-----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, JuREaqD6hx+JOymgL38+lIZmL20VAdWvMD8An/+MoM0jJRaLfyAHdcFeC+9VewqT 2dxItt6PDe0FKwH63PG1Hw== 0000077231-96-000029.txt : 19961113 0000077231-96-000029.hdr.sgml : 19961113 ACCESSION NUMBER: 0000077231-96-000029 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ENTERPRISES INC CENTRAL INDEX KEY: 0000077231 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 135605391 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11325 FILM NUMBER: 96658458 BUSINESS ADDRESS: STREET 1: 39 PUBLIC SQ STREET 2: WILKES BARRE CENTER CITY: WILKES BARRE STATE: PA ZIP: 18711-0601 BUSINESS PHONE: 7178298843 MAIL ADDRESS: STREET 1: 39 PUBLIC SQUARE CITY: WILKES BARRE STATE: PA ZIP: 18711-0601 10-Q 1 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income for the three and nine months ended September 30, 1996 and 1995. . . . . . . . . 2 Consolidated Balance Sheets as of September 30, 1996, and December 31, 1995 . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 11 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 21 -1- PART I. FINANCIAL INFORMATION PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income Three Months Ended Nine Months Ended September 30, September 30, 1996 1995* 1996 1995* (Thousands of Dollars) OPERATING REVENUES: Gas sales and services $ 16,208 $ 13,298 $ 115,956 $ 111,403 Pipeline construction and services 3,095 155 7,634 220 Other 51 94 108 203 Total operating revenues 19,354 13,547 123,698 111,826 OPERATING EXPENSES: Cost of gas 7,628 5,660 63,335 63,549 Other operation expenses 9,398 5,471 27,731 17,528 Maintenance 1,379 1,452 4,085 3,732 Depreciation 2,108 1,787 6,214 5,367 Income taxes (2,043) (2,750) 3,486 757 Taxes other than income taxes 1,635 1,421 8,380 7,999 Total operating expenses 20,105 13,041 113,231 98,932 OPERATING INCOME (LOSS) (751) 506 10,467 12,894 OTHER INCOME, NET 736 33 2,972 233 INCOME (LOSS) BEFORE INTEREST CHARGES (15) 539 13,439 13,127 INTEREST CHARGES: Interest on long-term debt 2,469 3,384 7,660 10,232 Other interest 166 642 623 1,485 Allowance for borrowed funds used during construction (73) (18) (169) (40) Total interest charges 2,562 4,008 8,114 11,677 INCOME (LOSS) FROM CONTINUING OPERATIONS (2,577) (3,469) 5,325 1,450 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS (Note 2) - - (386) (3,704) INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (2,577) (3,469) 4,939 (2,254) SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 363 690 1,383 2,073 INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (2,940) (4,159) 3,556 (4,327) EXTRAORDINARY LOSS (NET OF TAX BENEFIT OF $575,000) (Note 3) (1,117) - (1,117) - NET INCOME (LOSS) $ (4,057) $ (4,159) $ 2,439 $ (4,327) COMMON STOCK Earnings (loss) per share of common stock: Continuing operations $ (.61) $ (.72) $ .75 $ (.11) Discontinued operations - - (.07) (.65) Net income (loss) before premium on repurchase/redemption of subsidiary's preferred stock and extraordinary loss (.61) (.72) .68 (.76) Premium on repurchase/redemption of subsidiary's preferred stock (.02) - (.27) - Extraordinary loss (.23) - (.21) - Earnings (loss) per share of common stock $ (.86) $ (.72) $ .20 $ (.76) Weighted average shares outstanding 4,810,518 5,754,607 5,214,001 5,715,294 Cash dividends per share $ .55 $ .55 $ 1.65 $ 1.65 *Reclassified to conform with 1996 consolidated financial statement presentation. The accompanying notes are an integral part of the consolidated financial statements.
-2- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995* (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost $ 311,363 $ 295,895 Accumulated depreciation (80,708) (76,882) 230,655 219,013 OTHER PROPERTY AND INVESTMENTS: Nonutility property and equipment 12,785 11,553 Accumulated depreciation (5,655) (5,394) Other 1,223 983 8,353 7,142 CURRENT ASSETS: Cash and cash equivalents 1,491 629 Accounts receivable - Customers 10,461 21,066 Others 576 815 Reserve for uncollectible accounts (932) (788) Unbilled revenues 2,556 10,319 Materials and supplies, at average cost 3,220 2,876 Gas held by suppliers, at average cost 25,439 15,140 Natural gas transition costs collectible 3,134 4,612 Deferred cost of gas and supplier refunds, net 17,545 - Prepaid expenses and other 1,900 3,486 65,390 58,155 DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 29,687 30,015 Other 4,331 3,013 Unamortized debt expense 1,578 2,630 35,596 35,658 NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250 TOTAL ASSETS $ 339,994 $ 524,218 *Reclassified to conform with 1996 consolidated financial statement presentation. The accompanying notes are an integral part of the consolidated financial statements.
-3- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995* (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION (Note 4): Common shareholders' investment $ 116,153 $ 162,739 Preferred stock of PGE - Not subject to mandatory redemption, net 19,192 33,615 Subject to mandatory redemption 739 1,680 Long-term debt 75,000 106,706 211,084 304,740 CURRENT LIABILITIES: Current portion of long-term debt 20,130 116,001 Preferred stock subject to mandatory redemption 80 80 Notes payable - 10,180 Accounts payable 14,765 18,531 Deferred cost of gas and supplier refunds, net - 434 Accrued general business and realty taxes 541 1,493 Accrued income taxes 27,004 526 Accrued interest 885 2,307 Accrued natural gas transition costs 2,292 2,278 Other 4,322 3,534 70,019 155,364 DEFERRED CREDITS: Deferred income taxes 46,094 48,835 Accrued natural gas transition costs 384 1,144 Unamortized investment tax credits 4,810 4,938 Operating reserves 3,113 3,709 Other 4,490 5,488 58,891 64,114 COMMITMENTS AND CONTINGENCIES (Note 6) TOTAL CAPITALIZATION AND LIABILITIES $ 339,994 $ 524,218 *Reclassified to conform with 1996 consolidated financial statement presentation. The accompanying notes are an integral part of the consolidated financial statements.
-4- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 1995 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income (loss) from continuing operations, net of subsidiary's preferred stock dividends $ 3,942 $ (623) Effects of noncash charges to income - Depreciation 6,266 5,395 Extraordinary loss, net of tax benefit (1,117) - Deferred income taxes, net 530 205 Provisions for self insurance 742 889 Other, net 1,861 1,945 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and unbilled revenues 18,751 19,838 Gas held by suppliers (10,299) (130) Accounts payable (3,583) (3,696) Deferred cost of gas and supplier refunds, net (16,801) 7,207 Other current assets and liabilities, net 992 (10,243) Other operating items, net (4,583) 1,027 Net cash provided (used) by continuing operations (3,299) 21,814 Net cash provided (used) by discontinued operations (35,470) 3,764 Net cash provided (used) by operating activities (38,769) 25,578 CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (18,501) (14,907) Net proceeds from sale of discontinued operations 261,752 - Other, net (1,285) 2,560 Net cash provided (used) by investing activities 241,966 (12,347) CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 555 3,376 Repurchase of common stock (39,663) - Dividends on common stock (8,533) (9,430) Repurchase/redemption of preferred stock of PGE (15,364) (80) Repayment of long-term debt (81,906) (3,535) Net decrease in bank borrowings (56,034) (3,125) Other, net (1,390) (5) Net cash used for financing activities (202,335) (12,799) NET INCREASE IN CASH AND CASH EQUIVALENTS 862 432 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 629 330 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,491 $ 762 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 8,700 $ 19,634 Income taxes $ 34,584 $ 10,018 The accompanying notes are an integral part of the consolidated financial statements.
-5- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) GENERAL Nature of the Business. Pennsylvania Enterprises, Inc. ("the Company") is a holding company whose principal subsidiary, PG Energy Inc. ("PGE"), a regulated public utility formerly known as Pennsylvania Gas and Water Company, distributes natural gas to a ten-county area in northeastern Pennsylvania, a territory that includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The Company, through its other subsidiaries, Pennsylvania Energy Resources, Inc. ("PERI"), Theta Land Corporation and Keystone Pipeline Services, Inc. ("Keystone"), a wholly-owned subsidiary of PERI, is also engaged in various non-regulated activities, including energy-related services and pipeline construction and service activities, which prior to 1996 were not significant to the operations of the Company as a whole. Pennsylvania Energy Marketing Company, which was also a subsidiary of the Company, was merged into PERI on May 31, 1996. On October 30, 1996, PGE signed a purchase agreement to acquire all of the capital stock of Honesdale Gas Company, which distributes natural gas to approximately 3,200 customers in portions of Wayne and Pike Counties in northeastern Pennsylvania. This acquisition, which is subject to approval of the Pennsylvania Public Utility Commission ("PPUC"), is expected to be consummated in early 1997. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, PGE, PERI and Theta. The consolidated financial statements also include the accounts of Keystone beginning December 4, 1995, the date Keystone was acquired by PERI. All material intercompany accounts have been eliminated in consolidation. PGE is a regulated public utility subject to the jurisdiction of the PPUC for rate and accounting purposes. The financial statements of PGE that are incorporated in these consolidated financial statements 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. Interim Financial Statements. The interim consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. The results for the interim periods are not indicative of the results to be expected for the year, primarily due to the effect of seasonal variations in weather on PGE. However, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary to present fairly the results for the interim periods have been reflected in the consolidated financial statements. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. -6- 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 the Company. Therefore, actual amounts could differ from these estimates. (2) DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended (the "Agreement"), among the Company, PGE, American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, the Company and PGE sold substantially all of the assets, properties and rights of PGE's water utility operations to Pennsylvania-American on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American paid PGE $414.3 million consisting of $262.1 million in cash and the assumption of $152.2 million of PGE's liabilities, including $141.0 million of its long-term debt. PGE continued to operate the water utility business until February 16, 1996. The sale price reflected a $6.5 million premium over the book value of the assets sold. However, after transaction costs and the net effect of other items, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to an early retirement plan, the sale resulted in an after tax loss of approximately $6.2 million, net of the income from the water operations during the phase-out period (which for financial reporting purposes was April 1, 1995, through February 15, 1996). The sale involved a gain for income tax purposes primarily because of the accelerated depreciation that had been claimed by PGE with respect to the water utility plant that was sold. It is estimated that the income taxes payable on the sale, for which deferred income taxes had previously been provided, will be approximately $58.6 million, of which $33.5 million had been paid as of September 30, 1996. The cash proceeds from the sale of approximately $203.5 million, net of the estimated $58.6 million of income taxes, have been used by the Company and PGE to retire debt, to repurchase stock (see Note 4 of these Notes to Consolidated Financial Statements), for construction expenditures and for other working capital purposes. With the sale of PGE's water utility operations, the principal assets of the Company and PGE now consist of PGE's gas utility operations and approximately 46,000 acres of land. The accompanying consolidated financial statements reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995. Interest charges relating to indebtedness of PGE were allocated to the discontinued operations based on the relationship of the gross water utility plant that was sold 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 revenue requirements of both PGE's gas and water utility operations. None of the dividends on PGE's preferred stock nor any of the Company's interest expense were allocated to the discontinued operations. -7- Selected financial information for the discontinued operations is set forth below: [CAPTION] Net Assets of Discontinued Operations As of December 31, 1995 (Thousands of Dollars) [S] [C] Net utility plant $ 368,742 Current assets (primarily accounts receivable and accrued revenues) 12,756 Deferred charges and other assets 25,752 Total assets acquired by Pennsylvania-American 407,250 Liabilities assumed by Pennsylvania-American - Long-term debt 141,097 Other 5,983 147,080 Net assets acquired by Pennsylvania-American 260,170 Estimated liability for income taxes on sale of discontinued operations (56,710) Estimated net income of discontinued operations during the remainder of the phase-out period 790 Total net assets of discontinued operations $ 204,250
Loss With Respect to Discontinued Operations Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 (Thousands of Dollars) Income from discontinued operations, net of related income taxes of $1,403,000* $ - $ - $ - $ 2,127 Estimated loss on disposal of discontinued operations, net of income during the phase-out period - - (386) (5,831) Loss with respect to discontinued operations $ - $ - $ (386) $(3,704)
