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File No. ___________
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
EASTERN ENTERPRISES
9 Riverside Road
Weston, Massachusetts 02193
-------------------------------------------------------
(Name of company or companies filing this statement and
addresses of principal executive office)
EASTERN ENTERPRISES
------------------------------------------------------------------------------
(Name of top registered holding company parent of each applicant or declarant)
David W. Walker, Esq L. William Law, Jr., Esq.
Foley, Hoag & Eliot LLP Senior Vice President and General Counsel
One Post Office Square Eastern Enterprises
Boston, Massachusetts 02109 9 Riverside Road
Weston, Massachusetts 02193
------------------------------------------
(Names and addresses of agents for service)
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ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
This is an application under the Public Utility Holding Company Act of
1935 (the "Act") by Eastern Enterprises ("Eastern") for approval of its
acquisition, through a so-called reverse triangular merger, of all the
outstanding capital stock of Essex County Gas Company ("Essex"), a Massachusetts
gas utility company. Eastern is a holding company exempt from registration under
the Act pursuant to the "intrastate" exemption of Section 3(a)(1). Currently,
its sole utility subsidiary is Boston Gas Company ("Boston Gas"), a
Massachusetts gas utility company. Following the proposed acquisition, Eastern
will have two gas utility subsidiaries, both located in Massachusetts, and will
continue to satisfy the requirements of Section 3(a)(1). In addition, Essex and
Boston Gas together will constitute an integrated public-utility system because,
among other things, they have contiguous service areas and common sources of
supply.
Eastern is a Massachusetts voluntary association created by a
Declaration of Trust dated July 18, 1929, as amended, and is exempt under
Section 3(a)(1) of the Act pursuant to orders dated February 28, 1955 (Pub.
Util. Holding Company Act of 1935 Release No. 12807), November 3, 1967 (Pub.
Util. Holding Company Act of 1935 Release No. 15887) and August 28, 1975 (Pub.
Util. Holding Company Act of 1935 Release No. 19100) .
Eastern is the sole stockholder of all issued and outstanding common
stock of Boston Gas, a Massachusetts corporation engaged in the gas utility
business. Boston Gas serves approximately 530,000 customers, all in
Massachusetts. Boston Gas has outstanding 1,200,000 shares of non-voting
preferred stock, which are held by the public.
Essex is a regulated public utility and a non-affiliated Massachusetts
corporation engaged in the gas utility business. Essex serves over 42,000
customers in the Commonwealth of Massachusetts. Essex's service territory is
contiguous to Boston Gas' service territory.
A. PROPOSED ACQUISITION OF ESSEX
- ---------------------------------
Eastern and Essex have agreed, subject to various approvals including
approval from the Securities and Exchange Commission (the "Commission"), that
Eastern will acquire Essex through a merger into Essex of a subsidiary of
Eastern formed for that purpose. After the merger, Eastern will own all the
outstanding capital stock of Essex, and the former stockholders of Essex will
hold shares of common stock of Eastern. Eastern's common stock is traded on the
New York Stock Exchange, the Boston Stock Exchange and the Pacific Stock
Exchange. Based on reported prices for Eastern shares on those exchanges in
December 1997, when the merger was announced, the Eastern shares to be issued
would have a market value of approximately $80.5 million and would constitute
approximately 9.3% of Eastern's outstanding stock. The terms and conditions
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agreed upon between Eastern and Essex, are set forth in the Merger Agreement
included as Exhibit B hereto (the "Agreement").
The Agreement between Eastern and Essex was the result of a process
conducted by Essex to explore strategic alternatives.
Included with this Application as Exhibit D-1 is a copy of the Joint
Petition of Eastern Enterprises and Essex County Gas Company For Approval of
Merger submitted on February 27, 1998 to the Massachusetts Department of
Telecommunications and Energy (the "DTE Petition"), including exhibits. The
Massachusetts Department of Telecommunications and Energy (the "MDTE") will
schedule a hearing on the petition and will issue an order approving or
disapproving the merger.
Also included hereto as Exhibit C is a copy of the Registration
Statement (the "Registration Statement") on Form S-4, filed by Eastern, which
includes the Proxy Statement of Essex as filed with the Commission (the "Essex
Proxy Statement") in connection with the proposed special meeting of Essex
stockholders to approve the Merger.
1. Description of Business of Essex and Eastern
Essex is a gas utility whose principal business is the distribution and
sale of natural gas. Essex has 12 directors, including the President and Chief
Executive Officer and five other officers. Essex sells natural gas to over
42,000 customers in eastern Massachusetts. Essex's service territory in eastern
Massachusetts is contiguous to Boston Gas' service territory. The size of
Essex's customer base has been growing in recent years, with 820 new customers
added during fiscal 1997.
Essex net earnings for the twelve months ended August 31, 1997, was
$3,966,519 on revenues of $53,534,734.
Essex had a total of approximately 127 permanent employees on August 31,
1997.
Eastern is exclusively a holding company. Its sole utility subsidiary is
Boston Gas, a distributor of natural gas, serving approximately 530,000
residential, commercial and industrial customers in Boston and 73 other eastern
and central Massachusetts communities. In addition, Eastern has several
non-utility subsidiaries, including primarily Midland Enterprises Inc., a
carrier of coal and other dry bulk cargoes on the nations inland waterways, with
a fleet 2,302 dry cargo barges and 87 towboats.
2. Acquisition of Essex
The terms and mechanism for acquiring Essex are set forth in the
Agreement described in the prospectus included in the Registration Statement. In
brief, they include the following:
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(a) Eastern will form a temporary Massachusetts corporation ("NEWCO") as a
wholly-owned subsidiary of Eastern;*
(b) NEWCO will merge with and into Essex, with Essex as the surviving
corporation (the "Surviving Corporation") having all the rights,
interests, and obligations of Essex;
(c) Shares of NEWCO will be converted into shares of new common stock of the
Surviving Corporation, with the Surviving Corporation being a wholly
owned subsidiary of Eastern; and
(d) Each outstanding share of Essex will be converted into 1.183985 shares
of Eastern common stock subject to adjustment under certain
circumstances based on the average market price for a specified period
prior to closing, so that the stockholders of Essex will become
stockholders of Eastern.
The merger will become effective at the time of filing of the Articles
of Merger with the Secretary of State of the Commonwealth of Massachusetts. The
closing will be held only upon the satisfaction (or waiver, where permissible)
of certain conditions contained in the Agreement, including obtaining necessary
approvals from the MDTE, the Commission, and other government agencies.
3. Common Shares Issued by Eastern
The initial exchange ratio is 1.183985 shares of Eastern common stock
for each issued and outstanding share of Essex common stock. The actual number
of Eastern shares to be issued will be adjusted to provide that the value of the
Eastern common stock to be issued for each Essex common stock share will not be
less than $45 nor more than $50, based upon the average market price during a
specified period prior to closing. Eastern will register with the Commission
shares of its common stock for this purpose. (See Exhibit C hereto). This
acquisition price is reasonable in the opinion of Salomon Smith Barney,
Eastern's investment banking advisors, and will not result in any excessive
charges to Boston Gas or Essex rate payers. See Item 4(e) below.
Eastern's common shares are listed on the New York, Boston and Pacific
Stock Exchanges. From January 1, 1997 through December 31, 1997, the price for
Eastern's shares on the New York Stock Exchange -- Composite Transactions ranged
from a high of $45.375 to a low of $30.50. Essex's common shares are quoted on
NASDAQ. From January 1, 1997 through December 31, 1997, the price for Essex's
shares on NASDAQ ranged from a high of $49.00 to a low of $24.25.
- ------------------
*Newco will be formed under the Massachusetts statute relating to gas companies,
but will not own or operate any utility assets before consummation of the merger
and will disappear upon consummation of the merger.
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4. Compliance with Section 10
The proposed acquisition meets all the substantive requirements of
Section 10 of the Act. Specifically, the Commission should find that the
acquisition complies with subsections (c) and (f) on the basis of the following:
a. The acquisition is lawful under Section 8 of the Act and is not
detrimental to the carrying out of the provisions of Section 11.
Both Essex and Boston Gas are retail gas distribution companies, with no
electric utility assets or operations.
The resulting holding company system of Eastern will continue to be
exempt from registration under the Act pursuant to the "intrastate" exemption
provided in Section 3(a)(1), because Eastern and all of its utility
subsidiaries, Essex and Boston Gas, will continue to be organized under
Massachusetts law, and their combined utility operations will be carried on
solely in Massachusetts. See service area map, Exhibit E.
b. The acquisition will serve the public interest by tending toward the
economical and efficient development of an integrated public-utility system.
As the map attached as Exhibit E shows, the service areas of Essex and
Boston Gas are contiguous, and both companies receive a substantial portion of
their natural gas supplies from the Tennessee Gas Pipeline Company. Eastern
expects to derive substantial cost savings from the combined operations of Essex
and Boston Gas, including savings from sharing of their combined pipeline supply
capacity (DTE Petition, Testimony of William R. Luthern, p. 2) and savings from
consolidation of management positions and other duplicated administrative costs
(DTE Petition, Testimony of Joseph F. Bodanza, pp. 8-10). In addition, the
companies expect to attain more efficient service to customers by combining
their dispatch, telephone inquiry, and customer service operations (Id. at pp.
10-11).
c. Massachusetts law applying to the acquisition has been complied
with.
By its terms, the merger will not be consummated unless it is approved
by the MDTE under applicable provisions of Chapter 164 of the Massachusetts
General Laws. Eastern will provide to the Commission a copy of the MDTE's order
approving the merger as soon as it is available.
In addition, there is no basis for making any of the negative findings
that would prevent approval of the proposed acquisition under subsection (b) of
section 10, for the following reasons:
d. The acquisition will not tend toward any interlocking relations or
undue concentration of control of public-utility companies in Massachusetts.
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As indicated above, after the proposed acquisition, Essex will be a
wholly owned direct subsidiary of Eastern, as Boston Gas now is. As usual in
holding-company systems, Essex and Boston Gas may have officers and directors in
common, some of whom may also be officers of Eastern; but that mode of common
management of the integrated system of subsidiaries is not the sort of
"interlocking relationship" that the Act is intended to prevent.
The combination of Essex and Boston Gas will not substantially increase
the size of Eastern's utility subsidiary operations. Boston Gas currently serves
approximately 530,000 retail gas customers in 74 cities and towns in eastern and
central Massachusetts. Together, Essex and Boston Gas will serve a base of
approximately 572,000 retail gas customers in a contiguous service area
comprising 91 cities and towns in eastern and central Massachusetts. Boston Gas
had assets of $878.2 million at December 31, 1997 and revenues of $700.9 million
for the year then ended. Essex and Boston Gas together will have pro forma
combined assets of $974.0 million and pro forma combined revenues of $755.4
million.
e. The consideration to be paid is reasonable and bears a fair relation
to the value of the utility assets underlying the securities to be acquired.
The price to be paid by Eastern was determined by bids in a process
conducted by Essex, in which Eastern was one of five bidders. See DTE
Application, testimony of James H. Hastings, pp. 4-8. The investment banking
firm of Furman Selz, LLC advised the Board of Directors of Essex that the
exchange ratio was fair to the stockholders of Essex from a financial point of
view (see Essex Proxy Statement, pp. 26-30); and the investment banking firm of
Salomon Smith Barney has advised the Trustees of Eastern that the merger price
is reasonable, is consistent with recent history of mergers in the natural gas
industry, and is not likely to result in excessive charges against the earnings
of Eastern or Boston Gas (see DTE Petition, Testimony of Paul J. Murphy).
In addition, Eastern and Essex have proposed to the MDTE a rate plan
that will effect an immediate reduction in the retail gas price charged to
customers of Essex and a ten-year freeze on the base rates for Essex, to reflect
expected cost savings that would result from combined operation of Essex and
Boston Gas. See DTE Petition, Testimony of Joseph S. Bodanza. The plan also
contemplates a transfer from Essex to Boston Gas under the two companies'
respective Cost of Gas Adjustment Clauses, to compensate Boston Gas customers
for Essex's use of combined gas purchasing with Boston Gas to achieve savings.
Id. at p. 5.
Under Massachusetts law, retail gas rates are regulated by the MDTE,
which has full power to examine transactions with affiliates and to allow or
disallow intercompany costs and charges in the rate-setting process. Mass.
General Laws, c. 164, secs. 76A, 85, 94. Thus, the financial effect of the
merger price on customers of Essex and of Boston Gas is subject to effective
regulation by the applicable state authority.
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f. The acquisition will not unduly complicate the capital structure of
Eastern's holding-company system and will not be detrimental to the public
interest, the interest of investors or consumers, or the proper functioning of
the holding-company system.
The merger price will consist solely of shares of Eastern's voting
common stock, of the class that is publicly traded on the New York Stock
Exchange, the Pacific Stock Exchange, and the Boston Stock Exchange. There will
be no debt and no preferred or senior securities involved. There will be no
minority voting stock interest in either Essex or Boston Gas: both will be
wholly-owned subsidiaries of Eastern. As the Testimony of Paul J. Murphy in the
DTE Petition explains, the dilution to be experienced by stockholders of Eastern
is reasonable in view of the value of the assets being acquired. The interests
of gas consumers are protected by the jurisdiction of the MDTE. As outlined in
Item 1(a)(4)(b) above, the acquisition will serve the public interest by
promoting the economical and efficient development of an integrated
public-utility system.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
- ---------------------------------------
The estimated fees and expenses in connection with the proposed
transactions are set forth in Exhibit G hereto.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
- ----------------------------------------
Sections 9(a) and 10 of the Act are applicable to the acquisition by
Eastern of shares of capital stock of Essex.
ITEM 4. REGULATORY APPROVAL
- ----------------------------
The MDTE has jurisdiction over the proposed merger and certain matters
in connection therewith. The fact that the MDTE has jurisdiction over both
Boston Gas and Essex assures that the rates of both of these companies will be
just and reasonable and will not include unreasonable charges associated with
the merger. The proposed merger is subject to the satisfaction of the applicable
notification waiting period and approval by the Federal Trade Commission and the
Department of Justice pursuant to the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended. No other state regulatory commission and no other
federal commission (other than the Commission) has jurisdiction over the
proposed transactions.
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ITEM 5. PROCEDURE
- ------------------
It is anticipated that the MDTE will issue a decision by mid-1998 on the
merger. It is requested that the Commission take action with respect to this
Application or Declaration without a hearing being held and that an order be
issued allowing this Application/Declaration to become effective at
approximately the same time.
Eastern further requests that the Commission enter an order confirming
that Eastern's holding company system after consummation of the merger will
continue to be exempt from registration under the Act pursuant to the Commission
orders of February 8, 1955, November 3, 1967 and August 28, 1975 cited in the
Introduction above.
Eastern (i) does not request a recommended decision by an administrative
law judge, (ii) does not request a recommended decision by any other responsible
officer of the Commission, (iii) hereby specifies that the Division of
Investment Management may assist in the preparation of the Commission's
decision, and (iv) hereby requests that there be no 30-day waiting period
between the date of issuance of the Commission's order and the date on which it
is to become effective.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
- ------------------------------------------
(a) Exhibits
A-1 Specimen copy of Common Share certificate of Eastern.
A-2 Declaration of Trust of Eastern, dated as of July 18, 1929, as
amended (Incorporated herein by reference to Exhibit 3.1 to
Eastern's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989 (File No. 1-2297)).
A-3 By-laws of Eastern (Incorporated herein by reference to Exhibit
3.1 to Eastern's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992 (File No. 1-2297)).
A-4 Articles of organization of Essex (Incorporated herein by
reference to Essex's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1995 (File No. 1-8154)).
A-5 By-laws of Essex (Incorporated herein by reference to Essex's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1997
(File No. 1-8154)).
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A-6 Specimen copy of Common stock certificate of Essex.
*A-7 Articles of Organization of NEWCO.
*A-8 By-laws of NEWCO.
*A-9 Specimen copy of Common Stock certificate of NEWCO.
A-10 Articles of Organization of Surviving Corporation (See Exhibit
A-4 above).
A-11 By-laws of Surviving Corporation (See Exhibit A-5 above).
*A-12 Specimen copy of Common Stock certificate of Surviving
Corporation.
B Merger Agreement (Incorporated by reference to Exhibit 1 to
Essex's Current Report on Form 8-K dated 1/9/98 (File No.
1-8154)).
*C Registration Statement on Form S-4, including all financial
statements and exhibits thereto, with reference to additional
Common Shares of Eastern (Incorporated herein by reference to
File No. 333-________ ) (including the Prospectus/Proxy Statement
to be distributed to stockholders of Essex in connection with the
special meeting to be held on or about May 19, 1998).
D-1 Eastern and Essex Joint Petition for Approval of Merger filed
with the Massachusetts Department of Telecommunications and
Energy on February 27, 1998 (excluding Attachment 1 thereto,
which is included hereto as Exhibit B).
*D-2 Certified copy of order of Massachusetts Department of
Telecommunications and Energy.
E Map of service territories of Essex and Boston Gas (filed under
cover of Form SE).
F Opinion of Counsel.
G Statement of Estimated Fees and Expenses.
H Proposed Form of Notice.
*To be supplied by amendment.
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(b) Financial Statements
1. Consolidated Balance Sheets of Eastern as of December 31, 1997
(Incorporated herein by reference to Eastern's Annual Report on
Form 10-K for the fiscal year ended 12/31/97 (File No. 1-2297)).
2. Consolidated Statements of Operations and Shareholders' Equity of
Eastern for the twelve months ended December 31, 1997 on an
actual basis (Incorporated herein by reference to Eastern's
Annual Report on Form 10-K for the fiscal year ended 12/31/97
(File No. 1-2297)).
3. Consolidated Balance Sheets, Statements of Income and Retained
Earnings of Essex, for the years ended August 31, 1995 through
1997 and for the three months ended November 30, 1997
(Incorporated by reference to Essex's Annual Reports on Form 10-K
for the fiscal years ended 8/31/95, 8/31/96 and 8/31/97 and
Quarterly Report on Form 10-Q for the quarter ended 11/30/97
(File No. 1-8154)).
4. Unaudited Pro Forma Combined Balance Sheet of Boston Gas Company
and Essex County Gas Company as at December 31, 1997 and November
30, 1997, respectively.
5. Unaudited Pro Forma Combined Statement of Earnings of Boston Gas
Company and Essex County Gas Company for the fiscal year ended
December 31, 1997 and the twelve months ended November 30, 1997,
respectively.
Since the date of the Balance Sheets provided in 1 above, there have
been no material changes which were not in the ordinary course of
business.
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
- ------------------------------------------------
The proposed transaction does not involve a major federal action
significantly affecting the quality of the human environment.
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SIGNATURE
---------
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this statement to be signed on
its behalf by the undersigned officer thereunto duly authorized.
EASTERN ENTERPRISES(1)
Date: March 31, 1998 By: /s/ Walter J. Flaherty
-------------------------- -------------------------------
Walter J. Flaherty
Senior Vice President and Chief
Financial Officer
(1) Reference is hereby made to the declaration of trust establishing Eastern
Enterprises (formerly Eastern Gas and Fuel Associates) dated July 18, 1929, as
amended, a copy of which is on file in the office of the Secretary of the
Commonwealth of Massachusetts. The name "Eastern Enterprises" refers to the
trustees under said declaration as trustees and not personally; and no trustee,
shareholder, officer or agent of Eastern Enterprises shall be held to any
personal liability in connection with the affairs of said Eastern Enterprises,
but the trust estate only is liable.
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EXHIBIT INDEX
See Item 6, "Exhibits and Financial Statements," for statement of locations of
exhibits incorporated by reference.
