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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
----------------
Commission File Number 1-2297
EASTERN ENTERPRISES
9 Riverside Road, Weston, Massachusetts 02193
(781) 647-2300
Massachusetts 04-1270730
(State of organization) (I.R.S. Employer
Identification No.)
----------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, par value $1.00 per share New York Stock Exchange
Common Stock Purchase Rights, no par value Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
The registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendments to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $928 million as of February 12, 1998.
There were 20,416,027 shares of Common Stock, par value $1.00 per share,
outstanding as of February 12, 1998.
----------------
Documents Incorporated by Reference
Portions of the annual report to shareholders for the year ended December
31, 1997 are incorporated by reference into Part II of this Report.
Portions of the Registrant's 1998 definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 22, 1998 are incorporated by
reference into Part III of this Report.
----------------
Exhibits to Form 10-K and Financial Statement Schedules have been
included only in copies of the Form 10-K filed with the Securities and Exchange
Commission.
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<PAGE>
EASTERN ENTERPRISES
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
Page No.
-------------
PART I
Item 1. Business Form 10-K/1
Boston Gas Company Form 10-K/1
Midland Enterprises Inc. Form 10-K/5
General Form 10-K/7
Item 2. Properties Form 10-K/8
Item 3. Legal Proceedings Form 10-K/8
Item 4. Submission of Matters to a Vote of Security Holders Form 10-K/8
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters Form 10-K/8
Item 6. Selected Financial Data Form 10-K/8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations Form 10-K/9
Item 8. Financial Statements and Supplementary Data Form 10-K/14
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure Form 10-K/33
PART III
Item 10. Directors and Executive Officers of the Registrant Form 10-K/33
Item 11. Executive Compensation Form 10-K/33
Item 12. Security Ownership of Certain Beneficial
Owners and Management Form 10-K/33
Item 13. Certain Relationships and Related Transactions Form 10-K/33
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K Form 10-K/33
<PAGE>
PART I
Item 1. Business
1(a) General
Eastern Enterprises ("Eastern") is an unincorporated voluntary
association (commonly referred to as a "Massachusetts business trust")
established and existing under a Declaration of Trust dated July 18, 1929, as
from time to time amended.
Eastern's principal subsidiaries are Boston Gas Company ("Boston Gas")
and Midland Enterprises Inc. ("Midland"). Boston Gas is a regulated utility
that distributes natural gas in and around Boston, Massachusetts. Midland is
engaged in barge transportation, principally on the Ohio and Mississippi river
systems. In December 1997, Eastern sold its 50% interest in AllEnergy Marketing
Company, L.L.C., ("AllEnergy"), an unregulated energy marketing company, as
described in Note 9 of Notes to Financial Statements. Such information is
incorporated herein by reference.
In December 1997, Eastern announced the signing of a definitive agreement
to acquire Essex County Gas Company ("Essex County Gas"), a gas distribution
utility serving about 42,000 customers in northeastern Massachusetts, as
described in Note 5 of Notes to Financial Statements. The merger is expected to
close in mid-1998 and is subject to a number of conditions, including receipt
of regulatory and Essex County Gas shareholders' approval.
Late in 1997, Eastern formed a new subsidiary, ServicEdge Partners, Inc.,
a fuel neutral HVAC (heating, ventilation and air conditioning) service and
installation business to serve customers in eastern Massachusetts.
Eastern provides management and staff services to its operating
subsidiaries. Boston Gas and Midland are financed primarily through their own
internally generated funds and the issuance of their own funded debt, which is
not guaranteed by Eastern. The debt instruments relating to Boston Gas and
Midland borrowings generally contain restrictive covenants, including
restrictions on the payment of dividends to Eastern. In the opinion of
management, none of these restrictions has any material impact upon the
operations of Eastern and its subsidiaries.
The information in this Form 10-K should be read in conjunction with the
"Forward-Looking Information" in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
1(b) Financial Information About Industry Segments
Information with respect to this item may be found in Note 2 of Notes to
Financial Statements.
1(c) Description of Business
Boston Gas Company
Boston Gas is engaged in the transportation and sale of natural gas to
approximately 530,000 residential, commercial, and industrial customers in
Boston, Massachusetts, and 73 other communities in eastern and central
Massachusetts. Boston Gas also sells natural gas for resale. Boston Gas, the
largest natural gas distribution company in New England, has been in business
for 175 years and is the second oldest gas company in the United States. Since
1929, all of the common stock of Boston Gas has been owned by Eastern.
Boston Gas provides local transportation services and gas supply for all
customer classes. Boston Gas' services are available on a firm and non-firm
basis. Firm transportation services and sales are provided under rate tariffs
filed with the Massachusetts Department of Telecommunications and Energy (the
"Department"), formerly the Department of Public Utilities, that typically
obligate Boston Gas to provide service without interruption throughout the
year. Non-firm transportation services and sales are generally provided to
large commercial/industrial customers who can use gas and oil interchangeably.
Non-firm services, including sales to other gas companies for resale, are
provided through individually negotiated contracts and, in most cases, the
price charged takes into account the price of the customer's alternative fuel.
In 1993, the Department approved Boston Gas' proposal to unbundle local
transportation service and gas sales for its largest commercial/industrial
customers, and in 1996, to all commercial/industrial customers. Unbundling
allows customers to purchase local transportation from Boston Gas separately
from the purchase
Form 10-K/1
<PAGE>
of gas supply, which the customer may buy from other suppliers. Boston Gas
views these third party suppliers as trade allies in marketing gas and
increasing its throughput and expects to work closely with these trade allies
to facilitate the unbundling process and ensure a smooth transition, especially
in the tracking and processing of transactions. While the migration of
customers from firm sales to transportation-only service will lower Boston Gas'
revenues, it has no impact on Boston Gas' operating earnings. Boston Gas earns
all of its margins on the local distribution of gas and none on the resale of
the commodity itself. Boston Gas has also implemented a program to educate
commercial/industrial customers about the opportunity to purchase gas from
third-party suppliers, while still relying on Boston Gas for delivery.
In the fourth quarter of 1997, Boston Gas recorded a charge of $8.7
million in connection with its decision to exit the gas appliance repair and
service business.
Markets and Competition
The majority of Boston Gas' sales are for space heating and in this
market it competes with other fuel distributors, primarily oil dealers,
throughout its service territory. Over the last six years, Boston Gas has
increased its share in the total stationary energy market from 31% to 37%. This
market share compares to the national average of approximately 44% and may
represent a growth opportunity for Boston Gas. However, actual experience
cannot be predicted with certainty, and will depend on such factors as the
price of competitive energy sources, the level of investment by Boston Gas and
customer perceptions of relative value.
Gas Throughput
The following table, in billions of cubic feet of natural gas at 1,000
Btu per cubic foot ("BCF"), provides information about Boston Gas' throughput
during the three years 1995-1997:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Residential ............................ 41.7 42.8 39.7
Commercial/industrial .................. 35.7 39.4 48.1
Off-system sales ....................... 7.4 12.2 6.6
----- ----- -----
Total sales ............................ 84.8 94.4 94.4
Transportation of customer-owned gas ... 80.9 61.6 47.5
Less: Off-system sales ................. (7.4) (12.2) (6.6)
------ ------ ------
Total throughput ...................... 158.3 143.8 135.3
====== ====== ======
Firm throughput ....................... 120.0 118.7 94.9
====== ====== ======
</TABLE>
Residential customers comprise 92% of its customer base, while
commercial/industrial establishments account for the remaining 8%.
Volumetrically, residential customers account for 26% of total throughput and
35% of firm throughput, while commercial/industrial customers account for 74%
of total throughput and 65% of firm throughput, as depicted in the chart below.
In 1997, approximately 70% of the commercial/industrial customers' total
throughput was local transportation-only services. No customer, or group of
customers under common control, accounted for more than 2% of total firm
revenues in 1997. Boston Edison Company was responsible for 44% of the
transportation of customer-owned gas.
[PIE CHART]
1997 Firm Throughput Residential Sales 35%
C&I Transportation 39%
C&I Sales 26%
[GRAPH]
Boston Area Weather colder
(% of normal) 101 101 105 103 ------
---------------------------------- normal
99 ------
| | | | | warmer
93 94 95 96 97
Form 10-K/2
<PAGE>
Gas Supply
The following table in BCF provides information about Boston Gas' sources
of supply during 1995-1997:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Natural gas pipeline purchases ............. 80.6 91.7 93.4
Liquefied natural gas ("LNG") purchases .... 8.3 5.2 3.1
---- ---- ----
Total purchases ........................... 88.9 96.9 96.5
Change in storage gas ...................... 2.2 (3.4) 3.5
Company use, unbilled and other ............ (6.3) .9 (5.6)
----- ----- -----
Total sales ............................... 84.8 94.4 94.4
===== ===== =====
</TABLE>
Year to year variations in storage gas and unbilled gas reflect
variations in end-of-year customer requirements, due principally to weather.
Given the ready availability of supply, Boston Gas purchased
approximately two-thirds of its peak 1997 pipeline supplies under short-term
and spot contracts. The balance of peak day pipeline requirements is purchased
directly from domestic and Canadian producers and marketers pursuant to
long-term contracts which have been reviewed and approved by the Department or
by the Federal Energy Regulatory Commission ("FERC").
Pipeline supplies are transported on interstate pipeline systems to
Boston Gas' service territory pursuant to long-term contracts. FERC-approved
tariffs provide for fixed demand charges for the firm capacity rights under
these contracts. The interstate pipeline companies that provide firm
transportation service to Boston Gas' service territory, the peak daily and
annual capacity and the contract expiration dates are as follows:
<TABLE>
<CAPTION>
Capacity in BCF
-------------------- Expiration
Pipeline Daily Annual Dates
- -------------------------------------- --------- -------- -----------
<S> <C> <C> <C> <C>
Algonquin Gas Transmission Company
("Algonquin") .................. 0.28 87.4 1998-2012
Tennessee Gas Pipeline Company
("Tennessee") .................. 0.18 66.9 2000-2012
---- -----
0.46 154.3
==== =====
</TABLE>
In addition, Boston Gas has firm capacity contracts on interstate
pipelines upstream of the Algonquin and Tennessee pipelines to transport
natural gas purchased by Boston Gas from producing regions to the Algonquin and
Tennessee pipelines. The expiration dates for these contracts are similar to
those included in the above table.
Boston Gas has contracted with pipeline companies and others for the
storage of natural gas in underground storage fields located in Pennsylvania,
New York, Maryland and West Virginia. These contracts provide for storage
capacity of 17.3 BCF and peak day capacity of 0.16 BCF. Boston Gas utilizes its
existing capacity contracts to transport gas from the storage fields to its
service territory. Supplemental supplies of LNG and propane are purchased and
produced from foreign and domestic sources.
Peak day throughput was 0.66 BCF in 1997 and 0.69 BCF in 1996 and 1995.
Boston Gas provides for peak period demand through a least-cost portfolio of
pipeline, storage and supplemental supplies. Boston Gas considers its peak day
sendout capacity, based on its total supply resources, to be adequate to meet
the requirements of its firm customers.
Regulation
Boston Gas' operations are subject to Massachusetts statutes applicable
to gas utilities. Rates, gas purchases, pipeline safety regulations, issuance
of securities and affiliated party transactions are regulated by the
Department. Rates for firm transportation and sales provided by Boston Gas are
subject to approval by, and are on file with, the Department. In addition,
Boston Gas has a cost of gas adjustment clause which allows for the adjustment
of billing rates for firm gas sales to enable it to recover the actual cost of
gas delivered to firm customers, including the demand charges for capacity on
the interstate pipeline system.
Form 10-K/3
<PAGE>
On May 16, 1997, the Department responded to Boston Gas' request for
reconsideration, clarification and recalculation of certain sections of the
Department's November 1996 rate order, which had granted a $6.3 million
increase. In its May 1997 order, the Department granted an additional $1.9
million in revenues and reduced the productivity offset in the
Performance-Based Rate ("PBR") formula established in its November 1996 order
by 50 basis points, from 2.00% to 1.50%. Compared to the Department's original
decision, these changes will add approximately $3.5 million to revenues in
1998, increasing to about $8.0 million by 2002, the last year of the plan. On
June 5, 1997, Boston Gas filed a notice of appeal of the Department's orders to
the Massachusetts Supreme Judicial Court. Boston Gas expects that the appeal
will be heard sometime in 1998 and that any relief granted by the court will be
prospective.
On July 18, 1997, the Department directed all ten investor-owned gas
distribution companies in Massachusetts to undertake a collaborative process
with other stakeholders to develop common principles under which comprehensive
gas service unbundling might proceed. The Department deferred the second phase
of Boston Gas' unbundling proceeding, which is to address residential
unbundling and a permanent capacity assignment method, subject to its
assessment of the progress of the collaborative discussions.
On November 7, 1997, the Department approved rate schedules designed to
implement the $1.8 million rate increase approved by the Department in Boston
Gas' first PBR compliance proceeding.
In its November 1996 order, the Department also approved Boston Gas'
proposal to facilitate competition in the natural gas marketplace. Under the
approved service unbundling program, on an interim basis, eligible commercial
and industrial customers migrating from firm sales to firm transportation will
be assigned, at cost, a pro-rata share of the upstream pipeline capacity
purchased by Boston Gas to serve them.
At the Department's direction, permanent assignment of upstream pipeline
capacity is currently being addressed as part of the collaborative process
discussed above. The capacity assignment method ultimately approved by the
Department could permit capacity to be acquired by marketers at less than cost.
If that is the case, there can be no assurance that Boston Gas will be
permitted to recover such costs until the Department has addressed their
recoverability. The collaborative is also examining how to extend unbundled
transportation service to residential customers.
Boston Gas and Eastern were granted an intrastate exemption from the
provisions of the Public Utility Holding Company Act of 1935 under Section
3(a)(1) thereof, pursuant to an order of the Securities and Exchange Commission
dated February 28, 1955, as amended by orders dated November 3, 1967 and August
28, 1975.
Seasonality and Working Capital
Boston Gas' revenues, earnings and cash flows are highly seasonal as the
demand for most of its transportation services and sales is directly related to
temperature conditions. The majority of Boston Gas' earnings is generated in
the first quarter, with a seasonal loss occurring in the third quarter. Since
the bulk of its revenues is billed in the November through April heating
season, significant cash flows are generated from late winter to early summer.
In addition, through the cost of gas adjustment clause, Boston Gas bills its
customers over the heating season for pipeline demand charges paid by Boston
Gas over the entire year. The lag between payment and billing of demand
charges, along with other costs of gas distributed but unbilled, is reflected
as deferred gas costs and is financed through short-term borrowings. Short-term
borrowings are also required from time to time to finance normal business
operations. As a result of these factors, short-term borrowings are generally
highest during the late fall and early winter.