* Reflects income only through March 31, 1995, the effective date of the discontinuance of PGE's water utility operations for financial statement purposes. (3) EXTRAORDINARY LOSS On September 30, 1996, the Company defeased the $28.7 million outstanding principal amount of its 10.125% Senior Notes (the "Senior Notes"), due June 15, 1999, and recorded an extraordinary loss of $1.1 million ($1.6 million, net of $575,000 of related income tax benefits). The loss on the defeasance represents the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes will be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior -8- Notes, less (i) the interest income that will be earned on the funds that were deposited with the Trustee for the Senior Notes in connection with their defeasance and (ii) the related income tax benefit. (4) REPURCHASES OF STOCK During the nine-month period ended September 30, 1996, the Company repurchased 1,011,539 shares of its common stock for an aggregate consideration of $39.7 million, and PGE repurchased 132,988 shares of its 9% cumulative preferred stock for an aggregate consideration of $14.4 million and 18,591 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $947,000, largely pursuant to self tender offers conducted during March and April, 1996. Additionally, on June 17, 1996, PGE repurchased 9,408 shares of its 5.75% cumulative preferred stock (including 800 shares redeemed in accordance with annual sinking fund provisions) for an aggregate consideration of $838,000. (5) ACCOUNTING CHANGES 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 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 provisions of FASB Statement 121, which the Company and PGE adopted effective January 1, 1996, did not have a material impact on the financial position or results of operations of either the Company or PGE since the carrying amount of all assets, including regulatory assets, are considered recoverable. Accounting for Stock-Based Compensation. In October, 1995, FASB Statement 123, "Accounting for Stock-Based Compensation," was issued. The Company adopted this statement in the first quarter of 1996, but will continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," supplemented by the required footnote disclosures of FASB Statement 123. Adoption of FASB Statement 123 had no effect upon the Company's financial position or results of operations. (6) COMMITMENTS AND CONTINGENCIES Valve Maintenance On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PGE to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. On March 31, 1995, the PPUC adopted an Order approving a plan submitted by PGE for complying with the Emergency Order. The Company does not believe that PGE's compliance with the terms of such Order will have a material adverse effect on its financial position or results of operations. -9- Environmental Matters PGE, like many gas distribution companies, once utilized manufactured gas plants in connection with providing gas service to its customers. None of these plants has been in operation since 1960, and several of the plant sites are no longer owned by PGE. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PGE filed notices with the United States Environmental Protection Agency (the "EPA") with respect to the former plant sites. None of the sites is or was formerly on the proposed or final National Priorities List. The EPA has conducted site inspections and made preliminary assessments of each site and has concluded that no further remedial action is planned. While this conclusion does not constitute a legal prohibition against further regulatory action under CERCLA or other applicable federal or state law, the Company does not believe that additional costs, if any, related to these manufactured gas plant sites would be material to its financial position or results of operations since environmental remediation costs generally are recoverable through rates over a period of time. -10- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended (the "Agreement"), among the Company, PG Energy Inc. ("PGE"), American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, the Company and PGE sold substantially all of the assets, properties and rights of PGE's water utility operations to Pennsylvania-American on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American paid PGE $414.3 million consisting of $262.1 million in cash and the assumption of $152.2 million of PGE's liabilities, including $141.0 million of its long-term debt. PGE continued to operate the water utility business until February 16, 1996. The sale price reflected a $6.5 million premium over the book value of the assets being sold. However, after transaction costs and the net effect of other items, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to an early retirement plan, the sale resulted in an after tax loss of approximately $6.2 million, net of the income from the water operations during the phase-out period (which for financial reporting purposes was April 1, 1995, through February 15, 1996.) The cash proceeds from the sale of approximately $203.5 million, net of an estimated $58.6 million of income taxes, have been used by the Company and PGE to retire debt, to repurchase stock, for construction expenditures and for other working capital purposes. With the sale of PGE's water utility operations, the principal assets of the Company and PGE now consist of PGE's gas utility operations and approximately 46,000 acres of land. In accordance with generally accepted accounting principles, the Company's consolidated financial statements reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995, and the following sections of Management's Discussion and Analysis generally relate only to the Company's continuing operations. For additional information regarding the discontinued operations, see Note 2 of the accompanying Notes to Consolidated Financial Statements. -11- RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in the Company's consolidated statements of income as percentages of total operating revenues for each of the three and nine-month periods ended September 30, 1996, and September 30, 1995:
Percentage of Operating Revenues Three Months Ended Nine Months Ended September 30, September 30, 1996 1995 1996 1995 OPERATING REVENUES: Gas sales and services..................... 83.7% 98.2% 93.7% 99.6% Pipeline construction and services......... 16.0 1.1 6.2 0.2 Other...................................... 0.3 0.7 0.1 0.2 Total operating revenues................. 100.0 100.0 100.0 100.0 OPERATING EXPENSES: Cost of gas................................ 39.4 41.8 51.2 56.8 Other operation expenses................... 48.6 40.4 22.4 15.7 Maintenance................................ 7.1 10.7 3.3 3.3 Depreciation............................... 10.9 13.2 5.0 4.8 Income taxes............................... (10.6) (20.3) 2.8 0.7 Taxes other than income taxes.............. 8.5 10.5 6.8 7.2 Total operating expenses................. 103.9 96.3 91.5 88.5 OPERATING INCOME (LOSS)...................... (3.9) 3.7 8.5 11.5 OTHER INCOME, NET............................ 3.8 0.2 2.4 0.2 INTEREST CHARGES (1)......................... (13.2) (29.5) (6.6) (10.4) INCOME (LOSS) FROM CONTINUING OPERATIONS..... (13.3) (25.6) 4.3 1.3 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - (0.3) (3.3) INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS............................ (13.3) (25.6) 4.0 (2.0) SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... (1.9) (5.1) (1.1) (1.9) INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... (15.2) (30.7) 2.9 (3.9) EXTRAORDINARY LOSS........................... (5.8) - (0.9) - NET INCOME (LOSS)............................ (21.0) (30.7) 2.0 (3.9)
(1) None of the Company's interest expense nor any of the subsidiary's preferred stock dividends was allocated to the discontinued operations. Three Months Ended September 30, 1996, Compared With Three Months Ended September 30, 1995 Operating Revenues. Operating revenues increased $5.8 million (42.9%) from $13.5 million for the three-month period ended September 30, 1995, to $19.4 million for the three-month period ended September 30, 1996. Slightly more than half of the increase was the result of $3.1 million of revenues in the third quarter of 1996 from the pipeline construction and services activities of Keystone Pipeline Services, Inc. ("Keystone"), which was acquired in December, 1995. Also contributing to the higher revenues was a $1.9 million increase in PGE's gas sales and services primarily as a result of price increases due to -12- increases in the purchased gas cost component of PGE's tariffs (the "gas cost rate") (See "-Rate Matters") and a 79 million cubic feet (6.8%) increase in consumption by PGE's residential and commercial heating customers largely caused by customer growth and slightly cooler weather. Operating Expenses. Operating expenses, including depreciation and income taxes, increased $7.1 million (54.2%) from $13.0 million for the three-month period ended September 30, 1995, to $20.1 million for the three-month period ended September 30, 1996. As a percentage of operating revenues, total operating expenses increased from 96.3% during the third quarter of 1995 to 103.9% during the third quarter of 1996. The cost of gas increased $2.0 million (34.8%) from $5.7 million for the three-month period ended September 30, 1995, to $7.6 million for the three-month period ended September 30, 1996, primarily because of the aforementioned increases in PGE's gas cost rate (see "-Rate Matters") and increased sales to PGE's residential and commercial heating customers. Other than the cost of gas and income taxes, operating expenses increased by $4.4 million (43.3%) from $10.1 million for the three-month period ended September 30, 1995, to $14.5 million for the three-month period ended September 30, 1996. This increase was largely attributable to a $3.9 million (71.8%) increase in other operation expenses, primarily as a result of $3.0 million of expenses relative to Keystone's pipeline construction and services activities, and a $654,000 (12.9%) increase in expenses with respect to PGE's operations, which was principally attributable to payroll and payroll-related costs. Payroll and payroll-related costs increased largely because of charges, which had formerly been allocated to PGE's discontinued operations, now being absorbed by its continuing operations. Also contributing to the higher operating expenses were increased depreciation expense of $321,000 (18.0%), primarily as a result of $137,000 of depreciation relative to Keystone and $184,000 attributable to additions to PGE's utility plant. Income taxes for the three-month period ended September 30, 1996, increased by $707,000 (25.7%) from a credit of $2.7 million in 1995 to a credit of $2.0 million in 1996 due to a lower level of loss before income taxes (for this purpose, operating income net of interest charges). Operating Income (Loss). As a result of the above, operating income decreased by $1.3 million from income of $506,000 for the three-month period ended September 30, 1995, to a loss of $751,000 for the three-month period ended September 30, 1996, and decreased as a percentage of total operating revenues for such periods from 3.7% in 1995 to a negative 3.9% in 1996. Other Income, Net. Other income, net increased $703,000 from $33,000 for the three-month period ended September 30, 1995, to $736,000 for the three-month period ended September 30, 1996, largely as a result of investment income totaling $743,000 relative to the temporary investment of a portion of the proceeds from the sale of PGE's regulated water utility operations. Interest Charges. Interest charges decreased by $1.4 million (36.1%) from $4.0 million for the three-month period ended September 30, 1995, to $2.6 million for the three-month period ended September 30, 1996. This decrease was largely attributable to the lower level of indebtedness resulting from the repayment of PGE's $50.0 million term loan and all of its then outstanding bank borrowings on February 16, 1996, with proceeds from the sale of its regulated water utility operations on such date. -13- Income (Loss) From Continuing Operations. The loss from continuing operations decreased $884,000 from $3.5 million for the quarter ended September 30, 1995, to $2.6 million for the quarter ended September 30, 1996. This decrease was largely the result of the matters discussed above, principally the increase in operating revenues and other income, net and the decrease in interest charges, the effects of which were partially offset by the increased operating expenses. Subsidiary Preferred Stock Dividends. Dividends on preferred stock decreased $327,000 (47.4%) from $690,000 for the three-month period ended September 30, 1995, to $363,000 for the three-month period ended September 30, 1996, primarily as a result of the repurchase by PGE in 1996 of 132,988 shares of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock and 18,591 shares of its 4.10% cumulative preferred stock, largely during the second quarter of the year. Income (Loss) Before Extraordinary Loss. The decrease of $1.2 million (29.3%) in the loss before extraordinary loss, from $4.2 million for the three- month period ended September 30, 1995, to $2.9 million for the three-month period ended September 30, 1996, was largely the result of the decrease in the loss from continuing operations and the reduced dividends on preferred stock, as discussed above. Extraordinary Loss. On September 30, 1996, the Company defeased the $28.7 million outstanding principal amount of its 10.125% Senior Notes (the "Senior Notes"), due June 15, 1999, and recorded an extraordinary loss on such defeasance of $1.1 million ($1.6 million, net of $575,000 of related income tax benefits). The loss on the defeasance represents the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes will be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior Notes, less (i) the interest income that will be earned on the funds that were deposited with the Trustee for the Senior Notes in connection