Exhibit No. Description
----------- -----------
A-1 Specimen copy of Common Share certificate of Eastern
A-2 Declaration of Trust of Eastern, dated as of July 18, 1929,
as amended (Incorporated by Reference)
A-3 By-laws of Eastern (Incorporated by Reference)
A-4 Articles of Organization of Essex (Incorporated by Reference)
A-5 By-laws of Essex (Incorporated by Reference)
A-6 Specimen copy of Common Stock certificate of Essex
*A-7 Articles of organization of NEWCO
*A-8 By-laws of NEWCO
*A-9 Specimen copy of Common Stock certificate of NEWCO
A-10 Articles of Organization of Surviving Corporation (See
Exhibit A-4)
A-11 By-laws of Surviving Corporation (See Exhibit A-5)
*A-12 Specimen copy of Common Stock certificate of Surviving
Corporation
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B Merger Agreement (Incorporated by Reference)
*C Registration Statement on Form S-4, including all financial
statements and exhibits thereto, with reference to Common
Shares of Eastern
D-1 Eastern and Essex Joint Petition for Approval of Merger
filed with the Massachusetts Department of
Telecommunications and Energy (excluding Attachment 1
thereto, which is included hereto as Exhibit B)
*D-2 Certified copy of order of Massachusetts Department of
Telecommunications and Energy
E Map of service territories of Essex and Boston Gas (Filed
under cover of Form SE)
F Opinion of Counsel
G Statement of Estimated Fees and Expenses
H Proposed Form of Notice
* To be supplied by amendment.
See Item 6, "Exhibits and Financial Statements," for a statement of locations of
financial statements incorporated by reference.
Financial
Statement
No. Description
--------- -----------
1 Consolidated Balance Sheets of Eastern as of December 31,
1997 (Incorporated by Reference)
2 Consolidated Statements of Operations and Shareholders'
Equity of Eastern for the twelve months ended December 31,
1997 on an actual basis (Incorporated by Reference)
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3 Consolidated Balance Sheets, Statements of Income and
Retained Earnings of Essex, for the years ended August 31,
1995 through 1997 and for the three months ended November
30, 1997 (Incorporated by Reference)
4. Unaudited Pro Forma Combined Balance Sheet of Boston Gas
Company and Essex County Gas Company as at December 31,
1997 and November 30, 1997, respectively.
5. Unaudited Pro Forma Combined Statement of Earnings of
Boston Gas Company and Essex County Gas Company for the
Fiscal year ended December 31, 1997 and the twelve months
ended November 30, 1997, respectively.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information should be read
in conjunction with the consolidated financial statements, including the notes
thereto, of Eastern, Boston Gas and Essex County which are incorporated by
reference in this SEC Form U-1. The unaudited pro forma information is presented
for illustration purposes only in accordance with the assumptions set forth
below, and is not necessarily indicative of the operating results or financial
position that would have occurred if the Merger had been consummated nor is it
necessarily indicative of future operating results or financial position of the
combined enterprise. The unaudited pro forma combined financial information
presents only the combined results of the utility operations of Eastern (through
Boston Gas) and Essex County. The unaudited pro forma combined financial
information does not reflect any adjustments to conform accounting practices or
to reflect any cost savings or other synergies anticipated as a result of the
Merger or any Merger-related expenses.
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
The following unaudited pro forma combined balance sheet presents, under the
pooling-of-interests accounting method, the combined consolidated balance sheets
of Boston Gas as of December 31, 1997 and Essex County as of November 30, 1997.
BOSTON GAS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ESSEX COUNTY
BOSTON GAS GAS COMPANY
DECEMBER 31, NOVEMBER 30,
1997 1997 PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) ADJUSTMENTS BALANCES (1)
------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
GAS PLANT, AT COST $866,784 $107,508 $ - $974,292
CONSTRUCTION WORK-IN-PROCESS 2,715 - - 2,715
Less--Accumulated depreciation 329,918 25,366 - 355,284
-------- -------- --- --------
Net plant 539,581 82,142 - 621,723
CURRENT ASSETS:
Cash 307 369 - 676
Accounts receivable, less reserves of
$16,741 89,859 3,074 - 92,933
Deferred gas costs 66,595 2,216 - 68,811
Natural gas and other inventories 44,590 4,204 - 48,794
Materials and supplies, at average cost 3,316 701 - 4,017
Prepaid expenses 1,777 242 - 2,019
-------- -------- --- --------
206,444 10,806 - 217,250
OTHER ASSETS:
Deferred postretirement benefits cost 83,926 - - 83,926
Deferred charges and other assets 48,206 2,926 - 51,132
-------- -------- --- --------
Total other assets 132,132 2,926 - 135,058
-------- -------- --- --------
Total assets $878,157 $ 95,874 $ - $974,031
======== ======== === ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
<PAGE> 17
BOSTON GAS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ESSEX COUNTY
BOSTON GAS GAS COMPANY
DECEMBER 31, NOVEMBER 30,
1997 1997 PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) ADJUSTMENTS BALANCES (1)
------------- ----------------- ----------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CAPITALIZATION:
Common stockholders' investment
Common stock, authorized;
Boston Gas -- 0.5 million
Essex -- 5 million
Issued and outstanding,
Boston Gas -- 0.5 million $ 51,418 $ - $ - (3) $ 51,418
Essex -- 1.7 million - 20,557 - (3) 20,557
Amounts in excess of par value 43,233 - - (3) 43,233
Retained earnings 152,312 14,583 - 166,895
-------- ------- --- --------
Total common stockholders'
investment 246,963 35,140 - 282,103
Cumulative preferred stock, $1 par value,
(liquidation preference, $25 per share)
authorized and outstanding --1.2 million 29,326 - - 29,326
Long-term obligations, less current portion 211,236 28,731 - 239,967
-------- ------- --- --------
Total capitalization 487,525 63,871 - 551,396
Gas inventory financing 55,502 4,321 - 59,823
-------- ------- --- --------
Total capitalization and gas inventory
financing 543,027 68,192 - 611,219
CURRENT LIABILITIES:
Current portion of long-term obligations 507 945 - 1,452
Notes payable 39,700 6,358 - 46,058
Accounts payable 61,931 5,227 - 67,158
Accrued taxes 1,392 6 - 1,398
Accrued income taxes 11,174 (1,938) - 9,236
Accrued interest 4,372 160 - 4,532
Customer deposits 2,360 - - 2,360
Refunds due to customers 3,136 1,415 - 4,551
Pipeline transition costs - 274 - 274
-------- ------- --- --------
Total current liabilities 124,572 12,447 - 137,019
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 79,128 10,517 - 89,645
Unamortized investment tax credits 5,931 1,124 - 7,055
Postretirement benefits obligation 83,274 - - 83,274
Other 42,225 3,594 - 45,819
-------- ------- --- --------
Total reserves and deferred credits 210,558 15,235 - 225,793
-------- ------- --- --------
Total liabilities and stockholders'
investment $878,157 $95,874 $ - $974,031
======== ======= === ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
<PAGE> 18
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
The following unaudited pro forma combined statements of earnings present, under
the pooling-of-interests accounting method , the consolidated statements of
earnings of Boston Gas for the fiscal year ended December 31, 1997 with the
consolidated statements of operations of Essex County for the twelve months
ended November 30, 1997.
BOSTON GAS
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
FISCAL YEAR ENDED
ENDED NOVEMBER 30,
DECEMBER 31, 1997
1997 ESSEX COUNTY
BOSTON GAS GAS COMPANY PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) ADJUSTMENTS RESULTS (1)
------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenues $700,945 $54,427 $ - $755,372
Cost of gas sold 398,566 27,334 - 425,900
-------- ------- --- --------
Operating margin 302,379 27,093 - 329,472
Operating expenses:
Other operating expenses 148,487 13,170 - 161,657
Maintenance 22,017 744 - 22,761
Depreciation and amortization 44,413 3,422 - 47,835
Income taxes 22,510 2,565 - 25,075
Restructuring charge 8,692 - - 8,692
-------- ------- --- --------
Total operating expenses 246,119 19,901 - 266,020
-------- ------- --- --------
Operating earnings 56,260 7,192 - 63,452
Other earnings, net 298 372 - 670
-------- ------- --- --------
Earnings before interest expense 56,558 7,564 - 64,122
Interest expense:
Long-term debt 16,767 2,499 - 19,266
Other, including amortization of debt
expense 1,889 688 - 2,577
Less--interest during construction (609) (27) - (636)
-------- ------- --- --------
Total interest expense 18,047 3,160 - 21,207
-------- ------- --- --------
Net earnings 38,511 4,404 - 42,915
Preferred stock dividends 1,926 - - 1,926
-------- ------- --- --------
Net earnings applicable to common stock $ 36,585 $ 4,404 $ - $ 40,989
======== ======= === ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
<PAGE> 19
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) BOSTON GAS AND ESSEX COUNTY HISTORICAL FISCAL YEARS AND ACCOUNTING POLICIES
Boston Gas' historical fiscal year ends on December 31 while Essex County's
historical fiscal year ends on August 31. For purposes of combining Essex
County's historical financial information with Boston Gas' in the pro forma
combined statement of operations herein, the financial information of Boston Gas
for the fiscal year ended December 31, 1997 has been combined with Essex
County's financial information for the twelve months ended November 30, 1997.
The accounting policies of Eastern, Boston Gas and Essex County are currently
being studied from a conformity perspective. The impact of conforming accounting
policies (if any) is not presently estimable. If conforming adjustments are
required, they will be recorded as part of the restatement of prior periods as
required by the pooling-of-interests method. However, certain amounts in the
historical financial statements of Boston Gas and Essex County have been
reclassified to present consistent pro forma financial information. There were
no material intercompany transactions between Boston Gas and Essex County during
the periods presented.
(2) MERGER-RELATED EXPENSES
Eastern and Essex County will incur investment banking, legal, accounting and
other transaction costs as a result of the Merger. Based on information
currently available, these costs will total approximately $4.6 million and have
been and will be expensed in the period incurred. Since the Merger has not been
consummated, the Merger expenses can only be estimated at this time, and are
subject to revision as further information becomes available.
(3) COMMON STOCKHOLDERS' INVESTMENT
The common stock and paid-in capital accounts of Boston Gas and Essex County
have not been restated for the Merger due to the fact that Essex County common
stock is being exchanged for Eastern common stock, not Boston Gas common stock,
as provided in the Merger Agreement. The exchange ratio is one Essex County
common share for 1.183985 shares of Eastern common stock.
<PAGE> 1
Exhibit A-1
NUMBER SHARES
WI__________
COMMON STOCK COMMON STOCK
PAR VALUE $1.00 PAR VALUE $1.00
[GRAPHIC OMITTED]
THIS CERTIFICATE IS TRANSFERABLE CUSIP 27637F 10 0
IN NEW YORK CITY SEE REVERSE FOR CERTAIN DEFINITIONS
EASTERN ENTERPRISES
A MASSACHUSETTS VOLUNTARY ASSOCIATION
This
Certifies
that
is the
owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Eastern Enterprises (hereinafter called the Trust), a voluntary association
created by a Declaration of Trust dated July 18, 1929, which, as amended, is
hereby referred to and made a part hereof and a copy of which, as amended, is on
file in the office of the Secretary of The Commonwealth of Massachusetts. Said
Declaration of Trust provides that the name "Eastern Enterprises" refers to the
Trustees under said Declaration of Trust as Trustees but not personally, and
that no Trustee, shareholder, officer or agent of the Trust shall be held to any
personal liability in connection with this instrument, but that the trust estate
only is liable. The holder and every transferee or assignee of this certificate
or of the shares represented hereby or of any interest therein accepts and
agrees to be bound by the provisions of said Declaration of Trust, as amended,
as fully as though a subscriber thereto. This certificate and the shares
represented hereby shall be treated as negotiable and title thereto shall be
transferred by delivery of this certificate together with an endorsed or
accompanying written assignment or power of attorney, in blank or to a specified
person, signed by the person appearing by this certificate to be the owner of
the shares represented hereby, to the same extent in all respects as a stock
certificate and the shares represented thereby of a Massachusetts business
corporation, provided that no transfer or notice thereof shall affect the right
of any Trustee or officer of the Trust to treat the holder of record as the
holder and owner in fact for all purposes until such transfer is recorded in the
share register duly kept for that purpose; and the Trust and every successive
holder and bearer of this certificate by accepting or holding the same consents
and agrees to the foregoing provisions and each invites the others, and all
persons, to rely thereon. This certificate is not valid unless countersigned by
the Transfer Agent and registered by the Registrar.
Witness the facsimile signatures of the duly authorized officers of the
Trust.
DATED: COUNTERSIGNED AND REGISTERED:
THE BANK OF NEW YORK
/s/ W.J. Flaherty J.A. Ives BY TRANSFER AGENT
AND REGISTRAR,
SENIOR VICE PRESIDENT CHAIRMAN
AND CHIEF EXECUTIVE OFFICER AUTHORIZED SIGNATURE
[SEAL] American Bank Note Company
<PAGE> 2
EASTERN ENTERPRISES
THE TRUST WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS FROM
ITS SECRETARY, THE DESIGNATIONS, PREFERENCES, AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
For value received, ___________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within-named Trust with full
power of substitution in the premises.
Dated,
------------------------------- ----------------------------------------
NOTICE: The signature to this
assignment must correspond with
the name as written upon the face
of the Certificate, in every
particular, without alteration or
enlargement, or any change whatever.
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in a Common Stock Rights Agreement between the issuer and
The Bank of New York, as Rights Agent (the "Rights Agent"), dated as of February
22, 1990 (the "Rights Agreement"), the terms of which are hereby incorporated
herein by reference and a copy of which is on file at the principal offices of
the issuer and the Rights Agent. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. The Rights Agent will mail to
the registered holder of this certificate a copy of the Rights Agreement without
charge promptly after receipt of a written request therefor. Under certain
circumstances set forth in the Rights Agreement, Rights issued to, or held by
any Person who is, was or becomes an Acquiring Person, Adverse Person or any
Affiliate (which includes both affiliates and associates) of an Acquiring Person
or Adverse Person (as each such term is defined in the Rights Agreement),
whether currently held by or on behalf of such Person or Affiliate or by certain
subsequent holders, may become null and void.
<PAGE> 1
Exhibit A-6
NUMBER SHARES
10563
COMMON STOCK COMMON STOCK
ESSEX COUNTY GAS COMPANY
ORGANIZED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
CUSIP 296772 10 6
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT SPECIMEN is the owner or registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES, NO PAR VALUE, OF THE COMMON STOCK OF
ESSEX COUNTY GAS COMPANY, transferable on the books of the Company in person or
by duly authorized attorney upon surrender of this certificate properly endorsed
or assigned.
This certificate and the shares represented hereby are issued and shall be
held subject to the provisions of the Agreement of Association and the By-laws
of the Company as they may be amended from time to time, to all of which the
holder of this certificate and every transferee and assignee by accepting the
same expressly assents.
This certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS, the facsimile seal of the Company and the facsimile signatures of its
duly authorized officers.
Dated
ESSEX COUNTY GAS COMPANY
AND BY BY
/s/ J.H. Hastings /s/ P.H. Reardon
VICE PRESIDENT AND TREASURER PRESIDENT AND CHIEF EXECUTIVE OFFICER
[SEAL] Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Transfer Agent
and Registrar
by
Authorized Signature
<PAGE> 2
ESSEX COUNTY GAS COMPANY
A statement of the preferences, voting powers, qualifications and special
and relative rights of the shares of each class of stock authorized to be issued
so far as the same have been fixed and determined will be furnished to any
shareholder, without charge, upon request to the Clerk of the Company or to the
Transfer Agent named on the face hereof.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian
-----------------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
------------------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, ___________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------
- --------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within-named Company with full
power of substitution in the premises.
Dated,
------------------------------- ----------------------------------------
NOTICE: The signature to this assignment
must correspond with the name as written
upon the face of the Certificate, in
every particular, without alteration or
enlargement, or any change whatever.
<PAGE> 1
COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
- ------------------------------------
)
Eastern Enterprises )
and ) D.T.E. 98-___
Essex County Gas Company )
)
====================================
JOINT PETITION OF EASTERN ENTERPRISES, MERGER CO., AND
ESSEX COUNTY GAS COMPANY FOR APPROVAL OF MERGER
Now come Eastern Enterprises ("Eastern"), Essex County Gas Company
("Essex"), and Merger Co. (together, the "Parties"), and respectfully move that
the Department of Telecommunications and Energy (the "Department") approve the
following:
(1) the merger of Merger Co. and Essex, pursuant to G.L. c. 164, ss. 96;
(2) Essex's Rate Plan, pursuant to G.L. c. 164, ss. 94; and
(3) Merger Co.'s issuance and sale by Merger Co. of 100 shares of common
stock, $1.00 par value, to Eastern in exchange for consideration of
$100, pursuant to G.L. c. 164, ss. 14.
In addition, Eastern and Essex request that the Department confirm that
Essex, as the surviving corporation of the merger between Merger Co. and Essex,
will continue to have all the franchise rights and obligations that were
previously held by Essex, and that further action, pursuant to G.L. c. 164, ss.
21, is not required to consummate the merger.
<PAGE> 2
In support thereof, the Parties state the following:
1. Merger Co. is a gas company to be formed under G.L. c. 164, ss. 1, with a
principal place of business in Boston, Massachusetts. Merger Co. will be a
wholly owned subsidiary of Eastern.
2. Eastern is a Massachusetts business trust established and existing under a
Declaration of Trust dated July 18, 1929, as amended, with a principal
place of business in Weston, Massachusetts.
3. Essex is a Massachusetts gas company, pursuant to G.L. c. 164, ss. 1, with
a principal place of business in Amesbury, Massachusetts.
4. Eastern and Essex have entered into an Agreement and Plan of Merger dated
December 19, 1997 (the "Merger Agreement"), which is subject to necessary
approvals of government regulatory authorities having jurisdiction,
providing for the merger of Merger Co. into Essex. As a result of the
Merger Agreement, Essex will become a wholly owned subsidiary of Eastern. A
copy of the Merger Agreement is attached hereto as Attachment 1.
5. The Merger Agreement sets forth the following sequence of events that will
result in Essex becoming a wholly owned subsidiary of Eastern:
(a) Eastern shall cause Merger Co. to be incorporated and to adopt charter
documents and other organizational documents as may be necessary or
appropriate to effect the purpose of the Merger.
(b) Essex shareholders will vote on the approval of the Merger Agreement.
(c) The Department and other regulatory agencies will review the Merger
Agreement.
2
<PAGE> 3
(d) Upon receipt of the necessary regulatory approvals, Merger Co. will be
merged with and into Essex in accordance with the laws of the
Commonwealth of Massachusetts. Essex will be the surviving corporation
in the merger and will continue its corporate existence under the laws
of the Commonwealth of Massachusetts.
(e) By virtue of the merger and without any action on the part of any
holder of any capital stock of Essex or Merger Co: (i) each share of
common stock of Merger Co. will be converted into one share of common
stock of Essex, the surviving corporation; (ii) each share of Essex
common stock, that is owned by Essex as treasury stock and all shares
of Essex common stock that are owned, directly or indirectly, by Essex
or Eastern or any of their respective wholly owned subsidiaries will
be canceled and shall cease to exist; and (iii) each issued and
outstanding share of Essex common stock, other than shares canceled
pursuant to subclause (ii) of this paragraph, shall be converted into
the right to receive 1.183985 shares of Eastern common 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.
(f) Upon such conversion, each holder of a certificate formerly
representing any shares of
3
<PAGE> 4
Essex common stock shall cease to have any rights with respect
thereto, except the right to exchange such certificates for shares of
Eastern common stock to be issued in consideration of the surrender of
such certificate in accordance with the Merger Agreement.
(g) Upon the completion of the conversion of Essex common stock for
Eastern common stock, as described above, Essex will become a wholly
owned subsidiary of Eastern.
6. Merger Co.'s issuance and sale of 100 shares of its common stock to Eastern
is reasonably necessary for the purpose for which such issue of stock has
been authorized - namely, for the purpose of effecting the merger
transaction.
