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, 1996
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 $696.5 million as of February 24, 1997.
There were 20,336,034 shares of Common Stock, par value $1.00 per share,
outstanding as of February 24, 1997.
Documents Incorporated by Reference
Portions of the annual report to shareholders for the year ended December
31, 1996 are incorporated by reference into Part II of this Report.
Portions of the Registrant's 1997 definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 24, 1997 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.
EASTERN ENTERPRISES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business Form 10-K/1
Boston Gas Company Form 10-K/1
Midland Enterprises Inc. Form 10-K/5
AllEnergy Marketing Company, L.L.C. Form 10-K/8
General Form 10-K/8
Item 2. Properties Form 10-K/8
Item 3. Legal Proceedings Form 10-K/8
Item 4. Submission of Matters to a Vote of Security Holders Form 10-K/9
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters Form 10-K/9
Item 6. Selected Financial Data Form 10-K/9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations Form 10-K/9
Item 8. Financial Statements and Supplementary Data Form 10-K/14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure Form 10-K/33
PART III
Item 10. Directors and Executive Officers of the Registrant Form 10-K/33
Item 11. Executive Compensation Form 10-K/33
Item 12. Security Ownership of Certain Beneficial Owners and Management Form 10-K/33
Item 13. Certain Relationships and Related Transactions Form 10-K/33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Form 10-K/33
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. Eastern also owns a 50% interest in AllEnergy Marketing
Company, L.L.C., ("AllEnergy"), an unregulated energy marketing company,
which is a joint venture with New England Electric System. AllEnergy sells
energy commodities and related products and services to customers,
principally in the Northeast.
Eastern provides management and staff services to its operating
subsidiaries. Boston Gas and Midland are financed primarily through their own
internally generated funds and 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.
The information in Item 1 should be read in conjunction with the "Forward
Looking Information" in Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
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
approximately 525,000 residential, commercial, and industrial customers in
Boston, Massachusetts, and 73 other communities in eastern and central
Massachusetts. Boston Gas also sells natural gas for resale in Massachusetts
and other states. Boston Gas, the largest natural gas distribution company in
New England, has been in business for 174 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 local transportation services and gas supply for all
customer classes. 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 ("Department")
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.
In 1993, the Department approved Boston Gas' proposal to unbundle local
transportation service and gas sales for its largest commercial/industrial
customers, and in 1996 to all commercial/industrial customers. Unbundling
allows customers to purchase local transportation from Boston Gas separately
from the purchase of gas supply, which the customer may buy from it or other
suppliers. Boston Gas views these third party suppliers as partners in
marketing gas and increasing throughput and expects to work closely with them
to facilitate the unbundling process and ensure a smooth transition,
especially in the tracking and processing of transactions. Boston Gas has
also developed a program to educate customers
Form 10-K/1
about the opportunity to purchase gas from third-party suppliers, while still
relying on Boston Gas for safe and reliable delivery.
Markets and Competition
Boston Gas competes with other fuel distributors, primarily oil dealers,
throughout its service territory. Over the last six years, Boston Gas has
increased its share in the total stationary energy market from 28% to 36%.
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, the level of investment by Boston Gas
and customer perceptions of relative value.
Gas Throughput
The following table, in billions of cubic feet of natural gas at 1,000 Btu
per cubic foot ("BCF"), provides information about Boston Gas' throughput
during the three years 1994-1996:
Years Ended December 31,
--------------------------
1996 1995 1994
-------- ------ ------
Residential 42.8 39.7 41.4
Commercial/industrial 39.4 48.1 46.7
Off-system sales 12.2 6.6 7.6
-------- ------ ------
Total sales 94.4 94.4 95.7
Transportation of customer-owned gas 61.6 47.5 48.7
Less: Off-system sales (12.2) (6.6) (7.6)
-------- ------ ------
Total throughput 143.8 135.3 136.8
======== ====== ======
Firm throughput 118.7 94.9 95.5
======== ====== ======
Residential customers comprise 92% of its customer base, while
commercial/industrial establishments account for the remaining 8%.
Volumetrically, residential customers account for 30% of total throughput and
36% of firm throughput, while commercial/industrial customers account for 70%
of total throughput and 64% of firm throughput, as depicted in the chart
below. In 1996, approximately 60% of the commercial/industrial customers'
total throughput was local transportation only services. No customer, or
group of customers under common control, accounted for 2% or more of the
total firm revenues in 1996.
1996 Firm Throughput
[pie chart]
C&I Transportation 35%
Residential Sales 36%
C&I Sales 29%
Boston Area Weather
(% of normal)
[line chart]
1992 104
1993 99
1994 101
1995 100
1996 104
[100 represents normal, with lower numbers representing warmer weather and
higher numbers colder weather]
Form 10-K/2
Gas Supply
The following table in BCF provides information about Boston Gas' sources
of supply during 1994-1996:
Years Ended December 31,
-------------------------
1996 1995 1994
------- ------- --------
Natural gas pipeline purchases 91.7 93.4 92.2
Liquefied natural gas ("LNG") purchases 5.2 3.1 5.1
------- ------- --------
Total purchases 96.9 96.5 97.3
Change in storage gas (3.4) 3.5 0.4
Company use, unbilled and other .9 (5.6) (2.0)
------- ------- --------
Total sales 94.4 94.4 95.7
======= ======= ========
Year to year variations in storage gas and unbilled gas reflect variations
in end-of-year customer requirements, due principally to weather.
Given the ready availability of supply, Boston Gas purchased approximately
two-thirds of its peak pipeline supplies under short-term and spot contracts.
The balance of peak day pipeline requirements are purchased directly from
domestic and Canadian producers and marketers pursuant to long-term contracts
which have been reviewed and approved by the Department or by the Federal
Energy Regulatory Commission ("FERC").
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
======= ========
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 was 0.69 BCF in 1996 and 1995 and 0.65 BCF in 1994.
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.
Form 10-K/3
Regulation
Boston Gas' operations are subject to Massachusetts statutes applicable to
gas utilities. Rates, gas purchases, pipeline safety regulations, issuance of
securities and affiliated party transactions are regulated by the Department.
Rates for firm transportation and sales provided by Boston Gas are subject to
approval by, and are on file with, the Department. 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.
On November 29, 1996, the Department issued its order on Boston Gas' rate
restructuring and unbundling plan. In its order, the Department granted a
$6.3 million rate increase, effective December 1, 1996. In addition, the
Department ordered a performance-based regulatory plan that prescribes a
productivity offset in the formula for rate adjustments, service quality
measures and potential penalties that significantly exceeded those proposed
by Boston Gas. Boston Gas has filed with the Department a request for
reconsideration, clarification and recalculation of certain sections of its
order.
In its order, the Department also approved Boston Gas' proposal to
facilitate competition by allowing all commercial and industrial customers
the ability to choose alternative suppliers of natural gas beginning January
1, 1997. Under the approved service unbundling program, commercial and
industrial customers migrating from firm sales to firm transportation will be
assigned, on an interim basis, a pro-rata share of the cost of upstream
pipeline capacity purchased by Boston Gas to serve them.
The Department also stated that the issue of upstream pipeline capacity
assignment would be addressed in future regulatory proceedings. As more
customers elect to purchase gas from other suppliers, a greater amount of
upstream pipeline capacity under contract may be idle, unless it can be
remarketed or assigned. The recoverability of capacity costs will be an issue
for the Department to address for Boson Gas and all other gas 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
of these factors, short-term borrowings are generally highest during the late
fall and early winter.
Form 10-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 Department 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 the 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, 1996, Boston Gas had approximately 1,500 employees, 73%
of whom were organized in local unions with which Boston Gas has collective
bargaining agreements that expire in 1999.
