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 SEPTEMBER 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 October 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 nine months
ended September 30, 1998 and 1997.............................. 2
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997.......................................... 3
Consolidated Statements of Cash Flows for
the nine months ended September 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 6. Exhibits and Reports on Form 8-K...................... 16
<PAGE>
PART I. FINANCIAL INFORMATION
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
------------ ------------- ------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES ............................................ $ 15,223 $ 16,276 $ 105,381 $ 129,444
Cost of gas .............................................. 6,118 7,137 56,173 74,547
----------- ----------- ----------- -----------
OPERATING MARGIN .............................................. 9,105 9,139 49,208 54,897
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Operation ................................................ 6,164 6,065 18,993 18,730
Maintenance .............................................. 1,302 1,503 3,661 3,945
Depreciation ............................................. 2,438 2,242 7,317 6,719
Income taxes ............................................. (2,042) (2,184) 1,257 3,406
Taxes other than income taxes ............................ 1,711 1,997 8,586 9,613
----------- ----------- ----------- -----------
Total other operating expenses ....................... 9,573 9,623 39,814 42,413
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) ....................................... (468) (484) 9,394 12,484
OTHER INCOME, NET ............................................. 22 92 797 244
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INTEREST CHARGES ......................... (446) (392) 10,191 12,728
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt ................................ 2,443 2,329 7,485 6,737
Other interest ............................................ 88 199 285 540
Allowance for borrowed funds used during construction ..... (38) (45) (90) (144)
----------- ----------- ----------- -----------
Total interest charges ................................. 2,493 2,483 7,680 7,133
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................................. (2,939) (2,875) 2,511 5,595
DIVIDENDS ON PREFERRED STOCK .................................. 319 320 961 991
----------- ----------- ----------- -----------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK .................... $ (3,258) $ (3,195) $ 1,550 $ 4,604
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Before discount (premium) on repurchase of preferred stock $ (0.93) $ (0.96) $ 0.45 $ 1.39
Discount (premium) on repurchase of preferred stock ...... -- (0.01) -- 0.23
----------- ----------- ----------- -----------
Earnings (loss) per share of common stock ................ $ (0.93) $ (0.97) $ 0.45 $ 1.62
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................. 3,489,055 3,314,155 3,407,752 3,314,155
=========== =========== =========== ===========
CASH DIVIDENDS PER SHARE ...................................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------- ------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
<S> <C> <C>
At original cost .............................. $ 369,232 $ 351,106
Accumulated depreciation ...................... (94,826) (88,129)
--------- ---------
274,406 262,977
--------- ---------
OTHER PROPERTY AND INVESTMENTS .................... 4,001 4,459
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents .................... 422 304
Accounts receivable -
Customers ................................ 9,346 23,551
Parent ................................... 1,377 --
Affiliates, net .......................... 225 63
Others ................................... 397 280
Reserve for uncollectible accounts ....... (1,213) (1,168)
Accrued utility revenues ..................... 2,100 11,680
Materials and supplies, at average cost ...... 3,052 2,716
Gas held by suppliers, at average cost ....... 26,482 21,933
Deferred cost of gas and supplier refunds, net 11,540 6,316
Prepaid expenses and other ................... 3,915 1,633
--------- ---------
57,643 67,308
--------- ---------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible ................ 31,109 30,592
Other ..................................... 6,579 4,415
Unamortized debt expense ...................... 1,015 1,164
Other ......................................... 75 225
--------- ---------
38,778 36,396
--------- ---------
TOTAL ASSETS ...................................... $ 374,828 $ 371,140
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ----------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
<S> <C> <C>
Common shareholder's investment ............. $122,267 $107,425
Preferred stock -
Not subject to mandatory redemption, net 4,839 15,864
Subject to mandatory redemption ........ 560 640
Long-term debt
Parent ................................. 3,700 23,500
Other .................................. 95,000 106,000
-------- --------
226,366 253,429
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt ........... 46,697 24,776
Preferred stock subject to repurchase or
mandatory redemption .................... 11,057 80
Notes payable ............................... 2,270 2,170
