<PAGE>
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, 1997
---------------------------------------
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
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1270730
---------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9 RIVERSIDE ROAD, WESTON, MASSACHUSETTS 02193
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(Address of principal executive offices)
(Zip Code)
617-647-2300
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(Registrant's telephone number, including area code)
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Common Stock outstanding of Eastern Enterprises as of
October 24,1997 was 20,378,527.
<PAGE>
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")
<TABLE>
Consolidated Statement of Operations
- ------------------------------------
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
(In thousands, except per share amounts) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $125,524 $133,950 $710,300 $766,690
Operating costs and expenses:
Operating costs 89,032 96,345 508,387 553,105
Selling, general & adminis-
trative expenses 22,679 22,102 78,257 78,202
Depreciation & amortization 13,195 10,577 51,432 48,688
-------- -------- -------- --------
124,906 129,024 638,076 679,995
-------- -------- -------- --------
Operating earnings 618 4,926 72,224 86,695
Other income (expense):
Interest income 2,293 2,413 6,625 7,270
Interest expense (8,163) (8,325) (25,487) (25,828)
Equity in loss of AllEnergy (2,160) (803) (5,258) (1,821)
Other, net 1,067 2,327 1,125 2,604
-------- -------- -------- --------
Earnings (loss) before income
taxes (6,345) 538 49,229 68,920
Provision (credit) for income
taxes (2,273) (161) 16,040 25,415
-------- -------- -------- --------
Net earnings $ (4,072) $ 699 $ 33,189 $ 43,505
======== ======== ======== ========
Earnings per share $ (.20) $ .03 $ 1.62 $ 2.13
======== ======== ======== ========
Dividends per share $ .40 $ .37 $ 1.20 $ 1.11
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Form 10-Q
Page 3.
Eastern Enterprises and Subsidiaries
- ------------------------------------
<TABLE>
Consolidated Balance Sheet
- --------------------------
<CAPTION>
Sept 30, Dec. 31, Sept 30,
(In thousands) 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 181,116 $ 159,804 $ 171,035
Receivables, less allowances 49,787 96,854 55,888
Inventories 61,623 61,271 61,427
Deferred gas costs 49,750 75,337 44,773
Other current assets 7,590 6,396 12,679
---------- ---------- ----------
Total current assets 349,866 399,662 345,802
Property and equipment, at cost 1,483,555 1,450,741 1,423,020
Less--Accumulated depreciation 649,025 612,573 603,043
---------- ---------- ----------
Net property and equipment 834,530 838,168 819,977
Other assets:
Deferred post-retirement health care
costs 85,085 88,563 89,808
Investment in AllEnergy 5,774 2,032 66
Investments 15,333 31,346 29,805
Deferred charges and other costs,
less amortization 46,893 61,844 53,358
---------- ---------- ---------
Total other assets 153,085 183,785 173,037
---------- ---------- ---------
Total assets $1,337,481 $1,421,615 $1,338,816
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Form 10-Q
Page 4.
Eastern Enterprises and Subsidiaries
- ------------------------------------
<TABLE>
Consolidated Balance Sheet
- --------------------------
<CAPTION>
Sept 30, Dec. 31, Sept 30,
(In thousands) 1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 9,861 $ 61,557 $ 18,604
Accounts payable 45,889 74,114 52,241
Accrued expenses 42,841 25,999 31,153
Other current liabilities 59,108 72,722 67,142
--------- --------- ----------
Total current liabilities 157,699 234,392 169,140
Gas inventory financing 48,059 55,594 49,159
Long-term debt 343,469 347,313 350,118
Reserves and other liabilities:
Deferred income taxes 94,863 93,198 90,752
Post-retirement health care 95,747 96,980 97,401
Coal miners retiree health care 57,919 61,008 62,169
Preferred stock of subsidiary 29,318 29,292 29,284
Other reserves 71,536 75,848 71,489
--------- --------- ----------
Total reserves and other
liabilities 349,383 356,326 351,095
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares -- 50,000,000
Issued shares -- 20,442,907 at
September 30, 1997; 20,441,907 at
December 31, 1996 and
September 30, 1996 20,443 20,442 20,442
Capital in excess of par value 32,606 33,389 33,043
Retained earnings 387,674 377,714 369,368
Treasury stock at cost - 64,380
shares at September 30, 1997;
138,110 shares at December 31,
1996 and 137,866 shares at
September 30, 1996 (1,852) (3,555) (3,549)
--------- --------- ----------
Total shareholders' equity 438,871 427,990 419,304
--------- --------- ----------
Total liabilities and
shareholders' equity $1,337,481 $1,421,615 $1,338,816
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Form 10-Q
Page 5.
