-----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, FeCtpx4g5CI6RBXe6geDajFzal0X1yrmdJIhjjj8kVATmWxan6GXucuv0hoTvgf4 GkMGf5tN5felZCYmP2HsoQ== 0000077231-97-000027.txt : 19971110 0000077231-97-000027.hdr.sgml : 19971110 ACCESSION NUMBER: 0000077231-97-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA ENTERPRISES INC CENTRAL INDEX KEY: 0000077231 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 231920170 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11325 FILM NUMBER: 97709665 BUSINESS ADDRESS: STREET 1: ONE PEI CTR STREET 2: WILKES BARRE CTR 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, 1997 and 1996. . . . . . . . . 2 Consolidated Balance Sheets as of September 30, 1997, and December 31, 1996 . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19 -1- PART I. FINANCIAL INFORMATION PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES Consolidated Statements of Income
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (Thousands of Dollars, Except for Share Amounts) OPERATING REVENUES: Regulated $ 16,276 $ 13,998 $ 129,425 $ 108,870 Nonregulated - Gas sales and services 4,523 2,210 17,889 7,086 Pipeline construction and services 3,344 3,095 8,124 7,634 Other 66 51 126 108 Total operating revenues 24,209 19,354 155,564 123,698 OPERATING EXPENSES: Cost of gas 11,089 7,628 90,523 63,335 Operation and maintenance 11,088 10,777 32,396 31,816 Depreciation 2,367 2,108 7,045 6,214 Income taxes (2,064) (2,043) 3,618 2,610 Taxes other than income taxes 2,020 1,635 9,684 8,380 Total operating expenses 24,500 20,105 143,266 112,355 OPERATING INCOME (LOSS) (291) (751) 12,298 11,343 OTHER INCOME, NET 667 736 1,395 2,096 INCOME (LOSS) BEFORE INTEREST CHARGES 376 (15) 13,693 13,439 INTEREST CHARGES: Interest on long-term debt 2,238 2,469 6,379 7,660 Other interest 230 166 631 623 Allowance for borrowed funds used during construction (45) (73) (144) (169) Total interest charges 2,423 2,562 6,866 8,114 INCOME (LOSS) FROM CONTINUING OPERATIONS (2,047) (2,577) 6,827 5,325 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS - - - (386) INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (2,047) (2,577) 6,827 4,939 SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 320 363 991 1,383 INCOME (LOSS) BEFORE EXTRAORDINARY LOSS (2,367) (2,940) 5,836 3,556 EXTRAORDINARY LOSS (NET OF TAX BENEFIT OF $575,000) (Note 2) - (1,117) - (1,117) NET INCOME (LOSS) $ (2,367) $ (4,057) $ 5,836 $ 2,439 COMMON STOCK (Note 3): Earnings (Loss) Per Share of Common Stock: Continuing operations $ (.24) $ (.31) $ .61 $ .38 Discontinued operations - - - (.04) Income (loss) before discount (premium) on repurchase of subsidiary's preferred stock and extraordinary loss (.24) (.31) .61 .34 Discount (premium) on repurchase of subsidiary's preferred stock - (.01) .08 (.13) Extraordinary loss - (.11) - (.11) Earnings (loss) per share of common stock $ (.24) $ (.43) $ .69 $ .10 Weighted average shares outstanding 9,699,614 9,621,126 9,643,088 10,428,032 Cash dividends per share $ .30 $ .275 $ .89 $ .825 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, 1997 1996 (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost $ 344,242 $ 319,205 Accumulated depreciation (86,933) (79,783) 257,309 239,422 OTHER PROPERTY AND INVESTMENTS: Nonutility property and equipment 14,115 12,502 Accumulated depreciation (4,742) (4,674) Other 1,734 1,720 11,107 9,548 CURRENT ASSETS: Cash and cash equivalents 1,101 1,126 Accounts receivable - Customers 16,420 22,464 Others 889 565 Reserve for uncollectible accounts (1,452) (1,233) Unbilled revenues 3,374 12,966 Materials and supplies, at average cost 3,201 2,865 Gas held by suppliers, at average cost 25,970 20,265 Natural gas transition costs collectible 1,512 2,525 Deferred cost of gas and supplier refunds, net 9,207 19,316 Prepaid expenses and other 1,513 1,438 61,735 82,297 DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 30,712 29,771 Other 4,329 4,274 Unamortized debt expense 1,329 1,498 Other 457 - 36,827 35,543 TOTAL ASSETS $ 366,978 $ 366,810 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, 1997 1996 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' investment $ 117,538 $ 117,651 Preferred stock of PGE - Not subject to mandatory redemption, net 15,848 18,851 Subject to mandatory redemption 640 739 Long-term debt 125,000 75,000 259,026 212,241 CURRENT LIABILITIES: Current portion of long-term debt 14,720 38,721 Preferred stock subject to repurchase or mandatory redemption 80 115 Notes payable 4,500 10,000 Accounts payable 14,064 19,945 Accrued general business and realty taxes 1,691 2,350 Accrued income taxes 2,966 14,525 Accrued interest 1,470 1,243 Accrued natural gas transition costs 1,154 2,095 Other 2,807 3,904 43,452 92,898 DEFERRED CREDITS: Deferred income taxes 51,250 49,270 Unamortized investment tax credits 4,639 4,767 Operating reserves 2,805 3,086 Other 5,806 4,548 64,500 61,671 COMMITMENTS AND CONTINGENCIES (Note 6) TOTAL CAPITALIZATION AND LIABILITIES $ 366,978 $ 366,810 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, 1997 1996 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income from continuing operations, net of subsidiary's preferred stock dividends $ 5,836 $ 3,942 Effects of noncash charges to income - Depreciation 7,095 6,266 Extraordinary loss, net of tax benefit - (1,117) Deferred income taxes, net 715 530 Provisions for self insurance 630 742 Other, net 902 1,861 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and unbilled revenues 16,221 18,751 Gas held by suppliers (5,705) (10,299) Accounts payable (6,568) (3,583) Deferred cost of gas and supplier refunds, net 10,316 (16,801) Other current assets and liabilities, net (39) 992 Other operating items, net (335) (4,583) Net cash provided by (used for) continuing operations 29,068 (3,299) Net cash used for discontinued operations, principally for the payment of income taxes (13,655) (35,470) Net cash provided by (used for) operating activities 15,413 (38,769) CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (22,810) (18,501) Proceeds from the sale of discontinued operations - 261,752 Acquisition of regulated business (2,019) - Other, net (1,429) (1,285) Net cash provided by (used for) investing activities (26,258) 241,966 CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 1,861 555 Repurchase of common stock - (39,663) Dividends on common stock (8,583) (8,533) Repurchase/redemption of subsidiary's preferred stock (3,137) (15,364) Issuance of long-term debt 25,000 - Repayment of long-term debt - (81,906) Net decrease in bank borrowings (5,021) (56,034) Other, net 700 (1,390) Net cash provided by (used for) financing activities 10,820 (202,335) NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25) 862 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,126 629 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,101 $ 1,491 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 6,000 $ 8,700 Income taxes $ 15,197 $ 34,584 The accompanying notes are an integral part of the consolidated financial statements.
