FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 1-3490
PG ENERGY INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 24-0717235
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
(Address of principal executive offices) (Zip Code)
(570) 829-8843
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 3,494,418 shares of common stock, no par value, outstanding
as of July 31, 1999.
<PAGE>
PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and six
months ended June 30, 1999 and 1998.............. 2
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998............................ 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998...... 5
Notes to Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
<PAGE>
PART I. FINANCIAL INFORMATION
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------ ----------- ----------- ------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES .......................... $ 28,119 $ 25,143 $ 112,463 $ 90,158
Cost of gas ............................ 13,124 12,230 63,376 50,055
----------- ----------- ----------- -----------
OPERATING MARGIN ............................ 14,995 12,913 49,087 40,103
----------- ----------- ----------- -----------
OTHER OPERATING EXPENSES:
Operation .............................. 6,407 6,066 12,938 12,829
Maintenance ............................ 1,186 1,232 2,414 2,359
Depreciation ........................... 2,589 2,440 5,177 4,879
Income taxes ........................... (378) (897) 6,486 3,299
Taxes other than income taxes .......... 3,198 2,861 7,504 6,875
----------- ----------- ----------- -----------
Total other operating expenses ..... 13,002 11,702 34,519 30,241
----------- ----------- ----------- -----------
OPERATING INCOME ............................ 1,993 1,211 14,568 9,862
OTHER INCOME (DEDUCTIONS), NET .............. (115) 902 (111) 775
----------- ----------- ----------- -----------
INCOME BEFORE INTEREST CHARGES .............. 1,878 2,113 14,457 10,637
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt .............. 2,298 2,417 4,841 5,042
Other interest .......................... 137 73 290 197
Allowance for borrowed funds used during
construction ........................... (6) (29) (32) (52)
----------- ----------- ----------- -----------
Total interest charges ............... 2,429 2,461 5,099 5,187
----------- ----------- ----------- -----------
NET INCOME (LOSS) ........................... (551) (348) 9,358 5,450
DIVIDENDS ON PREFERRED STOCK ................ 52 321 104 642
----------- ----------- ----------- -----------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK .. $ (603) $ (669) $ 9,254 $ 4,808
=========== =========== =========== ===========
EARNINGS (LOSS) PER SHARE OF COMMON STOCK ... $ (0.17) $ (0.20) $ 2.65 $ 1.43
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,494,418 3,414,344 3,494,418 3,366,427
=========== =========== =========== ===========
CASH DIVIDENDS PER SHARE .................... $ -- $ -- $ -- $ --
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
-------------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost ............................. $ 384,562 $ 376,685
Accumulated depreciation ..................... (100,312) (95,735)
--------- ---------
284,250 280,950
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................... 3,919 3,981
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents .................... 1,908 768
Accounts receivable -
Customers ................................. 15,190 18,475
Affiliates, net ........................... 49 --
Others .................................... 293 269
Reserve for uncollectible accounts ........ (1,704) (1,080)
Accrued utility revenues ..................... 2,202 11,472
Materials and supplies, at average cost ...... 2,826 2,758
Gas held by suppliers, at average cost ....... 14,932 22,320
Deferred cost of gas and supplier refunds, net -- 6,058
Prepaid income taxes ......................... -- 1,560
Prepaid expenses and other ................... 5,595 2,582
--------- ---------
41,291 65,182
--------- ---------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible ................ 31,406 31,097
Other ..................................... 8,369 8,598
Unamortized debt expense ..................... 864 964
Other ........................................ -- 25
--------- ---------
40,639 40,684
--------- ---------
TOTAL ASSETS ..................................... $ 370,099 $ 390,797
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
------------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's investment .............. $135,902 $126,638
Preferred stock
Not subject to mandatory redemption ....... 4,745 4,831
Subject to mandatory redemption ........... 160 240
Long-term debt ............................... 95,000 95,000
-------- --------
235,807 226,709
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt -
Parent .................................... 7,500 6,900
Other ..................................... 24,267 61,348
Current portion of preferred stock subject to
mandatory redemption ...................... 80 --
Notes payable ................................ 1,400 1,200
Accounts payable -
Suppliers ................................. 10,366 15,659
Parent .................................... 77 674
Affiliates, net ........................... -- 3
Deferred cost of gas and supplier refunds, net 9,781 --
Accrued general business and realty taxes .... 645 1,464
Accrued income taxes ......................... 2,595 --
