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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
----------------
COMMISSION FILE NUMBER 1-2297
EASTERN ENTERPRISES
9 Riverside Road, Weston, Massachusetts 02493
(781) 647-2300
MASSACHUSETTS 04-1270730
(State of organization) (I.R.S. Employer
Identification No.)
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, par value $1.00 per share New York Stock Exchange
Common Stock Purchase Rights, no par value Boston Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
The registrant (1) has filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendments to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $901 million as of March 3, 1999.
There were 22,603,213 shares of Common Stock, par value $1.00 per share,
outstanding as of March 3, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual report to shareholders for the year ended December
31, 1998 are incorporated by reference into Part II of this Report.
Portions of the Registrant's 1999 definitive Proxy Statement for the
Annual Meeting of Shareholders to be held April 28, 1999 are incorporated by
reference into Part III of this Report.
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Exhibits to Form 10-K and Financial Statement Schedules have been included
only in copies of the Form 10-K filed with the Securities and Exchange
Commission.
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The purpose of this Form 10-K/A filing is to correct the "1998 Tonnage by
Commodity" pie chart data and the "Ton Miles by Commodity" bar chart data as
reflected in the Marine Transportation discussion of Form 10-K Item 1(c). This
information was incorrectly converted from graph to narrative form.
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PART I
ITEM 1. BUSINESS
1(a) GENERAL
Eastern Enterprises ("Eastern") is an unincorporated voluntary association
(commonly referred to as a "Massachusetts business trust") established and
existing under a Declaration of Trust dated July 18, 1929, as from time to
time amended.
Eastern's principal subsidiaries are Boston Gas Company ("Boston Gas"),
Essex Gas Company ("Essex Gas") and Midland Enterprises Inc. ("Midland").
Boston Gas and Essex Gas are regulated utilities that distribute natural gas
in and around Boston, Massachusetts. Midland is engaged in barge
transportation, principally on the Ohio and Mississippi river systems. Other
subsidiaries include ServicEdge Partners, Inc. ("ServicEdge") and AMR Data
Corporation ("AMR Data"). ServicEdge offers heating, ventilation and air
conditioning equipment installation and services to customers in eastern
Massachusetts. AMR Data provides customized metering equipment and services
primarily to municipal utilities in the Northeast.
On September 30, 1998, Eastern completed the acquisition of Essex Gas by
exchanging 2.0 million shares of Eastern common stock for all of the common
stock of Essex Gas. The transaction was accounted for as a pooling of
interests, as described in Note 2 of Notes to Financial Statements. Such
information is incorporated herein by reference.
In October 1998 Eastern signed a definitive agreement to acquire Colonial
Gas Company ("Colonial Gas") for a combination of stock and cash, as described
in Note 3. Formed in 1849, Colonial Gas distributes natural gas to
approximately 155,000 residential and commercial customers in 24 Massachusetts
communities located northwest of Boston and on Cape Cod. Colonial Gas also
owns and operates Transgas, Inc., the nation's largest over-the-road
transporter of liquefied natural gas ("LNG"). The acquisition of Colonial Gas
was approved by shareholders of both companies on February 10, 1999. The
merger is expected to close by mid-year, subject to the receipt of
satisfactory regulatory approvals.
Eastern provides management and staff services to its operating
subsidiaries. Boston Gas, Essex Gas and Midland are financed primarily through
their own internally generated funds and the issuance of their own funded
debt, which is not guaranteed by Eastern. The debt instruments relating to
Boston Gas, Essex Gas and Midland borrowings generally contain restrictive
covenants, including restrictions on the payment of dividends to Eastern. In
the opinion of management, none of these restrictions has any material impact
upon the operations of Eastern and its subsidiaries.
The information in this Form 10-K should be read in conjunction with the
"Forward-Looking Information" in Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
1(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Information with respect to this item may be found in Note 4.
1(c) DESCRIPTION OF BUSINESS
NATURAL GAS DISTRIBUTION
Eastern's natural gas distribution segment ("LDC segment") is comprised of
Boston Gas and Essex Gas, which together are engaged in the transportation and
sale of natural gas to approximately 580,000 residential, commercial, and
industrial customers in Boston and 90 other communities in eastern and central
Massachusetts. The LDC segment also sells natural gas for resale in
Massachusetts and other states. Boston Gas serves over 535,000 customers and
is the largest natural gas distribution company in New England. Boston Gas has
been in business for 176 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. As described above, Essex Gas was acquired by Eastern in
September 1998. Essex Gas serves approximately 44,000 customers. For
definitions of unfamiliar terms, see the Glossary on page 5 of the Form 10-K.
