SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 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)
Registrant's telephone number, including area code: (570) 829-8843
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
PREFERRED STOCK, $100 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 24, 1999: None
All Common Stock of the registrant is held by its parent company, Pennsylvania
Enterprises, Inc.
The number of shares of Common Stock, no par value, outstanding as of
February 24, 1999: 3,494,418 shares
Documents incorporated by reference: NONE
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I (1) (a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS............................................... 1
Item 2. PROPERTIES............................................. 12
Item 3. LEGAL PROCEEDINGS...................................... 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 12
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS....................... 13
Item 6. SELECTED FINANCIAL DATA................................ *
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 24
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 48
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... *
Item 11. EXECUTIVE COMPENSATION................................... *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................... *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... *
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K......................................... 49**
SIGNATURES............................................... 53
* These items have been omitted from this Form 10-K as Registrant meets the
conditions set forth in General Instructions I(1) (a) and (b) of Form 10-K
and is therefore filing this form with the reduced disclosure format.
** The "Index to Exhibits" is located on page 54.
<PAGE>
PART I
ITEM l. BUSINESS
GENERAL
PG Energy Inc. (PG Energy) is a subsidiary of Pennsylvania Enterprises,
Inc. ("PEI"). PG Energy, incorporated in Pennsylvania in 1867 as Dunmore Gas &
Water Company, is engaged in the distribution of natural gas. On February 14,
1997, PG Energy acquired all of the outstanding capital stock of Honesdale Gas
Company ("Honesdale"), a regulated public utility engaged in distributing
natural gas to portions of Wayne and Pike Counties, in an area adjacent to PG
Energy's service territory. Until February 16, 1996, when its water utility
operations were sold, PG Energy was also engaged in the distribution of water
(See "-Sale of Water Utility Operations"). Both PG Energy and Honesdale are
regulated by the Pennsylvania Public Utility Commission (the "PPUC"). As of
December 31, 1998, PG Energy provided service to approximately 148,900 natural
gas customers and Honesdale provided service to approximately 3,300 customers.
PG Energy and Honesdale employed approximately 565 persons as of December
31, 1998.
Restructuring of Natural Gas Industry
The natural gas industry, which historically has included producers,
interstate pipelines and local distribution companies ("LDCs"), is undergoing
significant restructuring. The industry is rapidly progressing from a highly
regulated environment to one in which there is competition, customer choice and
only partial regulation. The same change is occurring in the electric industry
which competes with the natural gas industry for many of the same energy uses.
The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PG Energy, are
presently responsible for procuring competitively-priced gas supplies and
arranging for the appropriate transportation capacity and storage services with
the interstate pipelines. Additionally, in accordance with regulations
promulgated by the PPUC, PG Energy currently offers transportation service to
certain customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PG Energy
charged all its customers bundled rates. These rates included a commodity charge
based on the cost, as approved by FERC, which PG Energy paid the pipelines for
natural gas delivered to the entry point on its distribution system. Except for
the approximately 600 customers currently receiving transportation service, PG
Energy's customers continue to be charged bundled rates as approved by the PPUC,
which include a commodity charge based on the costs prudently incurred by PG
Energy for the purchase of natural gas and for interstate pipeline
transportation capacity and storage services. Customers receiving transportation
service, which accounted for approximately 54% of PG Energy's total gas
deliveries in 1998, are charged rates approved by the PPUC which exclude the
commodity cost that is reflected in the bundled rates charged to other
customers.
Although the regulations promulgated by the PPUC only require LDCs to
offer transportation service to individual customers having an annual
consumption of at least 5,000 thousand cubic feet ("MCF") of natural gas and
groups of not more than ten customers having a combined consumption of at least
5,000 MCF per year, the PPUC has allowed certain LDCs to make transportation
service available to other customers, regardless of their consumption. One of
these companies is Honesdale which, with the approval of the PPUC, began
offering transportation service to its customers effective November 1, 1997.
During 1998 approximately 1,150 of Honesdale's customers received transportation
service and purchased their natural gas supplies from PG Energy Services Inc.
("Energy Services"), a nonregulated affiliate of PG Energy and the only marketer
currently selling gas to customers served by Honesdale. PG Energy is also
planning to file tariffs with the PPUC in the near future seeking approval to
make transportation service available to all of its 148,900 customers. However,
the actual timing of such filing may be influenced by the terms of the
legislation, as discussed below, which PG Energy currently believes that
Pennsylvania may enact in 1999 requiring that all customers of LDCs have the
right, within the next one to two years, to receive transportation service and
to choose the supplier of their natural gas.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania are required to unbundle generation charges
from the other charges included in their currently bundled rates and customers
can contract with qualified suppliers of their choosing, including the utility
currently serving them, to purchase electric energy at nonregulated rates. The
electric utilities will continue to utilize their transmission and distribution
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
PG Energy believes that Pennsylvania may enact similar legislation with
respect to the natural gas industry in 1999. As currently envisioned, such
legislation would require that PG Energy provide all of its customers with
unbundled transportation service within one to two years. While the rates for
the transportation of natural gas through PG Energy's distribution system and
the storage services offered by PG Energy would continue to be price regulated
by the PPUC, the commodity cost of gas purchased from suppliers other than PG
Energy would not be so regulated. Customers could, however, continue to receive
a bundled sales service from PG Energy which would be subject to price
regulation by the PPUC. Essentially, the legislation would extend the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier other than PG Energy, based on nonregulated market
prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PG Energy will be faced with significant
competition from marketers for the sale of natural gas to its customers.
However, under current regulations of the PPUC, PG Energy does not realize a
profit or incur any loss with respect to the commodity cost of natural gas.
Moreover, PG Energy would not expect the pending legislation to result in the
bypass of its distribution system by any significant number of customers because
of the nature of its customer base and the cost of any such bypass.
Additionally, based on various provisions of the legislation currently being
considered, PG Energy does not believe that the legislation will result in any
significant amount of transition costs (such as the negotiated buyout of
contracts with interstate pipelines, the recovery of deferred purchased gas
costs or the recovery of regulated assets). Further, PG Energy believes that the
transition costs it would incur in offering choice to all its customers
(including those involving information systems and customer education) would
generally be recoverable through rates or other customer charges. Accordingly,
although it cannot be certain, because the terms of such legislation have not
been finalized and the ultimate effect on PG Energy cannot be determined, PG
Energy does not believe that the enactment of legislation providing for
customers to purchase their natural gas from third parties would have any
material adverse impact on its earnings or financial condition despite the
increased competition to which PG Energy would be subject regarding the sale of
natural gas to its customers.
Sale of Water Utility Operations
On February 16, 1996, PG Energy sold its regulated water operations and
certain related assets to Pennsylvania-American Water Company
("Pennsylvania-American"), a wholly-owned subsidiary of American Water Works
Company, Inc. ("American"), for $414.3 million, consisting of $262.1 million in
cash and the assumption of $152.2 million of PG Energy's liabilities, including
$141.0 million of its long-term debt. (See Note 2, Discontinued Operations, of
the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K).
The cash proceeds from the sale of approximately $205.4 million, net of
$56.7 million of income taxes, were used by PEI and PG Energy to retire debt, to
repurchase stock, for construction expenditures and for working capital
purposes. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources-Sale of Water Utility
Operations" in Item 7 of this Form 10-K).
GAS BUSINESS
PG Energy and Honesdale (collectively referred to as the "Company")
distribute natural gas to an area in northeastern Pennsylvania lying within the
Counties of Luzerne, Lackawanna, Lycoming, Wyoming, Northumberland, Wayne,
Columbia, Union, Montour, Snyder, Susquehanna, Pike and Clinton, a territory
that includes the cities of Scranton, Wilkes-Barre and Williamsport. The total
estimated population of the Company's natural gas service area, based on the
1990 U.S. Census, is 760,000.
<PAGE>
Number and Type of Customers. At December 31, 1998, the Company had
approximately 152,200 natural gas customers, from which it derived total natural
gas revenues of $158.7 million during 1998. The following chart shows a
breakdown of the types of customers and the percentages of gas revenues
generated by each type of customer in 1998:
Type of Customer % of Customers % of Revenues
Residential 90.8% 66.7%
Commercial 8.9 24.1*
Industrial 0.2 7.7*
Other Users 0.1 1.5
--------- --------
Total 100.0% 100.0%
========= ========
* Includes the 2.6% of total gas revenues derived from interruptible customers.
During 1998, the Company delivered an estimated total of 45,969,700 MCF
of natural gas to its customers, of which 45% was sold at normal tariff rates,
54% represented gas transported for customers and 1% was sold under the
Alternate Fuel Rate (as described below).
The Company sells gas to "firm" customers with the understanding that
their supply will not be interrupted except during periods of supply deficiency
or emergency conditions. "Interruptible" gas customers are required to have
equipment installed capable of using an alternate energy form. Interruptible
customers, therefore, do not require a continuous supply of gas and their supply
can be interrupted at any time under the conditions set forth in their contracts
for gas service. In 1998 a total of 5,461,250 MCF of natural gas was sold to
interruptible customers, of which 5,210,078 MCF was transported for such
customers, which together represented 12% of the total deliveries of natural gas
to the Company's customers during 1998.
PG Energy's largest natural gas customer accounted for less than 1% of
its operating revenues in 1998.
Transportation and Storage Service. In accordance with current
regulations of the PPUC, PG Energy provides transportation service to natural
gas customers who consume at least 5,000 MCF of natural gas per year, meet
certain other conditions and execute a transportation agreement. In addition,
groups of up to ten customers, with a combined consumption of at least 5,000 MCF
per year, are eligible for transportation service. The PPUC has, however,
allowed certain LDCs to make transportation service available to other
customers, regardless of their consumption. One of these companies is Honesdale
which, with the approval of the PPUC, began offering transportation service to
all of its approximately 3,300 customers effective November 1, 1997. During
1998, approximately 1,150 of Honesdale's customers received transportation
service and purchased their natural gas supplies from Energy Services, the only
marketer currently selling gas to customers served by Honesdale.
Transportation service is provided on both a firm and an interruptible
basis and includes provisions regarding over and under deliveries of gas on
behalf of the respective customer. In addition, firm transportation customers
are offered a "storage service" pursuant to which such customers may have gas
delivered during the period from April through October for storage and
redelivery during the winter period. The Company also offer firm transportation
customers a "standby service" under the terms of which the customer will be
supplied with gas in the event the customer's transportation service is
interrupted or curtailed by its broker, supplier or other third party.
Set forth below is a summary of the gas transported by the Company and
the number of customers using transportation service from 1996 to 1998:
<TABLE>
<CAPTION>
Volume of Gas Transported (MCF)
---------------------------------------------------------
Number of Interstate Pennsylvania
Year Customers Gas Gas Total
- ----------- ---------------- ---------------- ------------------- --------------
<S> <C> <C> <C>
1998 1,736 (a) 24,669,000 - 24,669,000
1997 1,244 (a) 22,584,000 99,000 22,683,000
1996 503 15,959,000 4,459,000 20,418,000
</TABLE>
(a) Includes 1,148 and 729 residential and commercial customers of
Honesdale receiving transportation service in 1998 and 1997,
respectively.
During 1999, the Company expects to transport approximately 28,000,000
MCF of natural gas.
The rates charged by the Company for the transportation of interstate gas
are essentially equal to their tariff rates for the sale of gas with all gas
costs removed. Accordingly, the transportation of interstate gas has had no
significant adverse effect on earnings. Prior to January 15, 1997, the rates
charged for the transportation of Pennsylvania-produced natural gas
("Pennsylvania gas") were lower than those charged for the transportation of
interstate gas. As a result, the rates charged for the transportation of
Pennsylvania gas yielded considerably less revenue than the gross margin (gas
operating revenues less the cost of gas) that would be realized from sales under
normal tariff rates. However, as of January 15, 1997, in connection with PG
Energy's rate increase which was effective on such date (see "-Rates"), the
lower rates charged for the transportation of Pennsylvania gas were eliminated
and those rates were conformed with the rates charged for the transportation of
interstate gas. The elimination of such differential was the primary reason for
the dramatic decrease in the volume of Pennsylvania-produced gas transported by
the Company in 1997 and its elimination in 1998.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PG Energy offers an Alternate Fuel Rate for
eligible customers. This rate applies to large commercial and industrial
accounts that have the capability of using No. 2, 4 or 6 fuel oil or propane as
an alternate source of energy. Whenever the cost of such alternate fuel drops
below the cost of natural gas at PG Energy's normal tariff rates, PG Energy is
permitted by the PPUC to lower its price to these customers so that PG Energy
can remain competitive with the alternate fuel. However, in no instance may PG
Energy sell gas under this special arrangement for less than its average
commodity cost of gas purchased during the month. PG Energy's revenues under the
Alternate Fuel Rate amounted to $1.7 million in 1998, $2.4 million in 1997 and
$1.8 million in 1996. These revenues reflected the sale of 582,000 MCF, 651,000
MCF and 491,000 MCF in 1998, 1997 and 1996, respectively. It is presently
anticipated that approximately 600,000 MCF will be sold under the Alternate Fuel
Rate in 1999. The change in volumes sold under the Alternate Fuel Rate reflects
the switching by certain customers between alternate fuel service and
transportation service as a result of periodic changes in the relative cost of
natural gas and alternate fuels.
FERC Order 636. On April 8, 1992, FERC issued Order No. 636 ("Order
636"), requiring interstate pipelines to restructure their services and
operations in order to enhance competition and maximize the benefits of wellhead
price decontrol. The objectives of Order 636 were to be accomplished primarily
by unbundling the services provided by the interstate pipelines and by making
those services available to end users on the same terms as LDCs.
Pursuant to Order 636, the interstate pipelines have been required to:
(1) unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified
fixed-variable rate designs. The interstate pipelines have been granted a
blanket sales certificate to make unbundled sales in competition with
non-pipeline merchants and are being permitted recovery of all reasonable and
prudent transition costs incurred in order to comply with Order 636. Such
transition costs include: (1) the cost of renegotiating existing gas supply
contracts with producers ("Gas Supply Realignment Costs"); (2) recovery of gas
costs included in the interstate pipelines' purchased gas adjustment accounts at
the time they adopted market-based pricing for gas sales ("Account 191 Costs");
(3) unrecovered costs of assets that cannot be assigned to customers of
unbundled services ("Stranded Costs"); and (4) costs of new facilities to
physically implement Order 636 ("New Facility Costs"). Additionally, the
interstate pipelines have been allowed pre-granted abandonment of sales and
transportation services to customers upon expiration of applicable contracts,
subject to customers' rights of first refusal.
On October 15, 1993, the PPUC adopted an annual purchased gas cost
("PGC") order (the "PGC Order") regarding the recovery of Order 636 transition
costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PG Energy and other larger LDCs.
As of February 1, 1994, PG Energy began to recover the Gas Transition
Costs billed by its interstate pipelines through an increase in its PGC rate. As
of December 31, 1998, PG Energy had been billed a total of $1.3 million of Gas
Transition Costs by its interstate pipelines, which is the entire amount of such
billings that PG Energy expects. Of this amount, $857,000 was recovered by PG
Energy over a twelve-month period ended January 31, 1995, through an increase in
its PGC rate, $252,000 was recovered by PG Energy in its annual PGC rate that
the PPUC approved effective December 1, 1995, and the remaining $213,000 was
recovered by PG Energy in its PGC rate that was effective December 1, 1996.
The PGC Order also indicated that while Gas Supply Realignment and
Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs
eligible for recovery under the PGC rate filing mechanism, such costs are
subject to full recovery by LDCs through the filing of a tariff pursuant to
either the existing surcharge or base rate provisions of the Pennsylvania Public
Utility Code (the "Code"). By Order of the PPUC entered August 26, 1994, PG
Energy began recovering the Non-Gas Transition Costs billed pursuant to Order
636 through the billing of a surcharge to its customers effective September 12,
1994. As of December 31, 1998, $10.6 million of such Non-Gas Transition Costs
were billed to PG Energy and recovered from its customers. PG Energy does not
presently anticipate that it will be billed for any additional amount of Non-Gas
Transition Costs by its interstate pipelines.
Sources of Supply. The Company purchases natural gas from marketers,
producers, and integrated energy companies, generally under the terms of supply
arrangements that extend for varying periods of more or less than one year, but
frequently for the following heating season (i.e., November through March).
Depending upon their terms, these contracts may or may not provide for an
adjustment each month in the cost of gas purchased pursuant thereto based on the
then current market prices for natural gas. The largest individual supplier, an
integrated energy company, accounted for 28% of the Company's total purchases of
natural gas in 1998. Three other suppliers accounted for 23%, 20% and 10%,
respectively, of the Company's total purchases of natural gas in 1998. No other
suppliers accounted for more than 10% of the Company's purchases during 1998.
The purchases of natural gas by the Company during 1998 and 1997 and by
PG Energy during 1996 are summarized below:
Volume Average
Year Purchased (MCF) Cost per MCF*
- ----------------- ------------------------ -----------------
1998 22,763,000 $3.86
1997 26,540,000 $3.78
1996 27,955,000 $3.83
* At the entry points on the Company's distribution systems.
During 1999, the Company expects to purchase approximately 27,500,000 MCF
of natural gas under seasonal or other contracts of more or less than one year
at a currently projected average cost of $3.63 per MCF.
