As filed with the Securities and Exchange Commission on August 13, 1998
File No. 70-9165
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------------------------
AMENDMENT NO. 1 TO
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
The Application previously filed in this proceeding is
hereby amended and restated in its entirety to read as follows:
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"). On July 24,
1998 the Pennsylvania PUC approved the joint
application of the Company and Penn Fuel filed with the
Pennsylvania PUC on August 7, 1997 (attached as Exhibit
D-1). (The Pennsylvania PUC Order is attached as
Exhibit D-3.) 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. (See Exhibit D-4). 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,
1997.
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 its retail service
territory in eastern and central Pennsylvania, sells retail
electricity throughout Pennsylvania pursuant to Pennsylvania's
Retail Access Pilot Program, 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 40.9
billion kwh in plants it owned in 1997. PP&L purchased
13.4 billion kwh under purchase agreements and received
1.4 billion kwh as power pool interchange. During the
year, PP&L delivered about 2.2 billion kwh as pool
interchange and about 13.4 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 ("BG&E"). Safe Harbor's plant has a total
capacity of 417,500 kilowatts. The entire output of the
plant is sold to PP&L and BG&E. PP&L is entitled by
contract to one-third of this total capacity (139,000
kilowatts). In 1997, PP&L's purchases from Safe Harbor
amounted to approximately $10 million; Safe Harbor's 1997
total operating revenues were approximately one percent
of PP&L's 1997 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 1997, 59.5% of the energy generated by
PP&L's plants came from coal-fired stations, 36.9% from
nuclear operations at the Susquehanna station, 2.1% from
the Martins Creek oil and gas-fired steam station and
1.5% 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 the
subsidiaries listed below:
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 December
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 Global's investments are limited to
those in Exempt Wholesale Generators ("EWGs") and Foreign
Utility Companies ("FUCOs").
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. Its investments are
limited to those made for the benefit of associate
companies.
H. T. Lyons, Inc. is a heating, ventilating,
and air-conditioning subsidiary.
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, 1997, the
Company's operating revenues on a consolidated basis were
approximately $3.049 billion, of which approximately $90
million were attributable to non-utility activities.
Consolidated assets of the Company and its subsidiaries at
December 31, 1997 were approximately $9.985 billion, of which
approximately $6.766 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, 1997, PP&L, the
Company's principal subsidiary, employed approximately
6,343 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, 1997, 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 only
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 natural gas
sales and distribution service to approximately 35,000
customers in southern and eastern Pennsylvania and to
approximately 200 customers in a small portion of
Maryland. Ninety-nine percent of PFG Gas customers are
located in Pennsylvania. North Penn provides natural
gas sales and distribution services to approximately
34,500 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
December 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, 1997, Penn
Fuel's operating revenues on a consolidated basis were
approximately $119 million, of which approximately $106
million were attributable to its gas utility operations,
and $13 million from propane operations and merchandise
sales. Consolidated assets of Penn Fuel and its
subsidiaries as of December 31, 1997 were approximately
$208 million, of which approximately $150 million
consisted of property, plant and equipment, $31 million
were current assets and $27 million were deferred
regulatory assets.
Penn Fuel's principal executive office is
located at 55 South Third Street, Oxford, Pennsylvania
19363. As of December 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,
1997, which is attached as Exhibit G-2.
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 December 31, 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 2,585 45 46 36
Preferred and preference
stock 347 6 11 9
Common equity 2,809 49 71 55
------------------------ ----- --- --- ---
Total Capitalization 5,741 100 128 100
The Company's Pro Forma Consolidated Capital Structure
(In Millions)
(unaudited)
Company
$ %
Long-term debt 2,631 45
Preferred and preference
stock 358 6
Common equity 2,880 49
------------------------ ----- ---
Total Capitalization 5,869 100
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 Company estimates that approximately $5.9
million in annual savings will result from the
integration of the merging companies' operations. These
synergies will result from reductions of corporate
administration and executive management, and elimination
of the Penn Fuel Board of Directors (estimated annual
savings of $4 million); reduced costs associated with
procurement and other operations support functions ($1
million annual savings); and savings from consolidation
of Penn Fuel's answering services into the Company's
call center ($890,000 annual savings).
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 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 July 24, 1998 order approving the
Application is attached as Exhibit D-3. The Maryland
PSC has determined not to exercise jurisdiction over
the Transaction in the absence of any material changes
affecting Maryland aspects of the Transaction. (See
Exhibit D-4).
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. An Application seeking the Pennsylvania PUC's
approval was filed with the Pennsylvania PUC on August 7,
1997. On July 24, 1998 the Pennsylvania PUC approved the
Application, finding that the merger is necessary or
proper for the service, accommodation, convenience or
safety of the public. (The Pennsylvania PUC order is
attached as Exhibit D-3.)
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. (See
Exhibit D-4). It is the Company's understanding that
the Maryland PSC will not exercise jurisdiction over
the Transaction, provided that no material changes
affecting Maryland aspects of the Transaction will
have occurred since the issuance of the Maryland PSC's
determination. The Company believes that there is no
likelihood that the Maryland PSC will institute
proceedings concerning the Transaction. (See Exhibit
F-3).
Except as set forth above, no other state or
federal agency has jurisdiction over the transactions
described herein.
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)
(previously filed) . . . . . . . . . . . . . . . . . . . . . 1
A-2 By-Laws of the Company (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement
No. 33-5794) (previously filed). . . . . . . . . . . . . . . 2
A-3 Articles of Incorporation of Penn Fuel (previously filed). . 3
A-4 By-Laws of Penn Fuel (previously filed). . . . . . . . . . . 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) (previously filed) . . . . 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) (previously filed). . . . . . . . . . . . . . . . 6
D-1 Application to the Pennsylvania PUC, dated August 7,
1997 (previously filed). . . . . . . . . . . . . . . . . . . 7
D-2 Direct Testimony of Scott T. Jones, Paul T.
Champagne, and John J. Hilyard, Jr. submitted to the
Pennsylvania PUC (previously filed). . . . . . . . . . . . . 8
D-3 Determination of Pennsylvania PUC. . . . . . . . . . . . . . 9
D-4 Letter of Executive Secretary, Maryland Public
Service Commission . . . . . . . . . . . . . . . . . . . . . 10
E-1 Map of PP&L's service territory (previously filed) . . . . . 11
E-2 Map of PFG Gas service territory (previously filed). . . . . 12
E-3 Map of North Penn service territory (previously filed) . . . 13
E-4 Map showing the overlap of the service territories
of PP&L with those of PFG Gas and North Penn (previously
filed) . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
F-1 Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . 15
F-2 Past Tense Opinion of Counsel [to be filed by
amendment] . . . . . . . . . . . . . . . . . . . . . . . . . 16
F-3 Supplemental Opinion of Counsel. . . . . . . . . . . . . . . 17
G-1 The Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 (filed on
March 3, 1998 (File No. 1-11459) and
incorporated herein by reference). . . . . . . . . . . . . . 18
G-2 Penn Fuel's Annual Report to Shareholders for the
fiscal year ended December 31, 1997. . . . . . . . . . . . . 19
H-1 Opinion of Morgan Stanley & Co., Incorporated (previously
filed) . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
H-2 Opinion of First Union Capital Markets (previously
filed) . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
I-1 Proposed Form of Notice (previously filed) . . . . . . . . . 22
b. FINANCIAL STATEMENTS.
FS-1 Company Consolidated Balance Sheet as of December
31, 1997 (previously filed with the Commission in
the Company Annual Report on Form 10-K for the
year ended December 31, 1997 (Exhibit G-1 hereto),
filed on March 3, 1998, File No. 1-11459, and
incorporated herein by reference) . . . . . . . . . . . . . 23
FS-2 Company Consolidated Statement of Income for the 12
months ended December 31, 1997 (previously filed with
the Commission in the Company Annual Report on Form
10-K for the year ended December 31, 1997 (Exhibit G-1
hereto), filed on March 3, 1998, File No. 1-11459,
and incorporated herein by reference) . . . . . . . . . . . 24
FS-3 Penn Fuel Consolidated Balance Sheet as of December
31, 1997 (included in Penn Fuel Annual Report to
Shareholders, Exhibit G-2 hereto at pp. 14-15) . . . . . . . 25
FS-4 Penn Fuel Consolidated Statement of Income for the
12 months ended December 31, 1997 (included in Penn
Fuel Annual Report to Shareholders, Exhibit G-2
hereto, at p. 16 and incorporated herein by reference) . . . 26
FS-5 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)
(previously filed) . . . . . . . . . . . . . . . . . . . . . 27
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 Amendment No. 1 to the
Application previously filed herein to be signed on
its behalf by the undersigned thereunto duly authorized.
PP&L RESOURCES, INC.
By: /s/ Robert J. Grey Date: 08/13/98
------------------------------ --------
Name: Robert J. Grey
------------------------------
Title: Senior Vice President, General
Counsel and Secretary
------------------------------
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
HARRISBURG, PA 17105-3265
PUBLIC MEETING HELD JULY 23, 1998
Commissioners Present:
John M. Quain, Chairman
Robert K. Bloom, Vice Chairman
David W. Rolka
Nora Mead Brownell
Aaron Wilson, Jr.
In Re: Application of Pennsylvania
Power & Light Company, PFG Gas, Inc.,
and North Penn Gas Company for a A-120650F0006
certificate of public convenience
evidencing Commission approval A-122050F0003
of the transfer from Penn Fuel Gas, Inc.,
to PP&L Resources, Inc., control of all property
of Penn Fuel Gas Inc.'s public utility
subsidiaries, PFG Gas, Inc., and North Penn
Gas Company which is used or useful in the
public service
OPINION AND ORDER
BEFORE THE COMMISSION:
Before the Commission for consideration are the Initial Decision
(I.D.) of Administrative Law Judge (ALJ) Richard M. Lovenwirth, issued May
13, 1998, and Exceptions filed thereto by Applicants, Pennsylvania Power
and Light Company (PP&L), PFG Gas, Inc. (PFG) and North Penn Gas Company
(North Penn) (collectively Applicants), on June 2, 1998.
BACKGROUND (1)
A description of the parties to the instant transaction is
provided.
- --------
1 The Background is adapted from the Exceptions of the Applicants.
PP&L RESOURCES, INC.
PP&L Resources, Inc., (PP&L Resources) a public utility holding
company, was organized in 1995, in conjunction with a restructuring of the
PP&L corporate system. The Commission approved the reorganization in an
Order entered on February 10, 1995, at Docket No. A-110500, F.206. As a
result of the restructuring of the PP&L Corporate system, PP&L Resources
owns all of the common stock of PP&L, a regulated electric utility which is
one of the Applicants in this proceeding. The stock of PP&L Resources is
widely held and is traded on the New York Stock Exchange. (PP&L/Penn Fuel
Exhibit No. 1, pp. 2-3).
PP&L
PP&L is a Pennsylvania corporation organized in 1920, which
provides electric public utility service in central and eastern
Pennsylvania. PP&L serves approximately 1.2 million customers in a 10,000
square mile service territory in 29 counties of Pennsylvania, subject to
the Commission's regulatory jurisdiction. (PP&L/Penn Fuel Exhibit No. 1,
pp. 3-4). PP&L has recently had approved a restructuring plan, filed
consistent with the Electricity Generation Customer Choice and Competition
Act, 66 Pa. C.S. section 2806(d). See Application of Pennsylvania Power
---
& Light Company for Approval of a Restructuring Plan Under Section 2806 of the
Public Utility Code, Docket No. R-00973954 (Order entered June 15, 1998).
PENN FUEL GAS, INC.
Penn Fuel Gas, Inc (Penn Fuel) is a Pennsylvania corporation
which owns all of the common stock of two subsidiaries, PFG and North Penn,
each of which provides gas service subject to Commission jurisdiction. In
addition to owning public utility subsidiaries, Penn Fuel sells propane to
approximately 28,000 customers. Penn Fuel, since it was organized in 1944,
has been a family-owned business. (Statement JJH-1, p.4).(2)
- --------
2 Although Penn Fuel is controlled by one family, a small minority of
shares are owned by unrelated minority shareholders.
PFG
PFG provides gas sales and transportation services 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 central, southern and eastern Pennsylvania. (PP&L/Penn
Fuel Exhibit No. 1, p. 4).
NORTH PENN
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 services in ten
counties in northern and northwestern Pennsylvania. (PP&L/Penn Fuel Exhibit
No. 1, pp. 4-5).