-5- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is a holding company which, through its subsidiaries, is engaged in both regulated and nonregulated activities. The Company's regulated activities are conducted by its principal subsidiary, PG Energy Inc. ("PGE"), a regulated public utility, and PGE's wholly-owned subsidiary, Honesdale Gas Company ("Honesdale"), also a regulated public utility which was acquired on February 14, 1997. Together PGE and Honesdale distribute natural gas to a thirteen-county area in northeastern Pennsylvania, a territory that includes 130 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The Company, through its other subsidiaries, PG Energy Services Inc. ("Energy Services"), formerly known as Pennsylvania Energy Resources, Inc., Theta Land Corporation ("Theta") and Keystone Pipeline Services, Inc. ("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in various nonregulated activities, including the marketing and sale of natural gas and propane and other energy-related services, as well as the construction, maintenance and rehabilitation of natural gas distribution pipelines. Commencing in the fourth quarter of 1997, Energy Services will also begin marketing electricity and other products and services in 26 counties in northeastern and central Pennsylvania pursuant to a retail marketing alliance agreement with CNG Energy Services, a subsidiary of Consolidated Natural Gas Company. Additionally, Theta is initiating several residential and commercial real estate development projects on Company-owned land for which construction is currently expected to commence in the fourth quarter of 1997. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, PGE, Energy Services (including Keystone) and Theta. The consolidated financial statements also include the accounts of Honesdale beginning February 14, 1997, the date Honesdale was acquired by PGE. All material intercompany accounts have been eliminated in consolidation. Both PGE and Honesdale are subject to the jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and accounting purposes. The financial statements of PGE and Honesdale 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 -6- weather on energy sales and services. However, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary to present fairly the results for the interim periods have been reflected in the consolidated financial statements. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. Use of Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors which are difficult to predict and are beyond the control of the Company. Therefore, actual amounts could differ from these estimates. (2) EXTRAORDINARY LOSS Defeasance of Senior Notes. 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 represented the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes were scheduled to be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior Notes, less (i) the interest income expected to 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. (3) COMMON STOCK Common Stock Split. Pursuant to resolutions adopted by the Company's Board of Directors on February 19, 1997, a Certificate of Amendment was filed with the Secretary of State of the Commonwealth of Pennsylvania on March 20, 1997, amending the Company's Restated Articles of Incorporation to (i) increase the number of authorized shares of its common stock from 15 million shares to 30 million shares and (ii) reduce the stated value of such shares from $10.00 per share to $5.00 per share. This amendment had no effect on the Company's capital accounts. On February 19, 1997, the Board of Directors also declared a two-for- one split of the Company's common stock effective March 20, 1997. The number of shares of common stock reflected in these consolidated financial statements and the earnings per share of common stock for both the three and nine-month periods ended September 30, 1996, were restated to give retroactive effect to this stock split. (4) RATE MATTERS Rate Increase. By Order adopted December 19, 1996, the PPUC approved an overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million of additional annual revenue, effective January 15, 1997. Under the terms of the Order, the billing for the impact of the rate increase relative to PGE's residential heating customers, which totaled $2.4 million through June 30, 1997, was deferred, without carrying charges, until July, 1997. -7- Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility Code require that the tariffs of local gas distribution companies ("LDCs") be adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an interim basis when circumstances dictate, to reflect changes in their purchased gas costs. The procedure includes a process for the reconciliation of actual gas costs incurred and actual revenues received and also provides for the refund of any overcollections, plus interest thereon, or the recoupment of any undercollections of gas costs. In accordance with these procedures PGE has been permitted to make the following changes since January 1, 1996, to the gas costs contained in its gas tariff rates: [CAPTION] Change in Effective Rate per MCF Calculated Increase Date From To in Annual Revenue [S] [C] [C] [C] March 1, 1997 $4.18 $4.49 $ 8,300,000 December 1, 1996 3.01 4.18 32,400,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 The changes in gas rates on account of purchased gas costs have no effect on earnings since the change in revenue is offset by a corresponding change in the cost of gas. (5) ACCOUNTING CHANGES Earnings Per Share. In February, 1997, FASB Statement 128, "Earnings per Share" was issued. The provisions of this statement, which supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share", simplify the computation of earnings per share. FASB Statement 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997. The Company does not expect the adoption of FASB Statement 128 to have a material effect on its calculation of earnings per share. Reporting Comprehensive Income. In June, 1997, FASB Statement 130 "Reporting Comprehensive Income", was issued. The provisions of this statement, which are effective for fiscal years beginning after December 15, 1997, establish standards for reporting and display of comprehensive income and its components in financial statements. The reporting provisions of FASB Statement 130, which the Company will adopt in 1998, are not expected to have a material impact on the reported results of operations of the Company. Disclosures about Segments of an Enterprise and Related Information. In June, 1997, FASB Statement 131, "Disclosures about Segments of an Enterprise and Related Information" was issued. The provisions of this statement, which are effective for fiscal years beginning after December 15, 1997, establish standards for reporting information about operating segments in annual financial statements and selected segment information in interim financial reports issued to shareholders. The Company expects to adopt the reporting provisions of FASB Statement 131 in 1998. (6) COMMITMENTS AND CONTINGENCIES 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 1972, and several of the plant sites are no longer owned by PGE. Pursuant to the Comprehensive -8- 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. Notwithstanding this determination by the EPA, some of the sites may ultimately require remediation. One site that was owned by PGE from 1951 to 1967 and at which it operated a manufactured gas plant from 1951 to 1954 was subject to remediation in 1996. The remediation at this site, which was performed by the party from whom PGE acquired the site in 1951, required the removal of materials from two former gas holders. The cost of such remediation is purported to have been approximately $525,000, of which the party performing the remediation is seeking to recover a material portion from PGE. PGE, however, believes that any liability it may have with respect to such remediation would be considerably less than the amount that the other party is seeking. While the final resolution of the matter is uncertain, PGE does not believe that it will have any material impact on its financial position or results of operations. Although the conclusion by the EPA that it anticipates no further remedial action with respect to the sites at which PGE operated manufactured gas plants 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. Subsequent Event. On October 3, 1997, the Company signed an agreement to acquire a 25-megawatt cogeneration plant and related facilities located on an approximate 260 acre site in Lackawanna County, Pennsylvania. The Company plans to convert the plant, which was closed in July, 1997, from burning anthracite culm to natural gas. The consideration to be paid for the facilities and real estate will consist of approximately 33,500 shares of the Company's common stock. In addition, approximately $8.0 million will be expended by the Company in converting the plant so that it can burn natural gas. The closing on this acquisition is expected to occur in November, 1997. -9- PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS STOCK SPLIT On February 19, 1997, the Board of Directors of Pennsylvania Enterprises, Inc. (the "Company") declared a two-for-one split of the Company's Common Stock effective March 20, 1997, as more fully discussed in Note 3 of the accompanying Notes to Consolidated Financial Statements. The appropriate per share data included in this Form 10-Q has been restated to reflect this two-for-one split. 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, 1997, and September 30, 1996:
Percentage of Operating Revenues Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 OPERATING REVENUES: Regulated.................................. 67.2% 72.3% 83.2% 88.0% Nonregulated - Gas sales and services................... 18.7 11.4 11.5 5.7 Pipeline construction and services....... 13.8 16.0 5.2 6.2 Other.................................... 0.3 0.3 0.1 0.1 Total operating revenues............... 100.0 100.0 100.0 100.0 OPERATING EXPENSES: Cost of gas................................ 45.8 39.4 58.2 51.2 Operation and maintenance.................. 45.8 55.7 20.8 25.7 Depreciation............................... 9.8 10.9 4.6 5.0 Income taxes............................... (8.5) (10.6) 2.3 2.1 Taxes other than income taxes.............. 8.3 8.5 6.2 6.8 Total operating expenses................. 101.2 103.9 92.1 90.8 OPERATING INCOME (LOSS)...................... (1.2) (3.9) 7.9 9.2 OTHER INCOME, NET............................ 2.7 3.8 0.9 1.7 INTEREST CHARGES (1)......................... (10.0) (13.2) (4.4) (6.6) INCOME (LOSS) FROM CONTINUING OPERATIONS..... (8.5) (13.3) 4.4 4.3 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - - (0.3) INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS............................ (8.5) (13.3) 4.4 4.0 SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... (1.3) (1.9) (0.6) (1.1) INCOME (LOSS) BEFORE EXTRAORDINARY LOSS...... (9.8) (15.2) 3.8 2.9 EXTRAORDINARY LOSS........................... - (5.8) - (0.9) NET INCOME (LOSS)............................ (9.8) (21.0) 3.8 2.0 (1) None of the Company's interest expense nor any of the subsidiary's preferred stock dividends was allocated to the discontinued operations.
-10- Three Months Ended September 30, 1997, Compared With Three Months Ended September 30, 1996 Operating Revenues. Operating revenues increased $4.9 million (25.1%) from $19.4 million for the three-month period ended September 30, 1996, to $24.2 million for the three-month period ended September 30, 1997, largely as a result of a $2.3 million (16.3%) increase in regulated operating revenues and a $2.3 million (104.7%) increase in gas sales and services by PG Energy Services Inc. ("Energy Services"), a nonregulated affiliate of the Company formerly known as Pennsylvania Energy Resources, Inc. The $2.3 million (16.3%) increase in regulated operating revenues from $14.0 million for the quarter ended September 30, 1996, to $16.3 million for the quarter ended September 30, 1997, was primarily the result of the rate increase granted PG Energy Inc. ("PGE") by the Pennsylvania Public Utility Commission (the "PPUC") which became effective on January 15, 1997 (see "Rate Matters"), higher levels in PGE's gas cost rate and the operating revenues of Honesdale Gas Company ("Honesdale"), which was acquired by the Company on February 14, 1997, totaling $323,000. Also contributing to the increase was a 56 million cubic feet (3.7%) increase in deliveries to PGE's residential and commercial heating customers that was largely attributable to cooler weather. There was an increase of 47 heating degree days from 163 (135.8% of normal) during the third quarter of 1996 to 210 (175.0% of normal) during the third quarter of 1997. The $2.3 million (104.7%) increase in nonregulated gas sales and services from $2.2 million for the quarter ended September 30, 1996, to $4.5 million for the quarter ended September 30, 1997, was primarily the result of an 877,000 cubic feet (146.3%) increase in sales of natural gas by Energy Services during the quarter. Operating Expenses. Operating expenses, including depreciation and income taxes, increased $4.4 million (21.9%) from $20.1 million for the three-month period ended September 30, 1996, to $24.5 million for the three-month period ended September 30, 1997. As a percentage of operating revenues, total operating expenses decreased from 103.9% during the third quarter of 1996 to 101.2% during the third quarter of 1997, largely as a result of a proportionally greater increase in revenues. The cost of gas increased $3.5 million (45.4%) from $7.6 million for the three-month period ended September 30, 1996, to $11.1 million for the three- month period ended September 30, 1997, primarily because of the aforementioned increase in sales by both PGE and Energy Services, the higher levels in PGE's gas cost rate (see "-Rate Matters") and $194,000 of gas costs related to Honesdale. Other than the cost of gas and income taxes, operating expenses increased by $955,000 (6.6%) from $14.5 million for the three-month period ended September 30, 1996, to $15.5 million for the three-month period ended September 30, 1997. This increase was partially attributable to a $385,000 (23.5%) increase in taxes other than income taxes resulting from a higher level of gross receipts tax because of the increased sales by PGE and the sales of Honesdale. Operation and maintenance expense increased $311,000 (2.9%) as a result of $206,000 of costs relative to Honesdale in the third quarter of 1997, as well as increased payroll and other costs attributable to the expansion of the Company's nonregulated activities. Also contributing to the higher operating expenses was a $259,000 (12.3%) increase in depreciation expense, primarily as a result of additions to utility plant. -11- Operating Income (Loss). As a result of the above, the operating loss decreased by $460,000 (61.3%) from a loss of $751,000 for the three-month period ended September 30, 1996, to a loss of $291,000 for the three-month period ended September 30, 1997, and decreased as a percentage of total operating revenues for such periods from a negative 3.9% in 1996 to a negative 1.2% in 1997. Other Income, Net. Other income, net decreased $69,000 (9.4%) from $736,000 for the three-month period ended September 30, 1996, to $667,000 for the three- month period ended September 30, 1997, largely because the third quarter of 1996 included income from the temporary investment of certain proceeds from the sale of PGE's regulated water utility operations in February, 1996. The absence of such investment income was partially offset by an inducement fee paid to Energy Services relative to its participation in a retail marketing alliance. Interest Charges. Interest charges decreased by $139,000 (5.4%) from $2.6 million for the three-month period ended September 30, 1996, to $2.4 million for the three-month period ended September 30, 1997. This decrease was largely attributable to the Company's defeasance of its 10.125% Senior Notes on September 30, 1996. Income (Loss) From Continuing Operations. The loss from continuing operations decreased $530,000 (20.6%) from $2.6 million for the quarter ended September 30, 1996, to $2.0 million for the quarter ended September 30, 1997. This decrease was largely the result of the matters discussed above, principally the increase in operating revenues and the decrease in interest charges, the effects of which were partially offset by the increased operating expenses. Subsidiary's Preferred Stock Dividends. Dividends on preferred stock decreased $43,000 (11.8%) from $363,000 for the three-month period ended September 30, 1996, to $320,000 for the three-month period ended September 30, 1997, primarily as a result of the repurchase by PGE in 1997 of 30,375 shares of its 4.10% cumulative preferred stock. Income (Loss) Before Extraordinary Loss. The decrease of $573,000 (19.5%) in the loss before extraordinary loss, from $2.9 million for the three-month period ended September 30, 1996, to $2.4 million for the three-month period ended September 30, 1997, 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 represented the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes were scheduled to be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior Notes, less (i) the interest income expected to 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 $1.7 million (41.7%) in the net loss, from $4.1 million for the three-month period ended September 30, 1996, to $2.4 million for the three-month period ended September 30, 1997, as well as the decrease in the loss per share of common stock of $.19 from a loss of $.43 per share for the third