PART I
ITEM l. BUSINESS
GENERAL
Pennsylvania Gas and Water Company ("PG&W"), a subsidiary of Pennsylvania
Enterprises, Inc. ("PEI"), was incorporated in Pennsylvania in 1867 as Dunmore
Gas & Water Company. PG&W is an operating public utility regulated by the
Pennsylvania Public Utility Commission (the "PPUC") and is engaged in gas
utility operations and water utility operations in northeastern Pennsylvania.
As of December 31, 1994, PG&W had approximately 139,300 gas customers and
132,500 water customers.
PG&W has one wholly-owned subsidiary, Penn Gas Development Co., which was
organized to promote the use of natural gas primarily by assisting in the
financing of the development of property but which has been inactive in recent
years.
PG&W's gas operating revenues are highly seasonal and depend on certain
factors that are beyond its control, such as the price of natural gas and the
availability of markets for natural gas. Other factors include the weather, the
effect of federal and state regulation, the effect of competition from other
forms of energy, including electricity and oil, and the switching of customers
from sales to transportation service. See "GAS BUSINESS-Transportation and
Storage Service."
Since 1986, PG&W has incurred significant expenditures for water treatment
facilities and improvements to its water distribution system. While the PPUC
has approved rate increases since January 1, 1991, designed to produce an
aggregate of $35.8 million in additional annual water operating revenues, PG&W
will require additional rate increases in order to fully recover the capital
investment associated with its water utility operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations-Rate
Matters - Water Rate Filings" in Item 7 of this Form 10-K and "Industry
Segments."
As of December 31, 1994, PG&W employed approximately 965 persons. Certain
of these employees also perform services for PEI and its subsidiaries, since
certain of those companies have no employees other than officers.
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INDUSTRY SEGMENTS
The following tables set forth certain financial information concerning
PG&W's industry segments for the years indicated.
[CAPTION]
Year Ended December 31,
1994 1993 1992
(Thousands of Dollars)
[S] [C] [C] [C]
GAS UTILITY OPERATIONS
Operating revenues $167,992 $153,325 $143,227
Operating expenses excluding income taxes:
Cost of gas 98,653 86,557 77,720
Depreciation 6,667 6,388 6,087
Other operating expenses 37,247 34,927 34,031
Total 142,567 127,872 117,838
Operating income before income taxes 25,425 25,453 25,389
Income taxes 5,926 6,307 6,129
Operating income $ 19,499 $ 19,146 $ 19,260
Additions to utility plant $ 17,455 $ 13,325 $ 12,669
Identifiable assets at December 31 (a) $290,253 $285,596 $238,017
WATER UTILITY OPERATIONS
Operating revenues $ 66,731 $ 53,363 $ 48,651
Operating expenses excluding income taxes:
Depreciation 7,672 5,911 4,769
Other operating expenses 29,072 29,292 27,347
Deferred treatment plant costs, net 581 (1,532) (294)
Total 37,325 33,671 31,822
Operating income before income taxes 29,406 19,692 16,829
Income taxes 6,573 2,682 2,176
Operating income $ 22,833 $ 17,010 $ 14,653
Additions to utility plant $ 19,321 $ 32,575 $ 44,352
Identifiable assets at December 31 (a) $440,202 $426,389 $379,989
TOTAL OPERATIONS
Operating revenues $234,723 $206,688 $191,878
Operating expenses excluding income taxes:
Cost of gas 98,653 86,557 77,720
Depreciation 14,339 12,299 10,856
Other operating expenses 66,319 64,219 61,378
Deferred treatment plant costs, net 581 (1,532) (294)
Total 179,892 161,543 149,660
Operating income before income taxes 54,831 45,145 42,218
Income taxes 12,499 8,989 8,305
Operating income $ 42,332 $ 36,156 $ 33,913
Additions to utility plant $ 36,776 $ 45,900 $ 57,021
Identifiable assets at December 31 (a) $730,455 $711,985 $618,006
Other assets at December 31 (b) 8,825 14,323 11,866
Total assets $739,280 $726,308 $629,872
(a) Includes allocated common plant and is net of the respective accumulated
depreciation.
(b) Composed primarily of investments, cash and special deposits, prepayments
and unallocated deferred charges.
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Operating income from gas utility operations increased $353,000 (1.8%) from
$19.1 million in 1993 to $19.5 million in 1994, primarily as a result of a $2.6
million increase in the gross margin (gas operating revenues less the cost of
gas), the effect of which was partially offset by a higher level of maintenance
expense because of colder than normal weather in January and February 1994, and
increased gross receipts tax as a result of the higher level of gas revenues.
Operating income from gas utility operations decreased $114,000 (0.6%) from
$19.3 million in 1992 to $19.1 million in 1993, primarily as a result of
increases in other operations and maintenance expenses, depreciation, and income
and gross receipts taxes, the effects of which were largely offset by a $1.3
million increase in the gross margin. The higher level of additions to gas
utility plant in 1994 was principally the result of increased expenditures for
mains and services.
Operating income from water utility operations increased $5.8 million
(34.2%) from $17.0 million in 1993 to $22.8 million in 1994. This increase was
primarily the result of rate increases effective (i) March 9, 1993, for
customers in the Spring Brook Water Rate Area served exclusively by the Crystal
Lake Water Treatment Plant, (ii) June 23, 1993, for customers in the Scranton
Water Rate Area and (iii) December 16, 1993, for customers in the Spring Brook
Water Rate Area served by the Ceasetown and Watres Water Treatment Plants, as
well as a decrease in other taxes. The effects of these increases were
partially offset by increases in other operations expense, depreciation, net
deferred treatment plant costs and income taxes. Operating income from water
utility operations increased $2.4 million (16.1%) from $14.7 million in 1992 to
$17.0 million in 1993. This increase was primarily the result of the
aforementioned rate increases which became effective in 1993. The effects of
this increase were partially offset by increases in other operations and
maintenance expenses, depreciation, and income and property taxes. Additions to
water utility plant decreased in 1994 and 1993, largely as a result of the
timing of expenditures with respect to the Crystal Lake, Ceasetown and Watres
Water Treatment Plants in the Spring Brook Water Rate Area.
GAS BUSINESS
PG&W distributes natural gas to an area in northeastern Pennsylvania lying
within the Counties of Lackawanna, Luzerne, Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union and Snyder, a territory that includes
116 municipalities, in addition to the cities of Scranton, Wilkes-Barre and
Williamsport. The total estimated population of PG&W's natural gas service
area, based on the 1990 U.S. Census, is 561,000.
Number and Type of Customers. At December 31, 1994, PG&W had approximately
139,300 natural gas customers, from which it derived total natural gas revenues
of $168.0 million during 1994. The following chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1994:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.6% 63.8%
Commercial 8.1 23.8*
Industrial 0.2 10.8*
Other Users 0.1 1.6
Total 100.0% 100.0%
* Includes the 4.0% of total gas revenues derived from interruptible
customers.
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During 1994, PG&W delivered an estimated total of 44,400,000 thousand cubic
feet ("MCF") of natural gas to its customers, of which 56.3% was sold at normal
tariff rates, 40.9% represented gas transported for customers and 2.8% was sold
under the Alternate Fuel Rate (as described below).
PG&W sells gas to "firm" customers with the understanding that it will not
interrupt their supply except during periods of supply deficiency or emergency
conditions. "Interruptible" gas customers are required to have equipment
installed capable of using an alternate energy form. Interruptible customers,
therefore, do not require a continuous supply of gas and their supply can be
interrupted by PG&W at any time under the conditions set forth in their
contracts for gas service. In 1994, a total of 1,157,000 MCF of natural gas was
sold by PG&W to interruptible customers and 3,712,000 MCF was transported for
such customers, which together represented 11.0% of the total deliveries of
natural gas by PG&W to its customers during 1994.
No individual customer accounted for as much as 2.0% of PG&W's operating
revenues in 1994.
Transportation and Storage Service. PG&W provides transportation service to
natural gas customers who consume at least 5,000 MCF of natural gas per year,
meet certain other conditions and execute a transportation agreement. In
addition, groups of up to ten customers, with a combined consumption of at least
5,000 MCF per year, are eligible for transportation service. Prior to March 25,
1993, transportation service was only provided to individual customers, or
groups of not more than three customers, who consumed at least 50,000 MCF of
natural gas per year. Transportation service is provided on both a firm and an
interruptible basis and includes provisions regarding over and under deliveries
of gas on behalf of the respective customer. In addition, PG&W offers firm
transportation customers a "storage service" pursuant to which such customers
may have gas delivered to PG&W during the period from April through October for
storage and redelivery during the winter period. PG&W also offers firm
transportation customers a "standby service" under the terms of which PG&W will
supply the customer with gas in the event the customer's transportation service
is interrupted or curtailed by its broker, supplier or other third party.
Commencing in April, 1995, PG&W will begin offering a Market Sensitive Sales
Service ("MSSS") in conjunction with its transportation service. The MSSS,
which was approved by Order of the PPUC entered January 11, 1995, provides for
the sale of natural gas at contracted rates based on market prices and other
specified terms and conditions. The MSSS is expected to result in additional
sales of natural gas by PG&W and less transportation of natural gas by it on
behalf of third parties.
Set forth below is a summary of the gas transported by PG&W and the number
of its customers using transportation service from 1992 to 1994:
[CAPTION]
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
[S] [C] [C] [C] [C]
1994 574 13,411,000 4,744,000 18,155,000
1993 569 10,078,000 4,627,000 14,705,000
1992 457 9,084,000 3,843,000 12,927,000
During 1995, PG&W expects to transport approximately 16,672,000 MCF of
natural gas, of which it anticipates approximately 5,203,000 MCF will be
Pennsylvania gas.
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The rates charged by PG&W for the transportation of interstate gas are
essentially equal to its tariff rates for the sale of gas with all gas costs
removed. As a result, the transportation of interstate gas has had no
significant adverse effect on earnings. However, the rate charged for the
transportation of gas produced in Pennsylvania yields considerably less revenue
than the gross margin (gas operating revenues less the cost of gas) that would
be realized from sales under normal tariff rates. This lower rate for the
transportation of Pennsylvania gas is the result of regulations adopted by the
PPUC to encourage the production of natural gas within the state.
Alternate Fuel Sales. In order to be more competitive in terms of price
with certain alternate fuels, PG&W offers an Alternate Fuel Rate for eligible
customers. This rate applies to large commercial and industrial accounts that
have the capability of using No. 2, 4 or 6 fuel oil or propane as an alternate
source of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PG&W's normal tariff rates, PG&W is permitted by the PPUC to
lower its price to these customers so that PG&W can remain competitive with the
alternate fuel. However, in no instance may PG&W sell gas under this special
arrangement for less than its average commodity cost of gas purchased during the
month. PG&W's revenues under the Alternate Fuel Rate amounted to $3.7 million
in 1994, $4.6 million in 1993 and $3.4 million in 1992. These revenues
reflected the sale of 1,223,000 MCF, 1,541,000 MCF and 1,149,000 MCF in 1994,
1993, and 1992, respectively. It is anticipated that approximately 1,410,000
MCF will be sold under the Alternate Fuel Rate in 1995. The change in volumes
sold under the Alternate Fuel Rate reflects the switching by certain customers
between alternate fuel service and transportation service as a result of
periodic changes in the relative cost of natural gas and alternate fuels.
FERC Order 636. On April 8, 1992, the Federal Energy Regulatory Commission
("FERC") issued Order No. 636 ("Order 636"), requiring interstate pipeline
suppliers to restructure their services and operations in an attempt to enhance
competition and maximize the benefits of wellhead price decontrol. The
objectives of Order 636 were to be accomplished primarily by unbundling the
services (i.e., the sale, transportation and storage of gas) provided by the
interstate pipeline suppliers and by making those services available to end
users on the same terms as local gas distribution companies, such as PG&W.
Pursuant to Order 636, the interstate pipelines have been required to: (1)
unbundle transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3) provide a no-notice transportation service; (4) provide open
access storage service; (5) reallocate upstream pipeline capacity and upstream
storage for the benefit of downstream interstate pipeline suppliers; and (6)
implement a straight fixed-variable rate design to replace all modified fixed-
variable rate designs. The interstate pipelines have been granted a blanket
sales certificate to make unbundled sales in competition with non-pipeline
merchants and are being permitted recovery of all reasonable and prudent
transition costs incurred in order to comply with Order 636. Such transition
costs include: (1) the cost of renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs"); (2) recovery of gas costs included
in the interstate pipelines' purchased gas adjustment accounts at the time they
adopted market-based pricing for gas sales ("Account 191 Costs"); (3)
unrecovered costs of assets that cannot be assigned to customers of unbundled
services ("Stranded Costs"); and (4) costs of new facilities to physically
implement Order 636 ("New Facility Costs"). Additionally, the interstate
pipelines have been allowed pre-granted abandonment of sales and transportation
services to customers upon expiration of applicable contracts, subject to
customers' rights of first refusal.
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On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of Order 636 transition costs.
The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PG&W and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by local distribution companies through the filing of a tariff pursuant
to either the existing surcharge or base rate provisions of the Pennsylvania
Public Utility Code (the "Code"). The PGC Order further stated that all such
filings would be evaluated on a case-by-case basis. As of February 1, 1994,
PG&W began to recover the Gas Transition Costs that are being billed to PG&W by
its interstate pipelines through an increase in its PGC rate. It is currently
estimated that these costs, which will be billed to PG&W over a nineteen-month
period extending through March 31, 1995, will aggregate $1.2 million, of which
$1.1 million had been billed to PG&W and $659,000 had been recovered from its
customers as of December 31, 1994. By Order of the PPUC entered August 26,
1994, PG&W began recovering the Non-Gas Transition Costs that it estimates it
will ultimately be billed pursuant to Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W,
generally over a four-year period extending through the fourth quarter of 1997,
of which $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. As of December 31, 1994,
PG&W had recorded a liability of $5.6 million for the estimated transition costs
that remained to be billed to it as of such date, and both a current asset and a
deferred asset (which together totaled $8.8 million) representing the transition
costs remaining to be recovered from its customers.
Sources of Supply. PG&W purchases natural gas from marketers, producers,
and integrated energy companies, generally under the terms of supply
arrangements that extend for the heating season (i.e., November through March)
or for periods of one year or longer. These contracts typically provide for an
adjustment each month in the cost of gas purchased pursuant thereto based on the
then current market prices for natural gas. The largest individual supplier, an
integrated energy company, accounted for 24.5% of PG&W's total purchases of
natural gas in 1994. No other supplier accounted for more than 15% of PG&W's
total purchases of natural gas in 1994.
The purchases of natural gas by PG&W during each of the years 1994, 1993 and
1992 are summarized below:
[CAPTION]
Volume Average
Year Purchased (MCF) Cost per MCF
[S] [C] [C]
1994 28,364,000 $2.82
1993 26,200,000 $2.98
1992 21,323,000 $2.61
During 1995, PG&W expects to purchase a total of approximately 30,157,000
MCF of natural gas under seasonal or longer-term contracts at a currently
projected average cost of $2.79 per MCF. It is expected that a portion of these
purchases will be made through a company that is being formed by a group of
eight Northeastern and Mid-Atlantic local gas distribution companies including
PG&W, the primary purposes of which will be to increase the reliability of
natural gas supplies and reduce the cost of natural gas for the eight companies.
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PG&W presently has adequate supplies of natural gas to meet the demands of
existing customers through October, 1995, and believes that it will be able to
obtain sufficient supplies to meet the demands of its existing customers and to
serve new customers (of which approximately 3,500 are expected to be added in
1995) beyond October, 1995.
Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, PG&W has entered into agreements with its former interstate pipeline
suppliers providing for the firm transportation by those pipelines of the
following quantities of gas:
[CAPTION]
Daily Percentage of Total
Expiration Transportation Transportation
Pipeline Date (a) Entitlement (MCF) Entitlement
[S] [C] [C] [C]
Transco Various through 2015 74,100 (b) 55.5%
Tennessee 1999 and 2000 48,252 36.2
Columbia 2004 11,016 8.3
133,368 100.0%
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PG&W agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Includes 3,300 MCF per day that PG&W can transport during the period
December through February pursuant to an agreement with Transco that
extends through 2011.
PG&W has also contracted with its former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:
[CAPTION]
Maximum
Expiration Total Storage Daily Withdrawal
Pipeline Date (a) (MCF) (b) From Storage (MCF)
[S] [C] [C] [C]
Transco Various through 2013 6,500,000 131,044
Tennessee November 1, 2000 3,500,000 23,031
Columbia October 31, 2004 1,100,000 16,036
11,100,000 170,111
(a) Agreements are automatically extended from month-to-month or year-
to-year after their expiration unless notice of termination is given
by one of the parties and PG&W agrees to such termination. In no
event may any of the agreements be unilaterally terminated by the
pipelines without the approval of the FERC.
(b) Storage is utilized in order to meet peak day and seasonal demands.
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Based on its present pipeline transportation and storage entitlements, PG&W
is entitled to a maximum daily delivery of the following quantities of gas:
[CAPTION]
Firm Pipeline Withdrawals
Transportation From Storage Percentage
Pipeline (MCF) (MCF) Total (MCF) of Total
[S] [C] [C] [C] [C]
Transco 74,100 (a) 131,044 205,144 67.6%
Tennessee 48,252 23,031 71,283 23.5
Columbia 11,016 16,036 27,052 8.9
133,368 170,111 303,479 100.0%
(a) Includes 3,300 MCF that may be transported during the period
December through February.
In accordance with the provisions of Order 636, PG&W may release to its
customers and other parties the portions of its firm pipeline transportation and
storage entitlements which are in excess of its requirements. Such releases may
be made upon notice in accordance with the provisions of Order 636 and for a
consideration not in excess of PG&W's cost of the respective entitlement.
Releases may be made for periods ranging from one day to the remaining term of
the entitlement.
Since September 1, 1993, PG&W has released portions of its firm pipeline
transportation capacity to certain of its customers and third parties for
varying periods extending up to three years. The maximum capacity so released
on any one day in 1994 was 38,985 MCF. Through March 10, 1995, PG&W had not,
however, released any of its storage capacity.
PG&W believes that it has sufficient firm pipeline transportation and
storage entitlements to meet the demands of its existing customers and to supply
new customers.
Peak Day Requirements. PG&W plans for peak day demand on the basis of a
daily mean temperature of 0 degrees Fahrenheit. Requirements for such a design
peak day, assuming the curtailment of service to interruptible customers, are
currently estimated to be 302,906 MCF. Based upon present pipeline
transportation and storage contracts, and assuming no curtailments by its
suppliers, PG&W could meet a peak day requirement of 303,479 MCF. PG&W's
historic maximum daily sendout is 293,683 MCF, which occurred on January 19,
1994, when service to interruptible customers was curtailed. The mean
temperature in its gas service area on that day was -8 degrees Fahrenheit.
Construction Expenditures. PG&W's construction expenditures for gas utility
plant in 1994 totaled $17.5 million and are estimated to be $21.9 million for
1995. The higher level of expenditures estimated for 1995 reflects certain
long-term pipeline improvement programs, as well as an increased emphasis on new
business development.
Regulation. PG&W's natural gas utility operations are regulated by the
PPUC, particularly as to utility rates, service and facilities, accounts,
issuance of certain securities, the encumbering or disposition of public utility
properties, the design, installation, testing, construction, and maintenance of
PG&W's pipeline facilities and various other matters associated with broad
regulatory authority.
In addition to those regulations promulgated by the PPUC, PG&W must also
comply with federal, state and local regulations relating generally to the
discharge of materials into the environment or otherwise relating to the
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protection of the environment. Compliance with such regulations has not had any
material effect upon the capital expenditures, earnings or competitive position
of PG&W's gas business. Although it cannot predict the future impact of these
regulations, PG&W believes that any additional expenditures and costs made
necessary by them would be fully recoverable through rates.
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants have been in operation since 1960, and several of the plant sites are no
longer owned by PG&W. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed notices with the
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
laws, PG&W does not believe that additional costs, if any, related to these
manufactured gas plant sites will be material to its financial position or
results of operations.
