-----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, CxPOuJjIxidwndP6oyxMLnkjf9fc3QcqUW+wPkyAFBb1qVYTymNZMTJM3USaScTV PAzJjeYNzfI9w8FvcS7+Ng== 0000077242-97-000011.txt : 19971110 0000077242-97-000011.hdr.sgml : 19971110 ACCESSION NUMBER: 0000077242-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971107 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: SEC FILE NUMBER: 001-03490 FILM NUMBER: 97710124 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 nine months ended September 30, 1997 and 1996. . . . . . . . . 2 Consolidated Balance Sheets as of September 30, 1997, and December 31, 1996 . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Cash Flows for the nine months ended September 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 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16 -1- PART I. FINANCIAL INFORMATION PG ENERGY INC. Consolidated Statements of Income
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 (Thousands of Dollars, Except for Share Amounts) OPERATING REVENUES $ 16,276 $ 13,998 $ 129,444 $ 108,870 Cost of gas 7,137 5,979 74,547 58,532 OPERATING MARGIN 9,139 8,019 54,897 50,338 OTHER OPERATING EXPENSES: Operation 6,065 5,716 18,730 18,499 Maintenance 1,503 1,379 3,945 4,085 Depreciation 2,242 1,969 6,719 5,838 Income taxes (2,184) (2,005) 3,406 3,408 Taxes other than income taxes 1,997 1,619 9,613 8,331 Total other operating expenses 9,623 8,678 42,413 40,161 OPERATING INCOME (LOSS) (484) (659) 12,484 10,177 OTHER INCOME (DEDUCTIONS), NET 92 (8) 244 311 INCOME (LOSS) BEFORE INTEREST CHARGES (392) (667) 12,728 10,488 INTEREST CHARGES: Interest on long-term debt 2,329 1,665 6,737 4,680 Other interest 199 68 540 556 Allowance for borrowed funds used during construction (45) (73) (144) (169) Total interest charges 2,483 1,660 7,133 5,067 INCOME (LOSS) FROM CONTINUING OPERATIONS (2,875) (2,327) 5,595 5,421 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS - - - (386) NET INCOME (LOSS) (2,875) (2,327) 5,595 5,035 DIVIDENDS ON PREFERRED STOCK 320 363 991 1,383 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (3,195) $ (2,690) $ 4,604 $ 3,652 COMMON STOCK Earnings (loss) per share of common stock: Continuing operations $ (.96) $ (.81) $ 1.39 $ 1.09 Discontinued operations - - - (.10) Net income (loss) before discount (premium) on repurchase of preferred stock (.96) (.81) 1.39 .99 Discount (premium) on repurchase of preferred stock (.01) (.03) .23 (.37) Total $ (.97) $ (.84) $ 1.62 $ .62 Weighted average shares outstanding 3,314,155 3,314,155 3,314,155 3,697,410 Cash dividends per share (Note 2) $ - $ - $ - $ 10.217 The accompanying notes are an integral part of the consolidated financial statements.
-2- PG ENERGY INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 (Thousands of Dollars) ASSETS UTILITY PLANT: At original cost $ 344,242 $ 319,205 Accumulated depreciation (86,933) (79,783) 257,309 239,422 OTHER PROPERTY AND INVESTMENTS 4,471 4,894 CURRENT ASSETS: Cash and cash equivalents 256 690 Accounts receivable - Customers 10,454 17,183 Affiliates, net - 58 Others 284 565 Reserve for uncollectible accounts (1,254) (1,140) Accrued utility revenues 2,388 11,830 Materials and supplies, at average cost 2,811 2,460 Gas held by suppliers, at average cost 25,970 20,265 Natural gas transition costs collectible 1,512 2,525 Deferred cost of gas and supplier refunds, net 9,207 19,316 Prepaid expenses and other 1,365 1,313 52,993 75,065 DEFERRED CHARGES: Regulatory assets - Deferred taxes collectible 30,638 29,771 Other 4,329 4,274 Unamortized debt expense 1,095 1,153 Other 457 - 36,519 35,198 TOTAL ASSETS $ 351,292 $ 354,579 The accompanying notes are an integral part of the consolidated financial statements.
