================================================================================
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, 1999
----------------
COMMISSION FILE NUMBER 1-2297
EASTERN ENTERPRISES
9 Riverside Road, Weston, Massachusetts 02493
(781) 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, but will be contained in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $1,571 million as of February 29, 2000.
There were 27,146,679 shares of Common Stock, par value $1.00 per share,
outstanding as of February 29, 2000.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended December
31, 1999 are incorporated by reference into Part II of this Report.
Portions of the Registrant's 2000 definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 26, 2000 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, 1999
TABLE OF CONTENTS
PAGE NO.
PART I
Item 1. Business 10-K/1
Natural Gas Distribution 10-K/1
Marine Transportation 10-K/6
General 10-K/9
Item 2. Properties 10-K/9
Item 3. Legal Proceedings 10-K/9
Item 4. Submission of Matters to a Vote of Security
Holders 10-K/9
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters 10-K/10
Item 6. Selected Financial Data 10-K/10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-K/10
Item 8. Financial Statements and Supplementary Data 10-K/17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10-K/40
PART III
Item 10. Directors and Executive Officers of the Registrant 10-K/40
Item 11. Executive Compensation 10-K/40
Item 12. Security Ownership of Certain Beneficial Owners
and Management 10-K/40
Item 13. Certain Relationships and Related Transactions 10-K/40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 10-K/40
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"),
Colonial Gas Company ("Colonial Gas"), Essex Gas Company ("Essex Gas") and
Midland Enterprises Inc. ("Midland"). Boston Gas, Colonial Gas and Essex Gas
are regulated utilities that distribute natural gas in eastern and central
Massachusetts. Midland is engaged in barge transportation, principally on the
Ohio and Mississippi river systems. Other subsidiaries include ServicEdge
Partners, Inc. ("ServicEdge"), Transgas, Inc. ("Transgas") and AMR Data
Corporation ("AMR Data"). ServicEdge offers heating, ventilation and air
conditioning ("HVAC") equipment installation and services to customers in
eastern Massachusetts. Transgas is the nation's largest over-the-road
transporter of liquefied natural gas ("LNG"). AMR Data provides customized
automated metering equipment and services primarily to municipal utilities in
the Northeast.
On November 4, 1999, Eastern signed a definitive agreement to be acquired
by KeySpan Corporation ("KeySpan Energy") for $64.00 in cash per share of
Eastern common stock, as described in Note 2 of Notes to Financial Statements.
Such information is incorporated herein by reference. The transaction, which
is subject to receipt of regulatory approvals and the approval of Eastern
shareholders, is expected to close in mid to late 2000, although it is
possible that the transaction will not close until 2001.
In July 1999 Eastern signed a definitive agreement to acquire EnergyNorth,
Inc. ("EnergyNorth") for a combination of stock and cash, as described in Note
3. This agreement was amended in November 1999 in connection with the pending
acquisition of Eastern by KeySpan Energy, as discussed in Note 3. EnergyNorth
is an energy services holding company headquartered in Manchester, New
Hampshire. Its subsidiaries distribute natural gas and propane to
approximately 85,000 customers in New Hampshire and provide mechanical
contracting and HVAC services for commercial, industrial and institutional
customers in northern New England.
On August 31, 1999, Eastern completed the acquisition of Colonial Gas and
its subsidiary Transgas by the issuance of 4.2 million shares of Eastern
common stock valued at $186 million, cash payments, net of cash acquired, of
$150 million, and the assumption of $138 million in long term debt. The
transaction was accounted for using the purchase method of accounting, as
described in Note 4.
Eastern provides management services to its operating subsidiaries. Boston
Gas, Colonial Gas, Essex 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, Colonial Gas, Essex 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 Eastern and the operations of its subsidiaries.
The information in this Form 10-K 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 5.
1(c) DESCRIPTION OF BUSINESS
NATURAL GAS DISTRIBUTION
Eastern's natural gas distribution operations ("LDC group") are comprised
of Boston Gas, Colonial Gas and Essex Gas, which together are engaged in the
transportation and sale of natural gas to approximately 740,000 residential,
commercial, and industrial customers in Boston and 114 other communities in
eastern and central Massachusetts. The LDC group also sells natural gas for
resale in Massachusetts and other states. Boston Gas serves over 540,000
customers and is the largest natural gas distribution company in New England.
Boston Gas has been in business for 177 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. As described above, Colonial Gas was acquired
by Eastern in August 1999 and serves approximately 158,000
10-K/1
customers. Essex Gas was acquired by Eastern in September 1998 and serves
approximately 44,000 customers. For definitions of unfamiliar terms, see the
Glossary on page Form 10-K/6.
The LDC group provides local transportation services and gas supply to all
customer classes. The LDC group's services are available on a firm and non-
firm basis. Firm transportation services and sales are provided under rate
tariffs and/or contracts filed with the Massachusetts Department of
Telecommunications and Energy ("Department"), that typically obligate the LDC
group 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 or another energy source interchangeably.
Non-firm services are provided through individually negotiated contracts and,
in most cases, the price charged takes into account the price of the
customer's alternative fuel.
The LDC group offers unbundled services to all commercial/industrial
users, who are allowed to purchase local transportation from the LDC group
separately from the purchase of gas supply, which the customer may buy from
third party suppliers. The LDC group 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. The LDC
group has also implemented a program to educate commercial/industrial
customers about the opportunity to purchase gas from third party suppliers,
while still relying on the utility for delivery. As of December 31, 1999, the
LDC group had approximately 4,900 firm transportation customers. The chart
below reflects the change in composition of firm throughput as customers
migrate from bundled sales to transportation-only service. Service is
currently provided to all residential customers on a bundled basis. Unbundled
service to residential customers is expected to be offered beginning in April
2000. While the migration of customers to transportation-only service will
lower the LDC group's revenues, it has no impact on its operating earnings as
the LDC group earns all of its margins on the local distribution of gas and
none on the resale of the commodity itself. With gross margins unaffected by
migration to transportation-only service, the improvement in gross margin per
employee, as shown below, reflects the benefit of productivity programs and
acquisition synergies.
(Bar Chart)
FIRM THROUGHPUT
(IN BCF)
BUNDLED TRANSPORTATION-
SALES ONLY Total
----- ---- -----
1995 101.7 19.4 121.1
1996 101.9 46.0 147.9
1997 98.7 50.3 149.0
1998 85.8 49.4 135.2
1999 87.5 49.1 136.6
(Bar Chart)
GROSS MARGIN PER EMPLOYEE
($ IN THOUSANDS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$171 $187 $198 $201 $229
(Bar Chart)
BOSTON AREA WEATHER
% COLDER (WARMER) THAN NORMAL
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
1.00% 5.00% 3.00% -9.00% -5.00%
MARKETS AND COMPETITION
The LDC group competes with other fuel distributors, particularly oil
dealers, throughout its service territory.
GAS THROUGHPUT
The following table provides information about the LDC group's throughput
during the three years 1997-1999, as measured in billions of cubic feet of
natural gas at 1,000 Btu per cubic foot ("Bcf"). For comparability, the table
below reflects the annual throughput of all three LDCs for all periods. The
reduction in throughput from 1997 to 1998 primarily reflects the warmer
weather in 1998, as shown in the chart above.
10-K/2
Years Ended December 31,
1999 1998 1997
---- ---- ----
Residential 54.9 52.9 57.9
Commercial/Industrial 35.9 36.4 46.1
Off-system sales 5.5 12.7 7.4
----- ----- -----
Total sales 96.3 102.0 111.4
Transportation of customer-owned gas 63.3 73.0 87.9
Less: Off-system sales (5.6) (12.7) (7.4)
----- ----- -----
Total throughput 154.0 162.3 191.9
===== ===== =====
Firm throughput 136.6 135.2 149.0
===== ===== =====
The table above excludes the cumulative effect of adopting the accrual
method of revenue recognition, as discussed in Note 15. The one-time effect of
this change increased residential, commercial/industrial and transportation
throughput in 1998 by 3.3 Bcf, 1.4 Bcf and 0.4 Bcf, respectively.
In 1999 residential customers comprised 91% of the LDC group's customer
base, while commercial/industrial customers accounted for the remaining 9%.
Volumetrically, residential customers accounted for 36% of total throughput
and 40% of firm throughput, while commercial/industrial customers accounted
for 64% of total throughput and 60% of firm throughput. Approximately 62% of
the commercial/industrial customers' total throughput was local transportation
of customer-owned gas. No customer, or group of customers under common
control, accounted for more than 2% of total firm revenues in 1999. Firm
throughput for Sithe Energies, an independent power generator, accounted for
28% of the total transportation of customer-owned gas.
GAS SUPPLY
The following table provides information about the LDC group's sources of
supply during 1997-1999 in Bcf. For comparability, the table provides sources
of supply for all three LDCs for all periods.
Years Ended December 31,
1999 1998 1997
---- ---- ----
Natural gas purchases 86.3 91.3 95.4
Underground storage 13.2 14.0 19.1
LNG purchases 4.0 1.6 4.1
----- ----- -----
Total purchases 103.5 106.9 118.6
----- ----- -----
Company use, unbilled and other (7.2) (4.9) (7.2)
----- ----- -----
Total sales 96.3 102.0 111.4
===== ===== =====
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, the LDC group purchased approximately 80% of its
peak pipeline supplies in 1999 under short-term and spot contracts. The
balance of peak day pipeline requirements was purchased directly from various
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 the
LDC group's service territory pursuant to long-term contracts. FERC-approved
tariffs provide for fixed demand charges for the firm capacity rights under
these contracts. The daily and annual capacity and the expiration dates of the
interstate pipeline contracts that provide firm transportation service to the
LDC group's service territory are as follows:
Capacity (in Bcf)
---------------------- Expiration
Pipeline Daily Annual Dates
- -------- ----- ------ -----
Algonquin Gas Transmission Company
("Algonquin") 0.32 95.1 2000-2012
Tennessee Gas Pipeline Company
("Tennessee") 0.28 103.5 2003-2013
---- -----
0.60 198.6
==== =====
10-K/3
In addition, the LDC group has firm capacity contracts on interstate
pipelines upstream of the Algonquin and Tennessee pipelines to transport
natural gas purchased by the LDC group from producing regions to the Algonquin
and Tennessee pipelines. The expiration dates for these contracts are similar
to those included in the above table.
The LDC group 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 23.2 Bcf and peak day withdrawal capacity of 0.213 Bcf. The LDC
group utilizes its existing pipeline contracts to transport gas from the
storage fields to its service territory. Supplemental supplies of LNG and
propane are purchased from foreign and domestic sources.
The LDC group has entered into a portfolio management contract with El
Paso Energy Marketing, Inc. ("El Paso"). For a three-year period beginning
November 1, 1999, El Paso will provide all of the city gate supply
requirements to the LDC group at market prices and will manage certain of the
LDCs' upstream capacity, underground storage and firm supply contracts. The
Department approved the contract in October 1999.
Peak day throughput was 0.864 Bcf and 0.766 Bcf in 1999 and 1998,
respectively. The LDC group provides for peak period demand through a least-
cost portfolio of pipeline, storage and supplemental supplies.
The LDC group considers its annual and peak day sendout capacity, based on
its total supply resources, to be adequate to meet the requirements of its
firm customers.
REGULATION
The LDC group's operations are subject to Massachusetts statutes
applicable to regulated gas utilities. Rates, gas purchases, pipeline safety
regulations, issuances of securities and affiliated party transactions are
regulated by the Department. Rates for firm transportation and sales provided
by the LDC group are subject to approval by, and are on file with, the
Department. In addition, the LDC group has a cost of gas adjustment clause
("CGAC") 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
and certain other charges.
Boston Gas' rates for local transportation service are governed by a five-
year performance-based rate plan approved by the Department in its last rate
proceeding in 1996. Boston Gas' local transportation rates are recalculated
annually to reflect inflation for the previous 12 months, minus a productivity
factor. The plan also provides for penalties if Boston Gas fails to meet
specified service quality measures. Rates are capped such that 25% of earnings
in excess of a 15% return on ending equity are to be passed back to
ratepayers. Similarly, ratepayers are to absorb 25% of any shortfall below a
7% return on ending equity. The final year of the plan ends on October 31,
2002. Boston Gas appealed portions of the Department's performance-based rate
plan order to the Massachusetts Supreme Judicial Court ("SJC") in 1997. In an
August 1999 decision the SJC vacated the Department order as it relates to the
accumulated inefficiencies factor in the productivity factor and the level of
service quality penalties. These matters were remanded to the Department for
further proceedings. The Department has stated that it would consider in the
remand proceedings whether there should be retroactive collection of those
charges vacated by the court. The performance-based rate calculation for 1999
resulted in a rate increase of approximately $1.4 million, with no service
quality penalties. Boston Gas continues to recover its gas costs under its
CGAC.
Colonial Gas' and Essex Gas' rates for local transportation service are
governed by ten-year rate plans approved by the Department in conjunction with
its approval of Eastern's acquisition of these companies. These plans
immediately reduced rates for Colonial Gas and Essex Gas customers by 2.2% and
5.0%, respectively, reflecting expected gas supply cost savings passed back
through the CGAC. The plans freeze base rates through 2009 in the case of
Colonial Gas and 2008 in the case of Essex Gas. The freeze on base rates is
subject to adjustment only to take into account certain exogenous factors,
such as changes in tax laws, accounting changes, or regulatory, judicial or
legislative changes. All of Colonial Gas' and Essex Gas' administrative,
operations and maintenance functions have been integrated with those of Boston
Gas.
In July 1997 the Department directed all ten Massachusetts investor-owned
gas distribution companies ("gas utilities") to undertake a collaborative
process with other stakeholders, including third party suppliers, customers
and others, to develop common principles under which comprehensive gas service
unbundling for all gas consumers might proceed. A settlement on model terms
and conditions for unbundled transportation service jointly agreed upon by the
collaborative participants was approved by the Department on November 30,
1998. Further, on February 1, 1999, the Department ordered the assignment, for
a five-year transition period, of Massachusetts gas utility contractual
commitments for
10-K/4
upstream capacity on a mandatory, pro rata basis to marketers selling gas to
each gas utility's customers. The mandatory assignment method assures that the
costs of upstream capacity purchased by a gas utility to serve firm customers
will not be absorbed as stranded costs by the gas utility or its remaining
bundled service customers during the five-year transition period. Under the
Department's order, during the transition period the gas utilities will retain
primary responsibility for upstream capacity planning and procurement to support
customer requirements and growth. In year three of the transition period, the
Department intends to evaluate the extent to which the upstream capacity market
for Massachusetts is workably competitive and shorten or lengthen the transition
period accordingly. While the Department's order assures the recoverability of
stranded costs, if any, for capacity throughout the transition period, there can
be no assurance about the recoverability of subsequent potential stranded costs
until the Department has addressed the assignment of capacity after the
transition period.
Eastern was granted an exemption under the Public Utility Holding Company
Act of 1935 under Section 3(a)(1) thereof, pursuant to orders of the
Securities and Exchange Commission ("SEC") dated February 28, 1955, as amended
by orders dated November 3, 1967 and August 28, 1975. Eastern's exemption was
confirmed pursuant to orders of the SEC dated September 30, 1998, in
conjunction with the Essex Gas acquisition, and August 12, 1999, in
conjunction with the Colonial Gas acquisition.
SEASONALITY AND WORKING CAPITAL
The LDC group's revenues, earnings and cash flows are highly seasonal as
the demand for most of its distribution sales and services is for space
heating and, therefore, is directly related to variations in temperature
conditions. The majority of the LDC group's earnings are 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, while the LDC group pays pipeline demand charges over the entire
year, the majority of these charges are billed to customers over the heating
season. The lag between payment and billing of demand charges, 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.
ENVIRONMENTAL MATTERS
The LDC group may have or share responsibility under applicable
environmental laws for the remediation of certain former manufactured gas
plant sites. Information with respect to environmental matters may be found in
Note 14. Such information is incorporated herein by reference.
