-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PDwiNn4GAbYpt3AaMFY+pTHE4BJxNImuwQSBbpd4TwXDVbOssob+X9N3YOfdVHvq yGQVy543P2qmlbQDtVZfOA== 0000950156-99-000202.txt : 19990308 0000950156-99-000202.hdr.sgml : 19990308 ACCESSION NUMBER: 0000950156-99-000202 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990305 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: SEC FILE NUMBER: 001-02297 FILM NUMBER: 99557757 BUSINESS ADDRESS: STREET 1: 9 RIVERSIDE RD CITY: WESTON STATE: MA ZIP: 02493 BUSINESS PHONE: 7816472300 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, 1998 ---------------- COMMISSION FILE NUMBER 1-2297 EASTERN ENTERPRISES 9 Riverside Road, Weston, Massachusetts 02493 (781) 647-2300 MASSACHUSETTS 04-1270730 (State of organization) (I.R.S. Employer Identification No.) ---------------- Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED Common Stock, par value $1.00 per share New York Stock Exchange Common Stock Purchase Rights, no par value Boston Stock Exchange Pacific Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $901 million as of March 3, 1999. There were 22,603,213 shares of Common Stock, par value $1.00 per share, outstanding as of March 3, 1999. ---------------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual report to shareholders for the year ended December 31, 1998 are incorporated by reference into Part II of this Report. Portions of the Registrant's 1999 definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 1999 are incorporated by reference into Part III of this Report. ---------------- 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, 1998 TABLE OF CONTENTS PAGE NO. PART I Item 1. Business 10-K/1 Natural Gas Distribution 10-K/1 Marine Transportation 10-K/6 General 10-K/8 Item 2. Properties 10-K/8 Item 3. Legal Proceedings 10-K/8 Item 4. Submission of Matters to a Vote of Security Holders 10-K/8 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 10-K/9 Item 6. Selected Financial Data 10-K/9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-K/9 Item 8. Financial Statements and Supplementary Data 10-K/15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 10-K/36 PART III Item 10. Directors and Executive Officers of the Registrant 10-K/36 Item 11. Executive Compensation 10-K/36 Item 12. Security Ownership of Certain Beneficial Owners and Management 10-K/36 Item 13. Certain Relationships and Related Transactions 10-K/36 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 10-K/36 PART I ITEM 1. BUSINESS 1(a) GENERAL Eastern Enterprises ("Eastern") is an unincorporated voluntary association (commonly referred to as a "Massachusetts business trust") established and existing under a Declaration of Trust dated July 18, 1929, as from time to time amended. Eastern's principal subsidiaries are Boston Gas Company ("Boston Gas"), Essex Gas Company ("Essex Gas") and Midland Enterprises Inc. ("Midland"). Boston Gas and Essex Gas are regulated utilities that distribute natural gas in and around Boston, Massachusetts. Midland is engaged in barge transportation, principally on the Ohio and Mississippi river systems. Other subsidiaries include ServicEdge Partners, Inc. ("ServicEdge") and AMR Data Corporation ("AMR Data"). ServicEdge offers heating, ventilation and air conditioning equipment installation and services to customers in eastern Massachusetts. AMR Data provides customized metering equipment and services primarily to municipal utilities in the Northeast. On September 30, 1998, Eastern completed the acquisition of Essex Gas by exchanging 2.0 million shares of Eastern common stock for all of the common stock of Essex Gas. The transaction was accounted for as a pooling of interests, as described in Note 2 of Notes to Financial Statements. Such information is incorporated herein by reference. In October 1998 Eastern signed a definitive agreement to acquire Colonial Gas Company ("Colonial Gas") for a combination of stock and cash, as described in Note 3. Formed in 1849, Colonial Gas distributes natural gas to approximately 155,000 residential and commercial customers in 24 Massachusetts communities located northwest of Boston and on Cape Cod. Colonial Gas also owns and operates Transgas, Inc., the nation's largest over-the-road transporter of liquefied natural gas ("LNG"). The acquisition of Colonial Gas was approved by shareholders of both companies on February 10, 1999. The merger is expected to close by mid-year, subject to the receipt of satisfactory regulatory approvals. Eastern provides management and staff services to its operating subsidiaries. Boston Gas, Essex Gas and Midland are financed primarily through their own internally generated funds and the issuance of their own funded debt, which is not guaranteed by Eastern. The debt instruments relating to Boston Gas, Essex Gas and Midland borrowings generally contain restrictive covenants, including restrictions on the payment of dividends to Eastern. In the opinion of management, none of these restrictions has any material impact upon the operations of Eastern and its subsidiaries. The information in this Form 10-K should be read in conjunction with the "Forward-Looking Information" in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations. 