PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
months ended September 30, 1997 and 1996. . . . . . . . . 2
Consolidated Balance Sheets as of September 30, 1997,
and December 31, 1996 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996. . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
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PART I. FINANCIAL INFORMATION
PG ENERGY INC.
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
(Thousands of Dollars, Except for Share Amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 16,276 $ 13,998 $ 129,444 $ 108,870
Cost of gas 7,137 5,979 74,547 58,532
OPERATING MARGIN 9,139 8,019 54,897 50,338
OTHER OPERATING EXPENSES:
Operation 6,065 5,716 18,730 18,499
Maintenance 1,503 1,379 3,945 4,085
Depreciation 2,242 1,969 6,719 5,838
Income taxes (2,184) (2,005) 3,406 3,408
Taxes other than income taxes 1,997 1,619 9,613 8,331
Total other operating expenses 9,623 8,678 42,413 40,161
OPERATING INCOME (LOSS) (484) (659) 12,484 10,177
OTHER INCOME (DEDUCTIONS), NET 92 (8) 244 311
INCOME (LOSS) BEFORE INTEREST CHARGES (392) (667) 12,728 10,488
INTEREST CHARGES:
Interest on long-term debt 2,329 1,665 6,737 4,680
Other interest 199 68 540 556
Allowance for borrowed funds used
during construction (45) (73) (144) (169)
Total interest charges 2,483 1,660 7,133 5,067
INCOME (LOSS) FROM CONTINUING OPERATIONS (2,875) (2,327) 5,595 5,421
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS - - - (386)
NET INCOME (LOSS) (2,875) (2,327) 5,595 5,035
DIVIDENDS ON PREFERRED STOCK 320 363 991 1,383
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (3,195) $ (2,690) $ 4,604 $ 3,652
COMMON STOCK
Earnings (loss) per share of common stock:
Continuing operations $ (.96) $ (.81) $ 1.39 $ 1.09
Discontinued operations - - - (.10)
Net income (loss) before discount (premium)
on repurchase of preferred stock (.96) (.81) 1.39 .99
Discount (premium) on repurchase of
preferred stock (.01) (.03) .23 (.37)
Total $ (.97) $ (.84) $ 1.62 $ .62
Weighted average shares outstanding 3,314,155 3,314,155 3,314,155 3,697,410
Cash dividends per share (Note 2) $ - $ - $ - $ 10.217
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Thousands of Dollars)
ASSETS
<S> <C> <C>
UTILITY PLANT:
At original cost $ 344,242 $ 319,205
Accumulated depreciation (86,933) (79,783)
257,309 239,422
OTHER PROPERTY AND INVESTMENTS 4,471 4,894
CURRENT ASSETS:
Cash and cash equivalents 256 690
Accounts receivable -
Customers 10,454 17,183
Affiliates, net - 58
Others 284 565
Reserve for uncollectible accounts (1,254) (1,140)
Accrued utility revenues 2,388 11,830
Materials and supplies, at average cost 2,811 2,460
Gas held by suppliers, at average cost 25,970 20,265
Natural gas transition costs collectible 1,512 2,525
Deferred cost of gas and supplier refunds, net 9,207 19,316
Prepaid expenses and other 1,365 1,313
52,993 75,065
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,638 29,771
Other 4,329 4,274
Unamortized debt expense 1,095 1,153
Other 457 -
36,519 35,198
TOTAL ASSETS $ 351,292 $ 354,579
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
CAPITALIZATION:
Common shareholder's investment $ 101,254 $ 96,005
Preferred stock of PGE -
Not subject to mandatory redemption, net 15,848 18,851
Subject to mandatory redemption 640 739
Long-term debt 105,000 55,000
222,742 170,595
CURRENT LIABILITIES:
Current portion of long-term debt -
Parent 24,700 31,400
Other 14,720 38,721
Preferred stock subject to repurchase or
mandatory redemption 80 115
Note payable 4,500 10,000
Accounts payable -
Suppliers 12,277 17,831
Parent 34 348
Affiliates, net 17 -
Accrued general business and realty taxes 1,539 2,239
Accrued income taxes 2,858 14,559
Accrued interest 1,319 1,936
Accrued natural gas transition costs 1,154 2,095
Other 2,076 3,375
65,274 122,619
DEFERRED CREDITS:
Deferred income taxes 51,293 49,119
Unamortized investment tax credits 4,639 4,767
Operating reserves 2,805 3,086
Other 4,539 4,393
63,276 61,365
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 351,292 $ 354,579
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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PG ENERGY INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
(Thousands of Dollars)
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 5,595 $ 5,421