with their defeasance and (ii) the related income tax benefit. Net Income (Loss). The decrease of $102,000 in the net loss, from $4.2 million for the three-month period ended September 30, 1995, to $4.1 million for the three-month period ended September 30, 1996, as well as the decrease of $.11 in the loss per share of common stock before the premium on the repurchase/redemption of subsidiary's preferred stock and the extraordinary loss, from $.72 per share for the quarter ended September 30, 1995, to $.61 per share for the quarter ended September 30, 1996, were largely the result of the factors discussed above. While the net loss from continuing operations decreased by $.11 per share, the $.23 per share charge for the extraordinary loss and the $.02 per share charge for the premium on the repurchase of subsidiary's preferred stock acted to increase the loss per share of common stock for the quarter ended September 30, 1996, to $.86 per share. Although premiums on the repurchase of preferred stock are charged to retained earnings and are not a determinant of net income, the premiums associated with repurchases must be taken into account in calculating the earnings (loss) per share of common stock. Nine Months Ended September 30, 1996, Compared With Nine Months Ended September 30, 1995 Operating Revenues. Operating revenues increased $11.9 million (10.6%) from $111.8 million for the nine-month period ended September 30, 1995, to $123.7 million for the nine-month period ended September 30, 1996, largely as a result -14- of $7.6 million of operating revenues relative to the pipeline construction and services activities of Keystone, which was acquired in December, 1995. Also contributing to the increase in operating revenues was a higher level of revenues attributable to PGE's gas sales and services, primarily as a result of a 1.9 billion cubic feet (13.0%) increase in sales to residential and commercial heating customers. There was a 660 (17.9%) increase in heating degree days from 3,696 (90.7% of normal) during the first nine months of 1995 to 4,356 (106.9% of normal) during the first nine months of 1996. The effects of the increased sales to heating customers were partially offset by lower levels in the purchased gas cost component of PGE's tariffs (the "gas cost rate"). See "-Rate Matters." Operating Expenses. Operating expenses, including depreciation and income taxes, increased $14.3 million (14.5%) from $98.9 million for the nine-month period ended September 30, 1995, to $113.2 million for the nine-month period ended September 30, 1996. As a percentage of operating revenues, total operating expenses increased from 88.5% during the nine-month period ended September 30, 1995 to 91.5% during the nine-month period ended September 30, 1996. The cost of gas decreased $214,000 (0.3%) from $63.5 million for the nine- month period ended September 30, 1995, to $63.3 million for the nine-month period ended September 30, 1996, primarily because of the aforementioned lower levels in PGE's gas cost rate (see "-Rate Matters"), the effects of which were largely offset by the increased sales to residential and commercial heating customers. Other than the cost of gas and income taxes, operating expenses increased by $11.8 million (34.0%) from $34.6 million for the nine-month period ended September 30, 1995, to $46.4 million for the nine-month period ended September 30, 1996. This increase was largely attributable to a $10.2 million (58.2%) increase in other operation expenses, primarily as a result of $7.5 million of expenses relative to Keystone's pipeline construction and services activities, and a $2.2 million (13.2%) increase in expenses with respect to PGE's operations, which was principally the result of higher payroll and payroll- related costs. Payroll and payroll-related costs increased largely because of charges, which had formerly been allocated to PGE's discontinued operations, now being absorbed by its continuing operations. Also contributing to the higher operating expenses was a $847,000 (15.8%) increase in depreciation expense as a result of $370,000 of depreciation relative to Keystone and $477,000 of depreciation attributable to additions to PGE's utility plant. Income taxes increased $2.7 million from $757,000 in the first nine months of 1995 to $3.5 million in the first nine months of 1996 due to an increase in income before income taxes (for this purpose, operating income net of interest charges). Operating Income (Loss). As a result of the above, operating income decreased by $2.4 million (18.8%) from $12.9 million for the nine-month period ended September 30, 1995, to $10.5 million for the nine-month period ended September 30, 1996, and decreased as a percentage of total operating revenues for such periods from 11.5% in 1995 to 8.5% in 1996, primarily because of the higher level of operating expenses. Other Income, Net. Other income, net increased $2.7 million from $233,000 for the nine-month period ended September 30, 1995, to $3.0 million for the nine-month period ended September 30, 1996, largely as a result of investment income totaling $2.5 million relative to the temporary investment of a portion of the proceeds from the sale of PGE's regulated water utility operations. -15- Interest Charges. Interest charges decreased by $3.6 million (30.5%) from $11.7 million for the nine-month period ended September 30, 1995, to $8.1 million for the nine-month period ended September 30, 1996. This decrease was largely attributable to the lower level of indebtedness resulting from the repayment of PGE's $50.0 million term loan and all of its then outstanding bank borrowings on February 16, 1996, with proceeds from the sale of its regulated water utility operations on such date. Income (Loss) From Continuing Operations. Income from continuing operations increased $3.9 million (266.7%) from $1.5 million for the nine months ended September 30, 1995, to $5.3 million for the nine months ended September 30, 1996. This increase was largely the result of the matters discussed above, principally the increase in operating revenues and other income, net and the decrease in interest charges, the effects of which were partially offset by increased operating expenses. Subsidiary's Preferred Stock Dividends. Dividends on preferred stock decreased $690,000 (33.3%) from $2.1 million for the nine-month period ended September 30, 1995, to $1.4 million for the nine-month period ended September 30, 1996, primarily as a result of the repurchase by PGE in 1996 of 132,988 shares of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock and 18,591 shares of its 4.10% cumulative preferred stock, largely during the second quarter of the year. Income (Loss) Before Extraordinary Loss. The increase in income before extraordinary loss of $7.9 million from a loss of $4.3 million for the nine- month period ended September 30, 1995, to income of $3.6 million for the nine- month period ended September 30, 1996, was largely the result of the increase in income from continuing operations and the lower level of dividends on subsidiary's preferred stock, as discussed above, and the reduction of $3.3 million, from $3.7 million to $386,000, in the loss with respect to discontinued operations. Extraordinary Loss. On September 30, 1996, the Company defeased the $28.7 million outstanding principal amount of its 10.125% Senior Notes, due June 15, 1999, and recorded an extraordinary loss of $1.1 million ($1.6 million, net of $575,000 of related income tax benefit). The loss on the defeasance represents the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes will be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior Notes, less (i) the interest income that will be earned on the funds that were deposited with the Trustee for the Senior Notes in connection with their defeasance and (ii) the related income tax benefit. Net Income (Loss). The increase in net income of $6.8 million from a loss of $4.3 million for the nine-month period ended September 30, 1995, to income of $2.4 million for the nine-month period ended September 30, 1996, as well as the increase in earnings per share of common stock of $.96 from a loss of $.76 per share for the nine months ended September 30, 1995, to earnings of $.20 per share for the nine months ended September 30, 1996 (after a $.27 per share charge for the premium on repurchase of subsidiary's preferred stock and a $.21 per share charge relative to the extraordinary loss), were the result of the higher income from continuing operations and the reduced dividends on subsidiary's preferred stock, as discussed above, and the decrease of $.58 per share, from $.65 per share for the nine-month period ended September 30, 1995, to $.07 per share for the nine-month period ended September 30, 1996, in the loss with respect to discontinued operations. -16- RATE MATTERS Proposed Rate Increase. On May 24, 1996, PGE filed an application with the PPUC seeking an increase in its base gas rates, designed to produce $14.1 million in additional annual revenue, to be effective July 23, 1996. On June 20, 1996, the PPUC suspended this rate increase for seven months (until February 23, 1997) in order to investigate the reasonableness of the proposed rates. On November 7, 1996, PGE and certain parties filing objections to the rate increase request filed a "Settlement Agreement and Joint Petition for Settlement of Rate Investigation" (the "Settlement Petition") with the Administrative Law Judge ("ALJ") assigned to conduct the investigation of the rate increase request. This Settlement Petition provides for an overall 5.3% rate increase that is designed to produce $7.5 million of additional annual revenue. The Settlement Petition requests PPUC approval for the rate increase to become effective by January 15, 1997. Additionally, under the terms of the Settlement Petition, to the extent the proposed rate increase is approved and permitted to become effective no later than January 31, 1997, billing for the impact of the rate increase relative to PGE's residential heating customers (which it is estimated will total $6.6 million on an annual basis) will be deferred, without carrying charges, until July, 1997. It is not presently possible to determine what action either the ALJ or the PPUC will ultimately take with respect to this rate increase request or the Settlement Petition. Gas Cost Adjustment. The provisions of the Pennsylvania Public Utility Code (the "Code"), require that the tariffs of gas distribution companies, such as PGE, be adjusted on an annual basis, and on an interim basis when circumstances dictate, to reflect changes in their purchased gas costs. In addition, effective September 14, 1995, the PPUC adopted regulations that provide for the quarterly adjustment of the annual purchased gas cost rate of larger gas distribution companies, including PGE. Such quarterly adjustments are allowed when the actual purchased gas costs vary from the estimated costs reflected in the respective company's tariffs by 2% or more. In accordance with these procedures, PGE has been permitted to make the following changes since January 1, 1995, to the gas costs contained in its gas tariff rates: [CAPTION] Change in Calculated Effective Rate per MCF Increase (Decrease) Date From To in Annual Revenue [S] [C] [C] [C] December 1, 1996 $3.01 $4.18 $35,500,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 December 1, 1995 2.42 2.75 9,600,000 May 15, 1995 3.68 2.42 (8,200,000) The changes in gas rates on account of purchased gas costs have no effect on PGE's earnings since the change in revenue is offset by a corresponding change in the cost of gas. Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs ("Gas Transition Costs") are subject to recovery through the annual PGC rate filings made with the PPUC by PGE and other larger local gas distribution companies. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs ("Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full -17- recovery by local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Code. The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. PGE was billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines. Of this amount, $858,000 was recovered by PGE over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 is being recovered by PGE in its annual PGC rate that the PPUC has approved effective December 1, 1995, and the remaining $213,000 will be recovered by PGE in its PGC rate that the PPUC has approved effective December 1, 1996. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non- Gas Transition Costs that it estimates it will ultimately be billed pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $10.0 million of Non-Gas Transition Costs will be billed to PGE, generally over a four-year period extending through the fourth quarter of 1997, of which $7.3 million had been billed to PGE and $6.8 million had been recovered from its customers as of September 30, 1996. PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed to it and the amounts remaining to be recovered from its customers. LIQUIDITY AND CAPITAL RESOURCES Sale of Water Utility Operations On February 16, 1996, PGE sold its regulated water operations and certain related assets to Pennsylvania-American for $414.3 million, consisting of $262.1 million in cash and the assumption of $152.2 million of PGE's liabilities, including $141.0 million of its long-term debt. The Company and PGE used the $203.5 million of cash proceeds from the sale, after the payment of an estimated $58.6 million of federal and state income taxes (of which $33.5 million had been paid as of September 30, 1996), to retire debt, to repurchase stock, for construction expenditures and for other working capital purposes. In this regard, PGE repaid its $50.0 million term loan due 1996 and all of its then outstanding bank borrowings on February 16, 1996, and the Company and PGE temporarily invested the balance of the proceeds. During the nine months ended September 30, 1996, the Company repurchased 1,011,539 shares of its common stock for an aggregate consideration of $39.7 million, of which 890,602 shares were acquired in April pursuant to a self tender offer and 120,937 shares were acquired from time to time through open market transactions and an oddlot buyback program. PGE also repurchased 132,988 shares of its 9% cumulative preferred stock for an aggregate consideration of $14.4 million and 18,591 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $947,000, largely pursuant to self tender offers conducted during March and April, 1996. Additionally, on June 17, 1996, PGE repurchased 9,408 shares of its 5.75% cumulative preferred stock (including 800 shares redeemed in accordance with annual sinking fund provisions) for an aggregate consideration of $838,000. Liquidity The primary capital needs of the Company are the funding of PGE's construction program and the seasonal funding of PGE's gas purchases and increases in its customer accounts receivable. PGE's revenues are highly -18- seasonal and weather-sensitive, with approximately 75% of its revenues normally being realized in the first and fourth quarters of the calendar year when the temperatures in its service area are the coldest. Additionally, as the Company's non-regulated activities expand, capital will be required for those activities, especially the residential and commercial development that is planned for certain Company-owned land. The two projects that are currently planned by the Company are in the initial planning and design phases, and the amount and type of funding that those projects will require has not yet been finalized. Nonetheless, it is expected that they will be funded by a combination of capital provided by the Company, bank borrowings and other debt financing. The cash flow from PGE's operations is generally sufficient to fund a portion of its construction expenditures. However, to the extent external financing is required, it is the practice of PGE to use bank borrowings to fund such expenditures, pending the periodic issuance of stock and long-term debt. Bank borrowings are also used by PGE for the seasonal funding of its gas purchases and increases in customer accounts receivable. With the repayment of its term loan and all its bank borrowings on February 16, 1996, and the availability of cash proceeds from the sale of its regulated water operations, PGE terminated its $60.0 million bank credit agreement. However, in order to finance construction expenditures and to meet its seasonal borrowing requirements, PGE has since made arrangements for a total of $55.5 million of unsecured revolving bank credit, which is deemed adequate for its immediate needs. Specifically, PGE currently has five bank lines of credit with an aggregate borrowing capacity of $55.5 million which provide for borrowings at interest rates generally less than prime and which mature during mid-1997. As of November 7, 1996, PGE had $25.7 million of borrowings outstanding under these bank lines of credit. In addition, PGE can borrow up to $70.0 million from the Company during 1996, and also 1997 (at interest rates generally less than prime), to repay bank borrowings and for construction expenditures and other working capital requirements, to the extent that the Company has funds available for lending to PGE. As of November 7, 1996, PGE had $37.3 million outstanding under its borrowing arrangement with the Company. Such interim borrowings by PGE from the Company will be repaid with proceeds from bank borrowings by PGE. PGE plans to arrange new and replacement bank lines of credit when the funds that are available for borrowing from the Company are no longer available and as it requires additional funding for working capital and other purposes. The Company believes that PGE will be able to raise in a timely manner such funds as are required for its future construction expenditures, refinancings and other working capital requirements. Likewise, the Company believes that its non-regulated subsidiaries will be able to raise such funds as are required for their needs, including that required for the residential and commercial real estate development that is planned. Long-Term Debt and Capital Stock Financings Both the Company and PGE periodically engage in long-term debt and capital stock financings in order to obtain funds required for construction expenditures, the refinancing of existing debt and various working capital purposes. No long-term debt or capital stock financings were consummated by either the Company or PGE during the nine-month period ended September 30, 1996. -19- The Company also obtains external funds from the sale of its common stock through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992 Stock Option Plan and its Employees' Savings Plan. The Company has, however, temporarily suspended the sale of stock to both the DRP and Employees' Savings Plan as a result of the proceeds received from the sale of PGE's water utility operations, and the two plans are currently obtaining shares of Company common stock for participants through open market purchases. During the nine-month period ended September 30, 1996, the Company realized $340,000, $555,000 and $195,000 from the issuance of common stock under the DRP, 1992 Stock Option Plan and Employees' Savings Plan, respectively. Construction Expenditures and Related Financings Expenditures for the construction of utility plant by PGE totaled $18.2 million during the first nine months of 1996 and are currently estimated to be $11.4 million during the remainder of the year. Such expenditures are being financed with proceeds from the sale of PGE's regulated water operations, internally-generated funds, loans from the Company and bank borrowings, pending the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of September 30, 1996, $80,000 of PGE's preferred stock and $20.1 million of PGE's bank borrowings were required to be repaid within twelve months. On September 30, 1996, the Company defeased the $28.7 million outstanding principal amount of its 10.125% Senior Notes, due June 15, 1999 (the "Senior Notes"). Specifically, on that date, the Company deposited $29.9 million with the trustee for the Senior Notes, which will be used, together with interest earned on the funds so deposited, to pay the Company's interest and principal obligations through June 15, 1997, the date on which the Senior Notes will be redeemed. The deposit of such funds acted to discharge all of the Company's obligations with respect to the Senior Notes. Of the $29.9 million required to defease the Senior Notes, $17.2 million was obtained through the liquidation of the Company's temporary cash investments and $12.7 million was obtained through the repayment of loans that had been made by the Company to PGE. Forward-Looking Statements Certain statements made above relating to plans, conditions, objectives and economic performance go beyond historical information and may provide an indication of future results. To that extent, they are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and each is subject to factors that could cause actual results to differ from those in the forward-looking statement. -20- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10-1 Employment Agreement dated as of June 26, 1996, by and among the Company, PGE and Kenneth L. Pollock -- filed herewith. 10-2 Employment Agreement dated as of August 28, 1996, by and among the Company, PGE and Thomas F. Karam -- filed herewith. 11-1 Statement Re Computation of Per Share Earnings -- filed herewith. 27-1 Financial Data Schedule -- filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. -21- PENNSYLVANIA ENTERPRISES, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. PENNSYLVANIA ENTERPRISES, INC. (Registrant) Date: November 12, 1996 By: /s/ Thomas J. Ward Thomas J. Ward Secretary Date: November 12, 1996 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) -22- EX-27 2
UT THIS STATEMENT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE SHEET, STATEMENTS OF INCOME AND CASH FLOW AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS 0000077231 PENNSYLVANIA ENTERPRISES INC. 9-MOS DEC-31-1995 SEP-30-1996 PER-BOOK 230,655,000 8,353,000 65,390,000 35,596,000 0 339,994,000 48,052,000 20,431,000 47,670,000 116,153,000 739,000 19,192,000 75,000,000 0 0 0 20,130,000 80,000 0 0 108,700,000 339,994,000 123,698,000 3,486,000 109,745,000 113,231,000 10,467,000 2,972,000 13,439,000 8,114,000 4,939,000 1,383,000 2,439,000 8,533,000 4,837,000 (38,769,000) .20 .20
EX-10 3 W6-NY960780.213 V2 V2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is dated as of the 28th day of August, 1996, by and among PENNSYLVANIA ENTERPRISES, INC. ("PEI"), PG ENERGY, INC. ("PGE") and Thomas F. Karam (the "Executive"), an individual residing at 331 Glenburn Road, Clarks Summit, Pennsylvania 18411. W I T N E S S E T H: WHEREAS, PEI and PGE each desires to employ Executive in the capacity of its President and Chief Executive Officer in connection with the conduct of its business; and WHEREAS, PEI and PGE are offering Executive this Employment Agreement as an inducement to remain in their employ; and WHEREAS, Executive desires to accept such employment on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto agree as follows: 1. Employment. PEI and PGE each hereby employs Executive as its President and Chief Executive Officer, and Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. Term. The term of employment of Executive under this Agreement (the "Term") shall commence on September 1, 1996 and shall end on the date which is the fifth anniversary thereof unless terminated in accordance with Section 6 or 7 hereof. 3. Office and Duties. During the Term, Executive shall serve as the President and Chief Executive Officer of PEI and PGE and shall report to the Boards of Directors of PEI (the "PEI Board") and PGE (the "PGE Board"). Executive shall perform such duties as are customary for the President and Chief Executive Officer of a company engaged in natural gas distribution and energy-related services in the United States and consistent with such position and status, and such other executive and administrative duties consistent therewith as may from time to time be assigned to him by the PEI Board and the PGE Board. During the Term, Executive shall devote his full business time and best efforts to the business of PEI and PGE; provided, however, that Executive may engage in other activities to the extent that such other activities do not inhibit or prohibit the performance of Executive's duties under this Agreement, or conflict in any material way with the business of PEI, PGE or any of their respective affiliates. 4. Compensation. As compensation for the services to be rendered hereunder by Executive, PEI and PGE collectively agree to pay to Executive, (a) an aggregate salary payable in cash in accordance with PGE's usual payroll practices of $212,880 for the first year of the Term and, $225,000 for the second year of the Term. Thereafter the Compensation Committee of the PEI Board shall conduct periodic salary and performance reviews for Executive in accordance with PEI's usual practices and, based upon such reviews, Executive's annual salary may be increased above but may not be decreased below the amount paid to Executive for the second year of the Term. (b) a grant of options under PEI's 1992 Stock Option Plan (the "Option Plan") to purchase 75,000 shares of PEI's common stock, no par value, stated value $10.00 per share ("Common Stock") to be made on September 1, 1996. Such options shall become exercisable, subject to acceleration in the event of a "Change of Control" of PEI (as defined in the Option Plan) pursuant to the terms of the Option Plan, as follows: options to purchase 15,000 shares shall become exercisable on September 1, 1997, options to purchase an additional 15,000 shares shall become exercisable on September 1, 1998, options to purchase an additional 15,000 shares shall become exercisable on September 1, 1999, options to purchase an additional 15,000 shares shall become exercisable on September 1, 2000 and options to purchase an additional 15,000 shares shall become exercisable on September 1, 2001. Such options shall be exercisable for the three years following the termination of Executive's employment for any reason except for termination by PEI pursuant to Section 7(a) hereof for "Cause" (as defined in Section 7(a) hereof) or termination by Executive pursuant to Section 7(d) hereof without "Good Reason" (as defined in Section 7(c) hereof). 5. Benefits. (a) Executive shall be entitled during the Term to participate in (i) all employee benefit plans and programs as are currently available and as shall become available from time to time to other employees of PEI and/or PGE, including, without limitation, any health, accident, disability or hospitalization insurance and (ii) all executive plans and programs in each case, to the extent that his position, tenure, compensation, age, health and other qualifications make him eligible to participate, and to continue to receive all perquisites as are currently available to Executive. In addition, Executive shall be eligible for 4 weeks paid vacation during each calendar year of the Term. (b) PEI and/or PGE shall pay for any further education or annual training or licensing requirements of Executive and training or educational seminars as may be required by PEI and/or PGE. (c) PEI and PGE shall each promptly reimburse Executive for all business expenses and disbursements incurred by Executive in the performance of Executive's duties during the Term in accordance with its then current reimbursement policies. 