PENNSYLVANIA GAS AND WATER COMPANY
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Income for the three and six
months ended June 30, 1995 and 1994 . . . . . . . . . . . 2
Balance Sheets as of June 30, 1995,
and December 31, 1994 . . . . . . . . . . . . . . . . . . 3
Statements of Cash Flows for the six
months ended June 30, 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 . . . . . . . . . . . . . . 18
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PART I. FINANCIAL INFORMATION
PENNSYLVANIA GAS AND WATER COMPANY
Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
1995* 1994* 1995* 1994*
(Thousands of Dollars)
OPERATING REVENUES $ 25,184 $ 26,568 $ 93,421 $ 106,801
Cost of gas 12,874 14,354 54,281 64,814
OPERATING MARGIN 12,310 12,214 39,140 41,987
OTHER OPERATING EXPENSES:
Operation 5,457 5,175 11,281 11,304
Maintenance 1,312 1,044 2,280 2,194
Depreciation 1,784 1,670 3,576 3,340
Income taxes (766) (496) 4,101 5,551
Taxes other than income taxes 2,656 2,940 6,535 6,999
Total other operating expenses 10,443 10,333 27,773 29,388
OPERATING INCOME 1,867 1,881 11,367 12,599
OTHER INCOME (DEDUCTIONS), NET (62) (118) 172 81
INCOME BEFORE INTEREST CHARGES 1,805 1,763 11,539 12,680
INTEREST CHARGES:
Interest on long-term debt 2,269 2,134 4,659 4,300
Other interest 438 240 687 551
Allowance for borrowed funds used
during construction (13) 3 (22) (10)
Total interest charges 2,694 2,377 5,324 4,841
INCOME (LOSS) FROM CONTINUING OPERATIONS (889) (614) 6,215 7,839
DISCONTINUED OPERATIONS (Note 2):
Income from discontinued operations - 2,757 2,127 4,724
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 - 2,757 (3,704) 4,724
NET INCOME (LOSS) (889) 2,143 2,511 12,563
DIVIDENDS ON PREFERRED STOCK 692 1,261 1,383 2,644
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (1,581) $ 882 $ 1,128 $ 9,919
COMMON STOCK:
Earnings (loss) per share of common stock:
Continuing operations $ (.28) $ (.37) $ .87 $ 1.05
Discontinued operations - .54 (.67) .95
Net income (loss) before premium on
redemption of preferred stock (.28) .17 .20 2.00
Premium on redemption of preferred stock - (.11) - (.11)
Total $ (.28) $ .06 $ .20 $ 1.89
Weighted average shares outstanding 5,576,066 5,044,183 5,548,741 4,957,277
Cash dividends per share $ .7075 $ .355 $ 1.4125 $ .705
*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]
June 30, December 31,
1995* 1994*
(Thousands of Dollars)
ASSETS
[S] [C] [C]
UTILITY PLANT:
At original cost, less acquisition
adjustments of $386,000 $ 288,071 $ 284,080
Accumulated depreciation (75,668) (74,408)
212,403 209,672
OTHER PROPERTY AND INVESTMENTS 3,289 2,872
CURRENT ASSETS:
Cash 234 304
Accounts receivable -
Customers 10,787 15,676
Others 645 1,474
Reserve for uncollectible accounts (1,322) (921)
Accrued utility revenues 1,390 9,004
Materials and supplies, at average cost 2,713 2,743
Gas held by suppliers, at average cost 12,838 20,025
Natural gas transition costs collectible 4,342 4,708
Deferred cost of gas and supplier refunds, net - 3,767
Prepaid expenses and other 6,232 1,470
37,859 58,250
DEFERRED CHARGES:
Regulatory assets
Deferred taxes collectible 29,942 31,696
Natural gas transition costs collectible 1,991 4,099
Other 2,825 3,131
Unamortized debt expense 1,669 1,867
Other 3,218 3,552
39,645 44,345
NET ASSETS OF DISCONTINUED OPERATIONS 197,713 203,196
TOTAL ASSETS $ 490,909 $ 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]
June 30, December 31,
1995* 1994*
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S] [C] [C]
CAPITALIZATION:
Common shareholder's investment $ 214,369 $ 216,032
Preferred stock -
Not subject to mandatory redemption, net 33,615 33,615
Subject to mandatory redemption 1,680 1,760
Long-term debt 108,000 170,825
357,664 422,232
CURRENT LIABILITIES:
Current portion of long-term debt and
preferred stock subject to mandatory
redemption 36,670 3,290
Note payable to bank 2,000 -
Accounts payable -
Suppliers 14,483 16,762
Affiliates, net 1,541 788
Deferred cost of gas and supplier refunds, net 9,056 -
Accrued general business and realty taxes 779 3,381
Accrued income taxes 946 3,185
Accrued interest 2,974 2,713
Accrued natural gas transition costs 2,158 2,356
Other 2,860 2,395
73,467 34,870
DEFERRED CREDITS:
Deferred income taxes 46,747 46,627
Accrued natural gas transition costs 2,170 3,250
Unamortized investment tax credits 5,024 5,110
Operating reserves 2,191 2,383
Other 3,646 3,863
59,778 61,233
COMMITMENTS AND CONTINGENCIES (Note 4)
TOTAL CAPITALIZATION AND LIABILITIES $ 490,909 $ 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