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. Negotiations are under way with the lessor of the Lynn and
Salem facilities in connection with the scheduled expiration of these leases
in June 1997. Boston Gas also owns propane-air facilities at several
locations throughout its service territory.
On December 31, 1996, Boston Gas' distribution system included
approximately 5,800 miles of gas mains, 399,000 services and 529,000 active
customer meters. A majority of the gas mains consist of cast iron and bare
steel which requires ongoing maintenance and replacement.
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 1996, Boston Gas' capital expenditures were $58.5 million. Capital
expenditures were principally made for system replacement, for system
expansion to meet customer demand and for productivity enhancement
initiatives. Boston Gas plans to spend approximately $51 million for similar
purposes in 1997.
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 dry 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
June 1994, Midland sold its barge construction and repair facility located in
Louisiana.
Form 10-K/5
Sales
Midland transported 65.5 million, 66.2 million and 66.9 million tons in
1996, 1995 and 1994, respectively. Tonnage in 1996 declined 1.1% from 1995,
primarily as a result of reduced grain tonnage due in part to a shortage of
grain supplies and the resulting weak demand for barge towing on the lower
Mississippi River. Tonnage in 1995 declined slightly from 1994 due in part to
a softening of the domestic coal market in the second half of 1995 and
reduced shipments of aggregates.
Ton miles are the product of tons and distance transported. The following
charts depict 1996 tonnage by commodity and ton miles of cargo transported
for the period 1992-1996:
1996 Tonnage by Commodity
[pie chart]
Coal 65%
Grain 6%
Other 29%
Ton Miles by Commodity
(in billions)
[bar chart]
Coal Grain Other Liquid Total
1992 15.2 6.3 9.3 1.6 32.4
1993 14.0 4.8 11.8 1.6 32.2
1994 15.2 4.4 15.7 0.0 35.3
1995 15.2 5.2 16.4 0.0 36.8
1996 15.7 4.8 15.6 0.0 36.1
"Other" includes sand, stone, gravel, iron, scrap, steel, coke, phosphate,
towing for others, and other dry cargo.
In 1996, ton miles declined 2.0% from the record level set in 1995 due to
lower tonnage, as discussed above, and slightly shorter average trip lengths
due to reduced shipments of long haul grain and export coal tonnage. Ton mile
production in 1995 increased 4.2% over 1994, although 1995 tonnage declined
slightly, due to longer trip lengths associated with increased movements of
non-coal tonnage, predominantly on the Mississippi River. 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 further in the
"Seasonality" and "Competition" sections.
The following table summarizes Midland's backlog of transportation and
terminalling business under multi-year contracts:
December 31,
------------------
1996 1995
-------- ---------
Tons (in millions) 140.0 156.2
Revenues (in millions) $465.1 $485.3
Portions of revenue backlog not expected to be filled
within the current year 73% 72%
The 1996 revenue backlog (which is based on contracts that extend beyond
December 31, 1997) is shown at prices in effect on December 31, 1996, which
are subject to cost escalation/de-escalation provisions. Since services under
many of the multi-year contracts are based on customer requirements, Midland
has estimated its backlog based on its forecast of the anticipated
requirements of these contract customers. The 10.4% decline in tonnage
backlog from 1995 partially reflects the expiration of two utility coal
contracts and the elapsing terms of current multi-year contracts as they draw
closer to maturity, including those excluded from the calculation as they
enter their final year. The above backlog amounts include contracts awarded
but not yet signed at year end of 22.9 million tons and $94.9 million in
revenues for 1996 and 14.2 million tons and $67.2 million in revenues for
1995. The decrease in the revenue backlog is consistent with the reduction in
backlog tonnage. Electric utilities, which traditionally have entered into
multi-year transportation and coal supply agreements, have begun to shorten
the term of some agreements
Form 10-K/6
for reasons such as Clean Air Act requirements and the trend toward
deregulation of the electric power industry. These factors have also led to
changes in the sourcing of coal by utilities, leading to changes in traffic
patterns.
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, 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 1990s, competition among major
barge line companies was intense due to an imbalance between barge supply and
customer demand, impacted by occasionally weak grain and export coal markets.
This in turn led to revenue and margin erosion and prompted improvements in
cost and productivity and some industry consolidation. During the second half
of 1994, however, barge demand and supply approached equilibrium as both
domestic import demand and export requirements increased significantly. This
trend continued in 1995 and the first half of 1996. However, a shortage of
grain supplies and sharply higher grain prices slowed demand in late 1996 and
created uncertainty over near-term 1997 shipment levels. Coupled with an
increased availability of new equipment, a temporary imbalance of supply and
demand has again been created which has led to more intense competition and
decreased spot rates.
Improvements in operating efficiencies have permitted barge operators to
maintain comparatively low rate structures. Consequently, the barge industry
has generally been able to retain its competitive position with alternate
methods of transportation for bulk commodities, particularly when the origin
and destination of such movements are near or contiguous to navigable
waterways.
No customer, or group of customers under common control, accounted for 10%
or more of the total revenues in 1996. 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.
Midland's multi-year transportation and terminalling contracts expire at
various dates from April 1998 through December 2007. During 1996,
approximately 38% of Midland's 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 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.
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, at average costs per ton mile which are
generally below those of railroads.
Form 10-K/7
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, 1996, Midland's marine equipment consisted of 2,430 dry
cargo barges and 87 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 1996, Midland's capital expenditures were $47.9 million. These
expenditures were made principally for the purchase of new barges and for
renewal of equipment. In 1997 Midland expects to spend approximately $46
million for capital equipment, primarily for the purchase of new barges to
replace aging equipment.
Employees
As of December 31, 1996, Midland employed approximately 1,400 persons, of
whom approximately 36% are represented by labor unions.
AllEnergy Marketing Company, L.L.C.
AllEnergy is an unregulated retail energy marketing company that expects
to provide a comprehensive array of energy commodities and related products
and services to customers, principally in the Northeast. It was formed in
September 1996, through the combination of Eastern's and New England Electric
System's existing unregulated retail energy marketing subsidiaries, AllEnergy
Marketing Company, Inc. and NEES Energy, Inc., respectively, and is owned
equally by both companies. Eastern had formed AllEnergy Marketing Company,
Inc., in April 1996.
Energy marketing companies currently compete mainly on the basis of
commodity prices. In addition, AllEnergy intends to offer value-added
energy-related services.
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 approximately 3,000
employees at December 31, 1996.
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.
Form 10-K/8
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 1996.
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 Officer 60 1991
Richard R. Clayton President and Chief Operating Officer 58 1991
Walter J. Flaherty Senior Vice President and Chief Financial Officer 48 1992
L. William Law, Jr. Senior Vice President, General Counsel and Secretary 52 1995
Chester R. Messer Senior Vice President--President of Boston 55 1988
Gas Company
Fred C. Raskin Senior Vice President--President of Midland 48 1991
Enterprises Inc.
Business Experience
J. Atwood Ives joined Eastern in 1991 as Chairman and Chief Executive
Officer. He has served as a Trustee of Eastern since 1989.
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.
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.
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.
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, 1996 was 5,100.
Information with respect to this item may be found in the sections
captioned "Dividends Declared Per Share" and "Stock Price Range" appearing on
the inside back cover of the annual report to shareholders for the year ended
December 31, 1996. 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 "Six-Year Financial Summary" appearing on page 28 of the annual
report to shareholders for the year ended December 31, 1996. 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.
Form 10-K/9
1996 COMPARED TO 1995
Overview
The Company reported net earnings of $60.7 million, or $2.97 per share, in
1996, compared to net earnings of $53.9 million, or $2.66 per share, in 1995.
