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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
----------------
COMMISSION FILE NUMBER 1-2297
EASTERN ENTERPRISES
9 Riverside Road, Weston, Massachusetts 02193
(617) 647-2300
MASSACHUSETTS 04-1270730
(State of organization) (I.R.S. Employer
Identification No.)
----------------
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -----------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Common Stock Purchase Rights, no par value Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendments to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $738.7 million as of February 22, 1996.
There were 20,239,699 shares of Common Stock, par value $1.00 per share,
outstanding as of February 22, 1996.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended December
31, 1995 are incorporated by reference into Part II of this Report.
Portions of the Registrant's 1996 definitive Proxy Statement for the Annual
Meeting of Shareholders to be held April 25, 1996 are incorporated by
reference into Part III of this Report.
----------------
Exhibits to Form 10-K and Financial Statement Schedules have been included
only in copies of the Form 10-K filed with the Securities and Exchange
Commission.
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EASTERN ENTERPRISES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TABLE OF CONTENTS
PAGE NO.
--------
PART I
Item 1. Business............................................... K-1
Boston Gas Company.................................... K-1
Midland Enterprises Inc. ............................. K-5
General............................................... K-8
Item 2. Properties............................................. K-9
Item 3. Legal Proceedings...................................... K-9
Item 4. Submission of Matters to a Vote of Security Holders.... K-9
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters.................................. K-10
Item 6. Selected Financial Data................................ K-10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... K-10
Item 8. Financial Statements and Supplementary Data............ K-16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... K-36
PART III
Item 10. Directors and Executive Officers of the Registrant..... K-36
Item 11. Executive Compensation................................. K-36
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................ K-36
Item 13. Certain Relationships and Related Transactions......... K-36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.............................................. K-36
PART I
ITEM 1. BUSINESS
1(A) GENERAL
Eastern Enterprises ("Eastern") is an unincorporated voluntary association
(commonly referred to as a "Massachusetts business trust") established and
existing under a Declaration of Trust dated July 18, 1929, as from time to
time amended.
Eastern's principal subsidiaries are Boston Gas Company ("Boston Gas") and
Midland Enterprises Inc. ("Midland"). Boston Gas is a regulated utility that
distributes natural gas in and around Boston, Massachusetts. Midland is
engaged in barge transportation, principally on the Ohio and Mississippi river
systems. In April 1995 Eastern completed the sale of its subsidiary, WaterPro
Supplies Corporation ("WaterPro"), for $52.9 million in cash, which
approximated book value. The sale of WaterPro completed the disposition of
Eastern's Water Products Group, which consisted of WaterPro and another
subsidiary, Ionpure Technologies Corporation ("Ionpure"), which was sold in
1993. As described in Note 10 of Notes to Financial Statements, the Water
Products Group has been accounted for as a discontinued operation.
Eastern provides management and staff services to its operating
subsidiaries. Boston Gas and Midland are financed primarily through their own
internally generated funds and through the issuance of their own funded debt,
which is not guaranteed by Eastern. The debt instruments relating to Boston
Gas and Midland borrowings generally contain restrictive covenants, including
restrictions on the payment of dividends to Eastern. In the opinion of
management, none of these restrictions has any material impact upon the
operations of Eastern and its subsidiaries.
1(B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information with respect to this item may be found in Note 2 of Notes to
Financial Statements. Such information is incorporated herein by reference.
1(C) DESCRIPTION OF BUSINESS
BOSTON GAS COMPANY
Boston Gas is engaged in the transportation and sale of natural gas to over
515,000 residential, commercial, and industrial customers in Boston,
Massachusetts, and 73 other communities in eastern and central Massachusetts.
Boston Gas also sells gas for resale in Massachusetts and other states. Boston
Gas is the largest natural gas distribution company in New England, has been
in business for 173 years and is the second oldest gas company in the United
States. Since 1929, all of the common stock of Boston Gas has been owned by
Eastern.
Boston Gas provides both local transportation services and gas supply for
all customer classes. All residential customers and most commercial/industrial
("C&I") customers currently purchase combined or "bundled" supply and
transportation services from Boston Gas. Local transportation service is
offered on an unbundled basis to large commercial/industrial customers, who
may purchase gas supply from Boston Gas or other sources.
Boston Gas' services are available on a firm and non-firm basis. Firm
transportation services and sales are provided under rate tariffs filed with
the Massachusetts Department of Public Utilities ("DPU") that typically
obligate Boston Gas to provide service without interruption throughout the
year. Non-firm transportation services and sales are generally provided to
large commercial/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.
Margin on non-firm throughput and off-system sales, in excess
K-1
of a threshold based upon the prior year's experience, is shared between firm
customers and shareholders, 75% and 25%, respectively.
MARKETS AND COMPETITION
Boston Gas competes with other fuel distributors, primarily oil dealers,
throughout its service territory. Over the last five years, Boston Gas has
increased its share in the total stationary energy market from 28% to 35%.
This market share compares to the national average of approximately 43% and
may represent a growth opportunity for Boston Gas. However, actual experience
cannot be predicted with certainty, and will depend on such factors as the
price of competitive energy sources and customer perceptions of relative
value.
1995 Customer Base
[PIE CHART--PLOT POINTS BELOW]
Residential............................................ 92%
C & I.................................................. 8%
1995 Firm Throughput
[PIE CHART--PLOT POINTS BELOW]
Residential Sales...................................... 42%
C & I Sales............................................ 40%
C & I Transportation................................... 18%
Residential customers comprise 92% of its customer base, while
commercial/industrial establishments account for the remaining 8%.
Volumetrically, residential customers account for 29% of total throughput and
42% of firm throughput, while commercial/industrial customers account for 71%
of total throughput and 58% of firm throughput. Approximately half of the
commercial/industrial customers' total throughput is transportation.
In 1993, the DPU approved Boston Gas' proposal to unbundle local
transportation service and gas sales for its largest commercial/industrial
customers. Unbundling allows customers to purchase local transportation from
Boston Gas on a basis separate from the purchase of gas supply, which the
customer may buy from it or third parties. This unbundling initiative extended
to eligible customers direct access to gas supplies and interstate pipeline
capacity, as authorized by the Federal Energy Regulatory Commission ("FERC")
in Order 636. As a result of Order 636, Boston Gas has seen increasing
competition from other gas suppliers into its service territory. In 1995, 103
of the approximately 450 eligible customers purchased gas supplies from third
parties. In response to such perceived trends, in 1994 Boston Gas initiated a
large-scale reengineering effort to reduce costs, increase productivity, and
improve customer service.
K-2
GAS THROUGHPUT
The following table, in billions of cubic feet of natural gas at 1,000 Btu
per cubic foot ("BCF"), provides information with respect to the volumes of
gas throughput by Boston Gas during the three years 1993-1995:
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
Residential....................................... 39.7 41.4 41.9
Commercial/industrial............................. 48.1 46.7 49.1
Off-system sales.................................. 6.6 7.6 2.1
-------- -------- --------
Total sales....................................... 94.4 95.7 93.1
Transportation of customer-owned gas.............. 47.5 48.7 51.7
Less: Off-system sales............................ (6.6) (7.6) (2.1)
-------- -------- --------
Total throughput................................. 135.3 136.8 142.7
======== ======== ========
Firm throughput.................................. 94.9 95.5 95.3
======== ======== ========
No customer, or group of customers under common control, accounted for 3% or
more of the total firm revenues in 1995.
GAS SUPPLY
The following table in BCF provides statistical information with respect to
Boston Gas' sources of supply during 1993-1995:
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
Natural gas pipeline purchases.................... 93.4 92.2 86.3
Liquefied natural gas ("LNG") purchases........... 3.1 5.1 13.4
-------- -------- --------
Total purchases.................................. 96.5 97.3 99.7
Change in storage gas............................. 3.5 0.4 (4.0)
Company use, unbilled and other................... (5.6) (2.0) (2.6)
-------- -------- --------
Total sales...................................... 94.4 95.7 93.1
======== ======== ========
Boston Gas purchases approximately 60% of its pipeline gas supplies directly
from domestic and Canadian producers and marketers pursuant to long-term
contracts, which have been reviewed and approved by the DPU. Boston Gas
purchases its remaining pipeline supplies from domestic sources pursuant to
short-term, firm winter service agreements and on a spot basis. Boston Gas has
diversified its pipeline gas supplies across major North American producing
regions, including on- and off-shore Gulf of Mexico and mid-continent areas in
the United States, as well as from western Canada.
Pipeline supplies are transported on interstate pipeline systems to Boston
Gas' 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 Boston Gas' service territory, the peak daily and annual capacity
and the contract expiration dates are as follows:
Capacity in BCF
----------------- Expiration
Pipeline Daily Annual Dates
- -------- ------- -------- ----------
Algonquin Gas Transmission Company
("Algonquin").................................. 0.28 87.4 1997-2012
Tennessee Gas Pipeline Company ("Tennessee").... 0.18 66.9 2000-2012
------- --------
0.46 154.3
======= ========
K-3
In addition, Boston Gas has firm capacity contracts on interstate pipelines
upstream of the Algonquin and Tennessee pipelines to transport natural gas
purchased by Boston Gas from producing regions to the Algonquin and Tennessee
pipelines. The expiration dates for these contracts are similar to those
included in the above table.
Boston Gas has contracted with pipeline companies and others for the storage
of natural gas in underground storage fields located in Pennsylvania, New
York, Maryland and West Virginia. These contracts provide for storage capacity
of 17.3 BCF and peak day capacity of 0.16 BCF. Boston Gas utilizes its
existing capacity contracts to transport gas from the storage fields to its
service territory. Supplemental supplies of LNG and propane are purchased and
produced from foreign and domestic sources.
Peak day throughput in BCF was 0.69, 0.65 and 0.64 in 1995, 1994 and 1993,
respectively. Boston Gas provides for peak period demand through a least cost
portfolio of pipeline, storage and supplemental supplies. Boston Gas considers
its peak day sendout capacity, based on its total supply resources, to be
adequate to meet the requirements of its firm customers.
REGULATION
Boston Gas' operations are subject to Massachusetts statutes applicable to
gas utilities. Rates, the territorial limit of Boston Gas' service area,
purchase of gas, pipeline safety regulations, issuance of securities and
affiliated party transactions are regulated by the DPU. Rates for firm
transportation and sales provided by Boston Gas are subject to approval by,
and are on file with, the DPU. In addition, Boston Gas has a cost of gas
adjustment clause which 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.
In February 1995 the DPU ordered all large gas and electric utilities to
file incentive rate proposals as soon as possible. The order signaled a
significant departure from established DPU practice of setting rates to
reflect all allowed costs of service. In the second quarter of 1996 Boston Gas
intends to file an incentive rate proposal consistent with the DPU's
directives. As part of its rate restructuring proposal, Boston Gas will offer
unbundled transportation and sales service to a broader range of customers.
As more customers elect to purchase gas from third parties, a greater amount
of upstream pipeline capacity under contract may be idle, unless it can be
remarketed or assigned. The recoverability of cost for any such idle capacity
will be an issue for the DPU to address for all utilities subject to its
jurisdiction. While there can be no assurance, it is Boston Gas' position that
it should be afforded the opportunity to recover prudently incurred, non-
mitigable stranded capacity cost.
Boston Gas and Eastern were granted an intrastate exemption from the
provisions of the Public Utility Holding Company Act of 1935 under Section
3(a)(1) thereof, pursuant to an order of the Securities and Exchange
Commission dated February 28, 1955, as amended by orders dated November 3,
1967 and August 28, 1975.
SEASONALITY AND WORKING CAPITAL
Boston Gas' revenues, earnings and cash flows are highly seasonal as the
demand for most of its transportation services and sales is directly related
to temperature conditions. The majority of Boston Gas' earnings is generated
in the first quarter with a seasonal loss occurring in the third quarter.
Since the bulk of its revenues is billed in the November through April heating
season, significant cash flows are generated from late winter to early summer.
In addition, through the cost of gas adjustment clause, Boston Gas bills its
customers over the heating season for pipeline demand charges paid by Boston
Gas over the entire year. This difference, along with other costs of gas
distributed but unbilled, is reflected as deferred gas costs and is financed
through short-term borrowings. Short-term borrowings are also required from
time to time to finance normal business operations. As a result, short-term
borrowings are generally highest during the late fall and early winter.
