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 May 31, 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 May 31, 1997:
1,675,680
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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. In the opinion of management,
all adjustments, consisting of normally 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 nine months ended May 31, 1997, are not
necessarily indicative of the results that may be expected for the
fiscal year ending August 31, 1997.
3
ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEETS
May 31, 1997 August
(Unaudited) 31, 1996
------------ ---------
ASSETS
Utility plant $102,727,342 $ 98,603,784
Less: accumulated depreciation 25,030,867 22,290,175
------------ ------------
Net utility plant 77,696,475 76,313,609
------------ ------------
Other property and investments 667,769 633,515
------------ ------------
Capitalized lease 617,605 654,391
------------ ------------
Current assets:
Cash and cash equivalents 365,873 303,526
Accounts receivable, net
Customers 4,649,874 1,654,808
Other 195,108 229,189
Income tax refunds receivable - 874,000
Supplemental fuel inventory 2,734,568 4,047,421
Material and supplies 597,770 512,330
Prepaid deferred income taxes 1,337,748 328,066
Prepayments and other 154,794 622,502
Recoverable gas costs - 470,766
----------- -----------
Total current assets 10,035,735 9,042,608
----------- -----------
Deferred charges:
Regulatory assets 1,732,319 2,464,691
Unamortized debt expense and other 948,629 663,119
----------- -----------
Total deferred charges 2,680,948 3,127,810
----------- -----------
$ 91,698,532 $ 89,771,933
=========== ===========
See Notes to Consolidated Financial Statement
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
May 31, 1997 August
(Unaudited) 31, 1996
------------ --------
CAPITALIZATION AND LIABILITIES
Common stock equity:
Common stock, no par, (authorized
5,000,000 shares, issued and outstanding
1,675,680 shares at May 31, 1997
and 1,642,490 shares at
August 31, 1996 $20,069,794 $19,234,915
Unrealized gain on investments
available for sale, net 62,992 29,265
Retained earnings 15,941,757 13,833,767
ESOP shares purchased with debt - (75,000)
---------- ----------
Total common stock equity 36,074,543 33,022,947
---------- ----------
Long-term debt less current portion 28,799,000 19,765,535
Non-current obligations under ---------- ----------
capital lease 564,835 604,823
---------- ----------
Current liabilities:
Current portion of long-term debt 1,024,718 923,831
Current obligation under capital lease 52,770 49,568
Obligations under supplemental
fuel inventory 2,338,855 3,358,010
Notes payable, banks 1,615,000 11,940,000
Accounts payable 2,718,196 4,063,829
Taxes payable 1,015,341 11,832
Accrued interest 181,113 937,988
Refundable gas costs 840,554 -
Accrued transition costs 248,043 890,432
Supplier refund due customers 1,567,364 275,644
Other 393,460 176,681
---------- ----------
Total current liabilities 11,995,414 22,627,815
---------- ----------
Deferred credits:
Accumulated deferred income taxes 9,804,734 9,951,085
Unamortized investment tax credit 1,158,570 1,210,896
Deferred directors' fees and
compensation 1,066,362 991,503
Other 2,235,074 1,597,329
---------- ----------
Total deferred credits 14,264,740 13,750,813
---------- ----------
$91,698,532 $89,771,933
========== ==========
See Notes to Consolidated Financial Statements
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED
May 31, 1997 May 31, 1996
(Unaudited) (Unaudited)
------------ ------------
Operating revenues $16,659,598 $15,546,131
Less: Cost of gas 8,704,179 8,298,297
---------- ----------
Operating margin 7,955,419 7,247,834
---------- ----------
Operating expenses:
Operations and maintenance expenses 3,792,907 3,718,563
Depreciation 1,035,685 790,760
Taxes, other than federal income 567,762 516,493
Federal income taxes 587,558 488,555
---------- ----------
Total operating expenses 5,983,912 5,514,371
---------- ----------
Operating income 1,971,507 1,733,463
Other income (loss) - net 71,984 17,448
---------- ----------
Income before interest charges 2,043,491 1,750,911
---------- ----------
Interest charges:
Interest on long-term debt 636,588 489,898
Amortization of debt expense 8,059 6,874
Other interest expense 147,686 201,957
Allowance for funds used
during construction (4,967) (4,225)
----------- -----------
Total interest charges 787,366 694,504
----------- -----------
Net income 1,256,125 1,056,407
Preferred dividend requirements - (1,540)
----------- -----------
Income available for common stock $ 1,256,125 $ 1,054,867
=========== ===========
