-----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, UAuS/EAxcasNjBF3Iz7qKcU2I4sXN6m7pSHV1KAbwFUIa+LQ+VCN0PFF+2vMCrt4 qlNq57CosO+EJv5seg5FdQ== 0000077242-97-000008.txt : 19970807 0000077242-97-000008.hdr.sgml : 19970807 ACCESSION NUMBER: 0000077242-97-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970806 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: 97652254 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 Consolidated Statements of Income for the three and six months ended June 30, 1997 and 1996 . . . . . . . 2 Consolidated Balance Sheets as of June 30, 1997, and December 31, 1996 . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 . . . . . . . 5 Notes to Consolidated Financial Statements. . . . . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . 9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. . . . . 16 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16 -1- PART I. FINANCIAL INFORMATION PG ENERGY INC. CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 (Thousands of Dollars) OPERATING REVENUES $ 33,229 $ 25,457 $ 113,168 $ 94,872 Cost of gas 18,271 12,575 67,410 52,553 OPERATING MARGIN 14,958 12,882 45,758 42,319 OTHER OPERATING EXPENSES: Operation 6,203 6,226 12,665 12,783 Maintenance 1,316 1,492 2,442 2,706 Depreciation 2,266 1,970 4,477 3,869 Income taxes (241) (514) 5,590 5,413 Taxes other than income taxes 3,310 2,905 7,616 6,712 Total other operating expenses 12,854 12,079 32,790 31,483 OPERATING INCOME 2,104 803 12,968 10,836 OTHER INCOME (DEDUCTIONS), NET (87) 169 152 319 INCOME BEFORE INTEREST CHARGES 2,017 972 13,120 11,155 INTEREST CHARGES: Interest on long-term debt 2,217 1,243 4,408 3,015 Other interest 137 153 341 488 Allowance for borrowed funds used during construction (33) (50) (99) (96) Total interest charges 2,321 1,346 4,650 3,407 INCOME (LOSS) FROM CONTINUING OPERATIONS (304) (374) 8,470 7,748 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS - (21) - (386) NET INCOME (LOSS) (304) (395) 8,470 7,362 DIVIDENDS ON PREFERRED STOCK 318 383 671 1,020 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (622) $ (778) $ 7,799 $ 6,342 COMMON STOCK: Earnings (loss) per share of common stock: Continuing operations $ (.19) $ (.23) $ 2.35 $ 1.73 Discontinued operations - (.01) - (.10) Net income (loss) before discount (premium) on repurchase/redemption of preferred stock (.19) (.24) 2.35 1.63 Discount (premium) on repurchase/redemption of preferred stock .24 (.39) .25 (.33) Total $ .05 $ (.63) $ 2.60 $ 1.30 Weighted average number of shares outstanding 3,314,155 3,314,155 3,314,155 3,891,143 Cash dividends per share $ - $ - $ - $ 10.217 The accompanying notes are an integral part of the consolidated financial statements.
-2- PG ENERGY INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost $ 336,020 $ 319,205 Accumulated depreciation (85,080) (79,783) 250,940 239,422 OTHER PROPERTY AND INVESTMENTS 4,581 4,894 CURRENT ASSETS: Cash and cash equivalents 298 690 Accounts receivable - Customers 18,785 17,183 Affiliates, net 87 58 Others 688 565 Reserve for uncollectible accounts (1,631) (1,140) Accrued utility revenues 2,201 11,830 Materials and supplies, at average cost 2,809 2,460 Gas held by suppliers, at average cost 12,024 20,265 Natural gas transition costs collectible 1,633 2,525 Deferred cost of gas and supplier refunds, net 4,983 19,316 Prepaid expenses and other 1,942 1,313 43,819 75,065 DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 30,460 29,771 Other 4,654 4,274 Unamortized debt expense 1,067 1,153 Other 505 - 36,686 35,198 TOTAL ASSETS $ 336,026 $ 354,579 The accompanying notes are an integral part of the consolidated financial statements.