The Company presently has adequate supplies of natural gas to meet the
demands of existing customers through October, 1999, and the Company believes
that it will be able to obtain sufficient supplies to meet the demands of their
existing customers beyond October, 1999, and to serve new customers (of which
approximately 2,500 are expected to be added in 1999).
Pipeline Transportation and Storage Entitlements. Pursuant to the terms
of Order 636, the Company has entered into agreements with their former
interstate pipeline suppliers providing for the firm long haul transportation by
those pipelines on a daily basis of the following quantities of gas:
<PAGE>
<TABLE>
<CAPTION>
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
- ------------------ ----------------------------- ------------------------- --------------------------
<S> <C> <C> <C>
Transco Various through 2015 74,100 (b) 61.2%
Tennessee 1999 and 2000 35,983 (c) 29.7
Columbia 2004 11,016 9.1
------------------------- --------------------------
121,099 100.0%
========================= ==========================
</TABLE>
(a) Agreements are automatically extended from month-to-month or
year-to-year after their expiration unless notice of termination is
given by one of the parties and the Company agrees to such
termination. In no event may any of the agreements be unilaterally
terminated by the pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PG Energy can transport during the
period December through February pursuant to an agreement with
Transco that extends through 2011.
(c) Includes up to 3,416 MCF per day that Honesdale can transport during
the period November through January pursuant to an agreement with
Tennessee that extends through November, 2000.
<PAGE>
The Company has also contracted with its former interstate pipeline
suppliers and the New York State Electric and Gas Company ("NYSEG") for the
following volumes of gas storage and storage withdrawals:
<TABLE>
<CAPTION>
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline/Party Date (a) (MCF) (b) From Storage (MCF)
- ----------------------- ----------------------------- ------------------- ----------------------------
<S> <C> <C> <C>
Transco Various through 2013 6,200,000 86,884
Tennessee November 1, 2000 3,700,000 25,310 (d)
Columbia October 31, 2004 1,100,000 16,036
NYSEG (c) March 31, 2002 290,000 28,093
------------------- ----------------------------
11,290,000 156,323
=================== ============================
</TABLE>
(a) Agreements are automatically extended from month-to-month or
year-to-year after their expiration unless notice of termination is
given by one of the parties and the Company agrees to such
termination. In no event may any of the agreements be unilaterally
terminated by the pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
(c) Storage gas is delivered via Transco.
(d) Includes 2,279 MCF that may be delivered to Honesdale under the terms
of the storage contract with Tennessee.
Based on its present pipeline transportation and storage entitlements,
the Company is entitled to a maximum daily delivery of the following quantities
of gas:
<TABLE>
<CAPTION>
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
- ------------------ ------------------- ------------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Transco 74,100 (a) 114,977 (c) 189,077 68.2%
Tennessee 35,983 (b) 25,310 (d) 61,293 22.1
Columbia 11,016 16,036 27,052 9.7
------------------- ------------------- ------------------ ----------------
121,099 156,323 277,422 100.0%
=================== =================== ================== ================
</TABLE>
(a) Includes 3,300 MCF that may be transported by PG Energy during the
period December through February.
(b) Includes up to 3,416 MCF that may be transported by Honesdale during
the period November through January.
(c) Includes 28,093 MCF that may be delivered under the terms of the
storage contract with NYSEG and the abandonment of Transco's
LGA storage service.
(d) Includes 2,279 MCF that may be delivered to Honesdale under the terms
of the storage contract with Tennessee.
<PAGE>
In accordance with the provisions of Order 636, the Company may release to
customers and other parties the portions of firm pipeline transportation and
storage entitlements which are in excess of their requirements. Such releases
may be made upon notice in accordance with the provisions of Order 636 and for a
consideration not in excess of the cost of the respective entitlement. Releases
may be made for periods ranging from one day to the remaining term of the
entitlement.
Since September 1, 1993, PG Energy has released portions of its firm
pipeline transportation capacity to third parties for varying periods extending
up to three years. Honesdale has also released portions of its firm pipeline
transportation capacity since August 1, 1997. During 1998, the average daily
capacity so released was 32,674 MCF, and the maximum capacity released on any
one day in 1998 was 41,473 MCF. Through December 31, 1998, the Company had not,
however, released any storage capacity on the open market via the pipeline
electronic bulletin boards.
The Company believes it has sufficient firm pipeline transportation and
storage entitlements to meet the demands of its existing customers and to supply
new customers.
Peak Day Requirements. The Company plans for peak day demand on the basis
of a daily mean temperature of 0 degrees Fahrenheit. Requirements for such a
design peak day, assuming the curtailment of service to interruptible customers,
are currently estimated to be 354,000 MCF, of which 257,000 MCF would be
required for customers to whom the Company provides retail sales service and
97,000 MCF would be required for customers for whom the Company provides
transportation service through its distribution systems. The Company's historic
maximum daily sendout is 313,446 MCF, which occurred on January 17, 1997, when
service to interruptible customers and select industrial users was curtailed.
The mean temperature in its gas service area on that day was 5 degrees
Fahrenheit.
Capital Expenditures. Capital expenditures totaled $28.2 million during
1998, and are estimated to be $18.4 million during 1999.
Regulation. The natural gas utility operations of the Company are
regulated by the PPUC, particularly as to utility rates, service and facilities,
accounts, issuance of certain securities, the encumbering or disposition of
public utility properties, the design, installation, testing, construction, and
maintenance of pipeline facilities and various other matters associated with
broad regulatory authority.
In addition to those regulations promulgated by the PPUC, the Company
must also comply with federal, state and local regulations relating generally to
the discharge of materials into the environment or otherwise relating to the
protection of the environment. Compliance with such regulations has not had any
material effect upon the capital expenditures, earnings or competitive position
of the Company's gas business. Although it cannot predict the future impact of
these regulations, the Company believes that any additional expenditures and
costs made necessary by them would be fully recoverable through rates.
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. PG Energy paid $175,000 to the party performing the
remediation in settlement of a claim for PG Energy's share of such remediation
costs. 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.
The Company's gas distribution and transportation activities are not
subject to the Natural Gas Act, as amended.
Rates. 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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's base rates, designed to produce $7.4 million of
additional annual revenue, effective October 17, 1998.
The provisions of the 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. The procedure is limited to purchased gas costs,
to the exclusion of other rate matters, and requires a formal evidentiary
proceeding conducted by the PPUC, the submission of specific information
regarding gas procurement practices and specific findings of fact by the PPUC
regarding the "least cost fuel procurement" policies of the utility.
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1996, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- -------------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
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
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.
FERC Order 636, among other matters, requires that the Company contract
for sufficient gas supplies, pipeline capacity and storage for its annual needs.
These added responsibilities have resulted in increased scrutiny by the PPUC as
to the prudence of gas procurement and supply activities. However, to date, the
PPUC has permitted the Company to recover its gas supply costs in the rates
charged to customers. Additionally, although it cannot be certain, the Company
believes that it will be able to continue demonstrating to the PPUC the prudence
of its gas supply costs and, therefore, will be allowed to recover all such
costs in its future purchased gas cost rates.
Tax Surcharge Adjustments. Regulations of the PPUC provide for the
Company to apply a state tax adjustment surcharge tariff to bills for gas
service to recoup any increased taxes or pass through any decreased taxes
resulting from changes in the law with respect to the Pennsylvania Capital Stock
Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty Tax.
Honesdale is currently refunding approximately $11,000 of decreased taxes on an
annual basis in accordance with these regulations, while no state tax adjustment
surcharge is presently being applied to PG Energy's bills for gas service.
WATER BUSINESS
Prior to the sale of its water operations to Pennsylvania-American on
February 16, 1996, PG Energy distributed water to an area lying within the
Counties of Lackawanna, Luzerne, Susquehanna and Wayne, which included the
Cities of Scranton and Wilkes-Barre and 63 other municipalities. The total
estimated population of the water service area, based on the 1990 U.S. Census,
was 373,000.
Number and Type of Customers. At December 31, 1995, PG Energy had
approximately 133,400 water customers from which it derived total water revenues
of $7.5 million during the period January 1 through February 15, 1996.
Filtration of Water Supplies. All of PG Energy's water customers were
supplied with filtered water (except for several hundred who were supplied with
ground water from wells). The filtration of PG Energy's water supplies was
performed at ten water treatment plants, located throughout PG Energy's water
service area, which had an aggregate daily capacity of 101.1 million gallons.
Construction Expenditures. PG Energy's construction expenditures for
water utility plant totaled $815,000 during the period January 1 through
February 15, 1996.
<PAGE>
ITEM 2. PROPERTIES
Gas. The Company's gas systems consist of approximately 2,439 miles of
distribution lines, eleven city gate and 81 major regulating stations and
miscellaneous related and additional property. The Company believes that its gas
utility properties are adequately maintained and in good operating condition in
all material respects.
Most of PG Energy's gas utility properties are subject to a first
mortgage lien pursuant to the Indenture of Mortgage and Deed of Trust dated as
of March 15, 1946, as supplemented by thirty supplemental indentures from PG
Energy to First Trust of New York, National Association, as Trustee.
Land. As of February 24, 1999, PG Energy owned approximately 44,000 acres
of undeveloped land situated in
northeastern Pennsylvania.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1998, there were no matters submitted to a
vote of security holders of the registrant through the solicitation of proxies
or otherwise.
<PAGE>
PART II
ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock is owned entirely by PEI and is not traded.
PG Energy did not pay any cash dividends on common stock during the years
ended December 31, 1998 and 1997.
Information relating to restrictions on the payment of dividends by PG
Energy is set forth in Note 7 of the Notes to Consolidated Financial Statements
in Item 8 of this Form 10-K.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTRUCTURING OF NATURAL GAS INDUSTRY
PG Energy Inc. ("PG Energy"), a subsidiary of Pennsylvania Enterprises,
Inc. ("PEI"), and PG Energy's wholly-owned subsidiary, Honesdale Gas Company
("Honesdale") (collectively referred to as ("the Company"), are regulated public
utilities engaged in the sale and distribution of natural gas. The natural gas
industry, which historically has included producers, interstate pipelines and
local distribution companies ("LDCs"), is undergoing significant restructuring.
The industry is rapidly progressing from a highly regulated environment to one
in which there is competition, customer choice and only partial regulation. The
same change is also occurring in the electric industry which competes with the
natural gas industry for many of the same energy uses.
The restructuring of the natural gas industry has already involved the
decontrol of the wellhead price of natural gas, and interstate pipelines have
been required by the Federal Energy Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs. These changes in the
operations of the interstate pipelines were designed to enhance competition and
maximize the benefits of wellhead price decontrol.
As a result of actions by FERC, the interstate pipelines now primarily
provide transportation and storage services, and LDCs, such as PG Energy, are
presently responsible for the procurement of competitively-priced gas supplies
and arranging for the appropriate transportation capacity and storage services
with the interstate pipelines. Additionally, in accordance with regulations
promulgated by the Pennsylvania Public Utility Commission (the "PPUC"), PG
Energy currently offers transportation service to certain customers.
Prior to the unbundling of services by the interstate pipelines and those
services being made available to end users as well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PG Energy
charged all its customers bundled rates. These rates included a commodity charge
based on the cost, as approved by FERC, which PG Energy paid the pipelines for
natural gas delivered to the entry point on its distribution system. Except for
the approximately 600 customers currently receiving transportation service, PG
Energy's customers continue to be charged bundled rates as approved by the PPUC,
which include a commodity charge based on the costs prudently incurred by PG
Energy for the purchase of natural gas and for interstate pipeline
transportation capacity and storage services. Customers receiving transportation
service, which accounted for approximately 54% of PG Energy's total gas
deliveries in 1998, are charged rates approved by the PPUC which exclude the
commodity cost that is reflected in the bundled rates charged to other
customers.
Although the regulations promulgated by the PPUC only require LDCs to
offer transportation service to individual customers having an annual
consumption of at least 5,000 thousand cubic feet ("MCF") of natural gas and
groups of not more than ten customers having a combined consumption of at least
5,000 MCF per year, the PPUC has allowed certain LDCs to make transportation
service available to other customers, regardless of their consumption. One of
these companies is Honesdale which, with the approval of the PPUC, began
offering transportation service to its customers effective November 1, 1997.
During 1998, approximately 1,150 of Honesdale's customers received
transportation service and purchased their natural gas supplies from PG Energy
Services Inc. ("Energy Services"), a nonregulated affiliate of the Company and
the only marketer currently selling gas to customers served by Honesdale. PG
Energy is also planning to file tariffs with the PPUC in the near future seeking
approval to make transportation service available to all of its 148,900
customers. However, the actual timing of such filing may be influenced by the
terms of the legislation, as discussed below, which PG Energy currently believes
that Pennsylvania may enact in 1999 requiring that all customers of LDCs have
the right, within the next one to two years, to receive transportation service
and to choose the supplier of their natural gas.
In December, 1996, legislation was enacted in Pennsylvania which provides
all customers of electric utilities in the state with the right to choose the
generator of their electricity. This customer choice, which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending on January 1, 2001. Under this legislation, the
electric utilities in Pennsylvania are required to unbundle generation charges
from the other charges included in their currently bundled rates and customers
can contract with qualified suppliers of their choosing, including the utility
currently serving them, to purchase electric energy at nonregulated rates. The
electric utilities will continue to utilize their transmission and distribution
networks to distribute electricity to their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.
PG Energy believes that Pennsylvania may enact similar legislation with
respect to the natural gas industry in 1999. As currently envisioned, such
legislation would require that PG Energy provide all of its customers with
unbundled transportation service within one to two years. While the rates for
the transportation of natural gas through PG Energy's distribution system and
the storage services offered by PG Energy would continue to be price regulated
by the PPUC, the commodity cost of gas purchased from suppliers other than PG
Energy would not be so regulated. Customers could, however, continue to receive
a bundled sales service from PG Energy which would be subject to price
regulation by the PPUC. Essentially, the legislation would extend the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier other than PG Energy, based on nonregulated market
prices and other considerations.
If Pennsylvania enacts legislation which permits all customers of LDCs to
choose their supplier of natural gas, PG Energy will be faced with significant
competition from marketers for the sale of natural gas to its customers.
However, under current regulations of the PPUC, PG Energy does not realize a
profit or incur any loss with respect to the commodity cost of natural gas.
Moreover, PG Energy would not expect the pending legislation to result in the
bypass of its distribution system by any significant number of customers because
of the nature of its customer base and the cost of any such bypass.
Additionally, based on various provisions of the legislation currently being
considered, PG Energy does not believe that the legislation will result in any
significant amount of transition costs (such as the negotiated buyout of
contracts with interstate pipelines, the recovery of deferred purchased gas
costs or the recovery of regulated assets). Further, PG Energy believes that the
transition costs it would incur in offering choice to all its customers
(including those involving information systems and customer education) would
generally be recoverable through rates or other customer charges. Accordingly,
although it cannot be certain, because the terms of such legislation have not
been finalized and the ultimate effect on PG Energy cannot be determined, PG
Energy does not believe that the enactment of legislation providing for
customers to purchase their natural gas from third parties would have any
material adverse impact on its earnings or financial condition despite the
increased competition to which PG Energy would be subject regarding the sale of
natural gas to its customers.
DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among PEI, PG Energy, American Water Works Company, Inc.
("American") and Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI and PG Energy sold substantially all
of the assets, properties and rights of PG Energy's water utility operations to
Pennsylvania-American on February 16, 1996 (see "Liquidity and Capital Resources
Sale of Water Utility Operations").
In accordance with generally accepted accounting principles, the
Company's consolidated financial statements reflect PG Energy's water utility
operations as "discontinued operations" and the following sections of
Management's Discussion and Analysis generally relate only to the Company's
continuing operations. For additional information regarding the discontinued
operations, see Note 2 of the accompanying Notes to Consolidated Financial
Statements.
<PAGE>
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating revenues for each of the
calendar years ended December 31, 1998, 1997 and 1996:
Percentage of Operating Revenues
-----------------------------------
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- ------- ------------
OPERATING REVENUES ................ 100.0% 100.0% 100.0%
Cost of gas ................... 54.2 58.2 55.0
-------- ------- -------
OPERATING MARGIN .................. 45.8 41.8 45.0
-------- ------- -------
OPERATING EXPENSES:
Operation ..................... 15.7 12.9 15.6
Maintenance ................... 3.0 2.7 3.4
Depreciation .................. 6.1 4.7 4.7
Income taxes .................. 2.7 3.9 4.0
Taxes other than income taxes . 7.0 6.1 6.9
-------- ------- -------
Total operating expenses .. 34.5 30.3 34.6
-------- ------- -------
OPERATING INCOME .................. 11.3 11.5 10.4
OTHER INCOME, NET ................. 0.4 0.1 0.1
INTEREST CHARGES .................. (6.6) (5.2) (4.6)
-------- ------- -------
INCOME FROM CONTINUING OPERATIONS . 5.1 6.4 5.9
LOSS WITH RESPECT TO DISCONTINUED
OPERATIONS .................... -- -- (0.2)
------- ------- -------
NET INCOME ........................ 5.1 6.4 5.7
DIVIDENDS ON PREFERRED STOCK ...... (0.7) (0.7) (1.1) (1)
-------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK 4.4% 5.7% 4.6%
======== ======= =======
(1) None of the dividends on preferred stock was allocated to the
discontinued operations.
