1
See Notes to Financial Statements
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 November 30, 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 0-1166
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)
(978) 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 November 30,
1997:
1,693,902
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, 1997 (1997 10-K). 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 three months ended November 30,
1997, are not necessarily indicative of the results that may be
expected for the fiscal year ending August 31, 1998.
3
ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEETS
November
30, 1997 August
(Unaudited) 31, 1997
ASSETS
Utility plant $106,185,777 $104,540,111
Less: accumulated depreciation 25,365,712 25,021,795
------------ ------------
Net utility plant 80,820,065 79,518,316
------------ ------------
Other property and investments 740,108 718,838
------------ ------------
Capitalized lease 581,926 604,822
------------ ------------
Current assets:
Cash and cash equivalents 369,296 434,930
Accounts receivable, net
Customers 2,814,948 2,275,005
Other 258,997 389,526
Supplemental fuel inventory 4,203,714 4,131,520
Material and supplies 701,113 560,493
Prepaid deferred income taxes 1,938,151 100,105
Prepayments and other 242,000 622,024
Recoverable gas costs 2,216,407 320,909
------------ ------------
Total current assets 12,744,626 8,834,512
------------ ------------
Deferred charges:
Regulatory assets 1,635,147 1,790,966
Unamortized debt expense and other 1,290,321 1,278,367
------------ ------------
Total deferred charges 2,925,468 3,069,333
------------ ------------
$ 97,812,193 $ 92,745,821
============ ============
See Notes to Consolidated Financial Statements.
4
ESSEX COUNTY GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Continued)
November
30, 1997 August
(Unaudited) 31, 1997
CAPITALIZATION AND LIABILITIES
Common stock equity:
Common stock, no par value,
5,000,000 authorized shares.
Issued and outstanding 1,693,902
shares at November 30, 1997, and
1,685,318 shares at August 31, 1997 $20,557,092 $20,320,890
Unrecognized gain (loss) on
investments available for sale, net 4,273 (6,253)
Retained earnings 14,578,812 15,094,008
----------- -----------
Total common stock equity 35,140,177 35,408,645
----------- -----------
Long-term debt less current portion 28,199,000 28,799,000
Non-current obligations under ----------- -----------
capital lease 531,989 550,939
----------- -----------
Current liabilities:
Current portion of long-term debt 894,988 960,535
Current obligation under capital lease 49,938 53,883
Obligations under supplemental
fuel inventory 4,320,881 3,807,788
Notes payable, banks 6,358,000 3,313,000
Accounts payable 5,003,959 3,092,859
Accrued interest 160,529 803,237
Taxes payable 5,597 157,098
Accrued transition costs 274,594 401,465
Supplier refund due customers 1,415,217 1,567,364
Other 222,639 320,308
------------ ------------
Total current liabilities 18,706,342 14,477,537
------------ ------------
Deferred credits:
Accumulated deferred income taxes 10,516,663 8,941,079
Unamortized investment tax credit 1,123,690 1,141,132
Deferred directors' fees 1,147,006 1,106,358
Other 2,447,326 2,321,131
------------ ------------
Total deferred credits 15,234,685 13,509,700
------------ ------------
$ 97,812,193 $ 92,745,821
============ ============
See Notes to Consolidated Financial Statements
5
ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
November November
30, 1997 30, 1996
(Unaudited) (Unaudited)
Operating revenues $ 9,034,815 $ 8,142,501
Less: Cost of gas 4,192,532 4,130,103
----------- -----------
Operating margin 4,842,283 4,012,398
----------- -----------
Operating expenses:
Operations and maintenance expenses 3,034,244 3,004,376
Depreciation 546,685 497,760
Taxes, other than federal income 273,763 228,547
Federal income taxes 46,680 (189,442)
----------- -----------
Total operating expenses 3,901,372 3,541,241
----------- -----------
Operating income 940,911 471,157
Other income (loss) - net 13,128 (21,073)
----------- -----------
Income before interest charges 954,039 450,084
----------- -----------
Interest charges:
Interest on long-term debt 638,382 477,167
Amortization of debt expense 8,060 6,930
Other interest expense 136,328 231,383
Allowance for funds used
during construction (5,259) (4,727)
----------- -----------
Total interest charges 777,511 710,753
----------- -----------
