PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three and six
months ended June 30, 1996 and 1995 . . . . . . . . . . . 2
Balance Sheets as of June 30, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the six
months ended June 30, 1996 and 1995 . . . . . . . . . . . 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. . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
PG ENERGY INC.
Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 25,457 $ 25,184 $ 94,872 $ 93,421
Cost of gas 12,575 12,874 52,553 54,281
OPERATING MARGIN 12,882 12,310 42,319 39,140
OTHER OPERATING EXPENSES:
Operation 6,226 5,457 12,783 11,281
Maintenance 1,492 1,312 2,706 2,280
Depreciation 1,970 1,784 3,869 3,576
Income taxes (514) (766) 5,413 4,101
Taxes other than income taxes 2,905 2,656 6,712 6,535
Total other operating expenses 12,079 10,443 31,483 27,773
OPERATING INCOME 803 1,867 10,836 11,367
OTHER INCOME (DEDUCTIONS), NET 169 (62) 319 172
INCOME BEFORE INTEREST CHARGES 972 1,805 11,155 11,539
INTEREST CHARGES:
Interest on long-term debt 1,243 2,269 3,015 4,659
Other interest 153 438 488 687
Allowance for borrowed funds used
during construction (50) (13) (96) (22)
Total interest charges 1,346 2,694 3,407 5,324
INCOME (LOSS) FROM CONTINUING OPERATIONS (374) (889) 7,748 6,215
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
(Note 2) (21) - (386) (3,704)
NET INCOME (LOSS) (395) (889) 7,362 2,511
DIVIDENDS ON PREFERRED STOCK 383 692 1,020 1,383
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (778) $ (1,581) $ 6,342 $ 1,128
COMMON STOCK
Earnings (loss) per share of common stock:
Continuing operations $ (.23) $ (.28) $ 1.73 $ .87
Discontinued operations (.01) - (.10) (.67)
Net income (loss) before premium on
repurchase/redemption of preferred stock (.24) (.28) 1.63 .20
Premium on repurchase/redemption of
preferred stock (.39) - (.33) -
Total $ (.63) $ (.28) $ 1.30 $ .20
Weighted average shares outstanding 3,314,155 5,576,066 3,891,143 5,548,741
Cash dividends per share (Note 3) $ - $ .7075 $ 10.217 $ 1.4125
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
-2-
<PAGE>
PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
June 30, December 31,
1996 1995
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost $ 302,356 $ 295,895
Accumulated depreciation (79,011) (76,882)
223,345 219,013
OTHER PROPERTY AND INVESTMENTS 5,186 5,089
CURRENT ASSETS:
Cash and cash equivalents 1,409 328
Accounts receivable -
Customers 12,324 18,189
Others 575 815
Reserve for uncollectible accounts (1,096) (781)
Accrued utility revenues 1,599 10,319
Materials and supplies, at average cost 2,862 2,609
Gas held by suppliers, at average cost 12,110 15,140
Natural gas transition costs collectible 2,295 4,612
Deferred cost of gas and supplier refunds, net 10,615 -
Prepaid expenses and other 2,918 3,281
45,611 54,512
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,778 30,015
Other 3,612 3,013
Unamortized debt expense 1,240 1,340
34,630 34,368
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $ 308,772 $ 517,232
The accompanying notes are an integral part of the financial statements.
-3-
<PAGE>
PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
June 30, December 31,
1996 1995
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION: (Note 4)
Common shareholder's investment $ 94,973 $ 208,356
Preferred stock -
Not subject to mandatory redemption, net 19,222 33,615
Subject to mandatory redemption 729 1,680
Long-term debt 55,500 55,000
170,424 298,651
CURRENT LIABILITIES:
Current portion of long-term debt 11,000 115,801
Preferred stock subject to repurchase or
mandatory redemption 456 80
Note payable 5,000 10,000
Accounts payable -
Suppliers 14,590 17,781
Affiliates, net 907 826
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 617 1,542
Accrued income taxes 40,999 516
Accrued interest 680 2,062
Accrued natural gas transition costs 1,770 2,278
Other 3,642 3,162
79,661 154,482
DEFERRED CREDITS:
Deferred income taxes 45,972 48,848
Accrued natural gas transition costs 207 1,144
Unamortized investment tax credits 4,853 4,938
Operating reserves 3,283 3,709
Other 4,372 5,460
58,687 64,099
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 308,772 $ 517,232
The accompanying notes are an integral part of the financial statements.
