PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three
months ended March 31, 1995 and 1994. . . . . . . . . . . 2
Consolidated Balance Sheets as of March 31, 1995,
and December 31, 1994 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for
the three months ended March 31, 1995 and 1994. . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 17
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended
March 31,
1995* 1994*
(Thousands of Dollars)
OPERATING REVENUES $ 68,237 $ 80,233
Cost of gas 41,407 50,460
OPERATING MARGIN 26,830 29,773
OTHER OPERATING EXPENSES:
Operation 5,824 6,320
Maintenance 968 1,150
Depreciation 1,792 1,670
Income taxes 4,462 5,690
Taxes other than income taxes 3,879 4,059
Total other operating expenses 16,925 18,889
OPERATING INCOME 9,905 10,884
OTHER INCOME, NET 254 209
INCOME BEFORE INTEREST CHARGES 10,159 11,093
INTEREST CHARGES:
Interest on long-term debt 3,486 2,925
Allowance for borrowed funds used
during construction (9) (13)
Other interest 322 329
Total interest charges 3,799 3,241
INCOME FROM CONTINUING OPERATIONS 6,360 7,852
DISCONTINUED OPERATIONS:
Income from discontinued operations
(net of related income taxes of $1,403,000
and $1,485,000, respectively) 2,127 2,079
Estimated loss on disposal of discontinued
operations, net of anticipated income
during the phase-out period of $6,855,000
(net of related income taxes of $5,316,000) (5,831) -
Income (loss) with respect to discontinued
operations (3,704) 2,079
INCOME BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS 2,656 9,931
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 691 1,383
NET INCOME $ 1,965 $ 8,548
COMMON STOCK
Earnings per share of common stock:
Continuing operations $ 1.00 $ 1.20
Discontinued operations (.65) .38
Net income $ .35 $ 1.58
Weighted average shares outstanding 5,653,003 5,415,842
Cash dividends per share $ .55 $ .55
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995* 1994*
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $ 286,144 $ 284,080
Accumulated depreciation (76,421) (74,408)
209,723 209,672
OTHER PROPERTY AND INVESTMENTS 4,138 3,481
CURRENT ASSETS:
Cash 923 330
Restricted cash - common stock subscribed
(Note 4) 1,866 2,532
Accounts receivable -
Customers 22,554 16,883
Others 1,416 1,474
Reserve for uncollectible accounts (1,186) (937)
Accrued utility revenues 7,004 9,004
Materials and supplies, at average cost 2,831 2,797
Gas held by suppliers, at average cost 9,306 20,025
Deferred cost of gas and supplier refunds, net - 8,475
Prepaid expenses and other 4,776 1,483
49,490 62,066
DEFERRED CHARGES:
Deferred taxes collectible 30,600 31,696
Unamortized debt expense 3,345 3,539
Natural gas transition costs collectible 2,571 4,099
Other 6,633 6,683
43,149 46,017
NET ASSETS OF DISCONTINUED OPERATIONS 196,798 203,196
TOTAL ASSETS $ 503,298 $ 524,432
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995* 1994*
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' investment (Notes 4 and 5) $ 173,215 $ 172,012
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,760 1,760
Long-term debt 199,211 220,705
407,801 428,092
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 290 3,290
Accounts payable 11,397 17,781
Deferred cost of gas and supplier refunds, net 6,132 -
Accrued general business and realty taxes 2,308 3,315
Accrued income taxes 8,427 3,136
Accrued interest 1,801 2,850
Accrued natural gas transition costs 2,158 2,356
Other 3,198 2,398
35,711 35,126
DEFERRED CREDITS:
Deferred income taxes 45,833 46,600
Accrued natural gas transition costs 2,710 3,250
Unamortized investment tax credits 5,068 5,110
Operating reserves 2,234 2,383
Other 3,941 3,871
59,786 61,214
COMMITMENTS AND CONTINGENCIES (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $ 503,298 $ 524,432
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1995* 1994*
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations, net of
subsidiary's preferred stock dividends $ 5,669 $ 6,469
Effects of noncash charges to income -
Depreciation 1,799 1,677
Deferred income taxes, net 1,109 394
Provisions for self insurance 163 405
Other, net 1,012 1,102
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (3,364) (7,998)
Gas held by suppliers 10,719 23,749
Accounts payable (5,648) (7,346)
Deferred cost of gas and supplier refunds, net 15,397 4,170
Other current assets and liabilities, net (892) 1,556
Other operating items, net 168 (846)
Net cash provided by continuing operations 26,132 23,332
Net cash provided (used) by discontinued operations 3,764 (2,622)
Net cash provided by operating activities 29,896 20,710
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (3,770) (2,232)
Other, net 158 7
Net cash used for investing activities (3,612) (2,225)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 496 232
