PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
and six months ended June 30, 1997 and 1996 . . . . . . . 2
Consolidated Balance Sheets as of June 30, 1997,
and December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1997 and 1996 . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
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PART I. FINANCIAL INFORMATION
PG ENERGY INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 33,229 $ 25,457 $ 113,168 $ 94,872
Cost of gas 18,271 12,575 67,410 52,553
OPERATING MARGIN 14,958 12,882 45,758 42,319
OTHER OPERATING EXPENSES:
Operation 6,203 6,226 12,665 12,783
Maintenance 1,316 1,492 2,442 2,706
Depreciation 2,266 1,970 4,477 3,869
Income taxes (241) (514) 5,590 5,413
Taxes other than income taxes 3,310 2,905 7,616 6,712
Total other operating expenses 12,854 12,079 32,790 31,483
OPERATING INCOME 2,104 803 12,968 10,836
OTHER INCOME (DEDUCTIONS), NET (87) 169 152 319
INCOME BEFORE INTEREST CHARGES 2,017 972 13,120 11,155
INTEREST CHARGES:
Interest on long-term debt 2,217 1,243 4,408 3,015
Other interest 137 153 341 488
Allowance for borrowed funds used
during construction (33) (50) (99) (96)
Total interest charges 2,321 1,346 4,650 3,407
INCOME (LOSS) FROM CONTINUING OPERATIONS (304) (374) 8,470 7,748
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS - (21) - (386)
NET INCOME (LOSS) (304) (395) 8,470 7,362
DIVIDENDS ON PREFERRED STOCK 318 383 671 1,020
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (622) $ (778) $ 7,799 $ 6,342
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ (.19) $ (.23) $ 2.35 $ 1.73
Discontinued operations - (.01) - (.10)
Net income (loss) before discount (premium)
on repurchase/redemption of preferred
stock (.19) (.24) 2.35 1.63
Discount (premium) on repurchase/redemption
of preferred stock .24 (.39) .25 (.33)
Total $ .05 $ (.63) $ 2.60 $ 1.30
Weighted average number of shares outstanding 3,314,155 3,314,155 3,314,155 3,891,143
Cash dividends per share $ - $ - $ - $ 10.217
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost $ 336,020 $ 319,205
Accumulated depreciation (85,080) (79,783)
250,940 239,422
OTHER PROPERTY AND INVESTMENTS 4,581 4,894
CURRENT ASSETS:
Cash and cash equivalents 298 690
Accounts receivable -
Customers 18,785 17,183
Affiliates, net 87 58
Others 688 565
Reserve for uncollectible accounts (1,631) (1,140)
Accrued utility revenues 2,201 11,830
Materials and supplies, at average cost 2,809 2,460
Gas held by suppliers, at average cost 12,024 20,265
Natural gas transition costs collectible 1,633 2,525
Deferred cost of gas and supplier refunds, net 4,983 19,316
Prepaid expenses and other 1,942 1,313
43,819 75,065
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,460 29,771
Other 4,654 4,274
Unamortized debt expense 1,067 1,153
Other 505 -
36,686 35,198
TOTAL ASSETS $ 336,026 $ 354,579
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's investment $ 104,593 $ 96,005
Preferred stock of PGE -
Not subject to mandatory redemption, net 15,877 18,851
Subject to mandatory redemption 640 739
Long-term debt 83,266 55,000
204,376 170,595
CURRENT LIABILITIES:
Current portion of long-term debt -
Parent 27,200 31,400
Other 9,087 38,721
Preferred stock subject to repurchase or
mandatory redemption 80 115
Note payable 3,500 10,000
Accounts payable -
Suppliers 14,798 17,831
Parent 848 348
Accrued general business and realty taxes 1,272 2,239
Accrued income taxes 5,865 14,559
Accrued interest 1,264 1,936
Accrued natural gas transition costs 1,184 2,095
Other 2,948 3,375
68,046 122,619
DEFERRED CREDITS:
Deferred income taxes 50,716 49,119
Unamortized investment tax credits 4,682 4,767
Operating reserves 2,892 3,086
Other 5,314 4,393
63,604 61,365
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES $ 336,026 $ 354,579
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 8,470 $ 7,748
Effects of noncash charges to income -
Depreciation 4,507 3,908
Deferred income taxes, net 578 166
Provisions for self insurance 281 591
Other, net 826 772
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 9,056 15,140
Gas held by suppliers 8,241 3,030
Accounts payable (5,380) (2,468)
Deferred cost of gas and supplier refunds, net 14,602 (9,680)
