1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended FEBRUARY 28, 1995 OR _____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ________________________ Commission File Number 0-1166 ESSEX COUNTY GAS COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1427020 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification #) 7 North Hunt Road, Amesbury, Massachusetts 01913 (Address of principal executive offices) (Zip Code) (508) 388-4000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the reg- istrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: 	Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by court. Yes No _____ APPLICABLE ONLY TO CORPORATE ISSUERS: Number of shares of Common Stock outstanding as of February 28, 1995: 1,589,282 2 PART I - FINANCIAL INFORMATION Item 1 FINANCIAL STATEMENTS The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the notes to consolidated financial statements included in the registrant's Annual Report on Form 10-K for the year ended August 31, 1994 (1994 10-K). In the opinion of Management, all adjustments, consisting of normally recurring accruals considered necessary for a fair presentation, have been included. Because of the seasonal nature of the registrant's business, operating results for the three month and six month periods ended February 28, 1995, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 1995. 3 ESSEX COUNTY GAS COMPANY CONSOLIDATED BALANCE SHEETS February 28, 1995 August (Unaudited) 31, 1994 ASSETS ----------- -------- Utility plant $87,773,283 $85,564,414 Less: accumulated depreciation 19,694,445 18,519,429 ----------- ----------- Net utility plant 68,078,838 67,044,985 ----------- ----------- Other property and investments (at original cost) 505,591 499,439 ----------- ----------- Capitalized lease 721,403 741,939 ----------- ----------- Current assets: Cash 755,057 130,939 Accounts receivable: Customers 5,915,843 1,629,383 Other 336,480 407,523 Income tax refund - 688,000 Supplemental fuel inventory trust 5,357,067 6,783,404 Materials and supplies 512,080 583,422 Prepaid deferred income taxes 1,501,466 816,445 Prepayments and other 98,310 316,738 ----------- ----------- Total current assets 14,476,303 11,355,854 ----------- ----------- Deferred charges: Regulatory assets 2,191,649 2,636,658 Unamortized debt expense 652,020 665,510 Other 602,470 566,179 ----------- ----------- Total deferred charges 3,446,139 3,868,347 ----------- ----------- $87,228,274 $83,510,564 ============ ============ 4 ESSEX COUNTY GAS COMPANY CONSOLIDATED BALANCE SHEETS (Continued) February 28, 1995 August (Unaudited) 31, 1994 ----------- -------- CAPITALIZATION AND LIABILITIES Common stock equity: Common stock, par value $2.50, authorized 5,000,000 shares Issued and outstanding 1,589,282 shares at February 28, 1995, and 1,572,062 at August 31, 1994 $ 3,973,204 $ 3,930,155 Additional paid-in capital 13,930,465 13,532,990 Retained earnings 12,466,356 11,857,299 ESOP shares purchased with debt (225,000) (450,000) ------------ ------------ Total common stock equity 30,145,025 28,870,444 ------------ ------------ Redeemable preferred stock, 3,500 shares, 5.50%, $100 par value 350,000 350,000 ------------ ------------ Long-term debt, less current portion 20,746,150 21,713,124 ------------ ------------ Noncurrent obligations under capital lease 677,667 699,991 ------------ ------------ Current liabilities: Current portion of long-term debt 1,044,337 1,035,304 Current obligation under capital lease 43,736 41,948 Obligations under supplemental fuel inventory trust 5,657,175 6,428,770 Notes payable, banks 5,135,000 4,500,000 Accounts payable 2,217,182 2,930,578 Taxes payable 2,092,822 - Accrued interest 693,725 625,784 Refundable gas costs 1,832,718 770,184 Transition obligations 683,318 1,018,531 Supplier refund due customers 2,871,843 1,661,812 Other 745,650 852,259 ------------ ------------ Total current liabilities 23,017,506 19,865,170 ------------ ------------ Deferred credits: Accumulated deferred income taxes 8,380,583 8,452,562 Unamortized investment tax credit 1,315,727 1,350,779 Deferred directors' fees 818,738 777,871 Regulatory liabilities 874,994 874,994 Other 901,884 1,430,623 ------------ ------------ Total deferred credits 12,291,926 12,011,835 ------------ ------------ $87,228,274 $83,510,564 ============ ============ <FN> See notes to consolidated statements. 