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, 1999
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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
July 27, 1999 was 22,638,996.
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) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Revenues $170,520 $188,425 $ 515,349 $541,347
Operating costs and expenses:
Operating costs 123,020 129,036 353,008 367,740
Selling, general & adminis-
trative expenses 27,819 29,800 59,049 63,338
Depreciation & amortization 17,984 17,785 43,649 42,841
-------- -------- --------- --------
168,823 176,621 455,706 473,919
-------- -------- --------- --------
Operating earnings 1,697 11,804 59,643 67,428
Other income (expense):
Interest income 2,653 1,493 4,870 4,110
Interest expense (8,635) (7,706) (17,414) (17,030)
Other, net 178 802 1,103 2,229
Earnings (loss) before income -------- -------- --------- --------
taxes (4,107) 6,393 48,202 56,737
Provision for income taxes (1,539) 2,511 18,474 21,788
-------- -------- --------- --------
Earnings (loss) before
extraordinary items and
accounting change (2,568) 3,882 29,728 34,949
Extraordinary items, net of tax:
Reversal of Coal Act reserve - 48,425 - 48,425
Loss on early extinguishment
of debt - - - (1,465)
Cumulative effect of accounting
change, net of tax - - - 8,193
-------- -------- --------- --------
Net earnings (loss) $ (2,568) $ 52,307 $ 29,728 $ 90,102
======== ======== ========= ========
Basic earnings (loss) per share
before extraordinary
items and accounting change $ (.11) $ .16 $ 1.31 $ 1.55
Extraordinary items, net of tax:
Reversal of Coal Act reserve - 2.16 - 2.16
Loss on early extinguishment
of debt - - - (.07)
Cumulative effect of accounting
change, net of tax - - - .37
------- -------- --------- --------
Basic earnings per share $ (.11) $ 2.32 $ 1.31 $ 4.01
======= ======== ========= ========
Diluted earnings per share before
extraordinary items and
accounting change $ (.11) $ .17 $ 1.31 $ 1.54
Extraordinary items, net of tax:
Reversal of Coal Act reserve 2.13 - 2.13
Loss on early extinguishment
of debt - - (.06)
Cumulative effect of accounting
change, net of tax - - - .36
------- -------- --------- --------
Diluted earnings per share $ (.11) $ 2.30 $ 1.31 $ 3.97
======= ======== ========= ========
Dividends per share $ .42 $ .41 $ .84 $ .82
======= ======== ========= ========
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 Sheets
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June 30, Dec. 31, June 30,
(In thousands) 1999 1998 1998
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ASSETS
Current assets:
Cash and short-term investments $ 179,851 $ 159,836 $ 107,268
Receivables, less reserves 99,308 104,869 102,554
Inventories 44,158 55,866 43,944
Deferred gas costs - 54,065 24,979
Other current assets 7,646 5,689 8,239
---------- ---------- ----------
Total current assets 330,963 380,325 286,984
Property and equipment, at cost 1,751,233 1,722,718 1,671,260
Less--accumulated depreciation 788,852 746,969 725,676
---------- --------- ---------
Net property and equipment 962,381 975,749 945,584
Other assets:
Deferred postretirement health care
costs 75,888 78,567 84,356
Investments 15,708 15,395 16,597
Deferred charges and other costs,
less amortization 70,013 68,334 71,081
---------- ---------- ----------
Total other assets 161,609 162,296 172,034
---------- ---------- ----------
Total assets $1,454,953 $1,518,370 $1,404,602
========== ========== ==========
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) 1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 5,632 $ 43,237 $ 9,476
Accounts payable 37,793 56,567 42,269
Accrued expenses 38,547 38,540 43,342
Other current liabilities 44,675 40,011 48,720
---------- --------- ----------
Total current liabilities 126,647 178,355 143,807
Gas inventory financing 31,438 52,644 31,984
Long-term debt 383,173 385,519 320,167
Reserves and other liabilities:
Deferred income taxes 135,306 134,911 133,049
Postretirement health care 96,750 97,197 97,297
Preferred stock of subsidiary 29,377 29,360 29,343
Other reserves 92,716 94,315 91,791
---------- --------- ----------
Total reserves and other
liabilities 354,149 355,783 351,400
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000;
Issued shares -- 22,649,457 at
June 30, 1999; 22,535,734 at
December 31, 1998, and 22,486,044
at June 30, 1998 22,649 22,536 22,486
Capital in excess of par value 56,004 53,421 52,153
Retained earnings 481,315 470,576 482,113
Accumulated other comprehensive
earnings (loss) (63) (105) 794
Treasury stock at cost - 10,461
shares at June 30, 1999 and
at December 31, 1998, and
11,131 shares at June 30, 1998 (359) (359) (382)
---------- ---------- ----------
Total shareholders' equity 559,546 546,069 557,164
---------- ---------- ----------
Total liabilities and
shareholders' equity $1,454,953 $1,518,370 $1,404,602
========== ========== ==========
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
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Six months ended June 30,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 29,728 $ 90,102
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary credit for reversal of Coal Act reserve - (48,425)
Extraordinary loss on early extinguishment of debt - 1,465
Cumulative effect of accounting change - (8,193)
Depreciation and amortization 43,649 42,841
Income taxes and tax credits (1,007) (1,784)
Net gain on sale of assets (262) (1,625)
Other changes in assets and liabilities:
Receivables 5,559 22,576
Inventories 11,709 17,605
Deferred gas costs 62,055 45,909
Accounts payable (18,292) (30,475)
Other (3,176) (8,491)
-------- --------
Net cash provided by operating activities 129,963 121,505
-------- --------
Cash flows from investing activities:
Capital expenditures (29,431) (52,744)
Proceeds on sale of assets 3,906 5,654
Investments (3,776) (162)
Other (1,353) (2,058)
-------- --------
Net cash used by investing activities (30,654) (49,310)
Cash flows from financing activities:
Dividends paid (18,950) (18,167)
Changes in notes payable (37,835) (39,505)
Repayment of long-term debt (2,107) (52,887)
Changes in gas inventory financing (21,206) (27,839)
Other 804 2,814
-------- --------
Net cash used by financing activities (79,294) (135,584)
-------- --------
Net increase (decrease) in cash and cash equivalents 20,015 (63,389)
Cash and cash equivalents at beginning of year 159,836 170,657
-------- --------
Cash and cash equivalents at the end of the period 179,851 107,268
Short-term investments - -
-------- --------
Cash and short-term investments $179,851 $107,268
======== ========
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, 1999
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 1998 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 June 30, Six months ended June 30,
(In thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Weighted average shares 22,636 22,466 22,618 22,449
Dilutive effect of options 88 244 107 241
------ ------ ------ ------
Adjusted weighted average shares 22,724 22,710 22,725 22,690
====== ====== ====== ======
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 Reclassification
Gains (Losses) on Adjustments for Other
Investments (Gains) Losses Comprehensive
Arising During the Included in Net Income (Loss)
(In thousands) Period Income
- ------------------------------------------------------------------------------------------------------------------
1998
Pretax income (loss) $ 577 $(1,650) $ (1,073)
Income tax provision
(benefit) - - -
----- ------- -------- -
Net change $ 577 $(1,650) $ (1,073)
===== ======= ========
1999
Pretax income (loss) $ (40) $ 105 $ 65
Income tax provision
(benefit) (14) 37 23
----- ----- ------- --
Net change $ (26) $ 68 $ 42
===== ===== =======
In 1998, a capital loss carryforward eliminated the income taxes associated with
capital gains.