Accrued interest ............................. 1,606 1,807
Other ........................................ 816 1,149
-------- --------
59,133 90,204
-------- --------
DEFERRED CREDITS:
Deferred income taxes ........................ 61,819 60,211
Unamortized investment tax credits ........... 4,338 4,424
Operating reserves ........................... 2,629 2,836
Other ........................................ 6,373 6,413
-------- --------
75,159 73,884
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES ............. $370,099 $390,797
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1999 1998
--------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................ $ 9,358 $ 5,450
Gain on sale of other property ........................ -- (976)
Effects of noncash charges to income -
Depreciation ...................................... 5,223 4,918
Deferred income taxes, net ........................ 1,299 1,254
Provisions for self insurance ..................... 282 275
Other, net ........................................ 1,903 1,038
Changes in working capital, exclusive of cash and
current portion of long-term debt and preferred
stock -
Receivables and accrued utility revenues ..... 13,106 19,451
Gas held by suppliers ........................ 7,388 5,418
Accounts payable ............................. (4,979) 183
Deferred cost of gas and supplier refunds, net 15,839 320
Other current assets and liabilities, net .... (275) (5,286)
Other operating items, net ............................ (1,334) (546)
-------- --------
Net cash provided by operating activities ... 47,810 31,499
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ............................ (9,357) (12,257)
Proceeds from the sale of other property .............. -- 980
Other, net ............................................ 56 115
-------- --------
Net cash used for investing activities ....... (9,301) (11,162)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Repurchase of preferred stock ......................... (86) (80)
Dividends on preferred stock .......................... (104) (642)
Issuance of common stock .............................. -- 4,260
Issuance of long-term debt ............................ 13,800 --
Repayment of long-term debt ........................... (13,200) (7,500)
Net decrease in bank borrowings ....................... (37,795) (15,346)
Other, net ............................................ 16 (2)
-------- --------
Net cash used for financing activities ....... (37,369) (19,310)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ................... 1,140 1,027
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 768 304
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 1,908 $ 1,331
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) ............... $ 5,021 $ 5,238
======== ========
Income taxes ....................................... $ 1,470 $ 1,154
======== ========
</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"), 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
(collectively referred to as the "Company") 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 its subsidiary, Honesdale. All material
intercompany accounts have been eliminated in consolidation. The financial
information that is incorporated in these consolidated financial statements has
been prepared in accordance with generally accepted accounting principles,
including the provisions of Financial Accounting Standards Board ("FASB")
Statement 71, "Accounting for the Effects of Certain Types of Regulation," which
give recognition to the rate and accounting practices of regulatory agencies
such as the PPUC.
Interim Financial Statements. The interim consolidated financial
statements included herein have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading.
The results for the interim periods are not indicative of the results to
be expected for the year, primarily due to the effect of seasonal variations in
weather on the sale of natural gas. However, in the opinion of management, all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the results for the interim periods have been reflected in the
consolidated financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters which
are difficult to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
(2) RATE MATTERS
Rate Increase. By Order adopted 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 or the recoupment of any undercollections of gas
costs, plus interest in either case.
<PAGE>
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1998, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
--------------------------
Date From To in Annual Revenue
- ----------------- ----------- ----------- -----------------------------
June 1, 1999 .... $ 4.39 $ 4.15 $(5,800,000)
March 1, 1999 ... 4.53 4.39 (3,200,000)
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)
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
(3) ACCOUNTING CHANGES
Accounting for Derivative Instruments and Hedging Activities. In June
1998, FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued. The provisions of this statement, which are effective
for fiscal quarters beginning after June 15, 2000, establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. While the
Company generally has not used derivative instruments, it expects to adopt, to
the extent necessary, the provisions of FASB Statement No. 133 in the third
quarter of 2000. 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.