This proceeding involves an Application by PP&L, PFG Gas, Inc.
and North Penn Gas Company for certificates of public convenience
evidencing the Commission's approval, under Section 1102(a)(3) of the
Public Utility Code, 66 Pa. C.S. section 1102(a)(3), as interpreted by the
Commission's Statement of Policy on Utility Stock Transfers. 52 Pa. Code
section 69.901. Pursuant to the Application filed in this matter, said
Applicants seek the approval of the transfer from Penn Fuel Gas, Inc. to
PP&L Resources, by merger, of the title to, or the possession or use of,
all of the property of Penn Fuel's subsidiaries, PFG and North Penn, that
is used or useful in the public service. See Paragraph No. 10, pp. 5-6 of
the Application. ---
As a result of the proposed transaction, Penn Fuel would cease
being a family-controlled, comparatively small public utility holding
company and is becoming a wholly-owned subsidiary of PP&L Resources, a
publicly-held public utility holding company with its principal subsidiary
PP&L, a regulated electric utility. (Applicants Exc., p. 1). Penn Fuel
would thus become a direct or first-tier subsidiary of PP&L Resources. PFG
and North Penn would remain subsidiaries of Penn Fuel and thereby become
second-tier subsidiaries of PP&L Resources. (Id.).
---
The principal parties to the transaction are PP&L Resources,
Keystone Merger Corporation (Keystone), a newly-formed, wholly-owned
subsidiary of PP&L, Penn Fuel, and Penn Fuel's wholly owned subsidiaries,
PFG and North Penn.
HISTORY OF THE PROCEEDINGS (3)
On August 7, 1997, Applicants filed with the Commission an
application for a certificate of public convenience evidencing the
Commission's approval, under Section 1102(a)(3) of the Public Utility Code,
of the transfer from current stockholders of Penn Fuel Gas, Inc. (Penn
Fuel) to PP&L Resources, Inc. (PP&L Resources), all of Penn Fuel's common
and preferred stock. See Paragraph 10, pp. 5-6 of the Application, which is
---
PP&L/Penn Fuel Exhibit No. 1.
- --------
3 The History of Proceedings is adapted in large part from the Initial
Decision. ALJ Lovenwirth noted that the caption of the proceeding
fails to accurately describe the transaction(s) for which Commission
approval is sought by the instant Application.
Notice of the Application was published in newspapers of general
circulation in the Applicants' service territories, once each during the
weeks of September 1, 1997, and September 8, 1997. The Applicants filed
proofs of publications of such notice on October 2, 1997. (I.D., p. 5). In
addition, notice of the Application was published at 27 Pa. Bulletin No.
37, p. 4799 (September 13, 1997). -------------------
- -----------
On September 19, 1997, NE Hub Partners, L.P. (NE Hub) filed a
Petition to Intervene and a Protest on September 29, 1997. This Protest was
subsequently withdrawn by letter of its counsel dated April 28, 1998. In
said April 28, 1998 letter, counsel indicated that subsequent to the filing
of its Briefs, representatives of NE Hub met with representatives of PP&L
and discussed issues related to the merger. Based on these discussions, NE
Hub withdrew its objections to the proposed merger.
Donald R. Williams, as agent for B.M. Davies, filed a Protest on
------------------------
September 18, 1997. Mr. Williams indicated at a prehearing conference that
he saw no further purpose in his participation in these proceedings due to
the ruling of the presiding ALJ that he could only participate in his
capacity as a fiduciary. (I.D., p. 6, n. 6). Mr. Williams was thereafter
served with notice of the scheduled hearings and of the Interim Orders of
the presiding ALJ, including the briefing schedule, but never again
participated in the proceedings. (Id. citing N.T., pp. 11-16).
---
Consequently, his protest was dismissed for lack of prosecution.
Wayne T. Stephens filed a Protest on September 25, 1997. UGI
Utilities, Inc. filed a Petition to Intervene on September 29, 1997, which
was granted. Subsequent to its intervention, UGI Utilities, Inc. did not
participate in these proceedings.
A telephonic prehearing conference was held on December 1, 1997,
where certain preliminary rulings were made and a procedural schedule was
established. Also, a Protective Order was issued by Order of January 22,
1998.
A hearing was convened in Scranton, Pennsylvania on March 3,
1998. Applicants presented their prefiled written testimony and related
exhibits of three witnesses as their case-in-chief and the testimony of four
witnesses and related exhibits in rebuttal.(4) Mr. Stephens presented
prefiled written testimony and also testified on his own behalf (N.T.
65-74). All witnesses were present at the hearing and available for cross
examination. The transcript of the proceedings consists of 276 typewritten
pages. (I.D., p. 7).
On May 13, 1998, the Initial Decision was issued. ALJ Lovenwirth
recommended that the Application be granted. The Recommended Ordering
Paragraphs are reprinted below:
1. That the joint application of PP&L, Inc., PFG Gas, Inc., and
North Penn Gas Company filed on August 7, 1997, at docket
numbers A-120650F0006 and A-122050F0003 be and is hereby
approved, and certificates of public convenience be issued
to said applicants which, in summary, will authorize and/or
ratify the following transactions:
- --------
4 As part of its Withdrawal of Protest filed on April 28, 1998, NE Hub
moved that its evidence be stricken from the record. The ALJ granted
that motion, excepting, however, certain portions of the N.T. at pages
238 and 239, which recorded a colloquy between the presiding ALJ and
the witness. (I.D., p. 7, n. 8).
a. PP&L Resources has organized a new Pennsylvania
corporation, Keystone, as a wholly-owned subsidiary.
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 prior to 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. Penn
Fuel's preferred stock, at the option of each preferred
stockholder, may be redeemed for cash or converted into
the right to receive shares of common stock of PP&L
Resources. Following the acquisition of Penn Fuel by
PP&L Resources, no preferred shares of Penn Fuel will
remain outstanding.
e. Immediately after the acquisition, Penn Fuel will
continue to exist as a wholly-owned subsidiary of PP&L
Resources, and PFG and North Penn will continue to
exist and to own and operate their present facilities.
2. That approval of the joint application referenced in ordering
paragraph one shall not abrogate the need for any necessary
approvals of other regulatory authorities, including but not
limited to The Federal Securities and Exchange Commission,
the Federal Energy Regulatory Commission, the public utility
regulatory body of the State of Maryland (where PFG provides
public utility service), and the public utility regulatory
body of the State of New York (where North Penn may provide
public utility service).
3. That the protests of Donald R. Williams (acting as agent for
B.M. Davies) and Wayne T. Stephens be and are hereby
DISMISSED, without prejudice, i.e., any cause of action
which said protestants may have against the applicants which
are unrelated to the issues attendant upon this application
proceeding will not be barred by virtue of this Order.
4. That all Orders previously issued by this Commission or by
any other governmental agency which impose past or present
liabilities or penalties upon any of the parties to this
transaction shall be satisfied prior to the issuance of
certificates of public convenience.
5. That PP&L, PFG Gas, North Penn, PP&L Resources, Penn Fuel,
and Keystone shall comply fully with Chapter 21 of the
Public Utility Code (66 Pa. C.S.A. 2101 et. seq.) (other
---------------------------
than for those affiliated interest transactions which have
been approved by these ordering paragraphs). Said parties
shall comply with all sections of the Public Utility Code
and this Commission's regulations, including 66 Pa. C.S.A.
-------------
section 1506, so as to facilitate full employment by this
------------
Commission of 66 Pa. C.S.A. section 508.
-------------------------
6. NE Hub's motion that its evidence be stricken from the
record is hereby granted, excepting, however, that the
portion thereof appearing upon pages 238 and 239 of the
transcript, which recorded the colloquy between the
presiding judge and the witness, will be preserved.
(I.D., pp. 37-40).
The Exceptions of the Applicant were received June 2, 1998. The
Exceptions are in the nature of objections to certain dicta in the Initial
Decision, and objections to alleged overbreadth on Recommended Ordering
Paragraph No. 4.
DISCUSSION
ALJ Lovenwirth reached 29 Findings of Fact and 6 Conclusions of
Law. Those Findings of Fact and Conclusions of Law are incorporated by
reference herein and are adopted.
The pertinent Findings of Fact are set forth, below:
* * *
9. The sole remaining protestant is these proceedings is one
Wayne T. Stephens, an individual who resides at 2605 Appel
Street S.W., Allentown, Pennsylvania 18103, and also at Box
31, R.D. 2, Coudersport, Pennsylvania 16915, which latter
address is the subject matter of his protest, which brings
into focus four matters (Stephens Hearing Statement 1 and
N.T. 65 - 74), to wit: (1) that North Penn terminated the
supply of "free gas" that had been initiated pursuant to a
gas lease executed between a corporate predecessor of North
Penn and a predecessor in title of Mr. Stephens in 1900, (2)
that North Penn had not been willing to consider Mr.
Stephens' claim for damages to his property approximately 12
years ago resulting from the freezing of certain water
lines, (3) that North Penn was plugging certain wells, and
(4) that North Penn had not removed all of its facilities
from Mr. Stephens' property.
10. The flow of "free gas" to Mr. Stephens' premises originated
pursuant to a lease dated December 18, 1900, between R.C.
Stearns and Potter Gas Company, a predecessor of North Penn.
Under that lease, however, North Penn had the right to
surrender the lease at any time and thereafter to be
relieved of all obligations under the lease, including the
obligation to supply free gas (Statement JJH-2, pp. 9-10).
There had been two wells on Mr. Stephens' property. One was
abandoned in 1969. The second one was abandoned in 1996.
When the last of the wells on Mr. Stephens' property was
abandoned, North Penn surrendered the lease pursuant to its
terms and terminated the flow of "free gas".
11. The damages to Mr. Stephens' home occurred approximately 12
years ago (JJH-2, p. 11). Mr. Stephens' claim was turned
over to North Penn's liability insurance carrier for review.
The insurance carrier determined, following review, that
North Penn was not responsible for the damage. Thereafter,
Mr. Stephens brought a legal action against North Penn
seeking compensation for the damage. Mr. Stephens' attorney
later discontinued the legal action and withdrew the claim
against North Penn (Tr. 78-79).
12. North Penn explained why it is in the process of abandoning
and plugging a large number of its natural gas wells.
Pursuant to an order and agreement with the Department of
Environmental Protection dated March 27, 1996, North Penn is
required to plug approximately 24 old, non-productive wells
per year until a total of 342 wells have been plugged. The
wells are being plugged in order for North Penn to comply
with applicable environmental regulations (St. JJH-2, pp.
12- 13). Mr. Stephens expressed also concern about the
presence of certain facilities on his property. As North
Penn has explained, North Penn's facilities on this property
remain there pursuant to easements signed by Mr. Stephens'
predecessors in title (Statement JJH-2, pp. 11- 13).
13. If the Commission approves the merger and issues appropriate
certificates of public convenience, Penn Fuel Gas, Inc., a
holding company owned primarily by one family, will become a
wholly-owned subsidiary of PP&L Resources. No change of
service or change of service territory is contemplated in
these proceedings. Regardless of whether the Commission
issues the appropriate certificates of public convenience,
PP&L, PFG and North Penn will continue to provide services
as they do presently in their present service territories to
their present customers.
14. The Applicants' fitness to provide service is demonstrated
most clearly by the fact that they have been rendering
service in their present service territories for extended
period of times. Further, the need for public utility
service is demonstrated most readily by the fact that
service is being provided presently to many customers.
15. All three Applicants have a demonstrated ability to provide
the public utility services that they provide presently, and
approval of the application and issuance of appropriate
certificates of public convenience would not diminish their
ability to provide service in their existing service
territories.
16. Among the efficiencies arising from the merger will be Penn
Fuel's ability to raise capital as part of the PP&L
corporate system far more efficiently than as an independent
corporate system. Efficiencies will arise with regard to
equity, long-term debt and short-term debt.
17. Penn Fuel is a relatively small, family-controlled
corporation, whose stock is not actively traded. Prior to
the merger, Penn Fuel did not issue stock to the public in
order to maintain family control of the business.
Consequently, its sole means of raising equity capital was
to retain earnings. In contrast, there is an active market
for the stock of PP&L Resources; its stock is traded
publicly on the New York Stock Exchange. PP&L Resources is
included in the Standard & Poor's ("S&P") 500 Composite
Index and the S&P Public Utilities. PP&L Resources is well
known in financial markets. Statement JJH-1, p.4.
