-----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, IX62NTNCLoP87hNzOwIv7ve3o28nAJOcPnCZuiFRPlFxMKfu2FERGaCGx2z1GoC9 ZhXHP0hMg/hXV/WKleCX4Q== 0000077231-99-000011.txt : 19990303 0000077231-99-000011.hdr.sgml : 19990303 ACCESSION NUMBER: 0000077231-99-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990302 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-K SEC ACT: SEC FILE NUMBER: 001-03490 FILM NUMBER: 99554805 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-K 1 10K REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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) Registrant's telephone number, including area code: (570) 829-8843 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: TITLE OF CLASS PREFERRED STOCK, $100 PAR VALUE 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 24, 1999: None All Common Stock of the registrant is held by its parent company, Pennsylvania Enterprises, Inc. The number of shares of Common Stock, no par value, outstanding as of February 24, 1999: 3,494,418 shares Documents incorporated by reference: NONE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I (1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT. TABLE OF CONTENTS PAGE PART I Item 1. BUSINESS............................................... 1 Item 2. PROPERTIES............................................. 12 Item 3. LEGAL PROCEEDINGS...................................... 12 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 12 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................... 13 Item 6. SELECTED FINANCIAL DATA................................ * Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............... 14 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............ 24 Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................ 48 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... * Item 11. EXECUTIVE COMPENSATION................................... * Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................... * Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........... * PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K......................................... 49** SIGNATURES............................................... 53 * These items have been omitted from this Form 10-K as Registrant meets the conditions set forth in General Instructions I(1) (a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format. ** The "Index to Exhibits" is located on page 54. PART I ITEM l. BUSINESS GENERAL PG Energy Inc. (PG Energy) is a subsidiary of Pennsylvania Enterprises, Inc. ("PEI"). PG Energy, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company, is engaged in the distribution of natural gas. On February 14, 1997, PG Energy acquired all of the outstanding capital stock of Honesdale Gas Company ("Honesdale"), a regulated public utility engaged in distributing natural gas to portions of Wayne and Pike Counties, in an area adjacent to PG Energy's service territory. Until February 16, 1996, when its water utility operations were sold, PG Energy was also engaged in the distribution of water (See "-Sale of Water Utility Operations"). Both PG Energy and Honesdale are regulated by the Pennsylvania Public Utility Commission (the "PPUC"). As of December 31, 1998, PG Energy provided service to approximately 148,900 natural gas customers and Honesdale provided service to approximately 3,300 customers. PG Energy and Honesdale employed approximately 565 persons as of December 31, 1998. Restructuring of Natural Gas Industry The natural gas industry, which historically has included producers, interstate pipelines and local distribution companies ("LDCs"), is undergoing significant restructuring. The industry is rapidly progressing from a highly regulated environment to one in which there is competition, customer choice and only partial regulation. The same change is occurring in the electric industry which competes with the natural gas industry for many of the same energy uses. The restructuring of the natural gas industry has already involved the decontrol of the wellhead price of natural gas, and interstate pipelines have been required by the Federal Energy Regulatory Commission ("FERC") to separate the merchant function of selling natural gas from the transportation and storage services they provide (frequently referred to as "unbundling") and to make those services available to end users on the same terms as LDCs. These changes in the operations of the interstate pipelines were designed to enhance competition and maximize the benefits of wellhead price decontrol. As a result of actions by FERC, the interstate pipelines now primarily provide transportation and storage services, and LDCs, such as PG Energy, are presently responsible for procuring competitively-priced gas supplies and arranging for the appropriate transportation capacity and storage services with the interstate pipelines. Additionally, in accordance with regulations promulgated by the PPUC, PG Energy currently offers transportation service to certain customers. Prior to the unbundling of services by the interstate pipelines and those services being made available to end users as well as LDCs, and until the PPUC adopted regulations providing for the transportation of natural gas, PG Energy charged all its customers bundled rates. These rates included a commodity charge based on the cost, as approved by FERC, which PG Energy paid the pipelines for natural gas delivered to the entry point on its distribution system. Except for the approximately 600 customers currently receiving transportation service, PG Energy's customers continue to be charged bundled rates as approved by the PPUC, which include a commodity charge based on the costs prudently incurred by PG Energy for the purchase of natural gas and for interstate pipeline transportation capacity and storage services. Customers receiving transportation service, which accounted for approximately 54% of PG Energy's total gas deliveries in 1998, are charged rates approved by the PPUC which exclude the commodity cost that is reflected in the bundled rates charged to other customers. Although the regulations promulgated by the PPUC only require LDCs to offer transportation service to individual customers having an annual consumption of at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more than ten customers having a combined consumption of at least 5,000 MCF per year, the PPUC has allowed certain LDCs to make transportation service available to other customers, regardless of their consumption. One of these companies is Honesdale which, with the approval of the PPUC, began offering transportation service to its customers effective November 1, 1997. During 1998 approximately 1,150 of Honesdale's customers received transportation service and purchased their natural gas supplies from PG Energy Services Inc. ("Energy Services"), a nonregulated affiliate of PG Energy and the only marketer currently selling gas to customers served by Honesdale. PG Energy is also planning to file tariffs with the PPUC in the near future seeking approval to make transportation service available to all of its 148,900 customers. However, the actual timing of such filing may be influenced by the terms of the legislation, as discussed below, which PG Energy currently believes that Pennsylvania may enact in 1999 requiring that all customers of LDCs have the right, within the next one to two years, to receive transportation service and to choose the supplier of their natural gas. In December, 1996, legislation was enacted in Pennsylvania which provides all customers of electric utilities in the state with the right to choose the generator of their electricity. This customer choice, which is intended to increase competition and to lower costs for electricity, is being phased in over a three-year period ending on January 1, 2001. Under this legislation, the electric utilities in Pennsylvania are required to unbundle generation charges from the other charges included in their currently bundled rates and customers can contract with qualified suppliers of their choosing, including the utility currently serving them, to purchase electric energy at nonregulated rates. The electric utilities will continue to utilize their transmission and distribution networks to distribute electricity to their customers regardless of supplier, a function which will remain subject to rate regulation by the PPUC. PG Energy believes that Pennsylvania may enact similar legislation with respect to the natural gas industry in 1999. As currently envisioned, such legislation would require that PG Energy provide all of its customers with unbundled transportation service within one to two years. While the rates for the transportation of natural gas through PG Energy's distribution system and the storage services offered by PG Energy would continue to be price regulated by the PPUC, the commodity cost of gas purchased from suppliers other than PG Energy would not be so regulated. Customers could, however, continue to receive a bundled sales service from PG Energy which would be subject to price regulation by the PPUC. Essentially, the legislation would extend the transportation service which is now available to a limited number of PG Energy's customers to all its customers, and customers could choose to have their natural gas provided by a supplier other than PG Energy, based on nonregulated market prices and other considerations. If Pennsylvania enacts legislation which permits all customers of LDCs to choose their supplier of natural gas, PG Energy will be faced with significant competition from marketers for the sale of natural gas to its customers. However, under current regulations of the PPUC, PG Energy does not realize a profit or incur any loss with respect to the commodity cost of natural gas. Moreover, PG Energy would not expect the pending legislation to result in the bypass of its distribution system by any significant number of customers because of the nature of its customer base and the cost of any such bypass. Additionally, based on various provisions of the legislation currently being considered, PG Energy does not believe that the legislation will result in any significant amount of transition costs (such as the negotiated buyout of contracts with interstate pipelines, the recovery of deferred purchased gas costs or the recovery of regulated assets). Further, PG Energy believes that the transition costs it would incur in offering choice to all its customers (including those involving information systems and customer education) would generally be recoverable through rates or other customer charges. Accordingly, although it cannot be certain, because the terms of such legislation have not been finalized and the ultimate effect on PG Energy cannot be determined, PG Energy does not believe that the enactment of legislation providing for customers to purchase their natural gas from third parties would have any material adverse impact on its earnings or financial condition despite the increased competition to which PG Energy would be subject regarding the sale of natural gas to its customers. Sale of Water Utility Operations On February 16, 1996, PG Energy sold its regulated water operations and certain related assets to Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American Water Works Company, Inc. ("American"), for $414.3 million, consisting of $262.1 million in cash and the assumption of $152.2 million of PG Energy's liabilities, including $141.0 million of its long-term debt. (See Note 2, Discontinued Operations, of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K). The cash proceeds from the sale of approximately $205.4 million, net of $56.7 million of income taxes, were used by PEI and PG Energy to retire debt, to repurchase stock, for construction expenditures and for working capital purposes. (See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Sale of Water Utility Operations" in Item 7 of this Form 10-K). GAS BUSINESS PG Energy and Honesdale (collectively referred to as the "Company") distribute natural gas to an area in northeastern Pennsylvania lying within the Counties of Luzerne, Lackawanna, Lycoming, Wyoming, Northumberland, Wayne, Columbia, Union, Montour, Snyder, Susquehanna, Pike and Clinton, a territory that includes the cities of Scranton, Wilkes-Barre and Williamsport. The total estimated population of the Company's natural gas service area, based on the 1990 U.S. Census, is 760,000. Number and Type of Customers. At December 31, 1998, the Company had approximately 152,200 natural gas customers, from which it derived total natural gas revenues of $158.7 million during 1998. The following chart shows a breakdown of the types of customers and the percentages of gas revenues generated by each type of customer in 1998: Type of Customer % of Customers % of Revenues Residential 90.8% 66.7% Commercial 8.9 24.1* Industrial 0.2 7.7* Other Users 0.1 1.5 --------- -------- Total 100.0% 100.0% ========= ======== * Includes the 2.6% of total gas revenues derived from interruptible customers. During 1998, the Company delivered an estimated total of 45,969,700 MCF of natural gas to its customers, of which 45% was sold at normal tariff rates, 54% represented gas transported for customers and 1% was sold under the Alternate Fuel Rate (as described below). The Company sells gas to "firm" customers with the understanding that their supply will not be interrupted except during periods of supply deficiency or emergency conditions. "Interruptible" gas customers are required to have equipment installed capable of using an alternate energy form. Interruptible customers, therefore, do not require a continuous supply of gas and their supply can be interrupted at any time under the conditions set forth in their contracts for gas service. In 1998 a total of 5,461,250 MCF of natural gas was sold to interruptible customers, of which 5,210,078 MCF was transported for such customers, which together represented 12% of the total deliveries of natural gas to the Company's customers during 1998. PG Energy's largest natural gas customer accounted for less than 1% of its operating revenues in 1998. Transportation and Storage Service. In accordance with current regulations of the PPUC, PG Energy provides transportation service to natural gas customers who consume at least 5,000 MCF of natural gas per year, meet certain other conditions and execute a transportation agreement. In addition, groups of up to ten customers, with a combined consumption of at least 5,000 MCF per year, are eligible for transportation service. The PPUC has, however, allowed certain LDCs to make transportation service available to other customers, regardless of their consumption. One of these companies is Honesdale which, with the approval of the PPUC, began offering transportation service to all of its approximately 3,300 customers effective November 1, 1997. During 1998, approximately 1,150 of Honesdale's customers received transportation service and purchased their natural gas supplies from Energy Services, the only marketer currently selling gas to customers served by Honesdale. Transportation service is provided on both a firm and an interruptible basis and includes provisions regarding over and under deliveries of gas on behalf of the respective customer. In addition, firm transportation customers are offered a "storage service" pursuant to which such customers may have gas delivered during the period from April through October for storage and redelivery during the winter period. The Company also offer firm transportation customers a "standby service" under the terms of which the customer will be supplied with gas in the event the customer's transportation service is interrupted or curtailed by its broker, supplier or other third party. Set forth below is a summary of the gas transported by the Company and the number of customers using transportation service from 1996 to 1998:
Volume of Gas Transported (MCF) --------------------------------------------------------- Number of Interstate Pennsylvania Year Customers Gas Gas Total - ----------- ---------------- ---------------- ------------------- -------------- 1998 1,736 (a) 24,669,000 - 24,669,000 1997 1,244 (a) 22,584,000 99,000 22,683,000 1996 503 15,959,000 4,459,000 20,418,000
(a) Includes 1,148 and 729 residential and commercial customers of Honesdale receiving transportation service in 1998 and 1997, respectively. During 1999, the Company expects to transport approximately 28,000,000 MCF of natural gas. The rates charged by the Company for the transportation of interstate gas are essentially equal to their tariff rates for the sale of gas with all gas costs removed. Accordingly, the transportation of interstate gas has had no significant adverse effect on earnings. Prior to January 15, 1997, the rates charged for the transportation of Pennsylvania-produced natural gas ("Pennsylvania gas") were lower than those charged for the transportation of interstate gas. As a result, the rates charged for the transportation of Pennsylvania gas yielded considerably less revenue than the gross margin (gas operating revenues less the cost of gas) that would be realized from sales under normal tariff rates. However, as of January 15, 1997, in connection with PG Energy's rate increase which was effective on such date (see "-Rates"), the lower rates charged for the transportation of Pennsylvania gas were eliminated and those rates were conformed with the rates charged for the transportation of interstate gas. The elimination of such differential was the primary reason for the dramatic decrease in the volume of Pennsylvania-produced gas transported by the Company in 1997 and its elimination in 1998. Alternate Fuel Sales. In order to be more competitive in terms of price with certain alternate fuels, PG Energy offers an Alternate Fuel Rate for eligible customers. This rate applies to large commercial and industrial accounts that have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate source of energy. Whenever the cost of such alternate fuel drops below the cost of natural gas at PG Energy's normal tariff rates, PG Energy is permitted by the PPUC to lower its price to these customers so that PG Energy can remain competitive with the alternate fuel. However, in no instance may PG Energy sell gas under this special arrangement for less than its average commodity cost of gas purchased during the month. PG Energy's revenues under the Alternate Fuel Rate amounted to $1.7 million in 1998, $2.4 million in 1997 and $1.8 million in 1996. These revenues reflected the sale of 582,000 MCF, 651,000 MCF and 491,000 MCF in 1998, 1997 and 1996, respectively. It is presently anticipated that approximately 600,000 MCF will be sold under the Alternate Fuel Rate in 1999. The change in volumes sold under the Alternate Fuel Rate reflects the switching by certain customers between alternate fuel service and transportation service as a result of periodic changes in the relative cost of natural gas and alternate fuels. FERC Order 636. On April 8, 1992, FERC issued Order No. 636 ("Order 636"), requiring interstate pipelines to restructure their services and operations in order to enhance competition and maximize the benefits of wellhead price decontrol. The objectives of Order 636 were to be accomplished primarily by unbundling the services provided by the interstate pipelines and by making those services available to end users on the same terms as LDCs. Pursuant to Order 636, the interstate pipelines have been required to: (1) unbundle transportation service from sales service; (2) allocate sufficient storage capacity, together with firm transportation, to replicate previous sales services; (3) provide a no-notice transportation service; (4) provide open access storage service; (5) reallocate upstream pipeline capacity and upstream storage for the benefit of downstream interstate pipeline suppliers; and (6) implement a straight fixed-variable rate design to replace all modified fixed-variable rate designs. The interstate pipelines have been granted a blanket sales certificate to make unbundled sales in competition with non-pipeline merchants and are being permitted recovery of all reasonable and prudent transition costs incurred in order to comply with Order 636. Such transition costs include: (1) the cost of renegotiating existing gas supply contracts with producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included in the interstate pipelines' purchased gas adjustment accounts at the time they adopted market-based pricing for gas sales ("Account 191 Costs"); (3) unrecovered costs of assets that cannot be assigned to customers of unbundled services ("Stranded Costs"); and (4) costs of new facilities to physically implement Order 636 ("New Facility Costs"). Additionally, the interstate pipelines have been allowed pre-granted abandonment of sales and transportation services to customers upon expiration of applicable contracts, subject to customers' rights of first refusal. