<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10K
(Mark One)
[_]Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
[X]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from August 31, 1998 to December 31, 1998.
Commission File Number 18154
----------------
ESSEX GAS COMPANY
(Exact name of Registrant as specified in its charter)
(Formerly Essex County Gas Company)
Massachusetts 041427020
(State of organization) (IRS Employer Identification No.)
One Beacon Street
Boston, Massachusetts 02108
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (617) 7428400
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Class Exchange
-------------- --------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation SK is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10K. [_]
Indicate number of shares outstanding of Registrant's Common Stock, no par
value, as of March 22, 1999.
All common stock, 100 shares, are held by Eastern Enterprises
The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing this form with reduced
disclosure format.
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ESSEX GAS COMPANY
----------------
FORM 10-K
Transition Report
Period Ended December 31, 1998
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Topic Page
-------- ----- ----
<C> <S> <C>
PART I
1. Business...................................................... 1
General....................................................... 1
Competition................................................... 1
Gas Throughput................................................ 1
Gas Supply.................................................... 2
Regulation.................................................... 3
Environmental Matters......................................... 4
Employees..................................................... 4
2. Properties.................................................... 4
3. Legal Proceedings............................................. 5
4. Submission of Matters to a Vote of Security Holders........... 5
Glossary...................................................... 6
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 7
6. Selected Financial Data....................................... 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7
8. Financial Statements and Supplementary Data................... 11
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 29
PART III
10. Directors and Executive Officers of the Registrant............ 29
11. Executive Compensation........................................ 29
12. Security Ownership of Certain Beneficial Owners and
Management................................................... 29
13. Certain Relationships and Related Transactions................ 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-
K............................................................ 30
Signatures.................................................... 32
</TABLE>
<PAGE>
PART I
Item 1: Business
General
Essex Gas Company ("The Company" or "Essex Gas") is a regulated public
utility organized under the laws of the Commonwealth of Massachusetts in 1853
that purchases, distributes and sells natural gas to residential, commercial
and industrial customers in northeastern Massachusetts. The Company operates
in the cities of Haverhill, Newburyport, and Amesbury and fourteen smaller
municipalities covering an area of approximately 280 square miles. The
Company's service area is primarily comprised of residential communities with
a number of small commercial and diversified industrial businesses.
As discussed in Note A of the Notes to Consolidated Financial Statements,
pursuant to an Agreement and Plan of Merger dated as of December 19, 1997 by
and between Essex County Gas Company and Eastern Enterprises ("Eastern"), ECGC
Acquisition Gas Company, a wholly-owned subsidiary of Eastern, merged with and
into the Company on September 30, 1998, by an exchange of all of the Company's
stock for approximately 2,047,000 shares of Eastern common stock, with the
Company surviving the merger as a wholly-owned subsidiary of Eastern (the
"Acquisition"). On November 6, 1998, the Company changed its name from Essex
County Gas Company to Essex Gas Company. On December 7, 1998, the Company
changed its fiscal year end from August 31 to December 31, and accordingly has
prepared Consolidated Financial Statements for the period beginning September
1, 1998 and ending December 31, 1998 ("Transition Period").
For definitions of certain industry specific terms, see the Glossary at the
end of Part I and appearing on page 6.
The Company provides both local transportation services and gas supply for
all customer classes. All residential customers currently purchase combined or
bundled supply and transportation services from the Company. Residential users
of natural gas generally experience their highest level of consumption for
heating purposes during the winter months. Accordingly, the Company's sales
and operating revenues are sensitive to the weather. The Company also offers
unbundled local transportation service to its commercial and industrial
customers, thereby allowing them to purchase supply from third party
marketers. The Company expects residential unbundling to commence in 1999.
Although migration from firm sales to firm transportation service causes gross
revenues to decline, it has no impact on the Company's operating earnings. The
Company earns all of its margin on the local distribution of gas and none on
the resale of the commodity.
The Company offers both firm and non-firm services. Firm local
transportation services and sales are provided under rate tariffs or contracts
filed with the Massachusetts Department of Telecommunications and Energy (the
"Department") that typically obligate the Company to provide service without
interruption. Non-firm transportation services and sales are generally
provided to commercial and industrial customers who can use gas and oil
interchangeably. Non-firm services, including sales to other gas companies for
resale, are provided through individually negotiated contracts and, in most
cases, the price charged takes into account the price of the customer's
alternative fuel.
Competition
The Company has no direct competition with respect to the retail
distribution of natural gas in its service territory. However, the Company
faces competition from alternative fuels in most applications.
The Company's gas business competes principally with oil for industrial
boiler uses and oil and electricity for residential and commercial space
heating. Competition is primarily based on price.
Gas Throughput
The following table per dekatherm ("Dth") provides information with respect
to the volumes of gas delivered by the Company during the Transition Period
and the three fiscal years ended August.
<PAGE>
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -----------------------------
1998 1998 1997 1996
------------ --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Residential..................... 1,271 3,585 3,680 3,698
Commercial and Industrial ...... 686 1,983 2,062 2,068
Interruptible................... 184 55 758 893
----- --------- --------- ---------
Total Sales................... 2,141 5,623 6,500 6,659
Transportation of Customer-Owned
Gas............................ 13 30 -- --
----- --------- --------- ---------
Total Throughput.............. 2,154 5,653 6,500 6,659
===== ========= ========= =========
Total Firm Throughput......... 1,970 5,568 5,742 5,766
===== ========= ========= =========
</TABLE>
The Transition Period presented above includes the impact of adopting the
accrual method of revenue recognition as discussed in Note A of the Notes to
Consolidated Financial Statements. The effect of this change increased total
firm throughput in the Transition Period by 565 Dth.
As of December 31, 1998, residential customers comprise 90% of the customer
base, while commercial and industrial establishments account for the remaining
10%. Volumetrically, residential customers account for 59% of total throughput
and 65% of total firm throughput, while commercial and industrial customers
account for 41% of total throughput and 35% of total firm throughput.
No customer, or group of customers under common control, accounted for 2% or
more of total firm revenues during the Transition Period.
The Company's largest customer purchases gas on an interruptible basis and
accounted for approximately 1.8% of operating revenues during the Transition
Period and 2.7% of annual operating revenues on average over the past three
fiscal years ended August 31, 1998. Sales to that customer during the
Transition Period were $294,000.
Gas Supply
The following table per Dth shows the sources of the Company's gas supply
requirements for the Transition Period and three fiscal years ended August.
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -------------------------------
1998 1998 1997 1996
------------ --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Gas Supply (Dth):
Natural gas pipeline
purchased................. 2,023 4,952 5,376 5,307
Underground storage
withdrawn................. 120 646 1,007 1,062
Liquefied natural gas
purchased................. 64 183 253 477
----- --------- --------- ---------
Subtotal................. 2,207 5,781 6,636 6,846
Company use, unbilled and
other....................... (66) (158) (136) (187)
----- --------- --------- ---------
Total sales................ 2,141 5,623 6,500 6,659
===== ========= ========= =========
</TABLE>
The Company's supply requirements are purchased directly from domestic and
Canadian producers and marketers pursuant to contracts that have been approved
by the Department or by the Federal Energy Regulatory Commission ("FERC").
2
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Pipeline supplies are transported on interstate pipeline systems to the
Company's service territory pursuant to long-term contracts. FERC-approved
tariffs provide for fixed demand charges for the firm capacity rights under
these contracts. The interstate pipeline companies that provide firm
transportation service to the Company's service territory, the peak daily and
annual capacity and the contract expiration dates are as follows:
<TABLE>
<CAPTION>
Capacity in Dth
----------------
Pipeline Daily Annual Expiration Dates
-------- ------ --------- ----------------
<S> <C> <C> <C>
Tennessee Gas Pipeline Company.......... 24,969 9,113,685 11/1/2000
Tennessee Gas Pipeline Company.......... 1,621 591,665 1/14/2003
Tennessee Gas Pipeline Company..........
Iroquois Gas Transmission Company..... 2,000 730,000 11/30/2011
</TABLE>
The Company also has two contracts with pipeline companies for the storage
of natural gas in underground storage fields in New York and Pennsylvania.
These contracts provide storage capacity of about 1.2 million Dth and
approximately 13,700 Dth of peak day deliverability. Both contracts expire in
2000.
The Company has entered into an agreement with Distrigas of Massachusetts
Corporation which expires on October 31, 2006, that allows the Company to
purchase up to 4,000 Dth per day for 151 days of liquefied natural gas ("LNG")
in either liquid or vapor form. The Company, at its discretion, may increase
purchases under the contract by up to 2,000 Dth per day after appropriate
notice. The Company may also reduce quantities purchased if normal sales fall
below the normal 1994-95 heating season sendout.
Through a wholly-owned subsidiary, the Company owns a LNG storage facility
located in Haverhill, Massachusetts. The LNG storage facility has storage
capacity of 410,000 Dth and daily sendout capacity of 30,000 Dth. At the same
location, the Company owns and operates a propane plant that has storage
capacity of approximately 42,000 Dth with total daily sendout capacity of
3,500 Dth.
Based on current information concerning pipeline and supplemental gas
supplies, the Company believes that it has adequate resources to meet the
requirements of its firm customers.
Regulation
The Company's operations are subject to Massachusetts statutes applicable to
gas utilities. Rates, gas purchases, pipeline safety regulations, issuance of
securities, and affiliate transactions are regulated by the Department. Rates
for firm transportation and sales are subject to approval by, and are on file
with, the Department. In addition, the Company has a cost of gas adjustment
clause ("CGAC") that allows for the adjustment of billing rates for firm gas
sales to enable it to recover the actual cost of gas delivered to firm
customers, including the demand charges for capacity on the interstate
pipeline system. Similarly, through its local distribution adjustment clause
("LDAC"), the Company collects the actual costs of remediating former
manufactured gas plant sites from all firm customers, including those
purchasing gas supply from third parties.
