Exhibit 99.2
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
PAGE
Reports of independent public accountants F-2
Consolidated financial statements -
Consolidated statements of operations for the
three years ended December 31, 1997 F-3
Consolidated balance sheets as of December 31, 1997
and 1996 F-4
Consolidated statements of cash flows for the
three years ended December 31, 1997 F-6
Consolidated statements of shareholders' equity
for the three years ended December 31, 1997 F-7
Notes to consolidated financial statements F-8
Financial statement schedules-
Report of independent public accountants on schedules F-24
Consent of independent public accountants F-24
II Valuation and qualifying accounts and reserves F-25
Schedules not listed above are omitted as not applicable or nor
required under the rules of Regulation S-X
F-1
Independent Auditors' Report
To the Trustees and Shareholders of Eastern Enterprises:
We have audited the accompanying consolidated balance sheets
of Eastern Enterprises (a Massachusetts voluntary association) and
subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31,
1997. These 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 audits 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 financial statements referred to above
present fairly, in all material respects, the financial position of
Eastern Enterprises and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
October 1, 1998 (except with respect to the matter discussed in Note 3, as to
which the date is October 17, 1998)
F-2
Consolidated Statements of Operations
Years Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Revenues $1,023,740 $ 1,057,271 $ 994,462
Operating costs and expenses:
Operating costs 715,066 744,672 694,138
Selling, general and administrative expenses 122,035 115,136 114,983
Depreciation and amortization 71,322 67,229 64,005
Operating earnings 115,317 130,234 121,336
Other income (expense):
Interest income 8,997 9,419 5,633
Interest expense (37,411) (37,290) (41,273)
Other, net (4,033) (114) 4,109
------- -------- -------
Earnings before income taxes 82,870 102,249 89,805
Provision for income taxes 26,954 37,748 26,244
------- -------- -------
Earnings before extraordinary item 55,916 64,501 63,561
Extraordinary provision for coal miners retiree
health care, net of tax - - (6,500)
------- ------- -------
Net earnings $55,916 $64,501 $57,061
======= ======= =======
Basic earnings per share before extraordinary
item $ 2.50 $ 2.90 $ 2.88
Extraordinary provision for coal miners retiree health
care, net of tax - - (.30)
------- ------- -------
Basic earnings per share $ 2.50 $ 2.90 $ 2.58
======= ======= =======
Diluted earnings per share before extraordinary
item $ 2.49 $ 2.88 $ 2.87
Extraordinary provision for coal miners retiree health
care, net of tax - - (.30)
------- ------- -------
Diluted earnings per share $ 2.49 $ 2.88 $ 2.57
======= ======= =======
The accompanying notes are an integral part of these financial
statements.
F-3
Consolidated Balance Sheets
December 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments $175,709 $160,108
Receivables, less reserves of $17,220 in 1997 and
$17,301 in 1996 111,240 98,738
Inventories 61,336 65,831
Deferred gas costs 66,916 75,808
Other current assets 5,867 8,220
--------- --------
Total current assets 421,068 408,705
Property and equipment, at cost 1,621,850 1,550,469
Less--accumulated depreciation 688,169 635,333
---------- ---------
Net property and equipment 933,681 915,136
Other assets:
Deferred post-retirement health care costs 87,188 92,029
Investments 15,791 34,012
Deferred charges and other costs, less amortization 72,637 64,971
---------- ----------
Total other assets 175,616 191,012
---------- ----------
Total assets $1,530,365 $1,514,853
========== ==========
The accompanying notes are an integral part of these financial
statements.
F-4
Consolidated Balance Sheets
December 31,
(In thousands) 1997 1996
- -----------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current debt $ 48,378 $ 74,470
Accounts payable 70,833 78,178
Accrued expenses 38,505 27,828
Other current liabilities 67,649 73,186
---------- -----------
Total current liabilities 225,365 253,662
Gas inventory financing 59,310 58,952
Long-term debt 371,492 367,683
Reserves and other liabilities:
Deferred income taxes 107,804 103,149
Post-retirement health care 98,382 100,446
Coal miners retiree health care 57,000 61,008
Preferred stock of subsidiary 29,326 29,292
Other reserves 97,216 79,648
----------- -----------
Total reserves and other liabilities 389,728 373,543
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value; Authorized shares--
50,000,000; Issued shares--22,438,298 in 1997
and 22,386,591 in 1996 22,438 22,387
Capital in excess of par value 50,989 50,604
Retained earnings 412,623 391,577
Treasury stock at cost--54,928 shares in 1997
and 138,110 shares in 1996 (1,580) (3,555)
---------- ----------
Total shareholders' equity 484,470 461,013
---------- ----------
Total liabilities and shareholders' equity $1,530,365 $1,514,853
========== ==========
The accompanying notes are an integral part of these financial
statements.
F-5
Consolidated Statements of Cash Flows
Years Ended December 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $55,916 $ 64,501 $57,061
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary provision for coal miners retiree
health care, net of tax - - 6,500
Depreciation and amortization 71,322 67,229 64,005
Income taxes and tax credits 19,578 9,355 (590)
Equity in loss of AllEnergy 5,472 3,087 -
Net gain on sale of assets (1,435) (2,541) (20,990)
Provision for environmental expenditures - - 15,000
Other changes in assets and liabilities:
Receivables (12,502) 3,996 (3,604)
Inventories 4,495 (10,886) 12,632
Deferred gas costs 8,892 (6,358) 19,484
Accounts payable (7,345) 10,232 15,042
Other 2,247 (10,176) (1,181)
------- ------- -------
Net cash provided by operating activities 146,640 128,439 163,359
------- ------- -------
Cash flows from investing activities:
Capital expenditures (89,216) (119,783) (85,352)
Investments 3,018 (16,737) 1,900
Proceeds on sale of assets 7,290 3,210 118,343
Other (1,966) (2,798) (1,792)
Net cash provided (used) by investing activities (80,874) (136,108) 33,099
Cash flows from financing activities:
Dividends paid (35,255) (32,566) (30,845)
Changes in notes payable (25,927) 12,050 (10,140)
Changes in gas inventory financing 358 8,221 (9,275)
Proceeds from issuance of long-term debt 9,827 - 60,000
Repayment of long-term debt (5,801) (8,671) (67,614)
Repurchase of stock - - (8,357)
Other 1,581 3,469 3,242
------- ------- --------
Net cash used by financing activities (55,217) (17,497) (62,989)
------- ------- --------
Net increase (decrease) in cash and cash equivalents 10,549 (25,166) 133,469
Cash and cash equivalents at beginning of year 160,108 185,274 51,805
------- ------- --------
Cash and cash equivalents at end of year 170,657 160,108 185,274
Short-term investments 5,052 - 6,074
-------- -------- --------
Cash and short-term investments $175,709 $160,108 $191,348
======== ======== ========
The accompanying notes are an integral part of these financial
statements.