* * *
20. Penn Fuel will benefit by approval of the application also
with regard to short-term debt. Penn Fuel, on a stand alone
basis, is simply too small to issue commercial paper
(Statement JJH-2, p.5). Instead of using commercial paper to
raise short-term debt, Penn Fuel relies upon lines of credit
with three commercial banks. Because bank lines of credit
are more costly than commercial paper, Penn Fuel pays more
for bank borrowings than it would if it were able to issue
commercial paper (Statement JJH-2, p. 5) (footnote omitted).
Following the merger, Penn Fuel will be able to obtain short
term funds through the issuance of commercial paper by the
PP&L corporate system at a cost lower than Penn Fuel could
obtain alone.
21. The merger will also create opportunities to combine
operations. An example of operational savings is the future
combination of the billing systems. Penn Fuel's own
facilities for billing customers will be eliminated. In the
future, bills for service furnished by Penn Fuel and its
subsidiaries will be prepared by PP&L (Statement JJH-1,
p.7). By this procedure, PP&L's fixed cost of preparing and
printing bills will be spread over a larger customer base
and number of bills, thereby reducing fixed costs per bill.
* * *
25. Another function in which the merger will produce savings is
procurement. Savings will result from elimination of
positions and leveraging of PP&L's existing transportation
network. In addition, certain warehouses will be eliminated.
Using PP&L's transportation system to support delivery of
Penn Fuel's supplies will not materially increase PP&L's
costs, but use of PP&L's network will reduce significantly
Penn Fuel's costs. Penn Fuel will also be able to utilize
the substantial central warehouses of PP&L located in
Humboldt and Harrisburg. Such utilization of central
warehouse facilities also will produce cost savings
(Statement TJM-1, p.5). Further, merging the two procurement
functions into one will create cost saving opportunities by
consolidating buying power and utilizing volume purchasers
to obtain quantity discounts and by having one entity,
instead of two, involved in developing single source
suppliers and supplier relationships Statement TJM-1,
p.5).
26. In the future, it may also be possible for PP&L and PFG to
use one company's real estate holdings for construction of
the other's electrical or pipeline facilities. Duplicate use
of existing real estate holdings can be used to reduce future
capital costs (Statement STJ-1, p.10).
27. Each merging entity, Penn Fuel and PP&L Resources, presently
maintains a complete capability of providing all services
necessary to conduct operations and meet all obligations and
requirements placed upon each corporate system. When these
two corporate systems are combined, inevitably, many of the
functions in one of the corporate systems duplicate a
function in the other corporate system. Following the
merger, such duplication or redundancy can be eliminated,
thereby reducitng costs (Statement STJ-2, P. 17).
Further savings will be achieved from consolidation of other
corporate functions. For example, following the merger Penn Fuel
will no longer maintain an independent Board of Directors.
Present senior managers of the PP&L corporate system will serve
as directors of Penn Fuel. Thus, the costs of maintaining a
separate, independent Board of Directors for Penn Fuel will be
eliminated (Statement JJH-1, p.8; Statement TJM-1, p.5).
28. Penn Fuel's largest single expense presently is the cost of
gas purchased for resale to customers. The merger will
create opportunities for Penn Fuel and PP&L to cooperate in
gas procurement. Acquisition of Penn Fuel will provide
certain benefits to PP&L. By acquiring Penn Fuel, a source
of gas supply, PP&L will improve supply security (Statement
STJ-2, pp. 18-19). Further, by having an affiliate in the
natural gas business, PP&L will gain increased In-house
(sic) knowledge of gas costs which should improve the
combined system's ability to negotiate favorable contract
terms with natural gas suppliers (Statement STJ-2, p.
19-20)...
29. The granting of this application is not likely to result in
anticompetitive or discriminatory conduct, including the
unlawful exercise of market power, which will prevent retail
electricity customers in this Commonwealth from obtaining
the benefits of a properly functioning and workable
competitive retail electricity market.
(I.D., pp. 12-22) (Certain text omitted).
A. THE STEPHENS PROTEST
In his statement and testimony, Mr. Stephens expressed concerns
about North Penn. His concerns were that North Penn terminated the supply
of "free gas" that had been initiated pursuant to a gas lease executed
between a corporate predecessor of North Penn and a predecessor in title of
Mr. Stephens in 1900; (2) that North Penn had not been willing to consider
Mr. Stephens' claim for damages to his property approximately 12 years ago
resulting from the freezing of certain water lines; (3) that North Penn was
plugging certain wells; and (4) that North Penn had not removed all of its
facilities from Mr. Stephens' property.
The claims raised by Mr. Stephens' Protest have been the subject
of substantial correspondence between various counsel representing Mr.
Stephens and North Penn. (I.D. p. 22 quoting Applicants' Main Brief).
Concerning the claim involving "free gas" to Mr. Stephens'
premises, North Penn asserts that when the last of two wells was abandoned,
it surrendered the lease pursuant to its terms and terminated the flow of
"free gas".
Concerning Mr. Stephens' claim for damages resulting from water
damage following freezing of water pipelines, on review of its files, North
Penn indicated that the damages to Mr. Stephens' home occurred
approximately 12 years ago (JJH-2, p. 11). The claim was turned over to
North Penn's liability insurance carrier for review. The insurance carrier
determined, following review, that North Penn was not responsible for the
damage. Thereafter, Mr. Stephens brought a legal action against North Penn,
which action was discontinued and withdrawn. (N.T. pp. 78-79).
North Penn also explained why it is in the process of abandoning
and plugging a large number of its natural gas wells. This was done,
explained North Penn, pursuant to an order and agreement with the
Department of Environmental Protection dated March 27, 1996. North Penn is,
thereby, required to plug approximately 24 old, non-productive wells per
year until a total of 342 wells have been plugged. The wells are being
plugged in order for North Penn to comply with applicable environmental
regulations. (St. JJH-2, pp. 12-13).
In summary, the Applicants stated that "whatever claims Mr.
Stephens may have against North Penn will not be prejudiced by the merger.
Mr. Stephens will still be able to bring any action that is in his opinion
appropriate against North Penn following the merger." (I.D., p. 24, quoting
Applicants' Main Brief)
APPLICANTS' EXCEPTION NO. 1
In Exception No. 1, Applicants state "the ALJ, Sua Sponte,
Concluded Incorrectly in Dicta that Landowners' Retention of a Portion of
Their own Natural Gas, Produced by Lessee Utilities Pursuant to a Natural
Gas Lease, Is Utility Service for Which Tariff Rates Must Be Imposed."
The above-cited exception is related to the ALJ's consideration
of the Protest of Mr. Stephens. Specifically, at note 14 of page 23 of the
Initial Decision, the ALJ stated:
Although not cited by Applicants in their said brief, there is a
principle of law which states that a public utility must charge
for its product and services that which is set forth in its
approved tariff, even though it had previously agreed to supply
same "free of charge" in a prior contract between the public
utility and its ratepayer. See Brockway Glass Company v. Pa.
-----------------------------
P.U.C., 63 Pa Cmwlth 238, 437 A.2d 1067 (1981); Delph v. Pa.
------ ------------
P.U.C., 46 Pa. Cmwlth 552, 406 A.2d 1209 ((1979); LaPenna v.
------ ----------
Keystone Water Co.- Bangor District, Commission Order entered
-----------------------------------
November 3, 1982 at C-822936 (which adopted the Initial Decision
of the ALJ); and Kearney v. Pa. American Water Company,
-------------------------------------
Commission Order entered June 1, 1995 (which adopted the Initial
Decision of the ALJ).
The Applicants note the issue of whether Mr. Stephens' retention
of his gas for "free" under the old natural gas lease was utility service
was not raised by any party and was not addressed in the evidence.
(Applicants Exc., p.4). However, the Applicants are concerned that the
presiding ALJ misunderstood the nature of the relationship between the
landowner and North Penn under the natural gas lease. (Exc., p.6). As a
result, argues Applicants, the cases relied upon by the presiding ALJ are
cases which involved attempts to vary rates for electric utility service
from the rates specified in the utilities' tariffs. Therefore, they argue,
these cases have no application to North Penn's gas leases under which
landowners retain their own natural gas. (Id.).
---
Applicants cite Pa. PUC v. T.W. Phillips Gas & Oil Company, 19
Pa. P.U.C. 22 (1938), and Kepple v. Appollo Gas Co., Docket No. C-00934744
(Order entered July 25, 1994), for the proposition that "free gas"
provisions which are found in North Penn's leases are widely used and a
determination by this Commission that the retention by the landowners of
their own gas constitutes utility service would, effectively, revise
numerous gas leases across large portions of Pennsylvania involving many
landowners and natural gas companies. (Exc., pp. 6-7).
ANALYSIS
On consideration of the Applicant's Exception No. 1, we shall
grant said Exception only to the extent that the statement of the presiding
ALJ is mere dicta, is not material to disposition of the issues relating to
our approval of the proposed merger herein, and has no record support.
In Appollo Gas Co. v. Fred A. Heilman, et al., Docket No. C-
00924405 (Order entered March 10, 1994), we extensively discussed our
jurisdiction over "free gas" lease provisions. Further, in Kepple, we
discussed the doctrine of "wasteful consumption." Under this doctrine, a
utility could declare gas reserved for the landowners' use wasteful and,
therefore, impose a charge. Otherwise, gas which had not been devoted to
the public and would not have any potential for discrimination, is gas over
which the Commission would not exercise jurisdiction.
Such determinations are not material to the proceeding, and are
not supported by evidence of record. Therefore, we shall grant the
Exception of Applicants and strike this portion of the discussion of the
ALJ.
B. APPLICANTS' EXCEPTION NO. 2 TO ORDERING PARAGRAPH NO. 4
The Applicants object to Ordering Paragraph No. 4 of the Initial
Decision which states:
That all Orders previously issued by the Commission or by any
other governmental agency which impose past or present
liabilities or penalties upon any of the parties to the
Transaction shall be satisfied prior to the issuance of
certificates of public convenience.
(I.D., p. 39).
The Applicants argue that this paragraph is overly broad and
unsupported by the record evidence. The Applicants question whether the
phrase "other governmental agencies" as utilized by the ALJ in this
ordering paragraph would include local highway and building inspectors, the
Internal Revenue Service, other state and local taxing authorities, the
Department of Environmental Protection, etc. According to the Applicants,
no evidence was presented suggesting that the Applicants might have
unsatisfied penalties or liabilities from any other governmental agency.
The Applicants claim that because the utilities involved with the instant
Application are fit, the instant Application should be approved,
irrespective of whether the utilities have an unresolved controversy with a
governmental agency.
The Applicants also question how Ordering Paragraph No. 4, is to
be interpreted and applied. The Applicants point out that that PFG and North
Penn have entered into a consent order which contains a compliance schedule
for the remediation of numerous manufactured gas plants sites and for
plugging of numerous abandoned natural gas wells. The Applicants maintain
while PFG and North Penn have complied with the schedule of the consent
order thus far, it cannot be said that they have satisfied the consent
order because much of the remediation work is to be done in the future in
accordance with the consent order.
The Applicants contend that Ordering Paragraph No. 4 is
inappropriate because the Commission lacks statutory authority to act a
collection agent for other governmental agencies. The Applicants argue the
ordering paragraph would not change its obligations to other governmental
agencies because the requirement to satisfy any penalties or liabilities,
if any, with other governmental agencies would stand independently of the
Commission's final resolution of this proceeding.
The Applicants conclude that Ordering Paragraph No. 4, is
inconsistent with Commission practice. The Applicants urge the Commission
to strike the paragraph from the final order in this proceeding or in the
alternative, to delete any references to any "governmental agency."
(Exceptions, p. 8).
ANALYSIS
We note that in Finding of Fact No. 12, the ALJ found that
pursuant to an Order and Agreement with the Department of Environmental
Protection dated March 27, 1996, North Penn is required to plug
approximately 24 old, non-productive wells per year until a total of 342
wells have been plugged. (I.D., p. 14). However, there is no mention in the
Initial Decision of any record evidence indicating that North Penn or any
other of the Applicants have outstanding liabilities or penalties with any
other governmental agency which may impact upon the approval of this
Application. We also note that this Application was published in newspapers
of general circulation in each of the Applicants' service territories as
well as in the Pennsylvania Bulletin at 27 Pa. Bulletin No. 37, p. 4799
----------------------
(September 13, 1997). The record indicates that no governmental agency
filed a protest or moved to intervene in this proceeding. But for the
protest filed by Wayne T. Stephens dismissed by the ALJ, this Application
was largely unopposed.