<PAGE>
o Year Ended December 31, 1998, Compared With Year Ended December 31, 1997
Operating Revenues. Operating revenues decreased $31.6 million (16.6%)
from $190.6 million for 1997 to $159.0 million for 1998, primarily as a result
of a 3.9 billion cubic feet (17.0%) 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 1998 and colder than
normal temperatures during 1997, as well as lower levels in PG Energy's gas cost
rate (see "-Rate Matters"). The number of heating degree days decreased by 1,202
(18.5%) from 6,498 (103.3% of normal) during 1997 to 5,296 (84.2% of normal)
during 1998.
Cost of Gas. The cost of gas decreased $24.7 million (22.3%) from $110.9
million for 1997 to $86.2 million for 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 $6.9 million (8.6%) from
$79.7 million in 1997 to $72.8 million in 1998, primarily as a result of the
decrease in sales as a result of the warmer weather in 1998 as noted above. As a
percentage of operating revenues, the margin increased from 41.8% in 1997 to
45.8% in 1998 due to the proportionately lower cost of gas during the period.
Other Operating Expenses. Other operating expenses decreased $2.9 million
(5.1%) from $57.7 million for 1997 to $54.8 million for 1998. This decrease was
primarily attributable to a $3.1 million (42.1%) decrease in income taxes from
$7.3 million for 1997 to $4.2 million for 1998 due to a decrease in income
before income taxes (for this purpose, operating income net of interest
charges). Also contributing to this decrease was the effect of the reversal of
$1.9 million of previously expensed other postretirement benefit costs relative
to the period January 1, 1993, through January 15, 1997, recovery of which was
approved by the PPUC over a fifteen year period beginning November 1, 1998, a
$364,000 (7.0%) decrease in maintenance expense and a $483,000 (4.1%) 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 increased amortization of computer software costs and a
$641,000 (7.1%) increase in depreciation expense as a result of additions to
utility plant. As a percentage of operating revenues, other operating expenses
increased from 30.3% during 1997 to 34.5% during 1998, primarily because of the
lower level of operating revenues.
Operating Income. As a result of the above, operating income decreased by
$3.9 million (17.9%) from $22.0 million for 1997 to $18.0 million for 1998, and
decreased as a percentage of total operating revenues for such periods from
11.5% to 11.3%.
Other Income, Net. Other income, net increased $551,000 from $100,000 for
1997 to $651,000 for 1998, largely because of a gain on the sale of land in
June, 1998.
Interest Charges. Interest charges increased by $558,000 (5.6%) from
$10.0 million for 1997 to $10.5 million for 1998. This increase was largely
attributable to a higher level of long-term debt outstanding in 1998.
Income From Continuing Operations. Income from continuing operations
decreased $3.9 million (32.5%) from $12.1 million for 1997 to $8.2 million for
1998. This decrease was largely the result of the matters discussed above,
principally the decrease in operating margin and the increase in interest
charges.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$121,000 (9.2%) from $1.3 million for 1997 to $1.2 million for 1998, primarily
as a result of the repurchase by PG Energy in December 1998 of all its remaining
9% cumulative preferred stock as of December 1, 1998.
Earnings Applicable to Common Stock. The decrease in earnings applicable
to common stock of $3.8 million (35.4%) from $10.8 million for 1997 to $7.0
million for 1998 was primarily the result of the reduced operating margin and
increased interest charges discussed above. These same factors, along with
premiums of $.30 per share during 1998 and discounts of $.23 per share during
1997 on the repurchase of preferred stock, accounted for the decrease in
earnings per share of common stock of $1.75 from $3.49 per share for 1997 to
$1.74 per share for 1998. Also contributing to the decrease in earnings per
share of common stock was the 3.5% increase in the weighted average number of
shares outstanding as a result of the issuance of shares during 1998. (See
Liquidity and Capital Resources - Long-Term Debt and Capital Stock Financings).
o Year Ended December 31, 1997, Compared With Year Ended December 31, 1996
Operating Revenues. Operating revenues increased $30.0 million (18.7%)
from $160.6 million for 1996 to $190.6 million for 1997, primarily as a result
of higher levels in PG Energy's gas cost rate and the effect of the rate
increase granted PG Energy by the PPUC which became effective on January 15,
1997, (see "Rate Matters"). The effect of the increases in rates was partially
offset by a 749,000 cubic feet (2.9%) decrease in deliveries to PG Energy's
residential and commercial heating customers. There was a decrease of 129 (1.9%)
heating degree days from 6,627 (105.3% of normal) during 1996 to 6,498 (103.3%
of normal) during 1997. Operating revenues of Honesdale totaling $3.0 million
from its February 14, 1997, acquisition date through December 31, 1997, also
contributed to the increased operating revenues.
Cost of Gas. The cost of gas increased $22.6 million (25.6%) from $88.3
million for 1996 to $110.9 million for 1997, primarily because of higher levels
in PG Energy's gas cost rate (see "-Rate Matters"). Also contributing to the
increase was $2.0 million of gas costs related to Honesdale from its February
14, 1997, acquisition date through December 31, 1997.
Operating Margin. The operating margin increased $7.4 million (10.2%)
from $72.3 million in 1996 to $79.7 million in 1997, primarily because of the
aforementioned rate increase granted to PG Energy and $1.0 million of operating
margin of Honesdale since its February 14, 1997, acquisition date. As a
percentage of operating revenues, the margin decreased from 45.0% in 1996 to
41.8% in 1997, largely as a result of the proportionately higher ratio of cost
of gas to operating revenues.
Other Operating Expenses. Other operating expenses, including
depreciation and income taxes, increased $2.1 million (3.8%) from $55.6 million
for 1996 to $57.7 million for 1997. As a percentage of operating revenues, total
operating expenses decreased from 34.6% during 1996 to 30.3% during 1997,
largely as a result of the proportionately greater increase in operating
revenues. The increase in other operating expenses was primarily the result of a
$1.4 million (18.1%) increase in depreciation expense attributable to additions
to utility plant and a $629,000 (5.7%) increase in taxes other than income taxes
resulting from a higher level of gross receipts tax because of the increased
sales by PG Energy and the sales by Honesdale from its acquisition date.
Income taxes increased $957,000 (15.0%) from $6.4 million in 1996 to $7.3
million in 1997 due to an increase in income before income taxes (for this
purpose, operating income net of interest charges).
Operating Income. As a result of the above, operating income increased by
$5.2 million (31.4%) from $16.7 million for 1996 to $22.0 million for 1997, and
increased as a percentage of total operating revenues from 10.4% in 1996 to
11.5% in 1997.
Other Income, Net. Other income, net decreased $43,000 (30.1%) from
$143,000 for 1996 to $100,000 for 1997, largely because 1996 included income
from the temporary investment of certain proceeds from the sale of PG Energy's
regulated water utility operations in February, 1996.
Interest Charges. Interest charges increased $2.6 million (35.5%) from
$7.3 million for 1996 to $10.0 million for 1997. This increase was largely
attributable to bank borrowings to finance construction expenditures and for
other working capital needs and the reduction in PG Energy's interest expense in
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 From Continuing Operations. Income from continuing operations
increased $2.6 million (27.3%) from $9.5 million for 1996 to $12.1 million for
1997. This increase was largely the result of the matters discussed above,
principally the increase in operating margin, the effects of which were
partially offset by increased operating expenses and interest charges.
Net Income (Loss). The increase in net income of $3.0 million (32.3%)
from $9.2 million for 1996 to $12.1 million for 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
$418,000 (24.2%) from $1.7 million for 1996 to $1.3 million for 1997, primarily
as a result of the repurchase by PG Energy 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 30,560
shares of the 4.10% cumulative preferred stock in 1997.
Earnings Applicable to common Stock. The increase in earnings applicable
to common stock of $3.4 million (45.5%) from $7.4 million for 1996 to $10.8
million for 1997, as well as the increase in earnings per share of common stock
of $1.80 from $1.69 per share for 1996 (after a $.37 per share charge for
premiums on the repurchase of preferred stock) to $3.49 per share for 1997
(including a $.23 per share discount on the repurchase of preferred stock) were
the result of the higher income from continuing operations and the reduced
dividends on preferred stock, as discussed above, and the absence of any loss
with respect to discontinued operations. The increase in earnings applicable to
common stock also reflected a 8.0% decrease in the weighted average number of
shares outstanding as a result of the repurchase by PG Energy 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 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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's 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 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, 1996, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- ------------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
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
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.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, the Company will incur replacement costs in amounts
that due to the effects of inflation would materially exceed either the original
cost or the accrued depreciation of such property as reflected on its books of
account. However, the cost of such replacement property would be includable in
rate base, and the Company would be entitled to recover depreciation expense and
earn a return thereon, to the extent that its investment in such property was
prudently incurred and the property is used and useful in furnishing public
utility service.
LIQUIDITY AND CAPITAL RESOURCES
Sale of Water Utility Operations
On February 16, 1996, PG Energy sold its regulated water operations and
certain related assets to Pennsylvania-American for $414.3 million, consisting
of $262.1 million in cash and the assumption of $152.2 million of PG Energy's
liabilities, including $141.0 million of its long-term debt. PEI and PG Energy
used the $205.4 million of cash proceeds from the sale, net of $56.7 million of
income taxes, to retire debt, to repurchase stock, for construction expenditures
and for other working capital purposes. In this regard, PG Energy repurchased
2,297,297 shares of its common stock from PEI for an aggregate consideration of
$85.0 million, repaid its $50.0 million term loan due 1996 and all of its then
outstanding bank borrowings on February 16, 1996, and PEI and PG Energy
temporarily invested the balance of the proceeds. A portion of these proceeds
were subsequently used by PG Energy (i) on March 8, 1996, to repay the $30.0
million principal amount of its 10.125% promissory note (the "10.125% Promissory
Note") which was issued to PEI as a common stock dividend on February 16, 1996
(proceeds from the repayment of the 10.125% Promissory Note were used by PEI for
the defeasance of PEI's 10.125% Senior Notes on September 30, 1996) and (ii) to
repurchase 134,359 shares of its 9% cumulative preferred stock for an aggregate
consideration of $14.5 million and 20,330 shares of its 4.10% cumulative
preferred stock for an aggregate consideration of $1.0 million, largely pursuant
to self tender offers conducted during March and April, 1996. Additionally, on
June 17, 1996, PG Energy repurchased 9,408 shares of its 5.75% cumulative
preferred stock (including 800 shares redeemed in accordance with annual sinking
fund provisions) for an aggregate consideration of $838,000.
Liquidity
The primary capital needs of the Company continue to be the funding of
its 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 Company's practice 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 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 $67.0 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 $64.0 million which provide
for borrowings at interest rates generally less than prime and which mature at
various times during 1999 and 2000. Honesdale has a $3.0 million revolving bank
line of credit which provides for borrowing at a fixed rate of 6.75% and which
matures in November, 1999. The Company intends to renew or replace these lines
of credit as they expire. As of February 24, 1999, the Company had $32.6 million
of borrowings outstanding under these bank lines of credit. In addition, as of
February 24, 1999, PG Energy had approximately $9.6 million outstanding under
its borrowing arrangement with 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 that it will be able to raise in a timely manner
such funds as are required for its future construction expenditures,
refinancings and other working capital requirements.
<PAGE>
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. Set forth
below is a summary of such financings consummated since the beginning of 1997,
exclusive of interim bank borrowings.
On September 12, 1997, PG Energy 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 (5.440% as of February 24, 1999). Under the terms of the Term Loan
Agreement, PG Energy can choose interest rate periods of one, two, three or six
months. PG Energy utilized the proceeds from such loan to repay $25.0 million of
its bank borrowings.
On September 30, 1997, PG Energy issued $25.0 million of its 6.92% Senior
Notes due September 30, 2004 (the "6.92% Senior Notes"). The proceeds from the
issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million
of its bank borrowings.
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 its Customer Stock Purchase Plan (the "Customer Plan"). During
1998 PG Energy realized $6.2 million from the issuance of common stock to PEI in
connection with these plans. PG Energy did not issue any shares of its common
stock to PEI in connection with the DRP or the Customer Plan during 1997 because
of the reduction in its capital requirements resulting from the sale of PG
Energy's water utility operations to Pennsylvania-American and because of the
proceeds received from such sale.
Capital Expenditures and Related Financings
Capital expenditures for the construction of utility plant totaled $28.2
million, $30.2 million and $29.2 million during 1998, 1997 and 1996,
respectively. Such expenditures were financed with internally-generated funds
and bank borrowings.
The Company estimates that its capital expenditures will total $18.4
million during 1999, and will approximate $18.0 million in each of the years
2000 and 2001. It is anticipated that such capital 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 December 31, 1998, $68.2 million of PG Energy's long-term debt was
required to be repaid within twelve months. The $68.2 million of long-term debt
includes $51.3 million outstanding under PG Energy's bank lines of credit which
is due at various times during 1999, $10.0 million of PG Energy's 9.23% series
first mortgage bonds which are due September 1, 1999, and $6.9 million of
borrowings from PEI which are due December 31, 1999.
PG Energy intends to finance its current maturities of long-term debt
with internally generated funds and bank borrowings, and by the periodic
issuance of long-term debt and capital stock.
Year 2000 Readiness Disclosure
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.
It is estimated that the total cost of the Company's plan to address year
2000 issues will be approximately $2.0-2.5 million. This amount, which had been
largely expended as of December 31, 1998, includes costs for the purchase of
hardware and software, external contractors and internal resources. The internal
resources, which are estimated to account for approximately $1.0 million of the
total cost, involved the redeployment of existing personnel and did not
represent an incremental cost. In view of the estimated cost and the substantial
progress that has been made to date, management does not anticipate that the
expenditures necessary to carry out the plan to address year 2000 issues 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
replaced 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 modifications
and testing of the customer information system and the upgrading of the
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 make any changes in its contingency planning as the
occasion warrants.
The Company is subject to potential disruptions in its operations as a
result of year 2000 related failures of its critical suppliers and vendors.
Although there is presently no basis for suggesting such situation would occur,
management believes the worst case scenario in such regard might involve the
temporary disruption in the gas service of certain of its customers. To provide
for this and other possible contingencies related to year 2000 issues, the
Company is currently evaluating its existing emergency and disaster recovery
plans. These plans will be modified, as deemed appropriate, based, among other
considerations, on the Company's assessment of the year 2000 compliance of its
critical suppliers and vendors. These plans, as so modified, will attempt to
mitigate, to the extent reasonably possible, the effect of any year 2000 related
failures by a third party. However, the Company is dependent on its suppliers of
natural gas, interstate gas pipelines and utility and telecommunication
companies, over which it has no control, to serve its customers. Any disruption
in service by one of these key suppliers could, depending upon its nature and
extent, have a material adverse effect on the Company's operations.
<PAGE>
Market Risk Disclosures
The Company's primary market risk exposures relate to market prices for
natural gas and changes in long-term interest rates.
While the Company does not utilize derivative commodity instruments for
trading purposes, it does purchase natural gas for periods of more or less than
one year which, depending upon the terms of such contracts, may or may not
provide for an adjustment each month in the cost of gas purchased pursuant
thereto, based on the then current market prices for natural gas. Pursuant to
regulations of the PPUC, the Company is permitted to recover prudently incurred
gas costs from its customers. Accordingly, the associated commodity price risks
are limited.
The Company utilizes long-term debt as a primary source of its capital
and, therefore, is exposed to changes in interest rates. At December 31, 1998,
the Company had fixed-rate long-term debt aggregating $80.0 million. In
addition, the Company had $83.2 million of variable rate long-term debt,
including long-term borrowings under its bank lines of credit, for which the
interest rates are generally set, at the Company's option, for periods of one,
two or three months. If market interest rates were to average 50 basis points
(0.50%) more in 1999 than in 1998, it is estimated that the Company's interest
expense would increase by approximately $300,000. This amount has been
calculated by considering the impact of the hypothetical interest rates on the
Company's variable-rate debt and also the fixed-rate debt that matures in 1999.
In the event of a significant change in interest rates, the Company would take
such action, including the filing of rate increase requests with the PPUC as it
considers necessary, to mitigate the impact of the change. The Company has not
historically employed derivative financial instruments, except for the use, in
one instance, of an interest rate cap.