6. Termination for Death or Disability. At the election of PEI and/or PGE, the employment of Executive shall terminate in the event that Executive shall fail to render and perform the services required of him under this Agreement on a full-time basis because of any physical or mental incapacity or disability as determined by a physician or physicians acceptable to Executive and PEI and/or PGE for a total of 180 days or more during any consecutive 12 month period ("Disability"). In the event Executive dies during the Term or in the event PEI and/or PGE elects to terminate the employment of Executive for Disability, all obligations of PEI and/or PGE under this Agreement will cease as of the date of death or termination, except that PEI and/or PGE collectively shall pay, and Executive or his personal representative, as the case may be, shall be entitled to receive (i) the unpaid portion of his salary accrued through the end of the month in which such Disability is finally determined, to be paid in accordance with Section 4(a) hereof and (ii) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. 7. Termination of Employment Other Than for Death or Disability. (a) Cause. PEI and/or PGE may terminate the employment of Executive for "Cause" at any time in accordance with the provisions of this Section 7. Termination for "Cause" shall mean discharge by PEI and/or PGE on the grounds of (i) Executive's willful misconduct or gross negligence in the performance of his obligations under this Agreement, (ii) the habitual intoxication of Executive, (iii) inexcusable repeated or prolonged absence from work by Executive (other than pursuant to the Disability of Executive), (iv) the commission by Executive of an act of fraud or embezzlement, (v) any intentional or grossly negligent unauthorized disclosure of Confidential Information (as defined in Section 8(b) hereof) of PEI, PGE or any of their respective affiliates, (vi) a conviction of Executive (including entry of a guilty or nolo contendere plea) involving dishonesty or moral turpitude or (vii) the willful failure of Executive to perform faithfully the lawful duties which are assigned to him which are within the scope of PEI's and/or PGE's respective businesses and such failure is not cured by Executive within 14 days after written notice thereof from PEI and/or PGE to Executive. Upon a termination for Cause, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive, and Executive shall be entitled to receive, (x) the unpaid portion of his salary pro rated through the date of termination, to be paid in accordance with Section 4(a) hereof and (y) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. (b) Without Cause. In the event the Executive's employment is terminated by PEI and/or PGE without Cause, other than by reason of the death or Disability of Executive, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive, and Executive shall be entitled to receive either (i) in the event such termination does not occur within three years following the date on which a "Change in Control" (as defined below) of PEI occurs (A) the unpaid portion of his salary to the end of the Term, to be paid in accordance with Section 4(a) hereof, and (B) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted or (ii) in the event such termination occurs within three years following the date on which a Change in Control of PEI occurs (A) a Severance Payment equal to two times (2x) Executive's annual salary for the year in which such termination occurs to be paid in a lump sum within 10 days of such termination, (B) the unpaid portion of Executive's salary with respect to any additional years (other than the year in which such termination occurs) remaining in the Term to be paid in accordance with Section 4(a) hereof, (C) a continuation for a period of three years following the date on which a Change in Control of PEI occurs or until such time as Executive has obtained new employment and is covered by equivalent benefits, whichever is sooner, of Executive's coverage at the expense of PEI and/or PGE under life insurance, hospitalization and medical plans providing benefits which are substantially comparable to benefits provided to Executive under benefit plans of PEI, PGE and their respective subsidiaries in effect immediately prior to the Change in Control of PEI and (D) vested nonforfeitable amounts owing or accrued under any other benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. For purposes of this Agreement, a "Change in Control" of PEI shall be deemed to have occurred if and when: (w) there shall be consummated either (i) any consolidation or merger of PEI in which PEI is not the continuing or surviving corporation or pursuant to which shares of PEI's Common Stock are converted into cash, securities or other property, other than a consolidation or merger of PEI in which each holder of PEI's Common Stock immediately prior to the merger has upon consummation of the merger the same proportionate ownership of common stock of the surviving corporation as such holder had of PEI's Common Stock immediately prior to the merger, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of PEI; (x) the shareholders of PEI shall approve any plan or proposal for the liquidation or dissolution of PEI; (y) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than any trustee under any employee benefit plan of PEI or any of its subsidiaries, and persons (as such term is so used) who are then affiliates (as defined on August 28, 1996 in Rule 12b-2 under the Exchange Act) of such person, or any one of them, shall after the date hereof become the beneficial owner or owners (as defined on August 28, 1996 in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of PEI representing in the aggregate 20% or more of the voting power of all then outstanding securities of PEI having the right under ordinary circumstances to vote in an election of the PEI Board (without limitation, any securities of PEI having such voting power that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (z) during any period of 13 consecutive months, individuals who at the beginning of such period constitute the entire PEI Board and any new directors whose election by the PEI Board, or whose nomination for election by PEI's shareholders, shall have been approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election shall previously have been so approved shall cease for any reason to constitute a majority of the members of the PEI Board. (c) For Good Reason. Executive may terminate his employment for "Good Reason" upon 90 days' written notice to PEI and/or PGE. For purposes of this Agreement "Good Reason" shall mean (i) an adverse change in Executive's title, (ii) an assignment of duties to Executive which are inconsistent with his status as President and Chief Executive Officer of PEI and/or PGE, (iii) a substantial adverse alteration in Executive's status, nature of responsibilities or authority within PEI and/or PGE, (iv) following a Change in Control of PEI, a failure by PEI, PGE or any of their respective subsidiaries either to continue in effect any incentive or compensation plan or arrangement in which Executive shall be participating at the time of the Change in Control of PEI or to provide other plans or arrangements providing Executive with substantially comparable benefits or the taking by PEI, PGE or any of their respective subsidiaries of any action which would directly or indirectly materially adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan or arrangement, (v) any relocation of Executive's base of employment more than 25 miles from Wilkes-Barre, Pennsylvania without Executive's written consent, (vi) following a Change in Control of PEI, any failure by PEI and/or PGE to provide Executive with the number of paid vacation days per year to which Executive was entitled immediately prior to the Change in Control of PEI, (vii) any breach by PEI and/or PGE of any material provision of this Agreement or (viii) following a Change in Control of PEI, any failure by PEI and/or PGE to obtain from any successor to PEI a satisfactory agreement to assume and perform this Agreement. In the event that Executive terminates his employment for Good Reason, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive and Executive shall be entitled to receive either (x) in the event such termination does not occur within three years following the date on which a Change in Control of PEI occurs (A) the unpaid portion of his salary to the end of the Term, to be paid in accordance with Section 4(a) hereof, and (B) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted or (y) in the event such termination occurs within three years following the date on which a Change in Control of PEI occurs (A) a Severance Payment equal to two times (2x) Executive's annual salary for the year in which such termination occurs to be paid in a lump sum within 10 days of such termination, (B) the unpaid portion of Executive's salary with respect to any additional years (other than the year in which such termination occurs) remaining in the Term to be paid in accordance with Section 4(a) hereof, (C) a continuation for a period of three years following the date on which a Change in Control of PEI occurs or until such time as Executive has obtained new employment and is covered by equivalent benefits, whichever is sooner, of Executive's coverage at the expense of PEI and/or PGE under life insurance, hospitalization and medical plans providing benefits which are substantially comparable to benefits provided to Executive under benefit plans of PEI, PGE or any of their respective subsidiaries in effect immediately prior to the Change in Control of PEI and (D) vested nonforfeitable amounts owing or accrued under any other benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. (d) Without Good Reason. Executive may terminate his employment without Good Reason by giving PEI and/or PGE 90 days' written notice. Upon termination by Executive without Good Reason, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination except that PEI and/or PGE collectively shall pay Executive and Executive shall be entitled to receive (i) the unpaid portion of his salary pro rated through the date of termination to be paid in accordance with Section 4(a) hereof and (ii) vested,, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. 8. Covenant Not to Compete; Confidentiality; Litigation Support. In consideration for PEI's and PGE's execution and delivery of this Agreement: (a) Executive hereby agrees that during the period from the date of this Agreement through the end of the first year after the termination of Executive's employment with PEI and/or PGE for any reason other (x) than termination by PEI and/or PGE without Cause or (y) termination by Executive for Good Reason, Executive will not: (i) carry on or engage in any business that competes, directly or indirectly with the business of distributing natural gas, or any other business being conducted by PEI and/or PGE at the date of Executive's termination (collectively, a "Competing Business") anywhere in the United States; (ii) become a stockholder of a corporation or a member of a partnership or act as a consultant to or provide any assistance to any enterprise which carries on or engages in a Competing Business or which otherwise competes with PEI and/or PGE anywhere in the United States; provided, however, that Executive may own shares of stock of a corporation that is engaged in a Competing Business provided, that (A) Executive does not own more than one-half of one percent of the outstanding shares of stock of such corporation, (B) such shares are publicly traded on a United States natural securities exchange, NASDAQ or any over-the-counter public securities market and (C) Executive does not directly or indirectly acquire or assume any management responsibilities in such corporation; (iii) solicit, raid, entice or induce any person, firm or corporation that presently is or at any time during the Term shall be a client or customer of PEI, PGE or any of their respective affiliates to become a client or customer of any other person, firm or corporation engaged in a Competing Business anywhere in the United States; or (iv) solicit, raid, entice or induce any person who presently is or at any time during the Term shall be an employee of PEI, PGE or any of their respective affiliates to become employed by any other person, firm or corporation engaged in a Competing Business anywhere in the United States. (b) Executive acknowledges that during the Term he will have access to confidential information of PEI, PGE and their respective affiliates, including plans for future developments and information about costs, customers, profits, markets, key personnel, pricing policies, operational methods, and other business affairs and methods and other information not available to the public or in the public domain (hereinafter referred to as "Confidential Information"). In recognition of the foregoing, Executive covenants and agrees that, except as required by his duties to PEI and/or PGE, or as required by law or pursuant to legal process, Executive will keep secret all Confidential Information of PEI, PGE and their respective affiliates and will not, directly or indirectly, either during the Term of his employment hereunder or at any time thereafter, disclose or disseminate to anyone or make use of, for any purpose whatsoever, any Confidential Information, and upon termination of his employment, Executive will promptly deliver to PEI and/or PGE all tangible Confidential Information (including all copies thereof, whether prepared by Executive or others) which he may possess or control. (c) Executive acknowledges that the restrictions contained in this Section 8 are a reasonable and necessary protection of the immediate interests of PEI and PGE, that any violation of these restrictions would cause substantial injury to PEI and PGE and that PEI and PGE would not have entered into this Agreement without receiving the additional consideration offered by Executive by binding himself to these restrictions. In the event of a breach or threatened breach by Executive of any of these restrictions, PEI and/or PGE shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Executive from such breach or threatened breach; provided, however, that the right to apply for an injunction shall not be construed as prohibiting PEI and/or PGE from pursuing any other available remedies for such breach or threatened breach. In the event that, notwithstanding the foregoing, a covenant included in this Section 8 shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly. Without limitation of, and notwithstanding, the foregoing, in the event that, in any judicial proceeding, a court shall refuse to enforce any of the covenants contained in this Section 8, then the unenforceable covenant shall be deemed eliminated from the provisions of this Section 8 for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced. If any one or more of the provisions of this Section 8 shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Section shall not be effected thereby. To the extent permitted by applicable law, each party hereto waives any provision of law which renders any provision of this Section 8 invalid, illegal or unenforceable in any respect. (d) Executive agrees that during the Term and thereafter Executive shall be available to PEI and PGE and shall assist PEI and PGE in connection with any litigation brought by or against PEI and/or PGE relating to the period during which Executive was employed by PEI and/or PGE; provided, however, that all costs and expenses in connection with the foregoing shall be borne by PEI and/or PGE . (e) The provisions of this Section 8 shall survive the termination or expiration of this Agreement in accordance with the terms hereof. 