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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-2297
EASTERN ENTERPRISES
(Exact name of registrant as specified in its charter)
_________MASSACHUSETTS 04-1270730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
_______9 RIVERSIDE ROAD, WESTON, MASSACHUSETTS 02493
(Address of principal executive offices)
(Zip Code)
_________________781-647-2300
(Registrant's telephone number, including area code)
___________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The number of shares of Common Stock outstanding of Eastern Enterprises as of
October 27, 1999 was 27,020,034.
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 Nine months ended
September 30, September 30,
(In thousands, except per share amounts) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Revenues $144,978 $135,881 $660,327 $677,228
Operating costs and expenses:
Operating costs 108,058 97,598 461,066 465,338
Selling, general & administrative
expenses 25,609 28,856 84,658 92,194
Depreciation & amortization 16,141 13,953 59,790 56,794
-------- -------- -------- --------
149,808 140,407 605,514 614,326
-------- -------- -------- --------
Operating earnings (4,830) (4,526) 54,813 62,902
Other income (expense):
Interest income 2,618 1,438 7,488 5,548
Interest expense (9,648) (7,465) (27,062) (24,495)
Other, net 8,012 3,155 9,115 5,384
-------- -------- -------- --------
Earnings (loss) before income
taxes (3,848) (7,398) 44,354 49,339
Provision (credit) for income taxes (1,025) (3,644) 17,449 18,144
-------- -------- -------- --------
Earnings (loss) before
extraordinary items and
accounting change (2,823) (3,754) 26,905 31,195
Extraordinary items, net of tax:
Reversal of Coal Act reserve 0 0 0 48,425
Loss on early extinguishment
of debt 0 0 0 (1,465)
Cumulative effect of accounting
change, net of tax 0 0 0 8,193
-------- -------- -------- --------
Net earnings (loss) $ (2,823) $ (3,754) $26,905 $ 86,348
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share
before extraordinary
items and accounting change $ (.12) $ (.17) $ 1.16 $ 1.38
Extraordinary items, net of tax:
Reversal of Coal Act reserve 0 0 0 2.16
Loss on early extinguishment
of debt 0 0 0 (.07)
Cumulative effect of accounting
change, net of tax 0 0 0 .37
-------- -------- -------- --------
Basic earnings per share $ (.12) $ (.17) $ 1.16 $ 3.84
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings per share before
extraordinary items and
accounting change $ (.12) $ (.17) $ 1.16 $ 1.37
Extraordinary items, net of tax:
Reversal of Coal Act reserve 0 0 0 2.13
Loss on early extinguishment
of debt 0 0 0 (.06)
Cumulative effect of accounting
change, net of tax 0 0 0 .36
Diluted earnings per share $ (.12) $ (.17) $ 1.16 $ 3.80
-------- -------- -------- --------
-------- -------- -------- --------
Dividends per share $ .42 $ .41 $ 1.26 $ 1.23
-------- -------- -------- --------
-------- -------- -------- --------
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 3
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheets
- ---------------------------
September 30, December 31, September 30,
(In thousands) 1999 1998 1998
- ------------------------------------------------------------ -----------------
ASSETS
Current assets:
Cash and short-term
investments $30,718 $159,836 $167,501
Receivables, less reserves 87,920 104,869 66,075
Inventories 76,340 55,866 56,176
Deferred gas costs 21,589 54,065 48,853
Other current assets 7,319 5,689 9,247
---------- --------- ---------
Total current assets 223,886 380,325 347,852
Property and equipment,
at cost 2,179,169 1,722,718 1,699,539
Less--accumulated
depreciation 910,068 746,969 735,068
---------- --------- ---------
Net property and
equipment 1,269,101 975,749 964,471
Other assets:
Excess of cost over fair
value of acquired net
assets, less
amortization 248,351 0 0
Deferred postretirement
health care costs 74,551 78,567 82,965
Investments 15,437 15,395 13,894
Deferred charges and other
costs, less amortization 77,169 68,334 69,205
---------- --------- ---------
Total other assets 415,508 162,296 166,064
---------- --------- ---------
Total assets $1,908,495 $1,518,370 $1,478,387
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
Form 10-Q
Page 4
Eastern Enterprises and Subsidiaries
- ------------------------------------
Consolidated Balance Sheets
- ---------------------------
September 30, December 31, September 30,
(In thousands) 1999 1998 1998