-3- PG ENERGY INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholder's investment $ 104,593 $ 96,005 Preferred stock of PGE - Not subject to mandatory redemption, net 15,877 18,851 Subject to mandatory redemption 640 739 Long-term debt 83,266 55,000 204,376 170,595 CURRENT LIABILITIES: Current portion of long-term debt - Parent 27,200 31,400 Other 9,087 38,721 Preferred stock subject to repurchase or mandatory redemption 80 115 Note payable 3,500 10,000 Accounts payable - Suppliers 14,798 17,831 Parent 848 348 Accrued general business and realty taxes 1,272 2,239 Accrued income taxes 5,865 14,559 Accrued interest 1,264 1,936 Accrued natural gas transition costs 1,184 2,095 Other 2,948 3,375 68,046 122,619 DEFERRED CREDITS: Deferred income taxes 50,716 49,119 Unamortized investment tax credits 4,682 4,767 Operating reserves 2,892 3,086 Other 5,314 4,393 63,604 61,365 COMMITMENTS AND CONTINGENCIES (Note 4) TOTAL CAPITALIZATION AND LIABILITIES $ 336,026 $ 354,579 The accompanying notes are an integral part of the consolidated financial statements.
-4- PG ENERGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 1996 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income from continuing operations $ 8,470 $ 7,748 Effects of noncash charges to income - Depreciation 4,507 3,908 Deferred income taxes, net 578 166 Provisions for self insurance 281 591 Other, net 826 772 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues 9,056 15,140 Gas held by suppliers 8,241 3,030 Accounts payable (5,380) (2,468) Deferred cost of gas and supplier refunds, net 14,602 (9,680) Other current assets and liabilities, net (11,933) 2,467 Other operating items, net (790) (3,754) Net cash provided by continuing operations 28,458 17,920 Net cash used for discontinued operations - (24,175) Net cash provided by (used for) operating activities 28,458 (6,255) CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (13,923) (8,823) Proceeds from the sale of discontinued operations - 261,752 Acquisition of regulated business (2,009) Other, net 471 69 Net cash provided by (used for) investing activities (15,461) 252,998 CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock - 339 Repurchase of common stock - (85,000) Repurchase of preferred stock (3,108) (14,968) Dividends on common and preferred stock (671) (34,790) Repayment of long-term debt (4,646) (50,000) Net decrease in bank borrowings (5,782) (59,943) Other, net 818 (1,300) Net cash used for financing activities (13,389) (245,662) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (392) 1,081 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 690 328 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 298 $ 1,409 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 4,953 $ 4,277 Income taxes $ 14,536 $ 22,441 The accompanying notes are an integral part of the consolidated financial statements.
