-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, eBcHhz6ny6ilrl1Hfl7GB5OCWmdcsBUOfELnKwDVqBQzf0XFMOaGz4LUA2gDJp2A 54P7b/7FPZg8GaBVDdz3yA== 0000950146-95-000107.txt : 19950615 0000950146-95-000107.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950146-95-000107 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950315 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN ENTERPRISES CENTRAL INDEX KEY: 0000311259 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 041270730 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02297 FILM NUMBER: 95520797 BUSINESS ADDRESS: STREET 1: 9 RIVERSIDE RD CITY: WESTON STATE: MA ZIP: 02193 BUSINESS PHONE: 6176472300 FORMER COMPANY: FORMER CONFORMED NAME: EASTERN GAS & FUEL ASSOCIATES DATE OF NAME CHANGE: 19890511 10-K 1 EASTERN ENTERPRISES FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1994 Commission File Number 1-2297 EASTERN ENTERPRISES 9 Riverside Road, Weston, Massachusetts 02193 (617) 647-2300 Massachusetts 04-1270730 (State of organization) (I.R.S. Employer Identification No.) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange 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 $539.2 million as of February 27, 1995. There were 20,250,503 shares of Common Stock, par value $1.00 per share, outstanding as of February 27, 1995. Documents Incorporated by Reference Portions of the annual report to shareholders for the year ended December 31, 1994 are incorporated by reference into Part II of this Report. Portions of the Registrant's 1995 definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 27, 1995 are incorporated by reference into Part III of this Report. Exhibits to Form 10-K and Financial Statement Schedules have been included only in copies of the Form 10-K filed with the Securities and Exchange Commission. EASTERN ENTERPRISES ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 TABLE OF CONTENTS Page PART I No. Item 1. Business 1 Boston Gas Company 1 Midland Enterprises Inc. 6 Discontinued Operations 9 General 9 Item 2. Properties 9 Item 3. Legal Proceedings 9 Item 4. Submission of Matters to a Vote of Security Holders 9 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 34 PART III Item 10. Directors and Executive Officers of the Registrant 34 Item 11. Executive Compensation 34 Item 12. Security Ownership of Certain Beneficial Owners and Management 34 Item 13. Certain Relationships and Related Transactions 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 34 PART I Item 1. Business 1(a) General Eastern Enterprises ("Eastern") is an unincorporated voluntary association (commonly referred to as a "Massachusetts business trust") established and existing under a Declaration of Trust dated July 18, 1929, as from time to time amended. Eastern's principal subsidiaries are Boston Gas Company ("Boston Gas") and Midland Enterprises Inc. ("Midland"). Boston Gas is a regulated utility that distributes natural gas in and around Boston, Massachusetts. Midland is engaged in barge transportation, principally on the Ohio and Mississippi river systems. On November 8, 1994, Eastern announced its intention to sell its subsidiary, WaterPro Supplies Corporation ("WaterPro"). The anticipated sale will complete the disposition of Eastern's Water Products Group, which had consisted of WaterPro and another subsidiary, Ionpure Technologies Corporation ("Ionpure"), which was sold as of October 1, 1993. As described in Note 10 appearing on pages 27 and 28, the Water Products Group has been accounted for as a discontinued operation. Eastern provides management and staff services to its operating subsidiaries. Boston Gas and Midland are financed primarily through their own funded debt, which is not guaranteed by Eastern. Many of the debt instruments relating to Boston Gas and Midland borrowings 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. 1(b) Financial Information About Industry Segments Information with respect to this item may be found in Note 2 appearing on page 22. Such information is incorporated herein by reference. 1(c) Description of Business Boston Gas Company Boston Gas is engaged in the transportation, distribution and sale of natural gas to residential, commercial, and industrial customers in Boston, Massachusetts, and 73 other communities in eastern and central Massachusetts. Boston Gas also sells gas for resale in Massachusetts and other states (see "Competition" section). Boston Gas has one subsidiary, Massachusetts LNG Incorporated ("Mass LNG"), which holds a long-term lease on two liquefied natural gas ("LNG") facilities. Boston Gas is the largest natural gas distribution company in New England, has been in business for 172 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. Gas Sales and Transportation Gas is sold and transported for "firm" and "non-firm" customers. Principal uses of natural gas include central, space and water heating, cooking, drying, steam generation and a variety of industrial applications. "Firm" sales and transportation services are generally provided without interruption throughout the year, although uninterrupted seasonal services are available to firm customers for periods of less than 365 days. Firm services are provided under either filed rate schedules or through individually negotiated contracts. Firm sales and transportation of natural gas used for central or space heating are directly related to weather conditions. Consequently, temperature variations can have a significant impact, both favorable and unfavorable, upon Boston Gas' revenues and earnings. Compared to normal, actual billing temperatures were 1% colder, 1% warmer and 4% colder in 1994, 1993 and 1992, respectively. "Non-firm" sales and transportation services are generally provided to large commercial and industrial customers who can use gas and oil interchangeably or to other gas distribution utilities for resale. Non-firm services are dependent upon a number of factors, including the price of gas compared to competing fuels, gas supply availability, weather conditions and system capacity, both local and interstate. 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, which is generally residual fuel oil. Beginning November 1, 1993, gross margins from non-firm sales and transportation services ($10.9 million in 1994 and $8.2 million in 1993) in excess of a threshold based upon the prior season's experience are shared between firm customers and shareholders, 75% and 25%, respectively. The following table provides information with respect to the volumes of gas sold and transported by Boston Gas during the three years 1992-1994. The table is in billions of cubic feet ("BCF") of natural gas at 1,000 B.T.U. per cubic foot. Years Ended December 31, 1994 1993 1992 Firm Sales and Transportation Residential Heating 37.8 38.1 37.9 Residential Non-Heating 3.6 3.8 3.9 Commercial 25.1 26.0 25.8 Industrial 4.8 5.0 4.9 Seasonal Firm Contracts 10.4 10.0 6.4 Total Firm Sales 81.7 82.9 78.9 Firm Transportation 13.8 12.4 7.4 Total Firm Throughput 95.5 95.3 86.3 Non-Firm Sales and Transportation Interruptible 6.4 8.1 14.5 Special Sales for Resale 7.6 2.1 4.2 Total Non-Firm Sales 14.0 10.2 18.7 Non-Firm Transportation 34.9 39.3 27.3 Total Non-Firm Throughput 48.9 49.5 46.0 Total Throughput 144.4 144.8 132.3 Residential heating sales include all gas sold to customers having central or space heating. Commercial sales include all gas sold to retail establishments and commercial properties including central-metered apartment houses and condominiums with five or more units. The growth in Boston Gas' firm transportation services, as depicted below, reflects changes in the gas industry (see "Gas Supply" and "Competition" sections). FIRM THROUGHPUT (in BCF) [Bar Chart--plot points below] 1990 1991 1992 1993 1994 Sales 65.4 64.3 78.9 82.9 81.7 Transportation 0.0 0.0 7.4 12.4 13.8 65.4 64.3 86.3 95.3 95.5 Boston Gas' operations are subject to Massachusetts statutes applicable to gas utilities as described in the "Regulation" section. Facility expansion is regulated by the Massachusetts Department of Public Utilities ("DPU"). Municipal, state and federal authorities have jurisdiction over the use of public ways, land and waters for gas mains and other distribution facilities. Gas Supply The following table provides statistical information with respect to Boston Gas' sources of supply during 1992-1994. The table is in BCF of natural gas at 1,000 B.T.U. per cubic foot. Years Ended December 31, 1994 1993 1992 Natural Gas Purchases 92.2 86.3 94.1 LNG Purchases 4.2 13.4 12.4 Total Purchases 96.4 99.7 106.5 Change in Storage Gas 4.5 (4.0) (5.2) Company Use, Unbilled and Other (5.2) (2.6) (3.7) Total Sales 95.7 93.1 97.6 Boston Gas purchases approximately 70% of its pipeline gas supplies directly from domestic and Canadian producers and marketers pursuant to long-term contracts which have been reviewed and approved by the DPU. Boston Gas purchases its remaining pipeline supplies from domestic sources pursuant to short-term, firm winter service agreements and on a spot basis. Boston Gas has diversified its pipeline gas supplies across major North American producing regions, including on and off-shore Gulf of Mexico and mid-continent areas in the United States, as well as from western Canada. Pipeline supplies are transported on interstate pipeline systems to Boston Gas' service territory pursuant to transportation agreements approved by the Federal Energy Regulatory Commission ("FERC"). Boston Gas has also contracted with pipeline companies and others for the storage of natural gas and related transportation services from underground storage fields located in West Virginia, New York and Pennsylvania. Supplemental supplies of LNG and propane are purchased and produced from foreign and domestic sources. All interstate pipelines serving Boston Gas have implemented service restructuring plans on terms and conditions approved pursuant to FERC Order No. 636. FERC Order No. 636, issued April 8, 1992, required interstate pipeline companies to unbundle gas sales contracts into separate gas sales, transportation and storage services. Accordingly, Boston Gas' firm bundled service with Algonquin Gas Transmission Company ("Algonquin"), a wholly-owned subsidiary of Texas Eastern Transmission Corporation ("Texas Eastern"), was converted to an annual firm transportation entitlement of 87.4 BCF. Similarly, Boston Gas' firm bundled sales service with Texas Eastern has been converted into an annual firm transportation entitlement of 102.3 BCF; and its firm bundled sales service with Tennessee Gas Pipeline Company ("Tennessee") has been converted to an annual transportation and storage entitlement of 79.4 BCF. In addition, Boston Gas has firm entitlements on interstate pipelines upstream of Tennessee, Texas Eastern, and Algonquin, with direct access to supply areas. Together, these transportation entitlements are used to transport natural gas purchased by Boston Gas from producing regions described above and from underground storage facilities to its service territory. Boston Gas holds direct entitlements to 17.2 BCF of storage capacity with Tennessee, Texas Eastern and others. The underlying transportation and storage agreements with Algonquin, Texas Eastern, and Tennessee have terms generally expiring no earlier than November 1996, April 2012, and November 2000, respectively. Boston Gas is provided rights of first refusal under FERC Order No. 636 to extend the terms of the majority of these transportation and storage contracts. Boston Gas considers the service reliability of its current natural gas portfolio to be comparable to that existing prior to FERC Order No. 636. In addition to its domestic supply arrangements, Boston Gas has three contracts for the purchase of Canadian gas supplies. Boston Gas' contract with Boundary, Inc. provides for the purchase of 3.8 BCF of gas annually and expires in January 2003. Boston Gas also has contracts with Alberta Northeast Gas, Ltd. to purchase up to 4.8 BCF of gas annually, and with Imperial Oil of Canada, Ltd. for the purchase of 12.8 BCF of gas annually. These contracts expire in November 2003 and April 2007, respectively. Boston Gas has contracted with Iroquois Gas Transmission System, Tennessee and Algonquin to transport these gas supplies from the Canadian border to delivery points in Boston Gas' service territory. Boston Gas has contracts, expiring in 1998, with Distrigas of Massachusetts Corporation ("DOMAC") for the purchase of an annual quantity of up to 2.0 BCF of LNG and for 1.0 BCF of LNG storage capacity and related vaporization services. Boston Gas also purchases LNG from DOMAC on a spot basis when prices are competitive with alternative supplies. DOMAC's affiliate, Distrigas Corporation, imports the LNG from Algeria pursuant to agreements with Sonatrach, the Algerian National Energy Company. Boston Gas relies on supplemental supplies of storage gas, LNG and propane to meet firm sendout requirements which are greater than its firm pipeline capacity entitlements. The number of days that peak sendout can be maintained is limited by the capacity of Boston Gas' storage facilities for supplemental gas supplies and the rate at which these supplies can be sent out and subsequently replenished. Boston Gas owns or leases facilities which enable it to store the equivalent of 4.6 BCF of natural gas in liquid form as LNG and vaporize it for use during periods of high demand. The inventory for these facilities is provided by liquefaction of pipeline gas and from purchased LNG. Over the past five years, increased pipeline capacity has reduced Boston Gas' dependence on these more costly supplemental supplies. Boston Gas considers its peak day sendout capability, based on its total supply resources, adequate to meet the requirements of its firm customers. Regulation Boston Gas' operations are subject to Massachusetts statutes applicable to gas utilities. Rates, the territorial limit of Boston Gas' service area, purchase of gas, pipeline safety regulations, issuance of securities and affiliated party transactions are regulated by the DPU. Rates for firm sales and transportation provided by Boston Gas are subject to approval by, and are on file with, the DPU. In addition, Boston Gas has a cost of gas adjustment clause which allows for the adjustment of billing rates for firm gas sales to enable it to recover the actual cost of gas delivered to firm customers. On October 30, 1993, the DPU allowed Boston Gas an annual revenue increase of $37.7 million, effective November 1, 1993, and also approved several rate design changes that reduce the volatility of its margins attributable to weather. The DPU also ordered a four-year phase-in of the cost of post-retirement benefits other than pensions. Boston Gas began billing the second year phase-in on November 1, 1994. Changes stemming from FERC Order 636 are being considered at state levels. The DPU has initiated a proceeding to review alternative regulatory approaches, including regulation that is incentive or performance based. Boston Gas and Eastern were granted an intrastate exemption from the provisions of the Public Utility Holding Company Act of 1935 ("the Act") under Section 3(a)(1) thereof, pursuant to an order of the Securities and Exchange Commission (the "SEC") dated February 28, 1955, as amended by orders dated November 3, 1967 and August 28, 1975. On February 7, 1989, the SEC issued a proposed rule under the Act which would provide limits for non-utility related diversification by intrastate public utility holding companies, such as Eastern, that are exempt under the Act. Since its proposal in 1989, the SEC has taken no action with respect to this proposed rule. Eastern and Boston Gas cannot predict whether this proposed rule will be adopted or whether it will affect their exemption under the Act. Seasonality and Working Capital Boston Gas' revenues, earnings and cash flows are highly seasonal as most of its firm sales and transportation are directly related to temperature conditions. The majority of Boston Gas' earnings are generated in the first quarter with a seasonal loss occurring in the third quarter. Since the bulk of its revenues are billed in the November through April heating season, significant cash flows are generated from late winter to early summer. In addition, through the cost of gas adjustment clause, Boston Gas bills its customers over the heating season for pipeline demand charges paid by Boston Gas over the entire year. This difference, along with other costs of gas distributed but unbilled, is reflected as deferred gas costs and results in short-term borrowings. Short-term borrowings are also required from time to time to finance normal business operations. As a result of all factors, short-term borrowings are generally highest during the late fall and early winter. Competition Boston Gas competes with suppliers of fuel oil and electricity for residential, commercial and industrial customers. In addition, Boston Gas faces competition from other suppliers of natural gas for large commercial and industrial applications. Boston Gas' marketing efforts emphasize the continuing environmental benefits of natural gas, together with its reliability and long-term economic value as compared to oil and electricity. The clean burning nature of natural gas combustion and the absence of on-site fuel storage problems are major environmental advantages for natural gas. Boston Gas increased annualized firm throughput by an estimated 3.8 BCF during 1994 through volume additions of 2.3 BCF in the firm residential and commercial/industrial markets and additions of 1.5 BCF through special contracts and transportation arrangements. Increased activity in new residential construction, together with the accelerated marketing efforts to encourage conversion to natural gas, resulted in the addition of approximately 5,300 residential heating customers. Approximately 45% of Boston Gas' existing residential customers do not use gas for central heating, representing a prime marketing opportunity. Boston Gas targets this group through special programs with the objective of increasing the rate of heating conversion to natural gas. No customer, or group of customers under common control, accounted for 3% or more of the total firm revenues in 1994. Considerable growth opportunity exists in the commercial and industrial markets, where Boston Gas' market penetration is only two-thirds the national average due to historical capacity limitations and the relatively late introduction of natural gas into New England. Despite low oil prices in 1994, the environmental advantages of natural gas and customers' desire for long-term value and price stability generated the highest level of new sales in this market segment in the past five years. In June 1992, FERC granted Boston Gas the authority to make sales for resale in interstate commerce under the terms of a blanket marketing certificate. This additional sales authority allows Boston Gas to maximize the use of its supply entitlements, thereby minimizing the cost of gas to firm customers and making its sales rates more competitive. FERC Order No. 636 and other regulatory changes have increased competition among existing and new suppliers of natural gas in Boston Gas' service area, particularly in the large commercial and industrial sectors (see "Gas Supply"). Boston Gas provides firm and interruptible transportation-only service to customers who may engage in direct purchases of natural gas from other suppliers. Firm transportation tariffs provide equal gross margin opportunity for Boston Gas regardless of whether the customer purchases gas directly from Boston Gas or purchases gas from a third party and arranges for transportation-only service on Boston Gas' distribution system. These services allow flexibility for customers and encourage conversions to natural gas, while providing increased opportunities for Boston Gas to increase throughput on its system and generate increased margins. Boston Gas has also received DPU approval to enter into contracts designed to compete for commercial and industrial customers with alternative energy options. As a result of these factors, Boston Gas believes it is well positioned to respond to such competition. Boston Gas continues to pursue market opportunities in natural gas-powered vehicles as the passage of federal legislation has enhanced opportunities in this market. The City of Boston Fire Department recently removed restrictions which barred natural gas vehicles from city tunnels and major bridges, thus making the use of these vehicles more practical. Boston Gas achieved significant progress in 1994 through cooperative efforts with state and federal government agencies to obtain access to federal funding grants for fueling station infrastructure development. This funding will help provide additional commercial and municipal fleet fueling sites in the near future. Boston Gas' program in this market includes the installation of two Boston Gas-owned fueling stations, conversion of 103 Boston Gas vehicles and the establishment of pilot programs with a number of large fleet operators for on-site fueling to demonstrate the advantage of choosing natural gas to meet alternative fuel vehicle requirements. Environmental Matters Boston Gas may have or share responsibility for environmental remediation of certain former manufactured gas plant sites, as described in Note 11 appearing on pages 28 and 29. A subsidiary of New England Electric System has assumed responsibility for remediating 11 of the 15 such sites owned by Boston Gas, subject to a limited contribution by Boston Gas. A 1990 regulatory settlement with the DPU provides for recovery by Boston Gas of environmental costs associated with such sites over separate, seven-year amortization periods without a return on the unamortized balance. Although Boston Gas does not possess at this time sufficient information to reasonably determine the ultimate cost to it of such remediation, it believes that it is not probable that such costs will materially affect its financial condition or results of operations. Properties Boston Gas and Mass LNG own or lease facilities which enable them to liquefy natural gas in periods of low demand, store the resulting LNG and vaporize it for use