-4-
<PAGE>
PG ENERGY INC.
STATEMENTS OF CASH FLOWS
[CAPTION]
Six Months Ended
June 30,
1996 1995
(Thousands of Dollars)
[S] [C] [C]
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 7,748 $ 6,215
Effects of noncash charges to income -
Depreciation 3,908 3,596
Deferred income taxes, net 166 (127)
Provisions for self insurance 591 526
Other, net 772 1,219
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 15,140 13,733
Gas held by suppliers 3,030 7,187
Accounts payable (2,468) (2,691)
Deferred cost of gas and supplier refunds, net (9,680) 14,019
Other current assets and liabilities, net 2,467 (8,847)
Other operating items, net (3,754) 438
Net cash provided by continuing operations 17,920 35,268
Net cash provided (used) by discontinued operations (24,175) 3,764
Net cash provided (used) by operating activities (6,255) 39,032
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (8,823) (8,304)
Proceeds from the sale of discontinued operations 261,752 -
Other, net 69 (246)
Net cash provided (used) by investing activities 252,998 (8,550)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 339 5,046
Repurchase of common stock (85,000) -
Repurchase/redemption of preferred stock (14,968) (80)
Dividends on common and preferred stock (34,790) (9,220)
Repayment of long-term debt (50,000) (210)
Net decrease in bank borrowings (59,943) (26,070)
Other, net (1,300) (18)
Net cash used for financing activities (245,662) (30,552)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,081 (70)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 328 304
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,409 $ 234
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 4,277 $ 11,266
Income taxes $ 22,441 $ 8,147
The accompanying notes are an integral part of the financial statements.
-5-
<PAGE>
PG ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
Nature of the Business. PG Energy Inc. ("PGE"), formerly known as
Pennsylvania Gas and Water Company, a wholly-owned subsidiary of Pennsylvania
Enterprises, Inc. ("PEI"), is a regulated public utility subject to the
jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and
accounting purposes. PGE distributes natural gas to a ten-county area in
northeastern Pennsylvania, a territory that includes 116 municipalities, in
addition to the cities of Scranton, Wilkes-Barre and Williamsport. The
financial statements of PGE have been prepared in accordance with generally
accepted accounting principles, including the provisions of Financial Accounting
Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain
Types of Regulation," which give recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.
Interim Financial Statements. The interim financial statements included
herein have been prepared by PGE, 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 PGE 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 PGE's latest annual
report on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors which are difficult to
predict and are beyond the control of PGE. Therefore, actual amounts could
differ from these estimates.
(2) DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the
"Agreement"), among PEI, PGE, American Water Works Company, Inc. ("American")
and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-
owned subsidiary of American, PEI and PGE sold substantially all of the assets,
properties and rights of PGE's water utility operations to Pennsylvania-American
on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American
paid PGE $414.3 million consisting of $262.1 million in cash and the assumption
of $152.2 million of PGE's liabilities, including $141.0 million of its long-
term debt. PGE continued to operate the water utility business until February
16, 1996.
-6-
<PAGE>
The sale price reflected a $6.5 million premium over the book value of the
assets sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996). The sale involved a gain for income tax
purposes, primarily because of the accelerated depreciation that had been
claimed by PGE with respect to the water utility plant that was sold. It is
estimated that the income taxes payable on the sale, for which deferred income
taxes had previously been provided, will be approximately $58.6 million, of
which $22.3 million had been paid as of June 30, 1996.
The cash proceeds from the sale of approximately $203.5 million, net of the
estimated $58.6 million of income taxes, are being used by PEI and PGE to retire
debt, to repurchase stock (see Note 3 of these Notes to Financial Statements),
for construction expenditures and for other working capital purposes. With the
sale of PGE's water utility operations, the principal assets of PEI and PGE now
consist of PGE's gas utility operations and approximately 46,000 acres of land.
The accompanying financial statements reflect PGE's water utility operations
as "discontinued operations" effective March 31, 1995. Interest charges
relating to indebtedness of PGE were allocated to the discontinued operations
based on the relationship of the gross water utility plant that was sold to the
total of PGE's gross gas and water utility plant. This is the same method as
was utilized by PGE and the PPUC in establishing the revenue requirements of
both PGE's gas and water utility operations. None of the dividends on PGE's
preferred stock nor any of PEI's interest expense were allocated to the
discontinued operations.