EMPLOYEES
As of December 31, 1999, the LDC group had approximately 1,700 employees,
approximately 65% of whom were organized in local unions. Collective
bargaining agreements for Colonial Gas expire in 2000 and 2001. Collective
bargaining agreements with Boston Gas and Essex Gas expire in 2002.
PROPERTIES
The LDC group operates six LNG facilities in eastern Massachusetts. These
facilities enable the LDC group to purchase and store LNG and, at one
facility, to liquefy pipeline gas and store the resultant LNG for use in
periods of high demand. The LDC group owns and operates four such facilities.
In 1999 the LDC group resolved litigation concerning the other two facilities
by entering into a new 15-year lease of the facilities. Substantially all the
plant assets of Colonial Gas and Essex Gas are encumbered by indentures under
First Mortgage Medium-Term Notes and First Mortgage Bonds.
On December 31, 1999, the LDC group's distribution system included
approximately 10,000 miles of gas mains, 598,000 services and 749,000 active
customer meters. A majority of the gas mains consist of cast iron and bare
steel pipe, which requires ongoing maintenance and replacement.
The LDC group's mains and services generally are located on public ways or
private property not owned by it. The LDC group's occupation of such property
generally is pursuant to easements, licenses, permits or grants of location.
Except as stated above, the principal items of property of the LDC group are
owned in fee.
In 1999, the LDC group's capital expenditures were $69.3 million. Capital
expenditures were principally made for system replacement, system expansion to
meet customer demand, and productivity
10-K/5
enhancement initiatives. The LDC group plans to spend approximately $95 million
for similar purposes in 2000. The increase in large part reflects the
acquisition of Colonial Gas.
GLOSSARY -- NATURAL GAS DISTRIBUTION
BUNDLED SERVICE -- Two or more services tied together as a single product.
Services include gas sales, interstate transportation, local transportation,
balancing variations in customer usage, storage and peak shaving.
CAPACITY -- The capability of pipelines and supplemental facilities to deliver
and/or store gas.
COST OF GAS ADJUSTMENT CLAUSE ("CGAC") -- a rate mechanism that allows for the
adjustment of billing rates for firm sales that enable LDCs to recover the
actual cost of gas delivered to firm customers, including the demand charges
for capacity on the interstate pipeline system.
FIRM SERVICE -- Sales and/or transportation service provided without
interruption throughout the year. Uninterrupted seasonal services are also
available for less than 365 days. Firm services are provided either under
filed rate tariffs or through individually negotiated contracts.
INTERSTATE TRANSPORTATION -- Transportation of gas by an interstate pipeline
to the service territory.
LDC GROUP -- Boston Gas, Colonial Gas and Essex Gas, together.
LIQUEFIED NATURAL GAS ("LNG") -- Natural gas is in liquid form at a
temperature near absolute zero. Liquefying natural gas reduces its volume by a
factor of 600, which facilitates the storage by LDCs of supplemental supplies
needed for peak shaving.
LOCAL DISTRIBUTION COMPANY ("LDC") -- A utility that owns and operates a gas
distribution system for the delivery of gas supplies from the service
territory to end-user facilities.
LOCAL TRANSPORTATION SERVICE -- Transportation of gas by an LDC from the
connection to the pipeline to the end user.
NON-FIRM SERVICE -- Sales and transportation service offered at a lower level
of reliability and cost. Under this service, an LDC can interrupt sales or
service to a customer on short notice, typically during the winter season.
Non-firm services are provided through individually negotiated contracts. In
most cases, the price charged takes into account the price of the customer's
energy alternative.
PEAK SHAVING -- In times of heavy consumption, supplementing available
pipeline gas with supplies from underground storage or LNG facilities or with
injections of propane.
PERFORMANCE-BASED REGULATORY PLAN -- An incentive ratemaking mechanism,
typically a price cap plan, where rates are adjusted annually pursuant to a
pre-determined formula tied to a measure of inflation, offset by an assumed
increase in productivity, subject to the achievement of service quality
measures. Rates may also reflect certain exogenous costs that may be incurred.
THROUGHPUT -- Gas volume delivered to customers through an LDC's gas
distribution system.
UNBUNDLED SERVICE -- Service that is offered and priced separately, e.g.,
segregating the cost of the gas commodity delivered to an LDC's service
territory from the cost of local transportation service. Other unbundled
services may involve daily or monthly balancing, back-up or stand-by services
and pooling. With unbundled services, customers can pick and choose among the
offered services.
MARINE TRANSPORTATION
The marine transportation segment is comprised of Midland Enterprises Inc.
and its wholly-owned operating subsidiaries (together "Midland"), which are
engaged in the operation of a fleet of towboats and barges, 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 operates a boat and barge repair
facility, a coal dumping terminal, a phosphate rock and phosphate chemical
fertilizer terminal, cargo transfer facilities and provides refueling and
barge fleeting services.
10-K/6
SALES
Midland transported 60.0 million, 59.9 million and 57.0 million tons in
1999, 1998 and 1997, respectively. Tonnage in 1999 was essentially unchanged
from 1998 as increased non-coal shipments were offset by a 4% decrease in coal
shipments. Tonnage in 1998 grew 5% from 1997 as a result of increased
shipments to contract coal customers and new aggregate business acquired in
1998, partly offset by lower grain and export coal demand.
Ton miles are the product of tons and distance transported. The chart
below, at left depicts ton miles by commodity for the period 1995-1999. The
downward trend in coal ton miles reflects the continuing weakness in demand
for long-haul export coal transportation markets. Conversely, the increase in
grain ton miles in 1999 reflects increased demand for long-haul export grain
transportation.
(Bar Chart)
TON MILES BY COMMODITY
(IN BILLIONS)
Coal Grain Other
---- ----- -----
1995 15.20 5.20 16.40
1996 15.70 4.80 15.60
1997 13.60 4.50 15.00
1998 13.30 3.70 15.10
1999 12.60 5.00 15.40
"Other" includes iron, scrap steel, sand, stone, gravel, coke, phosphate,
alumina, towing for others and miscellaneous other dry cargo.
(Bar Chart)
REVENUE & COST PER TON MILE
(IN MILLS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Revenue $7.1 $7.4 $7.1 $7.1 $7.1
Cost $5.7 $6.0 $6.2 $6.5 $6.6
(Bar Chart)
BARGE FLEET ADDITIONS
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Gross 50 175 58 152 130
Net (24) 76 (128) 112 22
In 1999 ton miles increased 3% reflecting increased exports of grain and
imports of steel-related products, both of which increased the average trip
length. In 1998 ton miles declined 3% primarily due to an 8% decline in the
average length of haul, resulting from lower long-haul coal and grain export
tonnage. In addition to changes in ton miles transported, Midland's revenues
and net earnings are affected by other factors such as competition, operating
conditions and the segment of the river system traveled. For the first half of
1999, operations generally experienced normal seasonal weather patterns;
however, drought conditions negatively affected operations in the latter half
of the year. In 1998, multiple tropical storms, flooding and lock delays
adversely affected operations.
The following table summarizes Midland's backlog of transportation and
terminaling business under multi-year contracts:
December 31,
1999 1998
----- -----
Tons (in millions) 155.6 128.4
Revenues (in millions) $537.9 $496.6
Portions of revenue backlog not expected to
be filled within the current year 80% 74%
The 1999 revenue backlog (which is based on contracts that extend beyond
December 31, 2000) is shown at prices in effect on December 31, 1999, which
are generally subject to escalation/de-escalation adjustments. 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 21% increase in tonnage backlog
from 1998 mainly reflects new multi-year agreements, in addition to extended
terms on current multi-year contracts. Partially offsetting these increases
are expiring 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 revenue backlog increased 8%, as the increase in backlog
tonnage was partly offset by a shift in the forecast tonnage to shorter-haul
shipments which are priced lower on a per ton basis. Electric utilities, which
traditionally have entered into multi-year transportation and coal supply
agreements, have generally shortened the term of agreements for a variety of
reasons, such as uncertainty caused by the Clean Air Act requirements and
increasing competitive pressures resulting from the ongoing 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.
10-K/7
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 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 quality and availability. Midland's primary competitors
include other barge lines and railroads. There are a number of companies
offering transportation services on the waterways served by Midland. Price
competition between barge lines intensifies in periods when barge supply
exceeds demand. During the past few years, barge supply has increased as the
industry has built more barges than it has retired. The level of long-haul
export tonnage delivered to the Gulf of Mexico from the Ohio and upper
Mississippi rivers is a key component of barge demand. Grain and coal exports
are affected by the strength of the U.S. dollar, volatility of foreign
economies and changes in the level of foreign competition. In recent years,
export coal shipments have declined significantly due to these factors. While
grain exports increased in 1999, they have been below historic levels.
Increased imports of ores, cement and other raw materials through the Gulf
offset some of the export market weakness. These issues have continued to
create strong competition for domestic business and have contributed to the
erosion of margins reflected in the chart depicting revenue and cost per ton
mile.
In 1999 and 1998 the revenues from an operating subsidiary of Cinergy
Corp. and the combined revenues from two operating subsidiaries of The
Southern Company each accounted for more than 10% of Midland's consolidated
revenues under multi-year coal transportation agreements. In 1997 a subsidiary
of Cinergy Corp. accounted for approximately 10% of Midland's consolidated
revenues. No other customer, or group of customers under common control,
accounted for more than 10% of revenues in 1999, 1998 or 1997. 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 terminaling
contracts expire at various dates from March 2001 through June 2010. During
1999, approximately 52% of Midland's revenues resulted from multi-year
contracts. A substantial portion of the contracts provide for rate adjustments
based on changes in various costs, including diesel fuel costs, but the effect
of these adjustments is not immediate and Midland remains at risk for fuel
price volatility on other contracts and spot business. In addition, contracts
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 also 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 the customer for
the differential between the contract price and the cost of substituted
performance.
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, primarily railroads, for the transportation of bulk commodities,
particularly when the origin and destination of such movements are contiguous
to navigable waterways.
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, which are locking rivers, 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. Barge transportation
costs per ton mile are generally well below those of railroads.
ENVIRONMENTAL MATTERS
Midland is subject to the provisions of the Federal Water Pollution
Control Act, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendment and Reauthorization Act, the
Resource Conservation and Recovery Act of 1976 and the Oil Pollution Act of
1990 which permit the Coast Guard and the Environmental Protection Agency to
assess penalties and
10-K/8
clean-up costs for oil, hazardous substances, and hazardous waste discharges.
Midland is further subject to comparable state environmental statutes in the
states where it operates. 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 currently anticipated.
PROPERTIES
As of December 31, 1999, Midland operated 2,436 dry cargo barges and 86
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 1999, Midland's capital expenditures were $18.4 million. These
expenditures were made principally for the purchase of new dry cargo barges,
terminal facilities and information system improvements. In addition, in 1999
Midland acquired 97 new dry cargo barges under long-term operating leases.
About 23% of Midland's barge fleet is less than five years old, as reflected
in the chart of barge fleet additions. In 2000 Midland expects to spend
approximately $10 million for capital equipment, primarily for information
systems and equipment renovations and Midland expects to enter into additional
long-term operating leases for 50 to 100 new dry cargo barges.
EMPLOYEES
As of December 31, 1999, Midland employed approximately 1,400 persons, of
whom approximately 31% are represented by labor unions. Collective bargaining
agreements expire in 2000 through 2002.
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 "Natural Gas
Distribution" and "Marine Transportation" and Note 14.
EMPLOYEES
Eastern and its wholly-owned subsidiaries employed approximately 3,300
employees at December 31, 1999.
ITEM 2. PROPERTIES
Information with respect to this item may be found in Item 1(c) under
"Natural Gas Distribution" and "Marine Transportation." Such information is
incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Information with respect to certain legal proceedings may be found in Note
14 and in Item 1(c) hereof under "Natural Gas Distribution" and "Marine
Transportation." Such information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth
quarter of 1999.
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 63 1991
Fred C. Raskin President and Chief Operating Officer 51 1998
Walter J. Flaherty Executive Vice President and Chief Financial Officer 51 1999
J. Mark Cook Senior Vice President, President of Midland 56 1998
L. William Law, Jr. Senior Vice President, General Counsel and Secretary 55 1995
Chester R. Messer Senior Vice President, President of Boston Gas, Colonial Gas and Essex Gas 58 1988
10-K/9
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.
Fred C. Raskin was Senior Vice President and President of Midland from
1991 until returning to Eastern in 1998 as President and Chief Operating
Officer. He has been an employee of Eastern or its subsidiaries since 1978.
Walter J. Flaherty was elected Executive Vice President and Chief
Financial Officer in August 1999. He was Senior Vice President -
Administration of Boston Gas from 1988 until joining Eastern in 1991 as its
Senior Vice President, Chief Administrative Officer and Chief Financial
Officer. He has been an employee of Eastern or its subsidiaries since 1971.
J. Mark Cook was elected Senior Vice President and President of Midland in
1998. He was President of Cyprus Foote Mineral Company from 1996 to 1998. He
was Chairman and President of Cyprus Australia Coal Company from 1995 to 1996.
He was Senior Vice President, Western Operations for Cyprus Amax Coal Company
from 1993 to 1994.
L. William Law, Jr. has been General Counsel and Secretary of Eastern
since 1987. He has been an employee of Eastern or its subsidiaries since 1975.
Chester R. Messer has been President of Boston Gas since 1988 and an
employee since 1963. He became President of Colonial Gas and Essex Gas when
each was acquired.
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, 1999 was 7,000.
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, 1999. 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 Review" appearing on page 20 of the annual
report to shareholders for the year ended December 31, 1999. 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.
On November 4, 1999, Eastern signed a definitive agreement to be acquired
by KeySpan Corporation ("KeySpan") for $64.00 per share in cash, as described
in Note 2 of Notes to Financial Statements. Such information is incorporated
herein by reference. The transaction, which is subject to receipt of
regulatory approvals and the approval of Eastern shareholders, is expected to
close in mid to late 2000, although it is possible the merger will not close
until 2001.
In July 1999 Eastern signed a definitive agreement to acquire EnergyNorth,
Inc. ("EnergyNorth"), an energy services holding company whose subsidiaries
distribute natural gas and propane to approximately 85,000 customers in New
Hampshire and provide mechanical contracting and HVAC services for commercial,
industrial and institutional customers in northern New England. The July
agreement provided for a combination of stock and cash as the merger
consideration, but the agreement was amended in November 1999 in connection
with the pending acquisition of Eastern by KeySpan, as discussed in Note 3. If
the KeySpan agreement is not terminated, Eastern will acquire EnergyNorth for
approximately $203 million in cash simultaneously with Eastern's merger with
KeySpan. If the KeySpan agreement is terminated, Eastern will acquire
EnergyNorth for approximately $78 million in cash and 1.7 million Eastern
shares, subject to adjustment under a collar arrangement. The merger, which is
subject to satisfactory regulatory approvals and the approval of EnergyNorth
shareholders, is expected to close in mid to late 2000, although it is
possible the merger will not close until 2001. The merger is expected to be
tax free to Eastern whether or not the KeySpan agreement is terminated.
Eastern's acquisition of Colonial Gas Company ("Colonial Gas") on August
31, 1999 has been accounted for under the purchase method of accounting as
discussed in Note 4. Accordingly, Eastern's financial statements include
Colonial Gas' financial information from the date of acquisition. The
operations
10-K/10
of Colonial Gas, a regulated utility, are combined with those of Boston Gas and
Essex Gas and are presented herein as natural gas distribution (LDC group).
Midland Enterprises is reported as marine transportation. Other services include
the results of ServicEdge Partners, Inc. ("ServicEdge"), Transgas Inc.
("Transgas"), which was acquired as part of Colonial Gas, and AMR Data Corp.
("AMR Data").
1999 COMPARED TO 1998
The Company reported net earnings of $55.1 million, or $2.27 per share, in
1999, compared to net earnings of $106.0 million, or $4.67 per share, in 1998.