The LDC segment provides local transportation services and gas supply for
all customer classes. The LDC segment's services are available on a firm and
non-firm basis. Firm transportation services and sales are provided under rate
tariffs and/or contracts filed with the Massachusetts Department of
Telecommunications and Energy ("DTE"; formerly the Department of Public
Utilities), that typically obligate the LDC segment to provide service without
interruption throughout the year. Non-firm transportation services and sales
are generally provided to large commercial/industrial customers who can use
gas or another energy source interchangeably. Non-firm services are provided
through individually negotiated contracts and, in most cases, the price
charged takes into account the price of the customer's alternative fuel.
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The LDC segment offers unbundled services to all commercial/industrial
users, who are allowed to purchase local transportation from the LDC segment
separately from the purchase of gas supply, which the customer may buy from
third party suppliers. The LDC segment views these third party suppliers as
partners in marketing gas and increasing throughput and expects to work
closely with them to facilitate the unbundling process and ensure a smooth
transition, especially in the tracking and processing of transactions. The LDC
segment has also implemented a program to educate commercial/industrial
customers about the opportunity to purchase gas from third-party suppliers,
while still relying on the utility for delivery. As of December 31, 1998, the
LDC segment had approximately 4,400 firm transportation customers. The chart
below reflects the migration of customers to transportation-only service.
Service to all residential customers currently is on a bundled basis. While
the migration of customers from bundled sales to transportation-only service
will lower the LDC segment's revenues, it has no impact on its operating
earnings. The LDC segment earns all of its margins on the local distribution
of gas and none on the resale of the commodity itself.
(Bar Chart)
FIRM THROUGHPUT
(IN BCF)
BUNDLED TRANSPORTATION-
SALES ONLY
----- ----
1994 87.30 13.80
1995 83.10 16.90
1996 82.30 42.10
1997 78.70 47.00
1998 68.40 44.60
(Bar Chart)
BOSTON AREA WEATHER
(% VARIANCE FROM NORMAL)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
1.00% 1.00% 5.00% 3.00% -9.00%
MARKETS AND COMPETITION
The LDC segment competes with other fuel distributors, particularly oil
dealers, throughout its service territory.
GAS THROUGHPUT
The following table provides information about the LDC segment's
throughput during the three years 1996-1998, as measured in billions of cubic
feet of natural gas at 1,000 Btu per cubic foot ("Bcf"). The reduction in
throughput from 1997 to 1998 primarily reflects the warmer weather in 1998, as
shown in the chart above.
Years Ended December 31,
1998 1997 1996
---- ---- ----
Residential 41.3 45.4 46.5
Commercial/Industrial 30.2 38.5 42.4
Off-system sales 12.7 7.4 12.2
----- ----- -----
Total sales 84.2 91.3 101.1
Transportation of customer-owned gas 65.6 80.9 61.6
Less: Off-system sales (12.7) (7.4) (12.2)
----- ----- -----
Total throughput 137.1 164.8 150.5
===== ===== =====
Firm throughput 113.0 125.7 124.5
===== ===== =====
The table above excludes the cumulative effect of adopting the accrual
method of revenue recognition, as discussed in Note 13. The one-time effect of
this change increased residential, commercial/industrial and transportation
throughput in 1998 by 3.3 Bcf, 1.4 Bcf and 0.4 Bcf, respectively.
Residential customers comprise 92% of the LDC segment's customer base,
while commercial/industrial establishments account for the remaining 8%.
Volumetrically, residential customers account for 30% of total throughput and
37% of firm throughput, while commercial/industrial customers account for 70%
of total throughput and 63% of firm throughput. In 1998, approximately 68% of
the commercial/industrial customers' total throughput was local
transportation-only service. No customer, or group of customers under common
control, accounted for more than 2% of total firm revenues in 1998. Firm
throughput for Boston Edison accounted for 40% of the total transportation of
customer-owned gas.
