-----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, RFxFMimnYuuzY7yrGaSPDp9N2FxYRK9ucGcTNUG91uFW/RwNnzNDzBdXcKCgJkvX wdO78UqMn22dzy9wQNAdSw== 0000077242-96-000024.txt : 19960812 0000077242-96-000024.hdr.sgml : 19960812 ACCESSION NUMBER: 0000077242-96-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PG ENERGY INC CENTRAL INDEX KEY: 0000077242 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 240717235 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03490 FILM NUMBER: 96606487 BUSINESS ADDRESS: STREET 1: 39 PUBLIC SQ STREET 2: WILKES BARRE CTR CITY: WILKES-BARRE STATE: PA ZIP: 18711-0601 BUSINESS PHONE: 7178298843 FORMER COMPANY: FORMER CONFORMED NAME: PENNSYLVANIA GAS & WATER CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: SCRANTON SPRING BROOK WATER SERVICE CO DATE OF NAME CHANGE: 19660908 10-Q 1 PG ENERGY INC. TABLE OF CONTENTS PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements Statements of Income for the three and six months ended June 30, 1996 and 1995 . . . . . . . . . . . 2 Balance Sheets as of June 30, 1996, and December 31, 1995 . . . . . . . . . . . . . . . . . . 3 Statements of Cash Flows for the six months ended June 30, 1996 and 1995 . . . . . . . . . . . 5 Notes to Financial Statements . . . . . . . . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 10 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . 19 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 19 -1- PART I. FINANCIAL INFORMATION PG ENERGY INC. Statements of Income
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 (Thousands of Dollars) OPERATING REVENUES $ 25,457 $ 25,184 $ 94,872 $ 93,421 Cost of gas 12,575 12,874 52,553 54,281 OPERATING MARGIN 12,882 12,310 42,319 39,140 OTHER OPERATING EXPENSES: Operation 6,226 5,457 12,783 11,281 Maintenance 1,492 1,312 2,706 2,280 Depreciation 1,970 1,784 3,869 3,576 Income taxes (514) (766) 5,413 4,101 Taxes other than income taxes 2,905 2,656 6,712 6,535 Total other operating expenses 12,079 10,443 31,483 27,773 OPERATING INCOME 803 1,867 10,836 11,367 OTHER INCOME (DEDUCTIONS), NET 169 (62) 319 172 INCOME BEFORE INTEREST CHARGES 972 1,805 11,155 11,539 INTEREST CHARGES: Interest on long-term debt 1,243 2,269 3,015 4,659 Other interest 153 438 488 687 Allowance for borrowed funds used during construction (50) (13) (96) (22) Total interest charges 1,346 2,694 3,407 5,324 INCOME (LOSS) FROM CONTINUING OPERATIONS (374) (889) 7,748 6,215 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS (Note 2) (21) - (386) (3,704) NET INCOME (LOSS) (395) (889) 7,362 2,511 DIVIDENDS ON PREFERRED STOCK 383 692 1,020 1,383 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (778) $ (1,581) $ 6,342 $ 1,128 COMMON STOCK Earnings (loss) per share of common stock: Continuing operations $ (.23) $ (.28) $ 1.73 $ .87 Discontinued operations (.01) - (.10) (.67) Net income (loss) before premium on repurchase/redemption of preferred stock (.24) (.28) 1.63 .20 Premium on repurchase/redemption of preferred stock (.39) - (.33) - Total $ (.63) $ (.28) $ 1.30 $ .20 Weighted average shares outstanding 3,314,155 5,576,066 3,891,143 5,548,741 Cash dividends per share (Note 3) $ - $ .7075 $ 10.217 $ 1.4125 The accompanying notes are an integral part of the financial statements.