(Per share figures are presented on a diluted basis, as described in Note 1.)
Excluding extraordinary items described in Notes 6 and 16 and the cumulative
effect of an accounting change described in Note 15 from 1998 results,
Eastern's earnings and earnings per share increased 8% and 1%, respectively,
from $50.8 million and $2.24 per share in 1998.
(In millions) 1999 1998 Change
----- ----- ------
REVENUES
Natural gas distribution $690.8 $667.1 3.6%
Marine transportation 267.3 261.1 2.4%
Other services 20.6 7.1 nm
------ ------
Total $978.7 $935.3 4.6%
====== ======
The increase in consolidated revenues from 1998 to 1999 primarily reflects
the acquisition of Colonial Gas and colder weather, partially offset by lower
gas costs, lower non-firm sales and customer migration from firm gas sales to
transportation-only service.
(In millions) 1999 1998 Change
----- ----- ------
OPERATING EARNINGS
Natural gas distribution $101.4 $ 88.9 14.1%
Marine transportation 21.1 26.6 (20.7)%
Other services (2.9) (9.0) 67.8%
Headquarters (6.2) (6.1) (1.6)%
------ ------
Total $113.4 $100.4 12.9%
====== ======
The increase in consolidated operating earnings from 1998 to 1999
primarily reflects the acquisition of Colonial Gas, colder weather and the
absence of startup costs associated with ServicEdge, partially offset by
higher operating costs for marine transportation.
NATURAL GAS DISTRIBUTION ("LDC GROUP")
The LDC group includes the operations of Boston Gas, Colonial Gas and
Essex Gas, as discussed in Note 5. Revenues in 1999 increased $23.7 million,
compared to 1998, primarily reflecting the acquisition of Colonial Gas ($54
million), colder weather ($26 million) and throughput growth ($10 million),
partially offset by lower gas costs ($28 million), lower interruptible sales
($20 million) and the migration of customers from firm sales to
transportation-only service ($12 million). The impact of Essex Gas' revenue
recognition and the conforming of its historical periods with those of Eastern
increased 1998 revenues and operating earnings by $9 million and $4 million,
respectively, reflecting the 1998 inclusion of Essex Gas' operations for
December 1997 and the exclusion of its operations for September 1998, as
described in Note 4. Weather for 1999 was 5% colder than 1998 but 5% warmer
than normal. The revenue decrease associated with customer migration and lower
gas costs has no impact on operating earnings as the LDC group earns all of
its margins on the local distribution of gas and none on the sale of the
commodity or the passthrough of gas costs.
LDC group operating earnings in 1999 increased $12.5 million, as the
acquisition of Colonial Gas ($11 million), the impact of colder weather ($7
million), and throughput growth ($4 million) were partially offset by higher
controllable costs ($6 million) and the aforementioned Essex Gas accounting
treatment and fiscal periods ($4 million). A $2 million charge for an early
retirement program at Boston Gas related to the integration of Colonial Gas
operations was partially offset by lower expenses, principally bad debt
expense, reflecting improved collection experience.
MARINE TRANSPORTATION
Revenues in 1999 increased $6.2 million, reflecting higher ton mile
production due to increased demand for shipments of grain exports and backhaul
imports of steel-related products to the Ohio River
10-K/11
Valley. Partially offsetting was a continued decline in export coal shipments
due to the non- competitiveness of U.S. coal prices in world markets. Domestic
spot and utility contract coal shipments also trended lower, as mild weather and
high stockpiles reduced electric utility demand.
Tonnage transported in 1999 was unchanged from 1998, while ton miles
increased 3% as a result of an increase in average trip length due to the
additional long-haul grain and import tonnage discussed above. Total coal
tonnage and ton miles both declined 4%, reflecting weaker export and spot
shipments. Non-coal tonnage and ton miles both increased 8% due to the
increased grain and import tonnage.
Operating conditions were improved as compared to 1998, however, drought
conditions significantly hampered operations during the last half of 1999.
Operating expenses increased 6% over the prior year, reflecting rising costs
associated with crew labor, port expenses, vessel maintenance and insurance.
The purchase of new barges and other capital improvements increased
depreciation and property taxes. As a result of these items, operating
earnings declined $5.5 million from 1998.
OTHER SERVICES
Other services consist of the operations of ServicEdge, which accounts for
the majority of the revenues, Transgas, which was acquired as part of Colonial
Gas on August 31, 1999, and AMR Data. The decrease in the operating loss from
$9.0 million in 1998 to $2.9 million in 1999 primarily reflects the absence of
startup costs for ServicEdge, which commenced operations in 1998, and
profitable operations at Transgas and AMR Data.
HEADQUARTERS
The increase in Headquarters' unallocated expenses in 1999 reflects
KeySpan transaction costs of $2.4 million, partially offset by the absence of
$1.2 million in Essex Gas transaction costs and lower consulting costs
incurred in 1998.
OTHER
The $5.2 million increase in net interest expense primarily reflects the
assumption of debt and cash paid in the Colonial Gas acquisition and the
issuance of debt by Midland in September 1998, partially offset by interest
income on a tax settlement and lower working capital requirements for natural
gas distribution during the first part of 1999.
Other, net in 1999 includes a $3.2 million reduction in the environmental
reserve reflecting regulatory clearance of one site, $2.5 million in
environmental-related insurance recoveries and a $1.8 million gain on the sale
of a towboat. Other, net in 1998 primarily reflects realized gains on
investments.
The increase in Eastern's effective tax rate from 36% in 1998 to 40% in
1999 reflects the capital loss utilization available in 1998 and the non-
deductibility of KeySpan merger expenses and Colonial goodwill amortization.
In the first quarter of 1998, Eastern recognized an extraordinary loss of
$2.3 million pretax, $1.5 million net, or $.06 per share, on redeeming Midland
debt, as described in Note 6.
In June 1998 the U.S. Supreme Court held the Coal Industry Retiree Health
Benefit Act of 1992 ("Coal Act") to be unconstitutional as applied to Eastern.
The reversal of the Coal Act reserve resulted in an extraordinary gain of
$74.5 million pretax, $48.4 million net, or $2.13 per share, in the second
quarter of 1998, as described in Note 16.
Net earnings for the first quarter of 1998 include $8.2 million, or $.36 per
share, for the cumulative effect of changing Boston Gas' method of accounting
for unbilled revenues to an accrual method, as described in Note 15.
10-K/12
1998 COMPARED TO 1997
(In millions) 1998 1997 Change
---- ---- ------
REVENUES
Natural gas distribution $667.1 $ 754.5 (11.6)%
Marine transportation 261.1 269.2 (3.0)%
Other services 7.1 - nm
------ --------
Total $935.3 $1,023.7 (8.6)%
====== ========
The decrease in consolidated revenues from 1997 to 1998 primarily reflects
decreases for natural gas distribution, including the impact of warmer
weather, the migration from firm gas sales to transportation-only service and
lower gas costs, partially offset by sales to new customers.
(In millions) 1998 1997 Change
---- ---- ------
OPERATING EARNINGS
Natural gas distribution $ 88.9 $ 87.8 1.3%
Marine transportation 26.6 34.6 (23.1)%
Other services (9.0) (1.5) nm
Headquarters (6.1) (5.6) (8.9)%
------ ------
Total $100.4 $115.3 (12.9)%
====== ======
The decrease in consolidated operating earnings from 1997 to 1998
primarily reflects reduced volumes, lower rates and higher costs for marine
transportation and startup costs associated with ServicEdge.
NATURAL GAS DISTRIBUTION
Revenues in 1998 decreased $87.4 million, compared to 1997, primarily
reflecting warmer weather ($50 million), the migration of customers from firm
sales to transportation-only service ($22 million), lower gas costs ($17
million), and the absence of a 1997 nonrecurring increase in revenues ($9
million) related to a change in the recovery mechanism for the portion of bad
debts associated with gas costs. Growth in throughput was partially
offsetting. Weather for calendar 1998 was 9% warmer than normal and 13% warmer
than 1997.
Operating earnings in 1998 increased $1.1 million, as lower operating
costs ($9 million), throughput growth ($4 million), and modestly higher
average rates were mostly offset by the negative impact of warmer weather ($16
million) and higher depreciation expense. The decrease in operating costs
primarily reflects weather-related reductions and continued cost control
measures, as well as the absence of a $9 million charge related to Boston Gas'
decision to exit the gas appliance service business in 1997. The operating
earnings impact of this latter charge was essentially offset by the absence of
the nonrecurring revenue increase related to the bad debt recovery mechanism,
as described above.
MARINE TRANSPORTATION
Revenues in 1998 decreased $8.1 million, reflecting lower ton mile
production and lower rates resulting from weaker market conditions. A strong
U.S. dollar and economic problems in Asia combined to significantly reduce
long-haul export coal and grain demand, which in turn created excess barge
capacity and placed downward pressure on rates.
Tonnage transported in 1998 increased 5% over 1997, while ton miles
declined 3% due to shorter average trip lengths, primarily reflecting the
reduced long-haul export tonnage. Total coal tonnage increased 8% with coal
tonnage shipped under multi-year contracts to utility customers increasing
12%. Coal ton miles declined 3%, however, due to the decline in long-haul
export coal shipments.
Extreme adverse weather conditions significantly increased operating costs
and reduced productivity. Operating difficulties disrupted traffic patterns,
lowered fleet productivity and materially increased operating expenses. Lower
fuel prices, which dropped 23% per gallon in 1998, were partly offsetting.
Reflecting these operating and market issues, operating earnings declined $8.0
million from 1997.
OTHER SERVICES
Revenues of $7.1 million primarily reflect the results of ServicEdge,
which commenced operations in 1998. The operating loss of $9.0 million
primarily reflects costs associated with the startup of ServicEdge.
10-K/13
OTHER
The $2.4 million reduction in net interest expense reflects the use of
short-term investments for the redemption and issuance of Midland debt in
1998.
The $9.6 million increase in other, net reflects increased realized gains
on investments in 1998 and the absence of a charge recorded in 1997 to reflect
Eastern's share of a former joint venture's operating losses, as reflected in
Note 12. Eastern's effective tax rate in 1998 was 36%. In 1997 the rate was
33%, primarily because of adjustments relating to prior year returns, as
described in Note 13.
Net earnings for 1998 include an extraordinary gain on the reversal of the
Coal Act reserve, an extraordinary loss on the redemption of Midland debt and
the cumulative effect of an accounting change for Boston Gas, as described
above.
YEAR 2000 ISSUES
TRANSITION TO YEAR 2000
Eastern experienced no significant issues as a result of the transition
from December 31, 1999 to January 1, 2000.
Natural gas distribution transitioned into year 2000 without incident or
disruption to the gas distribution network, customer services or production
systems.
Marine transportation experienced no significant year 2000 related
problems or operational disruptions. A few minor program errors to non-
critical systems were identified and corrected.
Eastern and its operating subsidiaries will continue to monitor in-house
information systems through the end of the first quarter of 2000.
COST OF YEAR 2000 REMEDIATION
Eastern's cost incurred to achieve year 2000 compliance was approximately
$17.3 million as detailed in the following chart:
(In millions)
-----------------------------------------------------------
Natural gas distribution: capitalized $10.5
expensed 4.4
Marine transportation: capitalized 1.4
expensed 1.0
-----
Total $17.3
=====
Included above are the costs of purchased software and hardware,
consulting and the value of internal staff time. Capitalized projects have
resulted in added functionality while addressing year 2000 issues. The company
does not expect to incur any further significant year 2000 related costs.
FORWARD-LOOKING INFORMATION
This report and other company statements 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 forward-looking projections or expectations.
These factors include, but are not limited to: the effect of the pending
mergers with KeySpan and EnergyNorth, Eastern's ability to successfully
integrate its new gas distribution operations, temperatures above or below
normal in eastern Massachusetts, changes in market conditions for barge
transportation, adverse weather and operating conditions on the inland
waterways, uncertainties regarding the profitability of ServicEdge, changes in
economic conditions, including interest rates and the value of the dollar
versus other currencies, regulatory and court decisions and developments with
respect to Eastern's previously-disclosed environmental liabilities. Most of
these factors are difficult to predict accurately 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, will be more than sufficient
to meet Eastern's 2000 capital expenditure and working capital requirements,
potential funding of its environmental liabilities, normal debt repayments and
10-K/14
anticipated dividends to shareholders. Management expects KeySpan to provide
the funds needed for the acquisition of EnergyNorth. If the KeySpan agreement
is terminated, management expects the EnergyNorth acquisition to be funded
through a combination of internal sources and additional borrowings.
In addition to cash and marketable investments of $44.3 million at
December 31, 1999, Eastern and its subsidiaries maintain $145 million of
borrowing capacity under revolving credit agreements, plus uncommitted lines,
all of which are available for general corporate purposes. At December 31,
1999, there were borrowings of $80.2 million outstanding under these
facilities.
To meet working capital requirements which reflect the seasonal nature of
its business, natural gas distribution had outstanding $80.2 million of short-
term borrowings at December 31, 1999, an increase of $42.4 million from the
prior year, primarily reflecting the acquisition of Colonial Gas. In addition,
natural gas distribution maintains bank credit agreements of up to $110
million to finance its inventory of gas supplies. At December 31, 1999,
natural gas distribution had outstanding $70.3 million of gas inventory
financing for this purpose, of which $16.3 million is reflected in current
debt.
Eastern's capital structure is depicted in the chart below. The Company
expects to continue its policy of capitalizing its LDC group and Midland with
approximately equal amounts of equity and long-term debt. Boston Gas, Colonial
Gas and Midland currently maintain "A" ratings with the major rating agencies.
(Bar Chart)
CAPITAL STRUCTURE
($ IN MILLIONS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
Debt $379.02 $367.68 $371.49 $385.52 $ 515.23
Equity 426.47 461.01 484.47 546.07 754.63
------- ------- ------- ------- ---------
Total Capital $805.49 $828.69 $855.96 $931.59 $1,269.86
(Bar Chart)
OPERATING CASH FLOW
($ IN MILLIONS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$127.6 $131.7 $127.2 $126.3 $136.5
(Bar Chart)
CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION
($ IN MILLIONS)
CAPITAL EXPENDITURES: 1995 1996 1997 1998 1999
----- ------ ----- ------ -----
Natural Gas $64.3 $ 66.5 $62.3 $ 66.2 $69.3
Marine Transportation 20.9 47.9 25.7 46.6 18.4
----- ------ ----- ------ -----
Total $85.2 $114.4 $88.0 $112.8 $87.7
DEPRECIATION AND AMORTIZATION 1995 1996 1997 1998 1999
----- ------ ----- ------ -----
Natural Gas $40.8 $ 44.3 $47.8 $ 50.9 $55.8
Marine Transportation 22.9 22.6 22.7 23.8 24.3
----- ------ ----- ------ -----
Total $63.7 $ 66.9 $70.5 $ 74.7 $80.1
Operating cash flow was $136.5 million in 1999, reflecting a steady
increase in depreciation and amortization which has grown 27% from 1995 to
1999. Over this period, Eastern's capital expenditures were nearly $500
million and exceeded depreciation and amortization by approximately $130
million.
Consolidated capital expenditures for 2000 are budgeted at approximately
$107 million, with about 90% at Eastern's LDC group and the balance at
Midland.
10-K/15
OTHER MATTERS
Eastern is aware of certain non-utility sites, associated with former
operations, for which it may have or share responsibility for environmental
remediation or ongoing maintenance. Eastern has a reserve with a balance of
approximately $20 million at December 31, 1999, to cover the remediation and
maintenance costs of these sites, the principal of which is a former coal tar
processing facility in Everett, Massachusetts, as described in Note 14. 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.
Eastern's natural gas distribution operations, like many other companies
in the natural gas industry, are parties to government proceedings requiring
investigation and possible remediation of former manufactured gas plant
("MGP") sites. Boston Gas, Colonial Gas and Essex Gas may have or share
responsibility under applicable environmental law for remediation of 28 such
sites, as described in Note 14.
