EXHIBIT 13.1
(Page 26)
1993 COMPARED TO 1992
The reported net loss in 1993 included the effects of three substantial
charges of a non-recurring nature totaling $99.8 million, net of tax, or
$4.43 per share. In addition, a number of unusual external factors such as
floods and strikes negatively impacted each of Eastern's operating
businesses during 1993.
A management reevaluation of the Water Products Group resulted in the
sale of Ionpure Technologies at a loss and a writedown of WaterPro
Supplies' goodwill. On December 1, 1993, Eastern completed the sale of
Ionpure for a 22% equity interest in U.S. Filter Corporation, as described
in Note 10 of Notes to Financial Statements ("Notes"). This sale resulted
in a pretax charge of $13.0 million ($9.3 million net of tax, or $.41 per
share). In addition, in consideration of the continuing pressures on
operating margins, diminished expectations for growth and other factors,
Eastern revalued WaterPro and in the fourth quarter of 1993 recorded a
pre- and post-tax charge against goodwill of $45.0 million, or $2.00 per
share, as described in Note 12 of Notes.
Also in the fourth quarter of 1993, Eastern accrued a pretax charge of
$70.0 million representing the estimated undiscounted liability for health
care and death benefit premiums imposed by the Coal Industry Retiree
Health Benefit Act of 1992 ("Coal Act"). As described in Note 14 of Notes,
this charge has been reported as an extraordinary item of $45.5 million
net of tax, or $2.02 per share. On November 1, 1993 Eastern filed a
lawsuit in the Federal District Court for Massachusetts challenging the
constitutionality of the Coal Act, as applied to it, and asserting a claim
against Peabody Holding Company, Inc., to which Eastern sold its coal
subsidiaries in 1987, that any liability under the Coal Act should be
borne by Peabody and such subsidiaries. Eastern has posted security to
delay payment of premiums pending the outcome of its constitutional
challenge. Eastern's ultimate obligation under the Coal Act could range
from zero to more than $100 million depending on a number of factors,
including the outcome of such challenge, its claim against Peabody,
Medicare reimbursements, administrative review of assigned individuals,
medical inflation rates and changes in government health care programs.
(Page 27)
REVENUES:
(In millions)
--------------------------------------------------------------------------
1993 1992 Change
Boston Gas $ 614.3 $ 594.3 3 %
Midland 254.9 263.6 (3)%
Water Products Group 230.6 233.5 (1)%
----------------------
Total $1,099.8 $1,091.4 1 %
----------------------------------
----------------------------------
Consolidated revenues increased slightly in 1993. Although a variety of
market and economic factors affected the change, in general, continued
growth to the Boston Gas firm customer base offset decreases in coal and
grain transportation at Midland.
OPERATING EARNINGS:
(In millions)
--------------------------------------------------------------------------
1993 1992 Change
Boston Gas $49.1 $63.1 (22)%
Midland 33.0 38.3 (14)%
Water Products Group (0.4) (0.3) nm
Headquarters (4.7) (5.1) 8%
--------------
Operating earnings before writedown 77.0 96.0 (20)%
Writedown of WaterPro goodwill (45.0) -- nm
--------------
Total $32.0 $96.0 nm
--------------
--------------
Consolidated operating earnings decreased from 1992, due primarily to the
writedown of WaterPro goodwill and the absence of a one-time benefit in
1992 that resulted from a modification to the gas cost recovery mechanism
at Boston Gas that increased operating earnings by $11.6 million. In
addition, record flooding in the Midwest and strikes by the United Mine
Workers ("UMW") and Boston Gas union employees decreased revenues and
increased operating expenses.
Earnings before income taxes decreased from $63.0 million in 1992 to a
loss of $16.6 million in 1993, primarily reflecting the decrease in
operating earnings described above, the $13.0 million loss on the sale of
Ionpure, lower interest income and higher interest expense. Interest
income decreased due to lower investment balances and rates. The increase
in interest expense primarily reflected additional dividends paid on
subsidiary preferred stock. The high income tax rate in 1993 resulted from
the absence of any tax benefit recognized on the writedown of WaterPro
goodwill and, to a much lesser extent, the 1% increase in the federal
statutory rate and unbenefited capital losses on the sale of Ionpure, as
described in Note 9.
Net earnings of $46.1 million in 1992 decreased to a loss of $77.7
million in 1993, reflecting the above-described 1993 extraordinary charge
for the reserve for coal miners retiree health care and the absence of the
$8.2 million benefit recorded in 1992 on the adoption of SFAS 109, as
described in Note 9.
BOSTON GAS
Increased sales to Boston Gas firm customers, primarily to an electric
utility on a seasonal-firm basis, increased revenue by $21.8 million and
operating earnings by $4.9 million. Relatively low residual oil prices
throughout 1993 limited sales to non-firm customers and reduced
comparative revenues by nearly $15.0 million. However, a $37.7 million
rate increase which took effect November 1, 1993 and the pass through of
higher gas costs were somewhat offsetting. The weather in 1993, which was
4.5% warmer than 1992, was 1.3% warmer than normal, decreasing revenues by
$9.8 million and operating earnings by $1.7 million.
Excluding the $11.6 million benefit in 1992 of the modification to the
gas cost recovery mechanism, operating earnings decreased by $2.4 million
as the partial impact of the rate increase in combination with the benefit
of ongoing load growth offset much of the increased expenses attributable
primarily to the work stoppage.
(Page 28)
MIDLAND
Midland's transportation revenues decreased in 1993 primarily as a result
of: reduced coal and grain shipments caused by the severe flooding on the
Mississippi and Illinois Rivers and reduced exports of both commodities;
the curtailment of coal shipments under a major long-term contract; and
lower deliveries to electric utilities caused by the UMW strike.
Midland's tonnage and ton miles were unchanged from 1992 despite several
significant events that negatively affected the barge industry in general
and Midland specifically. A decline in coal tonnage from 1992 primarily
reflected reduced shipments to electric utilities due to the UMW strike
(resolved in December), disruption in river traffic caused by flooding,
and the cessation of coal shipments under a long-term contract. An
increase in non-coal tonnage, despite a significant reduction in grain
tonnage, served to replace the lower coal volume, although at lower
margins. Benefits of cost savings programs helped to offset much
of the lost margins. Higher coal terminal throughput was offset by lower
phosphate terminalling.
In addition to restricting tonnage and altering traffic patterns,
flooding increased operating costs and shifted business to less profitable
markets.
In December 1993 Midland sold its liquid barge business at a pretax gain
of $8.0 million. In addition, Midland closed its barge construction
facility in Port Allen, Louisiana and set up a $3.5 million reserve to
reflect shutdown costs and carrying charges until final disposition of the
facility is determined. These transactions were included in "Other
income."
WATER PRODUCTS GROUP
Water Products Group's revenue declined slightly as
increases at WaterPro offset most of the Ionpure
reduction resulting from its sale as of October 1, 1993.
Operating profits declined due to intense competition and slow moving
inventory charges at WaterPro. WaterPro's 1993 operating
profits also included charges related to upgrading
its information system, a training and logistics
initiative and higher corporate overhead. These
charges offset the absence of the $1.0 million
restructuring charge recorded in 1992.
1992 COMPARED TO 1991
REVENUES:
(In millions)
--------------------------------------------------------
1992 1991 Change
Boston Gas $ 594.3 $527.9 13 %
Midland 263.6 267.1 (1)%
Water Products Group 233.5 198.1 18 %
--------------------
Total $1,091.4 $993.1 10 %
--------------------------------
--------------------------------
The increase in consolidated revenues from 1991 to 1992 primarily
reflected colder weather and continued growth in the Boston Gas firm
customer base. Higher revenues for WaterPro and Ionpure also contributed
to the increase.