Accounts payable -
Suppliers .............................. 15,648 14,515
Parent ................................. -- 199
Accrued general business and realty taxes ... 427 2,797
Accrued income taxes ........................ 1,436 4,946
Accrued interest ............................ 1,188 1,844
Accrued natural gas transition costs ........ 281 1,087
Other ....................................... 834 1,188
-------- --------
79,838 53,602
-------- --------
DEFERRED CREDITS:
Deferred income taxes ....................... 55,060 52,207
Unamortized investment tax credits .......... 4,467 4,596
Operating reserves .......................... 2,578 2,825
Other ....................................... 6,519 4,481
-------- --------
68,624 64,109
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES .............. $374,828 $371,140
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
1998 1997
---------- ---------
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income ............................................................... $ 2,511 $ 5,595
Gain on sale of other property ........................................... (914) --
Effects of noncash charges to income -
Depreciation ......................................................... 7,374 6,764
Deferred income taxes, net ........................................... 2,336 904
Provisions for self insurance ........................................ 400 443
Other, net ........................................................... 1,469 1,335
Changes in working capital, exclusive of cash and current portion of
long-term debt and preferred stock -
Receivables and accrued utility revenues ........................ 22,184 17,314
Gas held by suppliers ........................................... (4,549) (5,705)
Accounts payable ................................................ (492) (6,528)
Deferred cost of gas and supplier refunds, net .................. (6,030) 10,316
Other current assets and liabilities, net ....................... (9,508) (1,260)
Other operating items, net ............................................... (1,131) (1,509)
-------- --------
Net cash provided by continuing operations ..................... 13,650 27,669
Net cash used for discontinued operations, principally for the payment
of income taxes ..................................................... -- (13,655)
-------- --------
Net cash provided by operating activities ....................... 13,650 14,014
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ............................................... (19,955) (22,810)
Proceeds from the sale of other property ................................. 980 --
Acquisition of regulated business ........................................ -- (2,019)
Other, net ............................................................... 204 530
-------- --------
Net cash used for investing activities .......................... (18,771) (24,299)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt ............................................... -- 25,000
Repurchase of preferred stock ............................................ (128) (3,137)
Dividends on preferred and common stock .................................. (961) (991)
Issuance of common stock ................................................. 6,170 --
Repayment of long-term debt (Note 3) ..................................... (12,300) (6,700)
Net increase (decrease) in bank borrowings ............................... 12,447 (5,021)
Other, net ............................................................... 11 700
-------- --------
Net cash provided by financing activities ....................... 5,239 9,851
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 118 (434)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 304 690
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 422 $ 256
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) .................................. $ 8,042 $ 7,203
======== ========
Income taxes .......................................................... $ 1,824 $ 15,042
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<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 information of the Company that is incorporated in these
consolidated financial statements has 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 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.
<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:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- ------------------ ------------ ------------- ----------------------
September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000
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
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
periods ended September 30, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. The provisions of this statement, which are effective
for fiscal quarters beginning after June 15, 1999, establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. While the
Company generally has not used derivative instruments, it expects to adopt, to
the extent necessary, the provisions of FASB Statement No. 133 in the third
quarter of 1999. The impact of such adoption on the Company's future financial
condition and results of operations will depend upon a number of factors,
including the extent to which the Company may use derivative instruments, and
the designation and effectiveness of such derivative hedging market risk.
