FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
Commission File Number 1-11441
ENERGYNORTH, INC.
(Exact name of registrant as specified in its charter)
New Hampshire 02-0363755
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1260 Elm Street, P.O. Box 329, Manchester, NH 03105
(Address and zip code of principal executive offices)
(603) 625-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 [ ]
EnergyNorth, Inc. had 3,317,498 shares of $1.00 par value common
stock outstanding on July 24, 1998, the filing date of this
report.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENERGYNORTH, INC.
Condensed Consolidated Balance Sheets
Assets
(Unaudited, except for September 30, 1997 data)
(Thousands of dollars)
June 30, September 30,
1998 1997 1997
------------------ -------------
Property:
Utility plant, at cost $154,918 $143,743 $146,830
Accumulated depreciation and amortization 50,819 47,690 47,815
------------------ -------------
Net utility plant 104,099 96,053 99,015
Net nonutility property, at cost 7,773 7,526 7,430
------------------ -------------
Net property 111,872 103,579 106,445
------------------ -------------
Current assets:
Cash and temporary cash investments 6,845 992 1,998
Note receivable - - 111
Accounts receivable (net of allowances of
$1,230, $1,378 and $1,357, respectively) 13,609 6,706 3,430
Unbilled revenues 595 593 602
Inventories, at average cost:
Materials and supplies 2,304 1,657 1,756
Supplemental gas supplies 6,990 5,551 9,120
Prepaid and deferred taxes 1,869 1,434 1,305
Recoverable FERC 636 transition costs 505 1,514 1,261
Prepaid expenses and other 444 477 1,340
------------------ -------------
Total current assets 33,161 18,924 20,923
------------------ -------------
Deferred charges:
Regulatory asset - income taxes 2,401 2,401 2,401
Recoverable environmental costs 5,464 6,268 6,546
Deferred charges and other assets 3,879 344 2,212
------------------ -------------
Total deferred charges 11,744 9,013 11,159
------------------ -------------
Total assets $156,777 $131,516 $138,527
================== =============
See accompanying notes to condensed consolidated financial statements.
3
ENERGYNORTH, INC.
Condensed Consolidated Balance Sheets
Stockholders' Equity and Liabilities
(Unaudited, except for September 30, 1997 data)
(Thousands of dollars)
June 30, September 30,
1998 1997 1997
------------------- -------------
Capitalization:
Common stockholders' equity:
Common stock - par value of $1 per
share, 10,000,000 shares authorized;
3,316,148, 3,243,543 and 3,243,543
shares issued and outstanding, respectively $ 3,316 $ 3,244 $ 3,244
Amount in excess of par 32,410 30,428 30,428
Retained earnings 19,082 17,194 14,050
------------------- -------------
Total common stockholders' equity 54,808 50,866 47,722
Long-term debt 45,731 29,168 45,242
------------------- -------------
Total capitalization 100,539 80,034 92,964
------------------- -------------
Current liabilities:
Notes payable to banks 1,505 5,500 100
Current portion of long-term debt 1,012 2,145 932
Current portion of capital lease obligations - 98 46
Inventory purchase obligation 5,919 4,101 7,852
Accounts payable 12,297 5,990 6,046
Deferred gas costs 3,959 2,476 1,300
Accrued interest 1,173 1,064 311
Accrued and deferred taxes 2,382 2,877 111
Accrued FERC 636 transition costs 505 1,514 1,261
Customer deposits, environmental and other 3,416 3,148 3,927
------------------- -------------
Total current liabilities 32,168 28,913 21,886
------------------- -------------
Commitments and contingencies
Deferred credits:
Deferred income taxes 18,605 17,155 18,302
Unamortized investment tax credits 1,641 1,768 1,734
Regulatory liability - income taxes 1,169 1,284 1,254
Contributions in aid of construction and other 2,655 2,362 2,387
------------------- -------------
Total deferred credits 24,070 22,569 23,677
------------------- -------------
Total stockholders' equity and liabilities $156,777 $131,516 $138,527
=================== =============
See accompanying notes to condensed consolidated financial statements.
4
ENERGYNORTH, INC.
