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 June 30, 2000
---------------------------------------
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 1-2297
EASTERN ENTERPRISES
- ---------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1270730
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 RIVERSIDE ROAD, WESTON, MASSACHUSETTS 02493
- ---------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
781-647-2300
- --------------------------------------------------------------------
(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 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
July 20, 2000 was 27,156,450.
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 Six months ended
June 30, June 30,
(In thousands, except per share amounts) 2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Revenues $204,788 $170,520 $638,483 $ 515,349
Operating costs and expenses:
Operating costs 145,421 123,020 428,421 353,008
Selling, general & admini-
strative expenses 34,104 27,819 69,606 59,049
Depreciation & amortization 21,732 17,984 54,809 43,649
-------- -------- -------- --------
201,257 168,823 552,836 455,706
-------- -------- -------- --------
Operating earnings 3,531 1,697 85,647 59,643
Other income (expense):
Interest income 1,789 2,653 2,423 4,870
Interest expense (12,563) (8,635) (24,687) (17,414)
Other, net 2,053 178 2,256 1,103
-------- -------- -------- --------
Earnings before income
taxes (5,190) (4,107) 65,639 48,202
Provision for income taxes (1,729) (1,539) 28,061 18,474
-------- -------- -------- ---------
Net earnings (loss) $ (3,461) $ (2,568) $ 37,578 $ 29,728
======== ======== ======== =========
Basic earnings per share $ (.13) $ (.11) $ 1.38 $ 1.31
======== ======== ======== =========
Diluted earnings per share $ (.13) $ (.11) $ 1.37 $ 1.31
======== ======== ======== =========
Dividends per share $ .43 $ .42 $ .86 $ .84
======== ======== ======== =========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 3
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheets
- ---------------------------
June 30, Dec. 31, June 30,
(In thousands) 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and short-term investments $30,898 $ 44,332 $179,851
Receivables, less reserves 112,786 135,409 99,573
Inventories 67,827 74,555 44,158
Deferred gas costs 48,436 64,503 -
Other current assets 8,168 5,008 7,646
---------- ---------- ---------
Total current assets 268,115 323,807 331,228
Property and equipment, at cost 2,214,956 2,197,156 1,751,233
Less--accumulated depreciation 936,958 906,953 788,874
---------- ---------- ---------
Net property and equipment 1,277,998 1,290,203 962,359
Goodwill, less amortization 243,960 247,137 -
Deferred postretirement health care
costs 69,972 72,760 75,888
Investments 14,064 14,671 15,708
Deferred charges and other costs,
less amortization 71,222 71,179 70,013
---------- ---------- ----------
Total other assets 399,218 405,747 161,609
---------- ---------- ----------
Total assets $1,945,331 $2,019,757 $1,455,196
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 4
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheets
- ---------------------------
June 30, Dec. 31, June 30,
(In thousands) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 80,453 $ 123,251 $ 5,632
Accounts payable 59,569 75,770 38,048
Accrued expenses 51,407 37,516 39,172
Other current liabilities 45,806 50,234 45,245
---------- ---------- ---------
Total current liabilities 237,235 286,771 128,097
Gas inventory financing 33,567 54,020 31,438
Long-term debt 503,168 515,232 383,173
Reserves and other liabilities:
Deferred income taxes 179,591 179,426 135,306
Postretirement health care 98,414 100,016 96,750
Preferred stock of subsidiary 21,438 26,454 29,377
Other reserves 101,077 103,208 91,509
---------- ---------- --------
Total reserves and other
liabilities 400,520 409,104 352,942
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000;
Issued shares -- 27,173,322 at
June 30, 2000; 27,131,090 at
December 31, 1999, and 22,649,457
Capital in excess of par value 246,382 244,449 56,004
Retained earnings 497,942 483,710 481,315
Accumulated other comprehensive
(loss) (73) (77) (63)
Treasury stock at cost - 16,892
shares at June 30, 2000 and
10,461 shares at June 30, 1999 (583) (583) (359)
---------- ---------- ----------
Total shareholders' equity 770,841 754,630 559,546
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,945,331 $2,019,757 $1,455,196
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 5
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Statement of Cash flows
- ------------------------------------
Six months ended June 30,
(In thousands) 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 37,578 $ 29,728
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 54,809 43,649
Income taxes and tax credits 12,356 (1,007)
Net gain on sale of assets (1,819) (262)
Other changes in assets and liabilities:
Receivables 22,623 5,559
Inventories 6,728 11,709
Deferred gas costs 16,068 62,055
Accounts payable (16,201) (18,292)
Other (4,158) (3,176)
------- ------
Net cash provided by operating activities 127,984 129,963
------- -------
Cash flows from investing activities:
Capital expenditures (35,472) (29,431)
Proceeds on sale of assets 7,442 3,906
Investments (6,392) (3,776)
Other (6,017) (1,353)
------- -------
Net cash used by investing activities (40,439) (30,654)
------- -------
Cash flows from financing activities:
Dividends paid (23,290) (18,950)
Repayment of long-term debt and preferred stock (17,203) (2,107)
Changes in notes payable (42,735) (37,835)
Changes in gas inventory financing (20,453) (21,206)
Other 2,702 804
-------- -------
Net cash used by financing activities (100,979) (79,294)
-------- -------
Net decrease in cash and cash equivalents (13,434) 20,015
Cash and cash equivalents at beginning of year 44,332 159,836
-------- -------
Cash and cash equivalents at the end of the period 30,898 179,851
Short-term investments - -
-------- --------
Cash and short-term investments $ 30,898 $179,851
======== ========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 6
EASTERN ENTERPRISES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
June 30, 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 Six months ended
June 30, June 30,
(In thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------
Weighted average shares 27,153 22,636 27,146 22,618
Dilutive effect of options 269 88 254 107
------ ------ ------ ------
Adjusted weighted average shares 27,422 22,724 27,400 22,725
====== ====== ====== ======
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 six
months ended June 30:
Form 10-Q
Page 7
Unrealized Holding
Gains (Losses) on Reclassification
Investments Adjustments for Other
Arising During the Gains Included in Comprehensive
(In thousands) Period Net Income Income (Loss)
- -------------------------------------------------------------------------------------------------------------
2000
Pretax $ 1,178 $ (1,172) $ 6
Income tax benefit (expense) (411) 409 (2)
------- --------- -------
Net change $ 767 $ (763) $ 4
======= ========= =======
1999
Pretax $ 213 $ (148) $ 65
Income tax benefit (expense) (75) 52 (23)
------- --------- --------
Net change $ 138 $ (96) $ 42
======= ========= ========
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 after August 6, 2000 up to the closing date. The transaction, which
is subject to receipt of approval from the Securities and Exchange Commission,
is expected to close in the fall of 2000, although it is possible the merger
will not close until 2001. 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 New Hampshire Public Utility Commission gave final approval to Eastern's
acquisition of EnergyNorth in an order issued on May 9, 2000. 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 June 30, Six months ended June 30,
(In thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Natural Gas Distribution $127,876 $101,368 $483,658 $381,651
Marine Transportation 70,405 65,783 141,675 127,109
Other Services 6,507 3,369 13,150 6,589
-------- -------- -------- --------
$204,788 $170,520 $638,483 $515,349
======== ======== ======== ========
Form 10-Q
Page 8
Operating Earnings: Three months ended June 30, Six months ended June 30,
(In thousands) 2000 1999 2000 1999
- -------------------------------------------------------------------------------------------------------------
Natural Gas Distribution $ 2,274 $(1,916) $ 83,459 $ 55,378
Marine Transportation 4,190 5,758 7,265 8,899
Other Services (205) (1,244) (630) (2,540)
Headquarters (2,728) (901) (4,447) (2,094)
------- ------- -------- --------
$ 3,531 $ 1,697 $ 85,647 $ 59,643
======= ======= ======== ========
5. Inventories
The components of inventories were as follows:
June 30, December 31, June 30,
(In thousands) 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------
Supplemental gas supplies $51,210 $57,935 $32,170
Other materials, supplies and
marine fuels 16,617 16,620 11,988
------- ------- -------
$67,827 $74,555 $44,158
======= ======= =======
6. Supplemental Cash Flow Information
The following are supplemental disclosures of cash flow information:
Six months ended June 30,
2000 1999
---------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $23,674 $17,290
Income taxes $16,064 $19,325
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 expected to close in the 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
Revenues: Consolidated revenues for the second quarter of 2000 and the first six
months of 2000 were $205 million and $638 million, respectively, up 20% and 24%
from 1999.
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. Revenues for the second quarter of 2000 were $127.9 million, an
increase of $26.5 million from 1999. The 26% increase in revenues primarily
reflects the inclusion of Colonial Gas revenues ($26.7 million), growth in
throughput ($3 million) and higher rates, partially offset by lower sales to
non-firm customers ($5 million). Weather in the second quarter was 19% colder
than 1999, or 24% colder than normal.
Year-to-date 2000 revenues were $483.7 million, an increase of $102.0 million or
27% from 1999. The increase primarily reflects the inclusion of Colonial Gas
revenues ($113.0 million), throughput growth ($13 million) and higher rates.
Partially offsetting were the pass through of lower gas costs ($13 million),
lower non-firm sales ($6 million), the impact of warmer weather in the first
quarter ($5 million) and the migration of firm customers to transportation-only
service. The pass through of higher or lower gas costs and the migration to
transportation-only service have no impact on the segment's operating earnings.
Natural gas distribution earns all of its margins on the local distribution of
gas and none on the resale of the commodity. Year-to-date weather was 3% colder
than 1999, but 1% warmer than normal.