quarter of 1996 to a loss of $.24 per share for the third quarter of 1997, were primarily the result of the decrease in loss from -12- continuing operations and the recording in the third quarter of 1996 of the extraordinary loss on the defeasance of the Company's Senior Notes, as discussed above. Also contributing to the decrease in the loss per share of common stock was the inclusion in the third quarter of 1996 of a $.01 per share premium of the repurchase of shares of preferred stock by PGE. While discounts and premiums on the repurchase of preferred stock are reflected in retained earnings and are not a determinant of net income, the discounts and premiums associated with repurchases must be taken into account in calculating the earnings (loss) per share of common stock. Nine Months Ended September 30, 1997, Compared With Nine Months Ended September 30, 1996 Operating Revenues. Operating revenues increased $31.9 million (25.8%) from $123.7 million for the nine months ended September 30, 1996, to $155.6 million for the nine months ended September 30, 1997, largely as a result of a $20.6 million (18.9%) increase in regulated operating revenues and a $10.8 million (152.5%) increase in nonregulated gas sales and services by Energy Services. The $20.6 million (18.9%) increase in regulated operating revenues from $108.9 million for the nine months ended September 30, 1996, to $129.4 million for the nine months ended September 30, 1997, was primarily the result of higher levels in PGE's gas cost rate and the effect of the rate increase granted PGE by the PPUC which became effective on January 15, 1997 (see "Rate Matters"). The effect of the increases in rates was partially offset by an 896 million cubic feet (5.0%) decrease in deliveries to PGE's residential and commercial heating customers. There was a decrease of 192 (4.4%) heating degree days from 4,356 (106.9% of normal) during the first nine months of 1996 to 4,164 (102.2% of normal) during the first nine months of 1997. Operating revenues of Honesdale totaling $1.9 million from its February 14, 1997, acquisition date through September 30, 1997, also contributed to the increased regulated operating revenues. The $10.8 million (152.5%) increase in nonregulated gas sales and services from $7.1 million for the nine months ended September 30, 1996, to $17.9 million for the nine months ended September 30, 1997, was primarily the result of a 3.4 million cubic feet (214.6%) increase in sales of natural gas by Energy Services during the period. Operating Expenses. Operating expenses, including depreciation and income taxes, increased $30.9 million (27.5%) from $112.4 million for the first nine months of 1996 to $143.3 million for the first nine months of 1997. As a percentage of operating revenues, total operating expenses increased from 90.8% during the first nine months of 1996 to 92.1% during the first nine months of 1997, largely as a result of an increase in the cost of gas. Cost of gas increased $27.2 million (42.9%) from $63.3 million for the first nine months of 1996 to $90.5 million for the first nine months of 1997, primarily because of higher levels in PGE's gas cost rate (see "-Rate Matters"), and the aforementioned increase in sales by Energy Services. Also contributing to the increase was $1.3 million of gas costs related to Honesdale from its February 14, 1997, acquisition date through September 30, 1997. Other than the cost of gas and income taxes, operating expenses increased by $2.7 million (5.9%) from $46.4 million for the first nine months of 1996 to $49.1 million for the first nine months of 1997. This increase was partially attributable to a $1.3 million (15.6%) increase in taxes other than income taxes resulting from a higher level of gross receipts tax because of the increased -13- sales by PGE and the sales of Honesdale from its acquisition date. Operation and maintenance expense increased $580,000 (1.8%) largely as a result of $470,000 of expenses relative to Honesdale since its acquisition date, as well as increased payroll and other costs attributable to the expansion of the Company's nonregulated activities. Also contributing to the higher operating expenses was an $831,000 (13.4%) increase in depreciation expense, primarily as a result of additions to utility plant. Income taxes increased $1.0 million (38.6%) from $2.6 million in the first nine months of 1996 to $3.6 million in the first nine months of 1997 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 increased by $955,000 (8.4%) from $11.3 million for the nine-month period ended September 30, 1996, to $12.3 million for the nine-month period ended September 30, 1997. However, as a percentage of total operating revenues, operating income decreased for such periods from 9.2% in the nine-month period ended September 30, 1996, to 7.9% in the nine-month period ended September 30, 1997, largely as a result of the proportionately higher ratio of cost of gas to operating revenues. Other Income, Net. Other income, net decreased $701,000 (33.4%) from $2.1 million for the nine-month period ended September 30, 1996, to $1.4 million for the nine-month period ended September 30, 1997, largely because the first nine months of 1996 included income from the temporary investment of certain proceeds from the sale of PGE's regulated water utility operations in February, 1996. The absence of such investment income in 1997 was partially offset by an inducement fee paid to Energy Services relative to its participation in a retail marketing alliance. Interest Charges. Interest charges decreased $1.2 million (15.4%) from $8.1 million for the first nine months of 1996 to $6.9 million for the first nine months of 1997. This decrease was largely attributable to the the Company's defeasance of its 10.125% Senior Notes on September 30, 1996. Income (Loss) From Continuing Operations. Income from continuing operations increased $1.5 million (28.2%) from $5.3 million for the nine-month period ended September 30, 1996, to $6.8 million for the nine-month period ended September 30, 1997. This increase was largely the result of the matters discussed above, principally the increase in operating revenues and decrease in interest charges, the effects of which were partially offset by increased operating expenses and the lower level of other income, net. Subsidiary's Preferred Stock Dividends. Dividends on preferred stock decreased $392,000 (28.3%) from $1.4 million for the nine-month period ended September 30, 1996, to $991,000 for the nine-month period ended September 30, 1997, primarily as a result of the repurchase by PGE in 1996 of 134,359 shares of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock and 20,330 shares of its 4.10% cumulative preferred stock, largely during the second quarter of that year, as well as its repurchase of an additional 30,375 shares of the 4.10% cumulative preferred stock in 1997. Income (Loss) Before Extraordinary Loss. The increase in income before extraordinary loss of $2.3 million (64.1%) from $3.6 million for the nine-month period ended September 30, 1996, to $5.8 million for the nine-month period ended September 30, 1997, was largely the result of the increase in income from continuing operations and the reduced dividends on preferred stock, as discussed above, and the absence of any loss with respect to discontinued operations. -14- 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 represented the interest expense on the Senior Notes from the date of defeasance through June 15, 1997, the date on which the Senior Notes were scheduled to be redeemed, plus the writeoff of the unamortized balance of issuance expenses related to the Senior Notes, less (i) the interest income expected to 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. The increase in net income of $3.4 million (139.3%) from $2.4 million for the first nine months of 1996 to $5.8 million for the first nine months of 1997 was the result of the higher income from continuing operations, the reduced dividends on subsidiary's preferred stock and the extraordinary loss in 1996, as discussed above, as well as the absence of any loss with respect to discontinued operations. These same factors, along with premiums of $.13 per share during the first nine months of 1996 and discounts of $.08 per share during the first nine months of 1997 on the repurchase of preferred stock, accounted for the increase in earnings per share of common stock of $.59 from $.10 per share for the first nine months of 1996 to $.69 per share for the first nine months of 1997. Also contributing to the increase in earnings per share of common stock was the reduction in the weighted average number of shares outstanding as a result of the repurchase of shares, largely during the second quarter of 1996, with proceeds from the sale of PGE's water utility operations in February, 1996. RATE MATTERS Rate Increase. By Order adopted December 19, 1996, the PPUC approved an overall 5.3% increase in PGE's base gas rates, designed to produce $7.5 million of additional annual revenue, effective January 15, 1997. Under the terms of the Order, the billing for the impact of the rate increase relative to PGE's residential heating customers, which totaled $2.4 million through June 30, 1997, was deferred, without carrying charges, until July, 1997. Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility Code require that the tariffs of local gas distribution companies ("LDCs") be adjusted on an annual basis, and, in the case of larger LDCs such as PGE, on an interim basis when circumstances dictate, to reflect changes in their purchased gas costs. The procedure includes a process for the reconciliation of actual gas costs incurred and actual revenues received and also provides for the refund of any overcollections, plus interest thereon, or the recoupment of any undercollections of gas costs. -15- In accordance with these procedures, PGE has been permitted to make the following changes since January 1, 1996, 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, 1997 $4.49 $3.95 $(15,700,000) March 1, 1997 4.18 4.49 8,300,000 December 1, 1996 3.01 4.18 32,400,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 The changes in gas rates on account of purchased gas costs have no effect on earnings since the change in revenue is offset by a corresponding change in the cost of gas. Recovery of FERC Order 636 Transition Costs. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non-Gas Transition Costs (i.e. Gas Supply Realignment and Stranded Costs) that it estimates it will ultimately be billed pursuant to Federal Energy Regulatory Commission Order 636, through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $10.7 million of Non-Gas Transition Costs will be billed to PGE, generally over a six-year period extending through January 1, 1999, of which $9.3 million had been billed to PGE and $9.2 million had been recovered from its customers as of September 30, 1997. 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 Liquidity The primary capital needs of the Company continue to be 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 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 nonregulated activities expand, increased capital will be required for those activities, especially the cogeneration plant the Company has agreed to acquire and the residential and commercial real estate development projects that are planned for certain Company-owned land. The real estate development projects that are currently planned by the Company are in their initial phases, and the amount and type of funding that those projects will require has not yet been finalized. Likewise, the costs which the cogeneration plant will involve are still being finalized. However, it is currently anticipated that the expenditures for both the real estate development projects and the cogeneration plant 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. -16- In order to temporarily finance construction expenditures and to meet its seasonal borrowing requirements, PGE has made arrangements for a total of $68.5 million of unsecured revolving bank credit, which is deemed adequate for its presently anticipated needs. Specifically, PGE currently has seven bank lines of credit with an aggregate borrowing capacity of $68.5 million which provide for borrowings at interest rates generally less than prime and mature at various times during 1998 and 1999 and which PGE intends to renew or replace as they expire. As of November 3, 1997, PGE had $21.2 million of borrowings outstanding under these bank lines of credit. The Company believes that PGE, as well as Honesdale, will be able to raise in a timely manner such funds as are required for their future construction expenditures, refinancings and other working capital requirements. Likewise, the Company believes that its nonregulated 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 which is planned. Long-Term Debt and Capital Stock Financings Both the Company and its subsidiaries, most notably 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. On September 12, 1997, PGE borrowed $25.0 million pursuant to a five-year term loan agreement dated August 14, 1997 (the "Term Loan Agreement"), which matures on August 14, 2002. Borrowings under the Term Loan Agreement bear interest at LIBOR ("London Interbank Offered Rates") plus one-quarter of one percent (5.875% as of November 3, 1997). Under the terms of the Term Loan Agreement, PGE can choose interest rate periods of one, two, three or six months. PGE utilized the proceeds from such loan to repay $25.0 million of its bank borrowings. On September 30, 1997, PGE issued $25.0 million of its 6.92% Senior Notes due September 30, 2004 (the "Senior Notes"). The proceeds from the issuance of the Senior Notes were used by PGE to repay $25.0 million of its bank borrowings. No capital stock financings were consummated by either the Company or PGE during the nine-month period ended September 30, 1997. The Company also obtains external funds from the sale of common stock through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992 Stock Option Plan and its Employees' Savings Plan. During the nine-month period ended September 30, 1997, the Company realized $1.3 million, $51,000 and $547,000 ($1.9 million in total) from the issuance of common stock under the DRP, 1992 Stock Option Plan and Employees' Savings Plan, respectively. Capital Expenditures and Related Financings Capital expenditures totaled $25.5 million during the first nine months of 1997, including $22.7 million of expenditures for the construction of utility plant. The Company estimates that its capital expenditures will total $16.7 million for the remainder of the year, consisting of $10.9 million relative to utility plant and $5.8 million with respect to the Company's nonregulated activities. It is anticipated that such capital expenditures will be financed with internally generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. -17- Current Maturities of Long-Term Debt and Preferred Stock As of September 30, 1997, $14.7 million of PGE's long-term debt and $80,000 of its preferred stock was required to be repaid within twelve months. 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, such as the nature of Pennsylvania legislation restructuring the natural gas and electric industries and general economic conditions and uncertainties relating to new projects like the residential and commercial development projects on Company-owned land. -18- PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10-1 Form of Stock Option Agreement, dated as of June 20, 1997, between the Company and certain of its Officers -- filed herewith. 10-2 Form of Stock Option Agreement, dated as of June 20, 1997, between the Company and certain of its non-employee directors -- 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. -19- 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 7, 1997 By: /s/ Thomas J. Ward Thomas J. Ward Secretary Date: November 7, 1997 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) -20- EX-11 2
EXHIBIT 11-1 PENNSYLVANIA ENTERPRISES, INC. Statement Re Computation of Per Share Earnings for the Three and Nine Month Periods Ended September 30, 1997 and 1996 Three Months Ended Nine Months Ended 1997 1996 1997 1996 Income (loss) before subsidiary's preferred stock dividends $ (2,047,000) $ (3,694,000) $ 6,827,000 $ 3,822,000 Subsidiary's preferred stock dividends 320,000 363,000 991,000 1,383,000 Net income (loss) $ (2,367,000) $ (4,057,000) $ 5,836,000 $ 2,439,000 Earnings (loss) per share of common stock* $ (.24) $ (.43) $ .69 $ .10 Computations of additional common shares outstanding Average shares of common stock 9,699,614 9,621,126 9,643,088 10,428,032 Incremental common shares applicable to options, based on the daily average market price 102,522 17,168 68,779 15,926 Average common shares as adjusted 9,802,136 9,638,294 9,711,867 10,443,958 Average shares of common stock 9,699,614 9,621,126 9,643,088 10,428,032 Incremental common shares applicable to options, based on the more dilutive of daily average or ending market price 102,993 19,148 67,892 17,434 Average common shares fully diluted 9,802,607 9,640,274 9,710,980 10,445,466 Earnings (loss) per share of common stock* Average common shares as adjusted $ (.24) $ (.43) $ .68 $ .10 Average common shares fully diluted $ (.24) $ (.43) $ .68 $ .10 * Earnings (loss) per share of common stock reflect the effects of (premiums)/discounts totaling $(48,261), $773,034, ($89,775) and ($1,383,771) on the redemption/repurchase of subsidiary's preferred stock in the three and nine month periods ended September 30, 1997 and 1996, respectively,, that were charged to retained earnings and not included in the determination of net income.