(4) 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. 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, however, constitute a legal prohibition against further regulatory action
under CERCLA or other applicable federal or state law, and even in the absence
of any further action by the EPA, some of the sites may ultimately require
remediation. In any event, 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.
(5) PROPOSED MERGER
On June 7, 1999, the Board of Directors of PEI approved a definitive
merger agreement with Southern Union Company ("Southern Union"), an
international energy company headquartered in Austin, Texas. In accordance with
the terms of the merger agreement, which is subject to the approval of the
shareholders of both PEI and Southern Union, as well as regulatory approval and
other customary conditions, PEI will merge with and into Southern Union and
Southern Union will be the surviving company. On the same day, following the
merger of PEI and Southern Union, Honesdale will be merged with and into PG
Energy and immediately thereafter PG Energy will be merged into Southern Union.
The merger agreement with Southern Union provides for each outstanding
share of PEI's common stock to be exchanged for $32.00 in Southern Union common
stock (subject to adjustment for market fluctuations) and $3.00 in cash, subject
to adjustment for market fluctuations in the price of Southern Union common
stock. Although there can be no certainty, PEI currently anticipates that the
merger with Southern Union will be consummated in the fourth quarter of 1999.
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULT OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the consolidated
statements of income of PG Energy Inc. ("PG Energy") as percentages of operating
revenues for each of the three-month period ended June 30, 1999 and 1998:
Three Months Ended Six Months Ended
June 30, June 30,
---------------- ----------------
1999 1998 1999 1998
----- ------ ------ -----
OPERATING REVENUES ................ 100.0% 100.0% 100.0% 100.0%
Cost of gas ................... 46.7 48.7 56.4 55.5
----- ----- ----- -----
OPERATING MARGIN .................. 53.3 51.3 43.6 44.5
----- ----- ----- -----
OPERATING EXPENSES:
Operation ..................... 22.8 24.0 11.5 14.2
Maintenance ................... 4.2 4.9 2.1 2.6
Depreciation .................. 9.2 9.7 4.6 5.4
Income taxes .................. (1.3) (3.5) 5.8 3.7
Taxes other than income taxes . 11.3 11.4 6.7 7.6
----- ----- ----- -----
Total operating expenses ..... 46.2 46.5 30.7 33.5
----- ----- ----- -----
OPERATING INCOME .................. 7.1 4.8 12.9 11.0
OTHER INCOME (DEDUCTIONS), NET ... (0.4) 3.6 (0.1) 0.8
INTEREST CHARGES .................. (8.6) (9.8) (4.5) (5.8)
----- ----- ----- -----
NET INCOME ........................ (1.9) (1.4) 8.3 6.0
DIVIDENDS ON PREFERRED STOCK ...... (0.2) (1.3) (0.1) (0.7)
----- ----- ----- -----
EARNINGS APPLICABLE TO COMMON STOCK (2.1)% (2.7)% 8.2% 5.3%
===== ===== ===== =====
o Three Months Ended June 30, 1999, Compared With Three Months Ended June
30, 1998
Operating Revenues. Operating revenues increased $3.0 million (11.8%)
from $25.1 million for the quarter ended June 30, 1998, to $28.1 million for the
quarter ended June 30, 1999, primarily as a result of higher levels in PG
Energy's gas cost rate, the impact of the rate increase granted PG Energy
effective October 16, 1998 (see "-Rate Matters") and a 65 million cubic feet
(2.4%) increase in sales by PG Energy to its residential and commercial heating
customers. This increase in sales was attributable to slightly colder weather
during the second quarter of 1999. The number of heating degree days increased
by 40 (6.1%) from 652 (85.2% of normal) during the second quarter of 1998 to 692
(90.5% of normal) during the second quarter of 1999.
Cost of Gas. The cost of gas increased $894,000 (7.3%) from $12.2 million
for the second quarter of 1998 to $13.1 million for the second quarter of 1999,
primarily because of the higher levels in PG Energy's gas cost rate (see "-Rate
Matters") and the aforementioned increase in the volume of natural gas sold by
PG Energy to its residential and commercial heating customers.
