1 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, 1994 --------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ----------------- Commission File Number 1-2297 EASTERN ENTERPRISES - ----------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1270730 - ----------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 RIVERSIDE ROAD, WESTON, MASSACHUSETTS 02193 - ----------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 617-647-2300 - ----------------------------------------------------------------------- (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 26, 1994, was 20,618,044. 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 (In thousands, except per share Three months ended September 30, Nine months ended September 30, amounts) 1994 1993 1994 1993 - ------------------------------------------------------------------------------------------------------------------- REVENUES $206,817 $195,917 $871,455 $824,030 OPERATING COSTS AND EXPENSES: Operating costs 163,039 155,879 655,206 624,056 Selling, general & adminis- trative expenses 28,906 33,667 93,243 101,586 Depreciation & amortization 11,116 11,644 45,319 43,284 -------- -------- -------- -------- 203,061 201,190 793,768 768,926 -------- -------- -------- -------- OPERATING EARNINGS 3,756 (5,273) 77,687 55,104 OTHER INCOME (EXPENSE): Interest income 559 646 1,438 2,210 Interest expense (9,701) (8,572) (28,932) (26,268) Writedown of Ionpure - (13,000) - (13,000) Other, net 254 (232) 2,306 (720) -------- -------- -------- -------- EARNINGS BEFORE INCOME TAXES (5,132) (26,431) 52,499 17,326 Provision for income taxes (2,019) (5,433) 20,763 12,035 -------- -------- -------- -------- Net earnings $ (3,113) $(20,998) $ 31,736 $ 5,291 ======== ======== ======== ======== EARNINGS PER SHARE $ (.14) $ (.93) $ 1.52 $ .23 ======== ======== ======== ======== DIVIDENDS PER SHARE $ .35 $ .35 $ 1.05 $ 1.05 ======== ======== ======== ======== The accompanying notes are an integral part of these financial statements. 3 Form 10-Q Page 3. Eastern Enterprises and Subsidiaries - -------------------------- Consolidated Balance Sheet - -------------------------- September 30, December. 31, September 30, (In thousands) 1994 1993 1993 - --------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and short-term investments $ 51,720 $ 52,240 $ 76,526 Receivables, less allowances 118,672 145,523 125,768 Inventories 79,508 87,568 102,133 Deferred gas costs 82,417 65,802 49,227 Other current assets 14,111 11,995 17,662 ---------- ---------- ---------- Total current assets 346,428 363,128 371,316 INVESTMENTS: Equity in U.S. Filter 44,615 44,292 - Other investments 5,735 8,279 8,459 ---------- ---------- ---------- Total investments 50,350 52,571 8,459 PROPERTY AND EQUIPMENT, AT COST 1,287,919 1,275,161 1,305,012 Less--Accumulated depreciation 511,144 489,196 504,824 ---------- ---------- ---------- Net property and equipment 776,775 785,965 800,188 OTHER ASSETS: Deferred post-retirement health care costs 98,513 101,182 101,641 Deferred charges and other costs 37,510 63,600 43,113 Goodwill, less amortization 12,948 13,231 80,323 ---------- ---------- ---------- Total other assets 148,971 178,013 225,077 ---------- ---------- ---------- TOTAL ASSETS $1,322,524 $1,379,677 $1,405,040 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 4 Form 10-Q Page 4. Eastern Enterprises and Subsidiaries - ------------------------------------ Consolidated Balance Sheet - -------------------------- September 30, December. 31, September 30, (In thousands) 1994 1993 1993 - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current debt $ 70,090 $ 114,335 $ 74,184 Accounts payable 56,480 76,161 69,865 Accrued expenses 42,297 31,280 33,317 Other current liabilities 46,048 63,703 41,190 ---------- ---------- ---------- Total current liabilities 214,915 285,479 218,556 GAS INVENTORY FINANCING 49,883 59,297 50,987 LONG-TERM DEBT 356,662 328,939 330,536 RESERVES AND OTHER LIABILITIES: Deferred income taxes 87,894 90,793 113,652 Post-retirement health care 103,069 104,730 106,403 Coal miners retiree health care 59,334 63,060 - Preferred stock of subsidiary 29,221 29,197 29,191 Other reserves 52,416 54,444 55,430 ---------- ---------- ---------- Total reserves and other liabilities 331,934 342,224 304,676 SHAREHOLDERS' EQUITY: Common stock, $1.00 par value Authorized shares -- 50,000,000 Issued shares -- 21,651,925 at September 30, 1994; 21,644,378 at December 31, 1993 and 23,644,378 at September 30, 1993 21,652 21,644 23,644 Capital in excess of par value 61,978 61,778 113,455 Retained earnings 309,766 299,131 388,996 Treasury stock at cost - 965,181 shares at Sept. 30, 1994; 714,786 shares at December 31, 1993 and 986,307 shares at Sept. 30, 1993 (24,266) (18,815) (25,810) ---------- ---------- ---------- Total shareholders' equity 369,130 363,738 500,285 ---------- ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,322,524 $1,379,677 $1,405,040 ========== ========== ========== The accompanying notes are an integral part of these financial statements. 