PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three
months ended March 31, 1996 and 1995. . . . . . . . . . . 2
Balance Sheets as of March 31, 1996,
and December 31, 1995 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the three
months ended March 31, 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 . . . . . . . . . . . . . . 17
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PART I. FINANCIAL INFORMATION
PG ENERGY INC.
Statements of Income
[CAPTION]
Three Months Ended
March 31,
1996 1995
(Thousands of Dollars)
[S] [C] [C]
OPERATING REVENUES $ 69,415 $ 68,237
Cost of gas 39,978 41,407
OPERATING MARGIN 29,437 26,830
OTHER OPERATING EXPENSES:
Operation 6,557 5,824
Maintenance 1,214 968
Depreciation 1,899 1,792
Income taxes 5,927 4,867
Taxes other than income taxes 3,807 3,879
Total other operating expenses 19,404 17,330
OPERATING INCOME 10,033 9,500
OTHER INCOME, NET 150 234
INCOME BEFORE INTEREST CHARGES 10,183 9,734
INTEREST CHARGES:
Interest on long-term debt 1,772 2,390
Other interest 335 249
Allowance for borrowed funds used
during construction (46) (9)
Total interest charges 2,061 2,630
INCOME FROM CONTINUING OPERATIONS 8,122 7,104
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
(Note 2) (365) (3,704)
NET INCOME 7,757 3,400
DIVIDENDS ON PREFERRED STOCK 637 691
EARNINGS APPLICABLE TO COMMON STOCK $ 7,120 $ 2,709
COMMON STOCK
Earnings per share of common stock:
Continuing operations $ 1.67 $ 1.16
Discontinued operations (.08) (.67)
Total $ 1.59 $ .49
Weighted average shares outstanding 4,468,130 5,521,112
Cash dividends per share (Note 3) $ 10.217 $ .705
The accompanying notes are an integral part of the financial statements.
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PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
March 31, December 31,
1996 1995
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost $ 298,675 $ 295,895
Accumulated depreciation (78,594) (76,882)
220,081 219,013
OTHER PROPERTY AND INVESTMENTS 5,005 5,089
CURRENT ASSETS:
Cash and cash equivalents 32,251 328
Accounts receivable -
Customers 24,950 18,189
Affiliates 250 -
Others 1,155 815
Reserve for uncollectible accounts (993) (781)
Accrued utility revenues 8,217 10,319
Materials and supplies, at average cost 2,852 2,609
Gas held by suppliers, at average cost 1,726 15,140
Natural gas transition costs collectible 3,514 4,612
Deferred cost of gas and supplier refunds, net 3,529 -
Prepaid expenses and other 4,443 3,281
81,894 54,512
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,893 30,015
Natural gas transition costs collectible - 497
Other 3,027 2,516
Unamortized debt expense 1,283 1,340
34,203 34,368
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $ 341,183 $ 517,232
The accompanying notes are an integral part of the financial statements.
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PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
March 31, December 31,
1996 1995
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION: (Note 4)
Common shareholder's investment $ 97,045 $ 208,356
Preferred stock -
Not subject to mandatory redemption, net 18,944 33,615
Subject to mandatory redemption 1,680 1,680
Long-term debt 55,000 55,000
172,669 298,651
CURRENT LIABILITIES:
Current portion of long-term debt - 115,801
Preferred stock subject to mandatory
redemption or repurchase 14,751 80
Note payable - 10,000
Accounts payable -
Suppliers 16,080 17,781
Affiliates, net - 826
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 2,330 1,542
Accrued income taxes 63,795 516
Accrued interest 979 2,062
Accrued natural gas transition costs 2,247 2,278
Other 5,254 3,162
105,436 154,482
DEFERRED CREDITS:
Deferred income taxes 45,923 48,848
Accrued natural gas transition costs 588 1,144
Unamortized investment tax credits 4,895 4,938
Operating reserves 3,359 3,709
Other 8,313 5,460
63,078 64,099
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 341,183 $ 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]
Three Months Ended
March 31,
1996 1995
(Thousands of Dollars)
[S] [C] [C]
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 8,122 $ 7,104
Effects of noncash charges to income -
Depreciation 1,912 1,799
Deferred income taxes, net 92 1,106
Provisions for self insurance 241 163
Other, net 530 916
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (5,037) (3,486)
Gas held by suppliers 13,414 10,719
Accounts payable (1,885) (5,421)
Deferred cost of gas and supplier refunds, net (2,955) 15,397
Other current assets and liabilities, net 4,995 (876)
Other operating items, net (2,895) (418)
Net cash provided by continuing operations 16,534 27,003
Net cash provided by discontinued operations 2,133 3,764
Net cash provided by operating activities 18,667 30,767
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (2,973) (3,770)
Proceeds from the sale of discontinued operations 261,752 -
Other, net 68 158
Net cash provided (used) by investing activities 258,847 (3,612)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 339 2,855
Repurchase of common stock (85,000) -
Dividends on common and preferred stock (34,407) (4,584)
Repayment of long-term debt (50,000) -
Net decrease in bank borrowings (76,443) (24,925)
Other, net (80) (10)
Net cash used for financing activities (245,591) (26,664)
NET INCREASE IN CASH AND CASH EQUIVALENTS 31,923 491
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 328 304
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,251 $ 795
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 3,082 $ 5,112
Income taxes $ 445 $ 437
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.