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 disruptions; industrial, commercial and residential growth in the
service territories of the Company; 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 is subject or
other external factors over which the Company has no control; and general
economic conditions and uncertainties relating to such growth during 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the reports of
independent accountants thereon are presented on pages 25 through 47 of this
Form 10-K.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of PG Energy Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page 49 present fairly, in all
material respects, the financial position of PG Energy Inc., and its subsidiary
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above. The financial statements of PG Energy Inc. for the year ended December
31, 1996, were audited by other independent accountants whose report dated
February 19, 1997, expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 17, 1999
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PG Energy Inc.:
We have audited the statements of income and cash flows of PG Energy Inc. ("PG
Energy"), formerly known as Pennsylvania Gas and Water Company (a Pennsylvania
corporation and wholly-owned subsidiary of Pennsylvania Enterprises, Inc.) for
the year ended December 31, 1996. These financial statements are the
responsibility of PG Energy's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of PG Energy
Inc. for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying
Accounts for the year ended December 31, 1996 (see index of financial
statements) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subject to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 19, 1997
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------------- -------------- ------------
(Thousands of Dollars)
<S> <C> <C> <C>
OPERATING REVENUES .......................... $ 158,951 $ 190,567 $ 160,594
Cost of gas ............................ 86,164 110,905 88,291
----------- ----------- -----------
OPERATING MARGIN ............................ 72,787 79,662 72,303
----------- ----------- -----------
OTHER OPERATING EXPENSES:
Operation .............................. 24,884 24,534 25,070
Maintenance ............................ 4,837 5,201 5,513
Depreciation ........................... 9,627 8,986 7,612
Income taxes ........................... 4,237 7,321 6,364
Taxes other than income taxes .......... 11,174 11,657 11,028
----------- ---------- -----------
Total other operating expenses ..... 54,759 57,699 55,587
----------- ----------- -----------
OPERATING INCOME ............................ 18,028 21,963 16,716
OTHER INCOME, NET ........................... 651 100 143
----------- ---------- -----------
INCOME BEFORE INTEREST CHARGES .............. 18,679 22,063 16,859
----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt .............. 10,204 9,481 6,862
Other interest .......................... 398 700 658
Allowance for borrowed funds used
during construction .................... (94) (231) (177)
----------- ------------ -----------
Total interest charges ............... 10,508 9,950 7,343
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS ........... 8,171 12,113 9,516
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
(Note 2) ............................... -- -- (363)
----------- ---------- -----------
NET INCOME .................................. 8,171 12,113 9,153
DIVIDENDS ON PREFERRED STOCK ................ 1,191 1,312 1,730
----------- ----------- -----------
EARNINGS APPLICABLE TO COMMON STOCK ......... $ 6,980 $ 10,801 $ 7,423
=========== =========== ===========
EARNINGS PER SHARE OF COMMON STOCK:
Continuing operations .................. $ 2.04 $ 3.26 $ 2.16
Discontinued operations ................ -- -- (0.10)
----------- ----------- -----------
Income before discount (premium) on
repurchase of preferred stock .......... 2.04 3.26 2.06
Discount (premium) on repurchase
of preferred stock ..................... (0.30) 0.23 (0.37)
----------- ------------ -----------
Earnings per share of common stock ..... $ 1.74 $ 3.49 $ 1.69
=========== ============ ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,429,597 3,314,155 3,601,072
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1998 1997
---------- ---------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost ............................. $ 376,685 $ 351,106
Accumulated depreciation ..................... (95,735) (88,129)
--------- ---------
280,950 262,977
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................... 3,981 4,459
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents .................... 768 304
Accounts receivable -
Customers ................................. 18,475 23,551
Affiliates, net ........................... -- 63
Others .................................... 269 280
Reserve for uncollectible accounts ........ (1,080) (1,168)
Accrued utility revenues ..................... 11,472 11,680
Materials and supplies, at average cost ...... 2,758 2,716
Gas held by suppliers, at average cost ....... 22,320 21,933
Deferred cost of gas and supplier refunds, net 6,058 6,182
Prepaid income taxes ......................... 1,560 --
Prepaid expenses and other ................... 2,582 1,767
-------- --------
65,182 67,308
-------- --------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible ................ 31,097 30,592
Other ..................................... 8,598 4,415
Unamortized debt expense ..................... 964 1,164
Other ........................................ 25 225
-------- -------
40,684 36,396
-------- -------
TOTAL ASSETS ..................................... $ 390,797 $ 371,140
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1998 1997
---------- ----------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements):
Common shareholder's investment .................. $126,638 $107,425
Preferred stock of PG Energy -
Not subject to mandatory redemption, net ...... 4,831 15,864
Subject to mandatory redemption ............... 240 640
Long-term debt -
Parent ........................................ -- 23,500
Other ......................................... 95,000 106,000
-------- -------
226,709 253,429
-------- -------
CURRENT LIABILITIES:
Current portion of long-term debt -
Parent ........................................ 6,900 --
Other ......................................... 61,348 24,776
Preferred stock subject to repurchase or mandatory
redemption .................................... -- 80
Notes payable .................................... 1,200 2,170
Accounts payable -
Suppliers ..................................... 15,659 14,515
Parent ........................................ 674 199
Affiliates, net ............................... 3 --
Accrued general business and realty taxes ........ 1,464 2,797
Accrued income taxes ............................. -- 4,946
Accrued interest ................................. 1,807 1,844
Accrued natural gas transition costs ............. -- 1,087
Other ............................................ 1,149 1,188
-------- -------
90,204 53,602
-------- -------
DEFERRED CREDITS:
Deferred income taxes ............................ 60,211 52,207
Unamortized investment tax credits ............... 4,424 4,596
Operating reserves ............................... 2,836 2,825
Other ............................................ 6,413 4,481
-------- --------
73,884 64,109
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES ................. $390,797 $371,140
======== ========
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>
Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 8,171 $ 12,113 $ 9,516
Gain on sale of other property (917) - -
Effects of noncash charges to income -
Depreciation 9,703 9,034 7,675
Deferred income taxes, net 2,894 1,863 1,940
Provisions for self insurance 1,050 711 1,042
Other, net 395 1,902 1,390
Changes in working capital, exclusive of cash and current portion of
long-term debt and preferred stock -
Receivables and accrued utility revenues 5,270 (5,220) 46
Gas held by suppliers (387) (1,668) (5,125)
Accounts payable 1,069 (4,425) 215
Deferred cost of gas and supplier refunds, net (829) 14,397 (18,493)
Other current assets and liabilities, net (8,910) 1,526 2,958
Other operating items, net 2,255 (1,809) (5,644)
------ ------- -------
Net cash provided by (used for) continuing operations 19,764 28,424 (4,480)
Net cash used for discontinued operations, principally for the payment
of income taxes - (13,655) (45,173)
------- ------- --------
Net cash provided by (used for) operating activities 19,764 14,769 (49,653)
------- ------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (29,003) (30,971) (29,312)
Proceeds from the sale of other property 985 - -
Proceeds from the sale of discontinued operations - - 261,752
Acquisition of regulated business - (2,019) -
Other, net 225 557 1,078
------- ------ -------
Net cash provided by (used for) investing activities (27,793) (32,433) 233,518
-------- -------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 25,000 49,900
Repurchase of preferred stock (12,124) (3,121) (15,670)
Dividends on preferred and common stock (1,191) (1,312) (35,498)
Issuance of common stock 6,171 - 339
Repurchase of common stock - - (85,008)
Repayment of long-term debt (Note 3) (9,100) (7,900) (68,500)
Net increase (decrease) in bank borrowings 25,155 4,053 (27,723)
Other, net (418) 558 (1,343)
------ ------- ---------
Net cash provided by (used for) financing activities 8,493 17,278 (183,503)
------ ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 464 (386) 362
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 304 690 328
------ ------ -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 768 $ 304 $ 690
====== ====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 10,127 $ 9,395 $ 7,139
========= ======== =======
Income taxes $ 1,757 $ 15,548 $46,483
========= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
December 31,
----------------------------------------
1998 1997
--------------- ---------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
COMMON SHAREHOLDER'S INVESTMENT:
Common stock, no par value
(stated value $10 per share)
Authorized - 15,000,000 shares
Outstanding - 3,494,418 shares and
3,314,155 shares, respectively $ 34,944 $ 33,142
Additional paid-in capital 44,546 32,677
Retained earnings 47,148 41,606
------------ ------------
Total common shareholder's investment 126,638 55.9% 107,425 42.4%
------------ ------------
PREFERRED STOCK, par value $100 per share Authorized - 997,500 shares:
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
48,310 and 49,110 shares outstanding,
respectively 4,831 4,911
9% cumulative preferred, 115,641 shares
outstanding at December 31, 1997, net
of issuance costs - 10,953
------------ -----------
Total preferred stock not subject to 4,831 2.1% 15,864 6.3%
mandatory redemption, net ------------ -----------
Subject to mandatory redemption -
5.75% cumulative preferred, 2,396 and
7,200 shares outstanding, respectively 240 720
Less current redemption requirements - (80)
Total preferred stock subject to mandatory redemption 240 0.1% 640 0.2%
LONG-TERM DEBT:
First mortgage bonds 55,000 55,000
Notes 108,248 99,276
Less current maturities and sinking fund requirements (68,248) (24,776)
---------- --------
Total long-term debt 95,000 41.9% 129,500 51.1%
---------- --------
TOTAL CAPITALIZATION $ 226,709 100.0% $253,429 100.0%
========== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Additional
Common Paid-in Retained
Stock Capital Earnings Total
-------------- ----------------- --------------- ---------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 56,025 $ 94,463 $ 57,868 $ 208,356
Net income for 1996 - - 9,153 9,153
Issuance of common stock 90 249 - 339
Repurchase of common stock (22,973) (62,035) - (85,008)
Premium on repurchase of
preferred stock - - (1,337) (1,337)
Dividends on:
Preferred stock - - (1,730) (1,730)
Common stock - - (33,768) (33,768)
--- --- --- ---
Balance at December 31, 1996 33,142 32,677 30,186 96,005
Net income for 1997 - - 12,113 12,113
Discount on redemption of
preferred stock - - 746 746
Dividends on:
Preferred stock - - (1,312) (1,312)
Common stock - - (127) (127)
--------- --------- ---------- -----------
Balance at December 31, 1997 33,142 32,677 41,606 107,425
Net income for 1998 - - 8,171 8,171
Issuance of common stock 1,802 4,369 - 6,171
Capital contribution by parent - 7,500 - 7,500
Premium on redemption of
preferred stock - - (1,022) (1,022)
Dividends on:
Preferred stock - - (1,191) (1,191)
Common stock - - (416) (416)
------------ ---------- ----------- ------------
Balance at December 31, 1998 $ 34,944 $ 44,546 $ 47,148 $ 126,638
============ ========== =========== ============
</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 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.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult to predict and are beyond the control of the Company.
Therefore, actual amounts could differ from these estimates.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll, administrative
and general costs, and an allowance for funds used during construction.
The allowance for funds used during construction ("AFUDC") is defined as
the net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as a reduction of interest expense (with respect to
the cost of borrowed funds) in the accompanying consolidated statements of
income. AFUDC varies according to changes in the level of construction work in
progress and in the sources and costs of capital. The weighted average rate for
such allowance was approximately 8% in both 1998 and 1997 and 9% in 1996.
The Company provides for depreciation on a straight-line basis. Exclusive
of transportation and work equipment, the Company's annual provision for
depreciation, as related to the average depreciable original cost of utility
plant, was 2.65% in 1998, 2.81% in 1997 and 2.60% in 1996.
When depreciable utility property is retired, the original cost of such
property is removed from the utility plant accounts and is charged, together
with the cost of removal less salvage, to accumulated depreciation. No gain or
loss is recognized in connection with retirements of depreciable utility
property, other than in the case of significant involuntary conversions or
extraordinary retirements.
Revenues and Cost of Gas. The Company bills customers monthly based on
estimated or actual meter readings on cycles that extend throughout the month.
The estimated unbilled amounts from the most recent meter reading dates through
the end of the period being reported on are recorded as accrued revenues.
The Company generally passes on to its customers increases or decreases
in gas costs from those reflected in its tariff charges. In accordance with this
procedure, the Company defers any current under or over-recoveries of gas costs
and collects or refunds such amounts in subsequent periods. The Company had
underrecoveries of gas costs totaling $15.3 million, $17.0 million and $29.6
million as of December 31, 1998, 1997 and 1996, respectively.
Deferred Charges (Regulatory Assets). The Company generally accounts for
and report costs in accordance with the economic effect of rate actions by the
PPUC. To this extent, certain costs are recorded as deferred charges pending
their recovery in rates. These amounts relate to previously-issued orders of the
PPUC and are of a nature which, in the opinion of the Company, will be
recoverable in future rates, based on such rate orders. In addition to deferred
taxes collectible, which represent the probable future rate recovery of the
previously unrecorded deferred taxes primarily relating to certain temporary
differences in the basis of utility plant not previously recorded because of the
regulatory rate practices of the PPUC, the following deferred charges are
included as "Other" regulatory assets as of December 31, 1998 and 1997:
1998 1997
--------------- ------------
(Thousands of Dollars)
Other postretirement benefits $ 2,887 $ 174
Computer software costs 2,007 1,945
Early retirement plan charges 1,961 618
Rate case expense 554 356
Low income usage reduction program 470 432
Extraordinary charges due to flooding 262 348
Other 457 542
-------------- ------------
Total $ 8,598 $ 4,415
============== ============
The Company also records, as deferred charges, the direct financing costs
incurred in connection with the issuance of long-term debt and equitably
amortizes such amounts over the life of the securities.
Cash and Cash Equivalents. For the purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments purchased, which generally have a maturity of three months or less,
to be cash equivalents.
Such instruments are carried at cost, which approximates market value.
<PAGE>
Income Taxes. The Company provides for deferred taxes in accordance with
the provisions of FASB Statement 109. The components of the Company's net
deferred income tax liability relative to continuing operations as of December
31, 1998 and 1997, are shown below:
1998 1997
--------------- -------------
(Thousands of Dollars)
Utility plant basis differences $ 58,922 $ 55,497
Pension benefits 766 341
Deferred charges 629 602
Operating reserves (969) (1,181)
Postretirement benefits (1,230) (700)
FERC Order 636 transition costs - (394)
Other 2,093 (1,958)
------------- ------------
Net deferred income tax liability $ 60,211 $ 52,207
============= ============
The provision for income taxes relative to continuing operations consists
of the following components:
1998 1997 1996
-------- ---------- ------------
(Thousands of Dollars)
Included in operating expenses:
Currently payable -
Federal .............................. $ 960 $ 4,196 $ 3,235
State ................................ 187 1,357 1,361
------- ------- -------
Total currently payable ............ 1,147 5,553 4,596
Deferred, net -
Federal .............................. 2,831 1,844 2,059
State ................................ 431 96 (119)
Total deferred, net ................ 3,262 1,940 1,940
Amortization of investment tax credits .. (172) (172) (172)
Total included in operating expenses 4,237 7,321 6,364
Included in other income, net:
Currently payable -
Federal .............................. 125 33 (59)
State ................................ 40 11 (19)
Total currently payable ............ 165 44 (78)
Deferred, net -
Federal .............................. (280) -- --
State ................................ (89) -- --
Total deferred, net ................ (369) -- --
Total included in other income, net (204) 44 (78)
Total provision for income taxes ... $ 4,033 $ 7,365 $ 6,286
<PAGE>
The total provision for income taxes relative to continuing operations
shown in the accompanying consolidated statements of income differs from the
amount which would be computed by applying the statutory federal income tax rate
to income before income taxes. The following table summarizes the major reasons
for this difference:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Income before income taxes ..................... $ 12,204 $ 19,478 $ 15,802
Tax expense at statutory federal income tax rate $ 4,271 $ 6,817 $ 5,531
Increases (reductions) in taxes resulting from -
State income taxes, net of federal income
tax benefit ............................... 370 952 795
Amortization of investment tax credits ...... (172) (172) (172)
Other, net .................................. (436) (232) 132
Total provision for income taxes ............... $ 4,033 $ 7,365 $ 6,286
</TABLE>
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 has no effect on the Company's financial statements for the
periods ended December 31, 1998.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, FASB Statement 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 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.
(2) DISCONTINUED OPERATIONS
Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended
(the "Agreement"), among PEI, PG Energy, American Water Works Company, Inc.
("American") and Pennsylvania-American Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI and PG Energy sold substantially all
of the assets, properties and rights of PG Energy's water utility operations to
Pennsylvania-American on February 16, 1996. Under the terms of the Agreement,
Pennsylvania-American paid PG Energy $414.3 million consisting of $262.1 million
in cash and the assumption of $152.2 million of PG Energy's liabilities,
including $141.0 million of its long-term debt. PG Energy continued to operate
the water utility business until February 16, 1996. The cash proceeds from the
sale of approximately $205.4 million, net of $56.7 million of income taxes, were
used by PEI and PG Energy to retire debt, to repurchase stock (see Note 4 of
these Notes to Consolidated Financial Statements), for construction expenditures
and for other working capital purposes.
<PAGE>
The sale price reflected a $6.5 million premium over the book value of
the assets sold. However, after transaction costs and the net effect of other
items, the sale resulted in an after tax loss of approximately $6.2 million, net
of the income from the water operations during the phase-out period (which for
financial reporting purposes was April 1, 1995, through February 15, 1996).
The accompanying consolidated financial statements reflect PG Energy's
water utility operations as "discontinued operations." Interest charges relating
to indebtedness of PG Energy were allocated through the date of disposition to
the discontinued operations based on the relationship of the gross water utility
plant that was sold to the total of PG Energy's gross gas and water utility
plant. This is the same method as was utilized by PG Energy and the PPUC in
establishing the revenue requirements of both PG Energy's gas and water utility
operations. None of the dividends on PG Energy's preferred stock nor any of
PEI's interest expense were allocated to the discontinued operations.
(3) RATE MATTERS
Rate Increases. 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.
