FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 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 0-17736
ESELCO, INC.
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(Exact name of registrant as specified in its charter)
MICHIGAN 38-2785176
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State of Incorporation (I.R.S. Employer
Identification Number)
725 East Portage Avenue
Sault Ste. Marie, Michigan 49783
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(Address of principal executive offices)
(Zip Code)
(906) 632-2221
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(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
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1,547,345 shares of Common Stock, par value $.007 per share,
outstanding as of March 31, 1997
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
E S E L C O, INC.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
March 31, December 31,
1 9 9 7 1 9 9 6
----------- ------------
ASSETS:
ELECTRIC PLANT, at original cost $72,414,407 $71,802,321
Less - Accumulated depreciation 30,413,910 29,671,038
----------- -----------
$42,000,497 $42,131,283
Asset acquired under capital lease 2,833,658 2,851,622
----------- -----------
$44,834,155 $44,982,905
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CURRENT ASSETS:
Cash $696,228 $293,883
Accounts receivable, less reserve of $37,642
and $32,000 respectively 3,691,577 2,999,783
Unbilled revenue 1,452,117 1,693,826
Materials and supplies, at average cost 1,288,451 1,148,046
Prepayments 1,559,057 1,966,932
----------- -----------
$ 8,687,430 $ 8,102,470
----------- -----------
OTHER ASSETS:
Debt expense, being amortized $ 27,172 $ 28,972
Regulatory asset 3,422,281 3,510,181
Other 675,208 531,193
----------- -----------
$ 4,124,661 $ 4,070,346
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$57,646,246 $57,155,721
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----------- -----------
STOCKHOLDERS' INVESTMENT AND LIABILITIES:
CAPITALIZATION (See Statement):
Common equity $20,969,680 $20,234,722
Preferred stock 0 0
Long-term debt (less current portion) 15,611,113 16,898,187
----------- -----------
$36,580,793 $37,132,909
----------- -----------
OTHER NONCURRENT LIABILITIES:
Obligation under capital lease $ 2,755,291 $2,775,905
----------- -----------
CURRENT LIABILITIES:
Notes payable $667,000 $1,119,000
Current portion of long-term debt 3,460,113 2,877,323
Current portion of lease obligation 78,367 75,717
Accounts payable 3,047,051 2,143,082
Dividends declared 433,257 415,960
Accrued taxes 1,329,693 1,754,101
Current deferred income taxes 64,355 66,755
Accrued interest 414,877 166,215
Other 312,096 270,116
----------- -----------
$ 9,806,809 $8,888,269
----------- -----------
DEFERRED CREDITS:
Deferred income taxes $ 4,385,536 $4,454,626
Net regulatory liability 1,196,526 1,193,526
Unamortized investment tax credit 856,381 873,181
Other 2,064,910 1,837,305
----------- -----------
$8,503,353 $8,358,638
----------- -----------
$57,646,246 $57,155,721
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----------- -----------
E S E L C O, INC.
CONSOLIDATED STATEMENT OF CAPITALIZATION
March 31, December 31,
1 9 9 7 1 9 9 6
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AMOUNT % AMOUNT %
----------- --- ------------- ---
COMMON EQUITY:
COMMON STOCK, par value $.007 per share
1997 1996
---------- ----------
Authorized shares 3,000,000 3,000,000
---------- ----------
---------- ----------
Outstanding shares 1,593,765 1,540,592 $11,156 $10,784
---------- -----------
---------- -----------
Capital surplus 19,376,264 17,336,201
Retained earnings 2,659,699 4,204,585
Unearned compensation - ESOP and
Restricted Stock Bonus Plan (1,077,439) (1,316,848)
------------ -----------
$20,969,680 57% $20,234,722 54%
------------ -----------
PREFERRED STOCK, value $.01 per share,
authorized 160,000 shares $ 0 0% $ 0 0%
------------ -----------
LONG-TERM DEBT of Subsidiaries (less current portion)
First Mortgage Bonds:
Series D, 7.00%, due 1998 $0 $ 855,000
Series F, 10.31%, due 2001 1,200,000 1,200,000
Series G, 10.25%, due 2009 4,440,000 4,440,000
Series H, 7.90%, due 2002 1,200,000 1,500,000
Energy Thrift Notes, 5.8%-10%, due 1998-2007 5,442,000 5,355,000
Equipment Loan, Floating Rate, due 1998 133,668 147,786
ESOP Loans of the Corporation,
floating rate, due 2000-2001 269,457 421,110
Term Loan, floating rate, due 1999 2,925,988 2,979,291
------------ -----------
$15,611,113 43% $16,898,187 46%
------------ --- ----------- ---
TOTAL CAPITALIZATION $36,580,793 100% $37,132,909 100%
------------ --- ----------- ---
------------ --- ----------- ---
E S E L C O, INC.