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, PGE sold substantially all of the assets, properties and
rights of its water utility operations to Pennsylvania-American on February 16,
1996.
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Under the terms of the Agreement, Pennsylvania-American paid PGE
approximately $413.5 million consisting of $266.4 million in cash and the
assumption of $147.1 million of PGE's liabilities, including $141.1 million of
its long-term debt. This price was subsequently reduced to $409.5 million as a
result of certain post-closing adjustments and is subject to further post-
closing adjustments, which currently are not expected to exceed $100-200,000.
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 $6.0 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 $58.7 million.
The net cash proceeds from the sale of approximately $203.1 million, net of
the estimated $58.7 million payable for income taxes, are being used by PGE to
retire debt, to repurchase stock (see Note 3 of these Notes to Financial
Statements) and for working capital for its continuing operations. With the
sale of PGE's water utility operations, the principal assets of PGE now consist
of its 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:
[CAPTION]
Net Assets of Discontinued Operations
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
[CAPTION]
Three Months Ended March 31,
1996 1995
(Thousands of Dollars)
[S] [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 (365) (5,831)
Loss with respect to discontinued operations $ (365) $ (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.
(3) CASH DIVIDENDS
The cash dividends per share for the three months ended March 31, 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. During April, 1996,
PGE repurchased 128,359 shares of its 9% Cumulative Preferred Stock for an
aggregate consideration of $13.9 million and 18,354 shares of its 4.10%
Cumulative Preferred Stock for an aggregate consideration of $918,000, in each
case pursuant to a self tender offer dated March 11, 1996.
(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 PGE's financial position or results of operations 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 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, (the
"Agreement") among PEI, PGE, American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, PGE sold substantially all of the assets, properties and
rights of its water utility operations to Pennsylvania-American on February 16,
1996.
Under the terms of the agreement, Pennsylvania-American paid PGE
approximately $413.5 million consisting of $266.4 million in cash and the
assumption of $147.1 million of PGE's liabilities, including $141.1 million of
its long-term debt. This price was subsequently reduced to $409.5 million as a
result of certain post-closing adjustments and is subject to further post-
closing adjustments, which currently are not expected to exceed $100-200,000.
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 $6.0 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 net cash proceeds from the sale of approximately $203.1 million, net of
an estimated $58.7 million payable for income taxes, are being used by PGE to
retire debt, to repurchase stock (see Note 3 of the accompanying Notes to
Financial Statements) and for working capital for its continuing operations.
With the sale of its water utility operations, the principal assets of PGE now
consist of its gas utility operations and approximately 46,000 acres of land.
In accordance with generally accepted accounting principles, PGE's financial
statements reflect its 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 total operating revenues for each of the three-month periods
ended March 31, 1996, and March 31, 1995:
[CAPTION]
Percentage of
Operating Revenues
Three Months Ended
March 31,
1996 1995
[S] [C] [C]
OPERATING REVENUES............................ 100.0% 100.0%
Cost of gas................................. 57.6 60.7
OPERATING MARGIN.............................. 42.4 39.3
OTHER OPERATING EXPENSES:
Operation................................... 9.4 8.6
Maintenance................................. 1.8 1.4
Depreciation................................ 2.7 2.6
Income taxes................................ 8.5 7.1
Taxes other than income taxes............... 5.5 5.7
Total other operating expenses............ 27.9 25.4
OPERATING INCOME.............................. 14.5 13.9
OTHER INCOME, NET............................. 0.2 0.3
INTEREST CHARGES.............................. 3.0 3.8
INCOME FROM CONTINUING OPERATIONS............. 11.7 10.4
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS.. (0.5) (5.4)
NET INCOME.................................... 11.2 5.0
DIVIDENDS ON PREFERRED STOCK(1)............... 0.9 1.0
EARNINGS APPLICABLE TO COMMON STOCK........... 10.3 4.0
(1) None of the dividends on preferred stock was allocated to the discontinued
operations.