Condensed Consolidated Statements of Income
For the periods ended June 30
(Unaudited)
(Thousands of dollars except for per share amounts and shares outstanding)
Three Months Nine Months Twelve Months
1998 1997 1998 1997 1998 1997
---------------------- --------------------- ----------------------
Total operating revenues $20,498 $18,085 $93,422 $96,437 $102,855 $104,853
---------------------- --------------------- ----------------------
Operating expenses:
Cost of sales 14,106 12,118 53,018 56,653 58,195 61,070
Operations and maintenance 5,542 5,226 16,785 16,258 22,185 21,341
Depreciation and amortization 1,640 1,542 5,004 4,666 6,491 6,025
Taxes other than income taxes 1,064 988 3,158 2,946 3,088 3,862
Federal and state income taxes (1,031) (936) 4,821 5,038 3,590 3,660
---------------------- --------------------- ----------------------
Total operating expenses 21,321 18,938 82,786 85,561 93,549 95,958
---------------------- --------------------- ----------------------
Operating income (loss) (823) (853) 10,636 10,876 9,306 8,895
---------------------- --------------------- ----------------------
Other income 247 200 1,096 688 1,364 883
Interest expense:
Interest on long-term debt 975 725 2,918 2,182 3,653 2,913
Other interest 207 198 594 759 903 893
---------------------- --------------------- ----------------------
Total interest expense 1,182 923 3,512 2,941 4,556 3,806
---------------------- --------------------- ----------------------
Net income (loss) $(1,758) $(1,576) $ 8,220 $ 8,623 $ 6,114 $ 5,972
====================== ===================== ======================
Weighted average shares outstanding 3,281,587 3,243,543 3,257,487 3,242,804 3,253,973 3,239,972
====================== ===================== ======================
Earnings (loss) per share $ (.54) $ (.49) $ 2.52 $ 2.66 $ 1.88 $ 1.84
====================== ===================== ======================
Dividends declared per share $ .335 $ .32 $ .975 $ .93 $ 1.295 $ 1.235
====================== ===================== ======================
See accompanying notes to condensed consolidated financial statements.
5
ENERGYNORTH, INC.
Condensed Consolidated Statements of Cash Flows
For the nine months ended June 30
(Unaudited)
(Thousands of dollars)
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 8,220 $ 8,623
Noncash items:
Depreciation and amortization 5,427 5,207
Deferred taxes and investment tax credits, net 153 438
Changes in:
Accounts receivable, net (2,817) (4,591)
Unbilled revenues 7 (11)
Inventories 1,972 3,421
Prepaid expenses and other 918 827
Deferred gas costs 2,659 6,258
Accounts payable 1,137 (199)
Accrued liabilities 310 64
Accrued/prepaid taxes 1,575 1,403
Payments for environmental costs and other (965) (759)
--------- ---------
Net cash provided by operating activities 18,596 20,681
--------- ---------
Cash flows from investing activities:
Additions to property (10,000) (8,943)
Changes in note receivable, net 131 (47)
Other investing activities 249 -
--------- ---------
Net cash used by investing activities (9,620) (8,990)
--------- ---------
Cash flows from financing activities:
Issues of common stock 63 90
Issues of long-term debt 456 508
Change in notes payable to banks 1,373 (4,035)
Increase in inventory purchase obligation 5,144 4,239
Change in customer deposits and other 3 (264)
Cash dividends on common stock (3,189) (3,016)
Refunding requirements:
Repayment of long-term debt (856) (809)
Repayment of capital lease obligations (46) (177)
Repayment of inventory purchase obligation (7,077) (8,005)
--------- ---------
Net cash used for financing activities (4,129) (11,469)
--------- ---------
Net increase in cash and temporary cash investments 4,847 222
Cash and temporary cash investments, beginning of period 1,998 770
--------- ---------
Cash and temporary cash investments, end of period $ 6,845 $ 992
========= =========
See accompanying notes to condensed consolidated financial statements.
6
ENERGYNORTH, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
EnergyNorth, Inc. (the "Company") is an exempt public utility
holding company operating in southern and central New Hampshire.
Its principal operating subsidiaries include EnergyNorth Natural
Gas, Inc. ("ENGI"), EnergyNorth Propane, Inc. ("ENPI"), and ENI
Mechanicals, Inc. ("ENMI"). ENGI is New Hampshire's largest natural
gas utility with over 70,000 customers. ENPI is a retail propane
company serving over 14,000 customers in New Hampshire, and through
its 49% investment in VGS Propane, LLC, serves more than 9,000 customers
in Vermont. ENMI, through its wholly-owned subsidiaries, Northern
Peabody, Inc. ("NPI") and Granite State Plumbing and Heating,
Inc. ("GSP&H"), provides mechanical contracting services for commercial,
industrial and institutional customers in northern New England.