EX-27 3
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-31-1997 SEP-30-1997 PER-BOOK 257,309,000 11,107,000 61,735,000 36,827,000 0 366,978,000 48,428,000 21,865,000 47,245,000 117,538,000 640,000 15,848,000 125,000,000 4,500,000 0 0 14,720,000 80,000 0 0 88,652,000 366,978,000 155,564,000 3,618,000 139,648,000 143,266,000 12,298,000 1,395,000 13,693,000 6,866,000 6,827,000 991,000 5,836,000 8,583,000 4,837,000 15,413,000 .69 .68
EX-10 4 EXHIBIT 10-1 Form of Stock Option Agreement with certain officers of the Company, dated June 20, 1997 7 STOCK OPTION AGREEMENT UNDER THE PENNSYLVANIA ENTERPRISES, INC. STOCK INCENTIVE PLAN Option No.: __________ THIS AGREEMENT dated as of June 20, 1997 (the "Date of Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC. (the "Company") and ____________ (the "Optionee"). WHEREAS, the Company has adopted the Pennsylvania Enterprises, Inc. Stock Incentive Plan (the "Plan"); and WHEREAS, the purpose of the Plan is to enable the Company and its subsidiaries to attract and retain key employees; and WHEREAS, the Stock Option Committee of the Company's Board of Directors (the "Committee") has determined that it would be in the best interests of the Company to enter into this Agreement. NOW, THEREFORE, the Company hereby grants an option (the "Option") under the Plan to the Optionee on the following terms and conditions: 1. AMOUNT OF STOCK SUBJECT TO OPTION: The Company hereby grants to the Optionee, subject to the terms and conditions set forth in this Agreement, the Option to purchase Four Thousand (4,000) shares of authorized and unissued common stock of the Company (without nominal or par value, with a stated value of $5.00 per share) or shares reacquired by the Company and held in treasury (the "Stock"), which Stock is to be issued by the Company upon the exercise of the Option as hereinafter set forth. 2. PURCHASE PRICE: The purchase price per share of Stock subject to the Option shall be twenty-five dollars and seventy-five cents ($25.75), the fair market value of a share of Stock on the Date of Grant, as determined by the Committee. 3. TYPE OF OPTION: The Option is intended to be a Non-Qualified Stock Option that is not an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 4. EARN-OUT OF OPTION: The Option will become exercisable on the first anniversary of the Date of Grant to the extent set forth below, depending on the conditions set forth in this Section 4 that have been satisfied. The Committee will notify the Optionee, prior to the first anniversary of the Date of Grant, of the number of shares of Stock as to which the Option will be exercisable in accordance with this Section 4. (a) The maximum number of shares with respect to which the option shall be exercisable shall be determined in accordance with the provisions of this Section 4(a), subject to the remaining provisions of this Section 4. (1) If PEI earnings per share for 1997 reaches the outstanding level of $[ ] per share ([ ]% of budget), the Option will be exercisable with respect to 1,000 shares, and will be exercisable with respect to an additional 600 shares for each of the performance goals set forth on Exhibit A (the "Performance Goals") which is satisfied (for a maximum total of 4,000 shares). (Exhibit B illustrates this relationship.) (2) If PEI earnings per share for 1997 reaches the target level of $[ ] per share ([ ]% of budget) but does not reach the outstanding level, the Option will be exercisable with respect to 750 shares, and will be exercisable with respect to an additional 450 shares for each of the Performance Goals which is satisfied (for a maximum total of 3,000 shares). (3) If PEI earnings per share for 1997 reaches the threshold level of $[ ] per share ([ ]% of budget) but does not reach the target level, the Option will be exercisable with respect to 500 shares, and will be exercisable with respect to an additional 300 shares for each of the Performance Goals which is satisfied (for a maximum total of 2,000 shares). (4) If PEI earnings per share for 1997 does not reach the threshold level of $[ ] per share, no portion of the Option shall be exercisable. (5) For purposes of Section 4(a) the Committee reserves the right to review and adjust ,as it deems appropriate, earnings per share results for one-time, non- operating gains or losses, such as those resulting from accounting changes, one-time asset sales, early retirement/severance programs, other extraordinary expenses or transactions, and also for temperature variations from normal degree days. (b) Notwithstanding the provisions of Section 4(a), no portion of the Option will be exercisable unless the Optionee (i) remains employed by the Company or a Related Company (as defined below) until the first anniversary of the Date of Grant in at least the same or a similarly responsible position and (ii) achieves at least a "meets standards" personnel performance rating on all performance evaluations of Optionee made during such period. For purposes of this Agreement, the term Related Company means a corporation, partnership, joint venture or other entity in which the Company owns, directly or indirectly, at least a 50% beneficial ownership interest. (c) The Compensation Committee shall determine, in its discretion, the level of earnings per share which has been attained, the extent to which the Performance Goals have been satisfied, and the extent to which the Optionee has satisfied the conditions set forth in paragraph 4(b). Notwithstanding the foregoing provisions of this Section 4, the Committee may, in its discretion, declare all or any portion of the Option to be exercisable. 5. PERIOD OF OPTION: The Option is granted as of the Date of Grant. The Option shall expire at the earliest to occur of (a) three months after termination of the Optionee's Employment (as defined below) for any reason except death, disability, or retirement; (b) one year after termination of the Optionee's Employment by reason of death or disability; (c) five years after termination of the Optionee's Employment by reason of retirement, on or after age 55, under the Employees' Retirement Plan of Pennsylvania Enterprises, Inc.; or (d) June 20, 2007 (ten years after the Date of Grant). In no event shall the term of the Option be greater than ten years. For purposes of this Agreement, "Employment" shall mean employment with the Company or any Related Company. 