PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three and nine
months ended September 30, 1996 and 1995. . . . . . . . . 2
Balance Sheets as of September 30, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the nine
months ended September 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19
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PART I. FINANCIAL INFORMATION
PG ENERGY INC.
Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 13,998 $ 12,119 $ 108,870 $ 105,540
Cost of gas 5,979 4,866 58,532 59,147
OPERATING MARGIN 8,019 7,253 50,338 46,393
OTHER OPERATING EXPENSES:
Operation 5,716 5,062 18,499 16,342
Maintenance 1,379 1,452 4,085 3,732
Depreciation 1,969 1,785 5,838 5,361
Income taxes (2,005) (2,442) 3,408 1,659
Taxes other than income taxes 1,619 1,399 8,331 7,934
Total other operating expenses 8,678 7,256 40,161 35,028
OPERATING INCOME (LOSS) (659) (3) 10,177 11,365
OTHER INCOME (DEDUCTIONS), NET (8) 20 311 192
INCOME (LOSS) BEFORE INTEREST CHARGES (667) 17 10,488 11,557
INTEREST CHARGES:
Interest on long-term debt 1,665 2,295 4,680 6,954
Other interest 68 571 556 1,258
Allowance for borrowed funds used
during construction (73) (19) (169) (40)
Total interest charges 1,660 2,847 5,067 8,172
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,327) (2,830) 5,421 3,385
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS (Note 2) - - (386) (3,704)
NET INCOME (LOSS) (2,327) (2,830) 5,035 (319)
DIVIDENDS ON PREFERRED STOCK 363 690 1,383 2,073
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (2,690) $ (3,520) $ 3,652 $ (2,392)
COMMON STOCK
Earnings (loss) per share of common stock:
Continuing operations $ (.81) $ (.63) $ 1.09 $ .24
Discontinued operations - - (.10) (.67)
Net income (loss) before premium on
repurchase/redemption of preferred stock (.81) (.63) .99 (.43)
Premium on repurchase/redemption of
preferred stock (.03) - (.37) -
Total $ (.84) $ (.63) $ .62 $ (.43)
Weighted average shares outstanding 3,314,155 5,585,882 3,697,410 5,561,257
Cash dividends per share (Note 3) $ - $ .64 $ 10.217 $ 2.0525
</TABLE>
The accompanying notes are an integral part of the financial statements.
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PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
September 30, December 31,
1996 1995
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost $ 311,363 $ 295,895
Accumulated depreciation (80,708) (76,882)
230,655 219,013
OTHER PROPERTY AND INVESTMENTS 5,159 5,089
CURRENT ASSETS:
Cash and cash equivalents 632 328
Accounts receivable -
Customers 7,948 18,189
Affiliates, net 122 -
Others 576 815
Reserve for uncollectible accounts (882) (781)
Accrued utility revenues 1,781 10,319
Materials and supplies, at average cost 2,959 2,609
Gas held by suppliers, at average cost 25,439 15,140
Natural gas transition costs collectible 3,134 4,612
Deferred cost of gas and supplier refunds, net 17,545 -
Prepaid expenses and other 1,716 3,281
60,970 54,512
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,687 30,015
Other 4,331 3,013
Unamortized debt expense 1,196 1,340
35,214 34,368
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $ 331,998 $ 517,232
The accompanying notes are an integral part of the financial statements.
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PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
September 30, December 31,
1996 1995
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION: (Note 4)
Common shareholder's investment $ 92,188 $ 208,356
Preferred stock -
Not subject to mandatory redemption, net 19,192 33,615
Subject to mandatory redemption 739 1,680
Long-term debt:
Parent 37,300 -
Other 55,000 55,000
204,419 298,651
CURRENT LIABILITIES:
Current portion of long-term debt 20,130 115,801
Preferred stock subject to mandatory redemption 80 80
Note payable - 10,000
Accounts payable -
Suppliers 13,785 17,781
Affiliates, net - 826
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 525 1,542
Accrued income taxes 27,445 516
Accrued interest 921 2,062
Accrued natural gas transition costs 2,292 2,278
Other 3,609 3,162
68,787 154,482
DEFERRED CREDITS:
Deferred income taxes 46,096 48,848
Accrued natural gas transition costs 384 1,144
Unamortized investment tax credits 4,810 4,938
Operating reserves 3,113 3,709
Other 4,389 5,460
58,792 64,099
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 331,998 $ 517,232
The accompanying notes are an integral part of the financial statements.