OPERATING EARNINGS:
(In millions)
---------------------------------------------------------
1992 1991 Change
Boston Gas $63.1 $39.3 61 %
Midland 38.3 40.5 (5)%
Water Products Group (0.3) (1.3) nm
Headquarters (5.1) (5.7) nm
-----------------
Total $96.0 $72.8 32 %
---------------------------
---------------------------
Results for all segments of Eastern's operations for 1992 and 1991 were
depressed by the recession, as reflected by weak demand experienced by
Midland and high bad debt expense for Boston Gas. For both WaterPro and
Ionpure, competitive pressures decreased margins which offset the benefit
of higher revenues.
(Page 29)
Net earnings before accounting changes increased 29% from 1991, as the
growth in operating earnings was partially offset by increased interest
expense, lower interest income and an increase in the reported tax rate
due to the 1992 adoption of SFAS 109, as described in Note 9 of Notes.
Net earnings for 1992 also increased from the $8.2 million benefit
recorded on the adoption of SFAS 109 and the absence of the $8.7 million
charge, net of tax, recorded in 1991 on the adoption of SFAS 106, as
described in Notes 9 and 15 of Notes. The SFAS charge in 1991 was
partially offset by a one-time gain related to a 1987 pension termination.
BOSTON GAS
The weather in 1992 was 19.3% colder than 1991 and 3.6% colder than
normal, increasing revenues by $47.0 million and operating earnings by
$14.7 million. The 1992 modification to the gas cost recovery mechanism
resulted in a one-time benefit to operating earnings of $11.6 million.
Growth in the firm customer base, which was evenly divided between
traditional residential markets and the commercial/industrial market,
increased operating earnings in 1992 by $7.1 million. These gains were
partially offset by higher operating expenses in 1992 related primarily to
increased system maintenance costs and depreciation.
MIDLAND
Midland's ton miles during 1992 increased 1% from 1991, reflecting
increased volume from grain and other commodities, mostly offset by
reduced demand for coal transportation due to moderate temperatures
and a weak economy. Industry overcapacity reduced rates
and margins. Revenues and earnings from support operations were
generally lower than 1991.
Lower fuel costs and improved operating conditions, partially offset
by increased administrative costs and depreciation expense related to fleet
renewal, resulted in lower operating costs as compared to 1991.
WATER PRODUCTS GROUP
In 1992 the Water Products Group incurred an operating loss of $0.3
million, compared to a loss in 1991 of $1.3 million. WaterPro's
results reflected increased sales, partially offset by decreased margins.
Ionpure benefited from increased sales of capital goods, especially in
Europe. The 1992 operating loss reflects a number of unusual charges,
including nearly $1.0 million in restructuring charges at WaterPro.
LIQUIDITY AND CAPITAL
RESOURCES
Management believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient
to meet Eastern's 1994 capital expenditure and working capital
requirements, normal debt repayments and anticipated dividends to
shareholders.
In addition to cash and short-term investments in excess of $50
million, Eastern maintains a $60 million credit agreement plus
other lines, all of which are available for general corporate purposes.
At December 31, 1993 there were no borrowings outstanding under any of
these facilities.
Through a combination of increased equity and newly issued debt,
Eastern expects to continue its policy of capitalizing Boston Gas and
Midland with approximately equal amounts of equity and long-term debt.
Both subsidiaries maintain "A" ratings with the major rating agencies.
(Page 30)
In May 1993 Eastern contributed $20.0 million to Boston Gas which was
used to redeem $20.0 million of 9% debentures due 2001.
During the last quarter of 1993, Eastern repurchased 1,739,900 shares
of its common stock for $46.0 million.
To meet working capital requirements which reflect the seasonal nature
of the gas distribution business, Boston Gas had $106.3 million of notes
outstanding at December 31, 1993. In January 1994 Boston Gas issued
$36.0 million of Medium-Term Notes, the proceeds of which were used
to reduce short-term indebtedness. An additional $14.0 million is
available for issuance under a shelf registration through December 31,
1994 for the funding of capital expenditures and other corporate purposes.
Boston Gas also maintains a credit agreement which backs the issuance
of up to $90 million of commercial paper to fund its inventory of gas
supplies. At December 31, 1993, Boston Gas had outstanding $59.3 million
of commercial paper for this purpose. Anticipated increases in deferred
gas costs and pipeline transition costs resulting from the restructuring
of the natural gas industry are expected to be funded through additional
short term borrowings.
Consolidated capital expenditures, principally at Boston Gas, are
budgeted at approximately $60 million for 1994.
OTHER MATTERS
Boston Gas may have or share responsibility for environmental
remediation of certain former manufactured gas plant sites, as described
in Note 13 of Notes. A 1990 regulatory settlement agreement provides for
recovery by Boston Gas of environmental costs associated with such sites
over separate, seven-year amortization periods without a return on the
unamortized balance. Although Eastern does not possess at this time
sufficient information to reasonably determine the ultimate cost to
Boston Gas of such remediation, it believes that it is not probable that
such costs will materially affect Eastern's financial condition or
results of operations.
Eastern may share responsibility for environmental remediation in the
vicinity of a former coal tar processing facility in Everett,
Massachusetts, as described in Note 13. Eastern does not possess at
this time sufficient information to reasonably determine or estimate
the ultimate cost to it of such remediation.
(Page 31)
Consolidated Statements of Operations
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
REVENUES $1,099,847 $1,091,434 $993,070
OPERATING COSTS AND EXPENSES:
Operating costs 830,692 805,154 742,535
Selling, general and administrative
expenses 132,907 136,545 130,937
Depreciation and amortization 59,261 53,728 46,793
----------------------------------
OPERATING EARNINGS BEFORE WRITEDOWN 76,987 96,007 72,805
Writedown of WaterPro goodwill 45,000 -- --
----------------------------------
OPERATING EARNINGS AFTER WRITEDOWN 31,987 96,007 72,805
OTHER INCOME (EXPENSE):
Interest income 2,875 4,217 6,628
Interest expense (35,305) (33,924) (29,720)
Loss on sale of Ionpure (13,000) -- --
Other, net (3,179) (3,269) (2,620)
----------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (16,622) 63,031 47,093
PROVISION FOR INCOME TAXES 15,538 25,125 17,726
----------------------------------
EARNINGS (LOSS) BEFORE EXTRAORDINARY
ITEM AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (32,160) 37,906 29,367
EXTRAORDINARY ITEM: Reserve for coal
miners retiree health care, net of
tax benefit of $24,500 (45,500) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
FOR:
Income taxes -- 8,209 --
Post-retirement health care costs, net
of tax benefit of $4,463 -- -- (8,662)
----------------------------------
NET EARNINGS (LOSS) $ (77,660) $ 46,115 $ 20,705
----------------------------------
----------------------------------
EARNINGS (LOSS) PER SHARE BEFORE
EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $(1.43) $1.67 $1.30
EXTRAORDINARY ITEM: Reserve for coal
miners retiree health care, net of tax (2.02) -- --
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
FOR:
Income taxes -- .37 --
Post-retirement health care costs, net
of tax -- -- (.38)
----------------------------------
EARNINGS (LOSS) PER SHARE $(3.45) $2.04 $ .92
----------------------------------
----------------------------------
The accompanying notes are an integral part of these financial statements.
(Page 32)
Consolidated Balance Sheets
(In thousands)
- ---------------------------------------------------------------------------
December 31, 1993 1992
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 52,240 $ 105,440
Receivables, less reserves of $14,466 in 1993 and
$12,630 in 1992 145,523 137,958
Inventories 87,568 93,078
Deferred gas costs 65,802 40,868
Other current assets 11,995 9,378
-----------------------
TOTAL CURRENT ASSETS 363,128 386,722
INVESTMENTS:
Equity in U.S. Filter 44,292 --
Other investments 8,279 7,443
-----------------------
TOTAL INVESTMENTS 52,571 7,443
PROPERTY AND EQUIPMENT, AT COST 1,275,161 1,275,573
Less -- accumulated depreciation 489,196 475,794
-----------------------
NET PROPERTY AND EQUIPMENT 785,965 799,779
OTHER ASSETS:
Deferred post-retirement health care costs 101,182 99,126
Deferred charges and other costs, less
amortization 63,600 41,097
Goodwill, less amortization 13,231 90,899
-----------------------
-----------------------
TOTAL ASSETS $1,379,677 $1,425,066
-----------------------
-----------------------
The accompanying notes are an integral part of these financial statements.