K-4
ENVIRONMENTAL MATTERS
Boston Gas may have or share responsibility under applicable environmental
law for the remediation of certain former manufactured gas plant ("MGP")
sites, as described in Note 11 of Notes to Financial Statements. A subsidiary
of New England Electric System has assumed responsibility for remediating 11
of the 15 such sites owned by Boston Gas, subject to a limited contribution by
Boston Gas. A 1990 regulatory settlement with the DPU provides for recovery by
Boston Gas of environmental costs associated with MGP sites over separate,
seven-year amortization periods without a return on the unamortized balance.
Boston Gas does not possess at this time sufficient information to reasonably
determine the ultimate cost to it of such remediation and no assurance can be
given with respect to future recoverability of such costs. However, in light
of the factors discussed above, Boston Gas believes that it is not probable
that such costs will materially affect its financial condition or results of
operations.
EMPLOYEES
As of December 31, 1995, Boston Gas had 1,500 employees, 73% of whom were
organized in local unions with which Boston Gas has collective bargaining
agreements that expire in 1999. The 10% reduction in staffing from the prior
year was accomplished through attrition and early retirement and severance
programs for both management and union employees associated with Boston Gas'
ongoing reengineering program.
PROPERTIES
Boston Gas owns or leases facilities which enable it to liquefy natural gas
in periods of low demand, store the resulting LNG and vaporize it for use in
periods of high demand. Boston Gas owns and operates such a facility in
Dorchester, Massachusetts, and leases one such facility in Lynn,
Massachusetts. In addition, Boston Gas leases a storage facility in Salem,
Massachusetts. Boston Gas also owns propane-air facilities at several
locations throughout its service territory.
On December 31, 1995, Boston Gas' distribution system included approximately
5,800 miles of gas mains, 397,000 services and 525,000 active customer meters.
Boston Gas' mains and services are generally located on public ways or
private property not owned by it. Boston Gas' occupation of such property is
generally pursuant to easements, licenses, permits or grants of location.
Except as stated above, the principal items of property of Boston Gas are
owned in fee.
In 1995, Boston Gas' capital expenditures were $57.3 million. Capital
expenditures were principally made for improvements to the distribution
system, for system expansion to meet customer demand and for productivity
enhancement initiatives. Boston Gas plans to spend approximately $60 million
for similar purposes in 1996.
MIDLAND ENTERPRISES INC.
Midland, through its wholly-owned subsidiaries (together "Midland"), is
engaged in the operation of a fleet of barges and towboats, principally on the
Ohio and Mississippi Rivers and their tributaries, the Gulf Intracoastal
Waterway and the Gulf of Mexico. Midland transports bulk commodities, a major
portion of which is coal. Midland also performs repair work on marine
equipment and operates two coal dumping terminals, a phosphate rock and
phosphate chemical fertilizer terminal and a marine fuel supply facility. In
December 1993 Midland sold Chotin, its liquid barge operations, including its
sole contract and trade name. In June 1994 Midland sold its barge construction
and repair facility located in Louisiana.
K-5
SALES
The following table indicates the tonnage transported (in millions) for the
period 1993-1995:
Years ended December 31,
--------------------------
1995 1994 1993
-------- -------- --------
Dry cargo............................................ 66.2 66.9 60.9
Liquid cargo......................................... -- -- 1.6
-------- -------- --------
Total tonnage...................................... 66.2 66.9 62.5
======== ======== ========
Tonnage in 1995 declined slightly due in part to a softening of the domestic
coal market in the second half of 1995 and reduced shipments of aggregates.
The record tonnage in 1994 increased 7% over 1993, despite the absence of the
liquid business, due to a stronger economy as evidenced by increased shipments
of coal, aggregates, ores, steel products and scrap. Coal tonnage in 1993 was
negatively impacted by a prolonged coal miners strike.
Ton miles are the product of tons and distance transported. The following
charts depict 1995 tonnage by commodity and ton miles of cargo transported for
the period 1991--1995:
1995 Tonnage by Commodity
[PIE CHART--PLOT POINTS BELOW]
Coal..................................................64%
Other.................................................30%
Grain................................................. 6%
Ton Miles by Commodity
(in billions) 1991 1992 1993 1994 1995
[BAR CHART--PLOT POINTS BELOW]
Coal......................... 15.6 15.2 14.0 15.2 15.2
Grain........................ 6.2 6.3 4.8 4.4 5.2
Other........................ 8.7 9.3 11.8 15.7 16.4
Liquid....................... 1.7 1.6 1.6 0.0 0.0
--- --- --- --- ---
Total..................... 32.2 32.4 32.2 35.3 36.8
"Other" includes sand, stone, gravel, iron, scrap, steel, coke, phosphate,
towing for others, and other dry cargo.
For the second straight year, Midland set a new ton mile record with 1995
ton miles increasing 4% over 1994. As noted above, although 1995 tonnage
declined slightly, longer trip lengths associated with increased movements of
non-coal tonnage, predominantly on the Mississippi River, resulted in
increased overall production. Ton miles in 1994 increased 10% over 1993,
reflecting the 7% increase in tonnage noted above. In addition to changes in
ton miles transported, Midland's revenues and net income are affected by other
factors such as competitive conditions, weather and the segment of the river
system traveled, as described in the "Seasonality" and "Competition" sections.
K-6
The following table summarizes Midland's backlog of transportation and
terminalling business under long-term contracts:
December 31,
-------------------
1995 1994
------ ------
Tons (in millions)........................................ 156.2 168.8
Revenues (in millions).................................... $485.3 $422.8
Portions of revenue backlog not expected to be filled
within the current year.................................. 72% 77%
The 1995 revenue backlog (which is based on contracts that extend beyond
December 31, 1996) is shown at prices in effect on December 31, 1995, which
are subject to escalation/de-escalation provisions. Since services under many
of the long-term contracts are based on customer requirements, Midland has
estimated its backlog based on its forecast of the anticipated requirements of
these long-term contract customers. The 7% decline in tonnage backlog from
1994 is partly due to the scheduled expiration of several long-term contracts
in 1996 that have not yet been renewed and therefore were excluded from the
calculation. The backlog calculation includes contracts awarded but not yet
signed of 14.2 million tons and $67.2 million in revenue at December 31, 1995;
there were no such contracts at December 31, 1994. The increase in the revenue
backlog reflects higher average market rates on newly negotiated contracts and
the change in contract mix, reflecting longer hauls at higher rates per ton.
The only significant raw material required by Midland is the diesel fuel to
operate its towboats. Diesel fuel is purchased from a variety of sources and
Midland regards the availability of diesel fuel as adequate for its
operations.
SEASONALITY
Revenues during winter months tend to be lower than revenues for the
remainder of the year due to the freezing of some northern rivers and
waterways during winter months, increased coal consumption by electric
utilities during the summer months and the fall harvest of grain.
COMPETITION
Midland's marine transportation business competes on the basis of price,
service and equipment availability. Midland's primary competitors include
other barge lines and railroads, including one integrated rail-barge carrier.
There are a number of companies offering transportation services on the
waterways served by Midland. In the early 1990's, competition among major
barge line companies was intense due to an imbalance between barge supply and
customer demand, impacted by economic conditions as well as by occasionally
weak grain and export coal markets. This in turn led to revenue and margin
erosion and prompted the initiation of cost and productivity improvements and
curtailment of new barge construction by many operators. During the second
half of 1994, however, barge demand and supply moved closer to equilibrium as
both domestic import demand and export requirements increased significantly.
This trend, which continued in 1995, led to improved rates and margins.
Barge operators have maintained relatively low rate structures due to
ongoing improvements in operating efficiencies and productivity. Consequently,
the barge industry has generally been able to retain its competitive position
with alternate methods of transportation for bulk commodities when the origin
and destination of such movements are contiguous to navigable waterways.
Due to the capital-intensive and high fixed-cost nature of Midland's
business, the negotiation of long-term contracts facilitates steady and
efficient utilization of equipment. Midland's long-term transportation and
terminalling contracts expire at various dates from January 1997 through June
2003. During 1995, approximately 34% of Midland's consolidated revenues
resulted from these contracts. A substantial portion of the contracts provide
for rate adjustments based on changes in various costs, including diesel fuel
costs, and, additionally, contain "force majeure" clauses that excuse
performance by the parties to the contracts when performance is prevented by
circumstances beyond their reasonable control. Many of these contracts
K-7
have provisions for termination for specified causes, such as material breach
of contract, environmental restrictions on the burning of coal, or loss by the
customer of an underlying commodity supply contract. Penalties for termination
for such causes are not generally specified. However, some contracts provide
that in the event of an uncured material breach by Midland that results in
termination of the contract, Midland would be responsible for reimbursing its
customer for the differential between the contract price and the cost of
substituted performance.
No customer, or group of customers under common control, accounted for 10%
or more of the total revenues in 1995. On the basis of past experience and its
competitive position, Midland considers that the simultaneous loss of several
of its largest customers, while possible, is unlikely to happen.
Towboats, such as those operated by Midland, are capable of moving in one
tow (barge configuration) approximately 22,500 tons of cargo (equivalent to
225 one hundred-ton capacity railroad cars) on the Ohio River and upper
Mississippi River and approximately 60,000 tons (equivalent to 600 one
hundred-ton capacity railroad cars) on the lower Mississippi River, where
there are no locks to transit. Average costs per ton mile for barge
transportation are generally below those of railroads.
ENVIRONMENTAL MATTERS
Midland is subject to the provisions of the Federal Water Pollution Control
Act, the Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, the Superfund Amendment and Reauthorization Act, the Resource
Conservation and Recovery Act of 1976, and the Oil Pollution Act of 1990,
which permit the Coast Guard and the Environmental Protection Agency to assess
penalties and clean-up costs for oil, hazardous substance, and hazardous waste
discharges. Some of these acts also allow third parties to seek damages for
losses caused by such discharges. Compliance with these acts has had no
material effect on Midland's capital expenditures, earnings, or competitive
position, and no such effect is anticipated.
PROPERTIES
As of December 31, 1995, Midland's marine equipment consisted of 2,354 dry
cargo barges and 84 towboats. Approximately half of this equipment is either
mortgaged to secure Midland's equipment financing obligations or chartered
under long-term leases from third parties.
In 1995, Midland's capital expenditures were $20.9 million. These
expenditures were made principally for the purchase of new barges and for
renewal of equipment. In 1996 Midland expects to spend approximately $48
million for capital equipment, with the increase due primarily to the purchase
of new barges.
EMPLOYEES
As of December 31, 1995, Midland employed 1,400 persons, of whom
approximately 34% are represented by labor unions.
GENERAL
ENVIRONMENTAL MATTERS
Certain information with respect to Eastern's compliance with Federal and
state environmental statutes may be found in Item 1(c) under "Boston Gas
Company" and "Midland Enterprises Inc." and Note 11 of Notes to Financial
Statements.
EMPLOYEES
Eastern and its wholly-owned subsidiaries employed 3,000 employees at
December 31, 1995.
K-8
ITEM 2. PROPERTIES
Information with respect to this item may be found in Item 1(c) under
"Boston Gas Company" and "Midland Enterprises Inc." Such information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to certain legal proceedings may be found in Notes
11 and 12 of Notes to Financial Statements and in Item 1(c) hereof under
"Boston Gas Company" and "Midland Enterprises Inc." Such information is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
The table below identifies the executive officers of Eastern, who are
appointed annually and serve at the pleasure of Eastern's Trustees.
Office Held
Name Title Age Since
---- ----- --- -----------
J. Atwood Ives.......... Chairman and Chief Executive 59 1991
Officer
Richard R. Clayton...... President and Chief Operating 57 1991
Officer
Walter J. Flaherty...... Senior Vice President and Chief 47 1992
Financial Officer
Chester R. Messer....... Senior Vice President--President of 54 1988
Boston Gas Company
Fred C. Raskin.......... Senior Vice President--President of 47 1991
Midland Enterprises Inc.
L. William Law, Jr...... Senior Vice President, General 51 1995
Counsel and Secretary
BUSINESS EXPERIENCE
Prior to joining Eastern in 1991, J. Atwood Ives was Vice Chairman, Chief
Financial Officer and a member of the Office of the Chairman of General Cinema
Corporation (now Harcourt General, Inc.) and The Neiman Marcus Group, Inc.
