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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 02493
________________________________________________
(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 02493
__________________________________________
(Names and addresses of agents for service)
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Item 1. Description of Proposed Transaction
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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 triangular merger (the "Merger"), of all the outstanding
capital stock of Colonial Gas Company ("Colonial"), 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 subsidiaries are Boston Gas Company ("Boston Gas"), a Massachusetts gas
utility company, and Essex Gas Company ("Essex Gas"), a Massachusetts gas
utility company. Following the proposed acquisition, Eastern will have three gas
utility subsidiaries, all located in Massachusetts, and will continue to satisfy
the requirements of Section 3(a)(1). In addition, Colonial Gas, Boston Gas and
Essex Gas together will constitute an integrated public-utility system because,
among other things, they have substantially 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); August 28, 1975 (Pub. Util. Holding Company Act of
1935 Release No. 19100); and September 30, 1998 (Pub. Util. Holding Company Act
of 1935 Release No. 26923).
Eastern is the sole stockholder of all issued and outstanding common stock
of Boston Gas and Essex Gas, Massachusetts corporations engaged in the gas
utility business. Together Boston Gas and Essex Gas serve approximately 580,000
customers, all in Massachusetts. Boston Gas has outstanding 1,200,000 shares of
non-voting preferred stock, which are held by the public.
Colonial is a regulated public utility and a non-affiliated Massachusetts
corporation engaged in the gas utility business. Colonial serves approximately
151,000 customers in the Commonwealth of Massachusetts. A portion of Colonial's
service territory is contiguous to Boston Gas' and Essex Gas' service
territories.
A. Proposed Acquisition of Colonial
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Eastern and Colonial have agreed, subject to various approvals including
approval from the Securities and Exchange Commission (the "Commission"), that
Eastern will acquire Colonial through a merger of Colonial into a subsidiary of
Eastern formed for that purpose. After the merger, Eastern will own all the
outstanding capital stock of Colonial, and the former stockholders of Colonial
will hold shares of common stock of Eastern and cash. Eastern's common stock is
traded on the New York Stock Exchange, the Boston Stock Exchange and the Pacific
Exchange. Based on reported closing price for Eastern
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shares on the New York Stock Exchange and the number of shares of Colonial
common stock outstanding on December 22, 1998, the Eastern shares to be issued
would have a market value of approximately $184 million and would constitute
approximately 16.4% of Eastern's outstanding stock following the Merger. The
terms and conditions agreed upon between Eastern and Colonial, are set forth in
the Agreement and Plan of Reorganization included as Exhibit B hereto (the
"Agreement").
The Agreement between Eastern and Colonial was the result of a process
conducted by Colonial to explore strategic alternatives.
Included with this Application as Exhibit D-1 is a copy of the Joint
Petition of Eastern Enterprises and Colonial Gas Company For Approval of Merger
submitted on December 24, 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, File No. 333-69039 filed by Eastern,
which includes the Joint Proxy Statement of Eastern and Colonial as filed with
the Commission (the "Joint Proxy Statement") in connection with the proposed
special meetings of Eastern shareholders and Colonial stockholders to approve
the issuance of Eastern common stock pursuant to the Agreement and the Merger,
respectively.
1. Description of Business of Colonial and Eastern
Colonial is a gas utility whose principal business is the distribution and
sale of natural gas. Colonial has 12 directors and 15 officers. Colonial sells
natural gas to approximately 151,000 customers in eastern Massachusetts. A
portion of Colonial's service territory in eastern Massachusetts is contiguous
to Boston Gas' and Essex Gas' service territories. The size of Colonial's
customer base has been growing in recent years, with 5,355 new customers added
during fiscal 1998.
Colonial net earnings for the twelve month period ended September 30, 1998,
was $15.041 million on revenues of $178.128 million. Non-utility subsidiaries
contributed $2.7 million to revenues, approximately 1.5% of total revenues for
that period.
Colonial had a total of approximately 508 permanent employees on
December 31, 1998.
Eastern is exclusively a holding company. Its sole utility subsidiaries are
Boston Gas and Essex Gas, distributors of natural gas, together serving
approximately 580,000 residential, commercial and industrial customers in Boston
and 90 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
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bulk cargoes on the nations inland waterways, with a fleet 2,414 barges and 87
tugboats and towboats. A list of Eastern's subsidiaries is attached as Exhibit I
to this Application.
Eastern's net earnings for the twelve-month period ended September 30, 1998
were $103.49 million on revenues of $973.396 million. Non-utility subsidiaries
of Eastern contributed $261.865 million, approximately 26.9% of total revenues
for that period.
Complete financial statements for Eastern and Colonial on a historical
basis and financial statements for Boston Gas, Essex Gas, and Colonial on a pro
forma combined basis are filed with this Application (See Index to Financial
Statements, Items 3 and 4).
2. Acquisition of Colonial
The terms and mechanism for acquiring Colonial are set forth in the
Agreement described in the Joint Proxy Statement 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;/1/
(b) Colonial will merge with and into NEWCO, with NEWCO as the surviving
corporation (the "Surviving Corporation") having all the rights, interests,
and obligations of Colonial and remaining a wholly-owned subsidiary of
Eastern; and
(c) Each outstanding share of common stock of Colonial will be converted into
either $37.50 cash or $37.50 worth of 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 Colonial may become shareholders 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
In the Merger, holders of Colonial common stock will receive cash and
common stock of Eastern having an expected aggregate value of approximately $334
million based on the number of shares of Colonial common stock outstanding as of
December 22, 1998. The actual value will depend on the market price of the
Eastern common stock and the
- ----------------
/1/ 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.
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number of shares of Colonial common stock outstanding on the date the Merger is
completed. The total amount of cash consideration to be paid to the Colonial
stockholders will equal $150 million (subject to adjustment for tax purposes).
Each share of Colonial common stock exchanged for cash will entitle the holder
to receive $37.50. Each share which is not exchanged for cash will entitle the
holder to receive that number of shares of Eastern common stock having a value
of $37.50 based on the average closing price of the Eastern common stock
reported in the New York Stock Exchange Composite Transactions over the ten
trading day period ending on the third trading day before the effective date of
the merger, so long as that average closing price is not less than $37.56 or
higher than $47.80. If the average closing price is less than $37.56 or higher
than $47.80, each share of Colonial common stock not exchanged for cash will
entitle the holder to receive approximately 0.998 shares and 0.785 shares,
respectively, of Eastern common stock. Eastern has registered with the
Commission shares of its common stock for this purpose. (See Exhibit C hereto).
This acquisition price is reasonable in the opinion of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Eastern's investment banking advisors, and will not
result in any excessive charges to Boston Gas, Essex Gas or Colonial 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, 1998 through December 22, 1998, the price for
Eastern's shares on the New York Stock Exchange -- Composite Transactions ranged
from a high of $45.625 to a low of $37.625. Colonial's common shares are quoted
on the New York Stock Exchange. From January 1, 1998 through December 22, 1998,
the price for Colonial's shares on New York Stock Exchange -- Composite
Transactions ranged from a high of $35.438 to a low of $26.50.
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.
Colonial, Boston Gas and Essex Gas are all 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,
Colonial, Boston Gas and Essex 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.
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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 Colonial,
Boston Gas and Essex Gas are substantially contiguous, and all three companies
receive a substantial portion of their natural gas supplies from the Tennessee
Gas Pipeline Company. The existing distribution systems of Boston Gas and
Colonial are physically connected at Littleton, Massachusetts. See DTE Petition,
Exhibit D-1 to this application, Testimony of William R. Luthern, p. 2. Eastern
expects to derive substantial cost savings from the combined operations of
Colonial, Boston Gas and Essex Gas, including savings estimated at $947,000 in
the first year of combined operations and $4 million in the following year ,
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. 8-9 and Exh. WRL-3) and savings from consolidation of management
positions and other duplicated administrative costs estimated at $8.7 million
annually (DTE Petition, Exhibit D-1 to this Application, Testimony of Joseph F.
Bodanza, p. 12 and Exh. JFB-5).
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 Colonial. Approval of the issuance of Eastern common stock in
the Merger by the shareholders of Eastern may be required under the rules of the
New York Stock Exchange if the aggregate number of shares of Eastern common
stock issued in the Merger will be equal to or greater than 20% of the total
number of shares of Eastern common stock issued and outstanding immediately
prior to the Merger. Eastern's Trustees approved the Merger on October 28,
1998. Colonial's Directors approved the Merger on October 17, 1998. The stock
issuance by Eastern in the Merger is anticipated to be approved by the
shareholders of Eastern at a meeting to be held on February 10, 1999. The
Merger is anticipated to be approved by the Stockholders of Colonial at a
meeting to be held February 10, 1999.
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.
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As indicated above, after the proposed acquisition, Colonial will be a
wholly-owned direct subsidiary of Eastern, as Boston Gas and Essex Gas are now.
As usual in holding-company systems, Colonial, Boston Gas and Essex 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 combined operations of Colonial, Boston Gas and Essex Gas will operate
entirely in Massachusetts and will be subject to regulation by the MDTE. Boston
Gas and Essex Gas together currently serve approximately 580,000 retail gas
customers in 91 cities and towns in eastern and central Massachusetts. Together,
Colonial, Boston Gas and Essex Gas will serve a base of approximately 731,000
retail gas customers in a contiguous service area comprising 112 cities and
towns in eastern and central Massachusetts. Boston Gas and Essex Gas had
combined assets of $902.499 million at September 30, 1998 and combined revenues
of $711.531 million for the twelve-month period then ended. Colonial, Boston Gas
and Essex Gas together will have pro forma combined assets of $1,499.868 million
and pro forma combined revenues of $889.659 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 Colonial, in which Eastern was one of two bidders from an initial
field of six interested potential bidders. See DTE Application, testimony of
Nickolas Stavropoulos, pp. 4-6. The investment banking firm of Salomon Smith
Barney advised the Board of Directors of Colonial that the merger consideration
was fair to the stockholders of Colonial from a financial point of view (see
Joint Proxy Statement, pp. 42-47); and the investment banking firm of Merrill
Lynch, Pierce, Fenner & Smith Incorporated has advised the Trustees of Eastern
that the merger price is reasonable and is consistent with recent history of
mergers in the natural gas industry (see DTE Petition, Testimony of James D.
Hempstead).
In addition, Eastern and Colonial have proposed to the MDTE a rate plan
that will effect an immediate reduction in the retail gas price charged to
customers of Colonial and a ten-year freeze on the base rates for Colonial, to
reflect expected cost savings that would result from combined operation of
Colonial, Boston Gas and Essex Gas. See DTE Petition, Testimony of Joseph F.
Bodanza.
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
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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
Colonial, Boston Gas and Essex Gas is subject to effective regulation by the
applicable state authority.
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 of cash and shares of Eastern's voting common
stock, of the class that is publicly traded on the New York Stock Exchange, the
Pacific Exchange, and the Boston Stock Exchange. There will be no preferred or
senior securities involved. There will be no minority voting stock interest in
Colonial, Boston Gas or Essex Gas: all will be wholly-owned subsidiaries of
Eastern. As the Testimony of James D. Hempstead of Merrill Lynch, Pierce, Fenner
& Smith Incorporated in the DTE Petition explains, the transaction will be
earnings neutral to Eastern shareholders to the extent cost savings related to
merger synergies are retained. 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 Colonial.
Section 3(a)(1) of the Act is applicable to Eastern's continued exemption
from registration under the Act.
Item 4. Regulatory Approval
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The MDTE has jurisdiction over the proposed Merger and certain matters in
connection therewith. The fact that the MDTE has jurisdiction over Boston Gas,
Colonial and Essex Gas assures that the rates of all 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
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regulatory commission and no other federal commission (other than the
Commission) has jurisdiction over the proposed transactions.
Item 5. Procedure
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It is anticipated that the MDTE will issue a decision by mid-1999 on the
Merger. It is requested that the Commission take action with respect to this
Application/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, August 28, 1975 and September 30, 1998
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 (Incorporated
herein by reference to Exhibit A-1 to the Eastern Enterprises Form U-1
dated March 31, 1998 (File No. 070-09195)).
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 Restated Articles of Organization of Colonial, as amended
(Incorporated herein by reference to Exhibit 3(a) to Colonial's Annual
Report on Form 10-K for the year ended December 31, 1993 (File No.
0-10007)).
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A-5 By-laws of Colonial, as amended (Incorporated herein by reference to
Exhibit 3(b) to Colonial's Annual Report on Form 10-K for the year
ended December 31, 1996 (File No. 0-10007)).
A-6 Specimen copy of Common stock certificate of Colonial.
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-7
above).
A-11 By-laws of Surviving Corporation (See Exhibit A-8 above).
A-12 Specimen copy of Common Stock certificate of Surviving Corporation
(See Exhibit A-9).
B Merger Agreement (Incorporated by reference to Exhibit 1 to Colonial's
Current Report on Form 8-K dated October 21, 1998 (File No. 0-10007)).
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. 333-69039)
(including the Joint Proxy Statement to be distributed to shareholders
of Eastern and stockholders of Colonial in connection with the special
meetings to be held on February 10, 1999).
D-1 Eastern and Colonial Joint Petition for Approval of Merger filed with
the Massachusetts Department of Telecommunications and Energy on
December 24, 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 Colonial, Boston Gas and Essex Gas
(Incorporated by reference to Exhibit E to Eastern Enterprises
Form U-1 dated March 31, 1998 (File No. 070-09195)).
F Opinion of Counsel.
G Statement of Estimated Fees and Expenses.
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H Proposed Form of Notice.
I Subsidiaries.
*To be supplied by amendment.
(b) Financial Statements
1. Consolidated Balance Sheets of Eastern as of December 31, 1997
(Incorporated herein by reference to Eastern's Current Report on Form
8-K dated November 23, 1998 (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 Current Report on
Form 8-K dated November 23, 1998 (File No. 1-2297)).
3. Consolidated Balance Sheets, Statements of Income of Colonial, for the
years ended December 31, 1995 through 1997 and for the nine months
ended September 30, 1998 (Incorporated by reference to Colonial's
Annual Reports on Form 10-K for the fiscal years ended December 31,
1995, 1996 and 1997 and Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 (File No. 0-10007)).
4. Unaudited Pro Forma Combined Balance Sheet of Boston Gas Company,
Colonial Gas and Essex Gas Company as at September 30, 1998.
5. Unaudited Pro Forma Combined Statement of Earnings of Boston Gas
Company, Colonial Gas Company and Essex Gas Company for the fiscal
year ended September 30, 1998.
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 statement to be signed on its
behalf by the undersigned officer thereunto duly authorized.
EASTERN ENTERPRISES/1/
Date: January 28, 1999 By: /s/ Walter J. Flaherty
----------------- -------------------------
Walter J. Flaherty
Senior Vice President and Chief
Financial Officer
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/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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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information should be read
in conjunction with the historical consolidated financial statements, including
the notes thereto, of Eastern Enterprises, Boston Gas Company, Essex Gas Company
and Colonial Gas Company. The unaudited pro forma combined 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 Enterprises (Boston Gas and Essex Gas) and Colonial Gas. The unadjusted
pro forma combined financial information does not contain any adjustments to
reflect any cost savings or other synergies anticipated as a result of the
Merger. In the opinion of management, all adjustments necessary to present
fairly such pro forma financial information have been made.
Eastern Enterprises will account for the Merger under the purchase method of
accounting for business combinations. The pro forma impact of the related
purchase accounting has been pushed down to Colonial Gas in the accompanying pro
forma combined balance sheet and statement of earnings. Accordingly, Eastern
Enterprises' post-merger investment in Colonial Gas is reflected herein on a pro
forma basis as additional paid-in capital. This is subject to further review by
Eastern Enterprises' management and is not necessarily indicative of the post-
merger capital structure of Colonial Gas. The following unaudited pro forma
combined balance sheet presents the combined consolidated balance sheets of
Boston Gas and Colonial Gas as of September 30, 1998 and Essex Gas as of August
31, 1998 giving effect to the Merger as if it had been consummated on those
dates. The following unaudited pro forma combined statement of earnings presents
the combined consolidated statements of earnings of Boston Gas and Colonial Gas
for the twelve months ended September 30, 1998 and Essex Gas for the twelve
months ended August 31, 1998, respectively, giving effect to the Merger as if it
had been consummated at the beginning of those periods. If and when the Merger
is consummated, it is possible that other changes may be required to the
combined financial statements to implement the purchase method of accounting for
this combination.
Colonial Gas' financial information includes its wholly owned non-rate regulated
subsidiary Transgas Inc. reflected as an equity method investment. Third-party
revenues for Transgas for the twelve months ended September 30, 1998 were $2.7
million.
The unaudited pro forma combined financial information includes Eastern
Enterprises' unaudited consolidated balance sheet as of September 30, 1998 and
the unaudited consolidated statement of operations for the twelve months then
ended.
F-1
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UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
BOSTON GAS ESSEX COUNTY COLONIAL GAS
SEPTEMBER 30, AUGUST 31, SEPTEMBER 30,
1998 1998 1998 PRO FORMA PRO FORMA
(AS REPORTED) (AS RECLASSIFIED) (AS RECLASSIFIED) ADJUSTMENTS BALANCES (1)
------------- --------------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
GAS PLANT, AT COST $866,147 $111,413 $349,371 $ - $1,326,931
CONSTRUCTION WORK-IN-PROCESS 38,038 45 40,959 - 79,042
Less - accumulated depreciation 359,108 28,151 98,957 - 486,216
--------- --------- --------- ----------- -----------
Net plant 545,077 83,307 291,373 - 919,757
CURRENT ASSETS:
Cash and short-term investments 509 254 1,018 - 1,781
Accounts receivable, less reserves of:
Boston Gas -- $16,626
Essex Gas -- $559
Colonial Gas -- $2,452 41,210 1,791 5,273 - 48,274
Deferred gas costs 48,853 - 14,582 - 63,435
Natural gas and other inventories 40,092 4,179 12,888 - 57,159
Materials and supplies, at average cost 3,137 511 3,084 - 6,732
Prepaid expenses 2,150 2,307 11,723 - 16,180
--------- --------- --------- ----------- -----------
135,951 9,042 48,568 - 193,561
OTHER ASSETS:
Deferred postretirement benefits cost 79,907 - 3,455 - 83,362
Investment in Transgas Inc. - - 4,968 - 4,968
Deferred charges and other assets 44,974 4,241 32,188 216,817 (3) 298,220
--------- --------- --------- ----------- -----------
Total other assets 124,881 4,241 40,611 216,817 386,550
--------- --------- --------- ----------- -----------
Total assets $805,909 $96,590 $380,552 $ 216,817 $1,499,868
========= ========= ========= =========== ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CAPITALIZATION
Common stockholders' investment
Common stock, authorized;
Boston Gas -- 0.5 million
Essex Gas -- 5 million
Colonial Gas -- 15 million
Issued and outstanding;
Boston Gas -- 0.5 million $51,418 $ - $ - $ - (2) $ 51,418
Essex Gas -- 1.7 million - 21,805 - - (2) 21,805
Colonial Gas -- 8.8 million - - 29,455 - (2) 29,455
Amounts in excess of par value 43,233 - 61,162 216,817 (4) 321,212
Retained earnings 165,770 16,491 34,178 - (2) 216,439
--------- --------- --------- ----------- ----------
Total common stockholders' investment 260,421 38,296 124,795 216,817 640,329
Cumulative preferred stock, $1 par value,
(liquidation preference, $25 per share)
authorized and outstanding -- 1.2 million 29,351 - - - 29,351
Long-term obligations, less current portion 210,820 28,691 111,041 - 350,552
--------- --------- --------- ----------- -----------
Total capitalization 500,592 66,987 235,836 216,817 1,020,232
Gas inventory financing 39,192 4,057 - - 43,249
--------- --------- --------- ----------- -----------
Total capitalization and gas inventory financing 539,784 71,044 235,836 216,817 1,063,481
--------- --------- --------- ----------- -----------
CURRENT LIABILITIES:
Current portion of long-term obligations 547 734 639 - 1,920
Notes payable 6,300 6,825 63,160 - 76,285
Accounts payable 38,893 2,024 8,535 - 49,452
Accrued taxes 1,641 8 - - 1,649
Accrued income taxes 5,706 - - - 5,706
Accrued interest 8,572 820 2,055 - 11,447
Deferred income taxes - - 5,236 - 5,236
Customer deposits 2,178 428 808 - 3,414
Refunds due to customers 458 881 6 - 1,345
Other - 118 2,464 - 2,582
--------- --------- --------- ----------- -----------
Total current liabilities 64,295 11,838 82,903 - 159,036
--------- --------- --------- ----------- -----------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 77,229 9,625 50,762 - 137,616
Unamortized investment tax credits 5,294 1,071 3,138 - 9,503
Postretirement benefits obligation 81,584 - 4,507 - 86,091
Other 37,723 3,012 3,406 - 44,141
--------- --------- --------- ----------- -----------
Total reserves and deferred credits 201,830 13,708 61,813 - 277,351
--------- --------- --------- ----------- -----------
Total liabilities and stockholders' equity $805,909 $ 96,590 $380,552 $ 216,817 $1,499,868
========= ========= ========= =========== ===========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
F-2
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS TWELVE MONTHS TWELVE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1998 AUGUST 31, 1998 SEPTEMBER 30, 1998
BOSTON GAS ESSEX GAS COLONIAL GAS PRO FORMA PRO FORMA
(AS RECLASSIFIED) (AS RECLASSIFIED) (AS RECLASSIFIED) ADJUSTMENTS RESULTS (1)
--------------------- ------------------ ----------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 660,710 $50,821 $178,128 $ - $ 889,659
Cost of gas sold 360,818 24,155 94,611 - 479,584
---------- -------- --------- -------- ----------
Operating margin 299,892 26,666 83,517 - 410,075
Operating expenses:
Other operating expenses 139,161 12,615 33,959 - 185,735
Maintenance 22,459 780 4,556 - 27,795
Depreciation and amortization 45,918 3,753 13,064 5,420 (3c) 68,155
Income taxes 25,484 2,399 9,405 - (5) 37,288
Restructuring charge 8,692 - - - 8,692
---------- -------- --------- -------- ----------
Total operating expenses 241,714 19,547 60,984 5,420 327,665
---------- -------- --------- -------- ----------
Operating earnings 58,178 7,119 22,533 (5,420) 82,410
Equity in Transgas Inc. loss - - (178) - (178)
Other earnings, net 491 228 1,307 - 2,026
---------- -------- --------- -------- ----------
Earnings before interest expense 58,669 7,347 23,662 (5,420) 84,258
Interest expense:
Long-term debt 16,767 2,515 8,093 - 27,375
Other, including amortization of debt expense 1,526 587 528 - 2,641
Less - interest during construction (504) (27) - - (531)
---------- -------- --------- -------- ----------
Total interest expense 17,789 3,075 8,621 - 29,485
---------- -------- --------- -------- ----------
Net earnings 40,880 4,272 15,041 (5,420) 54,773
Preferred stock dividends 1,926 - - - 1,926
---------- -------- --------- -------- ----------
Net earnings applicable to common stock $ 38,954 $ 4,272 $ 15,041 (5,420) 52,847
========== ======== ========= ======== ==========
</TABLE>
See accompanying notes to Unaudited Pro Forma Combined Financial Information
F-3
<PAGE>
UNAUDITED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
EASTERN ENTERPRISES
SEPTEMBER 30,1998
(AS REPORTED)
-------------------
<S> <C>
ASSETS
Current assets:
Cash and short-term investments $ 167,501
Receivables, less reserves 63,675
Inventories 56,176
Deferred gas costs 48,853
Other current assets 9,247
------------
Total current assets 345,452
Property and equipment, at cost 1,699,539
Less--accumulated depreciation 735,068
------------
Net property and equipment 964,471
Other assets:
Deferred post-retirement health care costs 82,965
Investments 13,894
Deferred charges and other costs,
less amortization 69,205
------------
Total other assets 166,064
------------
Total assets $ 1,475,987
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt $ 18,488
Accounts payable 47,490
Accrued expenses 44,156
Other current liabilities 40,739
------------
Total current liabilities 150,873
Gas inventory financing 43,249
Long-term debt 387,311
Reserves and other liabilities:
Deferred income taxes 135,899
Post-retirement health care 96,710
Preferred stock of subsidiary 29,351
Other reserves 91,671
------------
Total reserves and other liabilities 353,631
Commitments and Contingencies
Shareholders' equity:
Common stock, $1.00 par value
Authorized shares - 50 million
Issued shares - 22.5 million 22,508
Capital in excess of par value 52,666
Retained earnings 467,795
Accumulated other comprehensive earnings (loss) (1,687)
Treasury stock at cost - .01 million shares (359)
------------
Total shareholders' equity 540,923
------------
Total liabilities and shareholders' equity $ 1,475,987
============
</TABLE>
F-4
<PAGE>
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDED
SEPETMEBER 30,1998
EASTERN ENTERPRISES
(AS RECLASSIFIED)
----------------------------
<S> <C>
REVENUES $ 973,396
Operating costs and expenses:
Operating costs 664,700
Selling, general & administrative expenses 126,740
Depreciation & amortization 73,501
-----------
864,941
-----------
Operating earnings 108,455
Other income (expense):
Interest Income 7,919
Interest Expense (34,092)
Equity in loss of AllEnergy 1,225
Other, net 4,063
-----------
Earnings before income taxes 87,570
Provision for income taxes 31,040
-----------
Earnings before extraordinary items 56,530
Extraordinary items, net of tax:
Credit for coal miners retiree health care 48,425
Loss on early extinguishment of debt (1,465)
===========
Net earnings $ 103,490
===========
</TABLE>
F-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(1) BOSTON GAS, ESSEX GAS AND COLONIAL GAS HISTORICAL FISCAL YEARS AND
ACCOUNTING POLICIES
Boston Gas' and Colonial Gas' historical fiscal years end on December 31 while
Essex Gas' historical fiscal year ends on August 31. For purposes of combining
Essex Gas' historical financial information with that of Boston Gas and Colonial
Gas in the pro forma combined statement of earnings herein, the financial
information of Boston Gas and Colonial Gas for the twelve months ended September
30, 1998 have been combined with Essex Gas' financial information for the twelve
months ended August 31, 1998. For purposes of combining balance sheets, the
financial information of Boston Gas and Colonial Gas as of September 30, 1998
are combined with Essex Gas as of August 31, 1998.
Certain amounts in the historical financial statements of Essex Gas
and Colonial Gas have been reclassified to present consistent pro forma
financial information. There were no material intercompany transactions between
Colonial Gas and Eastern Enterprises (Boston Gas and Essex Gas) during the
period presented.
(2) COMMON STOCKHOLDERS' INVESTMENT
The common stock and paid-in capital amounts of Boston Gas, Essex Gas and
Colonial Gas have not been restated for the Merger, as provided for in the
Merger Agreement, due to the fact that Colonial Gas common stock is being
exchanged for either Eastern Enterprises common stock or cash, with the total
amount of cash consideration fixed at $150 million, not Boston Gas or Essex Gas
common stock. See notes (4) and (6) for discussion of merger considerations and
the exchange ratio, respectively, as they relate to common stockholders'
investment.
(3) PURCHASE PRICE ALLOCATION
The fair value of the consideration exchanged to acquire Colonial Gas common
stock will be determined at the closing date and will be allocated to the assets
and liabilities of Colonial Gas based on their estimated fair value. A
preliminary allocation of the purchase price has been presented in the unaudited
pro forma combined financial information in which the fair value of the
identifiable net tangible assets of Colonial Gas is assumed to equal the net
book value of such assets. The excess of consideration over the fair value of
the identifiable net tangible assets has been preliminarily allocated to
goodwill as follows (in thousands, except price per share):
<TABLE>
<CAPTION>
<S> <C>
Shares of Colonial Gas common stock on December 22, 1998 8,910
Consideration per Colonial Gas share (a) $37.50
--------
Consideration exchanged for Colonial Gas common stock $334,112
Plus: Estimated transaction costs (b) 7,500
--------
Total estimated purchase price 342,612
Less: Estimated fair value of Colonial Gas' identifiable
net assets (net book value) on September 30, 1998 124,795
--------
Total estimated goodwill due to merger $216,817
========
</TABLE>
(a) The estimated consideration and purchase price allocation used for pro
forma purposes are based on a value of $37.50 per share of Colonial Gas
common stock.
(b) Transaction costs primarily include investment banking fees and other
professional fees and are only an estimate as the Merger has not been
consummated.
F-6
<PAGE>
(c) A pro forma adjustment has been made for the twelve months ended
September 30, 1998 to reflect the push down of the incremental
amortization expense on the goodwill created by the Merger. Goodwill is
amortized over a 40-year life.
(4) MERGER CONSIDERATION
The Merger consideration consists of $150 million in cash and the balance in
Eastern Enterprises common stock. Four million shares of Colonial Gas common
stock will be exchanged for cash consideration in an amount equal to $37.50 per
share. Shares of Colonial Gas common stock which are not exchanged for cash
consideration will be converted into a number of shares of Eastern Enterprises
common stock based on the exchange ratio to be determined in the manner
described in note 6 below. Based on the average closing price of Eastern
Enterprises common stock on the New York Stock Exchange for the ten trading day
period (which is the period used to calculate the exchange ratio under the
Merger agreement - as discussed in note 6 below) ended on December 17, 1998
which was $41.56, Eastern Enterprises would issue 4.430 million shares in the
transaction (based on the number of shares of Colonial Gas common stock
outstanding December 22, 1998). Eastern Enterprises will account for the Merger
under the purchase method of accounting for business combinations. The pro forma
impact of the related purchase accounting has been pushed down to Colonial Gas
in the accompanying pro forma combined balance sheet and statement of earnings.
Accordingly, Eastern Enterprises' post-merger investment in Colonial Gas is
reflected herein on a pro forma basis as additional paid-in capital. This is
subject to further review by Eastern Enterprises' management and is not
necessarily indicative of the post-merger capital structure of Colonial Gas.
(5) INCOME TAXES
No pro forma adjustment has been made for the twelve months ended September 30,
1998 because goodwill created by the Merger is nondeductible for tax purposes.
(6) EXCHANGE RATIO
As provided for in the Merger Agreement, Colonial Gas shareholders will be
permitted to elect either Eastern Enterprises common stock or cash, with the
total amount of cash consideration fixed at $150 million. Shareholder elections
will be prorated to the extent necessary to maintain this mix of consideration.
Under the Merger Agreement's collar mechanism, if Eastern Enterprises' average
closing price per share for the ten trading day period ending on the third
trading day prior to the Merger's effective date is either higher than $47.80 or
lower than $37.56, the portion of the purchase price payable in Eastern
Enterprises shares would be determined based upon a fixed exchange ratio
calculated at such prices. Based upon the average closing price per share of
Eastern Enterprises common stock on the New York Stock Exchange for the ten
trading day period ended on December 17, 1998 (which is calculated as if the
Merger's effective date was December 22, 1998) of $41.56, the fixed exchange
ratio would be 0.902 shares of Eastern Enterprises common stock for each share
of Colonial Gas common stock (other than shares of Colonial Gas common stock to
be exchanged for an aggregate $150 million of cash consideration in the Merger)
and Eastern Enterprises would issue approximately 4.430 million shares in this
transaction based on the number of shares of Colonial Gas common stock
outstanding as of December 22, 1998. 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.
F-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- --------------------------------------
<C> <S> <C>
A-1 Specimen copy of Common Share Incorporated by
certificate of Eastern Reference
A-2 Declaration of Trust of Eastern, dated Incorporated by
as of July 18, 1929, as amended Reference
A-3 By-laws of Eastern Incorporated by
Reference
A-4 Articles of Organization of Colonial Incorporated by
Reference
A-5 By-laws of Colonial Incorporated by
Reference
A-6 Specimen copy of Common Stock
certificate of Colonial
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-7)
A-11 By-laws of Surviving Corporation
(See Exhibit A-8)
A-12 Specimen copy of Common Stock
certificate of Surviving Corporation
(See Exhibit A-9)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ------------- --------------------------------------
<C> <S> <C>
B Merger Agreement Incorporated
by Reference
C Registration Statement on Incorporated
Form S-4, including all financial by Reference
statements and exhibits thereto,
with reference to Common Shares
of Eastern
D-1 Eastern and Colonial 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 Incorporated
Colonial, Boston Gas and Essex by Reference
Gas
F Opinion of Counsel
G Statement of Estimated Fees and
Expenses
H Proposed Form of Notice
I Subsidiaries
</TABLE>
* To be supplied by amendment.