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PG ENERGY INC.
STATEMENTS OF CASH FLOWS
[CAPTION]
Nine Months Ended
September 30,
1996 1995
(Thousands of Dollars)
[S] [C] [C]
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 5,421 $ 3,385
Effects of noncash charges to income -
Depreciation 5,890 5,395
Deferred income taxes, net 519 195
Provisions for self insurance 742 889
Other, net 953 1,659
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 18,997 16,664
Gas held by suppliers (10,299) (130)
Accounts payable (4,639) (2,334)
Deferred cost of gas and supplier refunds, net (16,801) 7,207
Other current assets and liabilities, net 1,291 (10,335)
Other operating items, net (4,636) 1,077
Net cash provided (used) by continuing operations (2,562) 23,672
Net cash provided (used) by discontinued operations (35,470) 3,764
Net cash provided (used) by operating activities (38,032) 27,436
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (18,501) (14,907)
Proceeds from the sale of discontinued operations 261,752 -
Other, net 212 2,560
Net cash provided (used) by investing activities 243,463 (12,347)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 339 5,383
Repurchase of common stock (85,007) -
Repurchase/redemption of preferred stock (15,364) (80)
Dividends on common and preferred stock (35,151) (13,484)
Issuance of long-term debt to parent 49,900 -
Repayment of long-term debt to parent (12,600) -
Repayment of long-term debt (50,000) (3,535)
Net decrease in bank borrowings (55,854) (3,125)
Other, net (1,390) (25)
Net cash used for financing activities (205,127) (14,866)
NET INCREASE IN CASH AND CASH EQUIVALENTS 304 223
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 328 304
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 632 $ 527
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,704 $ 16,353
Income taxes $ 34,386 $ 8,338
The accompanying notes are an integral part of the financial statements.
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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.
On October 30, 1996, PGE signed a purchase agreement to acquire all of the
capital stock of Honesdale Gas Company, which distributes natural gas to
approximately 3,200 customers in portions of Wayne and Pike Counties in
northeastern Pennsylvania. This acquisition, which is subject to approval of
the PPUC, is expected to be consummated in early 1997.
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, as amended
(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
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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 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 $33.5 million had been paid as of September 30, 1996.
The cash proceeds from the sale of approximately $203.5 million, net of the
estimated $58.6 million of income taxes, have been used by PEI and PGE to retire
debt, to repurchase stock (see Note 4 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.
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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
<TABLE>
<CAPTION>
Loss With Respect to Discontinued Operations
Three Months Ended Nine Months Ended
September 30, September 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 - - (386) (5,831)
Loss with respect to discontinued
operations $ - $ - $ (386) $(3,704)
* Reflects income only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
</TABLE>
(3) CASH DIVIDENDS
The cash dividends per share for the nine months ended September 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.
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(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 nine-month period ended September 30, 1996, PGE repurchased 132,988 shares
of its 9% cumulative preferred stock for an aggregate consideration of $14.4
million and 18,591 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $947,000, largely pursuant to self tender offers
conducted during March and April, 1996. On June 17, 1996, PGE also repurchased
9,408 shares of its 5.75% cumulative preferred stock (including 800 shares
redeemed in accordance with annual sinking fund provisions) for an aggregate
consideration of $838,000.
(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.
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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, as amended
(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, have been 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.
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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 nine-month periods
ended September 30, 1996, and September 30, 1995:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 42.7 40.2 53.8 56.0
OPERATING MARGIN............................. 57.3 59.8 46.2 44.0
OTHER OPERATING EXPENSES:
Operation.................................. 40.8 41.8 17.0 15.5
Maintenance................................ 9.8 12.0 3.8 3.5
Depreciation............................... 14.1 14.7 5.4 5.1
Income taxes............................... (14.3) (20.1) 3.1 1.6
Taxes other than income taxes.............. 11.6 11.5 7.6 7.5
Total other operating expenses........... 62.0 59.9 36.9 33.2
OPERATING INCOME (LOSS)...................... (4.7) (0.1) 9.3 10.8
OTHER INCOME (DEDUCTIONS), NET............... - 0.2 0.3 0.2
INTEREST CHARGES............................. (11.9) (23.5) (4.6) (7.8)
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (16.6) (23.4) 5.0 3.2
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - (0.4) (3.5)
NET INCOME (LOSS)............................ (16.6) (23.4) 4.6 (0.3)
DIVIDENDS ON PREFERRED STOCK(1).............. (2.6) (5.7) (1.2) (2.0)
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (19.2) (29.1) 3.4 (2.3)
(1) None of the dividends on preferred stock was allocated to the discontinued
operations.
