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, 1995 and 1994. . . . . . . . . 2
Balance Sheets as of September 30, 1995,
and December 31, 1994 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the nine
months ended September 30, 1995 and 1994 . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 20
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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,
1995* 1994* 1995* 1994*
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 12,119 $ 14,356 $ 105,540 $ 121,157
Cost of gas 4,866 6,552 59,147 71,366
OPERATING MARGIN 7,253 7,804 46,393 49,791
OTHER OPERATING EXPENSES:
Operation 5,062 5,316 16,342 16,620
Maintenance 1,452 1,053 3,732 3,247
Depreciation 1,785 1,670 5,361 5,010
Income taxes (2,442) (1,938) 1,659 3,613
Taxes other than income taxes 1,399 1,569 7,934 8,568
Total other operating expenses 7,256 7,670 35,028 37,058
OPERATING INCOME (LOSS) (3) 134 11,365 12,733
OTHER INCOME (DEDUCTIONS), NET 20 (99) 192 (18)
INCOME BEFORE INTEREST CHARGES 17 35 11,557 12,715
INTEREST CHARGES:
Interest on long-term debt 2,295 2,218 6,954 6,518
Other interest 571 235 1,258 786
Allowance for borrowed funds used
during construction (19) (8) (40) (18)
Total interest charges 2,847 2,445 8,172 7,286
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,830) (2,410) 3,385 5,429
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations - 2,915 2,127 7,639
Estimated loss on disposal of discontinued
operations, net of anticipated income
during the phase-out period of $6,855,000
(net of related income taxes of $5,316,000) - - (5,831) -
Income (loss) with respect to discontinued
operations - 2,915 (3,704) 7,639
NET INCOME (LOSS) (2,830) 505 (319) 13,068
DIVIDENDS ON PREFERRED STOCK 690 1,025 2,073 3,669
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (3,520) $ (520) $ (2,392) $ 9,399
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ (.63) $ (.64) $ .24 $ .34
Discontinued operations - .54 (.67) 1.50
Net income (loss) before premium on
redemption of preferred stock (.63) (.10) (.43) 1.84
Premium on redemption of preferred stock - - - (.10)
Total $ (.63) $ (.10) $ (.43) $ 1.74
Weighted average shares outstanding 5,585,882 5,385,580 5,561,257 5,101,613
Cash dividends per share $ .64 $ .425 $ 2.0525 $ 1.13
*See Note 2 regarding discontinued operations and restatement of prior period financial
statements.
The accompanying notes are an integral part of the financial statements.
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</TABLE>
<PAGE>
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
September 30, December 31,
1995* 1994*
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $ 293,279 $ 284,080
Accumulated depreciation (76,680) (74,408)
216,599 209,672
OTHER PROPERTY AND INVESTMENTS 3,682 2,872
CURRENT ASSETS:
Cash 527 304
Accounts receivable -
Customers 7,577 15,676
Others 490 1,474
Reserve for uncollectible accounts (1,071) (921)
Accrued utility revenues 1,573 9,004
Materials and supplies, at average cost 2,926 2,743
Gas held by suppliers, at average cost 20,155 20,025
Natural gas transition costs collectible 4,350 4,708
Deferred cost of gas and supplier refunds, net - 3,767
Prepaid expenses and other 5,285 1,470
41,812 58,250
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible 30,174 31,696
Natural gas transition costs collectible 1,668 4,099
Other 3,062 3,131
Unamortized debt expense 1,564 1,867
Other 3,218 3,552
39,686 44,345
NET ASSETS OF DISCONTINUED OPERATIONS 195,595 203,196
TOTAL ASSETS $ 497,374 $ 518,335
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
September 30, December 31,
1995* 1994*
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION:
Common shareholder's investment $ 207,613 $ 216,032
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,680 1,760
Long-term debt 105,000 170,825
347,908 422,232
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 57,491 3,290
Note payable to bank 5,000 -
Accounts payable -
Suppliers 13,682 16,762
Affiliates, net 1,498 788
Deferred cost of gas and supplier refunds, net 2,468 -
Accrued general business and realty taxes 808 3,381
Accrued income taxes 459 3,185
Accrued interest 2,248 2,713
Accrued natural gas transition costs 2,158 2,356
Other 2,224 2,395
88,036 34,870
DEFERRED CREDITS:
Deferred income taxes 47,878 46,627
Accrued natural gas transition costs 1,631 3,250
Unamortized investment tax credits 4,982 5,110
Operating reserves 2,236 2,383
Other 4,703 3,863
61,430 61,233
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES $ 497,374 $ 518,335
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1995* 1994*
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 3,385 $ 5,429
Effects of noncash charges to income -
Depreciation 5,395 5,030
Deferred income taxes, net 195 1,296
Provisions for self insurance 889 1,064
Other, net 1,659 2,211
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 16,664 16,301
Gas held by suppliers (130) 4,657
Accounts payable (2,334) (8,552)
Deferred cost of gas and supplier refunds, net 7,207 147
Other current assets and liabilities, net (10,335) (4,623)
Other operating items, net 1,077 (1,348)
Net cash provided by continuing operations 23,672 21,612
Net cash provided by discontinued operations (Note 2) 3,764 1,621
Net cash provided by operating activities 27,436 23,233
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (14,907) (13,294)
Other, net 2,560 88
Net cash used for investing activities (12,347) (13,206)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 5,383 20,884
Redemption of preferred stock (80) (15,080)
Dividends on common and preferred stock (13,484) (9,569)
Repayment of long-term debt (3,535) (1,054)
Repayment of note payable to parent - (3,680)
Net decrease in bank borrowings (3,125) (3,463)
Other, net (25) (552)
Net cash used for financing activities (14,866) (12,514)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 223 (2,487)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 304 2,714
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 527 $ 227
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 16,353 $ 14,698
Income taxes $ 8,338 $ 5,751
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
</TABLE>
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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) DISCONTINUED OPERATIONS
On April 26, 1995, Pennsylvania Enterprises, Inc. ("PEI"), the parent
company of PG&W, and PG&W signed a definitive agreement (the "Agreement") with
American Water Works Company, Inc. ("American") and Pennsylvania-American Water
Company ("Pennsylvania-American"), a wholly-owned subsidiary of American,
providing for the sale to Pennsylvania-American of substantially all of the
assets, properties and rights of PG&W's water utility operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which currently is
expected to take place in late December, 1995, or early January, 1996. Until
the closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995). The sale will involve a gain for
income tax purposes, primarily because of the accelerated depreciation that has
been claimed by PG&W with respect to the water utility plant that is being sold.
It is currently estimated that the income taxes payable on the sale, for which
deferred income taxes have previously been provided, will be approximately $55
million.
The net cash proceeds from the sale of approximately $201 million, after the
payment of income taxes, will be used by PEI and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations. After
the sale, the principal assets of PG&W will consist of its gas utility
operations and approximately 46,000 acres of land.
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The sale of PG&W's water utility operations to Pennsylvania-American was
approved by the shareholders of both PEI and PG&W on October 11, 1995.
Completion of the sale remains subject to approval by the Pennsylvania Public
Utility Commission ("PPUC"), approval of certain debt holders of both PEI and
PG&W, and various other regulatory approvals and certain other conditions.
The accompanying financial statements reflect PG&W's water utility
operations as "discontinued operations" effective March 31, 1995. Interest
charges of PG&W have been allocated to the discontinued operations based on the
relationship of the gross water utility plant that is being sold to the total of
PG&W's gross gas and water utility plant. This is the same method as has been
utilized by PG&W and the PPUC in establishing the revenue requirements of both
PG&W's gas and water utility operations. None of the dividends on PG&W's
preferred stock has been allocated to the discontinued operations.