F-6
Consolidated Statements of Shareholders' Equity
Common Capital In
Stock Excess of Retained Treasury
(In thousands) $1 Par Value Par Value Earnings Stock Total
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994,
as previously reported $20,652 $37,712 $321,880 $(6,110) $374,134
Effect of Essex Gas merger 1,861 15,152 11,857 - 28,870
------- ------- -------- ------- --------
Balance at December 31, 1994,
as restated 22,513 52,864 333,737 (6,110) 403,004
Net earnings - - 57,061 - 57,061
Dividends declared--$1.42 per share - - (31,128) - (31,128)
Repurchase of stock - - - (8,357) (8,357)
Retirement of stock (300) (7,422) - 7,722 -
Unrealized gains on investments
available for sale, net - - 1,756 - 1,756
Issuance of stock, net and other 76 2,247 - 1,814 4,137
------ ------ ------ ------- -------
Balance at December 31, 1995 22,289 47,689 361,426 (4,931) 426,473
Net earnings - - 64,501 - 64,501
Dividends declared--$1.51 per share - - (33,204) - (33,204)
Pension liability adjustment, net - - (1,569) - (1,569)
Unrealized gains on investments
available for sale, net - - 423 - 423
Issuance of stock, net and other 98 2,915 - 1,376 4,389
-------- ------- ------- ------- --------
Balance at December 31, 1996 22,387 50,604 391,577 (3,555) 461,013
Net earnings - - 55,916 - 55,916
Dividends declared--$1.61 per share - - (35,493) - (35,493)
Pension liability adjustment, net - - (261) - (261)
Unrealized gains on investments
available for sale, net - - 884 - 884
Executive stock purchase loan
program - (1,156) - - (1,156)
Issuance of stock, net and other 51 1,541 - 1,975 3,567
------- ------- -------- ------- --------
Balance at December 31, 1997 $22,438 $50,989 $412,623 $(1,580) $484,470
======= ======= ======== ======= ========
The accompanying notes are an integral part of these financial
statements.
F-7
Notes To Financial Statements
1. Accounting Policies
The consolidated financial statements include the accounts of Eastern
Enterprises ("Eastern"), and its natural gas distribution subsidiaries, Boston
Gas Company ("Boston Gas") and Essex County Gas Company ("Essex Gas"), and its
marine transportation subsidiary, Midland Enterprises Inc. ("Midland").
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.
As discussed on Note 2, amounts have been restated under the pooling of
interests method of accounting to include the operations of Essex Gas. Certain
prior year financial statement information has been reclassified to be
consistent with the current presentation. All material intercompany balances and
transactions have been eliminated in consolidation. Certain accounting policies
followed by Eastern and its subsidiaries are described below:
Cash and short-term investments: Highly liquid instruments with
original maturities of three months or less are considered cash equivalents.
Inventories include the following:
December 31,
(In thousands) 1997 1996
--------------------------------------------------------------------------
Supplemental gas supplies $48,722 $53,335
Other materials, supplies and marine fuel 12,614 12,496
------- -------
$61,336 $65,831
Inventories are valued at the lower of cost or market using the
first-in, first-out (FIFO) or average cost method.
Regulatory assets and liabilities: Natural gas distribution operations
are subject to the provisions of Statement of Financial Accounting Standards
("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation."
Regulatory assets represent probable future revenue associated with certain
costs which will be recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions in revenues
associated with amounts that are to be credited to customers through the
ratemaking process.
Regulatory assets include the following:
December 31,
(In thousands) 1997 1996
----------------------------------------------------------------------
Post-retirement benefit costs $ 87,188 $ 92,029
Environmental costs 18,852 2,784
Deferred pipeline transition costs 401 17,389
Other 3,388 3,795
--------- --------
$109,829 $115,997
F-8
Notes To Financial Statements-(Continued)
Regulatory liabilities total $11,079,000 and $12,197,000 at
December 31, 1997 and 1996, respectively, and relate primarily to income taxes.
As of December 31, 1997 regulatory assets and regulatory liabilities
are being reflected in rates charged to customers over periods from one to 22
years.
Both natural gas distribution operations applied SFAS No. 71
during the periods presented. Effective September 30, 1998, Essex Gas
discontinued the application of SFAS No. 71. See Note 2 for further discussion.
Impairment of long-lived assets: Pursuant to SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," in the event that facts and circumstances indicate that the cost
of an asset may be impaired, an evaluation of the recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value is required.
Based on such evaluations there were no impairment charges in 1997 or 1996.
Other current liabilities include the following:
December 31,
(In thousands) 1997 1996
-------------------------------------------------------------------------------------------------
Pipeline transition costs liability $ - $16,494
Coal miners retiree health care premiums 19,500 16,300
Reserves for insurance claims 11,980 11,881
Dividend payable 8,359 8,122
Severance accruals 5,369 -
Pipeline refunds due utility customers 4,703 3,660
Other 17,738 16,729
------ ------
$67,649 $73,186
======= =======
Revenue recognition: Substantially all of natural gas distribution
operations revenues are recorded when billed. These operations defer the cost
of any firm gas that has been distributed, but is unbilled at the end of a
period, to the period in which the gas is billed to customers. Marine
transportation operations recognize revenue on tows in progress on the
percentage-of-completion method based on miles traveled.
Depreciation and amortization: Depreciation and amortization are
provided using the straight-line method at rates designed to allocate the cost
of property and equipment over their estimated useful lives:
Years
Gas utility plant 14-82
Boats and barges 23-30
Buildings 20-30
Furniture, fixtures and other equipment 3-25
Leaseholds shorter of useful life
or term of lease
F-9
Notes To Financial Statements-(Continued)
Earnings per share: SFAS No. 128, "Earnings per Share," requires the
computation of basic and diluted earnings per share. Basic earnings per share is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share is
determined by giving effect to the exercise of stock options using the treasury
stock method.