</TABLE>
Three Months Ended September 30, 1996, Compared
With Three Months Ended September 30, 1995
Operating Revenues. Operating revenues increased $1.9 million (15.5%) from
$12.1 million for the three-month period ended September 30, 1995, to $14.0
million for the three-month period ended September 30, 1996, primarily as a
result of price increases due to increases in the purchased gas cost component
of PGE's tariffs (the "gas cost rate") (See "-Rate Matters") and a 79 million
cubic feet (6.8%) increase in consumption by PGE's residential and commercial
heating customers largely caused by customer growth and slightly cooler weather.
Cost of Gas. The cost of gas increased $1.1 million (22.9%) from $4.9
million for the three-month period ended September 30, 1995, to $6.0 million for
the three-month period ended September 30, 1996, primarily because of the
aforementioned increases in the gas cost rate (see "-Rate Matters") and
increased sales to residential and commercial heating customers.
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Operating Margin. The operating margin increased $766,000 (10.6%) from $7.3
million in the third quarter of 1995 to $8.0 million in the third quarter of
1996. However, as a percentage of operating revenues, the operating margin
decreased from 59.8% for the quarter ended September 30, 1995, to 57.3% for the
quarter ended September 30, 1996, primarily because of the increased cost of
gas.
Other Operating Expenses. Other operating expenses increased $1.4 million
(19.6%) for the three-month period ended September 30, 1996, compared to the
three-month period ended September 30, 1995, and increased as a percentage of
operating revenues from 59.9% in the third quarter of 1995 to 62.0% in the third
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 $654,000 (12.9%) 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 $220,000 (15.7%)
increase in taxes other than income taxes as a result of increased gross
receipts tax, which is based on revenues collected from customers, and increased
depreciation expense of $184,000 (10.3%) attributable to additions to utility
plant.
Income taxes increased $437,000 (17.9%) from a credit of $2.4 million in the
third quarter of 1995 to a credit of $2.0 million in the third quarter of 1996
due to a lower level of loss before income taxes (for this purpose, operating
income net of interest charges).
Operating Income (Loss). As a result of the above, the operating loss
increased by $656,000 from $3,000 for the three-month period ended September 30,
1995, to $659,000 for the three-month period ended September 30, 1996, and
increased as a percentage of total operating revenues for such periods from 0.1%
in 1995 to 4.7% in 1996, primarily because of the aforementioned increase in
other operating expenses, the effects of which were partially offset by the
increased operating margin.
Interest Charges. Interest charges decreased by $1.2 million (41.7%) from
$2.8 million for the three-month period ended September 30, 1995, to $1.7
million for the three-month period ended September 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 $503,000 (17.8%) from $2.8 million for the quarter ended
September 30, 1995, to $2.3 million for the quarter ended September 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 partially offset by the increased other operating expenses.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$327,000 (47.4%) from $690,000 for the three-month period ended September 30,
1995, to $363,000 for the three-month period ended September 30, 1996, primarily
as a result of the repurchase by PGE in 1996 of 132,988 shares of its 9%
cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock
and 18,591 shares of its 4.10% cumulative preferred stock, largely during the
second quarter of the year.
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Earnings (Loss) Applicable to Common Stock. The decrease in loss applicable
to common stock of $830,000 (23.6%) from $3.5 million for the three-month period
ended September 30, 1995, to $2.7 million for the three-month period ended
September 30, 1996, was largely the result of the factors discussed above.
As a result of PGE's repurchase of 2,297,297 shares of its common stock from
PEI on February 16, 1996, which acted to reduce the weighted average number of
shares outstanding for the three-month period ended September 30, 1996, by
40.6%, and the $.03 per share charge for the premium on the repurchase of
preferred stock, the loss per share of common stock increased by $.21 per share
from $.63 per share for the three-month period ended September 30, 1995, to $.84
per share for the three-month period ended September 30, 1996. While premiums
on the repurchase of preferred stock are charged to retained earnings and are
not a determinant of earnings applicable to common stock, the premiums
associated with repurchases must be taken into account in calculating the
earnings (loss) per share of common stock.
