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, 1993, PG&W had approximately 137,200 gas customers and
131,400 water customers.
PG&W has four small wholly-owned subsidiaries: Trucksville Water Company,
Shavertown and Kingston Township Water Company, Hillcrest Water Co. and Homesite
Water Company, which are engaged in the distribution of water, and 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.
During recent years, PG&W's gas utility operations have generated about 75%
of PG&W's operating revenues and slightly more than half its operating income.
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
to Pennsylvania produced gas. See "GAS BUSINESS-Transportation and Storage
Service." During 1990 and 1991, PG&W's earnings from its gas utility operations
were adversely affected by unseasonably warm weather. The number of heating
degree days in 1990 and 1991 were 15.7% and 12.4%, respectively, below normal.
However, the number of heating degree days for 1992 and 1993 were only 3.1% and
1.8%, respectively, below normal.
Primarily as a result of the PPUC's approval since January 1, 1991, of rate
increases designed to produce an aggregate of $35.8 million in additional annual
water operating revenues, PG&W expects that its future water operating revenues
and water operating income will represent a greater portion of its total
operating revenues and operating income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 of this
Form 10-K and "Industry Segments."
As of December 31, 1993, PG&W employed approximately 975 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.
Year Ended December 31,
1991 1992 1993
(Thousands of Dollars)
GAS UTILITY OPERATIONS
Operating revenues $138,465 $143,227 $153,325
Operating expenses excluding income taxes:
Cost of gas 77,801 77,720 86,557
Depreciation 5,545 6,087 6,388
Other operating expenses 32,760 34,031 34,927
Total 116,106 117,838 127,872
Operating income before income taxes 22,359 25,389 25,453
Income taxes 3,920 6,129 6,307
Operating income $ 18,439 $ 19,260 $ 19,146
Additions to utility plant $ 9,359 $ 12,669 $ 13,325
Identifiable assets at December 31 (a) $229,593 $238,017 $285,596
WATER UTILITY OPERATIONS
Operating revenues $ 44,285 $ 48,651 $ 53,363
Operating expenses excluding income taxes:
Depreciation 4,234 4,769 5,911
Other operating expenses 26,022 27,347 29,292
Deferred treatment plant costs, net (664) (294) (1,532)
Total 29,592 31,822 33,671
Operating income before income taxes 14,693 16,829 19,692
Income taxes 1,439 2,176 2,682
Operating income $ 13,254 $ 14,653 $ 17,010
Additions to utility plant $ 19,155 $ 44,352 $ 32,575
Identifiable assets at December 31 (a) $310,374 $379,989 $426,389
TOTAL OPERATIONS
Operating revenues $182,750 $191,878 $206,688
Operating expenses excluding income taxes:
Cost of gas 77,801 77,720 86,557
Depreciation 9,779 10,856 12,299
Other operating expenses 58,782 61,378 64,219
Deferred treatment plant costs, net (664) (294) (1,532)
Total 145,698 149,660 161,543
Operating income before income taxes 37,052 42,218 45,145
Income taxes 5,359 8,305 8,989
Operating income $ 31,693 $ 33,913 $ 36,156
Additions to utility plant $ 28,514 $ 57,021 $ 45,900
Identifiable assets at December 31 (a) $539,967 $618,006 $711,985
Other assets at December 31 (b) 24,550 11,866 14,323
Total assets $564,517 $629,872 $726,308
(a) Includes allocated common plant and is net of the respective accumulated
depreciation.
(b) Composed primarily of investments, cash and special deposits, a $15.0
million intercompany advance to PEI in 1991, which was repaid in January,
1992, prepayments and unallocated deferred charges.
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Operating income from gas utility operations increased $821,000 (4.5%) from
$18.4 million in 1991 to $19.3 million in 1992, due primarily to a $4.8 million
increase in gross margin (gas operating revenues less the cost of gas), the
effect of which was largely offset by increases in other operating expenses,
depreciation and income and gross receipts taxes. Operating income from gas
utility operations decreased $113,000 (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 lower level of additions to gas utility plant in 1991 was
principally the result of variations in the timing of expenditures for mains and
services.
Operating income from water utility operations increased $1.4 million
(10.6%) from $13.3 million in 1991 to $14.7 million in 1992, due primarily to
the rate increases which the PPUC allowed for customers in the Scranton Water
Rate Area effective March 23, 1991, and for customers in the Spring Brook Water
Rate Area served exclusively by the Nesbitt Water Treatment Plant effective
January 30, 1992. These increased revenues were partially offset by increases
in other operating expenses, depreciation, property 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 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, the effects of
which were partially offset by increases in other operations and maintenance
expenses, depreciation, and income and property taxes. Additions to water
utility plant increased in 1992, and decreased in 1993, largely as 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
115 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, 1993, PG&W had approximately
137,200 natural gas customers, from which it derived total natural gas revenues
of $153.3 million during 1993. The following chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1993:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.7% 60.2%
Commercial 7.9 22.0*
Industrial 0.2 16.2*
Other Users 0.2 1.6
Total 100.0% 100.0%
* Includes the 4.9% of total gas revenues derived from interruptible
customers.
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During 1993, PG&W delivered an estimated total of 43,700,000 thousand cubic
feet ("MCF") of natural gas to its customers, of which 62.8% was sold at normal
tariff rates, 33.7% represented gas transported for customers and 3.5% 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 1993, a total of 1,729,000 MCF of natural gas was
sold by PG&W to interruptible customers and 2,888,000 MCF was transported for
such customers, which together represented 10.6% of the total deliveries of
natural gas by PG&W to its customers during 1993.
PG&W's largest natural gas customer accounted for approximately 4.5% of its
total gas operating revenues in 1993. No other customer accounted for as much
as 2.0% of such revenues.
Transportation and Storage Service. Commencing in 1986, PG&W began
providing transportation service to those natural gas customers, or groups of
not more than three customers, who consumed at least 50,000 MCF of natural gas
per year and executed a transportation agreement with PG&W. Pursuant to
regulations adopted by the PPUC, PG&W amended its gas transportation
regulations, effective March 25, 1993, to permit groups of up to ten customers,
with a combined consumption of at least 5,000 MCF per year, to qualify for
transportation service. 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 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.
Set forth below is a summary of the gas transported by PG&W and the number
of its customers using transportation service from 1991 to 1993:
[CAPTION]
Number Volume of Gas Transported (MCF)
of Interstate Pennsylvania
Year Customers Gas Gas Total
[S] [C] [C] [C] [C]
1991 352 12,278,000 3,114,000 15,392,000
1992 457 9,084,000 3,843,000 12,927,000
1993 569 10,078,000 4,627,000 14,705,000
During 1994, PG&W expects to transport approximately 17,400,000 MCF of
natural gas, of which it anticipates approximately 5,500,000 MCF will be
Pennsylvania gas.
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
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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, and it caused
net income to decrease by approximately $402,000 or $.11 per share for the year
ended December 31, 1991, by $578,000 or $.15 per share for the year ended
December 31, 1992, and by $553,000 or $.13 per share for the year ended December
31, 1993, compared to the net income that would have been realized had the
customers receiving Pennsylvania transportation gas taken their gas under the
same tariffs as which they were supplied gas in the prior year.
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 $2.9 million
in 1991, $3.4 million in 1992 and $4.6 million in 1993. These revenues
reflected the sale of 900,000 MCF, 1,149,000 MCF and 1,541,000 MCF in 1991, 1992
and 1993, respectively. It is anticipated that approximately 1,530,000 MCF will
be sold under the Alternate Fuel Rate in 1994. 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 are 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 existing 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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One of PG&W's interstate pipelines, Tennessee Gas Pipeline Company,
commenced operating under the provisions of Order 636 as of September 1, 1993,
and PG&W's two other interstate pipelines, Columbia Gas Transmission Corporation
and Transcontinental Gas Pipe Line Corporation, began operating under the
provisions of Order 636 as of November 1, 1993. PG&W entered into new
transportation and storage agreements with each of its three interstate pipeline
companies as of the respective date they commenced operating under Order 636,
and all prior sales and transportation agreements and the majority of the prior
storage agreements were concurrently terminated. It is currently estimated that
the aggregate transition costs which PG&W will be billed by its three interstate
pipelines pursuant to Order 636 will range between $11.0 million and $14.0
million, of which $1.0 million had been billed as of December 31, 1993. Such
billings will generally be made by the three interstate pipelines over a three-
year period extending through the fourth quarter of 1996.
On October 15, 1993, the PPUC adopted an order (the "Order") regarding
recovery of FERC Order 636 transition costs. The Order states the PPUC believes
that the recovery of Account 191 and New Facility Costs are subject to recovery
through the annual purchased gas cost ("PGC") rate filing made with the PPUC by
PG&W and other similar local gas distribution companies. The Order also
indicates that while Gas Supply Realignment Costs and Stranded 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 Order
further states that all such filings will be evaluated on a case-by-case basis.
As of February 1, 1994, PG&W began to recover the Account 191 and New Facility
Costs that are being billed by its interstate pipelines through an increase in
its PGC rate. Additionally, on January 14, 1994, PG&W filed tariffs pursuant to
the surcharge provisions of the Code seeking the full recovery of the Gas Supply
Realignment and Stranded Costs that it estimates it will be billed by its
interstate pipelines. On February 24, 1994, the PPUC suspended the
effectiveness of these proposed tariffs for six months (i.e., until August 28,
1994) in order to institute an investigation into the reasonableness of such
tariffs. Although it cannot be certain, based on the provisions of the Order,
PG&W believes it will be allowed the full recovery of all transition costs
billed to it pursuant to Order 636.
Sources of Supply. PG&W currently purchases natural gas both under the
terms of monthly spot purchases and longer-term (i.e., one to five years) supply
arrangements that provide for an adjustment each month in the price of gas
purchased pursuant thereto (collectively referred to as "spot market
purchases"). During 1993, PG&W also purchased a portion of its natural gas
under long-term supply contracts with its interstate pipelines prior to the
dates those contracts were terminated as a result of Order 636. Of the total
volume of natural gas purchased by PG&W in 1993, 3,700,000 MCF (12.4%) was
acquired from its interstate pipelines (of which 3,400,000 MCF was purchased
under former long-term supply contracts) and 26,200,000 MCF (87.6%) was acquired
from other sources, including marketers, producers, and integrated energy
companies. The largest of these other sources, a Canadian marketer, accounted
for 17.7% of PG&W's total purchases of natural gas in 1993.
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The spot market purchases of natural gas by PG&W during each of the years
1991, 1992 and 1993 are summarized below:
[CAPTION]
Volume Average Percentage of
Year Purchased (MCF) Cost per MCF Total Purchases
[S] [C] [C] [C]
1991 17,762,000 $2.08 73.5%
1992 21,323,000 $2.61 71.0%
1993 26,200,000 $2.98 87.6%
During 1994, PG&W expects to purchase a total of approximately 29,330,000
MCF of natural gas on the spot market under contracts ranging from one month to
five years in duration at a currently projected average cost of $3.27 per MCF.
These spot market purchases will constitute all of the natural gas that PG&W
anticipates purchasing in 1994.
PG&W presently has adequate supplies of natural gas to meet the demands of
existing customers through April, 1994 (i.e., the end of the 1993/94 heating
season), and believes that it will be able to obtain sufficient supplies in the
future to meet the demands of its existing customers and to supply new
customers, of which approximately 3,000 are expected to be added in 1994.
Pipeline Transportation and Storage Entitlements. Pursuant to the terms of
Order 636, PG&W entered into agreements with its former interstate pipeline
suppliers during 1993 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) PG&W can transport an additional 3,300 MCF per day during the period
December through February pursuant to an agreement with Transco that
extends through 2011.
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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.
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 one year. The maximum capacity so released on
any one day in 1993 was 27,942 MCF. Through March 23, 1994, 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.
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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 are currently estimated to be 288,396 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 303,295 MCF. PG&W's
historic maximum daily sendout is 293,683 MCF, which occurred on January 19,
1994. 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 1993 totaled $13.3 million and are estimated to be $17.0 million for
1994. The higher level of expenditures estimated for 1994 reflects certain
long-term pipeline improvement programs, as well as an increased emphasis on new
business development.
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 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 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 considers 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." As a result, the PPUC staff
indicated that it intends to initiate an informal investigation of the matter,
including PG&W's responsibility for the incidents referred to in the Emergency
Order. Although it is not presently possible to determine what action the PPUC
will ultimately take with respect to possible violations of law and the matters
raised by the Emergency Order, PG&W does not believe that compliance with, or
any liability that might result from such violations or the Emergency Order will
have a material adverse effect on its financial position or results of
operations.
Take-or-Pay Liabilities. FERC Order 500 issued in August, 1987, contains
regulations for the sharing by customers of interstate pipeline companies, such
as PG&W, of take-or-pay liabilities and associated contract renegotiation costs
incurred by those pipeline companies. Take-or-pay liabilities represented
amounts owed by pipeline companies to producers under the terms of contracts
which required that the pipeline companies pay for specified quantities of gas,
even though such gas was not actually taken. Order 500 provides that customers
of the pipeline companies may be charged as much as 75% of the take-or-pay
liabilities of the pipeline companies. In December, 1989, a Federal court ruled
that certain provisions of Order 500 relating to the allocation of take-or-pay
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costs were in violation of the Natural Gas Act. As a result, on November 1,
1990, the FERC issued Order 528 which includes guidelines for revised methods of
allocating take-or-pay costs. It is currently estimated that the provisions of
Orders 500 and 528 regarding the sharing of take-or-pay liabilities will result
in PG&W being charged as much as $18.1 million over a six-year period from 1988
through 1994. This figure, however, is subject to change based upon changes in
the take-or-pay obligations of PG&W's interstate pipeline suppliers and PG&W's
levels of transportation services and purchases from its interstate pipelines.