(Page 33)
(In thousands)
- ---------------------------------------------------------------------------
December 31, 1993 1992
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 114,335 $ 62,247
Accounts payable 76,161 78,889
Accrued expenses 31,280 22,188
Other current liabilities 63,703 42,802
-----------------------
TOTAL CURRENT LIABILITIES 285,479 206,126
GAS INVENTORY FINANCING 59,297 48,631
LONG-TERM DEBT 328,939 357,109
RESERVES AND OTHER LIABILITIES:
Deferred income taxes 90,793 105,544
Post-retirement health care 104,730 103,760
Coal miners retiree health care 63,060 --
Preferred stock of subsidiary 29,197 29,436
Other reserves 54,444 56,554
-----------------------
TOTAL RESERVES AND OTHER LIABILITIES 342,224 295,294
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock $1.00 par value --
Authorized shares -- 50,000,000
Issued shares -- 21,644,378 in 1993 and
23,634,543 in 1992 21,644 23,635
Capital in excess of par value 61,778 112,050
Retained earnings 299,131 408,739
Treasury stock at cost -- 714,786 shares in 1993
and 1,013,320 shares in 1992 (18,815) (26,518)
-----------------------
TOTAL SHAREHOLDERS' EQUITY 363,738 517,906
-----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,379,677 $1,425,066
-----------------------
-----------------------
The accompanying notes are an integral part of these financial statements.
(Page 34)
Consolidated Statements of Cash Flows
(In thousands)
- ---------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS (LOSS) $(77,660) $ 46,115 $ 20,705
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization 59,261 53,728 46,793
Income taxes and tax credits (16,061) 1,355 4,487
Coal miners retiree health care 70,000 -- --
Writedown of WaterPro goodwill 45,000 -- --
Loss on sale of Ionpure 13,000 -- --
Other changes in assets and liabilities:
Receivables (17,003) (14,138) 2,049
Inventories (3,813) (17,355) 6,363
Deferred gas costs (24,934) (26,994) 2,793
Accounts payable 717 3,331 3,915
Other (9,970) 532 5,720
------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 38,537 46,574 92,825
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64,391) (82,891) (112,085)
Acquisitions, net of cash acquired -- -- (37,117)
Short-term investments (14,411) 20,769 (34,696)
Proceeds on sale of liquid barge business 14,950 -- --
Other (3,096) (6,816) (1,201)
------------------------------
NET CASH USED BY INVESTING ACTIVITIES (66,948) (68,938) (185,099)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (31,697) (31,634) (31,560)
Issuance of preferred stock by subsidiary -- 29,436 --
Changes in notes payable 53,286 (1,474) 14,553
Proceeds from issuance of long-term debt -- 53,000 42,000
Repayment of long-term debt (26,273) (26,324) (9,519)
Changes in gas inventory financing 10,666 17,461 (4,021)
Purchase of treasury shares (46,039) -- (692)
Other 857 756 (4,095)
------------------------------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES (39,200) 41,221 6,666
------------------------------
Net increase (decrease) in cash and cash
equivalents (67,611) 18,857 (85,608)
Cash and cash equivalents at beginning of
year 91,377 72,520 158,128
------------------------------
Cash and cash equivalents at end of year 23,766 91,377 72,520
Short-term investments 28,474 14,063 34,696
------------------------------
CASH AND SHORT-TERM INVESTMENTS $ 52,240 $105,440 $107,216
------------------------------
------------------------------
The accompanying notes are an integral part of these financial statements.
(Page 35)
Consolidated Statements of Shareholders' Equity
(In thousands)
- ------------------------------------------------------------------------------------------------------------
Common Capital in
Stock Excess of Retained Treasury
$1 Par Value Par Value Earnings Stock Total
BALANCE AT DECEMBER 31, 1990 $23,598 $112,279 $405,898 $(28,615) $513,160
ADD (DEDUCT):
Net earnings -- -- 20,705 -- 20,705
Dividends declared -- $1.40 per
share -- -- (31,560) -- (31,560)
Purchase of stock -- -- -- (692) (692)
Foreign currency translation
adjustment -- -- (392) -- (392)
Issuance of stock 15 343 -- 1,307 1,665
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1991 23,613 112,622 394,651 (28,000) 502,886
ADD (DEDUCT):
Net earnings -- -- 46,115 -- 46,115
Dividends declared -- $1.40 per
share -- -- (31,660) -- (31,660)
Foreign currency translation
adjustment -- -- (367) -- (367)
Unearned compensation related to
the issuance of restricted stock, net -- (1,079) -- 1,371 292
Issuance of stock 22 507 -- 111 640
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 23,635 112,050 408,739 (26,518) 517,906
ADD (DEDUCT):
Net loss -- -- (77,660) -- (77,660)
Dividends declared -- $1.40 per
share -- -- (31,711) -- (31,711)
Purchase of stock -- -- -- (46,039) (46,039)
Retirement of stock (2,000) (50,732) -- 52,732 --
Foreign currency translation
adjustment -- -- (237) -- (237)
Unearned compensation related to
the issuance of restricted stock, net -- 262 -- 105 367
Issuance of stock 9 198 -- 905 1,112
-------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $21,644 $ 61,778 $299,131 $(18,815) $363,738
-------------------------------------------------------------------
-------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
(Page 36)
Notes to Financial Statements
1. ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Eastern
Enterprises ("Eastern"), Boston Gas Company ("Boston Gas"),
Midland Enterprises Inc. ("Midland") and Water Products Group,
consisting of WaterPro Supplies Corporation ("WaterPro") and
Ionpure Technologies Corporation ("Ionpure"). See Note 10 concerning the
exchange in 1993 of Ionpure for an equity interest in United States Filter
Corporation ("U.S. Filter") in a non-cash transaction.
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: Highly liquid instruments with original maturities of three months
or less are considered cash equivalents.
Inventories: Inventories are valued at the lower of cost or market using
the first-in, first-out (FIFO) or average cost method. The components of
inventories were as follows:
(In thousands)
----------------------------------------------------------------------
December 31, 1993 1992
Supplemental gas supplies $53,152 $42,140
Other materials, supplies and marine fuel 17,984 23,886
Finished products 16,432 27,052
--------------------
$87,568 $93,078
--------------------
--------------------
Goodwill: Goodwill is amortized on a straight-line basis over a period of
40 years. Accumulated amortization as of December 31, 1992 amounted to
$7,016,000.
During 1993, management determined that WaterPro's goodwill was impaired
and it was written down to its realizable value as described in Note 12.
Accumulated amortization was eliminated to reflect the new cost basis
which will be amortized over its remaining life of 35 years.
Other current liabilities: Included in other current liabilities were:
(In thousands)
----------------------------------------------------------------------
December 31, 1993 1992
Pipeline transition costs
regulatory liability $24,174 $ --
Pipeline refunds due utility
customers 8,029 13,061
Reserves for insurance claims 8,285 8,480
Dividends payable 7,930 7,916
--------------------
Revenue recognition: Boston Gas' revenues are recorded when billed. Boston
Gas defers the cost of any firm gas that has been distributed, but is
unbilled at the end of a period, to the period in which the gas is billed
to customers. Midland recognizes revenue on tows in progress on the
percentage of completion method based on miles traveled. WaterPro
recognizes revenues on shipment.