5 ESSEX COUNTY GAS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED February February 28, 1995 28, 1994 (Unaudited) (Unaudited) ----------- ----------- Operating revenues $20,160,226 $23,698,796 Less: Cost of gas 10,299,550 12,667,177 ------------ ------------ Operating margin 9,860,676 11,031,619 ------------ ------------ Operating expenses: Operations and maintenance expense 3,762,714 4,589,281 Depreciation 1,162,760 1,217,801 Taxes, other than federal income 837,345 781,394 Federal income taxes 1,276,474 1,514,300 ------------ ------------ Total operating expenses 7,039,293 8,102,776 ------------ ------------ Operating income 2,821,383 2,928,843 Other income - net 10,388 12,822 ------------ ------------ Income before interest charges 2,831,771 2,941,665 ------------ ------------ Interest charges: Interest on long-term debt 511,962 531,532 Amortization of debt expense 6,769 6,674 Other interest expense 215,067 93,983 Allowance for funds used during construction (9,990) (3,160) ------------ ------------ Total interest charges 723,808 629,029 ------------ ------------ Net income 2,107,963 2,312,636 red dividend requirements (4,812) (5,005) ------------ ------------ Income available for common stock $ 2,103,151 $ 2,307,631 ============ ============ Common shares outstanding (weighted average) 1,587,080 1,554,396 ------------ ------------ Earnings per common share $ 1.33 $ 1.48 ------- ------- Dividends per common share $ .39 $ .38 ------- ------- <FN> See notes to consolidated financial statements. 6 ESSEX COUNTY GAS COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED February February 28, 1995 28, 1994 (Unaudited) (Unaudited) ----------- ----------- Operating revenues $26,862,164 $30,295,991 Less: Cost of gas 13,521,610 15,904,036 ------------ ------------ Operating margin 13,340,554 14,391,955 ------------ ------------ Operating expenses: Operations and maintenance expenses 6,429,133 7,246,077 Depreciation 1,550,520 1,552,420 Taxes, other than federal income 1,044,551 931,192 Federal income taxes 1,093,948 1,344,600 ------------ ------------ Total operating expenses 10,118,152 11,074,289 Operating income 3,222,402 3,317,666 Other - net (867) (4,842) ------------ ------------ Income before interest charges 3,221,535 3,312,824 ------------ ------------ Interest charges: Interest on long-term debt 1,030,132 1,064,061 Amortization of debt expense 13,490 13,303 Other interest expense 363,713 176,726 Allowance for funds used during construction (19,911) (5,885) ------------ ------------ Total interest charges 1,387,424 1,248,205 ------------ ------------ Net income 1,834,111 2,064,619 Preferred dividend requirements (9,625) (10,010) ------------ ------------ Income available for common stock $ 1,824,486 $ 2,054,609 ============ ============ Common shares outstanding (weighted average) 1,582,311 1,550,883 ------------ ------------ Earnings per common share $ 1.15 $ 1.32 ------- ------- Dividends per common share $ .77 $ .75 ------- ------- <FN> See notes to consolidated financial statements. 7 ESSEX COUNTY GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED February February 28, 1995 28, 1994 (Unaudited) (Unaudited) ----------- ----------- Operating activities: Net income $ 1,834,111 $ 2,064,619 Adjustments to reconcile net income to net cash: ---------- ----------- Depreciation and amortization 1,833,484 1,782,407 Provision for uncollectible accounts 915,000 1,530,400 Deferred income taxes (757,000) (1,347,907) Non-cash compensation related to ESOP 225,000 150,000 Cash provided by (used in) working capital: Increase in accounts receivable (5,130,417) (8,942,653) Decrease in inventories including fuel 1,497,679 2,298,345 Decrease in prepaid expenses and other current assets 218,428 256,859 Increase in refundable gas costs 1,062,534 272,568 Increase (decrease) in accounts payable (713,396) 569,024 Increase in taxes payable 2,780,822 2,237,442 Increase in supplier refund due customers 1,210,031 - Other, net 415,807 987,373 ---------- ---------- Total adjustments 3,557,972 (206,142) ---------- ---------- Net cash provided by operating activities 5,392,083 1,858,477 ---------- ---------- Investing activities: Capital expenditures (2,947,325) (2,688,282) Cost of property retirements, net of salvage 84,130 (65,258) ---------- ---------- Net cash used in investing activities (2,863,195) (2,753,540) ---------- ---------- Financing activities: Dividends paid (1,225,054) (1,170,651) Net proceeds from issuance of common stock 414,820 319,144 Principal retired on long-term debt (732,941) (94,637) Decrease in fuel trust (771,595) (722,343) Principal payment on ESOP obligation (225,000) (150,000) Increase in notes payable, banks 635,000 2,975,000 ---------- ---------- Net cash provided by financing activities (1,904,770) 1,156,513 ---------- ---------- Net increase in cash 624,118 261,450 Cash at beginning of period 130,939 67,830 ---------- ---------- Cash at end of period $755,057 $329,280 ========== ========== Supplemental disclosures: Cash paid for interest (net of amount capitalized) $ 1,319,483 $ 1,246,326 ---------- ----------- Cash paid for income taxes $ 84,000 $ 160,000 ---------- ----------- <FN> See notes to consolidated financial statements. 