PG&W's gas distribution and transportation activities are not subject to the
Natural Gas Act, as amended.
Valve Maintenance. On November 16, 1993, the PPUC staff issued an Emergency
Order, subsequently ratified by the PPUC (the "Emergency Order"), requiring PG&W
by January 31, 1994, 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. The
Emergency Order was issued following the occurrence of two gas incidents (one
concerning an explosion and the other a fire) in PG&W's service area in June and
October, 1993, respectively, involving nearby gas shut off valves that had been
paved over by third parties and that could not be readily located due to alleged
inaccurate service line records. The Emergency Order also cited four additional
incidents occurring since January 31, 1991, in which shut off valves had been
paved over or records were inaccurate. In connection with these incidents, the
PPUC has alleged that PG&W has violated certain federal and state regulations
related to gas pipeline valves. The PPUC has the authority to assess fines for
such violations. The PPUC ordered PG&W to develop a plan, including a
timetable, by December 30, 1993, for compliance with the terms of the Emergency
Order. PG&W met the December 30, 1993, deadline for submission of this plan.
However, PG&W included in such plan, a timetable, which, in effect, requested an
extension of the January 31, 1994, deadline contained in the Emergency Order,
which PG&W viewed as unrealistic. On February 2, 1994, the PPUC staff notified
PG&W that it considered the plan submitted by PG&W "only a general plan of
action to address the problem with valving in [PG&W's] system" and that the plan
"is lacking in detail and more information is needed." By letter dated February
2, 1994, the PPUC staff indicated that it would initiate an informal
investigation of the matter, including PG&W's responsibility for the incidents
referred to in the Emergency Order. Following discussions between the PPUC
staff and PG&W regarding the development of a mutually acceptable plan, PG&W
submitted a detailed plan of action for complying with the Emergency Order to
the PPUC on April 11, 1994, which was subsequently revised. The PPUC staff
agreed that the revised plan (the "Plan") satisfies the concerns of the PPUC
expressed in the Emergency Order, and on November 30, 1994, the PPUC staff and
PG&W entered into a Settlement Agreement, subject to approval by the PPUC, (i)
terminating the informal investigation initiated by the PPUC staff, (ii)
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memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing
PG&W's commitment to satisfy the requirements of the Plan. The PPUC must
approve the Settlement Agreement. PG&W does not believe that compliance with
the terms of the Settlement Agreement or any liability that might result from
violations of law or the Emergency Order will have a material adverse effect on
its financial position or results of operations.
Rates. As required by the Code, PG&W files an annual purchased gas cost
rate with the PPUC. This rate is designed to recover purchased gas costs for
the period it will be in effect. The procedure includes a process for the
reconciliation of actual gas costs incurred and actual revenues received and
also provides for the refund of any overcollections, plus interest thereon, or
the recoupment of any undercollections of gas costs. The procedure is limited
to purchased gas costs, to the exclusion of other rate matters, and requires a
formal evidentiary proceeding conducted by the PPUC, the submission of specific
information regarding gas procurement practices and specific findings of fact by
the PPUC regarding the "least cost fuel procurement" policies of the utility.
In accordance with this procedure, PG&W placed a purchased gas cost rate of
$3.68 per MCF in effect on December 1, 1994, and is required to file a proposed
purchased gas cost rate on or before June 1, 1995, to be effective December 1,
1995. It is not presently possible to estimate how this proposed rate will
compare to the current purchased gas cost rate of $3.68 per MCF, which is
scheduled to remain in effect through November 30, 1995. The annual changes in
gas rates on account of purchased gas costs have no effect on PG&W's earnings
since the change in revenues is offset by a corresponding change in the cost of
gas.
The PPUC has issued proposed regulations that would provide for the
quarterly adjustment of the purchased gas cost rate of larger gas distribution
companies, including PG&W. Except for reducing the amount of any over or
undercollections of gas costs, the adoption of these proposed regulations would
not have any material effect on PG&W's financial position or results of
operations.
FERC Order 636, among other matters, requires that PG&W contract for
sufficient gas supplies, pipeline capacity and storage for its annual needs.
These added responsibilities may result in increased scrutiny by the PPUC as to
the prudence of PG&W's gas procurement and supply activities. Depending upon
how the PPUC views the cost effectiveness of such activities, PG&W may not be
permitted to recover all of its gas supply costs in the rates charged to
customers. However, although it cannot be certain, PG&W believes that it will
be able to demonstrate to the PPUC the prudence of its gas supply costs and,
therefore, will be allowed to recover all such costs in its purchased gas cost
rate.
Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax
adjustment surcharge tariff to its bills for gas service to recoup any increased
taxes resulting from changes in the law with respect to the Pennsylvania Capital
Stock Tax, Corporate Net Income Tax, Gross Receipts Tax or Public Utility Realty
Tax. In accordance with such procedure, PG&W filed a revised state tax
adjustment surcharge tariff with the PPUC which became effective August 1, 1994,
to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate.
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WATER BUSINESS
PG&W distributes water to an area lying within the Counties of Lackawanna,
Luzerne, Susquehanna and Wayne, which includes the Cities of Scranton and
Wilkes-Barre and 62 other municipalities. The total estimated population of
PG&W's water service area, based on the 1990 U.S. Census, is 398,000.
Number and Type of Customers. At December 31, 1994, PG&W had approximately
132,500 water customers from which it derived total water revenues of $66.7
million during 1994. The following chart shows a breakdown of the types of
customers and the percentages of water revenues they generated in 1994:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.6% 63.2%
Commercial 7.1 18.3
Industrial 0.3 8.6
Municipal and Other Users 1.0 9.9
Total 100.0% 100.0%
Sources of Supply and Safe Yield. The water that PG&W distributes is
furnished by a PG&W-owned water supply system, which includes 36 active and
standby reservoirs located on extensive watershed lands and five wells. The
water supply can be augmented, on a short-term basis, by two pump stations that
can pump water from streams outside the watershed into the reservoir storage
system. The combined "safe yield" of PG&W's active and standby sources of
supply is approximately 88 million gallons per day, and the combined storage
capacity of the reservoir system is estimated by PG&W to be approximately 20
billion gallons. ("Safe yield" is the quantity of water, generally expressed in
million gallons per day, that a source of supply can deliver in extreme drought
conditions.) The average daily delivery into PG&W's water distribution system
during 1994 was approximately 66.5 million gallons. As of December 31, 1994,
the quantity of water held in PG&W's reservoirs was approximately 19.0 billion
gallons or 96.3% of their maximum storage capacity.
PG&W has always been able to provide adequate water supplies to meet the
requirements of its service area and has never issued a mandatory water
conservation directive. PG&W believes it can continue to meet fully the water
supply requirements of its service area in the absence of any extended periods
of severe drought.
The Susquehanna River, one of the major rivers in the Commonwealth of
Pennsylvania, flows through PG&W's service area and has always been considered a
possible source of supply for its service area. Although PG&W is not presently
taking any water from the Susquehanna River and does not have facilities
installed that would permit it to do so, it is currently authorized to withdraw,
on an emergency basis, 15 million gallons per day from the river.
Filtration of Water Supplies. All of PG&W's water customers are supplied
with filtered water (except for several hundred who are supplied with ground
water from wells) which meets all federal and state drinking water regulations.
The filtration of PG&W's water supplies is performed at ten water treatment
plants, located throughout PG&W's water service area, which have an aggregate
daily capacity of 101.1 million gallons. The goal of providing all of PG&W's
customers who are served from surface supplies with filtered water was achieved
on September 30, 1993, when the Watres Water Treatment Plant was placed into
operation. The Watres Water Treatment Plant was the last of eight water
treatment plants to be constructed and placed into operation by PG&W during the
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period 1988 through 1993. Until the construction of these plants, most of
PG&W's water customers were supplied with treated, but nonfiltered water,
obtained from various reservoirs and stream intakes, although a relatively small
percentage of its customers received filtered water from two previously existing
water treatment plants or ground water pumped from wells.
Main Replacement and Rehabilitation Program and Other Distribution System
Improvements. PG&W distributes water to its customers through approximately
1,689 miles of pipe ranging in size from over 48" in diameter to less than 1" in
diameter. The majority of the water mains in PG&W's distribution system
consists of cast iron or ductile iron pipe. The majority of cast iron pipe is
unlined. Approximately 54% (based on linear feet of pipe of all diameters) of
PG&W's water mains were installed prior to 1920 and approximately 30% were
installed prior to 1900.
In 1987, PG&W completed a review of its distribution system designed to
ascertain the general nature and the approximate cost of improvements that would
be required for a complete distribution system main rehabilitation. In
performing the study, PG&W made certain assumptions as to the general structural
condition of its system. It did not request outside engineering assessments of
the entire system. Using the criteria developed in the distribution system
assessment as a guide, PG&W preliminarily estimated the cost of complete
distribution system main replacement and/or rehabilitation to be approximately
$248 million at 1987 price levels.
Based upon this assessment, PG&W determined that embarking on a program to
accomplish total distribution system rehabilitation in a relatively short span
of time would not be a cost effective means of improving water quality. PG&W
determined that the most substantial opportunities for improvement of water
quality lay in the filtration of PG&W's sources of water supply. In view of the
large commitment of capital needed to construct water treatment plants, rapid
implementation of a distribution system rehabilitation program would divert
financial resources from, and cause delays in, the construction of those
facilities. Consequently, PG&W developed a program of rehabilitation to be
implemented on a more modest scale, which PG&W believes will address the
conditions that are most likely to cause degradation of water quality in the
distribution system. This program, which includes the selective replacement and
rehabilitation of water mains and services and the elimination of dead-end
lines, involved the expenditure of $55.0 million during the period 1988 through
1994.
In connection with its distribution system rehabilitation program, PG&W
intends to expend an average of $9.8 million per year during the period 1995
through 1997 for water distribution system improvements, primarily the replacing
or cleaning and lining of mains. Such replacement and cleaning and lining of
mains will focus on the areas of highest priority and will be based on the
criteria set forth in the 1987 distribution system assessment, which will be
updated in accordance with the PPUC's June 23, 1993, Order allowing PG&W a
conditional rate increase for the Scranton Water Rate Area. As part of the
settlement resolving certain disputed issues relating to such Order, PG&W agreed
to spend a total of $4.9 million annually beginning June 23, 1993 (an additional
$2.5 million over its actual average annual expenditure of $2.4 million during
the three-year period ended June 30, 1993), for distribution system improvements
in the Scranton Water Rate Area until the PPUC is satisfied that PG&W is
providing adequate service. PG&W was in compliance with this provision of the
Order as of December 31, 1994, and the additional expenditures it is so required
to make are included in the amounts that it is planning to spend annually on
distribution system improvements during the years 1995 through 1997.
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PG&W estimates that approximately 30% of the water introduced to its
distribution system is lost through leakage or otherwise cannot be accounted for
through identifiable uses. However, PG&W believes that its rate of unaccounted
for water is not uncharacteristic of water systems of similar age, size and
demographics. Unaccounted for water requires PG&W to incur expenses to process
water that is not furnished to customers. While such costs are typically
recoverable in the rates charged to customers, the PPUC has disallowed their
recovery when unaccounted for water reached a level the PPUC determined to be
unreasonable. The PPUC, in a 1989 Policy Statement on water conservation for
water utilities, stated that levels of unaccounted for water should be kept
within reasonable levels. Although the PPUC has considered levels above 20% to
be excessive in certain circumstances, there is no industry standard for
unaccounted for water levels. In a 1990 decision involving another Pennsylvania
water utility, the PPUC recognized that historic unaccounted for water problems
could not be resolved immediately and that a utility would not be penalized if
it were making substantial progress toward achieving the 20% unaccounted for
goal. PG&W believes that it has made substantial progress in identifying
sources of water loss in its system through the implementation of an aggressive
leak detection program in conjunction with an ongoing main replacement program
and it is continuing its efforts to identify additional sources utilizing the
services of consultants.
Regulation. PG&W's water utility operations are regulated by the PPUC,
particularly as to utility rates, service and facilities, accounts, issuance of
certain securities, the encumbering or disposition of public utility properties
and various other matters associated with broad regulatory authority.
PG&W, in common with most industrial enterprises, is subject to regulation
with respect to the environmental effects of its operations. In addition to the
PPUC, the principal agency having regulatory authority over PG&W's water
operations is the DER, which has jurisdiction, among other matters, concerning
water rights, sources of supply, the design and construction of waterworks, the
quality of drinking water and the safety of dams.
In addition to those regulations promulgated by the PPUC, PG&W must also
comply with federal, interstate compact, state and local regulations relating
generally to the discharge of materials into the environment, or otherwise
relating to the protection of the environment. Compliance with such regulations
has not had any material effect upon the capital expenditures, earnings or
competitive position of PG&W's water business. Although it cannot predict the
future impact of these regulations, PG&W believes that any additional
expenditures and costs made necessary by them will be fully recoverable through
rates.
Federal and State Water Quality Standards. The Federal Safe Drinking Water
Act of 1974 (the "Act") regulates the quality of drinking water provided to the
public. Pursuant to the Act, the EPA has issued regulations relating to, among
other things, water quality standards, maximum contaminant levels and monitoring
requirements and prohibitions against the use of lead in distribution systems.
As permitted by the Act, the Pennsylvania Department of Environmental Resources
(the "DER") has assumed primacy for enforcement of drinking water standards in
Pennsylvania. PG&W has taken action to comply with these regulations and does
not anticipate any impact on its water operations as a result thereof.
Treatment and Testing of Water. All water entering PG&W's distribution
system is filtered (except for the small quantity of ground water pumped from
wells), disinfected, and treated with chemicals to minimize corrosion of the
distribution system and customers' piping. Water samples are taken at each of
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the intake stations and at selected locations in PG&W's service area, and
turbidity is monitored at each location at which the water enters the
distribution system. PG&W operates a laboratory which is certified by the DER
to perform microbiological, inorganic and organic chemical analyses of the water
in both its reservoirs and distribution system, utilizing a scheduled sampling
program. Such analyses include those tests required by the DER, and the results
of such tests are reported to the DER as required by law.
Construction Expenditures. PG&W's construction expenditures for water
utility plant in 1994 totaled $19.3 million, and are estimated to be $23.0
million for 1995. The higher level of capital expenditures estimated for 1995
is primarily attributable to the construction of storage tanks at the Hillside
Water Treatment Plant and increased expenditures for distribution system
improvements.
Rates. The following table summarizes PG&W's requests for water rate
increases and the action taken by the PPUC on those requests from January 1,
1991, to March 10, 1995:
Amount Increase
Date of Requested Effective Granted
Service Area Request (in millions) Date (in millions)
Scranton (filtered water
customers) June, 1990 $ 25.5 March, 1991 $ 15.0 (1)
(subject to
phase-in)
Spring Brook (customers
served water exclusively
from the Nesbitt Water
Treatment Plant) April, 1991 2.6 January, 1992 1.9
Spring Brook (customers
served water exclusively
from the Crystal Lake
Water Treatment Plant) June, 1992 4.4 March, 1993 2.0 (1)
(subject to
phase-in)
Scranton (filtered water
customers) September, 1992 9.9 June, 1993 5.0 (1)
Spring Brook (customers
served water exclusively
from the Ceasetown and
Watres Water Treatment
Plants) April, 1993 19.5 December, 1993 11.9 (1)
(subject to
phase-in)
(1) See "-Management's Discussion and Analysis of Financial Condition and
Results of Operations-Rate Matters-Water Rate Filings."
The rate relief granted in the past to PG&W by the PPUC has been less than
the full amounts requested. Generally, the amounts granted have been determined
through negotiated settlements with certain parties to the proceedings in order
to obtain rate relief earlier than expected and to avoid the substantial
expenses associated with further administrative and possible appellate
proceedings. PG&W believes that it will be able to obtain adequate future rate
relief as it makes further improvements to its distribution system and is able
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to demonstrate it is providing water that is suitable for all "household
purposes", i.e., meeting federal and state primary (health-related) and
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secondary (aesthetics-related, particularly taste, odor and color) drinking
water standards, and that meets all applicable water quality standards.
The magnitude of the projected rate increases that will be required to
enable PG&W to fully recover its capital expenditures associated with the
construction of the water treatment plants will be significant. Prior to the
construction of the plants, the average annual cost of water to PG&W's customers
receiving nonfiltered water was approximately $143. The average annual cost of
water to PG&W's residential customers, all of whom are now receiving filtered
water (except for several hundred who are supplied ground water from wells) was
approximately $340 as of March, 1995. PG&W anticipates that this cost will
increase to approximately $460 in the latter part of this decade, at which time
PG&W expects to have been allowed by the PPUC to fully reflect in rates its
costs associated with the filtration of its water supplies. PG&W believes that
these levels of increases, in terms of percentages, will not be inconsistent
with those that have been or will be experienced by other water utilities
required to make a similar transition to filtered water; however, the level of
rates that PG&W expects to seek in future rate increases will be such that the
PPUC may question the "affordability" of such rates and may require that any
such rate increases be phased-in over a period of time in order to reduce
consumer "rate shock." While PG&W expects that the PPUC will grant adequate
rate relief in a timely manner, there can be no assurance that the PPUC will
take such action.
Tax Surcharge Adjustments. The PPUC allows PG&W to apply a state tax
adjustment surcharge tariff to its bills for water service to recoup any
increased taxes resulting from changes in the law with respect to the
Pennsylvania Capital Stock Tax, Corporate Net Income Tax or Public Utility
Realty Tax. In accordance with such procedure, PG&W filed a revised state tax
adjustment surcharge tariff with the PPUC which became effective August 1, 1994,
to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on June 16, 1994, decreasing the Corporate Net Income Tax rate.
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ITEM 2. PROPERTIES
Gas. PG&W's gas system consists of approximately 2,191 miles of
distribution lines, nine city gate and 67 major regulating stations and
miscellaneous related and additional property. PG&W believes that its gas
utility properties are adequately maintained and in good operating condition in
all material respects. Continued expenditures will, however, be required with
regard to PG&W's on-going valve maintenance program. See "Business-Gas
Business-Valve Maintenance."
Most of PG&W's gas utility properties are subject to a first mortgage lien
pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15,
1946, as supplemented by twenty-nine supplemental indentures (collectively, the
"Indenture") from PG&W to First Trust of New York, National Association, as
Trustee.
Water. PG&W's water system consists principally of 36 active and standby
reservoirs and stream intakes, ten water treatment plants, five wells, various
distribution system storage tanks, approximately 1,689 miles of aqueducts and
pipelines, and miscellaneous related and additional property. In addition, PG&W
owns approximately 53,000 acres of land situated in northeastern Pennsylvania.
In PG&W's opinion, its water utility properties are adequately maintained
and in good operating condition in all material respects. Continued capital
expenditures will, nonetheless, be required for PG&W's on-going program of water
main replacement and rehabilitation and other improvements to ensure the
integrity of PG&W's distribution system. See "Business-Water Business-Main
Replacement and Rehabilitation Program and Other Distribution System
Improvements."
Most of PG&W's water utility properties are subject to a first mortgage lien
pursuant to the Indenture. Additionally, certain of these properties are
subject to a second mortgage lien (the "PENNVEST Mortgage") pursuant to a loan
agreement, dated October 16, 1987, between PG&W and the Pennsylvania Water
Facilities Loan Board and pursuant to loan agreements, dated March 3, 1989, and
December 3, 1992, between PG&W and the Pennsylvania Infrastructure Investment
Authority ("PENNVEST"), under the terms of which funds were provided to finance
the construction of certain water facilities. The PENNVEST Mortgage also
secures PG&W's obligations under assumption agreements dated April 5, 1993, with
PENNVEST which relate to loans which were assumed by PG&W in connection with its
acquisition of two small water companies.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation
incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1994, there were no matters submitted to a vote
of security holders of the registrant through the solicitation of proxies or
otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Registrant's common stock is owned entirely by PEI and is not traded.
