As filed with the Securities and Exchange Commission on January 28, 1998
File No . 70-____
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------
FORM U-1 APPLICATION OR DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
PP&L Resources, Inc.
Two North Ninth Street
Allentown, PA 18101
(Name of company or companies filing this statement
and address of principal executive offices)
None
(Name of top registered holding company parent of each applicant or declarant)
Robert J. Grey
Senior Vice President
General Counsel and Secretary
PP&L Resources, Inc.
Two North Ninth Street
Allentown, PA 18101
(610) 774-5151
(Name and addresses of agents for service)
--------------------------------------------
The Commission is requested to send copies of all
notices, orders and communications in connection with
this Application to:
Clifford (Mike) M. Naeve, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
1440 New York Avenue, N.W.
Washington, D.C. 20005
INTRODUCTION AND REQUEST FOR COMMISSION ACTION
Pursuant to Sections 9(a)(2) and 10 of the
Public Utility Holding Company Act of 1935 (the "Act"),
PP&L Resources, Inc. (the "Company"), which is an exempt
intrastate holding company under the Act, hereby requests
that the Securities and Exchange Commission (the
"Commission") authorize the Company's acquisition of all
of the issued and outstanding common stock of Penn Fuel
Gas, Inc. ("Penn Fuel"), which is an exempt intrastate
holding company under the Act (the "Transaction"). The
Company also requests an order under Section 3(a)(1) of
the Act declaring it and each of its subsidiary companies
exempt from all provisions of the Act except Section
9(a)(2) following consummation of the Transaction.
The Transaction will be governed by the terms
of an Agreement and Plan of Merger dated as of June 26,
1997 (the "Merger Agreement"), by and among the Company,
Keystone Merger Corp., a Pennsylvania Corporation
("Keystone") and a wholly-owned subsidiary of the
Company, and Penn Fuel. Under the terms of the Merger
Agreement, Keystone will be merged into Penn Fuel, with
Penn Fuel surviving as a wholly-owned subsidiary of the
Company.
Penn Fuel's Board of Directors approved the
Transaction on June 25, 1997, and the Company's Board of
Directors approved the Transaction on June 26, 1997. The
Transaction was approved by the shareholders of Penn Fuel
on October 1, 1997. The Transaction does not require
approval of the Company's shareholders. A registration
statement on Form S-4, which includes a Prospectus (the
"Registration Statement"), was filed with the Commission
on August 13, 1997 and was declared effective on
September 5, 1997.
The Transaction is conditioned, among other
things, upon approval by the Pennsylvania Public Utility
Commission ("Pennsylvania PUC"). The Maryland Public
Service Commission ("Maryland PSC") was notified of the
Transaction and has determined not to institute
proceedings on the matter at this time. In addition, the
Transaction was subject to the 30-day waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (as amended) (the "HSR Act"). On October 7, 1997,
the notices required pursuant to the HSR Act were filed
by the Company and Penn Fuel, respectively. On October
24, 1997, the United States Department of Justice ("DOJ")
granted early termination of the waiting period under the
HSR Act with respect to the Transaction.
The Company is the parent holding company of
PP&L, Inc. (formerly Pennsylvania Power & Light Company)
("PP&L"), which provides regulated electric service in
central eastern Pennsylvania. Penn Fuel is the parent
holding company of PFG Gas, Inc. ("PFG Gas"), which
provides regulated natural gas service in southern and
eastern Pennsylvania and in a small portion of northern
Maryland, and North Penn Gas Company ("North Penn"),
which provides regulated natural gas service in
northwestern and north central Pennsylvania. The
Transaction is designed to create a merged company that
will be able to compete effectively in the energy market
-- which is being opened to competition at both the state
and federal levels -- and to offer a broad array of
energy services to customers of the merged company.
For the Commission to approve the Transaction,
Section 10 of the Act requires the Commission to find
that the Transaction will tend towards the economical and
efficient development of an integrated public-utility
system and that state laws have been complied with. The
Transaction clearly satisfies these requirements. While
Section 10 also permits the Commission to disapprove an
acquisition if certain adverse circumstances would result
-- such as undue concentration of control or other harm
to the public interest or the interests of investors or
consumers -- these adverse circumstances are not present
here. Accordingly, the Company submits that the
Transaction meets all requirements of Section 10.
With respect to the exemption requested under
Section 3(a)(1), the holding company system must meet the
intrastate requirements of the exemption and, in
addition, the Commission must not find that the exemption
would be detrimental to the public interest or the
interests of investors or consumers. The Company submits
that these criteria are satisfied as well.
The Company requests expedited treatment of
this application, so that upon receipt of other
regulatory approvals, the Company and Penn Fuel will be
in a position to consummate the Transaction promptly.
Unless otherwise indicated, all financial information set
forth herein is for the fiscal year ended December 31,
1996.
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
A. DESCRIPTION OF THE PARTIES TO THE TRANSACTION.
1. THE COMPANY.
The Company is a public utility holding company
incorporated under the laws of the Commonwealth of
Pennsylvania,* which is exempt from regulation by the
Commission under the Act (except for Section 9(a)(2)
thereof) pursuant to Section 3(a)(1) of the Act and by
order of the Commission.** Through its subsidiaries, the
Company provides electric utility services and other
energy-related products and services.
--------------------
* The Company was incorporated in 1994 by PP&L in a
corporate reorganization.
** PP&L Resources, Inc., File No. 70-8104, Rel. No. 35-
26248 (issued March 10, 1995).
PP&L, the Company's principal subsidiary, is an
operating electric utility incorporated in 1920 under the
laws of the Commonwealth of Pennsylvania. PP&L serves
approximately 1.2 million customers in eastern and
central Pennsylvania, sells retail electricity throughout
Pennsylvania and markets wholesale electricity throughout
the Eastern United States. A map of PP&L's service area
is attached as Exhibit E-1. PP&L operates its generating
and transmission facilities as part of the Pennsylvania-
New Jersey-Maryland Interconnection Association.
PP&L owns a 90% undivided interest in each of
two nuclear-fueled generating units at its Susquehanna
station, and Allegheny Electric Cooperative, Inc. owns a
10% undivided interest in each of those units. PP&L also
owns undivided interests of 12.2% in the Keystone
generating station, 11.3% in the Conemaugh generating
station and 8.37% in the Merrill Creek Reservoir
generating station. Overall, PP&L produced about 39.4
billion kwh in plants it owned in 1996. PP&L purchased
7.8 billion kwh under purchase agreements and received
1.7 billion kwh as power pool interchange. During the
year, PP&L delivered about 1.3 billion kwh as pool
interchange and about 6.3 billion kwh under purchase
agreements.
PP&L owns 33.3% of the capital stock and 50% of
the voting stock of Safe Harbor Water Power Corporation
("Safe Harbor"), a Pennsylvania corporation, which owns
and operates a hydroelectric plant on the Susquehanna
river in south central Pennsylvania. The remaining
interest in Safe Harbor is held by Baltimore Gas &
Electric Company. Safe Harbor's plant has a total
capacity of 417,500 kilowatts. PP&L is entitled by
contract to one-third of this total capacity (139,000
kilowatts). In 1996, PP&L's purchases from Safe Harbor
amounted to approximately $10 million; Safe Harbor's 1996
total operating revenues were approximately one percent
of PP&L's 1996 utility operating revenues.*
--------------------
* PP&L is exempt by order from the provisions of the
Act (except for Section 9(a)(2)) pursuant to Section
3(a)(2). Pennsylvania Power & Light Company, Rel.
No. 35-19725; SEC Docket 814 (1976).
During 1996, 57% of the energy generated by
PP&L's plants came from coal-fired stations, 38.5% from
nuclear operations at the Susquehanna station, 2.5% from
the Martins Creek oil and gas-fired steam station and
2.0% from hydroelectric stations.
The Company is engaged in non-utility
businesses, as well as certain other utility businesses
that are not jurisdictional under the Act, through a
number of other subsidiaries:
PP&L Global, Inc. (formerly Power Markets
Development Company) ("PP&L Global") engages in
unregulated business activities through investments in
electric generation, transmission and distribution
facilities both overseas and domestically. As of July
31, 1997, PP&L Global had approximately $370 million of
investments and commitments in such facilities in the
United Kingdom, Bolivia, Peru, Argentina, Spain, Chile
and Portugal.
PP&L Spectrum, Inc. (formerly Spectrum Energy
Services Corporation), an unregulated subsidiary,
provides energy-related products and services both inside
and outside of PP&L's service territory.
Interstate Energy Company, a Delaware
corporation, operates oil and gas pipeline facilities
which supply fuel to PP&L's Martins Creek generating
station. Realty Company of Pennsylvania and BDW
Corporation own real estate and other interests related
to the operation of PP&L's electric generating stations.
PP&L Capital Funding, Inc., a Delaware
corporation, engages in debt financing activities on
behalf of the Company.
CEP Group, Inc. holds passive investments in
securities for investment purposes.
PP&L is subject to regulation by the
Pennsylvania PUC with respect to its rates for retail
sales of electricity as well as terms of service,
issuance of certain securities, the encumbering or
disposition of public utility properties, and accounting
and other matters. In addition, PP&L is subject to
regulation by the Federal Energy Regulatory Commission
("FERC") under the Federal Power Act with respect to
rates for the sale of electricity for resale and other
matters. PP&L is subject to the jurisdiction of the
Nuclear Regulatory Commission in connection with its
ownership and operation of the Susquehanna station
nuclear units. PP&L is also subject to applicable
federal and state environmental regulations.
The common stock of the Company, par value
$0.01 per share ("Company Common Stock"), is listed on
the New York Stock Exchange (the "NYSE") and the
Philadelphia Stock Exchange (the "PhSE"). As of the
close of business on December 31, 1997, there were
166,248,284 shares of Company Common Stock issued and
outstanding.
For the year ended December 31, 1996, the
Company's operating revenues on a consolidated basis were
approximately $2.910 billion, of which $64 million were
attributable to non-utility activities. Consolidated
assets of the Company and its subsidiaries at December
31, 1996 were approximately $9.824 billion, of which
approximately $6.487 billion consisted of net electric
plant and equipment.
The Company's principal executive office is
located at Two North Ninth Street, Allentown,
Pennsylvania 18101. At December 31, 1996, PP&L, the
Company's principal subsidiary, employed approximately
6,400 full-time employees.
More detailed information concerning the
Company and its subsidiaries is contained in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996, which is incorporated herein by
reference as Exhibit G-1.
2. PENN FUEL.
Penn Fuel is a public utility holding company
organized under the laws of the Commonwealth of
Pennsylvania and exempt from regulation by the Commission
under the Act (except for Section 9(a)(2) thereof)
pursuant to Section 3(a)(1) of the Act and by order of
the Commission.* Penn Fuel provides natural gas service
in Pennsylvania and Maryland through its public utility
subsidiaries and supplies liquid propane gas to customers
in Pennsylvania and Maryland. Penn Fuel is a closely-
held corporation whose common stock is not actively
traded.
--------------------
* Penn Fuel Gas, Inc., et al., File No. 70-8068,
Release No. 35-26050 (issued May 9, 1994).
PFG Gas and North Penn, Penn Fuel's principal
subsidiaries, are Pennsylvania corporations which provide
natural gas distribution and storage service to
residential, commercial and industrial customers in 31
counties in Pennsylvania. PFG Gas provides gas sales and
transportation service in southern and eastern
Pennsylvania and a small portion of Maryland. Ninety-
nine percent of PFG Gas customers are located in
Pennsylvania. North Penn provides gas sales and
transportation services to customers located in north and
northwestern Pennsylvania. North Penn also owns storage
capacity in two underground natural gas storage
facilities located in Pennsylvania: the Wharton Storage
Field and the Tioga-Meeker Storage Complex. Maps of the
PFG Gas and North Penn service territories are attached
as Exhibits E-2 and E-3, respectively.
PFG Gas and North Penn are subject to
regulation by the Pennsylvania PUC as public utilities
with respect to rates for service, terms of service,
issuance of certain securities, the encumbering or
disposition of public utility properties, the design,
installation, testing, construction, and maintenance of
pipeline facilities, and accounting and other matters.
Penn Fuel and its subsidiaries must also comply with
federal, state and local regulations related generally to
the discharge of materials into the environment. PFG
Gas's Maryland utility business is similarly subject to
the jurisdiction of the Maryland PSC. North Penn's
storage operations are subject to the jurisdiction of
FERC, although FERC has deferred rate authority for
storage to the Pennsylvania PUC.
The authorized capital stock of Penn Fuel
consists of 2,000,000 shares of common stock, par value
$1.00 per share ("Penn Fuel Common Stock"); 500,000
shares of unissued Penn Fuel Prior Preferred Stock, no
par value ("Unissued Preferred Stock"); and 2,000,000
shares of $1.40 cumulative preferred stock ("Penn Fuel
$1.40 Preferred Stock"). As of the close of business on
July 31, 1997, there were 717,583 shares of Penn Fuel
Common Stock issued and outstanding, no shares of
Unissued Preferred Stock issued and outstanding and
717,583 shares of Penn Fuel $1.40 Preferred Stock issued
and outstanding.
For the year ended December 31, 1996, Penn
Fuel's operating revenues on a consolidated basis were
approximately $114 million, of which approximately $100
million were attributable to its gas utility operations,
and $14 million from propane operations and merchandise
sales. Consolidated assets of Penn Fuel and its
subsidiaries as of December 31, 1996 were approximately
$196 million, of which approximately $141 million
consisted of property, plant and equipment, $29 million
were current assets and $26 million were deferred
regulatory assets.
Penn Fuel's principal executive office is
located at 55 South Third Street, Oxford, Pennsylvania
19363. As of August 31, 1997, Penn Fuel directly and
indirectly employed approximately 500 people.
More detailed information concerning Penn Fuel
and its subsidiaries is contained in Penn Fuel's Annual
Report to Shareholders for the year ended December 31,
1996, which is attached as Exhibit G-3.
3. KEYSTONE.
Keystone is a direct, wholly-owned subsidiary
of the Company, organized under the laws of the
Commonwealth of Pennsylvania solely for the purpose of
merging with Penn Fuel. Keystone is not engaged in any
business operations. The mailing address for Keystone is
the same as that for the Company.
B. DESCRIPTION OF THE TRANSACTION.
1. REASONS FOR THE TRANSACTION.
The Transaction will combine two companies with
complementary operations and expertise, and provide
important strategic, financial and other benefits to the
merging companies, their shareholders and their
customers.
The Transaction will allow the Company to
better serve all the customers in its newly enlarged
customer base. Pennsylvania is opening its retail
electricity markets to competition, and legislation has
been proposed to further open its gas markets in the near
future. Following the Transaction, the Company will be
able to compete in both energy markets and to provide gas
or electricity to customers, depending on their needs.
As a result of the Transaction, the Company
will expand its customer base into additional areas in
Pennsylvania. PFG Gas and North Penn's service regions
include certain geographic areas not presently served by
the Company. The Company's presence in a larger
geographic region and its ability to provide both gas and
electricity will enhance its ability to offer "behind the
meter" consulting services and will provide the Company
increased opportunities to provide the benefits of energy
management systems to residential and commercial
customers.
Penn Fuel will have access to opportunities in
the deregulated energy market that would be less
available with its stand-alone, limited resources. Also,
because of the increased size and resources the combined
entity will have in comparison to Penn Fuel standing
alone, the merger will greatly strengthen the foundation
supporting services to Penn Fuel's customers at a high
quality level. The merger is expected to give Penn Fuel
a broader access to management and business systems,
enable potential operating and management efficiencies
and provide increased stability and other benefits to
Penn Fuel inherent in being part of a much larger
organization.
By acquiring Penn Fuel and its utility
subsidiaries, the Company will obtain expertise
concerning alternative forms of energy, which will
enhance its ability to compete in the increasingly
deregulated energy market.
Due to the incomplete geographical overlap of
the service territories of PFG Gas and North Penn with
PP&L's service territory, and because PP&L provides only
electric utility service and PFG and North Penn provide
only gas utility service, there is limited potential in
the short term for achieving direct efficiencies in day-
to-day utility operations as a result of the Transaction.
However, as discussed in Item 3 below, the Company
expects over time to reap substantial efficiencies
through consolidation and coordination of various support
functions such as accounting, finance, information
systems, environmental management, gas marketing, and
procurement. Various direct cost reductions, such as,
inter alia, those resulting from consolidation of meter
reading in overlapping service territories, are also
anticipated. Moreover, as noted above and explained
below in Item 3, the combination of the merging
companies' expertise and resources will enable the
Company to, inter alia, better address competition in the
energy markets and provide its customers with a range of
electric and natural gas products and services.
2. MERGER AGREEMENT.
The Merger Agreement provides that, as soon as
practicable following the satisfaction or waiver of the
conditions to each party's obligation to consummate the
Transaction, Keystone will be merged with and into Penn
Fuel, the separate corporate existence of Keystone will
cease, and Penn Fuel will continue as the surviving
corporation in the merger, operating as a wholly-owned
subsidiary of the Company.
Each share of Penn Fuel Common Stock
outstanding prior to the merger will be converted into
the right to receive between 6.968 and 8.516 shares of
Company Common Stock, depending upon the market price of
the Company Common Stock at the time of the closing of
the merger. Penn Fuel common stock shareholders will
become Company shareholders, and the Company will become
the sole holder of all of the outstanding common stock of
Penn Fuel.
Penn Fuel is taking all necessary action to
redeem shares of the Penn Fuel $1.40 Preferred Stock in
accordance with the terms of the preferred stock.
Preferred shareholders will have the option of receiving
the cash redemption price or converting their preferred
shares into the right to receive between 0.682 and 0.833
shares of the Company Common Stock, depending upon the
market price of the Company Common Stock at the time of
the closing of the Transaction. Thus, Penn Fuel
preferred shareholders may become common shareholders of
the Company, and there will no longer be any shares of
Penn Fuel preferred stock outstanding.
3. BACKGROUND AND NEGOTIATIONS LEADING TO THE TRANSACTION.
The Company and Penn Fuel recognize that the
utility industry is currently undergoing unprecedented
change, including deregulation of electric power
generation, which will significantly impact the
competitiveness and business opportunities of the
companies in the near future. The Company has been
examining strategic alternatives to position itself to
compete more effectively in the energy market. One such
strategy is to combine electric and gas services so that
the Company can create efficiencies, control costs,
increase services available to consumers and expand its
customer base. At the same time, in light of the
changing of the utility industry, Penn Fuel also has been
considering several alternatives regarding its future,
including partnership opportunities or combining with an
electric utility to strengthen its competitive position
in the energy market.
In early 1997, the Company and Penn Fuel
entered into a confidentiality agreement and began
preliminary discussions regarding the possibility of a
business combination. In the months that followed, the
Company and Penn Fuel exchanged a limited amount of
confidential, nonpublic information and determined that
further investigation of a possible transaction,
including due diligence, was warranted. More in-depth
due diligence was conducted in May-June of 1997. During
this time, the companies considered alternative
structures for a possible business combination and
negotiated terms of the Merger Agreement. Periodically
throughout this process, the Boards of both Penn Fuel and
the Company were updated as to the ongoing status of
negotiations. On June 25, 1997, the Penn Fuel Board of
Directors approved the transaction, and on June 26, 1997,
the Company Board of Directors approved the Transaction
and the companies finalized and entered into the Merger
Agreement.
C. MANAGEMENT AND OPERATIONS OF THE COMPANY FOLLOWING THE
TRANSACTION.
Upon completion of the Transaction, Penn Fuel
will become a subsidiary of the Company, which will own
all of the issued and outstanding common stock of Penn
Fuel. Penn Fuel will continue to own and operate its
primary subsidiaries, PFG Gas and North Penn. Following
the Transaction, the officers, directors, corporate
charter and bylaws of Keystone immediately before the
merger will become the officers, directors, corporate
charter and bylaws of Penn Fuel, the surviving
corporation.
The Company's principal corporate and executive
offices will continue to be in Allentown, Pennsylvania.
Those of Penn Fuel will continue to be in Oxford,
Pennsylvania.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
The fees, commissions and expenses to be paid
or incurred, directly or indirectly, by both the Company
and Penn Fuel, in connection with the Transaction,
including registration of securities of the Company under
the Securities Act of 1933, and other related matters,
are estimated as follows:
Commission filing fee for the Company
Registration Statement on Form S-4 . . . . . . $24,930
HSR filing fee . . . . . . . . . . . . . . . . . $45,000
Accountants' fees . . . . . . . . . . . . . . . . $44,000
Shareholder communication (including prospectus
printing and distribution). . . . . . . . . . . $25,000
NYSE/PhSE listing fee . . . . . . . . . . . . . . $53,500
Exchanging, printing, and engraving of stock
certificates . . . . . . . . . . . . . . . . . $1,000
Investment bankers' fees and expenses . . . . . . $2,720,000
Legal fees and expenses (including regulatory
and antitrust). . . . . . . . . . . . . . . . . $2,182,000
Miscellaneous (including consultants) . . . . . . $228,000
TOTAL (estimated) . . . . . . . . . . . . . . . . $5,323,430
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
A. STATEMENT OF APPLICABLE PROVISIONS.
The Company believes that Sections 9(a)(2), 10,
and 3(a)(1) of the Act are directly or indirectly
applicable to the proposed Transaction.
Under Section 9(a)(2), it is unlawful, without
approval of the Commission, under the standards of
Section 10, for any person to acquire, directly or
indirectly, the securities of a public utility company,
if that person will, by virtue of the acquisition, become
an affiliate of that public utility and any other public
utility or holding company. The term "affiliate" for
this purpose means any person that directly or indirectly
owns, controls, or holds with power to vote, five percent
or more of the outstanding voting securities of the
specified company.
Pursuant to the Transaction, the Company will
acquire, indirectly through its acquisition of Penn Fuel,
securities of two public utilities, PFG Gas and North
Penn. Following the Transaction, the Company will be an
affiliate of the following public utilities: PP&L, Penn
Fuel, Safe Harbor, PFG Gas and North Penn. Accordingly,
the Transaction requires Commission approval under the
standards of Section 10.
Following the Transaction, the Company
believes, for reasons explained below, that it will
qualify for the intrastate exemption under Section
3(a)(1) of the Act, and requests an order granting such
exemption. Under this section, the Commission must
exempt, by rule or order, any holding company if that
holding company, and each material public utility
subsidiary company from which the holding company derives
any material part of its income, are predominantly
intrastate in character, and carry on their business in
the state in which they are organized, unless and except
insofar as the Commission finds the exemption detrimental
to the public interest or the interest of investors or
consumers.
B. THE STANDARDS OF SECTION 10.
The statutory standards to be considered by the
Commission in evaluating the Transaction are set forth in
Sections 10(b), 10(c) and 10(f) of the Act.
1. SECTION 10(B).
Under Section 10(b) of the Act, the Commission
must approve the Transaction unless the Commission finds
that:
(1) such acquisition will tend towards
interlocking relations or the concentration of
control of public-utility companies, of a kind
or to an extent detrimental to the public
interest or the interest of investors or
consumers;
(2) in case of the acquisition of
securities or utility assets, the
consideration, including all fees, commissions
and other remuneration, to whomsoever paid, to
be given, directly or indirectly, in connection
with the acquisition is not reasonable or does
not bear a fair relation to the sums invested
in or the earning capacity of the utility
assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly
complicate the capital structure of the
holding-company system of the applicant or will
be detrimental to the public interest or the
interest of investors or consumers or the
proper functioning of such holding company
system.
a. DETRIMENTAL "INTERLOCKING RELATIONS" OR
"CONCENTRATION OF CONTROL".
The Company believes that the Transaction will
not result in detrimental interlocking relations or
concentration of control. There is one common director
of the Company and Penn Fuel and following consummation
of the Transaction there may be additional common
directors and officers of the Company and PFG Gas and
North Penn. Such interlocking relationships, however,
would serve to integrate the merging companies, and are
characteristic of virtually every merger transaction
subject to Section 9(a)(2). Thus, any interlocking
relations which do occur will be of the kind generally
approved of by the Commission and will not be detrimental
to interests of consumers, investors or the public.
The Transaction will also not result in a
detrimental concentration of control. Penn Fuel is a
small company relative to the Company and its acquisition
by the Company will not make the Company excessively
large. The acquisition of Penn Fuel will increase the
Company's revenues and total assets by less than 4% and
2.1%, respectively. Following the Transaction, the
Company will have total utility assets of $10 billion,
total utility revenues of $3.1 billion, and will serve
approximately 1.2 million utility customers. The utility
activities of the Company following the Transaction will
be confined almost entirely to central and eastern
Pennsylvania. The Commission has approved a number of
transactions which resulted in holding companies of a
much larger size.*
Competition is not adversely affected by the
Transaction since neither PP&L nor Penn Fuel can exercise
market power in any unregulated energy market and the
merger of the two will not result in an increase in
market share in any relevant energy market. As of
November 1, 1997, PP&L began offering competitive retail
electric power to the 5 percent of Pennsylvania retail
electricity consumers who are participating in the
state's Retail Access Pilot Program, under the recently
enacted Pennsylvania Electricity Generation Customer
Choice and Competition Act, 66 Pa. C.S. Ch. 28. Under
this new law, PP&L will be required by January, 2001 to
transmit and distribute electricity to all of its retail
distribution customers that choose suppliers of
electricity other than PP&L.**
PP&L also currently competes in the wholesale
electric energy and capacity markets. The FERC has found
that PP&L does not possess market power in the electric
energy generation markets in which it competes.
Pennsylvania Power & Light Co., 80 F.E.R.C. paragraph 61,053
(1997). In addition, the FERC determined that PP&L could
not exercise market power over the transmission of
electricity since it had filed an open access
transmission tariff pursuant to FERC Order No. 888 and
888a.***
--------------------
* See, e.g., TUC Holding Co., File No. 70-8953, Rel.
No. 35-26749 (issued August 1, 1997). TUC Holding
has utility assets of approximately $19.6 billion,
operating utility revenues of approximately $6.9
billion and approximately 2.7 million utility
customers. See also Entergy Corp., 51 S.E.C. 869
(combined utility assets after Gulf States
acquisition of $21 billion).
** The local distribution of both electricity and gas
in Pennsylvania will remain franchised regulated
monopolies subject to the jurisdiction of the
Pennsylvania PUC.
*** See Promoting Wholesale Competition Through Open
Access Nondiscriminatory Transmission Services by
Public Utilities; Recovery of Stranded Costs by
Public Utilities and Transmitting Utilities, Order
No. 888, 61 Fed. Reg. 21,540 (1996), FERC Stats. &
Regs. paragraph 31,036 (1996), order on reh'g, Order No.
888-A, 62 Fed. Reg. 12,274 (1997), FERC Stats. &
Regs. paragraph 31,048 (1997), reh'g pending.
Penn Fuel is a relatively small local gas
distribution system. It provides gas and distribution
services to small commercial and residential customers
subject to regulation by the Pennsylvania PUC.
Industrial distribution customers of Penn Fuel may buy
gas from the company or use the company's regulated
distribution system to transport gas purchased from other
suppliers. Penn Fuel does not regularly engage in sales
of natural gas at wholesale. Its share of natural gas
sales at retail is insignificant compared to other large
systems in Pennsylvania and nearby regions, such as
Columbia Gas System, Inc., Consolidated Natural Gas
Company, or UGI Utilities, Inc.
Because the market shares of PP&L in electric
markets and of Penn Fuel in gas markets are not
sufficient to raise competitive concerns, it follows that
in a hypothetical market embracing both fuels, their
respective market shares would be even less significant.
Combined electric and gas markets would necessarily
include large electricity generators in the Pennsylvania-
New Jersey-Maryland Interconnection ("PJM"), but also the
countless marketers of natural gas that can reach the
region through its numerous large open access interstate
pipelines that operate under FERC Order No. 636.*
Accordingly, the merger cannot lessen competition in a
combined energy market. The Federal Trade Commission and
the United States Department of Justice apparently
reached the same conclusion when they both decided to
grant early termination of the 30-day waiting period
under the HSR Act. The Direct Testimony of Scott T.
Jones, submitted to the Pennsylvania PUC** and attached
as Exhibit D-2 to this Application, explains in detail
why the Transaction will not harm competition.
--------------------
* Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing
Transportation Under Part 284 of the Commission's
Regulations, Regulation of Natural Gas Pipelines
After Partial Wellhead Decontrol, and Order Denying
Rehearing in Part, Granting Rehearing in Part, and
Clarifying Order No. 636 (Order No. 636-A), 57 Fed.
Reg. 36,128 (August 12, 1992) (Citations omitted).
** Testimony filed in support of Application of PP&L
and PFG Gas, and North Penn in Docket Nos. A-
1206SOF0006, A-1220SOF0003.
On the contrary, the Transaction will provide
important competitive benefits. By expanding its
customer base, entering into the gas markets, and
acquiring the expertise and experience of Penn Fuel in
gas markets, the Company will be better positioned to
compete with larger utilities in an evolving and
increasingly competitive energy marketplace. This will
enable the Company to provide its customers with expanded
energy options. Additionally, the Transaction will
result in efficiencies and economies for consumers,
investors and the public. These benefits are outlined in
Item 3(B)(2) of this Application, and are benefits which
the Commission has weighed against any concerns about
concentration of control it has had in other
transactions. See American Electric Power Co., 46 S.E.C.
1299 (1978).
For all of these reasons, the Company believes
that the Transaction will not result in a concentration
of control which is detrimental to the public interest.
b. FAIRNESS OF CONSIDERATION.
Section 10(b)(2), as applied to the
Transaction, provides that the Commission shall approve
the Transaction unless it finds that the consideration
paid by the Company to the shareholders of Penn Fuel is
not reasonable or does not bear a fair relation to the
earning capacity of the utility assets underlying the
Penn Fuel shares. In its determination as to whether or
not consideration for an acquisition meets the fair and
reasonable test of Section 10(b)(2), the Commission has
considered whether the price was decided as the result of
arm's-length negotiations* and whether each party's Board
of Directors has approved the purchase price.** The
Commission also considers the opinions of investment
bankers*** and the earnings, dividends, and book and
market value of the shares of the company to be
acquired.****
--------------------
* American National Gas Co., 43 S.E.C. 203 (1966).
** Consolidated National Cas Co., 45 S.E.C. 672 (1990).
*** Id.
**** Northeast Utilities, 42 S.E.C. 963 (1966).
Upon consummation of the Transaction, (i) Penn
Fuel common stock shareholders would receive between
6.968 and 8.516 shares of the Company Common Stock for
each share of Penn Fuel common stock and (ii) holders of
Penn Fuel $1.40 Preferred Stock would receive the cash
redemption price applicable to their shares, or, at the
individual shareholder's option, between 0.682 and 0.833
shares of the Company Common Stock for each share of Penn
Fuel $1.40 Preferred Stock. The exact exchange ratio
would depend upon the closing price of the Company Common
Stock prior to the closing of the Transaction. Based on
the applicable exchange ratio, the aggregate value of the
consideration to be issued upon consummation of the
Transaction is expected to be approximately $121 million.
The consideration to be paid by the Company was
the result of arm's-length negotiations between the
management and financial and legal advisors of the
Company and Penn Fuel over a period of several months.
The Boards of Directors of each of the Company and Penn
Fuel approved the Transaction in meetings held on June
26, 1997 and June 25, 1997, respectively.
In addition, nationally-recognized investment
banking firms for each of the Company and Penn Fuel have
reviewed extensive information concerning the companies
and analyzed the respective conversion ratios employing
several valuation methodologies. In connection with the
approval of the Merger Agreement, (i) the Company's Board
of Directors considered the opinion of its financial
advisor, Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), to the effect that the consideration to be
paid by the Company upon consummation of the Transaction
is fair to the Company from a financial point of view,
and (ii) the Penn Fuel Board of Directors considered the
opinion of its financial advisor, First Union Capital
Markets ("First Union"), to the effect that the
consideration to be received by Penn Fuel common
shareholders in connection with the Transaction is fair
to such holders from a financial point of view. Each of
the fairness opinions of Morgan Stanley and First Union
are attached hereto as Exhibits H-1 and H-2,
respectively, and incorporated herein by reference.
In determining the consideration, the Company
examined certain gas companies considered to be
comparables as well as the consideration paid in other
acquisitions in the gas utility industry. When examined
in terms of multiples of earnings ("Earnings Multiple")
and book value ("Book Value Multiple"), the consideration
to be paid by the Company is reasonable when compared to
the consideration offered in comparable acquisitions.
Examples of such acquisitions are shown below.
BOOK
EARNINGS VALUE
COMPARABLE COMPANIES MULTIPLE MULTIPLE
-------------------- -------- --------
Southwest Gas 17.2x 1.2x
Atmos Energy 14.8 2.1
Public Service Co. of NC 13.1 1.8
Connecticut National Gas 12.7 1.3
North Carolina National Gas 12.3 1.9
Connecticut Energy Corporation 12.4 1.4
MEAN 13.8 1.6
PRECEDENT TRANSACTIONS
----------------------
PanEnergy/Duke (11/96) 22.1x 3.2
Pacific Ent./Enova (10/96) 14.9 2.1
NorAm/Houston Industries (8/96) 31.6 2.4
United Cities Gas/Atmos Energy (7/96) 24.1 2.1
ENSERCH/Texas Utilities (4/96) 29.5 --
Washington Energy/Puget Sound (10/95) -- 3.7
Grand Valley Gas/Associated
Natural Gas (2/94) 24.7 3.7
MEAN 24.5 2.6
IMPLIED MULTIPLES FOR THIS TRANSACTION 16.0X 1.6X
Also significant is that Penn Fuel
shareholders, as a result of the Transaction, will
receive Company Common Stock which is listed on the NYSE,
thus providing the Penn Fuel shareholders with a public
market for their securities that they do not have as Penn
Fuel shareholders. In addition, the Company's dividend
is currently set at $1.67 per share per annum, which is
substantially higher than Penn Fuel's current dividend
payout, as adjusted for the exchange ratio. Moreover,
the stock consideration to be received by Penn Fuel
shareholders upon consummation of the Transaction is
expected to be tax-free.
The Transaction was approved by all of the
shareholders of PFG who voted. There were no dissenters.
In light of these fairness opinions and
considering all relevant factors, the Company believes
that the consideration to be paid for the Penn Fuel
shares is reasonable and bears a fair relation to the
earnings capacity of the utility assets underlying the
Penn Fuel shares. Accordingly, the consideration to be
paid by the Company meets the standards of Section
10(b)(2).
c. REASONABLENESS OF FEES.
The Company believes that the overall fees,
commissions, and expenses incurred and to be incurred in
connection with the Transaction are reasonable and fair
in light of the size and complexity of the Transaction
relative to other transactions and the anticipated
benefits of the Transaction to the public, investors, and
consumers; that they are consistent with recent
precedent; and that they meet the standards of Section
10(b)(2).
As stated at Item 2 above, the Company and
Penn Fuel together expect to incur a combined total of
approximately $5.3 million in fees, commissions, and
expenses in connection with the Transaction. This amount
is substantially less than the fees associated with
recent transactions approved by the Commission,* and is
clearly consistent with the standards of Section
10(b)(2).
d. CAPITAL STRUCTURE AND THE PUBLIC INTEREST.
Section 10 (b)(3) requires the Commission to
determine whether the Transaction will unduly complicate
the Company's capital structure or would be detrimental
to the public interest, the interests of investors or
consumers, or the proper functioning of the Company's
system.
Following the Transaction, the Company will
have a capital structure which is substantially similar
to capital structures which the Commission has approved
in other orders.** After consummation of the
Transaction, the Company will own 100 percent of the
shares of Penn Fuel Common Stock, and indirectly will own
100 percent of Penn Fuel's two wholly-owned public
utility subsidiaries, PFG Gas and North Penn. All
outstanding preferred stock of Penn Fuel will be redeemed
for either cash or the Company's Common Stock. Penn Fuel
and its subsidiaries may continue to hold their debt,
which will have no material effect on the Company's
capital structure. The only issued and outstanding
voting securities of the Company will be the Company
Common Stock. For these reasons, the Company believes
that the Transaction will not unduly complicate its
capital structure.
--------------------
* See TUC Holding Co., supra. (estimated fees and
expenses of $37 million); Kansas Power & Light Co.,
Rel. No. 35-25465 (issued February 5, 1992)
(estimated fees and expenses of approximately $30
million); New Century Energies, Inc., Rel. No. 35-
26748 (issued August 1, 1997) (estimated fees and
expenses of $23.5 million).
** See, e.g., TUC Holding Co., supra; CINergy Corp.,
File No. 70-8427, Rel. No. 35-26146 (issued October
21, 1994); Entergy Corp., File No. 70-8059, Rel. No.
35-25952 (issued December 17, 1993). In each of
these orders, the Commission approved mergers which
resulted in a holding company acquiring 100 percent
of a utility operating company's common stock.
Set forth below are summaries of the historical
capital structures (excluding short-term debt) of the
Company and Penn Fuel as of June 30, 1997 and the pro
forma consolidated capital structure of the Company as of
the same date:
The Company and Penn Fuel Historical Capital Structures
(In Millions)
Company Penn Fuel
$ % $ %
Long-term debt 2,632 45 54 40
Preferred and preference
stock 347 611 11 8
Common equity 2,805 49 71 52
------------------------ ----- --- --- ---
Total Capitalization 5,784 100 136 100
The Company's Pro Forma Consolidated Capital Structure
(In Millions)
(unaudited)
Company
$ %
Long-term debt 2,687 45
Preferred and preference
stock 358 6
Common equity 2,875 49
------------------------ ----- ---
Total Capitalization 5,921 100
The ratio of consolidated common equity to
total capitalization of the Company will be, on an
unaudited pro forma basis, 49 percent. This figure
substantially exceeds the traditionally acceptable ratio
of approximately 30 percent.
As discussed earlier in Item 1(B)(1), the
Company believes that the Transaction, by achieving
efficiencies and economies, will benefit the interests of
the public, consumers and investors and will not impair
the proper functioning of the holding company system.
2. SECTION 10(C).
a. SECTION 10(C)(1).
Under Section 10(c)(1), the Commission must not
approve an acquisition which is "unlawful under the
provisions of Section 8" or "detrimental to the carrying
out of the provisions of Section 11." Section 8
prohibits an acquisition by a registered holding company
of an interest in an electric utility and a gas utility
serving substantially the same territory without the
express approval of the state commission when state law
prohibits or requires approval of the acquisition.
Section 8 applies only to registered holding companies
and is thus inapplicable to the Transaction. In any
event, the Transaction will be consummated only if
approval is received from the Pennsylvania PUC.
Section 11(b)(1) requires a registered holding
company, with limited exceptions, to limit its operations
to a "single integrated public-utility system, and to
such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations
of such integrated public-utility system."
Section 2(a)(29) provides separate definitions
for "integrated public-utility system" for gas and
electric companies. For electric utility companies, the
term means:
a system consisting of one or more units
of generating plants and/or transmission
lines and/or distributing facilities,
whose utility assets, whether owned by one
or more electric utility companies, are
physically interconnected or capable of
physical interconnection and which under
normal conditions may be economically
operated as a single interconnected and
coordinated system . . . .
For gas utilities, the term means:
a system consisting of one or more gas utility
companies which are so located and related that
substantial economies may be effectuated by
being operated as a single coordinated system.
With respect to either type of company, the system must be
confined in its operations to a single area or
region, in one or more States, not so large as
to impair (considering the state of the art and
the area or region affected) the advantages of
localized management, efficient operation, and
the effectiveness of regulation[.]*
--------------------
* For gas companies, utilities deriving natural gas
from a common source of supply may be deemed to be
included in a single area or region.
Section 11(b)(1) permits the acquisition and
retention of more than one integrated utility system only
if the requirements of Section 11(b)(1)(A)(C) are
satisfied.
The Commission has consistently recognized that
compliance with the standards of Section 11 is not
required where the resulting holding company is exempt
under Section 3. See, e.g., Gaz Metropolitan, Inc.,
Holding Co. Act Release No. 26170 (Nov. 23, 1994). In
applying Section 10(c)(1) to an exempt holding company,
the Commission focuses upon whether the acquisition would
be detrimental to the core concerns of Section 11, namely
the protection of the public interest and the interests
of investors and consumers. WPL Holdings, 49 S.E.C. 761
(1988), aff'd in part and rev'd in part sub nom.
Wisconsin Environmental Decade, Inc. v. S.E.C., 882 F.2d
523 (D.C. Cir. 1989) (authorizing combination electric
and gas exempt holding company); Dominion Resources Inc.,
Holding Co. Act Release No. 24618 (Apr. 5, 1988) (noting
that the "only question" regarding acquisition of
additional gas system is impact on public interest and
investors and consumers, and emphasizing that Section
10(c)(1) "would bring Section 11(b)(1) into consideration
only if Dominion Resources were not entitled to an
exemption").
The Commission has also emphasized that an
exempt holding company can acquire utility assets that
would not, when combined with the acquiring company's
existing utility assets, comply fully with the
requirements of Section 11(b)(1), provided there is "de
facto integration" of contiguous utility properties.*
--------------------
* TUC Holding Co., supra; see also Gaz Metropolitan,
Inc., supra.
The Transaction is fully consistent with the
standards of Section 10(c)(1) as applied to exempt
holding companies. The merger will produce a combined
enterprise which will better serve the needs of its
customers and the interests of its investors by offering
energy supply in competitive markets. The Transaction
will not impede the ability of the Pennsylvania PUC or
the Maryland PSC to carry out their statutory
responsibilities with respect to the utility activities
of PP&L, North Penn or PFG Gas. As noted above, the
Transaction will not be finalized until approval is
obtained from the Pennsylvania PUC, and the utility
operations of the combined enterprise will continue to be
regulated by the Pennsylvania PUC and the Maryland PSC
after the merger.
The Transaction also fully satisfies the "de
facto" integration standard set forth in TUC Holding Co.,
even though following the merger PP&L and Penn Fuel will
remain separate integrated public utility systems. The
service territories of the PP&L and Penn Fuel public
utility systems are largely located in adjacent or nearby
geographic areas and will overlap to some degree. As
discussed below, the systems of PP&L and Penn Fuel will
be coordinated with respect to a number of operational,
administrative, and support functions. Moreover, as
noted above, the Transaction will produce a combined
entity that will be able to compete more efficiently and
effectively in providing energy services to customers.
