-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JDWEGjv4uqS+6ydvk0O0RRO6XS0dzzeqXvvgPLpW5nCsgApUNHnwneA1lIGNIRrW AFEJODoxpwPgVWtEytMK8w== 0000318819-96-000019.txt : 19960404 0000318819-96-000019.hdr.sgml : 19960404 ACCESSION NUMBER: 0000318819-96-000019 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960216 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19960403 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN WATER WORKS CO INC CENTRAL INDEX KEY: 0000318819 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510063696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-03437 FILM NUMBER: 96544243 BUSINESS ADDRESS: STREET 1: 1025 LAUREL OAK RD CITY: VOORHEES STATE: NJ ZIP: 08043 BUSINESS PHONE: 6093468200 MAIL ADDRESS: STREET 1: 1025 LAUREL OAK ROAD CITY: VOORHEES STATE: NJ ZIP: 08043 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): February 16, 1996 ------------------ AMERICAN WATER WORKS COMPANY, INC. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 1-3437-2 51-0063696 - ------------------------------------------------------------------------ (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 1025 Laurel Oak Road, P.O. Box 1770, Voorhees, New Jersey 08043 - ------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (609) 346-8200 ------------------- Page 2 FORM 8-K/A The Registrant hereby amends the following items, financial statements, exhibits or other portions of its Current Report of Form 8-K filed on March 1, 1996 as set forth in the pages attached hereto: (List all such items, financial statements, exhibits or other portions amended) The following items of the Form 8-K are amended: Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. American Water Works Company, Inc. (Registrant) BY: /s/ George W. Johnstone -------------------------- George W. Johnstone President and Chief Executive Officer DATE: April 3, 1996 Page 3 FORM 8-K/A Item 7. Financial Statements, Pro Forma Financial Information and Exhibits ------------------------------------------------------------------ A current report on Form 8-K was filed on March 1, 1996 by the Registrant describing a subsidiary's acquisition (the "Acquisition") of the regulated water operations and certain related assets (the "Acquired Business") of PG Energy Inc., formerly known as Pennsylvania Gas and Water Company, a subsidiary of Pennsylvania Enterprises, Inc., as required under Item 2 of Form 8-K. This Form 8-K/A provides audited financial statements as of December 31, 1995 and for the twelve month period then ended and pro forma information for the Acquired Business which were previously unavailable pursuant to Item 7(a)(4) and Item 7(b)(2), respectively. Pursuant to Item 7 of Form 8-K, the tables on pages 4 through 8 set forth the unaudited pro forma financial statements which give effect to the Acquisition accounted for as a purchase. The unaudited pro forma balance sheet presents the combined financial position of the Registrant and the Acquired Business as of December 31, 1995 assuming that the Acquisition had occurred as of December 31, 1995. Such pro forma information is based upon the historical balance sheet data of the Registrant and the Acquired Business as of that date. The unaudited pro forma condensed statement of income gives effect to the Acquisition by combining the results of operations of the Registrant for the year ended December 31, 1995 with the results of operations of the Acquired Business for the year ended December 31, 1995 on a purchase method basis. The Report of Independent Public Accountants and the audited financial statements of the Acquired Business are set forth on pages 9 through 23. The pro forma financial information reflects pro forma adjustments that are based upon available information and certain assumptions that the Registrant believes are reasonable. The pro forma information does not necessarily reflect the results of operations or the financial position of the Registrant that actually would have resulted had the transaction to which pro forma effect is given been consummated as of the date or for the period indicated. The amounts contained in this Form 8-K/A are subject to adjustment based on a balance sheet as of February 16, 1996 pursuant to the terms of the Asset Purchase Agreement. There are no exhibits included with this Form 8-K/A. Page 4 FORM 8-K/A Pro Forma Balance Sheet (Unaudited) (In thousands) Pro Forma ------------------- Registrant Acquired Adjust- (Historical) Business ments Combined ---------- ---------- -------- ---------- ASSETS Property, plant and equipment Utility plant - at original cost less accumulated depreciation $2,884,681 $ 354,203 $ $3,238,884 Utility plant acquisition adjustments 34,974 14,538 6,500(a) 56,012 Other utility plant adjustments 147 147 Non-utility property, net of accumulated depreciation 20,144 20,144 Excess of cost of investments in subsidiaries over book equity at acquisition 22,638 22,638 ---------- ---------- -------- ---------- 2,962,584 368,741 6,500 3,337,825 ---------- ---------- -------- ---------- Current assets Cash and cash equivalents 23,204 23,204 Temporary investments - at cost plus accrued interest 513 513 Customer accounts receivable 61,786 7,134 68,920 Allowance for uncollectible accounts (1,030) (446) (1,476) Unbilled revenues 47,790 4,627 52,417 Miscellaneous receivables 4,571 4,571 Materials and supplies 9,599 1,169 10,768 Deferred vacation pay 9,374 9,374 Other 8,563 272 8,835 ---------- ---------- -------- ---------- 164,370 12,756 177,126 ---------- ---------- -------- ---------- Regulatory and other long-term assets Regulatory asset - income taxes recoverable through rates 172,265 172,265 Funds restricted for construction 13,927 13,927 Debt and preferred stock expense 20,753 5,165 25,918 