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding the recovery of Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to recovery through the annual PGC rate filing made with the PPUC by PG Energy and other larger LDCs. As of February 1, 1994, PG Energy began to recover the Gas Transition Costs billed by its interstate pipelines through an increase in its PGC rate. As of December 31, 1998, PG Energy had been billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines, which is the entire amount of such billings that PG Energy expects. Of this amount, $857,000 was recovered by PG Energy over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 was recovered by PG Energy in its annual PGC rate that the PPUC approved effective December 1, 1995, and the remaining $213,000 was recovered by PG Energy in its PGC rate that was effective December 1, 1996. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for recovery under the PGC rate filing mechanism, such costs are subject to full recovery by LDCs through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Pennsylvania Public Utility Code (the "Code"). By Order of the PPUC entered August 26, 1994, PG Energy began recovering the Non-Gas Transition Costs billed pursuant to Order 636 through the billing of a surcharge to its customers effective September 12, 1994. As of December 31, 1998, $10.6 million of such Non-Gas Transition Costs were billed to PG Energy and recovered from its customers. PG Energy does not presently anticipate that it will be billed for any additional amount of Non-Gas Transition Costs by its interstate pipelines. Sources of Supply. The Company purchases natural gas from marketers, producers, and integrated energy companies, generally under the terms of supply arrangements that extend for varying periods of more or less than one year, but frequently for the following heating season (i.e., November through March). Depending upon their terms, these contracts may or may not provide for an adjustment each month in the cost of gas purchased pursuant thereto based on the then current market prices for natural gas. The largest individual supplier, an integrated energy company, accounted for 28% of the Company's total purchases of natural gas in 1998. Three other suppliers accounted for 23%, 20% and 10%, respectively, of the Company's total purchases of natural gas in 1998. No other suppliers accounted for more than 10% of the Company's purchases during 1998. The purchases of natural gas by the Company during 1998 and 1997 and by PG Energy during 1996 are summarized below: Volume Average Year Purchased (MCF) Cost per MCF* - ----------------- ------------------------ ----------------- 1998 22,763,000 $3.86 1997 26,540,000 $3.78 1996 27,955,000 $3.83 * At the entry points on the Company's distribution systems. During 1999, the Company expects to purchase approximately 27,500,000 MCF of natural gas under seasonal or other contracts of more or less than one year at a currently projected average cost of $3.63 per MCF. The Company presently has adequate supplies of natural gas to meet the demands of existing customers through October, 1999, and the Company believes that it will be able to obtain sufficient supplies to meet the demands of their existing customers beyond October, 1999, and to serve new customers (of which approximately 2,500 are expected to be added in 1999). Pipeline Transportation and Storage Entitlements. Pursuant to the terms of Order 636, the Company has entered into agreements with their former interstate pipeline suppliers providing for the firm long haul transportation by those pipelines on a daily basis of the following quantities of gas:
Daily Percentage of Total Expiration Transportation Transportation Pipeline Date (a) Entitlement (MCF) Entitlement - ------------------ ----------------------------- ------------------------- -------------------------- Transco Various through 2015 74,100 (b) 61.2% Tennessee 1999 and 2000 35,983 (c) 29.7 Columbia 2004 11,016 9.1 ------------------------- -------------------------- 121,099 100.0% ========================= ==========================
(a) Agreements are automatically extended from month-to-month or year-to-year after their expiration unless notice of termination is given by one of the parties and the Company agrees to such termination. In no event may any of the agreements be unilaterally terminated by the pipelines without the approval of the FERC. (b) Includes 3,300 MCF per day that PG Energy can transport during the period December through February pursuant to an agreement with Transco that extends through 2011. (c) Includes up to 3,416 MCF per day that Honesdale can transport during the period November through January pursuant to an agreement with Tennessee that extends through November, 2000. The Company has also contracted with its former interstate pipeline suppliers and the New York State Electric and Gas Company ("NYSEG") for the following volumes of gas storage and storage withdrawals:
Maximum Expiration Total Storage Daily Withdrawal Pipeline/Party Date (a) (MCF) (b) From Storage (MCF) - ----------------------- ----------------------------- ------------------- ---------------------------- Transco Various through 2013 6,200,000 86,884 Tennessee November 1, 2000 3,700,000 25,310 (d) Columbia October 31, 2004 1,100,000 16,036 NYSEG (c) March 31, 2002 290,000 28,093 ------------------- ---------------------------- 11,290,000 156,323 =================== ============================
(a) Agreements are automatically extended from month-to-month or year-to-year after their expiration unless notice of termination is given by one of the parties and the Company agrees to such termination. In no event may any of the agreements be unilaterally terminated by the pipelines without the approval of the FERC. (b) Storage is utilized in order to meet peak day and seasonal demands. (c) Storage gas is delivered via Transco. (d) Includes 2,279 MCF that may be delivered to Honesdale under the terms of the storage contract with Tennessee. Based on its present pipeline transportation and storage entitlements, the Company is entitled to a maximum daily delivery of the following quantities of gas:
Firm Pipeline Withdrawals Transportation From Storage Percentage Pipeline (MCF) (MCF) Total (MCF) of Total - ------------------ ------------------- ------------------- ------------------ ---------------- Transco 74,100 (a) 114,977 (c) 189,077 68.2% Tennessee 35,983 (b) 25,310 (d) 61,293 22.1 Columbia 11,016 16,036 27,052 9.7 ------------------- ------------------- ------------------ ---------------- 121,099 156,323 277,422 100.0% =================== =================== ================== ================
(a) Includes 3,300 MCF that may be transported by PG Energy during the period December through February. (b) Includes up to 3,416 MCF that may be transported by Honesdale during the period November through January. (c) Includes 28,093 MCF that may be delivered under the terms of the storage contract with NYSEG and the abandonment of Transco's LGA storage service. (d) Includes 2,279 MCF that may be delivered to Honesdale under the terms of the storage contract with Tennessee. In accordance with the provisions of Order 636, the Company may release to customers and other parties the portions of firm pipeline transportation and storage entitlements which are in excess of their requirements. Such releases may be made upon notice in accordance with the provisions of Order 636 and for a consideration not in excess of the cost of the respective entitlement. Releases may be made for periods ranging from one day to the remaining term of the entitlement. Since September 1, 1993, PG Energy has released portions of its firm pipeline transportation capacity to third parties for varying periods extending up to three years. Honesdale has also released portions of its firm pipeline transportation capacity since August 1, 1997. During 1998, the average daily capacity so released was 32,674 MCF, and the maximum capacity released on any one day in 1998 was 41,473 MCF. Through December 31, 1998, the Company had not, however, released any storage capacity on the open market via the pipeline electronic bulletin boards. The Company believes it has sufficient firm pipeline transportation and storage entitlements to meet the demands of its existing customers and to supply new customers. Peak Day Requirements. The Company plans for peak day demand on the basis of a daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design peak day, assuming the curtailment of service to interruptible customers, are currently estimated to be 354,000 MCF, of which 257,000 MCF would be required for customers to whom the Company provides retail sales service and 97,000 MCF would be required for customers for whom the Company provides transportation service through its distribution systems. The Company's historic maximum daily sendout is 313,446 MCF, which occurred on January 17, 1997, when service to interruptible customers and select industrial users was curtailed. The mean temperature in its gas service area on that day was 5 degrees Fahrenheit. Capital Expenditures. Capital expenditures totaled $28.2 million during 1998, and are estimated to be $18.4 million during 1999. Regulation. The natural gas utility operations of the Company are regulated by the PPUC, particularly as to utility rates, service and facilities, accounts, issuance of certain securities, the encumbering or disposition of public utility properties, the design, installation, testing, construction, and maintenance of pipeline facilities and various other matters associated with broad regulatory authority. In addition to those regulations promulgated by the PPUC, the Company must also comply with federal, state and local regulations relating generally to the discharge of materials into the environment or otherwise relating to the protection of the environment. Compliance with such regulations has not had any material effect upon the capital expenditures, earnings or competitive position of the Company's gas business. Although it cannot predict the future impact of these regulations, the Company believes that any additional expenditures and costs made necessary by them would be fully recoverable through rates. 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. PG Energy paid $175,000 to the party performing the remediation in settlement of a claim for PG Energy's share of such remediation costs. 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. The Company's gas distribution and transportation activities are not subject to the Natural Gas Act, as amended. Rates. 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. By Order adopted October 16, 1998, the PPUC approved an overall 4.1% increase in PG Energy's base rates, designed to produce $7.4 million of additional annual revenue, effective October 17, 1998. The provisions of the Code require that the tariffs of 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. The procedure is limited to purchased gas costs, to the exclusion of other rate matters, and requires a formal evidentiary proceeding conducted by the PPUC, the submission of specific information regarding gas procurement practices and specific findings of fact by the PPUC regarding the "least cost fuel procurement" policies of the utility. In accordance with these procedures PG Energy has been permitted to make the following changes since January 1, 1996, to the gas costs contained in its tariff rates: Change in Calculated Effective Rate Per MCF Increase (Decrease) ------------------------- Date From To In Annual Revenue - ---------------------------- ---------- ----------- ------------------- December 1, 1998 $4.25 $4.53 $ 7,100,000 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 December 1, 1996 3.01 4.18 32,400,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 The changes in gas rates on account of purchased gas costs have no effect on earnings since the change in revenue is offset by a corresponding change in the cost of gas. FERC Order 636, among other matters, requires that the Company contract for sufficient gas supplies, pipeline capacity and storage for its annual needs. These added responsibilities have resulted in increased scrutiny by the PPUC as to the prudence of gas procurement and supply activities. However, to date, the PPUC has permitted the Company to recover its gas supply costs in the rates charged to customers. Additionally, although it cannot be certain, the Company believes that it will be able to continue demonstrating to the PPUC the prudence of its gas supply costs and, therefore, will be allowed to recover all such costs in its future purchased gas cost rates. Tax Surcharge Adjustments. Regulations of the PPUC provide for the Company to apply a state tax adjustment surcharge tariff to bills for gas service to recoup any increased taxes or pass through any decreased taxes resulting from changes in the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty Tax. Honesdale is currently refunding approximately $11,000 of decreased taxes on an annual basis in accordance with these regulations, while no state tax adjustment surcharge is presently being applied to PG Energy's bills for gas service. WATER BUSINESS Prior to the sale of its water operations to Pennsylvania-American on February 16, 1996, PG Energy distributed water to an area lying within the Counties of Lackawanna, Luzerne, Susquehanna and Wayne, which included the Cities of Scranton and Wilkes-Barre and 63 other municipalities. The total estimated population of the water service area, based on the 1990 U.S. Census, was 373,000. Number and Type of Customers. At December 31, 1995, PG Energy had approximately 133,400 water customers from which it derived total water revenues of $7.5 million during the period January 1 through February 15, 1996. Filtration of Water Supplies. All of PG Energy's water customers were supplied with filtered water (except for several hundred who were supplied with ground water from wells). The filtration of PG Energy's water supplies was performed at ten water treatment plants, located throughout PG Energy's water service area, which had an aggregate daily capacity of 101.1 million gallons. Construction Expenditures. PG Energy's construction expenditures for water utility plant totaled $815,000 during the period January 1 through February 15, 1996. ITEM 2. PROPERTIES Gas. The Company's gas systems consist of approximately 2,439 miles of distribution lines, eleven city gate and 81 major regulating stations and miscellaneous related and additional property. The Company believes that its gas utility properties are adequately maintained and in good operating condition in all material respects. Most of PG Energy's gas utility properties are subject to a first mortgage lien pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15, 1946, as supplemented by thirty supplemental indentures from PG Energy to First Trust of New York, National Association, as Trustee. Land. As of February 24, 1999, PG Energy owned approximately 44,000 acres of undeveloped land situated in northeastern Pennsylvania. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings other than ordinary routine litigation incidental to the business of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 1998, there were no matters submitted to a vote of security holders of the registrant through the solicitation of proxies or otherwise. PART II ITEM 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Registrant's common stock is owned entirely by PEI and is not traded. PG Energy did not pay any cash dividends on common stock during the years ended December 31, 1998 and 1997. Information relating to restrictions on the payment of dividends by PG Energy is set forth in Note 7 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESTRUCTURING OF NATURAL GAS INDUSTRY PG Energy Inc. ("PG Energy"), a subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), and PG Energy's wholly-owned subsidiary, Honesdale Gas Company ("Honesdale") (collectively referred to as ("the Company"), are regulated public utilities engaged in the sale and distribution of natural gas. The natural gas industry, which historically has included producers, interstate pipelines and local distribution companies ("LDCs"), is undergoing significant restructuring. The industry is rapidly progressing from a highly regulated environment to one in which there is competition, customer choice and only partial regulation. The same change is also occurring in the electric industry which competes with the natural gas industry for many of the same energy uses. The restructuring of the natural gas industry has already involved the decontrol of the wellhead price of natural gas, and interstate pipelines have been required by the Federal Energy Regulatory Commission ("FERC") to separate the merchant function of selling natural gas from the transportation and storage services they provide (frequently referred to as "unbundling") and to make those services available to end users on the same terms as LDCs. These changes in the operations of the interstate pipelines were designed to enhance competition and maximize the benefits of wellhead price decontrol. As a result of actions by FERC, the interstate pipelines now primarily provide transportation and storage services, and LDCs, such as PG Energy, are presently responsible for the procurement of competitively-priced gas supplies and arranging for the appropriate transportation capacity and storage services with the interstate pipelines. Additionally, in accordance with regulations promulgated by the Pennsylvania Public Utility Commission (the "PPUC"), PG Energy currently offers transportation service to certain customers. Prior to the unbundling of services by the interstate pipelines and those services being made available to end users as well as LDCs, and until the PPUC adopted regulations providing for the transportation of natural gas, PG Energy charged all its customers bundled rates. These rates included a commodity charge based on the cost, as approved by FERC, which PG Energy paid the pipelines for natural gas delivered to the entry point on its distribution system. Except for the approximately 600 customers currently receiving transportation service, PG Energy's customers continue to be charged bundled rates as approved by the PPUC, which include a commodity charge based on the costs prudently incurred by PG Energy for the purchase of natural gas and for interstate pipeline transportation capacity and storage services. Customers receiving transportation service, which accounted for approximately 54% of PG Energy's total gas deliveries in 1998, are charged rates approved by the PPUC which exclude the commodity cost that is reflected in the bundled rates charged to other customers. Although the regulations promulgated by the PPUC only require LDCs to offer transportation service to individual customers having an annual consumption of at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more than ten customers having a combined consumption of at least 5,000 MCF per year, the PPUC has allowed certain LDCs to make transportation service available to other customers, regardless of their consumption. One of these companies is Honesdale which, with the approval of the PPUC, began offering