They are engaged in the construction, design and service of heating,
ventilation and air conditioning equipment, and process piping.
Note 1. Basis of Presentation
The accompanying condensed consolidated financial statements of
EnergyNorth, Inc. include the accounts of all subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in the accompanying financial statements.
Effective May 1, 1998, the Company acquired NPI and GSP&H, which
are subsidiaries of ENMI. The acquisition was accounted for as a
purchase, and is reflected in the condensed consolidated financial
statements for the periods ended June 30, 1998.
The condensed consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the
rules and regulations of the U. S. Securities and Exchange
Commission. Certain footnote disclosures and other information,
normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been
condensed or omitted from these interim financial statements,
pursuant to such rules and regulations, although the Company
believes that the disclosures, when read in conjunction with the
consolidated financial statements and notes thereto contained in
the Company's Annual Report to Shareholders for the year ended
September 30, 1997, are adequate to make the information not
misleading. In the opinion of the Company, the accompanying
unaudited condensed consolidated financial statements contain all
adjustments, which include only normal recurring adjustments,
necessary to present fairly the financial position as of June 30,
1998 and 1997, and the results of operations for the three, nine
and twelve months then ended and statements of cash flows for the
nine months ended June 30, 1998 and 1997. All accounting policies
and practices have been applied in a manner consistent with prior
periods.
The business of ENGI and ENPI is influenced by seasonal weather
conditions. The amount of gas sold and transported for central
and space heating purposes and, to a lesser extent, water heating
is directly related to the ambient air temperature.
Consequently, more gas is sold and transported during the winter
months than is sold and transported during the summer months.
Therefore, the results of operations for the interim periods
presented are not indicative of the results to be expected for
all or any part of the balance of the current fiscal year.
Reclassifications are made periodically to previously issued
financial statements to conform to the current year's
presentation.
7
Note 2. Cash Flows
Supplemental disclosures of cash flow information for the nine
months ended June 30, are as follows (in thousands):
1998 1997
- -----------------------------------------------------------------
Cash paid during the period for:
Interest (net of amount capitalized) $2,222 $2,386
Income taxes 2,890 2,723
Noncash activities:
Acquisition investment 1,992 -
In preparing the accompanying condensed consolidated statements
of cash flows, all highly liquid investments having maturities of
three months or less when acquired were considered to be cash
equivalents and classified as cash and temporary cash
investments.
Note 3. Commitments and Contingencies
For a discussion of commitments and contingencies, please refer
to Footnote 9 in the Company's 1997 Annual Report to
Shareholders.
8
ENERGYNORTH, INC.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
June 30, 1998
Results of Operations
Net loss for the three months ended June 30, 1998, was
$(1,758,000), or $(.54) per share, compared to $(1,576,000), or
$(.49) per share, in 1997. Net income decreased to $8,220,000,
or $2.52 per share, for the nine months ended June 30, 1998, from
$8,623,000, or $2.66 per share, in 1997. For the twelve months
ended June 30, 1998, net income was $6,114,000, or $1.88 per
share, compared to $5,972,000, or $1.84 per share, in the prior
period. Included in the current twelve-month period results was
a one-time, after-tax credit of $649,000, or $.20 per share,
which was the result of a property tax settlement.
Temperatures for the current three, nine and twelve-month periods
were significantly warmer than the prior comparable periods and
had a major impact on the results of operations for the periods
presented. The table below discloses degree day data as recorded
at the U.S. weather station in Concord, New Hampshire, comparing
actual degree days to the previous period and to normal. Due to
the size and topographical variations of the Company's service
territory, weather conditions vary. Concord, New Hampshire
weather data is considered to be representative of the territory.
Actual Actual Change vs. Change vs.