(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 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 anticipates 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 nine-month periods ended September 30, 1998
and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES 100.0 % 100.0 % 100.0 % 100.0 %
Cost of gas 40.2 43.9 53.3 57.6
----- ----- ----- ----
OPERATING MARGIN 59.8 56.1 46.7 42.4
----- ----- ----- ----
OTHER OPERATING EXPENSES:
Operation 40.5 37.2 18.0 14.5
Maintenance 8.5 9.2 3.5 3.1
Depreciation 16.0 13.8 6.9 5.2
Income taxes (13.4) (13.4) 1.2 2.6
Taxes other than income taxes 11.2 12.3 8.1 7.4
----- ----- ---- ---
Total operating expenses 62.8 59.1 37.7 32.8
----- ----- ---- ----
OPERATING INCOME (3.0) (3.0) 9.0 9.6
OTHER INCOME, NET 0.1 0.6 0.7 0.2
INTEREST CHARGES (16.4) (15.3) (7.3) (5.5)
------ ------ ----- -----
NET INCOME (LOSS) (19.3) (17.7) 2.4 4.3
DIVIDENDS ON PREFERRED
STOCK (2.1) (1.9) (0.9) (0.7)
----- ----- ----- -----
EARNINGS (LOSS) APPLICABLE
TO COMMON STOCK (21.4)% (19.6)% 1.5 % 3.6 %
====== ====== ==== ====
</TABLE>
o Three Months Ended September 30, 1998, Compared With Three Months Ended
September 30, 1997
Operating Revenues. Operating revenues decreased $1.1 million (6.5%) from
$16.3 million for the quarter ended September 30, 1997, to $15.2 million for the
quarter ended September 30, 1998, primarily as a result of a 50 million cubic
feet (4.0%) decrease in sales by PG Energy to its residential and commercial
heating customers. This reduction in sales was attributable to the warmer than
normal temperatures during the third quarter of 1998 and colder than normal
temperatures during the same period in 1997, as well as lower levels in PG
Energy's gas cost rate (see "-Rate Matters"). The number of heating degree days
decreased by 97 (46.2%) from 210 (175.0% of normal) during the third quarter of
1997 to 113 (94.2% of normal) during the third quarter of 1998.
Cost of Gas. The cost of gas decreased $1.0 million (14.3%) from $7.1
million for the third quarter of 1997 to $6.1 million for the third quarter of
1998, primarily because of the aforementioned decrease in the volume of natural
gas sold by PG Energy to its residential and commercial heating customers and
lower levels in PG Energy's gas cost rate (see "-Rate Matters").
Operating Margin. The operating margin decreased $34,000 (0.4%) in the
third quarter of 1998 compared to the third quarter of 1997. As a percentage of
operating revenues, the margin increased from 56.1% in the third quarter of 1997
to 59.8% in the third quarter of 1998 due to the proportionately lower cost of
gas during the period.
Other Operating Expenses. Other operating expenses decreased $50,000
(0.5%) for the quarter ended September 30, 1997, compared to the quarter ended
September 30, 1998. This decrease was primarily attributable to a $201,000
(13.4%) decrease in maintenance expense and a $286,000 (14.3%) decrease in taxes
other than income taxes resulting from a lower level of gross receipts tax
related to the decrease in sales. The effects of these decreases were partially
offset by a $196,000 (8.7%) increase in depreciation expense as a result of
additions to utility plant and a $142,000 increase in income taxes from a credit
of $2.2 million for the third quarter of 1997 to a credit of $2.0 million for
the third quarter of 1998 due to a decrease in the loss before income taxes (for
this purpose, operating income net of interest charges). As a percentage of
operating revenues, other operating expenses increased from 59.1% during the
quarter ended September 30, 1997, to 62.8% during the quarter ended September
30, 1998, primarily because of the lower level of operating revenues.
Operating Income (Loss). As a result of the above, the operating loss
decreased by $16,000 (3.3%) from $484,000 for the third quarter of 1997 to
$468,000 for the third quarter of 1998, but remained unchanged as a percentage
of total operating revenues for such periods.
Other Income, Net. Other income, net decreased $70,000 (76.1%) from
$92,000 for the three-month period ended September 30, 1997, to $22,000 for the
three-month period ended September 30, 1998, largely because of an increase in
property taxes on other physical property and a lower level of other income.
Earnings (Loss) Applicable to Common Stock. The slight increase in the
loss applicable to common stock of $63,000 (2.0%) from $3.2 million for the
three-month period ended September 30, 1997, to $3.3 million for the three-month
period September 30, 1998, was primarily the result of the lower level of other
income, as discussed above. Despite the increase in loss applicable to common
stock, the loss per share of common stock decreased $.04 per share from $.97 per
share for the three-month period ended September 30, 1997 (including a $.01 per
share premium on the repurchase of preferred stock) to $.93 per share for the
three-month period ended September 30, 1998, as a result of the 5.3% increase in
the weighted average number of shares outstanding.