Selected financial information with respect to the discontinued operations
is set forth below:
Net Assets of Discontinued Operations
[CAPTION]
As of As of
September 30, December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 366,313 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 13,609 12,141
Deferred charges and other assets 26,498 31,103
Total assets being acquired by
Pennsylvania-American 406,420 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,132 141,420
Other 15,497 13,168
156,629 154,588
Net assets being acquired by
Pennsylvania-American 249,791 248,055
Estimated liability for income taxes on
sale of discontinued operations (55,050) (55,542)
Anticipated income from discontinued
operations during the balance of the
phase-out period 854 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 195,595 $ 203,196
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Income from Discontinued Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995* 1994
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Operating revenues $ - $17,507 $15,640 $50,473
Operating expenses, excluding income
taxes
Depreciation - 1,983 1,946 5,947
Other operating expenses - 7,286 6,929 21,971
- 9,269 8,875 27,918
Operating income before income taxes - 8,238 6,765 22,555
Income taxes - 2,148 1,403 5,518
Operating income - 6,090 5,362 17,037
Allocated interest and other charges - 3,175 3,235 9,398
Income from discontinued operations $ - $ 2,915 $ 2,127 $ 7,639
</TABLE>
Net Cash Provided (Used) by Discontinued Operations
[CAPTION]
Nine Months Ended
September 30,
1995* 1994
(Thousands of Dollars)
[S] [C] [C]
Income from discontinued operations $ 2,127 $ 7,639
Noncash charges (credits) to income:
Depreciation 1,946 5,947
Deferred treatment plant costs 145 436
Deferred income taxes 447 3,080
Deferred water utility billings - (4,329)
Changes in working capital, exclusive of cash
and current portion of long-term debt 1,648 (350)
Additions to utility plant (2,276) (13,590)
Utilization of proceeds from issuance of
long-term debt to be assumed by
Pennsylvania-American 1,137 7,203
Repayment of water facility loans (127) (6,708)
Other, net (1,283) 2,293
Net cash provided by discontinued operations $ 3,764 $ 1,621
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
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(3) RECOVERY OF ORDER 636 TRANSITION COSTS
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. The remaining
$252,000 of Gas Transition Costs will be recovered by PG&W in its annual PGC
rate that the PPUC has approved effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies through
the filing of a tariff pursuant to either the existing surcharge or base rate
provisions of the Pennsylvania Public Utility Code. By Order of the PPUC
entered August 26, 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 effective September 12, 1994. It is
currently estimated that $9.5 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 $5.6 million had been billed to PG&W and $3.4 million had been
recovered from its customers as of September 30, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) 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 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. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order. PG&W
does not believe that compliance with the terms of such 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
DISCONTINUED OPERATIONS
On April 26, 1995, Pennsylvania Enterprises, Inc. ("PEI"), the parent
company of PG&W, and PG&W signed a definitive agreement (the "Agreement") with
American Water Works Company, Inc. ("American") and Pennsylvania-American Water
Company ("Pennsylvania-American"), a wholly-owned subsidiary of American,
providing for the sale to Pennsylvania-American of substantially all of the
assets, properties and rights of PG&W's water utility operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which currently is
expected to take place in late December, 1995, or early January, 1996. Until
the closing, PG&W will continue to operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period (which for financial reporting
purposes commenced April 1, 1995) to the date of closing (which has been assumed
to be December 31, 1995).
The net cash proceeds from the sale of approximately $201 million, after the
payment of an estimated $55 million of income taxes, will be used by PEI and
PG&W to retire debt, to repurchase stock and for working capital for their
continuing operations. After the sale, the principal assets of PEI and PG&W
will consist of PG&W's gas utility operations and approximately 46,000 acres of
land.
The sale of PG&W's water utility operations to Pennsylvania-American was
approved by the shareholders of both PEI and PG&W on October 11, 1995.
Completion of the sale remains subject to approval by the Pennsylvania Public
Utility Commission ("PPUC"), approval of certain debt holders of both PEI and
PG&W, and various other regulatory approvals and certain other conditions.
Until the closing, PG&W intends to utilize its existing bank lines of credit for
the external financing requirements of the water utility operations, which PG&W
believes will be adequate for such purposes.
Operating revenues from PG&W's water utility operations increased by
$645,000 (3.7%) from $17.5 million for the three-month period ended September
30, 1994, to $18.2 million for the three-month period ended September 30, 1995.
This increase in revenues was principally the result of a 3.5% increase in
customer consumption which PG&W believes was attributable to the lower than
normal rainfall experienced in 1995. Operating expenses related to the water
utility operations, excluding income taxes, increased $967,000 (10.4%) from $9.3
million for the three-month period ended September 30, 1994, to $10.2 million
for the three-month period ended September 30, 1995. This increase was
primarily attributable to higher expenses as a result of operational changes and
increased maintenance necessitated by the lower than normal rainfall during the
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quarter. Income taxes with respect to the water utility operations decreased by
$261,000 (12.1%) from $2.1 million in the third quarter of 1994 to $1.9 million
in the third quarter of 1995 due to a lower level of income before income taxes
(for this purpose, operating income net of interest charges) and a decrease in
the Pennsylvania Corporate Net Income Tax rate. As a result of the foregoing,
operating income of the water utility operations decreased $61,000 (1.0%) from
$6.1 million for the three-month period ended September 30, 1994, to $6.0
million for the three-month period ended September 30, 1995. After allocated
interest and other charges, the income from the water utility operations
decreased $86,000 (3.0%) from $2.9 million for the three-month period ended
September 30, 1994, to $2.8 million for the three-month period ended September
30, 1995.
Operating revenues from PG&W's water utility operations remained relatively
unchanged, increasing $129,000 (0.3%) from $50.5 million for the nine-month
period ended September 30, 1994, to $50.6 million for the nine-month period
ended September 30, 1995. Operating expenses related to the water utility
operations, excluding income taxes, increased $462,000 (1.7%) from $27.9 million
for the nine-month period ended September 30, 1994, to $28.4 million for the
nine-month period ended September 30, 1995. This increase was primarily the
result of increased maintenance expense as a result of a higher level of leak
repairs in 1995 compared to 1994. Income taxes with respect to the water
utility operations decreased by $395,000 (7.2%) from $5.5 million in the first
nine months of 1994 to $5.1 million in the first nine months of 1995 due to a
lower level of income before income taxes (for this purpose, operating income
net of interest charges) and a decrease in the Pennsylvania Corporate Net Income
Tax rate. As a result of the foregoing, operating income of the water utility
operations increased $62,000 (0.4%) from $17.0 million for the nine-month period
ended September 30, 1994, to $17.1 million for the nine-month period ended
September 30, 1995. After allocated interest and other charges, the income from
the water utility operations for the nine-month periods ended September 30, 1994
and 1995, remained relatively unchanged, decreasing by $25,000 (0.3%).
In accordance with generally accepted accounting principles, PG&W's
financial statements have been restated to reflect PG&W's water utility
operations as "discontinued operations" effective March 31, 1995, and the
following sections of Management's Discussion and Analysis generally relate only
to PG&W's continuing operations, which consist primarily of its gas utility
operations. For additional information regarding the discontinued operations,
see Note 2 of the accompanying Notes to Financial Statements.