-5- PG ENERGY INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of the Business. PG Energy Inc. ("PGE") a wholly-owned subsidiary of Pennsylvania Enterprises, Inc. ("PEI"), and Honesdale Gas Company ("Honesdale") a wholly-owned subsidiary of PGE acquired on February 14, 1997, are regulated public utilities. Together PGE and Honesdale distribute natural gas to a twelve-county area in northeastern Pennsylvania, a territory that includes 129 municipalities, in addition to the cities of Scranton, Wilkes-Barre and Williamsport. Principles of Consolidation. The consolidated financial statements include the accounts of PGE and its subsidiary, Honesdale, beginning February 14, 1997, the date Honesdale was acquired by PGE. All material intercompany accounts have been eliminated in consolidation. Both PGE and Honesdale are subject to the jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and accounting purposes. The financial statements of PGE and Honesdale that are incorporated in these consolidated financial statements have been prepared in accordance with generally accepted accounting principles, including the provisions of Financial Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of Certain Types of Regulation," which give recognition to the rates and accounting practices of regulatory agencies such as the PPUC. Interim Financial Statements. The interim consolidated 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 on the sale of natural gas. However, in the opinion of management, all adjustments, consisting of only normal recurring accruals, necessary to present fairly the results for the interim periods have been reflected in the consolidated financial statements. It is suggested that these consolidated financial statements be read in conjunction with the 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 and regulatory matters which are difficult to predict and are beyond the control of PEI. Therefore, actual amounts could differ from these estimates. -6- (2) RATE MATTERS Rate Increase. By Order adopted December 19, 1996, the PPUC approved an overall 5.3% increase in PGE'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 PGE's residential heating customers, which totaled $2.4 million through June 30, 1997, was deferred, without carrying charges, until July, 1997. Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility Code require that the tariffs of local gas distribution companies ("LDCs") be adjusted on an annual basis, and, in the case of larger LDCs such as PGE, 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, PGE has been permitted to make the following changes since January 1, 1996, to the gas costs contained in its gas tariff rates: [CAPTION] Change in Effective Rate per MCF Calculated Increase Date From To in Annual Revenue [S] [C] [C] [C] 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. (3) ACCOUNTING CHANGES Earnings Per Share. In February, 1997, FASB Statement 128, "Earnings per Share" was issued. The provisions of this statement, which supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share", simplify the computation of earnings per share. FASB Statement 128 will be effective for financial statements for both interim and annual periods ending after December 15, 1997. PGE does not expect the adoption of FASB Statement 128 to have a material effect on its calculation of earnings per share. Reporting Comprehensive Income. In June, 1997, FASB Statement 130 "Reporting Comprehensive Income", was issued. The provisions of this statement, which are effective for fiscal years beginning after December 15, 1997, establish standards for reporting and display of comprehensive income and its components in financial statements. The reporting provisions of FASB Statement 130, which PGE will adopt in 1998, are not expected to have a material impact on its reported results of operations. (4) COMMITMENTS AND CONTINGENCIES 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 -7- 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. -8- PG ENERGY INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF CONTINUING OPERATIONS The following table expresses certain items in the consolidated statements of income of PG Energy Inc. ("PGE") as percentages of operating revenues for each of the three and six-month periods ended June 30, 1997 and 1996:
Percentage of Operating Revenues Three Months Ended Six Months Ended June 30, June 30, 1997 1996 1997 1996 OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0% Cost of gas................................ 55.0 49.4 59.6 55.4 OPERATING MARGIN............................. 45.0 50.6 40.4 44.6 OTHER OPERATING EXPENSES: Operation.................................. 18.7 24.4 11.2 13.5 Maintenance................................ 3.9 5.9 2.1 2.8 Depreciation............................... 6.8 7.7 4.0 4.1 Income taxes............................... (0.7) (2.0) 4.9 5.7 Taxes other than income taxes.............. 10.0 11.4 6.7 7.1 Total operating expenses................. 38.7 47.4 28.9 33.2 OPERATING INCOME............................. 6.3 3.2 11.5 11.4 OTHER INCOME (DEDUCTIONS), NET............... (0.2) 0.6 0.1 0.4 INTEREST CHARGES............................. (7.0) (5.3) (4.1) (3.6) INCOME (LOSS) FROM CONTINUING OPERATIONS..... (0.9) (1.5) 7.5 8.2 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - (0.1) - (0.4) NET INCOME (LOSS) ........................... (0.9) (1.6) 7.5 7.8 DIVIDENDS ON PREFERRED STOCK (1)............. (1.0) (1.5) (0.6) (1.1) EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (1.9) (3.1) 6.9 6.7
(1) None of the dividends on preferred stock was allocated to the discontinued operations. o Three Months Ended June 30, 1997, Compared With Three Months Ended June 30, 1996 Operating Revenues. Operating revenues increased $7.8 million (30.5%) from $25.5 million for the quarter ended June 30, 1996, to $33.2 million for the quarter ended June 30, 1997, primarily as a result of a 186 million cubic feet (5.7%) increase in sales to PGE's residential and commercial heating customers that was largely attributable to cooler weather. There was an increase of 92 (10.6%) heating degree days from 872 (114.0% of normal) during the second quarter of 1996 to 964 (126.0% of normal) during the second quarter of 1997. Also contributing to the increase were higher levels in PGE's gas cost rate and the effect of the rate increase granted PGE by the Pennsylvania Public Utility Commission (the "PPUC") which became effective on January 15, 1997 (see "Rate Matters"), as well as the operating revenues of Honesdale Gas Company ("Honesdale"), which was acquired by PGE on February 14, 1997, totaling $760,000. -9- Cost of Gas. The cost of gas increased $5.7 million (45.3%) from $12.6 million for the second quarter of 1996 to $18.3 million for the second quarter of 1997, primarily because of the aforementioned increase in sales to residential and commercial heating customers during the quarter and the inclusion in the second quarter of 1997 of $527,000 of gas costs with respect to Honesdale, as well as higher levels in PGE's gas cost rate (see "-Rate Matters"). Operating Margin. The operating margin increased $2.1 million (16.1%) from $12.9 million in the second quarter of 1996 to $15.0 million in the second quarter of 1997, primarily because of the higher level of sales, the increase in PGE's gas rates effective January 15, 1997 (see "-Rate Matters"), and the inclusion of Honesdale's operating margin. As a percentage of operating revenues, the margin, however, decreased from 50.6% in the second quarter of 1996 to 45.0% in the second quarter of 1997 as a result of the proportionately higher cost of gas in 1997. Other Operating Expenses. Other operating expenses increased $775,000 (6.4%) from $12.1 million for the quarter ended June 30, 1996, to $12.9 million for the quarter ended June 30, 1997. This increase was primarily attributable to a $296,000 (15.0%) increase in depreciation expense, as a result of additions to utility plant, and a $405,000 (13.9%) increase in taxes other than income taxes resulting from a higher level of gross receipts tax because of the increased sales by PGE and the sales by Honesdale. The effects of these increases were partially offset by lower levels of operation and maintenance expense. As a percentage of operating revenues, other operating expenses decreased from 47.4% during the quarter ended June 30, 1996, to 38.7% during the quarter ended June 30, 1997, primarily as a result of the proportionately greater increase in operating revenues. Income taxes for the three-month period ended June 30, 1997, increased by $273,000 (53.1%) from a credit of $514,000 in 1996 to a credit of $241,000 in 1997 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, operating income increased by $1.3 million (162.0%) from $803,000 for the second quarter of 1996 to $2.1 million for the second quarter of 1997, and increased as a percentage of total operating revenues from 3.2% in the second quarter of 1996 to 6.3% in the second quarter of 1997. Other Income (Deductions), Net. Other income (deductions), net decreased $256,000 from income of $169,000 for the three-month period ended June 30, 1996, to a deduction of $87,000 for the three-month period ended June 30, 1997, largely as a result of the absence of income from the temporary investment of certain proceeds from the sale of PGE's regulated water utility operations in February, 1996, because the second quarter of 1996 included a greater amount of gains on the condemnation of certain of PGE's property for highway construction. Interest Charges. Interest charges increased by $975,000 (72.4%) from $1.3 million for the second quarter of 1996 to $2.3 million for the second quarter of 1997. This increase was largely attributable to bank borrowings by PGE to finance construction expenditures and for other working capital