As discussed in Note A of the Notes to Consolidated Financial Statements, on
September 30, 1998, there was an Acquisition of the Company by Eastern, the
Weston, Massachusetts based owner of Boston Gas Company ("Boston Gas"). Boston
Gas operates a local gas distribution system serving approximately 535,000
customers that is contiguous to the Company's system. On September 17, 1998,
the Department approved the Acquisition and a rate plan. Under the approved
rate plan, there is an immediate five percent price reduction for the
Company's customers and a ten year freeze of base rates. The freeze on base
rates is subject only to certain exogenous factors, such as changes in tax
laws, accounting changes, or regulatory, judicial, or legislative changes. Gas
supply savings are expected to result from the consolidation of the Essex Gas
resource portfolio with the Boston Gas portfolio. Many of the administrative,
operations and maintenance functions of the Company have been integrated with
those of Boston Gas.
In the Company's most recent rate case, the Department approved an
annualized base rate increase of approximately $2.1 million. This increase
went into effect December 1, 1996.
3
<PAGE>
All of the Company's 4,300 commercial and industrial customers are eligible
to purchase unbundled local transportation service from the Company and to
purchase their gas supply from third parties. As of December 31, 1998, the
Company had 79 firm transportation customers.
On July 18, 1997, the Department directed all ten investor-owned gas
distribution companies in Massachusetts to undertake a collaborative process
with other stakeholders to develop common principles under which comprehensive
gas service unbundling might proceed. A settlement on model terms and
conditions for unbundled transportation service jointly entered by the LDCs
and the marketer group was approved by the Department on November 30, 1998. On
February 1, 1999, the Department issued its order on how unbundling of natural
gas services will proceed. For a five year transition period, the Department
determined that LDC contractual commitments to upstream capacity will be
assigned on a mandatory, pro rata basis to marketers selling gas supply to the
LDC's customers. The approved mandatory assignment method eliminates the
possibility that the costs of upstream capacity purchased by the Company to
serve firm customers will be absorbed by the LDC or other customers through
the transition period. The Department also found that, through the transition
period, LDCs will retain primary responsibility for upstream capacity planning
and procurement to assure that adequate capacity is available at Massachusetts
city gates to support customer requirements and growth. In year three of the
five year transition period, the Department intends to evaluate the extent to
which the upstream capacity market for Massachusetts is workably competitive
based on a number of factors, and accelerate or decelerate the transition
period accordingly.
Environmental Matters
The Company may have or share responsibility under applicable environmental
law for the remediation of five former manufactured gas plant ("MGP") sites
and one non-MGP site, and may share responsibility with respect to two federal
superfund sites. Information with respect to these matters may be found at
Note J of Notes to Consolidated Financial Statements. Such information is
incorporated herein by reference.
Employees
As of December 31, 1998, the Company had approximately 82 employees, 80% of
whom are organized in a local union with which the Company has a collective
bargaining agreement that expires in 2002.
Item 2: Properties
The Company's property consists primarily of its distribution system and
related facilities. The Company also owns a propane plant with a storage
capacity of 500,000 gallons. In addition, the Company, through its wholly-
owned subsidiary, LNG Storage, Inc., owns a LNG storage facility with a
storage capacity of 410,000 Dth.
Substantially all of the properties owned by the Company, other than
expressly exempted property, are subject to a lien under the indenture
securing the Company's First Mortgage Bonds. The indenture calls for a trustee
or receiver to take possession of the property if there is a default under its
terms. The property exempted from the lien includes cash, receivables,
supplemental fuel inventories, materials and supplies, rental appliances,
office furniture and equipment, and the LNG storage facility.
The Company leases a 30,000 square foot building which expires in October,
2005.
On December 31, 1998, the Company's distribution system included
approximately 770 miles of gas mains, 37,350 services as well as meters and
measuring and regulator station equipment, and rental equipment on customers'
premises.
The Company's gas mains and services are usually located on public ways or
private property not owned by it. In general, the Company's occupation of such
property is pursuant to easements, licenses, permits or grants of location.
Except as stated above, the principal items of property of the Company are
owned in fee.
4
<PAGE>
During the Transition Period, the Company's capital expenditures were $1.5
million. Capital expenditures were principally made for improvements to the
distribution system and for system expansion to meet customer demand. The
Company plans to spend approximately $6.8 million for similar purposes in
1999.
Item 3: Legal Proceedings
Other than certain routine claims incidental to its business, there are no
material pending legal proceedings involving the Company.
Item 4: Submission of Matters to a Vote of Security Holders
None.
5
<PAGE>
Glossary
Bundled Service--Two or more services tied together as a single product.
Services include gas sales at the city gate, interstate transportation, local
transportation, balancing daily swings in customer loads, storage, and peak-
shaving services.
Capacity--The capability of pipelines and supplemental facilities to deliver
and/or store gas.
City Gate--Physical interconnection between an interstate pipeline and the
local distribution company.
Dekatherm--1,000 cubic feet of natural gas at 1,000 BTU per cubic foot.
Firm Service--Sales and/or transportation service provided without
interruption throughout the year. Uninterrupted seasonal services are also
available for less than 365 days. Firm services are provided under either
filed rate tariffs or through individually negotiated contracts.
Gas Marketer (Broker)--A non-regulated buyer and seller of gas.
Interstate Transportation--Transportation of gas by an interstate pipeline
to the city gate.
Local Distribution Company (LDC)--A utility that owns and operates a gas
distribution system for the delivery of gas supplies from the city gate to
end-user facilities.
Local Transportation Service--Transportation of gas by the LDC from the city
gate to end-user facilities.
Non-Firm Service--Sales and transportation service offered at a lower level
of reliability and cost. Under this service, the LDC can interrupt customers
on short notice, typically during the winter season. Non-firm services are
provided through individually negotiated contracts and, in most cases, the
price charged takes into account the price of the customer's energy
alternative.
Throughput--Gas volume delivered to customers through the LDC's gas
distribution system.
Unbundled Service--Service that is offered and priced separately, such as
separating the cost of gas commodity delivered to the LDC's city gate from the
cost of transporting the gas from the city gate to the end user. Unbundled
services can also include daily or monthly balancing, back-up or stand-by
services and pooling. With unbundled services, customers have the opportunity
to select only the services they desire.
6
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock was traded on the NASDAQ/NMS through September
29, 1998 under the symbol "ECGC." On September 30, 1998, there was an
acquisition of Essex County Gas Company by Eastern, and Essex Gas Company
survives as a wholly-owned subsidiary of Eastern. The following table sets
forth, for the quarters indicated, the high and low market prices as reported
by NASDAQ/NMS, and the cash dividends per share declared in such quarters.
<TABLE>
<CAPTION>
Market Price Cash
------------- Dividends
High Low Per Share
------ ------ ---------
<S> <C> <C> <C>
Fiscal Year Ended August 31, 1997
First Quarter..................................... $27.00 $24.00 $0.40
Second Quarter.................................... 25.75 24.25 0.41
Third Quarter..................................... 26.00 24.25 0.41
Fourth Quarter.................................... 27.00 25.25 0.41
Fiscal Year Ended August 31, 1998
First Quarter..................................... $32.75 $26.00 0.41
Second Quarter.................................... 49.00 31.25 0.42
Third Quarter..................................... 47.00 44.00 0.42
Fourth Quarter.................................... 47.13 44.00 0.42
September 1 (through September 29, 1998)............ $49.25 $43.875 $0.42
</TABLE>
Item 6: Selected Financial Data
Not required.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The four months ended December 31, 1998 compared to the four months ended
December 31, 1997:
Results for the four month period ended December 31, 1998 and 1997 are not
comparable due to the effect of merger related expenses, the impact of
discontinuing the application of Statement of Financial Accounting Standards
No. 71 "Accounting for the Effects of Certain Types of Regulation" ("SFAS No.
71") and the impact of 23% warmer weather than the prior year. Merger related
expenses for professional fees, termination benefits, and other related costs
were $7.9 million on a pre-tax basis. As a result of the plan and extended
base rate freeze, the Company was required to discontinue the application of
SFAS No. 71 and adopt the accrual method of accounting for revenues. These
changes resulted in an extraordinary charge of approximately $2.9 million,
net, principally due to the write off of regulatory assets associated with
postretirement benefits. The impact of significantly warmer weather was offset
by the change to the accrual method of accounting for revenue in the current
year.
August 31, 1998 Compared to August 31, 1997:
Net earnings applicable to common stock for 1998 were $4.3 million, an
increase of $.3 million or 8% as compared to 1997. The increase primarily
reflects customer growth, the annualized effect of a base rate increase
granted by the Department effective December 1, 1996 and lower operations and
maintenance expense. The improvement in earnings was partially offset by
warmer weather and a higher charge for depreciation reflecting continued
investment in system replacement and expansion. Weather for 1998 was 11%
warmer than normal and 9% warmer than 1997.
August 31, 1997 Compared to August 31, 1996:
Net earnings applicable to common stock for 1997 were $4.0 million, an
increase of $.1 million or 3% as compared to 1996. This increase primarily
reflects customer growth and the effect of a $2.1 million annualized
7
<PAGE>
rate increase granted by the Department effective December 1, 1996, partially
offset by higher operating and maintenance expense and increased depreciation
expense. The latter reflects continued investment in system replacement and
expansion as well as a higher depreciation rate granted in the Company's rate
decision. Weather for 1997 was 2% warmer than normal and 4% warmer than 1996.
Liquidity and Capital Resources
To meet cash requirements, the Company has available lines of credit
totaling $13.0 million. The Company has a $10.0 million line of credit for the
exclusive purpose of funding its fuel inventory.
The Company believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient to
meet 1999 capital expenditures, working capital requirements, dividend
payments and normal debt repayments.
The Company expects capital expenditures for 1999 to be $6.8 million.
Capital expenditures will be primarily for improvements to the distribution
system, for system expansion to meet customer demand and for productivity
improvements.