CONSOLIDATED STATEMENT OF INCOME
The Three Months The Twelve Months
Ended March 31, Ended March 31,
----------------------- ------------------------
1997 1996 1997 1996
--------- ---------- ---------- -----------
OPERATING REVENUES $9,915,335 $9,777,252 $37,638,014 $37,389,413
---------- ---------- ----------- -----------
OPERATING EXPENSES:
Operation - Purchased power $4,974,117 $5,321,256 $18,503,896 $19,845,794
- Other 1,914,244 1,688,074 6,969,443 6,297,849
Maintenance 517,105 610,175 2,049,089 2,039,641
Depreciation and amortization 700,209 668,895 2,645,709 2,533,657
Property and other taxes 400,754 368,968 1,588,137 1,545,597
Income taxes 305,200 223,000 1,329,396 1,127,284
---------- ---------- ----------- -----------
Total operating expenses $8,811,629 $8,880,368 $33,085,670 $33,389,822
---------- ---------- ----------- -----------
Net operating income $1,103,706 $896,884 $ 4,552,344 $ 3,999,591
---------- ---------- ----------- -----------
OTHER INCOME (DEDUCTIONS), NET ($15,913) ($16,418) ($47,089) ($64,093)
---------- ---------- ----------- -----------
ALLOWANCE FOR FUNDS USED
DURING CONSTRUCTION $39,900 $ 0 $ 39,900 $ 0
---------- ---------- ----------- -----------
INTEREST CHARGES:
Interest on long-term debt $ 390,508 $ 327,062 $ 1,430,833 $ 1,273,709
Other interest 15,223 22,487 125,192 253,933
---------- ---------- ----------- -----------
Total interest charges $ 405,731 $ 349,549 $ 1,556,025 $ 1,527,642
---------- ---------- ----------- -----------
NET INCOME AVAILABLE FOR COMMON STOCK $ 721,962 $ 530,917 $ 2,989,130 $ 2,407,856
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
EARNINGS PER AVERAGE SHARE OF COMMON STOCK $ 0.45 $ 0.35 $ 1.90 $ 1.58
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
CASH DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK $ 0.27 $ 0.25 $ 1.06 $ 0.99
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
AVERAGE COMMON SHARES OUTSTANDING 1,590,389 1,532,197 1,571,375 1,522,036
---------- ---------- ----------- -----------
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E S E L C O, INC.
CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
1997 1996
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NET CASH FLOWS FROM (USED BY):
OPERATING ACTIVITIES:
Net income $721,962 $530,917
Noncash expenses, revenue, losses and gains
included in income
Depreciation and amortization 720,339 693,778
Deferred taxes and charge equivalent to
investment tax credit, net of amortization (85,290) 223,194
Net decrease (increase) in receivables and
unbilled revenue (450,085) 213,707
Net decrease (increase) in materials and
supplies and prepayments 267,470 313,443
Net increase (decrease) in accounts payable,
accrued taxes, and other current liabilities 521,541 (962,682)
Increase (decrease)in interest accrued
but not paid 248,662 193,010
Other 232,587 50,806
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Net cash from operating activities $ 2,177,186 $ 1,256,173
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INVESTING ACTIVITIES:
Acquisition of property, plant and equipment ($634,748) ($783,243)
Proceeds from disposals of property, plant
and equipment 46,995 9,097
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Net cash used by investing activities ($587,753) ($774,146)
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FINANCING ACTIVITIES:
Proceeds of short-term debt $ 1,235,500 $ 2,487,500
Payments to settle short-term debt (1,687,500) (3,383,500)
Issuance of long-term debt (net) 287,000 843,000
Payments on long-term debt (795,675) (493,907)
Proceeds from sale of common stock 206,844 224,304
Dividends paid (433,257) (390,777)
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Net cash used by financing activities ($1,187,088) ($713,380)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $402,345 ($231,353)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 293,883 302,845
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $696,228 $71,492
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INTEREST PAID $ 214,692 $ 205,130
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INCOME TAXES PAID $ 0 $ 0
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ESELCO, INC.
NOTES TO FINANCIAL STATEMENTS
(1) These consolidated financial statements include the accounts of ESELCO,
Inc. and its wholly owned subsidiaries, Edison Sault Electric Company
(Company) and Northern Tree Service, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation. The
consolidated financial statements as of March 31, 1997 and 1996 included
herein, which are unaudited, reflecting the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary
to present fairly the results of operations for the periods presented.
