PART I
ITEM l. BUSINESS
GENERAL
PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water
Company, is a subsidiary of Pennsylvania Enterprises, Inc. ("PEI"). PGE,
incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company, is engaged
in the distribution of natural gas. On February 14, 1997, PGE acquired all of
the outstanding capital stock of Honesdale Gas Company ("Honesdale"), a
regulated public utility engaged in distributing natural gas to portions of
Wayne and Pike Counties, in an area adjacent to PGE's service territory. Until
February 16, 1996, when its water utility operations were sold, PGE was also
engaged in the distribution of water (See "-Sale of Water Utility Operations.").
Both PGE and Honesdale are regulated by the Pennsylvania Public Utility
Commission ("PPUC"). As of December 31, 1996, PGE provided service to
approximately 144,200 natural gas customers and Honesdale provided service to
approximately 3,200 customers.
PGE employed approximately 570 persons as of December 31, 1996.
Restructuring of Natural Gas Industry
The natural gas industry, which historically has included producers,
interstate pipelines and local distribution companies ("LDCs"), is continuing to
undergo significant restructuring. The industry is rapidly progressing from a
highly regulated environment to one in which there is competition, customer
choice and only partial regulation. The same change is also beginning to occur
in the electric industry which competes with the natural gas industry for many
of the same energy uses.
The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PGE, are
presently responsible for the procurement of competitively-priced gas supplies
and arranging for the appropriate transportation capacity and storage services
with the interstate pipelines. Additionally, in accordance with regulations
promulgated by the PPUC, PGE currently offers transportation service to certain
customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PGE charged
all its customers bundled rates. These rates included a commodity charge based
on the cost, as approved by FERC, which PGE paid the pipelines for natural gas
delivered to the entry point on its distribution system. Except for the
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approximately 500 customers currently receiving transportation service, PGE's
customers continue to be charged bundled rates as approved by the PPUC, which
include a commodity charge based on the costs prudently incurred by PGE for the
purchase of natural gas and for interstate pipeline transportation capacity and
storage services. Customers receiving transportation service, which accounted
for approximately 43% of PGE's total gas deliveries in 1996, are charged rates
approved by the PPUC, which exclude the commodity cost that is reflected in the
bundled rates charged to other customers.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, will be phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania will be required to unbundle generation
charges from the other charges included in their currently bundled rates and
customers will contract with qualified suppliers of their choosing, including
the utility currently serving them, to purchase electric energy at nonregulated
rates. The electric utilities will continue to utilize their transmission
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
PEI and PGE believe that Pennsylvania may consider similar legislation with
respect to the natural gas industry in 1997. Such legislation may require that
PGE provide all of its customers with unbundled service over a period of several
years. While the rates for the transportation of natural gas through PGE's
distribution system and the storage services offered by PGE may continue to be
price regulated by the PPUC, the commodity cost of gas may not be so regulated.
Essentially, the transportation service which is now available to a limited
number of PGE's customers would be extended to all its customers. Customers
would choose the supplier of their natural gas, which could be PGE, based on
nonregulated market prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PGE will be faced with significant
competition from other gas utilities and marketers for the sale of natural gas
to its customers. However, under current regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas. Moreover, PGE would not expect the legislation to result in the bypass of
its distribution system by any significant number of customers because of the
nature of its customer base and the cost of any such bypass. Additionally,
based on the recently-enacted electric industry legislation, PGE anticipates
that any transition costs (such as the negotiated buyout of contracts with
interstate pipelines, the recovery of deferred purchased gas costs or the
recovery of regulatory assets) it has or might incur as a result of legislation
providing for customer choice of natural gas suppliers would be recovered
through a nonbypassable customer charge. Accordingly, although it cannot be
certain, because the terms of such legislation have not been finalized and the
ultimate effect on PGE cannot be determined, PGE does not believe that the
enactment of legislation providing for customers to purchase their natural gas
from third parties would have any material adverse impact on its earnings or
financial condition despite the increased competition to which PGE would be
subject regarding the sale of natural gas to its customers.
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Sale of Water Utility Operations
On February 16, 1996, PGE sold its regulated water operations and certain
related assets to Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American Water Works Company, Inc. ("American"),
for approximately $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. (See Note 2, Discontinued Operations, of the Notes to
Financial Statements in Item 8 of this Form 10-K). PGE continued to operate the
water utility business until February 16, 1996.
PEI and PGE are using the $203.3 million of cash proceeds from the sale,
after the payment of an estimated $58.8 million of federal and state income
taxes, to retire debt, to repurchase stock, for construction expenditures and
for working capital purposes. (See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations-Liquidity and Capital Resources-
Sale of Water Utility Operations" in Item 7 of this Form 10-K).
GAS BUSINESS
PGE distributes natural gas to an area in northeastern Pennsylvania lying
within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes
116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport. The total estimated population of PGE's natural gas service area,
based on the 1990 U.S. Census, is 561,000.
Number and Type of Customers. At December 31, 1996, PGE had approximately
144,200 natural gas customers, from which it derived total natural gas revenues
of $160.6 million during 1996. The following chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1996:
Type of Customer % of Customers % of Revenues
Residential 91.2% 61.7%
Commercial 8.4 24.1*
Industrial 0.2 12.9*
Other Users 0.2 1.3
Total 100.0% 100.0%
* Includes the 4.5% of total gas revenues derived from interruptible
customers.
During 1996, PGE delivered an estimated total of 47,600,000 thousand cubic
feet ("MCF") of natural gas to its customers, of which 56.1% was sold at normal
tariff rates, 42.9% represented gas transported for customers and 1.0% was sold
under the Alternate Fuel Rate (as described below).
PGE sells gas to "firm" customers with the understanding that it will not
interrupt their supply except during periods of supply deficiency or emergency
conditions. "Interruptible" gas customers are required to have equipment
installed capable of using an alternate energy form. Interruptible customers,
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therefore, do not require a continuous supply of gas and their supply can be
interrupted by PGE at any time under the conditions set forth in their contracts
for gas service. In 1996, a total of 1,321,000 MCF of natural gas was sold by
PGE to interruptible customers and 3,681,000 MCF was transported for such
customers, which together represented 10.5% of the total deliveries of natural
gas by PGE to its customers during 1996.
PGE's largest natural gas customer accounted for approximately 2.5% of its
operating revenues in 1996. No other customer accounted for as much as 2.0% of
such revenues in 1996.
Transportation and Storage Service. In accordance with current regulations
of the PPUC, PGE provides transportation service to natural gas customers who
consume at least 5,000 MCF of natural gas per year, meet certain other
conditions and execute a transportation agreement. In addition, groups of up to
ten customers, with a combined consumption of at least 5,000 MCF per year, are
eligible for transportation service. Transportation service is provided on both
a firm and an interruptible basis and includes provisions regarding over and
under deliveries of gas on behalf of the respective customer. In addition, PGE
offers firm transportation customers a "storage service" pursuant to which such
customers may have gas delivered to PGE during the period from April through
October for storage and redelivery during the winter period. PGE also offers
firm transportation customers a "standby service" under the terms of which PGE
will supply the customer with gas in the event the customer's transportation
service is interrupted or curtailed by its broker, supplier or other third
party.
Set forth below is a summary of the gas transported by PGE and the number of
its customers using transportation service from 1994 to 1996:
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
1996 503 15,959,000 4,459,000 20,418,000
1995 480 14,543,000 5,054,000 19,597,000
1994 574 13,411,000 4,744,000 18,155,000
During 1997, PGE expects to transport approximately 22,000,000 MCF of
natural gas.
The decrease in the number of customers using transportation service in 1995
was the result of PGE requiring such customers to install telemetering equipment
so that PGE could monitor the usage by those customers on a daily basis and
thereby determine if the appropriate quantities of natural gas were being
delivered for them. This requirement for telemetering equipment caused a number
of customers, for whom relatively small quantities of natural gas were being
transported, to revert to sales service.
The rates charged by PGE for the transportation of interstate gas are
essentially equal to its tariff rates for the sale of gas with all gas costs
removed. Accordingly, the transportation of interstate gas has had no
significant adverse effect on earnings. Prior to January 15, 1997, the rates
charged for the transportation of Pennsylvania-produced natural gas
("Pennsylvania gas") were lower than those charged for the transportation of
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interstate gas. As a result, the rates charged for the transportation of
Pennsylvania gas yielded considerably less revenue than the gross margin (gas
operating revenues less the cost of gas) that would be realized from sales under
normal tariff rates. However, as of January 15, 1997, in connection with the
rate increase which was effective on such date (see "-Rates"), the lower rates
charged for the transportation of Pennsylvania gas were eliminated and those
rates were conformed with the rates charged for the transportation of interstate
gas.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PGE offers an Alternate Fuel Rate for eligible
customers. This rate applies to large commercial and industrial accounts that
have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate
source of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PGE's normal tariff rates, PGE is permitted by the PPUC to
lower its price to these customers so that PGE can remain competitive with the
alternate fuel. However, in no instance may PGE sell gas under this special
arrangement for less than its average commodity cost of gas purchased during the
month. PGE's revenues under the Alternate Fuel Rate amounted to $1.8 million in
1996, $2.0 million in 1995, $3.7 million in 1994. These revenues reflected the
sale of 491,000 MCF, 603,000 MCF and 1,223,000 MCF in 1996, 1995 and 1994,
respectively. It is anticipated that approximately 426,000 MCF will be sold
under the Alternate Fuel Rate in 1997. The change in volumes sold under the
Alternate Fuel Rate reflects the switching by certain customers between
alternate fuel service and transportation service as a result of periodic
changes in the relative cost of natural gas and alternate fuels.
FERC Order 636. On April 8, 1992, FERC issued Order No. 636 ("Order 636"),
requiring interstate pipelines to restructure their services and operations in
order to enhance competition and maximize the benefits of wellhead price
decontrol. The objectives of Order 636 were to be accomplished primarily by
unbundling the services provided by the interstate pipelines and by making those
services available to end users on the same terms as LDCs.
Pursuant to Order 636, the interstate pipelines have been required to: (1)
unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified fixed-
variable rate designs. The interstate pipelines have been granted a blanket
sales certificate to make unbundled sales in competition with non-pipeline
merchants and are being permitted recovery of all reasonable and prudent
transition costs incurred in order to comply with Order 636. Such transition
costs include: (1) the cost of renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included
in the interstate pipelines' purchased gas adjustment accounts at the time they
adopted market-based pricing for gas sales ("Account 191 Costs"); (3)
unrecovered costs of assets that cannot be assigned to customers of unbundled
services ("Stranded Costs"); and (4) costs of new facilities to physically
implement Order 636 ("New Facility Costs"). Additionally, the interstate
pipelines have been allowed pre-granted abandonment of sales and transportation
services to customers upon expiration of applicable contracts, subject to
customers' rights of first refusal.
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On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of Order 636 transition costs.
The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PGE and other larger LDCs.
As of February 1, 1994, PGE began to recover the Gas Transition Costs that
are being billed to PGE by its interstate pipelines through an increase in its
PGC rate. As of December 31, 1996, PGE had been billed a total of $1.3 million
of Gas Transition Costs by its interstate pipelines, which is the entire amount
of such billings that PGE expects. Of this amount, $857,000 was recovered by
PGE over a twelve-month period ended January 31, 1995, through an increase in
its PGC rate, $252,000 was recovered by PGE in its annual PGC rate that the PPUC
has approved effective December 1, 1995, and the remaining $213,000 is being
recovered by PGE in its PGC rate that was effective December 1, 1996.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by LDCs through the filing of a tariff pursuant to either the existing
surcharge or base rate provisions of the Pennsylvania Public Utility Code (the
"Code"). 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 Order 636 through the billing of a surcharge to its customers effective
September 12, 1994. It is currently estimated that $10.1 million of Non-Gas
Transition Costs will be billed to PGE, generally over a six-year period
extending through January 1, 1999, of which $8.0 million had been billed to PGE
and $7.5 million had been recovered from its customers as of December 31, 1996.
