FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 0-7812
PENNSYLVANIA ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1920170
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One PEI Center
Wilkes-Barre, Pennsylvania 18711-0601
(Address of principal executive offices) (Zip Code)
(717) 829-8843
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Registrant had 10,053,593 shares of common stock, no par value, outstanding
as of July 30, 1998.
PENNSYLVANIA ENTERPRISES, INC.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income for the three and six months
ended June 30, 1998 and 1997.......................... 2
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997................................. 3
Consolidated Statements of Cash Flows for
the six months ended June 30, 1998 and 1997........... 5
Notes to Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 17
Item 5. Other Information........................................ 18
Item 6. Exhibits and Reports on Form 8-K......................... 18
PART I. FINANCIAL INFORMATION
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Thousands of Dollars)
OPERATING REVENUES:
Regulated $ 25,004 $ 33,210 $ 90,010 $ 113,149
Nonregulated -
Gas sales and services 7,576 5,991 16,601 13,366
Pipeline construction and services 3,204 2,627 5,608 4,780
Other 87 36 541 60
--- --- ---- --
Total operating revenues 35,871 41,864 112,760 131,355
------- ------- -------- -------
OPERATING EXPENSES:
Cost of gas 18,112 22,726 64,263 79,434
Operation and maintenance 11,408 10,976 22,741 21,308
Depreciation 2,610 2,379 5,211 4,678
Income taxes (693) 83 3,463 5,682
Taxes other than income taxes 2,916 3,338 6,977 7,664
------ ------ ------ -----
Total other operating expenses 34,353 39,502 102,655 118,766
------- ------- -------- -------
OPERATING INCOME 1,518 2,362 10,105 12,589
OTHER INCOME, NET 938 339 935 728
---- ---- ---- ---
INCOME BEFORE INTEREST CHARGES 2,456 2,701 11,040 13,317
------ ------ ------- ------
INTEREST CHARGES:
Interest on long-term debt 2,445 2,099 5,033 4,141
Other interest 110 166 269 401
Allowance for borrowed funds used during construction (29) (33) (52) (99)
---- ---- ---- ----
Total interest charges 2,526 2,232 5,250 4,443
------ ------ ------ -----
INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (70) 469 5,790 8,874
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS 321 318 642 671
---- ---- ---- ---
NET INCOME (LOSS) $ (391) $ 151 $ 5,148 $ 8,203
======= ====== ======== =======
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
OF COMMON STOCK:
Before discount on repurchase of subsidiary's preferred
stock $ (0.04) $ 0.02 $ 0.52 $ 0.85
Discount on repurchase of subsidiary's preferred stock - 0.08 - 0.09
-- ----- -- ----
Earnings (loss) per share of common stock $ (0.04) $ 0.10 $ 0.52 $ 0.94
======== ======= ======= ======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING:
Basic 9,899,397 9,643,642 9,826,776 9,629,606
========== ========== ========== =========
Diluted 9,999,017 9,701,991 9,916,915 9,681,514
========== ========== ========== =========
CASH DIVIDENDS PER SHARE $ 0.30 $ 0.30 $ 0.60 $ 0.59
====== ====== ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
--------------- ---------------
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
At original cost $ 362,560 $ 351,106
Accumulated depreciation (92,954) (88,129)
-------- -------
269,606 262,977
-------- -------
OTHER PROPERTY AND INVESTMENTS:
Nonutility property and equipment 25,377 16,335
Accumulated depreciation (5,226) (4,875)
Other 2,360 2,171
------ -----
22,511 13,631
------- ------
CURRENT ASSETS:
Cash and cash equivalents 1,379 2,202
Restricted cash - common stock subscribed (Note 3) 633 -
Accounts receivable -
Customers 17,667 28,681
Others 875 850
Reserve for uncollectible accounts (1,758) (1,340)
Unbilled revenues 2,721 12,108
Materials and supplies, at average cost 3,517 3,110
Gas held by suppliers, at average cost 16,515 21,933
Deferred cost of gas and supplier refunds, net 5,470 6,316
Prepaid expenses and other 4,222 1,686
------ -----
51,241 75,546