Years Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
--------------------------------------------------------------------------------------
Earnings before
extraordinary item $55,916 $64,501 $63,561
======= ======= =======
Weighted-average shares 22,329 22,245 22,113
Dilutive effect of options 169 169 58
-------- ------- -------
Adjusted weighted-average
shares 22,498 22,414 22,171
======= ====== ======
Basic earnings per share
before extraordinary item $ 2.50 $ 2.90 $ 2.88
======= ====== =======
Diluted earnings per share
before extraordinary item $ 2.49 $ 2.88 $ 2.87
======= ====== =======
SFAS No. 128 was adopted in 1997. As a result, reported earnings per
share for 1996 and 1995 were restated. The accretive effect of this accounting
change reflects the less dilutive application of the treasury stock method
under SFAS No. 128, as follows:
Years ended December 31,
1996 1995
---- ----
Primary earnings per share before
extraordinary item, as previously reported $2.88 $2.87
Effect of SFAS 128 0.02 0.01
----- -----
Basic earnings per share before extraordinary
item, as restated $2.90 $2.88
===== =====
Fully diluted earnings per share before
extraordinary item, as previously reported $2.87 $2.87
Effect of SFAS 128 0.01 0.00
----- -----
Diluted earnings per share before
extraordinary item, as restated $2.88 $2.87
===== =====
F-10
Notes To Financial Statements-(Continued)
Recent accounting pronouncements:
Effective January 1, 1998, Eastern adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement. Eastern's
only items of other comprehensive earnings include unrealized gains and losses
on certain marketable securities and unfunded pension liabilities.
2. Essex Gas Merger
On September 30, 1998, Eastern completed a merger with Essex Gas by
exchanging approximately 2,047,000 shares of its common stock for all of the
common stock of Essex Gas. Each share of Essex Gas was exchanged for 1.183985
shares of Eastern common stock. The merger was accounted for as a pooling of
interests and the accompanying financial statements include the accounts of
Essex Gas for all periods presented. Essex Gas' fiscal year ends on August 31.
Accordingly, the accompanying financial statements include years ending December
31 for Eastern combined with the years ending August 31 for Essex Gas.
Financial Results for the separate companies and the combined amounts
presented in the consolidated statements of operations were as follows:
Years Ended December 31,
1997 1996 1995
------------------------------------------
Revenues:
Eastern $ 970,204 $1,007,342 $949,412
Essex Gas 53,536 49,929 45,050
---------- ---------- --------
Combined $1,023,740 $1,057,271 $994,462
========== ========== ========
Earnings before extraordinary item:
Eastern $51,950 $60,665 $60,381
Essex Gas 3,966 3,836 3,180
------- -------- -------
Combined $55,916 $64,501 $63,561
======= ======= =======
The combined financial statements include adjustments to conform the
accounting policies of Essex Gas with those of Eastern, the most significant of
which concerned the adoption of SFAS No. 106, "Employers' Accounting for
Portretirement Benefits other than Pensions." To conform with Eastern's method
of adoption, on September 1, 1994, Essex Gas recognized its transition
obligation of approximately $4,100,000. Since Essex Gas had received regulatory
approval to fully recover the SFAS No. 106 costs in rates, a regulatory asset
was recorded for the transition obligation and there was no adjustment to
income.
In approving the Essex Gas merger, the Massachusetts Department of
Telecommunication and Energy (the "DTE"), approved a plan for Essex Gas
customers immediately reducing rates by 5% at which level rates will be frozen
for ten years. Because of the length of the rate freeze, Essex Gas is unable to
continue its application of SFAS No. 71, "Accounting for the Effects of Certain
Types of Regulation" and, effective September 30, 1998, will write-off net
regulatory assets approximating $2,950,000 pretax, $1,800,000 net or $.08 per
share. Essex Gas' regulatory assets primarily consist of deferred
post-retirement health care costs.
F-11
Notes To Financial Statements-(Continued)
3. Planned Merger with Colonial Gas Company
On October 17, 1998 Eastern signed a definitive agreement that provides
for the merger of Colonial Gas Company ("Colonial Gas") into Eastern for $37.50
per share, payable in Eastern stock and $150 million in cash. The exchange ratio
for the stock portion of the consideration will be based upon Eastern's average
closing stock price for a ten-day period prior to closing, subject to a collar
mechanism. The transaction is expected to close in mid-1999, subject to receipt
of satisfactory regulatory approvals and the approval of Eastern and Colonial
Gas shareholders. The merger is expected to be tax-free to the extent Colonial
Gas shareholders receive Eastern stock, and will be accounted for using the
purchase method of accounting.
4. Business Segment Information
Operating results and other financial data are presented for Eastern's
two business segments: Natural gas distribution, which includes Boston Gas and
Essex Gas, serving eastern and central Massachusetts, and marine transportation,
which includes Midland, with operations on the inland waterways.
(In thousands) 1997 1996 1995
--------------------------------------------------------------------------------------------
Revenues:
Natural gas distribution $ 754,481 $ 755,391 $ 698,123
Marine transportation 269,259 301,880 296,339
---------- ---------- ----------
$1,023,740 $1,057,271 $ 994,462
========== ========== ==========
Operating earnings:
Natural gas distribution $ 87,773 $ 77,291 $ 69,264
Marine transportation 34,614 58,415 57,828
Headquarters(1) (7,070) (5,472) (5,756)
----------- ----------- -----------
$ 115,317 $ 130,234 $ 121,336
=========== =========== ==========
Identifiable assets, net of depreciation and reserves:
Natural gas distribution $ 974,021 $ 970,282 $ 916,064
Marine transportation 356,350 353,928 365,654
Headquarters(2) 199,994 190,643 182,206
---------- ---------- ----------
$1,530,365 $1,514,853 $ 1,463,924
========== ========== ==========
Capital expenditures:
Natural gas distribution $ 62,283 $ 66,532 $ 64,289
Marine transportation 25,700 47,851 20,900
Headquarters 1,233 5,400 163
--------- ---------- -----------
$ 89,216 $ 119,783 $ 85,352
========== ========== ===========
Depreciation and amortization:
Natural gas distribution $ 47,786 $ 44,305 $ 40,765
Marine transportation 22,675 22,554 22,896
Headquarters 861 370 344
---------- ---------- -----------
$ 71,322 $ 67,229 $ 64,005
========== ========== ===========
(1) Reflects unallocated corporate general and administrative expenses.