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GAS SUPPLY
The following table provides information about the LDC segment's sources
of supply during 1996-1998 in Bcf:
Years Ended December 31,
1998 1997 1996
---- ---- ----
Natural gas purchases 88.4 92.9 99.2
LNG purchases 0.6 1.6 3.5
---- ---- -----
Total purchases 89.0 94.5 102.7
Change in storage gas (1.1) 3.2 (2.3)
Company use, unbilled and other (3.7) (6.4) .7
---- ---- -----
Total sales 84.2 91.3 101.1
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Year to year variations in storage gas and unbilled gas reflect variations
in end-of-year customer requirements, due principally to weather. Given the
ready availability of supply during 1998, the LDC segment purchased
approximately two-thirds of its peak pipeline supplies under short-term and
spot contracts. The balance of peak day pipeline requirements is purchased
directly from domestic and Canadian producers and marketers pursuant to long-
term contracts which have been reviewed and approved by the DTE or by the
Federal Energy Regulatory Commission ("FERC").
Pipeline supplies are transported on interstate pipeline systems to the
LDC segment's service territory pursuant to long-term contracts. FERC-approved
tariffs provide for fixed demand charges for the firm capacity rights under
these contracts. The daily and annual capacity and the contract expiration
dates of the interstate pipeline companies that provide firm transportation
service to the LDC segment's service territory, are as follows:
Capacity (in Bcf)
----------------------- Expiration
Pipeline Daily Annual Dates
- -------- ----- ------ -----
Algonquin Gas Transmission Company
("Algonquin") 0.28 87.4 1999-2012
Tennessee Gas Pipeline Company
("Tennessee") 0.21 77.3 2000-2012
---- -----
0.49 164.7
==== =====
In addition, the LDC segment has firm capacity contracts on interstate
pipelines upstream of the Algonquin and Tennessee pipelines to transport
natural gas purchased by the LDC segment from producing regions to the
Algonquin and Tennessee pipelines. The expiration dates for these contracts
are similar to those included in the above table.
The LDC segment 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 18.5 Bcf and peak day withdrawal capacity of 0.17 Bcf. The LDC
segment utilizes its existing capacity contracts to transport gas from the
storage fields to its service territory. Supplemental supplies of LNG and
propane are purchased and produced from foreign and domestic sources.
Peak day throughput was 0.70 Bcf, 0.71 Bcf, and 0.74 Bcf in 1998, 1997,
and 1996, respectively. The LDC segment provides for peak period demand
through a least-cost portfolio of pipeline, storage and supplemental supplies.
The LDC segment considers its annual and peak day sendout capacity, based
on its total supply resources, to be adequate to meet the requirements of its
firm customers.
REGULATION
The LDC segment's operations are subject to Massachusetts statutes
applicable to regulated gas utilities. Rates, gas purchases, pipeline safety
regulations, issuances of securities and affiliated party transactions are
regulated by the DTE. Rates for firm transportation and sales provided by the
LDC segment are subject to approval by, and are on file with, the DTE. In
addition, the LDC segment has a cost of gas adjustment clause ("CGAC") which
allows for the adjustment of billing rates for firm gas sales to enable it to
recover the actual cost of gas delivered to firm customers, including the
demand charges for capacity on the interstate pipeline system and certain
other charges.
Boston Gas' rates for local transportation service are governed by a five-
year performance-based rate plan approved by the DTE in 1996 in its last rate
proceeding in D.P.U. 96-50. Under this plan, Boston Gas' local transportation
rates are recalculated annually to reflect inflation for the previous 12
months, minus a productivity factor of 1.5 percent. The plan also provides
for penalties if Boston Gas fails to meet specified service quality measures,
with a maximum potential exposure of $4.9 million. Rates are capped such that
25% of earnings in
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excess of a 15% return on ending equity are to be passed back to ratepayers.
Similarly, ratepayers would absorb 25% of any shortfall below a 7% return on
ending equity. The final year of the plan ends on October 31, 2002. Boston Gas
has appealed the DTE's order in D.P.U. 96-50 to the Massachusetts Supreme
Judicial Court. Because of the low current rate of inflation, the calculation
for 1998 resulted in a minor rate reduction of approximately $100,000. Boston
Gas continues to recover its gas costs under its CGAC.