Environmental Matters
Boston Gas may have or share responsibility under applicable
environmental law for the remediation of certain former manufactured gas plant
("MGP") sites. Information with respect to environmental matters may be found
in Note 11 of Notes to Financial Statements. Such information is incorporated
herein by reference.
Employees
As of December 31, 1997, Boston Gas had approximately 1,440 employees,
74% of whom were organized in local unions with which Boston Gas has collective
bargaining agreements that expire in 1999.
Form 10-K/4
<PAGE>
Properties
Boston Gas owns or leases facilities which enable it to liquefy natural
gas in periods of low demand, store the resulting LNG and vaporize it for use
in periods of high demand. Boston Gas owns and operates such a facility in
Dorchester, Massachusetts, and leased one such facility in Lynn, Massachusetts.
In addition, Boston Gas leased an LNG storage facility in Salem, Massachusetts.
Both leases expired on June 30, 1997. Negotiations for purchase of the leased
facilities were unsuccessful and the matter is now in litigation. Boston Gas
continues to use the facilities pursuant to a stipulation and agreement between
the parties that provides for $2.3 million to be held in escrow and suspends
Boston Gas' rent payment obligation while the stipulation and agreement is in
effect. The stipulation and agreement terminates on the earlier of the
resolution by judgment or settlement of the litigation or October 1, 1998.
Boston Gas also owns propane-air facilities at several locations throughout its
service territory.
On December 31, 1997, Boston Gas' distribution system included
approximately 5,800 miles of gas mains, 401,000 services and 534,000 active
customer meters. A majority of the gas mains consist of cast iron and bare
steel, which requires ongoing maintenance and replacement.
Boston Gas' mains and services are generally located on public ways or
private property not owned by it. Boston Gas' occupation of such property is
generally pursuant to easements, licenses, permits or grants of location.
Except as stated above, the principal items of property of Boston Gas are owned
in fee.
In 1997, Boston Gas' capital expenditures were $55.4 million. Capital
expenditures were principally made for system replacement, for system expansion
to meet customer demand and for productivity enhancement initiatives. Boston
Gas plans to spend approximately $60 million for similar purposes in 1998, with
a slightly higher proportion for system expansion.
Midland Enterprises Inc.
Midland, through its wholly-owned subsidiaries (together "Midland"), is
engaged in the operation of a fleet of barges and towboats, principally on the
Ohio and Mississippi Rivers and their tributaries, the Gulf Intracoastal
Waterway and the Gulf of Mexico. Midland transports dry bulk commodities, a
major portion of which is coal. Midland also performs repair work on marine
equipment and operates two coal dumping terminals, a phosphate rock and
phosphate chemical fertilizer terminal and a marine fuel supply facility.
Sales
Midland transported 57.0 million, 65.5 million, and 66.2 million tons in
1997, 1996 and 1995, respectively. Tonnage in 1997 declined 13% from 1996,
primarily as a result of the non-renewal of several multi-year contracts,
unplanned plant outages for several major customer accounts and lower demand
from export coal and grain markets. Tonnage in 1996 declined 1% from 1995 as a
result of reduced grain tonnage due in part to a shortage of grain supplies and
the resulting weak demand for barge towing on the lower Mississippi River.
Ton miles are the product of tons and distance transported. The following
charts depict 1997 tonnage by commodity and ton miles of cargo transported for
the period 1993-1997:
[PIE CHART]
1997 Tonnage by Commodity
Coal 62%
Other 31%
Grain 7%
[BAR GRAPH]
Ton Miles by Commodity
Coal Grain Other Liquid Total
1993 14.0 4.8 11.8 1.6 32.2
1994 15.2 4.4 15.7 0.0 35.3
1995 15.2 5.2 16.4 0.0 36.8
1996 15.7 4.8 15.6 0.0 36.1
1997 13.6 4.5 15.0 0.0 33.1
"Other" includes sand, stone, gravel, iron, scrap, steel, alumina, coke,
phosphate, towing for others, and other commodities.
Form 10-K/5
<PAGE>
In 1997, ton miles declined 8% due to the lower tonnage, as discussed
above, partially offset by longer average hauls, particularly for coal. In
1996, ton miles declined 2.0% from the record level set in 1995 due to a 1%
decline in tonnage and slightly shorter average trip lengths. In addition to
changes in ton miles transported, Midland's revenues and net earnings are
affected by other factors such as competitive conditions, weather and the
segment of the river system traveled, as described further in the "Seasonality"
and "Competition" sections.
The following table summarizes Midland's backlog of transportation and
terminalling business under multi-year contracts:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
-------- -------
<S> <C> <C>
Tons (in millions) .................................. 123.2 140.0
Revenues (in millions) .............................. $412.1 $465.1
Portions of revenue backlog not expected to be filled
within the current year ........................... 66% 73%
</TABLE>
The 1997 revenue backlog (which is based on contracts that extend beyond
December 31, 1998) is shown at prices in effect on December 31, 1997, which are
subject to cost escalation/de-escalation provisions. Since services under many
of the multi-year contracts are based on customer requirements, Midland has
estimated its backlog based on its forecast of the anticipated requirements of
these contract customers. The 12% decline in tonnage backlog from 1996 mainly
reflects the elapsing terms of current multi-year contracts as they draw closer
to maturity, including those excluded from the calculation as they enter their
final year. The decrease in the revenue backlog is consistent with the
reduction in backlog tonnage. Electric utilities, which traditionally have
entered into multi-year transportation and coal supply agreements, have begun
to shorten the term of some agreements for a variety of reasons such as Clean
Air Act requirements and increasing competitive pressures resulting from the
ongoing deregulation of the electric power industry. These factors have also
led to changes in the sourcing of coal by utilities, leading to changes in
traffic patterns.
The only significant raw material required by Midland is the diesel fuel
to operate its towboats. Diesel fuel is purchased from a variety of sources and
Midland regards the availability of diesel fuel as adequate for its operations.
Seasonality
Revenues during winter months tend to be lower than revenues for the
remainder of the year due to the freezing of some northern waterways, increased
coal consumption by electric utilities during the summer months and the fall
harvest of grain.
Competition
Midland's inland marine transportation business competes on the basis of
price, service and equipment availability. Midland's primary competitors
include other barge lines and railroads, including one integrated rail-barge
carrier. There are a number of companies offering transportation services on
the waterways served by Midland. A shortage of grain supplies and sharply
higher grain prices slowed demand in late 1996 and market rates softened. In
1997, a stronger U.S. dollar and increased competition from foreign suppliers
to the world markets slowed U.S. exports of grain and coal, which weakened
demand for barges. Coupled with an increased availability of new equipment, a
temporary imbalance of supply and demand has been created, which has led to
more intense competition and decreased spot rates.
In 1997 approximately 10% of total revenues were accounted for by one
customer, The Cincinnati Gas and Electric Co., a subsidiary of Cinergy Corp.,
under a multi-year coal transportation agreement. No other customer, or group
of customers under common control, accounted for more than 10% of revenues in
1997, 1996 or 1995. On the basis of past experience and its competitive
position, Midland considers that the simultaneous loss of several of its
largest customers, while possible, is unlikely to happen. Midland's multi-year
transportation and terminalling contracts expire at various dates from February
1999 through December 2007. During 1997, approximately 44% of Midland's
revenues resulted from these contracts. A substantial portion of the contracts
provide for rate adjustments based on changes in various costs,
Form 10-K/6
<PAGE>
including diesel fuel costs, and, additionally, contain "force majeure" clauses
that excuse performance by the parties to the contracts when performance is
prevented by circumstances beyond their reasonable control. Many of these
contracts have provisions for termination for specified causes, such as
material breach of contract, environmental restrictions on the burning of coal,
or loss by the customer of an underlying commodity supply contract. Penalties
for termination for such causes are not generally specified. However, some
contracts provide that in the event of an uncured material breach by Midland
that results in termination of the contract, Midland would be responsible for
reimbursing the customer for the differential between the contract price and
the cost of substituted performance.
Improvements in operating efficiencies have permitted barge operators to
maintain comparatively low rate structures. Consequently, the barge industry
generally has been able to retain its competitive position with alternate
methods of transportation for bulk commodities, particularly when the origin
and destination of such movements are near or contiguous to navigable
waterways.
Towboats, such as those operated by Midland, are capable of moving in one
tow (barge configuration) approximately 22,500 tons of cargo (equivalent to 225
one hundred-ton capacity railroad cars) on the Ohio River and upper Mississippi
River and approximately 60,000 tons (equivalent to 600 one hundred-ton capacity
railroad cars) on the lower Mississippi River, where there are no locks to
transit. Barge transportation costs per ton mile are generally below those of
railroads.
Environmental Matters
Midland is subject to the provisions of the Federal Water Pollution
Control Act, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendment and Reauthorization Act, the
Resource Conservation and Recovery Act of 1976, and the Oil Pollution Act of
1990 which permit the Coast Guard and the Environmental Protection Agency to
assess penalties and clean-up costs for oil, hazardous substance, and hazardous
waste discharges and is further subject to comparable state environmental
statutes in the states where it operates. Some of these acts also allow third
parties to seek damages for losses caused by such discharges. Compliance with
these acts has had no material effect on Midland's capital expenditures,
earnings, or competitive position, and no such effect is currently anticipated.
Properties
As of December 31, 1997, Midland's marine equipment consisted of 2,302
dry cargo barges and 87 towboats. Approximately half of this equipment is owned
outright and unencumbered and the remaining half is either mortgaged to secure
Midland's equipment financing obligations or chartered under long-term leases
from third parties.
In 1997, Midland's capital expenditures were $25.7 million. These
expenditures were made principally for the purchase of new barges and for
refurbishment of equipment. In 1998 Midland expects to spend approximately $50
million for capital equipment, primarily for the purchase of new barges.
Employees
As of December 31, 1997, Midland employed approximately 1,400 persons, of
whom approximately 32% are represented by labor unions.
General
Environmental Matters
Certain information with respect to Eastern's compliance with federal and
state environmental statutes may be found in Item 1(c) under "Boston Gas
Company" and "Midland Enterprises Inc." and Note 11 of Notes to Financial
Statements.
Employees
Eastern and its wholly-owned subsidiaries employed approximately 2,900
employees at December 31, 1997.
Form 10-K/7
<PAGE>
Item 2. Properties
Information with respect to this item may be found in Item 1(c) under
"Boston Gas Company" and "Midland Enterprises Inc." Such information is
incorporated herein by reference.
Item 3. Legal Proceedings
Information with respect to certain legal proceedings may be found in
Notes 11 and 12 of Notes to Financial Statements and in Item 1(c) hereof under
"Boston Gas Company" and "Midland Enterprises Inc." Such information is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders in the fourth
quarter of 1997.
Executive Officers of the Registrant
General
The table below identifies the executive officers of Eastern, who are
appointed annually and serve at the pleasure of Eastern's Trustees.
<TABLE>
<CAPTION>
Office Held
Name Title Age Since
- ------------------------ ------------------------------------------------------ ----- ------------
<S> <C> <C> <C>
J. Atwood Ives ......... Chairman and Chief Executive Officer 61 1991
Richard R. Clayton ..... President and Chief Operating Officer 59 1991
Walter J. Flaherty ..... Senior Vice President and Chief Financial Officer 49 1992
L. William Law, Jr. .... Senior Vice President, General Counsel and Secretary 53 1995
Chester R. Messer ...... Senior Vice President--President of Boston 56 1988
Gas Company
Fred C. Raskin ......... Senior Vice President--President of Midland 49 1991
Enterprises Inc.
</TABLE>
Business Experience
J. Atwood Ives joined Eastern in 1991 as Chairman and Chief Executive
Officer. He has served as a Trustee of Eastern since 1989.
Richard R. Clayton joined Eastern in 1987 as Executive Vice President and
Chief Administrative Officer. He was Executive Vice President and Chief
Operating Officer of Eastern from 1990 to 1991.
Walter J. Flaherty was Senior Vice President-Administration of Boston Gas
from 1988 until joining Eastern in 1991 as its Senior Vice President and Chief
Administrative Officer. He has been an employee of Eastern or its subsidiaries
since 1971.
L. William Law, Jr. has been General Counsel and Secretary of Eastern
since 1987. He has been an employee of Eastern or its subsidiaries since 1975.
Chester R. Messer was Executive Vice President of Boston Gas prior to
1988. He has been an employee of Boston Gas since 1963.
Fred C. Raskin was Executive Vice President of Midland from 1988 to 1991.
He has been an employee of Eastern or its subsidiaries since 1978.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
Eastern's common stock is traded on the New York, Boston and Pacific
Stock Exchanges (ticker symbol EFU). The approximate number of shareholders at
December 31, 1997 was 5,200.
Information with respect to this item may be found in the sections
captioned "Dividends Declared Per Share" and "Stock Price Range" appearing on
page 29 of the annual report to shareholders for the year ended December 31,
1997. Such information is incorporated herein by reference.
Item 6. Selected Financial Data
Information with respect to this item may be found in the section
captioned "Six-Year Financial Summary" appearing on page 26 of the annual
report to shareholders for the year ended December 31, 1997. Such information
is incorporated herein by reference.
Form 10-K/8
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following commentary should be read in conjunction with the
Consolidated Financial Statements and accompanying Notes to Financial
Statements.
1997 COMPARED TO 1996
Overview
The Company reported net earnings of $52.0 million, or $2.54 per share,
in 1997, compared to net earnings of $60.7 million, or $2.98 per share, in
1996. (Per share figures are presented on a diluted basis, as described in Note
1 of Notes to Financial Statements.) Excluding non-recurring items and
Eastern's share of AllEnergy's losses, earnings and earnings per share declined
approximately 15% to $51.2 million, or $2.50 per share, in 1997 versus $60.3
million, or $2.96 per share, in 1996.
<TABLE>
<CAPTION>
1997 1996 Change
(In millions) ----------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Boston Gas $ 700.9 $ 705.4 ( 0.6)%
Midland 269.3 301.9 (10.8)%
-------- ---------
Total $ 970.2 $ 1,007.3 ( 3.7)%
======== =========
</TABLE>
The decrease in consolidated revenues from 1996 to 1997 primarily
reflects decreased demand for barge transportation and lower rates at Midland
and lower average usage and the migration of customers from firm gas sales to
transportation-only service, partially offset by sales to new customers, at
Boston Gas.