Nine Months Ended September 30, 1996, Compared
With Nine Months Ended September 30, 1995
Operating Revenues. Operating revenues increased $3.3 million (3.2%) from
$105.5 million for the nine-month period ended September 30, 1995, to $108.9
million for the nine-month period ended September 30, 1996, primarily as a
result of a 1.9 billion cubic feet (13.0%) increase in sales to residential and
commercial heating customers. There was a 660 (17.9%) increase in heating
degree days from 3,696 (90.7% of normal) during the first nine months of 1995 to
4,356 (106.9% of normal) during the first nine months of 1996. The effects of
the increased sales to heating customers were partially offset by lower levels
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 $615,000 (1.0%) from $59.1 million
for the nine-month period ended September 30, 1995, to $58.5 million for the
nine-month period ended September 30, 1996, primarily because of the
aforementioned lower levels 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 $3.9 million (8.5%) from
$46.4 million in the nine-month period ended September 30, 1995, to $50.3
million in the nine-month period ended September 30, 1996, primarily because of
the 1.9 billion cubic feet (13.0%) increase in consumption by residential and
commercial heating customers. As a percentage of operating revenues, the margin
increased from 44.0% in the first nine months of 1995 to 46.2% in the first nine
months of 1996.
Other Operating Expenses. Other operating expenses increased $5.1 million
(13.2%) from $35.0 million for the nine-month period ended September 30, 1995,
to $40.2 million for the nine-month period ended September 30, 1996, and
increased as a percentage of operating revenues from 33.2% during the first nine
months of 1995 to 36.9% during the first nine months of 1996, in part because of
the decrease in cost of gas and the corresponding reduction in revenues. The
$5.1 million increase in other operating expenses was attributable to a number
of factors, the most significant of which was a $2.2 million (13.2%) increase in
operation expenses, primarily 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 higher
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operating expenses was a $477,000 (8.9%) increase in depreciation expense
attributable to additions to PGE's utility plant, as well as a $353,000 (9.5%)
increase in maintenance expenses caused by charges relating to the maintenance
of gas valves and a $397,000 (5.0%) increase in taxes other than income taxes as
a result of increased gross receipts tax.
Income taxes increased $1.7 million (105.4%) from $1.7 million in the first
nine months of 1995 to $3.4 million in the first nine months of 1996 due to an
increase in income before income taxes (for this purpose, operating income net
of interest charges).
Operating Income (Loss). As a result of the above, operating income
decreased by $1.2 million (10.5%) from $11.4 million for the nine-month period
ended September 30, 1995, to $10.2 million for the nine-month period ended
September 30, 1996, and decreased as a percentage of total operating revenues
for such periods from 10.8% in 1995 to 9.3% in 1996, primarily because of the
higher level of other operating expenses.
Interest Charges. Interest charges decreased by $3.1 million (38.0%) from
$8.2 million for the nine-month period ended September 30, 1995, to $5.1 million
for the nine-month period ended September 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 $2.0 million (59.9%) from $3.4 million for the nine months ended
September 30, 1995, to $5.4 million for the nine months ended September 30,
1996. This increase was largely the result of the matters discussed above,
principally the increase in operating margin 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 $5.4 million from a loss
of $319,000 for the nine-month period ended September 30, 1995, to income of
$5.0 million for the nine-month period ended September 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
$690,000 (33.3%) from $2.1 million for the nine-month period ended September 30,
1995, to $1.4 million for the nine-month period ended September 30, 1996,
primarily as a result of the repurchase by PGE in 1996 of 132,988 shares of its
9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred
stock and 18,591 shares of its 4.10% cumulative preferred stock, largely during
the second quarter of the year.
Earnings (Loss) Applicable to Common Stock. The increase in earnings
applicable to common stock of $6.0 million from a loss of $2.4 million for the
nine-month period ended September 30, 1995, to income of $3.7 million for the
nine-month period ended September 30, 1996, as well as the increase in earnings
per share of common stock of $1.05 from a loss of $.43 per share for the nine
months ended September 30, 1995, to income of $.62 per share for the nine months
ended September 30, 1996 (after a $.37 per share charge for premiums on the
repurchase of preferred stock), were the result of higher income from continuing
operations and reduced dividends on preferred stock, as discussed above, and the
decrease of $.57 per share from $.67 per share for the nine-month period ended
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September 30, 1995, to $.10 per share for the nine-month period ended September
30, 1996, in the loss with respect to discontinued operations. The increase in
earnings applicable to common stock occurred despite a 33.5% decrease in the
weighted average number of shares outstanding for the nine-month period ended
September 30, 1996, resulting from the aforementioned repurchase of common stock
on February 16, 1996.
