<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
-----------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________
Commission File Number 18154
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ESSEX GAS COMPANY
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1427020
- ------------------------------ --------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
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(Address of principal executive offices)
(Zip Code)
617-742-8400
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(Registrant's telephone number, including area code)
NONE
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ---
---
Common stock of Registrant at the date of this report was 100 shares, all held
by Eastern Enterprises.
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PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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Company or group of companies for which report is filed:
ESSEX GAS COMPANY AND SUBSIDIARY ("Company")
Consolidated Statements of Earnings
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<TABLE>
<CAPTION>
(In Thousands)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, August 31, September 30, August 31,
1999 1998 1999 1998
-------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $3,718 $4,780 $30,178 $41,786
Cost of gas sold 856 1,876 12,561 19,962
------ ------ ------- -------
Operating Margin 2,862 2,904 17,617 21,824
------ ------ ------- -------
OPERATING EXPENSES:
Operations and maintenance expense 1,322 2,233 6,856 8,738
Depreciation and amortization 289 256 2,942 3,206
Taxes, other than income 168 174 1,106 1,349
Income Taxes 162 (409) 1,773 2,353
------ ------ ------- -------
Total Operating Expenses 1,941 2,254 12,677 15,646
------ ------ ------- -------
OPERATING EARNINGS 921 650 4,940 6,178
OTHER EARNINGS, NET 1 (3) 48 215
------ ------ ------- -------
EARNINGS BEFORE INTEREST EXPENSE 922 647 4,988 6,393
------ ------ ------- -------
INTEREST EXPENSE:
Interest on long-term debt 617 626 1,849 1,877
Other, including amortization
of debt expense 63 181 277 442
Less interest used during
construction (7) (10) (9) (22)
------ ------ ------- -------
Total Interest Expense 673 797 2,117 2,297
------ ------ ------- -------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $ 249 ($150) $ 2,871 $ 4,096
====== ====== ======= =======
Common Stock Dividends $ - $ 725 $ - $ 2,160
====== ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Essex Gas Company and Subsidiary
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Consolidated Balance Sheets
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(In Thousands)
September 30, December 31,
1999 1998
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ASSETS
GAS PLANT, AT COST $114,835 $112,540
Less: Accumulated depreciation (32,994) (29,821)
-------- --------
Total Net Plant 81,841 82,719
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 103 66
Accounts receivable less reserves
of $861 at September 30, 1999
and $745 at December 31, 1998 1,634 3,906
Accounts receivable - affiliates 3,523 -
Accrued utility margin 297 2,285
Supplemental gas inventories 1,200 3,891
Materials and supplies 503 396
Prepaid expenses 35 265
Current income taxes 2,348 2,504
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Total Current Assets 9,643 13,313
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OTHER ASSETS:
Unamortized debt expense 684 709
Other 1,476 1,200
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Total Other Assets 2,160 1,909
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TOTAL ASSETS $ 93,644 $ 97,941
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The accompanying notes are an integral part of these consolidated financial
statements.
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Essex Gas Company and Subsidiary
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Consolidated Balance Sheets
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(In Thousands)
September 30, December 31,
1999 1998
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LIABILITIES AND STOCKHOLDER'S INVESTMENT:
CAPITALIZATION:
Common stock equity $38,052 $35,137
Long-term obligations less current portion 28,022 28,071
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Total capitalization 66,074 63,208
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CURRENT LIABILITIES:
Current portion of long-term obligations 664 660
Gas inventory financing 1,047 4,345
Notes payable - 8,935
Notes payable - affiliate 4,000 -
Accounts payable 1,630 2,576
Accrued interest 892 445
Refundable gas costs 692 198
Supplier refund due customers - 34
Other 335 574
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Total Current Liabilities 9,260 17,767
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OTHER LIABILITIES:
Accumulated deferred income taxes 7,966 7,359
Unamortized investment tax credit 995 1,048
Deferred directors' fees 180 977
Retirement benefit liability 7,130 5,500
Other reserves 2,039 2,082
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Total Other Liabilities 18,310 16,966
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TOTAL LIABILITIES AND STOCKHOLDER'S
INVESTMENT $93,644 $97,941
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The accompanying notes are an integral part of these consolidated financial
statements.