Common stock subscribed (Note 4) 1,851 -
Dividends on common stock (3,109) (2,978)
Repayment of long-term debt - (845)
Net decrease in bank borrowings (24,925) (15,555)
Other, net (4) 6
Net cash used for financing activities (25,691) (19,140)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 593 (655)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 330 2,749
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 923 $ 2,094
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 6,204 $ 4,573
Income taxes $ 453 $ 527
*See Note 2 regarding discontinued operations and restatement of prior period
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
The interim consolidated financial statements included herein for
Pennsylvania Enterprises, Inc. (the "Company") and its subsidiaries:
Pennsylvania Gas and Water Company, Pennsylvania Energy Marketing Company,
Pennsylvania Energy Resources, Inc. and Theta Land Corporation, have been
prepared by the Company without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather on the Company's operating utility, Pennsylvania Gas and Water Company
("PG&W"). However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for the
interim periods have been reflected in the consolidated financial statements.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K.
(2) DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which is expected
to be in the fourth quarter of 1995. Until the closing, PG&W will continue to
operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995). The sale will involve a gain for
income tax purposes, primarily because of the accelerated depreciation that has
been claimed by PG&W with respect to the water utility plant that is being sold.
It is currently estimated that the income taxes payable on the sale, for which
deferred income taxes have previously been provided, will be approximately $55
million.
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The net cash proceeds from the sale of approximately $199 million, after the
payment of income taxes, will be used by the Company and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations. After
the sale, the principal assets of the Company and PG&W will consist of PG&W's
gas utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both the Company and
PG&W, termination of the waiting period under federal antitrust laws, and
various other regulatory approvals and certain other conditions.
The accompanying consolidated financial statements reflect PG&W's water
utility operations as "discontinued operations." Interest charges of PG&W have
been allocated to the discontinued operations based on the relationship of the
gross water utility plant that is being sold to the total of PG&W's gross gas
and water utility plant. This is the same method as has been utilized by PG&W
and the PPUC in establishing the revenue requirements of both PG&W's gas and
water utility operations. None of the dividends on PG&W's preferred stock nor
any of the Company's interest expense has been allocated to the discontinued
operations.
Selected financial information for the discontinued operations as of March
31, 1995, and December 31, 1994, and for the three-month periods ended March 31,
1995, and March 31, 1994, is set forth below:
[CAPTION]
As of As of
March 31, December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 359,223 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 12,082 12,141
Deferred charges and other assets 29,724 31,103
Total assets being acquired by
Pennsylvania-American 401,029 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,293 141,420
Other 14,481 13,168
155,774 154,588
Net assets being acquired by
Pennsylvania-American 245,255 248,055
Estimated liability for income taxes on
sale of discontinued operations (55,312) (55,542)
Anticipated income from discontinued
operations during phase-out period 6,855 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 196,798 $ 203,196
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[CAPTION]
Three months ended March 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Operating revenues $ 15,640 $ 16,052
Operating expenses, excluding income taxes
Depreciation 1,946 1,982
Other operating expenses 6,929 7,299
8,875 9,281
Operating income before income taxes 6,765 6,771
Income taxes 1,403 1,485
Operating income 5,362 5,286
Allocated interest charges 3,235 3,207
Income from discontinued operations $ 2,127 $ 2,079
(3) RECOVERY OF 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.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. PG&W will seek
recovery of the remaining $249,000 of Gas Transition Costs in its annual PGC
rate that is effective December 1, 1995.
