ITEM 2. PROPERTIES
Gas. PG&W's gas system consists of approximately 2,191 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 a first mortgage lien pursuant to the Indenture of Mortgage and Deed of Trust dated as of March 15, 1946, as supplemented by twenty-nine supplemental indentures (collectively, the "Indenture") from PG&W to First Trust of New York, National Association, as Trustee.
Water. PG&W's water system consists principally of 36 active and standby reservoirs and stream intakes, ten water treatment plants, five wells, various distribution system storage tanks, approximately 1,689 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.
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 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, and December 3, 1992, between PG&W and the Pennsylvania Infrastructure Investment Authority ("PENNVEST"), under the terms of which funds were provided to finance the construction of certain water facilities. The PENNVEST Mortgage also secures PG&W's obligations under assumption agreements dated April 5, 1993, with PENNVEST which relate to loans which were assumed by PG&W in connection with its acquisition of two small water companies.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings other than ordinary routine litigation incidental to the business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1994, there were no matters submitted to a vote of security holders of the registrant through the solicitation of proxies or otherwise.
PART II
ITEM 5.
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, 1994 and 1993, were as follows:
1994 1993
First quarter $ .350 $ .7100 Second quarter .355 .7100 Third quarter .425 .7100 Fourth quarter .680 .6925 Total $ 1.810 $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.
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, 1994, 1993 and 1992.
Percentage of Operating Revenues Year Ended December 31, 1994 1993 1992
Operating Revenues: Gas 71.6% 74.2% 74.6% Water 28.4 25.8 25.4 Total operating revenues 100.0 100.0 100.0
Operating Expenses: Cost of gas 42.0 41.9 40.5 Other operation expenses 17.1 18.8 19.8 Maintenance and depreciation 10.4 10.5 10.2 Deferred treatment plant costs, net 0.3 (0.7) (0.1) Income and other taxes 12.2 12.1 12.0 Total operating expenses 82.0 82.6 82.4
Operating Income 18.0 17.4 17.6 Other Income, Net - 0.3 - Interest Charges 9.5 9.9 10.9 Dividends on Preferred Stock 2.0 3.1 2.6 Earnings Applicable to Common Stock 6.5% 4.7% 4.1%
o Year ended December 31, 1994, compared with year ended December 31, 1993
Operating Revenues. PG&W's operating revenues increased $28.0 million (13.6%) from $206.7 million for 1993 to $234.7 million for 1994.
Gas operating revenues increased by $14.7 million (9.6%) from $153.3 million for 1993 to $168.0 million for 1994, primarily as a result of a price increase averaging 19.0% (designed to total $28.8 million on an annual basis) effective December 1, 1993, due to increased costs of purchased gas. See "-Rate Matters- Gas Rate Filings." Also contributing to the increase in gas operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in sales to residential and commercial heating customers. This increase was attributable to the addition of approximately 2,200 new customers and occurred despite heating degree days* that were 2.1% lower than normal and 0.3% less than in 1993. Additionally, the implementation of surcharges to recover Federal Energy Regulatory Commission ("FERC") Order 636 transition costs (as more fully discussed below under "-Rate Matters-Gas Rate Filings") acted to increase gas operating revenues by $1.8 million in 1994. The effects of the price increase and the surcharges on gas operating revenues were partially offset by the switching of certain commercial
* 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.
and industrial customers from sales to transportation service and a price decrease averaging 1.1% (designed to total $1.8 million on an annual basis) effective December 1, 1994, due to decreased costs of purchased gas (see"-Rate Matters-Gas Rate Filings").
Water operating revenues increased by $13.4 million (25.0%) from $53.4 million for 1993 to $66.7 million for 1994. This increase in revenues was primarily 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 $21.9 million (12.8%) from $170.5 million for 1993 to $192.4 million for 1994. As a percentage of operating revenues, total operating expenses decreased from 82.6% during 1993 to 82.0% during 1994. Operating expenses related to gas utility operations increased by $14.3 million (10.7%) from $134.2 million in 1993 to $148.5 million in 1994, primarily as a result of a $12.1 million increase in the cost of gas, a higher level of other operations and maintenance expense and increased gross receipts tax as a result of the higher level of gas revenues. Operating expenses related to water utility operations increased by $7.5 million (20.8%) from $36.4 million in 1993 to $43.9 million in 1994, primarily as a result of increases in other operation expense, depreciation, net deferred treatment plant costs and income taxes.
The cost of gas increased $12.1 million (14.0%) from $86.6 million for 1993 to $98.7 million for 1994. The effect of this increase, which was the result of higher costs for purchased gas and the implementation of surcharges to recover FERC Order 636 transition costs (see "-Rate Matters-Gas Rate Filings"), was partially offset by a 9.0% (2.6 billion cubic feet) decrease in the volume of gas sold during 1994, compared to 1993. This decreased volume was largely attributable to the aforementioned switching of certain customers from sales to transportation service. The gross margin on gas operations (gas operating revenues less the cost of gas) increased $2.6 million or 3.9% in 1994, primarily as a result of the increased sales to residential and commercial heating customers.
