Exhibit 99.1 Financial statements included in Eastern's Annual Report on Form
10_K for the year ended December 31, 1999:
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share amounts) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
(In thousands) 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
(In thousands) 1999 1998 1997
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<CAPTION>
Accumulated
Other
Common Capital In Comprehensive
Stock Excess of Retained Earnings Treasury
(In thousands) $1 Par Value Par Value Earnings (Loss) Stock Total
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
======= ======== ======== ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
The following is a summary of the reclassification adjustments and the
income tax effects for the components of other comprehensive income:
<TABLE>
<CAPTION>
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
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
====== ======= ======= ===== =======
</TABLE>
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.
<PAGE>
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.
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
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
(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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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
======= ======= =======
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.
<PAGE>
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)
========= =========
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.
<PAGE>
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 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.
<PAGE>
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").
<PAGE>
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.
<PAGE>
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:
<TABLE>
<CAPTION>
Pensions Health Care
(In thousands) 1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $ - $ -
======== ======== ========= ========
</TABLE>
<PAGE>
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%
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.
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1999 1998
-------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
</TABLE>
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.
<TABLE>
<CAPTION>
For the three months ended
(In thousands, except per share amounts) Mar. 31, June 30, Sept. 30, Dec. 31,
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
===== ===== ===== =====
</TABLE>
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 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
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.
<TABLE>
<CAPTION>
(In millions) 1999 1998 Change
---- ---- ------
<S> <C> <C> <C>
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%
====== ======
</TABLE>
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 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.
<TABLE>
1998 COMPARED TO 1997
<CAPTION>
(In millions) 1998 1997 Change
---- ---- ------
<S> <C> <C> <C>
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)%
====== ========
</TABLE>
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.
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
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.
[Graphic Omitted]
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.
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.
<PAGE>
Exhibit 99.2 Financial statements included in Eastern's Quarterly Report on Form
10-Q for the quarter ended June 30, 2000:
Consolidated Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
---------------------------------------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES $204,788 $170,520 $638,483 $515,349
--------- --------- ------------- -----------
OPERATING COSTS AND EXPENSES:
Operating costs 145,421 123,020 428,421 353,008
--------- --------- ------------- -----------
Selling, general & admini-
strative expenses 34,104 27,819 69,606 59,049
--------- --------- ------------- -----------
Depreciation & amortization 21,732 17,984 54,809 43,649
--------- --------- ------------- -----------
201,257 168,823 552,836 455,706
--------- --------- ------------- -----------
OPERATING EARNINGS 3,531 1,697 85,647 59,643
--------- --------- ------------- -----------
OTHER INCOME (EXPENSE):
Interest income 1,789 2,653 2,423 4,870
--------- --------- ------------- -----------
Interest expense (12,563) (8,635) (24,687) (17,414)
---------- ---------- ------------- -----------
Other, net 2,053 178 2,256 1,103
--------- --------- ------------- -----------
EARNINGS BEFORE INCOME
TAXES (5,190) (4,107) 65,639 48,202
---------- ---------- ------------- -----------
Provision for income taxes (1,729) (1,539) 28,061 18,474
---------- ---------- ------------- -----------
NET EARNINGS (LOSS) $ (3,461) $ (2,568) $ 37,578 $ 29,728
========= ========= ============= =========
BASIC EARNINGS PER SHARE $ (.13) $ (.11) $ 1.38 $ 1.31
========= ========= ============= =========
DILUTED EARNINGS PER SHARE $ (.13) $ (.11) $ 1.37 $ 1.31
========= ========= ============= =========
DIVIDENDS PER SHARE $ .43 $ .42 $ .86 $ .84
========= ========= -----======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Eastern Enterprises and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, Dec. 31, June 30,
(IN THOUSANDS) 2000 1999 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 30,898 $ 44,332 $ 179,851
Receivables, less reserves 112,786 135,409 99,573
Inventories 67,827 74,555 44,158
Deferred gas costs 48,436 64,503 -
Other current assets 8,168 5,008 7,646
---------- ---------- ----------
TOTAL CURRENT ASSETS 268,115 323,807 331,228
PROPERTY AND EQUIPMENT, AT COST 2,214,956 2,197,156 1,751,233
Less3/4accumulated depreciation 936,958 906,953 788,874
--------- ---------- ----------
NET PROPERTY AND EQUIPMENT 1,277,998 1,290,203 962,359
Goodwill, less amortization 243,960 247,137 -
Deferred postretirement health care
costs 69,972 72,760 75,888
Investments 14,064 14,671 15,708
Deferred charges and other costs,