Essex Gas' rates for local transportation service are governed by a ten-
year rate plan approved by the DTE in conjunction with its approval of
Eastern's acquisition of Essex Gas. The plan immediately reduced rates for
Essex Gas customers by 5% reflecting expected gas supply cost savings passed
back through the CGAC. The plan freezes base rates, which were set in a
December 1996 rate order, through 2008. The freeze on base rates is subject to
adjustment only to take into account certain exogenous factors, such as
changes in tax laws, accounting changes, or regulatory, judicial or
legislative changes. All of Essex Gas' administrative, operations and
maintenance functions have been integrated with those of Boston Gas.
In July 1997, the DTE directed all ten investor-owned gas distribution
companies ("gas utilities") in Massachusetts to undertake a collaborative
process with other stakeholders, including third party suppliers, customers
and others, to develop common principles under which comprehensive gas service
unbundling might proceed. A settlement on model terms and conditions for
unbundled transportation service jointly agreed upon by the gas utilities and
the stakeholders was approved by the DTE on November 30, 1998. Further, on
February 1, 1999, the DTE ordered that for a five-year transition period,
Massachusetts gas utility contractual commitments for upstream capacity will
be assigned on a mandatory, pro rata basis to marketers selling gas to each
gas utility's customers. The mandatory assignment method assures that the
costs of upstream capacity purchased by a gas utility to serve firm customers
will not be absorbed as stranded costs by the gas utility or its remaining
bundled customers during the five-year transition period. Under the DTE's
order, during the transition period the gas utilities will retain primary
responsibility for upstream capacity planning and procurement to support
customer requirements and growth. In year three of the transition period, the
DTE intends to evaluate the extent to which the upstream capacity market for
Massachusetts is workably competitive and shorten or lengthen the transition
period accordingly. While the DTE's order assures the recoverability of
stranded costs for capacity throughout the transition period, there can be no
assurance about the recoverability of subsequent potential stranded costs
until the DTE has addressed the assignment of capacity after the transition
period. The restructuring collaborative is also examining how to extend
unbundled transportation service to residential customers.
Eastern was granted an exemption under the Public Utility Holding Company
Act of 1935 under Section 3(a)(1) thereof, pursuant to orders of the
Securities and Exchange Commission ("SEC") dated February 28, 1955, as amended
by orders dated November 3, 1967 and August 28, 1975. Eastern's exemption was
confirmed pursuant to an order of the SEC dated September 30, 1998, in
conjunction with the Essex Gas acquisition.
SEASONALITY AND WORKING CAPITAL
The LDC segment's revenues, earnings and cash flows are highly seasonal as
the demand for most of its distribution sales and servicess is for space
heating and, therefore, is directly related to variations in temperature
conditions. The majority of the LDC segment's earnings is generated in the
first quarter, with a seasonal loss occurring in the third quarter. Since the
bulk of its revenues is billed in the November through April heating season,
significant cash flows are generated from late winter to early summer. In
addition, while the LDC segment pays pipeline demand charges over the entire
year, these charges are billed to customers over the heating season. The lag
between payment and billing of demand charges, along with other costs of gas
distributed but unbilled, is reflected as deferred gas costs and is financed
through short-term borrowings. Short-term borrowings are also required from
time to time to finance normal business operations. As a result of these
factors, short-term borrowings are generally highest during the late fall and
early winter.
ENVIRONMENTAL MATTERS
The LDC segment may have or share responsibility under applicable
environmental law for the remediation of certain former manufactured gas plant
sites. Information with respect to environmental matters may be found in Note
12. Such information is incorporated herein by reference.
EMPLOYEES
As of December 31, 1998, the LDC segment had approximately 1,400
employees, 73% of whom were organized in local unions. All of the collective
bargaining agreements expire in 1999.
PROPERTIES
The LDC segment operates four LNG facilities in Dorchester, Salem, Lynn
and Haverhill, Massachusetts. These facilities enable the LDC segment to
purchase, and at one facility to liquefy LNG and store it for use in
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periods of high demand. The LDC segment owns and operates such facilities in
Dorchester and Haverhill, Massachusetts. Boston Gas owns the real property
beneath the Salem and Lynn facilities and rented those plants under a lease/
financing arrangement. Boston Gas is currently litigating to enforce its
purchase rights under the lease. A stipulation with the lessor of the gas plants
that allowed Boston Gas to operate these facilities expired October 1, 1998.