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RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PG&W's statements of income
as percentages of operating revenues for each of the three and nine-month
periods ended September 30, 1995, and September 30, 1994:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 40.2 45.6 56.0 58.9
OPERATING MARGIN............................. 59.8 54.4 44.0 41.1
OTHER OPERATING EXPENSES:
Operation.................................. 41.8 37.0 15.5 13.7
Maintenance................................ 12.0 7.4 3.5 2.7
Depreciation............................... 14.7 11.6 5.1 4.1
Income taxes............................... (20.1) (13.4) 1.6 3.0
Taxes other than income taxes.............. 11.5 10.9 7.5 7.1
Total other operating expenses........... 59.9 53.5 33.2 30.6
OPERATING INCOME (LOSS)...................... (0.1) 0.9 10.8 10.5
OTHER INCOME (DEDUCTIONS), NET............... 0.2 (0.7) 0.2 -
INTEREST CHARGES............................. 23.5 17.0 7.8 6.0
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (23.4) (16.8) 3.2 4.5
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS................................. - 20.3 (3.5) 6.3
NET INCOME (LOSS)............................ (23.4) 3.5 (0.3) 10.8
DIVIDENDS ON PREFERRED STOCK(1).............. 5.7 7.1 2.0 3.0
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (29.1) (3.6) (2.3) 7.8
</TABLE>
(1) None of the dividends on preferred stock has been allocated to the
discontinued operations.
Three Months Ended September 30, 1995, Compared
With Three Months Ended September 30, 1994
Operating Revenues. Operating revenues decreased $2.2 million (15.6%) from
$14.4 million for the three-month period ended September 30, 1994, to $12.1
million for the three-month period ended September 30, 1995. This decrease was
primarily the result of a reduction in the purchased gas cost component of
PG&W's tariff ("the gas cost rate") effective May 16, 1995. See "-Rate
Matters." Also contributing to the decrease was a 106,000 cubic feet (8.4%)
decrease in consumption by residential and commercial heating customers as a
result of 48 (27.6%) fewer heating degree days during the quarter.
Cost of Gas. The cost of gas decreased $1.7 million (25.7%) from $6.6
million for the three-month period ended September 30, 1994, to $4.9 million for
the three-month period ended September 30, 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995 (see "-Rate
Matters") and the switching to transportation service by certain commercial and
industrial customers.
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Operating Margin. The operating margin decreased $551,000 (7.1%) from $7.8
million in the third quarter of 1994 to $7.3 million in the third quarter of
1995, primarily because of the 106,000 cubic feet (8.4%) decrease in consumption
by residential and commercial heating customers. However, as a percentage of
operating revenues, the margin increased from 54.4% for the quarter ended
September 30, 1994, to 59.8% for the quarter ended September 30, 1995, largely
as a result of a higher average charge per cubic feet to residential and
commercial heating customers because of their lower consumption due to the
warmer weather.
Other Operating Expenses. Other operating expenses decreased $414,000
(5.4%) for the three-month period ended September 30, 1995, compared to the
three-month period ended September 30, 1994. This decrease was attributable to
a number of factors, the most significant of which was a $504,000 (26.0%)
decrease in income taxes. Income taxes decreased from a credit of $1.9 million
in the third quarter of 1994 to a credit of $2.4 million in the third quarter of
1995 because of a decrease in income before income taxes (for this purpose,
operating income net of interest charges) and a reduction in the Pennsylvania
corporate net income tax rate. Also contributing to the decrease in other
operating expenses was a slightly lower level of operation expenses, which
declined $254,000 (4.8%), and a $170,000 (10.8%) decrease in taxes other than
income taxes, primarily as a result of decreased gross receipts tax attributable
to the lower operating revenues. The effects of these decreases were partially
offset by a $399,000 (37.9%) increase in maintenance expenses, principally as a
result of charges relative to the maintenance of gas valves, and increased
depreciation expense of $115,000 (6.9%) as a result of additions to utility
plant. Even though other operating expenses decreased, they increased as a
percentage of operating revenues from 53.5% during the third quarter of 1994 to
59.9% during the third quarter of 1995 because of the relatively greater
decrease in revenues.
Operating Income (Loss). As a result of the above, total operating income
(loss) decreased by $137,000 (102.2%) from income of $134,000 for the three-
month period ended September 30, 1994, to a loss of $3,000 for the three-month
period ended September 30, 1995, and decreased as a percentage of total
operating revenues for such periods from 0.9% in 1994 to 0.1% in 1995, primarily
because of the decrease in operating revenues resulting from the reduction in
the gas cost rate and lower consumption by residential and commercial heating
customers.
Interest Charges. Interest charges increased by $402,000 (16.4%) from $2.4
million for the three-month period ended September 30, 1994, to $2.8 million for
the three-month period ended September 30, 1995. This increase was largely
attributable to interest on overcollections of purchased gas costs and higher
levels of bank borrowings.
Income (Loss) From Continuing Operations. The loss from continuing
operations increased $420,000 (17.4%) from $2.4 million for the quarter ended
September 30, 1994, to $2.8 million for the quarter ended September 30, 1995.
This increase in the seasonal loss was largely the result of the matters
discussed above, principally the decrease in operating margin and increase in
interest charges.
-13-
<PAGE>
Net Income (Loss). The decrease in net income of $3.3 million from income
of $505,000 for the three-month period ended September 30, 1994, to a loss of
$2.8 million for the three-month period ended September 30, 1995, was largely
the result of the elimination from earnings of the income from discontinued
operations during the phase-out period for those operations. Also contributing
to the decrease in net income was the reduced income from continuing operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$335,000 (32.7%) from $1.0 million for the three-month period ended September
30, 1994, to $690,000 for the three-month period ended September 30, 1995, as a
result of the redemption by PG&W on December 16, 1994, of 150,000 shares ($15.0
million) of its 8.90% cumulative preferred stock, $100 par value. No dividends
on preferred stock have been allocated to the discontinued operations.
Earnings (Loss) Applicable to Common Stock. The decrease in earnings (loss)
applicable to common stock of $3.0 million from a loss of $520,000 for the
three-month period ended September 30, 1994, to a loss of $3.5 million for the
three-month period ended September 30, 1995, as well as the decrease in earnings
per share of common stock of $.53 from a loss of $.10 per share for the quarter
ended September 30, 1994, to a loss of $.63 per share for the quarter ended
September 30, 1995, were largely the result of the elimination from earnings of
the income from discontinued operations during the phase-out period for those
operations. The anticipated income from the discontinued operations during the
quarter ended September 30, 1995, was recorded as an offset to the estimated
loss on the disposal of the discontinued operations which was recorded as of
March 31, 1995. Also contributing to the decreases in earnings (loss)
applicable to common stock and earnings (loss) per share for the quarter ended
September 30, 1995, was the lower income from continuing operations. The
effects of these factors were partially offset by the reduced preferred stock
dividends.
Nine Months Ended September 30, 1995, Compared
With Nine Months Ended September 30, 1994
Operating Revenues. Operating revenues decreased $15.6 million (12.9%) from
$121.2 million for the nine-month period ended September 30, 1994, to $105.5
million for the nine-month period ended September 30, 1995. This decrease was
primarily the result of a reduction in the gas cost rate effective May 16, 1995.
See "-Rate Matters." Also contributing to the decrease in revenues was a 1.7
billion cubic feet (10.6%) decrease in sales to residential and commercial
heating customers, caused by a 638 (14.7%) decrease in heating degree days.
There were 3,696 heating degree days (90.7% of normal) during the first nine
months of 1995 compared to 4,334 (106.4% of normal) during the first nine months
of 1994.
Cost of Gas. The cost of gas decreased $12.2 million (17.1%) from $71.4
million for the nine-month period ended September 30, 1994, to $59.1 million for
the nine-month period ended September 30, 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995. See "-
Rate Matters." Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.
-14-
<PAGE>
Operating Margin. The operating margin decreased $3.4 million (6.8%) from
$49.8 million in the nine-month period ended September 30, 1994, to $46.4
million in the nine-month period ended September 30, 1995. However, as a
percentage of operating revenues, the margin increased from 41.1% in the first
nine months of 1994 to 44.0% in the first nine months of 1995 primarily as a
result of the higher average charge per cubic foot to residential and commercial
heating customers because of their lower consumption due to the warmer weather.