Six Months Ended
June 30,
1995* 1994*
(Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
Income from continuing operations $ 6,215 $ 7,839
Effects of noncash charges to income -
Depreciation 3,596 3,353
Deferred income taxes, net (127) 744
Provisions for self insurance 526 735
Other, net 1,219 1,572
Changes in working capital, exclusive of cash
and current portion of long-term debt -
Receivables and accrued utility revenues 13,733 12,137
Gas held by suppliers 7,187 14,642
Accounts payable (2,691) (4,165)
Deferred cost of gas and supplier refunds, net 14,019 5,492
Other current assets and liabilities, net (8,847) (2,998)
Other operating items, net 438 (827)
Net cash provided by continuing operations 35,268 38,524
Net cash provided (used) by discontinued operations (Note 2) 3,764 (3,308)
Net cash provided by operating activities 39,032 35,216
CASH FLOW FROM INVESTING ACTIVITIES:
Additions to utility plant (net of allowance for
equity funds used during construction) (8,304) (7,777)
Other, net (246) 35
Net cash used for investing activities (8,550) (7,742)
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of common stock 5,046 20,390
Redemption of preferred stock (80) (15,080)
Dividends on common and preferred stock (9,220) (6,255)
Repayment of long-term debt (210) (1,054)
Repayment of note payable to parent - (3,680)
Net decrease in bank borrowings (26,070) (23,014)
Other, net (18) (540)
Net cash used for financing activities (30,552) (29,233)
NET DECREASE IN CASH AND CASH EQUIVALENTS (70) (1,759)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 304 2,714
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 234 $ 955
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 11,266 $ 10,031
Income taxes $ 8,143 $ 4,314
*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 currently is
expected to take place in December, 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 $201 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" effective March 31, 1995. 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 with respect to the discontinued operations
is set forth below:
Net Assets of Discontinued Operations
[CAPTION]
As of As of
June 30, December 31,
1995 1994
(Thousands of Dollars)
[S] [C] [C]
Net utility plant $ 364,518 $ 359,399
Current assets (primarily accounts
receivable and accrued revenues) 13,291 12,141
Deferred charges and other assets 27,111 31,103
Total assets being acquired by
Pennsylvania-American 404,920 402,643
Liabilities being assumed by
Pennsylvania-American
Long-term debt 141,295 141,420
Other 14,280 13,168
155,575 154,588
Net assets being acquired by
Pennsylvania-American 249,345 248,055
Estimated liability for income taxes on
sale of discontinued operations (55,315) (55,542)
Anticipated income from discontinued
operations during the balance of the
phase-out period 3,683 -
Other net assets of discontinued operations
(written off as of March 31, 1995) - 10,683
Total net assets of discontinued operations $ 197,713 $ 203,196
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Income from Discontinued Operations
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995* 1994
(Thousands of Dollars)
Operating revenues $ - $16,914 $15,640 $32,966
Operating expenses, excluding income
taxes
Depreciation - 1,982 1,946 3,964
Other operating expenses - 7,196 6,929 14,685
- 9,178 8,875 18,649
Operating income before income taxes - 7,736 6,765 14,317
Income taxes - 1,963 1,403 3,370
Operating income - 5,773 5,362 10,947
Allocated interest and other charges - 3,016 3,235 6,223
Income from discontinued operations $ - $ 2,757 $ 2,127 $ 4,724
Net Cash Provided (Used) by Discontinued Operations
[CAPTION]
Six Months Ended June 30
1995* 1994
(Thousands of Dollars)
[S] [C] [C]
Income from discontinued operations $ 2,127 $ 4,724
Noncash charges (credits) to income:
Depreciation 1,946 3,964
Deferred treatment plant costs 145 291
Deferred income taxes 447 2,152
Deferred water utility billings - (2,909)
Changes in working capital, exclusive of cash
and current portion of long-term debt 1,648 485
Additions to utility plant (2,276) (8,676)
Utilization of proceeds from issuance of
long-term debt to be assumed by
Pennsylvania-American 1,137 4,240
Repayment of water facility loans (127) (7,279)
Other, net (1,283) (300)
Net cash provided (used) by discontinued
operations $ 3,764 $ (3,308)
* Reflects amounts only through March 31, 1995, the effective date of the
discontinuance of PG&W's water utility operations for financial statement
purposes.
