FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 1-3490
PG ENERGY INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 24-0717235
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
(Address of principal executive offices) (Zip Code)
(717) 829-8843
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 3,494,418 shares of common stock, no par value, outstanding
as of July 30, 1998.
<PAGE>
PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and six months
ended June 30, 1998 and 1997...................... 2
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997............................. 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997....... 5
Notes to Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.... 15
Item 5. Other Information...................................... 15
Item 6. Exhibits and Reports on Form 8-K....................... 15
<PAGE>
PART I. FINANCIAL INFORMATION
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
---------- --------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 25,143 $ 33,229 $ 90,158 $ 113,168
Cost of gas 12,230 18,271 50,055 67,410
------- ------- ------- ------
OPERATING MARGIN 12,913 14,958 40,103 45,758
------- ------- ------- ------
OTHER OPERATING EXPENSES:
Operation 6,066 6,203 12,829 12,665
Maintenance 1,232 1,316 2,359 2,442
Depreciation 2,440 2,266 4,879 4,477
Income taxes (897) (241) 3,299 5,590
Taxes other than income taxes 2,861 3,310 6,875 7,616
------ ------ ------ -----
Total other operating expenses 11,702 12,854 30,241 32,790
------- ------- ------- ------
OPERATING INCOME 1,211 2,104 9,862 12,968
OTHER INCOME (DEDUCTIONS), NET 902 (87) 775 152
--- --- --- ---
INCOME BEFORE INTEREST CHARGES 2,113 2,017 10,637 13,120
----- ----- ------ ------
INTEREST CHARGES:
Interest on long-term debt 2,417 2,217 5,042 4,408
Other interest 73 137 197 341
Allowance for borrowed funds used during construction (29) (33) (52) (99)
---- ---- ---- ----
Total interest charges 2,461 2,321 5,187 4,650
------ ------ ------ -----
NET INCOME (LOSS) (348) (304) 5,450 8,470
DIVIDENDS ON PREFERRED STOCK 321 318 642 671
---- ---- ---- ---
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (669) $ (622) $ 4,808 $ 7,799
======= ======= ======= =======
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Before discount on repurchase of preferred stock $ (0.20) $ (0.19) $ 1.43 $ 2.35
Discount on repurchase of preferred stock - 0.24 - 0.25
-- ----- -- ----
Earnings (loss) per share of common stock $ (0.20) $ 0.05 $ 1.43 $ 2.60
======== ======= ======= ======
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,414,344 3,314,155 3,366,427 3,314,155
========== ========== ========= =========
CASH DIVIDENDS PER SHARE $ - $ - $ - $ -
==== ==== ==== ====
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
<S> <C> <C>
At original cost $ 362,560 $ 351,106
Accumulated depreciation (92,954) (88,129)
------- --------
269,606 262,977
-------- -------
OTHER PROPERTY AND INVESTMENTS 4,082 4,459
------ -----
CURRENT ASSETS:
Cash and cash equivalents 1,331 304
Accounts receivable -
Customers 13,012 23,551
Parent 720 -
Affiliates, net 294 63
Others 422 280
Reserve for uncollectible accounts (1,504) (1,168)
Accrued utility revenues 2,021 11,680
Materials and supplies, at average cost 3,106 2,716
Gas held by suppliers, at average cost 16,515 21,933
Deferred cost of gas and supplier refunds, net 5,470 6,316
Prepaid expenses and other 4,078 1,633
----- -----
45,465 67,308
------ ------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,932 30,592
Other 6,290 4,415
Unamortized debt expense 1,065 1,164
Other 125 225
---- ---
38,412 36,396
------- ------
TOTAL ASSETS $ 357,565 $ 371,140
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
<S> <C> <C>
Common shareholder's investment $ 123,666 $ 107,425
Preferred stock -
Not subject to mandatory redemption, net 15,864 15,864
Subject to mandatory redemption 560 640
Long-term debt
Parent 8,500 23,500
Other 109,000 106,000
-------- -------
257,590 253,429
-------- -------
CURRENT LIABILITIES:
Current portion of long-term debt 6,500 24,776
Preferred stock subject to repurchase or
mandatory redemption 80 80
Notes payable 50 2,170
Accounts payable -
Suppliers 16,947 14,515
Parent - 199
Accrued general business and realty taxes 484 2,797
Accrued income taxes 5,304 4,946
Accrued interest 1,590 1,844
Accrued natural gas transition costs 561 1,087
Other 943 1,188
---- -----
32,459 53,602
------- ------
DEFERRED CREDITS:
Deferred income taxes 53,801 52,207
Unamortized investment tax credits 4,510 4,596
Operating reserves 2,684 2,825