Three Months Ended March 31, 1996, Compared
With Three Months Ended March 31, 1995
Operating Revenues. Operating revenues increased $1.2 million (1.7%) from
$68.2 million for the three-month period ended March 31, 1995, to $69.4 million
for the three-month period ended March 31, 1996. This increase was primarily
the result of a 1.6 billion cubic feet (16.1%) increase in sales to residential
and commercial heating customers as a result of a 509 (18.1%) increase in
heating degree days. There were 3,321 heating degree days (104.1% of normal)
during the first quarter of 1996 compared to 2,812 (88.2% of normal) during the
first quarter in 1995. 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 $1.4 million (3.5%) from $41.4
million for the three-month period ended March 31, 1995, to $40.0 million for
the three-month period ended March 31, 1996, primarily because of the
aforementioned reduction in the gas cost rate (see "-Rate Matters"), the effects
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of which were partially offset by the increased sales to residential and
commercial heating customers.
Operating Margin. The operating margin increased $2.6 million (9.7%) from
$26.8 million in the first quarter of 1995 to $29.4 million in the first quarter
of 1996 and, as a percentage of operating revenues, increased from 39.3% for the
quarter ended March 31, 1995, to 42.4% for the quarter ended March 31, 1996,
primarily because of the 1.6 billion cubic feet (16.1%) increase in consumption
by residential and commercial heating customers.
Other Operating Expenses. Other operating expenses increased $2.1 million
(12.0%) for the three-month period ended March 31, 1996, compared to the
three-month period ended March 31, 1995, and increased as a percentage of
operating revenues from 25.4% in the first quarter of 1995 to 27.9% in the first
quarter of 1996. These increases were attributable to a number of factors, the
most significant of which was a $1.1 million (21.8%) increase in income taxes.
Income taxes increased from $4.9 million in the first quarter of 1995 to $5.9
million in the first quarter of 1996 because of an increase in income before
income taxes (for this purpose, operating income net of interest charges). Also
contributing to the increase in other operating expenses was a higher level of
operation expenses, which increased $733,000 (12.6%) principally as a result of
higher payroll and payroll-related costs, a $246,000 (25.4%) increase in
maintenance expenses, principally as a result of charges relative to the
maintenance of gas valves, and increased depreciation expense of $107,000 (6.0%)
as a result of additions to utility plant.
Operating Income. As a result of the above, total operating income
increased by $533,000 (5.6%) from $9.5 million for the three-month period ended
March 31, 1995, to $10.0 million for the three-month period ended March 31,
1996, and increased as a percentage of total operating revenues for such periods
from 13.9% in 1995 to 14.5% in 1996, primarily because of the increase in
operating revenues resulting from the higher consumption by residential and
commercial heating customers.
Interest Charges. Interest charges decreased by $569,000 (21.6%) from $2.6
million for the three-month period ended March 31, 1995, to $2.1 million for the
three-month period ended March 31, 1996. This decrease was largely attributable
to the repayment of PGE's $50.0 million term loan and all of its outstanding
bank borrowings on February 16, 1996, with proceeds from the sale of its
regulated water utility operations on such date.
Income From Continuing Operations. Income from continuing operations
increased $1.0 million (14.3%) from $7.1 million for the quarter ended March 31,
1995, to $8.1 million for the quarter ended March 31, 1996. This increase was
largely the result of the matters discussed above, principally the increase in
operating margin and decrease in interest charges.
Net Income. The increase in net income of $4.4 million from $3.4 million
for the three-month period ended March 31, 1995, to $7.8 million for the three-
month period ended March 31, 1996, was largely the result of increased income
from continuing operations and the reduced loss with respect to discontinued
operations.
Earnings Applicable to Common Stock. The increase in earnings applicable to
common stock of $4.4 million from $2.7 million for the three-month period ended
March 31, 1995, to $7.1 million for the three-month period ended March 31, 1996,
as well as the increase in earnings per share of common stock of $1.10 from $.49
per share for the quarter ended March 31, 1995, to $1.59 per share for the
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quarter ended March 31, 1996, were largely the result of the increased income
from continuing operations and the reduced loss with respect to discontinued
operations.