Effects of noncash charges to income -
Depreciation 6,764 5,890
Deferred income taxes, net 904 519
Provisions for self insurance 443 742
Other, net 1,335 953
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 17,314 18,997
Gas held by suppliers (5,705) (10,299)
Accounts payable (6,528) (4,639)
Deferred cost of gas and supplier refunds, net 10,316 (16,801)
Other current assets and liabilities, net (1,260) 1,291
Other operating items, net (1,509) (4,636)
Net cash provided by (used for) continuing operations 27,669 (2,562)
Net cash used for discontinued operations, principally
for the payment of income taxes (13,655) (35,470)
Net cash provided by (used for) operating activities 14,014 (38,032)
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (22,810) (18,501)
Proceeds from the sale of discontinued operations - 261,752
Acquisition of regulated business (2,019) -
Other, net 530 212
Net cash provided by (used for) investing activities (24,299) 243,463
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock - 339
Repurchase of common stock - (85,007)
Repurchase/redemption of preferred stock (3,137) (15,364)
Dividends on common and preferred stock (991) (35,151)
Issuance of long-term debt 25,000 -
Issuance of long-term debt to parent - 49,900
Repayment of long-term debt to parent (6,700) (12,600)
Repayment of long-term debt - (50,000)
Net decrease in bank borrowings (5,021) (55,854)
Other, net 700 (1,390)
Net cash provided by (used for) financing activities 9,851 (205,127)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (434) 304
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 690 328
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 256 $ 632
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 7,203 $ 5,704
Income taxes $ 15,042 $ 34,386
The accompanying notes are an integral part of the financial statements.
</TABLE>
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PG ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. PG Energy Inc. ("PGE") a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc. ("PEI"), and Honesdale Gas Company ("Honesdale")
a wholly-owned subsidiary of PGE acquired on February 14, 1997, are regulated
public utilities. Together PGE and Honesdale distribute natural gas to a
thirteen-county area in northeastern Pennsylvania, a territory that includes 130
municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport.
Principles of Consolidation. The consolidated financial statements include
the accounts of PGE and its subsidiary, Honesdale, beginning February 14, 1997,
the date Honesdale was acquired by PGE. All material intercompany accounts have
been eliminated in consolidation.
Both PGE and Honesdale are subject to the jurisdiction of the Pennsylvania
Public Utility Commission ("PPUC") for rate and accounting purposes. The
financial statements of PGE and Honesdale that are incorporated in these
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, including the provisions of Financial
Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of
Certain Types of Regulation," which give recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.
Interim Financial Statements. The interim consolidated financial statements
included herein have been prepared by PGE, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although PGE believes that the
disclosures are adequate to make the information presented not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather. However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for the
interim periods have been reflected in the consolidated financial statements.
It is suggested that these consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in
PGE's latest annual report on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors which are difficult to
predict and are beyond the control of PGE. Therefore, actual amounts could
differ from these estimates.
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(2) CASH DIVIDENDS
The cash dividends per share for the nine months ended September 30, 1997,
include $9.077 with respect to a special $30.0 million dividend in the form of a
10.125% promissory note that was issued by PGE to PEI on February 16, 1996, in
connection with the sale of PGE's water utility operations on such date. This
note was paid in full by PGE on March 8, 1996.
