SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
---------------------------------------
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 02193
- ---------------------------------------------------------------------
(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
April 22, 1998 was 20,423,164.
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 Statement of Earnings
- ----------------------------------
Three months ended March 31,
(In thousands, except per share amounts) 1998 1997
- -----------------------------------------------------------------------------------------------------------
Revenues $342,919 $376,920
Operating costs and expenses:
Operating costs 235,645 272,559
Selling, general and administrative expenses 29,624 29,081
Depreciation and amortization 23,241 22,303
-------- --------
288,510 323,943
-------- --------
Operating earnings 54,409 52,977
Other income (expense):
Interest income 2,617 2,105
Interest expense (8,532) (8,790)
Equity in loss of AllEnergy - (1,277)
Other, net 1,290 (27)
-------- --------
Earnings before income taxes 49,784 44,988
Provision for income taxes 18,861 16,765
-------- --------
Earnings before extraordinary item 30,923 28,223
Extraordinary provision for early extinguishment
of debt, net of tax (1,465) -
-------- --------
Net earnings $ 29,458 $ 28,223
======== ========
Basic earnings per share before extraordinary
item $ 1.51 $ 1.39
Extraordinary provision for early extinguishment
of debt, net of tax (.07) -
======== ========
Basic earnings per share $ 1.44 $ 1.39
======== ========
Diluted earnings per share before extraordinary
item $ 1.50 $ 1.38
Extraordinary provision for early extinguishment
of debt, net of tax (.07) -
-------- --------
Diluted earnings per share $ 1.43 $ 1.38
======== ========
Dividends per share $ .41 $ .40
======== ========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 3.
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheet
- --------------------------
March 31, Dec. 31, March 31,
(In thousands) 1998 1997 1997
- --------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and short-term investments $ 122,791 $ 175,274 $ 174,492
Receivables, less reserves 153,169 108,575 149,846
Inventories 36,005 56,644 37,452
Deferred gas costs 32,062 66,595 26,791
Other current assets 4,287 5,145 5,242
---------- ---------- ----------
Total current assets 348,314 412,233 393,823
Property and equipment, at cost 1,541,168 1,516,186 1,456,749
Less--accumulated depreciation 683,468 662,628 629,376
---------- ---------- ----------
Net property and equipment 857,700 853,558 827,373
Other assets:
Deferred post-retirement health care
costs 82,587 83,926 87,404
Investments 15,879 15,072 30,413
Deferred charges and other costs,
less amortization 69,354 69,568 53,992
---------- ---------- ----------
Total other assets 167,820 168,566 171,809
---------- ---------- ----------
Total assets $1,373,834 $1,434,357 $1,393,005
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 4.
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheet
- --------------------------
March 31, Dec. 31, March 31,
(In thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 20,651 $ 44,051 $ 43,679
Accounts payable 68,573 67,740 51,308
Accrued expenses 57,799 37,143 52,075
Other current liabilities 66,717 65,762 66,021
----------- ----------- -----------
Total current liabilities 213,740 214,696 213,083
Gas inventory financing 31,610 55,502 34,636
Long-term debt 292,787 342,142 346,081
Reserves and other liabilities:
Deferred income taxes 97,594 98,863 93,473
Post-retirement health care 94,708 95,120 96,606
Coal miners retiree health care 55,632 57,000 59,938
Preferred stock of subsidiary 29,335 29,326 29,301
Other reserves 88,399 92,647 70,383
----------- ----------- -----------
Total reserves and other
liabilities 365,668 372,956 349,701
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000
Issued shares - 20,442,907 at
March 31, 1998, December 31, 1997
and March 31, 1997 20,443 20,443 20,443
Capital in excess of par value 32,342 32,663 33,654
Retained earnings 416,761 395,662 396,601
Accumulated other comprehensive
earnings 1,197 1,873 1,472
Treasury stock at cost - 20,783
shares at March 31, 1998; 54,928
shares at December 31, 1997 and
103,074 shares at March 31, 1997 (714) (1,580) (2,666)
---------- ---------- ----------
Total shareholders' equity 470,029 449,061 449,504
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,373,834 $1,434,357 $1,393,005
========== ========== ==========
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
- ------------------------------------
Three months ended March 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 29,458 $ 28,223
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 23,241 22,303
Income taxes and tax credits 10,915 16,837
Net loss on early extinguishment of debt 1,465 -
Net gain on sale of assets (1,135) -
Other changes in assets and liabilities:
Receivables (44,594) (52,991)
Inventories 20,639 23,819
Deferred gas costs 34,533 48,546
Accounts payable 833 (22,806)
Other 10,366 7,860
-------- --------
Net cash provided by operating activities 85,721 71,791
Cash flows from investing activities:
Capital expenditures (27,056) (12,038)
Proceeds on sale of assets 5,654 -
Investments (5,273) (7,110)
Other (790) (65)
-------- --------
Net cash used by investing activities (27,465) (19,213)
Cash flows from financing activities:
Dividends paid (8,359) (8,122)
Changes in notes payable (23,500) (17,400)
Repayment of long-term debt (51,509) (1,423)
Changes in gas inventory financing (23,892) (20,958)
Other 1,573 1,091
-------- --------
Net cash used by financing activities (105,687) (46,812)
Net increase (decrease) in cash and
cash equivalents (47,431) 5,766
Cash and cash equivalents at beginning of year 170,222 159,804
-------- --------
Cash and cash equivalents at end of period 122,791 165,570
Short-term investments - 8,922
-------- --------
Cash and short-term investments $122,791 $174,492
======== ========
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, 1998
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 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. 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 1997 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) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Weighted average shares 20,414 20,328
Dilutive effect of options 171 90
------ ------
Adjusted weighted average shares 20,585 20,418
====== ======
2. Change in Accounting Principles
Effective January 1, 1998, Eastern adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement requires
presentation of the components of comprehensive earnings, including the changes
in equity from non-owner sources such as unrealized gains on securities and
minimum pension liability adjustments. Eastern's total comprehensive earnings
were as follows:
Form 10-Q
Page 7.