-7-
<PAGE>
Selected financial information for the discontinued operations is set forth
below:
Net Assets of Discontinued Operations
[CAPTION]
As of December 31, 1995
(Thousands of Dollars)
[S] [C]
Net utility plant $ 368,742
Current assets (primarily accounts
receivable and accrued revenues) 12,756
Deferred charges and other assets 25,752
Total assets acquired by
Pennsylvania-American 407,250
Liabilities assumed by
Pennsylvania-American -
Long-term debt 141,097
Other 5,983
147,080
Net assets acquired by
Pennsylvania-American 260,170
Estimated liability for income taxes on
sale of discontinued operations (56,710)
Estimated net income of discontinued operations
during the remainder of the phase-out period 790
Total net assets of discontinued operations $ 204,250
Loss With Respect to Discontinued Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
Income from discontinued operations,
net of related income taxes of
$1,403,000* $ - $ - $ - $ 2,127
Estimated loss on disposal of
discontinued operations, net of
income during the phase-out period (21) - (386) (5,831)
Loss with respect to discontinued
operations $ 21 $ - $ 386 $ 3,704
</TABLE>
* Reflects income only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(3) CASH DIVIDENDS
The cash dividends per share for the six months ended June 30, 1996, include
$9.077 with respect to a special $30.0 million dividend in the form of a 10.125%
promissory note that was issued by PGE to PEI on February 16, 1996, in
connection with the sale of PGE's water utility operations on such date. This
note was paid in full by PGE on March 8, 1996.
-8-
<PAGE>
(4) REPURCHASES OF STOCK
On February 16, 1996, PGE repurchased 2,297,297 shares of its common stock
from PEI for an aggregate consideration of $85.0 million. Additionally, during
the quarter ended June 30, 1996, PGE repurchased 128,984 shares of its 9%
cumulative preferred stock for an aggregate consideration of $14.0 million and
18,524 shares of its 4.10% cumulative preferred stock for an aggregate
consideration of $927,000, largely pursuant to self tender offers. On June 17,
1996, PGE also repurchased 8,608 shares of its 5.75% cumulative preferred stock
(including 800 shares redeemed in accordance with annual sinking fund
provisions) for an aggregate considerations of $758,000.
(5) ACCOUNTING CHANGES
Long-Lived Assets. In March 1995, 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 provisions
of FASB Statement 121, which PGE adopted effective January 1, 1996, did not have
a material impact on the financial position or results of operations of PGE
since the carrying amount of all assets, including regulatory assets, are
considered recoverable.
(6) 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 PGE 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 PGE for complying with the Emergency Order. PGE
does not believe that its compliance with the terms of such Order will have a
material adverse effect on its financial position or results of operations.
Environmental Matters
PGE, 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 PGE. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PGE 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, PGE 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.
-9-
<PAGE>
PG ENERGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the
"Agreement"), among Pennsylvania Enterprises, Inc. ("PEI"), the parent company
of PG Energy Inc. ("PGE"), PGE, American Water Works Company, Inc. ("American")
and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-
owned subsidiary of American, PEI and PGE sold substantially all of the assets,
properties and rights of PGE's water utility operations to Pennsylvania-American
on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American
paid PGE $414.3 million consisting of $262.1 million in cash and the assumption
of $152.2 million of PGE's liabilities, including $141.0 million of its long-
term debt. PGE continued to operate the water utility business until February
16, 1996.
The sale price reflected a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the net effect of other
items, principally the write-off of certain deferred regulatory assets and
deferred credits and the impact of pension and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996.)
The cash proceeds from the sale of approximately $203.5 million, net of an
estimated $58.6 million of income taxes, are being used by PEI and PGE to retire
debt, to repurchase stock, for construction expenditures and for other working
capital purposes. With the sale of PGE's water utility operations, the
principal assets of PEI and PGE now consist of PGE's gas utility operations and
approximately 46,000 acres of land.
In accordance with generally accepted accounting principles, PEI's financial
statements reflect PGE'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 PGE's continuing operations. For
additional information regarding the discontinued operations, see Note 2 of the
accompanying Notes to Financial Statements.