The dividends per share of common stock paid by PG&W during the years ended
December 31, 1994 and 1993, were as follows:
1994 1993
First quarter $ .350 $ .7100
Second quarter .355 .7100
Third quarter .425 .7100
Fourth quarter .680 .6925
Total $ 1.810 $2.8225
Information relating to restriction on the payment of dividends by PG&W is
set forth in Note 7 to the Financial Statements in Item 8 of this Form 10-K.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table expresses certain items in PG&W's Statements of Income
contained in Item 8 of this Form 10-K as percentages of total operating revenues
for each of the calendar years ended December 31, 1994, 1993 and 1992.
Percentage of Operating Revenues
Year Ended December 31,
1994 1993 1992
Operating Revenues:
Gas 71.6% 74.2% 74.6%
Water 28.4 25.8 25.4
Total operating revenues 100.0 100.0 100.0
Operating Expenses:
Cost of gas 42.0 41.9 40.5
Other operation expenses 17.1 18.8 19.8
Maintenance and depreciation 10.4 10.5 10.2
Deferred treatment plant costs, net 0.3 (0.7) (0.1)
Income and other taxes 12.2 12.1 12.0
Total operating expenses 82.0 82.6 82.4
Operating Income 18.0 17.4 17.6
Other Income, Net - 0.3 -
Interest Charges 9.5 9.9 10.9
Dividends on Preferred Stock 2.0 3.1 2.6
Earnings Applicable to Common Stock 6.5% 4.7% 4.1%
o Year ended December 31, 1994, compared with year ended December 31, 1993
Operating Revenues. PG&W's operating revenues increased $28.0 million
(13.6%) from $206.7 million for 1993 to $234.7 million for 1994.
Gas operating revenues increased by $14.7 million (9.6%) from $153.3 million
for 1993 to $168.0 million for 1994, primarily as a result of a price increase
averaging 19.0% (designed to total $28.8 million on an annual basis) effective
December 1, 1993, due to increased costs of purchased gas. See "-Rate Matters-
Gas Rate Filings." Also contributing to the increase in gas operating revenues
in 1994 was a 224 million cubic feet (1.0%) increase in sales to residential and
commercial heating customers. This increase was attributable to the addition of
approximately 2,200 new customers and occurred despite heating degree days* that
were 2.1% lower than normal and 0.3% less than in 1993. Additionally, the
implementation of surcharges to recover Federal Energy Regulatory Commission
("FERC") Order 636 transition costs (as more fully discussed below under "-Rate
Matters-Gas Rate Filings") acted to increase gas operating revenues by $1.8
million in 1994. The effects of the price increase and the surcharges on gas
operating revenues were partially offset by the switching of certain commercial
* A heating degree day ("degree day") represents each degree by which the
average of the high and low temperatures for a given day is below 650
Fahrenheit. Actual degree days represent the sum of the degree days for the
period.
-19-
and industrial customers from sales to transportation service and a price
decrease averaging 1.1% (designed to total $1.8 million on an annual basis)
effective December 1, 1994, due to decreased costs of purchased gas (see"-Rate
Matters-Gas Rate Filings").
Water operating revenues increased by $13.4 million (25.0%) from $53.4
million for 1993 to $66.7 million for 1994. This increase in revenues was
primarily the result of rate increases which the Pennsylvania Public Utility
Commission (the "PPUC") allowed PG&W, including a $2.0 million annual rate
increase effective March 9, 1993, for customers in the Spring Brook Water Rate
Area served exclusively by the Crystal Lake Water Treatment Plant, a $5.0
million annual rate increase effective June 23, 1993, for customers in the
Scranton Water Rate Area, and an $11.9 million annual rate increase effective
December 16, 1993, for customers in the Spring Brook Water Rate Area served by
the Ceasetown and Watres Water Treatment Plants, as more fully explained below
under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $21.9 million (12.8%) from $170.5 million for 1993 to $192.4
million for 1994. As a percentage of operating revenues, total operating
expenses decreased from 82.6% during 1993 to 82.0% during 1994. Operating
expenses related to gas utility operations increased by $14.3 million (10.7%)
from $134.2 million in 1993 to $148.5 million in 1994, primarily as a result of
a $12.1 million increase in the cost of gas, a higher level of other operations
and maintenance expense and increased gross receipts tax as a result of the
higher level of gas revenues. Operating expenses related to water utility
operations increased by $7.5 million (20.8%) from $36.4 million in 1993 to $43.9
million in 1994, primarily as a result of increases in other operation expense,
depreciation, net deferred treatment plant costs and income taxes.
The cost of gas increased $12.1 million (14.0%) from $86.6 million for 1993
to $98.7 million for 1994. The effect of this increase, which was the result of
higher costs for purchased gas and the implementation of surcharges to recover
FERC Order 636 transition costs (see "-Rate Matters-Gas Rate Filings"), was
partially offset by a 9.0% (2.6 billion cubic feet) decrease in the volume of
gas sold during 1994, compared to 1993. This decreased volume was largely
attributable to the aforementioned switching of certain customers from sales to
transportation service. The gross margin on gas operations (gas operating
revenues less the cost of gas) increased $2.6 million or 3.9% in 1994, primarily
as a result of the increased sales to residential and commercial heating
customers.
Other than the cost of gas and income taxes, operating expenses increased by
$6.3 million (8.3%) from $75.0 million for 1993 to $81.2 million for 1994. This
increase was largely attributable to a $1.2 million increase in other operation
and maintenance expenses (principally as a result of a $668,000 increase in
payroll costs, a $507,000 increase in other postretirement benefits and
increased provisions for uncollectible accounts of $728,000) and a $2.1 million
increase in net deferred treatment plant costs during 1994 (see "-Deferred
Treatment Plant Costs, Net and Carrying Charges"), as well as a $2.0 million
increase in depreciation (primarily because of capital additions and the change
in December, 1993, from a 4% compound interest to a straight-line method of
depreciation with respect to water plant in the Ceasetown and Watres Service
Areas). The effects of these increases were partially offset by a $613,000
increase in costs charged to construction (which acts to reduce expense) as a
result of a higher level of construction activity.
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Income taxes increased by $3.5 million from $9.0 million in 1993 to $12.5
million in 1994 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges).
Deferred Treatment Plant Costs, Net and Carrying Charges. Pursuant to an
Order of the PPUC entered September 5, 1990, PG&W deferred all operating
expenses, including depreciation and property taxes, and the carrying charges
(equivalent to the allowance for funds used during construction ("AFUDC"))
relative to the four new Scranton Area water treatment plants and related
facilities from the dates of commercial operation of the plants until March 23,
1991, the effective date of the Scranton Area water rate increase approved by
the PPUC on March 22, 1991. By its Order entered June 23, 1993, relative to the
Scranton Water Rate Area, the PPUC granted PG&W's request to recover $5.8
million of costs deferred with respect to the Scranton Area water treatment
plants and related facilities over a ten-year period beginning June 23, 1993, of
which $885,000 had been recovered as of December 31, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges relative to the Crystal Lake Water Treatment Plant and
related facilities from August 3, 1992 (the date of commercial operation of that
plant), until March 9, 1993, the effective date of the water rate increase
approved by the PPUC on February 25, 1993, for customers in PG&W's Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant.
Additionally, in accordance with an Order of the PPUC entered July 28, 1993,
PG&W deferred all expenses and the carrying charges relative to the Ceasetown
and Watres Water Treatment Plants and related facilities incurred prior to
December 16, 1993, the effective date of the water rate increase approved by the
PPUC on December 15, 1993, for customers served by the Ceasetown and Watres
Water Treatment Plants.
As of December 31, 1994, a total of $4.6 million of costs relative to the
Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities
had been deferred pursuant to the PPUC's Orders of September 24, 1992, and July
28, 1993. PG&W will seek recovery of the costs that have been so deferred in
its next rate increase request relating to the Spring Brook Water Rate Area.
Although it cannot be certain, PG&W believes that the recovery of such costs
will be allowed by the PPUC in future rate increases, particularly in view of
the PPUC's action allowing the recovery of the costs deferred with respect to
the Scranton Area water treatment plants and related facilities.
Operating Income. As a result of the above, total operating income
increased by $6.2 million (17.1%) from $36.2 million for 1993 to $42.3 million
for 1994, and increased as a percentage of total operating revenues for such
periods from 17.4% in 1993 to 18.0% in 1994. Operating income from gas utility
operations increased $353,000 (1.8%) from $19.1 million in 1993 to $19.5 million
in 1994, primarily as a result of a $2.6 million increase in the gross margin,
the effect of which was partially offset by a higher level of maintenance
expense because of colder than normal weather in January and February, 1994, and
increased gross receipts tax as a result of the higher level of gas revenues.
Operating income from water utility operations increased $5.8 million (34.2%)
from $17.0 million in 1993 to $22.8 million in 1994. This increase was
primarily the result of rate increases effective March 9, 1993, June 23, 1993,
and December 16, 1993, and a decrease in other taxes, the effects of which were
partially offset by increases in other operations expense, depreciation, net
deferred treatment plant costs and income taxes, as discussed above.
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Other Income, Net. Other income, net decreased $544,000 from $560,000 for
1993 to $16,000 for 1994. This decrease was primarily attributable to a $1.5
million decrease in the allowance for equity funds used during construction
because of a lower level of construction in progress, largely as a result of the
completion of the Crystal Lake, Watres and Ceasetown Water Treatment Plants in
1993, and the discontinuance of the deferral of carrying charges relative to
those plants. The effect of such items was partially offset by a $254,000
increase ($145,000 net of related income taxes) in gains on the sale of non-
watershed land, a $469,000 gain ($268,000 net of related income taxes) on the
sale of PG&W's interest in an oil and gas joint venture and a decrease in net
interest expense associated with the unutilized portion of the proceeds from the
issuance on December 22, 1992, of the Luzerne County Industrial Development
Authority (the "Authority") Exempt Facilities Revenue Bonds, 1992 Series B
(Pennsylvania Gas and Water Company Project) (the "1992 Series B Bonds.") See
"-Liquidity and Capital Resources-Long-Term Debt and Capital Stock Financings."
The proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by PNC Bank (formerly Northeastern Bank of Pennsylvania)
as trustee for the 1992 Series B Bonds (the "IDA Trustee"), pending their
utilization to finance the construction of various additions and improvements to
PG&W's water facilities for which construction commenced subsequent to September
23, 1992. Interest expense relative to the funds so utilized for the benefit of
PG&W is reflected as interest on long-term debt. The interest expense relating
to the portion of the funds held by the IDA Trustee, net of the income earned on
the temporary investment of such funds, is reflected in other income, net.
Interest Charges. Interest charges increased by $2.1 million (10.4%) from
$20.4 million for 1993 to $22.5 million for 1994. This increase was primarily
attributable to a $1.2 million decrease in AFUDC, largely because of the
completion of the Crystal Lake, Ceasetown and Watres Water Treatment Plants, and
the discontinuance of the deferral, which totaled $1.2 million during 1993, of
the carrying charges associated with those plants.
Interest on long-term debt increased by $707,000 (3.4%) from $20.5 million
during 1993 to $21.2 million during 1994. The increase was principally the
result of an additional $868,000 of interest expense relative to the 1992 Series
B Bonds being reflected as interest on long-term debt (see "-Other Income,
Net"). The weighted average indebtedness outstanding during 1994 was $287.8
million as compared to $288.2 million during 1993. The weighted average
interest rate on indebtedness during 1994 was 7.73% as compared to 7.93% during
1993.
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.8
million (28.2%) from $6.5 million for 1993 to $4.6 million for 1994, primarily
as a result of the redemption by PG&W on December 23, 1993, of 100,000 shares
($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its
9.50% cumulative preferred stock, $100 par value.
Earnings Applicable to Common Stock. Earnings applicable to common stock
increased $5.3 million (54.2%) from $9.8 million for 1993 to $15.2 million for
1994. The increased earnings in 1994 were the result of the matters discussed
above, principally the increases in water operating revenues resulting from the
rate increases which the PPUC allowed PG&W effective March 9, 1993, June 23,
1993, and December 16, 1993, and the increase in the gross margin on gas
operations resulting primarily from the higher level of sales to residential and
commercial heating customers. The effects of these factors were partially
offset by increased operating expenses and interest charges.
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Before the $534,000 premium paid on the redemption of 150,000 shares of
PG&W's 9.50% cumulative preferred stock on May 31, 1994, and the $446,000
premium paid on the redemption of 150,000 shares of PG&W's 8.90% cumulative
preferred stock on December 16, 1994, the earnings per share of common stock
increased $.56 (23.7%) from $2.36 per share for 1993 to $2.92 per share for 1994.
This improvement was the result of the 54.2% increase in earnings applicable to
common stock and occurred despite a 24.3% increase in the weighted average
number of shares outstanding during 1994, primarily as a result of PG&W's sale
of 834,000 shares of common stock to Pennsylvania Enterprises, Inc. ("PEI"), the
parent company of PG&W, on October 27, 1993. While premiums on the redemption
of preferred stock are charged to retained earnings and are not a determinant of
earnings applicable to common stock, the premiums associated with any
redemptions occurring subsequent to January 20, 1994, must be taken into account
in calculating the earnings per share of common stock. As a consequence, the
premiums on the redemption of the 150,000 shares of PG&W's 9.50% cumulative
preferred stock and the 150,000 shares of PG&W's 8.90% cumulative preferred
stock acted to reduce earnings per share for 1994 by $.19 per share, resulting in
earnings of $2.73 per share of common stock for the year, an increase of $.37 per
share (15.7%) over the earnings of $2.36 per share for the year ended December
31, 1993.
o Year ended December 31, 1993, compared with year ended December 31, 1992
Operating Revenues. Operating revenues of PG&W increased $14.8 million
(7.7%) from $191.9 million for 1992 to $206.7 million for 1993.
Gas operating revenues increased by $10.1 million (7.1%) from $143.2 million
for 1992 to $153.3 million for 1993, primarily as a result of price increases
averaging 6.8% (designed to total $9.5 million on an annual basis) effective
December 1, 1992, and 19.0% (designed to total $28.8 million on an annual basis)
effective December 1, 1993, due to increased costs of purchased gas. Also
contributing to the increase in gas operating revenues in 1993 was an 840
million cubic feet (3.9%) increase in sales to residential and commercial
heating customers. Although heating degree days were 1.8% lower than normal
during 1993, they were 0.7% higher than in 1992. The effect of the price
increases and colder weather on gas operating revenues were partially offset by
the switching of certain commercial and industrial customers from sales to
transportation service.
Water operating revenues increased by $4.7 million (9.7%) from $48.7 million
for 1992 to $53.4 million for 1993. This increase in revenues was largely the
result of rate increases which the PPUC allowed PG&W, including a $2.0 million
annual rate increase effective March 9, 1993, for customers in the Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant, a
$5.0 million annual rate increase effective June 23, 1993, for customers in the
Scranton Water Rate Area, and an $11.9 million annual rate increase effective
December 16, 1993, for customers in the Spring Brook Water Rate Area served by
the Ceasetown and Watres Water Treatment Plants, as more fully explained below
under "-Rate Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $12.6 million (8.0%) from $158.0 million for 1992 to $170.5
million for 1993. As a percentage of operating revenues, total operating
expenses increased from 82.4% during 1992 to 82.6% during 1993. Operating
expenses related to PG&W's gas utility operations increased by $10.2 million
(8.2%) from $124.0 million in 1992 to $134.2 million in 1993, primarily as a
result of an $8.8 million increase in the cost of gas. Operating expenses
related to PG&W's water utility operations increased by $2.4 million (6.9%) from
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$34.0 million in 1992 to $36.4 million in 1993, primarily as a result of
increased operation and maintenance costs, depreciation and taxes, the effects
of which were partially offset by a $1.2 million increase in the deferral of
treatment plant costs (which acted to reduce expenses).
The cost of gas increased $8.8 million (11.4%) from $77.7 million for 1992
to $86.6 million for 1993. The effect of this increase, which was the result of
higher costs for purchased gas, was partially offset by a 2.7% (797 thousand
cubic feet) decrease in the volume of gas sold during 1993 compared to 1992.
This decreased volume was largely attributable to the aforementioned switching
of customers from sales to transportation service. The gross margin on gas
operations increased $1.3 million or 2.0% in 1993, primarily as a result of the
increased sales to residential and commercial heating customers due to the
colder weather experienced in 1993.
Other than the cost of gas and income taxes, operating expenses increased by
$3.0 million (4.2%) from $71.9 million for 1992 to $75.0 million for 1993. This
increase was largely attributable to a $1.3 million increase in other taxes,
principally as a result of increased gross receipts tax (resulting from the
higher level of gas revenues) and increased property taxes (resulting from the
construction of the Ceasetown and Watres Water Treatment Plants). Also
contributing to this increase was a $1.6 million increase in other operations
and maintenance expenses, primarily as a result of a $1.5 million increase in
payroll costs, as well as a $1.4 million increase in depreciation (primarily as
a result of capital additions and the change in March, 1993, from a 4% compound
interest to a straight-line method of depreciation with respect to water plant
in the Crystal Lake Service Area). The effects of such increases were partially
offset by a $1.2 million increase in the deferral of treatment plant costs
during 1993. See "Deferred Treatment Plant Costs, Net and Carrying Charges."
Income taxes increased by $684,000 (8.2%) from $8.3 million in 1992 to $9.0
million in 1993 due to a higher level of income before income taxes (for this
purpose, operating income net of interest charges) and the change, from 34% to
35%, in the federal corporate income tax rate on taxable income in excess of
$10.0 million. This increase was the result of the enactment of the Omnibus
Budget Reconciliation Act of 1993 (the "1993 Tax Act") on August 10, 1993. The
provisions of the 1993 Tax Act, which were retroactive to January 1, 1993,
increased PG&W's income tax expense by approximately $124,000 for the year 1993.
The effects of the increased income before income taxes and the higher federal
income tax rate were partially offset by the impact (approximately $668,000) of
the nontaxable equity portions of the AFUDC and of the deferred treatment plant
carrying charges that were recorded during 1993. See "-Other Income, Net", as
discussed above.
Deferred Treatment Plant Costs, Net and Carrying Charges. As more fully
discussed above, pursuant to an Order of the PPUC entered September 24, 1992,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges (equivalent to the AFUDC) relative to the Crystal Lake
Water Treatment Plant and related facilities from August 3, 1992 (the date of
commercial operation of that plant), until March 9, 1993, the effective date of
the water rate increase approved by the PPUC on February 25, 1993, for customers
in PG&W's Spring Brook Water Rate Area served exclusively by the Crystal Lake
Water Treatment Plant. Similarly, in accordance with an Order of the PPUC
entered July 28, 1993, PG&W deferred all expenses and the carrying charges
relative to the Ceasetown and Watres Water Treatment Plants and related
facilities incurred prior to December 16, 1993, the effective date of the water
rate increase approved by the PPUC on December 15, 1993, for customers served by
the Ceasetown and Watres Water Treatment Plants. As contemplated by the PPUC's
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Orders, PG&W will seek recovery of the $4.6 million of costs that have been so
deferred in its next rate increase request relating to the Spring Brook Water
Rate Area.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred
all operating expenses and the carrying charges relative to the four new
Scranton Area water treatment plants and related facilities from the dates of
commercial operation of the plants until March 23, 1991, the effective date of
the Scranton Area water rate increase approved by the PPUC on March 22, 1991.
By its Order entered June 23, 1993, relative to the Scranton Water Rate Area,
the PPUC granted PG&W's request to recover $5.8 million of costs deferred with
respect to the Scranton Area water treatment plants and related facilities over
a ten-year period beginning June 23, 1993, of which $304,000 had been recovered
as of December 31, 1993.
Operating Income. As a result of the above, total operating income
increased by $2.2 million (6.6%) from $33.9 million for 1992 to $36.2 million
for 1993, but decreased as a percentage of total operating revenues for such
periods from 17.6% in 1992 to 17.4% in 1993. Operating income from gas utility
operations decreased $114,000 (0.6%) from $19.3 million in 1992 to $19.1 million
in 1993, primarily as a result of increases in other operations and maintenance
expenses, depreciation, and income and gross receipts taxes, the effects of
which were partially offset by a $1.3 million increase in the gross margin.