------- ------
DEFERRED CHARGES:
Regulatory assets -
Deferred taxes collectible 30,932 30,592
Other 6,290 4,415
Unamortized debt expense 1,189 1,361
Other 230 308
---- ---
38,641 36,676
------- ------
TOTAL ASSETS $ 381,999 $ 388,830
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
--------------- ---------------
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholders' investment (Note 3) $ 126,786 $ 122,105
Preferred stock of PG Energy -
Not subject to mandatory redemption, net 15,864 15,864
Subject to mandatory redemption 560 640
Long-term debt 109,000 127,000
-------- -------
252,210 265,609
-------- -------
CURRENT LIABILITIES:
Current portion of long-term debt 27,500 24,776
Preferred stock subject to repurchase or
mandatory redemption 80 80
Notes payable 1,050 2,170
Accounts payable 22,343 18,448
Accrued general business and realty taxes 655 2,953
Accrued income taxes 5,043 4,618
Accrued interest 1,563 1,783
Accrued natural gas transition costs 561 1,087
Other 1,897 1,722
------ -----
60,692 57,637
------- ------
DEFERRED CREDITS:
Deferred income taxes 54,105 52,511
Unamortized investment tax credits 4,510 4,596
Operating reserves 2,684 2,825
Other 7,798 5,652
------ -----
69,097 65,584
------- ------
COMMITMENTS AND CONTINGENCIES (Note 5)
TOTAL CAPITALIZATION AND LIABILITIES $ 381,999 $ 388,830
========== =========
The accompanying notes are an integral part of the consolidated financial
statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-------------------------
1998 1997
--------- ----------
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 5,148 $ 8,203
Gain on sales of other property (1,174) -
Effects of noncash charges to income -
Depreciation 5,252 4,711
Deferred income taxes, net 1,254 389
Provisions for self insurance 381 406
Other, net 945 895
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and unbilled revenues 20,794 10,220
Gas held by suppliers 5,418 8,241
Accounts payable 1,225 (5,802)
Deferred cost of gas and supplier refunds, net 320 14,602
Other current assets and liabilities, net (4,858) (11,307)
Other operating items, net (1,387) (924)
------- -----
Net cash provided by operating activities 33,318 29,634
------- ------
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (12,257) (13,923)
Additions to nonutility property (9,253) (1,234)
Proceeds from the sales of other property 1,505 -
Acquisition of regulated business - (2,009)
Other, net 140 126
---- ---
Net cash used for investing activities (19,865) (17,040)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 4,801 1,211
Common stock subscribed, net 633 -
Repurchase of subsidiary's preferred stock (80) (3,108)
Dividends on common stock (5,901) (5,682)
Repayment of long-term debt - (446)
Net decrease in bank borrowings (13,726) (5,753)
Other, net (3) 822
--- ---
Net cash used for financing activities (14,276) (12,956)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (823) (362)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,202 1,126
------ -----
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,379 $ 764
======== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,195 $ 3,963
======== =======
Income taxes $ 1,801 $ 14,674
======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Business. Pennsylvania Enterprises, Inc. (the "Company") is a
holding company which, through its subsidiaries, is engaged in both regulated
and nonregulated activities. The Company's regulated activities are conducted by
its principal subsidiary, PG Energy Inc. ("PG Energy"), a regulated public
utility, and PG Energy's wholly-owned subsidiary, Honesdale Gas Company
("Honesdale"), also a regulated public utility which was acquired on February
14, 1997. Together PG Energy and Honesdale distribute natural gas to a
thirteen-county area in northeastern Pennsylvania, a territory that includes the
cities of Scranton, Wilkes-Barre and Williamsport. In 1997, PG Energy and
Honesdale collectively accounted for approximately 84% of the Company's
operating revenues.
The Company, through its other subsidiaries, PG Energy Services Inc.