Other than the cost of gas and income taxes, operating expenses increased by $6.3 million (8.3%) from $75.0 million for 1993 to $81.2 million for 1994. This increase was largely attributable to a $1.2 million increase in other operation and maintenance expenses (principally as a result of a $668,000 increase in payroll costs, a $507,000 increase in other postretirement benefits and increased provisions for uncollectible accounts of $728,000) and a $2.1 million increase in net deferred treatment plant costs during 1994 (see "-Deferred Treatment Plant Costs, Net and Carrying Charges"), as well as a $2.0 million increase in depreciation (primarily because of capital additions and the change in December, 1993, from a 4% compound interest to a straight-line method of depreciation with respect to water plant in the Ceasetown and Watres Service Areas). The effects of these increases were partially offset by a $613,000 increase in costs charged to construction (which acts to reduce expense) as a result of a higher level of construction activity.
Income taxes increased by $3.5 million from $9.0 million in 1993 to $12.5 million in 1994 due to a higher level of income before income taxes (for this purpose, operating income net of interest charges).
Deferred Treatment Plant Costs, Net 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 allowance for funds used during construction ("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 $5.8 million of costs deferred with respect to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $885,000 had been recovered as of December 31, 1994.
Similarly, as permitted by an Order of the PPUC entered September 24, 1992, PG&W 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 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, 1994, a total of $4.6 million of costs relative to the Crystal Lake, Ceasetown and Watres Water Treatment Plants and related facilities had been deferred pursuant to the PPUC's Orders of September 24, 1992, and July 28, 1993. PG&W will seek recovery of the costs that have been so deferred 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 $6.2 million (17.1%) from $36.2 million for 1993 to $42.3 million for 1994, and increased as a percentage of total operating revenues for such periods from 17.4% in 1993 to 18.0% in 1994. Operating income from gas utility operations increased $353,000 (1.8%) from $19.1 million in 1993 to $19.5 million in 1994, primarily as a result of a $2.6 million increase in the gross margin, the effect of which was partially offset by a higher level of maintenance expense because of colder than normal weather in January and February, 1994, and increased gross receipts tax as a result of the higher level of gas revenues. Operating income from water utility operations increased $5.8 million (34.2%) from $17.0 million in 1993 to $22.8 million in 1994. This increase was primarily the result of rate increases effective March 9, 1993, June 23, 1993, and December 16, 1993, and a decrease in other taxes, the effects of which were partially offset by increases in other operations expense, depreciation, net deferred treatment plant costs and income taxes, as discussed above.
Other Income, Net. Other income, net decreased $544,000 from $560,000 for 1993 to $16,000 for 1994. This decrease was primarily attributable to a $1.5 million decrease in the allowance for equity funds used during construction because of a lower level of construction in progress, largely as a result of the completion of the Crystal Lake, Watres and Ceasetown Water Treatment Plants in 1993, and the discontinuance of the deferral of carrying charges relative to those plants. The effect of such items was partially offset by a $254,000 increase ($145,000 net of related income taxes) in gains on the sale of non- watershed land, a $469,000 gain ($268,000 net of related income taxes) on the sale of PG&W's interest in an oil and gas joint venture and a decrease in 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 increased by $2.1 million (10.4%) from $20.4 million for 1993 to $22.5 million for 1994. This increase was primarily attributable to a $1.2 million decrease in AFUDC, largely because of the completion of the Crystal Lake, Ceasetown and Watres Water Treatment Plants, and the discontinuance of the deferral, which totaled $1.2 million during 1993, of the carrying charges associated with those plants.
Interest on long-term debt increased by $707,000 (3.4%) from $20.5 million during 1993 to $21.2 million during 1994. The increase was principally the result of an additional $868,000 of interest expense relative to the 1992 Series B Bonds being reflected as interest on long-term debt (see "-Other Income, Net"). The weighted average indebtedness outstanding during 1994 was $287.8 million as compared to $288.2 million during 1993. The weighted average interest rate on indebtedness during 1994 was 7.73% as compared to 7.93% during 1993.
Dividends on Preferred Stock. Dividends on preferred stock decreased $1.8 million (28.2%) from $6.5 million for 1993 to $4.6 million for 1994, primarily as a result of the redemption by PG&W on December 23, 1993, of 100,000 shares ($10.0 million), and on May 31, 1994, of 150,000 shares ($15.0 million), of its 9.50% cumulative preferred stock, $100 par value.
Earnings Applicable to Common Stock. Earnings applicable to common stock increased $5.3 million (54.2%) from $9.8 million for 1993 to $15.2 million for 1994. The increased earnings in 1994 were the result of the matters discussed above, principally the increases in water operating revenues resulting from the rate increases which the PPUC allowed PG&W effective March 9, 1993, June 23, 1993, and December 16, 1993, and the increase in the gross margin on gas operations resulting primarily from the higher level of sales to residential and commercial heating customers. The effects of these factors were partially offset by increased operating expenses and interest charges.
