-----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, J6wsjZLfv5wUhclI1eziwYYLW2beBW9vN+cv995776ML+ywKoGdz+SF/KpO9ihwq HttgePqkm+Dwr99Eo9O2lA== 0000077231-98-000026.txt : 19981106 0000077231-98-000026.hdr.sgml : 19981106 ACCESSION NUMBER: 0000077231-98-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PG ENERGY INC CENTRAL INDEX KEY: 0000077242 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 240717235 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03490 FILM NUMBER: 98738791 BUSINESS ADDRESS: STREET 1: 39 PUBLIC SQ STREET 2: WILKES BARRE CTR CITY: WILKES-BARRE STATE: PA ZIP: 18711-0601 BUSINESS PHONE: 7178298843 FORMER COMPANY: FORMER CONFORMED NAME: PENNSYLVANIA GAS & WATER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SCRANTON SPRING BROOK WATER SERVICE CO DATE OF NAME CHANGE: 19660908 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 1-3490 PG ENERGY INC. (Exact name of registrant as specified in its charter) Pennsylvania 24-0717235 (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 3,494,418 shares of common stock, no par value, outstanding as of October 30, 1998. PG ENERGY 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.................. 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...................... 16 PART I. FINANCIAL INFORMATION PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1998 1997 1998 1997 ------------ ------------- ------------- ------------ (Thousands of Dollars) OPERATING REVENUES ............................................ $ 15,223 $ 16,276 $ 105,381 $ 129,444 Cost of gas .............................................. 6,118 7,137 56,173 74,547 ----------- ----------- ----------- ----------- OPERATING MARGIN .............................................. 9,105 9,139 49,208 54,897 ----------- ----------- ----------- ----------- OTHER OPERATING EXPENSES: Operation ................................................ 6,164 6,065 18,993 18,730 Maintenance .............................................. 1,302 1,503 3,661 3,945 Depreciation ............................................. 2,438 2,242 7,317 6,719 Income taxes ............................................. (2,042) (2,184) 1,257 3,406 Taxes other than income taxes ............................ 1,711 1,997 8,586 9,613 ----------- ----------- ----------- ----------- Total other operating expenses ....................... 9,573 9,623 39,814 42,413 ----------- ----------- ----------- ----------- OPERATING INCOME (LOSS) ....................................... (468) (484) 9,394 12,484 OTHER INCOME, NET ............................................. 22 92 797 244 ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INTEREST CHARGES ......................... (446) (392) 10,191 12,728 ----------- ----------- ----------- ----------- INTEREST CHARGES: Interest on long-term debt ................................ 2,443 2,329 7,485 6,737 Other interest ............................................ 88 199 285 540 Allowance for borrowed funds used during construction ..... (38) (45) (90) (144) ----------- ----------- ----------- ----------- Total interest charges ................................. 2,493 2,483 7,680 7,133 ----------- ----------- ----------- ----------- NET INCOME (LOSS) ............................................. (2,939) (2,875) 2,511 5,595 DIVIDENDS ON PREFERRED STOCK .................................. 319 320 961 991 ----------- ----------- ----------- ----------- EARNINGS (LOSS) APPLICABLE TO COMMON STOCK .................... $ (3,258) $ (3,195) $ 1,550 $ 4,604 =========== =========== =========== =========== EARNINGS (LOSS) PER SHARE OF COMMON STOCK: Before discount (premium) on repurchase of preferred stock $ (0.93) $ (0.96) $ 0.45 $ 1.39 Discount (premium) on repurchase of preferred stock ...... -- (0.01) -- 0.23 ----------- ----------- ----------- ----------- Earnings (loss) per share of common stock ................ $ (0.93) $ (0.97) $ 0.45 $ 1.62 =========== =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................. 3,489,055 3,314,155 3,407,752 3,314,155 =========== =========== =========== =========== CASH DIVIDENDS PER SHARE ...................................... $ -- $ -- $ -- $ -- =========== =========== =========== =========== The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY 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 .................... 4,001 4,459 --------- --------- CURRENT ASSETS: Cash and cash equivalents .................... 422 304 Accounts receivable - Customers ................................ 9,346 23,551 Parent ................................... 1,377 -- Affiliates, net .......................... 225 63 Others ................................... 397 280 Reserve for uncollectible accounts ....... (1,213) (1,168) Accrued utility revenues ..................... 2,100 11,680 Materials and supplies, at average cost ...... 3,052 2,716 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 ................... 