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $61,984 $43,237 $ 18,488
Accounts payable 57,456 56,567 47,490
Accrued expenses 40,322 38,540 45,097
Other current liabilities 48,678 40,011 40,739
-------- -------- --------
Total current liabilities 208,440 178,355 151,814
Gas inventory financing 43,285 52,644 43,249
Long-term debt 516,683 385,519 387,311
Reserves and other liabilities:
Deferred income taxes 174,069 134,911 135,899
Postretirement health care 98,946 97,197 96,710
Preferred stock of subsidiary 26,447 29,360 29,351
Other reserves 104,866 94,315 91,671
-------- -------- --------
Total reserves and other
liabilities 404,328 355,783 353,631
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares--50,000,000;
Issued shares--27,021,196 at
September 30, 1999; 22,535,734
at December 31, 1998, and
22,507,975 at September
30, 1998 27,021 22,536 22,508
Capital in excess of par value 240,532 53,421 52,666
Retained earnings 468,970 470,576 469,254
Accumulated other comprehensive
loss (417) (105) (1,687)
Treasury stock at cost - 9,292
shares at September 30, 1999;
10,461 shares at December 31,
and September 30, 1998 (347) (359) (359)
-------- -------- --------
Total shareholders' equity 735,759 546,069 542,382
-------- -------- --------
Total liabilities and
shareholders' equity $1,908,495 $1,518,370 $1,478,387
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) 1999 1998
- ------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 26,905 $ 86,348
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary credit for reversal of
Coal Act reserve 0 (48,425)
Extraordinary loss on early
extinguishment of debt 0 1,465
Cumulative effect of accounting change 0 (8,193)
Depreciation and amortization 59,790 56,794
Income taxes and tax credits (7,175) (5,031)
Net gain on sale of assets (2,281) (4,522)
Other changes in assets and liabilities:
Receivables 29,875 59,055
Inventories (5,477) 5,372
Deferred gas costs 32,391 20,832
Accounts payable (9,644) (25,255)
Other 496 (9,319)
-------- --------
Net cash provided by operating activities 124,880 129,121
-------- --------
Cash flows from investing activities:
Capital expenditures (46,971) (84,646)
Acquisition of Colonial Gas, net of
cash acquired (150,446) 0
Proceeds on sale of assets 6,697 13,504
Investments (7,784) (3,928)
Other (2,632) (1,761)
-------- --------
Net cash used by investing activities (201,136) (76,831)
-------- --------
Cash flows from financing activities:
Dividends paid (28,458) (27,269)
Changes in notes payable (12,835) (32,933)
Proceeds from issuance of long-term debt 0 68,019
Repayment of long-term debt (3,442) (54,116)
Redemption of preferred stock (3,000) 0
Changes in gas inventory financing (9,359) (16,574)
Other 2,894 7,427
-------- --------
Net cash used by financing activities (54,200) (55,446)
-------- --------
Net decrease in cash and cash equivalents (130,456) (3,156)
Cash and cash equivalents at beginning of year 159,836 170,657
-------- --------
Cash and cash equivalents at the end of the period 29,380 167,501
Short-term investments 1,338 0
-------- --------
Cash and short-term investments $30,718 $167,501
-------- --------
-------- --------
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, 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 Nine months ended
September 30, September 30,
(In thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------
Weighted average shares 24,108 22,486 23,120 22,461
Dilutive effect of options 142 213 119 232
Adjusted weighted average
shares 24,250 2,699 23,239 22,693
------- ------ ------ ------
------- ------ ------ ------
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
nine months ended September 30:
Form 10-Q
Page 7
Unrealized Holding Reclassification
Gains (Losses) on Adjustments for Other
(In thousands) Investments Arising (Gains) Losses Comprehensive
During the Period Included in Net Income Income (Loss)
- ----------------------------------------------- -------------------------------
1998
Pretax loss $(1,608) $(1,946) $(3,554)
Income tax credit 0 0 0
-------- -------- --------
Net change $(1,608) $(1,946) $(3,554)
-------- -------- --------
-------- -------- --------
1999
Pretax loss $ (75) $ (405) $ (480)
Income tax credit (26) (142) (168)
-------- -------- --------
Net change $ (49) $ (263) $ (312)
-------- -------- --------
-------- -------- --------
In 1998, a capital loss carryforward eliminated the need for an income tax
provision associated with capital gains.
