Rate Area served exclusively by the Crystal Lake Water
Treatment Plant, a $5.0 million annual rate increase effective June 23, 1993,
for customers in the Scranton Water Rate Area, and an $11.9 million annual rate
increase effective December 16, 1993, for customers in the Spring Brook Water
Rate Area served by the Ceasetown and Watres Water Treatment Plants, as more
fully explained below under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $22.1 million (18.4%) from $119.8 million for the nine-month
period ended September 30, 1993, to $141.9 million for the nine-month period
ended September 30, 1994. As a percentage of operating revenues, total
operating expenses decreased from 83.5% during the nine-month period ended
September 30, 1993, to 82.7% during the nine-month period ended September 30,
1994. Operating expenses related to gas utility operations increased by $15.7
million (17.0%) from $92.4 million in the nine-month period ended September 30,
1993, to $108.1 million in the nine-month period ended September 30, 1994,
primarily as a result of a $13.4 million increase in the cost of gas, a higher
level of maintenance expense because of colder than normal weather and increased
income and other taxes. Operating expenses related to water utility operations
increased by $6.4 million (23.3%) from $27.3 million in the first nine months of
1993 to $33.7 million in the first nine months of 1994, primarily as a result of
increases in operation and maintenance costs, depreciation, net deferred
treatment plant costs and income taxes.
The cost of gas increased $13.4 million (23.0%) from $58.0 million for the
nine-month period ended September 30, 1993, to $71.4 million for the nine-month
period ended September 30, 1994. The effect of this increase, which was the
result of higher costs for purchased gas and the implementation of surcharges to
recover Order 636 transition costs (see "-Rate Matters-Gas Rate Filings"), was
partially offset by a 5.7% (1.1 billion cubic feet) decrease in the volume of
gas sold during the nine-month period ended September 30, 1994, compared to the
similar period in 1993. This decreased volume was largely attributable to the
aforementioned switching of certain customers from sales to transportation
service. The gross margin on gas operations (gas operating revenues less the
cost of gas) increased $3.8 million or 8.2% in the first nine months of 1994,
primarily as a result of the increased sales to residential and commercial
heating customers due to the colder weather.
* A heating degree day ("degree day") represents each degree by which the
average of the high and low temperatures for a given day is below 650
Fahrenheit. Actual degree days represent the sum of the degree days for the
period.
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Other than the cost of gas and income taxes, operating expenses increased by
$4.3 million (7.5%) from $57.1 million for the nine-month period ended September
30, 1993, to $61.4 million for the nine-month period ended September 30, 1994.
This increase was largely attributable to a $1.2 million increase in other
operation and maintenance expenses (principally as a result of a $612,000
increase in payroll costs, increased provisions for uncollectible accounts of
$329,000 and a $378,000 increase in charges for professional services) and a
$2.4 million increase in net deferred treatment plant costs during 1994 (see "-
Deferred Treatment Plant Costs, Net and Carrying Charges"), as well as a $1.7
million increase in depreciation (primarily because of capital additions and the
change in December, 1993, from a 4% compound interest to a straight-line method
of depreciation with respect to water plant in the Ceasetown and Watres Service
Areas). The effects of these increases were partially offset by a $917,000
decrease in other taxes and a $331,000 decrease in the provision for injuries
and damages.
Income taxes increased by $4.4 million (94.3%) from $4.7 million in the
nine-month period ended September 30, 1993, to $9.1 million in the nine-month
period ended September 30, 1994, due to a higher level of income before income
taxes (for this purpose, operating income net of interest charges).
Deferred Treatment Plant Costs, Net and Carrying Charges. As more fully
discussed above, pursuant to an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges (equivalent to the AFUDC) relative to the Crystal Lake
Water Treatment Plant and related facilities from August 3, 1992 (the date of
commercial operation of that plant), until March 9, 1993, the effective date of
the water rate increase approved by the PPUC on February 25, 1993, for customers
in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake
Water Treatment Plant. Similarly, in accordance with an Order of the PPUC
entered July 28, 1993, PG&W deferred all expenses and the carrying charges
relative to the Ceasetown and Watres Water Treatment Plants and related
facilities incurred prior to December 16, 1993, the effective date of the water
rate increase approved by the PPUC on December 15, 1993, for customers served by
the Ceasetown and Watres Water Treatment Plants. As contemplated by the PPUC's
Orders, PG&W will seek recovery of the costs that have been so deferred in its
next rate increase request relating to the Spring Brook Water Rate Area.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred
all operating expenses and the carrying charges relative to the four new
Scranton Area water treatment plants and related facilities from the dates of
commercial operation of the plants until March 23, 1991, the effective date of
the Scranton Area water rate increase approved by the PPUC on March 22, 1991.