Operating income from water utility operations increased $2.4 million (16.1%)
from $14.7 million in 1992 to $17.0 million in 1993. This increase was
primarily the result of rate increases effective March 9, 1993, June 23, 1993,
and December 16, 1993, as well as the deferral of costs relative to the Crystal
Lake, Ceasetown and Watres Water Treatment Plants and related facilities, the
effects of which were partially offset by increases in other operations and
maintenance expenses, depreciation, and income and property taxes, as discussed
above.
Other Income, Net. Other income, net increased from $30,000 in 1992, to
$560,000 in 1993, primarily as a result of the recording of $1.6 million of
deferred treatment plant carrying charges and allowance for equity funds used
during construction. This amount was partially offset by the net interest
expense associated with the unutilized portion of the proceeds from the issuance
on December 22, 1992, of the Authority's 1992 Series B Bonds. See "-Liquidity
and Capital Resources-Long-Term Debt and Capital Stock Financings." The
proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by the IDA Trustee, pending their utilization to finance
the construction of various additions and improvements to PG&W's water
facilities for which construction commenced subsequent to September 23, 1992.
Interest expense relative to the funds so utilized for the benefit of PG&W is
reflected as interest on long-term debt. The interest expense relating to the
portion of the funds held by the IDA Trustee, net of the income earned on the
temporary investment of such funds, is reflected in other income, net.
Interest Charges. Interest charges decreased by $572,000 (2.7%) from $21.0
million for 1992 to $20.4 million for 1993. This decrease was largely
attributable to a higher level of deferred treatment plant carrying charges
associated with the Crystal Lake, Ceasetown and Watres Water Treatment Plants
and related facilities, the effect of which was partially offset by increased
interest on long-term debt.
Although the weighted average interest rate on indebtedness decreased from
8.88% during 1992 to 7.93% during 1993, interest on long-term debt increased by
$1.6 million (8.4%) from $18.9 million during 1992 to $20.5 million during 1993.
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This increase was largely attributable to increased indebtedness to finance the
construction of various additions and improvements to PG&W's water utility
plant. The weighted average indebtedness outstanding during 1993 was $288.2
million as compared to $229.7 million during 1992. Largely offsetting the
effect of this increase was a lower level of interest expense incurred during
1993 in connection with overcollections from PG&W's gas customers.
Dividends on Preferred Stock. Dividends on preferred stock increased $1.4
million (27.6%) from $5.1 million in 1992, to $6.5 million in 1993, as a result
of the issuance by PG&W of 250,000 shares of its 9% cumulative preferred stock,
$100 par value, on August 18, 1992.
Earnings Applicable to Common Stock. Earnings applicable to common stock
increased $1.9 million (24.7%) from $7.9 million ($2.02 per share) for the year
ended December 31, 1992, to $9.8 million ($2.36 per share) for the year ended
December 31, 1993. The increased earnings in 1993 were the result of the
matters discussed above, primarily the increases in water operating revenues
resulting from the rate increases which the PPUC allowed PG&W effective March 9,
1993, June 23, 1993, and December 16, 1993, and the increase in the gross margin
on gas operations resulting from higher levels of sales to residential and
commercial heating customers. The effects of these factors were partially
offset by increases in operating expenses and dividends on PG&W's preferred
stock.
The earnings per share for the year ended December 31, 1993, increased
16.8%, compared to the similar period in 1992, as a result of the 24.7% increase
in earnings applicable to common stock and despite the 6.9% increase in the
weighted average number of shares outstanding during 1993, primarily as a result
of PG&W's sale of 834,000 shares of common stock to PEI on October 27, 1993.
RATE MATTERS
In accordance with the Pennsylvania Public Utility Code (the "Code"), PG&W
files an annual purchased gas cost rate with the PPUC. From time to time, PG&W
also files for adjustments to its gas and water rates to, among other reasons,
recover interest charges and depreciation expenses relating to capital
expenditures, recover increased operating expenses and make adjustments to
existing surcharge rates approved by the PPUC.
The following is a summary of such filings (exclusive of those solely
involving state tax adjustment surcharges) with respect to which the PPUC has
issued an order since the beginning of 1992, or which are currently pending.
Gas Rate Filings. Pursuant to the provisions of the Code which require that
the tariffs of larger gas distribution companies, such as PG&W, be adjusted on
an annual basis to reflect changes in their purchased gas costs, the PPUC
ordered PG&W to make the following changes during 1994, 1993 and 1992 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, 1994 $3.74 $3.68 $(1,800,000)
December 1, 1993 2.79 3.74 28,800,000
December 1, 1992 2.46 2.79 9,500,000
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The annual changes in gas rates on account of purchased gas costs have no
effect on PG&W's earnings since the change in revenue will be offset by a
corresponding change in the cost of gas.
The PPUC has issued proposed regulations that would provide for the
quarterly adjustment of the purchased gas cost rate of larger gas distribution
companies, including PG&W. Except for reducing the amount of any over or
undercollections of gas costs, the adoption of these proposed regulations would
not have any material effect on PG&W's financial position or results of
operations.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding the recovery of FERC Order 636 transition
costs. The PGC Order stated that Account 191 and New Facility Costs (the "Gas
Transition Costs") are subject to recovery through the annual PGC rate filing
made with the PPUC by PG&W and other larger local gas distribution companies.
The PGC Order also indicated that while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs") are not natural gas costs eligible for
recovery under the PGC rate filing mechanism, such costs are subject to full
recovery by 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. As of February 1, 1994, PG&W began to recover the Gas Transition Costs
that are being billed to PG&W by its interstate pipelines through an increase in
its PGC rate. It is currently estimated that these costs, which will be billed
to PG&W over a nineteen-month period extending through March 31, 1995, will
aggregate $1.2 million, of which $1.1 million had been billed to PG&W and
$659,000 had been recovered from its customers as of December 31, 1994. By
Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-Gas
Transition Costs that it estimates it will ultimately be billed by its
interstate pipelines pursuant to FERC Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W,
generally over a four-year period extending through the fourth quarter of 1997,
of which $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. As of December 31, 1994,
PG&W had recorded a liability of $5.6 million for the estimated transition costs
that remained to be billed to it as of such date and both a current asset and a
deferred asset (which together totaled $8.8 million) representing the transition
costs remaining to be recovered from PG&W's customers.
Water Rate Filings. As a general rule, public utilities are entitled to
recover their reasonable operating expenses and earn a fair rate of return on
their investment, or rate base. However, a regulated utility's ability to
generate earnings is influenced significantly by the timing and amount of rate
relief that it is granted. As part of the ratemaking process, the PPUC may
reject, in whole or in part, a public utility's request to increase its rates
where the PPUC concludes, after a hearing, that the service rendered by the
public utility is inadequate in that it fails to meet quantity or quality
standards for the type of service provided. Based upon previous rate filings
(referred to below), PG&W expects that the quality of its water service will be
scrutinized by the PPUC in any future water rate filings. In its Order of June
23, 1993, relating to the most recent Scranton Water Rate Area rate case, the
PPUC granted PG&W rate relief despite its finding that PG&W's water quality did
not always meet secondary drinking water standards. Notwithstanding this
decision, PG&W believes that it is providing its customers with water service
meeting or exceeding the PPUC's standards for quantity and quality, based on
testing performed by PG&W and an independent laboratory of water at certain
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customers' premises which indicates that the water meets federal and state
primary (health-related) drinking water standards all of the time and secondary
(aesthetics-related, particularly taste, odor and color) drinking water
standards nearly all of the time. PG&W also believes that in the future as it
makes further improvements to its distribution system, it will be able to
demonstrate to the PPUC's satisfaction that it is providing adequate service to
its customers.
As discussed below, the rate relief granted in the past to PG&W by the PPUC
has been less than the full amounts requested. Generally, the amounts granted
have been determined through negotiated settlements with certain parties to the
proceedings in order to obtain rate relief earlier than expected and to avoid
the substantial expenses associated with further administrative and possible
appellate proceedings. PG&W believes that it will be able to obtain adequate
future rate relief as it makes further improvements to its distribution system
and is able to demonstrate it is providing water that is suitable for all
"household purposes" and that meets all applicable water quality standards. See
"-Liquidity and Capital Resources-Failure to Obtain Adequate Rate Relief" for a
discussion of the adverse effects on PG&W if adequate rate relief were denied.
The magnitude of the projected rate increases that will be required to
enable PG&W to fully recover its capital expenditures associated with the
construction of the water treatment plants will be significant. Prior to the
construction of the plants, the average annual cost of water to PG&W's customers
receiving nonfiltered water was approximately $143. The average annual cost of
water to PG&W's residential customers, all of whom are now receiving filtered
water (except for several hundred who are supplied with ground water from
wells), was approximately $340 as of March, 1995. PG&W anticipates that this
cost will increase to approximately $460 in the latter part of this decade, at
which time PG&W expects to have been allowed by the PPUC to fully reflect in
rates its costs associated with the filtration of its water supplies. PG&W
believes that these levels of increases, in terms of percentages, will not be
inconsistent with those that will be experienced by other water utilities
required to make a similar transition to filtered water; however, the level of
rates that PG&W expects to seek in future rate increases will be such that the
PPUC may question the "affordability" of such rates and may also require that
any rate increases be phased-in over a period of time in order to reduce
consumer "rate shock." While PG&W expects that the PPUC will grant it adequate
rate relief in a timely manner, there can be no assurance that the PPUC will
take such action.
Scranton Area. By Order adopted March 22, 1991, the PPUC granted PG&W an
approximate 110% rate increase effective March 23, 1991, for the Scranton Water
Rate Area that was designed to produce $15.0 million of additional annual
revenue to be phased-in over a two-year period under the terms of a qualified
phase-in plan, pursuant to Financial Accounting Standards Board ("FASB")
Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans." In
accordance with said Order, PG&W deferred the billing of $4.7 million of the
increased revenue recorded during the period March 23, 1991, through March 22,
1992. Effective March 23, 1992, PG&W began to bill such $4.7 million by means
of a surcharge that will be in effect during the period through March 22, 2001,
and as of December 31, 1994, $1.4 million had been so billed to its Scranton
Water Rate Area customers.
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Crystal Lake Service Area. On June 30, 1992, PG&W filed an application with
the PPUC seeking a water rate increase, designed to produce $4.4 million in
additional annual revenue. This rate increase request involved the
approximately 5,000 customers in the Spring Brook Water Rate Area served
exclusively by the Crystal Lake Water Treatment Plant, which became fully
operational in August, 1992. On December 15, 1992, PG&W and certain parties
filing objections to the rate increase request reached a settlement providing
for an approximate 130% rate increase designed to produce $2.0 million of
additional annual revenue to be phased-in over a two-year period under the terms
of FASB Statement 92. The settlement provided that $1.1 million of the
increased revenue (an approximate 72% increase in rates) was to be realized
through an immediate rate increase and that the remaining $900,000 in increased
revenue (an additional 58% increase in rates) was to be realized through another
rate increase one year later (i.e., at the beginning of year two of the phase-in
period). The settlement also specified that the $900,000 in revenue that would
be deferred during the first year of the phase-in period, as well as an
approximate $243,000 in related carrying charges, was to be collected from
customers in the form of a surcharge in years three through five of the phase-in
period. By Order adopted February 25, 1993, the PPUC approved the settlement
effective March 9, 1993.
In accordance with the provisions of FASB Statement 92, PG&W commenced
recording the entire $2.0 million increase in annual revenue allowed by the PPUC
as additional revenue beginning March 9, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan. However,
pursuant to the terms of the settlement, PG&W deferred the billing of
approximately $900,000 of the increased revenue recorded during the first year
of the phase-in period (i.e., the period March 9, 1993, through March 8, 1994).
Effective March 9, 1995, PG&W began to bill, by means of the surcharge that will
be in effect in years three through five of the phase-in period, the approximate
$900,000 that has been so deferred, as well as the related carrying charges.
Scranton Area. On September 25, 1992, PG&W filed an application with the
PPUC seeking a water rate increase, designed to produce $9.9 million in
additional annual revenue. This rate increase request involved the
approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date.
By Order entered June 23, 1993, the PPUC rejected the proposed rate increase in
its entirety "due to inadequate service" (i.e., water quality). However, by the
same Order, the PPUC granted PG&W the alternative of a rate increase designed to
produce an additional $5.0 million in annual revenue, provided that PG&W
dedicate the entire increase to augment the improvements to its water
distribution system until "the demonstration by [PG&W] to [the PPUC] that it is
providing adequate service." PG&W accepted this alternative and placed such
$5.0 million rate increase into effect as of June 23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement (the
"Settlement Agreement") resolving certain disputed issues relating to its June
23, 1993, Order. The Settlement Agreement provided, among other things, for (i)
modification by the PPUC of its June 23, 1993, Order to reduce the amount of the
revenue increase that it ordered be dedicated to distribution system
improvements by the related income taxes and other expenses and the $319,000
additional expense for retiree health care and life insurance benefits that the
PPUC allowed PG&W in its revenues (which resulted in the requirement for an
additional annual expenditure for distribution system improvements by PG&W of
$2.5 million), (ii) the agreement by PG&W (with which it was in compliance as of
December 31, 1994) to spend a total of $4.9 million annually (an additional $2.5
million over its actual average annual expenditure of $2.4 million during the
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three-year period ended June 30, 1993) for distribution system improvements in
the Scranton Water Rate Area until the PPUC is satisfied that PG&W is providing
adequate service, (iii) the modification by the PPUC of its June 23, 1993, Order
to restore the Hollister Reservoir to PG&W's rate base, and (iv) the withdrawal
by PG&W and the Office of Consumer Advocate (the "OCA") of their appeals to the
Commonwealth Court of Pennsylvania regarding the PPUC's June 23, 1993, Order.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue. This rate increase request involved
approximately 59,300 customers in PG&W's Spring Brook Water Rate Area,
principally those customers (i) served by the Ceasetown Water Treatment Plant
which was placed in service on March 31, 1993, (ii) served by the Watres Water
Treatment Plant which was placed in service on September 30, 1993, (iii) served
jointly by the Ceasetown and Watres Water Treatment Plants, and (iv) who are
served exclusively by the Nesbitt Water Treatment Plant. On September 23, 1993,
PG&W, the PPUC Office of Trial Staff, the OCA and the Office of Small Business
Advocate filed a settlement petition (the "Settlement Petition") with the
Administrative Law Judge ("ALJ") assigned to conduct the investigation of the
rate increase request. This Settlement Petition provided for an overall 119%
rate increase involving approximately 44,900 customers, principally those served
either exclusively or jointly by the Ceasetown and Watres Water Treatment
Plants, that was designed to produce $11.9 million of additional annual revenue
to be phased-in over a two-year period under the terms of a qualified phase-in
plan, pursuant to FASB Statement 92. Under the terms of the Settlement
Petition, except for approximately 200 customers who were previously served
jointly by the Hillside and Nesbitt Water Treatment Plants, none of the
approximately 14,600 customers served exclusively by the Nesbitt Water Treatment
Plant would receive an increase. The Settlement Petition further provided that
$6.4 million of the increased revenue (an approximate 65% increase in rates) was
to be realized through an immediate rate increase and that the remaining $5.5
million of the increased revenue (an additional 54% increase in rates) was to be
realized through a further rate increase one year later (i.e., at the beginning
of year two of the phase-in period). The Settlement Petition also specified
that the $5.5 million in revenue that was to be deferred during the first year
of the phase-in period, as well as an approximate $1.3 million in related
carrying charges, was to be collected from customers in the form of a surcharge
in years three through five of the phase-in period. By Order adopted December
15, 1993, the PPUC approved the Settlement Petition effective December 16, 1993.
In accordance with the provisions of FASB Statement 92, PG&W commenced
recording the entire $11.9 million increase in annual revenue allowed by the
PPUC as additional revenue beginning December 16, 1993, along with the related
carrying charges on revenue deferred in accordance with the phase-in plan.
However, pursuant to the terms of the settlement, PG&W deferred the billing of
$5.3 million of the increased revenue recorded during the first year of the
phase-in period (i.e., the period December 16, 1993, through December 15, 1994).
The amount so deferred was $200,000 less than the $5.5 million originally
estimated because of slightly lower than anticipated consumption. Effective
December 16, 1995, PG&W will begin to bill the $5.3 million that had been so
deferred, as well as the related carrying charges, by means of the surcharge
that will be effective in years three through five of the phase-in period.
Effects of Inflation. When utility property reaches the end of its useful
life and must be replaced, PG&W will incur replacement costs in amounts that due
to the effects of inflation would materially exceed either the original cost or
the accrued depreciation of such property as reflected on its books of account.
However, the cost of such replacement property would be includable in PG&W's
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rate base, and PG&W would be entitled to recover depreciation expense and earn a
return thereon, to the extent that its investment in such property was prudently
incurred and the property is used and useful in furnishing public utility
service.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The liquidity of PG&W is influenced significantly by the capital intensive
nature of its operations and the ratemaking practices of the PPUC, which
together effectively require external financing of a substantial portion of
PG&W's construction expenditures. Additionally, because of the seasonal nature
of its gas utility operations and the ratemaking practices of the PPUC regarding
the recovery of purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it
is necessary for PG&W to finance its gas purchases and increases in its customer
accounts receivable with bank borrowings during certain periods of the year.
PG&W's ability to generate sufficient internal funds and to obtain the
external funds that are required for its operations and construction
expenditures is influenced significantly by the timing and amount of rate relief
it is granted. PG&W believes that it will be granted sufficient rate relief to
enable it to meet its future anticipated capital requirements, particularly in
view of the increases in annual water revenue aggregating $35.8 million which
PG&W has been granted by the PPUC since 1991 with respect to customers being
supplied with filtered water. PG&W also believes that it will be allowed
additional rate increases by the PPUC for its approximately 132,500 water
customers, all of whom are now receiving filtered water (except for several
hundred who are supplied with ground water from wells), because of the
relatively low level of earnings that PG&W is realizing from its water utility
operations and its expectation that with filtration and further distribution
system improvements, water quality should be less of a concern in its requests
for water rate increases. See "-Construction Expenditures and Related
Financing" and "-Failure to Obtain Adequate Rate Relief."
PEI relies on a number of sources, primarily cash dividends from PG&W, to
provide the funds necessary to pay dividends on its common stock, to pay
interest on its outstanding debt, and to meet all of its other obligations
(other than the repayment of debt for which PEI principally relies upon periodic
refinancings or sales of securities).
Because of limitations imposed by the terms of PG&W's Restated Articles of
Incorporation, as amended, PG&W is prohibited, without the consent of the
holders of a majority of the outstanding shares of its preferred stock, from
issuing more than $12.0 million of unsecured debt due on demand or within one
year from issuance. PG&W had no unsecured debt due on demand or within one year
from issuance outstanding as of December 31, 1994.
In addition, PG&W is prohibited from paying any dividends to PEI in the
event of a default under certain of its debt instruments or failure to make any
required dividend payments due holders of PG&W's preferred stock. Furthermore,
any failure by PG&W to pay preferred stock dividends for four consecutive
quarters would permit the holders of the PG&W preferred stock to elect a
majority of the directors of PG&W.
-31-
PG&W 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.
Interim Financing Practices
It is the practice of PG&W to use bank borrowings to finance certain of its
construction expenditures pending the periodic issuance of stock and long-term
debt. Additionally, because of the seasonal nature of its gas utility
operations and the ratemaking practices of the PPUC regarding the recovery of
purchased gas costs (see "-Rate Matters-Gas Rate Filings"), it is necessary for
PG&W to finance its gas purchases and increases in its customer accounts
receivable with bank borrowings during certain periods of the year.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, PG&W has made arrangements for a total of $67.5 million
of unsecured revolving bank credit. Specifically, PG&W has entered into a
revolving bank credit agreement (the "Credit Agreement") with a group of six
banks under the terms of which $60.0 million is available for borrowing by PG&W.