(2) Primarily includes cash and short-term investments.
F-12
Notes To Financial Statements-(Continued)
Natural gas distribution operations are subject to Massachusetts
statutes applicable to gas utilities. Their revenues, earnings and cash flows
are highly seasonal as most of their firm sales and transportation are
directly related to temperature levels. These operations purchase pipeline gas
supplies from a variety of domestic and Canadian producers and marketers,
using a combination of long-term commitments, firm winter service agreements
and spot purchases. These operations have diversified their pipeline gas
supplies across major North American producing regions.
A significant portion of marine transportation operations relate to
multi-year transportation contracts. Based on past experience and its
competitive position, management considers that the simultaneous loss of
several of its largest customers, while possible, is unlikely to happen.
5. Long-Term Obligations and Current Debt
Credit agreement and lines of credit: Eastern maintains credit
agreements with groups of banks, which provide for the borrowings by Eastern
and its subsidiaries of up to $119,000,000 at various times through December
31, 2001. The interest rate for borrowings is the agent bank's prime rate or,
at the borrower's option, various pricing alternatives. The agreements require
facility fees of 1/8 to 3/8 of 1% of the commitments. At December 31, 1997 and
1996, $3,313,000 and $11,940,000 were outstanding, respectively. Boston Gas
utilizes a portion of the credit agreement to back its commercial paper
borrowings. Included in current debt were $43,013,000 and $68,940,000 of
commercial paper with a weighted average interest rate of 6.19% and 5.97% at
December 31, 1997 and December 31, 1996, respectively. In addition, Eastern,
Boston Gas and Essex Gas have various uncommitted lines of credit which are
utilized for working capital needs and provide for interest at the bank's
prime rate or, at the borrower's option, various pricing alternatives.
Gas inventory financing: Boston Gas and Essex Gas maintain long-term
credit agreements with groups of banks, which provide for the borrowing of up
to $80,000,000 for the exclusive purpose of funding their inventory of gas
supplies or for backing commercial paper issued for the same purpose. All
costs related to this funding are recoverable from customers. Boston Gas and
Essex Gas have $59,310,000 and $58,952,000 of commercial paper outstanding or
bank borrowings to fund their inventory of gas supplies at December 31, 1997
and 1996, respectively. Since the commercial paper is supported by the credit
agreement, these borrowings have been classified as non-current in the
accompanying consolidated balance sheets. The Boston Gas credit agreement
includes a one-year revolving credit facility which may be converted to a
two-year term loan at the option of Boston Gas if the one-year revolving
credit facility is not renewed by the banks. Boston Gas may select the agent
bank's prime rate or, at Boston Gas' option, various pricing alternatives. The
Boston Gas agreement requires a facility fee of 1/12 of 1% on the commitment.
No borrowings were outstanding under this agreement during 1997 and 1996.
F-13
Notes To Financial Statements-(Continued)
Description of long-term debt:
December 31,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------------------
Natural gas distribution:
8.33%-9.75% Medium-Term Notes,
Series A, due 2005-2022 $100,000 $ 100,000
6.93%-8.50% Medium-Term Notes,
Series B, due 2006-2024 50,000 50,000
6.80%-7.25% Medium-Term Notes,
Series C, due 2012-2025 60,000 60,000
7.28%-10.25% First Mortgage Bonds
1998-2020 22,200 12,800
8.15% - 8.625% Debenture
Due 2006-2017 7,199 7,205
8.50% Mortgage Note
Due 1997 360 608
Other - 75
Capital leases 605 1,225
Less--current portion (1,014) (1, 543)
------- --------
Natural gas distribution 239,350 230,370
------- -------
Marine transportation:
First Preferred Ship Mortgages
9.9% Bonds, due 2008 47,791 48,399
8.1%-9.85% Medium-Term Notes,
Series A, due 2002-2012 68,000 68,000
Capital leases 20,702 24,901
Less--current portion (4,351) (3,987)
-------- --------
Marine transportation 132,142 137,313
-------- --------
Total long-term debt $371,492 $367,683
======== ========
Natural gas distribution Medium-Term Notes are not callable prior to
maturity. The First Mortgage Bonds are secured by substantially all the plant
assets of Essex Gas.
The marine transportation First Preferred Ship Mortgage Bonds and
Medium-Term Notes are secured by certain transportation equipment. The First
Preferred Ship Mortgage Bonds are not callable until April 1, 1998.
The Medium-Term Notes are not callable prior to maturity.
In March 1998, marine transportation utilized currently available cash
to call $50,000,000 of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In
extinguishing this debt, marine transportation recognized an extraordinary
charge of $2,254,000 pretax, $1,465,000 net, or $.06 per share.
In September 1998, marine transportation issued $75,000,000 of 6.25%
First Preferred Ship Mortgage Bonds maturing October 1, 2008. Proceeds of
$68,500,000 were net of $6,000,000 incurred on treasury rate lock agreements
entered into in the second and third quarters in order to hedge the underlying
treasury interest rate. The debt has an effective annual interest rate of 7.50%.
F-14
Notes To Financial Statements-(Continued)
Capital leases consist of equipment lease obligations with a weighted
average interest rate of 9.98%. Minimum lease payments under these agreements
are due in installments through 2005.
Debt payment requirements and maturities, net of amounts acquired in
advance, are $5,365,000, $10,496,000, $10,983,000, $9,931,000 and $10,398,000
for 1998 through 2002, respectively, and cumulatively $329,684,000 thereafter.
Five-year operating lease commitments: In addition to the equipment
financed under capital leases, Eastern and its subsidiaries lease certain
facilities, vessels and equipment under long-term operating leases which expire
on various dates through the year 2079. Total rentals charged to expense were
$10,887,000 in 1997, $13,840,000 in 1996 and $13,893,000 in 1995.
Future minimum lease commitments under operating leases are $6,079,000,
$5,426,000, $4,563,000, $3,907,000, $3,255,000 for 1998 through 2002,
respectively, and cumulatively $4,102,000 thereafter.
6. Preferred Stock of Subsidiary
Boston Gas has outstanding 1,200,000 shares of 6.421% Cumulative
Preferred Stock, which is non-voting and has a liquidation value of $25 per
share. The preferred stock requires 5% annual sinking fund payments beginning on
September 1, 1999 with a final redemption on September 1, 2018. The preferred
stock is not callable prior to 2003.