Richard R. Clayton joined Eastern in 1987 as Executive Vice President and
Chief Administrative Officer. He was Executive Vice President and Chief
Operating Officer of Eastern from 1990 to 1991.
Walter J. Flaherty was Senior Vice President-Administration of Boston Gas
from 1988 until joining Eastern in 1991 as its Senior Vice President and Chief
Administrative Officer. He has been an employee of Eastern or its subsidiaries
since 1971.
Chester R. Messer was Executive Vice President of Boston Gas in 1988. He was
elected a Senior Vice President of Eastern in 1988, when he became President
of Boston Gas. He has been an employee of Boston Gas since 1963.
Fred C. Raskin was Executive Vice President of Midland from 1988 to 1991. He
was elected a Senior Vice President of Eastern in 1991, when he became
President of Midland. He has been an employee of Eastern or its subsidiaries
since 1978.
L. William Law, Jr. has been General Counsel and Secretary of Eastern since
1987. He was elected Senior Vice President in 1995. He has been an employee of
Eastern or its subsidiaries since 1975.
K-9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Eastern's common stock is traded on the New York, Boston and Pacific Stock
Exchanges (ticker symbol EFU). The approximate number of shareholders at
December 31, 1995 was 5,400.
Information with respect to this item may be found in the sections captioned
"Cash Dividends Per Share" and "Stock Price Range" appearing on the inside
back cover of the annual report to shareholders for the year ended December
31, 1995. Such information is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Information with respect to this item may be found in the section captioned
"Five-Year Financial Summary" appearing on page 31 of the annual report to
shareholders for the year ended December 31, 1995. Such information is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following commentary should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes to Financial Statements.
1995 COMPARED TO 1994
OVERVIEW
The Company reported net earnings of $53.9 million, or $2.66 per share, in
1995 compared to net earnings of $51.1 million, or $2.46 per share, in 1994.
Net earnings from continuing operations before extraordinary item were $60.4
million, or $2.98 per share, in 1995, reflecting increases of 55% and 59%,
respectively, over the comparable results in 1994. Excluding the gain on the
sale of Eastern's United States Filter Corporation ("U.S. Filter") investment
and the provision for environmental expenses from 1995 results, earnings and
earnings per share from continuing operations increased by approximately 33%
and 36%, respectively, over the prior year, which was adjusted to exclude the
gain on the sale of a barge construction and repair facility.
Earnings from discontinued operations in 1994 reflect the net earnings of
WaterPro which was sold in 1995 and the after-tax gain realized on the
settlement of Eastern's lawsuit relating to its 1989 purchase of Ionpure (see
Note 10). In the fourth quarter of 1995, Eastern accrued a pretax charge of
$10.0 million to increase its accrual, first recorded in 1993, for the
estimated undiscounted liability for health care and death benefit premiums
imposed by the Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act"),
primarily due to a subsequent assignment to Eastern of additional miners and
their beneficiaries. As described in Note 12, this charge has been reported as
an extraordinary item of $6.5 million or $.32 per share.
1995 1994 Change
(In millions) ------ ------ ------
REVENUES:
Boston Gas $653.1 $660.2 (1)%
Midland 296.3 264.7 12 %
------ ------
Total $949.4 $924.9 3 %
====== ======
The increase in consolidated revenues from 1994 to 1995 primarily reflects
significant increases in Midland's rates for transporting non-coal
commodities.
1995 1994 Change
(In millions) ------ ------ ------
OPERATING EARNINGS:
Boston Gas $ 61.7 $ 65.8 (6)%
Midland 57.8 35.8 62 %
Headquarters (5.8) (4.2) (36)%
------ ------
Total $113.7 $ 97.4 17 %
====== ======
K-10
The increase in operating earnings from 1994 to 1995 primarily reflects
increased non-coal transportation rates and ideal operating conditions at
Midland, partially offset by the impact of demand-related factors and warmer
weather as well as costs associated with early retirement and severance
programs at Boston Gas and higher unallocated headquarters expense.
Other income in 1995 includes a $20.6 million gain on the sale of Eastern's
U.S. Filter investment and increased interest income on higher cash balances,
partly offset by a $15.0 million provision for environmental expenses, as
described in Notes 8 and 11. Other income for 1994 includes a $2.3 million
gain on the sale of Midland's barge construction and repair facility in
Louisiana.
The effective tax rate in 1995 was 10% lower than in 1994, principally
because the gain on the sale of the U.S. Filter investment was offset by a
realized tax loss on the sale of WaterPro which had been written down in 1993.
BOSTON GAS
Revenues in 1995 decreased by $7.1 million as increased sales to new and
existing firm customers were more than offset by demand-related factors
involving a reduction in weather-adjusted gas consumption. Weather for 1995
was 100.0% of normal, which was 0.6% warmer than 1994. Increased revenues from
non-firm sales and transportation were partially offsetting.
Operating earnings decreased $4.1 million from 1994. Sales to new firm
customers and the recognition of lost margins associated with conservation
programs increased operating earnings, partly offsetting the impact of reduced
demand and warmer weather. Higher operating costs, primarily reflecting non-
recurring charges associated with early retirement and severance programs for
both management and union employees were partially offset by the related
reduction in labor costs and reduced weather-related workload during the first
half of the year. These reductions were part of Boston Gas' ongoing
reengineering program focused on improving customer service and lowering
operating costs.
MIDLAND ENTERPRISES
Revenues and operating earnings increased by $31.6 million and $22.0
million, respectively, in 1995 over 1994, primarily reflecting higher
transportation rates. Partially offsetting were reduced revenues resulting
from contractual rate reductions on long-term utility coal contracts.
Operating earnings benefited from continued productivity improvements and
excellent operating conditions.
Ton miles increased 4% to a new record level, although total tonnage
transported declined 1%, due to significantly longer trip lengths. Coal
tonnage declined 1%, with coal shipments under long-term contracts increasing
4% and spot coal tonnage declining 17%, reflecting a weak second half market.
Non-coal ton miles increased 8% although tonnage was essentially unchanged
from 1994. Midland's focus on longer haul, higher margin non-coal commodities
more than offset the weakness in the spot coal market. As a result, grain
tonnage increased 18% with ores and steel tonnage up over 20% as compared to
1994. Operating results from terminal and support operations were relatively
unchanged from 1994 levels.
K-11
1994 COMPARED TO 1993
1994 1993 Change
(In millions) ------ ------ ------
REVENUES:
Boston Gas $660.2 $614.3 7%
Midland 264.7 254.9 4%
------ ------
Total $924.9 $869.2 6%
====== ======
The increase in consolidated revenues from 1993 to 1994 primarily reflects
the impact of Boston Gas' November 1993 rate increase and significantly
increased tonnages transported by Midland, partly offset by lower freight
rates and the absence of revenues from its liquid barge business, which was
sold in December 1993.
1994 1993 Change
(In millions) ------ ------ ------
OPERATING EARNINGS:
Boston Gas $ 65.8 $ 49.1 34%
Midland 35.8 33.0 8%
Headquarters (4.2) (4.7) 10%
------ ------
Total $ 97.4 $ 77.4 26%
====== ======
The improvement in operating earnings from 1993 to 1994 primarily reflects
the impact of Boston Gas' 1993 rate increase, partially offset by higher
depreciation and property taxes, and at Midland, the effect of cost reduction
and productivity improvement programs and better operating conditions,
partially offset by lower contracted rates for coal transportation. A
seventeen-week work stoppage at Boston Gas, record flooding in the Midwest and
the UMW strike decreased operating earnings in 1993.
Earnings from continuing operations before income taxes increased to $63.4
million in 1994 from $44.5 million in 1993, primarily reflecting the increase
in operating earnings described above, with higher interest expense and lower
interest income offset by higher other income, as described in Note 8. The
increase in interest expense reflects additional borrowings at Boston Gas and
higher dividends paid on its preferred stock. The repurchase of shares in the
fourth quarter of 1993 reduced funds available for investment in 1994,
resulting in lower interest income in 1994. The effective tax rate in 1993 was
3% higher than in 1994 because of the additional deferred tax requirements
resulting from the 1% increase in the federal tax rate, effective January 1,
1993.
The net loss in 1993 included the effects of three substantial charges
totaling $99.8 million, net of tax, or $4.43 per share, relating to an
extraordinary provision for coal miners retiree health care obligations ($45.5
million, net of tax, or $2.02 per share), a write-down of WaterPro's goodwill
($45.0 million, with no tax benefit, or $2.00 per share) and the loss on the
sale of Ionpure ($9.3 million, net of tax, or $.41 per share). See Notes 12
and 10 for discussion of these matters. The latter two charges are included in
the loss from discontinued operations for 1993.
BOSTON GAS
A $37.7 million annualized rate increase, which took effect November 1,
1993, increased 1994 revenues by $29.9 million. Although temperatures varied
widely relative to normal over the course of 1994, they averaged 1.5% warmer
than in 1993 and 0.6% colder than normal in 1994.
Operating earnings increased by $16.7 million as the benefit of the rate
increase, stable labor conditions and sales of gas to new firm customers were
partially offset by higher depreciation, property taxes and bad debts. In
total, the weather decreased 1994 operating earnings by about $3 million,
reflecting higher workload-related labor and operating costs associated with
the unusually cold weather in the first quarter, partially offset by
additional gross margins attributable to the weather.
K-12
MIDLAND ENTERPRISES
Revenues and operating earnings increased $9.8 million and $2.8 million,
respectively, in 1994 over 1993 due to significant increases in dry cargo
transportation, reduced operating and administrative expenses achieved through
ongoing cost reduction and productivity programs, as well as the absence of
increased costs associated with inefficiencies caused by the Mississippi River
flooding and the UMW strike in 1993. Partially offsetting were contractual and
market rate reductions negotiated early in 1994, the absence of the liquid
barge business, which contributed 5% and 7% of 1993 revenues and operating
earnings, respectively, and higher operating expenses associated with flooding
and severe winter icing conditions early in 1994. Reflecting improved market
and operating conditions, revenues and operating earnings for the second half
of 1994 increased by 12% and 48%, respectively, over the comparable period in
1993.
Tonnage and ton miles increased 11% and 10%, respectively, in 1994 as
increased shipments of coal, aggregates, ores and towing for others more than
offset the sale of Midland's liquid barge business, which accounted for
approximately 5% of ton miles in 1993. Coal tonnage increased 11% from 1993,
reflecting a significant increase in spot shipments and increased demand for
utility coal under long-term contracts. Excluding the liquid barge business,
non-coal tonnage increased 20% over 1993, despite a 15% reduction in grain
tonnage, primarily as a result of increased shipments of aggregates, steel,
scrap and ores. The reduction in grain tonnage reflected management's decision
to de-emphasize its commitment to the grain market and to concentrate on other
business areas, principally on the Ohio and the lower Mississippi rivers.
In June 1994 Midland recognized a pretax gain of $2.3 million on the sale of
its barge construction and repair facility in Louisiana. Midland had recorded
a $3.5 million reserve in December 1993 for the shutdown costs and carrying
charges associated with this facility. As mentioned earlier, in December 1993
Midland sold its liquid barge business at a pretax gain of $8.0 million. These
transactions are included in other income.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that projected cash flow from operations, in combination
with currently available resources, is more than sufficient to meet Eastern's
1996 capital expenditure and working capital requirements, potential funding
of its Coal Act and environmental liabilities, normal debt repayments and
anticipated dividends to shareholders.
In addition to cash and short-term investments of $191.2 million at December
31, 1995, Eastern maintains a $100.0 million long-term credit agreement plus
other lines, all of which are available for general corporate purposes. At
December 31, 1995 there were no borrowings outstanding under any of these
facilities.
Consolidated capital expenditures for 1996 are budgeted at approximately
$108 million, about 55% of which are for Boston Gas and the balance for
Midland.
Eastern's capital structure is depicted in the chart below. The decrease in
equity in 1993 reflects the impact of non-cash charges associated with the
provision for coal miners retiree health care, the write-down of WaterPro
goodwill, the loss on the sale of Ionpure and substantial share repurchases.
Through a combination of increased equity and debt, Eastern expects to
continue its policy of capitalizing Boston Gas and Midland with approximately
equal amounts of equity and long-term debt. Both subsidiaries maintain "A"
ratings with the major rating agencies.
