<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 June 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 18154
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ESSEX GAS COMPANY
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1427020
------------------------------ --------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
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(Address of principal executive offices)
(Zip Code)
617-742-8400
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(Registrant's telephone number, including area code)
NONE
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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 ___
---
Common stock of Registrant at the date of this report was 100 shares, all
held by Eastern Enterprises.
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FORM 10-Q
Page 2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Company or group of companies for which report is filed:
ESSEX GAS COMPANY AND SUBSIDIARY ("Company")
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------
(In Thousands)
Three Months Ended Six Months Ended
------------------ ----------------
<TABLE>
<CAPTION>
June 30, May 31, June 30, May 31,
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 4,411 $14,020 $26,460 $37,006
Cost of gas sold 1,704 6,753 11,705 18,086
------- ------- ------- -------
Operating Margin 2,707 7,267 14,755 18,920
------- ------- ------- -------
OPERATING EXPENSES:
Operations and maintenance expense 3,448 3,260 5,851 6,505
Depreciation and amortization 707 1,136 2,653 2,950
Taxes, other than income 301 474 938 1,175
Income Taxes (890) 814 1,611 2,762
------- ------- ------- -------
Total Operating Expenses 3,566 5,684 11,053 13,392
------- ------- ------- -------
OPERATING INCOME (LOSS) (859) 1,583 3,702 5,528
OTHER INCOME, NET 223 125 364 218
------- ------- ------- -------
INCOME (LOSS) BEFORE
INTEREST CHARGES (636) 1,708 4,066 5,746
------- ------- ------- -------
INTEREST CHARGES:
Interest on long-term debt 616 626 1,232 1,251
Amortization of deferred
debt expense 8 8 17 16
Other interest expense 87 80 197 245
Allowance for funds used during
construction (1) (6) (2) (12)
------- ------- ------- -------
TOTAL INTEREST CHARGES 710 708 1,444 1,500
------- ------- ------- -------
Income (Loss) applicable to
common stock $(1,346) $ 1,000 $ 2,622 $ 4,246
======= ======= ======= =======
Common Stock Dividends $ - $ 723 $ - $ 1,435
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FORM 10-Q
Page 3
ESSAY GAS COMPANY AND SUBSIDIARY
- --------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In Thousands)
June 30, December 31,
1999 1998
----------- -------------
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
GAS PLANT, AT COST $112,485 $111,416
Less: Accumulated depreciation 32,050 29,229
-------- --------
NET PLANT 80,435 82,187
-------- --------
Other property and investments 841 740
Capitalized Lease (net of accumulated amortization 502 532
Of $622 at June 30, 1999 and $592 at
December 31, 1998
CURRENT ASSETS:
Cash and cash equivalents 92 66
Accounts receivable (net of allowance 6,689 3,906
for uncollectible accounts of $939
at June 30, 1999 and $745 at
December 31, 1998)
Accrued utility margin 238 2,285
Supplemental fuel inventory 933 3,891
Materials and supplies (at average cost) 593 396
Prepayments and other 105 265
Current income taxes 2,110 2,504
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TOTAL CURRENT ASSETS 10,760 13,313
------- -------
DEFERRED CHARGES:
Unamortized debt expense and other 1,366 1,169
------- -------
TOTAL DEFERRED CHARGES 1,366 1,169
------- -------
TOTAL ASSETS $93,904 $97,941
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FORM 10-Q
Page 4
ESSEX GAS COMPANY AND SUBSIDIARY
- --------------------------------
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
<S> <C> <C>
JUNE 30, DECEMBER 31,
1999 1998
------- -------
CAPITALIZATION AND LIABILITIES:
COMMON STOCK EQUITY $37,804 $35,137
LONG-TERM DEBT LESS CURRENT PORTION 27,599 27,599
------- -------
TOTAL CAPITALIZATION 65,403 62,736
------- -------
NON-CURRENT OBLIGATIONS UNDER CAPITAL LEASE 439 472
CURRENT LIABILITIES:
Current portion of long-term debt 600 600
Current obligations under capital lease 63 60
Obligations under supplemental fuel inventory 895 4,345
Notes payable 4,000 8,935
Accounts payable 1,699 2,576
Accrued interest 277 445
Accrued taxes 212 21