Other Operating Expenses. Other operating expenses decreased $2.0 million
(5.5%) from $37.1 million for the nine-month period ended September 30, 1994, to
$35.0 million for the nine-month period ended September 30, 1995. This decrease
was primarily the result of a $2.0 million (54.1%) decrease in income taxes from
$3.6 million in the first nine months of 1994 to $1.7 million in the first nine
months of 1995 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges) and a reduction in the
Pennsylvania corporate net income tax rate. Also contributing to the decrease
in other operating expenses was a slightly lower level of operation expenses,
which declined $278,000 (1.7%), and a $634,000 (7.4%) decrease in taxes other
than income taxes, primarily because of a decrease in gross receipts tax as a
result of the lower level of operating revenues. The effect of the decreases in
taxes was partially offset by a $485,000 (14.9%) increase in maintenance
expenses, principally as a result of charges relative to the maintenance of gas
valves, and a $351,000 (7.0%) increase in depreciation expense as a result of
additions to utility plant. Notwithstanding the decrease in other operating
expenses, such expenses increased as a percentage of operating revenues from
30.6% during the first nine months of 1994 to 33.2% during the first nine months
of 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $1.4 million (10.7%) from $12.7 million for the nine-month period
ended September 30, 1994, to $11.4 million for the nine-month period ended
September 30, 1995. Nonetheless, operating income increased as a percentage of
total operating revenues for such periods from 10.5% in 1994 to 10.8% in 1995,
primarily because of the decrease in the cost of gas as a percentage of
operating revenues, the effect of which was partially offset by the lower levels
of taxes.
Interest Charges. Interest charges increased by $886,000 (12.2%) from $7.3
million for the nine-month period ended September 30, 1994, to $8.2 million for
the nine-month period ended September 30, 1995. This increase was largely
attributable to interest on overcollections of purchased gas costs and higher
levels of bank borrowings.
Income (Loss) From Continuing Operations. Income from continuing operations
decreased $2.0 million (37.6%) from $5.4 million for the nine months ended
September 30, 1994, to $3.4 million for the nine months ended September 30,
1995. This decrease was largely the result of the matters discussed above,
principally the decrease in operating margin resulting from the lower level of
sales to residential and commercial heating customers. The effect of the
decreased operating margin was partially offset by the lower levels of taxes.
Net Income (Loss). The decrease in net income (loss) of $13.4 million
(102.4%) from income of $13.1 million for the nine-month period ended September
30, 1994, to a loss of $319,000 for the nine-month period ended September 30,
1995, was largely the result of the estimated loss on the disposal of
discontinued operations, as discussed above. Also contributing to the decrease
in net income was the lower income from continuing operations.
-15-
<PAGE>
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.6
million (43.5%) from $3.7 million for the nine-month period ended September 30,
1994, to $2.1 million for the nine-month period ended September 30, 1995, as a
result of the redemption by PG&W on May 31, 1994, of 150,000 shares ($15.0
million) of its 9.50% cumulative preferred stock, $100 par value, and on
December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90% cumulative
preferred stock, $100 par value. No dividends on preferred stock have been
allocated to the discontinued operations.
Earnings (Loss) Applicable to Common Stock. The decrease in earnings (loss)
applicable to common stock of $11.8 million from income of $9.4 million for the
nine-month period ended September 30, 1994, to a loss of $2.4 million for the
nine-month period ended September 30, 1995, as well as the decrease in earnings
per share of common stock of $2.17 from earnings of $1.74 per share for the nine
months ended September 30, 1994 (after a $.10 per share charge for the premium
on redemption of preferred stock), to a loss of $.43 per share for the nine
months ended September 30, 1995, were largely the result of the estimated loss
(equivalent to $1.02 per share) on the disposal of discontinued operations, as
discussed above. Also contributing to the decreases in earnings (loss)
applicable to common stock and earnings per share for the nine months ended
September 30, 1995, was the lower income from continuing operations. The
effects of these factors were partially offset by the reduced preferred stock
dividends and, in the case of earnings per share, the absence of any premium on
the redemption of preferred stock.
RATE MATTERS
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 PPUC, by Order adopted November 10, 1994, authorized
PG&W to decrease the gas costs contained in its tariffs from $3.74 to $3.68 per
thousand cubic feet effective December 1, 1994. This change in gas rates on
account of purchased gas costs was designed to produce a decrease in annual
revenue of $1.8 million. In accordance with the same provisions of the Code, by
Order adopted May 11, 1995, the PPUC authorized PG&W to decrease the gas costs
contained in its gas tariffs to $2.42 per thousand cubic feet effective May 15,
1995, in order to refund overcollections from customers caused by lower than
anticipated purchased gas costs and the receipt of supplier refunds during 1995.
This change in gas rates on account of purchased gas costs was designed to
produce a decrease in revenue of $8.2 million from its effective date through
December 1, 1995. Additionally, by Order adopted November 9, 1995, the PPUC
authorized PG&W to increase its gas cost rate to $2.75 per thousand cubic feet
effective December 1, 1995. This change in gas rates on account of purchased
gas costs is designed to produce a $9.6 million increase in annual revenue. The
changes in 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.
Effective September 14, 1995, the PPUC adopted regulations that provide for
the quarterly adjustment of the annual 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, these regulations will not have any
material effect on PG&W's financial position or results of operations, and PG&W
will still be required to file an annual purchased gas cost rate. The initial
date that PG&W's purchased gas cost rate is subject to adjustment in accordance
with such regulations is March 1, 1996.
-16-
<PAGE>
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that
Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to
recovery through the annual PGC rate filings 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") are not natural gas costs eligible for recovery under the PGC rate
filing mechanism, such costs are 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.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. The remaining
$252,000 of Gas Transition Costs will be recovered by PG&W in its annual PGC
rate that the PPUC has approved effective December 1, 1995.
By Order of the PPUC entered August 26, 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 effective
September 12, 1994. It is currently estimated that $9.5 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 $5.6 million had been
billed to PG&W and $3.4 million had been recovered from its customers as of
September 30, 1995. PG&W has recorded the estimated Non-Gas Transition Costs
that remain to be billed to it and the amounts remaining to be recovered from
its customers.
LIQUIDITY AND CAPITAL RESOURCES
The primary capital needs of PG&W are the funding of its construction
program and the seasonal funding of its gas purchases and increases in its
customer accounts receivable. PG&W's revenues are highly seasonal and weather-
sensitive, with approximately 75% of its revenues normally being realized in the
first and fourth quarters of the calendar year when the temperatures in its
service area are the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PG&W for the seasonal funding of its gas
purchases and increases in customer accounts receivable.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, and also to provide funding required for its
discontinued operations, PG&W has made arrangements for a total of $80.5 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 May 31, 1996, 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 0.195% per annum on the average
daily amount of the unused portion of the available funds. As of November 10,
1995, $60.0 million of borrowings were outstanding under the Credit Agreement.
-17-
<PAGE>
PG&W currently has five additional bank lines of credit with an aggregate
borrowing capacity of $20.5 million which provide for borrowings at interest
rates generally less than prime. Borrowings outstanding under these bank lines
of credit are due and payable at various dates during 1996, the earliest of
which is March 31, 1996. As of November 10, 1995, PG&W had $9.0 million of
borrowings outstanding under these additional bank lines of credit.
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. No long-term debt or
capital stock financings were consummated by PG&W during the nine-month period
ended September 30, 1995. However, on October 12, 1995, PG&W borrowed $50.0
million (the "Bridge Loan") pursuant to a term loan agreement (the "Bridge Loan
Agreement"), which matures on November 1, 1996. The interest rate on borrowings
under the Bridge Loan Agreement is generally less than prime. Proceeds from the
Bridge Loan, along with other funds provided by PG&W, were utilized on October
13, 1995, to redeem the $50 million principal amount of PG&W's 9.57% Series
First Mortgage Bonds due September 1, 1996.