-10-
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PGE's statements of income as
percentages of operating revenues for each of the three and six-month periods
ended June 30, 1996, and June 30, 1995:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 49.4 51.1 55.4 58.1
OPERATING MARGIN............................. 50.6 48.9 44.6 41.9
OTHER OPERATING EXPENSES:
Operation.................................. 24.4 21.7 13.5 12.1
Maintenance................................ 5.9 5.2 2.8 2.4
Depreciation............................... 7.7 7.1 4.1 3.8
Income taxes............................... (2.0) (3.0) 5.7 4.4
Taxes other than income taxes.............. 11.4 10.5 7.1 7.0
Total other operating expenses........... 47.4 41.5 33.2 29.7
OPERATING INCOME............................. 3.2 7.4 11.4 12.2
OTHER INCOME (DEDUCTIONS), NET............... 0.6 (0.2) 0.4 0.2
INTEREST CHARGES............................. 5.3 10.7 3.6 5.7
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (1.5) (3.5) 8.2 6.7
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. 0.1 - 0.4 4.0
NET INCOME (LOSS)............................ (1.6) (3.5) 7.8 2.7
DIVIDENDS ON PREFERRED STOCK(1).............. 1.5 2.7 1.1 1.5
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (3.1) (6.2) 6.7 1.2
</TABLE>
(1) None of the dividends on preferred stock was allocated to the discontinued
operations.
Three Months Ended June 30, 1996, Compared
With Three Months Ended June 30, 1995
Operating Revenues. Operating revenues increased $273,000 (1.1%) from $25.2
million for the three-month period ended June 30, 1995, to $25.5 million for the
three-month period ended June 30, 1996, primarily as a result of a 175 million
cubic feet (5.6%) increase in consumption by PGE's residential and commercial
heating customers. Heating degree days during the second quarter of 1996 were
114 (15.0%) higher than in the second quarter of 1995 and 14.0% above normal.
The effects of the increased sales to heating customers were partially offset by
a reduction in the purchased gas cost component of PGE's tariff ("the gas cost
rate"). See "-Rate Matters."
Cost of Gas. The cost of gas decreased $299,000 (2.3%) from $12.9 million
for the three-month period ended June 30, 1995, to $12.6 million for the three-
month period ended June 30, 1996, primarily because of the aforementioned
reduction in the gas cost rate (see "-Rate Matters"), the effects of which were
largely offset by the increased sales to residential and commercial heating
customers.
-11-
<PAGE>
Operating Margin. The operating margin increased $572,000 (4.6%) from $12.3
million in the second quarter of 1995 to $12.9 million in the second quarter of
1996 and, as a percentage of operating revenues, increased from 48.9% for the
quarter ended June 30, 1995, to 50.6% for the quarter ended June 30, 1996,
primarily because of the 175 million cubic feet (5.6%) increase in consumption
by residential and commercial heating customers.
Other Operating Expenses. Other operating expenses increased $1.6 million
(15.7%) for the three-month period ended June 30, 1996, compared to the
three-month period ended June 30, 1995, and increased as a percentage of
operating revenues from 41.5% in the second quarter of 1995 to 47.4% in the
second quarter of 1996. These increases were attributable to a number of
factors, the most significant of which was a higher level of operation expenses,
which increased $769,000 (14.1%) principally as a result of higher payroll and
payroll-related costs. Payroll and payroll-related costs increased largely
because of charges, which were previously allocated to PGE's discontinued
operations, that are now being absorbed by its continuing operations. Also
contributing to the increase in other operating expenses was a $249,000 (9.4%)
increase in taxes other than income taxes as a result of increased gross
receipts tax, which is based on revenues collected from customers, a $180,000
(13.7%) increase in maintenance expenses, principally as a result of charges
relative to the maintenance of gas valves, and increased depreciation expense of
$186,000 (10.4%) attributable to additions to utility plant.
Income taxes increased $252,000 (32.9%) from a credit of $766,000 in the
second quarter of 1995 to a credit of $514,000 in the second quarter of 1996 due
to a lower level of loss before income taxes (for this purpose, operating income
net of interest charges).
