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, 1997
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 0-11
ESSEX COUNTY GAS COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1427020
(State or other jurisdiction (I.R.S.Identification #)
Employer incorporation or organization)
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 registrant 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, 1997:
1,666,866
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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, 1996 (1996 10-K). In
the opinion of Management, all adjustments, consisting of normal
ly recurring adjustments considered necessary for a fair
presentation, have been included. Because of the seasonal nature
of the registrant's business, operating results for the six
months ended February 28, 1997, are not necessarily indicative of
the results that may be expected for the year ending August 31,
1997.
3
ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEET
February
28, 1997 August
(Unaudited) 31, 1996
ASSETS ----------- --------
Utility plant $101,786,287 $ 98,603,784
Less: accumulated depreciation 24,130,146 22,290,175
----------- -----------
Net utility plant 77,656,141 76,313,609
----------- -----------
Other property and investments 638,749 633,515
----------- -----------
Capitalized lease 630,124 654,391
----------- -----------
Current assets:
Cash and cash equivalents 782,898 303,526
Accounts receivable, net
Customers 8,383,628 1,654,808
Other 243,740 229,189
Recoverable gas costs 1,927,663 470,766
Income tax refund receivable - 874,000
Supplemental fuel inventory 2,824,999 4,047,421
Material and supplies 514,537 512,330
Prepaid deferred income taxes - 328,066
Prepayments and other 28,025 622,502
----------- -----------
Total current assets 14,705,490 9,042,608
----------- -----------
Deferred charges:
Regulatory assets 2,331,665 2,464,691
Unamortized debt expense
and other 990,464 663,119
----------- -----------
Total deferred charges 3,322,129 3,127,810
----------- -----------
$ 96,952,633 $ 89,771,933
=========== ===========
See Notes to Consolidated Financial Statements
4
ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
February
28, 1997 August
(Unaudited) 31, 1996
----------- --------
CAPITALIZATION AND LIABILITIES
Common stock equity:
Common stock, no par (5,000,000
authorized shares, issued
and outstanding 1,666,866 shares at
February 28, 1997 and 1,642,490
shares at August 31, 1996) $ 19,849,921 $ 19,234,915
Unrecognized gain on investments
available for sale, net 70,216 29,265
Retained earnings 15,369,362 13,833,767
ESOP shares purchased with debt - (75,000)
---------- ----------
Total common stock equity 35,289,499 33,022,947
---------- ----------
Long-term debt less current
portion 28,799,000 19,765,535
Non-current obligations under ---------- ----------
capital lease 578,443 604,823
---------- ----------
Current liabilities:
Current portion of long-term debt 1,087,567 923,831
Current obligation under capital
lease 51,681 49,568
Obligations under supplemental fuel
inventory 3,309,043 3,358,010
Notes payable, banks 7,512,000 11,940,000
Accounts payable 3,367,236 4,063,829
Accrued interest 861,133 937,988
Transition obligations 792,716 890,432
Supplier refund due customers - 275,644
Other 385,470 188,513
---------- ----------
Total current liabilities 17,366,846 22,627,815
Deferred credits: ---------- ----------
Accumulated deferred income
taxes 10,719,958 9,951,085
Unamortized investment tax credit 1,176,012 1,210,896
Deferred directors' fees 1,030,963 991,503
Other 1,991,912 1,597,329
---------- ----------
Total deferred credits 14,918,845 13,750,813
---------- ----------
$ 96,952,633 $ 89,771,933
============ ===========
See Notes to Consolidated Financial Statements
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
February February
28, 1997 29, 1996
(Unaudited) (Unaudited)
----------- -----------
Operating revenues $ 23,220,840 $ 22,632,458
Less: Cost of gas 11,671,220 11,310,328
---------- ----------
Operating margin 11,549,620 11,322,130
---------- ----------
Operating expenses:
Operations and maintenance
expenses 3,551,161 3,788,109
Depreciation 1,648,682 1,255,760
Taxes, other than federal
income 979,992 920,737
Federal income taxes 1,555,558 1,655,555
---------- ----------
Total operating expenses 7,735,393 7,620,161
---------- ----------
Operating income 3,814,227 3,701,969
Other income - net 144,826 7,227
---------- ----------
Income before interest charges 3,959,053 3,709,196