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% (designed to total $9.5 million on an annual basis) effective December 1, 1992, and 19.0% (designed to total $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.
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 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 the deferral of treatment plant costs (which acted to reduce expenses).
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 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 the deferral of treatment plant costs during 1993. See "Deferred Treatment Plant Costs, Net and Carrying Charges."
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 were retroactive to January 1, 1993, increased PG&W's income tax expense by approximately $124,000 for the year 1993. 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 AFUDC and of the deferred treatment plant carrying charges that were recorded during 1993. See "-Other Income, Net", as discussed above.
Deferred Treatment Plant Costs, Net and Carrying Charges. As more fully discussed above, pursuant to an Order of the PPUC entered September 24, 1992, PG&W deferred all operating expenses, including depreciation and property taxes, and the carrying charges (equivalent to the AFUDC) 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. Similarly, 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 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 contemplated by the PPUC's
Orders, PG&W will seek recovery of the $4.6 million of costs that have been so deferred in its next rate increase request relating to the Spring Brook Water Rate Area.
Pursuant to an Order of the PPUC entered September 5, 1990, PG&W deferred all operating expenses and the carrying charges 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 $5.8 million of costs 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.
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%) 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 the recording of $1.6 million of deferred treatment plant carrying charges and allowance for equity funds used during construction. This amount 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 Authority's 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 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, 1993, June 23, 1993, and December 16, 1993, and the increase in the 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 despite 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 PEI on October 27, 1993.
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 1992, or which are currently pending.
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 1994, 1993 and 1992 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, 1994 $3.74 $3.68 $(1,800,000) December 1, 1993 2.79 3.74 28,800,000 December 1, 1992 2.46 2.79 9,500,000
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 October 15, 1993, the PPUC adopted an annual purchased gas cost ("PGC") order (the "PGC Order") regarding the recovery of 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 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. As of February 1, 1994, PG&W began to recover the Gas Transition 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 nineteen-month period extending through March 31, 1995, will aggregate $1.2 million, of which $1.1 million had been billed to PG&W and $659,000 had been recovered from its customers as of December 31, 1994. 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 by its interstate pipelines 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 $3.8 million had been billed to PG&W and $1.1 million had been recovered from its customers as of December 31, 1994. As of December 31, 1994, PG&W had recorded a liability of $5.6 million for the estimated transition costs that remained to be billed to it as of such date and both a current asset and a deferred asset (which together totaled $8.8 million) representing the transition costs remaining to be recovered from PG&W's customers.
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 despite 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 its customers with water service meeting or exceeding the PPUC's standards for quantity and quality, 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. See "-Liquidity and Capital Resources-Failure to Obtain Adequate Rate Relief" for a discussion of the adverse effects on PG&W if adequate rate relief were denied.
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, all of whom are now receiving filtered water (except for several hundred who are supplied with ground water from wells), was approximately $340 as of March, 1995. PG&W anticipates that this cost will increase to approximately $460 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 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 level of rates that PG&W expects to seek in future rate increases will be such that the PPUC may question the "affordability" of such rates and may also require that any rate increases be phased-in over a period of time in order to reduce consumer "rate shock." 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.
Scranton Area. By Order adopted March 22, 1991, the PPUC granted PG&W an approximate 110% rate increase effective March 23, 1991, for the Scranton Water Rate Area that was 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." In accordance with said Order, PG&W deferred the billing of $4.7 million of the increased revenue recorded during the period March 23, 1991, through March 22, 1992. Effective March 23, 1992, PG&W began to bill such $4.7 million by means of a surcharge that will be in effect during the period through March 22, 2001, and as of December 31, 1994, $1.4 million had been so billed to its Scranton Water Rate Area customers.
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 FASB Statement 92. The settlement 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 revenue deferred in accordance with the phase-in plan. However, pursuant to the terms of the settlement, PG&W deferred the billing of approximately $900,000 of the increased revenue recorded during the first year of the phase-in period (i.e., the period March 9, 1993, through March 8, 1994). Effective March 9, 1995, PG&W began to bill, by means of the surcharge that will be in effect in years three through five of the phase-in period, the approximate $900,000 that has been so deferred, as well as the related carrying charges.
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. This rate increase request involved the approximately 56,000 customers in PG&W's Scranton Water Rate Area at such date. 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 (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 (with which it was in compliance as of December 31, 1994) 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 Office of Consumer Advocate (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. 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 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 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 accordance with the provisions of FASB Statement 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. However, pursuant to the terms of the settlement, PG&W deferred the billing of $5.3 million of the increased revenue recorded during the first year of the phase-in period (i.e., the period December 16, 1993, through December 15, 1994). The amount so deferred was $200,000 less than the $5.5 million originally estimated because of slightly lower than anticipated consumption. Effective December 16, 1995, PG&W will begin to bill the $5.3 million that had been so deferred, as well as the related carrying charges, by means of the surcharge that will be effective in years three through five of the phase-in period.
