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 September 30, 1998
--------------------------------
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
- --------------------------------------- ----------------
(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
October 28, 1998 was 22,496,950.
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 Operations
- ------------------------------------
Three months ended Nine months ended
September 30, September 30,
(In thousands, except per share amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Revenues $135,258 $142,184 $707,980 $758,324
Operating costs and expenses:
Operating costs 96,982 98,631 485,009 535,375
Selling, general & adminis-
trative expenses 28,856 26,021 92,194 87,489
Depreciation & amortization 13,953 14,231 56,794 54,615
-------- -------- -------- --------
139,791 138,883 633,997 677,479
-------- -------- -------- --------
Operating earnings (loss) (4,533) 3,301 73,983 80,845
Other income (expense):
Interest income 1,438 2,293 5,548 6,626
Interest expense (7,465) (8,950) (24,495) (27,814)
Equity in loss of AllEnergy - (2,160) - (5,258)
Other, net 3,155 1,139 5,384 1,321
------- -------- -------- -------
Earnings (loss) before
income taxes (7,405) (4,377) 60,420 55,720
Provision (credit) for
income taxes (3,646) (1,561) 22,491 18,405
------- ------- -------- ------
Earnings (loss) before
extraordinary items (3,759) (2,816) 37,929 37,315
Extraordinary items,net of tax:
Credit for coal miners
retiree health care - - 48,425 -
Loss on early
extinguishment of debt - - (1,465) -
-------- -------- ------- --------
Net earnings (loss) $ (3,759) $ (2,816) $ 84,889 $ 37,315
======== ======== ======== ========
Basic earnings (loss) per share
before extraordinary items $ (.17) $ (.13) $ 1.69 $ 1.67
Extraordinary items, net of tax:
Credit for coal miners
retiree health care - - 2.16 -
Loss on early
extinguishment of debt - - (.07) -
-------- -------- -------- --------
Basic earnings (loss) per share $ (.17) $ (.13) $ 3.78 $ 1.67
======== ======== ======== ========
Diluted earnings (loss) per share
before extraordinary items $ (.17) $ (.13) $ 1.67 $ 1.66
Extraordinary items, net of tax:
Credit for coal miners
retiree health care - - 2.13 -
Loss on early
extinguishment of debt - - (.06) -
-------- -------- -------- --------
Diluted earnings (loss) per share $ (.17) $ (.13) $ 3.74 $ 1.66
======== ======== ======== ========
Dividends per share $ .40 $ .40 $ 1.21 $ 1.19
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 3.
Eastern Enterprises and Subsidiaries
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Consolidated Balance Sheet
- --------------------------
September 30, December 31, September 30,
(In thousands) 1998 1997 1997
ASSETS
Current assets:
Cash and short-term investments $ 167,501 $ 175,709 $ 181,482
Receivables, less reserves 63,675 111,240 54,632
Inventories 56,176 61,336 64,955
Deferred gas costs 48,853 66,916 49,750
Other current assets 9,247 5,867 9,083
---------- --------- ---------
Total current assets 345,452 421,068 359,902
Property and equipment, at cost 1,699,539 1,621,850 1,587,406
Less--accumulated depreciation 735,068 688,169 674,562
--------- --------- ---------
Net property and equipment 964,471 933,681 912,844
Other assets:
Deferred post-retirement health care
costs 82,965 87,188 88,398
Investments 13,894 15,791 21,775
Deferred charges and other costs,
less amortization 69,205 72,637 49,574
---------- ---------- ----------
Total other assets 166,064 175,616 159,747
---------- ---------- ----------
Total assets $1,475,987 $1,530,365 $1,432,493
========== ========== ==========
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 Sheet
- --------------------------
September 30, December 31, September 30,
(In thousands) 1998 1997 1997
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 18,488 $ 48,378 $ 12,553
Accounts payable 47,490 70,833 48,607
Accrued expenses 44,156 38,505 44,286
Other current liabilities 40,739 67,649 61,909
--------- --------- ---------
Total current liabilities 150,873 225,365 167,355
Gas inventory financing 43,249 59,310 50,398
Long-term debt 387,311 371,492 372,833
Reserves and other liabilities:
Deferred income taxes 135,899 107,804 104,668
Post-retirement health care 96,710 98,382 99,060
Coal miners retiree health care - 57,000 57,919