---------- ----------
Interest charges:
Interest on long-term debt 574,361 491,101
Amortization of debt expense 6,901 6,874
Other interest expense 252,812 242,286
Allowance for funds used during
construction (6,459) (9,521)
---------- ----------
Total interest charges 827,615 730,740
---------- ----------
Net income 3,131,438 2,978,456
Preferred dividend requirements - (4,620)
---------- ----------
Income available for common stock $ 3,131,438 $ 2,973,836
========== ==========
Common shares outstanding
(weighted average) 1,659,033 1,620,911
---------- ----------
Earnings per common share $ 1.89 $ 1.83
------ ------
Dividends per common share $ .41 $ .40
------ ------
See Notes to Consolidated Financial Statements
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
February February
28, 1997 29, 1996
(Unaudited) (Unaudited)
----------- -----------
Operating revenues $ 31,363,341 $ 29,594,472
Less: Cost of gas 15,801,323 14,583,808
---------- ----------
Operating margin 15,562,018 15,010,664
---------- ----------
Operating expenses:
Operations and maintenance
expenses 6,555,537 6,455,345
Depreciation 2,146,442 1,673,520
Taxes, other than federal
income 1,208,539 1,133,478
Federal income taxes 1,366,116 1,510,110
---------- ----------
Total operating expenses 11,276,634 10,772,453
---------- ----------
Operating income 4,285,384 4,238,211
Other expense- net 123,753 (9,646)
---------- ----------
Income before interest charges 4,409,137 4,228,565
Interest charges: ---------- ----------
Interest on long-term debt 1,051,528 988,504
Amortization of debt expense 13,831 13,695
Other interest expense 484,195 472,842
Allowance for funds used during
construction (11,186) (21,465)
---------- ----------
Total interest charges 1,538,368 1,453,576
---------- ----------
Net income 2,870,769 2,774,989
Preferred dividend requirements - (9,240)
---------- ----------
Income available for common stock $ 2,870,769 $ 2,765,749
========== ==========
Common shares outstanding
(weighted average) 1,653,293 1,616,852
---------- ----------
Earnings per common share $ 1.74 $ 1.71
------ ------
Dividends per common share $ 0.81 $ 0.79
------ ------
See Notes to Consolidated Financial Statements
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
February February
28, 1997 29, 1996
(Unaudited) (Unaudited)
Operating activities: --------- ---------
Net income $ 2,870,769 $ 2,774,989
Adjustments to reconcile net income ---------- ----------
to net cash:
Depreciation and amortization 2,247,481 1,953,850
Provision for uncollectible accounts 794,582 1,063,435
Deferred income taxes 1,099,395 61,905
Non-cash compensation related to ESOP 75,000 150,000
Changes in current assets and liablilities:
Accounts receivable (7,537,953) (7,575,425)
Inventories including fuel 1,220,215 3,590,069
Prepaid expenses and
other current assets 594,477 143,270
Refundable gas costs (1,456,897) (1,433,762)
Accounts payable (696,593) 174,087
Taxes payable 983,219 1,617,285
Supplier refund due customers (275,644) (1,317,101)
Other, net 326,687 382,124
---------- ----------
Total (2,626,031) (1,190,263)
Net cash provided by operating ---------- ----------
activities 244,738 1,584,726
---------- ----------
Investing activities:
Capital expenditures (3,778,338) (3,863,713)
Cost of property retirements, net of salvage 31,542 (209,183)
---------- ----------
Net cash used in investing activities (3,746,796) (4,072,896)
---------- ----------
Financing activities:
Dividends paid (1,335,174) (1,283,021)
Net proceeds from issuance of common stock 596,370 397,073
Proceeds from issuance of long-term debt 10,000,000 -
Principal retired on long-term debt (727,799) (711,974)
Decrease in fuel obligation (48,967) (418,016)
Principal payment on ESOP obligation (75,000) (150,000)
Net borrowings (repayment) of
short-term debt (4,428,000) 5,174,917
Other - 22,410
---------- ----------
Net cash provided by financing activities 3,981,430 3,031,389
---------- ----------
Net increase in cash 479,372 543,219
Cash at beginning of period 303,526 136,925
---------- ----------
Cash at end of period $ 782,898 $ 680,144
========== ==========
Supplemental disclosures:
Cash paid for interest
(net of amount capitalized) $1,615,223 $1,315,579
Cash paid for income taxes $ - $ 325,000
See Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements:
A. Interim Accounting Policies
The amount of natural gas sold for purposes of central and
space heating, and to a lesser extent, water heating, is
directly related to the ambient air temperature.