Other current assets and liabilities, net (11,933) 2,467
Other operating items, net (790) (3,754)
Net cash provided by continuing operations 28,458 17,920
Net cash used for discontinued operations - (24,175)
Net cash provided by (used for) operating
activities 28,458 (6,255)
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (13,923) (8,823)
Proceeds from the sale of discontinued operations - 261,752
Acquisition of regulated business (2,009)
Other, net 471 69
Net cash provided by (used for) investing
activities (15,461) 252,998
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock - 339
Repurchase of common stock - (85,000)
Repurchase of preferred stock (3,108) (14,968)
Dividends on common and preferred stock (671) (34,790)
Repayment of long-term debt (4,646) (50,000)
Net decrease in bank borrowings (5,782) (59,943)
Other, net 818 (1,300)
Net cash used for financing activities (13,389) (245,662)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (392) 1,081
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 690 328
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 298 $ 1,409
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 4,953 $ 4,277
Income taxes $ 14,536 $ 22,441
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. PG Energy Inc. ("PGE") a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc. ("PEI"), and Honesdale Gas Company ("Honesdale")
a wholly-owned subsidiary of PGE acquired on February 14, 1997, are regulated
public utilities. Together PGE and Honesdale distribute natural gas to a
twelve-county area in northeastern Pennsylvania, a territory that includes 129
municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport.
Principles of Consolidation. The consolidated financial statements include
the accounts of PGE and its subsidiary, Honesdale, beginning February 14, 1997,
the date Honesdale was acquired by PGE. All material intercompany accounts have
been eliminated in consolidation.
Both PGE and Honesdale are subject to the jurisdiction of the Pennsylvania
Public Utility Commission ("PPUC") for rate and accounting purposes. The
financial statements of PGE and Honesdale that are incorporated in these
consolidated financial statements 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 rates and accounting
practices of regulatory agencies such as the PPUC.
Interim Financial Statements. The interim consolidated 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 on the sale of natural gas. 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
consolidated financial statements. It is suggested that these consolidated
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 and regulatory matters which
are difficult to predict and are beyond the control of PEI. Therefore, actual
amounts could differ from these estimates.
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(2) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures, PGE has been permitted to make the
following changes since January 1, 1996, to the gas costs contained in its gas
tariff rates:
[CAPTION]
Change in
Effective Rate per MCF Calculated Increase
Date From To in Annual Revenue
[S] [C] [C] [C]
March 1, 1997 $4.18 $4.49 $ 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
(3) ACCOUNTING CHANGES
Earnings Per Share. In February, 1997, FASB Statement 128, "Earnings per
Share" was issued. The provisions of this statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", simplify the
computation of earnings per share. FASB Statement 128 will be effective for
financial statements for both interim and annual periods ending after December
15, 1997. PGE does not expect the adoption of FASB Statement 128 to have a
material effect on its calculation of earnings per share.
Reporting Comprehensive Income. In June, 1997, FASB Statement 130
"Reporting Comprehensive Income", was issued. The provisions of this statement,
which are effective for fiscal years beginning after December 15, 1997,
establish standards for reporting and display of comprehensive income and its
components in financial statements. The reporting provisions of FASB Statement
130, which PGE will adopt in 1998, are not expected to have a material impact on
its reported results of operations.