Preferred stock of subsidiary 29,351 29,326 29,318
Other reserves 91,671 97,216 75,996
--------- --------- ---------
Total reserves and other
liabilities 353,631 389,728 366,961
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000
Issued shares -- 22,507,975 at
September 30, 1998 22,438,298 at
December 31, 1997 and 22,426,887
at September 30, 1997 22,508 22,438 22,427
Capital in excess of par value 52,666 50,989 50,692
Retained earnings 467,795 410,756 401,212
Accumulated other comprehensive
earnings (loss) (1,687) 1,867 2,467
Treasury stock at cost - 10,461
shares at September 30, 1998;
54,928 shares at December 31, 1997
and 64,380 shares at
September 30, 1997 (359) (1,580) (1,852)
---------- ---------- ----------
Total shareholders' equity 540,923 484,470 474,946
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,475,987 $1,530,365 $1,432,493
========== ========== ==========
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
- ------------------------------------
Nine months ended September 30,
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 84,889 $ 37,315
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 56,794 54,615
Income taxes and tax credits (684) 11,223
Net credit for coal miners retiree
health care (48,425) -
Net loss on early extinguishment of debt 1,465 -
Net gain on sale of investments (4,522) (846)
Other changes in assets and liabilities:
Receivables 47,974 44,107
Inventories 5,372 875
Deferred gas costs 20,832 26,898
Accounts payable (25,255) (29,572)
Other (8,734) 10,903
------- -------
Net cash provided by operating activities 129,706 155,518
Cash flows from investing activities:
Capital expenditures (84,646) (52,189)
Proceeds on sale of investments 13,504 1,023
Investments (3,928) (5,838)
Other 147 (2,370)
------- -------
Net cash used by investing activities (74,923) (59,374)
Cash flows from financing activities:
Dividends paid (27,269) (26,417)
Changes in notes payable (32,933) (61,725)
Proceeds from issuance of long-term debt 68,019 10,000
Repayment of long-term debt (54,116) (4,359)
Changes in gas inventory financing (16,574) (8,554)
Other 5,000 1,949
------- -------
Net cash used by financing activities (57,873) (89,106)
Net increase (decrease) in cash and cash equivalents (3,090) 7,038
Cash and cash equivalents at beginning of year 170,591 160,108
------- -------
Cash and cash equivalents at end of period 167,501 167,146
Short-term investments - 14,336
------- -------
Cash and short-term investments $ 167,501 $ 181,482
========= =========
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 6.
EASTERN ENTERPRISES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 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 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. As
discussed in Note 2, amounts have been restated under the pooling of interests
method of accounting to include the operations of Essex County Gas Company
("Essex Gas"). 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, as adjusted to account for the Essex Gas acquisition. Diluted
earnings per share gives effect to the exercise of stock options using the
treasury stock method, as reflected below:
Three months ended Sept. 30, Nine months ended Sept. 30,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Weighted average shares 22,486 22,349 22,461 22,314
Dilutive effect of options - - 231 158
------ ------ ------ ------
Adjusted weighted average shares 22,486 22,349 22,692 22,472
====== ====== ====== ======
2. Essex County Gas Company Merger
On September 30, 1998, Eastern completed a merger with Essex Gas by exchanging
approximately 2,047,000 shares of its common stock for all of the common stock
of Essex Gas. Each share of Essex Gas was exchanged for 1.183985 shares of
Eastern common stock. The merger was accounted for as a pooling of interests.
Accordingly, the accompanying financial statements include the accounts of Essex
Gas for all periods presented.
Form 10-Q
Page 7.
Essex Gas's fiscal year ends on August 31. Accordingly, the accompanying
financial statements include the three and nine month periods ending September
30, 1998 of Eastern combined with the three and nine month periods ending August
31, 1998 of Essex Gas and the three and nine month periods ending September 30,
1997 of Eastern combined with the three and nine month periods ending May 31,
1997 of Essex Gas.