Operating Margin. The operating margin increased $2.1 million (16.1%)
from $12.9 million in the second quarter of 1998 to $15.0 million in the second
quarter of 1999, largely as a result of the impact of the October 16, 1998, rate
increase (see "-Rate Matters") and the increased sales to heating customers. As
a percentage of operating revenues, the margin increased slightly from 51.3% in
the second quarter of 1998 to 53.3% in the second quarter of 1999 due to the
impact of the October 16, 1998, rate increase (see "-Rate Matters").
Other Operating Expenses. Other operating expenses increased $1.3 million
(11.1%) from $11.7 million for the quarter ended June 30, 1998, to $13.0 million
for the quarter ended June 30, 1999. This increase was primarily attributable to
a $519,000 increase in income taxes, from a tax benefit of $897,000 for the
second quarter of 1998 to a tax benefit of $378,000 for the second quarter of
1999, as a result of a decrease in loss before income taxes (for this purpose,
operating income net of interest charges). Also contributing to this increase
was a $341,000 (5.6%) increase in operation expense, a $337,000 (11.8%) increase
in taxes other than income taxes resulting from a higher level of gross receipts
tax related to the increase in sales and a $149,000 (6.1%) increase in
depreciation expense as a result of additions to utility plant. The increase in
operation expense was primarily attributable to a higher level of other
postretirement benefit costs and an increase in amortization of computer
software costs resulting from the installation of new financial systems. As a
percentage of operating revenues, other operating expenses decreased from 46.5%
during the quarter ended June 30, 1998, to 46.2% during the quarter ended June
30, 1999, primarily because of the proportionately higher level of operating
revenues.
Operating Income. As a result of the above, operating income increased by
$782,000 (64.6%) from $1.2 million for the second quarter of 1998 to $2.0 for
the second quarter of 1999, and increased as a percentage of total operating
revenues for such periods from 4.8% in 1998 to 7.1% in 1999.
Other Income (Deductions), Net. Other income (deductions), net decreased
$1.0 million from income of $902,000 for the three-month period ended June 30,
1998, to a deduction of $115,000 for the three-month period ended June 30, 1999,
largely as a result of a gain on the sale of nonutility property recorded in
June, 1998, and the absence of any similar gain in 1999.
Preferred Stock Dividends. Dividends on preferred stock decreased
$269,000 (83.8%) from $321,000 for the second quarter of 1998 to $52,000 for the
second quarter of 1999, largely as a result of the repurchase by PG Energy of
all its remaining 9% cumulative preferred stock as of December 1, 1998.
Earnings (Loss) Applicable to Common Stock. The $66,000 (9.9%) decrease
in loss applicable to common stock from $669,000 for the three-month period
ended June 30, 1998, to $603,000 for the three-month period ended June 30, 1999,
as well as the $.03 per share decrease in loss per share of common stock, from
$.20 per share for the three-month period ended June 30, 1998, to $.17 per share
for the three-month period ended June 30, 1999, were primarily the result of the
increased operating income and the decrease in preferred stock dividends, as
discussed above, the effects of which were largely offset by the decrease in
other income (deductions), net. Also contributing to the decrease in loss per
share of common stock was a 2.3% increase in the weighted average number of
shares outstanding for the period.
o Six Months Ended June 30, 1999, Compared With Six Months Ended June 30,
1998
Operating Revenues. Operating revenues increased $22.3 million (24.7%)
from $90.2 million for the six months ended June 30, 1998, to $112.5 million for
the six months ended June 30, 1999, primarily as a result of a 1.9 billion cubic
feet (16.7%) increase in sales by PG Energy to its residential and commercial
heating customers that was attributable to more normal temperatures during the
first six months of 1999. Also contributing to the increased revenues were
higher levels in PG Energy's gas cost rate and the impact of the rate increase
granted PG Energy effective October 16, 1998 (see "-Rate Matters"). The number
of heating degree days increased by 492 (15.4%) from 3,185 (80.5% of normal)
during the first six months of 1998 to 3,677 (93.0% of normal) during the first
six months of 1999.
