PENNSYLVANIA GAS AND WATER COMPANY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three
months ended March 31, 1995 and 1994. . . . . . . . . . . 2
Balance Sheets as of March 31, 1995,
and December 31, 1994 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the three
months ended March 31, 1995 and 1994. . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 16
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA GAS AND WATER COMPANY
Statements of Income
[CAPTION]
Three Months Ended
March 31,
1995* 1994*
(Thousands of Dollars)
[S] [C] [C]
OPERATING REVENUES $ 68,237 $ 80,233
Cost of gas 41,407 50,460
OPERATING MARGIN 26,830 29,773
OTHER OPERATING EXPENSES:
Operation 5,824 6,320
Maintenance 968 1,150
Depreciation 1,792 1,670
Income taxes 4,867 5,968
Taxes other than income taxes 3,879 4,059
Total other operating expenses 17,330 19,167
OPERATING INCOME 9,500 10,606
OTHER INCOME, NET 234 199
INCOME BEFORE INTEREST CHARGES 9,734 10,805
INTEREST CHARGES:
Interest on long-term debt 2,390 2,166
Allowance for borrowed funds used
during construction (9) (13)
Other interest 249 311
Total interest charges 2,630 2,464
INCOME FROM CONTINUING OPERATIONS 7,104 8,341
DISCONTINUED OPERATIONS:
Income from discontinued operations
(net of related income taxes of $1,403,000
and $1,485,000, respectively) 2,127 2,079
Estimated loss on disposal of discontinued
operations, net of anticipated income
during the phase-out period of $6,855,000
(net of related income taxes of $5,316,000) (5,831) -
Income (loss) with respect to discontinued
operations (3,704) 2,079
NET INCOME 3,400 10,420
DIVIDENDS ON PREFERRED STOCK 691 1,383
EARNINGS APPLICABLE TO COMMON STOCK $ 2,709 $ 9,037
COMMON STOCK
Earnings per share of common stock:
Continuing operations $ 1.16 $ 1.43
Discontinued operations (.67) .43
Total $ .49 $ 1.86
Weighted average shares outstanding 5,521,112 4,869,450
Cash dividends per share $ .705 $ .35
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
March 31, December 31,
1995* 1994*
(Thousands of Dollars)
[S] [C] [C]
ASSETS
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $ 286,144 $ 284,080
Accumulated depreciation (76,421) (74,408)
209,723 209,672
OTHER PROPERTY AND INVESTMENTS 3,447 2,872
CURRENT ASSETS:
Cash 795 304
Accounts receivable -
Customers 21,492 15,676
Others 1,393 1,474
Reserve for uncollectible accounts (1,170) (921)
Accrued utility revenues 7,004 9,004
Materials and supplies, at average cost 2,786 2,743
Gas held by suppliers, at average cost 9,306 20,025
Deferred cost of gas and supplier refunds, net - 8,475
Prepaid expenses and other 4,771 1,470
46,377 58,250
DEFERRED CHARGES:
Deferred taxes collectible 30,600 31,696
Natural gas transition costs collectible 2,571 4,099
Unamortized debt expense 1,769 1,867
Other 6,633 6,683
41,573 44,345
NET ASSETS OF DISCONTINUED OPERATIONS 196,798 203,196
TOTAL ASSETS $ 497,918 $ 518,335
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION]
March 31, December 31,
1995* 1994*
(Thousands of Dollars)
[S] [C] [C]
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common shareholder's investment $ 217,703 $ 216,032
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,760 1,760
Long-term debt 149,325 170,825
402,403 422,232
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 290 3,290
Accounts payable -
Suppliers 10,566 16,762
Affiliates, net 827 788
Deferred cost of gas and supplier refunds, net 6,132 -
Accrued general business and realty taxes 2,374 3,381
Accrued income taxes 8,511 3,185
Accrued interest 1,660 2,713
Accrued natural gas transition costs 2,158 2,356
Other 3,197 2,395
35,715 34,870
DEFERRED CREDITS:
Deferred income taxes 45,857 46,627
Accrued natural gas transition costs 2,710 3,250
Unamortized investment tax credits 5,068 5,110
Operating reserves 2,234 2,383
Other 3,931 3,863
59,800 61,233
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES $ 497,918 $ 518,335
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
[CAPTION]
Three Months Ended
March 31,
1995* 1994*
(Thousands of Dollars)
[S] [C] [C]
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 7,104 $ 8,341
Effects of noncash charges to income -
Depreciation 1,799 1,677
Deferred income taxes, net 1,106 385
Provisions for self insurance 163 405
Other, net 916 1,054
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues (3,486) (8,001)
Gas held by suppliers 10,719 23,749