Financial results for the separate companies and the combined amounts presented
in the consolidated statements of operations were as follows:
Three Months Three Months Nine Months Nine Months
(In thousands) Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997
- ---------------------------------------------------------------------------------------------------------------------
Revenues:
Eastern $130,654 $125,524 $666,194 $710,300
Essex Gas 4,604 16,660 41,786 48,024
-------- -------- -------- --------
Combined $135,258 $142,184 $707,980 $758,324
======== ======== ======== ========
Earnings (loss) before
extraordinary items
Eastern $ (2,817) $ (4,072) $ 35,451 $ 33,189
Essex Gas (942) 1,256 2,478 4,126
-------- -------- -------- --------
Combined $ (3,759) $ (2,816) $ 37,929 $ 37,315
======== ======== ======== ========
The combined financial statements include adjustments to conform the accounting
policies of Essex Gas with those of Eastern. The primary adjustment conformed
Essex Gas's method of adoption of Statement of Financial Accounting Standards
("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" with Eastern's adoption by immediately recognizing the transition
obligation of approximately $4.1 million at the date of adoption, September 1,
1994. Since Essex Gas had received regulatory approval to fully recover the SFAS
No. 106 costs in rates, a regulatory asset was recorded for the transition
obligation and there was no adjustment to income.
Transaction fees are expected to total $9,500,000, of which $3,358,000 have been
incurred and expensed for the nine month period ending September 30, 1998. An
additional $300,000 of transaction fees were incurred and expensed in the fourth
quarter of the prior year. The remaining $5,842,000 will be expensed by Essex
Gas in September 1998. Transaction fees primarily include investment banking
fees and other professional fees.
In conjunction with the approval of the merger by the Massachusetts Department
of Telecommunication and Energy (the "DTE"), a rate plan, whereby Essex Gas
customers receive an immediate 5% rate reduction and base rates remain frozen
for ten years, was also approved. Because of the rate freeze, Essex Gas is
unable to continue its application of SFAS No. 71, "Accounting for the Effects
of Certain Types of Regulation" and, effective September 30, 1998 will write-off
net regulatory assets approximating $2,950,000 pretax, $1,200,000 net or $.05
per share. Regulatory assets primarily consisted of deferred post-retirement
health care costs. In addition, Essex Gas will be required to adopt a revenue
method which will reflect full accrual accounting which will result in a minor
non-recurring gain. The impact of these changes is not reflected in the
accompanying consolidated financial statements as a result of differing fiscal
year ends discussed above.
Form 10-Q
Page 8.
3. Planned Merger with Colonial Gas Company
On October 17, 1998 Eastern signed a definitive agreement that provides for the
merger of Colonial Gas Company ("Colonial Gas") into Eastern for $37.50 per
share, payable in Eastern stock and $150 million in cash. The exchange ratio for
the stock portion of the consideration will be based upon Eastern's average
closing stock price for a ten-day period prior to closing, subject to a collar
mechanism. The transaction is expected to close in mid-1999, subject to receipt
of satisfactory regulatory approvals and the approval of Eastern and Colonial
Gas shareholders. The merger is expected to be tax-free to the extent Colonial
Gas shareholders receive Eastern stock, and will be accounted for using the
purchase method of accounting.
4. 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 are follows:
Three months ended Sept. 30, Nine months ended Sept. 30,
(In thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------- ------------------------------------
Net earnings (loss) $(3,759) $(2,816) $84,889 $37,315
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period (2,185) 470 (1,608) 1,734
Reclassification adjustment
for gains included in net
earnings (296) (201) (1,946) (511)
------- ------- ------- -------
(2,481) 269 (3,554) 1,223
------- ------- ------- -------
Comprehensive earnings $(6,240) $(2,547) $81,335 $38,538
======= ======= ======= =======
5. Coal Miners Retiree Health Care
On June 25, 1998 the U.S. Supreme Court ruled that the Coal Industry Retiree
Health Benefit Act of 1992 ("the Coal Act") is unconstitutional as applied to
Eastern.
