-----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, VEzkicmvyMxTqvSP4nW0Kypdfd9PVzYomXx6d7mAGLcgUVHrzj/md9L8C7yWK0XD 7RNO0GqEvDk6mG9H/+++eQ== 0000077231-98-000025.txt : 19981106 0000077231-98-000025.hdr.sgml : 19981106 ACCESSION NUMBER: 0000077231-98-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 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: 98738778 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 SEPTEMBER 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 10,195,434 shares of common stock, no par value, outstanding as of October 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 nine months ended September 30, 1998 and 1997............................... 2 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997........................................... 3 Consolidated Statements of Cash Flows for the nine months ended September 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 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 Nine Months Ended September 30, September 30, ---------------------------- --------------------------- 1998 1997* 1998 1997* ------------- ------------ ------------- ------------ (Thousands of Dollars) OPERATING REVENUES: Energy products and services - Regulated ......................................... $ 15,177 $ 16,276 $ 105,187 $ 129,425 Nonregulated ...................................... 8,112 4,589 25,254 18,015 Pipeline construction and services .................... 3,611 3,344 9,219 8,124 ------------ ------------ ------------ ------------ Total operating revenues ...................... 26,900 24,209 139,660 155,564 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Cost of gas and other energy .......................... 13,105 11,089 77,752 90,523 Operation and maintenance ............................. 11,681 11,088 34,038 32,396 Depreciation .......................................... 2,691 2,367 7,902 7,045 Income taxes .......................................... (2,098) (2,064) 1,365 3,618 Taxes other than income taxes ......................... 1,780 2,020 8,757 9,684 ------------ ------------ ------------ ------------ Total other operating expenses .................... 27,159 24,500 129,814 143,266 ------------ ------------ ------------ ------------ OPERATING INCOME (LOSS) .................................... (259) (291) 9,846 12,298 OTHER INCOME, NET .......................................... 635 667 1,570 1,395 ------------ ------------ ------------ ------------ INCOME BEFORE INTEREST CHARGES ............................. 376 376 11,416 13,693 ------------ ------------ ------------ ------------ INTEREST CHARGES: Interest on long-term debt ............................. 2,668 2,238 7,701 6,379 Other interest ......................................... 138 230 407 631 Allowance for borrowed funds used during construction .. (38) (45) (90) (144) ------------ ------------ ------------ ------------ Total interest charges .............................. 2,768 2,423 8,018 6,866 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS ........................................ (2,392) (2,047) 3,398 6,827 SUBSIDIARY'S PREFERRED STOCK DIVIDENDS ..................... 319 320 961 991 ------------ ------------ ------------ ------------ NET INCOME (LOSS) .......................................... $ (2,711) $ (2,367) $ 2,437 $ 5,836 ============ ============ ============ ============ BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Before discount on repurchase of subsidiary's preferred stock ............................................. $ (0.27) $ (0.24) $ 0.25 $ 0.61 Discount on repurchase of subsidiary's preferred stock -- -- -- 0.08 ------------ ------------ ------------ ------------ Earnings (loss) per share of common stock ............. $ (0.27) $ (0.24) $ 0.25 $ 0.69 ============ ============ ============ ============ DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Before discount on repurchase of subsidiary's preferred stock ............................................. $ (0.27) $ (0.24) $ 0.24 $ 0.60 Discount on repurchase of subsidiary's preferred stock -- -- -- 0.08 ------------ ------------ ------------ ------------ Earnings (loss) per share of common stock ............. $ (0.27) $ (0.24) $ 0.24 $ 0.68 ============ ============ ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: Basic ........................................... 10,062,702 9,669,614 9,906,282 9,643,088 ============ ============ ============ ============ Diluted ......................................... 10,141,608 9,800,192 9,989,804 9,711,219 ============ ============ ============ ============ CASH DIVIDENDS PER SHARE ................................... $ 0.30 $ 0.30 $ 0.90 $ 0.89 ============ ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