Boston Gas, Colonial Gas and Essex Gas are aware of 30 other MGP sites
within their service territories. A subsidiary of New England Electric System
has provided full indemnification to Boston Gas with respect to eight of these
sites. At this time, there is substantial uncertainty as to whether Boston
Gas, Colonial Gas or Essex Gas has or shares responsibility for remediating
any of these other sites. No notice of responsibility has been issued to
Boston Gas, Colonial Gas or Essex Gas for any of these sites from any
governmental authority.
10-K/16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
Consolidated Statements of Operations 10-K/18
Consolidated Balance Sheets 10-K/19
Consolidated Statements of Cash Flows 10-K/20
Consolidated Statements of Shareholders' Equity 10-K/21
Notes to Financial Statements 10-K/22
Unaudited Quarterly Financial Information 10-K/38
Report of Independent Public Accountants 10-K/39
Management's Report on Responsibility 10-K/39
10-K/17
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
REVENUES $978,702 $935,264 $1,023,740
OPERATING COSTS AND EXPENSES:
Operating costs 665,422 640,792 715,066
Selling, general and administrative expenses 118,468 118,546 122,035
Depreciation and amortization 81,373 75,521 71,322
-------- -------- ----------
OPERATING EARNINGS 113,439 100,405 115,317
OTHER INCOME (EXPENSE):
Interest income 7,964 7,582 8,997
Interest expense (39,136) (33,584) (37,411)
Other, net 8,980 5,591 (4,033)
-------- -------- ----------
EARNINGS BEFORE INCOME TAXES 91,247 79,994 82,870
Provision for income taxes 36,154 29,166 26,954
-------- -------- ----------
EARNINGS BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING
CHANGE 55,093 50,828 55,916
Extraordinary items, net of tax:
Reversal of Coal Act reserve - 48,425 -
Loss on early extinguishment of debt - (1,465) -
Cumulative effect of accounting change, net of tax - 8,193 -
-------- -------- ----------
NET EARNINGS $ 55,093 $105,981 $ 55,916
======== ======== ==========
BASIC EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS
AND ACCOUNTING CHANGE $2.28 $2.26 $2.50
Extraordinary items, net of tax:
Reversal of Coal Act reserve - 2.16 -
Loss on early extinguishment of debt - (.07) -
Cumulative effect of accounting change, net of tax - .37 -
----- ----- -----
BASIC EARNINGS PER SHARE $2.28 $4.72 $2.50
===== ===== =====
DILUTED EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS
AND ACCOUNTING CHANGE $2.27 $2.24 $2.49
Extraordinary items, net of tax:
Reversal of Coal Act reserve - 2.13 -
Loss on early extinguishment of debt - (.06) -
Cumulative effect of accounting change, net of tax - .36 -
----- ----- -----
DILUTED EARNINGS PER SHARE $2.27 $4.67 $2.49
===== ===== =====
The accompanying notes are an integral part of these financial statements.
10-K/18
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands) 1999 1998
- -----------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 44,332 $ 159,836
Receivables, less reserves of $18,860 in 1999 and $17,070
in 1998 135,409 105,133
Inventories 74,555 55,867
Deferred gas costs 64,503 54,065
Other current assets 5,008 5,689
---------- ----------
TOTAL CURRENT ASSETS 323,807 380,590
PROPERTY AND EQUIPMENT, AT COST 2,197,156 1,722,603
Less--accumulated depreciation 906,953 746,992
---------- ----------
NET PROPERTY AND EQUIPMENT 1,290,203 975,611
OTHER ASSETS:
Goodwill, less amortization of $2,146 in 1999 247,137 -
Deferred postretirement health care costs 72,760 78,567
Investments 14,671 15,395
Deferred charges and other costs, less amortization 71,179 68,449
---------- ----------
TOTAL OTHER ASSETS 405,747 162,411
---------- ----------
TOTAL ASSETS $2,019,757 $1,518,612
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 123,251 $ 43,237
Accounts payable 75,770 56,339
Accrued expenses 37,516 39,164
Other current liabilities 50,234 43,013
---------- ----------
TOTAL CURRENT LIABILITIES 286,771 181,753
GAS INVENTORY FINANCING 54,020 52,644
LONG-TERM DEBT 515,232 385,519
RESERVES AND OTHER LIABILITIES:
Deferred income taxes 179,426 134,911
Postretirement health care 100,016 97,196
Preferred stock of subsidiary 26,454 29,360
Other reserves 103,208 91,160
---------- ----------
TOTAL RESERVES AND OTHER LIABILITIES 409,104 352,627
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value; Authorized shares--
50,000,000; Issued shares--27,131,090 in 1999 and
22,535,734 in 1998 27,131 22,536
Capital in excess of par value 244,449 53,421
Retained earnings 483,710 470,576
Accumulated other comprehensive (loss) (77) (105)
Treasury stock at cost--16,892 shares in 1999 and
10,461 shares in 1998 (583) (359)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 754,630 546,069
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,019,757 $1,518,612
========== ==========
The accompanying notes are an integral part of these financial statements.
10-K/19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 55,093 $ 105,981 $ 55,916
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary credit for reversal of Coal Act
reserve - (48,425) -
Extraordinary loss on early extinguishment of
debt - 1,465 -
Cumulative effect of accounting change - (8,193) -
Depreciation and amortization 81,373 75,521 71,322
Income taxes and tax credits 5,588 (1,876) 19,578
Net gain on sale of assets (2,125) (4,948) (778)
Other changes in assets and liabilities:
Receivables (15,541) 19,864 (12,502)
Inventories (3,692) 5,827 4,495
Deferred gas costs (10,523) 15,160 8,892
Accounts payable 3,599 (16,929) (7,345)
Other 159 (9,191) 7,062
--------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 113,931 134,256 146,640
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (88,117) (113,712) (89,216)
Acquisition of Colonial Gas, net of cash acquired (150,446) - -
Investments (8,208) (7,624) 3,018
Proceeds on sale of assets 9,998 15,956 7,290
Other (2,897) (6,035) (1,966)
--------- --------- --------
NET CASH USED BY INVESTING ACTIVITIES (239,670) (111,415) (80,874)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (39,801) (35,653) (35,255)
Changes in notes payable 48,738 (10,800) (25,927)
Changes in gas inventory financing 1,376 (7,300) 358
Proceeds from issuance of long-term debt - 68,519 9,827
Repayment of long-term debt and preferred stock (9,449) (56,348) (5,801)
Other 9,371 7,920 1,581
--------- --------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 10,235 (33,662) (55,217)
--------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (115,504) (10,821) 10,549
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 159,836 170,657 160,108
--------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 44,332 159,836 170,657
SHORT-TERM INVESTMENTS - - 5,052
--------- --------- --------
CASH AND SHORT-TERM INVESTMENTS $ 44,332 $ 159,836 $175,709
========= ========= ========
The accompanying notes are an integral part of these financial statements.
10-K/20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Other
Common Capital In Comprehensive
Stock Excess of Retained Earnings Treasury
(In thousands) $1 Par Value Par Value Earnings (Loss) Stock Total
- ----------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $22,387 $ 50,604 $390,333 $ 1,244 $(3,555) $461,013
Comprehensive income:
Net earnings - - 55,916 - - -
Unrealized holding gains on
investments, net - - - 884 - -
Pension liability adjustment,
net - - - (261) - -
Total comprehensive income - - - - - 56,539
Dividends declared--$1.61 per
share - - (35,493) - - (35,493)
Executive stock purchase loans - (1,156) - - - (1,156)
Issuance of stock, net 51 1,541 - - 1,975 3,567
------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1997 22,438 50,989 410,756 1,867 (1,580) 484,470
Comprehensive income:
Net earnings - - 105,981 - - -
Essex Gas excluded period - - (7,994) - - -
Unrealized holding losses on
investments, net - - - (2,448) - -
Pension liability adjustment,
net - - - 476 - -
Total comprehensive income - - - - - 96,015
Dividends declared--$1.65 per
share - - (38,167) - - (38,167)
Executive stock purchase loans - (169) - - - (169)
Issuance of stock, net 98 2,601 - - 1,221 3,920
------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1998 22,536 53,421 470,576 (105) (359) 546,069
Comprehensive income:
Net earnings - - 55,093 - - -
Unrealized holding losses on
investments, net - - - (383) - -
Pension liability adjustment,
net - - - 411 - -
Total comprehensiveincome - - - - - 55,121
Dividends declared--$1.69 per
share - - (41,959) - - (41,959)
Acquisition of Colonial Gas 4,219 181,378 - - - 185,597
Executive stock purchase loans - (2,381) - - - (2,381)
Issuance of stock, net 376 12,031 - - (224) 12,183
------- -------- -------- ------- ------- --------
BALANCE AT DECEMBER 31, 1999 $27,131 $244,449 $483,710 $ (77) $ (583) $754,630
======= ======== ======== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
10-K/21
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Eastern
Enterprises ("Eastern") and its natural gas distribution subsidiaries, Boston
Gas Company ("Boston Gas"), Colonial Gas Company ("Colonial Gas") and Essex
Gas Company ("Essex Gas"), its marine transportation subsidiary, Midland
Enterprises Inc. ("Midland"), and its other subsidiaries, ServicEdge Partners,
Inc. ("ServicEdge"), Transgas Inc. ("Transgas") and AMR Data Corp. ("AMR
Data"). As discussed in Note 4, Colonial Gas and its subsidiary Transgas, were
acquired on August 31, 1999 in a transaction accounted for using the purchase
method of accounting for business combinations.
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 revenues and expenses during
the reporting period, the reported amounts of assets and liabilities, and the
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
As discussed in Note 4, amounts have been restated under the pooling-of-
interests method of accounting to include the operations of Essex Gas,
acquired on September 30, 1998. 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 consist of the following:
December 31,
(In thousands) 1999 1998
---------------------------------------------------------------------
Supplemental gas supplies $57,935 $45,266
Other materials, supplies and marine fuel 16,620 10,601
------- -------
$74,555 $55,867
======= =======
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) or average cost method.
Regulatory assets and liabilities: 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" during the periods presented.
Colonial Gas and Essex Gas discontinued the application of SFAS No. 71 as of
August 31, 1999 and September 30, 1998, respectively, as discussed in Note 4.
Regulatory assets represent probable future revenue associated with certain
costs which will be recovered from customers through the ratemaking process.
Regulatory liabilities represent probable future reductions in revenues
associated with amounts that are to be credited to customers through the
ratemaking process.
Regulatory assets include the following:
December 31,
(In thousands) 1999 1998
-------------------------------------------------------------------
Postretirement benefit costs $72,760 $ 78,567
Environmental costs 21,299 20,990
Other 733 1,365
------- --------
$94,792 $100,922
======= ========
Regulatory liabilities total $8,586,000 and $9,479,000 at December 31,
1999 and 1998, respectively, and relate primarily to income taxes.
As of December 31, 1999 regulatory assets and regulatory liabilities are
being reflected in rates charged to customers over periods from one to 20
years.
10-K/22
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Other current liabilities consist of the following:
December 31,
(In thousands) 1999 1998
---------------------------------------------------------------------
Dividend payable $11,613 $ 9,455
Reserves for insurance claims 10,326 10,739
Pipeline refunds due utility customers 5,897 192
Other 22,398 22,627
------- -------
$50,234 $43,013
======= =======
Revenue recognition: Eastern's natural gas subsidiaries record revenues
utilizing the unbilled revenue method by estimating revenues that remain
unbilled at the end of the accounting periods. As described in Note 15, in
1998 Boston Gas changed its revenue accounting method to record unbilled
revenue. As described in Note 4, Essex Gas adopted the unbilled revenue method
upon acquisition. Deferred gas costs represent amounts billable to customers
through the operation of regulatory approved cost of gas adjustment clauses.
Midland recognizes revenue on tows in progress on the percentage-of-completion
method based on miles traveled. ServicEdge recognizes contract revenues over
the life of the contract, matching revenues with anticipated expenses and
other revenues when billed.
Depreciation and amortization: Depreciation and amortization are provided
using the straight-line method at rates designed to allocate the cost of
property and equipment over their estimated useful lives:
Years
----------------------------------------------------------------------
Gas utility plant 14-82
Boats and barges 23-30
Buildings 20-30
Furniture, fixtures and other equipment 3-25
Computer software and related equipment 3-10
Leaseholds shorter of useful life
or term of lease
Earnings per share: SFAS No. 128, "Earnings per Share," requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the year. Diluted earnings per share is
determined by giving effect to the exercise of stock options using the
treasury stock method. The following includes a reconciliation of shares
outstanding used to compute basic and diluted earnings per share:
Years Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------------
Earnings before extraordinary items
and accounting change $55,093 $50,828 $55,916
======= ======= =======
Weighted-average shares 24,112 22,474 22,329
Dilutive effect of options 142 206 169
------- ------- -------
Adjusted weighted-average shares 24,254 22,680 22,498
======= ======= =======
Basic earnings per share before
extraordinary items and accounting
change $2.28 $2.26 $2.50
===== ===== =====
Diluted earnings per share before
extraordinary items and accounting
change $2.27 $2.24 $2.49
===== ===== =====
Comprehensive income: Effective January 1, 1998, Eastern adopted SFAS No.
130, "Reporting Comprehensive Income." This statement requires presentation of
the components of comprehensive earnings, including the changes in equity from
non-owner sources such as unrealized gains on securities and minimum pension
liability adjustments, which are reflected on Eastern's consolidated
statements of shareholders' equity.
10-K/23
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following is a summary of the reclassification adjustments and the
income tax effects for the components of other comprehensive income:
Unrealized
Holding Gains
(Losses) on Reclassification
Investments Adjustments for Pension
Arising During Gains Included Net Unrealized Liability
(In thousands) the Period in Net Income Gains (Losses) Adjustment Total
- -------------------------------------------------------------------------------------------------------------
1997
Pretax $2,210 $(1,313) $ 897 $(401) $ 496
Income tax benefit
(expense) 12 (25) (13) 140 127
----- ------ ------ ---- ------
Net change $2,222 $(1,338) $ 884 $(261) $ 623
====== ======= ======= ===== =======
1998
Pretax $ 105 $(1,873) $(1,768) $ 732 $(1,036)
Income tax
(expense) (680) - (680) (256) (936)
----- ------ ------ ---- ------
Net change $ (575) $(1,873) $(2,448) $ 476 $(1,972)
====== ======= ======= ===== =======
1999
PRETAX $ 502 $(1,091) $ (589) $ 632 $ 43
INCOME TAX BENEFIT
(EXPENSE) (176) 382 206 (221) (15)
----- ------ ------ ---- ------
NET CHANGE $ 326 $ (709) $ (383) $ 411 $ 28
====== ======= ======= ===== =======
The income tax benefit in 1997 reflects the availability of capital loss
carryforwards to offset unrealized gains.
Pending Accounting Changes: SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, is effective
for fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or a
liability measured at its fair value. SFAS No. 133 requires that changes in
the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on
the consolidated financial statements. However, SFAS No. 133 could increase
volatility in earnings and other comprehensive income.
2. PLANNED MERGER WITH KEYSPAN
On November 4, 1999, Eastern signed a definitive agreement that provides
for the merger of Eastern with a wholly-owned subsidiary of KeySpan
Corporation ("KeySpan"), with Eastern surviving the merger and becoming a
wholly-owned subsidiary of KeySpan. In the merger, holders of Eastern common
stock will receive $64.00 in cash per share of Eastern common stock, without
interest, plus an additional $0.006 per share per day for each day the merger
has not closed beginning on the later of (a) August 4, 2000 or (b) ninety days
after the state of New Hampshire gives final regulatory approval. The
transaction, which is subject to receipt of regulatory approvals and the
approval of Eastern shareholders, is expected to close in mid to late 2000,
although it is possible the merger will not close until 2001.