("Energy Services"), PEI Power Corporation ("Power Corp") which was formed in
October, 1997, Theta Land Corporation ("Theta") and Keystone Pipeline Services,
Inc. ("Keystone"), a wholly-owned subsidiary of Energy Services, is engaged in
various nonregulated activities, including the sale of natural gas, propane and
electricity and other energy-related services, as well as the construction,
maintenance and rehabilitation of natural gas distribution pipelines and the
sale of property for residential, commercial and other development. In the
fourth quarter of 1997, Energy Services began marketing electricity and other
products and services, under the name PG Energy PowerPlus, in 26 counties in
northeastern and central Pennsylvania. Power Corp, an exempt wholesale
electricity generator, began generating and selling electricity in July, 1998,
upon completion of modifications to its cogeneration facility that enable it to
burn both natural gas and methane.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries, PG Energy, Energy Services
(including Keystone), Power Corp and Theta. The consolidated financial
statements also include the accounts of Honesdale beginning February 14, 1997,
the date Honesdale was acquired by PG Energy. All material intercompany accounts
have been eliminated in consolidation.
Both PG Energy and Honesdale (collectively referred to as the "Regulated
Subsidiaries") are subject to the jurisdiction of the Pennsylvania Public
Utility Commission (the "PPUC") for rate and accounting purposes. The financial
statements of the Regulated Subsidiaries that are incorporated in these
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, including the provisions of Financial
Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of
Certain Types of Regulation," which give recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.
Interim Financial Statements. The interim consolidated financial statements
included herein have been prepared by 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 sale of natural gas. However, in the opinion of management, all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the results for the interim periods have been reflected in the
consolidated financial statements. It is suggested that these consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's latest annual report
on Form 10-K.
Use of Accounting Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters which
are difficult to predict and are beyond the control of the Company. Therefore,
actual amounts could differ from these estimates.
(2) RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the PPUC approved an
overall 5.3% increase in PG Energy's base gas rates, designed to produce $7.5
million of additional annual revenue, effective January 15, 1997. Under the
terms of the Order, the billing for the impact of the rate increase relative to
PG Energy's residential heating customers, which totaled $2.4 million through
June 30, 1997, was deferred, without carrying charges, until July, 1997.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PG Energy,
on an interim basis when circumstances dictate, to reflect changes in their
purchased gas costs. The procedure includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures PG Energy has been permitted to make
the following changes since January 1, 1997, to the gas costs contained in its
tariff rates:
Change in Calculated
Effective Rate per MCF Increase (Decrease)
Date From To in Annual Revenue
- -------------------------------------- ----- ----- ------------
June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
(3) RESTRICTED CASH-COMMON STOCK SUBSCRIBED
The Company reinstated its Customer Stock Purchase Plan (the "Customer
Plan") effective February 4, 1998. The Customer Plan provides the residential
customers of all the Company's subsidiaries with a method of purchasing
newly-issued shares of the Company's common stock at a 5% discount from the
market price. On July 1, 1998, the Company issued 25,065 shares of its common
stock for an aggregate consideration of $645,000 with respect to payments
received pursuant to the Customer Plan during the subscription period ended June
30, 1998. Such payments are reflected under the captions "Restricted cash -
common stock subscribed" and "Common shareholders' investment" in these
consolidated financial statements as of June 30, 1998. The proceeds from the
issuance of shares through the Customer Plan were used by the Company to
purchase common stock of PG Energy.
(4) ACCOUNTING CHANGES
Reporting Comprehensive Income. Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting Comprehensive Income."
However, because there were no items comprising other comprehensive income, the
adoption of FASB 130 has no effect on the Company's financial statements for the
periods ended June 30, 1998.
Disclosures about Segments of an Enterprise and Related Information. In
June, 1997, FASB Statement 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. The provisions of this statement, which are
effective for fiscal years beginning after December 15, 1997, establish
standards for reporting information about operating segments in annual financial
statements and selected segment information in interim financial reports issued
to shareholders. The Company expects to adopt the reporting provisions of FASB
Statement 131 by the fourth quarter of 1998.