The Credit Agreement terminates on May 31, 1996, at which time any borrowings
outstanding thereunder are due and payable. The interest rate on borrowings
under the Credit Agreement is generally less than prime. The Credit Agreement
also requires the payment of a commitment fee of 0.195% per annum on the average
daily amount of the unused portion of the available funds. As of March 10,
1995, $35.0 million of borrowings were outstanding under the Credit Agreement.
PG&W currently has three additional short-term bank lines of credit with an
aggregate borrowing capacity of $7.5 million which provide for borrowings at
interest rates generally less than prime. Borrowings outstanding under two of
these bank lines of credit with borrowing capacities of $2.0 million and $3.0
million mature on May 31, 1995, and June 30, 1995, respectively. Borrowings
outstanding under the third bank line of credit with a borrowing capacity of
$2.5 million mature on May 31, 1996. As of March 10, 1995, PG&W had $3.9 million
of borrowings outstanding under these additional bank lines of credit. Prior to
their respective maturities, PG&W intends to renew the $7.5 million of these
bank lines of credit.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1994, $3.8 million of PG&W preferred stock and long-term
debt was required to be repaid within twelve months. Such amount included $3.0
million of borrowings that were outstanding under PG&W's bank lines of credit as
of such date.
PG&W believes that it will have sufficient cash flow and borrowing capacity
to repay current maturities of its preferred stock and long-term debt and to
meet its other obligations based on its present earnings and financing
capabilities, capitalization and banking arrangements and relationships.
Long-Term Debt and Capital Stock Financings
PG&W periodically engages in long-term debt and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing of
existing debt and various working capital purposes. Set forth below is a
summary of such financings, exclusive of interim bank borrowings, consummated by
PG&W since the beginning of 1993.
-32-
During 1993 and 1994, PG&W utilized $15.9 million and $9.8 million,
respectively, of the proceeds from the issuance by the Luzerne County Industrial
Development Authority (the "Authority") on December 22, 1992, of $30.0 million
of its 1992 Series B Bonds and with respect to which PG&W issued $30.0 million
of its 7.125% First Mortgage Bonds to the PNC Bank (formerly Northeastern Bank
of Pennsylvania) as trustee (the "IDA Trustee") for the 1992 Series B Bonds, as
security for the 1992 Series B Bonds. The proceeds from the issuance of the
1992 Series B Bonds were deposited in a construction fund held by the IDA
Trustee for the Authority's 1992 Series B Bonds, pending their utilization to
finance the construction of various additions and improvements to PG&W's water
facilities for which construction commenced subsequent to September 23, 1992.
As of December 31, 1994, $3.4 million of the proceeds (including investment
income) was held by the IDA Trustee and was available to finance the future
construction of qualified water facilities for PG&W.
In addition, during 1993, PG&W assumed $812,000 of indebtedness to the
Pennsylvania Infrastructure Investment Authority (an agency of the Commonwealth
of Pennsylvania known as "PENNVEST") in connection with its acquisition of the
assets and operations of two small water companies. Also, during 1993 and 1994,
PG&W borrowed $1.6 million and $695,000 respectively, under the terms of a water
facility loan agreement with PENNVEST dated December 3, 1992, relative to such
acquisition. A total of $2.6 million is being made available to PG&W pursuant
to the PENNVEST loan agreement, of which $270,000 remained available as of
December 31, 1994, for borrowing by PG&W.
On October 27, 1993, PG&W issued to PEI 834,000 shares of its common stock
for aggregate net proceeds of $31.9 million. PG&W utilized such funds to repay
bank borrowings. These borrowings had been incurred primarily to finance
construction expenditures.
On December 21, 1993, the Authority issued $19.0 million of its Exempt
Facilities Revenue Refunding Bonds, 1993 Series A (Pennsylvania Gas and Water
Company Project) (the "1993 Series A Bonds") and, in connection therewith, PG&W
issued $19.0 million of its 6.05% Series First Mortgage Bonds to the IDA Trustee
for the 1993 Series A Bonds, as security for the 1993 Series A Bonds. PG&W will
make payments to the IDA Trustee pursuant to the 6.05% Series First Mortgage
Bonds in amounts sufficient and at the times necessary to pay the debt service
requirements on the 1993 Series A Bonds. The proceeds from the issuance of the
1993 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's $19.0 million Exempt
Facilities Revenue Bonds, 1989 Series A (Pennsylvania Gas and Water Company
Project) (the "1989 Series A Bonds") on December 21, 1993, for use in redeeming
the 1989 Series A Bonds on January 1, 1994. The deposit of such funds acted to
discharge all of PG&W's obligations with respect to its 7%, 1989 Series A Note
in the principal amount of $19.0 million which had been issued to the IDA
Trustee in connection with the 1989 Series A Bonds and which was subject to
repayment on January 1, 1994.
On May 31, 1994, PG&W issued 500,000 shares of its common stock to PEI for
aggregate net proceeds of $20.0 million. PG&W used a portion of the proceeds it
so received to redeem $15.0 million of its 9.50% cumulative preferred stock and
to fund the $534,375 premium in connection with such redemption. The remaining
$4.5 million of proceeds were used by PG&W to repay a portion of its bank
borrowings and for working capital purposes.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provides the residential customers of PG&W with a method
of purchasing newly-issued shares of PEI common stock at a 5% discount from the
-33-
market price. PEI uses proceeds from the issuance of shares through the
Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized $1.7
million from the issuance of common stock to PEI in connection with the Customer
Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million from the
issuance of common stock to PEI in connection with the Customer Plan.
Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders
of shares of PEI common stock may reinvest cash dividends and/or make cash
investments in the common stock of PEI. The DRP was amended on May 5, 1994, to
provide PEI's shareholders with a method of reinvesting cash dividends and
making cash investments to purchase newly-issued shares of PEI's common stock at
a 5% discount from the market price. Prior to such amendment, cash dividends
were reinvested at 100% of the market price in newly-issued shares and cash
investments were used to purchase shares of PEI common stock on the open market.
PEI uses the proceeds from the DRP to purchase common stock of PG&W. During
1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and $385,000,
respectively, from the issuance of common stock to PEI in connection with the
DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million from the
issuance of common stock to PEI in connection with the DRP.
On November 15, 1994, the Authority issued $30.0 million of its Exempt
Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water
Company Project) (the "1994 Series A Bonds") and in connection therewith, PG&W
issued $30.0 million of its 7% Series First Mortgage Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on the 1994 Series A Bonds. The proceeds from the issuance of the
1994 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's Exempt Facilities Revenue
Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987
Series B Bonds") on November 15, 1994, for use in redeeming the 1987 Series B
Bonds on December 1, 1994. The deposit of such funds acted to discharge all of
PG&W's obligations with respect to its 8%, 1987 Series B Note in the principal
amount of $30.0 million which had been issued to the IDA Trustee in connection
with the 1987 Series B Bonds and which was subject to repayment on December 1,
1994.
PG&W's rated first mortgage bonds are currently rated BBB- (investment
grade) by Standard & Poor's Corporation ("S&P"), Baa3 (investment grade) by
Moody's Investors Services ("Moody's") and Class 2 by the National Association
of Insurance Commissioners ("NAIC"). On July 25, 1994, S&P said PG&W's outlook
was "stable" and that "continued, though slow financial improvement is expected
with the phase-in of water rate relief." However, S&P noted that "significant
capital expenditures and an excessive dividend payout...will continue to
challenge management over the intermediate term."
If PG&W's rated first mortgage bonds are downgraded below Class 2 (i.e.,
below investment grade) by the NAIC, this downgrade would cause the stated
interest rate on PG&W's $50.0 million of 9.57% Series First Mortgage Bonds due
1996 to increase to 11.17% per annum (which increase would cost PG&W $800,000
per year in additional interest expense, exclusive of tax benefits). Also, any
downgrading of PG&W's rated first mortgage bonds below investment grade by both
S&P and Moody's would result in the interest rate charged on borrowings under
the Credit Agreement being increased by one quarter percent per annum (which
increase could cost PG&W as much as $150,000 per year in additional interest
expense, exclusive of tax benefits, depending on the amount of borrowings
outstanding under the Credit Agreement). Additionally, any downgrading of
PG&W's rated first mortgage bonds by S&P, Moody's or the NAIC could have a
-34-
material adverse effect on the cost and difficulty of issuing additional debt,
which in turn could significantly impair PEI's and PG&W's ability to refinance
debt and fund future capital expenditures. See "-Failure to Obtain Adequate
Rate Relief."
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant during the period 1992
through 1994 were as follows:
[CAPTION]
Water Gas
Year Facilities Facilities Total
(Thousands of Dollars)
[S] [C] [C] [C]
1992 $ 44,352 $ 12,669 $ 57,021
1993 32,575 13,325 45,900
1994 19,321 17,455 36,776
$ 96,248 * $ 43,449 $139,697
* Includes $30.5 million, $20.7 million and $2.1 million, expended in
1992, 1993 and 1994, respectively, for various water supply and
treatment facilities and associated distribution system improvements
constituting part of the program that PG&W adopted in 1986 for
filtering all of its regularly used water supplies.
Approximately $13.2 million of PG&W's expenditures for the construction
of water facilities during 1994 were financed with proceeds from the
issuance of the Authority's 1992 Series B Bonds being held by the IDA
Trustee for the benefit of PG&W and with revenues from the water rate
increase for Scranton Water Rate Area which was effective June 23, 1993
(the "Scranton Area Water Rate Increase") (see "-Rate Matters-Water Rate
Filings-Scranton Area"). The balance ($6.1 million) of PG&W's expenditures
for the construction of water facilities during 1994, as well as its
expenditures for the construction of gas facilities during 1994, were
financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
PG&W estimates that its capital expenditures for 1995 through 1997 will
total $147.7 million, of which $74.5 million will involve the construction of
water facilities and $73.2 million will involve the construction of gas
facilities. PG&W anticipates that a portion of such water facilities will be
financed with the $3.4 million of proceeds from the issuance of the Authority's
1992 Series B Bonds held by the IDA Trustee as of December 31, 1994, for the
benefit of PG&W and with $7.5 million of revenues from the Scranton Area Water
Rate Increase, while the balance of its expenditures for water facilities ($63.6
million), as well as its expenditures for gas facilities, will be financed with
approximately $25.0 million from the issuance of a term loan in 1995, $29.5
million in 1996 from the sale of common stock to PEI, $50.0 million from the
issuance of another series of first mortgage bonds in 1997, proceeds from the
sale of common stock to PEI in connection with the Customer Plan and DRP, and
internally generated funds.
Neither PEI nor PG&W has made any formal arrangements for such proposed
future debt or stock financings and there can be no assurance that any
commitments for such proposed future debt or stock financings will be available
on terms acceptable to PEI or PG&W or that such proposed financings will be
consummated. The failure to consummate such proposed financings could have a
material adverse effect on PEI and PG&W.
-35-
Failure to Obtain Adequate Rate Relief
If PG&W is unable to obtain adequate rate relief in future rate increase
applications filed with the PPUC, PG&W would be forced to restrict its cash
expenditures by, among other actions, possibly reducing dividends on its common
stock, thereby resulting in a reduction of PEI's common stock dividends,
curtailing or deferring work on various capital projects, all of which could
negatively impact the quality and reliability of services rendered to the public
by PG&W.
Notwithstanding the PPUC's decision in its June 23, 1993, Order (see "-Rate
Matters-Water Rate Filings"), PG&W believes it will be able to obtain adequate
future rate relief, although there can be no assurance that such rate relief
will be obtained. However, if PG&W were unable to obtain adequate rate relief
from the PPUC under circumstances where PG&W believed that it is entitled as a
matter of law to such rate relief, PG&W would file appropriate appeals with the
Commonwealth Court of Pennsylvania, claiming that, contrary to law, the PPUC by
its actions had denied PG&W an opportunity to earn a fair rate of return on its
prudent investment in property which is used and useful in providing public
utility service.
-36-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of PG&W and the report of independent public
accountants thereon are presented on pages 37 through 62 of this Form 10-K.
-37-
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Gas and Water Company:
We have audited the accompanying balance sheets and statements of capitalization
of Pennsylvania Gas and Water Company (the "Company") (a Pennsylvania
corporation and a wholly-owned subsidiary of Pennsylvania Enterprises, Inc.) as
of December 31, 1994 and 1993, and the related statements of income, common
shareholder's investment, and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pennsylvania Gas and Water
Company as of December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1994
in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 9, effective January 1, 1993, the Company changed
its method of accounting for income taxes and postretirement benefits other than
pensions pursuant to standards promulgated by the Financial Accounting Standards
Board.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
New York, N.Y.
February 17, 1995
-38-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
[CAPTION]
Year Ended December 31,
1994 1993 1992
(Thousands of Dollars)
[S] [C] [C] [C]
OPERATING REVENUES:
Gas $ 167,992 $ 153,325 $ 143,227
Water 66,731 53,363 48,651
Total operating revenues 234,723 206,688 191,878
OPERATING EXPENSES:
Cost of gas 98,653 86,557 77,720
Other operation expenses 40,153 38,859 37,971
Maintenance 10,093 9,341 8,677
Depreciation 14,339 12,299 10,856
Deferred treatment plant costs, net 581 (1,532) (294)
Income taxes 12,499 8,989 8,305
Other taxes 16,073 16,019 14,730
Total operating expenses 192,391 170,532 157,965
OPERATING INCOME 42,332 36,156 33,913
OTHER INCOME, NET (Note 3) 16 560 30
INCOME BEFORE INTEREST CHARGES 42,348 36,716 33,943
INTEREST CHARGES:
Interest on long-term debt 21,222 20,515 18,929
Other interest 1,575 2,589 4,292
Allowance for borrowed funds used
during construction (255) (1,482) (1,773)
Deferred treatment plant carrying
charges - (1,207) (461)
Total interest charges 22,542 20,415 20,987
NET INCOME 19,806 16,301 12,956
DIVIDENDS ON PREFERRED STOCK 4,639 6,462 5,065
EARNINGS APPLICABLE TO COMMON STOCK $ 15,167 $ 9,839 $ 7,891
COMMON STOCK:
Earnings per share of common stock (Note 4):
Before premium on redemption of
preferred stock $ 2.92 $ 2.36 $ 2.02
Premium on redemption of
preferred stock (.19) - -
Earnings per share of common stock $ 2.73 $ 2.36 $ 2.02
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,189,108 4,176,087 3,908,351
The accompanying notes are an integral part of the financial statements.
-39-
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
December 31,
1994 1993
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
Gas plant, at original cost less
acquisition adjustments of $386,000 $260,679 $245,969
Water plant, at original cost plus
acquisition adjustments of $14,572,000, and
$14,577,000, respectively 376,735 360,996
Common plant, at original cost 26,118 26,212
663,532 633,177
Accumulated depreciation (94,461) (86,287)
569,071 546,890
OTHER PROPERTY AND INVESTMENTS:
Restricted funds held by trustee (Note 6) 3,401 12,853
Other 2,872 3,291
6,273 16,144
CURRENT ASSETS:
Cash and cash equivalents 304 2,714
Accounts receivable -
Customers 22,297 20,533
Others 1,474 1,258
Reserve for uncollectible accounts (1,299) (1,223)
Accrued utility revenues 13,299 16,123
Materials and supplies, at average cost 4,078 3,549
Gas held by suppliers, at average cost 20,025 26,650
Deferred cost of gas & supplier refunds, net 8,475 12,752
Prepaid expenses and other 2,531 2,026
71,184 84,382
DEFERRED CHARGES:
Deferred taxes collectible 55,410 51,382
Natural gas transition costs collectible (Note 2) 4,099 -
Unamortized debt expense 7,177 5,745
Deferred treatment plant costs
and carrying charges 9,548 10,129
Deferred water utility billings (Note 2) 8,908 3,885
Other 7,610 7,751
92,752 78,892
TOTAL ASSETS $739,280 $726,308
The accompanying notes are an integral part of the financial statements.
-40-
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
December 31,
1994 1993
(Thousands of Dollars)
[S] [C] [C]
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements on
page 42):
Common shareholder's investment (Notes 4 and 7) $216,032 $188,011
Preferred stock (Note 5) -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,760 31,840
Long-term debt (Note 6) 311,725 266,259
563,132 519,725
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption (Notes 5, 6 and 8) 3,810 38,664
Notes payable -
Bank (Note 8) - 2,000
Parent - 3,680
Accounts payable -
Suppliers 16,762 22,401
Affiliates, net 788 1,888
Accrued general business and realty taxes 3,881 3,574
Accrued income taxes 3,185 4,984
Accrued interest 4,716 4,042
Accrued natural gas transition costs (Note 2) 2,356 -
Other 3,455 2,440
38,953 83,673
DEFERRED CREDITS:
Deferred income taxes 96,939 87,005
Accrued natural gas transition costs (Note 2) 3,250 -
Unamortized investment tax credits 8,943 9,183
Advances for construction 11,349 10,985
Contributions in aid of construction 10,207 9,810
Operating reserves 2,383 1,863
Other 4,124 4,064
137,195 122,910
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES $739,280 $726,308
The accompanying notes are an integral part of the financial statements.
-41-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1994 1993 1992
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 19,806 $ 16,301 $ 12,956
Effects of noncash charges (credits) to income -
Depreciation 14,365 12,324 10,875
Deferred income taxes, net 5,871 1,678 2,048
Provisions for self insurance 1,695 1,800 1,196
Deferred treatment plant costs and carrying
charges, net 581 (3,560) (756)
Allowance for equity funds used during
construction (40) (734) -
Deferred water utility billings (5,574) (582) (969)
Other, net 3,522 4,540 2,812
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 1,449 (2,159) (2,517)
Gas held by suppliers 6,625 (5,038) (1,586)
Accounts payable (5,609) (515) 2,377
Deferred cost of gas and supplier refunds, net 5,784 (13,307) (11,429)
Other current assets and liabilities, net (559) 754 2,794
Other operating items, net (3,822) (3,251) (2,326)
Net cash provided by operating activities 44,094 8,251 15,475
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (37,940) (46,526) (58,324)
Other, net 2,226 1,493 2,030
Net cash used for investing activities (35,714) (45,033) (56,294)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 23,439 32,366 12,905
Issuance of preferred stock - - 23,615
Redemption of preferred stock (30,080) (10,080) (80)
Dividends on common and preferred stock (14,244) (18,398) (14,940)
Issuance of long-term debt 30,696 20,634 110,000
Repayment of long-term debt (38,584) (31,485) (57,371)
(Repayment) issuance of note payable to parent (3,680) - 3,680
Intercompany advance - - 15,000
Restricted funds held by trustee (Note 6) 9,753 15,868 (27,994)
Net increase (decrease) in bank borrowings 15,370 32,247 (20,167)
Other, net (3,460) (2,226) (3,917)
Net cash provided by (used for) financing
activities (10,790) 38,926 40,731
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,410) 2,144 (88)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,714 570 658
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 304 $ 2,714 $ 570
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 21,001 $ 21,092 $ 16,972
Income taxes $ 7,353 $ 6,790 $ 3,667
-42-
The accompanying notes are an integral part of the financial statements.
-43-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CAPITALIZATION
December 31,
1994 1993
(Thousands of Dollars)
COMMON SHAREHOLDER'S INVESTMENT (Note 7):
Common stock, no par value (Note 4)
(stated value $10 per share)
Authorized - 10,000,000 shares
Outstanding - 5,456,665 shares and
4,868,718 shares, respectively $ 54,567 $ 48,687
Additional paid-in capital 90,201 72,642
Retained earnings 71,264 66,682
Total common shareholder's investment 216,032 38.4% 188,011 36.2%
PREFERRED STOCK, par value $100 per share
Authorized - 997,500 shares (Note 5):
Not subject to mandatory redemption, net -
4.10% cumulative preferred,
100,000 shares issued 10,000 10,000
9% cumulative preferred,
250,000 shares outstanding, net of
issuance costs 23,615 23,615
Total preferred stock not subject to
mandatory redemption, net 33,615 6.0% 33,615 6.5%
Subject to mandatory redemption -
5.75% cumulative preferred, 18,400 and
19,200 shares outstanding, respectively 1,840 1,920
8.90% cumulative preferred, 150,000 shares
outstanding in 1993 - 15,000
9.50% 1988 series cumulative preferred,
150,000 shares outstanding in 1993 - 15,000
Less current redemption requirements (80) (80)
Total preferred stock subject to
mandatory redemption 1,760 0.3% 31,840 6.1%
LONG-TERM DEBT (Note 6):
First mortgage bonds 237,535 207,745
Notes 65,500 77,845
Other 12,420 19,253
Less current maturities and sinking
fund requirements (3,730) (38,584)
Total long-term debt 311,725 55.3% 266,259 51.2%
TOTAL CAPITALIZATION $563,132 100.0% $519,725 100.0%
The accompanying notes are an integral part of the financial statements.