Net earnings in 1995 included an extraordinary charge of $6.5 million or $.32
per share, as described in Note 12. Excluding gains on sales of investments,
earnings and earnings per share from continuing operations in 1996 increased
by approximately 17.5% and 16.8%, respectively, over the prior year, which
was adjusted to exclude a gain on the sale of Eastern's United States Filter
Corporation ("U.S. Filter") investment and a provision for environmental
expenses.
(In millions) 1996 1995 Change
----------- ------- ---------
Revenues:
Boston Gas $ 705.4 $653.1 8.0%
Midland 301.9 296.3 1.9%
----------- ------- ---------
Total $1,007.3 $949.4 6.1%
=========== ======= =========
The increase in consolidated revenues from 1995 to 1996 primarily reflects
higher customer usage, colder weather, and increased sales to new customers
for Boston Gas and increased demand for coal and other commodities at
Midland.
(In millions) 1996 1995 Change
-------- ------- ---------
Operating earnings:
Boston Gas $ 68.5 $ 61.7 11.0%
Midland 58.4 57.8 1.0%
Headquarters (5.5) (5.8) 5.2%
-------- ------- ---------
Total $121.4 $113.7 6.8%
======== ======= =========
The increase in operating earnings from 1995 to 1996 primarily reflects
the gross margin impact of Boston Gas' increased revenues, as described
above.
Other income in 1996 includes increased interest income on higher cash and
investment balances and decreased interest expense, reflecting lower average
rates principally due to the refinancing of $60.0 million of Boston Gas
debentures in December 1995 and lower balances of short term obligations.
Partly offsetting were the absence in 1996 of the 1995 $20.6 million gain on
the sale of Eastern's U.S. Filter investment and a $15.0 million provision
for environmental expenses, as described in Notes 1 and 11. In 1996, other
income includes a loss of $3.1 million, representing Eastern's share of
AllEnergy's operating results.
The effective tax rate in 1996 was 8.1% higher than in 1995, principally
because the gain on the 1995 sale of the U.S. Filter investment was offset by
the tax loss realized on the sale of WaterPro, which had been written down in
1993.
Boston Gas
Revenues in 1996 increased by $52.3 million due principally to higher
average customer usage, the impact of colder weather, increased sales to new
customers and increased non-firm sales. The migration of firm sales to
transportation only service was partially offsetting. Weather for 1996 was
4.1% colder than normal. Weather for 1995 was normal.
Operating earnings increased $6.8 million from 1995, primarily reflecting
the gross margin impact of increased revenues. Cost reductions from ongoing
reengineering programs, the absence of severance costs and lower consulting
expenses also contributed to the increase in operating earnings. Wage
increases and higher charges for depreciation were partially offsetting.
Form 10-K/10
Midland Enterprises
Revenues and operating earnings increased by $5.6 million and $0.6
million, respectively, in 1996 over 1995, primarily reflecting the continued
strong demand for coal and other dry cargo commodities and favorable rates.
Severe icing and flooding during the first quarter of 1996 and generally more
difficult operating conditions later in the year resulted in higher operating
costs and lower fleet productivity than in 1995.
Tonnage and ton miles decreased 1.1% and 2.0%, respectively, reflecting
shorter average hauls due to reduced foreign demand for coal and a shortage
of grain supplies. Coal tonnage and ton miles increased 1.4% and 3.1%,
respectively, to record levels reflecting significantly increased shipments
of domestic spot coal, while coal shipments under multi-year contracts for
utilities declined due to the non-renewal of several contracts. Non-coal
tonnage and ton miles declined 6% as a result of weaker barge demand for
grain exports on the lower Mississippi River. Operating results from terminal
and support facilities were slightly improved over 1995.
Ongoing programs to increase fleet productivity were offset by adverse
operating conditions and traffic pattern inefficiencies caused by the reduced
export tonnage. Fuel costs increased in 1996 due to rising fuel prices that
averaged 20% above 1995 levels. A substantial portion of Midland's multi-year
contracts contain fuel adjustment clauses to compensate for higher costs.
1995 COMPARED TO 1994
(In millions) 1995 1994 Change
-------- -------- ---------
Revenues:
Boston Gas $653.1 $660.2 (1.1)%
Midland 296.3 264.7 11.9%
-------- -------- ---------
Total $949.4 $924.9 2.6%
======== ======== =========
The increase in consolidated revenues from 1994 to 1995 primarily reflects
significant increases in Midland's rates for transporting non-coal
commodities.
(In millions) 1995 1994 Change
-------- --------- --------
Operating earnings:
Boston Gas $ 61.7 $65.8 (6.2)%
Midland 57.8 35.8 61.5%
Headquarters (5.8) (4.2) (38.1)%
-------- -------- --------
Total $113.7 $97.4 16.7%
======== ======== ========
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. 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 9.7% lower than in 1994, principally
because there was no tax on the gain on the sale of the U.S. Filter
investment, as discussed above.
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.
Form 10-K/11
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 multi-year utility coal contracts.
Operating earnings benefited from continued productivity improvements and
excellent operating conditions.
Ton miles increased 4.2% to a new record level, although total tonnage
transported declined 1.0%, due to significantly longer trip lengths. Coal
tonnage declined 1.2%, with coal shipments under multi-year contracts
increasing 3.5% and spot coal tonnage declining 17.5%, reflecting a weak
second half market. Non-coal ton miles increased 7.6% 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 17.8% with ores and steel
tonnage up 24.5% as compared to 1994. Operating results from terminal and
support operations were relatively unchanged from 1994 levels.
FORWARD LOOKING INFORMATION
This report and other company reports and statements issued or made from
time to time contain certain "forward looking statements" concerning
projected future financial performance, expected plans or future operations.
Eastern cautions that actual results and developments may differ materially
from such projections or expectations.
Investors should be aware of important factors that could cause actual
results to differ materially from the forward-looking projections or
expectations. These factors include, but are not limited to: temperatures
above or below normal in Boston Gas' service area, changes in market
conditions for barge transportation, adverse operating conditions on the
inland waterways, uncertainties regarding the start-up of AllEnergy,
including expense levels and customer response, changes in interest rates,
regulatory decisions, including without limitation, decisions on Boston Gas'
request for reconsideration of the Massachusetts Department of Public
Utilities rate restructuring order and developments with respect to Eastern's
previously-disclosed environmental and Coal Act liabilities. All of these
factors are difficult to predict and are generally beyond Eastern's control.
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 1997 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 marketable investments of $177 million at December
31, 1996, Eastern maintains a $100 million long-term revolving credit
agreement plus uncommitted lines, all of which are available for general
corporate purposes. At December 31, 1996, there were no borrowings
outstanding under any of these facilities.
Consolidated capital expenditures for 1997 are budgeted at approximately
$100 million, about equally divided between Boston Gas and Midland.
Eastern's capital structure is depicted in the chart on the facing page.
The decrease in equity in 1993 reflects the impact of non-cash charges
associated with the provision for Coal Act liabilities, 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
Form 10-K/12
Boston Gas and Midland with approximately equal amounts of equity and
long-term debt. Both subsidiaries maintain "A" ratings with the major rating
agencies. The chart below shows improvements in interest coverage at Boston
Gas and Midland.
To meet working capital requirements which reflect the seasonal nature of
the local gas distribution business, Boston Gas had commercial paper
outstanding of $57.0 million at December 31, 1996, an increase of $5.0
million from the prior year, primarily reflecting higher balances for
deferred gas costs. In addition, Boston Gas maintains a bank credit agreement
which supports the issuance of up to $70 million of commercial paper to fund
its inventory of gas supplies. At December 31, 1996, Boston Gas had
outstanding $55.6 million of commercial paper for this purpose.
Eastern did not repurchase any shares of common stock in 1996. It
repurchased 320,800 shares for $8.4 million in 1995 and 603,500 shares for
$14.6 million in 1994.