transportation service to its customers effective November 1, 1997. During 1998, approximately 1,150 of Honesdale's customers received transportation service and purchased their natural gas supplies from PG Energy Services Inc. ("Energy Services"), a nonregulated affiliate of the Company and the only marketer currently selling gas to customers served by Honesdale. PG Energy is also planning to file tariffs with the PPUC in the near future seeking approval to make transportation service available to all of its 148,900 customers. However, the actual timing of such filing may be influenced by the terms of the legislation, as discussed below, which PG Energy currently believes that Pennsylvania may enact in 1999 requiring that all customers of LDCs have the right, within the next one to two years, to receive transportation service and to choose the supplier of their natural gas. In December, 1996, legislation was enacted in Pennsylvania which provides all customers of electric utilities in the state with the right to choose the generator of their electricity. This customer choice, which is intended to increase competition and to lower costs for electricity, is being phased in over a three-year period ending on January 1, 2001. Under this legislation, the electric utilities in Pennsylvania are required to unbundle generation charges from the other charges included in their currently bundled rates and customers can contract with qualified suppliers of their choosing, including the utility currently serving them, to purchase electric energy at nonregulated rates. The electric utilities will continue to utilize their transmission and distribution networks to distribute electricity to their customers regardless of supplier, a function which will remain subject to rate regulation by the PPUC. PG Energy believes that Pennsylvania may enact similar legislation with respect to the natural gas industry in 1999. As currently envisioned, such legislation would require that PG Energy provide all of its customers with unbundled transportation service within one to two years. While the rates for the transportation of natural gas through PG Energy's distribution system and the storage services offered by PG Energy would continue to be price regulated by the PPUC, the commodity cost of gas purchased from suppliers other than PG Energy would not be so regulated. Customers could, however, continue to receive a bundled sales service from PG Energy which would be subject to price regulation by the PPUC. Essentially, the legislation would extend the transportation service which is now available to a limited number of PG Energy's customers to all its customers, and customers could choose to have their natural gas provided by a supplier other than PG Energy, based on nonregulated market prices and other considerations. If Pennsylvania enacts legislation which permits all customers of LDCs to choose their supplier of natural gas, PG Energy will be faced with significant competition from marketers for the sale of natural gas to its customers. However, under current regulations of the PPUC, PG Energy does not realize a profit or incur any loss with respect to the commodity cost of natural gas. Moreover, PG Energy would not expect the pending legislation to result in the bypass of its distribution system by any significant number of customers because of the nature of its customer base and the cost of any such bypass. Additionally, based on various provisions of the legislation currently being considered, PG Energy does not believe that the legislation will result in any significant amount of transition costs (such as the negotiated buyout of contracts with interstate pipelines, the recovery of deferred purchased gas costs or the recovery of regulated assets). Further, PG Energy believes that the transition costs it would incur in offering choice to all its customers (including those involving information systems and customer education) would generally be recoverable through rates or other customer charges. Accordingly, although it cannot be certain, because the terms of such legislation have not been finalized and the ultimate effect on PG Energy cannot be determined, PG Energy does not believe that the enactment of legislation providing for customers to purchase their natural gas from third parties would have any material adverse impact on its earnings or financial condition despite the increased competition to which PG Energy would be subject regarding the sale of natural gas to its customers. DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended (the "Agreement"), among PEI, PG Energy, American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, PEI and PG Energy sold substantially all of the assets, properties and rights of PG Energy's water utility operations to Pennsylvania-American on February 16, 1996 (see "Liquidity and Capital Resources Sale of Water Utility Operations"). In accordance with generally accepted accounting principles, the Company's consolidated financial statements reflect PG Energy's water utility operations as "discontinued operations" and the following sections of Management's Discussion and Analysis generally relate only to the Company's continuing operations. For additional information regarding the discontinued operations, see Note 2 of the accompanying Notes to Consolidated Financial Statements. RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in the Company's consolidated statements of income as percentages of operating revenues for each of the calendar years ended December 31, 1998, 1997 and 1996: Percentage of Operating Revenues ----------------------------------- Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- ------- ------------ OPERATING REVENUES ................ 100.0% 100.0% 100.0% Cost of gas ................... 54.2 58.2 55.0 -------- ------- ------- OPERATING MARGIN .................. 45.8 41.8 45.0 -------- ------- ------- OPERATING EXPENSES: Operation ..................... 15.7 12.9 15.6 Maintenance ................... 3.0 2.7 3.4 Depreciation .................. 6.1 4.7 4.7 Income taxes .................. 2.7 3.9 4.0 Taxes other than income taxes . 7.0 6.1 6.9 -------- ------- ------- Total operating expenses .. 34.5 30.3 34.6 -------- ------- ------- OPERATING INCOME .................. 11.3 11.5 10.4 OTHER INCOME, NET ................. 0.4 0.1 0.1 INTEREST CHARGES .................. (6.6) (5.2) (4.6) -------- ------- ------- INCOME FROM CONTINUING OPERATIONS . 5.1 6.4 5.9 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS .................... -- -- (0.2) ------- ------- ------- NET INCOME ........................ 5.1 6.4 5.7 DIVIDENDS ON PREFERRED STOCK ...... (0.7) (0.7) (1.1) (1) -------- ------- ------- EARNINGS APPLICABLE TO COMMON STOCK 4.4% 5.7% 4.6% ======== ======= ======= (1) None of the dividends on preferred stock was allocated to the discontinued operations. o Year Ended December 31, 1998, Compared With Year Ended December 31, 1997 Operating Revenues. Operating revenues decreased $31.6 million (16.6%) from $190.6 million for 1997 to $159.0 million for 1998, primarily as a result of a 3.9 billion cubic feet (17.0%) 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 1998 and colder than normal temperatures during 1997, as well as lower levels in PG Energy's gas cost rate (see "-Rate Matters"). The number of heating degree days decreased by 1,202 (18.5%) from 6,498 (103.3% of normal) during 1997 to 5,296 (84.2% of normal) during 1998. Cost of Gas. The cost of gas decreased $24.7 million (22.3%) from $110.9 million for 1997 to $86.2 million for 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 $6.9 million (8.6%) from $79.7 million in 1997 to $72.8 million in 1998, primarily as a result of the decrease in sales as a result of the warmer weather in 1998 as noted above. As a percentage of operating revenues, the margin increased from 41.8% in 1997 to 45.8% in 1998 due to the proportionately lower cost of gas during the period. Other Operating Expenses. Other operating expenses decreased $2.9 million (5.1%) from $57.7 million for 1997 to $54.8 million for 1998. This decrease was primarily attributable to a $3.1 million (42.1%) decrease in income taxes from $7.3 million for 1997 to $4.2 million for 1998 due to a decrease in income before income taxes (for this purpose, operating income net of interest charges). Also contributing to this decrease was the effect of the reversal of $1.9 million of previously expensed other postretirement benefit costs relative to the period January 1, 1993, through January 15, 1997, recovery of which was approved by the PPUC over a fifteen year period beginning November 1, 1998, a $364,000 (7.0%) decrease in maintenance expense and a $483,000 (4.1%) 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 increased amortization of computer software costs and a $641,000 (7.1%) increase in depreciation expense as a result of additions to utility plant. As a percentage of operating revenues, other operating expenses increased from 30.3% during 1997 to 34.5% during 1998, primarily because of the lower level of operating revenues. Operating Income. As a result of the above, operating income decreased by $3.9 million (17.9%) from $22.0 million for 1997 to $18.0 million for 1998, and decreased as a percentage of total operating revenues for such periods from 11.5% to 11.3%. Other Income, Net. Other income, net increased $551,000 from $100,000 for 1997 to $651,000 for 1998, largely because of a gain on the sale of land in June, 1998. Interest Charges. Interest charges increased by $558,000 (5.6%) from $10.0 million for 1997 to $10.5 million for 1998. This increase was largely attributable to a higher level of long-term debt outstanding in 1998. Income From Continuing Operations. Income from continuing operations decreased $3.9 million (32.5%) from $12.1 million for 1997 to $8.2 million for 1998. This decrease was largely the result of the matters discussed above, principally the decrease in operating margin and the increase in interest charges. Dividends on Preferred Stock. Dividends on preferred stock decreased $121,000 (9.2%) from $1.3 million for 1997 to $1.2 million for 1998, primarily as a result of the repurchase by PG Energy in December 1998 of all its remaining 9% cumulative preferred stock as of December 1, 1998. Earnings Applicable to Common Stock. The decrease in earnings applicable to common stock of $3.8 million (35.4%) from $10.8 million for 1997 to $7.0 million for 1998 was primarily the result of the reduced operating margin and increased interest charges discussed above. These same factors, along with premiums of $.30 per share during 1998 and discounts of $.23 per share during 1997 on the repurchase of preferred stock, accounted for the decrease in earnings per share of common stock of $1.75 from $3.49 per share for 1997 to $1.74 per share for 1998. Also contributing to the decrease in earnings per share of common stock was the 3.5% increase in the weighted average number of shares outstanding as a result of the issuance of shares during 1998. (See Liquidity and Capital Resources - Long-Term Debt and Capital Stock Financings). o Year Ended December 31, 1997, Compared With Year Ended December 31, 1996 Operating Revenues. Operating revenues increased $30.0 million (18.7%) from $160.6 million for 1996 to $190.6 million for 1997, primarily as a result of higher levels in PG Energy's gas cost rate and the effect of the rate increase granted PG Energy by the PPUC which became effective on January 15, 1997, (see "Rate Matters"). The effect of the increases in rates was partially offset by a 749,000 cubic feet (2.9%) decrease in deliveries to PG Energy's residential and commercial heating customers. There was a decrease of 129 (1.9%) heating degree days from 6,627 (105.3% of normal) during 1996 to 6,498 (103.3% of normal) during 1997. Operating revenues of Honesdale totaling $3.0 million from its February 14, 1997, acquisition date through December 31, 1997, also contributed to the increased operating revenues. Cost of Gas. The cost of gas increased $22.6 million (25.6%) from $88.3 million for 1996 to $110.9 million for 1997, primarily because of higher levels in PG Energy's gas cost rate (see "-Rate Matters"). Also contributing to the increase was $2.0 million of gas costs related to Honesdale from its February 14, 1997, acquisition date through December 31, 1997. Operating Margin. The operating margin increased $7.4 million (10.2%) from $72.3 million in 1996 to $79.7 million in 1997, primarily because of the aforementioned rate increase granted to PG Energy and $1.0 million of operating margin of Honesdale since its February 14, 1997, acquisition date. As a percentage of operating revenues, the margin decreased from 45.0% in 1996 to 41.8% in 1997, largely as a result of the proportionately higher ratio of cost of gas to operating revenues. Other Operating Expenses. Other operating expenses, including depreciation and income taxes, increased $2.1 million (3.8%) from $55.6 million for 1996 to $57.7 million for 1997. As a percentage of operating revenues, total operating expenses decreased from 34.6% during 1996 to 30.3% during 1997, largely as a result of the proportionately greater increase in operating revenues. The increase in other operating expenses was primarily the result of a $1.4 million (18.1%) increase in depreciation expense attributable to additions to utility plant and a $629,000 (5.7%) increase in taxes other than income taxes resulting from a higher level of gross receipts tax because of the increased sales by PG Energy and the sales by Honesdale from its acquisition date. Income taxes increased $957,000 (15.0%) from $6.4 million in 1996 to $7.3 million in 1997 due to an increase in income before income taxes (for this purpose, operating income net of interest charges). Operating Income. As a result of the above, operating income increased by $5.2 million (31.4%) from $16.7 million for 1996 to $22.0 million for 1997, and increased as a percentage of total operating revenues from 10.4% in 1996 to 11.5% in 1997. Other Income, Net. Other income, net decreased $43,000 (30.1%) from $143,000 for 1996 to $100,000 for 1997, largely because 1996 included income from the temporary investment of certain proceeds from the sale of PG Energy's regulated water utility operations in February, 1996. Interest Charges. Interest charges increased $2.6 million (35.5%) from $7.3 million for 1996 to $10.0 million for 1997. This increase was largely attributable to bank borrowings to finance construction expenditures and for other working capital needs and the reduction in PG Energy's interest expense in 1996 resulting from the repayment of its $50.0 million term loan and all of its then outstanding bank borrowings on February 16, 1996, with proceeds from the sale of its regulated water utility operations on such date. Income From Continuing Operations. Income from continuing operations increased $2.6 million (27.3%) from $9.5 million for 1996 to $12.1 million for 1997. This increase was largely the result of the matters discussed above, principally the increase in operating margin, the effects of which were partially offset by increased operating expenses and interest charges. Net Income (Loss). The increase in net income of $3.0 million (32.3%) from $9.2 million for 1996 to $12.1 million for 1997 was the result of the higher income from continuing operations, as discussed above, and the absence of any loss with respect to discontinued operations. Dividends on Preferred Stock. Dividends on preferred stock decreased $418,000 (24.2%) from $1.7 million for 1996 to $1.3 million for 1997, primarily as a result of the repurchase by PG Energy in 1996 of 134,359 shares of its 9% cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock and 20,330 shares of its 4.10% cumulative preferred stock, largely during the second quarter of that year, as well as its repurchase of an additional 30,560 shares of the 4.10% cumulative preferred stock in 1997. Earnings Applicable to common Stock. The increase in earnings applicable to common stock of $3.4 million (45.5%) from $7.4 million for 1996 to $10.8 million for 1997, as well as the increase in earnings per share of common stock of $1.80 from $1.69 per share for 1996 (after a $.37 per share charge for premiums on the repurchase of preferred stock) to $3.49 per share for 1997 (including a $.23 per share discount on the repurchase of preferred stock) were the result of the higher income from continuing operations and the reduced dividends on preferred stock, as discussed above, and the absence of any loss with respect to discontinued operations. The increase in earnings applicable to common stock also reflected a 8.0% decrease in the weighted average number of shares outstanding as a result of the repurchase by PG Energy of shares of its common stock on February 16, 1996, with proceeds from the sale of its regulated water utility operations. 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. By Order adopted October 16, 1998, the PPUC approved an overall 4.1% increase in PG Energy's 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 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, 1996, to the gas costs contained in its tariff rates: Change in Calculated Effective Rate Per MCF Increase (Decrease) ------------------------- Date From To In Annual Revenue - ---------------------------- ---------- ----------- ------------------ December 1, 1998 $4.25 $4.53 $ 7,100,000 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 December 1, 1996 3.01 4.18 32,400,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 The changes in gas rates on account of purchased gas costs have no effect on earnings since the change in revenue is offset by a corresponding change in the cost of gas. Effects of Inflation. When utility property reaches the end of its useful life and must be replaced, the Company will incur replacement costs in amounts that due to the effects of inflation would materially exceed either the original cost or the accrued depreciation of such property as reflected on its books of account. However, the cost of such replacement property would be includable in rate base, and the Company would be entitled to recover depreciation expense and earn a return thereon, to the extent that its investment in such property was prudently incurred and the property is used and useful in furnishing public utility service. LIQUIDITY AND CAPITAL RESOURCES Sale of Water Utility Operations On February 16, 1996, PG Energy sold its regulated water operations and certain related assets to Pennsylvania-American for $414.3 million, consisting of $262.1 million in cash and the assumption of $152.2 million of PG Energy's liabilities, including $141.0 million of its long-term debt. PEI and PG Energy used the $205.4 million of cash proceeds from the sale, net of $56.7 million of income taxes, to retire debt, to repurchase stock, for construction expenditures and for other working capital purposes. In this regard, PG Energy repurchased 2,297,297 shares of its common stock from PEI for an aggregate consideration of $85.0 million, repaid its $50.0 million term loan due 1996 and all of its then outstanding bank borrowings on February 16, 1996, and PEI and PG Energy temporarily invested the balance of the proceeds. A portion of these proceeds were subsequently used by PG Energy (i) on March 8, 1996, to repay the $30.0 million principal amount of its 10.125% promissory note (the "10.125% Promissory Note") which was issued to PEI as a common stock dividend on February 16, 1996 (proceeds from the repayment of the 10.125% Promissory Note were used by PEI for the defeasance of PEI's 10.125% Senior Notes on September 30, 1996) and (ii) to repurchase 134,359 shares of its 9% cumulative preferred stock for an aggregate consideration of $14.5 million and 20,330 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $1.0 million, largely pursuant to self tender offers conducted during March and April, 1996. Additionally, on June 17, 1996, PG Energy repurchased 9,408 shares of its 5.75% cumulative preferred stock (including 800 shares redeemed in accordance with annual sinking fund provisions) for an aggregate consideration of $838,000. Liquidity The primary capital needs of the Company continue to be the funding of its 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 Company's practice 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 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 $67.0 million of unsecured revolving bank credit, which is deemed adequate for its immediate needs. Specifically, PG Energy currently has seven bank lines of credit with an aggregate borrowing capacity of $64.0 million which provide for borrowings at interest rates generally less than prime and which mature at various times during 1999 and 2000. Honesdale has a $3.0 million revolving bank line of credit which provides for borrowing at a fixed rate of 6.75% and which matures in November, 1999. The Company intends to renew or replace these lines of credit as they expire. As of February 24, 1999, the Company had $32.6 million of borrowings outstanding under these bank lines of credit. In addition, as of February 24, 1999, PG Energy had approximately $9.6 million outstanding under its borrowing arrangement with 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 that it will be able to raise in a timely manner such funds as are required for its future construction expenditures, refinancings and other working capital requirements. 