Other 6,521 4,481
------ -----
67,516 64,109
------- ------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 357,565 $ 371,140
========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
---------- ----------
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 5,450 $ 8,470
Gain on sale of other property (976) -
Effects of noncash charges to income -
Depreciation 4,918 4,507
Deferred income taxes, net 1,254 578
Provisions for self insurance 275 281
Other, net 1,038 826
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 19,451 9,056
Gas held by suppliers 5,418 8,241
Accounts payable 183 (5,380)
Deferred cost of gas and supplier refunds, net 320 14,602
Other current assets and liabilities, net (5,286) (11,933)
Other operating items, net (546) (790)
---- ----
Net cash provided by operating activities 31,499 28,458
------ ------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (12,257) (13,923)
Proceeds from the sale of other property 980 -
Acquisition of regulated business - (2,009)
Other, net 115 471
---- ----
Net cash used for investing activities (11,162) (15,461)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 4,260 -
Repurchase of preferred stock (80) (3,108)
Dividends on preferred and common stock (642) (671)
Repayment of long-term debt (Note 3) (7,500) (4,646)
Net decrease in bank borrowings (15,346) (5,782)
Other, net (2) 818
--- ---
Net cash used for financing activities (19,310) (13,389)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,027 (392)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 304 690
---- ---
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,331 $ 298
======== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,238 $ 4,953
======== =======
Income taxes $ 1,154 $ 14,536
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. PG Energy Inc. ("PG Energy"), a wholly-owned
subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), and its wholly-owned
subsidiary Honesdale Gas Company ("Honesdale") acquired on February 14, 1997,
are regulated public utilities subject to the jurisdiction of the Pennsylvania
Public Utility Commission (the "PPUC") for rate and accounting purposes.
Together PG Energy and Honesdale distribute natural gas to a thirteen-county
area in northeastern Pennsylvania, a territory that includes the cities of
Scranton, Wilkes-Barre and Williamsport.
Principles of Consolidation. The consolidated financial statements include
the accounts of PG Energy and also its subsidiary, Honesdale, beginning February
14, 1997, the date Honesdale was acquired by PG Energy. All material
intercompany accounts have been eliminated in consolidation.
Both PG Energy and Honesdale (collectively referred to as the "Company")
are subject to the jurisdiction of the PPUC for rate and accounting purposes.
The financial statements of the Company 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 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 the Company believes
that the disclosures are adequate to make the information presented not
misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather on the sale of natural gas. However, in the opinion of management, all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the results for the interim periods have been reflected in the
consolidated financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters which
are difficult to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
(2) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PG Energy'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
PG Energy'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 LDCs be adjusted on an annual basis, and, in
the case of larger LDCs such as PG Energy, 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.
<PAGE>
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1997, to the gas costs contained in its
tariff rates:
<TABLE>
<CAPTION>
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- --------------------- ----- ----- ------------
<S> <C> <C> <C>
June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
</TABLE>
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
(3) CONTRIBUTION OF CAPITAL
On June 24, 1998, PEI converted $7.5 million of the outstanding loan
balance from PG Energy to a contribution of capital.
(4) ACCOUNTING CHANGES
Reporting Comprehensive Income. Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting Comprehensive Income."
However, because there were no items comprising other comprehensive income, the
adoption of FASB 130 had no effect on the Company's financial statements for the
second quarter of 1998.