less amortization 71,222 71,179 70,013
---------- ---------- ----------
TOTAL OTHER ASSETS 399,218 405,747 161,609
---------- ---------- ----------
TOTAL ASSETS $1,945,331 $2,019,757 $1,455,196
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Eastern Enterprises and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Balance Sheets
June 30, Dec. 31, June 30,
(IN THOUSANDS) 2000 1999 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current debt $ 80,453 $ 123,251 $ 5,632
Accounts payable 59,569 75,770 38,048
Accrued expenses 51,407 37,516 39,172
Other current liabilities 45,806 50,234 45,245
---------- ---------- ---------
TOTAL CURRENT LIABILITIES 237,235 286,771 128,097
GAS INVENTORY FINANCING 33,567 54,020 31,438
LONG-TERM DEBT 503,168 515,232 383,173
RESERVES AND OTHER LIABILITIES:
Deferred income taxes 179,591 179,426 135,306
Postretirement health care 98,414 100,016 96,750
Preferred stock of subsidiary 21,438 26,454 29,377
Other reserves 101,077 103,208 91,509
---------- ---------- ---------
TOTAL RESERVES AND OTHER
LIABILITIES 400,520 409,104 352,942
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $1.00 par value
Authorized shares 3/4 50,000,000;
Issued shares 3/4 27,173,322 at
June 30, 2000; 27,131,090 at
December 31, 1999, and 22,649,457
at June 30, 1999 27,173 27,131 22,649
Capital in excess of par value 246,382 244,449 56,004
Retained earnings 497,942 483,710 481,315
Accumulated other comprehensive
(loss) (73) (77) (63)
Treasury stock at cost - 16,892
shares at June 30, 2000 and
December 31, 1999; and
10,461 shares at June 30, 1999 (583) (583) (359)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 770,841 754,630 559,546
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,945,331 $2,019,757 $1,455,196
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
Eastern Enterprises and Subsidiaries
Consolidated Statement of Cash flows
<CAPTION>
SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS) 2000 1999
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET EARNINGS $ 37,578 $ 29,728
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 54,809 43,649
Income taxes and tax credits 12,356 (1,007)
Net gain on sale of assets (1,819) (262)
Other changes in assets and liabilities:
Receivables 22,623 5,559
Inventories 6,728 11,709
Deferred gas costs 16,068 62,055
Accounts payable (16,201) (18,292)
Other (4,158) (3,176)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 127,984 129,963
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (35,472) (29,431)
Proceeds on sale of assets 7,442 3,906
Investments (6,392) (3,776)
Other (6,017) (1,353)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (40,439) (30,654)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (23,290) (18,950)
Repayment of long-term debt and preferred stock (17,203) (2,107)
Changes in notes payable (42,735) (37,835)
Changes in gas inventory financing (20,453) (21,206)
Other 2,702 804
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (100,979) (79,294)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,434) 20,015
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 44,332 159,836
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 30,898 179,851
SHORT-TERM INVESTMENTS - -
-------- --------
CASH AND SHORT-TERM INVESTMENTS $ 30,898 $179,851
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
EASTERN ENTERPRISES AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
1. ACCOUNTING POLICIES
It is Eastern's opinion that the financial information contained in this report
reflects all adjustments necessary to present a fair statement of results for
the periods reported. All of these adjustments are of a normal recurring nature.
Results for the periods are not necessarily indicative of results to be expected
for the year, due to the seasonal nature of Eastern's operations. All accounting
policies have been applied in a manner consistent with prior periods. Such
financial information is subject to year-end adjustments and annual audit by
independent public accountants.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q. Therefore these interim
financial statements should be read in conjunction with Eastern's 1999 Annual
Report filed on Form 10-K with the Securities and Exchange Commission.
EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of shares
outstanding. Diluted earnings per share gives effect to the exercise of stock
options using the treasury stock method, as reflected below:
<TABLE>
<CAPTION>
Three months ended SIX MONTHS ENDED
June 30, June 30,
(IN THOUSANDS) 2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares 27,153 22,636 27,146 22,618
Dilutive effect of options 269 88 254 107
------ ------ ------ ------
Adjusted weighted average shares 27,422 22,724 27,400 22,725
====== ====== ====== ======
</TABLE>
<PAGE>
COMPREHENSIVE INCOME
The following is a summary of the reclassification adjustments and the income
tax effects for the components of other comprehensive income (loss) for the six
months ended June 30:
<TABLE>
<CAPTION>
Unrealized Holding
Gains (Losses) on Reclassification
Investments Adjustments for Other
Arising During the Gains Included in Comprehensive
(IN THOUSANDS) Period Net Income Income (Loss)
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
2000
Pretax $ 1,178 $ (1,172) $ 6
Income tax benefit (expense) (411) 409 (2)
------- --------- -------
Net change $ 767 $ (763) $ 4
======= ========= =======
1999
Pretax $ 213 $ (148) $ 65
Income tax benefit (expense) (75) 52 (23)
------- --------- --------
Net change $ 138 $ (96) $ 42
======= ========= ========
</TABLE>
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 plus, in certain circumstances, an accrued dividend, per
share of Eastern common stock, as well as an additional $0.006 per share per day
for each day after August 6, 2000 up to the closing date. The transaction, which
is subject to receipt of approval from the Securities and Exchange Commission,
is expected to close in the fall of 2000, although it is possible the merger
will not close until 2001. The merger was approved by Eastern Shareholders on
April 26, 2000.