-3- PG ENERGY INC. CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 (Thousands of Dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common shareholder's investment $ 101,254 $ 96,005 Preferred stock of PGE - Not subject to mandatory redemption, net 15,848 18,851 Subject to mandatory redemption 640 739 Long-term debt 105,000 55,000 222,742 170,595 CURRENT LIABILITIES: Current portion of long-term debt - Parent 24,700 31,400 Other 14,720 38,721 Preferred stock subject to repurchase or mandatory redemption 80 115 Note payable 4,500 10,000 Accounts payable - Suppliers 12,277 17,831 Parent 34 348 Affiliates, net 17 - Accrued general business and realty taxes 1,539 2,239 Accrued income taxes 2,858 14,559 Accrued interest 1,319 1,936 Accrued natural gas transition costs 1,154 2,095 Other 2,076 3,375 65,274 122,619 DEFERRED CREDITS: Deferred income taxes 51,293 49,119 Unamortized investment tax credits 4,639 4,767 Operating reserves 2,805 3,086 Other 4,539 4,393 63,276 61,365 COMMITMENTS AND CONTINGENCIES (Note 5) TOTAL CAPITALIZATION AND LIABILITIES $ 351,292 $ 354,579 The accompanying notes are an integral part of the consolidated financial statements.
-4- PG ENERGY INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 1996 (Thousands of Dollars) CASH FLOW FROM OPERATING ACTIVITIES: Income from continuing operations $ 5,595 $ 5,421 Effects of noncash charges to income - Depreciation 6,764 5,890 Deferred income taxes, net 904 519 Provisions for self insurance 443 742 Other, net 1,335 953 Changes in working capital, exclusive of cash and current portion of long-term debt - Receivables and accrued utility revenues 17,314 18,997 Gas held by suppliers (5,705) (10,299) Accounts payable (6,528) (4,639) Deferred cost of gas and supplier refunds, net 10,316 (16,801) Other current assets and liabilities, net (1,260) 1,291 Other operating items, net (1,509) (4,636) Net cash provided by (used for) continuing operations 27,669 (2,562) Net cash used for discontinued operations, principally for the payment of income taxes (13,655) (35,470) Net cash provided by (used for) operating activities 14,014 (38,032) CASH FLOW FROM INVESTING ACTIVITIES: Additions to utility plant (22,810) (18,501) Proceeds from the sale of discontinued operations - 261,752 Acquisition of regulated business (2,019) - Other, net 530 212 Net cash provided by (used for) investing activities (24,299) 243,463 CASH FLOW FROM FINANCING ACTIVITIES: Issuance of common stock - 339 Repurchase of common stock - (85,007) Repurchase/redemption of preferred stock (3,137) (15,364) Dividends on common and preferred stock (991) (35,151) Issuance of long-term debt 25,000 - Issuance of long-term debt to parent - 49,900 Repayment of long-term debt to parent (6,700) (12,600) Repayment of long-term debt - (50,000) Net decrease in bank borrowings (5,021) (55,854) Other, net 700 (1,390) Net cash provided by (used for) financing activities 9,851 (205,127) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (434) 304 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 690 328 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 256 $ 632 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest (net of amount capitalized) $ 7,203 $ 5,704 Income taxes $ 15,042 $ 34,386 The accompanying notes are an integral part of the 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 thirteen-county area in northeastern Pennsylvania, a territory that includes 130 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 rate and accounting practices of regulatory agencies such as the PPUC. Interim Financial Statements. The interim consolidated financial statements included herein have been prepared by 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 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 which are difficult to predict and are beyond the control of PGE. Therefore, actual amounts could differ from these estimates. -6- (2) CASH DIVIDENDS The cash dividends per share for the nine months ended September 30, 1997, 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. (3) 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. (4) 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. -7- (5) 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 1972, 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. Notwithstanding this determination by the EPA, some of the sites may ultimately require remediation. One site that was owned by PGE 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 PGE acquired the site in 1951, required the removal of materials from two former gas holders. The cost of such remediation is purported to have been approximately $525,000, of which the party performing the remediation is seeking to recover a material portion from PGE. PGE, however, believes that any liability it may have with respect to such remediation would be considerably less than the amount that the other party is seeking. While the final resolution of the matter is uncertain, PGE does not believe that it will have any material impact on its financial position or results of operations. Although the conclusion by the EPA that it anticipates no further remedial action with respect to the sites at which PGE operated manufactured gas plants 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 nine-month periods ended September 30, 1997, and September 30, 1996:
Percentage of Operating Revenues Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0% Cost of gas................................ 43.9 42.7 57.6 53.8 OPERATING MARGIN............................. 56.1 57.3 42.4 46.2 OTHER OPERATING EXPENSES: Operation.................................. 37.2 40.8 14.5 17.0 Maintenance................................ 9.2 9.8 3.1 3.8 Depreciation............................... 13.8 14.1 5.2 5.4 Income taxes............................... (13.4) (14.3) 2.6 3.1 Taxes other than income taxes.............. 12.3 11.6 7.4 7.6 Total other operating expenses........... 59.1 62.0 32.8 36.9 OPERATING INCOME (LOSS)...................... (3.0) (4.7) 9.6 9.3 OTHER INCOME, NET............................ 0.6 - 0.2 0.3 INTEREST CHARGES............................. (15.3) (11.9) (5.5) (4.6) INCOME (LOSS) FROM CONTINUING OPERATIONS..... (17.7) (16.6) 4.3 5.0 LOSS WITH RESPECT TO DISCONTINUED OPERATIONS. - - - (0.4) NET INCOME (LOSS)............................ (17.7) (16.6) 4.3 4.6 DIVIDENDS ON PREFERRED STOCK(1).............. (1.9) (2.6) (0.7) (1.2) EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (19.6) (19.2) 3.6 3.4 (1) None of the dividends on preferred stock was allocated to the discontinued operations.
Three Months Ended September 30, 1997, Compared With Three Months Ended September 30, 1996 Operating Revenues. Operating revenues increased $2.3 million (16.3%) from $14.0 million for the three-month period ended September 30, 1996, to $16.3 million for the three-month period ended September 30, 1997, primarily as a result of the rate increase granted PGE by the Pennsylvania Public Utility Commission (the "PPUC") which became effective on January 15, 1997 (see "Rate Matters"), higher levels in PGE's gas cost rate and the operating revenues of -9- Honesdale Gas Company ("Honesdale"), which was acquired by the Company on February 14, 1997, totaling $323,000. Also contributing to the increase was a 56 million cubic feet (3.7%) increase in deliveries to PGE's residential and commercial heating customers that was largely attributable to cooler weather. There was an increase of 47 heating degree days from 163 (135.8% of normal) during the third quarter of 1996 to 210 (175.0% of normal) during the third quarter of 1997. Cost of Gas. The cost of gas increased $1.2 million (19.4%) from $6.0 million for the three-month period ended September 30, 1996, to $7.1 million for the three-month period ended September 30, 1997, primarily because of the aforementioned increases in the gas cost rate (see "-Rate Matters"), increased sales to residential and commercial heating customers and $194,000 of gas costs related to Honesdale. Operating Margin. The operating margin increased $1.1 million (14.0%) from $8.0 million in the third quarter of 1996 to $9.1 million in the third quarter of 1997, primarily because of the increase in PGE's gas rates effective January 15, 1997 (see "-Rate Matters"), the higher level of sales and the inclusion of Honesdale's operating margin. However, as a percentage of operating revenues, the operating margin decreased from 57.3% for the quarter ended September 30, 1996, to 56.1% for the quarter ended September 30, 1997, as a result of the proportionately higher cost of gas in 1997. Other Operating Expenses. Other operating expenses increased $945,000 (10.9%) for the three-month period ended September 30, 1997, compared to the three-month period ended September 30, 1996. This increase was partially attributable to a higher level of operation expenses, which increased by $349,000 (6.1%), largely as a result of the inclusion of $189,000 of operation expenses of Honesdale. Also contributing to the increase in other operating expenses was a $378,000 (23.3%) 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 of Honesdale, and a $273,000 (13.9%) increase in depreciation expense attributable to additions to utility plant. As a percentage of operating revenues, other operating expenses decreased from 62.0% in the third quarter of 1996 to 59.1% in the third quarter of 1997, primarily as a result of the proportionately greater increase in operating revenues during the period. Income taxes decreased $179,000 (8.9%) from a credit of $2.0 million in the third quarter of 1996 to a credit of $2.2 million in the third quarter of 1997 due to a lower level of loss before income taxes (for this purpose, operating income net of interest charges). Operating Income (Loss). As a result of the above, the operating loss decreased by $175,000 (26.6%) from $659,000 for the three-month period ended September 30, 1996, to $484,000 for the three-month period ended September 30, 1997, and decreased as a percentage of total operating revenues for such periods from 4.7% in 1996 to 3.0% in 1997. Interest Charges. Interest