<TABLE>
<CAPTION>
1997 1996 Change
(In millions) ---------- ---------- ------------
<S> <C> <C> <C>
Operating earnings:
Boston Gas $ 78.8 $ 68.5 15.1%
Midland 34.6 58.4 (40.7)%
Headquarters ( 7.1) ( 5.5) (29.2)%
------- -------
Total $ 106.3 $ 121.4 (12.4)%
======= =======
</TABLE>
The decrease in operating earnings from 1996 to 1997 primarily reflects
the impact of decreased revenues and poor operating conditions at Midland,
partially offset by higher rates and lower operating expenses at Boston Gas.
Other income primarily reflects losses of $5.5 million and $3.1 million
in 1997 and 1996, respectively, representing Eastern's share of AllEnergy's
operating losses. Eastern sold its investment in AllEnergy in December 1997.
The effective tax rate in 1997 was 32%, which was 5% lower than in 1996,
primarily because of prior year adjustments.
Boston Gas
Revenues in 1997 decreased by 0.6% primarily because of lower average
customer usage, the migration of customers from firm sales to
transportation-only service and the impact of comparatively warmer weather,
partially offset by sales to new customers and the full year impact of the 1996
rate increase. Weather for 1997 was 3% colder than normal, but 2% warmer than
1996.
Operating earnings increased 15.1% from 1996, primarily reflecting growth
in throughput, lower operating expenses, higher rates and a $2.0 million gain
on the settlement of pension obligations, partially offset by the margin impact
of lower average usage and warmer weather and a higher charge for depreciation,
reflecting continued investment in system replacement and expansion. While 1997
weather was only 2% warmer than 1996, weather for the first quarter of 1997,
when Boston Gas generates most of its revenues and earnings, was 9% warmer than
the prior year. The migration of customers from firm sales to
transportation-only service has no impact on Boston Gas' operating earnings.
Boston Gas earns all of its margins on the local distribution of gas and none
on the resale of the commodity itself.
During the fourth quarter of 1997 Boston Gas recorded non-recurring
revenues of approximately $8.9 million related to a change ordered by the 1996
rate ruling regarding the recovery mechanism for the portion of bad debt
expense associated with gas costs. This income was largely offset by a charge
of
Form 10-K/9
<PAGE>
approximately $8.7 million related to Boston Gas' decision to exit the gas
appliance repair and service business.
Midland Enterprises
Revenues in 1997 decreased 10.8% primarily because of weak export demand
for coal and grain, lower contractual requirements for utility and industrial
coal customers and fewer barges. Weak demand depressed spot rates for nearly
all commodities, and traffic patterns were disrupted, reducing operational
efficiency. Operating conditions in 1997 were worse than those experienced in
1996, as navigation was negatively impacted by record flooding on the Ohio
River early in the year, and later by long traffic delays related to low water
and repairs to various key locks throughout the river system. These
uncontrollable events resulted in higher operating costs and lower fleet
productivity than in 1996. As a result of the weaker markets, Midland slowed
its fleet replacement program and did not renew expiring charters of outside
barges. These decisions, in addition to production delays which postponed the
delivery of new barges expected in the latter part of 1997, reduced the size of
Midland's barge fleet.
Tonnage and ton miles decreased 13% and 8%, respectively, reflecting the
weak market and operational issues discussed previously, although a change in
business mix and customer sourcing resulted in 5% longer average hauls. Coal
tonnage and ton miles decreased 17% and 14%, respectively, from the record
levels of 1996. Domestic coal volume, primarily for electric utilities,
declined due to the non-renewal of several multi-year contracts, unplanned
plant outages and milder temperatures. Export coal demand weakened as the
strong U.S. dollar effectively raised the prices of domestic supplies higher
than foreign competitors. Despite an ample grain harvest, the anticipated surge
in transportation volume and pricing for grain exports was short-lived, as much
of the harvest was put in storage due to reduced demand and the relative
strength of the U.S. dollar.
Ongoing improvement programs to lower vessel operating costs and
administrative expenses partially offset the higher operating costs discussed
above. Operating results at Midland's terminals were also lower, reflecting the
reduced demand for coal transportation. As a result of the adverse market and
operational issues discussed above, operating earnings decreased by 40.7% in
1997.
1996 COMPARED TO 1995
<TABLE>
<CAPTION>
1996 1995 Change
(In millions) ----------- ----------- ---------
<S> <C> <C> <C>
Revenues:
Boston Gas $ 705.4 $ 653.1 8.0%
Midland 301.9 296.3 1.9%
--------- --------
Total $ 1,007.3 $ 949.4 6.1%
========= ========
</TABLE>
The increase in consolidated revenues from 1995 to 1996 primarily
reflects higher customer usage, colder weather, and increased sales to new
customers for Boston Gas and increased demand for coal and other commodities at
Midland.
<TABLE>
<CAPTION>
1996 1995 Change
(In millions) ---------- ---------- ----------
<S> <C> <C> <C>
Operating earnings:
Boston Gas $ 68.5 $ 61.7 11.0%
Midland 58.4 57.8 1.0%
Headquarters ( 5.5) ( 5.8) 5.2%
------- -------
Total $ 121.4 $ 113.7 6.8%
======= =======
</TABLE>
The increase in operating earnings from 1995 to 1996 primarily reflects
the gross margin impact of Boston Gas' increased revenues, as described above.
Other income in 1996 includes increased interest income on higher cash
balances and decreased interest expense, reflecting lower average rates
principally due to the refinancing of $60.0 million of Boston Gas debentures in
December 1995 and lower balances of short term obligations. Partly offsetting
were the absence of a $20.6 million gain on the sale in 1995 of Eastern's U.S.
Filter investment and a $15.0 million provision for environmental expenses, as
described in Notes 9 and 11 of Notes to Financial Statements.
Form 10-K/10
<PAGE>
In 1996, other income includes a loss of $3.1 million, representing Eastern's
share of AllEnergy's operating results.
The effective tax rate in 1996 was 8% higher than in 1995, principally
because the gain on the 1995 sale of the U.S. Filter investment was offset by a
tax loss realized on the sale of WaterPro Supplies Corp., which had been
written down in 1993.
Boston Gas
Revenues in 1996 increased by 8.0% due principally to higher average
customer usage, the impact of colder weather, increased sales to new customers
and increased non-firm sales. The migration of firm sales to transportation
service was partially offsetting. Weather for 1996 was 5% colder than normal.
Weather for 1995 was near normal.
Operating earnings increased 11.0% from 1995, primarily reflecting the
margin impact of increased revenues. Benefits from ongoing reengineering
programs and the absence of severance costs and lower consulting expenses also
contributed to the increase in operating earnings. Wage increases and higher
charges for depreciation were partially offsetting.
Midland Enterprises
Revenues and operating earnings increased by 1.9% and 1.0%, respectively,
in 1996 over 1995, primarily reflecting the continued strong demand for coal
and other dry cargo commodities and favorable rates. Severe icing and flooding
during the first quarter of 1996 and generally more difficult operating
conditions later in the year resulted in higher operating costs and lower fleet
productivity than in 1995.
Tonnage and ton miles decreased 1% and 2%, respectively, reflecting
shorter average hauls due to reduced foreign demand for coal and a shortage of
grain supplies. Coal tonnage and ton miles increased 1% and 3%, respectively,
reflecting significantly increased shipments of domestic spot coal, while coal
shipments under multi-year contracts for utilities declined due to the
non-renewal of several contracts. Non-coal tonnage and ton miles declined 6% as
a result of weaker barge demand for grain exports on the lower Mississippi
River.
Ongoing programs to increase fleet productivity were offset by adverse
operating conditions and traffic pattern inefficiencies caused by the reduced
export tonnage. Fuel costs increased in 1996 due to rising fuel prices that
averaged 20% above 1995 levels.
Forward-Looking Information
This report and other company reports and statements issued or made from
time to time contain certain "forward-looking statements" concerning projected
future financial performance, expected plans or future operations. Eastern
cautions that actual results and developments may differ materially from such
projections or expectations.
Investors should be aware of important factors that could cause actual
results to differ materially from the forward-looking projections or
expectations. These factors include, but are not limited to: the effect of
strategic initiatives on earnings and cash flow, temperatures above or below
normal in Boston Gas' service area, 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 and
Coal Act 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, is more than sufficient to meet
Eastern's 1998 capital expenditure and working capital requirements, potential
funding of its Coal Act and environmental liabilities, normal debt repayments
and anticipated dividends to shareholders.
In addition to cash and marketable investments of $175.3 million at
December 31, 1997, Eastern maintains a $100 million long-term revolving credit
agreement plus uncommitted lines, all of which are
Form 10-K/11
<PAGE>
available for general corporate purposes. At December 31, 1997, there were no
borrowings outstanding under any of these facilities.
To meet working capital requirements which reflect the seasonal nature of
the local gas distribution business, Boston Gas had commercial paper
outstanding of $39.7 million at December 31, 1997, a decrease of $17.3 million
from the prior year, primarily reflecting lower balances for deferred gas
costs. In addition, Boston Gas maintains a bank credit agreement which supports
the issuance of up to $70 million of commercial paper to fund its inventory of
gas supplies. At December 31, 1997, Boston Gas had outstanding $55.5 million of
commercial paper for this purpose.
Consolidated capital expenditures for 1998 are budgeted at approximately
$110 million, with about 55% at Boston Gas and the balance at Midland.
Eastern's capital structure is depicted in the chart below. Subject to
the effects of strategic initiatives which Eastern might undertake, Eastern
expects to continue its policy of capitalizing Boston Gas and Midland with
approximately equal amounts of equity and long-term debt. Both subsidiaries
currently maintain "A" ratings with the major rating agencies. The chart below
shows general improvement in interest coverage at Boston Gas, but a decrease in
coverage for Midland during the current year, reflecting the weakness of
transportation markets and poor operating conditions in 1997.
[BAR CHART]
Capital Structure
($ in millions)
Debt Equity Total Capital
1993 329 364 693
1994 365 374 740
1995 358 396 754
1996 347 428 775
1997 342 449 791
[BAR CHART]
Interest Coverage
93 94 95 96 97
--- --- --- --- ---
Boston Gas 4.3 4.8 4.8 6.2 6.8
Midland 4.2 4.0 5.7 5.8 4.5
(pre-tax earnings plus depreciation, amortization
and interest expense divided by interest expense)
OTHER MATTERS
In December 1997, Eastern signed a definitive agreement to acquire Essex
County Gas Company ("Essex"), a gas distribution utility serving about 42,000
customers in northeastern Massachusetts. See Note 5 of Notes to Financial
Statements. The transaction is structured as a tax-free merger and is to be
accounted for as a pooling of interests. To effect the merger, Eastern will
issue 1.183985 shares of its stock for each share of Essex stock. The actual
number of Eastern shares to be issued will be adjusted to ensure that the value
of Eastern common stock to be issued for each Essex share will not be less than
$45.00 nor more than $50.00, based upon the average market price during a
specified period prior to closing. Based on Essex shares outstanding and
issuable at December 1, 1997 and the above exchange ratio, approximately 2.1
million shares of Eastern stock will be issued to effect the merger. The merger
is subject to a number of conditions, including receipt of regulatory and Essex
shareholders' approval.
In December 1997, Eastern sold its 50% interest in AllEnergy Marketing
Company, L.L.C. for $5.4 million.
On October 20, 1997 the United States Supreme Court granted Eastern's
petition for a writ of certiorari and agreed to hear Eastern's challenge to the
constitutionality of the Coal Industry Retiree Health Benefit Act of 1992 (the
"Coal Act"). In April 1997, the First Circuit Court of Appeals upheld the
constitutionality of the Coal Act as applied to Eastern, and it is that
decision that will now be reviewed by the Supreme Court. The Supreme Court's
ruling is expected by June 30, 1998.
Eastern has accrued pretax charges of $80.0 million for its estimated
undiscounted liability for health care and death benefit premiums under the
Coal Act. As discussed in Note 12 of Notes to Financial Statements, its
obligations for these premiums could range from a nominal amount to more than
$125 million.
On May 16, 1997 Boston Gas received a decision from the Massachusetts
Department of Telecommunications and Energy (the "Department"), formerly the
Department of Public Utilities, concerning its request for reconsideration,
clarification and recalculation of the Department's November 1996 rate
Form 10-K/12
<PAGE>
order. The Department granted Boston Gas an additional $1.9 million rate
increase (a $6.3 million increase was granted in the November 1996 order) and
reduced the productivity offset portion of the performance-based rate formula
established in its November 1996 order by 50 basis points, from 2.00% to 1.50%.
Compared to the Department's original decision, these changes will add
approximately $3.5 million to projected revenue in 1998, increasing to about
$8.0 million by 2002, the last year of the performance-based rate plan. On June
5, 1997, Boston Gas filed a notice of appeal of the Department's orders to the
Massachusetts Supreme Judicial Court. Boston Gas expects the appeal to be heard
some time in 1998.
Eastern may have or share responsibility for environmental remediation
and/or ongoing maintenance of certain non-utility sites associated with former
operations, the most significant of which is a former coal tar processing
facility, as described in Note 11 of Notes to Financial Statements. Eastern has
accrued a reserve of approximately $25 million at December 31, 1997, to cover
the potential remediation and maintenance costs of these sites. However,
Eastern does not possess at this time sufficient information to reasonably
determine or estimate the ultimate cost to it of such remediation and
maintenance.
Boston Gas may have or share responsibility under applicable
environmental law for the remediation of 17 former manufactured gas plant
("MGP") sites, as described in Note 11 of Notes to Financial Statements. A
subsidiary of New England Electric System has assumed responsibility for
remediating 10 of these sites, subject to a limited contribution from Boston
Gas. Boston Gas has recorded a liability of $19.5 million, which represents its
best estimate at this time of remediation costs, which may reasonably be
estimated to range from $17 million to $31 million. However, there can be no
assurance that such costs will not vary considerably from these estimates.
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. Boston Gas has recognized an insurance
receivable of $3.4 million, reflecting a negotiated settlement with an
insurance carrier for environmental expense indemnity, and a regulatory asset
of $16.1 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.
Eastern and its subsidiaries have assessed the impact of the year 2000
issue with respect to their information systems and are currently modifying
those systems as part of a plan which Eastern believes will provide year 2000
compliance. Anticipated spending for these modifications is being expensed as
incurred and is not expected to have a material impact on operating results or
financial condition.
