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, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-2297
EASTERN ENTERPRISES
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1270730
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 RIVERSIDE ROAD, WESTON, MASSACHUSETTS 02493
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(Address of principal executive offices)
(Zip Code)
781-647-2300
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(Registrant's telephone number, including area code)
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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 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
---- ----
The number of shares of Common Stock outstanding of Eastern Enterprises as of
April 27, 2000 was 27,146,678.
Form 10-Q
Page 2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Company or group of companies for which report is filed:
EASTERN ENTERPRISES AND SUBSIDIARIES ("Eastern")
Consolidated Statements of Operations
- -------------------------------------
Three months ended March 31,
(In thousands, except per share amounts) 2000 1999
- -----------------------------------------------------------------------------------------------------------
Revenues $433,695 $344,829
Operating costs and expenses:
Operating costs 283,000 229,988
Selling, general & admini-
strative expenses 35,502 31,230
Depreciation & amortization 33,077 25,665
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351,579 286,883
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Operating earnings 82,116 57,946
Other income (expense):
Interest income 634 2,217
Interest expense (12,124) (8,779)
Other, net 203 925
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Earnings before income
taxes 70,829 52,309
Provision for income taxes 29,790 20,013
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Net earnings $ 41,039 $32,296
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Basic earnings per share $ 1.51 $ 1.43
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Diluted earnings per share $ 1.50 $ 1.42
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Dividends per share $ .43 $ .42
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The accompanying notes are an integral part of these financial statements.
From 10-Q
Page 3
Eastern Enterprises and Subsidiaries
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Consolidated Balance Sheets
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March 31, December 31, March 31,
(In thousands) 2000 1999 1999
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ASSETS
Current assets:
Cash and short-term investments $31,722 $ 44,332 $178,818
Receivables, less reserves 194,208 135,409 158,308
Inventories 39,326 74,555 37,837
Deferred gas costs 24,626 64,503 -
Other current assets 5,443 5,008 3,920
--------- --------- ---------
Total current assets 295,325 323,807 378,883
Property and equipment, at cost 2,202,855 2,197,156 1,731,589
Less--accumulated depreciation 929,594 906,953 772,010
--------- --------- ---------
Net property and equipment 1,273,261 1,290,203 959,579
Goodwill, less amortization 245,613 247,137 -
Deferred postretirement health care
costs 71,420 72,760 77,228
Investments 13,444 14,671 14,965
Deferred charges and other costs,
less amortization 71,860 71,179 71,622
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Total other assets 402,337 405,747 163,815
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Total assets $1,970,923 $2,019,757 $1,502,277
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 4
Eastern Enterprises and Subsidiaries
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Consolidated Balance Sheets
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March 31, December 31, March 31,
(In thousands) 2000 1999 1999
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $71,551 $ 123,251 $ 7,353
Accounts payable 52,517 75,770 48,002
Accrued expenses 75,294 37,516 62,529
Other current liabilities 47,835 50,234 43,501
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Total current liabilities 247,197 286,771 161,385
Gas inventory financing 22,202 54,020 32,554
Long-term debt 513,997 515,232 384,307
Reserves and other liabilities:
Deferred income taxes 176,372 179,426 137,136
Postretirement health care 99,430 100,016 96,739
Preferred stock of subsidiary 26,462 26,454 29,368
Other reserves 100,417 103,208 90,647
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Total reserves and other
liabilities 402,681 409,104 353,890
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000;
Issued shares -- 27,163,570 at
March 31, 2000; 27,131,090 at
December 31, 1999, and 22,634,750
at March 31, 1999 27,164 27,131 22,635
Capital in excess of par value 245,720 244,449 55,270
Retained earnings 513,120 483,710 493,418
Accumulated other comprehensive
(loss) (575) (77) (823)
Treasury stock at cost - 16,892
shares at March 31, 2000 and
December 31, 1999; 10,461 shares
at March 31, 1999 (583) (583) (359)
---------- ---------- ----------
Total shareholders' equity 784,846 754,630 570,141
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,970,923 $2,019,757 $1,502,277
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 5
Eastern Enterprises and Subsidiaries
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Consolidated Statement of Cash flows
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Three months ended March 31,
(In thousands) 2000 1999
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Cash flows from operating activities:
Net earnings $ 41,039 $ 32,296
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 33,077 25,665
Income taxes and tax credits 26,487 14,597
Net gain on sale of assets (40) (267)
Other changes in assets and liabilities:
Receivables (58,799) (53,176)
Inventories 35,230 18,030
Deferred gas costs 39,877 54,642
Accounts payable (23,254) (8,338)
Other 5,753 11,040
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Net cash provided by operating activities 99,370 94,489
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Cash flows from investing activities:
Capital expenditures (15,112) (9,552)
Proceeds on sale of assets 4,261 1,941
Investments (3,834) (1,944)
Other (1,252) (118)
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Net cash used by investing activities (15,937) (9,673)
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Cash flows from financing activities:
Dividends paid (11,621) (9,455)
Repayment of long-term debt (1,410) (1,260)
Changes in notes payable (51,509) (35,985)
Changes in gas inventory financing (31,818) (20,090)
Other 315 956
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Net cash used by financing activities (96,043) (65,834)
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Net increase (decrease) in cash and cash equivalents (12,610) 18,982
Cash and cash equivalents at beginning of year 44,332 159,836
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Cash and cash equivalents at the end of the period 31,722 178,818
Short-term investments - -
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Cash and short-term investments $ 31,722 $178,818
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The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 6
EASTERN ENTERPRISES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
March 31, 2000
1. Accounting Policies
It is Eastern's opinion that the financial information contained in this report
reflects all adjustments necessary to present a fair statement of results for
the periods reported. All of these adjustments are of a normal recurring nature.