Three months ended March 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Net earnings $29,458 $28,223
Unrealized gains on securities:
Unrealized holding gains arising
during period 478 257
Less: reclassification adjustment
for gains included in net earnings (1,154) -
------- -------
(676) 257
------- -------
Comprehensive earnings $28,782 $28,480
======= =======
3. Debt
In March 1998, Midland utilized currently available cash to call $50 million of
9.9% First Preferred Ship Mortgage Bonds, due 2008. In extinguishing this debt,
Midland recognized an extraordinary charge of $2,254,000 pretax, $1,465,000 net,
or $.07 per share.
Midland has entered into a treasury rate lock in order to hedge the interest
rate on long-term debt anticipated to be issued in late 1998. The treasury rate
lock is for $20 million at a 10-year treasury rate of 5.617%. Upon issuance of
the debt, any gain or loss realized on the treasury rate lock will be amortized
to interest expense over the term of the related debt.
4. Inventories
The components of inventories were as follows:
March 31, Dec. 31, March 31,
(In thousands) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------
Supplemental gas supplies $24,174 $44,590 $25,017
Other materials, supplies and marine
fuels 11,831 12,054 12,435
------- ------- -------
$36,005 $56,644 $37,452
======= ======= =======
5. Supplemental cash flow information
The following are supplemental disclosures of cash flow information:
Three months ended March 31,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest, net of amounts capitalized $ 3,839 $ 1,631
Income taxes $ 8,168 $ 160
Form 10-Q
Page 8.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Revenues: Three months ended March 31,
(In thousands) 1998 1997 Change
- ------------------------------------------------------------------------------------------------------
Boston Gas $280,261 $312,538 (10)%
Midland 62,658 64,382 (3)%
-------- --------
Total $342,919 $376,920 (9)%
======== ========
Operating Earnings: Three months ended March 31,
(In thousands) 1998 1997 Change
----------------------------------------------------------------------------------------------------
Boston Gas $51,623 $48,791 6%
Midland 6,088 5,428 12%
ServicEdge (2,137) - nm
Headquarters (1,165) (1,242) 6%
------- -------
Total $54,409 $52,977 3%
======= =======
Boston Gas
The decrease in Boston Gas revenues was primarily attributable to the pass
through of lower gas costs ($25 million) and the migration of customers from
firm sales to transportation-only services ($12 million), factors that have no
impact on Boston Gas' operating earnings. The Company earns all of its margins
on the local distribution of gas and none on the sale of the commodity itself.
The revenue decrease also reflects 4% warmer weather ($10 million), partially
offset by higher non-firm sales and growth in throughput. Weather for the first
quarter of 1998 was 11% warmer than normal.
Operating earnings for 1998 increased by $2.8 million, reflecting lower
operating costs ($4 million), higher average rates and the impact of throughput
growth, partially offset by the margin impact of warmer weather ($3 million) and
the absence of a pension settlement gain reflected in 1997 ($2 million). The
decrease in operating costs reflects weather-related reductions and cost control
measures.
Midland Enterprises
Weak export grain and coal markets continued to place downward pressure on spot
and contract renewal rates, contributing to a 3% decline in first quarter
revenues. Offsetting this market weakness, lower fuel prices and improved river
conditions contributed to a 12% increase in operating earnings.
Thirty-year record flood levels in March of 1997 severely impacted operations on
the Ohio River and its tributaries and significantly increased operating costs.