(5) COMMITMENTS AND CONTINGENCIES
Environmental Matters. PG Energy, 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 PG Energy. Pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), PG Energy 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 PG Energy 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 PG Energy 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 PG Energy. PG Energy,
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, PG Energy 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 anticipate no
further remedial action with respect to the sites at which PG Energy operated
manufactured gas plants does not constitute a legal prohibition against further
regulatory action under CERCLA or other applicable federal or state law, the
Company 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.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the consolidated
statements of income of PG Energy Inc. ("PG Energy") as percentages of operating
revenues for each of the three and six-month periods ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING REVENUES 100.0 % 100.0 % 100.0 % 100.0 %
Cost of gas 48.7 55.0 55.5 59.6
----- ----- ----- ----
OPERATING MARGIN 51.3 45.0 44.5 40.4
----- ----- ----- ----
OTHER OPERATING EXPENSES:
Operation 24.0 18.7 14.2 11.2
Maintenance 4.9 3.9 2.6 2.1
Depreciation 9.7 6.8 5.4 4.0
Income taxes (3.5) (0.7) 3.7 4.9
Taxes other than income taxes 11.4 10.0 7.6 6.7
----- ----- ---- ---
Total operating expenses 46.5 38.7 33.5 28.9
----- ----- ----- ----
OPERATING INCOME 4.8 6.3 11.0 11.5
OTHER INCOME (DEDUCTIONS)
NET 3.6 (0.2) 0.8 0.1
INTEREST CHARGES (9.8) (7.0) (5.8) (4.1)
----- ----- ----- -----
NET INCOME (LOSS) (1.4) (0.9) 6.0 7.5
DIVIDENDS ON PREFERRED
STOCK (1.3) (1.0) (0.7) (0.6)
----- ----- ----- -----
EARNINGS (LOSS) APPLICABLE
TO COMMON STOCK (2.7)% (1.9)% 5.3 % 6.9 %
===== ===== ==== ====
</TABLE>
o Three Months Ended June 30, 1998, Compared With Three Months Ended June
30, 1997
Operating Revenues. Operating revenues decreased $8.1 million (24.3%) from
$33.2 million for the quarter ended June 30, 1997, to $25.1 million for the
quarter ended June 30, 1998, primarily as a result of a 0.8 billion cubic feet
(22.5%) decrease in sales by PG Energy to its residential and commercial heating
customers. This reduction in sales was attributable to the unseasonably warm
weather during the second quarter of 1998 and the unseasonably cool weather
during the same period in 1997, as well as lower levels in PG Energy's gas cost
rate (see "-Rate Matters"). There was a 313 (32.4%) decrease in heating degree
days from 965 (126.1% of normal) during the second quarter of 1997 to 652 (85.2%
of normal) during the second quarter of 1998.
Cost of Gas. The cost of gas decreased $6.0 million (33.1%) from $18.3
million for the second quarter of 1997 to $12.2 million for the second quarter
of 1998, primarily because of the aforementioned decrease in sales to PG
Energy's residential and commercial heating customers and lower levels in PG
Energy's gas cost rate (see "-Rate Matters").
Operating Margin. The operating margin decreased $2.0 million (13.7%) from
$15.0 million in the second quarter of 1997 to $12.9 million in the second
quarter of 1998, primarily because of the aforementioned reduction in sales to
residential and commercial heating customers. As a percentage of operating
revenues, the margin increased from 45.0% in the second quarter of 1997 to 51.3%
in the second quarter of 1998 as a result of the proportionately lower cost of
gas during the period.
Other Operating Expenses. Other operating expenses decreased $1.2 million
(9.0%) from $12.9 million for the quarter ended June 30, 1997, to $11.7 million
for the quarter ended June 30, 1998. This decrease was primarily attributable to
a $656,000 decrease in income taxes from a credit of $241,000 for the second
quarter of 1997 to a credit of $897,000 for the second quarter of 1998 due to a
decrease in income before income taxes (for this purpose, operating income net
of interest charges), and a $449,000 (13.6%) decrease in taxes other than income
taxes resulting from a lower level of gross receipts tax related to PG Energy's
decrease in sales. The effects of these decreases were partially offset by a
$174,000 (7.7%) increase in depreciation expense as a result of additions to PG
Energy's utility plant. As a percentage of operating revenues, other operating
expenses increased from 38.7% during the quarter ended June 30, 1997, to 46.5%
during the quarter ended June 30, 1998, primarily because of the lower level of
operating revenues.
Operating Income. As a result of the above, operating income decreased by
$893,000 (42.4%) from $2.1 million for the second quarter of 1997 to $1.2
million for the second quarter of 1998, and also decreased as a percentage of
total operating revenues for such periods from 6.3% in the second quarter of
1997 to 4.8% in the second quarter of 1998.