3,915 1,633 --------- --------- 57,643 67,308 --------- --------- DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible ................ 31,109 30,592 Other ..................................... 6,579 4,415 Unamortized debt expense ...................... 1,015 1,164 Other ......................................... 75 225 --------- --------- 38,778 36,396 --------- --------- TOTAL ASSETS ...................................... $ 374,828 $ 371,140 ========= ========= The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1998 1997 ------------ ---------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholder's investment ............. $122,267 $107,425 Preferred stock - Not subject to mandatory redemption, net 4,839 15,864 Subject to mandatory redemption ........ 560 640 Long-term debt Parent ................................. 3,700 23,500 Other .................................. 95,000 106,000 -------- -------- 226,366 253,429 -------- -------- CURRENT LIABILITIES: Current portion of long-term debt ........... 46,697 24,776 Preferred stock subject to repurchase or mandatory redemption .................... 11,057 80 Notes payable ............................... 2,270 2,170 Accounts payable - Suppliers .............................. 15,648 14,515 Parent ................................. -- 199 Accrued general business and realty taxes ... 427 2,797 Accrued income taxes ........................ 1,436 4,946 Accrued interest ............................ 1,188 1,844 Accrued natural gas transition costs ........ 281 1,087 Other ....................................... 834 1,188 -------- -------- 79,838 53,602 -------- -------- DEFERRED CREDITS: Deferred income taxes ....................... 55,060 52,207 Unamortized investment tax credits .......... 4,467 4,596 Operating reserves .......................... 2,578 2,825 Other ....................................... 6,519 4,481 -------- -------- 68,624 64,109 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL CAPITALIZATION AND LIABILITIES .............. $374,828 $371,140 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, -------------------- 1998 1997 ---------- --------- (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income ............................................................... $ 2,511 $ 5,595 Gain on sale of other property ........................................... (914) -- Effects of noncash charges to income - Depreciation ......................................................... 7,374 6,764 Deferred income taxes, net ........................................... 2,336 904 Provisions for self insurance ........................................ 400 443 Other, net ........................................................... 1,469 1,335 Changes in working capital, exclusive of cash and current portion of long-term debt and preferred stock - Receivables and accrued utility revenues ........................ 22,184 17,314 Gas held by suppliers ........................................... (4,549) (5,705) Accounts payable ................................................ (492) (6,528) Deferred cost of gas and supplier refunds, net .................. (6,030) 10,316 Other current assets and liabilities, net ....................... (9,508) (1,260) Other operating items, net ............................................... (1,131) (1,509) -------- -------- Net cash provided by continuing operations ..................... 13,650 27,669 Net cash used for discontinued operations, principally for the payment of income taxes ..................................................... -- (13,655) -------- -------- Net cash provided by operating activities ....................... 13,650 14,014 -------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant ............................................... (19,955) (22,810) Proceeds from the sale of other property ................................. 980 -- Acquisition of regulated business ........................................ -- (2,019) Other, net ............................................................... 204 530 -------- -------- Net cash used for investing activities .......................... (18,771) (24,299) -------- -------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of long-term debt ............................................... -- 25,000 Repurchase of preferred stock ............................................ (128) (3,137) Dividends on preferred and common stock .................................. (961) (991) Issuance of common stock ................................................. 6,170 -- Repayment of long-term debt (Note 3) ..................................... (12,300) (6,700) Net increase (decrease) in bank borrowings ............................... 12,447 (5,021) Other, net ............................................................... 11 700 -------- -------- Net cash provided by financing activities ....................... 