Deferred pension expense 16,468 16,468 Deferred postretirement benefit expense 11,418 11,418 Tank painting costs 8,901 8,901 Other 32,455 20,588 53,043 ---------- ---------- -------- ---------- 276,187 25,753 301,940 ---------- ---------- -------- ---------- $3,403,141 $ 407,250 $ 6,500 $3,816,891 ========== ========== ======== ========== Page 5 FORM 8-K/A Pro Forma Balance Sheet (Unaudited) (In thousands) Pro Forma ------------------- Registrant Acquired Adjust- (Historical) Business ments Combined ---------- ---------- -------- ---------- CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $ 818,939 $ $ $ 818,939 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 42,326 42,326 Preferred stocks of subsidiaries without mandatory redemption requirements 6,288 6,288 Long-term debt American Water Works Company, Inc. 116,000 116,000 Subsidiaries 1,268,649 140,420 1,409,069 ---------- ---------- -------- ---------- 2,303,875 140,420 2,444,295 ---------- ---------- -------- ---------- Current liabilities Bank debt 148,639 266,670(b) 415,309 Current portion of long-term debt 44,321 677 44,998 Accounts payable 43,300 43,300 Taxes accrued, including federal income 13,098 13,098 Interest accrued 26,263 1,828 28,091 Accrued vacation pay 9,512 9,512 Other 35,940 35,940 ---------- ---------- --------- ---------- 321,073 2,505 266,670 590,248 ---------- ---------- --------- ---------- Page 6 FORM 8-K/A Pro Forma Balance Sheet (Unaudited) (In thousands) Pro Forma ------------------- Registrant Acquired Adjust- (Historical) Business ments Combined ---------- ---------- -------- ---------- Regulatory and other long-term liabilities Advances for construction 131,141 2,419 133,560 Deferred income taxes 356,608 356,608 Deferred investment tax credits 38,515 38,515 Accrued pension expense 30,652 30,652 Accrued postretirement benefit expense 9,100 9,100 Other 3,840 3,840 ---------- ---------- -------- ---------- 569,856 2,419 572,275 ---------- ---------- -------- ---------- Contributions in aid of construction 208,337 1,736 210,073 ---------- ---------- -------- ---------- Commitments and contingencies ---------- ---------- -------- ---------- $3,403,141 $ 147,080 $266,670 $3,816,891 ========== ========== ======== ========== NOTES (Dollars in thousands): (a) Represents consideration in excess of net assets acquired. Consideration $ 266,670 Net assets acquired (260,170) --------- $ 6,500 ========= (b) Represents bank debt incurred to finance the Acquisition.
Page 7 FORM 8-K/A Consolidated Statement of Income (In thousands, except per share amounts) Pro Forma ------------------- Registrant Acquired Adjust- (Historical) Business ments Combined ---------- ---------- -------- ---------- Operating revenues $ 802,820 $ 66,306 $ $ 869,126 ---------- ---------- -------- ---------- Operating expenses Operation and maintenance 402,362 25,230 (2,941)(c) 424,651 Depreciation and amortization 79,977 8,439 163 (d) 88,579 General taxes 76,208 5,368 81,576 ---------- ---------- -------- ---------- 558,547 39,037 (2,778) 594,806 ---------- ---------- -------- ---------- Operating income 244,273 27,269 2,778 274,320 Allowance for other funds used during construction 11,771 11,771 Gain from eminent domain litigation 6,600 6,600 Other income 1,844 109 1,953 ---------- ---------- -------- ---------- 264,488 27,378 2,778 294,644 ---------- ---------- -------- ---------- Income deductions Interest expense 117,042 12,946 11,562 (e) 141,550 Allowance for borrowed funds used during construction (9,573) (203) (9,776) Amortization of debt expense 1,273 1,273 Preferred dividends of subsidiaries 3,698 3,698 Other deductions 2,341 2,341 ---------- ---------- -------- ---------- 114,781 12,743 11,562 139,086 ---------- ---------- -------- ---------- Income before income taxes 149,707 14,635 (8,784) 155,558 Provision for income taxes 57,646 5,889 (3,382)(f) 60,153 ---------- ---------- -------- ---------- Net income (loss) 92,061 8,746 (5,402) 95,405 Dividends on preferred stocks 3,984 3,984 ---------- ---------- -------- ---------- Net income (loss) to common stock $ 88,077 $ 8,746 $ (5,402) $ 91,421 ========== ========== ======== ========== Average shares of common stock outstanding 33,382 33,382 Earnings per common share on average shares outstanding $ 2.64 $ 2.74 ========== ========== Page 8 FORM 8-K/A NOTES (Dollars in thousands): (c) Represents reduction in operation and maintenance expenses as a result of employee reductions pursuant to the terms of the Asset Purchase Agreement filed with the Registrant's Current Report on Form 8-K on March 1, 1996. In accordance with the Asset Purchase Agreement, the Registrant hired 297 employees of the Acquired Business which it believes to be adequate to operate the business. PG Energy Inc., prior to the Acquisition, was a gas and water company. As discussed in footnote (1) to the financial statements of the Acquired Business, PG Energy Inc. used allocations approved by the Pennsylvania Public Utility Commission in preparing the Statement of Income from Water Business. This adjustment reflects the difference between the allocated labor costs of $12,050 and the labor costs of $9,109 for the 297 employees hired by the Registrant. The table below provides detail regarding the actual headcount reductions to be achieved by the Registrant. Allocated Actual --------- ------ Employees Administrative and general 91 11 Commercial 91 73 Distribution 135 125 Production 103 88 --------- ------ 420 297 ========= ====== (d) Represents the amortization, over a period of 40 years, of the utility plant acquisition adjustment incurred in connection with the Acquisition. (e) Represents the interest expense on the debt incurred to finance the Acquisition and the elimination of interest expense previously allocated to the Acquired Business from PG Energy Inc. related to debt not assumed in the Acquisition. Debt incurred $266,670 Interest rate in effect at commencement of facility 5.58% -------- 14,880 Interest allocated by PG Energy, Inc. (3,318) -------- $ 11,562 ======== (f) Represents the state and federal income tax effect on the pro forma adjustments at the Registrant's effective tax rate of 38.5%.