1(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information with respect to this item may be found in Note 4. 1(c) DESCRIPTION OF BUSINESS NATURAL GAS DISTRIBUTION Eastern's natural gas distribution segment ("LDC segment") is comprised of Boston Gas and Essex Gas, which together are engaged in the transportation and sale of natural gas to approximately 580,000 residential, commercial, and industrial customers in Boston and 90 other communities in eastern and central Massachusetts. The LDC segment also sells natural gas for resale in Massachusetts and other states. Boston Gas serves over 535,000 customers and is the largest natural gas distribution company in New England. Boston Gas has been in business for 176 years and is the second oldest gas company in the United States. Since 1929, all of the common stock of Boston Gas has been owned by Eastern. As described above, Essex Gas was acquired by Eastern in September 1998. Essex Gas serves approximately 44,000 customers. For definitions of unfamiliar terms, see the Glossary on page 5 of the Form 10-K. The LDC segment provides local transportation services and gas supply for all customer classes. The LDC segment's services are available on a firm and non-firm basis. Firm transportation services and sales are provided under rate tariffs and/or contracts filed with the Massachusetts Department of Telecommunications and Energy ("DTE"; formerly the Department of Public Utilities), that typically obligate the LDC segment to provide service without interruption throughout the year. Non-firm transportation services and sales are generally provided to large commercial/industrial customers who can use gas or another energy source interchangeably. Non-firm services are provided through individually negotiated contracts and, in most cases, the price charged takes into account the price of the customer's alternative fuel. 10-K/1 The LDC segment offers unbundled services to all commercial/industrial users, who are allowed to purchase local transportation from the LDC segment separately from the purchase of gas supply, which the customer may buy from third party suppliers. The LDC segment views these third party suppliers as partners in marketing gas and increasing throughput and expects to work closely with them to facilitate the unbundling process and ensure a smooth transition, especially in the tracking and processing of transactions. The LDC segment has also implemented a program to educate commercial/industrial customers about the opportunity to purchase gas from third-party suppliers, while still relying on the utility for delivery. As of December 31, 1998, the LDC segment had approximately 4,400 firm transportation customers. The chart below reflects the migration of customers to transportation-only service. Service to all residential customers currently is on a bundled basis. While the migration of customers from bundled sales to transportation-only service will lower the LDC segment's revenues, it has no impact on its operating earnings. The LDC segment earns all of its margins on the local distribution of gas and none on the resale of the commodity itself. (Bar Chart) FIRM THROUGHPUT (IN BCF) BUNDLED TRANSPORTATION- SALES ONLY ----- ---- 1994 87.30 13.80 1995 83.10 16.90 1996 82.30 42.10 1997 78.70 47.00 1998 68.40 44.60 (Bar Chart) BOSTON AREA WEATHER (% VARIANCE FROM NORMAL) 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- 1.00% 1.00% 5.00% 3.00% -9.00% MARKETS AND COMPETITION The LDC segment competes with other fuel distributors, particularly oil dealers, throughout its service territory. GAS THROUGHPUT The following table provides information about the LDC segment's throughput during the three years 1996-1998, as measured in billions of cubic feet of natural gas at 1,000 Btu per cubic foot ("Bcf"). The reduction in throughput from 1997 to 1998 primarily reflects the warmer weather in 1998, as shown in the chart above. Years Ended December 31, 1998 1997 1996 ---- ---- ---- Residential 41.3 45.4 46.5 Commercial/Industrial 30.2 38.5 42.4 Off-system sales 12.7 7.4 12.2 ----- ----- ----- Total sales 84.2 91.3 101.1 Transportation of customer-owned gas 65.6 80.9 61.6 Less: Off-system sales (12.7) (7.4) (12.2) ----- ----- ----- Total throughput 137.1 164.8 150.5 ===== ===== ===== Firm throughput 113.0 125.7 124.5 ===== ===== ===== The table above excludes the cumulative effect of adopting the accrual method of revenue recognition, as discussed in Note 13. The one-time effect of this change increased residential, commercial/industrial and transportation throughput in 1998 by 3.3 Bcf, 1.4 Bcf and 0.4 Bcf, respectively. Residential customers comprise 92% of the LDC segment's customer base, while commercial/industrial establishments account for the remaining 8%. Volumetrically, residential customers account for 30% of total throughput and 37% of firm throughput, while commercial/industrial customers account for 70% of total throughput and 63% of firm throughput. In 1998, approximately 68% of the commercial/industrial customers' total throughput was local transportation-only service. No customer, or group of customers under common control, accounted