Thus, the Commission should find that the Transaction
would not be detrimental to the interest of Section 11,
and thereby satisfies the requirements of Section
10(c)(1).
b. SECTION 10(C)(2).
Section 10(c)(2) requires that the Commission
not approve an acquisition unless "the Commission finds
that such acquisition will serve the public interest by
tending towards the economical and efficient development
of an integrated public-utility system."
The Commission has interpreted Section 10(c)(2)
to permit the approval of acquisitions resulting in more
than one integrated system. "[W]e have indicated in the
past that acquisitions may be approved even if the
combined system will not be a single integrated system.
Section 10(c)(2) requires only that the acquisition tend
'towards the economical and the efficient development of
an integrated public-utility system.'"* The Commission
has held that "where a holding company will be exempt
from registration under Section 3 of the Act following an
acquisition of non-integrating utility assets, it
suffices for purposes of Section 10(c)(2) to find
benefits to one integrated system."**
--------------------
* Gaz Metropolitan, Inc., 58 S.E.C. Docket 189, 192,
Rel. No. 35-26170 (Nov. 23, 1994) (quoting Union
Electric Company, 45 S.E.C. 489, 504-06 (1974),
aff'd without op. sub nom. City of Cape Girardeau v.
SEC, 521 F.2d 324 (D.C. Cir. 1975)).
** TUC Holding Co., supra.
In this case, both integrated utility systems
will realize a number of benefits from the Transaction.
The Transaction will combine two companies with
complementary operations and expertise, and provide
important strategic, financial and other benefits to the
merging companies, shareholders and customers.
The Transaction will have a number of
operational benefits that will result in economic
efficiencies for the Company as a whole and for both
integrated utility systems. The Company will experience
economies by combining and coordinating operations with
Penn Fuel with respect to accounting, finance,
information systems, environmental management, gas
marketing, and procurement. In addition, the Company
expects that the Transaction will result in various
direct operational cost reductions. For example, after
the Transaction, PP&L and Penn Fuel distribution
customers can be served out of common service centers,
and separate after-hours answering systems can be
consolidated. The operational benefits and efficiencies
associated with the Transaction are discussed in detail
in the testimony of Scott T. Jones, Paul T. Champagne,
and John J. Hilyard, Jr., submitted in conjunction with
the Application of PP&L, PFG Gas, and North Penn before
the Pennsylvania PUC (Docket Nos. A-1206SOF0006, A-
1220SOF0003) (attached as Exhibit D-2).
The Transaction will also allow the Company to
offer a greater range of services to customers, making it
more competitive, and will provide significantly
increased financial and other resources to Penn Fuel's
integrated gas utility system, making it better able to
meet customer needs. See Exhibit D-2. Although the
amount of such benefits cannot be specifically
quantified, the Commission has recognized that "specific
dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will
suffice even when these are not precisely quantifiable."
Centerior Energy Corp., Rel. No. 35-24073 (issued April
29, 1986). The Commission has previously found that
similar benefits satisfied the affirmative finding
required under Section 10(c)(2). See, e.g., Union
Electric Company, supra, 45 S.E.C. at 494 (provision of
substantial resources made available by acquiring entity
to acquired company demonstrated "efficiencies and
economies by virtue of the affiliation"); WPL Holdings,
Inc., 50 S.E.C. 233, 237 (1990) (benefits supporting
Section 10(c)(2) finding include "[a] structure that
could more effectively address the growing national
competition in the energy industry, refocus various
utility activities, facilitate selective diversification
into non-utility business . . . and provide additional
flexibility for financing . . ."). Accordingly, the
Commission should find that the requirements of Section
10(c)(2) are satisfied with regard to the Transaction.
3. SECTION 10(F) -- COMPLIANCE WITH STATE
REQUIREMENTS.
To approve an acquisition, the Commission is
required, under Section 10(f), to find that the
acquisition has complied with all applicable state laws.
The Transaction is expressly conditioned on receipt of
all required regulatory approvals, including that of the
Pennsylvania PUC. The Company has filed an Application
with the Pennsylvania PUC, a copy of which is filed as
Exhibit D-1 hereto, and a copy of the Pennsylvania PUC's
determination pursuant thereto will be filed as Exhibit
D-3 by amendment hereto.
C. SECTION 3(A)(1).
The Company believes that, following
consummation of the Transaction, it and each of its
subsidiary companies will be entitled to exemption under
Section 3(a)(1) from all provisions of the Act (except
for Section 9(a)(2) thereof).* Section 3(a)(1)
authorizes the Commission to exempt any holding company:
if such holding company, and every subsidiary
company thereof which is a public-utility
company from which such holding company
derives, directly or indirectly, any material
part of its income are predominantly intrastate
in character and will carry on their businesses
substantially within a single State in which
such holding company and every such subsidiary
company thereof are organized.
Following the Transaction, the Company and each of its
public utility subsidiaries will be organized in
Pennsylvania. Each such public utility subsidiary will
also earn all of its utility income in Pennsylvania with
the exceptions of PFG Gas, which earns approximately 99%
of its utility revenues in Pennsylvania, and Safe Harbor,
which contributes only a de minimis amount of revenues to
the Company.
--------------------
* Following the transaction, PP&L will continue to
meet the requirements for exemption under Section
3(a)(2), and Penn Fuel will continue to meet the
requirements for an exemption under Section 3(a)(1).
Under such circumstances, the Company will
qualify as an exempt holding company, "unless and except
insofar as [the Commission] finds the exemption
detrimental to the public interest or the interest of
investors or consumers . . . ." As discussed in Item
1(B)(1), the Company believes that the Transaction will
result in efficiencies and economies which will benefit
the interest of the public, investors and consumers. As
noted above, the combination of electric and gas utility
business resulting from the Transaction raises no public
interest concerns. Therefore, the Company believes it is
qualified for the Section 3(a)(1) exemption upon
consummation of the Transaction, and requests an order
from the Commission granting such exemption.
ITEM 4. REGULATORY APPROVAL.
The Transaction is conditioned on approval by
the Pennsylvania PUC, which must approve the transfer of
ownership of Penn Fuel to the Company through the
Transaction. The Pennsylvania PUC will approve such a
transfer if it finds or determines that granting approval
is necessary or proper for the service, accommodation,
convenience or safety of the public. An application
seeking the Pennsylvania PUC's approval was filed with
the Pennsylvania PUC on August 7, 1997.
The Transaction is also subject to the
expiration or termination of the 30-day waiting period
under the HSR Act and no action having been instituted by
the DOJ or the Federal Trade Commission ("FTC") that is
not withdrawn or terminated prior to the effective time
of the Transaction. The HSR Act, and the rules and
regulations thereunder, provide that certain merger
transactions (including the Transaction) may not be
consummated until required information and materials have
been furnished to the DOJ and the FTC and certain waiting
periods have expired or been terminated. On October 7,
1997, Penn Fuel and the Company made their respective
filings with the DOJ and the FTC. On October 24, 1997,
the DOJ granted early termination of the waiting period
with respect to the Transaction.
A Penn Fuel subsidiary, PFG Gas, has less than
300 customers in the State of Maryland. The Maryland PSC
has been duly notified of the proposed transfer by
merger, but has determined not to institute any
proceedings on the matter at this time.
ITEM 5. PROCEDURE.
The Commission is respectfully requested to
issue and publish not later than February 6, 1998 the
requisite notice under Rule 23 with respect to the filing
of this Application, such notice to specify a date not
later than March 6, 1998 by which comments may be entered
and a date not later than March 9, 1998 as a date after
which an order of the Commission granting and permitting
this Application to become effective may be entered by
the Commission.
It is submitted that a recommended decision by
a hearing or other responsible officer of the Commission
is not needed for approval of the proposed Transaction.
The Division of Investment Management may assist in the
preparation of the Commission's decision. There should
be no waiting period between the issuance of the
Commission's order and the date on which it is to become
effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
a. EXHIBITS.
Tab
A-1 Articles of Incorporation of the Company
(incorporated by reference to Exhibit B to the
Proxy Statement of PP&L and Registration
Statement of the Company, dated March 9, 1995) . . . . . . . 1
A-2 By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement
No. 33-5794) . . . . . . . . . . . . . . . . . . . . . . . . 2
A-3 Articles of Incorporation of Penn Fuel . . . . . . . . . . . 3
A-4 By-Laws of Penn Fuel . . . . . . . . . . . . . . . . . . . . 4
B-1 Agreement and Plan of Merger (filed as Annex I to
the Registration Statement of the Company on Form S-4,
filed on August 13, 1997, File No. 333-33565, and
incorporated herein by reference). . . . . . . . . . . . . . 5
C-1 Registration Statement of the Company on Form S-4
(filed on August 13, 1997, as amended to date
(File No. 333-33565) and incorporated herein by
reference) . . . . . . . . . . . . . . . . . . . . . . . . . 6
D-1 Application to the Pennsylvania PUC, dated August 7,
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
D-2 Direct Testimony of Scott T. Jones, Paul T.
Champagne, and John J. Hilyard, Jr. submitted to the
Pennsylvania PUC . . . . . . . . . . . . . . . . . . . . . . 8
D-3 Determination of Pennsylvania PUC (to be filed by
amendment) . . . . . . . . . . . . . . . . . . . . . . . . . 9
E-1 Map of PP&L's service territory . . . . . . . . . . . . . . 10
E-2 Map of PFG Gas service territory . . . . . . . . . . . . . . 11
E-3 Map of North Penn service territory . . . . . . . . . . . . 12
E-4 Map showing the overlap of the service territories
of PP&L with those of PFG Gas and North Penn . . . . . . . . 13
F-1 Opinion of Counsel [to be filed by amendment] . . . . . . . 14
F-2 Past Tense Opinion of Counsel [to be filed by
amendment] . . . . . . . . . . . . . . . . . . . . . . . . . 15
G-1 The Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 (filed on
February 28, 1997 (File No. 1-11459) and
incorporated herein by reference). . . . . . . . . . . . . . 16
G-2 The Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 (filed November 10,
1997 (File No. 1-11459) and incorporated herein by
reference) . . . . . . . . . . . . . . . . . . . . . . . . . 17
G-3 Penn Fuel's Annual Report to Shareholders for the
fiscal year ended December 31, 1996. . . . . . . . . . . . . 18
H-1 Opinion of Morgan Stanley & Co., Incorporated. . . . . . . . 19
H-2 Opinion of First Union Capital Markets . . . . . . . . . . . 20
I-1 Proposed Form of Notice . . . . . . . . . . . . . . . . . . 21
b. FINANCIAL STATEMENTS.
FS-1 Company Consolidated Balance Sheet as of December
31, 1996 (previously filed with the Commission in
the Company Annual Report on Form 10-K for the
year ended December 31, 1996 (Exhibit G-1 hereto),
filed on February 28, 1997, File No. 1-11459, and
incorporated herein by reference) . . . . . . . . . . . . . 22
FS-2 Company Consolidated Balance Sheet as of September
30, 1997 (previously filed with the Commission Company
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 (Exhibit G-2 hereto), filed on
November 10, 1997, File No. 1-11459, and incorporated
herein by reference) . . . . . . . . . . . . . . . . . . . . 23
FS-3 Company Consolidated Statement of Income for the 12
months ended December 31, 1996 (previously filed with
the Commission in the Company Annual Report on Form
10-K for the year ended December 31, 1996 (Exhibit G-1
hereto), filed on February 28, 1997, File No. 1-11459,
and incorporated herein by reference) . . . . . . . . . . . 24
FS-4 Company Consolidated Statement of Income for the 9
months ended September 30, 1997 (previously filed with
the Commission in the Company Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (Exhibit
G-2 hereto), filed on November 10, 1997, File No. 1-11459,
and incorporated herein by reference) . . . . . . . . . . . 25
FS-5 Penn Fuel Consolidated Balance Sheet as of December
31, 1996 (previously filed with the Commission in the
Registration Statement of the Company on Form S-4
(Exhibit C-1 hereto), filed on August 13, 1997, as
amended to date (File No.333-33565) and incorporated
herein by reference) . . . . . . . . . . . . . . . . . . . . 26
FS-6 Penn Fuel Consolidated Balance Sheet as of June 30,
1997 (previously filed with the Commission in the
Registration Statement of the Company on Form S-4
(Exhibit C-1 hereto), filed on August 13, 1997, as
amended to date (File No. 333-33565) and incorporated
herein by reference) . . . . . . . . . . . . . . . . . . . . 27
FS-7 Penn Fuel Consolidated Statement of Income for the
12 months ended December 31, 1996 (previously filed
with the Commission in the Registration Statement of
the Company on Form S-4 (Exhibit C-1 hereto), filed
on August 13, 1997, as amended to date (File No.
333-33565) and incorporated herein by reference) . . . . . . 28
FS-8 Penn Fuel Consolidated Statement of Income for the 6
months ended June 30, 1997 (previously filed with
the Commission in the Registration Statement of the
Company on Form S-4 (Exhibit C-1 hereto), filed on
August 13, 1997, as amended to date (File No.
333-33565) and incorporated herein by reference) . . . . . . 29
FS-9 Pro Forma Combined Financial data for the Company
and Penn Fuel (previously filed with the
Commission in the Registration Statement of
the Company on Form S-4 (Exhibit C-1 hereto), filed
on August 13, 1997, as amended to date (File No.
333-33565) and incorporated herein by reference) . . . . . . 30
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
The Company believes that the Transaction will
not involve major federal action significantly affecting
the quality of the human environment as those terms are
used in Section 102(2)(C) of the National Environmental
Policy Act, 42 U.S.C. Section 4321 et seq. ("NEPA").
First, no major federal action within the meaning of NEPA
is involved. Second, consummation of the Transaction
will not result in changes in the operations of the
subsidiaries of the Company or Penn Fuel that would have
any significant impact on the environment. To the
Company's knowledge, no federal agency is preparing an
environmental impact statement with respect to this
matter.
SIGNATURE
Pursuant to the requirements of the Public
Utility Holding Company Act of 1935, the undersigned
company has duly caused this Application to be signed on
its behalf by the undersigned thereunto duly authorized.
PP&L RESOURCES, INC.
By: /s/ Robert J. Grey Date: 1/28/98
------------------------------ -------
Name: Robert J. Grey
------------------------------
Title: Senior Vice President, General
Counsel and Secretary
------------------------------
EXHIBIT A-3
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
PENN FUEL GAS, INC.
ARTICLE I. The name of the corporation is:
Penn Fuel Gas, Inc.
ARTICLE II. The address of the registered
office of the corporation in this Commonwealth is:
55 South Third Street
Oxford, Chester County
Pennsylvania 19363
ARTICLE III. The purpose or purposes for
which the corporation is incorporated under the Business
Corporation Law of 1988 are to engage in, and to do any
lawful act concerning, any or all lawful business for
which corporations may be incorporated under said
Business Corporation Law, including but not limited to,
manufacturing, processing, acquiring, owning, using,
dealing in and disposing of personal property of every
class and description, engaging in research and
development, furnishing services, and acquiring,
improving, owning, using and disposing of real property
of any nature whatsoever.
ARTICLE IV. The term for which the
corporation is to exist is perpetual.
ARTICLE V. The aggregate number of shares
which the corporation shall have authority to issue is
4,500,000 shares of which 2,000,000 shares shall be
Common Stock of the par value of $1.00 per share, 500,000
shares shall be shares of Prior Preferred Stock, without
par value, and 2,000,000 shares shall be shares of
Preferred Stock, without par value. The board of
directors shall have the full authority permitted by law
to fix by resolution full, limited, multiple or
fractional or no voting rights, and such designations,
preferences, limitations and special rights of any class
or any series of any class that may be desired. Except
as may be expressly provided by the board of directors,
shares of Prior Preferred Stock shall rank senior to
shares of Preferred Stock with respect to payment of
dividends and distributions in liquidation.
ARTICLE VI. No holder of any class or series
of capital stock of the corporation shall have preemptive
rights, and the corporation shall have the right to issue
and to sell to any person or persons any shares of its
capital stock or any option rights or any securities
having conversion or option rights with respect to its
capital stock, without first offering such shares, rights
or securities to the holders of any class or series of
its then outstanding capital stock.
ARTICLE VII. The shareholders of the
corporation shall not have the right to cumulate their
votes for the election of directors of the corporation.
ARTICLE VIII. Any action which may be taken at
a meeting of shareholders or of a class of shareholders
may be taken without a meeting if a consent or consents
in writing to such action, setting forth the action so
taken, shall be signed by shareholders entitled to cast
the minimum number of votes that would be necessary to
authorize the action at a meeting at which all
shareholders entitled to vote thereon were present and
voting.
ARTICLE IX. (a) Directors and officers as
fiduciaries. A director or officer of the corporation
shall stand in a fiduciary relation to the corporation
and shall perform his or her duties as a director or
officer, including his or her duties as a member of any
committee of the board upon which he or she may serve, in
good faith, in a manner he or she reasonably believes to
be in the best interests of the corporation, and with
such care, including reasonable inquiry, skill and
diligence, as a person of ordinary prudence would use
under similar circumstances. In performing his or her
duties, a director or officer shall be entitled to rely
in good faith on information, opinions, reports or
statements, including financial statements and other
financial data, in each case prepared or presented by one
or more officers or employees of the corporation whom the
director or officer reasonably believes to be reliable
and competent with respect to the matters presented,
counsel, public accountants or other persons as to
matters that the director or officer reasonably believes
to be within the professional or expert competence of
such person, or a committee of the board of directors
upon which the director or officer does not serve, duly
designated in accordance with law, as to matters within
its designated authority, which committee the director or
officer reasonably believes to merit confidence. A
director or officer shall not be considered to be acting
in good faith if he or she has knowledge concerning the
matter in question that would cause his or her reliance
to be unwarranted. Absent breach of fiduciary duty, lack
of good faith or self-dealing, actions taken as a
director or officer of the corporation or any failure to
take any action shall be presumed to be in the best
interests of the corporation.
(b) Personal liability of directors. A
director of the corporation shall not be personally
liable, as such, for monetary damages (including, without
limitation, any judgment, amount paid in settlement,
penalty, punitive damages or expense of any nature
(including, without limitation, attorneys' fees and
disbursements)) for any action taken, or any failure to
take any action, unless the director has breached or
failed to perform the duties of his or her office under
these articles of incorporation, the bylaws of the
corporation or applicable provisions of law and the
breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
(c) Personal liability of officers. An
officer of the corporation shall not be personally
liable, as such, to the corporation or its shareholders
for monetary damages (including, without limitation, any
judgment, amount paid in settlement, penalty, punitive
damages or expense of any nature (including, without
limitation, attorneys' fees and disbursements)) for any
action taken, or any failure to take any action, unless
the officer has breached or failed to perform the duties
of his or her office under these articles of
incorporation, the bylaws of the corporation or
applicable provisions of law and the breach or failure to
perform constitutes self-dealing, willful misconduct or
recklessness.
(d) Interpretation of article. The provisions
of sections(b) and (c) of this article shall not apply to
the responsibility or liability of a director or officer,
as such, pursuant to any criminal statute or for the
payment of taxes pursuant to local, state or federal law.
The provisions of this article have been adopted pursuant
to the authority of the Pennsylvania Business Corporation
Law of 1988, shall be deemed to be a contract with each
director or officer of the corporation who serves as such
at any time while this article is in effect, and such
provisions are cumulative of and shall be in addition to
and independent of any and all other limitations on the
liabilities of directors or officers of the corporation,
as such, or rights of indemnification by the corporation
to which a director or officer of the corporation may be
entitled, whether such limitations or rights arise under
or are created by any statute, rule of law, bylaw,
agreement, vote of shareholders or disinterested
directors or otherwise. Each person who serves as a
director or officer of the corporation while this article
is in effect shall be deemed to be doing so in reliance
on the provisions of this article. No amendment to or
repeal of this article, nor the adoption of any
provisions of these articles of incorporation
inconsistent with this article, shall apply to or have
any effect on the liability or alleged liability of any
director or officer of the corporation for or with
respect to any acts or omissions of such director or
officer occurring prior to such amendment, repeal or
adoption of an inconsistent provision. In any action,
suit or proceeding involving the application of the
provisions of this article, the party or parties
challenging the right of a director or officer to the
benefits of this article shall have the burden of proof.
ARTICLE X. These articles of incorporation
may be amended in the manner at the time prescribed by
statute, and all rights conferred upon shareholders
herein are granted subject to this reservation.
Exhibit A-4
BYLAWS
OF
PENN FUEL GAS, INC.
(a Pennsylvania Corporation)
...oo0oo...
(as amended and restated by action
of the shareholders on May 28, 1996)
ARTICLE I
Offices and Fiscal Year
Section 1.1 Registered Office.--The registered
office of the corporation in the Commonwealth of
Pennsylvania shall be at 55 South Third Street, Oxford,
Chester County, Pennsylvania 19363, until otherwise
established by an amendment of the articles of
incorporation (the "articles") or by the board of
directors and a record of such change is filed with the
Pennsylvania Department of State in the manner provided
by law.
Section 1.2 Other Offices.--The corporation
may also have offices at such other places within or
without the Commonwealth of Pennsylvania as the board of
directors may from time to time appoint or the business
of the corporation may require.
Section 1.3 Fiscal Year.--The fiscal year of
the corporation shall begin on the first day of January
in each year.
ARTICLE II
Notice--Meetings Generally
Section 2.1 Notice of Meetings of Board of
Directors.--Notice of a regular meeting of the board of
directors need not be given. Notice of every special
meeting of the board of directors shall be given to each
director by telephone or in writing at least 24 hours (in
the case of notice by telephone, telex, TWX or facsimile
transmission) or 48 hours (in the case of notice by
telegraph, courier service or express mail) or five days
(in the case of notice by first class mail) before the
time at which the meeting is to be held. Every such
notice shall state the time and place of the meeting.
Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the board need be
specified in a notice of the meeting.
Section 2.2 Notice of Meetings of Shareholders
(a) General Rule.--Except as otherwise
provided in the Business Corporation Law, written notice
of every meeting of the shareholders shall be given by,
or at the direction of, the secretary or other authorized
person to each shareholder of record entitled to vote at
the meeting at least (1) ten days prior to the day named
for a meeting (and, in case of a meeting called to
consider a merger, consolidation, share exchange or
division, to each shareholder of record not entitled to
vote at the meeting) called to consider a fundamental
change under 15 Pa.C.S. Chapter 19 or (2) five days prior
to the day named for the meeting in any other case. In
the case of a special meeting of shareholders, the notice
shall specify the general nature of the business to be
transacted.
(b) Notice of Action by Shareholders on
Bylaws.--In the case of a meeting of shareholders that
has as one of its purposes action on the bylaws, written
notice shall be given to each shareholder that the
purpose, or one of the purposes, of the meeting is to
consider the adoption, amendment or repeal of the bylaws.
There shall be included in, or enclosed with, the notice
a copy of the proposed amendment or a summary of the
changes to be effected thereby.
(c) Notice of Action by Shareholders on
Fundamental Change.--In the case of a meeting of the
shareholders that has as one of its purposes action with
respect to any fundamental change under 15 Pa.C.S.
Chapter 19, each shareholder shall be given, together
with written notice of the meeting, a copy or summary of
the amendment or plan to be considered at the meeting in
compliance with the provisions of Chapter 19.
(d) Notice of Action by Shareholders
Giving Rise to Dissenters Rights.--In the case of a
meeting of the shareholders that has as one of its
purposes action that would give rise to dissenters rights
under the provisions of 15 Pa.C.S. Subchapter 15D, each
shareholder shall be given, together with written notice
of the meeting:
(1) a statement that the
shareholders have a right to dissent and obtain
payment of the fair value of their shares by
complying with the provisions of Subchapter 15D
(relating to dissenters rights); and
(2) a copy of Subchapter 15D.
Section 2.3 Waiver of Notice.
(a) Written Waiver.--Whenever any written
notice is required to be given under the provisions of
the Business Corporation Law, 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 the notice. Neither the business to be
transacted at, nor the purpose of, a meeting need be
specified in the waiver of notice of the meeting.
(b) Waiver by Attendance.--Attendance of
a person at any meeting shall constitute a waiver of
notice of the meeting except where a person attends a
meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any
business because the meeting was not lawfully called or
convened.
Section 2.4 Use of Conference Telephone and
Similar Equipment.--Any director may participate in any
meeting of the board of directors, and the board of
directors may provide by resolution with respect to a
specific meeting or with respect to a class of meetings
that one or more persons may participate in a meeting of
the shareholders of the corporation, by means of
conference telephone or similar communications equipment
by means of which all persons participating in the
meeting can hear each other. Participation in a meeting
pursuant to this section shall constitute presence in
person at the meeting.
ARTICLE III
Shareholders
Section 3.1 Place of Meeting.--All meetings of
the shareholders of the corporation shall be held at the
registered office of the corporation or such other place
as may be designated by the board of directors in the
notice of a meeting.
Section 3.2 Annual Meeting.--The board of
directors may fix and designate the date and time of the
annual meeting of the shareholders, but if no such date
and time is fixed and designated by the board, the
meeting for any calendar year shall be held on the fourth
Monday of May in such year, if not a legal holiday under
the laws of Pennsylvania, and, if a legal holiday, then
on the next succeeding business day, not a Saturday, at
10:00 o'clock A.M., and at said meeting the shareholders
then entitled to vote shall elect directors and shall
transact such other business as may properly be brought
before the meeting.
Section 3.3 Special Meetings.
(a) Call of Special Meetings.--Special
meetings of the shareholders may be called at any time:
(1) by the board of directors; or
(2) by the president; or
(3) unless otherwise provided in the
articles, by shareholders entitled to cast at
least 20% of the votes that all shareholders
are entitled to cast at a particular meeting.
(b) Fixing of Time for Meeting.--Upon
written request of any person who has called a special
meeting, it shall be the duty of the secretary to fix the
time of the meeting, which shall be held not more than 60
days after the receipt of the request. The secretary has
no independent right or authority to call a special
meeting of the shareholders, and may only do so in
response to the written request of another person who is
authorized under this Section 3.3 to call a special
meeting.
Section 3.4 Quorum and Adjournment.
(a) General Rule.--A meeting of
shareholders of the corporation duly called shall not be
organized for the transaction of business unless a quorum
is present. The presence of shareholders entitled to
cast at least a majority of the votes that all
shareholders are entitled to cast on a particular matter
to be acted upon at the meeting shall constitute a quorum
for the purposes of consideration and action on the
matter. Shares of the corporation owned, directly or
indirectly, by it and controlled, directly or indirectly,
by the board of directors of this corporation, as such,
shall not be counted in determining the total number of
outstanding shares for quorum purposes at any given time.
(b) Withdrawal of a Quorum.--The
shareholders 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.
(c) Adjournments Generally.--Any regular
or special meeting of the shareholders, including one at
which directors are to be elected and one which cannot be
organized because a quorum has not attended, may be
adjourned for such period and to such place as the
shareholders present and entitled to vote shall direct,
except that any meeting at which directors are to be
elected shall be adjourned only from day to day or for
such longer periods not exceeding 15 days each as the
shareholders present and entitled to vote shall direct.
(d) Electing Directors at Adjourned
Meeting.--Those shareholders entitled to vote who attend
a meeting called for the election of directors that has
been previously adjourned for lack of a quorum, although
less than a quorum as fixed in this section, shall
nevertheless constitute a quorum for the purpose of
electing directors.
(e) Other Action in Absence of Quorum.--
Those shareholders entitled to vote who attend a meeting
of shareholders that has been previously adjourned for
one or more periods aggregating at least 15 days because
of an absence of a quorum, although less than a quorum as
fixed in this section, shall nevertheless constitute a
quorum for the purpose of acting upon any matter set
forth in the notice of the meeting if the notice states
that those shareholders who attend the adjourned meeting
shall nevertheless constitute a quorum for the purpose of
acting upon the matter.
Section 3.5 Action by Shareholders.--Except as
otherwise provided in the Business Corporation Law or the
articles or these bylaws, whenever any corporate action
is to be taken by vote of the shareholders of the
corporation, it shall be authorized upon receiving the
affirmative vote of a majority of the votes cast by all
shareholders entitled to vote thereon and, if any
shareholders are entitled to vote thereon as a class,
upon receiving the affirmative vote of a majority of the
votes cast by the shareholders entitled to vote as a
class.
Section 3.6 Organization.--At every meeting of
the shareholders, the chairman of the board, if there be
one, or, in the case of vacancy in office or absence of
the chairman of the board, the vice chairman of the
board, if there be one, or one of the following officers
present in the order stated: the president, the vice
presidents in their order of rank and seniority, or a
person chosen by vote of the shareholders present, shall
act as chairman of the meeting. The secretary or, in the
absence of the secretary, an assistant secretary, or, in
the absence of both the secretary and assistant
secretaries, a person appointed by the chairman of the
meeting, shall act as secretary of the meeting.
Section 3.7 Voting Rights of Shareholders.--
Unless otherwise provided in the articles, every
shareholder of the corporation shall be entitled to one
vote for every share standing in the name of the
shareholder on the books of the corporation.
Section 3.8 Voting and Other Action by Proxy.
(a) General Rule.--
(1) Every shareholder entitled to
vote at a meeting of shareholders or to express
consent or dissent to corporate action in
writing without a meeting may authorize another
person to act for the shareholder by proxy.
(2) The presence of, or vote or
other action at a meeting of shareholders, or
the expression of consent or dissent to
corporate action in writing, by a proxy of a
shareholder shall constitute the presence of,
or vote or action by, or written consent or
dissent of, the shareholder.
(3) Where two or more proxies of a
shareholder are present, the corporation 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.
(b) Execution and Filing.--Every proxy
shall be executed in writing by the shareholder or by the
duly authorized attorney-in-fact of the shareholder and
filed with the secretary of the corporation. A telegram,
telex, cablegram, datagram or similar transmission from a
shareholder or attorney-in-fact, or a photographic,
facsimile or similar reproduction of a writing executed
by a shareholder or attorney-in-fact:
(1) may be treated as properly
executed for purposes of this subsection; and
(2) shall be so treated if it sets
forth a confidential and unique identification
number or other mark furnished by the
corporation to the shareholder for the purposes
of a particular meeting or transaction.
(c) 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 corporation. 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 corporation.
(d) Expenses.--The corporation shall pay
the reasonable expenses of solicitation of votes, proxies
or consents of shareholders 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.
Section 3.9 Determination of Shareholders of
Record.
(a) Fixing Record Date.--The board of
directors may fix a time prior to the date of any meeting
of shareholders as a record date for the determination of
the shareholders 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 shareholders. Only
shareholders of record on the date fixed shall be so
entitled notwithstanding any transfer of shares on the
books of the corporation after any record date fixed as
provided in this subsection. The board of directors may
similarly fix a record date for the determination of
shareholders of record for any other purpose. When a
determination of shareholders of record has been made as
provided in this section for purposes of a meeting, the
determination shall apply to any adjournment thereof
unless the board fixes a new record date for the
adjourned meeting.
(b) Determination When a Record Date is
Not Fixed.--If a record date is not fixed:
(1) The record date for determining
shareholders entitled to notice of or to vote
at a meeting of shareholders shall be at the
close of business on the day next preceding the
day on which notice is given or, if notice is
waived, at the close of business on the day
immediately preceding the day on which the
meeting is held.
(2) The record date for determining
shareholders entitled to express consent or
dissent to corporate action in writing without
a meeting, when prior action by the board of
directors is not necessary, to call a special
meeting or to propose an amendment of the
articles shall be the close of business on the
day on which the first written consent or
dissent, request for a special meeting or
petition proposing an amendment of the articles
is filed with the secretary of the corporation.
(3) The record date for determining
shareholders for any other purpose shall be at
the close of business on the day on which the
board of directors adopts the resolution
relating thereto.
Section 3.10 Unanimous Consent of Shareholders
in Lieu of Meeting.--Any action required or permitted to
be taken at a meeting of the shareholders or of a class
of shareholders may be taken without a meeting if, prior
or subsequent to the action, a consent or consents
thereto by all of the shareholders who would be entitled
to vote at a meeting for such purpose shall be filed with
the secretary of the corporation.
ARTICLE IV
Board of Directors
Section 4.1 Powers; Personal Liability.
(a) General Rule.--Unless otherwise
provided by statute, all powers vested by law in the
corporation shall be exercised by or under the authority
of, and the business and affairs of the corporation shall
be managed under the direction of, the board of
directors.
(b) Personal Liability of Directors.--
(1) A director shall not be
personally liable, as such, for monetary
damages (including, without limitation, any
judgment, amount paid in settlement, penalty,
punitive damages or expense of any nature
(including, without limitation, attorneys' fees
and disbursements)) for any action taken, or
any failure to take any action, unless:
(i) the director has breached
or failed to perform the duties of his or
her office under Subchapter 17B of the
Business Corporation Law (or any successor
provision); and
(ii) the breach or failure to
perform constitutes self-dealing, willful
misconduct or recklessness.
(2) The provisions of paragraph (1)
shall not apply to the responsibility or
liability of a director pursuant to any
criminal statute, or the liability of a
director for the payment of taxes pursuant to
local, state or federal law.
(The provisions of this subsection (c) were adopted by
the shareholders of the corporation on _______ __, 1996;
the predecessor provisions of this subsection (c) were
first adopted as Section 3.01(b) of the By-Laws of the
corporation, retroactive to January 27, 1987. The
provisions of this subsection (c) shall not apply to any
action filed prior to January 27, 1987 or to any breach
of performance of duty or any failure of performance of
duty by a director occurring prior to that date.)
Section 4.2 Qualifications and Selection of
Directors.
(a) Qualifications.--Each director of the
corporation shall be a natural person of full age who
need not be a resident of the Commonwealth of
Pennsylvania or a shareholder of the corporation. No
person who is 72 years of age or older, or will attain
the age of 72 years during the year in which such person
might be nominated as a director, shall be eligible to be
nominated or selected as a director of the corporation.
(b) Power to Select Directors.--Except as
otherwise provided in these bylaws, directors of the
corporation shall be elected by the shareholders. Any
shareholder may nominate as many persons for the office
of director as there are positions to be filled. If
nominations for the office of director have been called
for as provided in this section only candidates who have
been so nominated shall be eligible for election.
(c) Election of Directors.--In elections
for directors, voting need not be by ballot, unless
required by vote of the shareholders before the voting
for the election of directors begins. 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.
Section 4.3 Number and Term of Office.
(a) Number.--The board of directors shall
consist of such number of directors, not less than three
nor more than eleven, as may be determined from time to
time by resolution of the board of directors.
(b) Term of Office.--Each director shall
hold office for one year and until a successor has been
selected and qualified or until his or her earlier death,
resignation or removal. A decrease in the number of
directors shall not have the effect of shortening the
term of any incumbent director.
(c) Resignation.--Any director may resign
at any time upon written notice to the corporation. The
resignation shall be effective upon receipt thereof by
the corporation or at such subsequent time as shall be
specified in the notice of resignation.
(d) Chairman and Vice Chairman of the
Board.--The board of directors may elect from among the
members of the board a chairman of the board and a vice
chairman of the board. The chairman of the board, if
there be one, and vice chairman of the board, if there be
one, are not officers of the corporation.
Section 4.4 Vacancies.
(a) General Rule.--Vacancies in the board
of directors, including vacancies resulting from an
increase in the number of directors, may be filled by a
majority vote of the remaining members of the board
though less than a quorum, or by a sole remaining
director, and each person so selected shall be a director
to serve until the next selection of the class for which
such director has been chosen, and until a successor has
been selected and qualified or until his or her earlier
death, resignation or removal.
(b) Action by Resigned Directors.--When
one or more directors resign from the board effective at
a future date, the directors then in office, including
those who have so resigned, shall have power by the
applicable vote to fill the vacancies, the vote thereon
to take effect when the resignations become effective.
Section 4.5 Removal of Directors.
(a) Removal by the Shareholders.--The
entire board of directors, or any class of the board, or
any individual director may be removed from office by
vote of the shareholders entitled to vote thereon without
assigning any cause. In case the board or a class of the
board or any one or more directors are so removed, new
directors may be elected at the same meeting.
(b) Removal by the Board.--The board of
directors may declare vacant the office of a director who
has been judicially declared of unsound mind or who has
been convicted of an offense punishable by imprisonment
for a term of more than one year or if, within 60 days
after notice of his or her selection, the director does
not accept the office either in writing or by attending a
meeting of the board of directors.
Section 4.6 Place of Meetings.--Meetings of
the board of directors may be held at such place within
or without the Commonwealth of Pennsylvania as the board
of directors may from time to time appoint or as may be
designated in the notice of the meeting.
Section 4.7 Organization of Meetings.--At
every meeting of the board of directors, the chairman of
the board, if there be one, or, in the case of a vacancy
in the office or absence of the chairman of the board,
the vice chairman of the board, if there be one, or one
of the following officers present in the order stated:
the president, the vice presidents in their order of rank
and seniority, or a person chosen by a majority of the
directors present, shall act as chairman of the meeting.
The secretary or, in the absence of the secretary, an
assistant secretary, or, in the absence of the secretary
and the assistant secretaries, any person appointed by
the chairman of the meeting, shall act as secretary of
the meeting.
Section 4.8 Regular Meetings.--Regular
meetings of the board of directors shall be held at such
time and place as shall be designated from time to time
by resolution of the board of directors.
Section 4.9 Special Meetings.--Special
meetings of the board of directors shall be held whenever
called by the chairman or by two or more of the
directors.
Section 4.10 Quorum of and Action by
Directors.
(a) General Rule.--A majority of the
directors in office of the corporation shall be necessary
to constitute a quorum for the transaction of business
and the acts of a majority of the directors present and
voting at a meeting at which a quorum is present shall be
the acts of the board of directors.
(b) Action by Written Consent.--Any
action required or permitted to be taken at a meeting of
the directors may be taken without a meeting if, prior or
subsequent to the action, a consent or consents thereto
by all of the directors in office is filed with the
secretary of the corporation.
Section 4.11 Executive and Other Committees.
(a) Establishment and Powers.--The board
of directors may, by resolution adopted by a majority of
the directors in office, establish one or more committees
to consist of one or more directors of the corporation.
Each committee of the board shall serve at the pleasure
of the board. Any committee shall have and may exercise
such powers and authority of the board of directors as
are provided in the resolution of the board of directors
and otherwise permitted by applicable law.
(b) Alternate 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 consisting a
quorum, may unanimously appoint another director to act
at the meeting in the place of the absent or disqualified
member.
(c) Committee Procedures.--The term
"board of directors" or "board," when used in any
provision of these bylaws relating to the organization or
procedures of or the manner of taking action by the board
of directors, shall be construed to include and refer to
any executive or other committee of the board.
Section 4.12 Compensation.--The board of
directors shall have the authority to fix the
compensation of directors for their services as directors
and a director may be a salaried officer of the
corporation.
ARTICLE V
Officers
Section 5.1 Officers Generally.
(a) The officers of the corporation shall
be a president, one or more vice presidents, a secretary,
a treasurer, and such other officers as may be elected in
accordance with the provisions of Section 5.03. Officers
may but need not be directors or shareholders of the
corporation. The president and secretary shall be
natural persons of full age. The treasurer may be a
corporation, but if a natural person shall be of full
age. Any number of offices may be held by the same
person.
(b) Standard of Care.--In lieu of the
standards of conduct otherwise provided by law, officers
of the corporation shall be subject to the same standards
of conduct, including standards of care and loyalty and
rights of justifiable reliance, as shall at the time be
applicable to directors of the corporation. An officer
of the corporation shall not be personally liable, as
such, to the corporation or its shareholders for monetary
damages (including, without limitation, any judgment,
amount paid in settlement, penalty, punitive damages or
expense of any nature (including, without limitation,
attorneys' fees and disbursements) for any action taken,
or any failure to take any action, unless the officer has
breached or failed to perform the duties of his or her
office under the articles of incorporation, these bylaws,
or the applicable provisions of law and the breach or
failure to perform constitutes self-dealing, willful
misconduct or recklessness. The provisions of this
subsection shall not apply to the responsibility or
liability of an officer pursuant to any criminal statute
or for the payment of taxes pursuant to local, state or
federal law.
Section 5.2 Election, Term of Office and
Resignations.
(a) Election and Term of Office.--The
officers of the corporation, except those elected by
delegated authority pursuant to Section 5.03, shall be
elected annually by the board of directors, and each such
officer shall hold office for a term of one year and
until a successor has been selected and qualified or
until his or her earlier death, resignation or removal.
(b) Resignations.--Any officer may resign
at any time upon written notice to the corporation. The
resignation shall be effective upon receipt thereof by
the corporation or at such subsequent time as may be
specified in the notice of resignation.
Section 5.3 Subordinate Officers, Committees
and Agents.--The board of directors may from time to time
elect such other officers and appoint such committees,
employees or other agents as the business of the
corporation may require, including one or more assistant
secretaries, and one or more assistant treasurers, each
of whom shall hold office for such period, have such
authority, and perform such duties as are provided in
these bylaws, or as the board of directors may from time
to time determine. The board of directors may delegate
to any officer or committee the power to elect
subordinate officers and to retain or appoint employees
or other agents, or committees thereof, and to prescribe
the authority and duties of such subordinate officers,
committees, employees or other agents.
Section 5.4 Removal of Officers and Agents.--
Any officer or agent of the corporation may be removed by
the board of directors with or without cause.
Section 5.5 Vacancies.--A vacancy in any
office because of death, resignation, removal,
disqualification, or any other cause, may be filled by
the board of directors or by the officer or committee to
which the power to fill such office has been delegated
pursuant to Section 5.3, as the case may be, and if the
office is one for which these bylaws prescribe a term,
shall be filled for the unexpired portion of the term.
Section 5.6 Authority.--All officers of the
corporation, as between themselves and the corporation,
shall have such authority and perform such duties in the
management of the corporation as may be provided by or
pursuant to resolutions or orders of the board of
directors or, in the absence of controlling provisions in
the resolutions or orders of the board of directors, as
may be determined by or pursuant to these bylaws.
Section 5.7 The President.--The president
shall be the chief executive officer of the corporation
and shall have general supervision over the business and
operations of the corporation, subject, however, to the
control of the board of directors. The president shall
sign, execute, and acknowledge, in the name of the
corporation, deeds, mortgages, bonds, contracts or other
instruments, authorized by the board of directors, except
in cases where the signing and execution thereof shall be
expressly delegated by the board of directors, or by
these bylaws, to some other officer or agent of the
corporation; and, in general, shall perform all duties
incident to the office of president and such other duties
as from time to time may be assigned by the board of
directors.