Refundable gas costs 2,135 198
Supplier refund due customers - 34
Other 340 553
------- -------
TOTAL CURRENT LIABILITIES 10,221 17,767
------- -------
DEFERRED CREDITS:
Accumulated deferred income taxes 7,640 7,359
Unamortized investment tax credit 1,013 1,048
Deferred directors' fees 176 977
Retirement benefit liability 7,031 5,500
Other reserves 1,981 2,082
------- -------
TOTAL DEFERRED CREDITS 17,841 16,966
------- -------
TOTAL CAPITALIZATION AND LIABILITIES $93,904 $97,941
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FORM 10-Q
Page 5
ESSEX GAS COMPANY AND SUBSIDIARY
- --------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
Six Months Ended
-------------------
June 30, May 31,
1999 1998
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME: $ 2,622 $ 4,246
Adjustments to reconcile net income to net cash:
Depreciation and amortization, including amounts
related to non-utility operations 2,862 3,276
Deferred income taxes 281 (812)
Other changes in assets and liabilities:
Accounts receivable (2,783) (552)
Inventories including fuel 2,761 1,033
Accounts payable (877) (2,454)
Accrued Interest (168) (601)
Supplier refund obligations (34) (1,277)
Taxes payable/receivable 585 443
Refundable gas costs 2,101 4,293
Other, net 2,198 23
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,548 7,618
------- -------
INVESTING ACTIVITIES:
Utility capital expenditures (1,069) (2,862)
Payments for retirements of property, plant and
equipment, net (68) (36)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,137) (2,898)
------- -------
FINANCING ACTIVITIES:
Dividends paid - (1,435)
Issuance of common stock - 1,073
Principal retired on long-term debt - (146)
Changes in supplemental fuel inventory (3,450) (1,522)
Changes in notes payable (4,935) (2,233)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (8,385) (4,263)
------- -------
Net increase in cash and cash equivalents 26 457
Cash and cash equivalents at beginning of period 66 369
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 92 $ 826
======= =======
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest (net of amount capitalized) $ 1,259 $ 1,466
======= =======
Income taxes $ 555 $ 3,204
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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FORM 10-Q
Page 6
ESSEX GAS COMPANY AND SUBSIDIARY
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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JUNE 30, 1999
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1. ACCOUNTING POLICIES AND OTHER INFORMATION
-----------------------------------------
General
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It is the Company's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to present
a fair statement of results for the periods reported, but such results are
not necessarily indicative of results to be expected for the year due to
the seasonal nature of the Company's business. 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 pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the
disclosures herein, when read with the transition report for the period
ended December 31, 1998 filed on Form 10-K, are adequate to make the
information presented not misleading.
Certain prior year financial statement information has been reclassified to
be consistent with the current presentation.
Merger
------
On September 30, 1998, the Company merged with ECGC Acquisition Company, a
wholly owned subsidiary of Eastern Enterprises ("Eastern"), through the
exchange of all of the Company's stock for approximately 2,047,000 shares
of Eastern common stock. The merger was accounted for as a pooling of
interests by Eastern.
On December 7, 1998, the Company changed its fiscal year end from August 31
to December 31 to conform to Eastern's fiscal year end. Accordingly, a
transition period Form 10K has been filed reflecting the results of
operations and cash flows for the four months ended December 31, 1998. The
accompanying Consolidated Statements of Earnings and Cash Flows for the
three and six month periods ending June 30, 1999 have been compared to the
three and six month periods ending May 31, 1998 which represents the most
comparable periods of the preceding fiscal year. Recasting of the
preceding periods to a calendar basis for comparative purposes is not
practical and in management's opinion does not materially affect the
comparison.