* Restated to conform to 1998 presentation. PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 ------------ ------------- (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost ................................. $ 369,232 $ 351,106 Accumulated depreciation ......................... (94,826) (88,129) --------- --------- 274,406 262,977 --------- --------- OTHER PROPERTY AND INVESTMENTS: Nonutility property and equipment ................ 29,144 16,335 Accumulated depreciation ......................... (5,475) (4,875) Other ............................................ 2,352 2,171 --------- --------- 26,021 13,631 --------- --------- CURRENT ASSETS: Cash and cash equivalents ........................ 432 2,202 Restricted cash - common stock subscribed (Note 3) 487 -- Accounts receivable - Customers .................................... 15,056 28,681 Others ....................................... 876 850 Reserve for uncollectible accounts ........... (1,521) (1,340) Unbilled revenues ................................ 3,111 12,108 Materials and supplies, at average cost .......... 3,419 3,110 Gas held by suppliers, at average cost ........... 26,482 21,933 Deferred cost of gas and supplier refunds, net ... 11,540 6,316 Prepaid expenses and other ....................... 4,022 1,686 --------- --------- 63,904 75,546 --------- --------- DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible .................... 31,109 30,592 Other ......................................... 6,579 4,415 Unamortized debt expense .......................... 1,101 1,361 Other ............................................. 250 308 --------- --------- 39,039 36,676 --------- --------- TOTAL ASSETS ........................................... $ 403,370 $ 388,830 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 ---------- --------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholders' investment (Note 3) .... $125,167 $122,105 Preferred stock of PG Energy - Not subject to mandatory redemption, net 4,839 15,864 Subject to mandatory redemption ........ 560 640 Long-term debt .............................. 95,000 127,000 -------- -------- 225,566 265,609 -------- -------- CURRENT LIABILITIES: Current portion of long-term debt ........... 67,697 24,776 Preferred stock subject to repurchase or mandatory redemption .................... 11,057 80 Notes payable ............................... 3,270 2,170 Accounts payable ............................ 20,164 18,448 Accrued general business and realty taxes ... 646 2,953 Accrued income taxes ........................ 1,362 4,618 Accrued interest ............................ 1,221 1,783 Accrued natural gas transition costs ........ 281 1,087 Other ....................................... 1,868 1,722 -------- -------- 107,566 57,637 -------- -------- DEFERRED CREDITS: Deferred income taxes ....................... 55,364 52,511 Unamortized investment tax credits .......... 4,467 4,596 Operating reserves .......................... 2,578 2,825 Other ....................................... 7,829 5,652 -------- -------- 70,238 65,584 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL CAPITALIZATION AND LIABILITIES .............. $403,370 $388,830 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, ---------------------- 1998 1997 ---------- --------- (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income ............................................................... $ 2,437 $ 5,836 Gain on sales of nonutility property ..................................... (2,275) (701) Effects of noncash charges to income - Depreciation ......................................................... 7,970 7,095 Deferred income taxes, net ........................................... 2,336 715 Provisions for self insurance ........................................ 560 630 Other, net ........................................................... 1,576 1,603 Changes in working capital, exclusive of cash and current portion of long-term debt and preferred stock - Receivables and unbilled revenues ............................... 22,777 16,221 Gas held by suppliers ........................................... (4,549) (5,705) Accounts payable ................................................ (373) (6,568) Deferred cost of gas and supplier refunds, net .................. (6,030) 10,316 Other current assets and liabilities, net ....................... (8,624) (39) Other operating items, net ............................................... (1,954) (335) -------- -------- Net cash provided by continuing operations ..................... 13,851 29,068 Net cash used for discontinued operations, principally for the payment of income taxes ..................................................... -- (13,655) -------- -------- Net cash provided by operating activities ....................... 13,851 15,413 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant ............................................... (19,955) (22,810) Additions to nonutility property ......................................... (13,179) (2,172) Proceeds from the sales of nonutility property ........................... 2,855 746 Acquisition of regulated business ........................................ -- (2,019) Other, net ............................................................... 55 (3) -------- -------- Net cash used for investing activities .......................... (30,224) (26,258) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of long-term debt ............................................... -- 25,000 Issuance of common stock ................................................. 9,049 1,861 Common stock subscribed, net ............................................. 487 -- Repurchase of subsidiary's preferred stock ............................... (128) (3,137) Dividends on common stock ................................................ (8,926) (8,583) Net increase (decrease) in bank borrowings ............................... 14,110 (5,021) Other, net ............................................................... 11 700 -------- -------- Net cash used for financing activities .......................... 