(3) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures, PGE has been permitted to make the
following changes since January 1, 1996, to the gas costs contained in its gas
tariff rates:
[CAPTION]
Change in
Effective Rate per MCF Calculated Increase
Date From To in Annual Revenue
[S] [C] [C] [C]
March 1, 1997 $4.18 $4.49 $ 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
(4) ACCOUNTING CHANGES
Earnings Per Share. In February, 1997, FASB Statement 128, "Earnings per
Share" was issued. The provisions of this statement, which supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share", simplify the
computation of earnings per share. FASB Statement 128 will be effective for
financial statements for both interim and annual periods ending after December
15, 1997. PGE does not expect the adoption of FASB Statement 128 to have a
material effect on its calculation of earnings per share.
Reporting Comprehensive Income. In June, 1997, FASB Statement 130
"Reporting Comprehensive Income", was issued. The provisions of this statement,
which are effective for fiscal years beginning after December 15, 1997,
establish standards for reporting and display of comprehensive income and its
components in financial statements. The reporting provisions of FASB Statement
130, which PGE will adopt in 1998, are not expected to have a material impact on
its reported results of operations.
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(5) 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 1972, 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. Notwithstanding this determination by
the EPA, some of the sites may ultimately require remediation. One site that
was owned by PGE from 1951 to 1967 and at which it operated a manufactured gas
plant from 1951 to 1954 was subject to remediation in 1996. The remediation at
this site, which was performed by the party from whom PGE acquired the site in
1951, required the removal of materials from two former gas holders. The cost
of such remediation is purported to have been approximately $525,000, of which
the party performing the remediation is seeking to recover a material portion
from PGE. PGE, however, believes that any liability it may have with respect to
such remediation would be considerably less than the amount that the other party
is seeking. While the final resolution of the matter is uncertain, PGE does not
believe that it will have any material impact on its financial position or
results of operations. Although the conclusion by the EPA that it anticipates
no further remedial action with respect to the sites at which PGE operated
manufactured gas plants does not constitute a legal prohibition against further
regulatory action under CERCLA or other applicable federal or state law, PGE
does not believe that additional costs, if any, related to these manufactured
gas plant sites would be material to its financial position or results of
operations since environmental remediation costs generally are recoverable
through rates over a period of time.
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PG ENERGY INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the consolidated statements
of income of PG Energy Inc. ("PGE") as percentages of operating revenues for
each of the three and nine-month periods ended September 30, 1997, and September
30, 1996:
<TABLE>
<CAPTION>
Percentage of Operating Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 43.9 42.7 57.6 53.8
OPERATING MARGIN............................. 56.1 57.3 42.4 46.2
OTHER OPERATING EXPENSES:
Operation.................................. 37.2 40.8 14.5 17.0
Maintenance................................ 9.2 9.8 3.1 3.8
Depreciation............................... 13.8 14.1 5.2 5.4
Income taxes............................... (13.4) (14.3) 2.6 3.1
Taxes other than income taxes.............. 12.3 11.6 7.4 7.6
Total other operating expenses........... 59.1 62.0 32.8 36.9
OPERATING INCOME (LOSS)...................... (3.0) (4.7) 9.6 9.3
OTHER INCOME, NET............................ 0.6 - 0.2 0.3
INTEREST CHARGES............................. (15.3) (11.9) (5.5) (4.6)
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (17.7) (16.6) 4.3 5.0
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - - (0.4)
NET INCOME (LOSS)............................ (17.7) (16.6) 4.3 4.6
DIVIDENDS ON PREFERRED STOCK(1).............. (1.9) (2.6) (0.7) (1.2)
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (19.6) (19.2) 3.6 3.4
(1) None of the dividends on preferred stock was allocated to the discontinued
operations.