<TABLE>
<CAPTION>
Financial
Statement
No. Description
- --------- -------------------------------------------
<C> <S> <C>
1. Consolidated Balance Sheets of Eastern Incorporated
as of December 31, 1997 by Reference
2. Consolidated Statements of Operations Incorporated
and Shareholders' Equity of Eastern by Reference
for the twelve months ended December
31, 1997 on an actual basis
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial
Statement
No. Description
- --------- -------------------------------------------
<C> <S>
3. Consolidated Balance Sheets, Statements Incorporated
of Income of Colonial, for the years by Reference
ended December 31, 1995 through 1997
and for the nine months ended
September 30, 1998
4. Unaudited Pro Forma Combined Balance
Sheet of Boston Gas Company, Colonial Gas
Company and Essex Gas Company as at
September 30, 1998.
5. Unaudited Pro Forma Combined Statement
of Earnings of Boston Gas Company,
Colonial Gas Company and Essex Gas
Company for the Fiscal year ended
September 30, 1998.
</TABLE>
<PAGE>
NUMBER SHARES
CG 30156
COLONIAL GAS COMPANY
INCORPORATED UNDER THE LAWS OF
THE COMMONWEALTH OF MASSACHUSETTS CUSIP 195674 10 6
Certificate for Shares of
Common Stock, $3.33 Par Value
THIS CERTIFICATE
IS TRANSFERABLE SEE REVERSE FOR
IN BOSTON AND CERTAIN DEFINITIONS
NEW YORK
THIS CERTIFIES that
SPECIMEN
is the owner of
FULLY PAID AND NONASSESSABLE SHARES, $3.33 PAR VALUE, OF THE COMMON STOCK OF
Colonial Gas Company, transferable, so as to affect the rights of the Company,
only by transfer recorded on the books of the Company, in person or by duly
authorized attorney, and upon surrender of this certificate properly endorsed or
assigned. This certificate and the shares represented hereby are received and
held subject to the laws of The Commonwealth of Massachusetts, and to the
Articles of Organization, and the By-Laws, of the Company, all as from time to
time amended, and the owner of this certificate by accepting the same expressly
assents thereto. This certificate is not valid until countersigned by the
Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of Colonial Gas Company and the facsimile
signatures of its duly authorized officers.
C E R T I F I C A T E O F S T O C K
DATED:
COLONIAL GAS COMPANY
/s/ Dennis W. Carroll INCORPORATED /s/ Frederic L. Putnam, III
TREASURER 1849 PRESIDENT AND CHIEF
EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE.
<PAGE>
COLONIAL GAS COMPANY
In addition to its Common Stock, $3.33 par value, the Company has an
authorized class of (i) Class A Preferred Stock, $25.00 par value, and (ii)
Class B Preferred Stock, $1.00 par value, issuable in series by the Board of
Directors. The Company will furnish without charge to each stockholder who so
requests the powers, 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 rights.
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,__________________________________
____________________________________________
Signature(s) Guaranteed:
________________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
This certificate also evidences and entitles the holder hereof to certain
Rights as set forth in the Rights Agreement between Colonial Gas Company (the
"Company") and The First National Bank of Boston (the "Rights Agent") dated as
of December 1, 1993 (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 Company. 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
holder of this certificate a copy of the Rights Agreement, as in effect on the
date of mailing, 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 or
any Affiliate or Associate thereof (as such terms are defined in the Rights
Agreement), whether currently held by or on behalf of such Person or by any
subsequent holder, may become null and void.
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alternation or enlargement, or any change whatever.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
Examiner WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 164)
Name
Approved
ARTICLE I
The exact name of the corporation is:
CG Acquisition Gas Company
ARTICLE II
The purpose of the corporation is to engage in the following
business activities:
See attached Continuation Sheet 2.
C [_]
P [_]
M [_]
R.A.[_]
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on one side only of
separate 8 1/2 x 11 sheets of paper with a left margin of at least 1
inch. Additions to more than one article may be made on a single sheet
P.C. so long as each article requiring each addition is clearly indicated.
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- --------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 200,000 $1.00
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Preferred: Preferred:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
N/A
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None.
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See attached Continuation Sheets 6A, 6B and 6C.
**If there are no provisions state "None".
Note: The preceding six (6) articles are considered to be permanent and may ONLY
be changed by filing appropriate Articles of Amendment.
<PAGE>
ARTICLE VII
The effective date of organization of the corporation shall be the date approved
and filed by the Secretary of the Commonwealth. If a later effective date is
desired, specify such date which shall not be more than thirty days after the
date of filing.
N/A
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachsetts is:
c/o Boston Gas Company, One Beacon Street, Boston, MA 02108
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
President:
Treasurer:
Clerk: See attached Continuation Sheet 8b.
Directors:
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month of December.
d. The name and business address of the resident agent, if any, of the
corporation is: N/A
e. The date fixed by the by-laws for the annual meeting of stockholders is:
2nd Thursday in March unless otherwise determined by the Board of
Directors.
ARTICLE IX
By-laws of the corporation have been duly adopted and the president, treasurer,
clerk and directors whose names are set forth above, have been duly elected.
IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I/we, whose
signature(s) appear below as incorporator(s) and whose name(s) and business or
residential address(es) are clearly typed or printed beneath each signature do
hereby associate with the intention of forming this corporation under the
provisions of General Laws, Chapter 164 and do hereby sign these Articles of
Organization as incorporator(s) this ______day of _____________, 19_____,
________________________________________________________________________________
L. William Law, Jr., Esq
- --------------------------------------------------------------------------------
c/o Eastern Enterprises
9 Riverside Road
- --------------------------------------------------------------------------------
Weston, MA 02493
- --------------------------------------------------------------------------------
Note: If an existing corporation is acting as incorporator, type in the exact
name of the corporation, the state or other jurisdiction where it was
incorporated, the name of the person signing on behalf of said corporation and
the title he/she holds or other authority by which such action is taken.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF ORGANIZATION
(GENERAL LAWS, CHAPTER 164)
=================================================
I hereby certify that, upon examination of these
Articles of Organization, duly submitted to me,
it appears that the provisions of the General
Laws relative to the organization of
corporations have been complied with, and I
hereby approve said articles; and the filing fee
in the amount of $ ______ having been paid, said
articles are deemed to have been filed with me
this ______ day of ____________ 19 ______.
Effective date: ________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
FILING FEE: One Tenth of one percent of the
total authorized capital stock, but not less
than $200.00. For the purpose of filing, shares
of stock with a par value less than $1.00, or no
par stock, shall be deemed to have a par value
of $1.00 per share.
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
W. Brett Davis, Esq.
-------------------------------------------------
c/o Eastern Enterprises
9 Riverside Road
-------------------------------------------------
Weston, MA 02493
-------------------------------------------------
Telephone: (781) 647-2300
---------------------------------------
<PAGE>
CONTINUATION SHEET 2
--------------------
To engage in business as a gas utility company in any city or town of the
Commonwealth of Massachusetts; to exercise any and all rights, powers, licenses,
permits, privileges, authorizations and franchises at any time possessed by the
corporation or by any predecessor or constituent corporation; to engage in any
activity in any way connected with, incident to or in furtherance of the
foregoing activities; to engage in any other activity lawful for a corporation
subject to Chapter 164 of the Massachusetts General Laws; to engage in any
business, operation or activity through a wholly or partly owned subsidiary; and
to engage in any business, operation or activity referred to above to the same
extent as might an individual, whether as principal, agent, contractor or
otherwise, and either alone or in conjunction or a joint venture or other
arrangement with any corporation, association, trust, firm or individual.
<PAGE>
CONTINUATION SHEET 6A
---------------------
BY-LAWS
-------
The directors may make, amend or repeal the by-laws in whole or in part, except
with respect to any provision thereof which by law or the by-laws requires
action by the stockholders.
STOCKHOLDERS MEETINGS
---------------------
Meetings of the stockholders may be held anywhere in the United States.
RELIANCE UPON BOOKS OF ACCOUNT, ETC.
------------------------------------
Each director and officer of the corporation shall, in the performance of his
duties, be fully protected in relying in good faith upon the books of account of
the corporation, reports made to the corporation by any of its officers or
employees or by counsel, accountants, appraisers or other experts or
consultants selected with reasonable care by the directors, or upon other
records of the corporation.
CERTAIN TRANSACTIONS
--------------------
The directors shall have the power to fix from time to time their compensation.
No person shall be disqualified from holding any office by reason of any
interest. In the absence of fraud, any director, officer or stockholder of this
corporation individually, or any individual having any interest in any concern
which is a stockholder of this corporation, or any concern in which any such
directors, officers, stockholders or individuals have any interest, may be a
party to, or may be pecuniarily or otherwise interested in, any contract,
transaction or other act of this corporation, and
(1) such contract, transactions or act shall not be in any way invalidated
or otherwise affected by that fact;
(2) no such director, officer, stockholder or individual shall be liable
to account to this corporation for any profit or benefit realized
through any such contract, transaction or act; and
(3) any such director of this corporation may be counted in determining
the existence of a quorum at any meeting of the directors or of any
committee thereof which shall authorize any such contract, transaction
or act, and may vote to authorize the same;
<PAGE>
CONTINUATION SHEET 6B
---------------------
provided, however, that any contract, transaction or act in which any director
or officer of this corporation is so interested individually or as a director,
officer, trustee or member of any concern which is not a subsidiary or affiliate
of this corporation, or in which any directors or officers are so interested as
holders, collectively, of a majority of shares of capital stock or other
beneficial interest at the time outstanding in any concern which is not a
subsidiary or affiliate of this corporation, shall be duly authorized or
ratified by a majority of the directors who are not so interested and to whom
the nature of such interest has been disclosed;
the term "interest" including personal interest and interest as a
director, officer, stockholder, shareholder, trustee, member or
beneficiary of any concern;
the term "concern" meaning any corporation, association, trust,
partnership, firm, person or other entity other than this corporation;
and
the phrase "subsidiary or affiliate" meaning a concern in which a
majority of the directors, trustees, partners or controlling persons
are elected or appointed by the directors of this corporation, or are
constituted of the directors or officers of this corporation.
To the extent permitted by law, the authorizing or ratifying vote of a majority
in interest of each class of the capital stock of this corporation outstanding
and entitled to vote for directors at any annual meeting or a special meeting
duly called for the purpose (whether such vote is passed before or after
judgment rendered in a suit with respect to such contract, transaction or act)
shall validate any contract, transaction or act of this corporation, or of the
board of directors or any committee thereof, with regard to all stockholders of
this corporation, whether or not of record at the time of such vote, and with
regard to all creditors and other claimants under this corporation;
provided, however, that with respect to the authorization or
ratification of contracts, transactions or acts in which any of the
directors, officers or stockholders of this corporation have an
interest, the nature of such contracts, transactions or acts and the
interest of any director, officer or stockholder therein shall be
summarized in the notice of any such annual or special meeting, or in
a statement or letter accompanying such notice, and shall be fully
disclosed at any such meeting;
provided, also, that stockholders so interested may vote at any such
meeting; and
<PAGE>
CONTINUATION SHEET 6C
---------------------
provided, further, that any failure of the stockholders to authorize or ratify
such contract, transaction or act not be deemed in any way to invalidate the
same or to deprive this corporation, its directors, officers or employees of its
or their right to proceed with such contract, transaction or act.
No contract, transaction or act shall be avoided by reason of any provision of
this paragraph which would be valid but for those provisions.
PARTNERSHIP
-----------
The corporation may be a partner in any business enterprise which the
corporation would have power to conduct by itself.
<PAGE>
CONTINUATION SHEET 8b
---------------------
CG ACQUISITION GAS COMPANY
OFFICERS & DIRECTORS
--------------------
Name Resident Address Post Office Address
---- ---------------- -------------------
President Walter J. Flaherty 76 Old Post Road Eastern Enterprises
East Walpole, MA 02032 9 Riverside Road
Weston, MA 02493
Treasurer Jean A. Scholtens 2 Rice Spring Lane Eastern Enterprises
Wayland, MA 01778 9 Riverside Road
Weston, MA 02493
Clerk L. William Law, Jr. 75 Bacon Street Eastern Enterprises
Winchester, MA 01890 9 Riverside Road
Weston, MA 02493
Assistant W. Brett Davis 6 Wellington Street Eastern Enterprises
Clerk Boston, MA 02118 9 Riverside Road
Weston, MA 02493
Director Walter J. Flaherty 76 Old Post Road Eastern Enterprises
East Walpole, MA 02032 9 Riverside Road
Weston, MA 02493
<PAGE>
BY-LAWS
of
CG Acquisition Gas Company
Section 1. ARTICLES OF ORGANIZATION
The name and purposes of the corporation shall be as set forth in the
Articles of Organization, as amended and restated from time to time. These By-
laws, the powers of the corporation and of its directors and stockholders, or of
any class of stockholders if the corporation has more than one class of stock,
and all matters concerning the conduct and regulation of the business and
affairs of the corporation shall be subject to such provisions in regard
thereto, if any, as are set forth in the Articles of Organization as from time
to time in effect.
Section 2. STOCKHOLDERS
2.1. Annual Meeting. The annual meeting of stockholders shall be held at
--------------
ten o' clock in the forenoon on the second Thursday in March in each year
(unless that day be a legal holiday at the place where the meeting is to be
held, in which case the meeting shall be held at the same hour on the next
succeeding day not a legal holiday) or at such other date and time as shall be
determined from time to time by the board of directors. Purposes for which an
annual meeting is to be held, in addition to those prescribed by law, by the
Articles of Organization or by these By-laws, may be specified by the president
or by the directors.
No change in the date fixed in these By-laws for the annual meeting shall
be made within sixty days before the date stated herein. Notice of any change in
the date fixed in these By-laws for the annual meeting shall be given to all
stockholders at least twenty days before the new date fixed for such meeting.
2.2. Special Meeting in Place of Annual Meeting. If no annual meeting has
------------------------------------------
been held in accordance with the foregoing provisions, a special meeting of the
stockholders may be held in place thereof, and any action taken at such special
meeting shall have the same force and effect as if taken at the annual meeting,
and in such case all references in these By-laws to the annual meeting of the
stockholders shall be deemed to refer to such special meeting. Any such meeting
shall be called as provided in Section 2.3.
2.3. Special Meetings. A special meeting of the stockholders may be called
----------------
at any time by the president or by the directors. Each call of a meeting shall
state the place, date, hour and purposes of the meeting.
<PAGE>
2.4. Place of Meetings. All meetings of the stockholders shall be held at
-----------------
the principal office of the corporation in Massachusetts or, to the extent
permitted by the Articles of Organization, at such other place within the United
States as shall be fixed by the president or the directors. Any adjourned
session of any meeting of the stockholders shall be held at the same city or
town as the initial session, or at any other place at which meetings of the
stockholders may be held under the Articles of Organization and these By-laws,
in either case at the place designated in the vote of adjournment.
2.5. Notice of Meetings. A written notice of each meeting of stockholders,
------------------
stating the place, date and hour and the purposes of the meeting, shall be given
at least seven days before the meeting to each stockholder entitled to vote at
such meeting and to each stockholder who, by law, by the Articles of
Organization or by these By-laws, is entitled to notice, by leaving such notice
with such stockholder or at such stockholder's residence or usual place of
business, or by mailing it, postage prepaid, addressed to such stockholder at
such stockholder's address as it appears in the records of the corporation. Such
notice shall be given by the clerk or an assistant clerk or by an officer
designated by the directors. Whenever notice of a meeting is required to be
given to a stockholder under any provision of the Business Corporation Law of
The Commonwealth of Massachusetts or of the Articles of Organization or these
By-laws, a written waiver thereof, executed before or after the meeting by such
stockholder or such stockholder's attorney thereunto authorized and filed with
the records of the meeting, shall be deemed equivalent to such notice.
2.6. Quorum of Stockholders. At any meeting of the stockholders, a quorum
----------------------
as to any matter shall consist of a majority in interest of all stock issued and
outstanding and entitled to vote at the meeting; except that if two or more
classes or series of stock are entitled to vote as separate classes or series,
then in the case of each such class or series a quorum shall consists of a
majority in interest of all stock of that class or series issued and
outstanding; and except when a larger quorum is required by law, by the Articles
of Organization or by these By-laws. Stock owned directly or indirectly by the
corporation, if any, shall not be deemed outstanding for this purpose. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, whether or not a quorum is present, and the meeting may
be held as adjourned without further notice.
2.7. Action by Vote. When a quorum is present at any meeting, a plurality
--------------
of the votes properly cast for election to any office shall elect to such
office, and a majority of the votes properly cast upon any question other than
an election to an office shall decide the question, except when a larger vote is
required by law, by the Articles of Organization or by these By-laws. No ballot
shall be required for any election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.
2.8. Voting. Stockholders entitled to vote shall have one vote for each
------
share of stock entitled to vote held by them of record according to the records
of the corporation, unless otherwise provided by the Articles of Organization.
The corporation shall not, directly or indirectly, vote any share of its own
stock.
-2-
<PAGE>
2.9. Action by Writing. Any action required or permitted to be taken at
-----------------
any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of
stockholders. Such consents shall be treated for all purposes as a vote at a
meeting.
2.10. Proxies. To the extent permitted by law, stockholders entitled to
-------
vote may vote either in person or by proxy in writing, which proxies shall be
filed with the clerk or other person responsible to record the proceedings of
the meeting before being voted. Except to the extent permitted by law, no proxy
dated more than six months before the meeting named therein shall be valid.
Unless otherwise specifically limited by their terms, such proxies shall entitle
the holders of the proxies to vote at any adjournment of such meeting but shall
not be valid after the final adjournment of such meeting.
Section 3. BOARD OF DIRECTORS
3.1. Number. A board of not less than three directors shall be elected at
------
the annual meeting of the stockholders by such stockholders as have the right to
vote at such elections; provided, however, that the number of directors shall be
fixed at not less than two whenever the corporation shall have only two
stockholders and not less than one whenever the corporation shall have only one
stockholder. The number of directors may be increased at any time or from time
to time either by the stockholders or by the directors by vote of a majority of
the directors then in office. No director need be a stockholder.
3.2. Tenure. Except as otherwise provided by law, by the Articles of
------
Organization or by these By-laws, each director shall hold office until the next
annual meeting of the stockholders and until such director's successor is duly
elected and qualified, or until such director sooner dies, resigns, is removed
or becomes disqualified.
3.3. Powers. Except as reserved to the stockholders by law, by the
------
Articles of Organization or by these By-laws, the business of the corporation
shall be managed by the directors, who shall have and may exercise all the
powers of the corporation. In particular, and without limiting the generality of
the foregoing, the directors may at any time issue all or from time to time any
part of the unissued capital stock of the corporation from time to time
authorized under the Articles of Organization and may determine, subject to any
requirements of law, the consideration for which stock is to be issued and the
manner of allocating such consideration between capital and surplus.
3.4. Committees. The directors may, by vote of a majority of the directors
----------
then in office, elect from their number an executive committee and other
committees and may by vote delegate to any such committee or committees some or
all of the powers of the directors except those which by law, by the Articles of
Organization or by these By-laws they are prohibited from delegating. Except as
the directors may otherwise determine, any such committee may
-3-
<PAGE>
make rules for the conduct of its business, but unless otherwise provided by the
directors or such rules, its business shall be conducted in substantially the
same manner as is provided by these By-laws for the conduct of business by the
directors.
3.5. Regular Meetings. Regular meetings of the directors may be held
----------------
without call or notice at such places and at such times as the directors may
from time to time determine, provided that reasonable notice of the first
regular meeting following any such determination shall be given to absent
directors. A regular meeting of the directors may be held without call or notice
immediately after and at the same place as the annual meeting of the
stockholders.
3.6. Special Meetings. Special meetings of the directors may be held at
----------------
any time and at any place designated in the call of the meeting, when called by
the chairman of the board, if any, or the president or the treasurer or by two
or more directors, reasonable notice thereof being given to each director by the
clerk or an assistant clerk, or by the officer or one of the directors calling
the meeting.
3.7. Notice. Notice to a director shall be sufficient if sent to such
------
director by mail at least forty-eight hours or by telegram or telecopy at least
twenty-four hours before the meeting at such director's usual or last known
business or residence address, or if given to such director in person or by
telephone at least twenty-four hours before the meeting. Notice of a meeting
need not be given to any director if a written waiver of notice, executed by
such director before or after the meeting, is filed with the records of the
meeting, or to any director who attends the meeting without protesting the lack
of notice prior to the meeting or at its commencement. Neither notice of a
meeting nor a waiver of a notice need specify the purposes of the meeting.
3.8. Quorum. At any meeting if the directors a majority of the directors
------
then in office shall constitute a quorum. Any meeting may be adjourned from time
to time by a majority of the votes cast upon the question, whether or not a
quorum is present, and the meeting may be held as adjourned without further
notice.
3.9. Meeting by Conference Telephone. Unless otherwise provided by law or
-------------------------------
the Articles of Organization, members of the board of directors or any of any
committee designated thereby may participate in any meeting of such board or
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other
at the same time and participation by such means shall constitute presence in
person at a meeting.
3.10. Action by Vote. When a quorum is present at any meeting, a majority
--------------
of the directors present may take any action, except when a larger vote is
required by law, by the Articles of Organization or by these By-laws.
3.11. Action by Writing. Unless the Articles of Organization otherwise
-----------------
provide, any action required or permitted to be taken at any meeting of the
directors may be taken without a
-4-
<PAGE>
meeting if all the directors consent to the action in writing and the written
consents are filed with the records of the meetings of the directors. Such
consents shall be treated for all purposes as a vote taken at a meeting.
Section 4. OFFICERS AND AGENTS
4.1. Enumeration; Qualification. The officers of the corporation shall be
--------------------------
a president, a treasurer, a clerk and such other officers, if any, as the
incorporator or incorporators at their initial meeting, or the directors from
time to time, may in their discretion elect or appoint. The corporation may also
have such agents, if any, as the incorporator or incorporators at their initial
meeting, or the directors from time to time, may in their discretion appoint.
Any officer may be, but none need be, a director or stockholder. The clerk shall
be a resident of Massachusetts unless the corporation has a resident agent
appointed for the purpose of service of process. Any two or more offices may be
held by the same person. Any officer may be required by the directors to give
bond for the faithful performance of such officer's duties to the corporation in
such amount and with such sureties as the directors may determine.
4.2. Powers. Subject to law, to the Articles of Organization and to the
------
other provisions of these By-laws, each officer shall have, in addition to the
duties and powers herein set forth, such duties and powers as are commonly
incident to such officer's office and such duties and powers as the directors
may from time to time designate.
4.3. Election. The president, the treasurer and the clerk shall be elected
--------
annually by the directors at their first meeting following the annual meeting of
the stockholders. Other officers, if any, may be elected or appointed by the
board of directors at such meeting or at any other time.
4.4. Tenure. Except as otherwise provided by law or by the Articles of
------
Organization or by these By-laws, the president, the treasurer and the clerk
shall hold office until the first meeting of the directors following the next
annual meeting of the stockholders and until their respective successors are
chosen and qualified, and each other officer shall hold office until the first
meeting of the directors following the next annual meeting of the stockholders
unless a shorter period shall have been specified by the terms of such officer's
election or appointment, or in each case until such officer sooner dies,
resigns, is removed or becomes disqualified. Each agent shall retain authority
at the pleasure of the directors.
4.5. Chairman of the Board. The chairman of the board, if any, shall have
---------------------
the duties and powers specified in these By-laws and shall have such other
duties and powers as may be determined by the directors. Unless the board of
directors otherwise specifies, the chairman of the board shall preside, or
designate the person who shall preside, at all meetings of the stockholders and
of the board of directors.
4.6. President and Vice Presidents. The president shall be the chief
-----------------------------
executive officer of the corporation and shall, subject to the control of the
directors, have general charge and
-5-
<PAGE>
supervision of the business of the corporation. Unless the board of directors
otherwise specifies, the president shall preside, or designate the person who
shall preside, at all meetings of the stockholders and of the board of
directors.
Any vice presidents shall have such duties and powers as shall be
designated from time to time by the directors.
4.7 Treasurer and Assistant Treasurers. Except as the directors shall
----------------------------------
otherwise determine, the treasurer shall be the chief financial and accounting
officer of the corporation and shall have such other duties and powers as may be
designated from time to time by the directors or by the president.
Any assistant treasurers shall have such duties and powers as shall be
designated from time to time by the directors.
4.8 Clerk and Assistant Clerks. The clerk shall record all proceedings
--------------------------
of the stockholders and directors in a book or series of books to be kept
therefor, which book or books shall be kept at the principal office of the
corporation or at such other office permitted by law and shall be open at all
reasonable times to the inspection of any stockholder. In the absence of the
clerk from any meeting of stockholders or directors, an assistant clerk, or in
the absence of an assistant clerk, a temporary clerk chosen at the meeting,
shall record the proceedings thereof in the aforesaid book. Unless a transfer
agent has been appointed, the clerk shall keep or cause to be kept the stock and
transfer records of the corporation, which shall contain the names and record
addresses of all stockholders and the amount of stock held by each.
Any assistant clerks shall have such other duties and powers as shall be
designated from time to time by the directors.
Section 5. RESIGNATIONS AND REMOVALS
Any director or officer may resign at any time by delivering a resignation
in writing to the chairman of the board, if any, the president, the treasurer or
the clerk or to a meeting of the directors. Such resignation shall be effective
upon receipt unless specified to be effective at some other time. A director or
officer elected by the stockholders (including persons elected by directors to
fill vacancies in the board) may be removed from office (a) with or without
cause by the vote of the holders of a majority of the shares issued and
outstanding and entitled to vote in the election of such directors, provided
that the directors of a class elected by a particular class of stockholders may
be removed only by the vote of the holders of a majority of the shares of such
class, or (b) with cause by the vote of a majority of the directors then in
office. The directors may remove any officer elected by them with or without
cause by the vote of a majority of the directors then in office. A director or
officer may be removed for cause only after reasonable notice and opportunity to
be heard before the body proposing removal. No director or officer resigning,
and (except where a right to receive compensation
-6-
<PAGE>
shall be expressly provided in a duly authorized written agreement with the
corporation) no director or officer removed, shall have any right to any
compensation as such director or officer for any period following his
resignation or removal, or any right to damages on account of such removal,
whether his compensation be by the month or the year or otherwise; unless in the
case of a resignation, the directors, or in the case of a removal, the body
acting on the removal, shall in their or its discretion provide for
compensation.
Section 6. VACANCIES
Any vacancy in any office or in the board of directors, however occurring,
including a vacancy resulting from the enlargement of the board, may be filled
by vote of the stockholders or, in the absence of stockholder action, by the
directors by vote of a majority of the directors then in office. Each such
successor chosen to fill a vacancy shall hold office for the unexpired term and,
in the case of any director, the president, treasurer and clerk, until such
officer's successor is chosen and qualified, or in each case until such officer
sooner dies, resigns, is removed or becomes disqualified. The directors shall
have and may exercise all their powers notwithstanding the existence of one or
more vacancies in their number.
Section 7. CAPITAL STOCK
7.1. Number and Par Value. The total number of shares and the par value, if
--------------------
any, of each class of stock which the corporation is authorized to issue shall
be as stated in the Articles of Organization.
7.2. Stock Certificates. Each stockholder shall be entitled to a
------------------
certificate stating the number and the class and the designation of the series,
if any, of the shares held by such stockholder, in such form as shall, in
conformity to law, be prescribed from time to time by the directors. Such
certificates shall be signed by the chairman of the board, if any, the president
or a vice president and by the treasurer or an assistant treasurer. Such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to hold such office before
such certificate is issued, it may be issued by the corporation with the same
effect as if such officer still held such office at the time of its issue. The
stock and transfer records shall be kept at the corporation's principal office
or in such other office permitted by law.
7.3. Loss of Certificates. In the case of the alleged loss, destruction or
--------------------
mutilation of a certificate of stock, a duplicate certificate may be issued in
place thereof, upon such terms as the directors may prescribe.
-7-
<PAGE>
Section 8. TRANSFER OF SHARES OF STOCK
8.1. Transfer on Books. The board of directors may make such rules and
-----------------
regulations not inconsistent with law, the Articles of Organization or these
By-laws as it deems expedient relative to the issue, transfer and registration
of stock certificates. Except as may be otherwise required by law, by the
Articles of Organization or by these By-laws, the corporation shall be entitled
to treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to
receive notice and to vote with respect thereto, regardless of any transfer,
pledge or other disposition of such stock until the shares have been transferred
on the books of the corporation in accordance with the requirements of these
By-laws.
Each stockholder shall have the duty to notify the corporation of such
stockholder's post office address.
8.2. Record Date and Closing Transfer Books. The directors may fix in
--------------------------------------
advance a time, which shall be not more than sixty days before the date of any
meeting of stockholders or the date for the payment of any dividend or making of
any distribution to stockholders or the last day on which the consent or
dissent of stockholders may be effectively expressed for any purpose, as the
record date for determining the stockholders having the right to notice of and
to vote at such meeting and any adjournment thereof or the right to receive such
dividend or distribution or the right to give such consent or dissent, and in
such case only stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the corporation after the
record date. Without fixing such record date the directors may for any of such
purposes close the transfer books for all or any part of such period. If no
record date is fixed and the transfer books are not closed:
(1) The record date for determining stockholders having the right to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the date immediately preceding the day on which notice is given.
(2) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
acts with respect thereto.
Section 9. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the extent legally permissible, indemnify each of
its directors and officers (including persons who serve at its request as
directors, officers, or trustees of another organization in which it has any
interest, as a shareholder, creditor or otherwise) against all liabilities and
expenses, including amounts paid in satisfaction of judgments, in compromise or
as fines and penalties, and counsel fees, reasonably incurred by such person in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which such person may be involved or
with which such person may be threatened, while in office or thereafter, by
reason of such person being or having been such a
-8-
<PAGE>
director or officer, except with respect to any matter as to which such person
shall have been adjudicated in any proceeding not to have acted in good faith in
the reasonable belief that such person's action was in the best interests of the
corporation; provided, however, that as to any matter disposed of by a
compromise payment by such director or officer, pursuant to a consent decree or
otherwise, no indemnification either for said payment or for any other expenses
shall be provided unless such compromise shall be approved as in the best
interests of the corporation, after notice that it involves such
indemnification, (a) by a disinterested majority of the directors then in
office; or (b) by a majority of the disinterested directors then in office,
provided that there has been obtained an opinion in writing of independent legal
counsel to the effect that such director or officer appears to have acted in
good faith in the reasonable belief that such person's action was in the best
interests of the corporation; or (c) by the holders of majority of the
outstanding stock at the time entitled to vote for directors, voting as a single
class, exclusive of any stock owned by an interested director or officer. In
discharging his or her duty any such director or officer, when acting in good
faith, may rely upon the books of account of the corporation or of such other
organization, reports made to the corporation or to such other organization by
any of its officers or employees or by counsel, accountants, appraisers or other
experts selected with reasonable care by the board of directors or trustees, or
upon other records of the corporation or of such other organization. Expenses
including counsel fees incurred with respect to any such action, suit or
proceeding may be paid by the corporation prior to the final disposition of such
action, suit or proceeding, upon receipt of an undertaking by or on behalf of
the recipient to repay such amount if it is ultimately determined that
indemnification for such expenses is not authorized under this Section. The
right of indemnification hereby provided shall not be exclusive of or affect any
other right to which any director or officer may be entitled. As used in this
Section, the terms "director" and "officer" include their respective heirs,
executors and administrators, and an "interested" director or officer is one
against whom in such capacity the proceedings in question or another proceeding
on the same or similar grounds is then pending. Nothing contained in this
Section shall affect any rights to indemnification to which corporate personnel
other than directors and officers may be entitled by contract or otherwise under
law.
Section 10. CORPORATE SEAL
The seal of the corporation shall, subject to alteration by the directors,
consist of a flat-faced circular die with the word "Massachusetts," together
with the name of the corporation and the year of its organization, cut or
engraved thereon.