5,239 9,851 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... 118 (434) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................. 304 690 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 422 $ 256 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) .................................. $ 8,042 $ 7,203 ======== ======== Income taxes .......................................................... $ 1,824 $ 15,042 ======== ======== The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business. PG Energy Inc. ("PG Energy"), a wholly-owned subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), and its wholly-owned subsidiary Honesdale Gas Company ("Honesdale") acquired on February 14, 1997, are regulated public utilities subject to the jurisdiction of the Pennsylvania Public Utility Commission (the "PPUC") for rate and accounting purposes. 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. Principles of Consolidation. The consolidated financial statements include the accounts of PG Energy and also its subsidiary, 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 "Company") are subject to the jurisdiction of the PPUC for rate and accounting purposes. The financial information of the Company 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 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) CONTRIBUTION OF CAPITAL On June 24, 1998, PEI converted $7.5 million of the outstanding loan balance from PG Energy to a contribution of capital. (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 had no effect on the Company's financial statements for the periods ended September 30, 1998. Accounting for Derivative Instruments and Hedging Activities. In June 1998, FASB Statement No. 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 No. 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. PG ENERGY INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS - ------------------------------------------------------------------------------- RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in the consolidated statements of income of PG Energy Inc. ("PG Energy") 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 100.0 % 100.0 % 100.0 % 100.0 % Cost of gas 40.2 43.9 53.3 57.6 ----- ----- ----- ---- OPERATING MARGIN 59.8 56.1 46.7 42.4 ----- ----- ----- ---- OTHER OPERATING EXPENSES: Operation 40.5 37.2 18.0 14.5 Maintenance 8.5 9.2 3.5 3.1 Depreciation 16.0 13.8 6.9 5.2 Income taxes (13.4) (13.4) 1.2 2.6 Taxes other than income taxes 11.2 12.3 8.1 7.4 ----- ----- ---- --- Total operating expenses 62.8 59.1 37.7 32.8 ----- ----- ---- ---- OPERATING INCOME (3.0) (3.0) 9.0 9.6 OTHER INCOME, NET 0.1 0.6 0.7 0.2 INTEREST CHARGES (16.4) (15.3) (7.3) (5.5) ------ ------ ----- ----- NET INCOME (LOSS) (19.3) (17.7) 2.4 4.3 DIVIDENDS ON PREFERRED STOCK (2.1) (1.9) (0.9) (0.7) ----- ----- ----- ----- EARNINGS (LOSS) APPLICABLE TO COMMON STOCK (21.4)% (19.6)% 1.5 % 3.6 % ====== ====== ==== ====
o Three Months Ended September 30, 1998, Compared With Three Months Ended September 30, 1997 Operating Revenues. Operating revenues decreased $1.1 million (6.5%) 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 sales by PG Energy to its residential and commercial heating customers. This reduction in sales was attributable to the 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. Cost of Gas. The cost of gas decreased $1.0 million (14.3%) from $7.1 million for the third quarter of 1997 to $6.1 million for the third quarter of 1998, primarily because of the aforementioned 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"). Operating Margin. The operating margin decreased $34,000 (0.4%) in the third quarter of 1998 compared to the third quarter of 1997. As a percentage of operating revenues, the margin increased from 56.1% in the third quarter of 1997 to 59.8% in the third quarter of 1998 due to the proportionately lower cost of gas during the period. Other Operating Expenses. Other operating expenses decreased $50,000 (0.5%) for the quarter ended September 30, 1997, compared to the quarter ended September 30, 1998. This decrease was primarily attributable to a $201,000 (13.4%) decrease in maintenance expense and a $286,000 (14.3%) decrease in taxes other than income taxes resulting from a lower level of gross receipts tax related to the decrease in sales. The effects of these decreases were partially offset by a $196,000 (8.7%) increase in depreciation expense as a result of additions to utility plant and a $142,000 increase in income taxes from a credit of $2.2 million for the third quarter of 1997 to a credit of $2.0 million for the third quarter of 1998 due to a decrease in the loss before income taxes (for this purpose, operating income net of interest charges). As a percentage of operating revenues, other operating expenses increased from 59.1% during the quarter ended September 30, 1997, to 62.8% during the quarter ended