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 MARCH 31, 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 April 30, 1999.
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PG ENERGY INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
months ended March 31, 1999 and 1998.............. 2
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998............................. 3
Consolidated Statements of Cash Flows for
the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K.................... 15
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<TABLE>
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PART I. FINANCIAL INFORMATION
PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
OPERATING REVENUES ...................................... $ 84,344 $ 65,015
Cost of gas ........................................ 50,252 37,825
----------- -----------
OPERATING MARGIN ........................................ 34,092 27,190
----------- -----------
OTHER OPERATING EXPENSES:
Operation .......................................... 6,531 6,763
Maintenance ........................................ 1,228 1,127
Depreciation ....................................... 2,588 2,439
Income taxes ....................................... 6,864 4,196
Taxes other than income taxes ...................... 4,306 4,014
----------- -----------
Total other operating expenses ................. 21,517 18,539
----------- -----------
OPERATING INCOME ........................................ 12,575 8,651
OTHER INCOME (DEDUCTIONS), NET .......................... 4 (127)
----------- -----------
INCOME BEFORE INTEREST CHARGES .......................... 12,579 8,524
----------- -----------
INTEREST CHARGES:
Interest on long-term debt .......................... 2,543 2,625
Other interest ...................................... 153 124
Allowance for borrowed funds used during construction (26) (23)
----------- -----------
Total interest charges ........................... 2,670 2,726
----------- -----------
NET INCOME .............................................. 9,909 5,798
DIVIDENDS ON PREFERRED STOCK ............................ 52 321
----------- -----------
EARNINGS APPLICABLE TO COMMON STOCK ..................... $ 9,857 $ 5,477
=========== ===========
EARNINGS PER SHARE OF COMMON STOCK ...................... $ 2.82 $ 1.65
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ........... 3,494,418 3,317,978
=========== ===========
CASH DIVIDENDS PER SHARE ................................ $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
--------- ----------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost ............................. $ 379,134 $ 376,685
Accumulated depreciation ..................... (97,781) (95,735)
--------- ---------
281,353 280,950
--------- ---------
OTHER PROPERTY AND INVESTMENTS ................... 3,942 3,981
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents .................... 2,845 768
Accounts receivable -
Customers ................................. 30,750 18,475
Affiliates, net ........................... 113 --
Others .................................... 266 269
Reserve for uncollectible accounts ........ (1,527) (1,080)
Accrued utility revenues ..................... 8,831 11,472
Materials and supplies, at average cost ...... 2,695 2,758
Gas held by suppliers, at average cost ....... 6,940 22,320
Deferred cost of gas and supplier refunds, net -- 6,058
Prepaid income taxes ......................... -- 1,560
Prepaid expenses and other ................... 7,340 2,582
--------- ---------
58,253 65,182
--------- ---------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible ................ 31,257 31,097
Other ..................................... 8,509 8,598
Unamortized debt expense ..................... 914 964
Other ........................................ -- 25
--------- ---------
40,680 40,684
--------- ---------
TOTAL ASSETS ..................................... $ 384,228 $ 390,797
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1999 1998
--------- ---------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's investment .............. $136,495 $126,638
Preferred stock
Not subject to mandatory redemption ....... 4,745 4,831
Subject to mandatory redemption ........... 240 240
Long-term debt ............................... 95,000 95,000
-------- --------
236,480 226,709
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt -
Parent .................................... 13,200 6,900
Other ..................................... 29,836 61,348
Preferred stock subject to repurchase ........ 44 --
Notes payable ................................ 2,050 1,200
Accounts payable -
Suppliers ................................. 9,330 15,659
Parent .................................... 12 674
Affiliates, net ........................... -- 3
Deferred cost of gas and supplier refunds, net 10,859 --
Accrued general business and realty taxes .... 1,013 1,464
Accrued income taxes ......................... 5,179 --
Accrued interest ............................. 1,454 1,807
Other ........................................ 927 1,149
-------- --------
73,904 90,204
-------- --------
DEFERRED CREDITS:
Deferred income taxes ........................ 60,556 60,211
Unamortized investment tax credits ........... 4,381 4,424
Operating reserves ........................... 2,642 2,836
Other ........................................ 6,265 6,413
-------- --------
73,844 73,884
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES ............. $384,228 $390,797