7. Consummation of the merger is subject to the satisfaction of certain
conditions set forth in sections 8.1, 8.2 and 8.3 of the Merger Agreement.
8. This application was authorized by the Board of Directors of Essex at a
meeting duly called for that purpose and held on December 19, 1997.
9. Votes of the shareholders of Essex approving the Merger Agreement and the
terms thereof will be provided to the Department immediately upon their
receipt. A vote of the shareholders is scheduled for May 19, 1998.
10. The testimony of Messrs. Joseph F. Bodanza, Walter J. Flaherty, James H.
Hastings, William R. Luthern, and Paul J. Murphy, explaining in detail the
proposed transaction and its expected benefits, is attached hereto as
Exhibits JFB-1, WJF-1, JHH-1, WRL-1 and PJM-1, respectively.
11. The Rate Plan for Essex customers is submitted for Department approval,
pursuant to G.L. c. 164, ss. 94, as fully described in the testimony of
Joseph F. Bodanza (Exhibit JFB-1). The Rate Plan provides for an immediate
5 percent reduction in the total burner-tip price paid by Essex customers.
In addition, the
4
<PAGE> 5
Rate Plan establishes a ten-year freeze in Essex's base rates, which will
provide customers with significant price stability and additional savings
through the avoidance of base-rate increases that customers would have
otherwise experienced. As discussed in detail by Mr. Bodanza, the 5 percent
reduction will be provided to Essex customers principally through gas cost
savings, which will result from the attainment of synergies and
efficiencies in the gas supply function. The ten-year base rate freeze will
provide Essex customers with additional benefits of approximately $33
million.
12. It is necessary, expedient and in the public interest for the Merger
Agreement to be approved by the Department in order to provide long-term
advantages to Essex, its shareholders, customers and employees, and
Eastern, its shareholders, customers of Boston Gas Company ("Boston Gas"),
a wholly owned subsidiary of Eastern, and Eastern's employees (including
employees of Boston Gas).
WHEREFORE, the Parties respectfully request that the Department:
a. Determine that the proposed merger and the terms thereof are
consistent with the public interest;
b. Approve the Merger Agreement and the merger of Merger Co. into Essex,
pursuant to G.L. c. 164, ss. 96;
c. Vote pursuant to G.L. c. 164, ss. 14 that the proposed issuance of 100
shares of Merger Co. common stock, $1.00 par value, to Eastern is
reasonably necessary for the purposes stated;
5
<PAGE> 6
d. Approve and authorize, pursuant to G.L. c. 164, ss. 14, the issuance
by Merger Co. of 100 shares of Merger Co. common stock to Eastern in
consideration of $100 by Eastern;
e. Approve the Rate Plan, pursuant to G.L. c. 164, ss. 94, as just and
reasonable and consistent with the public interest.
f. Confirm that Essex, as the surviving corporation of the merger between
Merger Co. and Essex, will continue to have all the franchise rights
and obligations that were previously held by Essex, and that further
action, pursuant to G.L. c. 164, ss. 21, is not required to consummate
the merger; and
6
<PAGE> 7
g. Issue such other and further orders as may be necessary.
Respectfully submitted,
ESSEX COUNTY GAS COMPANY
By its attorneys,
/s/Robert Keegan, Esq.
----------------------------------
Robert J. Keegan, Esq.
Robert N. Werlin, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02110
(617) 951-1400
and
EASTERN ENTERPRISES
By its attorneys,
/s/L. William Law, Jr., Esq.
----------------------------------
L. William Law, Jr., Esq.
Senior Vice President and General Counsel
Eastern Enterprises
9 Riverside Road
Weston, MA 02193
Dated: March 25, 1998 (781) 647-2300
7
<PAGE> 8
EASTERN ENTERPRISES/ESSEX COUNTY GAS COMPANY
TESTIMONY OF WALTER J. FLAHERTY
D.T.E. 98-____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Walter J. Flaherty. My business address is 9 Riverside Road,
Weston, Massachusetts 02193.
Q. BY WHOM ARE YOU EMPLOYED, AND IN WHAT CAPACITY?
A. I am Senior Vice President and Chief Financial Officer of Eastern
Enterprises ("Eastern"). I am also a Director of Boston Gas Company
("Boston Gas").
Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE DEPARTMENT OF TELECOMMUNICATIONS
AND ENERGY?
A. Prior to joining Eastern in 1991, I was Senior Vice President of
Administration at Boston Gas. As an officer and employee of Boston Gas, I
testified in numerous proceedings before the Massachusetts Department of
Public Utilities.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to describe various aspects associated with
the proposed acquisition by Eastern of Essex County Gas Company ("Essex"),
including: (i) a background description of Eastern; (ii) Eastern's decision
to acquire Essex and the cost savings and other benefits that will accrue
as a result of the transaction; (iii) a description of the transaction, as
set forth in the Merger Agreement dated December 19, 1997; and (iv) a
summary of the required regulatory approvals necessary to effect the
merger.
<PAGE> 9
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 2
II. BACKGROUND OF EASTERN ENTERPRISES
Q. PLEASE DESCRIBE THE BACKGROUND AND OPERATIONS OF EASTERN ENTERPRISES.
A. 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 amended. Eastern's principal
subsidiaries are Boston Gas and Midland Enterprises, Inc. ("Midland").
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 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.
Midland transports coal and other dry bulk commodities on the Ohio and
Mississippi Rivers and their tributaries, the Gulf Intracoastal Waterway
and the Gulf of Mexico using a fleet of about 2,300 barges and 87 towboats.
During 1997, Eastern formed two new subsidiaries to take advantage of
opportunities being created by the restructuring of the energy industry.
ServicEdge Partners, Inc., ("ServicEdge") is a fuel-neutral, full-service
provider of heating, ventilation and air conditioning products and services
and AMR Data Corporation ("AMR Data") provides meter services to electric,
gas and water utilities throughout the Northeast. Eastern will also be
forming Merger Co., under G.L. c. 164, as a Massachusetts corporation and a
wholly owned subsidiary of Eastern for the specific purpose of effecting
the transactions contemplated by the merger.
<PAGE> 10
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 3
III. THE DECISION TO ACQUIRE ESSEX COUNTY GAS COMPANY
Q. IN GENERAL, WHAT ARE THE BENEFITS THAT MERGERS AND ACQUISITIONS CAN PROVIDE
TO UTILITY CUSTOMERS?
A. Utility mergers and acquisitions throughout the United States have produced
substantial benefits to customers in the form of operational synergies and
cost savings that have either reduced customer rates and/or slowed the rate
of growth in rates. These cost savings are generally not achievable in the
absence of a merger or other business combination because such savings are
typically attained as a result of integrating various corporate,
administrative and field functions, re-optimizing energy resources and
taking advantage of economies of scale, improved financial strength,
operational diversity, and other related opportunities that help to reduce
the cost of providing utility service.
Q. WHAT IS THE DURATION OF THESE BENEFITS TO CUSTOMERS?
A. The customer benefits that are created, i.e., lower costs, improved
efficiency, and better service, are direct and permanent. Although
transaction and other "up-front" costs are incurred to achieve these
customer benefits, the magnitude and permanence of these benefits generally
produces a value for customers that far outweighs the associated one-time
costs. As described below, and in the testimony of Mr. Bodanza, Essex
customers will receive substantial and lasting benefits as a result of
Eastern's acquisition of Essex.
<PAGE> 11
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 4
Q. WHAT FACTORS PLAYED A ROLE IN EASTERN'S DECISION TO ENGAGE IN THIS
TRANSACTION?
A. As competition intensifies and gas utilities fully unbundle at the local
level, especially in a performance-based regulatory environment, the keys
to success are increasing gas throughput, improving productivity,
controlling costs and providing quality customer service. The value of
Eastern's investment in its gas operations, and in turn our shareholders'
investment in Eastern, is maintained and potentially enhanced as long as we
are able to achieve those objectives. Fortunately, New England is
experiencing above-average growth rates for natural gas. At the same time,
however, size and scale are critical to achieving the necessary
productivity and cost efficiencies to support our growth initiatives, as is
investment in new technology and infrastructure. Utilities, in general, are
characterized by a high level of fixed costs. Spreading those fixed costs
over a larger base of customers and/or unit throughput will reduce prices
and enhance competitiveness.
The gas utility industry in Massachusetts, including Boston Gas, has made
substantial strides in cost reduction and productivity improvements as a
result of their own reengineering and continuous improvement efforts.
However, the attainment of significant incremental customer savings now has
to come from consolidation and rationalization of the industry. Such
efforts are essential in order to remain competitive.
<PAGE> 12
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 5
In sum, Eastern believes that utility consolidation provides an opportunity
to reduce costs, lower prices, enhance service for customers and preserve
competitiveness. It is a critical and beneficial strategy because it
represents a win-win situation for customers and shareholders. Eastern's
acquisition of Essex is a prime example of this strategy.
Q. WHAT SPECIFIC BENEFITS DOES EASTERN ENVISION WILL RESULT FROM THE PROPOSED
ACQUISITION OF ESSEX?
A. Although Essex has a strong reputation, both within the industry and its
service territory, as a well-managed, financially sound utility providing
quality service to its customers, its small size presents opportunities for
economies of scale operating under Eastern's corporate umbrella and as a
sister company to the contiguous Boston Gas. Essex's gas supply resources
can be redesigned and re-optimized and its gas supply planning and
dispatching functions will be augmented by the resources of Boston Gas. As
a result, customers of both companies will benefit substantially from
increased supply options and enhanced purchasing power. The ability to
dispatch across the combined distribution systems will increase dispatch
flexibility, enable existing gas supply resources to be optimized,
encourage and facilitate more efficient purchasing decisions, and secure
the ability to exercise broader system control. The expanded supply
portfolio will also increase the overall reliability in both service
territories. The gas supply portfolio synergies are described in detail in
the testimony of Mr. Luthern. In addition, the merger presents an
opportunity to realize cost savings as
<PAGE> 13
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 6
a result of reduced O&M expenses, i.e., corporate, administrative and
operational expenses. These opportunities are discussed in greater detail
in the testimony of Mr. Bodanza. In short, the acquisition of Essex will
allow Eastern to capture valuable synergies that exist between the two
contiguous distribution systems and to transform such efficiency gains into
cost savings and a more flexible and reliable distribution system for all
customers.
Q. HOW WILL ESSEX'S RATES BE AFFECTED?
A. As described in greater detail in Mr. Bodanza's testimony, Eastern proposes
that Essex's customers would receive an immediate 5 percent reduction in
their total burner-tip prices upon consummation of the merger. In addition,
Essex's base rates would be frozen for a period of ten years, which will
provide customers with significant price stability and additional savings
through the avoidance of rate increases that customers would have otherwise
experienced.
Q. WHAT IS THE NATURE OF THE INVESTMENT REQUIRED TO ATTAIN THE BENEFITS
ASSOCIATED WITH THIS ACQUISITION?
A. As described in the testimony of Messrs. Murphy and Bodanza, the investment
required to obtain the benefits associated with Eastern's acquisition of
Essex is represented by three categories of costs: (1) the transaction
costs incurred in developing, executing and obtaining the necessary
approvals for the merger; (2) costs incurred to achieve the synergies that
should ultimately reduce the cost of Essex's operations; and (3) the cost
to Eastern's shareholders for the
<PAGE> 14
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 7
acquisition, i.e., the premium over book value received by Essex
shareholders, which will be reflected in the level of earnings dilution
experienced by Eastern's current shareholders as a result of the exchange
of Eastern's common stock for the common stock of Essex. In this case, the
total of all these acquisition costs is estimated to be approximately $61
million.
Q. HOW DO THE DEPARTMENT'S REGULATORY POLICIES REGARDING THE RECOVERY OF
ACQUISITION COSTS AFFECT THE ATTAINMENT OF CUSTOMER BENEFITS ASSOCIATED
WITH LDC MERGERS AND ACQUISITIONS?
A. It is generally recognized that mergers and acquisitions have the potential
to provide significant and lasting benefits to customers. Our proposal will
achieve this result for Essex's customers. At the same time, substantial
costs, including the real cost of an acquisition premium, must be incurred
by the acquiring entity and its shareholders to effect such a transaction.
Thus, the Department's policy regarding the recovery of such costs will
heavily influence the achievement of mergers or acquisitions (and their
corresponding benefits) in this industry. Unregulated industries derive
profits from the free flow of the competitive market place, and therefore,
take investment risk with the knowledge that recovery of that investment
will be a function of their own management and business expertise. The
utility industry conducts business on the basis of regulated prices that
reflect regulatory ratemaking policies based on a variety of social,
political and financial factors. Thus, the ability of regulated utilities
to recover shareholder investment is often limited by regulatory policies
that serve broader societal interests.
<PAGE> 15
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 8
Without regulatory recognition that acquisition costs are incurred to
effect a transaction that will ultimately provide significant cost savings
and other benefits for customers, shareholders will not put their capital
at risk to effect such a transaction. In order to achieve the cost savings
generated by the merger, it is necessary for the Department to recognize
that there is a direct connection between the benefits realized and the
investment necessary to generate those benefits. An appropriate regulatory
policy that aligns customer, company and shareholder interests will
encourage cost-effective mergers and acquisitions by preserving shareholder
investment and by making customers the primary beneficiaries of the
available cost savings. Thus, it is extremely important that the Department
allow, in some reasonable manner, Eastern shareholders an opportunity to
recover the investment that was necessary to obtain real and lasting
benefit for Essex customers.
IV. DESCRIPTION OF THE ACQUISITION PROCESS
Q. PLEASE SUMMARIZE THE TERMS OF THE MERGER.
A. Pursuant to the terms of the Merger Agreement, Eastern will create and
incorporate Merger Co. as a wholly owned subsidiary. Merger Co. will then
be merged into Essex, with Essex, as the surviving corporation, continuing
as a wholly owned subsidiary of Eastern. Each share of Essex common stock
will then be exchanged for 1.183985 shares of Eastern common stock. The
Merger Agreement further provides that the actual number of Eastern shares
exchanged for each Essex share will be adjusted in order to ensure that the
market value of
<PAGE> 16
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 9
the Eastern common stock is not less than $45 per share, nor greater than
$50 per share, upon conversion.
Q. PLEASE DISCUSS THE CREATION AND FUNCTION OF MERGER CO.
A. As mentioned above, Eastern will create Merger Co. as a new wholly owned
subsidiary to facilitate Eastern's acquisition of Essex. Once the
transaction is completed, Essex will be an affiliate of Boston Gas and
Midland. Eastern has agreed to create Merger Co. because it was the express
desire of Essex's shareholders and Board of Directors that the merger be
structured as a tax-free transaction. If Eastern structured the acquisition
either as a cash purchase of Essex's stock or as a merger of Essex directly
into Boston Gas, the transaction could not have qualified as a tax-free
reorganization, pursuant to Section 368(a) of the Internal Revenue Code,
triggering tax liabilities at both the corporate and shareholder levels. By
utilizing Merger Co. as a merger vehicle, Eastern can ensure that the share
exchange between Eastern and Essex will not be taxable. The structure also
avoids the payment of certain debt-related pre-payment penalties and costs
that would have become payable if Essex were not the surviving entity.
Q. HOW WILL EASTERN ACCOMPLISH THIS TRANSACTION?
A. As discussed above, the overall structure of the transaction will result in
the acquisition of Essex by Eastern. The specific steps that will be taken
to accomplish this transaction are set forth in the Merger Agreement with
Essex. In
<PAGE> 17
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 10
accordance with the Merger Agreement, Eastern will create Merger Co., as a
wholly owned subsidiary of Eastern, and Merger Co. will issue 100 shares of
common stock to be held by Eastern. Eastern will then merge Merger Co. with
and into Essex, with each share of Merger Co. being converted into one
share of the surviving company's common stock. The issued and outstanding
shares of pre-merger Essex shall be converted into the right to receive
shares of Eastern common stock, $1.00 par value, based upon the applicable
conversion rate. As a result, Eastern will be the sole owner of the
outstanding shares of Essex, as the surviving company, and Eastern will
have issued approximately $2.1 million additional shares of its own common
stock to the shareholders of Essex to accomplish the merger.
Q. WHAT WILL BE THE CORPORATE STATUS OF ESSEX AFTER THE MERGER IS CONSUMMATED?
A. As a "Section 1 gas company," Essex, the surviving company of the merger,
will continue to be regulated by the Department pursuant to G.L. c. 164. At
the same time, Essex will be a wholly owned subsidiary of Eastern, and an
affiliate of Boston Gas, Midland, ServicEdge and AMR Data.
V. REGULATORY APPROVALS REQUIRED
Q. WHAT REGULATORY APPROVALS ARE REQUIRED FOR COMPLETION OF THE MERGER?
A. There are several regulatory approvals required for consummation of the
merger, including those of the Securities and Exchange Commission (the
"SEC") and the Department. In addition to regulatory approvals, Essex's
shareholder approval of
<PAGE> 18
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 11
the merger is required. A meeting of Essex's shareholders is scheduled for
May 19, 1998 to vote on the merger.
Q. WHAT SPECIFIC APPROVALS ARE NEEDED FROM THE SEC?
A. Pursuant to the Public Utility Holding Company Act of 1935, the SEC must
approve the acquisition by Eastern of the common stock of Essex, pursuant
to the Merger Agreement. In addition, pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, the merger is subject to expiration of
a waiting period (30 days, subject to an extension), during which the
Federal Trade Commission and the Department of Justice may review any
antitrust issues that are raised by the merger.
Q. WHAT ARE THE SPECIFIC APPROVALS REQUESTED OF THE DEPARTMENT?
A. Eastern seeks the following approvals and determinations from the
Department:
(1) Approval of the merger between Merger Co. and Essex, as provided for
by the terms of the Merger Agreement, consistent with the public
interest pursuant to G.L. c. 164, ss. 96;
(2) Approval of the issuance of 100 shares of common stock, par value of
$1.00, by Merger Co. to Eastern pursuant to G.L. c. 164, ss. 14;
(3) Approval of Essex's proposed rate plan, pursuant to G.L. c. 164, ss.
94; and
(4) A determination that no transfer of Essex's franchise will occur as a
result of the merger and related transactions. Pursuant to G.L. c.
164, ss. 21, approval of the Massachusetts General Court would be
required in the
<PAGE> 19
Testimony of Walter J. Flaherty
Exhibit WJF-1
March 25, 1998
Page 12
event that the structure of the merger required a transfer of Essex's
franchise to Merger Co. (or some other third party).
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE> 20
EASTERN ENTERPRISES/ESSEX COUNTY GAS COMPANY
TESTIMONY OF JAMES H. HASTINGS
D.T.E. 98-____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is James H. Hastings. My business address is 7 North Hunt Road,
Amesbury, Massachusetts 01913.
Q. BY WHOM ARE YOU EMPLOYED, AND IN WHAT CAPACITY?
A. I am Vice President and Treasurer of Essex County Gas Company ("Essex" or
the "Company").
Q. HAVE YOU PREVIOUSLY TESTIFIED IN PROCEEDINGS BEFORE THE DEPARTMENT?
A. Yes, I have testified on behalf of Essex in several Department proceedings
relating to rate and financing matters. Specifically, I have testified in
all of the Company's rate cases from 1987 through 1996. In addition, I have
testified in various financing cases, most recently D.P.U. 97-71, regarding
the Company's proposal to issue 50,000 shares of common stock.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
The purpose of my testimony is to: (i) describe the background of Essex and
the decision to sell Essex to Eastern Enterprises ("Eastern"); (ii) provide
an overview of the process undertaken to effect that sale; (iii) explain
the benefits of the sale to Essex's customers; and (iv) endorse the Rate
Plan submitted by Eastern and Essex in this case, which is an integral part
of the overall merger plan.
<PAGE> 21
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 2
II. THE DECISION TO SELL ESSEX TO EASTERN
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF ESSEX COUNTY GAS COMPANY.