charges increased by $823,000 (49.6%) from $1.7 million for the three-month period ended September 30, 1996, to $2.5 million for the three-month period ended September 30, 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 interest expense in the third quarter of 1996 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. -10- Income (Loss) From Continuing Operations. The loss from continuing operations increased $548,000 (23.5%) from $2.3 million for the quarter ended September 30, 1996, to $2.9 million for the quarter ended September 30, 1997. This increase was largely the result of the matters discussed above, principally the increases in other operating expenses and interest charges, the effects of which were partially offset by the increased operating margins. Dividends on Preferred Stock. Dividends on preferred stock decreased $43,000 (11.8%) from $363,000 for the three-month period ended September 30, 1996, to $320,000 for the three-month period ended September 30, 1997, primarily as a result of the repurchase by PGE in 1997 of 30,375 shares of its 4.10% cumulative preferred stock. Earnings (Loss) Applicable to Common Stock. The increase in loss applicable to common stock of $505,000 (18.8%) from $2.7 million for the three-month period ended September 30, 1996, to $3.2 million for the three-month period ended September 30, 1997, as well as the increase in loss per share of common stock of $.13 from a loss of $.84 per share for the third quarter of 1996 (after reflecting a $.03 per share premium on redemption of preferred stock) to a loss of $.97 per share for the third quarter of 1997 (after reflecting a $.01 per share premium on redemption of preferred stock) were primarily the result of the increase in loss from continuing operations, as discussed above. While discounts and premiums on the repurchase of preferred stock are reflected in retained earnings and are not a determinant of net income, the discounts and premiums associated with repurchases must be taken into account in calculating the earnings (loss) per share of common stock. Nine Months Ended September 30, 1997, Compared With Nine Months Ended September 30, 1996 Operating Revenues. Operating revenues increased $20.6 million (18.9%) from $108.9 million for the nine-month period ended September 30, 1996 to $129.4 million for the nine-month period ended September 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 increases in rates was partially offset by an 896 million cubic feet (5.0%) decrease in deliveries to PGE's residential and commercial heating customers. There was a decrease of 192 (4.4%) heating degree days from 4,356 (106.9% of normal) during the first nine months of 1996 to 4,164 (102.2% of normal) during the first nine months of 1997. Operating revenues of Honesdale totaling $1.9 million from its February 14, 1997, acquisition date through September 30, 1997, also contributed to the increased operating revenues. Cost of Gas. The cost of gas increased $16.0 million (27.4%) from $58.5 million for the nine-month period ended September 30, 1996, to $74.5 million for the nine-month period ended September 30, 1997, primarily because of higher levels in PGE's gas cost rate (see "-Rate Matters") and $1.3 million of gas costs related to Honesdale from its February 14, 1997, acquisition date through September 30, 1997. Operating Margin. The operating margin increased $4.6 million (9.1%) from $50.3 million in the nine-month period ended September 30, 1996, to $54.9 million in the nine-month period ended September 30, 1997, primarily because of the 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, however, the operating margin decreased from 46.2% in the first nine months of 1996 to 42.4% in the -11- first nine months of 1997 as a result of the proportionately higher cost of gas in 1997. Other Operating Expenses. Other operating expenses increased $2.3 million (5.6%) from $40.2 million for the first nine months of 1996 to $42.4 million for the first nine months of 1997. This increase was primarily attributable to an $881,000 (15.1%) increase in depreciation expense, as a result of additions to utility plant, and a $1.3 million (15.4%) 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. As a percentage of operating revenues, other operating expenses decreased from 36.9% during the first nine months of 1996, to 32.8% during the first nine months of 1997, primarily as a result of the proportionately greater increase in operating revenues during the period. Operating Income (Loss). As a result of the above, operating income increased by $2.3 million (22.7%) from $10.2 million for the nine-month period ended September 30, 1996, to $12.5 million for the nine-month period ended September 30, 1997, primarily because of the increased operating margin, the effect of which was partially offset by the higher level of other operating expenses. As a percentage of total operating revenues, operating income increased from 9.3% in 1996 to 9.6% in 1997. Interest Charges. Interest charges increased by $2.1 million (40.8%) from $5.1 million for