(5) COMMITMENTS AND CONTINGENCIES
Environmental Matters. PG Energy, like many gas distribution companies,
once utilized manufactured gas plants in connection with providing gas service
to its customers. None of these plants has been in operation since 1972, and
several of the plant sites are no longer owned by PG Energy. Pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), PG Energy filed notices with the United States Environmental
Protection Agency (the "EPA") with respect to the former plant sites. None of
the sites is or was formerly on the proposed or final National Priorities List.
The EPA has conducted site inspections and made preliminary assessments of each
site and has concluded that no further remedial action is planned.
Notwithstanding this determination by the EPA, some of the sites may ultimately
require remediation. One site that was owned by PG Energy from 1951 to 1967 and
at which it operated a manufactured gas plant from 1951 to 1954 was subject to
remediation in 1996. The remediation at this site, which was performed by the
party from whom PG Energy acquired the site in 1951, required the removal of
materials from two former gas holders. The cost of such remediation is purported
to have been approximately $525,000, of which the party performing the
remediation is seeking to recover a material portion from PG Energy. PG Energy,
however, believes that any liability it may have with respect to such
remediation would be considerably less than the amount that the other party is
seeking. While the final resolution of the matter is uncertain, PG Energy does
not believe that it will have any material impact on its financial position or
results of operations. Although the conclusion by the EPA that it anticipates no
further remedial action with respect to the sites at which PG Energy operated
manufactured gas plants 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.
PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table expresses certain items in the Company's consolidated
statements of income as percentages of operating revenues for each of the three
and six-month periods ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
---------- --------- --------- ---------
OPERATING REVENUES:
Regulated 69.7 % 79.3 % 79.8 % 86.1 %
Nonregulated -
Gas sales and services 21.1 14.3 14.7 10.2
Pipeline construction and services 8.9 6.3 5.0 3.6
Other 0.3 0.1 0.5 0.1
---- ------------ ---- -----------
Total operating revenues 100.0 100.0 100.0 100.0
------ ------ ------ -----
OPERATING EXPENSES:
Cost of gas 50.5 54.3 57.0 60.5
Operation and maintenance 31.8 26.2 20.2 16.2
Depreciation 7.3 5.7 4.6 3.6
Income taxes (1.9) 0.2 3.1 4.3
Taxes other than income taxes 8.1 8.0 6.1 5.8
---- ---- ---- ---
Total operating expenses 95.8 94.4 91.0 90.4
----- ----- ----- ----
OPERATING INCOME 4.2 5.6 9.0 9.6
OTHER INCOME, NET 2.6 0.8 0.8 0.5
INTEREST CHARGES (7.0) (5.3) (4.7) (3.4)
SUBSIDIARY'S PREFERRED
STOCK DIVIDENDS (0.9) (0.7) (0.5) (0.5)
----- ----- ----- -----
NET INCOME (LOSS) (1.1)% 0.4 % 4.6 % 6.2 %
===== ==== ==== ====
o Three Months Ended June 30, 1998, Compared With Three Months Ended June
30, 1997
Operating Revenues. Operating revenues decreased $6.0 million (14.3%) from
$41.9 million for the quarter ended June 30, 1997, to $35.9 million for the
quarter ended June 30, 1998, largely as a result of an $8.2 million (24.7%)
decrease in regulated operating revenues, the impact of which was partially
offset by a $1.6 million (26.5%) increase in gas sales and services by PG Energy
Services Inc. ("Energy Services"), a nonregulated affiliate of the Company, and
a $577,000 (22.0%) increase in pipeline construction and services revenues by
Keystone Pipeline Services, Inc.("Keystone"), a nonregulated subsidiary of
Energy Services.