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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PG ENERGY INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
----------------------
1999 1998
-------- ---------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ............................................................... $ 9,909 $ 5,798
Effects of noncash charges to income -
Depreciation ......................................................... 2,607 2,459
Deferred income taxes, net ........................................... 184 595
Provisions for self insurance ........................................ 141 150
Other, net ........................................................... 894 554
Changes in working capital, exclusive of cash and current portion of
long-term debt and preferred stock -
Receivables and accrued utility revenues ........................ (9,297) 618
Gas held by suppliers ........................................... 15,380 13,948
Accounts payable ................................................ (6,080) (4,938)
Deferred cost of gas and supplier refunds, net .................. 16,917 4,478
Other current assets and liabilities, net ....................... 1,022 (4,042)
Other operating items, net ............................................... (937) (237)
-------- --------
Net cash provided by operating activities ...................... 30,740 19,383
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant ............................................... (3,306) (4,477)
Other, net ............................................................... 5 33
-------- --------
Net cash used for investing activities .......................... (3,301) (4,444)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt - parent ...................................... 6,300 --
Repurchase of preferred stock ............................................ (42) --
Dividends on preferred stock ............................................. (52) (321)
Issuance of common stock ................................................. -- 640
Repayment of long-term debt .............................................. -- (2,500)
Net decrease in bank borrowings .......................................... (31,576) (11,725)
Other, net ............................................................... 8 (1)
-------- --------
Net cash used for financing activities .......................... (25,362) (13,907)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 2,077 1,032
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 768 304
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ....................................... $ 2,845 $ 1,336
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) .................................. $ 2,878 $ 3,187
======== ========
Income taxes .......................................................... $ -- $ 388
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
PG ENERGY INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. PG Energy Inc. ("PG Energy"), a wholly-owned
subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), and its wholly-owned
subsidiary Honesdale Gas Company ("Honesdale"), 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, 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, 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
--------------- --------- --------- ---------------------------
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, 1999, establish accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. While the
Company generally has not used derivative instruments, it expects to adopt, to
the extent necessary, the provisions of FASB Statement No. 133 in the third
quarter of 1999. The impact of such adoption on the Company's future financial
condition and results of operations will depend upon a number of factors,
including the extent to which the Company may use derivative instruments, and
the designation and effectiveness of such derivative hedging market risk.
(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.
<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 March 31, 1999 and 1998:
Three Months Ended
March 31,
-----------------
1999 1998
------- ------
OPERATING REVENUES ................ 100.0% 100.0%
Cost of gas ................... 59.6 58.2
----- -----
OPERATING MARGIN .................. 40.4 41.8
----- -----
OPERATING EXPENSES:
Operation ..................... 7.7 10.4
Maintenance ................... 1.5 1.7
Depreciation .................. 3.1 3.7
Income taxes .................. 8.1 6.5
Taxes other than income taxes . 5.1 6.2
----- -----
Total operating expenses ..... 25.5 28.5
----- -----
OPERATING INCOME .................. 14.9 13.3
OTHER INCOME (DEDUCTIONS), NET ... 0.0 (0.2)
INTEREST CHARGES .................. (3.2) (4.2)
----- -----
NET INCOME ........................ 11.7 8.9
DIVIDENDS ON PREFERRED STOCK ...... (0.0) (0.5)
----- -----
EARNINGS APPLICABLE TO COMMON STOCK 11.7% 8.4%
===== =====
o Three Months Ended March 31, 1999, Compared With Three Months Ended March
31, 1998
Operating Revenues. Operating revenues increased $19.3 million (29.7%)
from $65.0 million for the quarter ended March 31, 1998, to $84.3 million for
the quarter ended March 31, 1999, primarily as a result of a 1.8 billion cubic
feet (21.2%) increase in sales by PG Energy to its residential and commercial
heating customers. This increase in sales was attributable to more seasonable
weather during the first quarter of 1999, as well as 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 452 (17.8%) from 2,533 (79.4% of normal) during the first
quarter of 1998 to 2,985 (93.6% of normal) during the first quarter of 1999.