Eastern Enterprises and Subsidiaries
- ------------------------------------
<TABLE>
Consolidated Statement of Cash flows
- ------------------------------------
<CAPTION>
Nine months ended September 30,
(In thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 33,189 $ 43,505
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 51,432 48,688
Income taxes and tax credits 10,521 (1,087)
Equity in loss of AllEnergy 5,258 1,821
Other changes in assets and liabilities:
Receivables 47,068 48,846
Inventories (352) (13,545)
Deferred gas costs 25,587 27,167
Accounts payable (28,226) (12,719)
Other 2,610 (9,746)
--------- --------
Net cash provided by operating activities 147,087 132,930
Cash flows from investing activities:
Capital expenditures (47,355) (76,492)
Investment in AllEnergy (9,000) (1,887)
Investments 3,161 (19,259)
Proceeds on sale of investments 1,024 3,090
Other (2,257) (1,695)
--------- --------
Net cash (used) by investing activities (54,427) (96,243)
Cash flows from financing activities:
Dividends paid (24,398) (22,462)
Changes in notes payable (51,400) (38,300)
Repayment of long-term debt (3,568) (6,445)
Changes in gas inventory financing (7,535) 3,559
Other 1,217 2,805
--------- --------
Net cash (used) by financing activities (85,684) (60,843)
Net increase (decrease) in cash and cash equivalents 6,976 (24,156)
Cash and cash equivalents at beginning of year 159,804 185,137
--------- --------
Cash and cash equivalents at end of period 166,780 160,981
Short-term investments 14,336 10,054
--------- --------
Cash and short-term investments $ 181,116 $ 171,035
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Form 10-Q
Page 6.
EASTERN ENTERPRISES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
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 1996 Annual
Report filed on Form 10-K with the Securities and Exchange Commission.
Earnings per share
Per share amounts are based on the weighted average number of common and common
equivalent shares outstanding. Quarter and year-to-date shares are 20,545,000
and 20,504,000 respectively, in 1997 and 20,457,000 and 20,428,000,
respectively, in 1996.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," effective
for periods ending after December 15, 1997. Restating Eastern's reported
earnings per share for the three months and nine months ended September 30,
would result in basic earnings per share of $(.20) and $1.63 in 1997 and $.03
and $2.15 in 1996, respectively. The SFAS No. 128 calculation of diluted
earnings per share is equivalent to the fully diluted earnings per share
calculation, which is not materially different from the primary and basic
earnings per share calculations.
<PAGE>
Form 10-Q
Page 7.
2. Inventories
<TABLE>
The components of inventories were as follows:
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
(In thousands) 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental gas supplies $ 49,458 $ 49,287 $ 48,728
Other materials, supplies and marine
fuels 12,165 11,984 12,699
-------- -------- --------
$ 61,623 $ 61,271 $ 61,427
======== ======== ========
</TABLE>
3. Supplemental cash flow information
<TABLE>
The following are supplemental disclosures of cash flow information:
<CAPTION>
Nine months ended September 30,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash paid during the year for:
Interest, net of amounts capitalized $17,821 $17,645
Income taxes $ 6,191 $28,023
</TABLE>
<PAGE>
Form 10-Q
Page 8.
<TABLE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
<CAPTION>
Revenues:
Three months ended September 30,
(In thousands) 1997 1996 Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boston Gas $ 57,874 $ 59,453 (3)%
Midland 67,650 74,497 (9)%
-------- --------
Total $125,524 $133,950 (6)%
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996 Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boston Gas $510,155 $539,314 (5)%
Midland 200,145 227,376 (12)%
-------- --------
Total $710,300 $766,690 (7)%
======== ========
</TABLE>
Boston Gas
Lower non-firm gas sales decreased revenues for the third quarter of 1997 by
$8.1 million, as compared to 1996. Higher gas costs, higher rates and growth in
throughput were partially offsetting.
Warmer weather and lower average customer usage for the first nine months of
1997 decreased revenues by about $35 million versus the same period in 1996.