PGE has recorded the estimated transition costs that remained to be billed to it
and the amounts remaining to be recovered from its customers.
Sources of Supply. PGE purchases natural gas from marketers, producers, and
integrated energy companies, generally under the terms of supply arrangements
that extend for the heating season (i.e., November through March) or for periods
of one year or longer. These contracts typically provide for an adjustment each
month in the cost of gas purchased pursuant thereto based on the then current
market prices for natural gas. The largest individual supplier, an integrated
energy company, accounted for 22.5% of PGE's total purchases of natural gas in
1996. Three other suppliers accounted for 18.7%, 17.9% and 16.2% of PGE's total
purchases of natural gas in 1996. No other suppliers accounted for more than 3%
of PGE's purchases during 1996.
The purchases of natural gas by PGE during each of the years 1996, 1995 and
1994 are summarized below:
Volume Average
Year Purchased (MCF) Cost per MCF
1996 27,955,000 $3.35
1995 24,173,000 $2.62
1994 28,364,000 $2.82
The higher average cost for 1996 reflected the increase in the wellhead
price of natural gas during much of the year that resulted from the unusually
cold weather experienced in the northeastern United States during the winter of
1995/96 and the associated reduction in the volume of gas held in storage to
abnormally low levels in the spring of 1996.
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During 1997, PGE expects to purchase a total of approximately 28,750,000 MCF
of natural gas under seasonal or longer-term contracts at a currently projected
average cost of $2.89 per MCF.
PGE presently has adequate supplies of natural gas to meet the demands of
existing customers through October, 1997, and PGE believes that it will be able
to obtain sufficient supplies to meet the demands of its existing customers
beyond October, 1997 and to serve new customers (of which approximately 4,000
are expected to be added in 1997).
Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, PGE has entered into agreements with its former interstate pipeline
suppliers providing for the firm transportation by those pipelines on a daily
basis of the following quantities of gas:
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
Transco Various through 2015 74,100 (b) 55.5%
Tennessee 1999 and 2000 48,252 36.2
Columbia 2004 11,016 8.3
133,368 100.0%
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PGE agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PGE can transport during the period
December through February pursuant to an agreement with Transco that
extends through 2011.
PGE has also contracted with its former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline Date (a) (MCF) (b) From Storage (MCF)
Transco Various through 2013 6,500,000 131,044
Tennessee November 1, 2000 3,500,000 23,031
Columbia October 31, 2004 1,100,000 16,036
11,100,000 170,111
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PGE agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
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Based on its present pipeline transportation and storage entitlements, PGE
is entitled to a maximum daily delivery of the following quantities of gas:
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
Transco 74,100 (a) 131,044 205,144 67.6%
Tennessee 48,252 23,031 71,283 23.5
Columbia 11,016 16,036 27,052 8.9
133,368 170,111 303,479 100.0%
(a) Includes 3,300 MCF that may be transported during the period
December through February.
In accordance with the provisions of Order 636, PGE may release to its
customers and other parties the portions of its firm pipeline transportation and
storage entitlements which are in excess of its requirements. Such releases may
be made upon notice in accordance with the provisions of Order 636 and for a
consideration not in excess of PGE's cost of the respective entitlement.
Releases may be made for periods ranging from one day to the remaining term of
the entitlement.
Since September 1, 1993, PGE has released portions of its firm pipeline
transportation capacity to certain of its customers and third parties for
varying periods extending up to three years. During 1996, the average daily
capacity so released was 40,689 MCF, and the maximum capacity so released on any
one day in 1996 was 52,095 MCF. Through December 31, 1996, PGE had not,
however, released any of its storage capacity.
PGE believes that it has sufficient firm pipeline transportation and storage
entitlements to meet the demands of its existing customers and to supply new
customers.
Peak Day Requirements. PGE plans for peak day demand on the basis of a
daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design
peak day, assuming the curtailment of service to interruptible customers, are
currently estimated to be 337,956 MCF, of which 252,550 MCF would be required
for customers to whom PGE sells gas and 85,406 MCF would be required for
customers for whom PGE provides transportation service. PGE's historic maximum
daily sendout is 307,237 MCF, which occurred on January 17, 1997, when service
to interruptible customers and select industrial users was curtailed. The mean
temperature in its gas service area on that day was 5 degrees Fahrenheit.
Construction Expenditures. PGE's construction expenditures for gas utility
plant in 1996 totaled $29.2 million and are estimated to be $27.9 million for
1997.
Regulation. PGE's natural gas utility operations are regulated by the PPUC,
particularly as to utility rates, service and facilities, accounts, issuance of
certain securities, the encumbering or disposition of public utility properties,
the design, installation, testing, construction, and maintenance of PGE's
pipeline facilities and various other matters associated with broad regulatory
authority.
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In addition to those regulations promulgated by the PPUC, PGE must also
comply with federal, state and local regulations relating generally to the
discharge of materials into the environment or otherwise relating to the
protection of the environment. Compliance with such regulations has not had any
material effect upon the capital expenditures, earnings or competitive position
of PGE's gas business. Although it cannot predict the future impact of these
regulations, PGE believes that any additional expenditures and costs made
necessary by them would be fully recoverable through rates.
PGE, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants have 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
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
laws, PGE does not believe that additional costs, if any, related to these
manufactured gas plant sites will be material to its financial position or
results of operations.
PGE's gas distribution and transportation activities are not subject to the
Natural Gas Act, as amended.
Rates. 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 assigned to
conduct the investigation of the rate increase request. This Settlement
Petition provided for an overall 5.3% rate increase that was designed to produce
$7.5 million of additional annual revenue. By Order adopted December 19, 1996,
the PPUC approved the Settlement Petition effective January 15, 1997. Under the
terms of the Settlement Petition, the 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) is being deferred, without carrying
charges, until July, 1997.
The provisions of the Code require that the tariffs of LDCs 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. 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. The procedure
is limited to purchased gas costs, to the exclusion of other rate matters, and
requires a formal evidentiary proceeding conducted by the PPUC, the submission
of specific information regarding gas procurement practices and specific
findings of fact by the PPUC regarding the "least cost fuel procurement"
policies of the utility.
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Effective September 14, 1995, the PPUC adopted regulations that provide for
the quarterly adjustment of the annual purchased gas cost rate of larger LDCs,
including PGE. Such quarterly adjustments are allowed when the actual costs
vary from the 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 is still required to file an annual purchased
gas cost rate.
In accordance with these annual and quarterly procedures, PGE has been
permitted to make the following changes since January 1, 1994, 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]
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
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)*
December 1, 1994 3.74 3.68 (1,800,000)
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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.
FERC Order 636, among other matters, requires that PGE contract for
sufficient gas supplies, pipeline capacity and storage for its annual needs.
These added responsibilities have resulted in increased scrutiny by the PPUC as
to the prudence of PGE's gas procurement and supply activities. However, to
date, the PPUC has permitted PGE to recover all of its gas supply costs in the
rates charged to customers. Additionally, although it cannot be certain, PGE
believes that it will be able to continue demonstrating to the PPUC the prudence
of its gas supply costs and, therefore, will be allowed to recover all such
costs in its future purchased gas cost rates.
Tax Surcharge Adjustments. Regulations of the PPUC provide for PGE to apply
a state tax adjustment surcharge tariff to its bills for gas service to recoup
any increased taxes or passthrough any decreased taxes resulting from changes in
the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income
Tax, Gross Receipts Tax or Public Utility Realty Tax. Currently, no state tax
adjustment surcharge is applied to PGE's bills for gas service.
WATER BUSINESS
Prior to the sale of its water operations to Pennsylvania-American on
February 16, 1996, PGE distributed water to an area lying within the Counties of
Lackawanna, Luzerne, Susquehanna and Wayne, which included the Cities of
Scranton and Wilkes-Barre and 63 other municipalities. The total estimated
population of the water service area, based on the 1990 U.S. Census, was
373,000.
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Number and Type of Customers. At December 31, 1995, PGE had approximately
133,400 water customers from which it derived total water revenues of $66.3
million during 1995 and $7.5 million during the period January 1 through
February 15, 1996.
Filtration of Water Supplies. All of PGE's water customers were supplied
with filtered water (except for several hundred who were supplied with ground
water from wells) which met all federal and state drinking water regulations.
The filtration of PGE's water supplies was performed at ten water treatment
plants, located throughout PGE's water service area, which had an aggregate
daily capacity of 101.1 million gallons.
Construction Expenditures. PGE's construction expenditures for water
utility plant totaled $15.3 million in 1995 and $815,000 during the period
January 1 through February 15, 1996.
ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
<S> <C> <C>
Gas. PGE's gas system consists of approximately 2,265 miles of distribution
lines, nine city gate and 75 major regulating stations and miscellaneous related
and additional property. PGE believes that its gas utility properties are
adequately maintained and in good operating condition in all material respects.
</TABLE>
Most of PGE's gas utility properties are subject to a first mortgage lien
pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15,
1946, as supplemented by thirty supplemental indentures (collectively, the
"Indenture") from PGE to First Trust of New York, National Association, as
Trustee.
Land. As of March 1, 1997, PGE owned approximately 46,000 acres of
undeveloped land situated in northeastern Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, there were no matters submitted to a vote
of security holders of the registrant through the solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Registrant's common stock is owned entirely by PEI and is not traded.
The dividends per share of common stock paid by PGE during the years ended
December 31, 1996 and 1995, were as follows:
[CAPTION]
1996 1995
[S] [C] [C]
First quarter $10.2170 $ .7050
Second quarter - .7075
Third quarter - .6400
Fourth quarter - .6900
Total $10.2170 $2.7425
The cash dividends per share for the first quarter of 1996 include $9.0770
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. The
10.125% promissory note was paid in full by PGE on March 8, 1996.
Information relating to restriction on the payment of dividends by PGE is
set forth in Note 8 of the Notes to Financial Statements in Item 8 of this Form
10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTRUCTURING OF NATURAL GAS INDUSTRY
PG Energy Inc. ("PGE"), a subsidiary of Pennsylvania Enterprises, Inc.
("PEI"), is a regulated public utility engaged in the sale and distribution of
natural gas. The natural gas industry, which historically has included
producers, interstate pipelines and local distribution companies ("LDCs"), is
continuing to undergo significant restructuring. The industry is rapidly
progressing from a highly regulated environment to one in which there is
competition, customer choice and only partial regulation. The same change is
also beginning to occur in the electric industry which competes with the natural
gas industry for many of the same energy uses.
The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PGE, are
presently responsible for the procurement of competitively-priced gas supplies
and arranging for the appropriate transportation capacity and storage services
with the interstate pipelines. Additionally, in accordance with regulations
promulgated by the Pennsylvania Public Utility Commission ("PPUC"), PGE
currently offers transportation service to certain customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PGE charged
all its customers bundled rates. These rates included a commodity charge based
on the cost, as approved by FERC, which PGE paid the pipelines for natural gas
delivered to the entry point on its distribution system. Except for the
approximately 500 customers currently receiving transportation service, PGE's
customers continue to be charged bundled rates as approved by the PPUC, which
include a commodity charge based on the costs prudently incurred by PGE for the
purchase of natural gas and for interstate pipeline transportation capacity and
storage services. Customers receiving transportation service, which accounted
for approximately 43% of PGE's total gas deliveries in 1996, are charged rates
approved by the PPUC, which exclude the commodity cost that is reflected in the
bundled rates charged to other customers.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, will be phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania will be required to unbundle generation
charges from the other charges included in their currently bundled rates and
customers will contract with qualified suppliers of their choosing, including
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the utility currently serving them, to purchase electric energy at nonregulated
rates. The electric utilities will continue to utilize their transmission
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
PEI and PGE believe that Pennsylvania may consider similar legislation with
respect to the natural gas industry in 1997. Such legislation may require that
PGE provide all of its customers with unbundled service over a period of several
years. While the rates for the transportation of natural gas through PGE's
distribution system and the storage services offered by PGE may continue to be
price regulated by the PPUC, the commodity cost of gas may not be so regulated.