8 Notes to Consolidated Financial Statements: A. Interim Accounting Policies Since most firm customers utilize gas for space heating purposes, the Company's sales are highly sensitive to the severity of the weather. Consequently, less gas is sold during the summer months than is sold during the winter months. In order to match its costs more properly with gas sales revenue each month, the Company charges to certain expenses, primarily depreciation, an amount equal to the percentage of the annual volume of firm gas sales forecasted for the month, applied to the estimated annual expenses. B. Accounts Receivable Accounts Receivable - Customers are shown net of allowance for uncollectible accounts of $1,460,600 and $804,000 as of February 28, 1995 and August 31, 1994, respectively. C. Restriction on Retained Earnings Under the terms of the Twelfth Supplemental Indenture of First Mortgage Bonds dated as of December 1, 1990, retained earnings in the amount of $5,083,136 were unrestricted as to the payment of cash dividends on Common Stock and the purchase, redemption, or retirement of shares of capital stock as of February 28, 1995. Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Three Months Ended February 28, 1995 and February 28, 1994. The Company's gas sales are divided into two categories: firm, whereby the Company must supply gas to customers on demand; and interruptible, whereby the Company may, generally during colder months, discontinue service to high volume industrial customers. Sales of gas to interruptible customers do not materially affect the Company's operating income because the Company must return all operating margin on such sales directly to the Company's firm customers unless interruptible volumes exceed a certain threshold specified by the Massachusetts Department of Public Utilities ("MDPU"). Once the threshold is attained, the Company may retain 10% of gross profits. The threshold was not attained in the three month period ended February 28, 1995. The Company's sales are responsive to colder weather as the majority of its firm customers use natural gas for space heating purposes. The Company measures weather through the use of effective degree days. An effective degree day is calculated by subtracting the average temperature for the day, adjusted for wind and cloud cover, from 65 degrees Fahrenheit. 9 The Company's service territory experienced 3,158 effective degree days during the three months ended February 28, 1995 as compared to 3,746 effective degree days for the three months ended February 28, 1994. The twenty-year average is 3,481 effective degree days. As a result, the volume of firm sales decreased 14.4% to 2,192,806 Mcf for the three months ended February 28, 1995 from 2,562,364 Mcf for the three months ended February 28, 1994. During the winter months the Company typically has no interruptible sales. The Company's total operating revenues decreased 14.9% to $20,160,226 for the three months ended February 28, 1995 from $23,698,796 for the three months ended February 28, 1994. This decrease was primarily due to previously mentioned weather-related factors and a 1.1% decrease in the average unit price of gas sold to firm customers. The average unit selling price per Mcf of firm gas sold was $9.08 for the three months ended February 28, 1995 compared to $9.19 for the three months ended February 28, 1994. The decrease in unit selling price is related to the Company returning to its customers savings in gas costs as well as refunds received from its pipeline suppliers. Gas costs decreased 18.7% to $10,299,550 for the three months ended February 28, 1995 from $12,667,177 for the three months ended February 28, 1994. The decrease in gas costs recovered was attributable to the previously mentioned decrease in firm gas volumes sold and a 5.0% decrease in the Company's average cost of gas to $4.70 per Mcf for the three months ended February 28, 1995 from $4.94 per Mcf for the three months ended February 28, 1994. Operations and maintenance expenses decreased 18.0% to $3,762,714 for the three months ended February 28, 1995 from $4,589,281 for the three months ended February 28, 1994. This decrease was due primarily to reduced gas production and related costs which were related to reduced demand for gas and reduced bad debt expense. In