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File No. 070-09195
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
AMENDMENT NO. 2
TO
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
EASTERN ENTERPRISES
9 Riverside Road
Weston, Massachusetts 02193
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(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
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(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.
By this application, Eastern also requests that the Commission enter an
order confirming and continuing in effect Eastern's "intrastate" exemption
following consummation of the proposed merger.
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
dated as of December 19, 1997 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, were
$3,966,519 on revenues of $53,534,734, substantially all from utility
operations.
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. A list of Eastern's subsidiaries
is attached as Exhibit I to this Application.
Eastern's net earnings for the year ended December 31, 1997 were
$51,950,000 on revenues of $970,204,000. Non-utility subsidiaries of Eastern
contributed $269,259,000, approximately 27.8% of total revenues for 1997.
Complete financial statements for Eastern and Essex on a historical and
pro forma combined basis are included in the Prospectus/Proxy Statement forming
part of Eastern's Registration Statement on form S-4, filed as Exhibit C to
this Application.
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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:
(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 having all the rights, interests, and obligations of Essex;
(c) Shares of NEWCO will be converted into shares of new common stock of
Essex, with Essex becoming 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.
(e) Outstanding debt securities of Essex will not be affected and will
remain outstanding on the same terms and conditions.
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 estimated at $2.5 million annually, rising to
$3.4 million in 2001 and later years, from sharing of their combined pipeline
supply capacity and commodity cost savings (DTE Petition, Exhibit D-1 to this
Application, Testimony of William R. Luthern, p. 2) and savings from
consolidation of management positions and other duplicated administrative costs
estimated as $4.89 million annually (DTE Petition, Exhibit D-1 to this
Application, 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.
Under applicable Massachusetts corporation laws, the merger requires
approval by the Board of Trustees of Eastern and the Board of Directors and the
stockholders of Essex. Approval by the shareholders of Eastern is not required.
Eastern's Trustees approved the merger on December 12, 1997. Essex's Directors
approved the merger on December 19, 1997. The merger was approved by the
Stockholders of Essex at a meeting held June 24, 1998.
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
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The estimated fees and expenses in connection with the proposed
transactions are set forth in Exhibit G hereto.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
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Sections 9(a) and 10 of the Act are applicable to the acquisition by
Eastern of shares of capital stock of Essex.
Section 3(a)(1) of the Act is applicable to Eastern's continued
exemption from registration under the Act.
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
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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
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(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. 333-52235) (including the Prospectus/Proxy Statement to
be distributed to stockholders of Essex in connection with the
special meeting to be held on or about June 24, 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.
**I Subsidiaries of Eastern.
* To be supplied by amendment.
** Filed with this 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.
6. Unaudited Pro Forma Combined Balance Sheets of Eastern and
Essex.
7. Unaudited Pro Forma Combined Statements of Operations of Eastern
and Essex.
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
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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 Amendment to be signed on
its behalf by the undersigned officer thereunto duly authorized.
EASTERN ENTERPRISES(1)
Date: July 2, 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 (Incorporated by Reference)
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
**I List of Eastern's subsidiaries
* To be supplied by amendment.
** Filed with this 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.
6. Unaudited Pro Forma Combined Balance Sheets of Eastern and
Essex.
7. Unaudited Pro Forma Combined Statements of Operations of
Eastern and Essex.
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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 Eastern as of March 31, 1998 and Essex County as of February 28, 1998.
EASTERN ENTERPRISES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
EASTERN ESSEX COUNTY
ENTERPRISES GAS COMPANY
MARCH 31, 1998 FEBRUARY 28, 1998 PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) ADJUSTMENTS BALANCES(1)
----------------- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments............ $ 122,791 $ 1,946 $ -- $ 124,737
Receivables, less reserves of $19,065...... 153,169 7,069 -- 160,238
Inventories................................ 36,005 3,305 -- 39,310
Deferred gas costs......................... 32,062 -- -- 32,062
Other current assets....................... 4,287 366 -- 4,653
---------- -------- -------- ----------
Total current assets................ 348,314 12,686 -- 361,000
PROPERTY AND EQUIPMENT,
AT COST.................................... 1,541,168 108,620 -- 1,649,788
Less -- accumulated depreciation........... 683,468 27,606 -- 711,074
---------- -------- -------- ----------
Net property and equipment.......... 857,700 81,014 -- 938,714
OTHER ASSETS
Deferred post-retirement health care
costs.................................... 82,587 -- 82,587
Investments................................ 15,879 776 16,655
Deferred charges and other costs, less
amortization............................. 69,354 3,536 (730)(2) 72,160
---------- -------- -------- ----------
Total other assets.................. 167,820 4,312 (730)(2) 171,402
---------- -------- -------- ----------
TOTAL ASSETS........................ $1,373,834 $ 98,012 $ (730)(2) $1,471,116
========== ======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current debt............................... $ 20,651 $ 6,293 $ -- $ 26,944
Accounts payable........................... 68,573 2,966 -- 71,539
Accrued expenses........................... 57,799 3,028 -- 60,827
Other current liabilities.................. 66,717 1,433 -- 68,150
---------- -------- -------- ----------
Total current liabilities........... 213,740 13,720 -- 227,460
GAS INVENTORY FINANCING...................... 31,610 3,661 -- 35,271
LONG-TERM DEBT............................... 292,787 28,721 -- 321,508
RESERVES AND OTHER LIABILITIES
Deferred income taxes...................... 97,594 8,742 -- 106,336
Post-retirement health care................ 94,708 -- -- 94,708
Coal miners retiree health................. 55,632 -- -- 55,632
Preferred stock of subsidiary.............. 29,335 -- -- 29,335
Other reserves............................. 88,399 4,624 -- 93,023
---------- -------- -------- ----------
Total reserves and other
liabilities....................... 365,668 13,366 -- 379,034
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock, authorized;
Eastern -- 50 million,...................