Operating Income. As a result of the above, total operating income
decreased by $1.1 million (57.0%) from $1.9 million for the three-month period
ended June 30, 1995, to $803,000 for the three-month period ended June 30, 1996,
and decreased as a percentage of total operating revenues for such periods from
7.4% in 1995 to 3.2% in 1996, primarily because of the aforementioned increase
in other operating expenses, the effects of which were partially offset by the
increased operating margin resulting from the higher consumption by residential
and commercial heating customers.
Interest Charges. Interest charges decreased by $1.3 million (50.0%) from
$2.7 million for the three-month period ended June 30, 1995, to $1.3 million for
the three-month period ended June 30, 1996. This decrease was largely
attributable to the lower level of indebtedness resulting from the repayment of
PGE's $50.0 million term loan and all of its then outstanding bank borrowings on
February 16, 1996, with proceeds from the sale of its regulated water utility
operations on such date.
Income (Loss) From Continuing Operations. The loss from continuing
operations decreased $515,000 (57.9%) from $889,000 for the quarter ended June
30, 1995, to $374,000 for the quarter ended June 30, 1996. This decrease was
largely the result of the matters discussed above, principally the increase in
operating margin and decrease in interest charges, the effects of which were
largely offset by the increased other operating expenses.
-12-
<PAGE>
Dividends on Preferred Stock. Dividends on preferred stock decreased
$309,000 (44.7%) from $692,000 for the three-month period ended June 30, 1995,
to $383,000 for the three-month period ended June 30, 1996, largely as a result
of the repurchase by PGE of 128,984 shares of its 9% cumulative preferred stock,
8,608 shares of its 5.75% cumulative preferred stock and 18,524 shares of its
4.10% cumulative preferred stock during the second quarter of 1996.
Earnings (Loss) Applicable to Common Stock. The decrease in loss applicable
to common stock of $803,000 from $1.6 million for the three-month period ended
June 30, 1995, to $778,000 for the three-month period ended June 30, 1996, as
well as the $.04 decrease in the loss per share of common stock before premium
on repurchase/redemption of preferred stock, from $.28 per share for the quarter
ended June 30, 1995, to $.24 per share for the quarter ended June 30, 1996, was
largely the result of the factors discussed above. The effect of the decrease
in loss applicable to common stock on earnings per share was more than offset by
a $.39 per share charge for the premium on the repurchase of preferred stock
which acted to increase the loss per share of common stock for the quarter ended
June 30, 1996, to $.63 per share, compared to $.28 per share for the quarter
ended June 30, 1995. While premiums on the repurchase of preferred stock are
charged to retained earnings and are not a determinant of income, the premiums
associated with repurchases must be taken into account in calculating the
earnings (loss) per share of common stock.
Six Months Ended June 30, 1996, Compared
With Six Months Ended June 30, 1995
Operating Revenues. Operating revenues increased $1.5 million (1.6%) from
$93.4 million for the six-month period ended June 30, 1995, to $94.9 million for
the six-month period ended June 30, 1996, primarily as a result of a 1.8 billion
cubic feet (13.6%) increase in sales to residential and commercial heating
customers. There was a 623 (17.5%) increase in heating degree days from 3,570
(90.3% of normal) during the first six months of 1995 compared to 4,193 (106.0%
of normal) during the first six months of 1996. The effects of the increased
sales to heating customers were largely offset by reductions in the purchased
gas cost component of PGE's tariffs (the "gas cost rate"). See "-Rate Matters."
Cost of Gas. The cost of gas decreased $1.7 million (3.2%) from $54.3
million for the six-month period ended June 30, 1995, to $52.6 million for the
six-month period ended June 30, 1996, primarily because of the aforementioned
reductions in PGE's gas cost rate (see "-Rate Matters"), the effects of which
were partially offset by the increased sales to residential and commercial
heating customers.
Operating Margin. The operating margin increased $3.2 million (8.1%) from
$39.1 million in the six-month period ended June 30, 1995, to $42.3 million in
the six-month period ended June 30, 1996, primarily because of the 1.8 billion
cubic feet (13.6%) increase in consumption by residential and commercial heating
customers. As a percentage of operating revenues, the margin increased from
41.9% in the first six months of 1995 to 44.6% in the first six months of 1996.