Section 11. EXECUTION OF PAPERS
Except as the directors may generally or in particular cases authorize the
execution thereof in some other manner, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the corporation shall be signed by the chairman of the board, if any, the
president, a vice president or the treasurer.
-9-
<PAGE>
Section 12. FISCAL YEAR
Except as from time to time otherwise provided by the board of directors,
the fiscal year of the corporation shall end on the last day in December in each
year.
Section 13. AMENDMENTS
These By-laws may be altered, amended or repealed at any annual or special
meeting of the stockholders called for the purpose, of which the notice shall
specify the subject matter of the proposed alteration, amendment or repeal or
the sections to be affected thereby, by vote of the stockholders or if there
shall be two or more classes or series of stock entitled to vote on the
question, by vote of each such class or series. These By-laws may also be
altered, amended or repealed by vote of a majority of the directors then in
office, except that the directors shall not take any action which provides for
indemnification of directors nor any action to amend this Section 13, and except
that the directors shall not take any action unless permitted by law. Not later
than the time of giving notice of the meeting of stockholders next following the
making, amending or repealing by the directors of any such by-laws, notice
thereof stating the substance of such change shall be given to all stockholders
entitled to vote on amending the by-laws.
Any by-law so altered, amended or repealed by the directors may be further
altered or amended or reinstated by the stockholders in the above manner.
-10-
<PAGE>
<TABLE>
<CAPTION>
CERTIFICATE
- -----------
N
<S> <C> <C>
For ---XXX--- Shares NUMBER SHARES
--XXX-- --XXX--
Issued to
---Specimen---
- -----------------------------------------
- ----------------------------------------- CG ACQUISITION GAS COMPANY
- -----------------------------------------
Dated
FROM WHOM TRANSFERRED
THIS CERTIFIES THAT---Specimen---
- ----------------------------------------- -----------------------------------------------------------
Dated____________________________________ is the owner of ---XXX------------------------- Shares of Capital Stock of
--------------------------------
N0. ORIGINAL NO. ORIGINAL NO. OF SHARES CG Acquisition Gas Company
transferable only on the books of the Corporation by the holder hereof in
CERTIFICATE SHARES TRANSFERRED person or by Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this
Certificate to be signed by its duly authorized officers and its
Corporate Seal to be hereunto affixed
this ---XXX--- day of ---XXX--- A.D. xx___
--------------- ------------
- ------------------------------------------
Received CERTIFICATE NO.__________________ -------------------- --------------------
President Treasurer
For_________________________________Shares
this_________day of_______________________
__________________________________________
__________________________________________
</TABLE>
<PAGE>
CERTIFICATE
FOR
XX
SHARES
OF THE
CAPITAL STOCK
CC ACQUISITION GAS COMPANY
ISSUED TO
---SPECIMEN---
DATE
--XXX--
NOTICE: THE SIGNATURE OF 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.
For Value Received, _______ hereby sell, assign and transfer unto
_______________________________________________________________________________
________________________________________________________________ Shares of the
Capital Stock represented by the written Certificate, and do hereby irrevocably
constitute and appoint _____________________________________________ Attorney to
transfer the said Stock, on the books of the within named Corporation with the
full power of substitution in the premises.
Dated ____________________ ______
In presence of
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
D.T.E. 98- ________
EASTERN ENTERPRISES
COLONIAL GAS COMPANY
Joint Petition of Eastern Enterprises and
Colonial Gas Company
For Approval of Merger
December 24, 1998
<PAGE>
COMMONWEALTH OF MASSACHUSETTS
DEPARTMENT OF TELECOMMUNICATIONS AND ENERGY
___________________________________
)
Eastern Enterprises )
and ) D.T.E. 98- ___
Colonial Gas Company )
___________________________________)
JOINT PETITION OF EASTERN ENTERPRISES, MERGER SUB, AND
COLONIAL GAS COMPANY FOR APPROVAL OF MERGER
Now come Eastern Enterprises ("Eastern"), Colonial Gas Company
("Colonial"), and Merger Sub (together, the "Parties"), and respectfully move
that the Department of Telecommunications and Energy (the "Department") approve
the following:
(1) the merger of Merger Sub and Colonial, pursuant to G.L. c. 164, (S)
96;
(2) Colonial's Rate Plan, pursuant to G.L. c. 164, (S) 94; and
(3) Merger Sub's issuance and sale of 100 shares of common stock, $1.00
par value, to Eastern in exchange for consideration of $100, pursuant
to G.L. c. 164, (S) 14.
In addition, Eastern and Colonial request that the Department determine
that any transfer of Colonial's franchise that may be deemed to occur as a
result of the merger and related transactions is approved in accordance with
G.L. c. 164, (S) 96, and therefore, no approval by the Massachusetts General
Court is required under G.L. c. 164, (S) 21.
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In support thereof, the Parties state the following:
1. Merger Sub is a gas company to be formed under G.L. c. 164, (S) 1, with a
principal place of business in Boston, Massachusetts. Merger Sub 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. Colonial is a Massachusetts gas company, pursuant to G.L. c. 164, (S) 1,
with a principal place of business in Lowell, Massachusetts.
4. Eastern and Colonial have entered into an Agreement and Plan of
Reorganization dated as of October 17, 1998 (the "Merger Agreement"), which
is subject to necessary approvals of government regulatory authorities
having jurisdiction, providing for the merger of Colonial into Merger Sub.
As a result of the Merger Agreement, Colonial will become a wholly owned
subsidiary of Eastern. A copy of the Merger Agreement is enclosed herewith
as Attachment 1.
5. The Merger Agreement sets forth the following sequence of events that will
result in Colonial becoming a wholly owned subsidiary of Eastern:
(a) On February 10, 1999, Colonial stockholders will vote on the approval
of the Merger. Also on February 10, 1999, Eastern's shareholders will
vote on the approval of the issuance of stock necessary to accomplish
the Merger.
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<PAGE>
(b) Eastern shall cause Merger Sub 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.
(c) The Department will review the proposed Merger and Rate Plan.
(d) Upon receipt of the necessary regulatory approvals, Merger Sub will
issue and sell 100 shares of common stock, $1.00 par value, to Eastern
in exchange for consideration of $100.
(e) Upon receipt of the necessary regulatory approvals and the filing of
the Articles of Merger, Colonial will be merged with and into Merger
Sub in accordance with the laws of the Commonwealth of Massachusetts.
Merger Sub will be the surviving corporation in the merger and will
operate as "Colonial Gas Company" under the laws of the Commonwealth
of Massachusetts.
(e) By virtue of the Merger, each outstanding share of Colonial common
stock will be automatically converted into the right to receive one of
the following: (i) $37.50 in cash, without interest; or (ii) a number
of shares of Eastern common stock to be determined by dividing $37.50
by an amount equal to the average closing price of Eastern common
stock for a specified period prior to the effective date of the
merger. Cash consideration will be paid in lieu of fractional shares
of Eastern common stock. If such average closing price of Eastern
common stock is less than $37.56 or greater than $47.80, each share of
Colonial common stock not
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<PAGE>
converted into cash will be converted into the right to receive 0.998
or 0.785 shares of Eastern common stock, respectively.
(f) Although the holders of Colonial common stock may indicate the
preferred form of payment for their shares, as stated above, this
election is subject to the limitations that the total amount of
consideration payable in cash is fixed at $150 million, and therefore,
no more than 4,000,000 shares of Colonial common stock may be
converted into cash consideration in the merger. In addition, in order
for the merger to qualify as a tax-free reorganization, the aggregate
amount of cash consideration or shares of Eastern common stock paid to
Colonial stockholders may be adjusted to ensure that at least 45
percent of the aggregate consideration is paid with shares of Eastern
common stock.
(g) Upon the completion of the conversion of Colonial common stock into
cash or Eastern common stock, as described above, Colonial will become
a wholly owned subsidiary of Eastern.
6. Merger Sub'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 conditions set forth in
Article 6 of the Merger Agreement.
8. Votes of the stockholders of Colonial approving the Merger Agreement and
the terms thereof will be provided to the Department immediately upon their
receipt. A vote of Colonial's stockholders is scheduled for February 10,
1999.
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<PAGE>
9. The testimony of Messrs. Walter J. Flaherty, Nickolas Stavropoulos, James
D. Hempstead, Joseph F. Bodanza, and William R. Luthern, explaining in
detail the proposed transaction and its expected benefits, is enclosed
herewith as Exhibits WJF-1, JDH-1, NS-1, JFB-1, and WRL-1, respectively.
10. The Rate Plan for Colonial's customers is submitted for Department
approval, pursuant to G.L. c. 164, (S) 94, as fully described in the
testimony of Mr. Bodanza (Exhibit JFB-1). The Rate Plan provides for a 2.2
percent reduction in the total burner-tip price paid by Colonial customers
in the first full year following the merger. In addition, the Rate Plan
establishes a ten-year freeze in Colonial'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. The Rate Plan also includes the approval of a structure that
will afford Eastern and Colonial a reasonable opportunity to recover
merger-related costs. As discussed in detail by Mr. Bodanza, the 2.2
percent reduction in the overall burner-tip price of gas will be provided
to Colonial's customers through gas cost savings of approximately $37
million, which will result from the attainment of synergies and
efficiencies in the gas-supply function. The ten-year base-rate freeze will
provide Colonial customers with additional benefits of approximately $127.6
million, as well as savings resulting from the avoidance of certain
technology-related capital investments totaling $12.5 million. In total,
Colonial's customers will receive benefits of approximately $177.1 million,
or $116 annually per customer, over the ten-year period of the Rate Plan.
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<PAGE>
11. 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 Colonial, its shareholders, customers and employees, and
Eastern, its shareholders, customers of Boston Gas Company ("Boston Gas")
and Essex Gas Company ("Essex Gas"), wholly owned subsidiaries of Eastern,
and Eastern's employees (including employees of Boston Gas and Essex 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 Colonial into Merger
Sub, pursuant to G.L. c. 164, (S) 96;
c. Vote pursuant to G.L. c. 164, (S) 14 that the proposed issuance of 100
shares of Merger Sub common stock, $1.00 par value, to Eastern is
reasonably necessary for the purposes stated;
d. Approve and authorize, pursuant to G.L. c. 164, (S) 14, the issuance
by Merger Sub of 100 shares of Merger Sub common stock to Eastern in
consideration of $100 by Eastern;
e. Approve the Rate Plan, pursuant to G.L. c. 164, (S) 94, as just and
reasonable and consistent with the public interest.
f. Confirm that Merger Sub, as the surviving corporation of the merger
between Merger Sub and Colonial, will operate under the name of
"Colonial Gas Company" and continue to have all the franchise rights
and
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<PAGE>
obligations that were previously held by Colonial, and that further
action, pursuant to G.L. c. 164, (S) 21, is not required to consummate
the merger; and
g. Issue such other and further orders as may be necessary.
Respectfully submitted,
JOINT PETITIONERS:
EASTERN ENTERPRISES
COLONIAL GAS COMPANY
By their attorneys,
/s/ Robert J. Keegan
-----------------------------------------
Robert J. Keegan, Esq.
Robert N. Werlin, Esq.
Cheryl M. Kimball, Esq.
Keegan, Werlin & Pabian, LLP
21 Custom House Street
Boston, MA 02110
(617) 951-1400
and
EASTERN ENTERPRISES
By its attorney,
/s/ L. William Law, Jr.,
-----------------------------------------
L. William Law, Jr., Esq.
Senior Vice President and General Counsel
Eastern Enterprises
9 Riverside Road
Weston, MA 02193
(781) 647-2300
Dated: DECEMBER 24, 1998
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<PAGE>
EASTERN ENTERPRISES/COLONIAL 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 02493.
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") and Essex Gas Company ("Essex Gas").
Q. HAVE YOU PREVIOUSLY TESTIFIED BEFORE THE DEPARTMENT OF TELECOMMUNICATIONS
AND ENERGY?
A. Yes. 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 Department of Public
Utilities, predecessor to the Department of Telecommunications and Energy
(the "Department"). Most recently, I testified in Eastern-Essex
-------------
Acquisition, D.T.E. 98-27 (1998).
-----------
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to describe various aspects of the proposed
acquisition by Eastern of Colonial Gas Company ("Colonial"), including: (i)
a
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 2
background description of Eastern; (ii) Eastern's rationale for the
acquisition of Colonial 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 October 17, 1998;
and (iv) a summary of the required regulatory approvals necessary to effect
the merger.
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, Essex Gas and Midland Enterprises, Inc.
("Midland").
Eastern's gas distribution companies consist of Boston Gas and Essex Gas.
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. Essex Gas 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
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 3
covering an area of approximately 280 square miles. The service area of
Essex Gas is primarily composed of residential communities with a number of
small commercial and diversified light industrial businesses. Essex Gas
sells natural gas to approximately 42,000 customers in its service area.
Essex Gas became a subsidiary of Eastern on September 30, 1998.
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 2,400 barges and 87 towboats.
During 1997, Eastern also 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 Sub, as a Massachusetts corporation and
gas company under G.L. c. 164, (S) 1, which will be a wholly owned
subsidiary of Eastern for the specific purpose of effecting the
transactions contemplated by the merger, as described below.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 4
III. THE DECISION TO ACQUIRE COLONIAL 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
growth of such rates. These cost savings are generally not achievable in
the absence of a merger or other business combinations 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. Eastern's recent acquisition of
Essex Gas supports this analysis in that Essex Gas customers are currently
receiving the benefit of a 5 percent burner-tip price reduction and a ten-
year base rate freeze.
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 the benefits generally
produces value for customers that far outweighs the associated one-time
costs. As described below, and in the
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 5
testimony of Mr. Bodanza, Colonial's customers will receive substantial and
lasting benefits as a result of Eastern's acquisition of Colonial.
Q. WHAT FACTORS PLAYED A ROLE IN EASTERN'S DECISION TO ENGAGE IN THIS
TRANSACTION?
A. As competition intensifies and gas distribution utilities fully unbundle at
the local level, the keys to success are increasing gas throughput,
improving productivity, controlling costs and providing quality customer
service, especially in a performance-based regulatory environment. 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 and
Colonial, has made substantial strides in reducing costs and improving
productivity as a result of re-engineering efforts and cost-reduction
initiatives. However, the attainment of significant incremental customer
savings now has to come from consolidation
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 6
and rationalization of the industry. Such efforts are essential in order to
remain competitive. The integration of Essex Gas is a good example of the
significant level of incremental benefits available only as a result of the
merger.
In sum, Eastern believes that utility consolidation provides an opportunity
to reduce costs, lower prices, enhance service for customers and preserve
competitiveness. Consolidation is a critical and beneficial strategy,
because it represents a win-win situation for customers and shareholders as
demonstrated in the Eastern/Essex Gas merger. Eastern's acquisition of
Colonial will further that strategy, consistent with the regulatory goals
of the Department, by improving efficiency and lowering costs for customers
in the long term.
Q. WHAT SPECIFIC BENEFITS DOES EASTERN ENVISION WILL RESULT FROM THE PROPOSED
ACQUISITION OF COLONIAL?
A. In Eastern-Essex Gas Acquisition, the Department construed the public
-----------------------------
interest standard embodied in G.L. c. 164, (S) 96 as requiring a
demonstration that "no net harm" would result from the proposed merger. As
proposed herein, Eastern's acquisition of Colonial meets and exceeds that
test. Eastern believes that substantial benefits for customers can and
will be achieved through mergers and acquisitions, and has structured the
transaction with Colonial so that customers would experience both near- and
long-term benefits.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 7
Although Colonial 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, the merger presents opportunities to
Colonial for achieving economies of scale by operating as a sister company
to Essex Gas and Boston Gas, the latter of which has a service territory
that is partially contiguous to Colonial's Greater Lowell service
territory. As a result of the merger, customers of all three companies
will benefit substantially from increased supply options and enhanced
purchasing power. The ability to dispatch across the combined distribution
systems will increase flexibility, enable the optimization of existing gas-
supply resources, encourage and facilitate more efficient purchasing
decisions and secure the ability to exercise broader system control. The
expanded supply portfolio will also increase overall reliability in all
service territories. These gas supply synergies are described in detail in
the testimony of Mr. Luthern.
In addition, the merger presents an opportunity to realize cost savings as
a result of reduced operation and maintenance ("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 Colonial will allow Eastern to capture valuable
synergies that exist between the distribution systems and to transform such
efficiency gains into cost savings, lower rates and a more flexible and
reliable distribution system for all customers.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 8
Q. WHAT ARE THE BENEFITS EASTERN IS TRYING TO ACHIEVE THROUGH ITS RATE PLAN?
A. As described in greater detail in Mr. Bodanza's testimony, the Rate Plan
provides that Colonial's base rates will 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. Mr. Bodanza, in his testimony, estimates
that the benefits that customers will derive from this rate freeze will be
approximately $127.6 million. Further, Colonial's customers will benefit
from the reduced costs associated with synergies in gas supply totaling
$37.0 million over the ten-year rate freeze period. In addition,
Colonial's customers will benefit from avoided technology investments
totaling approximately $12.5 million, for a total customer benefit of
$177.1 million over the ten-year rate freeze period. At the same time, the
Rate Plan allows Eastern's shareholders a reasonable opportunity to recover
their investment.
Q. HOW WAS EASTERN'S DECISION TO ACQUIRE COLONIAL INFLUENCED BY THE
DEPARTMENT'S POLICY DETERMINATIONS IN THE ESSEX GAS AND BAY STATE GAS
COMPANY MERGERS?
A. For Eastern, the policy determinations embodied in the Department's orders
in Eastern-Essex Gas Acquisition, D.T.E. 98-27 (1998) and Northern Indiana
----------------------------- ----------------
Public Service Company/Bay State Gas Company, D.T.E. 98-31 (1998), were
--------------------------------------------
both encouraging and instructive with regard to its acquisition of
Colonial. In Eastern-
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<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 9
Essex Gas Acquisition, the Department found that approval of a ten-year
---------------------
rate freeze would yield significant benefits to customers and that the
proposed merger would provide customers with gas cost savings that would be
unavailable in the absence of the merger. D.T.E. 98-27, at 66. The
Department also found that transaction costs, merger-integration costs and
the acquisition premium represented real costs for Eastern's shareholders,
which must be factored into the overall balance of costs and benefits
resulting from the merger. Id. at 68. In making these findings, the
--
Department recognized that in a more competitive environment, "firms will
evolve in size and scope in a way that maximizes efficiency over time" and
that its long-standing prohibition against the recovery of an acquisition
premium posed a regulatory barrier to such consolidation. Id. at 69-70.
--
Thus, for Eastern, the Essex Gas and Bay State decisions represent a
fundamental policy determination by the Department that mergers and
acquisitions have the potential to provide significant and lasting benefits
to customers, and that recovery of a reasonable acquisition premium is a
"worthwhile investment" in obtaining greater efficiencies for the future
benefit of customers. Id. at 70.
--
Accordingly, Eastern views the acquisition of Colonial as instrumental in
giving effect to the Department's policy objectives set forth in the Essex
Gas and Bay State merger cases. As such, Eastern has structured both the
merger transaction
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 10
and the Rate Plan, as discussed in Mr. Bodanza's testimony, to be
consistent with the guidelines and precedent established by the Department
in the Essex Gas and Bay State merger cases. In that regard, the Rate Plan
has been structured so as to insulate customers from the financial or
economic risk associated with the ability of Eastern to attain synergies in
Colonial's operations that are sufficient to compensate Eastern for its
merger-related cost investment. Following the expiration of the ten-year
base-rate freeze, Eastern will be allowed to recover merger-related costs
where it has achieved synergies sufficient to allow for recovery of those
costs. If, following the ten-year period demonstrated synergies are not
equal to or greater than the annual required synergies, Eastern will bear
the risk of recovering its merger investment. Thus, Eastern's acquisition
of Colonial, will enable Eastern to preserve shareholder investment while
maximizing efficiencies for the benefit of customers.
IV. DESCRIPTION OF THE ACQUISITION PROCESS
Q. PLEASE SUMMARIZE THE TERMS OF THE MERGER AND THE CREATION AND FUNCTION OF
MERGER SUB.
A. Pursuant to the terms of the Merger Agreement, Eastern will create and
incorporate Merger Sub as a wholly owned subsidiary. Colonial will then be
merged into Merger Sub, with Merger Sub, as the surviving corporation,
continuing as a wholly owned subsidiary of Eastern. Merger Sub will
operate under the name "Colonial Gas Company." Each share of Colonial
common stock
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 11
will be canceled and extinguished and automatically converted into the
right to receive at the effective time of the merger one of the following:
(1) the per-share cash amount of $37.50; (2) a number of shares of Eastern
common stock, $1.00 par value, pursuant to an exchange ratio determined at
the time of the transaction; or (3) a combination of cash and shares.
Although the holders of Colonial common stock may indicate the preferred
form of payment for their shares, this election is subject to limitations
that ensure that the total amount of consideration payable in cash is fixed
at $150 million, and therefore, no more than 4,000,000 shares of Colonial
common stock may be converted into cash consideration in the merger. Thus,
to the extent that cash elections exceed $150 million, Colonial's
shareholders will receive a pro-rata combination of cash and shares of
Eastern common stock. In addition, the aggregate amount of cash
consideration or shares of Eastern common stock paid to Colonial may be
adjusted to ensure that at least 45 percent of the aggregate consideration
consists of 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 Colonial share
will not be less than $37.56, nor more than $47.80, based upon the average
market price of Eastern shares during a specified ten-day period prior to
closing.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 12
Q. WHAT IS THE NATURE OF THE INVESTMENT REQUIRED TO ATTAIN THE BENEFITS
ASSOCIATED WITH THE TRANSACTION?
A. As described in the testimony of Messrs. Hempstead and Bodanza, the
investment required to obtain the benefits associated with Eastern's
acquisition of Colonial is represented by three categories of costs: (1)
transaction costs incurred in developing, executing and obtaining the
necessary approvals for the merger; (2) integration costs incurred to
achieve the synergies that will reduce the cost of Colonial's operations;
and (3) the cost to Eastern's shareholders for the acquisition, i.e., the
----
premium over book value received by Colonial's shareholders. As described
in Mr. Bodanza's testimony, transaction costs and merger-integration costs
in this case are estimated to be $28.2 million.
Q. WHAT WILL BE THE RESULTING ACQUISITION PREMIUM?
A. The acquisition premium is calculated by taking the difference between
Colonial's book value of $14.11 per share and the purchase price of $37.50
per share, and multiplying this difference by the 8,853,349 shares of
Colonial common stock issued and outstanding as of November 18, 1998 (the
date of the proxy filing statement with the Securities and Exchange
Commission ("SEC")). The resulting premium of $207.2 million includes $8.0
million for the portion of the acquisition premium associated with
Transgas, Inc., Colonial's non-utility LNG transport affiliate. Thus, an
up-front acquisition premium of $199.2 million will be paid to accomplish
the acquisition of Colonial's gas distribution business.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 13
Q. DOES THE UP-FRONT ACQUISITION PREMIUM EQUAL THE TOTAL SYNERGIES REQUIRED BY
EASTERN TO MAINTAIN EARNINGS AT A PRE-MERGER LEVEL?
A. No. The payment of an acquisition premium has an unavoidable impact on the
earnings of the acquiring company. In this case, there are two important
considerations that must be taken into account in evaluating the impact of
the acquisition premium on Eastern's earnings.
First, as described by Mr. Bodanza, the transaction will be recorded using
purchase accounting, and therefore, the acquisition premium will be
recorded on the books of Colonial and amortized as an annual charge to
earnings of approximately $5 million. This charge is not tax deductible.
Therefore, in order to achieve after-tax earnings sufficient to recover the
amortized amount, it is necessary to "gross-up" the $5 million charge by a
tax factor of 1.6454. On a gross-up basis, synergies of approximately $8.2
million must be retained by shareholders to offset the negative impact of
these costs on earnings as a result of the merger.
In addition, in order to effect the transaction and to attain the resultant
benefits for customers, Eastern's shareholders will invest $144 million in
cash in the gas distribution operations of Colonial in order to accomplish
the transaction. This $144 million in cash has been available to Eastern
for investment since the divestiture of businesses unrelated to Eastern's
core gas-distribution and marine-transportation operations. Eastern has
invested these funds in high-quality, short-
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 14
term liquid investments yielding a modest annual return of approximately
5.5 percent, which reflects the relatively low-risk associated with that
type of investment. In this proceeding, Eastern seeks to be made whole for
only the return it currently earns on the cash portion of its investment,
rather than the expected return on equity from investments in gas
distribution operations. In order to maintain the historical return for
Eastern's shareholders after the merger, average annual retained synergies
of $4.1 million are required. These calculations are discussed further in
Mr. Bodanza's testimony.
In order to justify shareholder investment in this transaction, Eastern
must be careful to evaluate whether the level of earnings associated with
its common stock prior to the merger will be maintained following the
merger. In this case, as discussed in Mr. Hempstead's testimony, an
assessment as to the overall impact of the acquisition on the earnings of
Eastern must take into consideration both the 40-year amortization period
of the acquisition premium, which results in an annual charge to earnings
of $5 million, and the loss in earnings associated with the conversion of a
$144 million investment in short-term money markets to an investment in the
operations of Colonial. These considerations also form the basis of Mr.
Hempstead's earnings-dilution analysis, which is designed to assess the
overall impact of the merger on the earnings of Eastern, given that the
transaction
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 15
will be accomplished through a combination of cash consideration and the
issuance of Eastern shares of common stock.
Thus, in order to accomplish this transaction, Eastern's shareholders will
need to retain a total of $15.2 million annually on average for ten years,
and $12.3 million annually on average over the following 30-year period.
Q. IS CONSUMMATION OF THE MERGER DEPENDENT ON RECOVERY OF THE ACQUISITION
PREMIUM AND THE RELATED COSTS?
A. Yes. Currently, Eastern's shareholders receive a particular level of
earnings associated with their shares and have legitimate expectations with
regard to future earnings and earnings growth. Our financial objectives,
which are articulated each year in our annual report to shareholders,
reflect earnings and cash flow growth at a rate of 5 to 10 percent above
inflation, and a return on equity of 12 to 15 percent. In this case,
Eastern seeks only to maintain the level of earnings available to
shareholders prior to the merger by recovering the direct costs associated
with its investment in Colonial. Eastern's shareholders will experience
dilution in the value of their shares, unless they are afforded a
reasonable opportunity to recover these costs by retaining demonstrated
synergies. Because Eastern is obligated to ensure that the earnings value
of its shares of common stock does not decline as a result of the merger,
Eastern requires a reasonable opportunity to achieve and retain synergies
sufficient to recover the merger-related investment.
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 16
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 SEC and the Department. In addition to
regulatory approvals, Eastern's shareholders must approve the proposed
issuance of stock to accomplish the merger and Colonial's shareholders must
approve the merger. These shareholder meetings are currently scheduled for
February 10, 1999.
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 Colonial,
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 Sub and Colonial, as provided
for by the terms of the Merger Agreement, consistent with the public
interest pursuant to G.L. c. 164, (S) 96;
<PAGE>
Testimony of Walter J. Flaherty
Exhibit WJF-1
December 24, 1998
Page 17
(2) Approval of the issuance of 100 shares of common stock, par value of
$1.00, by Merger Sub to Eastern pursuant to G.L. c. 164, (S) 14;
(3) Approval of Colonial's proposed Rate Plan, pursuant to G.L. c. 164,
(S) 94; and
(4) A determination that any transfer of Colonial's franchise that may be
deemed to occur as a result of the merger and related transactions is
approved in accordance with G.L. c. 164, (S) 96, and therefore, no
approval by the Massachusetts General Court is required under G.L. c.
164, (S) 21.
See Eastern-Essex Acquisition, D.T.E. 98-27, at 75.
--- -------------------------
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
EASTERN ENTERPRISES/COLONIAL COMPANY
TESTIMONY OF NICKOLAS STAVROPOULOS
D.T.E. 98____
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is Nickolas Stavropoulos. My business address is 40 Market Street,
Lowell, Massachusetts 01852.
Q. BY WHOM ARE YOU EMPLOYED, AND IN WHAT CAPACITY?
A. I am Executive Vice President of Finance and Marketing, and Chief Financial
Officer of Colonial Gas Company ("Colonial"). I am also a Director of
Colonial.
Q. HAVE YOU PREVIOUSLY TESTIFIED IN PROCEEDINGS BEFORE THE DEPARTMENT?
A. Yes. As an officer and employee of Colonial, I have testified in numerous
proceedings before the Department of Public Utilities, predecessor to the
Department of Telecommunications and Energy (the "Department"). I most
recently testified in Colonial Gas Company, D.T.E. 97-112.
--------------------
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY IN THIS PROCEEDING?
A. The purpose of my testimony is: (i) to describe the background of Colonial
and the rationale for the merger of Colonial with Eastern Enterprises
("Eastern"); (ii) to provide an overview of the process undertaken to
effect that merger; (iii) to explain the benefits of the merger for
Colonial's customers; (iv) to co-sponsor the Rate Plan submitted by Eastern
and Colonial in this case, which is an integral part
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 2
of the overall merger plan; and (v) to describe Colonial's historic
service-quality metrics and assure the Department of Colonial's commitment
to maintaining high service-quality levels after consummation of the merger
transaction.
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF COLONIAL GAS COMPANY.
A. Colonial is a local gas distribution company ("LDC"), regulated by the
Department as a "gas company," pursuant to G.L. c. 164, (S) 1. Colonial was
organized in 1849 under the laws of the Commonwealth of Massachusetts and
currently operates in 24 municipalities located northwest of Boston and on
Cape Cod. Colonial's service area is approximately 622 square miles in size
and, of its approximately 152,000 customers, roughly 90 percent are
residential accounts.
II. THE DECISION MAKING PROCESS OF COLONIAL TO ENTER INTO THIS MERGER
Q. PLEASE EXPLAIN WHY COLONIAL DECIDED TO PURSUE A MERGER AT THIS TIME.
A. Over the past several years, Colonial's Board of Directors (the "Board")
and the management of Colonial have closely followed developments in the
gas utility industry with a particular focus on the evolution of natural
gas regulatory policies. As industry restructuring initiatives have been
developed and implemented, Colonial has carefully considered the impact of
such initiatives on Colonial's business strategy and options going forward.
Colonial has experienced significant growth over the past several years,
while controlling costs and improving productivity, which has enabled
Colonial to avoid a base-rate case since 1993.
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 3
However, 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 Colonial that its best opportunity to achieve
significant incremental cost savings would be through a business
combination.
As Colonial evaluated its existing position, it became evident that the
savings it could attain through the creation of economies of scale and/or
scope would be far greater with more expansive operations than the savings
Colonial could achieve on its own. As a result of this analysis, the Board,
in conjunction with Colonial management, concluded that it should further
investigate the benefits that could potentially result from a business
combination with a larger organization to determine if such a strategy
would be in the overall best interest of the Company's customers,
shareholders and employees.
Q. WHAT PROCESS DID COLONIAL UNDERTAKE TO PURSUE AND AGREE TO A MERGER
PARTNER?
A. Over the past several years, Colonial's Board has, from time to time,
discussed the option of merging with another organization, but each time
had decided to remain independent. However, following the announcement in
December 1997 of the proposed acquisition of Essex Gas Company ("Essex
Gas") by Eastern, and of Bay State Gas Company ("Bay State Gas") by
Northern Indiana Power Service
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 4
Company ("NIPSCO"), the Board decided to reassess Colonial's strategic
options and evaluate more closely a possible business combination
transaction. Colonial closely analyzed the proposed mergers of Eastern and
Essex Gas, and NIPSCO and Bay State Gas, and recognized that significant
savings and customer benefits could be realized through such a business
combination. In order to retain the option of remaining independent, the
Board approved at that time the creation of a holding company structure and
the submission of the holding company formation proposal to Colonial's
stockholders for approval (see Colonial Gas Company, D.T.E. 98-71).
--- -------- -----------
In March 1998, the Board retained Salomon Smith Barney, Inc., a well-
recognized investment banking firm, to assist in the exploration of
strategic options. Through the spring of 1998, Colonial considered several
options, including: (1) continuing its independent course; (2) merging with
a larger regional gas distribution company or electric company; (3) merging
with an out-of-region energy company; and (4) combining with a similarly
sized New England gas distribution company. In evaluating these potential
business combination alternatives, Colonial set an objective of achieving
the greatest possible benefits for shareholders, customers and employees,
in accordance with Department precedent in Mergers and Acquisitions, D.P.U.
