-----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, KgPRbWKoSbxk2Wu74BsF8upqOs2ZA4yKyc91wBB3kwfagdmpaLHoK9xpNBYBbELe Y6fj+YHwxrkj0XG6ZRsziQ== 0000077231-98-000018.txt : 19980812 0000077231-98-000018.hdr.sgml : 19980812 ACCESSION NUMBER: 0000077231-98-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980811 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: 98682141 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 QUARTERLY REPORT FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number 0-7812 PENNSYLVANIA ENTERPRISES, INC. (Exact name of registrant as specified in its charter) Pennsylvania 23-1920170 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) One PEI Center Wilkes-Barre, Pennsylvania 18711-0601 (Address of principal executive offices) (Zip Code) (717) 829-8843 (Registrant's telephone number including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Registrant had 10,053,593 shares of common stock, no par value, outstanding as of July 30, 1998. PENNSYLVANIA ENTERPRISES, INC. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Income for the three and six months ended June 30, 1998 and 1997.......................... 2 Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997................................. 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997........... 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 4. Submission of Matters to a Vote of Security Holders...... 17 Item 5. Other Information........................................ 18 Item 6. Exhibits and Reports on Form 8-K......................... 18 PART I. FINANCIAL INFORMATION PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, --------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ (Thousands of Dollars) OPERATING REVENUES: Regulated $ 25,004 $ 33,210 $ 90,010 $ 113,149 Nonregulated - Gas sales and services 7,576 5,991 16,601 13,366 Pipeline construction and services 3,204 2,627 5,608 4,780 Other 87 36 541 60 --- --- ---- -- Total operating revenues 35,871 41,864 112,760 131,355 ------- ------- -------- ------- OPERATING EXPENSES: Cost of gas 18,112 22,726 64,263 79,434 Operation and maintenance 11,408 10,976 22,741 21,308 Depreciation 2,610 2,379 5,211 4,678 Income taxes (693) 83 3,463 5,682 Taxes other than income taxes 2,916 3,338 6,977 7,664 ------ ------ ------ ----- Total other operating expenses 34,353 39,502 102,655 118,766 ------- ------- -------- ------- OPERATING INCOME 1,518 2,362 10,105 12,589 OTHER INCOME, NET 938 339 935 728 ---- ---- ---- --- INCOME BEFORE INTEREST CHARGES 2,456 2,701 11,040 13,317 ------ ------ ------- ------ INTEREST CHARGES: Interest on long-term debt 2,445 2,099 5,033 4,141 Other interest 110 166 269 401 Allowance for borrowed funds used during construction (29) (33) (52) (99) ---- ---- ---- ---- Total interest charges 2,526 2,232 5,250 4,443 ------ ------ ------ ----- INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (70) 469 5,790 8,874 SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 321 318 642 671 ---- ---- ---- --- NET INCOME (LOSS) $ (391) $ 151 $ 5,148 $ 8,203 ======= ====== ======== ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Before discount on repurchase of subsidiary's preferred stock $ (0.04) $ 0.02 $ 0.52 $ 0.85 Discount on repurchase of subsidiary's preferred stock - 0.08 - 0.09 -- ----- -- ---- Earnings (loss) per share of common stock $ (0.04) $ 0.10 $ 0.52 $ 0.94 ======== ======= ======= ====== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic 9,899,397 9,643,642 9,826,776 9,629,606 ========== ========== ========== ========= Diluted 9,999,017 9,701,991 9,916,915 9,681,514 ========== ========== ========== ========= CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.60 $ 0.59 ====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial statements. PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1998 1997 --------------- --------------- (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost $ 362,560 $ 351,106 Accumulated depreciation (92,954) (88,129) -------- ------- 269,606 262,977 -------- ------- OTHER PROPERTY AND INVESTMENTS: Nonutility property and equipment 25,377 16,335 Accumulated depreciation (5,226) (4,875) Other 2,360 2,171 ------ ----- 22,511 13,631 ------- ------ CURRENT ASSETS: Cash and cash equivalents 1,379 2,202 Restricted cash - common stock subscribed (Note 3) 633 - Accounts receivable - Customers 17,667 28,681 Others 875 850 Reserve for uncollectible accounts (1,758) (1,340) Unbilled revenues 2,721 12,108 Materials and supplies, at average cost 3,517 3,110 Gas held by suppliers, at average cost 16,515 21,933 Deferred cost of gas and supplier refunds, net 5,470 6,316 Prepaid expenses and other 4,222 1,686 ------ ----- 51,241 75,546 ------- ------ DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 30,932 30,592 Other 6,290 4,415 Unamortized debt expense 1,189 1,361 Other 230 308 ---- --- 38,641 36,676 ------- ------ TOTAL ASSETS $ 381,999 $ 388,830 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1998 1997 --------------- --------------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' investment (Note 3) $ 126,786 $ 122,105 Preferred stock of PG Energy - Not subject to mandatory redemption, net 15,864 15,864 Subject to mandatory redemption 560 640 Long-term debt 109,000 127,000 -------- ------- 252,210 265,609 -------- ------- CURRENT LIABILITIES: Current portion of long-term debt 27,500 24,776 Preferred stock subject to repurchase or mandatory redemption 80 80 Notes payable 1,050 2,170 Accounts payable 22,343 18,448 Accrued general business and realty taxes 655 2,953 Accrued income taxes 5,043 4,618 Accrued interest 1,563 1,783 Accrued natural gas transition costs 561 1,087 Other 1,897 1,722 ------ ----- 60,692 57,637 ------- ------ DEFERRED CREDITS: Deferred income taxes 54,105 52,511 Unamortized investment tax credits 4,510 4,596 Operating reserves 2,684 2,825 Other 7,798 5,652 ------ ----- 69,097 65,584 ------- ------ COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL CAPITALIZATION AND LIABILITIES $ 381,999 $ 388,830 ========== =========