Page 9 FORM 8-K/A REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To PG Energy Inc.: We have audited the accompanying Statement of Net Assets of Water Business of PG Energy Inc. (PGE), formerly known as Pennsylvania Gas and Water Company, (a Pennsylvania Corporation and a wholly owned subsidiary of Pennsylvania Enterprises, Inc.) as of December 31, 1995, and the related Statements of Income and Cash Flows from Water Business for the year then ended. These financial statements are the responsibility of PGE's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying financial statements have been prepared pursuant to the Asset Purchase Agreement, dated as of April 26, 1995, by and between Pennsylvania Enterprises, Inc., PGE, American Water Works Company, Inc. and Pennsylvania-American Water Company, as discussed in Note 1, and are not intended to be a complete presentation of the assets and liabilities of PGE's Water Business. In our opinion, the accompanying financial statements as of and for the year ended December 31, 1995, present fairly, in all material respects, the Net Assets of Water Business and its Income and Cash Flows pursuant to the Asset Purchase Agreement referred to in Note 1 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP New York, N.Y. February 23, 1996 Page 10 FORM 8-K/A PG ENERGY INC. Statement of Net Assets of Water Business as of December 31, 1995 (Thousands of Dollars) ACQUIRED ASSETS Utility Plant Water utility plant, at original cost $373,597 Accumulated depreciation (24,322) Acquisition adjustments 14,538 Construction work in progress 1,371 -------- Net water utility plant 365,184 Net common plant, at original cost 3,557 -------- Total utility plant 368,741 -------- Current Assets Accounts receivable Customers 7,134 Reserve for uncollectible accounts (446) Accrued utility revenues 4,627 Material and supplies at average cost, net of reserve for obsolescence 1,169 Prepaid expense 272 -------- Total current assets 12,756 -------- Deferred Charges Regulatory assets Deferred water utility billings 9,301 Deferred treatment plant costs and carrying charges 8,967 Other 2,320 Unamortized debt expense 5,165 -------- Total deferred charges 25,753 -------- TOTAL ACQUIRED ASSETS 407,250 -------- ASSUMED LIABILITIES Long-Term Debt (Note 3) 140,420 -------- Current Liabilities: Current portion of long-term debt (Note 3) 677 Accrued interest 1,828 -------- 2,505 -------- Deferred Credits 4,155 -------- TOTAL ASSUMED LIABILITIES 147,080 -------- NET ASSETS OF WATER BUSINESS $260,170 ======== The accompanying notes are an integral part of the financial statements. Page 11 FORM 8-K/A PG ENERGY INC. Statement of Income from Water Business for the Year Ended December 31, 1995 (Thousands of Dollars) OPERATING REVENUES $ 66,306 -------- OPERATING EXPENSES: Operation 18,447 Maintenance 6,783 Depreciation 7,858 Deferred treatment plant costs, net 581 Income taxes 5,867 Taxes other than income taxes 5,368 -------- Total operating expenses 44,904 -------- OPERATING INCOME 21,402 OTHER INCOME, NET 87 -------- INCOME BEFORE INTEREST CHARGES 21,489 -------- INTEREST CHARGES: Interest on long-term debt Amount equivalent to interest on assumed indebtedness (Note 3) 9,530 Other 3,318 Other interest 98 Allowance for borrowed funds used during construction (203) -------- Total interest charges 12,743 -------- NET INCOME FROM WATER BUSINESS $ 8,746 ======== The accompanying notes are an integral part of the financial statements. Page 12 FORM 8-K/A PG ENERGY INC. Statement of Cash Flows from Water Business for the Year Ended December 31, 1995 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income from water business $ 8,746 Effects of noncash charges to income - Depreciation 7,858 Deferred income taxes, net 3,098 Deferred treatment plant costs and carrying charges, net 581 Other, net 185 Current assets less current liabilities, exclusive of current portion of long-term debt - Receivables and accrued utility revenues (736) Other current assets and liabilities, net 780 Other operating items, net (2,714) -------- Net cash provided by operating activities 17,798 -------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (17,858) Other, net (184) -------- Net cash used for investing activities (18,042) -------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of long-term debt 261 Repayment of long-term debt (584) Use of restricted funds held by trustee 3,462 Other, net (125) -------- Net cash provided from financing activities 3,014 -------- NET CASH PROVIDED BY WATER BUSINESS $ 2,770 ======== The accompanying notes are an integral part of the financial statements. Page 13 FORM 8-K/A PG ENERGY INC. NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Purpose of statements. These statements have been prepared in accordance with the Asset Purchase Agreement among Pennsylvania Enterprises, Inc. ("PEI"), PG Energy Inc. ("PGE"), a wholly-owned subsidiary of PEI formerly known as Pennsylvania Gas and Water Company, American Water Works Company Inc. ("AWWC"), and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of AWWC (collectively the "Parties"), dated as of April 26, 1995 (the "Agreement"), providing for the sale by PEI and PGE to Pennsylvania-American of substantially all of the assets, properties and rights of PGE's water utility operations (the "Water Business"). Under the terms of the Agreement, Pennsylvania-American