Form 10-K/13
<PAGE>
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
-------------
Consolidated Statements of Operations Form 10-K/15
Consolidated Balance Sheets Form 10-K/16
Consolidated Statements of Cash Flows Form 10-K/18
Consolidated Statements of Shareholders' Equity Form 10-K/19
Notes to Financial Statements Form 10-K/20
Unaudited Quarterly Financial Information Form 10-K/31
Independent Auditors' Report Form 10-K/32
Management's Report on Responsibility Form 10-K/32
Form 10-K/14
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
- ------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Revenues $ 970,204 $1,007,342 $ 949,412
Operating costs and expenses:
Operating costs 684,582 716,595 668,701
Selling, general and administrative expenses 111,359 104,822 105,473
Depreciation and amortization 67,949 64,531 61,504
--------- ---------- ---------
Operating earnings 106,314 121,394 113,734
Other income (expense):
Interest income 8,997 9,419 5,633
Interest expense (34,318) (34,453) (38,536)
Other, net (4,371) (115) 4,103
--------- ---------- ---------
Earnings before income taxes 76,622 96,245 84,934
Provision for income taxes 24,672 35,580 24,553
--------- ---------- ---------
Earnings before extraordinary item 51,950 60,665 60,381
Extraordinary provision for coal miners retiree health
care, net of tax - - (6,500)
--------- ---------- ---------
Net earnings $ 51,950 $ 60,665 $ 53,881
========= ========== =========
Basic earnings per share before extraordinary
item $ 2.55 $ 2.99 $ 2.99
Extraordinary provision for coal miners retiree health
care, net of tax - - (.32)
--------- ---------- ---------
Basic earnings per share $ 2.55 $ 2.99 $ 2.67
========= ========== =========
Diluted earnings per share before extraordinary
item $ 2.54 $ 2.98 $ 2.98
Extraordinary provision for coal miners retiree health
care, net of tax - - (.32)
--------- ---------- ---------
Diluted earnings per share $ 2.54 $ 2.98 $ 2.66
========= ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Form 10-K/15
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- --------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 175,274 $ 159,804
Receivables, less reserves of $16,448 in 1997 and $16,648 in 1996 108,575 96,854
Inventories 56,644 61,271
Deferred gas costs 66,595 75,337
Other current assets 5,145 6,396
---------- ----------
Total current assets 412,233 399,662
Property and equipment, at cost 1,516,186 1,450,741
Less--accumulated depreciation 662,628 612,573
---------- ----------
Net property and equipment 853,558 838,168
Other assets:
Deferred post-retirement health care costs 83,926 88,563
Investments 15,072 33,378
Deferred charges and other costs, less amortization 69,568 61,844
---------- ----------
Total other assets 168,566 183,785
---------- ----------
Total assets $1,434,357 $1,421,615
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Form 10-K/16
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- ------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Current debt $ 44,051 $ 61,557
Accounts payable 67,740 74,114
Accrued expenses 37,143 25,999
Other current liabilities 65,762 72,722
---------- ----------
Total current liabilities 214,696 234,392
Gas inventory financing 55,502 55,594
Long-term debt 342,142 347,313
Reserves and other liabilities:
Deferred income taxes 98,863 93,198
Post-retirement health care 95,120 96,980
Coal miners retiree health care 57,000 61,008
Preferred stock of subsidiary 29,326 29,292
Other reserves 92,647 75,848
---------- ----------
Total reserves and other liabilities 372,956 356,326
Commitments and contingencies
Shareholders' equity:
Common stock $1.00 par value; Authorized shares--50,000,000;
Issued shares--20,442,907 in 1997 and 20,441,907 in 1996 20,443 20,442
Capital in excess of par value 32,663 33,389
Retained earnings 397,535 377,714
Treasury stock at cost--54,928 shares in 1997 and 138,110 shares
in 1996 (1,580) (3,555)
---------- ----------
Total shareholders' equity 449,061 427,990
---------- ----------
Total liabilities and shareholders' equity $1,434,357 $1,421,615
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Form 10-K/17
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
- ------------------------------------------------------ -------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 51,950 $ 60,665 $ 53,881
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary provision for coal miners retiree
health care, net of tax - - 6,500
Depreciation and amortization 67,949 64,531 61,504
Income taxes and tax credits 19,371 8,207 (1,119)
Equity in loss of AllEnergy 5,472 3,087 -
Net gain on sale of assets (1,435) (2,541) (20,990)
Provision for environmental expenditures - - 15,000
Other changes in assets and liabilities:
Receivables (11,721) 4,181 (3,942)
Inventories 4,627 (13,398) 12,337
Deferred gas costs 8,742 (3,397) 17,764
Accounts payable (6,374) 9,154 14,986
Other (4) (8,277) (3,269)
----------- ---------- ---------
Net cash provided by operating activities 138,577 122,212 152,652
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures (82,321) (111,755) (78,385)
Investments 3,588 (16,737) 1,900
Proceeds on sale of assets 6,720 3,210 118,343
Other (1,866) (2,540) (1,725)
---------- ---------- ---------
Net cash provided (used) by investing activities (73,879) (127,822) 40,133
---------- ---------- ---------
Cash flows from financing activities:
Dividends paid (32,549) (29,974) (28,365)
Changes in notes payable (17,300) 5,000 (10,530)
Changes in gas inventory financing (92) 9,994 (7,978)
Proceeds from issuance of long-term debt - - 60,000
Repayment of long-term debt (4,871) (7,356) (66,520)
Repurchase of stock - - (8,357)
Other 532 2,613 2,428
---------- ---------- ---------
Net cash used by financing activities (54,280) (19,723) (59,322)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 10,418 (25,333) 133,463
Cash and cash equivalents at beginning of year 159,804 185,137 51,674
---------- ---------- ---------
Cash and cash equivalents at end of year 170,222 159,804 185,137
Short-term investments 5,052 - 6,074
---------- ---------- ---------
Cash and short-term investments $175,274 $ 159,804 $ 191,211
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Form 10-K/18
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Capital In
Stock Excess of Retained Treasury
(In thousands) $1 Par Value Par Value Earnings Stock Total
- -------------------------------------------- -------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $20,652 $ 37,712 $ 321,880 $ (6,110) $ 374,134
Net earnings - - 53,881 - 53,881
Dividends declared--$1.42 per share - - (28,668) - (28,668)
Repurchase of stock - - - (8,357) (8,357)
Retirement of stock (300) (7,422) - 7,722 -
Unrealized gains on investments available
for sale, net - - 1,728 - 1,728
Issuance of stock, net 34 1,198 - 1,814 3,046
------- -------- --------- -------- ---------
Balance at December 31, 1995 20,386 31,488 348,821 (4,931) 395,764
Net earnings - - 60,665 - 60,665
Dividends declared--$1.51 per share - - (30,626) - (30,626)
Pension liability adjustment, net - - (1,569) - (1,569)
Unrealized gains on investments available
for sale, net - - 423 - 423
Issuance of stock, net 56 1,901 - 1,376 3,333
------- -------- --------- -------- ---------
Balance at December 31, 1996 20,442 33,389 377,714 (3,555) 427,990
Net earnings - - 51,950 - 51,950
Dividends declared--$1.61 per share - - (32,787) - (32,787)
Pension liability adjustment, net - - (261) - (261)
Unrealized gains on investments available
for sale, net - - 919 - 919
Executive stock purchase loan program - (1,156) - - (1,156)
Issuance of stock, net 1 430 - 1,975 2,406
------- -------- --------- -------- ---------
Balance at December 31, 1997 $20,443 $ 32,663 $ 397,535 $ (1,580) $ 449,061
======= ======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
Form 10-K/19
<PAGE>
Notes To Financial Statements
1. Accounting Policies
The consolidated financial statements include the accounts of Eastern
Enterprises ("Eastern"), Boston Gas Company ("Boston Gas") and Midland
Enterprises Inc. ("Midland").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year financial statement information has been reclassified
to be consistent with the current presentation. All material intercompany
balances and transactions have been eliminated in consolidation. Certain
accounting policies followed by Eastern and its subsidiaries are described
below:
Cash and short-term investments: Highly liquid instruments with original
maturities of three months or less are considered cash equivalents.
Inventories include the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- ---------------------------------------------------- ---------- ----------
<S> <C> <C>
Supplemental gas supplies $44,590 $49,287
Other materials, supplies and marine fuel 12,054 11,984
------- -------
$56,644 $61,271
======= =======
</TABLE>
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." Regulatory assets
represent probable future revenue associated with certain costs which will be
recovered from customers through the ratemaking process. Regulatory liabilities
represent probable future reductions in revenues associated with amounts that
are to be credited to customers through the ratemaking process.
Regulatory assets total $104,776,000 and $110,066,000 at December 31,
1997 and 1996, respectively, and relate primarily to post-retirement health
care costs, environmental remediation and pipeline transition costs. Regulatory
liabilities total $10,371,000 and $11,446,000 at December 31, 1997 and 1996,
respectively, and relate primarily to income taxes.
As of December 31, 1997 Boston Gas' regulatory assets and regulatory
liabilities are being reflected in rates charged to customers over periods from
1 to 22 years.
Boston Gas believes that the application of SFAS No. 71 is appropriate.
If, however, a portion of Boston Gas' operations were no longer subject to the
provisions of SFAS No. 71, a write-off of related regulatory assets and
liabilities would be required, unless some form of transition cost recovery
would continue through rates established and collected for Boston Gas'
remaining regulated operations.
Impairment of long-lived assets: Pursuant to SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," in the event that facts and circumstances indicate that the cost
of an asset may be impaired, an evaluation of the recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
value is required. Based on such evaluations there were no impairment charges
in 1997 or 1996.
Form 10-K/20
<PAGE>
Notes To Financial Statements-(Continued)
Other current liabilities include the following:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- --------------------------------------------------------- --------- ----------
<S> <C> <C>
Pipeline transition costs regulatory liability $ - $16,494
Coal miners retiree health care premiums 19,500 16,300
Reserves for insurance claims 11,980 11,881
Dividend payable 8,359 8,122
Severance accruals 5,369 -
Pipeline refunds due utility customers 3,136 3,384
Other 17,418 16,541
------- -------
$65,762 $72,722
======= =======
</TABLE>
Revenue recognition: Substantially all of Boston Gas' revenues are
recorded when billed. Boston Gas defers the cost of any firm gas that has been
distributed, but is unbilled at the end of a period, to the period in which the
gas is billed to customers. Midland recognizes revenue on tows in progress on
the percentage-of-completion method based on miles traveled.
Depreciation and amortization: Depreciation and amortization are provided
using the straight-line method at rates designed to allocate the cost of
property and equipment over their estimated useful lives. Because the rates of
depreciation on equipment vary with each property unit, it is impractical to
state each rate individually. Depreciation and amortization as a percentage of
average depreciable assets was as follows:
Years Ended December 31,
1997 1996
--------- ---------
Boston Gas 5.2% 5.2%
Midland 3.6% 3.7%
Headquarters 10.1% 10.1%
Earnings per share: SFAS No. 128, "Earnings per Share," requires the
computation 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.
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands, except per share amounts) 1997 1996 1995
- ---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Earnings before
extraordinary item $ 51,950 $ 60,665 $ 60,381
======== ======== ========
Weighted-average shares 20,358 20,274 20,187
Dilutive effect of options 110 110 59
-------- -------- --------
Adjusted weighted-average
shares 20,468 20,384 20,246
======== ======== ========
Basic earnings per share
before extraordinary item $ 2.55 $ 2.99 $ 2.99
======== ======== ========
Diluted earnings per share
before extraordinary item $ 2.54 $ 2.98 $ 2.98
======== ======== ========
</TABLE>
SFAS No. 128 was adopted in 1997. As a result, reported earnings per
share for 1996 and 1995 were restated. The effect of this accounting change on
previously reported earnings per share data was as follows:
Form 10-K/21
<PAGE>
Notes To Financial Statements-(Continued)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995
---------- ----------
<S> <C> <C>
Primary earnings per share before
extraordinary item, as previously reported $ 2.97 $ 2.98
Effect of SFAS 128 0.02 0.01
------- -------
Basic earnings per share before extraordinary
item, as restated $ 2.99 $ 2.99
======= =======
Fully diluted earnings per share before
extraordinary item, as previously reported $ 2.97 $ 2.98
Effect of SFAS 128 0.01 0.00
------- -------
Diluted earnings per share before
extraordinary item, as restated $ 2.98 $ 2.98
======= =======
</TABLE>
2. Business Segment Information
Operating results and other financial data are presented for Eastern's
two business segments: Boston Gas, a local natural gas distribution company
serving eastern and central Massachusetts, and Midland, an inland marine
transportation company.
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
- -------------------------------- ------------ ----------- ----------
<S> <C> <C> <C>
Revenues:
Boston Gas $ 700,945 $ 705,462 $ 653,073
Midland 269,259 301,880 296,339
---------- ---------- ----------
$ 970,204 $1,007,342 $ 949,412
---------- ---------- ----------
Operating earnings:
Boston Gas $ 78,770 $ 68,451 $ 61,662
Midland 34,614 58,415 57,828
Headquarters(1) (7,070) (5,472) (5,756)
---------- ---------- ----------
$ 106,314 $ 121,394 $ 113,734
========== ========== ==========
Identifiable assets, net of
depreciation and reserves:
Boston Gas $ 878,013 $ 877,044 $ 829,482
Midland 356,350 353,928 365,654
Headquarters(2) 199,994 190,643 182,206
---------- ---------- ----------
$1,434,357 $1,421,615 $1,377,342
========== ========== ==========
Capital expenditures:
Boston Gas $ 55,388 $ 58,504 $ 57,322
Midland 25,700 47,851 20,900
Headquarters 1,233 5,400 163
---------- ---------- ----------
$ 82,321 $ 111,755 $ 78,385
========== ========== ==========
Depreciation and
amortization:
Boston Gas $ 44,413 $ 41,607 $ 38,264
Midland 22,675 22,554 22,896
Headquarters 861 370 344
---------- ---------- ----------
$ 67,949 $ 64,531 $ 61,504
========== ========== ==========
</TABLE>
(1) Reflects unallocated corporate general and administrative expenses.
(2) Primarily includes cash and short-term investments.
Form 10-K/22
<PAGE>
Notes To Financial Statements-(Continued)
Boston Gas' operations are subject to Massachusetts statutes applicable
to gas utilities. Its revenues, earnings and cash flows are highly seasonal as
most of its firm sales and transportation are directly related to temperature
levels. Boston Gas purchases pipeline gas supplies from a variety of domestic
and Canadian producers and marketers, using a combination of long-term
commitments, firm winter service agreements and spot purchases. Boston Gas has
diversified its pipeline gas supplies across major North American producing
regions.
A significant portion of Midland's 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.