By its Order entered June 23, 1993, relative to the Scranton Water Rate Area,
the PPUC granted PG&W's request to recover $5.8 million of costs deferred with
respect to the Scranton Area water treatment plants and related facilities over
a ten-year period beginning June 23, 1993, of which $740,000 had been recovered
as of September 30, 1994.
Operating Income. As a result of the above, total operating income
increased by $6.0 million (25.4%) from $23.7 million for the nine-month period
ended September 30, 1993, to $29.8 million for the nine-month period ended
September 30, 1994, and increased as a percentage of total operating revenues
for such periods from 16.5% in 1993 to 17.3% in 1994. Operating income from gas
utility operations increased $1.5 million (12.6%) from $11.6 million in the
first nine months of 1993 to $13.0 million in the first nine months of 1994,
primarily as a result of a $3.8 million increase in the gross margin, the effect
of which was partially offset by a higher level of maintenance expense because
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of colder than normal weather and increased income and other taxes. Operating
income from water utility operations increased $4.6 million (37.5%) from $12.2
million in the first nine months of 1993 to $16.8 million in the first nine
months of 1994. This increase was primarily the result of rate increases
effective March 9, 1993, June 23, 1993, and December 16, 1993, and decreased
other taxes, the effects of which were partially offset by increases in
operation and maintenance costs, depreciation, net deferred treatment plant
costs and income taxes, as discussed above.
Other Income (Deductions), Net. Other income (deductions), net decreased
$606,000 from income of $477,000 for the nine-month period ended September 30,
1993, to a deduction of $129,000 for the nine-month period ended September 30,
1994. This decrease was primarily attributable to a $623,000 (93.4%) decrease
in the allowance for equity funds used during construction because of a lower
level of construction in progress, largely as a result of the completion of the
Crystal Lake, Watres and Ceasetown Water Treatment Plants in 1993, and the
discontinuance of the deferral of carrying charges relative to those plants, of
which the equity component included in other income (deductions), net totaled
$453,000 for the nine-month period ended September 30, 1993. The effect of such
items was partially offset by a $291,000 gain ($166,000 net of related income
taxes) on the sale of non-watershed land and a decrease in net interest expense
associated with the unutilized portion of the proceeds from the issuance on
December 22, 1992, of the Authority's 1992 Series B Bonds. See "-Liquidity and
Capital Resources-Long-Term Debt and Capital Stock Financings." The proceeds
from the issuance of the 1992 Series B Bonds were deposited in a construction
fund held by the IDA Trustee, pending their utilization to finance the
construction of various additions and improvements to PG&W's water facilities
for which construction commenced subsequent to September 23, 1992. Interest
expense relative to the funds so utilized for the benefit of PG&W is reflected
as interest on long-term debt. The interest expense relating to the portion of
the funds held by the IDA Trustee, net of the income earned on the temporary
investment of such funds, is reflected in other income (deductions), net.
Interest Charges. Interest charges increased by $1.5 million (9.9%) from
$15.1 million for the nine-month period ended September 30, 1993, to $16.6
million for the nine-month period ended September 30, 1994. This increase was
primarily attributable to a $1.1 million decrease in AFUDC, largely because of
the completion of the Crystal Lake, Ceasetown and Watres Treatment Plants, and
the discontinuance of the deferral, which totaled $627,000 during the nine-month
period ended September 30, 1993, of the carrying charges associated with those
plants.
Interest on long-term debt increased by $240,000 (1.6%) from $15.3 million
during the nine-month period ended September 30, 1993, to $15.5 million during
the nine-month period ended September 30, 1994. The increase was principally
the result of an additional $687,000 of interest expense relative to the 1992
Series B Bonds being reflected as interest on long-term debt (see "-Other Income
(Deductions), Net"). Largely offsetting the effect of this item was a decrease
in the weighted average interest rate on indebtedness from 7.98% during the
first nine months of 1993 to 7.74% during the first nine months of 1994, a $2.1
million (0.7%) decrease from $286.1 million during the first nine months of 1993
to $284.0 million during the first nine months of 1994 in the weighted average
indebtedness outstanding and reductions in the letter of credit and commitment
fees paid to certain of PG&W's lenders.
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.2
million (24.6%) from $4.9 million for the nine-month period ended September 30,
1993, to $3.7 million for the nine-month period ended September 30, 1994, as a
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result of the redemption by PG&W on December 23, 1993, of 100,000 shares ($10.0
million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its 9.50%
cumulative preferred stock, $100 par value.