As of December 31, 1993, PG&W had been billed $17.2 million by its pipelines for
take-or-pay liabilities.
On April 27, 1990, PG&W filed an application with the PPUC seeking approval
to recover 90% ($13.9 million based on then current estimates) of its total
take-or-pay liabilities, and $250,000 of related carrying costs, through
billings to customers generally over a four-year period beginning June 1, 1990.
The PPUC approved this application, effective June 1, 1990. The surcharge by
which PG&W bills its customers for take-or-pay costs is to be adjusted annually
as of June 1, to reflect changes in PG&W's total estimated liability for take-
or-pay costs (which is currently projected to be as much as $18.1 million) and
the portion of such costs remaining to be recovered from its customers. In
accordance with the PPUC's Order, PG&W has agreed to absorb a portion of its
take-or-pay liabilities. The amount to be absorbed by PG&W and reflected as
cost of gas is currently estimated to approximate $1.8 million, substantially
all of which had been charged to expense as of December 31, 1993. As of
December 31, 1993, PG&W had billed $14.8 million of take-or-pay costs to its
customers, and as of such date had deferred $1.1 million of such costs,
including related carrying charges, for future billing to customers.
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 procedures include a process for the
reconciliation of actual gas costs incurred and actual revenues received and
also provide 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 these procedures, PG&W placed a purchased gas cost rate of
$3.74 per MCF in effect on December 1, 1993, and is required to file a proposed
purchased gas cost rate on or before June 1, 1994, to be effective December 1,
1994. It is not presently possible to estimate how this proposed rate will
compare to the current purchased gas cost rate of $3.74 per MCF, which is
scheduled to remain in effect through November 30, 1994. 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 either PG&W's or PEI's financial position or
results of operations.
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
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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 satisfaction of the PPUC the prudence of its gas supply costs and,
therefore, will be allowed to recover all such costs.
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 24,
1991, to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on August 4, 1991, increasing each of the above-referenced state
taxes. Effective October 22, 1993, such state tax adjustment surcharge was
rolled into PG&W's base gas rates, as ordered by the PPUC, and currently no
state tax adjustment surcharge is applied to PG&W's bills for gas service.
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
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 is a subsidiary of PEI, which was formed in 1974 when PG&W restructured
its operations by creating a parent company (PEI) with two groups of
subsidiaries: one group, including PG&W and its water subsidiaries, is regulated
by the PPUC; the other group is not so regulated.
-11-
PEI is a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to Section
3(a) of the PUHCA, from all the provisions of the PUHCA (except Section 9(a)(2)
thereof) and the rules and regulations promulgated thereunder.
PG&W's gas distribution and transportation activities are not subject to the
Natural Gas Act, as amended.
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, 1993, PG&W had approximately
131,400 water customers from which it derived total water revenues of $53.4
million during 1993. The following chart shows a breakdown of the types of
customers and the percentages of water revenues they generated in 1993:
[CAPTION]
Type of Customer % of Customers % of Revenues
[S] [C] [C]
Residential 91.6% 63.3%
Commercial 7.1 16.9
Industrial 0.3 9.2
Municipal and Other Users 1.0 10.6
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 43 active and
standby reservoirs and stream intakes located on extensive watershed lands. The
water supply can also 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 1993 was approximately 65.9 million gallons. As of December 31, 1993,
the quantity of water held in PG&W's reservoirs was approximately 18.1 billion
gallons or 91.6% 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.
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Filtration of Water Supplies. All of PG&W's water customers are supplied
with filtered water 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 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 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.
Main Replacement and Rehabilitation Program and Other Distribution System
Improvements. PG&W distributes water to customers through approximately 1,675
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 as hereafter explained. To further assure that all of
PG&W's water customers receive adequate quantities of aesthetically pleasing,
palatable water, which meets all federal and state drinking water regulations,
PG&W has initiated a program for the selective replacement and rehabilitation of
water mains and services and the elimination of dead-end lines. This program
involved the expenditure of $46.2 million during the period 1988 through 1993
and satisfied the terms of the settlement agreement between PG&W and the PPUC
relating to the PPUC's October 23, 1986, Show Cause Order, pursuant to which
PG&W agreed to install an average of 14 miles of mains per year during the
period 1988 through 1992 (which was accomplished) and to remove all lead-lined
services by the end of 1991 (which was accomplished).
PG&W estimates that approximately 30% of the water introduced to its
distribution system is lost through leakage or otherwise cannot be accounted for
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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.
For the years 1994 through 1996, PG&W intends to expend an average of $9.8
million per year 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 by June, 1994, in accordance with the PPUC's June 23, 1993, Order
allowing PG&W a conditional rate increase for the Scranton Water Rate Area. See
"-Management's Discussion and Analysis of Financial Condition and Results of
Operations-Rate Matters-Water Rate Filings." As part of the settlement
resolving certain disputed issues relating to such Order, PG&W has 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. This additional expenditure is included in the $9.8
million that PG&W is planning to spend annually on distribution system
improvements subsequent to 1993.
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, disinfected, and treated with chemicals to minimize
corrosion of the distribution system and customers' piping. Water samples are
taken at each of 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.
-14-
Construction Expenditures. PG&W's construction expenditures for water
utility plant in 1993 totaled $32.6 million, and are estimated to be $29.8
million for 1994. The lower level of capital expenditures estimated for 1994 is
primarily attributable to completion of the Ceasetown and Watres Water Treatment
Plants in 1993.
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 23, 1994:
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 (1)
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 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", i.e., meeting federal and state primary (health-related) and
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 receiving filtered water as of March,
1994, is approximately $340. PG&W anticipates that this cost will increase to
approximately $475 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
-15-
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 magnitude of future rate
increases is such that the PPUC, to reduce consumer "rate shock," may require
that any such rate increases be phased-in over a period of time. 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.
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 24,
1991, to reflect the effect of tax legislation enacted by the Commonwealth of
Pennsylvania on August 4, 1991, increasing each of the above-referenced state
taxes. Effective October 22, 1993, such state tax adjustment surcharge was
rolled into PG&W's base water rates, as ordered by the PPUC, and currently no
state tax adjustment surcharge is applied to PG&W's bills for gas service.
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.
Interest of Luzerne County in Possible Purchase of Certain of PG&W's Water
Operations. During 1993, Luzerne County, Pennsylvania (the "County"), expressed
interest in the possible formation of an authority for the purpose of purchasing
PG&W's water operations in the County, where approximately 55% of PG&W's water
customers reside, and PG&W provided certain data to the County for a preliminary
feasibility study. On February 4, 1994, the County announced that it was no
longer considering the feasibility of purchasing such water operations and that
it had dissolved the special committee formed for that purpose.
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ITEM 2. PROPERTIES
Gas. PG&W's gas system consists of approximately 2,159 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 mortgage liens securing
certain funded debt. These 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-eight supplemental indentures (collectively, the
"Indenture") from PG&W to Morgan Guaranty Trust Company of New York, as Trustee,
and a second mortgage lien pursuant to a Subordinate Open End Mortgage, Security
Agreement, Assignment of Leases, Rents and Profits, Financing Statement and
Fixture Filing, dated as of September 10, 1991 (the "Intercreditor Mortgage"),
from PG&W to Swiss Bank Corporation, New York Branch ("SBC"), as Collateral
Agent, which secures PG&W's obligations under the Letter of Credit Agreement
dated as of December 1, 1987, as amended, between PG&W and SBC.
Water. PG&W's water system consists principally of 43 active and standby
reservoirs and stream intakes, ten water treatment plants, various distribution
system storage tanks, approximately 1,675 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,
approximately 70% of which is used in connection with its water utility
operations.
From time to time, PG&W engages in the sale of non-watershed land and other
physical property. Proposed legislation in Pennsylvania, if enacted, would
require water utilities to obtain the PPUC's prior approval for the transfer of
any watershed land (as defined) and would require the PPUC to credit to
ratepayers 50% of the net proceeds (as defined) of any sale, lease or other
transfer of such land permitted by the PPUC. PG&W currently anticipates that it
will realize average gross profits of approximately $600,000 per year through
1996 from sales of non-watershed land and other physical property. Sales on
non-watershed lands and other physical property would not be subject to the
proposed legislation; however, there can be no assurance that the proceeds
ultimately received will inure exclusively to the benefits of PEI's
shareholders.
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 mortgage liens
securing certain funded debt. These 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, December 3, 1992, and April 5, 1993, between PG&W and the
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Pennsylvania Infrastructure Investment Authority, which were primarily used to
finance the construction of certain water facilities. These properties are also
subject to a second or third mortgage lien (depending on whether they are
subject to the PENNVEST Mortgage) pursuant to the Intercreditor Mortgage.
-18-
ITEM 3. LEGAL PROCEEDINGS
Construction Litigation
On April 22, 1992, a complaint was filed in the Court of Common Pleas of
Lackawanna County, Pennsylvania, by the Quandel Group Inc. ("Quandel") against
PG&W in connection with the construction of PG&W's Brownell Water Treatment
Plant. In its complaint, Quandel, the general contractor for the project, made
various allegations and sought approximately $1.3 million in damages, plus
interest. PG&W answered the complaint and also filed a counterclaim against
Quandel seeking approximately $1.6 million in damages and expenses for failure
of Quandel to complete construction of the Brownell Water Treatment Plant in a
timely and proper manner. Also, PG&W joined Gannett-Fleming Water Resources
Engineers, Inc. (Gannett-Fleming), the designer of the project, as an additional
defendant in this action. On January 25, 1994, Quandel and PG&W reached an
agreement settling Quandel's claim against PG&W and PG&W's counterclaim against
Quandel on terms that had no material impact on PG&W's results of operations or
financial position. Additionally, as part of this settlement, Quandel agreed to
indemnify PG&W for any liability arising out of Quandel's claim against
Gannett-Fleming in this action, which is still pending, or otherwise relating to
the construction of the Brownell Water Treatment Plant.
-19-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1993, there were no matters submitted to a vote
of security holders of the registrant through the solicitation of proxies or
otherwise.
-20-
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, 1992 and 1993, were as follows:
[CAPTION]
1992 1993
[S] [C] [C]
First quarter $ .705 $ .7100
Second quarter .670 .7100
Third quarter .705 .7100
Fourth quarter .460 .6925
Total $ 2.540 $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, 1991, 1992 and 1993.
Percentage of Operating Revenues
Year Ended December 31,
1991 1992 1993
Operating Revenues:
Gas 75.8% 74.6% 74.2%
Water 24.2 25.4 25.8
Total operating revenues 100.0 100.0 100.0
Operating Expenses:
Cost of gas 42.6 40.5 41.9
Other operation expenses 19.9 19.8 18.8
Maintenance and depreciation 10.6 10.2 10.5
Deferred treatment plant costs, net (0.4) (0.1) (0.7)
Income and other taxes 10.0 12.0 12.1
Total operating expenses 82.7 82.4 82.6
Operating Income 17.3 17.6 17.4
Other Income, Net 0.6 - 0.3
Interest Charges 11.8 10.9 9.9
Dividends on Preferred Stock 2.3 2.6 3.1
Earnings Applicable to Common Stock 3.8% 4.1% 4.7%
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% ($9.5 million on an annual basis) effective December 1, 1992, and
19.0% ($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.
* 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.
-22-
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 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 $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
$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 deferred treatment
plant costs.
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 (gas operating revenues less the cost of gas) 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 net deferred treatment plant costs during
1993, as more fully discussed below.
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 are retroactive to January 1, 1993,
increased PG&W's income tax expense by approximately $124,000 for the year 1993.
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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 allowance for funds used during
construction ("AFUDC") and of the deferred treatment plant carrying charges that
were recorded during 1993. See "-Other Income, Net."
Deferred Treatment Plant Costs 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 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 $5.1 million of costs so 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.
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
July 28, 1993, PG&W has 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, 1993, a total of $4.6 million of costs, consisting of
$424,000 of operating expenses and $745,000 of carrying charges relative to the
Crystal Lake Water Treatment Plant and related facilities and $1.7 million of
expenses and $1.7 million of carrying charges relative to the Ceasetown and
Watres Water Treatment 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 the costs relative to the Crystal Lake,
Ceasetown and Watres Water Treatment Plants and related facilities that have
been deferred pursuant to such Orders 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 $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%)
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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 a $734,000 allowance for equity funds
used during construction and an approximate $821,000 equity component of
deferred treatment plant carrying charges. In prior years, PG&W had calculated
both the AFUDC and deferred treatment plant carrying charges based on the
interest rates of its bank borrowings and other relevant indebtedness. This
increase 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 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 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.
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,
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1993, June 23, 1993, and December 16, 1993, and the increase in 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 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 Pennsylvania Enterprises, Inc.
("PEI"), the parent company of PG&W, on October 27, 1993.
o Year ended December 31, 1992, compared with year ended December 31, 1991
Operating Revenues. Operating revenues of PG&W increased by $9.1 million
(5.0%) from $182.8 million for 1991 to $191.9 million for 1992.
Gas operating revenues increased by $4.7 million (3.4%) from $138.5 million
for 1991 to $143.2 million for 1992, primarily as a result of increased sales to
residential and commercial heating customers. The effect on revenues of these
increased sales was partially offset by a price decrease averaging 14.8% ($20.8
million on an annual basis) effective December 1, 1991, due to decreased costs
of purchased gas. Although heating degree days were 3.1% lower than normal
during 1992, they were 10.7% higher than in 1991. Largely because of the colder
weather and the addition of approximately 2,800 new customers, total gas
deliveries for the year were 8.0% higher than in 1991.