-2- PG ENERGY INC. BALANCE SHEETS [CAPTION] June 30, December 31, 1996 1995 (Thousands of Dollars) ASSETS [S] [C] [C] UTILITY PLANT: At original cost $ 302,356 $ 295,895 Accumulated depreciation (79,011) (76,882) 223,345 219,013 OTHER PROPERTY AND INVESTMENTS 5,186 5,089 CURRENT ASSETS: Cash and cash equivalents 1,409 328 Accounts receivable - Customers 12,324 18,189 Others 575 815 Reserve for uncollectible accounts (1,096) (781) Accrued utility revenues 1,599 10,319 Materials and supplies, at average cost 2,862 2,609 Gas held by suppliers, at average cost 12,110 15,140 Natural gas transition costs collectible 2,295 4,612 Deferred cost of gas and supplier refunds, net 10,615 - Prepaid expenses and other 2,918 3,281 45,611 54,512 DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 29,778 30,015 Other 3,612 3,013 Unamortized debt expense 1,240 1,340 34,630 34,368 NET ASSETS OF DISCONTINUED OPERATIONS (Note 2) - 204,250 TOTAL ASSETS $ 308,772 $ 517,232 The accompanying notes are an integral part of the financial statements. -3- PG ENERGY INC. BALANCE SHEETS [CAPTION] June 30, December 31, 1996 1995 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES [S] [C] [C] CAPITALIZATION: (Note 4) Common shareholder's investment $ 94,973 $ 208,356 Preferred stock - Not subject to mandatory redemption, net 19,222 33,615 Subject to mandatory redemption 729 1,680 Long-term debt 55,500 55,000 170,424 298,651 CURRENT LIABILITIES: Current portion of long-term debt 11,000 115,801 Preferred stock subject to repurchase or mandatory redemption 456 80 Note payable 5,000 10,000 Accounts payable - Suppliers 14,590 17,781 Affiliates, net 907 826 Deferred cost of gas and supplier refunds, net - 434 Accrued general business and realty taxes 617 1,542 Accrued income taxes 40,999 516 Accrued interest 680 2,062 Accrued natural gas transition costs 1,770 2,278 Other 3,642 3,162 79,661 154,482 DEFERRED CREDITS: Deferred income taxes 45,972 48,848 Accrued natural gas transition costs 207 1,144 Unamortized investment tax credits 4,853 4,938 Operating reserves 3,283 3,709 Other 4,372 5,460 58,687 64,099 COMMITMENTS AND CONTINGENCIES (Note 6) TOTAL CAPITALIZATION AND LIABILITIES $ 308,772 $ 517,232 The accompanying notes are an integral part of the financial statements. -4- PG ENERGY INC. STATEMENTS OF CASH FLOWS [CAPTION] Six Months Ended June 30, 1996 1995 (Thousands of Dollars) [S] [C] [C] CASH FLOW FROM OPERATING ACTIVITIES: Income from continuing operations $ 7,748 $ 6,215 Effects of noncash charges to income - Depreciation 3,908 3,596 Deferred income taxes, net 166 (127) Provisions for self insurance 591 526 Other, net 772 1,219 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues 15,140 13,733 Gas held by suppliers 3,030 7,187 Accounts payable (2,468) (2,691) Deferred cost of gas and supplier refunds, net (9,680) 14,019 Other current assets and liabilities, net 2,467 (8,847) Other operating items, net (3,754) 438 Net cash provided by continuing operations 17,920 35,268 Net cash provided (used) by discontinued operations (24,175) 3,764 Net cash provided (used) by operating activities (6,255) 39,032 CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (8,823) (8,304) Proceeds from the sale of discontinued operations 261,752 - Other, net 69 (246) Net cash provided (used) by investing activities 252,998 (8,550) CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock 339 5,046 Repurchase of common stock (85,000) - Repurchase/redemption of preferred stock (14,968) (80) Dividends on common and preferred stock (34,790) (9,220) Repayment of long-term debt (50,000) (210) Net decrease in bank borrowings (59,943) (26,070) Other, net (1,300) (18) Net cash used for financing activities (245,662) (30,552) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,081 (70) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 328 304 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,409 $ 234 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 4,277 $ 11,266 Income taxes $ 22,441 $ 8,147 The accompanying notes are an integral part of the financial statements. -5- PG ENERGY INC. NOTES TO FINANCIAL STATEMENTS (1) GENERAL Nature of the Business. PG Energy Inc. ("PGE"), formerly known as Pennsylvania Gas and Water Company, a wholly-owned subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), is a regulated public utility subject to the jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and accounting purposes. PGE distributes natural gas to a ten-county area in northeastern Pennsylvania, a territory that includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. The financial statements of PGE have been prepared in accordance with generally accepted accounting principles, including the provisions of Financial Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain Types of Regulation," which give recognition to the rate and accounting practices of regulatory agencies such as the PPUC. Interim Financial Statements. The interim financial statements included herein have been prepared by PGE, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although PGE believes that the disclosures are adequate to make the information presented not misleading. The results for the interim periods are not indicative of the results to be expected for the year, primarily due to the effect of seasonal variations in weather. However, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary to present fairly the results for the interim periods have been reflected in the financial statements. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto included in PGE's latest annual report on Form 10-K. Use of Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates involve judgments with respect to, among other things, various future economic factors which are difficult to predict and are beyond the control of PGE. Therefore, actual amounts could differ from these estimates. (2) DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the "Agreement"), among PEI, PGE, American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly- owned subsidiary of American, PEI and PGE sold substantially all of the assets, properties and rights of PGE's water utility operations to Pennsylvania-American on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American paid PGE $414.3 million consisting of $262.1 million in cash and the assumption of $152.2 million of PGE's liabilities, including $141.0 million of its long- term debt. PGE continued to operate the water utility business until February 16, 1996. -6- 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, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to an early retirement plan, 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 sale involved a gain for income tax purposes, primarily because of the accelerated depreciation that had been claimed by PGE with respect to the water utility plant that was sold. It is estimated that the income taxes payable on the sale, for which deferred income taxes had previously been provided, will be approximately $58.6 million, of which $22.3 million had been paid as of June 30, 1996. The cash proceeds from the sale of approximately $203.5 million, net of the estimated $58.6 million of income taxes, are being used by PEI and PGE to retire debt, to repurchase stock (see Note 3 of these Notes to Financial Statements), for construction expenditures and for other working capital purposes. With the sale of PGE's water utility operations, the principal assets of PEI and PGE now consist of PGE's gas utility operations and approximately 46,000 acres of land. The accompanying financial statements reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995. Interest charges relating to indebtedness of PGE were allocated to the discontinued operations based on the relationship of the gross water utility plant that was sold to the total of PGE's gross gas and water utility plant. This is the same method as was utilized by PGE and the PPUC in establishing the revenue requirements of both PGE's gas and water utility operations. None of the dividends on PGE's preferred stock nor any of PEI's interest expense were allocated to the discontinued operations. -7- Selected financial information for the discontinued operations is set forth below: Net Assets of Discontinued Operations [CAPTION] As of December 31, 1995 (Thousands of Dollars) [S] [C] Net utility plant $ 368,742 Current assets (primarily accounts receivable and accrued revenues) 12,756 Deferred charges and other assets 25,752 Total assets acquired by Pennsylvania-American 407,250 Liabilities assumed by Pennsylvania-American - Long-term debt 141,097 Other 5,983 147,080 Net assets acquired by Pennsylvania-American 260,170 Estimated liability for income taxes on sale of discontinued operations (56,710) Estimated net income of discontinued operations during the remainder of the phase-out period 790 Total net assets of discontinued operations $ 204,250 Loss With Respect to Discontinued Operations
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 (Thousands of Dollars) Income from discontinued operations, net of related income taxes of $1,403,000* $ - $ - $ - $ 2,127 Estimated loss on disposal of discontinued operations, net of income during the phase-out period (21) - (386) (5,831) Loss with respect to discontinued operations $ 21 $ - $ 386 $ 3,704
* Reflects income only through March 31, 1995, the effective date of the discontinuance of PGE's water utility operations for financial statement purposes. (3) CASH DIVIDENDS The cash dividends per share for the six months ended June 30, 1996, include $9.077 with respect to a special $30.0 million dividend in the form of a 10.125% promissory note that was issued by PGE to PEI on February 16, 1996, in connection with the sale of PGE's water utility operations on such date. This note was paid in full by PGE on March 8, 1996. -8- (4) REPURCHASES OF STOCK On February 16, 1996, PGE repurchased 2,297,297 shares of its common stock from PEI for an aggregate consideration of $85.0 million. Additionally, during the quarter ended June 30, 1996, PGE repurchased 128,984 shares of its 9% cumulative preferred stock for an aggregate consideration of $14.0 million and 18,524 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $927,000, largely pursuant to self tender offers. On June 17, 1996, PGE also repurchased 8,608 shares of its 5.75% cumulative preferred stock (including 800 shares redeemed in accordance with annual sinking fund provisions) for an aggregate considerations of $758,000. (5) ACCOUNTING CHANGES Long-Lived Assets. In March 1995, FASB Statement 121, "Accounting for the Impairment of Long-Lived Assets", was issued. The provisions of this statement, which are effective for fiscal years beginning after September 15, 1995, require that long-lived assets, identifiable intangibles, capital leases and goodwill be reviewed for impairment whenever events occur or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In addition, FASB Statement 121 requires that regulatory assets meet the recovery criteria of FASB Statement 71, "Accounting for Effects of Certain Types of Regulation", on an ongoing basis in order to avoid a writedown. The provisions of FASB Statement 121, which PGE adopted effective January 1, 1996, did not have a material impact on the financial position or results of operations of PGE since the carrying amount of all assets, including regulatory assets, are considered recoverable. (6) COMMITMENTS