in periods of high demand. Boston Gas owns and operates such a facility in Dorchester, Massachusetts, and Mass LNG leases one such facility in Lynn, Massachusetts, and a storage facility in Salem, Massachusetts. In addition, Boston Gas owns propane-air facilities at several locations throughout its service territory. On December 31, 1994, Boston Gas' distribution system included approximately 5,700 miles of gas mains, 397,000 services and 522,000 active customer meters. Boston Gas' mains and services are generally located on public ways or private property not owned by it. Boston Gas' occupation of such property is generally pursuant to easements, licenses, permits or grants of location. Except as stated above, the principal items of property of Boston Gas are owned in fee. A portion of the utility properties and franchises of Boston Gas is pledged as security for its First Mortgage Bonds. In 1994, Boston Gas' capital expenditures were $53.5 million. Capital expenditures were principally made for improvements to the distribution system, for system expansion to meet customer demand and for productivity enhancement initiatives. Boston Gas plans to spend approximately $58 million for similar purposes in 1995. Employees As of December 31, 1994, Boston Gas had 1,700 employees, 71% of whom were organized in six local unions with which Boston Gas has collective bargaining agreements. In 1993, after a seventeen-week work stoppage, Boston Gas entered into six-year labor contracts with the bargaining units, which provided for, among other things, annual wage increases of approximately 4%, updated work rules and changed health care coverage to a managed care program with cost sharing. Midland Enterprises Inc. Midland is primarily engaged through wholly-owned subsidiaries (together "Midland") 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 bulk commodities, a major portion of which is coal. Midland also performs repair work on marine equipment and operates two coal dumping terminals, a phosphate rock and phosphate chemical fertilizer terminal, and a marine fuel supply facility. In December 1993 Midland sold Chotin, its liquid barge operations, including its sole contract and trade name. In June 1994 Midland sold its barge construction and repair facility located in Louisiana. Sales The following table indicates the tonnages transported (in millions) for the period 1992--1994: Years ended December 31, 1994 1993 1992 Dry Cargo 69.6 60.9 60.8 Liquid Cargo -- 1.6 1.6 Total Tonnage 69.6 62.5 62.4 Tonnage in 1994 increased 11% over 1993 to a record 69.6 million tons, despite the absence of the liquid business, primarily due to a stronger economy as evidenced by increased shipments of coal, aggregates, ores, steel products and scrap. Coal tonnage in 1993 was negatively impacted by a prolonged United Mine Workers strike that disrupted coal shipments. Tonnage in 1993 increased slightly over 1992 due to increased shipments of non-coal commodities. The following chart summarizes the ton miles of cargo transported (in billions) for the period 1990-1994: TON MILES BY COMMODITY (in billions) [Bar chart--plot points below] 1990 1991 1992 1993 1994 Coal 14.1 15.6 15.2 14.0 15.2 Grain 7.0 6.2 6.3 4.8 4.4 Other* 8.8 8.6 9.3 11.9 15.7 Liquid 2.0 1.7 1.6 1.5 0.0 Total 32.0 32.1 32.4 32.2 35.3 * Other includes sand, stone, gravel, iron, scrap, steel, coke, phosphate, towing for others, and other dry cargo. Ton miles are the product of tons and distance transported. The record ton miles in 1994 reflected the 11% increase in tonnage noted above. The slight decline in ton miles from 1992 to 1993 reflected shorter average hauls of approximately equal tonnage. In addition to changes in ton miles transported, Midland's revenues and earnings are affected by other factors such as competitive conditions, weather and the segment of the river system traveled, as described in the "Seasonality" and "Competition" sections. The following table summarizes Midland's backlog of transportation and terminalling business under long-term contracts: Years ended December 31, 1994 1993 Tons (in millions) 168.8 165.5 Revenues (in millions) $422.8 $585.5 Portions of revenue backlog not expected to be filled within the current fiscal year 77% 80% The 1994 revenue backlog (which is based on contracts that extend beyond December 31, 1995) is shown at prices in effect on December 31, 1994, which are subject to escalation/de-escalation provisions. Since services under many of the long-term contracts are based on customer requirements, Midland has estimated its backlog based on its forecast of the anticipated requirements of these long-term contract customers. The 1994 revenue backlog decline from 1993 primarily reflects the amended terms of a contract with Gulf Power Company, which was in dispute at December 31, 1993. As amended, the contract's term and average trip length were reduced, accounting for a 35% decline in the revenue backlog. Other long-term contract extensions and additions were partially offsetting. The tonnage backlog was reduced 11% as a result of the Gulf Power contract amendment. However, this reduction was more than offset by other long-term contract additions and extensions, including the five-year contract extension with the Cincinnati Gas & Electric Company, Midland's largest customer, negotiated early in 1994. 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 rivers and waterways during winter months, increased coal consumption by electric utilities during the summer months, and the seasonal fall harvest of grain. Competition Midland's marine transportation business competes on the basis of price, service and equipment availability. Midland's primary competitors include other barge lines and railroads, including one integrated rail-barge carrier. There are a number of companies offering transportation services on the waterways served by Midland. In recent years, competition among major barge line companies has been intense due to an imbalance between barge supply and customer demand, impacted by economic conditions as well as at times by weak grain and coal export markets. This in turn has led to revenue and margin erosion, prompted cost and productivity improvements and some industry consolidation. During the second half of 1994, however, barge demand and supply moved closer to equilibrium with rates and margins improving. However, it is uncertain whether these short-term gains will be sustained. Barge operators have maintained relatively low rate structures due to ongoing improvements in operating efficiencies and productivity. Consequently, the barge industry has generally been able to retain its competitive position with alternate methods of transportation for bulk commodities when the origin and destination of such movements are contiguous to navigable waterways. Due to the capital-intensive, high fixed-cost nature of Midland's business, the negotiation of long-term contracts, which facilitate steady and efficient utilization of equipment is important to profitable operations. Midland's long-term transportation and terminalling contracts expire at various dates from January 1996 through June 2003. During 1994, approximately 38% of Midland's consolidated revenues resulted from these 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 which excuse performance by the parties to the contracts when performance is prevented by circumstances beyond their reasonable control. Many of these contracts have provisions for termination for specified causes, such as material breach of the 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 which results in termination of the contract, Midland would be responsible for reimbursing its customer for the differential between the contract price and the cost of substituted performance. No customer, or group of customers under common control, accounted for 10% or more of the total revenues in 1994. 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. 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. Average rates charged per ton mile for barge transportation are generally substantially below those charged by railroads. Environmental Matters Midland is subject to the provisions of the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Superfund Amendment and Reauthorization Act, the Resource Conservation and Recovery Act of 1976, and the Oil Pollution Act of 1990, which permit the Coast Guard and the Environmental Protection Agency to assess penalties and clean-up costs for oil, hazardous substance, and hazardous waste discharges. 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 anticipated. Properties As of December 31, 1994, Midland's marine equipment consisted of 2,378 dry cargo barges and 90 towboats. A substantial portion of this equipment is either mortgaged to secure Midland's equipment financing obligations or chartered under long-term leases from third parties. In 1994, Midland's capital expenditures were $4.3 million. These expenditures were made principally for renewal of existing equipment. In 1995 Midland expects to spend approximately $25 million for capital equipment. The increase in capital expenditures reflects primarily the replacement of barges. Employees As of December 31, 1994, Midland employed 1,300 persons, of whom approximately 35% are represented by labor unions. One of Midland's labor contracts expires in July 1995. Discontinued Operations As previously noted, in November 1994 Eastern announced its intention to sell WaterPro. On March 2, 1995, Eastern signed a purchase and sale agreement to sell WaterPro at a cash price approximately equivalent to book value, subject to certain post-closing adjustments. The closing is scheduled to occur in the second quarter of 1995. WaterPro is a wholesale distributor of components for the repair, improvement and expansion of municipal water supply and wastewater collection systems. WaterPro, headquartered in Edina, Minnesota, operates 28 distribution centers serving 20 states and has approximately 300 employees. The primary products distributed by WaterPro include pipes, fire hydrants, valves, fittings, meters and other water system components which are purchased from a variety of sources, including nationally branded products made by prominent manufacturers. WaterPro regards these sources as adequate. Components are typically warehoused by WaterPro and then sold to contractors, as well as cities, towns and private water utilities for new systems, rehabilitation and improvement to existing lines and system expansion. WaterPro's business is affected by housing starts and related construction activity, municipal infrastructure spending levels and seasonal weather conditions. Competition in WaterPro's business is intense and is based principally on price, service and product offering. General Environmental Matters Certain information with respect to Eastern's compliance with Federal and state environmental statutes may be found in Item 1(c) under "Boston Gas Company" and "Midland Enterprises Inc." and Note 11 appearing on pages 28 and 29. Employees Eastern and its wholly-owned subsidiaries employed 3,000 employees for continuing operations at December 31, 1994. Item 2. Properties Information with respect to this item may be found in Item 1(c) under "Boston Gas Company" and "Midland Enterprises Inc." Such information is incorporated herein by reference. Item 3. Legal Proceedings Information with respect to certain legal proceedings may be found in Notes 11 and 12 appearing on pages 28 through 29 and in Item 1(c) hereof under "Boston Gas Company" and "Midland Enterprises Inc." Such information is incorporated herein by reference. Item 4. Submission of Matters to a Vote of Securities Holders No matter was submitted to a vote of security holders in the fourth quarter of 1994. Executive Officers of the Registrant General The table below identifies the executive officers of Eastern, who are appointed annually and serve at the pleasure of Eastern's Trustees. Office Held Name Title Age Since J. Atwood Ives Chairman and Chief Executive Officer 58 1991 Richard R. Clayton President and Chief Operating Officer 56 1991 Walter J. Flaherty Senior Vice President and Chief Financial Officer 46 1992 Richard J. Klau Senior Vice President--President of WaterPro Supplies Corporation 46 1991 Chester R. Messer Senior Vice President--President of Boston Gas Company 53 1988 Fred C. Raskin Senior Vice President--President of Midland Enterprises Inc. 46 1991 L. William Law, Senior Vice President, General Counsel Jr. and Secretary 50 1995 Business Experience Prior to joining Eastern in 1991, J. Atwood Ives was Vice Chairman, Chief Financial Officer and a member of the Office of the Chairman of General Cinema Corporation (now Harcourt General, Inc.) and The Neiman Marcus Group, Inc. Prior to joining Eastern in 1987 as Executive Vice President and Chief Administrative Officer, Richard R. Clayton was Chairman, President and Chief Executive Officer of Vermont Castings, Inc. He was Executive Vice President and Chief Operating Officer of Eastern from 1990 to 1991. Walter J. Flaherty was Senior Vice President-Administration of Boston Gas from 1988 until joining Eastern in 1991 as its Senior Vice President and Chief Administrative Officer. He has been an employee of Eastern or its subsidiaries since 1971. Richard J. Klau was President of Ionpure from 1989 to 1991. Prior to joining Ionpure in 1989, he was Vice President and General Manager of the Process Water Division of Millipore Corporation. Chester R. Messer was Executive Vice President of Boston Gas in 1988. He was elected a Senior Vice President of Eastern in 1988, when he became President of Boston Gas. He has been an employee of Boston Gas since 1963. Fred C. Raskin was Executive Vice President of Midland from 1988 to 1991. He was elected a Senior Vice President of Eastern in 1991, when he became President of Midland. He has been an employee of Eastern or its subsidiaries since 1978. L. William Law, Jr. has been General Counsel and Secretary of Eastern since 1987. He was elected Senior Vice President in 1995. He has been an employee of Eastern or its subsidiaries since 1975. PART II. Item 5. Market For Registrant's Common Equity and Related Stockholder Matters Eastern's common stock is traded on the New York, Boston and Pacific Stock Exchanges (ticker symbol EFU). The approximate number of shareholders at December 31, 1994 was 5,100. Information with respect to this item may be found in the sections captioned "Cash Dividends Per Share" and "Stock Price Range" appearing on the inside back cover of the annual report to shareholders for the year ended December 31, 1994. Such information is incorporated herein by reference. Item 6. Selected Financial Data SUMMARY OF OPERATIONS
Years Ended December 31, (In thousands, except per share amounts) 1994 1993 1992 1991 1990 1989 Revenues: Boston Gas $ 660,158 $ 614,294 $ 594,330 $ 527,928 $ 554,509 $ 559,692 Midland 264,692 254,921 263,617 267,044 269,061 233,958 Total revenues 924,850 869,215 857,947 794,972 823,570 793,650 Operating costs and expenses 827,475 791,826 761,691 720,930 742,924 720,485 Operating earnings: Boston Gas 65,791 49,063 63,120 39,291 40,179 45,900 Midland 35,805 33,001 38,277 40,471 43,950 34,535 Headquarters (4,221) (4,675) (5,141) (5,720) (3,483) (7,270) Total operating earnings 97,375 77,389 96,256 74,042 80,646 73,165 Other income (expense): Interest income 1,901 3,213 4,703 7,169 10,877 9,469 Interest expense (38,464) (35,039) (33,537) (29,700) (27,022) (24,818) Other, net 2,553 (1,056) (2,414) (2,546) 2,052 3,215 Earnings from continuing operations before income taxes 63,365 44,507 65,008 48,965 66,553 61,031 Provision for income taxes 24,458 18,485 23,896 16,664 21,891 18,994 Earnings from continuing operations before extraordinary item and accounting changes 38,907 26,022 41,112 32,301 44,662 42,037 Earnings (loss) from discontinued operations, net((1)) 12,212 (58,182) (3,206) (3,674) 19,292 14,516 Extraordinary item net of tax((2)) -- (45,500) -- -- -- -- Cumulative effect of accounting changes((3)) -- -- 8,209 (7,922) -- -- Net earnings (loss) $ 51,119 $ (77,660) $ 46,115 $ 20,705 $ 63,954 $ 56,553 Financial statistics and ratios: Cash from operating activities $ 114,674 $ 35,116 $ 44,470 $ 45,945 $ 76,911 $ 83,630 Capital expenditures 57,883 61,450 80,538 106,134 93,552 88,884 Total assets 1,339,319 1,363,191 1,397,850 1,305,995 1,184,399 1,141,487 Long-term debt 365,488 328,939 357,109 327,361 296,578 260,367 Shareholders' equity 374,134 363,738 517,906 502,886 513,160 498,017 Debt/equity ratio 49/51 47/53 41/59 39/61 37/63 34/66 Return on total capital((4)) 8.3% 5.8% 7.1% 6.2% 7.6% 7.5% Return on equity((4)) 10.5% 5.9% 8.1% 6.4% 8.8% 8.7% Shares outstanding at December 31 20,411 20,930 22,621 22,543 22,504 23,213 Per share data: Earnings from continuing operations before extraordinary item and accounting changes $ 1.87 $ 1.15 $ 1.81 $ 1.43 $ 1.93 $ 1.81 Earnings (loss) from discontinued operations, net .59 (2.58) (.14) (.16) .84 .62 Extraordinary item net of tax((2)) -- (2.02) -- -- -- -- Effect of accounting changes((3)) -- -- .37 (.35) -- -- Net earnings (loss) $ 2.46 $ (3.45) $ 2.04 $ .92 $ 2.77 $ 2.43 Dividends declared $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40 $ 1.40 Shareholders' equity 18.33 17.38 22.89 22.31 22.80 21.45 (1) Includes Eastern's 15.01% investment in Peabody Holding Company, Inc., sold in 1990. (2) Provision for coal miners retiree health care of $70,000 pretax. (3) Accounting changes relating to income taxes in 1992 and retiree health care in 1991. (4) Based on earnings from continuing operations before extraordinary item and accounting changes.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following commentary should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to Financial Statements. 1994 COMPARED TO 1993 Overview The Company had net earnings of $51.1 million, or $2.46 per share, in 1994 compared to a net loss of $77.7 million, or $3.45 per share, in 1993. Net earnings from continuing operations, which consist of Eastern's two continuing business segments--Boston Gas and Midland, were $38.9 million, or $1.87 per share, in 1994, reflecting increases of 50% and 63%, respectively, over the comparable results of $26.0 million, or $1.15 per share, in 1993. As a result of Eastern's announced intention to sell WaterPro Supplies, the financial statements for 1994 and prior periods have been restated to account for Eastern's Water Products Group, which consisted of Ionpure Technologies, prior to its sale in 1993, and WaterPro, as a discontinued operation. See Note 10. Eastern's financial results for 1993 and 1994 reflect a number of one-time gains and charges as well as the impact of unusual operating conditions that had a material effect on earnings in both years. Adjusting for these year-to-year variations, management estimates that earnings and earnings per share from continuing operations increased by approximately 14% and 23%, respectively, over 1993 results. The net loss in 1993 included the effects of three substantial charges totaling $99.8 million, net of tax, or $4.43 per share, relating to an extraordinary provision for coal miners retiree health care obligations ($45.5 million, net of tax, or $2.02 per share), a write-down of WaterPro's goodwill ($45.0 million, with no tax benefit, or $2.00 per share) and the loss on the sale of Ionpure ($9.3 million, net of tax, or $.41 per share). See Notes 12 and 10, respectively, for discussion of these matters. The latter two charges are included in the loss from discontinued operations for 1993. In addition, the combined effects of a seventeen-week work stoppage at Boston Gas, severe flooding throughout the Midwest and a strike by the United Mine Workers ("UMW") significantly reduced operating results in 1993. Included in 1994 is an after-tax gain of $8.0 million, or $.38 per share, resulting from the settlement of Eastern's lawsuit relating to its 1989 acquisition of Ionpure, offset in part by costs relating to the anticipated sale of WaterPro. This net gain is reflected in earnings from discontinued operations. Included in earnings from continuing operations is a gain of $1.5 million, or $.07 per share, resulting from the sale of Midland's barge construction and repair facility. Unusual weather patterns in 1994 had a negative impact on earnings and partially offset the combined favorable impact of these one-time items. Although record cold temperatures early in 1994 generated higher sales to Boston Gas firm customers, the margin benefit of those sales was more than offset by increased costs for both Boston Gas and Midland caused by the extreme weather. In addition, significantly warmer than normal weather materially reduced revenue and operating earnings at Boston Gas in the fourth quarter of 1994. (In millions) 1994 1993 Change Revenues: Boston Gas $660.2 $614.3 7% Midland 264.7 254.9 4% Total $924.9 $869.2 6% The increase in consolidated revenues from 1993 to 1994 reflects the impact of Boston Gas' November 1993 rate increase and significantly increased tonnages transported by Midland, partly offset by lower freight rates and the absence of revenues from its liquid barge business, which was sold in December 1993. (In millions) 1994 1993 Change Operating Earnings: Boston Gas $65.8 $49.1 34% Midland 35.8 33.0 8% Headquarters (4.2) (4.7) 10% Total $97.4 $77.4 26% The improvement in operating earnings from 1993 to 1994 primarily reflects the impact of Boston Gas' 1993 rate increase, partially offset by higher depreciation and property taxes, and at Midland, the effect of cost reduction and productivity improvement programs and better operating conditions, partially offset by lower rates for coal transportation contracts. A seventeen-week work stoppage at Boston Gas, record flooding in the Midwest and the UMW strike, which increased operating costs and disrupted traffic patterns at Midland, decreased operating earnings in 1993. Earnings from continuing operations before income taxes increased to $63.4 million in 1994 from $44.5 million in 1993, primarily reflecting the increase in operating earnings described above, with higher interest expense and lower interest income offset by higher other income, as described in Note 8. The increase in