(4) COMMITMENTS AND CONTINGENCIES
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
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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
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the consolidated statements
of income of PG Energy Inc. ("PGE") as percentages of operating revenues for
each of the three and six-month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 55.0 49.4 59.6 55.4
OPERATING MARGIN............................. 45.0 50.6 40.4 44.6
OTHER OPERATING EXPENSES:
Operation.................................. 18.7 24.4 11.2 13.5
Maintenance................................ 3.9 5.9 2.1 2.8
Depreciation............................... 6.8 7.7 4.0 4.1
Income taxes............................... (0.7) (2.0) 4.9 5.7
Taxes other than income taxes.............. 10.0 11.4 6.7 7.1
Total operating expenses................. 38.7 47.4 28.9 33.2
OPERATING INCOME............................. 6.3 3.2 11.5 11.4
OTHER INCOME (DEDUCTIONS), NET............... (0.2) 0.6 0.1 0.4
INTEREST CHARGES............................. (7.0) (5.3) (4.1) (3.6)
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (0.9) (1.5) 7.5 8.2
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - (0.1) - (0.4)
NET INCOME (LOSS) ........................... (0.9) (1.6) 7.5 7.8
DIVIDENDS ON PREFERRED STOCK (1)............. (1.0) (1.5) (0.6) (1.1)
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (1.9) (3.1) 6.9 6.7
</TABLE>
(1) None of the dividends on preferred stock was allocated to the discontinued
operations.
o Three Months Ended June 30, 1997, Compared With Three Months Ended June 30,
1996
Operating Revenues. Operating revenues increased $7.8 million (30.5%) from
$25.5 million for the quarter ended June 30, 1996, to $33.2 million for the
quarter ended June 30, 1997, primarily as a result of a 186 million cubic feet
(5.7%) increase in sales to PGE's residential and commercial heating customers
that was largely attributable to cooler weather. There was an increase of 92
(10.6%) heating degree days from 872 (114.0% of normal) during the second
quarter of 1996 to 964 (126.0% of normal) during the second quarter of 1997.
Also contributing to the increase were higher levels in PGE's gas cost rate and
the effect of the rate increase granted PGE by the Pennsylvania Public Utility
Commission (the "PPUC") which became effective on January 15, 1997 (see "Rate
Matters"), as well as the operating revenues of Honesdale Gas Company
("Honesdale"), which was acquired by PGE on February 14, 1997, totaling
$760,000.
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Cost of Gas. The cost of gas increased $5.7 million (45.3%) from $12.6
million for the second quarter of 1996 to $18.3 million for the second quarter
of 1997, primarily because of the aforementioned increase in sales to
residential and commercial heating customers during the quarter and the
inclusion in the second quarter of 1997 of $527,000 of gas costs with respect to
Honesdale, as well as higher levels in PGE's gas cost rate (see "-Rate
Matters").
Operating Margin. The operating margin increased $2.1 million (16.1%) from
$12.9 million in the second quarter of 1996 to $15.0 million in the second
quarter of 1997, primarily because of the higher level of sales, the increase in
PGE's gas rates effective January 15, 1997 (see "-Rate Matters"), and the
inclusion of Honesdale's operating margin. As a percentage of operating
revenues, the margin, however, decreased from 50.6% in the second quarter of
1996 to 45.0% in the second quarter of 1997 as a result of the proportionately
higher cost of gas in 1997.
Other Operating Expenses. Other operating expenses increased $775,000
(6.4%) from $12.1 million for the quarter ended June 30, 1996, to $12.9 million
for the quarter ended June 30, 1997. This increase was primarily attributable
to a $296,000 (15.0%) increase in depreciation expense, as a result of additions
to utility plant, and a $405,000 (13.9%) increase in taxes other than income
taxes resulting from a higher level of gross receipts tax because of the
increased sales by PGE and the sales by Honesdale. The effects of these
increases were partially offset by lower levels of operation and maintenance
expense. As a percentage of operating revenues, other operating expenses
decreased from 47.4% during the quarter ended June 30, 1996, to 38.7% during the
quarter ended June 30, 1997, primarily as a result of the proportionately
greater increase in operating revenues.
Income taxes for the three-month period ended June 30, 1997, increased by
$273,000 (53.1%) from a credit of $514,000 in 1996 to a credit of $241,000 in
1997 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, operating income increased by
$1.3 million (162.0%) from $803,000 for the second quarter of 1996 to $2.1
million for the second quarter of 1997, and increased as a percentage of total
operating revenues from 3.2% in the second quarter of 1996 to 6.3% in the second
quarter of 1997.