Essentially, the transportation service which is now available to a limited
number of PGE's customers, would be extended to all its customers. Customers
would choose the supplier of their natural gas, which could be PGE, based on
nonregulated market prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PGE will be faced with significant
competition from other gas utilities and marketers for the sale of natural gas
to its customers. However, under current regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas. Moreover, PGE would not expect the legislation to result in the bypass of
its distribution system by any significant number of customers because of the
nature of its customer base and the cost of any such bypass. Additionally,
based on the recently-enacted electric industry legislation, PGE anticipates
that any transition costs (such as the negotiated buyout of contracts with
interstate pipelines, the recovery of deferred purchased gas costs or the
recovery of regulatory assets) it might incur as a result of legislation
providing for customer choice of natural gas suppliers would be recovered
through a nonbypassable customer charge. Accordingly, although it cannot be
certain, because the terms of such legislation have not been finalized and the
ultimate effect on PGE cannot be determined, PGE does not believe that the
enactment of legislation providing for customers to purchase their natural gas
from third parties would have any material adverse impact on its earnings or
financial condition despite the increased competition to which PGE would be
subject regarding the sale of natural gas to its customers.
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
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 cash proceeds from the sale of approximately $203.3
million, net of an estimated $58.8 million of income taxes, were used by PEI and
PGE to retire debt, to repurchase stock, for construction expenditures and for
other working capital purposes.
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, the sale resulted in an after tax loss of approximately $6.2 million, net
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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).
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.
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 calendar years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Year Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0%
Cost of gas................................ 55.0 55.3 58.7
OPERATING MARGIN............................. 45.0 44.7 41.3
OTHER OPERATING EXPENSES:
Operation.................................. 15.6 14.7 13.5
Maintenance................................ 3.4 3.2 2.6
Depreciation............................... 4.7 4.6 4.0
Income taxes............................... 4.0 3.4 3.4
Taxes other than income taxes.............. 6.9 6.5 6.4
Total operating expenses................. 34.6 32.4 29.9
OPERATING INCOME............................. 10.4 12.3 11.4
OTHER INCOME, NET............................ 0.1 0.2 -
INTEREST CHARGES............................. (4.6) (7.0) (5.9)
INCOME FROM CONTINUING OPERATIONS............ 5.9 5.5 5.5
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS................................. (0.2) (2.5) 6.3
NET INCOME................................... 5.7 3.0 11.8
DIVIDENDS ON PREFERRED STOCK(1).............. (1.1) (1.8) (2.8)
EARNINGS APPLICABLE TO COMMON STOCK.......... 4.6% 1.2% 9.0%
(1) None of the dividends on preferred stock has been allocated to the
discontinued operations.
o Year Ended December 31, 1996, Compared With Year Ended December 31, 1995
Operating Revenues. Operating revenues increased $7.8 million (5.1%) from
$152.8 million for 1995 to $160.6 million for 1996 primarily as a result of a
1.5 billion cubic feet (6.8%) increase in sales to residential and commercial
heating customers. There was a 598 (9.9%) increase in heating degree days from
6,029 (95.8% of normal) during 1995 to 6,627 (105.3% of normal) during 1996.
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<PAGE>
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 increased $3.9 million (4.6%) from $84.4
million for 1995 to $88.3 million for 1996 primarily because of the
aforementioned increase in sales to residential and commercial heating customer
the effects of which were partially offset by lower levels in PGE's gas cost
rate (see "-Rate Matters").
Operating Margin. The operating margin increased $3.9 million (5.7%) from
$68.4 million in 1995 to $72.3 million in 1996, primarily because of the 1.5
billion cubic feet (6.8%) increase in consumption by residential and commercial
heating customers. As a percentage of operating revenues, the margin increased
from 44.7% in 1995 to 45.0% in 1996.
Other Operating Expenses. Other operating expenses increased $6.1 million
(12.4%) from $49.5 million for 1995 to $55.6 million for 1996, and increased as
a percentage of operating revenues from 32.4% during 1995 to 34.6% during 1996.
The $6.1 million increase in other operating expenses was attributable to a
number of factors, the most significant of which was a $2.6 million (11.7%)
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 operating expenses was a $641,000 (9.2%) increase in
depreciation expense attributable to additions to PGE's utility plant, as well
as a $546,000 (11.0%) increase in maintenance expenses caused by charges
relating to the maintenance of gas valves and a $1.1 million (11.2%) increase in
taxes other than income taxes as a result of increased gross receipts tax.
Income taxes increased $1.2 million (23.1%) from $5.2 million in 1995 to
$6.4 million in 1996 due to an increase in income before income taxes (for this
purpose, operating income net of interest charges).
Operating Income. As a result of the above, operating income decreased by
$2.2 million (11.7%) from $18.9 million for 1995 to $16.7 million for 1996, and
decreased as a percentage of total operating revenues for such periods from
12.3% in 1995 to 10.4% in 1996, primarily because of the higher level of other
operating expenses.
Other Income, Net. Other income, net decreased $158,000 (52.5%) from
$301,000 for 1995 to $143,000 for 1996, largely as a result of a $548,000 charge
relative to the sale and abandonment of PGE's interest in certain gas rights and
properties in western Pennsylvania.
Interest Charges. Interest charges decreased by $3.4 million (31.7%) from
$10.8 million for 1995 to $7.3 million for 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 From Continuing Operations. Income from continuing operations
increased $1.0 million (12.3%) from $8.5 million for 1995 to $9.5 million for
1996. This increase was largely the result of the matters discussed above,
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<PAGE>
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. The increase in net income of $4.5 million from $4.6 million
for 1995 to $9.1 million for 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 $1.0
million (37.4%) from $2.8 million for 1995 to $1.7 million for 1996, 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.
Earnings Applicable to Common Stock. The increase in earnings applicable to
common stock of $5.6 million from $1.9 million for 1995 to $7.4 million for
1996, as well as the increase in earnings per share of common stock of $1.36
from $.33 per share for 1995 to income of $1.69 per share for 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 $.59 per share, from
$.69 per share for 1995 to $.10 per share for 1996, in the loss with respect to
discontinued operations. The increase in earnings applicable to common stock
reflected a 35.3% decrease in the weighted average number of shares outstanding
for 1996 resulting from the aforementioned repurchase of common stock on
February 16, 1996.
o Year Ended December 31, 1995, compared with year ended December 31, 1994
Operating Revenues. Operating revenues decreased $15.2 million (9.1%) from
$168.0 million for 1994 to $152.8 million for 1995. This decrease was primarily
the result of a reduction in the gas cost rate effective May 16, 1995. See "-
Rate Matters." Also contributing to the decrease in revenues was the switching
of certain commercial and industrial customers from sales to transportation
service and a 179 million cubic feet (0.8%) decrease in sales to residential and
commercial heating customers, caused by a 133 (2.2%) decrease in heating degree
days. There were 6,029 heating degree days (95.8% of normal) during 1995
compared to 6,162 (97.9% of normal) during 1994.
Cost of Gas. The cost of gas decreased $14.3 million (14.5%) from $98.7
million for 1994 to $84.4 million for 1995, primarily because of the
aforementioned reduction in the gas cost rate effective May 16, 1995. See "-
Rate Matters." Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.
Operating Margin. The operating margin decreased $955,000 (1.4%) from $69.3
million in 1994 to $68.4 million in 1995, primarily because of the 179 million
cubic feet (0.8%) decrease in consumption by residential and commercial heating
customers. However, as a percentage of operating revenues, the margin increased
from 41.3% in 1994 to 44.7% in 1995 primarily as a result of the higher average
charge per cubic foot to residential and commercial heating customers because of
their lower consumption due to the warmer weather.
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<PAGE>
Other Operating Expenses. Other operating expenses decreased $749,000
(1.5%) from $50.2 million for 1994 to $49.5 million for 1995. This decrease was
partially the result of a $481,000 (8.5%) decrease in income taxes from $5.6
million in 1994 to $5.2 million in 1995 due to a decrease in income before
income taxes (for this purpose, operating income net of interest charges) and a
reduction in the Pennsylvania corporate net income tax rate. Also contributing
to the decrease in other operating expenses was a slightly lower level of
operation expenses, which declined $214,000 (0.9%), and an $889,000 (8.2%)
decrease in taxes other than income taxes, primarily because of a decrease in
gross receipts tax as a result of the lower level of operating revenues. The
effect of the decreases in taxes and operation expenses was partially offset by
a $531,000 (12.0%) increase in maintenance expenses, principally as a result of
charges relative to the maintenance of gas valves, and a $304,000 (4.6%)
increase in depreciation expense as a result of additions to utility plant.
Notwithstanding the decrease in other operating expenses, such expenses
increased as a percentage of operating revenues from 29.9% during 1994 to 32.4%
during 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased $206,000 (1.1%) from $19.1 million for 1994 to $18.9 million for 1995.
However, as a percentage of total operating revenues, operating income increased
from 11.4% in 1994 to 12.3% in 1995, primarily because of the decrease in the
cost of gas as a percentage of operating revenues.
Other Income, Net. Other income, net increased $229,000 from $72,000 in
1994 to $301,000 in 1995, primarily as a result of a $227,000 write-off of
expired advances related to income taxes and a $226,000 decrease in amortization
of preferred stock issuance costs.
Interest Charges. Interest charges increased by $855,000 (8.6%) from $9.9
million for 1994 to $10.8 million for 1995. This increase was largely
attributable to interest on overcollections of purchased gas costs and increased
interest on long-term debt.
Income From Continuing Operations. Income from continuing operations
decreased $832,000 (8.9%) from $9.3 million for 1994 to $8.5 million for 1995.
This decrease was largely the result of the matters discussed above, principally
the decrease in operating margin resulting from the lower level of sales to
residential and commercial heating customers. The effect of the decreased
operating margin was partially offset by the lower levels of taxes.
Net Income. The decrease in net income of $15.2 million (76.6%) from $19.8
million for 1994 to $4.6 million for 1995 was largely the result of the
estimated loss (equivalent to $1.04 per share) on the disposal of PGE's water
utility operations, as discussed above. Also contributing to the decrease in
net income was the lower income from continuing operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.9
million (40.4%) from $4.6 million for 1994 to $2.8 million for 1995, as a result
of the redemption by PGE on May 31, 1994, of 150,000 shares ($15.0 million) of
its 9.50% cumulative preferred stock, $100 par value, and on December 16, 1994,
of 150,000 shares ($15.0 million) of its 8.90% cumulative preferred stock, $100
par value. No dividends on preferred stock were allocated to the discontinued
operations.
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<PAGE>
Earnings Applicable to Common Stock. The decrease in earnings applicable to
common stock of $13.3 million from $15.2 million for 1994 to $1.9 million for
1995, as well as the decrease in earnings per share of common stock of $2.40
from $2.73 per share for 1994 (after a $.19 per share charge for the premium on
redemption of preferred stock) to $.33 per share for 1995, were largely the
result of the estimated loss (equivalent to $1.04 per share) on the sale of
PGE's water utility operations, as discussed above. Also contributing to the
decreases in earnings applicable to common stock and earnings per share for 1995
was the lower income from continuing operations. The effects of these factors
were partially offset by the reduced dividends on preferred stock and, in the
case of earnings per share, the absence of any premium on the redemption of
subsidiary's preferred stock.
RATE MATTERS
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
assigned to conduct the investigation of the rate increase request. This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue. By Order adopted December
19, 1996, the PPUC approved the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement Petition, the 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) is being deferred, without
carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of LDCs 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. 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. The procedure is limited
to purchased gas costs, to the exclusion of other rate matters, and requires a
formal evidentiary proceeding conducted by the PPUC, the submission of specific
information regarding gas procurement practices and specific findings of fact by
the PPUC regarding the "least cost fuel procurement" policies of the utility.