Sales of electricity, of ESELCO's major subsidiary, are affected to some
degree by variations in weather conditions, and results of operations for
interim periods are not necessarily indicative of results to be expected
for the entire year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission, although ESELCO
believes that the disclosures which are made are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in ESELCO, Inc. 1996 Annual
Report on Form 10K, which incorporates by reference the financial
statements in the 1996 Annual Report to Shareholders.
(2) On March 12, 1997, the Board of Directors declared a 3% stock dividend
for shareholder of record May 1, 1997. The effect of this stock dividend
has been reflected in the average number of shares outstanding, earnings
and dividends declared per share for the periods presented. In addition,
the common equity of ESELCO has been adjusted to reflect this stock
dividend.
(3) On August 22, 1995, the Company filed an application with the Michigan
Public Service Commission (MPSC) for authority to implement price cap
regulation. In the application the Company proposed that its base rates be
capped at present levels, that its existing power supply cost recovery
(PSCR) factor be rolled into base rates, and that its existing PSCR Clause
be suspended. The Company published the required notice of opportunity to
comment or request a hearing. No comments were received and on September
21, 1995, the MPSC approved the Company's application subject to the
modification that the Company give 30 days notice rather than 2 weeks
notice for rate decreases and that the Company file an application by
October 1, 2000, to address its experience under the price cap mechanism.
With the latter modification the price cap authorization represents an
experimental regulatory mechanism. The order also allows the Company to
file an application seeking an increase in rates only under extraordinary
circumstances.
On October 23, 1995, the Attorney General for the State of Michigan
filed an intervention and petition for rehearing in the Company's price cap
order. The Attorney General's intervention was based on the grounds that
the MPSC did not have authority to approve price cap regulation. On
December 21, 1995, the MPSC rejected the
Attorney General's petition for rehearing. On January 19, 1996, the
Attorney General filed an appeal with the Michigan Court of Appeals.
Legal counsel for the Company believes that the Attorney General's
appeal is without merit and that the Company will prevail. A decision in
this case is not expected until mid to late 1997. The Company implemented
the price cap order on January 1, 1996.
(4) In 1993, Edison Sault received notification from the U.S.
Environmental Protection Agency (U.S. EPA) that it was being named a
"Potentially Responsible Party" at the Manistique River/ Harbor Area of
Concern (AOC) in Manistique, Michigan. There were a number of other
potentially responsible parties, some of whom have been notified by the
U.S. EPA.
The U.S. EPA, in conjunction with the Michigan Department of Natural
Resources, identified the Manistique River and Harbor as an "Area of
Concern" (AOC) due to PCBs which have been found in that area. An
Environmental Engineering/Cost Analysis (EECA) was submitted to the U.S.
EPA which provided an analysis of various methods of remediation for the
harbor. The EECA presented six alternatives of remediation action and
ultimately recommended a remediation method of in-place capping.
Management believed this to be the most prudent course of action. Although
the total ultimate cost of specific remedial action and Edison Sault's
potential liability were not known at that time, management had estimated
Edison Sault's minimum cost of this remedy to be $2.9 million. That figure
represented an increase of $1.9 million from the amount recorded during
1994. Certain other expenditures for investigation of any necessary
remedial action were incurred and are reflected in the accompanying
financial statements.
During 1995 and 1996, the U.S. EPA agreed to allow the PRPs to
remediate the harbor through in-place capping at a total cost of $6.4
million, with the Edison Sault portion costing $3.2 million. Through
further negotiations, the U.S. EPA and the PRPs agreed to a cash-out
settlement whereby the PRPs would pay to the U.S. EPA the $6.4 million cost
of capping for the right to be absolved from any future legal actions
concerning PCB pollution. To effect this settlement, an Administrative
Order on Consent was executed by all parties in December, 1996 with
payments made to the U.S. EPA prior to year-end 1996.
To date, Edison Sault has incurred a total cost of $3.6 million on
this project. Edison Sault has retained legal assistance to start a
process of recovering these costs through several insurance entities. The
certainty and magnitude of insurance recovery is unknown at this time.
In November 1993, the MPSC issued an order authorizing Edison Sault to
defer and amortize, over a period not to exceed ten years, environmental
assessment and remediation costs associated with the Manistique River AOC.
Therefore, Edison Sault has recorded a regulatory asset in the amount of
$3.2 million, plus unreimbursed cost of $300,000, for a total of $3.5
million, which the Company began amortizing in 1997.