------------------------
93-167-A (1994).
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 5
With the assistance of Salomon Smith Barney, Colonial narrowed to six those
companies, including Eastern, that fit one or more of its strategic
combination objectives. Preliminary discussions took place and
confidentiality agreements were signed with these six companies in June and
July 1998. From these discussions, Colonial identified three companies,
including Eastern, with which it continued discussions.
Following a due-diligence process, one of the companies subsequently
indicated that it was not interested in pursuing the transaction at that
time because of strategic considerations. After Eastern and the remaining
company continued to express strong interest, Colonial requested definitive
merger proposals from these companies on August 11, 1998.
In early September 1998, the other interested company asked Colonial to
delay the proposal process for an extended period of time. Colonial's
management met with the other company's management to discuss the request
but gave no commitment. On September 9, 1998, the Colonial Board met to
review the status of the merger proposal process and instructed management
to continue to monitor developments. On September 17, 1998, the Department
issued its order approving Eastern's acquisition of Essex Gas.
On September 23, 1998, the Eastern Board met and authorized Eastern's
management to proceed with an offer to acquire Colonial based upon the
terms
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 6
and conditions as presented at the meeting. Representatives of Merrill
Lynch & Co., Eastern's financial advisor, were present at the meeting and
gave a preliminary presentation to the Eastern Board of Trustees regarding
the proposed offer price and the terms and conditions of the proposed
acquisition.
On September 28, 1998, senior management of Eastern asked Colonial's senior
management if it would entertain a proposal from Eastern. The Colonial
Board met on October 5, 1998 to evaluate Eastern's request and, after
considering alternatives, authorized Colonial's management to inform
Eastern that it would entertain a proposal. In reaching this decision, the
Colonial Board took into account the uncertainties and risks associated
with continuing to delay the proposal process and the likelihood that
Eastern, because of the operating synergies that it could achieve, would be
in a good position to make a proposal that would maximize value for its
shareholders, provide benefits for customers and enhance opportunities for
employees.
On October 7, 1998, Eastern submitted a written proposal to Colonial, and
after further discussions and negotiations, a Merger Agreement was signed
on October 17, 1998.
Q. WHAT OBJECTIVES DOES COLONIAL HOPE TO ACHIEVE AS A RESULT OF THE MERGER?
A. As noted above, Colonial seeks to maximize the benefits provided to its
shareholders, its customers and its employees resulting from this merger.
First
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 7
and foremost, cost reductions achieved through economies of scale, the
attainment of gas-supply synergies and the ten-year rate freeze will
benefit Colonial's customers both immediately and over the long term.
Colonial's shareholders will also benefit from the merger because they will
receive substantial value for their stock. Moreover, Colonial believes that
a larger, more diversified company will benefit its employees over the long
term by providing them with greater opportunities and a dynamic working
environment.
III. IMPACT OF THE MERGER TO COLONIAL'S CUSTOMERS
Q. PLEASE DESCRIBE THE IMPACT OF THE MERGER ON COLONIAL'S CUSTOMERS.
A. Over the past several years, Colonial has worked diligently to reduce its
operation and maintenance expenses and the gas costs associated with
serving its customer base. The proposed transaction offers the potential
for additional cost savings that would not be achievable in the absence of
the merger. In particular, as a direct result of the merger, Colonial's
customers will realize significant savings through: (1) a 10-year rate
freeze and the avoidance of base rate increases; (2) a 2.2 percent
reduction in their total burner-tip price of gas, which will be achieved as
a result of synergies in gas supply between Boston Gas; and (3) savings
relating to the avoidance of significant technology-related investments, as
described below. In addition, customers will realize savings from the
consolidation of overlapping or
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 8
duplicative programs over the long term. These savings are discussed
further by Messrs. Bodanza and Luthern.
Of particular note, from Colonial's point of view, are the significant
savings that Colonial's customers will receive through the avoidance of
technology-related capital investments and ongoing expenses relating to
Year 2000 ("Y2K") compliance and the implementation of customer choice
technology systems. Boston Gas' investments in information technology and
systems will be integrated into the operations of Colonial, thereby
allowing Colonial to avoid these considerable expenses. Moreover, savings
will be realized from the elimination of ongoing expenses, such as
duplicate software and hardware license and maintenance fees. The cost
savings of avoided technology investments by Colonial are further discussed
by Mr. Bodanza and are estimated to be approximately $12.5 million.
Q. PLEASE DESCRIBE THE SAVINGS COLONIAL'S CUSTOMERS WILL REALIZE FROM THE TEN-
YEAR RATE FREEZE.
A. To determine the amount of savings to Colonial's customers as a result of
the ten-year base-rate freeze, Colonial performed a calculation of its
current revenue requirement based on a 1997 test year. This calculation
shows that Colonial has a revenue deficiency of approximately $8.5 million,
composed of $3 million in the Lowell Division and $5.5 million in the Cape
Cod Division (see Exhibit NS-2). As Mr. Bodanza notes in his testimony,
---
Colonial's customers will avoid a
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 9
minimum of one rate case, which Colonial had planned to file in April 2000,
along with other base-rate increases that would result from the filing of a
performance-based ratemaking plan. Colonial performed this analysis to
determine the scope of benefits that customers will receive as a result of
a ten-year, base-rate freeze. Colonial believes that its $8.5 million
revenue-deficiency calculation is conservative because it does not include
an updated depreciation study. The savings reflecting avoided base rate
cases are estimated at approximately $127.6 million over the ten-year
period of the rate freeze.
Q. DO YOU BELIEVE THAT THE BENEFITS PROVIDED BY THE RATE PLAN ARE IN THE BEST
INTEREST OF COLONIAL'S CUSTOMERS?
A. Yes, I do. The Rate Plan, which is an integral part of the merger, will
provide substantial rate relief to Colonial's customers. Those benefits
will continue to grow significantly over the next ten years and beyond. The
benefits provided to Colonial's customers would not be available without
the acquisition of Colonial by Eastern. Were the acquisition and the
associated Rate Plan not to receive the Department's approval, Colonial's
customers would lose the significant benefit of long-term rate stability,
i.e., current rates would not remain in effect for a period of ten years
----
as proposed in the Rate Plan and the future additional cost savings
resulting from synergies after the ten-year base-rate freeze would not be
achieved. In addition, Colonial's customers would not receive the benefit
of a 2.2 percent burner-tip price reduction. Accordingly, the absence of
the merger and the
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 10
associated Rate Plan would have significant adverse effects on Colonial'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, (S) 96.
IV. COLONIAL'S SERVICE QUALITY PROGRAM
Q. IS COLONIAL PROPOSING A SERVICE QUALITY PROGRAM IN CONJUNCTION WITH ITS
RATE PLAN?
A. Yes. In the Essex merger, the Department found that, although the Rate Plan
proposed by Eastern did not constitute a performance-based ratemaking plan,
quality of service is an essential factor in reviewing a merger and that it
is necessary to set a standard by which service quality may be measured
following the merger. Eastern-Essex Acquisition, D.T.E. 98-27, at 32. In
-------------------------
preparing this filing, Colonial reviewed the standards approved by the
Department for use by Boston Gas and Bay State in assessing service
quality.
Q. HAS COLONIAL TRACKED ITS SERVICE QUALITY IN ACCORDANCE WITH THE METRICS
USED BY BOSTON GAS?
A. In certain cases, Colonial has been measuring its performance using service
quality metrics similar to those used by Boston Gas. In general, however,
Colonial tracks data relating to these measures in a manner different from
Boston
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 11
Gas, and, in some cases, Colonial has less than one year of data relating
to such metrics.
Q. WHAT DOES THIS MEAN FOR COLONIAL'S PROPOSED SERVICE QUALITY PLAN?
A. Before Colonial can propose a comprehensive service quality plan more
closely approximating the metrics used by Boston Gas, it will need to alter
some of its processes for gathering data, modify the type of data it
collects and, in certain instances, develop new systems and procedures for
gathering additional data. Accordingly, Colonial proposes that time be
allowed to accomplish these changes and to gather the necessary data so
that it will be in a position to file a full service quality plan for the
Department's review and approval 18 months following the close of the
merger. This type of process was approved in the Essex merger case and is
both a necessary and appropriate approach for developing a service quality
plan in this case. Eastern-Essex Acquisition, D.T.E. 98-27.
-------------------------
Q. HOW DOES BOSTON GAS CURRENTLY MEASURE SERVICE QUALITY?
A Boston Gas currently measures its service quality using six metrics: (1)
emergency as well as billing and service telephone calls, answered within
40 seconds; (2) emergency calls responded to within 60 minutes; (3)
incidence rate for lost-time accidents; (4) service appointments met on the
same day requested; (5) on-cycle meter reads; and (6) Department complaint
cases and billing adjustments.
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 12
Q. HOW DOES COLONIAL CURRENTLY MEASURE SERVICE QUALITY?
A. Colonial has been dedicated to maintaining a high level of service quality
to its customers. Colonial currently measures its service quality in five
of the six areas that Boston Gas measures, although, as noted, Colonial's
data generally has been tracked differently.
Q. HOW DOES COLONIAL CURRENTLY MEASURE ITS HANDLING OF TELEPHONE INQUIRIES
FROM CUSTOMERS?
A. In September 1995, Colonial consolidated its customer service area into a
state-of-the-art call center identified as the "Center for Customer Service
Excellence" or "CCSE." Colonial's objective in establishing the CCSE was
to have in place a group of highly trained and professional representatives
prepared to respond to customer queries or requests on a "one call" basis,
i.e., without being transferred to other company representatives. Colonial
----
strongly believed that with such an approach, customer queries or requests
would be handled efficiently and effectively from both Colonial's
perspective and, more importantly, the customer's perspective.
The actual performance of CCSE representatives is continually monitored.
Historically, from July 1997 through June 1998, Colonial's CCSE
representatives handled 69.34 percent of all non-emergency calls within 40
seconds, as set forth in Exhibit NS-3.
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 13
Although Colonial has not historically tracked handling times for emergency
calls separately from other calls, Colonial has instituted procedures
within its CCSE that assure that emergency calls receive immediate
attention and are promptly answered. Those procedures include maintaining
a dedicated line for emergency leak and odor calls, assigning individual
representatives whose primary responsibility is answering those emergency
calls, training all CCSE representatives in responding to such calls and
operating an extra-loud ringing system to ensure that emergency calls are
immediately identified.
In an effort to measure its performance in this area more specifically,
Colonial proposes to track separately in the future its answering of both
emergency calls as well as non-emergency calls.
Q. HOW DOES COLONIAL MEASURE ITS RESPONSIVENESS TO EMERGENCY CALLS?
A. Colonial tracks the time, from initial notification to arrival on the
scene, to respond to each emergency gas odor or leak call. Colonial has
been maintaining this data, and providing it monthly to the Department's
Pipeline Engineering and Safety Division, since October 1997. From October
1997, through September 1998, Colonial has responded to 94.5 percent of
such calls within one hour or less (see Exhibit NS-4).
---
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 14
Q. HOW DOES COLONIAL CURRENTLY MEASURE LOST TIME FOR EMPLOYEES AS A RESULT OF
ACCIDENTS OR ILLNESS?
A. Colonial measures the proportion of time lost by its employees resulting
from accident or illness, relative to total work time. Colonial has been
maintaining this information for many years and reporting it annually
pursuant to the requirements of the Occupational Health and Safety Act
("OSHA"). For the three years ending June 1998, Colonial's running average
annual incidence rate for lost time accidents was 7.28 incidents per
200,000 hours worked (see Exhibit NS-5).
---
Q. HOW DOES COLONIAL CURRENTLY MEASURE ITS SUCCESS AT MEETING SCHEDULED
SERVICE APPOINTMENTS?
A. In April and May 1998, Colonial implemented a new, state-of-the-art
Computer-Aided Dispatch or "CAD" System. The CAD system links Colonial's
main office with its field service technicians via two-way mobile
computerized communications, and gives those technicians ready access to
customer service orders. Before implementing the new CAD system, Colonial
did not have the systems in place to track automatically the percentage of
service calls met on the day scheduled. With the new CAD system, Colonial
now has that tracking ability. However, because Colonial did not fully
complete the implementation of CAD until May 1998, it has only a limited
history in tracking this measure of service quality. In addition, the
period measured includes only off-peak months when there is a lower
incidence of scheduled service appointments and they can
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 15
be met with greater reliability because they are less affected by poor
weather conditions.
Q. HOW DOES COLONIAL CURRENTLY MEASURE ITS PERFORMANCE REGARDING ACTUAL
CUSTOMER METER READINGS?
A. Although Colonial bills its customers monthly, it has historically
alternated between actual and estimated meter readings on a bimonthly basis
because of the high cost of manually obtaining actual meter readings every
month. As a result of the installation of automated meter reading or "AMR"
devices in a higher percentage of the homes and businesses of its
customers, and the implementation of its new customer billing system,
Colonial is now striving to have all bills based on actual meter readings
each month. However, Colonial has only limited data available showing the
percentage of actual meters read versus those meters scheduled to be read.
In addition, that data period consists of the months June-November 1998
which were unaffected by snow or ice storms which can affect AMR programs
by slowing van readings. During the data period, the number of meters
actually read in relation to those scheduled to be read was 93.36 percent
(see Exhibit NS-6).
---
Q. IS COLONIAL PROPOSING TO MEASURE ITS PERFORMANCE WITH RESPECT TO DEPARTMENT
COMPLAINTS AND BILLING ADJUSTMENTS AFTER THE MERGER?
A. No. Colonial believes that the use of both Department Consumer Division
complaints and billing adjustments to measure a company's service quality
does
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 16
not accurately reflect the level of service provided by a local
distribution company. Traditionally, the Department's Consumer Division
measures the total number of complaints involving a company and separately
tracks the total dollar amount of bill adjustments made in relation to a
company. Should an LDC be the subject of an increase in the number of calls
to the Department, regardless of their relation to service quality, or have
adjusted even a single bill by a significant amount, these measures as
applied by the Department would lead to the conclusion that the company's
service quality was deteriorating. To the contrary, Colonial believes that
neither the number of complaints lodged at the Department, nor the dollar
amount of bill adjustments, is a true or accurate indicator of a company's
service quality.
For example, any call to the Department's Consumer Division regarding an
LDC is treated as a "case," if the caller has first called the LDC with an
issue. Because of the manner in which the Department records these calls
as complaints and analyzes that data, a moderate increase in the number of
such calls results in the automatic but often erroneous conclusion that the
LDC's service quality is declining. However, no distinction is made
between actual complaints and general inquiries and the Department's
statistics do not consider whether complaints have merit. Accordingly,
Colonial believes the Department's statistics need to make a finer
distinction between these types of calls and more fully
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 17
analyze their relationship to service quality before such statistics can be
used reliably as an indicator of a change in service quality.
The continued use of these statistics is likely to result in a greater
incidence of erroneous conclusions regarding service quality in the future.
With the advent of deregulation and the confusion that is likely to be
experienced by customers unaccustomed to differentiating between
distribution companies and competitive suppliers, the amount of
"complaints" lodged against distribution companies may rise dramatically,
regardless of whether the LDC is responsible for rendering the service
about which the customer may be inquiring. Moreover, a customer may not be
satisfied with an LDC's response to a complaint regardless of whether the
LDC has made a good-faith effort to resolve a customer's issue. As such,
Colonial believes that Consumer Division "complaints" are not an accurate
indicator of an LDC's service quality.
Further, regarding billing adjustments, an LDC could appear to be
performing below standard if it dramatically adjusted just one bill for a
large, industrial customer. A bill adjustment for one customer, even if
such adjustment is significant, should not be viewed as an accurate
measurement of a company's overall service quality. Moreover, the number
of billing disputes, as with the level of uncollectible bills, is driven in
large part by the health of the economy. During economic hard times,
customers are less able to pay their bills and more
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 18
likely to dispute them. Thus, the level of adjusted bills is likely to
change based on external economic factors that are unrelated to the quality
of service provided by the utility company. Colonial believes the
Department should not use Department billing adjustments as a service-
quality metric.
Q. WOULD YOU PLEASE SUMMARIZE COLONIAL'S SERVICE QUALITY PLAN?
A. Colonial will track its performance in the areas of: (1) emergency,
billing and service telephone call answering time; (2) response to
emergency calls; (3) lost-time accidents; (4) service appointments met on
the day scheduled; and (5) actual meter reads. For those service quality
metrics where Colonial does not have adequate historical data, i.e.,
----
service appointments met as scheduled, actual meter reads, and handling
time of emergency, billing and service telephone calls, Colonial proposes a
transition period of 18 months to implement the necessary systems and
processes to track this data more fully and appropriately. Following this
transition period, Colonial would submit such data to the Department for
its review, consistent with the Department's decision in D.T.E. 98-27
regarding the implementation of a service quality measurement program for
Essex. For those metrics where Colonial has adequate historical data,
i.e., response to emergency calls and incidence rate for lost time
----
accidents, Colonial proposes to continue to track its data in those areas
for the same 18 month period and submit that data to the Department
simultaneously with its data for the other referenced measures so
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 19
as to demonstrate that service quality has not been compromised in any
manner as a result of the merger. Indeed, Colonial believes that as a
direct result of the merger the Department will see an overall improvement
in the level of service quality being delivered to its customers following
the completion of the merger and the integration of certain of its
operations with those of Boston Gas.
Q. WOULD YOU PLEASE SUMMARIZE YOUR TESTIMONY?
A. After many years of success, Colonial determined that the best means for
continued and expanded growth in the gas industry was through a merger with
another organization. Following the mergers of Eastern and Essex Gas and
NIPSCO and Bay State Gas, respectively, Colonial diligently pursued such a
merger and, after a nearly year-long process, concluded that a merger with
Eastern was in the best interests of its shareholders, customers and
employees. The merger will allow Colonial's customers to realize
significant benefits in the form of a ten-year rate freeze, a 2.2 percent
reduction in the burner-tip price of gas and synergies relating to the
avoidance of technology-related investments. These benefits would not be
possible but for the merger. Further, the merger will not adversely affect
the high service quality Colonial's customers have experienced over the
years. For these reasons, I believe the merger is in the best interests of
our shareholders, customers and employees and is in the public interest.
<PAGE>
Testimony of Nickolas Stavropoulos
Exhibit NS-1
December 24, 1998
Page 20
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
Exh. NS-2 (pg.1 of 2)
Colonial Gas Company
--------------------
Cape Cod Division
-----------------
Revenue Deficiency Summary PAGE 1
--------------------------
Test-Year Ended December 31, 1997
---------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B
-------- --------
DESCRIPTION AMOUNT
----------- ------
Cost of Service
- ---------------
<S> <C>
Operating & Maintenance Expense.......................................... $58,422,827
Depreciation & Amortization Expense...................................... $ 7,236,749
Taxes Other Than Income.................................................. $ 1,295,809
Federal Income & Massachusetts Franchise Tax............................. $ 4,437,652
Amortization of Investment Tax Credits................................... ($110,640)
Interest on Customer Deposits............................................ $ 27,655
Return on Rate Base...................................................... $10,896,171
-----------
Total Cost of Service........................................... $82,206,223
-----------
Operating Revenue
- -----------------
Gas Operating Revenue.................................................... $76,635,774
Income from Utility Plant Leased to Others............................... $ 48,808
-----------
Total Operating Revenue......................................... $76,684,582
-----------
REVENUE DEFICIENCY....................................................... $ 5,521,641
===========
PROPOSED % INCREASE...................................................... 7.20%
===========
</TABLE>
<PAGE>
Exh. NS-2 (p.2 of 2)
Colonial Gas Company
--------------------
Lowell Division
---------------
Revenue Deficiency Summary PAGE 2
--------------------------
Test-Year Ended December 31, 1997
---------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN B
-------- --------
DESCRIPTION AMOUNT
----------- ------
Cost of Service
- ---------------
<S> <C>
Operating & Maintenance Expense.......................................... $ 79,742,333
Depreciation & Amortization Expense...................................... $ 8,058,346
Taxes Other Than Income.................................................. $ 4,205,206
Federal Income & Massachusetts Franchise Tax............................. $ 5,124,469
Amortization of Investment Tax Credits................................... ($190,262)
Interest on Customer Deposits............................................ $ 38,535
Return on Rate Base...................................................... $ 12,136,659
------------
Total Cost of Service........................................... $109,115,286
------------
Operating Revenue
- -----------------
Gas Operating Revenue.................................................... $106,157,439
Income from Utility Plant Leased to Others............................... ($46,094)
------------
Total Operating Revenue......................................... $106,111,345
------------
REVENUE DEFICIENCY....................................................... $ 3,003,941
============
PROPOSED % INCREASE...................................................... 2.83%
============
</TABLE>
<PAGE>
Exh. NS-3
COLONIAL GAS COMPANY
Non-Emergency Calls Handled
within 40 Seconds
Measurement Period: July 1997 - June 1998
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
NUMBER OF CALLS MONTHLY PERCENTAGE MEASUREMENT
MONTH CALLS HANDLED WITHIN HANDLED WITHIN PERIOD TO DATE
ENDING REC'D 40 SECONDS 40 SECONDS PERCENTAGE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
31-Jul-97 29,681 21,644 72.92% 72.92%
31-Aug-97 26,977 21,932 81.30% 76.91%
30-Sep-97 31,776 25,452 80.10% 78.06%
31-Oct-97 34,525 27,735 80.33% 78.70%
30-Nov-97 29,756 21,966 73.82% 77.75%
31-Dec-97 28,913 21,375 73.93% 77.14%
31-Jan-98 30,815 22,781 73.93% 76.67%
28-Feb-98 28,640 21,578 75.34% 76.51%
31-Mar-98 34,892 24,810 71.10% 75.83%
30-Apr-98 34,671 22,542 65.02% 74.62%
31-May-98 30,055 11,471 38.17% 71.41%
30-Jun-98 31,442 14,774 46.99% 69.34%
- -----------------------------------------------------------------------------------------
TOTAL 372,143 258,059 69.34% 69.34%
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exh. NS-4
COLONIAL GAS COMPANY
Analysis of Emergency Call Outs
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
NUMBER MEASUREMENT
NUMBER OF RESPONDED TO MONTHLY PERIOD TO DATE
MONTH CALLS WITHIN 60 MIN PERCENTAGE PERCENTAGE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oct-97 759 723 95.26% 95.26%
Nov-97 721 686 95.15% 95.20%
Dec-97 706 677 95.89% 95.43%
Jan-98 590 558 94.58% 95.24%
Feb-98 545 522 95.78% 95.33%
Mar-98 591 564 95.43% 95.35%
Apr-98 585 552 94.36% 95.22%
May-98 560 536 95.71% 95.27%
Jun-98 606 560 92.41% 94.97%
Jul-98 561 524 93.40% 94.83%
Aug-98 557 520 93.36% 94.71%
Sep-98 651 601 92.32% 94.50%
- -------------------------------------------------------------------------------
TOTAL 7,432 7,023 94.50% 94.50%
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exh. NS-5
COLONIAL GAS COMPANY
INCIDENCE RATE
JULY 1995 - JUNE 1998
Measurement Calculation: The number of fatalities and lost time
occupational injuries or illnesses as
reported on the OSHA 200 LOG multiplied
by 200,000 divided by the number of
hours worked.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
MONTHLY MEASUREMENT
LOST TIME HOURS INCIDENCE PERIOD TO DATE
MONTH ACCIDENTS *WORKED RATE INCIDENCE RATE
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jul-95 2
Aug-95 2
Sep-95 6
Oct-95 0
Nov-95 3
Dec-95 6 468,719 8.11 8.11
Jan-96 4 63,644 12.57 8.64
Feb-96 3 78,050 7.69 8.52
Mar-96 2 69,281 5.77 8.24
Apr-96 2 69,866 5.73 8.00
May-96 4 81,876 9.77 8.18
Jun-96 4 66,238 12.08 8.47
---------------------------------------------------------------------
---------------------------------------------------------------------
Jul-96 5 63,961 15.63 8.94
Aug-96 0 79,280 0.00 8.26
Sep-96 1 67,728 2.95 7.94
Oct-96 7 85,431 16.39 8.54
Nov-96 2 72,110 5.55 8.37
Dec-96 1 67,614 2.96 8.10
Jan-97 3 78,223 7.67 8.07
Feb-97 3 68,270 8.79 8.11
Mar-97 2 72,244 5.54 7.99
Apr-97 2 73,635 5.43 7.87
May-97 4 84,611 9.46 7.95
Jun-97 5 72,898 13.72 8.19
---------------------------------------------------------------------
---------------------------------------------------------------------
Jul-97 2 85,401 4.68 8.03
Aug-97 3 72,025 8.33 8.04
Sep-97 2 71,011 5.63 7.95
Oct-97 3 87,914 6.82 7.90
Nov-97 0 71,690 0.00 7.64
Dec-97 2 79,187 5.05 7.55
Jan-98 3 68,270 8.79 7.59
Feb-98 1 69,503 2.88 7.45
Mar-98 4 75,128 10.65 7.55
Apr-98 1 84,999 2.35 7.38
May-98 3 70,236 8.54 7.41
Jun-98 1 71,658 2.79 7.28
---------------------------------------------------------------------
---------------------------------------------------------------------
98 2,690,701 7.28
---------------------------------------------------------------------
</TABLE>
* 1995 was derived using a different calculation method than 1996 and
forward. Therefore, Colonial does not have monthly data
for 1995. December 1995 figure represents estimated hours worked from July
through December 1995 based on total hours worked during 1995.
<PAGE>
Exh. NS-6
COLONIAL GAS COMPANY
Percentage of On-Cycle Meter Reads
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
MEASUREMENT
NUMBER OF NUMBER OF MONTHLY PERIOD TO DATE
MONTH METERS METERS READ PERCENTAGE PERCENTAGE
SCHED. TO READ
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jun-98 153,686 138,720 90.26% 90.26%
Jul-98 154,135 138,186 89.65% 89.96%
Aug-98 154,661 147,894 95.62% 91.85%
Sep-98 153,804 150,942 98.14% 93.42%
Oct-98 155,227 148,669 95.78% 93.89%
Nov-98 155,800 141,305 90.70% 93.36%
- --------------------------------------------------------------------------------------------------------------------
Total 927,313 865,716 93.36% 93.36%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Data has not been presented prior to June, 1998 as new customer system
was installed in May, 1998. Since that date, all meters are scheduled to be read
monthly.
<PAGE>
EASTERN ENTERPRISES COLONIAL GAS COMPANY
Testimony of James D. Hempstead
D.T.E. 98-___
I. INTRODUCTION
Q. PLEASE STATE YOUR NAME AND BUSINESS ADDRESS.
A. My name is James D. Hempstead. My business address is Merrill Lynch & Co.
250 Vesey Street, World Financial Center, North Tower, New York, New York
10281.
Q. BY WHOM ARE YOU EMPLOYED AND IN WHAT CAPACITY?
A. I am Vice President of the Global Power Group at Merrill Lynch & Co.
("Merrill Lynch"). Merrill Lynch is an internationally recognized
investment banking firm that is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, leveraged
buyouts, negotiated underwritings, secondary distributions of listed and
unlisted securities and private placements.
Q. PLEASE DESCRIBE YOUR CURRENT RESPONSIBILITIES.
A. As Vice President of the Global Power Group, I am responsible for providing
corporate finance and strategic financial advisory services to our
electric, gas distribution and gas pipeline clients.
Q. PLEASE DESCRIBE YOUR EDUCATIONAL AND PROFESSIONAL BACKGROUND.
A. I received a Bachelor of Science in Business Administration from Villanova
University and a Masters of Business Administration at Fordham University.
I
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 2
have worked as an investment banker in the electric and gas utility
industries since 1991.
Q. WHAT IS THE ROLE OF MERRILL LYNCH IN THIS TRANSACTION?
A. Eastern Enterprises ("Eastern") retained Merrill Lynch as financial advisor
on the proposed acquisition of Colonial Gas Company ("Colonial") to provide
corporate finance and strategic financial advisory services. Specifically,
we have assisted Eastern with performing financial due diligence on
Colonial, developing a general strategy to accomplish the acquisition of
Colonial and have presented to Eastern's Board of Trustees an opinion as to
the fairness, from a financial point of view, of the transaction to
Eastern.
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is: (i) to describe Merrill Lynch's recent
experience with mergers in the natural gas industry and to demonstrate that
the price paid by Eastern for Colonial is consistent with this experience;
(ii) to explain the structure of the transaction and the use of purchase
accounting; and (iii) to provide the market's perspective on the
amortization and recovery of the acquisition premium.
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 3
II. RECENT EXPERIENCE WITH 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/ but there has been a fair amount
of activity in the overall gas industry, which includes gas distribution
utilities and gas pipelines. During the five-year period from 1990 to
1994, there were 211 M&A transactions in this sector reflecting a total
value of approximately $10.8 billion. More recently however, with the
restructuring of the natural gas and electric utility industries and the
introduction of competitive market forces, M&A activity in the gas sector
has increased. Since the beginning of 1995, there have been 225 completed
transactions.
Of the utility transactions, many have represented industry consolidation
(gas utility to gas utility mergers and acquisitions) and energy
convergence (primarily gas and electric utility combinations).
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 restructuring has led to the introduction of customer
choice and
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 4
competition. These forces require traditional cost-of-service utilities
to reposition 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 enter into business combinations can reduce their operating
and maintenance expenses by eliminating overlapping or redundant functions
(i.e., achieving 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.
Q. WHAT HAS BEEN YOUR PARTICULAR EXPERIENCE WITH SUCH MERGERS AND ACQUISITIONS
IN THE GAS UTILITY SECTOR OVER THE PAST FIVE YEARS?
A. During the past five years, Merrill Lynch has advised on 23 announced or
completed transactions and restructurings in the gas industry valued at
over $44.6 billion. These transactions are listed in Exhibit JDH-2,
attached. Since joining Merrill Lynch in 1998, I have participated in the
Eastern/Colonial and
_______________________________________________________________________________
/1/ SOURCE: Securities Data Company.
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 5
ONEOK/Southwest Gas transactions. In addition, at my previous employer, I
was involved in the Williams Companies acquisition of MAPCO, Inc. and the
Chapter 11 restructuring of The Columbia Gas System, Inc. Merrill Lynch,
over the past few years, has significantly increased the amount of time
spent on strategic advisory work for both electric and gas utility clients.
Q. IN GENERAL, HOW ARE UTILITY ACQUISITIONS STRUCTURED?
A. Utility acquisitions can be structured two ways: through the sale of assets
or the sale of stock. For a number of reasons, the preferred structure for
utility acquisitions is the sale of a company's stock. These transactions
can be structured as a tax-free, share-for-share exchange of common stock,
or the consideration paid to selling shareholders can include cash and
other securities. Attached as Exhibit JDH-3 is a list of some recent
utility 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?
In virtually all of the utility transactions, the price paid by the
acquiring company has been at a premium to the book value of the acquired
company. As noted on the list of precedent transactions, purchase prices
have ranged from 0.8 to 3.2 times the seller's book value (see Exhibit JDH-
---
3). Typically, buyers are willing to pay a premium to the seller's book in
value order to realize cost savings and
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 6
achieve operational efficiencies. These cost savings and business
efficiencies commonly benefit customers in the form of lower rates, a rate
freeze, or the avoidance of rate increases. Shareholders also benefit where
they have an opportunity to recover merger-related costs through the
retention of synergistic cost savings that would not be available in the
absence of the merger.
Market-to-book value multiples paid to acquire gas utilities can and do
vary quite broadly for good reason. 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 the earnings projected to result
from the rate treatment applied to those savings. The financial impact of
these factors can vary 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 transactions listed in Exhibit JDH-3, buyers of
utility companies have been paying approximately 9.0 to 38.0 times the
preceding
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 7
twelve-month earnings of the acquired company, with a median price of
slightly over 16.5 times the twelve-month earnings figure. As was the case
with the premiums paid relative to book value, these price-to-earnings
multiples are justified by the long-term benefits that customers and
shareholders will receive from the merger. In addition, earnings multiples
tend to vary more widely than book multiples because of company-specific
events and various management decisions that directly affect net income.