The PGC Order also indicated that while 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. 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 $4.5 million had been billed to PG&W and $2.4 million had been
recovered from its customers as of March 31, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) RESTRICTED CASH - COMMON STOCK SUBSCRIBED
On July 28, 1994, the Company 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 the Company's common stock at a 5%
discount from the market price. On January 3, 1995, the Company issued 45,360
shares of its common stock for an aggregate consideration of $1.2 million with
respect to payments received pursuant to the Customer Plan during the December,
1994, subscription period. Additionally, on April 3, 1995, the Company issued
42,871 shares of its common stock for an aggregate consideration of $1.2 million
with respect to payments received pursuant to the Customer Plan during the
March, 1995, subscription period. Such payments are reflected under captions
"Restricted cash - common stock subscribed" and "Common shareholders'
investment" in these consolidated financial statements as of the respective
balance sheet dates.
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Through the Company's Dividend Reinvestment and Stock Purchase Plan (the
"DRP"), holders of shares of the Company's common stock may reinvest cash
dividends and/or make cash investments in the common stock of the Company. On
January 3, 1995, the Company issued 51,565 shares of its common stock for an
aggregate consideration of $1.3 million with respect to cash investments made
pursuant to the DRP during the fourth quarter of 1994. Additionally, on April
3, 1995, the Company issued 23,206 shares of its common stock for an aggregate
consideration of $650,000 with respect to cash investments made pursuant to the
DRP during the first quarter of 1995. Such investments are reflected under the
captions "Restricted cash - common stock subscribed" and "Common shareholders'
investment" in these consolidated financial statements as of the respective
balance sheet dates.
(5) COMMON STOCK
On April 26, 1995, the Company adopted a Shareholder Rights Plan under the
terms of which each shareholder of record at the close of business on May 16,
1995, will receive a dividend distribution of one right ("Right" or "Rights")
for each share of common stock held.
Each Right will entitle shareholders to purchase from the Company one-half
of a share of common stock. No less than two Rights, and only integral
multiples of two Rights, may be exercised by holders of Rights at an exercise
price of $100 per share of common stock (equivalent to $50 for each one-half
share of common stock), subject to certain adjustments. The Rights will become
exercisable only if a person or group acquires 15% or more of the Company's
common stock, or commences a tender or exchange offer which, if consummated,
would result in that person or group owning at least 15% of the common stock.
Prior to that time, the Rights will not trade separately from the common stock.
If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the
$100 exercise price upon the exercise of two Rights, the Company's common stock
(or a common stock equivalent) with a value of twice the exercise price. In
addition, at any time after a 15% position is acquired and prior to the
acquisition by any person or group of 50% or more of the outstanding common
stock, the Company's Board of Directors may, at its option, require each
outstanding Right (other than Rights held by the acquiring person or group) to
be exchanged for one share of common stock (or one common stock equivalent).
If, following an acquisition of 15% or more of the Company's common stock,
the Company is acquired by any person in a merger or other business combination
transaction or sells more than 50% of its assets or earning power to any person
(other than the currently-pending sale of PG&W's water utility operations to
Pennsylvania-American or, if such sale is not consummated, any other sale of
PG&W's water utility operations, if and as approved by the Company's Board of
Directors), all other holders of Rights will then be entitled to purchase, by
payment of the $100 exercise price upon the exercise of two Rights, common stock
of the acquiring company with a value of twice the exercise price.
The Company may redeem the Rights at $.005 per Right at any time prior to
the time that a person or group has acquired 15% or more of its common stock.
The Rights, which expire on May 16, 2005, do not have voting or dividend rights
and, until they become exercisable, have no dilutive effect on the earnings per
share of the Company.
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(6) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order. PG&W
does not believe that compliance with the terms of such 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, the Company does not believe that additional costs, if
any, related to these manufactured gas plant sites would be material to its
financial position or results of operations since environmental remediation
costs generally are recoverable through rates over a period of time.
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PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, the Company and PG&W signed a definitive agreement (the
"Agreement") with American Water Works Company, Inc. ("American") and
Pennsylvania-American Water Company ("Pennsylvania-American"), a wholly-owned
subsidiary of American, providing for the sale to Pennsylvania-American of
substantially all of the assets, properties and rights of PG&W's water utility
operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which is expected
to be in the fourth quarter of 1995. Until the closing, PG&W will continue to
operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995).