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. Set forth below is a summary of such financings consummated since the beginning of 1997, exclusive of interim bank borrowings. On September 12, 1997, PG Energy borrowed $25.0 million pursuant to a five-year term loan agreement dated August 14, 1997 (the "Term Loan Agreement"), which matures on August 14, 2002. Borrowings under the Term Loan Agreement bear interest at LIBOR ("London Interbank Offered Rates") plus one-quarter of one percent (5.440% as of February 24, 1999). Under the terms of the Term Loan Agreement, PG Energy can choose interest rate periods of one, two, three or six months. PG Energy utilized the proceeds from such loan to repay $25.0 million of its bank borrowings. On September 30, 1997, PG Energy issued $25.0 million of its 6.92% Senior Notes due September 30, 2004 (the "6.92% Senior Notes"). The proceeds from the issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million of its bank borrowings. 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 (the "DRP") and its Customer Stock Purchase Plan (the "Customer Plan"). During 1998 PG Energy realized $6.2 million from the issuance of common stock to PEI in connection with these plans. PG Energy did not issue any shares of its common stock to PEI in connection with the DRP or the Customer Plan during 1997 because of the reduction in its capital requirements resulting from the sale of PG Energy's water utility operations to Pennsylvania-American and because of the proceeds received from such sale. Capital Expenditures and Related Financings Capital expenditures for the construction of utility plant totaled $28.2 million, $30.2 million and $29.2 million during 1998, 1997 and 1996, respectively. Such expenditures were financed with internally-generated funds and bank borrowings. The Company estimates that its capital expenditures will total $18.4 million during 1999, and will approximate $18.0 million in each of the years 2000 and 2001. It is anticipated that such capital expenditures will be financed with internally generated funds and bank borrowings, and by the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of December 31, 1998, $68.2 million of PG Energy's long-term debt was required to be repaid within twelve months. The $68.2 million of long-term debt includes $51.3 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 $6.9 million of borrowings from PEI which are due December 31, 1999. PG Energy intends to finance its current maturities of long-term debt with internally generated funds and bank borrowings, and by the periodic issuance of long-term debt and capital stock. Year 2000 Readiness Disclosure 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. It is estimated that the total cost of the Company's plan to address year 2000 issues will be approximately $2.0-2.5 million. This amount, which had been largely expended as of December 31, 1998, includes costs for the purchase of hardware and software, external contractors and internal resources. The internal resources, which are estimated to account for approximately $1.0 million of the total cost, involved the redeployment of existing personnel and did not represent an incremental cost. In view of the estimated cost and the substantial progress that has been made to date, management does not anticipate that the expenditures necessary to carry out the plan to address year 2000 issues 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 replaced 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 modifications and testing of the customer information system and the upgrading of the 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 make any changes in its contingency planning as the occasion warrants. The Company is subject to potential disruptions in its operations as a result of year 2000 related failures of its critical suppliers and vendors. Although there is presently no basis for suggesting such situation would occur, management believes the worst case scenario in such regard might involve the temporary disruption in the gas service of certain of its customers. To provide for this and other possible contingencies related to year 2000 issues, the Company is currently evaluating its existing emergency and disaster recovery plans. These plans will be modified, as deemed appropriate, based, among other considerations, on the Company's assessment of the year 2000 compliance of its critical suppliers and vendors. These plans, as so modified, will attempt to mitigate, to the extent reasonably possible, the effect of any year 2000 related failures by a third party. However, the Company is dependent on its suppliers of natural gas, interstate gas pipelines and utility and telecommunication companies, over which it has no control, to serve its customers. Any disruption in service by one of these key suppliers could, depending upon its nature and extent, have a material adverse effect on the Company's operations. Market Risk Disclosures The Company's primary market risk exposures relate to market prices for natural gas and changes in long-term interest rates. While the Company does not utilize derivative commodity instruments for trading purposes, it does purchase natural gas for periods of more or less than one year which, depending upon the terms of such contracts, may or may not provide for an adjustment each month in the cost of gas purchased pursuant thereto, based on the then current market prices for natural gas. Pursuant to regulations of the PPUC, the Company is permitted to recover prudently incurred gas costs from its customers. Accordingly, the associated commodity price risks are limited. The Company utilizes long-term debt as a primary source of its capital and, therefore, is exposed to changes in interest rates. At December 31, 1998, the Company had fixed-rate long-term debt aggregating $80.0 million. In addition, the Company had $83.2 million of variable rate long-term debt, including long-term borrowings under its bank lines of credit, for which the interest rates are generally set, at the Company's option, for periods of one, two or three months. If market interest rates were to average 50 basis points (0.50%) more in 1999 than in 1998, it is estimated that the Company's interest expense would increase by approximately $300,000. This amount has been calculated by considering the impact of the hypothetical interest rates on the Company's variable-rate debt and also the fixed-rate debt that matures in 1999. In the event of a significant change in interest rates, the Company would take such action, including the filing of rate increase requests with the PPUC as it considers necessary, to mitigate the impact of the change. The Company has not historically employed derivative financial instruments, except for the use, in one instance, of an interest rate cap. 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 disruptions; industrial, commercial and residential growth in the service territories of the Company; 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 is subject or other external factors over which the Company has no control; 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company and the reports of independent accountants thereon are presented on pages 25 through 47 of this Form 10-K. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of PG Energy Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a)(1) and (2) on page 49 present fairly, in all material respects, the financial position of PG Energy Inc., and its subsidiary at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The financial statements of PG Energy Inc. for the year ended December 31, 1996, were audited by other independent accountants whose report dated February 19, 1997, expressed an unqualified opinion on those statements. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 17, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To PG Energy Inc.: We have audited the statements of income and cash flows of PG Energy Inc. ("PG Energy"), formerly known as Pennsylvania Gas and Water Company (a Pennsylvania corporation and wholly-owned subsidiary of Pennsylvania Enterprises, Inc.) for the year ended December 31, 1996. These financial statements are the responsibility of PG Energy's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of PG Energy Inc. for the year ended December 31, 1996, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedule II, Valuation and Qualifying Accounts for the year ended December 31, 1996 (see index of financial statements) is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subject to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, N.Y. February 19, 1997 PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ------------------------------------------- 1998 1997 1996 ------------- -------------- ------------ (Thousands of Dollars) OPERATING REVENUES .......................... $ 158,951 $ 190,567 $ 160,594 Cost of gas ............................ 86,164 110,905 88,291 ----------- ----------- ----------- OPERATING MARGIN ............................ 72,787 79,662 72,303 ----------- ----------- ----------- OTHER OPERATING EXPENSES: Operation .............................. 24,884 24,534 25,070 Maintenance ............................ 4,837 5,201 5,513 Depreciation ........................... 9,627 8,986 7,612 Income taxes ........................... 4,237 7,321 6,364 Taxes other than income taxes .......... 11,174 11,657 11,028 ----------- ---------- ----------- Total other operating expenses ..... 54,759 57,699 55,587 ----------- ----------- ----------- OPERATING INCOME ............................ 18,028 21,963 16,716 OTHER INCOME, NET ........................... 651 100 143 ----------- ---------- ----------- INCOME BEFORE INTEREST CHARGES .............. 18,679 22,063 16,859 ----------- ----------- ----------- INTEREST CHARGES: Interest on long-term debt .............. 10,204 9,481 6,862 Other interest .......................... 398 700 658 Allowance for borrowed funds used during construction .................... (94) (231) (177) ----------- ------------ ----------- Total interest charges ............... 10,508 9,950 7,343 ----------- ----------- ----------- INCOME FROM CONTINUING OPERATIONS ........... 8,171 12,113 9,516 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS (Note 2) ............................... -- -- (363) ----------- ---------- ----------- NET INCOME .................................. 8,171 12,113 9,153 DIVIDENDS ON PREFERRED STOCK ................ 1,191 1,312 1,730 ----------- ----------- ----------- EARNINGS APPLICABLE TO COMMON STOCK ......... $ 6,980 $ 10,801 $ 7,423 =========== =========== =========== EARNINGS PER SHARE OF COMMON STOCK: Continuing operations .................. $ 2.04 $ 3.26 $ 2.16 Discontinued operations ................ -- -- (0.10) ----------- ----------- ----------- Income before discount (premium) on repurchase of preferred stock .......... 2.04 3.26 2.06 Discount (premium) on repurchase of preferred stock ..................... (0.30) 0.23 (0.37) ----------- ------------ ----------- Earnings per share of common stock ..... $ 1.74 $ 3.49 $ 1.69 =========== ============ =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,429,597 3,314,155 3,601,072 =========== ============ ===========
The accompanying notes are an integral part of the consolidated financial statements. PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, ----------------------- 1998 1997 ---------- --------- (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost ............................. $ 376,685 $ 351,106 Accumulated depreciation ..................... (95,735) (88,129) --------- --------- 280,950 262,977 --------- --------- OTHER PROPERTY AND INVESTMENTS ................... 3,981 4,459 --------- --------- CURRENT ASSETS: Cash and cash equivalents .................... 768 304 Accounts receivable - Customers ................................. 18,475 23,551 Affiliates, net ........................... -- 63 Others .................................... 269 280 Reserve for uncollectible accounts ........ (1,080) (1,168) Accrued utility revenues ..................... 11,472 11,680 Materials and supplies, at average cost ...... 2,758 2,716 Gas held by suppliers, at average cost ....... 22,320 21,933 Deferred cost of gas and supplier refunds, net 6,058 6,182 Prepaid income taxes ......................... 1,560 -- Prepaid expenses and other ................... 2,582 1,767 -------- -------- 65,182 67,308 -------- -------- DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible ................ 31,097 30,592 Other ..................................... 8,598 4,415 Unamortized debt expense ..................... 964 1,164 Other ........................................ 25 225 -------- ------- 40,684 36,396 -------- ------- TOTAL ASSETS ..................................... $ 390,797 $ 371,140 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, ----------------------- 1998 1997 ---------- ---------- (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION (see accompanying statements): Common shareholder's investment .................. $126,638 $107,425 Preferred stock of PG Energy - Not subject to mandatory redemption, net ...... 4,831 15,864 Subject to mandatory redemption ............... 240 640 Long-term debt - Parent ........................................ -- 23,500 Other ......................................... 95,000 106,000 -------- ------- 226,709 253,429 -------- ------- CURRENT LIABILITIES: Current portion of long-term debt - Parent ........................................ 6,900 -- Other ......................................... 61,348 24,776 Preferred stock subject to repurchase or mandatory redemption .................................... -- 80 Notes payable .................................... 1,200 2,170 Accounts payable - Suppliers ..................................... 15,659 14,515 Parent ........................................ 674 199 Affiliates, net ............................... 3 -- Accrued general business and realty taxes ........ 1,464 2,797 Accrued income taxes ............................. -- 4,946 Accrued interest ................................. 1,807 1,844 Accrued natural gas transition costs ............. -- 1,087 Other ............................................ 1,149 1,188 -------- ------- 90,204 53,602 -------- ------- DEFERRED CREDITS: Deferred income taxes ............................ 60,211 52,207 Unamortized investment tax credits ............... 4,424 4,596 Operating reserves ............................... 2,836 2,825 Other ............................................ 6,413 4,481 -------- -------- 73,884 64,109 -------- -------- TOTAL CAPITALIZATION AND LIABILITIES ................. $390,797 $371,140 ======== ======== The accompanying notes are an integral part of the consolidated financial statements. PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 8,171 $ 12,113 $ 9,516 Gain on sale of other property (917) - - Effects of noncash charges to income - Depreciation 9,703 9,034 7,675 Deferred income taxes, net 2,894 1,863 1,940 Provisions for self insurance 1,050 711 1,042 Other, net 395 1,902 1,390 Changes in working capital, exclusive of cash and current portion of long-term debt and preferred stock - Receivables and accrued utility revenues 5,270 (5,220) 46 Gas held by suppliers (387) (1,668) (5,125) Accounts payable 1,069 (4,425) 215 Deferred cost of gas and supplier refunds, net (829) 14,397 (18,493) Other current assets and liabilities, net (8,910) 1,526 2,958 Other operating items, net 2,255 (1,809) (5,644) ------ ------- ------- Net cash provided by (used for) continuing operations 19,764 28,424 (4,480) Net cash used for discontinued operations, principally for the payment of income taxes - (13,655) (45,173) ------- ------- -------- Net cash provided by (used for) operating activities 19,764 14,769 (49,653) ------- ------- -------- CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (29,003) (30,971) (29,312) Proceeds from the sale of other property 985 - - Proceeds from the sale of discontinued operations - - 261,752 Acquisition of regulated business - (2,019) - Other, net 225 557 1,078 ------- ------ ------- Net cash provided by (used for) investing activities (27,793) (32,433) 233,518 -------- -------- ------- CASH FLOW FROM FINANCING ACTIVITIES: Issuance of long-term debt - 25,000 49,900 Repurchase of preferred stock (12,124) (3,121) (15,670) Dividends on preferred and common stock (1,191) (1,312) (35,498) Issuance of common stock 6,171 - 339 Repurchase of common stock - - (85,008) Repayment of long-term debt (Note 3) (9,100) (7,900) (68,500) Net increase (decrease) in bank borrowings 25,155 4,053 (27,723) Other, net (418) 558 (1,343) ------ ------- --------- Net cash provided by (used for) financing activities 8,493 17,278 (183,503) ------ ------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 464 (386) 362 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 304 690 328 ------ ------ ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 768 $ 304 $ 690 ====== ====== ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest (net of amount capitalized) $ 10,127 $ 9,395 $ 7,139 ========= ======== ======= Income taxes $ 1,757 $ 15,548 $46,483 ========= ======== =======
The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, ---------------------------------------- 1998 1997 --------------- --------------- (Thousands of Dollars) COMMON SHAREHOLDER'S INVESTMENT: Common stock, no par value (stated value $10 per share) Authorized - 15,000,000 shares Outstanding - 3,494,418 shares and 3,314,155 shares, respectively $ 34,944 $ 33,142 Additional paid-in capital 44,546 32,677 Retained earnings 47,148 41,606 ------------ ------------ Total common shareholder's investment 126,638 55.9% 107,425 42.4% ------------ ------------ PREFERRED STOCK, par value $100 per share Authorized - 997,500 shares: Not subject to mandatory redemption, net - 4.10% cumulative preferred, 48,310 and 49,110 shares outstanding, respectively 4,831 4,911 9% cumulative preferred, 115,641 shares outstanding at December 31, 1997, net of issuance costs - 10,953 ------------ ----------- Total preferred stock not subject to 4,831 2.1% 15,864 6.3% mandatory redemption, net ------------ ----------- Subject to mandatory redemption - 5.75% cumulative preferred, 2,396 and 7,200 shares outstanding, respectively 240 720 Less current redemption requirements - (80) Total preferred stock subject to mandatory redemption 240 0.1% 640 0.2% LONG-TERM DEBT: First mortgage bonds 55,000 55,000 Notes 108,248 99,276 Less current maturities and sinking fund requirements (68,248) (24,776) ---------- -------- Total long-term debt 95,000 41.9% 129,500 51.1% ---------- -------- TOTAL CAPITALIZATION $ 226,709 100.0% $253,429 100.0% ========== ========
The accompanying notes are an integral part of the consolidated financial statements.