The $8.2 million (24.7%) decrease in regulated operating revenues from
$33.2 million for the quarter ended June 30, 1997, to $25.0 million for the
quarter ended June 30, 1998, was primarily the result of a 0.8 billion cubic
feet (22.5%) decrease in sales by PG Energy Inc. ("PG Energy") to its
residential and commercial heating customers. This reduction in sales was
attributable to the unseasonably warm weather during the second quarter of 1998
and the unseasonably cool weather during the same period in 1997, as well as
lower levels in PG Energy's gas cost rate (see "-Rate Matters"). There was a 313
(32.4%) decrease in heating degree days from 965 (126.1% of normal) during the
second quarter of 1997 to 652 (85.2% of normal) during the second quarter of
1998.
The $1.6 million (26.5%) increase in nonregulated gas sales and services
from $6.0 million for the quarter ended June 30, 1997, to $7.6 million for the
quarter ended June 30, 1998, was primarily the result of a 560,000 cubic feet
(35.1%) increase in sales of natural gas by Energy Services during the quarter.
Operating Expenses. Operating expenses, including depreciation and income
taxes, decreased $5.1 million (13.0%) from $39.5 million for the second quarter
of 1997 to $34.4 million for the second quarter of 1998. As a percentage of
operating revenues, total operating expenses increased from 94.4% during the
second quarter of 1997 to 95.8% during the second quarter of 1998 because of the
lower level of operating revenues.
The cost of gas decreased $4.6 million (20.3%) from $22.7 million for the
second quarter of 1997 to $18.1 million for the second quarter of 1998,
primarily because of the aforementioned decrease in sales to PG Energy's
residential and commercial heating customers and lower levels in PG Energy's gas
cost rate (see "-Rate Matters"). The effects of these factors were partially
offset by the increased sales by Energy Services.
Other than the cost of gas and income taxes, operating expenses increased
by $241,000 (1.4%) from $16.7 million for the second quarter of 1997 to $16.9
million for the second quarter of 1998. This increase was largely attributable
to a $432,000 (3.9%) increase in operation and maintenance expense, primarily as
a result of increased payroll and other costs associated with the expansion of
the Company's nonregulated activities. Also contributing to the higher operating
expenses was a $231,000 (9.7%) increase in depreciation expense, primarily
because of additions to utility plant.
Income taxes decreased $776,000 from tax expense of $83,000 for the second
quarter of 1997 to a tax benefit of $693,000 for the second quarter of 1998 due
to a decrease in income before income taxes (for this purpose, operating income
net of interest charges).
Operating Income. As a result of the above, operating income decreased by
$844,000 (35.7%) from $2.4 million for the three-month period ended June 30,
1997, to $1.5 million for the three-month period ended June 30, 1998, and also
decreased as a percentage of total operating revenues for such periods from 5.6%
in the three-month period ended June 30, 1997, to 4.2% in the three-month period
ended June 30, 1998.
Other Income, Net. Other income, net increased $599,000 from $339,000 for
the three-month period ended June 30, 1997, to $938,000 for the three-month
period ended June 30, 1998, largely because of a gain on the sale of land in
June, 1998. Interest Charges. Interest charges increased $294,000 (13.2%) from
$2.2 million for the second quarter of 1997 to $2.5 million for the second
quarter of 1998. This increase was largely attributable to a higher level of
long-term debt outstanding in 1998.
Net Income (Loss). The decrease in net income of $542,000 from income of
$151,000 for the second quarter of 1997 to a loss of $391,000 for the second
quarter of 1998 was the result of the matters discussed above, principally the
decrease in operating revenues and the increase in interest charges, the effects
of which were partially offset by decreased operating expenses. These same
factors, along with an $.08 per share discount on the repurchase of preferred
stock in 1997, accounted for the decrease in basic and diluted earnings per
share of common stock from earnings of $.10 per share for the second quarter of
1997 to a loss of $.04 per share for the second quarter of 1998.
o Six Months Ended June 30, 1998, Compared With Six Months Ended June 30, 1997
Operating Revenues. Operating revenues decreased $18.6 million (14.2%) from
$131.4 million for the six-month period ended June 30, 1997, to $112.8 million
for the six-month period ended June 30, 1998, largely as a result of a $23.1
million (20.5%) decrease in regulated operating revenues, the impact of which
was partially offset by a $3.2 million (24.2%) increase in gas sales and
services by Energy Services and an $828,000 (17.3%) increase in the pipeline
construction and services revenues of Keystone.