made an initial cash payment to PGE on February 16, 1996, the closing date for the sale of the Water Business, of approximately $413.5 million (including a $6.5 million premium over the book value of the assets sold) consisting of $266.4 million in cash and the assumption of $147.1 million of PGE's liabilities, including $141.1 million of its long-term debt, based on an Estimated Statement of Net Assets (as such term is defined in the Agreement) of the Water Business as of December 31, 1995. This price is subject to adjustment for changes in the assets of the Water Business and the liabilities assumed by Pennsylvania-American pursuant to the Agreement between December 31, 1995, and the February 16, 1996, closing date. The assets and liabilities reflected in the Statement of Net Assets of Water Business comprise the following items: o Acquired assets of PGE as defined in the Agreement, including all the assets, properties and rights used exclusively in PGE's regulated water business. o Assumed liabilities as defined in the Agreement, including specified indebtedness (as described in Note 3 of the Notes to Financial Statements) and accrued interest thereon and other specified liabilities related to the Water Business. o The assumed liabilities do not include employee benefit liabilities assumed by Pennsylvania-American as described in Note 4 to the Financial Statements. The accompanying Statement of Income from Water Business reflects PGE's water utility operations for the year 1995. Operating revenues and expenses have been determined in accordance with the methods utilized by PGE and the Pennsylvania Public Utility Commission (the "PPUC") in establishing the revenue requirements of PGE's water utility operations. Such methods include specific identification of expenses where possible and allocation of common expenses to the water utility operations based on PPUC-approved allocation methodology. Interest charges relating to indebtedness of PGE have been allocated to the Water Business based on the relationship of the gross water utility plant that was sold to Pennsylvania-American pursuant to the Agreement to the total of PGE's gross gas and water utility plant. This is the same method as was utilized by PGE and the PPUC in establishing the Page 14 FORM 8-K/A revenue requirements of both PGE's gas and water utility operations. None of the dividends on PGE's preferred stock have been allocated to the Water Business. Nature of the Business. PGE is a regulated public utility subject to the jurisdiction of the PPUC for rate and accounting purposes. The financial statements of PGE's Water Business have been prepared in accordance with generally accepted accounting principles, including the provisions of Financial Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain Types of Regulation," which give recognition to the rate and accounting practices of regulatory agencies such as the PPUC. Use of Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors which are difficult to predict and are beyond the control of PGE. Therefore, actual amounts could differ from these estimates. Utility Plant and Depreciation. Utility plant is stated at cost, which represents the original cost of construction, including payroll, administrative and general costs, and an allowance for funds used during construction, and the plant acquisition adjustments. The plant acquisition adjustments represent the difference between the cost to PGE of plant acquired as a system and the cost of such plant when first devoted to public service. Except for approximately $340,000 recorded in 1993, which is being amortized over a ten-year period, the plant acquisition adjustments relate to acquisitions made prior to October 31, 1970, and thus are not required to be amortized for financial reporting purposes since PGE believes there has been no diminution in their value. Also, such treatment is consistent with PPUC Orders. Common plant assets (items used jointly in PGE's gas and water utility operations) were determined in accordance with the Agreement and represent the portion of common plant assets to be assigned to the Water Business. The Agreement provides that a specific determination of the various tangible personal property to be assigned to the Water Business shall be made prior to the February 16, 1996, closing date and, therefore, the final purchase price (as specified in the Agreement) will be based on the actual net book value of the specific assets so assigned to the Water Business, including common plant assets. The allowance for funds used during construction ("AFUDC") is defined as the net cost during the period of construction of borrowed funds used and a reasonable rate upon other funds when so used. Such allowance is charged to utility plant and reported as a reduction of interest expense (with respect to the cost of borrowed funds) in the accompanying Statement of Income from Water Business. AFUDC varies according to changes in the level of construction work in progress and in the sources and costs of capital. The weighted average rate for such allowance was approximately 8% in 1995. PGE provides for depreciation on a straight-line basis for all common plant assets and approximately 96% of the water utility plant assets and on a 4% compound interest method for the remainder of the water utility plant assets. Exclusive of transportation and work equipment, the annual provision Page 15 FORM 8-K/A for depreciation, as related to the average depreciable original cost of utility plant constituting the Water Business, was 1.97% in 1995. When depreciable property is retired, the original cost of such property is removed from the utility plant accounts and is charged, together with the cost of removal less salvage, to