needs and the reduction in PGE's interest expense in the second quarter of 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. -10- Income (Loss) From Continuing Operations. The loss from continuing operations decreased $70,000 (18.7%) from $374,000 for the quarter ended June 30, 1996, to $304,000 for the quarter ended June 30, 1997. The decreased loss was largely the result of the matters discussed above, principally the increase in operating margin, the effects of which were partially offset by the higher levels of other operating expenses and interest charges. Net Income (Loss). The decrease in net loss of $91,000 (23.0%) from $395,000 for the second quarter of 1996 to $304,000 for the second quarter of 1997, was largely the result of the lower loss from continuing operations, as discussed above, and, to a lesser extent, the absence of any loss with respect to discontinued operations. Dividends on Preferred Stock. Dividends on preferred stock decreased $65,000 (17.0%) from $383,000 for the second quarter of 1996 to $318,000 for the second quarter of 1997, primarily as a result of the repurchase by PGE 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 the year, as well as its repurchase of an additional 30,090 shares of the 4.10% cumulative preferred stock in 1997. Earnings (Loss) Applicable to Common Stock. The decrease in loss applicable to common stock of $156,000 (20.0%) from $778,000 for the three-month period ended June 30, 1996, to $622,000 for the three-month period ended June 30, 1997, as well as the increase in earnings per share of common stock of $.68 from a loss of $.63 per share for the second quarter of 1996 (after reflecting a $.39 per share premium on redemption of preferred stock) to earnings of $.05 per share for the second quarter of 1997 (after reflecting a $.24 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. The $.39 per share charge for the premium on the repurchase of preferred stock in the second quarter of 1996 acted to increase the loss per share of common stock for the quarter ended June 30, 1996, to $.63 per share. The discount on redemption of preferred stock in the second quarter of 1997 acted to increase the earnings per share for the quarter by $.24 per share to $.05 per share. While discounts and premiums on the repurchase of preferred stock are reflected in retained earnings and are not a determinant of earnings (loss) applicable to common stock, the discounts and premiums associated with repurchases must be taken into account in calculating the earnings (loss) per share of common stock. o Six Months Ended June 30, 1997, Compared With Six Months Ended June 30, 1996 Operating Revenues. Operating revenues increased $18.3 million (19.3%) from $94.9 million for the six months ended June 30, 1996, to $113.2 million for the six months ended June 30, 1997, primarily as a result of higher levels in PGE's gas cost rate and the effect of the rate increase granted PGE by the PPUC which became effective on January 15, 1997 (see "Rate Matters"). The effect of the increase in rates was partially offset by a 1.0 billion cubic feet (6.9%) decrease in sales to PGE's residential and commercial heating customers. There was a decrease of 238 (5.7%) heating degree days from 4,192 (106.0% of normal) during the first six months of 1996 to 3,954 (100.0% of normal) during the first six months of 1997. Operating revenues of Honesdale totaling $1.6 million from its February 14, 1997, acquisition date through June 30, 1997, also contributed to the increased operating revenues. -11- Cost of Gas. The cost of gas increased $14.9 million (28.3%) from $52.6 million for the first six months of 1996 to $67.4 million for the first six months of 1997, primarily because of higher levels in PGE's gas cost rate (see "-Rate Matters") and the inclusion of $1.1 million of gas costs with respect to Honesdale from its February 14, 1997, acquisition date through June 30, 1997. The effect of the increase in PGE's gas cost rate was partially offset by a 1.0 billion cubic feet (6.9%) decrease in sales to its residential and commercial heating customers. Operating Margin. The operating margin increased $3.4 million (8.1%) from $42.3 million in the first six months of 1996 to $45.8 million in the first six months of 1997, primarily because of the aforementioned increase in PGE's gas rates effective January 15, 1997 (see "-Rate Matters") and the inclusion of Honesdale's operating margin from its February 14, 1997, acquisition date. As a percentage of operating revenues, the margin, however, decreased from 44.6% in the first six months of 1996 to 40.4% in the first six months of 1997 as a result of the proportionately higher cost of gas in 1997. Other Operating Expenses. Other operating expenses increased $1.3 million (4.2%) from $31.5 million for the first six months of 1996, to $32.8 million for the first six months of 1997. This increase was primarily attributable