Regulatory and Accounting Issues
On September 30, 1998, there was an Acquisition of the Company by Eastern,
the Weston, Massachusetts based parent company of Boston Gas. Boston Gas
operates a local gas distribution system serving approximately 535,000
customers that is contiguous to the Essex Gas system. On September 17, 1998,
the Department approved the Acquisition and a rate plan. Under the approved
rate plan, there is an immediate five percent price reduction and a ten year
freeze of base rates. The freeze on base rates is subject only to certain
exogenous factors, such as changes in tax laws, accounting changes, or
regulatory, judicial, or legislative changes. Gas supply savings are expected
to result from the consolidation of the Essex Gas resource portfolio with the
Boston Gas portfolio. Many of the administrative, operations and maintenance
functions of Essex Gas have been integrated with those of Boston Gas. (See
Note A of the Notes to Consolidated Financial Statements for a description of
the merger transaction and related costs.)
On July 18, 1997, the Department directed all ten investor-owned gas
distribution companies in Massachusetts to undertake a collaborative process
with other stakeholders to develop common principles under which comprehensive
gas service unbundling might proceed. A settlement on model terms and
conditions for unbundled transportation service jointly entered by the LDCs
and the marketer group was approved by the Department on November 30, 1998. On
February 1, 1999, the Department issued its order on how unbundling of natural
gas services will proceed. For a five year transition period, the Department
determined that LDC contractual commitments to upstream capacity will be
assigned on a mandatory, pro rata basis to marketers selling gas supply to the
LDC's customers. The approved mandatory assignment method eliminates the
possibility that the costs of upstream capacity purchased by the Company to
serve firm customers will be absorbed by the LDC or other customers through
the transition period. The Department also found that, through the transition
period, LDCs will retain primary responsibility for upstream capacity planning
and procurement to assure that adequate capacity is available at Massachusetts
city gates to support customer requirements and growth. In year three of the
five year transition period, the Department intends to evaluate the extent to
which the upstream capacity market for Massachusetts is workably competitive
based on a number of factors, and accelerate or decelerate the transition
period accordingly.
Environmental Matters
The Company may have or share responsibility under applicable environmental
law for the remediation of five former manufactured gas plant ("MGP") sites,
as described in Note J of the Notes to Consolidated Financial Statements. The
Company may also have or share responsibility for the remediation of one non-
MGP site and two federal superfund sites. The Company has recorded a liability
of approximately $400,000, which represents
8
<PAGE>
its best estimate at this time of remediation costs. However, there can be no
assurance that such costs will not vary considerably from this estimate.
Year 2000 Issue
On September 30, 1998, there was an Acquisition of the Company by Eastern,
the parent company of Boston Gas (See Note A 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 $1.2 million, included
in Operating Expenses in the accompanying Consolidated Statements of Income
for the Transition Period, 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 initiated and completed substantial portions of a plan to
replace or modify existing systems and technology as required and to assure
itself that major customers and critical vendors are also addressing these
issues.
With respect to IT systems, the Boston Gas has tested and certified as Year
2000 ready, five of its eleven "mission critical" business systems. Of the
remaining, two systems were installed in the fourth quarter of 1998 and are
scheduled for certification testing in the first quarter of 1999; one system
is scheduled for installation and testing in the first quarter of 1999; and
the remaining three are scheduled for replacement in the second quarter of
1999. All "less than critical" application systems will be tested and/or
upgraded by the second quarter of 1999. Conversion and testing of all
mainframe hardware and systems software have been completed and the remaining
non-compliant components of client-server and data/voice communications
infrastructure are scheduled for completion by the first quarter of 1999.
Replacements or remediation of non-compliant E-mail and desktop hardware and
software systems are scheduled for completion by the second quarter of 1999.
With respect to embedded chip systems, Boston Gas has completed an
inventory, assessment and remediation plan. All remediation, conversion and
testing are scheduled to be completed between the first and third quarters of
1999.
Boston Gas has identified material third party relationships and has
completed a detailed survey of third party readiness. Final data collection
and readiness assessment will be completed by the first quarter of 1999, with
selected testing and implementation of risk mitigation strategies for
significant vendors scheduled for completion by the second quarter of 1999.
However, there can be no assurance that third party systems, on which Boston
Gas' systems rely, 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 $13.5
million. Approximately 65% of these costs will be incurred under capital
projects that have or will result in added functionality while also addressing
Year 2000 issues. As of December 31, 1998 approximately $10.2 million of year
2000 compliance costs have been incurred.
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.
Business processes are expected to be prioritized and the impact of Year 2000
failure assessed by the end of the first quarter of 1999. Contingency plans
for critical business processes will be developed and tested by the end of the
third quarter of 1999.
9
<PAGE>
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 by a pipeline supplier or by suppliers of telecommunications,
electricity or banking services. A short-term interruption in pipeline
supplies would require the utilization of locally-stored liquefied natural gas
supplies. A telecommunication or electric outage would require Boston Gas to
implement business contingency and disaster recovery measures to enable the
continuation of service to its customers. Detailed plans to accommodate this
worst case scenario will be developed and tested as part of Boston Gas'
business contingency planning process.
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.
10
<PAGE>
Item 8: Financial Statements and Supplementary Data
(a) Financial Statements Required by Regulation S-X
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -------------------------------------
1998 1998 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES....... $16,637,325 $50,820,950 $53,534,734 $49,929,389
Less: Cost of gas...... 7,554,401 24,154,488 27,272,268 24,976,802
----------- ----------- ----------- -----------
Operating margin..... 9,082,924 26,666,462 26,262,466 24,952,587
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Operations and
maintenance expenses.. 4,554,828 11,772,403 12,291,661 11,976,067
Depreciation........... 1,234,911 3,752,714 3,372,714 2,697,241
Taxes, other than
income................ 537,516 1,623,010 1,596,284 1,437,286
Income taxes........... (594,906) 2,399,366 2,280,244 2,173,003
Merger related
expenses.............. 7,903,952 -- -- --
----------- ----------- ----------- -----------
TOTAL OPERATING
EXPENSES............ 13,636,301 19,547,493 19,540,903 18,283,597
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS).. (4,553,377) 7,118,969 6,721,563 6,668,990
OTHER INCOME, NET........ 60,950 228,002 337,707 1,997
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INTEREST CHARGES........ (4,492,427) 7,346,971 7,059,270 6,670,987
----------- ----------- ----------- -----------
INTEREST CHARGES:
Interest on long-term
debt.................. 818,753 2,515,169 2,338,112 1,967,073
Amortization of
deferred debt
expense............... 11,044 32,620 30,578 27,499
Other interest
expense............... 239,771 554,406 750,895 873,198
Allowance for funds
used during
construction.......... (2,926) (27,432) (26,834) (46,143)
----------- ----------- ----------- -----------
TOTAL INTEREST
CHARGES............. 1,066,642 3,074,763 3,092,751 2,821,627
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM...... (5,559,069) 4,272,208 3,966,519 3,849,360
EXTRAORDINARY ITEM, NET
OF TAX.................. (2,873,729) -- -- --
----------- ----------- ----------- -----------
NET INCOME (LOSS)........ (8,432,798) 4,272,208 3,966,519 3,849,360
PREFERRED DIVIDEND....... -- -- -- (13,860)
----------- ----------- ----------- -----------
NET INCOME (LOSS)
AVAILABLE FOR COMMON
STOCK................... $(8,432,798) $ 4,272,208 $ 3,966,519 $ 3,835,500
=========== =========== =========== ===========
SHARES OF COMMON STOCK
OUTSTANDING (WEIGHTED
AVERAGE):
Basic.................. N/A 1,711,379 1,664,677 1,626,315
Diluted................ N/A 1,766,608 1,714,596 1,682,841
EARNINGS PER COMMON
SHARE:
Basic.................. N/A $ 2.50 $ 2.38 $ 2.36
Diluted................ N/A $ 2.45 $ 2.34 $ 2.32
CASH DIVIDENDS DECLARED
PER COMMON SHARE........ $ 0.42 $ 1.67 $ 1.63 $ 1.59
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
11
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August 31, August 31,
1998 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
ASSETS
GAS PLANT, AT COST...................... $111,416,149 $110,168,004 $104,540,111
Less: Accumulated depreciation........ 29,228,740 28,151,230 25,021,795
------------ ------------ ------------
NET PLANT............................... 82,187,409 82,016,774 79,518,316
------------ ------------ ------------
Other property and investments.......... 739,686 739,686 718,838
------------ ------------ ------------
Capitalized Lease (net of accumulated
amortization of $591,841 at December
31, 1998, $539,823 at August 31, 1998
and $518,975 at August 31, 1997)....... 531,955 550,939 604,822
------------ ------------ ------------
CURRENT ASSETS:
Cash and cash equivalents............. 65,618 254,493 434,930
Accounts receivable (net of allowance
for uncollectible accounts of
$745,004 at December 31, 1998,
$558,757 at August 31, 1998, and
$772,233 at
August 31, 1997)..................... 6,190,764 1,790,833 2,664,531
Supplemental fuel inventory........... 3,890,876 4,178,459 4,131,520
Materials and supplies (at average
cost)................................ 396,007 511,231 560,493
Current income taxes.................. 2,504,447 1,364,648 143,647
Prepayments and other................. 265,721 355,365 478,377
Recoverable gas costs................. -- -- 320,909
------------ ------------ ------------
TOTAL CURRENT ASSETS................ 13,313,433 8,455,029 8,734,407
------------ ------------ ------------
DEFERRED CHARGES:
Regulatory assets..................... -- 4,838,657 5,137,767
Unamortized debt expense and other.... 1,168,721 2,459,959 1,193,446
------------ ------------ ------------