-8-
(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 $252,000 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 Pennsylvania Public Utility 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 $5.0 million had been billed to PG&W and $3.0 million had been
recovered from its customers as of June 30, 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.
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 currently is
expected to take place in December, 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 (which for financial reporting
purposes commenced April 1, 1995) to the date of closing (which has been assumed
to be December 31, 1995).
The net cash proceeds from the sale of approximately $201 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.
In accordance with generally accepted accounting principles, PG&W's
financial statements have been restated to reflect its water utility operations
as "discontinued operations" effective March 31, 1995, and the following
sections of Management's Discussion and Analysis generally relate only 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.
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RESULTS OF CONTINUING OPERATIONS
The following table expresses certain items in PG&W's statements of income
as percentages of operating revenues for each of the three and six-month periods
ended June 30, 1995, and June 30, 1994:
Percentage of Operating Revenues
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
OPERATING REVENUES........................... 100.0% 100.0% 100.0% 100.0%
Cost of gas................................ 51.1 54.0 58.1 60.7
OPERATING MARGIN............................. 48.9 46.0 41.9 39.3
OTHER OPERATING EXPENSES:
Operation.................................. 21.7 19.5 12.1 10.6
Maintenance................................ 5.2 3.9 2.4 2.0
Depreciation............................... 7.1 6.3 3.8 3.1
Income taxes............................... (3.0) (1.9) 4.4 5.2
Taxes other than income taxes.............. 10.5 11.1 7.0 6.6
Total other operating expenses........... 41.5 38.9 29.7 27.5
OPERATING INCOME............................. 7.4 7.1 12.2 11.8
OTHER INCOME (DEDUCTIONS), NET............... (0.2) (0.4) 0.2 0.1
INTEREST CHARGES............................. 10.7 9.0 5.7 4.5
INCOME (LOSS) FROM CONTINUING OPERATIONS..... (3.5) (2.3) 6.7 7.4
INCOME (LOSS) WITH RESPECT TO DISCONTINUED
OPERATIONS................................. - 10.4 (4.0) 4.4
NET INCOME (LOSS)............................ (3.5) 8.1 2.7 11.8
DIVIDENDS ON PREFERRED STOCK(1).............. 2.7 4.8 1.5 2.5
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK... (6.2) 3.3 1.2 9.3
(1) None of the dividends on preferred stock has been allocated to the
discontinued operations.
Three Months Ended June 30, 1995, Compared
With Three Months Ended June 30, 1994
Operating Revenues. Operating revenues decreased $1.4 million (5.2%) from
$26.6 million for the three-month period ended June 30, 1994, to $25.2 million
for the three-month period ended June 30, 1995. This decrease was primarily the
result of the switching of certain commercial and industrial customers from
sales to transportation service and a reduction in the purchased gas cost rate
component of operating revenues effective May 16, 1995. See "-RATE MATTERS."
Cost of Gas. The cost of gas decreased $1.5 million (10.3%) from $14.4
million for the three-month period ended June 30, 1994, to $12.9 million for the
three-month period ended June 30, 1995, primarily because of the aforementioned
switching to transportation service by certain commercial and industrial
customers and the reduction in the gas cost rate effective May 16, 1995. See "-
RATE MATTERS."
-11-
Operating Margin. The operating margin increased $96,000 (0.8%) from $12.2
million in the second quarter of 1994 to $12.3 million in the second quarter of
1995, primarily as a result of a 76,000 cubic feet (2.5%) increase in
consumption by residential and commercial heating customers.