Net income (loss) available for
common stock $ 176,528 $ (260,669)
=========== ===========
Common shares outstanding
(weighted average) 1,690,267 1,647,616
--------- ---------
Income (loss) per common share $ .10 $ (.16)
------ -------
Dividends per common share $ .41 $ .40
------ ------
See Notes to Consolidated Financial Statements
6
ESSEX COUNTY GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
November November
30, 1997 30, 1996
(Unaudited) (Unaudited)
Operating activities:
Net loss $ 176,528 $ (260,669)
Adjustments to reconcile net income ---------- -----------
to net cash:
Depreciation and amortization 606,533 554,477
Provision for uncollectible accounts 154,836 130,013
Deferred income taxes 216,217 (536,805)
Non-cash compensation related to ESOP - 75,000
Changes in current assets and liabilities:
Accounts receivable (564,250) (778,661)
Inventories (212,814) (1,331,259)
Prepayments and other 380,024 535,951
Taxes payable (151,501) 492,395
Recoverable gas costs (2,047,645) (1,907,974)
Accounts payable 1,911,100 (38,222)
Other, net (1,054,022) (853,803)
---------- ----------
Total adjustments (761,522) (3,658,888)
Net cash used in operating ---------- ----------
activities (584,994) (3,919,557)
---------- ----------
Investing activities:
Capital expenditures (1,874,125) (1,987,021)
Cost of property retirements, net (34,220) 15,669
Net cash used in ---------- ----------
investing activities (1,908,345) (1,971,352)
---------- ----------
Financing activities:
Dividends paid (691,725) (657,830)
Issuance of common stock 226,884 219,954
Principal retired on long-term debt (665,547) (666,261)
Increase in fuel note payable 513,093 1,392,787
Principal payment on ESOP obligation - (75,000)
Increase in notes payable, banks 3,045,000 6,445,000
Net cash provided by financing ---------- ----------
activities 2,427,705 6,658,650
---------- ----------
Net increase (decrease) in cash
and cash equivalents (65,634) 767,741
Cash and cash equivalents at
beginning of period 434,930 303,526
---------- ----------
Cash and cash equivalents
at end of period $ 369,296 $1,071,267
========== ==========
Supplemental disclosures:
Cash paid for interest
(net of amount capitalized) $1,412,558 $1,171,767
---------- ----------
Cash paid for income taxes $ 220,000 $ 0
---------- ----------
See Notes to Consolidated Financial Statements
7
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 $958,312 and $772,000 as of
November 30, 1997 and August 31, 1997, 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 $4,745,044 as of November 30, 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
1997 Annual Report on Form 10-K.
E. Merger Agreement
The Company has agreed, subject to the terms and conditions
of the Agreement and Plan of Merger dated as of December 19,
1997 (the "Merger Agreement") with Eastern Enterprises
("Eastern"), to merge with a wholly-owned subsidiary of
Eastern. Upon consummation of the proposed merger, the
Company would become a wholly-owned subsidiary of Eastern,
and each share of the Company's common stock would be
converted into the right to receive a number of shares of
Eastern common stock equal to the exchange ratio provided
for in the Merger Agreement. The exchange ratio is 1.183985
shares of Eastern common stock for each share of the
8
Company's common stock. The exchange ratio will be subject
to adjustment in the event that the average closing price
per share of Eastern common stock for the ten (10) trading
day period ending on the fifth trading day prior to the
closing date of the proposed merger is less than $45 or
greater than $50. The adjustment to the exchange ratio is
designed to assure that the market value of the Eastern
common stock (determined based upon such average closing
price) exchanged for each share of the Company's common
stock is not less than $45 nor more than $50 per share of
the Company's common stock. The proposed merger is subject
to a vote of the Company's stockholders, regulatory
approvals, required consents and other conditions.
Eastern is an unincorporated voluntary association, commonly
referred to as a "Massachusetts business trust." Eastern's
principal subsidiaries are Boston Gas Company ("Boston Gas")
and Midland Enterprises, Inc. ("Midland"). Boston Gas is a
regulated utility that distributes natural gas in and around
Boston, Massachusetts. Midland is engaged in barge
transportation, principally on the Ohio and Mississippi
river systems.