3. Long-Term Obligations and Current Debt
Credit agreement and lines of credit: Eastern maintains a credit
agreement with a group of banks, which provides for the borrowing by Eastern
and its subsidiaries of up to $100,000,000 at any time through December 31,
2001. The interest rate for borrowings is the agent bank's prime rate or, at
the borrower's option, various pricing alternatives. The agreement requires a
facility fee of 1/8 of 1% of the commitment. At December 31, 1997 and 1996 no
borrowings were outstanding. Boston Gas utilizes a portion of the credit
agreement to back its commercial paper borrowings. In addition, Eastern and
Boston Gas have various uncommitted lines of credit which are utilized for
working capital needs and provide for interest at the bank's prime rate or, at
the borrower's option, various pricing alternatives. Included in current debt
were $39,700,000 and $57,000,000 of commercial paper with a weighted average
interest rate of 6.19% and 5.99% at December 31, 1997 and December 31, 1996,
respectively.
Gas inventory financing: Boston Gas maintains a long-term credit
agreement with a group of banks, which provides for the borrowing of up to
$70,000,000 for the exclusive purpose of funding its inventory of gas supplies
or for backing commercial paper issued for the same purpose. All costs related
to this funding are recoverable from customers. Boston Gas had $55,502,000 and
$55,594,000 of commercial paper outstanding to fund its inventory of gas
supplies at December 31, 1997 and 1996, respectively. Since the commercial
paper is supported by the credit agreement, these borrowings have been
classified as non-current in the accompanying consolidated balance sheets. The
credit agreement includes a one-year revolving credit facility which may be
converted to a two-year term loan at the option of Boston Gas if the one-year
revolving credit facility is not renewed by the banks. Boston Gas may select
the agent bank's prime rate or, at Boston Gas' option, various pricing
alternatives. The agreement requires a facility fee of 1/12 of 1% on the
commitment. No borrowings were outstanding under this agreement during 1997 and
1996.
Description of long-term debt:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
------------------------------------ ----------- -----------
<S> <C> <C>
Boston Gas:
8.33%-9.75% Medium-Term Notes,
Series A, due 2005-2022 $100,000 $100,000
6.93%-8.50% Medium-Term Notes,
Series B, due 2006-2024 50,000 50,000
6.80%-7.25% Medium-Term Notes,
Series C, due 2012-2025 60,000 60,000
Capital leases - 570
Less--current portion - (570)
-------- --------
Boston Gas long-term debt 210,000 210,000
-------- --------
</TABLE>
Form 10-K/23
<PAGE>
Notes To Financial Statements-(Continued)
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
------------------------------------- ----------- -----------
<S> <C> <C>
Midland:
First Preferred Ship Mortgages
9.9% Bonds, due 2008 47,791 48,399
8.1%-9.85% Medium-Term Notes,
Series A, due 2002-2012 68,000 68,000
Capital leases 20,702 24,901
Less--current portion (4,351) (3,987)
------ ------
Midland long-term debt 132,142 137,313
------- -------
Total long-term debt $342,142 $347,313
======== ========
</TABLE>
Midland's First Preferred Ship Mortgage Bonds and Medium-Term Notes are
secured by certain transportation equipment.
Boston Gas' and Midland's Medium-Term Notes are not callable prior to
maturity. Midland's First Preferred Ship Mortgage Bonds are not callable until
April 1, 1998.
Capital leases consist of equipment lease obligations with a weighted
average interest rate of 10.03%. Minimum lease payments under these agreements
are due in installments through 2003.
Debt payment requirements and maturities, net of amounts acquired in
advance, are $4,351,000, $9,793,000, $10,280,000, $9,228,000 and $9,695,000 for
1998 through 2002, respectively, and cumulatively $303,146,000 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 rentals charged to expense were
$10,588,000 in 1997, $13,525,000 in 1996 and $13,603,000 in 1995.
Future minimum lease commitments under operating leases are $5,812,000,
$5,324,000, $4,495,000, $3,890,000, $3,254,000 for 1998 through 2002,
respectively, and cumulatively $4,102,000 thereafter.
4. Preferred Stock of Subsidiary
Boston Gas has outstanding 1,200,000 shares of 6.421% Cumulative
Preferred Stock, which is non-voting and has a liquidation value of $25 per
share. The preferred stock requires 5% annual sinking fund payments beginning
on September 1, 1999 with a final redemption on September 1, 2018. The
preferred stock is not callable prior to 2003.
5. Planned Merger with Essex County Gas Company
On December 22, 1997 Eastern and Essex County Gas Company ("Essex")
signed a definitive merger agreement that calls for each share of Essex common
stock to be converted into 1.183985 shares of Eastern common stock, subject to
adjustment. As of December 1, 1997 Essex had approximately 1.8 million shares
outstanding on a diluted basis. The actual number of Eastern shares to be
issued will be adjusted to ensure that the value of Eastern common stock to be
issued for each Essex share will not be less than $45.00 nor more than $50.00,
based upon the average market price during a specified period prior to closing.
The transaction is expected to close in mid-1998, subject to receipt of
regulatory and Essex shareholders' approval. The merger is expected to be
tax-free and accounted for as a pooling of interests.
6. Stock Plans
Eastern has three stock option plans which provide for the issuance of
non-qualified stock options, incentive stock options and stock appreciation
rights ("SARs") to its officers, non-employee trustees and key employees.
Options and SARs may be granted at prices not less than fair market value on
the date of grant for periods not extending beyond ten years from the date of
grant. No SARs have been granted since 1991. In 1995, the right to exercise
SARs was effectively eliminated.
Form 10-K/24
<PAGE>
Notes To Financial Statements-(Continued)
Eastern applies Accounting Principles Board Opinion 25 in accounting for
its plans. Accordingly, no compensation cost has been recognized for its stock
option plans and its employee stock purchase plan. Had compensation cost for
Eastern's plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," Eastern's net earnings would have been reduced by
$410,000 or $.02 per share in 1997, $290,000 or $.01 per share in 1996 and by
$170,000 or $.01 per share in 1995.
As the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting reductions in net earnings and
earnings per share may not be representative of that to be expected in future
years.
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 1997, 1996 and 1995,
respectively: dividend yields of 4.0% in each year; expected volatilities of
17.8%, 18.3% and 18.6%; risk-free interest rates of 6.1%, 5.4% and 6.0%; and an
expected life of 5.0 years for each year.
Shares available for future grants under these stock option plans were
844,777 at December 31, 1997, 1,003,127 at December 31, 1996 and 1,036,428 at
December 31, 1995. Stock options exercisable at December 31, 1997 and 1996 were
500,640 and 488,450, respectively.
Option activity during the past three years was as follows:
<TABLE>
<CAPTION>
Average Stock
Option Price Options SARs
------------ --------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1994 $25.83 654,711 127,960
Granted 26.96 106,250 -
Exercised 24.94 (33,662) (20,140)
Surrendered 21.94 (20,140) (7,200)
Canceled 26.93 (23,550) (5,400)
------- -------
Outstanding at December 31, 1995 $26.13 683,609 95,220
Granted 35.96 133,200 -
Exercised 22.99 (44,320) -
Surrendered - - (7,170)
Canceled 29.20 (24,899) (350)
------- -------
Outstanding at December 31, 1996 $27.96 747,590 87,700
Granted 33.63 161,700 -
Exercised 24.57 (52,140) -
Surrendered - - (22,500)
Canceled 35.52 (3,350) -
------- -------
Outstanding at December 31, 1997 $29.21 853,800 65,200
======= =======
</TABLE>
At December 31, 1997, the range of exercise prices of outstanding and
exercisable options was $22.06 to $37.00 and $22.06 to $36.25, respectively.
Under restricted stock plans for key employees and non-employee trustees,
Eastern awarded 4,400 shares in 1997 and 1996 and 2,800 shares in 1995. Eastern
recognized compensation expense of $109,000 in 1997, $305,000 in 1996 and
$425,000 in 1995 in accordance with the vesting terms of these and prior
awards. Shares available for future awards under these plans were 33,300 at
December 31, 1997 and 36,100 at December 31, 1996.
7. Common Stock Purchase Rights
On February 22, 1990, Eastern declared a distribution to shareholders of
record on March 5, 1990, pursuant to the terms of a Common Stock Rights
Agreement between Eastern and The First National Bank of Boston, the current
Rights Agent, of one common stock purchase right for each outstanding share of
common stock. Each right would initially entitle the holder to purchase one
share of common stock at an exercise price of $100, subject to adjustment to
prevent dilution. The rights become exercisable on the 10th business day after
a person acquires 20% or more of Eastern's stock or commences a tender offer
for 20% or more of Eastern's stock, or on the 10th business day after Eastern's
Board of Trustees
Form 10-K/25
<PAGE>
Notes To Financial Statements-(Continued)
determines that a shareholder owning at least 10% of Eastern's stock is an
"adverse person," based on criteria specified in the rights agreement. The
rights may be redeemed by Eastern at a price of $.01 at any time prior to the
10th day after a 20% position has been acquired. The rights will expire on
March 5, 2000.
If Eastern is acquired in a merger or other business combination, each
right will entitle its holder to purchase common shares of the acquiring
company having a market value of twice the exercise price of each right (i.e.,
at a 50% discount). If an acquiror purchases 20% of Eastern's common stock or
has been determined to be an "adverse person," each right will entitle its
holder to purchase a number of Eastern's common shares having a market value of
twice the right's exercise price.
8. Interest Expense
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
- ------------------------------------------ ---------- ---------- ---------
<S> <C> <C> <C>
Interest on long-term debt $30,298 $30,811 $33,257
Other, including amortization of
debt expense 2,703 2,240 3,852
Less--capitalized interest (609) (524) (499)
Subsidiary preferred stock dividends 1,926 1,926 1,926
------- ------- -------
Interest expense $34,318 $34,453 $38,536
======= ======= =======
Interest payments $33,432 $33,236 $35,552
======= ======= =======
</TABLE>
9. Other Income (Expense)
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
- ------------------------------------------- ---------- --------- --------
<S> <C> <C> <C>
Net gain on sale of assets $ 778 $ 2,775 $ 21,087
Equity in loss of AllEnergy (5,472) (3,087) -
Provision for environmental expenses - - (15,000)
Other 323 197 (1,984)
------- ------- --------
$(4,371) $ (115) $ 4,103
======= ======= ========
</TABLE>
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.
In November 1995, Eastern sold its 3,041,092 shares of United States
Filter Corporation common stock in a public offering for $65,479,000 in cash
realizing a gain of $20,581,000.
10. Income Taxes
The table below reconciles the statutory U.S. Federal income tax
provision from continuing operations to the recorded income tax provision:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rate 35% 35% 35%
State taxes, net of Federal benefit 3 3 3
Prior year adjustments (4) - -
Capital loss utilization - - (9)
Other (2) (1) -
----- ----- ----
Effective rate 32% 37% 29%
==== ==== ====
</TABLE>
The capital loss utilization in 1995 reflects a gain on the sale of the
U.S. Filter investment offset by a tax loss on the sale of a subsidiary, which
had been written down in 1993.
Form 10-K/26
<PAGE>
Notes To Financial Statements-(Continued)
Following is a summary of the provision for income taxes:
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
--------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Federal $10,894 $23,969 $ 21,024
State 4,043 3,148 5,160
------- ------- --------
Total current provision 14,937 27,117 26,184
Federal 10,073 7,118 (806)
State (338) 1,345 (825)
------- ------- --------
Total deferred provision 9,735 8,463 (1,631)
------- ------- --------
Provision for income taxes $24,672 $35,580 $ 24,553
======= ======= ========
Tax payments $ 6,075 $28,917 $ 25,298
======= ======= ========
</TABLE>
Significant items making up deferred tax assets and deferred tax
liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
-------------------------------------- ------------- -------------
<S> <C> <C>
Coal miners retiree health care $ 26,761 $ 27,073
Unbilled revenue 17,513 22,392
Environmental reserves 7,886 7,776
Other 32,286 30,873
--------- ---------
Total deferred tax assets 84,446 88,114
Accelerated depreciation (145,469) (140,159)
Deferred gas costs (27,418) (28,684)
Other (21,227) (17,474)
--------- ---------
Total deferred tax liabilities (194,114) (186,317)
--------- ---------
Total deferred taxes $(109,668) $ (98,203)
========= =========
</TABLE>
11. Environmental Matters
Eastern is aware of certain non-utility sites, associated with former
operations, for which it may have or share environmental remediation
responsibility or ongoing maintenance. Eastern has a reserve of approximately
$25 million in total at December 31, 1997 to cover the remediation and
maintenance of these sites, the principal of which is a former coal tar
processing facility (the "Facility") in Everett, Massachusetts. While Eastern
has provided reserves to cover the estimated probable costs of remediation and
maintenance for environmental sites based on the information available at the
present time, the extent of Eastern's potential liability at such sites is not
yet determined.
The Facility, which was located on a 10-acre parcel of land formerly owned
by Eastern, was operated by predecessors of Allied-Signal, Inc. from the early
1900s until 1937 and by Koppers Company, predecessor of Beazer East, Inc. (and
Eastern's controlling stockholder until 1951) from 1937 until 1960, when it was
shut down. The Facility processed coal tar purchased from Eastern's adjacent
by-product coke plant, also shut down in 1960. Eastern, Beazer and Allied-Signal
entered into an Administrative Consent Order with 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
Form 10-K/27
<PAGE>
Notes To Financial Statements-(Continued)
1995 and 1996, Eastern conducted and received the results of certain sediment
sampling which confirmed findings of contamination in the riverbed. In light of
uncertainties as to the full extent and sources of releases of compounds, the
nature of any required remediation, the area and volume of soil, ground water
and/or sediments that may be included, the possibility of participation by
additional potentially responsible parties and the apportionment of liability,
Eastern does not possess at this time sufficient information to reasonably
determine or estimate the ultimate cost to it of such remedial measures.
Eastern is recovering certain costs of its legal defense and may be entitled to
recover remediation costs from its insurers.
Boston Gas, like many other companies in the natural gas industry, is
party to governmental proceedings requiring investigation and possible
remediation of former manufactured gas plant ("MGP") sites. Boston Gas may have
or share responsibility under applicable environmental laws for the remediation
of 17 such sites. A subsidiary of New England Electric System ("NEES") has
assumed responsibility for remediating 10 of these sites, subject to a limited
contribution from Boston Gas. Boston Gas has estimated its 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." Boston Gas has recorded a liability of $19.5 million,
which represents its best estimate at this time of remediation costs, which may
reasonably be estimated to range from $17 million to $31 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 is aware of 21 other former MGP sites within its service
territory. 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 has or shares responsibility for
remediating any of these other sites. No notice of responsibility has been
issued to Boston Gas for any of these sites from any governmental environmental
authority.
By a rate order issued on May 25, 1990, the Department approved the
recovery of all prudently incurred environmental response costs associated with
former MGP sites over separate, seven-year amortization periods, without a
return on the unamortized balance. Boston Gas has recognized an insurance
receivable of $3.4 million, reflecting a negotiated settlement with an
insurance carrier for environmental expense indemnity, and a regulatory asset
of $16.1 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.