SEASONAL ASPECT
---------------
The amount of the Company's natural gas firm throughput for purposes of
space heating is directly related to the ambient air temperature.
Consequently, there is less gas throughput during the summer months than
during the winter months. In order to more properly match depreciation and
property tax expense with margin each month, the Company charges to
depreciation and property tax expense an amount equal to the percentage of
the annual volume of firm gas throughput forecasted for the month, applied
to the estimated annual depreciation and property tax expense.
<PAGE>
FORM 10-Q
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------
RESULTS OF OPERATIONS:
---------------------
RESULTS OF OPERATIONS
A comparison of results for the three and six month periods ended June 30,
1999 to the three and six month periods ended May 31, 1998 reflect
comparable but not precisely matched periods.
QUARTER-TO-QUARTER
Results for the quarter ended June 30, 1999 reflect a net loss of $1.3
million compared to net earnings applicable to common stock of $1.0 million
for the quarter ended May 31, 1998. This decrease in earnings reflects the
effect of the accounting change for revenue recognition, the use of fiscal
period ending May 31, 1998 and a non-recurring pension charge ($.8 million)
related to early retirement and severance programs for union employees.
This decline was partially mitigated by merger related synergies that
resulted in lower general and administrative expenses and employee
benefits.
YEAR TO DATE
Net earnings applicable to common stock for the six months ended June 30,
1999 were $2.6 million compared to earnings of $4.2 million for the six
months ended May 31, 1998. This decrease in earnings was primarily due to
the same reasons described in the quarter-to-quarter results.
YEAR 2000 ISSUE
On September 30, 1998, there was an Acquisition of the Company by Eastern,
the parent company of Boston Gas (See Note 1 of the Notes to Consolidated
Financial Statements). The Company's Year 2000 issues are being addressed
through the integration of its operations with those of its affiliate
Boston Gas. The Company has incurred a cost of approximately $1.4 million
to integrate various systems with those of Boston Gas. Boston Gas' Year
2000 plan is as follows:
STATE OF READINESS
Boston Gas has assessed the impact of the Year 2000 with respect to its
Information Technology (IT) systems and embedded chip technology systems as
well as its potential exposure to significant third party risks.
Accordingly, Boston Gas has substantially completed the replacement or
modification of existing systems and technology as required and assured
itself that major customers and critical vendors are also addressing these
issues. In addition, Boston Gas is finalizing and testing its contingency
plans to address major external and internal risk that could potentially
impact business operations.
With respect to internal information systems, Boston Gas has tested and
certified as Year 2000 ready, all eleven "mission critical" business
systems. Installation of an upgrade and replacement to two of these mission
critical systems scheduled for the third quarter of 1999 will include Year
2000 re-certification testing. The Company has completed certification
testing of fifty percent of less than critical business systems, and the
remaining are scheduled for testing during the third quarter of 1999. An
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FORM 10-Q
Page 8
integration test plan designed to re-certify interfaces between mission
critical systems has been developed and will be executed during the third
quarter of 1999. 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
with the exception of an upgrade to the call management server that is
scheduled for the third quarter. Eighty percent of Boston Gas' 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, Boston Gas will impose a freeze on changes to
information systems and technology components, effective October 1, 1999.
With respect to embedded chip systems, Boston Gas has completed its
inventory, assessment, remediation and certification testing of all date
sensitive components containing embedded chips.
Boston Gas has identified material third party relationships and has
completed a detailed survey of third party readiness. A readiness
assessment has been completed of all mission critical suppliers and risk
mitigation plans have been developed. Boston Gas 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 Boston Gas relies, will be timely
converted or that any such failure to convert by a third party would not
have an adverse effect on Boston Gas' operations.
COST OF YEAR 2000 REMEDIATION
Boston Gas expects the cost of Year 2000 compliance will approximate $13.9
million. Approximately 65% of these costs will be incurred under capital
projects that have resulted in added functionality while also addressing
Year 2000 issues. As of June 30, 1999 approximately $12.4 million has been
incurred.