TOTAL DEFERRED CHARGES.............. 1,168,721 7,298,616 6,331,213
------------ ------------ ------------
TOTAL ASSETS........................ $ 97,941,204 $ 99,061,044 $ 95,907,596
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
12
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August 31, August 31,
1998 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
COMMON STOCK EQUITY....................... $35,136,604 $38,295,586 $35,408,645
LONG-TERM DEBT, LESS CURRENT PORTION...... 27,599,000 28,199,000 28,799,000
----------- ----------- -----------
TOTAL CAPITALIZATION.................... 62,735,604 66,494,586 64,207,645
----------- ----------- -----------
NONCURRENT OBLIGATIONS UNDER CAPITAL
LEASE.................................... 471,730 492,366 550,939
----------- ----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt....... 600,000 675,361 960,535
Current obligation under capital lease.. 60,225 58,573 53,883
Obligations under supplemental fuel
inventory.............................. 4,344,561 4,056,828 3,807,788
Notes payable, banks.................... 8,935,000 6,825,000 3,313,000
Accounts payable........................ 2,575,948 2,024,036 3,092,859
Accrued interest........................ 445,348 820,116 803,237
Taxes payable........................... 20,710 7,861 157,098
Refundable gas costs due customers...... 198,602 721,388 --
Accrued transition costs................ -- -- 401,465
Supplier refund due customers........... 34,186 159,243 1,567,364
Other................................... 552,965 118,179 320,308
----------- ----------- -----------
TOTAL CURRENT LIABILITIES............. 17,767,545 15,466,585 14,477,537
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
DEFERRED CREDITS:
Accumulated deferred income taxes....... 7,358,901 9,037,536 8,840,974
Unamortized investment tax credit....... 1,048,112 1,071,368 1,141,132
Deferred directors' fees................ 977,404 951,219 1,106,358
Regulatory liabilities.................. -- 664,765 708,053
Retirement benefit liability............ 5,500,008 3,868,913 3,942,364
Other reserves.......................... 2,081,900 1,013,706 932,594
----------- ----------- -----------
TOTAL DEFERRED CREDITS................ 16,966,325 16,607,507 16,671,475
----------- ----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES.. $97,941,204 $99,061,044 $95,907,596
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -----------------------------------
1998 1998 1997 1996
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF
PERIOD..................... $16,514,556 $15,094,008 $13,833,767 $12,576,695
Net income (loss)......... (8,432,798) 4,272,208 3,966,519 3,849,360
----------- ----------- ----------- -----------
TOTAL................... 8,081,758 19,366,216 17,800,286 16,426,055
----------- ----------- ----------- -----------
Cash dividends declared:
Redeemable preferred
stock.................... -- -- -- 13,860
Common stock.............. 726,184 2,851,660 2,706,278 2,578,428
----------- ----------- ----------- -----------
TOTAL................... 726,184 2,851,660 2,706,278 2,592,288
----------- ----------- ----------- -----------
BALANCE AT END OF PERIOD.... $ 7,355,574 $16,514,556 $15,094,008 $13,833,767
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, ----------------------------------
1998 1998 1997 1996
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
NET INCOME (LOSS)............ $(8,432,798) $4,272,208 $3,966,519 $3,849,360
----------- ---------- ---------- ----------
Adjustments to reconcile net
income to net cash:
Extraordinary charge related
to discontinuance of SFAS
No. 71...................... 2,873,729 -- -- --
Depreciation and
amortization, including
amounts related to non-
utility operations.......... 1,462,530 4,167,438 3,787,613 3,138,655
Provisions for uncollectible
accounts.................... 186,248 (213,476) 119,441 57,792
Deferred income taxes........ 1,768,624 382,751 (812,633) 1,950,962
Noncash compensation
associated with ESOP........ -- -- 75,000 150,000
Other changes in assets and
liabilities:
Accounts receivable......... (4,251,168) 1,087,174 (899,975) (242,390)
Inventories including
fuel....................... 402,807 2,323 (132,262) 2,512,221
Accounts payable............ 770,130 (1,068,823) (970,970) 1,077,522
Supplier refund
obligations................ (125,057) (1,408,121) 1,291,720 (2,179,095)
Taxes payable/receivable.... (1,126,950) (1,370,238) 1,019,266 (802,472)
Recoverable (refundable)
gas costs.................. (522,786) 1,042,297 149,857 (2,960,944)
Deferred merger costs....... 1,666,378 (1,666,378) -- --
Other, net.................. (211,373) (213,093) 469,501 (324,853)
----------- ---------- ---------- ----------
Total adjustments........... 2,893,112 741,854 4,096,558 2,377,398
----------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES.. (5,539,686) 5,014,062 8,063,077 6,226,758
----------- ---------- ---------- ----------
INVESTING ACTIVITIES:
Utility capital
expenditures................ (1,475,657) (6,591,302) (6,894,633) (8,027,623)
Payments for retirements of
property, plant and
equipment, net.............. (169,720) (74,466) (99,602) (258,352)
Purchase of investment....... -- -- (570,113) --
Sale of investment........... -- -- 570,113 --
----------- ---------- ---------- ----------
NET CASH (USED IN)
INVESTING ACTIVITIES...... (1,645,377) (6,665,768) (6,994,235) (8,285,975)
----------- ---------- ---------- ----------
FINANCING ACTIVITIES:
Dividends paid............... (726,184) (2,851,660) (2,706,278) (2,592,288)
Issuance of common stock..... -- 1,447,063 1,048,703 856,007
Issuance of long-term debt... -- -- 9,827,190 --
Retirements of preferred
stock....................... -- -- -- (336,000)
Principal retired on long-
term debt................... (675,361) (885,l74) (854,831) (828,758)
Changes in supplemental fuel
inventory................... 287,733 249,040 449,778 (1,773,143)
Changes in notes payable,
banks....................... 2,110,000 3,512,000 (8,627,000) 7,050,000
Capital contribution from
Eastern..................... 6,000,000 -- -- --
Payment of ESOP debt......... -- -- (75,000) (150,000)
----------- ---------- ---------- ----------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES.. 6,996,188 1,471,269 (937,438) 2,225,818
----------- ---------- ---------- ----------
Net increase (decrease) in
cash and cash equivalents.... (188,875) (180,437) 131,404 166,601
Cash and cash equivalents at
beginning of period.......... 254,493 434,930 303,526 136,925
----------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD................ $ 65,618 $ 254,493 $ 434,930 $ 303,526
=========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period
for:
Interest (net of amount
capitalized).............. $ 1,441,410 $3,057,884 $3,227,502 $2,708,961
=========== ========== ========== ==========
Income taxes............... $ 618,900 $3,518,822 $2,682,465 $1,407,476
=========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
15
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
December 31, August 31, August 31,
1998 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
COMMON STOCK EQUITY:
Common stock, no par value, 200,000
authorized shares. Issued and
outstanding 100 shares at December
31, 1998............................. $27,805,225 -- --
Common stock, no par value, 5,000,000
authorized shares. Issued and
outstanding 1,729,007 shares at
August 31, 1998, and 1,685,318 issued
and outstanding at at August 31,
1997................................. -- $21,805,225 $20,320,890
Unrealized loss on investments
available for sale, net.............. (24,195) (24,195) (6,253)
Retained earnings..................... 7,355,574 16,514,556 15,094,008
----------- ----------- -----------
35,136,604 38,295,586 35,408,645
----------- ----------- -----------
LONG-TERM DEBT:
FIRST MORTGAGE BONDS:
10.25%, due serially from 1994 to
2003................................. 3,000,000 3,600,000 4,200,000
10.10%, due serially from 2010 to
2020................................. 8,000,000 8,000,000 8,000,000
7.28%, due serially from 2008 to
2016................................. 10,000,000 10,000,000 10,000,000
----------- ----------- -----------
21,000,000 21,600,000 22,200,000
----------- ----------- -----------
MORTGAGE NOTE:
8.5%, due serially from 1976 to 1998.. -- 75,361 360,535
----------- ----------- -----------
DEBENTURES:
8.625%, due 2006...................... 2,245,000 2,245,000 2,245,000
8.15%, due 2017....................... 4,954,000 4,954,000 4,954,000
----------- ----------- -----------
7,199,000 7,199,000 7,199,000
----------- ----------- -----------
TOTAL DEBT............................ 28,199,000 28,874,361 29,759,535
Less: Current portion maturing and
payable.............................. 600,000 675,361 960,535
----------- ----------- -----------
TOTAL LONG-TERM DEBT................ 27,599,000 28,199,000 28,799,000
----------- ----------- -----------
TOTAL CAPITALIZATION................ $62,735,604 $66,494,586 $64,207,645
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
General
Essex Gas Company (the "Company" or "Essex Gas") is a public utility engaged
in the distribution and sale of natural gas for residential, commercial and
industrial uses. Its service area is northeastern Massachusetts.
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 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. The transition period
("Transition Period") ended December 31, 1998 reflects the results of
operations and cash flows for the four months then ended and precedes the
start of the new fiscal year. Unaudited financial results of operations for
the four months ended December 31, 1997 are reflected on a comparative basis
in Note L of the Notes to Consolidated Financial Statements.
The merger related transaction fees, termination benefits and related
expenses charged against pre-tax earnings during the Transition Period
totaled, $7,904,000, of which approximately $6,124,000 have been paid to date.
The remaining $1,780,000 are reflected in several liability accounts in the
accompanying Consolidated Balance Sheet at December 31, 1998.
In connection with the merger, the Massachusetts Department of
Telecommunications and Energy (the Department) approved a rate plan that
results in an immediate five percent price reduction through the cost of gas
adjustment clause mechanism (CGAC) and a ten year freeze of base rates at
current levels. Due primarily to the length of the base rate freeze, the
Company was required to discontinue its application of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" ("SFAS No. 71") during the Transition Period. Accordingly, the
Company wrote off its net regulatory assets of $4,835,000, consisting
principally of postretirement costs. In addition, the Company was required to
adopt certain accounting practices in order to comply with generally accepted
accounting principles for nonregulated entities and to maintain consistency
with its new parent. As such, the Company recorded a nonrecurring pre-tax gain
of $335,000 due to the adoption of a revenue method that reflects full accrual
accounting, as discussed below. Adjustments to reflect these new practices and
the discontinuance of SFAS No. 71 are included in the extraordinary item, net
of tax in the Consolidated Statements of Income.