</TABLE>
Three Months Ended September 30, 1997, Compared
With Three Months Ended September 30, 1996
Operating Revenues. Operating revenues increased $2.3 million (16.3%) from
$14.0 million for the three-month period ended September 30, 1996, to $16.3
million for the three-month period ended September 30, 1997, primarily as a
result of the rate increase granted PGE by the Pennsylvania Public Utility
Commission (the "PPUC") which became effective on January 15, 1997 (see "Rate
Matters"), higher levels in PGE's gas cost rate and the operating revenues of
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Honesdale Gas Company ("Honesdale"), which was acquired by the Company on
February 14, 1997, totaling $323,000. Also contributing to the increase was a
56 million cubic feet (3.7%) increase in deliveries to PGE's residential and
commercial heating customers that was largely attributable to cooler weather.
There was an increase of 47 heating degree days from 163 (135.8% of normal)
during the third quarter of 1996 to 210 (175.0% of normal) during the third
quarter of 1997.
Cost of Gas. The cost of gas increased $1.2 million (19.4%) from $6.0
million for the three-month period ended September 30, 1996, to $7.1 million for
the three-month period ended September 30, 1997, primarily because of the
aforementioned increases in the gas cost rate (see "-Rate Matters"), increased
sales to residential and commercial heating customers and $194,000 of gas costs
related to Honesdale.
Operating Margin. The operating margin increased $1.1 million (14.0%) from
$8.0 million in the third quarter of 1996 to $9.1 million in the third quarter
of 1997, primarily because of the increase in PGE's gas rates effective January
15, 1997 (see "-Rate Matters"), the higher level of sales and the inclusion of
Honesdale's operating margin. However, as a percentage of operating revenues,
the operating margin decreased from 57.3% for the quarter ended September 30,
1996, to 56.1% for the quarter ended September 30, 1997, as a result of the
proportionately higher cost of gas in 1997.
Other Operating Expenses. Other operating expenses increased $945,000
(10.9%) for the three-month period ended September 30, 1997, compared to the
three-month period ended September 30, 1996. This increase was partially
attributable to a higher level of operation expenses, which increased by
$349,000 (6.1%), largely as a result of the inclusion of $189,000 of operation
expenses of Honesdale. Also contributing to the increase in other operating
expenses was a $378,000 (23.3%) increase in taxes other than income taxes
resulting from a higher level of gross receipts tax because of the increased
sales by PGE and the sales of Honesdale, and a $273,000 (13.9%) increase in
depreciation expense attributable to additions to utility plant. As a
percentage of operating revenues, other operating expenses decreased from 62.0%
in the third quarter of 1996 to 59.1% in the third quarter of 1997, primarily as
a result of the proportionately greater increase in operating revenues during
the period.
Income taxes decreased $179,000 (8.9%) from a credit of $2.0 million in the
third quarter of 1996 to a credit of $2.2 million in the third quarter of 1997
due to a lower level of loss before income taxes (for this purpose, operating
income net of interest charges).
Operating Income (Loss). As a result of the above, the operating loss
decreased by $175,000 (26.6%) from $659,000 for the three-month period ended
September 30, 1996, to $484,000 for the three-month period ended September 30,
1997, and decreased as a percentage of total operating revenues for such periods
from 4.7% in 1996 to 3.0% in 1997.
Interest Charges. Interest charges increased by $823,000 (49.6%) from $1.7
million for the three-month period ended September 30, 1996, to $2.5 million for
the three-month period ended September 30, 1997. This increase was largely
attributable to bank borrowings by PGE to finance construction expenditures and
for other working capital needs and the reduction in interest expense in the
third quarter of 1996 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.
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Income (Loss) From Continuing Operations. The loss from continuing
operations increased $548,000 (23.5%) from $2.3 million for the quarter ended
September 30, 1996, to $2.9 million for the quarter ended September 30, 1997.
This increase was largely the result of the matters discussed above, principally
the increases in other operating expenses and interest charges, the effects of
which were partially offset by the increased operating margins.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$43,000 (11.8%) from $363,000 for the three-month period ended September 30,
1996, to $320,000 for the three-month period ended September 30, 1997, primarily
as a result of the repurchase by PGE in 1997 of 30,375 shares of its 4.10%
cumulative preferred stock.