Earnings (Loss) Applicable to Common Stock. Earnings applicable to common
stock increased $5.1 million (119.4%) from $4.3 million for the nine-month
period ended September 30, 1993, to $9.4 million for the nine-month period ended
September 30, 1994. The increased earnings in 1994 were the result of the
matters discussed above, principally the increases in water operating revenues
resulting from the rate increases which the PPUC allowed PG&W effective March 9,
1993, June 23, 1993, and December 16, 1993, and the increase in gross margin on
gas operations resulting primarily from the higher level of sales to residential
and commercial heating customers due to the colder weather in 1994. The effects
of these factors were partially offset by increased operating expenses.
<TABLE>
<CAPTION>
<S> <S>
Before the $534,000 premium paid on the redemption of 150,000 shares of
PG&W's 9.50% cumulative preferred stock on May 31, 1994, the earnings per share
of common stock increased $.78 (73.6%) from $1.06 per share for the nine-month
period ended September 30, 1993, to $1.84 per share for the nine-month period
ended September 30, 1994. This improvement was the result of a 119.4% increase
in net income and occurred despite a 26.8% increase in the weighted average
number of shares outstanding in 1994 that was caused primarily by PG&W's sale of
common stock to PEI at various times in 1993 and 1994. While premiums on the
redemption of preferred stock are charged to retained earnings and are not a
determinant of earnings applicable to common stock, the premiums associated with
any redemptions occurring subsequent to January 20, 1994, must be taken into
account in calculating the earnings (loss) per share of common stock. As a
consequence, the premium on the redemption of the 150,000 shares of PG&W's 9.50%
cumulative preferred stock acted to reduce PG&W's earnings per share for the
nine-month period ended September 30, 1994, by $.10 per share, resulting in
earnings of $1.74 per share of common stock for the period, an increase of $.68
per share (64.2%) over the earnings of $1.06 per share for the nine-month period
ended September 30, 1993.
</TABLE>
RATE MATTERS
In accordance with the Pennsylvania Public Utility Code (the "Code"), PG&W
files an annual purchased gas cost rate with the PPUC. From time to time, PG&W
also files for adjustments to its gas and water rates to, among other reasons,
recover interest charges and depreciation expenses relating to capital
expenditures, recover increased operating expenses and make adjustments to
existing surcharge rates approved by the PPUC.
The following is a summary of such filings (exclusive of those solely
involving tax adjustment surcharges) with respect to which the PPUC has issued
an order since the beginning of 1993, or which are currently pending.
Gas Rate Filings. Pursuant to the provisions of the Code which require that
the tariffs of larger gas distribution companies, such as PG&W, be adjusted on
an annual basis to reflect changes in their purchased gas costs, the PPUC, by
Order adopted October 28, 1993, authorized PG&W to increase the gas costs
contained in its gas tariff rates from $2.79 to $3.74 per thousand cubic feet
effective December 1, 1993. This change in gas rates on account of purchased
gas costs was designed to produce an increase in annual revenue of $28.8
million. In accordance with the same provisions of the Code, PG&W is presently
seeking the approval of the PPUC to implement a purchased gas cost rate of $3.68
per thousand cubic feet effective December 1, 1994, that would result in a
decrease in annual revenue calculated to be $1.8 million. The annual changes in
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gas rates on account of purchased gas costs have no effect on PG&W's earnings
since the changes in revenue are offset by corresponding changes in the cost of
gas.
The PPUC has issued proposed regulations that would provide for the
quarterly adjustment of the purchased gas cost rate of larger gas distribution
companies, including PG&W. Except for reducing the amount of any over or
undercollections of gas costs, the adoption of these proposed regulations would
not have any material effect on PG&W's financial position or results of
operations.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated the PPUC
believes that the recovery of 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&W and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") were not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs were subject to full
recovery by local distribution companies through the filing of a tariff pursuant
to either the existing surcharge or base rate provisions of the Code. The PGC
Order further stated that all such filings would be evaluated on a case-by-case
basis. As of February 1, 1994, PG&W began to recover the Gas Transition Costs
that are being billed to PG&W by its interstate pipelines through an increase in
its PGC rate. It is currently estimated that these costs, which will be billed
to PG&W over a nineteen-month period extending through March 31, 1995, will
aggregate $1.2 million, of which $1.1 million had been billed to PG&W and
$456,000 had been recovered from its customers as of September 30, 1994.