Results for the periods are not necessarily indicative of results to be expected
for the year, due to the seasonal nature of Eastern's operations. All accounting
policies have been applied in a manner consistent with prior periods. Such
financial information is subject to year-end adjustments and annual audit by
independent public accountants.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q. Therefore these interim
financial statements should be read in conjunction with Eastern's 1999 Annual
Report filed on Form 10-K with the Securities and Exchange Commission.
Earnings Per Share
Basic earnings per share is based on the weighted average number of shares
outstanding. Diluted earnings per share gives effect to the exercise of stock
options using the treasury stock method, as reflected below:
Three months ended
March 31,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------
Weighted average shares 27,138 22,600
Dilutive effect of options 239 126
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Adjusted weighted average shares 27,377 22,726
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Comprehensive Income
The following is a summary of the reclassification adjustments and the income
tax effects for the components of other comprehensive income (loss) for the
three months ended March 31:
Form 10-Q
Page 7
Unrealized Holding Reclassification
Gains (Losses) on Adjustments for Other
Investments (Gains) Losses Comprehensive
Arising During the Included in Net Income (Loss)
(In thousands) Period Income
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1999
Pretax loss $ (852) $ (253) $(1,105)
Income tax credit (298) (89) (387)
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Net change $ (554) $ (164) $ (718)
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2000
Pretax loss $ (74) $ (692) $ (766)
Income tax credit (26) (242) (268)
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Net change $ (48) $ (450) $ (498)
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2. Planned Merger with KeySpan
On November 4, 1999 Eastern signed a definitive agreement that provides for the
merger of Eastern with a wholly-owned subsidiary of KeySpan Corporation
("KeySpan"), with Eastern surviving the merger and becoming a wholly-owned
subsidiary of KeySpan. In the merger, holders of Eastern common stock will
receive $64.00 in cash plus, in certain circumstances, an accrued dividend, per
share of Eastern common stock, as well as an additional $0.006 per share per day
for each day the merger has not closed beginning on the later of (a) August 4,
2000 or (b) ninety days after the state of New Hampshire gives final regulatory
approval to Eastern's acquisition of EnergyNorth, Inc. (see below). The
transaction, which is subject to receipt of regulatory approvals, is hoped to
close in the early fall of 2000. The merger was approved by Eastern shareholders
on April 26, 2000.
3. Planned Merger with EnergyNorth, Inc.
Under a definitive agreement signed in 1999, Eastern expects to acquire
EnergyNorth, Inc. ("EnergyNorth") for approximately $203 million in cash
simultaneously with Eastern's merger with KeySpan. If the KeySpan merger is
terminated, the agreement provides for Eastern to acquire EnergyNorth for
approximately $78 million in cash and 1.7 million in Eastern shares, subject to
a collar arrangement.
The transaction is subject to receipt of regulatory approvals. A regulatory
settlement agreement has been filed with the New Hampshire Public Utilities
Commission and a final order is expected shortly. The merger was approved by
EnergyNorth shareholders on April 27, 2000.