Water operating revenues increased by $4.4 million (9.9%) from $44.3 million
for 1991 to $48.7 million for 1992. This increase was primarily the result of
an approximate 110.0% rate increase which the PPUC allowed PG&W effective March
23, 1991, for customers in the Scranton Water Rate Area, and an approximate
46.0% rate increase which the PPUC allowed PG&W effective January 30, 1992, for
customers in the Spring Brook Water Rate Area served exclusively by the Nesbitt
Water Treatment Plant. These increases were designed to produce additional
annual revenue of $16.9 million, as more fully explained below under "-Rate
Matters-Water Rate Filings."
Operating Expenses. Operating expenses, including depreciation and income
taxes, increased $6.9 million (4.6%) from $151.1 million for 1991 to $158.0
million for 1992. As a percentage of operating revenues, total operating
expenses decreased from 82.7% during 1991 to 82.4% during 1992. Operating
expenses related to PG&W's gas utility operations increased by $3.9 million
(3.3%) from $120.0 million in 1991 to $124.0 million in 1992, primarily as a
result of increased operating costs, depreciation and income taxes. Operating
expenses related to PG&W's water utility operations increased by $3.0 million
(9.6%) from $31.0 million to $34.0 million in 1992, primarily as a result of
increased operating costs, depreciation and income taxes.
The cost of gas decreased by $81,000 (0.1%) from $77.8 million for 1991 to
$77.7 million for 1992. This slight reduction was the result of significantly
decreased costs for purchased gas, the effect of which was largely offset by a
21.6% increase (5.2 billion cubic feet) in the volume of gas sold during 1992,
compared to 1991. This increased volume was attributable to colder weather, the
switching of certain industrial customers from transportation to sales service
and the addition of new customers. Exclusive of charges related to take-or-pay
costs absorbed by PG&W, which totaled $554,000 in 1991 and $42,000 in 1992, the
gross margin on gas operations increased $4.3 million or 7.1% in 1992. This
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increase was primarily the result of increased sales to residential and
commercial heating customers because of colder weather.
Other than the cost of gas and income taxes, operating expenses increased by
$4.0 million (6.0%) from $67.9 million for 1991 to $71.9 million for 1992. This
increase was largely attributable to a $1.9 million increase in other taxes,
principally as a result of tax rate increases enacted by the Commonwealth of
Pennsylvania in August, 1991, an increase of $586,000 in the provisions for
self-insurance relating to liability to third parties and for workers'
compensation, and a $1.1 million increase in depreciation, primarily as a result
of capital additions and the change in March, 1991, from a 4.0% compound
interest to a straight-line method of depreciation with respect to certain water
plant. Also contributing to the increase was a $370,000 decrease in deferred
treatment plant costs during 1992. See "-Deferred Treatment Plant Costs and
Carrying Charges."
Income taxes increased by $2.9 million (55.0%) from $5.4 million in 1991 to
$8.3 million in 1992 due to a higher level of income before income taxes (for
this purpose, operating income net of interest charges) and an increase in the
state income tax rate enacted by the Commonwealth of Pennsylvania in August,
1991.
Deferred Treatment Plant Costs and Carrying Charges. As discussed above,
PG&W deferred all operating expenses, including depreciation and property taxes,
and the carrying charges relative to the four new Scranton Area water treatment
plants and related facilities and the Crystal Lake Water Treatment Plant and
related facilities. The deferral of such costs resulted in an increase in
earnings for the years ended December 31, 1991 and 1992, of $923,000 and
$437,000, respectively, net of related income taxes. As of December 31, 1992, a
total of $5.9 million of costs, consisting of $2.3 million of operating expenses
and $2.8 million of carrying charges relative to the Scranton Area water
treatment plants and related facilities, and $294,000 of operating expenses and
$461,000 of carrying charges relative to the Crystal Lake Water Treatment Plant
and related facilities, had been so deferred pursuant to the PPUC's Orders
permitting the deferral of these costs.
Operating Income. As a result of the above, total operating income
increased by $2.2 million (7.0%) from $31.7 million for 1991 to $33.9 million
for 1992, and increased as a percentage of total operating revenues from 17.3%
in 1991 to 17.6% in 1992. Operating income from gas utility operations
increased $821,000 (4.5%) from $18.4 million in 1991 to $19.3 million in 1992,
due primarily to a $4.8 million increase in gross margin, the effect of which
was partially offset by increases in other operations expenses, depreciation,
and income and gross receipts taxes. Operating income from water utility
operations increased $1.4 million (10.6%) from $13.2 million in 1991 to $14.7
million in 1992, due primarily to the $15.0 million increase in annual revenue
which the PPUC allowed for customers in PG&W's Scranton Water Rate Area
effective March 23, 1991, and the $1.9 million increase in annual revenue which
it allowed effective January 30, 1992, for customers in the Spring Brook Water
Rate Area served exclusively by the Nesbitt Water Treatment Plant. These
increased revenues were partially offset by increases in other operations
expenses, depreciation, and property and income taxes.
Other Income, Net and Interest Charges. Other income, net decreased from
$1.1 million in 1991 to $30,000 in 1992, primarily because (in each case, net of
the related income taxes if included in other income, net) of a $252,000
reduction in interest income from the temporary investment of funds by PG&W,
$127,000 of interest expense associated with the defeasance on September 15,
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1992, of the Luzerne County Industrial Development Authority (the "Authority")
Exempt Facilities Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water
Company Project) (the "1987 Series A Bonds") that were redeemed on October 1,
1992 (see "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock
Financings"), $151,000 in civil penalties relative to the extended completion
dates of PG&W's Ceasetown and Watres Water Treatment Plants and a $59,000
reduction in income from the sale of non-watershed land and other physical
property.
Interest charges decreased by $710,000 (3.3%) from $21.7 million for 1991 to
$21.0 million for 1992. This decrease was largely attributable to a $1.2
million (226.5%) increase in AFUDC in 1992 to $1.8 million from $543,000 in
1991. The increase in AFUDC was due to a greater amount of construction work-
in-progress, primarily as a result of the Crystal Lake Water Treatment Plant,
which was completed in July, 1992, the Ceasetown Water Treatment Plant which was
completed in late March, 1993, and the Watres Water Treatment Plant, which was
completed in late September, 1993. Partially offsetting the effect of the
increased AFUDC was a lower level of deferred treatment plant interest in 1992.
Dividends on Preferred Stock. Dividends on preferred stock increased
$829,000 (19.6%) from $4.2 million in 1991, to $5.1 million in 1992, as a result
of the issuance by PG&W of its 9% Cumulative Preferred Stock on August 18, 1992.
See "-Liquidity and Capital Resources-Long-Term Debt and Capital Stock
Financings."
Earnings Applicable to Common Stock. Earnings applicable to common stock
increased $1.0 million (14.5%) from $6.9 million ($1.87 per share) for the year
ended December 31, 1991, to $7.9 million ($2.02 per share) for the year ended
December 31, 1992. The increased earnings in 1992 were the result of the
matters discussed above, primarily the increase in gross margin on gas
operations resulting from higher levels of sales to residential and commercial
heating customers, as well as the increase in water operating revenues resulting
from the rate increases which the PPUC allowed PG&W effective March 23, 1991,
and January 30, 1992.
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 1991, or which are currently pending.
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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 1991, 1992 and 1993 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, 1991 $3.20 $2.46 $(20,800,000)
December 1, 1992 2.46 2.79 9,500,000
December 1, 1993 2.79 3.74 28,800,000
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 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 April 27, 1990, PG&W filed an application with the PPUC seeking approval
to recover 90% ($13.9 million based on then current estimates) of its total
take-or-pay liabilities, and $250,000 of related carrying costs, through
billings to customers generally over a four-year period beginning June 1, 1990.
The PPUC approved this application effective June 1, 1990. In connection with
this approval, PG&W agreed to absorb a portion of its take-or-pay liabilities.
The amount to be so absorbed by PG&W is currently estimated to be $1.8 million,
substantially all of which had been charged to expense as of December 31, 1993.
As of December 31, 1993, PG&W had billed $14.8 million of take-or-pay costs to
its customers and had deferred $1.1 million of such costs, including related
carrying charges, for future billing to customers.
Under terms of the PPUC's Order in respect of take-or-pay obligations, the
surcharge by which PG&W bills its customers for take-or-pay costs is adjusted
annually as of June 1 to reflect changes in PG&W's total estimated liability for
take-or-pay costs (which is currently projected to be as much as $18.1 million)
and the portion of such costs remaining to be recovered from its customers. In
accordance therewith, the PPUC approved an adjustment in PG&W's take-or-pay
surcharge effective June 1, 1993, based on the estimated $3.5 million of take-
or-pay costs that remained to be collected from PG&W's customers as of such
date.
On October 15, 1993, the PPUC adopted an annual purchased gas cost order
(the "PGC Order") regarding recovery of FERC Order 636 transition costs. The
PGC Order states the PPUC believes that the recovery of Account 191 and New
Facility Costs are subject to recovery through the annual PGC rate filing made
with the PPUC by PG&W and other similar local gas distribution companies. The
PGC Order also indicates that while Gas Supply Realignment and Stranded 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 states
that all such filings will be evaluated on a case-by-case basis. As of February
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1, 1994, PG&W began to recover the Account 191 and New Facility 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 twelve-month period extending through October 31, 1994, will aggregate
$1.0 million, of which $290,000 had been billed to PG&W as of December 31, 1993.
Additionally, PG&W is currently seeking the full recovery of the Gas Supply
Realignment and Stranded Costs that it estimates it will be billed by its
interstate pipelines through the filing of a tariff pursuant to the surcharge
provisions of the Code. It is currently estimated that these costs, which will
be billed to PG&W generally over a three-year period extending through the
fourth quarter of 1996 will range between $11.0 million and $13.0 million, of
which $730,000 had been billed to PG&W as of December 31, 1993. Based on the
provisions of the PGC Order, PG&W believes it will be allowed the full recovery
of all transition costs billed to it pursuant to Order 636.
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 notwithstanding 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 water service meeting or
exceeding the PPUC's standards for quantity and quality of service to its
customers receiving filtered water based on testing performed by PG&W and an
independent laboratory of water at certain 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.
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 receiving filtered water as of March,
1994, is approximately $340. PG&W anticipates that this cost will increase to
approximately $475 in the latter part of this decade, at which time PG&W expects
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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 magnitude of future rate increases is
such that the PPUC, to reduce consumer "rate shock," may require that any such
rate increases be phased-in over a period of time. 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.
The denial of adequate rate relief in future applications would require PG&W
to take various actions to restrict its capital expenditures and operating
expenses and possibly reduce dividends on its common stock in order to conserve
cash resources and minimize the reduction in earnings that such denial would
otherwise cause. See "-Liquidity and Capital Resources-Failure to Obtain
Adequate Rate Relief" for a discussion of the adverse effects on PG&W and PEI if
adequate rate relief were denied.
Scranton Area. On June 8, 1990, PG&W filed an application with the PPUC
seeking a water rate increase, designed to produce $25.5 million in additional
annual revenue. This rate increase request involved the approximately 54,700
customers at such date who would be furnished water from the one previously
existing and the four new water treatment plants in the Scranton Water Rate
Area. In December, 1990, PG&W and certain parties filing objections to the rate
increase request reached a settlement that provided for an approximate 110% rate
increase 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." The settlement provided
that $10.2 million of the increased revenue (an approximate 75% increase in
rates) was to be realized through an immediate rate increase and that the
remaining $4.8 million of the increased revenue (an additional 35% increase in
rates) was to be realized through another rate increase one year later (at the
beginning of year two of the phase-in period). The settlement also specified
that the $4.8 million in revenue that would be deferred during the first year of
the phase-in period was to be collected from customers in the form of a
surcharge in years two through ten of the phase-in period. Finally, PG&W also
agreed that it would not file for another general rate increase for the Scranton
Water Rate Area prior to six months after the effective date of the second phase
of the rate increase. By Order adopted March 22, 1991, the PPUC approved the
settlement.
In accordance with the accounting requirements for a qualified phase-in plan
as prescribed by FASB Statement 92, PG&W recorded a $1.2 million nonrecurring
charge to earnings as of December 31, 1990, representing the estimated net
present value of carrying charges with respect to the $4.8 million of revenue to
be deferred in the first year of the phase-in period. This charge was required
because the settlement did not provide for the billing of any carrying charges
on such deferred revenue. Additionally, in accordance with the provisions of
FASB Statement 92, PG&W commenced recording the entire $15.0 million increase in
annual revenue allowed by the PPUC as additional revenue beginning March 23,
1991. However, pursuant to the terms of the settlement, PG&W deferred the
billing of $4.7 million of the increased revenue recorded during the first year
of the phase-in period (i.e., the period March 23, 1991, through March 22,
1992). The amount so deferred was $100,000 less than the $4.8 million
originally estimated because of slightly lower than anticipated consumption.
Effective March 23, 1992, PG&W began to bill the $4.7 million that had been so
deferred by means of the surcharge that will be in effect in years two through
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ten of the phase-in period, and as of December 31, 1993, $871,000 had been so
billed to its Scranton Water Rate Area customers.