Cost of Gas. The cost of gas increased $13.3 million (26.6%) from $50.1
million for the six-month period ended June 30, 1998, to $63.4 million for the
six-month period ended June 30, 1999, primarily because of the aforementioned
increase in the volume of natural gas sold by PG Energy to its residential and
commercial heating customers and higher levels in PG Energy's gas cost rate (see
"-Rate Matters").
Operating Margin. The operating margin increased $9.0 million (22.4%)
from $40.1 million in the six-month period ended June 30, 1998, to $49.1 million
in the six-month period ended June 30, 1999, largely as a result of the
aforementioned increased sales to heating customers and the impact of the
October 16, 1998, rate increase (see "-Rate Matters"). As a percentage of
operating revenues, the margin decreased slightly from 44.5% in the six-month
period ended June 30, 1998, to 43.6% in the six-month period ended June 30,
1999, due to the proportionately higher cost of gas during the period.
Other Operating Expenses. Other operating expenses increased $4.3 million
(14.1%) from $30.2 million for the six-month period ended June 30, 1998, to
$34.5 million for the six-month period ended June 30, 1999. This increase was
primarily attributable to a $3.2 million increase in income taxes from $3.3
million for the six-month period ended June 30, 1998, to $6.5 million for the
six-month period ended June 30, 1999, due to an increase in income before income
taxes (for this purpose, operating income net of interest charges). Also
contributing to this increase was a $629,000 (9.1%) increase in taxes other than
income taxes resulting from a higher level of gross receipts tax related to the
increase in sales and a $298,000 (6.1%) increase in depreciation expense as a
result of additions to utility plant. As a percentage of operating revenues,
other operating expenses decreased from 33.5% during the six-month period ended
June 30, 1998, to 30.7% during the six-month period ended June 30, 1999,
primarily because of the proportionately higher level of operating revenues.
Other Income (Deductions), Net. Other income (deductions), net decreased
$886,000 from income of $775,000 for the six-month period ended June 30, 1998,
to a deduction of $111,000 for the six-month period ended June 30, 1999, largely
as a result of a gain on the sale of nonutility property recorded in June, 1998,
and the absence of any similar gain in 1999.
Operating Income. As a result of the above, operating income increased by
$4.7 million (47.7%) from $9.9 million for the six-month period ended June 30,
1998, to $14.6 million for the six-month period ended June 30, 1999, and
increased as a percentage of total operating revenues for such periods from
11.0% in 1998 to 12.9% in 1999.
Preferred Stock Dividends. Dividends on preferred stock decreased
$538,000 (83.8%) from $642,000 for the six-month period ended June 30, 1998, to
$104,000 for the six-month period ended June 30, 1999, largely as a result of
the repurchase by PG Energy of all its remaining 9% cumulative preferred stock
as of December 1, 1998.
Earnings Applicable to Common Stock. The $4.4 million (92.5%) increase in
earnings applicable to common stock, from $4.8 million for the six-month period
ended June 30, 1998, to $9.3 million for the six-month period June 30, 1999, as
well as the $1.22 per share increase in earnings per share of common stock, from
$1.43 per share for the six-month period ended June 30, 1998, to $2.65 per share
for the six-month period ended June 30, 1999, were primarily the result of the
increased operating income and reduced preferred stock dividends, as discussed
above. The increase in earnings per share also occurred despite a 3.8% increase
in the weighted average number of shares outstanding for the period.
RATE MATTERS
Rate Increases. 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 or the recoupment of any undercollections of gas
costs, plus interest in either case.
In accordance with these procedures, PG Energy has been permitted to make
the following changes since January 1, 1998, to the gas costs contained in its
gas tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
-----------------------
Date From To in Annual Revenue
- ---------------- --------- -------- -----------------
June 1, 1999 .... $ 4.39 $ 4.15 $(5,800,000)
March 1, 1999 ... 4.53 4.39 (3,200,000)
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)
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>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of PG Energy and its wholly-owned subsidiary,
Honesdale Gas Company (collectively referred to as the "Company"), continue to
be the funding of PG Energy's construction program and the seasonal funding of
its gas purchases and increases in its customer accounts receivable. The
Company's revenues are highly seasonal and weather-sensitive, with approximately
75% of its revenues normally being realized in the first and fourth quarters of
the calendar year when the temperatures in its service area are the coldest.