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
For the Three Months Ended November 30, 1997 and November 30,
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, generally during colder
months, may 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 Telecommunications and Energy
("DTE"), 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 retains 25% of gross profits. The
threshold was not attained in the three month period ended
November 30, 1997. Since most of the Company's firm customers
utilize gas for space heating purposes, the Company's sales are
sensitive to the severity of the weather. The Company measures
weather through the use of effective degree days. The Company's
service territory experienced 940 effective degree days during
the three months ended November 30, 1997 as compared to 978
effective degree days for the three months ended November 30,
1996. The twenty-year average is 953 effective degree days for
9
the three months ended November 30, 1997. The weather was 1.4%
warmer than normal during the quarter ended November 30, 1997 and
3.9% warmer compared to the same period in the prior year.
However, the month of November was 11.4% colder than normal and
8.8% colder than November 1996. As a result, the volume of firm
sales increased 9.3% to 1,006,363 Dth for the three months ended
November 30, 1997 from 921,143 Dth for the three months ended
November 30, 1996. For the same period, the Company's
interruptible sales volume decreased by 242,409 Dth to 43,826
Dth, and interruptible revenues decreased to $131,853 from
$683,735. The Company's total operating revenues increased 10.9%
to $9,034,815 for the three months ended November 30, 1997 from
$8,142,501 for the three months ended November 30, 1996. This
increase was due to the previously mentioned weather-related
increase in firm gas volumes as well as an 8.9% increase in the
average unit price of gas sold to firm customers. The average
unit price was $8.54 per Dth of firm gas sold for the three
months ended November 30, 1997 compared to $7.84 per Dth of firm
gas sold for the three months ended November 30, 1996.
Gas costs recovered increased 1.5% to $4,192,532 for the
three months ended November 30, 1997 from $4,130,103 for the
three months ended November 30, 1996. The reason for the
increase in gas costs recovered is due to the above mentioned
increase in volumes sold as well as a 16.7% increase in the
Company's average cost of gas to $3.99 per Dth for the three
months ended November 30, 1997 from $3.42 per Dth for the three
months ended November 30, 1996.
Operations and maintenance expenses increased 1.0% to
$3,034,244 for the three months ended November 30, 1997 compared
to $3,004,376 for the three months ended November 30, 1996.
Depreciation expense increased $48,925 (9.8%) for the three
months ended November 30, 1997 compared to the three months ended
November 30, 1996. This increase was primarily due to an
increase in the depreciation rate approved by the DTE effective
December 1, 1996, from 3.03% to 3.7%.
Interest charges for the three months ended November 30, 1997
increased by $66,758 compared to the three months ended November
30, 1996. The increase was primarily attributable to higher
outstanding balances on long-term debt.
Income attributable to common stock increased $437,197 to
$176,528 for the three months ended November 30, 1997 from a loss
of $260,669 for the three months ended November 30, 1996. Income
per common share increased $0.26 to $0.10 for the three months
ended November 30, 1997 from $0.16 per share for the three months
ended November 30, 1996. Dividends per common share were $.41 per
share for the three months ended November 30, 1997 compared to
$.40 per share for the three months ended November 30, 1996. In
December 1997, the Company declared a dividend of $.42 per share
which was paid to shareholders on January 1, 1998.
10
Liquidity and Capital Resources
Net cash used in operating activities for the three months
ended November 30, 1997 was $584,994. Cash flows were generated
primarily from depreciation and amortization of $606,533; and an
increase in Accounts Payable of $1,911,099. These sources of
cash were offset primarily by an increase in accounts receivable
of $564,250; an increase in recoverable gas costs of $2,047,645;
and a decrease in accrued interest expense of $642,708. The
increase in accounts receivable is due to the seasonal nature of
the Company's business. The increase in recoverable gas costs
represents higher gas costs which will be recovered from the
Company's firm customers.
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 did
not receive any supplier refunds during the three months ended
November 30,1997.
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 November 1997, the Company's obligation under
this credit agreement was $4,320,881.
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, includ
ing the issuance of additional shares of common stock through a
Dividend Reinvestment and Common Stock Purchase Plan. In the
quarter ended November 30, 1997, the Company raised $167,435 of
common stock through its Dividend Reinvestment and Common Stock
Purchase Plan (including $45,105 from the cash infusion portion
of the Plan) and $66,235 of common stock through the Company's
employee stock plan. Management anticipates that these and other
sources will remain available and will continue to adequately
serve the Company's needs.