Boston Gas remains in possession of the facilities pending the determination of
its purchase rights on appeal.
On December 31, 1998, the LDC segment's distribution system included
approximately 6,700 miles of gas mains, 456,000 services and 583,000 active
customer meters. A majority of the gas mains consist of cast iron and bare
steel pipe, which requires ongoing maintenance and replacement.
The LDC segment's mains and services generally are located on public ways
or private property not owned by it. The LDC segment's occupation of such
property generally is pursuant to easements, licenses, permits or grants of
location. Except as stated above, the principal items of property of the LDC
segment are owned in fee.
In 1998, the LDC segment's capital expenditures were $66.2 million.
Capital expenditures were principally made for system replacement, system
expansion to meet customer demand and productivity enhancement initiatives.
The LDC segment plans to spend approximately $68 million for similar purposes
in 1999, with a slightly higher proportion for system expansion.
GLOSSARY -- NATURAL GAS DISTRIBUTION
BUNDLED SERVICE -- Two or more services tied together as a single product.
Services include gas sales, interstate transportation, local transportation,
balancing variations in customer usage, storage and peak shaving.
CAPACITY -- The capability of pipelines and supplemental facilities to deliver
and/or store gas.
COST OF GAS ADJUSTMENT CLAUSE ("CGAC") -- a rate mechanism that allows for the
adjustment of billing rates for firm sales that enable LDCs to recover the
actual cost of gas delivered to firm customers, including the demand charges
for capacity on the interstate pipeline system.
FIRM SERVICE -- Sales and/or transportation service provided without
interruption throughout the year. Uninterrupted seasonal services are also
available for less than 365 days. Firm services are provided either under
filed rate tariffs or through individually negotiated contracts.
INTERSTATE TRANSPORTATION -- Transportation of gas by an interstate pipeline
to the service territory.
LDC SEGMENT -- Boston Gas and Essex Gas, together.
LIQUEFIED NATURAL GAS ("LNG") -- Natural gas is in liquid form at a
temperature near absolute zero. Liquefying natural gas reduces its volume by a
factor of 600, which facilitates the storage by LDCs of supplemental supplies
needed for peak shaving.
LOCAL DISTRIBUTION COMPANY ("LDC") -- A utility that owns and operates a gas
distribution system for the delivery of gas supplies from the service
territory to end-user facilities.
LOCAL TRANSPORTATION SERVICE -- Transportation of gas by an LDC from the
connection to the pipeline to the end user.
NON-FIRM SERVICE -- Sales and transportation service offered at a lower level
of reliability and cost. Under this service, an LDC can interrupt sales or
service to a customer on short notice, typically during the winter season.
Non-firm services are provided through individually negotiated contracts. In
most cases, the price charged takes into account the price of the customer's
energy alternative.
PEAK SHAVING -- In times of heavy consumption, supplementing available
pipeline gas with supplies from underground storage or LNG facilities or with
injections of propane.
PERFORMANCE-BASED REGULATORY PLAN -- An incentive ratemaking mechanism,
typically a price cap plan, where rates are adjusted annually pursuant to a
pre-determined formula tied to a measure of inflation, offset by an assumed
increase in productivity, subject to the achievement of service quality
measures. Rates may also reflect certain exogenous costs that may be incurred.
THROUGHPUT -- Gas volume delivered to customers through an LDC's gas
distribution system.
UNBUNDLED SERVICE -- Service that is offered and priced separately, e.g.,
segregating the cost of the gas commodity delivered to an LDC's service
territory from the cost of local transportation service. Other unbundled
10-K/5
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services may involve daily or monthly balancing, back-up or stand-by services
and pooling. With unbundled services, customers can pick and choose among the
offered services.
MARINE TRANSPORTATION
The marine transportation segment is comprised of Midland Enterprises
Inc. and its wholly-owned operating subsidiaries (together "Midland"), which
are engaged in the operation of a fleet of barges and towboats, principally on
the Ohio and Mississippi Rivers and their tributaries, the Gulf Intracoastal
Waterway and the Gulf of Mexico. Midland transports dry bulk commodities, a
major portion of which is coal. Midland also operates a boat and barge repair
facility, two coal dumping terminals, a phosphate rock and phosphate chemical
fertilizer terminal and provides refueling and barge fleeting services.