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 $1,490,688 and $653,000 as of
February 28, 1997 and August 31, 1996, respectively.
C. Restriction on Retained Earnings
Under the terms of the Indenture of First Mortgage Bonds
dated October 1, 1955, as updated by Supplemental Indentures
numbered One through Fifteen, retained earnings in the
amount of $5,535,595 as of February 28, 1997, were
unrestricted as to the payment of cash dividends on Common
Stock and the purchase, redemption, or retirement of shares
of capital stock.
D. Commitments and Contingencies
For information regarding commitments and contingencies, see
Notes to Consolidated Financial Statements in the Company's
1996 Annual Report of Form 10-K.
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
For the Three Months Ended February 28, 1997 and February 29, 1996
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, unless
interruptible volumes exceed a certain threshold specified by the
Massachusetts Department of Public Utilities ("MDPU"), the
Company must return all gross profit on such sales directly to
the Company's firm customers. Once the threshold is attained,
the Company may retain 10% of gross profits. The amount retained
in the three month period ended February 28, 1997 was less than
$10,000.
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,
9
adjusted for wind and cloud cover, from 65 degrees Fahrenheit.
The Company's service territory experienced 3,215 effective
degree days ("EDD") during the three months ended February 28,
1997 as compared to 3,655 EDD for the three months ended February
29, 1996. The Company's twenty year average for the three months
ended February 28, 1997 is 3,467 EDD. As a result of the warmer
weather, the volume of firm sales decreased 8.4% to 2,431,487
thousand cubic feet ("Mcf") for the three months ended February
28, 1997 from 2,655,549 for the three months ended February 29,
1996. The Company's total operating revenues increased 2.6% to
$23,220,840 for the three months ended February 28, 1997 from
$22,632,458 for the three months ended February 29, 1996. This
increase was primarily due to higher gas costs and the December
1, 1996 increase in base rates as approved by the Massachusetts
Department of Public Utilities ("MDPU"). The average unit price
per Mcf of firm gas sold was $9.47 for the three months ended
February 28, 1997 compared to $8.44 for the three months ended
February 29, 1996. The increase in unit selling price is related
to the rate increase mentioned above as well as the Company
collecting from customers additional gas costs.
Although sales were lower, the cost of gas increased 3.2% to
$11,671,220 for the three months ended February 28, 1997 from
$11,310,325 for the three months ended February 29, 1996. The
increase in gas costs is attributable to a 12.7% increase in the
Company's average cost of gas to $4.80 per firm Mcf for the three
months ended February 28, 1997 from $4.26 per firm Mcf for the
three months ended February 29, 1996. The increase in unit cost
is due to higher prices charged by suppliers.
Operations and maintenance expenses totaled $3,551,161 for
the three months ended February 28, 1997 compared to $3,788,109
for the three months ended February 29, 1996. The change was due
primarily to a decrease in allowance for uncollectible accounts.