In June 1995 Boston Gas filed a shelf registration for the issuance through
December 1997 of up to $100.0 million of Medium-Term Notes for the funding of
future capital expenditures and the refinancing of currently outstanding
indebtedness. In the fourth quarter of 1995 Boston Gas issued $60.0 million of
Medium-Term Notes, Series C, with a weighted average maturity of 26 years and
coupon of 7.08%. As described in Note 3, the proceeds from this issuance were
used to complete an in-substance defeasance which will reduce future interest
expense by more than $1 million annually.
K-13
In April 1995 Eastern sold WaterPro for $52.9 million in cash. In addition,
in November 1995 Eastern sold its investment in U.S. Filter common stock for
$65.5 million in cash.
To meet working capital requirements which reflect the seasonal nature of
the gas distribution business, Boston Gas had notes outstanding of $52.0
million at December 31, 1995, a decrease of $10.5 million from the prior year,
primarily reflecting lower balances for deferred gas costs. Boston Gas also
maintains a bank credit agreement which supports the issuance of up to $90.0
million of commercial paper to fund its inventory of gas supplies. At December
31, 1995 Boston Gas had $45.6 million of commercial paper outstanding for this
purpose.
Eastern repurchased 320,800, 603,500 and 1,739,900 shares of its common
stock for $8.4 million, $14.6 million and $46.0 million, respectively, in
1995, 1994 and 1993.
Year-End Common Shares
Outstanding (in millions) 1991 1992 1993 1994 1995
[BAR CHART--PLOT POINTS BELOW]
Total.................... 22.5 22.6 20.9 20.4 20.2
Capital Structure
(in millions) 1991 1992 1993 1994 1995
[BAR CHART--PLOT POINTS BELOW]
Equity...................... 327 357 329 366 357
Debt........................ 503 518 364 374 396
--- --- --- --- ---
Total.................... 830 875 693 740 753
K-14
OTHER MATTERS
Eastern may have or share responsibility for environmental remediation
and/or ongoing maintenance of certain non-utility sites associated with former
operations, the most significant of which is a former coal tar processing
facility, as described in Note 11. Eastern has accrued a reserve of
approximately $25 million in total at December 31, 1995 to cover the
remediation and maintenance of these sites. However, Eastern does not possess
at this time sufficient information to reasonably determine or estimate the
ultimate cost to it of such remediation and maintenance.
Boston Gas may have or share responsibility for environmental remediation of
certain former manufactured gas plant ("MGP") sites, as described in Note 11.
A subsidiary of New England Electric System has assumed responsibility for
remediating 11 of the 15 such sites owned by Boston Gas, subject to a limited
contribution by the latter. A 1990 regulatory settlement agreement provides
for recovery by Boston Gas of environmental costs associated with MGP sites
over separate, seven-year amortization periods without a return on the
unamortized balance. Eastern does not possess at this time sufficient
information to reasonably determine the ultimate cost to Boston Gas of such
remediation, and no assurance can be given with respect to the future
recoverability of such costs. However, particularly in light of the factors
discussed, Eastern currently believes that it is not probable that such costs
will materially affect its financial condition or results of operations.
Eastern has accrued pretax charges of $80.0 million for its estimated
undiscounted liability for health care and death benefit premiums under the
Coal Act. As discussed in Note 12, its obligations for these premiums could
range from zero to more than $115 million.
K-15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Consolidated Statements of Operations K-17
Consolidated Balance Sheets K-18
Consolidated Statements of Cash Flows K-20
Consolidated Statements of Shareholders' Equity K-21
Notes to Financial Statements K-22
Unaudited Quarterly Financial Information K-34
Independent Auditors' Report K-35
Management's Report on Responsibility K-35
K-16
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
----------------------------
1995 1994 1993
(In thousands, except per share amounts) -------- -------- --------
REVENUES $949,412 $924,850 $869,215
OPERATING COSTS AND EXPENSES:
Operating costs 668,701 668,287 642,603
Selling, general and administrative expenses 105,473 100,332 96,024
Depreciation and amortization 61,504 58,856 53,199
-------- -------- --------
OPERATING EARNINGS 113,734 97,375 77,389
OTHER INCOME (EXPENSE):
Interest income 5,633 1,953 3,213
Interest expense (38,536) (38,516) (35,039)
Other, net 4,103 2,553 (1,056)
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 84,934 63,365 44,507
Provision for income taxes 24,553 24,458 18,485
-------- -------- --------
EARNINGS FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM 60,381 38,907 26,022
Earnings (loss) from discontinued operations, net
of tax -- 12,212 (58,182)
Extraordinary provision for coal miners retiree
health care, net of tax (6,500) -- (45,500)
-------- -------- --------
NET EARNINGS (LOSS) $ 53,881 $ 51,119 $(77,660)
======== ======== ========
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM $2.98 $1.87 $1.15
Discontinued operations, net of tax -- .59 (2.58)
Extraordinary provision for coal miners retiree
health care, net of tax (.32) -- (2.02)
-------- -------- --------
NET EARNINGS (LOSS) PER SHARE $2.66 $2.46 $(3.45)
======== ======== ========
The accompanying notes are an integral part of these financial statements.
K-17
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
1995 1994
(In thousands) ---------- ----------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 191,211 $ 59,641
Receivables, less reserves of $16,009 in 1995 and
$16,091 in 1994 104,735 97,093
Inventories 47,883 60,207
Deferred gas costs 71,940 66,865
WaterPro net assets held for sale -- 51,462
Investment in U.S. Filter -- 44,847
Other current assets 9,117 8,054
---------- ----------
TOTAL CURRENT ASSETS 424,886 388,169
PROPERTY AND EQUIPMENT, AT COST 1,356,097 1,293,733
Less--accumulated depreciation 563,337 518,110
---------- ----------
NET PROPERTY AND EQUIPMENT 792,760 775,623
OTHER ASSETS:
Deferred post-retirement health care costs 93,830 97,589
Investments 13,821 5,531
Deferred charges and other costs, less amortization 52,045 72,407
---------- ----------
TOTAL OTHER ASSETS 159,696 175,527
---------- ----------
TOTAL ASSETS $1,377,342 $1,339,319
========== ==========
The accompanying notes are an integral part of these financial statements.
K-18
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
1995 1994
(In thousands) ---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 57,193 $ 67,774
Accounts payable 64,960 49,974
Accrued expenses 26,795 22,915
Other current liabilities 75,913 71,774
---------- ----------
TOTAL CURRENT LIABILITIES 224,861 212,437
GAS INVENTORY FINANCING 45,600 53,578
LONG-TERM DEBT 357,675 365,488
RESERVES AND OTHER LIABILITIES:
Deferred income taxes 89,102 91,534
Post-retirement health care 98,717 102,382
Coal miners retiree health care 65,025 58,155
Preferred stock of subsidiary 29,262 29,229
Other reserves 71,336 52,382
---------- ----------
TOTAL RESERVES AND OTHER LIABILITIES 353,442 333,682
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value; Authorized shares--
50,000,000;
Issued shares--20,385,587 in 1995 and 20,651,925
in 1994 20,386 20,652
Capital in excess of par value 31,488 37,712
Retained earnings 348,821 321,880
Treasury stock at cost--191,547 shares in 1995 and
241,395 shares in 1994 (4,931) (6,110)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 395,764 374,134
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,377,342 $1,339,319
========== ==========
The accompanying notes are an integral part of these financial statements.
K-19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------
1995 1994 1993
(In thousands) -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS (LOSS) $ 53,881 $ 51,119 $(77,660)
Adjustments to reconcile net earnings (loss)
to net cash provided by operating activities:
Discontinued operations non-cash charges and
working capital changes -- (4,830) 54,651
Extraordinary provision for coal miners
retiree health care, net of tax 6,500 -- 45,500
Depreciation and amortization 61,504 58,856 53,199
Income taxes and tax credits (1,119) 7,452 7,993
Net gain on sale of assets (20,990) (2,403) (8,447)
Provision for environmental expenditures 15,000 175 5,715
Other changes in assets and liabilities:
Receivables (3,942) 19,087 (5,519)
Inventories 12,337 8,534 (7,874)
Deferred gas costs 17,764 (23,901) (24,934)
Accounts payable 14,986 (13,679) 743
Other (3,269) 14,264 (8,251)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152,652 114,674 35,116
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (78,385) (57,883) (61,450)
Short-term investments 1,900 22,017 (14,411)
Proceeds on sale of WaterPro 52,864 -- --
Proceeds on sale of U.S. Filter investment 65,479 -- --
Proceeds on sale of barge construction
business -- 12,695 --
Proceeds on sale of liquid barge business -- -- 14,950
Other (1,725) (6,619) (2,101)
-------- -------- --------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 40,133 (29,790) (63,012)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (28,365) (29,779) (31,697)
Changes in notes payable (10,530) (43,770) 51,356
Changes in gas inventory financing (7,978) (5,719) 10,666
Proceeds from issuance of long-term debt 60,000 50,000 --
Repayment of long-term debt (66,520) (14,990) (24,661)
Repurchase of stock (8,357) (14,574) (46,039)
Other 2,428 1,885 857
-------- -------- --------
NET CASH USED BY FINANCING ACTIVITIES (59,322) (56,947) (39,518)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 133,463 27,937 (67,414)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 51,674 23,737 91,151
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 185,137 51,674 23,737
SHORT-TERM INVESTMENTS 6,074 7,967 27,991
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS $191,211 $ 59,641 $ 51,728
======== ======== ========
The accompanying notes are an integral part of these financial statements.
K-20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Capital In
Stock Excess of Retained Treasury
$1 Par value Par Value Earnings Stock Total
(In thousands) ------------ ---------- -------- -------- --------
Balance at December 31,
1992 $23,635 $112,050 $408,739 $(26,518) $517,906
Net loss -- -- (77,660) -- (77,660)
Dividends declared--
$1.40 per share -- -- (31,711) -- (31,711)
Repurchase of stock -- -- -- (46,039) (46,039)
Retirement of stock (2,000) (50,732) -- 52,732 --
Foreign currency
translation adjustment -- -- (237) -- (237)
Unearned compensation
related to the
issuance of restricted
stock, net -- 262 -- 105 367
Issuance of stock 9 198 -- 905 1,112
------- -------- -------- -------- --------
Balance at December 31,
1993 21,644 61,778 299,131 (18,815) 363,738
Net earnings -- -- 51,119 -- 51,119
Dividends declared--
$1.40 per share -- -- (29,003) -- (29,003)
Repurchase of stock -- -- -- (14,574) (14,574)
Retirement of stock (1,000) (24,312) -- 25,312 --
Unearned compensation
related to the
issuance of restricted
stock, net -- 345 -- 105 450
Unrealized gains on
investments available
for sale, net -- -- 633 -- 633
Issuance of stock 8 (99) -- 1,862 1,771
------- -------- -------- -------- --------
Balance at December 31,
1994 20,652 37,712 321,880 (6,110) 374,134
Net earnings -- -- 53,881 -- 53,881
Dividends declared--
$1.42 per share -- -- (28,668) -- (28,668)
Repurchase of stock -- -- -- (8,357) (8,357)
Retirement of stock (300) (7,422) -- 7,722 --
Unearned compensation
related to the
issuance of restricted
stock, net -- 374 -- 51 425
Unrealized gains on
investments available
for sale, net -- -- 1,728 -- 1,728
Issuance of stock 34 824 -- 1,763 2,621
------- -------- -------- -------- --------
Balance at December 31,
1995 $20,386 $ 31,488 $348,821 $ (4,931) $395,764
======= ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
K-21
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Eastern
Enterprises ("Eastern"), Boston Gas Company ("Boston Gas") and Midland
Enterprises Inc. ("Midland"). Financial information for Water Products Group
is reflected as discontinued operations (See Note 10).
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 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:
December 31,
---------------
1995 1994
(In thousands) ------- -------
Supplemental gas supplies $35,136 $46,844
Other materials, supplies and marine fuel 12,747 13,363
------- -------
$47,883 $60,207
======= =======
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) or average cost method.
Investment in U.S. Filter: In November 1995 Eastern sold its 3,041,092 shares
of United States Filter Corporation ("U.S. Filter") common stock in a public
offering for $65,479,000 in cash. The transaction resulted in a pretax and net
gain of $20,581,000 or $1.02 per share. In 1995, Eastern accounted for its
investment in U.S. Filter under the cost method and classified this investment
as a security available for sale.