Additionally, on January 14, 1994, PG&W filed tariffs pursuant to the surcharge
provisions of the Code seeking the full recovery of the Non-Gas Transition Costs
that it estimates it will be billed by its interstate pipelines. On February
24, 1994, the PPUC suspended the effectiveness of these proposed tariffs for
nine months (i.e., until August 28, 1994) in order to institute an investigation
into the reasonableness of such tariffs. On June 30, 1994, the PPUC
Administrative Law Judge (the "ALJ") assigned to conduct this investigation
issued a decision recommending, among other things, that the PPUC allow PG&W
full recovery of its Non-Gas Transition Costs, which decision was approved by
Order of the PPUC entered August 26, 1994. Effective September 12, 1994, PG&W
began recovering the Non-Gas Transition Costs that it estimates it will
ultimately be billed pursuant to FERC Order 636 through the billing of a
surcharge to its customers. It is currently estimated that $11.9 million of
Non-Gas Transition Costs will be billed to PG&W, generally over a four-year
period extending through the fourth quarter of 1997, of which $2.9 million had
been billed to PG&W and $67,000 had been recovered from its customers as of
September 30, 1994. PG&W has recorded a liability for the $8.9 million of such
estimated transition costs that remain to be billed to it as of September 30,
1994, and both a current asset and a deferred asset (which together totaled
$12.4 million as of September 30, 1994) representing the transition costs
remaining to be recovered from PG&W's customers.
Water Rate Filings. The rate relief granted in the past to PG&W by the PPUC
has been less than the full amounts requested. Generally, the amounts granted
have been determined through negotiated settlements with certain parties to the
proceedings in order to obtain rate relief earlier than expected and to avoid
the substantial expenses associated with further administrative and possible
appellate proceedings. However, the rate increase request filed by PG&W on
September 25, 1992, with respect to the Scranton Water Rate Area was fully
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litigated, and PG&W was only granted approximately 50% of its requested
increase, as more fully discussed below. Nonetheless, PG&W expects that its
investments in water treatment facilities mandated by the Pennsylvania
Department of Environmental Resources will be recognized in PG&W's future rates.
PG&W believes that it will be able to obtain adequate future rate relief as it
makes further improvements to its distribution system and is able to demonstrate
it is providing water that is suitable for all "household purposes," i.e.,
meeting federal and state primary (health-related) and secondary (aesthetics-
related, particularly taste, odor and color) drinking water standards, and that
meets all applicable water quality standards. However, there can be no
assurance that such adequate rate relief will be granted. See "-Liquidity and
Capital Resources-Failure to Obtain Adequate Rate Relief."
Crystal Lake Service Area. On June 30, 1992, PG&W filed an application with
the PPUC seeking a water rate increase, designed to produce $4.4 million in
additional annual revenue. This rate increase request involved the
approximately 5,000 customers in the Spring Brook Water Rate Area served
exclusively by the Crystal Lake Water Treatment Plant, which became fully
operational in August, 1992. On December 15, 1992, PG&W and certain parties
filing objections to the rate increase request reached a settlement providing
for an approximate 130% rate increase designed to produce $2.0 million of
additional annual revenue to be phased-in over a two-year period under the terms
of a qualified phase-in plan pursuant to Financial Accounting Standards Board
("FASB") Statement 92. The settlement further provided that $1.1 million of the
increased revenue (an approximate 72% increase in rates) was to be realized
through an immediate rate increase and that the remaining $900,000 in increased
revenue (an additional 58% increase in rates) was to be realized through another
rate increase one year later (i.e., at the beginning of year two of the phase-in
period). The settlement also specified that the $900,000 in revenue that would
be deferred during the first year of the phase-in period, as well as an
approximate $243,000 in related carrying charges, was to be collected from
customers in the form of a surcharge in years three through five of the phase-in
period. By Order adopted February 25, 1993, the PPUC approved the settlement
effective March 9, 1993. In accordance with the provisions of FASB Statement
92, PG&W commenced recording the entire $2.0 million increase in annual revenue
allowed by the PPUC as additional revenue beginning March 9, 1993, along with
the related carrying charges on revenue deferred in accordance with the phase-in
plan. However, pursuant to the terms of the settlement, PG&W deferred the
billing of approximately $900,000 of the increased revenue recorded during the
first year of the phase-in period (i.e., the period March 9, 1993, through March
8, 1994). Effective March 9, 1995, PG&W will begin to bill, by means of the
surcharge that will be in effect in years three through five of the phase-in
period, the approximate $900,000 that has been so deferred, as well as the
related carrying charges.
Scranton Area. On September 25, 1992, PG&W filed an application with the
PPUC seeking a water rate increase, designed to produce $9.9 million in
additional annual revenue. This rate increase request involved the
approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date.
By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in
its entirety "due to inadequate service" (i.e., water quality). However, by the
same Order, the PPUC granted PG&W the alternative of a rate increase designed to
produce an additional $5.0 million in annual revenue, provided that PG&W
dedicate the entire increase to augment the improvements to its water
distribution system until "the demonstration by [PG&W] to [the PPUC] that it is
providing adequate service." PG&W accepted this alternative and placed such
$5.0 million rate increase into effect as of June 23, 1993.