Section 5.8 The Vice Presidents.--The vice
presidents shall perform the duties of the president in
the absence of the president and such other duties as may
from time to time be assigned to them by the board of
directors or the president.
Section 5.9 The Secretary.--The secretary or
an assistant secretary shall attend all meetings of the
shareholders and of the board of directors and all
committees thereof and shall record all the votes of the
shareholders and of the directors and the minutes of the
meetings of the shareholders and of the board of
directors and of committees of the board in a book or
books to be kept for that purpose; shall see that notices
are given and records and reports properly kept and filed
by the corporation as required by law; shall be the
custodian of the seal of the corporation and see that it
is affixed to all documents to be executed on behalf of
the corporation under its seal; and, in general, shall
perform all duties incident to the office of secretary,
and such other duties as may from time to time be
assigned by the board of directors or the president.
Section 5.10 The Treasurer.--The treasurer or
an assistant treasurer shall have or provide for the
custody of the funds or other property of the
corporation; shall collect and receive or provide for the
collection and receipt of moneys earned by or in any
manner due to or received by the corporation; shall
deposit all funds in his or her custody as treasurer in
such banks or other places of deposit as the board of
directors may from time to time designate; shall,
whenever so required by the board of directors, render an
account showing all transactions as treasurer, and the
financial condition of the corporation; and, in general,
shall discharge such other duties as may from time to
time be assigned by the board of directors or the
president.
Section 5.11 Salaries.--The salaries of the
officers elected by the board of directors shall be fixed
from time to time by the board of directors or by such
officer as may be designated by resolution of the board.
The salaries or other compensation of any other officers,
employees and other agents shall be fixed from time to
time by the officer or committee to which the power to
elect such officers or to retain or appoint such
employees or other agents has been delegated pursuant to
Section 5.03. No officer shall be prevented from
receiving such salary or other compensation by reason of
the fact that the officer is also a director of the
corporation.
ARTICLE VI
Certificates of Stock, Transfer, Etc.
Section 6.1 Share Certificates.
(a) Form of Certificates.--Certificates
for shares of the corporation shall be in such form as
approved by the board of directors.
(b) Share Register.--The share register
or transfer books and blank share certificates shall be
kept by the secretary or by any transfer agent or
registrar designated by the board of directors for that
purpose. The share register shall be kept at either the
registered office of the corporation in the Commonwealth
of Pennsylvania or at its principal place of business
wherever situated or at the office of its registrar or
transfer agent.
Section 6.2 Issuance.--The share certificates
of the corporation shall be numbered and registered in
the share register or transfer books of the corporation
as they are issued. They shall be executed in such
manner as the board of directors shall determine.
Section 6.3 Transfer.--Transfers of shares
shall be made on the share register or transfer books of
the corporation upon surrender of the certificate
therefor, endorsed by the person named in the certificate
or by an attorney lawfully constituted in writing.
Section 6.4 Record Holder of Shares.--The
corporation shall be entitled to treat the person in
whose name any share or shares of the corporation stand
on the books of the corporation as the absolute owner
thereof, and 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.
Section 6.5 Lost, Destroyed or Mutilated
Certificates.--The holder of any shares of the
corporation shall immediately notify the corporation of
any loss, destruction or mutilation of the certificate
therefor, and the board of directors may, in its
discretion, cause a new certificate or certificates to be
issued to such holder, in case of mutilation of the
certificate, upon the surrender of the mutilated
certificate or, in case of loss or destruction of the
certificate, upon satisfactory proof of such loss or
destruction and, if the board of directors shall so
determine, the deposit of a bond in such form and in such
sum, and with such surety or sureties, as it may direct.
ARTICLE VII
Indemnification of Directors, Officers
and Other Authorized Representatives
(The provisions of this Article VII were adopted by the
shareholders of the corporation on _______ __, 1996; the
predecessor provisions of this Article were first adopted
by the board of directors as Article VII of the By-Laws
of the corporation on April 21, 1987, subject to
shareholder approval, and were approved by the
shareholders at the 1987 Annual Meeting of Shareholders.)
Section 7.1 Scope of Indemnification.
(a) General Rule.--The corporation shall
indemnify an indemnified representatives against any
liability incurred in connection with any proceeding in
which the indemnified representatives may be involved as
a party or otherwise by reason of the fact that such
person is or was serving in an indemnified capacity,
including, without limitation, liabilities resulting from
any actual or alleged breach or neglect of duty, error,
misstatement or misleading statement, negligence, gross
negligence or act giving rise to strict or products
liability, except:
(1) where such indemnification is
expressly prohibited by applicable law;
(2) where the conduct of the
indemnified representative has been finally
determined pursuant to Section 7.06 or
otherwise to constitute willful misconduct or
recklessness within the meaning of 15 Pa.C.S.
SECTION 1746(b) or any superseding provision of law
sufficient in the circumstances to bar
indemnification against liabilities arising
from the conduct; or
(3) to the extent such
indemnification has been finally determined in
a final adjudication pursuant to Section 7.06
to be otherwise unlawful.
(b) Partial Payment.--If an indemnified
representative is entitled to indemnification in respect
of a portion, but not all, of any liabilities to which
such person may be subject, the corporation shall
indemnify such indemnified representative to the maximum
extent for such portion of the liabilities.
(c) Presumption.--The termination of a
proceeding by judgment, order, settlement or conviction
or upon a plea of nolo contendere or its equivalent shall
not of itself create a presumption that the indemnified
representative is not entitled to indemnification.
(d) Definitions.--For purposes of this
Article:
(1) "indemnified capacity" means any
and all past, present and future service by an
indemnified representative in one or more
capacities as a director, officer, employee or
agent of the corporation, or, at the request of
the corporation, as a director, officer,
employee, agent, fiduciary or trustee of
another corporation, partnership, joint
venture, trust, employee benefit plan or other
entity or enterprise;
(2) "indemnified representative"
means any and all directors and officers of the
corporation and any other person designated as
an indemnified representative by the board of
directors of the corporation (which may, but
need not, include any person serving at the
request of the corporation, as a director,
officer, employee, agent, fiduciary or trustee
of another corporation, partnership, joint
venture, trust, employee benefit plan or other
entity or enterprise);
(3) "liability" means any damage,
judgment, amount paid in settlement, fine,
penalty, punitive damages, excise tax assessed
with respect to an employee benefit plan, or
cost or expense of any nature (including,
without limitation, attorneys' fees and
disbursements); and
(4) "proceeding" means any
threatened, pending or completed action, suit,
appeal or other proceeding of any nature,
whether civil, criminal, administrative or
investigative, whether formal or informal, and
whether brought by or in the right of the
corporation, a class of its security holders or
otherwise.
Section 7.2 Proceedings Initiated by
Indemnified Representatives.--Notwithstanding any other
provision of this Article, the corporation shall not
indemnify under this Article an indemnified
representative for any liability incurred in a proceeding
initiated (which shall not be deemed to include counter
claims or affirmative defenses) or participated in as an
intervenor or amicus curiae by the person seeking
indemnification unless such initiation of or
participation in the proceeding is authorized, either
before or after its commencement, by the affirmative vote
of a majority of the directors in office. This section
does not apply to reimbursement of expenses incurred in
successfully prosecuting or defending an arbitration
under Section 7.6 or otherwise successfully prosecuting
or defending the rights of an indemnified representative
granted by or pursuant to this Article.
Section 7.3 Advancing Expenses.--The
corporation shall pay the expenses (including attorneys'
fees and disbursements) incurred in good faith by an
indemnified representative in advance of the final
disposition of a proceeding described in Section 7.1 or
the initiation of or participation in which is authorized
pursuant to Section 7.2 upon receipt of an undertaking by
or on behalf of the indemnified representative to repay
the amount if it is ultimately determined pursuant to
Section 7.6 to such person is not entitled to be
indemnified by the corporation pursuant to this Article.
The financial ability of an indemnified representative to
repay an advance shall not be a prerequisite to the
making of such advance.
Section 7.4 Securing of Indemnification
Obligations.--To further effect, satisfy or secure the
indemnification obligations provided herein or otherwise,
the corporation may maintain insurance, obtain a letter
of credit, act as self-insurer, create a reserve, trust,
escrow, cash collateral or other fund or account, enter
into indemnification agreements, pledge or grant a
security interest in any assets or properties of the
corporation, or use any other mechanism or arrangement
whatsoever in such amounts, at such costs, and upon such
other terms and conditions as the board of directors
shall deem appropriate. Absent fraud, the determination
of the board of directors with respect to such amounts,
costs, terms and conditions shall be conclusive against
all security holders, officers and directors and shall
not be subject to voidability.
Section 7.5 Payment of Indemnification.--An
indemnified representative shall be entitled to
indemnification within 30 days after a written request
for indemnification has been delivered to the secretary
of the corporation.
Section 7.6 Arbitration.
(a) General Rule.--Any dispute related to
the right to indemnification, contribution or advancement
of expenses as provided under this Article, except with
respect to indemnification for liabilities arising under
the Securities Act of 1933 that the corporation has
undertaken to submit to a court for adjudication, shall
be decided only by arbitration in the metropolitan area
in which the principal executive offices of the
corporation are located at the time, in accordance with
the commercial arbitration rules then in effect of the
American Arbitration Association, before a panel of three
arbitrators, one of whom shall be selected by the
corporation, the second of whom shall be selected by the
indemnified representative and the third of whom shall be
selected by the other two arbitrators. In the absence of
the American Arbitration Association, or if for any
reason arbitration under the arbitration rules of the
American Arbitration Association cannot be initiated, and
if one of the parties fails or refuses to select an
arbitrator or the arbitrators selected by the corporation
and the indemnified representative cannot agree on the
selection of the third arbitrator within 30 days after
such time as the corporation and the indemnified
representative have each been notified of the selection
of the other's arbitrator, the necessary arbitrator or
arbitrators shall be selected by the presiding judge of
the court of general jurisdiction in such metropolitan
area.
(b) Qualifications of Arbitrators.--Each
arbitrator selected as provided herein is required to be
or have been a director or executive officer of a
corporation whose shares of common stock were listed
during at least one year of such service on the New York
Stock Exchange or the American Stock Exchange or quoted
on the National Association of Securities Dealers
Automated Quotations System.
(c) Burden of Proof.--The party or
parties challenging the right of an indemnified
representative to the benefits of this Article shall have
the burden of proof.
(d) Expenses.--The corporation shall
reimburse an indemnified representative for the expenses
(including attorneys' fees and disbursements) incurred in
successfully prosecuting or defending such arbitration.
(e) Effect.--Any award entered by the
arbitrators shall be final, binding and nonappealable and
judgment may be entered thereon by any party in
accordance with applicable law in any court of competent
jurisdiction, except that the corporation shall be
entitled to interpose as a defense in any such judicial
enforcement proceeding any prior final judicial
determination adverse to the indemnified representative
under Section 7.1(a)(2) in a proceeding not directly
involving indemnification under this Article. This
arbitration provision shall be specifically enforceable.
Section 7.7 Contribution.--If the
indemnification provided for in this Article or otherwise
is unavailable for any reason in respect of any liability
or portion thereof, the corporation shall contribute to
the liabilities to which the indemnified representative
may be subject in such proportion as is appropriate to
reflect the intent of this Article or otherwise.
Section 7.8 Contract Rights; Amendment or
Repeal.--All rights under this Article shall be deemed a
contract between the corporation and the indemnified
representative pursuant to which the corporation and each
indemnified representative intend to be legally bound.
Any repeal, amendment or modification hereof shall be
prospective only and shall not affect any rights or
obligations then existing.
Section 7.9 Scope of Article.--The rights
granted by this Article shall not be deemed exclusive of
any other rights to which those seeking indemnification,
contribution or advancement of expenses may be entitled
under any statute, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action
in an indemnified capacity and as to action in any other
capacity. The indemnification, contribution and
advancement of expenses provided by or granted pursuant
to this Article shall continue as to a person who has
ceased to be an indemnified representative in respect of
matters arising prior to such time, and shall inure to
the benefit of the heirs, executors, administrators and
personal representatives of such a person.
Section 7.10 Reliance on Provisions.--Each
person who shall act as an indemnified representative of
the corporation shall be deemed to be doing so in
reliance upon the rights of indemnification, contribution
and advancement of expenses provided by this Article.
Section 7.11 Interpretation.--The provisions
of this Article are intended to constitute bylaws
authorized by 15 Pa.C.S. SECTION 1746.
ARTICLE VIII
Miscellaneous
Section 8.1 Corporate Seal.--The corporation
shall have a corporate seal in the form of a circle
containing the name of the corporation, the year of
incorporation and such other details as may be approved
by the board of directors.
Section 8.2 Checks.--All checks, notes, bills
of exchange or other similar orders in writing shall be
signed by such one or more officers or employees of the
corporation as the board of directors may from time to
time designate.
Section 8.3 Contracts.--Except as otherwise
provided in the Business Corporation Law in the case of
transactions that require action by the shareholders, the
board of directors may authorize any officer or agent to
enter into any contract or to execute or deliver any
instrument on behalf of the corporation, and such
authority may be general or confined to specific
instances.
Section 8.4 Deposits.--All funds of the
corporation shall be deposited from time to time to the
credit of the corporation in such banks, trust companies
or other depositaries as the board of directors may
approve or designate, and all such funds shall be
withdrawn only upon checks signed by such one or more
officers or employees of the corporation as the board of
directors shall from time to time designate.
Section 8.5 Right of Inspection.--Every
shareholder 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, shareholders 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 shareholder. 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 shareholder. The demand shall be
directed to the corporation at its registered office in
the Commonwealth of Pennsylvania or at its principal
place of business wherever situated.
Section 8.6 Amendment of Bylaws.--These bylaws
may be amended or repealed, or new bylaws may be adopted,
either (i) by vote of the shareholders at any duly
organized annual or special meeting of shareholders, or
(ii) with respect to those matters that are not by
statute committed expressly to the shareholders and
regardless of whether the shareholders have previously
adopted or approved the bylaw being amended or repealed,
by vote of a majority of the board of directors of the
corporation in office at any regular or special meeting
of directors. Any change in these bylaws shall take
effect when adopted unless otherwise provided in the
resolution effecting the change.
EXHIBIT D-1
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In Re: Application of Pennsylvania Power :
& Light Company, PFG Gas, Inc. and :
North Penn Gas Company for a Certificate :
of Public Convenience Evidencing Approval :
under Section 1102(a)(3) of the Public : Docket No:
Utility Code of the Transfer from Penn Fuel : A----
Gas, Inc. to PP&L Resources, Inc. by :
Merger the Title to, or the Possession :
or Use of, All Property of Penn Fuel Gas, :
Inc.'s Public Utility Subsidiaries, PFG Gas, :
Inc. and North Penn Gas Company, Used or :
Useful in the Public Service :
TO THE PENNSYLVANIA PUBLIC UTILITY COMMISSION:
A. INTRODUCTION
1. By this Application, Pennsylvania Power & Light
Company ("PP&L"), PFG Gas, Inc ("PFG") and North Penn Gas
Company ("North Penn") seek, pursuant to Section 1102
(a)(3) of the Public Utility Code, 66 Pa.C.S.
SECTION 1102(a)(3), as interpreted in the Statement of Policy
on Utility Stock Transfers, at 52 Pa Code SECTION 69.901, a
certificate of public convenience evidencing the
Pennsylvania Public Utility Commission's ("Commission")
approval of the transfer by merger from Penn Fuel Gas,
Inc. ("Penn Fuel") to PP&L Resources, Inc. ("PP&L
Resources") the title to, or the possession or use of,
all property of Penn Fuel's gas distribution public
utility subsidiaries, PFG and North Penn, that is used or
useful in the public service.
2. The complete names and address of the
Applicants are:
Pennsylvania Power & Light Company
Two North Ninth Street
Allentown, Pennsylvania 18101-1179
PFG Gas, Inc.
55 South Third Street
Oxford, Pennsylvania 19363
3. The names, addresses and telephone numbers of
the Applicants' attorneys are:
David B. MacGregor
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, PA 19103-6993
Tel: (215) 963-5448
Fax: (215) 963-5299
John H. Isom
Morgan, Lewis & Bockius LLP
One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Tel: (717) 237-4022
Fax: (717) 237-4004
4. The name, address and telephone numbers of an
additional attorney for PP&L are:
Paul E. Russell
Associate General Counsel
Pennsylvania Power & Light Company
Two North Ninth Street
Allentown, PA 18101-1179
Tel: (610) 774-4254
Fax: (610) 774-6726
B. THE PARTIES TO THE PROPOSED TRANSACTION
5. PP&L Resources, a Pennsylvania corporation, was
organized in 1995, as part of a restructuring of the PP&L
corporate system. The Commission approved this
reorganization in an Order entered on February 10, 1995,
at Docket No. A-110500, F.206. As a result of the
restructuring, PP&L Resources owns all of the issued and
outstanding shares of common capital stock of PP&L. The
stock of PP&L Resources is widely held and is traded on
the New York Stock Exchange. PP&L is a public utility
corporation which provides electric service in
Pennsylvania. Because PP&L Resources owns all of the
issued and outstanding common capital stock of PP&L, PP&L
Resources is a holding company under the Public Utility
Holding Company Act of 1935 ("PUHCA"). PP&L Resources,
however, qualifies for an exemption under the PUHCA
because it and its electric utility subsidiary are
predominantly intrastate in character and carry on their
businesses in a single state in which they are organized.
In addition to PP&L, PP&L Resources owns other
subsidiaries, including Power Markets Development
Company, which invests in energy projects in the United
States and foreign countries, and Spectrum Energy
Services Corporation, which markets energy-related
services and products.
6. PP&L is a Pennsylvania corporation organized in
1920, which provides electric public utility service in
central and eastern Pennsylvania. As shown in Exhibit G,
Schedule 1 hereto, as of June 30, 1997, PP&L served
approximately 1.2 million customers. PP&L provides
service throughout a 10,000 square mile service territory
in 29 countries. For the twelve months ended June 30,
1997, PP&L's jurisdictional sales exceeded 32 billion
kWh. As shown in Exhibit I, Schedule 1 hereto, for the
same period, PP&L's annual operating revenues were
approximately $2.9 billion. PP&L's system includes more
than 1,100 miles of bulk transmission lines operating at
or above 230,000 volts and more than 50,000 miles of
other transmission and distribution lines operating at
less than 230,000 volts.
PP&L currently operates its generation and
transmission facilities as part of the Pennsylvania --
New Jersey -- Maryland ("PJM") interconnection. PP&L's
PJM operations and other wholesale services are subject
to the regulatory jurisdiction of the Federal Energy
Regulatory Commission ("FERC").
7. Penn Fuel is a Pennsylvania corporation
organized in 1944, Penn Fuel owns all of the common
capital stock of two subsidiaries, PFG and North Penn,
which provide gas service subject to the Commission's
regulatory jurisdiction. As a result of its ownership of
gas public utilities, Penn Fuel is a holding company
under the PUHCA. Penn Fuel, however, qualifies for an
exemption under the PUHCA because it and its gas utility
subsidiaries are predominantly intrastate in character
and carry on their businesses predominantly in a single
state in which they are organized. In addition to owning
public utility subsidiaries, Penn Fuel sells propane to
approximately 28,000 customers.
8. PFG provides gas sales and transportation
service in portions of 27 Pennsylvania counties and in a
small portion of northern Maryland. PFG owns and
operates numerous local gas distribution systems that are
dispersed throughout the southern and eastern two thirds
of Pennsylvania. As shown in Exhibit G, Schedule 2
hereto, as of June 30, 1997, PFG provided gas service to
35,518 customers in Pennsylvania. As shown in Exhibit I,
Schedule 2 hereto, annual operating revenues for PFG for
the twelve months ended June 30, 1997, were $50,251,383.
9. North Penn is a Pennsylvania corporation
organized in 1950. North Penn owns and operates two
local distribution systems, one in northwestern
Pennsylvania and one in north central Pennsylvania.
North Penn provides gas sales, transportation and storage
service in ten counties in northern and northwestern
Pennsylvania, subject to the regulatory jurisdiction of
the Commission. In addition, North Penn provides gas
storage service subject to the regulatory jurisdiction of
FERC, although by a FERC Order dated June 3, 1992, at
Docket No. RP91-111-004, authority over North Penn's
storage rates was delegated to the Commission. As shown
in Exhibit G, Schedule 3 hereto, as of June 30, 1997,
North Penn provided gas service to 34,544 customers in
Pennsylvania. As shown in Exhibit I, Schedule 3 hereto,
annual operating revenues for North Penn for the twelve
months ended June 30, 1997, were $45,189,495.
C. DESCRIPTION OF THE PROPOSED ACQUISITION AND MERGER
10. The following is a summary of the principal
steps which will be, or have been, taken to effect the
proposed acquisition and merger. A complete copy of the
Agreement and Plan of Merger, dated as of June 26, 1997,
is provided as Exhibit A hereto.
a. PP&L Resources has caused a new wholly-owned
subsidiary to be organized under the laws of
Pennsylvania for the purposes of the proposed
acquisition and merger. The name of this
corporation is Keystone Merger Corp.
("Keystone").
b. Keystone will be merged into Penn Fuel. Penn
Fuel will be the surviving corporation, and
Keystone will cease to exist.
c. Following the merger, the officers, directors,
corporate charter and bylaws of Keystone
immediately before the merger will become the
officers, directors, corporate charter and
bylaws of the surviving corporation, Penn Fuel.
d. In the merger, the outstanding shares of common
stock of Penn Fuel will be converted into the
right to receive shares of common stock of PP&L
Resources. In particular, each Penn Fuel
common share will be converted into the right
to receive between 6.968 and 8.516 shares of
PP&L Resources common stock, depending upon the
market price of PP&L Resources common stock at
the time of the closing of the merger. In this
manner, Penn Fuel common shareholders at the
time of the merger will become PP&L Resources
common shareholders, and PP&L Resources will be
the sole holder of all of the outstanding
common stock of Penn Fuel.
e. Penn Fuel is taking all actions necessary to
redeem shares of its outstanding preferred
stock in accordance with the terms of the
preferred stock. At the option of each
preferred stockholder, in lieu of receiving the
cash redemption price under the terms of the
preferred stock, such Penn Fuel preferred
stock, in the merger, may be converted into the
right to receive shares of common stock of PP&L
Resources. In particular, each Penn Fuel
preferred share would be converted into the
right to receive between 0.682 and 0.833 shares
of PP&L Resources common stock, depending upon
the market prices of PP&L Resources common
stock at the time of the closing of the merger.
In this manner, Penn Fuel preferred
shareholders at the time of the merger may
become PP&L Resources common shareholders, and
there will no longer be any shares of preferred
stock outstanding.
f. Immediately following the consummation of the
transaction proposed in the Agreement and Plan
of Merger, Penn Fuel will continue to exist,
will retain its present name, and will operate
as a wholly-owned subsidiary of PP&L Resources.
D. BENEFITS OF THE ACQUISITION AND MERGER
11. Presently, Penn Fuel's issued and outstanding
shares of common capital stock are closely held. Almost
95 percent of such stock is beneficially held by members
of a single family. After the acquisition by PP&L
Resources, Penn Fuel and its subsidiaries will be owned
by a large holding company whose common equity capital is
publicly traded on the New York Stock Exchange and whose
long-term debt is rated A2 by Moody's and A- by Standard
and Poor's ("S&P"). PP&L Resources is included in the
S&P 500 Composite Index and the S&P Public Utilities.
In contrast, Penn Fuel's common stock is not
actively traded, and its long-term debt is not rated.
Clearly, it will be much easier and more efficient for
Penn Fuel's operating subsidiaries to raise capital to
meet their ever increasing capital requirements to renew
and expand their systems as part of the PP&L Resources
corporate system than as part of the Penn Fuel corporate
system.
12. Acquisition of Penn Fuel will add to the PP&L
Resources corporate system's customer base in additional
areas in Pennsylvania because PFG and North Penn provide
service in geographic areas not presently served by PP&L,
as well as in areas presently served by PP&L.
13. Acquisition by PP&L Resources of Penn Fuel and
its operating subsidiaries will provide PP&L with
expertise concerning alternative forms of energy, which
expertise may be useful in making future decisions
concerning energy sources.
14. Acquisition of Penn Fuel will enable the PP&L
Resources corporate system to offer a wider range of
energy sources to customers. Retail electricity markets
in Pennsylvania will be open to competition beginning in
1999. Retail gas markets also are expected to be open to
competition in the near future. The merger will permit
the PP&L Resources corporate system to compete in both
energy markets on a state-wide basis and to provide to
customers electricity or gas depending on their needs.
15. Following the merger, the PP&L Resources
corporate system's presence in a larger geographic area
and the ability to provide both gas and electric energy
will enhance the ability to offer "behind the meter"
consulting services and present increased opportunities
to provide to residential and commercial customers the
benefits of energy management systems.
16. There are only limited opportunities for
achieving efficiencies in operations as a result of the
acquisition of Penn Fuel by PP&L Resources, due to the
differences in the nature of the utility services
provided, differences in training for and expertise of
employees of gas companies and of electric companies and
the limited geographical overlap of the service
territories of PFG and North Penn with PP&L's service
territory. Nevertheless, PP&L, PFG and North Penn will
seek to find operational efficiencies in an effort to
mitigate future increases in costs of service.
17. Due to the increased size and resources of the
combined corporate system, in comparison to the Penn Fuel
corporate system on a stand-alone basis, the acquisition
will greatly strengthen the foundation supporting
services to PFG's and North Penn's customers at a high
quality level.
18. Following the acquisition, PFG's and North
Penn's customers will have increased stability and other
benefits inherent in being part of a much larger
organization.
E. RATES
19. Presently, PFG and North Penn provide service
to Pennsylvania jurisdictional customers under a single
tariff and a single set of rates. PFG's and North Penn's
rates will not change as a result of the acquisition by
PP&L Resources.
20. PP&L's rates for electric service will not
change as a result of the acquisition.
F. SERVICE
21. Service provided by PP&L, PFG and North Penn
will not be affected by the acquisition.
G. CORPORATE APPROVALS
22. The merger has been approved by the Board of
Directors of Penn Fuel and the Board of Directors of PP&L
Resources.
23. The merger is subject to approval by Penn
Fuel's shareholders. Such approval is assured, however,
because interests representing almost 95 percent of the
issued and outstanding shares of common capital stock of
Penn Fuel have committed to vote in favor of the
acquisition pursuant to a voting agreement dated as of
June 26, 1997. The merger is subject also to other
closing conditions as set forth in the Agreement and Plan
of Merger dated as of June 26, 1997.
H. REGULATORY APPROVALS
24. The proposed merger is subject to approval by
the United States Securities and Exchange Commission
("SEC") under the PUHCA.
25. The Maryland Public Service Commission
("Maryland PSC") is being duly notified of the proposed
transfer by merger. The Maryland PSC will then determine
whether any proceedings and its approval will be
required.
26. The expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, will be required.
27. A registration statement under the Securities
Act of 1933 must be declared effective by the SEC.
I. SERVICE TERRITORIES
28. Provided as Exhibit B hereto are copies of the
tariff sheets of PFG and North Penn, which identify the
areas where they provide service in Pennsylvania.
Exhibit C hereto is a map depicting the portions of
pennsylvania where PFG and North Penn provide service.
29. Provided as Exhibit D hereto are copies of the
tariff sheets of PP&L identifying areas where it
provides service. Exhibit E is a map depicting the
portions of Pennsylvania where PP&L provides service.
30. The service territories of PP&L, PFG and North
Penn would not be changed by the Commission's approval of
this Application or by the consummation of the
transaction proposed herein.
J. CORPORATE HISTORIES OF THE AFFECTED UTILITIES
31. PP&L was founded in 1920 through consolidation
of eight electric companies. It was organized initially
as a direct subsidiary of Lehigh Power Securities
Corporation and an indirect subsidiary of the Electric
Bond and Share Company. In 1939, PP&L's corporate
parent, Lehigh Power Securities Corporation was
dissolved, and PP&L became a direct subsidiary of
National Power & Light Company and remained an indirect
subsidiary of Electric Bond and Share Company. From 1945
through 1947, as a result of a series of transactions,
National Power & Light Co. and Electric Bond and Share
Co. divested themselves of PP&L ownership and PP&L stock
was sold to the public. As explained above, in 1995,
PP&L became a subsidiary of a newly-formed holding
company, PP&L Resources.
Since its organization, PP&L has expanded its
service territory through a series of acquisitions.
a. In 1923, Wilkes Barre Electric Company was
merged into PP&L.
b. In 1925, PP&L acquired United Electric Company.
c. In 1929, PP&L acquired Harrisburg Light & Power
Company.
d. In 1930, PP&L acquired twenty-eight electric
companies which served substantially all of
Lancaster County, Pennsylvania.
e. In 1938, Conestoga Transmission and Lehigh
Electric Light & Power Company were merged into
PP&L.
f. In 1948, PP&L acquired Palmerton Lighting
Company.
g. In 1955, Pennsylvania Water & Power Company was
merged into PP&L.
h. In 1956, Scranton Electric Company was merged
into PP&L.
i. In 1980, Hershey Electric Company was merged
into PP&L.
32. Effective December 31, 1994, PFG was created by
a merger of seven predecessor public utility
corporations. In the merger, Allied Gas Company,
Counties Gas Company, Interboro Gas Company, Lewistown
Gas Company, South Penn Gas Company, and Union Gas
Company were merged with and into Central Penn Gas
Company, the surviving corporation, the name of which was
simultaneously changed to PFG Gas, Inc. The merger had
been approved by the Commission in an Order entered on
December 15, 1994, at Docket No. A-120003.
33. As part of an overall plan of simplification
and integration of the Pennsylvania Gas & Electric
Corporation ("Penn Corp.") corporate system under the
PUHCA North Penn Gas Company ("Old North Penn") and its
three wholly-owned gas utility subsidiaries Allegany Gas
Company, which had been incorporated in 1898, Alum Rock
Gas Company which had been incorporated in 1904, and
Dempseytown Gas Company, which had been incorporated in
1910, entered into an Agreement of Merger and
Consolidation which became effective as of December 31,
1950. Under the terms of the Agreement of Merger and
Consolidation, a new corporation, also known as North
Penn Gas Company was created and it acquired all of the
property, rights, power, privileges, franchises and
immunities of its predecessors. The corporation formed
by this merger and consolidation, new North Penn, is the
corporation which continues to provide public utility
service at this time.
Pursuant to an Amended Plan for Liquidation and
Dissolution of Penn Corp. under Section II of the PUHCA,
all of the capital stock of North Penn was distributed
to shareholders of Penn Corp. on February 19, 1953.
On May 13, 1977, all of North Penn's issued and
outstanding common stock was acquired by Penn Fuel
System, Inc., pursuant to a Plan under Section II(e) of
the PUHCA. Penn Fuel System, Inc. was a public utility
holding company that had been formed to acquire the stock
of North Penn. As of December 31, 1988, Penn Fuel
System, Inc. merged into Penn Fuel, and Penn Fuel System,
Inc. ceased to exist. As a result of this merger, North
Penn became a direct subsidiary of Penn Fuel.
K. SUPPORTING DATA
34. PP&L, PFG and North Penn will employ, in
furnishing service plant in service presently used by
them to furnish service, together with plant presently
under construction and plant which may be added in the
future prior to approval of this Application. Schedules
1, 2 and 3 of Exhibit F are Statements for PP&L, PFG and
North Penn, respectively, of the original cost, by
primary account, of plant in service. Also shown on each
schedule of Exhibit F is the reserve for depreciation
associated with plant in service. Approval by the
Commission of this Application and the consummation of
the transaction proposed herein will not alter the
original cost of plant in service or the depreciation
reserve of each company.
35. Schedules 1, 2 and 3 of Exhibit G hereto
indicate, for PP&L, PFG and North Penn, respectively, the
number of customers, by class, of each company as of June
30, 1997. Approval by the Commission of this Application
and the consummation of the transaction proposed herein
will not alter the number of customers served by each
company.
36. Schedules 1, 2 and 3 of Exhibit H hereto
contain balance sheets for PP&L, PFG and North Penn,
respectively, all as of June 30, 1997. Approval by the
Commission of this Application and the consummation of
the transaction proposed herein will have no material
effect upon the companies' balance sheets.
37. Schedules 1, 2 and 3 of Exhibit I hereto are
statements of income for PP&L, PFG and North Penn,
respectively, each for the twelve months ended June 30,
1997. Approval by the Commission of this Application and
the consummation of the transaction proposed herein will
not affect the income statements of the companies.
L. AFFILIATED INTERESTS CONTRACTS
38. As a result of the acquisition of Penn Fuel and
its subsidiaries by PP&L Resources, it is anticipated
that it will become necessary for the corporations in the
new PP&L Resources corporate system to enter into new
affiliated interests contracts under 66 Pa. C.S. SECTIONS
2101--07. Such contracts will be submitted to the Commission
in accordance with 66 Pa.C.S. SECTION 2102(b) as the contracts
are prepared and become available.
M. MISCELLANEOUS
39. All of the annual reports, tariffs and other
documents filed by PP&L, PFG and North Penn with the
Commission and filings by their predecessors, are made a
part hereof by reference.
WHEREFORE, for all the foregoing reasons,
Pennsylvania Power & Light Company, PFG Gas, Inc. and
North Penn Gas Company respectfully request that the
Pennsylvania Public Utility Commission approve this
Application and issue a certificate of public convenience
approving the transfer from Penn Fuel Gas, Inc. to PP&L
Resources, Inc. by merger the title to, or the possession
or use of, all property of Penn Fuel Gas Inc.'s gas
distribution public utility subsidiaries, PFG Gas, Inc.
and North Penn Gas Company, that is used or useful in the
public service.
Respectfully submitted,
/s/ John H. Isom
____________________________
Paul E. Russell David B. MacGregor
Associate General Counsel Morgan, Lewis & Bockius LLP
Pennsylvania Power & Light 2000 One Logan Square
Company Philadelphia, PA 19103-6993
Two North Ninth Street Tel: (215) 963-5000
Allentown, PA 18101-1179 Fax: (215) 963-5299
Tel: (610) 774-4254
Fax: (610) 774-6726
John H. Isom
Attorney for Pennsylvania Morgan, Lewis & Bockius LLP
Power & Light Company One Commerce Square
417 Walnut Street
Harrisburg, PA 17101-1904
Tel: (717) 237-4000
Fax: (717) 237-4004
Of Counsel:
Attorneys for Pennsylvania
MORGAN, LEWIS & BOCKIUS LLP Power & Light Company, PFG
Gas, Inc. and North Penn Gas
Dated: August 7, 1997 Company
(EXHIBIT A, AGREEMENT AND PLAN OF MERGER BY AND AMONG
PP&L RESOURCES, INC., KEYSTONE MERGER CORP. AND PENN FUEL
GAS, INC. DATED AS OF JUNE 26, 1997 IS OMITTED. EXHIBIT A
WAS PREVIOUSLY FILED AS ANNEX I TO THE REGISTRATION
STATEMENT OF THE COMPANY ON FORM S-4, FILED ON
AUGUST 13, 1997, FILE NO. 333-33565,
AND INCORPORATED HEREIN BY REFERENCE.)
- -----------------------------------------------------------------------------
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 35
PFG GAS, INC. Cancelling Original Page No. 35
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 1 OF 8
ADAMS COUNTY
-------------
Townships:
- ---------
Cumberland Freedom
BEDFORD COUNTY
--------------
Boroughs:
- --------
Bedford Everett
Townships:
- ---------
Bedford Monroe Snake Spring Valley
Colerain Napier West Providence
BERKS COUNTY
------------
Boroughs:
- --------
Hamburg Shoemakersville
Townships:
- ---------
Centre Perry Tilden Windsor
BLAIR COUNTY
------------
Boroughs:
- --------
Martinsburg Roaring Spring
Townships:
- ---------
Huston North Woodbury Taylor
BRADFORD COUNTY
---------------
Boroughs:
- --------
Alba Canton Sylvania Troy
Burlington
Townships:
- ---------
Arsenia Columbia Ridgebury Springfield
Burlington Granville Smithfield Troy
Canton LeRoy South Creek Wells
West Burlington
Unincorporated Communities:
- --------------------------
Austinville Centerville Fassett Leona
Bentley Creek Colubia Crossroads Gillett Mosherville
Big Pond East Smithfield Granville Summit Springfield
Cedar Ledge East Troy Grover West Burlington
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 36
PFG GAS, INC. Cancelling Original Page No. 36
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 2 OF 8
CARBON COUNTY
-------------
Boroughs:
- --------
Bowmastown Lehighton Palmerton Weissport
Jim Thorpe
Townships:
- ---------
East Penn Lower Towamensing Mahoning (part) Mauch Chunk
CENTRE COUNTY
-------------
Boroughs:
- --------
Phillipsburg South Phillipsburg
Townships:
- ---------
Rush
CHESTER COUNTY
--------------
Boroughs:
- --------
Oxford
Townships:
- ---------
East Nottingham Lower Oxford Upper Oxford West Nottingham
Elk
CLARION COUNTY
--------------
Boroughs:
- --------
Callensburg
Townships:
- ---------
Ashland Highland Monroe Salem
Beaver Knox Paint Toby
Clarion Licking Perry Washington
Elk Limestone Piney
Farmington Milcreek Richland
Unincorporated Communities:
- --------------------------
Altman's Corners Elmo Lickingville Perryville
Alum Rock Fern Lucinda Scotch Hill
(Richmond) Fisher Marble Snydersville
Arthurs Fryburg Matildaville Strobleton
Blairs Corners Haynie Millerstown Turkey City
Clarion Junction Hueffner Miola Tylersburg
Crown Kossuth Mt. Joy Wentlings Corners
Easton Leeper North Pinegrove Vowinckel
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 37
PFG GAS, INC. Cancelling Original Page No. 37
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 3 OF 8
CLEARFIELD COUNTY
-----------------
Boroughs:
- --------
Clearfield and Environs Curwensville Wallaceton
Chester Hill
Townships:
- ---------
Bradford Decatur Morris Pike
Boggs Knox
CLINTON COUNTY
--------------
Cities:
- ------
Lock Haven
Boroughs:
- --------
Avis Flemington Renovo South Renovo
Beech Creek Mill Hall
Townships:
- ---------
Allison Bald Eagle Chapman Noyes
Beech Creek Castanes Dunstable Pine Creek
(portion)
COLUMBIA COUNTY
---------------
Boroughs:
- --------
Centralia
Townships:
- ---------
Conyngham
CUMBERLAND COUNTY
-----------------
Boroughs:
- --------
Shippensburg
Townships:
- ---------
Shippensburg Southhampton
FOREST COUNTY
-------------
Boroughs:
- --------
Marienville Tionesta
Townships:
- ---------
Barnett Harmony Tionesta
Green Jenks
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
<PAGE>
Supplement No. 24 to
GAS - PA P.U.C. No. 1
First Revised Page No. 38
PFG GAS, INC. Cancelling Original Page No. 38
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 4 OF 8
FRANKLIN COUNTY
---------------
Boroughs:
- --------
Orrstown Shippensburg Waynesboro
Townships:
- ---------
Greene Guilford Southampton Washington
(portion) (portion)
FULTON COUNTY (C)
-------------
Boroughs:
- --------
McConnellsburg
Townships:
- ---------
Ayr (portion) Todd
HUNTINGDON COUNTY
-----------------
Boroughs:
- --------
Huntingdon Mapleton Mill Creek Mount Union
Townships:
- ---------
Brady Juniata Shirley Union
Henderson Oneida Smithfield Walker
JEFFERSON COUNTY
----------------
Townships:
- ---------
Barnett
JUNIATA COUNTY
--------------
Townships:
- ---------
Tuscarora Lack
LANCASTER COUNTY
----------------
Townships:
- ---------
Colerain Little Britain
LEHIGH COUNTY
-------------
Boroughs:
- --------
Slatington
Townships:
- ---------
Washington
(C) Indicates Change
- -----------------------------------------------------------------------------
ISSUED: April 18, 1997 EFFECTIVE: April 11, 1997
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 39
PFG GAS, INC. Cancelling Original Page No. 39
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 5 OF 8
LUZERNE COUNTY
--------------
Cities:
- ------
Pittston
Boroughs:
- --------
Exeter Laflin Pittston Yatesville
Hughestown (portion) (portion)
Township:
- --------
Jenkins Pittston
(portion)
LYCOMING COUNTY
---------------
Boroughs:
- --------
Hughesville Jersey Shore Picture Rocks Salladsburg
Townships:
- ---------
Jackson Penn (portion) Porter Wolf (portion)
Mifflin (portion)
McNett
Nippenose Piatt Shrewsbury(portion)
MCKEAN COUNTY
-------------
Boroughs:
- --------
Eldred Port Allegany
Townships:
- ---------
Annin Eldrid Keating Norwich
Cares Hamlin Liberty Otto
Sergeant
Unincorporated Communities:
- --------------------------
Betula Colegrove Farmers Valley Prentisvale
Bullis Mills Coleville Indian Creek Turtlepoint
Burtville Coryville Mix Creek Wrights
Cares Crosby Myrtle Wrights Corners
East Smethport
MIFFLIN COUNTY
--------------
Boroughs:
- --------
Burnham Juniata Terrace Lewistown McVeytown
Townships:
- ---------
Armagh Brown Granville Union
Bratton Derry Mennon
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 40
PFG GAS, INC. Cancelling Original Page No. 40
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 6 OF 8
MONROE COUNTY
-------------
Boroughs:
- --------
Delaware Water East Stroudsburg Stroudsburg Gap
Townships:
- ---------
Eldred Ross Smithfield Stroud
Middle Smithfield
MONTOUR COUNTY
--------------
Township:
- --------
Liberty (portion)
NORTHAMPTON COUNTY
------------------
Boroughs:
- --------
Bangor Pen Argyl & Vicinity Wind Gap Walnutport
East Bangor Roseto
Townships:
- ---------
Bushkill Plainfield Upper Mt. Bethel Washington
NORTHUMBERLAND COUNTY
---------------------
Cities:
- ------
Shamokin
Boroughs:
- --------
Kulpmont Marion Heights Mount Carmel Snydertown
Townships:
- ---------
Coal Little Mahanoy Ralpho Washington
East Cameron Lower Augusta Rockefeller West Cameron
Jordon Mount Carmel Shamokin Zerbe
East Chillisquaque
(portion)
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
First Revised Page No. 40(a)
PFG GAS, INC. Cancelling Original Page No. 40(a)
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 7 OF 8
POTTER COUNTY
-------------
Boroughs:
- --------
Austin Galeton Oswayo
Coudersport Ulysses Shinglehouse
Townships:
- ---------
Abbott Genesee Oswayo Summit
Allegany Harrison Pike Sweden
Bingham Hebron Pleasant Valley Sylvania
Clara Hector Portage Ulysses
East Fork Homer Roulette West Branch
Eulalia Keating Sharon Wharton
Unincorporated Communities:
- --------------------------
Andrews Settlement East Sharon Hebron Pusher Siding
Bingham Center Ellisburg Hickox Roulette
Brookland Elmer Honeyoye Sharon Center
Burtville Genesee Keating Summit Sweden Valley
Clara Germania Millport Walton
Colesburg Germania Station Mills West Bingham
Conneville Gold Newfield West Pike
Costello Harrison Valley North Bingham Wharton
SCHUYLKILL COUNTY
-----------------
Cities:
- ------
Pottsville
Boroughs:
- --------
Ashland Gilberton Middleport Palo Alto
Auburn Girardville Minersville Port Clinton
Cressona Gordon Mount Carbon Port Carbon
Deer Lake Landingville New Philadelphia Ringtown
Frackville Mechanicsville Orwigsburg
Townships:
- ---------
Blythe East Norwegian North Manheim South Manheim
Branch Hubley (C) Norweigan West Brunswick
Butler Mahanoy (portion) Ryan West Mahanoy
Union New Castle Upper Mahantango (C)
(C) Indicates Change
- -----------------------------------------------------------------------------
ISSUED: December 19, 1996 EFFECTIVE: December 6, 1996
<PAGE>
Supplement No. 7 to
GAS - PA P.U.C. No. 1
PFG GAS, INC. Original Page No. 40(b)
- -----------------------------------------------------------------------------
DESCRIPTION OF TERRITORY EXHIBIT B
PAGE 8 OF 8
TIOGA COUNTY
------------
Boroughs:
- --------
Blossburg Lawrenceville Roseville Westfield
Elkland Liberty Tioga
Knoxville Mansfield Wellsboro
Townships:
- ---------
Bloss Delmar Lawrence Rutland
Brookfield Duncan Liberty Shippen
Charleston Elkland Middlebury Sullivan
Chatham Farmington Nelson Tioga
Clymer Gaines Osceola Union
Covington Hamilton Putnam Ward
Deerfield Jackson Richmond Westfield
Unincorporated Communities:
- --------------------------
Academy Corners Hammond Millerton Sebring
Arnot Jackson Summit Mitchell Creek Shortsville
Austinburg Jobs Corners Morris Run Somers Lane
Canoe Camp Kenneyville Nelson Stokesdale
Covington Lambs Creek Ogdensburg Tioga Junction
Cowanesque Little Marsh Osceola Tomkins
Crooked Creek Mainsburg Phillips Station Trowbridge
Daggett Manhattan Potter Brook Watrous
Gaines Marshlands Round Top Wellsboro Junction
Gleason Middlebury Center Sabinsville
UNION COUNTY
------------
Boroughs:
- --------
Lewisburg
Townships:
- ---------
Buffalo East Buffalo Kelly Union
(portion) (portion) (portion) (portion)
VENANGO COUNTY
--------------
Cities & Boroughs:
- -----------------
Oil City Rouseville
Townships:
- ---------
Clinton Cranberry President Rockland
Cornplanter Pinegrove Richland Sugar Creek
Unincorporated Communities:
- --------------------------
Ahrensville McClintockville Pinegrove Tippery
Fertigs Nickleville Sugar Creek
- -----------------------------------------------------------------------------
ISSUED: February 27, 1996 EFFECTIVE: October 3, 1996
[Map of PFG's and North Penn's service territory is omitted] EXHIBIT C
Supplement No. 56
Electric PA. P.U.C. No. 200
PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4
Canceling Original and First Revised Page No. 4
- ---------------------------------------------------------------------------
TERRITORY COVERED BY THIS TARIFF EXHIBIT D
PAGE 1 OF 4
BERKS COUNTY (C)
Boroughs of New Morgan, Robesonia, Shillington, Sinking Spring,
Wernersville, West Lawn, Womelsdorf, Wyomissing, and Wyomissing Hills.