Beginning in 1993, Eastern recorded provisions totaling $80.0 million to fund
its liability under the Coal Act. As a result of the Supreme Court's decision,
Eastern reversed those provisions, less associated expenses, resulting in an
extraordinary gain of $74.5 million pretax, $48.4 million net or $2.13 per share
in the second quarter of 1998.
Form 10-Q
Page 9.
6. 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.
On September 29, 1998, Midland issued $75.0 million of 6.25% First Preferred
Ship Mortgage Bonds maturing October 1, 2008. Proceeds of $68.5 million were net
of $6.0 million incurred on treasury rate lock agreements entered into in the
second and third quarters in order to hedge the bond interest rate. The debt has
an effective annual interest rate of 7.50%.
7. Inventories
The components of inventories were as follows:
September 30, December 31, September 30,
(In thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------
Supplemental gas supplies $ 44,271 $ 48,722 $ 52,192
Other materials, supplies and
marine fuels 11,905 12,614 12,763
-------- -------- --------
$ 56,176 $ 61,336 $ 64,955
======== ======== ========
8. Supplemental cash flow information
The following are supplemental disclosures of cash flow information:
Nine months ended September 30,
(In thousands) 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $18,789 $20,884
Income taxes $25,030 $ 8,273
Form 10-Q
Page 10.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
On September 30, 1998, Eastern completed the acquisition of Essex County Gas
Company ("Essex Gas") by exchanging 2.0 million shares of Eastern common stock
for all of the common stock of Essex Gas. As described in Note 2 of Notes to
Financial Statements, the transaction was accounted for as a pooling of
interests. All financial statements presented for prior periods have been
restated to combine the financial information of Essex Gas and Boston Gas, which
are reported below as Gas operations. Because Essex Gas has an August 31 year
end, Eastern's consolidated results include Essex Gas operations for the three
and nine month periods ended August 31, 1998 and for the three and nine month
periods ended May 31, 1997.
Three months ended September 30,
Revenues:
(In thousands) 1998 1997 Change
- -----------------------------------------------------------------------------------------------------
Natural Gas Distribution $ 67,289 $ 74,534 (10)%
Marine Transportation 66,850 67,650 (1)%
Other Services 1,119 - nm
-------- --------
Total $135,258 $142,184 (5)%
======== ========
Nine months ended September 30,
1998 1997 Change
- -----------------------------------------------------------------------------------------------------
Natural Gas Distribution $511,706 $558,179 (8)%
Marine Transportation 194,671 200,145 (3)%
Other Services 1,603 - nm
-------- --------
Total $707,980 $758,324 (7)%
======== ========
Natural Gas Distribution
The decrease in gas revenues for the third quarter of 1998 primarily reflects
the inclusion in 1997 figures of a portion of Essex Gas heating season revenues.
Essex Gas revenues for the quarter ended May 31, 1997 were $11.1 million higher
than for the quarter ended August 31, 1997. This decrease was partially offset
by pass through of higher gas costs at Boston Gas ($7 million).
Year-to-date revenues decreased due primarily to warmer weather ($26 million),
the migration of customers from firm sales to transportation-only service ($18
million) and the pass through of lower gas costs ($16 million), partially offset
by throughput growth and higher non-firm sales. Year-to-date weather was 9%
warmer than normal, compared to near normal weather in 1997. Essex Gas revenues
for the quarter ended November 30, 1997 were $4.4 million higher than for the
quarter ended August 31, 1997, which also contributed to the year-to-date
decrease.
Marine Transportation
Overall weak transportation markets experienced during the first half of 1998
generally continued into the third quarter, reflecting the impact of the strong
U.S. dollar and Southeast Asia's economic problems on export demand for coal and
Form 10-Q
Page 11.
grain. Barge demand strengthened in the middle of the third quarter on increased
orders from electric utilities and industrial coal customers, coupled with
increased imports of steel-related products from the Gulf. Forecasts of a larger
grain harvest than last year helped increase spot rates, although rates
generally remain below 1997 levels. Lower fuel prices throughout 1998 decreased
rates on multi-year contracts containing fuel price adjustment clauses.