Lower non-firm gas sales, partially offset by growth in throughput, also
contributed to the decrease in revenues. Year-to-date weather was near normal
for 1997, and 3% warmer than 1996.
Midland Enterprises
Continued weak demand for transportation services resulted in revenue decreases
of 9% and 12% for the third quarter and first nine months of 1997, respectively,
as compared to 1996. A moderately cool summer tempered domestic electric utility
demand. Moreover, a weak export coal market and reduced shipments of grain to
the Gulf combined to depress rates as well as disrupt traffic patterns. Rates
per ton mile declined 3% and 5% for the third quarter and first nine months of
1997, respectively, as compared to 1996.
As a result of the market issues discussed above, tonnage decreased 11% for the
quarter and 15% year-to-date. Coal ton miles decreased 11% and 15% for the
quarter and the first nine months of 1997, respectively, due to reduced
requirements for utility and industrial accounts, as well as reduced export
demand.
<PAGE>
Form 10-Q
Page 9.
<TABLE>
Operating Earnings:
<CAPTION>
Three months ended September 30,
(In thousands) 1997 1996 Change
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boston Gas $ (7,541) $ (8,749) 14 %
Midland 10,061 14,663 (31)%
Headquarters (1,902) (988) (93)%
-------- --------
Total $ 618 $ 4,926 (87)%
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996 Change
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Boston Gas $52,618 $45,856 15 %
Midland 24,592 44,286 (44)%
Headquarters (4,986) (3,447) (45)%
------- -------
Total $72,224 $86,695 (17)%
======= =======
</TABLE>
Boston Gas
Third quarter operating earnings increased $1.2 million from 1996, primarily
reflecting higher rates, lower operating expenses and growth in throughput,
partially offset by a change in the inter-period allocation of depreciation and
property taxes, as discussed below.
Operating earnings for the first nine months of 1997 increased $6.8 million from
1996. The increase reflected growth in throughput, lower operating expenses,
higher rates and a $2.0 million gain on the settlement of pension obligations,
partially offset by the margin impact of decreased revenues and higher
depreciation, reflecting continued investment in system expansion and
replacement.
To better match expenses against gross margin, on January 1, 1997 Boston Gas
changed the inter-period allocation of depreciation and property taxes to be
based on firm throughput volumes, as opposed to firm sales volumes, reflecting
the increasing importance of unbundled transportation service. This change
increased third quarter 1997 expenses, as compared to 1996, by $3.1 million,
making up for expenses which were decreased by a similar amount for the first
six months of 1997.
Midland Enterprises
Operating earnings for the third quarter and year-to-date decreased by $4.6
million and $19.7 million, respectively. These decreases primarily reflected
weaker market conditions, as described above. The impact of adverse operating
conditions, primarily in the first half of 1997, was partially offset by the
benefit of cost containment and productivity programs.
Other:
In 1997, other income (expense) for the third quarter and year-to-date includes
losses of $2.2 million and $5.3 million, respectively, representing Eastern's
50% share of AllEnergy's operating results. In 1996, other income (expense) for
the third quarter and year-to-date includes losses of $0.8 million and $1.8
million, respectively, for AllEnergy.
<PAGE>
Form 10-Q
Page 10.
For the third quarter of 1997, other, net includes gains of $0.8 million
realized on the sale of investments. Other, net in the third quarter of 1996
included $2.0 million from the sale of investments.
An adjustment related to the examination of the 1994 tax return reduced the
1997 annualized income tax provision rate to 33%.
On October 20, 1997, the United States Supreme Court granted Eastern's petition
for a writ of certiorari and will hear Eastern's challenge to the
constitutionality of the Coal Industry Retiree Health Benefit Act of 1992 (the
"Coal Act"). In April 1997, the First Circuit Court of Appeals upheld the
constitutionality of the Coal Act as applied to Eastern, and it is that decision
that will now be reviewed by the Supreme Court. The Supreme Court's ruling is
not expected before mid-1998. (See Part II, Item 1. Legal Proceedings).
On May 16, 1997 Boston Gas received a decision from the Massachusetts Department
of Public Utilities ("Department") concerning its request for reconsideration,
clarification and recalculation of the Department's November 1996 rate order.
The Department granted Boston Gas an additional $1.9 million rate increase (a
$6.3 million increase was granted in the November 1996 Order) and reduced the
productivity factor portion of the Performance-Based Rate ("PBR") formula
established in its November 1996 Order by 50 basis points, from 2.00% to 1.50%.