Townships of Caernarvon, Cumru, Heidelberg, Lower Heidelberg, South
Heidelberg, and Spring.
BUCKS COUNTY
Boroughs of Richlandtown, Sellersville, Silverdale, Telford, and
Turmbauersville.
Townships of East Rockhill, Haycock, Hilltown, Milford, Richland,
Springfield, and West Rockhill.
CARBON COUNTY
Boroughs of Beaver Meadows, Bowmanstown, East Side, Jim Thorpe,
Lansford, Nesquehoning, Palmerton, Parryville, Summit Hill, and
Weissport.
Townships of Banks, East Penn, Franklin, Kidder, Lausanne, Lehigh,
Lower Towamensing, Mahoning, Packer, Penn Forest, and Towamensing.
CHESTER COUNTY
Boroughs of Atglen, Elverson, and Honey Brook.
Townships of Honey Brook, West Nantmeal, and West Sadsbury.
CLINTON COUNTY
City of Lock Haven.
Boroughs of Avis, Flemington, Loganton, Mill Hall, Renovo, and South
Renovo.
Townships of Allison, Bald Eagle, Castanea, Chapman, Colebrook,
Crawford, Dunnstable, Gallagher, Greene, Grugan, Logan, Noyes, Pine
Creek, Wayne, and Woodward.
COLUMBIA COUNTY
Town of Bloomsburg.
Boroughs of Ashland, Benton, Berwick, Briar Creek, Centralia,
Millville, Orangeville, and Stillwater.
Townships of Beaver, Benton, Briar Creek, Catawissa, Cleveland,
Conyngham, Fishing Creek, Franklin, Greenwood, Hemlock, Jackson, Locust,
Madison, Main, Mifflin, Montour, Mount Pleasant, North Centre, Orange,
Pine, Roaring Creek, Scott, South Centre, and Sugarloaf.
CUMBERLAND COUNTY
Boroughs of Camp Hill, Carlisle, Lemoyne, Mechanicsburg, New
Cumberland, Newville, Shiremanstown, West Fairview, and Wormleysburg.
Townships of Dickinson, East Pennsboro, Hampden, Lower Allen,
Middlesex, Monroe, North Middleton, North Newtow, Penn, Silver Spring,
South Middleton, South Newton, Upper Allen, and West Pennsboro.
DAUPHIN COUNTY
City of Harrisburg.
Boroughs of Berrysburg, Dauphin, Elizabethville, Gratz, Halifax,
Highspire, Hummelstown, Lykens, Millersburg, Paxtang, Penbrook, Pillow,
Steelton, and Williamstown.
Townships of Derry, East Hanover, Halifax, Jackson, Jefferson, Lower
Paxton, Lower Swatara, Lykens, Middle Paxton, Mifflin, Reed, Rush, South
Hanover, Susquehanna, Swatara, Upper Paxton, Washington, Wayne, West
Hanover, Wiconisco, and Williams.
(C) Indicates Change
- ---------------------------------------------------------------------------
Issued October 5, 1995 Effective September 28
<PAGE>
Supplement No. 56
Electric PA. P.U.C. No. 200
PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4A
Canceling Original and First Revised Page No. 4A
- ---------------------------------------------------------------------------
TERRITORY COVERED BY THIS TARIFF EXHIBIT D
PAGE 2 OF 4
JUNIATA COUNTY
Boroughs of Mifflin, Mifflintown, Port Royal, and Thompsontown
Townships of Delaware, Fayette, Fermanagh, Greenwood, Milford, Monroe,
Susquehanna, Turbett, and Walker.
LACKAWANNA COUNTY
Cities of Carbondale and Scranton.
Boroughs of Archbald, Blakely (part), Clarks Greer, Clarks Summit,
Dalton, Dickson City, Dunmore, Jermyn, Jessup, Mayfield, Moosic, Moscow,
Old Forge, Olyphant (part), Taylor, Throop, and Vandling.
Townships of Abington, Benton, Carbondale, Clifton, Covington,
Elmhurst, Fell, Glenburn, Greenfield, Jefferson, La Plume, Lehigh,
Madison, Newton, North Abington, Ransom, Roaring Brook, Scott, South
Abington, Spring Brook, and West Abington.
LANCASTER COUNTY
City of Lancaster.
Boroughs of Adamstown, (part), Akron, Christiana, Columbia, Denver,
East Petersburg, Elizabethtown, Ephrata (part), Lititz, Manheim,
Marietta, Millersville, Mount Joy, Mountville, New Holland, Quarryville,
Strasburg, and Terre Hill.
Townships of Bart, Brecknock, Caernarvon, Clay, Colerain, Conestoga,
Conoy, Drumore, Earl, East Cocalico, East Donegal, East Drumore, East
Earl, East Hempfield, East Lampeter, Eden, Elizabeth, Ephrata, Fulton,
Lancaster, Leacock, Little Britain, Manheim, Manor, Martick, Mount Joy,
Paradise, Penn, Pequea, Providence, Rapno, Sadsbury, Salisbury,
Strasburg, Upper Leacock, Warwick, West Cocalico, West Donegal, West
Earl, West Hempfield, and West Lampeter.
LEBANON COUNTY
Borough of Richland.
Townships of Heidelberg and Millcreek.
LEHIGH COUNTY
Cities of Allentown and Bethlehem.
Boroughs of Alburtis, Catasauqua, Coopersburg, Coplay, Emmaus, Fountain
Hill, Macungie, and Slatington.
Townships of Hanover, Heidelberg, Lower Macungie, Lower Milford,
Lohill, North Whitehall, Salisbury, South Whitehall, Upper Macungie,
Upper Milford, Upper Saucon, Washington, and Whitehall.
LUZERNE COUNTY
Cities of Hazelton, Pittstown, and Wilkes-Barre.
Boroughs of Ashley, Avoca, Bear Creek Village, Conyngham, Dupont,
Duryea, Exerter, Freeland, Hughestown, Jeddo, Laflin, Laurel Run,
Nescopeck, Nuangola, Penn Lake Park, West Hazleton, West Pittston, White
Haven, and Yatesville.
Townships of Bear Creek, Black Creek, Buck, Butler, Dennison, Dorrance,
Exeter, Fairview, Foster, Hanover, Hazle, Hollenbach, Jenkins, Nescopeck,
Pittston, Plains, Rice, Salem, Slocum, Sugarloaf, Wilkes-Barre, and
Wright.
LYCOMING COUNTY
City of Williamsport.
Boroughs of Duboistown, Hughesville, Jersey Shore, Montgomery,
Montoursville, Muncy, Picture Rocks, Salladasburg, and South Williamsport.
Townships of Anthony, Armstrong, Bastress, Brady, Clinton, Eldred,
Fairfield, Franklin, Hepburn, Jordan, Limestone, Loyalsock, Lycoming,
Mifflin, Mill Creek, Moreland, Muncy, Muncy Creek, Nippenose, Old
Lycoming,
(C) Indicates Change
- ---------------------------------------------------------------------------
Issued October 5, 1995 Effective September 28
<PAGE>
Supplement No. 56
Electric PA. P.U.C. No. 200
PENNSYLVANIA POWER & LIGHT COMPANY Second Revised Page No. 4A
Canceling Original and First Revised Page No. 4A
- ---------------------------------------------------------------------------
TERRITORY COVERED BY THIS TARIFF EXHIBIT D
PAGE 3 OF 4
LYCOMING COUNTY (continued), Penn, Piatt, Porter, Shrewbury,
Susquehanna, Upper Fairfield, Washington, Watson, Wolf, and Woodward.
MONROE COUNTY
Boroughs of East Stroudsburg (part), Mount Pocono, and Stroudsburg
(part).
Townships of Barrett, Chestnuthill, Coolbaugh, Eldred, Jackson,
Paradise, Pocono, Polk, Price, Smithfield, Stroud, Tobyhanna, and
Tunkhannock.
MONTGOMERY COUNTY
Boroughs of East Greenville, Pennsburg, Red Hill, Souderton, and
Telford.
Townships of Franconia, Hatfied, and Upper Hanover.
MONTOUR COUNTY
Boroughs of Danville and Washingtonville.
Townships of Anthony, Cooper, Derry, Liberty, Limestone, Mahoning,
Mayberry, Valley and West Hemlock.
NORTHAMPTON COUNTY
City of Bethlehem.
Boroughs of Freemansburg, Hellertown, Nazareth (part), North
Catasauqua, Northampton, Pen Argyl (part), Stockerton, Tatany, and
Walnutport.
Townships of Allen, Bethlehem, Bushkill, East Allen, Forks, Hanover,
Lehigh, Lower Mount Bethel, Lower Nazareth, Lower Saucon, Moore, Palmer,
Plainfield, Upper Nazareth, Washington, and Williams.
NORTHUMBERLAND COUNTY
Cities of Shamokin and Sunbury.
Boroughs of Herndon, Kulpmont, Marion Heights, McEwensville, Milton,
Mount Carmel, Northumberland, Riverside, Snydertown, and Turbotville.
Townships of Coal, Delaware, East Cameron, East Chillisquaque, Jackson,
Jordon, Lewis, Little Mahanoy, Lower Augusta, Upper Mahanoy, Washington,
West Cameron, West Chillisquaque, and Zeroe.
PERRY COUNTY
Boroughs of New Bloomfield, Landisburg, Liverpool, Marysville,
Millerstown, New Buffalo, and Newport.
Townships of Buffalo, Carroll, Centre, Greenwood, Howe, Juniata,
Liverpool, Miller, Northeast Madison, Oliver, Penn, Rye, Saville,
Southwest Madison, Spring, Tuscarora, Tyrone, Watts, and Wheatfield.
PIKE COUNTY
Townships of Blooming Grove, Greene, Lackawaxen, Palmyra, Porter, and
Shohola.
SCHUYLKILL COUNTY
City of Pottsville.
Borroughs of Ashland, Auburn, Coaldale, Cressona, Deer Lake,
Frackville, Gilberton, Girardyville, Jordon, Landingville, Mahanoy City,
McAooo, Mechanicsville, Middleport, Minnersville, Mount Cameron, New
Philadelphia, New Ringgold, Orwigsburg, Pine Grove, Port Carbon, Port
Clinton, Ringtown, Shenandoah, Tamaqua, Tower City, and Tremont.
Townships of Barry, Blythe, Branch, Butler, Cass, Delano, East
Brunswick, East Norwegian, East Union, Eldred, Foster, Frailey, Hegins,
Hupley, Kline, Mahanoy, New Castle, North Manheim, North Union,
Norwegian, Pine Grove, Porter, Reilly, Rush, Ryan, Schuylkill, South
Manheim, Tremont, Union, Mahantongo, Walker, Washington, Wayne, West
Brunswick, West Mahanoy, and West Penn.
(C) Indicates Change
- ---------------------------------------------------------------------------
Issued October 5, 1995 Effective September 28
Supplement No. 56
Electric PA. P.U.C. No. 200
PENNSYLVANIA POWER & LIGHT COMPANY Original Page No. 4B
- ---------------------------------------------------------------------------
TERRITORY COVERED BY THIS TARIFF EXHIBIT D
PAGE 4 OF 4
SNYDER COUNTY
Boroughs of Beavertown, Freeburg, McClure, Middleburg, Selinsgrove, and
Shamokin Dam.
Townships of Adams, Beaver, Centre, Chapman, Franklin, Jackson,
Middlecreek, Monroe, Penn, Perry, Union, Washington, West Beaver, and
West Perry.
SUSQUEHANNA COUNTY
Boroughs of Forest City and Union Dale.
Townships of Clifford and Herrick.
UNION COUNTY
Boroughs of Hartleton and New Berlin.
Townships of Gregg, Hartley, Kelly, Lewis, Limestone, Union, West
Buffalo and White Deer.
WAYNE COUNTY
Boroughs of Bethany, Hawley, Honesdale, Prompton and Waymart.
Townships of Berlin, Canaan, Cherry Ridge, Clinton, Damascus, Dreher,
Dyberry, Lake, Lebanon, Lehigh, Mount Pleasant, Oregon, Palmyra, Paupack,
Salem, South Canaan, Sterling and Texas.
WYOMING COUNTY
Borough of Factoryville.
Townships of Clinton, Nicholson, Overfield and Tunkhannock.
YORK COUNTY
Boroughs of East Prospect and Wrightsville.
Townships of Fairview, Hellam and Lower Windsor.
(C) Indicates Change
- ---------------------------------------------------------------------------
Issued October 5, 1995 Effective September 28
[Map of PP&L's service territory omitted] EXHIBIT E
EXHIBIT F
SCHEDULE 1
Pennsylvania Power and Light Company
Original Cost Plant in Service and
Accumulated Reserve for Depreciation
As of June 30, 1997
-------------------
Original Cost Depreciation Reserve
Account Plant Balance Balance
- ------- ------------- -------
Intangible
301 $ 476,251.80 -
302 147,083.87 -
303 30,875,967.95 143,677.00
------------------ ------------------
Total $ 31,499,303.62 $ 143,677.00
Steam Production
310 $ 13,234,308.30 $ 580,853.72
311 245,477,838.55 143,841,464.22
312 1,223,936,918.03 532,398,654.82
314 494,620,959.72 215,783,041.97
315 136,218,622.31 75,374,861.68
316 13,110,113.59 8,124,891.28
------------------ ------------------
Total $ 2,126,598,760.50 $ 976,103,767.69
Nuclear Production
320 $ 14,242,367.48 $ 1,941,545.86
321 914,670,166.02 280,677,270.27
322 1,869,295,947.26 480,229,649.24
323 550,628,104.09 132,754,573.07
324 553,516,745.48 164,845,003.58
325 112,764,585.36 13,295,580.55
------------------ ------------------
Total $ 4,015,117,915.69 $ 1,073,743,622.57
Hydro Production
330 $ 4,787,001.13 $ 65,821.00
331 7,518,997.49 4,252,573.31
332 46,633,615.58 11,880,249.37
333 37,948,453.50 7,517,187.67
334 24,385,591.87 2,409,452.56
335 1,667,815.74 548,861.34
336 260,007.75 136,811.99
------------------ ------------------
Total $ 123,201,483.06 $ 26,810,957.24
Other Production
340 $ 67,694.63 Non-depreciable
341 799,185.26 703,721.65
342 2,371,511.21 1,578,374.06
343 18,550,444.91 16,294,669.36
344 7,809,016.13 5,927,757.49
345 3,896,731.43 3,505,751.79
346 87,917.69 52,659.40
------------------ ------------------
Total $ 33,582,501.26 $ 28,062,933.75
Transmission
350 $ 23,089,416.27 $ 6,501,431.28
352 7,986,117.93 1,748,426.60
353 158,306,357.91 25,611,944.93
354 114,239,047.40 55,888,539.91
355 2,200,272.74 824,449.97
356 78,854,355.87 34,394,809.30
359 5,617,865.82 1,535,804.65
------------------ ------------------
Total $ 390,293,433.94 $ 126,505,406.64
Distribution
360 $ 106,442,476.72 $ 33,120,652.79
361 41,984,026.71 16,705,182.28
362 396,993,089.27 127,448,492.26
364 696,688,777.24 230,087,517.94
365 516,394,201.60 195,436,596.26
366 91,305,700.24 15,314,184.97
367 203,352,357.72 49,268,418.68
368 303,144,580.65 119,234,601.82
369 334,731,489.31 160,960,547.61
370 83,233,715.23 23,882,757.28
371 4,344,615.64 2,110,244.80
373 55,380,050.91 23,575,237.68
------------------ ------------------
Total $ 2,833,995,081.24 $ 997,144,434.37
General
389 $ 9,494,843.66 $ 127.00
390 191,883,871.57 55,899,086.06
391 64,473,524.62 44,735,269.07
392 104,339.71 74,543.91
393 3,602,408.29 1,774,310.53
394 39,441,931.21 12,167,564.64
395 11,544,546.22 5,128,423.14
397 8,818,669.63 3,975,037.39
398 6,291,836.17 2,599,987.02
------------------ ------------------
Total $ 335,655,971.08 $ 126,354,348.76
Grand Total $ 9,889,944,450.39 $ 3,354,869,148.02
EXHIBIT F
SCHEDULE 2
PFG GAS, INC.
Statement of Original Cost of Plant In Service
Account
Number Amount
------- ------
INTANGIBLE PLANT
ORGANIZATION EXPENSE 101301-0000 $ 73,222
FRANCHISES AND CONSENTS 101302-0000 131,210
MISCELLANEOUS INTANGIBLE PLANT 101303-0000 56,399
------------
TOTAL INTANGIBLE PLANT $ 260,831
------------
PRODUCTION PLANT
LAND AND LAND RIGHTS 101304-0000 $ 9,112
STRUCTURES AND IMPROVEMENTS 101305-0000 48,843
BOILER PLANT EQUIPMENT 101306-0000 62
------------
TOTAL PRODUCTION PLANT $ 58,017
------------
LOCAL STORAGE PLANT
STRUCTURES AND IMPROVEMENTS 101361-0000 $ 1,779
------------
TOTAL LOCAL STORAGE PLANT $ 1,779
------------
TRANSMISSION PLANT
LAND AND LAND RIGHTS 101365-1000 $ 385,719
RIGHTS OF WAY 101365-2000 115
STRUCTURES AND IMPROVEMENTS 101366-0000 11,307
MAINS 101367-0000 9,041,363
NEASURING & REGULATING STATION EQUIPMENT 101369-0000 1,550,354
------------
TOTAL TRANSMISSION PLANT $ 10,988,858
------------
DISTRIBUTION PLANT
LAND AND LAND RIGHTS 101374-0000 $ 268,373
RIGHTS OF WAY 101374-2000 53,021
STRUCTURES AND IMPROVEMENTS 101375-0000 88,182
MAINS 101376-0000 38,460,218
MEASURING & REGULATING STATION
EQUIPMENT - GENERAL 101378-0000 1,339,737
MEASURING & REGULATING STATION
EQUIPMENT - CITY GATE 101379-0000 48,692
SERVICES 101380-0000 24,110,161
METERS 101381-0000 3,268,039
METER INSTALLATIONS 101382-0000 1,644,860
HOUSE REGULATORS 101383-0000 $ 534,639
HOUSE REGULATOR INSTALLATIONS 101384-0000 167,221
MEASURING & REGULATING STATION
EQUIPMENT - INDUSTRIAL 101385-0000 2,897,584
OTHER EQUIPMENT 101387-0000 95,223
------------
TOTAL DISTRIBUTION PLANT $ 72,975,949
------------
GENERAL PLANT
LAND AND LAND RIGHTS 101389-0000 $ 132,908
STRUCTURES AND IMPROVEMENTS 101390-0000 1,175,121
OFFICE FURNITURE & EQUIPMENT 101391-0000 245,525
OFFICE FURNITURE & EQUIPMENT -
PERSONAL COMPUTERS 101391-4000 99,775
TRANSPORTATION EQUIPMENT 101392-0000 50,385
STORES EQUIPMENT 101393-0000 255
TOOLS, SHOP & GARAGE EQUIPMENT 101394-0000 565,493
LABORATORY EQUIPMENT 101395-0000 106,524
POWER OPERATED EQUIPMENT 101396-0000 272,027
COMMUNICATION EQUIPMENT 101397-0000 176,643
MISCELLANEOUS EQUIPMENT 101398-0000 52,391
OTHER TANGIBLE PROPERTY 101399-0000 113
------------
TOTAL GENERAL PLANT $ 2,877,160
------------
GAS PLANT IN THE PROCESS OF
RECLASSIFICATION 103000-0000 $ 40,540
GAS PLANT HELD FOR FUTURE USE 105000-0000 $ 88,286
NONUTILITY PROPERTY 121000-0000 $ 417,698
------------
TOTAL PLANT IN SERVICE $ 87,709,119
============
ACCUMULATED RESERVE FOR DEPRECIATION $ 12,347,948
============
EXHIBIT F
SCHEDULE 3
NORTH PENN GAS COMPANY
Statement of Original Cost of Plant In Service
Account
Number Amount
------- ------
INTANGIBLE PLANT
Organization Expense 101301-0000 $ 7,017
Franchises and Consents 101302-0000 10,179
------------
TOTAL INTANGIBLE PLANT $ 17,196
------------
PRODUCTION PLANT
Producing Lands 101325-1000 $ 13,029
Producing Leaseholds 101325-2000 158,728
Gas Rights 101325-3000 913,667
Rights-of-Way 101325-4000 29,546
Other Land 101325-5000 1,134
Field Measuring and Regulating
Station Structures 101328-0000 1,263
Other Structures 101329-0000 44,785
Producing Gas Wells - Well Construction 101330-0000 68,627
Producing Gas Wells - Well Equipment 101331-0000 49,353
Field Lines 101332-0000 704,916
Field Measuring and Regulating Station
Equipment 101334-0000 70,730
Drilling and Cleaning Equipment 101335-0000 49,604
Other Equipment 101337-0000 11,062
------------
TOTAL PRODUCTION PLANT $ 2,116,445
------------
STORAGE PLANT
Land 101350-1000 $ 26,687
Rights-of-Way 101350-2000 1,566
Compression Station Structures 101351-2000 29,025
Measuring and Regulating Station
Structures 101351-3000 12,595
Other Structures 101351-4000 82,342
Well Construction 101352-1000 1,629,586
Well Equipment 101352-2000 873,061
Storage Leaseholds 101352-1100 73,196
Storage Rights 101352-1200 176,810
Storage Lines 101353-0000 1,079,611
Compressor Station Equipment 101354-0000 6,222
Measuring & Reg. Station Equipment 101355-0000 805,446
Purification Equipment 101356-0000 144,514
Other Equipment 101357-0000 66,855
------------
TOTAL STORAGE PLANT 5,007,516
------------
TRANSMISSION PLANT
Land and Land Rights 101365-1000 $ 27,411
Rights of Way 101365-2000 509,121
Measuring & Regulating Station
Structures 101366-2000 117,130
Other Structures 101366-3000 37,818
Mains 101367-0000 18,959,919
Measuring & Regulating Station Equipment 101369-0000 1,882,525
Communication Equipment 101370-0000 321,779
Other Equipment 101371-0000 167,358
Testing Equipment 101371-1000 84,653
------------
TOTAL TRANSMISSION PLANT $ 22,107,714
------------
DISTRIBUTION PLANT
Land and Land Rights 101374-1000 $ 37,259
Rights of Way 101374-2000 1,379,897
Structures and Improvements -
Large Structures 101375-1000 541,363
Structures and Improvements -
Small Structures 101375-2000 26,623
Mains 101376-0000 23,717,316
Measuring & Regulating Station
Equipment - General 101378-0000 1,020,852
Services 101380-0000 11,447,828
Meters 101381-0000 1,805,738
Meter Installations 101382-0000 646,892
House Regulators 101383-0000 378,857
House Regulator Installations 101384-0000 385,651
Measuring & Regulating Station
Equipment - Industrial 101385-0000 573,734
Other Equipment 101387-0000 1,035,442
------------
TOTAL DISTRIBUTION PLANT $ 42,997,449
------------
GENERAL PLANT
Land and Land Rights 101389-0000 $ 113,576
Structures and Improvements 101390-0000 1,928,320
Office Furniture & Equipment 101391-0000 9,808
Office Furniture & Equipment -
Furniture 101391-1000 111,067
Office Furniture & Equipment -
Equipment 101391-2000 109,592
Office Furniture & Equipment -
Personal Computers 101391-4000 331,647
Transportation Equipment 101392-0000 69,428
Stores Equipment 101393-0000 785
Tools, Ship & Garage Equipment 101394-0000 15,705
Power Operated Equipment 101396-0000 325,390
Communication Equipment 101397-0000 67,249
Miscellaneous Equipment 101398-0000 2,495
------------
TOTAL GENERAL PLANT $ 3,085,064
TOTAL PLANT IN SERVICE $ 75,331,384
============
ACCUMULATED RESERVE FOR DEPRECIATION $ 24,847,868
============
EXHIBIT G
SCHEDULE 1
EXHIBIT G
SCHEDULE 1
PAGE 1 OF 1
PENNSYLVANIA POWER & LIGHT COMPANY
Number of Customers
By Rate Schedule
As of June 30, 1997
RATE SCHEDULE NUMBER OF CUSTOMERS
RS 1,070,866
RTD 296
RTS 14,590
GS-1 123,315
IS-1 4
ISM 1
GS-3 20,132
LP-4 824
IS-P 34
LP-5 97
IS-T 33
LPEP 1
LP-6 5
GH-1 1,231
GH-2 2,832
BL 16
SL/AL 1,086
EXHIBIT G
SCHEDULE 2
PFG GAS, INC. EXHIBIT G
Customers Served SCHEDULE 2
As Of June 30, 1997 PAGE 1 OF 1
Customer
Count
6/30/97
Residential 29,500
General 5,887
Resale 1
Large Volume Service 130
------
Total 35,518
EXHIBIT G
SCHEDULE 3
NORTH PENN GAS COMPANY EXHIBIT G
Customers Served SCHEDULE 3
As Of June 30, 1997 PAGE 1 OF 1
Customer
Served
6/30/97
Residential 31,341
General 3,126
Resale 2
Gas Lights 21
Large Volume Service 54
------
Total 34,544
EXHIBIT H
SCHEDULE 1
PENNSYLVANIA POWER & LIGHT COMPANY
BALANCE SHEET ACCOUNTS
ASSETS AND OTHER DEBITS
ACCT.
NO. TITLE OF ACCOUNT June 30, 1997
- ----- ---------------- -------------
UTILITY PLANT
101 UTILITY PLANT IN SERVICE $ 9,899,154,193.53
101.1 PROPERTY UNDER CAPITAL LEASES 659,860.15
105 UTILITY PLANT HELD FOR FUTURE USE 32,195,632.04
107 CONSTRUCTION WORK IN PROGRESS 153,750,278.35
------------------
GROSS UTILITY PLANT 10,085,759,964.07
108/111 ACCUMULATED PROVISION FOR DEPRECIATION AND
AMORTIZATION OF UTILITY PLANT IN SERVICE (3,348,112,427.82)
------------------
NET UTILITY PLANT, LESS NUCLEAR FUEL 6,737,647,536.25
120.1 NUCLEAR FUEL IN PROCESS 86,588.50
120.5 NUCLEAR FUEL PROVISION FOR AMORTIZATION
OF ASSEMBLY (4,476,620.70)
120.6 NUCLEAR FUEL UNDER CAPITAL LEASES 168,176,467.98
------------------
NET UTILITY PLANT 6,901,433,972.03
------------------
OTHER PROPERTY AND INVESTMENTS
121 NONUTILITY PROPERTY 5,870,203.64
122 ACCUMULATED PROVISION FOR DEPRECIATION
OF NONUTILITY PROPERTY (387,690.41)
------------------
NET NONUTILITY PROPERTY 5,482,513.23
123 INVESTMENT IN SUBSIDIARY COMPANIES 425,095,910.13
124 OTHER INVESTMENTS 8,892,223.89
128 OTHER SPECIAL FUNDS 169,802,581.75
------------------
TOTAL OTHER PROPERTY AND INVESTMENTS 609,273,229.00
------------------
CURRENT AND ACCRRUED ASSETS
131 CASH 372,745.89
132 INTEREST SPECIAL DEPOSITS 1,850.70
134 OTHER SPECIAL DEPOSITS 575.00
135 WORKING FUNDS 2,582,869.10
136 TEMPORARY CASH INVESTMENTS 133,616.00
NOTES AND ACCOUNTS RECEIVABLE
141 NOTES RECEIVABLE 10,119.67
142 CUSTOMER ACCOUNTS RECEIVABLE 216,108,325.51
143 OTHER ACCOUNTS RECEIVABLE 16,431,124.68
144 ACCUMULATED PROVISION FOR UNCOLLECTIBLE
ACCOUNTS-CREDIT (20,951,309.27)
------------------
TOTAL NOTES AND ACCOUNTS RECEIVABLE 211,598,260.59
------------------
RECEIVABLES FROM ASSOCIATED COMPANIES
145 NOTES RECEIVABLE FROM ASSOCIATED COMPANIES 26,921,000.00
146 ACCOUNTS RECEIVABLE FROM ASSOCIATED
COMPANIES 10,189,600.53
------------------
TOTAL RECEIVABLES FROM ASSOCIATED
COMPANIES 37,110,600.53
------------------
MATERIALS AND SUPPLIES
151 FUEL STOCK 99,724,157.86
152 FUEL STOCK EXPENSES UNDISTRIBUTED 212,462.82
154 PLANT MATERIALS AND OPERATING SUPPLIES 107,327,186.12
158 EMISSION ALLOWANCE INVENTORY 5,166,843.25
163 STORES EXPENSE UNDISTRIBUTED 641,1010.59
------------------
TOTAL MATERIALS AND SUPPLIES $ 213,017,751.64
------------------
CURRENT AND ACCRUED ASSETS (CONTINUED
165 PREPAYMENTS) $ 68,820,203.63
OTHER CURRENT AND ACCRUED ASSETS
171 INTEREST AND DIVIDENDS RECEIVABLE (32,545.56)
172 RENTS RECEIVABLE 2,555,320.88
173 ACCRUED UTILITY REVENUES 74,512,929.00
174 MISCELLANEOUS CURRENT AND ACCRUED ASSETS 28,311,181.49
190 ACCUMULATED DEFERRED INCOME TAXES (CURRENT) 27,847,760.00
------------------
TOTAL OTHER CURRENT AND ACCRUED ASSETS 133,194,645.81
------------------
TOTAL CURRENT AND ACCRUED ASSETS 666,887,118.89
------------------
DEFERRED DEBITS
181 UNAMORTIZED DEBT EXPENSE 5,271,080.17
182.3 OTHER REGULATORY ASSETS 1,400,420,937.45
183 PRELIMINARY SURVEY AND INVESTIGATION
CHARGES 1,293,548.51
184 CLEARING ACCOUNTS (1,899,844.96)
185 TEMPORARY FACILITIES (66,332.73)
186 MISCELLANEOUS DEFERRED DEBITS 13,833,634.80
189 UNAMORTIZED LOSS ON REACQUIRED DEBT 107,178,056.00
190 ACCUMULATED DEFERRED INCOME TAXES 322,233,038.00
LESS CURRENT ACCUMULATED DEFERRED
INCOME TAXES 27,847,760.00
------------------
TOTAL ACCUMULATED DEFERRED INCOME
TAXES (NONCURRENT) 294,385,278.00
------------------
TOTAL DEFERRED DEBITS 1,820,416,357.24
------------------
TOTAL ASSETS AND OTHER DEBITS $ 9,998,010.677.16
==================
PROPRIETARY CAPITAL
201 COMMON STOCK ISSUED 1,476,048,306.77
204 PREFERRED STOCK ISSUED 466,374,500.00
207 PREMIUM ON CAPITAL STOCK 87,000.00
211 NET UNREALIZED SECURITIES GAINS (LOSSES) 55,609,909.96
214 CAPITAL STOCK EXPENSE (18,868,634.73)
216 EARNINGS REINVESTED 1,047,261,064.27
215.1 APPROPRIATED RETAINED EARNINGS-
AMORTIZATION RESERVE-FEDERAL 3,062,823.32
216.1 UNAPPROPRIATED UNDISTRIBUTED SUBSIDIARY
EARNINGS 45,294,089.00
------------------
TOTAL PROPRIETARY CAPITAL 3,074,869,058.59
------------------
LONG-TERM DEBT
221 BONDS 2,786,232,000.00
222 REACQUIRED BONDS 0.00
224 OTHER LONG-TERM DEBT 125,475,000.00
226 UNAMORTIZED DISCOUNT ON LONG-TERM
DEBT-DEBIT (21,806,787.47)
------------------
2,889,900,212.53
------------------
LESS AMOUNTS DUE WITHIN ONE YEAR
221 BONDS 150,000,000.00
------------------
TOTAL LONG-TERM DEBT 2,739,900,212.53
------------------
OTHER NONCURRENT LIABILITIES
227 OBLIGATIONS UNDER CAPITAL LEASES-
NONCURRENT 108,543,467.98
------------------
TOTAL OTHER NONCURRENT LIABILITIES 108,543,467.98
------------------
CURRENT AND ACCRUED LIABILITIES
LONG-TERM DEBT DUE WITHIN ONE YEAR
221 BONDS 150,000,000.00
231 NOTES PAYABLE 191,700,000.00
232 ACCOUNTS PAYABLE 116,465,156.95
234 ACOUNTS PAYABLE TO ASSOCIATED COMPANIES 9,447,076.98
235 CUSTOMER DEPOSITS 1,582,299.58
236 TAXES ACCRUED (888,603.53)
237 INTEREST ACCRUED 53,367,778.12
238 DIVIDENDS DECLARED 75,562,448.75
240 MATURED INTEREST 1,850.70
241 TAX COLLECTIONS PAYABLE 4,130,782.51
242 MISCELLANEOUS CURRENT AND ACCRUED
LIABILITIES 92,075,313.02
243 OBLIGATIONS UNDER CAPITAL LEASES-CURRENT 60,292,860.15
283 ACCUMULATED DEFERRED INCOME TAXES-OTHER
(CURRENT) (60,066.00)
------------------
TOTAL CURRENT AND ACCRUED
LIABILITIES $ 753,676,897.23
------------------
DEFERRED CREDITS
228.3 ACCUMULATED PROVISION FOR PENSIONS
AND BENEFITS $ 48,010,764.00
228.4 ACCRUED MISCELLANEOUS OPERATING
PROVISION-D&D FUND 24,968,570.92
228.41 ACCRUED MISCELLANEOUS OPERATING
PROVISION-NUG BUYOUTS 48,510,000.00
252 CUSTOMER ADVANCES FOR CONSTRUCTION 195,049.67
253 OTHER DEFERRED CREDITS 460,026,412.12
254 OTHER REGULATORY LIABILITIES 187,526,353.82
255 ACCUMULATED DEFERRED INVESTMENT TAX
CREDITS 202,266,782.30
257 UNAMORTIZED GAIN ON REACQUIRED DEBT 3,940.00
281 ACCUMULATED DEFERRED INCOME TAXES
ACCELERATED AMORTIZATION PROPERTY 11,731,160.00
282 ACCUMULATED DEFERRED INCOME TAXES-
OTHER PROPERTY 1,805,440,768.00
283 ACCUMULATED DEFERRED INCOME TAXES-
OTHER 532,281,174.00
LESS ACCUMULATED DEFERRED INCOME
TAXES-OTHER (CURRENT) (60,066.00)
------------------
TOTAL ACCUMULATED DEFERRED INCOME
TAXES-OTHER (NONCURRENT) 532,341,240.00
------------------
TOTAL DEFERRED CREDITS 3,321,021,040.83
TOTAL LIABILITIES AND OTHER CREDITS $ 9,998,010,677.16
==================
EXHIBIT H
SCHEDULE 2
PFG GAS, INC.
BALANCE SHEET
JUNE
----
ASSETS AND OTHER DEBTS 1997
---------------------- ----
Utility Plant $ 87,709,119
Construction Work in Process 3,715,969
Depreciation (12,347,948)
Acquisition Adjustment 38,862
-------------
Total 79,116,002
-------------
Investment 1,900
-------------
Current and Accrued Assets
Cash 8,643,374
Special Deposit 2,155
Working Funds 7,588
Customer Accounts Receivable 4,645,037
Unbilled Revenue 441,826
(Reserve for Uncollectibles) (495,247)
Jobbing 21,335
Other Accounts Receivable 534,962
Plant, Materials & Operating Supplies 3,192,040
Natural Gas Inventories 3,094,862
Prepayments 384,671
Deferred Income Tax 637,113
-------------
Total Current & Accrued Assets 21,109,715
-------------
Deferred Debits:
Miscellaneous Deferred Debits 450,196
Regulatory Assets 29,268
-------------
Total Deferred Debits 479,464
-------------
Total Assets and Other Debits $ 100,707,081
=============
LIABILITIES AND OTHER CREDITS
-----------------------------
Proprietary Capital:
Common Stock Issued 264,433
Earned Surplus 43,967,755
Capital Surplus 1,651,341
-------------
Total Proprietary Capital 45,883,529
-------------
Long Term Debt:
Advances of Associates 648,905
Accounts Payable-Parent 37,914,460
-------------
Total Long Term Debt 38,563,365
-------------
Current and Accrued Liabilities:
Accounts Payable 2,288,637
Customer Deposits 191,861
Payroll Deductions 68,861
Taxes 2,178,487
Interest - Notes 13,820
Deferred Income Tax 635,228
-------------
Total Current & Accrued Liabilities 5,376,895
-------------
Deferred Credits:
Customer Advances 148,626
Other 1,166,012
-------------
Total Deferred Credits 1,314,638
-------------
Reserves
Miscellaneous 269,745
ACRS 6,303,777
Deferred Inc Tax - Payable 2,995,132
-------------
Total Reserves 9,568,654
-------------
Total Liabilities and Other Equity $ 100,707,081
=============
EXHIBIT H
SCHEDULE 3
NORTH PENN GAS COMPANY
BALANCE SHEET
JUNE
----
ASSETS AND OTHER DEBTS 1997
---------------------- ----
Utility Plant at Original Cost:
Gas Plant in Service $ 75,331,384
Gas Plant Held For Future Use 208,225
Construction Work in Progress 1,436,681
-------------
Total Utility Plant 76,976,289
-------------
Less Accumulated Provision for
Depreciation and Amortization 24,847,868
-------------
Net utility Plant 52,128,421
-------------
Gas Stored Underground 5,340,750
-------------
Other Property and Investments:
Non-Utility Property 39,150
Less Accumulated Provision for Depreciation (1,042)
Other Special Funds 259,308
-------------
Total Other Property and Investments 299,500
-------------
Current and Accrued Assets
Cash 198,166
Working Funds 6,970
Temporary Cash Investments 372,232
Customer Accounts Receivable 4,821,327
Merchandise 37,820
Other Accounts Receivable 279,315
Accum. Prov. for Uncollected Accounts-CR (309,383)
Unbilled Revenue 358,344
Plant, Materials & Operating Supplies 1,745,789
Gas Storage Underground - Current (423,946)
Prepayments 1,607,351
Misc. Current & Accrued Assets 139
-------------
Total Current & Accrued Assets 8,694,125
-------------
Deferred Debits:
Unamortized Debt Discount and Expense 223,488
Prelim. Survey & Investigation 45,905
Regulatory Assets 7,118,746
Clearing Accounts 424,334
Miscellaneous Deferred Debits 488,104
Accumulated Deferred Income Taxes 1,570,070
-------------
Total Deferred Debits 9,870,647
-------------
Total Assets and Other Debits $ 76,333,444
=============
LIABILITIES AND OTHER CREDITS
-----------------------------
Proprietary Capital:
Common Stock Issued $ 2,250,000
Earned Surplus 30,816,711
-------------
Total Proprietary Capital 33,066,711
-------------
Long Term Debt:
Notes 21,625,000
-------------
Current and Accrued Liabilities:
Accounts Payable 488,843
Payroll 142,004
Accounts Payable to Associated Co. 1,011,935
Customer Deposits 68,532
Tax Accrued - Federal Income 597,903
Tax Accrued-Other (27,721)
Interest Accrued - Long-term Debt 442,533
Interest Accrued-Other Debt 12,222
Dividends Declared 620,000
Long-term Debt Due Within One Year 1,125,000
Misc. Current & Accrued Liabilities 3,106,643
-------------
Total Current & Accrued Liabilities 7,587,895
-------------
Deferred Credits:
Other Deferred Credits 4,358,131
Other Regulatory Liabilities 849,001
Unrecovered Purchased Gas Costs 226,547
Accumulated Deferred Investment
Tax Credits 8,271,985
-------------
Total Deferred Credits 13,705,664
-------------
Operating Reserves 348,174
-------------
Total Liabilities and Other Credits $ 76,333,444
-------------
EXHIBIT I
SCHEDULE 1
PENNSYLVANIA POWER & LIGHT COMPANY
STATEMENT OF INCOME
TWELVE MONTHS ENDED JUNE 30, 1997
ACCT.