By Order adopted October 16, 1998, the PPUC approved an overall 4.1%
increase in PG Energy's 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.
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1996, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate Per MCF Increase (Decrease)
-------------------------
Date From To In Annual Revenue
- ---------------------------- ---------- ----------- -------------------
December 1, 1998 $4.25 $4.53 $ 7,100,000
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
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.
<PAGE>
(4) COMMON STOCK
PEI reinstated its Customer Stock Purchase Plan (the "Customer Plan")
effective February 4, 1998. The Customer Plan provides the residential customers
of all of PEI's subsidiaries with a method of purchasing newly-issued shares of
PEI's common stock at a 5% discount from the market price. The net proceeds from
the sale of any such shares of common stock are used for the general corporate
purposes of PEI or made available to PEI's subsidiaries, including PG Energy,
for construction expenditures, refinancings and other working capital
requirements. During 1998, PG Energy realized $1.5 million from the issuance of
its common stock to PEI in connection with the Customer Plan.
PG Energy also obtains funds from the sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
Effective May 9, 1995, PEI suspended the cash investment feature of the DRP and
the 5% discount from the market price on the reinvestment of dividends under the
DRP because of the significant reduction in its capital requirements resulting
from the sale of PG Energy's water utility operations to Pennsylvania-American
and because of the proceeds received from such sale. The cash investment feature
was, however, reinstated effective June 1, 1996. Additionally, from June 14,
1996, through December 31, 1996, PEI temporarily suspended the sale of
newly-issued stock to the DRP as a result of the proceeds received from the sale
of PG Energy's water utility operations, and during that period the DRP obtained
shares of PEI common stock for participants through open market purchases.
Effective January 1, 1997, PEI resumed selling newly-issued stock to the DRP.
Although PEI resumed selling newly-issued stock to the DRP effective
January 1, 1997, PG Energy did not issue any shares of its common stock to PEI
in connection with the DRP during 1997 because of the reduction in its capital
requirements resulting from the sale of PG Energy's water utility operations to
Pennsylvania-American and because of the proceeds received from such sale.
Effective January 30, 1998, PEI reinstated the 5% discount from market price on
the reinvestment of dividends and the supplemental cash investments under the
DRP. During 1998 and 1996, PG Energy realized $4.7 million and $340,000,
respectively, from the issuance of common stock to PEI in connection with the
DRP.
On June 24, 1998, PEI converted $7.5 million of the outstanding loan
balance from PG Energy to a contribution of capital.
On February 16, 1996, PG Energy repurchased 2,297,297 shares of its
common stock from PEI for an aggregate consideration of $85.0 million, with a
portion of the proceeds from the sale of its water utility operations to
Pennsylvania-American.
(5) PREFERRED STOCK
Preferred Stock Subject to Mandatory Redemption. Holders of the 5.75%
cumulative preferred stock have a noncumulative right each year to tender to PG
Energy and to require it to purchase at a per share price not exceeding $100, up
to (a) that number of shares of the 5.75% cumulative preferred stock which can
be acquired for an aggregate purchase price of $80,000 less (b) the number of
such shares which PG Energy may already have purchased during the year at a per
share price of not more than $100. During 1998, 1997 and 1996, PG Energy
repurchased 4,804, 992 and 9,408 shares, respectively, of its 5.75% cumulative
preferred stock (including 800 shares redeemed in each of the years in
accordance with annual sinking fund provisions) for an aggregate consideration
of $444,000 in 1998, $99,000 in 1997 and $838,000 in 1996.
As of December 31, 1998, the sinking fund requirements relative to PG
Energy's 5.75% cumulative preferred stock (the only series of preferred stock
subject to mandatory redemption that was outstanding as of such date) were
$80,000 for each of the years 2000 through 2002. At PG Energy's option, the
5.75% cumulative preferred stock may currently be redeemed at a price of $102.00
per share ($244,392 in the aggregate).
Preferred Stock Not Subject to Mandatory Redemption. During the year
ended December 31, 1996, PG Energy repurchased 134,359 shares of its 9%
cumulative preferred stock, $100 par value, for an aggregate consideration of
$14.5 million, largely pursuant to a self tender offer conducted during March
and April, 1996. On December 1, 1998, PG Energy redeemed the remaining 115,641
outstanding shares of its 9% cumulative preferred stock at a price of $104 per
share, which included a voluntary redemption premium of $4.00 per share
($463,000 in the aggregate), plus accrued dividends.
During the year ended December 31, 1996, PG Energy repurchased 20,330
shares of its 4.10% cumulative preferred stock, $100 par value, for an aggregate
consideration of $1.0 million, largely pursuant to a self tender offer conducted
during March and April, 1996. During the year ended December 31, 1997, PG Energy
repurchased 30,560 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $2.1 million, largely pursuant to a self tender offer
conducted during April and May, 1997. During the year ended December 31, 1998,
PG Energy repurchased 800 shares of its 4.10% cumulative preferred stock for an
aggregate consideration of $53,000, pursuant to unsolicited offers from
shareholders. At PG Energy's option, the 4.10% cumulative preferred stock may
currently be redeemed at a redemption price of $105.50 per share or for an
aggregate redemption price of $5,096,705.
Dividend Information. The dividends on the preferred stock of PG Energy
in each of the three years in the period ended December 31, 1998, were as
follows:
Series 1998 1997 1996
- --------------- --------------- --------------- --------------
(Thousands of Dollars)
4.10% $ 200 $ 228 $ 348
5.75% 36 44 72
9.00% 955 1,040 1,310
Total $ 1,191 $ 1,312 $ 1,730
Dividends on all series of PG Energy's preferred stock are cumulative and
PG Energy may not declare dividends on its common stock if any dividends on
shares of preferred stock then outstanding are in default.
<PAGE>
(6) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1998
and 1997:
1998 1997
------------ ----------
(Thousands of Dollars)
First mortgage bonds -
8.375% Series, due 2002 .......................... $ 30,000 $ 30,000
9.23 % Series, due 1999 .......................... 10,000 10,000
9.34 % Series, due 2019 .......................... 15,000 15,000
55,000 55,000
Notes -
6.92% Senior Notes, due 2004 ..................... 25,000 25,000
Term loan, due 2002 .............................. 25,000 25,000
Bank borrowings, at weighted average interest
rates of 5.99% and 6.11%, respectively (Note 8) 51,348 25,776
Parent ........................................... 6,900 23,500
108,248 99,276
Less current maturities and sinking fund requirements (68,248) (24,776)
Total long-term debt ............................. $ 95,000 $ 129,500
On September 12, 1997, PG Energy 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 plus one-quarter of one percent. Under the terms of the Term
Loan Agreement, PG Energy can choose interest rate periods of one, two, three or
six months. PG Energy utilized the proceeds from such loan to repay $25.0
million of its bank borrowings.
On September 30, 1997, PG Energy issued $25.0 million of its 6.92% Senior
Notes due September 30, 2004 (the "6.92% Senior Notes"). The proceeds from the
issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million
of its bank borrowings.
As of December 31, 1998 and 1997, PG Energy had $6.9 million and $23.5
million, respectively, outstanding under its borrowing arrangement with PEI. The
outstanding borrowings by PG Energy from PEI will be repaid with proceeds from
bank borrowings by PG Energy.
<PAGE>
Maturities and Sinking Fund Requirements. As of December 31, 1998, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
Year Amount
1999 $ 68,248,000 (a)
2000 $ -
2001 $ -
2002 $ 55,000,000 (b)
2003 $ -
(a) Represents PG Energy's 9.23% Series First Mortgage Bonds in the
principal amount of $10.0 million due September 1, 1999, $51.3
million of PG Energy's bank borrowings outstanding as of December
31, 1998, and $6.9 million of borrowings payable to PEI.
(b) Represents the $25.0 million of borrowings outstanding as of
December 31, 1998, under PG Energy's Term Loan Agreement due August
14, 2002, and PG Energy's 8.375% Series First Mortgage Bonds in the
principal amount of $30.0 million due December 1, 2002.
(7) DIVIDEND RESTRICTIONS
The preferred stock provisions of PG Energy's Restated Articles of
Incorporation and certain of the agreements under which PG Energy has issued
long-term debt provide for certain dividend restrictions. As of December 31,
1998, $5,416,000 of the consolidated retained earnings of the Company were
restricted against the payment of cash dividends on common stock under the most
restrictive of these covenants.
(8) BANK NOTES PAYABLE
The Company currently has arrangements for seven revolving bank lines of
credit with an aggregate borrowing capacity of $66.0 million which provide for
borrowings at interest rates generally less than prime and which mature at
various times during 1999 and 2000.
Because of limitations imposed by the terms of PG Energy's preferred
stock, PG Energy is prohibited, without the consent of the holders of a majority
of the outstanding shares of its preferred stock, from issuing more than $12.0
million of unsecured debt due on demand or within one year from issuance. PG
Energy had no borrowings due on demand or within one year from issuance
outstanding as of December 31, 1998.
<PAGE>
Information relating to the Company's bank lines of credit and borrowings
under those lines of credit is set forth below:
As of December 31,
------------------------------
1998 1997 1996
(Thousands of Dollars)
Borrowings under lines of credit
Short-term ............................... $ 1,200 $ 2,170 $10,000
Long-term ................................ 51,348 25,776 38,721
$52,548 $27,946 $48,721
Unused lines of credit
Short-term ............................... $ 1,800 $ 5,830 $ --
Long-term ................................ 11,652 35,724 16,779
$13,452 $41,554 $16,779
Total lines of credit
Prime rate ............................... $ -- $ 1,000 $ --
Less than prime rate ..................... 66,000 68,500 65,500
$66,000 $69,500 $65,500
Short-term bank borrowings
Maximum amount outstanding ............... $ 2,295 $10,000 $10,000
Daily average amount outstanding ......... $ 941 $ 3,740 $ 1,392
Weighted daily average interest rate ..... 6.544% 6.343% 6.241%
Weighted average interest rate at year-end 6.750% 6.536% 6.206%
Range of interest rates .................. 6.025- 5.800- 5.875-
8.500% 8.500% 6.438%
(9) POSTEMPLOYMENT BENEFITS
Substantially all employees of the Company, except those of Honesdale,
are covered by PEI's trusteed, noncontributory, defined benefit pension plan.
Pension benefits are based on years of service and average final salary. The
Company's funding policy is to contribute an amount necessary to provide for
benefits based on service to date, as well as for benefits expected to be earned
in the future by current participants.
In addition to pension benefits, the Company provides certain health care
and life insurance benefits ("other postretirement benefits") for retired
employees. All of the Company's employees, except those of Honesdale, may become
eligible for those benefits if they reach retirement age while working for the
Company. The Company records the cost of retiree health care and life insurance
benefits as a liability over the employees' active service periods instead of on
a benefits-paid basis.
Effective with its January 15, 1997, base rate increase (see Note 3 of
these Notes to Consolidated Financial Statements), PG Energy began funding and
recovering in rates its accumulated benefit obligations with respect to other
postretirement benefits. In addition, the PPUC Order adopted December 19, 1996,
specified that any excess or deficiency in other postretirement benefits costs
over the amount of such costs included in rates be deferred and included in a
future rate filing. As of December 31, 1998, all
other postretirement benefits costs relative to 1998 and prior years, including
$1.9 million of other postretirement benefits costs incurred during the period
January 1, 1993, through January 15, 1997, are being recovered by PG Energy in
its base gas rates which the PPUC approved effective October 17, 1998.
Under the terms of the agreement regarding the sale of PG Energy's water
utility operations to Pennsylvania-American, on February 16, 1996,
Pennsylvania-American assumed the accumulated pension benefit obligations and
the obligation to provide retiree health and life insurance benefits relating to
employees of PG Energy who accepted employment with Pennsylvania-American (the
"Transferred Employees"), as well as the obligation to provide retiree health
care and life insurance benefits to 45% of PG Energy's retired employees as of
that date. In this regard, pension plan assets in an amount equal to the
actuarial present value of accumulated plan benefits relative to the Transferred
Employees, with interest from February 16, 1996, were transferred to the
American pension plan in June, 1996. In addition, other postretirement benefits
plan assets in an amount proportional to the actuarial present value of
accumulated plan benefits relative to the Transferred Employees and 45% of PG
Energy's retired employees as of February 16, 1996, were transferred to trusts
established by Pennsylvania-American in 1997.
In January, 1998, as part of its cost reduction efforts, the Company
offered an Early Retirement Plan (the "1998 ERP") to its 41 active employees who
would be at least 59 years of age or older as of March 31, 1998, and had a
minimum of five years of service as of February 28, 1998. A total of 27
employees elected to accept this offer and retire as of March 1, 1998, resulting
in the recording, as of March 1, 1998, of an additional pension liability of
$1.4 million and an additional other postretirement benefits liability of
$563,000. These liabilities, which reflect increased costs associated with the
1998 ERP, were offset by assets representing the future rate recovery of such
liabilities which was granted by the PPUC in connection with PG Energy's rate
increase that became effective October 17, 1998.
The assumptions used in determining pension and other postretirement
benefit obligations were:
1998 1997 1996
Discount rate 7.00% 7.00% 7.75%
Expected long-term rate of return
on plan assets 9.00% 9.00% 9.00%
Projected increase in future
compensation levels 5.00% 5.00% 5.00%
<PAGE>
The following items were the components of net pension and other
postretirement benefits costs, relative to continuing operations, including
amounts capitalized:
<TABLE>
<CAPTION>
Other
Pension Costs Postretirement Benefits
----------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
---------- ----------- --------- --------- ---------- --------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Present value of benefits earned
during the year $ 845 $ 622 $ 799 $ 261 $ 282 $ 253
Interest cost on projected benefit
obligations 2,965 2,697 2,731 593 673 506
Expected return on plan assets (3,969) (3,444) (3,066) (43) (13) -
Amortization of:
Transition obligation (asset) (215) (215) (215) 314 314 314
Prior service cost 268 133 136 450 - -
Actuarial (gain) loss - (40) - (162) - -
--------- ----------- --------- ---------- ---------- --------
Net benefit cost $ (106) $ (247) $ 385 $ 1,413 $ 1,256 $ 1,073
========= =========== ========= ========== ========== ========
</TABLE>
The following table sets forth the funded status and change in funded
status for the pension and other postretirement benefits plans:
<TABLE>
<CAPTION>
Other
Postretirement
Pension Costs Benefits
----------------------------------------------------
1998 1997 1998 1997
----------- ------------ ------------- -------------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 45,106 $ 39,000 $ 580 $ 169
Actual return on plan assets 4,123 7,321 (2) (12)
Employer contributions 977 1,080 1,167 1,092
Participant contributions - - 66 30
Benefits paid (2,641) (2,295) (663) (699)
----------- ---------- --------- ---------
Fair value of plan assets at end of year 47,565 45,106 1,148 580
----------- ---------- --------- ---------
Change in projected benefit obligation:
Projected benefit obligation at beginning of year 42,384 35,567 9,712 6,944
Service cost 845 622 261 283
Interest cost 2,965 2,697 593 673
Participant contributions - - 66 30
Plan amendments 1,111 2,013 2,981 -
Actuarial (gain)loss 293 3,780 (3,622) 2,481
Benefits paid (2,641) (2,295) (663) (699)
---------- --------- --------- --------
Projected benefit obligation at end of year 44,957 42,384 9,328 9,712
---------- --------- --------- --------
Funded status 2,608 2,722 (8,180) (9,132)
Unrecognized net transition obligation (asset) (1,508) (1,724) 4,394 4,708
Unrecognized prior service cost 4,981 4,138 2,532 -
Unrecognized net actuarial (gain) loss (4,177) (4,315) (2,025) 1,391
---------- --------- --------- ---------
Prepaid (accrued) benefit cost at end of year $ 1,904 $ 821 $ (3,279) $ (3,033)
========== ========= ========= =========
</TABLE>
It was also assumed that the per capita cost of covered health care
benefits would increase at an annual rate of 7 1/2% in 1999 and that this rate
would decrease gradually to 5-1/2% for the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption has a significant effect
on the amounts reported for health care plans. To illustrate, assuming that the
health care cost trend rate changed by one percentage point each year would have
the following impact:
One Percentage Point
Increase Decrease
(Thousands of Dollars)
Effect on total service and
interest cost components $ 36 $ 34
Effect on other postretirement
benefits obligation 371 359
(10) CAPITAL EXPENDITURES
The Company estimates the cost of its 1999 capital expenditure programs
will be of $18.4 million. 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.
(11) 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. PG Energy paid $175,000 to the party
performing the remediation in settlement of a claim for PG Energy's share of
such remediation costs. 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>
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
o Long-term debt. The fair value of long-term debt has been estimated
based on the quoted market price as of the respective dates for the
portion of such debt which is publicly traded and, with respect to the
portion of such debt which is not publicly traded, on the estimated
borrowing rate as of the respective dates for long-term debt of
comparable credit quality with similar terms and maturities.
o Preferred stock subject to mandatory redemption. The fair value of
preferred stock subject to mandatory redemption has been estimated
based on the market value as of the respective dates for preferred
stock of comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of financial instruments at
December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt (including current
portion) $ 156,348 $ 166,313 $ 130,776 $ 136,914
Preferred stock subject to mandatory
redemption (including current
portion) 240 244 720 734
</TABLE>
The Company believes that the regulatory treatment of any excess or
deficiency of fair value relative to the carrying amounts of these items, if
such items were settled at amounts approximating those above, would dictate that
these amounts be used to increase or reduce its rates over a prescribed
amortization period. Accordingly, any settlement would not result in a material
impact on the financial position or the results of operations of the Company.