Depreciation expense increased $392,922 (31.3%) for the three
months ended February 28, 1997 compared to the three months ended
February 29, 1996. This increase was primarily due to an increase
in the depreciation rate approved by the MDPU from 3.03% to 3.70%.
Interest charges for the three months ended February 28, 1997
increased by $96,875 (13.3%) compared to the three months ended
February 29, 1996. The increase was primarily related to
higher outstanding balances on Notes Payable to banks and the issue
of $10,000,000 in First Mortgage Bonds.
Income available for common stock increased $157,602 to
$3,131,438 for the three months ended February 28, 1997 from
$2,973,836 for the three months ended February 29, 1996. Income
per common share increased $0.06 to $1.89 for the three months
ended February 28, 1997 from $1.83 per share for the three months
ended February 29, 1996. Dividends per common share were $.41
per share for the three months ended February 28, 1997 compared
to $.40 per share for the three months ended February 29, 1996.
In March 1997, the Company declared a dividend of $.41 per share
which was paid to shareholders on April 1, 1997.
For the Six Months Ended February 28,1997 and February 29, 1996
Total operating revenues for the six months ended February
28, 1997 increased 6.0% to $31,363,341 from $29,594,472 for the
six months ended February 29, 1996. Firm gas volumes were
3,332,754 Mcf for the six month period ended February 28, 1997
compared to 3,483,891 Mcf for the six month period ended February
29, 1996. The increase in operating revenues is primarily due
to the rate increase discussed above which was offset by
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significantly warmer weather. There were 4,193 EDD for the
six month period ended February 28, 1997 compared to 4,562 EDD for
the six months ended February 29, 1996, representing a 8.1%
decrease. Average EDD in the Company's service area for the six
month period is equivalent to 4,421 EDD. The average selling price
of firm gas was $9.08 for the six months ended February 28, 1997
compared to $8.19 for the same period last year. The increase is
due to the rate and gas cost factors discussed above.
Interruptible revenues for the six months ended February 28, 1997
and February 29, 1996 were $683,943 and $591,886, respectively.
Operations and maintenance expenses for the six months ended
February 28, 1997 increased to $6,555,537 from $6,455,345 for the
comparable period a year ago. The increase was due to pre-
planned maintenance cost for a gas main of approximately
$105,000; additional marketing expenses of $67,000; a $70,000
increase in expenses for outside services; and an increase in
general salaries of $106,000 offset by a reduction of
uncollectible accounts and bad debt expense of $268,000.
Interest expense increased $84,792 (15.8%) for the six months
ended February 28, 1997 compared to the six months ended February
29, 1996. The increase was due to the factors mentioned above for
the three month period ended February 28, 1997.
Income available for common stock increased by $105,020 to
$2,870,769 for the six months ended February 28, 1997 as compared
to $2,765,749 for the same period last year while earnings per
share increased to $1.74 from $1.71. Dividends were $.81 and
$.79 per share, respectively.
Liquidity and Capital Resources
Net cash provided by operating activities for the six months
ended February 28, 1997 was $244,738. Cash flows were generated
primarily from net income of $2,870,769, a decrease in
inventories of $1,220,215, depreciation and amortization of
$2,247,481, deferred income taxes of $1,099,395, provision of
uncollectible accounts of $794,582 and an increase in taxes
payable of $983,219. These sources of cash were offset primarily
by cash used for refundable gas costs to customers in the amount
of $1,456,897 and an increase in accounts receivable of $7,537,953.
The decrease in inventories results from the seasonal nature
of the Company's business whereby inventories are built in the
warmer months and sold in the colder months. The cash used for
refundable gas costs to customers represents return of supplier
pipeline refunds (discussed below) as well as savings in gas costs
which are also returned to the Company's firm customers.
The increase in accounts receivable is due to the seasonal
nature of the Company's business.