(5) On March 25, 1997, ESELCO, Inc. and Wisconsin Energy Corporation
announced that they had entered into a letter of intent, setting forth the
preliminary terms of the potential acquisition of ESELCO, Inc. by Wisconsin
Energy Corporation. All outstanding shares of ESELCO, Inc. common stock
would be converted into shares of Wisconsin Energy Corporation common stock
based on a value of $44.50 for each share of ESELCO, Inc. common stock in
a transaction proposed to be structured as a tax-free reorganization. The
total purchase price would be approximately $71.0 million. The exact
number of shares of Wisconsin Energy Corporation common stock to be issued
in the transaction would be
determined by dividing $44.50 by the average closing prices of Wisconsin
Energy Corporation common stock during a specified period prior to closing.
Consummation of the proposed transaction is contingent upon several
conditions, including the negotiation and execution of a definitive
agreement, approval by the Board of Directors of both companies and the
shareholders of ESELCO, Inc., receipt of all appropriate regulatory
approvals and the effectiveness of a registration statement to be filed
with the Securities and Exchange Commission covering the Wisconsin Energy
Corporation shares to be issued in the transaction. There can be no
assurance as to the final terms of the proposed transaction, that the
conditions will be satisfied or that the proposed transaction will be
consummated.
ESELCO, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Operating revenues for the first three months of 1997 were 1% higher than
last year, while total kilowatthour sales decreased 1%. Residential, commercial
and resale sales are all down about 1% from last year reflecting warmer weather
in 1997. Industrial sales were up 2% based on increased sales to three of our
four industrial customers.
Purchased power expense decreased 7% due to lower requirements because of
decreased sales and increased hydro generation.
Other operating and maintenance expenses increased 6% during the first
three months of 1997 due to an increase in payroll and associated employee
benefits costs as well as the ten year write-off of costs associated with the
Manistique Harbor EPA Project.
Interest expense increased 16%, primarily due to an increase in borrowings
which included a term loan to cover the EPA payment.
Based on the above changes, net income available for common stock increased
36% from last year.
TWELVE MONTHS ENDED MARCH 31, 1997 AND 1996
Operating revenues during the current twelve month period were 1% higher
than a year ago. Total electric sales also increased 1% during the current
twelve month period. Residential sales were down 1% during the period while
commercial sales were slightly higher than last year. Industrial sales
increased a net of 1% while resale sales were up 4% for the period.
Purchased power expense decreased 4% due to decreased requirements
reflecting an increase in hydro generation. In addition, we were able to
replace higher cost energy purchases with lower cost energy from American
Electric Power Company during the period.
Other operating and maintenance expenses were up 8% during the current
twelve month period, due to increased payroll and associated employee benefit
costs and higher water costs reflecting higher rates and additional water
available for generation at the Company's hydro plant.
Depreciation and amortization expenses increased 4% due to the Company's
ongoing construction program.
Based on an increase in taxable income, income taxes increased 18% during
the period.
Based on the above changes, net income available for common stock increased
24% from the prior twelve month period.
LIQUIDITY AND CAPITAL COMMITMENTS
INVESTING ACTIVITIES ESELCO invested $635,000 in property, plant, and
equipment in the three-month period ending March 31, 1997. For the same period
in 1996, ESELCO invested approximately $783,000 in property, plant, and
equipment.
Investment expenditures during both periods included costs associated with
the planned construction of a new 138 KV interconnection with Wisconsin Electric
Power Company. This project has a planned completion date of 1998. The
Company's projected share of the cost of this project is $9.4 million. Most of
these expenditures are expected to be made in late 1997 and 1998.
In December, 1996 the Company signed a purchase agreement with Consumers
Power Company for the purchase of a 138 KV submarine circuit across the Straits
of Mackinac. Since 1990, the Company has leased these cables at an annual net
lease cost of approximately $466,000. The purchaser of the cable will be ESEG,
a wholly-owned subsidiary of ESELCO, Inc. ESEG has been an inactive subsidiary
of ESELCO. ESEG will lease the cables to Edison Sault under an operating lease
arrangement. The purchase and lease are subject to approval by the Federal
Energy Regulatory Commission (FERC). The cost of the purchase which is expected
to be consummated in 1997 will be approximately $3.8 million.
CASH PROVIDED BY OPERATING AND FINANCE ACTIVITIES Cash provided by operating
activities for the three-month period ending March 31, 1997, and March 31, 1996,
totalled $2,177,000 and $1,256,000, respectively. After payment of dividends,
internal sources of funds exceeded the capital requirements of ESELCO for the
quarter ending March 31, 1997. Dividend payments for the three months ending
March 31, 1997, totalled $433,000 which represented a 60% payout ratio. For the
same period in 1996, dividends totalled $391,000 which represented a 74%
dividend payout ratio.