Other current liabilities include the following:
December 31 ,
---------------
1995 1994
(In thousands) ------- -------
Pipeline refunds due utility customers $13,173 $18,720
Coal miners retiree health care premiums 13,100 10,538
Reserves for insurance claims 13,037 8,809
Pipeline transition costs regulatory liability 9,510 11,560
Dividend payable 7,470 7,154
Revenue recognition: Boston Gas' revenues are recorded when billed. Boston Gas
defers 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.
Midland recognizes revenue on tows in progress on the percentage-of-completion
method based on miles traveled.
Earnings per share: Earnings per share are based on the weighted average
number of common and common equivalent shares outstanding. Such shares
amounted to 20,285,000 in 1995, 20,789,000 in 1994 and 22,530,000 in 1993.
Fully diluted earnings per share were not materially different from primary
earnings per share.
K-22
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Because the rates of
depreciation on commercial equipment vary with each property unit, it is
impractical to state each rate individually. Depreciation and amortization as
a percentage of average depreciable assets was as follows:
Years Ended December 31,
-------------------------
1995 1994
------------ ------------
Boston Gas 5.1% 5.2%
Midland 4.0% 3.9%
Headquarters 10.9% 12.4%
2. BUSINESS SEGMENT INFORMATION
Operating results and other financial data are presented for Eastern's two
business segments: Boston Gas, a local gas distribution company serving
eastern and central Massachusetts, and Midland, a barge transportation company
operating on the inland waterways.
(In thousands) 1995 1994 1993
-------- -------- --------
REVENUES:
Boston Gas $653,073 $660,158 $614,294
Midland 296,339 264,692 254,921
-------- -------- --------
$949,412 $924,850 $869,215
======== ======== ========
OPERATING EARNINGS:
Boston Gas $ 61,662 $65,791 $49,063
Midland 57,828 35,805 33,001
Headquarters (5,756) (4,221) (4,675)
-------- ------- -------
$113,734 $97,375 $77,389
======== ======= =======
IDENTIFIABLE ASSETS, NET OF
DEPRECIATION AND RESERVES:
Boston Gas $ 829,482 $ 833,620 $ 834,440
Midland 365,654 345,625 373,144
Headquarters 182,206 160,074 155,607
---------- ---------- ----------
$1,377,342 $1,339,319 $1,363,191
========== ========== ==========
CAPITAL EXPENDITURES:
Boston Gas $57,322 $53,504 $47,057
Midland 20,900 4,337 14,191
Headquarters 163 42 202
------- ------- -------
$78,385 $57,883 $61,450
======= ======= =======
DEPRECIATION AND AMORTIZATION:
Boston Gas $38,264 $35,809 $27,566
Midland 22,896 22,659 25,288
Headquarters 344 388 345
------- ------- -------
$61,504 $58,856 $53,199
======= ======= =======
Headquarters operating expenses reflect unallocated corporate general and
administrative expenses. Headquarters identifiable assets primarily include
cash, short-term investments, WaterPro net assets held for sale and the
investment in U.S. Filter.
K-23
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Boston Gas' operations are subject to Massachusetts statutes applicable to
gas utilities. Its revenues, earnings and cash flows are highly seasonal as
most of its firm sales and transportation are directly related to temperature
levels. Boston Gas purchases 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. Boston Gas has
diversified its pipeline gas supplies across major North American producing
regions, including western Canada.
A substantial portion of Midland's operations relate to long-term
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.
3. LONG-TERM OBLIGATIONS AND CURRENT DEBT
Credit agreement and lines of credit: Eastern maintains a credit agreement
with a group of banks, which provides for the borrowing by Eastern and its
subsidiaries of up to $100,000,000 at any time through December 29, 2000. The
interest rate for borrowings is the agent bank's prime rate or, at Eastern's
option, various alternatives. The agreement requires a facility fee of 1/8 of
1% of the commitment. At December 31, 1995 and 1994 no borrowings were
outstanding. Boston Gas utilizes the credit agreement to back its commercial
paper borrowings. In addition, Eastern and Boston 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 Eastern's option, various
alternatives. Included in current debt were $52,000,000 and $62,530,000 of
commercial paper and notes payable with a weighted average interest rate of
5.93% at December 31, 1995 and 1994, respectively.
Gas inventory financing: Boston Gas maintains a long-term credit agreement
with a group of banks, which provides for the borrowing of up to $90,000,000
for the exclusive purpose of funding its 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 had $45,600,000 and
$53,578,000 of commercial paper outstanding to fund its inventory of gas
supplies at December 31, 1995 and 1994, 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
credit agreement includes a one-year revolving credit which may be converted
to a two-year term loan at the option of Boston Gas if the one-year revolving
credit is not renewed by the banks. Boston Gas may select the agent bank's
prime rate or, at Boston Gas' option, various alternatives. The agreement
requires a facility fee of 1/12 of 1% on the commitment. No borrowings were
outstanding under this agreement during 1995 and 1994.
Description of long-term debt:
December 31,
LONG-TERM DEBT: ------------------
1995 1994
(In thousands) -------- --------
BOSTON GAS:
8.75%-9.00% Sinking Fund Debentures, due 2001 $ -- $ 60,000
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 --
First Mortgage Bonds-8.375% Series, due 1996 -- 2,880
Capital leases 4,281 5,690
Less--current portion (1,509) (1,890)
-------- --------
BOSTON GAS LONG-TERM DEBT 212,772 216,680
-------- --------
K-24
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
December 31,
LONG-TERM DEBT (CONTINUED): ------------------
1995 1994
(In thousands) -------- --------
MIDLAND:
First Preferred Ship Mortgage Bonds--9.9% Series,
due 2008 48,648 48,758
8.1%-9.85% Medium-Term Notes, Series A, due 2002-
2012 71,000 71,000
Capital leases 28,939 32,404
Less--current portion (3,684) (3,354)
-------- --------
MIDLAND LONG-TERM DEBT 144,903 148,808
-------- --------
TOTAL LONG-TERM DEBT $357,675 $365,488
======== ========
In 1995, Boston Gas filed a shelf registration covering the issuance through
1997 of up to $100,000,000 of Medium-Term Notes. In October and November 1995,
Boston Gas issued $60,000,000 of Medium-Term Notes, Series C, with a weighted
average maturity of 26 years and coupon of 7.08%. The proceeds from this
issuance were used to complete an in-substance defeasance of $60,000,000
principal amount of 8.75%-9.00% Debentures due 2001. In connection with the
defeasance Boston Gas has irrevocably requested that the Debenture Trustee
call the Debentures on the first date that they can be redeemed with lower
cost debt. In December 1995, Boston Gas deposited $65,136,000 of U.S.
government securities into an irrevocable trust to cover the principal amount
called, the call premiums of $1,161,000 and interest to the date of call of
$3,975,000. As a result of the in-substance defeasance, the debt has been
considered extinguished; accordingly, the government securities and
$60,000,000 principal amount of Debentures due 2001 were removed from the
balance sheet at December 31, 1995. Pursuant to regulatory accounting, the in-
substance defeasance transaction resulted in the deferral of $2,250,000 as
debt issuance costs to be amortized over the lives of the newly issued Medium-
Term Notes.
On September 1, 1995 Boston Gas redeemed all of the outstanding principal
amount of 8.375% First Mortgage Bonds due 1996 at a redemption price of 100%.
In 1994 Boston Gas issued $50,000,000 of Medium-Term Notes, Series B, with a
weighted average maturity of 21 years and coupon of 7.20%. The Series B Notes
include $12,000,000 maturing in 2006 with a put option at par in 1999 and an
interest rate step up from 8.09% to 8.59% in 1999. Proceeds from the issuances
reduced current debt.
Midland's First Preferred Ship Mortgage Bonds and Medium-Term Notes are
secured by certain transportation equipment.
Boston Gas' and Midland's Medium-Term Notes are not callable prior to
maturity. Midland's First Preferred Ship Mortgage Bonds are not callable until
April 1, 1998.
Capital leases consist of property and equipment lease obligations with a
weighted average interest rate of 9.78%. Minimum lease payments under these
agreements are due in installments through 2003.
Debt payment requirements and maturities, net of amounts acquired in
advance, are $5,193,000, $5,374,000, $4,895,000, $10,395,000 and $10,947,000
for 1996 through 2000, respectively.
K-25
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Five-year operating lease commitments: In addition to the property and
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 2008. Total rentals charged to
expense were $13,603,000 in 1995, $13,165,000 in 1994 and $12,189,000 in 1993.
Future minimum lease commitments under operating leases are $11,421,000,
$7,586,000, $3,851,000, $2,910,000, $2,139,000 for 1996 through 2000,
respectively, and cumulatively $5,702,000 thereafter.
4. 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.
5. STOCK PLANS
Eastern has two stock option plans which provide for the issuance of non-
qualified stock options, incentive stock options and stock appreciation rights
("SARs") to its officers 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. In the third quarter of
1995, the right to exercise SARs was effectively eliminated.
Shares available for future grants under these stock option plans were
1,036,428 at December 31, 1995, 98,988 at December 31, 1994 and 199,334 at
December 31, 1993. Stock options exercisable at December 31, 1995 and 1994
were 451,159 and 438,291, respectively. SARs exercisable at December 31, 1994
were 124,150.
Option activity during the past three years was as follows:
Average Stock
option price options SARs
------------ ------- -------
OUTSTANDING AT DECEMBER 31, 1992 $26.00 584,845 142,688
Exercised 21.93 (10,109) (8,588)
Surrendered 21.97 (8,588) (120)
Canceled 29.16 (1,940) (970)
------- -------
OUTSTANDING AT DECEMBER 31, 1993 $26.12 564,208 133,010
Granted 24.24 108,000 --
Exercised 20.38 (7,547) (150)
Surrendered 21.69 (150) --
Canceled 29.29 (9,800) (4,900)
------- -------
OUTSTANDING AT DECEMBER 31, 1994 $25.83 654,711 127,960
Granted 26.96 106,250 --
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 $26.13 683,609 95,220
======= =======
Under restricted stock plans for key employees and non-employee trustees,
Eastern awarded 2,800 shares in 1995, 6,000 shares in 1994 and 4,000 shares in
1993. Eastern recognized compensation expense
K-26
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of $425,000 in 1995, $450,000 in 1994 and $367,000 in 1993 in accordance with
the vesting terms of these and prior awards. Shares available for future
awards under these plans were 40,500 at December 31, 1995 and 42,500 at
December 31, 1994.
6. 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 between Eastern and The First National Bank of Boston, the current
Rights Agent, of one common 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 $100.00, subject to adjustment
to prevent dilution. The rights become exercisable on the 10th business day
after a person acquires 20% or more of Eastern's stock or commences a tender
offer for 20% or more of Eastern's stock, or on the 10th business day after
Eastern's Board of Trustees determines that a shareholder owning at least 10%
of Eastern's stock is an "adverse person," based on criteria specified in the
rights agreement. The rights may be redeemed by Eastern at a price of $.01 at
any time prior to the 10th day after a 20% position has been acquired. 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 20% of Eastern's common stock or has
been determined to be an "adverse person," 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.
7. INTEREST EXPENSE
Years Ended December 31,
----------------------------
1995 1994 1993
(In thousands) -------- -------- --------
Interest on long-term debt $ 33,257 $ 32,430 $ 31,326
Other, including amortization of debt expense 3,852 5,092 3,488
Less--capitalized interest (499) (932) (1,164)
Subsidiary preferred stock dividends 1,926 1,926 1,389
-------- -------- --------
INTEREST EXPENSE $ 38,536 $ 38,516 $ 35,039
======== ======== ========
INTEREST PAYMENTS $ 35,552 $ 35,336 $ 34,040
======== ======== ========
8. OTHER INCOME (EXPENSE)
Years Ended December 31,
----------------------------
1995 1994 1993
(In thousands) -------- -------- --------
Gain on sale of U.S. Filter investment $ 20,581 $ -- $ --
Provision for environmental expenses (15,000) (175) (5,715)
Shutdown and subsequent sale of barge con-
struction facility -- 2,300 (3,500)
Gain on sale of liquid barge business -- -- 7,988
Other (1,478) 428 171
-------- -------- --------
$ 4,103 $ 2,553 $ (1,056)
======== ======== ========
K-27
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. 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,
------------------------------
1995 1994 1993
-------- -------- --------
Statutory rate 35% 35% 35%
State taxes, net of Federal benefit 3 4 4
Capital loss utilization (9) - -
Deferred tax effect of change in
statutory rate - - 3
-------- -------- --------
Effective rate 29% 39% 42%
======== ======== ========
The capital loss utilization in 1995 reflects the gain on the sale of the
U.S. Filter investment offset by the tax loss on the sale of WaterPro, which
had been written down in 1993.