PG ENERGY INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Additional Common Paid-in Retained Stock Capital Earnings Total -------------- ----------------- --------------- --------------- (Thousands of Dollars) Balance at December 31, 1995 $ 56,025 $ 94,463 $ 57,868 $ 208,356 Net income for 1996 - - 9,153 9,153 Issuance of common stock 90 249 - 339 Repurchase of common stock (22,973) (62,035) - (85,008) Premium on repurchase of preferred stock - - (1,337) (1,337) Dividends on: Preferred stock - - (1,730) (1,730) Common stock - - (33,768) (33,768) --- --- --- --- Balance at December 31, 1996 33,142 32,677 30,186 96,005 Net income for 1997 - - 12,113 12,113 Discount on redemption of preferred stock - - 746 746 Dividends on: Preferred stock - - (1,312) (1,312) Common stock - - (127) (127) --------- --------- ---------- ----------- Balance at December 31, 1997 33,142 32,677 41,606 107,425 Net income for 1998 - - 8,171 8,171 Issuance of common stock 1,802 4,369 - 6,171 Capital contribution by parent - 7,500 - 7,500 Premium on redemption of preferred stock - - (1,022) (1,022) Dividends on: Preferred stock - - (1,191) (1,191) Common stock - - (416) (416) ------------ ---------- ----------- ------------ Balance at December 31, 1998 $ 34,944 $ 44,546 $ 47,148 $ 126,638 ============ ========== =========== ============
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 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. 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 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K) which are difficult to predict and are beyond the control of the Company. Therefore, actual amounts could differ from these estimates. Utility Plant and Depreciation. Utility plant is stated at cost, which represents the original cost of construction, including payroll, administrative and general costs, and an allowance for funds used during construction. The allowance for funds used during construction ("AFUDC") is defined as the net cost during the period of construction of borrowed funds used and a reasonable rate upon other funds when so used. Such allowance is charged to utility plant and reported as a reduction of interest expense (with respect to the cost of borrowed funds) in the accompanying consolidated statements of income. AFUDC varies according to changes in the level of construction work in progress and in the sources and costs of capital. The weighted average rate for such allowance was approximately 8% in both 1998 and 1997 and 9% in 1996. The Company provides for depreciation on a straight-line basis. Exclusive of transportation and work equipment, the Company's annual provision for depreciation, as related to the average depreciable original cost of utility plant, was 2.65% in 1998, 2.81% in 1997 and 2.60% in 1996. When depreciable utility property is retired, the original cost of such property is removed from the utility plant accounts and is charged, together with the cost of removal less salvage, to accumulated depreciation. No gain or loss is recognized in connection with retirements of depreciable utility property, other than in the case of significant involuntary conversions or extraordinary retirements. Revenues and Cost of Gas. The Company bills customers monthly based on estimated or actual meter readings on cycles that extend throughout the month. The estimated unbilled amounts from the most recent meter reading dates through the end of the period being reported on are recorded as accrued revenues. The Company generally passes on to its customers increases or decreases in gas costs from those reflected in its tariff charges. In accordance with this procedure, the Company defers any current under or over-recoveries of gas costs and collects or refunds such amounts in subsequent periods. The Company had underrecoveries of gas costs totaling $15.3 million, $17.0 million and $29.6 million as of December 31, 1998, 1997 and 1996, respectively. Deferred Charges (Regulatory Assets). The Company generally accounts for and report costs in accordance with the economic effect of rate actions by the PPUC. To this extent, certain costs are recorded as deferred charges pending their recovery in rates. These amounts relate to previously-issued orders of the PPUC and are of a nature which, in the opinion of the Company, will be recoverable in future rates, based on such rate orders. In addition to deferred taxes collectible, which represent the probable future rate recovery of the previously unrecorded deferred taxes primarily relating to certain temporary differences in the basis of utility plant not previously recorded because of the regulatory rate practices of the PPUC, the following deferred charges are included as "Other" regulatory assets as of December 31, 1998 and 1997: 1998 1997 --------------- ------------ (Thousands of Dollars) Other postretirement benefits $ 2,887 $ 174 Computer software costs 2,007 1,945 Early retirement plan charges 1,961 618 Rate case expense 554 356 Low income usage reduction program 470 432 Extraordinary charges due to flooding 262 348 Other 457 542 -------------- ------------ Total $ 8,598 $ 4,415 ============== ============ The Company also records, as deferred charges, the direct financing costs incurred in connection with the issuance of long-term debt and equitably amortizes such amounts over the life of the securities. Cash and Cash Equivalents. For the purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments purchased, which generally have a maturity of three months or less, to be cash equivalents. Such instruments are carried at cost, which approximates market value. Income Taxes. The Company provides for deferred taxes in accordance with the provisions of FASB Statement 109. The components of the Company's net deferred income tax liability relative to continuing operations as of December 31, 1998 and 1997, are shown below: 1998 1997 --------------- ------------- (Thousands of Dollars) Utility plant basis differences $ 58,922 $ 55,497 Pension benefits 766 341 Deferred charges 629 602 Operating reserves (969) (1,181) Postretirement benefits (1,230) (700) FERC Order 636 transition costs - (394) Other 2,093 (1,958) ------------- ------------ Net deferred income tax liability $ 60,211 $ 52,207 ============= ============ The provision for income taxes relative to continuing operations consists of the following components: 1998 1997 1996 -------- ---------- ------------ (Thousands of Dollars) Included in operating expenses: Currently payable - Federal .............................. $ 960 $ 4,196 $ 3,235 State ................................ 187 1,357 1,361 ------- ------- ------- Total currently payable ............ 1,147 5,553 4,596 Deferred, net - Federal .............................. 2,831 1,844 2,059 State ................................ 431 96 (119) Total deferred, net ................ 3,262 1,940 1,940 Amortization of investment tax credits .. (172) (172) (172) Total included in operating expenses 4,237 7,321 6,364 Included in other income, net: Currently payable - Federal .............................. 125 33 (59) State ................................ 40 11 (19) Total currently payable ............ 165 44 (78) Deferred, net - Federal .............................. (280) -- -- State ................................ (89) -- -- Total deferred, net ................ (369) -- -- Total included in other income, net (204) 44 (78) Total provision for income taxes ... $ 4,033 $ 7,365 $ 6,286 The total provision for income taxes relative to continuing operations shown in the accompanying consolidated statements of income differs from the amount which would be computed by applying the statutory federal income tax rate to income before income taxes. The following table summarizes the major reasons for this difference:
1998 1997 1996 ---------- --------- ---------- (Thousands of Dollars) Income before income taxes ..................... $ 12,204 $ 19,478 $ 15,802 Tax expense at statutory federal income tax rate $ 4,271 $ 6,817 $ 5,531 Increases (reductions) in taxes resulting from - State income taxes, net of federal income tax benefit ............................... 370 952 795 Amortization of investment tax credits ...... (172) (172) (172) Other, net .................................. (436) (232) 132 Total provision for income taxes ............... $ 4,033 $ 7,365 $ 6,286
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 December 31, 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. (2) DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995, as amended (the "Agreement"), among PEI, PG Energy, American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned subsidiary of American, PEI and PG Energy sold substantially all of the assets, properties and rights of PG Energy's water utility operations to Pennsylvania-American on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American paid PG Energy $414.3 million consisting of $262.1 million in cash and the assumption of $152.2 million of PG Energy's liabilities, including $141.0 million of its long-term debt. PG Energy continued to operate the water utility business until February 16, 1996. The cash proceeds from the sale of approximately $205.4 million, net of $56.7 million of income taxes, were used by PEI and PG Energy to retire debt, to repurchase stock (see Note 4 of these Notes to Consolidated Financial Statements), for construction expenditures and for other working capital purposes. The sale price reflected a $6.5 million premium over the book value of the assets sold. However, after transaction costs and the net effect of other items, the sale resulted in an after tax loss of approximately $6.2 million, net of the income from the water operations during the phase-out period (which for financial reporting purposes was April 1, 1995, through February 15, 1996). The accompanying consolidated financial statements reflect PG Energy's water utility operations as "discontinued operations." Interest charges relating to indebtedness of PG Energy were allocated through the date of disposition to the discontinued operations based on the relationship of the gross water utility plant that was sold to the total of PG Energy's gross gas and water utility plant. This is the same method as was utilized by PG Energy and the PPUC in establishing the revenue requirements of both PG Energy's gas and water utility operations. None of the dividends on PG Energy's preferred stock nor any of PEI's interest expense were allocated to the discontinued operations. (3) RATE MATTERS Rate Increases. 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. By Order adopted October 16, 1998, the PPUC approved an overall 4.1% increase in PG Energy's 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, 1996, to the gas costs contained in its tariff rates: Change in Calculated Effective Rate Per MCF Increase (Decrease) ------------------------- Date From To In Annual Revenue - ---------------------------- ---------- ----------- ------------------- December 1, 1998 $4.25 $4.53 $ 7,100,000 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 December 1, 1996 3.01 4.18 32,400,000 September 1, 1996 2.88 3.01 3,600,000 June 1, 1996 2.75 2.88 3,400,000 The changes in gas rates on account of purchased gas costs have no effect on earnings since the change in revenue is offset by a corresponding change in the cost of gas. (4) COMMON STOCK PEI reinstated its Customer Stock Purchase Plan (the "Customer Plan") effective February 4, 1998. The Customer Plan provides the residential customers of all of PEI's subsidiaries with a method of purchasing newly-issued shares of PEI's common stock at a 5% discount from the market price. The net proceeds from the sale of any such shares of common stock are used for the general corporate purposes of PEI or made available to PEI's subsidiaries, including PG Energy, for construction expenditures, refinancings and other working capital requirements. During 1998, PG Energy realized $1.5 million from the issuance of its common stock to PEI in connection with the Customer Plan. PG Energy also obtains funds from the sale of its common stock to PEI in connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP"). Effective May 9, 1995, PEI suspended the cash investment feature of the DRP and the 5% discount from the market price on the reinvestment of dividends under the DRP because of the significant reduction in its capital requirements resulting from the sale of PG Energy's water utility operations to Pennsylvania-American and because of the proceeds received from such sale. The cash investment feature was, however, reinstated effective June 1, 1996. Additionally, from June 14, 1996, through December 31, 1996, PEI temporarily suspended the sale of newly-issued stock to the DRP as a result of the proceeds received from the sale of PG Energy's water utility operations, and during that period the DRP obtained shares of PEI common stock for participants through open market purchases. Effective January 1, 1997, PEI resumed selling newly-issued stock to the DRP. Although PEI resumed selling newly-issued stock to the DRP effective January 1, 1997, PG Energy did not issue any shares of its common stock to PEI in connection with the DRP during 1997 because of the reduction in its capital requirements resulting from the sale of PG Energy's water utility operations to Pennsylvania-American and because of the proceeds received from such sale. Effective January 30, 1998, PEI reinstated the 5% discount from market price on the reinvestment of dividends and the supplemental cash investments under the DRP. During 1998 and 1996, PG Energy realized $4.7 million and $340,000, respectively, from the issuance of common stock to PEI in connection with the DRP. On June 24, 1998, PEI converted $7.5 million of the outstanding loan balance from PG Energy to a contribution of capital. On February 16, 1996, PG Energy repurchased 2,297,297 shares of its common stock from PEI for an aggregate consideration of $85.0 million, with a portion of the proceeds from the sale of its water utility operations to Pennsylvania-American. (5) PREFERRED STOCK Preferred Stock Subject to Mandatory Redemption. Holders of the 5.75% cumulative preferred stock have a noncumulative right each year to tender to PG Energy and to require it to purchase at a per share price not exceeding $100, up to (a) that number of shares of the 5.75% cumulative preferred stock which can be acquired for an aggregate purchase price of $80,000 less (b) the number of such shares which PG Energy may already have purchased during the year at a per share price of not more than $100. During 1998, 1997 and 1996, PG Energy repurchased 4,804, 992 and 9,408 shares, respectively, of its 5.75% cumulative preferred stock (including 800 shares redeemed in each of the years in accordance with annual sinking fund provisions) for an aggregate consideration of $444,000 in 1998, $99,000 in 1997 and $838,000 in 1996. As of December 31, 1998, the sinking fund requirements relative to PG Energy's 5.75% cumulative preferred stock (the only series of preferred stock subject to mandatory redemption that was outstanding as of such date) were $80,000 for each of the years 2000 through 2002. At PG Energy's option, the 5.75% cumulative preferred stock may currently be redeemed at a price of $102.00 per share ($244,392 in the aggregate). Preferred Stock Not Subject to Mandatory Redemption. During the year ended December 31, 1996, PG Energy repurchased 134,359 shares of its 9% cumulative preferred stock, $100 par value, for an aggregate consideration of $14.5 million, largely pursuant to a self tender offer conducted during March and April, 1996. On December 1, 1998, PG Energy redeemed the remaining 115,641 outstanding shares of its 9% cumulative preferred stock at a price of $104 per share, which included a voluntary redemption premium of $4.00 per share ($463,000 in the aggregate), plus accrued dividends. During the year ended December 31, 1996, PG Energy repurchased 20,330 shares of its 4.10% cumulative preferred stock, $100 par value, for an aggregate consideration of $1.0 million, largely pursuant to a self tender offer conducted during March and April, 1996. During the year ended December 31, 1997, PG Energy repurchased 30,560 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $2.1 million, largely pursuant to a self tender offer conducted during April and May, 1997. During the year ended December 31, 1998, PG Energy repurchased 800 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $53,000, pursuant to unsolicited offers from shareholders. At PG Energy's option, the 4.10% cumulative preferred stock may currently be redeemed at a redemption price of $105.50 per share or for an aggregate redemption price of $5,096,705. Dividend Information. The dividends on the preferred stock of PG Energy in each of the three years in the period ended December 31, 1998, were as follows: Series 1998 1997 1996 - --------------- --------------- --------------- -------------- (Thousands of Dollars) 4.10% $ 200 $ 228 $ 348 5.75% 36 44 72 9.00% 955 1,040 1,310 Total $ 1,191 $ 1,312 $ 1,730 Dividends on all series of PG Energy's preferred stock are cumulative and PG Energy may not declare dividends on its common stock if any dividends on shares of preferred stock then outstanding are in default. (6) LONG-TERM DEBT Long-term debt consisted of the following components at December 31, 1998 and 1997: 1998 1997 ------------ ---------- (Thousands of Dollars) First mortgage bonds - 8.375% Series, due 2002 .......................... $ 30,000 $ 30,000 9.23 % Series, due 1999 .......................... 10,000 10,000 9.34 % Series, due 2019 .......................... 15,000 15,000 55,000 55,000 Notes - 6.92% Senior Notes, due 2004 ..................... 25,000 25,000 Term loan, due 2002 .............................. 25,000 25,000 Bank borrowings, at weighted average interest rates of 5.99% and 6.11%, respectively (Note 8) 51,348 25,776 Parent ........................................... 6,900 23,500 108,248 99,276 Less current maturities and sinking fund requirements (68,248) (24,776) Total long-term debt ............................. $ 95,000 $ 129,500 On September 12, 1997, PG Energy borrowed $25.0 million pursuant to a five-year term loan agreement dated August 14, 1997 (the "Term Loan Agreement"), which matures on August 14, 2002. Borrowings under the Term Loan Agreement bear interest at LIBOR plus one-quarter of one percent. Under the terms of the Term Loan Agreement, PG Energy can choose interest rate periods of one, two, three or six months. PG Energy utilized the proceeds from such loan to repay $25.0 million of its bank borrowings. On September 30, 1997, PG Energy issued $25.0 million of its 6.92% Senior Notes due September 30, 2004 (the "6.92% Senior Notes"). The proceeds from the issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million of its bank borrowings. As of December 31, 1998 and 1997, PG Energy had $6.9 million and $23.5 million, respectively, outstanding under its borrowing arrangement with PEI. The outstanding borrowings by PG Energy from PEI will be repaid with proceeds from bank borrowings by PG Energy. Maturities and Sinking Fund Requirements. As of December 31, 1998, the aggregate annual maturities and sinking fund requirements of long-term debt for each of the next five years ending December 31, were: Year Amount 1999 $ 68,248,000 (a) 2000 $ - 2001 $ - 2002 $ 55,000,000 (b) 2003 $ - (a) Represents PG Energy's 9.23% Series First Mortgage Bonds in the principal amount of $10.0 million due September 1, 1999, $51.3 million of PG Energy's bank borrowings outstanding as of December 31, 1998, and $6.9 million of borrowings payable to PEI. (b) Represents the $25.0 million of borrowings outstanding as of December 31, 1998, under PG Energy's Term Loan Agreement due August 14, 2002, and PG Energy's 8.375% Series First Mortgage Bonds in the principal amount of $30.0 million due December 1, 2002. (7) DIVIDEND RESTRICTIONS The preferred stock provisions of PG Energy's Restated Articles of Incorporation and certain of the agreements under which PG Energy has issued long-term debt provide for certain dividend restrictions. As of December 31, 1998, $5,416,000 of the consolidated retained earnings of the Company were restricted against the payment of cash dividends on common stock under the most restrictive of these covenants. (8) BANK NOTES PAYABLE The Company currently has arrangements for seven revolving bank lines of credit with an aggregate borrowing capacity of $66.0 million which provide for borrowings at interest rates generally less than prime and which mature at various times during 1999 and 2000. Because of limitations imposed by the terms of PG Energy's preferred stock, PG Energy is prohibited, without the consent of the holders of a majority of the outstanding shares of its preferred stock, from issuing more than $12.0 million of unsecured debt due on demand or within one year from issuance. PG Energy had no borrowings due on demand or within one year from issuance outstanding as of December 31, 1998. Information relating to the Company's bank lines of credit and borrowings under those lines of credit is set forth below: As of December 31, ------------------------------ 1998 1997 1996 (Thousands of Dollars) Borrowings under lines of credit Short-term ............................... $ 1,200 $ 2,170 $10,000 Long-term ................................ 