Other Income (Deductions), Net. Other income (deductions), net increased
$989,000 from a deduction of $87,000 for the three-month period ended June 30,
1997, to income of $902,000 for the three-month period ended June 30, 1998,
largely because of a gain on the sale of land in June, 1998.
Interest Charges. Interest charges increased by $140,000 (6.0%) from $2.3
million for the second quarter of 1997 to $2.5 million for the second quarter of
1998. This increase was largely attributable to a higher level of long-term debt
outstanding in 1998.
Earnings (Loss) Applicable to Common Stock. The increase in the loss
applicable to common stock of $47,000 (7.6%) from $622,000 for the three-month
period ended June 30, 1997, to $669,000 for the three-month period June 30,
1998, as well as the decrease in earnings (loss) per share of common stock of
$.25 from earnings of $.05 per share for the three-month period ended June 30,
1997 (including a $.24 per share discount on the repurchase of preferred stock),
to a loss of $.20 per share for the three-month period ended June 30, 1998, were
the result of the reduced net income as discussed above.
o Six Months Ended June 30, 1998, Compared With Six Months Ended June 30,
1997
Operating Revenues. Operating revenues decreased $23.0 million (20.3%) from
$113.2 million for the six months ended June 30, 1997, to $90.2 million for the
six months ended June 30, 1998, primarily as a result of a 2.5 billion cubic
feet (17.8%) decrease in sales by PG Energy to its residential and commercial
heating customers. This reduction in sales was attributable to the unseasonably
warm weather during the six months ended June 30, 1998, and lower levels in PG
Energy's gas cost rate (see "-Rate Matters"). There was a 770 (19.5%) decrease
in heating degree days from 3,955 (100.0% of normal) during the six months ended
June 30, 1997, to 3,185 (80.5% of normal) during the six months ended June 30,
1998.
Cost of Gas. The cost of gas decreased $17.4 million (25.7%) from $67.4
million for the six months ended June 30, 1997, to $50.0 million for the six
months ended June 30, 1998, primarily because of the aforementioned decrease in
sales to PG Energy's residential and commercial heating customers and lower
levels in PG Energy's gas cost rate (see "-Rate Matters").
Operating Margin. The operating margin decreased $5.7 million (12.4%) from
$45.8 million in the six months ended June 30, 1997, to $40.1 million in the six
months ended June 30, 1998, primarily because of the aforementioned reduction in
sales to residential and commercial heating customers. As a percentage of
operating revenues, the margin increased from 40.4% in the six months ended June
30, 1997, to 44.5% in the six months ended June 30, 1998, as a result of the
proportionately lower cost of gas during the period.
Other Operating Expenses. Other operating expenses decreased $2.5 million
(7.8%) from $32.8 million for the six-month period ended June 30, 1997, to $30.2
million for the six-month period ended June 30, 1998. This decrease was
primarily attributable to a $2.3 million (41.0%) decrease in income taxes from
$5.6 million for the six months ended June 30, 1997, to $3.3 million for the six
months ended June 30, 1998, due to a decrease in income before income taxes (for
this purpose, operating income net of interest charges), and a $741,000 (9.7%)
decrease in taxes other than income taxes resulting from a lower level of gross
receipts tax related to PG Energy's decrease in sales. The effects of these
decreases were partially offset by a $402,000 (9.0%) increase in depreciation
expense as a result of additions to PG Energy's utility plant. As a percentage
of operating revenues, other operating expenses increased from 28.9% during the
six-month period ended June 30, 1997, to 33.5% during the six-month period ended
June 30, 1998, because of the lower level of operating revenues.
Operating Income. As a result of the above, operating income decreased by
$3.1 million (24.0%) from $13.0 million for the six-month period ended June 30,
1997, to $9.9 million for the six-month period ended June 30, 1998, and also
decreased as a percentage of total operating revenues for such periods from
11.5% in 1997 to 11.0% in the six-month period ended June 30, 1998.
Other Income (Deductions), Net. Other income (deductions), net increased
$623,000 from $152,000 for the six-month period ended June 30, 1997, to $775,000
for the six-month period ended June 30, 1998, largely because of a gain on the
sale of land in June, 1998.