Capital Structure
($ in millions)
[bar chart]
Equity Debt Total Capital
1992 357 518 875
1993 329 364 693
1994 365 374 740
1995 358 396 753
1996 347 428 775
Interest Coverage*
[bar chart]
Boston Gas Midland
1992 4.9 4.3
1993 4.3 4.2
1994 4.8 4.0
1995 4.8 5.7
1996 6.2 5.8
*(pre-tax earnings plus depreciation, amortization
and interest expense divided by interest expense)
OTHER MATTERS
On December 19, 1996, Boston Gas filed with the Massachusetts Department
of Public Utilities (the "Department") a request for reconsideration,
clarification and recalculation of the November 29, 1996 Order received from
the Department regarding its rate restructuring proposal. In its Order, the
Department granted an increase in base revenues of $6.3 million, effective
December 1, 1996. The Department also approved Boston Gas' plan to convert to
performance-based regulation ("PBR"), but established an unsatisfactory PBR
formula and associated service quality measurements.
On September 18, 1996, Eastern and New England Electric System ("NEES")
formed AllEnergy, an unregulated retail energy marketing company that is
intended to provide a comprehensive array of energy commodities and related
products and services to customers in the Northeast. AllEnergy combined
Eastern's and NEES' existing unregulated retail energy marketing
subsidiaries, AllEnergy Marketing Company, Inc. and NEES Energy, Inc.,
respectively, and is owned equally by both companies. The participation of
NEES and NEES Energy, Inc. in the joint venture was approved by the
Securities and Exchange Commission on December 23, 1996.
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, 1996, to cover the
potential remediation and maintenance costs 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 NEES 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
Form 10-K/13
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, 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 a nominal amount to more than $125 million.
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
Consolidated Statements of Operations Form 10-K/15
Consolidated Balance Sheets Form 10-K/16
Consolidated Statements of Cash Flows Form 10-K/18
Consolidated Statements of Shareholders' Equity Form 10-K/19
Notes to Financial Statements Form 10-K/20
Unaudited Quarterly Financial Information Form 10-K/31
Independent Auditors' Report Form 10-K/32
Management's Report on Responsibility Form 10-K/32
Form 10-K/14
Consolidated Statements of Operations
Years Ended December 31,
(In thousands, except per share amounts) 1996 1995 1994
----------------------------------------------------------------------------------------------------
Revenues $1,007,342 $949,412 $924,850
Operating costs and expenses:
Operating costs 716,595 668,701 668,287
Selling, general and administrative expenses 104,822 105,473 100,332
Depreciation and amortization 64,531 61,504 58,856
------------- ------------- -------------
Operating earnings 121,394 113,734 97,375
Other income (expense):
Interest income 9,419 5,633 1,953
Interest expense (34,453) (38,536) (38,516)
Equity in loss of AllEnergy (3,087) - -
Other, net 2,972 4,103 2,553
------------- ------------- -------------
Earnings from continuing operations before income taxes 96,245 84,934 63,365
Provision for income taxes 35,580 24,553 24,458
------------- ------------- -------------
Earnings from continuing operations before extraordinary
item 60,665 60,381 38,907
Earnings from discontinued operations, net of tax - - 12,212
Extraordinary provision for coal miners retiree health
care, net of tax - (6,500) -
------------- ------------- -------------
Net earnings $ 60,665 $ 53,881 $ 51,119
============= ============= =============
Earnings per share from continuing operations before
extraordinary item $2.97 $2.98 $1.87
Discontinued operations, net of tax - - .59
Extraordinary provision for coal miners retiree health
care, net of tax - (.32) -
------------- ------------- -------------
Net earnings per share $2.97 $2.66 $2.46
============= ============= =============
The accompanying notes are an integral part of these financial statements.
Form 10-K/15
Consolidated Balance Sheets
December 31,
(In thousands) 1996 1995
-----------------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments $ 159,804 $ 191,211
Receivables, less reserves of $16,648 in 1996 and $16,009
in 1995 96,854 104,735
Inventories 61,271 47,883
Deferred gas costs 75,337 71,940
Other current assets 6,396 9,117
------------- ------------
Total current assets 399,662 424,886
Property and equipment, at cost 1,450,741 1,356,097
Less--accumulated depreciation 612,573 563,337
------------- ------------
Net property and equipment 838,168 792,760
Other assets:
Deferred post-retirement health care costs 88,563 93,830
Investment in AllEnergy 2,032 -
Other investments 31,346 13,821
Deferred charges and other costs, less amortization 61,844 52,045
------------- ------------
Total other assets 183,785 159,696
------------- ------------
Total assets $1,421,615 $1,377,342
============= ============
The accompanying notes are an integral part of these financial statements.
Form 10-K/16
Consolidated Balance Sheets
December 31,
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Current debt $ 61,557 $ 57,193
Accounts payable 74,114 64,960
Accrued expenses 25,999 26,795
Other current liabilities 72,722 75,913
------------- ------------
Total current liabilities 234,392 224,861
Gas inventory financing 55,594 45,600
Long-term debt 347,313 357,675
Reserves and other liabilities:
Deferred income taxes 93,198 89,102
Post-retirement health care 96,980 98,717
Coal miners retiree health care 61,008 65,025
Preferred stock of subsidiary 29,292 29,262
Other reserves 75,848 71,336
------------- ------------
Total reserves and other liabilities 356,326 353,442
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value; Authorized shares--50,000,000;
Issued shares--20,441,907 in 1996 and 20,385,587 in 1995 20,442 20,386
Capital in excess of par value 33,389 31,488
Retained earnings 377,714 348,821
Treasury stock at cost--138,110 shares in 1996 and 191,547
shares in 1995 (3,555) (4,931)
------------- ------------
Total shareholders' equity 427,990 395,764
------------- ------------
Total liabilities and shareholders' equity $1,421,615 $1,377,342
============= ============
The accompanying notes are an integral part of these financial statements.
Form 10-K/17
Consolidated Statements of Cash Flows
Years Ended December 31,
(In thousands) 1996 1995 1994
- ------------------------------------------------------- ------------------------------------
Cash flows from operating activities:
Net earnings $ 60,665 $ 53,881 $ 51,119
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Discontinued operations non-cash charges and
working capital changes - - (4,830)
Extraordinary provision for coal miners retiree
health care, net of tax - 6,500 -
Depreciation and amortization 64,531 61,504 58,856
Income taxes and tax credits 8,207 (1,119) 7,452
Equity in loss of AllEnergy 3,087 - -
Net gain on sale of assets (2,541) (20,990) (2,403)
Provision for environmental expenditures - 15,000 175
Other changes in assets and liabilities:
Receivables 4,181 (3,942) 19,087
Inventories (13,398) 12,337 8,534
Deferred gas costs (3,397) 17,764 (23,901)
Accounts payable 9,154 14,986 (13,679)
Other (8,277) (3,269) 14,264
------------ ----------- -----------
Net cash provided by operating activities 122,212 152,652 114,674
------------ ----------- -----------
Cash flows from investing activities:
Capital expenditures (111,755) (78,385) (57,883)
Investment in AllEnergy (5,119) - -
Investments (11,618) 1,900 22,017
Proceeds on sale of assets 3,210 118,343 12,695
Other (2,540) (1,725) (6,619)
------------ ----------- -----------
Net cash provided (used) by investing activities (127,822) 40,133 (29,790)
------------ ----------- -----------
Cash flows from financing activities:
Dividends paid (29,974) (28,365) (29,779)
Changes in notes payable 5,000 (10,530) (43,770)
Changes in gas inventory financing 9,994 (7,978) (5,719)
Proceeds from issuance of long-term debt - 60,000 50,000
Repayment of long-term debt (7,356) (66,520) (14,990)
Repurchase of stock - (8,357) (14,574)
Other 2,613 2,428 1,885
------------ ----------- -----------
Net cash used by financing activities (19,723) (59,322) (56,947)
------------ ----------- -----------
Net increase (decrease) in cash and cash equivalents (25,333) 133,463 27,937
Cash and cash equivalents at beginning of year 185,137 51,674 23,737
------------ ----------- -----------
Cash and cash equivalents at end of year 159,804 185,137 51,674
Short-term investments - 6,074 7,967
------------ ----------- -----------
Cash and short-term investments $ 159,804 $191,211 $ 59,641
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
Form 10-K/18
Consolidated Statements of Shareholders' Equity
Common Capital In
Stock Excess of Retained Treasury
(In thousands) $1 Par Value Par Value Earnings Stock Total
---------------------------------------------- ----------------------------------------------------------------
Balance at December 31, 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 -
Unrealized gains on investments available
for sale, net - - 633 - 633
Issuance of stock, net 8 246 - 1,967 2,221
--------------- ------------ ----------------------- -----------
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 -
Unrealized gains on investments available
for sale, net - - 1,728 - 1,728
Issuance of stock, net 34 1,198 - 1,814 3,046
--------------- ------------ ----------------------- -----------
Balance at December 31, 1995 20,386 31,488 348,821 (4,931) 395,764
Net earnings - - 60,665 - 60,665
Dividends declared--$1.51 per share - - (30,626) - (30,626)
Pension liability adjustment, net - - (1,569) - (1,569)
Unrealized gains on investments available
for sale, net - - 423 - 423
Issuance of stock, net 56 1,901 - 1,376 3,333
--------------- ------------ ----------------------- -----------
Balance at December 31, 1996 $20,442 $ 33,389 $377,714 $ (3,555) $427,990
=============== ============ ======================= ===========
The accompanying notes are an integral part of these financial statements.