12. Coal Miners Retiree Health Care
In September 1993, Eastern received notice from the Social Security
Administration ("SSA") claiming that Eastern is responsible for health care and
death benefit premiums for certain retired coal miners and their beneficiaries
under the Federal Coal Industry Retiree Health Benefit Act of 1992 ("Coal
Act"). In 1995, 1996, and 1997, Eastern received SSA notices of responsibility
relating to additional retired coal miners and their beneficiaries. The total
amount of premiums requested for all assignments aggregates in excess of
$19,000,000 to cover the period from February 1, 1993 through September 30,
1998, exclusive of interest, and primarily relates to retired miners who are
said to have worked for Eastern's Coal Division prior to the transfer of those
operations to a subsidiary in 1965. Eastern filed suit in Federal District
Court in Massachusetts against the Commissioner of the SSA and the Trustees of
the United Mine Workers of America Combined Benefit Fund seeking to avoid
payment of premiums based on the SSA's assignments under the Coal Act and to
have the Coal Act declared unconstitutional. In April 1997, the First Circuit
Court of Appeals approved the District Court's decision upholding the
constitutionality of the Coal Act. On October 20, 1997, the U.S. Supreme Court
granted Eastern's petition and agreed to review the First Circuit's ruling. A
decision is expected from the U.S. Supreme Court by June 30, 1998. Eastern also
asserted a claim in the Federal District Court in Massachusetts in January,
1994 against Peabody Holding Company, Inc. ("Peabody"), to which Eastern sold
its coal subsidiaries in 1987,
Form 10-K/28
<PAGE>
Notes To Financial Statements-(Continued)
that any liabilities of Eastern under the Coal Act should be borne by Peabody
and such subsidiaries. Eastern has posted security to delay payment of premiums
pending the final outcome of its constitutional challenge.
In 1993, Eastern recorded a reserve of $70,000,000 ($45,500,000 net of
tax or $2.02 per share) to provide for its estimated undiscounted obligations
under the Coal Act with respect to notices received from the SSA in that year.
Principally due to the additional notices received, in 1995 Eastern recorded an
additional reserve of $10,000,000 ($6,500,000 net of tax or $.32 per share).
These reserves have been accounted for as extraordinary items. No additional
reserve was recorded for 1996 or 1997, as the impact of the additional notices
received was offset by a decrease in the estimated rate of medical inflation.
Management has estimated that Eastern's obligation could range from a nominal
amount to more than $125 million depending on the outcome of its constitutional
challenge or its claim against Peabody, or other factors including
administrative review of assigned individuals, the availability of transfers
from the Abandoned Mine Reclamation Fund to pay for the health care premiums of
unassigned miners and their beneficiaries, the resetting of premiums, medical
inflation rates, Medicare reimbursements, other changes in government health
care programs and possible changes in the terms of the Coal Act.
13. Retiree Benefits
Eastern and its subsidiaries, through various company-administered plans
and other union retirement and welfare plans, provide retirement benefits for
the majority of their employees, including pension and certain health care and
life insurance benefits. Normal retirement age is 65 but provision is made for
earlier retirement. Pension benefits for salaried plans are based on salary and
years of service, while union retirement and welfare plans are based on
negotiated benefits and years of service. Employees hired before 1993 who are
participants in the pension plans become eligible for post-retirement health
care benefits if they reach retirement age while working for Eastern. The
funding of retirement and employee benefit plans is in accordance with the
requirements of the plans and, where applicable, in sufficient amounts to
satisfy the "Minimum Funding Standards" of the Employee Retirement Income
Security Act ("ERISA"). The net cost for these plans and agreements charged to
expense was as follows:
Pensions
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Service cost $ 4,859 $ 4,714 $ 4,705
Interest cost on projected benefit obligation 12,055 11,537 10,803
Actual return on plan assets (53,260) (16,859) (29,924)
Net amortization and deferral 37,394 4,992 19,011
--------- --------- ---------
Total net pension cost of company-administered plans 1,048 4,384 4,595
Multi-employer union retirement and welfare plans 270 293 293
--------- --------- ---------
Total net pension cost $ 1,318 $ 4,677 $ 4,888
========= ========= =========
</TABLE>
Health Care
<TABLE>
<CAPTION>
Years Ended December 31,
(In thousands) 1997 1996 1995
- ----------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 904 $ 899 $ 864
Interest cost on accumulated benefits obligation 6,802 6,849 6,615
Actual return on plan assets (5,958) (1,355) 2,352
Net amortization and deferral 2,833 (1,357) (4,706)
Amortization and deferral of deferred costs 4,637 5,266 3,760
-------- -------- --------
Total net retiree health care cost $ 9,218 $ 10,302 $ 8,885
======== ======== ========
</TABLE>
The following table sets forth the funded status of company-administered
plans and amounts recorded in Eastern's consolidated balance sheet as of
December 31, 1997 and 1996 using actuarial measurement dates as of October 1,
1997 and 1996:
Form 10-K/29
<PAGE>
Notes To Financial Statements-(Continued)
<TABLE>
<CAPTION>
Pensions Health Care
(In thousands) 1997 1996 1997 1996
- -------------------------------------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested benefits $ 137,462 $ 130,841 $ 80,456 $ 77,524
Non-vested benefits 13,624 13,404 16,925 16,831
--------- --------- --------- ---------
151,086 144,245 97,381 94,355
Effect of future salary increases 19,555 19,670 - -
--------- --------- --------- ---------
Projected benefit obligation ("PBO") $ 170,641 $ 163,915 $ 97,381 $ 94,355
========= ========= ========= =========
Plan assets at fair value $ 231,522 $ 192,736 $ 23,877 $ 17,918
Less PBO 170,641 163,915 97,381 94,355
--------- --------- --------- ---------
Plan assets in excess of (less than) PBO 60,881 28,821 (73,504) (76,437)
Unrecognized net obligation at December 31,
1985 being amortized over 15 years 1,308 1,721 - -
Unrecognized net gain (62,765) (31,551) (9,977) (7,528)
Unrecognized prior service cost (benefit) 14,243 14,986 (11,639) (13,015)
Amounts contributed to plans during fourth
quarter 206 227 - -
Unfunded accumulated benefits (5,058) (4,705) - -
--------- --------- --------- ---------
Net asset (reserve) at December 31 $ 8,815 $ 9,499 $ (95,120) $ (96,980)
========= ========= ========= =========
</TABLE>
The above vested health care benefits include $73,515,000 and $69,864,000
for retirees in 1997 and 1996, respectively. To fund health care benefits under
its collective bargaining agreements Boston Gas maintains a Voluntary Employee
Beneficiary Association ("VEBA"), to which it makes contributions from time to
time. Plan assets are invested in equity securities, fixed-income investments
and money market instruments.
Following are the assumptions used in the actuarial measurements for 1997
and 1996:
Discount rate 7.5%
Return on plan assets 8.5%
Increase in future compensation 4.75-5.00%
Health care inflation trend 7.0%
The health care inflation trend is assumed to be 7% through 1999, 6% in
2000 and 5% thereafter. A one-percentage-point increase in the assumed health
care cost trend would have increased the net periodic post-retirement benefit
cost charged to expense and the accumulated benefit obligation by $107,000 and
$5,679,000, respectively, in 1997 and $82,000 and $7,268,000, respectively, in
1996.
14. Fair Values of Financial Instruments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which requires investments in debt and equity securities
other than those accounted for under the equity method to be carried at fair
value or amortized cost for debt securities expected to be held to maturity,
Eastern has classified its investments in debt and equity securities as
available for sale. Accordingly, the net unrealized gains and losses computed
in marking these securities to market have been reported as a component of
shareholders' equity. The difference between the fair value and the original
cost of these securities is a net unrealized gain of $3,703,000 and $2,784,000,
in 1997 and 1996, respectively.
The following methods and assumptions were used to estimate the fair
value disclosures for financial instruments:
Cash, short-term investments and current debt: The carrying amounts
approximate fair value because of the short maturity of those instruments.
Current debt includes notes payable and gas inventory financing.
Other current assets and investments: Other current assets and
investments include marketable securities classified as available for sale.
Pursuant to SFAS No. 115 the carrying value is the fair value.
Long-term debt and preferred stock of subsidiary: The fair values are
based on currently-quoted market prices.
Form 10-K/30
<PAGE>
Notes To Financial Statements-(Continued)
The carrying amounts and estimated fair values of Eastern's financial
instruments are as follows:
<TABLE>
<CAPTION>
December 31,
(In thousands) 1997 1996
- ------------------------------------------ ------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and short-term investments $175,274 $175,274 $159,804 $159,804
Marketable securities and investments 15,311 15,311 31,531 31,531
Short-term debt 95,202 95,202 112,594 112,594
Long-term debt 346,493 386,153 351,870 382,909
Preferred stock of subsidiary 29,326 31,525 29,292 29,586
</TABLE>
15. Unaudited Quarterly Financial Information
<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>
1997:
Revenues $ 376,920 $ 207,856 $125,524 $ 259,904
Operating earnings 52,977 18,629 618 34,090
Earnings before income taxes 44,988 10,586 (6,345) 27,393
Net earnings $ 28,223 $ 9,038 $ (4,072) $ 18,761
========= ========= ======== =========
Basic earnings per share(1) $ 1.39 $ .44 $ (.20) $ .92
========= ========= ======== =========
Diluted earnings per share(1) $ 1.38 $ .44 $ (.20) $ .92
========= ========= ======== =========
1996:
Revenues $ 419,220 $ 213,520 $133,950 $ 240,652
Operating earnings 59,181 22,588 4,926 34,699
Earnings before income taxes 52,504 15,878 538 27,325
Net earnings $ 32,882 $ 9,924 $ 699 $ 17,160
========= ========= ======== =========
Basic earnings per share(1) $ 1.63 $ .49 $ .03 $ .84
========= ========= ======== =========
Diluted earnings per share(1) $ 1.62 $ .49 $ .03 $ .84
========= ========= ======== =========
</TABLE>
(1) Reflects adoption of SFAS No. 128, "Earnings per Share," as described in
Note 1 of Notes to Financial Statements.
Form 10-K/31
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of Eastern Enterprises:
We have audited the accompanying consolidated balance sheets of Eastern
Enterprises (a Massachusetts voluntary association) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Eastern Enterprises
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1998.
Management's Report on Responsibility
The management of Eastern Enterprises is responsible for the preparation,
integrity and fair presentation of the Company's financial statements. These
statements have been prepared in accordance with generally accepted accounting
principles and, as such, include amounts based on management's informed
judgments and estimates. The financial statements have been audited by the
independent accounting firm of Arthur Andersen LLP which was given unrestricted
access to all financial records and related data.
Eastern maintains a system of internal control over financial reporting
which is designed to provide reasonable assurance to the Company's management
and Board of Trustees regarding the preparation of reliable financial
statements and the safeguarding of assets. The system includes a documented
organizational structure and division of responsibility, an internal audit
staff, the careful selection and development of personnel and established
policies and procedures, including policies to foster a strong ethical climate
and control environment, which are communicated throughout Eastern.
The Audit Committee of the Board of Trustees, consisting solely of
outside trustees, meets periodically with management, internal auditors and the
independent auditors to review internal accounting controls, and the accounting
principles and practices used to report financial condition and the results of
operations. The Audit Committee also annually recommends to the Board of
Trustees the selection of independent auditors.
/s/ J. Atwood Ives /s/ Walter J. Flaherty /s/ James J. Harper
J. Atwood Ives Walter J. Flaherty James J. Harper
Chairman and Senior Vice President and Vice President and
Chief Executive Officer Chief Financial Officer Controller
Form 10-K/32
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to this item may be found in the sections
captioned "Information With Respect To Nominees and Trustees" appearing on
pages 4 through 6 and "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing on page 13 of the 1998 definitive Proxy Statement. Such information
is incorporated herein by reference. See also the item captioned "Executive
Officers of the Registrant" at the end of Part I hereof.
Item 11. Executive Compensation
Information with respect to this item may be found in the sections
captioned "Compensation of Executive Officers" appearing on pages 8 through 10,
"Compensation of Trustees" appearing on pages 11 and 12, "Termination of
Employment and Change of Control Arrangements" appearing on pages 12 and 13,
"Compensation Committee Report" appearing on pages 13 through 16 and
"Performance Graph" appearing on page 17 of the 1998 definitive Proxy
Statement. Such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information with respect to this item may be found in the sections
captioned "Information With Respect To Certain Shareholders" appearing on page
2 and "Stock Ownership of Trustees and Executive Officers" appearing on page 7
of the 1998 definitive Proxy Statement. Such information is incorporated herein
by reference.
Item 13. Certain Relationships and Related Transactions
Information with respect to this item may be found in the last paragraph
in the section captioned "Compensation of Executive Officers" appearing on
pages 8 through 10, and in the sections captioned "Compensation of Trustees"
appearing on pages 11 and 12, "Termination of Employment and Change of Control
Arrangements" appearing on pages 12 and 13 and "Certain Transactions" appearing
on page 18 of the 1998 definitive Proxy Statement. Such information is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)
(1) and (2) List of Financial Statements and Financial Statement Schedules
Exhibits and Financial Statement Schedules to the Form 10-K have been
included only with the copies of the Form 10-K filed with the SEC. A copy of
this Form 10-K, including a list of exhibits and Financial Statement Schedules
is available free of charge upon written request to: Corporate Relations
Department, Eastern Enterprises, 9 Riverside Road, Weston, MA 02193.
Form 10-K/33
<PAGE>
(3) LIST OF EXHIBITS
<TABLE>
<S> <C>
3.1 -- Declaration of Trust of Eastern Enterprises, as amended through April 27, 1989 (filed as
Exhibit 3.1 to Quarterly Report of Eastern Enterprises on Form 10-Q for the quarter ended
June 30, 1989 (File no. 1-2297)).*
3.2 -- By-Laws of Eastern Enterprises, as amended through July 23, 1992 (filed as Exhibit 3.1 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended June 30, 1992 (File no.
1-2297)).*
(NOTE: Eastern agrees to furnish to the Securities and Exchange Commission upon request a
copy of any instrument with respect to long-term debt of Eastern or any of its subsidiaries.
Such instruments are not filed herewith since no such instrument authorizes securities in an
amount greater than 10% of the total assets of Eastern and its subsidiaries on a consolidated
basis.)