Earnings (Loss) Applicable to Common Stock. The increase in loss applicable
to common stock of $505,000 (18.8%) from $2.7 million for the three-month period
ended September 30, 1996, to $3.2 million for the three-month period ended
September 30, 1997, as well as the increase in loss per share of common stock of
$.13 from a loss of $.84 per share for the third quarter of 1996 (after
reflecting a $.03 per share premium on redemption of preferred stock) to a loss
of $.97 per share for the third quarter of 1997 (after reflecting a $.01 per
share premium on redemption of preferred stock) were primarily the result of the
increase in loss from continuing operations, as discussed above. While
discounts and premiums on the repurchase of preferred stock are reflected in
retained earnings and are not a determinant of net income, the discounts and
premiums associated with repurchases must be taken into account in calculating
the earnings (loss) per share of common stock.
Nine Months Ended September 30, 1997, Compared
With Nine Months Ended September 30, 1996
Operating Revenues. Operating revenues increased $20.6 million (18.9%) from
$108.9 million for the nine-month period ended September 30, 1996 to $129.4
million for the nine-month period ended September 30, 1997, primarily as a
result of higher levels in PGE's gas cost rate and the effect of the rate
increase granted PGE by the PPUC which became effective on January 15, 1997 (see
"Rate Matters"). The effect of the increases in rates was partially offset by
an 896 million cubic feet (5.0%) decrease in deliveries to PGE's residential and
commercial heating customers. There was a decrease of 192 (4.4%) heating degree
days from 4,356 (106.9% of normal) during the first nine months of 1996 to 4,164
(102.2% of normal) during the first nine months of 1997. Operating revenues of
Honesdale totaling $1.9 million from its February 14, 1997, acquisition date
through September 30, 1997, also contributed to the increased operating
revenues.
Cost of Gas. The cost of gas increased $16.0 million (27.4%) from $58.5
million for the nine-month period ended September 30, 1996, to $74.5 million for
the nine-month period ended September 30, 1997, primarily because of higher
levels in PGE's gas cost rate (see "-Rate Matters") and $1.3 million of gas
costs related to Honesdale from its February 14, 1997, acquisition date through
September 30, 1997.
Operating Margin. The operating margin increased $4.6 million (9.1%) from
$50.3 million in the nine-month period ended September 30, 1996, to $54.9
million in the nine-month period ended September 30, 1997, primarily because of
the increase in PGE's gas rates effective January 15, 1997 (see "-Rate Matters")
and the inclusion of Honesdale's operating margin from its February 14, 1997,
acquisition date. As a percentage of operating revenues, however, the operating
margin decreased from 46.2% in the first nine months of 1996 to 42.4% in the
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first nine months of 1997 as a result of the proportionately higher cost of gas
in 1997.
Other Operating Expenses. Other operating expenses increased $2.3 million
(5.6%) from $40.2 million for the first nine months of 1996 to $42.4 million for
the first nine months of 1997. This increase was primarily attributable to an
$881,000 (15.1%) increase in depreciation expense, as a result of additions to
utility plant, and a $1.3 million (15.4%) increase in taxes other than income
taxes resulting from a higher level of gross receipts tax because of the
increased sales by PGE and the sales by Honesdale from its acquisition date. As
a percentage of operating revenues, other operating expenses decreased from
36.9% during the first nine months of 1996, to 32.8% during the first nine
months of 1997, primarily as a result of the proportionately greater increase in
operating revenues during the period.
Operating Income (Loss). As a result of the above, operating income
increased by $2.3 million (22.7%) from $10.2 million for the nine-month period
ended September 30, 1996, to $12.5 million for the nine-month period ended
September 30, 1997, primarily because of the increased operating margin, the
effect of which was partially offset by the higher level of other operating
expenses. As a percentage of total operating revenues, operating income
increased from 9.3% in 1996 to 9.6% in 1997.