Interest Charges. Interest charges increased by $537,000 (11.5%) from $4.7
million for the six-month period of 1997 to $5.2 million for the six-month
period ended June 30, 1998. This increase was largely attributable to a higher
level of long-term debt outstanding in 1998.
Net Income. The decrease in net income of $3.0 million (35.7%) from $8.5
million for the six-month period ended June 30, 1997, to $5.5 million for the
six-month period ended June 30, 1998, was largely the result of the lower level
of operating income and the increased interest charges, as discussed above, the
effects of which were partially offset by the increase in other income.
Earnings Applicable to Common Stock. The decrease in earnings applicable to
common stock of $3.0 million (38.4%) from $7.8 million for the six-month period
ended June 30, 1997, to $4.8 million for the six-month period June 30, 1998, as
well as the decrease in earnings per share of common stock of $1.17 (45.0%) from
$2.60 per share for the six-month period ended June 30, 1997 (including a $.25
per share discount on the repurchase of preferred stock), to $1.43 per share for
the six-month period ended June 30, 1998, were the result of the reduced net
income as discussed above.
RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the Pennsylvania Public
Utility Commission (the "PPUC") approved an overall 5.3% increase in PG Energy'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 PG Energy's residential heating
customers, which totaled $2.4 million through June 30, 1997, was deferred
without carrying charges, until July, 1998.
Proposed Rate Increase. On March 16, 1998, PG Energy filed an application
with the PPUC seeking an increase in its base gas rates, designed to produce
$15.0 million in additional annual revenue, to be effective May 15, 1998. On
April 23, 1998, the PPUC suspended this rate increase for seven months (until
December 15, 1998) in order to investigate the reasonableness of the proposed
rates. It is not presently possible to determine what action the PPUC will
ultimately take in this matter.
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 PG Energy,
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, PG Energy has been permitted to make
the following changes since January 1, 1997, to the gas costs contained in its
gas tariff rates:
<TABLE>
<CAPTION>
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- ----------------- -------- ------- ---------------------
<S> <C> <C> <C>
June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
</TABLE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of PG Energy and its wholly-owned subsidiary,
Honesdale Gas Company (collectively referred to as the "Company") continue to be
the funding of PG Energy's construction program and the seasonal funding of its
gas purchases and increases in its customer accounts receivable. The Company'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 the Company'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 the Company to use bank borrowings
to fund such expenditures, pending the periodic issuance of stock and long-term
debt. Bank borrowings are also used for the seasonal funding of the Company's
gas purchases and increases in its customer accounts receivable.
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, the Company has made arrangements for a total
of $71.0 million of unsecured revolving bank credit, which is deemed adequate
for its immediate needs. Specifically, PG Energy currently has seven bank lines
of credit with an aggregate borrowing capacity of $70.0 million which provide
for borrowings at interest rates generally less than prime and which mature at
various times during 1998 and 1999. Honesdale has a $1.0 million revolving bank
line of credit which provides for borrowing at the prime rate (currently 8.5%)
and which matures in June, 1999. The Company intends to renew or replace these
lines of credit as they expire. As of July 30, 1998, the Company had $17.0
million of borrowings outstanding under these bank lines of credit. In addition,
PG Energy can borrow up to $70.0 million from PEI through December 31, 1999 (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 PG Energy. As of July 30, 1998, PG
Energy had $8.5 million outstanding under its borrowing arrangement with PEI.
Such interim borrowings by PG Energy from PEI will be repaid with proceeds from
bank borrowings by PG Energy. PG Energy 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.
The Company believes it will be able to raise in a timely manner such funds
as are required for future construction expenditures, refinancings and other
working capital requirements.
Long-Term Debt and Capital Stock Financings
The Company periodically engages in long-term debt and capital stock
financings in order to obtain funds required for construction expenditures, the
refinancing of existing debt and various working capital purposes. No long-term
debt or capital stock financings were consummated by the Company during the
six-month period ended June 30, 1998.