Other Operating Expenses. Other operating expenses increased $3.7 million
(13.4%) from $27.8 million for the six-month period ended June 30, 1995, to
$31.5 million for the six-month period ended June 30, 1996, and increased as a
percentage of operating revenues from 29.7% during the first six months of 1995
to 33.2% during the first six months of 1996, in part because of the reductions
in PGE's gas cost rate and the corresponding decrease in revenues. The $3.7
million increase in other operating expenses was attributable to a number of
factors, the most significant of which was a $1.5 million (13.3%) increase in
-13-
<PAGE>
operation expenses, primarily as result of higher payroll and payroll-related
costs. Payroll and payroll-related costs increased largely because of charges,
which were previously allocated to PGE's discontinued operations, that are now
being absorbed by its continuing operations. Also contributing to the higher
operating expenses was a $293,000 (8.2%) increase in depreciation expense
attributable to additions to PGE's utility plant, as well as a $426,000 (18.7%)
increase in maintenance expenses caused by charges relating to the maintenance
of gas valves.
Income taxes increased $1.3 million (32.0%) from $4.1 million in the first
six months of 1995 to $5.4 million in the first six months of 1996 due to an
increase in income before income taxes (for this purpose, operating income net
of interest charges).
Operating Income. As a result of the above, total operating income
decreased by $531,000 (4.7%) from $11.4 million for the six-month period ended
June 30, 1995, to $10.8 million for the six-month period ended June 30, 1996,
and decreased as a percentage of total operating revenues for such periods from
12.2% in 1995 to 11.4% in 1996, primarily because of the higher level of other
operating expenses.
Interest Charges. Interest charges decreased by $1.9 million (36.0%) from
$5.3 million for the six-month period ended June 30, 1995, to $3.4 million for
the six-month period ended June 30, 1996. This decrease was largely
attributable to the lower level of indebtedness resulting from the repayment of
PGE's $50.0 million term loan and all of its then outstanding bank borrowings on
February 16, 1996, with proceeds from the sale of its regulated water utility
operations on such date.
Income (Loss) From Continuing Operations. Income from continuing operations
increased $1.5 million (24.7%) from $6.2 million for the six months ended June
30, 1995, to $7.7 million for the six months ended June 30, 1996. This increase
was largely the result of the matters discussed above, principally the increase
in operating margin resulting from the higher level of sales to residential and
commercial heating customers and the decrease in interest charges, the effects
of which were partially offset by the higher level of other operating expenses.
Net Income (Loss). The increase in net income of $4.9 million (193.2%) from
$2.5 million for the six-month period ended June 30, 1995, to $7.4 million for
the six-month period ended June 30, 1996, was largely the result of the higher
income from continuing operations, as discussed above, and the decreased loss
with respect to discontinued operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$363,000 (26.2%) from $1.4 million for the six-month period ended June 30, 1995,
to $1.0 million for the six-month period ended June 30, 1996, largely as a
result of the repurchase by PGE of 128,984 shares of its 9% cumulative preferred
stock, 8,608 shares of its 5.75% cumulative preferred stock and 18,524 shares of
its 4.10% cumulative preferred stock, $100 par value, during the second quarter
of 1996.
Earnings (Loss) Applicable to Common Stock. The increase in earnings
applicable to common stock of $5.2 million (462.2%) from $1.1 million for the
six-month period ended June 30, 1995, to $6.3 million for the six-month period
ended June 30, 1996, as well as the increase in earnings per share of common
stock of $1.10 from $.20 per share for the six months ended June 30, 1995, to
$1.30 per share for the six months ended June 30, 1996 (after a $.33 per share
charge for premiums on the repurchase of preferred stock), were the result of
-14-
<PAGE>
the higher income from continuing operations and the reduced dividends on
preferred stock, as discussed above, and the decrease of $.57 per share from
$.67 per share for the six-month period ended June 30, 1995, to $.10 per share
for the six-month period ended June 30, 1996, in the loss with respect to
discontinued operations.
RATE MATTERS
Proposed Rate Increase. On May 24, 1996, PGE filed an application with the
Pennsylvania Public Utility Commission ("PPUC") seeking an increase in its base
gas rates, designed to produce $14.1 million in additional annual revenue, to be
effective July 23, 1996. On June 20, 1996, the PPUC suspended this rate
increase for seven months (until February 23, 1997) in order to investigate the
reasonableness of the proposed rates. It is not presently possible to determine
what action the PPUC will ultimately take in this matter.