AND CONTINGENCIES Valve Maintenance On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PGE to survey its gas distribution system to verify the location and spacing of its gas shut off valves, to add or repair valves where needed and to establish programs for the periodic inspection and maintenance of all such valves and the verification of all gas service line information. On March 31, 1995, the PPUC adopted an Order approving a plan submitted by PGE for complying with the Emergency Order. PGE does not believe that its compliance with the terms of such Order will have a material adverse effect on its financial position or results of operations. Environmental Matters PGE, like many gas distribution companies, once utilized manufactured gas plants in connection with providing gas service to its customers. None of these plants has been in operation since 1960, and several of the plant sites are no longer owned by PGE. Pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), PGE filed notices with the United States Environmental Protection Agency (the "EPA") with respect to the former plant sites. None of the sites is or was formerly on the proposed or final National Priorities List. The EPA has conducted site inspections and made preliminary assessments of each site and has concluded that no further remedial action is planned. While this conclusion does not constitute a legal prohibition against further regulatory action under CERCLA or other applicable federal or state law, PGE 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. -9- PG ENERGY INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCONTINUED OPERATIONS Pursuant to an Asset Purchase Agreement dated April 26, 1995 (the "Agreement"), among Pennsylvania Enterprises, Inc. ("PEI"), the parent company of PG Energy Inc. ("PGE"), PGE, American Water Works Company, Inc. ("American") and Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly- owned subsidiary of American, PEI and PGE sold substantially all of the assets, properties and rights of PGE's water utility operations to Pennsylvania-American on February 16, 1996. Under the terms of the Agreement, Pennsylvania-American paid PGE $414.3 million consisting of $262.1 million in cash and the assumption of $152.2 million of PGE's liabilities, including $141.0 million of its long- term debt. PGE continued to operate the water utility business until February 16, 1996. The sale price reflected a $6.5 million premium over the book value of the assets being sold. However, after transaction costs and the net effect of other items, principally the write-off of certain deferred regulatory assets and deferred credits and the impact of pension and other postretirement benefit expenses relative to an early retirement plan, 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 cash proceeds from the sale of approximately $203.5 million, net of an estimated $58.6 million of income taxes, are being used by PEI and PGE to retire debt, to repurchase stock, for construction expenditures and for other working capital purposes. With the sale of PGE's water utility operations, the principal assets of PEI and PGE now consist of PGE's gas utility operations and approximately 46,000 acres of land. In accordance with generally accepted accounting principles, PEI's financial statements reflect PGE's water utility operations as "discontinued operations" effective March 31, 1995, and the following sections of Management's Discussion and Analysis generally relate only to PGE's continuing operations. For additional information regarding the discontinued operations, see Note 2 of the accompanying Notes to Financial Statements. -10- RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in PGE's statements of income as percentages of operating revenues for each of the three and six-month periods ended June 30, 1996, and June 30, 1995:
Percentage of Operating Revenues Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0% Cost of gas................................ 49.4 51.1 55.4 58.1 OPERATING MARGIN............................. 50.6 48.9 44.6 41.9 OTHER OPERATING EXPENSES: Operation.................................. 24.4 21.7 13.5 12.1 Maintenance................................ 5.9 5.2 2.8 2.4 Depreciation............................... 7.7 7.1 4.1 3.8 Income taxes............................... (2.0) (3.0) 5.7 4.4 Taxes other than income taxes.............. 11.4 10.5 7.1 7.0 Total other operating expenses........... 47.4 41.5 33.2 29.7 OPERATING INCOME............................. 3.2 7.4 11.4 12.2 OTHER INCOME (DEDUCTIONS), NET............... 0.6 (0.2) 0.4 0.2 INTEREST CHARGES............................. 5.3 10.7 3.6 5.7 INCOME (LOSS) FROM CONTINUING OPERATIONS..... (1.5) (3.5) 8.2 6.7 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. 0.1 - 0.4 4.0 NET INCOME (LOSS)............................ (1.6) (3.5) 7.8 2.7 DIVIDENDS ON PREFERRED STOCK(1).............. 1.5 2.7 1.1 1.5 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (3.1) (6.2) 6.7 1.2