The light of the record evidence as presented in this proceeding,
we find that the reference to "any other governmental agency" in Ordering
Paragraph No. 4, is overly broad and should be stricken. Accordingly, we
will grant the Applicants' Exception No. 2, in part.
C. THE PUBLIC INTEREST STANDARDS
On consideration of the record, the ALJ concluded that the
applicants are financially and technically fit. The individual,
publicly-regulated entities, PP&L, PFG and North Penn, will continue to
provide services as they do presently in their present service territories
to their present customers.
We note that the same legal entities will continue to provide
regulated service pursuant to their same Commission-approved tariffs,
currently on file.
We further note that consistent with the case City of York, et
al. v. Pa. PUC, 449 Pa. 136, 295 A. 2d 825 (1972), a merger must be approved
upon a demonstration of a net benefit to the public. We conclude that the
merger will produce financial savings, result in operational efficiencies,
reduce cost of corporate functions, and enhance opportunities for efficient
fuel procurement.
We further conclude that the merger will not have an
anticompetitive or discriminatory effect. 66 Pa. C.S. section 2811(e)(1); (2).
CONCLUSION
Our review of the proposed application leads us to conclude that
the proposed merger is necessary or proper for the service, accommodation,
convenience, or safety of the public, and that the Application should be
approved as in the public interest; THEREFORE,
IT IS ORDERED:
1. That the Joint Application of PP&L, Inc., PFG Gas, Inc. and
North Penn Gas Company filed on August 7, 1997, is, hereby, approved
2. That the Exceptions of the Applicants are granted, in part,
consistent with this Opinion and Order.
3. That the Initial Decision of Administrative Law Judge Richard
M. Lovenwirth issued May 13, 1998, is adopted, as modified, consistent with
this Opinion and Order.
BY THE COMMISSION,
/s/ James J. McNulty
James J. McNulty
Secretary
(SEAL)
ORDER ADOPTED: July 23, 1998
ORDER ENTERED: July 24, 1998
[STATE OF MARYLAND LOGO]
COMMISSIONERS BRYAN G. MOORHOUSE
-------- GENERAL COUNSEL
H. RUSSELL FRISBY, JR. DANIEL P. GAHAGAN
CHAIRMAN EXECUTIVE SECRETARY
CLAUDE M. LIGON GREGORY V. CARMEAN
E. MASON HENDRICKSON EXECUTIVE DIRECTOR
SUSANNE BROGAN
GERALD L. THORPE
PUBLIC SERVICE COMMISSION
WILLIAM DONALD SCHAEFER TOWER
6 ST. PAUL STREET
BALTIMORE, MARYLAND 21202-6806
(410) 767-8000
FAX NUMBER (410) 333-6495
#17,9/3/97AM;ML#58120,S-315
September 3, 1997
Thomas P. Perkins, III
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
Dear Mr. Perkins:
This is to advise you that the Commission has reviewed the August 1,
1997 filing by PFG Gas, Inc. regarding the Agreement and Plan of Merger by
and among Penn Fuel Gas, Inc., PP&L Resources, Inc. and Keystone Merger
Corp.
After considering this matter at the September 3, 1997 Administrative
Meeting, the Commission noted the transaction and retained authority to
institute proceedings if and when appropriate, but declined to do so at
this time.
By Direction of the Commission,
/s/ Daniel P. Gahagan
-------------------------------
Daniel P. Gahagan
Executive Secretary
jrb
Exhibit F-1
August 13, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Application of PP&L Resources, Inc. on
Form U-1 under the Public Utility Holding
Company Act of 1935 (File No. 70-9165)
Ladies and Gentleman:
I am Senior Counsel of PP&L, Inc., a direct subsidiary of PP&L
Resources, Inc. (the "Company"), and, as such, am familiar with the
Company's affairs, including the proposed transaction (as defined below). I
am providing this opinion to the Securities and Exchange Commission (the
"Commission") in connection with the filing with the Commission of the
Application on Form U-1 (File No. 70-9165) (the "Application") of the
Company under the Public Utility Holding Company Act of 1935, as amended
(the "Act"). The Application requests that the Commission issue an order
authorizing the acquisition by the Company of all of the issued and
outstanding shares of common stock and preferred stock of Penn Fuel Gas,
Inc. ("Penn Fuel"), a Pennsylvania corporation and an exempt intrastate
holding company under the Act (the "Transaction"). Penn Fuel is the parent
holding company of PFG Gas, Inc., 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, which provides regulated
natural gas service in northwestern and north central Pennsylvania.
In connection with this opinion, I have examined such corporate
records, certificates, and other documents as I have considered relevant
and necessary as a basis for the opinions expressed in this letter.
The opinions expressed below with respect to the Transaction are
subject to and rely upon the following assumptions and conditions:
a. The Transaction shall have been duly authorized and approved,
to the extent required by the governing corporate documents and applicable
state laws, by the shareholders of the Company and Penn Fuel.
b. All required approvals, authorizations, consents,
certificates, rulings and orders of, and all filings and registrations
with, all applicable federal and state commissions and regulatory
authorities with respect to the Transaction shall have been obtained or
made, as the case may be, and shall have become final and unconditional in
all respects and shall remain in effect (including the approval and
authorization of the Commission under the Act) and the Transaction shall
have been accomplished in accordance with all such approvals,
authorizations, consents, certificates, orders, filings and registrations.
c. The Commission shall have duly entered an appropriate order or
orders with respect to the Transaction granting and permitting the
Application to become effective under the Act and the rules and regulations
thereunder.
d. The Registration Statement of the Company on Form S-4, as
amended to date (File No. 33-33565), filed with the Commission in
connection with the Transaction on August 13, 1997, amended on September 4,
1997, and declared effective by the Commission on September 5, 1997, shall
remain effective pursuant to the Securities Act of 1933, as amended; no
stop order shall have been entered with respect thereto.
e. All corporate formalities required by the laws of the
Commonwealth of Pennsylvania for the consummation of the Transaction shall
have been taken; and the Transaction shall have become effective in
accordance with the laws of the Commonwealth of Pennsylvania.
f. The parties shall have obtained all consents, waivers and
releases, if any, required for the Transaction under all applicable
governing corporate documents, contracts, agreements, debt instruments,
indentures, franchises, licenses and permits.
g. The representations and warranties of Penn Fuel concerning the
corporate organization and existence of Penn Fuel set forth in the
Agreement and Plan of Merger By and Among PP&L Resources, Inc., Keystone
Merger Corp. and Penn Fuel Gas, Inc. dated June 26, 1997 ("Agreement and
Plan of Merger") are true and correct as of the date hereof and Penn Fuel
has complied with all applicable covenants and conditions set forth in the
Agreement and Plan of Merger.
Based on the foregoing, and subject to the assumptions and
conditions set forth herein, I am of the opinion that:
1. All laws of the Commonwealth of Pennsylvania applicable to the
Transaction as described in the Application will have been complied with.
2. The Company and Penn Fuel are each a corporation validly
organized and duly existing under the laws of the Commonwealth of
Pennsylvania.
3. The shares of Company common stock to be issued in conjunction
with the Transaction will be validly issued, fully paid and nonassessable,
and the holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the Articles of Incorporation of the
Company.
4. The shares of Penn Fuel common and preferred stock to be
acquired by the Company in the Transaction may be legally acquired by the
Company.
5. The consummation of the Transaction will not violate the legal
rights of the holders of any securities issued by the Company, or any
associate company thereof.
This opinion is being delivered solely for the benefit of the
person to whom it is addressed; accordingly, it may not be utilized by any
other person or for any other purpose without my prior written consent. I
hereby consent to the use of this opinion as an exhibit to the Application.
Very truly yours,
/s/ Michael A. McGrail
----------------------
Michael A. McGrail
VENABLE, BAETJER AND HOWARD, LLP
Including professional corporations OFFICES IN
1800 Mercantile Bank & Trust Building MARYLAND
Two Hopkins Plaza WASHINGTON, D.C.
Baltimore, Maryland 21201-2978 VIRGINIA
(410) 244-7400, Fax (410) 244-7742
VENABLE Thomas P. Perkins, III P.C.
ATTORNEYS AT LAW (410) 244-7510
August 6, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Re: SEC File No. 70-9165
Application or Declaration Under the Public Utility
Holding Company Act of 1935 of PP&L Resources, Inc.
---------------------------------------------------
Ladies and Gentlemen:
Attached hereto is a copy of the ruling ("Ruling") dated
September 3, 1997, issued at the direction of the Maryland Public Services
Commission (the "Maryland Commission"). The Maryland Commission's Ruling
was based upon the joint request of PP&L Resources, Inc., Keystone Merger
Corp., Penn Fuel Gas, Inc. and PFG Gas, Inc., requesting that the Maryland
Commission not exercise jurisdiction in connection with the Agreement and
Plan of Merger dated as of June 26, 1997 by and among PP&L Resources, Inc.,
Keystone Merger Corp. and Penn Fuel Gas, Inc. (the "Agreement"). The
undersigned appeared as counsel for PP&L Resources, Inc. at the hearing
held before the Maryland commissino on September 3, 1997. As set forth in
the Ruling, the Maryland Commission declined to exercise jurisdiction on
the grounds that the Agreement does not materially affect the franchise or
rights of PFG Gas, Inc. in Maryland, within the meaning of Section 24(b)(1)
of Article 78 of the Annotated Code of Maryland.
In the eleven months since the issuance of the Ruling, the
Maryland Commission has not taken any further action in connection with
this matter. The "retained authority to institute proceedings" referenced
in the Ruling is standard language generally included by the Maryland
Commission in similar rulings to reserve its right to institute
proceedings if, in any particular case, there is a material change in the
facts in this matter with regard to the Maryland aspects of the Agreement.
Based on extensive experience in appearing before the Maryland
Commission, it is my considered opinion that the Agreement can be
consummated without any likelihood that the Maryland Commission will
institute any proceedings in connection therewith.
Very truly yours,
Venable, Baetjer and Howard, LLP
By: /s/ Thomas P. Perkins, III
--------------------------------
Thomas P. Perkins, III, P.C.
BAODOCSI\0061107.01
<PAGE>
[STATE OF MARYLAND LOGO]
COMMISSIONERS BRYAN G. MOORHOUSE
-------- GENERAL COUNSEL
H. RUSSELL FRISBY, JR. DANIEL P. GAHAGAN
CHAIRMAN EXECUTIVE SECRETARY
CLAUDE M. LIGON GREGORY V. CARMEAN
E. MASON HENDRICKSON EXECUTIVE DIRECTOR
SUSANNE BROGAN
GERALD L. THORPE
PUBLIC SERVICE COMMISSION
WILLIAM DONALD SCHAEFER TOWER
6 ST. PAUL STREET
BALTIMORE, MARYLAND 21202-6806
(410) 767-8000
FAX NUMBER (410) 333-6495
#17,9/3/97AM;ML#58120,S-315
September 3, 1997
Thomas P. Perkins, III
Venable, Baetjer and Howard, LLP
1800 Mercantile Bank & Trust Building
Two Hopkins Plaza
Baltimore, Maryland 21201
Dear Mr. Perkins:
This is to advise you that the Commission has reviewed the August 1,
1997 filing by PFG Gas, Inc. regarding the Agreement and Plan of Merger by
and among Penn Fuel Gas, Inc., PP&L Resources, Inc. and Keystone Merger
Corp.
After considering this matter at the September 3, 1997 Administrative
Meeting, the Commission noted the transaction and retained authority to
institute proceedings if and when appropriate, but declined to do so at
this time.
By Direction of the Commission,
/s/ Daniel P. Gahagan
-------------------------------
Daniel P. Gahagan
Executive Secretary
jrb
PENN FUEL GAS, INC.
1997 Annual Report
PENN FUEL GAS, INC. AND SUBSIDIARIES
Table of Contents
- ---------------------------------------------------------------------------
PAGE
Letter to Shareholders...................................................1
Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................5
Independent Auditors' Report............................................13
Financial Statements:
Consolidated Balance Sheets - December 31, 1997 and 1996............14
Consolidated Statements of Income, Years ended
December 31, 1997, 1996, and 1995...............................16
Consolidated Statements of Retained Earnings, Years ended
December 31, 1997, 1996, and 1995...............................17
Consolidated Statements of Cash Flows, Years ended
December 31, 1997, 1996, and 1995...............................18
Notes to Consolidated Financial Statements - December 31, 1997,
1996, and 1995......................................................20
Selected Financial Data.................................................38
Statistical Review.....................................................39
Corporate Information...................................................42
PENN FUEL GAS, INC. AND SUBSIDIARIES
To our Shareholders
- --------------------------------------------------------------------------
Penn Fuel Gas, Inc. had a momentous year in 1997. We enjoyed near record
earnings from our gas utility and propane businesses and increased the
dividend to our common shareholders. Our customer growth continued at a
pace above the national average and we extended our gas utility service
areas. Most notably we entered, at mid-year, a merger agreement with PP&L
Resources, Inc. that presents an exciting opportunity for growth and
participation in an expanding energy services enterprise.