Form 10-K/19
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 include the following:
December 31,
(In thousands) 1996 1995
-----------------------------------------------------------------
Supplemental gas supplies $49,287 $35,136
Other materials, supplies and marine fuel 11,984 12,747
-------- ---------
$61,271 $47,883
======== =========
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) or average cost method.
Investment in AllEnergy. Eastern holds a 50% interest in AllEnergy
Marketing Company, L.L.C. ("AllEnergy"), an unregulated energy marketing
company. AllEnergy is a joint venture with New England Electric System.
Eastern accounts for its investment in AllEnergy using the equity method.
Investment in U.S. Filter: In November 1995, Eastern sold its 3,041,092
shares of United States Filter Corporation common stock in a public offering
for $65,479,000 in cash. 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.
Regulatory assets and liabilities: Boston Gas is subject to the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting
for the Effects of Certain Types of Regulation." Regulatory assets represent
probable future revenue associated with certain costs which will be recovered
from customers through the ratemaking process. Regulatory liabilities
represent probable future reductions in revenues associated with amounts that
are to be credited to customers through the ratemaking process.
Regulatory assets total $110,066,000 and $109,604,000 at December 31, 1996
and 1995, respectively, and relate primarily to post-retirement health care
costs and pipeline transition costs. Regulatory liabilities total $11,446,000
and $12,391,000 at December 31, 1996 and 1995, respectively, and relate
primarily to income taxes.
As of December 31, 1996 Boston Gas' regulatory assets and regulatory
liabilities are being reflected in rates charged to customers over periods
from 1 to 23 years.
Boston Gas believes that the application of SFAS No. 71 is appropriate.
If, however, a portion of Boston Gas' operations were no longer subject to
the provisions of SFAS No. 71, a write-off of related regulatory assets and
liabilities would be required, unless some form of transition cost recovery
(refund) would continue through rates established and collected for Boston
Gas' remaining regulated operations.
Impairment of long-lived assets: Pursuant to SFAS No. 121, "Accounting for
the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed
Of," in the event that facts and circumstances indicate that the cost of an
asset may be impaired, an evaluation of the recoverability would be
performed. If an evaluation is required, the estimated future undiscounted
cash flows associated with the asset would be compared to the asset's
carrying amount to determine if a write-down to market value or discounted
cash flow value is required. Based on such evaluations there were no
impairment charges in 1996.
Form 10-K/20
Notes To Financial Statements-(Continued)
Other current liabilities include the following:
December 31,
(In thousands) 1996 1995
- -----------------------------------------------------------------------
Pipeline transition costs regulatory liability $16,494 $ 9,510
Coal miners retiree health care premiums 16,300 13,100
Reserves for insurance claims 11,881 13,037
Dividend payable 8,122 7,470
Pipeline refunds due utility customers 3,384 13,173
Other 16,541 19,623
--------- ---------
$72,722 $75,913
========= =========
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.
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 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,
1996 1995
-------------------------------
Boston Gas 5.2% 5.1%
Midland 3.7% 4.0%
Headquarters 10.1% 10.9%
Earnings per share: Earnings per share are based on the weighted average
number of common and common equivalent shares outstanding. Such shares
amounted to 20,445,000 in 1996, 20,285,000 in 1995 and 20,789,000 in 1994.
Fully diluted earnings per share are not materially different from primary
earnings per share.
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) 1996 1995 1994
- ---------------------------------------------------------------------
Revenues:
Boston Gas $ 705,462 $ 653,073 $ 660,158
Midland 301,880 296,339 264,692
------------- ------------- -------------
$1,007,342 $ 949,412 $ 924,850
------------- ------------- -------------
Operating earnings:
Boston Gas $ 68,451 $ 61,662 $ 65,791
Midland 58,415 57,828 35,805
Headquarters(1) (5,472) (5,756) (4,221)
------------- ------------- -------------
$ 121,394 $ 113,734 $ 97,375
============= ============= =============
Identifiable assets, net
of depreciation and
reserves:
Boston Gas $ 877,044 $ 829,482 $ 833,620
Midland 353,928 365,654 345,625
AllEnergy 2,032 - -
Headquarters(2) 188,611 182,206 160,074
------------- ------------- -------------
$1,421,615 $1,377,342 $1,339,319
============= ============= =============
Form 10-K/21
Notes To Financial Statements-(Continued)
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------
Capital expenditures:
Boston Gas $ 58,504 $57,322 $53,504
Midland 47,851 20,900 4,337
Headquarters(3) 5,400 163 42
-------- ------- -------
$111,755 $78,385 $57,883
======== ======= =======
Depreciation and
amortization:
Boston Gas $ 41,607 $38,264 $35,809
Midland 22,554 22,896 22,659
Headquarters 370 344 388
-------- ------- -------
$ 64,531 $61,504 $58,856
======== ======= =======
(1) Reflects unallocated corporate general and administrative expenses.
(2) Primarily includes cash, short-term investments and, in 1994, WaterPro
net assets held for sale and the investment in U.S. Filter Corporation.
(3) Excludes $5,119 for investment in AllEnergy in 1996.
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 significant 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 31, 2001. The
interest rate for borrowings is the agent bank's prime rate or, at the
borrower's option, various pricing alternatives. The agreement requires a
facility fee of 1/8 of 1% of the commitment. At December 31, 1996 and 1995 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 the borrower's
option, various pricing alternatives. Included in current debt were
$57,000,000 and $52,000,000 of commercial paper with a weighted average
interest rate of 5.99% and 5.93% at December 31, 1996 and December 31, 1995,
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 $70,000,000
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 $55,594,000 and
$45,600,000 of commercial paper outstanding to fund its inventory of gas
supplies at December 31, 1996 and 1995, 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 facility which may
be converted to a two-year term loan at the option of Boston Gas if the
one-year revolving credit facility is not renewed by the banks. Boston Gas
may select the agent bank's prime rate or, at Boston Gas' option, various
pricing alternatives. The agreement requires a facility fee of 1/12 of 1% on
the commitment. No borrowings were outstanding under this agreement during
1996 and 1995.