interest expense reflects additional borrowings at Boston Gas and a full year of dividends paid on its preferred stock. The repurchase of shares in the fourth quarter of 1993 reduced funds available for investment in 1994, resulting in lower interest income in 1994. The effective tax rate in 1993 was 3% higher than in 1994 because of the additional deferred tax requirements resulting from the 1% increase in the federal tax rate, effective January 1, 1993. As mentioned earlier, the 1993 net loss included an extraordinary provision of $70.0 million ($45.5 million, net of tax, or $2.02 per share) for coal miners retiree health care representing the estimated undiscounted liability for health care and death benefit premiums imposed by the Coal Industry Retiree Health Benefit Act of 1992, as described in Note 12. Boston Gas A $37.7 million annualized rate increase, which took effect November 1, 1993, increased 1994 revenues by $29.9 million. Increased sales to new and existing firm customers increased Boston Gas' revenues by $7.5 million. Although temperatures varied widely relative to normal over the course of 1994, they averaged 1.5% warmer than in 1993 and only 0.6% colder than normal in 1994. The record cold weather during the first quarter more than offset 18% warmer than normal weather in the fourth quarter, increasing revenues for the year by $5.5 million. The balance of the revenue increase was attributable to increased sales to non-firm customers. Most of the gross margins on these sales are credited to firm customers. Operating earnings increased by $16.7 million as the benefit of the rate increase, stable labor conditions and sales of gas to new firm customers were partially offset by higher depreciation, property taxes and bad debts. In total, the weather decreased 1994 operating earnings by about $3 million, reflecting higher workload-related labor and operating costs associated with the unusually cold weather in the first quarter, partially offset by additional gross margins attributable to the weather. Midland Enterprises Revenues and operating earnings increased 4% and 8%, respectively, in 1994 over 1993 due to significant increases in dry cargo transportation, reduced operating and administrative expenses achieved through ongoing cost reduction and productivity programs, as well as the absence of increased costs associated with inefficiencies caused by the Mississippi River flooding and the UMW strike in 1993. Partially offsetting were contractual and market rate reductions negotiated early in 1994, the absence of the liquid barge business, which contributed 5% and 7% of 1993 revenues and operating earnings, respectively, and higher operating expenses associated with flooding and severe winter icing conditions early in 1994. Reflecting improved market and operating conditions, revenues and operating earnings for the second half of 1994 increased by 12% and 48%, respectively, over the comparable period in 1993. Tonnages and ton miles increased 11% and 10%, respectively, in 1994 as increased shipments of coal, aggregates, ores and towing for others more than offset the sale of Midland's liquid barge business, which accounted for approximately 5% of ton miles in 1993. Coal tonnage increased 11% from 1993, reflecting a significant increase in spot shipments and increased demand for utility coal under long-term contracts. Excluding the liquid barge business, non-coal tonnage increased 20% over 1993, despite a 15% reduction in grain tonnage, primarily as a result of increased shipments of aggregates, steel, scrap and ores. The reduction in grain tonnage reflected management's decision to de-emphasize its commitment to the grain market and to concentrate on other business areas, principally on the Ohio and the lower Mississippi rivers. In June 1994 Midland recognized a pretax gain of $2.3 million on the sale of its barge construction and repair facility in Louisiana. Midland had recorded a $3.5 million reserve in December 1993 for the shutdown costs and carrying charges associated with this facility. As mentioned earlier, Midland sold its liquid barge business at a pretax gain of $8.0 million in December 1993. These transactions are included in "Other income." Discontinued Operations--Water Products Group As described in Note 10, Eastern's Water Products Group has been accounted for as a discontinued operation as a result of the decision to sell WaterPro. For the ten months ended October 31, 1994, WaterPro's revenues increased 19% from the comparable period in 1993 and its operating earnings increased from $2.8 million to $7.8 million, reflecting market share gains, improved productivity and increased construction activity. Earnings from discontinued operations in 1994 also include $9.0 million received in settlement of a lawsuit relating to Eastern's acquisition of Ionpure and related legal expenses. Revenues from discontinued operations in 1993 include $40.7 million from Ionpure through its sale, effective October 1, 1993. The loss from discontinued operations in 1993 includes a $45.0 million write-down of WaterPro's goodwill, an operating loss of $1.9 million at Ionpure and a loss of $13.0 million on the sale of Ionpure. The estimated loss of $2.5 million, net of tax, from disposition of the Water Products Group reflects the anticipated losses through the closing date plus the estimated expenses associated with the sale of WaterPro. 1993 COMPARED TO 1992 (In millions) 1993 1992 Change Revenues: Boston Gas $614.3 $594.3 3% Midland 254.9 263.6 (3)% Total $869.2 $857.9 1% Consolidated revenues increased slightly in 1993. Although a variety of market and economic factors affected the change, continued growth in the Boston Gas firm customer base offset decreases in coal and grain transportation at Midland. (In millions) 1993 1992 Change Operating Earnings: Boston Gas $49.1 $63.1 (22)% Midland 33.0 38.3 (14)% Headquarters (4.7) (5.1) 8% Total $77.4 $96.3 (20)% Consolidated operating earnings decreased from 1992, due primarily to the absence of a one-time benefit in 1992 that resulted from a modification to the gas cost recovery mechanism at Boston Gas that increased operating earnings by $11.6 million. In addition, record flooding in the Midwest and strikes by the UMW and Boston Gas union employees decreased revenues and increased operating expenses. Earnings from continuing operations before income taxes decreased from $65.0 million in 1992 to $44.5 million in 1993, primarily reflecting the decrease in operating earnings described above, lower interest income and higher interest expense. Interest income decreased due to lower investment balances and rates. The increase in interest expense primarily reflected additional dividends paid on subsidiary preferred stock. The higher income tax rate in 1993 resulted from the 1% increase in the federal statutory rate, as described in Note 9. The loss from discontinued operations for 1993 reflected the write-down of WaterPro goodwill and the loss on the sale of Ionpure, as described above. Net earnings of $46.1 million in 1992 decreased to a loss of $77.7 million in 1993, reflecting the above-described 1993 extraordinary provision charge for coal miners retiree health care and the absence of the $8.2 million benefit recorded in 1992 for a change in the accounting for income taxes, as described in Note 9. Boston Gas Increased sales to Boston Gas firm customers, primarily to an electric utility on a seasonal-firm basis, increased revenue by $21.8 million and operating earnings by $4.9 million. Relatively low residual oil prices throughout 1993 limited sales to non-firm customers and reduced comparative revenues by nearly $15.0 million. However, the November 1993 rate increase and the pass through of higher gas costs were somewhat offsetting. The weather in 1993, which was 4.5% warmer than 1992, was 1.3% warmer than normal, decreasing revenues by $9.8 million and operating earnings by $1.7 million. Excluding the $11.6 million benefit in 1992 of the modification to the gas cost recovery mechanism, operating earnings decreased by $2.4 million as the partial impact of the rate increase in combination with the benefit of ongoing load growth offset much of the increased expenses attributable primarily to the work stoppage. Midland Midland's transportation revenues decreased in 1993 primarily as a result of reduced coal and grain shipments caused by the severe flooding on the Mississippi and Illinois Rivers and reduced exports of both commodities, the curtailment of coal shipments under a major long-term contract and lower deliveries to electric utilities caused by the UMW strike. Midland's tonnage and ton miles were unchanged from 1992 despite several significant events that negatively affected the barge industry in general and Midland specifically. A decline in coal tonnage from 1992 primarily reflected reduced shipments to electric utilities due to the UMW strike (resolved in December), disruption in river traffic caused by flooding, and the cessation of coal shipments under a long-term contract. An increase in non-coal tonnage, despite a significant reduction in grain tonnage, served to replace the lower coal volume, although at lower margins. Benefits of cost savings programs helped to offset much of the lost margins. Higher coal terminal throughput was offset by lower phosphate terminalling. In addition to restricting tonnage and altering traffic patterns, flooding increased operating costs and shifted business to less profitable markets. LIQUIDITY AND CAPITAL RESOURCES Management believes that projected cash flow from operations, in combination with currently available resources, is more than sufficient to meet Eastern's 1995 capital expenditure and working capital requirements, normal debt repayments and anticipated dividends to shareholders. In addition to cash and short-term investments in excess of $60 million, Eastern also maintains a $100 million long-term revolving credit agreement plus other lines, all of which are available for general corporate purposes. At December 31, 1994 there were no borrowings outstanding under any of these facilities. Eastern's capital structure is depicted in the chart below. The decrease in equity in 1993 reflects the impact of non-cash charges associated with the provision for coal miners retiree health care, the write-down of WaterPro goodwill and the loss on the sale of Ionpure. Through a combination of increased equity and debt, Eastern expects to continue its policy of capitalizing Boston Gas and Midland with approximately equal amounts of equity and long-term debt. Both subsidiaries maintain "A" ratings with the major rating agencies. CAPITAL STRUCTURE ($ in millions) [Bar chart--plot points below] 1990 1991 1992 1993 1994 Debt 297 327 357 329 365 Equity 513 503 518 364 374 Total Capital 810 830 875 693 740 L-T Debt/Total Capital 37% 39% 41% 47% 49% During 1994 Boston Gas issued $50.0 million of Medium-Term Notes Series B, with a weighted average maturity of 21 years and coupon of 7.20%. To meet working capital requirements which reflect the seasonal nature of the gas distribution business, Boston Gas had notes outstanding of $62.5 million at December 31, 1994, a decrease of $43.8 million from the prior year, primarily reflecting the use of proceeds from the issuance of medium-term notes. Boston Gas also maintains a bank credit agreement which supports the issuance of up to $90 million of commercial paper to fund its inventory of gas supplies. At December 31, 1994, Boston Gas had outstanding $53.6 million of commercial paper for this purpose. Consolidated capital expenditures are budgeted at approximately $83 million for 1995, two-thirds of which are for Boston Gas and the balance for Midland. During 1994 Eastern repurchased 603,500 shares of its common stock for $14.6 million. OTHER MATTERS Boston Gas may have or share responsibility for environmental remediation of certain former manufactured gas plant sites, as described in Note 11. A subsidiary of New England Electric System has assumed responsibility for remediating eleven of the fifteen such sites owned by Boston Gas, subject to a limited contribution by the latter. A 1990 regulatory settlement agreement provides for recovery by Boston Gas of environmental costs associated with such sites over separate, seven-year amortization periods without a return on the unamortized balance. Although Eastern does not possess at this time sufficient information to reasonably determine the ultimate cost to Boston Gas of such remediation, it believes that it is not probable that such costs will materially affect Eastern's financial condition or results of operations. Eastern may share responsibility for environmental remediation in the vicinity of a former coal tar processing facility in Everett, Massachusetts, as described in Note 11. Eastern does not possess at this time sufficient information to reasonably determine or estimate the ultimate cost to it of such remediation. Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Page Consolidated Statements of Operations 17 Consolidated Balance Sheets 18 Consolidated Statements of Cash Flows 19 Consolidated Statements of Shareholders' Equity 20 Notes to Financial Statements 21 Unaudited Quarterly Financial Information 32 Independent Auditors' Report 33 Management's Report on Responsibility 33 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, (In thousands, except per share amounts) 1994 1993 1992 Revenues $924,850 $869,215 $857,947 Operating costs and expenses: Operating costs 668,287 642,603 619,754 Selling, general and administrative expenses 100,332 96,024 94,392 Depreciation and amortization 58,856 53,199 47,545 Operating earnings 97,375 77,389 96,256 Other income (expense): Interest income 1,901 3,213 4,703 Interest expense (38,464) (35,039) (33,537) Other, net 2,553 (1,056) (2,414) Earnings from continuing operations before income taxes 63,365 44,507 65,008 Provision for income taxes 24,458 18,485 23,896 Earnings from continuing operations before extraordinary item and accounting change 38,907 26,022 41,112 Earnings (loss) from discontinued operations, net of tax 12,212 (58,182) (3,206) Earnings (loss) before extraordinary item and accounting change 51,119 (32,160) 37,906 Extraordinary provision for coal miners retiree health care, net of tax -- (45,500) -- Cumulative effect of change in accounting for income taxes -- -- 8,209 Net earnings (loss) $ 51,119 $(77,660) $ 46,115 Earnings per share from continuing operations before extraordinary item and accounting change $1.87 $1.15 $1.81 Discontinued operations .59 (2.58) (.14) Extraordinary provision for coal miners retiree health care, net of tax -- (2.02) -- Cumulative effect of change in accounting for income taxes -- -- .37 Net earnings (loss) per share $2.46 $(3.45) $2.04 The accompanying notes are an integral part of these financial statements. CONSOLIDATED BALANCE SHEETS
December 31, (In thousands) 1994 1993 ASSETS Current assets: Cash and short-term investments $ 60,854 $ 52,211 Receivables, less reserves of $16,091 in 1994 and $13,945 in 1993 97,093 116,180 Inventories 60,207 71,136 Deferred gas costs 66,865 65,802 WaterPro net assets held for sale 51,462 46,632 Other current assets 6,841 11,762 Total current assets 343,322 363,723 Investments: U.S. Filter 44,847 44,292 Other investments 5,531 8,279 Total investments 50,378 52,571 Property and equipment, at cost 1,293,733 1,267,972 Less--accumulated depreciation 518,110 485,827 Net property and equipment 775,623 782,145 Other assets: Deferred post-retirement health care costs 97,589 101,182 Deferred charges and other costs, less amortization 72,407 63,570 Total other assets 169,996 164,752 Total assets $1,339,319 $1,363,191 Liabilities and Shareholders' Equity Current liabilities: Current debt $ 67,774 $ 114,335 Accounts payable 49,981 63,660 Accrued expenses 22,908 20,754 Other current liabilities 71,774 70,643 Total current liabilities 212,437 269,392 Gas inventory financing 53,578 59,297 Long-term debt 365,488 328,939 Reserves and other liabilities: Deferred income taxes 91,534 90,783 Post-retirement health care 102,382 104,730 Coal miners retiree health care 58,155 63,060 Preferred stock of subsidiary 29,229 29,197 Other reserves 52,382 54,055 Total reserves and other liabilities 333,682 341,825 Commitments and contingencies Shareholders' equity: Common stock $1.00 par value; Authorized shares--50,000,000; Issued shares--20,651,925 in 1994 and 21,644,378 in 1993 20,652 21,644 Capital in excess of par value 37,712 61,778 Retained earnings 321,880 299,131 Treasury stock at cost--241,395 shares in 1994 and 714,786 shares in 1993 (6,110) (18,815) Total shareholders' equity 374,134 363,738 Total liabilities and shareholders' equity $1,339,319 $1,363,191
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (In thousands) 1994 1993 1992 Cash flows from operating activities: Net earnings (loss) $ 51,119 $(77,660) $ 46,115 Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Discontinued operations non-cash charges and working capital changes (4,830) 54,651 2,148 Extraordinary provision for coal miners retiree health care, net of tax -- 45,500 -- Accounting change for income taxes -- -- (8,209) Depreciation and amortization 58,856 53,199 47,545 Income taxes and tax credits 7,452 7,993 8,774 Other changes in assets and liabilities: Receivables 19,087 (5,519) (14,461) Inventories 8,534 (7,874) (14,649) Deferred gas costs (1,063) (24,934) (26,994) Accounts payable (13,679) 743 4,431 Other (10,802) (10,983) (230) Net cash provided by operating activities 114,674 35,116 44,470 Cash flows from investing activities: Capital expenditures (57,883) (61,450) (80,538) Short-term investments 22,017 (14,411) 20,769 Proceeds on sale of liquid barge business -- 14,950 -- Proceeds on sale of barge construction business 12,695 -- -- Other (6,619) (2,101) (6,688) Net cash used by investing activities (29,790) (63,012) (66,457) Cash flows from financing activities: Dividends paid (29,779) (31,697) (31,634) Issuance of preferred stock by subsidiary -- -- 29,436 Changes in notes payable (43,770) 51,356 (1,474) Changes in gas inventory financing (5,719) 10,666 17,461 Proceeds from issuance of long-term debt 50,000 -- 53,000 Repayment of long-term debt (14,990) (24,661) (25,157) Repurchase of stock (14,574) (46,039) -- Other 1,885 857 764 Net cash provided (used) by financing activities (56,947) (39,518) 42,396 Net increase (decrease) in cash and cash equivalents 27,937 (67,414) 20,409 Cash and cash equivalents at beginning of year 23,737 91,151 70,742 Cash and cash equivalents at end of year 51,674 23,737 91,151 Short-term investments 9,180 28,474 14,063 Cash and short-term investments $ 60,854 $ 52,211 $105,214
The accompanying notes are an integral part of these financial statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Capital In Stock Excess Of Retained Treasury (In thousands) $1 Par Value Par Value Earnings Stock Total Balance at December 31, 1991 $23,613 $112,622 $394,651 $(28,000) $502,886 Add (deduct): Net earnings -- -- 46,115 -- 46,115 Dividends declared--$1.40 per share -- -- (31,660) -- (31,660) Foreign currency translation adjustment -- -- (367) -- (367) Unearned compensation related to the issuance of restricted stock, net -- (1,079) -- 1,371 292 Issuance of stock 22 507 -- 111 640 Balance at December 31, 1992 23,635 112,050 408,739 (26,518) 517,906 Add (deduct): Net loss -- -- (77,660) -- (77,660) Dividends declared--$1.40 per share -- -- (31,711) -- (31,711) Repurchase of stock -- -- -- (46,039) (46,039) Retirement of stock (2,000) (50,732) -- 52,732 -- Foreign currency translation adjustment -- -- (237) -- (237) Unearned compensation related to the issuance of restricted stock, net -- 262 -- 105 367 Issuance of stock 9 198 -- 905 1,112 Balance at December 31, 1993 21,644 61,778 299,131 (18,815) 363,738 Add (deduct): Net earnings -- -- 51,119 -- 51,119 Dividends declared--$1.40 per share -- -- (29,003) -- (29,003) Repurchase of stock -- -- -- (14,574) (14,574) Retirement of stock (1,000) (24,312) -- 25,312 -- Unearned compensation related to the issuance of restricted stock, net -- 345 -- 105 450 Unrealized gains, on investments available for sale, net -- -- 633 -- 633 Issuance of stock 8 (99) -- 1,862 1,771 Balance at December 31, 1994 $20,652 $ 37,712 $321,880 $ (6,110) $374,134