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. 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. 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 PG&W has been granted by the PPUC since 1991 with respect to customers being supplied with filtered water. PG&W also believes that it will be allowed additional rate increases by the PPUC for its approximately 132,500 water customers, all of whom are now receiving filtered water (except for several hundred who are supplied with ground water from wells), 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."
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).
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 no unsecured debt due on demand or within one year from issuance outstanding as of December 31, 1994.
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 believes that it will be able to raise in a timely manner such funds as are required for its future construction expenditures, refinancings and other working capital requirements.
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 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 $67.5 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 March 10, 1995, $35.0 million of borrowings were outstanding under the Credit Agreement.
Current Maturities of Long-Term Debt and Preferred Stock
As of December 31, 1994, $3.8 million of PG&W preferred stock and long-term debt was required to be repaid within twelve months. Such amount included $3.0 million of borrowings that were outstanding under PG&W's bank lines of credit as of such date.
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 1993.
During 1993 and 1994, PG&W utilized $15.9 million and $9.8 million, respectively, of the proceeds from the issuance by the Luzerne County Industrial Development Authority (the "Authority") on December 22, 1992, of $30.0 million of its 1992 Series B Bonds and with respect to which PG&W issued $30.0 million of its 7.125% First Mortgage Bonds to the PNC Bank (formerly Northeastern Bank of Pennsylvania) as trustee (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 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. As of December 31, 1994, $3.4 million of the proceeds (including investment income) was held by the IDA Trustee and was available to finance the future construction of qualified water facilities for PG&W.
In addition, 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. Also, during 1993 and 1994, PG&W borrowed $1.6 million and $695,000 respectively, 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 $270,000 remained available as of December 31, 1994, 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.
On May 31, 1994, PG&W issued 500,000 shares of its common stock to PEI for aggregate net proceeds of $20.0 million. PG&W used a portion of the proceeds it so received to redeem $15.0 million of its 9.50% cumulative preferred stock and to fund the $534,375 premium in connection with such redemption. The remaining $4.5 million of proceeds were used by PG&W to repay a portion of its bank borrowings and for working capital purposes.
On July 28, 1994, PEI implemented a Customer Stock Purchase Plan (the "Customer Plan") which provides the residential customers of PG&W with a method of purchasing newly-issued shares of PEI common stock at a 5% discount from the
market price. PEI uses proceeds from the issuance of shares through the Customer Plan to purchase common stock of PG&W. During 1994, PG&W realized $1.7 million from the issuance of common stock to PEI in connection with the Customer Plan. Additionally, on January 3, 1995, PG&W realized $1.2 million from the issuance of common stock to PEI in connection with the Customer Plan.
Through PEI's Dividend Reinvestment and Stock Purchase Plan ("DRP"), holders of shares of PEI common stock may reinvest cash dividends and/or make cash investments in the common stock of PEI. The DRP was amended on May 5, 1994, to provide PEI's shareholders with a method of reinvesting cash dividends and making cash investments to purchase newly-issued shares of PEI's common stock at a 5% discount from the market price. Prior to such amendment, cash dividends were reinvested at 100% of the market price in newly-issued shares and cash investments were used to purchase shares of PEI common stock on the open market. PEI uses the proceeds from the DRP to purchase common stock of PG&W. During 1994, 1993 and 1992, PG&W realized $1.8 million, $465,000 and $385,000, respectively, from the issuance of common stock to PEI in connection with the DRP. Additionally, on January 3, 1995, PG&W realized $1.3 million from the issuance of common stock to PEI in connection with the DRP.
On November 15, 1994, the Authority issued $30.0 million of its Exempt Facilities Revenue Refunding Bonds, 1994 Series A (Pennsylvania Gas and Water Company Project) (the "1994 Series A Bonds") and in connection therewith, PG&W issued $30.0 million of its 7% Series First Mortgage Bonds. PG&W will make payments to the IDA Trustee pursuant to the 7% Series First Mortgage Bonds in amounts sufficient and at the times necessary to pay the debt service requirements on the 1994 Series A Bonds. The proceeds from the issuance of the 1994 Series A Bonds, along with additional funds provided by PG&W, were deposited with the IDA Trustee for the Authority's Exempt Facilities Revenue Bonds, 1987 Series B (Pennsylvania Gas and Water Company Project) (the "1987 Series B Bonds") on November 15, 1994, for use in redeeming the 1987 Series B Bonds on December 1, 1994. The deposit of such funds acted to discharge all of PG&W's obligations with respect to its 8%, 1987 Series B Note in the principal amount of $30.0 million which had been issued to the IDA Trustee in connection with the 1987 Series B Bonds and which was subject to repayment on December 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 July 25, 1994, S&P said PG&W's outlook was "stable" and that "continued, though slow financial improvement is expected with the phase-in of water rate relief." However, S&P noted that "significant capital expenditures and an excessive dividend payout...will continue to challenge management over the intermediate 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 both S&P and Moody's would result in the interest rate charged on borrowings under the Credit Agreement being increased by one quarter percent per annum (which increase could cost PG&W as much as $150,000 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. See "-Failure to Obtain Adequate Rate Relief."