As we celebrate our successes and anticipate the completion of the merger
we also note with sadness the end of an era. John H. Ware 3rd, our
Company's founder and leader for much of its history, passed away July
29, 1997.
FINANCIAL HIGHLIGHTS
Penn Fuel's net income available to common shareholders totaled $6.187
million or $8.62 per share in 1997 compared to $6.389 million or $8.90 per
share in 1996. The 1997 results reflected the expensing of certain legal
and other costs associated with the planned merger with PP&L. Without these
nonrecurring charges Penn Fuel's 1997 net income from its business
operations would have been approximately $6.72 million or $9.37 per share.
In February 1997 the Board of Directors approved a 20% increase in the
Company's annual common dividend to $2.88 per share. In February 1998 the
Board increased the dividend by an additional 20% to $3.46 per year. This
most recent increase marks the fourth consecutive annual 20% increase in
Penn Fuel's return to its common shareholders.
Penn Fuel's capital expenditure commitment to system improvements and
expansions totaled $13.7 million in 1997, a record for the Company. Over
$4.0 million of this investment was dedicated to servicing new
customers and business opportunities.
EXPANDED AND IMPROVED OPERATIONS
During 1997 Penn Fuel continued its program of upgrading antiquated
segments of its gas utility distribution and transmission system. At the
same time, the Company complemented these replacement projects with
marketing programs to stimulate new gas applications and customer additions
along current pipeline routings.
The Company worked closely with commercial developers and prospective gas
customers to extend its natural gas systems and attract new customers.
Approximately one thousand customers were added to Penn Fuel's utility
service in 1997. A number of these were large volume industrial and
commercial users which contribute to the economic health and growth of Penn
Fuel serviced communities.
Penn Fuel received approvals for two significant service territory
expansions in 1997 and introduced natural gas service to major customers in
each area. In south central Pennsylvania, a commitment to convert to
natural gas by a large and expanding JLG industries complex will introduce
gas into the Boro of McConnellsburg for the first time. A second conversion
by Quaker State Farms similarly will provide natural gas service to a new
segment of Schuylkill County Pennsylvania.
In the Company's North Penn Gas utility, an engineering project to expand
the capacity of the Meeker Storage Field was completed and implemented in
1997. This project, which required only minimal investment, increased the
Company's valuable storage capability by approximately 5% or 500 thousand
dekatherrns.
IMPROVED SERVICE AND CUSTOMER CHOICE
Penn Fuel has undertaken significant initiatives in 1997 to promote
additional gas service expansions and to make choice of marketer/natural
gas supplier available to our customers. A Company supported trade ally
network of contractors and suppliers will be enhanced to provide sales and
service support and promotion of natural gas throughout our service areas.
These resources will supplement Penn Fuel's marketing applications and
staffing.
Customer choice of energy supplier has been available for some years for
large volume industrial and commercial natural gas customers. In 1997
choice also began to become available to electric customers of all sizes in
Pennsylvania as a result of "Customer Choice" legislation. Inevitably this
supplier choice will be extended to small volume natural gas customers,
including residential. Penn Fuel has implemented a variety of measures to
prepare for this transition which is likely to occur before the millennium.
Penn Fuel initiated, and in early 1998 received Pennsylvania Public Utility
Commission approval for, a proposal to make supplier choice available to
all our commercial and small industrial customers - some 9,000 in number.
Penn Fuel will continue to provide the delivery service for this gas which
customers will purchase directly from gas marketers. Since the Company
currently earns no margin on gas purchased on behalf of its customers, this
choice or conversion by customers does not affect Penn Fuel's operating
profit. The extension of choice to commercial customers will provide us and
our customers with valuable operating experience in an unbundled service
environment. We have also taken additional steps to prepare for full retail
unbundling by beginning to upgrade our utility customer service and billing
system. Penn Fuel has also been an active participant in a collaborative
effort by business, consumer and regulatory interests to develop the
"ground rules" or legislation under which full residential natural gas
customer choice can be accomplished in Pennsylvania.
THE MERGER
Following a thorough assessment by the Board of Directors of the Company's
strategic direction, Penn Fuel entered a merger agreement with PP&L
Resources on June 27, 1997. We look forward with anticipation to the
closing of this merger which will be attractive for our shareholders,
employees and customers. The merger will be accomplished through a tax-free
exchange of Penn Fuel common stock for between 6.968 and 8.516 shares of
PP&L Resources common stock, as described in the Merger Agreement and
Prospectus which has been provided to Penn Fuel shareholders. Penn Fuel's
shareholders approved the merger in October 1997 and several required
regulatory approval steps have been completed. A merger approval
application was submitted to the Pennsylvania PUC in August 1997 and
currently is moving through the PUC review process. We anticipate that a
PUC decision in our case and a final review by the Securities and Exchange
Commission will be conducted so that the merger can be completed sometime
in the summer of 1998. We look forward to participating in the growth of
PP&L and its energy business.
WE REMEMBER, WITH GRATITUDE
Penn Fuel Gas lost a major influence on its history and direction with the
death of John H. Ware 3rd on July 29, 1997. Mr. Ware founded Penn Fuel in
l944 and for forty-five years lead the Company's growth as President and
Chairman of the Board of Directors. In addition to his recognition as a
natural gas utility and propane industry leader, Mr. Ware served as
Chairman of the American Water Works, the largest investor owned water
utility in the U.S. He also was highly regarded as a philanthropist and a
civic and political leader. Mr. Ware served as a member of the Pennsylvania
Senate from 1961 to 1971 and was a member of the U.S. House of
Representatives from 1971 to 1975. We at Penn Fuel can attribute much of
our recent success to Mr. Ware's insightful leadership and the business
foundation he built over the years.
We remember also the contribution of William F. Ryan who passed away
December 27, 1997. Bill served with distinction as a member of Penn Fuel's
Board of Directors from 1991 through 1996 - a period of significant change
and upgrading of the Company's capabilities.
In a different light, as we anticipate the completion of our merger with
PP&L, we would like to acknowledge and express appreciation for the
dedication of our Board of Directors who have, on your behalf, provided
direction that has led to our business achievements. We recognize also the
continued dedication of Penn Fuel's employees in focusing on your Company's
businesses while at the same time planning for the transition to a merged
Company with PP&L.
The year 1998 and the completion of our merger will bring the end of a
proud era as an independent company for Penn Fuel. We can look back for a
brief moment with pride at the accomplishments that have been fashioned
with your support and the commitment of Penn Fuel's employees. We are
enthusiastic about the future, however, and the new opportunities to build
shareholder value through energy customer choice, expansion of unbundled
services, and growth with PP&L.
We thank you for your continued confidence in Penn Fuel.
/s/ Paul W. Ware /s/ Terry H. Hunt
Paul W. Ware Terry H. Hunt
Chairman President & Chief
Executive Officer
PENN FUEL GAS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
OVERVIEW
Net income and basic net income per common share were $6,187,000 and $8.62,
respectively, for 1997 compared to $6,389,000 and $8.90 for 1996 and
$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.
1997 COMPARED WITH 1996
The change in net income in 1997 from 1996 represents a decrease of
$202,000 (3.2%). Utility operating revenues less cost of gas (gross utility
margin) increased $4,620,000 (8.5%) in 1997, the first full year that new
rates for utility services approved by the Pennsylvania Public Utility
Commission (PAPUC) in October 1996 were in effect. Gross margins from
liquefied petroleum (LP) and merchandise sales decreased $103,000 (1.5%)
and $92,000 (40.4%), respectively.
Utility throughput in 1997 was 479,000 Dth (1.8%) below 1996. Deliveries to
sales customers decreased 1,637,000 Dth (11.6%) while throughput to
transportation customers increased 1,158,000 Dth (9.1%). Based on degree
days measured by the Company 1997 was 4.7% warmer than normal and 1996 was
2.7% colder than normal. Sales customers typically use a significant
portion of the natural gas they purchase for heating purposes during the
winter months, therefore, it is expected their usage would be lower in
warmer than normal periods. In addition to the impact of warmer than normal
weather in 1997 on sales throughput, industrial and commercial customers
increasingly are choosing transportation service versus sales service. In
1997 the number of transportation customers increased from 124 to 176 and
the number of industrial sales customers decreased from 302 to 265. The
Company added an educational institution as a new transportation customer
in 1997 that used in excess of 200,000 Dth during the year. Generally, the
gross margin the Company earns on sales and transportation throughput is
the same for the same type of customer.
Sales to LP customers declined to 788,000 Dth in 1997 from 841,000 Dth in
1996. Warmer than normal weather and a lower customer count contributed to
the decrease in sales. The Company's customer count decreased during the
year to 27,549 from 28,021 as competition for customers increased.
During 1997 the Company determined that its needs for a new corporate
headquarters building had changed after announcing its proposed merger with
PP&L Resources, Inc. The project to construct the new building was canceled
and related costs totaling $411,000 that had been deferred were charged to
expense. The after tax effect of the charge was $244,000 ($.34 per share).
Deferred and current income tax benefits resulting from a tax accounting
change approved by the Internal Revenue Service (IRS) in 1996 amounted to
$273,000 ($.38 per share) in 1997 compared to $868,000 ($1.21 per share) in
1996.
1996 COMPARED WITH 1995
The increase in net income in 1996 compared with 1995 is the result of
several factors. Gross utility margin increased $4,406,000 (8.8%) in 1996.
The full benefit of a rate increase approved by the PAPUC 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 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 IRS 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
Operating revenues were $119,213,000 in 1997, $113,507,000 in 1996, and
$105,647,000 in 1995. Revenues from utility operations increased $6,676,000
in 1997 while revenues from LP and merchandise decreased $690,000 and
$280,000, respectively. The net change in 1997 total operating revenues
compared with 1996 is an increase of $5,706,000.
In October 1996 the PAPUC approved increases in the Company's rates for
utility services that were calculated to produce additional annual
operating revenues of $6,725,000. 1997 was the first full calendar year
these new rates were in effect. The cost of gas sold to utility customers
in 1997 was $2,056,000 higher than the cost of such gas in 1996. Cost of
gas is recovered from customers and included in utility revenues.
Utility operations accounted for $6,706,000 of the $7,860,000 increase in
1996 revenues. 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 PAPUC. 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 the rate
increase approved by the PAPUC in October 1996.
LP operating revenues of $11,604,000 in 1997 were $690,000 less than 1996
revenues. The lower revenues follow a 53,000 Dth decrease in 1997 sales
volumes from 1996. Warmer than normal weather and increased competition
primarily from new entrants into the business were the primary causes of
the reduced LP sales. Gross margin declined slightly (1.5%) to $6,868,000
in 1997.
LP operating revenues increased $1,285,000 in 1996 from $11,009,000 in 1995
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
Other operating, administrative and general, and maintenance expenses
increased $2,235,000 (6.7%) in 1997 versus 1996. During 1997 the Company
continued its participation in proceedings concerning an application by
another company to develop salt dome storage in the same area as the
Company's existing underground storage facilities. Legal expenses
associated with this matter were higher in 1997 than 1996. The Company's
1997 legal and consulting expenses also increased from 1996 as a result
work related to its proposed merger with PP&L Resources, Inc.
In 1997 the Company increased its accrued liability related to manufactured
gas plant sites where costs are not recovered through the ratemaking
process. The increase amounted to $287,000 and was recognized as an
operating expense in 1997. Pension expense increased $97,000 in 1997.
During 1997 an increasing number of municipalities where the Company has
natural gas distribution facilities installed underground began adopting
more stringent restoration requirements. Compliance with these new policies
has increased the cost of maintenance projects that involve road
excavation.
Other operating, administrative and general, and maintenance expenses
increased $ 1,146,000 (3.5%) in 1996 compared with 1995. 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
continued 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 1997 and 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 (FERC) 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
Depreciation and amortization expense increased $1,643,000 (29.7%) from
1995 to 1997 due to investment in property, plant, and equipment, and
higher amortization of capitalized environmental costs.