Regulation
For the periods prior to the approval of the merger and rate plan, the
accounting policies conform to generally accepted accounting principles as
applied to regulated public utilities and reflect the effects of the
ratemaking process in accordance with SFAS No. 71. Under SFAS No. 71, the
Company was allowed to defer certain costs that otherwise would be expensed in
recognition of the ability to recover them in future rates.
The Company had established regulatory assets in cases where the Department
permitted or was expected to permit the recovery of specific costs over time.
As of August 31, 1998, regulatory assets included approximately $440,000 for
environmental costs, $260,000 related to a settlement payment for a
supplemental retirement plan, and $389,000 related to deferred income taxes.
Included in deferred credits is a regulatory liability of $665,000 related to
deferred income taxes. Assuming a cost-of-service based regulatory structure,
regulators may permit incurred costs, normally treated as expenses, to be
deferred and recovered through future rates. Through their actions, regulators
may also reduce or eliminate the value of an asset, or create a liability.
The Company's operations are subject to Massachusetts's statutes applicable
to gas utilities. Its revenues, earnings and cash flows are highly seasonal,
as most of its throughput is directly related to temperature conditions.
17
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of LNG Storage,
Inc., a wholly-owned subsidiary. All material intercompany balances and
transactions have been eliminated.
Cash Equivalents
Cash equivalents are defined as investments with an original maturity of
three months or less.
Gas Operating Revenues
As previously mentioned, effective with the merger and the ten year base
rate freeze, the Company is unable to continue the application of SFAS No. 71,
resulting also in a change in its method of accounting for revenues.
Previously, substantially all revenues were recorded when billed. The Company
deferred the cost of any firm gas that had been distributed, but was unbilled
at the end of a period, to a period in which the gas was billed to customers.
Under the new method, the unbilled revenue is recorded at the end of each
accounting period. The impact on the Transition Period earnings due to this
change is an increase in margin of $2,285,000.
Cost of Gas Adjustment Clause and Deferred Gas Costs
The CGAC requires the Company to adjust its rates semi-annually for firm gas
sales in order to track changes in the cost of gas distributed, with an annual
adjustment of subsequent rates for any collection over or under recovery of
actual costs incurred. The local distribution adjustment clause ("LDAC")
allows the Company to recover from all firm customers the amortization of all
environmental response costs associated with former manufactured gas plant
("MGP") sites and FERC Order 636 transition costs. These costs were previously
recovered through the CGAC.
Depreciation
Depreciation is provided at rates designed to amortize the cost of
depreciable property, plant and equipment over their estimated remaining
useful lives. The composite depreciation rate, expressed as a percentage of
the average depreciable property in service for the Transition Period, was
3.69%. For the fiscal years ended August 31, the composite rate was 3.70% in
1998, 3.53% in 1997 and 3.03% in 1996.
Accumulated depreciation is charged with the original cost and cost of
removal, less salvage value, of units retired. Expenditures for repairs,
upkeep of units of property and renewal of minor items of property replaced
independently of the unit of which they are a part are charged to maintenance
expense as incurred.
Estimates
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 and
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.
Earnings Per Share
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 established standards for computing and
presenting earnings per share and applies to entities with publicly held
common stock. This statement is effective for fiscal years ending after
December 15, 1997 and early adoption is not permitted. The statement requires
restatement of prior years' earnings per share. The Company adopted this
statement for its fiscal year ended August 31, 1998.
18
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings per share are not presented at December 31, 1998 because the
Company is now a wholly-owned subsidiary of Eastern.
Reclassifications
Certain prior year financial statement amounts have been reclassified for
consistent presentation with the current year.
B. Supplemental Fuel Inventory
The Company, with Department approval, finances its supplemental gas
inventory through a single purpose financing arrangement extending through
December 31, 2000. The credit agreement provides for a total commitment of up
to $10,000,000 and is secured by storage gas. All costs related to the
financing are recoverable from customers. The effective interest cost of the
financing was 5.8% for the Transition Period and for the fiscal years ended
August 31, 1998 and 1997, it was 6.20% and 6.10%, respectively.
C. Common Stock
Common stock activity for the previous three fiscal years and the Transition
Period are as follows:
<TABLE>
<CAPTION>
Additional
Number of Common Paidin
Shares Stock Capital
---------- ----------- -----------
<S> <C> <C> <C>
BALANCE, AUGUST 31, 1995.. 1,607,061 $ 4,017,653 $14,311,026
Dividend reinvestment
plan..................... 19,754 366,787 100,916
Amortization of capital
stock expense............ -- 50,229 --
Employee stock plans...... 11,319 226,881 52,370
Sale of common stock...... 4,356 97,283 11,770
Conversion to no par
value.................... -- 14,476,082 (14,476,082)
---------- ----------- -----------
BALANCE, AUGUST 31, 1996.. 1,642,490 19,234,915 --
Dividend reinvestment
plan..................... 19,733 475,380 --
Amortization of capital
stock expense............ -- 37,272 --
Employee stock plans...... 17,794 438,252 --
Sale of common stock...... 5,301 135,071 --
---------- ----------- -----------
BALANCE, AUGUST 31, 1997.. 1,685,318 20,320,890 --
Dividend reinvestment
plan..................... 12,652 476,579 --
Amortization of capital
stock expense............ -- 37,272 --
Employee stock plans...... 27,967 865,061 --
Sale of common stock...... 3,070 105,423 --
---------- ----------- -----------
BALANCE, AUGUST 31, 1998.. 1,729,007 21,805,225 --
Merger with Eastern:
Exchange of common
stock.................. (1,729,007) -- --
Issuance of common stock
to Eastern............. 100 -- --
Capital contribution from
Eastern.................. -- 6,000,000 --
---------- ----------- -----------
BALANCE, DECEMBER 31,
1998..................... 100 $27,805,225 $ --
========== =========== ===========
</TABLE>
19
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
D. Restriction on Retained Earnings
Under the terms of the indenture securing the First Mortgage Bonds,
substantially all of the Company's retained earnings in the amount of
$7,356,000 as of December 31, 1998 were restricted as to the payment of cash
dividends on common stock and the purchase, redemption or retirement of shares
of common stock.
E. Interim Financing and Long-term Debt
The Company periodically borrows from banks on an unsecured, short-term
basis. At December 31, 1998, the Company had $8,935,000 of outstanding notes
payable with a weighted average interest rate of 5.95% under available lines
of credit totaling $13,000,000. The annual commitment fees related to these
lines of credit are between 0 and 37.5 basis points on the total amount of the
line.
Substantially all plant assets are pledged as collateral under the terms of
the Indenture of First Mortgage Bonds. The 8.5% Mortgage Note represents an
obligation secured by the liquefied gas storage facility in Haverhill,
Massachusetts. In accordance with the terms of the Indenture of First Mortgage
Bonds, the Note Purchase Agreement of the sinking fund notes and the Mortgage
Note, the Company is required to make specified sinking fund payments and
other maturities of long-term debt of $600,000 annually for the years 1999
through 2002 and $25,799,000 thereafter.
F. Disclosure About Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair values
of financial statements:
Cash and Cash Equivalents
The carrying amounts approximate fair value.
Short-Term Debt
The carrying amounts of the Company's short term debt, including notes
payable and gas inventory financing, approximate their fair value.
Long-Term Debt
The fair value of long-term debt is estimated based on currently quoted
market prices.
The carrying amounts and estimated fair values of the Company's debt at
December 31, 1998, August 31, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998 August 31, 1998 August 31, 1997
----------------------- ----------------------- -----------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Short-term debt......... $13,279,561 $13,279,561 $10,881,828 $10,881,828 $ 7,120,788 $ 7,120,788
Long-term debt.......... $28,730,955 $33,995,955 $29,425,300 $38,998,862 $30,364,357 $36,767,678
</TABLE>
20
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
G. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, ----------------------------------
1998 1998 1997 1996
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
FEDERAL
Current..................... $ (562,493) $1,948,230 $2,258,000 $ 294,144
Deferred.................... (1,364,704) 104,257 (298,635) 1,569,000
Amortization of investment
tax credit................. (23,256) (69,764) (69,764) (69,784)
----------- ---------- ---------- ----------
Total Federal............. (1,950,453) 1,982,723 1,889,601 1,793,360
----------- ---------- ---------- ----------
STATE
Current..................... 76,103 395,957 454,643 58,643
Deferred.................... (346,734) 20,686 (64,000) 321,000
----------- ---------- ---------- ----------
Total State............... (270,631) 416,643 390,643 379,643
----------- ---------- ---------- ----------
Total Income Tax Provision
(Benefit)................ $(2,221,084) $2,399,366 $2,280,244 $2,173,003
=========== ========== ========== ==========
</TABLE>
For the Transition Period, approximately $1,626,000 of the income tax
benefit is netted against the extraordinary item in the Consolidated
Statements of Income.
A reconciliation of federal income taxes calculated at the statutory rate
with income tax provision (benefit) shown in the financial statements for the
Transition Period and the fiscal years ended August 31, 1998, 1997, and 1996
are as follows:
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, ----------------------------------
1998 1998 1997 1996
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Federal statutory rate........ 35.0% 34.0% 34.0% 34.0%
=========== ========== ========== ==========
Federal income tax provision
(benefit) at statutory rates
on net income before
extraordinary item........... $(2,153,891) $2,265,922 $2,117,753 $2,048,628
Increase (decrease) in taxes
resulting from:
Amortization of investment
tax credit................. (23,256) (69,764) (69,764) (69,784)
Non-deductible merger
expenses................... 1,396,135 -- -- --
Adjustment due to tax rate
change..................... 220,687 -- -- --
State taxes, net of federal
benefit.................... (94,280) 274,984 257,824 250,564
Other....................... 59,699 (71,776) (25,569) (56,405)
----------- ---------- ---------- ----------
Total Income Tax Provision
(Benefit) on net income
before extraordinary
item..................... $ (594,906) $2,399,366 $2,280,244 $2,173,003
=========== ========== ========== ==========
EFFECTIVE INCOME TAX RATE..... 9.7% 36.0% 36.6% 36.1%
=========== ========== ========== ==========
</TABLE>
The Company follows the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). SFAS No.