5 Form 10-Q Page 5. Eastern Enterprises and Subsidiaries - ------------------------------------ Consolidated Statement of Cash Flows - ------------------------------------ Nine months ended September 30, (In thousands) 1994 1993 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 31,736 $ 5,291 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 45,319 43,284 Income taxes and tax credits (1,928) 2,312 Writedown on Ionpure - 13,000 Other changes in assets and liabilities: Receivables 26,851 12,190 Inventories 5,665 (9,055) Deferred gas costs (16,615) (8,359) Accounts payable (19,681) (9,024) Other 12,835 1,518 -------- ------- Net cash provided by operating activities 84,182 51,157 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (41,936) (41,449) Short-term investments 19,964 (16,401) Proceeds from sale of barge construction business 12,695 - Other (5,329) (3,829) ------- ------- Net cash provided (used) by investing activities (14,606) (61,679) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (22,539) (23,768) Changes in notes payable (42,600) 11,286 Proceeds from issuance of long-term debt 36,000 - Repayment of long-term debt (8,740) (24,820) Changes in gas inventory financing (9,414) 2,356 Purchase of treasury shares (7,076) - Other 1,489 153 -------- -------- Net cash used by financing activities (52,880) (34,793) -------- -------- Net increase (decrease) in cash and cash equivalents 16,696 (45,315) Cash and cash equivalents at beginning of year 23,766 91,377 -------- -------- Cash and cash equivalents at end of period 40,462 46,062 Short-term investments 11,258 30,464 -------- -------- CASH AND SHORT-TERM INVESTMENTS $ 51,720 $ 76,526 ======== ======== The accompanying notes are an integral part of these financial statements. 6 Form 10-Q Page 6. EASTERN ENTERPRISES AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS September 30, 1994 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. 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 1993 Annual Report filed on Form 10-K with the Securities and Exchange Commission. SHORT-TERM INVESTMENTS Effective January 1, 1994, Eastern adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," which requires investments in debt and equity securities to be carried at fair value. Eastern's investment in U.S. Filter is specifically excluded from SFAS 115 because it is accounted for under the equity method of accounting. Pursuant to SFAS 115, Eastern has classified its investments in debt and equity securities as available for sale. Accordingly, the net unrealized gains and losses computed in marking these securities to market have been reported within retained earnings. At September 30, 1994 the difference between the fair value and the original cost of these securities is immaterial. EARNINGS PER SHARE Per share amounts are based on the weighted average number of common shares outstanding and common equivalent shares. Quarter and year-to-date shares are 20,703,000 and 20,884,000, respectively, in 1994 and 22,696,000 and 22,694,000, respectively, in 1993. 7 Form 10-Q Page 7. 2. INVENTORIES The components of inventories were as follows: September 30, December 31, September 30, (In thousands) 1994 1993 1993 - ------------------------------------------------------------------------------------------------------------- Supplemental gas supplies $ 47,868 $ 53,152 $ 54,018 Other materials, supplies and marine fuels 15,209 17,984 22,618 Finished products 16,431 16,432 25,497 -------- -------- --------- $ 79,508 $ 87,568 $ 102,133 ======== ======== ========= 3. SUPPLEMENTAL CASH FLOW INFORMATION The following are supplemental disclosures of cash flow information: Nine months ended September 30, (In thousands) 1994 1993 - ------------------------------------------------------------------------------------------------------------- Cash paid during the year for: Interest, net of amounts capitalized $18,966 $19,296 Income taxes $22,566 $12,845 8 Form 10-Q Page 8. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- REVENUES: Three months ended September 30, (In thousands) 1994 1993 Change - --------------------------------------------------------------------------------------------------- Boston Gas $ 72,114 $ 66,606 8 % Midland 67,108 56,427 19 % Water Products Group 67,595 72,884 (7)% -------- -------- Total $206,817 $195,917 6 % ======== ======== Nine months ended September 30, (In thousands) 1994 1993 Change - --------------------------------------------------------------------------------------------------- Boston Gas $509,222 $453,399 12 % Midland 194,261 189,023 3 % Water Products Group 167,972 181,608 (8)% -------- -------- Total $871,455 $824,030 6 % ======== ======== BOSTON GAS A $37.7 million annualized rate increase which took effect November 1, 1993 increased revenues by $3.8 million and $28.1 million for the quarter and the first nine months of 1994, respecively. Colder weather in the Boston Gas service territory increased year-to- date revenues by $19.2 million. Weather for first nine months of 1994 was 6.5% colder than normal, compared to the slightly warmer than normal weather for the same period in 1993. The balance of the revenue increase was attributable to increased sales to non- firm customers. Most of the margins on these sales are credited to firm customers. MIDLAND ENTERPRISES Revenues for the third quarter of 1994 increased 19% as a result of more favorable operating and market conditions, increased shipments of coal, aggregates, ores, towing for others and a favorable resolution, early in the third quarter, of a contract dispute with a major utility customer. Third quarter 1993 activity was negatively impacted by the United Mine Workers strike and severe flooding on the Mississippi and Illinois Rivers. For the first nine months of 1994, revenues increased 3% reflecting the increased third quarter activity, partially offset by rate reductions and lower production earlier in the year. Midland's liquid barge business, which was sold in December 1993, generated revenues of $3.1 million and $8.8 million in the third quarter and first nine months of 1993, respectively. Coal tonnage increased 32% in the third quarter from the comparable period in 1993, primarily reflecting increased demand for utility coal under long-term contracts as well as the resolution of the contract disagreement and the United Mine Workers strike, both of which negatively impacted 1993 operations. For the first nine months of 1994, coal tonnage increased 11% as increased spot coal 9 Form 10-Q Page 9. shipments and increased third quarter contract activity more than offset weak demand during the first half of the year. Strong third quarter activity, redeployment of equipment to other commodities and towing for others resulted in overall increases in ton miles for the third quarter and first nine months of 1994 of 30% and 9%, respectively. WATER PRODUCTS GROUP Revenues for WaterPro Supplies for the third quarter and first nine months of 1994 increased 15% and 19%, respectively, reflecting WaterPro market share gains and increased construction activity. Ionpure Technologies, which was sold effective October 1, 1993, generated revenues of $14.1 million and $40.7 million for the third quarter and first nine months of 1993, respectively. OPERATING EARNINGS: Three months ended September 30, (In thousands) 1994 1993 Change - ---------------------------------------------------------------------------------------------------- Boston Gas $(8,406) $(11,219) 25% Midland 9,257 5,009 85% Water Products Group 4,234 1,869 nm Headquarters (1,329) (932) (43)% -------- -------- Total $ 3,756 $ (5,273) nm ======== ======== Nine months ended September 30, (In thousands) 1994 1993 Change - ---------------------------------------------------------------------------------------------------- Boston Gas $ 50,069 $ 34,330 46% Midland 24,153 23,908 1% Water Products Group 6,783 184 nm Headquarters (3,318) (3,318) - ------- ------- Total $ 77,687 $ 55,104 41% ======= ======= BOSTON GAS Colder than normal weather increased operating earnings by about $1 million for the first nine months of 1994, after taking