INCOME TAX EXPENSE
Current and deferred income tax expense in 1997 and 1996 include the impact
of a change in the Company's tax accounting method for cost of removal. In
1996 the Company received approval from the 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 rata 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. The comparable deferred and current tax benefits recognized in
1997 were $273,000.
TAXES OTHER THAN INCOME
Taxes other than income include taxes based on payroll and various state
and local taxes. Beginning with 1995 utility revenues subject to gross
receipts tax have been higher in each succeeding year and there has been a
corresponding increase in taxes other than income. Further, the Company's
payroll has increased each year resulting in higher payroll taxes.
INTEREST EXPENSE
Interest expense increased $126,000(2.9%) in 1997. In addition to
reducing long-term debt by making the sinking fund payments required by the
terms of the notes, the Company exercised its option to prepay the
remaining balance of the 9.2% notes. For the year, interest related to
long-term debt decreased by more than interest incurred through short bank
borrowings increased. Interest expense related to the recovery of purchased
gas and transition costs from customers was lower in 1997 than 1996 because
the Company was in an undercollected position for most of the year. The
Company does not earn interest or incur interest when it has underrecovered
purchased gas related costs. As line of credit borrowings increased in
1997, the Company's temporary cash investments were reduced from 1996 and
interest income declined.
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 overcollection 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
After the announcement of its proposed merger with PP&L Resources, Inc.,
the Company concluded its needs had changed and canceled a new office
building project initiated in 1995. Costs totaling $411,000 that were
incurred in connection with the project but that had been deferred were
charged to expense in 1997. The land acquired for the project is being
offered for sale. Other expense (income) in 1996 includes $193,000 of
pretax gain on the sale of real estate. In 1995 certain assets of an LP
subsidiary located in Delaware were sold and a pretax 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 businesses are both seasonal in nature and
weather sensitive. The heating season of November through March is the
Company's highest period of positive 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
funds 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, 1997 and December 31, 1996, the
Company had outstanding line of credit borrowings of $20,475,000 and
$7,500,000, respectively. The Company expects to negotiate bank lines of
credit in 1998 at levels appropriate to meet its requirements. In 1997 the
Company and its subsidiaries have unsecured committed and uncommitted bank
lines of credit that in aggregate total $22,500,000 and $45,000,000,
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; $2.88 on
March 7, 1997; and to $3.44 on February 24, 1998.
The Company's 1998 capital improvement and environmental budgets total
$16,485,000. In 1997 capital and environmental expenditures amounted to
$15,633,000.
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, 1997, the Company had 2,615,000 Dth of natural gas
in inventory and 60,000 Dth of LP. At December 31, 1996, natural gas
inventory totaled 3,305,000 Dth and LP totaled 60,000 Dth.
The storage gas balance at December 31, 1997 reflects the results of the
most recent test performed at the Company's largest underground storage
field which indicate there is a difference between the amount of gas in the
field and the Company's inventory records. Pending further analysis of the
test data by the Company and the operator of the storage field, the Company
has reclassified 672,000 Dth of gas with a cost of $527,000 from current
assets - inventories gas to deferred debits - other. The amount
reclassified represents the Company's proportionate share of the parties'
preliminary estimate of the difference. Based on its prior experiences, the
Company expects it would be permitted by the PAPUC to recover a difference
between its recorded inventory and the amount of gas determined by its
joint studies with the operator of the field through rates charged for its
natural gas utility services. The Company's 1998 gas purchase program will
provide for a sufficient level of storage injections to meet its
requirements for the 1998-1999 heating season.
Based on tests it conducted during 1997 the Company concluded one of its
storage fields was capable of providing additional storage space. The
Company has successfully marketed this additional space for the 1998-1999
storage season.
MERGER AGREEMENT
On June 27, 1997, the Company and PP&L Resources, Inc. (PP&L) announced
they had signed a definitive agreement under which PP&L will acquire the
Company. Under the terms of the agreement, upon consummation of the merger,
which is subject to the receipt of various regulatory approvals, common
stockholders of the Company will receive, subject to certain adjustments,
between 6.968 and 8.516 shares of PP&L common stock for each share of the
Company that they own. Penn Fuel's shareholders approved the merger in
October 1997.
The Company's preferred stock may be redeemed in accordance with its terms
upon written approval of holders of at least 66 2/3% of the preferred
shares outstanding, at a redemption price of $15 per share, plus accrued
and unpaid dividends. Owners of more than 93.5% of the total number of the
preferred shares outstanding as of July 31, 1997 have indicated their
intent to provide the shareholder approval required for such redemption.
Each share of preferred stock outstanding that is not redeemed in
accordance with its terms will be converted into the right to receive
between 0.682 and 0.833 shares of PP&L common stock, subject to certain
adjustments.
Costs related to the proposed merger that are contingent upon its
consummation have not been recognized in the Company's financial
statements. If incurred, the aggregate amount of such costs is expected to
be material to the Company's results of operations.
GAS UTILITY INDUSTRY RESTRUCTURING
The restructuring of the natural gas industry to date has largely affected
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, such
as the Company's utility subsidiaries.
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 l, 1999. Certain aspects of
the proposed legislation may change as the result of legislative hearings
and collaborative negotiations among industry participants directed by the
Chairman of the PAPUC, but it is expected that some measure of customer
choice will be provided to all users of natural gas in Pennsylvania. 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 distribution
of natural gas regulated by the PAPUC. Legislation providing customer
choice to users of electricity was enacted in Pennsylvania in December
1996.
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. As a result of a Company proposal
approved by the PAPUC on February 27, 1998, unbundled transportation
service availability was expanded to include all industrial and commercial
customers.
YEAR 2000
The Company's principal computer systems are purchased software packages.
Generally, these systems are year 2000 compliant. Where they are not, the
Company either has scheduled the installation of a system upgrade or the
software vendor has assured the Company their software will be made year
2000 compliant in the near future. The Company does not expect the cost of
year 2000 compliance to have a material impact on its financial position.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130). This statement requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company plans to adopt this statement on January l, 1998, as required. The
Company does not have any items of comprehensive income, other than those
presented on its consolidated statements of income, that would require
disclosure and presentation of accumulated balances in the equity section
of the balance sheet.
In June 1997 the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise and Related
Information (SFAS 131). This statement established standards for reporting
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure about
products and services, geographic areas and major customers. The Company
plans to adopt this statement on January l, 1998 as required.
In February 1998 the FASB issued Statement of Financial Accounting
Standards No. 132, Employers' Disclosures About Pensions and Other
Post-retirement Benefits (SFAS 132), which amends FASB Statements No. 87,
88, and 106. The statement revises employers' disclosures about pension and
other post-retirement benefit plans. It does not change the measurement or
recognition of these plans. The statement suggests combined formats for
presentation of pension and other post-retirement benefit disclosures. The
Company plans to adopt this statement on January 1, 1998 as required.
KPMG Peat Marwick LLP
1600 Market Street
Philadelphia, PA 19103 7212
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, 1997 and 1996, and the
related consolidated statements of income, retained earnings, and cash
flows for each of the years in the three-year period ended December 31,
1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31. 1997, 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 post-retirement benefits other than
pensions to adopt the provisions of Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 106, Employers' Accounting
for Post-retirement Benefits Other Than Pensions.
/s/ KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
April 3, 1998, except as to note 7
which is as of April 21, 1998
THIS PAGE LEFT BLANK INTENTIONALLY
<TABLE>
<CAPTION>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
- ----------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization:
Stockholders' equity:
Common, $1 par value; authorized 2,000,000 shares, issued
and outstanding 717,583 shares in 1997 and 1996 $ 718 718
Preferred, no par value; authorized 500,000 shares, issued none -- --
Additional paid-in capital 714 714
Retained earnings 69,433 65,313
- ----------------------------------------------------------------------------------------------------------------------
70,865 66,745
Redeemable preferred stock:
$1.40 cumulative preferred stock; authorized 2,000,000 shares,
issued and outstanding 717,583 shares in 1997 and 1996 10,764 10,764
Long-term debt, less amounts payable within one year 46,429 51,694
- ----------------------------------------------------------------------------------------------------------------------
128,058 129,203
- ----------------------------------------------------------------------------------------------------------------------
Current liabilities:
Notes payable 20,475 7,500
Long-term debt payable within one year 1,235 2,939
Accounts payable 9,135 11,346
Accrued environmental costs 1,815 1,811
Other current and accrued liabilities 5,848 4,554
- ----------------------------------------------------------------------------------------------------------------------
38,508 28,150
- ----------------------------------------------------------------------------------------------------------------------
Deferred credits:
Unamortized investment tax credits 1,914 1,990
Unamortized excess of equity value of subsidiary at
acquisition over cost 431 537
Deferred income taxes 20,858 17,530
Accrued environmental costs 14,092 14,163
Accrued well plugging costs 3,596 3,792
Other 532 1,100
- ----------------------------------------------------------------------------------------------------------------------
41,423 39,112
- ----------------------------------------------------------------------------------------------------------------------
$207,989 196,465
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
(in thousands, except per share information)
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Operating revenue:
<S> <C> <C> <C>
Utility revenue $106,469 99,793 93,087
Liquefied petroleum gas revenue 11,604 12,294 11,009
Merchandise sales 1,140 1,420 1,551
- ---------------------------------------------------------------------------------------------------------
119,213 113,507 105,647
- --------------------------------------------------------------------------------------------------------
Operating revenue deductions:
Cost of gas, utility 47,434 45,378 43,078
Cost of liquefied petroleum gas 4,736 5,323 4,278
Cost of sales, merchandise 1,004 1,192 1,319
Operating, administrative, and general expenses 31,881 30,274 29,235
Maintenance 3,866 3,238 3,131
Depreciation and amortization 7,184 6,246 5,541
Taxes, other than income 7,298 6,788 6,514
Income taxes 3,924 3,741 3,223
- --------------------------------------------------------------------------------------------------------
107,327 102,180 96,319
- --------------------------------------------------------------------------------------------------------
Operating income 11,886 11,327 9,328
- -------------------------------------------------------------------------------------------------------
Other expense (income):
Interest 4,488 4,362 4,731
Other 206 (429) (1,102)
- --------------------------------------------------------------------------------------------------------
4,694 3,933 3,629
- --------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle 7,192 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 7,192 7,394 6,077
Dividend requirement on redeemable preferred stock (1.005) (1,005) (1,005)
- --------------------------------------------------------------------------------------------------------
Net income applicable to common stock $ 6,187 6,389 5,072
- --------------------------------------------------------------------------------------------------------
Basic net income per common share:
Income before cumulative effect of a change in
accounting principle $ 8.62 8.90 6.54
Cumulative effect on prior years (to December 31, 1994)
of change to record unbilled revenue, net of tax -- -- 0.53
- -----------------------------------------------------------------------------------------------------------
Total $ 8.62 8.90 7.07
- -----------------------------------------------------------------------------------------------------------
Diluted net income per common share:
Income before cumulative effect of a change in
accounting principle $ 8.52 8.87 6.52
Cumulative effect on prior years (to December 31. 1994)
of change to record unbilled revenue. net of tax -- -- 0.52
- ------------------------------------------------------------------------------------------------------------
Total $ 8.52 8.87 7.04
- ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Consolidated Statements of Retained Earnings
Years ended December 31, 1997, 1996, and 1995
(in thousands, except per share information)
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 65,313 60,646 57,009
Net income 7,192 7,394 6,077
Dividends:
Redeemable preferred stock ($1.40 in 1997,
1996, and 1995) (1,005) (1,005) (1,005)
Common stock ($2.88 in 1997, $2.40 in 1996,
and $2.00 in 1995) (2,067) (1,722) (1,435)
- -----------------------------------------------------------------------------------------------------------
Balance at end of year $ 69,433 65,313 60,646
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(in thousands)
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $7,192 7,394 6,077
- --------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,184 6,246 5,541
Amortization of extraordinary
property loss -- 38 231
Deferred taxes and investment tax credits 2,342 3,874 1,701
Gain on sale of liquefied petroleum gas
property -- (193) (945)
Changes in assets and liabilities:
Increase in accounts receivable (167) (1,671) (671)
(Increase) decrease in gas inventory 87 (2,255) 3,722
Increase in unrecovered gas
and transition costs (2,905) (3,450) (1,501)
Increase in other inventories (510) (878) (353)
Increase (decrease) in accounts payable
and accrued liabilities (917) 3,881 (1,342)
Increase (decrease) in other
assets/liabilities, net 212 (1,175) (89)
- --------------------------------------------------------------------------------------------------------------------
Total adjustments 5,326 4,417 6,294
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,518 11,811 12,371
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (13,685) (12,561) (13,403)
Proceeds on the sale of liquefied petroleum gas property -- 226 l,379
Other (2,029) (2,514) (2,380)
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,714) (14,849) (14,404)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Principal payments on long-term debt $ (6,969) (4,079) (2,458)
Net increase in notes payable 12,975 7,000 500
Dividends paid:
Preferred (1,005) (1,005) (1,005)
Common (2,067) (1,722) (1,435)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,934 194 (4,398)
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (262) (2,844) (6,431)
Cash and cash equivalents at beginning of year 2,513 5,357 11,788
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,251 2,513 5,357
- ---------------------------------------------------------------------------------------------------------------------
Supplementary disclosures of cash flow information: Cash paid
for the year for:
Interest $ 5,006 4,913 5,326
Income taxes 1,183 1,556 3,178
- ---------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
- ---------------------------------------------------------------------------
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING 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 (PAPUC) and the Maryland
Public Service Commission. Significant accounting practices are
summarized below.