<PAGE>
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---------------- ----------------- ------------------ ------------------
(Thousands of Dollars, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Operating revenues $ 65,015 $ 25,143 $ 15,223 $ 53,570
Operating income (loss) 8,651 1,211 (468) 8,634
Income (loss) from continuing
operations 5,477 (669) (3,258) 5,430
Net income (loss) 5,477 (669) (3,258) 5,430
Basic earnings (loss) per share of common stock:
Continuing operations 1.65 (.20) (.93) 1.52
Discount (premium) on
repurchase/redemption of
preferred stock - - - (.30)
----------------- -------------- ---------------- ----------------
Earnings (loss) per share of
common stock $ 1.65 $ (.20) $ (.93) $ 1.22
================= ============== ================ ================
QUARTER ENDED
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
----------------- ---------------- ------------------ ------------------
(Thousands of Dollars, Except Per Share Amounts)
Operating revenues $ 79,939 $ 33,229 $ 16,276 $ 61,123
Operating income (loss) 10,864 2,104 (484) 9,479
Income (loss) from continuing
operations 8,421 (622) (3,195) 6,197
Net income (loss) 8,421 (622) (3,195) 6,197
Basic earnings (loss) per share of common stock:
Continuing operations 2.54 (.19) (.96) 1.87
Discount (premium) on
repurchase/redemption of
preferred stock - .24 (.01) -
---------------- ----------------- ----------------- ----------------
Earnings (loss) per share of
common stock $ 2.54 $ .05 $ (.97) $ 1.87
================ ================= ================= ================
</TABLE>
Because of the seasonal nature of the Company gas heating business, there
are substantial variations in operations reported on a quarterly basis.
<PAGE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In its Form 8-K dated May 22, 1997, the Company reported a "Change in
Registrant's Certifying Accountant" for its fiscal year beginning January 1,
1997. Because the Form 8-K dated May 22, 1997, did not include a reported
disagreement on any matter of accounting principles or practices or financial
statement disclosure, no disclosure pursuant to Item 304 of Regulation S-K of
the Commission's Rules and Regulations is required in Item 9.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements, notes to
consolidated financial statements and reports of independent
accountants for PG Energy and its subsidiary are presented in Item
8 of this Form 10-K.
<TABLE>
<CAPTION>
Page
<S> <C> <C> <C> <C> <C> <C>
Report of Independent Accountants on the Consolidated Financial
Statements as of December 31, 1998 and 1997............................................. 25
Report of Independent Accountants on the
Financial Statements as of December 31, 1996............................................ 26
Consolidated Statements of Income for each of the three years
in the period ended December 31, 1998................................................... 27
Consolidated Balance Sheets as of December 31, 1998 and 1997................................ 28
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............................................. 30
Consolidated Statements of Capitalization as of December 31,
1998 and 1997........................................................................... 31
Consolidated Statements of Common Shareholder's Investment
for each of the three years in the period ended December
31, 1998................................................................................ 32
Notes to Consolidated Financial Statements.................................................. 33
2. Financial Statement Schedules
The following consolidated financial statement schedule for PG
Energy and its subsidiary is filed as a part of this Form 10-K.
Schedules not included have been omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1998.................................................... 52
</TABLE>
3. Exhibits
See "Index to Exhibits" located on page 54 for a listing of
all exhibits filed herein or incorporated by reference to a
previously filed registration statement or report with the
Securities and Exchange Commission.
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K - continued
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
(c) Executive Compensation Plans and Arrangements
The following listing includes the Company's executive compensation plans
and arrangements in effect as of December 31, 1998:
Exhibit
Number
10-23 Form of Change in Control Agreement between PEI and certain of
its Officers -- filed as Exhibit 10-34 to PG Energy's Annual
Report on Form 10-K for 1989, File No. 1-3490.
10-24 First Amendment to Form of Change in Control Agreement, dated as
of May 24, 1995, between PEI and certain of its Officers --
filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for
1995, File No. 0-7812.
10-25 Agreement, dated as of March 15, 1991, by and between PEI, PG
Energy and Robert L. Jones -- filed as Exhibit No. 10-38 to PG
Energy's Annual Report on Form 10-K for 1990, File No. 1-3490.
10-26 Employment Agreement effective September 1, 1995, between PEI
and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1995,
File No. 0-7812.
10-27 Supplemental Retirement Agreement, dated as of December 23,
1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-17
to PEI's Common Stock Form S-2, Registration No. 33-43382.
10-28 First Amendment to the Supplemental Retirement Agreement, dated
as of September 1, 1994, between PEI and Dean T. Casaday --
filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for
1994, File No. 0-7812.
10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan,
effective June 3, 1992 -- filed as Exhibit A to PEI's
1993 definitive Proxy Statement, File No. 0-7812.
10-30 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.
10-31 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.
<PAGE>
Exhibit
Number
10-32 Pennsylvania Enterprises, Inc. Stock Incentive Plan,
effective May 14, 1997 -- filed as Exhibit A to PEI's
1997 definitive Proxy Statement, File No. 0-7812.
10-33 Employment Agreement dated as of August 28, 1996, by and among
PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to
PEI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No.
0-7812.
10-34 Amended Employment Agreement dated as of May 6, 1998, by and
among PEI, PG Energy 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.
10-35 Director Deferred Compensation Plan dated as of April 23, 1997
-- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, File No. 0-7812.
10-36 First Amendment to the Director Deferred Compensation Plan,
amended and restated effective as of November 19, 1997, filed as
Exhibit 10-40 to PEI's Annual Report on Form 10-K for 1997, File
No. 0-7812.
10-37 1995 Directors' Stock Compensation Plan, effective
January 18, 1995 -- filed as Exhibit A to PEI's 1995
definitive Proxy Statement, File No. 0-7812.
10-38 First Amendment to the 1995 Directors' Stock Compensation Plan,
amended and restated effective as of November 19, 1997 -- filed
as Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1997,
File No. 0-7812.
10-39 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.
10-40 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.
10-41 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.
10-42 Director Retirement Plan, effective as of January 1, 1999 --
filed as Exhibit 10-42 to PEI's Annual Report
on Form 10-K for 1998, File No. 0-7812.
(d) Statements Excluded from Annual Report to Shareholders Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PG ENERGY INC.
(Registrant)
Date: March 1, 1999 By: /s/ Thomas F. Karam
Thomas F. Karam
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 1, 1999 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C>
/s/ Ronald W. Simms Chairman of the Board of Directors March 1, 1999
Ronald W. Simms
/s/ William D. Davis Vice Chairman of the Board of Directors March 1, 1999
William D. Davis
/s/ Thomas F. Karam Director, President and Chief Executive Officer March 1, 1999
Thomas F. Karam
/s/ Robert J. Keating Director March 1, 1999
Robert J. Keating
/s/ John D. McCarthy Director March 1, 1999
John D. McCarthy
/s/ John D. McCarthy, Jr. Director March 1, 1999
John D. McCarthy, Jr.
/s/ Kenneth M. Pollock Director March 1, 1999
Kenneth M. Pollock
/s/ Richard A. Rose, Jr. Director March 1, 1999
Richard A. Rose, Jr.
/s/ James A. Ross Director March 1, 1999
James A. Ross
</TABLE>
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number
(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2-1 Asset Purchase Agreement dated as of April 26, 1995, among
PEI, PG Energy, American Water Works Company, Inc., and
Pennsylvania-American Water Company -- filed as Exhibit 2-1 to
PG Energy's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, File No. 1-3490.
(3) Articles of Incorporation and By-Laws:
3-1 Restated Articles of Incorporation, as amended -- filed as
Exhibit 3-1 to PG Energy's Annual Report on
form 10-K for 1995, File No. 1-3490.
3-2 By-Laws of PG Energy, as amended and restated on January 20,
1999 -- filed herewith.
(4) Instruments Defining the Rights of Security Holders, Including Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15,
1946, between Scranton-Spring Brook Water Service Company (now
PG Energy) and First Trust of New York, National Association,
as Successor Trustee to Morgan Guaranty Trust Company of New
York -- filed as Exhibit 2(c) to PG Energy's Bond Form S-7,
Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952
-- filed as Exhibit 2(d) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 --
filed as Exhibit 2(e) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958
-- filed as Exhibit 2(f) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960
-- filed as Exhibit 2(g) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15,
1961 -- filed as Exhibit 2(h) to PG Energy's
Bond Form S-7, Registration No. 2-55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15,
1963 -- filed as Exhibit 2(i) to PG Energy's
Bond Form S-7, Registration No. 2-55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966
-- filed as Exhibit 2(j) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
<PAGE>
Exhibit
Number
4-9 Seventeenth Supplemental Indenture, dated as of October 15,
1967 -- filed as Exhibit 2(k) to PG Energy's
Bond Form S-7, Registration No. 2-55419.
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970
-- filed as Exhibit 2(1) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972
-- filed as Exhibit 2(m) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976
-- filed as Exhibit 2(n) to PG Energy's Bond
Form S-7, Registration No. 2-55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1,
1976 -- filed as Exhibit 4-16 to PG Energy's
Annual Report on Form 10-K for 1982, File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15,
1989 -- filed as Exhibit 4-22 to PG Energy's
Annual Report on Form 10-K for 1989, File No. 1-3490.
4-15 Twenty-third Supplemental Indenture, dated as of August 15,
1989 -- filed as Exhibit 4-23 to PG Energy's
Annual Report on Form 10-K for 1989, File No. 1-3490.
4-16 Twenty-fourth Supplemental Indenture, dated as of
September 1, 1991 -- filed as Exhibit 4-3 to PEI's
Common Stock Form S-2, Registration No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1,
1992 -- filed as Exhibit 4-1 to PG Energy's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1992, File
No. 1-3490.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1,
1992 -- filed as Exhibit 4-20 to PG Energy's
Bond Form S-2, Registration No.33-54278.
4-19 Twenty-seventh Supplemental Indenture, dated as of
December 1, 1992 -- filed as Exhibit 4-19 to PG
Energy's Annual Report on Form 10-K for 1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of
December 1, 1993 -- filed as Exhibit 4-20 to PG
Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1,
1994 -- filed as Exhibit 4-21 to PG Energy's
Annual Report on Form 10-K for 1994, File No. 1-3490.
4-22 Thirtieth Supplemental Indenture, dated as of December 1,
1995 -- filed as Exhibit 4-22 to PG Energy's
Annual Report on Form 10-K for 1995, File No. 1-3490.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh,
Eighth, Eleventh and Thirteenth Supplemental
Indentures merely convey additional properties to
the Trustee.
Exhibit
Number
(10) Material Contracts:
10-1 Service Agreement for transportation service under Rate
Schedule FT, dated February 1, 1992, by and between PG Energy
and Transcontinental Gas Pipe Line Corporation -- filed as
Exhibit 10-4 to PG Energy's Annual Report on Form 10-K for
1991, File No. 1-3490.
10-2 Service Agreement for storage service under Rate Schedule
SS-2, dated April 1, 1990, between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit
10-8 to PEI's Common Stock Form S-2, Registration No.
33-43382.
10-3 Service Agreement for sales service under Rate Schedule FS,
dated August 1, 1991, between PG Energy and Transcontinental
Gas Pipe Line Corporation -- filed as Exhibit 10-6 to PG
Energy's Annual Report on Form 10-K for 1991, File No. 1-3490.
10-4 Service Agreement for transportation service under Rate
Schedule FT, dated August 1, 1991, between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit
10-10 to PEI's Common Stock Form S-2, Registration No.
33-43382.
10-5 Service Agreement for storage service under Rate Schedule LSS,
dated October 1, 1993, by and between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit
10-7 to PG Energy's Annual Report on Form 10-K for 1993, File
No. 1-3490.
10-6 Service Agreement for storage service under Rate Schedule GSS,
dated October 1, 1993, by and between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit
10-8 to PG Energy's Annual Report on Form 10-K for 1993, File
No. 1-3490.
10-7 Service Agreement for transportation service under Rate
Schedule FT, dated April 1, 1995, by and between PG Energy and
Transcontinental Gas Pipe Line Corporation -- filed as Exhibit
10-1 to PG Energy's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995, File No. 1-3490.
10-8 Service Agreement for transportation service under Rate
Schedule FTPO, dated July 10, 1997, effective November 1,
1997, by and between PG Energy and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-10 to PG Energy's
Annual Report on Form 10-K for 1997, File No. 1-3490.
10-9 Service Agreement for transportation service under Rate
Schedule FTS, dated November 1, 1993, by and between PG Energy
and Columbia Gas Transmission Corporation -- filed as Exhibit
10-9 to PG Energy's Annual Report on Form 10-K for 1993, File
No. 1-3490.
10-10 Service Agreement for transportation service under Rate
Schedule SST, dated November 1, 1993, by and between PG Energy
and Columbia Gas Transmission Corporation -- filed as Exhibit
10-10 to PG Energy's Annual Report on Form 10-K for 1993, File
No. 1-3490.
Exhibit
Number
10-11 Service Agreement for storage service under Rate Schedule FSS,
dated November 1, 1993, by and between PG Energy and Columbia
Gas Transmission Corporation -- filed as Exhibit 10-11 to PG
Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate
Schedule FTS-1, dated November 1, 1993, by and between PG
Energy and Columbia Gulf Transmission Company -- filed as
Exhibit 10-12 to PG Energy's Annual Report on Form 10-K for
1993, File No. 1-3490.
10-13 Service Agreement (Contract No. 946) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by
and between PG Energy and Tennessee Gas Pipeline Company --
filed as Exhibit 10-1 to PG Energy's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, File No.
1-3490.
10-14 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by
and between PG Energy and Tennessee Gas Pipeline Company --
filed as Exhibit 10-2 to PG Energy's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, File No.
1-3490.
10-15 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by
and between PG Energy and Tennessee Gas Pipeline Company --
filed as Exhibit 10-3 to PG Energy's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, File No.
1-3490.
10-16 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by
and between PG Energy and Tennessee Gas Pipeline Company --
filed as Exhibit 10-4 to PG Energy's Quarterly Report on Form
10-Q for the quarter ended September 30, 1993, File No.
1-3490.
10-17 Service Agreement (Contract No. 2289) for storage service
under Rate Schedule FS, dated September 1, 1993, by and
between PG Energy and Tennessee Gas Pipeline Company -- filed
as Exhibit 10-5 to PG Energy's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, File No. 1-3490.
10-18 Service Agreement for storage service, dated April 15, 1997,
effective November 1, 1997, by and between PG Energy and New
York State Electric & Gas Corporation -- filed as Exhibit
10-22 to PG Energy's Annual Report on Form 10-K for 1997, File
No. 1-3490.
10-19 Service Agreement for transportation service under Rate
Schedule FT, dated April 30, 1997, effective November 1, 1997,
by and between PG Energy and CNG Transmission Corporation --
filed as Exhibit 10-23 to PG Energy's Annual Report on Form
10-K for 1997, File No. 1-3490.
10-20 Bond Purchase Agreement, dated September 1, 1989, relating to
PG Energy's First Mortgage Bonds 9.23% Series due 1999 and
First Mortgage Bonds 9.34% Series due 2019 among Allstate Life
Insurance Company, Allstate Life Insurance Company of New York
and PG Energy -- filed as Exhibit 10-33 to PG Energy's Annual
Report on Form 10-K for 1989, File No. 1-3490.
Exhibit
Number
10-21 Term Loan Agreement dated August 14, 1997, among PG Energy,
the Banks parties thereto and PNC Bank, National Association,
in its capacity as Agent for the Banks -- filed as Exhibit
10-25 to PG Energy's Annual Report on Form 10-K for 1997, File
No. 1-3490.
10-22 6.92% Senior Notes Purchase Agreement, dated September 30,
1997, between PG Energy and the Purchasers -- filed as Exhibit
10-26 to PG Energy's Annual Report on Form 10-K for 1997, File
No. 1-3490.
10-23 Form of Change in Control Agreement between PEI and certain
of its Officers -- filed as Exhibit 10-34 to
PG Energy's Annual Report on Form 10-K for 1989, File No.
1-3490.
10-24 First Amendment to Form of Change in Control Agreement, dated
as of May 24, 1995, between PEI and certain of its Officers --
filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for
1995, File No. 0-7812.
10-25 Agreement, dated as of March 15, 1991, by and between
PEI, PG Energy and Robert L. Jones -- filed as
Exhibit 10-38 to PG Energy's Annual Report on Form 10-K for
1990, File No. 1-3490.
10-26 Employment Agreement effective September 1, 1995, between PEI
and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1995, File No. 0-7812.
10-27 Supplemental Retirement Agreement, dated as of December
23, 1991, between PEI and Dean T. Casaday --
filed as Exhibit 10-17 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-28 First Amendment to the Supplemental Retirement Agreement,
dated as of September 1, 1994, between PEI and Dean T. Casaday
-- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K
for 1994, File No. 0-7812.