Other Operating Expenses. Other operating expenses increased $110,000
(1.1%) from $10.3 million for the three-month period ended June 30, 1995, to
$10.4 million for the three-month period ended June 30, 1994. Operation and
maintenance expenses increased $550,000 (8.8%), principally because of increased
payroll and related costs, and depreciation expense increased by $114,000
(6.8%), as a result of additions to utility plant. However, taxes other than
income taxes decreased $284,000, primarily as a result of decreased gross
receipts tax attributable to the lower operating revenues. In addition, income
taxes decreased by $270,000 (54.4%) from a credit of $496,000 in the second
quarter of 1994 to a credit of $766,000 in the second quarter of 1995 due to a
decrease in income before income taxes (for this purpose, operating income net
of interest charges) and a reduction in the Pennsylvania corporate net income
tax rate. Other operating expenses increased as a percentage of operating
revenues from 38.9% during the second quarter of 1994 to 41.5% during the second
quarter of 1995 because of the decrease in revenues.
Operating Income. As a result of the above, total operating income remained
relatively unchanged for the three-month period ended June 30, 1994, compared to
the three-month period ended June 30, 1995, decreasing by only $14,000 (0.7%).
Nonetheless, operating income increased as a percentage of total operating
revenues for such periods from 7.1% in 1994 to 7.4% in 1995, primarily because
of the decrease in operating revenues due to the switching of certain customers
to transportation service and the reduction in the gas cost rate.
Interest Charges. Interest charges increased by $317,000 (13.3%) from $2.4
million for the three-month period ended June 30, 1994, to $2.7 million for the
three-month period ended June 30, 1995. This increase was a result of a
$135,000 (6.3%) increase in interest on long-term debt from $2.1 million during
the three-month period ended June 30, 1994, to $2.3 million during the three-
month period ended June 30, 1995, and a higher level of interest relative to
overcollections of purchased gas costs.
Income (Loss) From Continuing Operations. The loss from continuing
operations increased $275,000 (44.8%) from $614,000 for the quarter ended June
30, 1994, to $889,000 for the quarter ended June 30, 1995. This increase in the
seasonal loss was largely the result of the matters discussed above, principally
the increase in interest charges.
Net Income (Loss). The decrease in net income of $3.0 million from income
of $2.1 million for the three-month period ended June 30, 1994, to a loss of
$889,000 for the three-month period ended June 30, 1995, was largely the result
of the elimination from earnings of the income from discontinued operations
during the phase-out period for those operations. Also contributing to the
decrease in net income was the reduced income from continuing operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased
$569,000 (45.1%) from $1.3 million for the three-month period ended June 30,
1994, to $692,000 for the three-month period ended June 30, 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.
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Earnings (Loss) Applicable to Common Stock. The decrease in earnings
applicable to common stock of $2.5 million from income of $882,000 for the
three-month period ended June 30, 1994, to a loss of $1.6 million for the three-
month period ended June 30, 1995, as well as the decrease in earnings per share
of common stock of $.34 from income of $.06 per share for the quarter ended June
30, 1994 (after an $.11 per share charge for the premium on redemption of
preferred stock), to a loss of $.28 per share for the quarter ended June 30,
1995, were largely the result of the elimination from earnings of the income
from the discontinued operations during the phase-out period for those
operations. The anticipated income from the discontinued operations during the
quarter ended June 30, 1995, was recorded as an offset to the estimated loss on
the disposal of the discontinued operations which was recorded as of March 31,
1995. Also contributing to the decreases in earnings applicable to common stock
and earnings per share for the quarter ended June 30, 1995, was the lower income
from continuing operations. The effects of these factors were partially offset
by the reduced preferred stock dividends and, in the case of the earnings per
share, the absence of any premium on the redemption of preferred stock.
Six Months Ended June 30, 1995, Compared
With Six Months Ended June 30, 1994
Operating Revenues. Operating revenues decreased $13.4 million (12.5%) from
$106.8 million for the six-month period ended June 30, 1994, to $93.4 million
for the six-month period ended June 30, 1995. This decrease was primarily the
result of a 1.6 billion cubic feet (10.8%) decrease in sales to residential and
commercial heating customers, caused by a 590 (14.2%) decrease in heating degree
days. There were 3,570 heating degree days (90.3% of normal) during the first
six months of 1995 compared to 4,160 (105.2% of normal) during the first six
months of 1994.