6-30-98 6-30-97 Normal Previous Period Normal
------- ------- ------ --------------- ----------
3 months 826 1,166 1,020 (29.2)% (19.0)%
9 months 6,365 7,159 7,225 (11.1)% (11.9)%
12 months 6,579 7,434 7,500 (11.5)% (12.3)%
Quarterly Comparison
Total operating revenues increased $2.4 million, or 13.3%, for
the quarter ended June 30, 1998. Included in the increase were
$5.6 million of ENMI mechanical contract sales. Utility gas service
revenues were $13.1 million compared to $16 million in the prior period,
an 18.2% decrease. Although the average number of customers increased
2.5% for the quarter, the weather was 29.2% warmer, and firm
sendout, including transportation, decreased 9.3%. Although less
sendout was the primary reason for the decrease in revenue, lower
purchased gas costs of $276,000 passed through the cost of gas
adjustment ("CGA") to firm customers also contributed to the revenue
decrease. Changes in the CGA rates affect operating revenues;
however, they do not affect total margin because the CGA is a
tariff mechanism designed to provide dollar-for-dollar recovery
of gas costs. Margin decreased 2.6% for the quarter.
Despite a 7.1% increase in the average number of retail propane
customers, propane gallons sold decreased 9.1% for the three-
month period due to warm temperatures. Consequently, retail
propane operating revenues decreased $297,000 and gross margin
decreased 5.7% compared to the same quarter last year.
9
Operations and maintenance expenses relating to the acquired
companies were the main reason for the increase from the prior
comparable period. Depreciation and amortization expenses
increased for the period as a result of capital additions and
amortization of environmental remediation costs. The 23.5%
increase in other income resulted primarily from interest earned
on the temporary investment of surplus cash. Total interest
expense increased 28.1%, due mostly to the $22 million of 7.4%
First Mortgage Bonds issued in September 1997.
Nine-Month Comparison
Total operating revenues decreased $3 million, or 3.1%, for the
nine months ended June 30, 1998. Partially offsetting the
decrease were $5.6 million of ENMI mechanical contract sales.
Utility gas service revenues were $77.7 million compared
to $84.8 million in the prior period, an 8.3% decrease. The decrease
resulted in part from lower purchased gas costs of $3.2 million
that were passed through the CGA to firm customers. In addition,
revenues decreased as customers switched from sales gas service to
transportation gas service. Although the average number of customers
increased 2.5%, firm sendout, including transportation, decreased
almost 1% due to the warmer weather. Margin earned from utility natural gas
operations was virtually unchanged from the prior period.
The average number of retail propane customers grew nearly 7.3%
for the nine-month period. However, temperatures were 11.1%
warmer than the prior period, causing retail propane gallons sold
to be nearly the same as the prior period. Operating revenues
decreased $1.6 million as retail prices decreased in response to lower
purchased propane costs. The result was a decrease of 1.1%
in margin.
Included in the 3.2% increase in operations and maintenance
expenses were expenses attributed to the newly acquired mechanical
contracting operations and increased wage rates. Continued capital
additions to the distribution system were the primary reason
for the 7.2% increase in depreciation and amortization expenses.
The increase in other income was due mostly to interest on refunds
received from federal income tax settlements and to interest earned on
temporary investments. The primary reason for the 19.4% increase
in total interest expense was the September 1997 debt issuance.
Twelve-Month Comparison
Total operating revenues decreased almost $2 million, or 1.9%,
for the twelve months ended June 30, 1998. Partially offsetting
the decrease were $5.6 million of ENMI mechanical contract sales.
Utility gas service revenues were $85.9 million compared
to $92 million in the prior period, a 6.6% decrease. Included
in the current period revenues were lower gas costs of $2.6 million
that were passed through the CGA. Although firm sendout, including
transportation, was nearly the same as the prior period, revenues
decreased as customers switched from sales gas service to transportation
gas service. Margin earned from utility natural gas operations was
virtually unchanged from the corresponding prior period.
10
The average number of retail propane customers increased nearly
7.4% for the twelve months ended June 30, 1998. Propane gallons
sold increased only slightly since temperatures were 11.5% warmer
than the prior period. As sales prices decreased to reflect
lower propane costs, operating revenues decreased $1.5 million,
or 11.9%. Margin earned from retail propane operations was approximately
the same as the prior period.
Operations and maintenance expenses of the mechanical contracting
operations and increases in wages were the primary reasons for the
4% increase in operations and maintenance expenses for the period. Higher
depreciation and amortization charges were a direct result of plant
additions and amortization of environmental remediation costs. Taxes
other than income taxes decreased as a result of favorable property tax
settlements. The increase in other income included interest on
refunds received from federal income tax settlements and interest
earned on temporary investments.