2. Strategic Initiatives
Pending Merger with Colonial Gas Company
On July 15, 1999 the Massachusetts Department of Telecommunications and Energy
approved the merger of Colonial Gas Company ("Colonial Gas") into a wholly-owned
subsidiary of Eastern for $37.50 per share of Colonial Gas stock, payable in
Eastern stock and $150.0 million in cash, and the rate plan for Colonial Gas
Company. Pursuant to the rate plan approved in conjunction with the merger,
Colonial Gas customers will receive a 2.2% price reduction, with base rates
frozen for ten years. The exchange ratio for the stock portion of the
consideration will be based upon Eastern's average closing stock price for the
ten trading days period prior to closing, subject to a collar mechanism. The
transaction is expected to close on August 31, 1999, subject to receipt of final
regulatory approval. The merger is expected to be tax-free to Eastern and will
be accounted for using the purchase method of accounting. Under the purchase
method of accounting, the operating results of Colonial Gas will be included in
Eastern's consolidated results for the periods subsequent to the closing.
Planned Merger with EnergyNorth, Inc.
On July 14, 1999, Eastern signed a definitive agreement that provides for the
merger of EnergyNorth, Inc. ("EnergyNorth") into a wholly-owned subsidiary of
Eastern at a value of $47.00 per share of EnergyNorth. Under the agreement,
50.1% of the common stock of EnergyNorth will be converted into Eastern stock
and the balance will be converted into cash. The exchange ratio for the stock
portion of the consideration will be based upon Eastern's weighted average
trading stock price for a ten-day period prior to closing, subject to a collar
mechanism. The transaction is expected to close in early to mid-2000, subject to
receipt of satisfactory regulatory approvals and the approval of EnergyNorth
shareholders. The merger is expected to be tax-free to Eastern and, as with the
Colonial transaction, will be accounted for using the purchase method of
accounting.
Form 10-Q
Page 8.
3. Essex Gas Merger
On September 30, 1998, Eastern completed a merger with Essex Gas which was
accounted for as a pooling of interests and the accompanying consolidated
financial statements include the accounts of Essex Gas for all periods. Prior to
the merger, Essex Gas' fiscal year ended on August 31. Accordingly, the
accompanying consolidated statement of operations for the current period
reflects a calendar alignment of periods for Eastern and Essex Gas, while the
prior period comparative statement of operations reflects the three and six
month periods ended June 30, 1998 of Eastern combined with the three and six
month periods ended May 31, 1998 of Essex Gas.
Three and Six months ended June 30,
(In thousands) 1998 1998
- --------------------------------------------------------------------------------------------------------------------
Revenues:
Eastern $174,271 $504,165
Essex Gas 14,154 37,182
-------- --------
Combined $188,425 $541,347
======== ========
Earnings before extraordinary items and
accounting change:
Eastern $2,979 $ 31,529
Essex Gas 903 3,420
------ --------
Combined $3,882 $ 34,949
====== ========
In conforming Essex Gas' historical periods based on a fiscal year ending August
31 with Eastern's operations and changing Essex Gas' fiscal year-end, the
consolidated statement of cash flows for the six months ended June 30, 1998
includes the effect of Essex Gas' excluded period, September 1, 1997 through
November 30, 1997, of ($585,000) for net operating activity, ($1,908,000) for
net investing activity and $2,428,000 for net financing activity. These amounts
are reflected in the other captions in the consolidated statement of cash flows.
4. Business Segments
Eastern's reportable business segment information with respect to revenues and
operating earnings is presented below:
Revenues: Three months ended June 30, Six months ended June 30,
(In thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------
Natural Gas Distribution $101,368 $121,916 $381,651 $ 412,148
Marine Transportation 65,783 65,163 127,109 127,821
Other Services 3,369 1,346 6,589 1,378
-------- -------- -------- ---------
$170,520 $188,425 $515,349 $ 541,347
======== ======== ======== =========
Form 10-Q
Page 9.
Operating Earnings: Three months ended June 30, Six months ended June 30,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Natural Gas Distribution $ (1,916) $ 8,136 $55,378 $60,974
Marine Transportation 5,758 7,719 8,899 13,807
Other Services (1,244) (2,608) (2,540) (4,834)
Headquarters (901) (1,443) (2,094) (2,519)
------- ------- ------- -------
$ 1,697 $11,804 $59,643 $67,428
======= ======= ======= =======
5. Inventories
The components of inventories were as follows:
June 30, December 31, June 30,
(In thousands) 1999 1998 1998
- -------------------------------------------------------------------------------------------------------
Supplemental gas supplies $32,170 $45,266 $32,535
Other materials, supplies and
marine fuels 11,988 10,600 11,409
------- ------- -------
$44,158 $55,866 $43,944
======= ======= =======
6. Supplemental Cash Flow Information
The following are supplemental disclosures of cash flow information:
Six months ended June 30,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $16,872 $17,660
Income taxes $19,325 $23,829
Form 10-Q
Page 10.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Revenues: Consolidated revenues for the second quarter of 1999 and the first
six months of 1999 were $171 million and $515 million, respectively, down 10%
and 5% from 1998.