The accompanying notes are an integral part of these financial statements. NOTES TO FINANCIAL STATEMENTS 1. Accounting Policies The consolidated financial statements include the accounts of Eastern Enterprises ("Eastern"), Boston Gas Company ("Boston Gas") and Midland Enterprises Inc. ("Midland"). Financial information for Water Products Group, consisting of WaterPro Supplies Corporation ("WaterPro") and Ionpure Technologies Corporation ("Ionpure"), has been restated to conform to discontinued operations presentation (See Note 10). Certain prior year financial statement information has been reclassified to be consistent with the current presentation. All material intercompany balances and transactions have been eliminated in consolidation. Certain accounting policies followed by Eastern and its subsidiaries are described below: Cash and short-term investments: Highly liquid instruments with original maturities of three months or less are considered cash equivalents. Inventories: Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) or average cost method. The components of inventories were as follows: December 31, (In thousands) 1994 1993 Supplemental gas supplies $46,844 $53,152 Other materials, supplies and marine fuel 13,363 17,984 $60,207 $71,136 Investment in U.S. Filter: Eastern holds 3,041,092 shares or 18% of the voting stock of U.S. Filter. Eastern accounts for its investment in U.S. Filter using the equity method, with a lag of one fiscal quarter. The difference of approximately $20 million between the carrying value of Eastern's investment and its share of the underlying net assets of U.S. Filter is being amortized over a period of 40 years. Other current liabilities: Included in other current liabilities were: December 31, (In thousands) 1994 1993 Pipeline refunds due utility customers $18,720 $ 8,029 Pipeline transition costs regulatory liability 11,560 24,174 Reserves for insurance claims 8,809 8,285 Dividends payable 7,154 7,930 Coal miners retiree health care 10,538 6,940 Revenue recognition: Boston Gas' revenues are recorded when billed. Boston Gas defers the cost of any firm gas that has been distributed, but is unbilled at the end of a period, to the period in which the gas is billed to customers. Midland recognizes revenue on tows in progress on the percentage of completion method based on miles traveled. Depreciation and amortization: Depreciation and amortization are provided using the straight-line method at rates designed to allocate the cost of property and equipment over their estimated useful lives. Because the rates of depreciation on commercial equipment vary with each property unit, it is impractical to state each rate individually. Depreciation and amortization as a percentage of average depreciable assets was as follows: Years Ended December 31, 1994 1993 Boston Gas 5.2% 4.0% Midland 3.9% 4.2% Headquarters 12.4% 11.2% NOTES TO FINANCIAL STATEMENTS--(Continued) Earnings per share: Earnings per share are based on the weighted average number of common and common equivalent shares outstanding. Such shares amounted to 20,789,000 in 1994, 22,530,000 in 1993 and 22,654,000 in 1992. Fully diluted earnings per share were not materially different from primary earnings per share. 2. Business Segment Information Operating results and other financial data are presented for Eastern's two business segments: Boston Gas, a local gas distribution company serving eastern and central Massachusetts, and Midland, a barge transportation company operating on the inland waterways. (In thousands) 1994 1993 1992 Revenues: Boston Gas $ 660,158 $ 614,294 $ 594,330 Midland 264,692 254,921 263,617 $ 924,850 $ 869,215 $ 857,947 Operating earnings: Boston Gas $ 65,791 $ 49,063 $ 63,120 Midland 35,805 33,001 38,277 Headquarters (4,221) (4,675) (5,141) $ 97,375 $ 77,389 $ 96,256 Identifiable assets, net of depreciation and reserves: Boston Gas $ 833,620 $ 834,440 $ 738,604 Midland 345,625 373,144 395,097 Headquarters 160,074 155,607 264,149 $1,339,319 $1,363,191 $1,397,850 Capital expenditures: Boston Gas $ 53,504 $ 47,057 $ 51,136 Midland 4,337 14,191 29,327 Headquarters 42 202 75 $ 57,883 $ 61,450 $ 80,538 Depreciation and amortization: Boston Gas $ 35,809 $ 27,566 $ 22,493 Midland 22,659 25,288 24,607 Headquarters 388 345 445 $ 58,856 $ 53,199 $ 47,545 Operating loss under "Headquarters" reflects unallocated corporate general and administrative expenses. Identifiable assets under "Headquarters" include primarily cash, short-term investments, WaterPro net assets held for sale and the investment in U.S. Filter. NOTES TO FINANCIAL STATEMENTS--(Continued) 3. Long-Term Obligations and Current Debt Credit agreement and lines of credit: In 1994 Eastern negotiated a credit agreement with a group of banks which provides for the borrowing by Eastern and certain subsidiaries of up to $100,000,000 at any time through December 31, 1999. In addition, Boston Gas maintains committed lines of credit totaling $40,000,000. At December 31, 1994 and 1993 no borrowings were outstanding under credit agreements. The interest rate for borrowings is the agent bank's prime rate or, at Eastern's option, various alternatives. The agreement and lines require facility or commitment fees, which average 1/8 of 1% of the commitment. Boston Gas utilizes the credit agreement and the lines of credit to back its commercial paper borrowings. In addition, Eastern and Boston Gas have various uncommitted lines of credit which are utilized for short-term borrowings and provide for interest at federal funds, money market or prime rates. Included in current debt were $62,530,000 and $106,300,000 of commercial paper and notes payable with weighted average interest rates of 5.93% and 3.50% at December 31, 1994 and 1993, respectively. Gas inventory financing: Boston Gas maintains a credit agreement with a group of banks which provides for the borrowing of up to $90,000,000 for the exclusive purpose of funding its inventory of gas supplies or for backing commercial paper issued for the same purpose. All costs related to this funding are recoverable from customers. Boston Gas had $53,578,000 and $59,297,000 of commercial paper outstanding to fund its inventory of gas supplies at December 31, 1994 and 1993, respectively. Since the commercial paper is supported by the credit agreement, these borrowings have been classified as non-current in the accompanying consolidated balance sheets. The credit agreement includes a one-year revolving credit which may be converted to a two-year term loan at the option of Boston Gas if the one-year revolving credit is not renewed by the banks. Boston Gas may select interest rate alternatives based on prime or Eurodollar rates and requires a facility fee of 1/10 of 1% on the commitment. No borrowings were outstanding under this agreement during 1994 and 1993. Description of long-term debt: Long-term debt: December 31, (In thousands) 1994 1993 Boston Gas: 7.95%-9% Sinking Fund Debentures, due 1997-2001 $ 60,000 $ 63,142 8.33%-9.75% Medium-Term Notes, Series A, due 2005-2022 100,000 100,000 6.93-8.50% Medium-Term Notes, Series B, due 2006-2024 50,000 -- First Mortgage Bonds-8.375% Series, due 1996 2,880 3,360 Capital leases 5,690 7,008 Less--current portion (1,890) (2,165) 216,680 171,345 Midland: First Preferred Ship Mortgage Bonds- 9.9% Series, due 2008 48,758 48,692 8.1%-9.85% Medium-Term Notes, Series A, due 2002-2012 71,000 75,000 Promissory Note, due 1995 -- 3,031 8.8% Ship Financing Bond, due 1996 -- 938 Capital leases 32,404 35,804 Less--current portion (3,354) (5,871) 148,808 157,594 $365,488 $328,939 NOTES TO FINANCIAL STATEMENTS--(Continued) In 1994 Boston Gas issued $50,000,000 of Medium-Term Notes, Series B, with a weighted average maturity of 21 years and coupon of 7.2%. The Series B Notes include $12,000,000 maturing in 2006 with a put option at par in 1999 and an interest rate step up from 8.09% to 8.59% in 1999. Proceeds from the issuances reduced current debt. Boston Gas' First Mortgage Bonds are secured by a first mortgage lien on a portion of Boston Gas' utility properties and franchises. Midland's First Preferred Ship Mortgage Bonds and Medium-Term Notes are secured by certain transportation equipment. Capital leases consist of property and equipment lease obligations with a weighted average interest rate of 9.68%. Minimum lease payments under these agreements are due in installments through 2003. Five-year operating lease and sinking fund commitments: In addition to the property and equipment financed under capital leases, Eastern and its subsidiaries lease certain facilities, vessels and equipment under long-term operating leases which expire on various dates through the year 2008. Total rentals charged to expense were $10,882,000 in 1994, $10,131,000 in 1993 and $8,653,000 in 1992. Future minimum lease commitments under operating leases are $9,547,000, $8,586,000, $5,372,000, $2,633,000, $1,925,000 for 1995 through 1999, respectively, and $7,176,000 thereafter. Sinking fund requirements and maturities, net of amounts acquired in advance are $5,243,000, $7,593,000, $13,086,000, $12,975,000 and $18,482,000 for 1995 through 1999, respectively. 4. Preferred Stock of Subsidiary In 1992 Boston Gas sold 1,200,000 shares of variable-term cumulative preferred stock, which is non-voting and has a liquidation value of $25 per share. In 1993, Boston Gas selected a Final Term ending September 1, 2018 and fixed the annual dividend rate at 6.421%, payable quarterly. The Final Term requires 5% annual sinking fund payments beginning on September 1, 1999. The preferred stock cannot be called prior to 2003. 5. Stock Plans Eastern has a stock option plan which provides for the issuance of non-qualified stock options, incentive stock options and stock appreciation rights ("SARs") to its officers and key employees. Options and SARs may be granted at prices not less than fair market value on the date of grant for periods not extending beyond ten years from the date of grant. Exercise of an option requires surrender of the related SAR, if any. Exercise of an SAR requires surrender of the related option. Shares available for future grants under the stock option plans were 98,988 at December 31, 1994, 199,334 at December 31, 1993 and 188,806 at December 31, 1992. Stock options exercisable at December 31, 1994 and 1993 were 438,291 and 389,188 respectively. SARs exercisable at December 31, 1994 and 1993 were 124,150 and 121,100, respectively. Option activity during the past three years was as follows: Average Stock option price options SARs Outstanding at December 31, 1991 $25.72 631,281 169,595 Granted 27.06 2,000 -- Exercised 21.79 (20,569) (22,647) Surrendered 21.49 (22,647) (1,850) Canceled 28.47 (5,220) (2,410) Outstanding at December 31, 1992 $26.00 584,845 142,688 Exercised 21.93 (10,109) (8,588) Surrendered 21.97 (8,588) (120) Canceled 29.16 (1,940) (970) NOTES TO FINANCIAL STATEMENTS--(Continued) Average Stock option price options SARs Outstanding at December 31, 1993 $26.12 564,208 133,010 Granted 24.24 108,000 -- Exercised 20.38 (7,547) (150) Surrendered 21.69 (150) -- Canceled 29.29 (9,800) (4,900) Outstanding at December 31, 1994 $25.83 654,711 127,960 Under Restricted Stock Plans for key employees and non-employee trustees, Eastern awarded 6,000 shares in 1994, 4,000 shares in 1993 and 52,500 shares in 1992. Eastern recognized compensation expense of $450,000 in 1994, $367,000 in 1993 and $292,000 in 1992 in accordance with the vesting terms of these awards. Shares available for future awards under these plans were 42,500 shares at December 31, 1994 and 48,500 at December 31, 1993. 6. Common Stock Purchase Rights On February 22, 1990, Eastern declared a distribution to shareholders of record on March 5, 1990, pursuant to the terms of a Common Stock Rights Agreement between Eastern and the Rights Agent (currently The First National Bank of Boston), of one common stock purchase right for each outstanding share of common stock. Each right would initially entitle the holder to purchase one share of common stock at an exercise price of $100.00, subject to adjustment to prevent dilution. The rights become exercisable on the 10th business day after a person acquires 20% or more of Eastern's stock or commences a tender offer for 20% or more of Eastern's stock, or on the 10th business day after Eastern's Board of Trustees determines that a shareholder owning at least 10% of Eastern's stock is an "adverse person," based on criteria specified in the rights agreement. The rights may be redeemed by Eastern at a price of $.01 at any time prior to the 10th day after a 20% position has been acquired. The rights will expire on March 5, 2000. If Eastern is acquired in a merger or other business combination, each right will entitle its holder to purchase common shares of the acquiring company having a market value of twice the exercise price of each right (i.e., at a 50% discount). If an acquiror purchases 20% of Eastern's common stock or has been determined to be an "adverse person," each right will entitle its holder to purchase a number of Eastern's common shares having a market value of twice the right's exercise price. 7. Interest Expense Years Ended December 31, (In thousands) 1994 1993 1992 Interest on long-term debt $32,430 $31,326 $31,781 Other, including amortization of debt expense 5,040 3,488 2,988 Less--capitalized interest (932) (1,164) (1,637) Subsidiary preferred stock dividends 1,926 1,389 405 Interest expense $38,464 $35,039 $33,537 Interest payments $36,686 $34,040 $33,002 NOTES TO FINANCIAL STATEMENTS--(Continued) 8. Other Income (Expense) Years Ended December 31, (In thousands) 1994 1993 1992 Shutdown and subsequent sale of barge construction facility $2,600 $(3,500) $ -- Gain on sale of liquid barge business -- 7,988 -- Provision for environmental expenses (725) (5,715) (2,500) Other 678 171 86 $2,553 $(1,056) $(2,414) 9. Income Taxes The table below reconciles the statutory U.S. Federal income tax provision from continuing operations to the recorded income tax provision: Years Ended December 31, (In thousands) 1994 1993 1992 Statutory rate 35% 35% 34% Computed provision for income taxes at statutory Federal rate $22,178 $15,577 $22,103 Increase (decrease) from statutory rate resulting principally from: State taxes, net of Federal benefit 2,083 1,636 2,165 Deferred tax effect of change in statutory rate -- 1,419 -- Other, net 197 (147) (372) Provision for income taxes $24,458 $18,485 $23,896 Effective rate 39% 42% 37% Following is a summary of the provision for income taxes: Years Ended December 31, (In thousands) 1994 1993 1992 Current: Federal $18,059 $ 9,598 $14,059 State 821 1,197 3,677 Total current provision 18,880 10,795 17,736 Deferred: Federal 3,194 6,370 5,560 State 2,384 1,320 600 Total deferred provision 5,578 7,690 6,160 Provision for income taxes $24,458 $18,485 $23,896 Tax payments $17,951 $10,809 $ 6,656 Effective January 1, 1992, Eastern adopted Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes" by recording a credit to income of approximately $8,209,000 or $.37 per share, which represents the net decrease to the deferred tax liabilities for non-utility operations as of that date. This amount has been reflected in the consolidated statement of operations as the cumulative effect of the accounting change. The cumulative effect for Boston Gas and the impact of the 1993 tax increase have been recorded as a regulatory asset and are being recovered in accordance with Boston Gas' 1993 rate order. The Revenue Reconciliation Act of 1993 increased the statutory Federal income tax rate from 34% to 35%, effective January 1, 1993. The provision for income tax in 1993 includes approximately $447,000 for the impact of the rate change on current earnings, and approximately $1,419,000 to reflect the additional deferred tax requirements for non-utility operations as of January 1, 1993, in accordance with SFAS 109. NOTES TO FINANCIAL STATEMENTS--(Continued) Significant items making up deferred tax liabilities and deferred tax assets are as follows: December 31, (In thousands) 1994 1993 Assets: Unbilled revenue $ 30,978 $ 30,924 Coal miners retiree health care 24,043 24,500 Bad debt reserve 6,285 5,429 Regulatory liabilities 5,233 5,494 Deferred investment tax credits 5,213 5,437 Other 15,561 12,464 Total deferred tax assets 87,313 84,248 Liabilities: Accelerated depreciation (131,310) (130,005) Deferred gas costs (23,455) (23,861) Other (25,245) (17,830) Total deferred tax liabilities (180,010) (171,696) Total deferred taxes $ (92,697) $ (87,448) 10. Discontinued Operations On November 8, 1994, Eastern announced its intention to sell WaterPro. On March 2, 1995, Eastern signed a purchase and sale agreement to sell WaterPro at a cash price approximately equivalent to book value, subject to certain post-closing adjustments. The sale of WaterPro, which is scheduled to close in the second quarter of 1995, will complete the disposition of Eastern's Water Products Group, which consisted of WaterPro and Ionpure prior to the sale of the latter in 1993. The disposal of Water Products Group has been accounted for as a discontinued operation and accordingly, its net assets and operating results for both the current and prior periods are segregated and reported as discontinued operations in the accompanying consolidated financial statements. Following is a summary of results of operations for the Water Products Group through the measurement date of October 31, 1994 and the estimated gain or loss on disposition: (In thousands) 1994 1993 1992 Revenues $189,125 $230,632 $233,487 Earnings (loss) before income taxes $ 17,544 $(61,129) $ (1,977) Provision (benefit) for income taxes 2,832 (2,947) 1,229 Earnings (loss) from operations of discontinued operations 14,712 (58,182) (3,206) Loss on disposition before income taxes (3,850) -- -- Benefit for income taxes 1,350 -- -- Loss on disposition (2,500) -- -- Net earnings (loss) from discontinued operations $ 12,212 $(58,182) $ (3,206) The tax provision from operations in 1994 includes a benefit of $1,760,000 related to a tax examination of Ionpure concluded during that year. The net loss on disposition of $2,500,000 reflects an accrual for estimated expenses on the sale of WaterPro, including anticipated losses from operations from the measurement date through the expected disposal date. NOTES TO FINANCIAL STATEMENTS--(Continued) Earnings (loss) from operations of discontinued operations include the following: (In thousands) 1994 1993 1992 Operations $6,591 $(2,094) $(2,150) Writedown of WaterPro goodwill -- (45,000) -- Sale of Ionpure 1,038 (9,300) -- Settlement of lawsuit concerning Ionpure acquisition, net of legal costs 7,083 (1,788) (1,056) $14,712 $(58,182) $(3,206) 11. Environmental Matters Boston Gas, like many other companies in the natural gas industry, is party to governmental actions requiring investigation and possible remediation of former manufactured gas plant ("MGP") sites. Boston Gas currently owns fifteen former MGP sites. Massachusetts Electric Company ("MEC"), a wholly-owned subsidiary of New England Electric System ("NEES"), has assumed full responsibility for remediating one such MGP site in Lynn, Massachusetts, pursuant to the decision of the First Circuit Court of Appeals in John S. Boyd Inc. et al. v. Boston Gas Company, et al., which affirmed that NEES and its subsidiaries are responsible for remediating the site as prior owners and operators. Pursuant to a settlement agreement between MEC and Boston Gas (the "Settlement Agreement"), MEC has also assumed responsibility for remediating ten other sites owned by Boston Gas, subject to limited contribution by Boston Gas. Boston Gas is working with the Massachusetts Department of Environmental Protection (the "DEP") to determine the extent of remediation which may be required at the four former MGP sites currently owned by Boston Gas and not covered by the Settlement Agreement or the Boyd decision. Boston Gas is aware of other former MGP sites located within Boston Gas' service territory but not currently owned by Boston Gas. A 1990 settlement agreement with the Massachusetts Department of Public Utilities provides for recovery by Boston Gas through the cost of gas adjustment clause of any environmental response costs associated with MGP sites over separate, seven-year amortization periods without a return on the unamortized balance. Due to uncertainties as to the extent and sources of releases of compounds, as well as the nature and extent of any required remediation, management does not possess at this time sufficient information to reasonably determine the ultimate cost to Boston Gas of remediation at such sites, but believes that it is not probable that such costs will materially affect Eastern's financial condition or results of operations, particularly given Boston Gas' limited financial exposure due to the Settlement Agreement as well as its ability to recover all such costs incurred. Eastern is aware of certain non-utility sites, associated with operations in which it is no longer involved, for which it may have or share environmental remediation responsibility. While Eastern has provided reserves that cover some anticipated costs of remediation of the site of a former coal tar processing facility in Everett, Massachusetts (the "Facility") and believes that it has provided adequate reserves to cover the estimated costs of remediation of the other such sites, the extent of Eastern's potential liability at such sites is not yet determinable. The Facility, which was located on a 10-acre parcel of land formerly owned by Eastern, was operated by predecessors of Allied-Signal, Inc. from the early 1900s until 1937 and by Koppers Company, predecessor of Beazer East, Inc. (and Eastern's controlling stockholder until 1951) from 1937 until 1960 when the Facility was shut down. The Facility processed coal tar purchased from Eastern's adjacent by-product coke plant, also shut down in 1960. Eastern, Beazer and Allied-Signal entered into an Administrative Consent Order with the DEP in 1989 which requires that they jointly investigate and develop a remedial response plan for the Facility site, including any area where a release from that site may have come to be located. The companies have entered into a cost-sharing agreement under which each company has agreed to bear one-third of the costs of compliance with the Consent Order, while preserving any claims it may have against the other companies. In 1993 the companies completed preliminary remedial measures, including abatement of seepage of materials into the adjacent Island End River, a 29-acre tidal river which is part of Boston harbor. Studies NOTES TO FINANCIAL STATEMENTS--(Continued) have identified compounds that may be associated with coal tar and/or oil in soil and ground water at the site and adjacent areas and in the Island End River sediments. The National Oceanic and Atmospheric Administration and the Coast Guard are working with the DEP in connection with further investigation and possible remediation of river sediment conditions. In addition, the U.S. Environmental Protection Agency is currently evaluating the Facility site and the Island End River for possible designation as a federal priority Superfund site. In light of uncertainties as to the extent and sources of releases of compounds, the nature of any required remediation, the area and volume of soil, ground water and/or sediments that may be included, the possibility of participation by additional potentially responsible parties and the apportionment of liability, Eastern does not possess at this time sufficient information to reasonably determine or estimate the ultimate cost to it of such remedial measures. Eastern is recovering certain costs of its legal defense and may be entitled to recovery of remediation costs from its insurers with respect to this matter. 