9. Governing Law. This Agreement is governed by and is to be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without regard to conflicts of law principles. If under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement. The invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 10. Arbitration. If a dispute arises between the parties respecting the terms of this Agreement or Executive's employment by PEI and/or PGE , such dispute shall be settled by binding arbitration in Wilkes-Barre, Pennsylvania, in accordance with the rules of the American Arbitration Association. Each party shall bear its own expense of any such arbitration; provided, however, that Executive shall be entitled to receive reimbursement of his reasonable legal fees and out-of-pocket expenses from PEI and/or PGE with respect to any claim or dispute relating to the interpretation or enforcement of this Agreement promptly after invoices for such fees and expenses are rendered unless the position taken by Executive is determined by a court of competent jurisdiction to be frivolous. 11. Additional Payments. (a) In the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with PEI and/or PGE (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of Executive's failure to file timely a tax return or pay taxes shown due on his return), imposed with respect to such Gross-Up Payment and the Excise Tax, including any Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at PEI's and/or PGE's expense by an accounting firm selected by PEI and PGE and reasonably acceptable to Executive which is designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to PEI and/or PGE and Executive within five days of the date on which Executive's employment with PEI and/or PGE is terminated if applicable, or such other time as requested by PEI and/or PGE or by Executive (provided Executive reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by Executive with respect to a Payment or Payments, it shall furnish Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten days of the delivery of the Determination to Executive, Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 11(b) shall be paid by PEI and/or PGE collectively to Executive within five days of the receipt of the Determination. The existence of the Dispute shall not in any way affect Executive's right to receive the Gross-Up Payment in accordance with the Determination. If there is no Dispute, the Determination shall be binding, final and conclusive upon PEI and/or PGE and Executive subject to the application of Section 11(c) below. (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to Executive from any governmental taxing authority that Executive's tax liability (whether in respect of Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which PEI and/or PGE has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by PEI and/or PGE (which shall include the position taken by PEI and/or PGE, together with its consolidated group, on its federal income tax return) or (iv) upon the resolution of the Dispute to Executive's satisfaction. If an Underpayment occurs, Executive shall promptly notify PEI and/or PGE and PEI and/or PGE shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of Executive's failure to file timely a tax return or pay taxes shown due on Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a Final Determination (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments (or portion thereof) with respect to which Executive had previously received a Gross-Up Payment. A "Final Determination" shall be deemed to have occurred when Executive has received from the applicable government taxing authority a refund of taxes or other reduction in Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by PEI and/or PGE to Executive and Executive shall pay to PEI and/or PGE on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to Executive until the date of repayment to PEI and/or PGE. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment or Payments, PEI and/or PGE collectively shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that PEI and/or PGE has actually withheld from the Payment or Payments. 12. Allocation of Responsibility to Make Certain Payments. Responsibility for payment of the amounts payable pursuant to Sections 4(a), 5(b), 6, 7, 8(d), 10 and 11 of this Agreement shall be allocated between PEI and PGE as agreed upon from time to time by PEI and PGE. 13. Miscellaneous. (a) This Agreement cancels and supersedes any and all prior agreements and understandings between or among any or all of the parties hereto with respect to the employment of Executive by PEI and PGE. This Agreement constitutes the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. (b) Neither this Agreement nor the rights or obligations hereunder of any party hereto shall be assignable without the written consent of (i) PEI and PGE, with respect to an assignment or attempted assignment by Executive and (ii) Executive, with respect to an assignment or attempted assignment by PEI and/or PGE; provided, however, that no consent of Executive shall be required for any assignment by PEI and/or PGE whereby the assignee, by operation of law or otherwise, continues to carry on substantially the business of PEI and/or PGE, as the case may be, prior to the assignment. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of PEI and PGE. (c) Whenever under this Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by Federal Express or other similar overnight service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice: If to PEI: Pennsylvania Enterprises, Inc. Wilkes-Barre Center 39 Public Square Wilkes-Barre, Pennsylvania 18711-0601 Attention: Secretary If to PGE: PG Energy, Inc. Wilkes-Barre Center 39 Public Square Wilkes-Barre, Pennsylvania 18711-0601 Attention: Secretary If to Executive: Thomas F. Karam 331 Glenburn Road Clarks Summit, Pennsylvania 18411 In the case of Federal Express or other similar overnight service, such notice or advice shall be effective when sent, and, in the cases of certified or registered mail, shall be effective 2 days after delivery to the U.S. Post Office. (d) The invalidity of any portion of this Agreement shall not be deemed to render the remainder of this Agreement invalid. (e) The headings of this Agreement are for convenience of reference only and do not constitute a part hereof. (f) The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. (g) The amounts required to be paid by PEI and/or PGE to Executive pursuant to this Agreement shall not be subject to offset. (h) In the event that Executive's employment with PEI and/or PGE is terminated for any reason, Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages under this Agreement. IN WITNESS WHEREOF, Executive has hereunto set his hand and PEI and PGE have caused this instrument to be duly executed as of the day and year first above written. PENNSYLVANIA ENTERPRISES, INC. By: Name: Kenneth L. Pollock Title: Chairman of the Board of Directors PG ENERGY, INC. By: Name: Kenneth L. Pollock Title: Chairman of the Board of Directors Executive Thomas F. Karam APPROVED: COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF PENNSYLVANIA ENTERPRISES, INC. By: Name: John D. McCarthy Title: Chairman EX-10 4 13 W6-NY960920.111 V2 V2 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT is dated as of the 26th day of June, 1996, by and among PENNSYLVANIA ENTERPRISES, INC. ("PEI"), PG ENERGY, INC. ("PGE") and Kenneth L. Pollock (the "Executive"), an individual residing at 4050 Bayview Drive, Ft. Lauderdale, Florida 33308. W I T N E S S E T H: WHEREAS, PEI and PGE each desires to employ Executive in the capacity of Chairman of its Board of Directors in connection with the conduct of its business; and WHEREAS, PEI and PGE are offering Executive this Employment Agreement as an inducement to remain in their employ; and WHEREAS, Executive desires to accept such employment on the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the parties hereto agree as follows: 1. Employment. PEI and PGE each hereby employs Executive as Chairman of its Board of Directors, and Executive hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. Term. The term of employment of Executive under this Agreement (the "Term") shall commence on June 26, 1996 and shall end on the date which is the third anniversary thereof unless terminated in accordance with Section 6 or 7 hereof; provided, however, that this Agreement shall terminate if and when Executive is no longer a member of the Boards of Directors of PEI (the "PEI Board") and PGE (the "PGE Board"). 3. Office and Duties. During the Term, Executive shall serve as the Chairman of the PEI Board and as the Chairman of the PGE Board. Executive shall preside at meetings of the PEI Board and the PGE Board, play an active role in the management of PEI as assigned to him by the PEI Board and in the management of PGE as assigned to him by the PGE Board and in each case, perform such other duties as are customary for the Chairman of the board of directors of a company engaged in natural gas distribution and energy-related services in the United States and consistent with such position and status. 4. Compensation. As compensation for the services to be rendered hereunder by Executive, PEI and PGE collectively agree to pay to Executive: (a) an aggregate salary payable in cash in accordance with PGE's usual payroll practices of $97,500 for the first year of the Term, $97,500 for the second year of the Term and $97,500 for the third year of the Term; and (b) a grant of options under PEI's 1992 Stock Option Plan (the "Stock Option Plan") to purchase 45,000 shares of PEI's common stock, no par value, stated value $10.00 per share ("Common Stock") to be made on September 1, 1996. Such options shall become exercisable, subject to acceleration in the event of a "Change of Control" of PEI (as defined in the Option Plan) pursuant to the terms of the Option Plan, as follows: options to purchase 15,000 shares shall become exercisable on September 1, 1997, options to purchase an additional 15,000 shares shall become exercisable on September 1, 1998 and options to purchase an additional 15,000 shares shall become exercisable on September 1, 1999. Such options shall be exercisable for the three years following the termination of Executive employment for any reason, except for termination by PEI pursuant to Section 7(a) hereof for "Cause" (as defined in Section 7(a) hereof) or termination by Executive pursuant to Section 7(d) hereof without "Good Reason" (as defined in Section 7(c) hereof). 5. Benefits. (a) Executive shall be entitled during the Term to participate in (i) all employee benefit plans and programs as are currently available and as shall become available from time to time to other employees of PEI and/or PGE, including, without limitation, any health, accident, disability or hospitalization insurance and (ii) all executive plans and programs in each case, to the extent that his position, tenure, compensation, age, health and other qualifications make him eligible to participate, and to continue to receive all perquisites as are currently available to Executive. (b) PEI and PGE shall each promptly reimburse Executive for all business expenses and disbursements incurred by Executive in the performance of Executive's duties during the Term in accordance with its then current reimbursement policies. 6. Termination for Death or Disability. At the election of PEI and/or PGE, the employment of Executive shall terminate in the event that Executive shall fail to render and perform the services required of him under this Agreement on a full-time basis because of any physical or mental incapacity or disability as determined by a physician or physicians acceptable to Executive and PEI and/or PGE for a total of 180 days or more during any consecutive 12 month period ("Disability"). In the event Executive dies during the Term or in the event PEI and/or PGE elects to terminate the employment of Executive for Disability, all obligations of PEI and/or PGE under this Agreement will cease as of the date of death or termination, except that PEI and/or PGE collectively shall pay, and Executive or his personal representative, as the case may be, shall be entitled to receive (i) the unpaid portion of his salary accrued through the end of the month in which such Disability is finally determined, to be paid in accordance with Section 4(a) hereof and (ii) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. 