14,603 10,820 -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................... (1,770) (25) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 2,202 1,126 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 432 $ 1,101 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) .................................. $ 8,178 $ 6,000 ======== ======== Income taxes .......................................................... $ 2,679 $ 15,197 ======== ======== 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. These activities include the sale of natural gas, propane, electricity and other energy-related products and services; the construction, maintenance and rehabilitation of utility facilities, primarily 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 information of the Regulated Subsidiaries that is incorporated in these consolidated financial statements has 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 - ------------------- ---------- ----------- ------------------------- September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000 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 October 1, 1998, the Company issued 20,401 shares of its common stock for an aggregate consideration of $483,000 with respect to payments received pursuant to the Customer Plan during the subscription period ended September 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 September 30, 1998. (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 September 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 will adopt the reporting provisions of FASB Statement 131 in the fourth quarter of 1998. Accounting for Derivative Instruments and Hedging Activities. In June 1998, FASB Statement 133, "Accounting for Derivative Instruments and Hedging Activities" was issued. The provisions of this statement, which are effective for fiscal quarters beginning after June 15, 1999, establish accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. While the Company generally has not used derivative instruments, it expects to adopt, to the extent necessary, the provisions of FASB Statement 133 in the third quarter of 1999. The impact of such adoption on the Company's future financial condition and results of operations will depend upon a number of factors, including the extent to which the Company may use derivative instruments, and the designation and effectiveness of such derivative hedging market risk. (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 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 nine-month periods ended September 30, 1998 and 1997:
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------------ 1998 1997 1998 1997 ----------- ----------- ------------ ----------- OPERATING REVENUES: Energy products and services - Regulated 56.4 % 67.2 % 75.3 % 83.2 % Nonregulated 30.2 19.0 18.1 11.6 Pipeline construction and services 13.4 13.8 6.6 5.2 ----- ----- ----- ----- Total operating revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- OPERATING EXPENSES: Cost of gas and other energy 48.8 45.8 55.7 58.2 Operation and maintenance 43.4 45.8 24.4 20.8 Depreciation 10.0 9.8 5.6 4.6 Income taxes (7.8) (8.5) 1.0 2.3 Taxes other than income taxes 6.6 8.3 6.3 6.2 ----- ----- ----- ----- Total operating expenses 101.0 101.2 93.0 92.1 ----- ----- ----- ----- OPERATING INCOME (1.0) (1.2) 7.0 7.9 OTHER INCOME, NET 2.4 2.7 1.1 0.9 INTEREST CHARGES (10.3) (10.0) (5.7) (4.4) SUBSIDIARY'S PREFERRED STOCK DIVIDENDS (1.2) (1.3) (0.7) (0.6) ----- ----- ----- ----- NET INCOME (LOSS) (10.1)% (9.8)% 1.7% 3.8% ====== ===== ===== =====
o Three Months Ended September 30, 1998, Compared With Three Months Ended September 30, 1997 Operating Revenues. Operating revenues increased $2.7 million (11.1%) from $24.2 million for the quarter ended September 30, 1997, to $26.9 million for the quarter ended September 30, 1998, largely as a result of a $3.5 million (76.8%) increase in revenues from nonregulated energy products and services, including a $2.2 million (49.7%) increase in gas sales and services by PG Energy Services Inc. ("Energy Services"), a nonregulated affiliate of the Company, and $832,000 attributable to the generation and sale of electric energy by PEI Power Corporation ("Power Corp"), a nonregulated affiliate of the Company which began generating and selling electricity in July, 1998. The impact of these increases was partially offset by a $1.1 million (6.8%) decrease in operating revenues from regulated energy products and services, namely, the sale and transportation of natural gas. Operating revenues from regulated energy products and services decreased $1.1 million (6.8%) from $16.3 million for the quarter ended September 30, 1997, to $15.2 million for the quarter ended September 30, 1998, primarily as a result of a 50 million cubic feet (4.0%) decrease in natural gas sales by PG Energy Inc. ("PG Energy") to its residential and commercial heating customers. This reduction in sales was attributable to warmer than normal temperatures during the third quarter of 1998 and colder than normal temperatures during the same period in 1997, as well as lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The number of heating degree days decreased by 97 (46.2%) from 210 (175.0% of normal) during the third quarter of 1997 to 113 (94.2% of normal) during the third quarter of 1998. The $2.2 million (49.7%) increase in Energy Services' nonregulated gas sales and services, from $4.5 million for the quarter ended September 30, 1997, to $6.8 million for the quarter ended