accumulated depreciation. No gain or loss is recognized in connection with retirements of depreciable property, other than in the case of significant involuntary conversions or extraordinary retirements. Revenues. PGE bills its customers based on estimated or actual meter readings on a cycle basis. Certain water customers, primarily large users, are billed monthly on a cycle that extends throughout the month. Other water customers are billed bi-monthly on cycles that extend over the bi-monthly period. The estimated unbilled amounts from the most recent meter reading dates through the end of the period being reported on are recorded as accrued revenues. Deferred Charges (Regulatory Assets). PGE generally accounts for and reports its costs in accordance with the economic effect of rate actions by the PPUC. To this extent, certain costs are recorded as deferred charges pending their recovery in rates. These amounts relate to previously-issued orders of the PPUC and are of a nature which, in the opinion of PGE, will be recoverable in future rates, based on such rate orders. Pursuant to an Order of the PPUC entered September 5, 1990, PGE deferred all operating expenses, including depreciation and property taxes, and the carrying charges (equivalent to the AFUDC relative to the four Scranton Area water treatment plants and related facilities from the dates of commercial operation of the plants until March 23, 1991, the effective date of the Scranton Area water rate increase approved by the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC granted PGE's request to recover $5.8 million of costs deferred relative to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $1.5 million had been recovered as of December 31, 1995. Similarly, as permitted by an Order of the PPUC entered September 24, 1992, PGE deferred all operating expenses, including depreciation and property taxes, and the carrying charges relative to the Crystal Lake Water Treatment Plant and related facilities from August 3, 1992 (the date of commercial operation of that plant), until March 9, 1993, the effective date of the water rate increase approved by the PPUC on February 25, 1993, for customers in PGE's Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant. Additionally, in accordance with an Order of the PPUC entered July 28, 1993, PGE deferred all expenses and the carrying charges relative to the Ceasetown and Watres Water Treatment Plants and related facilities, until December 16, 1993, the effective date of the water increase for customers served by the Ceasetown and Watres Water Treatment Plants approved by the PPUC on December 15, 1993. A total of $4.6 million of costs relative to these plants and related facilities was deferred pursuant to the respective PPUC Orders permitting the deferral of such costs. As contemplated by the PPUC's Orders of September 24, 1992, and July 28, 1993, PGE planned to seek recovery of these costs, which total $4.6 million, in its next rate increase request relative to the Spring Brook Water Rate Area. Although it cannot be certain, PGE believes that the recovery of such costs will be allowed by the PPUC in future rate increases, particularly in Page 16 FORM 8-K/A view of the PPUC's action allowing the recovery of the costs deferred with respect to the Scranton Area water treatment plants and related facilities. The PPUC has, in certain orders more fully described in Note 2 of the Notes to Financial Statements, granted rate increases to PGE designed to be phased-in over multiple periods under the terms of qualified phase-in plans pursuant to the provisions of FASB Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans". PGE has recorded a deferred charge representing the revenue which will be recovered from customers in subsequent years in accordance with the terms of such PPUC Orders. As of December 31, 1995, $9.3 million of such revenue was deferred pending recovery from PGE's customers. The following deferred charges are included as "Other" regulatory assets as of December 31, 1995 (in thousands of dollars): Preliminary survey and investigation charges $ 878 Cold weather maintenance charges 521 Deferred water rate case expense 266 Pre-operating costs - Crystal Lake Water Treatment Plant 251 Unaccounted for water study 100 Jobbing work in progress 97 Retirement work in progress 93 Management audit charges 80 Other 34 ------ $2,320 ====== Income Taxes. The provision for income taxes as of December 31, 1995, consists of the following components (in thousands of dollars): Included in operating expenses: Currently payable - Federal $ 1,907 State 862 ------- Total currently payable 2,769 ------- Deferred, net - Federal 2,841 State 257 ------- Total deferred, net 3,098 ------- Total included in operating expenses 5,867 ------- Included in other income, net: Currently payable - Federal 17 State 5 ------- Total currently payable 22 ------- Page 17 FORM 8-K/A Deferred, net - Federal - State - ------- Total deferred, net - ------- Total included in other income, net 22 ------- Total provision for income taxes $ 5,889 ======= The components of deferred income taxes for 1995 (in thousands of dollars) included in the accompanying Statement of Income from Water Business, which are recorded consistent with the treatment allowed by the PPUC for ratemaking purposes, are as follows: Excess of tax depreciation over depreciation for accounting purposes $ 2,165 Deferred treatment plant costs (369) Deferred water utility billings (292) Contributions and advances for construction 981 Other, net 613 ------- Total deferred taxes, net $ 3,098 ======= Included in: Operating expenses $ 3,098 Other income, net - ------- Total deferred taxes, net $ 3,098 ======= The total provision for income taxes shown in the