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code (the "Code") relating to the annual purchased gas cost rate
of larger gas distribution companies, such as PGE, the PPUC, by Order adopted
May 11, 1995, authorized PGE to decrease the gas costs contained in its gas
tariffs from $3.68 per thousand cubic feet 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. In accordance with the same provisions of the
Code, the PPUC, by Order adopted November 9, 1995, authorized PGE 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 PGE's earnings since the
changes in revenue are offset by corresponding changes in the cost of gas.
Quarterly Gas Cost Adjustment. Effective September 14, 1995, the PPUC
adopted regulations providing for the quarterly adjustment of the annual
purchased gas cost rate of larger gas distribution companies, including PGE.
Such adjustments are allowed when the actual purchased gas costs vary from the
estimated costs reflected in the respective company's tariffs by 2% or more. In
accordance with the regulations regarding quarterly gas cost rate adjustments,
PGE increased its gas cost rate to $2.88 per thousand cubic feet effective June
1, 1996. Except for reducing the amount of any over or undercollections of gas
costs, the changes in gas rates pursuant to these regulations will not have any
material effect on PGE's financial position or results of operations, and PGE
will still be required to file an annual purchased gas cost rate.
Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC
adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition
costs. The PGC Order stated that Account 191 and New Facility Costs ("Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PGE and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs ("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.
-15-
<PAGE>
PGE was billed a total of $1.3 million of Gas Transition Costs by its
interstate pipelines. Of this amount, $858,000 was recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 is being recovered by PGE in its annual PGC rate that the PPUC has
approved effective December 1, 1995, and the recovery of the remaining $213,000
is being sought by PGE in its PGC rate that will be effective December 1, 1996.
By Order of the PPUC entered August 26, 1994, PGE 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 $8.7 million of Non-Gas
Transition Costs will be billed to PGE, generally over a four-year period
extending through the fourth quarter of 1997, of which $6.8 million had been
billed to PGE and $6.4 million had been recovered from its customers as of June
30, 1996. PGE 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
Sale of Water Utility Operations
On February 16, 1996, PGE sold its regulated water operations and certain
related assets to Pennsylvania-American for $414.3 million, consisting of $262.1
million in cash and the assumption of $152.2 million of PGE's liabilities,
including $141.0 million of its long-term debt. PGE used the $203.5 million of
cash proceeds from the sale, after the payment of an estimated $58.6 million of
federal and state income taxes (of which $22.3 million had been paid as of July
31, 1996), to retire debt, to repurchase stock, for construction expenditures
and for other working capital purposes. In this regard, on February 16, 1996,
PGE repurchased 2,297,297 shares of its common stock from PEI for an aggregate
consideration of $85.0 million, repaid its $50.0 million term loan due 1996 and
all of its then outstanding bank borrowings, and temporarily invested the
balance of the proceeds. Additionally, on March 8, 1996, PGE repaid its $30.0
million 10.125% promissory note which was issued to PEI as a common stock
dividend on February 16, 1996.
During the quarter ended June 30, 1996, as part of the recapitalization
following the sale of its water utility operations, PGE repurchased 128,984
shares of its 9% cumulative preferred stock for an aggregate consideration of
$14.0 million and 18,524 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $927,000, largely pursuant to self tender offers. On
June 17, 1996, PGE also repurchased 8,608 shares of its 5.75% cumulative
preferred stock (including 800 shares redeemed in accordance with annual sinking
fund provisions) for an aggregate consideration of $758,000.
Liquidity
The primary capital needs of PGE are the funding of its construction program
and the seasonal funding of its gas purchases and increases in customer accounts
receivable. PGE'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.
-16-
<PAGE>
The cash flow from PGE's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is generally the practice of PGE to use bank
borrowings to fund such expenditures, pending the periodic issuance of stock and
long-term debt. Bank borrowings are also used by PGE for the seasonal funding
of its gas purchases and increases in customer accounts receivable.
With the repayment of its term loan and all its bank borrowings on February
16, 1996, and the availability of cash proceeds from the sale of its regulated
water operations, PGE terminated its $60.0 million bank credit agreement.