Form 10-K/22
Notes To Financial Statements-(Continued)
Description of long-term debt:
December 31,
(In thousands) 1996 1995
---------------------------------------------------------
Long-term debt:
Boston Gas:
8.33%-9.75% Medium-Term Notes,
Series A, due 2005-2022 $100,000 $100,000
6.93%-8.50% Medium-Term Notes,
Series B, due 2006-2024 50,000 50,000
6.80%-7.25% Medium-Term Notes,
Series C, due 2012-2025 60,000 60,000
Capital leases 570 4,281
Less--current portion (570) (1,509)
----------- -----------
Boston Gas long-term debt 210,000 212,772
----------- -----------
Midland:
First Preferred Ship Mortgages
9.9% Bonds, due 2008 48,399 48,648
8.1%-9.85% Medium-Term Notes,
Series A, due 2002-2012 68,000 71,000
Capital leases 24,901 28,939
Less--current portion (3,987) (3,684)
----------- -----------
Midland long-term debt 137,313 144,903
----------- -----------
Total long-term debt $347,313 $357,675
=========== ===========
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, which
have subsequently been called. Pursuant to regulatory accounting, the
in-substance defeasance transaction resulted in the deferral of $2,582,000 as
debt issuance costs to be amortized over the lives of the newly issued
Medium-Term Notes.
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 9.92%. Minimum lease payments under these
agreements are due in installments through 2003.
Debt payment requirements and maturities, net of amounts acquired in
advance, are $4,557,000, $4,390,000, $9,836,000, $10,329,000 and $9,281,000
for 1997 through 2001, respectively, and cumulatively $313,477,000
thereafter.
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 $13,525,000 in 1996, $13,603,000 in 1995 and $13,165,000 in 1994.
Future minimum lease commitments under operating leases are $9,464,000,
$6,315,000, $5,592,000, $4,816,000, $3,419,000 for 1997 through 2001,
respectively, and cumulatively $6,589,000 thereafter.
Form 10-K/23
Notes To Financial Statements-(Continued)
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 three stock option plans which provide for the issuance of
non-qualified stock options, incentive stock options and stock appreciation
rights ("SARs") to its officers, non-employee trustees and key employees.
Options and SARs may be granted at prices not less than fair market value on
the date of grant for periods not extending beyond ten years from the date of
grant. In the third quarter of 1995, the right to exercise SARs was
effectively eliminated.
Eastern applies Accounting Principles Board Opinion 25 in accounting for
its plans. Accordingly, no compensation cost has been recognized for its
stock option plans and its employee stock purchase plan. Had compensation
cost for Eastern's plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," Eastern's net earnings would have
been reduced by $290,000 or $.01 per share in 1996 and by $170,000 or $.01
per share in 1995.
As the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting reductions in net earnings
and earnings per share may not be representative of that to be expected in
future years.
Shares available for future grants under these stock option plans were
1,003,127 at December 31, 1996, 1,036,428 at December 31, 1995 and 98,988 at
December 31, 1994. Stock options exercisable at December 31, 1996 and 1995
were 488,450 and 451,159, respectively.
Option activity during the past three years was as follows:
Average Stock
Option Price Options SARs
- -----------------------------------------------------------------------------
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
Granted 35.96 133,200 -
Exercised 22.99 (44,320) -
Surrendered - - (7,170)
Canceled 29.20 (24,899) (350)
----------- -------------
Outstanding at December 31, 1996 $27.96 747,590 87,700
=========== =============
Under restricted stock plans for key employees and non-employee trustees,
Eastern awarded 4,400 shares in 1996, 2,800 shares in 1995 and 6,000 shares
in 1994. Eastern recognized compensation expense of $305,000 in 1996,
$425,000 in 1995 and $450,000 in 1994 in accordance with the vesting terms of
these and prior awards. Shares available for future awards under these plans
were 36,100 at December 31, 1996 and 40,500 at December 31, 1995.
Form 10-K/24
Notes To Financial Statements-(Continued)
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, 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,
(In thousands) 1996 1995 1994
- ------------------------------------------------------------------------
Interest on long-term debt $30,811 $33,257 $32,430
Other, including amortization of
debt expense 2,240 3,852 5,092
Less--capitalized interest (524) (499) (932)
Subsidiary preferred stock dividends 1,926 1,926 1,926
--------- --------- ----------
Interest expense $34,453 $38,536 $38,516
Interest payments $33,236 $35,552 $35,336
========= ========= ==========
8. Other Income (Expense)
Years Ended December 31,
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------
Net gain (loss) on sale of assets $2,775 $ 21,087 $ (72)
Provision for environmental expenses - (15,000) (175)
Sale of barge construction facility - - 2,300
Other 197 (1,984) 500
-------- ----------- ---------
$2,972 $ 4,103 $2,553
======== =========== =========
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,
1996 1995 1994
-----------------------------------------------------------------------
Statutory rate 35% 35% 35%
State taxes, net of Federal benefit 3 3 4
Capital loss utilization - (9) -
Other (1) - -
-------- -------- ------
Effective rate 37% 29% 39%
======== ======== ======
Form 10-K/25
Notes To Financial Statements-(Continued)
The capital loss utilization in 1995 reflects a gain on the sale of the
U.S. Filter investment offset by a 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,
(In thousands) 1996 1995 1994
-------------------------------------------------------------
Federal $23,969 $21,024 $18,059
State 3,148 5,160 821
--------- --------- ----------
Total current provision 27,117 26,184 18,880
Federal 7,118 (806) 3,194
State 1,345 (825) 2,384
--------- --------- ----------
Total deferred provision 8,463 (1,631) 5,578
--------- --------- ----------
Provision for income taxes $35,580 $24,553 $24,458
========= ========= ==========
Tax payments $28,917 $25,298 $17,951
========= ========= ==========
Significant items making up deferred tax assets and deferred tax
liabilities are as follows:
December 31,
(In thousands) 1996 1995
- --------------------------------------------------------------
Coal miners retiree health care $ 27,073 $ 26,865
Unbilled revenue 22,392 24,637
Environmental reserves 7,776 8,400
Bad debt reserve 6,494 6,249
Other 24,379 23,109
------------ ------------
Total deferred tax assets 88,114 89,260
Accelerated depreciation (140,159) (136,307)
Deferred gas costs (28,684) (16,296)
Other (17,474) (26,004)
------------ ------------
Total deferred tax liabilities (186,317) (178,607)
------------ ------------
Total deferred taxes $ (98,203) $ (89,347)
============ ============
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, completing the disposition of Eastern's Water
Products Group. Net earnings, including the estimated loss on disposition,
for discontinued operations of $12,212,000, net of $1,482,000 tax provision,
were recorded through the measurement date of October 31, 1994. Revenues from
discontinued operations were $189,125,000 in 1994.
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. Eastern has a reserve of approximately
$25 million in total at December 31, 1996 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,
Form 10-K/26
Notes To Financial Statements-(Continued)
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 they jointly investigate and develop a
remedial response plan for the Facility site, including any area where a
release from that site may have come to be located. The companies have
entered into a cost-sharing agreement under which each company has agreed to
pay one-third of the costs of compliance with the consent order, while
preserving any claims it may have against the other companies. In 1993 the
companies completed preliminary remedial measures, including abatement of
seepage of materials into the adjacent Island End River, a 29-acre tidal
river which is part of Boston Harbor. Studies have identified compounds that
may be associated with coal tar and/or oil in soil and ground water at the
site and adjacent areas, including the riverbed. In addition to the DEP, the
National Oceanic and Atmospheric Administration and the Coast Guard have been
involved in river sediment investigation and remediation discussions. During
1995 and 1996, Eastern conducted and received the results of certain sediment
sampling which confirmed findings of contamination in the riverbed. In light
of uncertainties as to the full extent and sources of releases of compounds,
the nature of any required remediation, the area and volume of soil, ground
water and/or sediments that may be included, the possibility of participation
by additional potentially responsible parties and the apportionment of
liability, Eastern does not possess at this time sufficient information to
reasonably determine or estimate the ultimate cost to it of such remedial
measures. Eastern is recovering certain costs of its legal defense and may be
entitled to recover remediation costs from its insurers.