The cash flow from the Company's operations is generally sufficient to
fund a portion of its construction expenditures. However, to the extent external
financing is required, it is the 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 its customer accounts receivable.
In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements, the Company has made arrangements for a total
of $57.0 million of unsecured revolving bank credit, which is deemed adequate
for its needs. Specifically, PG Energy currently has six bank lines of credit
with an aggregate borrowing capacity of $54.0 million which provide for
borrowings at interest rates generally less than prime and which mature at
various dates 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 July 31, 1999, the Company had $20.0 million of
borrowings outstanding under these bank lines of credit. In addition, as of July
31, 1999, PG Energy had $7.5 million outstanding under its borrowing arrangement
with Pennsylvania Enterprises, Inc. ("PEI"), its parent company. Such interim
borrowings by PG Energy from PEI will be repaid with proceeds from bank
borrowings by PG Energy.
The Company believes it will be able to raise in a timely manner such
funds as are required for future construction expenditures, refinancings and
other working capital requirements.
Long-Term Debt and Capital Stock Financings
The Company periodically engages in long-term debt and capital stock
financings in order to obtain funds required for construction expenditures, the
refinancing of existing debt and various working capital purposes. No long-term
debt or capital stock financings were consummated by the Company during the
six-month period ended June 30, 1999.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $9.1 million
during the six months ended June 30, 1999 and are currently estimated to be $9.3
million during the remainder of the year. These expenditures will be financed
with internally generated funds and bank borrowings pending the proposed merger
with Southern Union Company (see Note 5 of the Notes to Consolidated Financial
Statements) or, alternatively, the periodic issuance of long-term debt and
capital stock.
Current Maturities of Long-Term Debt
As of June 30, 1999, $31.8 million of PG Energy's long-term debt was
required to be repaid within twelve months. The $31.8 million of long-term debt
includes $14.3 million outstanding under PG Energy's bank lines of credit which
is due at various dates during 1999 and 2000, $10.0 million of PG Energy's 9.23%
series first mortgage bonds which mature September 1, 1999, and $7.5 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 pending the proposed merger
with Southern Union Company (see Note 5 of the Notes to Consolidated Financial
Statements) or, alternatively, the periodic issuance of long-term debt and
capital stock.
<PAGE>
Pending Redemption of Preferred Stock
As one of the conditions to the proposed merger with Southern Union
Company (see Note 5 of the Notes to Consolidated Financial Statements), the
Company has agreed to redeem all of the outstanding shares of its preferred
stock prior to the merger. Such redemption, which will involve an aggregate
redemption price of $5.2 million, plus accrued dividends, will be funded with
borrowings under PG Energy's bank lines of credit.
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, was completed in March, 1999, for all
applications and devices that could have a material effect on the Company's
operations, as well as most other applications and devices, and all such
applications and devices are now year 2000 compliant. The plan is scheduled to
be completed by September 30, 1999, with respect to the several relatively minor
issues that remain outstanding. The plan involved the replacement of certain
systems with purchased software, the renovation of other systems, and the
purchase of certain hardware and other devices. The Company has utilized both
internal resources and contract personnel to implement the plan.
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, nearly all of
which had been expended as of June 30, 1999, 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 because the
plan is now essentially complete, management does not believe 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 made to the
Company's customer information system and upgrading of its operating system
software which were completed in March, 1999, resolved the primary year 2000
issues.
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 has surveyed
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 status of 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 has evaluated its existing emergency and disaster recovery plans and has
concluded that these plans are adequate to address such potential situations.
The emergency and disaster recovery plans will, however, be modified, if
necessary, based on any changes in the Company's continuing assessment of the
year 2000 compliance of its critical suppliers and vendors. The Company's plans,
as they now exist and as they may be 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.