The $23.1 million (20.5%) decrease in regulated operating revenues from
$113.1 million for the six-month period ended June 30, 1997, to $90.0 million
for the six-month period ended June 30, 1998, was primarily the result of a 2.5
billion cubic feet (17.8%) decrease in sales by PG Energy to its residential and
commercial heating customers. This reduction in sales was attributable to the
unseasonably warm weather during the period and lower levels in PG Energy's gas
cost rate (see "-Rate Matters"). There was a 770 (19.5%) decrease in heating
degree days from 3,955 (100.0% of normal) during the first six months of 1997 to
3,185 (80.5% of normal) during the first six months of 1998.
The $3.2 million increase in nonregulated gas sales and services from $13.4
million for the six-month period ended June 30, 1997, to $16.6 million for the
six-month period ended June 30, 1998, was primarily the result of a 1.3 million
cubic feet (36.8%) increase in sales of natural gas by Energy Services during
the period.
Operating Expenses. Operating expenses, including depreciation and income
taxes, decreased $16.1 million (13.6%) from $118.8 million for the six-month
period ended June 30, 1997, to $102.7 million for the six-month period ended
June 30, 1998. As a percentage of operating revenues, total operating expenses
increased from 90.4% during the six-month period ended June 30, 1997, to 91.0%
during the six-month period ended June 30, 1998, because of the lower level of
operating revenues.
The cost of gas decreased $15.2 million (19.1%) from $79.4 million for the
six-month period ended June 30, 1997, to $64.3 million for the six-month period
ended June 30, 1998, primarily because of the aforementioned decrease in sales
to PG Energy's residential and commercial heating customers and lower levels in
PG Energy's gas cost rate (see "-Rate Matters"). The effects of these factors
were partially offset by the increased sales by Energy Services.
Other than the cost of gas and income taxes, operating expenses increased
by $1.3 million (3.8%) from $33.6 million for the six-month period ended June
30, 1997, to $34.9 million for the six-month period ended June 30, 1998. This
increase was largely attributable to a $1.4 million (6.7%) increase in operation
and maintenance expense, primarily as a result of increased payroll and other
costs associated with the expansion of the Company's nonregulated activities.
Also contributing to the higher operating expenses was a $533,000 (11.4%)
increase in depreciation expense, primarily as a result of additions to utility
plant.
Income taxes decreased $2.2 million (39.1%) from $5.7 million for the
six-month period ended June 30, 1997, to $3.5 million for the six-month period
ended June 30, 1998, due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges).
Operating Income. As a result of the above, operating income decreased by
$2.5 million (19.7%) from $12.6 million for the six-month period ended June 30,
1997, to $10.1 million for the six-month period ended June 30, 1998, and also
decreased as a percentage of total operating revenues for such periods from 9.6%
in the six-month period ended June 30, 1997, to 9.0% in the six-month period
ended June 30, 1998.
Other Income, Net. Other income, net increased $207,000 from $728,000 for
the six-month period ended June 30, 1997, to $935,000 for the six-month period
ended June 30, 1998, largely because of a gain on the sale of land in June,
1998.
Interest Charges. Interest charges increased $807,000 (18.2%) from $4.4
million for the six-month period ended June 30, 1997, to $5.2 million for the
six-month period ended June 30, 1998. This increase was largely attributable to
a higher level of long-term debt outstanding in 1998.
Subsidiary's Preferred Stock Dividends. Dividends on preferred stock
decreased $29,000 (4.3%) from $671,000 for the six-month period ended June 30,
1997, to $642,000 for the six-month period ended June 30, 1998, primarily as a
result of repurchases of preferred stock in 1997.