Following is a summary of the provision for income taxes:
Years Ended December 31,
---------------------------
1995 1994 1993
(In thousands) -------- -------- --------
Federal $ 21,024 $ 18,059 $ 9,598
State 5,160 821 1,197
-------- -------- --------
TOTAL CURRENT PROVISION 26,184 18,880 10,795
Federal (806) 3,194 6,370
State (825) 2,384 1,320
-------- -------- --------
TOTAL DEFERRED PROVISION (1,631) 5,578 7,690
-------- -------- --------
PROVISION FOR INCOME TAXES $ 24,553 $ 24,458 $ 18,485
======== ======== ========
TAX PAYMENTS $ 25,298 $ 17,951 $ 10,809
======== ======== ========
Significant items making up deferred tax liabilities and deferred tax assets
are as follows:
December 31,
--------------------
1995 1994
(In thousands) --------- ---------
Coal miners retiree health care $ 26,865 $ 24,043
Unbilled revenue 24,637 30,978
Environmental reserves 8,400 4,091
Bad debt reserve 6,249 6,285
Other 23,109 21,916
--------- ---------
TOTAL DEFERRED TAX ASSETS 89,260 87,313
Accelerated depreciation (136,307) (131,310)
Deferred gas costs (16,296) (23,455)
Other (26,004) (25,245)
--------- ---------
TOTAL DEFERRED TAX LIABILITIES (178,607) (180,010)
--------- ---------
TOTAL DEFERRED TAXES $ (89,347) $ (92,697)
========= =========
K-28
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. DISCONTINUED OPERATIONS
In April 1995 Eastern completed the sale of its subsidiary, WaterPro
Supplies Corporation ("WaterPro"), for $52,864,000 in cash, which approximated
book value. The sale of WaterPro completed the disposition of Eastern's Water
Products Group, which consisted of WaterPro and Ionpure Technologies
Corporation ("Ionpure"). Ionpure was sold in 1993.
Following is a summary of results of operations for the Water Products Group
through the measurement date of October 31, 1994 and the estimated loss on
disposition:
1994 1993
(In thousands) -------- --------
Revenues $189,125 $230,632
======== ========
Earnings (loss) before income taxes $17,544 $(61,129)
Provision (benefit) for income taxes 2,832 (2,947)
-------- --------
Earnings (loss) from operations of discontinued opera-
tions 14,712 (58,182)
-------- --------
Loss on disposition before income taxes (3,850) --
Benefit for income taxes (1,350) --
-------- --------
Loss on disposition (2,500) --
-------- --------
Net earnings (loss) from discontinued operations $12,212 $(58,182)
======== ========
The tax provision from operations in 1994 includes a benefit of $1,760,000
related to a tax examination of Ionpure concluded during that year. The net
loss on disposition of $2,500,000 reflects an accrual for estimated expenses
on the sale of WaterPro, including anticipated losses from operations from the
measurement date through the expected disposal date.
Earnings (loss) from operations of discontinued operations include the
following:
1994 1993
(In thousands) ------- --------
Operations $ 6,591 $ (2,094)
Writedown of WaterPro goodwill -- (45,000)
Sale of Ionpure 1,038 (9,300)
Settlement of lawsuit relating to Ionpure acquisition,
net of
legal costs 7,083 (1,788)
------- --------
$14,712 $(58,182)
======= ========
11. 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. Specifically, Eastern has a reserve of
approximately $25 million in total at December 31, 1995 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
1900s 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 Massachusetts
Department of Environmental Protection ("DEP") in 1989 which requires that
K-29
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. The
National Oceanic and Atmospheric Administration and the Coast Guard are
working with the DEP in connection with further investigation and possible
remediation of river sediment conditions. During 1995 Eastern conducted and
received the results of certain sediment sampling which confirmed findings of
contamination in the riverbed. Additional sampling has been ordered by the
DEP. Consequently, during 1995 Eastern provided an additional $15,000,000 of
environmental expense for the potential remediation of the riverbed. However,
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.
Boston Gas, like many other companies in the natural gas industry, is party
to governmental actions requiring investigation and possible remediation of
former manufactured gas plant ("MGP") sites. Boston Gas currently owns 15
former MGP sites. Massachusetts Electric Company ("MEC"), a wholly-owned
subsidiary of New England Electric System ("NEES"), has assumed full
responsibility for remediating one such MGP site in Lynn, Massachusetts,
pursuant to the decision of the First Circuit Court of Appeals in John S. Boyd
Inc., et al. v. Boston Gas Company, et al., which affirmed that NEES and its
subsidiaries are responsible for remediating the site as prior owners and
operators. Pursuant to a settlement agreement between MEC and Boston Gas (the
"Settlement Agreement"), MEC has also assumed responsibility for remediating
ten other sites owned by Boston Gas, subject to a limited contribution by
Boston Gas. Boston Gas is working with the DEP to determine the extent of
remediation which may be required at the four former MGP sites currently owned
by Boston Gas and not covered by the Settlement Agreement or the Boyd
decision. Boston Gas is aware of other former MGP sites located within Boston
Gas' service territory but not currently owned by Boston Gas. A 1990
settlement agreement with the Massachusetts Department of Public Utilities
provides for recovery by Boston Gas through the cost of gas adjustment clause
of any environmental response costs associated with MGP sites over separate,
seven-year amortization periods without a return on the unamortized balance.
Due to uncertainties as to the extent and sources of releases of compounds, as
well as the nature and extent of any required remediation, management does not
possess at this time sufficient information to reasonably determine the
ultimate cost to Boston Gas of remediation at such sites, and no assurance can
be given with respect to the future recoverability of such costs. However,
management believes that it is not probable that such costs will materially
affect Eastern's financial condition or results of operations, particularly
given Boston Gas' limited financial exposure due to the Settlement Agreement
as well as its current ability to recover all other such costs incurred.
12. COAL MINERS RETIREE HEALTH CARE
In September 1993 Eastern received notice from the Social Security
Administration ("SSA") claiming that Eastern is responsible for health care
and death benefit premiums for certain retired coal miners and their
beneficiaries under the Federal Coal Industry Retiree Health Benefit Act of
1992 ("Coal Act"). In July and September 1995, Eastern received SSA notices
relating to an additional group of retired coal miners and their
beneficiaries. The total amount of premiums requested aggregates in excess of
$12,000,000 to cover the period from February 1, 1993 through September 30,
1996, and primarily relates to retired miners who are said to have worked for
Eastern's Coal Division prior to the transfer of those
K-30
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
operations to a subsidiary in 1965. Eastern is challenging in the courts the
constitutionality of the Coal Act as applied to it and asserting a claim
against Peabody Holding Company, Inc. ("Peabody"), to which Eastern sold its
coal subsidiaries in 1987, that any liabilities under the Coal Act should be
borne by Peabody and such subsidiaries. Eastern has posted security to delay
payment of premiums pending the outcome of its constitutional challenge.
Eastern is aware of several other lawsuits challenging the constitutionality
of the Coal Act. In mid-1995 a federal district court ordered a 10% reduction
in health care premiums under the Coal Act in NCA v. Shalala; such decision
has been appealed.
In 1993 Eastern recorded a reserve of $70,000,000 ($45,500,000 net of tax
or $2.02 per share) to provide for its estimated undiscounted obligations
under the Coal Act with respect to notices received from the SSA in that year.
Principally due to the additional notices received, in 1995 Eastern recorded
an additional reserve of $10,000,000 ($6,500,000 net of tax or $.32 per
share). These reserves have been accounted for as extraordinary items.
Management has estimated that Eastern's obligation could range from zero to
more than $115 million depending on the outcome of its constitutional
challenge or its claim against Peabody, or other factors including
administrative review of assigned individuals, the availability of transfers
from the Abandoned Mine Reclamation Fund to pay for the health care premiums
of unassigned miners and their beneficiaries, the resetting of premiums,
medical inflation rates, Medicare reimbursements, other changes in government
health care programs and possible changes in the terms of the Coal Act.
13. RETIREE BENEFITS
Eastern and its subsidiaries, through various company-administered plans and
other union retirement and welfare plans under collective bargaining
agreements, provide retirement benefits for the majority of their employees,
including pension and certain health care and life insurance benefits. Normal
retirement age is 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 hired before 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
collective bargaining agreements 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,
----------------------------
1995 1994 1993
(In thousands) -------- -------- --------
Service cost $ 4,705 $ 4,792 $ 4,282
Interest cost on projected benefit obligation 10,803 10,005 9,791
Actual return on plan assets (29,924) (6,540) (21,690)
Net amortization and deferral 19,011 (3,903) 10,674
-------- -------- --------
Total net pension cost of company-
administered plans 4,595 4,354 3,057
Multi-employer union retirement and welfare
plans 293 309 377
-------- -------- --------
TOTAL NET PENSION COST $ 4,888 $ 4,663 $ 3,434
======== ======== ========
K-31
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Health Care
Years Ended December 31,
----------------------------
1995 1994 1993
(In thousands) -------- -------- --------
Service cost $ 864 $ 907 $ 1,566
Interest cost on accumulated benefits
obligation 6,615 6,038 8,035
Actual return on plan assets 2,352 (755) (282)
Net amortization and deferral (4,706) (2,739) (1,183)
Amortization and deferral of deferred costs 3,760 3,472 (2,275)
-------- -------- --------
TOTAL RETIREE HEALTH CARE COST $ 8,885 $ 6,923 $ 5,861
======== ======== ========
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, 1995 and 1994 using actuarial measurement dates as of October 1,
1995 and 1994:
Pensions Health Care
------------------ --------------------
1995 1994 1995 1994
(In thousands) -------- -------- --------- ---------
ACCUMULATED BENEFIT OBLIGATION:
Vested benefits $124,240 $113,306 $ 77,797 $ 75,983
Non-vested benefits 13,975 15,195 17,017 15,069
-------- -------- --------- ---------
138,215 128,501 94,814 91,052
Effect of future salary increases 18,720 18,896 -- --
-------- -------- --------- ---------
PROJECTED BENEFIT OBLIGATION
("PBO") $156,935 $147,397 $ 94,814 $ 91,052
======== ======== ========= =========
PLAN ASSETS AT FAIR VALUE $174,883 $155,808 $ 13,963 $ 11,611
Less PBO 156,935 147,397 94,814 91,052
-------- -------- --------- ---------
PLAN ASSETS IN EXCESS OF (LESS
THAN) PBO 17,948 8,411 (80,851) (79,441)
Unrecognized net obligation at
December 31, 1985
being amortized over 15 years 2,136 2,542 -- --
Unrecognized net gain (24,129) (12,498) (6,112) (7,119)
Unrecognized prior service cost
(benefit) 14,988 16,313 (14,354) (15,822)
Amounts contributed to plans dur-
ing fourth quarter 2,881 534 2,600 --
Unfunded accumulated benefits (2,318) (2,591) -- --
-------- -------- --------- ---------
NET ASSET (RESERVE) AT DECEMBER
31 $ 11,506 $ 12,711 $ (98,717) $(102,382)
======== ======== ========= =========
The above vested health care benefits include $70,412,000 and $66,544,000
for retirees in 1995 and 1994, respectively. To fund health care benefits
under its collective bargaining agreements Boston Gas maintains a Voluntary
Employee Beneficiary Association ("VEBA"), to which it makes contributions
from time to time. Boston Gas contributed $2,600,000 to the VEBA in 1995. Plan
assets are invested in equity securities, fixed-income investments and money
market instruments. Following are the assumptions used in the actuarial
measurements:
1995 1994
---------- -----
Discount rate 7.5% 7.5%
Return on plan assets 8.5% 8.5%
Increase in future compensation 4.75%-5.0% 5.0%
Health care inflation trend 10.0% 11.0%
The health care inflation trend is assumed to drop gradually to 5% over 5
years. 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 $79,000 and $7,325,000,
respectively, in 1995 and $73,000 and $7,227,000, respectively, in 1994.