The accompanying notes are an integral part of the consolidated financial statements. PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, ------------------------- 1998 1997 --------- ---------- (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 5,148 $ 8,203 Gain on sales of other property (1,174) - Effects of noncash charges to income - Depreciation 5,252 4,711 Deferred income taxes, net 1,254 389 Provisions for self insurance 381 406 Other, net 945 895 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and unbilled revenues 20,794 10,220 Gas held by suppliers 5,418 8,241 Accounts payable 1,225 (5,802) Deferred cost of gas and supplier refunds, net 320 14,602 Other current assets and liabilities, net (4,858) (11,307) Other operating items, net (1,387) (924) ------- ----- Net cash provided by operating activities 33,318 29,634 ------- ------ CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (12,257) (13,923) Additions to nonutility property (9,253) (1,234) Proceeds from the sales of other property 1,505 - Acquisition of regulated business - (2,009) Other, net 140 126 ---- --- Net cash used for investing activities (19,865) (17,040) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 4,801 1,211 Common stock subscribed, net 633 - Repurchase of subsidiary's preferred stock (80) (3,108) Dividends on common stock (5,901) (5,682) Repayment of long-term debt - (446) Net decrease in bank borrowings (13,726) (5,753) Other, net (3) 822 --- --- Net cash used for financing activities (14,276) (12,956) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (823) (362) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,202 1,126 ------ ----- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,379 $ 764 ======== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 5,195 $ 3,963 ======== ======= Income taxes $ 1,801 $ 14,674 ======= ========
The accompanying notes are an integral part of the consolidated financial statements. 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. ("PG Energy"), a regulated public utility, and PG Energy's wholly-owned subsidiary, Honesdale Gas Company ("Honesdale"), also a regulated public utility which was acquired on February 14, 1997. Together PG Energy and Honesdale distribute natural gas to a thirteen-county area in northeastern Pennsylvania, a territory that includes the cities of Scranton, Wilkes-Barre and Williamsport. In 1997, PG Energy and Honesdale collectively accounted for approximately 84% of the Company's operating revenues. The Company, through its other subsidiaries, PG Energy Services Inc. ("Energy Services"), PEI Power Corporation ("Power Corp") which was formed in October, 1997, 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 sale of natural gas, propane and electricity and other energy-related services, as well as the construction, maintenance and rehabilitation of natural gas distribution pipelines and the sale of property for residential, commercial and other development. In the fourth quarter of 1997, Energy Services began marketing electricity and other products and services, under the name PG Energy PowerPlus, in 26 counties in northeastern and central Pennsylvania. Power Corp, an exempt wholesale electricity generator, began generating and selling electricity in July, 1998, upon completion of modifications to its cogeneration facility that enable it to burn both natural gas and methane. Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, PG Energy, Energy Services (including Keystone), Power Corp and Theta. The consolidated financial statements also include the accounts of Honesdale beginning February 14, 1997, the date Honesdale was acquired by PG Energy. All material intercompany accounts have been eliminated in consolidation. Both PG Energy and Honesdale (collectively referred to as the "Regulated Subsidiaries") are subject to the jurisdiction of the Pennsylvania Public Utility Commission (the "PPUC") for rate and accounting purposes. The financial statements of the Regulated Subsidiaries 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 the sale of natural gas. 