Cost of Gas. The cost of gas increased $12.4 million (32.9%) from $37.8
million for the first quarter of 1998 to $50.3 million for the first quarter of
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 $6.9 million (25.4%)
from $27.2 million in the first quarter of 1998 to $34.1 million in the first
quarter of 1999. As a percentage of operating revenues, the margin decreased
slightly from 41.8% in the first quarter of 1998 to 40.4% in the first quarter
of 1999 due to the proportionately higher cost of gas during the period.
Other Operating Expenses. Other operating expenses increased $3.0 million
(16.1%) from $18.5 million for the quarter ended March 31, 1998, to $21.5
million for the quarter ended March 31, 1999. This increase was primarily
attributable to a $2.7 million increase in income taxes from $4.2 million for
the first quarter of 1998 to $6.9 million for the first quarter of 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 $292,000
(7.3%) 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. As a
percentage of operating revenues, other operating expenses decreased from 28.5%
during the quarter ended March 31, 1998, to 25.5% during the quarter ended March
31, 1999, primarily because of the proportionately higher level of operating
revenues.
Operating Income. As a result of the above, operating income increased by
$3.9 million (45.4%) from $8.7 million for the first quarter of 1998 to $12.6
for the first quarter of 1999, and increased as a percentage of total operating
revenues for such periods from 13.3% in 1998 to 14.9% in 1999.
Preferred Stock Dividends. Dividends on preferred stock decreased
$269,000 (83.8%) from $321,000 for the first quarter of 1998 to $52,000 for the
first quarter of 1999, 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 (80.0%) increase in
earnings applicable to common stock, from $5.5 million for the three-month
period ended March 31, 1998, to $9.9 million for the three-month period March
31, 1999, and the $1.17 per share increase in earnings per share of common
stock, from $1.65 per share for the three-month period ended March 31, 1998, to
$2.82 per share for the three-month period ended March 31, 1999, were primarily
the result of the increased operating income, as discussed above.
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, 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, 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
- -------------- ------- --------- ------------------------------
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.
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 $67.0 million of unsecured revolving bank credit, which is deemed adequate
for its 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 April 30, 1999, the Company had $7.3 million of
borrowings outstanding under these bank lines of credit. In addition, as of
April 30, 1999, PG Energy had $13.2 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
three-month period ended March 31, 1999.
Construction Expenditures and Related Financings
Expenditures for the construction of utility plant totaled $3.2 million
during the three months ended March 31, 1999 and are currently estimated to be
$15.2 million during the remainder of the year. These expenditures will be
financed with internally generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
Current Maturities of Long-Term Debt
As of March 31, 1999, $43.0 million of PG Energy's long-term debt was
required to be repaid within twelve months. The $43.0 million of long-term debt
includes $19.8 million outstanding under PG Energy's bank lines of credit which
is due at various times during 1999 and 2000, $10.0 million of PG Energy's 9.23%
series first mortgage bonds which mature September 1, 1999, and $13.2 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 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, was completed in March, 1999, for all
applications and devices that could have a material effect on the Company's
operations, and all such applications and devices are now year 2000 compliant.
The plan is scheduled to be completed 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 March 31, 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 largely 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 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 continuing to evaluate 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.
Natural Gas Industry Restructuring
PG Energy believes that in 1999 Pennsylvania may enact legislation which
provides all customers of the larger natural gas utilities in the state that are
regulated by the PPUC with the right to choose their natural gas supplier. As
currently envisioned, such legislation would require that PG Energy provide all
of its customers with unbundled transportation service within the next year to
18 months. 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 the
larger regulated 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 of the larger regulated LDCs 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.
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 nature of
Pennsylvania legislation restructuring the natural gas industry; the impact of
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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Form of Stock Option Agreement -- filed as Exhibit 10-1 to
Pennsylvania Enterprises, Inc.'s Quarterly Report on Form 10-Q
for the quarter ended March 31, 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: May 6, 1999 By: /s/ Donna M. Abdalla
Donna M. Abdalla
Secretary
Date: May 6, 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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THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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