RATE MATTERS
Proposed Rate Increase. On May 24, 1996, PGE filed an application with the
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. On
November 7, 1996, PGE and certain parties filing objections to the rate increase
request filed a "Settlement Agreement and Joint Petition for Settlement of Rate
Investigation" (the "Settlement Petition") with the Administrative Law Judge
("ALJ") assigned to conduct the investigation of the rate increase request.
This Settlement Petition provides for an overall 5.3% rate increase that is
designed to produce $7.5 million of additional annual revenue. The Settlement
Petition requests PPUC approval for the rate increase to become effective by
January 15, 1997. Additionally, under the terms of the Settlement Petition, to
the extent the proposed rate increase is approved and permitted to become
effective no later than January 31, 1997, billing for the impact of the rate
increase relative to PGE's residential heating customers (which it is estimated
will total $6.6 million on an annual basis) will be deferred, without carrying
charges, until July, 1997. It is not presently possible to determine what
action either the ALJ or the PPUC will ultimately take with respect to this rate
increase request or the Settlement Petition.
Gas Cost Adjustment. The provisions of the Pennsylvania Public Utility Code
(the "Code"), require that the tariffs of gas distribution companies, such as
PGE, be adjusted on an annual basis, and on an interim basis when circumstances
dictate, to reflect changes in their purchased gas costs. In addition,
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 PGE. Such quarterly 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 these
procedures, PGE has been permitted to make the following changes since January
1, 1995, to the gas costs contained in its gas tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
[S] [C] [C] [C]
December 1, 1996 $3.01 $4.18 $35,500,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)
The changes in gas rates on account of purchased gas costs have no effect on
PGE's earnings since the change in revenue is offset by a corresponding change
in the cost of gas.
-15-
<PAGE>
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.
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 remaining $213,000 will be
recovered by PGE in its PGC rate that the PPUC has approved 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 $10.0 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 $7.3 million had been
billed to PGE and $6.8 million had been recovered from its customers as of
September 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 $33.5 million had been paid as of
September 30, 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.
-16-
<PAGE>
During the nine months ended September 30, 1996, as part of the
recapitalization following the sale of its water utility operations PGE
repurchased 132,988 shares of its 9% cumulative preferred stock for an aggregate
consideration of $14.4 million and 18,591 shares of its 4.10% cumulative
preferred stock for an aggregate consideration of $947,000, largely pursuant to
self tender offers conducted during March and April, 1996. On June 17, 1996,
PGE also repurchased 9,408 shares of its 5.75% cumulative preferred stock
(including 800 shares redeemed in accordance with annual sinking fund
provisions) for an aggregate consideration of $838,000.
Liquidity
The primary capital needs of 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.
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 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 construction expenditures and to meet its seasonal
borrowing requirements, PGE has since made arrangements for a total of $55.5
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 $55.5 million which provide for borrowings at
interest rates generally less than prime and which mature during mid-1997. As
of November 7, 1996, PGE had $25.7 million of borrowings outstanding under these
bank lines of credit. In addition, PGE can borrow up to $70.0 million from PEI
during 1996, and also 1997 (at interest rates generally less than prime), 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. As of November 7, 1996, PGE had $37.3 million outstanding under its
borrowing arrangement with PEI. 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 available 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 nine-month period
ended September 30, 1996.
-17-
<PAGE>
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 has not subsequently so issued any common stock.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant by PGE totaled $18.2
million during the first nine months of 1996 and are currently estimated to be
$11.4 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, loans from PEI 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, 1996, $80,000 of PGE's preferred stock and $20.1 million
of PGE's bank borrowings were required to be repaid within twelve months.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Employment Agreement dated as of June 26, 1996, by and among PEI,
PGE and Kenneth L. Pollock -- filed as Exhibit 10-1 to PEI's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1996, File No. 0-7812.
10-2 Employment Agreement dated as of August 28, 1996, by and among PEI,
PGE and Thomas F. Karam -- filed as Exhibit 10-2 to PEI's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1996, File
No. 0-7812.
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: November 12, 1996 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 12, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-20-
<PAGE>
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<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.
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