Natural Gas Distribution
The natural gas distribution segment includes the operations of Boston Gas
Company and Essex Gas Company, as discussed in Note 3 of Notes to Financial
Statements. The effect of the accounting treatment used for revenue recognition
and the use of fiscal periods ending May 31 in the prior year at Essex Gas
reduced second quarter and year-to-date comparative revenues by $7 million and
$9 million, respectively.
Revenues for the second quarter of 1999 were $101.4 million, a decrease of $20.5
million or 17% from 1998. The revenue decrease reflects the pass through of
lower gas costs ($7 million), warmer weather ($3 million), the Essex Gas
accounting effects, lower weather-adjusted average usage and migration of
customers from firm sales to transportation-only service, partially offset by
throughput growth. Weather in the second quarter was 4% colder than normal, but
1% warmer than the previous year.
Year-to-date 1999 revenues were $381.7 million, a decrease of $30.5 million or
7%. The decrease reflects lower non-firm sales ($21 million), the pass through
of lower gas costs ($9 million), migration to transportation ($9 million) and
the Essex Gas accounting effects, partially offset by the impact of colder
weather ($19 million) and throughput growth. Year-to-date weather was 3% warmer
than normal, but 7% colder than 1998.
Marine Transportation
Revenues for the second quarter and first six months of 1999 were $65.8 million
and $127.1 million, respectively, showing little change from 1998. River
transportation markets in the second quarter improved over the first quarter of
1999, on the strength of increased shipments of non-coal commodities,
particularly grain. Continued weak demand for spot coal, reflecting high utility
inventories, and export coal were partially offsetting. Overall, rates per ton
mile declined 5% for the quarter and 4% year-to-date, due in part to the
contractual pass through of lower fuel prices. As a result, revenues increased
1% for the second quarter but decreased 1% for the first six months, as compared
to 1998.
Tonnage transported increased 1% in the second quarter but declined 2% for the
first six months as compared to last year. Coal tonnage declined 4% for the
second quarter and 5% year to date. Coal ton miles increased 1% year to date,
reflecting longer average hauls. Non-coal tonnage increased 8% and 4% for the
second quarter and year to date, respectively, reflecting increased long haul
grain shipments.
Form 10-Q
Page 11.
Other Services
Revenues for the second quarter and first six months of 1999 were $3.4 million
and $6.6 million, respectively, up from $1.3 million and $1.4 million from the
comparable periods in 1998 primarily reflecting increases at ServicEdge, which
commenced operations in April 1998.
Operating Earnings: Consolidated operating earnings for the second quarter and
first six months of 1999 were $1.7 million and $59.6 million, respectively,
reflecting decreases of 86% and 12% from the prior year.
Natural Gas Distribution
Natural gas distribution recorded an operating loss of $1.9 million in the
second quarter of 1999. The $10.1 million decrease from 1998 reflects the effect
of the accounting treatment used for revenue recognition and the use of the
fiscal periods ending May 31 in the prior year, including merger-related
expenses, at Essex Gas ($4 million), higher operating costs ($4 million)
impacted by lower capitalized expenses, a non-recurring retiree benefit charge
and lower weather-adjusted average customer usage.
Operating earnings for the first six months of 1999 were $55.4 million, down
$5.6 million or 9% from 1998. The decrease reflects higher operating costs ($8
million), the Essex Gas accounting effects ($4 million) and lower average usage
($2 million). Partially offsetting were the margin impact of colder weather ($6
million) and growth in throughput ($3 million).