109 requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax basis of assets and liabilities using enacted tax rates in
effect
21
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
in the year in which the differences are expected to reverse. Significant
items making up deferred tax assets and liabilities at December 31, 1998 and
August 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
August 31,
December 31, -----------------------
1998 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Liabilities
Utility Plant-primarily depreciation.... $12,212,594 $11,698,486 $11,399,390
Regulatory Assets....................... -- 449,755 685,761
Other................................... 326,396 231,610 61,613
----------- ----------- -----------
TOTAL LIABILITIES..................... 12,538,990 12,379,851 12,146,764
----------- ----------- -----------
Assets
Investment tax credits.................. 621,477 664,765 708,053
Deferred directors fees................. 383,387 364,222 423,624
Unbilled revenue........................ -- 243,418 317,513
Reserve for uncollectible receivables... 292,228 213,948 295,688
Deferred gas costs...................... 77,902 276,219 --
Post-retirement benefits................ 2,401,529 451,284 363,565
Supplier refund......................... -- -- 600,144
Capitalized cost--inventory............. 950,950 928,282 443,739
Other................................... 452,616 200,177 153,464
----------- ----------- -----------
TOTAL ASSETS.......................... 5,180,089 3,342,315 3,305,790
----------- ----------- -----------
ACCUMULATED DEFFERRED INCOME TAXES, NET... $ 7,358,901 $ 9,037,536 $ 8,840,974
=========== =========== ===========
</TABLE>
H. Leases
The Company is obligated under various lease agreements for certain
facilities and equipment used in operations. Total expenditures under
operating leases were $51,000 for the Transition Period and $285,000,
$299,000, and $315,000 for the fiscal years 1998, 1997, and 1996 respectively.
The property classified as a capital lease as of December 31, 1998 and August
31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
August 31,
December 31, ---------------------
1998 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Buildings................................ $1,123,796 $1,123,796 $1,123,796
Less: Accumulated depreciation........... 591,841 572,857 518,974
---------- ---------- ----------
$ 531,955 $ 550,939 $ 604,822
========== ========== ==========
</TABLE>
Depreciation expense of $19,000, $54,000, $50,000, and $46,000 along with
interest of $15,000, $49,000, $53,000, and $57,000 related to the capital
lease, is included in other operating expenses for the Transition Period and
fiscal years ended August 31, 1998, 1997, and 1996 respectively.
22
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also has various operating lease agreements for equipment,
vehicles and office space. The remaining minimum annual rental commitment for
these and all other non-cancelable leases is as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999.................................................... $102,500 $ 95,286
2000.................................................... 102,500 56,825
2001.................................................... 102,500 10,928
2002.................................................... 102,500 --
Thereafter.............................................. 290,416 --
-------- --------
Total minimum lease payments............................ $700,416 $163,039
========
Less: Amount representing interest...................... 168,461
--------
$531,955
========
</TABLE>
I. Employee Benefits
Effective September 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits," which revises
prior disclosure requirements. The information for fiscal years ended August
31, 1998, 1997 and 1996 have been restated to conform to the Transition Period
presentation. The net cost for these plans and agreements charged to expense
was as follows:
Pensions
The Company has two pension plans covering substantially all employees. The
funding of retirement and employee benefit plans is in accordance with the
requirements of the plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act ("ERISA").
<TABLE>
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -------------------------------
1998 1998 1997 1996
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Service cost................. $ 106,291 $ 318,872 $ 286,362 $ 268,542
Interest cost on projected
benefit obligation.......... 259,493 778,479 752,921 722,354
Expected return on plan as-
sets........................ (301,356) (904,067) (754,437) (664,486)
Amortization of prior service
cost........................ 54,662 163,988 138,876 138,876
Amortization of transition
obligation.................. 2,927 8,782 8,782 8,782
Recognized actual gain....... (13,484) (40,453) -- --
--------- --------- --------- ---------
Total net pension cost..... $ 108,533 $ 325,601 $ 432,504 $ 474,068
========= ========= ========= =========
Health Care
<CAPTION>
Transition
Period Ended Fiscal Years Ended August 31,
December 31, -------------------------------
1998 1998 1997 1996
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Service cost................. $ 37,852 $ 113,556 $ 103,140 $ 104,379
Interest cost on accumulated
benefit obligation.......... 119,714 359,141 345,298 316,398
Expected return on plan as-
sets........................ (33,965) (101,896) (62,348) (37,043)
Amortization of transition
obligation.................. 67,956 203,867 203,868 203,868
--------- --------- --------- ---------
Total net retiree health
care cost................. $ 191,557 $ 574,668 $ 589,958 $ 587,602
========= ========= ========= =========
</TABLE>
23
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tables above do not reflect retirement enhancements for pension and
health care of $623,000 and $555,000 respectively, or curtailment gains of
$635,000 for pension and $85,000 for health care, which were related to the
Company's early retirement offering to management personnel.
As discussed in Note A of the Notes to Consolidated Financial Statements,
the Company conformed to Eastern's method of accounting for post-retirement
benefits other than pensions by recognizing the remaining unamortized
transition obligation of $3.0 million. Since the Company had received
regulatory approval to fully recover the SFAS No. 106 costs in rates, a
regulatory asset was recorded.
The following tables set forth the change in benefit obligation and plan
assets and reconciliation of funded status of Company plans and amounts
recorded in the Company's balance sheet as of December 31, 1998 and August 31,
1998 and 1997 using actuarial measurement dates of October 1, 1998 and August
31, 1998 and 1997:
<TABLE>
<CAPTION>
Pensions Health Care
-------------------------------------- --------------------------------------
Transition Fiscal Years Ended Transition Fiscal Years Ended
Period Ended August 31, Period Ended August 31,
December 31, ------------------------ December 31, ------------------------
1998 1998 1997 1998 1998 1997
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit
obligation
Balance at beginning of
period................. $11,720,859 $10,688,514 $ 9,707,828 $ 5,387,961 $ 4,857,768 $ 4,218,010
Service cost............ 79,718 318,872 286,362 9,462 113,556 103,140
Interest cost........... 194,620 778,479 752,921 29,930 359,141 345,298
Plan amendments......... -- -- 376,668 -- -- --
Curtailment (gain)...... (635,431) -- -- (84,921) -- --
Special termination
benefits............... 623,321 -- -- 555,183 -- --
Benefits paid........... (160,576) (642,300) (612,558) (20,941) (256,116) (101,421)
Actuarial (gain) or
loss................... (422,125) 577,294 177,293 (166,804) 313,612 292,741
----------- ----------- ----------- ----------- ----------- -----------
Balance at end of
period................. $11,400,386 $11,720,859 $10,688,514 $ 5,709,870 $ 5,387,961 $ 4,857,768
=========== =========== =========== =========== =========== ===========
Change in plan assets
Fair value, beginning of
period................. $11,459,383 $10,211,480 $ 9,082,672 $ 1,754,391 $ 1,386,073 $ 886,580
Actual return on plan
assets................. (1,295,268) 1,700,203 1,741,366 (46,121) 53,396 35,551
Employer contributions.. -- 190,000 -- -- 571,038 565,363
Benefits paid........... (160,576) (642,300) (612,558) (20,941) (256,116) (101,421)
----------- ----------- ----------- ----------- ----------- -----------
Fair value, end of
period................. $10,003,539 $11,459,383 $10,211,480 $ 1,687,329 $ 1,754,391 $ 1,386,073
=========== =========== =========== =========== =========== ===========
Reconciliation of funded
status
Funded status........... $(1,396,847) $ (261,476) $ (477,034) $(4,022,541) $(3,633,570) $(3,471,695)
Unrecognized actuarial
(gain) or loss......... (668,096) (1,764,636) (1,586,247) 165,810 370,700 8,588
Unrecognized transition
obligation............. (159,351) (16,042) (7,260) -- -- --
Unrecognized prior
service................ 1,118,088 1,471,593 1,635,581 -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net amount recognized
period end............ $(1,106,206) $ (570,561) $ (434,960) $(3,856,731) $(3,262,870) $(3,463,107)
=========== =========== =========== =========== =========== ===========
Amounts recognized in
balance sheet
Intangible asset........ $ 537,071 $ 35,482 $ 44,297 $ -- $ -- $ --
Accrued benefit
liability.............. (1,643,277) (606,043) (479,257) (3,856,731) (3,262,870) (3,463,107)
----------- ----------- ----------- ----------- ----------- -----------
Net amount............. $(1,106,206) $ (570,561) $ (434,960) $(3,856,731) $(3,262,870) $(3,463,107)
=========== =========== =========== =========== =========== ===========
</TABLE>
24
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
To fund health care benefits under its collective bargaining agreements, the
Company maintains a Voluntary Employee Beneficiary Association ("VEBA") Trust
to which it makes contributions from time to time. Plan assets are invested in
debt and equity marketable securities.
Following are the weighted-average assumptions used in developing the
projected benefit obligation:
<TABLE>
<CAPTION>
August 31,
December 31, --------------
1998 1998 1997 1996
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate.................................. 7.25% 7.0% 7.5% 8.0%
Return on plan assets.......................... 8.5% 8.0% 8.0% 8.0%
Increase in future compensation................ 5.0% 5.0% 5.0% 6.0%
Health care inflation trend.................... 8.0% 7.0% 8.0% 8.5%
</TABLE>
The health care inflation trend is assumed to be 8% in 1999 and decrease
gradually to 5% for 2005. A one percentage point increase or decrease in the
assumed health care trend rate for 1998 would have the following effects:
<TABLE>
<CAPTION>
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Service cost and
interest cost
components............. $ 12,149 $ (11,561)
Post-retirement benefit
obligation............. $389,092 $(363,218)
</TABLE>
Employee Stock Ownership Plan
On September 1, 1986, the Company created an Employee Stock Ownership Plan
and Trust ("ESOP" or "Trust"). The Company contributes annually to the Trust
an amount equal to principal plus interest and any other fees net of interest
income earned by the Trust and dividends on unallocated shares. The Trust was
created primarily to acquire shares of the Company's common stock for the
exclusive benefit of the participants (substantially all nonbargaining
employees). During fiscal 1987, the Trust borrowed $1,500,000 and acquired
82,800 shares, as adjusted for a two-for-one stock split effective April 1,
1987, of the Company's previously unissued common stock. The Company
guarantees the loan and final payment of $75,000 was made in October, 1996.