3. PLANNED MERGER WITH ENERGYNORTH, INC.
Under a definitive agreement signed in 1999, Eastern expects to acquire
EnergyNorth, Inc. ("EnergyNorth") for approximately $203 million in cash
simultaneously with Eastern's merger with KeySpan. If the KeySpan merger is
terminated, the agreement provides for Eastern to acquire EnergyNorth for
approximately $78 million in cash and 1.7 million in Eastern shares, subject to
a collar arrangement.
The New Hampshire Public Utility Commission gave final approval to Eastern's
acquisition of EnergyNorth in an order issued on May 9, 2000. The merger was
approved by EnergyNorth shareholders on April 27, 2000.
<PAGE>
4. BUSINESS SEGMENTS
Eastern's reportable business segment information for revenues and operating
earnings is presented below:
<TABLE>
<CAPTION>
Revenues: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Natural Gas Distribution $127,876 $101,368 $483,658 $381,651
Marine Transportation 70,405 65,783 141,675 127,109
Other Services 6,507 3,369 13,150 6,589
--------- --------- -------- --------
$204,788 $170,520 $638,483 $515,349
========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Operating Earnings: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Natural Gas Distribution $ 2,274 $(1,916) $ 83,459 $ 55,378
Marine Transportation 4,190 5,758 7,265 8,899
Other Services (205) (1,244) (630) (2,540)
Headquarters (2,728) (901) (4,447) (2,094)
------- ------- -------- --------
$ 3,531 $ 1,697 $ 85,647 $ 59,643
======= ======= ======== ========
</TABLE>
5. INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(IN THOUSANDS) 2000 1999 1999
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental gas supplies $51,210 $57,935 $32,170
Other materials, supplies and
marine fuels 16,617 16,620 11,988
------- ------- -------
$67,827 $74,555 $44,158
======= ======= =======
</TABLE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following are supplemental disclosures of cash flow information:
SIX MONTHS ENDED JUNE 30,
2000 1999
(IN THOUSANDS)
--------------------------------------------------------------------------------
Cash paid during the year for:
Interest, net of amounts capitalized $23,674 $17,290
Income taxes $16,064 $19,325
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In November 1999 Eastern signed a definitive agreement to be acquired by KeySpan
Corporation ("KeySpan") for $64.00 per share in cash, as discussed in Note 2 of
Notes to Financial Statements. Such information is incorporated herein by
reference. The transaction is expected to close in the fall of 2000.
In 1999 Eastern signed a definitive agreement to acquire EnergyNorth, Inc.
("EnergyNorth") for approximately $203 million in cash simultaneously with
Eastern's merger with KeySpan, as discussed in Note 3. If the KeySpan merger is
terminated, the agreement provides for Eastern to acquire EnergyNorth for
approximately $78 million in cash and 1.7 million in Eastern shares, subject to
a collar arrangement.
RESULTS OF OPERATIONS
REVENUES: Consolidated revenues for the second quarter of 2000 and the first six
months of 2000 were $205 million and $638 million, respectively, up 20% and 24%
from 1999.
NATURAL GAS DISTRIBUTION
The natural gas distribution segment includes the operations of Boston Gas
Company, Essex Gas Company and Colonial Gas Company, which Eastern acquired in
August 1999. Revenues for the second quarter of 2000 were $127.9 million, an
increase of $26.5 million from 1999. The 26% increase in revenues primarily
reflects the inclusion of Colonial Gas revenues ($26.7 million), growth in
throughput ($3 million) and higher rates, partially offset by lower sales to
non-firm customers ($5 million). Weather in the second quarter was 19% colder
than 1999, or 24% colder than normal.
Year-to-date 2000 revenues were $483.7 million, an increase of $102.0 million or
27% from 1999. The increase primarily reflects the inclusion of Colonial Gas
revenues ($113.0 million), throughput growth ($13 million) and higher rates.
Partially offsetting were the pass through of lower gas costs ($13 million),
lower non-firm sales ($6 million), the impact of warmer weather in the first
quarter ($5 million) and the migration of firm customers to transportation-only
service. The pass through of higher or lower gas costs and the migration to
transportation-only service have no impact on the segment's operating earnings.