accompanying statement of income differs from the amount which would be computed by applying the statutory federal income tax rate to income before income taxes. The following table summarizes the major reasons for this difference in 1995 (in thousands of dollars): Income before income taxes $14,635 ======= Tax expense at statutory federal income tax rate $ 5,122 Increases (reductions) in taxes resulting from - State income taxes, net of federal income tax benefit 760 Other, net 7 ------- Total provision for income taxes $ 5,889 ======= Long Lived Assets. In March 1995, FASB Statement 121, "Accounting for the Impairment of Long-Lived Assets", was issued. The provisions of this statement, which are effective for fiscal years beginning after September 15, 1995, require that long-lived assets, identifiable intangibles, capital leases and goodwill be reviewed for impairment whenever events occur or changes in circumstances indicate that the carrying amount of the assets may Page 18 FORM 8-K/A not be recoverable. In addition, FASB Statement 121 requires that regulatory assets meet the recovery criteria of FASB Statement 71, "Accounting for Effects of Certain Types of Regulation", on an ongoing basis in order to avoid a writedown. The implementation of FASB Statement 121 in 1996 is not expected to have any significant impact on the Water Business since the carrying amount of all assets, including regulatory assets, is considered recoverable. (2) RATE MATTERS Scranton Area. By Order adopted March 22, 1991, the PPUC granted PGE an approximate 110% rate increase effective March 23, 1991, for the Scranton Water Rate Area that was designed to produce $15.0 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan, pursuant to Financial Accounting Standards Board ("FASB") Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans." In accordance with said Order, PGE deferred the billing of $4.7 million of the increased revenue recorded during the period March 23, 1991, through March 22, 1992. Effective March 23, 1992, PGE began to bill such $4.7 million by means of a surcharge that will be in effect during the period through March 22, 2001, and as of December 31, 1995, $1.9 million had been so billed to its Scranton Water Rate Area customers. On September 25, 1992, PGE filed an application with the PPUC seeking a water rate increase, designed to produce $9.9 million in additional annual revenue. This rate increase request involved the approximately 56,000 customers in PGE's Scranton Water Rate Area at such date. By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in its entirety "due to inadequate service" (i.e., water quality). However, by the same Order, the PPUC granted PGE the alternative of a rate increase designed to produce an additional $5.0 million in annual revenue, provided that PGE dedicate the entire increase to augment the improvements to its water distribution system until "the demonstration by [PGE] to [the PPUC] that it is providing adequate service." PGE accepted this alternative and placed such $5.0 million rate increase into effect as of June 23, 1993. On August 19, 1993, the PPUC approved a settlement agreement (the "Settlement Agreement") resolving certain disputed issues relating to its June 23, 1993, Order. The Settlement Agreement provided, among other things, for (i) modification by the PPUC of its June 23, 1993, Order to reduce the amount of the revenue increase that it ordered be dedicated to distribution system improvements by the related income taxes and other expenses and the $319,000 additional expense for retiree health care and life insurance benefits that the PPUC allowed PGE in its revenues (which resulted in the requirement for an additional annual expenditure for distribution system improvements by PGE of $2.5 million), (ii) the agreement by PGE (with which it was in compliance as of December 31, 1995) to spend a total of $4.9 million annually (an additional $2.5 million over its actual average annual expenditure of $2.4 million during the three-year period ended June 30, 1993) for distribution system improvements in the Scranton Water Rate Area until the PPUC is satisfied that PGE is providing adequate service, (iii) the modification by the PPUC of its June 23, 1993, Order to restore the Hollister Reservoir to PGE's rate base, and (iv) the withdrawal by PGE and the Office of Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court of Pennsylvania regarding the PPUC's June 23, 1993, Order. Page 19 FORM 8-K/A Spring Brook Water Rate Increase. Crystal Lake Service Area. On June 30, 1992, PGE filed an application with the PPUC seeking a water rate increase, designed to produce $4.4 million in additional annual revenue. This rate increase request involved the approximately 5,000 customers in the Spring Brook Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, which became fully operational in August, 1992. On December 15, 1992, PGE and certain parties filing objections to the rate increase request reached a settlement providing for an approximate 130% rate increase designed to produce $2.0 million of additional annual revenue to be phased-in over a two-year period under the terms of FASB Statement 92. The settlement provided that $1.1 million of the increased revenue (an approximate 72% increase in rates) was to be realized through an immediate rate increase and that the remaining $900,000 in increased revenue (an additional 58% increase in rates) was to be realized through another rate increase one year later (i.e., at the beginning of year two of the phase-in period). The settlement also specified that the $900,000 in revenue that would be deferred during the first year of the phase-in period, as well as an approximate $243,000 in related carrying charges, was