Depreciation and amortization: Depreciation and amortization are provided
using the straight-line method at rates designed to allocate the cost of
property and equipment over their estimated useful lives. Because the
rates of depreciation on commercial equipment vary with each property
unit, it is impractical to state each rate individually. Excluding the
amortization of goodwill, depreciation and amortization as a percentage of
average depreciable assets was as follows:
--------------------------------------------------------------------
Years ended December 31, 1993 1992
Boston Gas 4.0% 3.8%
Midland 4.2% 4.1%
Water Products Group 13.7% 15.5%
Headquarters 11.2% 14.7%
----------------
Earnings per share: Earnings per share are based on the weighted average
number of common and common equivalent shares outstanding. Such shares
amounted to 22,530,000 in 1993, 22,654,000 in 1992 and 22,580,000 in 1991.
Fully diluted earnings per share were not materially different from
primary earnings per share.
2. BUSINESS SEGMENT INFORMATION
Operating results and other financial data are presented for Eastern's
three business segments: Boston Gas, a local gas distribution company
serving eastern and central Massachusetts; Midland, a barge transportation
(Page 37)
company operating on the inland waterways;
and Water Products Group, consisting of WaterPro, a distributor of
components for municipal water and wastewater systems and Ionpure, a
provider of water purification systems sold effective October 1, 1993.
(In thousands)
----------------------------------------------------------------------
1993 1992 1991
REVENUES:
Boston Gas $ 614,294 $ 594,330 $527,928
Midland 254,921 263,617 267,044
Water Products Group 230,632 233,487 198,098
-----------------------------------
$1,099,847 $1,091,434 $993,070
-----------------------------------
-----------------------------------
OPERATING EARNINGS:
Boston Gas $49,063 $63,120 $39,291
Midland 33,001 38,277 40,471
Water Products Group\1/<F1> (402) (249) (1,237)
Headquarters (4,675) (5,141) (5,720)
-----------------------------------
$76,987 $96,007 $72,805
-----------------------------------
-----------------------------------
IDENTIFIABLE ASSETS, NET OF DEPRECIATION AND RESERVES:
Boston Gas $ 834,440 $ 738,604 $ 644,273
Midland 373,144 395,097 391,714
Water Products Group 64,230 179,751 178,813
Headquarters 107,863 111,614 118,651
-----------------------------------
$1,379,677 $1,425,066 $1,333,451
-----------------------------------
-----------------------------------
CAPITAL EXPENDITURES:
Boston Gas $47,057 $51,136 $ 57,400
Midland 14,191 29,327 48,531
Water Products Group\2/<F2> 2,941 2,353 5,951
Headquarters 202 75 203
-----------------------------------
$64,391 $82,891 $112,085
-----------------------------------
-----------------------------------
DEPRECIATION AND AMORTIZATION:
Boston Gas $27,566 $22,493 $18,685
Midland 25,288 24,607 22,240
Water Products Group 6,062 6,183 5,447
Headquarters 345 445 421
------------------------------------
$59,261 $53,728 $46,793
------------------------------------
------------------------------------
<FN>
- -----------
<F1> \1/Excludes $45,000 charge to write down WaterPro goodwill in 1993.
<F2> \2/Excludes $37,117 for acquisitions in 1991.
Operating loss under "Headquarters" reflects unallocated corporate
general and administrative expenses. Identifiable assets under
"Headquarters" include cash and short-term investments and in
1993 Eastern's investment in U.S. Filter.
3. LONG-TERM OBLIGATIONS AND CURRENT DEBT
Credit agreement and lines of credit:
Eastern maintains a credit agreement with a group of banks which provides
for the borrowing by Eastern and certain subsidiaries of up to $60,000,000
at any time through December 31, 1994. In addition Eastern and certain
subsidiaries maintain lines of credit totaling $50,000,000. At December
31, 1993 and 1992 no borrowings were outstanding under these agreements.
The interest rate for borrowings is the agent bank's prime rate or, at
Eastern's option, various alternatives. The agreement and lines require
facility or commitment fees, which average 3/16 of 1% of the unused
portion. Boston Gas utilizes the credit agreement and the lines of credit
to back commercial paper borrowings. Included in current debt were
$106,300,000 and $54,944,000 of commercial paper and notes payable at
December 31, 1993 and 1992, respectively.
Gas inventory financing: Boston Gas funds its inventory of gas supplies
through external sources. All costs related to this funding are
recoverable from customers. Boston Gas maintains a credit agreement with a
group of banks which provides for the borrowing of up to $90,000,000 for
the exclusive purpose of funding its inventory of gas supplies or for
backing commercial paper issued for the same purpose. Boston Gas had
$59,297,000 and $48,631,000 of commercial paper outstanding to fund its
inventory of gas supplies at December 31, 1993 and 1992, respectively.
Since the commercial paper is supported by the credit agreement, these
borrowings have been classified as non-current in the accompanying
consolidated balance sheets. The credit agreement includes a one-year
revolving credit which may be converted to a two-year term loan at the
option of Boston Gas if the one-year revolving credit is not renewed
(Page 38)
by the banks. Boston Gas may select interest rate alternatives based on
prime or Eurodollar rates and requires a commitment fee of 1/8 of 1% on the
unused portion. No borrowings were outstanding under this agreement during
1993 and 1992.
LONG-TERM DEBT:
(In thousands)
-----------------------------------------------------------------------------
December 31, 1993 1992
BOSTON GAS:
7.95%-9% Sinking Fund Debentures, due 1997-2001 $ 63,142 $ 83,142
8.33%-9.75% Medium-Term Notes, Series A,
due 2005-2022 100,000 100,000
First Mortgage Bonds --
8.375% Series, due 1996 3,360 3,840
Capital leases 7,008 8,240
Less -- current portion (2,165) (1,712)
--------------------
171,345 193,510
--------------------
MIDLAND:
First Preferred Ship Mortgage Bonds -- 9.9% Series,
due 2008 48,692 48,827
8.1%-9.85% Medium-Term Notes, Series A,
due 2002-2012 75,000 75,000
Promissory Note, due 1995 3,031 5,456
8.8% Ship Financing Bond,
due 1996 938 1,314
Capital leases 35,804 38,593
Less -- current portion (5,871) (5,591)
--------------------
157,594 163,599
--------------------
$328,939 $357,109
--------------------
--------------------
Description of debt: In 1992 Boston Gas filed a shelf registration
covering the issuance of up to $50,000,000 of Medium-Term Notes through
December 31, 1994. In January 1994 Boston Gas issued $36,000,000 of
Medium-Term Notes, Series B, with a weighted average maturity of 24 years
and coupon of 6.94%. Proceeds from the issuance reduced current debt.
Boston Gas' First Mortgage Bonds are secured by a first mortgage lien on
a portion of Boston Gas' utility properties and franchises.
Midland's First Preferred Ship Mortgage Bonds are secured by certain
transportation equipment. The Ship Financing Bond was assumed pursuant to
an acquisition of certain marine companies. This obligation is guaranteed
by the U.S. Government and is secured by certain transportation equipment.
Midland's promissory note bears interest at variable rates based upon
the prime rate or, at its option, Eurodollar or certificate of deposit
quotes.
Capital leases consist of property and equipment lease obligations with
an average interest rate of 9.6%. Minimum lease payments under these
agreements are due in installments through 2003.
Five-year sinking funds and operating lease commitments: In addition to
the property and equipment financed under capital leases, Eastern and its
subsidiaries lease certain facilities, vessels and equipment under long-
term operating leases which expire on various dates through the year 2006.
Total rentals charged to expense were $13,169,000 in 1993, $12,563,000 in
1992 and $10,923,000 in 1991.
Sinking fund requirements and maturities, net of amounts acquired in
advance are $8,036,000, $6,675,000, $8,239,000, $15,049,000 and
$13,016,000 for 1994 through 1998, respectively.