51,348 25,776 38,721 $52,548 $27,946 $48,721 Unused lines of credit Short-term ............................... $ 1,800 $ 5,830 $ -- Long-term ................................ 11,652 35,724 16,779 $13,452 $41,554 $16,779 Total lines of credit Prime rate ............................... $ -- $ 1,000 $ -- Less than prime rate ..................... 66,000 68,500 65,500 $66,000 $69,500 $65,500 Short-term bank borrowings Maximum amount outstanding ............... $ 2,295 $10,000 $10,000 Daily average amount outstanding ......... $ 941 $ 3,740 $ 1,392 Weighted daily average interest rate ..... 6.544% 6.343% 6.241% Weighted average interest rate at year-end 6.750% 6.536% 6.206% Range of interest rates .................. 6.025- 5.800- 5.875- 8.500% 8.500% 6.438% (9) POSTEMPLOYMENT BENEFITS Substantially all employees of the Company, except those of Honesdale, are covered by PEI's trusteed, noncontributory, defined benefit pension plan. Pension benefits are based on years of service and average final salary. The Company's funding policy is to contribute an amount necessary to provide for benefits based on service to date, as well as for benefits expected to be earned in the future by current participants. In addition to pension benefits, the Company provides certain health care and life insurance benefits ("other postretirement benefits") for retired employees. All of the Company's employees, except those of Honesdale, may become eligible for those benefits if they reach retirement age while working for the Company. The Company records the cost of retiree health care and life insurance benefits as a liability over the employees' active service periods instead of on a benefits-paid basis. Effective with its January 15, 1997, base rate increase (see Note 3 of these Notes to Consolidated Financial Statements), PG Energy began funding and recovering in rates its accumulated benefit obligations with respect to other postretirement benefits. In addition, the PPUC Order adopted December 19, 1996, specified that any excess or deficiency in other postretirement benefits costs over the amount of such costs included in rates be deferred and included in a future rate filing. As of December 31, 1998, all other postretirement benefits costs relative to 1998 and prior years, including $1.9 million of other postretirement benefits costs incurred during the period January 1, 1993, through January 15, 1997, are being recovered by PG Energy in its base gas rates which the PPUC approved effective October 17, 1998. Under the terms of the agreement regarding the sale of PG Energy's water utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American assumed the accumulated pension benefit obligations and the obligation to provide retiree health and life insurance benefits relating to employees of PG Energy who accepted employment with Pennsylvania-American (the "Transferred Employees"), as well as the obligation to provide retiree health care and life insurance benefits to 45% of PG Energy's retired employees as of that date. In this regard, pension plan assets in an amount equal to the actuarial present value of accumulated plan benefits relative to the Transferred Employees, with interest from February 16, 1996, were transferred to the American pension plan in June, 1996. In addition, other postretirement benefits plan assets in an amount proportional to the actuarial present value of accumulated plan benefits relative to the Transferred Employees and 45% of PG Energy's retired employees as of February 16, 1996, were transferred to trusts established by Pennsylvania-American in 1997. In January, 1998, as part of its cost reduction efforts, the Company offered an Early Retirement Plan (the "1998 ERP") to its 41 active employees who would be at least 59 years of age or older as of March 31, 1998, and had a minimum of five years of service as of February 28, 1998. A total of 27 employees elected to accept this offer and retire as of March 1, 1998, resulting in the recording, as of March 1, 1998, of an additional pension liability of $1.4 million and an additional other postretirement benefits liability of $563,000. These liabilities, which reflect increased costs associated with the 1998 ERP, were offset by assets representing the future rate recovery of such liabilities which was granted by the PPUC in connection with PG Energy's rate increase that became effective October 17, 1998. The assumptions used in determining pension and other postretirement benefit obligations were: 1998 1997 1996 Discount rate 7.00% 7.00% 7.75% Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% Projected increase in future compensation levels 5.00% 5.00% 5.00% The following items were the components of net pension and other postretirement benefits costs, relative to continuing operations, including amounts capitalized:
Other Pension Costs Postretirement Benefits ----------------------------------- ------------------------------------ 1998 1997 1996 1998 1997 1996 ---------- ----------- --------- --------- ---------- -------- (Thousands of Dollars) Present value of benefits earned during the year $ 845 $ 622 $ 799 $ 261 $ 282 $ 253 Interest cost on projected benefit obligations 2,965 2,697 2,731 593 673 506 Expected return on plan assets (3,969) (3,444) (3,066) (43) (13) - Amortization of: Transition obligation (asset) (215) (215) (215) 314 314 314 Prior service cost 268 133 136 450 - - Actuarial (gain) loss - (40) - (162) - - --------- ----------- --------- ---------- ---------- -------- Net benefit cost $ (106) $ (247) $ 385 $ 1,413 $ 1,256 $ 1,073 ========= =========== ========= ========== ========== ========
The following table sets forth the funded status and change in funded status for the pension and other postretirement benefits plans:
Other Postretirement Pension Costs Benefits ---------------------------------------------------- 1998 1997 1998 1997 ----------- ------------ ------------- ------------- (Thousands of Dollars) Change in plan assets: Fair value of plan assets at beginning of year $ 45,106 $ 39,000 $ 580 $ 169 Actual return on plan assets 4,123 7,321 (2) (12) Employer contributions 977 1,080 1,167 1,092 Participant contributions - - 66 30 Benefits paid (2,641) (2,295) (663) (699) ----------- ---------- --------- --------- Fair value of plan assets at end of year 47,565 45,106 1,148 580 ----------- ---------- --------- --------- Change in projected benefit obligation: Projected benefit obligation at beginning of year 42,384 35,567 9,712 6,944 Service cost 845 622 261 283 Interest cost 2,965 2,697 593 673 Participant contributions - - 66 30 Plan amendments 1,111 2,013 2,981 - Actuarial (gain)loss 293 3,780 (3,622) 2,481 Benefits paid (2,641) (2,295) (663) (699) ---------- --------- --------- -------- Projected benefit obligation at end of year 44,957 42,384 9,328 9,712 ---------- --------- --------- -------- Funded status 2,608 2,722 (8,180) (9,132) Unrecognized net transition obligation (asset) (1,508) (1,724) 4,394 4,708 Unrecognized prior service cost 4,981 4,138 2,532 - Unrecognized net actuarial (gain) loss (4,177) (4,315) (2,025) 1,391 ---------- --------- --------- --------- Prepaid (accrued) benefit cost at end of year $ 1,904 $ 821 $ (3,279) $ (3,033) ========== ========= ========= =========
It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 7 1/2% in 1999 and that this rate would decrease gradually to 5-1/2% for the year 2003 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported for health care plans. To illustrate, assuming that the health care cost trend rate changed by one percentage point each year would have the following impact: One Percentage Point Increase Decrease (Thousands of Dollars) Effect on total service and interest cost components $ 36 $ 34 Effect on other postretirement benefits obligation 371 359 (10) CAPITAL EXPENDITURES The Company estimates the cost of its 1999 capital expenditure programs will be of $18.4 million. It is anticipated that such expenditures will be financed with internally generated funds and bank borrowings and by the periodic issuance of stock and long-term debt. (11) 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. PG Energy paid $175,000 to the party performing the remediation in settlement of a claim for PG Energy's share of such remediation costs. 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. (12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: o Long-term debt. The fair value of long-term debt has been estimated based on the quoted market price as of the respective dates for the portion of such debt which is publicly traded and, with respect to the portion of such debt which is not publicly traded, on the estimated borrowing rate as of the respective dates for long-term debt of comparable credit quality with similar terms and maturities. o Preferred stock subject to mandatory redemption. The fair value of preferred stock subject to mandatory redemption has been estimated based on the market value as of the respective dates for preferred stock of comparable credit quality with similar terms and maturities. The carrying amounts and estimated fair values of financial instruments at December 31, 1998 and 1997, were as follows:
1998 1997 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Thousands of Dollars) Long-term debt (including current portion) $ 156,348 $ 166,313 $ 130,776 $ 136,914 Preferred stock subject to mandatory redemption (including current portion) 240 244 720 734
The Company believes that the regulatory treatment of any excess or deficiency of fair value relative to the carrying amounts of these items, if such items were settled at amounts approximating those above, would dictate that these amounts be used to increase or reduce its rates over a prescribed amortization period. Accordingly, any settlement would not result in a material impact on the financial position or the results of operations of the Company. (13) QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ---------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1998 1998 1998 1998 ---------------- ----------------- ------------------ ------------------ (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 65,015 $ 25,143 $ 15,223 $ 53,570 Operating income (loss) 8,651 1,211 (468) 8,634 Income (loss) from continuing operations 5,477 (669) (3,258) 5,430 Net income (loss) 5,477 (669) (3,258) 5,430 Basic earnings (loss) per share of common stock: Continuing operations 1.65 (.20) (.93) 1.52 Discount (premium) on repurchase/redemption of preferred stock - - - (.30) ----------------- -------------- ---------------- ---------------- Earnings (loss) per share of common stock $ 1.65 $ (.20) $ (.93) $ 1.22 ================= ============== ================ ================ QUARTER ENDED ---------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1997 1997 1997 1997 ----------------- ---------------- ------------------ ------------------ (Thousands of Dollars, Except Per Share Amounts) Operating revenues $ 79,939 $ 33,229 $ 16,276 $ 61,123 Operating income (loss) 10,864 2,104 (484) 9,479 Income (loss) from continuing operations 8,421 (622) (3,195) 6,197 Net income (loss) 8,421 (622) (3,195) 6,197 Basic earnings (loss) per share of common stock: Continuing operations 2.54 (.19) (.96) 1.87 Discount (premium) on repurchase/redemption of preferred stock - .24 (.01) - ---------------- ----------------- ----------------- ---------------- Earnings (loss) per share of common stock $ 2.54 $ .05 $ (.97) $ 1.87 ================ ================= ================= ================
Because of the seasonal nature of the Company gas heating business, there are substantial variations in operations reported on a quarterly basis. ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In its Form 8-K dated May 22, 1997, the Company reported a "Change in Registrant's Certifying Accountant" for its fiscal year beginning January 1, 1997. Because the Form 8-K dated May 22, 1997, did not include a reported disagreement on any matter of accounting principles or practices or financial statement disclosure, no disclosure pursuant to Item 304 of Regulation S-K of the Commission's Rules and Regulations is required in Item 9. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The following consolidated financial statements, notes to consolidated financial statements and reports of independent accountants for PG Energy and its subsidiary are presented in Item 8 of this Form 10-K.
Page Report of Independent Accountants on the Consolidated Financial Statements as of December 31, 1998 and 1997............................................. 25 Report of Independent Accountants on the Financial Statements as of December 31, 1996............................................ 26 Consolidated Statements of Income for each of the three years in the period ended December 31, 1998................................................... 27 Consolidated Balance Sheets as of December 31, 1998 and 1997................................ 28 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998............................................. 30 Consolidated Statements of Capitalization as of December 31, 1998 and 1997........................................................................... 31 Consolidated Statements of Common Shareholder's Investment for each of the three years in the period ended December 31, 1998................................................................................ 32 Notes to Consolidated Financial Statements.................................................. 33 2. Financial Statement Schedules The following consolidated financial statement schedule for PG Energy and its subsidiary is filed as a part of this Form 10-K. Schedules not included have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. Schedule Number Page II Valuation and Qualifying Accounts for the three-year period ended December 31, 1998.................................................... 52
3. Exhibits See "Index to Exhibits" located on page 54 for a listing of all exhibits filed herein or incorporated by reference to a previously filed registration statement or report with the Securities and Exchange Commission. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1998. (c) Executive Compensation Plans and Arrangements The following listing includes the Company's executive compensation plans and arrangements in effect as of December 31, 1998: Exhibit Number 10-23 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PG Energy's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-24 First Amendment to Form of Change in Control Agreement, dated as of May 24, 1995, between PEI and certain of its Officers -- filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No. 0-7812. 10-25 Agreement, dated as of March 15, 1991, by and between PEI, PG Energy and Robert L. Jones -- filed as Exhibit No. 10-38 to PG Energy's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-26 Employment Agreement effective September 1, 1995, between PEI and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-7812. 10-27 Supplemental Retirement Agreement, dated as of December 23, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-28 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy Statement, File No. 0-7812. 10-30 Form of Stock Option Agreement, dated as of June 20, 1997, between PEI and certain of its Officers -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-7812. 10-31 Form of Stock Option Agreement, dated as of June 20, 1997, between PEI and certain of its non-employee directors -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-7812. Exhibit Number 10-32 Pennsylvania Enterprises, Inc. Stock Incentive Plan, effective May 14, 1997 -- filed as Exhibit A to PEI's 1997 definitive Proxy Statement, File No. 0-7812. 10-33 Employment Agreement dated as of August 28, 1996, by and among PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-7812. 10-34 Amended Employment Agreement dated as of May 6, 1998, by and among PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-4 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-35 Director Deferred Compensation Plan dated as of April 23, 1997 -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-7812. 10-36 First Amendment to the Director Deferred Compensation Plan, amended and restated effective as of November 19, 1997, filed as Exhibit 10-40 to PEI's Annual Report on Form 10-K for 1997, File No. 0-7812. 10-37 1995 Directors' Stock Compensation Plan, effective January 18, 1995 -- filed as Exhibit A to PEI's 1995 definitive Proxy Statement, File No. 0-7812. 10-38 First Amendment to the 1995 Directors' Stock Compensation Plan, amended and restated effective as of November 19, 1997 -- filed as Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1997, File No. 0-7812. 10-39 Form of Stock Option Grant, dated as of May 6, 1998, between PEI and certain of its Officers -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-40 Form of Stock Option Grant, dated as of May 6, 1998, between PEI and certain of its non-employee directors -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-41 Stock Option Grant, dated as of May 6, 1998, between PEI and Thomas F. Karam -- filed as Exhibit 10-3 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-42 Director Retirement Plan, effective as of January 1, 1999 -- filed as Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1998, File No. 0-7812. (d) Statements Excluded from Annual Report to Shareholders Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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: March 1, 1999 By: /s/ Thomas F. Karam Thomas F. Karam President and Chief Executive Officer (Principal Executive Officer) Date: March 1, 1999 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date /s/ Ronald W. Simms Chairman of the Board of Directors March 1, 1999 Ronald W. Simms /s/ William D. Davis Vice Chairman of the Board of Directors March 1, 1999 William D. Davis /s/ Thomas F. Karam Director, President and Chief Executive Officer March 1, 1999 Thomas F. Karam /s/ Robert J. Keating Director March 1, 1999 Robert J. Keating /s/ John D. McCarthy Director March 1, 1999 John D. McCarthy /s/ John D. McCarthy, Jr. Director March 1, 1999 John D. McCarthy, Jr. /s/ Kenneth M. Pollock Director March 1, 1999 Kenneth M. Pollock /s/ Richard A. Rose, Jr. Director March 1, 1999 Richard A. Rose, Jr. /s/ James A. Ross Director March 1, 1999 James A. Ross