Effective September 14, 1995, the PPUC adopted regulations that provide for
the quarterly adjustment of the annual purchased gas cost rate of larger LDCs,
including PGE. Such quarterly adjustments are allowed when the actual costs
vary from the 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 is still required to file an annual purchased
gas cost rate.
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In accordance with these annual and quarterly procedures, PGE has been
permitted to make the following changes since January 1, 1994, 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]
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
December 1, 1995 2.42 2.75 9,600,000
May 15, 1995 3.68 2.42 (8,200,000)*
December 1, 1994 3.74 3.68 (1,800,000)
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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.
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 (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PGE and other larger LDCs. The PGC Order also indicated
that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition
Costs") are not natural gas costs eligible for recovery under the PGC rate
filing mechanism, such costs are subject to full recovery by LDCs 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, $857,000 was recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 was recovered by PGE in its annual PGC rate that the PPUC approved
effective December 1, 1995, and the remaining $213,000 is being recovered by
PGE in its PGC rate that was 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 $10.1 million of Non-Gas
Transition Costs will be billed to PGE, generally over a six-year period
extending through January 1, 1999, of which $8.0 million had been billed to PGE
and $7.5 million had been recovered from its customers as of December 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.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, PGE will incur replacement costs in amounts that due
to the effects of inflation would materially exceed either the original cost or
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the accrued depreciation of such property as reflected on its books of account.
However, the cost of such replacement property would be includable in PGE's rate
base, and PGE would be entitled to recover depreciation expense and earn a
return thereon, to the extent that its investment in such property was prudently
incurred and the property is used and useful in furnishing public utility
service.
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 and PEI used the $203.3
million of cash proceeds from the sale, after an estimated $58.8 million of
federal and state income taxes (of which $44.6 million had been paid as of
December 31, 1996), to retire debt, to repurchase stock, for construction
expenditures and for other working capital purposes. In this regard, 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
repaid all of its then outstanding bank borrowings on February 16, 1996, and PEI
and PGE temporarily invested the balance of the proceeds. A portion of these
proceeds were subsequently used by PGE (i) on March 8, 1996, to repay the $30.0
million principal amount of its 10.125% promissory note (the "10.125% Promissory
Note") which was issued to PEI as a common stock dividend on February 16, 1996
(proceeds from the repayment of the 10.125% Promissory Note were used by PEI for
the defeasance of PEI's 10.125% Senior Notes on September 30, 1996) and (ii) to
repurchase 134,359 shares of its 9% cumulative preferred stock for an aggregate
consideration of $14.5 million and 20,330 shares of its 4.10% cumulative
preferred stock for an aggregate consideration of $1.0 million, largely pursuant
to self tender offers conducted during March and April, 1996. Additionally, on
June 17, 1996, PGE 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 continue to be 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
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borrowing requirements, PGE has since made arrangements for a total of $65.5
million of unsecured revolving bank credit, which is deemed adequate for its
immediate needs. Specifically, PGE currently has six bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime and which mature during mid-1997. As
of March 1, 1997, PGE had $27.2 million of borrowings outstanding under these
bank lines of credit. In addition, PGE can borrow up to $70.0 million from PEI
during 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 March 1, 1997, PGE had approximately $31.0 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. Set forth below is a
summary of such financings consummated by PGE since the beginning of 1995,
exclusive of interim bank borrowings, the 10.125% Promissory Note and
indebtedness that was assumed by Pennsylvania-American in connection with its
purchase of PGE's water utility operations.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provided the residential customers of PGE with a method
of purchasing newly-issued shares of PEI's common stock at a 5% discount from
the market price. The proceeds from the issuance of shares through the Customer
Plan were used by PEI to purchase PGE common stock. PGE realized $2.4 million
and $1.7 million from the issuance of common stock to PEI in connection with the
Customer Plan during 1995 and 1994, respectively. Effective May 9, 1995, PEI
suspended the Customer Plan because of the significant reduction in PEI's and
PGE's capital requirements resulting from the sale of PGE's water utility
operations to Pennsylvania-American.
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").
However, from June 14, 1996, through December 31, 1996, PEI 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, and during that period the DRP
obtained shares of PEI common stock for participants through open market
purchases. Although effective January 1, 1997, PEI resumed selling stock to the
DRP. PGE does not expect to make sales of its common stock to PEI in connection
with the DRP during 1997 because of the significant reduction in PGE's capital
requirements resulting from the sale of PGE's water utility operations to
Pennsylvania-American.
-22-
<PAGE>
Through the DRP, holders of shares of PEI's common stock may reinvest cash
dividends and/or make cash investments in common stock of PEI. During 1996,
1995 and 1994, PGE realized $340,000, $3.3 million and $1.8 million,
respectively, from the issuance of common stock to PEI in connection with the
DRP.
On October 12, 1995, PGE borrowed $50.0 million under a term loan agreement.
The proceeds from the term loan, along with other funds provided by PGE, were
utilized on October 13, 1995, to redeem the $50.0 million principal amount of
PGE's 9.57% Series First Mortgage Bonds due September 1, 1996, in connection
with the then-pending sale of PGE's water utility operations to Pennsylvania-
American. PGE repaid its $50.0 million term loan on February 16, 1996, with
proceeds from the sale of its water utility operations to Pennsylvania-American.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $29.2 million,
$21.1 million and $19.6 million in 1996, 1995 and 1994, respectively. Such
expenditures were financed with internally-generated funds and bank borrowings,
and to the extent necessary by the periodic issuance of stock and long-term
debt.
PGE currently estimates that its capital expenditures will total $27.9
million during 1997. Capital expenditures are currently expected to range from
$25.0-30.0 million in each of the years 1998 and 1999. 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 December 31, 1996, $70.1 million of PGE's long-term debt and $115,000
of PGE's preferred stock was required to be repaid within twelve months. The
$70.1 million of PGE's long-term debt consisted of borrowings of $38.7 million
under its lines of bank credit and $31.4 million of borrowings from PEI.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of PGE and the report of independent public
accountants thereon are presented on pages 24 through 48 of this Form 10-K.
-23-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PG Energy Inc.:
We have audited the accompanying balance sheets and statements of capitalization
of PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water Company
(a Pennsylvania corporation and a wholly-owned subsidiary of Pennsylvania
Enterprises, Inc.) as of December 31, 1996 and 1995, and the related statements
of income, common shareholder's investment, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of PGE's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PG Energy Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying
Accounts for the three-year period ended December 31, 1996 (see index of
financial statements) is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subject to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 19, 1997
-24-
<PAGE>
PG ENERGY INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES $ 160,594 $ 152,756 $ 167,992
Cost of gas 88,291 84,372 98,653
OPERATING MARGIN 72,303 68,384 69,339
OTHER OPERATING EXPENSES:
Operation 25,070 22,438 22,652
Maintenance 5,513 4,967 4,436
Depreciation 7,612 6,971 6,667
Income taxes 6,364 5,168 5,649
Taxes other than income taxes 11,028 9,918 10,807
Total other operating expenses 55,587 49,462 50,211
OPERATING INCOME 16,716 18,922 19,128
OTHER INCOME, NET (Note 4) 143 301 72
INCOME BEFORE INTEREST CHARGES 16,859 19,223 19,200
INTEREST CHARGES:
Interest on long-term debt 6,862 9,304 8,914
Other interest 658 1,543 1,005
Allowance for borrowed funds used
during construction (177) (94) (21)
Total interest charges 7,343 10,753 9,898
INCOME FROM CONTINUING OPERATIONS 9,516 8,470 9,302
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS (Note 2) (363) (3,834) 10,504
NET INCOME 9,153 4,636 19,806
DIVIDENDS ON PREFERRED STOCK 1,730 2,763 4,639
EARNINGS APPLICABLE TO COMMON STOCK $ 7,423 $ 1,873 $ 15,167
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ 2.16 $ 1.02 $ .90
Discontinued operations (.10) (.69) 2.02
Income before premium on repurchase/
redemption of preferred stock 2.06 .33 2.92
Premium on repurchase/redemption of
preferred stock (.37) - (.19)
Total $ 1.69 $ .33 $ 2.73
Weighted average number of shares outstanding 3,601,072 5,569,765 5,189,108
</TABLE>
The accompanying notes are an integral part of the financial statements.
-25-
<PAGE>
PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
December 31,
1996 1995
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost $319,205 $295,895
Accumulated depreciation (79,783) (76,882)
239,422 219,013
OTHER PROPERTY AND INVESTMENTS 4,894 5,089
CURRENT ASSETS:
Cash and cash equivalents 690 328
Accounts receivable -
Customers 17,183 18,189
Affiliates, net 58 -
Others 565 815
Reserve for uncollectible accounts (1,140) (781)
Accrued utility revenues 11,830 10,319
Materials and supplies, at average cost 2,460 2,609
Gas held by suppliers, at average cost 20,265 15,140
Natural gas transition costs collectible 2,525 4,612
Deferred cost of gas and supplier refunds, net 19,316 -
Prepaid expenses and other 1,313 3,281
75,065 54,512
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 29,771 30,015
Other 4,274 3,013
Unamortized debt expense 1,153 1,340
35,198 34,368
NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250
TOTAL ASSETS $354,579 $517,232
The accompanying notes are an integral part of the financial statements.
-26-
<PAGE>
PG ENERGY INC.
BALANCE SHEETS
[CAPTION]
December 31,
1996 1995
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION (see accompanying statements):
Common shareholder's investment (Notes 5 and 8) $ 96,005 $208,356
Preferred stock of PGE (Note 6) -
Not subject to mandatory redemption, net 18,851 33,615
Subject to mandatory redemption 739 1,680
Long-term debt (Note 7) 55,000 55,000
170,595 298,651
CURRENT LIABILITIES:
Current portion of long-term debt (Notes 7 and 9)
Parent 31,400 -
Other 38,721 115,801
Preferred stock subject to repurchase or mandatory
redemption (Note 6) 115 80
Note payable (Note 9) 10,000 10,000
Accounts payable -
Suppliers 17,831 17,781
Parent 348 760
Affiliates, net - 66
Deferred cost of gas and supplier refunds, net - 434
Accrued general business and realty taxes 2,239 1,542
Accrued income taxes 14,559 516
Accrued interest 1,936 2,062
Accrued natural gas transition costs (Note 3) 2,095 2,278
Other 3,375 3,162
122,619 154,482
DEFERRED CREDITS:
Deferred income taxes 49,119 48,848
Accrued natural gas transition costs (Note 3) - 1,144
Unamortized investment tax credits 4,767 4,938
Operating reserves 3,086 3,709
Other 4,393 5,460
61,365 64,099
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
TOTAL CAPITALIZATION AND LIABILITIES $354,579 $517,232
The accompanying notes are an integral part of the financial statements.
-27-
<PAGE>
PG ENERGY INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 9,516 $ 8,470 $ 9,302
Effects of noncash charges to income -
Depreciation 7,675 7,018 6,693
Deferred income taxes, net 1,940 (265) 725
Provisions for self insurance 1,042 2,652 1,030
Other, net 1,390 5,190 2,755
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 46 (3,309) 1,546
Gas held by suppliers (5,125) 4,885 6,625
Accounts payable 215 839 (5,609)
Deferred cost of gas and supplier refunds, net (18,493) 5,715 5,784
Other current assets and liabilities, net 2,958 (6,622) (658)
Other operating items, net (5,644) 2,675 (4,020)
Net cash provided by (used for) continuing
operations (4,480) 27,248 24,173
Net cash provided by (used for) discontinued
operations (45,173) 3,764 552
Net cash provided by (used for) operating
activities (49,653) 31,012 24,725
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (29,312) (20,615) (16,960)
Proceeds from the sale of discontinued
operations 261,752 - -
Other, net 1,078 (4,934) 1,098
Net cash provided by (used for) investing
activities 233,518 (25,549) (15,862)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 339 5,720 23,439
Repurchase of common stock (85,008) - -
Redemption of preferred stock (15,670) (80) (30,080)
Dividends on common and preferred stock (35,498) (18,032) (14,244)
Issuance of long-term debt - 50,000 30,000
Issuance of long-term debt to parent 49,900 - -
Repayment of long-term debt (50,000) (53,535) (31,055)
Repayment of long-term debt to parent (18,500) - -
Repayment of note payable to parent - - (3,680)
Net increase (decrease) in bank borrowings (27,723) 10,519 15,370
Other, net (1,343) (31) (1,023)
Net cash used for financing activities (183,503) (5,439) (11,273)
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 362 24 (2,410)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 328 304 2,714
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 690 $ 328 $ 304
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 7,139 $ 23,802 $ 21,001
Income taxes $ 46,483 $ 8,694 $ 7,353
The accompanying notes are an integral part of the financial statements.