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 and regulatory matters which are difficult to predict and are beyond the control of the Company. Therefore, actual amounts could differ from these estimates. (2) RATE MATTERS Rate Increase. By Order adopted December 19, 1996, the PPUC approved an overall 5.3% increase in PG Energy'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 PG Energy'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 PG Energy, 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 PG Energy has been permitted to make the following changes since January 1, 1997, to the gas costs contained in its tariff rates: Change in Calculated Effective Rate per MCF Increase (Decrease) Date From To in Annual Revenue - -------------------------------------- ----- ----- ------------ June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000 March 1, 1998 4.05 3.95 (2,100,000) December 1, 1997 4.49 4.05 (12,100,000) March 1, 1997 4.18 4.49 8,300,000 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. (3) RESTRICTED CASH-COMMON STOCK SUBSCRIBED The Company reinstated its Customer Stock Purchase Plan (the "Customer Plan") effective February 4, 1998. The Customer Plan provides the residential customers of all the Company's subsidiaries with a method of purchasing newly-issued shares of the Company's common stock at a 5% discount from the market price. On July 1, 1998, the Company issued 25,065 shares of its common stock for an aggregate consideration of $645,000 with respect to payments received pursuant to the Customer Plan during the subscription period ended June 30, 1998. Such payments are reflected under the captions "Restricted cash - common stock subscribed" and "Common shareholders' investment" in these consolidated financial statements as of June 30, 1998. The proceeds from the issuance of shares through the Customer Plan were used by the Company to purchase common stock of PG Energy. (4) ACCOUNTING CHANGES Reporting Comprehensive Income. Effective January 1, 1998, the Company adopted the provisions of FASB Statement 130 "Reporting Comprehensive Income." However, because there were no items comprising other comprehensive income, the adoption of FASB 130 has no effect on the Company's financial statements for the periods ended June 30, 1998. 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 by the fourth quarter of 1998. (5) COMMITMENTS AND CONTINGENCIES Environmental Matters. PG Energy, 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 PG Energy. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PG Energy 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 PG Energy 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 PG Energy 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 PG Energy. PG Energy, 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, PG Energy 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 PG Energy 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. PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ------------------------------------------------------------------------------ RESULTS OF OPERATIONS The following table expresses certain items in the Company's consolidated statements of income as percentages of operating revenues for each of the three and six-month periods ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1998 1997 1998 1997 ---------- --------- --------- --------- OPERATING REVENUES: Regulated 69.7 % 79.3 % 79.8 % 86.1 % Nonregulated - Gas sales and services 21.1 14.3 14.7 10.2 Pipeline construction and services 8.9 6.3 5.0 3.6 Other 0.3 0.1 0.5 0.1 ---- ------------ ---- ----------- Total operating revenues 100.0 100.0 100.0 100.0 ------ ------ ------ ----- OPERATING EXPENSES: Cost of gas 50.5 54.3 57.0 60.5 Operation and maintenance 31.8 26.2 20.2 16.2 Depreciation 7.3 5.7 4.6 3.6 Income taxes (1.9) 0.2 3.1 4.3 Taxes other than income taxes 8.1 8.0 6.1 5.8 ---- ---- ---- --- Total operating expenses 95.8 94.4 91.0 90.4 ----- ----- ----- ---- OPERATING INCOME 4.2 5.6 9.0 9.6 OTHER INCOME, NET 2.6 0.8 0.8 0.5 INTEREST CHARGES (7.0) (5.3) (4.7) (3.4) SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (0.9) (0.7) (0.5) (0.5) ----- ----- ----- ----- NET INCOME (LOSS) (1.1)% 0.4 % 4.6 % 6.2 % ===== ==== ==== ====
o Three Months Ended June 30, 1998, Compared With Three Months Ended June 30, 1997 Operating Revenues. Operating revenues decreased $6.0 million (14.3%) from $41.9 million for the quarter ended June 30, 1997, to $35.9 million for the quarter ended June 30, 1998, largely as a result of an $8.2 million (24.7%) decrease in regulated operating revenues, the impact of which was partially offset by a $1.6 million (26.5%) increase in gas sales and services by PG Energy Services Inc. ("Energy Services"), a nonregulated affiliate of the Company, and a $577,000 (22.0%) increase in pipeline construction and services revenues by Keystone Pipeline Services, Inc.("Keystone"), a nonregulated subsidiary of Energy Services. The $8.2 million (24.7%) decrease in regulated operating revenues from $33.2 million for the quarter ended June 30, 1997, to $25.0 million for the quarter ended June 30, 1998, was primarily the result of a 0.8 billion cubic feet (22.5%) decrease in sales by PG Energy Inc. ("PG Energy") to its residential and commercial heating customers. This reduction in sales was attributable to the unseasonably warm weather during the second quarter of 1998 and the unseasonably cool weather during the same period in 1997, as well as lower levels in PG Energy's gas cost rate (see "-Rate Matters"). There was a 313 (32.4%) decrease in heating degree days from 965 (126.1% of normal) during the second quarter of 1997 to 652 (85.2% of normal) during the second quarter of 1998. The $1.6 million (26.5%) increase in nonregulated gas sales and services from $6.0 million for the quarter ended June 30, 1997, to $7.6 million for the quarter ended June 30, 1998, was primarily the result of a 560,000 cubic feet (35.1%) increase in sales of natural gas by Energy Services during the quarter. Operating Expenses. Operating