Future minimum lease commitments under operating leases are as follows:
Operating lease
(In thousands) commitments
----------------------------------------------------------------------------
1994 $10,374
1995 9,327
1996 7,661
1997 4,501
1998 1,613
Thereafter 4,979
-------
$38,455
-------
-------
(Page 39)
4. PREFERRED STOCK OF SUBSIDIARY
On July 23, 1992 Boston Gas sold 1,200,000 shares of variable-term
cumulative preferred stock, which is non-voting and has a
liquidation value of $25 per share. On July 13, 1993, Boston Gas
selected a Final Term of September 1, 2018 and fixed the dividend
rate at 6.421%. Dividends are paid quarterly, commencing
September 1, 1993. The Final Term requires 5% annual
sinking fund payments beginning on September 1,
1999 and is non-callable for 10 years.
5. STOCK PLANS
Eastern has a stock option plan which provides for the
issuance of non-qualified stock options, incentive
stock options and stock appreciation rights ("SARs")
to its officers and key employees. Options and SARs
may be granted at prices not less than fair market value
on the date of grant for periods not extending beyond
ten years from the date of grant. Exercise of an
option requires surrender of the related
SAR, if any. Exercise of an SAR requires surrender of
the related option.
Shares available for future grants under the
stock option plans were 199,334 at December 31,
1993, 188,806 at December 31, 1992, and 162,939 at
December 31, 1991. Stock options exercisable at
December 31, 1993 and 1992 were 389,188 and 330,325,
respectively. SARs exercisable at December 31,
1993 and 1992 were 121,100 and 116,228, respectively.
Option activity during the past three years was as follows:
Average Stock
option price options SARs
---------------------------------------------------------
Outstanding at
December
31, 1990 $24.14 375,811 166,406
Granted 27.34 313,500 31,750
Exercised 24.29 (16,357) (26,711)
Surrendered 23.54 (26,711) (50)
Canceled 25.45 (14,962) (1,800)
--------------------------------
Outstanding at
December
31, 1991 $25.72 631,281 169,595
Granted 27.06 2,000 --
Exercised 21.79 (20,569) (22,647)
Surrendered 21.49 (22,647) (1,850)
Canceled 28.47 (5,220) (2,410)
---------------------------------
Outstanding at
December
31, 1992 $26.00 584,845 142,688
Exercised 21.93 (10,109) (8,588)
Surrendered 21.97 (8,588) (120)
Canceled 29.16 (1,940) (970)
---------------------------------
Outstanding at
December
31, 1993 $26.12 564,208 133,010
---------------------------------
---------------------------------
Under Restricted Stock Plans for key employees and non-employee
trustees, Eastern awarded 4,000 and 52,500 shares in 1993 and 1992.
Eastern recognized compensation expense of $367,000 in 1993 and $292,000
in 1992 in accordance with the vesting terms of these awards. Shares
available for future awards under these plans were 48,500 shares at
December 31, 1993 and 22,500 at December 31, 1992.
6. COMMON STOCK PURCHASE RIGHTS
On February 22, 1990, Eastern declared a distribution to shareholders of
record on March 5, 1990, pursuant to the terms of a Common Stock Rights
Agreement between Eastern and The Bank of New York, of one common stock
purchase right for each outstanding share of common stock. Each right
would initially entitle the holder to purchase one share of common stock
at an exercise price of $100.00, subject to adjustment to prevent
dilution. The rights become exercisable on the 10th business day
after a person
(Page 40)
acquires 20% or more of Eastern's stock or commences a tender offer for
20% or more of Eastern's stock, or on the 10th business day after
Eastern's Board of Trustees determines that a shareholder owning at least
10% of Eastern's stock is an "adverse person," based on criteria specified
in the rights agreement. The rights may be redeemed by Eastern at a price
of $.01 at any time prior to the 10th day after a 20% position has been
acquired. The rights will expire March 5, 2000.
If Eastern is acquired in a merger or other business combination, each
right will entitle its holder to purchase common shares of the acquiring
company having a market value of twice the exercise price of each right
(i.e., at a 50% discount). If an acquiror purchases 20% of Eastern's
common stock or has been determined to be an "adverse person," each right
will entitle its holder to purchase a number of Eastern's common shares
having a market value of twice the right's exercise price.
7. INTEREST EXPENSE
(In thousands)
----------------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Interest on long-term debt $31,326 $31,781 $29,427
Other, including amortization of debt expense 3,754 3,375 3,838
Less -- capitalized interest (1,164) (1,637) (3,545)
Subsidiary preferred stock dividends 1,389 405 --
-------------------------------
Interest expense $35,305 $33,924 $29,720
-------------------------------
-------------------------------
Interest payments $34,307 $33,390 $28,554
-------------------------------
-------------------------------
8. OTHER INCOME (EXPENSE)
(In thousands)
----------------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Provision for environmental expenses $ (5,715) $ (2,500) $ (5,400)
Gain on termination of pension plan in 1987 -- -- 3,500
Gain on sale of liquid barge business 7,988 -- --
Closing of barge construction facility (3,500) -- --
Other (1,952) (769) (720)
------------------------------------
$ (3,179) $ (3,269) $ (2,620)
------------------------------------
------------------------------------
9. INCOME TAXES
The table below reconciles the statutory U.S. Federal income tax provision
(In thousands)
--------------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Statutory rate 35% 34% 34%
Computed provision for income taxes at statutory Federal rate $(5,818) $21,431 $16,012
Increase (decrease) from statutory rate resulting principally from:
Writedown of goodwill 15,750 -- --
State taxes, net of Federal benefit 1,833 2,468 1,649
Effect of change in Federal income tax rate 1,414 -- (1,500)
Unbenefited capital losses 1,068 84 --
Amortization of goodwill 839 907 863
Unbenefited foreign losses 373 470 1,181
Other, net 79 (235) (479)
--------------------------------
Provision for
income taxes $15,538 $25,125 $17,726
--------------------------------
--------------------------------
Following is a summary of the provision for income taxes:
(In thousands)
---------------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Current:
Federal $ 6,083 $14,662 $10,783
State 1,500 3,139 1,852
Foreign -- (25) 219
-------------------------------
Total current
provision 7,583 17,776 12,854
Deferred:
Federal 6,635 6,749 4,226
State 1,320 600 646
-------------------------------
Total deferred
provision 7,955 7,349 4,872
-------------------------------
Provision for
income taxes $15,538 $25,125 $17,726
-------------------------------
-------------------------------
Tax payments $10,809 $ 6,656 $ 8,817
-------------------------------
(Page 41)
Effective January 1, 1992, Eastern adopted Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes."
Eastern recorded a credit to income of approximately $8,209,000 or $.37
per share, which represents the net decrease to the deferred tax
liabilities as of that date. This amount has been reflected in the
consolidated statement of earnings as the cumulative effect of the
accounting change for non-utility operations. The cumulative effect for
Boston Gas and the impact of the 1993 tax increase have been recorded as a
regulatory asset and are being recovered in accordance with Boston Gas'
1993 rate order.
The 1991 tax provision was reduced by $1,755,000 of credits no longer
applicable under SFAS 109.
The Revenue Reconciliation Act of 1993 increased the statutory Federal
income tax rate from 34% to 35%, effective January 1, 1993. The provision
for income tax in 1993 includes approximately $468,000 for the impact of
the rate change on the current earnings, and approximately $1,414,000 to
reflect the additional deferred tax requirements for non-utility
operations as of January 1, 1993, in accordance with SFAS 109.