Nesbitt Service Area. On April 30, 1991, PG&W filed an application with the
PPUC seeking a water rate increase, designed to produce $2.6 million in
additional annual revenue. This rate increase request involved the
approximately 14,300 customers in the Spring Brook Water Rate Area at such date
who were served exclusively by the Nesbitt Water Treatment Plant. PG&W and
certain parties filing objections to the rate increase request reached a
settlement that provided for a $1.9 million increase in annual revenue which the
PPUC approved effective January 30, 1992. However, on February 27, 1992, the
PPUC granted a petition of the Office of Consumer Advocate (the "OCA"), a
complainant in the rate proceeding and a signatory to the settlement, for
reconsideration and clarification of the PPUC Order which approved the
settlement. As a result, the $1.9 million rate increase remains subject to
further PPUC and possible appellate review. Although it cannot be certain, PG&W
believes that the $1.9 million increase will not be rescinded in whole or in
part or affected in any other way as a result of the OCA's petition, and as of
March 23, 1994, no further action had been taken by the PPUC with respect to the
OCA's petition.
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 a qualified phase-in plan pursuant to FASB Statement 92. The settlement
further 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 the revenue deferred in accordance with the phase-in plan.
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, 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. On November 13, 1992, the PPUC suspended this
rate increase for seven months (until June 24, 1993) in order to investigate the
reasonableness of the proposed rates. 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]
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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 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 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, 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
June 3, 1993, the PPUC suspended this rate increase for seven months (until
January 28, 1994) by operation of law in order to institute an investigation
into the reasonableness of the proposed rates. 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
now 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
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accordance with the provisions of FASB 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.
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
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. See "-Construction Expenditures and Related
Financing" and "-Failure to Obtain Adequate Rate Relief." 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. This is a problem faced by all regulated utilities, and one that
had been particularly acute with respect to PG&W because of the denial by the
PPUC in 1986 and again in 1988, as a result of water quality issues, of water
rate increases requested by PG&W. Nonetheless, PG&W was able to generate and
raise sufficient capital resources despite these denials, and 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 it has been granted by the
PPUC since 1991 with respect to customers being supplied with filtered water.
PG&W also believes that additional rate increases will be allowed by the PPUC
for its approximately 131,400 water customers, all of whom are now receiving
filtered water, 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."
If PG&W is denied future rate relief, it would be necessary, depending upon
the amount so denied, for PEI and PG&W to take various actions to reduce cash
expenditures. For a discussion of the actions PEI and PG&W would take to reduce
cash expenditures, see "-Failure to Obtain Adequate Rate Relief." Such measures
would continue until PG&W was allowed sufficient rate relief to increase its
earnings to a level that would permit it to raise additional debt and equity
capital. Concurrently with taking actions to reduce cash expenditures, PG&W
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would file appropriate appeals with the Commonwealth Court of Pennsylvania,
alleging that, contrary to law, it had been denied an opportunity to earn a fair
rate of return on its prudent investment in used and useful utility property
devoted to public service.
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). The approximate amount of funds required
for these purposes, net of the amounts provided to PEI by PG&W for use of PEI's
federal income tax credits, are expected to total $14.5 million in 1994, $15.2
million in 1995 and $17.5 million in 1996. During 1994, $3.7 million of the
funds required by PEI for these purposes will be provided through the repayment
by PG&W of its $3.7 million demand loan from PEI.
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 $5.7 million of unsecured debt due on demand or
within one year from issuance outstanding as of December 31, 1993, which
included the $3.7 million demand loan from PEI.
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.
PG&W presently has sufficient funding for its working capital needs, as well
as its construction program, through at least the third quarter of 1994, and
believes it will be able to raise such funds as are required for construction
expenditures, refinancings and other working capital requirements beyond the
third quarter of 1994.
PG&W believes that based on its current financial projections, it will be
able to achieve sufficient levels of earnings during 1994, as a result of
various cost control measures and water rate increases which have already been
granted, to enable it to meet its interest and fixed charge coverage
requirements and to give it the borrowing and other financing capability
necessary for its working capital needs and planned construction program.
However, if PG&W is not granted additional water rate increases in future years,
it may be necessary for PEI and PG&W to take various actions at such time to
reduce expenditures in order to satisfy PG&W's interest and fixed charge
coverage requirements and to maintain sufficient liquidity, and thereby lessen
the amount of debt and equity capital which must be raised. See "-Failure to
Obtain Adequate Rate Relief."
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
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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 $67.0 million
of unsecured revolving bank credit. Specifically, on April 19, 1993, PG&W
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 April 30, 1995, 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 3/8 of 1% per
annum on the average daily amount of the unused portion of the available funds.
As of March 23, 1994, $41.0 million of borrowings were outstanding under the
Credit Agreement. PG&W also has three short-term bank lines of credit with an
aggregate borrowing capacity of $7.0 million which provide for borrowings at
interest rates generally less than prime and mature on April 30, 1994. As of
March 23, 1994, PG&W had no borrowings outstanding under the short-term bank
lines of credit.
Prior to their maturity on April 30, 1994, PG&W will seek to renew the $7.0
million short-term bank lines of credit. PG&W believes that based on its
present earnings and financing capabilities, capitalization and banking
arrangements and relationships it will be successful in renewing the $7.0
million short-term bank lines of credit.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1993, $38.7 million of PG&W preferred stock and long-term
debt was required to be repaid within twelve months. Such amount included a
note in the principal amount of $30.0 million, that is subject to repayment on
December 1, 1994, issued in 1987 to PNC Bank (formerly Northeastern Bank of
Pennsylvania) as trustee (the "IDA Trustee") in connection with the issuance by
the Luzerne County Industrial Development Authority (the "Authority") of $30.0
million of its Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas
and Water Company Project) due 2017 (the "1987 Series B Bonds"). Also, such
amount included approximately $7.0 million of high interest rate water facility
loans of PG&W having a weighted annual interest rate of 9.33% which were repaid
by PG&W on January 31, 1994, with bank borrowings.
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 1992.
On January 30, 1992, PG&W received a total of $22.0 million from PEI
representing repayment of a $15.0 million intercompany advance made on September
12, 1991, and a $7.0 million contribution which was treated as an intercompany
advance pending approval by the PPUC of the issuance of shares of common stock
relative to such contribution. PG&W utilized such funds to repay a portion of
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its bank borrowings which had been incurred primarily to finance construction
expenditures.
On June 19, 1992, PG&W issued to PEI 137,143 shares of its common stock for
aggregate net proceeds of approximately $5.5 million. On the same date, PG&W
also received $3.7 million from PEI in the form of a demand loan. PG&W utilized
such funds, totaling approximately $9.2 million, to repay bank borrowings which
had been incurred primarily to finance construction expenditures. The interest
rate on this demand loan (which is to be repaid during 1994) is currently 3.41%
(1% less than the interest rate PG&W is required to pay on borrowings under the
Credit Agreement).
On August 18, 1992, PG&W issued 250,000 shares of its 9% Cumulative
Preferred Stock, par value $100 per share, the net proceeds of which
(approximately $23.6 million) were used to repay $16.1 million of bank
borrowings and for working capital purposes.
On September 15, 1992, the Authority issued $50.0 million of its Exempt
Facilities Revenue Refunding Bonds, 1992 Series A (Pennsylvania Gas and Water
Company Project) (the "1992 Series A Bonds") and, in connection therewith, PG&W
issued $50.0 million of its 7.20% First Mortgage Bonds to the IDA Trustee for
the 1992 Series A Bonds as security for the 1992 Series A Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7.20% First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on the 1992 Series A Bonds. The proceeds from the issuance of the
1992 Series A Bonds, along with additional funds provided by PG&W, were
deposited with the IDA Trustee for the Authority's $50.0 million Exempt
Facilities Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water Company
Project) (the "1987 Series A Bonds") on September 15, 1992, for use in redeeming
the 1987 Series A Bonds on October 1, 1992. The deposit of such funds acted to
discharge all of PG&W's obligations with respect to its 8-1/2%, 1987 Series A
Note in the principal amount of $50.0 million which had been issued to the IDA
Trustee in connection with the 1987 Series A Bonds and which was subject to
repayment on October 1, 1992.
On December 14, 1992, PG&W issued $30.0 million of its 8.375% Series First
Mortgage Bonds due 2002. The proceeds from the issuance of these bonds were
used to repay approximately $28.7 million of bank borrowings, thereby providing
PG&W with additional borrowing capacity for future capital expenditures and
other working capital needs.
On December 22, 1992, the Authority issued $30.0 million of its 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% First Mortgage Bonds to the IDA Trustee for the 1992
Series B Bonds, as security for the 1992 Series B Bonds. PG&W will make
payments to the IDA Trustee pursuant to the 7.125% First Mortgage Bonds in
amounts sufficient and at the times necessary to pay the debt service
requirements on 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.
During 1992 and 1993, $2.0 million and $15.9 million, respectively, of the
proceeds from the 1992 Series A Bonds were so utilized. As of December 31,
1993, $12.9 million of the proceeds (including investment income of $731,000)
was held by the IDA Trustee and was available to finance the future construction
of qualified water facilities for PG&W.
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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 and also borrowed $1.6
million 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
$1.0 million remained available as of December 31, 1993, 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.
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 November 29, 1993, S&P said PG&W's
outlook was "stable" and that "continued, though slow, improvements in PG&W's
financial profile are expected as the last [water] treatment plant is completed
in 1993 and adequate water rate relief is granted." However, S&P noted that
"significant capital expenditures and an excessive dividend payout...will
continue to challenge management over the short 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
either S&P or Moody's would result in the interest rate charged on borrowings
under the Credit Agreement being increased by one half percent per annum (which
increase could cost PG&W as much as $300,000 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
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.
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During 1991, 1992 and 1993, PG&W realized $445,000, $385,000 and $465,000,
respectively, from the issuance of common stock to PEI in connection with PEI's
Dividend Reinvestment and Stock Purchase Plan.
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant during the period 1991
through 1993 were as follows:
[CAPTION]
Water Gas
Year Facilities Facilities Total
(Thousands of Dollars)
[S] [C] [C] [C]
1991 $ 19,155 $ 9,359 $ 28,514
1992 44,352 12,669 57,021
1993 32,575 13,325 45,900
$ 96,082 * $ 35,353 $131,435
* Includes $11.7 million, $30.5 million and $20.7 million expended in
1991, 1992 and 1993, 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.
The construction of water facilities and gas facilities by PG&W during 1993
was largely 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 1994 through 1996 will
total $136.3 million, of which $84.3 million will involve the construction of
water facilities and $52.0 million will involve the construction of gas
facilities. PG&W anticipates that a portion of such water facilities will be
financed with the $12.9 million of proceeds from the issuance of the Authority's
1992 Series B Bonds held by the IDA Trustee as of December 31, 1993, for the
benefit of PG&W and that the balance of its expenditures for water facilities,
as well as its expenditures for gas facilities, will be financed with
approximately $51.0 million from the issuance of another series of first
mortgage bonds in 1995 and other loans in 1994, $32.0 million in late 1995 from
the sale of common stock to PEI and $40.4 million of 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.
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, reducing or eliminating dividends on its
common stock, thereby resulting in a reduction or elimination of PEI's common
stock dividends, curtailing or deferring work on various capital projects,
considering the sale of selected assets and reducing its operating expenses, all
of which could negatively impact the quality and reliability of services
rendered to the public by PG&W.
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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.
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
presently records a liability for benefits of this nature, and thus the
provisions of FASB Statement 112, which PG&W adopted effective January 1, 1994,
are not expected to have a material impact on its financial position or results
of operations.
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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 42 through 71 of this Form 10-K.
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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, 1993 and 1992, 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, 1993. 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, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 1993
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 schedules listed in Item 14 are the
responsibility of the Company's management and are presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state 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 & CO.
New York, N.Y.
March 4, 1994
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PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
Year Ended December 31,
1991 1992 1993
(Thousands of Dollars)
OPERATING REVENUES:
Gas $ 138,465 $ 143,227 $ 153,325
Water 44,285 48,651 53,363
Total operating revenues 182,750 191,878 206,688
OPERATING EXPENSES:
Cost of gas 77,801 77,720 86,557
Other operation expenses 36,334 37,971 38,859
Maintenance 9,634 8,677 9,341
Depreciation 9,779 10,856 12,299
Deferred treatment plant costs, net
(Note 2) (664) (294) (1,532)
Income taxes 5,359 8,305 8,989
Other taxes 12,814 14,730 16,019
Total operating expenses 151,057 157,965 170,532
OPERATING INCOME 31,693 33,913 36,156
OTHER INCOME, NET (Note 3) 1,134 30 560
INCOME BEFORE INTEREST CHARGES 32,827 33,943 36,716
INTEREST CHARGES:
Interest on long-term debt 18,536 18,929 20,515
Other interest 4,633 4,292 2,589
Allowance for borrowed funds used
during construction (543) (1,773) (1,482)
Deferred treatment plant carrying
charges (Note 2) (929) (461) (1,207)
Total interest charges 21,697 20,987 20,415
NET INCOME 11,130 12,956 16,301
DIVIDENDS ON PREFERRED STOCK 4,236 5,065 6,462
EARNINGS APPLICABLE TO COMMON STOCK $ 6,894 $ 7,891 $ 9,839
EARNINGS PER SHARE OF COMMON STOCK $ 1.87 $ 2.02 $ 2.36
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 3,687,736 3,908,351 4,176,087
The accompanying notes are an integral part of the financial statements.