Production was disrupted by adverse operating conditions due to low water in the
Ohio Valley in September and multiple tropical storms in the Gulf Coast areas
for the entire quarter. The low water caused prolonged lock delays and
groundings on Midland's main trade routes.
Tonnage transported in the third quarter and year-to-date increased 6% and 7%,
respectively, compared to the same periods in 1997 despite the adverse operating
conditions. Third quarter ton miles were flat with 1997, while year-to-date ton
miles were 3% below the prior year level. The tonnage increases primarily
reflect replacement of reductions in long haul export tonnage with shorter haul
domestic movements. Coal tonnage shipped under multi-year contracts with utility
and industrial customers increased 18% and 24%, respectively, for the quarter
and year-to-date, compared to 1997. Reduced spot domestic and export coal
tonnage was partially offsetting.
Other Services
Revenues reflect the commencement of operations at ServicEdge in April 1998.
Operating Earnings:
Three months ended September 30,
(In thousands) 1998 1997 Change
- ---------------------------------------------------------------------------------------------------------
Natural Gas Distribution $(7,653) $(4,858) (58)%
Marine Transportation 8,421 10,061 (16)%
Other Services (2,808) - nm
Headquarters (2,493) (1,902) (31)%
------- -------
Total $(4,533) $ 3,301 nm
======= =======
Nine months ended September 30,
1998 1997 Change
- --------------------------------------------------------------------------------------------------------
Natural Gas Distribution $64,409 $61,239 5%
Marine Transportation 22,228 24,592 (10)%
Other Services (7,465) - nm
Headquarters (5,189) (4,986) (4)%
------- -------
Total $73,983 $80,845 (8)%
======= =======
Natural Gas Distribution
Operating earnings for the third quarter of 1998 decreased by $2.8 million,
primarily reflecting the inclusion in 1997 results of a portion of Essex Gas'
heating season earnings, as discussed above. Essex Gas operating earnings for
the quarter ended May 31, 1997 were $2.3 million higher than for its quarter
ended August 31, 1997. The decrease also reflects $0.8 million of merger
transaction costs expensed in 1998.
Form 10-Q
Page 12.
Year-to-date operating earnings increased by $3.3 million, primarily reflecting
lower operating costs ($9 million), growth in throughput and higher average
rates, partially offset by the margin impact of warmer weather ($8 million), the
absence of a pension settlement gain reflected in 1997 ($2 million) and $1.6
million of merger transaction costs.
The pass through of higher or lower gas costs and migration to
transportation-only service have no impact on gas operating earnings. Eastern's
natural gas distribution operations earn all of their margins on the local
distribution of gas and none on the resale of the commodity.
Marine Transportation
Operating earnings for the third quarter and year-to-date 1998 decreased by $1.6
million and $2.3 million, respectively, reflecting substantially increased
operating expenses and weaker market conditions, as described above. Additional
owned and chartered equipment was employed to help offset the impact of lock
delays in the Ohio Valley and weather delays in the Gulf. The tropical storms,
flooding and lock delays in the third quarter, following the disruptions from
heavy rains associated with El Nino-related storms earlier in the year, resulted
in substantially higher operating costs than 1997. Weak demand for export grain
and coal throughout 1998 also increased operating costs by disrupting pattern
efficiencies. These higher costs were partially offset by lower fuel prices, as
compared to 1997. New barge purchases increased depreciation expense and taxes.
Other Services
ServicEdge's operating losses of $2.8 million for the second quarter and $7.5
million for the first nine months of 1998, reflect slower than anticipated
customer growth and general and administrative expense associated with starting
this new business.
Other
Interest income and interest expense for the third quarter of 1998 decreased by
$0.9 million and $1.5 million, respectively, primarily reflecting the use of
short-term investments to redeem $50 million of Midland debt in March 1998, as
discussed in Note 7. Year-to-date interest income and interest expense decreased
by $1.0 million and $3.3 million, respectively, primarily reflecting the
redemption of Midland debt. Eastern recognized an extraordinary loss of $2.3
million pretax, $1.5 million net, or $.06 per share on redeeming this debt.