4.1 -- Common Stock Rights Agreement between Eastern and The Bank of New York, dated as of
February 22, 1990, and Exhibits attached thereto (filed as Exhibit 1 to Form 8-K of Eastern
dated March 1, 1990 (File no. 1-2297)).*
4.1.1 -- Agreement between Eastern and The First National Bank of Boston, dated January 30, 1995
(filed as Exhibit 4.1.1 to Annual Report of Eastern on Form 10-K for year ended December
31, 1994 (File no. 1-2297)).*
10.1 -- Gas Transportation Contract between Boston Gas Company and Tennessee Gas Pipeline
Company dated as of September 1, 1993 (filed as Exhibit 10.1 to Annual Report of Boston
Gas Company on Form 10-K for the year ended December 31, 1993 (File no. 2-23416)).*
10.2 -- Gas Transportation Contracts between Boston Gas Company and Texas Eastern Transmission
Corporation dated December 30, 1993 (filed as Exhibits 10.2 and 10.3 to Annual Report of
Boston Gas Company on Form 10-K for the year ended December 31, 1993 (File no.
2-23416)).*
10.3 -- Gas Transportation Contracts between Boston Gas Company and Algonquin Gas
Transmission Company dated December 30, 1993 (filed as Exhibits 10.4 and 10.5 to Annual
Report of Boston Gas Company on Form 10-K for the year ended December 31, 1993 (File
no. 2-23416)).*
10.4 -- Firm Gas Transportation Agreement between Boston Gas Company and Iroquois Gas
Transmission System, L.P., dated as of February 7, 1991 (filed as Exhibit 10.17 to the Annual
Report of Boston Gas Company on Form 10-K for the year ended December 31, 1990 (File
no. 2-23416)).*
10.5 -- Eastern's Deferred Compensation Plan for Trustees, as amended (filed as Exhibit 10.7 to
Annual Report of Eastern on Form 10-K for the year ended December 31, 1993 (File no.
1-2297)).*(a)
10.5.1 -- Amendment to Eastern's Deferred Compensation Plan for Trustees, dated December 8, 1995
(Filed as Exhibit 10.5.1 to Annual Report of Eastern on Form 10-K for year ended December
31, 1995 (File no. 1-2297)).*(a)
10.6 -- Eastern's 1982 Stock Option Plan, as amended (filed as Exhibit 10.2 to Quarterly Report of
Eastern on Form 10-Q for the quarter ended March 31, 1992 (File no. 1-2297)).*(a)
10.7 -- Eastern's 1995 Stock Option Plan (filed as Exhibit 10.9 to Annual Report of Eastern on Form
10-K for the year ended December 31, 1994 (File no. 1-2297)).*(a)
10.8 -- Eastern's Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10.1 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994 (File no.
1-2297)).*(a)
10.8.1 -- Amendment to Eastern's Supplemental Executive Retirement Plan, dated December 8, 1995
(Filed as Exhibit 10.8.1 to Annual Report of Eastern on Form 10-K for year ended December
31, 1995 (File no. 1-2297)).*(a)
10.9 -- Trust Agreement between Eastern and Shawmut Bank of Boston, N.A., as amended (filed as
Exhibit 10.12 to the Annual Report of Eastern on Form 10-K for the year ended December
31, 1990 (File no. 1-2297)).*(a)
10.9.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of Boston, N.A. (filed
as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for quarter June 30, 1995 (File
no. 1-2297)).*(a)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.9.2 -- Amendment to Trust Agreement between Eastern and the Key Trust Company of Ohio, N.A.,
as successor trustee, dated December 8, 1995 (filed as Exhibit 10.9.2 to Annual Report of
Eastern on Form 10-K for year ended December 31, 1995 (File no. 1-2297)).*(a)
10.10 -- Eastern's Executive Incentive Compensation Plan, as amended (filed as Exhibit 10.3 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1992 (File no.
1-2297)).*(a)
10.11 -- Salary Continuation Agreement between Eastern and certain officers (filed as Exhibit 10.2 to
Quarterly Report of Eastern on Form 10-Q for quarter ended September 30, 1994 (File no.
1-2297)).*(a)
10.12 -- Agreement dated November 27, 1991 between Eastern and J. Atwood Ives (filed as Exhibit
10.14 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1991
(File no. 1-2297)).*(a)
10.13 -- Agreement dated October 25, 1991 between Eastern and Richard R. Clayton (filed as Exhibit
10.15 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1991
(File no. 1-2297)).*(a)
10.14 -- Agreement dated April 28, 1994 between Eastern and J. Atwood Ives (filed as Exhibit 10.2 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994 (File no.
1-2297)).*(a)
10.15 -- Agreement dated April 28, 1994 between Eastern and Richard R. Clayton (filed as Exhibit 10.3
to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994 (File no.
1-2297)).*(a)
10.16 -- Eastern's Headquarters Retirement Plan, as amended (filed as Exhibit 10.1 to Quarterly Report
of Eastern on Form 10-Q for the quarter ended September 30, 1991 (File no.
1-2297)).*(a)
10.16.1 -- Amendment to Eastern's Headquarters Retirement Plan, dated April 27, 1995 (filed as Exhibit
10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter June 30, 1995 (File no.
1-2297)).*(a)
10.16.2 -- Amendment to Eastern's Headquarters Retirement Plan, dated June 26, 1997.(a)
10.17 -- Midland Enterprises Inc. Salaried Retirement Plan, as amended and restated (filed as Exhibit
10.2 to Quarterly Report of Eastern on Form 10-Q for quarter ended September 30, 1991 (File
no. 1-2297)).*(a)
10.17.1 -- Amendment to Midland Enterprises Inc. Salaried Retirement Plan, dated November 4, 1994
(filed as Exhibit 10.19.1 to Annual Report of Eastern on Form 10-K for year ended December
31, 1994 (File no. 1-2297)).*(a)
10.18 -- Boston Gas Company Retirement Plan, as amended and restated (filed as Exhibit 10.3 to
Quarterly Report of Eastern on Form 10-Q for the quarter ended September 30, 1991 (File no.
1-2297)).*(a)
10.18.1 -- Amendment to Boston Gas Company Retirement Plan, dated December 5, 1994 (filed as
Exhibit 10.20.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1994
(File no. 1-2297)).*(a)
10.19 -- Trust Agreement made as of October 2, 1987 between Eastern and The Bank of New York, as
amended (filed as Exhibit 10.19 to the Annual Report of Eastern on Form 10-K for the year
ended December 31, 1990 (File no. 1-2297)).*(a)
10.19.1 -- Trust Agreement made as of April 28, 1995 between Eastern and the Key Trust Company of
Ohio, N.A., as successor trustee (Filed as Exhibit 10.19.1 to Annual Report of Eastern on
Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*
10.20 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended (filed as Exhibit 10.22 to
Annual Report of Eastern on Form 10-K for the year ended December 31, 1992 (File no.
1-2297)).*(a)
10.20.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees, dated December 8,
1995 (filed as Exhibit 10.20.1 to Annual Report of Eastern on Form 10-K for the year ended
December 31, 1995 (File no. 1-2297)).*(a)
10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan (Filed as Exhibit 10.21 to Annual
Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(a)
10.22 -- Eastern's 1992 Restricted Stock Plan (filed as Exhibit 10.1 to Quarterly Report of Eastern on
Form 10-Q for the quarter ended March 31, 1992 (File no. 1-2297)).*(a)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.23 -- Eastern's Restricted Stock Plan for Non-Employee Trustees (filed as Exhibit 10.24 to Annual
Report of Eastern on Form 10-K for the year ended December 31, 1992 (File no. 1-2297)).*(a)
10.24 -- Eastern's 1994 Deferred Compensation Plan (filed as Exhibit 10.22 to Annual Report of
Eastern on Form 10-K for year ended December 31, 1993 (File no. 1-2297)).*(a)
10.24.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December 8, 1995 (Filed as
Exhibit 10.24.1 to Annual Report of Eastern on Form 10-K for the year ended December 31,
1995 (File no. 1-2297)).*(a)
10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25, 1996 (filed as Exhibit
10.24.2 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File
no. 1-2297)).*(a)
10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended February 27, 1997 (filed
as Exhibit 10.25 to Annual Report of Eastern on Form 10-K for year ended December 31,
1996 (File no. 1-2297)).*
10.26 -- Credit Agreement, dated as of December 31, 1994, by and between Eastern, Boston Gas,
Midland, the Banks named therein and The First National Bank of Boston, individually and as
Agent (filed as Exhibit 10.26 to Annual Report of Eastern on Form 10-K for year ended
December 31, 1996 (File no. 1-2297)).*
10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31, 1995, by and among
Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of
Boston, individually and as Agent (filed as Exhibit 10.26.1 to Annual Report of Eastern on
Form 10-K for year ended December 31, 1996 (File no. 1-2297)).*
10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31, 1996, by and among
Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of
Boston, individually and as Agent (filed as Exhibit 10.26.2 to Annual Report of Eastern on
Form 10-K for year ended December 31, 1996 (File no. 1-2297)).*
13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December
31, 1997. With the exception of the sections captioned "Six-Year Financial Summary"
appearing on page 26 and "Stock Price Range" and "Dividends Declared Per Share" appearing
on the inside back cover of the said annual report, which are incorporated by reference in
Items 5 and 6 of this Form 10-K. Said annual report is not deemed filed as part of this report.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
</TABLE>
Eastern will furnish a copy of any exhibit not included herewith to any
holder of Eastern's common stock upon payment of the cost of reproduction and
mailing.
(B) REPORTS ON FORM 8-K
On December 23, 1997, Eastern filed a Form 8-K which contained the press
release announcing the agreement to acquire Essex County Gas.
- ------------
*Not filed herewith. In accordance with Rule 12b-32 of the General Rules
and Regulations under the Securities and Exchange Act of 1934, reference is
made to the document previously filed with the Commission.
(a) Indicates a management contract or compensatory plan or arrangement.
<PAGE>
EASTERN ENTERPRISES AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND
SCHEDULES
DECEMBER 31, 1997
(SUBMITTED IN ANSWER TO ITEMS 14(A)(1) AND (2) OF FORM 10-K,
SECURITIES AND EXCHANGE COMMISSION)
FINANCIAL STATEMENTS
EASTERN ENTERPRISES AND SUBSIDIARIES:
Report of independent public accountants on schedules ......... F-2
Consent of independent public accountants ..................... F-2
SCHEDULES (PAGES F-3 THROUGH F-5)
II Valuation and Qualifying accounts and reserves
Schedules not listed above are omitted as not applicable or not required
under the rules of Regulation S-X.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO EASTERN ENTERPRISES:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Eastern
Enterprises Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 23, 1998. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in the index on page F-1 are the responsibility of
Eastern's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports, dated January 23, 1998, included in, and incorporated
by reference into, Eastern Enterprises Annual Report on this Form 10-K for the
year ended December 31, 1997, into Eastern's previously filed Post-Effective
Amendment No. 1 to Form S-16 Registration Statement No. 2-71614 on Form S-3 and
Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862 and
No. 33-56424.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Boston, Massachusetts
February 27, 1998
F-2
<PAGE>
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Year Ended December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
--------------------- -------------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1996 Expenses Accounts Created 1997
- --------------------------------------- -------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets--
Reserves for doubtful accounts ....... $ 16,648 $ 5,204 $ 0 $ (5,404) $ 16,448
======== ======= ====== ========= ========
Reserves for loss on investments ..... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ====== ========= ========
Reserves included in liabilities--
Reserve for post-retirement health
care ............................... $ 96,980 $ 4,578 $ 0 $ (6,438) $ 95,120
Reserve for coal miners retiree health
care ............................... 77,308 0 0 (808) 76,500
Reserves for employee benefits ....... 24,624 9,690 907 (9,985) 25,236
Reserves for environmental expenses .. 26,809 0 122 (1,011) 25,920
Reserves for insurance claims ........ 12,838 7,348 (530) (6,485) 13,171
Other ................................ 17,680 6,304 41 (7,706) 16,319
-------- ------- ------ --------- --------
Total liability reserves ............ $256,239 $27,920 $ 540 $ (32,433) $252,266
======== ======= ====== ========= ========
</TABLE>
F-3
<PAGE>
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Year Ended December 31, 1996
(In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
--------------------- -------------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1995 Expenses Accounts Created 1996
- --------------------------------------- -------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets--
Reserves for doubtful accounts ....... $ 16,009 $12,942 $ 0 $ (12,303) $ 16,648
======== ======= ====== ========= ========
Reserves for loss on investments ..... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ====== ========= ========
Reserves included in liabilities--
Reserve for post-retirement health
care ............................... $ 98,717 $ 1,311 $3,725 $ (6,773) $ 96,980
Reserve for coal miners retiree health
care ............................... 78,125 0 0 (817) 77,308
Reserves for employee benefits ....... 16,439 12,216 2,896 (6,927) 24,624
Reserves for environmental expenses .. 26,356 0 1,255 (802) 26,809
Reserves for insurance claims ........ 14,133 7,746 1,972 (11,013) 12,838
Other ................................ 18,537 5,212 (837) (5,232) 17,680
-------- ------- ------ --------- --------
Total liability reserves ............ $252,307 $26,485 $9,011 $ (31,564) $256,239
======== ======= ====== ========= ========
</TABLE>
F-4
<PAGE>
SCHEDULE II
EASTERN ENTERPRISES AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
For the Year Ended December 31, 1995
(In Thousands)
<TABLE>
<CAPTION>
Additions Deductions
--------------------- -------------
Charges
Charged for Which
Balance to Costs Charged Reserves Balance
December 31, and to Other Were December 31,
Description 1994 Expenses Accounts Created 1995
- --------------------------------------- -------------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Reserves deducted from assets--
Reserves for doubtful accounts ....... $ 16,091 $14,768 $ 0 $ (14,850) $ 16,009
======== ======= ======== ========= ========
Reserves for loss on investments ..... $ 19 $ 0 $ 0 $ 0 $ 19
======== ======= ======== ========= ========
Reserves included in liabilities--
Reserve for post-retirement health
care ............................... $102,382 $ 1,150 $ 3,974 $ (8,789) $ 98,717
Reserve for coal miners retiree health
care ............................... 68,693 10,000 0 (568) 78,125
Reserves for employee benefits ....... 12,453 11,039 169 (7,222) 16,439
Reserves for environmental expenses .. 9,850 15,350 1,920 (764) 26,356
Reserves for insurance claims ........ 9,890 8,978 5,876 (10,611) 14,133
Other ................................ 18,753 5,642 (1,008) (4,850) 18,537
-------- ------- -------- --------- --------
Total liability reserves ............ $222,021 $52,159 $ 10,931 $ (32,804) $252,307
======== ======= ======== ========= ========
</TABLE>
F-5
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EASTERN ENTERPRISES
Registrant
By /s/ JAMES J. HARPER
----------------------------------
JAMES J. HARPER
Vice President and Controller
(Chief Accounting Officer)
Date: February 27, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 27th day of February, 1998.