o Nine Months Ended September 30, 1998, Compared With Nine Months Ended
September 30, 1997
Operating Revenues. Operating revenues decreased $24.1 million (18.6%)
from $129.4 million for the nine months ended September 30, 1997, to $105.3
million for the nine months ended September 30, 1998, primarily as a result of a
2.5 billion cubic feet (16.7%) decrease in sales by PG Energy to its residential
and commercial heating customers. This reduction in sales was attributable to
the warmer than normal weather during the nine months ended September 30, 1998,
and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The number
of heating degree days decreased by 867 (20.8%) from 4,165 (102.2% of normal)
during the nine months ended September 30, 1997, to 3,298 (80.9% of normal)
during the nine months ended September 30, 1998.
Cost of Gas. The cost of gas decreased $18.4 million (24.6%) from $74.5
million for the nine months ended September 30, 1997, to $56.2 million for the
nine months ended September 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 (10.4%)
from $54.9 million in the nine months ended September 30, 1997, to $49.2 million
in the nine months ended September 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
42.4% in the nine months ended September 30, 1997, to 46.7% in the nine months
ended September 30, 1998, as a result of the proportionately lower cost of gas
during the period.
Other Operating Expenses. Other operating expenses decreased $ 2.6
million (6.1%) from $42.4 million for the nine-month period ended September 30,
1997, to $39.8 million for the nine-month period ended September 30, 1998. This
decrease was primarily attributable to a $2.1 million (63.1%) decrease in income
taxes from $3.4 million for the nine months ended September 30, 1997, to $1.3
million for the nine months ended September 30, 1998, due to a decrease in
income before income taxes (for this purpose, operating income net of interest
charges), and a $1.0 million (10.7%) 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
$598,000 (8.9%) increase in depreciation expense as a result of additions to
utility plant. As a percentage of operating revenues, other operating expenses
increased from 32.8% during the nine-month period ended September 30, 1997, to
37.7% during the nine-month period ended September 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 (24.8%) from $12.5 million for the nine-month period ended
September 30, 1997, to $9.4 million for the nine-month period ended September
30, 1998, and also decreased as a percentage of total operating revenues for
such periods from 9.6% in 1997 to 9.0% in the nine-month period ended September
30, 1998.
Other Income, Net. Other income, net increased $553,000 from $244,000 for
the nine-month period ended September 30, 1997, to $797,000 for the nine-month
period ended September 30, 1998, largely because of a gain on the sale of land
in June, 1998.
Interest Charges. Interest charges increased by $547,000 (7.7%) from $7.1
million for the nine-month period of 1997 to $7.7 million for the nine-month
period ended September 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 $3.1 million (55.1%) from $5.6
million for the nine-month period ended September 30, 1997, to $2.5 million for
the nine-month period ended September 30, 1998, was largely attributable to the
lower level of revenues because of warmer than normal weather and the increased
interest charges, as discussed above, the effects of which were partially offset
by the increase in other income.
Earnings (Loss) Applicable to Common Stock. The decrease in earnings
applicable to common stock of $3.1 million (66.3%) from $4.6 million for the
nine-month period ended September 30, 1997, to $1.6 million for the nine-month
period September 30, 1998, as well as the decrease in earnings per share of
common stock of $1.17 (72.2%) from $1.62 per share for the nine-month period
ended September 30, 1997 (including a $.23 per share discount on the repurchase
of preferred stock), to $.45 per share for the nine-month period ended September
30, 1998, were the result of the reduced net income, as discussed above, and the
2.8% increase in the weighted average number of shares outstanding.
RATE MATTERS
Rate Increases. 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, 1997.
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 September 29, 1998,
PG Energy and certain parties filing objections to the rate increase request
filed a Settlement Petition with the Administrative Law Judge assigned to
conduct the investigation of the rate increase request. By Order adopted October
16, 1998, the PPUC approved the Settlement Petition and granted PG Energy an
overall 4.1% increase in its base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
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.