for more than 2% of total firm revenues in 1998. Firm throughput for Boston Edison accounted for 40% of the total transportation of customer-owned gas. 10-K/2 GAS SUPPLY The following table provides information about the LDC segment's sources of supply during 1996-1998 in Bcf: Years Ended December 31, 1998 1997 1996 ---- ---- ---- Natural gas purchases 88.4 92.9 99.2 LNG purchases 0.6 1.6 3.5 ---- ---- ----- Total purchases 89.0 94.5 102.7 Change in storage gas (1.1) 3.2 (2.3) Company use, unbilled and other (3.7) (6.4) .7 ---- ---- ----- Total sales 84.2 91.3 101.1 ==== ==== ===== Year to year variations in storage gas and unbilled gas reflect variations in end-of-year customer requirements, due principally to weather. Given the ready availability of supply during 1998, the LDC segment purchased approximately two-thirds of its peak pipeline supplies under short-term and spot contracts. The balance of peak day pipeline requirements is purchased directly from domestic and Canadian producers and marketers pursuant to long- term contracts which have been reviewed and approved by the DTE or by the Federal Energy Regulatory Commission ("FERC"). Pipeline supplies are transported on interstate pipeline systems to the LDC segment's service territory pursuant to long-term contracts. FERC-approved tariffs provide for fixed demand charges for the firm capacity rights under these contracts. The daily and annual capacity and the contract expiration dates of the interstate pipeline companies that provide firm transportation service to the LDC segment's service territory, are as follows: Capacity (in Bcf) ----------------------- Expiration Pipeline Daily Annual Dates - -------- ----- ------ ----- Algonquin Gas Transmission Company ("Algonquin") 0.28 87.4 1999-2012 Tennessee Gas Pipeline Company ("Tennessee") 0.21 77.3 2000-2012 ---- ----- 0.49 164.7 ==== ===== In addition, the LDC segment has firm capacity contracts on interstate pipelines upstream of the Algonquin and Tennessee pipelines to transport natural gas purchased by the LDC segment from producing regions to the Algonquin and Tennessee pipelines. The expiration dates for these contracts are similar to those included in the above table. The LDC segment has contracted with pipeline companies and others for the storage of natural gas in underground storage fields located in Pennsylvania, New York, Maryland and West Virginia. These contracts provide for storage capacity of 18.5 Bcf and peak day withdrawal capacity of 0.17 Bcf. The LDC segment utilizes its existing capacity contracts to transport gas from the storage fields to its service territory. Supplemental supplies of LNG and propane are purchased and produced from foreign and domestic sources. Peak day throughput was 0.70 Bcf, 0.71 Bcf, and 0.74 Bcf in 1998, 1997, and 1996, respectively. The LDC segment provides for peak period demand through a least-cost portfolio of pipeline, storage and supplemental supplies. The LDC segment considers its annual and peak day sendout capacity, based on its total supply resources, to be adequate to meet the requirements of its firm customers. REGULATION The LDC segment's operations are subject to Massachusetts statutes applicable to regulated gas utilities. Rates, gas purchases, pipeline safety regulations, issuances of securities and affiliated party transactions are regulated by the DTE. Rates for firm transportation and sales provided by the LDC segment are subject to approval by, and are on file with, the DTE. In addition, the LDC segment has a cost of gas adjustment clause ("CGAC") which allows for the adjustment of billing rates for firm gas sales to enable it to recover the actual cost of gas delivered to firm customers, including the demand charges for capacity on the interstate pipeline system and certain other charges. Boston Gas' rates for local transportation service are governed by a five- year performance-based rate plan approved by the DTE in 1996 in its last rate proceeding in D.P.U. 96-50. Under this plan, Boston Gas' local transportation rates are recalculated annually to reflect inflation for the previous 12 months, minus a productivity factor of 1.5 percent. The plan also provides for penalties if Boston Gas fails to meet specified service quality measures, with a maximum potential exposure of $4.9 million. Rates are capped such that 25% of earnings in 10-K/3 excess of a 15% return on ending equity are to be passed back to ratepayers. Similarly, ratepayers would absorb 25% of any shortfall below a 7% return on ending equity. The final year of the plan ends on October 31, 2002. Boston Gas has appealed the DTE's order in D.P.U. 96-50 to the Massachusetts Supreme Judicial Court. Because of the low current rate of inflation, the calculation for 1998 resulted in a minor rate reduction of approximately $100,000. Boston Gas continues to recover its gas costs under its CGAC. Essex Gas' rates for local transportation service are governed by a ten- year rate plan approved by the DTE in conjunction with its approval of Eastern's acquisition of Essex Gas. The plan immediately reduced rates for Essex Gas customers by 5% reflecting expected gas supply cost savings passed back through the