(1) None of the dividends on preferred stock was allocated to the discontinued operations. Three Months Ended June 30, 1996, Compared With Three Months Ended June 30, 1995 Operating Revenues. Operating revenues increased $273,000 (1.1%) from $25.2 million for the three-month period ended June 30, 1995, to $25.5 million for the three-month period ended June 30, 1996, primarily as a result of a 175 million cubic feet (5.6%) increase in consumption by PGE's residential and commercial heating customers. Heating degree days during the second quarter of 1996 were 114 (15.0%) higher than in the second quarter of 1995 and 14.0% above normal. The effects of the increased sales to heating customers were partially offset by a reduction in the purchased gas cost component of PGE's tariff ("the gas cost rate"). See "-Rate Matters." Cost of Gas. The cost of gas decreased $299,000 (2.3%) from $12.9 million for the three-month period ended June 30, 1995, to $12.6 million for the three- month period ended June 30, 1996, primarily because of the aforementioned reduction in the gas cost rate (see "-Rate Matters"), the effects of which were largely offset by the increased sales to residential and commercial heating customers. -11- Operating Margin. The operating margin increased $572,000 (4.6%) from $12.3 million in the second quarter of 1995 to $12.9 million in the second quarter of 1996 and, as a percentage of operating revenues, increased from 48.9% for the quarter ended June 30, 1995, to 50.6% for the quarter ended June 30, 1996, primarily because of the 175 million cubic feet (5.6%) increase in consumption by residential and commercial heating customers. Other Operating Expenses. Other operating expenses increased $1.6 million (15.7%) for the three-month period ended June 30, 1996, compared to the three-month period ended June 30, 1995, and increased as a percentage of operating revenues from 41.5% in the second quarter of 1995 to 47.4% in the second quarter of 1996. These increases were attributable to a number of factors, the most significant of which was a higher level of operation expenses, which increased $769,000 (14.1%) principally as a result of higher payroll and payroll-related costs. Payroll and payroll-related costs increased largely because of charges, which were previously allocated to PGE's discontinued operations, that are now being absorbed by its continuing operations. Also contributing to the increase in other operating expenses was a $249,000 (9.4%) increase in taxes other than income taxes as a result of increased gross receipts tax, which is based on revenues collected from customers, a $180,000 (13.7%) increase in maintenance expenses, principally as a result of charges relative to the maintenance of gas valves, and increased depreciation expense of $186,000 (10.4%) attributable to additions to utility plant. Income taxes increased $252,000 (32.9%) from a credit of $766,000 in the second quarter of 1995 to a credit of $514,000 in the second quarter of 1996 due to a lower level of loss before income taxes (for this purpose, operating income net of interest charges). Operating Income. As a result of the above, total operating income decreased by $1.1 million (57.0%) from $1.9 million for the three-month period ended June 30, 1995, to $803,000 for the three-month period ended June 30, 1996, and decreased as a percentage of total operating revenues for such periods from 7.4% in 1995 to 3.2% in 1996, primarily because of the aforementioned increase in other operating expenses, the effects of which were partially offset by the increased operating margin resulting from the higher consumption by residential and commercial heating customers. Interest Charges. Interest charges decreased by $1.3 million (50.0%) from $2.7 million for the three-month period ended June 30, 1995, to $1.3 million for the three-month period ended June 30, 1996. This decrease was largely attributable to the lower level of indebtedness resulting from the repayment of PGE's $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 (Loss) From Continuing Operations. The loss from continuing operations decreased $515,000 (57.9%) from $889,000 for the quarter ended June 30, 1995, to $374,000 for the quarter ended June 30, 1996. This decrease was largely the result of the matters discussed above, principally the increase in operating margin and decrease in interest charges, the effects of which were largely offset by the increased other operating expenses. -12- Dividends on Preferred Stock. Dividends on preferred stock decreased $309,000 (44.7%) from $692,000 for the three-month period ended June 30, 1995, to $383,000 for the three-month period ended June 30, 1996, largely as a result of the repurchase by PGE of 128,984 shares of its 9% cumulative preferred stock, 8,608 shares of its 5.75% cumulative preferred stock and 18,524 shares of its 4.10% cumulative preferred stock during the second quarter of 1996. Earnings (Loss) Applicable to Common Stock. The decrease in loss applicable to common stock of $803,000 from $1.6 million for the three-month period ended June 30, 1995, to $778,000 for the three-month period ended June 30, 1996, as well as the $.04 decrease in the loss per share of common stock before premium on repurchase/redemption of preferred stock, from $.28 per share for the quarter ended June 30, 1995, to $.24 per share for the quarter ended June 30, 1996, was largely the result of the factors discussed above. The effect of the decrease in loss applicable to common stock on earnings per share was more than offset by a $.39 per share charge for the premium on the repurchase of preferred stock which acted to increase the loss per share of common stock for the quarter ended June 30, 1996, to $.63 per share, compared to $.28 per share for the quarter ended June 30, 1995. While premiums on the repurchase of preferred stock are charged to retained earnings and are not a determinant of income, the premiums associated with repurchases must be taken into account in calculating the earnings (loss) per share of common stock. Six Months Ended June 30, 1996, Compared With Six Months Ended June 30, 1995 Operating Revenues. Operating revenues increased $1.5 million (1.6%) from $93.4 million for the six-month period ended June 30, 1995, to $94.9 million for the six-month period ended June 30, 1996, primarily as a result of a 1.8 billion cubic feet (13.6%) increase in sales to residential and commercial heating