-43-
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
December 31,
1992 1993
(Thousands of Dollars)
ASSETS
UTILITY PLANT:
Gas plant, at original cost less
acquisition adjustments of $386,000 $234,708 $245,969
Water plant, at original cost plus
acquisition adjustments of $14,236,000, and
$14,577,000, respectively 329,809 360,996
Common plant, at original cost 24,525 26,212
589,042 633,177
Accumulated depreciation (76,743) (86,287)
512,299 546,890
OTHER PROPERTY AND INVESTMENTS:
Restricted funds held by trustee (Note 6) 28,020 12,853
Other 3,049 3,291
31,069 16,144
CURRENT ASSETS:
Cash and cash equivalents 570 2,714
Accounts receivable -
Customers 22,230 20,533
Others 716 1,258
Reserve for uncollectible accounts (1,475) (1,223)
Accrued utility revenues 12,547 16,123
Materials and supplies, at average cost 3,520 3,549
Gas held by suppliers, at average cost 21,612 26,650
Deferred cost of gas & supplier refunds, net - 12,752
Prepaid expenses and other 1,963 2,026
61,683 84,382
DEFERRED CHARGES:
Deferred taxes collectible - 51,382
Unamortized debt expense 5,580 5,745
Deferred treatment plant costs
and interest (Note 2) 6,569 10,129
Deferred water utility billings (Note 2) 3,795 3,885
Other 8,877 7,751
24,821 78,892
TOTAL ASSETS $629,872 $726,308
The accompanying notes are an integral part of the financial statements.
-44-
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
December 31,
1992 1993
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements on
page 47):
Common shareholder's investment (Notes 4 and 7) $158,098 $188,011
Preferred stock (Note 5) -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 41,920 31,840
Long-term debt (Note 6) 245,877 266,259
479,510 519,725
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption (Notes 5, 6 and 8) 39,085 38,664
Notes payable -
Bank (Note 8) - 2,000
Parent 3,680 3,680
Accounts payable -
Suppliers 23,944 22,401
Affiliates, net 613 1,888
Deferred cost of gas and supplier refunds, net 555 -
Accrued general business and realty taxes 3,362 3,574
Accrued income taxes 4,007 4,984
Accrued interest 5,200 4,042
Other 1,620 2,440
82,066 83,673
DEFERRED CREDITS:
Deferred income taxes 33,816 87,005
Unamortized investment tax credits 9,439 9,183
Advances for construction 10,747 10,985
Contributions in aid of construction 8,761 9,810
Operating reserves 1,565 1,863
Other 3,968 4,064
68,296 122,910
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES $629,872 $726,308
The accompanying notes are an integral part of the financial statements.
-45-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
Year Ended December 31,
1991 1992 1993
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 11,130 $ 12,956 $ 16,301
Effects of noncash charges (credits) to income -
Depreciation 9,792 10,875 12,324
Deferred income taxes, net 2,693 2,048 1,678
Provisions for self insurance 622 1,196 1,800
Deferred treatment plant costs and carrying
charges, net (1,593) (756) (3,560)
Allowance for equity funds used during
construction - - (734)
Deferred water utility billings (3,706) (969) (582)
Other, net 2,410 2,812 4,540
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 938 (2,517) (2,159)
Gas held by suppliers (626) (1,586) (5,038)
Accounts payable 1,068 2,377 (515)
Deferred cost of gas and supplier refunds, net 7,027 (11,429) (13,307)
Other current assets and liabilities, net 835 2,794 754
Other operating items, net (1,578) (2,326) (3,251)
Net cash provided by operating activities 29,012 15,475 8,251
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (29,144) (58,324) (46,526)
Other, net 1,984 2,030 1,493
Net cash used for investing activities (27,160) (56,294) (45,033)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 445 12,905 32,366
Issuance of preferred stock - 23,615 -
Redemption of preferred stock (80) (80) (10,080)
Dividends on common and preferred stock (13,085) (14,940) (18,398)
Issuance of long-term debt 50,315 110,000 20,634
Repayment of long-term debt (7,929) (57,371) (31,485)
Issuance of note payable to parent - 3,680 -
Intercompany advance (15,000) 15,000 -
Restricted funds held by trustee (Note 6) - (27,994) 15,868
Net increase (decrease) in bank borrowings (16,526) (20,167) 32,247
Other, net (1,347) (3,917) (2,226)
Net cash provided by (used for) financing
activities (3,207) 40,731 38,926
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,355) (88) 2,144
CASH AT BEGINNING OF YEAR 2,013 658 570
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 658 $ 570 $ 2,714
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $ 17,845 $ 16,972 $ 21,092
Income taxes $ 1,475 $ 3,667 $ 6,790
-46-
The accompanying notes are an integral part of the financial statements.
-47-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CAPITALIZATION
December 31,
1992 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 - 4,018,730 shares and
4,868,718 shares, respectively $ 40,187 $ 48,687
Additional paid-in capital 48,776 72,642
Retained earnings 69,135 66,682
Total common shareholder's investment 158,098 33.0% 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 7.0% 33,615 6.5%
Subject to mandatory redemption -
5.75% cumulative preferred, 20,000 and
19,200 shares outstanding, respectively 2,000 1,920
8.90% cumulative preferred, 150,000 shares
outstanding 15,000 15,000
9.50% 1988 series cumulative preferred,
250,000 and 150,000 shares outstanding,
respectively 25,000 15,000
Less current redemption requirements (80) (80)
Total preferred stock subject to
mandatory redemption 41,920 8.7% 31,840 6.1%
LONG-TERM DEBT (Note 6):
First mortgage bonds 200,015 207,745
Notes 67,253 77,845
Other 17,614 19,253
Less current maturities and sinking
fund requirements (39,005) (38,584)
Total long-term debt 245,877 51.3% 266,259 51.2%
TOTAL CAPITALIZATION $479,510 100.0% $519,725 100.0%
The accompanying notes are an integral part of the financial statements.
-48-
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1991, 1992 AND 1993
Additional
Common Paid-In Retained
Stock Capital Earnings Total
(Thousands of Dollars)
Balance at December 31, 1990 $36,811 $ 39,288 $ 73,089 $149,188
Net income for 1991 - - 11,130 11,130
Issuance of common stock 146 299 - 445
Dividends on:
Preferred stock (Note 5) - - (4,236) (4,236)
Common stock ($2.40 per share) - - (8,849) (8,849)
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
The accompanying notes are an integral part of the financial statements.
-49-
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 five wholly-owned subsidiaries: Penn Gas
Development Co. and four small water companies, which have not been consolidated
since they are insignificant. The equity method is used to account for PG&W's
investment in these subsidiaries.
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, 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 plant
acquisition adjustments are not being amortized, consistent with PPUC Orders.
The plant acquisition adjustments of approximately $340,000 recorded in 1993
will be amortized over a ten-year period commencing on January 1, 1994, in
accordance with the PPUC's December 15, 1993, Order regarding the increase in
water rates for customers in the Spring Brook Water Rate Area served by the
Ceasetown and Watres Water Treatment Plants.
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 9% in 1991, 7% in 1992 and 8% in 1993.
PG&W provides for depreciation on a straight-line basis for gas plant and
all common plant. As of December 31, 1993, depreciation was provided on a
straight-line basis for approximately 61% 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]
1991 1992 1993
[S] [C] [C] [C]
Gas 2.33% 2.51% 2.49%
Water 1.42 1.57 1.71
Common 7.22 6.76 8.06
-50-
The increase in the annual rate of depreciation relative to water plant in
both 1992 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 is generally being
made as PG&W is allowed to initially increase its rates for customers receiving
filtered water service.
Under the terms of the settlement discussed in Note 2 relative to the water
rate increase approved by the PPUC on December 15, 1993, for customers in the
Spring Brook Water Rate Area served by the Ceasetown and Watres Water Treatment
Plants, PG&W will begin depreciating all water facilities located in the areas
served by those plants on a straight-line basis effective January 1, 1994. This
change is expected to increase the annual provision for depreciation by
approximately $1.5 million and to increase the overall annual rate of
depreciation with respect to water plant to approximately 2.21%.
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 or quarterly
on cycles that extend over the respective periods. 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.
In accordance with an Order adopted by the PPUC on May 31, 1990, PG&W is
recovering 90% of its total take-or-pay liabilities through the billing of a
surcharge to customers generally over a four-year period beginning June 1, 1990.
This surcharge is reflected as operating revenue and is offset by a
corresponding charge to the cost of gas. The take-or-pay liabilities billed to
PG&W, which will be recovered in future periods by means of such surcharge, are
included in deferred cost of gas and supplier refunds, net. The cost of gas
also includes that portion (i.e., 10%) of PG&W's take-or-pay liabilities which
it has agreed to absorb in accordance with the PPUC's Order of May 31, 1990.
Deferred Charges. 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 discussed in Note 2, certain pre-operating
costs relative to PG&W's water treatment plants, costs associated with the Early
Retirement Plan as discussed in Note 9, 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.
-51-
PG&W 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. The provision for income taxes consists of the following
components:
[CAPTION]
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Included in operating expenses:
Currently payable -
Federal $ 2,328 $ 4,664 $ 5,644
State 570 1,888 1,917
Total currently payable 2,898 6,552 7,561
Deferred, net -
Federal 2,454 2,512 2,535
State 263 (503) (851)
Total deferred, net 2,717 2,009 1,684
Amortization of investment tax credits (256) (256) (256)
Total included in operating expenses 5,359 8,305 8,989
Included in other income, net:
Currently payable -
Federal 104 (29) (44)
State (24) (26) (28)
Total currently payable 80 (55) (72)
Deferred, net -
Federal (31) 39 (6)
State 7 - -
Total deferred, net (24) 39 (6)
Total included in other income, net 56 (16) (78)
Total provision for income taxes $ 5,415 $ 8,289 $ 8,911
-52-
Deferred income taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes and, with respect to
elements of operating income, are recorded consistent with the treatment allowed
by the PPUC for ratemaking purposes. The source of these timing differences and
the tax effect of each is as follows:
[CAPTION]
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Excess of tax depreciation over
depreciation for accounting purposes $ 2,441 $ 2,502 $ 3,214
Deferred treatment plant costs, net 982 585 1,458
Take-or-pay costs, net (222) (446) (1,126)
Other, net (508) (593) (1,868)
Total deferred taxes, net $ 2,693 $ 2,048 $ 1,678
Included in:
Operating expenses $ 2,717 $ 2,009 $ 1,684
Other income, net (24) 39 (6)
Total deferred taxes, net $ 2,693 $ 2,048 $ 1,678
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:
[CAPTION]
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Income before income taxes $16,545 $21,245 $25,212
Tax expense at statutory federal
income tax rate $ 5,625 $ 7,223 $ 8,824
Increases (reductions) in taxes
resulting from -
State income taxes, net of
federal income tax benefit 795 1,161 935
Allowance for equity funds used during
construction and equity component of
deferred treatment plant carrying
charges - - (545)
Amortization of investment tax credits (256) (256) (256)
Other, net (749) 161 (47)
Total provision for income taxes $ 5,415 $ 8,289 $ 8,911
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. As of December 31, 1993, a total of
$87.0 million in deferred income taxes, relating primarily to temporary
differences involving utility plant and consisting of deferred tax liabilities
of $95.6 million and deferred tax assets of $8.6 million, were so reflected in
these financial statements in accordance with the requirements of FASB Statement
109.
-53-
(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 1991, 1992 and 1993 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, 1991 $3.20 $2.46 $(20,800,000)
December 1, 1992 2.46 2.79 9,500,000
December 1, 1993 2.79 3.74 28,800,000
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 Take-or-Pay Costs. On April 27, 1990, PG&W filed an application
with the PPUC seeking approval to recover 90% ($13.9 million based on then
current estimates) of its total take-or-pay liabilities, and $250,000 of related
carrying costs, through billings to customers generally over a four-year period
beginning June 1, 1990. The PPUC approved this application, effective June 1,
1990. In connection with this approval, PG&W agreed to absorb a portion of its
take-or-pay liabilities. The amount to be so absorbed by PG&W is currently
estimated to be $1.8 million, substantially all of which had been charged to
expense as of December 31, 1993. As of December 31, 1993, PG&W had billed $14.8
million of take-or-pay costs to its customers and had deferred $1.1 million of
such costs, including related carrying charges, for future billing to customers.
Under terms of the PPUC's Order in respect of take-or-pay obligations, the
surcharge by which PG&W bills its customers for take-or-pay costs is to be
adjusted annually as of June 1 to reflect changes in PG&W's total estimated
liability for take-or-pay costs (which is currently projected to be as much as
$18.1 million) and the portion of such costs remaining to be recovered from its
customers. In accordance therewith, the PPUC approved an adjustment in PG&W's
take-or-pay surcharge effective June 1, 1993, based on the estimated $3.5
million of take-or-pay costs that remained to be collected from its customers as
of such date.
Water Rate Filings
Scranton Area Water Rate Increases. March, 1991, Increase. On June 8,
1990, PG&W filed an application with the PPUC seeking a water rate increase,
designed to produce $25.5 million in additional annual revenue. This rate
increase request involved the approximately 54,700 customers at such date who
would be furnished water from the one previously existing and the four new water
treatment plants in the Scranton Water Rate Area. In December, 1990, PG&W and
certain parties filing objections to the rate increase request reached a
settlement that provided for an approximate 110% rate increase 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 FASB
Statement 92 entitled "Regulated Enterprises-Accounting for Phase-in Plans."
The settlement provided that $10.2 million of the increased revenue (an
-54-
approximate 75% increase in rates) was to be realized through an immediate rate
increase and that the remaining $4.8 million of the increased revenue (an
additional 35% increase in rates) was to be realized through another rate
increase one year later (at the beginning of year two of the phase-in period).
The settlement also specified that the $4.8 million in revenue that would be
deferred during the first year of the phase-in period was to be collected from
customers in the form of a surcharge in years two through ten of the phase-in
period. By Order adopted March 22, 1991, the PPUC approved the settlement and
permitted PG&W a water rate increase estimated to produce additional annual
revenue of $15.0 million, effective March 23, 1991.