the previous year the Company incurred additional outside services relating to gas supply and regulatory items which were no longer issues in the current fiscal year. Interest charges for the three months ended February 28, 1995 increased by $94,779. The increase was primarily attributable to higher interest rates including the interest payable to customers on pipeline refunds received by the Company. Income attributable to common stock decreased 8.9% to $2,103,151 for the three months ended February 28, 1995 from $2,307,631 for the three months ended February 28, 1994. Income per common share decreased 10.1% to $1.33 for the three months ended February 28, 1995 from $1.48 per share for the three months ended February 28, 1994. Dividends per common share were $.39 per share for the three months ended February 28, 1995 compared to $.38 per share for the three months ended February 28, 1994. In March 1995, the Company declared a dividend of $.39 per share which was paid to shareholders on April 1, 1995. Six Months Ended February 28, 1995 and February 28, 1994 Operating revenues for the six months ended February 28, 1995 were $26,862,164 compared to $30,295,991 for the six months ended February 28, 1994. Firm gas volumes were 2,051,022 Mcf compared to 3,427,498 Mcf for the six month period ended February 28, 1994. These decreases are due to significantly warmer weather as degree days were 3,947 compared to 4,757 a year ago, representing a 17.0% decrease. Normal weather in the Company's service area for the six month period is equivalent to 4,461 effective degree days. The average selling price of firm gas was $8.74 for the six months ended February 28, 1995 compared to $8.71 for the same period last year. Interruptible revenues for the six months ended February 28, 1995 and 1994 were $642,565 and $2,468, respectively as the Company was able to obtain, on an interruptible basis, competitively priced spot gas for sale to its largest interruptible customer. Operations and maintenance expenses for the six months ended February 28, 1995 decreased to $6,429,133 from $7,246,077 for the comparable period a year ago. Reasons for this decrease are similar to those mentioned for the quarter ended February 28, 1995. 10 Interest expense increased $139,219 as a result of higher interest rates. Income available to common shareholders decreased by $230,122 to $1,824,486 as compared to $368,328 for the same six month period last year while earnings per share decreased to $1.15 from $1.32. Dividends were $.77 and $.75, respectively. Liquidity and Capital Resources The Company continues to invest a significant amount of capital in its distribution system to satisfy current and expected future customer demand. Funding has traditionally been generated from operations, short-term bank borrowings, issuance of long-term debt and the issuance of additional equity, including additional shares of common stock through a Dividend Reinvestment Plan. Management anticipates that these and other sources will remain available and continue to adequately serve the Company's needs. The Company finances most of its gas inventory through a trust which purchases gas with funds loaned by a bank. The Company is obligated to repurchase gas from the trust at prices based on original product cost, financing charges and trust fees. The credit agreement between the trust and the bank extends through October 1, 1995, and the maximum financing commitment is $7,000,000. As of February 28, 1995, the Company's repurchase obligation to the trust was $5,657,175. For the three months ended February 28, 1995, the Company's construction expenditures totaled $1,435,313. These expenditures were funded principally from operations. Historically, the second quarter of the Company's fiscal year has been characterized by minimal construction expenditures, high gas sendout and high operating revenues. Cash requirements during this period have historically been satisfied through operations. Construction expenditures for the six months ended February 28, 1995 were $2,947,000 as compared to $2,688,000 for the same period a year ago. These were funded by cash flows from operations and short-term bank borrowings. The six-month period ended February 28, 1995 is characterized by higher receivables associated with peak season billing and higher gas purchases which results in increased short-term borrowings. Although the Company anticipates a reduction of short-term borrowings as winter receivables are collected, the onset of renewed construction activity in the subsequenty quarter may require additional short-term borrowings under exsisting lines of credit. Planned construction	expenditures for the remainder of fiscal 1995 are currently estimated at $3,800,000 and planned construction expenditures for fiscal 1996 are currently estimated at $7,000,000. The Company's planned construction expenditures and long-term debt repayments have been and will continue to be funded through cash generated by operations and short-term bank borrowings, which the Company anticipates will be replaced from time to time with equity and long-term debt financings. 