customers. There was a 623 (17.5%) increase in heating degree days from 3,570 (90.3% of normal) during the first six months of 1995 compared to 4,193 (106.0% of normal) during the first six months of 1996. The effects of the increased sales to heating customers were largely offset by reductions in the purchased gas cost component of PGE's tariffs (the "gas cost rate"). See "-Rate Matters." Cost of Gas. The cost of gas decreased $1.7 million (3.2%) from $54.3 million for the six-month period ended June 30, 1995, to $52.6 million for the six-month period ended June 30, 1996, primarily because of the aforementioned reductions in PGE's gas cost rate (see "-Rate Matters"), the effects of which were partially offset by the increased sales to residential and commercial heating customers. Operating Margin. The operating margin increased $3.2 million (8.1%) from $39.1 million in the six-month period ended June 30, 1995, to $42.3 million in the six-month period ended June 30, 1996, primarily because of the 1.8 billion cubic feet (13.6%) increase in consumption by residential and commercial heating customers. As a percentage of operating revenues, the margin increased from 41.9% in the first six months of 1995 to 44.6% in the first six months of 1996. Other Operating Expenses. Other operating expenses increased $3.7 million (13.4%) from $27.8 million for the six-month period ended June 30, 1995, to $31.5 million for the six-month period ended June 30, 1996, and increased as a percentage of operating revenues from 29.7% during the first six months of 1995 to 33.2% during the first six months of 1996, in part because of the reductions in PGE's gas cost rate and the corresponding decrease in revenues. The $3.7 million increase in other operating expenses was attributable to a number of factors, the most significant of which was a $1.5 million (13.3%) increase in -13- operation expenses, primarily as result of higher payroll and payroll-related costs. Payroll and payroll-related costs increased largely because of charges, which were previously allocated to PGE's discontinued operations, that are now being absorbed by its continuing operations. Also contributing to the higher operating expenses was a $293,000 (8.2%) increase in depreciation expense attributable to additions to PGE's utility plant, as well as a $426,000 (18.7%) increase in maintenance expenses caused by charges relating to the maintenance of gas valves. Income taxes increased $1.3 million (32.0%) from $4.1 million in the first six months of 1995 to $5.4 million in the first six months of 1996 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, total operating income decreased by $531,000 (4.7%) from $11.4 million for the six-month period ended June 30, 1995, to $10.8 million for the six-month period ended June 30, 1996, and decreased as a percentage of total operating revenues for such periods from 12.2% in 1995 to 11.4% in 1996, primarily because of the higher level of other operating expenses. Interest Charges. Interest charges decreased by $1.9 million (36.0%) from $5.3 million for the six-month period ended June 30, 1995, to $3.4 million for the six-month period ended June 30, 1996. This decrease was largely attributable to the lower level of indebtedness resulting from the repayment of PGE's $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 (Loss) From Continuing Operations. Income from continuing operations increased $1.5 million (24.7%) from $6.2 million for the six months ended June 30, 1995, to $7.7 million for the six months ended June 30, 1996. This increase was largely the result of the matters discussed above, principally the increase in operating margin resulting from the higher level of sales to residential and commercial heating customers and the decrease in interest charges, the effects of which were partially offset by the higher level of other operating expenses. Net Income (Loss). The increase in net income of $4.9 million (193.2%) from $2.5 million for the six-month period ended June 30, 1995, to $7.4 million for the six-month period ended June 30, 1996, was largely the result of the higher income from continuing operations, as discussed above, and the decreased loss with respect to discontinued operations. Dividends on Preferred Stock. Dividends on preferred stock decreased $363,000 (26.2%) from $1.4 million for the six-month period ended June 30, 1995, to $1.0 million for the six-month period ended June 30, 1996, largely as a result of the repurchase by PGE of 128,984 shares of its 9% cumulative preferred stock, 8,608 shares of its 5.75% cumulative preferred stock and 18,524 shares of its 4.10% cumulative preferred stock, $100 par value, during the second quarter of 1996. Earnings (Loss) Applicable to Common Stock. The increase in earnings applicable to common stock of $5.2 million (462.2%) from $1.1 million for the six-month period ended June 30, 1995, to $6.3 million for the six-month period ended June 30, 1996, as well as the increase in earnings per share of common stock of $1.10 from $.20 per share for the six months ended June 30, 1995, to $1.30 per share for the six months ended June 30, 1996 (after a $.33 per share charge for premiums on the repurchase of preferred stock), were the result of -14- the higher income from continuing operations and the reduced dividends on preferred stock, as discussed above, and the decrease of $.57 per share from $.67 per share for the six-month period ended June 30, 1995, to $.10 per share for the six-month period ended June 30, 1996, in the loss with respect to discontinued operations. RATE MATTERS Proposed Rate Increase. On May 24, 1996, PGE filed an application with the Pennsylvania Public Utility Commission ("PPUC") seeking an increase in its base gas rates, designed to produce $14.1 million in additional annual revenue, to be effective July 23, 1996. On June 20, 1996, the PPUC suspended this rate increase for seven months (until February 23, 1997) in order to investigate the reasonableness of the proposed rates. It is not presently possible to determine what action the PPUC will ultimately take in this matter. Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania Public Utility Code (the "Code") relating to the annual purchased gas cost rate of larger gas distribution companies, such as PGE, the PPUC, by Order adopted May 11, 1995, authorized PGE to decrease the gas costs contained in its gas tariffs from $3.68 per thousand cubic feet to $2.42 per thousand cubic feet effective May 15, 1995, in order to refund overcollections from customers caused by lower than anticipated purchased gas costs and the receipt of supplier refunds during 1995. This change in gas rates on account of purchased gas costs was designed to produce a decrease in revenue of $8.2 million from its effective date through December 1, 1995. In accordance with the same provisions of the Code, the PPUC, by Order adopted November 9, 1995, authorized PGE to increase its gas cost rate to $2.75 per thousand cubic feet effective December 1, 1995. This change in gas rates on account of purchased gas costs is designed to produce a $9.6 million increase in annual revenue. The changes in gas rates on account of purchased gas costs have no effect on PGE's earnings since the changes in revenue are offset by corresponding changes in the cost of gas. Quarterly Gas Cost Adjustment. Effective September 14, 1995, the PPUC adopted regulations providing for the quarterly adjustment of the annual purchased gas cost rate of larger gas distribution companies, including PGE. Such adjustments are allowed when the actual purchased gas costs vary from the estimated costs reflected in the respective company's tariffs by 2% or more. In accordance with the regulations regarding quarterly gas cost rate adjustments, PGE increased its gas cost rate to $2.88 per thousand cubic feet effective June 1, 1996. Except for reducing the amount of any over or undercollections of gas costs, the changes in gas rates pursuant to these regulations will not have any material effect on PGE's financial position or results of operations, and PGE will still be required to file an annual purchased gas cost rate. Recovery of FERC Order 636 Transition Costs. On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding recovery of Federal Energy Regulatory Commission ("FERC") Order 636 transition costs. The PGC Order stated that Account 191 and New Facility Costs ("Gas Transition Costs") are subject to recovery through the annual PGC rate filings made with the PPUC by PGE and other larger local gas distribution companies. The PGC Order also indicated that while Gas Supply Realignment and Stranded Costs ("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 local distribution companies through the filing of a tariff pursuant to either the existing surcharge or base rate provisions of the Code. The PGC Order further stated that all such filings would be evaluated on a case-by-case basis. -15- PGE was billed a total of $1.3 million of Gas Transition Costs by its interstate pipelines. Of this amount, $858,000 was recovered by PGE over a twelve-month period ended January 31, 1995, through an increase in its PGC rate, $252,000 is being recovered by PGE in its annual PGC rate that the PPUC has approved effective December 1, 1995, and the recovery of the remaining $213,000 is being sought by PGE in its PGC rate that will be effective December 1, 1996. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non- Gas Transition Costs that it estimates it will ultimately be billed pursuant to FERC Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $8.7 million of Non-Gas Transition Costs will be billed to PGE, generally over a four-year period extending through the fourth quarter of 1997, of which $6.8 million had been billed to PGE and $6.4 million had been recovered from its customers as of June 30, 1996. PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed to it and the amounts remaining to be recovered from its customers. LIQUIDITY AND CAPITAL RESOURCES Sale of Water Utility Operations On February 16, 1996, PGE 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 PGE's liabilities, including $141.0 million of its long-term debt. PGE used the $203.5 million of cash proceeds from the sale, after the payment of an estimated $58.6 million of federal and state income taxes (of which $22.3 million had been paid as of July 31, 1996), to retire debt, to repurchase stock, for construction expenditures and for other working capital purposes. In this regard, on February 16, 1996, PGE 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, and temporarily invested the balance of the proceeds. Additionally, on March 8, 1996, PGE repaid its $30.0 million 10.125% promissory note which was issued to PEI as a common stock dividend on February 16, 1996. During the quarter ended June 30, 1996, as part of the recapitalization following the sale of its water utility operations, PGE repurchased 128,984 shares of its 9% cumulative preferred stock for an aggregate consideration of $14.0 million and 18,524 shares of its 4.10% cumulative preferred stock for an aggregate consideration of $927,000, largely pursuant to self tender offers. On June 17, 1996, PGE also repurchased 8,608 shares of its 5.75% cumulative preferred stock (including 800 shares redeemed in accordance with annual sinking fund provisions) for an aggregate consideration of $758,000. Liquidity The primary capital needs of PGE are