to a $608,000 (15.7%) increase in depreciation expense, as a result of additions to utility plant, and a $904,000 (13.5%) increase in taxes other than income taxes resulting from a higher level of gross receipts tax because of the increased sales by PGE and the sales by Honesdale from its acquisition date. The effects of these increases were partially offset by lower levels of operation and maintenance expense. As a percentage of operating revenues, other operating expenses decreased from 33.2% during the first six months of 1996, to 28.9% during the first six months of 1997, primarily as a result of the proportionately greater increase in operating revenues during the period. Income taxes increased $177,000 (3.3%) from $5.4 million in the first six months of 1996 to $5.6 million in the first six months of 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 $2.1 (19.7%) from $10.8 million for the first six months of 1996 to $13.0 million for the first six months of 1997, and increased as a percentage of total operating revenues from 11.4% in the first six months of 1996 to 11.5% in the first six months of 1997. Other Income (Deductions), Net. Other income (deductions), net decreased $167,000 (52.4%) from $319,000 for the six-month period ended June 30, 1996, to $152,000 for the six-month period ended June 30, 1997, largely as a result of the absence of income from the temporary investment of certain proceeds from the sale of PGE's regulated water utility operations in February, 1996. Interest Charges. Interest charges increased by $1.2 million (36.5%) from $3.4 million for the first six months of 1996 to $4.6 million for the first six months of 1997. This increase was largely attributable to bank borrowings by PGE to finance construction expenditures and for other working capital needs and the reduction in PGE's interest expense in the first six months of 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. -12- Income (Loss) From Continuing Operations. Income from continuing operations increased $722,000 (9.3%) from $7.7 million for the six-month period ended June 30, 1996, to $8.5 million for the six-month period ended June 30, 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 the higher levels of other operating expenses and interest charges. Net Income (Loss). The increase in net income of $1.1 million (15.1%) from $7.4 million for the first six months of 1996 to $8.5 million for the first six months of 1997 was largely the result of the higher income from continuing operations, as discussed above, and, to a lesser extent, the absence of any loss with respect to discontinued operations. Dividends on Preferred Stock. Dividends on preferred stock decreased $349,000 (34.2%) from $1.0 million for the first six months of 1996 to $671,000 for the first six months of 1997, primarily as a result of the repurchase by PGE 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 30,090 shares of the 4.10% cumulative preferred stock in 1997. Earnings Applicable to Common Stock. The increase in earnings applicable to common stock of $1.5 million (23.0%) from $6.3 million for the six-month period ended June 30, 1996, to $7.8 million for the six-month period ended June 30, 1997, as well as the increase in earnings per share of common stock of $1.30 from $1.30 per share for the first six months of 1996 (after reflecting a $.33 per share premium on redemption of preferred stock) to $2.60 per share for the first six months of 1997 (after reflecting a $.25 per share discount on redemption 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 14.8% decrease in the weighted average number of shares outstanding as a result of the repurchase by PGE 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 PGE'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 PGE's residential heating customers, which totaled $2.4 million through June 30, 1997, was deferred, without carrying charges, until July, 1997. Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility Code require that the tariffs of local gas distribution companies ("LDCs") be adjusted on an annual basis, and, in the case of larger LDCs such as PGE, 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. -13- In accordance with these procedures, PGE has been permitted to make the following changes since January 1, 1996, to the gas costs contained in its gas tariff rates: [CAPTION] Change in Effective Rate per MCF Calculated Increase Date From To in Annual Revenue [S] [C] [C] [C] 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. Recovery of FERC Order 636 Transition Costs. By Order of the PPUC entered August 26, 1994, PGE began recovering the Non-Gas Transition Costs (i.e. Gas Supply Realignment and Stranded Costs) that it estimates it will ultimately be billed pursuant to Federal Energy Regulatory Commission Order 636 through the billing of a surcharge to its customers effective September 12, 1994. It is currently estimated that $10.8 million of Non-Gas Transition Costs will be billed to PGE, generally over a six-year period extending through January 1, 1999, of which $9.0 million had been billed to PGE and recovered from its customers as of June 30, 1997. 