These variables may include decisions as to depreciation rates, debt
retirements and the timing of operations and maintenance expenditures.
Q. GIVEN YOUR EXPERIENCE WITH OTHER GAS UTILITY MERGERS AND ACQUISITIONS AND
YOUR SPECIALIZED KNOWLEDGE OF THE INDUSTRY, IS IT MERRILL LYNCH'S OPINION
THAT THE PURCHASE PRICE PAID FOR COLONIAL IS FAIR FOR EASTERN FROM A
FINANCIAL POINT OF VIEW?
A. As advisor to Eastern, Merrill Lynch carefully analyzed the price paid in
the acquisition and considered it both in relation to the prices paid in
similar relevant transactions and in relation to our estimates of the cost
savings that would be necessary to make the transaction earnings-neutral
for Eastern's shareholders. Merrill Lynch concluded that the purchase
price to be paid by Eastern for Colonial is fair to Eastern from a
financial point of view, and so reported to both Eastern's management and
Eastern's Board of Trustees. One of the important factors leading to
Merrill Lynch's opinion regarding the transaction price was the value paid
by Eastern as a multiple of Colonial's earnings and book value. In that
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 8
regard, the purchase price to be paid by Eastern represents 2.66 times
Colonial's book value and 22.1 times Colonial's latest twelve-month
earnings. These multiples are consistent with recent comparable gas
distribution acquisitions (see Exhibit JDH-4). It should be noted that in
---
preparing our opinion, we have assumed that the necessary regulatory
approvals would be obtained without any unreasonable restrictions,
amendments or modifications to the Rate Plan.
III. STRUCTURE OF THE TRANSACTION AND USE OF PURCHASE ACCOUNTING
Q. PLEASE DESCRIBE THE METHODS OF ACCOUNTING FOR AN ACQUISITION AND HOW
EASTERN'S ACQUISITION OF COLONIAL GAS WILL BE STRUCTURED.
A. Acquisitions are reflected in one of two ways under generally accepted
accounting principles ("GAAP"): purchase accounting and pooling-of-
interests accounting. Pooling-of-interests accounting is required if the
transaction meets certain criteria established under GAAP, as set forth in
Exhibit JDH-5. One requirement for pooling-of-interests accounting is that
the acquisition must be accomplished through an exchange of the acquiring
company's stock for the outstanding stock of the acquired company. Since
Eastern will pay $144 million in cash consideration to acquire the gas
distribution operations of Colonial, pooling-of-interests accounting cannot
be used for this transaction.
If the requirements of pooling-of-interest accounting were met, then the
balance sheets of Eastern and Colonial would have been combined. Thus, for
accounting
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 9
purposes, there would be no adjustment (i.e., increase or decrease) to any
---
of the assets or liabilities of the merged entities to account for the
acquisition premium. In a purchase-accounting transaction, such as the
Eastern/Colonial combination, any acquisition premium paid is recorded on
the books of the acquired company and amortized over a certain time period,
not to exceed 40 years, in accordance with GAAP. For regulated companies
such as Colonial, the amount paid in excess of the net book value on an
historical cost basis represents the acquisition premium, which is
amortized over a 40-year period. Generally, gas utilities use a 40-year
period because of the long lives of the underlying assets, which are
primarily mains and services with useful lives well in excess of 40 years.
The amortization of the acquisition premium represents an expense which, if
not recovered, results in lower earnings for shareholders. As Mr. Bodanza
indicates in his testimony, the $199.2 million premium that will be paid by
Eastern for Colonial's gas distribution operations will be amortized over
40 years on the books of Colonial, in accordance with GAAP.
Q. HOW WILL THE PAYMENT OF THE ACQUISITION PREMIUM AFFECT THE EARNINGS OF
EASTERN'S SHAREHOLDERS?
A. Eastern will be paying a premium over book value for the acquisition of
Colonial. In this case, Eastern's shareholders will be paying a total
purchase price of $319 million for the equity of Colonial's gas
distribution business, which includes an acquisition premium of $199.2
million. Because the acquisition is being
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 10
accounted for under the purchase method, the difference between the
purchase price and the net book value is recorded as the acquisition
premium. The amortization of this premium will reduce earnings. In
addition, Eastern will no longer be earning interest on its balance sheet
on the $144 million of cash to be invested in Colonial's gas distribution
assets, which will have the effect of further reducing earnings. Thus,
earnings dilution results when the incremental earnings from the acquired
company, adjusted for the amortization of the acquisition premium and the
loss of earnings on any cash consideration, are less on a per-share basis
than the earnings on a per-share basis of the acquiror without the
acquisition, adjusted for any incremental shares issued in conjunction with
the transaction.
Q. WILL EASTERN'S SHAREHOLDERS EXPERIENCE EARNINGS DILUTION AS A RESULT OF THE
ACQUISITION OF COLONIAL?
A. Yes. In the absence of an opportunity to retain cost savings resulting
from merger-related synergies, Eastern shareholders will experience
earnings dilution. Thus, in order to quantify the level of retained
synergies necessary to make the transaction earnings-neutral for Eastern's
shareholders, I have performed an earnings dilution analysis.
Because the acquisition of Colonial includes both regulated and unregulated
operations, I have calculated the earnings dilution to reflect only the
dilution attributable to the gas distribution operations. To avoid
dilution to Eastern's
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 11
earnings, and a corresponding reduction in the value of Eastern's shares,
shareholders would need to retain pre-tax earnings of $521 million over a
40-year period, which represents an average of $13.0 million per year, or
$0.35 per share on average, after-tax, as set forth in Exhibit JDH-6. This
dilution represents an economic loss to Eastern's shareholders of
approximately 8 percent of earnings in 1999, which Eastern would otherwise
have expected to earn had the acquisition not occurred (see Exhibit JDH-6).
---
Q. PLEASE DESCRIBE THE GENERAL ASSUMPTIONS MADE IN DETERMINING THE EARNINGS
DILUTION IMPACT.
A. These calculations are based on several assumptions. First, the
acquisition price and the acquisition premium were adjusted to exclude
Transgas, Colonial's unregulated operation. Using Eastern's 1999 estimated
average earnings per share from First Call/2/ of $3.01, future earnings
were projected assuming a 3 percent annual growth rate over the next 20
years. This growth rate is conservative in light of both Eastern's
historical performance and its corporate objectives. Moreover, this 3
percent growth rate is conservative relative to typical gas-utility growth
rates.
It is important to note that, as growth rates assumed for the acquiror
increase, the level of earnings dilution experienced as a result of an
acquisition also increases.
___________________
/2/ First Call is a widely recognized and commonly used database that
maintains equity research analysts' estimates of publicly traded companies'
future earnings and earnings growth rates.
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 12
In assuming a very conservative level of growth, the level of earnings
dilution may be understated. The earnings of Colonial are based on
Colonial's five-year stand-alone financial plan, which was provided to
Eastern and other potential acquirors in due diligence prior to the
announcement of the acquisition. The earnings were adjusted to exclude: (1)
base-rate increases in 2000 through 2002; and (2) the effect of Transgas.
Second, Colonial's earnings were adjusted to reflect the loss of earnings
that Eastern will experience as a result of using $144 million in cash
investments to acquire Colonial. This loss is calculated assuming cash
investments have been earning a pre-tax return of 5.5 percent, with a tax
rate of approximately 35 percent (the effective tax rate for Eastern).
Third, Colonial's earnings must be further reduced for the amortization of
the acquisition premium. Using a 40-year amortization of the premium
attributable to the gas distribution business of Colonial, or $199.2
million, the annual amortization is approximately $5.0 million.
IV. MARKET'S PERSPECTIVE ON THE AMORTIZATION AND RECOVERY OF THE ACQUISITION
PREMIUM.
Q. PLEASE EXPLAIN WHAT FACTORS ARE CONSIDERED BY MARKET PARTICIPANTS IN
PLACING A VALUE ON EASTERN'S SHARES.
A. Gas company stock prices are affected by both company-specific events and
by industry-wide events. These factors include: interest rates,
projections of earnings growth, dividend policy, commodity prices and price
volatility,
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 13
significant weather changes, regulatory decisions, and M&A. With respect to
the factors considered by market participants in placing a value on
Eastern's shares, the primary drivers are projected earnings growth and
dividend stability.
The market views the consolidation trend in the gas distribution industry
favorably, because of the opportunity for achieving cost-saving
efficiencies and economies of scale. For this reason, the market responded
well to Eastern's proposed transaction with Colonial. It is significant
that the market views the "no net harm" standard established by the
Department as a very reasonable approach that will spur investment in the
future because it provides an opportunity to recover the costs necessary to
effect the consolidation.
Q. HOW WILL AMORTIZATION OF THE ACQUISITION PREMIUM AFFECT THE MARKET'S
PERSPECTIVE ON THE VALUE OF EASTERN'S STOCK?
A. The market recognizes that the amortization of the premium represents a
charge to earnings over a 40-year period. If Eastern is unable to retain
sufficient cost savings from the transaction, then the transaction will be
dilutive to Eastern's per-share earnings. The market will expect Eastern
to realize sufficient merger savings to make the transaction neutral to
earnings within the first full calendar year of operations. If Eastern
does not have the opportunity to achieve this objective, the market will
adjust the share price accordingly to reflect a lower earnings stream.
<PAGE>
Testimony of James D. Hempstead
Exhibit JDH-1
December 24, 1998
Page 14
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
Exhibit JDH-2
December 24, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
MERRILL LYNCH'S GAS INDUSTRY M&A EXPERIENCE /(1)/(2)/
- ------------------------------------------------------------------------------------------------------------
TRANSACTION VALUE
ACQUIROR TARGET ($ IN MILLIONS)
- ---------------------------------- ------------------------------------ ----------------------------------
<S> <C> <C>
Duke Power PANENERGY $ 9,952
BROOKLYN UNION GAS Long Island Lighting/LIPA 8,193
Enova Corp. PACIFIC ENTERPRISES 4,335
KN Energy MIDCON 3,990
Houston Industries NORAM ENERGY 3,865
The Williams Companies TRANSCO ENERGY 2,706
Shell Oil Company TEJAS GAS CORP. 2,650
CMS Energy DUKE ENERGY (PEPL & TGC) 2,200
ONEOK Inc. SOUTHWEST GAS 1,764
TEJAS GAS CORP. Central & South West 890
TEJAS GAS CORP. Transok Inc. 890
Associated Natural Gas PANHANDLE EASTERN 825
ATMOS ENERGY United Cities Gas 497
EASTERN ENTERPRISES Colonial Gas 494
PACIFIC GAS & ELECTRIC Teco Pipeline Company 365
PANENERGY Mobil Natural Gas (Midstream JV) 304
The Williams Companies KERN RIVER GAS TRANSMISSION 205
ENOVA/PACIFIC ENTERPRISES AIG Trading Corp. 190
Mitchell Energy PANHANDLE EASTERN 120
TEPPCO DUKE ENERGY (DETTCO) 100
Crystal Oil FIRST RESERVE GAS 78
Norwest Corporation SOUTHWEST GAS NA
PACIFIC GAS & ELECTRIC Valero Energy NA
----------------------------------
$44,613
==================================
</TABLE>
/(1)/ Source: Merrill Lynch & Co.
/(2)/ Merrill Lynch clients are indicated in bold.
- --------------------------------------------------------------------------------
<PAGE>
Exhibit JDH-3
December 24, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED UTILITY ACQUISITION MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
ANNOUNCEMENT EQUITY ENTERPRISE PRICE/ ACCOUNTING
DATE SUCCESSOR COMPANY VALUE VALUE PRICE/LTM BOOK TREATMENT CASH
- -------------- ------------ ------------ ------------ ------------ ---------
TARGET EARNINGS
------------
ACQUIROR
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/14/98 ONEOK
Southwest Gas $ 864.0 $ 1,764.3 18.9x 1.90x Purchase 100%
ONEOK 1,049.9 2,159.4 14.0 1.75
------------ ------------
1,913.9 3,923.7
12/14/98 National Grid Group
New England Electric System 3,216.5 3,877.9 14.9 2.01 Purchase 100
National Grid Group 12,434.5 14,873.8 19.3 8.41
------------ ------------
15,651.1 18,751.7
12/7/98 ScottishPower
PacifiCorp 7,335.9 12,225.4 29.9 1.83 Purchase 0
ScottishPower 12,727.0 16,184.2 15.6 4.44
------------ ------------
20,062.9 28,409.6
12/7/98 BEC Energy
Commonwealth Energy 949.6 1,575.5 19.5 2.13 Purchase 10
BEC Energy 1,981.7 2,943.6 14.2 1.85
------------ ------------
2,931.4 4,519.0
11/23/98 AES Corporation
CILCORP 894.8 1,334.8 37.8 2.51 Purchase 100
AES Corporation 7,854.9 14,948.9 28.1 4.59
------------ ------------
8,749.7 16,283.7
11/11/98 Carolina Power & Light
North Carolina Natural Gas 353.5 426.0 20.9 2.83 Pooling 0
Carolina Power & Light 7,197.7 9,966.1 17.4 2.54
------------ ------------
7,551.2 10,392.1
10/19/98 Eastern Enterprises
Colonial Gas 332.0 494.0 22.1 2.66 Purchase 45
Eastern Enterprises 975.8 1,243.5 18.6 1.80
------------ ------------
1,307.8 1,737.4
8/12/98 MidAmerican Energy
MidAmerican Energy 2,554.9 4,045.6 18.2 1.95 Purchase 100
CalEnergy 1,579.6 6,088.2 15.0 2.03
------------ ------------
4,134.6 10,133.7
5/12/98 Consolidated Edison
Orange & Rockland 790.8 1,319.4 18.8 2.10 Purchase 100
Consolidated Edison 10,567.6 15,460.3 15.2 1.78
------------ ------------
11,358.4 16,779.8
4/30/98 Sierra Pacific Resources
Sierra Pacific Resources 1,077.7 1,921.0 14.5 1.70 Purchase 20
Nevada Power 1,226.1 2,264.5 14.9 11.47
------------ ------------
2,303.7 4,185.5
3/19/98 Westar Energy
Kansas City Power & Light 2,135.3 2,135.3 16.4 2.38 Pooling 0
Western Resources 2,767.6 4,542.3 15.8 1.30
------------ ------------
4,902.9 6,677.6
12/22/97 Eastern Enterprises
Essex County Gas Company 80.5 98.6 18.3 2.26 Pooling 0
Eastern Enterprises 833.8 1,051.1 15.9 2.00
------------ ------------
914.3 1,149.7
12/22/97 American Electric Power
Central & South West 6,438.7 12,063.7 16.8 1.77 Pooling 0
American Electric Power 9,587.2 15,615.1 15.3 2.06
------------ ------------
4,902.9 6,677.6
</TABLE>
<PAGE>
Exhibit JDH-3 (Continued)
December 24, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED UTILITY ACQUISITION MULTIPLES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
ANNOUNCEMENT EQUITY ENTERPRISE PRICE/ ACCOUNTING
DATE SUCCESSOR COMPANY VALUE VALUE PRICE/LTM BOOK TREATMENT CASH
- -------------- ------------ ------------ ------------ ------------ ---------
TARGET EARNINGS
------------
ACQUIROR
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/18/97 NIPSCO
Bay State Gas 540.3 827.6 25.7 2.31 Purchase 50
NIPSCO 2,893.5 4,897.7 15.5 2.28
------------ ------------
3,433.7 5,725.3
5/21/97 LG&E Energy
KU Energy $ 1,578.9 $ 2,219.5 19.3x 2.65x Pooling 0%
LG&E 1,658.5 2,568.7 13.8 2.04
------------ ------------
3,237.4 4,788.2
4/7/97 Allegheny Energy
DQE 2,588.1 3,941.9 14.5 1.86 Pooling 0
Allegheny Power System 3,619.1 6,350.4 13.6 1.67
------------ ------------
6,207.2 10,292.3
12/29/96 KeySpan Corporation
Long Island Lighting Co. 2,951.5 8,193.1 11.3 1.17 Pooling 0
Brooklyn Union Gas 1,524.8 2,201.5 15.8 1.68
------------ ------------
4,476.3 10,394.6
11/25/96 Duke Energy
PanEnergy 7,553.4 9,951.6 21.8 3.14 Pooling 0
Duke Power 9,651.1 14,071.9 14.6 1.97
------------ ------------
17,204.5 24,023.5
10/14/96 Sempra Energy
Pacific Enterprises 2,826.9 4,334.9 14.7 2.15 Pooling 0
Enova 2,579.0 4,070.2 11.4 1.67
------------ ------------
5,405.9 8,405.1
9/16/96 FirstEnergy
Centerior 1,602.8 6,343.2 8.6 0.83 Pooling 0
Ohio Edison 3,146.7 6,632.5 10.4 1.29
------------ ------------
4,749.6 12,975.7
8/12/96 Conectiv
Atlantic Energy 915.7 3,083.7 10.7 1.13 Purchase 0
Delmarva Power & Light 1,291.0 2,358.4 12.0 1.39
------------ ------------
2,206.7 5,442.2
8/12/96 Houston Industries
NorAm Energy 2,241.8 3,865.3 33.5 3.20 Purchase 50
Houston Industries 6,240.1 10,451.0 14.9 1.55
------------ ------------
2,206.7 5,442.2
7/22/96 Atmos Energy
United Cities Gas 332.0 496.4 22.8 2.06 Pooling 0
Atmos Energy 414.9 572.3 22.6 2.29
------------ ------------
746.9 1,068.7
7/22/96 Enron
Portland General 2,140.0 3,288.5 14.7 2.30 Pooling 0
Enron 10,555.5 14,566.2 23.4 3.28
------------ ------------
12,695.5 17,854.8
5/24/96 Interstate Energy
WPL Holdings 950.1 1,546.8 11.4 1.55 Pooling 0
IES Industries 1,043.8 1,794.7 14.6 1.69
Interstate Power 327.8 573.5 12.1 1.62
------------ ------------
2,321.7 3,915.0
8/23/95 New Century Energies
Southwestern Public Service 1,219.6 1,841.1 12.2 1.76 Pooling 0
Public Service Co. of Colorado 1,980.0 3,610.7 11.2 1.52
------------ ------------
3,199.7 5,451.9
</TABLE>
<PAGE>
Exhibit JDH-3 (Continued)
December 24, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED UTILITY ACQUISITION MULTIPLES (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------------------------
ANNOUNCEMENT EQUITY ENTERPRISE PRICE/ ACCOUNTING
DATE SUCCESSOR COMPANY VALUE VALUE PRICE/LTM BOOK TREATMENT CASH
- -------------- ------------ ------------ ------------ ------------ ---------
TARGET EARNINGS
------------
ACQUIROR
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
8/14/95 Ameren
CIPSCO 1,258.9 1,815.7 15.8 1.97 Pooling 0
Union Electric 3,663.7 5,822.6 12.8 1.63
------------ ------------
4,922.6 7,638.3
7/27/94 MidAmerican Energy
Iowa-Illimois Gas & Electric 655.9 1,554.2 12.1 0.94 Pooling 0
Midwest Resources 836.7 1,735.0 11.8 1.20
------------ ------------
1,492.6 3,289.3
</TABLE>
<PAGE>
Exhibit JDH-4
December 24, 1998
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SELECTED GAS DISTRIBUTION ACQUISITION MULTIPLES
- ------------------------------------------------------------------------------------------------------------------------------------
ANNOUNCEMENT EQUITY ENTERPRISE PRICE/ ACCOUNTING
DATE SUCCESSOR COMPANY VALUE VALUE PRICE/LTM BOOK TREATMENT CASH
- -------------- ------------ ------------ ------------ ------------ ---------
TARGET EARNINGS
------------
ACQUIROR
------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
12/14/98 ONEOK
Southwest Gas $ 864.0 $ 1,764.3 18.9x 1.90x Purchase 100%
ONEOK 1,049.9 2,159.4 14.0 1.75
------------ ------------
1,913.9 3,923.7
11/11/98 Carolina Power & Light
North Carolina Natural Gas 353.5 426.0 20.9 2.83 Pooling 0
Carolina Power & Light 7,197.7 9,966.1 17.4 2.54
------------ ------------
7,551.2 10,392.1
10/19/98 Eastern Enterprises
Colonial Gas 332.0 494.0 22.1 2.66 Purchase 45
Eastern Enterprises 975.8 1,243.5 18.6 1.80
------------ ------------
1,307.8 1,737.4
12/22/97 Eastern Enterprises
Essex County Gas Company 80.5 98.6 18.3 2.26 Pooling 0
Eastern Enterprises 833.8 1,051.1 15.9 2.00
------------ ------------
914.3 1,149.7
12/18/97 NIPSCO
Bay State Gas 540.3 827.6 25.7 2.31 Purchase 50
NIPSCO 2,893.5 4,897.7 15.5 2.28
------------ ------------
3,433.7 5,725.3
7/22/96 Atmos Energy
United Cities Gas 332.0 496.4 22.8 2.06 Pooling 0
Atmos Energy 414.9 572.3 22.6 2.29
------------ ------------
746.9 1,068.7
</TABLE>
________________________________________________________________________________
<PAGE>
Exhibit JDH-5
December 24, 1998
- --------------------------------------------------------------------------------
"POOLING-OF-INTERESTS" ACCOUNTING QUALIFICATION CRITERIA
- --------------------------------------------------------------------------------
1. Each of the combining companies must be autonomous and may not have been a
subsidiary or division of another corporation within two years prior to the
initiation of a plan of combination (APB-16, par.
46a)..
2. At the date of initiation and at the date of consummation of the
combination plan, each combining company is independent of the other. An
intercorporate investment of 10 percent or less of the total outstanding
voting common stock of any combining company is acceptable and will not
impair the independence test (APB-16, par. 46b)..
In addition, the term business combination does not apply to the transfer
of net assets or the exchange of shares between companies under common
control (APB-16, par. 5). Therefore, the exchange by a partially owned
subsidiary of its common stock for the outstanding voting common stock of
its parent (a downstream merger) cannot be accounted for by the pooling-of-
interests method (FTB 85-5, pars. 13 and 14). The acquisition of some or
all of the stock held by minority stockholders of a subsidiary, whether
acquired by the parent, the subsidiary itself, or another affiliate, should
be accounted for by the purchase method (fair value) (APB-16, par. 43)..
3. After a plan is initiated, it must be completed within one year in
accordance with a specific plan, or completed in a single transaction (APB-
16, par. 47a)..
4. At the consummation date of the plan, the acquiring company offers and
issues its majority class of stock (voting rights) for no less than 90
percent of the voting common stock interests of the combining company being
acquired. The 90 percent or more of the voting common stock interests being
acquired is determined at the date the plan is consummated (APB-16, par.
47b)..
5. No changes in the equity interests of the voting common stock of any
combining company may be made in contemplation of a pooling of interests.
This restriction is for a period beginning two years prior to the
initiation date of the plan of combination, and for the period between the
initiation date and the consummation date (APB-16, par.
47c)..
6. The reacquisition of voting common stock by any combining company is
allowed except for purposes of business combinations. In addition, any
reacquisition of voting common stock between the initiation and the
consummation dates must be no more than a normal amount (APB-16, par.
47d)..
7. Each common stockholder to a plan of combination must receive a voting
common stock interest exactly in proportion to his or her voting common
stock interest prior to the combination (APB-16, par.
47e)..
8. The common stockholders to a plan of combination must receive the voting
rights they are entitled to and must not be deprived or restricted in any
way from exercising those rights (APB-16, par.
47f)..
9. The entire plan of combination must be effected on the date of consummation
(APB-16, par. 47g)..
10. The combined corporation may not agree to reacquire or retire any of the
stock issued to effect the combination (APB-16, par. 48a)..
11. The combined corporation may not enter into any agreements to the benefit
of the former shareholders of the combiners, such as loan guarantees
secured by issuer company stock (APB-16, par. 48b)..
12. The combined corporation may not plan to dispose of substantial amounts of
the assets of the combiners within two years of the date of the combination
other than routine transactions in the ordinary course of business or to
eliminate excess capacity (APB-16, par. 48c)..
Source: 1996 Miller GAAP Guide.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
Exhibit JDH-6
----------------------------------------------------------------------------------------------------------------------------
PURCHASE PRICE OF EQUITY AND GOODWILL CALCULATION December 24, 1998
--------------------------------------------------
<S> <C>
Offer price per share $ 37.50
Shares outstanding 8,853 /(1)/
---------
$ 332,001
Less: Fair market value of TransGas (13,000) /(2)/
---------
$ 319,001
Less: Book value of Colonial Gas (119,827) /(3)/
---------
$ 199,174
Amortization period (years) 40
Annual goodwill amortization $ 4,979
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS OF PRO FORMA SHARES OUTSTANDING
- -------------------------------------------
<S> <C> <C> <C>
Colonial Purchase Price $ 332,001
Less: Cash Consideration 150,000
--------
Eastern Common Stock Consideration $ 182,001
Assumed Eastern Common Stock Price Per Share $ 41.00
GAS TRANSGAS TOTAL
---------- ----------- --------
Cash (includes transaction expenses) 144,127 5,873 $ 150,000
Eastern Shares Issued 4,265 174 4,439
Eastern Shares Outstanding at 9/30/98 22,438 22,438
---------- ---------------
Pro Forma Shares Outstanding 26,703 26,877
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
ASSUMPTIONS OF TAX AND INTEREST RATES
- -------------------------------------
Assumed Pre-Tax Interest Rate on Cash Balance 5.50%
Assumed Tax Rate (Corporate) 35.0%
Assumed Tax Rate (Gas Company) 39.2%
Assumed After-Tax Interest Rate on Cash (Gas Distribution) 3.575%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h)
Colonial TransGas Interest Adjusted Eastern Pro Forma Pro Forma
Net Net Goodwill Forgone Colonial Net Eastern Combined Combined
Year Year Income Income Amortization on Cash Net Income Income EPS Net Income EPS
- --------------- ---- --------- --------- --------------- --------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1999 $17,767 ($1,128) ($4,979) ($5,153) $ 6,507 $ 67,500 $3.01 $ 74,007 $2.77
2 2000 18,568 (1,255) (4,979) (5,153) 7,181 69,525 3.10 76,706 2.87
3 2001 19,346 (1,395) (4,979) (5,153) 7,819 71,611 3.19 79,430 2.97
4 2002 20,155 (1,550) (4,979) (5,153) 8,473 73,759 3.29 82,232 3.08
5 2003 8,727 75,972 3.39 84,699 3.17
6 2004 8,989 78,251 3.49 87,240 3.27
7 2005 9,259 80,599 3.59 89,857 3.37
8 2006 9,537 83,016 3.70 92,553 3.47
9 2007 9,823 85,507 3.81 95,330 3.57
10 2008 10,117 88,072 3.93 98,190 3.68
11 2009 10,421 90,714 4.04 101,135 3.79
12 2010 10,733 93,436 4.16 104,169 3.90
13 2011 11,055 96,239 4.29 107,294 4.02
14 2012 11,387 99,126 4.42 110,513 4.14
15 2013 11,729 102,100 4.55 113,829 4.26
16 2014 12,081 105,163 4.69 117,243 4.39
17 2015 12,443 108,318 4.83 120,761 4.52
18 2016 12,816 111,567 4.97 124,384 4.66
19 2017 13,201 114,914 5.12 128,115 4.80
20 2018 13,597 118,362 5.28 131,959 4.94
21 2019 14,005 121,913 5.43 135,917 5.09
22 2020 14,425 125,570 5.60 139,995 5.24
23 2021 14,858 129,337 5.76 144,195 5.40
24 2022 15,303 133,217 5.94 148,520 5.56
25 2023 15,762 137,214 6.12 152,976 5.73
26 2024 16,235 141,330 6.30 157,565 5.90
27 2025 16,722 145,570 6.49 162,292 6.08
28 2026 17,224 149,937 6.68 167,161 6.26
29 2027 17,741 154,435 6.88 172,176 6.45
30 2028 18,273 159,068 7.09 177,341 6.64
31 2029 18,821 163,840 7.30 182,661 6.84
32 2030 19,386 168,755 7.52 188,141 7.05
33 2031 19,967 173,818 7.75 193,786 7.26
34 2032 20,566 179,033 7.98 199,599 7.47
35 2033 21,183 184,404 8.22 205,587 7.70
36 2034 21,819 189,936 8.46 211,755 7.93
37 2035 22,474 195,634 8.72 218,107 8.17
38 2036 23,148 201,503 8.98 224,651 8.41
39 2037 23,842 207,548 9.25 231,390 8.67
40 2038 24,557 213,774 9.53 238,332 8.93
<CAPTION>
Accretion/ Accretion/ Break-even
(Dilution) (Dilution) Pre-Tax
Year Year ($ per share) (%) Savings
- --------------- ---- ------------- ------------ -----------
<S> <C> <C> <C> <C>
1 1999 ($0.24) -7.9% ($10,405)
2 2000 (0.23) -7.3% (9,929)
3 2001 (0.22) -6.8% (9,532)
4 2002 (0.21) -6.3% (9,128)
5 2003 (0.21) -6.3% (9,401)
6 2004 (0.22) -6.3% (9,683)
7 2005 (0.23) -6.3% (9,974)
8 2006 (0.23) -6.3% (10,273)
9 2007 (0.24) -6.3% (10,581)
10 2008 (0.25) -6.3% (10,899)
11 2009 (0.26) -6.3% (11,226)
12 2010 (0.26) -6.3% (11,563)
13 2011 (0.27) -6.3% (11,909)
14 2012 (0.28) -6.3% (12,267)
15 2013 (0.29) -6.3% (12,635)
16 2014 (0.30) -6.3% (13,014)
17 2015 (0.31) -6.3% (13,404)
18 2016 (0.31) -6.3% (13,806)
19 2017 (0.32) -6.3% (14,221)
20 2018 (0.33) -6.3% (14,647)
21 2019 (0.34) -6.3% (14,647)
22 2020 (0.35) -6.3% (14,647)
23 2021 (0.36) -6.3% (14,647)
24 2022 (0.38) -6.3% (14,647)
25 2023 (0.39) -6.3% (14,647)
26 2024 (0.40) -6.3% (14,647)
27 2025 (0.41) -6.3% (14,647)
28 2026 (0.42) -6.3% (14,647)
29 2027 (0.43) -6.3% (14,647)
30 2028 (0.45) -6.3% (14,647)
31 2029 (0.46) -6.3% (14,647)
32 2030 (0.48) -6.3% (14,647)
33 2031 (0.49) -6.3% (14,647)
34 2032 (0.50) -6.3% (14,647)
35 2033 (0.52) -6.3% (14,647)
36 2034 (0.53) -6.3% (14,647)
37 2035 (0.55) -6.3% (14,647)
38 2036 (0.57) -6.3% (14,647)
39 2037 (0.58) -6.3% (14,647)
40 2038 (0.60) -6.3% (14,647)
--------------
($521,440)
</TABLE>
<PAGE>
EASTERN ENTERPRISES COLONIAL 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. HAVE YOU PREVIOUSLY TESTIFIED IN PROCEEDINGS BEFORE THE DEPARTMENT?
A. Yes, I have testified in a number of other proceedings before the
Department during my tenure with Boston Gas. Most recently, I testified on
behalf of Eastern Enterprises ("Eastern") in Eastern-Essex Acquisition,
-------------------------
D.T.E. 98-27 (1998).
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is: (i) to discuss the Rate Plan for Colonial
Gas Company ("Colonial"); (ii) to discuss the costs associated with
achieving the merger and the required accounting treatment of those costs
in a purchase accounting transaction; (iii) to describe and propose a
process for calculating the
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 2
cost savings and synergies achieved that are available to offset the total
transaction costs following the expiration of the ten-year rate-freeze
period; and (iv) 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, (S) 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 Colonial
customers with significant and immediate benefits while allowing Eastern's
shareholders an opportunity to recover the costs incurred to achieve the
merger. In that regard, the Rate Plan provides a 2.2 percent reduction in
the total burner-tip price of gas currently paid by Colonial's 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 both the acquisition premium paid by
Eastern and the related transaction costs through the retention of merger-
related synergies.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 3
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
immediate and long-term benefits to Colonial customers. Based on
Colonial's 1997 normalized revenues of approximately $183 million, Colonial
customers would receive an immediate burner-tip price reduction of
approximately $1.0 million, which would increase to $4.0 million in the
first full year following the merger, for an overall burner-tip price
reduction of 2.2 percent. These savings, as described in the testimony of
Mr. Luthern, will result from the attainment of synergies and efficiencies
in the gas supply function and are estimated to total approximately $37
million over the ten-year rate-freeze period. All savings related to the
gas supply function will be reflected in Colonial's Cost of Gas Adjustment
Clause ("CGAC") over ten-years.