the funding of its construction program and the seasonal funding of its gas purchases and increases in customer accounts receivable. PGE's revenues are highly seasonal and weather-sensitive, with approximately 75% of its revenues normally being realized in the first and fourth quarters of the calendar year when the temperatures in its service area are the coldest. -16- The cash flow from PGE's operations is generally sufficient to fund a portion of its construction expenditures. However, to the extent external financing is required, it is generally the practice of PGE to use bank borrowings to fund such expenditures, pending the periodic issuance of stock and long-term debt. Bank borrowings are also used by PGE for the seasonal funding of its gas purchases and increases in customer accounts receivable. With the repayment of its term loan and all its bank borrowings on February 16, 1996, and the availability of cash proceeds from the sale of its regulated water operations, PGE terminated its $60.0 million bank credit agreement. However, in order to finance on-going construction expenditures and to meet its seasonal borrowing requirements, PGE has since made arrangements for a total of $45.5 million of unsecured revolving bank credit, which is deemed adequate for its immediate needs. Specifically, PGE currently has five bank lines of credit with an aggregate borrowing capacity of $45.5 million which provide for borrowings at interest rates generally less than prime and which mature during mid-1997. As of July 31, 1996, PGE had $23.5 million of borrowings outstanding under these bank lines of credit. In addition, PGE is currently seeking approval of the PPUC to borrow up to $70.0 million from PEI for periods of up to two years. Upon receiving approval of the PPUC, PGE intends to borrow funds from PEI during 1996, and also 1997, to repay bank borrowings and for construction expenditures and other working capital requirements, to the extent that PEI has funds available for lending to PGE. Any such interim borrowings by PGE from PEI will be repaid with proceeds from bank borrowings by PGE. PGE plans to arrange new and replacement bank lines of credit when the funds that are available for borrowing from PEI are no longer adequate for its needs and as it requires additional funding for working capital and other purposes. PGE 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 PGE periodically engages in long-term debt and capital stock financings in order to obtain funds required for construction expenditures, the refinancing of existing debt and various working capital purposes. No long-term debt or capital stock financings were consummated by PGE during the three-month period ended June 30, 1996. PGE 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"). PEI has, however, temporarily suspended the sale of stock to the DRP as a result of the proceeds received from the sale of PGE's water utility operations. As a consequence, although PGE realized $340,000 from the issuance of common stock to PEI in connection with the DRP during the six-month period ended June 30, 1996, PGE is not presently so issuing any common stock. Construction Expenditures and Related Financings Expenditures for the construction of utility plant by PGE totaled $8.6 million during the first six months of 1996 and are currently estimated to be $21.0 million during the remainder of the year. Such expenditures are being financed with proceeds from the sale of PGE's regulated water operations, internally-generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. -17- Current Maturities of Long-Term Debt and Preferred Stock As of June 30, 1996, $80,000 of PGE's preferred stock and $11.0 million of PGE's bank borrowings were required to be repaid within twelve months. An additional $376,000 of PGE's preferred stock, which was repurchased in July, 1996, was also reflected as a current liability as of June 30, 1996. Forward-Looking Statements Certain statements made above relating to plans, conditions, objectives and economic performance go beyond historical information and may provide an indication of future results. To that extent, they are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and each is subject to factors that could cause actual results to differ from those in the forward-looking statement. -18- PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On June 26, 1996, Pennsylvania Enterprises, Inc., the sole common shareholder of PG Energy Inc., executed an action in lieu of a meeting of shareholders re-electing the following incumbent directors of PG Energy Inc. to an additional one year term: Kenneth L. Pollock, William D. Davis, Dean T. Casaday, Robert J. Keating, James A. Ross, John D. McCarthy, Ronald W. Simms, Kenneth M. Pollock, Paul R. Freeman, John D. McCarthy, Jr. and Richard A. Rose, Jr. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27-1 Financial Data Schedule -- filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. -19- PG ENERGY INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. PG ENERGY INC. (Registrant) Date: August 9, 1996 By: /s/ Thomas J. Ward Thomas J. Ward Secretary Date: August 9, 1996 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) -20- EX-27 2
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 6-MOS DEC-31-1995 JUN-30-1996 PER-BOOK 223,345,000 5,186,000 45,611,000 34,630,000 0 308,772,000 33,142,000 32,684,000 29,147,000 94,973,000 729,000 19,222,000 55,500,000 5,000,000 0 0 11,000,000 456,000 0 0 121,892,000 308,772,000 94,872,000 5,413,000 78,623,000 84,036,000 10,836,000 319,000 11,155,000 3,407,000 7,362,000 1,020,000 6,342,000 33,770,000 4,837,000 (6,255,000) 1.30 1.30
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