INDEX TO EXHIBITS Exhibit Number (2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession: 2-1 Asset Purchase Agreement dated as of April 26, 1995, among PEI, PG Energy, American Water Works Company, Inc., and Pennsylvania-American Water Company -- filed as Exhibit 2-1 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-3490. (3) Articles of Incorporation and By-Laws: 3-1 Restated Articles of Incorporation, as amended -- filed as Exhibit 3-1 to PG Energy's Annual Report on form 10-K for 1995, File No. 1-3490. 3-2 By-Laws of PG Energy, as amended and restated on January 20, 1999 -- filed herewith. (4) Instruments Defining the Rights of Security Holders, Including Debentures: 4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946, between Scranton-Spring Brook Water Service Company (now PG Energy) and First Trust of New York, National Association, as Successor Trustee to Morgan Guaranty Trust Company of New York -- filed as Exhibit 2(c) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed as Exhibit 2(d) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as Exhibit 2(e) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed as Exhibit 2(f) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed as Exhibit 2(g) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 -- filed as Exhibit 2(h) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 -- filed as Exhibit 2(i) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed as Exhibit 2(j) to PG Energy's Bond Form S-7, Registration No. 2-55419. Exhibit Number 4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 -- filed as Exhibit 2(k) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed as Exhibit 2(1) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed as Exhibit 2(m) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed as Exhibit 2(n) to PG Energy's Bond Form S-7, Registration No. 2-55419. 4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 -- filed as Exhibit 4-16 to PG Energy's Annual Report on Form 10-K for 1982, File No. 1-3490. 4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 -- filed as Exhibit 4-22 to PG Energy's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 -- filed as Exhibit 4-23 to PG Energy's Annual Report on Form 10-K for 1989, File No. 1-3490. 4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991 -- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration No. 33-43382. 4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992 -- filed as Exhibit 4-1 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, File No. 1-3490. 4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992 -- filed as Exhibit 4-20 to PG Energy's Bond Form S-2, Registration No.33-54278. 4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992 -- filed as Exhibit 4-19 to PG Energy's Annual Report on Form 10-K for 1992, File No. 0-7812. 4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993 -- filed as Exhibit 4-20 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994 -- filed as Exhibit 4-21 to PG Energy's Annual Report on Form 10-K for 1994, File No. 1-3490. 4-22 Thirtieth Supplemental Indenture, dated as of December 1, 1995 -- filed as Exhibit 4-22 to PG Energy's Annual Report on Form 10-K for 1995, File No. 1-3490. NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth, Eleventh and Thirteenth Supplemental Indentures merely convey additional properties to the Trustee. Exhibit Number (10) Material Contracts: 10-1 Service Agreement for transportation service under Rate Schedule FT, dated February 1, 1992, by and between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-4 to PG Energy's Annual Report on Form 10-K for 1991, File No. 1-3490. 10-2 Service Agreement for storage service under Rate Schedule SS-2, dated April 1, 1990, between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-3 Service Agreement for sales service under Rate Schedule FS, dated August 1, 1991, between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-6 to PG Energy's Annual Report on Form 10-K for 1991, File No. 1-3490. 10-4 Service Agreement for transportation service under Rate Schedule FT, dated August 1, 1991, between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-10 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-5 Service Agreement for storage service under Rate Schedule LSS, dated October 1, 1993, by and between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-7 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-6 Service Agreement for storage service under Rate Schedule GSS, dated October 1, 1993, by and between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-8 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-7 Service Agreement for transportation service under Rate Schedule FT, dated April 1, 1995, by and between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-1 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, File No. 1-3490. 10-8 Service Agreement for transportation service under Rate Schedule FTPO, dated July 10, 1997, effective November 1, 1997, by and between PG Energy and Transcontinental Gas Pipe Line Corporation -- filed as Exhibit 10-10 to PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490. 10-9 Service Agreement for transportation service under Rate Schedule FTS, dated November 1, 1993, by and between PG Energy and Columbia Gas Transmission Corporation -- filed as Exhibit 10-9 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-10 Service Agreement for transportation service under Rate Schedule SST, dated November 1, 1993, by and between PG Energy and Columbia Gas Transmission Corporation -- filed as Exhibit 10-10 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. Exhibit Number 10-11 Service Agreement for storage service under Rate Schedule FSS, dated November 1, 1993, by and between PG Energy and Columbia Gas Transmission Corporation -- filed as Exhibit 10-11 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-12 Service Agreement for transportation service under Rate Schedule FTS-1, dated November 1, 1993, by and between PG Energy and Columbia Gulf Transmission Company -- filed as Exhibit 10-12 to PG Energy's Annual Report on Form 10-K for 1993, File No. 1-3490. 10-13 Service Agreement (Contract No. 946) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-14 Service Agreement (Service Package No. 171) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-2 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-15 Service Agreement (Service Package No. 187) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-3 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-16 Service Agreement (Service Package No. 190) for transportation service under Rate Schedule FT-A, dated September 1, 1993, by and between PG Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-4 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-17 Service Agreement (Contract No. 2289) for storage service under Rate Schedule FS, dated September 1, 1993, by and between PG Energy and Tennessee Gas Pipeline Company -- filed as Exhibit 10-5 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, File No. 1-3490. 10-18 Service Agreement for storage service, dated April 15, 1997, effective November 1, 1997, by and between PG Energy and New York State Electric & Gas Corporation -- filed as Exhibit 10-22 to PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490. 10-19 Service Agreement for transportation service under Rate Schedule FT, dated April 30, 1997, effective November 1, 1997, by and between PG Energy and CNG Transmission Corporation -- filed as Exhibit 10-23 to PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490. 10-20 Bond Purchase Agreement, dated September 1, 1989, relating to PG Energy's First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds 9.34% Series due 2019 among Allstate Life Insurance Company, Allstate Life Insurance Company of New York and PG Energy -- filed as Exhibit 10-33 to PG Energy's Annual Report on Form 10-K for 1989, File No. 1-3490. Exhibit Number 10-21 Term Loan Agreement dated August 14, 1997, among PG Energy, the Banks parties thereto and PNC Bank, National Association, in its capacity as Agent for the Banks -- filed as Exhibit 10-25 to PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490. 10-22 6.92% Senior Notes Purchase Agreement, dated September 30, 1997, between PG Energy and the Purchasers -- filed as Exhibit 10-26 to PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490. 10-23 Form of Change in Control Agreement between PEI and certain of its Officers -- filed as Exhibit 10-34 to PG Energy's Annual Report on Form 10-K for 1989, File No. 1-3490. 10-24 First Amendment to Form of Change in Control Agreement, dated as of May 24, 1995, between PEI and certain of its Officers -- filed as Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No. 0-7812. 10-25 Agreement, dated as of March 15, 1991, by and between PEI, PG Energy and Robert L. Jones -- filed as Exhibit 10-38 to PG Energy's Annual Report on Form 10-K for 1990, File No. 1-3490. 10-26 Employment Agreement effective September 1, 1995, between PEI and Dean T. Casaday -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-7812. 10-27 Supplemental Retirement Agreement, dated as of December 23, 1991, between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's Common Stock Form S-2, Registration No. 33-43382. 10-28 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812. 10-29 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy Statement, File No. 0-7812. 10-30 Form of Stock Option Agreement, dated as of June 20, 1997, between PEI and certain of its Officers -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-7812. 10-31 Form of Stock Option Agreement, dated as of June 20, 1997, between PEI and certain of its non-employee directors -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-7812. 10-32 Pennsylvania Enterprises, Inc. Stock Incentive Plan, effective May 14, 1997 -- filed as Exhibit A to PEI's 1997 definitive Proxy Statement, File No. 0-7812. Exhibit Number 10-33 Employment Agreement dated as of August 28, 1996, by and among PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, File No. 0-7812. 10-34 Amended Employment Agreement dated as of May 6, 1998, by and among PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-4 to PEI's Quarterly report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-35 Director Deferred Compensation Plan dated as of April 23, 1997 -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-7812. 10-36 First Amendment to the Director Deferred Compensation Plan, amended and restated effective as of November 19, 1997 -- filed as Exhibit 10-40 to PEI's Annual Report on Form 10-K for 1997, File No. 0-7812. 10-37 1995 Directors' Stock Compensation Plan, effective January 18, 1995 -- filed as Exhibit A to PEI's 1995 definitive Proxy Statement, File No. 0-7812. 10-38 First Amendment to the 1995 Directors' Stock Compensation Plan, amended and restated effective as of November 19, 1997 -- filed as Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1997, File No. 0-7812. 10-39 Form of Stock Option Grant, dated as of May 6, 1998, between PEI and certain of its Officers -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-40 Form of Stock Option Grant, dated as of May 6, 1998, between PEI and certain of its non-employee directors -- filed as Exhibit 10-2 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-41 Stock Option Grant, dated as of May 6, 1998, between PEI and Thomas F. Karam -- filed as Exhibit 10-3 to PEI's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812. 10-42 Director Retirement Plan, effective as of January 1, 1999 -- filed as Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1998, File No. 0-7812. (21) Subsidiaries of the Registrant: 21-1 Subsidiaries of the Registrant -- filed herewith. (27) Financial Data Schedule: 27-1 Financial Data Schedule -- filed herewith.
PG ENERGY INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998 Balance at Charged Charged Balance beginning to to other at end Description of year income accounts Deductions of year ----------- -------- --------- ---------- --------- (Thousands of Dollars) Deducted from the asset to which it applies: Reserve for uncollectible accounts- Year ended December 31, 1998 ............................. $1,168 $1,947 $ -- $2,035(a) $1,080 Year ended December 31, 1997 ............................. $1,140 $2,112 $ 4 $2,088(a) $1,168 Year ended December 31, 1996 ............................. $ 781 $2,015 $ -- $1,656(a) $1,140 Shown as operating reserves on the consolidated balance sheets: Insurance - Year ended December 31, 1998 ........................... $2,825 $1,050 $ -- $1,039(b) $2,836 Year ended December 31, 1997 ........................... $3,086 $ 711 $ -- $ 972(b) $2,825 Year ended December 31, 1996 ........................... $3,709 $1,042 $ -- $1,665(b) $3,086
NOTES: (a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries. (b) Deductions are principally payments made in settlement of claims. EX-3.(II) 2 PG ENERGY BYLAWS PG ENERGY INC. B Y L A W S ------------ ARTICLE I STOCKHOLDERS Section 1. Place of Holding Meetings. Meetings of stockholders shall be held within the State of Pennsylvania, and, unless otherwise determined by the Board of Directors, all meetings of the stockholders shall be held at the office of the Company. Section 2. Voting. (a) Voting Rights of Stockholders. - Unless otherwise provided in the articles, every stockholder of the Company shall be entitled to one vote for every share standing in the name of the stockholder on the books of the Company; provided, however, that in all elections for directors such stockholders may cast the whole number of his votes for one candidate or distribute them upon two or more candidates as he may prefer. (b) Voting and Other Action by Proxy. (1) Every stockholder entitled to vote at a meeting of stockholders may authorize another person to act for the stockholder by proxy. (2) The presence of, or vote or other action at a meeting of stockholders by a proxy of a stockholder shall constitute the presence of, or vote or action by the stockholder. (3) Where two or more proxies of a stockholder are present, the Company shall, unless otherwise expressly provided in the proxy, accept, as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (c) Execution and Filing. - Every proxy shall be executed in writing by the stockholder or by the duly authorized attorney-in-fact of stockholder and filed with the Secretary of the Company. A telegram, telex, cablegram, datagram or similar transmission from a stockholder or attorney-in-fact, or a photographic, facsimile or similar reproduction of a writing executed by a stockholder or attorney-in-fact: (1) may be treated as properly executed for purposes of this subsection; and (2) shall be so treated if it sets forth a confidential and unique identification number or other mark furnished by the Company to the stockholder for the purposes of a particular meeting or transaction. (d) Revocation. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the Secretary of the Company. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the Secretary of the Company. (e) Expenses. The Company shall pay the reasonable expenses of solicitation of votes, proxies or consents of stockholders by or on behalf of the Board of Directors or its nominees for election to the Board, including solicitation by professional proxy solicitors and otherwise. (f) Voting by Fiduciaries and Pledgees. Shares of the Company standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A stockholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledgee, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. (g) Voting by Joint Holders of Shares. Where shares of the Company are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose of determining a quorum and the Company shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (3) However, if there has been filed with the Secretary of the Company a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. (h) Voting by Corporations. Any corporation that is a stockholder of the Company may vote at meetings of stockholders of this Company by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the Board of Directors of the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the Secretary of this Company, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. Section 3. Quorum. Any number of stockholders together holding at least a majority of the stock issued and outstanding of the class or classes entitled to vote, who shall be present in person or represented by proxy at any meeting (other than an adjourned meeting as specified in Article I, Section 8, herein) duly called, shall constitute a quorum for the transaction of business, except as may be otherwise provided by law. The stockholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Section 4. Adjournment of Meetings. If less than a quorum shall be in attendance at the time for which the meeting shall have been called, the meeting may be adjourned from time to time by a majority vote of the stockholders present or represented, without any notice other than an announcement at the meeting, until a quorum shall attend. Any meeting at which a quorum is present may also be adjourned, in like manner, for such time, or upon such call, as may be determined by vote. Section 5. Annual Election of Directors. The Board of Directors may fix and designate the date and time of the Annual Meeting of Stockholders for the election of directors and the transaction of other business. If no such date and time is fixed and designated by the Board, the meeting for any calendar year shall be held on the second Wednesday in May at an hour to be named in the notice. At each Annual Meeting, the stockholders entitled to vote shall, as provided in Section 2 of this Article, by ballot, elect a Board of Directors, and they may transact such other corporate business as shall come before the meeting. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of stockholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. Section 6: Special Meetings. How Called. Special meetings of the stockholders for any purpose or purposes, may be called at any time by the Board, upon written request delivered to the Secretary of the Company. In addition, an "interested stockholder" (as defined in section 2553 of the Pennsylvania Business Corporation Law as it may from time to time be amended) may, upon written request delivered to the Secretary of the Company, call a special meeting for the purpose of approving a business combination under either subsection (3) or (4) of section 2555. Any request for a special meeting of stockholders shall state the purpose or purposes of the proposed meeting. Upon receipt of any such request, it shall be the duty of the Secretary to give notice, in a manner consistent with these Bylaws, of a special meeting of the stockholders to be held at such time as the Secretary may fix, which time may not be, if the meeting is called pursuant to a statutory right, more than sixty (60) days after receipt of the request. If the Secretary shall neglect or refuse to fix the date of the meeting and give notice thereof, the person or persons calling the meeting may do so. Business transacted at any special meeting shall be confined to the business stated in the notice. Section 7. Manner of Voting at Stockholders' Meetings. At all meetings of stockholders, all questions, except the question of an amendment to the Bylaws, and the election of directors, and all such other questions, the manner of deciding which is especially regulated by statute, shall be determined by a majority vote of the stockholders entitled to vote present in person or represented by proxy; provided, however, that any qualified voter may demand a stock vote, and in that case, such stock vote shall immediately be taken. Section 8. Notice of Stockholders' Meetings. Written notice of every meeting of the stockholders stating the place, the date and hour thereof and the matters to be acted on at such meeting, shall be given in a manner consistent with the applicable provisions of section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any successor act or regulation (the "Exchange Act"), by, or at the direction of, the Secretary of the Company or, in the absence of the Secretary of the Company any Assistant Secretary of the Company, at least twenty (20) days prior to the day named for a meeting, to each stockholder entitled to vote thereat on the date fixed as a record date in accordance with these Bylaws or, if no record date be fixed, then of record at the close of business on the 50th day next preceding the day of the meeting, at such address as appears on the transfer books of the Company. Any notice of any meeting of stockholders shall state that, for purposes of any meeting that has been previously adjourned for one or more periods aggregating at least fifteen (15) days because of an absence of a quorum, the stockholders entitled to vote who attend such a meeting, although less than a quorum pursuant to Article 1, Section 3 of these Bylaws, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the original notice of the meeting that was so adjourned. Notice or other communications need not be sent to any stockholder with whom the Company has been unable to communicate for more than twenty-four (24) consecutive months because communications to the stockholder are returned unclaimed or the stockholder has otherwise failed to provide the Company with a current address. Whenever the stockholder provides the Company with a current address, the Company shall commence sending notices and other communications to the stockholder in the same manner as to the other stockholders. Section 9. Unanimous Written Consent. Any action required or permitted to be taken at a meeting of the stockholders or of a class of stockholders may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto in writing, setting forth the action so taken, shall be signed by all of the stockholders who would be entitled to vote at a meeting for such purpose and filed with the Secretary. Except as otherwise provided in Article V, Section 5 of these Bylaws, the record date for determining stockholders entitled to express consent or dissent to action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be at the close of business on the day on which the first written consent or dissent is filed with the Secretary. If prior action by the Board of Directors is necessary, the record date for determining such stockholders shall be at the close of business on the day on which the Board adopts the resolution relating to such action. ARTICLE II DIRECTORS Section 1. First Meeting. The newly elected directors may hold their first meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the Annual Meeting of Stockholders, or the time and place of such meeting may be fixed by consent in writing of all the directors. Section 2. Election of Officers. At such meeting the directors shall elect a President, one or more Vice Presidents, a Treasurer and a Secretary, who need not be directors. The directors may also elect such other officers as provided in Article III, Section 1. of these Bylaws. Such officers shall hold office until the next annual election of officers and until their successors are elected and qualify, unless removed by the Board of Directors as provided in Section 8 of Article III of these Bylaws. Section 3. Regular Meetings. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Section 4. Special Meetings. How called. Notice. Special meetings of the Board may be called by either the President, the Secretary, the Chairman of the Executive Committee or by the Secretary pursuant to the written request of any two directors, upon forty-eight (48) hours' notice afforded by either telephone, telegraph, facsimile or personal notice, or upon three (3) days' notice afforded by mail. Section 4A. Chairman of the Board of Directors. The Chairman of the Board of Directors shall be a member of the Board of Directors. He shall preside as Chairman at all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as are specified in these Bylaws or as are usually performed by a Chairman of the Board of Directors, or as from time to time shall be assigned to him by the Board of Directors. In the absence of, or at the request of, the Chairman of the Board of Directors, the Board of Directors is authorized to designate a Chairman for the Annual Meeting or special meetings. Section 5. Number and Quorum. The number of directors shall be not less than three (3) nor more than fifteen (15). Within such limits, the number of directors may be increased or decreased by the Board of Directors from time to time without a vote of the stockholders. The directors shall be elected by the stockholders, at the Annual Meeting of stockholders, in each year, to hold office for the term of one year and until their successors are chosen. A majority of the directors in office shall constitute a quorum for the transaction of business. Directors need not be stockholders. Section 6. Place of Meeting. The directors may hold their meetings and have one or more offices, and keep the books of the Company, outside the State of Pennsylvania, at any office or offices of the Company, or at any other place, as they may from time to time by resolution determine. Section 7. Powers of Directors. The Board of Directors shall have all the necessary powers for the management of the business of the Company, and subject to the restrictions imposed by law, or by these Bylaws, may exercise all the powers of the Corporation. Section 8. Vacancies. Vacancies occurring in the membership of the Board of Directors, from whatever cause arising, shall be filled by a majority vote of the remaining directors, and in case of any increase in the number of directors, the additional directors authorized by such increase shall be elected by a majority vote of the directors in office, although less than a quorum. Section 9. Removal of Directors. Any one or more of the directors may be removed, either with or without cause, at any time, by a majority vote of the stockholders entitled to vote at any regular or special meeting. The successor or successors of any director or directors so removed shall be elected by the remaining directors. Section 10. Compensation of Directors. Directors and members of any committee of the Board of Directors, except full-time officers and employees of the Company, shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending such meetings. The compensation of directors may be paid on such basis as is determined in the resolution of the Board of Directors. Section 11. Executive Committee and Other Committees. How Appointed. The directors may by a resolution adopted by a majority of the directors in office appoint from their number an Executive Committee of three or more members and other Committees of one or more members. The Committees may make their own rules of procedure and shall meet where and as provided by such rules, or by a resolution of the directors. A majority shall constitute a quorum, but in every case the affirmative vote of a majority of all the members of the committee shall be necessary to the adoption of any resolution. Section 12. Executive Committee. Powers. During the intervals between the meetings of the directors, the Executive Committee shall have and may exercise all the powers of the directors in the management of the business and affairs of the Company, including power to authorize the seal of the Company to be affixed to all papers which may require it, in such manner as such committee shall deem best for the interests of the Company, in all cases in which specific directions shall not have been given by the directors. Neither the Executive Committee or any other committee of the Board of Directors created by these Bylaws nor the Board of Directors shall have any power or authority as to the following: (i) the submission to stockholders of any action requiring approval of stockholders under the Pennsylvania Business Corporation Law. (ii) the creation or filling of vacancies in the Board of Directors. (iii) the adoption, amendment or repeal of the Bylaws. (iv) the amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board. (v) action on matters committed by the Bylaws or resolution of the Board of Directors to another committee of the Board. Section 13. Meeting by Telephonic Conference. Any meeting of the Board of Directors or of a committee thereof, including the Executive Committee, may be held in which any one or more or all of the directors or participants may participate as if present in person, by means of conference telephone or similar communication equipment in a manner by which all persons participating in the meeting can hear each other. Section 14. Substitute Committee Members. The Board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. Section 15. Personal Liability of Directors. To the fullest extent that the laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter amended, permit elimination or limitation of the liability of directors, no director of the Company shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a director. Further, any amendment or repeal of this Section 15 which has the effect of increasing director liability shall operate prospectively only, and shall not affect any action taken, or any failure to act, prior to its adoption. Section 16. Action by Consent of Directors. Any action required or permitted to be taken at a meeting of the Board or of a committee of the Board may be taken without a meeting if, prior or subsequent to the action, a consent or consents in writing setting forth the action so taken shall be signed by all of the directors in office or the members of the committee, as the case may be, and filed with the Secretary of the Company. ARTICLE III OFFICERS Section 1. Required Officers of the Company. The officers of the Company shall be a President, one or more Vice Presidents, a Secretary and a Treasurer, one or more Assistant Secretaries, and one or more Assistant Treasurers. One person may hold any two offices except the office of President and Vice President. The Board of Directors may appoint such other officers as from time to time they may determine. All officers of the Company, as between themselves and the Company, shall have such authority and perform such duties in the management of the Company as may be provided by or pursuant to the Board of Directors, or as may be determined by or pursuant to these Bylaws. Section 2. President. The President shall be the Chief Executive Officer of the Company and shall have general management and control of the business and affairs of the Company, subject to the direction of the Board of Directors, and he shall generally do and perform all acts incident to the office of the President, or which are authorized or required by law. The President shall have power to call special meetings of the stockholders or directors for any purpose or purposes, and when authorized by the Board of Directors or these Bylaws shall make and sign contracts and agreements in the name of and on behalf of the Company. Section 3. Vice Presidents. Each Vice President shall have such powers and shall perform such duties as may be assigned to him by the President or the Board of Directors. In case of the absence or disability of the President, the duties of the office of the President shall be performed by the Vice Presidents in the order of priority established by the Board, and unless and until the Board of Directors shall otherwise direct. Section 4. Secretary. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and directors, and all other notices required by law or by these Bylaws, and in case of his absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the directors or stockholders upon whose request the meeting is called, as provided in these Bylaws. He shall record all the proceedings of the meetings of the stockholders and of the directors in a book to be kept for that purpose, and shall perform such other duties as may be assigned to him by the directors or the President. He shall have custody of the seal of the Company and shall affix the same to all instruments requiring it, when authorized by the directors or the President, and attest the same. Section 5. Assistant Secretary. The Board of Directors may appoint an Assistant Secretary or more than one Assistant Secretary. Each Assistant Secretary shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 6. Treasurer. The Treasurer shall have the custody of all funds, securities, evidences of indebtedness and other valuable documents of the Company; he shall receive and give or cause to be given receipts and acquittances for moneys paid in on account of the Company and shall pay out of the fund on hand all just debts of the Company, of whatever nature upon maturity of the same; he shall enter or cause to be entered in books of the Company to be kept for that purpose full and accurate accounts of all moneys received and paid out on account of the Company, and he shall perform all the other duties incident to the office of the Treasurer. If the Board of Directors so determine, he shall give the Company a bond for the faithful discharge of his duties in such amount and with such security as the Board shall prescribe. Section 7. Assistant Treasurer. The Board of Directors may appoint an Assistant Treasurer or more than one Assistant Treasurer. Each Assistant Treasurer shall have such powers and shall perform such duties as may be assigned to him by the Board of Directors or the President. Section 8. Removal of Officers and Agents. Any officer or agent of the Company may be removed by the Board of Directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. ARTICLE IV CAPITAL STOCK Section 1. Issue of Certificates of Stock. Certificates of the shares of the capital stock of the Company shall be in such form as shall be approved by the Board of Directors. Each stockholder shall be entitled to a certificate of his stock under the seal of the Company, executed, by facsimile or otherwise, by or on behalf of the Company, by the President or a Vice President, and also by the Treasurer or an Assistant Treasurer. In case any officer who has signed or whose facsimile signature has been placed upon any share certificate shall have ceased to be such officer, because of death, resignation or otherwise, before the certificate is issued, it may be issued by the Company with the same effect as if the officer had not ceased to be such at the time of issue. No stock certificate shall be valid unless countersigned and registered in such manner, if any, as the directors shall by resolution prescribe. Section 2. Transfer of Shares. The shares of stock of the Company shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Company by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the directors may designate, by whom they shall be cancelled, and new certificates shall thereupon be issued. A record shall be made of each transfer, and a duplicate thereof mailed to the Pennsylvania office of the Company. Section 3. Dividends. The directors may declare dividends from the surplus or net profits arising from the business of the Company as and when they deem expedient. Before declaring any dividend, there may be reserved out of the accumulated profits such sum or sums as the directors from time to time, in their discretion, think proper for working capital or as a reserve fund to meet contingencies or for equalizing dividends, or for such other purposes as the directors shall think conducive to the interest of the Company. Section 4. Lost Certificates. If the owner of a share certificate claims that it has been lost, destroyed, or wrongfully taken, the Company shall issue a new certificate in place of the original certificate if the owner so requests before the Company has notice that the certificate has been acquired by a bona fide purchaser and if the owner has filed with the Company an indemnity bond and an affidavit of facts satisfactory to the Board or its designated agent, and has complied with such other reasonable requirements, if any, as the Board may deem appropriate. Section 5. Rules as to Issue of Certificates. The Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Company. Each and every person accepting from the Company certificates of stock therein shall furnish the Corporation a written statement of his or her residence or post office address. Section 6. Holder of Record to be deemed Holder in Fact. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by law or by Section 7 of this Article. Section 7. Shares of Stock Held for Account of Another. The Board of Directors is authorized to adopt a procedure whereby a stockholder of the Corporation may certify in writing that all or part of the shares of stock registered in the name of the stockholder are held for account of a specified person or persons. The resolution of the Board of Directors that adopts this certification procedure may include the following: (1) The class of stockholder who may qualify. (2) The purpose or purposes for which the certification may be made. (3) The form of certification and the information that it should contain. (4) The time after the record date within which the certification must be received by the Corporation, if the certification concerns a record date. (5) Any other provisions regarding the certification procedure that the Board of Directors deems necessary or desirable. On receipt by the Corporation of a certification that complies with the procedure adopted by the Board of Directors, the person specified in the certification is deemed, for the purpose set forth in the certification, to be the holder of record of the shares of stock indicated in the certification in place of the stockholder making the certification. ARTICLE V MISCELLANEOUS PROVISIONS Section 1. Fiscal Year. The fiscal year of the Company shall end on the 31st day of December of each year. Section 2. Checks, etc. All checks, drafts or orders for the payment of money shall be signed by such officer(s) or agent(s) as the directors may designate. Section 3. Notice and Waiver of Notice. Except as provided in Article 1 Section 8 of these Bylaws, whenever, under the provisions of the Pennsylvania Business Corporation Law or of the Articles or of these Bylaws or otherwise, written notice is required to be given to any person, it may be given to such person either personally or by sending a copy thereof by first class or express mail, postage prepaid, telegram (with messenger service specified), telex, TWX (with answerback received), courier service (with charges prepaid) or facsimile transmission to his or her address (or to his or her telex, TWX, or facsimile number) appearing on the books of the Company or, in the case of directors, supplied by the director to the Company for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person. A notice given by telex or TWX shall be deemed to have been given when dispatched. If mailed at least twenty (20) days prior to the meeting or corporate action to be taken, notice may be sent by any class of postpaid mail (including bulk mail). Whenever any notice is required to be given by the Pennsylvania Business Corporation Law or by the Articles or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted nor the purpose of a meeting need be specified in the waiver of notice of the meeting. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting, except where any person attends a meeting for the express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened, and the person so objects at the beginning of the meeting. Section 4. Inspection of Books. Every stockholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register books and records of account, and records of the proceedings of the incorporators, stockholders and directors and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a stockholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand shall be directed to the Company at its registered office in the Commonwealth of Pennsylvania or at its principal place of business wherever situated. Section 5. Record date. The Board of Directors may fix a time prior to the date of any meeting of stockholders as a record date for the determination of the stockholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of stockholders. Only stockholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Company after any record date fixed as provided in this subsection. The Board of Directors may similarly fix a record date for the determination of stockholders of record for any other purpose. When a determination of stockholders for a record date has been made as provided in this Section for the purpose of a meeting, such determination shall apply to any adjournments thereof unless the Board fixes a new record date for the adjourned meeting. ARTICLE VI AMENDMENT AND REPEAL Section 1. Amendment and Repeal of Bylaws. The stockholders by the affirmative vote of the holders of a majority of the stock issued and outstanding of the class or classes entitled to vote, may at any meeting, provided the substance of the proposed amendment shall have been stated in the notice of the meeting, amend, alter or repeal any of these Bylaws. Section 2. Amendments By Directors. Except as prohibited by law, the directors, by the affirmative vote of a majority of the Board, may at any meeting amend, alter or repeal these Bylaws, in whole or in part. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Except as prohibited by law, every director and officer of the Company shall be entitled as of right to be indemnified by the Company against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the Company or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Company or by reason of the fact that such person is or was serving at the request of the Company as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as "Action"). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the Company prior to final disposition of such Action, subject to such conditions as may be prescribed by law. Persons who are not directors or officers of the Company may be similarly indemnified in respect of service to the Company or to another such entity at the request of the Company to the extent the Board of Directors at any time designates such person as entitled to the benefits of this Section. As used herein, "expense" shall include fees and expenses of counsel selected by such person; and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. Section 2. Right of Claimant to Bring Suit. If a claim for indemnification by any person eligible to be indemnified under Section 1 is not paid in full by the Company within 30 days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such suit that the conduct of the claimant was such that under Pennsylvania law the Company would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel and its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its stockholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the suit or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. Section 3. Insurance and Funding. The Company may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any Action, whether or not the Company would have the power to indemnify such persons against such liability or expense by law or under the provisions of this Article VII. The Company may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Section 4. Non-exclusivity; Nature and Extent of Rights. The right of indemnification provided for herein (1) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, by-law or charter provision, vote of stockholders or directors or otherwise, (2) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (3) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (4) shall be applicable to Actions commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the effective date DATED: January 20, 1999 EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21-1 PG ENERGY INC. AND SUBSIDIARY Subsidiaries of the Registrant The following are subsidiaries of the Registrant. Their voting securities are owned 100% by the Registrant and they are incorporated in Pennsylvania. Penn Gas Development Co. (1) Honesdale Gas Company (2) (1) A subsidiary of PG Energy Inc. accounted for on the equity method which has not been consolidated since it is insignificant. (2) A subsidiary of PG Energy Inc. acquired on February 14, 1997, and included in the consolidation of PG Energy Inc. EX-27 4 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. YEAR DEC-31-1998 DEC-31-1998 PER-BOOK 280,950,000 3,981,000 65,182,000 40,684,000 0 390,797,000 34,944,000 44,546,000 47,148,000 126,638,000 240,000 4,831,000 95,000,000 1,200,000 0 0 68,248,000 0 0 0 94,640,000 390,797,000 158,951,000 4,237,000 136,686,000 140,923,000 18,028,000 651,000 18,679,000 10,508,000 8,171,000 1,191,000 6,980,000 416,000 4,837,000 19,764,000 1.74 1.74
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