We also propose to freeze Colonial's base rates for ten years, which will
provide customers with savings of $127.6 million as demonstrated in Exhibit
JFB-2. In addition, cost savings will accrue to Colonial customers as a
result of the avoidance of information technology-related capital
investments, totaling $12.5 million over the ten-year rate-freeze period,
as demonstrated in Exhibit JFB-3. We have estimated that the combined
impact of the gas supply cost savings, avoided capital costs and rate-
freeze savings will provide Colonial customers with
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 4
benefits of $177 million, or an average of $17.7 million annually, over ten
years, as calculated in Exhibit JFB-4.
<TABLE>
<CAPTION>
--------------------------------------------------------------
TABLE 1
-------
CUSTOMER BENEFITS OVER TEN-YEAR RATE-FREEZE PERIOD
--------------------------------------------------
<S> <C>
Gas Supply Savings $37 million
Avoided Technology Investments $12.5 million
Avoided Base-Rate Increases $127.6 million
--------------
TOTAL CUSTOMER BENEFITS $177.1 million
--------------------------------------------------------------
</TABLE>
These benefits represent per customer annual savings of approximately $116,
or $1164 per customer over ten years.
We are further proposing to amortize all transaction costs incurred to
complete the merger as well as all integration costs incurred to realize
projected cost synergies during the ten-year period of the base-rate
freeze. In addition, as required under generally accepted accounting
principles ("GAAP"), we are proposing to amortize over 40 years, and
recover through the earnings of Colonial, the acquisition premium incurred
by Eastern to accomplish the merger. In order to offset the effect of the
merger-related costs on earnings, we are proposing to retain O&M synergies
during the ten-year rate-freeze period and, to the extent that achieved
synergies are demonstrated to be equal to or greater than the amortized
amount of merger-related cost, during the following 30 years of the Rate
Plan.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 5
Q. ON WHAT BASIS HAVE YOU DETERMINED THAT GAS COST SAVINGS OF APPROXIMATELY $4
MILLION ANNUALLY 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 Colonial.
Such joint coordination will create increased supply options, result in
more efficient use of existing resources, and generate savings from an
enhancement of Colonial's purchasing power. Mr. Luthern has reviewed
Colonial'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 Colonial's supply contracts and
requirements forecast has enabled him to project that gas costs for the
Colonial portfolio will be reduced in the first full year following the
merger by $4.0 million annually. In addition, there may be opportunities
for additional savings relating to the restructuring of other capacity
contracts in the future, which would flow to customers through the
operation of the CGAC.
Q. HOW DID YOU CALCULATE THE CUSTOMER SAVINGS THAT ARE LIKELY TO RESULT FROM
THE TEN-YEAR FREEZE IN THE BASE RATES OF COLONIAL?
A. As discussed by Mr. Stavropoulos in his testimony, we have performed a
revenue-requirement analysis based on a 1997 test year, which indicates
that Colonial has a revenue deficiency of $8.5 million across its two
operating divisions. I estimate that, if base rates are frozen for ten
years, Colonial's customers will avoid a rate
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 6
case, which Colonial planned on filing in April 2000, along with additional
base rate increases during the rate-freeze period. Rather than projecting a
series of base-rate cases over that period, I have estimated annual base-
rate increases based on the price-cap approach that has been approved by
the Department. Using the test-year 1997 calculated revenue requirement of
$92 million to establish "cast-off" rates, I have performed an analysis to
quantify annual price increases that would occur over the rate-freeze
period using a forecast of the inflation measure GDP-PI, less an offset of
100 basis points. Thus, as demonstrated in Exhibit JFB-2, over the proposed
ten-year rate-freeze period, savings of $127.6 million would be achieved
for the direct benefit of Colonial's customers.
Q. WHY IS THE TEN-YEAR RATE FREEZE PARTICULARLY SIGNIFICANT IN THIS CASE?
A. In this case, the ten-year rate freeze proposal actually represents a base-
rate decrease in real terms for Colonial's customers because of the $8.5
million revenue deficiency and the inflation offset, which is discussed in
the testimony of Mr. Stavropoulos. In addition, as recognized by the
Department in NIPSCO-Bay State Acquisition, the benefits of a rate freeze
----------------------------
are compounded over time. D.T.E. 98-31, at 16. Thus, the rate-freeze
benefits for Colonial's customers are significant and unprecedented because
of the extended time period, i.e., ten years, and because Colonial will be
----
freezing rates that are not currently collecting sufficient revenue to
recover its costs to serve customers. Although Eastern is
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 7
assuming considerable risk in committing to a ten-year rate freeze given
the existence of a significant revenue deficiency, Eastern is willing to
make such a commitment given the Department's recognition that, should
serious adverse circumstances arise during the rate freeze such as
significant inflation, reasonable and properly supported adjustments would
be considered by the Department. D.T.E. 98-31, at 18-19.
During the ten-year period of the rate freeze, Eastern is proposing to
shoulder the risk for a reasonable level of inflation in the costs Colonial
incurs to provide service to its customers. If inflation rates were to rise
precipitously, however, it would be impossible for Colonial to bear all
cost increases for the full ten-year period, especially where Colonial has
"locked in" a revenue deficiency. Accordingly, we are proposing that the
Department provide an opportunity for Colonial to file for an appropriate
modification in rates during the ten-year rate-freeze period where
inflation, as measured by the GDP-PI, has increased by more than 5 percent
in a twelve-month period.
Therefore, consistent with previous Department findings, and unless
inflation increases significantly, the proposed base-rate freeze 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. See D.T.E. 98-27, at 19; D.T.E. 98-31, at 17.
---
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 8
Q. ARE THERE CURRENTLY ANY PENDING CASES BEFORE THE DEPARTMENT THAT INVOLVE
POLICY DETERMINATIONS THAT COULD SIGNIFICANTLY AFFECT THE OPERATION OF THE
RATE PLAN, AND THEREFORE, CONSTITUTE AN EXOGENOUS COST?
A. Yes. The Department currently has under consideration a proceeding to
investigate the recovery of lost base revenues ("LBRs") associated with
conservation measures installed through demand-side management ("DSM")
programs, which is docketed as Colonial Gas Company, D.T.E. 97-112. Since
--------------------
a gas company's allowed revenue requirement is recovered through rates
largely on a volumetric, test-year basis, DSM measures installed to reduce
gas usage have the effect of decreasing the number of revenue-producing
sales and billing units needed to recover a company's approved revenue
requirement. The Department has recognized that a significant reduction in
revenue resulting from such installations would preclude a company from
recovering its revenue requirement between rate cases and, as a result,
would require the filing of more frequent rate cases. See, e.g., D.P.U.
--- ----
86-36-F at 35 (1988); Boston Gas Company, D.P.U. 90-17/18/55, at 139
------------------
(1990). Thus, the Department has historically allowed annual adjustments
to provide for the recovery of LBRs until the full impact of those lost
sales can be reflected in a company's base rates during a rate-case
proceeding.
A reversal of this long-standing policy regarding the recovery of LBRs
would have a significant, negative impact on the operation of the Rate
Plan, as proposed herein. Colonial's most recent filing for LBR recovery
was filed on September 7,
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 9
1998, which requested recovery of $1.2 million associated with LBRs for the
period of May 1997 through April 1998. This filing was docketed as Colonial
--------
Gas Company, D.T.E. 98-95. Because of the ten-year rate freeze, Colonial
-----------
will not be able to adjust for LBRs through a general rate proceeding were
the Department to limit LBR recovery. Since a change in the Department's
regulatory policy with regard to the recovery of LBRs would have a
significant impact on the ability of Eastern and Colonial to have a
reasonable opportunity to recover merger-related costs during the rate
freeze period, it would be necessary to treat such a change in Department
policy as an exogenous cost. Therefore, in order to implement the Rate
Plan, Eastern and Colonial would need the Department's recognition that any
such policy change would constitute an exogenous cost, which Colonial could
recover through adjusted rates.
Q. WILL COLONIAL'S CUSTOMERS BE THE BENEFICIARIES OF ANY MERGER-RELATED COST
SAVINGS IN ADDITION TO THE TEN-YEAR RATE FREEZE AND GAS COST REDUCTIONS?
A. We estimate that additional cost savings will be realized for the benefit
of Colonial's customers as a result of the avoidance of certain
information-technology-related capital investments and ongoing expenses
associated with these investments. Over the past several years, Boston Gas
has invested significantly in information technology, including software
systems, hardware and infrastructure. These investments have enhanced
customer service, improved productivity and advanced Boston Gas' readiness
for the Year 2000. In addition,
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 10
these investments have positioned Boston Gas to implement a comprehensive
customer-choice program in 1999.
Combining the information processing needs of Boston Gas and Colonial will
enable Colonial to avoid incurring duplicate expenditures. Colonial will be
able to avoid planned development and/or modifications of a variety of
systems, including work management, facilities maintenance, supervisory
control and data acquisition, and broker management. The investments in
technology made by Boston Gas will be leveraged and integrated into the
operations of Colonial. Additionally, savings will be realized from the
elimination of duplicate software and hardware licenses and maintenance
fees. The cost savings of avoided technology investment by Colonial are
estimated to be approximately $12.5 million over the ten-year rate-freeze
period, as shown in Exhibit JFB-3.
Q. HAVE YOU IDENTIFIED ANY POTENTIAL NEAR-TERM COST SAVINGS THAT COULD BE
REALIZED THROUGH OPERATION AND MAINTENANCE EFFICIENCIES?
A. The Colonial acquisition is distinguishable from Eastern's acquisition of
Essex in one major respect. Because of Essex's relatively small size
(42,000 customers) in comparison to the Boston Gas system (520,000
customers), and the minimal level of automation employed in Essex's
operations, a significant portion of the operation and maintenance ("O&M")
synergies were readily apparent and attainable within a reasonable time
frame. Specifically, Essex's relatively small
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 11
size allowed Boston Gas effectively to "annex" Essex's back-office
operations using the information systems of Boston Gas.
In this case, the attainment of O&M synergies is more complicated because
Colonial's operation is much larger (152,000 customers) and is divided into
two non-contiguous operating divisions. In addition, Colonial has already
implemented a variety of initiatives to control costs and improve
productivity. In that respect, Colonial is committed to certain
contractual arrangements for O&M-related services that must be fulfilled
either by retaining the contract or by "buying out" the remaining
commitment. In addition, because Colonial is recognized for its strong
management team, we anticipate that many members of the Colonial management
team will be retained after the merger, which will allow us to build on the
enhanced management resources of the affiliated companies. Thus, on an
overall basis, the same proportion of staff reductions are not available in
this transaction as were available in the Essex merger.
Given the relatively large scale of Colonial's operations, which is roughly
four times the size of Essex, and the fact that Colonial has certain
systems in place, the identification of O&M synergies in this case will
require the development of a comprehensive and carefully planned
integration plan. As a result, the attainment of O&M synergies will be a
longer-term process than in the Essex case, since it will take time both to
identify cost-saving opportunities and to implement
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 12
measures to attain those synergies. Boston Gas and Colonial will use a
collaborative approach to determine how best to combine all functional
areas. The objective of this process will be to define and implement the
business processes and infrastructure necessary for the companies to
operate with the utmost efficiency. For that purpose, the services of
Deloitte & Touche Consulting ("Deloitte & Touche") have been retained to
support the enterprise-wide merger integration process. Deloitte & Touche
is the most experienced consulting firm in the area of merger integration
within the utility industry.
Without having completed the process to develop a comprehensive plan to
guide the merger integration process, it is our estimate that available O&M
synergies over the next few years will grow to approximately $8.7 million
per year. We estimate that labor savings can be achieved through the
reduction of approximately 5 percent, or 100 redundant positions. We
estimate that the direct wage, salary and benefit cost reductions
associated with these positions is approximately $6.8 million. Moreover,
we estimate that other cost savings of approximately $1.9 million 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 approximately $8.7 million or 25 percent of Colonial's total O&M
expenses for the most recent fiscal year, are potentially attainable in the
near term
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 13
as a result of Eastern's acquisition of Colonial. These savings are set
forth in Exhibit JFB-5.
Q. WHAT RISKS DO YOU PERCEIVE ARE INVOLVED IN ACHIEVING O&M SYNERGIES BOTH IN
THE NEAR AND LONG TERM?
A. As noted above, O&M synergies resulting from Eastern's acquisition of
Colonial will develop over time and will involve a substantial effort to
identify and achieve. Accordingly, there is uncertainty surrounding the
magnitude of the O&M cost savings, which means that Eastern will be
assuming a considerable amount of risk in achieving sufficient O&M cost
savings to offset the transaction costs that will be incurred to complete
the acquisition. These uncertainties relate primarily to the potential for
combining functional areas of the companies, taking into consideration such
issues as where the function should be performed and whether it should be
performed on a centralized or decentralized basis.
Thus, the savings estimate of $8.7 million in the near term is a
conservative estimate based on our initial review of Colonial's operations.
Normal inflation alone will increase the value of these identified savings
after the first few years following the merger. As stated above, we have
retained the services of Deloitte & Touche to assist in the development of
a comprehensive integration plan that, when implemented through a
collaborative approach, will be instrumental in identifying possible
additional synergies and potential cost reductions. We
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 14
anticipate that, in the long term, significant cost-saving opportunities
will result from this merger.
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 Colonial customers and will not compromise
employee or public safety in achieving the cost-savings. Since the Rate
Plan provides Colonial customers with a 2.2 percent reduction in burner-tip
prices, stabilizes rates for the next ten years and avoids significant
technology-related expenditures, Eastern's shareholders are assuming all of
the risk associated with achieving the O&M savings required to offset
recovery of the costs incurred to complete the transaction.
Q. HOW DOES THE RATE PLAN ALLOCATE THE BENEFITS OF THE MERGER BETWEEN
COLONIAL'S CUSTOMERS AND EASTERN'S SHAREHOLDERS?
A. As stated above, the estimated benefits to Colonial's customers will total
approximately $177.1 million over the next ten years. This is composed of
CGAC reductions of approximately $37.0 million, the $127.6 million benefit
associated with the ten-year freeze in base rates and the $12.5 million in
cost avoidance associated with information technology. Estimated savings
from O&M synergies, approximating $8.7 million annually over the ten-year
period of the Rate Plan, will be used to offset the costs incurred by
Eastern to accomplish the acquisition. As discussed above, we believe that
O&M cost savings will be more
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 15
difficult to achieve than in the Essex integration. By relying upon O&M
cost savings for recovery 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
that may result from anticipated inflation levels.
III. ACCOUNTING TREATMENT TO BE ACCORDED TO THE MERGER TRANSACTION COSTS
Q. HOW WILL THE ACQUISITION COSTS BE RECORDED FOR ACCOUNTING PURPOSES?
A. As indicated in the testimony of Mr. Hempstead, acquisitions are reflected
in one of two ways under GAAP: purchase accounting and pooling-of-
interests accounting. Eastern's acquisition of Colonial will be structured
as a purchase-accounting transaction, which will be recorded and amortized
on the books of Colonial. For regulated companies such as Colonial, the
amount paid in excess of the net book value on an historical cost basis
represents an acquisition premium, which is recorded on the books of the
acquired company and is amortized over the useful life of the underlying
assets in accordance with GAAP. Accordingly, in this transaction, the
amount paid for Colonial in excess of book value, i.e., the acquisition
----
premium, will be recorded on the books of Colonial and amortized over a
period of 40 years.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 16
Q. WHAT ARE THE COSTS ASSOCIATED WITH ACHIEVING THE MERGER BENEFITS FOR
COLONIAL'S CUSTOMERS?
A. The costs incurred to achieve the acquisition fall into the following three
categories: (1) transaction costs related to the completion of the merger;
(2) merger-integration costs that will be incurred to achieve the
synergies; and (3) the acquisition premium, which will be amortized over 40
years under GAAP.
Q. PLEASE DESCRIBE EACH OF THESE COST CATEGORIES IN MORE DETAIL.
A. The first 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 costs
totaling $11.6 million is set forth in Exhibit JFB-6.
The second category of costs are those necessary to ensure the successful
and timely integration of Colonial'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, customer and employee-communication costs and similar costs to
support the merger integration process. An itemization of these costs
totaling $16.6 million is set forth in Exhibit JFB-7.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 17
As set forth in Exhibit JFB-11, the sum of these two cost categories will
be amortized over the ten-year rate-freeze period requiring annual retained
synergies of approximately $2.9 million.
The third category of merger costs relates to the acquisition premium
required to make available the lower rates and cost savings that result
from the merger. The precise amount of the acquisition premium cannot be
determined prior to the merger closing, because the final cost is subject
to some adjustments depending on several factors, such as the number of
shares of Colonial common stock outstanding, the number of shares of
Eastern common stock issued to accomplish the transaction and the ten-day
average closing price of Eastern's stock at the time of the merger closing.
The merger transaction is discussed in detail in Mr. Flaherty's testimony.
Based on information available at this point in time, the acquisition
premium to be recorded on the books of Colonial is estimated to be
approximately $199.2 million.
Q. HOW HAVE YOU ANALYZED AND QUANTIFIED THE ACQUISITION PREMIUM?
A. The acquisition premium is calculated by taking the difference between
Colonial's book value of $14.11 per share and the purchase price of $37.50
per share, and multiplying this difference by the 8,853,349 shares of
Colonial common stock issued and outstanding as of November 18, 1998 (date
of the proxy filing statement with the Securities and Exchange Commission).
The resulting premium
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 18
of $207.2 million includes $8.0 million for the portion of the premium
associated with Transgas, Inc., Colonial's non-utility LNG transport
affiliate. The total acquisition premium attributable to the Transgas
operations was calculated based on an evaluation of its historical
contribution to Colonial's consolidated earnings.
Thus, an up-front acquisition premium of $199.2 million will be paid to
accomplish the acquisition of Colonial's gas distribution operations. This
calculation is set forth in Exhibit JFB-8.
Q. DOES THE ACQUISITION PREMIUM REFLECT THE TOTAL LOSS IN EARNINGS THAT
EASTERN SHAREHOLDERS WILL EXPERIENCE AS A RESULT OF THE MERGER?
A. An acquisition premium is a necessary cost that, ultimately, is a
worthwhile investment because it results in the creation of a more
efficient operation that will produce cost-saving opportunities and lower
rates to customers. The payment of an acquisition premium, however, has an
unavoidable impact on the earnings of the acquiring company. As explained
by Mr. Hempstead, the acquisition premium must be analyzed both as a
function of the price paid for the acquired company in excess of its book
value and as a function of the overall impact it will have on the earnings
of the post-merger entity.
In a pooling-of-interests transaction, like Essex, the impact on earnings
can be quantified through an "earnings dilution" calculation, which
analyzes and compares the earnings per share of the pre-merger and post-
merger business
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 19
operations of the acquiring company. This analysis is necessary in a
pooling-of-interests transaction, because the acquisition premium is not
recorded on the books of the post-merger entity, which would have the
effect of revealing the direct and discrete impact on the earnings of the
post-merger entity.
In a purchase-accounting transaction, the acquisition premium is recorded
on the books of the acquired company and amortized as a direct charge to
earnings over an extended period of time. Because the acquisition of
Colonial requires the use of purchase accounting, the acquisition premium
will be recorded on the books of Colonial and amortized as a $5 million
charge to earnings over a 40-year amortization period. In addition, the
purchase price involves the payment of $144 million in cash consideration
attributable to Colonial's gas distribution operations. In order to
calculate the total loss in earnings that Eastern will experience as a
result of the merger, both of these considerations must be taken into
account. As discussed below and in the testimony of Mr. Hempstead, such
considerations must be factored into any earnings-dilution analysis, which
is designed to assess the overall impact of a merger on the earnings of the
acquiring company.
Q. WHAT ARE THE CONSIDERATIONS THAT MUST BE TAKEN INTO ACCOUNT IN QUANTIFYING
THE TOTAL COST OF THE ACQUISITION PREMIUM TO EASTERN'S SHAREHOLDERS?
A. There are two considerations that must be taken into account in evaluating
the impact of the acquisition premium on Eastern's earnings. First, as
noted above, GAAP requires the $199.2 million premium to be amortized over
the life of the
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 20
underlying assets for a period no greater than 40 years. In this case, the
underlying assets, primarily mains and services have a useful life well in
excess of 40 years, and therefore, a 40-year amortization period is both
reasonable and appropriate. Thus, for each year over the next 40 years,
there will be a $5 million charge against Colonial's earnings, which is not
tax deductible. As a result, it is necessary to "gross-up" this amount by a
tax factor of 1.6454 to achieve after-tax earnings sufficient to cover this
cost and to reimburse Eastern's shareholders for their investment. This
calculation is consistent with the Department's treatment of merger-related
transaction costs, such as investment banking and legal fees, which are
also non-tax-deductible. See D.T.E. 98-27, at 52. On a gross-up basis, cost
---
savings and synergies of approximately $8.2 million annually over the 40-
year amortization period must be realized to offset the impact of these
costs on earnings, as set forth in Exhibit JFB-9.
The second consideration is that Eastern has invested $144 million in cash
in order to accomplish this particular transaction. This cash payment will
have a direct effect on Eastern's earnings because Eastern has historically
invested this money in short-term money markets accounts, which has
produced a modest return of approximately 5.5 percent. Since shareholders
expect, and are entitled to, a return on the full amount of any investment,
it is necessary for Eastern to receive a return on the $144 million cash
portion of the investment that at least
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JFB-1
December 24, 1998
Page 21
offsets the earnings loss that will be realized as a result of this cash
payment. For that purpose, I have calculated that annual pre-tax earnings
of approximately $4.1 million on average are necessary over the 40-year
amortization period to compensate Eastern's shareholders for the loss in
earnings associated with the $144 million cash investment, as demonstrated
in Exhibit JFB-10.
Q. HAS AN EARNINGS-DILUTION ANALYSIS ALSO BEEN UNDERTAKEN TO DEMONSTRATE THE
OVERALL IMPACT OF THIS TRANSACTION ON THE EARNINGS PER SHARE OF EASTERN?
A. Yes, as described above and in the testimony of Mr. Hempstead, the overall
impact on earnings resulting from a proposed merger represents the true
cost of the acquisition to the shareholders of the acquiring company.
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. In this case, the combination of Eastern
and Colonial will result in a pre-tax earnings dilution to Eastern's
shareholders of $13.0 million per year on average over the 40-year
amortization of the acquisition premium. See Exhibit JDH-6. As described
---
by Mr. Hempstead, the primary factors driving the earnings dilution
analysis are the amortization of the non-tax-deductible premium of $199.2
over 40 years, which will reduce the earnings of Colonial, and the
investment of $144 million in cash, which will reduce the earnings that
Eastern's shareholders currently receive by the earnings stream associated
with the 5.5 percent return earned on that money. These costs represent a
real economic
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 22
loss to Eastern's shareholders that they would reasonably except to recover
by retaining synergies achived through the combination of the two companies
Q. WHAT ARE THE TOTAL RETAINED SYNERGIES THAT WILL BE REQUIRED TO PRESERVE THE
INVESTMENT MADE BY EASTERN SHAREHOLDERS IN THIS TRANSACTION?
A. As approved by the Department in D.T.E. 98-27, Eastern is proposing to rely
solely on retained synergies to maintain the requisite earnings levels, and
therefore, to ensure that the value of the investment made by Eastern's
shareholders is preserved. In Exhibit JFB-11, I have calculated the pre-
tax earnings requirement necessary to recover the total cost of the
transaction over the rate-freeze period and over the post-rate freeze
period.
As shown in Exhibit JFB-11, during the ten-year rate freeze period, annual
synergies of $2.9 million will be required to recover the merger-related
transaction and integration costs. Synergies of approximately $8.2 million
will be necessary to offset the non-tax-deductible annual amortization
charge to earnings resulting from the acquisition premium. In addition,
annual synergies of $4.1 million on average will be necessary to provide
recovery of the lost earnings associated with the payment of $144 million
in cash attributable to Colonial's gas distribution operations. Thus,
Eastern's shareholders will require retained synergies of $15.2 million
annually on average for the ten-year rate-freeze period and $12.3 million
annually on average over the following 30-year period to preserve their
investment in this transaction, as set forth in Exhibit JFB-11.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 23
Under this proposal, the Joint Petitioners are seeking to recover these
costs through retained synergies achieved during the ten-year rate-freeze
period, and to recover remaining costs during the subsequent 30-year period
based on demonstrated synergies. Accordingly, customers will bear no risk
in the future that they will shoulder either the economic impact or the
responsibility for Eastern's recovery of any of these costs.
Q. CAN YOU FURTHER EXPLAIN YOUR RATIONALE FOR REQUESTING THAT EASTERN BE
ALLOWED TO RETAIN SYNERGIES SUFFICIENT TO PROVIDE A RETURN ON THE $144
MILLION CASH PAYMENT?
A. As with any investment, the investor of capital in an enterprise hopes to
realize a return on its investment that is commensurate with the risk
assumed. Colonial's current rates are established in accordance with
traditional ratemaking policies, which allow investors an overall return at
Colonial's weighted average cost of capital on the book value of their
investment, as represented in the ratemaking calculation of the Company's
rate base. That return, however, is designed to compensate investors only
for the book value of their investment. Eastern's shareholders are
investing $199.2 million over and above that book value, upon which they
reasonably expect to earn a return. I believe that Eastern should be
allowed to earn a return on the full amount of the acquisition premium at a
rate commensurate with the risk associated with owning a regulated natural
gas local distribution company. Were such a return allowed on Eastern's
investment in
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 24
Colonial, average annual synergies of $13.3 million would need to be
achieved and retained, as set forth in Exhibit JFB-12. In this case,
however, Eastern is conservatively proposing to recover only the lost
earnings on the $144 million in cash that has been invested in this
transaction, or $4.3 million per year, as set forth in Exhibit JFB-10. At a
minimum, it is necessary for Eastern's shareholders to receive sufficient
earnings simply to offset the earnings lost as a result of converting the
$144 million cash from a short-term money market investment to an
investment in Colonial's gas distribution operations.
Eastern and Colonial strongly believe that there are substantial synergies
and cost savings that can be achieved in the long term as a result of the
merger and, in fact, that assumption serves as the primary motivating
factor for Eastern's substantial investment in this merger. At the same
time, as discussed above and in the testimony of Messrs. Flaherty and
Hempstead, the transaction and integration costs as well as the acquisition
premium represent real costs required to accomplish the merger, achieve
available synergies, and lower rates to customers, which must be recovered
by shareholders in order to justify their investment in this transaction.
Q. IS THIS PROPOSAL CONSISTENT WITH REGULATORY POLICIES?
A. Eastern and Colonial have attempted to structure the transaction, and the
proposed Rate Plan, to be consistent with the Department's orders in
Eastern
-------
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 25
Enterprises/Essex County Gas Company, D.T.E. 98-27 (1998) and NIPSCO/Bay
------------------------------------ ----------
State Gas Company, D.T.E. 98-31 (1998). In those orders, the Department
-----------------
established a regulatory policy that recognizes that such costs are a
necessary component of merger transactions that will ultimately result in
substantial cost savings for customers, and that shareholders will not put
their capital at risk to accomplish a transaction unless such a policy is
embraced. The Department further found that the recovery of merger-related
costs will be allowed to the extent that such costs are demonstrated to be
offset by merger-related savings. Mergers, such as the one proposed here,
will provide customers with the permanent benefit of harnessed synergies
and increased efficiencies, which will grow over time. These customer
benefits, however, can be achieved only where there is a direct linkage
between such benefits and the recovery of shareholder investment. We
believe the Rate Plan as proposed in this filing appropriately achieves
this balance.
IV. POST-TEN-YEAR PLAN FOR SHARING OF MERGER-RELATED BENEFITS AND RELATED
ISSUES
Q. AT THE CONCLUSION OF THE TEN-YEAR RATE FREEZE, HOW DOES THE COMPANY PROPOSE
TO RECOVER THE REMAINING UNAMORTIZED ACQUISITION PREMIUM AND RELATED COSTS?
A. As discussed above, at the conclusion of the ten-year rate-freeze period,
Eastern will need to retain annual synergies of $12.3 million to recover
the cost of the merger. Of this amount, $8.2 million is required to offset
the remaining 30-year
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 26
tax-affected amortization of the acquisition premium and $4.1 million is
required to compensate shareholders for the 5.5 percent return being earned
on the $144 million cash, which Eastern will invest in the acquisition of
Colonial. Eastern and Colonial propose to recover this amount based on a
demonstration that O&M synergies for Colonial are equal to or greater than
$12.3 million. To the extent that synergies in excess of $12.3 million are
demonstrated at the conclusion of the ten-year rate-freeze period, rates
would be established to flow savings in excess of that amount to customers.
If, on the other hand, Eastern and Colonial demonstrate annual synergies of
less than $12.3 million, then rates would be established that would allow
Colonial to recover annually only that portion of the merger cost that can
be offset by demonstrated synergies. By limiting merger cost recovery in
the 30-year post-rate-freeze period to the amount of demonstrable O&M
synergies, Colonial's customers will be fully insulated from any financial
risk or responsibility associated with the ongoing recovery of acquisition
costs.
Q. AT THE CONCLUSION OF THE TEN-YEAR RATE FREEZE, HOW DO EASTERN AND COLONIAL
PROPOSE TO MEASURE THE SYNERGIES ACHIEVED AND TO COMPARE THOSE SYNERGIES TO
THE COSTS THEY ARE PROPOSING TO RECOVER?
A. In order to ensure that Eastern's shareholders have a reasonable
opportunity to recover merger-related costs following the expiration of the
ten-year rate freeze, it is necessary to determine a process for
demonstrating the level of O&M synergies attained as a result of the
merger. Such a process would require that Colonial
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 27
demonstrate what its cost of service and associated non-gas revenue
requirement would have been in the absence of the merger, i.e., on a stand-
----
alone basis. It would also require that Colonial demonstrate its actual
cost of service and associated non-gas revenue requirement at such time
that the rates are reviewed following the rate freeze. The difference
between Colonial's hypothetical "stand-alone," non-gas revenue requirement
and Colonial's actual cost of service and non-gas revenue requirement
following the expiration rate freeze represents the level of synergies
attained as a result of the merger, which are therefore available to
compensate for merger costs on a going-forward basis.
Q. HOW DO THE COMPANIES PROPOSE TO DEMONSTRATE, UPON THE EXPIRATION OF THE
RATE FREEZE, WHAT COLONIAL'S NON-GAS REVENUE REQUIREMENT AND COST OF
SERVICE WOULD HAVE BEEN IN THE ABSENCE OF A MERGER?
A. For the purpose of making this demonstration, Eastern and Colonial propose
to use a tracking mechanism similar to one adopted in other jurisdictions
to establish the level of synergies available as a result of a proposed
merger. As a baseline, Colonial proposes to use the 1997 test-year, non-
gas revenue requirement of $92 million referenced in Exhibit JFB-2. To
derive the revenue requirement for Colonial, following the expiration of
the rate freeze, that would have existed in the absence of a merger,
Colonial proposes to apply an annual escalator to its non-gas revenue
requirement of $92.0 million. The proposed escalator would be based on the
actual GDP-PI experienced each year during the ten-year, rate-freeze
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 28
period, offset by the productivity index used in the Boston Gas PBR formula
in each of those years, and adjusted for growth in firm throughput. By
applying these annual escalation factors to the normalized 1997 non-gas
revenue requirement, and incorporating any allowed exogenous cost
adjustments, a reasonable estimation of the revenue requirement for
Colonial in the absence of the merger can be determined.
Q. HOW DO EASTERN AND COLONIAL PROPOSE TO DEMONSTRATE WHAT COLONIAL'S NON-GAS
REVENUE REQUIREMENT ACTUALLY IS UPON THE EXPIRATION OF THE RATE FREEZE?
A. At this time, we anticipate that Colonial will operate as a corporate
entity separate from both Boston Gas and Essex Gas during the ten-year,
rate-freeze period. In that regard, Colonial will maintain separate books
of account, on which it will record its operating revenues and expenses.