Construction Expenditures and Related Financing
Expenditures for the construction of utility plant during the period 1992 through 1994 were as follows: [CAPTION] Water Gas Year Facilities Facilities Total (Thousands of Dollars) [S] [C] [C] [C] 1992 $ 44,352 $ 12,669 $ 57,021 1993 32,575 13,325 45,900 1994 19,321 17,455 36,776 $ 96,248 * $ 43,449 $139,697
* Includes $30.5 million, $20.7 million and $2.1 million, expended in 1992, 1993 and 1994, 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.
Approximately $13.2 million of PG&W's expenditures for the construction of water facilities during 1994 were financed with proceeds from the issuance of the Authority's 1992 Series B Bonds being held by the IDA Trustee for the benefit of PG&W and with revenues from the water rate increase for Scranton Water Rate Area which was effective June 23, 1993 (the "Scranton Area Water Rate Increase") (see "-Rate Matters-Water Rate Filings-Scranton Area"). The balance ($6.1 million) of PG&W's expenditures for the construction of water facilities during 1994, as well as its expenditures for the construction of gas facilities during 1994, were 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 1995 through 1997 will total $147.7 million, of which $74.5 million will involve the construction of water facilities and $73.2 million will involve the construction of gas facilities. PG&W anticipates that a portion of such water facilities will be financed with the $3.4 million of proceeds from the issuance of the Authority's 1992 Series B Bonds held by the IDA Trustee as of December 31, 1994, for the benefit of PG&W and with $7.5 million of revenues from the Scranton Area Water Rate Increase, while the balance of its expenditures for water facilities ($63.6 million), as well as its expenditures for gas facilities, will be financed with approximately $25.0 million from the issuance of a term loan in 1995, $29.5 million in 1996 from the sale of common stock to PEI, $50.0 million from the issuance of another series of first mortgage bonds in 1997, proceeds from the sale of common stock to PEI in connection with the Customer Plan and DRP, and 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, possibly reducing dividends on its common stock, thereby resulting in a reduction of PEI's common stock dividends, curtailing or deferring work on various capital projects, all of which could negatively impact the quality and reliability of services rendered to the public by PG&W.
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.
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 37 through 62 of this Form 10-K.
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, 1994 and 1993, 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, 1994. 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, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 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 schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states 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 LLP
New York, N.Y. February 17, 1995
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF INCOME
[CAPTION] Year Ended December 31, 1994 1993 1992 (Thousands of Dollars) [S] [C] [C] [C] OPERATING REVENUES: Gas $ 167,992 $ 153,325 $ 143,227 Water 66,731 53,363 48,651 Total operating revenues 234,723 206,688 191,878
OPERATING EXPENSES: Cost of gas 98,653 86,557 77,720 Other operation expenses 40,153 38,859 37,971 Maintenance 10,093 9,341 8,677 Depreciation 14,339 12,299 10,856 Deferred treatment plant costs, net 581 (1,532) (294) Income taxes 12,499 8,989 8,305 Other taxes 16,073 16,019 14,730 Total operating expenses 192,391 170,532 157,965
OPERATING INCOME 42,332 36,156 33,913
OTHER INCOME, NET (Note 3) 16 560 30
INCOME BEFORE INTEREST CHARGES 42,348 36,716 33,943
INTEREST CHARGES: Interest on long-term debt 21,222 20,515 18,929 Other interest 1,575 2,589 4,292 Allowance for borrowed funds used during construction (255) (1,482) (1,773) Deferred treatment plant carrying charges - (1,207) (461) Total interest charges 22,542 20,415 20,987
NET INCOME 19,806 16,301 12,956
DIVIDENDS ON PREFERRED STOCK 4,639 6,462 5,065
EARNINGS APPLICABLE TO COMMON STOCK $ 15,167 $ 9,839 $ 7,891
COMMON STOCK: Earnings per share of common stock (Note 4): Before premium on redemption of preferred stock $ 2.92 $ 2.36 $ 2.02 Premium on redemption of preferred stock (.19) - - Earnings per share of common stock $ 2.73 $ 2.36 $ 2.02
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,189,108 4,176,087 3,908,351
The accompanying notes are an integral part of the financial statements.
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION] December 31, 1994 1993 (Thousands of Dollars) ASSETS [S] [C] [C] UTILITY PLANT: Gas plant, at original cost less acquisition adjustments of $386,000 $260,679 $245,969 Water plant, at original cost plus acquisition adjustments of $14,572,000, and $14,577,000, respectively 376,735 360,996 Common plant, at original cost 26,118 26,212 663,532 633,177 Accumulated depreciation (94,461) (86,287) 569,071 546,890
OTHER PROPERTY AND INVESTMENTS: Restricted funds held by trustee (Note 6) 3,401 12,853 Other 2,872 3,291 6,273 16,144
CURRENT ASSETS: Cash and cash equivalents 304 2,714 Accounts receivable - Customers 22,297 20,533 Others 1,474 1,258 Reserve for uncollectible accounts (1,299) (1,223) Accrued utility revenues 13,299 16,123 Materials and supplies, at average cost 4,078 3,549 Gas held by suppliers, at average cost 20,025 26,650 Deferred cost of gas & supplier refunds, net 8,475 12,752 Prepaid expenses and other 2,531 2,026 71,184 84,382
DEFERRED CHARGES: Deferred taxes collectible 55,410 51,382 Natural gas transition costs collectible (Note 2) 4,099 - Unamortized debt expense 7,177 5,745 Deferred treatment plant costs and carrying charges 9,548 10,129 Deferred water utility billings (Note 2) 8,908 3,885 Other 7,610 7,751 92,752 78,892
TOTAL ASSETS $739,280 $726,308
The accompanying notes are an integral part of the financial statements.