</TABLE>
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<PAGE>
PG ENERGY INC.
STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
December 31,
1996 1995
(Thousands of Dollars)
<S> <C> <C>
COMMON SHAREHOLDER'S INVESTMENT (Notes 5 and 8):
Common stock, no par value
(stated value $10 per share)
Authorized - 15,000,000 shares
Outstanding - 3,314,155 and
5,602,480 shares, respectively $ 33,142 $ 56,025
Additional paid-in capital 32,677 94,463
Retained earnings 30,186 57,868
Total common shareholder's investment 96,005 56.3% 208,356 69.8%
PREFERRED STOCK, par value $100 per share
Authorized - 997,500 shares (Note 6):
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
79,670 and 100,000 shares outstanding,
respectively 7,967 10,000
Less current repurchases (35) -
9% cumulative preferred, 115,641 and
250,000 shares outstanding, respectively,
net of issuance costs 10,919 23,615
Total preferred stock not subject to
mandatory redemption, net 18,851 11.1% 33,615 11.2%
Subject to mandatory redemption -
5.75% cumulative preferred, 8,192 and
17,600 shares outstanding, respectively 819 1,760
Less current redemption requirements (80) (80)
Total preferred stock subject to
mandatory redemption 739 0.4% 1,680 0.6%
LONG-TERM DEBT (Note 7):
First mortgage bonds 55,000 55,000
Notes 70,121 115,801
Less current maturities and sinking
fund requirements (70,121) (115,801)
Total long-term debt 55,000 32.2% 55,000 18.4%
TOTAL CAPITALIZATION $ 170,595 100.0% $ 298,651 100.0%
The accompanying notes are an integral part of the financial statements.
</TABLE>
-29-
<PAGE>
PG ENERGY INC.
STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
[CAPTION]
Additional
Common Paid-In Retained
Stock Capital Earnings Total
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Balance at December 31, 1993 $48,687 $ 72,642 $ 66,682 $188,011
Net income for 1994 - - 19,806 19,806
Issuance of common stock 5,880 17,559 - 23,439
Premium on redemption of preferred
stock - - (980) (980)
Dividends on:
Preferred stock (Note 6) - - (4,639) (4,639)
Common stock ($1.81 per share) - - (9,605) (9,605)
Balance at December 31, 1994 54,567 90,201 71,264 216,032
Net income for 1995 - - 4,636 4,636
Issuance of common stock 1,458 4,262 - 5,720
Dividends on:
Preferred stock (Note 6) - - (2,763) (2,763)
Common stock ($2.7425 per share) - - (15,269) (15,269)
Balance at December 31, 1995 56,025 94,463 57,868 208,356
Net income for 1996 - - 9,153 9,153
Issuance of common stock 90 249 - 339
Repurchase of common stock (22,973) (62,035) - (85,008)
Premium on repurchase of
preferred stock - - (1,337) (1,337)
Dividends on:
Preferred stock (Note 6) - - (1,730) (1,730)
Common stock ($10.217 per share) - - (33,768) (33,768)
Balance at December 31, 1996 $33,142 $ 32,677 $ 30,186 $ 96,005
The accompanying notes are an integral part of the financial statements.
-30-
<PAGE>
PG ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. On February
14, 1997, PGE acquired all of the outstanding capital stock of Honesdale Gas
Company ("Honesdale"), a regulated public utility serving approximately 3,200
customers in portions of Pike and Wayne Counties in northeastern Pennsylvania.
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.
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 (see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult to predict and are beyond the control of PEI. Therefore,
actual amounts could differ from these estimates.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll, administrative
and general costs, and an allowance for funds used during construction.
The allowance for funds used during construction ("AFUDC") is defined as the
net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as a reduction of interest expense (with respect to
the cost of borrowed funds) in the accompanying statements of income. AFUDC
varies according to changes in the level of construction work in progress and in
the sources and costs of capital. The weighted average rate for such allowance
was approximately 9% in 1996, 8% in 1995 and 7% in 1994.
PGE provides for depreciation on a straight-line basis. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
related to the average depreciable original cost of utility plant, was 2.60% in
1996, 2.75% in 1995 and 2.77% in 1994, respectively.
-31-
<PAGE>
When depreciable property is retired, the original cost of such property is
removed from the utility plant accounts and is charged, together with the cost
of removal less salvage, to accumulated depreciation. No gain or loss is
recognized in connection with retirements of depreciable property, other than in
the case of significant involuntary conversions or extraordinary retirements.
Revenues and Cost of Gas. PGE bills its customers monthly based on
estimated or actual meter readings on cycles that extend throughout the month.
The estimated unbilled amounts from the most recent meter reading dates through
the end of the period being reported on are recorded as accrued revenues.
PGE generally passes on to its customers increases or decreases in gas costs
from those reflected in its tariff charges. In accordance with this procedure,
PGE defers any current under or over-recoveries of gas costs and collects or
refunds such amounts in subsequent periods. PGE had underrecoveries of gas
costs totaling $29.6 million, $10.4 million and $15.8 million as of December 31,
1996, 1995 and 1994, respectively.
Deferred Charges (Regulatory Assets). PGE generally accounts for and
reports its costs in accordance with the economic effect of rate actions by the
PPUC. To this extent, certain costs are recorded as deferred charges pending
their recovery in rates. These amounts relate to previously-issued orders of
the PPUC and are of a nature which, in PGE's opinion, will be recoverable in
future rates, based on such rate orders. In addition to deferred taxes
collectible, which represent the probable future rate recovery of the previously
unrecorded deferred taxes primarily relating to certain temporary differences in
the basis of utility plant not previously recorded because of the regulatory
rate practices of the PPUC, the following deferred charges are included as
"Other" regulatory assets as of December 31, 1996 and 1995:
[CAPTION]
1996 1995
(Thousands of Dollars)
[S] [C] [C]
Computer software costs $ 1,293 $ 415
Early retirement plan charges 664 710
Rate case expense 588 11
Low income usage reduction program 492 429
Extraordinary charges due to flooding 426 -
Customer assistance program 219 109
Corrosion control costs 194 341
Natural gas transition costs collectible - 497
Other 398 501
Total $ 4,274 $ 3,013
PGE also records, as deferred charges, the direct financing costs incurred
in connection with the issuance of long-term debt and redeemable preferred stock
and equitably amortizes such amounts over the life of such securities.
Cash and Cash Equivalents. For the purposes of the statements of cash
flows, PGE considers all highly liquid debt instruments purchased, which
generally have a maturity of three months or less, to be cash equivalents. Such
instruments are carried at cost, which approximates market value.
-32-
<PAGE>
Income Taxes. PGE provides for deferred taxes in accordance with the
provisions of FASB Statement 109. The components of PGE's net deferred income
tax liability relative to continuing operations as of December 31, 1996 and
1995, are shown below:
[CAPTION]
1996 1995
(Thousands of Dollars)
[S] [C] [C]
Utility plant basis differences $53,132 $51,822
FERC Order 636 transition costs 181 700
Postretirement benefits (726) (536)
Take-or-pay costs, net (467) (467)
Alternative minimum tax - (1,947)
Operating reserves (1,406) (1,300)
Other (1,595) 576
Net deferred income tax liability $49,119 $48,848
The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
1996 1995 1994
(Thousands of Dollars)
[S] [C] [C] [C]
Included in operating expenses:
Currently payable -
Federal $ 3,235 $ 4,457 $ 3,013
State 1,361 1,169 1,128
Total currently payable 4,596 5,626 4,141
Deferred, net -
Federal 2,059 198 1,785
State (119) (463) (105)
Total deferred, net 1,940 (265) 1,680
Amortization of investment tax credits (172) (193) (172)
Total included in operating expenses 6,364 5,168 5,649
Included in other income, net:
Currently payable -
Federal (59) 135 213
State (19) 43 85
Total currently payable (78) 178 298
Deferred, net -
Federal - - (5)
State - - -
Total deferred, net - - (5)
Total included in other income, net (78) 178 293
Total provision for income taxes $ 6,286 $ 5,346 $ 5,942
-33-
<PAGE>
The total provision for income taxes relative to continuing operations shown
in the accompanying statements of income differs from the amount which would be
computed by applying the statutory federal income tax rate to income before
income taxes. The following table summarizes the major reasons for this
difference:
[CAPTION]
1996 1995 1994
(Thousands of Dollars)
[S] [C] [C] [C]
Income before income taxes $15,802 $13,816 $15,293
Tax expense at statutory federal
income tax rate $ 5,531 $ 4,836 $ 5,353
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 795 487 879
Amortization of investment tax
credits (172) (193) (172)
Other, net 132 216 (118)
Total provision for income taxes $ 6,286 $ 5,346 $ 5,942
Long Lived Assets. FASB Statement 121, "Accounting for the Impairment of
Long-Lived Assets", requires that long-lived assets, identifiable intangibles,
capital leases and goodwill be reviewed for impairment whenever events occur or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. In addition, FASB Statement 121 requires that regulatory assets
meet the recovery criteria of FASB Statement 71, "Accounting for Effects of
Certain Types of Regulation", on an ongoing basis in order to avoid a writedown.
The implementation of FASB Statement 121 in 1996 did not have a significant
impact on PGE. The carrying amount of all assets, including regulatory assets,
is considered recoverable.
(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
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 cash proceeds from the sale of approximately $203.3
million, net of the estimated $58.8 million of income taxes, have been used by
PEI and PGE to retire debt, to repurchase stock (see Note 5 of the Notes to
Financial Statements), for construction expenditures and for working capital for
their continuing operations.
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, the sale resulted in an estimated 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
-34-
<PAGE>
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 $58.8 million, of which $44.6 million had been
paid as of December 31, 1996.
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 through the date of disposition
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.
Selected financial information for the discontinued operations as of
December 31, 1995, and for the years ended December 31, 1995 and 1994 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) 38,508
Total assets being acquired by
Pennsylvania-American 407,250
Liabilities being assumed by
Pennsylvania-American 147,080
Net assets being 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
Income From Discontinued Operations
[CAPTION]
Years ended December 31,
1995* 1994
(Thousands of Dollars)
[S] [C] [C]
Operating revenues $ 15,640 $ 66,731
Operating expenses, excluding income taxes 8,875 36,677
Operating income before income taxes 6,765 30,054
Income taxes 1,403 6,850
Operating income 5,362 23,204
Other income 9 49
Allocated interest charges (3,244) (12,749)
Income from discontinued operations $ 2,127 $ 10,504
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
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<PAGE>
Net Cash Provided by Discontinued Operations
[CAPTION]
Years ended December 31,
1995* 1994
(Thousands of Dollars)
[S] [C] [C]
Income from discontinued operations $ 2,127 $ 10,504
Noncash charges (credits) to income:
Depreciation 1,946 7,672
Deferred treatment plant costs, net 145 581
Deferred income taxes 447 5,146
Deferred water utility billings - (5,574)
Changes in working capital, exclusive
of long-term debt 1,648 353
Additions to utility plant (2,276) (20,980)
Utilization of restricted funds - 9,753
Net increase (decrease) in long-term
debt 1,010 (6,834)
Other, net (1,283) (69)
Net cash provided by discontinued
operations $ 3,764 $ 552
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PGE's water utility operations for financial statement
purposes.