Cost of Gas. The cost of gas decreased $10.5 million (16.3%) from $64.8
million for the six-month period ended June 30, 1994, to $54.3 million for the
six-month period ended June 30, 1995, primarily because of the reduced
consumption by residential and commercial heating customers.
Operating Margin. The operating margin decreased $2.8 million (6.8%) from
$42.0 million in the six-month period ended June 30, 1994 to $39.1 million in
the six-month period ended June 30, 1995. However, as a percentage of operating
revenues, the margin increased from 39.3% in the first six months of 1994 to
41.9% in the first six months of 1995 primarily as a result of the 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 $1.6 million
(5.5%) from $29.4 million for the six-month period ended June 30, 1994, to $27.8
million for the six-month period ended June 30, 1995. This decrease was
primarily the result of a $1.5 million (26.1%) decrease in income taxes from
$5.6 million in the first six months of 1994 to $4.1 million in the first six
months of 1995 due to a decrease in income before income taxes (for this
purpose, operating income net of interest charges) and a reduction in the
Pennsylvania corporate net income tax rate. Also contributing to the decrease
in other operating expenses was a $464,000 (6.6%) decrease in taxes other than
income taxes, primarily because of a decrease in gross receipts tax as a result
of the lower level of operating revenues. The effect of the decreases in taxes
was partially offset by a $236,000 (7.1%) increase in depreciation expense, as a
result of additions to utility plant, and a $63,000 (0.5%) increase in operation
and maintenance expenses. Notwithstanding the decrease in other operating
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expenses, such expenses increased as a percentage of operating revenues from
27.5% during the first six months of 1994 to 29.7% during the first six months
of 1995 because of the relatively greater decrease in revenues.
Operating Income. As a result of the above, total operating income
decreased by $1.2 million (9.8%) from $12.6 million for the six-month period
ended June 30, 1994, to $11.4 million for the six-month period ended June 30,
1995. Nonetheless, operating income increased as a percentage of total
operating revenues for such periods from 11.8% in 1994 to 12.2% 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 taxes.
Interest Charges. Interest charges increased by $483,000 (10.0%) from $4.8
million for the six-month period ended June 30, 1994, to $5.3 million for the
six-month period ended June 30, 1995, as a result of a $359,000 (8.3%) increase
in interest on long-term debt from $4.3 million during the six-month period
ended June 30, 1994, to $4.7 million during the six-month period ended June 30,
1995, and a $243,000 increase in interest on overcollections of purchased gas
costs.
Income (Loss) From Continuing Operations. Income from continuing operations
decreased $1.6 million (20.7%) from $7.8 million for the six months ended June
30, 1994, to $6.2 million for the six months ended June 30, 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 the lower levels of taxes.
Net Income (Loss). The decrease in net income of $10.1 million (80.0%) from
$12.6 million for the six-month period ended June 30, 1994, to $2.5 million for
the six-month period ended June 30, 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 lower income from
continuing operations.
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.3
million (47.7%) from $2.6 million for the six-month period ended June 30, 1994,
to $1.4 million for the six-month period ended June 30, 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 (Loss) Applicable to Common Stock. The decrease in earnings
applicable to common stock of $8.8 million (88.6%) from $9.9 million for the
six-month period ended June 30, 1994, to $1.1 million for the six-month period
ended June 30, 1995, as well as the decrease in earnings per share of common
stock of $1.69 from $1.89 per share for the six months ended June 30, 1994
(after an $.11 per share charge for the premium on redemption of preferred
stock), to $.20 per share for the six months ended June 30, 1995, were largely
the result of the estimated loss (equivalent to $1.05 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 for the
six months ended June 30, 1995, was the lower income from continuing operations.
The effects of these factors were partially offset by the reduced dividends on
preferred stock and, in the case of earnings per share, the absence of any
premium on the redemption of preferred stock.
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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, by Order adopted May 11, 1995, the PPUC authorized PG&W to decrease the
gas costs contained in its gas rates to $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
1995. This change in gas rates on account of purchased gas costs was designed
to produce a decrease in revenue of $8.2 million from its effective date through
December 1, 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.
Effective June 14, 1995, the PPUC adopted regulations 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, these regulations will not have any
material effect on PG&W's financial position or results of operations, and PG&W
will still be required to file an annual purchased gas cost rate.