Occasionally the Company receives refunds from its pipeline
supplier as a result of regulatory action by the Federal Energy
Regulatory Commission. The supplier refunds are returned by the
Company to customers over a twelve month period.
The Company continues to invest a significant amount of
capital in its distribution system to satisfy current and 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 need.
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The Company finances its gas inventory with a bank through a
special purpose credit agreement which has a maximum financing
commitment of $10,000,000 with a floating interest rate. This
credit agreement extends through December 31, 2000. As of
February 28, 1997 the Company's obligation under this credit
agreement was $3,309,043.
In January 1997 the Company issued $10,000,000 in First
Mortgage Bonds due 2017. The rate on these Bonds is 7.28%.
For the three months ended February 28, 1997, the Company's
construction expenditures totaled $1,801,000. These expenditures
were funded principally from short-term bank borrowings.
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,
1997 were $3,818,000 as compared to $3,865,000 for the same
period a year ago. These were funded by cash flow from
operations and short-term bank borrowings. The six-month period
ended February 28, 1997 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 subsequent quarter may require
additional short-term borrowings under existing lines of credit.
Planned construction expenditures for the remainder of fiscal
1997 are currently estimated at $2,700,000 and planned
construction expenditures for fiscal 1998 are currently estimated
at $6,200,000. 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 financings.
Regulatory and Accounting Issues
The Company's revenues are based on rates regulated by the
MDPU. These rates are designed to allow the Company to recover
its operating costs and provide an opportunity to earn a
reasonable rate of return on investor supplied funds. Once
approved, the Company's rates are adjusted by a CGA which,
subject to approval by the MDPU, permits the Company to change
rates to recover its gas costs and certain other costs on a
dollar-for-dollar basis. The CGA is also used as the mechanism
to reduce charges to firm customers by the margin earned on sales
to interruptible customers. In September 1996 the Company
received approval for a rate increase of $2,100,000 which was
effective December 1, 1996.
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
The information called for by this item is unchanged
from that filed in the Company's Annual Report on Form
10-K for fiscal 1996 filed November 26, 1996.
Item 2 Changes in Securities
None.
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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 21, 1997. For a description of the meeting
and the matters voted thereat, see the Company's
Notice of Annual Meeting and Proxy Statement ("Proxy
Statement"), filed with the Securities and Exchange
Commission on December 2, 1996, 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. Election of Directors
Number of Shares
For Against Withheld
C.E. Billups 1,304,920 13,171 4,462
B.C. Bixby 1,309,530 8,561 4,462
D.A. Burkhardt 1,308,877 9,215 5,115
E.J. Curtis 1,308,677 9,415 5,315
D.J. Dotson 1,309,430 8,661 4,562
R.P. Hamel 1,305,139 12,952 4,462
R.S. Jackson 1,309,530 8,561 4,462
E.H. Jostrom 1,309,232 8,859 4,760
R.L. Meade 1,309,311 8,780 4,462
K.L. Paul 1,309,525 8,566 4,462
P.H. Reardon 1,309,402 8,690 4,701
R.L. Wellman 1,309,430 8,661 4,562
Item 5 Other Information
None.
Item 6(a) Exhibits
3.1 Restated Articles of Organization of Essex County
Gas Company.1
3.2 By Laws of Essex County Gas Company.2
4.6 Fifteenth Supplemental Indenture Dated as of
December 1, 1996 providing for a 7.28% Series Due 2017.
13
27. Financial Data Schedule.
1 Previously filed as an exhibit to the Registrant's 10-K filed
for the fiscal year ended August 31, 1988 and is incorporated
herein by this reference.
2 Previously filed as an exhibit to the Registrant's 10-Q filed
February 28, 1991 and is incorporated herein by this reference.
Item 6(b) Reports on Form 8-K
None.
14
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 ________________
Philip H. Reardon
President and Chief Executive Officer
By_____________________________________________
James H. Hastings
Vice President and Treasurer
(Principal Financial Officer)
Date: April 11, 1997