PG&W also obtains external funds from the sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP")
and Customer Stock Purchase Plan (the "Customer Plan"). During the nine-month
period ended September 30, 1995, PG&W realized $3.0 million and $2.4 million
from the issuance of common stock to PEI under the DRP and Customer Plan,
respectively. However, because of the significant reduction in its capital
requirements that will result from the currently pending sale of PG&W's water
utility operations to Pennsylvania-American, effective May 9, 1995, PEI
suspended both the investment feature of the DRP, from which $2.0 million was
realized in 1995 prior to such action, and the Customer Plan.
Expenditures for the construction of utility plant totaled $15.3 million
during the first nine months of 1995 and are currently estimated to be $4.8
million during the remainder of the year. PG&W's construction expenditures are
being financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1995, $57.5 million of PG&W preferred stock and long-
term debt was required to be repaid within twelve months, exclusive of PG&W's
9.57% Series First Mortgage Bonds due September 1, 1996. Such amount included
borrowings of $49.0 million under the Credit Agreement and $8.4 million under
three additional bank lines of credit, which expire during the second and third
quarters of 1996. Prior to their respective expirations, PG&W intends to renew
the Credit Agreement and its other bank lines of credit to the extent the
related borrowing capacity is required. The $50 million of PG&W's 9.57% Series
First Mortgage Bonds were redeemed on October 13, 1995, largely with proceeds
from the Bridge Loan and were thus classified as long-term debt as of September
30, 1995.
-18-
<PAGE>
Long Lived Assets
In March 1995, Financial Accounting Standards Board ("FASB") Statement 121,
"Accounting for the Impairment of Long-Lived Assets", was issued. The
provisions of this statement, which are effective for fiscal years beginning
after September 15, 1995, require that long-lived assets, identifiable
intangibles, capital leases and goodwill be reviewed for impairment whenever
events occur or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. In addition, FASB Statement 121 requires
that regulatory assets meet the recovery criteria of FASB Statement 71,
"Accounting for Effects of Certain Types of Regulation", on an ongoing basis in
order to avoid a writedown. The implementation of FASB Statement 121 in 1996 is
not expected to have any significant impact on PG&W since the carrying amount of
all assets, including regulatory assets, is considered recoverable.
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At a special meeting held on October 11, 1995, PG&W's preferred
shareholders approved the Asset Purchase Agreement providing for the sale
by Pennsylvania Enterprises, Inc. ("PEI"), the parent company of PG&W, and
PG&W of PG&W's regulated water operations and certain related assets to
Pennsylvania-American Water Company, Inc., a wholly-owned subsidiary of
American Water Works Company, Inc., for approximately $409 million
(including debt assumed), subject to adjustment. The preferred
shareholders cast 188,508 votes for this proposal, 8,187 votes against it,
and 5,541 abstained from voting on the proposal. PG&W's common
shareholder, PEI, by executing a consent in lieu of a special meeting also
approved the Asset Purchase Agreement on October 11, 1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Service Agreement for storage service dated October 13, 1995, by and
between PG&W and Avoca Natural Gas Storage -- filed herewith.
10-2 Employment Agreement effective September 1, 1995, between PEI and
Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, 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.
-20-
<PAGE>
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 13, 1995 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 13, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
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<PAGE>
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 13, 1995 By:
Thomas J. Ward
Secretary
Date: November 13, 1995 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000077242
<NAME> PENNSYLVANIA GAS AND WATER COMPANY
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 216,599,000
<OTHER-PROPERTY-AND-INVEST> 3,682,000
<TOTAL-CURRENT-ASSETS> 41,812,000
<TOTAL-DEFERRED-CHARGES> 39,686,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 497,374,000
<COMMON> 55,933,000
<CAPITAL-SURPLUS-PAID-IN> 94,218,000
<RETAINED-EARNINGS> 57,462,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 207,613,000
1,680,000
33,615,000
<LONG-TERM-DEBT-NET> 105,000,000
<SHORT-TERM-NOTES> 5,000,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 57,411,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 86,975,000
<TOT-CAPITALIZATION-AND-LIAB> 497,374,000
<GROSS-OPERATING-REVENUE> 105,540,000
<INCOME-TAX-EXPENSE> 1,659,000
<OTHER-OPERATING-EXPENSES> 92,516,000
<TOTAL-OPERATING-EXPENSES> 94,175,000
<OPERATING-INCOME-LOSS> 11,365,000
<OTHER-INCOME-NET> 192,000
<INCOME-BEFORE-INTEREST-EXPEN> 11,557,000
<TOTAL-INTEREST-EXPENSE> 8,172,000
<NET-INCOME> (319,000)
2,073,000
<EARNINGS-AVAILABLE-FOR-COMM> (2,392,000)
<COMMON-STOCK-DIVIDENDS> 11,411,000
<TOTAL-INTEREST-ON-BONDS> 18,609,000
<CASH-FLOW-OPERATIONS> 27,436,000
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
FIRM NATURAL GAS STORAGE AGREEMENT
THIS FIRM NATURAL GAS STORAGE AGREEMENT dated as of October 13,
1995, by and between Avoca Natural Gas Storage, a New York general
partnership ("Owner") and Pennsylvania Gas and Water Company, a
Pennsylvania corporation ("Customer"), (singularly, "Party," and
collectively, the "Parties").
W I T N E S S E T H
WHEREAS, Owner plans to construct, own and operate a facility in
Avoca, New York (as defined in subsection 1.9 below) for injection, storage
and withdrawal of natural Gas to serve markets primarily in the Northeast
United States;
WHEREAS, Customer desires to purchase firm storage service to
enable it to meet the requirements of its various customers; and
WHEREAS, Owner is willing to provide services to Customer in
accordance with the terms and conditions set forth below.
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants hereinafter contained, Owner and Customer agree as
follows:
PART I
DEFINITIONS AND PRE-OPERATIONAL ACTIVITIES
Article 1
DEFINITIONS
1.1 "Agreement" means this Firm Natural Gas Storage Agreement
(including all exhibits identified in the Schedule of Exhibits attached
hereto ("Exhibits")) as it may be amended and supplemented from time to
time.
1.2 "Annual Escalation Factor" as used in Exhibit B shall be
computed for any Contract Year by the following formula:
AEF (n) equals AEF (n-1) times (0.5 plus (0.5 times CPI (m) divided by
CPI (m-1))
where n is the applicable Contract Year; n-1 is the Contract Year preceding
the applicable Contract Year; CPI is the Consumer Price Index/New York-
Northern New Jersey-Long Island, NY-NJ-CT All Urban Consumers published by
the U.S. Department of Labor, Bureau of Labor Statistics (base year 1982/84
equals 100); and CPI (m) is CPI as reported for the last Month of the
preceding calendar year, and CPI (m-1) is the CPI as reported for the last
Month of the second preceding calendar year. For purposes of calculating
the AEF, AEF (1) shall equal 1.00.
1.3 "Approved" or "Approval" means approved by or approval of Owner
unless otherwise stated.
1.4 "Authorized Overrun Service" means the service set forth in
Section 4.3 of this Agreement and Section 3 of Rate Schedule FS.
<PAGE>
1.5 "Commencement Date" means the earlier of (i) thirty (30) Days
after Owner issues the Notice of Readiness or (ii) the first Day Customer
causes Gas to be injected into the Facility.