A. Essex is a local gas distribution company ("LDC"), regulated by the
Department of Telecommunications and Energy (the "Department") as a "gas
company," pursuant to G.L. c. 164, ss. 1. Essex was organized in 1853 under
the laws of the Commonwealth of Massachusetts and currently operates in the
cities of Haverhill, Newburyport and Amesbury, as well as 14 other
municipalities covering an area of approximately 280 square miles. Essex's
service area is primarily composed of residential communities with a number
of small commercial and diversified light industrial businesses. Essex
sells natural gas to approximately 42,000 customers in its service area.
Q. PLEASE EXPLAIN WHY ESSEX DECIDED TO PURSUE A MERGER AT THIS TIME?
A. Over the past several years, Essex's Board of Directors (the "Board") and
the management of Essex have followed developments in the gas utility
industry closely with a particular focus on changes in regulatory policies.
As industry restructuring initiatives have been developed and implemented,
Essex has carefully considered the impact of such initiatives on Essex's
business strategy options going forward. With the unbundling of LDC
services, the implementation of customer choice programs, the transfer of
the gas supply merchant function to unregulated marketers and the business
operating restrictions that result from application of the Department's
standards of conduct, it has become increasingly clear to Essex that its
relatively small size and limited access to available
<PAGE> 22
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 3
resources would restrict its business opportunities to being a local
distributor of natural gas. As Essex formulated its business plan, it
became evident that the opportunities to improve the efficiency of its
operations by leveraging its resources into other business activities were
severely constrained. Further analysis of its existing resources indicated
that the ability to attain savings through the creation of economies of
scale and/or scope would be far greater with more expansive operations than
the savings Essex could achieve on its own. As a result of this analysis,
the Board, in conjunction with Essex management, concluded that it should
further investigate the benefits that could potentially result from a
business combination with a larger utility operating company to determine
if such a strategy would be in the overall best interest of the Company's
customers and shareholders.
III. OVERVIEW OF PROCESS TO EFFECT MERGER
Q. WHAT PROCESS DID ESSEX USE TO MAXIMIZE THE VALUE ATTAINED FOR THE COMPANY?
A. In order to obtain a fair, market-based price for the sale of the Company,
Essex engaged the services of an experienced and independent financial
advisor to conduct a competitive bidding process with the objective of
maximizing the benefits provided to Essex customers and shareholders as a
result of the sale. Specifically, at a Board meeting on July 21, 1997, the
Board authorized management to interview and select investment bankers for
the purpose of achieving the Board's objectives in this process. On
September 15, 1997, Essex
<PAGE> 23
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 4
retained Furman Selz, L.L.C. ("Furman Selz"), an investment banking
company, to serve as financial advisor to the Company in connection with a
possible business combination with a third party. Furman Selz contacted
more than 35 companies to solicit their interest in a transaction involving
the acquisition of Essex. Of that group, 13 companies agreed to sign a
confidentiality agreement and were sent a descriptive memorandum with
respect to Essex. Six of those companies submitted non-binding indications
of interest at the end of October and the first week of November. Based on
such indications, five of the companies, including Eastern, were invited to
conduct additional due diligence during the middle two weeks of November
and to submit proposals no later than December 5th.
Q. HOW WAS THE BIDDING PROCESS STRUCTURED?
A. On behalf of Essex, Furman Selz invited the five potential bidders to
submit proposals no later than December 5th and requested that the bidders
communicate comments on a proposed merger agreement included in the
solicitation. In soliciting those bids, Furman Selz indicated the Board's
preference for a stock-for-stock transaction in which shareholders could
exchange their shares on a tax-free basis, although the Board was willing
to entertain cash bids as well. All five of the bidders submitted proposals
on December 5th.
<PAGE> 24
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 5
Q. HOW DID ESSEX DETERMINE THAT EASTERN'S PROPOSAL REPRESENTED THE MAXIMUM
VALUE ACHIEVABLE FOR ESSEX CUSTOMERS AND SHAREHOLDERS?
A. After reviewing all of the proposals with Essex management, Furman Selz
conducted negotiations with the five final bidders. Those direct
negotiations resulted in Eastern making the proposal that is embodied in
the Merger Agreement. Of particular significance to Essex was the fact that
Eastern's subsidiary, Boston Gas, operates in a service territory that is
contiguous to that of Essex, which creates a significant potential for both
companies to achieve operational synergies and associated cost reductions.
In recognition of this potential, the proposed Rate Plan, as described in
the testimony of Mr. Bodanza, provides an immediate 5 percent reduction in
the current overall burner-tip price of gas to Essex customers. In
addition, under the Rate Plan, Essex customers will receive significant
benefits in the form of a freeze in base rates for the next 10 years. This
base rate freeze will preclude the filing of three base rate cases. In sum,
because Eastern's proposal was structured as a tax-free stock exchange and
because it offered Essex's customers and shareholders the best possible
overall financial benefits compared to those of all other bidders, the
Board and Essex management selected Eastern as the winning bidder.
Q. WHAT IS THE PROPOSAL THAT IS EMBODIED IN THE MERGER AGREEMENT?
A. As discussed in the testimony of Walter J. Flaherty, the terms of the
Merger Agreement provide that one share of Essex common stock will be
exchanged for 1.183985 shares of Eastern common stock. The actual number of
Eastern shares
<PAGE> 25
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 6
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 that $45.00 nor
more than $50.00, based upon the average market price during a specified
period prior to closing. Structured in this manner, the transaction is free
of tax at the corporate level, as well as the shareholder level.
IV. BENEFITS OF THE MERGER TO ESSEX CUSTOMERS
Q. PLEASE DESCRIBE THE BENEFITS OF THE MERGER TO ESSEX'S CUSTOMERS.
A. Over the past several years, Essex has worked diligently to reduce its
operations and maintenance expenses and gas costs associated with serving
its customer base. The proposed transaction offers the potential for
additional savings that would not be achievable in the absence of Eastern's
acquisition of Essex. In particular, there is the potential to attain
savings as a result of the coordination of similar functions that are
typically performed by both companies. In accordance with the Rate Plan,
discussed in Mr. Bodanza's testimony, Essex's customers will experience
significant savings immediately upon the approval of the acquisition.
Specifically, the Rate Plan provides for an immediate 5 percent reduction
in the burner-tip prices paid by Essex customers. As mentioned above, these
savings are made possible as a direct result of the acquisition because of
the ability to capture potential gas cost savings through the coordination
of the gas planning, acquisition and dispatch activities of Essex and
Boston Gas, as well as other cost savings attainable through integration
and coordination of certain administrative and operating functions of the
two companies.
<PAGE> 26
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 7
Q. HOW WILL THESE SAVINGS BE PASSED ON TO ESSEX'S CUSTOMERS?
A. Essex's customers will obtain the savings associated with the Rate Plan
through reductions in gas costs, which will be reflected in Essex's Cost of
Gas Adjustment factor and the Local Distribution Adjustment Clause. In
addition, as part of the Rate Plan, no increase in base rates will be
sought for a period of 10 years.
Q. WOULD IT BE POSSIBLE TO ACHIEVE THESE SAVINGS IN THE ABSENCE OF THE
ACQUISITION OF ESSEX BY EASTERN?
A. As I have indicated, Essex has been, and continues to be, dedicated to
reducing its costs in all areas in order to provide its customers with
reliable gas sales and transportation services at the lowest possible cost.
However, there are limitations on Essex's ability to capture the high level
of savings that could potentially be achieved through a merger with a
larger entity, especially where Boston Gas' service territory is contiguous
with Essex's service territory. As described in Mr. Bodanza's testimony,
the acquisition will create economies of scale and synergies that present
the opportunity for significant cost reductions and ultimately short and
long-term benefits to customers in the form of lower prices.
V. ENDORSEMENT OF THE RATE PLAN
Q. DO YOU BELIEVE THAT THE BENEFITS PROVIDED BY THE RATE PLAN ARE IN THE BEST
INTEREST OF ESSEX'S CUSTOMERS?
A. Yes, I do. The Rate Plan, an integral part of the merger, will provide
immediate and substantial rate relief to Essex's customers. Those benefits
will continue to grow significantly over the next 10 years and beyond. As I
explained above, the benefits provided to Essex's customers would not be
available without the
<PAGE> 27
Testimony of James H. Hastings
Exhibit JHH-1
March 25, 1998
Page 8
acquisition of Essex by Eastern. Thus, I believe, the Rate Plan is clearly
in the best interest of all Essex customers.
Q. WHAT AFFECT WOULD A FAILURE TO APPROVE THE ACQUISITION AND THE ASSOCIATED
RATE PLAN HAVE ON ESSEX'S CUSTOMERS?
A. Were the acquisition and the associated Rate Plan not to receive approval,
Essex's customers would not obtain the immediate 5 percent price reduction
that would otherwise take effect upon approval of the merger. In addition,
Essex's customers would lose the benefit of the guarantee of rate
stability, i.e., that current rates would remain in effect for a period of
10 years. In lieu of the Department's approval of the proposed transaction,
Essex would likely be put in the position of seeking a rate increase in
1999. Accordingly, the failure to approve the merger and the associated
Rate Plan would have significant adverse effects on Essex's customers. I
believe that, given the potential cost savings and the fact that such
savings would not otherwise be achievable absent the proposed transaction,
approval of the acquisition and the associated Rate Plan is consistent with
the public interest pursuant to G.L. c. 164,ss. 96.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE> 28
EASTERN ENTERPRISES/ESSEX COUNTY GAS COMPANY
TESTIMONY OF PAUL J. MURPHY
D.T.E. 98-____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Paul J. Murphy. My business address is 388 Greenwich Street, New
York, New York 10048.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am a Managing Director in Salomon Smith Barney's Global Power Investment
Banking Group. Salomon Smith Barney is an internationally recognized
investment banking firm that underwrites and develops markets for
securities in various global exchanges and engages in the valuation of
businesses and their securities in connection with mergers and
acquisitions.
Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES.
A. As head of Salomon Smith Barney's Natural Gas Group ("Salomon Smith
Barney"), I am responsible for the firm's investment banking activities in
the natural gas pipeline, distribution, gathering and marketing industries.
Salomon Smith Barney provides corporate finance services to clients who are
seeking to raise equity and debt capital in both the public and private
capital markets, as well as to obtain general securities valuation. Salomon
Smith Barney also provides a variety of strategic advisory services,
including advice on merger and acquisition transactions and opportunities,
corporate and asset business valuation, capital
<PAGE> 29
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 2
structure, liability management and a broad range of derivative products
and services.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND.
A. I graduated from the University of Western Ontario in London, Canada in
1977, and earned law degrees from Ottawa Law School in 1980 and Columbia
Law School in 1984. From 1980 through 1987, with the exception of the 1984
academic year, I worked as an Associate at the Toronto law firm of Garvey,
Ferriss and at Skadden, Arps, Slate, Meagher & Flom in New York. I have
worked at Salomon Smith Barney since 1987. In the past seven years, my
experience in the natural gas industry includes raising over $17 billion of
capital for natural gas companies and advising on more than $11 billion of
completed merger, acquisition and restructuring transactions for gas
companies.
Q. WHAT IS THE ROLE OF SALOMON SMITH BARNEY IN THIS TRANSACTION?
A. Salomon Smith Barney has provided Eastern Enterprises ("Eastern") and
Boston Gas Company ("Boston Gas") with corporate finance and strategic
advisory services since 1992. We have assisted Eastern with its corporate
restructuring and securities and business valuation activities and have
provided advice with respect to opportunities created as a result of energy
industry deregulation. Salomon Smith Barney is the financial advisor to
Eastern on its proposed acquisition of Essex County Gas Company ("Essex").
<PAGE> 30
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 3
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is: (i) to describe the recent history of
mergers in the natural gas industry and to demonstrate that the price paid
by Eastern for Essex is reasonable and consistent with this experience; and
(ii) to explain the principle of pooling of interests accounting and
earnings dilution and to discuss the application of these principles to the
Eastern acquisition of Essex.
II. RECENT HISTORY OF MERGERS AND ACQUISITIONS IN THE GAS UTILITY SECTOR
Q. PLEASE PROVIDE A BRIEF OVERVIEW OF THE RECENT HISTORY OF MERGERS AND
ACQUISITIONS IN THE GAS UTILITY INDUSTRY.
A. Historically, there has been limited merger and acquisition ("M&A")
activity in the gas utility industry.(1) During the five-year period from
1990 to 1994, there were eleven M&A transactions in this sector with a
total value of approximately $1.8 billion. More recently however, with the
introduction of deregulation and competitive forces, M&A activity in the
gas utility sector has increased. Since the beginning of 1995, there have
been fourteen completed transactions representing a total of $16.3 billion.
Most of these transactions represented industry consolidation (gas utility
to gas utility mergers and acquisitions) and energy convergence (primarily
gas and electric utility combinations). Salomon Smith Barney anticipates a
continued
(1) Gas pipeline and distribution companies.
<PAGE> 31
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 4
high level of transactions as deregulation and competitive forces are
introduced across the nation over the next five years.
Q. WHAT FACTORS HAVE LED TO THE INCREASED LEVELS OF MERGER AND ACQUISITION
ACTIVITY IN THE GAS UTILITY SECTOR IN RECENT YEARS?
A. As noted above, the increased level of M&A activity is largely driven by
the forces of existing and future competition in the energy industry. Gas
and electric utility deregulation introduces customer choice and
competition. These forces require traditional cost-of-service utilities to
position for a new market order where low operating costs, efficiencies,
economies of scale and superior customer service are the keys to both
survival and, ultimately, success. To remain competitive in this market
environment, companies will need to develop both large scale and low-cost
structures. Larger scale will be required to develop the physical plant and
technical infrastructure to compete. Low-cost structures will be needed to
offer services at prices customers will find attractive. Mergers and
acquisitions are a primary means to achieve these goals. Companies that
combine can reduce their operating and maintenance expenses by eliminating
overlapping or redundant functions (i.e., "cost synergies") in such ----
areas as managerial and supervisory positions; legal, accounting and
consulting services; customer accounting, billing, collection and other
"back office" operations; planning, contracting and administrative
services, and field service and operations.
<PAGE> 32
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 5
Q. WHAT HAS BEEN YOUR PARTICULAR EXPERIENCE WITH SUCH MERGERS AND ACQUISITIONS
IN THE GAS UTILITY SECTOR OVER THE PAST SEVEN YEARS?
A. During the past seven years, I have advised on eleven completed
transactions and restructurings in the gas distribution and transmission
industry valued at over $11.5 billion. These transactions are listed in
Exhibit PJM-2, attached. The number of transactions I have worked on in
this area has increased over the last several years.
Q. IN GENERAL, HOW ARE UTILITY ACQUISITIONS STRUCTURED?
A. Deals have been structured as stock or cash acquisitions, in which the
acquiring company has paid a premium to the selling company or its
shareholders, as the case may be. Attached is Exhibit PJM-3, which lists
some recent acquisitions and the particular characteristics of those
transactions.
Q. IN GENERAL, HOW HAVE THE ACQUISITION PRICES OF THESE TRANSACTIONS COMPARED
TO THE BOOK VALUES OF THE ACQUIRED COMPANIES AND WHAT IS THE REASON FOR ANY
DISPARITY?
A. In each of the utility transactions, the price paid by the acquiring
company has been at a premium to the book value of the acquired company.
The magnitude of the premiums, as noted on the list of precedent
transactions, has ranged from 1.4x to 3.5x the seller's book value. This
range of premiums has generally narrowed to 1.9x to 2.8x over the past
three years. Buyers generally pay a premium to the seller's book value in
these transactions because of the cost savings and economies that they can
achieve and retain for shareholders to offset their costs incurred in
achieving the merger.
<PAGE> 33
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 6
Market-to-book value multiples paid to acquire gas utilities can and do
vary quite broadly for very good reasons. Generally speaking, an acquiror
is willing to pay a price for a target company consistent with expected
earnings growth or increased stock values, which are deemed acceptable by
the acquiror's management and board of directors. The price paid, as a
multiple of book value, reflects the buyer's expectations of the acquired
company's future contribution to the combined company's short- and
long-term financial performance. These expectations are driven primarily by
multi-year projections of cost savings and rate treatment, as well as the
nature of the currency used to pay for the acquisition. The financial
impact of these factors can vary quite broadly from case to case, which is
reflected in the range of market-to-book values paid or proposed for gas
utility acquisitions in recent years.
Q. IN GENERAL, HOW HAVE THE ACQUISITION PRICES OF THESE MERGERS COMPARED TO
THE EARNINGS OF THE ACQUIRED COMPANIES?
A. As illustrated by the precedent transactions listed in Exhibit PJM-3,
buyers of utility companies have been paying approximately 15 to 35 times
the preceding twelve month earnings, with a median price of slightly over
20 times the twelve month earnings. As was the case with the premium prices
paid relative to book value, such high price-to-earnings multiples are
justified only where there are sound expectations that cost savings and
economies will be realized and retained for the benefit of shareholders.
<PAGE> 34
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 7
Q. GIVEN YOUR EXPERIENCE WITH OTHER GAS UTILITY MERGERS AND ACQUISITIONS AND
YOUR SPECIALIZED KNOWLEDGE OF THE INDUSTRY, IS IT YOUR OPINION THAT THE
PURCHASE PRICE PAID BY EASTERN FOR ESSEX IS REASONABLE?
A. Yes. As advisor to Eastern, Salomon Smith Barney carefully analyzed the
price paid in the acquisition and considered it both in relation to the
prices paid in similar relevant transactions and management's estimates of
the cost savings that may be achieved through the transaction. Salomon
Smith Barney concluded that the purchase price to be paid by Eastern for
Essex is reasonable (and so reported to both management and the Board of
Directors). One of the important factors leading to Salomon Smith Barney's
opinion on the reasonableness of the transaction price was the value paid
by Eastern as a multiple of Essex's earnings and book value. In that
regard, the purchase price to be paid by Eastern represents 2.3 times
Essex's book value and 18.6 times Essex's latest twelve-month earnings.
These multiples are consistent with recent comparable gas distribution
acquisitions (see Exhibit PJM-3).
III. THE PRINCIPLE OF POOLING OF INTEREST ACCOUNTING AND EARNINGS DILUTION
Q. PLEASE DESCRIBE THE ALTERNATIVE METHODS OF ACCOUNTING FOR AN ACQUISITION.
A. Acquisitions are reflected in one of two ways under generally accepted
accounting principles: purchase accounting and pooling of interests
accounting. In a purchase accounting transaction (where one company
purchases the assets or stock of another), any amount paid for the acquired
company in excess of book value, i.e., a premium or "goodwill," is recorded
on the books of the acquired
<PAGE> 35
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 8
company as an adjustment to the value of the company's asset or
capitalization accounts and amortized over a period of time. The
amortization of the acquisition premium represents an expense and, if not
recovered, results in lower earnings for shareholders.
Pooling of interests accounting is required if the transaction involves the
exchange of common stock and certain other criteria are met. As discussed
in Mr. Flaherty's testimony, Eastern's acquisition of Essex will be
structured as a pooling of interests transaction. Under pooling of interest
accounting, an acquisition is effected through an exchange of the voting
stock of the acquiror for all, or a substantial portion of, the voting
stock of the acquiree. The balance sheets of the acquiror and the acquiree
are simply combined, and for accounting purposes, there is no adjustment
(i.e., increase or decrease) to any of the assets or liabilities of the
merged entities to account for the acquisition premium. Rather, the
exchange ratio, in this case one Essex share exchanged for 1.183985 Eastern
shares, reflects a number of factors, such as a premium for management
control of the company and the long term strategic and economic value to be
gained through the acquisition. Thus, pooling accounting results in a
merger of previously independent stockholder interests into a new
consolidated entity and, although shareholders of the acquired company may
receive a premium, there is no associated adjustment to the book value of
the assets of the new entity, as is the case in a purchase accounting
transaction.