NO
- -----
UTILITY OPERATING INCOME
400 OPERATING REVENUES $2,922,716,805.95
-----------------
OPERATING EXPENSES
401 OPERATION EXPENSES 1,410,305,217.85
402 MAINTENANCE EXPENSES 194,242,652.10
403/406 DEPRECIATION EXPENSES AND
AMORTIZATION OF ELECTRIC PLANT
ACQUISITION ADJUSTMENTS 367,995,793.95
407.3 REGULATORY DEBITS 23,322,608.00
407.4 REGULATORY CREDITS (69,486,751.92)
408.1 TAXES OTHER THAN INCOME TAXES
STATE GROSS RECEIPTS 104,036,738.00
STATE CAPITAL STOCK 33,862,580.00
STATE UTILITY REAL ESTATE 44,760,980.00
OTHER 20,748,675.16
409.1 INCOME TAXES
FEDERAL 160,344,399.00
STATE 55,461,918.00
410.1 PROVISION FOR DEFERRED INCOME TAXES
FEDERAL 132,797,548.00
STATE 34,973,617.00
411.1 PROVISION FOR DEFERRED INCOME
TAXES-CREDIT
FEDERAL (107,840,209.00)
STATE (19,783,553.00)
411.4 INVESTMENT TAX CREDIT ADJUSTMENT (9,919,032.00)
411.8 GAINS FROM DISPOSITION OF EMISSION
ALLOWANCES (800,528.98)
------------
TOTAL UTILITY OPERATING EXPENSES 2,375,022,652.16
----------------
NET UTILITY OPERATING INCOME 547,694,153.79
--------------
OTHER INCOME AND DEDUCTIONS
OTHER INCOME
415/416 MERCHANDISING, JOBBING AND
CONTRACT WORK
418 NONOPERATING RENTAL INCOME (1,335,286.72)
418.1 EQUITY IN EARNINGS OF SUBSIDIARY
COMPANIES 9,221,890.33
419 INTEREST AND DIVIDEND INCOME 7,080,789.16
419.1 ALLOWANCE FOR EQUITY FUNDS USED
DURING CONSTRUCTION 4,762,107.06
421 MISCELLANEOUS NONOPERATING INCOME 3,970,668.99
421.1 GAIN ON DISPOSITION OF PROPERTY 74,514.15
---------
TOTAL OTHER INCOME 23,774,682.97
-------------
OTHER INCOME DEDUCTIONS
421.2 LOSS ON DISPOSITION OF PROPERTY 3,442.40
426.1-426.5 MISCELLANEOUS INCOME DEDUCTIONS 8,227,265.52
------------
TOTAL OTHER INCOME DEDUCTIONS $8,230,707.92
-------------
OTHER INCOME AND DEDUCTIONS
(CONTINUED)
TAXES APPLICABLE TO OTHER INCOME
AND DEDUCTIONS
408.2 TAXES OTHER THAN INCOME TAXES $77,092.00
409.2 INCOME TAXES
FEDERAL (2,102,174.00)
STATE (660,942.00)
D.C. TAX 32,924.00
410.2/411.2 PROVISION FOR DEFERRED INCOME
TAXES-NET
FEDERAL 239,390.00
STATE 79,725.00
---------
TOTAL TAXES APPLICABLE TO OTHER
INCOME AND DEDUCTION (2,333,985.00)
--------------
NET OTHER INCOME AND DEDUCTIONS 17,877,960.05
-------------
INCOME BEFORE INTEREST CHARGES 565,572,113.84
--------------
INTEREST CHARGES
427 INTEREST ON LONG-TERM DEBT 204,529,660.13
428 AMORTIZATION OF DEBT DISCOUNT AND
EXPENSE 2,404,737.01
428.1 AMORTIZATION OF LOSS ON REACQUIRED
DEBT 7,228,189.00
429 AMORTIZATION OF PREMIUM ON
DEBT-CREDIT (10,967.37)
429.1 AMORITIZATION OF GAIN ON REACQUIRED
DEBT-CREDIT (2,367.25)
431 OTHER INTEREST CHARGES 5,674,936.68
------------
432 ALLOW. FOR BORROWED FUNDS USED
DURING CONSTRUCTION-CREDIT (5,201,949.02)
--------------
NET INTEREST CHARGES 214,622,239.18
--------------
NET INCOME $350,949,874.66
===============
EXHIBIT I
SCHEDULE 2
PFG GAS, INC.
STATEMENT OF INCOME
FOR THE TWELVE MONTH PERIOD ENDED JUNE 30, 1997
1997
----
Total Operating Revenue $ 58,251,383
----------------
Operating Expenses
Cost of Gas $ 28,210,642
Operation 11,582,379
Maintenance 2,711,233
Depreciation 3,402,110
Taxes Other Than Income Taxes 3,547,772
Income Taxes
Federal 2,189,660
State (117,380)
Investment Tax Credit (39,902)
----------------
Total $ 51,486,516
----------------
Operating Income $ 6,764,867
----------------
Other Income
Interest Income $ 39,111
Miscellaneous Non-Operating Income 87,877
----------------
Total Other Income $ 126,988
----------------
Gross Income $ 6,891,855
----------------
Income Deductions
Miscellaneous $ 3,996
Other Interest 2,038,315
Allowance for Borrowed Funds Used During
Construction - Credit (31,641)
-----------------
Total Interest Charges $ 2,010,669
----------------
NET INCOME $ 4,881,186
================
EXHIBIT I
SCHEDULE 3
NORTH PENN GAS COMPANY
STATEMENT OF INCOME
FOR THE TWELVE MONTH PERIOD ENDED JUNE 30, 1997
1997
----
Total Operating Revenue $ 45,189,495
----------------
Operating Expenses
Cost of Gas $ 17,856,286
Administrative 7,097,007
Operation 7,335,892
Maintenance 739,631
Depreciation 2,457,572
Taxes - General 2,686,834
Income Taxes
Federal 1,294,626
State 255,242
Investment Tax Credit (36,463)
----------------
Total $ 39,686,627
----------------
Operating Income $ 5,502,868
----------------
Other Income
Interest Income $ 248,160
Miscellaneous Non-Operating Income 140,289
----------------
Total Other Income $ 388,449
----------------
Gross Income $ 5,891,317
----------------
Income Deductions
Miscellaneous $ 12,525
Interest on Long - term Debt 2,132,125
Amortization of Debt Expense 14,245
Other Interest 154,959
Allowance for Borrowed Funds Used During
Construction - Credit (18,761)
Total Interest Charges $ 2,295,093
----------------
NET INCOME $ 3,596,224
================
AFFIDAVITS
AFFIDAVIT
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF LEHIGH :
FRANK A. LONG, being duly sworn according to law, deposes and
states that he is Executive Vice President and Chief Operating Officer of
Pennsylvania Power & Light Company; that he is authorized to and does
make this affidavit for it; and that the facts set forth above related to
Pennsylvania Power & Light Company and its affiliates are correct to the
best of his knowledge, information and belief and that he expects
Pennsylvania Power & Light Company to be able to prove the same at any
hearing hereof.
/s/ Frank A. Long
------------------------------
Frank A. Long
Executive Vice President and
Chief Operating Officer
Sworn to and subscribed
before me this 5th day
of August, 1997
/s/ Francine A. Greenzweig
- ---------------------------
Notary Public
AFFIDAVIT
COMMONWEALTH OF PENNSYLVANIA :
: SS.
COUNTY OF CHESTER :
Terry H. Hunt, being duly sworn according to law, deposes and
states that he is President and Chief Executive Officer of PFG Gas, Inc.,
and North Penn Gas Company; that he is authorized to and does make this
affidavit for them; and that the facts set forth above as to PFG Gas,
Inc., North Penn Gas Company and their affiliates are correct to the best
of his knowledge, information and belief and that he expects PFG Gas,
Inc. and North Penn Gas Company to be able to prove the same at any
hearing hereof.
/s/ Terry H. Hunt
------------------------------
Terry H. Hunt
President and Chief Operating
Officer
SWORN TO AND SUBSCRIBED
before me this 4th day
of August, 1997
/s/ Eleanor R. Ross
- ----------------------------
Notary Public
Exhibit D-2
Application of Pennsylvania Power & Light Company
PFG Gas, Inc. and North Penn Gas Company
Docket Nos. A-120650F0006, A-122050F0003
Statements and Exhibits
Statement STJ-1........................................Scott T. Jones
Exhibit STJ-I....................................Scott T. Jones
Exhibit STJ-2....................................Scott T. Jones
Exhibit STJ-3....................................Scott T. Jones
Statement PTC-1.....................................Paul T. Champagne
Statement JJH-1..................................John J. Hilyard, Jr.
Submitted: December 22, 1997
Statement STJ-1
DIRECT TESTIMONY
OF
DR. SCOTT T. JONES
Application of Pennsylvania Power and Light Company,
PFG Gas, Inc., North Penn Gas Company
Docket Nos. A-122050F0003, A-120650F0006
December 22, 1997
I. QUALIFICATIONS AND EXPERIENCE
Q: Please state your name and business address.
A: My name is Scott T. Jones. My business address is One Mifflin
Place, Cambridge, Massachusetts, 02138.
Q: What position do you hold?
A: I am CEO, The Economics Resource Group, Inc. My firm specializes in
economic and regulatory policy consulting services to private and,
to a lesser extent, public organizations in traditionally regulated
industries.
Q: What is your professional and educational background?
A: I have been involved in issues related to the regulation of
utilities and regulatory policy for 12 years. My experience with
regulated utilities and regulatory policy includes research and
testimony on behalf of clients as well as working with regulators
at the state and federal level as a senior executive in the energy
industry. My previous work experience and testimony includes the
determination of market-clearing energy and capacity prices under
conditions of retail and wholesale competition, rate design, the
role of regulation in project economics and project finance, the
determination of workably competitive markets including a market
power evaluation of Pennsylvania-New Jersey-Maryland power pool
("PJM"), facilities siting, resource cost analysis, and financial
economics pertaining to tariff structure, mergers and debt
refinancing. I have acted as a consultant to and as a member of the
energy industry in matters pertaining to electric utilities, oil
pipelines, natural gas transmission and distribution companies, and
gas liquids transportation systems.
In addition to my more recent work discussed above, I have
submitted testimony on several occasions before the Federal Energy
Regulatory Commission examining market power issues associated with
oil and gas companies. This testimony addressed not only the
analytical determination of whether a market is competitive, but
also what types of tests should be applied to determine the
conditions under which a market may be declared workably
competitive.(1) The specific analyses focused on a variety of gas and
oil company products sold in various geographic markets, including
the relevant geographic market pertinent to this matter.
- -----------
1 See, for example, FERC Comments in Response to Notice of Inquiry on
Market-based Ratemaking for Oil Pipelines, Docket No. RM94-1-000,
Statement of Scott T. Jones, January 24, 1994.
My experience in the energy industry, including two occasions
where worked in the oil and gas industry, spans 22 years. I hold a
Ph.D. in Economics from Virginia Tech. My resume is attached as
Exhibit STJ 1, listing my background and experience in further
detail.
II. INTRODUCTION AND FINDINGS
Q: What is the purpose of your testimony in this proceeding?
A: PP&L Resources, Inc. ("Resources" or the "Company") has asked me to
examine its proposed merger with Penn Fuel Gas, Inc. ("Penn
Fuel")(2), and determine whether the merger is consistent with the
public interest. In that regard, I will provide testimony that
analyzes three factors: the effect on rates(3), the effect on
competition, and the effect on regulation.
- ------------
2 Penn Fuel Gas, Inc., is an intrastate holding company exempt under
Sections 9(a)(2) and 10 of the Public Utility Holding Company Act
of 1935 ("PUHCA").
3 As part of the examination of the effect of the merger on rates, I
have also been asked, as an economist, to develop an opinion about
whether the merger creates benefits for the utilities' customers,
directly or indirectly through increased economic efficiencies that
accrue to society as a whole.
Q: What regulatory policy statements have you reviewed to determine
what factors to examine in order to prepare your testimony in this
matter?
A: In conducting my analysis, I reviewed and applied the Federal
Energy Regulatory Commission's (the "FERC") Merger Policy
Statement(4), relevant portions of the Pennsylvania Electric
Competition Act(5), and the Pennsylvania Public Utility
Commission's (the "PPUC") Order adopting a policy statement
regarding the treatment of gas marketers.(6)
- ----------------
4 FERC, Inquiry Concerning the Commission's Merger Policy Under the
Federal Power Act; Policy Statement, 61 FR 68595 (1996). The FERC
follows a standard that has been adopted by other federal agencies
like the Department of Justice, which focuses on the change in
market power as a result of the merger. Since the Pennsylvania
Public Utility Commission's (PPUC) does not have a similar standard
for measuring the effect of proposed mergers on competition, I have
adopted the guidelines in the FERC's Merger Policy Statement.
5 Electric Generation Customer Choice and Competition Act, PN4282,
December 3, 1996.
6 Pennsylvania Public Utility Commission, Order Regarding Affiliated
Interests of Natural Gas Marketers, Docket No. M-00960838, June 9,
1997.
II.A SUMMARY OF THE MERGER
Q: Could you please summarize the proposed merger between Resources
and Penn Fuel?
A: Yes. The owner of a large, eastern Pennsylvania-based,
vertically-integrated, investor-owned electric utility (Resources)
is proposing to merge with the owner of a small, closely-held,
natural gas utility (Penn Fuel). Penn Fuel provides gas storage,
sales, transportation and distribution services in addition to
propane storage, transportation and delivery services for retail
and wholesale customers scattered over two thirds of Pennsylvania.
Resources is the parent holding company of PP&L, Inc.
("PP&L") which provides regulated retail electric service in
central eastern Pennsylvania. Penn Fuel is the parent holding
company of PFG Gas, Inc. ("PFG Gas"), which provides regulated
natural gas service in southern and eastern Pennsylvania and in a
small portion of northern Maryland, and of North Penn Gas Company
("North Penn"), which provides regulated natural gas service in
northwestern and north central Pennsylvania.
II.B SUMMARY OF THE FINDINGS
Q: What are your conclusions based on the analysis of the proposed
merger?
A: I have examined the pre- and post-merger market for possible
changes due to the merger. As a result of my analysis, find that
the merger will bestow benefits to the ratepayers, have no effect
on the current state of competition, and have no impact on the
required regulation of the firms. I have reached these conclusions
for the following reasons:
1. I have identified many areas where the merged firms are
likely to improve the efficiency of existing operations and
services. In this way, both customers and society as a whole
are made better off as a result of the merger.
2. There is no evidence that the proposed merger will reduce
competition in the market for energy supply, transportation,
or transmission services. Post-merger, the rising tide of
competition for electric energy and natural gas service in
Pennsylvania, along with the continued regulation of
transportation and transmission services, will insure that
the relatively small number of customers common to both
Resources and Penn Fuel will continue to benefit from the
pressure that market forces will bring to bear on the
combined firm. For those 30,000 or so Penn Fuel customers
that become customers of Resources, emerging competition will
insure that if Resources does not meet the demands of these
customers, some other energy supplier will.
3. There is no evidence that the proposed merger will affect the
way that various aspects of the utilities' operations are
currently regulated. Intervenors and protesters express
concerns about post-merger horizontal and vertical market
power issues.(7) Based on my analysis of the proposed merger,
the concerns are without merit and should be dismissed.
The evidence regarding this proposed merger suggests that the
merger is in the public interest and should be approved.
- -------------
7 Petition to Intervene of UGI Utilities, Inc., Docket No.
A-122050F0003, A-120650F0006, September 29, 1997, p. 1; Protest of
New England Hub Partners, L.P., Docket No. A122050F0003,
A-120650F0006, September 29, 1997, pp. 6-7; Reply of New England Hub
Partners, L.P., to the answer of PP&L, PFG Gas, Inc., and North
Penn Gas Co., October 17, 1997, p. 9.
II.C TESTIMONY STRUCTURE
Q: How is your testimony structured for the purposes of this
proceeding?
A: I first present an examination of the merger's effect on rates. I
then discuss the effect of the merger on competition. Finally, I
comment on the effect of the proposed merger on regulation.
III. THE EFFECT OF THE MERGER ON RATES
Q: The FERC's Merger Policy Statement explains that its primary focus
is the effect of the merger on ratepayer protection. Why would the
proposed merger benefit the ratepayer and how will ratepayers
realize these benefits?
A: As noted in the section titled "Efficiencies" in Revisions to the
Horizontal Merger Guidelines dated April 8, 1997, "Competition
usually spurs firms to achieve efficiencies internally.
Nevertheless, mergers have the potential to generate significant
efficiencies by permitting a better utilization of existing assets,
enabling the combined firm to achieve lower costs in producing a
given quantity and quality than either firm could have achieved
without the proposed transaction. Indeed, the primary benefit of
mergers to the economy is their potential to generate such
efficiencies."(8)
- ------------
8 Revisions to the Horizontal Merger Guidelines, issued by the U.S.
Department of Justice and the Federal Trade commission, April 8,
1997. The Agency also correctly notes that only those efficiencies
likely to be accomplished with the proposed merger and unlikely to
be accomplished in the absence of either the proposed merger or
another means have comparable anticompetitive effects. These are
called merger-specific efficiencies.
Q: Have you identified some of the savings and societal benefits
that will accrue as a result of the merger?
A: Yes. First of all, find the reasons listed for the merger listed in
Form U-1, Application or Declaration Under the Public Utility
Holding Company Act of 1935 (at 9) both compelling and well within
the scope of this merger. That document discusses the following
benefits and efficiency gains:
1. The customer base of the combined utilities will be larger.
Customers will benefit directly from enhanced electricity
competition enabling them to tailor their energy needs to
either gas or electricity services. For example, Penn Fuel's
current industrial and commercial customers who could gain
from an array of services will gain ready access to the
ability of a much larger utility to provide sophisticated
energy/fuel management services, risk management services,
enhanced financial services, and so forth.
2. Similarly, Penn Fuel's customers will benefit from company
personnel's access to advanced information systems,
professional training and research routinely provided to
employees of Resources, a much larger organization.
3. Resources' wholesale (and after 1999, retail) customers will
benefit from the Company's affiliation with Penn Fuel's
experienced natural gas marketing personnel(9). Added natural
gas marketing skills will allow Resources to offer its
customers a wider array of energy options as well as possibly
to acquire fuel supplies at a lower cost for its gas-fired
generation facilities.
- -------------
9 Natural gas has been and is expected to be the fuel used by most
new capacity constructed in the territory served by the
Pennsylvania-New Jersey-Maryland interconnection association
("PJM").
4. The combined firms should be able to reduce their overall
cost of operation to a level below that which would have
prevailed but for the merger. Cost reductions are likely to
be achieved in common corporate departments such as
accounting, finance, information systems, regulatory affairs,
legal consulting and procurement.
Secondly, I would expect the combined firms to achieve direct
cost reductions, economic efficiencies, or added customer benefits
such as the following.
5. The applicants customers can be served out of common service
centers. Most service skills needed to meet customer
requirements are the same for both companies. While the
technical skills needed for some customer service
requirements are not common to existing employees today,
further training and consolidation of equipment and materials
could make headway on the operational side. Training and
other skill-enhancing efforts should lead to an ongoing
customer benefit that works to lower cost and enhance
offerings at service centers.
6. North Penn, PFG Gas and PP&L customers can be served by a
common customer relations department, including activities
like billing, new services, low income customer activities,
etc.
7. The combination of Penn Fuel with Resources should lead to a
reduction in the cost of capital financing Penn Fuel.
Further, a merger with the larger Resources, will add an
expanded array of finance options for capital projects, which
Penn Fuel's management cannot currently access on its own.
Reduced capital costs should lead to lower customer costs for
a number of utility services.
8. Existing utility rights of way and real estate holdings used
for regulated assets such as transmission wires or gas
pipelines and compressor stations, can be used to reduce
future capital costs. Additional gas might be run under
existing wires, reducing the per mile cost of developing
infrastructure.
I would also note that the expected benefits from the merger
of Penn Fuel and Resources are found in the testimony of John J.
Hilyard, Jr., and Paul T. Champagne, filed on behalf of the
applicants.
Q: How will the merger benefits be passed on to consumers?
A: So long as the proposed merger results in at least some economic
efficiencies that are ultimately passed through to the market,
customers will benefit from the merger. For regulated utility
service, these efficiency gains are reflected in a reduction (all
else equal) in the rate of change in the rate base, which
translates into a slower rise in prices. For those products and
services marketed in a competitive market, the crucible of
competition will likely force merger savings to be passed on to
consumers.
Q: Do the various benefits described above have to be quantified as
alleged by the intervenors to be judged valuable from an
economist's perspective?
A: No. Economic theory does not require that the magnitude of a change
in the structure of the market be quantified to declare that the
market as a whole is improved and customers are made better off by
the merger. Quantifications of various costs and benefits due to
mergers is difficult. In fact the FERC in its latest policy
statement on merger policy explicitly recognizes the problem with
quantifying benefits to mergers:
Our investigations have frequently required trial-type
hearings. Although we have considered the applicants' burden
of proof to be met by a generalized showing of likely costs
and benefits, these hearings have often been time-consuming,
and there has been considerable controversy over whether the
estimates of future costs and benefits are truly meaningful.
Moreover, there has been controversy over the position we
have taken that benefits are to be "counted" even if they
could reasonably be obtained by means other than the
merger.(10)
- -----------
10 Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act; Policy Statement, op. cit., at 18.
Surely, economists sometimes engage in measuring the economic
benefits or costs given a change in the marketplace. However, all
that is actually required to declare a change beneficial to the
economic well-being of the market, or individual market
participants, is to know (all else equal) that costs are reduced,
or the array products are expanded. In this particular case, it is
clear that there are numerous potential synergies and savings to be
achieved and that the merger is clearly in the public interest.
IV. THE EFFECT OF THE MERGER ON COMPETITION
IV.A SUMMARY OF FINDINGS REGARDING THE
IMPACT OF THE MERGER ON COMPETITION
Q: What are the potential concerns regarding the impact of the merger
on competition?
A: Potential concerns of the merger's effect on competition is whether
it causes an increase in horizontal and vertical market power. The
horizontal market power concern in this case consists of whether
Penn Fuel and Resources combined would have a sufficiently large
share of the natural gas transportation or the electricity
generation market to exercise market power by restricting supply or
otherwise erecting barriers to entry in an effort to raise prices.
In the absence of evidence suggesting that the merger would
significantly increase market power, a market is workably
competitive and the proposed merger unlikely to have adverse
competitive effects.(11)
Potential vertical market power concerns Penn Fuel's ability
to adversely affect competition by erecting barriers to entry or
otherwise raising prices to the merged firm's competitors.(12) This
could occur only if Penn Fuel's gas transportation facilities serve
existing or future gas-fired generators which compete in the same
geographic market as PP&L.
In either instance, the ultimate concern is whether the
effect of the merger may substantially lessen competition or tend
to create a monopoly.(13)
- -------------
11 Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act, Policy Statement, op. cit., at 30.
12 FERC Order Approving Merger, Duke Power Company and PanEnergy
Corporation, Docket EC97-13-000, May 28, 1997, p. 21.
13 The Clayton Act (1914), Section 7, as amended in 1950.
Q: Summarize your findings regarding the impact the merger will have on
competition.
A: PP&L is a generator of electric energy that serves wholesale
customers at market-based rates in competitive markets.
Transmission and distribution services are provided by PP&L under
largely regulated, non-discriminatory open-access provisions
established by state and federal regulatory agencies. Other
services, like energy brokering, are unregulated.
Penn Fuel does not own energy resources. To the extent that
these companies provide energy services, the applicant is both a
very small part of a much larger natural gas market and subject,
for the most part, to Commission regulation.
Finally, neither applicant shares, as a matter of their
current business operations, customers or competitors except in the
broadest sense that both Resources and Penn Fuel are energy
companies. Without any significant overlap, and without any
evidence that either company possesses market power in its business
not subject to regulation, market power cannot be increased by the
merger. Hence, I find that there is no evidence that the oposed
merger causes harm to competition in the relevant markets.
IV.B NATURAL GAS AND ELECTRIC POWER INDUSTRY
RESTRUCTURING AND DEREGULATION
Q: Is it important to distinguish between a utility's wholesale and
retail businesses?
A: Yes. Because of the nature of the services demanded and the way the
utility provides those services, a utility's customer base is
fundamentally different, for wholesale versus retail customers (see
Table 1).
Most natural gas in the U.S. is sold to end users by local
distribution companies ("LDCs") like those operated by North Penn
and PFG Gas. The companies are obligated to meet all of the natural
gas needs of their customers and are responsible for securing
adequate supplies of natural gas and maintaining the means to
deliver that gas to customers. Most natural gas used by
distribution companies is produced in areas outside of their
service territories and must be transported by interstate pipeline
to the "city-gate" of the distribution company.
Table 1
Penn Fuel and PP&L Product Offerings
Product PP&L Penn Fuel
------- ---- ---------
Wholesale
Gas Storage N Y
Gas Transmission N Y
Electricity Y N
Electricity Transmission Y N
Propane N Y
Retail
Electricity Y N
Gas N Y
Until 1985, virtually all natural gas supplies were purchased
at the city-gate by regulated distribution companies from
FERC-regulated interstate pipelines. The price and conditions of
natural gas transportation was regulated, although the price of gas
was set by the competitive market. After 1985, the FERC began
requiring interstate pipelines to sell natural gas transportation
separately from the sale of the commodity gas and permitted the
distribution companies to convert their contract demand for natural
gas delivered to their city-gate into firm transportation, thereby
opening direct purchase of gas to the distribution companies. The
interstate pipelines could continue to transport gas for resale to
distribution companies (the "sale for resale" or wholesale
business), but they now also had to offer the distribution
companies the choice of transportation-only (including
interruptible transportation) for gas they bought from the
producers.
In 1992, as a result of FERC Order No. 636, a secondary
market for interstate pipeline capacity formed from the released
firm capacity of the distribution companies opening direct purchase
of gas from producers over interstate pipelines to the city-gates
by marketers and industrial customers of the distribution
companies. As a result of these changes in the way gas
transportation and sales are regulated, the provision of interstate
natural gas service at wholesale to LDCs at their city-gates has
been separated or unbundled into three relevant products: natural
gas, access to an interstate pipelines, and with capacity-release,
natural gas transportation capacity.
Similarly, for the electric industry, FERC Order No. 888/889
changed the relationship between the way a utility supplied
customers with generation service. Prior to the Order, wholesale
electric customers, usually municipal electric companies that
resold the electricity generated by investor-owned utilities,
purchased bundled generation with regulated transmission and
distribution services to the meter. Now, wholesale customers can
shop for generation from any supplier and receive delivery over
wires at non-discriminatory, regulated rates. This same purchase
option is to be extended to retail customers in Pennsylvania
beginning in 1999 as a result of the Electric Generation Customer
Choice and Competition Act.(14)
- ------------
14 Enacted as House Bill No. 1505, Sections 3-4, 66 Pa. C.S. P.
2801-2812
Q: What is the status of wholesale and retail sales of the applicants?
A: Today, the wholesale generation and energy marketing business of
PP&L is subject to market-based rates approved by the FERC(15),
while other retail businesses of PP&L remain regulated.(16) The
energy supply business of Penn Fuel does not exist, since Penn Fuel
does not own a company that produces and sells natural gas.(17)
With the exception of Penn Fuel's propane operations, the
transportation and distribution businesses (including gas sales,
transportation, storage and distribution services), whether to
large industrial customers or residential users, are regulated by
the PPUC. However, the fact that unregulated gas production and
unregulated interstate customer base eligible to choose alternate
suppliers.
gas transportation services are available to Penn Fuel's industrial
customers does impact on the traditional gas merchant (bundled
sales) function of the utility. Hence, competitive pressure bears
on Penn Fuel's gas sales to customers because unbundled
alternatives exist upstream of the city-gate.
- ------------
15 Federal Energy Regulatory Commission, Order Conditionally Accepting
for Filing Proposed Market Based Rates, Issued July 17, 1997,
Docket No. ER97-3055-000.
16 The deregulation of the electricity industry in Pennsylvania
started this year with 5% of the customer base eligible to choose
alternate suppliers.
17 PP&L/Penn Fuel witness John J. Hilyard (at 2) points out that Penn
Fuel does collect for sale a small amount of local production.
IV.C RELEVANT GEOGRAPHIC AND PRODUCT MARKETS
Q: Dr. Jones, what is an appropriate framework for examining
competition?
A: In order to analyze the extent of competition, it is necessary to
properly establish the relevant geographic and product markets.
Equally important in analyzing this merger proposal is
clarification of the distinction between the companies' retail and
wholesale businesses. Having defined the market, an economist will
then investigate the potential for a market participant to exercise
horizontal and vertical market power.
IV.C.1 GEOGRAPHIC MARKET
Q: What is the relevant geographic market for the purposes of
evaluating the proposed merger between Resources and Penn Fuel?
A: The FERC has determined, based upon an analysis I conducted, that
PP&L's relevant geographic market is at least as large as PJM.(18)
I recognize, however, that compared to the size of PJM, natural gas
transportation, distribution and storage markets tend to cover a
much larger geographic market, sometimes encompassing many states
in more than one region of the U.S.(19)
To simplify matters here, I have restricted the analysis of
natural gas transportation and storage to a geographic market just
slightly larger than PJM, including the seven states of
Pennsylvania, Ohio, West Virginia, Maryland, Delaware, New Jersey
and New York.
- --------------
18 Affidavit, Dr. Scott T. Jones, in support of PP&L's Application for
Authority to Sell Energy and Capacity at Market-Based Rates, FERC,
Docket No. ER97-3055-000.
19 For example, interstate pipelines like Transco, a PFG Gas storage
customer, "stages" natural gas supplies into storage outside of
Tioga County, Pennsylvania, on the basis of storage costs, gas
costs, transportation requirements, and other competitive reasons.
If PFG Gas, post-merger, were to attempt to sustain a
non-competitive rate increase affecting gas storage costs, Transco
would have an incentive to use less costly storage capacity in
Pennsylvania or as far west Indiana or Illinois and as far south as
Texas or Louisiana.
Q: Why not expand the analysis completed for PP&L to include the
larger, seven state geographic market used for natural gas?
A: The FERC has already approved PP&L's market-based rates on the
basis of exactly the same tests for market power that I would use
if the market were larger than just PJM. A larger geographic area
would only increase the number of competitors to be counted in the
relevant market, but not increase PP&L's generation resources.
Hence, the outcome of the analysis is known without performing the
study.
IV.C.2 PRODUCT MARKET
Q: What are the relevant product markets affected by the merger of
Penn Fuel with Resources and why?
A: The relevant product markets for purposes of a pre- and post-merger
examination of the change in market power are the retail and
wholesale businesses that each applicant pursues that are somehow
common to the strategic interests of the combined companies.
North Penn and PFG Gas engage in regulated natural gas
transportation, natural gas storage (both on- and off-system), and
natural gas procurement/sales (the "merchant function") to
on-system Customers. In addition, Penn Fuel owns a small
unregulated "bottled gas" business for propane storage sales and
transportation.
On the other hand, PP&L is in the business of generating
electric energy in the wholesale market, then transmitting
electricity to its customers. PP&L does not directly participate in
any of the business activities engaged in by Penn Fuel, i.e., it
does not own or operate natural gas transportation, distribution,
or gas storage facilities in competition with Penn Fuel.(20)
Therefore, although the service territories of Penn Fuel and PP& L
overlap to some extent as shown in Exhibit STJ 2, the applicants do
not serve the same customers with the same services.
- ------------
20 PP&L does operate a pipeline from the Philadelphia area for
transportation service dedicated to its generation plant at Martins
Creek, as well as a Public Service Electric and Gas facility in New
Jersey. This pipeline is switched from gas to fuel oil service,
depending on the utility's requirements during the year. As a
result, various segments of this pipeline are underutilized much of
the time.
Q: But in a broader sense, isn't there some overlap between
electricity and gas, in that electricity competes with natural gas,
say for example as a fuel for heating or cooking?
A: Yes, along with other energy sources like fuel oil, propane, wood,
geothermal energy, etc. In fact, based on the move toward
deregulation of electric generation and the proposed deregulation
of intra-state natural gas markets, and given the fact that all
customers can choose the type of energy they use for certain
applications, trade press articles suggest that the relevant
product market could be expanded to "energy," measured in BTUs
regardless of source.(21) If the product market were to be defined
this broadly, there would be numerous participants and competitors
for BTU services, all but eliminating the need to analyze the
merger for market power. For purposes of my market power analysis,
I have chosen to narrow the relevant product market as noted above.
- -------------
21 "Duke Energy Sees BTU as 'Common Currency' in Converged
Marketplace", Inside FERC, November 24, 1997, p. 1.
IV.D MARKET POWER
IV.D.1 HORIZONTAL MARKET POWER
Q: What are the indicators that horizontal market power exists as a
result of the merger and what are the remedies if the concern is
realized?
A: Regulators generally use traditional economic tools for assessing
the potential for the exercise of horizontal market power.(22)
These tools are used as benchmarks, designed to measure market
concentration where the market consists of a very small number of
firms that when combined control most of the capacity to serve
customers in the relevant geographic market. The concern here is
that it is easier for one or two competitors to coordinate their
activities in an effort to erect barriers to market entry or
otherwise sustain a non-competitive increase in price. When these
concerns are evidenced by analysis, regulators look to the
applicants to voluntarily mitigate market power.
- -------------
22 The most common tool is the Herfindahl-Hirschman Index (HHI). The
HHI is a market-share based indicator of market concentration.
Q: What are the steps necessary to determine if the merger results in
an increase in horizontal market power?
A: The steps for assessing the impact of a merger on competition is
set out in the FERC's Merger Policy Statement. The Guidelines call
for a multi-step process that begins with the definition of the
relevant geographic and product market for the combined firms. This
is followed by developing measures of market concentration. Next,
the analysis evaluates whether the extent of concentration in the
pre-merger versus the post-merger market, along with other factors
that characterize the market, raises concerns about potential anti-
competitive effects.
Q: If the applicants' markets are only loosely connected, and the
apparent change in market power as a result of the merger is nil,
why have you supplied evidence regarding the structure of the
markets as part of your testimony?
A: I provide evidence about the level of competition facing customers
of Penn Fuel and, separately, PP&L, in order to lay to rest any
concern on the part of the PPUC that either PP&L or the operating
companies of Penn Fuel have the ability to exercise horizontal
market power in a post-merger setting. Table 2 contains a listing
of the markets where horizontal market power is feasibly of
concern.
Table 2
Potential Horizontal Market Power Concerns
Product PP&L Penn Fuel Horizontal Market Power Concern?
-----------------------------------------------------------------------
Wholesale
Gas Storage N Y Regulated and many competitors
Gas Transmission N Y Regulated and many competitors
Electricity Y N No market power--commission-
approved market-based rates
Electricity
Transmission Y N Regulated, under the control of
an independent system operator
for PJM
Propane N Y Competitive market
Retail
Electricity Y N Regulated, but soon to be
deregulated witn many
competitors
Gas N Y Regulated, expected to be
deregulated with many
competitors
Q: What about the other relevant product markets that you identified
earlier?
A: As shown in Table 2, Penn Fuel markets are either subject to PPUC
regulatory jurisdiction and/or are not shared at all by Resources
PP&L. For example, PP&L does not sell, transport or store propane.
PP&L does not own, use, or operate natural gas storage and, in
fact, even Penn Fuel's gas storage is of little consequence in the
relevant geographic market.
Q: What do you mean by their gas storage business is of little
consequence in the relevant market?
A: On the basis of ownership of storage capacity, Penn Fuel's Tioga
County, Pennsylvania fields (see Exhibit STJ 3) constitute less
than one third of one percent of the deliverability capacity in the
relevant geographic market (see Table 3). However, the percentage
of capacity actually operated by Penn Fuel is even less than that.
CNG, the interstate pipeline and storage company, operates all Penn
Fuel gas storage except the Meeker field and even Meeker's capacity
is dependent on the CNG compressors to get gas out of storage and
onto the pipeline system.
Table 3
Gas Storage Market Share Analysis
Deliverablity Market
Storage Operator (MMcfd) Share
--------------------------------------------
Cabot 63 0.4%
CNG 8,902 59.4%
Columbia 4,150 27.7%
Duke 30 2.0%
Equitrans 41 2.8%
Hampshire 48 0.3%
Honeoye 40 0.3%
National Gas Oil 40 0.3%
NFG 79 5.3%
Nyseg 14 1.0%
Penn Fuel 41 0.3%
Phillips 31 0.2%
-------------------------------------------
Total 14,979 100%
Source: AGA, 1997
Q: What weight should be placed on the presence of unbundled
interstate pipeline services when considering a merger between a
gas distribution company and an electric utility?
A: The fact that unbundled gas transportation, sales and storage
services are readily available at the city-gate of the distribution
company means considerable competitive pressure has already been
brought to bear on the distribution company, particularly the
services offered to industrial customers. Given that interstate
pipelines offer unbundled services to shippers, anindustrial
customer holding capacity on North Penn's system could contract for
the purchase of gas from an oil company or gas marketer, then
arrange for interstate transportation on a pipeline all the way
through the city gate of the North Penn or PFG Gas distribution
systems at prices that reflect upstream supply and demand
conditions for fuel and transportation. In this way, the rates
North Penn is able to charge for competing gas sales must reflect
the external conditions just outside its city-gate.
As an indication of the relative magnitude of competitive
pressure brought by interstate pipelines into Pennsylvania, Table 4
lists the pipelines along with the capacities of each of those
systems. The combined capacity of these interstate systems is more
than 100 times greater than that of Penn Fuel.
Table 4
Interstate Pipeline Capacity in the Market
Pipeline Capacity Share of Total
Pipeline Operator (MMcfd) Capacity
------------------------------------------------------
ANR 3,359 19%
CNG 21 0.1%
Columbia 3,367 19%
Crossroads 250 1.4%
Duke 4,051 23%
North Country 56 0.3%
Penn Fuel 167 0.9%
St Lawrence 62 0.3%
Tennessee 3,301 19%
Union 45 0.3%
Williams 3,107 17%
------------------------------------------------------
Total 17,786 100%
Note: Penn Fuel represents peak capacity on the combined
PFG Gas and North Penn Systems.
Source: EIA, 1996, Penn Fuel.
IV.D.2 VERTICAL MARKET POWER
Q: What is vertical market power?
A: Vertical market power accrues to merger applicants that have, as a
result of a merger, the ability to restrict the supply of energy or
services to competitors, or otherwise engage in discriminatory
behavior as a result of the firm's vertical structure.
Q: What are some remedies to prevent potential vertical market power
concerns?
A: Regulators and statutes impose non-discriminatory transportation
and transmission service requirements on monopoly providers.
Regulated companies are required to unbundle their services and
charge regulated rates for transmission and transportation services
provided to energy suppliers. Penn Fuel is required to provide open
access and non-discriminatory transportation services under FERC
Order 636 and state law. PP&L is required to provide open access
and non-discriminatory transmission services under FERC Orders 888
and 888-A and under the Pennsylvania Electric Competition Act.
Q: Dr. Jones, have you considered the potential for the applicants to
possess and exercise vertical market power?
A: Yes. As a result of the merger, Resources and Penn Fuel might
survey their common customer base looking for an opportunity to
practice "affiliate self dealing," where the applicants help one
another in a deliberate effort to harm the competitors to one or
both of the applicant firms. Secondly, I have examined the proposed
merger's effect on competition for evidence of rebundling of energy
and transmission or transportation services. Vertical market power
could allow rebundling, causing customers to both take and pay for
the combined services. However, an examination of the market
containing the customers common to both utilities reveals that
neither of these vertical market power factors is present, since,
as I noted earlier, the applicants do not share customers for the
same services, or face common competitors for those services.
Therefore, there is no basis for concluding that the merger will
create any significant vertical market power.
IV.D.3 MITIGATION OF MARKET POWER:
COMPETITIVE ALTERNATIVES
Q: Besides the specific examples you discuss regarding horizontal and
vertical market power, are there other factors that might mitigate
merger-related market power?
A: Yes. Markets tend to evolve with or without mergers, due to the
presence of a variety of competitive alternatives, not just other
gas and electric utilities. Under the FERC's Merger Policy
Statement, certain conditions require that these factors be
identified and accounted for in a market power finding.