CGAC. The plan freezes base rates, which were set in a December 1996 rate order, through 2008. The freeze on base rates is subject to adjustment only to take into account certain exogenous factors, such as changes in tax laws, accounting changes, or regulatory, judicial or legislative changes. All of Essex Gas' administrative, operations and maintenance functions have been integrated with those of Boston Gas. In July 1997, the DTE directed all ten investor-owned gas distribution companies ("gas utilities") in Massachusetts to undertake a collaborative process with other stakeholders, including third party suppliers, customers and others, to develop common principles under which comprehensive gas service unbundling might proceed. A settlement on model terms and conditions for unbundled transportation service jointly agreed upon by the gas utilities and the stakeholders was approved by the DTE on November 30, 1998. Further, on February 1, 1999, the DTE ordered that for a five-year transition period, Massachusetts gas utility contractual commitments for upstream capacity will be assigned on a mandatory, pro rata basis to marketers selling gas to each gas utility's customers. The mandatory assignment method assures that the costs of upstream capacity purchased by a gas utility to serve firm customers will not be absorbed as stranded costs by the gas utility or its remaining bundled customers during the five-year transition period. Under the DTE's order, during the transition period the gas utilities will retain primary responsibility for upstream capacity planning and procurement to support customer requirements and growth. In year three of the transition period, the DTE intends to evaluate the extent to which the upstream capacity market for Massachusetts is workably competitive and shorten or lengthen the transition period accordingly. While the DTE's order assures the recoverability of stranded costs for capacity throughout the transition period, there can be no assurance about the recoverability of subsequent potential stranded costs until the DTE has addressed the assignment of capacity after the transition period. The restructuring collaborative is also examining how to extend unbundled transportation service to residential customers. Eastern was granted an exemption under the Public Utility Holding Company Act of 1935 under Section 3(a)(1) thereof, pursuant to orders of the Securities and Exchange Commission ("SEC") dated February 28, 1955, as amended by orders dated November 3, 1967 and August 28, 1975. Eastern's exemption was confirmed pursuant to an order of the SEC dated September 30, 1998, in conjunction with the Essex Gas acquisition. SEASONALITY AND WORKING CAPITAL The LDC segment's revenues, earnings and cash flows are highly seasonal as the demand for most of its distribution sales and servicess is for space heating and, therefore, is directly related to variations in temperature conditions. The majority of the LDC segment's earnings is generated in the first quarter, with a seasonal loss occurring in the third quarter. Since the bulk of its revenues is billed in the November through April heating season, significant cash flows are generated from late winter to early summer. In addition, while the LDC segment pays pipeline demand charges over the entire year, these charges are billed to customers over the heating season. The lag between payment and billing of demand charges, along with other costs of gas distributed but unbilled, is reflected as deferred gas costs and is financed through short-term borrowings. Short-term borrowings are also required from time to time to finance normal business operations. As a result of these factors, short-term borrowings are generally highest during the late fall and early winter. ENVIRONMENTAL MATTERS The LDC segment may have or share responsibility under applicable environmental law for the remediation of certain former manufactured gas plant sites. Information with respect to environmental matters may be found in Note 12. Such information is incorporated herein by reference. EMPLOYEES As of December 31, 1998, the LDC segment had approximately 1,400 employees, 73% of whom were organized in local unions. All of the collective bargaining agreements expire in 1999. PROPERTIES The LDC segment operates four LNG facilities in Dorchester, Salem, Lynn and Haverhill, Massachusetts. These facilities enable the LDC segment to purchase, and at one facility to liquefy LNG and store it for use in 10-K/4 periods of high demand. The LDC segment owns and operates such facilities in Dorchester and Haverhill, Massachusetts. Boston Gas owns the real property beneath the Salem and Lynn facilities and rented those plants under a lease/ financing arrangement. Boston Gas is currently litigating to enforce its purchase rights under the lease. A stipulation with the lessor of the gas plants that allowed Boston Gas to operate these facilities expired October 1, 1998. Boston Gas remains in possession of the facilities pending the determination of its purchase rights on appeal. On December 31, 1998, the LDC segment's distribution system included approximately 6,700 miles of gas mains, 456,000 services and 583,000 