12. Coal Miners Retiree Health Care In September 1993 Eastern received notice from the Social Security Administration ("SSA") claiming that Eastern is responsible for health care and death benefit premiums for certain retired coal miners and their beneficiaries under the federal Coal Industry Retiree Health Benefit Act of 1992 (the "Coal Act"). The amount of premiums requested aggregates in excess of $5,000,000 to cover an initial 20 month period ending September 30, 1994, and relates to retired miners who are said to have worked for Eastern's Coal Division prior to the transfer of those operations to a subsidiary in 1965. Eastern has not yet received a bill for subsequent periods. Eastern has filed a lawsuit in the Federal District Court for Massachusetts challenging the constitutionality of the Coal Act as applied to it, and asserting a claim against Peabody Holding Company, Inc. ("Peabody"), to which Eastern sold its coal subsidiaries in 1987, that any liabilities under the Coal Act should be borne by Peabody and such subsidiaries. Eastern has posted security to delay payment of premiums pending the outcome of its constitutional challenge. Eastern is aware of several other lawsuits challenging the constitutionality of the Coal Act. In 1993 Eastern recorded a reserve of $70,000,000 to provide for its estimated undiscounted obligations under the Coal Act. This amount was reflected as an extraordinary item of $45,500,000 net of tax or $2.02 per share, in accordance with the conclusions of the Financial Accounting Standard Board's Emerging Issues Task Force, which has determined that any entity such as Eastern which no longer has operations in the coal industry should account for its entire obligation under the Coal Act as an extraordinary item. Eastern's obligation could range from zero to more than $100 million depending on the outcome of its constitutional challenge or its claim against Peabody, or other factors including administrative review of assigned individuals, medical inflation rates, Medicare reimbursements and other changes in government health care programs. 13. Retiree Benefits Eastern and its subsidiaries, through various company administered plans and other union retirement and welfare plans under collective bargaining agreements, provide retirement benefits for the majority of their employees, including pension and certain health care and life insurance benefits. Normal retirement age is 65 but provision is made for earlier retirement. Pension benefits for salaried plans are based on salary and years of service, while union retirement and welfare plans are based on negotiated benefits and years of service. Employees hired before 1993 who are participants in the pension plans become eligible for health care benefits if they reach retirement age while working for Eastern. The funding of retirement and employee benefit plans is in accordance with the requirements of the plans and collective bargaining agreements and, where applicable, in sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act ("ERISA"). The net cost for these plans and agreements charged to expense was as follows: NOTES TO FINANCIAL STATEMENTS--(Continued) Pensions Years Ended December 31, (In thousands) 1994 1993 1992 Service cost $ 4,792 $ 4,282 $ 3,852 Interest cost on projected benefit obligation 10,005 9,791 8,940 Actual return on plan assets (6,540) (21,690) (12,945) Net amortization and deferral (3,903) 10,674 2,572 Total net pension cost of company-administered plans 4,354 3,057 2,419 Multi-employer union retirement and welfare plans 309 377 321 Total net pension cost $ 4,663 $ 3,434 $ 2,740 Health Care Years Ended December 31, (In thousands) 1994 1993 1992 Service cost $ 907 $ 1,566 $ 1,459 Interest cost on accumulated benefits obligation 6,038 8,035 8,847 Actual return on plan assets (755) (282) (173) Net amortization and deferral (2,739) (1,183) (247) Boston Gas deferral 3,472 (2,275) (4,447) Total retiree health care cost $ 6,923 $ 5,861 $ 5,439 The following table sets forth the funded status of company-administered plans and amounts recorded in Eastern's consolidated balance sheet as of December 31, 1994 and 1993 using actuarial measurement dates as of October 1, 1994 and 1993: Pensions Health Care (In thousands) 1994 1993 1994 1993 Accumulated benefit obligation: Vested benefits $113,306 $104,355 $ 75,983 $ 67,492 Non-vested benefits 15,195 13,275 15,069 15,741 128,501 117,630 91,052 83,233 Effect of future salary increases 18,896 18,820 -- -- Projected benefit obligation ("PBO") $147,397 $136,450 $ 91,052 $ 83,233 Plan assets at fair value $155,808 $152,925 $ 11,611 $ 10,856 Less PBO 147,397 136,450 91,052 83,233 Plan assets in excess of (less than) PBO 8,411 16,475 (79,441) (72,377) Unrecognized net obligation at December 31, 1985 being amortized over 15 years 2,542 2,951 -- -- Unrecognized net (gain) loss (12,498) (19,638) (7,119) (15,171) Unrecognized prior service cost (benefit) 16,313 15,837 (15,822) (17,182) Amounts contributed to plans during fourth quarter 534 476 -- -- Unfunded accumulated benefits (2,591) (1,291) -- -- Net asset (reserve) at $ $ December 31 12,711 14,810 $(102,382) $(104,730) The above vested health care benefits include $66,544,000 and $58,380,000 for retirees in 1994 and 1993, respectively. To fund health care benefits under its collective bargaining agreements Boston Gas maintains a Voluntary Employee Beneficiary Association ("VEBA"), to which it makes contributions from time to time. Plan assets are invested in equity securities, fixed-income investments and money market instruments. NOTES TO FINANCIAL STATEMENTS--(Continued) Following are the assumptions used in the actuarial measurements: 1994 1993 Discount rate 7.5% 7.5% Return on plan assets 8.5% 8.5% Increase in future compensation 5.0% 5.0% Health care inflation trend 11.0% 12.0% The health care inflation trend is assumed to drop gradually to 5% after 6 years. A one-percentage-point increase in the assumed health care cost trend would have increased the net periodic post-retirement benefit cost charged to expense and the accumulated benefit obligation by $73,000 and $7,227,000 and, $62,000 and $6,440,000, respectively, in 1994 and 1993. 14. Fair Values of Financial Instruments Effective January 1, 1994, Eastern adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities," which requires investments in debt and equity securities other than those accounted for under the equity method to be carried at fair value or amortized cost for debt securities expected to be held to maturity. Pursuant to SFAS 115, Eastern has classified its investments in debt and equity securities as available for sale. Accordingly, the net unrealized gains and losses computed in marking these securities to market have been reported as a component of shareholders' equity. At December 31, 1994 the difference between the fair value and the original cost of these securities is a net gain of $633,000. The following methods and assumptions were used to estimate the fair value disclosures for financial instruments: Cash, short-term investments and debt: The carrying amounts approximate fair value because of the short maturity of those instruments. Short-term debt includes notes payable, gas inventory financing and other miscellaneous short-term liabilities. Long-term debt and preferred stock of subsidiary: The fair values are based on currently quoted market prices. The carrying amounts and estimated fair values of Eastern's financial instruments are as follows: December 31, (In thousands) 1994 1993 Carrying Fair Carrying Fair Amount Value Amount Value Cash and short-term investments $ 60,854 $ 60,854 $ 52,211 $ 52,211 Short-term debt 116,108 116,108 165,596 165,596 Long-term debt 370,732 372,869 336,975 384,850 Preferred stock of subsidiary 29,229 26,250 29,197 30,600 NOTES TO FINANCIAL STATEMENTS--(Continued) 15. Unaudited Quarterly Financial Information For the three months ended (In thousands, except per June Sept share amounts) Mar 31, 30, 30, Dec 31 1994: Revenues $372,468 $191,793 $139,222 $221,367 Operating earnings (loss) 57,126 14,256 (478) 26,471 Earnings (loss) from continuing operations before income taxes 47,832 7,970 (9,413) 16,976 Earnings (loss) from continuing operations 28,862 5,015 (5,594) 10,624 Earnings (loss) from discontinued operations (174) 1,146 2,481 8,759 Net earnings (loss) $ 28,688 $ 6,161 $ (3,113) $ 19,383 Earnings (loss) per share from continuing operations $1.38 $.24 $(.27) $.52 Earnings (loss) per share from discontinued operations (.01) .05 .13 .42 Net earnings (loss) per share $1.37 $29 $(.14) $.94 1993: Revenues $324,077 $195,312 $123,033 $226,793 Operating earnings (loss) 49,230 12,832 (7,142) 22,469 Earnings (loss) from continuing operations before income taxes 41,109 5,184 (14,652) 12,866 Earnings (loss) from continuing operations before extraordinary item 25,340 3,581 (10,370) 7,471 Loss from discontinued operations (2,315) (317) (10,628) (44,922) Extraordinary item net of tax -- -- -- (45,500) Net earnings (loss) $ 23,025 $ 3,264 $(20,998) $(82,951) Earnings (loss) per share from continuing operations before extraordinary item $1.12 $.16 $(.46) $ .33 Loss per share from discontinued operations (.10) (.02) (.47) (1.99) Extraordinary item net of tax -- -- -- (2.02) Net earnings (loss) per share $1.02 $.14 $(.93) $(3.68) INDEPENDENT AUDITORS' REPORT To the Trustees and Shareholders of Eastern Enterprises: We have audited the accompanying consolidated balance sheets of Eastern Enterprises (a Massachusetts voluntary association) and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Eastern Enterprises and subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As explained in Note 9 to the consolidated financial statements, effective January 1, 1992 the company changed its method of accounting for income taxes. As explained in Note 14 to the consolidated financial statements, effective January 1, 1994 the company changed its method of accounting for securities. Arthur Andersen LLP Boston, Massachusetts January 25, 1995 (except with respect to the matter discussed in Note 10, as to which the date is March 2, 1995). MANAGEMENT'S REPORT ON RESPONSIBILITY The management of Eastern Enterprises is responsible for the preparation, integrity and fair presentation of the company's financial statements. These statements have been prepared in accordance with generally accepted accounting principles and, as such, include amounts based on management's informed judgments and estimates. The financial statements have been audited by the independent accounting firm of Arthur Andersen LLP which was given unrestricted access to all financial records and related data. Eastern maintains a system of internal control over financial reporting which is designed to provide reasonable assurance to the company's management and Board of Trustees regarding the preparation of reliable financial statements and the safeguarding of assets. The system includes a documented organizational structure and division of responsibility, an internal audit staff, the careful selection and development of personnel and established policies and procedures, including policies to foster a strong ethical climate and control environment, which are communicated throughout Eastern. The Audit Committee of the Board of Trustees, consisting solely of outside trustees, meets periodically with management, internal auditors and the independent auditors to review internal accounting controls, and the accounting principles and practices used to report financial condition and the results of operations. The Audit Committee also annually recommends to the Board of Trustees the selection of independent auditors. J. Atwood Ives Chairman and Chief Executive Officer Walter J. Flaherty Senior Vice President and Chief Financial Officer James J. Harper Vice President and Controller Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III. Item 10. Directors and Executive Officers of the Registrant Information with respect to this item may be found in the section captioned "Information With Respect to Nominees and Trustees" appearing on pages 4 through 6 of the 1995 definitive Proxy Statement. Such information is incorporated herein by reference. See also the item captioned "Executive Officers of the Registrant" at the end of Part I hereof. Item 11. Executive Compensation Information with respect to this item may be found in the section captioned "Compensation of Executive Officers" appearing on pages 8 through the second full paragraph on page 13 of the 1995 definitive Proxy Statement. Such information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management Information with respect to this item may be found in the sections captioned "Information With Respect to Certain Shareholders" appearing on pages 2 and 3 and "Stock Ownership of Trustees and Executive Officers" appearing on page 7 of the 1995 definitive Proxy Statement. Such information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information with respect to this item may be found in the last paragraph in the section captioned "Compensation of Trustees" appearing on page 12 of the 1995 definitive Proxy Statement. Such information is incorporated herein by reference. PART IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) and (2) List of Financial Statements and Financial Statement Schedules Exhibits and Financial Statement Schedules to the Form 10-K have been included only with the copies of the Form 10-K filed with the SEC. A copy of this Form 10-K, including a list of exhibits and Financial Statement Schedules is available free of charge upon written request to: Corporate Relations Department, Eastern Enterprises, 9 Riverside Road, Weston, MA 02193. TRUSTEES AND OFFICERS Trustees Officers J. Atwood Ives(1) Thomas W. Jones(2) J. Atwood Ives Chairman and President and Chairman and Chief Executive Officer Chief Operating Officer Chief Executive Officer Eastern Enterprises Teachers Insurance and Richard R. Clayton Richard R. Clayton Annuity Association/ President and President and College Retirement Chief Operating Officer Chief Operating Officer Equities Fund Walter J. Flaherty Eastern Enterprises New York, NY Senior Vice President and Nelson J. Darling, Jr.(2,3) Harold T. Miller(1,3,4) Chief Financial Officer Trustee and Director Retired Chairman and Richard J. Klau Boston, MA Chief Executive Officer Senior Vice President and Samuel Frankenheim(2,3) Houghton Mifflin Company President, WaterPro Counsel Boston, MA Supplies Corporation Ropes & Gray William J. Pruyn Chester R. Messer Boston, MA Retired Chairman Senior Vice President and Dean W. Freed(1,2) Eastern Enterprises President, Boston Gas Director and William G. Salatich(1,4) Company Retired Chairman President Fred C. Raskin EG&G, Inc. William G. Salatich Senior Vice President and Wellesley, MA Consulting Inc. President, Midland Robert P. Henderson(1,3,4) Northfield, IL Enterprises Inc. Chairman Rina K. Spence(3,4) L. William Law, Jr. Greylock Management Corp. President and Senior Vice President, Boston, MA Chief Executive Officer General Counsel and Leonard R. Jaskol(4) RKS Health Ventures Secretary Chairman and Cambridge, MA Michael J. Cawley Chief Executive Officer Vice President-- Lydall, Inc. Risk Management Manchester, CT James J. Harper Vice President and Controller Jane W. McCahon Vice President-- (1) Executive Committee Corporate Relations (2) Audit Committee Jean A. Scholtens (3) Nominating Committee Vice President and (4) Compensation Committee Treasurer (3) LIST OF EXHIBITS 3.1 -- Declaration of Trust of Eastern Enterprises, as amended through April 27, 1989 (filed as Exhibit 3.1 to Quarterly Report of Eastern Enterprises on Form 10-Q for the quarter ended June 30, 1989).* 3.2 -- By-Laws of Eastern Enterprises, as amended through July 23, 1992 (filed as Exhibit 3.1 to Quarterly Report of Eastern on Form 10-Q for the quarter ended June 30, 1992).* (NOTE: Eastern agrees to furnish to the Securities and Exchange Commission upon request a copy of any instrument with respect to long-term debt of Eastern or any of its subsidiaries. Such instruments are not filed herewith since no such instrument authorizes securities in an amount greater than 10% of the total assets of Eastern and its subsidiaries on a consolidated basis.) 4.1 -- Common Stock Rights Agreement between Eastern and The Bank of New York, dated as of February 22, 1990, and Exhibits attached thereto (filed as Exhibits to Form 8-K of Eastern dated March 1, 1990).* 4.1.1 -- Agreement between Eastern and The First National Bank of Boston, dated January 30, 1995, with respect to Common Stock Rights Agreement. 10.1 -- Gas Transportation Contract between Boston Gas Company and Tennessee Gas Pipeline Company dated as of September 1, 1993 (filed as Exhibit 10.1 to Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1993 (File no. 2-23416)).* 10.2 -- Gas Transportation Contracts between Boston Gas Company and Texas Eastern Transmission Corporation dated December 30, 1993 (filed as Exhibits 10.2 and 10.3 to Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1993 (File no. 2-23416)).* 10.3 -- Gas Transportation Contracts between Boston Gas Company and Algonquin Gas Transmission Company dated December 30, 1993 (filed as Exhibits 10.4 and 10.5 to Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1993 (File no. 2-23416)).* 10.4 -- Gas Sales Contract between Boston Gas Company and Esso Resources Canada, Limited, dated as of May 1, 1989, as amended, (filed as Exhibits 10.12 and 10.12.1 to the Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1989 (File no. 2-23416)).* 10.5 -- Gas Sales Agreement between Boston Gas Company and Alberta Northeast Gas Limited, dated as of February 7, 1991 (filed as Exhibit 10.16 to the Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1990 (File no. 2-23416)).* 10.6 -- Firm Gas Transportation Agreement between Boston Gas Company and Iroquois Gas Transmission System, L.P., dated as of February 7, 1991 (filed as Exhibit 10.17 to the Annual Report of Boston Gas Company on Form 10-K for the year ended December 31, 1990 (File no. 2-23416)).* 10.7 -- Eastern's Deferred Compensation Plan for Trustees, as amended (filed as Exhibit 10.7 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1993).*(a) 10.8 -- Eastern's 1982 Stock Option Plan, as amended (filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1992).*(a) 10.9 -- Eastern's 1995 Stock Option Plan. (a) 10.10 -- Eastern's Supplemental Executive Retirement Plan, as amended (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994).*(a) 10.11 -- Trust Agreement between Eastern and Shawmut Bank of Boston, N.A., as amended (filed as Exhibit 10.12 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1990).*(a) 10.12 -- Eastern's Executive Incentive Compensation Plan, as amended (filed as Exhibit 10.3 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1992).*(a) 10.13 -- Salary Continuation Agreements between Eastern and certain officers (filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for quarter ended September 30, 1994).*(a) 10.14 -- Agreement dated November 27, 1991 between Eastern and J. Atwood Ives (filed as Exhibit 10.14 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1991).*(a) 10.15 -- Agreement dated October 25, 1991 between Eastern and Richard R. Clayton (filed as Exhibit 10.15 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1991).*(a) 10.16 -- Agreement dated April 28, 1994 between Eastern and J. Atwood Ives (filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994).*(a) 10.17 -- Agreement dated April 28, 1994 between Eastern and Richard R. Clayton (filed as Exhibit 10.3 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1994).*(a) 10.18 -- Eastern's Headquarters Retirement Plan, as amended and restated (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter ended September 30, 1991).*(a) 10.18.1-- Amendment to Eastern's Headquarters Retirement Plan, dated October 27,1994. (a) 10.19 -- Midland Enterprises Inc. Salaried Retirement Plan, as amended and restated (filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for the quarter ended September 30, 1991).*(a) 10.19.1-- Amendment to Midland Enterprises Inc. Salaried Retirement Plan, dated November 4, 1994.(a) 10.20 -- Boston Gas Company Retirement Plan, as amended and restated (filed as Exhibit 10.3 to Quarterly Report of Eastern on Form 10-Q for the quarter ended September 30, 1991).*(a) 10.20.1-- Amendment to Boston Gas Company Retirement Plan, dated December 5, 1994. (a) 10.21 -- Trust Agreement made as of October 2, 1987 between Eastern and The Bank of New York, as amended (filed as Exhibit 10.19 to the Annual Report of Eastern on Form 10-K for the year ended December 31, 1990).*(a) 10.22 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended (filed as Exhibit 10.22 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1992).*(a) 10.23 -- Eastern's 1992 Restricted Stock Plan (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter ended March 31, 1992).*(a) 10.24 -- Eastern's Restricted Stock Plan for Non-Employee Trustees (filed as Exhibit 10.24 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1992).*(a) 10.25 -- Eastern's 1994 Deferred Compensation Plan (filed as Exhibit 10.22 to Annual Report of Eastern on Form 10-K for year ended December 31, 1993).*(a) 10.26 -- Eastern's Executive Stock Purchase Loan Plan (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for quarter ended September 30, 1994).*(a) 13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1994. With the exception of the sections captioned "Cash Dividends Per Share" and "Stock Price Range" appearing on the inside back cover of the said annual report which are incorporated by reference in Item 5 of this Form 10-K, said annual report is not deemed filed as part of this report. 21.1 -- Subsidiaries of the registrant. Eastern will furnish a copy of any exhibit not included herewith to any holder of Eastern's common stock upon payment of the cost of reproduction and mailing. (B) REPORTS ON FORM 8-K There were no reports on Form 8-K filed in the fourth quarter of 1994. *Not filed herewith. In accordance with Rule 12b-32 of the General Rules and Regulations under the Securities and Exchange Act of 1934, reference is made to the document previously filed with the Commission. (a) Indicates a management contract or compensatory plan or arrangement. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EASTERN ENTERPRISES Registrant By /s/ JAMES J. HARPER JAMES J. HARPER Vice President and Controller (Chief Accounting Officer) Date: March 15, 1995. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 15th day of March, 1995. SIGNATURE TITLE /s/ J. ATWOOD IVES ----------------------- J. ATWOOD IVES Chairman and Chief Executive Officer and Trustee /s/ RICHARD R. CLAYTON ----------------------- RICHARD R. CLAYTON President and Chief Operating Officer and Trustee /s/ WALTER J. FLAHERTY ----------------------- WALTER J. FLAHERTY Senior Vice President and Chief Financial Officer /s/ NELSON J. DARLING, JR. ----------------------- NELSON J. DARLING, JR. Trustee /s/ SAMUEL FRANKENHEIM ----------------------- SAMUEL FRANKENHEIM Trustee /s/ DEAN W. FREED ----------------------- DEAN W. FREED Trustee /s/ ROBERT P. HENDERSON ----------------------- ROBERT P. HENDERSON Trustee /s/ LEONARD R. JASKOL ----------------------- LEONARD R. JASKOL Trustee /s/ THOMAS W. JONES ----------------------- THOMAS W. JONES Trustee /s/ HAROLD T. MILLER ----------------------- HAROLD T. MILLER Trustee /s/ WILLIAM J. PRUYN ----------------------- WILLIAM J. PRUYN Trustee /s/ WILLIAM G. SALATICH ----------------------- WILLIAM G. SALATICH Trustee /s/ RINA K. SPENCE ----------------------- RINA K. SPENCE Trustee EASTERN ENTERPRISES AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES DECEMBER 31, 1994 (SUBMITTED IN ANSWER TO ITEMS 14(A)(1) AND (2) OF FORM 10-K, SECURITIES AND EXCHANGE COMMISSION) FINANCIAL STATEMENTS Page EASTERN ENTERPRISES AND SUBSIDIARIES: Report of independent public accountants on schedules F-2 Consent of independent public accountants F-2 SCHEDULES (PAGES F-3 THROUGH F-5) II Valuation and qualifying accounts and reserves Schedules not listed above are omitted as not applicable or not required under the rules of Regulation S-X. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES TO EASTERN ENTERPRISES: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Eastern Enterprises Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 25, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedules listed in the index on page F-1 are the responsibility of Eastern's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Boston, Massachusetts January 25, 1995 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports, dated January 25, 1995, included in, and incorporated by reference into, Eastern Enterprises Annual Report on this Form 10-K for the year ended December 31, 1994, into Eastern's previously filed Post-Effective Amendment No. 1 to Form S-16 Registration Statement No. 2-71614 on Form S-3 and Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862 and No. 33-56424. Boston, Massachusetts March 15, 1995 ARTHUR ANDERSEN LLP SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Year Ended December 31, 1994 (Thousands) Additions Deductions Charges for Balance Charged Which Balance December to Costs Charged Reserves December 31, and to Other Were 31, Description 1993 Expenses Accounts Created 1994 Reserves deducted from assets-- Reserves for doubtful accounts $ 13,945 $15,864 $ 0 $(13,718) $ 16,091 Reserves for loss on investments $ 19 $ 0 $ 0 $ 0 $ 19 Reserves included in liabilities-- Reserve for post-retirement health care $104,730 $ 1,103 $ 2,186 $ (5,637) $102,382 Reserve for coal miners retiree health care 70,000 0 0 (1,307) 68,693 Reserves for employee benefits 10,661 8,716 1,279 (8,203) 12,453 Reserves for environmental expenses 10,866 175 125 (1,316) 9,850 Reserves for insurance claims 9,167 7,004 2,127 (8,408) 9,890 Other 19,611 7,854 (4,255) (4,457) 18,753 Total liability reserves $225,035 $24,852 $ 1,462 $(29,328) $222,021 SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Year Ended December 31, 1993 (Thousands) Additions Deductions Charges for Balance Charged Which Balance December to Costs Charged Reserves December 31, and to Other Were 31, Description 1992 Expenses Accounts Created 1993 Reserves deducted from assets-- Reserves for doubtful accounts $ 11,835 $13,127 $ 0 $(11,017) $ 13,945 Reserves for loss on investments $ 19 $ 0 $ 0 $ 0 $ 19 Reserves included in liabilities-- Reserve for post-retirement health care $102,221 $ 1,331 $ 6,805 $ (5,627) $104,730 Reserve for coal miners retiree health care 0 70,000 0 0 70,000 Reserves for employee benefits 11,473 8,635 (692) (8,755) 10,661 Reserves for environmental expenses 6,746 5,639 (159) (1,360) 10,866 Reserves for insurance claims 9,202 6,369 1,098 (7,502) 9,167 Other 23,252 7,532 (6,887) (4,286) 19,611 Total liability reserves $152,894 $99,506 $ 165 $(27,530) $225,035 SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES For the Year Ended December 31, 1992 (Thousands) Additions Deductions Charges for Balance Charged Which Balance December to Costs Charged Reserves December 31, and to Other Were 31, Description 1991 Expenses Accounts Created 1992 Reserves deducted from assets-- Reserves for doubtful accounts $ 10,443 $12,444 $ 0 $(11,052) $ 11,835 Reserves for loss on investments $ 19 $ 0 $ 0 $ 0 $ 19 Reserves included in liabilities-- Reserve for post-retirement health care $102,181 $10,040 $ 432 $(10,432) $102,221 Reserves for employee benefits 10,897 9,300 (130) (8,594) 11,473 Reserves for environmental expenses 7,367 2,500 282 (3,403) 6,746 Reserves for insurance claims 10,235 7,032 232 (8,297) 9,202 Other 13,034 3,762 15,844 (9,388) 23,252 Total liability reserves $143,714 $32,634 $16,660 $(40,114) $152,894 EXHIBIT INDEX See Item 14(a)(3), "List of Exhibits," for statement of the location of exhibits incorporated by reference. Exhibit 3.1 -- Declaration of Trust of Eastern Enterprises, as amended through April 27, 1989 (incorporated by reference). 3.2 -- By-Laws of Eastern Enterprises, as amended through July 23, 1992 (incorporated by reference). 4.1 -- Common Stock Rights Agreement between Eastern and The Bank of New York, dated as of February 22, 1990, and Exhibits attached thereto (incorporated by reference). 4.1.1-- Agreement between Eastern and The First National Bank of Boston, dated January 30, 1995. 10.1 -- Gas Transportation Contract between Boston Gas Company and Tennessee Gas Pipeline Company dated as of September 1, 1993 (incorporated by reference). 10.2 -- Gas Transportation Contracts between Boston Gas Company and Texas Eastern Transmission Corporation dated December 30, 1993 (incorporated by reference). 10.3 -- Gas Transportation Contracts between Boston Gas Company and Algonquin Gas Transmission Company dated December 30, 1993 (incorporated by reference). 10.4 -- Gas Sales Contract between Boston Gas Company and Esso Resources Canada, Limited, dated as of May 1, 1989, as amended (incorporated by reference). 10.5 -- Gas Sales Agreement between Boston Gas Company and Alberta Northeast Gas Limited, dated as of February 7, 1991 (incorporated by reference). 10.6 -- Firm Gas Transportation Agreement between Boston Gas Company and Iroquois Gas Transmission System, L.P., dated as of February 7, 1991 (incorporated by reference). 10.7 -- Eastern's Deferred Compensation Plan for Trustees, as amended (incorporated by reference). 10.8 -- Eastern's 1982 Stock Option Plan, as amended (incorporated by reference). 10.9 -- Eastern's 1995 Stock Option Plan. 10.10 -- Eastern's Supplemental Executive Retirement Plan, as amended (incorporated by reference). 10.11 -- Trust Agreement between Eastern and Shawmut Bank of Boston N.A., as amended (incorporated by reference). 10.12 -- Eastern's Executive Incentive Compensation Plan, as amended (incorporated by reference). 10.13 -- Salary Continuation Agreements between Eastern and certain officers, as amended (incorporated by reference). 10.14 -- Agreement dated November 27, 1991 between Eastern and J. Atwood Ives (incorporated by reference). 10.15 -- Agreement dated October 25, 1991 between Eastern and Richard R. Clayton (incorporated by reference). 10.16 -- Agreement dated April 28, 1994, between Eastern and J. Atwood Ives (incorporated by reference). 10.17 -- Agreement dated April 28, 1994, between Eastern and Richard R. Clayton (incorporated by reference). 10.18 -- Eastern's Headquarters Retirement Plan, as amended and restated (incorporated by reference). 10.18.1-- Amendment to Eastern's Headquarters Retirement Plan dated October 27, 1994. 10.19 -- Midland Enterprises Inc. Salaried Retirement Plan, as amended and restated (incorporated by reference). 10.19.1-- Amendment to Midland Enterprises Inc. Salaried Retirement Plan, dated November 4, 1994. 10.20 -- Boston Gas Company Retirement Plan, as amended and restated (incorporated by reference). 10.20.1-- Amendment to Boston Gas Company Retirement Plan, dated December 5, 1994. 10.21 -- Trust Agreement made as of October 2, 1987 between Eastern and The Bank of New York, as amended (incorporated by reference). 10.22 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended (incorporated by reference). 10.23 -- Eastern's 1992 Restricted Stock Plan (incorporated by reference). 10.24 -- Eastern's Restricted Stock Plan for Non-Employee Trustees (incorporated by reference). 10.25 -- Eastern's 1994 Deferred Compensation Plan (incorporated by reference). 10.26 -- Eastern's Executive Stock Purchase Loan Plan (incorporated by reference). 13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1994. 21.1 -- Subsidiaries of the registrant. EX-4.1.1 2 RIGHTS OF SECURITY HOLDERS EXHIBIT 4.1.1 AGREEMENT AGREEMENT dated as of the 30th day of January, 1995, by and between Eastern Enterprises, a Massachusetts voluntary association (the "Trust"), and The First National Bank of Boston ("FNBB"). W I T N E S S E T H WHEREAS, the Trust is party to a Common Stock Rights Agreement dated as of February 22, 1990, by and between the Trust and The Bank of New York as Rights Agent (the "Rights Agreement"); WHEREAS, The Bank of New York has resigned as Rights Agent under the Rights Agreement, effective as of January 30, 1995; and WHEREAS, the parties hereto desire to enter into this agreement to confirm the appointment of FNBB as successor Rights Agent under the Rights Agreement; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: 1. The parties acknowledge and agree that FNBB shall be the successor Rights Agent under the Rights Agreement, effective as of January 30, 1995, and accordingly, pursuant to Section 21 of such Agreement, shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent under such Agreement, without further act or deed, and, except as the context in the Rights Agreement otherwise requires, shall be deemed to be the "Rights Agent" for all purposes of such Agreement. 2. FNBB represents and warrants that it is a corporation organized and doing business under the laws of the United States, The Commonwealth of Massachusetts, or the State of New York (or of any other State of the United States so long as it is authorized to do business as a banking institution in The Commonwealth of Massachusetts or the State of New York), in good standing, having a principal office in The Commonwealth of Massachusetts or the State of New York, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by federal or state authority and which has a combined capital and surplus of at least $50,000,000. 3. Section 25 of the Rights Agreement is hereby amended, effective January 30, 1995, by deleting the address of The Bank of New York set forth therein and substituting therefor the following: "THE FIRST NATIONAL BANK OF BOSTON Attention: Shareholder Services Division 150 Royall Street Canton, MA 02021" 4. Section 31 of the Rights Agreement is hereby amended, effective January 30, 1995, by deleting such Section in its entirety and substituting therefor the following: "Section 31. Governing Law. This Agreement and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of The Commonwealth of Massachusetts and for all purposes shall be governed by and construed in accordance with the laws of said Commonwealth applicable to contracts to be made and performed entirely within said Commonwealth." 5. Reference is hereby made to the declaration of trust establishing the Trust dated July 18, 1929, as amended, a copy of which is on file in the office of the Secretary of State of The Commonwealth of Massachusetts. The name "Eastern Enterprises" refers to the trustees under such declaration as trustees and not personally. No trustee, shareholder, officer or agent of the Trust shall be held to any personal liability in connection with the affairs of the Trust and only the trust estate may be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and set their respective hands and seals, all as of the day and year first above written. EASTERN ENTERPRISES By: /s/ L. William Law, Jr. Title: General Counsel THE FIRST NATIONAL BANK OF BOSTON By: /s/ Colleen H. Shea Title: Administration Manager EX-10.9 3 MATERIALS CONTRACTS Exhibit 10.9 EASTERN ENTERPRISES 1995 Stock Option Plan 1. Purpose of the Plan; Certain Definitions. The purpose of this plan (the "Plan") is to attract, retain and motivate those employees of Eastern Enterprises ("Eastern") or its subsidiaries whose efforts are determined by the Compensation Committee of the Board of Trustees of Eastern (the "Committee") to have an important bearing on the success of the business of Eastern and its subsidiaries ("Eligible Employees"). This purpose will be advanced by encouraging the ownership by such employees of shares of beneficial interest ("Stock") of Eastern. The term "Participant" means an Eligible Employee to whom an award is made under the Plan. 2. Administration of the Plan. The Plan shall be administered by the Committee. All members of the Committee shall be appointed by the Board of Trustees to serve at the Board's pleasure. All members of the Committee shall be both "disinterested" within the meaning of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and, to the extent required in order to qualify the Plan under Section 162(m)(4)(C) of the Internal Revenue Code of 1986, as amended (the "Code") (including any applicable transition rules), "outside directors" within the meaning of Section 162(m)(4)(C)(i) of the Code. The Committee shall have authority, consistent with the Plan, (a) to determine which Eligible Employees shall be granted options; (b) to determine whether the options granted to any Eligible Employees shall be incentive stock options, as defined in Section 422(b) of the Code ("incentive stock options"), or non-statutory stock options, or both; (c) to determine whether stock appreciation rights shall be included in any or all options granted to an Eligible Employee, either concurrently with the grant of an option, or at any time thereafter during the term of such option, all in accordance with Section 8; (d) to determine whether any or all options granted to an Eligible Employee shall be exercisable with shares of Stock ("shares") or other permissible forms of payment in accordance with Section 7(c); (e) to determine the time or times when options shall be granted and the number of shares subject to each option; (f) to determine the option price of the shares subject to each option; (g) to prescribe the time or times when each option becomes exercisable and the duration of the exercise period; (h) to prescribe the form or forms of the instruments evidencing any options granted under the Plan and to change such forms from time to time; (i) to adopt, amend and rescind rules and regulations for the administration of the Plan, the options and stock appreciation rights and for its own acts and proceedings; and (j) to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Committee shall be binding upon all parties concerned. 3. Limitations. The Stock which may be issued and sold under the Plan shall not exceed in the aggregate 1,000,000 shares, except as such total number may be adjusted pursuant to Section 16 below. To the extent that any option granted under the Plan shall expire or terminate unexercised or for any reason become unexercisable as to any shares subject thereto, such shares shall thereafter be available for further grants under the Plan, within the limit specified above. Stock delivered upon the exercise of options may, as determined by the Board of Trustees, be previously issued Stock acquired by Eastern or authorized but theretofore unissued shares. The Board of Trustees and the officers of Eastern shall take appropriate action required for such delivery. The maximum number of shares for which any Participant may be awarded options in any calendar year is 250,000. The maximum number of shares as to which any Participant may be awarded stock appreciation rights in any calendar year is likewise 250,000. For purposes of the limitations described in this paragraph, the cancellation and regrant, or the repricing, of an option or a stock appreciation right shall be treated as a new grant, and both the old and the new grants shall count against the applicable limit (to the extent occurring in the same calendar year). The limitations described in this paragraph shall be subject to adjustment to reflect stock splits, recapitalizations and other corporate changes to the extent consistent with continued qualification of the Plan under Section 162(m)(4)(C) of the Code, and shall be construed consistent with regulations (including proposed regulations) issued under Section 162(m) of the Code. 4. Participants. Participants shall be selected from time to time by the Committee in its discretion only from among Eligible Employees. The Committee may grant an option or stock appreciation right to any Eligible Employee who is then a Participant or to any other Eligible Employees in accordance with the Committee's determination from time to time. 5. Option Price. The option price per share with respect to each option shall be determined by the Committee but shall not be less than the fair market value of the Stock at the time the option is granted, as determined by the Committee. 6. Option Period. Each option shall, subject to Sections 10, 11 and 12 specify the period during which it may be exercised, which period shall not in any event exceed 10 years from the date the option is granted. 7. Exercise of Options. (a) Each option shall be made exercisable at such time or times, whether or not in installments, as the Committee shall prescribe at the time the option is granted. In the case of an option not immediately exercisable in full, the Committee may at any time accelerate the time at which all or any part of the option may be exercised. The instruments evidencing options intended to be incentive stock options shall contain such other provisions relating to exercise and other matters as are required of incentive stock options under the applicable provisions of the Code and applicable regulations (including proposed regulations), as from time to time in effect. (b) A person electing to exercise an option shall give written notice to Eastern, as specified by the Committee, of his or her election and of the number of shares he or she has elected to purchase, such notice to be accompanied by any relevant documents required by the Committee, and shall at the time of such exercise tender the purchase price of the shares he or she has elected to purchase in accordance with paragraph (c) below. If the notice of election to purchase is given by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, Eastern shall be under no obligation to deliver shares pursuant to such exercise unless and until it is satisfied that the person or persons giving such notice is or are entitled to exercise the option. (c) Except as hereafter provided in this paragraph (c), the purchase price for shares subject to an option shall be payable to Eastern by cash (including check, bank draft or money order acceptable to the Committee and payable to the order of Eastern). If so provided by the Committee, an option may be made exercisable (i) by the delivery of shares of Stock (duly owned by the Participant and for which the Participant has good title free of any liens and encumbrances, and which, if acquired by the Participant from Eastern, shall have been held for at least six months) having a fair market value equal to the purchase price of the Stock to be purchased by exercise of the option, or (ii) by delivery of a promissory note of the Participant to Eastern, such note to be payable on such terms as are specified by the Committee, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to Eastern sufficient funds to pay the exercise price, or (iv) by any combination of the foregoing permissible forms of payment. If the price is paid in whole or in part in shares of Stock, such shares shall be valued at their fair market value at the time of exercise, as determined by the Committee. If the purchase price is paid in whole or in part in shares of Stock, the certificate for such shares shall be accompanied by appropriate instruments of transfer in form acceptable to the Committee. If an incentive stock option is to be exercisable, in whole or in part, other than by payment in cash as described above, the Committee shall so specify at the time the option is granted and an appropriate provision shall be included in the instrument evidencing the option. 