The ESOP was recorded as a liability and the offsetting debit was accounted
for as a reduction of common stock equity in the accompanying consolidated
balance sheets. Interest was payable monthly at a floating rate, which was 80%
of the current prime rate. The charge to income, which equals the Company's
contribution, was $0 for the Transition Period and $336,000, $174,000, and
$223,000 respectively for the fiscal years ended 1998, 1997, and 1996.
Interest on ESOP debt was $0 for the Transition Period and $0, $1,000 and
$17,000 respectively for the fiscal years ended 1998, 1997 and 1996. Dividends
on unallocated ESOP shares used to pay debt service was $0 for the Transition
Period and $0, $6,000 and $13,000 respectively for the fiscal years ended
1998, 1997 and 1996.
As of the merger date, all shares in the plan were converted to shares of
Eastern Common Stock.
Savings Plan
The Company has a thrift savings plan in which the Company matches one-half
of employee contributions with the match capped at three percent. The Company
contributed $46,000 during the Transition Period and $164,000, $169,000 and
$132,000 to the Plan in fiscal years 1998, 1997 and 1996, respectively.
Stock Option Plans
In 1995 the Company adopted an Incentive Stock Option Plan and a Non-
Qualified Stock Option Plan (the Plans) under which options may be granted to
officers and key employees. Options totaling 100,000 shares may
25
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
be granted under the Plans with not more than 25,000 shares granted during any
one year to any individual. During 1995, the Company granted a total of 20,000
shares under the Incentive Stock Option Plan and 4,000 shares under the Non-
Qualified Stock Option Plan at a price of $24.25 with exercise dates beginning
February 9, 1996 and ending February 9, 2000. No options were granted or
exercised during the Transition Period, prior to the merger date and fiscal
years 1998 and 1997.
As of the merger date, all shares in the plan were converted to shares of
Eastern Common Stock.
J. Commitments and Contingencies
Construction Expenditures
The Company's construction expenditures are presently estimated at
$6,800,000 for 1999, and approximately $7,000,000 in each of the following
three years.
Environmental Matters
The Company, like many other companies in the natural gas industry, is party
to governmental proceedings requiring investigation and possible remediation
of former manufactured gas plant ("MGP") sites. The Company may have or share
responsibility under applicable environmental laws for the remediation of five
such sites, as well as for one non-MGP site. The Company has estimated its
potential share of the costs of investigating and remediating these sites in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies," and the American Institute of Certified Public Accountants
Statement of Position 96-1, "Environmental Remediation Liabilities." The
Company has recorded a liability of approximately $400,000, which represents
its best estimate at this time of remediation costs. However, there can be no
assurance that such cost will not vary considerably from this estimate.
Factors that may bear on costs differing from estimates include, without
limit, changes in regulatory standards, changes in remediation technologies
and practices and the type and extent of contaminants discovered at the sites.
The Company has received and responded to Requests for Information from the
U.S. Environmental Protection Agency ("EPA") pursuant to Section 104 of the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), regarding two federal superfund sites that the EPA is currently
investigating. It is not possible at this time to reasonably estimate the
amount of the Company's obligation for remediation of the sites; however, the
Company expects that its share, if any, will be de minimis.
By a rate order issued on May 25, 1990, the Department approved recovery of
all prudently incurred environmental response costs associated with former MGP
sites over separate, seven-year amortization periods, without a return on the
unamortized balance. The Company currently believes, in light of the
Department rate order on environmental cost recovery, that it is not probable
that such costs will materially affect its financial condition or results of
operations.
K. Related Party Transactions
The Company incurred $200,000 for legal, tax and corporate services provided
by Eastern. Included in Other Current Liabilities in the Consolidated Balance
Sheet at December 31, 1998 is a net payable to parent and affiliates of
approximately $218,000.
26
<PAGE>
ESSEX GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
L. Selected Comparative Financial Information
<TABLE>
<CAPTION>
Four Months Ended
------------------------
December
December 31,
31, 1998 1997
----------- -----------
Unaudited
<S> <C> <C>
Operating Revenues................................. $16,637,325 $16,296,888
----------- -----------
Operating Margin................................... $ 9,082,924 $ 8,539,304
----------- -----------
Operating Expenses................................. $13,636,301 $ 6,341,911
----------- -----------
Income Taxes....................................... $ (594,906) $ 667,216
----------- -----------
Net Income Before Extraordinary Item............... $(5,559,069) $ 1,188,749
----------- -----------
Extraordinary Item, Net of Tax..................... $(2,873,729) $ --
----------- -----------
Net Income Available for Common Stock.............. $(8,432,798) $ 1,188,749
=========== ===========
</TABLE>
The significant increase in operating expenses for the four months ended
December 31, 1998 as compared to the four months ended December 31, 1997 is
primarily due to merger related expenses as discussed in Note A of the Notes
to Consolidated Financial Statements.
This financial information is presented herein for comparative purposes and
includes any adjustments which are, in the opinion of management, necessary
for a fair presentation.
27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Essex Gas Company:
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Essex Gas Company (a Massachusetts corporation) as of
December 31, 1998, August 31, 1998 and August 31, 1997, and the related
consolidated statements of income, retained earnings and cash flows for the
four-month period ended December 31, 1998 and each of the three years in the
period ended August 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Essex Gas
Company as of December 31, 1998, August 31, 1998 and August 31, 1997, and the
results of its operations and its cash flows for the four-month period ended
December 31, 1998 and each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
As discussed in Note A, as a result of the merger, the approved rate plan
and related discontinuance of SFAS No. 71, the Company changed certain
accounting practices to comply with generally accepted accounting principles
for non-regulated entities.
Boston, Massachusetts
March 5, 1999
28
<PAGE>
Item 8: Financial Statements and Supplementary Data
(b) Selected Quarterly Financial Data
YEAR ENDED AUGUST 31, 1998
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
November 30, February 28, May 31, August 31,
1997 1998 1998 1998
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues.......... $9,034,815 23,027,508 14,154,192 4,604,435
Operating income............ 940,911 3,901,570 1,683,374 593,114
Income (loss) applicable to
common shares.............. 176,528 3,246,456 999,650 (150,426)
Earnings (loss) per common
share...................... .10 1.91 .58 (.09)
Dividends declared per
common share............... .41 .42 .42 .42
Stock price range:
High...................... 32.75 49.00 47.00 47.13
Low....................... 26.00 31.25 44.00 44.00
YEAR ENDED AUGUST 31, 1997
<CAPTION>
Three Months Ended
------------------------------------------------
November 30, February 28, May 31, August 31,
1996 1997 1997 1997
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
Operating revenues.......... $8,142,501 $23,220,840 $16,659,598 $5,511,795
Operating income............ 471,157 3,814,227 1,971,507 464,672
Income (loss) applicable to
common shares.............. (260,669) 3,131,438 1,256,125 (160,375)
Earnings (loss) per common
share...................... (.16) 1.89 .75 (.10)
Dividends declared per
common share............... .40 .41 .41 .41
Stock price range:
High...................... 27.00 25.75 26.00 27.00
Low....................... 24.00 24.25 24.25 25.25
</TABLE>
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Not required.
Item 11: Executive Compensation
Not required.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Not required.
Item 13: Certain Relationships and Related Transactions
Not required.
29
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
A) Documents filed as part of this report:
1. The Financial Statements of the Company, on pages 11 through 27, and
the Report of Arthur Andersen LLP on page 28 therein.
2. Financial Statement Schedules.
The following supplementary financial statement schedules required by Rule
5-04 of Regulation S-X, and report thereon, are filed as part of this Form 10-
K on the page indicated below:
<TABLE>
<CAPTION>
Schedule Page No. in
Number Description this Report
-------- ----------- -----------
<C> <S> <C>
II Consolidated Valuation and Qualifying Accounts for the
transition period ended December 31, 1998 and the
three years ended August 31, 1998.................... 31
Report of Independent Public Accountants.............. 28
</TABLE>
Schedules other than the one listed above are either not required or not
applicable, or the required information is shown in the financial statements
or notes thereto.
3. Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index on pages 33 through 35.
B) Reports on Form 8-K.
Form 8-K filed on October 14, 1998.
Form 8-K filed on December 7, 1998.
30
<PAGE>
CONSOLIDATION VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Reserves which are deducted in the balance sheets from assets to which they
apply:
<TABLE>
<CAPTION>
Transition Balance at Charged to Charged to Balance
Period Ended beginning costs and other at end
December 31, Description of period expenses accounts(1) Deductions of period
------------ ----------- ---------- ---------- ----------- ---------- ---------
<C> <S> <C> <C> <C> <C> <C>
Allowance for doubtful
1998 accounts................ $559 $169 $ 46 $ 29 $745
<CAPTION>
Fiscal Years Balance at Charged to Charged to Balance
Ended beginning costs and other at end
August 31, Description of period expenses accounts(1) Deductions of period
------------ ----------- ---------- ---------- ----------- ---------- ---------
<C> <S> <C> <C> <C> <C> <C>
Allowance for doubtful
1998 accounts................ $772 $431 $110 $754 $559
Allowance for doubtful
1997 accounts................ $653 $614 $167 $662 $772
Allowance for doubtful
1996 accounts................ $595 $613 $164 $719 $653
</TABLE>
- --------
(1) Represents recoveries on accounts previously written off
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Essex Gas Company (Registrant)
/s/ Joseph F. Bodanza
By: _________________________________
Joseph F. Bodanza
Senior Vice President and
Treasurer
(Principal Financial and
Accounting Officer)
Date: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 31st day of March 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Chester R. Messer, II Director and President
___________________________________________
Chester R. Messer, II
/s/ Joseph F. Bodanza Director and Senior Vice President and
___________________________________________ Treasurer (Principal Financial and
Joseph F. Bodanza Accounting Officer)
/s/ J. Atwood Ives Director
___________________________________________
J. Atwood Ives
/s/ Fred C. Raskin Director
___________________________________________
Fred C. Raskin
/s/ Walter J. Flaherty Director
___________________________________________
Walter J. Flaherty
/s/ Anthony J. DiGiovanni Director
___________________________________________
Anthony J. DiGiovanni
/s/ L. William Law, Jr. Director
___________________________________________
L. William Law, Jr.
</TABLE>
32
<PAGE>
EXHIBIT INDEX
The exhibits listed below are filed herewith or are incorporated by reference
to other filings.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
3.1 Restated Articles of Organization of Essex County Gas
Company(10)....................................................