Q: Can you briefly illustrate and discuss the competitive alternatives
the applicants' customers face, particularly the source and extent
of alternate fuels?
A: There are several elements in the natural gas and electricity
markets that bring competitive pressure to bear on the applicants.
First, many of Penn Fuel's largest customers are "dual-fuel,"
capable of switching in a short period of time to the alternate
fuel. Dual-fuel capability is also a factor in the electric market
where the generation of electric energy at many sites might
originate with gas-fired, oil-fired or coal-fired boilers.
As an example of the ready availability of alternate fuel,
Exhibit STJ 4 illustrates the density and range (shown as colored
circles) of trucking radii for fuel oil out of terminals and
refineries.
Q: In place of fuel-switching, are there ways Penn Fuel's customers
might gain access to another source of delivered natural gas?
A: Large customers might avoid an increase in delivered natural gas
prices by arranging to construct a pipeline from a nearby
interstate pipeline and by-pass the gas distribution company (see
Exhibit STJ 3). This can also be used by customers as an extremely
effective threat, since by-pass means the permanent loss of
pipeline market share. By-pass is an option for any customer near
an alternative pipeline.
Q: Besides by-pass, what can customers do to bring competitive
pressure to bear on natural gas distribution companies?
A: First, Penn Fuel's largest customers could acquire added
interruptible capacity on the distribution company's system, then
link that capacity to aggressive negotiations with gas marketers,
interstate pipelines, gas storage operators, and gas producers,
creating a gas "package" to their burner tip. This delivered price
becomes the alternative against which Penn Fuel must structure any
offer to sell gas to that customer.
Second, gas by wire or "tolling" of gas supplies into
electricity is an option for some industrial customers. Suppose an
electric generation company has a plant that takes gas from Penn
Fuel. Generation companies have learned how to arrange for gas to
be delivered to another generator to be tolled into electricity.
This lowers the capacity factor at the generation facility on the
Penn Fuel system and increases the capacity factor at the plant
tolling gas into electricity.
V. EFFECT OF THE MERGER ON REGULATION
Q: Have you reviewed the apparent effect of the merger on regulation?
A: Yes.
Q: On the basis of that review, are you able to make a public interest
determination of the effect of the proposed merger on regulation?
A: Yes. I have determined that there is nothing about the proposed
merger that suggests the applicants are preparing to engage in
regulatory evasion, such as jurisdiction shopping or market
restructuring in an effort to reduce or otherwise fundamentally
alter the way regulators currently oversee applicant markets. The
proposed merger between Penn Fuel and Resources will not change the
fact that the PPUC will regulate Penn Fuel's existing and post-
merger business activities. Similarly, the merger will still leave
PP&L's retail business subject to the jurisdiction of the PPUC and
its transmission business subject to FERC oversight. All other
relevant government agencies, such as the Nuclear Regulatory
Commission, will retain their pre-merger oversight in a post-merger
environment.
VI. CONCLUSIONS
Q: Can you summarize your overall findings regarding the ability of
the applicants to exercise market power as a result of the proposed
merger?
A: The objective of my analysis was to apply the regulatory standard
which seeks to identify a significant increase in market power as a
result of the proposed merger. My analysis revealed that:
1. The merger bestows benefits on the applicants, customers, and
society as a whole through a variety of efficiency-enhancing
changes to the way the companies currently operate.
2. There is no change in the level of horizontal or vertical
market concentration as a result of the merger. Hence,
allowing the firms to merge means that the post-merger impact
on the relevant markets is nil.
3. The effect of the merger on regulation does not cause a
change in the way the firms are regulated, nor does the
merger provide an opportunity for the combined firms to
engage in regulatory evasion.
Q: Does this conclude your direct testimony?
A: Yes, it does.
Exhibit STJ 1
SCOTT T. JONES
The Economics Resource Group, Inc.
One Mifflin Place
Cambridge, MA 02138
(617) 491-4900
(617) 520-0215 (direct)
PROFESSIONAL EXPERIENCE
The Economics Resource Group, Inc., Cambridge, MA
CEO, 1993 - present
Responsible for the strategic focus and development of the
management consulting and litigation support services firm in new
areas of business. Directly responsible for many oil and gas,
utility and other industry clients.
Coho Resources, Inc., Dallas, TX
Senior Vice President, 1992 - 1993, Board of Directors, 1990 - 1993
Responsible for marketing, business development, and all regulatory
matters within this oil and gas exploration and production company.
Oversaw oil and gas sales. Negotiated pipeline/transportation
agreements. Implemented risk management programs and directed
acquisitions/divestitures.
AUS Consultants, Industry Analysis Group, suburban Philadelphia, PA
President, 1988 - 1992
Co-founder of the Group. Responsible for the operation of the
consulting firm which had over 200 industry clients. Directly
responsible for oil and refined products clients, oil pipeline
clients and gas utilities. Coordinated the energy risk management
and fuel supply management practices.
Chase Econometrics/WEFA, Bala Cynwyd, PA
Senior Vice President, 1986 - 1988
Responsible for the development, enhancement and execution of all
consulting services in each of the following areas of this Chase
Manhattan Bank subsidiary: oil, gas, coal, electric utilities,
non-ferrous metals, steel, plastics and packaging materials.
Atlantic Richfield Company, Los Angeles, CA
Director; Energy Studies, and Director; Market Research, 1980 - 1985
Responsible for the design and implementation of market-related
plans/projects for senior management in the U.S. and foreign oil
markets, natural gas markets, refining/marketing and metals
markets.
General Motors Corporation, Detroit, Ml
Senior Staff Associate, 1976 - 1980
Responsible for energy, regulatory and long-range marketing
strategies for senior management. Worked with every division, plus
the technical staffs.
University of Texas, San Antonio, TX, and Virginia Tech, Blacksburg, VA
Assistant Professor, School of Business and Consultant to Industry,
1974 - 1976
Responsible for classes in economics, marketing, finance and
statistics.
U.S. Army
Commissioned Officer, 1967 - 1970
EDUCATION
Virginia Tech, Blacksburg, VA
Ph.D. in Economics, 1976
Dissertation: "A Variable Risk Hypothesis for Foreign Exchange Rate
Behavior"
University of Texas, Arlington, TX
M.A. in Economics and Marketing, 1973
B.A. in Business, 1972
TESTIMONY
Pennsylvania Power & Light Company
Prepared Direct Testimony before the Pennsylvania Public Utility
Commission, Docket No. R00973975, Statement No. 1. Economic theory
and regulatory policy principles supporting stranded cost recovery
for PP&L, Inc., from UGI Utilities, Inc., customers subject to an
ongoing power supply agreement. Also, market-clearing prices for
energy and capacity for UGI's two facilities in PJM under
conditions of retail and wholesale competition, 1999-2001. Re:
PAPUC v. UGI Utilities, Inc. - Application of UGI Utilities, Inc.,
for Approval of its Restructuring Plan under ss.2806 of the Public
Utility Code. November 21, 1997.
Pennsylvania Power & Light Company
Prepared Rebuttal Testimony before the Pennsylvania Public Utility
Commission, Docket No. R-00973954, Statement No. 7-R.
Market-clearing prices for energy and capacity, plus unit revenue
estimates for PP&L and PJM facilities to support the company's
stranded cost recovery and corporate restructuring filing in
accordance with the State of Pennsylvania, Electricity Generation
Customer Choice and Competition Act of 1996. Harrisburg, PA, August
4, 1997.
Pennsylvania Power & Light Company
Affidavit in Support of PP&L's Petition before the Federal Energy
Regulatory Agency, Docket No. ER97-3055-000. Application for
Authority to Sell Energy and Capacity at Market-Based Rates. Market
power analysis of the Pennsylvania-New Jersey-Maryland
Interconnection ("PJM pool") in support of the application to sell
electricity at market-based rates. Washington, DC, May 23,1997.
Pennsylvania Power & Light Company
Prepared Rebuttal Testimony before the Federal Energy Regulatory
Commission, Docket No. SC97-1-000. Market price of electric energy
and capacity in a competitive environment. The formation of market
prices support PP&L's claim for stranded cost relief before the
Commission in response to comments by the staff and plaintiffs in
this matter. Washington, DC, April 22, 1997.
Pennsylvania Power & Light Company
Prepared Direct Testimony before the Pennsylvania Public Utility
Commission, Docket No. R-00973954, Statement No. 7. Market price
and revenue estimates for PP&L and PJM to support the company's
stranded cost recovery and corporate restructuring filing in
accordance with the State of Pennsylvania, Electricity Generation
Customer Choice and Competition Act of 1996. Harrisburg, PA, April
1, 1997.
BP America, Inc.
Affidavit in Support of BP's Petition before the United States
Internal Revenue Service. Tax dispute involving the transfer of
North West Shelf net profits royalty interest (NPRI) owned by BP
Property Developments Australia (BPPDA) to Standard Oil Company, a
subsidiary of BP America. Testimony as to the fair market value of
the property. Cambridge, MA, February 28, 1997.
BP Exploration (Alaska), Inc.
Deposition testimony before the Superior Court for the State of
Alaska, Third Judicial District, Anchorage, AK, In the Matter of
Prudhoe Bay Unit Litigation, Case No. 3AN-95-8960CI, damages
proceeding involving the quantity, quality, and fair market value
of the crude oil and the facilities used to produce/transport
hydrocarbons from the Prudhoe Bay Unit. Boston, MA, November 19,
1996.
Koch Industries, Inc.
Deposition testimony before the United States District Court,
Eastern District of Oklahoma, In the Matter of Petro Source
Partners, Ltd. (plaintiff) vs. Koch Industries, Inc., Koch
Gathering Systems, Inc., and Koch Oil Company (defendants), Case
No. 95-356-B, antitrust proceeding involving the market for crude
oil and gas liquid sales, transportation and trading in Oklahoma,
Kansas, and Texas. Oklahoma City, OK, August 28, 1996.
Koch Industries, Inc.
Affidavit in Support of the Brief of Defendant's Motion for Summary
Judgment (with exhibits). Submitted to the United States District
Court, Eastern District of Oklahoma, In the Matter of Petro Source
Partners, Ltd. (plaintiff) vs. Koch Industries, Inc., Koch
Gathering Systems, Inc., and Koch Oil Company (defendants), Case
No. 95-356-B. Muskogee, OK, August 23, 1996.
BP Exploration (Alaska), Inc.
Prepared direct testimony before the State of Alaska, Department of
Natural Resources and Department of Revenue, Joint Hearing In the
Matter of the Appropriate Reservoir Management for Optimization of
Natural Gas Liquids Blending and Utilization; and Economic and
Physical Recovery within the Prudhoe Bay Unit. This case involved
the valuation and use of hydrocarbon producing properties as well
as the valuation of facilities used on the North Slope for
transportation and treatment. Anchorage, AK, August 22, 1995.
BP Exploration (Alaska), Inc.
Prepared direct and rebuttal testimony before the State of Alaska,
Alaska Oil and Gas Conservation Commission In the Matter of a
Hearing to Review the Plan of Development and Operation and Other
Agreements as They Affect Natural Gas Liquid Throughput, Miscible
Injectant Utilization and Ultimate Recovery from Prudhoe Bay.
Anchorage, AK, May 12, 1995, and June 12, 1995.
Northern Natural Gas Company
Prepared direct testimony before the Federal Energy Regulatory
Commission, Docket No. RP95-185-000, natural gas pipeline rate
case, market-based storage. Washington, DC, March 13, 1995.
Florida Gas Transmission Company
Prepared direct testimony before the Federal Energy Regulatory
Commission, Docket No. RP95-103-000, natural gas pipeline rate
case, incentive rate-making and market-based rates. Washington, DC,
January 10, 1995.
Exxon Corporation and Exxon Company USA
Deposition testimony before the Superior Court of the State of
California for the County of Los Angeles, In the Matter of The
People of the State of California and the City of Long Beach vs.
Chevron Corporation; Unocal Corporation; Mobil Oil Corporation;
Shell California Production; Texaco Inc.; Exxon Corporation; Exxon
Company, USA, No. C 587 912. Oil pricing/contract dispute.
December 7, 1994.
El Paso Natural Gas Company
Deposition testimony before the U.S. District Court for the
Northern District of California In the Matter of Jonathan C. S. Cox
vs. El Paso Natural Gas Company. South Texas producing property,
natural gas price/contract dispute matter. November 29, 1994.
Mariposa Pipeline Company
Testimony before the Superior Court of the State of California for
the County of Santa Barbara In the Matter of Mariposa Pipeline
Company vs. Gaviota Terminal Company, Case No. 194428. Condemnation
proceeding and rate case. Testimony focused on the market value of
pipeline and terminal facilities (both marine and on-shore) for
heavy crude oil, gas liquids, and emissions recovery
plant/equipment in a limited-life producing property. April 18,
1994.
Association of Oil Pipelines
Testimony before the Federal Energy Regulatory Commission In the
Matter of Market-Based Ratemaking for Oil Pipelines, Notice of
Inquiry, Docket No. RM94-1-000. Washington, DC, January 25, 1994.
ARCO Pipe Line Company and Four Comers Pipe Line Company
Testimony before the Federal Energy Regulatory Commission In the
Matter of Market-Based Ratemaking for Oil Pipelines, Notice of
Inquiry, Docket No. RM94-1-000. Washington, DC, January 24, 1994.
Santa Fe Pacific Pipe Line Company
Testimony before the Federal Energy Regulatory Commission, Docket
No. IS92-39-000. Testimony about the market facing shippers on a
southwest U.S. petroleum products pipeline. Washington, DC, May 24,
1993.
Buckeye Pipe Line Company, L.P.
Testimony before the Federal Energy Regulatory Commission Technical
Conference In the Matter of the Interstate Oil Pipe Line Industry,
Docket No. OR92-6-000. Washington, DC, April 30, 1992.
Williams Pipe Line Company
Testimony before the Federal Energy Regulatory Commission In the
Matter of Williams Pipe Line Company, Docket No. IS90-21-000,
Bifurcated rate case, oil pipeline market power showing, Phase l.
Washington, DC, July 1991.
ARCO Pipe Line Company
Prepared direct testimony before the Federal Energy Regulatory
Commission, Docket No. IS90-34-000, Bifurcated rate case, oil
pipeline market power showing, Phase I, Washington, DC, February
1991.
Amoco Pipe Line Company
Prepared direct testimony before the Federal Energy Regulatory
Commission, Docket No. IS90-30-000, Bifurcated rate case, Rocky
Mountain crude oil pipeline market power showing, Phase I.
Washington, DC, August 1990.
Hawaiian Electric Company, Inc.
Testimony before the Public Utilities Commission of the State of
Hawaii on behalf of Hawaiian Electric Company for approval of AES
Power Purchase Contract, Docket No. 6177. Honolulu, HI, November
1989.
Buckeye Pipe Line Company, L.P.
Testimony before the Federal Energy Regulatory Commission, Docket
IS87-14-000, Bifurcated rate case, oil pipeline market power
showing, Phase I. Washington, DC, October 1988.
Sacramento Municipal Utility District
Testimony before the Sacramento Municipal Utility District Board In
the Matter of the Rancho Seco Nuclear Facility. Sacramento, CA, May
1988.
U.S. Senate
Testimony before the U.S. Senate Committee on Energy and Natural
Resources, Senator Bennett A. Johnson, Chairman, Oversight Hearing
on the World Oil Outlook. Washington, DC, March 11, 1987.
SELECTED INDUSTRY PROJECTS/PUBLICATIONS
Lead economic and industry valuation expert in the hostile takeover
attempt by Union Pacific Resources, Inc., of Pennzoil Company. Prepared
Valuation of Pennzoil Company for the Chancery Court in Delaware based on
proprietary documents provided by Pennzoil through discovery. The report
required that all of Pennzoil's operations and plans be modeled and
integrated into a valuation by business segment (upstream and downstream)
and collectively as enterprise value. November 1997.
Senior market strategist on electric industry restructuring for a major
investor-owned utility in the northeast. Responsible for directing a team
charged with rate design, market analysis, corporate restructuring and
strategy. 1994-1996.
Senior market strategist to Columbia Gulf Transmission regarding their
Gulf Coast corporate, marketing, and regulatory strategy. The proprietary
projects included asset acquisition and divestiture, developing
alternative marketing opportunities for jurisdictional and
non-jurisdictional businesses, rate design, and planned expert testimony.
July 1996-July 1997.
Senior energy economist to the Single Participating Area (SPA) team for
BP Exploration, Inc., formed as a result of Order 360, Alaska Oil and Gas
Conservation Commission, September 1995. Team member (on-site) from
November 1995 to August 1996. The issues were: the value of the
hydrocarbons produced 1995-2030 from the Prudhoe Bay Unit; the market
value of the facilities used to treat and transport those hydrocarbons;
the probable value of alternative uses for natural gas from the North
Slope in the global market; the use of various valuation techniques as
applied to the hydrocarbon resources from the PBU; and the impact of oil
and gas production on the workforce/economy of Alaska. All work was
proprietary and considered highly confidential.
Senior energy economist as part of a team advising a major southwestern
U.S. investor-owned electric utility regarding strategy and testimony
needed to support a petition against the merger of competing firms. The
work considered competitive conditions throughout Texas, Oklahoma, New
Mexico, and Louisiana as well as interconnects with Mexico. 1994-1995.
"The Relationship Between Fuel Oil and Natural Gas Prices in the 1990's,"
proprietary client report that examined the statistical relationships
that are embedded in the way oil and gas prices move together. The
objective was to provide a risk management tool to the client to use when
hedging exposure to oil price changes linked to gas procurement
contracts. 1993.
"An Assessment of Competition: Amoco Pipe Line Company's Rocky Mountain
Crude Oil System," prepared by AUS Consultants. March 1992.
"Optimizing Capital Expenditures and Trucking Penalties Among Terminals
in the Combined Sun/Atlantic System," proprietary study prepared for Sun
Oil Company in cooperation with Sun/Atlantic Pipe Line Companies. July
1990.
"Competition in the Atlantic Pipe Line Company Market: Theory and
Evidence of the Battle for Transportation Services," proprietary study
prepared for Sun/Atlantic Pipe Line Company. April 1990.
"Competition in the Williams Pipe Line Company Market: Theory and
Evidence of the Battle for Transportation Services" (2 volumes),
proprietary study prepared for Williams Pipe Line Company. February 1990.
"The Competitive Environment Faced by Sun Pipe Line Company's
FERC-Regulated Crude Oil System," (2 volumes), proprietary study prepared
for Senior Management of the Sun Pipe Line Company. November 1989.
"Sun Pipe Line Company Market Analysis of the Eastern Products System,
1985-1988," proprietary study prepared for Sun Pipe Line Company. July
1989.
"An Analysis of Refined Product Use in Buckeye Pipe Line Company, L.P.
Market Areas: 1989-1994," proprietary study prepared for the Senior
Management of Buckeye. June 1989.
"Market Analysis of Ohio and Indiana for Refined Petroleum Product
Pipelines", proprietary study prepared for Buckeye Pipe Line Company,
L.P. June 1989.
"Standing on the Brink: The North American Natural Gas Market," published
by Chase Econometrics. Detailed analysis of the prospects of gas
producers, distributors, IPP's/co-gen and transmission companies in the
rapidly unfolding environment of deregulated markets. 1988.
"Power Wheeling in North America," published by Chase Econometrics. The
first market analyst of its kind, showing the detailed quantitative
effects of open access in North America. The work covered all NERC
regions including Canada.
1988.
"Natural Gas Procurement: Supply Options and Solutions" (with Matt
Dutzman), produced for several pipelines and utilities. Complete analysis
of the natural gas industry's evolving market. The study included the
role of brokers, IPP's, co-gen plus several scenarios regarding the
evolving relationship between gas buyers and sellers. 1988.
"The Impact of a Gasoline Tax," proprietary study prepared for Mobil Oil
Corporation. This widely quoted study demonstrated the impact of either a
25 or 50 cent per gallon gas tax on the auto, gasoline and labor markets.
1987.
"China's Energy Supply/Demand Balance," proprietary study prepared for
the Atlantic Richfield Company. Demonstrated that China could remain an
important exporter of energy if it instituted certain measures to
conserve domestic demand during the 1990s. 1987.
"U.S. Oil and Gas Drillings: Beyond the Current Crisis," published by
WEFA, demonstrated why drilling activity could sink toward 1,000 active
rigs before recovering in the 1990s. January 1987.
"The Next Oil Shock," published by Chase Econometrics (2 volumes).
Complete global analysis of the prospects for much higher oil and gas
prices by 1992 once energy consuming-countries become increasingly
dependent on oil from countries in politically unstable regions or those
nations hostile to the United States. 1986.
"Oil and Natural Gas Supply/Demand Balances" (Oil and Gas Market Trends
Team Member), National Petroleum Council, Washington, DC. 1986.
PUBLICATIONS AND RESEARCH
"Regulatory Reform and the Economics of Contract Confidentiality: The
Example of Natural Gas Pipelines" (with J. Kalt, A. Jaffe, and F.
Felder), Regulation, No. 1, 1996.
"Natural Gas Pipelines: Roadmap to Reform" (with F. Felder), Public
Utilities Fortnightly, April 1, 1995.
"Focusing In On Futures and Options" (with F. Felder), Electric
Perspectives, Edison Electric Institute, January/February 1995.
"Using Derivatives in Real Decision Making" (with F. Felder), Public
Utilities Fortnightly, October 15, 1994.
"OCTG Markets are Hammered by Natural Gas," Center Lines, Cleveland, OH,
January 1992.
"Least-Cost Planning for Investor-Owned Natural Gas Distribution
Companies: What's Needed and What's Not" (with G. Schink), City Gate
Magazine, Pennsylvania Gas Association, Harrisburg, PA, June 1989.
"Oil and Natural Gas Markets: Change is on the Way," Chemical Marketing &
Management, Vol. 2, No. 4, summer 1987.
"Energy Resources and the Global Marketplace," The Canadian Mining and
Metallurgical Bulletin, spring 1987.
"OPEC May Stumble, But It Won't Fall," The New York Times, February 8,
1987.
"Forecasting Oil Prices to 1995," Hydrocarbon Processing, Vol. 66, No.
8, August 1987.
"Negotiating China's Energy Future," East Asian Executive Reports, Vol.
8, No. 4, April 1986.
"Multiple Scenario Planning in an Uncertain Oil and Gas Market," Journal
of Business Forecasting, Vol. 4, No. 3, 1986.
"Exchange Rate Movements and Oil Demand," in M. Wionczek, ed., Strategic
Planning in the Oil and Gas Industry, Westview Press, 1985.
"Political Instability and Foreign Direct Investments: The Motor Vehicle
Industry, 1948-65" (with K. Bollen), Social Forces, Vol. 60, No. 4, June
1982.
"A Perspective on the Cost of Energy Technologies," SAE Transactions,
Spring 1982.
"Political Instability's Impact on Output: Motor Vehicles Production in
Argentina, Brazil, and Mexico" (with K. Bollen), Studies in Comparative
International Development, Vol. 17, No. 4, 1982.
"Aluminum Markets and Supply Elasticity," Light Metals Age, May 1981.
PUBLICATIONS IN PROCEEDINGS
"Twenty Years Is a Long Time: Tomorrow's Oil & Gas Market with Lessons
from the Past," in 20th Annual Petrochemical Review, DeWitt & Company,
Houston, TX, pp. A-1 to A-18, March 22, 1995.
"Fuel-Switching Between Distillates and Natural Gas: The Search for a New
Rule of Thumb," in The World Oil & Gas Industries in the 21st Century,
Proceedings from the 16th Annual North American Conference, International
Association of Energy Economists, Dallas, TX, November 9, 1994.
"The Energy Market Outlook: Costs Going Down and Reliability Improving,"
in Forecast '94, Steel Service Center Institute, Chicago, IL, September
27, 1993.
"Good News for the Petrochemicals: Will the Energy Market Play Along?" in
1993 Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-16,
March, 1993.
"New Age Energy Markets," in 1992 Petrochemical Review, DeWitt & Company,
Houston, TX, pp. 1-21, March 1992.
"Oil & Gas Market Outlook: Opportunities for New Mexico Producers,
1990-95," in Proceedings: Oil and Gas '91, Robert O. Anderson School of
Business, University of New Mexico, February 13, 1991.
"Clearing Away the Fog: A Look at Oil and Gas in the 1990s," in 1990
Petrochemical Review, DeWitt & Company, Houston, TX, pp. 1-16, March
1990.
"Time to Get on With the Job at Hand," in Forward to the Nineties, The
Alliance, Anchorage, AK, pp. 1-15, January 1990.
"Energy Markets: Have Petrochemical Producers Found a Safe Haven or Just
the Eye of the Storm?" in 1989 Petrochemical Review, DeWitt & Company,
pp. 1-16, March 1989.
"Alaska-On the Threshold of a Dream," in Proceedings from Meet Alaska,
1989, The Alliance, pp. 1-9, January 1989.
"Crude Oil Outlook," in 1988 Petrochemical Review, DeWitt & Company,
Houston, TX, pp. 1-20, March 1988.
"Oil and Natural Gas Markets: Change is on the Way," in Review and
Forecast: Prospects for Profitability, The Chemical Marketing Research
Association, pp. 174-179, May 1987.
"Petroleum Product Market in Transition," in Proceedings, National
Petroleum Refiners Association, San Antonio, TX, pp. 15-25, April 1987.
"Low World Crude Oil Price - How Long Do We Have?", in 1987 Petrochemical
Review, DeWitt & Company, Houston, TX, pp. 1-15, April 1987.
OTHER PROFESSIONAL ACTIVITIES
Invited Speaker (Partial Listing)
American Association of Energy Economics, American Gas Association,
American Petroleum Institute, Association of Oil Pipelines,
Canadian Energy Research Institute, Canadian Petroleum Association,
Central Electricity Generating Board of the U.K., DeWitt
Petrochemical, Gas Daily and Gas Buyer's Guide, Georgia Mining
Association, Independent Petroleum Association of Canada,
International Association of Energy Economists, Institute of Gas
Technology, National Association of Business Economists, National
Petroleum Council Oil Daily, Society of Gas Operators, Society of
Rate of Return Analysis, State of North Dakota, State of Texas,
Steel Service Center Institute, Transportation Research Board, U.S.
Association of Energy Economists, University of New Mexico,
University of Southern California University of Texas (Arlington)
Directorships and Advisory Committees
COHO Resources, Inc., Dallas, TX. Director, 1990-93 (an oil and
gas exploration and production company)
Remuda Corporation, Denver, CO. Advisory Committee, 1991 - present
(a natural gas exploration, production and marketing company)
Professional Associations and Certifications
Petroleum Economics & Management Program, Northwestern University
International Association of Energy Economists
National Association of Business Economists
American Economic Association
[Exhibit STJ-2 - Map of Penn Fuel and PP&L Service
Territories Omitted]
[Exhibit STJ-3 - Map of Gas Storage and Selected Interstate
Pipeline Alternatives Omitted]
[Exhibit STJ-4 - Map of Selected Alternatives to Penn Fuel's
Gas Sales Omitted]
STATEMENT PTC-1
DIRECT TESTIMONY
OF
PAUL T. CHAMPAGNE
Application of Pennsylvania Power & Light Company,
PFG Gas, Inc. and North Penn Gas Company;
Docket Nos.: A-120650F00006, A-122050F00003
DECEMBER 22, 1997
Q. Please state your full name and business address.
A. My name is Paul T. Champagne, and my business address is Suite
400,11350 Random Hills Road, Fairfax, Virginia 22020.
Q. By whom are you employed and in what capacity?
A. I am Vice President for Business Development of PP&L Global, Inc. a
which is a wholly-owned subsidiary of PP&L Resources, Inc. ("PP&L
Resources").
Q. Please summarize your educational background and experience related
to your testimony in this proceeding.
A. In 1981, I was awarded a Bachelor's Degree in Chemical Engineering
from the University of Illinois. From 1981 to 1983, I took graduate
courses in Mechanical Engineering at the University of Illinois.
From 1983 through 1988, I served as a research engineer for the
Research Triangle Institute at Research Triangle Park, North
Carolina. From 1989 through 1994, I served as Business Developer
and Regional Manager for Business Development for the Edison
Mission Energy Company, which is a wholly-owned subsidiary of
Edison International. Edison Mission Energy Company specializes in
the development and acquisition of domestic and international power
projects. In 1995, I joined PP&L Global, Inc. as Vice President for
Business Development.
Q. Explain your responsibilities with regard to the proposed
acquisition by PP&L Resources, Inc. of Penn Fuel Gas, Inc. ("Penn
Fuel").
A. I participated in the review of Penn Fuel on behalf of PP&L
Resources that led to its decision to offer to purchase the stock
of Penn Fuel.
Q. Are you familiar with the testimony of John J. Hilyard, Jr. in
this proceeding?
A. Yes, I am. He has summarized many of the efficiencies and service
enhancements that Penn Fuel's utility subsidiaries, PFG Gas, Inc.
("PFG") and North Penn Gas Company ("North Penn") will experience
as a result of the acquisition by PP&L.
Q. Will these efficiencies benefit PFG and North Penn customers?
A. Yes. As a result of efficiencies arising from the acquisition,
PFG's and North Penn's future rates will undoubtedly be lower than
they would have been if Penn Fuel and its subsidiaries continued to
exist independently of PP&L Resources.
Q. Do you anticipate immediate rate reductions as a result of the
merger?
A. We cannot predict immediate rate reductions for PFG and North Penn
customers. The efficiencies discussed in Mr. Hilyard's testimony
will be implemented over a period of years. Whether other increases
in costs will offset these efficiencies during the transition
period cannot be predicted with certainty.
Further, it is generally anticipated that gas supply will be
unbundled from the transportation service provided by local
distribution companies in the near future. When similar legislation
was enacted concerning electric generation in the Electricity
Generation Customer Choice and Competition Act, a price cap was
imposed on the electric distribution companies, such as PP&L. It
remains uncertain whether such a price cap will be enacted as part
of gas supply deregulation. Because we are not certain what form of
rate regulation will be in effect for gas distribution companies in
the near future, we cannot make any definitive statements
concerning rate reductions.
Q. Under ownership by PP&L Resources will PFG and North Penn continue
to be able to provide safe and reliable service?
A. Absolutely. PP&L Resources will not take any action that will limit
PFG's or North Penn's ability to provide safe and reliable service.
PFG's and Penn Fuel's technical expertise to design, construct and
maintain its gas distribution systems will not be altered in any
manner that reduces its ability to offer safe and reliable service.
Q. Will PP&L itself receive any benefits from the acquisition?
A. Yes, it will. As PFG's and North Penn's systems are integrated into
PP&L, the fixed costs of certain of PP&L's systems, such as the
billing system and the information system, will be spread over a
larger customer base, thereby reducing the cost per unit of these
systems.
In addition, there are potential marketing opportunities
which may produce benefits in the future, depending upon the manner
in which competitive markets for electric generation and natural
gas supplies develop. PP&L will be able to offer customers a range
of energy options backed up by extensive experience in both
electric and gas industries. The presence of the PP&L corporate
system in new territory may provide opportunities for PP&L to
market electric generation beyond its resent service territory.
Further, PP&L may be able to assist PFG and North Penn to market
gas service within their present service territories or within the
service territory of PP&L.
Q. Are any other opportunities presented by the acquisition?
A. Yes. As a provider of both electric and natural gas services, the
PP&L corporate system will have an increased opportunity to provide
"behind the meter" consulting services to customers, particularly
those who use substantial amounts of energy, to obtain the benefits
of energy management systems. Q. Will PP&L be able to reduce its
rates as a result of the acquisition? A. No. As I explained
previously, most of the efficiencies arising from the acquisition
will arise from the integration of Penn Fuel systems into PP&L
systems. Therefore, most of the efficiencies will inure most
directly to PFG and North Penn. Further, in terms of total number
of customers, the acquisition of Penn Fuel by PP&L Resources, Inc.
does not represent a major expansion. The PP&L corporate system
will be expanding its number of utility customers by only about 6%,
including gas service customers of Penn Fuel that are already
electric service customers of PP&L. One cannot expect substantial
economies of scale from such a small increase in the total number
of customers.
Another consideration that must be noted is that PP&L is
already subject to a rate cap under the Electricity Generation
Customer Choice and Competition Act. The opportunities and the
economies rising from the acquisition of Penn Fuel by PP&L
Resources may make the existing rate cap for PP&L somewhat more
manageable.
Q. Do you have anything further at this time?
A. No, I do not.
STATEMENT JJH-1
DIRECT TESTIMONY
OF
JOHN J. HILYARD, JR.
Application of Pennsylvania Power & Light Company,
PFG Gas, Inc. and North Penn Gas Company;
Docket Nos.: A-120650F00006, A-122050F00003
DECEMBER 22, 1997
Q. Please state your name and business address.
A. My name is John J. Hilyard, Jr. My business address is 55 South
Third Street, Oxford, Pennsylvania 19363.
Q. By whom are you employed and in what capacity?
A. I am the Manager of Rates and of Major Customer Services for Penn
Fuel Gas, Inc. ("Penn Fuel") and its utility subsidiaries including
PFG Gas, Inc. ("PFG") and North Penn Gas Company ("North Penn").
Q. Please describe your educational background and business
experience.
A. I have a Bachelor's Degree in Accounting from the University of
Pennsylvania. While attending the University of Pennsylvania, I
interned with Main Lafrentz & Co., Certified Public Accountants,
and served as a member of its audit staff. After graduating, I
joined Penn Fuel as an Accountant/Rate Analyst. My duties and
responsibilities have included preparation of statistical and
financial data required for the utility subsidiaries of Penn Fuel.
In 1993, I was appointed to the position of Manager of Rates, and
earlier in 1997, I was appointed to the additional position of
Manager of Major Customer Services.
Q. Have you testified previously before any regulatory agencies?
A. Yes, I have testified previously in behalf of utility subsidiaries
and associated companies of Penn Fuel before the Delaware Public
Service Commission, Maryland Public Service Commission and the
Pennsylvania Public Utility Commission ("Commission").
Q. Are you familiar with PP&L/Penn Fuel Exhibit No. 1, the application
for certificates of public convenience evidencing the Commission's
approval of the acquisition, which was filed on August 7, 1997?
A. Yes, I am.
Q. Are the portions of the application providing information
concerning Penn Fuel, PFG Gas, Inc. and North Penn Gas Company true
and correct to the best of your knowledge, information and belief?
A. Yes, they are.
Q. Please describe generally the operations of Penn Fuel Gas, Inc.
and its subsidiaries.
A. Penn Fuel is a holding company under the Public Utility Holding
Company Act. Penn Fuel's corporate headquarters, which also serve
as the corporate headquarters of its two utility subsidiaries, are
located in Oxford, Chester County, Pennsylvania. In addition to
owning public utility subsidiaries, Penn Fuel sells propane to
approximately 28,000 customers.
PFG provides gas sales and transportation service in portions
of 27 counties in Pennsylvania and in a small portion of northern
Maryland. PFG owns and operates numerous local gas distribution
systems that are dispersed throughout southern, central and eastern
Pennsylvania. Each local distribution system is interconnected with
one of the following interstate pipeline companies: Texas Eastern
Transmission Corporation, Transcontinental Gas Pipeline Company or
Columbia Gas Transmission Corporation. With the exception of a
small volume of locally-produced gas, all gas sold to or
transported by PFG to its customers is delivered to PFG by one of
these three interstate pipeline companies.
The local gas distribution systems now owned and operated by
PFG were acquired directly or indirectly by Penn Fuel from 1945
through 1970. At the time of acquisition, each local distribution
system was owned by a separate corporation. Initially, Penn Fuel
preserved the corporate separateness of the owners of the local
distribution systems. As a result of the acquisitions, Penn Fuel
owned 25 different gas distribution subsidiaries, each maintaining
its own set of rates. In the 1970's, Penn Fuel undertook an initial
simplification of its corporate structure by a series of mergers.
As a result of these mergers, the 25 operating companies were
merged into seven public utility corporations.(1) These seven public
utility corporations were merged on December 31, 1994, to form
PFG. As of June 30, 1997, PFG provided gas service to 35,518
customers in Pennsylvania.
- -------------
1 Allied Gas Company, Central Penn Gas Company, Counties Gas Company,
Interboro Gas Company, Lewistown Gas Company, South Penn Gas
Company, and Union Gas Company.
Q. Summarize the operations of North Penn.
A. North Penn owns and operates two gas distribution systems, the
larger one is in north central Pennsylvania, and the smaller one is
in northwestern Pennsylvania. North Penn provides gas sales,
transportation and storage service in 10 counties in northern and
northwestern Pennsylvania. North Penn produces a small portion of
its gas supplies and purchases a small volume of locally-produced
gas.
Most gas supplies sold by North Penn or transported by North
Penn to its customers are received from Tennessee Gas Pipeline
Company or from CNG Transmission Corporation, both interstate
pipeline companies. As of June 30, 1997, North Penn provided gas
service to 34,544 customers in Pennsylvania.
In addition to sales and transportation service, North Penn
provides storage service to on-system and off-system customers, and
North Penn provides sales for resale service to a small local
distribution company, Clarion River Gas Co., and to an isolated
portion of the system of New York State Electric & Gas Company.
Q. Will the acquisition of Penn Fuel by PP&L provide any benefits to
customers of PFG and North Penn?
A. Yes. There will be benefits to PFG's and North Penn's customers.
Q. Can you provide some examples of benefits of the acquisition?
A. Yes, I can. One example is that, in the future, Penn Fuel will be
able to raise new capital as part of the PP&L corporate system.
PP&L Resources' stock is publicly traded on the New York Stock
Exchange and its long-term debt is rated A2 by Moody's and A- by
Standard & Poor's ("S&P"). PP&L Resources is included in the S&P
500 composite index and the S&P public utilities. PP&L Resources is
well-known in financial markets.
Penn Fuel, in contrast, since its inception has been a
family-owned business. Therefore, Penn Fuel has never made a public
stock offering. Penn Fuel's ability to raise equity capital has
been limited to retention of earnings.
Similarly, Penn Fuel and its subsidiaries have not issued
debt to the public. Instead, in the past, Penn Fuel has raised debt
capital through private placements, generally with insurance
companies. Penn Fuel and North Penn have a "2" designation from the
National Association of Insurance Commissioners. This designation
corresponds generally to a BBB bond rating, which is the lowest
investment grade bond rating. In the future, as part of the PP&L
corporate system, Penn Fuel and its subsidiaries should be able to
raise capital at a lower cost rate and under more favorable terms
and conditions than they could on their own.
Q. Can you provide any other examples of benefits to Penn Fuel and its
customers of the acquisition?
A. Yes. Retail electricity markets in Pennsylvania are now in the
process of being opened to competition. PP&L's restructuring
proceeding under the Electricity Generation Customer Choice and
Competition Act, 66 Pa.C.S. Ch. 28, is pending at this time. PP&L's
pilot program is under way, and it is expected that PP&L, and the
other Pennsylvania electric distribution companies, will open
substantial portions of their retail electricity markets to
competition commencing in 1999. PP&L is and has been a leader in
the move toward the opening of electric energy markets to
competition.
It is anticipated that gas markets will be opened fully to
competition in the near future. Bills are pending in the
Pennsylvania House of Representatives and in the Senate that would
require complete opening of the natural gas supply market to
competition, much as the Electricity Generation Customer Choice and
Competition Act, 66 Pa.C.S. Ch. 28, opened electric generation to
competition. As a result of the acquisition, Penn Fuel will have
available to it the benefit of PP&L's experience in dealing with
the issues arising from the opening of residential energy markets
to competition. This experience should facilitate a smooth
transition to a competitive gas supply market for the benefit of
customers.
Q. Does the acquisition present opportunities for Penn Fuel to improve
its gas acquisition procedures?
A. Yes, it does. The combined acquisition of gas for PP&L and Penn
Fuel may enable the combined entity to buy natural gas on terms
more favorable than either could obtain alone, thereby benefitting
customers of PP&L as well as customers of PFG and North Penn.
Further, Penn Fuel has not made substantial utilization of
financial instruments to stabilize gas costs. It is my
understanding that PP&L, in contrast, has substantial experience in
energy-related financial instruments, such as collars, which are
designed to reduce volatility of prices paid for energy. Such
financial instruments are available for both natural gas and
electricity and are generally similar in nature. Following the
acquisition, Penn Fuel will have the benefit of PP&L's expertise
with these financial instruments, which may provide opportunities
to reduce the volatility of amounts paid by Penn Fuel for natural
gas, which in turn may reduce the volatility of prices paid by its
customers for natural gas.
Q. Would any improvements in service or efficiencies result from
the acquisition?
A. Yes. Penn Fuel's operations, commencing in the portion of its
service territories that overlap PP&L's service territory, would be
consolidated over time into PP&L's operations. Such consolidation
would have many benefits.
Penn Fuel's after-hour answering services would be
eliminated, and those operations would be consolidated into PP&L's
24-hour call center which has modern and sophisticated
communication systems and computerized identification of the most
efficient approach to dispatching crews to a site where assistance
is needed. Further, if there were a wide-spread problem in Penn
Fuel's system, Penn Fuel would have access to additional personnel
from PP&L to address the situation as needed. Penn Fuel's present
after-hours system, in contrast, is simply an answering service
that has a list of numbers of employees to be called out in
response to incoming reports of problems. The consolidation of Penn
Fuel's answering services into PP&L's modern, centralized 24-hour
call center will improve service and create efficiencies.
Q. Will Penn Fuel be able to achieve any other efficiencies as a
result of the acquisition?
A. Yes, it will. Penn Fuel's own facilities for billing customers will
be eliminated, and bills for service furnished by Penn Fuel and its
subsidiaries will be prepared by PP&L.
Further, to the extent that Penn Fuel and PP&L have
overlapping service territories, meter reading will be
consolidated. Thereafter, only one premises visit to a customer
receiving both gas and electric service will be required to obtain
data for preparing bills for both services.
Another example of an area in which efficiencies will be
achievable is construction. When gas lines and electric lines are
being extended into the same area, it will be much easier to
coordinate supervision and inspection of such gas and electric
projects by a single employee.
It is anticipated also that certain operation centers will be
consolidated, particularly in the geographic areas where Penn
Fuel's operations overlap those of PP&L. Reducing the number of
operation center buildings will reduce the expenses associated with
maintenance of such buildings.