expenses, including depreciation and income taxes, decreased $5.1 million (13.0%) from $39.5 million for the second quarter of 1997 to $34.4 million for the second quarter of 1998. As a percentage of operating revenues, total operating expenses increased from 94.4% during the second quarter of 1997 to 95.8% during the second quarter of 1998 because of the lower level of operating revenues. The cost of gas decreased $4.6 million (20.3%) from $22.7 million for the second quarter of 1997 to $18.1 million for the second quarter of 1998, primarily because of the aforementioned decrease in sales to PG Energy's residential and commercial heating customers and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The effects of these factors were partially offset by the increased sales by Energy Services. Other than the cost of gas and income taxes, operating expenses increased by $241,000 (1.4%) from $16.7 million for the second quarter of 1997 to $16.9 million for the second quarter of 1998. This increase was largely attributable to a $432,000 (3.9%) increase in operation and maintenance expense, primarily as a result of increased payroll and other costs associated with the expansion of the Company's nonregulated activities. Also contributing to the higher operating expenses was a $231,000 (9.7%) increase in depreciation expense, primarily because of additions to utility plant. Income taxes decreased $776,000 from tax expense of $83,000 for the second quarter of 1997 to a tax benefit of $693,000 for the second quarter of 1998 due to a decrease in income before income taxes (for this purpose, operating income net of interest charges). Operating Income. As a result of the above, operating income decreased by $844,000 (35.7%) from $2.4 million for the three-month period ended June 30, 1997, to $1.5 million for the three-month period ended June 30, 1998, and also decreased as a percentage of total operating revenues for such periods from 5.6% in the three-month period ended June 30, 1997, to 4.2% in the three-month period ended June 30, 1998. Other Income, Net. Other income, net increased $599,000 from $339,000 for the three-month period ended June 30, 1997, to $938,000 for the three-month period ended June 30, 1998, largely because of a gain on the sale of land in June, 1998. Interest Charges. Interest charges increased $294,000 (13.2%) from $2.2 million for the second quarter of 1997 to $2.5 million for the second quarter of 1998. This increase was largely attributable to a higher level of long-term debt outstanding in 1998. Net Income (Loss). The decrease in net income of $542,000 from income of $151,000 for the second quarter of 1997 to a loss of $391,000 for the second quarter of 1998 was the result of the matters discussed above, principally the decrease in operating revenues and the increase in interest charges, the effects of which were partially offset by decreased operating expenses. These same factors, along with an $.08 per share discount on the repurchase of preferred stock in 1997, accounted for the decrease in basic and diluted earnings per share of common stock from earnings of $.10 per share for the second quarter of 1997 to a loss of $.04 per share for the second quarter of 1998. o Six Months Ended June 30, 1998, Compared With Six Months Ended June 30, 1997 Operating Revenues. Operating revenues decreased $18.6 million (14.2%) from $131.4 million for the six-month period ended June 30, 1997, to $112.8 million for the six-month period ended June 30, 1998, largely as a result of a $23.1 million (20.5%) decrease in regulated operating revenues, the impact of which was partially offset by a $3.2 million (24.2%) increase in gas sales and services by Energy Services and an $828,000 (17.3%) increase in the pipeline construction and services revenues of Keystone. The $23.1 million (20.5%) decrease in regulated operating revenues from $113.1 million for the six-month period ended June 30, 1997, to $90.0 million for the six-month period ended June 30, 1998, was primarily the result of a 2.5 billion cubic feet (17.8%) decrease in sales by PG Energy to its residential and commercial heating customers. This reduction in sales was attributable to the unseasonably warm weather during the period and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). There was a 770 (19.5%) decrease in heating degree days from 3,955 (100.0% of normal) during the first six months of 1997 to 3,185 (80.5% of normal) during the first six months of 1998. The $3.2 million increase in nonregulated gas sales and services from $13.4 million for the six-month period ended June 30, 1997, to $16.6 million for the six-month period ended June 30, 1998, was primarily the result of a 1.3 million cubic feet (36.8%) increase in sales of natural gas by Energy Services during the period. Operating Expenses. Operating expenses, including depreciation and income taxes, decreased $16.1 million (13.6%) from $118.8 million for the six-month period ended June 30, 1997, to $102.7 million for the six-month period ended June 30, 1998. As a percentage of operating revenues, total operating expenses increased from 90.4% during the six-month period ended June 30, 1997, to 91.0% during the six-month period ended June 30, 1998, because of the lower level of operating revenues. The cost of gas decreased $15.2 million (19.1%) from $79.4 million for the six-month period ended June 30, 1997, to $64.3 