Essex -- 5 million;......................
issued and outstanding;
Eastern -- 20.4 million; 22.5 million pro
forma.................................. 20,443 -- 2,038 (4) 22,481
Essex -- 1.7 million..................... -- 21,424 (21,424)(4) --
Capital in excess of par................... 32,342 -- 19,386 (4) 51,728
Retained earnings.......................... 417,958 17,120 (730)(2) 434,348
Treasury stock............................. (714) -- -- (714)
---------- -------- -------- ----------
Total shareholders' equity.......... 470,029 38,544 (730) 507,843
---------- -------- -------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................ $1,373,834 $ 98,012 $ (730) $1,471,116
========== ======== ======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
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EASTERN ENTERPRISES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR TWELVE MONTHS
ENDED ENDED
DECEMBER 31, NOVEMBER 30,
1997 1997
EASTERN ESSEX COUNTY
ENTERPRISES GAS COMPANY PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) ADJUSTMENTS RESULTS(1)
------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues ......................................... $970,204 $54,427 $ -- $1,024,631
Operating costs and expenses:
Operating costs ................................ 684,582 30,558 -- 715,140
Selling, general and administrative
expenses ..................................... 111,359 10,690 -- 122,049
Depreciation and amortization .................. 67,949 3,422 -- 71,371
-------- ------- ----------
Operating earnings ............................... 106,314 9,757 -- 116,071
Other income (expense):
Interest income ................................ 8,997 -- -- 8,997
Interest expense ............................... (34,318) (3,160) -- (37,478)
Other, net ..................................... (4,371) 372 -- (3,999)
-------- ------- ----- ----------
Earnings from continuing operations
before income taxes ............................ 76,622 6,969 -- 83,591
Provision for income taxes ....................... 24,672 2,565 -- 27,237
-------- ------- ----- ----------
Net earnings ............................ $ 51,950 $ 4,404 $ -- $ 56,354
======== ======= ===== ==========
Earnings per common share(3)(5):
Basic .......................................... $ 2.55 $ 2.63 $ 2.52
========= ======== ==========
Diluted ........................................ $ 2.54 $ 2.55 $ 2.50
========= ======== ==========
Weighted average number of common shares
outstanding:
Basic .......................................... 20,358 1,676 308 22,342
========= ======== ==== ==========
Diluted ........................................ 20,468 1,728 318 22,514
========= ======== ==== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information.
<PAGE> 17
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) EASTERN AND ESSEX COUNTY HISTORICAL FISCAL YEARS AND ACCOUNTING POLICIES
Eastern's 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 Eastern's in the pro forma
combined statements of operations herein, the financial information of Eastern
for the fiscal years ended December 31, 1997, 1996 and 1995 and the three months
ended March 31, 1998 and 1997 have been combined with Essex County's financial
information for the twelve months ended November 30, 1997 and August 31, 1996
and 1995 and the three months ended February 28, 1998 and 1997, respectively. As
a result, Essex County's financial information for the three months ended
November 30, 1996 are excluded from the pro forma data. Essex County's operating
revenues and net loss available to common shareholders for the three months
ended November 30, 1996 were $8.1 million and $(0.3) million, respectively.