Common shares outstanding
(weighted average) 1,671,636 1,631,666
----------- -----------
Earnings per common share $ .75 $ .65
------ ------
Dividends per common share $ .41 $ .40
------ ------
See Notes to Consolidated Financial Statements
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ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED
May 31, 1997 May 31, 1996
(Unaudited) (Unaudited)
------------ ------------
Operating revenues $48,022,939 $45,140,603
Less: Cost of gas 24,505,502 22,882,105
---------- ----------
Operating margin 23,517,437 22,258,498
---------- ----------
Operating expenses:
Operations and maintenance expenses 10,348,444 10,173,908
Depreciation 3,182,127 2,464,280
Taxes, other than federal income 1,776,301 1,649,971
Federal income taxes 1,953,674 1,998,665
---------- ----------
Total operating expenses 17,260,546 16,286,824
---------- ----------
Operating income 6,256,891 5,971,674
Other income (loss) - net 195,737 7,802
---------- ----------
Income before interest charges 6,452,628 5,979,476
---------- ----------
Interest charges:
Interest on long-term debt 1,688,116 1,478,402
Amortization of debt expense 21,890 20,569
Other interest expense 631,881 674,799
Allowance for funds used
during construction (16,153) (25,690)
---------- ----------
Total interest charges 2,325,734 2,148,080
---------- ----------
Net income 4,126,894 3,831,396
Preferred dividend requirements - (10,780)
---------- ----------
Income available for common stock $ 4,126,894 $ 3,820,616
========== ==========
Common shares outstanding
(weighted average) 1,659,474 1,621,836
---------- ----------
Earnings per common share $ 2.49 $ 2.36
----- -----
Cash dividends declared per common share $ 1.22 $ 1.19
----- -----
See Notes to Consolidated Financial Statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
May 31, 1997 May 31, 1996
(Unaudited) (Unaudited)
------------ -----------
Operating activities:
Net income $ 4,126,894 $ 3,831,396
Adjustments to reconcile net income ---------- ----------
to net cash:
Depreciation and amortization 3,388,567 2,875,802
Provision for uncollectible accounts 1,509,573 1,975,676
Deferred income taxes (1,175,801) 317,781
Non-cash compensation related to ESOP 75,000 150,000
Changes in current assets and liabilities:
Accounts receivable (4,470,558) (3,528,477)
Inventories 1,227,413 4,476,072
Prepayments and other 467,708 (10,011)
Accounts payable (1,345,633) (157,928)
Refundable gas costs 1,311,320 (766,472)
Taxes payable 1,877,509 1,369,241
Supplier refunds due customers 1,291,720 (1,901,253)
Other, net 147,143 (88,950)
---------- ----------
Total adjustment 4,303,961 4,711,481
---------- ----------
Net cash used in operating activities 8,430,855 8,542,877
---------- ----------
Investing activities:
Capital expenditures (4,834,244) (4,993,436)
Cost of property retirements, net of salvage (112,482) (275,604)
---------- ----------
Net cash used in investing activities (4,946,726) (5,269,040)
---------- ----------
Financing activities:
Dividends paid (2,018,904) (1,938,344)
Net proceeds from issuance of common stock 806,925 666,625
Retirement of preferred stock - (336,000)
Proceeds from issuance of long-term debt 10,000,000 -
Principal retired on long-term debt (790,648) (769,752)
Decrease in supplemental fuel inventory
obligation (1,019,155) (3,384,580)
Principal payment on ESOP obligation (75,000) (150,000)
Increase (decrease) in notes payable, banks (10,325,000) 2,625,000
Other - 27,360
---------- ----------
Net cash provided by financing
activities (3,421,782) (3,259,691)
---------- ----------
Net increase in cash and cash equivalents 62,347 14,146
Cash and cash equivalents at
beginning of period 303,526 136,925
---------- ----------
Cash and cash equivalents at end of period $ 365,873 $ 151,071
========== ==========
Supplemental disclosures:
Cash paid for interest
(net of amount capitalized) $ 3,062,609 $ 2,489,817
========== ==========
Cash paid for income taxes $ 2,082,465 $ 876,976
========== ==========
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 $2,162,365 and $653,000 as of May 31,
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
$6,107,990 as of May 31, 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
Annual Report on Form 10-K for the fiscal year ended August 31,
1996.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
For the Three Months Ended May 31, 1997 and May 31, 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
margins exceed a certain threshold specified by the Massachusetts
Department of Public Utilities ("MDPU"), the Company must return
all margins on such sales directly to the Company's firm customers.