Interest Charges. Interest charges increased by $2.1 million (40.8%) from
$5.1 million for the first nine months of 1996 to $7.1 million for the first
nine months of 1997. This increase was largely attributable to bank borrowings
by PGE to finance construction expenditures and for other working capital needs
and the reduction in PGE's interest expense in the first nine months of 1996
resulting from the repayment of its $50.0 million term loan and all of its then
outstanding bank borrowings on February 16, 1996, with proceeds from the sale of
its regulated water utility operations on such date.
Income (Loss) From Continuing Operations. Income from continuing operations
increased $174,000 (3.2%) from $5.4 million for the nine months ended September
30, 1996, to $5.6 million for the nine months ended September 30, 1997. This
increase was largely the result of the matters discussed above, principally the
increase in operating income, the effect of which was largely offset by the
increased interest charges.
Net Income (Loss). The increase in net income of $560,000 (11.1%) from $5.0
million for the first nine months of 1996 to $5.6 million for the first nine
months of 1997 was the result of the higher income from continuing operations,
as discussed above, and the absence of any loss with respect to discontinued
operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$392,000 (28.3%) from $1.4 million for the nine-month period ended September 30,
1996, to $991,000 for the nine-month period ended September 30, 1997, primarily
as a result of the repurchase by PGE in 1996 of 134,359 shares of its 9%
cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock
and 20,330 shares of its 4.10% cumulative preferred stock, largely during the
second quarter of that year, as well as its repurchase of an additional 30,375
shares of the 4.10% cumulative preferred stock in 1997.
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<PAGE>
Earnings (Loss) Applicable to Common Stock. The increase in earnings
applicable to common stock of $952,000 (26.1%) from $3.7 million for the nine-
month period ended September 30, 1996, to $4.6 million for the nine-month period
ended September 30, 1997, as well as the increase in earnings per share of
common stock of $1.00 from $.62 per share for the first nine months of 1996
(after reflecting a $.37 per share premium on redemption of preferred stock) to
$1.62 per share for the first nine months of 1997 (after reflecting a $.23 per
share discount on redemption of preferred stock) were the result of the higher
income from continuing operations and the reduced dividends on preferred stock,
as discussed above, and the absence of any loss with respect to discontinued
operations. The increase in earnings applicable to common stock also reflected
a 10.4% decrease in the weighted average number of shares outstanding as a
result of the repurchase by PGE of shares of its common stock on February 16,
1996, with proceeds from the sale of its regulated water utility operations.
RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million
of additional annual revenue, effective January 15, 1997. Under the terms of
the Order, the billing for the impact of the rate increase relative to PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an
interim basis when circumstances dictate, to reflect changes in their purchased
gas costs. The procedure includes a process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures, PGE has been permitted to make the
following changes since January 1, 1996, to the gas costs contained in its gas
tariff rates:
[CAPTION]
Change in Calculated
Effective Rate per MCF Increase/(Decrease)
Date From To in Annual Revenue
[S] [C] [C] [C]
December 1, 1997 $4.49 $3.95 $(15,700,000)
March 1, 1997 4.18 4.49 8,300,000
December 1, 1996 3.01 4.18 32,400,000
September 1, 1996 2.88 3.01 3,600,000
June 1, 1996 2.75 2.88 3,400,000
The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is offset by a corresponding change in the
cost of gas.
Recovery of FERC Order 636 Transition Costs. By Order of the PPUC entered
August 26, 1994, PGE began recovering the Non-Gas Transition Costs (i.e. Gas
Supply Realignment and Stranded Costs) that it estimates it will ultimately be
billed pursuant to Federal Energy Regulatory Commission Order 636 through the
billing of a surcharge to its customers effective September 12, 1994. It is
currently estimated that $10.7 million of Non-Gas Transition Costs will be
billed to PGE, generally over a six-year period extending through January 1,
-13-
<PAGE>
1999, of which $9.3 million had been billed to PGE and $9.2 million had been
recovered from its customers as of September 30, 1997. PGE has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of PGE continue to be the funding of its
construction program and the seasonal funding of its gas purchases and increases
in its customer accounts receivable. PGE's revenues are highly seasonal and
weather-sensitive, with approximately 75% of its revenues normally being
realized in the first and fourth quarters of the calendar year when the
temperatures in its service area are the coldest.