On October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding recovery of Federal Energy Regulatory
Commission ("FERC") Order 636 transition costs. The PGC Order stated that
Account 191 and New Facility Costs (the "Gas Transition Costs") are subject to
recovery through the annual PGC rate filings made with the PPUC by PG&W and
other larger local gas distribution companies. The PGC Order also indicated
that while Gas Supply Realignment and Stranded Costs (the "Non-Gas Transition
Costs") are not natural gas costs eligible for recovery under the PGC rate
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 $252,000 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 $5.0 million had been
billed to PG&W and $3.0 million had been recovered from its customers as of June
30, 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.
-15-
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 normally 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 $75.5 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 August 1,
1995, $34.0 million of borrowings were outstanding under the Credit Agreement.
PG&W currently has five additional bank lines of credit with an aggregate
borrowing capacity of $15.5 million which provide for borrowings at interest
rates generally less than prime. Borrowings outstanding under these bank lines
of credit are due and payable at various dates during 1996, the earliest of
which is March 31, 1996. As of August 1, 1995, PG&W had $11.3 million of
borrowings outstanding under these additional 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 six-month period
ended June 30, 1995. However, PG&W is currently negotiating the terms of a
$50.0 million bank loan, the proceeds of which would be used to redeem the $50.0
million principal amount of its 9.57% Series First Mortgage Bonds due September
1, 1996. PG&W has not reached any definitive agreement regarding this proposed
loan nor has it obtained the required approval of the PPUC. Accordingly, there
can be no assurance that such loan and the related refunding of the 9.57% Series
First Mortgage Bonds will necessarily occur.
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 the six-month
period ended June 30, 1995, PG&W realized $2.7 million and $2.4 million from the
issuance of common stock to PEI in connection with the DRP and Customer Plan,
respectively. However, because of the significant reduction in its capital
requirements that will result from the currently-pending sale of PG&W's water
utility operations to Pennsylvania-American, effective May 9, 1995, PEI
suspended both the investment feature of the DRP, from which $2.0 million was
realized in 1995 prior to such action, and the Customer Plan.
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Expenditures for the construction of utility plant totaled $8.8 million
during the first six months of 1995 and are currently estimated to be $16.0
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.
Current Maturities of Long-Term Debt and Preferred Stock
As of June 30, 1995, $36.7 million of PG&W preferred stock and long-term
debt was required to be repaid within twelve months. Such amount included
borrowings of $29.0 million under the Credit Agreement and $2.5 million under an
additional bank line of credit, both of which expire on May 31, 1996, and $1.8
million under another bank line of credit which expires on June 30, 1996. Prior
to their respective expirations, PG&W intends to renew the Credit Agreement and
its other bank lines of credit to the extent the related borrowing capacity is
required. Also included in current maturities of long-term debt and preferred
stock as of June 30, 1995, was $3.3 million of PG&W's 8% Series First Mortgage
Bonds due 1997. These bonds, representing all of the 8% Series still
outstanding, were redeemed by PG&W on July 10, 1995, at a price of 100.34% of
principal (plus accrued interest to the redemption date), which included a
voluntary redemption premium aggregating $11,305, with funds from bank
borrowings.
Long Lived Assets
In March 1995, Financial Accounting Standards Board ("FASB") Statement 121,
"Accounting for the Impairment of Long-Lived Assets", was issued. The
provisions of this statement, which are effective for fiscal years beginning
after June 15, 1995, require that long-lived assets, identifiable intangibles,
capital leases and goodwill be reviewed for impairment whenever events occur or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. In addition, FASB Statement 121 requires that regulatory assets
meet the recovery criteria of FASB Statement 71, "Accounting for Effects of
Certain Types of Regulation", on an ongoing basis in order to avoid a writedown.
The implementation of FASB Statement 121 in 1996 is not expected to have any
significant impact on the Company or PG&W since the carrying amount of all
assets, including regulatory assets, is considered recoverable.
-17-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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: August 10, 1995 By: /s/ Thomas J. Ward
Thomas J. Ward
Secretary
Date: August 10, 1995 By: /s/ John F. Kell, Jr.
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)
-19-
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: August 10, 1995 By:
Thomas J. Ward
Secretary
Date: August 10, 1995 By:
John F. Kell, Jr.
Vice President, Finance
(Principal Financial Officer and
Principal Accounting Officer)