RISKS OF YEAR 2000 ISSUES
Boston Gas has assessed the most reasonably likely worst case Year 2000
scenario. Given Boston Gas' efforts to minimize the risk of Year 2000
failure by its internal systems, Boston Gas believes the worst case
scenario would involve failures that impact data and voice communication
providers, its electricity provider or a pipeline supplier. Detailed plans
to accommodate any one or a combination of these worse case scenarios are
addressed as part of Boston Gas' business contingency planning process.
CONTINGENCY PLANS
Boston Gas has initiated the development of a business contingency plan in
the event that one or more of its internal systems, its embedded chip
systems, or its mission critical suppliers' systems experience a Year 2000
failure. An impact analysis has been completed which identified voice/data
communications, electricity and gas supply as the three major sources of
external risk and their impact on mission critical processes. Draft plans
have been developed and desk tested for each of these risk areas. During
the third quarter of 1999, all plans will be finalized and tested via live
drills.
<PAGE>
FORM 10-Q
Page 9
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, expected plans or future
operations. The Company cautions that actual results and developments may
differ materially from such projections or expectations.
Investors should be aware of important factors that could cause actual
results to differ materially from the forward-looking projections or
expectations. These factors include, but are not limited to: the effect of
the Acquisition by Eastern and other strategic initiatives on earnings and
cash flow, temperatures above or below normal in the Company's service
area, changes in economic conditions, including interest rates, the
timetable and cost for completing Year 2000 plans, the impact of third
party Year 2000 issues, regulatory and court decisions and developments
with respect to previously disclosed environmental liabilities. Most of
these factors are difficult to predict accurately and are generally beyond
the control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient to
meet 1999 capital expenditures and working capital requirements, dividend
payments and normal debt repayments.
Capital expenditures for the year are projected to be in line with the
original estimate of $6.8 million.
<PAGE>
FORM 10-Q
Page 10
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) List of Exhibits
None.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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FORM 10-Q
Page 11
SIGNATURES
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It is the Company's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to present
a fair statement of results for the period reported, but such results are
not necessarily indicative of results to be expected for the year due to
the seasonal nature of the business of the Company. Except as otherwise
herein indicated, all accounting policies have been applied in a manner
consistent with prior periods. Such financial information is subject to
year-end adjustments and an annual audit by independent public accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Essex Gas Company
---------------------------------------------
(Registrant)
/s/ Joseph F. Bodanza
---------------------------------------------
J.F. Bodanza, Sr Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: July 30, 1999
------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 80,435
<OTHER-PROPERTY-AND-INVEST> 1,343
<TOTAL-CURRENT-ASSETS> 10,760
<TOTAL-DEFERRED-CHARGES> 1,366
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 93,904
<COMMON> 27,805
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 9,999
<TOTAL-COMMON-STOCKHOLDERS-EQ> 37,804
0
0
<LONG-TERM-DEBT-NET> 27,599
<SHORT-TERM-NOTES> 4,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 600
0
<CAPITAL-LEASE-OBLIGATIONS> 439
<LEASES-CURRENT> 63
<OTHER-ITEMS-CAPITAL-AND-LIAB> 23,399
<TOT-CAPITALIZATION-AND-LIAB> 93,904
<GROSS-OPERATING-REVENUE> 26,460
<INCOME-TAX-EXPENSE> 1,611
<OTHER-OPERATING-EXPENSES> 9,442
<TOTAL-OPERATING-EXPENSES> 11,053
<OPERATING-INCOME-LOSS> 3,702
<OTHER-INCOME-NET> 364
<INCOME-BEFORE-INTEREST-EXPEN> 4,066
<TOTAL-INTEREST-EXPENSE> 1,444
<NET-INCOME> 2,622
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,622
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 1,232
<CASH-FLOW-OPERATIONS> 9,548
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