The unaudited pro forma combined condensed financial information do not
include all adjustments (see note (2)) to conform the accounting policies of
Essex County to those followed by Eastern. The nature and extent of such
adjustments, if any, will be based upon further analysis and are not expected to
be material. However, certain amounts in the historical financial statements of
Eastern and Essex County have been reclassified to present consistent pro forma
financial information. There were no material intercompany transactions between
Eastern 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 will
be expensed in the period incurred consistent with Eastern's historical
accounting treatment of such costs. In the three months ended February 28, 1998,
Essex County incurred $0.7 million of Merger expenses which were capitalized as
deferred charges. Accordingly, a pro forma adjustment has been made to reflect
the expensing of such costs in the unaudited pro forma combined statement of
operations for the three months ended March 31, 1998. Costs incurred by Essex
County related to the Merger prior to November 30, 1997 were not material. 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) EARNINGS PER SHARE
The pro forma net earnings per share reflect (i) the weighted average
number of Eastern common shares that would have been outstanding if the Merger
occurred at the beginning of the periods presented upon the conversion of each
outstanding share of Essex County common stock into 1.183985 shares of Eastern
common stock, as provided in the Merger agreement and (ii) the dilutive impact
of stock options using the treasury stock method.
(4) Adjusted to reflect the issuance of 2,037,542 shares of common stock of
Eastern ($1.00 par value per share) in exchange for all of the outstanding
shares of common stock of Essex County based on an exchange ratio of 1.183985.
<PAGE> 18
(5) EXCHANGE RATIO
As provided for in the Merger Agreement, each issued and outstanding share
of Essex County Common Stock shall be converted into the right to receive
1.183985 shares of Eastern Common Stock, provided that, if the Market Value (as
defined) of 1.183985 shares of Eastern Common Stock is less than $45 per share,
then each such share of Essex County Common Stock shall be converted into the
right to receive the number of shares of Eastern Common Stock having a Market
Value equal to $45; and if the Market Value of 1.183985 shares of Eastern Common
Stock is more than $50 per share, then each such share of Essex County Common
Stock shall be converted into the right to receive the number of shares of
Eastern Common Stock having a Market Value equal to $50. Accordingly, a market
value of Eastern Common Stock below $38.01 per share will cause an increase in
the exchange ratio and a market value of Eastern Common Stock above $42.23 will
cause a decrease in the exchange ratio. Any increase in the exchange ratio will
cause a corresponding decrease in the pro forma combined per share amounts and
any decrease in the exchange ratio will cause a corresponding increase in the
pro forma per share amounts. For example, if Eastern's stock price was at either
its most recent 52-week low ($34.00) or 52-week high ($45.62), the recalculated
combined pro forma earnings per share in the latest fiscal year and interim
period would be as follows:
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
52-WEEK 52-WEEK 52-WEEK 52-WEEK
LOW HIGH LOW HIGH
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings per share.............. $ 2.50 $ 2.54 $ 1.41 $ 1.44
Diluted earnings per share............ $ 2.48 $ 2.52 $ 1.40 $ 1.42
Book value per share.................. $21.40 $21.77 $22.37 $22.77
</TABLE>
<PAGE> 1
EXHIBIT I
SUBSIDIARIES OF EASTERN ENTERPRISES
Utility Subsidiary:
Boston Gas Company
Non-Utility Subsidiaries:
AllEnergy Marketing Company, Inc. (inactive)
AMR Data Corporation - performs automated reading services for BGC and
others
Massachusetts LNG Incorporated (subsidiary of Boston Gas Company) - holds
title to LNG storage facilities
Boston Gas Services, Inc. (inactive)
Eastern Associated Capital Corp. - holds interest in an investment
partnership
Eastern Associated Securities Corp. - holds title to investment securities
Eastern Energy Systems Corp. (inactive)
Eastern Enterprises Foundation - makes charitable contributions
Eastern Rivermoor Company, Inc. - holds title to real estate used by BGC
Eastern Urban Services, Inc. (inactive)
Midland Enterprises Inc. - Midland and all active subsidiaries are engaged
in river barge transportation services and related support activities
Capital Marine Supply, Inc.
Chotin Transportation, Inc.
Eastern Associated Terminals Company
Federal Barge Lines, Inc.
River Fleets, Inc.
Hartley Marine Corp.
Minnesota Harbor Service, Inc.
Ohio River Company (The)
Ohio River Company Traffic Division, Inc. (The)
Ohio River Terminals Company (The)
Orgulf Transport Co.
Orsouth Transport Co.
Port Allen Marine Service, Inc.
Red Circle Transport Co.
West Virginia Terminals, Inc.
Mystic Steamship Corporation (inactive)
PCC Land Company, Inc. - holds title to real property in Pennsylvania
Philadelphia Coke Co., Inc. (inactive)
ServiceEdge Partners, Inc. - installs and services HVAC equipment
Water Products Group Incorporated (inactive)
Western Associated Energy Corp. (inactive)
SUBSIDIARIES OF ESSEX COUNTY GAS COMPANY
(All are non-utility)
LNG Storage, Inc.
Northern Energy Company, Inc. (inactive)