The net cash proceeds from the sale of approximately $199 million, after the
payment of an estimated $55 million of income taxes, will be used by the Company
and PG&W to retire debt, to repurchase stock and for working capital for their
continuing operations. After the sale, the principal assets of the Company and
PG&W will consist of PG&W's gas utility operations and approximately 46,000
acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both the Company and
PG&W, termination of the waiting period under federal antitrust laws, and
various other regulatory approvals and certain other conditions. Until the
closing, PG&W intends to utilize its existing bank lines of credit for the
external financing requirements of the water utility operations, which the
Company believes will be adequate for such purposes.
Operating revenues from PG&W's water utility operations decreased by
$412,000 (2.6%) from $16.1 million for the three-month period ended March 31,
1994, to $15.6 million for the three-month period ended March 31, 1995. This
decrease in revenues was principally the result of a 5.4% decrease in customer
consumption. Operating expenses related to the water utility operations,
excluding income taxes, decreased $406,000 (4.4%) from $9.3 million for the
three-month period ended March 31, 1994, to $8.9 million for the three-month
period ended March 31, 1995. The major reason for this decrease was a $213,000
(4.8%) decrease in other operation expenses, primarily as a result of decreases
in the provision for injuries and damages and the amortization of rate case
expense, the effects of which were partially offset by an increase in payroll
costs. Income taxes with respect to the water utility operations decreased by
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$82,000 (5.5%) from $1.5 million in the first quarter of 1994 to $1.4 million in
the first quarter of 1995 due to a lower level of income before income taxes
(for this purpose, operating income net of interest charges) and a decrease in
the Pennsylvania Corporate Net Income Tax rate. As a result of the foregoing,
operating income of the water utility operations increased $76,000 (1.4%) from
$5.3 million for the three-month period ended March 31, 1994, to $5.4 million
for the three-month period ended March 31, 1995. After interest charges, the
income from the water utility operations increased $48,000 (2.3%) from
$2,079,000 for the three-month period ended March 31, 1994, to $2,127,000 for
the three-month period ended March 31, 1995.
In accordance with generally accepted accounting principles, the Company's
consolidated financial statements have been restated to reflect PG&W's water
utility operations as "discontinued operations," and the following sections of
Management's Discussion and Analysis relate exclusively to the Company's
continuing operations, which consist primarily of PG&W's gas utility operations.
For additional information regarding the discontinued operations, see Note 2 of
the accompanying Notes to Consolidated Financial Statements.
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of total operating revenues for each of the
three-month periods ended March 31, 1995, and March 31, 1994:
[CAPTION]
Percentage of
Operating Revenues
Three Months Ended
March 31,
1995 1994
[S] [C] [C]
OPERATING REVENUES........................... 100.0% 100.0%
Cost of gas................................ 60.7 62.9
OPERATING MARGIN............................. 39.3 37.1
OTHER OPERATING EXPENSES:
Operation.................................. 8.6 7.9
Maintenance................................ 1.4 1.4
Depreciation............................... 2.6 2.1
Income taxes............................... 6.5 7.0
Taxes other than income taxes.............. 5.7 5.1
Total other operating expenses........... 24.8 23.5
OPERATING INCOME............................. 14.5 13.6
OTHER INCOME, NET............................ 0.4 0.3
INTEREST CHARGES(1).......................... 5.6 4.1
INCOME FROM CONTINUING OPERATIONS............ 9.3 9.8
INCOME (LOSS) FROM DISCONTINUED OPERATIONS... (5.4) 2.6
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK
DIVIDENDS.................................. 3.9 12.4
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1).... 1.0 1.7
NET INCOME................................... 2.9 10.7
(1) None of the Company's interest expense nor any of the subsidiary's
preferred stock dividends has been allocated to the discontinued operations.
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Operating Revenues. Operating revenues decreased $12.0 million (15.0%) from
$80.2 million for the three-month period ended March 31, 1994, to $68.2 million
for the three-month period ended March 31, 1995. This decrease was primarily
the result of a 1.7 billion cubic feet (14.2%) decrease in sales to residential
and commercial heating customers, caused by a 655 (18.9%) decrease in heating
degree days.