2. 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 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.
3. Mergers
Colonial Gas Merger
On August 31, 1999, Eastern completed a merger with Colonial Gas in a
transaction with an enterprise value of approximately $474 million. In
effecting the transaction, Eastern paid $150 million in cash, net of cash
acquired and including transaction costs, issued approximately 4.2 million
shares of common stock valued at $186 million and assumed $138 million of debt.
The cash portion of the transaction was financed through available cash and
borrowings under Eastern's line of credit.
The Colonial merger has been accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying
Consolidated Statements of Operations include Colonial Gas' results commencing
August 31, 1999. The purchase price was allocated to the net assets acquired
based on their fair value. The historical cost basis of Colonial Gas' assets
and liabilities, with the exception of its retiree benefit obligations and the
adjustments described below, was determined to represent the fair value due to
the existence of a regulatory-approved rate plan based upon the recovery of
historical costs and a fair return thereon. As a result of the merger and
related rate plan, value was not allocated to systems that will no longer be
used due to the integration of Colonial into Eastern's natural gas
Form 10-Q
Page 8
distribution business and value was not allocated to Colonial's net regulatory
assets. No value was allocated to the net regulatory assets because the rate
plan does not meet the criteria for the continued application of SFAS 71,
Accounting for the Effects of Certain Types of Regulation. The allocation of
the purchase price remains subject to adjustment upon final valuation of
certain acquired balances. The excess of cost over the fair value of the net
assets acquired, or goodwill, of $248 million has been recorded as an asset
and is being amortized on a straight-line basis, principally over a period of
40 years.
The following table sets forth the Company's unaudited pro forma results as if
the transaction had occurred on January 1, 1998.
Nine months ended
(In thousands) September 30
1999 1998
Revenues $790,602 $797,780
Operating earnings 71,367 76,229
Earnings before extraordinary
items and accounting change 27,614 30,419
Earnings per common share before
extraordinary items and
accounting change:
Basic $1.03 $1.14
Diluted $1.02 $1.13
Weighted average number of common
shares outstanding:
Basic 26,876 26,680
Diluted 26,994 26,912
These unaudited pro forma results have been prepared for comparative purposes
only and include certain adjustments which primarily reflect goodwill
amortization, reduced interest income and an adjusted income tax provision
using Eastern's incremental rate of 35%.
Form 10-Q
Page 9
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
nine month periods ended September 30, 1998 of Eastern combined with the
three and nine month periods ended August 31, 1998 of Essex Gas.
Three and Nine months ended September 30,
(In thousands) 1998 1998
- ----------------------------------------------------------------------------
Revenues:
Eastern $131,277 $635,442
Essex Gas 4,604 41,786
--------- ---------
Combined $135,881 $677,228
--------- ---------
--------- ---------
Earnings (loss) before extraordinary items
and accounting change:
Eastern $ (2,812) $ 28,717
Essex Gas (942) 2,478
--------- ---------
Combined $ (3,754) $ 31,195
--------- ---------
--------- ---------
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 nine months ended September
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 respective other captions in the
consolidated statement of cash flows.