Another example of areas in which efficiencies can be
achieved is that, following the acquisition, Penn Fuel will no
longer maintain an independent board of directors. Costs of
maintaining a separate, independent board of directors for Penn
Fuel will be eliminated.
Another area in which there are potential savings from
consolidation include information and communication systems. Penn
Fuel's separate computer and information systems will be
eliminated, and such services will be provided on a consolidated
basis by PP&L.
Q. Do you have anything further at this time?
A. No, I do not.
Exhibit G-3
_________________
The Path Ahead...
_________________
Choices
Penn Fuel Gas, Inc.
1996 Annual Report
[Map of Propane District Office and Gas Utility
Service Area Omitted]
Penn Fuel Gas, Inc.
Penn Fuel Gas, Inc. is an Oxford, Pennsylvania
based holding company which through its natural gas
utility subsidiaries provides services to approximately
70,900 customers located in over half the counties of
Pennsylvania. Additionally, the Company engages a
natural gas storage, transportation and merchandise
services. Penn Fuel Gas also provides propane gas
service to approximately 28,000 customers in Pennsylvania
and Maryland.
Highlights
Letter to Shareholders
Management's Discussion and Analysis
Independent Auditors' Report
Financial Statements
Summary of Financial Data
Operating Statistics
Board of Directors
1996 Highlights
% Change
1996 1995 1996 v. 1995
-------------------------------------------------------------------
Operating Revenues thousands $113,507 $105,647 7.4
Net Income thousands $ 7,394 $ 6,077 21.7
Net Income Applicable to $ 6,389 $ 5,072 26.0
Common Stock thousands
Earnings per Common Share $ 8.90 $ 7.07 $ 26.0
Dividends per Preferred Share $ 1.40 $ 1.40 --
Dividends per Common Share $ 2.40 $ 2.00 20.0
Total Assets thousands $196,465 $184,277 6.6
Stockholders' Equity per $ 93.01 $ 86.51 7.5
Common Share
Gas Throughput -- Dekatherms 27,616 27,518 0.2
thousands
Number of Customers 98,907 98,256 0.7
----------------------------------------------------------------
1993 1994 1995 1996
--------------------------------------------------------
Net Income 5,305 5,705 6,077 7,394
($ in thousands)
Earnings Per 5.99 6.55 7.07 8.90
Common Share ($)
Stockholders' Equity 74.89 81.44 86.51 93.01
Per Common Share ($)
--------------------------------------------------------
Graph from original converted to table format.
[Photograph of Terry H. Hunt and Paul W. Ware omitted]
To Our Shareholders
Penn Fuel Gas enjoyed a successful year in 1996 with
significant improvements in earnings and return on
shareholders' equity, operating efficiencies, and utility
rates. The Company also assumed a leadership role in the
management of its environmental responsibilities. A
number of these accomplishments are highlighted below and
throughout this report.
HIGHLIGHTS
(X) Penn Fuel's 1996 net income available to common
shareholders was $6,389 million or $8.90 per share,
a 26% increase from the $5,072 million or $7.07
reported in 1995.
(X) In early 1996 Penn Fuel increased its common stock
dividend by 20% to $2.40 per share on an annual
basis. In February 1997, the Board of Directors
approved an additional 20% common dividend increase
to $2.88 per share on an annual basis.
(X) Common shareholders' equity per share increased to
$93.01 in 1996, a 7.5% increase from 1995. This
increased equity, together with the improved net
income, are indicative of increased value and
financial strength of Penn Fuel.
(X) In October 1996 the Pennsylvania Public Utility
Commission approved an increase in Penn Fuel's
utility subsidiary rates of $6.725 million. The
full year impact of these higher rates will be
reflected in 1997.
(X) In March 1996 Penn Fuel and the Pennsylvania
Department of Environmental Protection executed a
Consent Agreement under which Penn Fuel will
investigate and clean up, as necessary, twenty
former manufactured gas plant sites. This agreement
is the first of its kind among Pennsylvania gas
companies and will permit the Company to responsibly
manage our environmental obligations in our
customers' interests.
THE PATH AHEAD
We are proud of your Company's achievements and
continue to be appreciative of the confidence you
maintain in Penn Fuel's development. The energy industry
landscape is dramatically changing, however, and we must
build on the foundation of past achievements as the
Company embarks on the path ahead that best serves its
shareholders and customers.
This path will be marked for the first time with
Choice. Gas and electric utility customers will have the
choices of energy supplier, service, and pricing.
Choices will also be required as Penn Fuel steers through
the challenges and opportunities of an increasingly
deregulated energy environment.
The Commonwealth of Pennsylvania took a national
leadership role in the deregulation of the electric
utility industry with the passage of unbundling
legislation in 1996. Over the next several years,
industrial, commercial, and residential customers alike
will have the opportunity to choose their electricity
supplier under terms and pricing that suits their
individual needs. The responsibility for delivery of the
electric power to consumers will continue to rest with
electric utilities under regulated terms.
Similar unbundling and customer choice initiatives
are progressing in the natural gas business. Large
volume customers have had the right, for some time, to
choose their natural gas supplier. Legislation was
recently introduced in Pennsylvania, however, that would
fully unbundle all natural gas services, deregulate the
sale of the natural gas commodity, and mandate choice of
natural gas supplier for all residential and small
commercial customers by the end of this decade. We
welcome the prospect of customer choice and the
competitive opportunity it brings. Penn Fuel is a viable
and aggressive participant in the unbundled energy
environment.
We expect that the electric and natural gas
industries will evolve from fully regulated to largely
competitive in a transition parallel to the deregulation
of banking and telecommunications. Utilities are
responding to competition like participants in those
industries:
1) With a greater focus on cost cutting and
efficiency measures to lower the cost of
providing energy delivery and customer
services;
2) Through alliances and combinations to generate
economics of scale; and,
3) Through the creation of menus of total energy
services and products.
--------------------------
1993 1994 1995 1996
---------------------------------------------
Earnings Per
Common Share($) 5.99 6.55 7.07 8.90
---------------------------------------------
Graph from original converted to table format.
PENN FUEL INITIATIVES
As we explore business opportunities available in a
deregulated energy environment, Penn Fuel must retain its
focus on the critical success factors in our primary
businesses -- customer relations; efficient and cost
effective operations; and appropriate recovery of costs
through rates.
Penn Fuel has earned a solid reputation for
providing reliable service that is community and customer
oriented. Your Company works hard to maintain those good
relations -- regardless of customer size -- and expects
that these close connections will be an asset in an
expanded energy service market.
In an increasingly competitive environment, Penn
Fuel continues to manage business costs, looking for
efficiencies without jeopardizing the service reliability
our customers expect. Expanded training programs are
enhancing the skills of our operating and service
personnel and providing more flexibility for operations
support. We are also seeking further improvements in the
Company's award winning safety program and accident
prevention records.
We expect to continue growing Penn Fuel's earnings
through a combination of rates improvements, operating
efficiencies, and expansion. While price competition is
new to the utility industry, Penn Fuel is already
experienced because of its unregulated propane business.
We look forward to the new competitive arena of
customer choice with the confidence that we have the
people and capabilities to be an effective market
participant.
Marketing of additional natural gas and propane
applications to existing Penn Fuel customers and an
aggressive program of customer expansion are integral
parts of a marketing strategy for the Company. We are
also dramatically expanding our trade ally relationships
with local contractors and other energy companies to
build a network of service and sales capabilities and to
foster customer growth.
The transition to a full customer choice environment
will introduce a new set of challenges for Penn Fuel to
develop enhanced customer services and billing systems,
and to optimize the Company's gas supply and pipeline
capacities needed for the new utility business
environment. Penn Fuel has an outstanding team of gas
supply professionals to facilitate this transition and to
develop opportunities for adding value from the Company's
gas storage capabilities.
Finally, as we evaluate choices for business
expansion, we will be assessing opportunities for
alliances or other relationships that can expand energy
service offerings for our customers and provide
additional growth. We fully understand that Penn Fuel,
itself, has finite capabilities for developing a full
service energy presence. Our challenge will be to focus
on areas where we can bring key success ingredients from
our own expertise and select partners who bring
complimentary abilities.
We look forward to the new competitive arena of
customer choice with the confidence that we have the
people and capabilities to be an effective market
participant. The directors, management, and employees
of Penn Fuel appreciate your continued support of your
Company's successful growth.
Paul W. Ware Terry H. Hunt
Chairman President and Chief Executive Officer
Management's Discussion and Analysis
RESULTS OF OPERATIONS
Net income and earnings per common share were
$6,389,000 and $8.90, respectively, for 1996 compared to
$5,072,000 and $7.07 for 1995. Net income for 1995
includes $378,000, equivalent to $.53 per common share
from the cumulative effect, net of tax, on prior years of
a change in accounting principle.
The increase in net income is the result of several
factors. Gross utility margin, defined as operating
revenues less cost of gas increased $4,406,000 (8.8%) in
1996. The full benefit of a rate increase approved by
the Pennsylvania Public Utility Commission (PUC) in 1995
is included in 1996 revenues as is part of the benefit of
a rate increase approved in October 1996. Utility
throughput in 1996 was almost the same as in 1995 as
deliveries to sales customers increased 492,000 Dth
(3.6%), and throughput to transportation customers
decreased 405,000 Dth (3.1%). Sales to Liquefied
Petroleum (LP) customers were almost the same at 841,000
Dth in 1996 compared to 830,000 Dth in 1995. The gross
margin on LP sales increased $240,000 (3.6%) in 1996.
Degree days in 1996 were 2.7% above normal while degree
days in 1995 were 2.3% below normal. Also included in
1996 net income is $868,000 ($1.21 per share)
representing the current tax benefits of a change in tax
accounting method approved by the Internal Revenue
Service during the year and $115,000 ($.16 per share)
from the sale of real estate no longer used in
operations. 1995 net income included $567,000 ($.79 per
share) from the sale of assets by a subsidiary that
accounted for all the Company's LP and merchandise sales
in Delaware.
Operating revenues increased $7,860,000 to
$113,507,000 in 1996. Utility operations accounted for
$6,706,000 of the increase. Several factors, including
the impact of rate case proceedings settled in 1996 and
1995, higher sales volumes and the recovery of purchased
gas costs that were higher in 1996 than 1995 contributed
to the increase in revenues. 1996 utility operating
revenues include the increase in rates approved in
September 1995 by the PUC. The rates were designed to
provide $2,247,000 of additional annual revenues. Also
included in 1996 utility operating revenues is a partial
year's benefit of a rate increase approved by the PUC in
October 1996. The new rates were designed to provide
$6,725,000 of increased annual revenues.
Utility throughput in 1996 was virtually the same as
in 1995: 26,775,000 Dth versus 26,688,000 Dth. However,
there was a change in the mix of sales and transportation
volumes which has an effect on operating revenues. Rates
charged to sales customers include a component to recover
the cost of gas purchased by the Company for resale to
its customers. Rates charged for transportation service
do not include an amount to recover the cost of gas
delivered because the transportation customer has
purchased the commodity from a supplier other than the
Company. The gross margin the Company earns on sales and
transportation service is generally the same for the same
type of customer, but the operating revenue generated by
the two services will differ even if the volume is the
same because the recovery of gas costs is included in
rates charged to sales customers.
LP operating revenues increased $1,285,000 in 1996
while sales on a Dth basis remained essentially
unchanged: 841,000 Dth in 1996 and 830,000 Dth in 1995.
In 1996 the Company was able to recover higher product
costs through increased selling prices and improve its
gross margin by $240,000 (3.6%).
Other operating, administrative and general and
maintenance expenses increased $1,146,000 (3.5%)in 1996.
During the year the Company began a program to inspect
the condition of a major transmission line that is part
of its pipeline system. The program will continue into
1997. To date, no significant anomalies have been
identified through the program. The cost of the program
and resulting repairs have been charged to expense in
1996. Legal expense was higher in 1996 primarily because
of the costs incurred to oppose an application by another
Company with the Federal Energy Regulatory Commission to
develop salt dome storage in the same area as the
Company's existing underground storage facilities. Other
factors contributing to the increase in expense are
higher payroll costs and uncollectible accounts expense.
Expense reductions in 1996 included a $343,000
pension expense credit. The credit resulted from
discontinuing an investment contract with an insurance
company, funding outstanding guaranteed annuities under
the contract and placing the balance of the assets from
the contract with an investment manager. Also in 1996
the Company implemented a new purchasing and inventory
control system. As part of the implementation of the new
system, the Company expanded its definition of
inventoriable items, redesigned its part numbers and took
a physical inventory. The cost of items included in the
physical inventory net of reserves for loss contingencies
resulted in a $141,000 reduction in 1996 expense.
Depreciation and amortization expense increased
$705,000 (12.7%) in 1996. Higher amortization of
capitalized environmental costs accounted for $283,000 of
the increase. Depreciation of investment in property,
plant and equipment increased $422,000 in 1996.
Current and deferred income tax expense in 1996
include the impact of a change in tax accounting method
for cost of removal. In 1996 the Company received
approval from the Internal Revenue Service (IRS) to
deduct cost of removal from taxable income beginning with
the 1994 tax year. The approval applied to the deduction
of applicable costs incurred in 1994 and subsequent years
and to costs incurred by the Company prior to 1994
(accumulated costs). The accumulated costs are
deductible pro rate over a six year period also beginning
with the 1994 tax year. Approval to begin deducting
costs of removal created timing differences or current
tax benefits depending on the vintage of the assets the
costs related to, and the principles followed for
recognizing differences between book and tax at the time.
The combination of deferred taxes and current tax
benefits recognized in 1996 as a result of the approval
to deduct cost of removal reduced the year's tax expense
$868,000.
Interest expense for 1996 was $369,000 (7.8%) lower
compared to 1995 expense. Lower interest costs resulting
from reductions in long-term debt through required and
optional prepayments more than offset interest incurred
through higher levels of borrowings under the Company's
lines of credit. In addition, interest costs related to
the over collection of purchased gas and transition costs
were lower in 1996 because these amounts were refunded to
customers during the year. A decrease in interest income
from temporary cash investments was approximately offset
by the amount of interest received from the settlement of
prior years income tax issues.
Other expense (income) in 1996 includes $193,000 of
pre-tax gain on the sale of real estate. In 1995 certain
assets of an LP subsidiary located in Delaware were sold
and a pre-tax gain of $945,000 was recognized as other
income. The real estate sold in 1996 was previously used
in the Delaware LP business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's natural gas and LP business are both
seasonal in nature and weather sensitive. The heating
season of November through March is the Company's highest
period of cash flow. However, cash requirements for
capital expenditures and the acquisition of gas for
storage are highest during the spring and fall of the
year. Bank lines of credit are used to meet the
Company's seasonal working capital requirements and as a
source of under for its capital investment program.
Periodically the Company refinances capital investments
funded through its lines of credit by issuing long-term
debt. At December 31, 1996 and December 31, 1995 the
Company had outstanding line of credit borrowings of
$7,500,000 and $500,000 respectively. The Company
expects to negotiate bank lines of credit in 1997 at
levels appropriate to meet its requirements. In 1996 the
Company and its subsidiaries have unsecured committed and
uncommitted bank lines of credit that in aggregate total
$12,000,000 and $24,000,000 respectively.
In the first quarter of 1995, the Company reinstated
a common dividend to its stockholders at the annual rate
of $2.00 per share. The annual rate of the common
dividend was increased to $2.40 on February 27, 1996 and
to $2.88 on March 7, 1997.
The Company's 1997 capital improvement and
environmental budgets total $13,343,000. In 1996 capital
and environmental expenditures amounted to $14,109,000.
In 1995 the Company acquired undeveloped acreage with the
intent of constructing a new office building for the
Company's management and administrative functions. The
new office building project has not been included in the
Company's 1997 capital budget pending finalization of
plans and permitting.
Gas inventory is primarily natural gas (storage gas)
but also includes smaller amounts of LP. Natural gas in
storage is generally purchased during the warmer months
of the year and held either in facilities owned by the
Company or by interstate pipelines for withdrawal during
the heating season. At December 31, 1996 the Company had
3,305,000 Dth of natural gas in inventory and 60,000 Dth
of LP. At December 31, 1995 natural gas inventory
totaled 2,614,000 Dth and LP totaled 52,000 Dth. The
Company's projections show an increase in storage at
December 31, 1997 of up to 500,000 Dth. The increase in
storage is part of a study to determine the level of
additional storage space that may be developed in one of
the Company's storage fields.
REGULATORY MATTERS
Order 636 issued by the Federal Energy Regulatory
Commission (FERC) in 1992 substantially changed the
regulations governing the operations and services
provided by interstate pipeline companies. The Order
requires the interstate pipelines to separately charge
for services such as storage and transportation, which
were historically bundled as part of the traditional
merchant gas sales service they offered. The regulated
services available from interstate pipelines no longer
include the aggregation of gas supplies from producers.
Instead, the Company is responsible for securing its gas
supply requirements through negotiated, unregulated
transactions.
The interstate pipelines interconnected with the
Company's system implemented Order 636 in 1993. All of
the Company's pipeline suppliers have implemented plans
approved by the FERC to recover from their customers,
including the Company, 100% of transition costs prudently
incurred in complying with Order 636. The amount and
duration of transition costs is different for each
supplier. The Company has received authorization from
the PUC to recover all transition costs billed by the
pipelines.
A $5,712,000 refund to its customers was included in
the Company's annual purchased gas cost filing submitted
to the PUC on August 31, 1995. Included in the refund
was approximately $2,600,000 deferred in 1994 plus
interest. The PUC granted the Company authorization to
refund the amount as a lump-sum bill credit during
December 1995. The balance of $2,969,000 was included as
a refund in rates charged to customers during the period
November 1, 1995 through November 30, 1996.
Revised rates for the recovery of the Company's
purchased gas costs were approved by the PUC effective
December 1, 1996. The Company and the parties who
participated in purchased gas cost proceedings agreed
that $895,000 of cost for pipeline capacity that the
Company would not need to meet its firm sales
requirements during the next three winters (stranded
costs) could be claimed through rates established under a
different docket. The Company's filing in support of the
recovery of these stranded costs has been suspended by
the PUC until July 1, 1997 in order to consider the
formal complaints filed by various parties. The Company
is recording the pipeline capacity costs as liability and
an offsetting regulatory asset representing the expected
recovery of these costs from its customers.
On January 27, 1995, the Company filed a rate
increase request with the PUC seeking an increase in
annual revenues of $5,022,000. The filing covered
approximately half of the Company's utility customers.
On September 27, 1995, the PUC adopted an order
authorizing an increase in annual operating revenues of
$2,247,000 effective on one day's notice for service
rendered after September 27, 1995. The annual increase
includes an allowance for the recovery of the cost of
postretirement benefits other than pensions (PBOPs)
calculated in accordance with FAS 106, including recovery
and amortization over five years of such costs deferred
from January 1, 1995 to September 27, 1995. The
Pennsylvania Office of Consumer Advocate appealed the
PUC's decision allowing recovery of the deferred costs.
The amount at issue is $435,000. On February 7, 1997,
the Commonwealth Court ordered the appeal to be reargued
before the entire court. In the opinion of management
the decision of the court will not have a material
adverse effect on the Company.
On February 27, 1996, the Company's two wholly owned
public utility subsidiaries filed a request with the PUC
for an increase in annual revenues of $10,955,000 and
authorization to consolidate the tariffs of the two
subsidiaries into one tariff and one set of rates. In
October 1996, final approval of a settlement resolving
the issues was received from the PUC. Under the
settlement, the Companies were permitted to consolidate
their tariffs and increase their rates to produce
additional annual operating revenues of $6,725,000.
Gas supply cost, including contracts with pipelines
for delivery service (capacity cost), storage service and
the cost of natural gas purchased for sale and delivery
to customers is the Company's largest cost. The
Company's tariffs provide for the recovery of these costs
subject to regulatory review and approval. Rates to
recover gas supply costs are based on projections of the
volume of gas the Company will purchase; the cost of
these purchases and the amount of gas its sales customers
will use. Deviations between such projections and actual
experience cause over or under recovery of the costs from
customers which are adjusted in the Company's filings
with the PUC and either refunded or collected. At
December 31, 1996 the Company's rates for the recovery of
gas costs plus its rates authorized to recover pipeline
transition costs resulted in undercollection from
customers of $370,000. At December 31, 1995 the Company
overcollected gas and transition costs in the amount of
$3,080,000 which as been paid back to the customers with
interest.
COMMITMENTS AND CONTINGENCIES
The Company has accrued environmental costs at
December 31, 1996 amounting to $15,728,000 and recorded a
regulatory asset of $15,115,000. At December 31, 1996,
$613,000 of the amount accrued has been charged to
expense to provide for the minimum range of environmental
costs related to non-utility sites. The Company has also
accrued $4,038,000 at December 31, 1996 to recognize the
estimated cost of plugging 366 producing and non-
producing gas wells.
The Company and its subsidiaries are present or past
owners of approximately twenty-six (26) properties on
which manufactured gas plants (MGP) were located. In
October 1993, the Company and the Pennsylvania Department
of Environmental Protection (PADEP) signed a Consent
Order and Agreement (COA) for the environmental
assessment of twenty (20) of the Company's twenty-one
(21) MGP sites located in Pennsylvania, which at the time
were under the Company's control. (The one such
Pennsylvania MGP site not covered by the COA was the
Brodhead Creek Superfund Site which is the subject of
separate agreements with the United States Environmental
Protection Agency (USEPA).
On March 27, 1996, the Company, North Penn Gas
Company (North Penn), a wholly owned subsidiary of the
Company, and PADEP signed a new COA (1996 COA). The
agreement, except for certain provisions which have been
incorporated by reference, supersedes the 1993 COA. The
1996 COA provides that from 1996 through the year 2011
the Company will perform a minimum amount of work per
year to investigate, and where necessary, clean-up twenty
(20) MGP sites and that North Penn will plug all of its
non-producing wells. The 1996 COA has a term of fifteen
(15) years, but may be terminated by either party after
five (5) years.
Progress on the investigation, clean-up and well
plugging activities covered by the 1996 COA will be
measured through a point system, which is based on
addressing the highest risks earlier in the process. In
any year in which the Company's and North Penn's
environmental costs defined by the 1996 COA exceed
$1,750,000 (Environmental Cost Cap), the Company will not
be required to achieve the minimum required points except
that North Penn must meet the well plugging schedule set
forth in the agreement regardless of whether the minimum
required points or the Environmental Cost Cap are
reached. The point system gives the Company and North
Penn some flexibility in determining the activities to be
undertaken in a given year; however, the 1996 COA does
not relieve or limit the Company's or North Penn's
obligation to comply with applicable statutes or
regulations. The Company and North Penn satisfied the
1996 COA's minimum point requirement during 1996 and
PADEP has approved the Company's 1997 annual plan.
North Penn's estimate of the cost to plug the wells
covered by the 1996 COA is $4,038,000. After recognizing
North Penn's estimated well plugging cost, the Company
allocated the balance of the Environmental Cost Cap to
MGP site activities for the purposes of estimating the
related total commitment under the 1996 COA. The
estimated present value of the portion of the
Environmental Cost Cap allocated to MGP site activities
plus oversight cost reimbursements owed to PADEP during
the term of the agreement is $15,728,000 at December 31,
1996 and $16,333,000 at December 31, 1995. The estimated
present value was determined based upon interest rates
for United States Treasury obligations with maturities
that coincide with the term of the 1996 COA.
The Company has adopted the present value of its
estimated total Environmental Cost Cap under the 1996 COA
as the low end of the range of costs that may be incurred
in connection with MGP site activities. A liability of
$15,728,000 and an associated regulatory asset of
$15,115,000 have been recorded at December 31, 1996. A
liability of $16,333,000 and an associated regulatory
asset of $15,891,000 were recorded at December 31, 1995.
The Company's actual costs will depend on a number of
factors including actual site conditions determined
through the site assessment process, changing technology,
government statutes and regulations, success in pursuing
claims against and finalizing cost sharing arrangements
with other potentially responsible parties and recoveries
from insurers. At December 31, 1996, the Company
estimated a range of environmental liability for the MGP
sites of $9,517,000 to $38,702,000. At December 31, 1995
the estimated range was $11,300,000 to $48,300,000.
In September 1994, the Company initiated a suit
against some of its insurers seeking defense and/or
indemnification from the insurers against claims
involving former MGP sites. The insurers have answered
the Company's complaint, the parties have exchanged
documents and have entered the discovery phase.
Localized minor amounts of petroleum hydrocarbon
impacted soils have been identified in the process of
removing and abandoning equipment at a former compressor
station site. The removal and abandonment project was
undertaken in accordance with a plan approved by state
and federal environmental agencies. A plan to remediate
the impacted soil is scheduled to be developed and
implemented in 1997. With respect to the Brodhead Creek
Superfund Site, the USEPA has concluded removal of
groundwater contamination is technically impracticable
and that certain wells should be periodically monitored
and pumped unless and until new technology becomes
available. The costs incurred by the Company for work
related to the impacted soils and Brodhead Creek will be
counted against the Environmental Cost Cap included in
the 1996 COA.
The Company has received authorization from the PUC
to capitalize environmental and clean-up expenditures and
well plugging costs for accounting and ratemaking
purposes and to amortize such expenditures over five (5)
years. The Company expects the PUC will continue to
authorize the recovery of such expenditures associated
with MGP sites previously or currently owned by its
utility subsidiaries and the costs of plugging wells
through the rates the Company charges for its services.
Accruals sufficient to provide for the minimum range
of costs associated with non-utility sites have been
charged to expense. At December 31, 1996 the amount
accrued was $613,000 compared to $442,000 at December 31,
1995. Additional investigation and remediation may be
required at the sites in the future; however, the scope
of these activities cannot be determined and therefore
any related cost has not been accrued.
GAS UTILITY INDUSTRY RESTRUCTURING
The restructuring of the natural gas industry to
date has largely effected those aspects of the business
regulated at the national or interstate level by the
FERC. The Natural Gas Policy Act was passed in 1978 and
started the gradual decontrol of natural gas prices at
the wellhead. Subsequent orders issued by the FERC
resulted in open access to pipeline transportation,
resolution of take-or-pay liabilities and finally the
unbundling of merchant gas sales service from other
interstate pipeline services such as storage and
transportation. All of these FERC initiatives have had
significant effects on the operations of local
distribution companies (LDC), such as the Company's
utility subsidiaries.
Most of the Company's large industrial and
commercial customers now purchase their natural gas from
a supplier other than the Company and utilize the
Company's pipelines to deliver the gas to their
facilities. The rate for this delivery or transportation
service has been unbundled from the rate the Company
charges for the cost of the gas. In situations where the
customer is in a position to exercise its ability to
build a connection to an interstate pipeline and bypass
use of the Company's facilities, the Company has
negotiated competitive rates.
Legislation has recently been introduced in
Pennsylvania that, among other things, provides gas
supply choice to all gas customers, not just those that
use large volumes of the commodity, after April 1, 1999.
Under the proposed legislation LDCs will be required to
file a restructuring proposal with the PUC by December
31, 1997. Certain aspects of the proposed legislation
may change as the result of hearings to be held by the
legislature, but it is expected that some measure of
customer choice will be provided to all users of natural
gas in Pennsylvania. Legislation providing customer
choice to users of electricity was enacted in
Pennsylvania in December 1996. As proposed, the
restructuring plan is to include unbundled rates for gas
distribution (transportation) and supply a proposal to
physically, operationally and legally separate the gas
supply merchant function from the distribution function
and a proposed supplier of last resort mechanism. Under
current regulations the Company does not earn a profit
from the gas supply merchant function. The return on
investment or profit is part of the rate the Company
charges for delivering the gas and providing other
services. The proposed legislation would continue to
have the transportation and distribution of natural gas
regulated by the PUC.
_________________________________
Independent Auditors' Report
_________________________________
THE BOARD OF DIRECTORS, PENN FUEL GAS, INC.:
We have audited the accompanying consolidated
balance sheets of Penn Fuel Gas, Inc. and subsidiaries as
of December 31, 1996 and 1995 and the related
consolidated statements of income, retained earnings, and
cash flows for the years then ended. These consolidated
financial statements are the responsibility of the
Company's management. Our responsibility is to express
an opinion on these consolidated financial statements
based on our audits.
We conducted our audits 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 audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all
material respects, the financial position of Penn Fuel
Gas, Inc. and subsidiaries as of December 31, 1994 and
1995, and the results of their operations and their cash
flows for the years then ended in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial
statements, in 1995 the Company changed its method of
recognizing revenues from sales of natural gas to
residential and small commercial customers. As discussed
in Note 5 to the consolidated financial statements, in
1995 the Company changed its method of accounting for
postretirement benefits other than pensions to adopt the
provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other
Than Pensions.
KPMG Peat Marwick LLP
April 4, 1997
CONSOLIDATED BALANCE SHEETS
(in thousands) Dec. 31, Dec. 31,
1996 1995
--------------------------------------------------------------
Assets
Property, plant, and equipment:
Gas utility plant:
Natural gas production and
gathering $ 2,401 $ 2,464
Storage 5,008 5,000
Transmission 33,221 32,310
Distribution 117,082 108,823
General and other 10,615 9,156
--------------------------------------------------------------
168,327 157,753
Liquefied petroleum gas property 10,454 10,146
--------------------------------------------------------------
178,781 167,899
Less accumulated depreciation,
depletion, and amortization 42,830 40,638
--------------------------------------------------------------
135,951 127,261
Gas stored underground -- noncurrent 5,341 5,341
--------------------------------------------------------------
141,292 132,602
--------------------------------------------------------------
Current assets:
Cash and cash equivalents 2,513 5,357
Receivables, less allowance for
doubtful accounts of $988 in
1996 and $920 in 1995 13,802 12,131
Inventories:
Gas 6,179 3,924
Merchandise, material, and
supplies 3,706 2,828
Unrecovered gas and transition
costs 370 --
Prepayments and other 1,379 1,627
Deferred income taxes 1,322 1,570
--------------------------------------------------------------
29,271 27,437
--------------------------------------------------------------
Deferred debits:
Environmental costs 15,115 15,891
Well plugging and abandonment costs 4,038 4,191
Other 6,749 4,156
--------------------------------------------------------------
25,902 24,238
--------------------------------------------------------------
$196,465 $184,277
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(in thousands) Dec. 31, Dec. 31,
1996 1995
--------------------------------------------------------------
Capitalization and Liabilities
Capitalization:
Stockholders' equity:
Common, $1 par value; authorized
2,000,000 shares, issued and
outstanding 717,583 shares in
1996 and 1995 $ 718 $ 718
Preferred, no par value;
authorized 500,000 shares,
issued none -- --
Additional paid-in capital 714 714
Retained earnings 65,313 60,646
--------------------------------------------------------------
66,745 62,078
Redeemable preferred stock:
$1.40 cumulative preferred stock;
authorized 2,000,000 shares,
issued and outstanding 717,583
shares in 1996 and 1995 10,764 10,764
Long-term debt, less amounts
payable within one year 51,694 55,644
--------------------------------------------------------------
129,203 128,486
--------------------------------------------------------------
Current liabilities:
Notes payable 7,500 500
Long-term debt payable within
one year 2,939 3,068
Accounts payable 11,346 8,167
Overrecovered gas and transition
costs -- 3,080
Accrued environmental costs 1,811 1,815
Other current and accrued
liabilities 4,554 3,852
--------------------------------------------------------------
28,150 20,482
--------------------------------------------------------------
Deferred credits:
Unamortized investment tax credits 1,990 2,067
Unamortized excess of equity
value of subsidiary at
acquisition over cost 537 642
Deferred income taxes 17,530 12,883
Accrued environmental costs 14,163 14,768
Accrued well plugging and
abandonment costs 3,792 3,941
Other 1,100 1,008
--------------------------------------------------------------
39,112 35,309
--------------------------------------------------------------
$196,465 $184,277
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, expect per share Dec. 31, Dec. 31,
information) 1996 1995
--------------------------------------------------------------
Operating revenue:
Utility revenue $ 99,793 $ 93,087
Liquefied petroleum gas revenue 12,294 11,009
Merchandise sales 1,420 1,551
--------------------------------------------------------------
113,507 105,647
--------------------------------------------------------------
Operating revenue deductions:
Cost of gas, utility 45,378 43,078
Cost of liquefied petroleum gas 5,323 4,278
Cost of sales, merchandise 1,192 1,319
Operating, administrative, and
general expenses 30,274 29,235
Maintenance 3,238 3,131
Depreciation and amortization 6,246 5,541
Taxes, other than income 6,788 6,514
Income taxes 3,741 3,223
--------------------------------------------------------------
102,180 96,319
--------------------------------------------------------------
Operating income 11,327 9,328
--------------------------------------------------------------
Other expense (income):
Interest 4,362 4,731
Other (429) (1,102)
--------------------------------------------------------------
3,933 3,629
--------------------------------------------------------------
Income before cumulative effect of
a change in accounting principle 7,394 5,699
Cumulative effect on prior years
(to December 31, 1994) of change
to record unbilled revenue, net
of tax -- 378
--------------------------------------------------------------
Net income 7,394 6,077
Dividend requirement on redeeemable
preferred stock (1,005) (1,005)
--------------------------------------------------------------
Net income applicable to common stock $ 6,389 $ 5,072
--------------------------------------------------------------
Income before cumulative effect of
a change in accounting principl $ 8.90 $ 6.54
Cumulative effect on prior years
(to December 31, 1994) of change
to record unbilled revenue, net
of tax -- 0.53
--------------------------------------------------------------
Net income applicable to common stock $ 8.90 $ 7.07
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF RETAIN INCOME
(in thousands, expect per share Dec. 31, Dec. 31,
information) 1996 1995
--------------------------------------------------------------
Balance at beginning of year $ 60,646 $ 57,009
Net income 7,394 6,077
Dividends
Redeemable preferred stock
($1.40 in 1996 and 1995) (1,005) (1,005)
Common stock ($2.40 in 1996
and $2.00 in 1995) (1,722) (1,435)
--------------------------------------------------------------
Balance at end of year $ 65,313 $ 60,646
--------------------------------------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands) Dec. 31, Dec. 31,
1996 1995
--------------------------------------------------------------
Cash flows from operating activities:
Net income $ 7,394 $ 6,077
--------------------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 6,246 5,541
Amortization of extraordinary
property loss 38 231
Deferred taxes and investment
tax credits 3,874 1,701
Gain on sale of liquefied
petroleum gas property (193) (945)
Changes in assets and liabilities:
Increase in accounts receivable (1,671) (671)
(Increase) decrease in gas
inventory (2,255) 3,722
Decrease in overrecovered gas
and transition costs, net (3,450) (1,501)
Increase in other inventories (878) (353)
Increase (decrease) in
accounts payable and accrued
liabilities 3,881 (1,342)
Decrease in other assets/
liabilities, net (1,175) (89)
--------------------------------------------------------------
Total adjustments 4,417 6,294
--------------------------------------------------------------
Net cash provided by operating
activities 11,811 12,371
--------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (12,561) (13,403)
Proceeds on the sale of liquefied
petroleum gas assets 226 1,379
Other (2,514) (2,380)
--------------------------------------------------------------
Net cash used in investing activities (14,849) (14,404)
--------------------------------------------------------------
Cash flows from financing activities:
Principal payments on long-term debt (4,079) (2,458)
Net increase in notes payable 7,000 500
Dividends paid:
Preferred (1,005) (1,005)
Common (1,722) (1,435)
--------------------------------------------------------------
Net cash provided by (used in)
financing activities 194 (4,398)
--------------------------------------------------------------
Net decrease in cash and cash
equivalents (2,844) (6,431)
Cash and cash equivalents at
beginning of year 5,357 11,788
--------------------------------------------------------------
Cash and cash equivalents at end
of year $ 2,513 $ 5,357
--------------------------------------------------------------
Supplementary disclosures of cash
flow information
Cash paid for the year for:
Interest $ 4,913 $ 5,326
Income taxes 1,556 3,178
--------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(1) DESCRIPTION OF BUSINESS AND
SUMMARY OF SIGNIFICANT ACCOUNT POLICIES
DESCRIPTION OF BUSINESS
Penn Fuel Gas, Inc. (the Company) is an exempt public
utility holding company whose utility subsidiaries
provide natural gas distribution, transmission and
storage service from facilities in Pennsylvania. In
addition, the Company provides gas distribution service
to a small number of customers in Maryland. The Company
also sells liquefied petroleum (LP) gas and merchandise
in Pennsylvania and Maryland. In August 1995, the
Company sold its LP operations in Delaware. (See
Liquefied Petroleum Gas Property).
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of the Company and its subsidiaries, each of
which is wholly owned. All material intercompany
accounts have been eliminated.
The Company's utility subsidiaries maintain their
accounting records in conformity with the uniform system
of accounts prescribed by the Federal Energy Regulatory
Commission (FERC), Pennsylvania Public Utility Commission
(PUC) and the Maryland Public Service Commission.
Significant accounting practices are summarized below.
PROPERTY, PLANT, AND EQUIPMENT
Utility Plant. Utility plant is carried at cost.
Depreciation is computed using the straight-line method.
Based on average utility plant, the composite straight-
line rates for 1996 and 1995 were 2.8% and 3.0%,
respectively.
For utility property, expenditures for replacements
and renewals considered to be units of property are
charged to utility plant accounts at cost. Expenditures
for maintenance, repairs, renewals and replacements
determined to be less than units of property are charged
to maintenance. At the time utility properties are
retired, replaced, or otherwise disposed of, accumulated
depreciation, depletion, and amortization is charged with
the cost of the properties plus the costs incurred in
retiring, replacing or disposing of the property. As
discussed in Note 7, the Company has accrued the
estimated costs of removal related to 366 producing and
nonproducing gas wells.
Gas stored underground - noncurrent represents the
cost of the estimated volume of gas required to maintain
pressures in the underground storage fields at levels
sufficient to meet the service requirements of the
Company's customers on a peak day.
Liquefied Petroleum Gas Property. Liquefied petroleum
gas property is carried at cost. Depreciation is
computed using the straight-line method. Based on
average LP plant, the composite straight-line rate for
1996 and 1995 was 3.2%. Expenditures for maintenance,
repairs, renewals, and replacements determined to be less
than units of property are charged to maintenance. When
assets are retired or otherwise disposed of, the cost and
related accumulated depreciation are removed from the
accounts and any resulting gain or loss is reflected in
income for the period.
On August 28, 1995, Gas-Oil Products, Inc. of Delaware
(GOP), a wholly owned subsidiary of the Company, which
accounted for all of the Company's business in Delaware,
sold certain of its assets including tanks, inventory,
motor vehicles and accounts receivable. On a
consolidated basis, GOP's operations accounted for
approximately 9% of the Company's LP volume and
approximately 2% of the Company's merchandise sales. The
selling price of the assets was received in cash and
resulted in a gain before income tax of $945,000, which
is reported as other income. In 1996 the real estate
previously used in the operation was sold and resulted in
a gain before income tax of $193,000, which is reported
as other income.
OPERATING UTILITY REVENUES
Residential and small commercial customer's meters are
read on a cycle basis throughout each month. Revenues
from sales and transportation services are recorded based
on meters read. Generally, large commercial and
industrial and resale customers' meters are read on the
last day of each month. Revenues from storage service
are also recorded monthly.
CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1995, one utility subsidiary
changed its method of recognizing revenue from sales of
natural gas to residential and small commercial
customers. Previously, revenues from these customers
were recognized when he accounts were billed. Revenues
related to gas delivered after billing and before the end
of a month were recognized in the following month. In
1995, the subsidiary began accruing estimated revenues
from gas service provided but not billed consistent with
the industry practice which more closely matches revenues
with the period in which service is provided and related
expenses are incurred. The cumulative effect of the
change at December 31, 1994 was to increase net income
$378,000, net of income taxes. The change had the effect
of increasing 1995 net income (excluding the beginning of
the year cumulative effect of $378,000) by $156,000.
INVENTORIES
Inventories of materials, supplies, and appliances are
recorded partly on average cost and partly at the lower
of cost, determined by the first-in, first-out method, or
market.
Gas inventories of one subsidiary are recorded on the
last-in, first-out (LIFO) method. The gas inventories of
all other utility subsidiaries are valued at average
cost.
Gas stored underground - noncurrent represents the
cost of the estimated volume of gas required to maintain
pressures in the underground storage fields at levels
sufficient to meet the service requirements of the
Company's customers on a peak day.
DEFERRED DEBITS
Environmental costs are regulatory assets established
in conjunction with recognition in the financial
statements of environmental liabilities. Where such
liabilities are not recovered from other responsible
parties through cost recovery litigation or insurance
claims, the Company expects to continue to recover
environmental costs associated with utility sites through
PUC approved rates charged for its services.
Well plugging and abandonment costs are regulatory
assets established in conjunction with recognition in the
financial statements of the cost to plug and abandon
wells in accordance with current regulations. Such costs
have historically been recovered through the ratemaking
process.
Other deferred debits are amortized on the straight-
line method over an appropriate number of years
determined in regulatory proceedings.
UNRECOVERED/OVERRECOVERED GAS COSTS
Unrecovered/overrecovered gas costs represent net
changes in gas costs which will either be collected from
or paid to customers by fuel cost adjustments in the
future. Amounts to be collected or paid over a
subsequent period are classified as current in the
financial statements.
DEFERRED INCOME TAXES
The Company provides deferred income taxes on timing
differences between book and tax income based on policies
and decision established in regulatory proceedings. The
principal timing differences are depreciation, deferred
gas costs and environmental costs. In 1996 the Company
received approval from the Internal Revenue Service to
change its tax accounting method for cost of removal.
Deferred taxes have been recognized in 1996 for certain
timing differences related to the change in method. The
tax effects of timing differences resulted in deferred
tax assets of $4,039,000 and deferred tax liabilities of
$20,247,000 at December 31, 1996. Deferred tax assets
and deferred tax liabilities were $4,330,000 and
$15,643,000, respectively, at December 31, 1995.
INVESTMENT TAX CREDITS
Deferred investment tax credits are amortized to
income on the straight-line method over the estimated
useful lives of the related property.
CASH EQUIVALENTS
For the purpose of reporting cash flows, highly liquid
investments purchased with a maturity of three months or
less are considered to be cash equivalents.
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 reported period.
Actual results could differ from those estimates.
EARNINGS PER COMMON SHARE
Earnings per common share were calculated based on net
income less preferred stock dividend requirements divided
by the weighted average number of common shares
outstanding during the period.