Other Income (Deductions), Net. Other income (deductions), net decreased
$256,000 from income of $169,000 for the three-month period ended June 30, 1996,
to a deduction of $87,000 for the three-month period ended June 30, 1997,
largely as a result of the absence of income from the temporary investment of
certain proceeds from the sale of PGE's regulated water utility operations in
February, 1996, because the second quarter of 1996 included a greater amount of
gains on the condemnation of certain of PGE's property for highway construction.
Interest Charges. Interest charges increased by $975,000 (72.4%) from $1.3
million for the second quarter of 1996 to $2.3 million for the second quarter of
1997. This increase was largely attributable to bank borrowings by PGE to
finance construction expenditures and for other working capital needs and the
reduction in PGE's interest expense in the second quarter of 1996 resulting from
the repayment of its $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.
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Income (Loss) From Continuing Operations. The loss from continuing
operations decreased $70,000 (18.7%) from $374,000 for the quarter ended June
30, 1996, to $304,000 for the quarter ended June 30, 1997. The decreased loss
was largely the result of the matters discussed above, principally the increase
in operating margin, the effects of which were partially offset by the higher
levels of other operating expenses and interest charges.
Net Income (Loss). The decrease in net loss of $91,000 (23.0%) from
$395,000 for the second quarter of 1996 to $304,000 for the second quarter of
1997, was largely the result of the lower loss from continuing operations, as
discussed above, and, to a lesser extent, the absence of any loss with respect
to discontinued operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$65,000 (17.0%) from $383,000 for the second quarter of 1996 to $318,000 for the
second quarter of 1997, primarily as a result of the repurchase by PGE in 1996
of 134,359 shares of its 9% cumulative preferred stock, 9,408 shares of its
5.75% cumulative preferred stock and 20,330 shares of its 4.10% cumulative
preferred stock, largely during the second quarter of the year, as well as its
repurchase of an additional 30,090 shares of the 4.10% cumulative preferred
stock in 1997.
Earnings (Loss) Applicable to Common Stock. The decrease in loss applicable
to common stock of $156,000 (20.0%) from $778,000 for the three-month period
ended June 30, 1996, to $622,000 for the three-month period ended June 30, 1997,
as well as the increase in earnings per share of common stock of $.68 from a
loss of $.63 per share for the second quarter of 1996 (after reflecting a $.39
per share premium on redemption of preferred stock) to earnings of $.05 per
share for the second quarter of 1997 (after reflecting a $.24 per share discount
on the repurchase of preferred stock) were the result of the higher income from
continuing operations and the reduced dividends on preferred stock, as discussed
above. The $.39 per share charge for the premium on the repurchase of preferred
stock in the second quarter of 1996 acted to increase the loss per share of
common stock for the quarter ended June 30, 1996, to $.63 per share. The
discount on redemption of preferred stock in the second quarter of 1997 acted to
increase the earnings per share for the quarter by $.24 per share to $.05 per
share. While discounts and premiums on the repurchase of preferred stock are
reflected in retained earnings and are not a determinant of earnings (loss)
applicable to common stock, the discounts and premiums associated with
repurchases must be taken into account in calculating the earnings (loss) per
share of common stock.
o Six Months Ended June 30, 1997, Compared With Six Months Ended June 30, 1996
Operating Revenues. Operating revenues increased $18.3 million (19.3%) from
$94.9 million for the six months ended June 30, 1996, to $113.2 million for the
six months ended June 30, 1997, primarily as a result of higher levels in PGE's
gas cost rate and the effect of the rate increase granted PGE by the PPUC which
became effective on January 15, 1997 (see "Rate Matters"). The effect of the
increase in rates was partially offset by a 1.0 billion cubic feet (6.9%)
decrease in sales to PGE's residential and commercial heating customers. There
was a decrease of 238 (5.7%) heating degree days from 4,192 (106.0% of normal)
during the first six months of 1996 to 3,954 (100.0% of normal) during the first
six months of 1997. Operating revenues of Honesdale totaling $1.6 million from
its February 14, 1997, acquisition date through June 30, 1997, also contributed
to the increased operating revenues.