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On August 19, 1993, the PPUC approved a settlement agreement (the
"Settlement Agreement") resolving certain disputed issues relating to its June
23, 1993, Order. The Settlement Agreement provided, among other things, for (i)
modification by the PPUC of its June 23, 1993, Order to reduce the amount of the
revenue increase that it ordered be dedicated to distribution system
improvements by the related income taxes and other expenses and the $319,000
additional expense for retiree health care and life insurance benefits that the
PPUC allowed PG&W in its revenues (which resulted in the requirement for an
additional annual expenditure for distribution system improvements by PG&W of
$2.5 million), (ii) the agreement by PG&W (with which it was in compliance as of
September 30, 1994) to spend a total of $4.9 million annually (an additional
$2.5 million over its actual average annual expenditure of $2.4 million during
the three-year period ended June 30, 1993) for distribution system improvements
in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is
providing adequate service, (iii) the modification by the PPUC of its June 23,
1993, Order to restore the Hollister Reservoir to PG&W's rate base, and (iv) the
withdrawal by PG&W and the Office of Consumer Advocate (the "OCA") of their
appeals to the Commonwealth Court of Pennsylvania regarding the PPUC's June 23,
1993, Order.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue. This rate increase request involved
approximately 59,300 customers in PG&W's Spring Brook Water Rate Area,
principally those customers (i) served by the Ceasetown Water Treatment Plant
which was placed in service on March 31, 1993, (ii) served by the Watres Water
Treatment Plant which was placed in service on September 30, 1993, (iii) served
jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are
served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993,
PG&W, the PPUC Office of Trial Staff, the OCA and the Office of Small Business
Advocate filed a settlement petition (the "Settlement Petition") with the ALJ
assigned to conduct the investigation of the rate increase request. This
Settlement Petition provided for an overall 119% rate increase involving
approximately 44,900 customers, principally those served either exclusively or
jointly by the Ceasetown and Watres Water Treatment Plants, that was designed to
produce $11.9 million of additional annual revenue to be phased-in over a two-
year period under the terms of a qualified phase-in plan, pursuant to FASB
Statement 92. Under the terms of the Settlement Petition, except for
approximately 200 customers who were previously served jointly by the Hillside
and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers
served exclusively by the Nesbitt Water Treatment Plant would receive an
increase. The Settlement Petition further provided that $6.4 million of the
increased revenue (an approximate 65% increase in rates) was to be realized
through an immediate rate increase and that the remaining $5.5 million of the
increased revenue (an additional 54% increase in rates) was to be realized
through a further rate increase one year later (i.e., at the beginning of year
two of the phase-in period). The Settlement Petition also specified that the
$5.5 million in revenue that was to be deferred during the first year of the
phase-in period, as well as an approximate $1.3 million in related carrying
charges, was to be collected from customers in the form of a surcharge in years
three through five of the phase-in period. By Order adopted December 15, 1993,
the PPUC approved the Settlement Petition effective December 16, 1993. In
accordance with the provisions of FASB Statement 92, PG&W commenced recording
the entire $11.9 million increase in annual revenue allowed by the PPUC as
additional revenue beginning December 16, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan. However,
pursuant to the terms of the settlement, PG&W will defer the billing of
approximately $5.5 million of the increased revenue recorded during the first
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year of the phase-in period (i.e., the period December 16, 1993, through
December 15, 1994). Effective December 16, 1995, PG&W will begin to bill by
means of the surcharge that will be effective in years three through five of the
phase-in period, the approximate $5.5 million that it is estimated will be so
deferred, as well as the related carrying charges.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity of PG&W is influenced significantly by the capital intensive
nature of its operations and the ratemaking practices of the PPUC, which
together effectively require external financing of a substantial portion of
PG&W's construction expenditures. See "-Construction Expenditures and Related
Financing" and "-Failure to Obtain Adequate Rate Relief." Additionally, because
of the seasonal nature of its gas utility operations and the ratemaking
practices of the PPUC regarding the recovery of purchased gas costs (see "-Rate
Matters-Gas Rate Filings"), it is necessary for PG&W to finance its gas
purchases and increases in its customer accounts receivable with bank borrowings
during certain periods of the year.
PG&W's ability to generate sufficient internal funds and to obtain the
external funds that are required for its operations and construction
expenditures is affected materially by the timing and amount of rate relief it
is granted. This is a problem faced by all regulated utilities, and one that
had been particularly acute with respect to PG&W because of the denial by the
PPUC in 1986 and again in 1988, as a result of water quality issues, of water
rate increases requested by PG&W. Nonetheless, PG&W was able to generate and
raise sufficient capital resources despite these denials, and PG&W believes that
it will be granted sufficient rate relief to enable it to meet its future
anticipated capital requirements, particularly in view of the increases in
annual water revenue aggregating $35.8 million which it has been granted by the
PPUC since 1991 with respect to customers being supplied with filtered water.