K-32
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Effective January 1, 1994, Eastern adopted Statement of Financial Accounting
Standards No. 115 ("SFAS 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. Pursuant to SFAS 115, 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 $2,361,000 and $633,000, respectively, in 1995 and 1994.
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, gas inventory financing and other
miscellaneous short-term liabilities.
Other current assets and investments: Other current assets and investments
include marketable securities classified as available for sale. Pursuant to
SFAS 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.
The carrying amounts and estimated fair values of Eastern's financial
instruments are as follows:
December 31,
-----------------------------------
1995 1994
(In thousands) ----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and short-term investments $191,211 $191,211 $ 59,641 $ 59,641
Marketable securities and investments 14,791 14,791 3,606 3,606
Short-term debt 97,600 97,600 116,108 116,108
Long-term debt 362,868 412,061 370,732 372,869
Preferred stock of subsidiary 29,262 28,829 29,229 26,250
K-33
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. UNAUDITED QUARTERLY FINANCIAL INFORMATION
For the three months ended
-------------------------------------
(In thousands, except per share Mar 31, June 30, Sept 30, Dec 31
amounts) -------- -------- -------- --------
1995:
Revenues $366,968 $198,876 $133,444 $250,124
Operating earnings 58,862 19,143 3,215 32,514
Earnings (loss) before income taxes 49,613 11,342 (4,152) 28,131
EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEM 30,639 7,075 (2,559) 25,226
Extraordinary item, net of tax -- -- -- (6,500)
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 30,639 $ 7,075 $ (2,559) $ 18,726
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM $1.51 $.35 $(.13) $1.25
Extraordinary item, net of tax -- -- -- (.32)
----- ---- ----- -----
NET EARNINGS (LOSS) PER SHARE $1.51 $.35 $(.13) $ .93
===== ==== ===== =====
1994:
Revenues $372,468 $191,793 $139,222 $221,367
Operating earnings (loss) 57,126 14,256 (478) 26,471
Earnings (loss) from continuing
operations before income taxes 47,832 7,970 (9,413) 16,976
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS 28,862 5,015 (5,594) 10,624
Earnings (loss) from discontinued
operations (174) 1,146 2,481 8,759
-------- -------- -------- --------
NET EARNINGS (LOSS) $ 28,688 $ 6,161 $ (3,113) $ 19,383
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS $1.38 $.24 $(.27) $.52
Earnings (loss) per share from
discontinued operations (.01) .05 .13 .42
----- ---- ----- ----
NET EARNINGS (LOSS) PER SHARE $1.37 $.29 $(.14) $.94
===== ==== ===== ====
K-34
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, 1995 and 1994, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Boston, Massachusetts
January 24, 1996.
MANAGEMENT'S REPORT ON RESPONSIBILITY
The management of Eastern Enterprises is responsible for the preparation,
integrity and fair presentation of the company's financial statements. These
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts based on management's informed
judgments and estimates. The financial statements have been audited by the
independent accounting firm of Arthur Andersen LLP which was given
unrestricted access to all financial records and related data.
Eastern maintains a system of internal control over financial reporting which
is designed to provide reasonable assurance to the Company's management and
Board of Trustees regarding the preparation of reliable financial statements
and the safeguarding of assets. The system includes a documented
organizational structure and division of responsibility, an internal audit
staff, the careful selection and development of personnel and established
policies and procedures, including policies to foster a strong ethical climate
and control environment, which are communicated throughout Eastern.
The Audit Committee of the Board of Trustees, consisting solely of outside
trustees, meets periodically with management, internal auditors and the
independent auditors to review internal accounting controls, and the
accounting principles and practices used to report financial condition and the
results of operations. The Audit Committee also annually recommends to the
Board of Trustees the selection of independent auditors.
J. Atwood Ives Chairman Walter J. Flaherty James J. Harper Vice
and Chief Executive Senior Vice President President and Controller
Officer and Chief Financial
Officer
K-35
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
Information with respect to this item may be found in the section captioned
"Information With Respect To Nominees and Trustees" appearing on pages 4
through 6 of the 1996 definitive Proxy Statement. Such information is
incorporated herein by reference. See also the item captioned "Executive
Officers of the Registrant" at the end of Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found in the section captioned
"Compensation of Executive Officers" appearing on pages 8 through the first
full paragraph on page 13 of the 1996 definitive Proxy Statement. Such
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found in the sections captioned
"Information With Respect To Certain Shareholders" appearing on pages 2 and 3
and "Stock Ownership of Trustees and Executive Officers" appearing on page 7
of the 1996 definitive Proxy Statement. Such information is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found in the last paragraph in
the section captioned "Compensation of Trustees" appearing on page 11 of the
1996 definitive Proxy Statement. Such information is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A)
(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules to the Form 10-K have been
included only with the copies of the Form 10-K filed with the SEC. A copy of
this Form 10-K, including a list of exhibits and Financial Statement Schedules
is available free of charge upon written request to: Corporate Relations
Department, Eastern Enterprises, 9 Riverside Road, Weston, MA 02193.
K-36
(3) LIST OF EXHIBITS
3.1 --Declaration of Trust of Eastern Enterprises, as amended through April
27, 1989 (filed as Exhibit 3.1 to Quarterly Report of Eastern
Enterprises on Form 10-Q for the quarter ended June 30, 1989).*
3.2 --By-Laws of Eastern Enterprises, as amended through July 23, 1992
(filed as Exhibit 3.1 to Quarterly Report of Eastern on Form 10-Q for
the quarter ended June 30, 1992).*
(NOTE: Eastern agrees to furnish to the Securities and Exchange
Commission upon request a copy of any instrument with respect to long-
term debt of Eastern or any of its subsidiaries. Such instruments are
not filed herewith since no such instrument authorizes securities in
an amount greater than 10% of the total assets of Eastern and its
subsidiaries on a consolidated basis.)
4.1 --Common Stock Rights Agreement between Eastern and The Bank of New
York, dated as of February 22, 1990, and Exhibits attached thereto
(filed as Exhibits to Form 8-K of Eastern dated March 1, 1990).*
4.1.1 --Agreement between Eastern and The First National Bank of Boston,
dated January 30, 1995 (filed as Exhibit 4.1.1 to Annual Report of
Eastern on Form 10-K for year ended December 31, 1994).*
10.1 --Gas Transportation Contract between Boston Gas Company and Tennessee
Gas Pipeline Company dated as of September 1, 1993 (filed as Exhibit
10.1 to Annual Report of Boston Gas Company on Form 10-K for the year
ended December 31, 1993 (File no. 2-23416)).*
10.2 --Gas Transportation Contracts between Boston Gas Company and Texas
Eastern Transmission Corporation dated December 30, 1993 (filed as
Exhibits 10.2 and 10.3 to Annual Report of Boston Gas Company on Form
10-K for the year ended December 31, 1993 (File no. 2-23416)).*
10.3 --Gas Transportation Contracts between Boston Gas Company and Algonquin
Gas Transmission Company dated December 30, 1993 (filed as Exhibits
10.4 and 10.5 to Annual Report of Boston Gas Company on Form 10-K for
the year ended December 31, 1993 (File no. 2-23416)).*
10.4 --Firm Gas Transportation Agreement between Boston Gas Company and
Iroquois Gas Transmission System, L.P., dated as of February 7, 1991
(filed as Exhibit 10.17 to the Annual Report of Boston Gas Company on
Form 10-K for the year ended December 31, 1990 (File no. 2-23416)).*
10.5 --Eastern's Deferred Compensation Plan for Trustees, as amended (filed
as Exhibit 10.7 to Annual Report of Eastern on Form 10-K for the year
ended December 31, 1993).*(a)
10.5.1 --Amendment to Eastern's Deferred Compensation Plan for Trustees, dated
December 8, 1995. (a)
10.6 --Eastern's 1982 Stock Option Plan, as amended (filed as Exhibit 10.2
to Quarterly Report of Eastern on Form 10-Q for the quarter ended
March 31, 1992).*(a)
10.7 --Eastern's 1995 Stock Option Plan (filed as Exhibit 10.9 to Annual
Report of Eastern on Form 10-K for year ended December 31, 1994).*(a)
10.8 --Eastern's Supplemental Executive Retirement Plan, as amended (filed
as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the
quarter ended March 31, 1994).*(a)
10.8.1 --Amendment to Eastern's Supplemental Executive Retirement Plan, dated
December 8, 1995.(a)
10.9 --Trust Agreement between Eastern and Shawmut Bank of Boston, N.A., as
amended (filed as Exhibit 10.12 to the Annual Report of Eastern on
Form 10-K for the year ended December 31, 1990).*(a)
10.9.1 --Amendment to Trust Agreement between Eastern and Shawmut Bank of
Boston, N.A. (filed as Exhibit 10.2 to Quarterly Report of Eastern on
Form 10-Q for quarter June 30, 1995).*
10.9.2 --Amendment to Trust Agreement between Eastern and the Key Trust
Company of Ohio, N.A., as successor trustee, dated December 8, 1995.
10.10 --Eastern's Executive Incentive Compensation Plan, as amended (filed as
Exhibit 10.3 to Quarterly Report of Eastern on Form 10-Q for the
quarter ended March 31, 1992).*(a)
10.11 --Salary Continuation Agreements between Eastern and certain officers
(filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for
quarter ended September 30, 1994).*(a)
10.12 --Agreement dated November 27, 1991 between Eastern and J. Atwood Ives
(filed as Exhibit 10.14 to the Annual Report of Eastern on Form 10-K
for the year ended December 31, 1991).*(a)
10.13 --Agreement dated October 25, 1991 between Eastern and Richard R.
Clayton (filed as Exhibit 10.15 to the Annual Report of Eastern on
Form 10-K for the year ended December 31, 1991).*(a)
10.14 --Agreement dated April 28, 1994 between Eastern and J. Atwood Ives
(filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q
for the quarter ended March 31, 1994).*(a)
10.15 --Agreement dated April 28, 1994 between Eastern and Richard R.
Clayton (filed as Exhibit 10.3 to Quarterly Report of Eastern on Form
10-Q for the quarter ended March 31, 1994). *(a)
10.16 --Eastern's Headquarters Retirement Plan, as amended and restated
(filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q
for the quarter ended September 30, 1991).*(a)
10.16.1 --Amendment to Eastern's Headquarters Retirement Plan, dated April 27,
1995 (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form
10-Q for quarter June 30, 1995).*(a)
10.17 --Midland Enterprises Inc. Salaried Retirement Plan, as amended and
restated (filed as Exhibit 10.2 to Quarterly Report of Eastern on
Form 10-Q for the quarter ended September 30, 1991).*(a)
10.17.1 --Amendment to Midland Enterprises Inc. Salaried Retirement Plan,
dated November 4, 1994 (filed as Exhibit 10.19.1 to Annual Report of
Eastern on Form 10-K for year ended December 31, 1994).*(a)
10.18 --Boston Gas Company Retirement Plan, as amended and restated (filed
as Exhibit 10.3 to Quarterly Report of Eastern on Form 10-Q for the
quarter ended September 30, 1991).*(a)
10.18.1 --Amendment to Boston Gas Company Retirement Plan, dated December 5,
1994 (filed as Exhibit 10.20.1 to Annual Report of Eastern on Form
10-K for year ended December 31, 1994).*(a)
10.19 --Trust Agreement made as of October 2, 1987 between Eastern and The
Bank of New York, as amended (filed as Exhibit 10.19 to the Annual
Report of Eastern on Form 10-K for the year ended December 31,
1990).*(a)
10.19.1 --Trust Agreement made as of April 28, 1995 between Eastern and the
Key Trust Company of Ohio, N.A., as successor trustee.