million for the six-month period ended June 30, 1998, primarily because of the aforementioned decrease in sales to PG Energy's residential and commercial heating customers and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The effects of these factors were partially offset by the increased sales by Energy Services. Other than the cost of gas and income taxes, operating expenses increased by $1.3 million (3.8%) from $33.6 million for the six-month period ended June 30, 1997, to $34.9 million for the six-month period ended June 30, 1998. This increase was largely attributable to a $1.4 million (6.7%) increase in operation and maintenance expense, primarily as a result of increased payroll and other costs associated with the expansion of the Company's nonregulated activities. Also contributing to the higher operating expenses was a $533,000 (11.4%) increase in depreciation expense, primarily as a result of additions to utility plant. Income taxes decreased $2.2 million (39.1%) from $5.7 million for the six-month period ended June 30, 1997, to $3.5 million for the six-month period ended June 30, 1998, due to a decrease in income before income taxes (for this purpose, operating income net of interest charges). Operating Income. As a result of the above, operating income decreased by $2.5 million (19.7%) from $12.6 million for the six-month period ended June 30, 1997, to $10.1 million for the six-month period ended June 30, 1998, and also decreased as a percentage of total operating revenues for such periods from 9.6% in the six-month period ended June 30, 1997, to 9.0% in the six-month period ended June 30, 1998. Other Income, Net. Other income, net increased $207,000 from $728,000 for the six-month period ended June 30, 1997, to $935,000 for the six-month period ended June 30, 1998, largely because of a gain on the sale of land in June, 1998. Interest Charges. Interest charges increased $807,000 (18.2%) from $4.4 million for the six-month period ended June 30, 1997, to $5.2 million for the six-month period ended June 30, 1998. This increase was largely attributable to a higher level of long-term debt outstanding in 1998. Subsidiary's Preferred Stock Dividends. Dividends on preferred stock decreased $29,000 (4.3%) from $671,000 for the six-month period ended June 30, 1997, to $642,000 for the six-month period ended June 30, 1998, primarily as a result of repurchases of preferred stock in 1997. Net Income (Loss). The decrease in net income of $3.1 million (37.2%) from $8.2 million for the six-month period ended June 30, 1997, to $5.1 million for the six-month period ended June 30, 1998, was the result of the matters discussed above, principally the decrease in operating revenues and the increase in interest charges, the effects of which were partially offset by decreased operating expenses. The same factors, along with a $.09 per share discount on the repurchase of preferred stock in 1997, accounted for the decrease in basic and diluted earnings per share of common stock from $.94 per share for the six-month period ended June 30, 1997, to $.52 per share for the six-month period ended June 30, 1998. RATE MATTERS Rate Increase. By Order adopted December 19, 1996, the Pennsylvania Public Utility Commission (the "PPUC") approved an overall 5.3% increase in PG Energy'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 PG Energy's residential heating customers, which totaled $2.4 million through June 30, 1997, was deferred, without carrying charges, until July, 1997. Proposed Rate Increase. On March 16, 1998, PG Energy filed an application with the PPUC seeking an increase in its base gas rates, designed to produce $15.0 million in additional annual revenue, to be effective May 15, 1998. On April 23, 1998, the PPUC suspended this rate increase for seven months (until December 15, 1998) in order to investigate the reasonableness of the proposed rates. It is not presently possible to determine what action the PPUC will ultimately take in this matter. 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 PG Energy, 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, PG Energy has been permitted to make the following changes since January 1, 1997, to the gas costs contained in its gas tariff rates:
Change in Calculated Effective Rate per MCF Increase (Decrease) Date From To in Annual Revenue - --------------------------------- ----- ----- ------------ June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000 March 1, 1998 4.05 3.95 (2,100,000) December 1, 1997 4.49 4.05 (12,100,000) March 1, 1997 4.18 4.49 8,300,000
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. LIQUIDITY AND CAPITAL RESOURCES Liquidity The primary capital needs of the Company continue to be the funding of PG Energy's construction program and the seasonal funding of PG Energy's gas purchases and increases in its customer accounts receivable. PG Energy'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 continue to expand, further capital will be required for those activities. It is currently anticipated that such expenditures will be funded by a combination of capital provided by the Company, bank borrowings and other debt financing. The cash flow from PG Energy'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 PG Energy to use bank borrowings to fund such expenditures, pending the periodic issuance of stock and long-term debt. Bank borrowings are also used by