Accounts payable (5,421) (7,297)
Deferred cost of gas and supplier refunds, net 15,397 4,170
Other current assets and liabilities, net (876) 1,599
Other operating items, net (418) (815)
Net cash provided by continuing operations 27,003 25,257
Net cash provided (used) by discontinued operations 3,764 (2,622)
Net cash provided by operating activities 30,767 22,635
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (3,770) (2,232)
Other, net 158 7
Net cash used for investing activities (3,612) (2,225)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 2,855 121
Dividends on common and preferred stock (4,584) (3,087)
Repayment of long-term debt - (845)
Repayment of note payable to parent - (1,840)
Net decrease in bank borrowings (24,925) (15,555)
Other, net (10) -
Net cash used for financing activities (26,664) (21,206)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 491 (796)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 304 2,714
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 795 $ 1,918
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,112 $ 4,094
Income taxes $ 437 $ 500
*See Note 2 regarding discontinued operations and restatement of prior period
financial statements.
The accompanying notes are an integral part of the financial statements.
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PENNSYLVANIA GAS AND WATER COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) GENERAL
The interim financial statements included herein have been prepared by
Pennsylvania Gas and Water Company ("PG&W"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although PG&W
believes that the disclosures are adequate to make the information presented not
misleading.
The results for the interim periods are not indicative of the results to be
expected for the year, primarily due to the effect of seasonal variations in
weather. However, in the opinion of management, all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the results for the
interim periods have been reflected in the financial statements. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in PG&W's latest annual
report on Form 10-K.
(2) DISCONTINUED OPERATIONS
On April 26, 1995, Pennsylvania Enterprises, Inc. ("PEI"), the parent
company of PG&W, and PG&W signed a definitive agreement (the "Agreement") with
American Water Works Company, Inc. ("American") and Pennsylvania-American Water
Company ("Pennsylvania-American"), a wholly-owned subsidiary of American,
providing for the sale to Pennsylvania-American of substantially all of the
assets, properties and rights of PG&W's water utility operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which is expected
to be in the fourth quarter of 1995. Until the closing, PG&W will continue to
operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995). The sale will involve a gain for
income tax purposes, primarily because of the accelerated depreciation that has
been claimed by PG&W with respect to the water utility plant that is being sold.
It is currently estimated that the income taxes payable on the sale, for which
deferred income taxes have previously been provided, will be approximately $55
million.
The net cash proceeds from the sale of approximately $199 million, after the
payment of income taxes, will be used by PEI and PG&W to retire debt, to
repurchase stock and for working capital for their continuing operations. After
the sale, the principal assets of PG&W will consist of its gas utility
operations and approximately 46,000 acres of land.
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The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both PEI and PG&W,
termination of the waiting period under federal antitrust laws, and various
other regulatory approvals and certain other conditions.
The accompanying financial statements reflect PG&W's water utility
operations as "discontinued operations." Interest charges have been allocated
to the discontinued operations based on the relationship of the gross water
utility plant that is being sold to the total of PG&W's gross gas and water
utility plant. This is the same method as has been utilized by PG&W and the
PPUC in establishing the revenue requirements of both PG&W's gas and water
utility operations. None of the dividends on PG&W's preferred stock has been
allocated to the discontinued operations.