-44-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
[CAPTION]
Additional
Common Paid-In Retained
Stock Capital Earnings Total
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Balance at December 31, 1991 $36,957 $ 39,587 $ 71,134 $147,678
Net income for 1992 - - 12,956 12,956
Issuance of common stock 3,230 9,207 - 12,437
Loss on sale of preferred stock
held in treasury - (18) (15) (33)
Dividends on:
Preferred stock (Note 5) - - (5,065) (5,065)
Common stock ($2.54 per share) - - (9,875) (9,875)
Balance at December 31, 1992 40,187 48,776 69,135 158,098
Net income for 1993 - - 16,301 16,301
Issuance of common stock 8,500 23,866 - 32,366
Premium on redemption of
preferred stock - - (356) (356)
Dividends on:
Preferred stock (Note 5) - - (6,462) (6,462)
Common stock ($2.8225 per share) - - (11,936) (11,936)
Balance at December 31, 1993 48,687 72,642 66,682 188,011
Net income for 1994 - - 19,806 19,806
Issuance of common stock 5,880 17,559 - 23,439
Premium on redemption of preferred
stock - - (980) (980)
Dividends on:
Preferred stock (Note 5) - - (4,639) (4,639)
Common stock ($1.81 per share) - - (9,605) (9,605)
Balance at December 31, 1994 $54,567 $ 90,201 $ 71,264 $216,032
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pennsylvania Gas and Water Company ("PG&W"), 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. PG&W has one wholly-owned subsidiary, Penn Gas
Development Co. (PGD), which has not been consolidated since it is
insignificant. Prior to October 1, 1994, PG&W had four other wholly-owned
subsidiaries, each a small water company, which were not consolidated since they
also were insignificant. As of September 30, 1994, these four small water
companies were merged into PG&W. The equity method is used to account for
PG&W's investment in PGD and was used to account for its investment in the four
small water companies prior to their merger into PG&W.
Utility Plant and Depreciation. Utility plant is stated at cost, which
represents the original cost of construction, including payroll, administrative
and general costs, an allowance for funds used during construction, and the
plant acquisition adjustments. The plant acquisition adjustments represent the
difference between the cost to PG&W of plant acquired as a system and the cost
of such plant when first devoted to public service, and are primarily
attributable to land, water rights and goodwill. Except for approximately
$340,000 recorded in 1993 with respect to water plant, which is being amortized
over a ten-year period, the plant acquisition adjustments relate to acquisitions
made prior to October 31, 1970, and thus are not required to be amortized for
financial reporting purposes since PG&W believes there has been no diminution in
their value. Also, such treatment is consistent with PPUC Orders.
The allowance for funds used during construction ("AFUDC") is defined as the
net cost during the period of construction of borrowed funds used and a
reasonable rate upon other funds when so used. Such allowance is charged to
utility plant and reported as either other income, net (with respect to the cost
of equity funds) or as a reduction of interest expense (with respect to the cost
of borrowed funds) in the accompanying statements of income. AFUDC varies
according to changes in the level of construction work in progress and in the
sources and costs of capital. The weighted average rate for such allowance was
approximately 7% in 1994, 8% in 1993 and 7% in 1992.
PG&W provides for depreciation on a straight-line basis for gas plant and
all common plant. As of December 31, 1994, depreciation was provided on a
straight-line basis for approximately 96% of the water plant and on a 4%
compound interest method for the remainder of the water plant. Exclusive of
transportation and work equipment, the annual provision for depreciation, as
related to the average depreciable original cost of utility plant, resulted in
the following percentages:
[CAPTION]
1994 1993 1992
[S] [C] [C] [C]
Gas 2.48% 2.49% 2.51%
Water 2.02 1.71 1.57
Common 7.62 8.06 6.76
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The increase in the annual rate of depreciation relative to water plant in
both 1994 and 1993 reflects a change from the 4% compound interest method to the
straight-line method of depreciation with respect to certain of that plant, as
ordered by the PPUC. Such change in method of depreciation has generally been
made as PG&W was allowed to initially increase its rates for customers receiving
filtered water service.
When depreciable property is retired, the original cost of such property is
removed from the utility plant accounts and is charged, together with the cost
of removal less salvage, to accumulated depreciation. No gain or loss is
recognized in connection with retirements of depreciable property, other than in
the case of significant involuntary conversions or extraordinary retirements.
Revenues and Cost of Gas. PG&W bills its customers based on estimated or
actual meter readings on a cycle basis. Gas customers and certain water
customers, primarily large users, are billed monthly on a cycle that extends
throughout the month. Other water customers are billed bi-monthly on cycles
that extends over the bi-monthly period. The estimated unbilled amounts from
the most recent meter reading dates through the end of the period being reported
on are recorded as accrued revenues.
PG&W generally passes on to its customers increases or decreases in gas
costs from those reflected in its tariff charges. In accordance with this
procedure, PG&W defers any current under or over-recoveries of gas costs and
collects or refunds such amounts in subsequent periods.
Deferred Charges (Regulatory Assets). PG&W generally accounts for and
reports its costs in accordance with the economic effect of rate actions by the
PPUC. To this extent, certain costs are recorded as deferred charges pending
their recovery in rates. Such deferred charges include, among other amounts,
deferred treatment plant costs and carrying charges as more fully discussed in
the following paragraphs, certain pre-operating costs relative to PG&W's water
treatment plants, costs associated with an early retirement plan, and certain
preliminary survey and investigation costs. These amounts either relate to
previously-issued orders of the PPUC or are of a nature which, in the opinion of
PG&W, will be recoverable in future rates, based on past actions of the PPUC or
other relevant factors.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred
all operating expenses, including depreciation and property taxes, and the
carrying charges (equivalent to the AFUDC) relative to the four new Scranton
Area water treatment plants and related facilities from the dates of commercial
operation of the plants until March 23, 1991, the effective date of the Scranton
Area water rate increase approved by the PPUC on March 22, 1991. By its Order
entered June 23, 1993, relative to the Scranton Water Rate Area, the PPUC
granted PG&W's request to recover the $5.8 million of costs deferred relative to
the Scranton Area water treatment plants and related facilities over a ten-year
period beginning June 23, 1993, of which $885,000 had been recovered as of
December 31, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992,
PG&W has deferred all operating expenses, including depreciation and property
taxes, and the carrying charges relative to the Crystal Lake Water Treatment
Plant and related facilities from August 3, 1992 (the date of commercial
operation of that plant), until March 9, 1993, the effective date of the water
rate increase approved by the PPUC on February 25, 1993, for customers in PG&W's
Spring Brook Water Rate Area served exclusively by the Crystal Lake Water
Treatment Plant. Additionally, in accordance with an Order of the PPUC entered
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July 28, 1993, PG&W deferred all expenses and the carrying charges relative to
the Ceasetown and Watres Water Treatment Plants and related facilities, until
December 16, 1993, the effective date of the water rate increase for customers
served by the Ceasetown and Watres Water Treatment Plants approved by the PPUC
on December 15, 1993. A total of $4.6 million of costs relative to these plants
and related facilities had been so deferred pursuant to the respective PPUC
Orders permitting the deferral of such costs.
As contemplated by the PPUC's Orders of September 24, 1992, and July 28,
1993, PG&W will seek recovery of these costs, which total $4.6 million, in its
next rate increase request relative to the Spring Brook Water Rate Area.
Although it cannot be certain, PG&W believes that the recovery of such costs
will be allowed by the PPUC in future rate increases, particularly in view of
the PPUC's action allowing the recovery of the costs deferred with respect to
the Scranton Area water treatment plants and related facilities.
PG&W also records, as deferred charges, the direct financing costs incurred
in connection with the issuance of long-term debt and redeemable preferred stock
and equitably amortizes such amounts over the life of such securities.
Cash and Cash Equivalents. For the purposes of the statements of cash
flows, PG&W considers all highly liquid debt instruments purchased, which
generally have a maturity of three months or less, to be cash equivalents. Such
instruments are carried at cost, which approximates market value.
Income Taxes. Effective January 1, 1993, PG&W adopted the provisions of
Financial Accounting Standards Board ("FASB") Statement 109, "Accounting for
Income Taxes," which superseded previously issued income tax accounting
standards. The adoption of FASB Statement 109 did not have a significant effect
on PG&W's results of operations. In accordance with the provisions of FASB
Statement 109, PG&W recorded as of January 1, 1993, an additional deferred tax
liability and an asset, representing the probable future rate recovery of the
previously unrecorded deferred taxes, primarily relating to certain temporary
differences in the basis of utility plant which had not previously been recorded
because of the regulatory rate practices of the PPUC.
The components of PG&W's net deferred income tax liability as of December 31,
1994 and 1993, are shown below:
1994 1993
(Thousands of Dollars)
Utility plant basis differences $94,430 $86,924
Deferred treatment plant costs, net 4,194 4,460
Deferred water utility billings 4,151 1,892
FERC Order 636 transition costs 1,371 -
Contributions and advances for construction (3,544) (3,284)
Alternative minimum tax (2,213) (2,176)
Operating reserves (1,020) (816)
Other (430) 5
Net deferred income tax liability $96,939 $87,005
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The provision for income taxes consists of the following components:
1994 1993 1992
(Thousands of Dollars)
Included in operating expenses:
Currently payable -
Federal $ 4,986 $ 5,644 $ 4,664
State 1,893 1,917 1,888
Total currently payable 6,879 7,561 6,552
Deferred, net -
Federal 5,486 2,535 2,512
State 390 (851) (503)
Total deferred, net 5,876 1,684 2,009
Amortization of investment tax credits (256) (256) (256)
Total included in operating expenses 12,499 8,989 8,305
Included in other income, net:
Currently payable -
Federal 213 (44) (29)
State 85 (28) (26)
Total currently payable 298 (72) (55)
Deferred, net -
Federal (5) (6) 39
State - - -
Total deferred, net (5) (6) 39
Total included in other income, net 293 (78) (16)
Total provision for income taxes $ 12,792 $ 8,911 $ 8,289
The components of deferred income taxes, which are recorded consistent with
the treatment allowed by the PPUC for ratemaking purposes, are as follows:
1994 1993 1992
(Thousands of Dollars)
Excess of tax depreciation over
depreciation for accounting purposes $ 3,449 $ 3,214 $ 2,502
Deferred treatment plant costs, net (266) 1,458 585
Deferred water utility billings 2,259 75 258
FERC Order 636 transition costs 1,371 - -
Take-or-pay costs, net (652) (1,126) (446)
Other, net (290) (1,943) (851)
Total deferred taxes, net $ 5,871 $ 1,678 $ 2,048
Included in:
Operating expenses $ 5,876 $ 1,684 $ 2,009
Other income, net (5) (6) 39
Total deferred taxes, net $ 5,871 $ 1,678 $ 2,048
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The total provision for income taxes shown in the accompanying statements of
income differs from the amount which would be computed by applying the statutory
federal income tax rate to income before income taxes. The following table
summarizes the major reasons for this difference:
1994 1993 1992
(Thousands of Dollars)
Income before income taxes $32,598 $25,212 $21,245
Tax expense at statutory federal
income tax rate $11,409 $ 8,824 $ 7,223
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 1,751 935 1,161
Deferred treatment plant carrying
charges and allowance for equity funds
used during construction (14) (545) -
Amortization of investment tax credits (256) (256) (256)
Other, net (98) (47) 161
Total provision for income taxes $12,792 $ 8,911 $ 8,289
(2) RATE MATTERS
Gas Utility Operations
Annual Gas Cost Adjustment. Pursuant to the provisions of the Pennsylvania
Public Utility Code, which require that the tariffs of gas distribution
companies, such as PG&W, be adjusted on an annual basis to reflect changes in
their purchased gas costs, the PPUC ordered PG&W to make the following changes
during 1994, 1993 and 1992 to the gas costs contained in its gas tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
December 1, 1994 $3.74 $3.68 $(1,800,000)
December 1, 1993 2.79 3.74 28,800,000
December 1, 1992 2.46 2.79 9,500,000
The annual changes in gas rates on account of purchased gas costs have no
effect on PG&W's earnings since the change in revenue is offset by a
corresponding change in the cost of gas.
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 Gas Transition Costs are subject to recovery
through the annual PGC rate filing made with the PPUC by PG&W and other larger
local gas distribution companies. The PGC Order also indicated that while Non-
Gas Transition Costs were not natural gas costs eligible for recovery under the
PGC rate filing mechanism, such costs were 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. As of
February 1, 1994, PG&W began to recover the Gas Transition Costs that are being
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billed to PG&W by its interstate pipelines through an increase in its PGC rate.
It is currently estimated that these costs, which will be billed to PG&W over a
nineteen-month period extending through March 31, 1995, will aggregate $1.2
million, of which $1.1 million had been billed to PG&W and $659,000 had been
recovered from its customers as of December 31, 1994. By Order of the PPUC
entered August 26, 1994, PG&W 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 $9.4 million of Non-Gas Transition Costs will be billed
to PG&W, generally over a four-year period extending through the fourth quarter
of 1997, of which $3.8 million had been billed to PG&W and $1.1 million had been
recovered from its customers as of December 31, 1994. PG&W has recorded a
liability for the $5.6 million of such estimated transition costs that remain to
be billed to it as of December 31, 1994, and both a current asset and a deferred
asset (which together totaled $8.8 million as of December 31, 1994) representing
the transition costs remaining to be recovered from its customers.
Water Rate Filings
Scranton Area Water Rate Increase. On September 25, 1992, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$9.9 million in additional annual revenue, to be effective November 24, 1992.
This rate increase request involved the approximately 56,000 customers in PG&W's
Scranton Water Rate Area at such date. By Order entered June 23, 1993, the PPUC
rejected the proposed rate increase in its entirety "due to inadequate service"
(i.e., water quality). However, by the same Order, the PPUC granted PG&W the
alternative of a rate increase designed to produce an additional $5.0 million in
annual revenue, provided that PG&W dedicate the entire increase to augment the
improvements to its water distribution system until "...the demonstration by
[PG&W] to [the PPUC] that it is providing adequate service." PG&W accepted this
alternative and placed such $5.0 million rate increase into effect as of June
23, 1993.
On August 19, 1993, the PPUC approved a settlement agreement resolving
certain disputed issues relating to its June 23, 1993, Order. This settlement
agreement provided, among other things, for (i) modification by the PPUC of its
June 23, 1993, Order to reduce the amount of the revenue increase that it
ordered be dedicated to distribution system improvements by the related income
taxes and other expenses and the $319,000 additional expense for retiree health
care and life insurance benefits that the PPUC allowed PG&W in its revenues
(which resulted in the requirement for an additional annual expenditure for
distribution system improvements by PG&W of $2.5 million), (ii) the agreement by
PG&W (with which it was in compliance as of December 31, 1994) to spend a total
of $4.9 million annually (an additional $2.5 million over its actual average
annual expenditure of $2.4 million during the three-year period ended June 30,
1993) for distribution system improvements in the Scranton Water Rate Area until
the PPUC is satisfied that PG&W is providing adequate service, (iii) the
modification by the PPUC of its June 23, 1993, Order to restore the Hollister
Reservoir to PG&W's rate base, and (iv) the withdrawal by PG&W and the Office of
Consumer Advocate (the "OCA") of their appeals to the Commonwealth Court of
Pennsylvania regarding the PPUC's June 23, 1993, Order.
Spring Brook Water Rate Increases. Crystal Lake Service Area. On June 30,
1992, PG&W filed an application with the PPUC seeking a water rate increase,
designed to produce $4.4 million in additional annual revenue. This rate
increase request involved the approximately 5,000 customers in the Spring Brook
Water Rate Area served exclusively by the Crystal Lake Water Treatment Plant,
which became fully operational in August, 1992. On December 15, 1992, PG&W and
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certain parties filing objections to the rate increase request reached a
settlement providing for an approximate 130% rate increase designed to produce
$2.0 million of additional annual revenue to be phased-in over a two-year period
under the terms of a qualified phase-in plan pursuant to FASB Statement 92. The
settlement provided that $1.1 million of the increased revenue (an approximate
72% increase in rates) was to be realized through an immediate rate increase and
that the remaining $900,000 in increased revenue (an additional 58% increase in
rates) was to be realized through another rate increase one year later (i.e., at
the beginning of year two of the phase-in period). The settlement also
specified that the $900,000 in revenue that would be deferred during the first
year of the phase-in period, as well as an approximate $243,000 in related
carrying charges, was to be collected from customers in the form of a surcharge
in years three through five of the phase-in period. By Order adopted February
25, 1993, the PPUC approved the settlement effective March 9, 1993. In
accordance with the provisions of FASB Statement 92, PG&W commenced recording
the entire $2.0 million increase in annual revenue allowed by the PPUC as
additional revenue beginning March 9, 1993, along with the related carrying
charges on revenue deferred in accordance with the phase-in plan.
Ceasetown and Watres Service Areas. On April 29, 1993, PG&W filed an
application with the PPUC seeking a water rate increase, designed to produce
$19.5 million in additional annual revenue, to be effective June 28, 1993. This
rate increase request involved approximately 59,300 customers in PG&W's Spring
Brook Water Rate Area, principally those customers (i) served by the Ceasetown
Water Treatment Plant which was placed in service on March 31, 1993, (ii) served
by the Watres Water Treatment Plant which was placed in service on September 30,
1993, (iii) served jointly by the Ceasetown and Watres Water Treatment Plants,
and (iv) who are served exclusively by the Nesbitt Water Treatment Plant. On
September 23, 1993, PG&W and certain parties filing objections to the rate
increase request reached a settlement providing for an overall 119% rate
increase involving approximately 44,900 customers, principally those served
either exclusively or jointly by the Ceasetown and Watres Water Treatment
Plants, designed to produce $11.9 million of additional annual revenue to be
phased-in over a two-year period under the terms of a qualified phase-in plan,
pursuant to FASB Statement 92. Under the terms of the settlement, except for
approximately 200 customers who were previously served jointly by the Hillside
and Nesbitt Water Treatment Plants, none of the approximately 14,600 customers
now served exclusively by the Nesbitt Water Treatment Plant would receive an
increase. The settlement further provided that $6.4 million of the increased
revenue (an approximate 65% increase in rates) was to be realized through an
immediate rate increase and that the remaining $5.5 million of the increased
revenue (an additional 54% increase in rates) was to be realized through a
further rate increase one year later (i.e., at the beginning of year two of the
phase-in period). The settlement also specified that the $5.5 million in
revenue to be deferred during the first year of the phase-in period, as well as
an approximate $1.3 million in related carrying charges, is to be collected from
customers in the form of a surcharge in years three through five of the phase-in
period. By Order adopted December 15, 1993, the PPUC approved the settlement
effective December 16, 1993. In accordance with the provisions of FASB
Statement 92, PG&W commenced recording the entire $11.9 million increase in
annual revenue allowed by the PPUC as additional revenue beginning December 16,
1993, along with the related carrying charges on revenue deferred in accordance
with the phase-in plan.