During 1996, Edison Sault borrowed $3.2 million under a bank term loan
agreement. The proceeds from this loan were used for payment to the U.S.
Environmental Protection Agency in settlement of the Manistique Harbor Project.
In addition, ESEG has arranged bank secured term loan financing for its planned
acquisition of the 138 KV submarine cables described above.
Edison Sault has authority to issue up to $10 million in short-term
obligations. Included in this authority is a line of credit in the amount of $4
million at the prime rate. In addition, Edison Sault has authority to issue
short-term thrift notes to Michigan residents. The Company's short-term
financing requirements relate primarily to financing customer accounts
receivable, unbilled revenue resulting from cycle billing, and capital
expenditures until permanently financed.
At March 31, 1997, the Company had approximately $7.8 million of unused
bank line of credit and additional energy thrift notes. These two sources of
short-term financing should be sufficient to meet the Company's short-term
capital requirements.
ESELCO's shareholders reinvested approximately $207,000 through the
dividend reinvestment plan (DRP) in the first three months of 1997. For the
three-month period ending March 31, 1996, the DRP provided $224,000 of capital.
Effective March 24, 1997 the Board of Directors of ESELCO, Inc. declared
the suspension of the Dividend Reinvestment Plan. The Dividend Reinvestment
Plan has been
suspended pending the potential acquisition of ESELCO, Inc. by Wisconsin
Energy Corporation.
At March 31, 1997, the long-term portion of first mortgage bonds totalled
$6,840,000 which is a decrease of $1,155,000 from the December 31, 1996 amount.
First mortgage bonds are secured by the utility plant of Edison Sault. At
December 31, 1996, there was approximately $10.4 million of unutilized bond
financing capability resulting from plant additions and bond retirements.
Edison Sault also has authority to issue up to $10 million in long-term
energy thrift notes to Michigan residents. At March 31, 1997, the long-term
portion of energy thrift notes outstanding was $5,442,000 which is an increase
of $87,000 over the December 31, 1996 amount.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits.
Filed
Exhibit ----------------------
No. Description of Exhibit Herewith By Reference
--------- --------------------------------------------------------------- -------- ------------
(3) (a) Articles of Incorporation as filed on January 6, 1989 - (d) *
(b) Bylaws - (f)
*
(4) Instruments defining the rights of security holders, including
indentures:
(a) Mortgage and Deed of Trust as of March 1, 1952 - (a)
*
(b) Supplemental Indenture dated as of February 1, 1957 - (a) *
(c) Second Supplemental Indenture dated as of January 1,
1964 - (a) *
(d) Third Supplemental Indenture dated as of February 1,
1968 - (a) *
(e) Fourth Supplemental Indenture dated as of September 15,
1975 - (a) *
(f) Fifth Supplemental Indenture dated as of October 1,
1986 - (b) *
(g) Sixth Supplemental Indenture dated as of April 1, 1989
- (d) *
(h) Seventh Supplemental Indenture dated as of February
15, 1992 - (e) *
(i) Debenture Indenture dated as of August 1, 1973 - (a) *
(j) Form of Long-Term Energy Thrift Note - (c) *
(27) Financial Data Schedule *
Key to Exhibits Incorporated by Reference:
(a) Filed with the Company's Registration Statement, Form S-16,
No. 2-67191, filed April 2, 1980.
(b) Filed with the Company's Form 10-K for 1986, dated March 30, 1987,
File No. 0-1158.
(c) Filed with the Company's Registration Statement, Amendment No. 2 to
Form S-3, No. 2-67191, filed February 16, 1988.
(d) Filed with the Company's Form 10-Q for June 30, 1989, dated August 11,
1989, File No. 0-17736.
(e) Filed with the Company's Form 10-Q for March 31, 1992, dated May 13,
1992, File No. 0-17736.
(f) Filed with the Company's Form 10-K for December 31, 1996, dated March
25, 1997, File No. 0-17736.
Item 6. (b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
three months ended March 31, 1997.
Item Reported Financial Statements Filed Date of Report
------------------ ----------------------------- ------------------
5. Other Events No January 23, 1997
5. Other Events No March 25, 1997
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.
ESELCO, INC.
(Registrant)
/s/ William R. Gregory
Date May 8, 1997 __________________________________
WILLIAM R. GREGORY
Its President
/s/ David R. Hubbard
Date May 8, 1997 __________________________________
DAVID R. HUBBARD
Its Vice President - Finance