6. EXERCISE OF OPTION: (a) To the extent the Option has become exercisable pursuant to Section 4, the Option may be exercised in whole or in part with respect to full shares (and no fractional shares shall be issued) until it expires in accordance with Section 5. (b) In order to exercise the Option or any part thereof, the Optionee shall give notice in writing to the Company at its headquarters address (on a form acceptable to the Company) of the Optionee's intention to purchase all or part of the shares subject to the Option, and in said notice the Optionee shall set forth the number of shares as to which he/she desires to exercise his/her Option. The notice must be accompanied by payment in full of the exercise price for such shares in such manner as may be permitted by the Company. Such payment may be made in cash, through the delivery to the Company of full shares of Stock which have been owned by the Optionee for at least six months having a value equal to the total exercise price of the portion of the Option so exercised, or through a combination of cash and such shares of Stock. Any shares of Stock so delivered shall be valued at the average of the high and low trading prices for the day prior to the date on which the option is exercised. The Option will be deemed exercised on the date a proper notice of exercise (accompanied as described above) is hand delivered, or, if mailed, postmarked. (c) The Optionee shall, no later than the date of exercise of the Option, make payment to the Company in cash or its equivalent of any federal, state, local or other taxes of any kind required by law to be withheld with respect to the Option. The obligations of the Company under the Plan shall be conditional on such payment, and the Company (and, where applicable, any Related Company) shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. 7. NON-TRANSFERABILITY OF OPTION: The Option is not transferable otherwise than by will or by the laws of descent and distribution. To the extent the Option is exercisable at the time of the Optionee's death, it may be exercised by the executor or administrator of the Optionee's estate or by the person designated by will or entitled by the laws of descent and distribution, upon such death, to any remaining rights arising out of the Option. 8. CHANGE OF CONTROL: Notwithstanding the provisions of Section 4, the Option shall become fully exercisable upon the occurrence of a Change of Control (as defined in the Plan). 9. CHANGE IN CAPITAL: If prior to the expiration of the Option, there shall be any changes in the Stock structure of the Company by reason of the declaration of stock dividends, recapitalization resulting in stock split-ups or combinations or exchanges of shares by reason of merger, consolidation, or by any other means, then the number of shares subject to the Option and the exercise price per share of Stock shall be equitably and appropriately adjusted as the Committee in its sole discretion shall deem just and reasonable in light of all the circumstances pertaining thereto. 10. RIGHT TO TERMINATE EMPLOYMENT: The Option shall not confer upon the Optionee any right to continue in the employ of the Company or a Related Company or interfere in any way with the right of the Company or any Related Company to terminate the Optionee's employment at any time, nor shall it interfere in any way with the right of the Optionee to terminate the Optionee's employment. 11. REGISTRATION AND OTHER REQUIREMENTS: The Option is subject to the requirement that, if at any time the Committee shall determine that (a) the listing, registration or qualification of the Stock subject or related to the Option upon any securities exchange or under any state or federal law, (b) the consent or approval of any governmental regulatory body or (c) an agreement by the Optionee with respect to the disposition of Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the issuance, purchase or delivery of Stock under the Option, the Option shall not be exercised, in whole or in part, unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Committee. 12. SUBJECT TO THE PLAN: The Option evidenced by the Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which are incorporated herein by reference and made a part hereof. In addition, the Option is subject to any rules and regulations promulgated by the Committee. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto: PENNSYLVANIA ENTERPRISES, INC. By: ______________________________ Name: Thomas F. Karam Title: President and CEO Accepted and agreed to as of the Date of Grant: __________________________ Optionee Exhibit A Performance Goals With respect to fiscal 1997: [Listing of Goals] Exhibit B Options that become exercisable based upon achievement of earnings and performance goals as set forth in Section 4(a) of the Stock Option Agreement. Goals Satisfied PEI Earnings 5 4 3 2 1 0 Equal to or 4,000 3,400 2,800 2,200 1,600 1,000 Greater Than Outstanding Equal to or 3,000 2,550 2,100 1,650 1,200 750 Greater Than Target but Less Than Outstanding Equal to or 2,000 1,700 1,400 1,100 800 500 Greater Than Threshold but Less Than Target Less Than 0 0 0 0 0 0 Threshold EX-10 5 EXHIBIT 10-2 Form of Stock Option Agreement with certain non-employee directors of the Company, dated June 20, 1997 3 STOCK OPTION AGREEMENT UNDER THE PENNSYLVANIA ENTERPRISES, INC. STOCK INCENTIVE PLAN Option No.: __________ THIS AGREEMENT dated as of June 20, 1997 (the "Date of Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC. (the "Company") and ____________ (the "Optionee"). WHEREAS, the Company has adopted the Pennsylvania Enterprises, Inc. Stock Incentive Plan (the "Plan"); and WHEREAS, the purpose of the Plan is to pay a portion of the compensation of the Company's non-employee directors in options to purchase Common Stock of the Company; and WHEREAS, the Company's Board of Directors (the "Board") has determined that it would be in the best interests of the Company to enter into this Agreement. NOW, THEREFORE, the Company hereby grants an option (the "Option") under the Plan to the Optionee on the following terms and conditions: 1. AMOUNT OF STOCK SUBJECT TO OPTION: The Company hereby grants to the Optionee, subject to the terms and conditions set forth in this Agreement, the Option to purchase Two Thousand (2,000) shares of authorized and unissued common stock of the Company (without nominal or par value, with a stated value of $5.00 per share) or shares reacquired by the Company and held in treasury (the "Stock"), which Stock is to be issued by the Company upon the exercise of the Option as hereinafter set forth. 2. PURCHASE PRICE: The purchase price per share of Stock subject to the Option shall be twenty-five dollars and seventy-five cents ($25.75), the fair market value of a share of Stock on the Date of Grant, as determined by the Board. 3. TYPE OF OPTION: The Option is intended to be a Non-Qualified Stock Option that is not an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. 4. EARN-OUT OF OPTION: The Option will become exercisable on the later of (i) the first anniversary of the Date of Grant or (ii) the date of the shareowner meeting to be held in 1998, to the extent set forth below, depending on the conditions set forth in this Section 4 that have been satisfied. The Board will notify the Optionee, prior to the date the Option becomes exercisable, of the number of shares of Stock as to which the Option will be exercisable in accordance with this Section 4. (a) The maximum number of shares with respect to which the option shall be exercisable shall be determined in accordance with the provisions of this Section 4(a), subject to the remaining provisions of this Section 4. (1) If PEI earnings per share for 1997 reaches the outstanding level of $[ ] per share ([ ]% of budget), the Option will be exercisable with respect to 500 shares, and will be exercisable with respect to an additional 300 shares for each of the performance goals set forth on Exhibit A (the "Performance Goals") which is satisfied (for a maximum total of 2,000 shares). (Exhibit B illustrates this relationship.) (2) If PEI earnings per share for 1997 reaches the target level of $[ ] per share ([ ]% of budget) but