10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan,
effective June 3, 1992 -- filed as Exhibit A to
PEI's 1993 definitive Proxy Statement, File No. 0-7812.
10-30 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.
10-31 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.
10-32 Pennsylvania Enterprises, Inc. Stock Incentive Plan,
effective May 14, 1997 -- filed as Exhibit A to
PEI's 1997 definitive Proxy Statement, File No. 0-7812.
Exhibit
Number
10-33 Employment Agreement dated as of August 28, 1996, by and among
PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to
PEI's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, File No. 0-7812.
10-34 Amended Employment Agreement dated as of May 6, 1998, by and
among PEI, PG Energy 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.
10-35 Director Deferred Compensation Plan dated as of April 23, 1997
-- filed as Exhibit 10-1 to PEI's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, File No. 0-7812.
10-36 First Amendment to the Director Deferred Compensation Plan,
amended and restated effective as of November 19, 1997 --
filed as Exhibit 10-40 to PEI's Annual Report on Form 10-K for
1997, File No. 0-7812.
10-37 1995 Directors' Stock Compensation Plan, effective January
18, 1995 -- filed as Exhibit A to PEI's 1995
definitive Proxy Statement, File No. 0-7812.
10-38 First Amendment to the 1995 Directors' Stock Compensation
Plan, amended and restated effective as of November 19, 1997
-- filed as Exhibit 10-42 to PEI's Annual Report on Form 10-K
for 1997, File No. 0-7812.
10-39 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.
10-40 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.
10-41 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.
10-42 Director Retirement Plan, effective as of January 1, 1999
-- filed as Exhibit 10-42 to PEI's Annual
Report on Form 10-K for 1998, File No. 0-7812.
(21) Subsidiaries of the Registrant:
21-1 Subsidiaries of the Registrant -- filed herewith.
(27) Financial Data Schedule:
27-1 Financial Data Schedule -- filed herewith.
<PAGE>
<TABLE>
<CAPTION>
PG ENERGY INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
----------- -------- --------- ---------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1998 ............................. $1,168 $1,947 $ -- $2,035(a) $1,080
Year ended December 31, 1997 ............................. $1,140 $2,112 $ 4 $2,088(a) $1,168
Year ended December 31, 1996 ............................. $ 781 $2,015 $ -- $1,656(a) $1,140
Shown as operating reserves on the consolidated balance sheets:
Insurance -
Year ended December 31, 1998 ........................... $2,825 $1,050 $ -- $1,039(b) $2,836
Year ended December 31, 1997 ........................... $3,086 $ 711 $ -- $ 972(b) $2,825
Year ended December 31, 1996 ........................... $3,709 $1,042 $ -- $1,665(b) $3,086
</TABLE>
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written
off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.
PG ENERGY INC.
B Y L A W S
------------
ARTICLE I
STOCKHOLDERS
Section 1. Place of Holding Meetings. Meetings of stockholders
shall be held within the State of Pennsylvania, and, unless otherwise determined
by the Board of Directors, all meetings of the stockholders shall be held at the
office of the Company.
Section 2. Voting.
(a) Voting Rights of Stockholders. - Unless otherwise provided
in the articles, every stockholder of the Company shall be
entitled to one vote for every share standing in the name
of the stockholder on the books of the Company; provided,
however, that in all elections for directors such
stockholders may cast the whole number of his votes for one
candidate or distribute them upon two or more candidates as
he may prefer.
(b) Voting and Other Action by Proxy.
(1) Every stockholder entitled to vote at a meeting of
stockholders may authorize another person to act for
the stockholder by proxy.
(2) The presence of, or vote or other action at a
meeting of stockholders by a proxy of a stockholder
shall constitute the presence of, or vote or action
by the stockholder.
(3) Where two or more proxies of a stockholder are
present, the Company shall, unless otherwise
expressly provided in the proxy, accept, as the vote
of all shares represented thereby the vote cast by a
majority of them and, if a majority of the proxies
cannot agree whether the shares represented shall be
voted or upon the manner of voting the shares, the
voting of the shares shall be divided equally among
those persons.
(c) Execution and Filing. - Every proxy shall be executed in
writing by the stockholder or by the duly authorized
attorney-in-fact of stockholder and filed with the
Secretary of the Company. A telegram, telex, cablegram,
datagram or similar transmission from a stockholder or
attorney-in-fact, or a photographic, facsimile or similar
reproduction of a writing executed by a stockholder or
attorney-in-fact:
(1) may be treated as properly executed for purposes of
this subsection; and
<PAGE>
(2) shall be so treated if it sets forth a confidential
and unique identification number or other mark
furnished by the Company to the stockholder for the
purposes of a particular meeting or transaction.
(d) Revocation. A proxy, unless coupled with an interest, shall
be revocable at will, notwithstanding any other agreement
or any provision in the proxy to the contrary, but the
revocation of a proxy shall not be effective until written
notice thereof has been given to the Secretary of the
Company. An unrevoked proxy shall not be valid after three
years from the date of its execution unless a longer time
is expressly provided therein.
A proxy shall not be revoked by the death or incapacity of
the maker unless, before the vote is counted or the
authority is exercised, written notice of the death or
incapacity is given to the Secretary of the Company.
(e) Expenses. The Company shall pay the reasonable expenses of
solicitation of votes, proxies or consents of stockholders
by or on behalf of the Board of Directors or its nominees
for election to the Board, including solicitation by
professional proxy solicitors and otherwise.
(f) Voting by Fiduciaries and Pledgees. Shares of the Company
standing in the name of a trustee or other fiduciary and
shares held by an assignee for the benefit of creditors or
by a receiver may be voted by the trustee, fiduciary,
assignee or receiver. A stockholder whose shares are
pledged shall be entitled to vote the shares until the
shares have been transferred into the name of the pledgee,
or a nominee of the pledgee, but nothing in this section
shall affect the validity of a proxy given to a pledgee or
nominee.
(g) Voting by Joint Holders of Shares. Where shares of the
Company are held jointly or as tenants in common by two or
more persons, as fiduciaries or otherwise:
(1) if only one or more of such persons is present in
person or by proxy, all of the shares standing in
the names of such persons shall be deemed to be
represented for the purpose of determining a quorum
and the Company shall accept as the vote of all the
shares the vote cast by a joint owner or a majority
of them; and
(2) if the persons are equally divided upon whether the
shares held by them shall be voted or upon the
manner of voting the shares, the voting of the
shares shall be divided equally among the persons
without prejudice to the rights of the joint owners
or the beneficial owners thereof among themselves.
(3) However, if there has been filed with the Secretary
of the Company a copy, certified by an attorney at
law to be correct, of the relevant portions of the
agreement under which the shares are held or the
instrument by which the trust or estate was created
or the order of court appointing them or of an order
of court directing the voting of the shares, the
persons specified as having such voting power in the
document latest in date of operative effect so
filed, and only those persons, shall be entitled to
vote the shares but only in accordance therewith.
(h) Voting by Corporations. Any corporation that is a
stockholder of the Company may vote at meetings of
stockholders of this Company by any of its officers or
agents, or by proxy appointed by any officer or agent,
unless some other person, by resolution of the Board of
Directors of the other corporation or a provision of its
articles or bylaws, a copy of which resolution or provision
certified to be correct by one of its officers has been
filed with the Secretary of this Company, is appointed its
general or special proxy in which case that person shall be
entitled to vote the shares.
Section 3. Quorum. Any number of stockholders together holding at
least a majority of the stock issued and outstanding of the class or classes
entitled to vote, who shall be present in person or represented by proxy at any
meeting (other than an adjourned meeting as specified in Article I, Section 8,
herein) duly called, shall constitute a quorum for the transaction of business,
except as may be otherwise provided by law. The stockholders present at a duly
organized meeting can continue to do business until adjournment notwithstanding
the withdrawal of enough shareholders to leave less than a quorum.
Section 4. Adjournment of Meetings. If less than a quorum shall be
in attendance at the time for which the meeting shall have been called, the
meeting may be adjourned from time to time by a majority vote of the
stockholders present or represented, without any notice other than an
announcement at the meeting, until a quorum shall attend. Any meeting at which a
quorum is present may also be adjourned, in like manner, for such time, or upon
such call, as may be determined by vote.
Section 5. Annual Election of Directors. The Board of Directors
may fix and designate the date and time of the Annual Meeting of Stockholders
for the election of directors and the transaction of other business. If no such
date and time is fixed and designated by the Board, the meeting for any calendar
year shall be held on the second Wednesday in May at an hour to be named in the
notice. At each Annual Meeting, the stockholders entitled to vote shall, as
provided in Section 2 of this Article, by ballot, elect a Board of Directors,
and they may transact such other corporate business as shall come before the
meeting. The candidates receiving the highest number of votes from each class or
group of classes, if any, entitled to elect directors separately up to the
number of directors to be elected by the class or group of classes shall be
elected. If at any meeting of stockholders, directors of more than one class are
to be elected, each class of directors shall be elected in a separate election.
Section 6: Special Meetings. How Called. Special meetings of the
stockholders for any purpose or purposes, may be called at any time by the
Board, upon written request delivered to the Secretary of the Company. In
addition, an "interested stockholder" (as defined in section 2553 of the
Pennsylvania Business Corporation Law as it may from time to time be amended)
may, upon written request delivered to the Secretary of the Company, call a
special meeting for the purpose of approving a business combination under either
subsection (3) or (4) of section 2555. Any request for a special meeting of
stockholders shall state the purpose or purposes of the proposed meeting. Upon
receipt of any such request, it shall be the duty of the Secretary to give
notice, in a manner consistent with these Bylaws, of a special meeting of the
stockholders to be held at such time as the Secretary may fix, which time may
not be, if the meeting is called pursuant to a statutory right, more than sixty
(60) days after receipt of the request. If the Secretary shall neglect or refuse
to fix the date of the meeting and give notice thereof, the person or persons
calling the meeting may do so. Business transacted at any special meeting shall
be confined to the business stated in the notice.
Section 7. Manner of Voting at Stockholders' Meetings. At all
meetings of stockholders, all questions, except the question of an amendment to
the Bylaws, and the election of directors, and all such other questions, the
manner of deciding which is especially regulated by statute, shall be determined
by a majority vote of the stockholders entitled to vote present in person or
represented by proxy; provided, however, that any qualified voter may demand a
stock vote, and in that case, such stock vote shall immediately be taken.
Section 8. Notice of Stockholders' Meetings. Written notice of
every meeting of the stockholders stating the place, the date and hour thereof
and the matters to be acted on at such meeting, shall be given in a manner
consistent with the applicable provisions of section 14 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder, or
any successor act or regulation (the "Exchange Act"), by, or at the direction
of, the Secretary of the Company or, in the absence of the Secretary of the
Company any Assistant Secretary of the Company, at least twenty (20) days prior
to the day named for a meeting, to each stockholder entitled to vote thereat on
the date fixed as a record date in accordance with these Bylaws or, if no record
date be fixed, then of record at the close of business on the 50th day next
preceding the day of the meeting, at such address as appears on the transfer
books of the Company. Any notice of any meeting of stockholders shall state
that, for purposes of any meeting that has been previously adjourned for one or
more periods aggregating at least fifteen (15) days because of an absence of a
quorum, the stockholders entitled to vote who attend such a meeting, although
less than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall
nevertheless constitute a quorum for the purpose of acting upon any matter set
forth in the original notice of the meeting that was so adjourned. Notice or
other communications need not be sent to any stockholder with whom the Company
has been unable to communicate for more than twenty-four (24) consecutive months
because communications to the stockholder are returned unclaimed or the
stockholder has otherwise failed to provide the Company with a current address.
Whenever the stockholder provides the Company with a current address, the
Company shall commence sending notices and other communications to the
stockholder in the same manner as to the other stockholders.
Section 9. Unanimous Written Consent. Any action required or
permitted to be taken at a meeting of the stockholders or of a class of
stockholders may be taken without a meeting if, prior or subsequent to the
action, a consent or consents thereto in writing, setting forth the action so
taken, shall be signed by all of the stockholders who would be entitled to vote
at a meeting for such purpose and filed with the Secretary.
Except as otherwise provided in Article V, Section 5 of these
Bylaws, the record date for determining stockholders entitled to express consent
or dissent to action in writing without a meeting, when prior action by the
Board of Directors is not necessary, shall be at the close of business on the
day on which the first written consent or dissent is filed with the Secretary.
If prior action by the Board of Directors is necessary, the record date for
determining such stockholders shall be at the close of business on the day on
which the Board adopts the resolution relating to such action.
ARTICLE II
DIRECTORS
Section 1. First Meeting. The newly elected directors may hold
their first meeting for the purpose of organization and the transaction of
business, if a quorum be present, immediately after the Annual Meeting of
Stockholders, or the time and place of such meeting may be fixed by consent in
writing of all the directors.
Section 2. Election of Officers. At such meeting the directors
shall elect a President, one or more Vice Presidents, a Treasurer and a
Secretary, who need not be directors. The directors may also elect such other
officers as provided in Article III, Section 1. of these Bylaws. Such officers
shall hold office until the next annual election of officers and until their
successors are elected and qualify, unless removed by the Board of Directors as
provided in Section 8 of Article III of these Bylaws.
Section 3. Regular Meetings. Regular meetings of the
directors may be held without notice at such places and
times as shall be determined from time to time by resolution of the directors.
Section 4. Special Meetings. How called. Notice. Special
meetings of the Board may be called by either the President, the Secretary,
the Chairman of the Executive Committee or by the Secretary pursuant to the
written request of any two directors, upon forty-eight (48) hours' notice
afforded by either telephone, telegraph, facsimile or personal notice, or
upon three (3) days' notice afforded by mail.
Section 4A. Chairman of the Board of Directors. The Chairman of
the Board of Directors shall be a member of the Board of Directors. He shall
preside as Chairman at all meetings of the stockholders and of the Board of
Directors, and shall perform such other duties as are specified in these Bylaws
or as are usually performed by a Chairman of the Board of Directors, or as from
time to time shall be assigned to him by the Board of Directors. In the absence
of, or at the request of, the Chairman of the Board of Directors, the Board of
Directors is authorized to designate a Chairman for the Annual Meeting or
special meetings.
Section 5. Number and Quorum. The number of directors shall be not
less than three (3) nor more than fifteen (15). Within such limits, the number
of directors may be increased or decreased by the Board of Directors from time
to time without a vote of the stockholders. The directors shall be elected by
the stockholders, at the Annual Meeting of stockholders, in each year, to hold
office for the term of one year and until their successors are chosen. A
majority of the directors in office shall constitute a quorum for the
transaction of business. Directors need not be stockholders.
Section 6. Place of Meeting. The directors may hold their meetings
and have one or more offices, and keep the books of the Company, outside the
State of Pennsylvania, at any office or offices of the Company, or at any other
place, as they may from time to time by resolution determine.
Section 7. Powers of Directors. The Board of Directors shall have
all the necessary powers for the management of the business of the Company, and
subject to the restrictions imposed by law, or by these Bylaws, may exercise all
the powers of the Corporation.
Section 8. Vacancies. Vacancies occurring in the membership of the
Board of Directors, from whatever cause arising, shall be filled by a majority
vote of the remaining directors, and in case of any increase in the number of
directors, the additional directors authorized by such increase shall be elected
by a majority vote of the directors in office, although less than a quorum.
Section 9. Removal of Directors. Any one or more of the directors
may be removed, either with or without cause, at any time, by a majority vote of
the stockholders entitled to vote at any regular or special meeting. The
successor or successors of any director or directors so removed shall be elected
by the remaining directors.
Section 10. Compensation of Directors. Directors and members of
any committee of the Board of Directors, except full-time officers and employees
of the Company, shall be entitled to such reasonable compensation for their
services as directors and members of any such committee as shall be fixed from
time to time by resolution of the Board of Directors, and shall also be entitled
to reimbursement for any reasonable expenses incurred in attending such
meetings. The compensation of directors may be paid on such basis as is
determined in the resolution of the Board of Directors.
Section 11. Executive Committee and Other Committees. How
Appointed. The directors may by a resolution adopted by a majority of the
directors in office appoint from their number an Executive Committee of three or
more members and other Committees of one or more members. The Committees may
make their own rules of procedure and shall meet where and as provided by such
rules, or by a resolution of the directors. A majority shall constitute a
quorum, but in every case the affirmative vote of a majority of all the members
of the committee shall be necessary to the adoption of any resolution.
Section 12. Executive Committee. Powers. During the intervals
between the meetings of the directors, the Executive Committee shall have and
may exercise all the powers of the directors in the management of the business
and affairs of the Company, including power to authorize the seal of the Company
to be affixed to all papers which may require it, in such manner as such
committee shall deem best for the interests of the Company, in all cases in
which specific directions shall not have been given by the directors. Neither
the Executive Committee or any other committee of the Board of Directors created
by these Bylaws nor the Board of Directors shall have any power or authority as
to the following:
(i) the submission to stockholders of any action requiring
approval of stockholders under the Pennsylvania Business Corporation Law.
(ii) the creation or filling of vacancies in the Board of
Directors.
(iii) the adoption, amendment or repeal of the Bylaws.
(iv) the amendment or repeal of any resolution of the Board that
by its terms is amendable or repealable only by the Board.