4. Business Segments
Eastern's reportable business segment information for revenues and operating
earnings is presented below:
Revenues: Three months ended Sept. 30, Nine months ended Sept. 30,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------
Natural Gas
Distribution $ 70,790 $67,381 $452,441 $479,529
Marine
Transportation 69,690 66,850 196,799 194,671
Other Services 4,498 1,650 11,087 3,028
-------- -------- -------- --------
$144,978 $135,881 $660,327 $677,228
-------- -------- -------- --------
-------- -------- -------- --------
Form 10-Q
Page 10
Operating Earnings: Three months ended Nine months ended
(In thousands) Sept. 30 Sept. 30
1999 1998 1999 1998
- ------------------------------------------------------------------------------
Natural Gas
Distribution $(9,436) $(7,646) $45,942 $53,328
Marine Transportation 6,706 8,421 15,605 22,228
Other Services (1,184) (2,977) (3,724) (7,811)
Headquarters (916) (2,324) (3,010) (4,843)
-------- -------- -------- --------
$(4,830) $(4,526) $54,813 $62,902
-------- -------- -------- --------
-------- -------- -------- --------
5. Inventories
The components of inventories were as follows:
September 30, December 31, September 30,
(In thousands) 1999 1998 1998
- ------------------------------------------------ ----------------- -----------
Supplemental gas supplies $60,454 $45,266 $44,271
Other materials, supplies and
marine fuels 15,886 10,600 11,905
------- ------- -------
$76,340 $55,866 $56,176
6. Supplemental Cash Flow Information
The following are supplemental disclosures of cash flow information:
Nine months ended September 30,
1999 1998
(In thousands)
- ----------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $17,711 $18,789
Income taxes $24,523 $25,030
The following is the supplemental disclosure of noncash investing and financing
activities:
Eastern acquired all of the capital stock of Colonial Gas Company for $336
million, comprised of cash payments of approximately $150 million, net of
cash acquired and including transaction costs, and the issuance of 4.2 million
shares of common stock valued at $186 million. In addition, Eastern assumed
Colonial liabilities of $138 million.
Form 10-Q
Page 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Revenues: Consolidated revenues for the third quarter of 1999 were $145
million, up 7% from 1998. Revenues for the first nine months of 1999 were
$660 million, down 2% from the prior year.
Natural Gas Distribution
The natural gas distribution segment includes the operations of Boston Gas
Company, Essex Gas Company and Colonial 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 August 31 in the
prior year at Essex Gas reduced year-to-date comparative revenues by $9
million, but did not significantly impact comparative revenues for the
quarter. Revenues for the quarter and year-to-date include Colonial Gas
revenues of $4.4 million since the August 31, 1999 date of acquisition.
Revenues for the third quarter of 1999 were $70.8 million, an increase of
$3.4 million or 5% from 1998. The revenue increase reflects the addition of
Colonial Gas revenues, partially offset by the pass through of lower gas costs.
Year-to-date revenues were $452.4 million, a decrease of $27.1 million or 6%.
The decrease reflects lower non-firm sales ($19 million), the pass through
of lower gas costs ($11 million), migration to transportation ($10 million)and
the Essex Gas accounting effects, partially offset by the impact of colder
weather ($17 million), throughput growth and the additional Colonial Gas
revenues.
Marine Transportation
Revenues for the third quarter of 1999 were $69.7 million, up $2.8 million
or 4% from 1998. For the first nine months of 1999, revenues were
$196.8 million, up $2.1 million or 1% from the prior year. These increases
reflected a strong market for grain exports and increased import activity of
ores and steel-related raw materials, partially offset by declines in coal
demand by electric utilities, as high stockpiles slowed shipments. Rates per
ton mile in the quarter improved modestly over the same period in 1998,
primarily due to the strengthening of the grain and import markets
discussed above, while rates for spot coal movements were generally lower.
Rates also benefited from contractual pass through provisions in multi-year
contracts related to fuel prices that were up 22% from 1998 for the quarter,
but down 2% for the first nine months.
Tonnage transported decreased 2% for both the third quarter and first nine
months as compared to last year. Coal tonnage for the third quarter and
year-to-date declined 9% and 7%, respectively. Coal ton miles were down 10%
for the quarter and 3% year-to-date, mainly from continued weak demand for
spot and export movements. Non-coal tonnage increased 11% and 6% for the
third quarter and year-to-date, respectively, as a result of the market factors
discussed above. Non-coal ton miles increased 13% and 8% for the third quarter
and year-to-date periods.