3.2 Bylaws of Essex County Gas Company(11).........................
4.1 Indenture dated as of June 1, 1986 between the Company and
Centerre Trust Company of St. Louis, Trustee(2)................
4.2 Eleventh Supplemental Indenture dated as of September 15, 1988,
providing for a 10.25 percent Series due 2003(1)...............
4.3 Twelfth Supplemental Indenture dated as of December 1, 1990,
providing for a 10.10 percent Series due 2020(4)...............
4.4 Revolving Credit Agreement dated November 14, 1995 between
Essex County Gas Company and the First National Bank of
Boston(12).....................................................
4.5 Fifteenth Supplemental Indenture dated as of December 1, 1996
providing for a 7.28 percent Series due 2017(13)...............
10.1 LNG Storage, Inc., Lease Indenture of Mortgage and Deed of
Trust dated April 10, 1972(1)..................................
10.2 Haverhill Familee Investment Corporation--Lease of Corporate
Headquarters dated November 1, 1975(1).........................
10.3 Arlington Trust Company--Purchase Contract, Credit Agreement,
Trust Agreement and Storage Agreement dated October 1,
1980(1)........................................................
10.4 Consolidated Gas Supply Corporation--Underground Storage
Contract dated February 18, 1980(1)............................
10.5 Penn-York Energy Corporation--Storage Services Agreement dated
December 21, 1984(1)...........................................
10.6 Canadian Gas Transportation Contract between Tennessee Gas
Pipeline Company and Essex County Gas Company dated December 1,
1987(3)........................................................
10.7 Phase 2 Gas Sales Agreement between Boundary Gas and Essex
County Gas Company dated September 14, 1987(3).................
10.8 Amendment to the Agreement for the Sale of Gas between Bay
State Gas Company and Essex County Gas Company dated May 6,
1988(3)........................................................
10.9 Agreement for the Liquefaction of Gas between Bay State Gas
Company and Essex County Gas Company dated March 14, 1988(3)...
10.10 Bond Purchase Agreement dated December 1, 1990, between
Allstate Life Insurance Company of New York, and Essex County
Gas Company(4).................................................
10.11 Iroquois Gas Transmission System, L.P. Gas Transportation
Contract for Firm Reserved Service dated February 7, 1991(3)...
10.12 Alberta Northeast Gas Limited (ANE), Gas Sales Contract
Agreement No. 1 dated February 7, 1991(5)......................
10.13 Aquila Energy Marketing Corporation Gas Sales Agreement dated
June 5, 1992(5)................................................
10.14 Natural Gas Clearinghouse Gas Sales Agreement dated June 8,
1992(5)........................................................
10.15 Tennessee Gas Pipeline Transportation Contract dated February
7, 1991(6).....................................................
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10.16 Tennessee Gas Pipeline Company Gas Storage Contract (SS-NE)
TGP002099STO dated November 10, 1991(6)........................
10.17 Tennessee Gas Pipeline Company Storage Service Transportation
Contract TF-4175 dated October 28, 1991(6).....................
10.18 Form of employment agreement between the Company and each of
the following officers: Wayne I. Brooks, Vice President; John
W. Purdy, Jr., Vice President; James H. Hastings, Vice
President and Treasurer; Allen R. Neale, Vice President; and
Cathy E. Brown, Clerk. These contracts are identical to those
submitted with the Annual Report for each with the exception of
compensation amounts(2)*.......................................
10.19 Employment Agreement between the Company and Philip H. Reardon,
President, dated November 19, 1992(7)*.........................
10.20 Gas Transportation Agreement between Essex County Gas Company
and Tennessee Gas Pipeline Company (for use under FT-A Rate
Schedule) dated September 1, 1993(8)...........................
10.21 Gas Transportation Agreement between Essex County Gas Company
and Tennessee Gas Pipeline Company (for use under FT-A Rate
Schedule) dated August 25, 1993(8).............................
10.22 Gas Transportation Agreement between Essex County Gas Company
and Tennessee Gas Pipeline Company (for use under
Transportation Service "CGT-NE" Rate Schedule) dated September
1, 1993(8).....................................................
10.23 Gas Transportation Agreement between Essex County Gas Company
and Tennessee Gas Pipeline Company (for use under FT-A Rate
Schedule) dated September 1, 1993(8)...........................
10.24 Gas Transportation Agreement between Essex County Gas Company
and Tennessee Gas Pipeline Company (for use under Rate Schedule
FS) dated September 1, 1993(8).................................
10.25 Amendment to Employment Agreement between the Company and
Philip H. Reardon, President, dated March 3, 1994*.............
10.26 Amendment to Employment Agreement between the Company and John
W. Purdy, Jr., Vice President, dated March 3, 1994*............
10.27 Amendment to Employment Agreement between the Company and Wayne
I. Brooks, Vice President, dated March 3, 1994*................
10.28 Amendment to Employment Agreement between the Company and Allen
R. Neale, Vice President, dated March 3, 1994*.................
10.29 Amendment to Employment Agreement between the Company and James
H. Hastings, Vice President and Treasurer, dated March 3,
1994*..........................................................
10.30 Amendment to Employment Agreement between the Company and Cathy
E. Brown, Corporate Clerk, dated March 3, 1994*................
10.31 Essex County Gas Company Supplemental Retirement Plan for
Philip H. Reardon effective January 1, 1994*...................
10.32 Employment Agreement between the Company and William T. Beaton,
Vice President, dated June 7, 1995*............................
27 Financial Data Schedule .......................................
</TABLE>
- --------
* Denotes Management Contract.
(1) Previously filed as an exhibit to Registrant's Registration Statement on
Form S-7, filed October 23, 1981, File No. 2-74531 and is incorporated
herein by this reference.
34
<PAGE>
(2) Previously filed as an exhibit to Registrant's Registration Statement on
Form S-2, filed June 19, 1986, File No. 33-6597 and are incorporated
herein by this reference.
(3) Previously filed as an exhibit to Registrant's 10-Q filed for the quarter
ended February 29, 1996, and is incorporated herein by this reference.
(4) Previously filed as an exhibit to Registrant's 10-Q filed for the quarter
ended February 28, 1991, and is incorporated herein by this reference.
(5) Previously filed as an exhibit to Registrant's 10-Q filed for the quarter
ended May 31, 1992, and is incorporated herein by this reference.
(6) Previously filed as an exhibit to Registrant's 10-K filed for the fiscal
year ended August 31, 1992, and are incorporated herein by this reference.
(7) Previously filed as an exhibit to Registrant's Form S-3, No. 33-69736,
filed on September 30, 1993, and is incorporated herein by this reference.
(8) Previously filed as an exhibit to Registrant's Form 10-K filed for the
fiscal year ended August 31, 1993, and is incorporated herein by this
reference.
(9) Previously filed as an exhibit to Registrant's Form 10-Q filed for the
quarter ended May 31, 1996 and is incorporated herein by this reference.
(10) Previously filed as an exhibit to Registrant's Form 10-Q filed for the
quarter ended February 28, 1995 and is incorporated herein by this
reference.
(11) Previously filed as an exhibit to Registrant's Form 10-Q filed for the
quarter ended May 31, 1998 and is incorporated herein by this reference.
(12) Previously filed as an exhibit to Registrant's Form 10-Q filed for the
quarter ended November 30, 1996 and is incorporated herein by this
reference.
(13) Previously filed as an exhibit to Registrant's Form 10-Q filed for the
quarter ended February 28, 1998 and is incorporated herein by this
reference.
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF INCOME AND STATEMENT OF CASH FLOWS CONTAINED IN FORM 10-K OF
ESSEX COUNTY GAS COMPANY FOR THE FOUR MONTHS ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 82,187
<OTHER-PROPERTY-AND-INVEST> 740
<TOTAL-CURRENT-ASSETS> 13,313
<TOTAL-DEFERRED-CHARGES> 1,169
<OTHER-ASSETS> 532
<TOTAL-ASSETS> 97,941
<COMMON> 27,805
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 7,356
<TOTAL-COMMON-STOCKHOLDERS-EQ> 35,137
0
0
<LONG-TERM-DEBT-NET> 27,599
<SHORT-TERM-NOTES> 8,935
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 600
0
<CAPITAL-LEASE-OBLIGATIONS> 472
<LEASES-CURRENT> 60
<OTHER-ITEMS-CAPITAL-AND-LIAB> 25,138
<TOT-CAPITALIZATION-AND-LIAB> 97,941
<GROSS-OPERATING-REVENUE> 16,637
<INCOME-TAX-EXPENSE> (595)
<OTHER-OPERATING-EXPENSES> 21,785
<TOTAL-OPERATING-EXPENSES> 21,190
<OPERATING-INCOME-LOSS> (4,553)
<OTHER-INCOME-NET> 61
<INCOME-BEFORE-INTEREST-EXPEN> (4,492)
<TOTAL-INTEREST-EXPENSE> 1,067
<NET-INCOME> (8,433)
0
<EARNINGS-AVAILABLE-FOR-COMM> (8,433)
<COMMON-STOCK-DIVIDENDS> 726
<TOTAL-INTEREST-ON-BONDS> 819
<CASH-FLOW-OPERATIONS> (5,539)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