SALES
Midland transported 59.9 million, 57.0 million, and 65.5 million tons in
1998, 1997 and 1996, respectively. Tonnage in 1998 grew 5% from 1997 as a
result of increased shipments by contract coal customers and new aggregate
business acquired in 1998, partly offset by lower grain and export coal
demand. Tonnage in 1997 declined 13% from 1996, primarily as a result of the
non-renewal of several multi-year contracts, unplanned plant outages for
several customer accounts and lower demand from export coal and grain markets.
Ton miles are the product of tons and distance transported. The following
charts depict 1998 tonnage by commodity and ton miles of cargo transported for
the period 1994-1998:
(Pie Chart)
1998 TONNAGE BY COMMODITY
Coal 63.50%
Grain 5.20%
Other 31.30%
(Bar Chart)
TON MILES BY COMMODITY
(IN BILLIONS)
Coal Grain Other
---- ----- -----
1994 15.20 4.40 15.70
1995 15.20 5.20 16.40
1996 15.70 4.80 15.60
1997 13.60 4.50 15.00
1998 13.30 3.70 15.10
"Other" includes sand, stone, gravel, iron, scrap, steel, coke, phosphate,
other commodities and towing for others.
In 1998, ton miles declined 3% primarily due to an 8% decline in the
average length of haul, which resulted principally from lower coal and grain
export tonnage. In 1997, ton miles declined 8% due to the lower tonnage, as
discussed above, partially offset by longer average hauls, particularly for
coal. In addition to changes in ton miles transported, Midland's revenues and
net earnings are affected by other factors such as competition, operating
conditions and the segment of the river system traveled. In 1997 and again in
1998, river navigation was significantly affected by adverse weather
conditions. In 1998, multiple tropical storms, flooding and lock delays
affected operations, while record flooding, ice and lock repairs slowed
production and reduced tonnage levels in 1997, as described further in the
"Competition" section.
The following table summarizes Midland's backlog of transportation and
terminaling business under multi-year contracts:
December 31,
1998 1997
----- -----
Tons (in millions) 128.4 123.2
Revenues (in millions) $496.6 $412.1
Portions of revenue backlog not expected to
be filled within the current year 74% 66%
The 1998 revenue backlog (which is based on contracts that extend beyond
December 31, 1999) is shown at prices in effect on December 31, 1998, which
are generally subject to certain cost escalation/de-escalation provisions.
Since services under many of the multi-year contracts are based on customer
requirements, Midland has estimated its backlog based on its forecast of the
anticipated requirements of these contract customers. The 4% increase in
tonnage backlog from 1997 mainly reflects new multi-year agreements, in
addition to extended terms on current multi-year contracts. Partially
offsetting these increases are elapsing terms of current multi-year contracts
as they draw closer to maturity, including those excluded from the calculation
as they enter their final
10-K/6
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year. The 21% increase in revenue backlog exceeded the increase in the tonnage
backlog due to the mix change of the forecasted backlog tonnage as longer haul
commodities generally produce higher revenues on a tonnage basis. Electric
utilities, which traditionally have entered into multi-year transportation and
coal supply agreements, have begun to shorten the term of some agreements for a
variety of reasons such as Clean Air Act requirements and increasing competitive
pressures resulting from the ongoing deregulation of the electric power
industry. These factors have also led to changes in the sourcing of coal by
utilities, leading to changes in traffic patterns.
The only significant raw material required by Midland is the diesel fuel
to operate its towboats. Diesel fuel is purchased from a variety of sources
and Midland regards the availability of diesel fuel as adequate for its
operations.
SEASONALITY
Revenues during winter months tend to be lower than revenues for the
remainder of the year due to the freezing of some northern waterways,
increased coal consumption by electric utilities during the summer months and
the fall harvest of grain.
COMPETITION
Midland's marine transportation business competes on the basis of price,
service and equipment quality and availability. Midland's primary competitors
include other barge lines and railroads. There are a number of companies
offering transportation services on the waterways served by Midland. Price
competition between barge lines intensifies as barge supply exceeds demand.
During the past few years, barge supply has increased as the industry has
built more barges than it has retired. Partially offsetting in 1998 were poor
operating conditions and lock delays which consumed barge days and absorbed some
of the additional capacity. In addition, the strength of the U.S. dollar and
weak foreign economies reduced demand for U.S. exports of coal and grain in 1998
and 1997. As a result of these factors and lower fuel costs in 1998, market
rates have fallen as competition has intensified.