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Essex Gas Company and Subsidiary
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Consolidated Statements of Cash Flows
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<TABLE>
<CAPTION>
(In Thousands)
Nine Months Ended
----------------------
September 30, August 31,
1999 1998
-------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
NET INCOME: $ 2,871 $ 4,096
Adjustments to reconcile net income to net cash:
Depreciation and amortization, including amounts
related to non-utility operations 2,942 3,561
Deferred income taxes 607 167
Other changes in assets and liabilities:
Accounts receivable 737 1,283
Inventories, including gas 2,584 215
Accounts payable (946) (2,980)
Supplier refund obligations (34) (1,788)
Taxes payable/receivable 156 (1,219)
Refundable gas costs 494 3,090
Other, net 1,393 (826)
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Net Cash Provided By Operating Activities 10,804 5,599
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Cash Flows from Investing Activities:
Capital expenditures (2,409) (4,717)
Net cost of removal (125) (40)
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Net Cash Used In Investing Activities (2,534) (4,757)
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Cash Flows from Financing Activities:
Dividends paid - (2,160)
Issuance of common stock - 1,220
Change in long-term debt - (220)
Changes in inventory financing (3,298) (264)
Changes in notes payable (4,935) 467
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Net Cash Used In Financing Activities (8,233) (957)
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Net increase (decrease) in cash and cash equivalents 37 (115)
Cash and cash equivalents at beginning of period 66 369
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Cash and cash equivalents at end of period $ 103 $ 254
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest net of amounts capitalized $ 1,576 $ 1,645
======= =======
Income taxes $ 603 $ 3,299
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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ESSEX GAS COMPANY AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SEPTEMBER 30, 1999
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1. ACCOUNTING POLICIES AND OTHER INFORMATION
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General
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It is the Company's opinion that the financial information contained in
this report reflects all adjustments necessary to present a fair statement
of results for the periods reported. All of these adjustments are of a
normal recurring nature. Results for the periods are not necessarily
indicative of results to be expected for the year, due to the seasonal
nature of the Company's operations. All accounting policies have been
applied in a manner consistent with prior periods. Such financial
information is subject to year-end adjustments and annual audit by
independent public accountants.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q. Therefore
these interim financial statements should be read in conjunction with the
Company's 1998 Annual Report filed on Form 10-K with the Securities and
Exchange Commission.
Merger
------
On September 30, 1998, the Company merged with ECGC Acquisition Company, a
wholly owned subsidiary of Eastern Enterprises ("Eastern"), through the
exchange of all of the Company's stock for approximately 2,047,000 shares
of Eastern common stock. The merger was accounted for as a pooling of
interests by Eastern. The operations of the Company were integrated into
the operations of its affiliate, Boston Gas.
In connection with the merger, the Massachusetts Department of
Telecommunications and Energy approved a rate plan resulting in a ten year
freeze of base rates at current levels. As part of the approved rate plan,
Essex will be charged by Boston Gas for incremental costs incurred by
Boston on behalf of the Company. Due 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".
On December 7, 1998, the Company changed its fiscal year end from August 31
to December 31 to conform to Eastern's fiscal year end. Accordingly, a
transition period Form 10-K was filed reflecting the results of operations
and cash flows for the four months ended December 31, 1998. The
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accompanying Consolidated Statements of Earnings and Cash Flows for the
three and nine month periods ending September 30, 1999 have been compared
to the three and nine month periods ending August 31, 1998 which represents
the most comparable periods of the preceding fiscal year. Recasting of the
preceding periods to a calendar basis for comparative purposes is not
practical and in management's opinion does not materially affect the
comparison.
Seasonal Aspect
---------------
The amount of the Company's natural gas firm throughput for purposes of
space heating is directly related to the ambient air temperature.
Consequently, there is less gas throughput during the summer months than
during the winter months. In addition, under its seasonal rate structure,
the rates charged customers during November through April are higher than
those charged during May through October. In order to more properly match
depreciation and property tax expense with margin each month, the Company
charges to depreciation and property tax expense an amount equal to the
percentage of the annual volume of firm gas throughput forecasted for the
month, applied to the estimated annual depreciation and property tax
expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -----------------------------------------------------------------------
RESULTS OF OPERATIONS:
----------------------
RESULTS OF OPERATIONS
A comparison of results for the three and nine month periods ended
September 30, 1999 to the three and nine month periods ended August 31,
1998 reflect comparable but not precisely matched periods.
Quarter-To-Quarter
Net earnings applicable to common stock for the three months ended
September 30, 1999 were $.2 million compared to a net loss of $.2 million
for the quarter ended August 31, 1998. This improvement primarily reflects
merger-related synergies resulting from reduced employee levels and
associated benefits and other general and administrative expenses.
Year-To-Date
Net earnings applicable to common stock for the nine months ended September
30, 1999 were $2.9 million compared to $4.1 million for the nine months
ended August 31, 1998. The decrease in operating margin of $4.2 million
reflects primarily the impact of the change to the accrual method of
revenue accounting as of the merger date and the impact of the inclusion of
December 1997 in the nine months ended August 31, 1998.
The decrease in operations and maintenance expense reflects merger related
synergies resulting from reduced employee levels and associated benefits
and other general and administrative expenses, partially offset by a $1.3
million early retirement and severance charge.
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YEAR 2000 ISSUE
On September 30, 1998, there was an Acquisition of the Company by Eastern,
the parent company of Boston Gas (See Note 1 of the Notes to Consolidated
Financial Statements). The Company's Year 2000 issues are being addressed
through the integration of its operations with those of its affiliate,
Boston Gas. The Company has incurred a cost of approximately $1.4 million
to integrate various systems with those of Boston Gas. Boston Gas' Year
2000 plan is as follows:
State of Readiness
Boston Gas has assessed the impact of the Year 2000 with respect to its
Information Technology (IT) systems and embedded chip technology systems as
well as its potential exposure to significant third party risks.