11 PART II - OTHER INFORMATION Item 1 Legal Proceedings The information called for is unchanged from that filed in the Company's Annual Report on Form 10-K for fiscal 1994. Item 2 Changes in Securities None. Item 3 Defaults Upon Senior Securities None. Item 4 Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held on January 17, 1995. For a description of the meeting and the matters voted on thereat, see the Company's Notice of Annual Meeting and Proxy Statement (the "Proxy Statement"), filed with the Securities and Exchange Commission on December 6, 1994, which is incorporated herein by reference. There was no solicitation in opposition to the management's nominees as listed in the Proxy Statement, and all such nominees were selected. The votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter voted on at the Annual Meeting is as follows: 1. To fix the number of members of the Board of Directors at twelve as provided in the Proxy Statement. Number of Shares For 1,229,198 Against 6,131 Abstain/Broker non-votes 13,417 12 2.Election of Directors Number of Shares For Against C.E. Billups 1,378,030 21,123 B.C. Bixby 1,382,648 16,506 D.A. Burkhardt 1,381,969 17,184 E.J. Curtis 1,382,128 17,026 D.J. Dotson 1,380,748 18,405 R.P. Hamel 1,378,035 21,118 R.S. Jackson 1,381,626 17,526 E.H. Jostrom 1,382,648 16,506 R.L. Meade 1,382,648 16,506 K.L. Paul 1,382,648 16,506 P.H. Reardon 1,382,648 16,506 R.L. Wellman 1,382,128 17,026 3. Election of James H. Hastings, as Treasurer of the Company. Number of Shares For 1,291,187 Against 3,214 Abstain/Broker non-votes 16,634 4. Election of Cathy E. Brown, as Clerk of the Company. Number of Shares For 1,285,803 Against 8,084 Abstain/Broker non-votes 17,149 5. To amend the Restated Articles of Organization to increase the Company's authorized shares of Common Stock and to reduce the par value of the Company's Common Stock. Number of Shares For 1,230,054 Against 56,085 Abstain/Broker non-votes 24,892 6. To adopt Amended and Restated By-laws. Number of Shares For 929,095 Against 99,968 Abstain/Broker non-votes 27,086 7. To adopt the 1994 Stock Option Plan. Number of Shares For 972,170 Against 42,889 Abstain/Broker non-votes 34,471 13 Item 5 Other Information None Item 6(a) Exhibits 3.1 Restated Articles of Organization 3.2 Amended and Restated By-laws 10.34 1994 Stock Option Plan Item 6(b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESSEX COUNTY GAS COMPANY By /s/ Philip H, Reardon Philip H. Reardon, President Date: April 12, 1995 By /s/ James H. Hastings James H. Hastings Vice President and Treasurer [ARTICLE] UT LEGEND> This schedule contains summary financial information extracted from the balance sheet, statement of income and statement of cash flows contained in Form 10-Q of Essex County Gas Company for the six months ended February 28, 1995 and is qualified in its entirety by reference to such financial statements. /LEGEND> [CIK] 0000046189 [NAME] ESSEX COUNTY GAS COMPANY [MULTIPLIER] 1,000 [PERIOD-TYPE] 6-MOS FISCAL-YEAR-END> AUG-31-1994 [PERIOD-END] FEB-28-1995 [BOOK-VALUE] PER-BOOK [TOTAL-NET-UTILITY-PLANT] 68,079 [OTHER-PROPERTY-AND-INVEST] 506 [TOTAL-CURRENT-ASSETS] 14,476 [TOTAL-DEFERRED-CHARGES] 3,446 [OTHER-ASSETS] 721 [TOTAL-ASSETS] 87,228 [COMMON] 3,973 [CAPITAL-SURPLUS-PAID-IN] 13,705 [RETAINED-EARNINGS] 12,467 [TOTAL-COMMON-STOCKHOLDERS-EQ] 30,145 [PREFERRED-MANDATORY] 350 [PREFERRED] 0 [LONG-TERM-DEBT-NET] 20,746 [SHORT-TERM-NOTES] 5,135 [LONG-TERM-NOTES-PAYABLE] 0 [COMMERCIAL-PAPER-OBLIGATIONS] 0 [LONG-TERM-DEBT-CURRENT-PORT] 1,044 [PREFERRED-STOCK-CURRENT] 0 [CAPITAL-LEASE-OBLIGATIONS] 678 [LEASES-CURRENT] 43 [OTHER-ITEMS-CAPITAL-AND-LIAB] 29,087 [TOT-CAPITALIZATION-AND-LIAB] 87,228 [GROSS-OPERATING-REVENUE] 26,862 [INCOME-TAX-EXPENSE] 1,094 [OTHER-OPERATING-EXPENSES] 22,546 [TOTAL-OPERATING-EXPENSES] 23,640 [OPERATING-INCOME-LOSS] 3,222 [OTHER-INCOME-NET] 0 [INCOME-BEFORE-INTEREST-EXPEN] 3,222 [TOTAL-INTEREST-EXPENSE] 1,388 [NET-INCOME] 1,834 <PREFERRED-STOCK-DIVIDEND> 10 [EARNINGS-AVAILABLE-FOR-COMM] 1,824 [COMMON-STOCK-DIVIDENDS] 1,215 [TOTAL-INTEREST-ON-BONDS] 1,030 [CASH-FLOW-OPERATIONS] 5,329 [EPS-PRIMARY] 1.15 [EPS-DILUTED] 1.15