SIGNATURE TITLE
/s/ J. ATWOOD IVES Chairman and Chief Executive Officer
- ------------------------------------- and Trustee
J. ATWOOD IVES
/s/ RICHARD R. CLAYTON President and Chief Operating Officer
- ------------------------------------- and Trustee
RICHARD R. CLAYTON
/s/ WALTER J. FLAHERTY
- ------------------------------------- Senior Vice President and Chief
WALTER J. FLAHERTY Financial Officer
/s/ JAMES R. BARKER
- ------------------------------------- Trustee
JAMES R. BARKER
/s/ JOHN D. CURTIN, JR.
- ------------------------------------- Trustee
JOHN D. CURTIN, JR.
/s/ SAMUEL FRANKENHEIM
- ------------------------------------- Trustee
SAMUEL FRANKENHEIM
/s/ LEONARD R. JASKOL
- ------------------------------------- Trustee
LEONARD R. JASKOL
/s/ WENDELL J. KNOX
- ------------------------------------- Trustee
WENDELL J. KNOX
/s/ RINA K. SPENCE
- ------------------------------------- Trustee
RINA K. SPENCE
/s/ DAVID B. STONE
- ------------------------------------- Trustee
DAVID B. STONE
<PAGE>
EXHIBIT INDEX
See Item 14(a)(3), "List of Exhibits," for statement of the location of
exhibits incorporated by reference.
Exhibit
3.1 -- Declaration of Trust of Eastern Enterprises, as amended through
April 27, 1989 (incorporated by reference).
3.2 -- By-Laws of Eastern Enterprises, as amended through July 23, 1992
(incorporated by reference).
4.1 -- Common Stock Rights Agreement between Eastern and The Bank of New
York, dated as of February 22, 1990, and Exhibits attached thereto
(incorporated by reference).
4.1.1 -- Agreement between Eastern and The First National Bank of Boston,
dated January 30, 1995 (incorporated by reference).
10.1 -- Gas Transportation Contract between Boston Gas Company and
Tennessee Gas Pipeline Company dated as of September 1, 1993
(incorporated by reference).
10.2 -- Gas Transportation Contracts between Boston Gas Company and Texas
Eastern Transmission Corporation dated December 30, 1993
(incorporated by reference).
10.3 -- Gas Transportation Contracts between Boston Gas Company and
Algonquin Gas Transmission Company dated December 30, 1993
(incorporated by reference).
10.4 -- Firm Gas Transportation Agreement between Boston Gas Company and
Iroquois Gas Transmission System, L.P., dated as of February 7, 1991
(incorporated by reference).
10.5 -- Eastern's Deferred Compensation Plan for Trustees, as amended
(incorporated by reference).
10.5.1 -- Amendment to Eastern's Deferred Compensation Plan for Trustees,
dated December 8, 1995 (incorporated by reference).
10.6 -- Eastern's 1982 Stock Option Plan, as amended (incorporated by
reference).
10.7 -- Eastern's 1995 Stock Option Plan (incorporated by reference).
10.8 -- Eastern's Supplemental Executive Retirement Plan, as amended
(incorporated by reference).
10.8.1 -- Amendment to Eastern's Supplemental Executive Retirement Plan,
dated December 8, 1995 (incorporated by reference).
10.9 -- Trust Agreement between Eastern and Shawmut Bank of Boston N.A.,
as amended (incorporated by reference).
10.9.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of
Boston, N.A. (incorporated by reference).
10.9.2 -- Amendment to Trust Agreement between Eastern and the Key Trust
Company of Ohio, N.A., as successor trustee, dated December 8, 1995
(incorporated by reference).
10.10 -- Eastern's Executive Incentive Compensation Plan, as amended
(incorporated by reference).
10.11 -- Salary Continuation Agreements between Eastern and certain
officers, as amended (incorporated by reference).
10.12 -- Agreement dated November 27, 1991 between Eastern and J. Atwood
Ives (incorporated by reference).
10.13 -- Agreement dated October 25, 1991 between Eastern and Richard R.
Clayton (incorporated by reference).
10.14 -- Agreement dated April 28, 1994, between Eastern and J. Atwood Ives
(incorporated by reference).
10.15 -- Agreement dated April 28, 1994, between Eastern and Richard R.
Clayton (incorporated by reference).
10.16 -- Eastern's Headquarters Retirement Plan, as amended and restated
(incorporated by reference).
10.16.1 -- Amendment to Eastern's Headquarters Retirement Plan, dated April
27, 1995 (incorporated by reference).
10.16.2 -- Amendment to Eastern's Headquarters Retirement Plan, dated June
26, 1997.
10.17 -- Midland Enterprises Inc. Salaried Retirement Plan, as amended and
restated (incorporated by reference).
10.17.1 -- Amendment to Midland Enterprises Inc. Salaried Retirement Plan,
dated November 4, 1994 (incorporated by reference).
10.18 -- Boston Gas Company Retirement Plan, as amended and restated
(incorporated by reference).
<PAGE>
10.18.1 -- Amendment to Boston Gas Company Retirement Plan, dated December 5,
1994 (incorporated by reference).
10.19 -- Trust Agreement made as of October 2, 1987 between Eastern and The
Bank of New York, as amended (incorporated by reference).
10.19.1 -- Trust Agreement made as of April 28, 1995 between Eastern and the
Kely Trust Company of Ohio, N.A., as successor trustee (incorporated
by reference).
10.20 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended
(incorporated by reference).
10.20.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees,
dated December 8, 1995 (incorporated by reference).
10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan
(incorporated by reference).
10.22 -- Eastern's 1992 Restricted Stock Plan (incorporated by reference).
10.23 -- Eastern's Restricted Stock Plan for Non-Employee Trustees
(incorporated by reference).
10.24 -- Eastern's 1994 Deferred Compensation Plan (incorporated by
reference).
10.24.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December
8, 1995 (incorporated by reference).
10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25,
1996 (incorporated by reference).
10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended
February 27, 1997 (incorporated by reference).
10.26 -- Credit Agreement, dated as of December 31, 1994, by and between
Eastern, Boston Gas, Midland, the Banks named therein and The First
National Bank of Boston, individually and as Agent (incorporated by
reference).
10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31,
1995, by and among Eastern, Boston Gas, Midland, the Banks named
therein and The First National Bank of Boston, individually and as
Agent (incorporated by reference).
10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31,
1996, by and among Eastern, Boston Gas, Midland, the Banks named
therein and The First National Bank of Boston, individually and as
Agent (incorporated by reference).
13.1 -- Portions incorporated herein of annual report to shareholders for
the year ended December 31, 1997.
21.1 -- Subsidiaries of the registrant.
23.1 -- Consent of Arthur Andersen LLP.
27.1 -- Financial Data Schedule.
Exhibit 10.16.2
EASTERN ENTERPRISES
HEADQUARTERS RETIREMENT PLAN
Amendment
Pursuant to Section 14.01 of the Eastern Enterprises Headquarters
Retirement Plan (the "Plan"), said Plan is hereby amended, with effective dates
as indicated:
1. Section 2.03 is amended by inserting the following at the end of the
first paragraph thereof:
"Notwithstanding the foregoing, effective July 1, 1996, the Annual
Earnings of an Eligible Employee who is participating in Midland
Enterprises Inc.'s 'Non-Officer Incentive Compensation Program' as of
each Earnings Measurement Date shall mean such Employee's annual salary
rate plus the annual performance bonus awarded to him under such program
for the calendar year immediately preceding such Earnings Measurement
Date."
2. Section 7.022 of the Plan is amended, effective July 1, 1996, by
adding at the end thereof the following:
"Notwithstanding the foregoing, upon receiving the required explanation
described above, a Member may elect an annuity starting date (as defined
in Code Section 417(f)(2)) which is less than 30 days after the required
explanation is given, provided such election is in accordance with Treas.
Reg. section 1.417(e)-IT."
IN WITNESS WHEREOF, Eastern Enterprises has caused this instrument to be
signed in its name and on its behalf by its duly authorized officer this
26 day of June, 1997.
EASTERN ENTERPRISES
By: /s/ L. William Law, Jr.
--------------------------
Title: Senior Vice President
Six-Year Financial Summary
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
($ in millions, except per share amounts)
Revenues:
Boston Gas $700,945 $ 705,462 $653,073 $660,158 $614,294 $594,330
Midland 269,259 301,880 296,339 264,692 254,921 263,617
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 970,204 1,007,342 949,412 924,850 869,215 857,947
Operating earnings:
Boston Gas 78,770 68,451 61,662 65,791 49,063 63,120
Midland 34,614 58,415 57,828 35,805 33,001 38,277
Headquarters (7,070) (5,472) (5,756) (4,221) (4,675) (5,141)
- ---------------------------------------------------------------------------------------------------------------------------
Total operating earnings 106,314 121,394 113,734 97,375 77,389 96,256
Other income (expense):
Interest income 8,997 9,419 5,633 1,953 3,213 4,703
Interest expense (34,318) (34,453) (38,536) (38,516) (35,039) (33,537)
Other, net (4,371) (115) 4,103 2,553 (1,056) (2,414)
- ---------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before income taxes 76,622 96,245 84,934 63,365 44,507 65,008
Provision for income taxes 24,672 35,580 24,553 24,458 18,485 23,896
- ---------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations
before extraordinary items and
accounting change 51,950 60,665 60,381 38,907 26,022 41,112
Discontinued operations and
accounting change(1) - - - 12,212 (58,182) 5,003
Extraordinary items(2) - - (6,500) - (45,500) -
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 51,950 $ 60,665 $ 53,881 $ 51,119 $(77,660) $ 46,115
- ---------------------------------------------------------------------------------------------------------------------------
Number of common shares:
Outstanding at year end 20,388 20,304 20,194 20,411 20,930 22,621
Diluted weighted average 20,468 20,384 20,246 20,780 22,510 22,638
Diluted per share data:(3)
Earnings from continuing operations
before extraordinary items and
accounting change $2.54 $2.98 $2.98 $1.87 $ 1.16 $1.82
Discontinued operations and
accounting change(1) - - - .59 (2.59) .22
Extraordinary items(2) - - (.32) - (2.02) -
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $2.54 $2.98 $2.66 $2.46 $(3.45) $2.04
===========================================================================================================================
Dividends declared $ 1.61 $ 1.51 $ 1.42 $ 1.40 $ 1.40 $ 1.40
Shareholders' equity 22.03 21.08 19.60 18.33 17.38 22.89
Financial statistics and ratios:
Cash from operating activities $ 138,577 $ 122,212 $ 152,652 $ 114,674 $ 35,116 $ 44,470
Capital expenditures 82,321 111,755 78,385 57,883 61,450 80,538
Depreciation and amortization 67,949 64,531 61,504 58,856 53,199 47,545
Total assets 1,434,357 1,421,615 1,377,342 1,339,319 1,363,191 1,397,850
Long-term debt 342,142 347,313 357,675 365,488 328,939 357,109
Shareholders' equity 449,061 427,990 395,764 374,134 363,738 517,906
Debt/equity ratio 43/57 45/55 47/53 49/51 47/53 41/59
Return on total capital(4) 9.1% 10.5% 10.9% 8.3% 5.8% 7.1%
Return on equity(4) 11.9% 14.8% 15.7% 10.5% 5.9% 8.1%
</TABLE>
- --------------
(1) Includes results from Water Products Group net of tax, and accounting change
related to income taxes in 1992.
(2) Provision for coal miners retiree health care of $10,000 and $70,000 pre-tax
in 1995 and 1993, respectively.
(3) Basic earnings per share from continuing operations before extraordinary
items and accounting change were $2.55, $2.99, $2.98, $1.87, $1.16 and
$1.82 for 1997 through 1992, respectively.
(4) Based on earnings from continuing operations before extraordinary item and
accounting change.
STOCK PRICE RANGE
1997 1996
Quarter High Low High Low
- ------- ---- --- ---- ---
First $36-3/8 $30-1/2 $37-1/8 $33-1/8
Second 35-7/8 30-1/2 36-7/8 32-3/8
Third 38-3/16 34-3/4 38-5/8 30-1/2
Fourth 45-3/8 36-3/4 40-3/8 34-7/8
DIVIDENDS DECLARED PER SHARE
Quarter 1997 1996
- ------- ---- ----
First $ .40 $ .37
Second .40 .37
Third .40 .37
Fourth .41 .40
Total $1.61 $1.51
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
The following table shows all direct and indirect subsidiaries of the
registrant except (1) subsidiaries which, considered in the aggregate as a
single subsidiary, do not constitute a significant subsidiary, and (2) certain
consolidated wholly-owned multiple subsidiaries carrying on the same line of
business as to which certain summary information appears below:
Jurisdiction of Incorporation
-----------------------------
Boston Gas Company ............................... Massachusetts
Midland Enterprises Inc. ......................... Delaware
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES
TO EASTERN ENTERPRISES:
We have audited, in accordance with generally accepted auditing
standards, the consolidated financial statements included in Eastern
Enterprises Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 23, 1998. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedules listed in the index on page F-1 are the responsibility of
Eastern's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1998
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports, dated January 23, 1998, included in, and incorporated
by reference into, Eastern Enterprises Annual Report on this Form 10-K for the
year ended December 31, 1997, into Eastern's previously filed Post-Effective
Amendment No. 1 to Form S-16 Registration Statement No. 2-71614 on Form S-3 and
Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862 and
No. 33-56424.
Arthur Andersen LLP
Boston, Massachusetts
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of earnings and the consolidated balance sheets and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 175,274
<SECURITIES> 0
<RECEIVABLES> 125,023
<ALLOWANCES> 16,448
<INVENTORY> 56,644
<CURRENT-ASSETS> 412,233
<PP&E> 1,516,186
<DEPRECIATION> 662,620
<TOTAL-ASSETS> 1,434,357
<CURRENT-LIABILITIES> 214,696
<BONDS> 342,142
29,326
0
<COMMON> 20,443
<OTHER-SE> 428,618
<TOTAL-LIABILITY-AND-EQUITY> 1,434,357
<SALES> 700,945
<TOTAL-REVENUES> 970,204
<CGS> 531,774
<TOTAL-COSTS> 751,674
<OTHER-EXPENSES> 94,368
<LOSS-PROVISION> 13,222
<INTEREST-EXPENSE> 34,318
<INCOME-PRETAX> 76,622
<INCOME-TAX> 24,672
<INCOME-CONTINUING> 51,950
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,950
<EPS-PRIMARY> 2.55<F1>
<EPS-DILUTED> 2.54<F2>
<FN>
<F1> EPS - Primary is EPS Basic per SFAS 128
<F2> EPS - Fully Diluted is EPS - Diluted per SFAS 128
</FN>
</TABLE>