Significant items making up deferred tax liabilities and deferred tax
assets are as follows:
(In thousands)
------------------------------------------------------------------------------------------
December 31, 1993 1992
Assets:
Unbilled revenue $ 30,924 $ 21,878
Coal retiree health care 24,500 --
Regulatory liabilities 5,494 6,797
Deferred investment tax credits 5,437 5,567
Bad debt reserve 5,366 4,390
Other 13,038 12,795
------------------------
Total deferred tax assets 84,759 51,427
Liabilities:
Accelerated depreciation (130,379) (118,617)
Deferred gas costs (23,861) (15,526)
Other (18,098) (18,913)
------------------------
Total deferred tax liabilities (172,338) (153,056)
------------------------
Total deferred taxes $ (87,579) $ (101,629)
--------------------------
--------------------------
During 1991, deferred income taxes were provided for
significant timing differences in the
recognition of revenue and expenses for tax and
financial statement purposes. Principal
components of the 1991 deferred provision were
$2,807,000 for employee benefit reserves and $2,794,000
for accelerated depreciation, partially offset by a credit of $1,021,000
for deferred gas costs.
10. IONPURE DISPOSITION
On December 1, 1993 Eastern exchanged the stock of its
wholly owned subsidiary, Ionpure, for 2,027,395
shares or 22% of the voting stock of U.S. Filter plus
$100,000. In connection with the exchange, in the third
quarter of 1993 Eastern recorded a pre-tax charge of
$13,000,000 ($9,300,000 after-tax or $.41 per share)
to write down Ionpure assets to their estimated
realizable value, net of related transaction
expenses. The tax credit of $3,700,000 reflects the
benefit of ordinary deductions from the
transaction and partial utilization of capital
losses against current capital gains. Since Ionpure
was operated for the account of U.S. Filter after October
1, 1993, its subsequent operating results have been
excluded from Eastern's consolidated results.
Eastern accounts for its investment in U.S. Filter
using the equity method, with a lag of one fiscal
quarter. The difference of approximately $19,700,000
between the carrying value of Eastern's investment and
its share of the underlying net assets of U.S. Filter as
of December 1, 1993 is being amortized over a period of 40 years.
11. ACQUISITIONS
On January 10, 1991 Eastern acquired certain assets and
operations of A & P Water and Sewer Supplies, Inc., a
distributor of components for municipal water systems
in the mid-Atlantic region, for approximately $35,500,000
in cash. Eastern also acquired
(Page 42)
another operation in 1991 for $1,600,000. These acquisitions have
been accounted for as purchases. Accordingly, the acquired
assets and liabilities were recorded at their estimated
fair values at the date of acquisition.
Results of operations for these acquisitions have been
included in Eastern's consolidated results since
the dates of acquisition. Results of operations from
the beginning of the year to the dates of acquisition
would not have been material to Eastern.
12. WRITEDOWN OF WATERPRO GOODWILL
During the fourth quarter of 1993, Eastern determined
that a significant impairment of the fair value
of WaterPro had occurred due to a permanent erosion in
margins and lack of industry growth. The impairment was
determined by discounting at 10% WaterPro's cash flows,
as projected in management's five year forecast. The
discount rate reflects WaterPro's projected
weighted average cost of capital. Accordingly,
Eastern wrote down the book value of WaterPro by taking
a $45,000,000 charge against the goodwill associated with
the purchase of WaterPro's operations. No tax benefit
has been recognized against this charge.
13. ENVIRONMENTAL MATTERS
There are 37 identified former manufactured gas
plant ("MGP") sites located within Boston Gas' service
territory. Massachusetts Electric Company, a wholly-
owned subsidiary of New England Electric System
("NEES"), has assumed responsibility for
remediating one such MGP site in Lynn, Massachusetts,
pursuant to the decision of the First Circuit Court of
Appeals in John S. Boyd, Inc. et al. v. Boston Gas
---------------------------------------
Company, et al., which affirmed that NEES and its
----------------
subsidiaries are responsible for remediating the site as
prior owners and operators, and that Boston Gas did not
assume any liability for such remediation when it
acquired the property from NEES in 1973.
Thirteen other former MGP sites within Boston Gas'
service territory are currently owned by Boston
Gas, and 10 of such 13 sites were also acquired from NEES
and its subsidiaries. Boston Gas is currently working
with the Massachusetts Department of Environmental
Protection (the "DEP") to determine the extent of
remediation which may be required at such 13 sites. A
1990 settlement agreement with the Massachusetts
Department of Public Utilities provides for
recovery by Boston Gas through the cost of gas
adjustment clause of any environmental response costs
associated with MGP sites over separate, seven-year
amortization periods without a return on the unamortized
balance. Due to uncertainties as to the
extent and sources of releases of compounds, the
nature and extent of any required remediation and the
extent of contribution or assumption of responsibility
by NEES for the sites acquired from it, Eastern
does not possess at this time sufficient information
to reasonably determine the ultimate cost to Boston Gas
of remediation at such sites, but believes that it
is not probable that such costs will materially affect
Eastern's financial condition or results of operations.
Eastern is aware of certain non-utility sites,
associated with operations in which it is no longer
involved, for which it may have or share environmental
remediation responsibility. While Eastern has provided
reserves that cover some anticipated costs of
remediation of the site of a former coal tar processing
facility in Everett, Massachusetts (the
"Facility"), and believes that it has provided
reserves that are adequate to cover the estimated costs
of remediation of the other such sites, the extent of
Eastern's potential liability at such sites is
not yet determinable.
The Facility, which was located on a 10-acre parcel of land
formerly owned by Eastern, was operated by predecessors of
Allied-Signal, Inc. from the early 1900s until 1937 and by
Koppers Company, predecessor of Beazer East, Inc. (and
Eastern's controlling stockholder until 1951) from 1937
until 1960 when the Facility was shut down. The Facility
processed coal tar purchased from Eastern's adjacent
by-product coke plant, also shut down in
(Page 43)
1960. Eastern, Beazer and Allied-Signal entered into
an Administrative Consent Order with the 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 bear 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 and in the
Island End River sediments. The National Oceanic and
Atmospheric Administration and the Coast Guard have
recently begun working with the DEP in connection with
further investigation and possible remediation of
river sediment conditions. In addition, the U.S.
Environmental Protection Agency is currently
evaluating the Facility site and the Island End River for
possible designation as a federal priority Superfund
site. In light of uncertainties as to the
extent and sources of releases of compounds, the
nature of any required remediation, the area and
volume of soil, ground water and/or sediments that may be
included, the possibility of participation by additional
potentially responsible parties and the
apportionment of liability, Eastern does not possess at
this time sufficient information to reasonably
determine or estimate the ultimate cost to it of such
remedial measures. Eastern may be entitled to recovery
against certain insurers with respect to this matter.
14. COAL MINERS RETIREE HEALTH CARE
In September 1993 Eastern received notice from the
Social Security Administration claiming that
Eastern is responsible for health care and death
benefit premiums for certain retired coal miners and
their beneficiaries under the newly-effective federal
Coal Industry Retiree Health Benefit Act of 1992 (the
"Coal Act"). The amount of premiums requested
aggregates in excess of $5,000,000 to cover an
initial 20-month period ending September 30, 1994,
and relates to retired miners who are said to have
worked for Eastern's Coal Division prior to the
transfer of those operations to a subsidiary in 1965.
Eastern has filed a lawsuit in the Federal District
Court for Massachusetts challenging the
constitutionality of the new statute, as applied to it,
and asserting a claim against Peabody Holding
Company, Inc. ("Peabody"), to which Eastern sold its
coal subsidiaries in 1987, that any liabilities under
the Coal Act should be borne by Peabody and such
subsidiaries. Eastern has posted security to delay
payment of premiums pending the outcome of its
constitutional challenge. Eastern is aware of several
other lawsuits challenging the constitutionality of the
Coal Act.
Eastern has recorded a reserve of $70,000,000 to
provide for its undiscounted obligations under the Coal
Act. This amount has been reflected as an
extraordinary item of $45,500,000 net of tax or
$2.02 per share, in accordance with the
conclusions of the Financial Accounting Standard Board's
Emerging Issues Task Force, which has determined that an
entity such as Eastern which no longer has operations in
the coal industry should account for its entire
obligation under the Coal Act as an extraordinary
item. If Eastern prevails in its constitutional challenge
or its claim against Peabody, its obligation
under the Coal Act would be eliminated. Eastern's
obligation could be more than $100 million depending
on other factors including administrative review of
assigned individuals, medical inflation rates,
Medicare reimbursements and other changes in government
health care programs.