Selected financial information for the discontinued operations as of March
31, 1995, and December 31, 1994, and for the three-month periods ended March 31,
1995, and March 31, 1994, is set forth below:
[CAPTION]
As of As of
March 31, December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 359,223 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 12,082 12,141
Deferred charges and other assets 29,724 31,103
Total assets being acquired by
Pennsylvania-American 401,029 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,293 141,420
Other 14,481 13,168
155,774 154,588
Net assets being acquired by
Pennsylvania-American 245,255 248,055
Estimated liability for income taxes on
sale of discontinued operations (55,312) (55,542)
Anticipated income from discontinued
operations during phase-out period 6,855 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 196,798 $ 203,196
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Three months ended March 31,
1995 1994
(Thousands of Dollars)
[CAPTION]
[S] [C] [C]
Operating revenues $ 15,640 $ 16,052
Operating expenses, excluding income taxes
Depreciation 1,946 1,982
Other operating expenses 6,929 7,299
8,875 9,281
Operating income before income taxes 6,765 6,771
Income taxes 1,403 1,485
Operating income 5,362 5,286
Allocated interest charges 3,235 3,207
Income from discontinued operations $ 2,127 $ 2,079
(3) RECOVERY OF ORDER 636 TRANSITION COSTS
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that Gas
Transition Costs are subject to recovery through the annual PGC rate filing.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. PG&W will seek
recovery of the remaining $249,000 of Gas Transition Costs in its annual PGC
rate that is effective December 1, 1995.
The PGC Order also indicated that while Non-Gas Transition Costs are not
natural gas costs eligible for recovery under the PGC rate filing mechanism,
such costs are subject to full recovery by local distribution companies through
the filing of a tariff pursuant to either the existing surcharge or base rate
provisions of the Code. By Order of the PPUC entered August 26, 1994, PG&W
began recovering the Non-Gas Transition Costs that it estimates it will
ultimately be billed pursuant to FERC Order 636 through the billing of a
surcharge to its customers effective September 12, 1994. It is currently
estimated that $9.4 million of Non-Gas Transition Costs will be billed to PG&W,
generally over a four-year period extending through the fourth quarter of 1997,
of which $4.5 million had been billed to PG&W and $2.4 million had been
recovered from its customers as of March 31, 1995. PG&W has recorded the
estimated Non-Gas Transition Costs that remain to be billed to it and the
amounts remaining to be recovered from its customers.
(4) COMMITMENTS AND CONTINGENCIES
Valve Maintenance
On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the "Emergency Order"), requiring PG&W to survey its gas
distribution system to verify the location and spacing of its gas shut off
valves, to add or repair valves where needed and to establish programs for the
periodic inspection and maintenance of all such valves and the verification of
all gas service line information. On March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PG&W for complying with the Emergency Order. PG&W
does not believe that compliance with the terms of the Order will have a
material adverse effect on its financial position or results of operations.
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Environmental Matters
PG&W, like many gas distribution companies, once utilized manufactured gas
plants in connection with providing gas service to its customers. None of these
plants has been in operation since 1960, and several of the plant sites are no
longer owned by PG&W. Pursuant to the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), PG&W filed notices with the
United States Environmental Protection Agency (the "EPA") with respect to the
former plant sites. None of the sites is or was formerly on the proposed or
final National Priorities List. The EPA has conducted site inspections and made
preliminary assessments of each site and has concluded that no further remedial
action is planned. While this conclusion does not constitute a legal
prohibition against further regulatory action under CERCLA or other applicable
federal or state law, PG&W does not believe that additional costs, if any,
related to these manufactured gas plant sites would be material to its financial
position or results of operations since environmental remediation costs
generally are recoverable through rates over a period of time.
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PENNSYLVANIA GAS AND WATER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DISCONTINUED OPERATIONS
On April 26, 1995, Pennsylvania Enterprises, Inc. ("PEI"), the parent
company of PG&W, and PG&W signed a definitive agreement (the "Agreement") with
American Water Works Company, Inc. ("American") and Pennsylvania-American Water
Company ("Pennsylvania-American"), a wholly-owned subsidiary of American,
providing for the sale to Pennsylvania-American of substantially all of the
assets, properties and rights of PG&W's water utility operations.