Net Income (Loss). The decrease in net income of $3.1 million (37.2%) from
$8.2 million for the six-month period ended June 30, 1997, to $5.1 million for
the six-month period ended June 30, 1998, was the result of the matters
discussed above, principally the decrease in operating revenues and the increase
in interest charges, the effects of which were partially offset by decreased
operating expenses. The same factors, along with a $.09 per share discount on
the repurchase of preferred stock in 1997, accounted for the decrease in basic
and diluted earnings per share of common stock from $.94 per share for the
six-month period ended June 30, 1997, to $.52 per share for the six-month period
ended June 30, 1998.
RATE MATTERS
Rate Increase. By Order adopted December 19, 1996, the Pennsylvania Public
Utility Commission (the "PPUC") approved an overall 5.3% increase in PG Energy's
base gas rates, designed to produce $7.5 million of additional annual revenue,
effective January 15, 1997. Under the terms of the Order, the billing for the
impact of the rate increase relative to PG Energy's residential heating
customers, which totaled $2.4 million through June 30, 1997, was deferred,
without carrying charges, until July, 1997.
Proposed Rate Increase. On March 16, 1998, PG Energy filed an application
with the PPUC seeking an increase in its base gas rates, designed to produce
$15.0 million in additional annual revenue, to be effective May 15, 1998. On
April 23, 1998, the PPUC suspended this rate increase for seven months (until
December 15, 1998) in order to investigate the reasonableness of the proposed
rates. It is not presently possible to determine what action the PPUC will
ultimately take in this matter.
Gas Cost Adjustments. The provisions of the Pennsylvania Public Utility
Code require that the tariffs of local gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the case of larger LDCs such as PG Energy,
on an interim basis when circumstances dictate, to reflect changes in their
purchased gas costs. The procedure includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any overcollections, plus interest thereon, or the recoupment of any
undercollections of gas costs.
In accordance with these procedures, PG Energy has been permitted to make
the following changes since January 1, 1997, 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
- --------------------------------- ----- ----- ------------
June 1, 1998 $ 3.95 $ 4.18 $ 5,800,000
March 1, 1998 4.05 3.95 (2,100,000)
December 1, 1997 4.49 4.05 (12,100,000)
March 1, 1997 4.18 4.49 8,300,000
The changes in gas rates on account of purchased gas costs have no effect
on earnings since the change in revenue is offset by a corresponding change in
the cost of gas.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
The primary capital needs of the Company continue to be the funding of
PG Energy's construction program and the seasonal funding of PG Energy's gas
purchases and increases in its customer accounts receivable. PG Energy's
revenues are highly seasonal and weather-sensitive, with approximately 75% of
its revenues normally being realized in the first and fourth quarters of the
calendar year when the temperatures in its service area are the coldest.
Additionally, as the Company's nonregulated activities continue to
expand, further capital will be required for those activities. It is currently
anticipated that such expenditures will be funded by a combination of capital
provided by the Company, bank borrowings and other debt financing.
The cash flow from PG Energy'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 Energy 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 Energy for the seasonal funding of its
gas purchases and increases in customer accounts receivable.
In order to temporarily finance construction expenditures and to meet
its seasonal borrowing requirements, PG Energy has made arrangements for a total
of $70.0 million of unsecured revolving bank credit, which is deemed adequate
for its needs. Specifically, PG Energy currently has seven bank lines of credit
with an aggregate borrowing capacity of $70.0 million which provide for
borrowings at interest rates generally less than prime and which mature at
various times during 1998 and 1999 and which PG Energy intends to renew or
replace as they expire. As of July 30, 1998, PG Energy had $17.0 million of
borrowings outstanding under these bank lines of credit.
The Company believes that its regulated subsidiaries will be able to
raise in a timely manner such funds as are required for their future
construction expenditures, refinancings and other working capital requirements.
Likewise, the Company believes that its nonregulated subsidiaries will be able
to raise such funds as are required for their future needs.
Long-Term Debt and Capital Stock Financings
Both the Company and its subsidiaries, most notably PG Energy,
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 Energy during the
six-month period ended June 30, 1998.