to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted February 25, 1993, the PPUC approved the settlement effective March 9, 1993. In accordance with the provisions of FASB Statement 92, PGE commenced recording the entire $2.0 million increase in annual revenue allowed by the PPUC as additional revenue beginning March 9, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. However, pursuant to the terms of the settlement, PGE deferred the billing of approximately $900,000 of the increased revenue recorded during the first year of the phase-in period (i.e., the period March 9, 1993, through March 8, 1994). Effective March 9, 1995, PGE began to bill, by means of the surcharge that will be in effect in years three through five of the phase-in period, the approximate $900,000 that has been so deferred, as well as the related carrying charges and as of December 31, 1995, $293,000 had been so billed to its Crystal Lake service area customers. Ceasetown and Watres Service Areas. On April 29, 1993, PGE filed an application with the PPUC seeking a water rate increase, designed to produce $19.5 million in additional annual revenue. This rate increase request involved approximately 59,300 customers in PGE's Spring Brook Water Rate Area, principally those customers (i) served by the Ceasetown Water Treatment Plant which was placed in service on March 31, 1993, (ii) served by the Watres Water Treatment Plant which was placed in service on September 30, 1993, (iii) served jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993, PGE, the PPUC Office of Trial Staff, the OCA and the Office of Small Business Advocate filed a settlement petition (the "Settlement Petition") with the Administrative Law Judge ("ALJ") assigned to conduct the investigation of the rate increase request. This Settlement Petition provided for an overall 119% rate increase involving approximately 44,900 customers, principally those served either exclusively or jointly by the Ceasetown and Watres Water Treatment Plants, that was designed to produce $11.9 million of additional annual revenue to be phased-in over a two-year period under the terms of a qualified phase-in plan, pursuant to FASB Statement 92. Under the terms of the Settlement Petition, except for approximately 200 customers who were previously served jointly by the Hillside and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers served exclusively by the Nesbitt Water Treatment Plant would receive an increase. The Settlement Petition further provided that Page 20 FORM 8-K/A $6.4 million of the increased revenue (an approximate 65% increase in rates) was to be realized through an immediate rate increase and that the remaining $5.5 million of the increased revenue (an additional 54% increase in rates) was to be realized through a further rate increase one year later (i.e., at the beginning of year two of the phase-in period). The Settlement Petition also specified that the $5.5 million in revenue that was to be deferred during the first year of the phase-in period, as well as an approximate $1.3 million in related carrying charges, was to be collected from customers in the form of a surcharge in years three through five of the phase-in period. By Order adopted December 15, 1993, the PPUC approved the Settlement Petition effective December 16, 1993. In accordance with the provisions of FASB Statement 92, PGE commenced recording the entire $11.9 million increase in annual revenue allowed by the PPUC as additional revenue beginning December 16, 1993, along with the related carrying charges on revenue deferred in accordance with the phase-in plan. However, pursuant to the terms of the settlement, PGE deferred the billing of $5.3 million of the increased revenue recorded during the first year of the phase-in period (i.e., the period December 16, 1993, through December 15, 1994). The amount so deferred was $200,000 less than the $5.5 million originally estimated because of slightly lower than anticipated consumption. Effective December 16, 1995, PGE began to bill the $5.3 million that had been so deferred, as well as the related carrying charges, by means of the surcharge that will be effective in years three through five of the phase-in period and as of December 31, 1995, $17,000 had been so billed to its Ceasetown/Watres service area customers. (3) LONG-TERM DEBT Long-term debt at December 31, 1995, and the interest thereon during the year ended December 31, 1995, were as follows (in thousands of dollars): Long-term debt Interest * --------- -------- First mortgage bonds - 6.05 % Series, due 2019 $ 19,000 $ 1,150 7.00 % Series, due 2017 30,000 2,100 7.125% Series, due 2022 30,000 2,106 7.20 % Series, due 2017 50,000 3,600 --------- -------- 129,000 8,956 Notes - Water facility loans, (at interest rates ranging from, 1.764% to 7.382%, repayable in installments through 2012) 12,097 574 Less current maturities (677) - --------- -------- Total long-term debt $ 140,420 $ 9,530 ========= ======== * See Note 1, Summary of Significant Accounting Policies-Purpose of Statements, regarding the allocation of interest charges to the Water Business. Page 21 FORM 8-K/A All of the obligations of PGE and PEI with respect to such debt were assigned to and assumed by Pennsylvania-American on February 16, 1996, in connection with its purchase of the Water Business on that date. 7.125% Series First Mortgage Bonds. On December 22, 1992, the Luzerne County Industrial Development Authority (the "Authority") issued $30.0 million of its 7.125% Exempt Facilities Revenue Bonds, 1992 Series B (Pennsylvania Gas and Water Company Project)(the "1992 Series B Bonds") and, in connection therewith, PGE issued $30.0 million of its 7.125% Series First Mortgage Bonds to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the "IDA Trustee") for the 1992 Series B Bonds, as security for the 1992 Series B Bonds. The proceeds from the issuance of the 1992 Series B Bonds were deposited in a construction fund held by the IDA Trustee for the 1992 Series B Bonds, pending their utilization to finance the construction of various additions and improvements to PGE's water facilities for which construction commenced subsequent to September 23, 1992. During 1995 the remaining $3.4 million (including investment income) held by the IDA Trustee and available to PGE to finance the construction of qualified water facilities was so utilized. Maturities and Sinking Fund Requirements. As of December 31, 1995, the aggregate annual maturities (in thousands of dollars) of long-term debt for each of the next five years ending December 31, all of which related to the water facility loans, were: Year Amount ---- ------ 1996 $ 677 1997 $ 710 1998 $ 728 1999 $ 766 2000 $ 807 (4) POSTEMPLOYMENT BENEFITS Pension Benefits PGE's retirement plan is a trusteed, noncontributory, defined benefit pension plan which covers substantially all employees. Pension benefits are based on years of service and average final salary. PGE's funding policy is to contribute an amount necessary to provide for benefits based on service to date, as well as for benefits expected to be earned in the future by current participants. To the extent that the present value of these obligations is fully covered by assets in the trust, a contribution may not be made for a particular year. Net pension costs relative to the Water Business, including amounts capitalized, was $288,000 in 1995. The following items were the components of such net pension costs for the year 1995 (in thousands of dollars): Present value of benefits earned during the year $ 351 Interest cost on projected benefit obligations 1,193 Return on plan assets (1,228) Net amortization and deferral (28) -------- Net pension cost $ 288 ======== Page 22 FORM 8-K/A The assumptions used in determining pension obligations for 1995 were: Discount rate 7.00 % Expected long-term rate of return on plan assets 9.00 % Projected increase in future compensation levels 5.00 % Under the terms of the Agreement regarding the sale of PGE's water utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American assumed the accumulated benefit obligations relating to employees of PGE who accepted employment with Pennsylvania-American (the "Transferred Employees"). In this regard, plan assets in an amount equal to the actuarial present value of accumulated plan benefits relative to the Transferred Employees, totaling an estimated $2.7 million at December 31, 1995, will be transferred to the AWWC pension plan. Other Postretirement Benefits In addition to pension benefits, PGE provides certain health care and life insurance benefits for retired employees. Substantially all of PGE's employees may become eligible for those benefits if they reach retirement age while working for PGE. PGE records the cost of retiree health care and life insurance benefits as a liability over the employees' active service periods instead of on a benefits-paid basis. The following items were the components of the net cost of postretirement benefits other than pensions relative to the Water Business for the year 1995 (in thousands of dollars): Present value of benefits earned during the year $ 103 Interest cost on accumulated benefit obligation 473 Return on plan assets (57) Net amortization and deferral 320 -------- Net cost of postretirement benefits other than pensions 839 Less disbursements for benefits (453) -------- Increase in liability for postretirement benefits other than pensions $ 386 ======== The assumptions used in determining other postretirement benefit obligations for 1995 were: Discount rate 7.00 % Expected long-term rate of return on plan assets 9.00 % Projected increase in future compensation levels 5.00 % It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 9% in 1996 and that this rate would decrease gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The health care cost trend rate assumption had a significant effect on the amounts accrued. To illustrate, increasing the assumed health care cost trend rate by 1 percentage point in each year would increase the aggregate of the service and interest cost components of the net cost of postretirement benefits other than pensions for the year 1995 by approximately $50,000. Page 23 FORM 8-K/A Under the terms of the Agreement regarding the sale of PGE's water utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American assumed the accumulated benefit obligation relating to the Transferred Employees, as well as 45% of PGE's retired employees as of that date. In this regard, it is estimated that plan assets approximating $1.4 million as of December 31, 1995, will be transferred to trusts established by Pennsylvania-American to fund the accumulated plan benefits relative to the Transferred Employees and 45% of PGE's retired employees as of February 16, 1996. Other Postemployment Benefits In December, 1992, FASB Statement 112, "Employers' Accounting for Postemployment Benefits," was issued. The provisions of this statement require the recording of a liability for postemployment benefits (such as disability benefits, including workers' compensation, salary continuation and the continuation of benefits such as health care and life insurance) provided to former or inactive employees, their beneficiaries and covered dependents. (5) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of long-term debt was equal to its actual recorded value on December 31, 1995, since such debt was assumed by Pennsylvania-American on February 16, 1996, at its recorded value. -----END PRIVACY-ENHANCED MESSAGE-----