7. Stock Plans
Eastern has five stock option plans which provide for the issuance of
non-qualified stock options, incentive stock options and stock appreciation
rights ("SARs") to its officers, non-employee trustees and key employees.
Options and SARs may be granted at prices not less than fair market value on the
date of grant for periods not extending beyond ten years from the date of grant.
No SARs have been granted since 1991. In 1995, the right to exercise outstanding
SARs was effectively eliminated.
Eastern applies Accounting Principles Board Opinion 25 in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans and its employee stock purchase
plan. Had compensation cost for Eastern's plans been determined consistent
with SFAS No. 123, "Accounting for Stock-Based Compensation," Eastern's net
earnings would have been reduced by $418,000 or $.02 per share in 1997, $304,000
or $.01 per share in 1996 and by $183,000 or $.01 per share in 1995. The
weighted average fair value of options granted during 1997 was $33.66.
As the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting reductions in net
earnings and earnings per share may not be representative of that to be expected
in future years.
F-15
Notes To Financial Statements-(Continued)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend
yields of 4.0% in each year; expected volatilities of 17.8%, 18.3% and 18.6%;
risk-free interest rates of 6.1%, 5.4% and 6.0%; and an expected life of 5.0
years for each year.
Shares available for future grants under these stock option plans were
934,760 at December 31, 1997, 1,093,110 at December 31, 1996 and 1,126,411 at
December 31, 1995.
Option activity during the past three years was as follows:
Average Stock
Option Price Options SARs
----------------------------------------------------------------------------
Outstanding at December 31, 1994 $25.83 654,711 127,960
Granted 26.39 134,666 -
Exercised 24.94 (33,662) 20,140)
Surrendered 21.94 (20,140) (7,200)
Canceled 26.93 (23,550) (5,400)
-------- ------
Outstanding at December 31, 1995 $26.13 712,025 95,220
Granted 35.96 133,200 -
Exercised 22.99 (44,320) -
Surrendered - - (7,170)
Canceled 29.20 (24,899) (350)
------- ------
Outstanding at December 31, 1996 $27.96 776,006 87,700
Granted 33.63 161,700 -
Exercised 24.57 (52,140) -
Surrendered - - (22,500)
Canceled 35.52 (3,350) -
------- -------
Outstanding at December 31, 1997 $29.21 882,216 65,200
======= =======
Stock options exercisable at December 31, 1997 and 1996 were 512,006
and 493,250, respectively. At December 31, 1997, the range of exercise prices of
outstanding and exercisable options was $20.48 to $37.00 and $20.48 to $36.25,
respectively, with a weighted-average remaining contractual life of 5.8 years.
Under restricted stock plans for key employees and non-employee
trustees, Eastern awarded 4,400 shares in 1997 and 1996 and 2,800 shares in
1995. Eastern recognized compensation expense of $109,000 in 1997, $305,000 in
1996 and $425,000 in 1995 in accordance with the vesting terms of these and
prior awards. Shares available for future awards under these plans were 33,300
at December 31, 1997 and 36,100 at December 31, 1996.
8. Common Stock Purchase Rights
On February 22, 1990, Eastern declared a distribution to shareholders
of record on March 5, 1990, pursuant to the terms of a Common Stock Rights
Agreement (the "1990 Rights Agreement") between Eastern and BankBoston, N.A.,
the current Rights Agent, of one common
F-16
Notes To Financial Statements-(Continued)
stock purchase right for each outstanding share of common stock. Each right
would initially entitle the holder to purchase one share of common stock at an
exercise price of $100, subject to adjustment to prevent dilution. The rights
become exercisable on the 10th business day after a person acquires 10% or more
of Eastern's stock or commences a tender offer for 10% or more of Eastern's
stock. The rights may be redeemed by Eastern at any time prior to the 10th day
after a 10% position has been acquired at a price of $.01 or for shares of
common stock of Eastern at an initial exchange ratio of one share for each
right, subject to adjustment and subject to other limitations contained in the
1990 Rights Agreement. The rights will expire on March 5, 2000.
If Eastern is acquired in a merger or other business combination, each
right will entitle its holder to purchase common shares of the acquiring company
having a market value of twice the exercise price of each right (i.e., at a 50%
discount). If an acquiror purchases 10% of Eastern's common stock each right
will entitle its holder to purchase a number of Eastern's common shares having a
market value of twice the right's exercise price.
On July 22, 1998 Eastern declared a dividend of one purchase right (a
"New Right") for every outstanding share of Eastern common stock. The New Rights
will be distributed at the close of business upon the earlier to occur of (i)
the date of redemption by Eastern of Eastern's rights issued pursuant to the
1990 Rights Agreement discussed above, and (ii) February 18, 2000, to
shareholders of record as of the close of business on such date (the "New
Dividend Record Date"). The terms of the New Rights are set forth in a Rights
Agreement dated as of July 22, 1998 (the "New Rights Agreement") between Eastern
and BankBoston, N.A., as Rights Agent.
Each New Right would initially entitle the holder to purchase from
Eastern one share of Eastern common stock at a price of $160 per share, subject
to adjustment. The New Rights will expire on July 22, 2008, or upon the earlier
redemption of the New Rights. The material terms of the New Rights Agreement are
substantially similar to the terms of the 1990 Rights Agreement discussed above.
9. Interest Expense
Years Ended December 31,
(In thousands) 1997 1996 1995
-------------------------------------------------------------------------------
Interest on long-term debt $32,636 $32,778 $35,306
Other, including amortization of
debt expense 3,485 3,142 4,612
Less--capitalized interest (636) (570) (591)
Subsidiary preferred stock dividends 1,926 1,940 1,946
------- ------- -------
Interest expense $37,411 $37,290 $41,273
======= ======= =======
Interest payments $36,660 $35,945 $38,069
======= ======= =======
10. Other Income (Expense)
Years Ended December 31,
(In thousands) 1997 1996 1995
-------------------------------------------------------------------------------------------------
Net gain on sale of assets $ 778 $2,775 $21,087
Equity in loss of AllEnergy (5,472) (3,087) -
Provision for environmental expenses - - (15,000)
Other 661 198 (1,978)
------- ------- --------
$(4,033) $ (114) $ 4,109
======= ======= ========
F-17
Notes To Financial Statements-(Continued)
In December 1997, Eastern sold its 50% interest in AllEnergy Marketing
Company, L.L.C. for $5,375,000 which approximated the net book value of its
investment at September 30, 1997. Eastern accounted for its investment in
AllEnergy using the equity method.