(3) RATE MATTERS
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
assigned to conduct the investigation of the rate increase request. This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue. By Order adopted December
19, 1996, the PPUC approved the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement Petition, the 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) is being 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") 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. 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, 1994, 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 32,400,000
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)*
December 1, 1994 3.74 3.68 (1,800,000)
* Represents estimated reduction in revenue for the period May 15, 1995,
through November 30, 1995.
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.
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 (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filings
made with the PPUC by PGE and other LDCs. The PGC Order also indicated that
while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs")
are not natural gas costs eligible for recovery under the PGC rate filing
mechanism, such costs are subject to full recovery by LDCs 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, $857,000 was recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 was recovered by PGE in its annual PGC rate that the PPUC approved
effective December 1, 1995, and the remaining $213,000 is being recovered by PGE
in its PGC rate that was 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 $10.1 million of Non-Gas
Transition Costs will be billed to PGE, generally over a six-year period
extending through January 1, 1999, of which $8.0 million had been billed to PGE
and $7.5 million had been recovered from its customers as of December 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.
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<PAGE>
(4) OTHER INCOME, NET
Other income, net was comprised of the following elements:
[CAPTION]
Year ended December 31,
1996 1995 1994
(Thousands of Dollars)
[S] [C] [C] [C]
Net interest income on the temporary
investment of proceeds from the sale
of PGE's water utility operations $ 267 $ - $ -
Loss on sale and retirement of gas wells
and related abandonment of subsurface gas
rights, net of related income taxes (321) - -
Gain on sale of land and other property,
net of related income taxes 141 - 165
Write-off of expired advances relating
to income taxes, net of related
income taxes - 227 -
Amortization of preferred stock issuance
costs, net of related income tax
benefits (13) (1) (227)
Other 69 75 134
Total $ 143 $ 301 $ 72
(5) COMMON STOCK
On May 31, 1994, PGE issued 500,000 shares of its common stock to PEI for
aggregate net proceeds of $20.0 million. The proceeds from the shares issued on
May 31, 1994, were used by PGE to redeem $15.0 million of its 9.50% 1988 series
cumulative preferred stock, to fund the $534,375 premium in connection with such
redemption, to repay a portion of its bank borrowings and for working capital
purposes. Other than shares issued in connection with PEI's Dividend
Reinvestment and Stock Purchase Plan and Customer Stock Purchase Plan, PGE has
not issued any other shares of common stock since January 1, 1994.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provided the residential customers of PGE with a method
of purchasing newly-issued shares of PEI common stock at a 5% discount from the
market price. PEI uses proceeds from the issuance of shares through the
Customer Plan to purchase common stock of PGE. PGE realized $2.4 million and
$1.7 million from the issuance of common stock to PEI in connection with the
Customer Plan during 1995 and 1994, respectively. Effective May 9, 1995, the
Customer Plan was suspended because of the significant reduction in PEI's and
PGE's capital requirements resulting from the sale of PGE's water utility
operations to Pennsylvania-American.
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").
However, from June 14, 1996, through December 31, 1996, PEI 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, and during that period the DRP
obtained shares of PEI common stock for participants through open market
purchases. Although effective January 1, 1997, PEI resumed selling stock to the
DRP, PGE does not expect to make sales of its common stock to PEI in connection
with the DRP during 1997 because of the significant reduction in PGE's capital
requirements resulting from the sale of PGE's water utility operations to
Pennsylvania-American.
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<PAGE>
Through the DRP, holders of shares of PEI's common stock may reinvest cash
dividends and/or make cash investments in common stock of PEI. During 1996,
1995 and 1994, PGE realized $340,000, $3.3 million and $1.8 million,
respectively, from the issuance of common stock to PEI in connection with the
DRP.
On February 16, 1996, PGE repurchased 2,297,297 shares of its common stock
from PEI for an aggregate consideration of $85.0 million, with a portion of the
proceeds from the sale of its water utility operations to Pennsylvania-American.
(6) PREFERRED STOCK
Preferred Stock Subject to Mandatory Redemption. On May 31, 1994, PGE
redeemed the remaining 150,000 outstanding shares of its 9.50% 1988 series
cumulative preferred stock, $100 par value, at a price of $103.5625 per share,
which included a voluntary redemption premium of $3.5625 per share ($534,375 in
the aggregate), plus accrued dividends.
On December 16, 1994, PGE redeemed all 150,000 shares of its 8.90%
cumulative preferred stock at a price of $102.97 per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate).
The holders of the 5.75% cumulative preferred stock have a noncumulative
right each year to tender to PGE and to require it to purchase at a per share
price not exceeding $100, up to (a) that number of shares of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase price
of $80,000 less (b) the number of such shares which PGE may already have
purchased during the year at a per share price of not more than $100. On
June 17, 1996, PGE 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. Eight hundred such
shares were acquired and cancelled by PGE in each of the years ended
December 31, 1995 and 1994, for an aggregate purchase price in each year of
$80,000.
As of December 31, 1996, the sinking fund requirements relative to PGE's
5.75% cumulative preferred stock (the only series of preferred stock subject to
mandatory redemption that was outstanding as of such date) were $80,000 for each
of the years 1997 through 2001. At PGE's option, the 5.75% cumulative preferred
stock may currently be redeemed at a price of $102.00 per share ($836,000 in the
aggregate).
Preferred Stock Not Subject to Mandatory Redemption. During the year ended
December 31, 1996, PGE repurchased 134,359 shares of its 9% cumulative preferred
stock, $100 par value, for an aggregate consideration of $14.5 million, largely
pursuant to a self tender offer conducted during March and April, 1996. The 9%
cumulative preferred stock is not redeemable at the option of PGE prior to
September 15, 1997. Thereafter, it is redeemable at the option of PGE, in whole
or in part, upon not less than 30 days' notice, at $100 per share plus accrued
dividends to the date of redemption and at a premium of $8 per share if redeemed
from September 15, 1997, to September 14, 1998, and a premium of $4 per share if
redeemed from September 15, 1998, to September 14, 1999.
During the year ended December 31, 1996, PGE repurchased 20,330 shares of
its 4.10% cumulative preferred stock, $100 par value, for an aggregate
consideration of $1.0 million, largely pursuant to a self tender offer conducted
during March and April, 1996. An additional 350 shares of 4.10% cumulative
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<PAGE>
preferred stock were repurchased in January, 1997, for an aggregate
consideration of $19,000. At PGE's option, the 4.10% cumulative preferred stock
may currently be redeemed at a redemption price of $105.50 per share or for an
aggregate redemption price of $8,368,260.
Dividend Information. The dividends on the preferred stock of PGE in each
of the three years in the period ended December 31, 1996, were as follows:
[CAPTION]
Series 1996 1995 1994
(Thousands of Dollars)
[S] [C] [C] [C]
4.10% $ 348 $ 410 $ 410
5.75% 72 103 108
8.90% - - 1,280
9.00% 1,310 2,250 2,250
9.50% 1988 series - - 591
Total $1,730 $2,763 $4,639
Dividends on all series of PGE's preferred stock are cumulative and PGE may
not declare dividends on its common stock if any dividends on shares of
preferred stock then outstanding are in default.
(7) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1996
and 1995:
[CAPTION]
1996 1995
(Thousands of Dollars)
[S] [C] [C]
First mortgage bonds -
8.375% Series, due 2002 $ 30,000 $ 30,000
9.23 % Series, due 1999 10,000 10,000
9.34 % Series, due 2019 15,000 15,000
55,000 55,000
Notes -
Term loan, due 1996 - 50,000
Bank borrowings, at weighted average interest
rates of 6.18% and 6.62%, respectively (Note 9) 38,721 65,801
Note payable to PEI 31,400 -
70,121 115,801
Less current maturities and sinking
fund requirements (70,121) (115,801)
Total long-term debt $ 55,000 $ 55,000
On October 12, 1995, PGE borrowed $50.0 million pursuant to a term loan
agreement. Proceeds from the loan, along with other funds provided by PGE, were
utilized on October 13, 1995, to redeem the $50.0 million principal amount of
PGE's 9.57% Series First Mortgage Bonds due September 1, 1996. PGE repaid its
$50.0 million term loan on February 16, 1996, with proceeds from the sale of its
water operations to Pennsylvania-American.
On August 22, 1996, the PPUC granted PGE permission to 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 December 31, 1996, PGE had $31.4 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.
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<PAGE>
Maturities and Sinking Fund Requirements. As of December 31, 1996, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
Year Amount
[S] [C]
1997 $ 70,121,000 (a)
1998 $ -
1999 $ 10,000,000 (b)
2000 $ -
2001 $ -
(a) Includes $38.7 million of bank borrowings outstanding as of December 31,
1996, and $31.4 million of borrowings payable to PEI.
(b) Represents PGE's 9.23% Series First Mortgage Bonds in the principal
amount of $10.0 million due September 1, 1999.
(8) DIVIDEND RESTRICTIONS
The preferred stock provisions of PGE's Restated Articles of Incorporation
and certain of the agreements under which PGE has issued long-term debt provide
for certain dividend restrictions. As of December 31, 1996, $5,416,000 of the
retained earnings of PGE were restricted against the payment of cash dividends
on common stock under the most restrictive of these covenants.
(9) BANK NOTES PAYABLE
As of April 19, 1993, PGE entered into a revolving bank credit agreement, as
subsequently amended (the "Credit Agreement"), with a group of six banks under
the terms of which $60.0 million was available for borrowing by PGE through May
31, 1996. The Credit Agreement was terminated on February 26, 1996, following
the sale of PGE's water operations to Pennsylvania-American on February 16,
1996, and the repayment of all borrowings outstanding under the Credit Agreement
with proceeds from such sale. The interest rate on borrowings under the Credit
Agreement was generally less than prime. The Credit Agreement required the
payment of a commitment fee of .195% per annum on the average daily amount of
the unused portion of the available funds.
PGE currently has arrangements for six revolving bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime and which mature during mid-1997. As
of March 1, 1997, PGE had $27.2 million outstanding under these bank lines of
credit.
Because of limitations imposed by the terms of PGE's preferred stock, PGE is
prohibited, without the consent of the holders of a majority of the outstanding
shares of its preferred stock, from issuing more than $12.0 million of unsecured
debt due on demand or within one year from issuance. PGE had $10.0 million due
on demand or within one year from issuance outstanding as of December 31, 1996.
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<PAGE>
Information relating to PGE's bank lines of credit and borrowings under
those lines of credit is set forth below:
<TABLE>
<CAPTION>
As of December 31,
1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Borrowings under lines of credit
Short-term $ 10,000 $ 10,000 $ -
Long-term 38,721 65,801 65,500
$ 48,721 $ 75,801 $ 65,500
Unused lines of credit
Short-term $ - $ - $ -
Long-term 16,779 4,699 2,000
$ 16,779 $ 4,699 $ 2,000
Total lines of credit
Prime rate $ - $ - $ -
Other than prime rate 65,500 80,500 67,500
$ 65,500 $ 80,500 $ 67,500
Short-term bank borrowings (a)
Maximum amount outstanding $ 10,000 $ 10,000 $ 5,692
Daily average amount outstanding $ 1,392 $ 2,581 $ 441
Weighted daily average interest
rate 6.241% 6.513% 3.984%
Weighted average interest rate at
year-end 6.206% 6.334% -
Range of interest rates 5.875- 6.290- 3.700-
6.438% 6.660% 6.000%
(a) PGE had no short-term bank borrowings outstanding as of December 31,
1994.