(Page 44)
15. RETIREE BENEFITS
Eastern and its subsidiaries, through
various company-administered plans and other union
retirement and welfare plans under collective bargaining
agreements, provide retirement benefits for the
majority of their employees, including pensions and
certain health care and life insurance benefits. Normal
retirement age is 65 but provision is made for
earlier retirement. Pension benefits for salaried plans
are based on salary and years of service, while
union retirement and welfare plans are based on
negotiated benefits and years of service. Employees
who are participants in the pension plans become
eligible for health care benefits if they reach
retirement age while working for Eastern.
The funding of retirement and employee benefit plans
is in accordance with the requirements of the plans
and collective bargaining agreements and, where
applicable, in sufficient amounts to satisfy the
"Minimum Funding Standards" of the Employee Retirement
Income Security Act ("ERISA").
Effective January 1, 1991, Eastern adopted Statement of
Financial Accounting Standards No. 106 ("SFAS
106"), "Employers" Accounting for Post-
retirement Benefits Other Than Pensions,'' by
immediately recognizing the cumulative effect of the
accounting change. SFAS 106 requires that the expected
cost of post-retirement benefits other than pensions
be charged to expense during the period that the employee
renders service. At the date of adoption, the cumulative
effect of the accounting change ("transition
obligation") was $102,245,000, of which
$89,120,000 was attributable to Boston Gas. With
regulatory approval, Boston Gas has deferred the cost of
the transition obligation and the amount by
which expense under SFAS 106 exceeds expense under the
current benefit payments. The impact of immediate
recognition of the balance of the transition obligation
was $13,125,000 pre-tax or $8,662,000 net of tax, equal
to $.38 per share. Boston Gas' 1993 rate order
provides a four year transition to full recovery
of tax deductible amounts, which approximate SFAS 106
expense including amortization of the
transition charges. The net cost for these plans
and agreements charged to expense was as follows:
PENSIONS
(In thousands)
-------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Service cost $ 4,556 $ 4,176 $ 3,894
Interest cost on projected benefit obligation 9,869 9,033 8,353
Actual return on plan assets (21,763) (12,961) (25,796)
Net amortization and deferral 10,729 2,590 17,378
-----------------------------------
Total net pension cost of company-administered plans 3,391 2,838 3,829
Multi-employer union retirement and welfare plans 377 321 298
-----------------------------------
Total net pension cost $ 3,768 $ 3,159 $ 4,127
-----------------------------------
-----------------------------------
HEALTH CARE
(In thousands)
-------------------------------------------------------------------------------------------------
Years ended December 31, 1993 1992 1991
Service cost $ 1,590 $ 1,569 $ 1,511
Interest cost on accumulated benefit obligation 8,065 8,955 8,644
Actual return on plan assets (282) (173) --
Net amortization and deferral (1,241) (247) --
Boston Gas deferral (2,368) (4,447) (5,130)
---------------------------------------
Total retiree health care cost $ 5,764 $ 5,657 $ 5,025
---------------------------------------
---------------------------------------
(Page 45)
The following table sets forth the funded status of company-administered
plans and amounts recorded in Eastern's consolidated balance sheet as of
December 31, 1993 and 1992 using actuarial measurement dates as of October
1, 1993 and 1992:
(In thousands) Pensions Health Care
-----------------------------------------------------------------------------------------------------
1993 1992 1993 1992
Accumulated benefit obligation:
Vested benefits $104,355 $101,276 $ 67,492 $ 84,696
Non-vested benefits 13,275 11,773 15,741 29,441
-------------------------------------------------------
117,630 113,049 83,233 114,137
Effect of future salary increases 18,820 18,477 -- --
-------------------------------------------------------
Projected benefit obligation ("PBO") $136,450 $131,526 $ 83,233 $ 114,137
-------------------------------------------------------
-------------------------------------------------------
Plan assets at fair value $152,925 $147,175 $ 10,856 $ 5,573
Less PBO 136,450 131,526 83,233 114,137
-------------------------------------------------------
Plan assets in excess of (less than)
PBO 16,475 15,649 (72,377) (108,564)
Unrecognized net obligation at December
31, 1985 being amortized over 15 years 2,951 3,324 -- --
Unrecognized net (gain) loss (19,638) (12,370) (15,171) 8,145
Unrecognized prior service cost
(benefit) 15,837 8,315 (17,182) (8,341)
Amounts contributed to plans during
fourth quarter 476 375 -- 5,000
Unfunded accumulated benefits (1,291) (918) -- --
-------------------------------------------------------
Net asset (reserve) at December 31 $ 14,810 $ 14,375 $(104,730) $(103,760)
-------------------------------------------------------
-------------------------------------------------------
The above vested health care benefits include $58,380,000
and $70,128,000 for retirees in 1993 and 1992,
respectively. To fund health care benefits under its
collective bargaining agreements, in 1991 Boston
Gas established a Voluntary Employee Beneficiary
Association ("VEBA"), to which it makes contributions
from time to time. Plan assets are invested in
equity securities, fixed income investments and money
market instruments.
Following are the assumptions used in the
actuarial measurements:
-----------------------------------------------
1993 1992
Discount rate 7.5% 7.5%
Return on plan assets 8.5% 8.5%
Increase in future
compensation 5.0% 5.0%
Health care inflation
trend 12.0% 14.0%
-----------------
The health care inflation trend is assumed to drop gradually to 5% after 7
years. A one-percentage-point increase in the assumed health care cost
trend would have increased the net periodic post-retirement benefit cost
charged to expense and the accumulated benefit obligation by $62,000 and
$6,440,000, and, $89,000 and $9,993,000, respectively, in 1993 and 1992.
(Page 46)
16. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments:
Cash, short-term investments and debt: The carrying amounts approximate
fair value because of the short maturity of those instruments. Short-term
debt includes notes payable, gas inventory financing, and other
miscellaneous short-term liabilities.
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:
(In thousands)
---------------------------------------------------------------------------------------------------
December 31, 1993 1992
----------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term investments $ 52,240 $ 52,240 $105,440 $105,440
Short-term debt 165,596 165,596 103,575 103,575
Long-term debt 336,975 390,336 364,412 394,290
Preferred stock of subsidiary 29,197 30,600 29,436 29,436
-----------------------------------------------------
17. UNAUDITED QUARTERLY FINANCIAL INFORMATION
(In thousands, except per share amounts)
---------------------------------------------------------------------------------------------------
For the three months ended 1993: Mar. 31, June 30, Sept. 30, Dec. 31,
Revenues $368,368 $259,745 $195,917 $275,817
Operating earnings (loss) 46,617 13,760 (5,273) (23,117)
Pretax earnings (loss) 38,190 5,567 (26,431) (33,948)
Earnings (loss) before extraordinary item 23,025 3,264 (20,998) (37,451)
Net earnings (loss) 23,025 3,264 (20,998) (82,951)
Earnings (loss) per share before
extraordinary item $1.02 $.14 $ (.93) $ (1.66)
Earnings (loss) per share 1.02 .14 (.93) (3.68)
-----------------------------------------------------
1992:
Revenues $356,589 $250,251 $203,264 $281,330
Operating earnings 55,442 19,535 2,033 18,997
Pretax earnings (loss) 48,003 12,290 (5,206) 7,944
Earnings (loss) before accounting change 29,825 7,384 (3,559) 4,256
Net earnings (loss) 38,034 7,384 (3,559) 4,256
Earnings (loss) per share before
accounting change $1.32 $.32 $ (.15) $.18
Earnings (loss) per share 1.69 .32 (.15) .18
-----------------------------------------------------
(Page 47)
Independent Auditor's Report
To the Trustees and Shareholders of Eastern Enterprises:
We have audited the accompanying consolidated
balance sheets of Eastern Enterprises (a Massachusetts
voluntary association) and subsidiaries as of December
31, 1993 and 1992, and the related consolidated
statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended
December 31, 1993. These financial statements are the
responsibility of the company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of
material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also
includes assessing the accounting principles used and
significant estimates made by management, as well as
evaluating the overall financial statement
presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the
financial position of Eastern Enterprises and subsidiaries
as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three
years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As explained in Notes 15 and 9 to the consolidated
financial statements, effective January 1, 1991 and
January 1, 1992, respectively, the company changed its method
of accounting for post-retirement benefits other than
pensions and income taxes.