In 1997, other income includes losses for the quarter and first nine months of
$2.2 million and $5.3 million, respectively, 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 $3.0
million for the quarter and $4.6 million year-to-date.
Form 10-Q
Page 13.
In June 1998, The U.S. Supreme Court held the Coal Industry Retiree Health
Benefit of 1992 ("Coal Act") to be unconstitutional, as applied to Eastern. As
discussed in Note 5, the reversal of Coal Act provisions resulted in an
extraordinary gain of $74.5 million pre-tax, $48.4 million net, or $2.13 per
share in the second quarter of 1998.
In October 1998 Eastern signed a definitive agreement to acquire Colonial Gas
Company ("Colonial Gas") for $37.50 in Eastern stock and cash. See Note 3 of
Notes. The cash consideration has been fixed at $150.0 million and will be
financed by available funds. Colonial Gas is a gas distribution utility serving
about 150,000 customers in and around Lowell, Massachusetts and on Cape Cod. The
merger is subject to a number of conditions, including approval by regulators
and the shareholders of both Eastern and Colonial Gas.
YEAR 2000 ISSUES
State of Readiness
Eastern has assessed the impact of the year 2000 with respect to its information
technology ("IT") systems and embedded chip systems as well as the Company's
exposure to significant third party risks. In such regard, Eastern has initiated
and completed substantial portions of its plans to replace or modify existing
systems and technology and to assure that major customers and critical vendors
are also addressing these issues. Year 2000 issues for Essex Gas are being
addressed by integration of its systems with those of Boston Gas, which is
scheduled for completion by the first quarter of 1999.
With respect to IT systems, Boston Gas has tested and certified four of its
eleven "mission critical" application systems. A fifth system is scheduled for
certification in the fourth quarter of 1998 and replacement of the remaining six
systems is in process and scheduled to be completed by the second quarter of
1999. All other "less than critical" applications are scheduled to be tested
and/or upgraded by the second quarter of 1999. Conversion and testing of all
mainframe hardware and software has been completed. Replacements are in process
for client server, data/voice communications, e-mail and desktop hardware and
software, with completion scheduled by the second quarter of 1999.
With respect to embedded chip systems, Boston Gas has completed an inventory and
expects to complete its assessment and action plan in the fourth quarter of
1998. All remediation, conversion and testing is scheduled for completion by the
second quarter of 1999.
Boston Gas has identified material third party relationships and expects to
complete its detailed survey and assessment of third party readiness by the
fourth quarter of 1998. Selected testing and implementation of risk mitigation
strategies for high risk vendors are scheduled for completion by the second
quarter of 1999.
Midland has modified and tested all mainframe-based programs and systems, which
were operating on a new mainframe as of September 30, 1998. All non-mainframe
(server) based systems have been tested and all have been modified except for
Accounts Receivable, which is scheduled for completion in the second quarter of
1999. Midland expects its personal computers to be 100% compliant by mid-1999.
Form 10-Q
Page 14.
With respect to embedded chip systems, Midland's major operating assets and
sub-systems were reviewed for embedded chip technology. Based on this
review and actions taken, management believes year 2000 issues in regards to
internal chip technology will not impair its operating assets.
Midland has assessed third party risk with respect to critical suppliers,
services and customers. Midland is actively seeking written confirmation of
third party readiness. If such readiness is in doubt, Midland expects to locate
backup providers by the second quarter of 1999.
Notwithstanding Eastern's efforts with third parties, there can be no assurance
that the systems of third parties on which Eastern's systems rely will be timely
converted or that any such failure to convert by a third party would not have an
adverse effect on Eastern's operations.