September 30, 1998, was primarily the result of a 1.1 million cubic feet (73.2%) increase in sales of natural gas by Energy Services during the quarter. Operating Expenses. Operating expenses, including depreciation and income taxes, increased $2.7 million (10.9%) from $24.5 million for the third quarter of 1997 to $27.2 million for the third quarter of 1998. As a percentage of operating revenues, total operating expenses decreased slightly from 101.2% during the third quarter of 1997 to 101.0% during the third quarter of 1998. The cost of gas and other energy increased $2.0 million (18.2%) from $11.1 million for the third quarter of 1997 to $13.1 million for the third quarter of 1998, primarily because of the aforementioned increase in sales by Energy Services and the sales of Power Corp since it began operating in July, 1998. The effects of these increases were partially offset by the decrease in the volume of natural gas sold by PG Energy to its residential and commercial heating customers and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). Other than the cost of gas and other energy and income taxes, operating expenses increased by $677,000 (4.4%) from $15.5 million for the third quarter of 1997 to $16.2 million for the third quarter of 1998. This increase was largely attributable to a $593,000 (5.3%) 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 $324,000 (13.7%) increase in depreciation expense, primarily because of additions to utility plant. The effects of these increases were partially offset by a $240,000 (11.9%) decrease in taxes other than income taxes resulting from a lower level of gross receipts tax because of the decreased sales by PG Energy and Honesdale Gas Company ("Honesdale"), a wholly-owned regulated subsidiary of PG Energy. Operating Income (Loss). As a result of the above, the operating loss decreased by $32,000 (11.0%) from $291,000 for the three-month period ended September 30, 1997, to $259,000 for the three-month period ended September 30, 1998, and also decreased as a percentage of total operating revenues for such periods from 1.2% in the three-month period ended September 30, 1997, to 1.0% in the three-month period ended September 30, 1998. Interest Charges. Interest charges increased $345,000 (14.2%) from $2.4 million for the third quarter of 1997 to $2.8 million for the third quarter of 1998. This increase was largely attributable to a higher level of long-term debt outstanding in 1998. Net Income (Loss). The increase of $344,000 in the net loss, from $2.4 million for the third quarter of 1997 to $2.7 million for the third quarter of 1998, and the $.03 per share increase in both the basic and diluted loss per share of common stock, from $.24 per share for the third quarter of 1997 to $.27 per share for the third quarter of 1998, were principally the result of operating income remaining relatively static while interest charges increased. o Nine Months Ended September 30, 1998, Compared With Nine Months Ended September 30, 1997 Operating Revenues. Operating revenues decreased $15.9 million (10.2%) from $155.6 million for the nine-month period ended September 30, 1997, to $139.7 million for the nine-month period ended September 30, 1998, largely as a result of a $24.2 million (18.7%) decrease in operating revenues from regulated energy products and services, the impact of which was partially offset by a $7.2 million (40.2%) increase in operating revenues from nonregulated energy products and services, including a $5.5 million (30.6%) increase in gas sales and services by Energy Services, $832,000 of electric energy sales by Power Corp since July, 1998, when it began generating and selling electricity, and a $1.1 million (13.5%) increase in the pipeline construction and services revenues of Keystone Pipeline Services, Inc., a nonregulated subsidiary of Energy Services. Operating revenues from regulated energy products and services decreased $24.2 million (18.7%) from $129.4 million for the nine-month period ended September 30, 1997, to $105.2 million for the nine-month period ended September 30, 1998, primarily as a result of a 2.5 billion cubic feet (16.7 %) decrease in natural gas sales by PG Energy to its residential and commercial heating customers. This reduction in sales was attributable to warmer than normal weather during the period and lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The number of heating degree days decreased by 867 (20.8%) from 4,165 (102.2% of normal) during the first nine months of 1997 to 3,298 (80.9% of normal) during the first nine months of 1998. The $5.5 million increase in Energy Services' nonregulated gas sales and services from $17.9 million for the nine-month period ended September 30, 1997, to $23.4 million for the nine-month period ended September 30, 1998, was primarily the result of a 2.4 million cubic feet (47.5%) increase in sales of natural gas by Energy Services during the period. Operating Expenses. Operating expenses, including depreciation and income taxes, decreased $13.5 million (9.4%) from $143.3 million for the nine-month period ended September 30, 1997, to $129.8 million for the nine-month period ended September 30, 1998. As a percentage of operating revenues, total operating expenses increased from 92.1% during the nine-month period ended September 30, 1997, to 93.0% during the nine-month period ended September 30, 1998, because of the lower level of operating revenues. The cost of gas and other energy