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 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 and in September 1996, 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
Form 10-K/27
Notes To Financial Statements-(Continued)
$16,000,000 to cover the period from February 1, 1993 through September 30,
1997, and primarily relates to retired miners who are said to have worked for
Eastern's Coal Division prior to the transfer of those operations to a
subsidiary in 1965. Eastern filed suit in Federal District Court in
Massachusetts against the Commissioner of the SSA and the Trustees of the
UMWA Combined Benefit Fund seeking to avoid payment of premiums based on the
SSA's assignments under the Coal Act and to have the Coal Act declared
unconstitutional. This action is currently pending in the First Circuit Court
of Appeals, the assignments and the constitutionality of the Coal Act having
been upheld at the federal district court level. Eastern has asserted a claim
in the same court on January 5, 1994 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 final 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. Chater, which was affirmed by the
Eleventh Circuit Court of Appeals in April 1996.
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. No
additional reserve was recorded for 1996, as the impact of the additional
notices received in 1996 was offset by a decrease in the estimated rate of
medical inflation. Management has estimated that Eastern's obligation could
range from a nominal amount to more than $125 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,
(In thousands) 1996 1995 1994
-------------------------------------------------------------------------------------------
Service cost $ 4,714 $ 4,705 $ 4,792
Interest cost on projected benefit obligation 11,537 10,803 10,005
Actual return on plan assets (16,859) (29,924) (6,540)
Net amortization and deferral 4,992 19,011 (3,903)
----------- ----------- ----------
Total net pension cost of company-administered plans 4,384 4,595 4,354
Multi-employer union retirement and welfare plans 293 293 309
----------- ----------- ----------
Total net pension cost $ 4,677 $ 4,888 $ 4,663
=========== =========== ==========
Form 10-K/28
Notes To Financial Statements-(Continued)
Health Care
Years Ended December 31,
(In thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------
Service cost $ 899 $ 864 $ 907
Interest cost on accumulated benefits obligation 6,849 6,615 6,038
Actual return on plan assets (1,355) 2,352 (755)
Net amortization and deferral (1,357) (4,706) (2,739)
Amortization and deferral of deferred costs 5,266 3,760 3,472
--------- --------- ----------
Total retiree health care cost $10,302 $ 8,885 $ 6,923
========= ========= ==========
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, 1996 and 1995 using actuarial measurement dates as of October 1,
1996 and 1995:
Pensions Health Care
(In thousands) 1996 1995 1996 1995
----------------------------------------------------------------------------------------------
Accumulated benefit obligation:
Vested benefits $130,841 $124,240 $ 77,524 $ 77,797
Non-vested benefits 13,404 13,975 16,831 17,017
---------------------- ------------ -----------
144,245 138,215 94,355 94,814
Effect of future salary increases 19,670 18,720 -- --
---------------------- ------------ -----------
Projected benefit obligation ("PBO") $163,915 $156,935 $ 94,355 $ 94,814
====================== ============ ===========
Plan assets at fair value $192,736 $174,883 $ 17,918 $ 13,963
Less PBO 163,915 156,935 94,355 94,814
---------------------- ------------ -----------
Plan assets in excess of (less than) PBO 28,821 17,948 (76,437) (80,851)
Unrecognized net obligation at December 31,
1985 being amortized over 15 years 1,721 2,136 - -
Unrecognized net gain (31,551) (24,129) (7,528) (6,112)
Unrecognized prior service cost (benefit) 14,986 14,988 (13,015) (14,354)
Amounts contributed to plans during fourth
quarter 227 2,881 - 2,600
Unfunded accumulated benefits (4,705) (2,318) - -
---------------------- ------------ -----------
Net asset (reserve) at December 31 $ 9,499 $ 11,506 $(96,980) $(98,717)
====================== ============ ===========
The above vested health care benefits include $69,864,000 and $70,412,000
for retirees in 1996 and 1995, 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:
1996 1995
------------------------------
Discount rate 7.5% 7.5%
Return on plan assets 8.5% 8.5%
Increase in future compensation 4.75-5.00% 4.75-5.00%
Health care inflation trend 7.0% 10.0%
The health care inflation trend is assumed to be 7% through 1999, 6% in
2000 and 5% thereafter. A one-percentage-point increase in the assumed health
care cost trend would have increased the net periodic post-retirement benefit
cost charged to expense and the accumulated benefit obligation by $78,000 and
$7,268,000, respectively, in 1996 and $79,000 and $7,325,000, respectively,
in 1995.
Form 10-K/29
Notes To Financial Statements-(Continued)
14. Fair Values of Financial Instruments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which requires investments in debt and equity securities
other than those accounted for under the equity method to be carried at fair
value or amortized cost for debt securities expected to be held to maturity,
Eastern has classified its investments in debt and equity securities as
available for sale. Accordingly, the net unrealized gains and losses computed
in marking these securities to market have been reported as a component of
shareholders' equity. The difference between the fair value and the original
cost of these securities is a net unrealized gain of $2,784,000 and
$2,361,000, respectively, in 1996 and 1995.
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash, short-term investments and current debt: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Current debt includes notes payable and gas inventory financing.
Other current assets and investments: Other current assets and investments
include marketable securities classified as available for sale. Pursuant to
SFAS No. 115 the carrying value is the fair value.
Long-term debt and preferred stock of subsidiary: The fair values are
based on currently-quoted market prices.
The carrying amounts and estimated fair values of Eastern's financial
instruments are as follows:
December 31,
(In thousands) 1996 1995
- ----------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash and short-term investments $159,804 $159,804 $191,211 $191,211
Marketable securities and investments 31,531 31,531 14,791 14,791
Short-term debt 112,594 112,594 97,600 97,600
Long-term debt 351,870 382,909 362,868 412,061
Preferred stock of subsidiary 29,292 29,586 29,262 28,829
Form 10-K/30
Notes To Financial Statements-(Continued)
15. Unaudited Quarterly Financial Information
For the three months ended
(In thousands, except per share amounts) Mar 31, June 30, Sept 30, Dec 31,
- -------------------------------------------------------------------------------------------------
1996:
Revenues $419,220 $213,520 $133,950 $240,652
Operating earnings 59,181 22,588 4,926 34,699
Earnings before income taxes 52,504 15,878 538 27,325
Net earnings $ 32,882 $ 9,924 $ 699 $ 17,160
=========== =========== =========== ==========
Net earnings per share $1.61 $.49 $.03 $.84
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
=========== =========== =========== ==========
Form 10-K/31
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, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 22, 1997.
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.
/s/ J. Atwood Ives
J. Atwood Ives
Chairman and
Chief Executive Officer
/s/ Walter J. Flaherty
Walter J. Flaherty
Senior Vice President and
Chief Financial Officer
/s/ James J. Harper
James J. Harper
Vice President and Controller
Form 10-K/32
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 sections
captioned "Information With Respect To Nominees and Trustees" appearing on
pages 3 through 5 and "Section 16(a) Beneficial Ownership Reporting
Compliance" appearing on pages 11 and 12 of the 1997 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 sections
captioned "Compensation of Executive Officers" appearing on pages 6 through
the first full paragraph on page 9, "Compensation of Trustees" appearing on
pages 9 and 10, "Termination of Employment and Change of Control
Arrangements" appearing on pages 10 and 11, "Compensation Committee Report"
appearing on pages 12 through 14 and "Performance Graph" appearing on page 15
of the 1997 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 1 and 2 and "Stock Ownership of Trustees and Executive Officers"
appearing on pages 5 through 6 of the 1997 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 Executive Officers" appearing on
pages 6 through 9, and in the sections captioned "Compensation of Trustees"
appearing on page 5, "Termination of Employment and Change of Control
Arrangements" appearing on pages 10 and 11 and "Certain Transactions"
appearing on page 16 of the 1997 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.