PG&W also believes that additional rate increases will be allowed by the PPUC
for its approximately 132,000 water customers, all of whom are now receiving
filtered water, because of the relatively low level of earnings that PG&W is
realizing from its water utility operations and its expectation that with
filtration and further distribution system improvements, water quality should be
less of a concern in its requests for water rate increases. See "-Construction
Expenditures and Related Financing" and "-Failure to Obtain Adequate Rate
Relief."
If PG&W is denied future rate relief, it would be necessary, depending upon
the amount so denied, for PG&W to take various actions to reduce cash
expenditures. For a discussion of the actions PG&W would take to reduce cash
expenditures, see "-Failure to Obtain Adequate Rate Relief." Such measures
would continue until PG&W was allowed sufficient rate relief to increase its
earnings to a level that would permit it to raise additional debt and equity
capital. Concurrently with taking actions to reduce cash expenditures, PG&W
would file appropriate appeals with the Commonwealth Court of Pennsylvania,
alleging that, contrary to law, it had been denied an opportunity to earn a fair
rate of return on its prudent investment in used and useful utility property
devoted to public service.
PEI relies on a number of sources, primarily cash dividends from PG&W, to
provide the funds necessary to pay dividends on its common stock, to pay
interest on its outstanding debt, and to meet all of its other obligations
(other than the repayment of debt, for which PEI principally relies upon
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periodic refinancings or sales of securities). The approximate amount of funds
required, net of the amounts provided to PEI by PG&W for use of PEI's federal
income tax credits, are expected to total $14.5 million in 1994, $15.0 million
in 1995 and $17.4 million in 1996.
Because of limitations imposed by the terms of PG&W's Restated Articles of
Incorporation, as amended, PG&W 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&W had no unsecured debt due on demand or within one year
from issuance outstanding as of September 30, 1994.
In addition, PG&W is prohibited from paying any dividends to PEI in the
event of a default under certain of its debt instruments or failure to make any
required dividend payments due holders of PG&W's preferred stock. Furthermore,
any failure by PG&W to pay preferred stock dividends for four consecutive
quarters would permit the holders of the PG&W preferred stock to elect a
majority of the directors of PG&W.
PG&W presently has sufficient funding for its working capital needs, as well
as its construction program, through at least the second quarter of 1995, and
believes that it will be able to raise such funds as are required for
construction expenditures, refinancings and other working capital requirements
beyond the second quarter of 1995.
Interim Financing Practices
It is the practice of PG&W to use bank borrowings to finance certain of its
construction expenditures pending the periodic issuance of stock and long-term
debt. Additionally, because of the seasonal nature of its gas utility
operations and the ratemaking practices of the PPUC regarding the recovery of
purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it is necessary for
PG&W to finance its gas purchases and increases in its customer accounts
receivable with bank borrowings during certain periods of the year.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, PG&W has made arrangements for a total of $67.0 million
of unsecured revolving bank credit. Specifically, PG&W has entered into a
revolving bank credit agreement (the "Credit Agreement") with a group of six
banks under the terms of which $60.0 million is available for borrowing by PG&W.
The Credit Agreement terminates on April 30, 1995, at which time any borrowings
outstanding thereunder are due and payable. The interest rate on borrowings
under the Credit Agreement is generally less than prime. The Credit Agreement
also requires the payment of a commitment fee of 3/8 of 1% per annum on the
average daily amount of the unused portion of the available funds. As of
November 7, 1994, $45.0 million of borrowings were outstanding under the Credit
Agreement. PG&W also has three other bank lines of credit with an aggregate
borrowing capacity of $7.0 million which provide for borrowings at interest
rates generally less than prime and mature during mid-1995. As of November 7,
1994, PG&W had no borrowings outstanding under these bank lines of credit.
Current Maturities of Long-Term Debt and Preferred Stock
On May 31, 1994, PG&W redeemed all 150,000 outstanding shares of its 9.50%
1988 series cumulative preferred stock, $100 par value, at a price of $103.5625
per share, plus accrued dividends. This redemption, which included a voluntary
redemption premium of $3.5625 per share ($534,375 in the aggregate), was funded
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by PG&W with proceeds from the sale of $20.0 million of its common stock to PEI
on May 31, 1994. See "-Long-Term Debt and Capital Stock Financings."