Under the terms of the Agreement, Pennsylvania-American will pay
approximately $409 million consisting of $254 million in cash and the assumption
of $155 million of PG&W's liabilities, including $141 million of its long-term
debt. This price is subject to adjustment for changes in the assets of PG&W's
water utility operations and the liabilities to be assumed by Pennsylvania-
American between December 31, 1994, and the date of closing, which is expected
to be in the fourth quarter of 1995. Until the closing, PG&W will continue to
operate its water utility business.
The sale price reflects a $6.5 million premium over the book value of the
assets being sold. However, after transaction costs and the write-off of
certain deferred regulatory assets and deferred credits, the sale will result in
an estimated after tax loss of $5 to 8 million, net of the expected income from
the water operations during the phase-out period to the date of closing (which
has been assumed to be December 31, 1995).
The net cash proceeds from the sale of approximately $199 million, after the
payment of an estimated $55 million of income taxes, will be used by PEI and
PG&W to retire debt, to repurchase stock and for working capital for their
continuing operations. After the sale, the principal assets of PG&W will
consist of its gas utility operations and approximately 46,000 acres of land.
The sale of PG&W's water utility operations to Pennsylvania-American is
subject to approval by the Pennsylvania Public Utility Commission ("PPUC"),
approval of the stockholders and certain debt holders of both PEI and PG&W,
termination of the waiting period under federal antitrust laws, and various
other regulatory approvals and certain other conditions. Until the closing,
PG&W intends to utilize its existing bank lines of credit for the external
financing requirements of the water utility operations, which PG&W believes will
be adequate for such purposes.
Operating revenues from PG&W's water utility operations decreased by
$412,000 (2.6%) from $16.1 million for the three-month period ended March 31,
1994, to $15.6 million for the three-month period ended March 31, 1995. This
decrease in revenues was principally the result of a 5.4% decrease in customer
consumption. Operating expenses related to the water utility operations,
excluding income taxes, decreased $406,000 (4.4%) from $9.3 million for the
three-month period ended March 31, 1994, to $8.9 million for the three-month
period ended March 31, 1995. The major reason for this decrease was a $213,000
(4.8%) decrease in other operation expenses, primarily as a result of decreases
in the provision for injuries and damages and the amortization of rate case
expense, the effects of which were partially offset by an increase in payroll
costs. Income taxes with respect to the water utility operations decreased by
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$82,000 (5.5%) from $1.5 million in the first quarter of 1994 to $1.4 million in
the first quarter of 1995 due to a lower level of income before income taxes
(for this purpose, operating income net of interest charges) and a decrease in
the Pennsylvania Corporate Net Income Tax rate. As a result of the foregoing,
operating income of the water utility operations increased $76,000 (1.4%) from
$5.3 million for the three-month period ended March 31, 1994, to $5.4 million
for the three-month period ended March 31, 1995. After interest charges, the
income from the water utility operations increased $48,000 (2.3%) from
$2,079,000 for the three-month period ended March 31, 1994, to $2,127,000 for
the three-month period ended March 31, 1995.
In accordance with generally accepted accounting principles, PG&W's
financial statements have been restated to reflect its water utility operations
as "discontinued operations," and the following sections of Management's
Discussion and Analysis relate exclusively to PG&W's continuing operations,
which consist primarily of its gas utility operations. For additional
information regarding the discontinued operations, see Note 2 of the
accompanying Notes to Financial Statements.
RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PG&W's statements of income
as percentages of total operating revenues for each of the three-month periods
ended March 31, 1995, and March 31, 1994:
[CAPTION]
Percentage of
Operating Revenues
Three Months Ended
March 31,
1995 1994
[S] [C] [C]
OPERATING REVENUES............................ 100.0% 100.0%
Cost of gas................................. 60.7 62.9
OPERATING MARGIN.............................. 39.3 37.1
OTHER OPERATING EXPENSES:
Operation................................... 8.6 7.9
Maintenance................................. 1.4 1.4
Depreciation................................ 2.6 2.1
Income taxes................................ 7.1 7.4
Taxes other than income taxes............... 5.7 5.1
Total other operating expenses.............. 25.4 23.9
OPERATING INCOME.............................. 13.9 13.2
OTHER INCOME, NET............................. 0.3 0.3
INTEREST CHARGES.............................. 3.8 3.1
INCOME FROM CONTINUING OPERATIONS............. 10.4 10.4
INCOME (LOSS) FROM DISCONTINUED OPERATIONS.... (5.4) 2.6
NET INCOME.................................... 5.0 13.0
DIVIDENDS ON PREFERRED STOCK(1)............... 1.0 1.7
EARNINGS APPLICABLE TO COMMON STOCK........... 4.0 11.3
(1) None of the dividends on preferred stock has been allocated to the
discontinued operations.
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Operating Revenues. Operating revenues decreased $12.0 million (15.0%) from
$80.2 million for the three-month period ended March 31, 1994, to $68.2 million
for the three-month period ended March 31, 1995. This decrease was primarily
the result of a 1.7 billion cubic feet (14.2%) decrease in sales to residential
and commercial heating customers, caused by a 655 (18.9%) decrease in heating
degree days.
Cost of Gas. The cost of gas decreased $9.1 million (17.9%) from $50.5
million for the three-month period ended March 31, 1994, to $41.4 million for
the three-month period ended March 31, 1995, primarily because of the reduced
consumption by residential and commercial heating customers.
Operating Margin. The operating margin decreased $2.9 million (9.9%) from
$29.8 million in the first quarter of 1994 to $26.8 million in the first quarter
of 1995. However, as a percentage of operating revenues, the margin increased
from 37.1% in the first quarter of 1994 to 39.3% in the first quarter of 1995
primarily as a result of a higher average charge per cubic foot to residential
and commercial heating customers because of their lower consumption due to the
warmer weather.
Other Operating Expenses. Other operating expenses decreased $1.8 million
(9.6%) from $19.2 million for the three-month period ended March 31, 1994, to
$17.3 million for the three-month period ended March 31, 1995, primarily as a
result of a $678,000 (9.1%) decrease in operation and maintenance expenses and a
lower level of income taxes. The principal reason for the lower level of
operation and maintenance expenses was a reduction in payroll and related costs
due to the warmer weather in January and February, 1995, compared to the similar
period in 1994. Income taxes decreased by $1.1 million (18.4%) from $6.0
million in the first quarter of 1994 to $4.9 million in the first quarter of
1995 due to a decrease in income before income taxes (for this purpose,
operating income net of interest charges). Notwithstanding the decrease in
other operating expenses, such expenses increased as a percentage of operating
revenues from 23.9% during the first quarter of 1994 to 25.4% during the first
quarter of 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $1.1 million (10.4%) from $10.6 million for the three-month period
ended March 31, 1994, to $9.5 million for the three-month period ended March 31,
1995. Nonetheless, operating income increased as a percentage of total
operating revenues for such periods from 13.2% in 1994 to 13.9% in 1995,
primarily because of the decrease in the cost of gas as a percentage of
operating revenues, the effect of which was partially offset by the lower levels
of operation and maintenance expenses and income taxes.
Interest Charges. Interest charges increased by $166,000 (6.7%) from $2.5
million for the three-month period ended March 31, 1994, to $2.6 million for the
three-month period ended March 31, 1995, as a result of a $224,000 (10.3%)
increase in interest on long-term debt from $2.2 million during the three-month
period ended March 31, 1994, to $2.4 million during the three-month period ended
March 31, 1995.
Income From Continuing Operations. Income from continuing operations
decreased $1.2 million (14.8%) from $8.3 million for the quarter ended March 31,
1994, to $7.1 million for the quarter ended March 31, 1995. This decrease was
largely the result of the matters discussed above, principally the decrease in
operating margin resulting from the lower level of sales to residential and
commercial heating customers. The effect of the decreased operating margin was
partially offset by lower operating expenses.