However, in order to finance on-going construction expenditures and to meet its
seasonal borrowing requirements, PGE has since made arrangements for a total of
$45.5 million of unsecured revolving bank credit, which is deemed adequate for
its immediate needs. Specifically, PGE currently has five bank lines of credit
with an aggregate borrowing capacity of $45.5 million which provide for
borrowings at interest rates generally less than prime and which mature during
mid-1997. As of July 31, 1996, PGE had $23.5 million of borrowings outstanding
under these bank lines of credit. In addition, PGE is currently seeking
approval of the PPUC to borrow up to $70.0 million from PEI for periods of up to
two years. Upon receiving approval of the PPUC, PGE intends to borrow funds
from PEI during 1996, and also 1997, to repay bank borrowings and for
construction expenditures and other working capital requirements, to the extent
that PEI has funds available for lending to PGE. Any such interim borrowings by
PGE from PEI will be repaid with proceeds from bank borrowings by PGE. PGE
plans to arrange new and replacement bank lines of credit when the funds that
are available for borrowing from PEI are no longer adequate for its needs and as
it requires additional funding for working capital and other purposes.
PGE believes that it will be able to raise in a timely manner such funds as
are required for its future construction expenditures, refinancings and other
working capital requirements.
Long-Term Debt and Capital Stock Financings
PGE 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 PGE during the three-month period
ended June 30, 1996.
PGE 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").
PEI has, however, temporarily suspended the sale of stock to the DRP as a result
of the proceeds received from the sale of PGE's water utility operations. As a
consequence, although PGE realized $340,000 from the issuance of common stock to
PEI in connection with the DRP during the six-month period ended June 30, 1996,
PGE is not presently so issuing any common stock.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant by PGE totaled $8.6
million during the first six months of 1996 and are currently estimated to be
$21.0 million during the remainder of the year. Such expenditures are being
financed with proceeds from the sale of PGE's regulated water operations,
internally-generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.
-17-
<PAGE>
Current Maturities of Long-Term Debt and Preferred Stock
As of June 30, 1996, $80,000 of PGE's preferred stock and $11.0 million of
PGE's bank borrowings were required to be repaid within twelve months. An
additional $376,000 of PGE's preferred stock, which was repurchased in July,
1996, was also reflected as a current liability as of June 30, 1996.
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 26, 1996, Pennsylvania Enterprises, Inc., the sole common
shareholder of PG Energy Inc., executed an action in lieu of a meeting of
shareholders re-electing the following incumbent directors of PG Energy
Inc. to an additional one year term: Kenneth L. Pollock, William D. Davis,
Dean T. Casaday, Robert J. Keating, James A. Ross, John D. McCarthy, Ronald
W. Simms, Kenneth M. Pollock, Paul R. Freeman, John D. McCarthy, Jr. and
Richard A. Rose, Jr.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
-19-
<PAGE>
PG ENERGY INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG ENERGY INC.
(Registrant)
Date: August 9, 1996 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: August 9, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-20-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000077242
<NAME> PG ENERGY INC
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 223,345,000
<OTHER-PROPERTY-AND-INVEST> 5,186,000
<TOTAL-CURRENT-ASSETS> 45,611,000
<TOTAL-DEFERRED-CHARGES> 34,630,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 308,772,000
<COMMON> 33,142,000
<CAPITAL-SURPLUS-PAID-IN> 32,684,000
<RETAINED-EARNINGS> 29,147,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 94,973,000
729,000
19,222,000
<LONG-TERM-DEBT-NET> 55,500,000
<SHORT-TERM-NOTES> 5,000,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 11,000,000
456,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 121,892,000
<TOT-CAPITALIZATION-AND-LIAB> 308,772,000
<GROSS-OPERATING-REVENUE> 94,872,000
<INCOME-TAX-EXPENSE> 5,413,000
<OTHER-OPERATING-EXPENSES> 78,623,000
<TOTAL-OPERATING-EXPENSES> 84,036,000
<OPERATING-INCOME-LOSS> 10,836,000
<OTHER-INCOME-NET> 319,000
<INCOME-BEFORE-INTEREST-EXPEN> 11,155,000
<TOTAL-INTEREST-EXPENSE> 3,407,000
<NET-INCOME> 7,362,000
1,020,000
<EARNINGS-AVAILABLE-FOR-COMM> 6,342,000
<COMMON-STOCK-DIVIDENDS> 33,770,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> (6,255,000)
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.30
</TABLE>