Cost of year 2000 remediation
Boston Gas and Midland expect the cost of their year 2000 compliance to
approximate $13 million and $2 million, respectively, as detailed in the
following chart:
Expected future
(In millions) Cost to date Cost
- -------------------------------------------------------------------------------------------------------------
Boston Gas - capital $6.0 $2.4
expense $2.3 $2.3
Midland - capital (includes mainframe) $0.9 $0.0
expense $0.7 $0.4
Risks of year 2000 issues
Boston Gas has assessed the most reasonably likely worst case year 2000
scenario. Given its efforts to minimize the risk of year 2000 failure by its
internal systems and its distribution network control systems, Boston Gas
believes the worst case scenario would occur if its primary telecommunications
vendor and/or its electric supplier experiences a year 2000 failure which
results in an outage. An outage would require Boston Gas to enact disaster
recovery measures to enable the continuation of service to its customers. Such
measures would include utilization of Boston Gas' co-generation capability for
electrical power, relocating the customer inquiry function and use of a wireless
network for communications.
Midland believes its worst case scenario would involve failures by the Army
Corps of Engineers, which operates the various lock and dam systems on the
inland waterways, or by rail services which are essential for bringing
commodities to the rivers for transit in Midland's barges. These failures could
significantly disrupt Midland's operations. The risk of failure by
communications systems or fuel suppliers is expected to be mitigated by the
availability of alternate suppliers.
Contingency plans
Boston Gas and Midland are in the process of developing contingency plans and
anticipate having such plans in place by the second quarter of 1999.
Form 10-Q
Page 15.
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 the Colonial Gas merger
and other strategic initiatives on earnings and cash flow, difficulties
encountered in integrating Eastern's gas utility 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, uncertainties regarding the start-up of ServicEdge, including expense
levels and customer acceptance, the timetable and cost for completion of
Eastern's year 2000 plans, the impact of third parties' year 2000 issues,
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 and the borrowing discussed below, are more
than sufficient to meet Eastern's 1998 capital expenditure and working capital
requirements, potential funding of its environmental liabilities, normal debt
repayments, anticipated dividend payments to shareholders and the planned
acquisition of Colonial Gas.
Consolidated capital expenditures are budgeted at approximately
$110 million, with about 55% at gas operations and the balance at Midland.
As discussed in Note 5, in March 1998, Midland utilized currently available cash
to redeem $50 million of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In
September 1998 Midland issued $75 million of 6.25% First Preferred Ship Mortgage
Bonds due October 1, 2008. The $68.5 million net proceeds of the notes will be
used to fund current and future capital expenditures for barges and other
capital equipment.
Form 10-Q
Page 16.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
10.1 Change of Control Agreement, dated as of
July 22, 1998, by and between Eastern
Enterprises and J. Atwood Ives.
10.2 Employment Agreement, dated as of September 1,
1998, by and between Eastern Enterprises and
Fred C. Raskin.
10.3 Change of Control Agreement, dated as of
September 1, 1998 and between Eastern Enterprises
and Fred C. Raskin.
10.4 Change of Control Agreement, dated as of
July 22, 1998, by and between Eastern Enterprises
and Walter J. Flaherty.
10.5 Change of Control Agreement, dated as of
July 22, 1998, by and between Eastern Enterprises
and L. William Law, Jr.
10.6 Change of Control Agreement, dated as of July 22,
1998, by and between Eastern Enterprises, Boston
Gas Company and Chester R. Messer, II.
10.7 Amendment to Eastern's Supplemental Executive
Retirement Plan, dated as of July 22, 1998.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule for the nine
month period ending September 30, 1997.
(b) Report on Form 8-K
On July 28, 1998, Eastern filed Form 8-K which contained a
description of Amendment No. 2 to a Common Stock Rights
Agreement, dated as of July 22, 1998, with BankBoston, N.A.
This Form 8-K also included a description of the declaration
of a common stock purchase right dividend pursuant to a new
Rights Agreement, dated as of July 22, 1998, between Eastern
and BankBoston, N.A.
Form 10-Q
Page 17.
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
By /S/ JAMES J. HARPER
----------------------
James J. Harper
Vice President and Controller
(Chief Accounting Officer)
By /S/ WALTER J. FLAHERTY
-----------------------
Walter J. Flaherty
Senior Vice President and
Chief Financial Officer
October 29, 1998