PENNSYLVANIA GAS AND WATER COMPANY
BALANCE SHEETS
[CAPTION] December 31, 1994 1993 (Thousands of Dollars) [S] [C] [C] CAPITALIZATION AND LIABILITIES
CAPITALIZATION (see accompanying statements on page 42): Common shareholder's investment (Notes 4 and 7) $216,032 $188,011 Preferred stock (Note 5) - Not subject to mandatory redemption, net 33,615 33,615 Subject to mandatory redemption 1,760 31,840 Long-term debt (Note 6) 311,725 266,259 563,132 519,725
CURRENT LIABILITIES: Current portion of long-term debt and preferred stock subject to mandatory redemption (Notes 5, 6 and 8) 3,810 38,664 Notes payable - Bank (Note 8) - 2,000 Parent - 3,680 Accounts payable - Suppliers 16,762 22,401 Affiliates, net 788 1,888 Accrued general business and realty taxes 3,881 3,574 Accrued income taxes 3,185 4,984 Accrued interest 4,716 4,042 Accrued natural gas transition costs (Note 2) 2,356 - Other 3,455 2,440 38,953 83,673
DEFERRED CREDITS: Deferred income taxes 96,939 87,005 Accrued natural gas transition costs (Note 2) 3,250 - Unamortized investment tax credits 8,943 9,183 Advances for construction 11,349 10,985 Contributions in aid of construction 10,207 9,810 Operating reserves 2,383 1,863 Other 4,124 4,064 137,195 122,910
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
TOTAL CAPITALIZATION AND LIABILITIES $739,280 $726,308
The accompanying notes are an integral part of the financial statements.
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF CAPITALIZATION
PENNSYLVANIA GAS AND WATER COMPANY
STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
[CAPTION] Additional Common Paid-In Retained Stock Capital Earnings Total (Thousands of Dollars) [S] [C] [C] [C] [C] 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
Net income for 1994 - - 19,806 19,806 Issuance of common stock 5,880 17,559 - 23,439 Premium on redemption of preferred stock - - (980) (980) Dividends on: Preferred stock (Note 5) - - (4,639) (4,639) Common stock ($1.81 per share) - - (9,605) (9,605)
Balance at December 31, 1994 $54,567 $ 90,201 $ 71,264 $216,032
The accompanying notes are an integral part of the financial statements.
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 one wholly-owned subsidiary, Penn Gas Development Co. (PGD), which has not been consolidated since it is insignificant. Prior to October 1, 1994, PG&W had four other wholly-owned subsidiaries, each a small water company, which were not consolidated since they also were insignificant. As of September 30, 1994, these four small water companies were merged into PG&W. The equity method is used to account for PG&W's investment in PGD and was used to account for its investment in the four small water companies prior to their merger into PG&W.
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, which is being amortized over a ten-year period, 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 treatment is consistent with PPUC Orders.
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 7% in 1994, 8% in 1993 and 7% in 1992.
PG&W provides for depreciation on a straight-line basis for gas plant and all common plant. As of December 31, 1994, depreciation was provided on a straight-line basis for approximately 96% 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] 1994 1993 1992 [S] [C] [C] [C] Gas 2.48% 2.49% 2.51% Water 2.02 1.71 1.57 Common 7.62 8.06 6.76
The increase in the annual rate of depreciation relative to water plant in both 1994 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 has generally been made as PG&W was allowed to initially increase its rates for customers receiving filtered water service.
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 on cycles that extends over the bi-monthly period. 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.
Deferred Charges (Regulatory Assets). 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 more fully discussed in the following paragraphs, certain pre-operating costs relative to PG&W's water treatment plants, costs associated with an early retirement plan, 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.
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 $5.8 million of costs deferred relative to the Scranton Area water treatment plants and related facilities over a ten-year period beginning June 23, 1993, of which $885,000 had been recovered as of December 31, 1994.
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. A total of $4.6 million of costs relative to these 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 these costs, which total $4.6 million, 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.
PG&W also 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. 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.
[CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Actuarial present value of the projected benefit obligations: Accumulated benefit obligations Vested $ 21,592 $ 24,265 Nonvested 77 125 Total 21,669 24,390 Provision for future salary increases 7,565 9,769 Projected benefit obligations 29,234 34,159 Market value of plan assets, primarily invested in equities and bonds 30,457 32,471 Plan assets in excess of (less than) projected benefit obligations 1,223 (1,688) Unrecognized net transition asset as of January 1, 1986, being amortized over 20 years (2,528) (2,758) Unrecognized prior service costs 2,150 2,279 Unrecognized net (gain) loss (1,644) 1,710
Accrued pension cost at year-end $ (799) $ (457)
The discount rate used to determine the actuarial present value of the projected benefit obligations was 8-3/4% in 1994 and 8% in 1993. An expected long-term rate of return on plan assets of 9% and a 5-1/2% projected increase in future compensation levels were assumed in determining the net pension cost for both of the years 1994 and 1993.
Other Postretirement Benefits
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 $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.
The following items were the components of the net cost of postretirement benefits other than pensions for the years 1994 and 1993: [CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Present value of benefits earned during the year $ 269 $ 226 Interest cost on accumulated benefit obligation 967 967 Return on plan assets (6) - Net amortization and deferral 654 617
Net cost of postretirement benefits other than pensions 1,884 1,810 Less disbursements for benefits (987) (983)
Increase in liability for postretirement benefits other than pensions $ 897 $ 827
Reconciliations of the accumulated benefit obligation to the accrued liability for postretirement benefits other than pensions as of December 31, 1994 and 1993, follow: [CAPTION] 1994 1993 (Thousands of Dollars) [S] [C] [C] Accumulated benefit obligation: Retirees $ 9,021 $ 10,149 Fully eligible active employees 1,628 1,735 Other active employees 1,305 1,222 11,954 13,106 Plan assets at fair value 839 - Accumulated benefit obligation in excess of plan assets 11,115 13,106 Unrecognized transition obligation being amortized over 20 years (11,108) (11,725) Unrecognized net gain (loss) 885 (554)
Accrued liability for postretirement benefits other than pensions $ 892 $ 827
The assumptions used to calculate the costs to be accrued by PG&W under FASB Statement 106 included discount rates of 8-3/4% and 8% in 1994 and 1993, respectively, and a 5-1/2% projected annual increase in future compensation levels. It was also assumed that the per capita cost of covered health care benefits would increase at an annual rate of 10-1/2% in 1994 and that this rate would decrease gradually to 5-1/2% 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, 1994, by approximately $778,000 and the aggregate of the service and interest cost components of the net cost of postretirement benefits other than pensions for the year 1994 by approximately $64,000.
The additional costs accrued pursuant to FASB Statement 106 are allocated between PG&W's gas utility and water utility operations. By Orders entered in 1993 relative to PG&W's water utility operations, the PPUC approved the inclusion of the costs required to be accrued pursuant to FASB Statement 106 in PG&W's water rates. Since PG&W has not sought to increase its base gas rates, the $447,000 ($256,000 net of related income taxes) and $407,000 ($232,000 net of related income taxes) of additional cost incurred in 1994 and 1993, respectively, with regard to PG&W's gas utility operations as a result of the
adoption of the provisions of FASB Statement 106 were expensed without any adjustment being made to its gas rates.
Other 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 consistently recorded liabilities for benefits of this nature prior to the effectiveness of FASB Statement 112 and, as a result, the provisions of FASB Statement 112, which PG&W adopted effective January 1, 1994, did not have a material impact on its financial position or results of operations.
(10) CONSTRUCTION EXPENDITURES
PG&W estimates the cost of its 1995 construction program will be $44.9 million, which includes $23.0 million for the construction of water facilities and $21.9 million for the construction of gas facilities.
(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 periodic inspection and maintenance of all such valves and the verification of all gas service line information. PG&W submitted a detailed plan of action for complying with the Emergency Order to the PPUC on April 11, 1994, which was subsequently revised. The PPUC staff agreed that the revised plan (the "Plan") satisfies the concerns of the PPUC expressed in the Emergency Order, and on November 30, 1994, the PPUC staff and PG&W entered into a Settlement Agreement, subject to approval by the PPUC, (i) terminating the informal investigation of the matter initiated by the PPUC staff, (ii) memorializing the acceptance by the PPUC staff of the Plan and (iii) evidencing PG&W's commitment to satisfy the requirements of the Plan. The PPUC must approve the Settlement Agreement. PG&W does not believe that compliance with the terms of the Settlement Agreement or any liability that might result from violations of law 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.
(12) INDUSTRY SEGMENTS
Financial information with respect to PG&W's industry segments for the years ended December 31, 1994, 1993 and 1992 is included in Item 1 of this Form 10-K. Such industry segment information is incorporated herein as part of these Financial Statements.
(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
(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 the trustee has been based on the market value as of the respective dates 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 quoted market price as of the respective dates 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 rate as of the respective dates 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 the respective dates for preferred stock of comparable credit quality with similar terms and maturities.