7. Termination of Employment Other Than for Death or Disability. (a) Cause. PEI and/or PGE may terminate the employment of Executive for "Cause" at any time in accordance with the provisions of this Section 7. Termination for "Cause" shall mean discharge by PEI and/or PGE on the grounds of (i) Executive's willful misconduct or gross negligence in the performance of his obligations under this Agreement, (ii) the habitual intoxication of Executive, (iii) inexcusable repeated or prolonged absence from work by Executive (other than pursuant to the Disability of Executive), (iv) the commission by Executive of an act of fraud or embezzlement, (v) any intentional or grossly negligent unauthorized disclosure of Confidential Information (as defined in Section 8(b) hereof) of PEI, PGE or any of their respective affiliates, (vi) a conviction of Executive (including entry of a guilty or nolo contendere plea) involving dishonesty or moral turpitude or (vii) the willful failure of Executive to perform faithfully the lawful duties which are assigned to him which are within the scope of PEI's and/or PGE's respective businesses and such failure is not cured by Executive within 14 days after written notice thereof from PEI and/or PGE to Executive. Upon a termination for Cause, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive, and Executive shall be entitled to receive, (x) the unpaid portion of his salary pro rated through the date of termination, to be paid in accordance with Section 4(a) hereof and (y) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. (b) Without Cause. In the event the Executive's employment is terminated by PEI and/or PGE without Cause or the Executive is no longer a member of the PEI Board or the PGE Board, other than by reason of the death or Disability of Executive or his resignation from the PEI Board or the PGE Board, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive, and Executive shall be entitled to receive either (i) in the event such termination does not occur within three years following the date on which a "Change in Control" (as defined below) of PEI occurs (A) the unpaid portion of his salary to the end of the Term, to be paid in accordance with Section 4(a) hereof and (B) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted or (ii) in the event such termination occurs within three years following the date on which a Change in Control of PEI occurs (A) a Severance Payment equal to two times (2x) Executive's annual salary for the year in which such termination occurs to be paid in a lump sum within 10 days of such termination, (B) the unpaid portion of Executive's salary with respect to any additional years (other than the year in which such termination occurs) remaining in Term to be paid in accordance with Section 4(a) hereof, (C) a continuation for a period of three years following the date on which a Change in Control of PEI occurs of Executive's coverage at the expense of PEI and/or PGE under life insurance, hospitalization and medical plans providing benefits which are substantially comparable to benefits provided to Executive under benefit plans of PEI, PGE and their respective subsidiaries in effect immediately prior to the Change in Control of PEI, and (D) vested, nonforfeitable amounts owing or accrued under any other benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. For purposes of this Agreement, a "Change in Control" of PEI shall be deemed to have occurred if and when: (w) there shall be consummated either (i) any consolidation or merger of PEI in which PEI is not the continuing or surviving corporation or pursuant to which shares of PEI's Common Stock are converted into cash, securities or other property, other than a consolidation or merger of PEI in which each holder of PEI's Common Stock immediately prior to the merger has upon consummation of the merger the same proportionate ownership of Common Stock of the surviving corporation as such holder had of PEI's common stock immediately prior to the merger, or (ii) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of PEI; (x) the shareholders of PEI shall approve any plan or proposal for the liquidation or dissolution of PEI; (y) any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than any trustee under any employee benefit plan of PEI or any of its subsidiaries, and persons (as such term is so used) who are then affiliates (as defined on June 26, 1996 in Rule 12b-2 under the Exchange Act) of such person, or any one of them, shall after the date hereof become the beneficial owner or owners (as defined on June 26, 1996 in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of securities of PEI representing in the aggregate 20% or more of the voting power of all then outstanding securities of PEI having the right under ordinary circumstances to vote in an election of the PEI Board (without limitation, any securities of PEI having such voting power that any such person has the right to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed beneficially owned by such person); or (z) during any period of 13 consecutive months, individuals who at the beginning of such period constitute the entire PEI Board and any new directors whose election by the PEI Board, or whose nomination for election by PEI's shareholders, shall have been approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election shall previously have been so approved shall cease for any reason to constitute a majority of the members of the PEI Board. (c) For Good Reason. Executive may terminate his employment for "Good Reason" upon 90 days' written notice to PEI and/or PGE. For purposes of this Agreement "Good Reason" shall mean (i) an adverse change in Executive's title, (ii) an assignment of duties to Executive which are inconsistent with his status as Chairman of the PEI Board or the PGE Board, (iii) a substantial adverse alteration in Executive's status, nature of responsibilities or authority within PEI and/or PGE, (iv) following a Change in Control of PEI, a failure by PEI, PGE or any of their respective subsidiaries either to continue in effect any incentive or compensation plan or arrangement in which Executive shall be participating at the time of the Change in Control of PEI or to provide other plans or arrangements providing Executive with substantially comparable benefits or the taking by PEI, PGE or any of their respective subsidiaries of any action which would directly or indirectly materially adversely affect Executive's participation in or materially reduce Executive's benefits under any such plan or arrangement, (v) any breach by PEI and/or PGE of any material provision of this Agreement or (vi) following a Change in Control of PEI, any failure by PEI and PGE to obtain from any successor to PEI a satisfactory agreement to assume and perform this Agreement. In the event that Executive terminates his employment for Good Reason, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination, except that PEI and/or PGE collectively shall pay Executive and Executive shall be entitled to receive either (x) in the event such termination does not occur within three years following the date on which a Change in Control of PEI occurs (A) the unpaid portion of his salary to the end of the Term, to be paid in accordance with Section 4(a) hereof and (B) vested, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted or (y) in the event such termination occurs within three years following the date on which a Change in Control of PEI occurs (A) a Severance Payment equal to two times (2X) Executive's annual salary for the year in which such termination occurs to be paid in a lump sum within 10 days of such termination, (B) the unpaid portion of Executive's salary with respect to any additional years (other than the year in which such termination occurs) remaining in the Term to be paid in accordance with Section 4(a) hereof, (C) a continuation for a period of three years following the date on which a Change in Control of PEI occurs of Executive's coverage at the expense of PEI and/or PGE under life insurance, hospitalization and medical plans providing benefits which are substantially comparable to benefits provided to Executive under benefit plans of PEI, PGE or any of their respective subsidiaries in effect immediately prior to the Change in Control of PEI and (D) vested nonforfeitable amounts owing or accrued under any other benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. (d) Without Good Reason. Executive may terminate his employment without Good Reason by giving PEI and/or PGE 90 days' written notice. Upon termination by Executive without Good Reason, all obligations of PEI and/or PGE under this Agreement will cease as of the date of termination except that PEI and/or PGE collectively shall pay Executive and Executive shall be entitled to receive (i) the unpaid portion of his salary pro rated through the date of termination to be paid in accordance with Section 4(a) hereof and (ii) vested,, nonforfeitable amounts owing or accrued under any benefit plans or programs set forth or referred to in Section 5(a) hereof in which Executive participated as of his termination under the terms and conditions of the plan or program pursuant to which such benefits were granted. 8. Covenant Not to Compete; Confidentiality; Litigation Support. In consideration for PEI and PGE's execution and delivery of this Agreement: (a) Executive hereby agrees that during the period from the date of this Agreement through the end of the first year after the termination of Executive's employment with PEI and/or PGE for any reason other than (x) termination by PEI and/or PGE without Cause or (y) termination by Executive for Good Reason, Executive will not: (i) carry on or engage in any business that competes, directly or indirectly with the business of distributing natural gas, or any other business being conducted by PEI and/or PGE at the date of Executive's termination (collectively, a "Competing Business") anywhere in the United States; (ii) become a stockholder of a corporation or a member of a partnership or act as a consultant to or provide any assistance to any enterprise which carries on or engages in a Competing Business or which otherwise competes with PEI and/or PGE anywhere in the United States; provided, however, that Executive may own shares of stock of a corporation that is engaged in a Competing Business provided, that (A) Executive does not own more than one-half of one percent of the outstanding shares of stock of such corporation, (B) such shares are publicly traded on a United States natural securities exchange, NASDAQ or any over-the-counter public securities market and (C) Executive does not directly or indirectly acquire or assume any management responsibilities in such corporation; (iii) solicit, raid, entice or induce any person, firm or corporation that presently is or at any time during the Term shall be a client or customer of PEI, PGE or any of their respective affiliates to become a client or customer of any other person, firm or corporation engaged in a Competing Business anywhere in the United States; or (iv) solicit, raid, entice or induce any person who presently is or at any time during the Term shall be an employee of PEI, PGE or any of their respective affiliates to become employed by any other person, firm or corporation engaged in a Competing Business anywhere in the United States. (b) Executive acknowledges that during the Term he will have access to confidential information of PEI, PGE and their respective affiliates, including plans for future developments and information about costs, customers, profits, markets, key personnel, pricing policies, operational methods, and other business affairs and methods and other information not available to the public or in the public domain (hereinafter referred to as "Confidential Information"). In recognition of the foregoing, Executive covenants and agrees that, except as required by his duties to PEI and/or PGE, or as required by law or pursuant to legal process, Executive will keep secret all Confidential Information of PEI, PGE and their respective affiliates and will not, directly or indirectly, either during the Term of his employment hereunder or at any time thereafter, disclose or disseminate to anyone or make use of, for any purpose whatsoever, any Confidential Information, and upon termination of his employment, Executive will promptly deliver to PEI and/or PGE all tangible Confidential Information (including all copies thereof, whether prepared by Executive or others) which he may possess or control. (c) Executive acknowledges that the restrictions contained in this Section 8 are a reasonable and necessary protection of the immediate interests of PEI and PGE, that any violation of these restrictions would cause substantial injury to PEI and PGE and that PEI and PGE would not have entered into this Agreement without receiving the additional consideration offered by Executive by binding himself to these restrictions. In the event of a breach or threatened breach by Executive of any of these restrictions, PEI and/or PGE shall be entitled to apply to any court of competent jurisdiction for an injunction restraining Executive from such breach or threatened breach; provided, however, that the right to apply for an injunction shall not be construed as prohibiting PEI and/or PGE from pursuing any other available remedies for such breach or threatened breach. In the event that, notwithstanding the foregoing, a covenant included in this Section 8 shall be deemed by any court to be unreasonably broad in any respect, it shall be modified in order to make it reasonable and shall be enforced accordingly. Without limitation of, and notwithstanding, the foregoing, in the event that, in any judicial proceeding, a court shall refuse to enforce any of the covenants contained in this Section 8, then the unenforceable covenant shall be deemed eliminated from the provisions of this Section 8 for the purpose of those proceedings to the extent necessary to permit the remaining covenants to be enforced. If any one or more of the provisions of this Section 8 shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Section shall not be effected thereby. To the extent permitted by applicable law, each party hereto waives any provision of law which renders any provision of this Section 8 invalid, illegal or unenforceable in any respect. (d) Executive agrees that during the Term and thereafter Executive shall be available to PEI and PGE and shall assist PEI and PGE in connection with any litigation brought by or against PEI and/or PGE relating to the period during which Executive was employed by PEI and/or PGE; provided, however, that all costs and expenses in connection with the foregoing shall be borne by PEI and/or PGE . (e) The provisions of this Section 8 shall survive the termination or expiration of this Agreement in accordance with the terms hereof. 