The cash flow from PGE's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PGE to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PGE for the seasonal funding of its gas
purchases and increases in customer accounts receivable.
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, PGE has made arrangements for a total of $68.5
million of unsecured revolving bank credit, which is deemed adequate for its
presently anticipated needs. Specifically, PGE currently has seven bank lines
of credit with an aggregate borrowing capacity of $68.5 million which provide
for borrowings at interest rates generally less than prime and mature at various
times during 1998 and 1999 and which PGE intends to renew or replace as they
expire. As of November 3, 1997, PGE had $21.2 million of borrowings outstanding
under these bank lines of credit.
In addition, as of September 30, 1997, PGE had borrowed $24.7 million from
Pennsylvania Enterprises, Inc. ("PEI"), its parent Company. The terms and
conditions regarding such borrowing provide for the payment of interest at rates
generally less than prime and the repayment of principal on December 31, 1997.
It is anticipated that the repayment date of this loan will be extended beyond
December 31, 1997, until such date as the funds borrowed thereunder are required
for use by PEI. PGE plans to ultimately repay this loan from PEI with
borrowings under its bank lines of credit.
PGE, as well as Honesdale, believe that they will be able to raise in a
timely manner such funds as are required for their future construction
expenditures, refinancings and other working capital requirements.
Long-Term Debt and Capital Stock Financings
PGE periodically engages in long-term debt and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing of
existing debt and various working capital purposes.
On September 12, 1997, PGE borrowed $25.0 million pursuant to a five-year
term loan agreement dated August 14, 1997 (the "Term Loan Agreement"), which
matures on August 14, 2002. Borrowings under the Term Loan Agreement bear
interest at LIBOR ("London Interbank Offered Rates") plus one-quarter of one
percent (5.875% as of November 3, 1997). Under the terms of the Term Loan
Agreement, PGE can choose interest rate periods of one, two, three or six
months. PGE utilized the proceeds from such loan to repay $25.0 million of its
bank borrowings.
-14-
<PAGE>
On September 30, 1997, PGE issued $25.0 million of its 6.92% Senior Notes
due September 30, 2004 (the "Senior Notes"). The proceeds from the issuance of
the Senior Notes were used by PGE to repay $25.0 million of its bank borrowings.
No capital stock financings were consummated by PGE during the nine-month
period ended September 30, 1997.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $22.7 million
during the first nine months of 1997 and are currently estimated to be $10.9
million during the remainder of the year. It is anticipated that such
expenditures will be financed with internally generated funds and bank
borrowings, pending the periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of September 30, 1997, $39.5 million of PGE's long-term debt, including
$24.7 million borrowed from PEI, and $80,000 of its preferred stock was required
to be repaid within twelve months.
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement, such as the nature of Pennsylvania
legislation restructuring the natural gas industry and general economic
conditions and uncertainties.
-15-
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Form of Stock Option Agreement, dated as of June 20, 1997, between
PEI and certain of its Officers -- filed as Exhibit 10-1 to PEI's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997, File No. 0-7812.
10-2 Form of Stock Option Agreement, dated as of June 20, 1997, between
PEI and certain of its non-employee directors -- filed as Exhibit
10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, File No. 0-7812.
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report
is filed.
-16-
<PAGE>
PG ENERGY INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG ENERGY INC.
(Registrant)
Date: November 7, 1997 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: November 7, 1997 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
-17-
<PAGE>
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<LEGEND>
THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRD FROM THE BALANCE
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REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<CIK> 0000077242
<NAME> PG ENERGY INC
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