10.20 --Eastern's Retirement Plan for Non-Employee Trustees, as amended
(filed as Exhibit 10.22 to Annual Report of Eastern on Form 10-K for
the year ended December 31, 1992).*(a)
10.20.1 --Amendment to Eastern's Retirement Plan for Non-Employee Trustees,
dated December 8, 1995.(a)
10.21 --Eastern's 1996 Non-Employee Trustees' Stock Option Plan.(a)
10.22 --Eastern's 1992 Restricted Stock Plan (filed as Exhibit 10.1 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended March
31, 1992).*(a)
10.23 --Eastern's Restricted Stock Plan for Non-Employee Trustees (filed as
Exhibit 10.24 to Annual Report of Eastern on Form 10-K for the year
ended December 31, 1992).*(a)
10.24 --Eastern's 1994 Deferred Compensation Plan (filed as Exhibit 10.22 to
Annual Report of Eastern on Form 10-K for year ended December 31,
1993).*(a)
10.24.1 --Amendment to Eastern's Deferred Compensation Plan, dated December 8,
1995).(a)
10.25 --Eastern's Executive Stock Purchase Loan Plan (filed as Exhibit 10.1
to Quarterly Report of Eastern on Form 10-Q for quarter ended
September 30, 1994).*(a)
13.1 --Portions incorporated herein of annual report to shareholders for
the year ended December 31, 1995. With the exception of the sections
captioned "Five-Year Financial Summary" appearing on page 31 and
"Stock Price Range" and "Per Share Dividends Declared" appearing on
the inside back cover of the said annual report, which are
incorporated by reference in Items 5 and 6 of this Form 10-K. Said
annual report is not deemed filed as part of this report.
21.1 --Subsidiaries of the registrant.
27. --Eastern's Financial Data Schedule.
- --------
* Not filed herewith. In accordance with Rule 12b-32 of the General Rules and
Regulations under the Securities and Exchange Act of 1934, reference is
made to the document previously filed with the Commission.
(a)Indicates a management contract or compensatory plan or arrangement.
Eastern will furnish a copy of any exhibit not included herewith to any
holder of Eastern's common stock upon payment of the cost of reproduction and
mailing.
(B) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed in the fourth quarter of 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EASTERN ENTERPRISES
Registrant
By /s/ James J. Harper
----------------------------------
JAMES J. HARPER
Vice President and Controller
(Chief Accounting Officer)
Date: March 15, 1996.
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 15th day of March, 1996.
SIGNATURE TITLE
/s/ J. Atwood Ives Chairman and Chief Executive Officer
- ------------------------------------- and Trustee
J. ATWOOD IVES
/s/ Richard R. Clayton President and Chief Operating
- ------------------------------------- Officer and Trustee
RICHARD R. CLAYTON
/s/ Walter J. Flaherty Senior Vice President and Chief
- ------------------------------------- Financial Officer
WALTER J. FLAHERTY
/s/ James R. Barker Trustee
- -------------------------------------
JAMES R. BARKER
/s/ Samuel Frankenheim Trustee
- -------------------------------------
SAMUEL FRANKENHEIM
/s/ Dean W. Freed Trustee
- -------------------------------------
DEAN W. FREED
/s/ Robert P. Henderson Trustee
- -------------------------------------
ROBERT P. HENDERSON
/s/ Leonard R. Jaskol
- ------------------------------------- Trustee
LEONARD R. JASKOL
/s/ Thomas W. Jones
- ------------------------------------- Trustee
THOMAS W. JONES
/s/ Rina K. Spence Trustee
- -------------------------------------
RINA K. SPENCE
/s/ David B. Stone Trustee
- -------------------------------------
DAVID B. STONE
EASTERN ENTERPRISES AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1995
(SUBMITTED IN ANSWER TO ITEMS 14(A)(1) AND (2) OF FORM 10-K,
SECURITIES AND EXCHANGE COMMISSION)
FINANCIAL STATEMENTS
Page
----
EASTERN ENTERPRISES AND SUBSIDIARIES:
Report of independent public accountants on schedules...................... F-2
Consent of independent public accountants.................................. F-2
SCHEDULES (PAGES F-3 THROUGH F-5)
II Valuation and Qualifying accounts and reserves
Schedules not listed above are omitted as not applicable or not required
under the rules of Regulation S-X.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO EASTERN ENTERPRISES:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in Eastern Enterprises Annual
Report to Shareholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 24, 1996. 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 therein in relation to the basic financial statements taken as a whole.
Boston, Massachusetts
January 24, 1996 Arthur Andersen LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports, dated January 24, 1996, included in, and
incorporated by reference into, Eastern Enterprises Annual Report on this Form
10-K for the year ended December 31, 1995, into Eastern's previously filed
Post-Effective 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.
Boston, Massachusetts
March 15, 1996 Arthur Andersen LLP
F-2
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,
Description 1994 Expenses Accounts Created 1995
- ----------- ------------ -------- -------- ---------- ------------
Reserves deducted from
assets--
Reserves for doubtful
accounts.............. $ 16,091 $14,768 $ 0 $(14,849) $ 16,009
======== ======= ======= ======== ========
Reserves for loss on
investments........... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ======= ======== ========
Reserves included in li-
abilities--
Reserve for post-re-
tirement health care.. $102,382 $ 1,150 $ 3,974 $ (8,789) $ 98,717
Reserve for coal miners
retiree health care... 68,693 10,000 0 (568) 78,125
Reserves for employee
benefits.............. 12,453 11,039 169 (7,222) 16,439
Reserves for environ-
mental 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 re-
serves............... $222,021 $52,159 $10,931 $(32,804) $252,307
======== ======= ======= ======== ========
F-3
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1994
(In Thousands)
Additions Deductions
----------------- ----------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1993 Expenses Accounts Created 1994
- ----------- ------------ -------- -------- ---------- ------------
Reserves deducted from
assets--
Reserves for doubtful
accounts.............. $ 13,945 $15,864 $ 0 $(13,718) $ 16,091
======== ======= ====== ======== ========
Reserves for loss on
investments........... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ====== ======== ========
Reserves included in li-
abilities--
Reserve for post-re-
tirement health care.. $104,730 $ 1,103 $2,186 $ (5,637) $102,382
Reserve for coal miners
retiree health care... 70,000 0 0 (1,307) 68,693
Reserves for employee
benefits.............. 10,661 8,716 1,279 (8,203) 12,453
Reserves for environ-
mental expenses....... 10,866 175 125 (1,316) 9,850
Reserves for insurance
claims................ 9,167 7,004 2,127 (8,408) 9,890
Other.................. 19,611 7,854 (4,255) (4,457) 18,753
-------- ------- ------ -------- --------
Total liability re-
serves............... $225,035 $24,852 $1,462 $(29,328) $222,021
======== ======= ====== ======== ========
F-4
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1993
(In Thousands)
Additions Deductions
----------------- ----------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1992 Expenses Accounts Created 1993
- ----------- ------------ -------- -------- ---------- ------------
Reserves deducted from
assets--
Reserves for doubtful
accounts.............. $ 11,835 $13,127 $ 0 $(11,017) $ 13,945
======== ======= ====== ======== ========
Reserves for loss on
investments........... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ====== ======== ========
Reserves included in li-
abilities--
Reserve for post-re-
tirement health care.. $102,221 $ 1,331 $6,805 $ (5,627) $104,730
Reserve for coal miners
retiree health care... 0 70,000 0 0 70,000
Reserves for employee
benefits.............. 11,473 8,635 (692) (8,755) 10,661
Reserves for environ-
mental expenses....... 6,746 5,639 (159) (1,360) 10,866
Reserves for insurance
claims................ 9,202 6,369 1,098 (7,502) 9,167
Other.................. 23,252 7,532 (6,887) (4,286) 19,611
-------- ------- ------ -------- --------
Total liability re-
serves............... $152,894 $99,506 $ 165 $(27,530) $225,035
======== ======= ====== ======== ========
F-5
EXHIBIT INDEX
See Item 14(a)(3), "List of Exhibits," for statement of the location of
exhibits incorporated by reference.
EXHIBIT
-------
3.1 --Declaration of Trust of Eastern Enterprises, as amended through
April 27, 1989 (incorporated by reference).
3.2 --By-Laws of Eastern Enterprises, as amended through July 23, 1992
(incorporated by reference).
4.1 --Common Stock Rights Agreement between Eastern and The Bank of New
York, dated as of February 22, 1990, and Exhibits attached thereto
(incorporated by reference).
4.1.1 --Agreement between Eastern and The First National Bank of Boston,
dated January 30, 1995 (incorporated by reference).
10.1 --Gas Transportation Contract between Boston Gas Company and Tennessee
Gas Pipeline Company dated as of September 1, 1993 (incorporated by
reference).
10.2 --Gas Transportation Contracts between Boston Gas Company and Texas
Eastern Transmission Corporation dated December 30, 1993
(incorporated by reference).
10.3 --Gas Transportation Contracts between Boston Gas Company and
Algonquin Gas Transmission Company dated December 30, 1993
(incorporated by reference).
10.4 --Firm Gas Transportation Agreement between Boston Gas Company and
Iroquois Gas Transmission System, L.P., dated as of February 7, 1991
(incorporated by reference).
10.5 --Eastern's Deferred Compensation Plan for Trustees, as amended
(incorporated by reference).
10.5.1 --Amendment to Eastern's Deferred Compensation Plan for Trustees,
dated December 8, 1995.
10.6 --Eastern's 1982 Stock Option Plan, as amended (incorporated by
reference).
10.7 --Eastern's 1995 Stock Option Plan (incorporated by reference).
10.8 --Eastern's Supplemental Executive Retirement Plan, as amended
(incorporated by reference).
10.8.1 --Amendment to Eastern's Supplemental Executive Retirement Plan, dated
December 8, 1995.
10.9 --Trust Agreement between Eastern and Shawmut Bank of Boston N.A., as
amended (incorporated by reference).
10.9.1 --Amendment to Trust Agreement between Eastern and Shawmut Bank of
Boston, N.A. (incorporated by reference).
10.9.2 --Amendment to Trust Agreement between Eastern and the Key Trust
Company of Ohio, N.A., as successor trustee, dated December 8, 1995.
10.10 --Eastern's Executive Incentive Compensation Plan, as amended
(incorporated by reference).
10.11 --Salary Continuation Agreements between Eastern and certain officers,
as amended (incorporated by reference).
10.12 --Agreement dated November 27, 1991 between Eastern and J. Atwood Ives
(incorporated by reference).
10.13 --Agreement dated October 25, 1991 between Eastern and Richard R.
Clayton (incorporated by reference).
10.14 --Agreement dated April 28,1994, between Eastern and J. Atwood Ives
(incorporated by reference).
10.15 --Agreement dated April 28, 1994, between Eastern and Richard R.
Clayton (incorporated by reference).
10.16 --Eastern's Headquarters Retirement Plan, as amended and restated
(incorporated by reference).
10.16.1 --Amendment to Eastern's Headquarters Retirement Plan, dated April 27,
1995 (incorporated by reference).
10.17 --Midland Enterprises Inc. Salaried Retirement Plan, as amended and
restated (incorporated by reference).
EXHIBIT
-------
10.17.1 --Amendment to Midland Enterprises Inc. Salaried Retirement Plan,
dated November 4, 1994 (incorporated by reference).
10.18 --Boston Gas Company Retirement Plan, as amended and restated
(incorporated by reference).
10.18.1 --Amendment to Boston Gas Company Retirement Plan, dated December 5,
1994 (incorporated by reference).
10.19 --Trust Agreement made as of October 2, 1987 between Eastern and The
Bank of New York, as amended (incorporated by reference).
10.19.1 --Trust Agreement made as of April 28, 1995 between Eastern and the
Kely Trust Company of Ohio, N.A., as successor trustee.
10.20 --Eastern's Retirement Plan for Non-Employee Trustees, as amended
(incorporated by reference).
10.20.1 --Amendment to Eastern's Retirement Plan for Non-Employee Trustees,
dated December 8, 1995.
10.21 --Eastern's 1996 Non-Employee Trustees' Stock Option Plan.
10.22 --Eastern's 1992 Restricted Stock Plan (incorporated by reference).
10.23 --Eastern's Restricted Stock Plan for Non-Employee Trustees
(incorporated by reference).
10.24 --Eastern's 1994 Deferred Compensation Plan (incorporated by
reference).
10.24.1 --Amendment to Eastern's Deferred Compensation Plan, dated December 8,
1995.
10.25 --Eastern's Executive Stock Purchase Loan Plan (incorporated by
reference).
13.1 --Portions incorporated herein of annual report to shareholders for
the year ended December 31, 1995.
21.1 --Subsidiaries of the registrant.
27. --Eastern's Financial Data Schedule.