The pass through of higher or lower gas costs and 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.
Marine Transportation
Operating earnings for the second quarter of 1999 were $5.8 million, a decrease
of $2.0 million from 1998. Operating earnings for the first six months of 1999
were $8.9 million, down $4.9 million from the prior year. The decreases for the
second quarter and year-to-date reflect lower rates and higher costs associated
with crew labor, port expenses, vessel maintenance and insurance. Partially
offsetting were improved operating conditions during the second quarter and
lower fuel costs year to date.
Other Services
Other Services' operating losses for the second quarter and first six months of
1999 were $1.2 million and $2.5 million, respectively, as compared to losses of
$2.6 million and $4.8 million during the comparable periods in 1998. These
losses reflect the operations of ServicEdge. Lower operating losses in 1999
primarily reflect a reduction in costs associated with the start-up of
ServicEdge.
Form 10-Q
Page 12.
Other:
Net interest expense for the second quarter and first six months of 1999
decreased by $0.2 million and $0.4 million, primarily reflecting lower working
capital requirements for natural gas distribution. The reduced interest
associated with the issuance of $75.0 million of 6.25% (effective rate 7.5%)
debt by Midland in September 1998, which replaced $50.0 million of 9.9% Midland
debt redeemed in March 1998, was largely offset by the combination of lower
average investment balances and interest rates.
In the first quarter of 1998 Eastern recognized an extraordinary loss of $2.3
million pretax, $1.5 million net, or $.06 per share, on redeeming the Midland
debt noted above.
In June 1998 the U.S. Supreme Court held the Coal Industry Retiree Health
Benefit Act of 1992 ("Coal Act") to be unconstitutional as applied to Eastern.
The reversal of the Coal Act reserve resulted in an extraordinary gain of $74.5
million pretax, $48.4 million, or $2.13 per share, in the second quarter of
1998.
Net earnings for the first quarter of 1998 include $8.2 million, or $.36 per
share, for the cumulative effect of changing Boston Gas' method of accounting
for unbilled revenues to an accrual method.
YEAR 2000 ISSUES
State of Readiness
Eastern has assessed the impact of the year 2000 with respect to its information
technology ("IT") and embedded chip systems as well as the Company's exposure to
significant third party risks. In such regard, Eastern has 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.
With respect to IT systems, natural gas distribution has tested and certified as
year 2000 ready all eleven "mission critical" business systems. Installation of
an upgrade and replacement to two of these systems scheduled for the third
quarter of 1999 will include year 2000 re-certification testing. Half of the
less than critical business systems have completed certification testing while
the balance is scheduled for testing during the third quarter of 1999. An
integration test plan designed to re-certify interfaces between mission critical
systems has been developed and is scheduled for execution during the third
quarter of 1999. Conversion and testing of all technology infrastructure
components has been completed, including mainframe and client server hardware
and software, data/voice communications and e-mail systems. All telephony
components have been certified as year 2000 ready with the exception of an
upgrade to a call management server that is scheduled for the third quarter.
Eighty percent of the company's desktop hardware, operating system software and
applications have been certified as year 2000 ready with the remaining desktops
scheduled to be certified as part of the rollout of an upgraded application in
the third quarter of 1999. To minimize the risk of corruption of previously
certified information systems, the Company plans to impose a freeze on changes
to information systems and technology components, effective October 1, 1999 With
respect to embedded chip systems, the Company
Form 10-Q
Page 13.
has completed its inventory, assessment, remediation and certification testing
of all date sensitive components containing embedded chips and is year 2000
ready.
Natural gas distribution has identified material third party relationships and
has completed a detailed survey and assessment of third party readiness. A
readiness assessment has been completed of all mission critical suppliers and
risk mitigation plans developed. The Company has begun testing electronic
interfaces with suppliers, where practicable, and implemented risk mitigation
strategies as required. However, there can be no assurance that third party
systems, on which the Company'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
the Company's operations.
Marine transportation has modified and tested all mainframe-based programs and
systems, which are operating on a year 2000 compliant mainframe. Substantially
all client server and desktop-based systems have been tested and modified except
for the accounts receivable system, which is scheduled for production rollout by
September 30, 1999.