Form 10-Q
Page 12
Other Services
Revenues for the third quarter and first nine months of 1999 were $4.5 million
and $11.1 million, respectively, up from $1.7 million and $3.0 million for
the comparable periods in 1998, primarily reflecting increases at ServicEdge,
which commenced operations in April 1998.
Operating Earnings: Consolidated operating earnings for the third quarter of
1999 were a seasonal loss of $4.8 million, as compared to a loss of
$4.5 million for 1998. Consolidated operating earnings for the first nine
months of 1999 were $54.8 million, down $8.1 million or 13% from the prior year.
Natural Gas Distribution
Natural gas distribution recorded an operating loss of $9.4 million for the
third quarter of 1999, as compared to a loss of $7.6 million for the prior
year. The $1.8 million decrease from 1998 reflects the inclusion of Colonial
Gas' $1.0 million post-acquisition operating loss, higher operating costs
including a $2.2 million charge for an early retirement program at Boston
Gas related to integration of Colonial Gas operations, partially offset by
lower expenses, principally bad debt expense, reflecting improved
collections experience.
Operating earnings for the first nine months of 1999 were $45.9 million, down
$7.4 million or 14% from 1998. The decrease reflects higher operating costs
($10 million), the effect of the accounting treatment used for revenue
recognition and the use of fiscal periods ending August 31 in the prior year
($4 million), Colonial Gas' post-acquisition operating loss and lower
average usage. Partially offsetting were the margin impact of 7% colder
weather ($6 million) and growth in throughput ($3 million). Year-to-date
weather was 3% warmer than normal compared to the 10% warmer than normal
weather in 1998.
The pass through of 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 third quarter of 1999 were $6.7 million, a decrease
of $1.7 million or 20% from 1999. Operating earnings for the first nine months
of 1999 were $15.6 million, down $6.6 million or 30% from the prior year.
The decreases for the third quarter and year-to-date reflect higher costs
associated with crew labor, port expenses, vessel maintenance and insurance.
Drought conditions impacted operations on the lower Mississippi River during
the third quarter.
Other Services
Other services' operating losses for the third quarter and fist nine months of
1999 were $1.2 million and $3.7 million, respectively, as compared to losses of
$3.0 million and $7.8 million for the comparable periods in 1998. These
losses primarily 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 13
Other
The $2.1 million reduction in the Headquarters operating loss for the third
quarter of 1999 primarily reflects the absence of legal and consulting
expenses associated with the Essex acquisition in 1998.
Net interest expense for the third quarter and first nine months of 1999
increased by $1.0 million and $.6 million, respectively, primarily
reflecting the cash paid for the Colonial Gas acquisition and the issuance of
debt by Midland in September 1998, partially offset by interest income on a
tax settlement and lower working capital requirements for natural gas
distribution during the first part of 1999. The reduced interest expense
associated with the Midland's issuance of $75 million of 6.25% (effective
rate 7.5%) debt, which replaced $50.0 million of 9.9% Midland debt redeemed
in March 1998, was largely offset by a combination of lower interest
income due to reduced average investment balances and interest rates.
Other, net for the third quarter of 1999 includes a $3.2 million reduction
in the environmental reserve reflecting regulatory clearance of one site,
$2.5 million in environmental-related insurance recoveries and a $1.8 million
gain on the sale of a towboat. Other, net in 1998 primarily reflects realized
gains on investments of $2.9 million for the quarter and $4.5 million
year-to-date.
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 net, 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 the
replacement or modification of existing systems and technology as required and
has taken reasonable steps to assure itself that major customers and critical
vendors are also addressing these issues. In addition, Eastern has completed
the development and testing of its contingency plans to address major external
and internal risks that could potentially impact business operations.