In November 1995, Eastern sold its 3,041,092 shares of United States
Filter Corporation common stock in a public offering for $65,479,000 in cash,
realizing a gain of $20,581,000.
11. Income Taxes
The table below reconciles the statutory U.S. Federal income tax
provision from continuing operations to the recorded income tax provision:
Years Ended December 31,
1997 1996 1995
---------------------------------------------------------------------------------------------------
Statutory rate 35% 35% 35%
State taxes, net of Federal benefit 3 3 3
Prior year adjustments (4) - -
Capital loss utilization - - (8)
Other (1) (1) (1)
-- --- ---
Effective rate 33% 37% 29%
== == ==
Prior year tax adjustments reflect the resolution of Federal tax audit
issues on the sale of a subsidiary in 1993 and inventory capitalization in 1994.
Following is a summary of the provision for income taxes:
Years Ended December 31,
(In thousands) 1997 1996 1995
-------------------------------------------------------------------------------
Federal $ 13,152 $24,262 $22,493
State 4,498 3,205 5,452
------- ------- -------
Total current provision 17,650 27,467 27,945
Federal 9,706 8,616 (876)
State (402) 1,665 (825)
------- ------- -------
Total deferred provision 9,304 10,281 (1,701)
------- ------- -------
Provision for income taxes $26,954 $37,748 $26,244
======= ======= =======
Tax payments $ 8,758 $30,325 $27,041
======== ======= =======
Significant items making up deferred tax assets and deferred tax liabilities are as follows:
December 31,
(In thousands) 1997 1996
--------------------------------------------------------------------------------
Coal miners retiree health care $ 26,761 $ 27,073
Unbilled revenue 17,513 22,392
Environmental reserves 7,886 7,776
Other 35,321 32,632
--------- ---------
Total deferred tax assets 87,481 89,873
Accelerated depreciation (156,868) (150,938)
Deferred gas costs (27,418) (28,684)
Other (21,704) (18,077)
---------- ---------
Total deferred tax liabilities (205,990) (197,699)
--------- ---------
Total deferred taxes $(118,509) $(107,826)
========= =========
F-18
Notes To Financial Statements-(Continued)
12. Environmental Matters
Eastern is aware of certain non-utility sites, associated with former
operations, for which it may have or share environmental remediation
responsibility or ongoing maintenance. Eastern has a reserve of approximately
$25 million in total at December 31, 1997 to cover the remediation and
maintenance of these sites, the principal of which is a former coal tar
processing facility (the "Facility") in Everett, Massachusetts. While Eastern
has provided reserves to cover the estimated probable costs of remediation and
maintenance for environmental sites based on the information available at the
present time, the extent of Eastern's potential liability at such sites is not
yet determined.
The Facility, which was located on a 10-acre parcel of land formerly
owned by Eastern, was operated by predecessors of Allied-Signal, Inc. from the
early 1900's until 1937 and by Koppers Company, predecessor of Beazer East, Inc.
(and Eastern's controlling stockholder until 1951) from 1937 until 1960, when it
was shut down. The Facility processed coal tar purchased from Eastern's adjacent
by-product coke plant, also shut down in 1960. Eastern, Beazer and Allied-Signal
entered into an Administrative Consent Order with the Massachusetts Department
of Environmental Protection ("DEP") in 1989 which requires that they jointly
investigate and develop a remedial response plan for the Facility site,
including any area where a release from that site may have come to be located.
The companies have entered into a cost-sharing agreement under which each
company has agreed to pay one-third of the costs of compliance with the consent
order, while preserving any claims it may have against the other companies. In
1993 the companies completed preliminary remedial measures, including abatement
of seepage of materials into the adjacent Island End River, a 29-acre tidal
river which is part of Boston Harbor. Studies have identified compounds that may
be associated with coal tar and/or oil in soil and ground water at the site and
adjacent areas, including the riverbed. In addition to the DEP, the National
Oceanic and Atmospheric Administration and the Coast Guard have been involved in
river sediment investigation and remediation discussions. During 1995 and 1996,
Eastern conducted and received the results of certain sediment sampling which
confirmed findings of contamination in the riverbed. In light of uncertainties
as to the full extent and sources of releases of compounds, the nature of any
required remediation, the area and volume of soil, ground water and/or sediments
that may be included, the possibility of participation by additional potentially
responsible parties and the apportionment of liability, Eastern does not possess
at this time sufficient information to reasonably determine or estimate the
ultimate cost to it of such remedial measures. Eastern is recovering certain
costs of its legal defense and may be entitled to recover remediation costs from
its insurers.
Eastern's natural gas distribution operations, like many other
companies in the natural gas industry, are parties to governmental proceedings
requiring investigation and possible remediation of former manufactured gas
plant ("MGP") sites. Boston Gas and Essex Gas may have or share responsibility
under applicable environmental laws for the remediation of 18 such sites. A
subsidiary of New England Electric System ("NEES") has assumed responsibility
for remediating 10 of these sites, subject to a limited contribution from Boston
Gas. Boston Gas and Essex Gas have estimated their potential share of the costs
of investigating and remediating former MGP sites in accordance with SFAS No. 5,
"Accounting for Contingencies," and the American Institute of Certified Public
Accountants Statement of Position 96-1, "Environmental Remediation Liabilities."
These operations have recorded liabilities of $19.5 million, which represents
their best
F-19
Notes To Financial Statements-(Continued)
estimate at this time of remediation costs, which may reasonably be estimated to
range from $17 million to $31 million. However, there can be no assurance that
such costs will not vary considerably from these estimates. 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.
Boston Gas and Essex Gas are aware of 26 other former MGP sites within
their service territories. The NEES subsidiary has provided full indemnification
to Boston Gas with respect to eight of these sites. At this time, there is
substantial uncertainty as to whether Boston Gas or Essex Gas have or share
responsibility for remediating any of these other sites. No notice of
responsibility has been issued to Boston Gas or Essex Gas for any of these sites
from any governmental environmental authority.