Compared to the Department's original decision, these changes add approximately
$3.5 million to projected revenue in 1998, increasing to about $8.0 million by
2002, the last year of the plan. On June 5, 1997, Boston Gas filed a notice of
appeal of the Department's orders to the Massachusetts Supreme Judicial Court.
Boston Gas expects the appeal to take approximately one year. The first annual
PBR rate adjustment is expected to be effective November 1, 1997.
FORWARD-LOOKING INFORMATION:
This report and other company reports and statements issued or made from time to
time contain certain "forward-looking statements" concerning projected future
financial performance or concerning expected plans or future operations. Eastern
cautions that actual results and developments may differ materially from such
projections or expectations.
Investors should be aware of important factors that could cause actual results
to differ materially from the forward-looking projections or expectations. These
factors include, but are not limited to: the effect of strategic initiatives on
earnings and cash flow, temperatures above or below normal in Boston Gas
Company's service area, changes in market conditions for barge transportation,
adverse weather and operating conditions on the inland waterways, uncertainties
regarding the start-up of AllEnergy, including expense levels and customer
acceptance, changes in interest rates, regulatory and court decisions, and
developments with respect to Eastern's previously-disclosed environmental and
Coal Act liabilities. All of these factors are difficult to predict and are
generally beyond the control of the Company.
<PAGE>
Form 10-Q
Page 11.
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
1997 capital expenditure and working capital requirements, potential funding of
its Coal Act and environmental liabilities, normal debt repayments and
anticipated dividend payments to shareholders.
Consolidated capital expenditures are budgeted at $73 million, about 75%
of which are for Boston Gas and the balance for Midland.
<PAGE>
Form 10-Q
Page 12.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On October 20, 1997, the United States Supreme Court granted Eastern's
petition for a writ of certiorari and will review Eastern's challenge to the
constitutionality of the Coal Industry Retiree Health Benefit Act of 1992 (the
"Coal Act"). Eastern was assigned responsibility under the Coal Act to fund
health care benefits for retired miners and their dependents. This liability may
exceed $100 million, depending on factors such as the administrative review of
assigned individuals, medical inflation rates, and other factors as described
in Note 12 of Eastern's 1996 Annual Report filed on Form 10-K with the
Securities and Exchange Commission. The case, Eastern Enterprises
v. Chater, was originally filed in the United States District Court in
Massachusetts in November 1993 against the Commissioner of the Social Security
Administration and the Trustees of the UMWA Combined Benefit Fund. Eastern
challenges the Coal Act on the grounds that it violates its due process rights
and amounts to an unconstitutional taking of its property without compensation.
The District Court ruled against Eastern on July 8, 1996, and the First Circuit
Court of Appeals affirmed this decision on April 7, 1997. The United States
Supreme Court will now review the decision of the First Circuit Court of
Appeals; a ruling is not expected before mid-1998.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed in the third
quarter of 1997.
<PAGE>
Form 10-Q
Page 13.
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 24, 1997 By James J. Harper
-------------------- ----------------------
James J. Harper
Vice President and Controller
(Chief Accounting Officer)
Date: October 24, 1997 By Walter J. Flaherty
-------------------- -----------------------
Walter J. Flaherty
Senior Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of earnings and the consolidated balance sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 181,116
<SECURITIES> 0
<RECEIVABLES> 66,588
<ALLOWANCES> 16,801
<INVENTORY> 61,623
<CURRENT-ASSETS> 349,866
<PP&E> 1,483,555
<DEPRECIATION> 649,025
<TOTAL-ASSETS> 1,337,481
<CURRENT-LIABILITIES> 157,699
<BONDS> 343,469
<COMMON> 20,443
29,318
0
<OTHER-SE> 418,428
<TOTAL-LIABILITY-AND-EQUITY> 1,337,481
<SALES> 510,155
<TOTAL-REVENUES> 710,300
<CGS> 394,378
<TOTAL-COSTS> 559,170
<OTHER-EXPENSES> 66,571
<LOSS-PROVISION> 9,843
<INTEREST-EXPENSE> 25,487
<INCOME-PRETAX> 49,229
<INCOME-TAX> 16,040
<INCOME-CONTINUING> 33,189
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,189
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.62
</TABLE>