the first nine months of 1996 to $7.1 million for the first nine 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 nine 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. Income (Loss) From Continuing Operations. Income from continuing operations increased $174,000 (3.2%) from $5.4 million for the nine months ended September 30, 1996, to $5.6 million for the nine months ended September 30, 1997. This increase was largely the result of the matters discussed above, principally the increase in operating income, the effect of which was largely offset by the increased interest charges. Net Income (Loss). The increase in net income of $560,000 (11.1%) from $5.0 million for the first nine months of 1996 to $5.6 million for the first nine months of 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 $392,000 (28.3%) from $1.4 million for the nine-month period ended September 30, 1996, to $991,000 for the nine-month period ended September 30, 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 30,375 shares of the 4.10% cumulative preferred stock in 1997. -12- Earnings (Loss) Applicable to Common Stock. The increase in earnings applicable to common stock of $952,000 (26.1%) from $3.7 million for the nine- month period ended September 30, 1996, to $4.6 million for the nine-month period ended September 30, 1997, as well as the increase in earnings per share of common stock of $1.00 from $.62 per share for the first nine months of 1996 (after reflecting a $.37 per share premium on redemption of preferred stock) to $1.62 per share for the first nine months of 1997 (after reflecting a $.23 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 10.4% 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. 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 Calculated Effective Rate per MCF Increase/(Decrease) Date From To in Annual Revenue [S] [C] [C] [C] December 1, 1997 $4.49 $3.95 $(15,700,000) 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. 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 $10.7 million of Non-Gas Transition Costs will be billed to PGE, generally over a six-year period extending through January 1, -13- 1999, of which $9.3 million had been billed to PGE and $9.2 million had been recovered from its customers as of September 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 $68.5 million of unsecured revolving bank credit, which is deemed adequate for its presently anticipated needs. Specifically, PGE currently has seven bank lines of credit with an aggregate borrowing capacity of $68.5 million which provide for borrowings at interest rates generally less than prime and mature at various times during 1998 and 1999 and which PGE intends to renew or replace as they expire. As of November 3, 1997, PGE had $21.2 million of borrowings outstanding under these bank lines of credit. In addition, as of September 30, 1997, PGE had borrowed $24.7 million from Pennsylvania Enterprises, Inc. ("PEI"), its parent Company. 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. On September 12, 1997, PGE 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 (5.875% as of November 3, 1997). Under the terms of the Term Loan Agreement, PGE can choose interest rate periods of one, two, three or six months. PGE utilized the proceeds from such loan to repay $25.0 million of its bank borrowings. -14- On September 30, 1997, PGE issued $25.0 million of its 6.92% Senior Notes due September 30, 2004 (the "Senior Notes"). The proceeds from the issuance of the Senior Notes were used by PGE to repay $25.0 million of its bank borrowings. No capital stock financings were consummated by PGE during the nine-month period ended September 30, 1997. Construction Expenditures and Related Financings Expenditures for the construction of utility plant totaled $22.7 million during the first nine months of 1997 and are currently estimated to be $10.9 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 September 30, 1997, $39.5 million of PGE's long-term debt, including $24.7 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 6. Exhibits and Reports on Form 8-K (a) Exhibits 10-1 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. 10-2 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. 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. -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: November 7, 1997 By: /s/ Thomas J. Ward Thomas J. Ward Secretary Date: November 7, 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 EXTRACTRD FROM THE BALANCE SHEET, STATEMENTS OF INCOME AND CASH FLOW, AND IS QUALIFIED IN ITS ENTIRETY BR REFERENCE TO SUCH STATEMENTS. 0000077242 PG ENERGY INC 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 257,309,000 4,471,000 52,993,000 36,519,000 0 351,292,000 33,142,000 32,678,000 35,434,000 101,254,000 640,000 15,848,000 105,000,000 4,500,000 0 0 39,420,000 80,000 0 0 84,550,000 351,292,000 129,444,000 3,406,000 113,554,000 116,960,000 12,484,000 244,000 12,728,000 7,133,000 5,595,000 991,000 4,604,000 0 4,837,000 14,014,000 1.62 1.62
-----END PRIVACY-ENHANCED MESSAGE-----