(v) action on matters committed by the Bylaws or resolution of the
Board of Directors to another committee of the Board.
Section 13. Meeting by Telephonic Conference. Any meeting of the
Board of Directors or of a committee thereof, including the Executive Committee,
may be held in which any one or more or all of the directors or participants may
participate as if present in person, by means of conference telephone or similar
communication equipment in a manner by which all persons participating in the
meeting can hear each other.
Section 14. Substitute Committee Members. The Board may designate
one or more directors as alternate members of any committee who may replace any
absent or disqualified member at any meeting of the committee or for the
purposes of any written action by the committee. In the absence or
disqualification of a member and alternate member or members of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another director to act at the meeting in the place of the absent or
disqualified member.
Section 15. Personal Liability of Directors. To the fullest extent
that the laws of the Commonwealth of Pennsylvania, as now in effect or as
hereafter amended, permit elimination or limitation of the liability of
directors, no director of the Company shall be personally liable for monetary
damages as such for any action taken, or any failure to take any action, as a
director. Further, any amendment or repeal of this Section 15 which has the
effect of increasing director liability shall operate prospectively only, and
shall not affect any action taken, or any failure to act, prior to its adoption.
Section 16. Action by Consent of Directors. Any action required or
permitted to be taken at a meeting of the Board or of a committee of the Board
may be taken without a meeting if, prior or subsequent to the action, a consent
or consents in writing setting forth the action so taken shall be signed by all
of the directors in office or the members of the committee, as the case may be,
and filed with the Secretary of the Company.
ARTICLE III
OFFICERS
Section 1. Required Officers of the Company. The officers of the
Company shall be a President, one or more Vice Presidents, a Secretary and a
Treasurer, one or more Assistant Secretaries, and one or more Assistant
Treasurers. One person may hold any two offices except the office of President
and Vice President. The Board of Directors may appoint such other officers as
from time to time they may determine. All officers of the Company, as between
themselves and the Company, shall have such authority and perform such duties in
the management of the Company as may be provided by or pursuant to the Board of
Directors, or as may be determined by or pursuant to these Bylaws.
Section 2. President. The President shall be the Chief Executive
Officer of the Company and shall have general management and control of the
business and affairs of the Company, subject to the direction of the Board of
Directors, and he shall generally do and perform all acts incident to the office
of the President, or which are authorized or required by law. The President
shall have power to call special meetings of the stockholders or directors for
any purpose or purposes, and when authorized by the Board of Directors or these
Bylaws shall make and sign contracts and agreements in the name of and on behalf
of the Company.
Section 3. Vice Presidents. Each Vice President shall have such
powers and shall perform such duties as may be assigned to him by the President
or the Board of Directors. In case of the absence or disability of the
President, the duties of the office of the President shall be performed by the
Vice Presidents in the order of priority established by the Board, and unless
and until the Board of Directors shall otherwise direct.
Section 4. Secretary. The Secretary shall give, or cause to be
given, notice of all meetings of stockholders and directors, and all other
notices required by law or by these Bylaws, and in case of his absence or
refusal or neglect so to do, any such notice may be given by any person
thereunto directed by the President, or by the directors or stockholders upon
whose request the meeting is called, as provided in these Bylaws. He shall
record all the proceedings of the meetings of the stockholders and of the
directors in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him by the directors or the President. He shall
have custody of the seal of the Company and shall affix the same to all
instruments requiring it, when authorized by the directors or the President, and
attest the same.
Section 5. Assistant Secretary. The Board of Directors may appoint
an Assistant Secretary or more than one Assistant Secretary. Each Assistant
Secretary shall have such powers and shall perform such duties as may be
assigned to him by the Board of Directors or the President.
Section 6. Treasurer. The Treasurer shall have the custody of all
funds, securities, evidences of indebtedness and other valuable documents of the
Company; he shall receive and give or cause to be given receipts and
acquittances for moneys paid in on account of the Company and shall pay out of
the fund on hand all just debts of the Company, of whatever nature upon maturity
of the same; he shall enter or cause to be entered in books of the Company to be
kept for that purpose full and accurate accounts of all moneys received and paid
out on account of the Company, and he shall perform all the other duties
incident to the office of the Treasurer. If the Board of Directors so determine,
he shall give the Company a bond for the faithful discharge of his duties in
such amount and with such security as the Board shall prescribe.
Section 7. Assistant Treasurer. The Board of Directors may appoint
an Assistant Treasurer or more than one Assistant Treasurer. Each Assistant
Treasurer shall have such powers and shall perform such duties as may be
assigned to him by the Board of Directors or the President.
Section 8. Removal of Officers and Agents. Any officer or agent of
the Company may be removed by the Board of Directors with or without cause. The
removal shall be without prejudice to the contract rights, if any, of any person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
<PAGE>
ARTICLE IV
CAPITAL STOCK
Section 1. Issue of Certificates of Stock. Certificates of the
shares of the capital stock of the Company shall be in such form as shall be
approved by the Board of Directors. Each stockholder shall be entitled to a
certificate of his stock under the seal of the Company, executed, by facsimile
or otherwise, by or on behalf of the Company, by the President or a Vice
President, and also by the Treasurer or an Assistant Treasurer. In case any
officer who has signed or whose facsimile signature has been placed upon any
share certificate shall have ceased to be such officer, because of death,
resignation or otherwise, before the certificate is issued, it may be issued by
the Company with the same effect as if the officer had not ceased to be such at
the time of issue. No stock certificate shall be valid unless countersigned and
registered in such manner, if any, as the directors shall by resolution
prescribe.
Section 2. Transfer of Shares. The shares of stock of the Company
shall be transferable upon its books by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such transfer
the old certificates shall be surrendered to the Company by the delivery thereof
to the person in charge of the stock and transfer books and ledgers, or to such
other person as the directors may designate, by whom they shall be cancelled,
and new certificates shall thereupon be issued. A record shall be made of each
transfer, and a duplicate thereof mailed to the Pennsylvania office of the
Company.
Section 3. Dividends. The directors may declare dividends from the
surplus or net profits arising from the business of the Company as and when they
deem expedient. Before declaring any dividend, there may be reserved out of the
accumulated profits such sum or sums as the directors from time to time, in
their discretion, think proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends, or for such other purposes as the
directors shall think conducive to the interest of the Company.
Section 4. Lost Certificates. If the owner of a share certificate
claims that it has been lost, destroyed, or wrongfully taken, the Company shall
issue a new certificate in place of the original certificate if the owner so
requests before the Company has notice that the certificate has been acquired by
a bona fide purchaser and if the owner has filed with the Company an indemnity
bond and an affidavit of facts satisfactory to the Board or its designated
agent, and has complied with such other reasonable requirements, if any, as the
Board may deem appropriate.
Section 5. Rules as to Issue of Certificates. The Board of
Directors may make such rules and regulations as it may deem expedient
concerning the issue, transfer and registration of certificates of stock of the
Company.
Each and every person accepting from the Company certificates of
stock therein shall furnish the Corporation a written statement of his or her
residence or post office address.
Section 6. Holder of Record to be deemed Holder in Fact. The
Company shall be entitled to treat the holder of record of any share or shares
of stock as the holder in fact thereof, and accordingly shall not be bound to
recognize any equitable or other claim to, or interest in, such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, save as expressly provided by law or by Section 7 of this
Article.
Section 7. Shares of Stock Held for Account of Another. The Board
of Directors is authorized to adopt a procedure whereby a stockholder of the
Corporation may certify in writing that all or part of the shares of stock
registered in the name of the stockholder are held for account of a specified
person or persons. The resolution of the Board of Directors that adopts this
certification procedure may include the following:
(1) The class of stockholder who may qualify.
(2) The purpose or purposes for which the certification may be
made.
(3) The form of certification and the information that it should
contain.
(4) The time after the record date within which the
certification must be received by the Corporation, if the
certification concerns a record date.
(5) Any other provisions regarding the certification procedure
that the Board of Directors deems necessary or desirable.
On receipt by the Corporation of a certification that complies
with the procedure adopted by the Board of Directors, the person specified in
the certification is deemed, for the purpose set forth in the certification, to
be the holder of record of the shares of stock indicated in the certification in
place of the stockholder making the certification.
ARTICLE V
MISCELLANEOUS PROVISIONS
Section 1. Fiscal Year. The fiscal year of the Company shall
end on the 31st day of December of each year.
Section 2. Checks, etc. All checks, drafts or orders for the
payment of money shall be signed by such officer(s) or agent(s) as the directors
may designate.
Section 3. Notice and Waiver of Notice. Except as provided in
Article 1 Section 8 of these Bylaws, whenever, under the provisions of the
Pennsylvania Business Corporation Law or of the Articles or of these Bylaws or
otherwise, written notice is required to be given to any person, it may be given
to such person either personally or by sending a copy thereof by first class or
express mail, postage prepaid, telegram (with messenger service specified),
telex, TWX (with answerback received), courier service (with charges prepaid) or
facsimile transmission to his or her address (or to his or her telex, TWX, or
facsimile number) appearing on the books of the Company or, in the case of
directors, supplied by the director to the Company for the purpose of notice. If
the notice is sent by mail, telegraph or courier service, it shall be deemed to
have been given to the person entitled thereto when deposited in the United
States mail or with a telegraph office or courier service for delivery to that
person. A notice given by telex or TWX shall be deemed to have been given when
dispatched. If mailed at least twenty (20) days prior to the meeting or
corporate action to be taken, notice may be sent by any class of postpaid mail
(including bulk mail). Whenever any notice is required to be given by the
Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to the
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
nor the purpose of a meeting need be specified in the waiver of notice of the
meeting. Attendance of a person at any meeting shall constitute a waiver of
notice of the meeting, except where any person attends a meeting for the express
purpose of objecting to the transaction of any business because the meeting was
not lawfully called or convened, and the person so objects at the beginning of
the meeting.
Section 4. Inspection of Books. Every stockholder shall, upon
written verified demand stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business for any
proper purpose, the share register books and records of account, and records of
the proceedings of the incorporators, stockholders and directors and to make
copies or extracts therefrom. A proper purpose shall mean a purpose reasonably
related to the interest of the person as a stockholder. In every instance where
an attorney or other agent is the person who seeks the right of inspection, the
demand shall be accompanied by a verified power of attorney or other writing
that authorizes the attorney or other agent to so act on behalf of the
stockholder. The demand shall be directed to the Company at its registered
office in the Commonwealth of Pennsylvania or at its principal place of business
wherever situated.
Section 5. Record date. The Board of Directors may fix a time
prior to the date of any meeting of stockholders as a record date for the
determination of the stockholders entitled to notice of, or to vote at, the
meeting, which time, except in the case of an adjourned meeting, shall be not
more than 90 days prior to the date of the meeting of stockholders. Only
stockholders of record on the date fixed shall be so entitled notwithstanding
any transfer of shares on the books of the Company after any record date fixed
as provided in this subsection. The Board of Directors may similarly fix a
record date for the determination of stockholders of record for any other
purpose. When a determination of stockholders for a record date has been made as
provided in this Section for the purpose of a meeting, such determination shall
apply to any adjournments thereof unless the Board fixes a new record date for
the adjourned meeting.
ARTICLE VI
AMENDMENT AND REPEAL
Section 1. Amendment and Repeal of Bylaws. The stockholders by the
affirmative vote of the holders of a majority of the stock issued and
outstanding of the class or classes entitled to vote, may at any meeting,
provided the substance of the proposed amendment shall have been stated in the
notice of the meeting, amend, alter or repeal any of these Bylaws.
Section 2. Amendments By Directors. Except as prohibited by
law, the directors, by the affirmative vote of a majority of the Board, may
at any meeting amend, alter or repeal these Bylaws, in whole or in part.
<PAGE>
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 1. Right to Indemnification. Except as prohibited by law,
every director and officer of the Company shall be entitled as of right to be
indemnified by the Company against reasonable expense and any liability paid or
incurred by such person in connection with any actual or threatened claim,
action, suit or proceeding, civil, criminal, administrative, investigative or
other, whether brought by or in the right of the Company or otherwise, in which
he or she may be involved, as a party or otherwise, by reason of such person
being or having been a director or officer of the Company or by reason of the
fact that such person is or was serving at the request of the Company as a
director, officer, employee, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or other
entity (such claim, action, suit or proceeding hereinafter being referred to as
"Action"). Such indemnification shall include the right to have expenses
incurred by such person in connection with an Action paid in advance by the
Company prior to final disposition of such Action, subject to such conditions as
may be prescribed by law. Persons who are not directors or officers of the
Company may be similarly indemnified in respect of service to the Company or to
another such entity at the request of the Company to the extent the Board of
Directors at any time designates such person as entitled to the benefits of this
Section. As used herein, "expense" shall include fees and expenses of counsel
selected by such person; and "liability" shall include amounts of judgments,
excise taxes, fines and penalties, and amounts paid in settlement.
Section 2. Right of Claimant to Bring Suit. If a claim for
indemnification by any person eligible to be indemnified under Section 1 is not
paid in full by the Company within 30 days after a written claim has been
received by the Company, the claimant may at any time thereafter bring suit
against the Company to recover the unpaid amount of the claim, and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim. It shall be a defense to any such suit
that the conduct of the claimant was such that under Pennsylvania law the
Company would be prohibited from indemnifying the claimant for the amount
claimed, but the burden of proving such defense shall be on the Company. Neither
the failure of the Company (including its Board of Directors, independent legal
counsel and its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the claimant is proper in the
circumstances because the conduct of the claimant was not such that
indemnification would be prohibited by law, nor an actual determination by the
Company (including its Board of Directors, independent legal counsel or its
stockholders) that the conduct of the claimant was such that indemnification
would be prohibited by law, shall be a defense to the suit or create a
presumption that the conduct of the claimant was such that indemnification would
be prohibited by law.
Section 3. Insurance and Funding. The Company may purchase and
maintain insurance to protect itself and any person eligible to be indemnified
hereunder against any liability or expense asserted or incurred by such person
in connection with any Action, whether or not the Company would have the power
to indemnify such persons against such liability or expense by law or under the
provisions of this Article VII. The Company may create a trust fund, grant a
security interest, cause a letter of credit to be issued or use other means
(whether or not similar to the foregoing) to ensure the payment of such sums as
may become necessary to effect indemnification as provided herein.
Section 4. Non-exclusivity; Nature and Extent of Rights. The right
of indemnification provided for herein (1) shall not be deemed exclusive of any
other rights, whether now existing or hereafter created, to which those seeking
indemnification hereunder may be entitled under any agreement, by-law or charter
provision, vote of stockholders or directors or otherwise, (2) shall be deemed
to create contractual rights in favor of persons entitled to indemnification
hereunder, (3) shall continue as to persons who have ceased to have the status
pursuant to which they were entitled or were designated as entitled to
indemnification hereunder and shall inure to the benefit of the heirs and legal
representatives of persons entitled to indemnification hereunder and (4) shall
be applicable to Actions commenced after the adoption hereof, whether arising
from acts or omissions occurring before or after the adoption hereof. The right
of indemnification provided for herein may not be amended, modified or repealed
so as to limit in any way the indemnification provided for herein with respect
to any acts or omissions occurring prior to the effective date
DATED: January 20, 1999
EXHIBIT 21-1
PG ENERGY INC. AND SUBSIDIARY
Subsidiaries of the Registrant
The following are subsidiaries of the Registrant. Their voting
securities are owned 100% by the Registrant and they are incorporated in
Pennsylvania.
Penn Gas Development Co. (1)
Honesdale Gas Company (2)
(1) A subsidiary of PG Energy Inc. accounted for on the equity method which
has not been consolidated since it is insignificant.
(2) A subsidiary of PG Energy Inc. acquired on February 14, 1997, and
included in the consolidation of PG Energy Inc.
<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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 280,950,000
<OTHER-PROPERTY-AND-INVEST> 3,981,000
<TOTAL-CURRENT-ASSETS> 65,182,000
<TOTAL-DEFERRED-CHARGES> 40,684,000
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 390,797,000
<COMMON> 34,944,000
<CAPITAL-SURPLUS-PAID-IN> 44,546,000
<RETAINED-EARNINGS> 47,148,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 126,638,000
240,000
4,831,000
<LONG-TERM-DEBT-NET> 95,000,000
<SHORT-TERM-NOTES> 1,200,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 68,248,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 94,640,000
<TOT-CAPITALIZATION-AND-LIAB> 390,797,000
<GROSS-OPERATING-REVENUE> 158,951,000
<INCOME-TAX-EXPENSE> 4,237,000
<OTHER-OPERATING-EXPENSES> 136,686,000
<TOTAL-OPERATING-EXPENSES> 140,923,000
<OPERATING-INCOME-LOSS> 18,028,000
<OTHER-INCOME-NET> 651,000
<INCOME-BEFORE-INTEREST-EXPEN> 18,679,000
<TOTAL-INTEREST-EXPENSE> 10,508,000
<NET-INCOME> 8,171,000
1,191,000
<EARNINGS-AVAILABLE-FOR-COMM> 6,980,000
<COMMON-STOCK-DIVIDENDS> 416,000
<TOTAL-INTEREST-ON-BONDS> 4,837,000
<CASH-FLOW-OPERATIONS> 19,764,000
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
</TABLE>