8. Award and Exercise of Stock Appreciation Rights; Limitations. (a) A stock appreciation right is a right granted to the holder to receive, pursuant to the terms of the right, an amount payable in shares of Stock or, at the election of the Committee, cash or a combination of cash and shares of Stock, in each case equal to the increase in the value of the shares covered by the option to which the stock appreciation right is related, as more particularly set forth below in this Section 8. References in the Plan to the exercise of stock options shall include the exercise of any stock appreciation rights which are granted with such options. (b) Any option granted under the Plan, or any replacement or other option under the Plan, may contain such provisions relating to stock appreciation rights, not inconsistent with this Section 8 and other provisions of the Plan, as the Committee shall deem advisable. Any such option accompanied by a stock appreciation right shall provide for the surrender of any unexercised stock appreciation right to the extent that the option which it accompanies, or to which it is related, is exercised. (c) A stock appreciation right shall be exercisable when the related option is surrendered, and only to the extent the related option is, at the time, exercisable. No stock appreciation right shall be exercisable earlier than six months after the date of grant. (d) An exercisable stock appreciation right shall entitle the holder to exercise such right or any portion thereof (and to surrender unexercised the accompanying option to which it relates, or any portion thereof) and to receive in satisfaction of such exercise, subject to the limitations below, an amount, payable as provided for below, having an aggregate value, as determined by the Committee, equal to (x) minus (y), where (x) is the fair market value, on the date of exercise of the stock appreciation right, of the shares of Stock subject to that portion of the accompanying option which is surrendered, and (y) is the option price of such shares. The Committee shall be entitled in its sole discretion to elect, at any time before or after exercise of any stock appreciation right by the holder, to discharge Eastern's obligation in respect thereof (i) by the delivery of shares of Stock or (ii) by the payment of cash or partially by the payment of cash and partially by the delivery of shares of Stock. The total value of payments under (ii) above shall equal the aggregate value of the shares of Stock deliverable under (i) above. No fractional shares will be delivered. (e) Unless otherwise consented to or unless otherwise required by the Committee at any time, any full or partial exercise by an Eastern Trustee or officer (as defined for this purpose by the applicable regulations of the Securities and Exchange Commission) of a stock appreciation right to be satisfied in cash, in full or partial settlement of the right so exercised at the time, shall be made only during the period beginning on the third business day following the date of release for publication of quarterly or annual (as the case may be) summary statements of sales and earnings of Eastern and its subsidiaries, and ending on the twelfth business day following such date. (f) The Committee may, in its discretion, as it deems such to be in the best interests of Eastern, impose other conditions and limitations upon the exercise of a stock appreciation right, and upon Eastern's obligations under the Plan in respect of stock appreciation rights, which conditions may include a condition or limitation that the stock appreciation right may only be exercised in accordance with further rules and regulations adopted by the Committee from time to time. Such rules and regulations may govern the right to exercise stock appreciation rights granted prior to the adoption or amendment of such rules and regulations as well as stock appreciation rights granted thereafter. Without limiting the foregoing, the Committee may specify that stock appreciation rights may be exercised by the holder thereof only with the consent of the Committee, or that stock appreciation rights may be exercised by the holder thereof without such consent, or that such stock appreciation rights shall be exercised automatically by the occurrence of an event, by the passage of time or in any other way. 9. Delivery of Shares. Eastern shall not be obligated to deliver any shares pursuant to the exercise of any option unless and until (i) in the opinion of Eastern's counsel, all applicable Federal and state laws and regulations have been complied with; (ii) in the event the outstanding Stock is at the time listed upon any stock exchange, the shares to be delivered have been listed or authorized to be added to the list upon official notice of issuance upon such exchange; and (iii) all other legal matters in connection with the issuance and delivery of shares have been approved by Eastern's counsel. Without limiting the generality of the foregoing, Eastern may require from the Participant or other person exercising the option such investment representation or such agreement, if any, as counsel for Eastern may consider necessary in order to comply with the Securities Act of 1933 and may require that the Participant or such other person agree that any sale of the shares will be made only on the New York Stock Exchange or in such other manner as is permitted by the Committee and that he or she will notify Eastern when he or she makes any disposition of the shares whether by sale, gift or otherwise. Eastern shall use its best efforts to effect any compliance and listing, and the Participant or other person exercising the option shall take any action reasonably requested by Eastern in such connection. A Participant or other person entitled to exercise an option or stock appreciation right shall have the rights of a shareholder only as to shares actually acquired by him or her under the Plan. 10. Rights in Event of Death. In the event of a Participant's death at a time when he or she is entitled to exercise an option, then at any time or times on or before the latest date on which the Participant could have exercised the option had he or she remained in the employ of Eastern or a subsidiary such option may be exercised, as to all or any of the shares which the Participant was entitled to purchase at the time of his or her death, by the Participant's executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution. If a Participant dies before an option previously granted to him or her has become exercisable and the Participant is then in the employ of Eastern or one of its subsidiaries, such option shall be deemed to have been exercisable by such Participant immediately prior to his or her death to the extent the Participant could have exercised the option had he or she remained in the employ of Eastern or one of its subsidiaries until the time when the option would first have become exercisable to any extent. 11. Retirement and Disability. In the event of a Participant's retirement or disability at a time when he or she is entitled to exercise an option, then at any time or times on or before the latest date on which the Participant could have exercised the option had he or she remained in the employ of Eastern or a subsidiary the Participant may exercise such option as to all or any of the shares which he or she was entitled to purchase at the time of retirement or disability. For purposes of this Section, retirement or disability means termination of employment with Eastern or any subsidiary if such termination constitutes retirement or disability as provided for at the time of such termination under any retirement or disability program then maintained by Eastern or such subsidiary. 12. Other Termination of Employment. In the event the employment of a Participant terminates for any reason other than his or her death, disability or retirement, the Participant may, unless discharged for cause which in the opinion of the Committee casts such discredit on the Participant or Eastern as to justify immediate termination of the option, exercise the option after the date when his or her employment terminated, but only within three months after the date of termination or such longer period as the Committee, in its sole discretion, shall provide for either at the time the option is granted or in an amendment to the option. In no event, however, may any option granted under the Plan be exercised after the latest date on which the Participant could have exercised had he or she remained in the employ of Eastern or a subsidiary. 13. Replacement Options. Eastern may grant options under the Plan on terms differing from those provided for hereinabove where such options are granted in substitution for options held by employees of other companies who concurrently become employees of Eastern or a subsidiary as the result of a merger or consolidation of the employing company with Eastern or a subsidiary, or the acquisition by Eastern or a subsidiary of property or stock of the employing company. The Committee may direct that the substitute options be granted on such terms and conditions as it considers appropriate in the circumstances. 14. Non-transferability of Options. Options may not be transferred by the Participant otherwise than by will or the laws of descent and distribution, and during the Participant's lifetime shall be exercisable only by the Participant. 15. Use of Proceeds. The proceeds received by Eastern from the sale of shares pursuant to the Plan will be used for the general purposes of Eastern, except that any shares of Stock included in such proceeds may be held by Eastern as treasury shares. 16. Changes in Stock. In the event of a stock dividend, split-up or combination of shares, recapitalization or merger in which Eastern is the surviving company, or other similar capital change, the number and kind of shares or securities of Eastern subject to the Plan and to options and stock appreciation rights then outstanding and to be granted hereunder, the maximum number of shares or securities which may be issued or sold under the Plan, option prices and other relevant provisions shall be appropriately adjusted by the Board of Trustees of Eastern, whose determination shall be binding on all persons. In the event of a consolidation or a merger in which Eastern is not the surviving company, or in the event its outstanding shares are converted into securities of another entity or exchanged for other consideration, or in the event of the complete liquidation of Eastern, all outstanding options and stock appreciation rights shall thereupon terminate, but at least twenty days prior to the effective date of any such consolidation or merger, the Board of Trustees of Eastern shall either (a) make all outstanding options and stock appreciation rights immediately exercisable or (b) arrange to have the surviving company grant replacement options to the Participants. 17. Employment Rights. The adoption of the Plan does not confer upon any employee of Eastern or a subsidiary any right to continued employment with Eastern or a subsidiary, as the case may be, nor does it interfere in any way with the right of Eastern or a subsidiary to terminate the employment of any of its employees at any time. 18. Amendments. The Committee may at any time discontinue granting options and stock appreciation rights under the Plan. The Board of Trustees of Eastern may at any time or times amend the Plan or amend any outstanding option or stock appreciation right for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may be at the time permitted by law, provided that no such amendment shall, without the approval of the shareholders of Eastern, effect a change to the Plan that would require shareholder approval in order for the Plan to continue to qualify as exempt under Rule 16b-3 or to continue to qualify under Sections 162(m)(4)(C) and 422 of the Code, and no such amendment shall adversely affect the rights of any Participant (without his or her consent) under any option or stock appreciation right theretofore granted. 19. Tax Withholding. The Committee may require, as a condition to the exercise of any option or stock appreciation right hereunder, that the Participant or other person exercising the same pay to Eastern all taxes required to be withheld in connection with such exercise. Without limiting the foregoing, the Committee in its discretion may permit such tax withholding to be satisfied through the holding back of shares otherwise deliverable upon exercise or through the tendering to Eastern of shares previously acquired by the person exercising the option or stock appreciation right. 20. Effective Date and Duration of Plan. The Plan shall become effective upon its adoption by the Board of Trustees of Eastern subject to approval within twelve months thereafter by vote of the holders of at least a majority of the shares of the outstanding Stock of Eastern. No options may be granted under the Plan after December 31, 2004. EX-10.18.1 4 MATERIALS CONTRACTS Exhibit 10.18.1 EASTERN ENTERPRISES HEADQUARTERS RETIREMENT PLAN Amendment Pursuant to Section 14.01 of the Eastern Enterprises Headquarters Retirement Plan, said Plan is hereby amended as follows: 1. Effective July 1, 1994, Section 2.03 is amended by inserting the following at the end of the first paragraph thereof: "Notwithstanding the foregoing, the Annual Earnings of an Eligible Employee who is participating in the Employer's 'Sales Department Compensation Program' as of each Earnings Measurement Date shall mean such Employee's annual salary rate plus the annual performance bonus awarded to him under such program for the calendar year immediately preceding such Earnings Measurement Date." 2. Effective July 1, 1994, Section 2.03 is amended further by deleting the last paragraph thereof and substituting the following therefor: "For each Plan Year ending before July 1, 1994, a Member's Annual Earnings shall be limited for all purposes under the Plan to $200,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code). For each Plan Year beginning after June 30, 1994 (and for each prior Plan Year in which Annual Earnings are taken into account in computing benefits in any Plan Year beginning after June 30, 1994), Annual Earnings shall be limited for all purposes under the Plan to $150,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code.) In applying the above limitations, the special rules of Section 5.06 below shall apply. In addition, the family aggregation rules of Code section 414(q)(6) shall apply, except that in applying such rules, the term 'family' shall include only the spouse of the Member and any lineal descendants who have not attained age 19 before the close of the Plan Year." 3. Effective July 1, 1993, Section 2.11 is amended by deleting subsections (c) and (d) and by substituting the following therefor: "(c) employed in a location to which the Plan has not been specifically extended by the Board of Trustees, (d) considered an Employee solely by reason of the leased-employee rules of section 414(n) of the Code and the second sentence of paragraph 2.12, or (e) employed to perform or complete a specific project, and classified as a temporary employee for other purposes of the Employer." 4. Section 2.11 is amended further by inserting the following sentences at the end thereof: "Effective July 1, 1993, any Employee who is employed by Midland Enterprises Inc. or a subsidiary thereof with a salary grade of 18 or 19 shall be considered an Eligible Employee under this Plan. Effective January 1, 1994, the term Eligible Employee shall also include the employee(s) of WaterPro Supplies Corporation listed on Schedule A." 5. Effective July 1, 1994, Section 2.19(d) is amended by inserting, immediately following subparagraph (iii), the following subparagraph (iv): "(iv) pursuant to an approved leave of absence under the terms of the Family and Medical Leave Act, but only to the extent required by that Act as reasonably determined by the Administrator,". 6. Effective July 1, 1994, Section 2.19 is further amended by inserting the following at the end thereof: "Notwithstanding the foregoing and except as otherwise provided by law, no more than 501 Hours of Service will be credited to any Employee on account of any single continuous period during which the Employee performs no duties. Except as hereinafter provided, Hours of Service to be credited to an Employee under (a), (b) or (c) above will be calculated and credited pursuant to paragraphs (b) and (c) of section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by reference." 7. Effective July 1, 1994, Article V is amended by adding at the end thereof the following new section: "5.06 Members Subject to Limitations on Annual Earnings. Notwithstanding anything to the contrary in Sections 5.01 through 5.05, (a) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1989 exceeded $200,000, the Member's accrued benefit at any time after June 30, 1989 and before July 1, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time during such period, shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the Member's accrued benefit as of June 30, 1989. (b) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1994, exceeded $150,000, the Member's accrued benefit at any time after June 30, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time after that date shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the sum of (i) the Member's accrued benefit as of June 30, 1994, determined after giving effect to Section 5.06(a), and (ii) the amount determined under the applicable formula as of the date benefits are determined, taking into account only Years of Benefit Service after June 30, 1994. (c) For purposes of (b)(2) above, Years of Benefit Service shall be determined by treating the Year of Benefit Service that includes June 30, 1994 as consisting of two fractional years, the earlier of which shall be included in Years of Benefit Service in determining the Member's accrued benefit as of June 30, 1994 and the later of which shall be included in Years of Benefit Service after June 30, 1994." 8. Effective July 1, 1994, Article VII is renamed "Forms of Benefit". 9. Effective with respect to individuals whose annuity starting date (as defined in Code section 417(f)(2)) is on or after July 1, 1994, Article VII is further amended by adding the following at the end thereof: "7.07 Optional Forms of Benefit for Non-Married Members. In lieu of a monthly benefit payable for his lifetime only, a Member who is not married on his annuity starting date may elect (in the manner prescribed by the Administrator) to receive: (a) a reduced monthly benefit during his lifetime with one-half of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (b) a reduced monthly benefit during his lifetime with two-thirds of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (c) a reduced monthly benefit during his lifetime with the entire such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime. Notwithstanding any other provision of the Plan to the contrary, the provisions of this Section 7.07 shall apply only with respect to Beneficiaries who are "designated beneficiaries" within the meaning of Code section 401(a)(9)(E) and the rules promulgated thereunder, and the forms of benefit described in (b) and (c) above shall be available only with respect to Beneficiaries whose age is such as to satisfy the incidental death benefit requirements under section 401(a)(9) of the Code (as construed by said rules)." 10. Effective January 1, 1993, Article VII is amended further by adding at the end thereof the following: "7.08 Direct Rollovers. Notwithstanding any provision of the Plan to the contrary that may otherwise limit a distributee's election under this Section 7.08, for distributions made on or after January 1, 1993, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution, subject to the limitations imposed in temporary Treasury Regulation section 1.401(a)(31)-1T, paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 7.08, the following definitions shall apply: (a) An 'eligible rollover distribution' is any distribution of all or any portion of the distributee's benefit, provided such portion is equal to or in excess of $200, except that an eligible rollover distribution does not include the following: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives of the distributee and the distributee's beneficiary, or for a specified period of ten years or more, or any distribution to the extent such distribution is required under Code section 401(a)(9). (b) With respect to a distributee other than the Member's surviving spouse, an 'eligible retirement plan' is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a). With respect to a distributee who is a Member's surviving spouse, an eligible retirement plan is an individual retirement account or an individual retirement annuity. (c) A 'distributee' includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is an alternate payee under a Qualified Domestic Relations Order described in Section 2.24A above, are distributees with regard to the interest of the spouse or former spouse. (d) A 'direct rollover' is a payment by the Plan to the eligible retirement plan specified by the distributee." 11. Effective July 1, 1994, Section 9.02 is amended by adding immediately after the phrase "Member's severance from service for any reason" the following: ", including death". 12. Effective July 1, 1994, Section 9.02 is amended further by deleting the first sentence of the second paragraph thereof in its entirety and by substituting the following therefor: "For purposes of determining the present value of an individual's benefit or the actuarial equivalency of an individual's benefit or the actuarial equivalency of alternative forms under this paragraph, the same interest and mortality assumptions as are specified in paragraph 15.04 shall be applied to the Member's accrued benefit payable commencing at the later of retirement or the Member's Normal Retirement Date, provided that the interest assumption used for purposes of this paragraph 9.02 shall not be greater than the schedule of immediate and deferred interest rate(s) which would be used by the Pension Benefit Guaranty Corporation, as of the beginning of the Plan Year in which the lump sum is paid, for purposes of determining the present value of benefits on plan termination." 13. Effective July 1, 1994, Section 15.04 is amended by deleting the phrase "retires, separates from service or dies" in the second sentence thereof and by substituting the following therefor: "separates from service (whether by death, retirement or otherwise)". 