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(3) OTHER INCOME, NET
Other income, net was comprised of the following elements:
1994 1993 1992
(Thousands of Dollars)
Gain on sale of investment in joint
venture, net of related income taxes $ 268 $ - $ -
Gain on sale of non-watershed land and
other property, net of related income
taxes 165 20 102
Deferred treatment plant carrying charges
and allowance for equity funds used
during construction 40 1,555 -
Interest on note to affiliate - - 133
Amortization of preferred stock issuance
costs, net of related income tax
benefits (227) (126) (66)
Net interest expense on proceeds
remaining in construction fund (217) (785) (23)
Premium on retirement/defeasance of debt (40) (81) (127)
Other 27 (23) 11
Total $ 16 $ 560 $ 30
(4) COMMON STOCK
Since January 1, 1992, PG&W has issued the following amounts of common stock
to PEI, its parent company, in addition to shares issued in connection with
PEI's Dividend Reinvestment and Stock Purchase Plan and Customer Stock Purchase
Plan:
Purchase Price
Date Purchased Number of Shares Per Share* Aggregate
March 23, 1992 171,779 $ 40.75 $ 7.0 million
June 19, 1992 137,143 $ 40.25 $ 5.5
October 27, 1993 834,000 $ 38.25 $31.9
May 31, 1994 500,000 $ 40.00 $20.0
Total 1,642,922 $64.4 million
* Approximately equal to the book value of PG&W's common stock at the date of
issuance.
The proceeds from the shares issued on June 19, 1992, and October 27, 1993,
were used to repay bank borrowings which had been incurred primarily to finance
construction expenditures. The shares issued on March 23, 1992, represented
capitalization of the $7.0 million contribution made by PEI to PG&W on January
30, 1992, which had been temporarily treated as an intercompany advance pending
approval by the PPUC of the issuance of shares of common stock relative to such
contribution. Upon its receipt, the $7.0 million contribution was also utilized
to repay bank borrowings incurred primarily to finance construction
expenditures. The proceeds from the shares issued on May 31, 1994, were used by
PG&W to redeem $15.0 million of its 9.50% 1988 series cumulative preferred
stock, to fund the $534,375 premium in connection with such redemption, to repay
a portion of its bank borrowings and for working capital purposes.
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On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the
"Customer Plan") which provides the residential customers of PG&W with a method
of purchasing newly-issued shares of PEI common stock at a 5% discount from the
market price. PEI uses proceeds from the issuance of shares through the
Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized $1.7
million from the issuance of common stock to PEI in connection with the Customer
Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million from the
issuance of common stock to PEI in connection with the Customer Plan.
Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders
of shares of PEI common stock may reinvest cash dividends and/or make cash
investments in the common stock of PEI. The DRP was amended on May 5, 1994, to
provide PEI's shareholders with a method of reinvesting cash dividends and
making cash investments to purchase newly-issued shares of PEI's common stock at
a 5% discount from the market price. Prior to such amendment, cash dividends
were reinvested at 100% of the market price in newly-issued shares and cash
investments were used to purchase shares of PEI common stock on the open market.
PEI uses the proceeds from the DRP to purchase common stock of PG&W. During
1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and $385,000,
respectively, from the issuance of common stock to PEI in connection with the
DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million from the
issuance of common stock to PEI in connection with the DRP.
(5) PREFERRED STOCK
Preferred Stock of PG&W Subject to Mandatory Redemption
On December 23, 1993, PG&W redeemed 100,000 shares of the 9.50% 1988 series
cumulative preferred stock at a price of $103.5625 per share (plus accrued
dividends to the redemption date), which included a voluntary redemption premium
of $3.5625 per share ($356,250 in the aggregate). On May 31, 1994, PG&W
redeemed the remaining 150,000 outstanding shares of its 9.50% 1988 series
cumulative preferred stock, $100 par value, at a price of $103.5625 per share,
which included a voluntary redemption premium of $3.5625 per share ($534,375 in
the aggregate), plus accrued dividends.
On December 16, 1994, PG&W redeemed all 150,000 shares of its 8.90%
cumulative preferred stock at a price of $102.97 per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate).
The holders of the 5.75% cumulative preferred stock have a noncumulative
right each year to tender to PG&W and to require it to purchase at a per share
price not exceeding $100, up to (a) that number of shares of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase price
of $80,000 less (b) the number of such shares which PG&W may already have
purchased during the year at a per share price of not more than $100. Eight
hundred such shares were acquired and cancelled by PG&W in each of the three
years in the period ended December 31, 1994, for an aggregate purchase price in
each year of $80,000.
As of December 31, 1994, the sinking fund requirements relative to PG&W's
5.75% cumulative preferred stock (the only series of preferred stock subject to
mandatory redemption that was outstanding on such date) were $80,000 for each of
the years 1995 through 1999.
At PG&W's option, the 5.75% cumulative preferred stock may currently be
redeemed at a price of $102.00 per share ($1,876,800 in the aggregate.)
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Preferred Stock of PG&W Not Subject to Mandatory Redemption
On August 18, 1992, PG&W issued 250,000 shares of its 9% cumulative
preferred stock, par value $100 per share, for aggregate net proceeds of
approximately $23.6 million. The 9% cumulative preferred stock is not
redeemable by PG&W prior to September 15, 1997. Thereafter, it is redeemable at
the option of PG&W, in whole or in part, upon not less than 30 days' notice, at
$100 per share plus accrued dividends to the date of redemption and at a premium
of $8 per share if redeemed from September 15, 1997, to September 14, 1998, and
a premium of $4 per share if redeemed from September 15, 1998, to September 14,
1999.
At PG&W's option, the 4.10% cumulative preferred stock may currently be
redeemed at a redemption price of $105.50 per share or for an aggregate
redemption price of $10,550,000.
Dividend Information
The dividends on the preferred stock of PG&W in each of the three years in
the period ended December 31, 1994, were as follows:
Series 1994 1993 1992
(Thousands of Dollars)
4.10% $ 410 $ 410 $ 409
5.75% 108 113 117
8.90% 1,280 1,335 1,335
9.00% 2,250 2,250 829
9.50% 1988 series 591 2,354 2,375
Total $4,639 $6,462 $5,065
Dividends on all series of PG&W's preferred stock are cumulative, and if
dividends in an amount equivalent to four full quarterly dividends on all shares
of preferred stock then outstanding are in default and until all such dividends
have been paid, the holders of the preferred stock, voting separately as one
class, shall be entitled to elect a majority of the Board of Directors of PG&W.
Additionally, PG&W may not declare dividends on its common stock if any
dividends on shares of preferred stock then outstanding are in default.
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(6) LONG-TERM DEBT
Long-term debt consisted of the following components at December 31, 1994
and 1993:
1994 1993
(Thousands of Dollars)
First mortgage bonds -
6.05 % Series, due 2019 $ 19,000 $ 19,000
7 % Series, due 2017 30,000 -
7.125% Series, due 2022 30,000 30,000
7.20 % Series, due 2017 50,000 50,000
8 % Series, due 1997 3,535 3,745
8.375% Series, due 2002 30,000 30,000
9.23 % Series, due 1999 10,000 10,000
9.34 % Series, due 2019 15,000 15,000
9.57 % Series, due 1996 50,000 50,000
237,535 207,745
Notes -
1%, due 1994 (Small Business Administration) - 845
8%, 1987 Series B, defeased on November 15, 1994 - 30,000
Bank borrowings, at weighted average interest
rates of 5.28% and 4.31%, respectively,
(Note 8) 65,500 47,000
65,500 77,845
Water facility loans from agencies of the
Commonwealth of Pennsylvania, at interest rates
ranging from 1.76% to 9.36%, repayable in
installments through 2012 12,420 19,253
Less current maturities and sinking
fund requirements (3,730) (38,584)
Total long-term debt $311,725 $266,259
7.125% Series First Mortgage Bonds. On December 22, 1992, the Luzerne
County Industrial Development Authority (the "Authority") issued $30.0 million
of its 7.125% Exempt Facilities Revenue Bonds, 1992 Series B (Pennsylvania Gas
and Water Company Project) (the "1992 Series B Bonds") and, in connection
therewith, PG&W issued $30.0 million of its 7.125% Series First Mortgage Bonds
to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the "IDA
Trustee") for the 1992 Series B Bonds, as security for the 1992 Series B Bonds.
The proceeds from the issuance of the 1992 Series B Bonds were deposited in a
construction fund held by the IDA Trustee for the 1992 Series B Bonds, pending
their utilization to finance the construction of various additions and
improvements to PG&W's water facilities for which construction commenced
subsequent to September 23, 1992. As of December 31, 1994, $3.4 million
(including investment income) was so held by the IDA Trustee and was available
to finance the future construction of qualified water facilities for PG&W.
Under the terms of the 7.125% Series First Mortgage Bonds, PG&W will make
payments to the IDA Trustee in amounts sufficient and at the times necessary to
pay the debt service requirements on the 1992 Series B Bonds.
6.05% Series First Mortgage Bonds. On December 21, 1993, the Authority
issued $19.0 million of its Exempt Facilities Revenue Refunding Bonds, 1993
Series A (Pennsylvania Gas and Water Company Project) (the "1993 Series A
Bonds") and, in connection therewith, PG&W issued $19.0 million of its 6.05%
Series First Mortgage Bonds to the IDA Trustee for the 1993 Series A Bonds, as
security for the 1993 Series A Bonds. PG&W will make payments to the IDA
Trustee pursuant to the 6.05% Series First Mortgage Bonds in amounts sufficient
and at the times necessary to pay the debt service requirements on the 1993
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Series A Bonds. The proceeds from the issuance of the 1993 Series A Bonds,
along with additional funds provided by PG&W, were deposited with the IDA
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Trustee for the Authority's $19.0 million of 7% Exempt Facilities Revenue Bonds,
1989 Series A (Pennsylvania Gas and Water Company Project) (the "1989 Series A
Bonds") on December 21, 1993, for use in redeeming the 1989 Series A Bonds on
January 1, 1994. The deposit of such funds acted to discharge all of PG&W's
obligations with respect to its 7%, 1989 Series A Note in the principal amount
of $19.0 million which had been issued to the IDA Trustee in connection with the
1989 Series A Bonds and which was subject to repayment on January 1, 1994.
7% Series First Mortgage Bonds. On November 15, 1994, the Authority issued
$30.0 million of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A
(Pennsylvania Gas and Water Company Project) due 2017 (the "1994 Series A
Bonds") and, in connection therewith, PG&W issued $30.0 million of its 7% Series
First Mortgage Bonds, as security for the 1994 Series A Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on the 1994 Series A Bonds. The proceeds from the issuance of the
1994 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's $30.0 million of 8% Exempt
Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company
Project) (the "1987 Series B Bonds") on November 15, 1994, for use in redeeming
the 1987 Series B Bonds on December 1, 1994. The deposit of such funds acted to
discharge all of PG&W's obligations with respect to its 8%, 1987 Series B Note
in the principal amount of $30.0 million which had been issued to the IDA
Trustee in connection with the 1987 Series B Bonds and which was subject to
repayment on December 1, 1994.
Maturities and Sinking Fund Requirements. As of December 31, 1994, the
aggregate annual maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:
Year Amount
1995 $ 3,730,000
1996 $113,258,000 (a)
1997 $ 3,694,000
1998 $ 611,000
1999 $ 10,644,000 (b)
(a) Includes $62.5 million of bank borrowings outstanding as of December 31,
1994, due May 31, 1996, and PG&W's 9.57% Series First Mortgage Bonds in
the principal amount of $50.0 million due September 1, 1996.
(b) Includes PG&W's 9.23% Series First Mortgage Bonds in the principal
amount of $10.0 million due September 1, 1999.
Liens Securing Indebtedness. Most of PG&W's properties are subject to
mortgage liens securing certain funded debt. Additionally, PG&W's gross
revenues and receipts, accounts receivable and certain of its other rights and
interests are subject to liens securing various water facility loans from
agencies established by the Commonwealth of Pennsylvania for the purpose of
providing financial assistance to public water supply and sewage systems in the
state. These liens are limited to the amount of the related loans outstanding,
which aggregated $12.4 million as of December 31, 1994.
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(7) DIVIDEND RESTRICTIONS
The preferred stock provisions of PG&W's Restated Articles of Incorporation
and certain of the agreements under which PG&W has issued long-term debt provide
for certain dividend restrictions. As of December 31, 1994, $37,357,000 of the
retained earnings of PG&W were restricted against the payment of cash dividends
on common stock under the most restrictive of these covenants.
(8) BANK NOTES PAYABLE
PG&W has entered into a revolving bank credit agreement (the "Credit
Agreement") with a group of six banks under the terms of which $60.0 million is
available for borrowing by PG&W. The Credit Agreement terminates on May 31,
1996, at which time any borrowings outstanding thereunder are due and payable.
The interest rate on borrowings under the Credit Agreement is generally less
than prime. The Credit Agreement also requires the payment of a commitment fee
of .195% per annum on the average daily amount of the unused portion of the
available funds. As of March 10, 1995, $35.0 million of borrowings were
outstanding under the Credit Agreement. PG&W currently has three additional
bank lines of credit with an aggregate borrowing capacity of $7.5 million which
provide for borrowings at interest rates generally less than prime. Borrowings
outstanding under two of these bank lines of credit with borrowing capacities of
$2.0 million and $3.0 million mature on May 31, 1995, and June 30, 1995,
respectively. Borrowings outstanding under the third bank line of credit with a
borrowing capacity of $2.5 million mature on May 31, 1996. As of March 10,
1995, PG&W had $3.9 million of borrowings outstanding under these additional
bank lines of credit. The commitment fees paid by PG&W with respect to its
revolving bank credit agreements totaled $97,000 in 1994, $113,000 in 1993 and
$152,000 in 1992.
Because of limitations imposed by the terms of PG&W's preferred stock, PG&W
is prohibited, without the consent of the holders of a majority of the
outstanding shares of its preferred stock, from issuing more than $12.0 million
of unsecured debt due on demand or within one year from issuance. PG&W had no
unsecured debt due on demand or within one year from issuance outstanding as of
December 31, 1994.
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Information relating to PG&W's bank lines of credit and borrowings under
those lines of credit is set forth below:
As of December 31,
1994 1993 1992
(Thousands of Dollars)
Borrowings under lines of credit
Short-term $ - $ 2,000 $ -
Long-term 65,500 47,000 17,000
$ 65,500 $ 49,000 $ 17,000
Unused lines of credit
Short-term $ - $ 5,000 $ -
Long-term 2,000 13,000 28,000
$ 2,000 $ 18,000 $ 28,000
Total lines of credit
Prime rate $ - $ 2,000 $ 45,000
Other than prime rate 67,500 65,000 -
$ 67,500 $ 67,000 $ 45,000
Short-term bank borrowings (a)
Maximum amount outstanding $ 5,692 $ 5,666 $ -
Daily average amount outstanding $ 441 $ 637 $ -
Weighted daily average interest
rate 3.984% 4.046% -
Weighted average interest rate at
year-end - 4.208% -
Range of interest rates 3.700- 3.750- -
6.000% 6.000% -
(a) PG&W did not incur any short-term bank borrowings during the year ended
December 31, 1992, and had no short-term bank borrowings outstanding as
of December 31, 1992, or December 31, 1994.
(9) POSTEMPLOYMENT BENEFITS
Pension Benefits
Substantially all employees of PG&W are covered by PEI's trusteed,
noncontributory, defined benefit pension plan. Pension benefits are based on
years of service and average final salary. PG&W's funding policy is to
contribute an amount necessary to provide for benefits based on service to date,
as well as for benefits expected to be earned in the future by current
participants. To the extent that the present value of these obligations is
fully covered by assets in the trust, a contribution may not be made for a
particular year. Net pension costs, including amounts capitalized, were
$562,000, $443,000 and $333,000 in 1994, 1993 and 1992, respectively.
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The following items were the components of the net pension cost for the
years 1994, 1993 and 1992:
1994 1993 1992
(Thousands of Dollars)
Present value of benefits earned
during the year $ 999 $ 854 $ 789
Interest cost on projected benefit
obligations 2,545 2,402 2,262
Return on plan assets 973 (3,127) (2,646)
Net amortization and deferral (101) (97) (93)
Deferral of investment (loss) gain (3,854) 411 21
Net pension cost $ 562 $ 443 $ 333
The funded status of the plan as of December 31, 1994 and 1993, was as follows:
[CAPTION]
1994 1993
(Thousands of Dollars)
[S] [C] [C]
Actuarial present value of the projected
benefit obligations:
Accumulated benefit obligations
Vested $ 21,592 $ 24,265
Nonvested 77 125
Total 21,669 24,390
Provision for future salary increases 7,565 9,769
Projected benefit obligations 29,234 34,159
Market value of plan assets, primarily
invested in equities and bonds 30,457 32,471
Plan assets in excess of (less than) projected
benefit obligations 1,223 (1,688)
Unrecognized net transition asset as of
January 1, 1986, being amortized over
20 years (2,528) (2,758)
Unrecognized prior service costs 2,150 2,279
Unrecognized net (gain) loss (1,644) 1,710
Accrued pension cost at year-end $ (799) $ (457)
The discount rate used to determine the actuarial present value of the
projected benefit obligations was 8-3/4% in 1994 and 8% in 1993. An expected
long-term rate of return on plan assets of 9% and a 5-1/2% projected increase in
future compensation levels were assumed in determining the net pension cost for
both of the years 1994 and 1993.
Other Postretirement Benefits
In addition to pension benefits, PG&W provides certain health care and life
insurance benefits for retired employees. Substantially all of PG&W's employees
may become eligible for those benefits if they reach retirement age while
working for PG&W. Prior to January 1, 1993, the cost of retiree health care and
life insurance, which totaled $870,000 in 1992, was expensed as the premiums
were paid under insurance contracts.
Effective January 1, 1993, PG&W adopted the provisions of FASB Statement
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions."
The provisions of FASB Statement 106 require that PG&W record the cost of
retiree health care and life insurance benefits as a liability over the
employees' active service periods instead of on a benefits-paid basis, as was
PG&W's prior practice.
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The following items were the components of the net cost of postretirement
benefits other than pensions for the years 1994 and 1993:
[CAPTION]
1994 1993
(Thousands of Dollars)
[S] [C] [C]
Present value of benefits earned during the year $ 269 $ 226
Interest cost on accumulated benefit obligation 967 967
Return on plan assets (6) -
Net amortization and deferral 654 617
Net cost of postretirement benefits other than
pensions 1,884 1,810
Less disbursements for benefits (987) (983)
Increase in liability for postretirement benefits
other than pensions $ 897 $ 827
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of December 31,
1994 and 1993, follow:
[CAPTION]
1994 1993
(Thousands of Dollars)
[S] [C] [C]
Accumulated benefit obligation:
Retirees $ 9,021 $ 10,149
Fully eligible active employees 1,628 1,735
Other active employees 1,305 1,222
11,954 13,106
Plan assets at fair value 839 -
Accumulated benefit obligation
in excess of plan assets 11,115 13,106
Unrecognized transition obligation
being amortized over 20 years (11,108) (11,725)
Unrecognized net gain (loss) 885 (554)
Accrued liability for postretirement
benefits other than pensions $ 892 $ 827
The assumptions used to calculate the costs to be accrued by PG&W under FASB
Statement 106 included discount rates of 8-3/4% and 8% in 1994 and 1993,
respectively, and a 5-1/2% projected annual increase in future compensation
levels. It was also assumed that the per capita cost of covered health care
benefits would increase at an annual rate of 10-1/2% in 1994 and that this rate
would decrease gradually to 5-1/2% for the year 2003 and remain at that level
thereafter. The health care cost trend rate assumption had a significant effect
on the amounts accrued. To illustrate, increasing the assumed health care cost
trend rate by 1 percentage point in each year would increase the transition
obligation as of January 1, 1994, by approximately $778,000 and the aggregate of
the service and interest cost components of the net cost of postretirement
benefits other than pensions for the year 1994 by approximately $64,000.
The additional costs accrued pursuant to FASB Statement 106 are allocated
between PG&W's gas utility and water utility operations. By Orders entered in
1993 relative to PG&W's water utility operations, the PPUC approved the
inclusion of the costs required to be accrued pursuant to FASB Statement 106 in
PG&W's water rates. Since PG&W has not sought to increase its base gas rates,
the $447,000 ($256,000 net of related income taxes) and $407,000 ($232,000 net
of related income taxes) of additional cost incurred in 1994 and 1993,
respectively, with regard to PG&W's gas utility operations as a result of the
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adoption of the provisions of FASB Statement 106 were expensed without any
adjustment being made to its gas rates.