PROPERTY, PLANT, AND EQUIPMENTS
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 1997, 1996, and 1995 were
2.6%, 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 cost of removal
related to 337 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 1997
was 3.1% and 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.
In 1996 the real estate used by a wholly owned subsidiary that
was previously engaged in the sale of LP was sold. The sale
resulted in a gain before income tax of $193,000, which is
reported as other income.
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.
OPERATING UTILITY REVENUES
Revenues from sales and transportation services are recorded based on
meters read. Residential and small commercial customers' meters are
read on a cycle basis throughout each month. 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.
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 inventory of one subsidiary is recorded on the last-in,
first-out (LIFO) method. Approximately $437,000 and $1,899,000
of the Company's gas inventory at December 31, 1997 and 1996,
respectively, was valued using the LIFO method. The estimated
replacement cost exceeded the LIFO inventory cost by
approximately $l,462,000 and $2,004,000 at December 31, 1997
and 1996, respectively. The gas inventory of the other utility
subsidiary is valued at average cost.
The results of the most recent tests performed at the Company's
largest underground storage field indicate there is a difference
between the amount of gas in the field and the Company's
inventory records. Pending further analysis of the test data by
the Company and the operator of the storage field, the Company
has reclassified 672,000 Dth of gas with a cost of $527,000 from
the current assets - inventories gas to deferred debits - other.
The amount reclassified represents the Company's proportionate
share of the parties' preliminary estimate of the difference.
Based on its prior experiences, the Company expects it would be
permitted by the PAPUC to recover a difference between its
recorded inventory and the amount of gas determined by its joint
studies with the operator of the field through rates charged for
its natural gas utility services.
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 PAPUC approved rates charged for its services.
Well plugging 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 GAS COSTS
Unrecovered gas costs represent net changes in gas costs which
will be collected from customers by fuel cost adjustments in the
future. Amounts to be collected 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 decisions
established in regulatory proceedings. In 1996 the Company
received approval from the Internal Revenue Service (IRS) 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.
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 reported during the
period. Actual results could differ from those estimates.
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.
NET INCOME PER COMMON SHARE
The Company has adopted Statement of Financial Accounting
Standards No. 128, Earnings Per Share (FAS 128) in the fourth
quarter of 1997. FAS 128 requires the Company to use methods for
calculating earnings per share that differ from methods used in
prior periods and requires the Company to restate net income per
common share reported in prior periods. The adoption of this
statement had no effect on the results of operations, financial
conditions, or long-term liquidity.
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 the 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.
RECLASSIFICATIONS
Certain reclassifications were made to the 1996 financial statements
to conform with the 1997 presentation.
(2) DEBT
At December 31, 1997, the Company and its subsidiaries have committed
bank lines of credit that in aggregate total $22,500,000, and
uncommitted bank lines of credit that in aggregate total $45,000,000.
At December 31, 1996, the amount of the lines was $12,000,000 and
$24,000,000, respectively. The credit lines, which are unsecured, are
reviewed annually. The Company expects to negotiate bank lines of
credit in 1998 at levels appropriate to meet its requirements.
During 1997 and 1996 the maximum amount borrowed under the lines of
credit at any month end was $21,575,000 and $7,500,000,
respectively. Average monthly borrowings ranged from zero to
$19,536,000 in 1997 and from zero to $6,874,000 in 1996. The weighted
average interest rate on borrowings under the lines of credit at
December 31, 1997 and 1996 was 6.31% and 6.89%, respectively.
Long-term debt at December 31, 1997 and 1996, less amounts payable in
one year, consisted of the following (in thousands):
<TABLE>
<CAPTION>
Annual installments Due date 1997 1996
- ---------------------------------------------------------------------------------------------
Notes payable:
<S> <C> <C> <C> <C> <C>
9.20% $ 1,500 2001 $ -- 3,000
9.59% 750 (commencing 1996) 2005 3,750 5,250
9.64% 375 (commencing 1996) 2010 5,625 6,375
8.70% 833 (commencing 2011) 2023 10,000 10,000
7.51% 1,818 (commencing 2004) 2014 20,000 20,000
6.70% 1,400 (commencing 1999) 2003 7,000 7,000
- ---------------------------------------------------------------------------------------------
46,375 51,625
Capital leases 54 69
- ---------------------------------------------------------------------------------------------
$ 46,429 51, 694
- ---------------------------------------------------------------------------------------------
</TABLE>
The terms of the Company's and a wholly owned subsidiary's 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 ratios, and the payment of
dividends. At December 3l, 1997, the payment of dividends by this
subsidiary was limited to $4,900,000 by the terms of its long-term
debt agreements. The subsidiary's net assets at December 31, 1997
were $32,634,000. Under the most respective provisions, the amount of
consolidated retained earnings available for preferred and common
stock dividends at December 31, 1997 was approximately $ 11,090,000.
In 1997 the Company elected to exercise its option to double the
annual installment payments on the 9.59% and 9.64% notes and to
prepay the balance of the 9.2% notes.
Maturities of long-term notes and capital leases for the next five
years are as: 1998 - $1,235,000; 1999 - $2,579,000; 2000 -
$2,525,000; 2001 - $2,525,000, and 2002 - $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 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 at $15 per share
provided that 66-2/3% of preferred shareholders approve such
redemption. During 1997 the Company did not redeem any preferred
stock.
(4) INCOME TAXES
Income tax expense for 1997, 1996, and 1995 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------
Current:
<S> <C> <C> <C>
Federal $ 1,030 523 1,232
State 402 201 289
----------------------------------------------------------------------------------------
1,432 724 1,521
Deferred 2,568 3,093 1,778
Amortization of deferred investment tax credits (76) (76) (76)
----------------------------------------------------------------------------------------
$ 3,924 3,741 3,223
----------------------------------------------------------------------------------------
</TABLE>
In 1996 the Company received approval from the IRS 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 tax effects of temporary differences between book and tax
accounting that give rise to the deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 consist of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------
Deferred tax assets:
<S> <C> <C>
Unbilled revenues $ 1,467 1,170
Investment tax credit 1,308 1,360
Allowance for doubtful accounts 334 402
Contribution in aid of construction 1,197 1,016
Other 1,156 1,270
-----------------------------------------------------------------------------------
Total gross deferred tax assets 5,462 5,218
Deferred tax liabilities:
Utility plant depreciation 18,897 16,827
Environmental expenditures 2,409 2,198
Change in tax accounting method
for cost of removal 1,120 1,037
Unrecovered gas and transition costs 2,047 291
Other 1,433 1,073
------------------------------------------------------------------------------------
Total gross deferred tax liabilities 25,906 21,426
------------------------------------------------------------------------------------
Net deferred tax liabilities $ 20,444 16,208
------------------------------------------------------------------------------------
</TABLE>
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 l, 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 1997,
1996, and 1995 includes the following components (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 729 809 618
Interest cost 1,640 1,679 1,575
Return on assets (includes insurance
contract settlement) (4,121) (3,734) (4,748)
Net amortization and deferral 1,832 1,229 2,814
----------------------------------------------------------------------------------------
Net pension (income) cost $ 80 (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:
1997 1996 1995
-----------------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.00%
Weighted-average rate of increase in future
compensation levels 5% 5% 5%
-----------------------------------------------------------------------------------------
</TABLE>
The funded status of the pension plan(s) at December 31, 1997 and
1996 is as follows (in thousands):
1997 1996
-----------------------------------------------------------------------
Vested benefit obligation $ 18,396 15,622
Accumulated benefit obligation 19,565 16,619
Additional benefits related to future
compensation levels 4,329 3,947
------------------------------------------------------------------------
Projected benefit obligation 23,894 20,566
Plan assets at fair value (28,154) (24,984)
------------------------------------------------------------------------
(4,260) (4,418)
Unrecognized transition amount 795 958
Unrecognized net gain 4,416 4,385
Unrecognized prior service cost (562) (615)
------------------------------------------------------------------------
Accrued pension cost $ 389 310
------------------------------------------------------------------------
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. Pension plan assets
consist primarily of common stock and fixed income securities.
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
projected benefit obligation for the two nonqualified plans was
$440,000 at December 31,1997 and $433,000 at December 31, 1996. Net
expense re1ated to these plans was $72,000 in 1997, $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 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 PAPUC, which among other things, sought
authorization for the recognition in rates of the cost of PBOPs on an
accrual basis instead of the "pay as you go" basis. On September 27,
1995, the PAPUC 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 PAPUC's
decision. In May 1997 the Commonwealth Court of Pennsylvania affirmed
the PAPUC's decision concerning the Company's recovery of the
$435,000 deferred cost.
The Company has established trust funds for the deposit of FAS 106
costs being recovered through its rates. Net periodic PBOP expense in
1997, 1996, and 1995 consists of the following components (in
thousands):
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 63 93 80
Interest cost 447 555 530
Return on assets (32) (66) -
Net amortization and deferral 186 431 310
----------------------------------------------------------------------------------
Net periodic post-retirement benefit expense $ 664 1,013 920
---------------------------------------------------------------------------------
</TABLE>
The funded status of the p1an at December 31, 1997 and 1996 is as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------------
Accumulated post-retirement benefit obligation (APBO) As of
December 31, 1997 and 1996:
<S> <C> <C>
Fully eligible active employees $ 1,350 1,803
Other active employees 1,278 1,743
Retirees 3,651 4,292
-------------------------------------------------------------------------------------
6,279 7,838
Plan assets at fair value (1,908) (1,157)
-------------------------------------------------------------------------------------
Accumulated obligation in excess of plan assets 4,371 6,681
Unrecognized net transition obligation (5,330) (5,640)
Unrecognized net gain (loss) 732 (778)
-------------------------------------------------------------------------------------
Accrued (prepaid) postretirement benefit cost $ (227) 263
-------------------------------------------------------------------------------------
</TABLE>
The discount rate used in determining the benefit obligation was
7.25% for 1997 and 7.75% for 1996. Annual rates of increase in the
per capita cost of covered health care benefits of 10.10% and 11.20%
were assumed for 1997 based on the age of plan participants. The
Company assumed rates for 1996 were 10.6% and 11.8%. The rates were
assumed to decrease gradually to 5.5% over ten years in both 1997 and
1996 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, 1997 by $309,000 and
the net periodic postretirement benefit expense for the year then
ended by $24,000. As of December 31, 1996, the APBO would increase
$386,000 and the net periodic postretirement benefit expense would
increase $30,000 if a one percentage point increase in the health
care cost trend rates was assumed.
(6) REGULATORY MATTERS
A $5,712,000 refund to its customers was included in the Company's
annual purchased gas cost filing submitted to the PAPUC on August 31,
1995. Included in the refund was approximately $2,600,000 deferred in
1994 plus interest. The PAPUC 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 changed to
customers during the period of November 1, 1995 through November 30,
1996.
Revised rates for the recovery of the Company's purchased gas costs
were approved by the PAPUC effective December l, 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 through a component of the
Company's existing transition surcharge was approved by the PAPUC by
its order dated October 6, 1997. Formulae for the calculation and
allocation of stranded costs consistent with the order were utilized
in the purchased gas cost recovery proceeding which was approved by
the PAPUC effective December 1, 1997.
On January 27, 1995, the Company filed a rate increase request with
the PAPUC 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 PAPUC 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
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, as discussed in note 5.