(10) POSTEMPLOYMENT BENEFITS
Pension Benefits. Substantially all employees of PGE are covered by PEI's
trusteed, noncontributory, defined benefit pension plan. Pension benefits are
based on years of service and average final salary. PGE's funding policy is to
contribute an amount necessary to provide for benefits based on service to date,
as well as for benefits expected to be earned in the future by current
participants. To the extent that the present value of these obligations is
fully covered by assets in the trust, a contribution may not be made for a
particular year.
Under the terms of the agreement regarding the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed the accumulated benefit obligations relating to employees of PGE who
accepted employment with Pennsylvania-American (the "Transferred Employees").
In this regard, plan assets in an amount equal to the actuarial present value of
accumulated plan benefits relative to the Transferred Employees, with interest
from February 16, 1996, were transferred to the American pension plan in June,
1996. As a result of this and other actions, PGE recognized, as of December 31,
1995, an estimated settlement loss of $200,000 ($117,000 net of the related
income tax benefit) and curtailment gain of $2.7 million ($1.6 million net of
related income taxes) in its determination of the estimated loss on the disposal
of water utility operations.
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</TABLE>
<PAGE>
In December, 1995, PGE offered an Early Retirement Plan ("ERP") to its
employees who would be 59 years of age or older and had a minimum of five years
of service as of December 31, 1995. Of the 63 eligible employees, 50 elected to
accept this offer and retired as of December 31, 1995, resulting in the
recording, as of December 31, 1995, of an additional pension liability of $1.6
million reflecting the increased costs associated with the ERP. Such amount was
charged to the estimated loss on the disposal of water utility operations.
Net pension costs relative to continuing operations, including amounts
capitalized, were $385,000, $353,000 and $309,000 in 1996, 1995 and 1994,
respectively. The following items were the components of such net pension
costs:
[CAPTION]
1996 1995 1994
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned
during the year $ 799 $ 430 $ 549
Interest cost on projected benefit
obligations 2,731 1,459 1,400
Return on plan assets (5,875) (1,502) 535
Net amortization and deferral (79) (34) (55)
Deferral of investment (loss) gain 2,809 - (2,120)
Net pension cost $ 385 $ 353 $ 309
The funded status of the plan as of December 31, 1996 and 1995, was as
follows:
[CAPTION]
1996 1995
(Thousands of Dollars)
[S] [C] [C]
Actuarial present value of the projected
benefit obligations:
Accumulated benefit obligations
Vested $ 28,613 $ 29,100
Nonvested 21 47
Total 28,634 29,147
Provision for future salary increases 6,933 7,841
Projected benefit obligations 35,567 36,988
Approximate market value of plan assets, primarily
invested in equities and bonds 39,000 34,000
Plan assets in excess of (less than) projected
benefit obligations 3,433 (2,988)
Unrecognized net transition asset as of
January 1, 1986, being amortized over 20 years (1,939) (2,155)
Unrecognized prior service costs 2,258 1,507
Unrecognized net (gain) loss (4,259) 2,155
Accrued pension cost at year-end $ (507) $ (1,481)
The assumptions used in determining pension obligations were:
[CAPTION]
1996 1995 1994
[S] [C] [C] [C]
Discount rate 7.75% 7.00 % 8.75 %
Expected long-term rate of return
on plan assets 9.00% 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00% 5.00 % 5.50 %
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<PAGE>
Other Postretirement Benefits. In addition to pension benefits, PGE
provides certain health care and life insurance benefits for retired employees.
Substantially all of PGE's employees may become eligible for those benefits if
they reach retirement age while working for PGE. PGE records the cost of
retiree health care and life insurance benefits as a liability over the
employees' active service periods instead of on a benefits-paid basis.
Under the terms of the agreement regarding the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed PGE's obligation to provide retiree health care and life insurance
benefits to the Transferred Employees, as well as 45% of PGE's retired employees
as of that date. In this regard, plan assets in an amount proportional to the
actuarial present value of accumulated plan benefits relative to the Transferred
Employees and 45% of the retired employees as of February 16, 1996, will be
transferred to trusts established by Pennsylvania-American, which is expected to
occur in the second quarter of 1997. Pennsylvania-American is reimbursing PGE
for benefit plan payments made on behalf of the retired employees for whom
Pennsylvania-American has assumed responsibility. As a result of the transfer,
early retirement and displacement of employees, PGE recognized an estimated
settlement and curtailment loss of $385,000 ($225,000 net of the related income
tax benefit) as part of the loss on the disposal of its water utility
operations.
In conjunction with the ERP offered by PGE to certain of its employees, PGE
recorded, as of December 31, 1995, an additional liability of $805,000,
($471,000 net of the related income tax benefit) reflecting the cost of future
health care benefits required to be recognized in conjunction with the ERP.
Such amount was charged to the estimated loss on disposal of water utility
operations.
The following items were the components of the net cost of postretirement
benefits other than pensions relative to continuing operations for the years
1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Present value of benefits earned during
the year $ 253 $ 127 $ 148
Interest cost on accumulated benefit
obligation 506 577 532
Return on plan assets - (69) (4)
Net amortization and deferral 314 391 360
Net cost of postretirement benefits other
than pensions 1,073 1,026 1,036
Less disbursements for benefits (501) (555) (543)
Increase in liability for postretirement
benefits other than pensions $ 572 $ 471 $ 493
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</TABLE>
<PAGE>
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1996 and 1995 follow:
[CAPTION]
1996 1995
(Thousands of Dollars)
[S] [C] [C]
Accumulated benefit obligation:
Retirees $ 4,359 $ 6,514
Fully eligible active employees 1,033 850
Other active employees 1,552 1,074
6,944 8,438
Plan assets at fair value 169 -
Accumulated benefit obligation
in excess of plan assets 6,775 8,438
Unrecognized transition obligation
being amortized over 20 years (5,022) (5,438)
Unrecognized net gain (loss) 1,116 (703)
Accrued liability for postretirement
benefits other than pensions $ 2,869 $ 2,297
The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
1996 1995 1994
[S] [C] [C] [C]
Discount rate 7.75 % 7.00 % 8.75 %
Expected long-term rate of return
on plan assets 9.00 % 9.00 % 9.00 %
Projected increase in future
compensation levels 5.00 % 5.00 % 5.50 %
It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 8-1/2% in 1997 and that this rate would
decrease gradually to 5-1/2% for the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption had a significant effect
on the amounts accrued. To illustrate, increasing the assumed health care cost
trend rate by 1 percentage point in each year would increase the transition
obligation as of January 1, 1997, by approximately $294,000 and the aggregate of
the service and interest cost components of the net cost of postretirement
benefits other than pensions for the year 1996 by approximately $31,000.
Since PGE did not seek to increase its base gas rates prior to 1996, the
$442,000 ($259,000 net of related income taxes), $441,000 ($258,000 net of
related income taxes), and $447,000 ($256,000 net of related income taxes) of
additional cost incurred in 1996, 1995 and 1994, respectively, as a result of
the adoption of the provisions of FASB Statement 106 were expensed without any
adjustment being made to its gas rates. Effective with its January 15, 1997,
base rate increase (see Note 3 of the Notes to Financial Statements), PGE will
begin funding its accumulated benefit obligations with respect to other
postretirement benefits.
(11) CONSTRUCTION EXPENDITURES
PGE estimates the cost of its 1997 construction program will be $27.9
million. It is anticipated that such expenditures will be financed with
internally generated funds and bank borrowings, and, to the extent necessary, by
the periodic issuance of stock and long-term debt.
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(12) 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
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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<PAGE>
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
QUARTER ENDED
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C]
Operating revenues $ 69,415 $ 25,457 $ 13,998 $ 51,724
Operating income (loss) 10,033 803 (659) 6,539
Income (loss) from continuing
operations 7,485 (757) (2,690) 3,748
Loss with respect to
discontinued operations (365) (21) - 23
Net income (loss) $ 7,120 $ (778) $ (2,690) $ 3,771
Earnings (loss) per share
of common stock: (a)
Continuing operations $ 1.67 $ (.23) $ (.81) $ 1.13
Discontinued operations (.08) (.01) - .01
Net income (loss) before
premium on repurchase/
redemption of preferred
stock 1.59 (.24) (.81) 1.14
Premium on repurchase/
redemption of preferred
stock - (.39) (.03) .01
Earnings (loss) per share of
common stock (a) $ 1.59 $ (.63) $ (.84) $ 1.15
<TABLE>
<CAPTION>
QUARTER ENDED
March 31, June 30, September 30, December 31,
1995 1995 1995 1995
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 68,237 $ 25,184 $ 12,119 $ 47,216
Operating income 9,500 1,867 (3) 7,558
Income (loss) from continuing
operations 6,413 (1,581) (3,520) 4,395
Loss with respect to
discontinued operations (3,704) - - (130)
Net income (loss) $ 2,709 $ (1,581) $ (3,520) $ 4,265
Earnings (loss) per share
of common stock: (a)
Continuing operations $ 1.16 $ (.28) $ (.63) $ .78
Discontinued operations (.67) - - (.02)
Earnings (loss) per share of
common stock (a) $ .49 $ (.28) $ (.63) $ .76
</TABLE>
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in the financial
statements and supplementary data of this report, as a result of PGE's
issuance of additional shares of common stock at various dates in 1994 and
1995 and its repurchase of shares of common stock during 1996.
Because of the seasonal nature of PGE's gas heating business, there are
substantial variations in operations reported on a quarterly basis.
-47-
<PAGE>
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
o Long-term debt. The fair value of PGE's long-term debt has been estimated
based on the quoted market price as of the respective dates for the portion
of such debt which is publicly traded and, with respect to the portion of
such debt which is not publicly traded, on the estimated borrowing rate as
of the respective dates for long-term debt of comparable credit quality with
similar terms and maturities.
o Preferred stock subject to mandatory redemption. The fair value of PGE's
preferred stock subject to mandatory redemption has been estimated based on
the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of PGE's financial
instruments at December 31, 1996 and 1995, were as follows:
[CAPTION]
1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Long-term debt (including current
portion) $125,121 $ 130,622 $170,801 $ 175,431
Preferred stock subject to
mandatory redemption (including
current portion) 819 836 1,760 1,795
PGE believes that the regulatory treatment of any excess or deficiency of
fair value relative to the carrying amounts of these items, if such items were
settled at amounts approximating those above, would dictate that these amounts
be used to increase or reduce its rates over a prescribed amortization period.
Accordingly, any settlement would not result in a material impact on PGE's
financial position or the results of operations of either PEI or PGE.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-48-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements, notes to financial statements
and report of independent public accountants for PGE are presented in
Item 8 of this Form 10-K.
Page
Report of Independent Public Accountants . . . . . . . . . . . . 24
Statements of Income for each of the three years in the
period ended December 31, 1996 . . . . . . . . . . . . . . . . 25
Balance Sheets as of December 31, 1996 and 1995. . . . . . . . . 26
Statements of Cash Flows for each of the three years in the
period ended December 31, 1996 . . . . . . . . . . . . . . . . 28
Statements of Capitalization as of December 31, 1996 and 1995. . 29
Statements of Common Shareholder's Investment for each of
the three years in the period ended December 31, 1996. . . . . 30
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 31
2. Financial Statement Schedules
The following financial statement schedule for PGE is filed as a
part of this Form 10-K. Schedules not included have been omitted
because they are not applicable or the required information is shown in
the financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1996 . . . . . . . . . . . . . 51
3. Exhibits
See "Index to Exhibits" located on page 53 for a listing of all
exhibits filed herein or incorporated by reference to a previously
filed registration statement or report with the Securities and Exchange
Commission.
-49-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
(c) Executive Compensation Plans and Arrangements
The following listing includes PGE's executive compensation plans and
arrangements in effect as of December 31, 1996.
Exhibit
10-23 Form of Change in Control Agreement between PEI and certain of its
Officers -- filed as Exhibit 10-34 to PGE's Annual Report on Form
10-K for 1989, File No. 1-3490.