Once the threshold is attained, the Company may retain 25% of the
margin above the threshold. The amount retained in the three month
period ended May 31, 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 and compares to both prior year and "normal"
weather as determined by a twenty year average. For the three
months ended May 31, 1997 the weather was 1.7% warmer than the same
time period in 1996. As a result, the volume of firm sales
decreased 0.2% to 1,774,661 Dekatherms ("DKT") for the three months
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ended May 31, 1997 from 1,778,228 DKT for the three months ended
May 31, 1996. The Company's total operating revenues increased 7.2%
to $16,659,598 for the three months ended May 31, 1997 from
$15,546,131 for the three months ended May 31, 1996. This increase
was primarily due to a December 1, 1996 increase in base rates as
approved by the MDPU and an 11.0% increase in the average unit price
of gas sold to firm customers. The average unit price per DKT of firm
gas sold was $9.08 for the three months ended May 31, 1997 compared
to $8.18 for the three months ended May 31, 1996.
Total gas costs, including both firm and interruptible,
increased 4.9% to $8,704,179 for the three months ended May 31,
1997 from $8,298,297 for the three months ended May 31, 1996. The
increase in gas costs is attributable to an 11.3% increase in the
Company's unit cost of gas. The unit cost of gas increased to
$4.52 per DKT for the three months ended May 31, 1997 from $4.06
per DKT for the three months ended May 31, 1996. The increase was
due to slightly higher gas product costs billed by suppliers.
Operations and maintenance expenses increased 2.0% to
$3,792,907 for the three months ended May 31, 1997 compared to
$3,718,563 for the three months ended May 31, 1996. The increase
was due primarily to general maintenance costs of $79,000, an
increase in expenses for meter and house regulators in the amount
of $90,000, additional outside service costs in the amount of
$33,000, and an increase in general salaries of $41,000 offset by a
reduction of uncollectible accounts and bad debt expense of
$197,000.
Depreciation expense increased $244,925 (31.0%) for the three
months ended May 31, 1997 compared to the three months ended May
31, 1996. This increase was primarily due to an increase in the
depreciation rate approved by the MDPU effective December 1, 1996
from 3.03% to 3.70%.
Interest charges for the three months ended May 31, 1997
increased by $92,862 (13.4%) compared to the three months ended May
31, 1996. The increase was primarily related to higher outstanding
balances on long-term debt.
Income available for common stock increased 19.1% to $1,256,125
for the three months ended May 31, 1997 from $1,054,867 for the
three months ended May 31, 1996. Income per common share increased
to $.75 for the three months ended May 31, 1997 from $0.65 per
share for the three months ended May 31, 1996. Dividends per common
share were $.41 per share for the three months ended May 31, 1997
compared to $.40 per share for the three months ended May 31, 1996
(such dividends were paid April 1, 1997 and 1996, respectfully).
In June 1997, the Company declared a dividend of $.41 per share which
was paid to shareholders on July 1, 1997.