PG Energy for the seasonal funding of its gas purchases and increases in customer accounts receivable. In order to temporarily finance construction expenditures and to meet its seasonal borrowing requirements, PG Energy has made arrangements for a total of $70.0 million of unsecured revolving bank credit, which is deemed adequate for its needs. Specifically, PG Energy currently has seven bank lines of credit with an aggregate borrowing capacity of $70.0 million which provide for borrowings at interest rates generally less than prime and which mature at various times during 1998 and 1999 and which PG Energy intends to renew or replace as they expire. As of July 30, 1998, PG Energy had $17.0 million of borrowings outstanding under these bank lines of credit. The Company believes that its regulated subsidiaries 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 future needs. Long-Term Debt and Capital Stock Financings Both the Company and its subsidiaries, most notably PG Energy, 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 PG Energy during the six-month period ended June 30, 1998. The Company also obtains external funds from the sale of common stock through its Dividend Reinvestment and Stock Purchase Plan, its Customer Stock Purchase Plan, its 1992 Stock Option Plan and its Employees' Savings Plan. During 1998 (through July 30) the Company realized $7.5 million from the issuance of common stock under these plans. Capital Expenditures and Related Financings Capital expenditures totaled $21.8 million during the first six months of 1998, including $12.1 million of expenditures for the construction of utility plant and $8.5 million for the conversion of Power Corp's cogeneration facility and construction of the related methane recovery facility. The Company estimates that its capital expenditures will total $25.8 million for the remainder of the year, consisting of $24.2 million relative to utility plant and $1.6 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, and by the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of June 30, 1998, $27.5 million of long-term debt and $80,000 of PG Energy's preferred stock was required to be repaid within twelve months. Year 2000 The Company is currently replacing its financial and human resource systems with purchased software packages. The installation of these new systems, along with modifications currently being made to its customer information system, will resolve the primary year 2000 issues. The new financial and human resource systems are anticipated to be fully operational by January, 1999, while modifications to the new customer information system are now anticipated to be completed and tested by March 31, 1999. The Company has completed a review of the program coding of other significant in-house developed applications and determined that they are presently year 2000 compliant. Additionally, the Company is reviewing its installed base of personal computers to identify non-compliant machines that would be in service at year 2000. 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 industry and general economic conditions and uncertainties relating to the expansion of the Company's nonregulated activities. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this filing. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of the Company was held on May 6, 1998. (b) The following persons were elected directors of the Company with the voting as indicated:
No. of Shares No. of Shares Name Voted in Favor Withheld - ------------------------ ---------------- -------------- Kenneth L. Pollock 8,178,160 99,353 William D. Davis 8,189,800 87,713 Thomas F. Karam 8,193,640 83,873 Robert J. Keating 8,180,954 96,559 James A. Ross 8,182,748 94,765 John D. McCarthy 8,190,164 87,349 Ronald W. Simms 8,190,080 87,433 Kenneth M. Pollock 8,184,579 92,934 Paul R. Freeman 8,187,189 90,324 John D. McCarthy, Jr. 8,180,239 97,274 Richard A. Rose, Jr. 8,189,643 87,870
Item 5. Other Information Effective August 4, 1998, Paul R. Freeman resigned as a Director of Pennsylvania Enterprises, Inc. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10-1 Form of Stock Option Grant, dated as of May 6, 1998, between the Company and certain of its Officers - - filed herewith. 10-2 Form of Stock Option Grant, dated as of May 6, 1998, between the Company and certain of its non-employee directors - - filed herewith. 10-3 Stock Option Grant, dated as of May 6, 1998, between the Company and Thomas F. Karam - - filed herewith. 10-4 Amended Employment Agreement dated as of May 6, 1998, by and among the Company, PG Energy Inc. and Thomas F. Karam - - 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. 