4. Business Segments
Eastern's reportable business segment information for revenues and operating
earnings is presented below:
Revenues: Three months ended March 31,
(In thousands) 2000 1999
- --------------------------------------------------------------------------------------
Natural Gas Distribution $355,782 $280,283
Marine Transportation 71,270 61,326
Other Services 6,643 3,220
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$433,695 $344,829
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Form 10-Q
Page 8
Operating Earnings: Three months ended March 31,
(In thousands) 2000 1999
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Natural Gas Distribution $81,185 $57,294
Marine Transportation 3,075 3,141
Other Services (425) (1,296)
Headquarters (1,719) (1,193)
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$82,116 $57,946
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5. Inventories
The components of inventories were as follows:
March 31, December 31, March 31,
(In thousands) 2000 1999 1999
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Supplemental gas supplies $22,958 $57,935 $26,072
Other materials, supplies and
marine fuels 16,368 16,620 11,765
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$39,326 $74,555 $37,837
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6. Supplemental Cash Flow Information
The following are supplemental disclosures of cash flow information:
Three months ended March 31,
(In thousands) 2000 1999
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Cash paid during the year for:
Interest, net of amounts capitalized $4,493 $1,453
Income taxes $3,251 $4,952
Form 10-Q
Page 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In November 1999 Eastern signed a definitive agreement to be acquired by KeySpan
Corporation ("KeySpan") for $64.00 per share in cash, as discussed in Note 2 of
Notes to Financial Statements. Such information is incorporated herein by
reference. The transaction is hoped to close in the early fall of 2000.
In 1999 Eastern signed a definitive agreement to acquire EnergyNorth, Inc.
("EnergyNorth") for approximately $203 million in cash simultaneously with
Eastern's merger with KeySpan, as discussed in Note 3. If the KeySpan merger is
terminated, the agreement provides for Eastern to acquire EnergyNorth for
approximately $78 million in cash and 1.7 million in Eastern shares, subject to
a collar arrangement.
RESULTS OF OPERATIONS
Natural Gas Distribution
The natural gas distribution segment includes the operations of Boston Gas
Company, Essex Gas Company and Colonial Gas Company, which Eastern acquired in
August 1999. The 27% increase in revenues primarily reflects the inclusion of
Colonial Gas revenues ($86 million) and growth in throughput ($10 million),
partially offset by the pass through of lower gas costs ($16 million), the
impact of warmer weather ($4 million) and the migration of customers from firm
sales to transportation-only service ($3 million). The pass through of gas costs
and the migration of customers to transportation-only service have no impact on
operating earnings. Weather for the quarter was 7% warmer than normal and 2%
warmer than the first quarter of 1999.
Operating earnings for 2000 increased by $23.9 million, primarily reflecting
inclusion of Colonial Gas operations ($27.4 million) and growth in throughput
($4 million), partially offset by a cumulative adjustment for prior years which
increased gas costs by $3 million, higher labor charges ($3 million), the impact
of warmer weather ($1 million) and the absence of a pension settlement gain ($1
million) recognized in 1999.
Marine Transportation
First quarter revenues increased 16% over last year on higher coal shipments by
electric utility customers and increased demand for industrial raw materials.
Market rates for spot business improved as a result of stronger demand for
transportation services and a slightly reduced industry-wide supply of barges.
In addition, fuel adjustment mechanisms contained in multi-year and annual
contracts further increased revenues reflecting a portion of the 80% increase in
fuel prices as compared to the first quarter of 1999. As a result of these
factors, rates per ton mile increased 6% for the quarter. First quarter tonnage
increased 14%, while ton miles increased 10%, reflecting a shorter average
length of haul.
Form 10-Q
Page 10
Operating conditions were generally improved as compared to 1999, with reduced
winter icing and flooding. Although fleet productivity improved over 1999,
operating costs increased 21%, mainly as a result higher fuel prices. The
Company estimates the net impact of higher fuel costs reduced operating earnings
by approximately $2.0 million, as compared to 1999. Terminal operating results
were also lower than in 1999, reflecting higher fuel costs and lower throughput.
As a result of these factors, operating earnings were essentially unchanged from
the prior year.
Other Services
First quarter revenues for other services increased from $3.2 million in 1999 to
$6.6 million in 2000, primarily reflecting the results of Transgas, which was
acquired as part of Colonial Gas. Transgas results also accounted for more than
half the reduction of the other services operating loss for the first quarter.
Other
The $4.9 million increase in net interest expense reflects the inclusion of $2.8
million interest expense for Colonial Gas and the use of $150.1 million of cash
in the Colonial Gas acquisition.
The increase in the effective tax rate from 38% to 42% primarily reflects
Colonial Gas goodwill amortization.
The 20% increase in diluted shares outstanding reflects the issuance of
approximately 4.2 million shares of stock in the Colonial Gas acquisition.