EXCESS OF EQUITY VALUE OVER COST OF ACQUISITION
The excess of the equity value over the cost of
acquisition, arising from the acquisition of North Penn
Gas Company in 1977, is being amortized on the straight-
line method over twenty-five (25) years.
(2) DEBT
At December 31, 1996, the company and its subsidiaries
have committed bank lines of credit that is aggregate
total $12,000,000, and uncommitted bank lines of credit
that in aggregate total $24,000,000. At December 31,
1995 the amount of the lines was $8,000,000 and
$24,000,000, respectively. The credit lines, which are
unsecured, are reviewed annually. The Company expects to
negotiate bank lines of credit in 1997 at levels
appropriate to meet its requirements.
During 1996 and 1995 the maximum amount borrowed under
the lines of credit at any month end was $7,500,000 and
$500,000, respectively. Average monthly borrowings
ranged from zero to $6,874,000 in 1996 and from zero to
$500,000 in 1995. The weighted average interest rate on
borrowings under the lines of credit at December 31, 1996
and 1995 was 6.89% and 6.70% respectively.
Long-term debt at December 31, 1996 and 1995, less
amounts payable in one year, consisted of the following
(in thousands):
Annual Due
Installments Date 1996 1995
--------------------------------------------------------------
Notes
payable:
9.20% $1,500 2001 $ 3,000 $ 4,500
9.59% 750 2005 5,250 6,750
(commencing 1996)
9.64% 375 2010 6,375 7,125
(commencing 1996)
8.70% 833 2023 10,000 10,000
(commencing 2011)
7.51% 1,818 2014 20,000 20,000
(commencing 2004)
6.70% 1,400 2003 7,000 7,000
(commencing 1999)
--------------------------------------------------------------
51,625 55,375
Capital leases 69 269
--------------------------------------------------------------
$51,694 $55,644
--------------------------------------------------------------
The terms of the long-term debt agreements contain,
among other things, restrictions relating to the creation
of debt, liens, investments, disposition of assets,
mergers and consolidations, purchase of shares,
acceleration of debt payments, maintenance of equity to
debt ratio is, and the payment of dividends. In 1996 the
Company elected to exercise its option to double the
annual installment payments on the 9.59% and 9.64% notes.
Under the most restrictive provisions, the amount of
consolidated retained earnings available for preferred
and common stock dividends at December 31, 1996 was
approximately $9,455,000.
Maturities of long-term notes and capital leases for
the next five years are as follows: 1997 -- $2,939,000;
1998 -- $2,694,000; 1999 -- $4,025,000; 2000 --
$2,525,000, and 2001 -- $2,525,000.
(3) REDEEMABLE PREFERRED STOCK
In November 1991 the Company authorized the creation
of 2,000,000 shares of $1.40 cumulative preferred stock
(Preferred Stock). The Company issued one share of
Preferred Stock for each share of common stock
outstanding on December 16, 1991. The Preferred Stock
was recorded at its estimated value of $15 per share at
the date of distribution.
The Preferred Stock is subject to mandatory redemption
at $15 per share over a ten-year period beginning January
1, 2018. Additionally, commencing January 1, 1997, all
or part of the outstanding preferred stock is redeemable
at the option of the Company provided that 66-2/3% of
preferred shareholders approve such redemption.
(4) INCOME TAXES
Income tax expense for 1996 and 1995 consisted of the
following (in thousands):
1996 1995
-----------------------------------------------------
Current:
Federal $ 523 $ 1,232
State 201 289
-----------------------------------------------------
724 1,521
Deferred 3,093 1,778
Amortization of deferred (76) (76)
investment tax credits
-----------------------------------------------------
$ 3,741 $ 3,223
-----------------------------------------------------
In 1996 the Company received approval from the
Internal Revenue Service to change its tax accounting
method for cost of removal. The change in method which
is effective for the tax year beginning January 1, 1994
created a combination of timing differences and current
tax benefits. Deferred taxes have been recorded
recognizing the timing differences.
The primary difference between the Company's income
tax expense at the federal statutory rate of 34% and the
effective tax rate is state income taxes, and the
reduction in current tax expense resulting from the 1996
approved change in tax accounting method.
(5) RETIREMENT PLANS
Effective January 1, 1996, two noncontributory defined
benefit plans sponsored by the Company were merged to
form one plan. The Company funds accrued pension costs
subject to limitations included in the Internal Revenue
Code and the Employee Retirement Income Security Act of
1974. Net pension (income) cost for the pension plan(s)
for 1996 and 1995 includes the following components (in
thousands):
1996 1995
--------------------------------------------------------
Service cost $ 809 $ 618
Interest cost 1,679 1,575
Return on assets (includes (3,734) (4,748)
insurance contract settlement)
Net amortization and deferral 1,229 2,814
--------------------------------------------------------
Net pension (income) cost $ (17) $ 259
--------------------------------------------------------
The assumptions used by the pension plan(s) in
determining the actuarial present value of the plan's
benefit obligations are as follows:
1996 1995
-------------------------------------------------
Discount rate 7.75% 7.0%
Amortization of deferred 5% 5%
investment tax credits
-------------------------------------------------
The funded status of the pension plan(s) at December
31, 1996 and 1995 is as follows (in thousands):
1996 1995
------------------------------------------------------------
Vested benefit obligation $ 15,622 $ 19,087
------------------------------------------------------------
Accumulated benefit obligation 16,619 20,410
Additional benefits related to
future compensation levels 3,947 3,864
------------------------------------------------------------
Projected benefit obligation 20,566 24,274
Plan assets at fair value (24,984) (25,009)
------------------------------------------------------------
(4,418) (735)
Unrecognized transition amount 1,263
Unrecognized net gain 958 466
Unrecognized prior service cost 4,385 (668)
------------------------------------------------------------
(615)
Accrued pension cost $ 310 $ 326
------------------------------------------------------------
The Company also sponsors an unfunded nonqualified
Supplemental Executive Retirement Plan (SERP) which
provides additional retirement benefits to certain
employees. Effective February 1, 1996, the Company
established an unfunded nonqualified retirement program
for the benefit of its Board of Directors. The
actuarially determined benefit obligation for the two
nonqualified plans was $433,000 at December 31, 1996 and
$282,000 at December 31, 1995. Net expense related to
these plans was $229,000 in 1996 and $60,000 in 1995.
Benefit payments under both plans are made directly by
the Company to plan participants or their beneficiaries.
In 1996 the Company discontinued an investment
contract with an insurance company that was used to
manage approximately $7,000,000 of pension assets. At
the time the contract was discontinued, there were
approximately $2,700,000 of outstanding guaranteed
annuities under the contract. The insurance company
issued certificates to retirees to guarantee their
pension benefits under the program; the balance of the
pension assets were transferred to an investment manager
for reinvestment. Settlement of the investment contract
resulted in a reduction of $343,000 to 1996 pension cost.
In addition to providing pension benefits, the Company
provides certain health care and life insurance benefits
for retired employees of one subsidiary. These benefits
are provided through an insurance company, and
substantially all of the subsidiary's employees will
become eligible for them if they reach their retirement
age while working for the subsidiary. Up to and
including December 31, 1994, the subsidiary recognized
the cost of providing these benefits for retirees on the
"pay as you go" basis.
In the first quarter of 1995, the Company adopted the
provisions of Statement of Accounting Standards No. 106
(FAS 106). Employers' Accounting for Postretirement
Benefits Other than Pensions (PBOPs), issued by the
Financial Accounting Standards Board in December 1990.
FAS 106 requires the expected cost of PBOPs to be
recognized on an accrual basis as employees perform
services to earn the benefits. Also, during the first
quarter of 1995, the company filed a rate increase
request with the PUC, which among other things, sought
authorization for the recognition in rates of the cost of
PBOPs on an accrual basis instead of "pay as you go"
basis. On September 27, 1995, the PUC adopted an order
authorizing an increase in the Company's rates and the
recovery of the cost of PBOPs in accordance with FAS 106.
The Company recorded a liability of $435,000 and an
associated regulatory asset representing the estimated
FAS 106 costs incurred from January 1, 1995 to September
27, 1995 and began a five-year amortization of these
costs in October 1995. The Pennsylvania Office of
Consumer Advocate appealed the PUCs decision.
On February 7, 1997 the Commonwealth Court ordered that
the appeal be reargued before the entire court. In the
opinion of management, the decision of the court will not
have a material adverse effect on the Company.
The Company has established trust funds for the
deposit of FAS 106 costs being recovered through its
rates. Net periodic PBOP expense in 1996 and 1995
consists of the following components (in thousands):
1996 1995
----------------------------------------------------
Service cost $ 93 $ 80
Interest cost 555 530
Return on assets (66) --
Net amortization and deferral 431 310
----------------------------------------------------
Net periodic postretirement $ 1,013 $ 920
benefit expense
----------------------------------------------------
The funded status of the plan at December 31, 1996 and
1995 is as follows (in thousands):
1996 1995
---------------------------------------------------------
Accumulated postretirement benefit
obligation (APBO)
as of December 31, 1996 and 1995:
Fully eligible active employees $ 1,803 $ 1,853
Other active employees 1,743 1,791
Retirees 4,292 4,409
----------------------------------------------------------
7,838 8,053
Plan assets at fair value (1,157) (260)
----------------------------------------------------------
Accumulated obligation in excess
of plan assets 6,681 7,793
Unrecognized net transition
obligation (5,640) (5,950)
Unrecognized net loss (778) (1,523)
----------------------------------------------------------
Accrued postretirement benefit cost $ 263 $ 320
----------------------------------------------------------
The discount rate used in determining the benefit
obligation was 7.75% for 1996 and 7.0% for 1995. Annual
rates of increase in the per capita cost of covered
health care benefits of 10.6% and 11.8% were assumed for
1996 based on the age of plan participants. The Company
assumed rates for 1995 were 11.2% and 12.5%. The rates
were assumed to decrease gradually to 5.5% over ten years
in both 1996 and 1995 and remain level thereafter. The
health care cost trend rate assumption has a significant
effect on amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage
point would increase the APBO as of December 31, 1996 by
$386,000 and the net periodic postretirement benefit
expense for the year then ended by $30,000. As of
December 31,1995, the APBO would increase $396,000 and
the net periodic postretirement benefit expense would
increase $29,000 if a one percentage point increase in
the health care cost trend rates was assumed.
(6) REGULATORY MATTERS
Order 636 issued by FERC in 1992 substantially changed
the regulations governing the operations and services
provided by interstate pipeline companies. The Order
requires the interstate pipelines to separately charge
for services such as storage and transportation, which
were historically bundled as part of the traditional
merchant gas sales service they offered. The regulated
services available from interstate pipelines no longer
include the aggregation of gas supplies from producers.
Instead, the Company is responsible for securing its gas
supply requirements through negotiated, unregulated
transactions.
The interstate pipelines interconnected with the
Company's system implemented Order 636 in 1993. All of
the Company's pipeline suppliers have implemented plans
approved by the FERC to recover from their customers,
including the Company, 100% of transition costs prudently
incurred in complying with Order 636. The amount and
duration of transition costs is different for each
supplier. The Company has received authorization from
the PUC to recover all transition costs billed by the
pipelines.
A $5,712,000 refund to its customers was included in
the Company's annual purchased gas cost filing submitted
to the PUC on August 31, 1995. Included in the refund
was approximately $2,600,000 deferred in 1994 plus
interest. The PUC granted the Company authorization to
refund the amount as a lump-sum bill credit during
December 1995. The balance of $2,969,000 was included as
a refund in rates charged to customers during the period
November 1, 1995 through November 30, 1996.
Revised rates for the recovery of the Company's
purchased gas costs were approved by the PUC effective
December 1, 1996. the Company and the parties who
participated in purchased gas cost proceedings agreed
that $895,000 of cost for pipeline capacity that the
Company would not need to meet its firm sales
requirements during the next three winters (stranded
costs) could be claimed through rates established under a
different docket. The Company's filing in support of the
recovery of these stranded costs has been suspended by
the PUC until July 1, 1997 in order to consider the
formal complaints filed by various parties. The Company
is recording the pipeline capacity costs as a liability
and an offsetting regulatory asset representing the
expected recovery of these costs from its customers.
On January 27, 1995, the Company filed a rate increase
request with the PUC seeking an increase in annual
revenues of $5,022,000. The filing covered approximately
half of the Company's utility customers. On September
27, 1995, the PUC adopted an order authorizing an
increase in annual operating revenues of $2,247,000
effective on one day's notice for service rendered after
September 27, 1995. The annual increase includes an
allowance for the recovery of the cost of postretirement
benefits other than pensions (PBOPs) calculated in
accordance with FAS 106, including recovery and
amortization over five years of such costs deferred from
January 1, 1995 to September 27, 1995. The Pennsylvania
Office of Consumer Advocate appealed the PUC's decision
allowing recovery of the deferred costs. The amount at
issue is $435,000. On February 7, 1997, the Commonwealth
Court ordered the appeal to be reargued before the entire
court. In the opinion of management the decision of the
court will not have a material adverse effect on the
Company.
On February 27, 1996, the Company's two wholly owned
public utility subsidiaries filed a request with the PUC
for an increase in annual revenues of $10,955,000 and
authorization to consolidate the tariffs of the two
subsidiaries into one tariff and one set of rates. In
October 1996, final approval of a settlement resolving
the issues was received from the PUC. Under the
settlement, the Companies were permitted to consolidate
their tariffs and increase their rates to produce
additional annual operating revenues of $6,725,000.
Gas supply cost, including contracts with pipelines
for delivery service (capacity cost), storage service and
the cost of natural gas purchased for sale and delivery
to customers is the Company's largest cost. The
Company's tariffs provide for the recovery of these costs
subject to regulatory review and approval. Rates to
recover gas supply costs are based on projections of the
volume of gas the Company will purchase; the cost of
these purchases and the amount of gas its sales customers
will use Deviations between such projections and actual
experience cause over or under recovery of the costs from
customers which are adjusted in the Company's filings
with the PUC and either refunded or collected. At
December 31, 1996 the Company's rates for the recovery of
gas costs plus its rates authorized to recover pipeline
transition costs resulted in undercollection from
customers of $370,000. At December 31, 1995 the Company
overcollected gas and transition costs in the amount of
$3,080,000 which has been paid back to the customers with
interest.
(7) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are present or past
owners of approximately twenty-six (26) properties on
which manufactured gas plants (MGP) were located. In
October 1993, the Company and the Pennsylvania Department
of Environmental Protection (PADEP) signed a Consent
Order and Agreement (COA) for the environmental
assessment of twenty (20) of the Company's twenty-one
(21) MGP sites located in Pennsylvania, which at the time
were under the Company's control. (The one such
Pennsylvania MGP site not covered by the COA was the
Brodhead Creek Superfund Site which is the subject of
separate agreements with the United States Environmental
Protection Agency (USEPA).)
On March 27, 1996, the Company, North Penn Gas Company
(North Penn), a wholly owned subsidiary of the Company,
and PADEP signed a new COA (1996 COA). This agreement,
except for certain provisions which have been
incorporated by reference, supersedes the 1993 COA. The
1996 COA provides that from 1996 through the year 2011
the Company will perform a minimum amount of work per
year to investigate, and where necessary, clean up twenty
(20) MGP sites and that North Penn will plug all of its
non-producing wells. The 1996 COA has a term of fifteen
(15) years, but may be terminated by either party after
five (5) years.
Progress on the investigation, clean-up and well
plugging activities covered by the 1996 COA will be
measured through a point system, which is based on
addressing the highest risks earlier in the process. In
any year in which the Company's and North Penn's
environmental costs defined by the 1996 COA exceed
$1,750,000 (Environmental Cost Cap), the Company will not
be required to achieve the minimum required points except
that North Penn must meet the well plugging schedule set
forth in the agreement regardless of whether the minimum
required points or the Environmental Cost Cap are
reached. The point system gives the Company and North
Penn some flexibility in determining the activities to be
undertaken in a given year, however, the 1996 COA does
not relieve or limit the Company's or North Penn's
obligation to comply with applicable statues or
regulations. The Company and North Penn satisfied the
1996 COA's minimum point requirement during 1996 and
PADEP has approved the Company's 1997 annual plan.
North Penn's estimate of the cost to plug the wells
covered by the 1996 COA is $4,038,000. After recognizing
North Penn's estimated well plugging cost, the Company
allocated the balance of the Environmental Cost Cap to
MGP site activities for the purposes of estimating the
related total commitment under the 1996 COA. The
estimated present value of the portion of the
Environmental Cost Cap allocated to MGP site activities
plus oversight cost reimbursements owed to PADEP during
the term of the agreement is $15,728,000 at December 31,
1996 and $16,333,000 at December 31, 1995. The estimated
present value was determined based on interest rates for
United States Treasury obligations with maturities that
coincide with the term of the 1996 COA.
The Company has adopted the present value of its
estimated total Environmental Cost Cap under the 1996 COA
as the low end of the rate of costs that may be incurred
in connection with MGP site activities. A liability of
$15,728,000 and an associated regulatory asset of
$15,115,000 have been recorded at December 31, 1996. A
liability of $16,333,000 and an associated regulatory
asset of $15,891,000 were recorded at December 31, 1995.
The Company's actual costs will depend on a number of
factors including actual site conditions determined
through the site assessment process, changing technology,
government statutes and regulations, success in pursuing
claims against and finalizing cost sharing arrangements
with other potentially responsible parties and recoveries
from insurers. At December 31, 1996, the Company
estimated a range of environmental liability for the MGP
sites of $9,517,000 to $38,702,000. At December 31, 1995
the estimated range was $11,300,000 to $48,300,000.
In September 1994, the Company initiated a suit
against some of its insurers seeking defense and/or
indemnification from the insurers against claims
involving former MGP sites. The insurers have answered
the Company's complaint, the parties have exchanged
documents and have entered the discovery phase.
Localized minor amounts of petroleum hydrocarbon
impacted soils have been identified in the process of
removing and abandoning equipment at a former compressor
station site. The removal and abandonment project was
undertaken in accordance with a plan approved by state
and federal environmental agencies. A plan to remediate
the impacted soil is scheduled to be developed and
implemented in 1997. With respect to the Brodhead Creek
Superfund Site, the USEPA has concluded removal of
groundwater contamination is technically impracticable
and that certain wells should be periodically monitored
and pumped unless and until new technology becomes
available. The costs incurred by the Company for work
related to the impacted soils and Brodhead Creek will be
counted against the Environmental Cost Cap included in
the 1996 COA.
The Company has received authorization from the PUC to
capitalize environmental and clean-up expenditures and
well plugging costs for accounting and ratemaking
purposes and to amortize such expenditures over five (5)
years. The Company expects the PUC will continue to
authorize the recovery of such expenditures associated
with MGP sites previously or currently owned by its
utility subsidiaries and the costs of plugging wells
through the rates the Company charges for its services.
Accruals sufficient to provide for the minimum range
of costs associated with non-utility sites have been
charged to expense. At December 31, 1996 the amount
accrued was $613,000 compared to $442,000 at December 31,
1995. Additional investigation and remediation may be
required at the sites in the future, however, the scope
of these activities cannot be determined and therefore
any related cost has not been accrued.
(8) COMMON STOCK
The Company has a Stock Option Agreement under which
14,350 shares were granted in 1992. The options are
exercisable on a pro rata basis during a seven-year
period commencing in 1995. There are 4,019 options
outstanding at December 31, 1996 exercisable at a price
of $52.27 per share.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and liabilities
which are considered financial instruments approximates
their fair value as of the dates presented. The carrying
amounts and estimated fair values of the Company's long-
term financial liabilities as of December 31, 1996 are as
follows (in thousands):
Carrying Estimated
amount fair value
--------------------------------------------------
Long-term debt $ 51,625 $ 54,105
Preferred Stock 10,764 13,634
--------------------------------------------------
The fair value of long-term debt and preferred stock
has been estimated based on market rates for similar
instruments with approximately the same maturities.
Management believes that the prepayment provisions of the
Company's long-term debt do not make it economically
feasible to refinance the debt at this time.
SUMMARY OF FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except
per share data)
Year ended December 31 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 113,507 $ 105,647 $ 123,410 $ 115,812 $ 105,603
Cost of sales 51,893 48,675 67,188 63,432 58,978
Other operating expenses 50,287 47,644 46,035 42,940 39,824
-----------------------------------------------------------------------------------------------
Operating income 11,327 9,328 10,187 9,440 6,801
Interest expense 4,362 4,731 4,347 4,320 3,864
Other (income) expense (429) (1,102) 135 (185) (28)
-----------------------------------------------------------------------------------------------
Income before cumulative
effect of a change in
accounting principle 7,394 5,699 5,705 5,305 2,965
Cumulative effect on prior
years (to December 31, 1994)
of change to record unbilled
revenue, net of tax -- 378 -- -- --
-----------------------------------------------------------------------------------------------
Net income $ 7,394 $ 6,077 $ 5,705 $ 5,305 $ 2,965
-----------------------------------------------------------------------------------------------
Earnings per common share
(based on weighted average
number of shares
outstanding) $ 8.90 $ 7.07 $ 6.55 $ 5.99 $ 2.73
-----------------------------------------------------------------------------------------------
Cash dividends per preferred
share $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40
-----------------------------------------------------------------------------------------------
Cash dividends per common
share $ 2.40 $ 2.00 $-- $-- $--
-----------------------------------------------------------------------------------------------
Total assets $ 196,465 $ 184,277 $ 174,367 $ 159,236 $ 147,608
-----------------------------------------------------------------------------------------------
Property, plant, and equipment,
net $ 141,292 $ 132,602 $ 122,897 $ 115,237 $ 108,369
-----------------------------------------------------------------------------------------------
Capitalization:
Stockholders' equity $ 66,745 $ 62,078 $ 58,441 $ 53,741 $ 49,441
Redeemable preferred stock 10,764 10,764 10,764 10,764 10,764
Long-term debt 51,694 55,644 58,904 34,995 56,359
-----------------------------------------------------------------------------------------------
Revolving line of credit, notes
payable and long-term debt 129,203 128,486 128,109 99,500 116,564
payable within one year 10,439 3,568 2,266 24,395 2,055
-----------------------------------------------------------------------------------------------
$ 139,642 $ 132,054 $ 130,375 $ 123,895 $ 118,619
-----------------------------------------------------------------------------------------------
</TABLE>
OPERATING STATISTICS
<TABLE>
<CAPTION>
Year ended December 31 1996 1995 1994 1993 1992
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues
(in thousands)
Utility:
Sales:
Residential $ 47,914 $ 40,025 $ 47,377 $ 42,358 $ 35,025
Commercial 25,418 25,990 29,183 25,936 20,70 6
Industrial 10,681 11,339 20,124 21,039 21,437
Resale 49 222 682 1,120 1,659
------------------------------------------------------------------------------------
84,062 77,576 97,366 90,453 78,827
Storage 6,157 5,570 5,101 5,167 6,164
Transportation 8,897 8,458 6,899 6,883 6,454
Other 677 1,483 843 583 558
------------------------------------------------------------------------------------
99,793 93,087 110,209 103,086 92,003
Liquefied petroleum 12,294 11,009 11,648 11,359 11,909
------------------------------------------------------------------------------------
112,087 104,096 121,857 114,445 103,912
Merchandise 1,420 1,551 1,553 1,367 1,691
------------------------------------------------------------------------------------
Total $113,507 $105,647 $123,410 $115,812 $105,603
------------------------------------------------------------------------------------
Throughput -- DTH:
(in thousands)
Utility:
Sales:
Residential 7,316 6,513 6,790 6,597 6,470
Commercial 4,500 4,737 4,865 4,643 4,318
Industrial 2,282 2,303 4,017 4,423 5,090
Resale 11 64 161 307 403
------------------------------------------------------------------------------------
14,109 13,617 15,833 15,970 16,281
Transportation 12,666 13,071 9,613 9,177 9,589
------------------------------------------------------------------------------------
26,775 26,688 25,446 25,147 25,870
Liquefied petroleum 841 830 865 857 893
------------------------------------------------------------------------------------
Total 27,616 27,518 26,311 26,004 26,763
------------------------------------------------------------------------------------
Customers:
Utility:
Sales:
Residential 61,504 60,688 59,130 58,068 57,199
Commercial 8,954 8,865 8,655 8,694 8,361
Industrial 302 323 342 356 369
Resale 2 2 3 3 3
------------------------------------------------------------------------------------
70,762 69,878 68,130 67,121 65,932
Transportation 124 118 92 62 43
------------------------------------------------------------------------------------
70,886 69,996 68,222 67,183 65,975
Liquefied petroleum 28,021 28,260 29,935 30,338 31,197
------------------------------------------------------------------------------------
Total 98,907 98,256 98,157 97,521 97,172
------------------------------------------------------------------------------------
Total degree days 5,494 5,223 5,411 5,352 5,204
------------------------------------------------------------------------------------
Percent of degree days
to thirty-year average 102.7% 97.7% 101.2% 100.1% 97.3%
------------------------------------------------------------------------------------
</TABLE>
[PHOTOGRAPHS OF BOARD OF DIRECTORS OMITTED]
------------------
Board of Directors
------------------
Carol W. Gates (2)
Oxford Advisory Board, Fulton Bank
Terry H. Hunt (1)
President and CEO, Penn Fuel Gas, Inc. and subsidiaries
Director, UTI Energy Corp.
Marilyn Ware Lewis (1)(3)
Chairman, American Water Works Company, Inc.
Director, CIGNA Corporation
W. Kirk Liddell (2)
President and CEO, Irex Corporation
Director, High Industries, Inc.
Director, CoreStates Central/Northern Regional Board
Loren D. Mellendorf (2)(3)
Retired Executive Vice President, American Water Works Company, Inc.
John H. Ware, IV (2)
Director, Subsidiaries of American Water Works Company, Inc.
Paul W. Ware (1)(2)(3)
Chairman, Penn Fuel Gas, Inc. and subsidiaries
Director, American Water Works Company, Inc.
Director, The York Water Company
Richard P. Wild (1)(3)
Partner, Dechert Price & Rhoads
Committees: (1) Executive Committee (2) Audit Committee
(3) Compensation Committee
---------------------
Corporate Information
---------------------
PENN FUEL GAS, INC. OFFICERS
Terry H. Hunt
President and Chief Executive Officer
George C. Rhodes, Sr.
Senior Vice President, Utility Operations and Engineering
Ronald J. Frederick
Vice President, Human Resources and Administration
Edward L. McCusker
Vice President and Treasurer
Charles C. Rogala
Vice President, Utility Operations
George W. Ruth
Vice President, Gas Supply
Eleanor R. Ross
Secretary
John P. Nitsche
Assistant Secretary
SUBSIDIARIES
PFG Gas, Inc.
North Penn Gas Company
STOCK TRANSFER
Penn Fuel Gas, Inc.
55 South Third Street, Oxford, PA 19363
Attention: Eleanor R. Ross
ANNUAL MEETING
The annual meeting of shareholders will be held at
The Eden Resort Inn, 222 Eden Road, Lancaster, Pennsylvania
on Tuesday, May 27, 1997 at 9:00 a.m.
Notice of the meeting and proxy are enclosed
for holders of common stock.
This report, including financial statements contained herein,
is submitted for the general information of shareholders of the
Company and not in connection with any sale, offer
for sale, or solicitation of any offer to purchase any securities.
-------------------
Penn Fuel Gas, Inc.
-------------------
55 South Third Street
Oxford, Pa 19363
(610) 932-2000
EXHIBIT H-1
[MORGAN STANLEY LETTERHEAD]
June, 25, 1997
Board of Directors
PP&L Resources, Inc.
Two North Ninth Street
Allentown, Pennsylvania 18101
Members of the Board:
We understand that Penn Fuel Gas, Inc. ("PFG" or the
"Company"), PP&L Resources, Inc. ("Resources") and
Keystone Merger Corp. a wholly owned subsidiary of
Resources ("Keystone"), propose to enter into an
Agreement and Plan of Merger, substantially in the form
of the draft dated June 20, 1997 (the "Merger") of
Keystone with and into PFG. Pursuant to the Merger, the
Company will become a wholly owned subsidiary of
Resources and each outstanding share of common stock, par
value $1.00 per share (the "PFG Common Stock"), of the
Company other than shares held in treasury or held by any
subsidiaries of PFG, will be converted into the right to
receive 7,665 (the "Common Stock Exchange Ratio") shares
of common stock, par value $0.01 per share ("Resources
Common Stock"), of Resources subject to adjustment in
certain circumstances pursuant to a certain formula set
forth in the Merger Agreement. The terms and conditions
of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the Common
Stock Exchange Ratio pursuant to the Merger Agreement is
fair from a financial point of view to Resources.
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available
financial statements and other information
of Resources;
(ii) reviewed certain internal financial
statements and other financial and
operating data concerning the Company
prepared by the management of the Company,
including information relating to certain
strategic and operational benefits
anticipated from the Merger;
(iii) analyzed certain financial projections
prepared by the management of the Company;
(iv) discussed the past and current operations
and financial condition and the prospects
of the Company with senior executives of
the Company and Resources;
(v) reviewed certain internal financial
statements concerning Resources prepared by
the management of Resources;
(vi) discussed the past and current operations
and financial condition and the prospects
of Resources with senior executives of
Resources, and analyzed the pro forma
impact of the Merger on Resources' earnings
per share, consolidated capitalization and
financial ratios;
(vii) reviewed and discussed with senior
executives of Resources their assessment of
the cost savings and revenue enhancements
to be realized in the Merger;
(viii) reviewed the reported prices and trading
activity of Resources Common Stock;
(ix) compared the financial performance of the
Company with that of certain comparable
publicly-traded companies and their
securities;
(x) reviewed the financial terms, to the extent
publicly available, of certain comparable
acquisition transactions;
(xi) participated in discussions and
negotiations among representatives of the
Company and Resources and their financial
and legal advisors;
(xii) reviewed the Merger Agreement and certain
related documents;
(xiii) reviewed certain environmental analyses
provided by Resources; and
(xiv) performed such other analyses and
considered such other factors as we have
deemed appropriate.
We have assumed and relied upon, without independent
verification, the accuracy and completeness of the
information reviewed by us for the purposes of this
opinion. With respect to the financial projections,
including estimates of the strategic, financial and
operational benefits anticipated from the Merger, we have
assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and
judgments of the future financial performance of the
Company and Resources. We have not made any independent
valuation or appraisal of the assets or liabilities of
the Company or Resources; however, we have reviewed the
environmental analyses provided by Resources and have
relied without independent verification upon such
analyses for purposes of this opinion. We have assumed
that the Merger will be accounted for as a "pooling-of-
interests" business combination in accordance with U.S.
generally accepted accounting principles and will qualify
as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code of 1986. Our opinion
is necessarily based on economic, market and other
conditions as in effect on, and the information made
available to us as of, the date hereof.
In connection with this opinion, we have relied on the
Company's and Resources' assessment of costs savings and
revenue enhancements to be realized by the Merger.
We have acted as financial advisor to the Board of
Directors of Resources in connection with this
transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financial advisory and financing
services for Resources and have received fees for the
rendering of these services.
It is understood that this letter is for the information
of the Board of Directors of Resources only and may not
be used for any other purpose without our prior written
consent.
Based upon and subject to the foregoing, we are of the
opinion on the date hereof that the Common Stock Exchange
Ratio pursuant to the Merger Agreement is fair from a
financial point of view to Resources.
Very truly yours,
MORGAN STANLEY & CO.
INCORPORATED
By: /s/ Daniel B. More
___________________
Daniel B. More
Managing Director
EXHIBIT H-2
[First Union Capital Markets Corp. letterhead]
CONFIDENTIAL
June 26, 1997
Board of Directors
Penn Fuel Gas, Inc.
55 South Third Street
Oxford, Pennsylvania 19363
Members of the Board:
You have asked us to advise you with respect to the fairness to
the stockholders of Penn Fuel Gas, Inc. ("Penn Fuel") from a
financial point of view of the exchange ratio to be offered to
such stockholders pursuant to the terms of the Agreement of
Merger, dated as of June 26, 1997 (the "Merger Agreement"), among
Penn Fuel, PP&L Resources, Inc. ("PP&L"), and a wholly owned
subsidiary of PP&L ("Merger Sub"). The Merger Agreement provides
for the merger (the "Merger") of Penn Fuel with and into Merger
Sub pursuant to which (i) Penn Fuel will become a wholly owned
subsidiary of PP&L, (ii) each outstanding share of common stock,
par value $1 per share, of Penn Fuel will be converted into 7.665
shares of common stock of PP&L, subject to adjustment pursuant to
the Merger Agreement, (iii) Penn Fuel's preferred stock will be
redeemed for cash or PP&L common shares representing a market
value of $10.76 million, and (iv) each outstanding option to
purchase Penn Fuel common stock granted under Penn Fuel's 1992
Stock Option Agreement will be cashed out simultaneously with the
Merger such that no options to acquire PP&L stock would exist
following the Merger.
In arriving at our opinion, we have reviewed certain publicly
available business and financial information relating to Penn
Fuel and PP&L, as well as the Merger Agreement. We have also
reviewed certain other information, including financial
forecasts, provided to us by Penn Fuel, and have met with Penn
Fuel's and PP&L's managements to discuss the business and
prospects of Penn Fuel and PP&L.
We have also considered certain financial data of Penn Fuel, and
we have compared that data with similar data for publicly held
companies in businesses similar to those of Penn Fuel and we have
considered the financial terms of certain other business
combinations and other transactions which have recently been
effected. We also considered such other information, financial
studies, analyses and investigations and financial, economic and
market criteria which we deemed relevant. We have also relied
upon the views of Penn Fuel's management concerning the business,
operational and strategic benefits and implications of the
Merger. We have assumed, with your consent, that the Merger will
be accounted for as a pooling of interests under generally
accepted accounting principles.
In connection with our review, we have not assumed any
responsibility for independent verification of any of the
foregoing information and have relied on its being complete and
accurate in all material respects. With respect to the financial
forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available
estimates and judgments of Penn Fuel's management as to the
future financial performance of Penn Fuel. In addition, we have
not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of Penn Fuel or PP&L, nor
have we been furnished with any such evaluations or appraisals.
Our opinion is necessarily based upon financial, economic, market
and other conditions as they exist and can be evaluated on the
date hereof. We are not expressing any opinion as to what the
value of the stock of PP&L actually will be when issued to Penn
Fuel's stockholders pursuant to the Merger or the prices at which
such stock will trade subsequent to Merger. In connection with
our engagement, we approached third parties to solicit
indications of interest in a possible acquisition of Penn Fuel.
We have acted as financial advisor to Penn Fuel in connection
with the Merger and will receive a fee for our services, a
significant portion of which is contingent upon the consummation
of the Merger.
In the ordinary course of business, we or our affiliates may
actively trade the debt and equity securities of PP&L for our or
any such affiliate's own account or for the account of customers,
and accordingly, may hold a long or short position in such
securities. In addition, we and our affiliates in the past may
have provided investment and/or commercial banking products and
services for Penn Fuel, its affiliates and other related persons.
It is understood that this letter is for the information of the
Board of Directors of Penn Fuel in connection with its
consideration of the Merger, does not constitute a recommendation
to any stockholder as to how such stockholders should vote on the
proposed Merger and is not to be quoted or referred to, in whole
or in part, in any registration statement, prospectus or proxy
statement, or in any other document used in connection with the
offering or sale of securities, nor shall this letter be used for
any other purposes, without First Union Capital Markets Corp.'s
prior written consent.
Based upon and subject to the foregoing, it is our opinion that,
as of the date hereof, the exchange ratio to be offered to the
stockholders of Penn Fuel in the Merger is fair from a financial
point of view to such stockholders.
Very truly yours,
FIRST UNION CAPITAL MARKETS CORP.
EXHIBIT I-1
SECURITIES AND EXCHANGE COMMISSION
-------------------------------------------------
(Release No. 35-__________)
FILING UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
PP&L Resources, Inc. (the "Company"), Two North
Ninth Street, Allentown, PA 18101, a Pennsylvania
corporation which is a holding company exempt from the
registration requirements of the Act under section
3(a)(1) of the Act, has filed an application-declaration
on Form U-1 under sections 9(a)(2), 10 and 3(a)(1) of the
Act.
Pursuant to the terms of an Agreement and Plan
of Merger dated as of June 26, 1997 (the "Merger
Agreement"), by and among the Company, Keystone Merger
Corp., a Pennsylvania corporation ("Keystone") and a
wholly-owned subsidiary of the Company, and Penn Fuel
Gas, Inc. ("Penn Fuel"), the Company proposes to acquire
all of the issued and outstanding common stock of Penn
Fuel, a holding company exempt from the registration
requirements of the Act under section 3(a)(1) of the Act
(the "Transaction"). Under the terms of the Merger
Agreement, Keystone will be merged into Penn Fuel, with
Penn Fuel surviving as a wholly-owned subsidiary of the
Company. As a result of the Transaction, the Company
would be a public-utility holding company as defined in
section 2(a)(7) of the Act with three public utility
subsidiaries PP&L, Inc. (formerly Pennsylvania Power &
Light Company) ("PP&L"), which is currently a wholly-
owned subsidiary of the Company, and PFG Gas, Inc. ("PFG
Gas") and North Penn Gas Company ("North Penn"), which
are currently wholly-owned subsidiaries of Penn Fuel.
The Company has also requested an order of exemption
under section 3(a)(1) from all provisions of the Act
except section 9(a)(2).
The Company is a holding company which
provides, through its subsidiaries, electric utility
services and other energy-related products and services
in central eastern Pennsylvania. PP&L, the Company's
principal subsidiary, is an operating electric utility
incorporated under the laws of the Commonwealth of
Pennsylvania. As of June 30, 1997, PP&L served
approximately 1.2 million residential, commercial and
industrial customers in a 10,000 square mile territory in
29 counties of central eastern Pennsylvania, with a
population of approximately 2.6 million persons. PP&L
also sells power to other electric utilities and owns
direct and indirect interests in a number of generating
stations. In addition, the Company engages in other
businesses which are not jurisdictional under the Act,
through a number of other subsidiaries, including
investing in electric generation, transmission and
distribution facilities both overseas and domestically,
providing energy-related products and services inside and
outside of PP&L's service territory, and operating oil
and gas pipeline facilities which supply fuel to PP&L's
Martins Creek generating station. For the year ended
December 31, 1996, the Company's operating revenues on a
consolidated basis were approximately $2.910 billion, of
which $64 million were attributable to non-utility
activities. Consolidated assets of the Company and its
subsidiaries at December 31, 1996 were approximately
$9.824 billion, of which approximately $6.487 billion
consisted of net electric plant and equipment.
Penn Fuel is a holding company which provides
natural gas service in Pennsylvania and Maryland through
its public utility subsidiaries and supplies liquid
propane gas to customers in Pennsylvania and Maryland.
Penn Fuel is a closely-held corporation, incorporated
under the laws of the Commonwealth of Pennsylvania, whose
common stock is not actively traded. PFG Gas and North
Penn, Penn Fuel's principal subsidiaries, are
Pennsylvania corporations which provide natural gas
distribution and storage service to residential,
commercial and industrial customers in 31 counties in
Pennsylvania. PFG Gas provides gas sales and
transportation service in southern and eastern
Pennsylvania and a small portion of Maryland. North Penn
provides gas sales and transportation services to
customers located in north and northwestern Pennsylvania.
North Penn also owns storage capacity in two underground
natural gas storage facilities located in Pennsylvania:
the Wharton Storage Field and the Tioga-Meeker Storage
Complex. For the year ended December 31, 1996, Penn
Fuel's operating revenues on a consolidated basis were
approximately $114 million, of which approximately $100
million were attributable to its gas utility operations,
and $14 million from propane operations and merchandise
sales. Consolidated assets of Penn Fuel and its
subsidiaries as of December 31, 1996 were approximately
$196 million, of which approximately $141 million
consisted of property, plant and equipment, $29 million
were current assets and $26 million were deferred
regulatory assets.
The Application states that the Transaction
will combine two companies with complementary operations
and expertise, and provide important strategic, financial
and other benefits to the merging companies, shareholders
and customers.
The Merger Agreement provides for the business
combination of the Company and Penn Fuel to be effected
by the merger of Keystone with and into Penn Fuel, the
separate corporate existence of Keystone will cease, and
Penn Fuel will continue as the surviving corporation in
the merger, operating as a wholly-owned subsidiary of the
Company. Each share of Penn Fuel Common Stock
outstanding prior to the merger will be converted into
the right to receive between 6.968 and 8.516 shares of
Company Common Stock, depending upon the market price of
the Company Common Stock at the time of the closing of
the merger. Penn Fuel common shareholders will become
Company common shareholders and the Company will become
the sole holder of all of the outstanding Common Stock of Penn
Fuel. Penn Fuel is taking all necessary action to redeem
shares of the Penn Fuel $1.40 Preferred Stock in
accordance with the terms of the preferred stock.
Preferred shareholders will have the option of receiving
the cash redemption price or converting their preferred
shares into the right to receive between 0.682 and 0.833
shares of the Company Common Stock, depending upon the
market price of the Company Common Stock at the time of
the closing of the Transaction. Thus, Penn Fuel
preferred shareholders may become common shareholders of
the Company and there will no longer be any shares of
Penn Fuel preferred stock outstanding.
The Transaction is conditioned, among other
things, upon approval by the Pennsylvania Public Utility
Commission, based on its analysis of whether granting
approval is necessary or proper for the service,
accommodation, convenience or safety of the public. The
Maryland Public Service Commission was notified of the
Transaction and has determined not to institute
proceedings on the matter at this time. In addition, the
Transaction was subject to the 30-day waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (as amended) (the "HSR Act"). On October 7, 1997,
the notice required pursuant to the HSR Act was filed by
the Company and Penn Fuel, respectively. On October 24,
1997, the United States Department of Justice granted
early termination of the waiting period under the HSR Act
with respect to the Transaction.
The Company states that following consummation
of the Transaction, it and each of its subsidiaries will
be entitled to an exemption from all provisions of the
Act except section 9(a)(2) because it and each of its
public utility subsidiaries from which it derives a
material part of its income will be predominantly
intrastate in character and will carry on their utility
businesses substantially within the Commonwealth of
Pennsylvania.
For the Commission, by the Division of
Investment Management, pursuant to delegated authority.