10-K/24
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PLANNED MERGER WITH ENERGYNORTH, INC.
On July 14, 1999, Eastern signed a definitive agreement that provides for
the merger of EnergyNorth, Inc. ("EnergyNorth") into a wholly-owned subsidiary
of Eastern. This agreement was amended on November 4, 1999, in connection with
the execution of the merger agreement between Eastern and KeySpan discussed
above in Note 2. In the proposed merger, a wholly-owned subsidiary of Eastern
will merge into EnergyNorth and, as a result, EnergyNorth will become a
wholly-owned subsidiary of Eastern.
If the KeySpan-Eastern merger agreement has not been terminated prior to
the effective time of the Eastern-EnergyNorth merger, holders of EnergyNorth
common stock will receive $61.13 cash, without interest, per share of
EnergyNorth. The per share amount of $61.13 may be increased if the cash
amount to be paid for each share of Eastern common stock in the merger
discussed in Note 2 above is increased above $64.00. If the KeySpan-Eastern
merger agreement has been terminated, holders of EnergyNorth common stock will
receive cash or Eastern common stock worth $47.00 per share of EnergyNorth,
with 50.1% of the common stock of EnergyNorth being converted into Eastern
stock and the balance being converted into cash. The exchange ratio for the
stock portion of the consideration will be based upon Eastern's weighted
average trading stock price for a ten-day period prior to closing, subject to
a collar mechanism.
The transaction, which is subject to receipt of regulatory approvals and
the approval of EnergyNorth shareholders, is expected to close simultaneously
with the KeySpan merger. The merger is expected to be tax-free to Eastern
whether or not the KeySpan-Eastern merger agreement is terminated. The
Eastern-EnergyNorth merger will be accounted for using the purchase method of
accounting.
4. MERGERS
COLONIAL GAS MERGER
On August 31, 1999, Eastern completed a merger with Colonial Gas in a
transaction with an enterprise value of approximately $474 million. In
effecting the transaction, Eastern paid $150 million in cash, net of cash
acquired and including transaction costs, issued approximately 4.2 million
shares of common stock valued at $186 million and assumed $138 million of
debt. The cash portion of the transaction was financed through available cash
and borrowings under Eastern's lines of credit.
The Colonial merger has been accounted for using the purchase method of
accounting for business combinations. Accordingly, the accompanying
Consolidated Statements of Operations include Colonial Gas results commencing
September 1, 1999. The purchase price was allocated to the net assets acquired
based on their fair value. The historical cost basis of Colonial Gas' assets
and liabilities, with the exception of its retiree benefit obligations and the
adjustments described below, was determined to represent the fair value due to
the existence of a regulatory-approved rate plan based upon the recovery of
historical costs and a fair return thereon. As a result of the merger and
related rate plan approved by the Massachusetts Department of
Telecommunications and Energy ("Department"), value was not allocated to
systems that will no longer be used due to the integration of Colonial into
Eastern's natural gas distribution business and value was not allocated to
Colonial's net regulatory assets. No value was allocated to the net regulatory
assets because the rate plan does not meet the criteria for the continued
application of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation." The allocation of the purchase price remains subject to
adjustment upon final valuation of certain acquired balances. The excess of
cost over the fair value of the net assets acquired, or goodwill, of
approximately $250 million has been recorded as an asset and is being
amortized on a straight-line basis, principally over a period of 40 years.
10-K/25
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth Eastern's unaudited pro forma results as if
the transaction had occurred on January 1, 1998.
Years Ended December 31,
(In thousands) 1999 1998
-----------------------------------------------------------------------
Revenues $1,108,977 $1,118,357
Operating earnings 133,049 128,082
Earnings before extraordinary items and
accounting change 56,921 54,729
Earnings per common share before extraordinary
items and accounting change:
Basic $2.11 $2.05
Diluted $2.10 $2.03
Weighted average number of common shares
outstanding:
Basic 26,920 26,693
Diluted 27,063 26,899
ESSEX GAS MERGER
On September 30, 1998, Eastern completed a merger with Essex Gas by
exchanging approximately 2.0 million shares of its common stock for all of the
common stock of Essex Gas. Each share of Essex Gas was exchanged for 1.183985
shares of Eastern common stock. The merger was accounted for as a pooling-of-
interests and the accompanying consolidated financial statements include the
accounts of Essex Gas for all periods. Prior to the merger, Essex Gas' fiscal
year ended on August 31. Accordingly, the accompanying Consolidated Statement
of Operations includes the year ended December 31, 1998 of Eastern combined
with the period from December 1, 1997 through December 31, 1998 for Essex Gas
excluding the month of September 1998. The financial statements for 1997
include the year ended December 31 for Eastern combined with the year ended
August 31 for Essex Gas.
Pre-merger financial results for the separate companies and the combined
amounts in the Consolidated Statements of Operations include the nine months
ended September 30, 1998 of Eastern combined with the nine months ended August
31, 1998 of Essex Gas and the year ended December 31, 1997 of Eastern combined
with the year ended August 31, 1997 of Essex Gas, as follows:
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
--------------------------------------------------------------------
Revenues:
Eastern $635,442 $ 970,204
Essex Gas 41,786 53,536
-------- ----------
Combined $677,228 $1,023,740
======== ==========
Earnings before extraordinary item:
Eastern $ 28,717 $ 51,950
Essex Gas 2,478 3,966
-------- ----------
Combined $ 31,195 $ 55,916
======== ==========
The combined financial statements for 1998 and 1997 include adjustments to
conform the accounting policies of Essex Gas with those of Eastern. The
primary adjustment conformed Essex Gas' method of adoption of SFAS No. 106,
"Employers" Accounting for Postretirement Benefits Other Than Pensions" with
Eastern's adoption by immediately recognizing the transition obligation of
approximately $4.1 million at the date of adoption, September 1, 1994. Since
Essex Gas had received regulatory approval to fully recover the SFAS No. 106
costs in rates, a regulatory asset was recorded for the transition obligation
and there was no adjustment to income during the pre-merger period.
Transaction fees totaled $9,776,000 pre-tax, of which $2,788,000 was
incurred and expensed during the nine month period ending September 30, 1998.
An additional $750,000 of transaction fees were incurred and expensed in 1997.
The remaining $6,238,000 was expensed by Essex Gas in September 1998.
Transaction fees primarily include investment banking fees and other
professional fees.
10-K/26
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As a result of the merger and related rate plan approved by the
Department, Essex Gas was unable to continue its application of SFAS No. 71,
and, effective September 30, 1998, wrote off net regulatory assets
approximating $4,500,000 pre-tax or $2,873,000 after-tax, which primarily
consisted of deferred postretirement health care costs. In addition, Essex Gas
was required to adopt a revenue method which reflects full accrual accounting
and which resulted in a minor nonrecurring gain. In conforming Essex Gas'
historical periods based on a fiscal year ending August 31 with Eastern's
operations and changing Essex Gas' fiscal year-end, consolidated results for
the year ended December 31, 1998 include Essex Gas' results for December 1997
and December 1998 and exclude its results for September 1998. Essex Gas'
revenues and net earnings for December 1997 were $7,262,000 and $995,000,
respectively. Essex Gas' revenues and net loss for September 1998 were
$1,374,000 and $8,121,000, respectively. The September 1998 net loss reflected
transaction and integration expenses of $5,088,000 and the aforementioned
write off of regulatory assets. Essex Gas' revenues and net earnings for the
three months ended November 30, 1997 were $9,035,000 and $127,000,
respectively. The Consolidated Statement of Cash Flows for 1998 includes the
effect of Essex Gas' excluded periods of ($2,103,000) for net operating
activity, ($2,178,000) for net investing activity and $4,574,000 for net
financing activity. These amounts are reflected in the other captions in the
Consolidated Statement of Cash Flows.
5. BUSINESS SEGMENT INFORMATION
Effective January 1, 1998, Eastern adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Pursuant to SFAS No.
131, Eastern's two reportable segments are natural gas distribution and marine
transportation. Natural gas distribution, which includes Boston Gas, Colonial
Gas and Essex Gas, provides services to customers in eastern and central
Massachusetts, and marine transportation, which includes Midland, operates
boats and barges on the inland waterways. Other services include ServicEdge,
Transgas and AMR Data.
Segment information, including operating results and other financial data,
is presented below:
(In thousands) 1999 1998 1997
------------------------------------------------------------------------
Revenues:
Natural gas distribution $ 690,809 $ 667,106 $ 754,481
Marine transportation 267,269 261,061 269,259
Other services 20,624 7,097 -
---------- ---------- ----------
$ 978,702 $ 935,264 $1,023,740
========== ========== ==========
Operating earnings:
Natural gas distribution $ 101,359 $ 88,913 $ 87,773
Marine transportation 21,114 26,634 34,614
Other services (2,932) (9,043) (1,481)
Headquarters(1) (6,102) (6,099) (5,589)
---------- ---------- ----------
$ 113,439 $ 100,405 $ 115,317
========== ========== ==========
Identifiable assets, net of
depreciation and reserves:
Natural gas distribution $1,555,561 $ 952,818 $ 974,021
Marine transportation 377,918 379,676 356,350
Other(2) 86,278 186,118 199,994
---------- ---------- ----------
$2,019,757 $1,518,612 $1,530,365
========== ========== ==========
Capital expenditures:
Natural gas distribution $ 69,265 $ 66,248 $ 62,283
Marine transportation 18,447 46,621 25,700
Other 405 843 1,233
---------- ---------- ----------
$ 88,117 $ 113,712 $ 89,216
========== ========== ==========
(1) Reflects unallocated corporate general and administrative expenses.
(2) Primarily includes cash and short-term investments.
10-K/27
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(In thousands) 1999 1998 1997
----------------------------------------------------------------------
Depreciation and amortization:
Natural gas distribution $ 55,754 $ 50,870 $ 47,786
Marine transportation 24,345 23,838 22,675
Other 1,274 813 861
--------- --------- ---------
$ 81,373 $ 75,521 $ 71,322
========= ========= =========
Interest expense:
Natural gas distribution $ 24,866 $ 22,565 $ 23,067
Marine transportation 13,031 10,830 13,713
Other 1,239 189 631
--------- --------- ---------
$ 39,136 $ 33,584 $ 37,411
========= ========= =========
Income tax provision:
Natural gas distribution $ 30,914 $ 27,121 $ 24,792
Marine transportation 4,917 6,534 8,464
Other 323 (4,489) (6,302)
--------- --------- ---------
$ 36,154 $ 29,166 $ 26,954
========= ========= =========
Natural gas distribution operations are subject to Massachusetts statutes
applicable to gas utilities. Their revenues, earnings and cash flows are
highly seasonal as most of their firm sales and transportation are directly
related to temperature levels. These operations purchase gas supplies from a
variety of producers and marketers, under a combination of long-term
commitments, firm winter service agreements and spot purchases. These
operations have diversified their gas supplies across major North American
producing regions.
A significant portion of marine transportation operations relate to multi-
year transportation contracts. Based on past experience and its competitive
position, management considers that the simultaneous loss of several of its
largest customers, while possible, is unlikely to happen.
6. LONG-TERM OBLIGATIONS AND CURRENT DEBT
Credit agreements and lines of credit: Eastern maintains credit agreements
with groups of banks, which provide for the borrowings by Eastern and its
subsidiaries of up to $145,000,000 at various times through December 31, 2001.
The interest rate for borrowings is the agent bank's prime rate or, at the
borrower's option, various pricing alternatives. The agreements require
facility fees ranging from 9.5 to 37.5 basis points on the commitments. In
addition, Eastern, Boston Gas, Colonial Gas and Essex Gas have various
uncommitted lines of credit which are utilized for working capital needs and
provide for interest at the bank's prime rate or, at the borrower's option,
various pricing alternatives. At December 31, 1999 and 1998, $80,200,000 and
$8,935,000 were outstanding, with a weighted average interest rate of 6.28%
and 5.95%, respectively. Boston Gas utilizes a portion of the credit agreement
to back its commercial paper borrowings. Included in current debt were
$20,000,000 and $37,835,000 of commercial paper with a weighted average
interest rate of 6.26% and 5.30% at December 31, 1999 and 1998, respectively.
Covenants related to these credit agreements and lines of credit require the
maintenance of certain financial ratios and involve other restrictions
regarding cash dividends, the purchase or redemption of stock and the pledging
of assets.
Gas inventory financing: Boston Gas, Colonial Gas and Essex Gas maintain
credit agreements with groups of banks, which provide for the borrowing of up
to $110,000,000 for the exclusive purpose of funding their inventory of gas
supplies or for backing commercial paper issued for the same purpose. All
costs related to this funding are recoverable from customers. To fund their
inventory of gas supplies, Boston Gas, Colonial Gas and Essex Gas had
commercial paper of $70,262,000 ($16,242,000 is reflected in current debt),
and $52,644,000 at December 31, 1999 and 1998, respectively. Since $54,020,000
and $52,644,000 of the fuel inventory financing is supported by long-term
credit agreements, these borrowings have been classified as non-current in the
accompanying consolidated balance sheets in 1999 and 1998, respectively. The
Boston Gas credit agreement includes a one-year revolving credit facility
which may be converted to a two-year term loan at the option of Boston Gas if
the one-year revolving credit facility is not renewed by the banks. Boston Gas
may select the agent bank's prime rate or, at Boston Gas' option, various
pricing alternatives. The Boston Gas agreement requires a facility fee of 8.5
basis points on the commitment. No borrowings were outstanding under this
agreement during 1999 and 1998.
10-K/28
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Description of long-term debt:
December 31,
(In thousands) 1999 1998
------------------------------------------------------------------------
NATURAL GAS DISTRIBUTION:
6.80%-9.75% Unsecured Medium-Term Notes,
due 2005-2025 $210,000 $210,000
5.50%-7.38% First Mortgage Medium-Term Notes,
due 2003-2028 95,000 -
7.28%-10.25% First Mortgage Bonds
due 1999-2022 45,400 21,000
8.15%-8.625% Debenture
due 2006-2017 7,157 7,199
Capital leases 16,816 532
Less--current portion (1,641) (660)
-------- --------
NATURAL GAS DISTRIBUTION 372,732 238,071
-------- --------
MARINE TRANSPORTATION:
First Preferred Ship Mortgages
6.25% Bonds, due 2008, effective 7.50% 69,088 68,619
8.1%-9.85% Medium-Term Notes,
Series A, due 2002-2012 67,263 67,423
Capital leases 11,316 16,148
Less--current portion (5,167) (4,742)
-------- --------
MARINE TRANSPORTATION 142,500 147,448
-------- --------
TOTAL LONG-TERM DEBT $515,232 $385,519
======== ========
Natural gas distribution Medium-Term Notes are not callable prior to
maturity. The First Mortgage Medium-Term Notes and the First Mortgage Bonds
are secured by substantially all the plant assets of Colonial Gas and Essex
Gas.
The marine transportation First Preferred Ship Mortgage Bonds and Medium-
Term Notes are secured by certain transportation equipment. The Medium-Term
Notes are not callable prior to maturity.
In March 1998 marine transportation utilized available cash to call
$50,000,000 of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In
extinguishing this debt, marine transportation recognized an extraordinary
charge of $2,254,000 pre-tax, $1,465,000 net, or $.06 per share.
In September 1998 marine transportation issued $75,000,000 of 6.25% First
Preferred Ship Mortgage Bonds maturing October 1, 2008 at a discount. The debt
has an effective annual interest rate of 7.50%.
Capital leases consist of equipment lease obligations with a weighted
average interest rate of 7.68%. Minimum lease payments under these agreements
are due in installments through 2014.
Debt payment requirements, including capitalized leases and maturities,
net of amounts acquired in advance, are $6,808,000, $5,650,000, $6,268,000,
$12,034,000 and $1,014,000 for 2000 through 2004, respectively, and
cumulatively $490,266,000 thereafter.