In accordance with the accounting requirements for a qualified phase-in plan
as prescribed by FASB Statement 92, PG&W recorded a $1.2 million nonrecurring
charge to earnings as of December 31, 1990, representing the estimated net
present value of carrying charges on the $4.8 million of revenue to be deferred
in the first year of the phase-in period. This charge was required because the
terms of the settlement did not provide for the billing of any carrying charges
on such deferred revenue. Additionally, in accordance with the provisions of
FASB Statement 92, PG&W commenced recording the entire $15.0 million increase in
annual revenue allowed by the PPUC as additional revenue beginning March 23,
1991. However, pursuant to the terms of the settlement, PG&W deferred the
billing of $4.7 million of the increased revenue recorded during the first year
of the phase-in period (i.e., the period March 23, 1991, through March 22,
1992). The amount so deferred was $100,000 less than the $4.8 million
originally estimated because of slightly lower than anticipated consumption.
Effective March 23, 1992, PG&W began to bill the $4.7 million that had been so
deferred by means of the surcharge that will be in effect in years two through
ten of the phase-in period, and as of December 31, 1993, $871,000 had been so
billed to its Scranton Water Rate Area customers.
June, 1993, 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. On November 13, 1992, the PPUC suspended this
rate increase for seven months (until June 24, 1993) in order to investigate the
reasonableness of the proposed rates. 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 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
-55-
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. Nesbitt Service Area. On April 30,
1991, PG&W filed an application with the PPUC seeking a water rate increase,
designed to produce $2.6 million in additional annual revenue. This rate
increase request involved the approximately 14,300 customers in the Spring Brook
Water Rate Area at such date who were served exclusively by the Nesbitt Water
Treatment Plant. PG&W and certain parties filing objections to the rate
increase request reached a settlement that provided for a $1.9 million increase
in annual revenue which the PPUC approved effective January 30, 1992. However,
on February 27, 1992, the PPUC granted a petition of the OCA, a complainant in
the rate proceeding and a signatory to the settlement, for reconsideration and
clarification of the PPUC Order which approved the settlement. As a result, the
$1.9 million rate increase remains subject to further PPUC and possible
appellate review. Although it cannot be certain, PG&W believes that the $1.9
million increase will not be rescinded in whole or in part or affected in any
other way as a result of the OCA's petition and as of March 23, 1994, no further
action had been taken by the PPUC with respect to the OCA's petition.
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, to be effective August 29, 1992. 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 a qualified phase-in plan, pursuant to FASB Statement 92.
The settlement further 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 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
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June 3, 1993, the PPUC suspended this rate increase for seven months (until
January 28, 1994) by operation of law in order to institute an investigation
into the reasonableness of the proposed rates. 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, "Regulated
Enterprises-Accounting for Phase-In Plans." 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 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.
Deferred Treatment Plant Costs 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 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 $5.1 million of costs deferred relative to the Scranton Area water
treatment plants and related facilities over a ten-year period beginning June
23, 1993.
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
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.
As of December 31, 1993, a total of $4.6 million of costs, consisting of
$424,000 of operating expenses and $745,000 of carrying charges relative to the
Crystal Lake Water Treatment Plant and related facilities, and $1.7 million of
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operating expenses and $1.7 million of carrying charges relative to the
Ceasetown and Watres Water Treatment 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 the costs relative to the Crystal Lake,
Ceasetown and Watres Water Treatment Plants that have been deferred pursuant to
such Orders 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.
(3) OTHER INCOME, NET
Other income, net was comprised of the following elements:
[CAPTION]
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Equity component of deferred treatment
plant carrying charges $ - $ - $ 821
Allowance for equity funds used during
construction - - 734
Gain on sale of non-watershed land and
other property, net of related income
taxes 182 102 20
Interest income on repurchase agreements,
net of related income taxes 254 2 16
Interest on note to affiliate 437 133 -
Net interest expense on proceeds
remaining in construction fund - (23) (785)
Premium on retirement/defeasance of debt - (127) (81)
Other 261 (57) (165)
Total $ 1,134 $ 30 $ 560
(4) COMMON STOCK
Since January 1, 1991, 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:
[CAPTION]
Purchase Price
Date Purchased Number of Shares Per Share* Aggregate
[S] [C] [C] [C]
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
Total 1,142,922 $44.4 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
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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. These issuances of common stock by PG&W and the related
reductions in its bank borrowings acted to improve PG&W's debt/equity ratio, as
well as its interest and fixed charge coverages.
(5) PREFERRED STOCK
Preferred Stock of PG&W Subject to Mandatory Redemption
On September 16, 1988, PG&W issued 250,000 shares of its 9.50% 1988 series
cumulative preferred stock, $100 par value. 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). The remaining 150,000 shares of the 9.50% 1988 series cumulative
preferred stock, which are currently outstanding, are subject to mandatory
redemption on December 15, 1997, at a price of $100 per share, plus unpaid
dividends accrued on such shares.
On December 16, 1988, PG&W issued 150,000 shares of its 8.90% cumulative
preferred stock, $100 par value. The 8.90% cumulative preferred stock is
subject to mandatory redemption of 18,750 shares on each of December 15, 1997,
March 15, 1998, June 15, 1998, and September 15, 1998, and 75,000 shares on
December 15, 1998, in each instance, at a price of $100 per share, plus unpaid
dividends accrued on such shares.
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, 1993, for an aggregate purchase price in
each year of $80,000.
As of December 31, 1993, the aggregate annual maturities and sinking fund
requirements of PG&W's cumulative preferred stock subject to mandatory
redemption for each of the next five years ending December 31, were as follows:
[CAPTION]
Year Amount
[S] [C]
1994 $ 80,000
1995 $ 80,000
1996 $ 80,000
1997 $16,955,000 (a)
1998 $13,205,000 (b)
(a) Includes the entire $15.0 million principal amount of the 9.50% 1988 series
cumulative preferred stock currently outstanding and $1,875,000 of the 8.90%
cumulative preferred stock, both of which are subject to redemption on
December 15, 1997.
(b) Includes the entire $13,125,000 principal amount of the 8.90% cumulative
preferred stock that is subject to redemption during 1998.
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At PG&W's option, the following series of cumulative preferred stock subject
to mandatory redemption may currently be redeemed at the prices indicated:
[CAPTION]
Current Redemption Price
Series Per Share Aggregate
[S] [C] [C]
5.75% $ 102.00 $ 1,958,400
8.90% $ 103.96 $15,594,000
9.50% 1988 Series $ 103.56 $15,534,375
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, 1993, were as follows:
[CAPTION]
Series 1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
4.10% $ 405 $ 409 $ 410
5.75% 121 117 113
8.90% 1,335 1,335 1,335
9.00% - 829 2,250
9.50% 1988 series 2,375 2,375 2,354
Total $4,236 $5,065 $6,462
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, 1992
and 1993:
1992 1993
(Thousands of Dollars)
First mortgage bonds -
6.05 % Series, due 2019 $ - $ 19,000
7.125% Series, due 2022 30,000 30,000
7.20 % Series, due 2017 50,000 50,000
8 % Series, due 1997 3,955 3,745
8.375% Series, due 2002 30,000 30,000
9.23 % Series, due 1999 10,000 10,000
9-1/4% Series, due 1996 5,000 -
9.34 % Series, due 2019 15,000 15,000
9.57 % Series, due 1996 (a) 50,000 50,000
10 % Series, due 1995 6,060 -
200,015 207,745
Notes -
1%, due 1994 (Small Business Administration) 1,253 845
7%, 1989 Series A, due 2019, defeased on
December 21, 1993 19,000 -
8%, 1987 Series B, due 2017, but subject to
repayment in 1994 30,000 30,000
Bank borrowings, at weighted average interest
rates of 6.19% and 4.31% respectively, due in
1995 (Note 8) 17,000 47,000
67,253 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 17,614 19,253
Less current maturities and sinking
fund requirements (39,005) (38,584)
Total long-term debt $245,877 $266,259
(a) The interest rate on the 9.57% Series First Mortgage Bonds, due 1996, was
increased to 11.17% for the period January 1 through March 31, 1992,
pursuant to the terms of those bonds, because PEI had not consummated the
sale of at least $20.0 million in common stock and had not repaid the $15.0
million intercompany advance from PG&W made on September 12, 1991, by
December 31, 1991.
8%, 1987 Series B Note. On December 23, 1987, the Luzerne County Industrial
Development Authority (the "Authority") issued $30.0 million of its 8% Exempt
Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company
Project) (the "1987 Series B Bonds") and in connection therewith, PG&W issued a
promissory note in the principal amount of $30.0 million (its 8%, 1987 Series B
Note) to PNC Bank (formerly Northeastern Bank of Pennsylvania), as trustee (the
"IDA Trustee") for the 1987 Series B Bonds, as security for the 1987 Series B
Bonds. The 1987 Series B Bonds mature on December 1, 2017; bear interest at an
initial annual rate of 8% through November 30, 1994; are secured by a letter of
credit issued by Swiss Bank Corporation, New York Branch expiring on December
20, 1994, for which the annual fee is $279,000; and on December 1, 1994, will be
redeemed or, at the option of PG&W, purchased by PG&W for remarketing as of that
date. Under the terms of the 1987 Series B Note, PG&W agreed to pay the debt
service requirements on the 1987 Series B Bonds.
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7.20% Series First Mortgage Bonds. On September 15, 1992, the Authority
issued $50.0 million of its Exempt Facilities Revenue Refunding Bonds, 1992
Series A (Pennsylvania Gas and Water Company Project) (the "1992 Series A
Bonds") and, in connection therewith, PG&W issued $50.0 million of its 7.20%
First Mortgage Bonds to the IDA Trustee for the 1992 Series A Bonds, as security
for the 1992 Series A Bonds. The proceeds from the issuance of the 1992 Series
A Bonds, along with additional funds provided by PG&W, were deposited with the
IDA Trustee for the Authority's $50.0 million of 8-1/2% Exempt Facilities
Revenue Bonds, 1987 Series A (Pennsylvania Gas and Water Company Project) (the
"1987 Series A Bonds") on September 15, 1992, for use in redeeming the 1987
Series A Bonds on October 1, 1992. The deposit of such funds acted to discharge
all of PG&W's obligations with respect to its 8-1/2%, 1987 Series A Note in the
principal amount of $50.0 million which had been issued to the IDA Trustee in
connection with the 1987 Series A Bonds and which was subject to repayment on
October 1, 1992. Under the terms of the 7.20% 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 A Bonds.
8.375% Series First Mortgage Bonds. On December 14, 1992, PG&W issued $30.0
million of its 8.375% Series First Mortgage Bonds due 2002. The proceeds from
the issuance of these bonds were used to repay approximately $28.7 million of
bank borrowings, thereby providing PG&W with additional borrowing capacity for
future capital expenditures and other working capital needs.
7.125% Series First Mortgage Bonds. On December 22, 1992, the Authority
issued $30.0 million of its 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 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, 1993, $12.9
million 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.
10% and 9-1/4% Series First Mortgage Bonds. On May 1, 1993, PG&W redeemed
the $5,700,000 of its 10% Series First Mortgage Bonds due 1995 and the
$3,750,000 of its 9-1/4% Series First Mortgage Bonds due 1996 then outstanding,
utilizing funds from bank borrowings. The 10% Series First Mortgage Bonds were
redeemed at a price of 100.42% of principal (plus accrued interest to the
redemption date), which included a voluntary redemption premium aggregating
$23,940. The 9-1/4% Series First Mortgage Bonds were redeemed at a price of
100.98% of principal (plus accrued interest to the redemption date), which
included a voluntary redemption premium aggregating $36,750.
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
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.
As of December 31, 1993, the aggregate annual maturities and sinking fund
requirements of long-term debt for each of the next five years ending
December 31, were:
[CAPTION]
Year Amount
[S] [C]
1994 $38,584,000 (a)
1995 $47,730,000 (b)
1996 $50,758,000 (c)
1997 $ 3,694,000
1998 $ 611,000
(a) Includes the 8%, 1987 Series B Note in the principal amount of $30.0
million due 2017, but subject to repayment or refinancing on December 1,
1994. Such amount also includes the aggregate principal amount of
approximately $7.0 million relative to six water facility loans of PG&W
having a weighted annual interest rate of 9.33% which were voluntarily
repaid by PG&W on January 31, 1994, with bank borrowings.
(b) Includes $47.0 million of bank borrowings outstanding as of December 31,
1993.
(c) Includes the 9.57% Series First Mortgage Bonds in the principal amount
of $50.0 million due 1996.
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 $19.3 million
as of December 31, 1993, and $12.1 million as of March 23, 1994, subsequent to
the prepayment of certain of such loans.
(7) DIVIDEND RESTRICTIONS
Several of PG&W's debt instruments contain restrictions on the payment by
PG&W of dividends to PEI. Under the most restrictive of these provisions, which
is contained in the letter of credit agreement relating to the 1987 Series B
Bonds issued by the Luzerne County Industrial Development Authority with respect
to which PG&W has issued its 1987 Series B Note in the principal amount of $30.0
million, PG&W may not pay dividends to PEI of more than $12.5 million in 1994
and thereafter. In addition, provisions of such agreement and also PG&W's
revolving bank credit agreement (the "Credit Agreement" as defined in Note 8 to
these financial statements) prohibit PG&W from paying any dividends to PEI in
the event of any default under those agreements. These restrictions are not
expected to prohibit PG&W from paying a sufficient amount of dividends to PEI to
permit PEI to pay its current $2.20 per share annual dividend on its common
stock.