1.6 "Contract Year" means (i) for the initial year of operations,
the period beginning on the Commencement Date and continuing through March
31, (ii) for each successive year of operations, a one-year period from
April 1 of one year through March 31 of the following year except that
(iii) the final Contract Year shall begin on April 1 and terminate on the
anniversary of the Commencement Date. For the first and last Contract
Year, if less than 365 Days, any calculation in this Agreement determined
by reference to a Contract Year shall be adjusted by multiplication of the
appropriate figure by a fraction the numerator of which shall be the number
of Days in that Contract Year and the denominator of which shall be 365.
1.7 "Day" means a calendar day, including Saturdays, Sundays and
holidays, except that in the event that an obligation falls due on a
Saturday, Sunday or legal holiday in the State of New York the obligation
shall be due on the immediately preceding business day.
1.8 "Dekatherm" or "Dth" means the quantity of heat energy which is
1,000,000 British thermal units.
1.9 "Electronic Bulletin Board" means the computer information and
scheduling system established by Owner.
1.10 "Facility" means the structure and facilities to be designed
and constructed by Owner for purposes of providing the Services
contemplated by this Agreement.
1.11 "FERC" shall mean Federal Energy Regulatory Commission or any
federal commission, agency or other governmental body or bodies succeeding
to the powers of such commission.
1.12 "FERC Gas Tariff" means Owner's effective, approved tariff on
file at the FERC, which shall include all Rate Schedules and General Terms
and Conditions.
1.13 "Financing Agreement" means any agreement between Owner and any
bank, financial institution or other entity relating to the construction
and/or permanent financing of the Facility.
1.14 "Force Majeure" means an event of Force Majeure as specified in
Article 13.
1.15 "Fuel Reimbursement Charge" means a charge to be paid by
Customer to Owner, pursuant to Exhibit B, as compensation for the injection
and withdrawal of natural gas from the Storage Facility.
1.16 "Gas" means natural Gas of a quality at least equal to the
quality specified in Article 7.
1.17 "Governmental Approvals" means all authorizations, consents,
exemptions, permits, certificates and approvals from any federal, state or
municipal body in the United States having jurisdiction or potential
jurisdiction in relation to the construction and operation of the Facility
or the performance of the obligations contemplated by this Agreement.
<PAGE>
1.18 "Interruptible Storage Service Agreement" means an agreement
between Owner and Customer for the provision of interruptible storage
service pursuant to Rate Schedule IS of Owner's FERC Gas Tariff.
1.19 "Maximum Daily Injection Quantity" means the maximum quantity
of Gas which Customer is entitled to inject into the Facility on any Day.
This quantity shall equal one-twentieth (1/20) of the Maximum Storage
Capacity.
1.20 "Maximum Daily Withdrawal Quantity" means the maximum quantity
of Gas which Customer is entitled to withdraw on any Day. This quantity
shall equal one-tenth (1/10) of the Maximum Storage Capacity.
1.21 "Maximum Storage Capacity" or "MSC" means the maximum quantity
of Gas which Customer is entitled to store at the Facility at any given
time.
1.22 "Month" means a calendar month.
1.23 "Notice of Readiness" means a notice to be issued by Owner to
Customer specifying that the Facility is ready to commence the provision of
Services under this Agreement.
1.24 "Point of Delivery" means the point where Customer shall inject
Gas into the Facility or withdraw Gas from the Facility, as specified in
Section 5.1.
1.25 "Price Terms" means the prices attached as Exhibit B, as
Exhibit B may be adjusted from time to time in accordance with this
Agreement, which sets forth the payment obligations of Customer for the
Services provided pursuant to this Agreement.
1.26 "Project" means this Avoca Natural Gas Storage project,
pursuant to which Governmental Approvals will be secured, contracts will be
entered, Financing Agreement will be arranged, the Facility will be
constructed, Gas will be injected and withdrawn for Customers' accounts,
and related tasks will be accomplished.
1.27 "Rate Schedules" means the rate schedules contained in Owner's
FERC Gas tariff.
1.28 "Services" means the injection, storage and withdrawal of Gas,
and any ancillary activities, to be performed by Owner for Customer
pursuant to this Agreement.
1.29 "Site" means the parcel of land located at Avoca, New York,
under or through which Services are to be provided pursuant to this
Agreement.
1.30 "Term" means the period of time specified in Article 17.
1.31 "Transporter" means CNG Transmission Corporation, Tennessee Gas
Pipeline Company or such other transporter agreed to by Owner and Customer.
1.32 "USD" means lawful currency of the United States of America
expressed in dollars.
Additional terms indicated by capitalization and utilized in this
Agreement shall have the meaning ascribed to them where first utilized.
<PAGE>
Article 2
PRE-OPERATIONAL ACTIVITIES
2.1 Approvals. This Agreement and the respective obligations of
the Parties hereunder are subject to all valid laws, orders, rules and
regulations of duly constituted authorities having jurisdiction
("Applicable Law").
2.2 Notice of Readiness. Owner shall issue a Notice of Readiness
to Customer at such time as Owner has accomplished all tasks necessary for
the commencement of operations at the Facility.
2.3 Outside Date. Customer commits that, in the event the Notice
of Readiness is issued on or before December 31, 1997, Customer will
proceed with the performance of obligations under this Agreement. In the
event the Notice of Readiness is not issued by such date, in the absence of
Force Majeure, Owner or Customer, each in its sole and unreviewable
discretion, may terminate this Agreement without further obligation to the
other Party, in which event each Party shall bear its own costs associated
with the Project without recourse against the other for recovery of those
costs; provided, however, that Customer may not terminate this Agreement
(1) if Owner provides a portion of Customer's MSC, in which case Customer's
Monthly Demand Charge as set forth in Exhibit B shall be applied to the
level of service actually provided by Owner during the period of partial
service or (2) if Owner provides a comparable service to Customer.
PART II
SERVICES
Article 3
STORAGE SERVICES
3.1 Firm Storage. Customer hereby reserves and Owner hereby agrees
to provide capacity for the storage of Gas owned by Customer on each Day in
an amount up to the Maximum Storage Capacity, as provided in Exhibit A.
3.2 Authorized Overrun Storage Service. Owner may permit Customer
to store quantities of Gas in excess of Customer's Maximum Storage
Capacity; provided, however, that Customer has executed an Interruptible
Storage Service Agreement with Owner for such excess quantities.
3.3 Payment Schedule. Customer shall pay Owner for services
provided pursuant to this Agreement in accordance with the Price Terms.
Article 4
INJECTIONS AND WITHDRAWALS
4.1 Injections. Customer hereby reserves and Owner hereby agrees
to provide facilities and capacity to support the injection of Gas owned by
Customer into the Facility on each Day in an amount up to the Maximum Daily
Injection Quantity.
<PAGE>
4.2 Withdrawals. Customer hereby reserves and Owner hereby agrees
to provide facilities and capacity to support the withdrawal of Gas owned
by Customer from the Facility on each Day in an amount up to the Maximum
Daily Withdrawal Quantity.
4.3 Authorized Injection and Withdrawal Overrun Service. If
operating conditions permit and Customer will not exceed its Maximum
Storage Capacity, Owner may authorize Customer to inject or withdraw
quantities in excess of Customer's Maximum Daily Injection and Withdrawal
Quantities. The charge for such Authorized Overrun Service is set forth in
Exhibit B.
Article 5
SCHEDULING
5.1 Points of Delivery and Points of Redelivery. Owner and
Customer designate as Exhibit "C," attached hereto and made a part hereof,
a list of the currently available Points of Delivery and Points of
Redelivery.
5.2 Customer Scheduling of Transportation. Customer shall be
solely responsible for making all arrangements and paying for the
transportation of the Gas to the Point of Delivery for injection into the
Facility, and for making all arrangements and paying for the transportation
of Gas from the Point of Delivery for Gas for withdrawal from the Facility.