decreased $12.8 million (14.1%) from $90.5 million for the nine-month period ended September 30, 1997, to $77.8 million for the nine-month period ended September 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 of Energy Services and the sales by Power Corp. Other than the cost of gas and other energy and income taxes, operating expenses increased by $1.6 million (3.2%) from $49.1 million for the nine-month period ended September 30, 1997, to $50.7 million for the nine-month period ended September 30, 1998. This increase was largely attributable to a $1.6 million (5.1%) increase in operation and maintenance expense, primarily because of increased payroll and other costs associated with the expansion of the Company's nonregulated activities and an $857,000 (12.2%) increase in depreciation expense, primarily as a result of additions to utility plant. The impact of these increases was partially offset by a $927,000 (9.6%) decrease in taxes other than income taxes resulting from a lower level of gross receipts tax because of the decreased sales by PG Energy and Honesdale. Income taxes decreased $2.3 million (62.3%) from $3.6 million for the nine-month period ended September 30, 1997, to $1.4 million for the nine-month period ended September 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, primarily the decrease in sales by PG Energy, operating income decreased by $2.5 million (19.9%) from $12.3 million for the nine-month period ended September 30, 1997, to $9.8 million for the nine-month period ended September 30, 1998, and also decreased as a percentage of total operating revenues for such periods from 7.9% in the nine-month period ended September 30, 1997, to 7.0% in the nine-month period ended September 30, 1998. Interest Charges. Interest charges increased $1.2 million (16.8%) from $6.9 million for the nine-month period ended September 30, 1997, to $8.0 million for the nine-month period ended September 30, 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 $3.4 million (58.2%) from $5.8 million for the nine-month period ended September 30, 1997, to $2.4 million for the nine-month period ended September 30, 1998, was the result of the matters discussed above, principally the decrease in sales by PG Energy and the increase in interest charges, the effects of which were partially offset by decreased operating expenses. The same factors, along with the inclusion of a $.08 per share discount on the repurchase of preferred stock in 1997, accounted for the decrease in both basic and diluted earnings per share of common stock of $.44 per share for the nine-month period ended September 30, 1998. RATE MATTERS Rate Increases. 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. 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 September 29, 1998, PG Energy and certain parties filing objections to the rate increase request filed a Settlement Petition with the Administrative Law Judge assigned to conduct the investigation of the rate increase request. By Order adopted October 16, 1998, the PPUC approved the Settlement Petition and granted PG Energy an overall 4.1% increase in its base rates, designed to produce $7.4 million of additional annual revenue, effective October 17, 1998. 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 - --------------------- ----------- ---------- ------------------------- September 1, 1998 $ 4.18 $ 4.25 $ 1,900,000 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 $63.0 million of unsecured revolving bank credit, which is deemed adequate for its needs. Specifically, PG Energy currently has six bank lines of credit with an aggregate borrowing capacity of $63.0 million which provide for borrowings at interest rates generally less than prime and which mature at various times during 1999 and which PG Energy intends to renew or replace as they expire. As of October 30, 1998, PG Energy had $38.7 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 nine-month period ended September 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 October 30) the Company realized $10.7 million from the issuance of common stock under these plans. Capital Expenditures and Related Financings Capital expenditures totaled $33.3 million during the first nine months of 1998, including $20.0 million of expenditures for the construction of utility plant and $9.1 million for the conversion of Power Corp's cogeneration plant and construction of the related methane recovery facility. The Company estimates that its capital expenditures will total $12.0 million for the remainder of the year, consisting of $10.0 million relative to utility plant and $2.0 million with respect to the Company's nonregulated activities. These capital expenditures will be financed with internally generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of September 30, 1998, $67.7 million of long-term debt and $11.1 million of PG Energy's preferred stock was required to be repaid within twelve months. The $67.7 million of long-term debt includes $20.0 million outstanding under the Company's Term Loan Agreement which is due on May 31, 1999, $36.7 million outstanding under PG Energy's bank lines of credit which is due at various times during 1999, $10.0 million of PG Energy's 9.23% series first mortgage bonds which are due September 1, 1999, and $1.0 million outstanding under a Power Corp bank line of credit which is due March 30, 1999. The $11.1 million of PG Energy preferred stock includes $11.0 million relative to