Natural Gas Industry Restructuring
In June, 1999, legislation was enacted in Pennsylvania which provides all
customers of the larger natural gas utilities in the state with the right to
choose their natural gas supplier. With respect to natural gas distribution
companies such as PG Energy, the legislation requires that the companies offer
all of their customers unbundled transportation services beginning on November
1, 1999. The PPUC is, however, permitted to extend such date for up to eight
months (i.e. until July 1, 2000) for specific companies for good cause shown.
While, under the terms of the legislation, the rates for the
transportation of natural gas through PG Energy's distribution system and the
storage services offered by PG Energy will continue to be price regulated by the
PPUC, the commodity cost of gas purchased from suppliers other than PG Energy
will not be so regulated. Customers can, however, continue to receive a bundled
sales service from PG Energy which will be subject to price regulation by the
PPUC. Essentially, the legislation extends the transportation service which has
been available to PG Energy's larger customers for a number of years to all its
customers, and customers will be able, if they so choose, to have their natural
gas provided by a supplier other than PG Energy, based on nonregulated market
prices and other considerations.
In accordance with provisions of the legislation, PG Energy submitted a
restructuring filing with the PPUC on August 2, 1999. This filing describes the
terms and conditions, and includes the tariffs by which PG Energy proposes to
offer unbundled transportation service to all of its customers. In the filing,
PG Energy has proposed that such service will be offered no later than April 1,
2000, once the appropriate customer education has been accomplished and the
necessary information systems have been implemented. It is not possible, at this
time, to determine if the PPUC will accept PG Energy's restructuring filing as
submitted, or whether it will require certain modifications or revisions
thereto.
Because the legislation permits all customers of larger natural gas
utilities 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 does not expect the legislation will 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, 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 will incur in offering
choice to all its customers (including those involving information systems and
customer education) will generally be recoverable through rates or other
customer charges. Accordingly, although it cannot be certain, PG Energy does not
believe that the enactment of the legislation will have any material adverse
impact on its earnings or financial condition despite the increased competition
to which PG Energy will be subject regarding the sale of natural gas to its
customers.
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, while expressed in good faith and believed by the Company
to have a reasonable basis, 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 recently enacted
legislation in Pennsylvania providing for the restructuring of the natural gas
industry; the proposed merger with Southern Union Company (see Note 5 of the
Notes to Consolidated Financial Statements); the impact of any year 2000
disruption; industrial, commercial and residential growth in the service
territories of the Company and its subsidiary; the weather and other natural
phenomena; the timing and extent of changes in commodity prices and interest
rates; changes in environmental and other laws and regulations to which the
Company and its subsidiary are subject or other external factors over which the
Company has no control; and general economic conditions and uncertainties
relating to such growth during the periods covered by the forward-looking
statements. Also, it is not possible for the Company to predict any new factors
which may emerge and affect the Company and its subsidiary, nor can it assess
the effect of each such factor on the Company's business or the extent to which
any such factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements. The Company
undertakes no obligation to publicly release any revision to these
forward-looking statements to reflect events or circumstances after the date of
this filing.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 5, 1999, Pennsylvania Enterprises, Inc., the sole common shareholder
of PG Energy Inc., executed an action in lieu of a meeting of shareholders
re-electing the following incumbent directors of PG Energy Inc. to an additional
one year term: Ronald W. Simms, William D. Davis, Thomas F. Karam, Robert J.
Keating, James A. Ross, John D. McCarthy, Kenneth M. Pollock, John D. McCarthy,
Jr. and Richard A. Rose, Jr.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2-1 Agreement of Merger between Southern Union Company and
Pennsylvania Enterprises, Inc. dated as of June 7, 1999 -- filed
as Exhibit 2-1 to Pennsylvania Enterprises, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999, File
No. 0-7812.
27-1 Financial Data Schedule -- filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
PG ENERGY INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PG ENERGY INC.
(Registrant)
Date: August 3, 1999 By: /s/ Donna M. Abdalla
---------------- -------------------------------------
Donna M. Abdalla
Secretary
Date: August 3, 1999 By: /s/ John F. Kell, Jr.
---------------- -------------------------------------
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)
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<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.
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