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In addition, the preferred stock provisions of PG&W's Restated Articles of
Incorporation and the indenture of mortgage under which PG&W has issued first
mortgage bonds provide for certain dividend restrictions.
(8) BANK NOTES PAYABLE
On April 25, 1991, PG&W entered into an agreement with the various banks
with which it had previously arranged lines of credit. The purpose of the
agreement was to consolidate PG&W's existing bank lines of credit to provide for
uniform terms relative to its bank borrowings and to extend the due dates of
such borrowings. As such, the agreement superseded PG&W's individual bank lines
of credit. The aggregate amount available to PG&W in 1992 under this agreement
was $45.0 million. On March 1, 1993, PG&W elected to reduce the amount so
available to $35.0 million in order to reduce the commitment fee that would
otherwise be payable and since no more than $35.0 million would be required by
PG&W under the agreement prior to its expiration on April 30, 1993. The
interest rate on borrowings under the agreement was prime. The agreement also
required the payment of a commitment fee of 1/2 of 1% per annum on the average
daily amount of the unused portion of the available funds. The commitment fees
paid with respect to this agreement totaled $60,000 in 1991, $152,000 in 1992
and $43,000 in 1993.
On April 19, 1993, PG&W 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
April 30, 1995, 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 3/8 of 1% per annum on the average daily amount of the unused
portion of the available funds. As of March 23, 1994, $41.0 million of
borrowings were outstanding under the Credit Agreement. PG&W also has three
short-term bank lines of credit with an aggregate borrowing capacity of $7.0
million which provide for borrowings at interest rates generally less than prime
and mature on April 30, 1994. As of March 23, 1994, PG&W had no borrowings
outstanding under the short-term bank lines of credit. The commitment fees paid
with respect to these agreements totaled $70,000 in 1993.
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 $5.7
million of unsecured debt due on demand or within one year from issuance
outstanding as of December 31, 1993, which included a $3.7 million demand loan
from PEI.
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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,
1991 1992 1993
(Thousands of Dollars)
Borrowings under lines of credit
Short-term $ - $ - $ 2,000
Long-term 37,000 17,000 47,000
$ 37,000 $ 17,000 $ 49,000
Unused lines of credit
Short-term $ - $ - $ 5,000
Long-term 8,000 28,000 13,000
$ 8,000 $ 28,000 $ 18,000
Total lines of credit
Prime rate $ 45,000 $ 45,000 $ 2,000
Other than prime rate - - 65,000
$ 45,000 $ 45,000 $ 67,000
Short-term bank borrowings (a)
Maximum amount outstanding $ 12,000 $ - $ 5,666
Daily average amount outstanding $ 8,972 $ - $ 637
Weighted daily average interest
rate 9.280% - 4.046%
Weighted average interest rate at
year-end - - 4.208%
Range of interest rates 9.000- - 3.750-
10.000% - 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 at December 31, 1991 or 1992.
(9) POSTRETIREMENT 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
$243,000, $333,000 and $443,000 in 1991, 1992 and 1993, respectively.
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The following items were the components of the net pension cost for the
years 1991, 1992 and 1993:
[CAPTION]
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Present value of benefits earned
during the year $ 637 $ 789 $ 854
Interest cost on projected benefit
obligations 2,120 2,262 2,402
Return on plan assets (3,824) (2,646) (3,127)
Net amortization and deferral 1,310 (72) 314
Net pension cost $ 243 $ 333 $ 443
The discount rate used to determine the actuarial present value of the
projected benefit obligations, the expected long-term rate of return on plan
assets and the projected increase in future compensation levels assumed in
determining the net pension cost for each of the years 1991, 1992 and 1993, were
as follows:
[CAPTION]
[S] [C]
Discount rate 8%
Expected long-term rate of return
on plan assets 9%
Projected increase in future
compensation levels 5-1/2%
The funded status of the plan as of December 31, 1992 and 1993, was as
follows:
[CAPTION]
1992 1993
(Thousands of Dollars)
[S] [C] [C]
Actuarial present value of the projected
benefit obligations:
Accumulated benefit obligations
Vested $ 21,813 $ 24,265
Nonvested 139 125
Total 21,952 24,390
Provision for future salary increases 7,746 9,769
Projected benefit obligations 29,698 34,159
Market value of plan assets, primarily
invested in equities and bonds 30,963 32,471
Plan assets in excess of (less than) projected
benefit obligations 1,265 (1,688)
Unrecognized net transition asset as of
January 1, 1986, being amortized over
20 years (2,988) (2,758)
Unrecognized prior service costs 2,412 2,279
Unrecognized net (gain) loss (704) 1,710
Accrued pension cost at year-end $ (15) $ (457)
-66-
In March, 1991, as part of a cost reduction program, PG&W offered an Early
Retirement Plan ("ERP") to its employees who would be 60 years of age or older
and have a minimum of five years of service as of April 30, 1991. Of the 79
eligible employees, 73 elected to accept this offer and retired in 1991. In
accordance with FASB Statement 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
PG&W recorded, as of April 30, 1991, an additional pension liability of $2.0
million, reflecting the increased costs associated with the ERP. This
liability, which was included in "Other deferred credits" as of December 31,
1992 and 1993, partially offsets an asset included in "Other deferred charges,"
representing the probable future rate recovery of such liability. As a result,
the provisions of FASB Statement 88 did not have a significant effect on PG&W's
results of operations for 1991. During 1992, PG&W began amortizing the portion
of the deferred charges relative to its gas operations over a 20-year period and
will begin amortizing the portion relating to its water operations as such
amounts are approved in rates. In addition, the deferred liability is being
amortized as an offset against pension expense over a 20 year amortization
period approximating the effect of including the additional pension costs
related to the ERP in the present value of benefits earned during the year.
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 $800,000 in 1991 and $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 year 1993:
[CAPTION]
(Thousands
of Dollars)
[S] [C]
Present value of benefits earned during the year $ 226
Interest cost on accumulated benefit obligation 967
Return on plan assets (a) -0-
Amortization of transition obligation over 20 years 617
Net cost of postretirement benefits other than pensions 1,810
Less disbursements for benefits (983)
Increase in liability for postretirement benefits
other than pensions $ 827
Reconciliations of the accumulated benefit obligation to the accrued
liability for postretirement benefits other than pensions as of January 1, 1993,
and December 31, 1993, follow:
[CAPTION]
January 1, December 31,
1993 1993
(Thousands of Dollars)
[S] [C] [C]
Accumulated benefit obligation:
Retirees $ 9,878 $ 10,149
Fully eligible active employees 1,649 1,735
Other active employees 815 1,222
12,342 13,106
Plan assets at fair value (a) -0- -0-
Accumulated benefit obligation
in excess of plan assets 12,342 13,106
Unrecognized transition obligation (12,342) (11,725)
Unrecognized net loss -0- (554)
Accrued liability for postretirement
benefits other than pensions $ -0- $ 827
For purposes of calculating the costs to be accrued by PG&W under FASB
Statement 106, an 8% discount rate and a 5.5% projected annual increase in
future compensation levels were assumed. It was also assumed that the per
capita cost of covered health care benefits would increase at an annual rate of
12% in 1993 and that this rate would decrease gradually to 5.5% 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, 1993, by
approximately $723,000 and the aggregate of the service and interest cost
components of the net cost of postretirement benefits other than pensions for
the year 1993 by approximately $60,000.
(a) As of December 31, 1993, PG&W had segregated funds totaling $182,000,
pending the establishment of a qualified trust fund for a portion of its
liability for postretirement benefits other than pensions, as discussed in the
paragraph immediately above.
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The additional costs accrued pursuant to FASB Statement 106 are allocated
between PG&W's gas utility and water utility operations. By Order entered June
23, 1993, relative to the rate increase request that PG&W had filed on September
25, 1992, with respect to the Scranton Water Rate Area, the PPUC allowed PG&W to
recover in revenues the additional costs ($319,000 for the year 1993, based on
then current estimates) that were required to be accrued pursuant to FASB
Statement 106 and which were allocable to the Scranton Water Rate Area.
Similarly, by Order entered December 15, 1993, relative to the rate increase
request that PG&W had filed on April 29, 1993, relative to the Spring Brook
Water Rate Area, the PPUC allowed PG&W to recover in revenues the additional
costs ($322,000 for the year 1993 based on then current estimates) that were
required to be accrued pursuant to FASB Statement 106 and which were allocable
to the Spring Brook Water Rate Area. Since PG&W did not seek an increase in its
base gas rates during 1993, the $407,000 ($232,000 net of related income taxes)
of additional cost incurred with regard to its gas utility operations as a
result of the adoption of the provisions of FASB Statement 106 was expensed.
(10) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1994 construction program will be $46.8
million. Construction of water facilities, estimated to cost $29.8 million,
will be financed with the $12.9 million of proceeds from the issuance of the
1993 Series A Bonds held by the IDA Trustee as of December 31, 1993, for the
benefit of PG&W, internally generated funds and borrowings under PG&W's
revolving bank credit facilities, pending the periodic issuance of stock and
long-term debt. Construction of gas facilities, estimated to cost $17.0
million, will be financed with internally generated funds and borrowings under
PG&W's revolving bank credit facilities, pending the periodic issuance of stock
and long-term debt.
(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 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 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 considers 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." As a result, the PPUC staff
-69-
indicated that it intends to initiate an informal investigation of the matter,
including PG&W's responsibility for the incidents referred to in the Emergency
Order. Although it is not presently possible to determine what action the PPUC
will ultimately take with respect to possible violations of law and the matters
raised by the Emergency Order, PG&W does not believe that compliance with, or
any liability that might result from such violations 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.
On February 4, 1994, PG&W was requested by the Pennsylvania Department of
Environmental Resources to perform an evaluation to determine if a pipeline
owned by PG&W was the source of certain soil contamination discovered by the
Pennsylvania Department of Transportation in late 1993 in an area adjacent to
that pipeline at a road crossing in Jackson Township, Northumberland County,
Pennsylvania. This pipeline was purchased by Scranton-Spring Brook Water
Service Company ("Scranton-Spring Brook"), a predecessor of PG&W, in 1956, but
was never operated by Scranton-Spring Brook or PG&W in the area in question. At
this time, pending further environmental analysis and evaluation, neither the
source nor the extent of the contamination is known. However, if the source of
the contamination is determined to be PG&W's pipeline, PG&W would be required to
perform such remediation work as is necessary and to dispose of the contaminated
soil. While it cannot be certain, PG&W does not presently believe that any
liability it might have with respect to such contamination would have a material
adverse effect on either its financial position or results of operations.
Further, if PG&W were determined to be the responsible party with respect to the
subject contamination, it would seek to recover any liability it were to so
incur from the former owner and operator of the pipeline and/or its successors.
Additionally, to the extent it could not recover its costs from such parties,
PG&W could seek authority of the PPUC to recover those costs in the rates
charged to its natural gas customers.
(12) INDUSTRY SEGMENTS
Financial information with respect to PG&W's industry segments for the years
ended December 31, 1991, 1992 and 1993 is included in Item 1 of this Form 10-K.
Such industry segment information is incorporated herein as part of these
Financial Statements.
-70-
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
QUARTER ENDED
March 31, June 30, September 30, December 31,
1992 1992 1992 1992
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C]
Operating revenues $ 70,673 $ 34,000 $ 25,440 $ 61,765
Operating income 12,620 6,270 4,160 10,863
Earnings (loss) applicable
to common stock 5,763 (44) (2,704) 4,876
Earnings (loss) per share
of common stock (a) 1.55 (.01) (.67) 1.21
[CAPTION]
QUARTER ENDED
March 31, June 30, September 30, December 31,
1993 1993 1993 1993
(Thousands of Dollars, Except Per Share Amounts)
[S] [C] [C] [C] [C]
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.
(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 trustee has been based on the current market values 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 current quoted market price 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 rates at December 31, 1993,
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 December 31, 1993, for preferred stock of comparable
credit quality with similar terms and maturities.
-71-
The carrying amounts and estimated fair values of PG&W's financial
instruments at December 31, 1992 and 1993, were as follows:
[CAPTION]
1992 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
[S] [C] [C] [C] [C]
Restricted funds held by trustee $ 28,020 $ 28,016 $ 12,853 $ 12,857
Long-term debt (including current
portion) 284,882 291,704 306,843 327,436
Preferred stock subject to
mandatory redemption (including
current portion) 42,000 43,929 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.
-72-
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-73-
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 . . . . . . . . . . . . 42
Statements of Income for each of the three years in the
period ended December 31, 1993 . . . . . . . . . . . . . . . . 43
Balance Sheets as of December 31, 1992 and 1993. . . . . . . . . 44
Statements of Cash Flows for each of the three years in the
period ended December 31, 1993 . . . . . . . . . . . . . . . . 46
Statements of Capitalization as of December 31, 1992 and 1993. . 47
Statements of Common Shareholder's Investment for each of
the three years in the period ended December 31, 1993. . . . . 48
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 49
2. Financial Statement Schedules
The following financial statement schedules for PG&W are 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
V Property, Plant and Equipment for the three-year period
ended December 31, 1993. . . . . . . . . . . . . . . . . 75
VI Accumulated Depreciation of Property, Plant and Equipment
for the three-year period ended December 31, 1993. . . . 76
VIII Valuation and Qualifying Accounts for the three-year
period ended December 31, 1993 . . . . . . . . . . . . . 77
X Supplementary Income Statement Information for the
three-year period ended December 31, 1993. . . . . . . . 78
3. Exhibits
See "Index to Exhibits" located on page 80 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.
-74-
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 1993.