RATE MATTERS
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 that provide 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.
Except for reducing the amount of any over or undercollections of gas costs,
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. As of May 10, 1996, no such quarterly gas cost
adjustments had been made to PGE's tariffs.
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 are 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
will be sought by PGE in its PGC rate that is expected to become 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
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FERC Order 636 through the billing of a surcharge to its customers effective
September 12, 1994. It is currently estimated that $9.4 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 $6.6 million had been
billed to PGE and $5.9 million had been recovered from its customers as of March
31, 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 approximately $413.5 million,
consisting of $266.4 million in cash and the assumption of $147.1 million of
PGE's liabilities, including $141.1 million of its long-term debt. This price
was subsequently reduced to $409.5 million as a result of certain post-closing
adjustments and is subject to further post-closing adjustments, which currently
are not expected to exceed $100-200,000.
PGE is using the $203.1 million of cash proceeds from the sale, after the
payment of an estimated $58.7 million of federal and state income taxes, to
retire debt, to repurchase stock and for 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 and repaid its
$50.0 million term loan and all of its outstanding bank borrowings.
Additionally, PGE temporarily invested $67.0 million of the proceeds from the
sale pending the use of such funds for (i) the repayment on March 8, 1996, of
its $30.0 million 10.125% promissory note which was issued to PEI as a common
stock dividend on February 16, 1996, (ii) the repurchase of 128,359 shares of
its 9% cumulative preferred stock at a price of $108 per share (for an aggregate
consideration of $13.9 million) in April, 1996, (iii) the repurchase of 18,354
shares of its 4.10% cumulative preferred stock at a price of $50 per share (for
an aggregate consideration of $918,000) in April, 1996, and (iv) for other
working capital purposes. As of May 10, 1996, PGE had temporary cash
investments totaling approximately $13.0 million.
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 that have been temporarily invested, PGE terminated its $60.0
million bank credit agreement and one additional bank line of credit under which
$3.0 million was available for borrowing by PGE. PGE has retained and currently
has three bank lines of credit with an aggregate borrowing capacity of $14.5
million (See "-Liquidity"), which is deemed adequate for its immediate needs
through June 30, 1996, when the last $5.0 million of these lines will expire.
PGE plans to arrange new and replacement bank lines of credit as the proceeds
from the sale of its water utility operations are fully utilized and as it
requires bank borrowings for working capital and other purposes.
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 its 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.
-14-
<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 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.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, PGE has made arrangements for a total of $14.5 million
of unsecured revolving bank credit and plans to arrange other bank lines of
credit as its needs require (See "-Sale of Water Utility Operations").
Specifically, PGE currently has three bank lines of credit with an aggregate
borrowing capacity of $14.5 million which provide for borrowings at interest
rates generally less than prime. Two of these bank lines providing for an
aggregate borrowing capacity of $9.5 million expire on May 31, 1996, and the
third line, which provides for borrowings up to $5.0 million, expires June 30,
1996. However, PGE currently has no borrowings outstanding under these bank
lines of credit, and it intends to arrange new and replacement bank lines of
credit when it again has a need for bank borrowings. Additionally, PGE plans to
borrow funds from PEI during 1996 for its construction expenditures and other
working capital requirements to the extent that PEI has funds available for
lending to PGE. Any such interim borrowings from PEI will be repaid with
proceeds from bank borrowings by PGE.
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 March 31, 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").
During the three-month period ended March 31, 1996, PGE realized $340,000 from
the issuance of common stock to PEI under the DRP.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $2.8 million
during the first three months of 1996 and are currently estimated to be $26.8
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.
Current Maturities of Long-Term Debt and Preferred Stock
As of March 31, 1996, $80,000 of PGE's preferred stock was required to be
repaid within twelve months. An additional $14.7 million of PGE's preferred
stock, which was repurchased in April, 1996, pursuant to self tender offers, was
also reflected as a current liability as of March 31, 1996.
-15-
<PAGE>
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.
-16-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27-1 Financial Data Schedule -- filed herewith.
(b) PGE filed a report on Form 8-K dated February 28, 1996, pursuant to Item 5.
Other Events, regarding the sale by PGE on February 16, 1996, of its
regulated water utility operations and certain related assets.
-17-
<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: May 14, 1996 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: May 14, 1996 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-18-
<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 FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000077242
<NAME> PG ENERGY INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
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