Capital Resources and Liquidity
Cash flow patterns reflect the seasonality of the Company's utility and
propane businesses. The greatest demand for cash is in the fall and early
winter as construction projects are brought to completion and
during the winter as accounts receivable balances grow. During
the spring and early summer months, a positive cash flow stream
is created as accounts receivable balances are collected. At
this time, inventories have been utilized and prepaid amounts,
mostly insurance, are being amortized. During the summer months,
supplemental gas supplies are replenished in preparation for the
winter heating season. The overcollected deferred gas cost
amounts at June 30, 1998, will be returned to customers during
subsequent winter and summer periods through the CGA mechanism.
ENMI does not share the seasonal characteristics of the utility and
propane businesses.
The Company's major capital requirements result from efforts to
serve additional customers and from normal replacements and
efficiency improvements to the existing plant. For the nine
months ended June 30, 1998, capital expenditures totaled
approximately $10 million.
Capital expenditures and working capital requirements were
financed by internally generated funds and supplemented by short-
term bank borrowings. At June 30, 1998, the Company had
unsecured bank lines of credit of $25.6 million, $1.5 million of
which was outstanding.
Construction expenditures for fiscal 1998 are expected to total
approximately $13.2 million. Construction expenditures, payment
of dividends, long-term debt repayments, environmental
remediation and working capital requirements will continue to be
funded through cash generated by operations supplemented by
available lines of credit.
Federal Energy Regulatory Commission Order 636
Federal Energy Regulatory Commission Order 636 allows interstate
pipeline companies to recover transition costs created as they
buy out of long-term, fixed-price gas contracts. Since the
11
Company's supplier, Tennessee Gas Pipeline Company, began billing
these costs on September 1, 1993, as a component of demand charges,
$8.6 million has been billed through June 30, 1998. The Company has
recorded additional transition costs of approximately $505,000 that
are expected to be billed over a period of six months. The Company
is recovering transition costs through the CGA.
Environmental Matters
The Company and certain of its predecessors owned or operated
several facilities for the manufacture of gas from coal, a
process used through the mid-1900s that produced by-products that
may be considered contaminated or hazardous under current law,
and some of which may still be present at such facilities.
The estimated cost of remedial action required by the New
Hampshire Department of Environmental Services and for other
environmental actions ranges from $1.6 million to $3.5 million.
The Company has recorded $1.6 million at June 30, 1998, in deferred
charges. In a proceeding before the State of New Hampshire Public
Utilities Commission, the Company received an order that
provides for recovery from ratepayers, over a seven-year period,
of substantially all costs of investigation, remediation and
recovery efforts for a portion of a former gas manufacturing site
in Concord, New Hampshire. The recovery amount is net of recoveries
from third parties and does not include recovery of carrying costs.
Through June 30, 1998, the Company had reached settlements with
certain of the defendants in suits brought by the Company against
numerous parties to recover the costs of investigation and
remediation of the Concord site in an aggregate amount of $2.1
million and further payment to the Company of a portion of
future Concord site remediation costs.
In suits brought by the Company against numerous insurers seeking
recovery of investigation and remediation expenses in connection
with a former manufactured gas plant in Laconia, New Hampshire,
the Company had reached settlements with defendants in an
aggregate amount of $240,000, through June 30, 1998.
Factors that May Affect Future Results
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 includes forward-
looking statements concerning 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 regulatory allowance of recovery of changes
in the cost of gas; uncertain demands for capital expenditures
and the availability of cash from various sources; uncertainty as
to whether transportation rates will be reduced in future
12
regulatory proceedings with resulting decreases in transportation
margins; and uncertainty as to environmental costs and as to
regulatory approval of the full recovery of environmental costs,
transition costs and other regulatory assets.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A description of pending legal proceedings is contained in the
Company's annual report on Form 10-K for the fiscal year ended
September 30, 1997.
The Company reached settlements totaling $90,000 during the quarter
ended June 30, 1998, in suits for recovery of investigation and
remediation at former manufactured gas plant sites, described in Part I,
Management's Discussion and Analysis of Financial Condition and Results
of Operations. No further material legal proceedings or material
developments occurred in the quarter.
Items 2-5 are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
(Submitted only in electronic format to the
Securities and Exchange Commission)
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1998.
14
ENERGYNORTH, INC.
SIGNATURE
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.
EnergyNorth, Inc.
(Registrant)
Date: July 24, 1998 /s/ DAVID A. SKRZYSOWSKI
David A. Skrzysowski, duly authorized
Vice President & Controller
(Principal Accounting Officer)