By a rate order issued on May 25, 1990, the Department approved the
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. Eastern's natural gas operations have
recognized an insurance receivable of $3.4 million, reflecting a negotiated
settlement with an insurance carrier for environmental expense indemnity, and a
regulatory asset of $16.1 million, representing the expected rate recovery of
environmental remediation costs, net of the insurance settlement. Eastern
currently believes, in light of the indemnity agreement with the NEES subsidiary
and 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.
13. Coal Miners Retiree Health Care
On June 25, 1998 the U.S. Supreme Court ruled that the Coal Industry
Retiree Health Benefit Act of 1992 ("the Coal Act") is unconstitutional as
applied to Eastern. Accordingly, previously recorded reserves not used, less
associated expenses, resulted in an extraordinary gain of $74,500,000 pretax,
$48,425,000 net or $2.13 per share in the second quarter of 1998.
In 1993, Eastern recorded a reserve of $70,000,000 ($45,500,000 net of
tax or $1.88 per share) to provide for its estimated undiscounted obligations
under the Coal Act with respect to notices of responsibility received from the
Social Security Administration in that year. The notices claimed that Eastern
was responsible for health care and death benefit premiums for certain retired
coal miners and their beneficiaries who were said to have worked for Eastern's
Coal Division prior to the transfer of those operations to a subsidiary in 1965.
Principally due to receipt of additional notices, in 1995 Eastern recorded an
additional reserve of $10,000,000 ($6,500,000 net of tax or $.30 per share).
Provisions to establish these reserves were accounted for as extraordinary
items. Eastern never paid any premiums under the Coal Act.
14. Retiree Benefits
Eastern and its subsidiaries, through various company-administered
plans and other union retirement and welfare plans, provide retirement benefits
for the majority of their employees, including pension and certain health care
and life insurance benefits. Normal retirement age ranges from 60 to 65, but
provision is made for earlier retirement. Pension benefits for salaried plans
are based on salary and years of service, while union retirement and welfare
plans are based on negotiated benefits and years of service. Employees,
excluding Essex Gas employees, hired before
F-20
Notes To Financial Statements-(Continued)
1993 who are participants in the pension plans become eligible for
post-retirement health care benefits if they reach retirement age while working
for Eastern. 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"). The net cost for these plans and
agreements charged to expense was as follows: Pensions
Years Ended December 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Service cost $ 5,145 $ 4,983 $4,937
Interest cost on projected benefit obligation 12,808 12,259 11,471
Actual return on plan assets (55,001) (17,985) (30,811)
Net amortization and deferral 38,529 5,601 19,423
------- ------ ------
Total net pension cost of company-administered
plans 1,481 4,858 5,020
Multi-employer union retirement and welfare plans 270 293 293
------- ------ ------
Total net pension cost $ 1,751 $5,151 $5,313
======= ====== ======
Health Care
Years Ended December 31,
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------
Service cost $ 1,007 $ 1,003 $ 949
Interest cost on accumulated benefits obligation 7,147 7,165 6,900
Actual return on plan assets (5,994) (1,378) 2,365
Net amortization and deferral 3,010 (1,168) (4,549)
Amortization and deferral of deferred costs 4,841 5,470 3,963
------- ------- ------
Total net retiree health care cost $10,011 $11,092 $9,628
======= ======= ======
The following table sets forth the funded status of
company-administered plans and amounts recorded in Eastern's consolidated
balance sheet as of December 31, 1997 and 1996 using actuarial measurement dates
as of October 1, 1997 and 1996:
Pensions Health Care
(In thousands) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested benefits $ 146,719 $139,039 $ 83,832 $ 80,467
Non-vested benefits 14,184 13,940 18,407 18,106
---------- -------- --------- ---------
160,903 152,979 102,239 98,573
Effect of future salary increases 20,427 20,644 - -
---------- -------- -------- ---------
Projected benefit obligation ("PBO") $ 181,330 $173,623 $102,239 $ 98,573
---------- -------- -------- ---------
Plan assets at fair value $ 241,734 $201,819 $ 25,263 $ 18,804
Less PBO 181,330 173,623 102,239 98,573
Plan assets in excess of (less than) PBO 60,404 28,196 (76,976) (79,769)
Unrecognized net obligation at December 31,
1985 being amortized over 15 years 1,308 1,721 - -
Unrecognized net gain (64,402) (32,327) (9,968) (7,839)
Unrecognized prior service cost (benefit) 15,878 16,385 (8,377) (9,549)
Amounts contributed to plans during fourth
quarter 206 227 - -
Unfunded accumulated benefits (5,058) (4,705) - -
---------- --------- --------- ---------
Net asset (reserve) at December 31 $ 8,336 $ 9,497 $(95,321) $(97,157)
========== ========= ======== ========
F-21
Notes To Financial Statements-(Continued)
The above vested health care benefits include $76,728,000 and
$72,698,000 for retirees in 1997 and 1996, respectively. To fund health care
benefits under its collective bargaining agreements, Boston Gas and Essex Gas
maintain Voluntary Employee Beneficiary Association ("VEBAs"), to which they
make contributions from time to time. Essex Gas made contributions during 1997
and 1996 of $560,241 and $541,483, respectively. Plan assets are invested in
debt and equity marketable securities.
Following are the assumptions used in developing the projected benefit
obligation for 1997, 1996 and 1995:
1997 1996 1995
---- ---- ----
Discount rate 7.5% 7.5-8.0% 7.5-8.0%
Return on plan assets 8.5% 8.5% 8.5%
Increase in future compensation 4.75-5.0% 4.75-6.0% 4.75-6.00%
Health care inflation trend 7.0-8.75% 7.0-9.5% 7.5-10.0%
The health care inflation trend is assumed to be 7% through 1999, 6% in
2000 and 5% thereafter. A one-percentage-point increase in the assumed health
care cost trend would have increased the net periodic post-retirement benefit
cost charged to expense and the accumulated benefit obligation by $145,000 and
$6,123,000, respectively, in 1997 and $115,000 and $7,596,000, respectively, in
1996.
See Note 2 for discussion of the adjustment conforming Essex Gas'
method of adoption of SFAS No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions".
15. Fair Values of Financial Instruments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," which requires investments in debt and equity securities
other than those accounted for under the equity method to be carried at fair
value or amortized cost for debt securities expected to be held to maturity,
Eastern has classified its investments in debt and equity securities as
available for sale. Accordingly, the net unrealized gains and losses computed in
marking these securities to market have been reported as a component of
shareholders' equity. The difference between the fair value and the original
cost of these securities is a net unrealized gain of $3,697,000 and $2,813,000,
in 1997 and 1996, respectively.