Natural gas distribution earns all of its margins on the local distribution of
gas and none on the resale of the commodity. Year-to-date weather was 3% colder
than 1999, but 1% warmer than normal.
MARINE TRANSPORTATION
Revenues for the second quarter and first six months of 2000 were $70.4 million
and $141.7 million, respectively. The increases of 7% and 11% from the
comparable periods of 1999 were mainly the result of higher rates associated
with fuel adjustment mechanisms contained in multi-year and annual contracts and
from higher coal tonnage delivered to electric utilities. As a result of higher
fuel prices for diesel fuel, Midland's fuel cost rose 73% for the second quarter
and 78% year-to-date, as compared to 1999. Due to the fuel-related rate
increases, market improvement in spot rates and a higher mix of coal tonnage,
rates per ton mile rose 17% and 12% in the second quarter and year to date,
respectively, over 1999.
Tonnage transported for the second quarter and first six months of 2000
increased 2% and 8%, respectively. Coal tonnage increased 12% for the quarter
and 13% year to date, reflecting tonnage for a new customer as well as increased
demand for existing accounts. Partially offsetting was a reduction in non-coal
tonnage, which declined 13% and 1% for the second quarter and fist six months,
respectively, reflecting reduced movements of grain, ores and stone. While
tonnage for the quarter increased, ton-miles declined 7% reflecting the lower
mix of non-coal tonnage with its long hauls to and from the Gulf of Mexico. For
the first six months of 2000, ton miles increased 1% over 1999, primarily
reflecting increased movements of coal and steel in the first quarter.
OTHER SERVICES
Revenues for the second quarter and first six months of 2000 were $6.5 million
and $13.2 million, respectively, up from $3.4 million and $6.6 million from the
comparable periods in 1999, primarily reflecting the results of Transgas, which
was acquired as part of Colonial Gas.
OPERATING EARNINGS: Consolidated operating earnings for the second quarter and
first six months of 2000 were $3.5 million and $85.6 million, respectively, up
from $1.7 and $59.6 million for the comparable periods in 1999.
NATURAL GAS DISTRIBUTION
For the second quarter of 2000, natural gas distribution recorded operating
earnings of $2.3 million, as compared to an operating loss of $1.9 million in
1999. The improvement primarily reflected the inclusion of Colonial Gas'
operating earnings of $2.5 million, throughput growth and the absence of a
non-recurring retiree benefit charge in 1999, partially offset by higher system
maintenance costs and wage and benefit increases.
For the first six months of 2000, natural gas distribution recorded operating
earnings of $83.5 million, up 51% from 1999. The improvement primarily reflected
the inclusion of Colonial Gas' operating earnings of $29.9 million and
throughput growth, partially offset by a cumulative adjustment to gas costs for
prior years which decreased operating earnings by $3 million.
MARINE TRANSPORTATION
Operating earnings for the second quarter and first six months of 2000 were $4.2
million and $7.3 million, respectively, both down $1.6 million from 1999. While
fuel cost escalation increased rates, as discussed above, the year-to-date net
negative impact of higher fuel costs is estimated to be approximately $2.5
million, most of which occurred in the first quarter. Higher labor, vessel
charter and maintenance also contributed to higher costs in the second quarter.
Operating results from cargo handling and support operations were also lower
than in 1999.
OTHER SERVICES
Operating losses for the second quarter and year-to-date were $0.2 million and
$0.6 million, as compared to losses of $1.2 million and $2.5 million,
respectively, in 1999. More than half the improvement from last year reflects
the inclusion of Transgas results.
<PAGE>
OTHER
Headquarters operating loss for the second quarter and first six months of 2000
increased by $1.8 million and $2.4 million, respectively, primarily reflecting
expenses related to the KeySpan merger.
Net interest expense for the second quarter and first six months of 2000
increased by $4.8 million and $9.7 million, respectively. The increase reflects
the inclusion of Colonial Gas' net interest expense of $2.9 million for the
quarter and $5.7 million year-to-date and the use of $150 million of cash in the
Colonial Gas acquisition.
Other net for the second quarter of 2000 includes a gain of $1.8 million on the
disposition of marine equipment.
The increase in the effective tax rate from 38% to 43% primarily reflects
Colonial Gas goodwill amortization.
The 21% increase in diluted shares outstanding reflects the issuance of
approximately 4.2 million shares of stock in the Colonial Gas acquisition.
ORWARD-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 case 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, 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 flows from operations, in combination
with currently available resources, will be more than sufficient to meet
Eastern's 2000 capital expenditure requirements and working capital
requirements, potential funding of its environmental liabilities, normal debt
repayments and 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.
Consolidated capital expenditures are budgeted at approximately $100 million,
with about 90% at natural gas distribution segment and the balance at marine
transportation.