Marine Transportation
Revenues for the second quarter and first six months of 2000 were $70.4 million
and $141.7 million, respectively. The increases of 7% and 11% from the
comparable periods of 1999 were mainly the result of higher rates associated
with fuel adjustment mechanisms contained in multi-year and annual contracts and
from higher coal tonnage delivered to electric utilities. As a result of higher
fuel prices for diesel fuel, Midland's fuel cost rose 73% for the second quarter
and 78% year-to-date, as compared to 1999. Due to the fuel-related rate
increases, market improvement in spot rates and a higher mix of coal tonnage,
rates per ton mile rose 17% and 12% in the second quarter and year to date,
respectively, over 1999.
Form 10-Q
Page 10
Tonnage transported for the second quarter and first six months of 2000
increased 2% and 8%, respectively. Coal tonnage increased 12% for the quarter
and 13% year to date, reflecting tonnage for a new customer as well as increased
demand for existing accounts. Partially offsetting was a reduction in non-coal
tonnage, which declined 13% and 1% for the second quarter and fist six months,
respectively, reflecting reduced movements of grain, ores and stone. While
tonnage for the quarter increased, ton-miles declined 7% reflecting the lower
mix of non-coal tonnage with its long hauls to and from the Gulf of Mexico. For
the first six months of 2000, ton miles increased 1% over 1999, primarily
reflecting increased movements of coal and steel in the first quarter.
Other Services
Revenues for the second quarter and first six months of 2000 were $6.5 million
and $13.2 million, respectively, up from $3.4 million and $6.6 million from the
comparable periods in 1999, primarily reflecting the results of Transgas, which
was acquired as part of Colonial Gas.
Operating Earnings: Consolidated operating earnings for the second quarter and
first six months of 2000 were $3.5 million and $85.6 million, respectively, up
from $1.7 and $59.6 million for the comparable periods in 1999.
Natural Gas Distribution
For the second quarter of 2000, natural gas distribution recorded operating
earnings of $2.3 million, as compared to an operating loss of $1.9 million in
1999. The improvement primarily reflected the inclusion of Colonial Gas'
operating earnings of $2.5 million, throughput growth and the absence of a
non-recurring retiree benefit charge in 1999, partially offset by higher system
maintenance costs and wage and benefit increases.
For the first six months of 2000, natural gas distribution recorded operating
earnings of $83.5 million, up 51% from 1999. The improvement primarily reflected
the inclusion of Colonial Gas' operating earnings of $29.9 million and
throughput growth, partially offset by a cumulative adjustment to gas costs for
prior years which decreased operating earnings by $3 million.
Marine Transportation
Operating earnings for the second quarter and first six months of 2000 were $4.2
million and $7.3 million, respectively, both down $1.6 million from 1999. While
fuel cost escalation increased rates, as discussed above, the year-to-date net
negative impact of higher fuel costs is estimated to be approximately $2.5
million, most of which occurred in the first quarter. Higher labor, vessel
charter and maintenance also contributed to higher costs in the second quarter.
Operating results from cargo handling and support operations were also lower
than in 1999.
Other Services
Operating losses for the second quarter and year-to-date were $0.2 million and
$0.6 million, as compared to losses of $1.2 million and $2.5 million,
respectively, in 1999. More than half the improvement from last year reflects
the inclusion of Transgas results.
Form 10-Q
Page 11
Other
Headquarters operating loss for the second quarter and first six months of 2000
increased by $1.8 million and $2.4 million, respectively, primarily reflecting
expenses related to the KeySpan merger.
Net interest expense for the second quarter and first six months of 2000
increased by $4.8 million and $9.7 million, respectively. The increase reflects
the inclusion of Colonial Gas' net interest expense of $2.9 million for the
quarter and $5.7 million year-to-date and the use of $150 million of cash in the
Colonial Gas acquisition.
Other net for the second quarter of 2000 includes a gain of $1.8 million on the
disposition of marine equipment.
The increase in the effective tax rate from 38% to 43% primarily reflects
Colonial Gas goodwill amortization.
The 21% increase in diluted shares outstanding reflects the issuance of
approximately 4.2 million shares of stock in the Colonial Gas acquisition.
Form 10-Q
Page 12
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 case 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.
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 $100 million,
with about 90% at natural gas distribution segment and the balance at marine
transportation.
Form 10-Q
Page 13
PART II. OTHER INFORMATION
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 Second Quarter
of 2000.
Form 10-Q
Page 14
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: July 21, 2000 By /s/ WALTER J. FLAHERTY
------------- ----------------------
Walter J. Flaherty
Executive Vice President and
Chief Financial Officer
Date: July 21, 2000 By /S/ JAMES J. HARPER
------------- ---------------------
James J. Harper
Vice President and Controller
(Chief Accounting Officer)