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: August 11, 1998 By: /s/ Donna M. Abdalla ------------------- --------------------------------------- Donna M. Abdalla Acting Secretary Date: August 11, 1998 By: /s/ John F. Kell, Jr. ------------------- --------------------------------------- John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) EX-10 2 FORM OF OFFICER STOCK OPTION GRANT FORM OF EXECTIVE OFFICER STOCK OPTION GRANT UNDER THE PENNSYLVANIA ENTERPRISES, INC. STOCK INCENTIVE PLAN Option No.: Option No THIS AGREEMENT dated as of _______ (the "Date of Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC. (the "Company") and FirstName LastName (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 Total>> 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 $____ price per share, 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: (a) The Option shall be exercisable with respect to Half1 shares (50% of the shares subject to the Option) on the first anniversary of the Date of Grant, but only if (i) PEI earnings per share for fiscal year in which date of grant occurs is at least $___ per share and (ii) Optionee satisfies the employment condition of paragraph 4(c) until such date. (b) In addition to the portion of the Option which shall be exercisable pursuant to paragraph 4(a) hereof, the Option shall be exercisable with respect to Half2 shares (50% of the shares subject to the Option) on the second anniversary of the Date of Grant, but only if (i) PEI earnings per share for fiscal year after year in which date of grant occurs is at least $___ per share and (ii) Optionee satisfies the employment condition of paragraph 4(c) until such date. (c) In order to satisfy the employment condition of this paragraph 4(c), Optionee must (i) remain employed by the Company or a Related Company (as defined below) in at least the same or a similarly responsible position until the time specified in paragraph 4(a) or 4(b), respectively, and (ii) achieve at least a "meets standards" personnel performance rating on all performance evaluations of Optionee made until such time. 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. (d) For purposes of this Section 4 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, asset sales, early retirement/severance programs, other extraordinary expenses or transactions, and also for temperature variations from normal degree days. (e) The Committee shall determine, in its discretion, the level of earnings per share which has been attained and the extent to which the Optionee has satisfied the conditions set forth in paragraph 4(c). 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) _______ (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. 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, through a combination of cash and such shares of Stock, or in such other manner as may be permitted by the Committee. 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 and this Option 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: By Name Title: By Title Accepted and agreed to as of the Date of Grant: ________________________________ Optionee EX-10 3 FORM OF DIRECTOR STOCK OPTION GRANT FORM OF DIRECTOR STOCK OPTION GRANT UNDER THE PENNSYLVANIA ENTERPRISES, INC. STOCK INCENTIVE PLAN Option No.: OptionNo THIS AGREEMENT dated as of _______ (the "Date of Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC. (the "Company") and FirstName LastName (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 ______ 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 $ price per share, 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: (a) The Option shall be exercisable with respect to ______ shares (50% of the shares subject to the Option) on the first anniversary of the Date of Grant, but only if (i) PEI earnings per share for fiscal year in which date of grant occurs is at least $___ per share and (ii) Optionee continues to serve on the Board until such date. (b) In addition to the portion of the Option which shall be exercisable pursuant to paragraph 4(a) hereof, the Option shall be exercisable with respect to ______ shares (50% of the shares subject to the Option) on the second anniversary of the Date of Grant, but only if (i) PEI earnings per share for fiscal year after year in which date of grant occurs is at least $___ per share and (ii) Optionee continues to serve on the Board until such date. (c) For purposes of this Section 4 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, asset sales, early retirement/severance programs, other extraordinary expenses or transactions, and also for temperature variations from normal degree days. (d) The Board shall determine, in its discretion, the level of earnings per share which has been attained and the extent to which the Optionee has satisfied the conditions set forth in paragraphs 4(a) and 4(b). Notwithstanding the foregoing provisions of this Section 4, the Board 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) two years after termination of the Optionee's service on the Board for any reason; or (b) _______ (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. 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, through a combination of cash and such shares of Stock, or in such other manner as may be permitted by the Board. 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 and this Option 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: By Name Title: By Title Accepted and agreed to as of the Date of Grant: ________________________________ Optionee EX-10 4 STOCK OPTION GRANT STOCK OPTION GRANT UNDER THE PENNSYLVANIA ENTERPRISES, INC. STOCK INCENTIVE PLAN Option No.: 98-093 THIS AGREEMENT dated as of May 6, 1998 (the "Date of Grant") is made by and between PENNSYLVANIA ENTERPRISES, INC. (the "Company") and Thomas F. Karam (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 60,000 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 $23.9375 per share, 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: (a) The Option shall be exercisable with respect to 30,000 shares (50% of the shares subject to the Option) on May 1, 2002, but