It is on the basis of those actual, recorded operating results that
Colonial proposes to demonstrate its actual cost of service and non-gas
revenue requirement upon the expiration of the base-rate freeze.
Q. HOW OFTEN DO YOU PROPOSE TO MEASURE THE SYNERGIES ACHIEVED IN THE
OPERATIONS OF COLONIAL AFTER THE EXPIRATION OF THE TEN-YEAR, RATE-FREEZE
PERIOD?
A. We believe that the comparison of Colonial's actual non-gas revenue
requirement to the escalated 1997 revenue requirement will need to be made
only one time. After the expiration of the rate-freeze period, we
anticipate that Colonial would
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 29
make a filing reflecting a demonstration of attained synergies calculated
in accordance with the proposed tracking mechanism. It is our hope that by
that time, achieved annual synergies will outweigh the annual recovery of
merger-related costs. Thus, where the proposed tracking mechanism
demonstrates annual synergies in excess of $12.3 million, customers would
receive the excess benefits and Eastern's shareholders would retain
synergies sufficient to recover their remaining merger costs on an
annualized basis. Where the tracking mechanism indicates achieved synergies
of less than $12.3 million, the recovery of merger-related costs would be
limited to the level of demonstrated synergies, until such time that
Colonial could demonstrate a level of synergies equal to or greater than
$12.3 million.
Q. WHAT IS THE POTENTIAL FOR CONSOLIDATION OF THE RATES OF COLONIAL AND BOSTON
GAS EITHER BEFORE OR AFTER THE TEN-YEAR RATE-FREEZE PERIOD?
A. The primary objective of this merger, and of the Department's stated
regulatory goals with regard to mergers and acquisitions, is the eventual
consolidation of business operations in a manner that will maximize
efficiencies and minimize costs. In order to achieve the objective of
maximizing efficiency and minimizing cost, a strategy must be developed to
guide the merger integration process, which is based on a thorough
examination and understanding of the business practices and requirements of
the merging companies' operations. For that reason, full consolidation of
the operations of Boston Gas, Essex Gas and Colonial will take
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 30
some period of time to accomplish. It is Eastern's hope that, at some
point, it will be in a position to combine the operations of all three
companies in a way that will promote additional savings and distribute the
benefits of those increased efficiencies to all customers.
At that point, it would be appropriate, and more efficient, to combine the
cost accounting of the three companies and eliminate the need for
complicated and time-consuming cost allocations. In conjunction with this
consolidation analysis, we will also evaluate the feasibility of
implementing uniform rates for all three companies and, during the ten-year
rate-freeze period, we may take initial steps to institute necessary
changes that would facilitate our efforts toward rate consolidation.
Q. WHAT IS THE POTENTIAL FOR RATE DESIGN CHANGES DURING THE TEN-YEAR RATE-
FREEZE PERIOD?
A. Currently, the rates of Boston Gas, Essex Gas and Colonial differ both in
structure and in effect. For instance, if the ultimate objective is to
establish uniform rates for all customers, it would be desirable to
institute rate-design changes in the interim ten-year period to minimize
the level of rate impacts to customers that may result from a consolidation
of rates. Thus, over the ten-year rate-freeze period, we will conduct a
comprehensive review of various rate-design issues, as well as cost
disparities, among the three companies. To the extent that certain rate-
design changes can be accomplished in a revenue-neutral fashion, we may
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 31
seek Department approval to modify the rates and rate design of Boston Gas,
Colonial and Essex.
Q. PLEASE DISCUSS HOW COSTS WILL BE ALLOCATED BETWEEN BOSTON GAS, ESSEX GAS
AND COLONIAL BOTH BEFORE AND AFTER THE TEN-YEAR RATE-FREEZE PERIOD.
A. In Eastern-Essex Acquisition, the Department recognized Eastern's
-------------------------
opportunity to recoup merger costs over the period of the Essex Rate Plan
through allocation of expected productivity gains to shareholders. D.T.E.
98-27-A at 4. The Department found that, for the purpose of setting the
rates of Boston Gas during the term of the Essex Rate Plan, only
incremental costs incurred by Boston Gas would be allocated to the Essex
operations. Id. at 5. The Department further directed Eastern and Essex
--
to file a cost-allocation methodology with the Department establishing a
strategy for allocating costs following the ten-year period of the Essex
Rate Plan. D.T.E. 98-27, at 47.
Consistent with these determinations, Eastern is proposing to institute for
Colonial an incremental-cost allocation approach during the ten-year, rate-
freeze period. Because the Essex merger did not require the Department's
recognition of retained synergies following the ten-year period of the
Essex Rate Plan, the incremental-cost approach was necessary only for that
period. Consistent with the Department's determinations that Eastern's
opportunity to recoup merger costs is dependent on its ability to retain
synergies, Eastern must, in this case, request that the incremental cost
approach be used until such time that the operations are
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 32
consolidated or until the merger cost-recovery amount is fixed through the
previously discussed tracking mechanism. Such incremental cost treatment is
required if Eastern's shareholders are to retain the opportunity to recover
merger-related costs.
Q. HOW DO EASTERN AND COLONIAL PROPOSE TO TREAT THE COSTS ASSOCIATED WITH THE
OPERATING AREAS THAT ARE CONSOLIDATED WITH BOSTON GAS?
A. As indicated previously in my testimony, Boston Gas and Colonial will be
seeking opportunities to improve the efficiency of the operations of both
companies by combining functional areas where appropriate. To the extent
that certain functions are combined, whether located at Colonial, Boston
Gas or Essex Gas, during the ten-year rate-freeze period, only the pro-rata
share of incremental costs incurred to provide services to the other
companies will be directly billed to those companies. Therefore,
Colonial's books will reflect the ongoing costs incurred by Colonial to
provide service to customers including any direct charges billed to
Colonial by Boston Gas or Essex Gas relating to incremental costs that
those companies may incur in rendering services for Colonial.
V. 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 Eastern-Essex Acquisition, D.T.E. 98-27 and NIPSCO-Bay State
------------------------- ----------------
Acquisition, D.T.E. 98-31, the Department construed the public interest
-----------
standard embodied in
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 33
G.L. c. 164, (S) 96 to require, at its core, the "avoidance of harm to the
public." D.T.E. 98-31, at 9. As a result, the Department confirmed that the
public interest standard requires merger proponents to demonstrate that "no
net harm" will result from the transaction with regard to customer
interests. Id. Thus, in making a finding that a proposed merger is
--
consistent with the public interest, the Department will consider a variety
of factors to ensure that the "no net harm" test has been met, including:
(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.
Q. WHAT IMPACT WILL THE MERGER HAVE ON THE RATES OF COLONIAL?
A. As described above, the Rate Plan provides that Colonial's customers will
receive a 2.2 percent burner-tip price reduction by the first full year
following the merger,
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 34
would receive the benefit of avoided technology investments, and would not
be subject to base-rate increases for ten years. Because the merger 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, (S)
96.
Q. WHAT IMPACT WILL THE ACQUISITION HAVE ON THE QUALITY OF SERVICE TO CURRENT
COLONIAL CUSTOMERS?
A. Consistent with the Department's directives in Eastern-Essex Acquisition,
-------------------------
Eastern and Colonial have proposed to track certain service-quality metrics
to ensure that current service-quality levels are maintained, which is
discussed in Mr. Stavropoulos' testimony. D.T.E. 98-27, at 32-33. Eastern
and Colonial are committed to maintaining the high level of service quality
and reliability provided by Colonial and believe that, using Boston Gas'
information-systems resources and customer-service experience, will
ultimately improve the quality of service to Colonial's customers.
Q. IN GENERAL, WHAT WOULD BE THE NET SAVINGS RESULTING FROM THE PROPOSED
MERGER?
A. As described above, Eastern's acquisition of Colonial has the potential to
yield substantial cost reductions associated with gas-supply and
dispatching operations, and costs associated with redundant personnel or
corporate and administrative
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 35
functions. The savings associated with O&M activities are estimated to be
approximately $8.7 million annually in the near term, which we expect will
increase over time. The savings associated with gas-supply operations are
expected to be at least $37 million over the next ten years, as described
in Mr. Luthern's testimony.
Q. WHAT IMPACT WILL THE PROPOSED MERGER HAVE ON COMPETITION WITHIN THE GAS
INDUSTRY?
A. The acquisition of Colonial will facilitate greater competition in the gas
industry. Boston Gas, Essex Gas and Colonial 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 three companies, the companies will be in a
better position to minimize transition costs and to streamline and
standardize systems for third-party gas marketers in Colonial's service
territory. Boston Gas anticipates using its Broker Management System to
facilitate communications with marketers in Colonial's 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 function of both companies negates any
opportunity to exploit market power as a result of the merger.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 36
Q. HOW WILL THE FINANCIAL INTEGRITY OF COLONIAL COMPARE TO THAT OF THE PRE-
MERGER COLONIAL?
A. As mentioned in the testimony of Mr. Stavropoulos, Colonial faces the need
for considerable investments in technology. Post-merger, Colonial will be
a subsidiary of Eastern and will have access to the broader financial
resources of Eastern. In addition, the greater financial and operational
resources available to the combined companies should strengthen their
competitive position in the increasingly deregulated and competitive energy
marketplace.
Q. HOW WILL THE BENEFITS OF THE MERGER BE DISTRIBUTED BETWEEN EASTERN
SHAREHOLDERS AND COLONIAL'S CUSTOMERS?
A. Colonial's customers will receive a 2.2 percent reduction in their overall
burner-tip delivered gas price within the first full year following the
merger. In addition, Colonial's base rates will be frozen at current
levels for a period of ten years, subject only to exogenous changes and
significantly higher inflation than experienced over the past several
years. Thus, Colonial's rates will be both lower and more stable as a
result of the merger. It is noteworthy that, absent the merger, Colonial
was planning to request a base-rate increase in 2000, which would be
subject to subsequent increases during the ten-year period under a PBR
plan. Instead, customers will receive substantial benefits relating to the
ten-year rate freeze, which commits Eastern to rates that reflect a $8.5
million revenue deficiency. At the same time, the Rate Plan provides
Eastern's shareholders with
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 37
the opportunity to retain merger-related O&M synergies over the rate-freeze
period, and to the extent demonstrated, over the subsequent 30-year period
of the Rate Plan, to compensate for the acquisition costs incurred to bring
real and immediate benefits to Colonial's 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 Colonial'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 mitigate the effect on displaced employees. In
addition, all contractual agreements in effect with the various bargaining
units will be honored.
As part of the collaborative integration process, various programs
including early retirement and severance offerings, and outplacement and
retraining support, will be developed to assist displaced employees.
Available employment opportunities will be provided to employees whose
positions have been eliminated.
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 38
Q. WHAT IMPACT WILL THE MERGER HAVE ON ECONOMIC DEVELOPMENT IN COLONIAL'S
SERVICE TERRITORY?
A. As stated earlier, upon consummation of the merger, delivered gas prices
for all Colonial customers will be reduced and base rates will be frozen
for a period of ten years. Since Colonial was planning to seek a base rate
increase in 2000, the merger will result in 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 Colonial'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 COLONIAL TO
ACHIEVE THE MERGER BENEFITS PREVIOUSLY DISCUSSED WITHOUT BEING ACQUIRED BY
EASTERN?
A. Smaller companies generally do not have the ability to harness the
financial resources or capture the economies of scale and/or scope that are
derived from more expansive operations. Colonial's relatively small size
in comparison to the joint operations of Boston Gas and Essex Gas 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,
<PAGE>
Testimony of Joseph F. Bodanza
Exhibit JBF-1
December 24, 1998
Page 39
together with a gas supply plan coordinated with the operations of Boston
Gas will permit Colonial to obtain the advantages of such economies for its
customers.
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, the merger is consistent with the
public interest, as required by G.L. c. 164, (S) 96.
Q. DOES THIS CONCLUDE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
Exh. JFB-2 (pg. 1 of 3)
Cast Off Revenue Requirement
For PBR Ratemaking
<TABLE>
<S> <C>
REVENUE REQUIREMENT PER 1997 TEST YEAR
Lowell Cost of Service $109,115,286
Cape Cod Cost of Service 82,206,223
-------------------
TOTAL REVENUE REQUIREMENT 191,321,509
-------------------
NORMALIZED 1997 GAS COSTS
Lowell Division 58,823,951
Cape Cod Division 40,486,652
-------------------
TOTAL NORMALIZED GAS COSTS 99,310,603
-------------------
CAST OFF REVENUE REQUIREMENT
FOR PBR RATEMAKING $92,010,906
===================
</TABLE>
<PAGE>
Exh. JFB-2 (pg. 2 of 3)
REVENUE DEFICIENCY PER 1997 TEST YEAR
<TABLE>
<S> <C>
REVENUE REQUIREMENT PER 1997 TEST YEAR
Lowell Cost of Service $109,115,286
Cape Cod Cost of Service 82,206,223
-------------------
TOTAL REVENUE REQUIREMENT 191,321,509
-------------------
NORMALIZED 1997 REVENUES
Lowell Division 106,111,345
Cape Cod Division 76,684,582
-------------------
TOTAL NORMALIZED REVENUES 182,795,927
-------------------
REVENUE DEFICIENCY PER 1997 TEST YEAR $8,525,582
===================
</TABLE>
<PAGE>
Exh. JFB-2 (pg. 3 of 3)
Rate Freeze Benefits To Customers
($000's)
Cast Off Revenue Requirement
For PBR Ratemaking $92,011
============
<TABLE>
<CAPTION>
Year Year Year Year Year Year Year
Beginning Ending 1 2 3 4 5 6 7
- --------------- ------------ ---------- ----------- ------------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
7/99 6/00 0 0 0 0 0 0 0
7/00 6/01 5,744 0 0 0 0 0 0
7/01 6/02 8,526 1,364 0 0 0 0 0
7/02 6/03 8,526 2,024 760 0 0 0 0
7/03 6/04 8,526 2,024 1,128 1,090 0 0 0
7/04 6/05 8,526 2,024 1,128 1,618 1,174 0 0
7/05 6/06 8,526 2,024 1,128 1,618 1,742 996 0
7/06 6/07 8,526 2,024 1,128 1,618 1,742 1,478 1,011
7/07 6/08 8,526 2,024 1,128 1,618 1,742 1,478 1,500
7/08 6/09 8,526 2,024 1,128 1,618 1,742 1,478 1,500
---------- ----------- ------------ ---------- --------- --------- ----------
73,948 15,533 7,531 9,179 8,142 5,429 4,011
---------- ----------- ------------ ---------- --------- --------- ----------
<CAPTION>
Year Year Year Total
Beginning Ending 8 9 10 Benefit
- --------------- ------------ --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
7/99 6/00 0 0 0
7/00 6/01 0 0 0
7/01 6/02 0 0 0
7/02 6/03 0 0 0
7/03 6/04 0 0 0
7/04 6/05 0 0 0
7/05 6/06 0 0 0
7/06 6/07 0 0 0
7/07 6/08 1,094 0 0
7/08 6/09 1,624 1,112 0
--------- ---------- --------
2,718 1,112 0 127,602
--------- ---------- --------
</TABLE>
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 2005
----------- ------------ ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
GDPPI Forecast (1) 3.20% 2.20% 2.70% 2.80% 2.50% 2.50%
Productivity Offset 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
PBR % Increase 2.20% 1.20% 1.70% 1.80% 1.50% 1.50%
<CAPTION>
2006 2007 2008
--------- ---------- --------
<S> <C> <C> <C>
GDPPI Forecast (1) 2.60% 2.60% 2.60%
Productivity Offset 1.00% 1.00% 1.00%
PBR % Increase 1.60% 1.60% 1.60%
</TABLE>
(1) Per WEFA, Inc.
<PAGE>
Exh. JFB-3 (pg. 1 of 3)
INFORMATION TECHNOLOGY COST AVOIDANCE
<TABLE>
<CAPTION>
AVOIDED
AVOIDED ANNUAL
INVESTMENT EXPENSE
----------------- --------------
APPLICATIONS
- -------------------------------------------------
<S> <C> <C>
SCADA System (Year 2K Compliance) $ 50,000 $ 16,000
Work Management System (Year 2K Compliance) 2,237,000 99,000
Broker Management System (Customer Choice) 868,000 135,000
Payroll System Upgrades (Year 2K Compliance) 50,000 38,000
Legal Case Management (Year 2K Compliance) 30,000 8,000
Facilities Maintenance System (Implementation terminated) 1,400,000 76,000
----------------- --------------
SUBTOTAL APPLICATIONS $4,635,000 $372,000
----------------- --------------
INFRASTRUCTURE
- -------------------------------------------------------
Public Branch Exchange (PBX) Upgrade (Year 2K) 150,000 0
----------------- --------------
SUBTOTAL INFRASTRUCTURE $ 150,000 $ 0
----------------- --------------
TOTAL INFORMATION TECHNOLOGY COST AVOIDANCE $4,785,000 $372,000
================= ==============
</TABLE>
<PAGE>
Exh. JFB-3 (pg. 2 of 3)
INFORMATION TECHNOLOGY COST AVOIDANCE SUMMARY
<TABLE>
<S> <C>
Information Technology Investment 4,785,000
Cost of Capital Colonial (DPU 93-78) 9.36%
RETURN ON RATE BASE 447,876
LESS : INTEREST
Cost of Debt Colonial (DPU 93-78) 4.85%
INTEREST 232,073
NET INCOME 215,804
Factor for Taxable Income 1.6454
TAXABLE INCOME 355,083
Mass Franchise Tax (6.5%) 23,080
FEDERAL TAXABLE INCOME 332,003
Federal Income Tax 117,728
TOTAL INCOME TAXES 140,809
Amortization of Avoided Investments over 10 Years 478,500
Return on Rate Base 447,876
Income Taxes 140,809
---------------
Avoided Investment Costs 1,067,185
Avoided Annual Expense 372,000
---------------
ANNUAL COST AVOIDED 1,439,185
---------------
</TABLE>
<PAGE>
Exh. JFB-3 (pg. 3 of 3)
INFORMATION TECHNOLOGY COST AVOIDANCE BENEFITS TO CUSTOMERS
ANNUAL COST AVOIDED $1,439,185
=================
<TABLE>
<CAPTION>
CUSTOMER
BENEFITS
BEGINNING ENDING $ MILLIONS
------------- -------------- -----------------
<S> <C> <C>
7/99 6/00 $0.0
7/00 6/01 1.0
7/01 6/02 1.4
7/02 6/03 1.4
7/03 6/04 1.4
7/04 6/05 1.4
7/05 6/06 1.4
7/06 6/07 1.4
7/07 6/08 1.4
7/08 6/09 1.4
--------------
$12.5
--------------
</TABLE>
<PAGE>
Exh. JFB-4
TOTAL ESTIMATED MERGER BENEFITS
($000)
<TABLE>
<S> <C>
Benefit of Ten Year Rate Freeze 127,602
Benefit of Gas Cost Savings Over
Rate Freeze Period 37,000
Benefit of Information Technology Cost
Avoidance Over Rate Freeze Period 12,500
----------------
Total Merger Benefits to Customers $177,102
================
</TABLE>
<PAGE>
Exh. JFB-5 (pg. 1 of 2)
Summary of Estimated O&M Savings
Resulting From The Merger
($000)
100 Personnel at Average Salary of $52,000 $5,200
100 Personnel at Average Benefits of $16,500 1,650
-----------
Total Salary and Benefit Savings $6,850
Estimated Non-Labor Savings 1,892
-----------
Total Estimated O&M Savings $8,742
===========
<PAGE>
Exh. JFB-5 (pg. 2 of 2)
ESTIMATED NON-LABOR SAVINGS
($000)
<TABLE>
<CAPTION>
Estimated
Non-Labor
Savings
-----------------
<S> <C>
SALES/MARKETING
Advertising 300
Contract Services 40
-----------------
TOTAL SALES/MARKETING 340
-----------------
INFORMATION TECHNOLOGY
License/Maintenance Fees 100
-----------------
TOTAL INFORMATION TECHNOLOGY 100
-----------------
PERSONNEL
Outside Services (Actuary and Comp) 61
Drug Testing 10
-----------------
TOTAL PERSONNEL 71
-----------------
OTHER
Insurance 100
Investor Relations 172
Annual Report, SEC Filings, Investor Communications 200
Internal Audit 65
Audit Fees 30
Directors' Fees 114
Membership Dues 100
Office Supplies Expenses 410
Miscellaneous Expenses 190
-----------------
TOTAL OTHER 1,381
-----------------
TOTAL ESTIMATED NON LABOR SAVINGS 1,892
=================
</TABLE>
<PAGE>
Exh. JFB-6
SUMMARY OF TRANSACTION COSTS TO COMPLETE
THE MERGER
($000)
<TABLE>
<S> <C>
Investment Banking Fees $5,330
Legal and Regulatory 1,350
Accounting Fees 200
Filing Fees 308
Other 175
------------
Subtotal 7,363
Less: Transaction costs allocated to
Transgas, Inc. (1) 284
------------
Transaction Costs - Colonial 7,079
Gross Up Factor for Taxes (2) 1.6454
Total $11,647
============
</TABLE>
(1) Per Exhibit JFB-8, $8 million or 3.86 percent of the premium is allocable to
Transgas.
(2) The transaction costs to complete the merger are non-tax-deductible.
<PAGE>
Exh. JFB-7
Estimated Costs to Achieve Synergies
($000)
<TABLE>
<CAPTION>
<S> <C>
FAS 88 "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension
Plans and Termination Benefits" Charge $ 5,435
FAS-106 "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions" Charge 89
Estimated Severance Costs 2,250
Estimated Outplacement/Retraining Costs 228
Change in Control Agreements 2,270
Executive Retention Agreements 1,400
Systems Consolidation Costs 760
Deloitte & Touche Integration Consulting 300
FAS 106 Transition Obligation Write Off per FAS 71 3,597
Communication Expense 300
--------------
Total Estimated Costs to Achieve
Synergies $16,629
==============
</TABLE>
<PAGE>
Exh. JFB-8
Acquisition Premium Costs
($000)
<TABLE>
<CAPTION>
<S> <C> <C>
Offering Price Per Share $37.50
Shares Issued & Outstanding @ 11/18/98 8,853,349
-----------------
Total Purchase Price $332,001
Estimated Fair Market Value - Transgas (13,000)
-----------------
Adjusted Purchase Price - Colonial Gas Operations $319,001
Total Book Value $124,795
Book Value - Transgas ($4,968)
-----------------
Adjusted Book Value - Colonial Gas Operations $119,827
--------------
Acquisition Premium - Colonial Gas Operations $199,174
Acquisition Premium Amortization Period per "GAAP" 40 Years
Annual Acquisition Premium Amortization $4,979
Gross Up Factor For Taxes (1) 1.6454
Total Costs of Acquisition Premium $8,193
==============
</TABLE>
(1) The acquisition premium is non tax deductible.
<PAGE>
Exh. JFB-9 (pg. 1 of 4)
PRE-TAX REVENUE REQUIREMENT FOR RECOVERY OF ACQUISITION PREMIUM
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premium 199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Tax factor 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454
Pretax 327,720,900 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022
</TABLE>
-----------------------------------------
Premium $199,174,000
Amortization Period 40 Years
Tax Gross-Up Factor 1.6454
-----------------------------------------
<PAGE>
Exh. JFB-9 (pg. 2 of 4)
<TABLE>
<CAPTION>
Year 11 Year 12 Year 13 Year 14 Year 15 Year 16 Year 17 Year 18 Year 19 Year 20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premium 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Tax factor 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454
Pretax 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022
</TABLE>
<PAGE>
Exh. JFB-9 (pg. 3 of 4)
<TABLE>
<CAPTION>
Year 21 Year 22 Year 23 Year 24 Year 25 Year 26 Year 27
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Premium 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Tax factor 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454
Pretax 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022
<CAPTION>
Year 28 Year 29 Year 30
--------- --------- ---------
<S> <C> <C> <C>
Premium 4,979,350 4,979,350 4,979,350
Tax factor 1.6454 1.6454 1.6454
Pretax 8,193,022 8,193,022 8,193,022
</TABLE>
<PAGE>
Exh. JFB-9 (pg. 4 of 4)
<TABLE>
<CAPTION>
Year 31 Year 32 Year 33 Year 34 Year 35 Year 36 Year 37 Year 38 Year 39 Year 40
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Premium 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Tax factor 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454
Pretax 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022 8,193,022
</TABLE>
<PAGE>
Exh. JFB-10 (pg. 1 of 4)
COST OF $144 MILLION CASH INVESTMENT
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 144,127,000 140,523,825 136,920,650 133,317,475 129,714,300 126,111,125
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 7,926,985 7,728,810 7,530,636 7,332,461 7,134,287 6,737,937
<CAPTION>
Year 7 Year 8 Year 9 Year 10
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 122,507,950 118,904,775 115,301,600 111,698,425
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 6,936,112 6,539,763 6,341,588 6,143,413
</TABLE>
-------------------------------------------------------------
Historic Earnings Rate 5.5%
Amortization Period 40 Years
Rate Case Assumption Annual
Average Annual Retained Synergies $4.1 Million
-------------------------------------------------------------
<PAGE>
Exh. JFB-10 (pg. 2 of 4)
<TABLE>
<CAPTION>
COST OF $144 MILLION CASH INVESTMENT
Year 11 Year 12 Year 13 Year 14 Year 15
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 108,095,250 104,492,075 100,888,900 97,285,725 93,682,550
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 5,945,239 5,747,064 5,548,890 5,350,715 5,152,540
<CAPTION>
Year 16 Year 17 Year 18 Year 19 Year 20
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 90,079,375 86,476,200 82,873,025 79,269,850 75,666,675
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 4,954,366 4,756,191 4,558,016 4,359,842 4,161,667
</TABLE>
------------------------------------------------------------------
Return on Equity Investment 5.5%
Amortization Period 40 Years
Rate Case Assumption Annual
Average Annual Return $4.1 Million
------------------------------------------------------------------
<PAGE>
Exh. JFB-10 (pg. 3 of 4)
Cost of $144 Million Cash Investment
<TABLE>
<CAPTION>
Year 21 Year 22 Year 23 Year 24 Year 25 Year 26
--------------- -------------- -------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 72,063,500 68,460,325 64,857,150 61,253,975 57,650,800 54,047,625
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 3,963,493 3,765,318 3,567,143 3,368,969 3,170,794 2,972,619
<CAPTION>
Year 27 Year 28 Year 29 Year 30
--------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 50,444,450 46,841,275 43,238,100 39,634,925
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 2,774,445 2,576,270 2,378,096 2,179,921
</TABLE>
----------------------------------------------------------------
Return on Equity Investment 5.5%
Amortization Period 40 Years
Rate Case Assumption Annual
Average Annual Return $4.1 Million
----------------------------------------------------------------
<PAGE>
Exh. JFB-10 (pg. 4 of 4)
Cost of $144 Million Cash Investment
<TABLE>
<CAPTION>
Year 31 Year 32 Year 33 Year 34 Year 35 Year 36
--------------- -------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 36,031,750 32,428,575 28,825,400 25,222,225 21,619,050 18,015,875
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 1,981,746 1,783,572 1,585,397 1,387,222 1,189,048 990,873
<CAPTION>
Year 37 Year 38 Year 39 Year 40 Total
------------ ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Amortization of Investment 3,603,175 3,603,175 3,603,175 3,603,175
Cash Investment 14,412,700 10,809,525 7,206,350 3,603,175
Historic Earnings Rate 5.50% 5.50% 5.50% 5.50%
Cost of Cash Investment 792,699 594,524 396,349 198,175 162,503,193
</TABLE>
----------------------------------------------------------------
Return on Equity Investment 5.5%
Amortization Period 40 Years
Rate Case Assumption Annual
Average Annual Return $4.1 Million
----------------------------------------------------------------
<PAGE>
Exh. JFB-11
ANNUAL PRETAX EARNINGS REQUIREMENTS
TO RECOVER THE COSTS OF THE MERGER
($MILLIONS)
<TABLE>
<CAPTION>
Post
Rate Freeze Rate Freeze
Period Period
Years 1-10 Years 11- 40
------------------- --------------------
<S> <C> <C>
Annual Amortization of Costs
Necessary to Achieve Synergies $1.7 $0.0
Annual Amortization of Transaction
Costs to Complete the Merger $1.2 $0.0
Annual Amortization of the
Acquisition Premium $8.2 $8.2
Average Annual Cost of
$144 Million Cash Investment $4.1 $4.1
------------------ --------------------
Annual Pre-Tax Earnings
Requirement to Recover the Costs
of the Merger $15.2 $12.3
================== ====================
</TABLE>
<PAGE>
EXHIBIT JFB-12 (page 1 of 4)
Revenue Requirement
<TABLE>
<CAPTION>
Amortization
40 Yrs. Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 199,174,000 194,194,650 189,215,300 184,235,950 179,256,600
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
----- ----- ----- ----- -----
Return on Rate Base 18,682,521 18,215,458 17,748,395 17,281,332 16,814,269
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
----- ----- ----- ----- -----
Interest 7,469,025 7,282,299 7,095,574 6,908,848 6,722,123
Net Income 11,213,496 10,933,159 10,652,821 10,372,484 10,092,147
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 18,450,687 17,989,419 17,528,152 17,066,885 16,605,618
Mass Franchise Tax 1,199,295 1,169,312 1,139,330 1,109,348 1,079,365
Federal Taxable Income 17,251,392 16,820,107 16,388,822 15,957,538 15,526,253
Federal Income Tax 6,037,987 5,887,038 5,736,088 5,585,138 5,434,188
Total Income Taxes 7,237,282 7,056,350 6,875,418 6,694,486 6,513,554
<CAPTION>
Year 6 Year 7 Year 8 Year 9 Year 10
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
79,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 77,250 169,297,900 164,318,550 159,339,200 154,359,850
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ----
Return on Rate Base 47,206 15,880,143 15,413,080 14,946,017 14,478,954
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ----
Interest 35,397 6,348,671 6,161,946 5,975,220 5,788,494
Net Income 11,809 9,531,472 9,251,134 8,970,797 8,690,460
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 44,351 15,683,084 15,221,816 14,760,549 14,299,282
Mass Franchise Tax 49,383 1,019,400 989,418 959,436 929,453
Federal Taxable Income 94,968 14,663,683 14,232,398 13,801,114 13,369,829
Federal Income Tax 83,239 5,132,289 4,981,339 4,830,390 4,679,440
Total Income Taxes 32,622 6,151,690 5,970,758 5,789,825 5,608,893
</TABLE>
<TABLE>
<CAPTION>
Year 1 Year 2 Year 3 Year 4 Year 5
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 18,682,521 18,215,458 17,748,395 17,281,332 16,814,269
Income Taxes 7,237,282 7,056,350 6,875,418 6,694,486 6,513,554
--------- --------- --------- --------- ---------
Revenue Requirement 30,899,153 30,251,158 29,603,163 28,955,168 28,307,173
<CAPTION>
Year 6 Year 7 Year 8 Year 9 Year 10
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 16,347,206 15,880,143 15,413,080 14,946,017 14,478,954
Income Taxes 6,332,622 6,151,690 5,970,758 5,789,825 5,608,893
--------- --------- --------- --------- ---------
Revenue Requirement 27,659,178 27,011,183 26,363,188 25,715,192 25,067,197
------------------------------------------------------------------------------------
Note:
Purchase Price/share $37.50
Shares Outstanding as of 11/18/98 8,853,349
------------
$332,000,588
Transgas Consideration ($13,000,000)
------------
$319,000,588
Book Value ( Excludes $5.0M Transgas) $119,827,000
------------
Premium associated with LDC $199,173,588
------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT JFB-12 (PAGE 2 OF 4)
Year 11 Year 12 Year 13 Year 14 Year 15
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 149,380,500 144,401,150 139,421,800 134,442,450 129,463,100
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ----
Return on Rate Base 14,011,891 13,544,828 13,077,765 12,610,702 12,143,639
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ----
Interest 5,601,769 5,415,043 5,228,318 5,041,592 4,854,866
Net Income 8,410,122 8,129,785 7,849,447 7,569,110 7,288,773
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 13,838,015 13,376,748 12,915,481 12,454,213 11,992,946
Mass Franchise Tax 899,471 869,489 839,506 809,524 779,542
Federal Taxable Income 12,938,544 12,507,259 12,075,974 11,644,690 11,213,405
Federal Income Tax 4,528,490 4,377,541 4,226,591 4,075,641 3,924,692
Total Income Taxes 5,427,961 5,247,029 5,066,097 4,885,165 4,704,233
<CAPTION>
Year 16 Year 17 Year 18 Year 19 Year 20
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 124,483,750 119,504,400 114,525,050 109,545,700 104,566,350
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ----
Return on Rate Base 11,676,576 11,209,513 10,742,450 10,275,387 9,808,324
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ----
Interest 4,668,141 4,481,415 4,294,689 4,107,964 3,921,238
Net Income 7,008,435 6,728,098 6,447,760 6,167,423 5,887,086
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 11,531,679 11,070,412 10,609,145 10,147,878 9,686,610
Mass Franchise Tax 749,559 719,577 689,594 659,612 629,630
Federal Taxable Income 10,782,120 10,350,835 9,919,550 9,488,266 9,056,981
Federal Income Tax 3,773,742 3,622,792 3,471,843 3,320,893 3,169,943
Total Income Taxes 4,523,301 4,342,369 4,161,437 3,980,505 3,799,573
</TABLE>
<TABLE>
<CAPTION>
Year 11 Year 12 Year 13 Year 14 Year 15
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 14,011,891 13,544,828 13,077,765 12,610,702 12,143,639
Income Taxes 5,427,961 5,247,029 5,066,097 4,885,165 4,704,233
--------- --------- --------- --------- ---------
Revenue Requirement 24,419,202 23,771,207 23,123,212 22,475,217 21,827,222
<CAPTION>
Year 16 Year 17 Year 18 Year 19 Year 20
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 11,676,576 11,209,513 10,742,450 10,275,387 9,808,324
Income Taxes 4,523,301 4,342,369 4,161,437 3,980,505 3,799,573
--------- --------- --------- --------- ---------
Revenue Requirement 21,179,227 20,531,232 19,883,237 19,235,242 18,587,247
</TABLE>
<PAGE>
Exhibit JFB-12 (page 3 of 4)
<TABLE>
<CAPTION>
Year 21 Year 22 Year 23 Year 24 Year 25
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 99,587,000 94,607,650 89,628,300 84,648,950 79,669,600
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
----- ----- ----- ----- -----
Return on Rate Base 9,341,261 8,874,198 8,407,135 7,940,072 7,473,008
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
----- ----- ----- ----- -----
Interest 3,734,513 3,547,787 3,361,061 3,174,336 2,987,610
Net Income 5,606,748 5,326,411 5,046,073 4,765,736 4,485,398
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 9,225,343 8,764,076 8,302,809 7,841,542 7,380,275
Mass Franchise Tax 599,647 569,665 539,683 509,700 479,718
Federal Taxable Income 8,625,696 8,194,411 7,763,126 7,331,842 6,900,557
Federal Income Tax 3,018,994 2,868,044 2,717,094 2,566,145 2,415,195
Total Income Taxes 3,618,641 3,437,709 3,256,777 3,075,845 2,894,913
<CAPTION>
Year 26 Year 27 Year 28 Year 29 Year 30
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 74,690,250 69,710,900 64,731,550 59,752,200 54,772,850
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38%
----- ----- ----- ----- -----
Return on Rate Base 7,005,945 6,538,882 6,071,819 5,604,756 5,137,693
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75%
----- ----- ----- ----- -----
Interest 2,800,884 2,614,159 2,427,433 2,240,708 2,053,982
Net Income 4,205,061 3,924,724 3,644,386 3,364,049 3,083,711
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 6,919,007 6,457,740 5,996,473 5,535,206 5,073,939
Mass Franchise Tax 449,735 419,753 389,771 359,788 329,806
Federal Taxable Income 6,469,272 6,037,987 5,606,702 5,175,418 4,744,133
Federal Income Tax 2,264,245 2,113,296 1,962,346 1,811,396 1,660,446
Total Income Taxes 2,713,981 2,533,049 2,352,117 2,171,185 1,990,253
</TABLE>
<TABLE>
<CAPTION>
Year 21 Year 22 Year 23 Year 24 Year 25
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 9,341,261 8,874,198 8,407,135 7,940,072 7,473,008
Income Taxes 3,618,641 3,437,709 3,256,777 3,075,845 2,894,913
--------- --------- --------- --------- ---------
Revenue Requirement 17,939,252 17,291,256 16,643,261 15,995,266 15,347,271
<CAPTION>
Year 26 Year 27 Year 28 Year 29 Year 30
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 7,005,945 6,538,882 6,071,819 5,604,756 5,137,693
Income Taxes 2,713,981 2,533,049 2,352,117 2,171,185 1,990,253
--------- --------- --------- --------- ---------
Revenue Requirement 14,699,276 14,051,281 13,403,286 12,755,291 12,107,296
</TABLE>
<PAGE>
Exhibit JFB-12 (page 4 of 4)
<TABLE>
<CAPTION>
Year 31 Year 32 Year 33 Year 34 Year 35 Year 36
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 49,793,500 44,814,150 39,834,800 34,855,450 29,876,100 24,896,750
Cost of Capital 9.38% 9.38% 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ---- ---- ----
Return on Rate Base 4,670,630 4,203,567 3,736,504 3,269,441 2,802,378 2,335,315
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ---- ---- ----
Interest 1,867,256 1,680,531 1,493,805 1,307,079 1,120,354 933,628
Net Income 2,803,374 2,523,037 2,242,699 1,962,362 1,682,024 1,401,687
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454 1.6454 1.6454
Taxable Income 4,612,672 4,151,404 3,690,137 3,228,870 2,767,603 2,306,336
Mass Franchise Tax 299,824 269,841 239,859 209,877 179,894 149,912
Federal Taxable Income 4,312,848 3,881,563 3,450,278 3,018,994 2,587,709 2,156,424
Federal Income Tax 1,509,497 1,358,547 1,207,597 1,056,648 905,698 754,748
Total Income Taxes 1,809,320 1,628,388 1,447,456 1,266,524 1,085,592 904,660
<CAPTION>
Year 37 Year 38 Year 39 Year 40
------- ------- ------- -------
<S> <C> <C> <C> <C>
199,174,000 4,979,350 4,979,350 4,979,350 4,979,350
Rate Base 19,917,400 14,938,050 9,958,700 4,979,350
Cost of Capital 9.38% 9.38% 9.38% 9.38%
---- ---- ---- ----
Return on Rate Base 1,868,252 1,401,189 934,126 467,063
Less : Interest
Cost of Debt 3.75% 3.75% 3.75% 3.75%
---- ---- ---- ----
Interest 746,903 560,177 373,451 186,726
Net Income 1,121,350 841,012 560,675 280,337
Factor for Taxable Income 1.6454 1.6454 1.6454 1.6454
Taxable Income 1,845,069 1,383,801 922,534 461,267
Mass Franchise Tax 119,929 89,947 59,965 29,982
Federal Taxable Income 1,725,139 1,293,854 862,570 431,285
Federal Income Tax 603,799 452,849 301,899 150,950
Total Income Taxes 723,728 542,796 361,864 180,932
</TABLE>
<TABLE>
<CAPTION>
Year 31 Year 32 Year 33 Year 34 Year 35 Year 36
------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350 4,979,350
Return on Rate Base 4,670,630 4,203,567 3,736,504 3,269,441 2,802,378 2,335,315
Income Taxes 1,809,320 1,628,388 1,447,456 1,266,524 1,085,592 904,660
---------- ---------- ---------- --------- --------- ---------
Revenue Requirement 11,459,301 10,811,306 10,163,311 9,515,316 8,867,320 8,219,325
<CAPTION>
Year 37 Year 38 Year 39 Year 40 Total
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C>
Amortization 4,979,350 4,979,350 4,979,350 4,979,350 199,174,000
Return on Rate Base 1,868,252 1,401,189 934,126 467,063 382,991,685
Income Taxes 723,728 542,796 361,864 180,932 148,364,278
--------- --------- --------- --------- -----------
Revenue Requirement 7,571,330 6,923,335 6,275,340 5,627,345 730,529,962
</TABLE>
<PAGE>
EASTERN ENTERPRISES/COLONIAL 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").