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Net Income. The decrease in net income of $7.0 million (67.4%) from $10.4
million for the three-month period ended March 31, 1994, to $3.4 million for the
three-month period ended March 31, 1995, was largely the result of the estimated
loss on the disposal of discontinued operations, as discussed above. Also
contributing to the decrease in net income was the reduced income from
continuing operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$692,000 (50.0%) from $1.4 million for the three-month period ended March 31,
1994, to $691,000 for the three-month period ended March 31, 1995, as a result
of the redemption by PG&W on May 31, 1994, of 150,000 shares ($15.0 million), of
its 9.50% cumulative preferred stock, $100 par value, and on December 16, 1994,
of 150,000 shares ($15.0 million) of its 8.90% cumulative preferred stock, $100
par value. No dividends on preferred stock have been allocated to the
discontinued operations.
Earnings Applicable to Common Stock. The decrease in earnings applicable to
common stock of $6.3 million (70.0%) from $9.0 million for the three-month
period ended March 31, 1994, to $2.7 million for the three-month period ended
March 31, 1995, as well as the decrease in earnings per share of common stock of
$1.37 from $1.86 per share for the quarter ended March 31, 1994, to $.49 per
share for the quarter ended March 31, 1995, was largely the result of the
estimated loss (equivalent to $1.06 per share) on the disposal of discontinued
operations, as discussed above. Also contributing to the decreases in earnings
applicable to common stock and earnings per share was the reduced income from
continuing operations. The effects of these factors were partially offset by
reduced dividends on preferred stock.
RATE MATTERS
Pursuant to the provisions of the Pennsylvania Public Utility Code (the
"Code") which require that the tariffs of larger gas distribution companies,
such as PG&W, be adjusted on an annual basis to reflect changes in their
purchased gas costs, the PPUC, by Order adopted November 10, 1994, authorized
PG&W to decrease the gas costs contained in its gas tariff rates from $3.74 to
$3.68 per thousand cubic feet effective December 1, 1994. This change in gas
rates on account of purchased gas costs was designed to produce a decrease in
annual revenue of $1.8 million. In accordance with the same provisions of the
Code, PG&W is presently seeking the approval of the PPUC to implement a
purchased gas cost rate of $2.42 per thousand cubic feet effective May 15, 1995,
in order to refund overcollections from customers caused by lower than
anticipated purchased gas costs and the receipt of supplier refunds during the
first quarter of 1995. The changes in gas rates on account of purchased gas
costs have no effect on PG&W's earnings since the changes in revenue are offset
by corresponding changes in the cost of gas.
The PPUC has adopted regulations effective June 14, 1995, that provide for
the quarterly adjustment of the annual purchased gas cost rate of larger gas
distribution companies, including PG&W. Except for reducing the amount of any
over or undercollections of gas costs, the adoption of these regulations will
not have any material effect on PG&W's financial position or results of
operations, and PG&W will still be required to file an annual purchased gas cost
rate.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that
Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to
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recovery through the annual PGC rate filing made with the PPUC by PG&W and other
larger local gas distribution companies. The PGC Order also indicated that
while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition Costs")
are not natural gas costs eligible for recovery under the PGC rate filing
mechanism, such costs are subject to full recovery by local distribution
companies through the filing of a tariff pursuant to either the existing
surcharge or base rate provisions of the Code. The PGC Order further stated
that all such filings would be evaluated on a case-by-case basis.
PG&W was billed a total of $1.1 million of Gas Transition Costs by its
interstate pipelines over a nineteen-month period extending through March 31,
1995. Of this amount, $858,000 was recovered by PG&W over a twelve-month period
ended January 31, 1995, through an increase in its PGC rate. PG&W will seek
recovery of the remaining $249,000 of Gas Transition Costs in its annual PGC
rate that is effective December 1, 1995.