Five-year operating lease commitments: In addition to the equipment
financed under capital leases, Eastern and its subsidiaries lease certain
facilities, vessels and equipment under long-term operating leases which
expire on various dates through the year 2079. Total rents charged to expense
were $12,360,000 in 1999, $10,294,000 in 1998 and $10,887,000 in 1997. Future
minimum lease commitments under operating leases are $10,526,000, $9,215,000,
$7,628,000, $4,015,000, $3,498,000 for 2000 through 2004, respectively, and
cumulatively $24,788,000 thereafter.
7. PREFERRED STOCK OF SUBSIDIARY
Boston Gas has 1,080,000 shares outstanding 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. At the option
of Boston Gas, the annual sinking fund payment may be increased to 10%. In
1999 Boston Gas redeemed 120,000 shares, or 10% of the original issue, at the
liquidation price of $25 per share. The preferred stock is callable beginning
in 2003.
10-K/29
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. 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. On
September 30, 1998, two stock option plans of Essex Gas were terminated.
Options and SARs may be granted at prices not less than fair market value on
the date of grant for periods not extending beyond ten years from the date of
grant. No SARs have been granted since 1991. In 1995, the right to exercise
outstanding SARs was effectively eliminated.
Eastern applies Accounting Principles Board Opinion 25 in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans and its employee stock purchase plan. Had compensation cost for
Eastern's plans been determined applying SFAS No. 123, "Accounting for Stock-
Based Compensation," Eastern's net earnings would have been reduced by
$729,000 or $.03 per share in 1999, $542,000 or $.02 per share in 1998, and by
$418,000 or $.02 per share in 1997. The weighted average fair value of options
granted during 1999, 1998, and 1997 was $39.01, $42.86 and $33.63,
respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1999, 1998 and 1997, respectively:
dividend yields of 4.0% in each year; expected volatilities of 17.0%, 16.5%
and 17.8%; risk-free interest rates of 5.0%, 5.0% and 6.1%; and an expected
life of 5.0 years for each year.
Shares available for future grants under these stock option plans were
409,130 at December 31, 1999, 666,927 at December 31, 1998 and 934,760 at
December 31, 1997.
Option activity during the past three years was as follows:
Average
Option Stock
Price Options SARs
--------------------------------
OUTSTANDING AT DECEMBER 31, 1996 $27.96 776,006 87,700
Granted 33.63 161,700 -
Exercised 24.57 (52,140) -
Surrendered - - (22,500)
Canceled 35.52 (3,350) -
------- ------
OUTSTANDING AT DECEMBER 31, 1997 $29.21 882,216 65,200
Granted 42.86 220,850 -
Exercised 23.38 (65,843) -
Surrendered - - (20,720)
Canceled 36.22 (43,000) -
------- ------
OUTSTANDING AT DECEMBER 31, 1998 $32.19 994,223 44,480
Granted 39.01 234,000 -
Exercised 27.21 (294,012) -
Surrendered - - (28,980)
Canceled 36.11 (52,761) (2,050)
------- ------
OUTSTANDING AT DECEMBER 31, 1999 $35.36 881,450 13,450
======= ======
Stock options exercisable at December 31, 1999 and 1998 were for 378,433
shares and 561,342 shares, respectively. At December 31, 1999, the range of
exercise prices of outstanding and exercisable options was $23.44 to $49.97
and $23.44 to $43.59, respectively, with a weighted-average remaining
contractual life of options outstanding of 6.8 years.
Pursuant to the merger agreement with KeySpan, holders of vested options
and holders of unvested options who have employment agreements, pursuant to
which their options will vest at a change of control, can elect to receive
cash for the excess of $64.00 over the option exercise price at the time of
the merger. Options not cashed out in this way will be converted to options to
purchase KeySpan stock.
Under restricted stock plans for key employees and non-employee trustees,
Eastern awarded 5,500 shares in 1998 and 4,400 shares in 1997. Eastern
recognized compensation expense of $70,000 in 1999 and 1998 and $109,000 in
1997 in accordance with the vesting terms of these and prior awards. Shares
available for future awards under these plans were 27,800 at December 31, 1999
and December 31, 1998.
10-K/30
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. 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 (as amended, the "1990 Rights Agreement") between Eastern and
BankBoston, N.A., 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 10% or more of Eastern's stock
or commences a tender offer for 10% or more of Eastern's stock or such later
date as the board determines. The rights may be redeemed by Eastern at any
time prior to the 10th day after a 10% position has been acquired at a price
of $.01 per right. Eastern may exchange any outstanding rights at any time
after a person acquires 10% or more of Eastern stock, but before such person
beneficially owns 50% or more of Eastern's stock, for shares of common stock
of Eastern at an initial exchange ratio of one share for each right, subject
to adjustment and subject to other limitations contained in the 1990 Rights
Agreement. The rights will expire on March 5, 2000.
If Eastern is acquired in a merger or other business combination, each
right will entitle its holder to purchase common shares of the acquiring
company having a market value of twice the exercise price of each right (i.e.,
at a 50% discount). If an acquiror purchases 10% of Eastern's common stock,
each right will entitle its holder to purchase a number of Eastern's common
shares having a market value of twice the right's exercise price.
On July 22, 1998 Eastern declared a dividend of one purchase right (a "New
Right") for every outstanding share of Eastern common stock. The New Rights
were distributed at the close of business on February 18, 2000 to shareholders
of record as of the close of business on such date. The terms of the New
Rights are set forth in a Rights Agreement dated as of July 22, 1998 (the "New
Rights Agreement") between Eastern and BankBoston, N.A., as Rights Agent.
Each New Right would initially entitle the holder to purchase from Eastern
one share of Eastern common stock at a price of $160 per share, subject to
adjustment. The New Rights will expire on July 22, 2008, or upon the earlier
redemption of the New Rights. The material terms of the New Rights Agreement
are substantially similar to the terms of the 1990 Rights Agreement discussed
above.
In connection with the KeySpan-Eastern merger, Eastern has agreed to amend
the New Rights Agreement to exempt the anticipated merger.
10. COMMITMENTS AND CONTINGENCIES
Eastern maintains employment agreements with 32 employees. The pending
KeySpan merger is expected to trigger the change of control provisions under
these agreements which, in the event of a termination, provide for one to
three times salary and bonus as severance and, in certain circumstances, a tax
gross-up and enhanced retirement benefits. Excluding payment for stock options
described in Note 8, the maximum contingent liability under these agreements
is approximately $33.3 million. In addition, the acquisition of Colonial Gas
triggered change of control provisions under agreements with eight Colonial
Gas employees. In the event of a termination, these agreements provide for
severance and, under certain circumstances, enhanced retirement benefits. The
maximum contingent liability under these agreements is approximately $8.5
million.
11. INTEREST EXPENSE
Years Ended December 31,
(In thousands) 1999 1998 1997
----------------------------------------------------------------------
Interest on long-term debt $34,863 $29,866 $32,636
Other, including amortization of debt
expense 3,334 2,282 3,485
Less--capitalized interest (923) (490) (636)
Subsidiary preferred stock dividends 1,862 1,926 1,926
------- ------- -------
INTEREST EXPENSE $39,136 $33,584 $37,411
======= ======= =======
INTEREST PAYMENTS $35,782 $32,362 $36,660
======= ======= =======
10-K/31
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. OTHER INCOME (EXPENSE)
Years Ended December 31,
(In thousands) 1999 1998 1997
---------------------------------------------------------------------
Net gain on sale of assets $ 2,125 $ 4,948 $ 778
Environmental reversal and recoveries 5,718 - -
Equity in loss of AllEnergy - - (5,472)
Other 1,137 643 661
------- ------- --------
$ 8,980 $ 5,591 $ (4,033)
======= ======= ========
In December 1997, Eastern sold its 50% interest in AllEnergy Marketing
Company, L.L.C. for $5,375,000, which approximated the net book value of its
investment at September 30, 1997. Eastern accounted for its investment in
AllEnergy using the equity method.
13. 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,
1999 1998 1997
--------------------------------------------------------------------
Statutory rate 35% 35% 35%
State taxes, net of Federal benefit 4 4 3
Goodwill and merger-related costs 2 - -
Capital loss utilization - (2) -
Adjustment - - (4)
Other (1) (1) (1)
-- -- --
Effective rate 40% 36% 33%
== == ==
The adjustment in 1997 reflects the resolution of Federal tax audit issues
on the sale of a subsidiary in 1993 and inventory capitalization in 1994.
Following is a summary of the provision for income taxes:
Years Ended December 31,
(In thousands) 1999 1998 1997
------------------------------------------------------------------
Federal $19,554 $22,747 $13,152
State 4,513 5,429 4,498
------- ------- -------
TOTAL CURRENT PROVISION 24,067 28,176 17,650
Federal 10,134 1,470 9,706
State 1,953 (480) (402)
------- ------- -------
TOTAL DEFERRED PROVISION 12,087 990 9,304
------- ------- -------
PROVISION FOR INCOME TAXES $36,154 $29,166 $26,954
======= ======= =======
TAX PAYMENTS $26,809 $32,567 $ 8,758
======= ======= =======
Significant items making up deferred tax assets and deferred tax
liabilities are as follows:
December 31,
(In thousands) 1999 1998
------------------------------------------------------------------
Environmental reserves $ 7,275 $ 7,495
Other 41,756 35,339
--------- ---------
TOTAL DEFERRED TAX ASSETS 49,031 42,834
Accelerated depreciation (203,593) (161,209)
Deferred gas costs (15,981) (12,332)
Other (19,710) (20,818)
--------- ---------
TOTAL DEFERRED TAX LIABILITIES (239,284) (194,359)
--------- ---------
TOTAL DEFERRED TAXES $(190,253) $(151,525)
========= =========
10-K/32
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. 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
$20 million in total at December 31, 1999 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. In 1999
Eastern reduced the reserve by $3.2 million related to the regulatory
clearance of one site. 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 Allied-Signal, Inc., predecessor of Honeywell
International, Inc., from the early 1900s until 1937 and by Koppers Company,
predecessor of Beazer East, Inc. (and Eastern's controlling stockholder until
1951) from 1937 until 1960, when it was shut down. The Facility processed coal
tar purchased from Eastern's adjacent by-product coke plant, also shut down in
1960. Eastern, Beazer and Honeywell ("the Companies") entered into an
Administrative Consent Order with the Massachusetts Department of
Environmental Protection ("DEP") in 1989 which requires that they jointly
investigate and develop a remedial response plan for the Facility site,
including any area where a release from that site may have come to be located.
The Companies have entered into a cost-sharing agreement under which each
company has agreed to pay one-third of the costs of compliance with the
consent order, while preserving any claims it may have against the other
companies. In 1993, the Companies completed preliminary remedial measures,
including abatement of seepage of materials into the adjacent Island End
River, a 29-acre tidal river which is part of Boston Harbor. Studies have
identified compounds that may be associated with coal tar and/or oil in soil
and ground water at the site and adjacent areas, including the riverbed. In
addition to the DEP, the National Oceanic and Atmospheric Administration and
the Coast Guard have been involved in river sediment investigation and
remediation discussions. During 1995 and 1996, the Companies conducted and
received the results of certain sediment sampling which confirmed findings of
contamination in the riverbed. The Coast Guard has been working with the DEP
since July 1998 to bring about a remedial solution that would abate the
continuing sheening problem in the Island End River. Eastern, Beazer and
Honeywell have proposed a remedial solution, a major element of which is the
utilization of a containment structure with limited dredging. As yet, however,
no agreement has been reached with the regulators as to the appropriate
remedial solution. In light of uncertainties as to the full extent and sources
of releases of compounds, the nature of the 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. In 1999 Eastern recovered $2.5 million of prior defense costs from
insurance carriers.
Eastern's natural gas distribution operations, like many other companies
in the natural gas industry, are parties to governmental proceedings requiring
investigation and possible remediation of former manufactured gas plant
("MGP") sites. Boston Gas, Colonial Gas and Essex Gas may have or share
responsibility under applicable environmental laws for the remediation of 28
such sites. A subsidiary of New England Electric System ("NEES") has assumed
responsibility for remediating 11 of these sites, subject to a limited
contribution from Boston Gas. Boston Gas, Colonial Gas and Essex Gas have
estimated their potential share of the costs of investigating and remediating
former MGP sites in accordance with SFAS No. 5, "Accounting for
Contingencies," and the American Institute of Certified Public Accountants
Statement of Position 96-1, "Environmental Remediation Liabilities." These
operations have recorded liabilities of $19.2 million, which represents their
best estimate at this time of remediation costs, which may reasonably be
estimated to range from $18 million to $34 million. However, there can be no
assurance that such costs will not vary considerably from these estimates.
Factors that may bear on costs differing from estimates include, without
limit, changes in regulatory standards, changes in remediation technologies
and practices and the type and extent of contaminants discovered at the sites.
Boston Gas, Colonial Gas and Essex Gas are aware of 30 other former MGP
sites within their service territories. The NEES subsidiary has provided full
indemnification to Boston Gas with respect to eight of these sites. At this
time, there is substantial uncertainty as to whether Boston Gas, Colonial Gas
or Essex
10-K/33
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Gas have or share responsibility for remediating any of these other sites. No
notice of responsibility has been issued to Boston Gas, Colonial Gas or Essex
Gas for any of these sites from any governmental environmental authority.
By a rate order issued on May 25, 1990, the Department approved the
recovery of all prudently incurred environmental response costs associated
with former MGP sites over separate, seven-year amortization periods, without
a return on the unamortized balance. Eastern's natural gas operations have
recognized an insurance receivable of $3.3 million, reflecting a negotiated
settlement with an insurance carrier for environmental expense indemnity, and
a regulatory asset of $14.7 million, representing the expected rate recovery
of environmental remediation costs, net of the insurance settlement. Eastern
currently believes, in light of the indemnity agreement with the NEES
subsidiary and the Department rate order on environmental cost recovery, that
it is not probable that such costs will materially affect its financial
condition or results of operations.
15. UNBILLED REVENUE ACCOUNTING CHANGE
During the fourth quarter of 1998, Boston Gas changed its method of
accounting for unbilled revenues, retroactively applied as of January 1, 1998.
Previously, substantially all revenues were 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 in which gas is billed to customers. Under the new method,
the estimated margin on unbilled revenues is recorded at the end of each
accounting period. This accrual method of accounting for revenues is the
prevalent method in the utility industry. The cumulative effect of this
accounting change at January 1, 1998 was to increase net earnings by
$8,193,000, or $.36 per share. The effect of this accounting change was to
increase earnings before extraordinary items and accounting change by
$405,000, or $.02 per share, for the year ended December 31, 1998. The pro
forma effect of retroactively applying this method to 1997 was not material.
16. COAL MINERS RETIREE HEALTH CARE
On June 25, 1998 the U.S. Supreme Court ruled that the Coal Industry
Retiree Health Benefit Act of 1992 ("Coal Act") is unconstitutional as applied
to Eastern. Accordingly, previously recorded reserves not used, less
associated expenses, resulted in an extraordinary gain of $74,500,000 pre-tax,
$48,425,000 net, or $2.13 per share, in the second quarter of 1998.
In 1993, Eastern recorded a reserve of $70,000,000 ($45,500,000 net of
tax, or $1.88 per share) to provide for its estimated undiscounted obligations
under the Coal Act with respect to notices of responsibility received from the
Social Security Administration in that year. The notices claimed that Eastern
was responsible for health care and death benefit premiums for certain retired
coal miners and their beneficiaries who were said to have worked for Eastern's
Coal Division prior to the transfer of those operations to a subsidiary in
1965. Principally due to receipt of additional notices, in 1995 Eastern
recorded an additional reserve of $10,000,000 ($6,500,000 net of tax or $.30
per share). Provisions to establish these reserves were accounted for as
extraordinary items. Eastern never paid any premiums under the Coal Act.