Cost of Gas. The cost of gas decreased $9.1 million (17.9%) from $50.5
million for the three-month period ended March 31, 1994, to $41.4 million for
the three-month period ended March 31, 1995, primarily because of the reduced
consumption by residential and commercial heating customers.
Operating Margin. The operating margin decreased $2.9 million (9.9%) from
$29.8 million in the first quarter of 1994 to $26.8 million in the first quarter
of 1995. However, as a percentage of operating revenues, the margin increased
from 37.1% in the first quarter of 1994 to 39.3% in the first quarter of 1995
primarily as a result of a higher average charge per cubic foot to residential
and commercial heating customers because of their lower consumption due to the
warmer weather.
Other Operating Expenses. Other operating expenses decreased $2.0 million
(10.4%) from $18.9 million for the three-month period ended March 31, 1994, to
$16.9 million for the three-month period ended March 31, 1995, primarily as a
result of a $678,000 (9.1%) decrease in operation and maintenance expenses and a
lower level of income taxes. The principal reason for the lower level of
operation and maintenance expenses was a reduction in payroll and related costs
due to the warmer weather in January and February, 1995, compared to the similar
period in 1994. Income taxes decreased by $1.2 million (21.6%) from $5.7
million in the first quarter of 1994 to $4.5 million in the first quarter of
1995 due to a decrease in income before income taxes (for this purpose,
operating income net of interest charges). Notwithstanding the decrease in
other operating expenses, such expenses increased as a percentage of operating
revenues from 23.5% during the first quarter of 1994 to 24.8% during the first
quarter of 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $1.0 million (9.0%) from $10.9 million for the three-month period
ended March 31, 1994, to $9.9 million for the three-month period ended March 31,
1995. Nonetheless, operating income increased as a percentage of total
operating revenues for such periods from 13.6% in 1994 to 14.5% in 1995,
primarily because of the decrease in the cost of gas as a percentage of
operating revenues, the effect of which was partially offset by the lower levels
of operation and maintenance expenses and income taxes.
Interest Charges. Interest charges increased by $558,000 (17.2%) from $3.2
million for the three-month period ended March 31, 1994, to $3.8 million for the
three-month period ended March 31, 1995, as a result of a $561,000 (19.2%)
increase in interest on long-term debt from $2.9 million during the three-month
period ended March 31, 1994, to $3.5 million during the three-month period ended
March 31, 1995. This increase was principally the result of interest on
borrowings under the Company's May 31, 1994, term loan agreement. None of the
interest expense on borrowings under the Company's term loan agreement or the
Company's senior notes have been allocated to the discontinued operations.
Income From Continuing Operations. Income from continuing operations
decreased $1.5 million (19.0%) from $7.9 million for the quarter ended March 31,
1994, to $6.4 million for the quarter ended March 31, 1995. This decrease was
largely the result of the matters discussed above, principally the decrease in
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operating margin resulting from the lower level of sales to residential and
commercial heating customers. The effect of the decreased operating margin was
partially offset by lower operating expenses.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $692,000 (50.0%) from $1.4 million for the three-month period ended
March 31, 1994, to $691,000 for the three-month period ended March 31, 1995, as
a result of the redemption by PG&W on May 31, 1994, of 150,000 shares ($15.0
million), of its 9.50% cumulative preferred stock, $100 par value, and on
December 16, 1994, of 150,000 shares ($15.0 million) of its 8.90% cumulative
preferred stock, $100 par value. No dividends on preferred stock have been
allocated to the discontinued operations.
Net Income. The decrease in net income of $6.6 million (77.0%) from $8.5
million for the three-month period ended March 31, 1994, to $2.0 million for the
three-month period ended March 31, 1995, as well as the decrease in earnings per
share of common stock of $1.23 from $1.58 per share for the quarter ended March
31, 1994, to $.35 per share for the quarter ended March 31, 1995, were largely
the result of the estimated loss (equivalent to $1.03 per share) on the disposal
of discontinued operations, as discussed above. Also contributing to the
decreases in net income and earnings per share was the lower income from
continuing operations. The effects of these factors were partially offset by
the reduced dividends on subsidiary's preferred stock.