The Company also obtains external funds from the sale of common stock
through its Dividend Reinvestment and Stock Purchase Plan, its Customer Stock
Purchase Plan, its 1992 Stock Option Plan and its Employees' Savings Plan.
During 1998 (through July 30) the Company realized $7.5 million from the
issuance of common stock under these plans.
Capital Expenditures and Related Financings
Capital expenditures totaled $21.8 million during the first six months
of 1998, including $12.1 million of expenditures for the construction of utility
plant and $8.5 million for the conversion of Power Corp's cogeneration facility
and construction of the related methane recovery facility.
The Company estimates that its capital expenditures will total $25.8
million for the remainder of the year, consisting of $24.2 million relative to
utility plant and $1.6 million with respect to the Company's nonregulated
activities. It is anticipated that such capital expenditures will be financed
with internally generated funds and bank borrowings, and by the periodic
issuance of stock and long-term debt.
Current Maturities of Long-Term Debt and Preferred Stock
As of June 30, 1998, $27.5 million of long-term debt and $80,000 of PG
Energy's preferred stock was required to be repaid within twelve months.
Year 2000
The Company is currently replacing its financial and human resource
systems with purchased software packages. The installation of these new systems,
along with modifications currently being made to its customer information
system, will resolve the primary year 2000 issues. The new financial and human
resource systems are anticipated to be fully operational by January, 1999, while
modifications to the new customer information system are now anticipated to be
completed and tested by March 31, 1999.
The Company has completed a review of the program coding of other
significant in-house developed applications and determined that they are
presently year 2000 compliant. Additionally, the Company is reviewing its
installed base of personal computers to identify non-compliant machines that
would be in service at year 2000.
Forward-Looking Statements
Certain statements made above relating to plans, conditions, objectives
and economic performance go beyond historical information and may provide an
indication of future results. To that extent, they are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, and each is subject to factors that could cause actual results to differ
from those in the forward-looking statement, such as the nature of Pennsylvania
legislation restructuring the natural gas industry and general economic
conditions and uncertainties relating to the expansion of the Company's
nonregulated activities. The Company undertakes no obligation to publicly
release any revision to these forward-looking statements to reflect events or
circumstances after the date of this filing.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on May 6, 1998.
(b) The following persons were elected directors of the Company with the voting
as indicated:
No. of Shares No. of Shares
Name Voted in Favor Withheld
- ------------------------ ---------------- --------------
Kenneth L. Pollock 8,178,160 99,353
William D. Davis 8,189,800 87,713
Thomas F. Karam 8,193,640 83,873
Robert J. Keating 8,180,954 96,559
James A. Ross 8,182,748 94,765
John D. McCarthy 8,190,164 87,349
Ronald W. Simms 8,190,080 87,433
Kenneth M. Pollock 8,184,579 92,934
Paul R. Freeman 8,187,189 90,324
John D. McCarthy, Jr. 8,180,239 97,274
Richard A. Rose, Jr. 8,189,643 87,870
Item 5. Other Information
Effective August 4, 1998, Paul R. Freeman resigned as a Director of
Pennsylvania Enterprises, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10-1 Form of Stock Option Grant, dated as of May 6, 1998, between
the Company and certain of its Officers - - filed herewith.
10-2 Form of Stock Option Grant, dated as of May 6, 1998, between the
Company and certain of its non-employee directors - - filed
herewith.
10-3 Stock Option Grant, dated as of May 6, 1998, between the
Company and Thomas F. Karam - - filed herewith.
10-4 Amended Employment Agreement dated as of May 6, 1998, by and
among the Company, PG Energy Inc. and Thomas F. Karam - - filed
herewith.
27-1 Financial Data Schedule - - filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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: August 11, 1998 By: /s/ Donna M. Abdalla
------------------- ---------------------------------------
Donna M. Abdalla
Acting Secretary
Date: August 11, 1998 By: /s/ John F. Kell, Jr.
------------------- ---------------------------------------
John F. Kell, Jr.
Vice President, Financial Services
(Principal Financial Officer and
Principal Accounting Officer)