9. Governing Law. This Agreement is governed by and is to be construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania without regard to conflicts of law principles. If under such law, any portion of this Agreement is at any time deemed to be in conflict with any applicable statute, rule, regulation or ordinance, such portion shall be deemed to be modified or altered to conform thereto or, if that is not possible, to be omitted from this Agreement. The invalidity of any such portion shall not affect the force, effect and validity of the remaining portion hereof. 10. Arbitration. If a dispute arises between the parties respecting the terms of this Agreement or Executive's employment by PEI and/or PGE, such dispute shall be settled by binding arbitration in Wilkes-Barre, Pennsylvania, in accordance with the rules of the American Arbitration Association. Each party shall bear its own expense of any such arbitration; provided, however, that Executive shall be entitled to receive reimbursement of his reasonable legal fees and out-of-pocket expenses from PEI and/or PGE with respect to any claim or dispute relating to the interpretation or enforcement of this Agreement promptly after invoices for such fees and expenses are rendered unless the position taken by Executive is determined by a court of competent jurisdiction to be frivolous. 11. Additional Payments. (a) In the event that any payment or benefit (within the meaning of Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended (the "Code")), to Executive or for his benefit paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise in connection with, or arising out of, his employment with PEI and/or PGE (a "Payment" or "Payments"), would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then Executive will be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by Executive of all taxes (including any interest or penalties, other than interest and penalties imposed by reason of Executive's failure to file timely a tax return or pay taxes shown due on his return), imposed with respect to such Gross-Up Payment and the Excise Tax, including any Excise Tax imposed upon the Gross-Up Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) An initial determination as to whether a Gross-Up Payment is required pursuant to this Agreement and the amount of such Gross-Up Payment shall be made at PEI's and/or PGE's expense by an accounting firm selected by PEI and PGE and reasonably acceptable to Executive which is designated as one of the five largest accounting firms in the United States (the "Accounting Firm"). The Accounting Firm shall provide its determination (the "Determination"), together with detailed supporting calculations and documentation, to PEI and/or PGE and Executive within five days of the date on which Executive's employment with PEI and/or PGE is terminated if applicable, or such other time as requested by PEI and/or PGE or by Executive (provided Executive reasonably believes that any of the Payments may be subject to the Excise Tax) and if the Accounting Firm determines that no Excise Tax is payable by Executive with respect to a Payment or Payments, it shall furnish Executive with an opinion reasonably acceptable to Executive that no Excise Tax will be imposed with respect to any such Payment or Payments. Within ten days of the delivery of the Determination to Executive, Executive shall have the right to dispute the Determination (the "Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section 11(b) shall be paid by PEI and/or PGE collectively to Executive within five days of the receipt of the Determination. The existence of the Dispute shall not in any way affect Executive's right to receive the Gross-Up Payment in accordance with the Determination. If there is no Dispute, the Determination shall be binding, final and conclusive upon PEI and/or PGE and Executive subject to the application of Section 11(c) below. (c) As a result of the uncertainty in the application of Sections 4999 and 280G of the Code, it is possible that a Gross-Up Payment (or a portion thereof) will be paid which should not have been paid (an "Excess Payment") or a Gross-Up Payment (or a portion thereof) which should have been paid will not have been paid (an "Underpayment"). An Underpayment shall be deemed to have occurred (i) upon notice (formal or informal) to Executive from any governmental taxing authority that Executive's tax liability (whether in respect of Executive's current taxable year or in respect of any prior taxable year) may be increased by reason of the imposition of the Excise Tax on a Payment or Payments with respect to which PEI and/or PGE has failed to make a sufficient Gross-Up Payment, (ii) upon a determination by a court, (iii) by reason of determination by PEI and/or PGE (which shall include the position taken by PEI and/or PGE, together with their respective consolidated groups, on their respective federal income tax returns) or (iv) upon the resolution of the Dispute to Executive's satisfaction. If an Underpayment occurs, Executive shall promptly notify PEI and/or PGE and PEI and/or PGE shall promptly, but in any event, at least five days prior to the date on which the applicable government taxing authority has requested payment, pay to Executive an additional Gross-Up Payment equal to the amount of the Underpayment plus any interest and penalties (other than interest and penalties imposed by reason of Executive's failure to file timely a tax return or pay taxes shown due on Executive's return) imposed on the Underpayment. An Excess Payment shall be deemed to have occurred upon a Final Determination (as hereinafter defined) that the Excise Tax shall not be imposed upon a Payment or Payments (or portion thereof) with respect to which Executive had previously received a Gross- Up Payment. A "Final Determination" shall be deemed to have occurred when Executive has received from the applicable government taxing authority a refund of taxes or other reduction in Executive's tax liability by reason of the Excise Payment and upon either (x) the date a determination is made by, or an agreement is entered into with, the applicable governmental taxing authority which finally and conclusively binds Executive and such taxing authority, or in the event that a claim is brought before a court of competent jurisdiction, the date upon which a final determination has been made by such court and either all appeals have been taken and finally resolved or the time for all appeals has expired or (y) the statute of limitations with respect to Executive's applicable tax return has expired. If an Excess Payment is determined to have been made, the amount of the Excess Payment shall be treated as a loan by PEI and/or PGE to Executive and Executive shall pay to PEI and/or PGE on demand (but not less than 10 days after the determination of such Excess Payment and written notice has been delivered to Executive) the amount of the Excess Payment plus interest at an annual rate equal to the Applicable Federal Rate provided for in Section 1274(d) of the Code from the date the Gross-Up Payment (to which the Excess Payment relates) was paid to Executive until the date of repayment to PEI and/or PGE. (d) Notwithstanding anything contained in this Agreement to the contrary, in the event that, according to the Determination, an Excise Tax will be imposed on any Payment or Payments, PEI and/or PGE collectively shall pay to the applicable government taxing authorities as Excise Tax withholding, the amount of the Excise Tax that PEI and/or PGE has actually withheld from the Payment or Payments. 12. Allocation of Responsibility to Make Certain Payments Responsibility for payment of the amounts payable by PEI and/or PGE pursuant to Sections 4(a), 6, 7, 8(d), 10 and 11 of this Agreement shall be allocated between PEI and PGE as agreed upon from time to time by PEI and PGE. 13. Miscellaneous. (a) This Agreement cancels and supersedes any and all prior agreements and understandings between or among any or all of the parties hereto with respect to the employment of Executive by PEI and PGE. This Agreement constitutes the entire agreement among the parties with respect to the matters herein provided, and no modification or waiver of any provision hereof shall be effective unless in writing and signed by the parties hereto. (b) Neither this Agreement nor the rights or obligations hereunder of any party hereto shall be assignable without the written consent of (i) PEI and PGE, with respect to an assignment or attempted assignment by Executive and (ii) Executive, with respect to an assignment or attempted assignment by PEI and/or PGE; provided, however, that no consent of Executive shall be required for any assignment by PEI and/or PGE whereby the assignee, by operation of law or otherwise, continues to carry on substantially the business of PEI and/or PGE, as the case may be, prior to the assignment. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of PEI and PGE. (c) Whenever under this Agreement it becomes necessary to give notice, such notice shall be in writing, signed by the party or parties giving or making the same, and shall be served on the person or persons for whom it is intended or who should be advised or notified, by Federal Express or other similar overnight service or by certified or registered mail, return receipt requested, postage prepaid and addressed to such party at the address set forth below or at such other address as may be designated by such party by like notice: If to PEI: Pennsylvania Enterprises, Inc. Wilkes-Barre Center 39 Public Square Wilkes-Barre, Pennsylvania 18711-0601 Attention: Secretary If to PGE: PG Energy, Inc. Wilkes-Barre Center 39 Public Square Wilkes-Barre, Pennsylvania 18711-0601 Attention: Secretary If to Executive: Kenneth L. Pollock 4050 Bayview Drive Ft. Lauderdale, Florida 33308 In the case of Federal Express or other similar overnight service, such notice or advice shall be effective when sent, and, in the cases of certified or registered mail, shall be effective 2 days after delivery to the U.S. Post Office. (d) The invalidity of any portion of this Agreement shall not be deemed to render the remainder of this Agreement invalid. (e) The headings of this Agreement are for convenience of reference only and do not constitute a part hereof. (f) The failure of any party at any time to require performance by any other party of any provision hereof or to resort to any remedy provided herein or at law or in equity shall in no way affect the right of such party to require such performance or to resort to such remedy at any time thereafter, nor shall the waiver by any party of a breach of any of the provisions hereof be deemed to be a waiver of any subsequent breach of such provisions. No such waiver shall be effective unless in writing and signed by the party against whom such waiver is sought to be enforced. (g) The amounts required to be paid by PEI and/or PGE to Executive pursuant to this Agreement shall not be subject to offset. (h) In the event that Executive's employment with PEI and/or PGE is terminated for any reason, Executive shall not be required to seek other employment or otherwise to mitigate Executive's damages under this Agreement. IN WITNESS WHEREOF, Executive has hereunto set his hand and PEI and PGE have caused this instrument to be duly executed as of the day and year first above written. PENNSYLVANIA ENTERPRISES, INC. By: Name: Thomas F. Karam Title: Executive Vice President PG ENERGY, INC. By: Name: Thomas F. Karam Title: Executive Vice President Executive Kenneth L. Pollock Approved: Compensation Committee of the Board of Directors of Pennsylvania Enterprises, Inc. By: Name: John D. McCarthy Title: Chairman EX-11 5
EXHIBIT 11-1 PENNSYLVANIA ENTERPRISES, INC. Statement Re Computation of Per Share Earnings for the Three and Nine Month Periods Ended September 30, 1996 and 1995 Three Months Ended Nine Months Ended 1996 1995 1996 1995 Income (loss) before subsidiary's preferred stock dividends $ (3,694,000) $ (3,469,000) $ 3,822,000 $ (2,254,000) Subsidiary's preferred stock dividends 363,000 690,000 1,383,000 2,073,000 Net income (loss) $ (4,057,000) $ (4,159,000) $ 2,439,000 $ (4,327,000) Earnings (loss) per share of common stock* $ (.86) $ (.72) $ .20 $ (.76) Computations of additional common shares outstanding Average shares of common stock 4,810,518 5,754,607 5,214,001 5,715,294 Incremental common shares applicable to options, based on the daily average market price 8,584 3,418 7,963 1,194 Average common shares as adjusted 4,819,102 5,758,025 5,221,964 5,716,488 Average shares of common stock 4,810,518 5,754,607 5,214,001 5,715,294 Incremental common shares applicable to options, based on the more dilutive of daily average or ending market price 9,574 5,963 8,717 3,121 Average common shares fully diluted 4,820,092 5,760,570 5,222,718 5,718,415 Earnings (loss) per share of common stock Average common shares as adjusted $ (.86) $ (.72) $ .20 $ (.76) Average common shares fully diluted $ (.86) $ (.72) $ .20 $ (.76) * Earnings (loss) per share of common stock reflect the effects of premiums totaling $89,775 and $1,383,771 on the redemption/repurchase of subsidiary's preferred stock in the periods ended September 30, 1996, that were charged to retained earnings and not included in the determination of net income.
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