only if (i) PEI earnings per share goal for 2001, as determined by the Compensation Committee of the Board of Directors of the Company and approved by the Board of Directors of the Company, is met and (ii) Optionee satisfies the employment condition of paragraph 4(c) until such date except in the event of a Change of Control (as defined in the Incentive Plan), in which case such options shall become fully exercisable. (b) In addition to the portion of the Option which shall be exercisable pursuant to paragraph 4(a) hereof, the Option shall be exercisable with respect to 30,000 shares (50% of the shares subject to the Option) on May 1, 2003, but only if (i) PEI earnings per share goal for 2002, as set by the Compensation Committee of the Board of Directors of the Company, is met and (ii) Optionee satisfies the employment condition of paragraph 4(c) until such date except in the event of a Change of Control (as defined in the Incentive Plan), in which case such options shall become fully exercisable. (c) In order to satisfy the employment condition of this paragraph 4(c), Optionee must remain employed by the Company or a Related Company (as defined below) in at least the same or a similarly responsible position until the time specified in paragraph 4(a) or 4(b), respectively. 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. (d) For purposes of this Section 4 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, asset sales, early retirement/severance programs, other extraordinary expenses or transactions, and also for temperature variations from normal degree days. (e) The Committee shall determine, in its discretion, the level of earnings per share which has been attained and the extent to which the Optionee has satisfied the conditions set forth in paragraph 4(c). 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) May 5, 2008 (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. 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, through a combination of cash and such shares of Stock, or in such other manner as may be permitted by the Committee. 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 and this Option 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: Kenneth L. Pollock Title: Chairman Accepted and agreed to as of the Date of Grant: ____________________________ Optionee EX-10 5 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, dated as of the 28th day of August, 1996, and amended as of the 6th day of May, 1998, 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 seventh 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, $225,000 for the second year of the Term until April 30, 1998, and $275,000 for the period from May 1, 1998 to April 30, 1999. 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 $275,000 per annum. (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 September1, 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). (c) a grant of options under PEI's Stock Incentive Plan (the "Incentive Plan") to purchase 60,000 shares of PEI's common stock, no par value, stated value $10.00 per share ("Common Stock") to be made on May 6, 1998. Such options shall become exercisable, subject to acceleration in the event of a "Change of Control" of PEI (as defined in the Incentive Plan) pursuant to the terms of the Incentive Plan, as follows: options to purchase 30,000 shares shall become exercisable on May 1, 2002, and options to purchase an additional 30,000 shares shall become exercisable on May 1, 2003. The exercisability of such options shall be subject to the achievement by the Company of any financial and operational goals specified by the Compensation Committee of the Board of Directors of the Company except in the event of a Change of Control (as defined in the Incentive Plan), in which case such options shall become fully exercisable. 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. Executive shall not receive a Gross-Up Payment for the Excise Tax, if any, imposed with respect to the options referred to in Section 4(c) hereof. (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. One PEI Center Wilkes-Barre, Pennsylvania 18711 Attention: Secretary If to PGE: PG Energy, Inc. One PEI Center Wilkes-Barre, Pennsylvania 18711 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 6th day of May, 1998. PENNSYLVANIA ENTERPRISES, INC. By: /s/ Kenneth L. Pollock Name: Kenneth L. Pollock Title: Chairman of the Board of Directors PG ENERGY, INC. By: /s/ Kenneth L. Pollock Name: Kenneth L. Pollock Title: Chairman of the Board of Directors Executive /s/ Thomas F. Karam Thomas F. Karam APPROVED: COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS OF PENNSYLVANIA ENTERPRISES, INC. By: /s/ John D. McCarthy Name: John D. McCarthy Title: Chairman By: /s/ Ronald W. Simms Name: Ronald W. Simms By: /s/ William D. Davis Name: William D. Davis By: /s/ Richard A. Rose, Jr. Name: Richard A. Rose, Jr. EX-27 6 FDS --
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. 6-MOS DEC-31-1997 JUN-30-1998 PER-BOOK 269,606,000 22,511,000 51,241,000 38,641,000 0 381,999,000 50,355,000 26,888,000 49,543,000 126,786,000 560,000 15,864,000 109,000,000 1,050,000 0 0 27,500,000 80,000 0 0 101,159,000 381,999,000 112,760,000 3,463,000 99,192,000 102,655,000 10,105,000 935,000 11,040,000 5,250,000 5,790,000 642,000 5,148,000 5,901,000 4,837,000 33,318,000 .52 .52
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