As of September 30, 1994, $76.9 million of PG&W preferred stock and long-
term debt was required to be repaid within twelve months. Such amount included
$46.1 million outstanding under the Credit Agreement which is due on April 30,
1995. Also included in such current maturities is the 1987 Series B Note in the
principal amount of $30.0 million, that is subject to repayment on December 1,
1994, which was issued in 1987 to PNC Bank (formerly Northeastern Bank of
Pennsylvania) as trustee (the "IDA Trustee") in connection with the issuance by
the Luzerne County Industrial Development Authority (the "Authority") of $30.0
million of its Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas
and Water Company Project) due 2017 (the "1987 Series B Bonds"). It is intended
that the 1987 Series B Bonds will be redeemed with the proceeds from the sale by
the Authority of $30.0 million of its Exempt Facilities Revenue Refunding Bonds,
1994 Series A (Pennsylvania Gas and Water Company Project) due 2017 (the "1994
Series A Bonds"). In this regard, PG&W has entered into an agreement with the
Authority and Wheat First Butcher & Singer, on behalf of itself and Legg Mason
Wood Walker, Incorporated (the "Underwriters"), providing for the sale of the
1994 Series A Bonds to the Underwriters and the use of proceeds therefrom, along
with monies provided by PG&W, to redeem the 1987 Series B Bonds on December 1,
1994, and thereby discharge PG&W of its obligations with respect to the 1987
Series B Note. As security for and as evidence of its obligations with respect
to the 1994 Series A Bonds, PG&W will issue $30.0 million of its 7% Series First
Mortgage Bonds to the IDA Trustee for the benefit of the holders of the 1994
Series A Bonds.
PG&W believes that it will have sufficient cash flow and borrowing capacity
to repay current maturities of its preferred stock and long-term debt and to
meet its other obligations based on its present earnings and financing
capabilities, capitalization and banking arrangements and relationships.
Long-Term Debt and Capital Stock Financings
PG&W periodically engages in long-term debt and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing of
existing debt and various working capital purposes.
On May 31, 1994, PG&W issued 500,000 shares of its common stock to PEI for
aggregate net proceeds of $20.0 million. PG&W used a portion of the proceeds it
so received to redeem $15.0 million of its 9.50% cumulative preferred stock and
to fund the $534,375 premium in connection with such redemption. The remaining
$4.5 million of proceeds were used by PG&W to repay a portion of its bank
borrowings and for working capital purposes.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provides the residential customers of PG&W with a method
of purchasing newly-issued shares of PEI common stock at a 5% discount from the
market price. PEI uses proceeds from the issuance of shares through the
Customer Plan to purchase common stock of PG&W. On October 3, 1994, PG&W
realized $1.7 million from the issuance of common stock to PEI in connection
with the Customer Plan.
During 1994 (through November 7) PG&W realized $1.4 million from the
issuance of common stock to PEI in connection with PEI's Dividend Reinvestment
and Stock Purchase Plan ("DRIP"). PEI uses the proceeds from the DRIP to
purchase common stock of PG&W. The DRIP was amended on May 5, 1994, to provide
PEI's shareholders with a method of reinvesting cash dividends and making
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supplemental cash payments to purchase newly-issued shares of PEI's common stock
at a 5% discount from the market price. Prior to such amendment, cash dividends
were reinvested at 100% of the market price and supplemental cash payments were
used to purchase shares of PEI's common stock on the open market.
In addition, during the nine-month period ended September 30, 1994, PG&W
utilized $7.2 million of the proceeds from the issuance by the Authority on
December 22, 1992, of its $30.0 million of 1992 Series B Bonds and with respect
to which PG&W issued its $30.0 million of 7.125% Series First Mortgage Bonds to
the IDA Trustee on December 22, 1992, as security for the 1992 Series B Bonds.
The proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by the IDA Trustee for the Authority's 1992 Series B
Bonds, pending their utilization to finance the construction of various
additions and improvements to PG&W's water facilities for which construction
commenced subsequent to September 23, 1992. As of September 30, 1994, $5.9
million was held by the IDA Trustee and was available to finance the future
construction of qualified water facilities for PG&W.
PG&W's rated first mortgage bonds are currently rated BBB- (investment
grade) by Standard & Poor's Corporation ("S&P"), Baa3 (investment grade) by
Moody's Investors Services ("Moody's") and Class 2 by the National Association
of Insurance Commissioners ("NAIC"). On July 25, 1994, S&P said PG&W's outlook
was "stable" and that "continued though slow financial improvement is expected
with the phase-in of water rate relief." However, S&P noted that "significant
capital expenditures and an excessive dividend payout...will continue to
challenge management over the intermediate term."