1998 operating conditions in these areas have been more normal, although El
Nino-related weather patterns caused delays and flooding in Midland's
southeastern and Gulf operations, impacting operating efficiencies and costs,
while also reducing winter heating related coal demand throughout the Midwest.
Form 10-Q
Page 9.
First quarter tonnage increased 9% over 1997, while related ton miles declined
5%, reflecting increased utility demand from existing customers as well as new
multi-year industrial coal contracts. Coal ton miles were unchanged from 1997,
reflecting shorter average trip lengths and weaker demand for export coal.
Non-coal tonnage and ton miles declined 6% and 9%, respectively, as compared
with 1997, primarily reflecting weak export grain demand and reduced towing for
other carriers.
Other
ServicEdge's operating loss of $2.1 million for the first quarter of 1998
reflects general and administrative expenses in preparation for serving
customers beginning in April 1998.
In 1997, other income includes a loss of $1.3 million, representing Eastern's
share of AllEnergy's operating losses. Eastern sold its investment in AllEnergy
in December 1997.
In 1998, other, net includes realized gains on investments of $1.1 million.
In March 1998, Eastern recognized an extraordinary loss of $2.3 million pretax,
$1.5 million net, or $.07 per share on the early extinguishment of $50 million
of Midland debt, as discussed in Note 2 of Notes to Financial Statements.
In March 1998, the U.S. Supreme Court heard oral arguments in Eastern's
challenge to the constitutionality of the Coal Industry Retiree Health Benefit
Act of 1992 as applied to Eastern. The Supreme Court's ruling is expected by
June 30, 1998.
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 the forward-looking projections or expectations. These
factors include, but are not limited to: the effect of strategic initiatives on
earnings and cash flow, temperatures above or below normal in Boston Gas'
service area, changes in market conditions for barge transportation, adverse
weather and operating conditions on the inland waterways, uncertainties
regarding the start-up of ServicEdge, including expense levels and customer
acceptance, 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 and
Coal Act liabilities. Most of these factors are difficult to predict accurately
and are generally beyond Eastern's control.
Form 10-Q
Page 10.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that projected cash flows from operations, in combination
with currently available resources and the borrowing discussed below, are more
than sufficient to meet Eastern's 1998 capital expenditure and working capital
requirements, potential funding of its Coal Act and environmental liabilities,
normal debt repayments and anticipated dividend payments to shareholders.
Consolidated capital expenditures are budgeted at approximately $110
million, with about 55% at Boston Gas and the balance at Midland.
As discussed in Note 2, in March 1998, Midland utilized currently available cash
to call $50 million of 9.9% First Preferred Ship Mortgage Bonds, due 2008.
Midland currently expects to borrow up to $75 million later in 1998 to refinance
the called debt and to fund capital expenditures for barges during 1998 and
1999. Midland has entered into a treasury rate lock in order to hedge the
interest rate for $20 million of this debt, as discussed in Note 2.
Form 10-Q
Page 11.
PART II. OTHER INFORMATION
Item 2. Changes in Securities
Eastern issued an aggregate of 7,864 shares of its common stock on January 28,
1998 to executives of Eastern and its subsidiaries, other than its Chairman and
Chief Executive Officer and President and Chief Operating Officer, pursuant to
Eastern's Executive Incentive Compensation Plan ("Incentive Plan"). Eastern
issued 2,025 shares of its common stock on February 25, 1998 to its Chairman and
Chief Executive Officer and 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 22, 1998,
at which the shareholders voted to elect the following Trustees for terms of
office expiring at the 2001 Annual Meeting of Shareholders:
James R. Barker, with 17,875,645 shares voting for and 88,123 shares
withholding authority;
Samuel Frankenheim, with 17,871,689 shares voting for and
88,123 shares withholding authority;
J. Atwood Ives, with 17,876,577 shares voting for and
88,123 shares withholding authority;
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
10.5.2 Eastern's amended and restated Deferred
Compensation Plan for Trustees, dated
April 22, 1998.
10.9.3 Amendment to Trust Agreement between
Eastern and Key Trust Company of
Ohio, N.A., as successor trustee,
dated February 25, 1998.
10.15.1 Letter agreements dated February 25, 1998 with
each of J. A. Ives and R. R. Clayton terminating
letter agreements dated April 28, 1994 regarding
SERP benefits.
10.21.1 Amendment to Eastern's 1996
Non-Employee Trustees' Stock Option
Plan, effective April 22, 1998.
27.1 Financial Data Schedule.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the first quarter
of 1998.
Form 10-Q
Page 12.
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. 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
By /s/ WALTER J. FLAHERTY
------------------------
Walter J. Flaherty
Senior Vice President
Chief Financial Officer
Date: April 23, 1998 By /S/ JAMES J. HARPER
---------------------------
James J. Harper
Vice President and Controller
(Chief Accounting Officer)