By Order of the PPUC entered August 26, 1994, PG&W began recovering the Non-
Gas Transition Costs that it estimates it will ultimately be billed pursuant to
FERC Order 636 through the billing of a surcharge to its customers effective
September 12, 1994. It is currently estimated that $9.4 million of Non-Gas
Transition Costs will be billed to PG&W, generally over a four-year period
extending through the fourth quarter of 1997, of which $4.5 million had been
billed to PG&W and $2.4 million had been recovered from its customers as of
March 31, 1995. PG&W has recorded the estimated Non-Gas Transition Costs that
remain to be billed to it and the amounts remaining to be recovered from its
customers.
LIQUIDITY AND CAPITAL RESOURCES
The primary capital needs of PG&W are the funding of its construction
program and the seasonal funding of its gas purchases and increases in its
customer accounts receivable. PG&W's revenues are highly seasonal and weather-
sensitive, with approximately 75% of its revenues being realized in the first
and fourth quarters of the calendar year when the temperatures in its service
area are the coldest.
The cash flow from PG&W's operations is generally sufficient to fund a
portion of its construction expenditures. However, to the extent external
financing is required, it is the practice of PG&W to use bank borrowings to fund
such expenditures, pending the periodic issuance of stock and long-term debt.
Bank borrowings are also used by PG&W for the seasonal funding of its gas
purchases and increases in customer accounts receivable.
In order to so finance construction expenditures and to meet its seasonal
borrowing requirements, and also to provide funding required for its
discontinued operations, PG&W has made arrangements for a total of $67.5 million
of unsecured revolving bank credit. Specifically, PG&W has entered into a
revolving bank credit agreement (the "Credit Agreement") with a group of six
banks under the terms of which $60.0 million is available for borrowing by PG&W.
The Credit Agreement terminates on May 31, 1996, at which time any borrowings
outstanding thereunder are due and payable. The interest rate on borrowings
under the Credit Agreement is generally less than prime. The Credit Agreement
also requires the payment of a commitment fee of 0.195% per annum on the average
daily amount of the unused portion of the available funds. As of May 5, 1995,
$29.0 million of borrowings were outstanding under the Credit Agreement.
PG&W currently has three additional bank lines of credit with an aggregate
borrowing capacity of $7.5 million which provide for borrowings at interest
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rates generally less than prime. Borrowings outstanding under two of these bank
lines of credit with borrowing capacities of $2.0 million and $3.0 million
mature on May 31, 1995, and June 30, 1995, respectively. Borrowings outstanding
under the third bank line of credit with a borrowing capacity of $2.5 million
mature on May 31, 1996. As of May 5, 1995, PG&W had $5.5 million of borrowings
outstanding under these additional bank lines of credit. Prior to their
respective maturities, PG&W intends to renew the $7.5 million of these bank
lines of credit.
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. No long-term debt or
capital stock financings were consummated by PG&W during the three-month period
ended March 31, 1995.
PG&W also obtains external funds from the sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP")
and Customer Stock Purchase Plan (the "Customer Plan"). During 1995 (through
May 5) PG&W realized $2.3 million and $2.4 million from the issuance of common
stock to PEI in connection with the DRP and Customer Plan, respectively.
Expenditures for the construction of utility plant totaled $3.5 million
during the first three months of 1995 and are currently estimated to be $21.3
million during the remainder of the year. PG&W's construction expenditures are
being financed with internally-generated funds and bank borrowings, pending the
periodic issuance of stock and long-term debt.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2-1 Asset Purchase Agreement dated as of April 26, 1995, among PEI,
PG&W, American Water Works Company, Inc., and Pennsylvania-American
Water Company -- filed herewith.
10-1 Service Agreement for transportation service under Rate Schedule FT,
dated April 1, 1995, by and between PG&W and Transcontinental Gas
Pipe Line Corporation -- filed herewith.
27-1 Financial Data Schedule -- filed herewith.
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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PENNSYLVANIA GAS AND WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
Date: May 9, 1995 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: May 9, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
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PENNSYLVANIA GAS AND WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENNSYLVANIA GAS AND WATER COMPANY
(Registrant)
Date: May 9, 1995 By:
Thomas J. Ward
Secretary
Date: May 9, 1995 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)