On February 27, 1996, the Company's two wholly owned public utility
subsidiaries filed a request with the PAPUC 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 PAPUC. 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 PAPUC
and either refunded or collected. At December 31, 1997, the Company's
undercollection resulting from past recovery of gas costs was
$3,275,000, which is currently being recovered under rates that went
into effect on December 1, 1997 and were adjusted on March 1, 1998.
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 26 properties on which manufactured gas plants (MGP)
were located. On March 27, 1996, the Company, North Penn Gas Company
(North Penn), a wholly owned subsidiary of the Company, and the
Pennsylvania Department of Environmental Protection (PADEP) signed a
Consent Order and Agreement (1996 COA). This agreement, except for
certain provisions which have been incorporated by reference,
supersedes a previous COA signed in 1993. One such MGP site is the
subject of separate agreements with the United States Environmental
Protection Agency (USEPA). On January 1, 1997, the Company adopted
AICPA Statement of Position 96-l, Environmental Remediation
Liabilities. The impact of adopting the statement was not material.
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 15 years, but may be terminated by either party
after five 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 1997 and 1996. PADEP has approved
the Company's 1998 annual plan.
North Penn's estimate of the cost to plug the wells covered by the
1996 COA is $3,846,000 at December 31, 1997 and $4,038,000 at
December 31, 1996. 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 $15,657,000 at December 31, 1997
and $15,728,000 at December 31, 1996. 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 range
of costs that may be incurred in connection with MGP site activities.
A liability of $15,657,000 and an associated regulatory asset of
$14,757,000 have been recorded at December 31, 1997. A liability of
$15,728,000 and an associated regulatory asset of $15,115,000 were
recorded at December 31, 1996. 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,
1997, the Company estimated a range of environmental liability for
the MGP sites of $8,772,000 and $37,018,000. At December 31, 1996 the
estimated range was $9,517,000 to $38,702,000.
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. On April 21, 1998, the
Company reached a settlement with one of its general liability
insurers regarding claims arising from its current or former
ownership of MGP sites and a compressor station at an underground
storage field. The Company expects to receive the amount of the
settlement in a lump sum cash payment during the second quarter of
1998. By agreement, the amount and terms of the settlement, which
will provide funding that is material to the Company's accrued
environmental liabilities as of December 31, 1997, are confidential.
The Company estimates that approximately 89% of the amount provided
for in the settlement applies to utility sites and 11% to nonutility
sites. The proceeds attributable to the utility sites will be
recorded as an offset to environmental and clean up expenditures
capitalized by the Company and amortized over five years beginning in
1999. The amount of the settlement related to nonutility sites will
be recognized as income in 1998.
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. During 1997 a plan to remediate
the impacted soil was developed and implemented. After reviewing the
Company's report on the work performed, PADEP requested the Company
to develop a plan for additional sampling at the site. The plan is
scheduled to be submitted in the second quarter of 1998.
The USEPA has concluded that removal of groundwater contamination at
the Brodhead Creek superfund site is technically impractical, but has
requested that certain wells be periodically monitored 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 PAPUC to capitalize
environmental and cleanup expenditures and well plugging costs for
accounting and ratemaking purposes and to amortize such expenditures
over five years. The Company expects the PAPUC 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 nonutility sites have been charged to expense. Such
accruals which amounted to $900,000 and $613,000 at December 31, 1997
and December 31, 1996, respectively, are included in the accrued
environmental liability reflected in the Company's balance sheet.
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 vest and become exercisable on a
pro rata basis during a seven year period commencing in 1995. There
are 6,027 options outstanding at December 31, 1997 exercisable at a
price of $54.48 per share. The options will become fully vested
concurrent with a change in control (as defined) of the Company. The
proposed merger discussed in note 12 meets the definition of a change
in control.
(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,
1997 are as follows (in thousands):
Carrying Estimated
amount fair value
-----------------------------------------------------------------------
Long-term debt $ 46,375 50,327
Redeemable preferred stock 10,764 15,069
----------------------------------------------------------------------
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.
(10) NET INCOME PER COMMON SHARE
In December 1997 the Company adopted FAS 128, Earnings Per Share,
which prescribes two methods for calculating earnings per common
share: "Basic" and "Diluted" methods. These calculations differ from
those used in prior periods and as a result all prior period net
income per common share data reflect the adoption of FAS 128.
Basic net income per common share is based on the weighted average
number of common shares outstanding. Diluted net income per common
share is based on the weighted average number of common shares
outstanding and potentially dilutive effect of employee stock
options. The adoption of this statement had no effect on the results
of operations, financial conditions, or long-term liquidity of the
Company. The following table summarizes the shares used in computing
basic and diluted net income per common share:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average common shares outstanding during the
period for the Basic Computation 717,583 717,583 717,583
Dilutive effect of employee stock options 8,919 2,630 2,921
-----------------------------------------------------------------------------------------------------------
Average common shares outstanding during the
period for Diluted computation. 726,502 720,213 720,504
-----------------------------------------------------------------------------------------------------------
</TABLE>
(11) OPERATING LEASES
Future minimum rental payments in the aggregate and for each of the
five succeeding years and thereafter (in thousands):
1998 $ 1,086
1999 941
2000 657
2001 258
2002 100
Thereafter 61
----------------------------------------
Total $ 3,103
----------------------------------------
(12) ACQUISITION OF COMPANY
On June 27, 1997, the Company and PP&L Resources, Inc. (PP&L)
announced they had signed a definitive agreement under which PP&L
will acquire the Company. Under the terms of the agreement, upon
consummation of the merger, which is subject to the receipt of
various regulatory approvals, common stockholders of the Company will
receive, subject to certain adjustments, between 6.968 and 8.516
shares of PP&L common stock for each share of the Company that they
own. Penn Fuel's shareholders approved the merger in October 1997.
The Company's preferred stock may be redeemed in accordance with its
terms upon written approval of holders of at least 66 2/3% of the
preferred shares outstanding, at a redemption price of $15 per share,
plus accrued and unpaid dividends. Owners of more than 93.5% of the
total number of the preferred shares outstanding as of July 31, 1997
have indicated their intent to provide the shareholder approval
required for such redemption. Each share of preferred stock
outstanding that is not redeemed in accordance with its terms will be
converted into the right to receive between 0.682 and 0.833 shares of
PP&L common stock, subject to certain adjustments.
Costs including retention, severance payments, and other costs
related to the proposed merger that are contingent upon its
consummation have not been recognized in the Company's financial
statements. If incurred, the aggregate amount of such costs are
expected to be material to the Company's results of operations.
Pending receipt of the required regulatory approvals it is expected
that the merger can be completed in the summer of 1998.
PENN FUEL GAS, INC. AND SUBSIDIARIES
Selected Financial Data
Year ended December 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 119,213 113,507 105,647 123,410 115,812
Cost of sales 53,174 51,893 48,675 67,188 63,432
Other operating expenses 54,153 50,287 47,644 46,035 42,940
- -----------------------------------------------------------------------------------------------------------------------
Operating income 11,886 11,327 9,328 10,187 9,440
Interest expense 4,488 4,362 4,731 4,347 4,320
Other (income) expense 206 (429) (1,102) 135 (185)
- -----------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of a change in
accounting principle 7,192 7,394 5,699 5,705 5,305
Cumulative effect on prior years (to December 31, 1994)
of change to record unbilled revenue, net of tax -- -- 378 -- --
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 7,192 7,394 6,077 5,705 5,305
- -----------------------------------------------------------------------------------------------------------------------
Net income per common share (based on weighted
average number of shares outstanding) - Basic $ 8.62 8.90 7.07 6.55 5.99
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends per preferred share $ 1.40 1.40 1.40 1.40 1.40
- -----------------------------------------------------------------------------------------------------------------------
Cash dividends per common share $ 2.88 2.40 2.00 -- --
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 207,989 196,465 184,277 174,367 159,236
- -----------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment, net $ 149,716 141,292 132,602 122,897 115,237
- -----------------------------------------------------------------------------------------------------------------------
Capitalization:
Stockholders' equity $ 70,865 66,745 62,078 58,441 53,741
Redeemable preferred stock 10,764 10,764 10,764 10,764 10,764
Long-term debt 46,429 51,694 55,644 58,904 34,995
- -----------------------------------------------------------------------------------------------------------------------
$ 128,058 129,203 128,486 128,109 99,500
Notes payable and long-term
debt payable within one year 21,710 10,439 3,568 2,266 24,395
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$ 149,768 139,642 132,054 130,375 123,895
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PENN FUEL GAS, INC. AND SUBSIDIARIES
Statistical Review
Year ended December 31, 1997
(converted to thousands)
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1997 1996 1995 1994 1993
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Throughput - DTH: (in thousands) (unaudited):
Utility:
Sales:
Residential 6,866 7,316 6,513 6,790 6,597
Commercial 4,121 4,500 4,737 4,865 4,643
Industrial 1,474 2,282 2,303 4,017 4,423
Resale 11 11 64 161 307
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12,472 14,109 13,617 15,833 15,970
Transportation 13,824 12,666 13,071 9,613 9,177
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26,296 26,775 26,688 25,446 25,147
Liquefied petroleum 788 841 830 865 857
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Total 27,084 27,616 27,518 26,311 26,004
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Operating revenues (in thousands):
Utility:
Sales:
Residential $ 54,249 47,914 40,025 47,377 42,358
Commercial 27,240 25,418 25,990 29,183 25,936
Industrial 7,857 10,681 11,339 20,124 21,039
Resale 56 49 222 682 1,120
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89,402 84,062 77,576 97,366 90,453
Storage 6,388 6,157 5,570 5,101 5,167
Transportation 9,760 8,897 8,458 6,899 6,883
Other 919 677 1,483 843 583
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106,469 99,793 93,087 110,209 103,086
Liquefied petroleum 11,604 12,294 11,009 11,648 11,359
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118,073 112,087 104,096 121,857 114,445
Merchandise 1,140 1,420 1,551 1,553 1,367
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Total $ 119,213 113,507 105,647 123,410 115,812
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Customer (unaudited):
Utility:
Sales:
Residential $ 62,414 61,504 60,688 59,130 58,068
Commercial 9,025 8,954 8,865 8,655 8,694
Industrial 265 302 323 342 356
Resale 2 2 2 2 3
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71,706 70,762 69,878 68,130 67,121
Transportation 176 124 118 92 62
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71,882 70,886 69,996 68,222 67,183
Liquefied petroleum 27,549 28,021 28,260 29,935 30,338
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Total 99,431 98,907 98,256 98,157 97,521
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Total degree days (unaudited) 5,089 5,494 5,223 5,411 5,352
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Percent of degree days to thirty-year average
(unaudited) 95.3% 102.7% 97.7% 101.2% 100.1%
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</TABLE>
PENN FUEL GAS, INC. AND SUBSIDIARIES
Board of Directors and Corporate Information
<TABLE>
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<S> <C>
BOARD OF DIRECTORS PENN FUEL GAS, INC. OFFICERS
Carol W. Gates (2) Terry H. Hunt
Oxford Advisory Board, Fulton Bank President and Chief Executive Officer
Terry H. Hunt (l) George C. Rhodes, Sr.
President and CEO, Penn Fuel Gas, Inc. Senior Vice President, Utility Operations
and subsidiaries and Engineering
Director, UTI Energy Corp.
Ronald J. Frederick
Marilyn Ware Lewis (1) (3) Vice President, Human Resources
Chairman, American Water Works and Administration
Company, Inc.
Director, CIGNA Corporation Edward L. McCusker
Director, PP&L Resources, Inc. Vice President and Treasurer
W. Kirk Liddell (2) Charles C. Rogala
President and CEO, Irex Corporation Vice President, Utility Operations
Director, High Industries, Inc.
Director, CoreStates Central/Northern George W. Ruth
Regional Board Vice President, Gas Supply
Loren D. Mellendorf (2) (3) Eleanor R. Ross
Retired Executive Vice President, Secretary
American Water Works Company, Inc.
John P. Nitsche
John H. Ware, IV (2) Assistant Secretary
Director, Subsidiaries of American Water
Works Company, Inc.
SUBSIDIARIES
Paul W. Ware (l) (2) (3)
Chairman, Penn Fuel Gas, Inc. and subsidiaries PFG Gas, Inc.
Director, American Water Works Company, Inc. North Penn Gas Company
Director, The York Water Company
Richard P. Wild (l) (3)
Partner, Dechert Price & Rhoads
</TABLE>
Committees: (1)Executive Committee (2) Audit Committee
(3) Compensation Committee