Arthur Andersen & Co.
Boston, Massachusetts,
February 4, 1994.
Management's Report on Responsibility
The management of Eastern Enterprises is responsible for
the preparation, integrity and fair presentation of the
company's financial statements. These statements
have been prepared in accordance with generally
accepted accounting principles and, as such, include amounts
based on management's informed judgments and estimates. The
financial statements have been audited by the independent
accounting firm of Arthur Andersen & Co., 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, financial results
and accounting principles and practices. The Audit Committee
also annually recommends to the Board of Trustees the
selection of independent auditors.
J. Atwood Ives
Chairman and Chief Executive Officer
Walter J. Flaherty
Senior Vice President and Chief Financial Officer
James J. Harper
Vice President and Controller
(Page 48)
Summary of Operations
(In thousands,
except per share
amounts)
- ---------------------------------------------------------------------------------------------------------------------
Years ended
December 31, 1993 1992 1991 1990 1989 1988
REVENUES:
Boston Gas $ 614,294 $ 594,330 $ 527,928 $ 554,509 $ 559,692 $ 449,437
Midland 254,921 263,617 267,044 269,061 233,958 222,492
Water Products
Group 230,632 233,487 198,098 126,452 46,436 --
------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,099,847 1,091,434 993,070 950,022 840,086 671,929
Operating costs
and expenses 1,022,860 995,427 920,265 863,696 764,070 606,251
OPERATING EARNINGS:
Boston Gas 49,063 63,120 39,291 40,179 45,900 43,092
Midland 33,001 38,277 40,471 43,950 34,535 27,381
Water Products
Group (402) (249) (1,237) 5,680 2,851 --
Headquarters (4,675) (5,141) (5,720) (3,483) (7,270) (4,795)
------------------------------------------------------------------------------------------------
OPERATING
EARNINGS BEFORE
WRITEDOWN: 76,987 96,007 72,805 86,326 76,016 65,678
Writedown of
WaterPro
goodwill (45,000) -- -- -- -- --
-----------------------------------------------------------------------------------------------
OPERATING
EARNINGS AFTER
WRITEDOWN: 31,987 96,007 72,805 86,326 76,016 65,678
OTHER INCOME (EXPENSE):
Interest income 2,875 4,217 6,628 11,108 9,612 8,875
Interest expense (35,305) (33,924) (29,720) (27,344) (24,945) (24,241)
Loss on sale of
Ionpure (13,000) -- -- -- -- --
Peabody-
related\1/<F1> -- -- -- 13,887 13,621 14,003
Other, net (3,179) (3,269) (2,620) 4,590 3,335 1,897
-----------------------------------------------------------------------------------------------
PRE-TAX EARNINGS
(LOSS) (16,622) 63,031 47,093 88,567 77,639 66,212
Provision for
income taxes 15,538 25,125 17,726 24,613 21,086 15,539
-----------------------------------------------------------------------------------------------
EARNINGS (LOSS)
BEFORE
EXTRAORDINARY
ITEM AND
ACCOUNTING
CHANGES (32,160) 37,906 29,367 63,954 56,553 50,673
Extraordinary
item net of
tax\2/<F2> (45,500) -- -- -- -- --
Cumulative
effect of
accounting
change for:
SFAS No. 109 -- 8,209 -- -- -- --
SFAS No. 106 -- -- (8,662) -- -- --
------------------------------------------------------------------------------------------------
NET EARNINGS
(LOSS) $ (77,660) $ 46,115 $ 20,705 $ 63,954 $ 56,553 $ 50,673
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
FINANCIAL
STATISTICS AND
RATIOS:
Total assets $1,379,677 $1,425,066 $1,333,451 $1,199,214 $1,148,727 $1,087,224
Cash from
operating
activities 38,537 46,574 92,825 88,042 81,278 68,840
Capital
expenditures\3/<F3> 64,391 82,891 112,085 96,779 89,587 63,101
Long-term debt 328,939 357,109 327,361 296,578 260,367 263,587
Shareholders'
equity 363,738 517,906 502,886 513,160 498,017 472,750
Debt/equity
ratio 47/53 41/59 39/61 37/63 34/66 36/64
Return on total
capital 5.0%\4/<F4> 7.7% 4.8% 10.2% 9.5% 9.2%
Return on equity 4.5%\4/<F4> 9.0% 4.1% 12.6% 11.7% 11.0%
SHARES
OUTSTANDING AT
DECEMBER 31 20,930 22,621 22,543 22,504 23,213 23,166
PER SHARE DATA:
Earnings (loss)
before
extraordinary
item and
accounting
change $ (1.43) $ 1.67 $ 1.30 $ 2.77 $ 2.43 $ 2.18
Net earnings
(loss) (3.45) 2.04 .92 2.77 2.43 2.18
Dividends
declared 1.40 1.40 1.40 1.40 1.40 1.30
Shareholders'
equity 17.38 22.89 22.31 22.80 21.45 20.41
--------------------------------------------------------------------------------------------
<FN>
<F1> \1/Eastern's 15.01% investment in Peabody Holding Company, Inc. (Peabody), sold in 1990.
<F2> \2/Charge of $70,000 pretax or $2.02 per share to reserve for coal miners retiree health care.
<F3> \3/Excludes $37,117 in 1991, $10,931 in 1990 and $93,689 in 1989 for acquisitions by Water Products Group.
<F4> \4/Excludes non-recurring net charges of $98,800 for the writedown of WaterPro goodwill, loss on sale of Ionpure and
a reserve for coal miners retiree health care.
(Page 50)
CASH DIVIDENDS PER SHARE
- -----------------------------------
Quarter 1993 1992
First $ .35 $ .35
Second .35 .35
Third .35 .35
Fourth .35 .35
------------------
Total $1.40 $1.40
------------------
------------------
STOCK PRICE RANGE
- ---------------------------------------------------------
Quarter High Low High Low
First $29 3/8 $26 3/8 $28 1/2 $23 1/2
Second 30 26 3/8 27 3/4 25 1/4
Third 29 1/4 26 7/8 28 5/8 24 3/4
Fourth 29 25 1/2 28 1/2 24 1/8
----------------------------------------
APPENDIX TO EXHIBIT 13.1
NARRATIVE DESCRIPTION OF GRAPHIC AND IMAGE MATERIAL APPEARING IN PAPER FORMAT
VERSION OF FORM 10-K
Pages 26 through 29 contain bar graphs of revenues, operating earnings,
capital structure and capital expenditures for 1989 through 1993. The data
points comprising these graphs appear in the table on page 48 under the
heading, "Summary of Operations."
Capital expenditures by business segment for 1991 through 1993 are shown
in Note 2 of Notes to Financial Statements. Capital expenditures, in millions
of dollars, for 1989 and 1990 were as follows:
1989 1990
---- ----
Boston Gas ................................. 40.7 42.3
Water Products Group and Other ............. .8 3.6
Midland .................................... 48.1 50.9
--- ---
Total .................................. 89.6 96.8
--- ---
--- ---
The figures exclude acquisitions in the Water Products group.