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Cost of Gas. The cost of gas increased $14.9 million (28.3%) from $52.6
million for the first six months of 1996 to $67.4 million for the first six
months of 1997, primarily because of higher levels in PGE's gas cost rate (see
"-Rate Matters") and the inclusion of $1.1 million of gas costs with respect to
Honesdale from its February 14, 1997, acquisition date through June 30, 1997.
The effect of the increase in PGE's gas cost rate was partially offset by a 1.0
billion cubic feet (6.9%) decrease in sales to its residential and commercial
heating customers.
Operating Margin. The operating margin increased $3.4 million (8.1%) from
$42.3 million in the first six months of 1996 to $45.8 million in the first six
months of 1997, primarily because of the aforementioned increase in PGE's gas
rates effective January 15, 1997 (see "-Rate Matters") and the inclusion of
Honesdale's operating margin from its February 14, 1997, acquisition date. As a
percentage of operating revenues, the margin, however, decreased from 44.6% in
the first six months of 1996 to 40.4% in the first six months of 1997 as a
result of the proportionately higher cost of gas in 1997.
Other Operating Expenses. Other operating expenses increased $1.3 million
(4.2%) from $31.5 million for the first six months of 1996, to $32.8 million for
the first six months of 1997. This increase was primarily attributable to a
$608,000 (15.7%) increase in depreciation expense, as a result of additions to
utility plant, and a $904,000 (13.5%) increase in taxes other than income taxes
resulting from a higher level of gross receipts tax because of the increased
sales by PGE and the sales by Honesdale from its acquisition date. The effects
of these increases were partially offset by lower levels of operation and
maintenance expense. As a percentage of operating revenues, other operating
expenses decreased from 33.2% during the first six months of 1996, to 28.9%
during the first six months of 1997, primarily as a result of the
proportionately greater increase in operating revenues during the period.
Income taxes increased $177,000 (3.3%) from $5.4 million in the first six
months of 1996 to $5.6 million in the first six months of 1997 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, operating income increased by
$2.1 (19.7%) from $10.8 million for the first six months of 1996 to $13.0
million for the first six months of 1997, and increased as a percentage of total
operating revenues from 11.4% in the first six months of 1996 to 11.5% in the
first six months of 1997.
Other Income (Deductions), Net. Other income (deductions), net decreased
$167,000 (52.4%) from $319,000 for the six-month period ended June 30, 1996, to
$152,000 for the six-month period ended June 30, 1997, largely as a result of
the absence of income from the temporary investment of certain proceeds from the
sale of PGE's regulated water utility operations in February, 1996.
Interest Charges. Interest charges increased by $1.2 million (36.5%) from
$3.4 million for the first six months of 1996 to $4.6 million for the first six
months of 1997. This increase was largely attributable to bank borrowings by
PGE to finance construction expenditures and for other working capital needs and
the reduction in PGE's interest expense in the first six months of 1996
resulting from the repayment of its $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.
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Income (Loss) From Continuing Operations. Income from continuing operations
increased $722,000 (9.3%) from $7.7 million for the six-month period ended June
30, 1996, to $8.5 million for the six-month period ended June 30, 1997. This
increase was largely the result of the matters discussed above, principally the
increase in operating margin, the effects of which were partially offset by the
higher levels of other operating expenses and interest charges.
Net Income (Loss). The increase in net income of $1.1 million (15.1%) from
$7.4 million for the first six months of 1996 to $8.5 million for the first six
months of 1997 was largely the result of the higher income from continuing
operations, as discussed above, and, to a lesser extent, the absence of any loss
with respect to discontinued operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$349,000 (34.2%) from $1.0 million for the first six months of 1996 to $671,000
for the first six months of 1997, primarily as a result of the repurchase by PGE
in 1996 of 134,359 shares of its 9% cumulative preferred stock, 9,408 shares of
its 5.75% cumulative preferred stock and 20,330 shares of its 4.10% cumulative
preferred stock, largely during the second quarter of that year, as well as its
repurchase of an additional 30,090 shares of the 4.10% cumulative preferred
stock in 1997.