The carrying amounts and estimated fair values of PG&W's financial instruments at December 31, 1994 and 1993, were as follows: [CAPTION] 1994 1993 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value (Thousands of Dollars) [S] [C] [C] [C] [C] Restricted funds held by trustee $ 3,401 $ 3,401 $ 12,853 $ 12,857 Long-term debt (including current portion) 315,455 317,867 306,843 327,436 Preferred stock subject to mandatory redemption (including current portion) 1,840 1,877 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.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
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 . . . . . . . . . . . . 37
Statements of Income for each of the three years in the period ended December 31, 1994 . . . . . . . . . . . . . . . . 38
Balance Sheets as of December 31, 1994 and 1993. . . . . . . . . 39
Statements of Cash Flows for each of the three years in the period ended December 31, 1994 . . . . . . . . . . . . . . . . 41
Statements of Capitalization as of December 31, 1994 and 1993. . 42
Statements of Common Shareholder's Investment for each of the three years in the period ended December 31, 1994. . . . . 43
Notes to Financial Statements. . . . . . . . . . . . . . . . . . 44
2. Financial Statement Schedules The following financial statement schedule for PG&W is 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 II Valuation and Qualifying Accounts for the three-year period ended December 31, 1994 . . . . . . . . . . . . . 66
3. Exhibits See "Index to Exhibits" located on page 68 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.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of 1994.
(c) Executive Compensation Plans and Arrangements
The following listing includes PG&W's executive compensation plans and arrangements in effect as of December 31, 1994.
Exhibit
10-32 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.
10-33 Agreement dated as of March 15, 1991, by and between PEI, PG&W and Robert L. Jones -- filed as Exhibit No. 10-38 to PG&W's Annual Report on Form 10-K for 1990, File No. 1-3490.
10-34 Employment Agreement effective September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, File No. 0-7812.
10-35 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.
10-36 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812.
10-37 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.
Schedule II
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 27, 1995 By: /s/ Dean T. Casaday Dean T. Casaday President and Chief Executive Officer (Principal Executive Officer)
Date: March 27, 1995 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.
Signature Capacity Date
/s/ Kenneth L. Pollock Chairman of the Board of March 27, 1995 Kenneth L. Pollock Directors
/s/ William D. Davis Vice Chairman of the Board March 27, 1995 William D. Davis of Directors
/s/ Dean T. Casaday Director, President and March 27, 1995 Dean T. Casaday Chief Executive Officer
/s/ Robert J. Keating Director March 27, 1995 Robert J. Keating
/s/ John D. McCarthy Director March 27, 1995 John D. McCarthy
/s/ Kenneth M. Pollock Director March 27, 1995 /s/ Kenneth M. Pollock
/s/ James A. Ross Director March 27, 1995 James A. Ross
/s/ Ronald W. Simms Director March 27, 1995 Ronald W. Simms
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 January 18, 1995 -- filed herewith.
(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.
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. 1-3490.
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. 1-3490.
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 of New York, as Trustee -- 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 as Exhibit 4-20 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
4-21 Twenty-ninth Supplemental Indenture, dated as of November 1, 1994, from PG&W to First Trust of New York, National Association, as Successor Trustee to Morgan Guaranty Trust Company of New York -- filed herewith.
NOTE: The First, Second, Third, Fifth, Sixth, Seventh, Eighth, Eleventh and Thirteenth Supplemental Indentures merely convey additional properties to the Trustee.
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 as Exhibit 10-7 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-8 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-9 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-10 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
Exhibit Number
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 as Exhibit 10-11 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-12 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-13 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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 as Exhibit 10-14 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
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.
Exhibit Number
10-20 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.
10-21 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.
10-22 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.
10-23 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.
10-24 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.
10-25 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.
10-26 Second Amended and Restated Project Facilities Agreement, dated as of December 1, 1993, between PG&W and the Luzerne County Industrial Development Authority -- filed as Exhibit 10-30 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
10-27 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 as Exhibit 10-31 to PG&W's Annual Report on Form 10-K for 1993, File No. 1-3490.
Exhibit Number
10-28 7% Bond Purchase Agreement, dated November 1, 1994, among the Luzerne County Industrial Development Authority, PG&W and Wheat First Butcher Singer, as representative on behalf of itself and Legg Mason Wood Walker Incorporated -- filed herewith.
10-29 Amended and Restated Project Facilities Agreement, dated as of November 1, 1994, between PG&W and the Luzerne County Industrial Development Authority -- filed herewith.
10-30 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, File No. 1-3490.
10-31 First Amendment to Credit Agreement and Notes, dated as of December 16, 1994, 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 herewith.
10-32 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.
10-33 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.
10-34 Employment Agreement, effective September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1994, File No. 0-7812.
10-35 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.
10-36 First Amendment to the Supplemental Retirement Agreement, dated as of September 1, 1994, between PEI and Dean T. Casaday -- filed as Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No. 0-7812.
10-37 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.
PART I PAGE
Item l. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . 16
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . 17
Item 6.
Item 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . *
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . 18
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . 36
Item 9.
Item 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . . . . . . 63
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . *
Item 11.
Item 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . *
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . *
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . *
PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . 64**
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 67
________________________ * 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 68.