into account the higher workload-related labor and operating costs associated with the unusually cold first quarter weather. Meaningful expense comparisons to 1993 are difficult to make due to the impact of the strike on last year's results. The benefit of the rate increase was partially offset by higher depreciation charges, property taxes and bad debt expense. Increased sales to new firm customers also contributed to the improved earnings. MIDLAND ENTERPRISES Operating earnings for the third quarter of 1994 increased 85% from the same period in 1993 due to the significant volume gains discussed above, reduced operating expenses from ongoing cost reduction and productivity improvement programs, as well as the absence of increased costs associated with flooding and the UMW strike in 1993. Operating earnings for the first nine months of 1994 increased 1% from 1993 as the higher third quarter results were largely offset by reduced utility contract coal revenues in the first half of the year, as 10 Form 10-Q Page 10. previously discussed, and lower rates associated with non-coal tonnage. Earnings were also reduced by significantly higher operating costs resulting from extended periods of winter ice, high water and flooding during the first four months of 1994 that significantly increased operating costs. During the second quarter of 1994, Midland recorded a pre-tax gain of $2.3 million on the sale of its Port Allen barge construction and shipyard facility in Louisiana. This gain is included in Other, net on the Statement of Operations. WATER PRODUCTS GROUP WaterPro Supplies increased its operating earnings for the third quarter and first nine months of 1994 by $2.0 million and $4.7 million, respectively. Most of the improvement was attributable to the increased volume, partially offset by increases in related selling expenses and a small decrease in year-to-date gross margin percentage. Operating results for Water Products Group also reflect the sale of Ionpure Technologies which generated operating losses of $0.3 million and $1.9 million in the third quarter and first nine months of 1993, respectively. OTHER Eastern's consolidated net earnings for the third quarter and first nine months of 1993 were negatively impacted by an after-tax charge of $10.9 million or $.48 per share to write down its investment in Ionpure in anticipation of its exchange of Ionpure for an equity interest in U.S. Filter. The provision for income taxes for the third quarter of 1993 for non-utility operations includes approximately $1.4 million to reflect the additional deferred tax requirements resulting from the increase in the statutory Federal income tax rate from 34% to 35%, effective January 1, 1993. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Management believes that projected cash flow from operations, in combination with currently available resources, is more than sufficient to meet Eastern's 1994 capital expenditure and working capital requirements, normal debt repayments and anticipated dividend payments to shareholders. In January 1994 Boston Gas issued $36.0 million of Medium-Term Notes with a weighted average maturity of 24 years and a coupon of 6.94%, the proceeds of which were used to reduce short-term indebtedness. On July 28, 1994 Eastern announced a stock repurchase program of up to 2 million shares. About 2.8 million shares have been repurchased under the 3 million share program announced in September, 1990. Consolidated capital expenditures, principally at Boston Gas, are budgeted at approximately $60 million for 1994. 11 Form 10-Q Page 11. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits Exhibit 10.1 - Executive Stock Purchase Loan Plan Exhibit 10.2 - Salary Continuation Agreements between Eastern and Certain Officers Exhibit 27 - Financial Data Schedule (b) Report on Form 8-K None 12 Form 10-Q Page 12. SIGNATURES It is Eastern's opinion that the financial information contained in this report reflects all adjustments necessary to present a fair statement of results for the 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. 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 JAMES J. HARPER ----------------------------- James J. Harper Vice President and Controller (Chief Accounting Officer) By WALTER J. FLAHERTY ----------------------------- Walter J. Flaherty Senior Vice President and Chief Financial Officer October 28, 1994