does not reach the outstanding level, the Option will be exercisable with respect to 375 shares, and will be exercisable with respect to an additional 225 shares for each of the Performance Goals which is satisfied (for a maximum total of 1,500 shares). (3) If PEI earnings per share for 1997 reaches the threshold level of $[ ] per share ([ ]% of budget) but does not reach the target level, the Option will be exercisable with respect to 250 shares, and will be exercisable with respect to an additional 150 shares for each of the Performance Goals which is satisfied (for a maximum total of 1,000 shares). (4) If PEI earnings per share for 1997 does not reach the threshold level of $[ ] per share, no portion of the Option shall be exercisable. (5) For purposes of Section 4(a) the Board reserves the right to review and adjust, as it deems appropriate, earnings per share results for one-time, non-operating gains or losses, such as those resulting from accounting changes, one-time asset sales, early retirement/severance programs, other extraordinary expenses or transactions, and also for temperature variations from normal degree days. (b) Notwithstanding the provisions of Section 4(a), no portion of the Option will be exercisable unless the Optionee continues to serve on the Board until the Company's annual meeting of shareowners held in 1998. (c) The Board shall determine, in its discretion, the level of earnings per share which has been attained, the extent to which the Performance Goals have been satisfied, and whether the Optionee has satisfied the conditions set forth in paragraph 4(b). Notwithstanding the foregoing provisions of this Section 4, the Board may, upon a determination that there were extraordinary circumstances, declare all or any portion of the Option to be exercisable. 5. PERIOD OF OPTION: The Option is granted as of the Date of Grant. The Option shall expire at the earliest to occur of (a) two years after termination of the Optionee's service on the Board for any reason; or (b) June 20, 2007 (ten years after the Date of Grant). In no event shall the term of the Option be greater than ten years. 6. EXERCISE OF OPTION: (a) To the extent the Option has become exercisable pursuant to Section 4, the Option may be exercised in whole or in part with respect to full shares (and no fractional shares shall be issued) until it expires in accordance with Section 5. (b) In order to exercise the Option or any part thereof, the Optionee shall give notice in writing to the Company at its headquarters address (on a form acceptable to the Company) of the Optionee's intention to purchase all or part of the shares subject to the Option, and in said notice the Optionee shall set forth the number of shares as to which he/she desires to exercise his/her Option. The notice must be accompanied by payment in full of the exercise price for such shares in such manner as may be permitted by the Company. Such payment may be made in cash, through the delivery to the Company of full shares of Stock which have been owned by the Optionee for at least six months having a value equal to the total exercise price of the portion of the Option so exercised, or through a combination of cash and such shares of Stock. Any shares of Stock so delivered shall be valued at the average of the high and low trading prices for the day prior to the date on which the option is exercised. The Option will be deemed exercised on the date a proper notice of exercise (accompanied as described above) is hand delivered, or, if mailed, postmarked. (c) The Optionee shall, no later than the date of exercise of the Option, make payment to the Company in cash or its equivalent of any federal, state, local or other taxes of any kind which may be required by law to be withheld with respect to the Option. The obligations of the Company under the Plan shall be conditional on such payment, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Optionee. 7. NON-TRANSFERABILITY OF OPTION: The Option is not transferable otherwise than by will or by the laws of descent and distribution. To the extent the Option is exercisable at the time of the Optionee's death, it may be exercised by the executor or administrator of the Optionee's estate or by the person designated by will or entitled by the laws of descent and distribution, upon such death, to any remaining rights arising out of the Option. 8. CHANGE OF CONTROL: Notwithstanding the provisions of Section 4, the Option shall become fully exercisable upon the occurrence of a Change of Control (as defined in the Plan). 9. CHANGE IN CAPITAL: If prior to the expiration of the Option, there shall be any changes in the Stock structure of the Company by reason of the declaration of stock dividends, recapitalization resulting in stock split-ups or combinations or exchanges of shares by reason of merger, consolidation, or by any other means, then the number of shares subject to the Option and the exercise price per share of Stock shall be equitably and appropriately adjusted as the Board in its sole discretion shall deem just and reasonable in light of all the circumstances pertaining thereto. 10. RIGHT TO TERMINATE EMPLOYMENT: The Option shall not confer upon the Optionee any right to continued service as a Director of the Company. 11. REGISTRATION AND OTHER REQUIREMENTS: The Option is subject to the requirement that, if at any time the Board shall determine that (a) the listing, registration or qualification of the Stock subject or related to the Option upon any securities exchange or under any state or federal law, (b) the consent or approval of any governmental regulatory body or (c) an agreement by the Optionee with respect to the disposition of Stock is necessary or desirable (in connection with any requirement or interpretation of any federal or state securities law, rule or regulation) as a condition of, or in connection with, the issuance, purchase or delivery of Stock under the Option, the Option shall not be exercised, in whole or in part, unless such listing, registration, qualification, consent, approval or agreement shall have been effected or obtained free of any conditions not acceptable to the Board. 12. SUBJECT TO THE PLAN: The Option evidenced by the Agreement and the exercise thereof are subject to the terms and conditions of the Plan, which are incorporated herein by reference and made a part hereof. In addition, the Option is subject to any rules and regulations promulgated by the Board. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto: PENNSYLVANIA ENTERPRISES, INC. By: ______________________________ Name: Thomas F. Karam Title: President and CEO Accepted and agreed to as of the Date of Grant: __________________________ Optionee Exhibit A Performance Goals With respect to fiscal 1997: [Listing of Goals] Exhibit B Options that become exercisable based upon achievement of earnings and performance goals as set forth in Section 4(a) of the Stock Option Agreement. Goals Satisfied PEI Earnings 5 4 3 2 1 0 Equal to or 2,000 1,700 1,400 1,100 800 500 Greater Than Outstanding Equal to or 1,500 1,275 1,050 825 600 375 Greater Than Target but Less Than Outstanding Equal to or 1,000 850 700 550 400 250 Greater Than Threshold but Less Than Target Less Than 0 0 0 0 0 0 Threshold -----END PRIVACY-ENHANCED MESSAGE-----