<PAGE> 36
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 9
Q. HOW DOES POOLING OF INTERESTS ACCOUNTING AFFECT THE EARNINGS OF THE
ACQUIRING COMPANY?
A. In a typical pooling of interests acquisition, the acquiring company pays a
premium price for the utility being acquired. This premium price is
reflected in valuation measures (i.e., market to book value and price
earnings multiple) of the acquired utility. Since common equity is the
currency used to effect the combination, the payment of shares at such a
premium price results in a pro forma dilution of both the book value and
earnings per share of the acquiror. The payment of the premium to acquire
the target, and the subsequent risk of dilution, are rational undertakings
only where management believes that the retention of financial benefits
derived from the merger will more than offset the costs of the transaction.
Since mergers and acquisitions are undertaken to enhance shareholder value,
rather than to diminish it, earnings dilution must be considered by Eastern
in consummating this transaction. Eastern's shareholders have the
reasonable expectation that the economic benefits of the transaction will
be shared with customers in a manner that will augment Eastern's earnings
and enhance the value of its shares.
This pooling of interests process and its dilutive impact on earnings is
demonstrated by the following hypothetical acquisition of Utility B by
Utility A.
<PAGE> 37
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 10
Table 1 represents the pre-acquisition characteristics of Utility A and
Utility B, indicating the difference in size between the two as well as the
identical per share features for both.
Table 1
(in millions, except per share amounts)
<TABLE>
<CAPTION>
BOOK VALUE EARNINGS
SHARES BOOK VALUE EARNINGS PER SHARE PER SHARE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utility A 20 $400 $48 $20 $2.40
Utility B 10 $200 $24 $20 $2.40
</TABLE>
Utility B is then acquired by Utility A through the exchange of stock at a
premium ratio of 1.2 shares of Utility A for every 1.0 share of Utility B,
such that 12 million shares of Utility A are issued to acquire Utility B.
Table 2 demonstrates the pro forma dilutive impact of this transaction on
Utility A shareholders.
<PAGE> 38
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 11
TABLE 2
(in millions, except per share amounts)
<TABLE>
<CAPTION>
Book Value Earnings
Shares Book Value Earnings per share per share
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Utility A 20 $ 400 $ 48 $ 20.00 $ 2.40
Utility B 10 $ 200 $ 24
----- -----
Pro Forma 32 $ 600 $ 72 $ 18.75 $ 2.25
== ===== =====
Dilution ($ 1.25) ($ 0.15)
Percentage Change (6.3%) (6.3%)
</TABLE>
As demonstrated in Table 2, the premium paid in stock by Utility A to
acquire Utility B results in pro forma dilution of both book value and
earnings per share for Utility A shareholders.
Q. WHAT DOES THE EARNINGS DILUTION EXPERIENCED BY THE ACQUIRING COMPANY'S
SHAREHOLDERS REPRESENT?
A. In purchase accounting, an adjustment (i.e., an increase or decrease), is
made to the asset or capitalization accounts of the acquired company to
reflect the "acquisition premium" or the amount paid by the acquiror in
excess of book value. Under pooling of interests accounting, an
"acquisition adjustment" is not explicitly recorded on the books in this
manner. Rather, the acquisition premium is reflected in the difference
between the valuation of the stock of the acquiring company and the value
of the stock of the acquired company, which is exchanged in order to
accomplish the transaction. Although the accounting treatment may be
<PAGE> 39
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 12
different, the result is the same. That is, the acquisition premium, or the
amount of earnings dilution to be experienced by the acquiring company's
shareholders, represents a real economic cost incurred to execute the
transaction.
Q. WILL EASTERN'S SHAREHOLDERS EXPERIENCE EARNINGS DILUTION AS A RESULT OF THE
ACQUISITION OF ESSEX?
A. Yes, similar to the example described above, Eastern will issue additional
shares of its common stock to execute the transaction. Those additional
shares will be exchanged for shares of Essex at a rate of 1.183985 shares
of Eastern for each share of Essex. As demonstrated in the table below,
which was based on financial information available at the time of the
offer, this premium valuation for Essex would result in a pro forma
dilution of both book value and earnings for Eastern's shareholders.
<PAGE> 40
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 13
<TABLE>
<CAPTION>
Table 3
(in millions, except per share amounts)
SHARES BOOK VALUE EARNINGS BOOK VALUE EARNINGS
PER SHARE PER SHARE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Eastern 20.378 $438.9 $57.5 $21.54 2.82
Essex 1.685 $ 35.4 $ 4.2 21.01 2.47
-------- --------
Pro Forma 22.483 (a) $476.4 (b) $61.6 $21.19 $2.74(c)
Dilution ($0.35) ($0.08)
Percentage Change (1.6%) (2.8%)
</TABLE>
(a) Calculated by adding the fully diluted, exchange-ratio effected number
of shares from Essex to the shares outstanding of Eastern.
(b) Book value of Essex adjusted to reflect additional issuance of common
stock whose proceeds are not used to repurchase shares back.
(c) Represents pro-forma dilution in first year following acquisition.
This dilution of earnings represents a real cost to Eastern's shareholders.
Moreover, this pro forma analysis does not include the out-of-pocket
transaction and synergy costs of approximately $15 million, which are
identified in Mr. Bodanza's testimony, that will also be financed and borne
by Eastern's shareholders. If unable to retain a portion of the cost
savings resulting from the merger, Eastern's shareholders will suffer both
book value and earnings dilution in the value of their holdings. Unless
there is a reasonable opportunity to recover the premium associated with
this type of transaction through the retention of a portion of the attained
synergies, mergers of this sort cannot be accomplished. Mergers are
undertaken to enhance shareholder value, not reduce it. As a result,
<PAGE> 41
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 14
shareholders' reasonable expectations are that the economic benefits of
this merger will be shared with customers in a way that will enhance,
rather than diminish, the amount of Eastern's earnings and the value of its
shares. Absent a reasonable opportunity for the recovery of and return on
investor costs, investor earnings will be reduced.
Q. CAN THE MINIMUM ECONOMIC BENEFIT EASTERN SHAREHOLDERS ARE EXPECTING TO
RECEIVE BE CALCULATED?
A. Yes, it can. To avoid dilution to Eastern's earnings and a reduction in the
value of Eastern's shares, shareholders would need incremental economic
benefit from the Essex merger of at least $46 million in pre-tax earnings
over the next ten years (see Exhibit PJM-4) (not including the
out-of-pocket transaction costs of $15 million identified in Mr. Bodanza's
testimony). This calculation is based on several assumptions. Utilizing
Eastern's 1998 estimated average earnings per share from First Call,(1) I
projected earnings assuming growth at a conservative three percent annual
rate over the next 10 years. This growth rate is conservative in light of
both Eastern's historical performance and its corporate objectives.
Moreover, this three percent growth rate is conservative relative to
typical gas utility growth rates. It is important to note that, as growth
rates assumed for the
(1) First Call is a widely recognized and commonly used data base that
maintains equity research analysts' estimates of publicly traded companies'
future earnings and earnings growth rates.
<PAGE> 42
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 15
acquiror increase, the level of earnings dilution it experiences as a
result of an acquisition also increases. In assuming a highly conservative
level of growth, the level of earnings dilution may be understated.
The dilutive impact of the merger with Essex was calculated based on the
Essex five-year stand-alone financial plan, which were provided to Eastern
and other potential acquirors in due diligence prior to the announcement of
the acquisition. For 2000 and beyond, Eastern management projected that
Essex could maintain annual net income of $4 million. Using this assumption
and pooling accounting, the combination of Eastern and Essex results in
pre-tax earnings dilution to Eastern's shareholders of an average of $4.6
million per year, or $0.12 per share. This represents a real economic loss
to Eastern's shareholders of roughly 2.8 percent of the earnings, in 1998,
that Eastern would otherwise have expected to earn had the acquisition not
occurred (see Exhibit PJM-4). This loss grows to as much as 4.5 percent in
the tenth year.
As noted earlier, earnings dilution is a real economic loss to Eastern's
shareholders which they would reasonably expect to recover through the cost
savings and synergies achieved through the combination of the two
companies. Not counting the $15 million in acquisition-related expenses
computed by Mr. Bodanza, the analysis in Exhibit PJM-4 illustrates that
Eastern needs to retain over a ten-year period an average of $4.6 million
of savings per year simply to recover from the expected impact of dilution.
Acquirors generally expect to do
<PAGE> 43
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 16
better than this in return for both putting their capital at risk and
undertaking the considerable effort required to achieve benefits for both
customers and shareholders. Acquirors generally expect transactions to
generate earnings growth to compensate them for these risks and
expenditures.
Q. HOW DOES THE EARNINGS DILUTION AND AMOUNT OF COST SAVINGS AND SYNERGIES
THAT NEED TO BE RETAINED COMPARE IN A POOLING VERSUS A PURCHASE
TRANSACTION?
A. If Eastern had acquired Essex in a purchase transaction, the projected
earnings dilution and synergies required to break even would have been
significantly greater. This would have resulted in fewer benefits to be
shared by Essex customers and Eastern shareholders.
As noted in Mr. Bodanza's testimony, the premium over Essex's book value
paid by Eastern amounted to $47.1 million. In a traditional rate of return
context, this premium would be added to Essex's rate base so that the costs
associated with the premium would be recovered through Essex's future
rates. As further noted in Mr. Bodanza's testimony, the revenue requirement
associated with this recovery amounts to an average of $8 million per year
over a ten-year projected period. This is significantly greater than the
$4.6 million revenue requirement that shareholders need to "break even" in
the pooling case discussed above. As a result, pooling treatment is clearly
the more economical way of completing the acquisition and the alternative
that leaves the greatest amount of savings available for sharing between
Eastern's shareholders and Essex's customers. Pooling
<PAGE> 44
Testimony of Paul J. Murphy
Exhibit PJM-1
March 25, 1998
Page 17
achieves this result because Eastern's stock, which is the acquisition
currency, is itself valued at a premium to its book value in the public
equity market. This premium helps offset the premium paid to Essex's
shareholders in the acquisition.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE> 45
TRANSACTIONS BY PAUL MURPHY - EXHIBIT PJM-2
<TABLE>
<CAPTION>
Date Client Deal Transaction Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 K N Energy Acquisition of MidCon Energy $3.5 Billion
- --------------------------------------------------------------------------------------------------------
1997 PacifiCorp Sale of Tejas Gas Gathering system
to El Paso Energy $200 Million
- --------------------------------------------------------------------------------------------------------
1996 Columbia Gas Sale of exploration and production $200 Million
assets to Hunt Petroleum
- --------------------------------------------------------------------------------------------------------
1996 Western Resources Sale of Kansas and Oklahoma gas distribution $690 Million
assets to and acquisition of 45% interest
in ONEOK Inc.
- --------------------------------------------------------------------------------------------------------
1996 Cornerstone Natural Gas Sale to El Paso Energy $121 Million
- --------------------------------------------------------------------------------------------------------
1996 Republic of Argentina Sale of the Government's 25% interest $140 Million
in Transportadora de Gas Del Norte, S.A.
to CMS Energy
- --------------------------------------------------------------------------------------------------------
1995 TransCanada Pipelines Ltd. Exclusive adviser and financing agent to $350 Million
TransCanada on acquisition of the franchise
to construct the Gasoducto de Occidente
pipeline in Columbia
- --------------------------------------------------------------------------------------------------------
1991-1995 Columbia Gas Exclusive adviser to Columbia Gas and $5 Billion
Columbia Gas Transmission in their 4 1/2 year
bankruptcy proceedings.
- --------------------------------------------------------------------------------------------------------
1993 NGC Corp. Sale of 25% interest in NGC to Nova Corp. $500 Million
(formerly Natural Gas
Clearinghouse)
- --------------------------------------------------------------------------------------------------------
1993 Western Resources Sale of Missouri gas distribution assets $404 Million
to Southern Union
- --------------------------------------------------------------------------------------------------------
1992 United Gas Pipeline Sale to Koch Industries $414 Million
========================================================================================================
</TABLE>
<PAGE> 46
SELECTED GAS DISTRIBUTION M&A TRANSACTIONS - EXHIBIT PJM-3
(Dollars in Millions)
<TABLE>
<CAPTION>
============================================================================================================================
Date
Announced Offer Offer Price Offer Price
(Closing) Acquirer/Target Value (a) Book Value (b) LTM EPS (c)
============================================================================================================================
<S> <C> <C> <C> <C>
12/22/97 Eastern Enterprises/ 82 2.3x 18.6x
(Pending) Essex County Gas
12/18/97 NIPSCO Industries/ 540 2.3x 21.6x
(Pending) Bay State Gas
6/27/97 PP&L Resources/ 121 1.9 16.4
(Pending) Penn Fuel Gas, Inc.
6/18/97 TECO Energy Inc./ 21 2.0 35.4
(6/30/97) West Florida Gas
11/22/96 TECO Energy Inc./ 300 2.8 18.8
(6/16/97) Lykes Energy Inc.
10/14/96 ENOVA Corporation/ 2,797 2.1 14.5
(Pending) Pacific Enterprises
8/12/96 Houston Industries/ 2,421 2.5 26.9
(8/6/97) NorAm Energy
7/22/96 Atmos/ 339 2.1 22.1
(7/31/97) United Cities Gas
10/10/95 Puget Sound P&L/ 478 1.9 14.8
(2/10/97) Washginton Energy
7/09/93 Southern Union Company/ 415 1.4 NA
(02/01/94) Western Resources-Missouri Gas Distribution Properties
5/13/93 Wisconsin Energy/ 45 3.5 27.8
(01/03/94) Wisconsin Southern Gas
3/25/93 Atmos Energy Corp./ 65 3.1 NA
(12/22/93) Greeley Gas Company
6/12/89 CNG/ 164 2.0 17.6
(1/1/90) Virginia Natural Gas
---------------------------------------------------------------
Low 1.4 14.5
Median 2.1 20.2
High 3.5 35.4
---------------------------------------------------------------
</TABLE>
Note: Eastern acquisition of Essex excluded from low, median and high
calculations.
______________________________________
(a) Total Value calculation assumes all shares purchased at Offer Price per
Share, and does not reflect different prices paid in open market purchases
except as otherwise noted.
(b) Tangible book value as per latest available data.
(c) Earnings per share (primary) for trailing 12 months ending with last
quarter prior to announcement, adjusted for non-recurring items.
<PAGE> 47
COMPANY CONFIDENTIAL
WORK IN PROGRESS
<TABLE>
<CAPTION>
EFU Stand Pro Forma
Alone Combined
----- ------------------
<S> <C> <C>
Share Price($ per share) -- $ 47.50
Exchange Ratio 1.183985
Implied Financial Results
Equity Value ($ million) $ 818 $ 902
Firm Value ($ million) $ 1,248 $ 1,369
New Shares Issued (million) 2.11
Total Shares (million) 20.38 22.49
Assumed EFU Growth in Earnings 3.0%
---
</TABLE>
<TABLE>
<CAPTION>
Essex NI*
---------
($ in 000's)
1998 Pro Forma Analysis
<S> <C> <C> <C>
EFU EPS ($ per share) $ 2.82
Pro Forma EPS ($ per share) 4,163 $ 2.74
Accretion/(Dilution) ($ per share) $ (0.08)
Accretion/(Dilution) (Percent) -2.8%
Required Retained Synergies for Break-Even($ millions) $ (3.0)
1999 Pro Forma Analysis
EFU EPS ($ per share) $ 2.90
Pro Forma EPS ($ per share) 4,267 $ 2.82
Accretion/(Dilution) ($ per share) $ (0.08)
Accretion/(Dilution) (Percent) -2.8%
Required Retained Synergies for Break-Even($ millions) $ (3.1)
2000 Pro Forma Analysis
EFU EPS ($ per share) $ 2.99
Pro Forma EPS ($ per share) 4,000 $ 2.89
Accretion/(Dilution) ($ per share) $ (0.10)
Accretion/(Dilution) (Percent) -3.4%
Required Retained Synergies for Break-Even($ millions) $ (3.8)
2001 Pro Forma Analysis
EFU EPS ($ per share) $ 3.08
Pro Forma EPS ($ per share) 4,000 $ 2.97
Accretion/(Dilution) ($ per share) $ (0.11)
Accretion/(Dilution) (Percent) -3.6%
Required Retained Synergies for Break-Even($ millions) $ (4.1)
2002 Pro Forma Analysis
EFU EPS ($ per share) $ 3.17
Pro Forma EPS ($ per share) 4,000 $ 3.05
Accretion/(Dilution) ($ per share) $ (0.12)
Accretion/(Dilution) (Percent) -3.8%
Required Retained Synergies for Break-Even($ millions) $ (4.5)
</TABLE>
Page 1 of 2
<PAGE> 48
COMPANY CONFIDENTIAL
WORK IN PROGRESS
<TABLE>
<S> <C> <C> <C>
Assumed EFU Growth in Earnings 3.0%
Essex NI*
---------
($ in 000's)
2003
EFU EPS ($ per share) $ 3.27
Pro Forma EPS ($ per share) 4,000 $ 3.14
Accretion/(Dilution) ($ per share) $ (0.13)
Accretion/(Dilution) (Percent) -3.9%
Required Retained Synergies for Break-Even($ millions) $ (4.8)
2004
EFU EPS ($ per share) $ 3.37
Pro Forma EPS ($ per share) 4,000 $ 3.23
Accretion/(Dilution) ($ per share) $ (0.14)
Accretion/(Dilution) (Percent) -4.1%
Required Retained Synergies for Break-Even($ millions) $ (5.1)
2005
EFU EPS ($ per share) $ 3.47
Pro Forma EPS ($ per share) 4,000 $ 3.32
Accretion/(Dilution) ($ per share) $ (0.15)
Accretion/(Dilution) (Percent) -4.2%
Required Retained Synergies for Break-Even($ millions) $ (5.5)
2006
EFU EPS ($ per share) $ 3.57
Pro Forma EPS ($ per share) 4,000 $ 3.42
Accretion/(Dilution) ($ per share) $ (0.16)
Accretion/(Dilution) (Percent) -4.4%
Required Retained Synergies for Break-Even($ millions) $ (5.9)
2007
EFU EPS ($ per share) $ 3.68
Pro Forma EPS ($ per share) 4,000 $ 3.51
Accretion/(Dilution) ($ per share) $ (0.17)
Accretion/(Dilution) (Percent) -4.5%
Required Retained Synergies for Break-Even($ millions) $ (6.2)
Cum. Required Retained Synergies for Break-Even in 10 yrs ($ millions) $ 46.0
*Source: Essex County Gas Company 5 year plan for 1998 and 1999
</TABLE>
Page 2 of 2
<PAGE> 49
EASTERN ENTERPRISES/ESSEX COUNTY GAS COMPANY
Testimony of Joseph F. Bodanza
D.T.E. 98-____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Joseph F. Bodanza. My business address is One Beacon Street,
Boston, Massachusetts 02108.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am Senior Vice President and Treasurer of Boston Gas Company ("Boston
Gas"). I am responsible for the financial, accounting, treasury,
governmental/state regulatory and public affairs, pricing and rates, as
well as the design, implementation and maintenance of information and
communications systems.
Q. ARE YOU FAMILIAR WITH THE PROPOSED ACQUISITION OF ESSEX COUNTY GAS COMPANY
BY EASTERN ENTERPRISES?
A. Yes. Eastern Enterprises ("Eastern") has requested that I evaluate and
analyze the operations of Essex County Gas Company ("Essex"). In that
regard, I have attempted to determine if there are synergistic
opportunities to realize reductions in the operating costs of Essex by
eliminating or combining certain of its operations with those of Boston
Gas, thereby reducing the overall level of expenses associated with Essex's
operations. Based on this analysis, I have been asked to develop a rate
plan (the "Rate Plan") for Essex.
<PAGE> 50
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 2
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is: (i) to discuss the Rate Plan for Essex; and
(ii) to review the specific benefits associated with the proposed merger
demonstrating that the merger is consistent with the public interest,
pursuant to G.L. c. 164, ss. 96.