14. Effective January 1, 1994, the Plan is amended by inserting the following at the end thereof: EX-10.19.1 5 MATERIALS CONTRACTS Exhibit 10.19.1 MIDLAND ENTERPRISES INC. SALARIED RETIREMENT PLAN First Amendment Pursuant to Section 14.01 of the Midland Enterprises Inc. Salaried Retirement Plan, said Plan is hereby amended as follows: 1. Effective July 1, 1994, Section 2.03 is amended by inserting the following at the end of the first paragraph thereof: "Notwithstanding the foregoing, the Annual Earnings of an Eligible Employee who is participating in the Employer's 'Sales Department Compensation Program' as of each Earnings Measurement Date shall mean such Employee's annual salary rate plus the annual performance bonus awarded to him under such program for the calendar year immediately preceding such Earnings Measurement Date." 2. Effective July 1, 1994, Section 2.03 is amended further by deleting the last paragraph thereof and substituting the following therefor: "For each Plan Year ending before July 1, 1994, a Member's Annual Earnings shall be limited for all purposes under the Plan to $200,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code). For each Plan Year beginning after June 30, 1994 (and for each prior Plan Year in which Annual Earnings are taken into account in computing benefits in any Plan Year beginning after June 30, 1994), Annual Earnings shall be limited for all purposes under the Plan to $150,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code.) In applying the above limitations, the special rules of Section 5.06 below shall apply. In addition, the family aggregation rules of Code section 414(q)(6) shall apply, except that in applying such rules, the term 'family' shall include only the spouse of the Member and any lineal descendants who have not attained age 19 before the close of the Plan Year." 3. Effective July 1, 1993, Section 2.11 is amended by deleting subsections (c) and (d) and by substituting the following therefor: "(c) employed in a location to which the Plan has not been specifically extended by the Board of Directors, (d) considered an Employee solely by reason of the leased-employee rules of section 414(n) of the Code and the second sentence of paragraph 2.12, or (e) employed to perform or complete a specific project or projects and classified as a temporary employee for other purposes of the Employer." 4. Effective July 1, 1993, Section 2.11 is amended further by inserting after the second sentence, the following: "Effective on or after July 1, 1993, any Employee who is employed by Midland Enterprises Inc. or a subsidiary thereof with a salary grade level of 18 or 19 shall not be considered an Eligible Employee under the Plan." 5. Effective July 1, 1994, Section 2.19(d) is amended by inserting, immediately following subparagraph (iii), the following subparagraph (iv): "(iv) pursuant to an approved leave of absence under the terms of the Family and Medical Leave Act, but only to the extent required by that Act as reasonably determined by the Administrator,". 6. Effective July 1, 1994, Section 2.19 is further amended by inserting the following at the end thereof: "Notwithstanding the foregoing and except as otherwise provided by law, no more than 501 Hours of Service will be credited to any Employee on account of any single continuous period during which the Employee performs no duties. Except as hereinafter provided, Hours of Service to be credited to an Employee under (a), (b) or (c) above will be calculated and credited pursuant to paragraphs (b) and (c) of section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by reference." 7. Effective July 1, 1994, Article V is amended by adding at the end thereof the following new section: "5.06 Members Subject to Limitations on Annual Earnings. Notwithstanding anything to the contrary in Sections 5.01 through 5.05, (a) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1989 exceeded $200,000, the Member's accrued benefit at any time after June 30, 1989 and before July 1, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time during such period, shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the Member's accrued benefit as of June 30, 1989. (b) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1994, exceeded $150,000, the Member's accrued benefit at any time after June 30, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time after that date shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the sum of (i) the Member's accrued benefit as of June 30, 1994, deter- mined after giving effect to Section 5.06(a), and (ii) the amount determined under the applicable formula as of the date benefits are determined, taking into account only Years of Benefit Service after June 30, 1994. (c) For purposes of (b)(2) above, Years of Benefit Service shall be determined by treating the Year of Benefit Service that includes June 30, 1994 as consisting of two fractional years, the earlier of which shall be included in Years of Benefit Service in determining the Member's accrued benefit as of June 30, 1994 and the later of which shall be included in Years of Benefit Service after June 30, 1994." 8. Effective July 1, 1994, Article VII is renamed "Forms of Benefit". 9. Effective with respect to individuals whose annuity starting date (as defined in Code section 417(f)(2)) is on or after July 1, 1994, Article VII is further amended by adding the following at the end thereof: "7.07 Optional Forms of Benefit for Non-Married Members. In lieu of a monthly benefit payable for his lifetime only, a Member who is not married on his annuity starting date may elect (in the manner prescribed by the Administrator) to receive: (a) a reduced monthly benefit during his lifetime with one-half of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (b) a reduced monthly benefit during his lifetime with two-thirds of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (c) a reduced monthly benefit during his lifetime with the entire such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime. Notwithstanding any other provision of the Plan to the contrary, the provisions of this Section 7.07 shall apply only with respect to Beneficiaries who are "designated beneficiaries" within the meaning of Code section 401(a)(9)(E) and the rules promulgated thereunder, and the forms of benefit described in (b) and (c) above shall be available only with respect to Beneficiaries whose age is such as to satisfy the incidental death benefit requirements under section 401(a)(9) of the Code (as construed by said rules)." 10. Effective January 1, 1993, Article VII is amended further by adding at the end thereof the following: "7.08 Direct Rollovers. Notwithstanding any provision of the Plan to the contrary that may otherwise limit a distributee's election under this Section 7.08, for distributions made on or after January 1, 1993, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution, subject to the limitations imposed in temporary Treasury Regulation section 1.40(a)(31)-1T, paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 7.08, the following definitions shall apply: (a) An 'eligible rollover distribution' is any distribution of all or any portion of the distributee's benefit, provided such portion is equal to or in excess of $200, except that an eligible rollover distribution does not include the following: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives of the distributee and the distributee's beneficiary, or for a specified period of ten years or more, or any distribution to the extent such distribution is required under Code section 401(a)(9). (b) With respect to a distributee other than the Member's surviving spouse, an 'eligible retirement plan' is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a). With respect to a distributee who is a Member's surviving spouse, an eligible retirement plan is an individual retirement account or an individual retirement annuity. (c) A 'distributee' includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is an alternate payee under a Qualified Domestic Relations Order described in Section 2.24A above, are distributees with regard to the interest of the spouse or former spouse. (d) A 'direct rollover' is a payment by the Plan to the eligible retirement plan specified by the distributee." 11. Effective July 1, 1994, Section 9.02 is amended by adding immediately after the phrase "Member's severance from service for any reason" the following:, "including death". 12. Effective July 1, 1994, Section 9.02 is amended further by deleting the first sentence of the second paragraph thereof in its entirety and by substituting the following therefor: "For purposes of determining the present value of an individual's benefit or the actuarial equivalency of an individual's benefit or the actuarial equivalency of alternative forms under this paragraph, the same interest and mortality assumptions as are specified in paragraph 15.04 shall be applied to the Member's accrued benefit payable commencing at the later of retirement or the Member's Normal Retirement Date, provided that the interest assumption used for purposes of this paragraph 9.02 shall not be greater than the schedule of immediate and deferred interest rate(s) which would be used by the Pension Benefit Guaranty Corporation, as of the beginning of the Plan Year in which the lump sum is paid, for purposes of determining the present value of benefits on plan termination." 13. Effective July 1, 1994, Section 15.04 is amended by deleting the phrase "retires, separates from service or dies" in the second sentence thereof and by substituting the following therefor: "separates from service (whether by death, retirement or otherwise)". IN WITNESS WHEREOF, Midland Enterprises Inc. has caused this instrument to be duly executed as of this 4th day of November, 1994. MIDLAND ENTERPRISES INC. By: /s/ W. H. Ferguson Title: V.P. Human Resources EX-10.20.1 6 MATERIALS CONTRACTS Exhibit 10.20.1 BOSTON GAS COMPANY RETIREMENT PLAN First Amendment Pursuant to Section 14.01 of the Boston Gas Company Retirement Plan, said Plan is hereby amended as follows: 1. Effective July 1, 1994, Section 2.03 is amended by deleting the last paragraph thereof and substituting the following therefor: "For each Plan Year ending before July 1, 1994, a Member's Annual Earnings shall be limited for all purposes under the Plan to $200,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code). For each Plan Year beginning after June 30, 1994 (and for each prior Plan Year in which Annual Earnings are taken into account in computing benefits in any Plan Year beginning after June 30, 1994), Annual Earnings shall be limited for all purposes under the Plan to $150,000 (or such larger amount as the Secretary of the Treasury may determine for such Plan Year under section 401(a)(17) of the Code.) In applying the above limitations, the special rules of Section 5.06 below shall apply. In addition, the family aggregation rules of Code section 414(q)(6) shall apply, except that in applying such rules, the term 'family' shall include only the spouse of the Member and any lineal descendants who have not attained age 19 before the close of the Plan Year." 2. Effective July 1, 1993, Section 2.11 is amended by deleting subsections (c) and (d) and by substituting the following therefor: "(c) employed in a location to which the Plan has not been specifically extended by the Board of Directors, (d) considered an Employee solely by reason of the leased-employee rules of section 414(n) of the Code and the second sentence of paragraph 2.12, or (e) employed to perform or complete a specific project or projects, and classified as a temporary employee for other purposes of the Employer." 3. Effective July 1, 1994, Section 2.19(d) is amended by inserting, immediately following subparagraph (iii), the following subparagraph (iv): "(iv) pursuant to an approved leave of absence under the terms of the Family and Medical Leave Act, but only to the extent required by that Act as reasonably determined by the Administrator,". 4. Effective July 1, 1994, Section 2.19 is further amended by inserting the following at the end thereof: "Notwithstanding the foregoing and except as otherwise provided by law, no more than 501 Hours of Service will be credited to any Employee on account of any single continuous period during which the Employee performs no duties. Except as hereinafter provided, Hours of Service to be credited to an Employee under (a), (b) or (c) above will be calculated and credited pursuant to paragraphs (b) and (c) of section 2530.200b-2 of the Department of Labor Regulations, which are incorporated herein by reference." 5. Effective July 1, 1994, Article V is amended by adding at the end thereof the following new section: "5.06 Members Subject to Limitations on Annual Earnings. Notwithstanding anything to the contrary in Sections 5.01 through 5.05, (a) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1989 exceeded $200,000, the Member's accrued benefit at any time after June 30, 1989 and before July 1, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time during such period, shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the Member's accrued benefit as of June 30, 1989. (b) in the case of a Member whose Annual Earnings for any Plan Year prior to July 1, 1994, exceeded $150,000, the Member's accrued benefit at any time after June 30, 1994, and the amount of benefits determined for the Member under Sections 5.01 through 5.05 at any time after that date shall be the greater of: (1) the amount determined under the applicable formula taking into account the Member's total Years of Benefit Service, or (2) the sum of (i) the Member's accrued benefit as of June 30, 1994, determined after giving effect to Section 5.06(a), and (ii) the amount determined under the applicable formula as of the date benefits are determined, taking into account only Years of Benefit Service after June 30, 1994. (c) For purposes of (b)(2) above, Years of Benefit Service shall be determined by treating the Year of Benefit Service that includes June 30, 1994 as consisting of two fractional years, the earlier of which shall be included in Years of Benefit Service in determining the Member's accrued benefit as of June 30, 1994 and the later of which shall be included in Years of Benefit Service after June 30, 1994." 6. Effective July 1, 1994, Article VII is renamed "Forms of Benefit". 7. Effective with respect to individuals whose annuity starting date (as defined in Code section 417(f)(2)) is on or after July 1, 1994, Article VII is further amended by adding the following at the end thereof: "7.07 Optional Forms of Benefit for Non-Married Members. In lieu of a monthly benefit payable for his lifetime only, a Member who is not married on his annuity starting date may elect (in the manner prescribed by the Administrator) to receive: (a) a reduced monthly benefit during his lifetime with one-half of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (b) a reduced monthly benefit during his lifetime with two-thirds of such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime, or (c) a reduced monthly benefit during his lifetime with the entire such reduced benefit to continue after his death to his designated Beneficiary for the Beneficiary's lifetime. Notwithstanding any other provision of the Plan to the contrary, the provisions of this Section 7.07 shall apply only with respect to Beneficiaries who are "designated beneficiaries" within the meaning of Code section 401(a)(9)(E) and the rules promulgated thereunder, and the forms of benefit described in (b) and (c) above shall be available only with respect to Beneficiaries whose age is such as to satisfy the incidental death benefit requirements under section 401(a)(9) of the Code (as construed by said rules)." 8. Effective January 1, 1993, Article VII is amended further by adding at the end thereof the following: "7.08 Direct Rollovers. Notwithstanding any provision of the Plan to the contrary that may otherwise limit a distributee's election under this Section 7.08, for distributions made on or after January 1, 1993, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an eligible rollover distribution, subject to the limitations imposed in temporary Treasury Regulation section 1.401(a)(31)-1T, paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section 7.08, the following definitions shall apply: (a) An 'eligible rollover distribution' is any distribution of all or any portion of the distributee's benefit, provided such portion is equal to or in excess of $200, except that an eligible rollover distribution does not include the following: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives of the distributee and the distributee's beneficiary, or for a specified period of ten years or more, or any distribution to the extent such distribution is required under Code section 401(a)(9). (b) With respect to a distributee other than the Member's surviving spouse an 'eligible retirement plan' is an individual retirement account described in Code section 408(a), an individual retirement annuity described in Code section 408(b), an annuity plan described in Code section 403(a), or a qualified trust described in Code section 401(a). With respect to a distributee who is a Member's surviving spouse, an eligible retirement plan is an individual retirement account or an individual retirement annuity. (c) A 'distributee' includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is an alternate payee under a Qualified Domestic Relations Order described in Section 2.24A above, are distributees with regard to the interest of the spouse or former spouse. (d) A 'direct rollover' is a payment by the Plan to the eligible retirement plan specified by the distributee." 9. Effective July 1, 1994, Section 9.02 is amended by adding immediately after the phrase "Member's severance from service for any reason" the following: ", including death". 10. Effective July 1, 1994, Section 9.02 is amended further by deleting the first sentence of the second paragraph thereof in its entirety and by substituting the following therefor: "For purposes of determining the present value of an individual's benefit or the actuarial equivalency of an individual's benefit or the actuarial equivalency of alternative forms under this paragraph, the same interest and mortality assumptions as are specified in paragraph 15.04 shall be applied to the Member's accrued benefit payable commencing at the later of retirement or the Member's Normal Retirement Date, provided that the interest assumption used for purposes of this paragraph 9.02 shall not be greater than the schedule of immediate and deferred interest rate(s) which would be used by the Pension Benefit Guaranty Corporation, as of the beginning of the Plan Year in which the lump sum is paid, for purposes of determining the present value of benefits on plan termination." 11. Effective July 1, 1994, Section 15.04 is amended by deleting the phrase "retires, separates from service or dies" in the second sentence thereof and by substituting the following therefor: "separates from service (whether by death, retirement or otherwise)". 12. Effective May 21, 1993, the Plan is amended by inserting at the end thereof, the following Exhibit A: "Exhibit A Reference is made to the 1993 negotiated changes to the Boston Gas Company Union Pension Plan (the "Union Plan"). For purposes of determining whether the Normal Retirement Benefit of a Member under Section 5.01 of the Plan, as calculated before applying the last two sentences of that Section (the "tentative normal retirement benefit"), is less than the normal retirement benefit to which the Member would have been entitled under the Union Plan assuming membership in that plan, the benefits under the two plans shall be compared as follows: (a) The normal retirement benefit under the Union Plan shall be determined taking into account, to the extent applicable, the benefit increase scheduled for March 25, 1996 and converting the resulting projected benefit to a level benefit using the actuarial assumptions applicable for determining actuarial equivalency under the Plan. (b) The present value of the Member's tentative normal retirement benefit under the Plan shall be compared to the present value of the benefit determined under (a) above. If the present value of the Member's tentative normal retirement benefit exceeds the present value of the benefit determined under (a) above, the Member's Normal Retirement Benefit under Section 5.01 shall equal the Member's tentative normal retirement benefit. (c) If the present value of the benefit determined under (a) above exceeds the present value of the Member's tentative normal retirement benefit, the Member's Normal Retirement Benefit under Section 5.01 shall be the benefit determined under (a) above. (d) In determining the Early Retirement Benefit under Section 5.03 of any Member whose Normal Retirement Benefit is determined under (c) above, the following steps shall be taken: (i) First, compare (A) the present value at early retirement of the Member's tentative normal retirement benefit, reduced using the early retirement factors set forth in Section 5.03, plus the Member's Social Security supplement under Section 5.031, to (B) the present value at early retirement of the benefit determined under (a) above, similarly reduced for early retirement using the 5.03 factors. (ii) If the amount determined under (i)(A) exceeds the amount determined under (i)(B), the benefit payable to the Member at early retirement shall equal the Member's tentative normal retirement benefit reduced as prescribed under Section 5.03, including the Member's Social Security supplement under Section 5.031. (iii) If the amount determined under (i)(B) exceeds the amount determined under (i)(A), the benefit payable to the Member at early retirement shall be the actuarial equivalent of the amount determined under (i)(B) and the Member shall not be entitled to the separate Social Security supplement under Section 5.031. IN WITNESS WHEREOF, Boston Gas Company has caused this instrument to be duly executed as of this 5th day of December, 1994. BOSTON GAS COMPANY By: /s/ Chester R. Messer Title: /s/ President EX-13.1 7 EXHIBIT 13.1 Cash Dividends Per Share Quarter 1994 1993 First $ .35 $ .35 Second .35 .35 Third .35 .35 Fourth .35 .35 Total $1.40 $1.40 Stock Price Range Quarter 1994 1993 High Low High Low First $27-3/4 $23-3/4 $29-3/8 $26-3/8 Second 27-1/8 22-3/8 30 26-3/8 Third 26-5/8 22-1/4 29-1/4 25-7/8 Fourth 28 25 29 25-1/2 EX-21.1 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The following table shows all direct and indirect subsidiaries of the registrant except (1) subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a significant subsidiary, and (2) certain consolidated wholly-owned multiple subsidiaries carrying on the same line of business as to which certain summary information appears below. Jurisdiction of Incorporation Boston Gas Company Massachusetts Midland Enterprises Inc. Delaware 14 subsidiaries engaged in water transportation and related activities Water Products Group Incorporated Massachusetts WaterPro Supplies Corporation Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----