YEAR 2000 ISSUES
Eastern continued to monitor its systems through the end of the first quarter of
2000, including the quarter closing activity. No significant year 2000 errors or
discrepancies were detected and no costs were incurred. Eastern will no longer
report on Year 2000 issues.
FORWARD-LOOKING INFORMATION:
This report and other company statements and statements issued or made from time
to time contain certain "forward-looking statements" concerning projected future
financial performance, expected plans or future operations. Eastern cautions
that actual results and developments may differ materially from such projections
or expectations.
Investors should be aware of important factors that could cause actual results
to differ materially from forward-looking projections or expectations. These
factors include, but are not limited to: the effect of the pending mergers with
KeySpan and EnergyNorth, Eastern's ability to successfully integrate its new gas
distribution operations, temperatures above or below normal in eastern
Massachusetts, changes in market conditions for barge transportation, adverse
weather and operating conditions on the inland waterways, changes in economic
conditions, including interest rates and the value of the dollar versus other
currencies, regulatory and court decisions and developments with respect to
Eastern's previously-disclosed environmental liabilities. Most of these factors
are difficult to predict accurately and are generally beyond Eastern's control.
Form 10-Q
Page 11
LIQUIDITY AND CAPITAL RESOURCES
Management believes that projected cash flows from operations, in combination
with currently available resources, will be more than sufficient to meet
Eastern's 2000 capital expenditure requirements and working capital
requirements, potential funding of its environmental liabilities, normal debt
repayments and anticipated dividends to shareholders. Management expects KeySpan
to provide the funds needed for the acquisition of EnergyNorth. If the KeySpan
agreement is terminated, management expects the EnergyNorth acquisition to be
funded through a combination of internal sources and additional borrowings.
Consolidated capital expenditures are budgeted at approximately $107 million,
with about 90% at natural gas distribution segment and the balance at marine
transportation.
Form 10-Q
Page 12
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Eastern issued an aggregate of 9,286 shares of its common stock on January 26,
2000 to executives of Eastern and its subsidiaries, other than its Chairman and
Chief Executive Officer and its President and Chief Operating Officer, pursuant
to Eastern's Executive Incentive Compensation Plan ("Incentive Plan"). Eastern
issued 6,344 shares of its common stock on February 23, 2000 to its Chairman and
Chief Executive Officer and its President and Chief Operating Officer pursuant
to its Incentive Plan. The issuances of such shares were exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section 4
(2) thereof.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the registrant was held on April 26, 2000,
at which the shareholders voted (i) to amend the registrant's Declaration of
Trust to authorize certain mergers, (ii) approve and adopt an Agreement and Plan
of merger, dated as of November 4, 1999, as amended, among the registrant,
KeySpan Corporation and ACJ Acqusition LLC and (iii) to elect Trustees for terms
of office expiring at the 2003 Annual Meeting of Shareholders as follows:
(i) to amend the registrant's Declaration of Trust, with 16,306,529
shares voting for, 160,228 shares voting against and 228,164
shares abstaining;
(ii) to approve and adopt the Agreement and Plan of merger, dated as
of November 4, 1999, as amended, among the registrant, KeySpan
Corporation and ACJ Acquisition LLC, with 16,326,123 shares
voting for, 182,221 shares voting against and 186,415
shares abstaining;
(iii) Richard R. Clayton, with 23,492,419 shares voting for and
237,443 shares withholding authority;
Leonard R. Jaskol, with 23,492,301 shares voting for and
237,372 shares withholding authority;
David B. Stone, with 23,488,734 shares voting for and
237,371 shares withholding authority;
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27.1 Financial Data Schedule
(b) Report of Form 8-K
There we no reports on Form 8-K filed in the First Quarter
of 2000.
Form 10-Q
Page 13
SIGNATURES
It is Eastern's opinion that the financial information contained in
this report reflects all adjustments necessary to present a fair statement of
results for the period reported. All of these adjustments are of a normal
recurring nature. Results for the period are not necessarily indicative of
results to be expected for the year, due to the seasonal nature of Eastern's
operations. All accounting policies have been applied in a manner consistent
with prior periods other than changes disclosed in Notes to Financial
Statements. Such financial information is subject to year-end adjustments and
annual audit by independent public accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934,
Eastern has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EASTERN ENTERPRISES
Date: April 28, 2000 By /s/ WALTER J. FLAHERTY
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Walter J. Flaherty
Executive Vice President and
Chief Financial Officer
Date: April 28, 2000 By /S/ JAMES J. HARPER
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James J. Harper
Vice President and Controller
(Chief Accounting Officer)