PG Energy 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") and Customer Stock Purchase Plan (the "Customer Plan"). During 1998
(through July 30) PG Energy realized $4.7 million and $1.5 million from the
issuance of common stock to PEI in connection with the DRP and the Customer
Plan, respectively.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $12.1 million
during the six months ended June 30, 1998 and are currently estimated to be
$24.2 million during the remainder of the year. It is anticipated that such
expenditures will be financed with internally generated funds and bank
borrowings and by the periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of June 30, 1998, $6.5 million of long-term debt, and $80,000 of PG
Energy's preferred stock was required to be repaid within
twelve months.
Year 2000
The Company is currently replacing its financial and human resource
systems with purchased software packages. The installation of these new systems,
along with modifications currently being made to its customer information
system, will resolve the primary year 2000 issues. The new financial and human
resource systems are anticipated to be fully operational by January, 1999, while
modifications to the new customer information system are now anticipated to be
completed and tested by March 31, 1999.
The Company has completed a review of the program coding of other
significant in-house developed applications and determined that they are
presently year 2000 compliant. Additionally, the Company is reviewing its
installed base of personal computers to identify non-compliant machines that
would be in service at year 2000.
<PAGE>
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives and
economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement, such as the nature of Pennsylvania
legislation restructuring the natural gas industry and general economic
conditions and uncertainties. The Company undertakes no obligation to publicly
release any revision to these forward-looking statements to reflect events or
circumstances after the date of this filing.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 6, 1998, Pennsylvania Enterprises, Inc., the sole common shareholder
of PG Energy Inc., executed an action in lieu of a meeting of shareholders
re-electing the following incumbent directors of PG Energy Inc. to an additional
one year term: Kenneth L. Pollock, William D. Davis, Thomas F. Karam, Robert J.
Keating, James A. Ross, John D. McCarthy, Ronald W. Simms, Kenneth M. Pollock,
Paul R. Freeman, John D. McCarthy, Jr. and Richard A. Rose, Jr.
Item 5. Other Information
Effective August 4, 1998, Paul R. Freeman resigned as a Director of PG
Energy Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.
10-2 Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No.
0-7812.
10-3 Stock Option Grant, dated as of May 6, 1998, between PEI and Thomas F.
Karam - - filed as Exhibit 10-3 to PEI's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, File No. 0-7812.
10-4 Amended Employment Agreement dated as of May 6, 1998, by and among
PEI, PG Energy Inc. and Thomas F. Karam - - filed as Exhibit 10-4 to PEI's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, 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.
<PAGE>
PG ENERGY INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG ENERGY INC.
(Registrant)
Date: August 11, 1998 By: /s/ Donna M. Abdalla
------------------ ---------------------------------------
Donna M. Abdalla
Acting Secretary
Date: August 11, 1998 By: /s/ John F. Kell, Jr.
------------------ ----------------------------------------
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
<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 BY REFERENCE TO SUCH STATEMENTS)
</LEGEND>
<CIK> 0000077242
<NAME> PG ENERGY INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 269,606,000
<OTHER-PROPERTY-AND-INVEST> 4,082,000
<TOTAL-CURRENT-ASSETS> 45,465,000
<TOTAL-DEFERRED-CHARGES> 38,412,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 357,565,000
<COMMON> 34,401,000
<CAPITAL-SURPLUS-PAID-IN> 43,179,000
<RETAINED-EARNINGS> 46,086,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 123,666,000
560,000
15,864,000
<LONG-TERM-DEBT-NET> 117,500,000
<SHORT-TERM-NOTES> 50,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 6,500,000
80,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 93,345,000
<TOT-CAPITALIZATION-AND-LIAB> 357,565,000
<GROSS-OPERATING-REVENUE> 90,158,000
<INCOME-TAX-EXPENSE> 3,299,000
<OTHER-OPERATING-EXPENSES> 76,997,000
<TOTAL-OPERATING-EXPENSES> 80,296,000
<OPERATING-INCOME-LOSS> 9,862,000
<OTHER-INCOME-NET> 775,000
<INCOME-BEFORE-INTEREST-EXPEN> 10,637,000
<TOTAL-INTEREST-EXPENSE> 5,187,000
<NET-INCOME> 5,450,000
642,000
<EARNINGS-AVAILABLE-FOR-COMM> 4,808,000
<COMMON-STOCK-DIVIDENDS> 327,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> 31,499,000
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.43
</TABLE>