The following methods and assumptions were used to estimate the fair
value disclosures for financial instruments.
Cash, short-term investments and current debt: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Current debt includes notes payable and gas inventory financing.
Other current assets and investments: Other current assets and
investments include marketable securities classified as available for sale.
Pursuant to SFAS No. 115 the carrying value is the fair value.
Long-term debt and preferred stock of subsidiary: The fair values are
based on currently-quoted market prices.
F-22
Notes To Financial Statements-(Continued)
The carrying amounts and estimated fair values of Eastern's financial
instruments are as follows:
December 31,
(In thousands) 1997 1996
------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term investments $175,709 $175,709 $160,108 $160,108
Marketable securities and investments 16,030 16,030 32,164 32,164
Short-term debt 102,323 102,323 127,892 127,892
Long-term debt 376,857 422,370 373,213 406,784
Preferred stock of subsidiary 29,326 31,525 29,292 29,586
16. Unaudited Quarterly Financial Information
For the three months ended
(In thousands, except per share amounts) Mar 31, June 30, Sept 30, Dec 31,
- -----------------------------------------------------------------------------------------------------------
1997:
Revenues $385,063 $231,077 $142,184 $265,416
Operating earnings 53,223 24,321 3,301 34,472
Earnings before income taxes 44,502 15,595 (4,377) 27,150
Net earnings $ 27,962 $ 12,169 $ (2,816) $ 18,601
========= ======== ========= ========
Basic earnings per share(1) $1.26 $.54 $(.13) $.83
====== ==== ===== ====
Diluted earnings per share(1) $1.25 $.54 $(.13) $.83
===== ==== ===== ====
1996:
Revenues $426,182 $237,268 $149,496 $244,325
Operating earnings 59,543 27,243 7,251 36,197
Earnings before income taxes 52,121 20,822 2,184 27,122
Net earnings $ 32,674 $ 12,898 $ 1,754 $ 17,175
========= ========= ========= =========
Basic earnings per share(1) $1.47 $.58 $.08 $.77
===== ==== ==== ====
Diluted earnings per share(1) $1.46 $.58 $.07 $.77
===== ===== ==== ====
(1) Reflects adoption of SFAS No. 128, "Earnings per Share," as described in
Note 1.
F-23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO EASTERN ENTERPRISES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Eastern Enterprises included in
this Form 8-K, and have issued our report theron dated October 1, 1998 (except
with respect to the matter discussed in Note 3 to the financial statements, as
to which the date is October 17, 1998). Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedules listed
in the index on page F-1 are the responsibility of Eastern's management and are
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. These
schedules have been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly state in all
material respects the financial data required to be set forth herein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
October 1, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports, dated October 1, 1998, included in this Form 8-K
into Eastern Enterprises' previously filed Post-Effecitve Amendment No.1 to
Form S-16 Registration Statement No. 2-71614 on Form S-3 and Form S-8
Registration Statements No.2-77146, No. 33-19990, No. 33-40862 and No. 33-56424.
Arthur Andersen LLP
Boston, Massachusetts
November 20, 1998
F-24
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For The Year Ended December 31, 1997
(In Thousands)
Additions Deductions
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
1996 Expenses Accounts Created 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Description
Reserves deducted from assets- $ 17,301 $ 5,818 $ 167 $ (6,066) $ 17,220
========= ======= ----- ======== ========
Reserves for doubtful accounts
Reserves for loss on investments $ 19 $ - $ - $ - $ 19
========= ======= ===== ======== ========
Reserves included in liabilities-
Reserve for post-retirement health
care $100,446 $ 4,578 $ - $ (6,642) $ 98,382
Reserve for coal miners retiree health
care 77,308 - - (808) 76,500
Reserves for employee benefits 24,624 9,690 907 (9,985) 25,236
Reserves for environmental expenses 26,809 - 122 (1,011) 25,920
Reserves for insurance claims 12,838 7,348 (530) (6,485) 13,171
Other 17,680 6,304 41 (7,706) 16,319
-------- ------- ----- -------- --------
Total liability reserves $259,705 $27,920 $540 $(32,637) $255,528
======== ======= ==== ======== ========
F-25
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For The Year Ended December 31, 1996
(In Thousands)
Additions Deductions
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
1995 Expenses Accounts Created 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Description
Reserves deducted from assets- $ 16,604 $13,555 $164 $(13,022) $ 17,301
========= ======= ---- ======== ========
Reserves for doubtful accounts
Reserves for loss on investments $ 19 $ - $ - $ - $ 19
========= ======= ===== ======== ========
Reserves included in liabilities-
Reserve for post-retirement health
care $ 102,387 $ 1,311 $3,725 $ (6,977) $100,446
Reserve for coal miners retiree health
care 78,125 - - (817) 77,308
Reserves for employee benefits 16,439 12,216 2,896 (6,927) 24,624
Reserves for environmental expenses 26,356 - 1,255 (802) 26,809
Reserves for insurance claims 14,133 7,746 1,972 (11,013) 12,838
Other 18,537 5,212 (837) (5,232) 17,680
-------- ------- ------ -------- --------
Total liability reserves $255,977 $26,485 $9,011 $(31,768) $259,705
======== ======= ====== ======== ========
F-26
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For The Year Ended December 31, 1995
(In Thousands)
Additions Deductions
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
1994 Expenses Accounts Created 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Description
Reserves deducted from assets- $ 16,895 $15,190 $ 230 $(15,711) $ 16,604
========= ======= ======== ======== ========
Reserves for doubtful accounts
Reserves for loss on investments $ 19 $ - $ - $ - $ 19
========= ======= ======== ========= ========
Reserves included in liabilities-
Reserve for post-retirement health
care $106,256 $ 1,150 $ 3,974 $ (8,993) $102,387
Reserve for coal miners retiree health
care 68,693 10,000 - (568) 78,125
Reserves for employee benefits 12,453 11,039 169 (7,222) 16,439
Reserves for environmental expenses 9,850 15,350 1,920 (764) 26,356
Reserves for insurance claims 9,890 8,978 5,876 (10,611) 14,133
Other 18,753 5,642 (1,008) (4,850) 18,537
-------- ------- ------- -------- --------
Total liability reserves $225,895 $52,159 $10,931 $(33,008) $255,977
======== ======= ======= ======== ========
F-27