Form 10-K/33
NOTES
(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 (File no.
1-2297)).*
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 (File no. 1-2297)).*
(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 Exhibit 1 to Form 8-K of Eastern dated March 1, 1990 (File no.
1-2297)).*
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 (File no.
1-2297)).*
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 (File no. 1-2297)).*(a)
10.5.1 -- Amendment to Eastern's Deferred Compensation Plan for Trustees, dated December 8, 1995 (Filed as
Exhibit 10.5.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1995 (File no.
1-2297)).*(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 (File no. 1-2297)).*(a)
10.7 -- Eastern's 1995 Stock Option Plan (filed as Exhibit 10.9 to Annual Report of Eastern on Form 10-K for
the year ended December 31, 1994 (File no. 1-2297)).*(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 (File no. 1-2297)).*(a)
10.8.1 -- Amendment to Eastern's Supplemental Executive Retirement Plan, dated December 8, 1995 (Filed as Exhibit
10.8.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1995 (File no.
1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(a)
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 (Filed as Exhibit 10.9.2 to Annual Report of Eastern on Form 10-K for
year ended December 31, 1995 (File no. 1-2297)).*(a)
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 (File no. 1-2297)).*(a)
10.11 -- Salary Continuation Agreement 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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(a)
10.16 -- Eastern's Headquarters Retirement Plan, as amended (filed as Exhibit 10.1 to Quarterly Report of
Eastern on Form 10-Q for the quarter ended September 30, 1991 (File no. 1-2297)).*(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 the quarter June 30, 1995 (File no. 1-2297)).*(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 quarter ended September 30, 1991 (File no. 1-2297)).*(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 (File no.
1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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
(File no. 1-2297)).*(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 (Filed as Exhibit 10.19.1 to Annual Report of Eastern on Form 10-K for the year ended
December 31, 1995 (File no. 1-2297)).*
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 (File no. 1-2297)).*(a)
10.20.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees, dated December 8, 1995 (filed as
Exhibit 10.20.1 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no.
1-2297)).*(a)
10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan (Filed as Exhibit 10.21 to Annual Report of
Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(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 (File no. 1-2297)).*(a)
10.24.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December 8, 1995 (Filed as Exhibit 10.24.1 to
Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(a)
10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25, 1996.
10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended February 27, 1997.
10.26 -- Credit Agreement, dated as of December 31, 1994, by and between Eastern, Boston Gas, Midland, the Banks
named therein and The First National Bank of Boston, individually and as Agent.
10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31, 1995, by and among Eastern, Boston Gas,
Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent.
10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31, 1996, by and among Eastern, Boston Gas,
Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent.
13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1996.
With the exception of the sections captioned "Six-Year Financial Summary" appearing on page 28 and
"Stock Price Range" and "Dividends Declared Per Share" 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.
23.1 -- Consent of Arthur Andersen LLP.
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 1996.
*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 ENTERPRISES AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1996
(SUBMITTED IN ANSWER TO ITEMS 14(A)(1) AND (2) OF FORM 10-K,
SECURITIES AND EXCHANGE COMMISSION)
FINANCIAL STATEMENTS
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 22, 1997. 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 22, 1997 /s/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 22, 1997, included in, and
incorporated by reference into, Eastern Enterprises Annual Report on this
Form 10-K for the year ended December 31, 1996, 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 14, 1997 /s/Arthur Andersen LLP
F-2
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Year Ended December 31, 1996
(In Thousands)
Additions Deductions
---------------------- -------------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1995 Expenses Accounts Created 1996
----------- -------------- ----------- ----------- ------------- --------------
Reserves deducted from assets --
Reserves for doubtful accounts $ 16,009 $12,942 $ 0 $(12,303) $ 16,648
============== =========== =========== ============= ==============
Reserves for loss on investments $ 19 $ 0 $ 0 $ 0 $ 19
============== =========== =========== ============= ==============
Reserves included in liabilities --
Reserve for post-retirement health
care $ 98,717 $ 1,311 $3,725 $ (6,773) $ 96,980
Reserve for coal miners retiree health
care 78,125 0 0 (817) 77,308
Reserves for employee benefits 16,439 12,216 2,896 (6,927) 24,624
Reserves for environmental expenses 26,356 0 1,255 (802) 26,809
Reserves for insurance claims 14,133 7,746 1,972 (11,013) 12,838
Other 18,537 5,212 (837) (5,232) 17,680
-------------- ----------- ----------- ------------- --------------
Total liability reserves $252,307 $26,485 $9,011 $(31,564) $256,239
============== =========== =========== ============= ==============
F-3
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 $(14,850) $ 16,009
============== =========== =========== ============= ==============
Reserves for loss on investments $ 19 $ 0 $ 0 $ 0 $ 19
============== =========== =========== ============= ==============
Reserves included in liabilities --
Reserve for post-retirement 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 environmental expenses 9,850 15,350 1,920 (764) 26,356
Reserves for insurance claims 9,890 8,978 5,876 (10,611) 14,133
Other 18,753 5,642 (1,008) (4,850) 18,537
-------------- ----------- ----------- ------------- --------------
Total liability reserves $222,021 $52,159 $10,931 $(32,804) $252,307
============== =========== =========== ============= ==============
F-4
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 liabilities --
Reserve for post-retirement 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 environmental 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 reserves $225,035 $24,852 $ 1,462 $(29,328) $222,021
============== =========== =========== ============= ==============
F-5
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 14, 1997.
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 14th day of March, 1997.
SIGNATURE TITLE
/s/J. ATWOOD IVES
__________________________________ Chairman and Chief Executive
J. ATWOOD IVES Officer and Trustee
/s/RICHARD R. CLAYTON
__________________________________ President and Chief Operating
RICHARD R. CLAYTON Officer and Trustee
/s/WALTER J. FLAHERTY
__________________________________ Senior Vice President and
WALTER J. FLAHERTY Chief Financial Officer
/s/JAMES R. BARKER
__________________________________ Trustee
JAMES R. BARKER
/s/JOHN D. CURTIN, JR.
__________________________________ Trustee
JOHN D. CURTIN, JR.
/s/SAMUEL FRANKENHEIM
__________________________________ Trustee
SAMUEL FRANKENHEIM
/s/LEONARD R. JASKOL
__________________________________ Trustee
LEONARD R. JASKOL
/s/RINA K. SPENCE
__________________________________ Trustee
RINA K. SPENCE
/s/DAVID B. STONE
__________________________________ Trustee
DAVID B. STONE
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 (incorporated
by reference).
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 (incorporated by
reference).
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 (incorporated by reference).
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).
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 (incorporated by reference).
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 (incorporated
by reference).
10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan (incorporated by reference).
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 (incorporated by reference).
10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25, 1996.
10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended February 27, 1997.
10.26 -- Credit Agreement, dated as of December 31, 1994, by and between Eastern, Boston Gas, Midland, the
Banks named therein and The First National Bank of Boston, individually and as Agent.
10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31, 1995, by and among Eastern, Boston Gas,
Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent.
10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31, 1996, by and among Eastern, Boston Gas,
Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent.
13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1996.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Arthur Andersen LLP.