<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
gas tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- ------------------ ----------- ------------- --------------------------
September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000
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
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 $64.0 million of unsecured revolving bank credit, which is deemed adequate
for its needs. Specifically, PG Energy currently has six bank lines of credit
with an aggregate borrowing capacity of $63.0 million which provide for
borrowings at interest rates generally less than prime and which mature at
various times during 1999. Honesdale has a $1.0 million revolving bank line of
credit which provides for borrowing at the prime rate (currently 8.0%) and which
matures in June, 1999. The Company intends to renew or replace these lines of
credit as they expire. As of October 30, 1998, the Company had $39.2 million of
borrowings outstanding under these bank lines of credit. In addition, as of
October 30, 1998, PG Energy had $3.9 million outstanding under its borrowing
arrangement with Pennsylvania Enterprises, Inc. ("PEI"), its parent company.
Such interim borrowings by PG Energy from PEI will be repaid with proceeds from
bank borrowings by PG Energy.
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
nine-month period ended September 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
and its Customer Stock Purchase Plan. During 1998 (through October 30) PG Energy
realized $6.2 million from the issuance of common stock to PEI in connection
with these plans.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $20.0 million
during the nine months ended September 30, 1998 and are currently estimated to
be $10.0 million during the remainder of the year. These 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, 1998, $46.7 million of long-term debt and $11.1
million of PG Energy's preferred stock was required to be repaid within twelve
months. The $46.7 million of long-term debt includes $36.7 million outstanding
under PG Energy's bank lines of credit which is due at various times during 1999
and $10.0 million of PG Energy's 9.23% series first mortgage bonds which are due
September 1, 1999. The $11.1 million of PG Energy preferred stock includes $11.0
million relative to all of the outstanding shares of PG Energy's 9% cumulative
preferred stock, $100 par value, which have been called for redemption on
December 1, 1998, at a price of $104 per share, plus accrued dividends.
PG Energy intends to finance its current maturities of long-term debt
and preferred stock with internally generated funds and bank borrowings pending
the periodic issuance of long-term debt and capital stock.
Year 2000
The Company has performed an inventory and assessment of its computer
systems and applications, as well as devices with embedded technology, to
identify year 2000 issues and to develop a plan for addressing those issues.
This plan, which was initiated in 1996, is scheduled to be completed by March
31, 1999, for all applications and devices that could have a material effect on
the Company's operations, and by June 30, 1999, with respect to all other
issues. The plan involves the replacement of certain systems with purchased
software, the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule. In view of the
substantial progress that has been made to date, management does not anticipate
the expenditures necessary to carry out the plan will be material relative to
the Company's financial position or results of operations.
As key elements of its plan to address year 2000 issues, the Company is
in the process of replacing its financial and human resource systems with
purchased software. The installation of these new systems, along with
modifications currently being made to the Company's customer information system
and upgrading of its operating system software, will resolve the primary year
2000 issues. The new financial and human resource systems are anticipated to be
fully tested and operational by January, 1999, while the modifications and
testing of the customer information system and the upgrading of its Company's
operating system software are now anticipated to be completed by March 31, 1999.
The Company's plan to address year 2000 issues includes an assessment of
its critical suppliers and vendors, and also its largest customers, to determine
their status relative to year 2000 compliance. The Company is in the process of
surveying approximately 200 such suppliers, vendors and customers and to date
has not identified any situations that would appear to pose a significant risk
to the Company. The Company intends to continue monitoring the progress being
made by its suppliers, vendors and largest customers relative to year 2000
compliance and will promptly initiate appropriate contingency planning should
the occasion warrant.
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, such statements 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. The Company
cautions that assumptions, projections, expectations, intentions or beliefs
about future events may and often do vary from actual results and the
differences between assumptions, projections, expectations, intentions or
beliefs and actual results can be material. Accordingly, there can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual achievements and events to differ materially from those
expressed or implied in such forward-looking statements: the nature of
Pennsylvania legislation restructuring the natural gas industry; the impact of
year 2000 compliance; industrial, commercial and residential growth in the
service territories of the Company and its subsidiary; the weather and other
natural phenomena; the timing and extent of changes in commodity prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its subsidiary are subject or other external factors over which
the Company has no control; and general economic conditions, in each case curing
the periods covered by the forward-looking statements. 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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:November 5, 1998 By: /s/ Donna M. Abdalla
Donna M. Abdalla
Acting Secretary
Date:November 5, 1998 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
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(THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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