For the Nine Months Ended May 31, 1997 and May 31, 1996
Operating revenues for the nine months ended May 31, 1997
increased 6.4% to $48,022,939 compared to $45,140,603 for the nine
months ended May 31, 1996. Firm gas revenues amounted to
$46,371,321 for the nine months ended May 31, 1997 compared to
$43,089,630 for the same period in 1996, an increase of 3.8%. Firm
gas volumes decreased 2.4% to 5,187,401 DKT for the nine months
ended May 31, 1997 compared to 5,315,600 DKT for the nine month
period ended May 31, 1996. The increase in operating revenues is
primarily due to the rate increase discussed above which was
partially offset by lower firm gas volumes. The average selling
price of firm gas was $8.94 for the nine months ended May 31, 1997
compared to $8.11 for the same period last year. This increase is
also due to the rate and gas cost factors discussed above.
Interruptible revenues for the nine months ended May 31, 1997 and
1996 were $1,029,411 and $1,332,927, respectively.
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Operations and maintenance expenses for the nine months ended
May 31, 1997 increased to $10,348,444 from $10,173,908 for the
comparable period a year ago. The increase was due primarily to
pre-planned maintenance cost for a gas main and general maintenance
of approximately $200,000, an increase in expenses for meter and
house regulators in the amount of $81,000, additional advertising
expense of $75,000, an increase in general salaries of $134,000,
and additional outside service expense of $104,000 offset by a
reduction of uncollectible accounts and bad debt expense of
$466,000.
Interest charges increased $177,654 (8.3%) for the nine months
ended May 31, 1997 compared to the nine months ended May 31, 1996.
The increase was primarily related to higher outstanding balances
on long-term debt and amounts payable to customers on pipeline
refunds received by the Company.
Income available for common stock increased by $306,278 (8.0%)
to $4,126,894 for the nine months ended May 31, 1997 as
compared to $3,820,616 for the same period last year while earnings
per share increased to $2.49 from $2.36. Dividends were $1.22 and
$1.19 per common share, respectively, for these periods.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months
ended May 31, 1997 was $8,430,855. Cash flows were generated
primarily from net income of $4,126,894, a decrease in inventories
of $1,227,413, refundable gas costs to customers in the amount of
$1,311,320, depreciation and amortization of $3,388,567, supplier
refund due customers in the amount of $1,291,720, provision of
uncollectible accounts of $1,509,573, and an increase in taxes
payable of $1,877,509. These sources of cash were offset primarily
by cash used for deferred income taxes in the amount of $1,175,801,
an increase in accounts receivable of $4,470,558 and a decrease in
accounts payable in the amount of $1,345,633. The decrease in
inventories resulted 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 savings in gas costs which are returned to
the Company's firm customers discussed below. 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. During the nine
months ended May 31, 1997 the Company received $1,567,364 in
supplier refunds.
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 from December 12, 1995 through December
31, 2000. As of May 31, 1997, the Company's obligation under this
credit agreement was $2,338,855.
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 the Company's Dividend Reinvestment and
Common Stock Purchase Plan. Management anticipates that these and
other sources will remain available and continue to adequately
serve the Company's needs.
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Net construction expenditures for the nine months ended May 31,
1997 were $4,834,244 as compared to $4,993,436 for the same period
a year ago. These expenditures were funded by cash flows from
operations and short-term bank borrowings. These expenditures were
funded principally from the previously above-mentioned sources of
financing. Historically, the third quarter of the Company's fiscal
year including the three months ended May 31, 1997 has been
characterized by increasing capital expenditures, diminishing gas
sendout and reduced operating revenues. Cash requirements during
this period have historically been satisfied through operations and
short-term borrowings. Planned construction expenditures for the
remainder of fiscal 1997 are currently estimated at $1,900,000 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 the
Company expects them to 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.
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 Cost of Gas Adjustment ("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 March 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 establishes
standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential
common stock. This statement is effective for fiscal years ending
after December 15, 1997 and early adoption is not permitted. When
adopted, the statement will require restatement of prior years'
earnings per share. The Company will adopt this statement for its
fiscal year ended August 31, 1998. In addition, the Company
believes that the adoption of SFAS No. 128 will not have a material
effect on its financial statements.
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 year ended August 31, 1996.
Item 2 Changes in Securities
None.
Item 3 Defaults Upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
None.
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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.
27. Financil Data Schedule.
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 and Chief Executive Officer
By___/s/ James H. Hastings______________________
James H. Hastings
Vice President and Treasurer
(Principal Financial Officer)
Date: July 11, 1997