10-24 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between PEI and certain of its Officers -- filed as
Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No.
0-7812.
10-25 Agreement dated as of March 15, 1991, by and between PEI, PGE and
Robert L. Jones -- filed as Exhibit No. 10-38 to PGE's Annual Report
on Form 10-K for 1990, File No. 1-3490.
10-26 Employment Agreement effective September 1, 1995, between PEI and
Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995, File No.
0-7812.
10-27 Supplemental Retirement Agreement, dated as of December 23, 1991,
between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's
Common Stock Form S-2, Registration No. 33-43382.
10-28 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between PEI and Dean T. Casaday -- filed as
Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
0-7812.
10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy
Statement, File No. 0-7812.
10-30 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.
10-31 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.
(d) Statements Excluded from Annual Report to Shareholders
Not applicable.
</TABLE>
-50-
<PAGE>
Schedule II
-51-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
PG ENERGY INC.
(Registrant)
<S> <C> <C>
Date: March 6, 1997 By: /s/ Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 6, 1997 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Kenneth L. Pollock Chairman of the Board of March 6, 1997
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 6, 1997
William D. Davis of Directors
/s/ Thomas F. Karam Director, President and March 6, 1997
Thomas F. Karam Chief Executive Officer
/s/ Paul R. Freeman Director March 6, 1997
Paul R. Freeman
/s/ Robert J. Keating Director March 6, 1997
Robert J. Keating
/s/ John D. McCarthy Director March 6, 1997
John D. McCarthy
/s/ John D. McCarthy, Jr. Director March 6, 1997
John D. McCarthy, Jr.
/s/ Kenneth M. Pollock Director March 6, 1997
Kenneth M. Pollock
/s/ Richard A. Rose, Jr. Director March 6, 1997
Richard A. Rose, Jr.
/s/ James A. Ross Director March 6, 1997
James A. Ross
/s/ Ronald W. Simms Director March 6, 1997
Ronald W. Simms
-52-
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2-1 Asset Purchase Agreement dated as of April 26, 1995, among PEI, PGE,
American Water Works Company, Inc., and Pennsylvania-American Water
Company -- filed as Exhibit 2-1 to PGE's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, File No. 1-3490.
(3) Articles of Incorporation and By Laws:
3-1 Restated Articles of Incorporation -- filed as Exhibit 3-1 to PGE's
Annual Report on Form 10-K for 1995, File No. 1-3490.
3-2 By-Laws of PGE, as amended and restated -- filed as Exhibit 3-2 to
PGE's Annual Report on Form 10-K for 1995, File No. 1-3490.
(4) Instruments Defining the Rights of Security Holders, Including Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
between Scranton-Spring Brook Water Service Company (now PGE) and
First Trust of New York, National Association, as Successor Trustee
to Morgan Guaranty Trust Company of New York -- filed as Exhibit
2(c) to PGE's Bond Form S-7, Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed
as Exhibit 2(d) to PGE's Bond Form S-7, Registration No. 2-55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
Exhibit 2(e) to PGE's Bond Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
as Exhibit 2(f) to PGE's Bond Form S-7, Registration No. 2-55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed
as Exhibit 2(g) to PGE's Bond Form S-7, Registration No. 2-55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 --
filed as Exhibit 2(h) to PGE's Bond Form S-7, Registration No. 2-
55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 --
filed as Exhibit 2(i) to PGE's Bond Form S-7, Registration No. 2-
55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
as Exhibit 2(j) to PGE's Bond Form S-7, Registration No. 2-55419.
4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 --
filed as Exhibit 2(k) to PGE's Bond Form S-7, Registration No. 2-
55419.
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed
as Exhibit 2(1) to PGE's Bond Form S-7, Registration No. 2-55419.
-53-
<PAGE>
Exhibit
Number
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
as Exhibit 2(m) to PGE's Bond Form S-7, Registration No. 2-55419.
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
as Exhibit 2(n) to PGE's Bond Form S-7, Registration No. 2-55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
filed as Exhibit 4-16 to PGE's Annual Report on Form 10-K for 1982,
File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-22 to PGE's Annual Report on Form 10-K for 1989,
File No. 1-3490.
4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-23 to PGE's Annual Report on Form 10-K for 1989,
File No. 1-3490.
4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
-- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration
No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992,
-- filed as Exhibit 4-1 to PGE's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992, File No. 1-3490.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992,
-- filed as Exhibit 4-20 to PGE's Bond Form S-2, Registration No.
33-54278.
4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
-- filed as Exhibit 4-19 to PGE's Annual Report on Form 10-K for
1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993,
-- filed as Exhibit 4-20 to PGE's Annual Report on Form 10-K for
1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994,
-- filed as Exhibit 4-21 to PGE's Annual Report on Form 10-K for
1994, File No. 1-3490.
4-22 Thirtieth Supplemental Indenture, dated as of December 1, 1995, --
filed as Exhibit 4 to PGE's Annual Report on Form 10-K for 1995,
File No. 1-3490.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
-54-
<PAGE>
Exhibit
Number
(10) Material Contracts:
10-1 Service Agreement for storage service under Rate Schedule LGA, dated
August 6, 1974, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-3 to PGE's Annual Report on Form
10-K for 1984, File No. 1-3490.
10-2 Service Agreement for transportation service under Rate Schedule FT,
dated February 1, 1992, by and between PGE and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-4 to PGE's Annual
Report on Form 10-K for 1991, File No. 1-3490.
10-3 Service Agreement for storage service under Rate Schedule SS-2,
dated April 1, 1990, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-4 Service Agreement for sales service under Rate Schedule FS, dated
August 1, 1991, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-6 to PGE's Annual Report on Form
10-K for 1991, File No. 1-3490.
10-5 Service Agreement for transportation service under Rate Schedule FT,
dated August 1, 1991, between PGE and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-10 to PEI's Common Stock Form S-
2, Registration No. 33-43382.
10-6 Service Agreement for transportation service under Rate Schedule IT,
dated January 31, 1992, between PGE and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-8 to PGE's Annual Report on
Form 10-K for 1991, File No. 1-3490.
10-7 Service Agreement for storage service under Rate Schedule LSS, dated
October 1, 1993, by and between PGE and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-7 to PGE's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-8 Service Agreement for storage service under Rate Schedule GSS, dated
October 1, 1993, by and between PGE and Transcontinental Gas
Pipeline Corporation Company -- filed as Exhibit 10-8 to PGE's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-9 Service Agreement for transportation service under Rate Schedule
FTS, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-9 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-10 Service Agreement for transportation service under Rate Schedule
SST, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-10 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
-55-
<PAGE>
Exhibit
Number
10-11 Service Agreement for storage service under Rate Schedule FSS, dated
November 1, 1993, by and between PGE and Columbia Gas Transmission
Corporation -- filed as Exhibit 10-11 to PGE's Annual Report on Form
10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate Schedule
FTS-1, dated November 1, 1993, by and between PGE and Columbia Gulf
Transmission Company -- filed as Exhibit 10-12 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-13 Service Agreement for transportation service under Rate Schedule
ITS-1, dated November 1, 1993, by and between PGE and Columbia Gulf
Transmission Company -- filed as Exhibit 10-13 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-14 Service Agreement for transportation service under Rate Schedule
ITS, dated November 1, 1993, by and between PGE and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-14 to PGE's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-15 Service Agreement (Contract No. 946) for transportation service
under Rate Schedule FT-A, dated September 1, 1993, by and between
PGE and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to
PGE's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-16 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline Company -- filed as Exhibit
10-2 to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-17 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline Company -- filed as Exhibit
10-3 to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-18 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PGE and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to
PGE's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-19 Service Agreement (Contract No. 2289) for storage service under Rate
Schedule FS, dated September 1, 1993, by and between PGE and
Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PGE's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993, File
No. 1-3490.
10-20 Service Agreement for transportation service under Rate Schedule FT,
dated April 1, 1995, by and between PGE and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-1 to PGE's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File No.
1-3490.
-56-
<PAGE>
Exhibit
Number
10-21 Service Agreement for storage service dated October 13, 1995, by and
between PGE and Avoca Natural Gas Storage -- filed as Exhibit 10-1
to PGE's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, File No. 1-3490.
10-22 Bond Purchase Agreement, dated September 1, 1989, relating to PGE's
First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds
9.34% Series due 2019 among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York and PGE -- filed as
Exhibit 10-33 to PGE's Annual Report on Form 10-K for 1989, File No.
1-3490.
10-23 Form of Change in Control Agreement between PEI and certain of its
Officers -- filed as Exhibit 10-34 to PGE's Annual Report on Form
10-K for 1989, File No. 1-3490.
10-24 First Amendment to Form of Change in Control Agreement, dated as of
May 24, 1995, between PEI and certain of its Officers -- filed as
Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No.
0-7812.
10-25 Agreement, dated as of March 15, 1991, by and between PEI, PGE and
Robert L. Jones -- filed as Exhibit 10-38 to PGE's Annual Report on
Form 10-K for 1990, File No. 1-3490.
10-26 Employment Agreement, effective September 1, 1995, between PEI and
Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1995, File No.
0-7812.
10-27 Supplemental Retirement Agreement, dated as of December 23, 1991,
between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's
Common Stock Form S-2, Registration No. 33-43382.
10-28 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between PEI and Dean T. Casaday -- filed as
Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
0-7812.
10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy
Statement, File No. 0-7812.
10-30 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.
10-31 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.
-57-
<PAGE>
TABLE OF CONTENTS
PART I PAGE
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 11
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 11
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 12
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . *
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 13
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 23
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 48
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . *
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . *
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 49**
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 52
________________________
* These items have been omitted from this Form 10-K as Registrant meets the
conditions set forth in General Instructions J(1)(a) and (b) of Form 10-K
and is therefore filing this form with the reduced disclosure format.
** The "Index to Exhibits" is located on page 53.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 6, 1997 By:
Thomas F. Karam
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 6, 1997 By:
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
Chairman of the Board of March 6, 1997
Kenneth L. Pollock Directors
Vice Chairman of the Board March 6, 1997
William D. Davis of Directors
Director, President and March 6, 1997
Thomas F. Karam Chief Executive Officer
Director March 6, 1997
Paul R. Freeman
Director March 6, 1997
Robert J. Keating
Director March 6, 1997
John D. McCarthy
Director March 6, 1997
John D. McCarthy, Jr.
Director March 6, 1997
Kenneth M. Pollock
Director March 6, 1997
Richard A. Rose, Jr.
Director March 6, 1997
James A. Ross
Director March 6, 1997
Ronald W. Simms
<PAGE>
<TABLE>
<CAPTION>
PG ENERGY INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1996 $ 781 $ 2,015 $ - $ 1,656(a) $ 1,140
Year ended December 31, 1995 $ 921 $ 1,541 $ - $ 1,681(a) $ 781
Year ended December 31, 1994 $ 811 $ 1,756 $ - $ 1,646(a) $ 921
Shown as operating reserves on the balance sheets:
Insurance -
Year ended December 31, 1996 $ 3,709 $ 1,042 $ - $ 1,665(b) $ 3,086
Year ended December 31, 1995 $ 2,383 $ 2,652 $ - $ 1,326(b) $ 3,709
Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BE
REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000077242
<NAME> PG ENERGY INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 239,422,000
<OTHER-PROPERTY-AND-INVEST> 4,894,000
<TOTAL-CURRENT-ASSETS> 75,065,000
<TOTAL-DEFERRED-CHARGES> 35,198,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 354,579,000
<COMMON> 33,142,000
<CAPITAL-SURPLUS-PAID-IN> 32,677,000
<RETAINED-EARNINGS> 30,186,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 96,005,000
739,000
18,851,000
<LONG-TERM-DEBT-NET> 55,000,000
<SHORT-TERM-NOTES> 10,000,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
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115,000
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1,730,000
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<EPS-PRIMARY> 1.69
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</TABLE>