II. DISCUSSION OF THE RATE PLAN
Q. What is the purpose of the Rate Plan?
A. The purpose of the Rate Plan is to allocate the potential savings resulting
from operating synergies in an equitable manner so as to provide Essex
customers with significant and immediate benefits while allowing Eastern's
shareholders to recover over a reasonable period of time the costs incurred
to achieve the merger. In that regard, the Rate Plan provides an immediate
5 percent reduction in the total burner-tip price of gas currently paid by
Essex sales customers. In addition, we have proposed to freeze base rates
for ten years, which will provide customers with price stability and
additional savings through the avoidance of rate increases that customers
would have otherwise experienced. Under our proposal, Eastern shareholders
also have a reasonable opportunity to recover the costs incurred to
accomplish the merger.
Q. WHAT ARE THE BASIC ELEMENTS OF THE RATE PLAN THAT YOU ARE PROPOSING?
A. In developing the proposed Rate Plan, we have set an objective of providing
an immediate 5 percent reduction in the total burner-tip price of gas
currently paid by Essex customers. Based on Essex's total normalized
revenues of approximately
<PAGE> 51
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 3
$46.9 million (pursuant to Essex's 1996 rate settlement and its 1997 CGAC
filings), the total price reduction will be approximately $2.35 million. As
described in the testimony of Mr. Luthern, we have identified net cost
savings for Essex customers of approximately $1.46 million in the first
year that will result from the attainment of synergies and efficiencies in
the gas supply function. Savings related to the gas supply function will be
reflected in Essex's Cost of Gas Adjustment Clause ("CGAC") over the
ten-year period of the Rate Plan. To achieve an overall $2.35 million rate
reduction, a credit of $900,000 will be applied to Essex's Local
Distribution Adjustment Clause ("LDAC") until November 2000. Upon
expiration of the existing long-haul contract with Tennessee Gas Pipeline
Company ("Tennessee") in November 2000, total gas savings will increase by
an additional $900,000.
In addition, we propose to freeze Essex's base rates for ten years, which
will provide customers with additional savings of approximately $33
million. We have estimated that the combined impact of the rate freeze and
price reductions will provide Essex customers with a benefit of
approximately $57 million over the next ten years (Exhibit JFB-2).
Q. ON WHAT BASIS HAVE YOU DETERMINED THAT COST SAVINGS OF APPROXIMATELY $1.46
MILLION WILL BE ATTAINED AS A RESULT OF SYNERGIES IN GAS SUPPLY OPERATIONS?
A. We estimate that gas cost savings will be attained as a result of the
ability to coordinate the gas supply resources of Boston Gas and Essex.
Such joint
<PAGE> 52
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 4
planning will create increased supply options, result in the more efficient
use of existing resources, and generate savings from an enhancement of
Essex's purchasing power. Mr. Luthern has reviewed Essex's gas resource
portfolio and gas supply operations to identify available synergies, and
his testimony outlines how these savings will be achieved.
As indicated by Mr. Luthern, a review of Essex's supply contracts and
requirements forecast has enabled him to project that gas costs for the
Essex portfolio will be reduced in the first full year of the merger by
$2.5 million. That number will increase to $3.4 million upon the expiration
of the Tennessee long-haul contract on November 1, 2000. The majority of
these savings ($2.2 million in the first year) will be achieved through the
release of the Tennessee pipeline capacity and eventually removing the
total costs of that capacity from the Essex CGAC upon the expiration date
of the existing contract. The remaining savings of $300,000 per year will
reflect reduced commodity costs resulting from enhanced purchasing power.
In addition, there are likely to be opportunities for additional savings
relating to the restructuring of other capacity contracts in the future.
Q. IF THE TOTAL SAVINGS WILL BE $2.5 MILLION IN THE FIRST YEAR, WHY WILL ESSEX
CUSTOMERS RECEIVE ONLY A $1.46 MILLION REDUCTION IN THE CGAC?
A. To achieve the synergies and resulting capacity cost savings through
coordination of the Essex and Boston Gas supply portfolios, Boston Gas will
need to forego
<PAGE> 53
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 5
some opportunity sales, e.g., short-term capacity release revenues. These
revenues are credited to Boston Gas' customers through the Boston Gas CGAC.
To compensate Boston Gas' customers for such foregone opportunities, the
Rate Plan includes a transfer from the Essex CGAC to the Boston Gas CGAC to
represent a charge to Essex for the value of the Boston Gas resources that
will be used to serve Essex customers. As described by Mr. Luthern, each
year an appropriate transfer will be computed. In the first year, that
transfer will be $1.04 million so that the net savings to Essex' customers
in the CGAC will be approximately $1.46 million. This adjustment ensures
that the net savings relating to gas cost synergies are passed through to
Essex' customers and that Boston Gas' customers are compensated for any
foregone opportunities.
Q. HOW DID YOU CALCULATE THE CUSTOMER SAVINGS THAT RESULT FROM THE TEN-YEAR
FREEZE IN THE BASE RATES OF ESSEX?
A. To estimate the customer savings resulting from the proposed ten-year rate
freeze, I have reviewed Essex's five-year financial forecast and historical
ratemaking patterns and extrapolated from that data. I estimate that, if
base rates are frozen for ten years, Essex customers will avoid several
rate cases which, based on Essex's recent history, would have resulted in
increases of approximately 4 percent every three years on average. Thus, as
demonstrated in Exhibit JFB-3, over a ten-year period, price increases
generating approximately $33 million would be avoided.
<PAGE> 54
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 6
Q. PLEASE ELABORATE ON THE BASIS FOR THIS ESTIMATE.
A. Within the past ten years, the Department has approved four base rate
increases for Essex representing an average increase of approximately 4
percent. Essex County Gas Company, D.P.U. 96-70 (1996) (approving an
increase of $2.1 million or 4.6 percent overall); Essex County Gas Company,
D.P.U. 93-107 (1993) (approving an increase of $1.7 million or 4.2 percent
overall); Essex County Gas Company, D.P.U. 89-107 (1989) (approving an
increase of $1.3 million or 4.0 percent overall); Essex County Gas Company,
D.P.U. 87-59 (1987) (approving an increase $1.2 million or 3.7 percent
overall). Essex's financial forecast projects that Essex would seek and be
granted a base rate increase by the Department within the next two years of
approximately $1.8 million and two increases of a slightly higher level
later in the ten-year period. Using these assumptions, the ten-year
base-rate freeze would save Essex customers approximately $33 million (see
Exhibit JFB-3). Although Essex has been working hard to reduce its
operations and maintenance ("O&M") and gas supply costs, inflation remains
a critical factor in Essex's cost structure. That is, Essex's expenses,
particularly those associated with labor, tend to grow at or above the rate
of inflation, while its revenues tend to grow at a slightly slower rate.
Thus, even when inflation is at a relatively low level, as is currently the
case, Essex has been forced to pursue base rate increases every few years
to address the disparity between costs and revenues.
<PAGE> 55
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 7
As a result of the Rate Plan, however, the base rates for Essex customers
would not increase for ten years notwithstanding inflationary pressures.
The freeze in base rates will be subject only to cost changes resulting
from exogenous factors such as changes in tax laws, accounting changes and
regulatory, judicial or legislative changes. Absent recognition of
exogenous cost changes, the applicability of Statement of Financial
Accounting Standards No. 71 ("SFAS 71") would be jeopardized for Essex.
Failure to meet the criteria of SFAS 71 would have an immediate negative
impact on Essex's financial statements and its ability to finance needed
investments to ensure the safe and reliable operation of its distribution
system.
Q. IF THE 5 PERCENT BURNER-TIP PRICE REDUCTION IS PROVIDED TO ESSEX CUSTOMERS,
IN LARGE PART, THROUGH REDUCTIONS IN THE CGAC, WON'T TRANSPORTATION
CUSTOMERS BE DENIED A PRICE BENEFIT FROM THE MERGER?
A. No. Transportation customers will receive comparable benefits in three
ways. First, transportation customers will receive a significant price
benefit as a result of the ten-year base-rate freeze we are proposing to
apply to Essex's current distribution rates. Second, the two-year $900,000
reduction in the LDAC will apply both to transportation and sales
customers. And finally, because most of the CGAC savings reflect the
attainment of capacity-related cost reductions, transportation customers
will receive those benefits in the form of lower-cost capacity releases to
them. Although the details of the future capacity-release mechanism will
depend on the outcome of the Massachusetts Gas Unbundling
<PAGE> 56
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 8
Collaborative, it is envisioned that, whatever the eventual structure
approved by the Department, the synergies achieved on behalf of Essex's
customers will be reflected in the capacity-release mechanism, as applied
to Essex's transportation customers.
Q. HAVE YOU ESTIMATED THE POTENTIAL NEAR-TERM COST SAVINGS THAT COULD BE
REALIZED THROUGH O&M EFFICIENCIES?
A. Exhibit JFB-4 sets forth our analysis of savings available from O&M expense
reductions. Essex's actual O&M expenses totaled $12,584,000, including
labor expenses of $4,887,000 and non-labor expenses of $7,698,000, for the
fiscal year ending August 31, 1997. We estimate that labor savings can be
achieved through the reduction of 31 management positions and 19
non-management positions. We estimate that the direct wage and salary cost
reductions associated with these positions is approximately $2,479,000
($1,801,000 in management labor expenses and $678,000 in non-management).
We also estimate that the elimination of employee benefits associated with
these positions would result in an additional $969,000 of annual cost
savings. Moreover, we estimate that other cost savings in the amount of
$1,439,000 could result from the consolidation of programs and expenditures
relating to insurance, audit and consulting fees, shareholder services and
other general corporate functions. Therefore, in total, we estimate that
O&M savings of $4,887,000, or 39 percent of Essex's total O&M expenses for
the most recent fiscal year, are potentially attainable in the near term as
a result of Eastern's acquisition of Essex.
<PAGE> 57
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 9
Q. WHAT IS THE LIKELIHOOD THAT THE FULL AMOUNT OF THESE ESTIMATED SYNERGIES IN
O&M EXPENSES WILL BE REALIZED?
A. The primary risk involved in attaining the total estimated O&M savings of
$4,887,000, is associated with the reduction of certain employee positions.
These "at-risk" savings are estimated to be approximately $1,181,000, or 24
percent of the total projected O&M savings.
The large majority of the total at-risk savings, approximately $1,046,000,
are associated with union positions that are covered by a collective
bargaining agreement that will remain in effect until February 1999.
Eastern will honor this contractual agreement. At the expiration of the
contractual agreement, the parties are required to bargain in good faith.
Therefore, the only way for Eastern to obtain the estimated union labor
savings is to negotiate a settlement with the union. The remainder of the
at-risk savings relate to general administrative expenses incurred to
support these union positions.
Q. PLEASE PROVIDE EXAMPLES OF OTHER FACTORS THAT COULD AFFECT THE ATTAINMENT
OF YOUR O&M SAVINGS ESTIMATE.
A. These uncertainties include, but are not limited to, how quickly and
successfully we can manage coordination of field operations, facilities and
systems. For example, in the area of field operations, we have assumed the
following synergies can be achieved relatively quickly:
O Conversion of Essex's current manual service order system to Boston
Gas' computer-aided dispatch system and dispatch operations
<PAGE> 58
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 10
O Consolidation of Essex's telephone inquiry and other customer activity
functions into Boston Gas's inquiry center operation
Further uncertainties that could adversely affect the timing and cost of
attainable synergies include the extent of backlog in work required by the
U.S. Department of Transportation, the condition of district regulator
stations, and the accuracy and completeness of Essex's maps and records. In
addition, we will need to determine the appropriate level of integration of
systems, equipment, customer accounting, collection and billing-related
services.
Q. WHAT OTHER DIFFICULTIES ARE INVOLVED IN ASCERTAINING THE LEVEL OF POTENTIAL
SAVINGS THAT COULD BE ATTAINED FROM THIS ACQUISITION?
A. Since it is very difficult to predict how successful the integration of
certain elements of Essex's operations with those of Boston Gas will be, it
is difficult to project cost savings with a great degree of precision. In
evaluating cost saving opportunities, it is important to keep in mind that
there may be unforeseen factors that could delay the realization of savings
or reduce expected savings. The savings estimates we have calculated
represent our best efforts to identify and reduce known and measurable
costs in advance of gaining the level of familiarity that will come only
from the actual integration of Essex's resources and requirements with
those of Boston Gas. In addition, as we move forward with our efforts to
capture these synergies, we are committed to maintaining the high quality
of service and reliability now enjoyed by Essex customers and will not
compromise employee or public safety in achieving our cost savings goals.
Since
<PAGE> 59
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 11
the Rate Plan provides Essex customers with an immediate 5 percent
reduction and stabilizes rates for the next ten years, Eastern's
shareholders are assuming all of the risk associated with achieving the
estimated level of O&M savings.
Q. HOW DOES THE RATE PLAN ALLOCATE THE BENEFITS OF THE MERGER BETWEEN ESSEX'S
CUSTOMERS AND EASTERN'S SHAREHOLDERS?
A. The benefits to Essex's customers will total approximately $57 million over
ten years. This is composed of the CGAC and LDAC reductions of
approximately $24 million and the $33 million benefit associated with the
ten-year freeze in base rates. Moreover, we believe that additional gas
cost savings may be achievable as a result of renegotiation of existing
contracts, which is possible because of the enhanced purchasing power that
will exist as a result of the merger. Near-term, identified savings from
O&M synergies, estimated to be approximately $4.9 million annually, will be
used to offset the cost of the merger incurred by Eastern. As discussed
above, we believe that O&M cost savings will be more difficult to achieve.
By relying upon O&M cost savings for reimbursement of the costs incurred to
effect the merger, and instituting a freeze on base-rates, Eastern's
shareholders are assuming both the risk of achieving these savings and the
risk of cost increases as a result of inflation.
Q. WHAT ARE THE COSTS ASSOCIATED WITH ACHIEVING THE MERGER BENEFITS FOR ESSEX
CUSTOMERS?
A. The costs incurred to achieve the acquisition fall into the following three
categories: (1) merger integration costs incurred to achieve the synergies
that will
<PAGE> 60
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 12
ultimately reduce the costs of Essex's operations; (2) transaction costs
related to the completion of the merger; and (3) the acquisition premium,
which will be reflected in the earnings dilution experienced by Eastern's
shareholders as a result of the exchange of Eastern's common stock for the
common stock of Essex.
Q. PLEASE DESCRIBE EACH OF THESE COST CATEGORIES IN MORE DETAIL.
A. The first category of costs are those necessary to ensure the successful
and timely integration of Essex's and Boston Gas' operations. These costs
include early retirement and severance costs incurred to reduce redundant
positions, retraining costs, system and facility consolidation costs
required for efficient operations, customer and employee communication
costs necessary to inform both groups of the effects of the merger. An
itemization of these costs is set forth in Exhibit JFB-5.
The second category of costs relating to the transaction involves expenses
incurred in completing the merger. These non-tax-deductible costs involve
investment banking fees, legal and regulatory expenses, accounting fees,
filing fees and miscellaneous expenses. An itemization of these cost
estimates is set forth in Exhibit JFB-6. The sum of the first two
categories is approximately $15 million.
The third category is the acquisition premium required to complete the
acquisition and realize the synergies. Because the acquisition will be
effected through the issuance and exchange of Eastern common stock with the
common stock of
<PAGE> 61
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 13
Essex, the acquisition premium will be reflected in the earnings dilution
experienced by Eastern's shareholders as a result of the exchange. A
discussion of this cost and the extent to which earnings dilution is
expected to occur is addressed by Mr. Murphy in his testimony. As described
in Mr. Murphy's testimony, earnings dilution for Eastern shareholders is
estimated to be $46 million. The sum of the three cost categories results
in a total acquisition cost of $61 million.
Q. MR. MURPHY DESCRIBES THE ACQUISITION PREMIUM RESULTING FROM THIS POOLING OF
INTERESTS TRANSACTION ACQUISITION TO BE $46 MILLION. HAVE YOU ANALYZED THE
ACQUISITION PREMIUM AS IF THE TRANSACTION WERE ACCOUNTED FOR AS A PURCHASE
TRANSACTION?
A. Yes. Referring to Exhibit JFB-7, I have computed the acquisition premium
assuming that Eastern purchased all outstanding and issuable (as of
December 1, 1997) shares of Essex at $47.50 per share. The resulting
acquisition premium of $26.49 per share represents the difference between
the price paid and the book value per share. A total premium of $47.1
million is computed by multiplying $26.49 times the 1.778 million shares of
Essex. Exhibit JFB-8 computes a revenue requirement of $81 million that
would be necessary under purchase accounting to allow shareholders to earn
on and recover their investment based on an up-front premium of $47.1
million paid in a purchase transaction.
Q. HOW DOES EASTERN PROPOSE TO RECOUP THESE ACQUISITION-RELATED COSTS?
A. The total savings that must be realized by Eastern shareholders so that
they may recover the costs associated with the transaction is approximately
$61 million.
<PAGE> 62
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 14
The Rate Plan, as described above, implicitly provides an opportunity for
Eastern's shareholders to recover those costs, although Eastern is bearing
all risks of capturing O&M synergies and, at the same time, absorbing the
impact of inflationary cost increases over the period of the Rate Plan.
Thus, approval of the Rate Plan will implicitly recognize the opportunity
to recover the acquisition costs over a ten-year period.
Q. WHAT RATIONALE DO YOU HAVE FOR SEEKING REGULATORY RECOGNITION OF THE
ACQUISITION COSTS?
A. Eastern and Essex strongly believe that there are substantial synergies and
cost savings resulting from the merger and, in fact, that assumption serves
as the primary motivating factor for the shareholder investment in this
proposal. At the same time, as discussed above and in the testimony of
Messrs. Flaherty and Murphy, there are real costs associated with
accomplishing this transaction. Thus, in order to effect the transaction
and to attain the resultant benefits for customers, Eastern's shareholders
must make a substantial investment and recover their investment. In the
absence of a regulatory policy that recognizes, in some equitable manner,
that such costs are a necessary component of a transaction that will
ultimately result in substantial cost savings for customers, shareholders
will not put their capital at risk to accomplish a transaction. Mergers
such as the one proposed here will provide customers with the permanent
benefit of harnessed synergies and increased efficiencies. However, these
customer benefits can be achieved only if the Department recognizes that
there is a direct linkage between
<PAGE> 63
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 15
these benefits and the investment necessary to bring them about and
provides a reasonable opportunity for shareholders to recover the costs of
the acquisition. We believe the Rate Plan as proposed in this filing
appropriately achieves this balance.
III. THE MERGER'S CONSISTENCY WITH THE PUBLIC INTEREST
Q. WHAT FACTORS DOES THE DEPARTMENT CONSIDER IN DETERMINING WHETHER THE MERGER
IS CONSISTENT WITH THE PUBLIC INTEREST?
A. In Mergers and Acquisitions, D.P.U. 93-167-A (1994), the Department stated
that it will generally consider the following factors in order to assess
whether a merger is consistent with the public interest:
(1) Impact on rates;
(2) Impact on quality of service;
(3) Savings resulting from the merger;
(4) Impact on competition;
(5) Financial integrity of post-merger entity;
(6) Fairness of the distribution of benefits resulting from the
merger between stockholders and customers;
(7) Societal costs and benefits of the merger;
(8) Impact on economic development; and
(9) Alternatives to the merger.
Each of these factors is assessed below.
<PAGE> 64
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 16
Q. WHAT IMPACT WILL THE MERGER HAVE ON THE RATES OF ESSEX?
A. As described above, the Rate Plan provides that Essex's customers would
receive an immediate 5 percent reduction in their total burner-tip price
upon the consummation of the acquisition and would not be subject to base
rate increases for ten years. Because the acquisition is necessary to
achieve the economies of scale and other efficiencies that will produce the
cost savings, and because a significant portion of such cost savings will
be passed on to customers in the form of reduced prices, the merger is
consistent with the public interest under G.L. c. 164, ss. 96.