all of the outstanding shares of PG Energy's 9% cumulative preferred stock, $100 par value, which have been called for redemption on December 1, 1998, at a price of $104 per share, plus accrued dividends. PG Energy, the Company and Power Corp are each intending to finance their respective current maturities of long-term debt and preferred stock with internally generated funds and bank borrowings pending the periodic issuance of long-term debt and capital stock. Year 2000 The Company has performed an inventory and assessment of its computer systems and applications, as well as devices with embedded technology, to identify year 2000 issues and to develop a plan for addressing those issues. This plan, which was initiated in 1996, is scheduled to be completed by March 31, 1999, for all applications and devices that could have a material effect on the Company's operations, and by June 30, 1999, with respect to all other issues. The plan involves the replacement of certain systems with purchased software, the renovation of other systems, and the purchase of certain hardware and other devices. The Company is utilizing both internal resources and contract personnel to implement the plan, which is currently on schedule. In view of the substantial progress that has been made to date, management does not anticipate the expenditures necessary to carry out the plan will be material relative to the Company's financial position or results of operations. As key elements of its plan to address year 2000 issues, the Company is in the process of replacing its financial and human resource systems with purchased software. The installation of these new systems, along with modifications currently being made to the Company's customer information system and upgrading of its operating system software, will resolve the primary year 2000 issues. The new financial and human resource systems are anticipated to be fully tested and operational by January, 1999, while the modifications and testing of the customer information system and the upgrading of its Company's operating system software are now anticipated to be completed by March 31, 1999. The Company's plan to address year 2000 issues includes an assessment of its critical suppliers and vendors, and also its largest customers, to determine their status relative to year 2000 compliance. The Company is in the process of surveying approximately 200 such suppliers, vendors and customers and to date has not identified any situations that would appear to pose a significant risk to the Company. The Company intends to continue monitoring the progress being made by its suppliers, vendors and largest customers relative to year 2000 compliance and will promptly initiate appropriate contingency planning should the occasion warrant. 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, such statements 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. The Company cautions that assumptions, projections, expectations, intentions or beliefs about future events may and often do vary from actual results and the differences between assumptions, projections, expectations, intentions or beliefs and actual results can be material. Accordingly, there can be no assurance that actual results will not differ materially from those expressed or implied by the forward-looking statements. The following are some of the factors that could cause actual achievements and events to differ materially from those expressed or implied in such forward-looking statements: the nature of Pennsylvania legislation restructuring the natural gas industry; the impact of year 2000 compliance; industrial, commercial and residential growth in the service territories of the Company and its subsidiaries; the weather and other natural phenomena; the timing and extent of changes in commodity prices and interest rates; changes in environmental and other laws and regulations to which the Company and its subsidiaries are subject or other external factors over which the Company has no control; growth in opportunities for the Company's nonregulated activities; and general economic conditions and uncertainties relating to such growth during the periods covered by the forward-looking statements. 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 6. Exhibits and Reports on Form 8-K (a) Exhibits 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: November 5, 1998 By: /s/ Donna M. Abdalla Donna M. Abdalla Acting Secretary Date: November 5, 1998 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) EX-27 2 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. 9-MOS DEC-31-1997 SEP-30-1998 PER-BOOK 274,406,000 26,021,000 63,904,000 39,039,000 0 403,370,000 50,634,000 30,711,000 43,822,000 125,167,000 560,000 4,839,000 95,000,000 3,270,000 0 0 67,697,000 11,057,000 0 0 95,780,000 403,370,000 139,660,000 1,365,000 128,449,000 129,814,000 9,846,000 1,570,000 11,416,000 8,018,000 3,398,000 961,000 2,437,000 8,926,000 4,837,000 13,851,000 .25 .24
EX-27 3 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. 9-MOS DEC-31-1996 SEP-30-1997 PER-BOOK 257,309,000 11,107,000 61,735,000 36,827,000 0 366,978,000 48,428,000 21,865,000 47,245,000 117,538,000 640,000 15,848,000 125,000,000 4,500,000 0 0 14,720,000 80,000 0 0 88,652,000 366,978,000 155,564,000 3,618,000 139,648,000 143,266,000 12,298,000 1,395,000 13,693,000 6,866,000 6,827,000 991,000 5,836,000 8,583,000 4,837,000 15,413,000 .69 .68
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