In my current position, I am responsible for the planning, acquisition and
marketing of Boston Gas' gas supply resources. In addition, I am
responsible for all state and federal regulatory matters relating to gas
supply, planning and acquisition.
Q. HAVE YOU PREVIOUSLY TESTIFIED IN PROCEEDINGS BEFORE THE DEPARTMENT?
A. Yes, I have testified in a number of other proceedings before the
Department, as well as proceedings before the Federal Energy Regulatory
Commission (the "FERC") and the Canadian National Energy Board. I recently
testified on gas supply synergies in Eastern-Essex Acquisition, D.T.E. 98-
-------------------------
27 (1998).
Q. WHAT IS THE PURPOSE OF YOUR TESTIMONY?
A. The purpose of my testimony is to describe the benefits of the gas supply
synergies resulting from the acquisition of Colonial Gas Company
("Colonial") by Eastern Enterprises ("Eastern"), the parent company of
Boston Gas and Essex
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 2
Gas Company ("Essex"), and to explain how these efficiencies will be
attained so as to reduce future gas supply costs for Colonial 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 PROCUREMENT FOR COLONIAL'S
CUSTOMERS?
A. Yes, the acquisition will facilitate the development of more efficient gas
supply resources for Colonial. Re-optimization of Colonial's portfolio
will be possible as a result of the coordination of the gas supply planning
and acquisition efforts of Boston Gas, Essex and Colonial. Such
coordination will create the opportunity to use more efficiently the
resources of these three companies and allow Colonial'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 Boston Gas, Essex and portions
of Colonial's system are geographically contiguous, and connected through
the Tennessee Gas Pipeline Company ("Tennessee") and Algonquin Gas
Transmission Company ("Algonquin"). Moreover, the Boston Gas and Colonial
systems are physically connected in Littleton, Massachusetts.
Q. PLEASE PROVIDE A BRIEF DESCRIPTION OF COLONIAL GAS COMPANY'S CURRENT SUPPLY
PORTFOLIO.
A. Colonial has two operating divisions, i.e., the Lowell Division and the
----
Cape Cod Division. A summary of the portfolio resources held by Colonial
to serve these
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 3
divisions is set forth in Exhibit WRL-2. With regard to the Lowell
Division, Colonial currently has long-haul transportation contracts with
Tennessee for 42,496 MMBtu per day. Colonial also has a contract with
Iroquois Gas Transmission System ("Iroquois") for 6,000 MMBtu per day to
transport Alberta-Northeast ("ANE") Canadian gas supplies to the Tennessee
pipeline for use by either the Lowell or Cape Cod Divisions. To serve its
Cape Cod Division, Colonial currently has a long-haul transportation
contract with Algonquin for 28,235 MMBtu per day.
With regard to gas commodity resources to serve the Lowell Division,
Colonial has contracts with Sonat Marketing Company and Union Pacific
Fuels, Inc., for delivery of firm gas supplies totaling 23,830 MMBtu per
day, which are transported to the Lowell Division city gates on the
Tennessee pipeline. Colonial also has bundled supply contracts with ANE
for baseload gas supplies delivered from the Canadian border under domestic
transportation arrangements with Tennessee and Iroquois, totaling
approximately 6,000 MMBtu per day, which can be delivered, in whole or in
part, to either the Lowell Division or the Cape Cod Division. To serve its
Cape Cod Division, Colonial has gas supply commodity contracts with CNG
Energy Services for delivery of firm gas supplies totaling 6,108 MMBtu per
day, which are transported to the city gates of the Cape Cod Division on
the Algonquin pipeline.
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 4
Colonial has several contracts for upstream underground storage and
transportation, including a total of 4.70 Bcf of storage capacity and
36,882 MMBtu of peak-day deliverability. Colonial also maintains a 1 Bcf
liquefied natural gas ("LNG") storage and vaporization facility in
Tewksbury, Massachusetts, for use by the Lowell Division, and a 151,000 Mcf
LNG facility in South Yarmouth, Massachusetts, to service the Cape Cod
Division. Colonial has two contracts with Distrigas of Massachusetts
Corporation ("DOMAC") for the purchase of LNG with combined peak season
maximum daily quantities of 13,000 MMBtu in the 1998-99 split year and
15,000 MMBtu in the 1999-2000 split year. These volumes may be taken in
either vaporized gas or liquid form, as needed by Colonial. This LNG can
be trucked to either of Colonial's LNG facilities, as well as smaller
satellite facilities located in Westford and Wareham, Massachusetts. In
addition, Colonial has propane facilities in Lowell and Tewksbury (for the
Lowell Division), and in Bourne, Chatham and Yarmouth (for the Cape Cod
Division) to meet its customers' peaking requirements.
Q. ARE YOU FAMILIAR WITH THE MANNER IN WHICH COLONIAL'S UPSTREAM PIPELINE AND
STORAGE VOLUMES ARE DELIVERED TO THE COLONIAL CITY GATES?
A. Yes. Boston Gas subscribes to similar services on the Tennessee and
Algonquin pipelines as Colonial, and therefore, transports its long-haul
domestic supplies, short-haul storage supplies and its Canadian supplies
under the same tariffs.
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 5
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 firm access to domestic and Canadian supply resources. Of these
upstream pipelines, only Algonquin and Tennessee provide direct service to
Boston Gas' city gates.
The interstate pipeline capacity available to meet system requirements and
to fill underground storage can be separated logically into two components.
First, Boston Gas holds long-haul capacity to transport supply from the
producing regions of the lower 48 states. In total, this capacity allows
for transportation of approximately 242,000 MMBtu per day to Boston Gas'
service territory. 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 city gates of Boston Gas. Also, a component of
Boston Gas' pipeline supply originates in Canada, supplying 54,000 MMBtu
per day to its city gate.
In addition, the Boston Gas has contracted with pipeline companies and
others for the storage of natural gas in underground storage fields located
in Pennsylvania, New York, Maryland and West Virginia. These contracts
provide for storage capacity of 17.3 Bcf and peak-day deliverability of
195,000 MMBtu per day.
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 6
Boston Gas also utilizes supplemental facilities, i.e., local production
----
plants, to store and vaporize LNG and liquid propane supplies. Boston Gas
has LNG storage capacity of 3.14 Bcf and can deliver maximum daily
quantities of 291,400 MMBtu per day from these facilities. The Boston Gas
also has propane storage capacity of 0.158 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. As a first step, I reviewed the gas supply portfolio of Colonial to
determine the maximum daily quantity, annual delivery limitations, and
termination dates of each contract. I also reviewed Colonial'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
Colonial's gas supply portfolio with that of Boston Gas and Essex. In
order to determine which resources could be reduced or eliminated through
the coordination of the Colonial resource portfolio with that of Boston Gas
and Essex, we analyzed the use of Boston Gas and Essex resources, with and
without Colonial's operations. Specifically, we performed a dispatch
analysis using Boston Gas and Essex resources to meet their system
requirements, in isolation, and a dispatch analysis of Colonial's resources
to meet Colonial system requirements. Finally, we performed a dispatch
analysis using all resources to meet the combined system's aggregate load.
This analysis allowed
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 7
us to determine the most efficient resource mix. This analysis also allowed
us to identify whether incremental levels of Boston Gas/Essex resources
could or would be utilized to substitute for certain resources in the
Colonial portfolio, and whether Colonial's resources could displace certain
elements in Boston's portfolio with the savings credited back to Colonial's
customers.
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 Colonial's resource portfolio and gas
requirements, several cost-saving measures may be available, which are
summarized in Exhibit WRL-3. It is important to note that, unlike the
integration of Essex's gas supply portfolio, where the vast majority of gas
cost savings could be achieved through a single release of capacity, the
attainment of gas supply synergies in this integration process will occur
through a series of cost-saving measures.
For instance, pursuant to its restructured agreement with Imperial Oil
Resources, Inc., Boston Gas is entitled to Sable Island ("Sable") volumes
of 42,666 MMBtu/day beginning in 2000/01, which were to be transported from
the Maritimes & Northeast Pipeline ("M&NE") to Boston Gas' city gate using
Tennessee backhaul service. In evaluating gas supply synergies resulting
from the merger with Colonial, it became apparent that approximately 65
percent of the Sable volumes could be delivered by M&NE directly to
Colonial's service territory in Dracut, Massachusetts, and using
displacement, equal volumes of
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 8
Colonial's gas supply would be delivered to Boston Gas. The opportunity to
use displacement to deliver 65 percent of the volumes rather than Tennessee
backhaul services would allow Boston to avoid approximately $1.7 million
annually in transportation costs. As discussed below, these savings would
be allocated to Colonial through the Cost of Gas Adjustment Clause
("CGAC").
In addition, Colonial currently has a contract with DOMAC that provides for
the delivery of vaporized LNG volumes to the Cape Division via the
Algonquin pipeline. These charges, approximately $854,000 annually, can be
eliminated when the contract expires in October 2000, since Boston Gas can
take the DOMAC volumes in Everett and deliver an equivalent amount of gas
out of its own supplies to the Cape Division. Similarly, based on combined
dispatch, we estimate that approximately $558,000 in annual savings could
be achieved as a result of restructuring the DOMAC contract. These savings
would result from reduced use of LNG (approximately 0.65 Bcf) starting in
the 1999/00 heating season and a reduction in required vaporization
capability commencing in 2000/01 of 1,500 MMBtu.
As indicated in Exhibit WRL-3, we estimate that other savings will be
available as a result of the release or elimination of redundant upstream
capacity and that those savings are likely to total approximately $869,000
annually.
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 9
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 those set forth in Exhibit
WRL-3 that could be reduced or eliminated at this time without jeopardizing
the ability to meet Colonial's system requirements. Additional cost
savings are difficult to estimate because the attainment of those savings
is dependent upon the ability of Colonial and Boston Gas to renegotiate
existing capacity commitments. For example, we believe that additional
cost savings may be achievable as a result of consolidation of the
Tennessee and Algonquin contracts as those contracts come up for renewal.
However, such cost savings depend, to some degree, upon the Department's
determinations in its generic gas unbundling proceeding.
Q. WHAT ARE THE TOTAL GAS SUPPLY SAVINGS THAT YOU ESTIMATE WOULD BE ATTAINABLE
AND HOW DO THOSE SAVINGS COMPARE TO COLONIAL'S BURNER-TIP PRICES?
I estimate that gas cost savings of $1.0 million annually will be achieved
by the 1999/00 heating season, which will escalate to $4.0 million annually
by the 2000/01 heating season. As calculated in the testimony of Mr.
Bodanza, the $4.0 million in annual savings represents a 2.2 percent
reduction in the burner-tip prices of Colonial's customers.
Q. WILL THE ATTAINMENT OF EFFICIENCIES THROUGH THE COMBINED MANAGEMENT OF THE
BOSTON GAS AND COLONIAL RESOURCES AFFECT BOSTON GAS CUSTOMERS?
A. In the Essex merger, Essex's relatively small size in relation to the
Boston Gas system and its particular resource mix provided a unique
opportunity to release
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 10
Essex's long-haul transportation capacity and to utilize capacity at a
higher load factor on the Boston Gas system. In this case, however, the
gas-supply synergies will not be attained as a result of a single discrete
transaction, but rather, will be attained through a series of cost savings
measures that will not depend upon the utilization of Boston Gas capacity.
Because gas supply synergies will be gained through the combined use of
portfolio resources, cost allocations will be necessary to ensure that
Boston Gas and Essex customers are held harmless and that Colonial
customers are assured benefits relating to the use or elimination of
Colonial resources to achieve such synergies. To the extent that such
synergies are gained by replacing gas-supply resources of Colonial with
less expensive supplies available to Boston Gas, a cost allocation will be
made to compensate Boston Gas customers. In this way, Colonial's customers
will receive the cost-saving benefits that they are entitled to and Boston
Gas customers will be held harmless. To the extent that additional
capacity savings in the future result from the higher utilization of Boston
Gas capacity, which would reduce capacity-release opportunities for Boston
Gas customers, Boston Gas customers would be kept whole for the transaction
using the same methodology employed by Boston Gas in the Essex transaction.
<PAGE>
Testimony of William R. Luthern
Exhibit WRL-1
December 24, 1998
Page 11
Q. WILL COORDINATION OF COLONIAL'S RESOURCE PORTFOLIO WITH THAT OF BOSTON GAS
AND ESSEX HAVE ANY EFFECT ON COMPETITION?
A. We believe that the consolidation of the gas supply and dispatch operations
will actually facilitate the move to an unbundled environment because of
two factors. First, the coordination of the Boston, Essex and Colonial
resource portfolios provides a unique opportunity to consolidate and
reoptimize the portfolios, which will create a more flexible and less
costly mix of resources for assignment to migrating customers. Second, as
discussed by Mr. Bodanza, Colonial had not yet developed its information-
systems technology to accommodate system-wide service by third-party
competitive suppliers. As a result of the merger, Colonial will be able to
avoid this costly undertaking and take advantage of the Broker Management
System developed by Boston Gas. More importantly, competitive suppliers
will be able to transact business on a standardized basis across all three
service territories, which is a primary objective of the statewide
implementation effort. In that regard, the merger will facilitate
Colonial's transition to an unbundled environment for the benefit of
customers and competitive suppliers that may be interested in serving
customers on Colonial's system.
Q. DOES THIS COMPLETE YOUR TESTIMONY?
A. Yes, it does.
<PAGE>
Exh. WRL-2
SUMMARY OF CURRENT PEAK DAY DELIVERABILITY
(IN MMBTU)
<TABLE>
<CAPTION>
LOWELL CAPE COD EITHER COLONIAL
DIVISION DIVISION DIVISION TOTAL
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Pipeline - Tennessee 42,496 42,496
Pipeline - Algonquin 20,908 20,908
Pipeline - Iroquois 2,000 4,000 6,000
Storage - National Fuel 16,083 16,083
Storage - Tennessee 7,504 7,504
Storage - Texas Eastern 6,969 6,969
Storage - CNGT 6,326 6,326
Distrigas Vapor 5,000 7,000 12,000
LNG 69,600 27,000 96,600
Propane 7,000 7,000
----------------------------------------------------------------
TOTAL 144,683 66,203 11,000 221,886
</TABLE>
SUMMARY OF CURRENT ANNUAL SUPPLY CAPABILITY
(IN MMBTU)
<TABLE>
<CAPTION>
LOWELL CAPE COD EITHER COLONIAL
DIVISION DIVISION DIVISION TOTAL
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Pipeline - Tennessee 15,511,040 15,511,040
Pipeline - Algonquin 7,830,585 7,830,585
Pipeline - Iroquois 730,000 1,460,000 2,190,000
Storage - National Fuel 2,056,000 2,056,000
Storage - Tennessee 1,095,830 1,095,830
Storage - Texas Eastern 493,486 493,486
Storage - CNGT 1,056,129 1,056,129
Distrigas Vapor 2,668,000 2,668,000
LNG 1,145,000 222,000 1,367,000
Propane 158,000 158,000
-------------------------------------------------------------------
TOTAL 20,695,870 9,602,200 4,128,000 34,426,070
</TABLE>
<PAGE>
Exh. WRL-3
SUMMARY OF COST SAVINGS 1999/2000 2000/2001
- ----------------------- --------- ---------
Elimination of TGP Backhaul For M&NE Volumes - 1,721,000
Elimination of DOMAC Backhaul To Cape - 854,000
Restructuring DOMAC Contract 78,000 558,000
Upstream Optimization 869,000 869,000
--------- ----------
$947,000 $4,002,000
<PAGE>
[Ropes & Gray Letterhead]
January 28, 1999
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 "Colonial Shares") of common stock, $3.33 par value, of Colonial Gas
Company, a Massachusetts gas utility company ("Colonial") in exchange for cash
and 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
Reorganization, dated as of October 17, 1998 (the "Merger Agreement"), by and
between Eastern and Colonial providing for the merger (the "Merger") of Colonial
with and into a Massachusetts corporation to be formed by and to be a wholly-
owned subsidiary of Eastern ("Merger Sub"), as a result of which Merger Sub will
continue as the surviving corporation under the name "Colonial Gas Company."
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:
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.
<PAGE>
2. Eastern is validly organized and duly existing as an unincorporated
voluntary association under the laws of The Commonwealth of Massachusetts.
3. Both prior to and following the consummation of the Merger, Merger Sub
will be a corporation duly organized, validly existing and in good standing
under the laws of The Commonwealth of Massachusetts.
4. The shares of capital stock of Merger Sub to be issued to Eastern will
be duly authorized, validly existing, fully paid and non-assessable and will
entitle Eastern as the holder thereof to all the rights and privileges
pertaining thereto as set forth in the Charter and By-laws of Merger Sub.
5. 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.
6. Assuming consummation of the Merger in accordance with the terms of
the Merger Agreement, the Colonial Shares to be acquired by Eastern pursuant to
the terms of the Merger Agreement will be legally acquired by Eastern.
7. 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>
EXHIBIT G
SCHEDULE OF ESTIMATED FEES AND EXPENSES IN
CONNECTION WITH THE PROPOSED TRANSACTION
(In Thousands)
--------------
Investment Banking Fees $5,330
Legal and Regulatory 1,350
Accounting Fees 200
Filing Fees 108
Printing 200
Proxy Solicitation 25
Exchange Agent 30
Miscellaneous 120
------
$7,363
<PAGE>
Exhibit H
Proposed Form of Notice
Eastern Enterprises ("Eastern"), 9 Riverside Road, Weston, Massachusetts
02493, a public utility holding company exempt by order under section 3(a)(1) of
the Act, has filed an application under sections 3(a)(1), 9(a)(2) and 10 of the
Act.
Eastern proposes to acquire all of the issued and outstanding voting
securities of Colonial Gas Company ("Colonial"), a gas public utility company.
To accomplish the acquisition, Eastern and Colonial have entered into an
Agreement and Plan of Reorganization dated as of October 17, 1998 ("Agreement").
The Agreement provides, among other things, that Colonial will merge with and
into a special purpose subsidiary of Eastern ("NEWCO"), which will continue to
be a wholly-owned subsidiary of Eastern. Each outstanding share of Colonial
will be converted into cash or shares of Eastern common stock having a value of
$37.50, subject to adjustment under certain circumstances and based on the
quoted market price for Eastern shares during a ten-day period preceding the
effective date. Each holder of Colonial stock may elect to receive either cash
or Eastern shares; if the total amount of cash elected exceeds $150,000,000,
then that total will be prorated among the electing stockholders and the balance
will be made up by Eastern shares. The stockholders of Colonial will cease to
be stockholders of Colonial; those who receive Eastern shares in the merger will
become shareholders of Eastern. Outstanding debt securities of Colonial will
not be affected and will remain outstanding on the same terms and conditions.
The trustees of Eastern approved the merger at a meeting held on
October 28, 1998. No approval of the merger by Eastern's shareholders is
required; but Eastern's shareholders are being asked to approve the possible
issuance of Eastern shares in connection with the merger. The board of directors
of Colonial approved the merger at a meeting held on October 17, 1998. The
<PAGE>
Trustees of Eastern approved the merger and the issuance of additional Eastern
shares at a meeting held on October 28, 1998. The stockholders of Colonial are
scheduled to vote on the Merger at a meeting to be held on February 10, 1999.
The shareholders of Eastern are scheduled to vote on the issuance of additional
shares at a meeting to be held on February 10, 1999.
Eastern's two utility subsidiaries, Boston Gas Company ("Boston Gas") and
Essex Gas Company ("Essex Gas"), together serve approximately 575,000 gas retail
customers, all in Massachusetts./1/ Colonial serves approximately 151,000 gas
retail customers entirely in eastern Massachusetts. The service territories of
Boston Gas, Essex Gas, and Colonial are contiguous. Eastern's net earnings for
the twelve months ended September 30, 1998 (restated to include Essex Gas) were
$103.49 million on revenues of $973.396 million. Eastern's non-utility
subsidiaries contributed $261.865 million approximately 26.9% of total revenues
during this period. Colonial's net earnings for the twelve months ended
September 30, 1998 were $15.041 million on revenues of $178.128 million.
Colonial's non-utility subsidiaries contributed $2.7 million, approximately
1.5% of total revenues during this period. Both Eastern's gas subsidiaries and
Colonial are subject to the retail rate-making jurisdiction of the Massachusetts
Department of Telecommunications and Energy.
Eastern has several direct non-utility subsidiaries. These include:
Midland Enterprises Inc. ("Midland"), AllEnergy Marketing Company, Inc., AMR
Data Corporation, Boston Gas Services, Inc., Eastern Associated Capital Corp.,
Eastern Associated Securities Corp., Eastern Energy Systems Corp., Eastern
Enterprises Foundation, Eastern Rivermoor Company, Inc., Eastern Urban Services,
Inc., Mystic Steamship Corporation, PCC Land Company, Inc., Philadelphia
- --------------------
/1/ Boston Gas has an active wholly owned non-utility subsidiary, Massachusetts
LNG Incorporated, which holds title to a liquid natural gas storage facility.
<PAGE>
Coke Co., Inc., ServiceEdge Partners, Inc., Water Products Group Incorporated,
and Western Associated Energy Corp./2/ Midland and its subsidiaries/3/ are
engaged in river barge transportation services and related support activities.
The other non-utility subsidiaries are engaged in investment activities, real
estate activities, installing and servicing HVAC equipment, automated meter
reading services, and ownership of liquid natural gas storage facilities.
Colonial has one active non-utility subsidiary, Transgas Inc., which
provides over-the-road transportation of liquefied natural gas, propane, and
similar commodities, and two inactive non-utility subsidiaries, CGI Transport
Ltd and Colonial Energy.
In addition, Eastern requests an order granting it an exemption under
section 3(a)(1) of the Act following the Merger. Eastern asserts that upon
consummation of the Merger, Eastern will continue to satisfy the requirements
for an exemption under section 3(a)(1). Eastern states that it and its public
utility subsidiaries currently are and will continue to be predominately
intrastate in character and will continue to carry on their businesses
substantially in Massachusetts.
For the Commission, by the Division of Investment Management, under
delegated authority.
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/2/ ALLEnergy Marketing Company, Inc., Boston Gas Services, Inc., Eastern Energy
Systems Corp., Mystic Steamship Corporation, Philadelphia Coke Co., Inc., Water
Products Group Incorporated, and Western Associated Energy Corp. are inactive.
/3/ Midland's subsidiaries include: Capital Marine Supply, Inc., Chotin
Transportation, Inc., Eastern Associated Terminals Company, Federal Barge Lines,
Inc., Hartley Marine Corp., Minnesota Harbor Service, Inc., The Ohio River
Company, The Ohio River Company Traffic Division, Inc., The Ohio River Terminals
Company, Orgulf Transport Co., Orsouth Transport Co., Port Allen Marine Service,
Inc., Red Circle Transport Co., River Fleets, Inc., and West Virginia Terminals,
Inc. Midland and its active subsidiaries are engaged in river barge
transportation services and related support activities.
<PAGE>
EXHIBIT I
SUBSIDIARIES OF EASTERN ENTERPRISES
Utility Subsidiaries:
Boston Gas Company
Essex Gas Company
Non-Utility Subsidiaries:
AllEnergy Marketing Company, Inc. (inactive)
AMR Data Corporation - performs automated reading services for BGC and
others
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. - holds real estate limited partnership
interests
LNG Storage, Inc. (subsidiary of Essex Gas Company) - holds title to LNG
storage facilities
Massachusetts LNG Incorporated (subsidiary of Boston Gas Company) - holds
title to LNG storage facilities
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)
<PAGE>
Northern Energy Company, Inc. (subsidiary of Essex Gas Company) (inactive)
PCC Land Company, Inc. - holds title to real property in Pennsylvania
Philadelphia Coke Co., Inc. (inactive)
ServicEdge Partners, Inc. - installs and services HVAC equipment
Water Products Group Incorporated (inactive)
Western Associated Energy Corp. (inactive)
SUBSIDIARIES OF COLONIAL GAS COMPANY
(All are non-utility)
Transgas Inc. (fuel trucking transportation)
CGI Transport Ltd. (subsidiary of Transgas Inc.) (inactive)
Colonial Energy (subsidiary of Transgas Inc.) (inactive)