17. RETIREE BENEFITS
Eastern and its subsidiaries, through various company-administered plans
and other union retirement and welfare plans, provide retirement benefits for
the majority of their employees, including pension and certain health care and
life insurance benefits. Normal retirement age ranges from 60 to 65, but
provision is made for earlier retirement. Pension benefits for salaried plans
are based on salary and years of service, while union retirement and welfare
plans are based on negotiated benefits and years of service. Employees,
excluding Essex Gas employees, hired before 1993 who are participants in the
pension plans become eligible for postretirement health care benefits if they
reach retirement age while working for Eastern. The funding of retirement and
employee benefit plans is in accordance with the requirements of the plans
and, where applicable, in sufficient amounts to satisfy the "Minimum Funding
Standards" of the Employee Retirement Income Security Act ("ERISA").
10-K/34
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Effective January 1, 1998, Eastern adopted SFAS No. 132, "Employers"
Disclosures about Pensions and Other Postretirement Benefits," which revises
prior disclosure requirements. The information for 1997 has been restated to
conform to this presentation. The net cost for these plans and agreements
charged to expense was as follows:
Pensions
Years Ended December 31,
(In thousands) 1999 1998 1997
--------------------------------------------------------------------------
Service cost $ 5,687 $ 5,250 $ 5,145
Interest cost on projected benefit
obligation 15,449 13,300 12,808
Expected return on plan assets (19,415) (17,049) (15,820)
Amortization of prior service cost 1,744 1,552 1,501
Amortization of transitional obligation 397 424 424
Recognized actuarial gain (664) (599) (263)
Settlement and curtailment gain (1,268) (490) (2,314)
-------- -------- --------
Total net pension cost of company-
administered plans 1,930 2,388 1,481
Multi-employer union retirement and
welfare plans 445 475 270
-------- -------- --------
Total net pension cost $ 2,375 $ 2,863 $ 1,751
======== ======== ========
Health Care
Years Ended December 31,
(In thousands) 1999 1998 1997
----------------------------------------------------------------------------
Service cost $ 984 $ 1,066 $ 1,007
Interest cost on accumulated benefits
obligation 7,649 7,425 7,147
Expected return on plan assets (2,319) (2,131) (1,585)
Amortization of prior service cost (1,317) (1,374) (1,170)
Recognized actuarial gain (280) (399) (229)
Regulatory deferral 5,359 5,359 4,841
-------- -------- --------
Total net retiree health care cost $ 10,076 $ 9,946 $ 10,011
======== ======== ========
The tables above do not reflect pension enhancements at natural gas
distribution operations of $2,593,000 and $3,847,000 for 1999 and 1998,
respectively, and retirement health care enhancements of $353,000 and $698,000
for 1999 and 1998, respectively.
10-K/35
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The following tables set forth the change in benefit obligation and plan
assets, reconciliation of funded status and amounts recognized in other
comprehensive income of company-administered plans and amounts recorded in
Eastern's consolidated balance sheets as of December 31, 1999 and 1998 using
actuarial measurement dates as of October 1, 1999 and 1998:
Pensions Health Care
(In thousands) 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Balance at beginning of year $254,429 $181,330 $ 115,048 $102,239
Service cost 5,687 5,250 984 1,066
Interest cost 15,449 13,300 7,649 7,425
Plan amendments 639 1,264 1,406 -
Curtailment (gain) 98 (635) (106) (85)
Settlement (gain) 333 (294) - -
Special termination benefits 2,593 3,868 353 698
Benefits paid (11,071) (10,159) (7,354) (6,642)
Settlement payments (3,665) - - -
Actuarial (gain) or loss 858 4,143 (1,591) (474)
-------- -------- --------- --------
Balance at end of year $265,350 $198,067 $ 116,389 $104,227
======== ======== ========= ========
CHANGE IN PLAN ASSETS
Fair value at beginning of year $277,772 $241,734 $ 31,653 $ 25,263
Actual return on plan assets 17,957 (6,789) 926 439
Employer contributions 901 1,121 7,034 6,936
Benefits paid (11,071) (10,220) (7,354) (6,642)
Special termination benefits (3,665) - - -
-------- -------- --------- --------
Fair value at end of year $281,894 $225,846 $ 32,259 $ 25,996
======== ======== ========= ========
RECONCILIATION OF FUNDED STATUS
Funded status $ 16,544 $ 27,779 $ (84,130) $(78,231)
Contributions for fourth quarter 387 208 1,757 1,591
Unrecognized actuarial (gain) (34,592) (35,646) (10,465) (10,292)
Unrecognized transition obligation 336 734 - -
Unrecognized prior service 17,575 15,075 (7,543) (10,265)
-------- -------- --------- --------
Net amount recognized at end of year $ 250 $ 8,150 $(100,381) $(97,197)
======== ======== ========= ========
AMOUNTS RECOGNIZED IN BALANCE SHEET
Prepaid benefit cost $ 24,409 $ 23,416 $ - $ -
Accrued benefit liability (28,441) (20,383) (100,381) (97,197)
Intangible asset 2,759 3,032 - -
Accumulated other comprehensive income 1,523 2,085 - -
-------- -------- --------- --------
Net amount $ 250 $ 8,150 $(100,381) $(97,197)
======== ======== ========= ========
Other comprehensive income pre-tax $ 632 $ 732 $ - $ -
======== ======== ========= ========
To fund health care benefits under its collective bargaining agreements,
Boston Gas and Essex Gas maintain voluntary employee beneficiary associations,
to which they make contributions from time to time. Essex Gas made
contributions during 1997 of $560,241. Plan assets are invested in debt and
equity marketable securities.
Following are the weighted-average assumptions used in developing the
projected benefit obligation for 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Discount rate 7.5% 7.25% 7.5%
Return on plan assets 8.5% 8.5% 8.5%
Increase in future compensation 4.0%-4.5% 4.5%-5.0% 4.75%-5.0%
Health care inflation trend 8.0%-10.0% 8.0% 7.0-8.75%
10-K/36
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The health care inflation trend for individuals not yet 65 years of age is
assumed to be 8.0% in 2000 and decreasing gradually to 5.0% in 2008. The
health care inflation rate for individuals 65 years of age or older is 10.0%
in 2000 and decreasing gradually to 5.0% in 2008. A one-percentage point
increase (decrease) in the assumed health care trend rate for 1999 would have
the following effects:
One-Percentage One-Percentage
(In thousands) Point Increase Point Decrease
-----------------------------------------------------------------------
Total of service and interest cost
components $ 633 $ (559)
Postretirement benefit obligation $8,658 $(7,591)
See Note 4 for discussion of the adjustment conforming Essex Gas' method
of adoption of SFAS No. 106.
18. 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
other comprehensive income. The difference between the fair value and the
original cost of these securities is a net unrealized gain of $867,000 and
$1,250,000, at December 31, 1999 and 1998, respectively.
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash and short-term investments and short-term debt: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Short-term debt includes notes payable and gas inventory financing.
Marketable securities and investments: Marketable securities and
investments include marketable securities classified as available for sale.
Pursuant to SFAS No. 115 the carrying value is the fair value based on
currently quoted market prices.
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) 1999 1998
- -------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Cash and short-term investments $ 44,332 $ 44,332 $159,836 $159,836
Marketable securities and investments 14,975 14,975 15,801 15,801
Short-term debt 170,463 170,463 90,479 90,479
Long-term debt 522,040 515,187 390,921 443,927
Preferred stock of subsidiary 26,454 26,730 29,360 30,076
10-K/37
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
19. UNAUDITED QUARTERLY FINANCIAL INFORMATION
Unaudited quarterly financial information for 1998 has been restated to
reflect the retroactive change of accounting described in Note 15.
For the three months ended
(In thousands, except per share amounts) Mar. 31, June 30, Sept. 30, Dec. 31,
- ----------------------------------------------------------------------------------------------------------
1999:
Revenues $344,829 $170,520 $144,978 $318,375
Operating earnings 57,946 1,697 (4,830) 58,626
EARNINGS BEFORE INCOME TAXES 52,309 (4,107) (3,848) 46,893
NET EARNINGS $ 32,296 $ (2,568) $ (2,823) $ 28,188
======== ======== ======== ========
BASIC EARNINGS PER SHARE $1.43 $(.11) $(.12) $1.04
===== ===== ===== =====
DILUTED EARNINGS PER SHARE $1.42 $(.11) $(.12) $1.03
===== ===== ===== =====
1998:
Revenues $352,922 $188,425 $135,881 $258,036
Operating earnings 55,624 11,804 (4,526) 37,503
Earnings before income taxes 50,344 6,393 (7,398) 30,655
EARNINGS BEFORE EXTRAORDINARY ITEMS AND
ACCOUNTING CHANGE $ 31,067 $ 3,882 $ (3,754) $ 19,633
Extraordinary items, net of tax (1,465) 48,425 - -
Accounting change, net of tax 8,193 - - -
-------- -------- -------- --------
NET EARNINGS $ 37,795 $ 52,307 $ (3,754) $ 19,633
======== ======== ======== ========
BASIC EARNINGS PER SHARE BEFORE EXTRAORDINARY
ITEMS AND ACCOUNTING CHANGE $1.39 $ .16 $(.17) $ .88
Extraordinary items, net of tax (.07) 2.16 - -
Accounting change, net of tax .37 - - -
----- ----- ----- -----
Net earnings $1.69 $2.32 $(.17) $ .88
===== ===== ===== =====
DILUTED EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $1.37 $ .17 $(.17) $ .87
Extraordinary items, net of tax (.06) 2.13 - -
Accounting change, net of tax .36 - - -
----- ----- ----- -----
Net earnings $1.67 $2.30 $(.17) $ .87
===== ===== ===== =====
10-K/38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1999 and 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
As explained in Note 15 to the financial statements, effective January 1,
1998, the Company changed its method of accounting for unbilled revenues at
Boston Gas Company.
/s/ Arthur Andersen
Arthur Andersen LLP
Boston, Massachusetts
January 21, 2000
MANAGEMENT'S REPORT ON RESPONSIBILITY
The management of Eastern 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 /s/ Walter J. Flaherty /s/ James J. Harper
J. Atwood Ives Walter J. Flaherty James J. Harper
Chairman and Executive Vice President and Vice President
Chief Executive Officer Chief Financial Officer and Controller
10-K/39
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 47 through 49 and "Section 16(a) Beneficial Ownership Reporting
Compliance" appearing on page 56 and "Certain Transactions and Other
Disclosures" appearing on page 61 of the 1999 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 51 through
54, "Compensation of Trustees" appearing on page 55, "Termination of
Employment and Change of Control Arrangements" appearing on page 56,
"Compensation Committee Report" appearing on pages 57 through 59 and
"Performance Graph" appearing on page 60 of the 2000 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 page
62 and "Stock Ownership of Trustees and Executive Officers" appearing on page
50 of the 2000 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 sections
captioned "Compensation of Trustees" appearing on page 55 and "Certain
Transactions and Other Disclosures" appearing on page 61 of the 2000
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 02493.
10-K/40
(3) LIST OF EXHIBITS
2.1 -- Agreement and Plan of Reorganization dated as of July 14, 1999, by
and between Eastern, EE Acquisition Company, Inc. and EnergyNorth,
Inc., including Amendment No. 1 dated November 4, 1999
(incorporated by reference to Exhibit 2.1 to Registration
Statement on Form S-4 of Eastern Enterprises, dated January 28,
2000 (File No. 333-95693)).*
2.2 -- Agreement and Plan of Merger, dated as of November 4, 1999, by an
among Eastern Enterprises, KeySpan Energy Corporation and ACJ
Acquisition LLC (incorporated by reference to Exhibit 2 of Current
Report on Form 8-K of KeySpan Energy Corporation dated November 4,
1999 (Commission File No. 001-14161)).*
2.3 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of
January 26, 2000, by and among Eastern Enterprises, KeySpan Energy
Corporation and ACJ Acquisition LLC.
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 February 24,
1999 (incorporated by reference to Exhibit 3.2 to Annual Report on
Form 10-K of Eastern for the year ended December 31, 1998 (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
(incorporated by reference to 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 (incorporated by reference to Exhibit 4.1.1
to Annual Report of Eastern on Form 10-K for year ended December
31, 1994 (File No. 1-2297)).*
4.1.2 -- Amendment No. 2 to Common Stock Rights Agreement, dated as of
July 22, 1998, between Eastern and BankBoston, N.A. (incorporated
by reference to Exhibit 99.1 to Form 8-K of Eastern filed July 28,
1998 (File No. 1-2297)).*
4.1.3 -- Rights Agreement, dated as of July 22, 1998, between Eastern and
BankBoston, N.A. (incorporated by reference to Exhibit 99.2 to
Form 8-K of Eastern filed July 28, 1998 (File No. 1-2297)).*
10.1 -- Agreement, dated as of September 14, 1999, by and between Boston
Gas Company, Essex Gas Company, Colonial Gas Company and El Paso
Energy Marketing Company (Redacted)+
10.2 -- Eastern's amended and restated Deferred Compensation Plan for
Trustees, dated April 22, 1998 (incorporated by reference to
Exhibit 10.5.2 to Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 (File No. 1-2297)).*(a)
10.2.1 -- Amendment to Eastern's Amended and Restated Deferred Compensation
Plan for Trustees, dated as of October 27, 1999. (a)
10.2.2 -- Amendment to Eastern's Amended and Restated Deferred Compensation
Plan for Trustees, dated as of December 20, 1999. (a)
10.3 -- Eastern's 1982 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.2 to Quarterly Report of Eastern on Form
10-Q for the quarter ended March 31, 1992 (File No. 1-2297)).*(a)
10.4 -- Eastern's 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.9 to Annual Report of Eastern on Form 10-K for the year
ended December 31, 1994 (File No. 1-2297)).*(a)
10.5 -- Eastern's Amended and Restated Supplemental Executive Retirement
Plan. (a)
10.6 -- Trust Agreement between Eastern and Shawmut Bank of Boston, N.A.,
as amended (incorporated by reference to 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)
10.6.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of
Boston, N.A. (incorporated by reference to Exhibit 10.2 to
Quarterly Report of Eastern on Form 10-Q for quarter June 30, 1995
(File No. 1-2297)).*(a)
10.6.2 -- 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 to Exhibit 10.9.2 to Annual Report
of Eastern on Form 10-K for year ended December 31, 1995 (File No.
1-2297)).*(a)
10.6.3 -- Amendment to Trust Agreement between Eastern and Key Trust Company
of Ohio, N.A., as successor trustee, dated February 25, 1998
(incorporated by reference to Exhibit 10.9.3 to Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 (File No.
1-2297)).*(a)
10.6.4 -- Amendment, dated as of September 22, 1999, to Trust Agreement
between Eastern and Key Trust Company of Ohio, N.A. (a)
10.7 -- Eastern's Executive Incentive Compensation Plan, as amended
(incorporated by reference to Exhibit 10.3 to Quarterly Report of
Eastern on Form 10-Q for the quarter ended March 31, 1992 (File
No. 1-2297)).*(a)
10.8.1 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and J. Atwood Ives (incorporated by reference
to Exhibit 10.11.1 to Quarterly Report of Eastern on Form 10-Q for
the quarter ended September 30, 1999 (File No. 1-2297)).*(a)
10.8.2 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and Fred C. Raskin (incorporated by reference
to Exhibit 10.11.2 to Quarterly Report of Eastern on Form 10-Q for
the quarter ended September 30, 1999 (File No. 1-2297)).*(a)
10.8.3 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and Walter J. Flaherty (incorporated by
reference to Exhibit 10.11.3 to Quarterly Report of Eastern on
Form 10-Q for the quarter ended September 30, 1999 (File No.
1-2297)).*(a)
10.8.4 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and L. William Law, Jr. (incorporated by
reference to Exhibit 10.11.4 to Quarterly Report of Eastern on
Form 10-Q for the quarter ended September 30, 1999 (File No.