In 1998 the revenues from an operating subsidiary of Cinergy Corp. and the
combined revenues from two operating subsidiaries of The Southern Company
each accounted for more than 10% of Midland's consolidated revenues under
multi-year coal transportation agreements. In 1997 a subsidiary of Cinergy
Corp. accounted for approximately 10% of Midland's consolidated revenues. No
other customer, or group of customers under common control, accounted for more
than 10% of revenues in 1998, 1997 or 1996. On the basis of past experience
and its competitive position, Midland considers that the simultaneous loss of
several of its largest customers, while possible, is unlikely to happen.
Midland's multi-year transportation and terminaling contracts expire at
various dates from March 2000 through December 2007. During 1998,
approximately 48% of Midland's revenues resulted from multi-year contracts. A
substantial portion of the contracts provide for rate adjustments based on
changes in various costs, including diesel fuel costs, and, additionally,
contain "force majeure" clauses that excuse performance by the parties to the
contracts when performance is prevented by circumstances beyond their
reasonable control. Many of these contracts also have provisions for
termination for specified causes, such as material breach of contract,
environmental restrictions on the burning of coal, or loss by the customer of
an underlying commodity supply contract. Penalties for termination for such
causes are not generally specified. However, some contracts provide that in
the event of an uncured material breach by Midland that results in termination
of the contract, Midland would be responsible for reimbursing the customer for
the differential between the contract price and the cost of substituted
performance.
Improvements in operating efficiencies have permitted barge operators to
maintain comparatively low rate structures. Consequently, the barge industry
has generally been able to retain its competitive position with alternate
methods, primarily railroads, for the transportation of bulk commodities,
particularly when the origin and destination of such movements are near or
contiguous to navigable waterways.
Towboats, such as those operated by Midland, are capable of moving in one
tow (barge configuration) approximately 22,500 tons of cargo (equivalent to
225 one hundred-ton capacity railroad cars) on the Ohio River and upper
Mississippi River and approximately 60,000 tons (equivalent to 600 one
hundred-ton capacity railroad cars) on the lower Mississippi River, where
there are no locks to transit. Barge transportation costs per ton mile are
generally below those of railroads.
ENVIRONMENTAL MATTERS
Midland is subject to the provisions of the Federal Water Pollution
Control Act, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, the Superfund Amendment and Reauthorization Act, the
Resource Conservation and Recovery Act of 1976 and the Oil Pollution Act of
1990 which permit the Coast Guard and the Environmental Protection Agency to
assess penalties and clean-up costs for
10-K/7
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oil, hazardous substances, and hazardous waste discharges. Midland is further
subject to comparable state environmental statutes in the states where it
operates. Some of these acts also allow third parties to seek damages for losses
caused by such discharges. Compliance with these acts has had no material effect
on Midland's capital expenditures, earnings, or competitive position, and no
such effect is currently anticipated.
PROPERTIES
As of December 31, 1998, Midland's marine equipment consisted of 2,414 dry
cargo barges and 87 towboats. Approximately half of this equipment is either
mortgaged to secure Midland's equipment financing obligations or chartered
under long-term leases from third parties.
In 1998, Midland's capital expenditures were $46.6 million. These
expenditures were made principally for the purchase of new barges and for
renewal of equipment. In 1999 Midland expects to spend approximately $42
million for capital equipment, primarily for the purchase of new barges.
EMPLOYEES
As of December 31, 1998, Midland employed approximately 1,300 persons, of
whom approximately 29% are represented by labor unions. One of Midland's
collective bargaining agreements, covering approximately 100 employees,
expires in 1999.
GENERAL
ENVIRONMENTAL MATTERS
Certain information with respect to Eastern's compliance with federal and
state environmental statutes may be found in Item 1(c) under "Natural Gas
Distribution" and "Marine Transportation" and Note 12.
EMPLOYEES
Eastern and its wholly-owned subsidiaries employed approximately 2,900
employees at December 31, 1998.
10-K/8
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amended report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EASTERN ENTERPRISES
Registrant
By /s/ JAMES J. HARPER
JAMES J. HARPER
Vice President and Controller
(Chief Accounting Officer)
Date: June 21, 1999