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 Liquidity The primary capital needs of PGE continue to be the funding of its construction program and the seasonal funding of its gas purchases and increases in its 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. 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 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. In order to temporarily finance construction expenditures and to meet its seasonal borrowing requirements, PGE has made arrangements for a total of $83.5 million of unsecured revolving bank credit, which is deemed adequate for its ongoing needs. Specifically, PGE currently has eight bank lines of credit with an aggregate borrowing capacity of $83.5 million which provide for borrowings at interest rates generally less than prime, which mature at various times during 1997 and 1998 and which PGE intends to renew or replace as they expire. As of August 1, 1997, PGE had $46.3 million of borrowings outstanding under these bank lines of credit. -14- In addition, as of June 30, 1997, PGE had borrowed $27.2 million from PEI. The terms and conditions regarding such borrowing provide for the payment of interest at rates generally less than prime and the repayment of principal on December 31, 1997. It is anticipated that the repayment date of this loan will be extended beyond December 31, 1997, until such date as the funds borrowed thereunder are required for use by PEI. PGE plans to ultimately repay this loan from PEI with borrowings under its bank lines of credit. PGE, as well as Honesdale, believe that they will be able to raise in a timely manner such funds as are required for their future construction expenditures, refinancings and other working capital requirements. 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 six-month period ended June 30, 1997. However, PGE plans to issue $50.0 million of unsecured term notes during the third quarter of 1997, of which $25.0 million will be issued to a syndicate of banks and $25.0 million will be issued to accredited private placement investors. The proceeds from these long-term debt financings will be used to repay a portion of PGE's bank borrowings. Construction Expenditures and Related Financings Expenditures for the construction of utility plant totaled $13.9 million during the first six months of 1997 and are currently estimated to be $19.8 million during the remainder of the year. It is anticipated that such expenditures will be financed with internally generated funds and bank borrowings, pending the periodic issuance of stock and long-term debt. Current Maturities of Long-Term Debt and Preferred Stock As of June 30, 1997, $36.3 million of PGE's long-term debt, including $27.2 million borrowed from PEI, and $80,000 of its preferred stock was required to be repaid within twelve months. Forward-Looking Statements Certain statements made above relating to plans, conditions, objectives and economic performance go beyond historical information and may provide an indication of future results. To that extent, they are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, and each is subject to factors that could cause actual results to differ from those in the forward-looking statement, such as the nature of Pennsylvania legislation restructuring the natural gas industry and general economic conditions and uncertainties. -15- PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders On May 14, 1997, 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, Thomas F. Karam, 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 10-1 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. 27-1 Financial Data Schedule -- filed herewith. (b) Reports on Form 8-K PGE filed a report on Form 8-K dated May 28, 1997, pursuant to Item 4. Changes in Registrant's Certifying Accountant, reporting the appointment of the accounting firm of Price Waterhouse LLP as independent accountants. -16- 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 6, 1997 By: /s/ Thomas J. Ward Thomas J. Ward Secretary Date: August 6, 1997 By: /s/ John F. Kell, Jr. John F. Kell, Jr. Vice President, Financial Services (Principal Financial Officer and Principal Accounting Officer) -17- 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-31-1996 JUN-30-1997 PER-BOOK 250,940,000 4,581,000 43,819,000 36,686,000 0 336,026,000 33,142,000 32,678,000 38,773,000 104,593,000 640,000 15,877,000 83,266,000 3,500,000 0 0 36,287,000 80,000 0 0 91,783,000 336,026,000 113,168,000 5,590,000 94,610,000 100,200,000 12,968,000 152,000 13,120,000 4,650,000 8,470,000 671,000 7,799,000 0 4,837,000 28,458,000 2.60 2.60
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