(c) Executive Compensation Plans and Arrangements
The following listing includes PG&W's executive compensation plans and
arrangements in effect as of December 31, 1993.
Exhibit
10-41 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.
10-42 Agreement by and between PEI, PG&W and Robert L. Jones dated as of
March 15, 1991 -- filed as Exhibit No. 10-38 to PG&W's Annual Report
on Form 10-K for 1990, File No. 1-3490.
10-43 Employment Agreement dated August 30, 1991, between PEI and Dean T.
Casaday -- filed as Exhibit 10-16 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-44 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.
10-45 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.
-75-
Schedule V
-76-
Schedule VI
-77-
Schedule VIII
-78-
PENNSYLVANIA GAS AND WATER COMPANY
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993
[CAPTION]
Year ended December 31,
1991 1992 1993
(Thousands of Dollars)
[S] [C] [C] [C]
Taxes other than income taxes were as follows:
State gross receipts tax $ 5,993 $ 6,715 $ 7,212
State capital stock tax 1,773 1,936 1,961
Payroll taxes 2,224 2,276 2,444
Real estate and personal property taxes 2,777 2,951 3,717
Other taxes 710 772 888
$13,477 $14,650 $16,222
Charged to:
Other taxes $12,814 $14,730 $16,019
Other accounts 663 (80) 203
$13,477 $14,650 $16,222
NOTE:
The amounts of maintenance and repairs, depreciation and income taxes, which
are charged to accounts other than those set forth in the statements of
income, are not significant. PG&W did not incur any significant costs for
royalties, rents, advertising or research and development during the three-
year period ended December 31, 1993.
-79-
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.
[CAPTION]
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
[S] [C] [C]
Date: March 23, 1994 By: /s/ Dean T. Casaday
Dean T. Casaday
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 23, 1994 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.
[CAPTION]
Signature Capacity Date
[S] [C] [C]
/s/ Kenneth L. Pollock Chairman of the Board of March 23, 1994
Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 23, 1994
William D. Davis of Directors
/s/ Dean T. Casaday Director, President and March 23, 1994
Dean T. Casaday Chief Executive Officer
/s/ Robert J. Keating Director March 23, 1994
Robert J. Keating
/s/ John D. McCarthy Director March 23, 1994
John D. McCarthy
/s/ Kenneth M. Pollock Director March 23, 1994
/s/ Kenneth M. Pollock
/s/ James A. Ross Director March 23, 1994
James A. Ross
/s/ Ronald W. Simms Director March 23, 1994
Ronald W. Simms
-80-
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 October 17, 1991 --
filed as Exhibit 3-2 to PG&W's Annual Report on Form 10-K for 1991,
File No. 1-3490.
(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.
-81-
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. 0-7812.
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. 0-7812.
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 -- 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 herewith.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth,
Eleventh and Thirteenth Supplemental Indentures merely convey
additional properties to the Trustee.
4-21 Statement Affecting Class or Series of Shares with respect to 9.50%
1988 Series Cumulative Preferred Stock of PG&W -- filed as Exhibit
4-18 to PG&W's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1988, File No. 1-3490.
4-22 Statement Affecting Class or Series of Shares with respect to 8.90%
Cumulative Preferred Stock of PG&W -- filed as Exhibit 4-20 to
PG&W's Annual Report on Form 10-K for 1988, File No. 1-3490.
-82-
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 herewith.
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 herewith.
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 herewith.
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 herewith.
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 herewith.
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 herewith.
-83-
Exhibit
Number
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 herewith.
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 herewith.
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.
10-20 Joint Venture Agreement, dated May 1, 1975, between Robert Mosbacher
and Transco Exploration Company, et. al., and Exhibit "B,"
Ratification thereof by PG&W, dated July 11, 1975 -- filed as
Exhibit 5(1) to PG&W's Bond Form S-7, Registration No. 2-55419.
10-21 Project Facilities Agreement, dated December 1, 1987, between
Luzerne County Industrial Development Authority and PG&W -- filed as
Exhibit 10-19 to PG&W's Annual Report on Form 10-K for 1987, File
No. 1-3490.
10-22 Remarketing Agreement, dated December 1, 1987, among PG&W, Butcher &
Singer Inc. and Dean Witter Reynolds Inc. -- filed as Exhibit 10-21
to PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490.
-84-
Exhibit
Number
10-23 8% Bond Purchase Agreement, dated December 15, 1987, among Luzerne
County Industrial Development Authority, PG&W, Butcher & Singer Inc.
and Dean Witter Reynolds Inc. -- filed as Exhibit 10-22 to PG&W's
Annual Report on Form 10-K for 1987, File No. 1-3490.
10-24 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.
10-25 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.
10-26 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.
10-27 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.
10-28 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.
10-29 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.
10-30 Second Amended and Restated Project Facilities Agreement dated as of
December 1, 1993, between PG&W and the Luzerne County Industrial
Development Authority -- filed herewith.
-85-
Exhibit
Number
10-31 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 herewith.
10-32 Letter of Credit Agreement, dated December 1, 1987, between PG&W and
Swiss Bank Corporation, New York Branch -- filed as Exhibit 10-20 to
PG&W's Annual Report on Form 10-K for 1987, File No. 1-3490.
10-33 Amendment No. 1, dated as of September 10, 1991, to December 1987
Reimbursement Agreement between PG&W and Swiss Bank Corporation, New
York Branch -- filed as Exhibit 10-6 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-34 Amendment No. 2, dated as of December 13, 1991 to December 1987
Reimbursement Agreement between PG&W and Swiss Bank Corporation, New
York Branch -- filed as Exhibit 10-15 to PEI's Common Stock Form S-
2, Registration No. 33-43382.
10-35 Amendment No. 3, dated as of May 11, 1992, to December 1987
Reimbursement Agreement between PG&W and Swiss Bank Corporation, New
York Branch -- filed as Exhibit 10-2 to PG&W's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992, File No. 1-3490.
10-36 Subordinate Open End Mortgage, Security Agreement, Assignment of
Leases, Rents and Profits, Financing Statement and Fixture Filing,
dated as of September 10, 1991, made by PG&W, as Mortgagor, to Swiss
Bank Corporation, as Collateral Agent and Mortgagee -- filed as
Exhibit 10-1 to PEI's Common Stock Form S-2, Registration No. 33-
43382.
10-37 Collateral Agency and Intercreditor Agreement, dated as of September
10, 1991, among Manufacturers Hanover Trust Company (now Chemical
Bank), as Bank Agency, Swiss Bank Corporation, New York Branch,
First Eastern Bank, N.A., Hanover Bank, Meridian Bank, Northeastern
Bank of Pennsylvania (now PNC Bank, Northeast PA), Philadelphia
National Bank (now CoreStates Bank, N.A.), United Penn Bank (now
Mellon Bank, N.A.), National Australia Bank, Limited, New York
Branch, Swiss Bank Corporation, New York Branch, as Collateral Agent
and PG&W -- filed as Exhibit 10-2 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-38 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.
10-39 9.50% Cumulative Preferred Stock Purchase Agreement, dated
December 11, 1987, between PG&W and the purchasers named therein --
filed as Exhibit 10-23 to PG&W's Annual Report on Form 10-K for
1987, File No. 1-3490.
-86-
Exhibit
Number
10-40 Recapitalization Agreement, dated September 16, 1988, between PG&W
and the original purchasers of PG&W's 9.50% Cumulative Preferred
Stock, pursuant to which shares of the 9.50% Cumulative Preferred
Stock were exchanged for shares of PG&W's 9.50% 1988 Series
Cumulative Preferred Stock -- filed as Exhibit 10-24 to PG&W's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1988, File No. 1-3490.
10-41 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.
10-42 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.
10-43 Employment Agreement, dated August 30, 1991, between PEI and Dean T.
Casaday -- filed as Exhibit 10-16 to PEI's Common Stock Form S-2,
Registration No. 33-43382.
10-44 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.
10-45 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.
-87-
TABLE OF CONTENTS
PART I PAGE
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 20
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 21
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . *
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 22
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 41
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 72
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 . . . . . . . . . . . . . . . . . . . . . . . 73**
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 79
________________________
* 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 80.
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 23, 1994 By:
Dean T. Casaday
President and Chief Executive
Officer
(Principal Executive Officer)
Date: March 23, 1994 By:
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
Chairman of the Board of March 23, 1994
Kenneth L. Pollock Directors
Vice Chairman of the Board March 23, 1994
William D. Davis of Directors
Director, President and March 23, 1994
Dean T. Casaday Chief Executive Officer
Director March 23, 1994
Robert J. Keating
Director March 23, 1994
John D. McCarthy
Director March 23, 1994
Kenneth M. Pollock
Director March 23, 1994
James A. Ross
Director March 23, 1994
Ronald W. Simms
PENNSYLVANIA GAS AND WATER COMPANY
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993
Balance at Additions Adjustments Balance at
beginning at and end
Classification of year cost Retirements transfers (a) of year
(Thousands of Dollars)
Year ended December 31, 1991
Gas plant (b) $ 213,957 $ 9,073 $ 1,188 $ 56 $ 221,898
Water plant (c) 269,040 6,895 672 85 275,348
Common plant 26,182 244 1,332 (64) 25,030
Total plant in service 509,179 16,212 3,192 77 522,276
Construction work in progress 3,908 12,302(d) - - 16,210(e)
Total $ 513,087 $ 28,514 $ 3,192 $ 77 $ 538,486
Year ended December 31, 1992
Gas plant (b) $ 221,898 $ 12,487 $ 506 $ (3) $ 233,876
Water plant (c) 275,348 20,840 1,693 (1,079) 293,416
Common plant 25,030 2,600 3,077 (107) 24,446
Total plant in service 522,276 35,927 5,276 (1,189) 551,738
Construction work in progress 16,210 21,094(d) - - 37,304(e)
Total $ 538,486 $ 57,021 $ 5,276 $ (1,189) $ 589,042
Year ended December 31, 1993
Gas plant (b) $ 233,876 $ 11,225 $ 793 $ 29 $ 244,337
Water plant (c) 293,416 61,471 988 1,397 355,296
Common plant 24,446 3,000 1,319 (91) 26,036
Total plant in service 551,738 75,696 3,100 1,335 625,669
Construction work in progress 37,304 (29,796)(d) - - 7,508
Total $ 589,042 $ 45,900 $ 3,100 $ 1,335 $ 633,177
NOTES:
(a) Represents transfers to other physical property and transfers between gas, water and common plant.
(b) At original cost less acquisition adjustments of $386,000.
(c) At original cost plus acquisition adjustments of $14,236,000 at December 31, 1991 and 1992, and
$14,577,000 at December 31, 1993.
(d) Net of transfers to utility plant in service.
(e) Includes $6,187,000, $4,856,000 and $628,000, respectively, for the construction of the Ceasetown,
Crystal Lake and Watres Water Treatment Plants at December 31, 1991, and $21,998,000, and $10,119,000,
respectively, for the construction of the Ceasetown and Watres Water Treatment Plants at December 31,
1992.
PENNSYLVANIA GAS AND WATER COMPANY
SCHEDULE VI - ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993
Additions charged to Deductions
Balance at Balance
beginning Other Salvage Removal at end
Classification of year Income accounts(a) recoveries Retirements cost Transfers(b) of year
(Thousands of Dollars)
Year ended December 31, 1991
Gas plant $ 45,247 $ 5,034 $ 180 $ 43 $ 1,188 $ 166 $ 1 $49,151
Water plant 6,679 3,613 - 7 672 276 64 9,415
Common plant 11,932 1,137 729 33 1,332 25 4 12,478
Total $ 63,858 $ 9,784 $ 909 $ 83 $ 3,192 $ 467 $ 69 $71,044
Year ended December 31, 1992
Gas plant $ 49,151 $ 5,656 $ 111 $ 17 $ 506 $ 344 $ 1 $54,086
Water plant 9,415 4,202 - 8 1,693 312 (31) 11,589
Common plant 12,478 1,006 638 84 3,077 - (61) 11,068
Total $ 71,044 $10,864 $ 749 $ 109 $ 5,276 $ 656 $ (91) $76,743
Year ended December 31, 1993
Gas plant $ 54,086 $ 5,894 $ 121 $ 13 $ 793 $ 312 $ 10 $59,019
Water plant 11,589 5,230 - 52 988 708 158 15,333
Common plant 11,068 1,186 913 95 1,319 8 - 11,935
Total $ 76,743 $12,310 $ 1,034 $ 160 $ 3,100 $ 1,028 $ 168 $86,287
NOTES:
(a) Represents depreciation of transportation and work equipment charged to clearing accounts, together with other
equipment expenses, and apportioned therefrom to various operating, construction and other accounts on the
basis of the use of such equipment.
(b) Represents transfers to other physical property and transfers between gas, water and common plant.
PENNSYLVANIA GAS AND WATER COMPANY
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1993
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, 1991 $ 1,626 $ 1,744 $ - $ 1,763(a) $ 1,607
Year ended December 31, 1992 $ 1,607 $ 1,806 $ - $ 1,938(a) $ 1,475
Year ended December 31, 1993 $ 1,475 $ 1,590 $ - $ 1,842(a) $ 1,223
Shown as operating reserves on the balance sheets:
Insurance -
Year ended December 31, 1991 $ 2,178 $ 635 $ - $ 966(b) $ 1,847
Year ended December 31, 1992 $ 1,847 $ 1,216 $ - $ 1,498(b) $ 1,565
Year ended December 31, 1993 $ 1,565 $ 1,823 $ 75 $ 1,600(b) $ 1,863
NOTES:
(a) Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.
(b) Deductions are principally payments made in settlement of claims.