September 30, 1998, primarily because of the lower level of operating revenues. Operating Income (Loss). As a result of the above, the operating loss decreased by $16,000 (3.3%) from $484,000 for the third quarter of 1997 to $468,000 for the third quarter of 1998, but remained unchanged as a percentage of total operating revenues for such periods. Other Income, Net. Other income, net decreased $70,000 (76.1%) from $92,000 for the three-month period ended September 30, 1997, to $22,000 for the three-month period ended September 30, 1998, largely because of an increase in property taxes on other physical property and a lower level of other income. Earnings (Loss) Applicable to Common Stock. The slight increase in the loss applicable to common stock of $63,000 (2.0%) from $3.2 million for the three-month period ended September 30, 1997, to $3.3 million for the three-month period September 30, 1998, was primarily the result of the lower level of other income, as discussed above. Despite the increase in loss applicable to common stock, the loss per share of common stock decreased $.04 per share from $.97 per share for the three-month period ended September 30, 1997 (including a $.01 per share premium on the repurchase of preferred stock) to $.93 per share for the three-month period ended September 30, 1998, as a result of the 5.3% increase in the weighted average number of shares outstanding. o Nine Months Ended September 30, 1998, Compared With Nine Months Ended September 30, 1997 Operating Revenues. Operating revenues decreased $24.1 million (18.6%) from $129.4 million for the nine months ended September 30, 1997, to $105.3 million for the nine months ended September 30, 1998, primarily as a result of a 2.5 billion cubic feet (16.7%) decrease in sales by PG Energy to its residential and commercial heating customers. This reduction in sales was attributable to the warmer than normal weather during the nine months ended September 30, 1998, 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 nine months ended September 30, 1997, to 3,298 (80.9% of normal) during the nine months ended September 30, 1998. Cost of Gas. The cost of gas decreased $18.4 million (24.6%) from $74.5 million for the nine months ended September 30, 1997, to $56.2 million for the nine months 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"). Operating Margin. The operating margin decreased $5.7 million (10.4%) from $54.9 million in the nine months ended September 30, 1997, to $49.2 million in the nine months ended September 30, 1998, primarily because of the aforementioned reduction in sales to residential and commercial heating customers. As a percentage of operating revenues, the margin increased from 42.4% in the nine months ended September 30, 1997, to 46.7% in the nine months ended September 30, 1998, as a result of the proportionately lower cost of gas during the period. Other Operating Expenses. Other operating expenses decreased $ 2.6 million (6.1%) from $42.4 million for the nine-month period ended September 30, 1997, to $39.8 million for the nine-month period ended September 30, 1998. This decrease was primarily attributable to a $2.1 million (63.1%) decrease in income taxes from $3.4 million for the nine months ended September 30, 1997, to $1.3 million for the nine months ended September 30, 1998, due to a decrease in income before income taxes (for this purpose, operating income net of interest charges), and a $1.0 million (10.7%) decrease in taxes other than income taxes resulting from a lower level of gross receipts tax related to PG Energy's decrease in sales. The effects of these decreases were partially offset by a $598,000 (8.9%) increase in depreciation expense as a result of additions to utility plant. As a percentage of operating revenues, other operating expenses increased from 32.8% during the nine-month period ended September 30, 1997, to 37.7% during the nine-month period ended September 30, 1998, because of the lower level of operating revenues. Operating Income. As a result of the above, operating income decreased by $3.1 million (24.8%) from $12.5 million for the nine-month period ended September 30, 1997, to $9.4 million for the nine-month period ended September 30, 1998, and also decreased as a percentage of total operating revenues for such periods from 9.6% in 1997 to 9.0% in the nine-month period ended September 30, 1998. Other Income, Net. Other income, net increased $553,000 from $244,000 for the nine-month period ended September 30, 1997, to $797,000 for the nine-month period ended September 30, 1998, largely because of a gain on the sale of land in June, 1998. Interest Charges. Interest charges increased by $547,000 (7.7%) from $7.1 million for the nine-month period of 1997 to $7.7 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. The decrease in net income of $3.1 million (55.1%) from $5.6 million for the nine-month period ended September 