Owner shall have no obligation to inject Gas for Customer, or to withdraw
Gas for Customer, to the extent that Transporter is unwilling, not
obligated to, or unable to transport equivalent quantities, as the case may
be.
5.3 Scheduling of Storage Volumes and Intra-Day Changes in
Nominations. Owner and Customer agree that the obligations of Owner and
Customer for scheduling and changing nominations hereunder shall be in
accordance with Section 6 of Owner's FERC Gas Tariff's General Terms and
Conditions.
<PAGE>
PART III
GAS PRESSURE, QUALITY AND MEASUREMENT
Article 6
PRESSURE
Owner and Customer agree that the obligations of Owner and
Customer as to the pressure of Gas injected and withdrawn from Avoca shall
be in accordance with Sections 2 and 3 of Owner's FERC Gas Tariff's General
Terms and Conditions.
Article 7
QUALITY
Owner and Customer agree that the obligations of Owner and
Customer as to the quality of the Gas injected and withdrawn from Avoca
shall be governed by Section 2 of Owner's FERC Gas Tariff's General Terms
and Conditions.
Article 8
MEASUREMENT
Owner and Customer agree that the obligations of Owner and
Customer as to the measuring of Gas shall be governed by Sections 3 and 4
of Owner's FERC Gas Tariff's General Terms and Conditions.
PART V
MISCELLANEOUS
Article 9
BILLING AND PAYMENT
Owner and Customer agree that the obligations of Owner and
Customer as to billing and payment shall be governed by Section 12 of
Owner's FERC Gas Tariff's General Terms and Conditions.
Article 10
TAXES
Owner shall send Customer an invoice for all taxes attributable to
the injection, storage or withdrawal of Customer's Gas and Customer shall
pay such invoice in accordance with Article 9 of this Agreement.
<PAGE>
Article 11
BASE GAS
Customer shall provide a quantity of the Facility's base gas pro
rated to reflect Customer's MSC. Customer shall retain title to such base
gas at all times and shall be entitled to withdraw such contribution of
Base Gas upon the expiration of Customer's contract term.
Article 12
RATE SCHEDULES AND GENERAL TERMS AND CONDITIONS
This Agreement and all terms and provisions contained or
incorporated herein are subject to the provisions of Owner's applicable
Rate Schedules and of Owner's General Terms and Conditions on file with the
FERC, or other duly constituted authorities having jurisdiction, and as the
same may be legally amended or superseded, which Rate Schedules and General
Terms and Conditions are by this reference made a part hereof.
Article 13
FORCE MAJEURE
Owner and Customer agree that Force Majeure shall be defined in
accordance with Section 11 of Owner's FERC Gas Tariff's General Terms and
Conditions.
Article 14
POSSESSION, TITLE, RISK OF LOSS AND WARRANTY
14.1 Possession, Title and Risk of Loss. Owner and Customer agree
that the obligations of Owner and Customer as to possession, title and risk
of loss shall be governed by Section 15 of Owner's FERC Gas Tariff's
General Terms and Conditions.
14.2 Warranty. Owner and Customer agree that the obligations of
Owner and Customer as to warranty of title to Gas shall be governed by
Section 16 of Owner's FERC Gas Tariff's General Terms and Conditions.
Article 15
DEFAULT
15.1 Termination for Default. If (i) either Party shall fail in any
material respect to comply with, observe, perform or shall default in any
material respect upon any obligation under this Agreement (an "Event of
Default"), except due to causes excused by Force Majeure or attributable to
the other's wrongful act or failure to act, and such failure materially and
adversely affects the ability of either Party to deliver or accept Gas and
(ii) after written notice thereof from the Party claiming a right to
terminate this Agreement, such failure shall continue for a period of
thirty (30) Days, then the Party claiming the right to terminate may, by
<PAGE>
notice in writing, terminate this Agreement as of the date of the notice of
termination; provided, however, that if such failure cannot be reasonably
cured within such thirty (30) Days, the Party claimed to be in default
shall be entitled to such further time as shall reasonably be required to
effect such cure, provided that such Party commences within such thirty
(30) Days substantial efforts to effect such cure and at all times
thereafter proceeds diligently to complete such cure. Notwithstanding the
foregoing, Customer shall give written notice to the Lenders providing debt
financing for the Project (the "Lenders") or any agent for the Lenders of
an Event of Default of Owner and the Lenders or the agent for the Lenders
shall have the option, but not the obligation, to cure such Event of
default for a period of 60 days after the applicable cure period of Owner
under this Section 15.1.
15.2 Other Rights Preserved. The availability or exercise of the
right to terminate this Agreement pursuant to this Article shall not serve
to diminish or effect the right of the Parties to seek damages or specific
performance, for breach of this Agreement, as provided in Article 17.11
hereof.
Article 16
TERM
This Agreement will be effective upon execution and continue in
full force and effect for an initial term of twenty (20) years from the
Commencement Date ("Initial Term"). This Agreement shall automatically
renew annually following the expiration of the Initial Term, unless either
Party delivers notice to the other Party twelve Months prior to the end of
the initial term or any subsequent one-year extension of this Agreement of
its intention not to renew, in which event this Agreement shall so
terminate; provided, however, that Customer and Avoca may agree in writing
between one (1) and five (5) years before expiration of the initial term to
extend this Agreement.
Article 17
LEGAL RELATIONS
17.1 Entire Agreement. This Agreement, including all Exhibits
hereto, contains the entire understanding of the Parties with respect to
the subject matter hereof, and supersedes all prior agreements and
commitments with respect thereto. There are no oral understandings or
other terms or conditions. Neither Party has relied upon any
representation, expressed or implied, not contained in this Agreement.
17.2 APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE SUBSTANTIVE LAWS OF THE STATE OF NEW YORK,
EXCLUSIVE OF CONFLICTS OF LAWS PROVISIONS.
17.3 Amendments. No change, amendment or modification of this
Agreement shall be valid or binding upon the Parties unless such change,
amendment or modification shall be in writing and duly executed by the
Parties.
<PAGE>
17.4 Captions. The captions and subheadings contained in this
Agreement are for convenience and reference only and in no way define,
describe, extend or limit the scope or intent of this Agreement or the
intent of any provision contained herein.
17.5 Notice. Any notice, demand, offer or other written instrument
required or permitted to be given pursuant to this Agreement, except for
the provisions herein requiring notice on the Electronic Bulletin Board,
shall be in writing signed by the Party giving such notice and shall be
hand-delivered or sent by registered letter, overnight courier provided a
receipt signed by the addressee obtained, or telexed to the other Party.
Unless otherwise specifically provided in this Agreement, any written
notice or other communication shall be sufficiently given or shall be
deemed given on the earlier of (1) the third business day following the
date on which the same is mailed by registered or certified mail, postage
prepaid or (2) the date of the addressee's receipt of such notice,
addressed:
(a) if delivered to Owner:
Avoca Natural Gas Storage
One Bowdoin Square
Boston, MA 02114
(b) if delivered to Customer:
Pennsylvania Gas and Water Company
Wilkes-Barre Center
39 Public Square
Wilkes-Barre, PA 18711-1601
Each Party shall have the right to change the place to which
notice shall be sent or delivered by similar notice or like manner to the
other Party.
17.6 Severability. The invalidity of one or more phrases,
sentences, clauses, or Articles contained in this Agreement shall not
affect the validity of the remaining portion of the Agreement so long as
the material purposes of this Agreement can be determined and effectuated.
In the event that one or more phrases, sentences, clauses, or Articles is
held to be invalid and such invalidity affects the remaining portion of the
Agreement to alter its material purposes, the Parties shall negotiate in
good faith to amend this Agreement to have the same force and effect as if
such phrase, sentence, clause, or Article were not invalid.