With respect to embedded chip systems, marine transportation has reviewed its
major operating assets and their sub-systems. Based on this review and actions
taken, management believes its operations will not be impaired by year 2000
issues with regard to embedded chip technology.
Marine transportation has assessed third party risk with respect to significant
suppliers, services and customers and is actively seeking written confirmation
of third party readiness. While many third parties express confidence in their
year 2000 programs and project completion by mid-1999, they do not make 100%
guarantees or assurances.
Cost of year 2000 remediation
Natural gas distribution and marine transportation expect the cost of year
2000 compliance to approximate $16.2 million as detailed in the following
chart:
Cost through June Expected
(In millions) 1999 subsequent cost
- ------------------------------------------------------------------------------------------------------
Natural Gas Distribution - capitalized $ 8.8 $ .4
- expensed 3.6 1.1
Marine Transportation - capitalized 1.1 .2
- expensed .8 .2
----- -----
Total $14.3 $ 1.9
===== =====
Risks of year 2000 issues
Natural gas distribution and marine transportation operations have 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 system, natural gas distribution
believes its worst case scenario would involve failures that impact data and
voice communication providers, its electricity provider or a pipeline supplier.
Scenarios involving one or more of these failures are addressed in detail as
part of the Company's business contingency planning process.
Form 10-Q
Page 14.
Marine transportation believes its worst case scenario would involve
infrastructure disruption through failure of third party services. These could
include, without limit: lock and dam operations, rail services for river-served
docks and terminals, telecommunications, electricity and banking services. Major
delays to river traffic and customers could result in a loss of revenues. Such
failures would require the Company to enact disaster recovery plans, use
alternate service providers and seek other routes of navigation, to the extent
possible.
Contingency plans
Natural gas distribution has initiated the development of a business contingency
plan concerning year 2000 risks to its internal systems, embedded chips and
significant suppliers. An impact analysis of business processes has been
completed which identified voice/data communications, electricity and gas supply
as the three major sources of risk. Draft plans have been developed and tested
for each of these major risk areas. During the third quarter of 1999, the
Company expects to finalize and test these plans via live drills.
Marine transportation has substantially completed preparation of a contingency
plan, which it expects to complete by September 30, 1999. To the extent marine
transportation believes that any supplier of critical goods or services poses a
significant risk of year 2000 failure, it expects to locate backup providers by
September 30, 1999.
Eastern believes its actions and planning efforts are appropriate to address
year 2000 concerns. However, Eastern cannot guarantee that such actions will
prevent all or any year 2000 disruptions to itself, its customers or its
suppliers. The Company cautions that forward looking statements contained in the
year 2000 discussion should be read in conjunction with the following disclosure
statement regarding such information.
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 pending mergers and other
strategic initiatives on earnings and cash flow, 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, uncertainties regarding the ultimate profitability of ServicEdge, 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.
Form 10-Q
Page 15.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that projected cash flows from operations, in combination
with currently available resources, is more than sufficient to meet Eastern's
1999 capital expenditure requirements, potential funding of its environmental
liabilities, normal debt repayments, anticipated dividends to shareholders and
the planned acquisitions of Colonial Gas and EnergyNorth.
Consolidated capital expenditures are budgeted at approximately $85 million,
with about 75% at natural gas distribution segment and the balance at marine
transportation. In addition, marine transportation to enter into a series of
long-term operating leases for up to 100 additional new barges in the third and
fourth quarters of 1999, the terms of which are still under negotiation with a
selected financial institution.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
27.1 Financial Data Schedule.
(b) Report on Form 8-K
There were no reports on Form 8-K filed in the second
quarter of 1999.
Form 10-Q
Page 16.
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 29, 1999 By /s/ WALTER J. FLAHERTY
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Walter J. Flaherty
Senior Vice President and
Chief Financial Officer
Date: July 29, 1999 By /S/ JAMES J. HARPER
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James J. Harper
Vice President and Controller
(Chief Accounting Officer)