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For the three months ended November 30, 1997, the Company's
construction expenditures totaled $1,924,453. These expenditures
were funded principally from short-term bank borrowings.
Historically, the first quarter of the Company's fiscal year has
been characterized by significant construction expenditures, low
gas sendout and low operating revenues. Cash requirements during
this period have historically been satisfied through short-term
bank borrowings. Planned construction expenditures for the
remainder of fiscal 1998 are currently estimated at $4,750,000
and planned construction expenditures for fiscal 1999 are
currently estimated at $8,000,000. 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.
Merger Agreement
The Company has agreed, subject to the terms and conditions of
the Agreement and Plan of Merger dated as of December 19, 1997
(the "Merger Agreement") with Eastern Enterprises ("Eastern"),
to merge with a wholly-owned subsidiary of Eastern. Upon
consummation of the proposed merger, the Company would become
a wholly-owned subsidiary of Eastern, and each share of the
Company's common stock would be converted into the right to
receive a number of shares of Eastern common stock equal to the
exchange ratio provided for in the Merger Agreement. The exchange
ratio is 1.183985 shares of Eastern common stock for each share
of the Company's common stock. The exchange ratio will be
subject to adjustment in the event that the average closing
price per share of Eastern common stock for the ten (10) trading
day period ending on the fifth trading day prior to the closing
date of the proposed merger is less than $45 or greater than
$50. The adjustment to the exchange ratio is designed to assure
that the market value of the Eastern common stock (determined
based upon such average closing price) exchanged for each share
of the Company's common stock is not less than $45 nor more than $50
per share of the Company's common stock. The proposed merger is
subject to a vote of the Company's stockholders, regulatory
approvals, required consents and other conditions.
Eastern is an unincorporated voluntary association, commonly
referred to as a "Massachusetts business trust." Eastern's
principal subsidiaries are Boston Gas Company ("Boston Gas")
and Midland Enterprises, Inc. ("Midland"). Boston Gas is a
regulated utility that distributes natural gas in and around
Boston, Massachusetts. Midland is engaged in barge transportation,
principally on the Ohio and Mississippi river systems.
12
Regulatory and Accounting Issues
The Company's revenues are based on rates regulated by the
DTE. 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 DTE, 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 interim
and annual periods ending after December 15, 1997 and early
adoption is not permitted. When adopted, the statement will
require restatement of prior years' earnings per share. In
addition, the Company believes that the adoption of SFAS No. 128
will not have a material effect on its financial statements.
The American Institute of Certified Public Accountants issued
a Statement of Position ("SOP") 96-1, Environmental Remediation
Liabilities. The SOP's objective is to make the timing of the
recognition of environmental obligations more uniform by
discussing the estimation process and providing benchmarks to aid
in determining when to recognize environmental liabilities. The
SOP is effective for the Company in fiscal 1998. The adoption of
SOP 96-1 did not have a material effect on the Company's
financial statements.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995
encourages the use of cautionary statements accompanying forward-
looking statements. The preceding Management's Discussion and
Analysis of Financial Condition and Results of Operations
included forward-looking statements concerning the impact of
transportation customers on the Company's profitability; the
impact of changes in the cost of gas and of the CGA mechanism on
total margin; projected capital expenditures and sources of cash
to fund expenditures; and estimated costs of environmental
remediation and anticipated regulatory approval of recovery
mechanisms. The Company's future results, generally and with
respect to such forward-looking statements, may be affected by
many factors, among which are uncertainty as to the precise rates
for transportation of gas that will be allowed by the regulators
13
and transportation-only customers; uncertainty as to the
regulatory allowance of the recovery charges in the cost of gas;
uncertain demands for capital expenditures and the availability
of cash from various sources; and uncertainty as to the
regulatory approval of the full recovery of environmental costs,
transition costs, and other regulatory assets.
14
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,
1997.
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.
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
27. Financial Data Schedule.
Item 6(b) Reports on Form 8-K
None.
__________________________________
1Previously filed as an exhibit to the Company's form 10-Q for
the quarter ended February 28, 1995 and is incorporated herein by
this reference.
2Previously filed as an exhibit to Registrant's Form 10-Q filed
for the quarter ended May 31, 1997 and is incorporated herein by
this reference.
15
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: January 9, 1998