1-2297)).*(a)
10.8.5 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern, Boston Gas Company and Chester R. Messer
(incorporated by reference to Exhibit 10.11.5 to Quarterly Report
of Eastern on Form 10-Q for the quarter ended September 30, 1999
(File No. 1-2297)).*(a)
10.8.6 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern, Midland Enterprises Inc. and J. Mark Cook
(incorporated by reference to Exhibit 10.11.6. to Quarterly Report
of Eastern on Form 10-Q for the quarter ended September 30, 1999
(File No. 1-2297)).*(a)
10.9 -- Agreement dated November 27, 1991 between Eastern and J. Atwood
Ives (incorporated by reference to 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)
10.10 -- Agreement dated October 25, 1991 between Eastern and Richard R.
Clayton (incorporated by reference to Exhibit 10.15 to the Annual
Report of Eastern on Form 10-K for the year ended December 31,
1991 (incorporated by reference to Exhibit 10.14 to Annual Report
of Eastern on Form 10-K for the year ended December 31, 1998 (File
No. 1-2297)).*(a)
10.11 -- Letter Agreement, dated May 22, 1998, by and between Eastern and
Richard R. Clayton (incorporated by reference to Exhibit 10.14 to
Annual Report of Eastern on Form 10- K for the year ended December
31, 1998 (File No. 1-2297)).*(a)
10.12 -- Employment Agreement, dated as of September 1, 1998, by and
between Eastern and Fred C. Raskin (incorporated by reference to
Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 1-2297)).*(a)
10.13 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended
(incorporated by reference to Exhibit 10.22 to Annual Report of
Eastern on Form 10-K for the year ended December 31, 1992 (File
No. 1-2297)).*(a)
10.13.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees,
dated December 8, 1995 (incorporated by reference to 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)
10.14 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan
(incorporated by reference to Exhibit 10.21 to Annual Report of
Eastern on Form 10-K for the year ended December 31, 1995 (File
No. 1-2297)).*(a)
10.14.1 -- Amendment to Eastern's 1996 Non-Employee Trustees' Stock Option
Plan (incorporated by reference to Exhibit 10.21.1 to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998 (File No.
1-2297)).*(a)
10.15 -- Eastern's 1992 Restricted Stock Plan (incorporated by reference to
Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the
quarter ended March 31, 1992 (File No. 1-2297)).*(a)
10.16 -- Eastern's Restricted Stock Plan for Non-Employee Trustees
(incorporated by reference to Exhibit 10.24 to Annual Report of
Eastern on Form 10-K for the year ended December 31, 1992 (File
No. 1-2297)).*(a)
10.16.1 -- Amendment dated as of September 22, 1999, to Eastern's Restricted
Stock Plan for Non-Employee Trustees (incorporated by reference to
Exhibit 10.23.1 to Quarterly Report of Eastern on Form 10-Q for
the quarter ended September 30, 1999 (File No. 1-2297)).*
10.17 -- Eastern's 1994 Deferred Compensation Plan (incorporated by
reference to Exhibit 10.22 to Annual Report of Eastern on Form
10-K for year ended December 31, 1993 (File No. 1-2297)).*(a)
10.17.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December
8, 1995 (incorporated by reference to 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)
10.17.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25,
1996 (incorporated by reference to Exhibit 10.24.2 to Annual
Report of Eastern on Form 10-K for the year ended December 31,
1996 (File No. 1-2297)).*(a)
10.18 -- Eastern's Enterprises Executive Stock Purchase Loan Plan, as
amended February 27, 1997 (incorporated by reference to Exhibit
10.25 to Annual Report of Eastern on Form 10-K for year ended
December 31, 1996 (File No. 1-2297)).*
10.19 -- 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
(incorporated by reference to Exhibit 10.26 to Annual Report of
Eastern on Form 10-K for year ended December 31, 1996 (File No.
1-2297)).*
10.19.1 -- 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 (incorporated by reference to Exhibit 10.26.1 to Annual
Report of Eastern on Form 10-K for the year ended December 31,
1996 (File No. 1-2297)).*
10.19.2 -- 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 (incorporated by reference to Exhibit 10.26.2 to Annual
Report of Eastern on Form 10-K for year ended December 31, 1996
(File No. 1-2297)).*
10.19.3 -- Amendment No. 3 to Credit Agreement, dated as of August 20, 1999,
by and among, Eastern, Boston Gas Company and Midland enterprises
Inc., the Banks named therein and BankBoston, N.A., individually
and as Agent.
13.1 -- Portions incorporated herein of annual report to shareholders for
the year ended December 31, 1999. With the exception of the
sections captioned "Six-Year Financial Summary" appearing on page
20 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.
27.1 -- Financial Data Schedule for the twelve months ended December 31,
1999.
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
Eastern filed a Current Report on Form 8-K on November 8, 1999.
- ----------
*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.
+ Confidential Treatment Requested.
(a) Indicates a management contract or compensatory plan or arrangement.
EASTERN ENTERPRISES AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1999
(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 of 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 21, 2000. 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 subject 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.
/s/ Arthur Andersen
Arthur Andersen LLP
Boston, Massachusetts
January 21, 2000
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports, dated January 21, 2000, included in, and
incorporated by reference into, Eastern Enterprises Annual Report on this Form
10-K for the year ended December 31, 1999, into Eastern's previously filed
Post-Effective Amendment No. 1 to Form S-16 Registration Statement No. 2-71614
on Form S-3, Form S-4 Registration Statements No. 333-69039 and No. 333-95693,
and Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862,
No. 33-56424, No. 33-58873 and No. 333-88967.
/s/ Arthur Andersen
Arthur Andersen LLP
Boston, Massachusetts
March 9, 2000
F-2
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
ADDITIONS DEDUCTIONS
--------------------------- ----------
CHARGES
CHARGED FOR WHICH
BALANCE TO COSTS CHARGED RESERVES BALANCE
DECEMBER 31, AND TO OTHER WERE DECEMBER 31,
DESCRIPTION 1998 EXPENSES ACCOUNTS CREATED 1999
- ----------- ---- -------- -------- ------- ----
Reserves deducted from assets --
Reserves for doubtful accounts ................ $ 17,070 $12,005 $ 3,176 $(13,391) $ 18,860
======== ======= ======= ======== ========
Reserves for loss on inventory ................ $ -- $ 234 $ -- $ -- $ 234
======== ======= ======= ======== ========
Reserves for loss on investments .............. $ 19 $ -- $ -- $ -- $ 19
======== ======= ======= ======== ========
Reserves included in liabilities --
Reserve for postretirement health care ........ $ 97,197 $ 5,781 $ 4,857 $ (8,211) $ 99,624
Reserves for employee benefits ................ 29,716 16,722 7,345 (13,290) 40,493
Reserves for environmental expenses ........... 25,115 249 850 (4,340) 21,874
Reserves for insurance claims ................. 12,269 5,497 3,268 (8,863) 12,171
Other ......................................... 11,157 286 -- (1,190) 10,253
======== ======= ======= ======== ========
Total liability reserves .................... $175,454 $28,535 $16,320 $(35,894) $184,415
======== ======= ======= ======== ========
F-3
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
ADDITIONS DEDUCTIONS
--------------------------- ----------
CHARGES
CHARGED FOR WHICH
BALANCE TO COSTS CHARGED RESERVES BALANCE
DECEMBER 31, AND TO OTHER WERE DECEMBER 31,
DESCRIPTION 1997 EXPENSES ACCOUNTS CREATED 1998
- ----------- ---- -------- -------- ------- ----
Reserves deducted from assets --
Reserves for doubtful accounts ................ $ 17,220 $ 5,062 $ 120 $ (5,332) $ 17,070
======== ======= ======= ======== ========
Reserves for loss on investments .............. $ 19 $ -- $ -- $ -- $ 19
======== ======= ======= ======== ========
Reserves included in liabilities --
Reserve for postretirement health care ........ $ 98,382 $ 5,540 $ -- $ (6,725) $ 97,197
Reserve for coal miner's retiree health care .. 76,500 (74,500) -- (2,000) --
Reserves for employee benefits ................ 25,236 14,092 1,486 (11,098) 29,716
Reserves for environmental expenses ........... 25,920 71 82 (958) 25,115
Reserves for insurance claims ................. 13,171 5,029 1,968 (7,899) 12,269
Other ......................................... 16,319 377 921 (6,460) 11,157
-------- ------- ------- -------- --------
Total liability reserves .................... $255,528 $(49,391) $ 4,457 $(35,140) $175,454
======== ======= ======= ======== ========
F-4
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
ADDITIONS DEDUCTIONS
--------------------------- ----------
CHARGES
CHARGED FOR WHICH
BALANCE TO COSTS CHARGED RESERVES BALANCE
DECEMBER 31, AND TO OTHER WERE DECEMBER 31,
DESCRIPTION 1996 EXPENSES ACCOUNTS CREATED 1997
- ----------- ---- -------- -------- ------- ----
Reserves deducted from assets --
Reserves for doubtful accounts ................ $ 17,301 $ 5,818 $ 167 $ (6,066) $ 17,220
======== ======= ======= ======== ========
Reserves for loss on investments .............. $ 19 $ -- $ -- $ -- $ 19
======== ======= ======= ======== ========
Reserves included in liabilities --
Reserve for postretirement health care ........ $100,446 $ 4,578 $ -- $ (6,642) $ 98,382
Reserve for coal miner's retiree health care .. 77,308 -- -- (808) 76,500
Reserves for employee benefits ................ 24,624 9,690 907 (9,985) 25,236
Reserves for environmental expenses ........... 26,809 -- 122 (1,011) 25,920
Reserves for insurance claims ................. 12,838 7,348 (530) (6,485) 13,171
Other ......................................... 17,680 6,304 41 (7,706) 16,319
-------- ------- ------- -------- --------
Total liability reserves .................... $259,705 $27,920 $ 540 $(32,637) $255,528
======== ======= ======= ======== ========
F-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 10, 2000
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 10th day of March, 2000.
SIGNATURE TITLE
Chairman and Chief Executive Officer and
/s/ J. ATWOOD IVES Trustee
- --------------------------------
J. ATWOOD IVES
/s/ FRED C. RASKIN President and Chief Operating Officer
- --------------------------------
FRED C. RASKIN
Executive Vice President and Chief
/s/ WALTER J. FLAHERTY Financial Officer
- --------------------------------
WALTER J. FLAHERTY
/s/ JAMES R. BARKER Trustee
- --------------------------------
JAMES R. BARKER
/s/ RICHARD R. CLAYTON Trustee
- --------------------------------
RICHARD R. CLAYTON
/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/ WENDELL J. KNOX Trustee
- --------------------------------
WENDELL J. KNOX
/s/ F. L. PUTNAM, JR. Trustee
- --------------------------------
F. L. PUTNAM, JR.
/s/ RINA K. SPENCE Trustee
- --------------------------------
RINA K. SPENCE
/s/ DAVID B. STONE Trustee
- --------------------------------
DAVID B. STONE
F-6
EXHIBIT INDEX
See Item 14(a)(3), "List of Exhibits," for statement of the location of
exhibits incorporated by reference.
EXHIBIT
2.1 -- Agreement and Plan of Reorganization, dated as of July 14, 1999 by
and between Eastern, EE Acquisition Company, Inc. and EnergyNorth,
Inc., including Amendment No. 1 dated November 4, 1999
(incorporated by reference).
2.2 -- Agreement and Plan of Merger, dated as of November 4, 1999, by and
among Eastern Enterprises, KeySpan Energy Corporation and ACJ
Acquisition LLC (incorporated by reference).
2.3 -- Amendment No. 1 to Agreement and Plan of Merger, dated as of
January 26, 2000, by and among Eastern Enterprises, KeySpan Energy
Corporation and ACJ Acquisition LLC.
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 February 24,
1999 (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).
4.1.2 -- Amendment No. 2 to Common Stock Rights Agreement, dated as of
July 22, 1998, between Eastern and BankBoston, N.A. (incorporated
by reference).
4.1.3 -- Rights Agreement, dated as of July 22, 1998, between Eastern and
BankBoston, N.A. (incorporated by reference).
10.1 -- Agreement, dated as of September 14, 1999, by and between Boston
Gas Company, Essex Gas Company, Colonial Gas Company and El Paso
Energy Marketing Company (Redacted)+
10.2 -- Eastern's amended and restated Deferred Compensation Plan for
Trustees, dated April 22, 1998 (incorporated by reference).
10.2.1 -- Amendment to Eastern's Amended and Restated Deferred Compensation
Plan For Trustees, dated as of October 27, 1999.
10.2.2 -- Amendment to Eastern's Amended and Restated Deferred Compensation
Plan For Trustees, dated as of December 20, 1999.
10.3 -- Eastern's 1982 Stock Option Plan, as amended (incorporated by
reference).
10.4 -- Eastern's 1995 Stock Option Plan (incorporated by reference).
10.5 -- Eastern's Amended and Restated Supplemental Executive Retirement
Plan.
10.6 -- Trust Agreement between Eastern and Shawmut Bank of Boston N.A.,
as amended (incorporated by reference).
10.6.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of
Boston, N.A. (incorporated by reference).
10.6.2 -- 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).
10.6.3 -- Amendment to Trust Agreement between Eastern and Key Trust Company
of Ohio, N.A., as successor trustee, dated February 25, 1998
(incorporated by reference).
10.6.4 -- Amendment, dated as of September 22, 1999, to Trust Agreement
between Eastern and Key Trust Company of Ohio, N.A.
10.7 -- Eastern's Executive Incentive Compensation Plan, as amended
(incorporated by reference).
10.8.1 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and J. Atwood Ives (incorporated by
reference).
10.8.2 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and Fred C. Raskin (incorporated by
reference).
10.8.3 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and Walter J. Flaherty (incorporated by
reference).
10.8.4 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern and L. William Law, Jr. (incorporated by
reference).
10.8.5 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern, Boston Gas Company and Chester R. Messer
(incorporated by reference).
10.8.6 -- Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern, Midland Enterprises Inc. and J. Mark Cook
(incorporated by reference).
10.9 -- Agreement dated November 27, 1991 between Eastern and J. Atwood
Ives (incorporated by reference).
10.10 -- Agreement dated October 25, 1991 between Eastern and Richard R.
Clayton (incorporated by reference).
10.11 -- Letter Agreement, dated May 22, 1998, by and between Eastern and
Richard R. Clayton (incorporated by reference).
10.12 -- Employment Agreement, dated as of September 1, 1998, by and
between Eastern and Fred C. Raskin (incorporated by reference).
10.13 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended
(incorporated by reference).
10.13.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees,
dated December 8, 1995 (incorporated by reference).
10.14 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan
(incorporated by reference).
10.14.1 -- Amendment to Eastern's 1996 Non-Employee Trustees' Stock Option
Plan (incorporated by reference).
10.15 -- Eastern's 1992 Restricted Stock Plan (incorporated by reference).
10.16 -- Eastern's Restricted Stock Plan for Non-Employee Trustees
(incorporated by reference).
10.16.1 -- Amendment, dated as of September 22, 1999, to Eastern's Restricted
Stock Plan for Non-Employee Trustees (incorporated by reference).
10.17 -- Eastern's 1994 Deferred Compensation Plan (incorporated by
reference).
10.17.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December
8, 1995 (incorporated by reference).
10.17.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July
25, 1996 (incorporated by reference).
10.18 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended
February 27, 1997 (incorporated by reference).
10.19 -- 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
(incorporated by reference).
10.19.1 -- 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 (incorporated by reference).
10.19.2 -- 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 (incorporated by reference).
10.19.3 -- Amendment No. 3 to Credit Agreement, dated as of August 20, 1999,
by and among, Eastern, Boston Gas Company and Midland Enterprises
Inc., the Banks named therein and BankBoston, N.A., individually
and as Agent.
13.1 -- Portions incorporated herein of annual report to shareholders for
the year ended December 31, 1999.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule for the twelve months ended
December 31, 1999.
- ----------
+ Confidential Treatment Requested.