Q. WHAT IMPACT WILL THE ACQUISITION HAVE ON THE QUALITY OF SERVICE TO CURRENT
ESSEX CUSTOMERS?
A. Because the service territories of Boston Gas and Essex are contiguous, the
operations of Essex can be operated more efficiently when coordinated with
Boston Gas' overall operations. Eastern and Boston Gas are committed to
maintaining the high level of service quality and reliability provided by
Essex. Moreover, Boston Gas will be able to rely on its information systems
resources and customer service experience to enhance the quality of service
to Essex's customers.
Q. IN GENERAL, WHAT WOULD BE THE NET SAVINGS RESULTING FROM THE PROPOSED
MERGER?
A. As described above, the Eastern acquisition of Essex has the potential to
yield substantial cost reductions associated with: (1) gas supply and
dispatching
<PAGE> 65
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 17
operations; (2) distribution system operation (i.e., reductions in total
facilities, vehicles, and testing and repair functions); (3) customer
service and accounting functions, including billing and credit and
collection; and (4) other general, corporate and administrative functions.
The savings associated with O&M activities are estimated to be
approximately $4.9 million annually. The savings associated with gas supply
operations are expected to be at least $22 million over the next ten years,
based on the savings identified in Mr. Luthern's testimony.
Q. WHAT IMPACT WILL THE PROPOSED MERGER HAVE ON COMPETITION WITHIN THE GAS
INDUSTRY?
A. The acquisition of Essex will facilitate greater competition in the gas
industry. Both Boston Gas and Essex are participating in the Massachusetts
Gas Unbundling Collaborative, and are operating under the assumption that
natural gas distribution companies will be undergoing further unbundling in
the not-too-distant future. By combining the resource portfolios of the two
companies, Boston Gas will be in a better position to minimize transition
costs and to streamline and standardize systems for third-party gas
marketers in the Essex service area. Boston Gas anticipates using its
broker management system to facilitate communications with marketers in the
Essex service territory. The proposed merger will allow for the combination
of two regulated utilities whose rates and services would continue to be
subject to the Department's regulatory authority. Accordingly, the
Department's continued regulation of the distribution
<PAGE> 66
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 18
function of both companies negates any opportunity to exploit market power
as a result of the merger.
Q. HOW WILL THE FINANCIAL INTEGRITY OF ESSEX COMPARE TO THAT OF THE PRE-MERGER
ESSEX?
A. As mentioned in the testimony of Mr. Hastings, Essex is a relatively small
company with limited access to financial resources. Post-merger, Essex will
be a subsidiary of Eastern and will have access to the broader financial
resources of Eastern. It is anticipated that Essex's cost of debt and
financing of gas inventory costs will be reduced upon combining its
requirements with those of Boston Gas. Currently, Essex's external working
capital needs and gas inventory financing requirements are accomplished
through lines of credit with various banking institutions versus the less
costly commercial paper programs that Boston Gas has in place. Any savings
realized by utilizing Boston Gas' commercial paper programs would be flowed
back to customers through the CGAC and thus provide Essex customers
additional savings over those estimated in my testimony.
Q. HOW WILL THE BENEFITS OF THE MERGER BE DISTRIBUTED BETWEEN EASTERN
SHAREHOLDERS AND ESSEX CUSTOMERS?
A. Essex customers will receive an immediate 5 percent reduction in their
overall burner-tip gas price. In addition, Essex's base rates will be
frozen at current levels for a period of ten years, subject only to
exogenous changes. Thus, Essex's rates will be both lower and more stable
as a result of the merger. It is noteworthy that, absent the merger, Essex
was planning to request a rate increase within the
<PAGE> 67
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 19
next two years. Instead, customers will receive an immediate 5 percent rate
reduction and no base rate increases for ten years. At the same time, the
Rate Plan would provide Eastern's shareholders with the opportunity to
capture a portion of the merger-related synergies and to be reimbursed for
the acquisition costs incurred to bring real and immediate benefits to
Essex customers.
Q. WHAT ARE THE SOCIETAL COSTS AND BENEFITS PRODUCED BY THE MERGER?
A. On balance, the overall result of the merger will be a more efficient use
of combined resources and lower gas prices to consumers, which may provide
the impetus for greater economic efficiency in Essex's service territory.
Societal costs resulting from the elimination of redundant positions are
expected to be minimal in this case because of Eastern's commitment to
maintain a presence in the community and to undertake all reasonable
efforts to provide any employees who may be displaced with access to
employee placement programs.
According to the Merger Agreement, any employees who are terminated or
whose positions are eliminated will be entitled to participate in job
opportunity and employee placement programs. We also intend to present
opportunities for employment at Boston Gas and Eastern to Essex employees
whose positions have been eliminated.
<PAGE> 68
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 20
Q. WHAT IMPACT WILL THE MERGER HAVE ON ECONOMIC DEVELOPMENT IN ESSEX'S SERVICE
TERRITORY?
A. As stated earlier, upon consummation of the merger, delivered gas prices
for all Essex customers will be reduced by 5 percent and base rates will be
frozen for a period of ten years. Since Essex was planning to seek a base
rate increase within the next two years, the merger will result in
considerably lower, and more stable, prices both in the near and long term.
The savings in gas bills for all customers will be of significant benefit
to the local economy, and therefore, should have a positive effect on
economic development within Essex's service territory. Given the
Commonwealth's location at the end of the interstate pipeline network,
utility consolidation may be the only significant means of reducing energy
costs and making Massachusetts industry more competitive.
Q. ARE THERE ANY OTHER REASONABLE AND COST-EFFECTIVE WAYS FOR ESSEX TO ACHIEVE
THE MERGER BENEFITS PREVIOUSLY DISCUSSED WITHOUT BEING ACQUIRED BY EASTERN?
A. Smaller companies generally do not have the ability to capture the
economies of scale and/or scope that are derived from more expansive
operations. Essex's relatively small size prevents it from attaining
economies of scale and from realizing the attendant savings that result
from such economies. Potential elimination of redundant facilities,
personnel and resources, together with a gas supply plan coordinated with
the operations of Boston Gas will permit Essex to obtain the advantages of
such economies for its customers.
<PAGE> 69
Testimony of Joseph F. Bodanza
Exhibit JFB-1
March 25, 1998
Page 21
Q. BASED ON YOUR KNOWLEDGE OF THESE COMPANIES AND THE AREA THEY SERVE, IS THE
PROPOSED MERGER CONSISTENT WITH THE PUBLIC INTEREST?
A. Yes, for all of the reasons stated above, and in consideration of the
expected benefits described in the testimony of Mr. Luthern, the merger is
consistent with the public interest, as required by G.L. c. 164, ss. 96.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE> 70
Exhibit JFB-2
D.T.E. 98-_____
BENEFITS TO CUSTOMERS
$ Million
<TABLE>
<CAPTION>
PERIOD 5% PRICE
BEGINNING END REDUCTION RATE FREEZE TOTAL
- --------- --- --------- ----------- -----
<S> <C> <C> <C> <C>
11/98 10/99 2.35 - - - 2.35
11/99 10/00 2.35 1.4 3.75
11/00 10/01 2.35 1.8 4.15
11/01 10/02 2.35 1.8 4.15
11/02 10/03 2.35 3.4 5.75
11/03 10/04 2.35 3.8 6.15
11/04 10/05 2.35 3.8 6.15
11/05 10/06 2.35 5.4 7.75
11/06 10/08 2.35 5.8 8.15
11/07 10/08 2.35 5.8 8.15
----- ---- -----
23.50 33.0 56.50
</TABLE>
<PAGE> 71
Exhibit JFB-3
D.T.E. 98-_____
RATE FREEZE BENEFIT
($000)
<TABLE>
<CAPTION>
RATE CASES
----------
BEGINNING END 1 2 3 TOTAL OF 1/2/3
- --------- --- - - - -----------
<S> <C> <C> <C> <C> <C>
11/98 10/99 - - - - - - - - -
11/99 10/00 1,440 - - - - - -
11/00 10/01 1,800 - - - - - -
11/01 10/02 1,800 - - - - - -
11/02 10/03 1,800 1,600 - - -
11/03 10/04 1,800 2,000 - - -
11/04 10/05 1,800 2,000 - - -
11/05 10/06 1,800 2,000 1,600
11/06 10/07 1,800 2,000 2,000
11/07 10/08 1,800 2,000 2,000 ______
------ ----- ------
15,840 11,600 5,600 33,040
</TABLE>
<PAGE> 72
Exhibit JFB-4
D.T.E. 98-____
SUMMARY OF ESTIMATED O&M SAVINGS
RESULTING FROM MERGER
<TABLE>
<CAPTION>
ESTIMATE OF
CATEGORY ANNUAL SAVINGS ($000)
-------- ---------------------
<S> <C>
Wage and Salary Savings
31 Management Positions $1,801
19 Union Positions $ 678
TOTAL WAGE AND SALARY SAVINGS $2,479
------
NON-WAGE/SALARY SUMMARY
Employee benefits $ 969
Outside services $ 460
Director's Fees, Interest & Annual Report $ 286
Insurance $ 150
Regulatory Expense Rate Case $ 50
Membership dues $ 40
Debt Commitment Fees $ 54
Shareholder Services $ 43
Office Supplies and Expenses $ 305
Other Administrative Expenses $ 51
TOTAL NON-WAGE/SALARY SAVINGS $2,408
------
TOTAL ESTIMATED O&M SAVINGS $4,887
======
</TABLE>
<PAGE> 73
Exhibit JFB-5
D.T.E. 98-_____
SUMMARY OF COSTS
NECESSARY TO ACHIEVE SYNERGIES
<TABLE>
<CAPTION>
($000)
------
<S> <C>
Separation Costs, Early Retirement,
Severance and Retraining Programs 4,445
Directors' Retirement Fees 500
Systems Consolidation 600
Communication Expense 100
Telecommunications 375
Directors Deferred Compensation Fees 1,472
---------------------------------------------------------
TOTAL $7,492
</TABLE>
Note: These costs are tax deductible.
<PAGE> 74
Exhibit JFB-6
D.T.E. 98-_____
SUMMARY OF TRANSACTION COSTS TO COMPLETE THE
MERGER
<TABLE>
<CAPTION>
($000)
------
<S> <C>
Investment Banking Fees 2,700
Legal and Regulatory 1,485
Accounting Fees 200
Filing Fees 82
Other 155
----
Subtotal 4,622
Gross-up factor for taxes (1) 1.6454
TOTAL $7,605
</TABLE>
(1) The transaction costs to complete the merger are not tax deductible.
<PAGE> 75
Exhibit JFB-7
D.T.E. 98-____
SUMMARY OF ACQUISITION COSTS
<TABLE>
<CAPTION>
<S> <C>
Offering Price/Share $47.50
Book Value/Share as of 8/31/97 $21.01
Premium/Share $26.49
Shares Outstanding and Issuable as of 12/1/97 1,778,058
Premium $47.1 million
</TABLE>
<PAGE> 76
Exhibit JFB - 8
D.T.E. 98-____
<TABLE>
<CAPTION>
Amortization
10 Yrs. Year 2 Year 3 Year 4 Year 5
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
47,100,000 4,710,000 4,710,000 4,710,000 4,710,000 4,710,000
Rate Base 47,100,000 42,390,000 37,680,000 32,970,000 28,260,000
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ----
Return on Rate Base 4,417,980 3,976,182 3,534,384 3,092,586 2,650,788
Loss: Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ----
Interest 1,766,250 1,589,625 1,413,000 1,236,375 1,059,750
Net Income 2,651,730 2,386,557 2,121,384 1,856,211 1,591,038
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 4,363,157 3,926,841 3,490,525 3,054,210 2,617,894
Mass Franchise Tax 283,605 255,245 226,884 198,524 170,163
Federal Taxable Income 4,079,551 3,671,596 3,263,641 2,855,686 2,447,731
Federal Income Tax 1,427,843 1,285,059 1,142,274 999,490 856,706
Total Income Taxes 1,711,448 1,540,303 1,369,159 1,198,014 1,026,869
<CAPTION>
Amortization
Year 6 Year 7 Year 8 Year 9 Year 10
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
4,710,000 4,710,000 4,710,000 4,710,000 4,710,000
Rate Base 23,550,000 18,840,000 14,130,000 9,420,000 4,710,000
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ----
Return on Rate Base 2,208,990 1,767,192 1,325,394 883,596 441,793
Loss: Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ----
Interest 883,125 706,500 529,875 353,250 176,625
Net Income 1,325,865 1,060,692 795,519 530,346 265,173
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 2,181,578 1,745,263 1,308,947 872,631 436,316
Mass Franchise Tax 141,803 113,442 85,082 56,721 28,361
Federal Taxable Income 2,039,776 1,631,821 1,223,865 815,910 407,955
Federal Income Tax 713,921 571,137 428,353 285,569 142,784
Total Income Taxes 855,724 684,579 513,434 342,290 171,145
</TABLE>
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amortization 4,710,000 4,710,000 4,710,000 4,710,000 4,710,000
Return on Rate Base 4,417,960 3,976,182 3,534,384 3,092,586 2,650,788
Income Taxes 1,711,448 1,540,303 1,369,159 1,198,014 1,026,869
--------- --------- --------- --------- ---------
Revenue Requirement 10,839,428 10,226,485 9,613,543 9,000,600 8,387,657
<CAPTION>
Year 6 Year 7 Year 8 Year 9 Year 10 Total
------ ------ ------ ------ ------- -----
<S> <C> <C> <C> <C> <C> <C>
Amortization 4,710,000 4,710,000 4,710,000 4,710,000 4,710,000 47,100,000
Return on Rate Base 2,208,990 1,767,192 1,325,394 883,596 441,798 24,298,890
Income Taxes 855,724 684,579 513,434 342,290 171,145 9,412,965
------- ------- ------- ------- ------- ---------
Revenue Requirement 7,774,714 7,161,771 6,548,828 5,935,886 5,322,943 80,811,855
</TABLE>
<PAGE> 77
EASTERN ENTERPRISES/ESSEX COUNTY GAS COMPANY
Testimony of William R. Luthern
D.T.E. 98-____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is William R. Luthern. My business address is One Beacon Street,
Boston, Massachusetts 02108.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am Vice President of Gas Resources for Boston Gas Company ("Boston Gas"
or the "Company").
Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES.
A. In my current position, I am responsible for the planning, acquisition and
marketing of the Company's gas supply resources. In addition, I am
responsible for all federal regulatory matters.
Q. HAVE YOU PREVIOUSLY TESTIFIED IN PROCEEDINGS BEFORE THE DEPARTMENT?
A. Yes, I have testified in a number of proceedings before the Department, the
Federal Energy Regulatory Commission (the "FERC"), and the Canadian
National Energy Board.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to describe the benefit of the potential gas
supply planning and acquisition synergies resulting from the acquisition of
Essex County Gas Company ("Essex") by Eastern Enterprises ("Eastern"), the
parent company
<PAGE> 78
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 2
of Boston Gas, and to explain how these efficiencies will be attained so as
to reduce future gas supply costs to Essex customers, while fairly
compensating Boston Gas customers for the value associated with the assets
used to serve Essex customers.
II. EFFECT OF MERGER ON GAS SUPPLY PLANNING AND THE POTENTIAL FOR REDUCED GAS
COSTS
Q. WILL THE PROPOSED ACQUISITION CREATE THE OPPORTUNITY FOR SYNERGIES
ASSOCIATED WITH GAS SUPPLY PLANNING AND PURCHASING FOR ESSEX'S CUSTOMERS?
A. Yes, the acquisition will facilitate the development of a more efficient
gas supply plan for Essex. Re-optimization of Essex's portfolio will be
possible as a result of the coordination of Boston Gas' and Essex's gas
supply planning and acquisition efforts. Such coordination will create the
opportunity to more efficiently use the resources of both companies and
allow Essex's customers to benefit from the economies of scale gained
through the aggregation of supply resources. The opportunity to capture
such synergies will be enhanced because the service territories of Essex
and Boston Gas are geographically contiguous, and connected through the
Tennessee Gas Pipeline Company ("Tennessee").
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF ESSEX COUNTY GAS COMPANY'S CURRENT
SUPPLY PORTFOLIO.
A. As illustrated in Exhibit WRL-2, Essex currently has a long-haul
transportation contract with Tennessee for 15,728 Mcf per day. Essex has
gas supply commodity contracts with Aquila Energy, Enron Capital & Trade
Resources Corp., El Paso Energy Marketing, Coral Energy and Natural Gas
Clearinghouse
<PAGE> 79
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 3
for delivery of firm gas supplies totaling 15,728 MMBtu per day, which are
transported to Essex's citygates on the Tennessee pipeline. Essex has
bundled supply contracts with Boundary Gas, Inc. and Alberta Northeast,
Limited for baseload gas supplies delivered from the Canadian border under
domestic transportation arrangements with Tennessee and the Iroquois Gas
Transmission system, totaling approximately 3,621 MMBtu per day. Essex has
several contracts for upstream underground storage and transportation,
including a total of 1.162 Bcf of storage capacity and 9,241 MMBtu of peak
day deliverability. Essex also maintains LNG and propane facilities in
Haverhill with storage capacity of 0.440 Bcf and 0.042 Bcf, respectively,
with output rates of 34,400 MMBtu per day and 8,400 MMBtu per day,
respectively. In addition, Essex has a contract with Distrigas of
Massachusetts Corporation for the purchase of LNG in liquid or vapor form
ranging from 0.604 to 0.906 Bcf annually.
Q. ARE YOU FAMILIAR WITH THE MANNER IN WHICH ESSEX'S UPSTREAM PIPELINE AND
STORAGE VOLUMES ARE DELIVERED TO THE ESSEX CITYGATE?
A. Yes. Boston Gas subscribes to the identical services on Tennessee as Essex,
and as such transports its long-haul domestic supplies, short-haul storage
supplies and its Canadian supplies under the exact same tariffs.
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF BOSTON GAS COMPANY'S CURRENT SUPPLY
PORTFOLIO.
A. Boston Gas has capacity entitlements on multiple upstream pipelines that
provide direct access to domestic and Canadian supply resources. Of these
upstream
<PAGE> 80
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 4
pipelines, two pipeline companies, Algonquin Gas Transmission Company
("Algonquin") and Tennessee provide direct service to Boston Gas'
citygates.
The interstate pipeline capacity available to meet system requirements and
to fill underground storage can be logically separated into two components.
First, Boston Gas holds long-haul capacity to transport supply from the
producing regions of the lower 48 states. Aggregated at Boston, this
capacity allows for transportation of approximately 242,000 MMBtu per day.
Boston Gas also holds short-haul capacity that is used to transport
approximately 167,000 MMBtu per day, from upstream underground storage
fields to the citygates of Boston Gas. Also, a component of Boston Gas'
pipeline supply originates in Canada, supplying 54,000 MMBtu per day to its
citygate.
In addition, the Company 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 deliverability of 195,000 Bcf
per day.
The Company also utilizes upon supplemental facilities, i.e., local
production plants, to store and vaporize liquefied natural gas ("LNG") and
liquid propane supplies. The Company has LNG storage capacity of 3.14 Bcf
and can deliver maximum daily quantities of 291,400 MMBtu per day from
these facilities. The
<PAGE> 81
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 5
Company also has propane storage capacity of 1.584 Bcf and can deliver up
to 70,000 MMBtu per day from those facilities.
Q. ON WHAT BASIS DID YOU DETERMINE THAT IT WAS POSSIBLE TO CAPTURE GAS SUPPLY
SYNERGIES FOR THE TWO SYSTEMS?
A. I have reviewed the gas supply portfolio of Essex to determine the maximum
daily quantity, annual delivery limitations, and termination dates of each
contract. I also reviewed Essex's gas sendout requirements and each of its
contracts to determine which contracts, if any, could be reduced or
displaced as a result of the ability to coordinate Essex's gas supply
portfolio with that of Boston Gas.