17.7 Assignment. This Agreement shall be binding upon, shall inure
to the benefit of, and may be performed by, the successors and assigns of
the Parties, except that no assignment, pledge, or other transfer of this
Agreement shall operate to release the assignor, pledgor, or transferor
from any of its obligations under this Agreement unless consent to the
release is given in writing by the other Party or such transfer is incident
to a merger or consolidation with, or transfer of all or substantially all
of the assets of the transferor to, another person or business entity which
shall, as part of such succession, assume all the obligations of the
transferor under this Agreement.
<PAGE>
Customer acknowledges that Owner intends to make a collateral
assignment of this Agreement to the banks, financial institutions or other
entities (collectively the "Lenders") in connection with a Financing
Agreement and agrees that if the Lenders succeed to the interest of Owner
by foreclosure or otherwise, Customer shall accord the Lenders the same
rights as Owner hereunder.
In order to facilitate the obtaining of financing or refinancing
for the Facility, Customer shall execute such consents, agreements or
similar documents with respect to a collateral assignment hereof to the
Lenders as Lenders may reasonably request in connection with the
documentation of the financing or refinancing for the Facility.
17.8 No Waiver. The failure of either party to enforce any of the
provisions of this Agreement or to require compliance with any of its
terms, at any time during the pendency of this Agreement, shall in no way
affect the validity of this Agreement, or any part hereof, and shall not be
deemed a waiver of the right of such Party thereafter to enforce any
provision of this Agreement.
17.9 Non-Recourse Obligations. Customer understands and agrees that
(a) Customer shall have no recourse against any participants in Owner and
its sole recourse shall be against Owner and Owner's assets, irrespective
of any failure to comply with applicable law or any provision of this
Agreement; (b) no claim shall be made against any participants in Owner in
connection with this Agreement, except that the participants may be joined
as nominal parties for the purpose of enforcing Customer's rights
hereunder; (c) Customer shall have no right to any claim against Owner for
any capital contributions from any participants in Owner not yet due and
owing; and (d) this representation is made expressly for the benefit of the
participants in Owner.
17.10 Exhibits. All Exhibits referenced in this Agreement shall be
incorporated into this Agreement by such reference and shall be deemed to
be an integral part of this Agreement.
17.11 Liability of Owner and Customer. In the event of a breach of
this Agreement by one Party, the other Party shall be entitled to the
remedies available at law or in equity, provided in no event shall Owner or
Customer be liable to the other for any indirect or consequential cost,
expense or damage, including loss of profits.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their duly authorized representatives effective as of the date
first written above.
AVOCA NATURAL GAS STORAGE
By: /s/ James H. Leonard
Title: Senior Vice President
PENNSYLVANIA GAS AND WATER COMPANY
By: /s/ Joseph F. Perugino
Title: Vice President Gas Supply and Marketing
<PAGE>
EXHIBIT A
Maximum Storage Capacity
500,000 Dekatherms
(50,000 Dekatherms per day of Deliverability)
<PAGE>
EXHIBIT B
Price And Payment Provisions
1. Price of Services: For each of the services to be provided
hereunder, Customer agrees to pay and shall pay the following charge:
(a) Monthly Demand Charge. (1) Customer agrees to pay and shall
pay the following charge to Owner, multiplied by the Annual Escalation
Factor:
$3.75/Dth of Maximum Daily Withdrawal Quantity
(b) Commodity Injection Charge. For each Dekatherm injected and
stored for Customer's account, Customer agrees to pay and shall pay the
following charge:
$.01/Dth
(c) Commodity Withdrawal Charge. For each Dekatherm of Gas
withdrawn from Customer's account, Customer agrees to pay and shall pay the
following charge:
$.01/Dth
(d) Authorized Injection and Withdrawal Overrun Charge. For
Authorized Injection and Withdrawal Overrun Service rendered by Owner to
Customer pursuant to Article 4.3, Customer agrees to pay and shall pay the
following charge (in addition to the otherwise applicable injection and
withdrawal charges specified in Paragraphs (1(b) and (c) of this Exhibit):
$.01/Dth
2. Fuel Reimbursement Charge. There shall be due and owing from
Customer to Owner a fuel reimbursement charge equal to two percent (2%) of
the quantities injected by Customer. Such charge shall be paid by Customer
to Owner in-kind at time of injection.
3. Adjustment of Annual Escalation Factor. In the event that:
(a) the Consumer Price Index/New York-Northeastern New Jersey All
Urban Consumers ("CPI") ceases to be published by the U.S. Department of
Labor, Bureau of Labor Statistics; or
(b) there is a significant change in the components or purpose
and use of the CPI or the way in which it is calculated;
___________________
(1) The Monthly Demand Charge is calculated on a per unit of
deliverability basis.
<PAGE>
then the Parties shall agree upon a substitute component for use in
calculating the Annual Escalation Factor. Pending such agreement, the
Annual Escalation Factor for the last month in which such factor can be
calculated shall continue to govern calculation of the Price. Any agreed
upon modification shall become effective as of the first day of the first
month following such agreement, subject, however, to the receipt of any
regulatory or governmental approvals required to make such change effective
without modifications (unless such modifications are acceptable to both
Parties).
In the event that the Parties are unable to agree upon a
substitute component, such determination shall be made by arbitration in
accordance with Section 4 of this Exhibit B. The purpose of such
arbitration shall be to determine a substitute component which produces the
same results as the Annual Escalation Factor based on the CPI.
4. Arbitration.
(a) Notice. In the event that either Party wishes to submit
the adjustment of the Annual Escalation Factor to arbitration, such Party
(the "Demanding Party") shall commence arbitration by serving written
notice on the other Party. The notice shall contain the name of an
arbitrator selected by the Demanding Party, a statement of the matter in
dispute, a request for relief and the grounds therefor.
(b) Response to Demand. The Party receiving such written
notice shall within thirty (30) days thereafter serve written notice on the
Demanding Party stating the name of an arbitrator selected by the receiving
Party and an answering statement. The two arbitrators so selected shall
promptly name a third arbitrator, provided that nothing in this Section 4
shall preclude agreement by the Parties (including the Demanding Party) to
have the arbitration conducted by a single arbitrator.
(c) Qualifications of Arbitrators. The arbitrator(s)
selected to act hereunder shall be qualified by education or experience to
decide matters relating to the question in dispute and shall not be
employees or agents of any Party, unless otherwise agreed by the Parties.
(d) Arbitration Procedures; Place of Arbitration. The
arbitrator(s) selected hereunder shall promptly hear and determine (after
giving the Parties due notice of hearing and a reasonable opportunity to be
heard) the question submitted and shall render their decision thereon
within ninety (90) days after appointment of the third arbitrator. Except
as otherwise agreed by the Parties, the arbitration shall be conducted in
accordance with the rules and regulations of the American Arbitration
Association applicable to commercial disputes. Unless otherwise agreed by
the Parties, the arbitration shall be held in New York.
(e) Effect of Decision. The decision of the arbitrators, or
a majority thereof, shall be made in writing and shall be final and binding
upon the Parties as to the question(s) submitted and shall not be subject
to judicial review. The written decision may be issued with or without an
opinion. If either Party requests a written opinion with respect to a
decision, one shall be issued expeditiously, but its issuance shall not
delay compliance with and implementation of the decision. The Parties
shall abide by and comply with such decision and a judgment may be entered
upon an arbitration decision in any court of competent jurisdiction.
<PAGE>
EXHIBIT C
Delivery and Redelivery Points
The delivery and redelivery point shall be the point of
interconnection between the Avoca facility and CNG Transmission
Corporation, Tennessee Gas Pipeline Company or any other pipeline as Owner
and Customer may mutually agree.
<PAGE>