30, 1997, to $2.5 million for the nine-month period ended September 30, 1998, was largely attributable to the lower level of revenues because of warmer than normal weather and the increased interest charges, as discussed above, the effects of which were partially offset by the increase in other income. Earnings (Loss) Applicable to Common Stock. The decrease in earnings applicable to common stock of $3.1 million (66.3%) from $4.6 million for the nine-month period ended September 30, 1997, to $1.6 million for the nine-month period September 30, 1998, as well as the decrease in earnings per share of common stock of $1.17 (72.2%) from $1.62 per share for the nine-month period ended September 30, 1997 (including a $.23 per share discount on the repurchase of preferred stock), to $.45 per share for the nine-month period ended September 30, 1998, were the result of the reduced net income, as discussed above, and the 2.8% increase in the weighted average number of shares outstanding. 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 PG Energy and its wholly-owned subsidiary, Honesdale Gas Company (collectively referred to as the "Company") continue to be the funding of PG Energy's construction program and the seasonal funding of its gas purchases and increases in its customer accounts receivable. The Company'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. The cash flow from the Company'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 the Company to use bank borrowings to fund such expenditures, pending the periodic issuance of stock and long-term debt. Bank borrowings are also used for the seasonal funding of the Company's gas purchases and increases in its customer accounts receivable. In order to temporarily finance construction expenditures and to meet its seasonal borrowing requirements, the Company has made arrangements for a total of $64.0 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. Honesdale has a $1.0 million revolving bank line of credit which provides for borrowing at the prime rate (currently 8.0%) and which matures in June, 1999. The Company intends to renew or replace these lines of credit as they expire. As of October 30, 1998, the Company had $39.2 million of borrowings outstanding under these bank lines of credit. In addition, as of October 30, 1998, PG Energy had $3.9 million outstanding under its borrowing arrangement with Pennsylvania Enterprises, Inc. ("PEI"), its parent company. Such interim borrowings by PG Energy from PEI will be repaid with proceeds from bank borrowings by PG Energy. The Company believes it will be able to raise in a timely manner such funds as are required for future construction expenditures, refinancings and other working capital requirements. Long-Term Debt and Capital Stock Financings The Company periodically engages 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 the Company during the nine-month period ended September 30, 1998. PG Energy also obtains external funds from the sale of its common stock to PEI in connection with PEI's Dividend Reinvestment and Stock Purchase Plan and its Customer Stock Purchase Plan. During 1998 (through October 30) PG Energy realized $6.2 million from the issuance of common stock to PEI in connection with these plans. Construction Expenditures and Related Financings Expenditures for the construction of utility plant totaled $20.0 million during the nine months ended September 30, 1998 and are currently estimated to be $10.0 million during the remainder of the year. These 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, $46.7 million of long-term debt and $11.1 million of PG Energy's preferred stock was required to be repaid within twelve months. The $46.7 million of long-term debt includes $36.7 million outstanding under PG Energy's bank lines of credit which is due at various times during 1999 and $10.0 million of PG Energy's 9.23% series first mortgage bonds which are due September 1, 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 intends to finance its 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 subsidiary; 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 subsidiary are subject or other external factors over which the Company has no control; and general economic conditions, in each case curing 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. PG ENERGY 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. PG ENERGY 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 0000077242 PG ENERGY INC. 9-MOS DEC-31-1997 SEP-30-1998 PER-BOOK 274,406,000 4,001,000 57,643,000 38,778,000 0 374,828,000 34,944,000 44,546,000 42,777,000 122,267,000 560,000 4,839,000 98,700,000 2,270,000 0 0 46,697,000 11,057,000 0 0 88,438,000 374,828,000 105,381,000 1,257,000 94,730,000 95,987,000 9,394,000 797,000 10,191,000 7,680,000 2,511,000 961,000 1,550,000 393,000 4,837,000 13,650,000 .45 .45
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