RATE MATTERS
Pursuant to the provisions of the Pennsylvania Public Utility Code (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, by Order adopted November 10, 1994, authorized
PG&W to decrease the gas costs contained in its gas tariff rates from $3.74 to
$3.68 per thousand cubic feet effective December 1, 1994. This change in gas
rates on account of purchased gas costs was designed to produce a decrease in
annual revenue of $1.8 million. In accordance with the same provisions of the
Code, PG&W is presently seeking the approval of the PPUC to implement a
purchased gas cost rate of $2.42 per thousand cubic feet effective May 15, 1995,
in order to refund overcollections from customers caused by lower than
anticipated purchased gas costs and the receipt of supplier refunds during the
first quarter of 1995. The changes in gas rates on account of purchased gas
costs have no effect on the Company's earnings since the changes in revenue are
offset by corresponding changes in the cost of gas.
The PPUC has adopted regulations effective June 14, 1995, that provide for
the quarterly adjustment of the annual 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 regulations will
not have any material effect on PG&W's financial position or results of
operations, and PG&W will still be required to file an annual purchased gas cost
rate.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that
Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to
recovery through the annual PGC rate filings 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
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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.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. PG&W will seek
recovery of the remaining $249,000 of Gas Transition Costs in its annual PGC
rate that is effective December 1, 1995.
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 $4.5 million had been
billed to PG&W and $2.4 million had been recovered from its customers as of
March 31, 1995. PG&W has recorded the estimated Non-Gas Transition Costs that
remain to be billed to it and the amounts remaining to be recovered from its
customers.
LIQUIDITY AND CAPITAL RESOURCES
The primary capital needs of the Company are the funding of PG&W's
construction program and the seasonal funding of PG&W's gas purchases and
increases in its customer accounts receivable. PG&W's revenues are highly
seasonal and weather-sensitive, with approximately 75% of its revenues being
realized in the first and fourth quarters of the calendar year when the
temperatures in its service area are the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PG&W for the seasonal funding of its gas
purchases and increases in customer accounts receivable.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, and also to provide funding required for its
discontinued operations, 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 May 5, 1995,
$29.0 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
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mature on May 31, 1996. As of May 5, 1995, PG&W had $5.5 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.
Both the Company and PG&W periodically engage in long-term debt and capital
stock financings in order to obtain funds required for construction
expenditures, the refinancing of existing debt and various working capital
purposes. No long-term debt or capital stock financings were consummated by
either the Company or PG&W during the three-month period ended March 31, 1995.
The Company also obtains external funds from the sale of its common stock
through its Dividend Reinvestment and Stock Purchase Plan (the "DRP"), Customer
Stock Purchase Plan (the "Customer Plan") and Employees' Savings Plan. During
1995 (through May 5) the Company realized $2.3 million, $2.4 million and
$191,000 from the issuance of common stock under the DRP, Customer Plan and
Employees' Savings Plan, respectively.
Expenditures for the construction of utility plant totaled $3.5 million
during the first three months of 1995 and are currently estimated to be $21.3
million during the remainder of the year. PG&W's construction expenditures are
being financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2-1 Asset Purchase Agreement dated as of April 26, 1995, among the
Company, PG&W, American Water Works Company, Inc., and Pennsylvania-
American Water Company -- filed as Exhibit 2-1 to PG&W's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File No.
1-3490.
4-1 Rights Agreement dated as of April 26, 1995, between the Company and
Chemical Bank, as Rights Agent -- filed herewith.
10-1 Service Agreement for transportation service under Rate Schedule FT,
dated April 1, 1995, by and between PG&W and Transcontinental Gas
Pipe Line Corporation -- filed as Exhibit 10-1 to PG&W's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995, File No.
1-3490.
11-1 Statement Re Computation of Per Share Earnings -- filed herewith.
27-1 Financial Data Schedule -- filed herewith.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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PENNSYLVANIA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: May 9, 1995 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: May 9, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
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PENNSYLVANIA ENTERPRISES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA ENTERPRISES, INC.
(Registrant)
Date: May 9, 1995 By:
Thomas J. Ward
Secretary
Date: May 9, 1995 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)