Earnings Applicable to Common Stock. The increase in earnings applicable to
common stock of $1.5 million (23.0%) from $6.3 million for the six-month period
ended June 30, 1996, to $7.8 million for the six-month period ended June 30,
1997, as well as the increase in earnings per share of common stock of $1.30
from $1.30 per share for the first six months of 1996 (after reflecting a $.33
per share premium on redemption of preferred stock) to $2.60 per share for the
first six months of 1997 (after reflecting a $.25 per share discount on
redemption of preferred stock) were the result of the higher income from
continuing operations and the reduced dividends on preferred stock, as discussed
above, and the absence of any loss with respect to discontinued operations. The
increase in earnings applicable to common stock also reflected a 14.8% decrease
in the weighted average number of shares outstanding as a result of the
repurchase by PGE of shares of its common stock on February 16, 1996, with
proceeds from the sale of its regulated water utility operations.
RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
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<PAGE>
In accordance with these procedures, PGE has been permitted to make the
following changes since January 1, 1996, to the gas costs contained in its gas
tariff rates:
[CAPTION]
Change in
Effective Rate per MCF Calculated Increase
Date From To in Annual Revenue
[S] [C] [C] [C]
March 1, 1997 $4.18 $4.49 $ 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
Recovery of FERC Order 636 Transition Costs. By Order of the PPUC entered
August 26, 1994, PGE began recovering the Non-Gas Transition Costs (i.e. Gas
Supply Realignment and Stranded Costs) that it estimates it will ultimately be
billed pursuant to Federal Energy Regulatory Commission Order 636 through the
billing of a surcharge to its customers effective September 12, 1994. It is
currently estimated that $10.8 million of Non-Gas Transition Costs will be
billed to PGE, generally over a six-year period extending through January 1,
1999, of which $9.0 million had been billed to PGE and recovered from its
customers as of June 30, 1997. 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
Liquidity
The primary capital needs of PGE continue to be 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.
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 temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, PGE has made arrangements for a total of $83.5
million of unsecured revolving bank credit, which is deemed adequate for its
ongoing needs. Specifically, PGE currently has eight bank lines of credit with
an aggregate borrowing capacity of $83.5 million which provide for borrowings at
interest rates generally less than prime, which mature at various times during
1997 and 1998 and which PGE intends to renew or replace as they expire. As of
August 1, 1997, PGE had $46.3 million of borrowings outstanding under these bank
lines of credit.
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<PAGE>
In addition, as of June 30, 1997, PGE had borrowed $27.2 million from PEI.
The terms and conditions regarding such borrowing provide for the payment of
interest at rates generally less than prime and the repayment of principal on
December 31, 1997. It is anticipated that the repayment date of this loan will
be extended beyond December 31, 1997, until such date as the funds borrowed
thereunder are required for use by PEI. PGE plans to ultimately repay this loan
from PEI with borrowings under its bank lines of credit.
PGE, as well as Honesdale, believe that they will be able to raise in a
timely manner such funds as are required for their 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 six-month period
ended June 30, 1997. However, PGE plans to issue $50.0 million of unsecured
term notes during the third quarter of 1997, of which $25.0 million will be
issued to a syndicate of banks and $25.0 million will be issued to accredited
private placement investors. The proceeds from these long-term debt financings
will be used to repay a portion of PGE's bank borrowings.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $13.9 million
during the first six months of 1997 and are currently estimated to be $19.8
million during the remainder of the year. It is anticipated that such
expenditures will be financed with internally generated funds and bank
borrowings, pending the periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of June 30, 1997, $36.3 million of PGE's long-term debt, including $27.2
million borrowed from PEI, and $80,000 of its preferred stock was 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, such as the nature of Pennsylvania
legislation restructuring the natural gas industry and general economic
conditions and uncertainties.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 14, 1997, 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,
Thomas F. Karam, 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
10-1 Director Deferred Compensation Plan dated as of April 23, 1997 --
filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997, File No. 0-7812.
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
PGE filed a report on Form 8-K dated May 28, 1997, pursuant to Item 4.
Changes in Registrant's Certifying Accountant, reporting the appointment of
the accounting firm of Price Waterhouse LLP as independent accountants.
-16-
<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 6, 1997 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: August 6, 1997 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-17-
<PAGE>
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THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
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<NAME> PG ENERGY INC.
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