Q. HAVE YOU BEEN ABLE TO IDENTIFY AND QUANTIFY POTENTIAL GAS COST SAVINGS AS A
RESULT OF THAT ANALYSIS?
A. Yes. Based on my review of Essex's resource portfolio and gas requirements,
Essex could release its Tennessee long-haul capacity contract of 15,728 Mcf
per day and obtain 70 percent of the current maximum tariff rate, or $2.2
million, in the capacity-release market each year until the contract
expires on November 1, 2000. Upon expiration of the term of the Tennessee
contract, Essex customers would experience gas cost savings thereafter of
$3.1 million annually. In addition, I estimate that Essex could attain
approximately $300,000 in commodity cost savings annually as a result of
renegotiating Essex's domestic supply and combining Essex's supply
purchases with those of Boston Gas, which would create increased purchasing
power.
<PAGE> 82
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 6
Q. HAVE YOU BEEN ABLE TO IDENTIFY ANY OTHER POSSIBLE COST SAVINGS THAT COULD
BE ATTAINED AS A RESULT OF THE COORDINATION OF THE RESOURCE PORTFOLIOS?
A. We have not identified any contracts, other than the Tennessee long-haul
contract, that could be reduced or eliminated without jeopardizing the
ability to meet Essex's system requirements. We believe that additional
cost savings may be achievable; however, at this point, such cost
reductions are difficult to estimate because the attainment of those
additional savings is dependent upon the ability of Essex and Boston Gas to
renegotiate existing capacity commitments.
Q. WHAT ARE THE TOTAL GAS SUPPLY SAVINGS THAT YOU ESTIMATE WOULD BE ATTAINABLE
AND HOW DOES THAT COMPARE TO ESSEX'S TOTAL GAS COSTS?
A. As set forth above, I estimate that gas cost savings of $2.5 million
annually will be achieved and that those savings will increase to $3.4
million in 2001 and continue at that level thereafter. This total reflects
cost savings of $2.2 million annually until the Tennessee contract expires
as a result of the release of Tennessee pipeline capacity and $300,000
annually in commodity cost savings. In 2001 and beyond, total gas cost
savings are estimated to increase to $3.4 million as a result of
eliminating the cost of the Tennessee contract combined with the reduction
in commodity costs.
Essex's fixed capacity costs total approximately $8.1 million. Thus, the
$2.2 million in estimated savings resulting from the release of the
Tennessee pipeline capacity represents approximately 27 percent of Essex's
fixed capacity costs, and
<PAGE> 83
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 7
such cost savings will increase to approximately 38 percent at the
expiration date of the Tennessee contract.
Q. WILL THE USE OF BOSTON GAS GAS SUPPLY RESOURCES TO ATTAIN EFFICIENCIES IN
THE ESSEX PORTFOLIO AFFECT THE ABILITY OF BOSTON GAS CUSTOMERS TO BENEFIT
FROM CAPACITY-RELEASE OPPORTUNITIES?
A. Yes. The opportunity for the realization of synergies and associated cost
savings as a result of the merger rests in the ability of Essex and Boston
Gas to coordinate their gas supply planning and purchasing operations,
especially since the service territories are contiguous. This coordinated
planning will significantly increase the ability of Essex and Boston Gas to
utilize their resources in an efficient manner and at a higher load factor.
As a result, some capacity-release opportunities on the Boston Gas system
will be foregone.
To determine the impact of this arrangement on Boston Gas customers, we
have analyzed the use of Boston Gas resources to meet system requirements,
with and without Essex's operations. Specifically, we performed a dispatch
analysis using Boston Gas resources to meet Boston Gas system requirements,
in isolation, and a dispatch analysis of Essex resources to meet Essex
system requirements. This analysis allowed us to determine the incremental
levels of Boston Gas resources that would be utilized to substitute for
Essex's Tennessee long-haul contract. As a result, we were able to
determine that certain resources of Boston Gas would be used to serve Essex
customers that would otherwise be released into the marketplace.
<PAGE> 84
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 8
Q. HAVE YOU BEEN ABLE TO QUANTIFY THE VALUE OF THESE FOREGONE CAPACITY-RELEASE
OPPORTUNITIES?
A. In order to quantify the value of any foregone capacity-release
opportunities, we used the dispatch analysis to identify the particular
resources of the Boston Gas portfolio that would be used to serve Essex
customers. We then calculated the value of the incremental capacity using
market values from the 1997/98 heating season for capacity releases
associated with the resources identified in the dispatch analysis. This
analysis is attached as Exhibit WRL-3. As demonstrated in Exhibit WRL-3,
the total value of foregone capacity-release opportunities for the normal
split year 1998/99 is estimated to be $1.04 million.
Q. HOW DO YOU PROPOSE TO PROVIDE ESSEX'S CUSTOMERS WITH GAS COST SAVINGS AND
TO COMPENSATE BOSTON GAS CUSTOMERS FOR FOREGONE CAPACITY-RELEASE
OPPORTUNITIES?
A. As set forth in the Rate Plan proposed by Mr. Bodanza, gas cost savings
will be passed on to customers through the normal operation of Essex's Cost
of Gas Adjustment Clause ("CGAC"). Although reductions in fixed capacity
costs and commodity costs are estimated to be $2.5 million annually over
the first two years of the Rate Plan, these savings are achieved only by
virtue of the coordinated gas supply activities of Boston Gas and Essex.
Thus, in order to ensure that Boston Gas customers are held harmless and do
not subsidize Essex customers, the Essex CGAC must reflect both the
reduction in the gas supply costs of Essex portfolio ($2.5 million) and the
Boston Gas opportunity revenues that were foregone to serve Essex customers
($1.04 million). Therefore, for the first year of the Rate
<PAGE> 85
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 9
Plan, we propose to pass net gas cost savings of $1.46 million to Essex
customers through the Essex CGAC and to credit the Boston Gas CGAC for
$1.04 million to reflect projected foregone opportunity revenues.
Q. HOW HAVE YOU DETERMINED THE VALUE OF THE FOREGONE REVENUE AND HOW WILL THAT
REVENUE BE ACCOUNTED FOR AFTER THE FIRST YEAR OF THE RATE PLAN?
A. In pursuing capacity-release opportunities for Boston Gas customers, we
normally run a dispatch analysis each year prior to the start of the
heating season and make projections as to the availability of capacity for
release in each month during the upcoming year. Generally, Boston Gas will
make such capacity available for release by November 1 for the entire
season. In our experience, this approach avoids the need for daily trades
during the heating season (which would impose a significant administrative
burden upon the Company), and maximizes the volume and value of the
capacity being placed on the secondary market.
Consistent with that approach, we have developed the analysis set forth in
Exhibit WRL-3 to estimate the amount of the foregone revenues that would
occur as a result of the merger. Going forward, we would propose to prepare
such an analysis at the start of each heating season, with the objective of
estimating the revenues that would have been available for Boston Gas
customers had the capacity been released rather than utilized to meet the
system requirements of Essex. In establishing the dollar value of the
foregone revenues, we propose to use the most recent available data each
year to estimate the value that capacity
<PAGE> 86
Testimony of William R. Luthern
Exhibit WRL-1
March 25, 1998
Page 10
would receive on the secondary release market. Once we have determined the
value of the foregone revenues, we will lock-in that transfer by charging
the Essex CGAC and crediting the Boston Gas CGAC for that amount. In this
way, we project Essex customers will receive net benefits in the form of
reduced gas costs in the first two years after the merger, totaling
approximately $1.5 million annually, while Boston Gas customers will be
compensated for the use of that portion of the Boston Gas system necessary
to serve Essex customers, i.e., by $1.04 million the first year. Following
the expiration date of Essex's Tennessee long-haul capacity contract on
November 1, 2000, we project the net gas cost savings to Essex customers
will increase from approximately $1.5 to approximately $2.4 million
annually.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes, it does.
<PAGE> 87
Exhibit WRL-2
D.T.E. 98-____
CURRENT ESSEX COUNTY GAS COMPANY PORTFOLIO
<TABLE>
<CAPTION>
Contract Quantity Termination Date
-------- -------- ----------------
<S> <C> <C> <C>
1. Tennessee Long Haul 15,728 mcf/d November 1, 2000
2. Iroquois Pipeline 2,000 mcf/d May 30, 2011
3. Tennessee 2,000 mcf/d May 30, 2011
4. Tennessee 645 mcf/d January 14, 2003
5. Tennessee 976 mcf/d January 14, 2003
6. Tennessee 5,172 mcf/d November 1, 2000
7. Tennessee 4,069 mcf/d May 31, 2000
8. Tennessee Storage 0.781 Bcf November 1, 2000
9. Tennessee Storage 0.381 Bcf April 1, 2000
10. Distrigas 0.604 Bcf - 0.906 Bcf October 31, 2006
11. ANE Supply 2,000 mcf/d November 30, 2005
12. Boundary Supply 1,610 mcf/d January 15, 2003
13. Maritimes & Northeast 2,000 mcf/d November 1, 2009
14. Supply domestic 15,728 mcf/d October 31, 1999 -
(Aquila, NGC, ECT, EPEM, Coral) November 1, 2002
</TABLE>
<PAGE> 88
Exhibit WRL - 3
O.T.E 98-____
Boston Gas Company Interstate Capacity
Serving Essex County Gas Company
Normal Year 1998/99
<TABLE>
<CAPTION>
Nov-98 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
TGP Long-Haul
Quantity (MMBtu/month) 7,979 0 0 0 19,565 16,728
Market Value ($/MMBtu) $0.60 $0.80 $0.90 $0.80 $0.80 $0.08
- ------------------------------------------ -------- -------- -------- -------- -------- --------
Value ($) $4,788 $0 $0 $0 $15,652 $1,338
TGP Short-Haul
Quantity (MMBtu/month) 83,256 154,457 91,482 72,915 229,216 27,500
Market Value ($/MMBtu) $0.41 $0.41 $0.41 $0.41 $0.41 $0.01
- ------------------------------------------ -------- -------- -------- -------- -------- --------
Value ($) $34,135 $63,327 $37,508 $29,895 $93,979 $275
TETCO/AGT Long-Haul
Quantity (MMBtu/month) 275,185 47,184 33,872 47,184 80,326 345,749
Market Value ($/MMBtu) $0.60 $0.80 $0.90 $0.80 $0.80 $0.09
- ------------------------------------------ -------- -------- -------- -------- -------- --------
Value ($) $165,111 $37,747 $30,485 $37,747 $64,261 $31,117
TETCO/AGT Short-Haul
Quantity (MMBtu/month) 47,184 205,902 172,794 226,452 129,691 0
Market Value ($/MMBtu) $0.41 $0.41 $0.41 $0.41 $0.41 $0.01
-------- -------- -------- -------- -------- --------
Value ($) $19,345 $84,420 $70,846 $92,845 $53,173 $0
<CAPTION>
May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Total
------ ------ ------ ------ ------ ------ -----
TGP Long-Haul
<S> <C> <C> <C> <C> <C> <C> <C>
Quantity (MMBtu/month) 120,624 216,908 377,710 381,853 263,897 103,397 1,508,660
Market Value ($/MMBtu) $0.04 $0.04 $0.04 $0.04 $0.04 $0.04
---------- ---------- ---------- ---------- ----------
Value ($) $4,825 $8,676 $15,108 $15,274 $10,556 $4,136 $80,353
TGP Short-Haul
Quantity (MMBtu/month) 0 0 0 0 0 0 658,827
Market Value ($/MMBtu) $0.01 $0.01 $0.01 $0.01 $0.01 $0.01
---------- ---------- ---------- ---------- ----------
Value ($) $0 $0 $0 $0 $0 $0 $259,119
TETCO/AGT Long-Haul
Quantity (MMBtu/month) 99,961 23,495 0 0 10,606 201,191 1,164,753
Market Value ($/MMBtu) $0.04 $0.04 $0.04 $0.04 $0.04 $0.04
---------- ---------- ---------- ---------- ----------
Value ($) $3,998 $940 $0 $0 $424 $8,048 $379,879
TETCO/AGT Short-Haul
Quantity (MMBtu/month) 0 0 0 0 0 0 782,022
Market Value ($/MMBtu) $0.01 $0.01 $0.01 $0.01 $0.01 $0.01
---------- ---------- ---------- ---------- ----------
Value ($) $0 $0 $0 $0 $0 $0 $320,629
Total Value = $1,039,980
</TABLE>
<PAGE> 1
EXHIBIT E
Color coded map indicating the service territories of local distribution
gas companies within the Commonwealth of Massachusetts.
<PAGE> 1
[LETTERHEAD OF ROPES & GRAY]
March 31, 1998
The Securities and Exchange Commission
Washington, D.C. 20549
Re: Eastern Enterprises - Form U-1
------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with the Form U-1 (the "Form
U-1") to be filed with the Securities and Exchange Commission pursuant to the
Public Utility Holding Company Act of 1935, as amended, by Eastern Enterprises,
a Massachusetts voluntary association ("Eastern"). The Form U-1 is being filed
in connection with the acquisition by Eastern of all of the outstanding shares
(the "Essex County Shares") of common stock, no par value, of Essex County Gas
Company, a Massachusetts gas utility company ("Essex County") in exchange for
shares (the "Eastern Shares") of common stock, $1.00 par value, of Eastern. The
Eastern Shares are to be issued pursuant to an Agreement and Plan of Merger,
dated as of December 19, 1997 (the "Merger Agreement"), by and between Essex
County and Eastern providing for the merger (the "Merger") of a Massachusetts
corporation to be formed by and to be the wholly-owned subsidiary of Eastern
with and into Essex County, as a result of which the Essex County will be the
surviving corporation.
We have acted as counsel for Eastern in connection with the Merger
Agreement and the proposed issuance of the Eastern Shares contemplated thereby.
For purposes of this opinion, we have examined and relied upon such documents,
records, certificates and other instruments as we have deemed necessary.
We express no opinion as to the applicability of, compliance with or effect
of Federal law or the law of any jurisdiction other than The Commonwealth of
Massachusetts.
Based on the foregoing, we are of the opinion that:
<PAGE> 2
Securities and Exchange Commission -2- March 31, 1998
1. Assuming consummation of the Merger in accordance with the terms of the
Merger Agreement, the Merger will comply with all applicable provisions of the
laws of The Commonwealth of Massachusetts.
2. Eastern is validly organized and duly existing as an unincorporated
voluntary association under the laws of The Commonwealth of Massachusetts.
3. The Eastern Shares have been duly authorized and, when issued and
delivered in accordance with the terms of the Merger Agreement, will be validly
issued, fully paid and non-assessable and entitle the holders thereof to all the
rights and privileges pertaining thereto as set forth in the Declaration of
Trust dated July 18, 1929, as amended and By-laws of Eastern.
4. Assuming consummation of the Merger in accordance with the terms of the
Merger Agreement, the Essex County Shares to be acquired by Eastern pursuant to
the terms of the Merger Agreement will be legally acquired by Eastern.
5. The consummation of the Merger in accordance with the terms of the
Merger Agreement will not violate any legal rights of the holders of any issued
and outstanding securities of Eastern or any of its affiliates.
We hereby consent to the filing of this opinion as an exhibit to Eastern's
Form U-1.
It is understood that this opinion is to be used only in connection with
the Form U-1 and may not be relied upon for any other purpose.
Very truly yours,
/s/ Ropes & Gray
Ropes & Gray
<PAGE> 1
EXHIBIT G
SCHEDULE OF ESTIMATED FEES AND EXPENSES IN
CONNECTION WITH THE PROPOSED TRANSACTION
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Investment Banking Fees $2,700
Legal and Regulatory 1,485
Accounting Fees 200
Filing Fees 82
Printing 100
Proxy Solicitation 10
Exchange Agent 20
Miscellaneous 25
------
Total $4,622
======
</TABLE>
<PAGE> 1
EXHIBIT H
Proposed Form of Notice
Notice of Proposal to Acquire Securities of a Utility Company
Eastern Enterprises ("Eastern"), an exempt intrastate holding company located in
Massachusetts, has filed an Application/Declaration under Section 10 of the 1935
Act seeking the Commission's approval of Eastern's acquisition through a
so-called reverse triangular merger of all the outstanding Common Stock of Essex
County Gas Company ("Essex County"), a Massachusetts gas utility company.
Eastern currently holds all the outstanding Common Stock of Boston Gas Company,
a Massachusetts gas utility company. Under the proposed plan of merger, the
Common Stock of Essex County outstanding immediately before consummation of the
merger will be converted into shares of Eastern's Common Stock at a ratio of
1.183985 shares of Eastern for each share of Essex County, subject to adjustment
under certain circumstances. The proposed merger is subject to expiration or
termination of the notification waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the approval by the
Massachusetts Department of Telecommunication and Energy and by the stockholders
of Essex County.
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000311259
<NAME> EASTERN ENTERPRISES
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PRO-FORMA
<TOTAL-NET-UTILITY-PLANT> 621,723
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 217,250
<TOTAL-DEFERRED-CHARGES> 135,058
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 974,031
<COMMON> 71,975
<CAPITAL-SURPLUS-PAID-IN> 43,233
<RETAINED-EARNINGS> 166,895
<TOTAL-COMMON-STOCKHOLDERS-EQ> 282,103
29,326
0
<LONG-TERM-DEBT-NET> 239,967
<SHORT-TERM-NOTES> 46,058
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 59,823
<LONG-TERM-DEBT-CURRENT-PORT> 1,452
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 315,302
<TOT-CAPITALIZATION-AND-LIAB> 974,031
<GROSS-OPERATING-REVENUE> 329,472
<INCOME-TAX-EXPENSE> 25,075
<OTHER-OPERATING-EXPENSES> 240,945
<TOTAL-OPERATING-EXPENSES> 266,020
<OPERATING-INCOME-LOSS> 63,452
<OTHER-INCOME-NET> 670
<INCOME-BEFORE-INTEREST-EXPEN> 64,122
<TOTAL-INTEREST-EXPENSE> 21,207
<NET-INCOME> 42,915
1,926
<EARNINGS-AVAILABLE-FOR-COMM> 40,989
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) BOSTON GAS AND ESSEX COUNTY HISTORICAL FISCAL YEARS AND ACCOUNTING POLICIES
Boston Gas' historical fiscal year ends on December 31 while Essex County's
historical fiscal year ends on August 31. For purposes of combining Essex
County's historical financial information with Boston Gas' in the pro forma
combined statement of operations herein, the financial information of Boston Gas
for the fiscal year ended December 31, 1997 has been combined with Essex
County's financial information for the twelve months ended November 30, 1997.
The accounting policies of Eastern, Boston Gas and Essex County are currently
being studied from a conformity perspective. The impact of conforming accounting
policies (if any) is not presently estimable. If conforming adjustments are
required, they will be recorded as part of the restatement of prior periods as
required by the pooling-of-interests method. However, certain amounts in the
historical financial statements of Boston Gas and Essex County have been
reclassified to present consistent pro forma financial information. There were
no material intercompany transactions between Boston Gas and Essex County during
the periods presented.
(2) MERGER-RELATED EXPENSES
Eastern and Essex County will incur investment banking, legal, accounting and
other transaction costs as a result of the Merger. Based on information
currently available, these costs will total approximately $4.6 million and have
been and will be expensed in the period incurred. Since the Merger has not been
consummated, the Merger expenses can only be estimated at this time, and are
subject to revision as further information becomes available.
(3) COMMON STOCKHOLDERS' INVESTMENT
The common stock and paid-in capital accounts of Boston Gas and Essex County
have not been restated for the Merger due to the fact that Essex County common
stock is being exchanged for Eastern common stock, not Boston Gas common stock,
as provided in the Merger Agreement. The exchange ratio is one Essex County
common share for 1.183985 shares of Eastern common stock.
</FN>
</TABLE>