If PG&W's rated first mortgage bonds are downgraded below Class 2 (i.e.,
below investment grade) by the NAIC, this downgrade would cause the stated
interest rate on PG&W's $50.0 million of 9.57% Series First Mortgage Bonds due
1996 to increase to 11.17% per annum (which increase would cost PG&W $800,000
per year in additional interest expense, exclusive of tax benefits). Also, any
downgrading of PG&W's rated first mortgage bonds below investment grade by
either S&P or Moody's would result in the interest rate charged on borrowings
under the Credit Agreement being increased by one half percent per annum (which
increase could cost PG&W as much as $300,000 per year in additional interest
expense, exclusive of tax benefits, depending on the amount of borrowings
outstanding under the Credit Agreement). Additionally, any downgrading of
PG&W's rated first mortgage bonds by S&P, Moody's or the NAIC could have a
material adverse effect on the cost and difficulty of issuing additional debt
and preferred stock, which in turn could significantly impair PEI's and PG&W's
ability to refinance debt and fund future capital expenditures. See "-Failure
to Obtain Adequate Rate Relief."
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant totaled $26.4 million
during the first nine months of 1994 and are currently estimated to be $8.7
million during the remainder of the year. A portion of PG&W's expenditures for
water facilities during 1994, which it is presently estimated will total $19.2
million, are being financed with proceeds from the issuance of the Authority's
1992 Series B Bonds being held by the IDA Trustee for the benefit of PG&W and
with revenues from the water rate increase for Scranton Water Rate Area
customers which was effective June 23, 1993 (see "-Rate Matters-Water Rate
Filings"). The balance of PG&W's expenditures for water facilities, as well as
its currently estimated $15.9 million in expenditures for gas facilities, are
being financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
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Failure to Obtain Adequate Rate Relief
If PG&W is unable to obtain adequate rate relief in future rate increase
applications filed with the PPUC, PG&W would be forced to restrict its cash
expenditures by, among other actions, possibly reducing dividends on its common
stock, and PG&W would be forced to restrict its cash expenditures by, among
other actions, curtailing or deferring work on various capital projects and
reducing its operating expenses, all of which could negatively impact the
quality and reliability of services rendered to the public by PG&W.
Notwithstanding the PPUC's decision in its June 23, 1993, Order (see "-Rate
Matters-Water Rate Filings"), PG&W believes it will be able to obtain adequate
future rate relief, although there can be no assurance that such rate relief
will be obtained. However, if PG&W were unable to obtain adequate rate relief
from the PPUC under circumstances where PG&W believed that it is entitled as a
matter of law to such rate relief, PG&W would file appropriate appeals with the
Commonwealth Court of Pennsylvania, claiming that, contrary to law, the PPUC by
its actions had denied PG&W an opportunity to earn a fair rate of return on its
prudent investment in property which is used and useful in providing public
utility service.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Employment Agreement effective September 1, 1994, between PEI and
Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No. 0-
7812.
27-1 Financial Data Schedule -- filed herewith.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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PENNSYLVANIA GAS AND WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
Date: November 9, 1994 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 9, 1994 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
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PENNSYLVANIA GAS AND WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
Date: November 9, 1994 By:
Thomas J. Ward
Secretary
Date: November 9, 1994 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $562,206,000
<OTHER-PROPERTY-AND-INVEST> 8,916,000
<TOTAL-CURRENT-ASSETS> 64,165,000
<TOTAL-DEFERRED-CHARGES> 88,996,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> $724,283,000
<COMMON> $53,919,000
<CAPITAL-SURPLUS-PAID-IN> 88,295,000
<RETAINED-EARNINGS> 69,646,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 211,860,000
16,760,000
33,615,000
<LONG-TERM-DEBT-NET> 219,357,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 76,803,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 165,808,000
<TOT-CAPITALIZATION-AND-LIAB> $724,283,000
<GROSS-OPERATING-REVENUE> $171,630,000
<INCOME-TAX-EXPENSE> 9,130,000
<OTHER-OPERATING-EXPENSES> 132,729,000
<TOTAL-OPERATING-EXPENSES> 141,859,000
<OPERATING-INCOME-LOSS> 29,771,000
<OTHER-INCOME-NET> (129,000)
<INCOME-BEFORE-INTEREST-EXPEN> 29,642,000
<TOTAL-INTEREST-EXPENSE> 16,574,000
<NET-INCOME> 13,068,000
3,669,000
<EARNINGS-AVAILABLE-FOR-COMM> $9,399,000
<COMMON-STOCK-DIVIDENDS> $5,900,000
<TOTAL-INTEREST-ON-BONDS> $16,791,000
<CASH-FLOW-OPERATIONS> $35,853,000
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
</TABLE>