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Other Postemployment Benefits
In December, 1992, FASB Statement 112, "Employers' Accounting for
Postemployment Benefits," was issued. The provisions of this statement require
the recording of a liability for postemployment benefits (such as disability
benefits, including workers' compensation, salary continuation and the
continuation of benefits such as health care and life insurance) provided to
former or inactive employees, their beneficiaries and covered dependents. PG&W
consistently recorded liabilities for benefits of this nature prior to the
effectiveness of FASB Statement 112 and, as a result, the provisions of FASB
Statement 112, which PG&W adopted effective January 1, 1994, did not have a
material impact on its financial position or results of operations.
(10) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1995 construction program will be $44.9
million, which includes $23.0 million for the construction of water facilities
and $21.9 million for the construction of gas facilities.
(11) 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 PG&W by January 31,
1994, 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. PG&W submitted
a detailed plan of action for complying with the Emergency Order to the PPUC on
April 11, 1994, which was subsequently revised. The PPUC staff agreed that the
revised plan (the "Plan") satisfies the concerns of the PPUC expressed in the
Emergency Order, and on November 30, 1994, the PPUC staff and PG&W entered into
a Settlement Agreement, subject to approval by the PPUC, (i) terminating the
informal investigation of the matter initiated by the PPUC staff, (ii)
memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing
PG&W's commitment to satisfy the requirements of the Plan. The PPUC must
approve the Settlement Agreement. PG&W does not believe that compliance with
the terms of the Settlement Agreement or any liability that might result from
violations of law or the Emergency Order will have a material adverse effect on
its financial position or results of operations.
Environmental Matters
PG&W, 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 PG&W. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PG&W 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, PG&W 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.
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(12) INDUSTRY SEGMENTS
Financial information with respect to PG&W's industry segments for the years
ended December 31, 1994, 1993 and 1992 is included in Item 1 of this Form 10-K.
Such industry segment information is incorporated herein as part of these
Financial Statements.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
(Thousands of Dollars, Except Per Share Amounts)
Operating revenues $ 96,285 $ 43,483 $ 31,862 $ 63,093
Operating income 15,892 7,654 6,225 12,561
Net income (loss) 9,037 882 (520) 5,768
Earnings (loss) applicable
to common stock
Before premium on
redemption of
preferred stock 1.86 .17 (.10) 1.06
Premium on redemption of
preferred stock - (.11) - (.08)
Earnings (loss) per share
of common stock (a) 1.86 .06 (.10) .98
QUARTER ENDED
March 31, June 30, September 30, December 31,
1993 1993 1993 1993
(Thousands of Dollars, Except Per Share Amounts)
Operating revenues $ 78,318 $ 37,251 $ 27,959 $ 63,160
Operating income 13,315 5,672 4,762 12,407
Earnings (loss) applicable
to common stock 6,827 (1,037) (1,506) 5,555
Earnings (loss) per share
of common stock (a) 1.70 (.26) (.37) 1.20
(a) The total of the earnings per share for the quarters does not equal the
earnings per share for the year, as shown elsewhere in Item 8 of this
Form 10-K, as a result of PG&W's issuance of additional shares of common
stock at various dates during the year.
Because of the seasonal nature of PG&W's gas heating business, there are
substantial variations in operations reported on a quarterly basis.
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(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
o Restricted funds held by trustee. The fair value of the restricted funds
held by the trustee has been based on the market value as of the respective
dates of the financial instruments in which such funds have been invested.
o Long-term debt. The fair value of PG&W's long-term debt has been estimated
based on the quoted market price as of the respective dates for the portion
of such debt which is publicly traded and, with respect to the portion of
such debt which is not publicly traded, on the estimated borrowing rate as
of the respective dates for long-term debt of comparable credit quality with
similar terms and maturities.
o Preferred stock subject to mandatory redemption. The fair value of PG&W's
preferred stock subject to mandatory redemption has been estimated based on
the market value as of the respective dates for preferred stock of
comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of PG&W's financial
instruments at December 31, 1994 and 1993, were as follows:
[CAPTION]
1994 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Restricted funds held by trustee $ 3,401 $ 3,401 $ 12,853 $ 12,857
Long-term debt (including current
portion) 315,455 317,867 306,843 327,436
Preferred stock subject to
mandatory redemption (including
current portion) 1,840 1,877 31,920 33,087
PG&W believes that the regulatory treatment of any excess or deficiency of
fair value relative to the carrying amounts of these items, if such items were
settled at amounts approximating those above, would dictate that these amounts
be used to increase or reduce its rates over a prescribed amortization period.
Accordingly, any settlement would not result in a material impact on PG&W's
financial position or the results of operations of either PEI or PG&W.
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ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following financial statements, notes to financial statements
and report of independent public accountants for PG&W are presented in
Item 8 of this Form 10-K.
Page
Report of Independent Public Accountants . . . . . . . . . . . . 37
Statements of Income for each of the three years in the
period ended December 31, 1994 . . . . . . . . . . . . . . . . 38
Balance Sheets as of December 31, 1994 and 1993. . . . . . . . . 39
Statements of Cash Flows for each of the three years in the
period ended December 31, 1994 . . . . . . . . . . . . . . . . 41
Statements of Capitalization as of December 31, 1994 and 1993. . 42
Statements of Common Shareholder's Investment for each of
the three years in the period ended December 31, 1994. . . . . 43
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 44
2. Financial Statement Schedules
The following financial statement schedule for PG&W is filed as a
part of this Form 10-K. Schedules not included have been omitted
because they are not applicable or the required information is shown in
the financial statements or notes thereto.
Schedule Number Page
II Valuation and Qualifying Accounts for the three-year
period ended December 31, 1994 . . . . . . . . . . . . . 66
3. Exhibits
See "Index to Exhibits" located on page 68 for a listing of all
exhibits filed herein or incorporated by reference to a previously
filed registration statement or report with the Securities and Exchange
Commission.
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1994.
(c) Executive Compensation Plans and Arrangements
The following listing includes PG&W's executive compensation plans and
arrangements in effect as of December 31, 1994.
Exhibit
10-32 Form of Change in Control Agreement between PEI and certain of its
Officers -- filed as Exhibit 10-34 to PG&W's Annual Report on Form
10-K for 1989, File No. 1-3490.
10-33 Agreement dated as of March 15, 1991, by and between PEI, PG&W and
Robert L. Jones -- filed as Exhibit No. 10-38 to PG&W's Annual
Report on Form 10-K for 1990, File No. 1-3490.
10-34 Employment Agreement effective September 1, 1994, between PEI and
Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1994, File No.
0-7812.
10-35 Supplemental Retirement Agreement, dated as of December 23, 1991,
between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's
Common Stock Form S-2, Registration No. 33-43382.
10-36 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between PEI and Dean T. Casaday -- filed as
Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
0-7812.
10-37 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy
Statement, File No. 0-7812.
(d) Statements Excluded from Annual Report to Shareholders
Not applicable.
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Schedule II
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
Date: March 27, 1995 By: /s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 27, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Kenneth L. Pollock Chairman of the Board of March 27, 1995
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 27, 1995
William D. Davis of Directors
/s/ Dean T. Casaday Director, President and March 27, 1995
Dean T. Casaday Chief Executive Officer
/s/ Robert J. Keating Director March 27, 1995
Robert J. Keating
/s/ John D. McCarthy Director March 27, 1995
John D. McCarthy
/s/ Kenneth M. Pollock Director March 27, 1995
/s/ Kenneth M. Pollock
/s/ James A. Ross Director March 27, 1995
James A. Ross
/s/ Ronald W. Simms Director March 27, 1995
Ronald W. Simms
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INDEX TO EXHIBITS
Exhibit
Number
(3) Articles of Incorporation and By Laws:
3-1 Restated Articles of Incorporation of PG&W, as amended -- filed as
Exhibit 3-1 to PG&W's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1992, File No. 1-3490.
3-2 By-Laws of PG&W, as amended and restated on January 18, 1995 --
filed herewith.
(4) Instruments Defining the Rights of Security Holders, Including
Debentures:
4-1 Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
between Scranton-Spring Brook Water Service Company (now PG&W) and
Guaranty Trust Company, as Trustee (now Morgan Guaranty Trust
Company of New York) -- filed as Exhibit 2(c) to PG&W's Bond Form S-
7, Registration No. 2-55419.
4-2 Fourth Supplemental Indenture, dated as of March 15, 1952 -- filed
as Exhibit 2(d) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-3 Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
Exhibit 2(e) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-4 Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
as Exhibit 2(f) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-5 Twelfth Supplemental Indenture, dated as of July 15, 1960 -- filed
as Exhibit 2(g) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-6 Fourteenth Supplemental Indenture, dated as of December 15, 1961 --
filed as Exhibit 2(h) to PG&W's Bond Form S-7, Registration No. 2-
55419.
4-7 Fifteenth Supplemental Indenture, dated as of December 15, 1963 --
filed as Exhibit 2(i) to PG&W's Bond Form S-7, Registration No. 2-
55419.
4-8 Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
as Exhibit 2(j) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-9 Seventeenth Supplemental Indenture, dated as of October 15, 1967 --
filed as Exhibit 2(k) to PG&W's Bond Form S-7, Registration No. 2-
55419.
4-10 Eighteenth Supplemental Indenture, dated as of May 1, 1970 -- filed
as Exhibit 2(1) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-11 Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
as Exhibit 2(m) to PG&W's Bond Form S-7, Registration No. 2-55419.
-72-
Exhibit
Number
4-12 Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
as Exhibit 2(n) to PG&W's Bond Form S-7, Registration No. 2-55419.
4-13 Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
filed as Exhibit 4-16 to PG&W's Annual Report on Form 10-K for 1982,
File No. 1-3490.
4-14 Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-22 to PG&W's Annual Report on Form 10-K for 1989,
File No. 1-3490.
4-15 Twenty-third Supplemental Indenture, dated as of August 15, 1989 --
filed as Exhibit 4-23 to PG&W's Annual Report on Form 10-K for 1989,
File No. 1-3490.
4-16 Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration
No. 33-43382.
4-17 Twenty-fifth Supplemental Indenture, dated as of September 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-1 to PG&W's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1992, File No. 1-3490.
4-18 Twenty-sixth Supplemental Indenture, dated as of December 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-20 to PG&W's Bond Form S-2, Registration No.
33-54278.
4-19 Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-19 to PG&W's Annual Report on Form 10-K for
1992, File No. 0-7812.
4-20 Twenty-eighth Supplemental Indenture, dated as of December 1, 1993,
from PG&W to Morgan Guaranty Trust Company of New York, as Trustee
-- filed as Exhibit 4-20 to PG&W's Annual Report on Form 10-K for
1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994,
from PG&W to First Trust of New York, National Association, as
Successor Trustee to Morgan Guaranty Trust Company of New York --
filed herewith.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
-73-
Exhibit
Number
(10) Material Contracts:
10-1 Service Agreement for storage service under Rate Schedule LGA, dated
August 6, 1974, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-3 to PG&W's Annual Report on Form
10-K for 1984, File No. 1-3490.
10-2 Service Agreement for transportation service under Rate Schedule FT,
dated February 1, 1992, by and between PG&W and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-4 to PG&W's Annual
Report on Form 10-K for 1991, File No. 1-3490.
10-3 Service Agreement for storage service under Rate Schedule SS-2,
dated April 1, 1990, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-4 Service Agreement for sales service under Rate Schedule FS, dated
August 1, 1991, between PG&W and Transcontinental Gas Pipe Line
Corporation -- filed as Exhibit 10-6 to PG&W's Annual Report on Form
10-K for 1991, File No. 1-3490.
10-5 Service Agreement for transportation service under Rate Schedule FT,
dated August 1, 1991, between PG&W and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-10 to PEI's Common Stock
Form S-2, Registration No. 33-43382.
10-6 Service Agreement for transportation service under Rate Schedule IT,
dated January 31, 1992, between PG&W and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-8 to PG&W's Annual Report on
Form 10-K for 1991, File No. 1-3490.
10-7 Service Agreement for storage service under Rate Schedule LSS, dated
October 1, 1993, by and between PG&W and Transcontinental Gas Pipe
Line Corporation -- filed as Exhibit 10-7 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-8 Service Agreement for storage service under Rate Schedule GSS, dated
October 1, 1993, by and between PG&W and Transcontinental Gas
Pipeline Corporation Company -- filed as Exhibit 10-8 to PG&W's
Annual Report on Form 10-K for 1993, File No. 1-3490.
10-9 Service Agreement for transportation service under Rate Schedule
FTS, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-9 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-10 Service Agreement for transportation service under Rate Schedule
SST, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-10 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
-74-
Exhibit
Number
10-11 Service Agreement for storage service under Rate Schedule FSS, dated
November 1, 1993, by and between PG&W and Columbia Gas Transmission
Corporation -- filed as Exhibit 10-11 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
10-12 Service Agreement for transportation service under Rate Schedule
FTS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf
Transmission Company -- filed as Exhibit 10-12 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-13 Service Agreement for transportation service under Rate Schedule
ITS-1, dated November 1, 1993, by and between PG&W and Columbia Gulf
Transmission Company -- filed as Exhibit 10-13 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-14 Service Agreement for transportation service under Rate Schedule
ITS, dated November 1, 1993, by and between PG&W and Columbia Gas
Transmission Corporation -- filed as Exhibit 10-14 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-15 Service Agreement (Contract No. 946) for transportation service
under Rate Schedule FT-A, dated September 1, 1993, by and between
PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit 10-1 to
PG&W's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-16 Service Agreement (Service Package No. 171) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit
10-2 to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-17 Service Agreement (Service Package No. 187) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline Company -- filed as Exhibit
10-3 to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1993, File No. 1-3490.
10-18 Service Agreement (Service Package No. 190) for transportation
service under Rate Schedule FT-A, dated September 1, 1993, by and
between PG&W and Tennessee Gas Pipeline -- filed as Exhibit 10-4 to
PG&W's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993, File No. 1-3490.
10-19 Service Agreement (Contract No. 2289) for storage service under Rate
Schedule FS dated September 1, 1993, by and between PG&W and
Tennessee Gas Pipeline -- filed as Exhibit 10-5 to PG&W's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1993, File
No. 1-3490.
-75-
Exhibit
Number
10-20 Bond Purchase Agreement, dated September 1, 1989, relating to PG&W's
First Mortgage Bonds 9.23% Series due 1999 and First Mortgage Bonds
9.34% Series due 2019 among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York and PG&W -- filed as
Exhibit 10-33 to PG&W's Annual Report on Form 10-K for 1989, File
No. 1-3490.
10-21 Form of Bond Purchase Agreement, dated as of September 1, 1991, re:
$50.0 million of 9.57% First Mortgage Bonds, due September 1, 1996,
entered into between PG&W and each of the following parties: Pacific
Mutual Life Insurance Company, Principal Mutual Life Insurance
Company, Great West Life & Annuity Insurance Company, The Life
Insurance Company of Virginia, Lutheran Brotherhood, Transamerica
Life Insurance and Annuity Company and The Franklin Life Insurance
Company -- filed as Exhibit 10-7 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-22 Amended and Restated Project Facilities Agreement dated as of
September 1, 1992, between PG&W and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-1 to PG&W's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1992, File
No. 1-3490.
10-23 7.20% Bond Purchase Agreement, dated September 2, 1992, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities Inc., as representative
on behalf of itself and Legg Mason Wood Walker Incorporated -- filed
as Exhibit 10-2 to PG&W's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1992, File No. 1-3490.
10-24 Project Facilities Agreement, dated December 1, 1992, between
Luzerne County Industrial Development Authority and PG&W -- filed as
Exhibit 10-29 to PG&W's Annual Report on Form 10-K for 1992, File
No. 1-3490.
10-25 7.125% Bond Purchase Agreement, dated December 10, 1992, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities Inc., as representative
on behalf of itself and Legg Mason Wood Walker Incorporated -- filed
as Exhibit 10-30 to PG&W's Annual Report on Form 10-K for 1992, File
No. 1-3490.
10-26 Second Amended and Restated Project Facilities Agreement, dated as
of December 1, 1993, between PG&W and the Luzerne County Industrial
Development Authority -- filed as Exhibit 10-30 to PG&W's Annual
Report on Form 10-K for 1993, File No. 1-3490.
10-27 6.05% Bond Purchase Agreement, dated December 2, 1993, among the
Luzerne County Industrial Development Authority, PG&W and Butcher &
Singer, a division of Wheat First Securities, Inc., as
representative on behalf of itself and Legg Mason Wood Walker
Incorporated -- filed as Exhibit 10-31 to PG&W's Annual Report on
Form 10-K for 1993, File No. 1-3490.
-76-
Exhibit
Number
10-28 7% Bond Purchase Agreement, dated November 1, 1994, among the
Luzerne County Industrial Development Authority, PG&W and Wheat
First Butcher Singer, as representative on behalf of itself and Legg
Mason Wood Walker Incorporated -- filed herewith.
10-29 Amended and Restated Project Facilities Agreement, dated as of
November 1, 1994, between PG&W and the Luzerne County Industrial
Development Authority -- filed herewith.
10-30 Credit Agreement, dated as of April 19, 1993, by and among PG&W, the
Banks parties thereto and PNC Bank, Northeast PA, as Agent, and
CoreStates Bank, N.A. and NBD Bank, N.A. as Co-Agents -- filed as
Exhibit 10-1 to PG&W's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1993, File No. 1-3490.
10-31 First Amendment to Credit Agreement and Notes, dated as of December
16, 1994, by and among PG&W, the Banks parties thereto and PNC Bank,
Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A.
as Co-Agents -- filed herewith.
10-32 Form of Change in Control Agreement between PEI and certain of its
Officers -- filed as Exhibit 10-34 to PG&W's Annual Report on Form
10-K for 1989, File No. 1-3490.
10-33 Agreement, dated as of March 15, 1991, by and between PEI, PG&W and
Robert L. Jones -- filed as Exhibit 10-38 to PG&W's Annual Report on
Form 10-K for 1990, File No. 1-3490.
10-34 Employment Agreement, effective September 1, 1994, between PEI and
Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report
on Form 10-Q for the Quarter ended September 30, 1994, File No.
0-7812.
10-35 Supplemental Retirement Agreement, dated as of December 23, 1991,
between PEI and Dean T. Casaday -- filed as Exhibit 10-17 to PEI's
Common Stock Form S-2, Registration No. 33-43382.
10-36 First Amendment to the Supplemental Retirement Agreement, dated as
of September 1, 1994, between PEI and Dean T. Casaday -- filed as
Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
0-7812.
10-37 Pennsylvania Enterprises, Inc. 1992 Stock Option Plan, effective
June 3, 1992 -- filed as Exhibit A to PEI's 1993 definitive Proxy
Statement, File No. 0-7812.
-77-
TABLE OF CONTENTS
PART I PAGE
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 17
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . *
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 36
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 63
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . *
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . *
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 64**
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 67
________________________
* These items have been omitted from this Form 10-K as Registrant meets the
conditions set forth in General Instructions J(1)(a) and (b) of Form 10-K
and is therefore filing this form with the reduced disclosure format.
** The "Index to Exhibits" is located on page 68.
PENNSYLVANIA GAS AND WATER COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1994
Balance at Charged Charged Balance
beginning to to other at end
Description of year income accounts Deductions of year
(Thousands of Dollars)
Deducted from the asset to which it applies:
Reserve for uncollectible accounts-
Year ended December 31, 1994 $ 1,223 $ 2,325 $ - $ 2,249(a) $ 1,299
Year ended December 31, 1993 $ 1,475 $ 1,590 $ - $ 1,842(a) $ 1,223
Year ended December 31, 1992 $ 1,607 $ 1,806 $ - $ 1,938(a) $ 1,475
Shown as operating reserves on the balance sheets:
Insurance -
Year ended December 31, 1994 $ 1,863 $ 1,695 $ - $ 1,175(b) $ 2,383
Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863
Year ended December 31, 1992 $ 1,847 $ 1,216 $ - $ 1,498(b) $ 1,565
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.