Form 10-Q
Page 14
With respect to IT systems, natural gas distribution has tested and
certified as year 2000 ready all eleven "mission critical" business systems
and all eighteen less than critical business systems. Recertification of
mission critical systems and integration points has been completed. Conversion
and certification 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 telephone components
have been certified as year 2000 ready. All of the Company's desktop hardware,
operating system software and applications have been certified as year 2000
ready. To minimize the risk of corruption of previously certified information
systems, the Company imposed a freeze on changes to information systems and
technology components, effective in early October 1999. The Company expects
changes to its production environment to be governed by strict change
management procedures and to be limited to emergency production fixes and
regulatory-required changes.
With respect to embedded chip systems, the Company 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 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 "mission
critical" programs and systems, which are operating on a year 2000 compliant
mainframe. Client server and desktop-based systems have also been modified
and tested. Data/voice communication and e-mail systems have been tested and
replaced where necessary.
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.
Form 10-Q
Page 15
Cost of year 2000 remediation
Natural gas distribution and marine transportation expect the cost of year
2000 compliance to approximate $16.8 million as detailed in the following chart:
Cost through Expected
(In millions) September 1999 Subsequent Cost
- ------------------------------------------------------------------------------
Natural Gas Distribution - capitalized $8.9 $.2
- expensed 4.4 .8
Marine Transportation - capitalized 1.3 .1
- expensed 1.0 .1
----- -----
Total $15.6 $1.2
----- -----
----- -----
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 third party
failures that impact data and voice communicationproviders, 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
plans.
Similarly, marine transportation believes its worst case scenario would
involve third party failures that impact lock and dam operations, rail
services for river-served docks and terminals, or 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 completed the development of business contingency
plans 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. Plans have been developed and
desk top tests conducted for each risk area. Live drills were successfully
conducted to test the Company's ability to deliver critical services in the
event of a failure or disruption in voice/data communications.
Marine transportation has completed preparation of a contingency plan,
based on an assessment of third party risk. The Company has obtained written
and verbal confirmation from providers of critical services as to their year
2000 readiness. To the extent marine transportation believes that any supplier
of critical goods or services poses a significant risk of year 2000 failure,
the Company has located or identified backup providers.
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.
Form 10-Q
Page 16
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 functionality of programs and systems in the year 2000, 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, 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 acquisition of EnergyNorth.
Consolidated capital expenditures are budgeted at approximately $85 million,
with about 80% at natural gas distribution segment and the balance at marine
transportation. In addition, marine transportation has signed a series of
long-term operating leases for up to 100 additional new barges for delivery by
year end.
On August 16, 1999, Eastern announced that it is beginning the process of
evaluating a number of strategic and financial alternatives to enhance
shareholder value. The process will include an assessment of its current
strategy of consolidating New England gas distribution utilities, as well as
consideration of share repurchases and/or other strategic transactions,
including joint ventures or sale of all or a portion of the company.
Form 10-Q
Page 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
2 EnergyNorth Merger Agreement, dated as of July 14, 1999.
10.11.1 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and J. Atwood Ives.
10.11.2 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and Fred Raskin.
10.11.3 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and Walter J. Flaherty.
10.11.4 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and L. William Law, Jr.
10.11.5 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and Boston Gas Company and
Chester R. Messer, II.
10.11.6 Change of Control Agreement, dated as of September 22,
1999, by and between Eastern and Midland Enterprises
Inc. and J. Mark Cook.
10.23.1 Amendment, dated as of September 22, 1999, to Eastern's
Restricted Stock Plan for Non-Employee Trustees.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
September 15, 1999 includes proforma financial results
reflecting the merger of Colonial Gas into Eastern.
August 19, 1999, Eastern announced that it is beginning the
process of evaluating strategic and financial alternatives
to enhance shareholder value.
July 19, 1999, Eastern Enterprises, EE Acquisition Company,
and Energy North, Inc. entered into a Plan of
Reorganization.
Form 10-Q
Page 18
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: October 29, 1999 By /s/ WALTER J. FLAHERTY
Walter J. Flaherty
Senior Vice President and
Chief Financial Officer
Date: October 29, 1999 By /S/ JAMES J. HARPER
James J. Harper
Vice President and Controller
(Chief Accounting Officer)