Accordingly, Boston Gas has completed the replacement or modification of
existing systems and technology as required and assured itself that major
customers and critical vendors are also addressing these issues. In
addition, Boston Gas has completed the development and testing of
contingency plans to address major external and internal risks that could
potentially impact business operations.
With respect to internal information systems, Boston Gas has tested and
certified as Year 2000 ready, all eleven mission critical business systems
and all eighteen less than critical business systems. Recertification of
mission critical systems and integration points has been completed.
Conversion and certification testing of all technology infrastructure
components has been completed, including mainframe and client-server
hardware and software, data/voice communications and e-mail systems. All
telephone components have been certified as Year 2000 ready. All of Boston
Gas' desktop hardware, operating system software and applications have been
certified as Year 2000 ready. To minimize the risk of corruption of
previously certified information systems, Boston Gas has imposed a freeze
on changes to information systems and technology components, effective
October 1, 1999. Production environment changes will be limited to
emergency production fixes and regulatory required changes.
With respect to embedded chip systems, Boston Gas has completed its
inventory, assessment, remediation and certification testing of all date
sensitive components.
Boston Gas has identified material third party relationships and has
completed a detailed survey of third party readiness. A readiness
assessment has been completed of all mission critical suppliers and risk
mitigation plans have been developed. Boston Gas has implemented risk
mitigation strategies as required. However, there can be no assurance that
third party systems, on which Boston Gas relies, will be timely converted
or that any such failure to convert by a third party would not have an
adverse effect on Boston Gas' operations.
Cost of Year 2000 Remediation
Boston Gas expects the cost of Year 2000 compliance will approximate $13.9
million. Approximately 65% of these costs will be incurred under capital
projects that have resulted in added functionality while also
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addressing Year 2000 issues. As of September 30, 1999 approximately $12.9
million has been incurred.
Risks of Year 2000 Issues
Boston Gas has assessed the most reasonably likely worst case Year 2000
scenario. Given Boston Gas' efforts to minimize the risk of Year 2000
failure by its internal systems, Boston Gas believes the worst case
scenario would involve failures that impact data and voice communication
providers, its electricity provider or a pipeline supplier. Detailed plans
to accommodate any one or a combination of these worst case scenarios are
addressed as part of Boston Gas' business contingency plans.
Contingency Plans
Boston Gas has completed the development of business contingency plans in
the event that one or more of its internal systems, its embedded chip
systems, or its mission critical suppliers' systems experience a Year 2000
failure. An impact analysis was completed which identified voice/data
communications, electricity and gas supply as the three major sources of
external risk and their impact on mission critical processes. Contingency
plans have been developed and desktop tests conducted for each risk area.
Successful exercises were conducted to test Boston Gas' ability to deliver
critical services in the event of a failure or disruption in voice/data
communications.
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
strategic initiatives on earnings and cash flow, the ability to
successfully integrate natural gas distribution operations, temperatures
above or below normal in the Company's service area, changes in economic
conditions, including interest rates, the functionality of programs and
systems in the Year 2000, the impact of third parties' Year 2000 issues,
regulatory and court decisions and developments with respect to previously
disclosed environmental liabilities. Most of these factors are difficult
to predict accurately and are generally beyond the control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient to
meet 1999 capital expenditures and working capital requirements, dividend
payments and normal debt repayments.
Capital expenditures for the year are projected to be $4.8 million.
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PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings involving the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) List of Exhibits
None.
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURES
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It is the Company's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to present
a fair statement of results for the period reported, but such results are
not necessarily indicative of results to be expected for the year due to
the seasonal nature of the business of the Company. Except as otherwise
herein indicated, all accounting policies have been applied in a manner
consistent with prior periods. Such financial information is subject to
year-end adjustments and an annual audit by independent public accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Essex Gas Company
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(Registrant)
/s/ Joseph F. Bodanza
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J.F. Bodanza, Sr. Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: November 3, 1999
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 81,841
<OTHER-PROPERTY-AND-INVEST> 840
<TOTAL-CURRENT-ASSETS> 9,643
<TOTAL-DEFERRED-CHARGES> 1,320
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 93,644
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 27,806
<RETAINED-EARNINGS> 10,246
<TOTAL-COMMON-STOCKHOLDERS-EQ> 38,052
0
0
<LONG-TERM-DEBT-NET> 27,599
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 5,047
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0
<CAPITAL-LEASE-OBLIGATIONS> 423
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<GROSS-OPERATING-REVENUE> 30,178
<INCOME-TAX-EXPENSE> 1,773
<OTHER-OPERATING-EXPENSES> 6,856
<TOTAL-OPERATING-EXPENSES> 12,677
<OPERATING-INCOME-LOSS> 4,940
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<INCOME-BEFORE-INTEREST-EXPEN> 4,988
<TOTAL-INTEREST-EXPENSE> 2,117
<NET-INCOME> 2,871
0
<EARNINGS-AVAILABLE-FOR-COMM> 2,871
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<TOTAL-INTEREST-ON-BONDS> 1,849
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</TABLE>