active customer meters. A majority of the gas mains consist of cast iron and bare steel pipe, which requires ongoing maintenance and replacement. The LDC segment's mains and services generally are located on public ways or private property not owned by it. The LDC segment's occupation of such property generally is pursuant to easements, licenses, permits or grants of location. Except as stated above, the principal items of property of the LDC segment are owned in fee. In 1998, the LDC segment's capital expenditures were $66.2 million. Capital expenditures were principally made for system replacement, system expansion to meet customer demand and productivity enhancement initiatives. The LDC segment plans to spend approximately $68 million for similar purposes in 1999, with a slightly higher proportion for system expansion. GLOSSARY -- NATURAL GAS DISTRIBUTION BUNDLED SERVICE -- Two or more services tied together as a single product. Services include gas sales, interstate transportation, local transportation, balancing variations in customer usage, storage and peak shaving. CAPACITY -- The capability of pipelines and supplemental facilities to deliver and/or store gas. COST OF GAS ADJUSTMENT CLAUSE ("CGAC") -- a rate mechanism that allows for the adjustment of billing rates for firm sales that enable LDCs to recover the actual cost of gas delivered to firm customers, including the demand charges for capacity on the interstate pipeline system. FIRM SERVICE -- Sales and/or transportation service provided without interruption throughout the year. Uninterrupted seasonal services are also available for less than 365 days. Firm services are provided either under filed rate tariffs or through individually negotiated contracts. INTERSTATE TRANSPORTATION -- Transportation of gas by an interstate pipeline to the service territory. LDC SEGMENT -- Boston Gas and Essex Gas, together. LIQUEFIED NATURAL GAS ("LNG") -- Natural gas is in liquid form at a temperature near absolute zero. Liquefying natural gas reduces its volume by a factor of 600, which facilitates the storage by LDCs of supplemental supplies needed for peak shaving. LOCAL DISTRIBUTION COMPANY ("LDC") -- A utility that owns and operates a gas distribution system for the delivery of gas supplies from the service territory to end-user facilities. LOCAL TRANSPORTATION SERVICE -- Transportation of gas by an LDC from the connection to the pipeline to the end user. NON-FIRM SERVICE -- Sales and transportation service offered at a lower level of reliability and cost. Under this service, an LDC can interrupt sales or service to a customer on short notice, typically during the winter season. Non-firm services are provided through individually negotiated contracts. In most cases, the price charged takes into account the price of the customer's energy alternative. PEAK SHAVING -- In times of heavy consumption, supplementing available pipeline gas with supplies from underground storage or LNG facilities or with injections of propane. PERFORMANCE-BASED REGULATORY PLAN -- An incentive ratemaking mechanism, typically a price cap plan, where rates are adjusted annually pursuant to a pre-determined formula tied to a measure of inflation, offset by an assumed increase in productivity, subject to the achievement of service quality measures. Rates may also reflect certain exogenous costs that may be incurred. THROUGHPUT -- Gas volume delivered to customers through an LDC's gas distribution system. UNBUNDLED SERVICE -- Service that is offered and priced separately, e.g., segregating the cost of the gas commodity delivered to an LDC's service territory from the cost of local transportation service. Other unbundled 10-K/5 services may involve daily or monthly balancing, back-up or stand-by services and pooling. With unbundled services, customers can pick and choose among the offered services. MARINE TRANSPORTATION The marine transportation segment is comprised of Midland Enterprises Inc. and its wholly-owned operating subsidiaries (together "Midland"), which are engaged in the operation of a fleet of barges and towboats, principally on the Ohio and Mississippi Rivers and their tributaries, the Gulf Intracoastal Waterway and the Gulf of Mexico. Midland transports dry bulk commodities, a major portion of which is coal. Midland also operates a boat and barge repair facility, two coal dumping terminals, a phosphate rock and phosphate chemical fertilizer terminal and provides refueling and barge fleeting services. SALES Midland transported 59.9 million, 57.0 million, and 65.5 million tons in 1998, 1997 and 1996, respectively. Tonnage in 1998 grew 5% from 1997 as a result of increased shipments by contract coal customers and new aggregate business acquired in 1998, partly offset by lower grain and export coal demand. Tonnage in 1997 declined 13% from 1996, primarily as a result of the non-renewal of several multi-year contracts, unplanned plant outages for several customer accounts and lower demand from export coal and grain markets. Ton miles are the product of tons and distance transported. The following charts depict 1998 tonnage by commodity and ton miles of cargo transported for the period 1994-1998: (Pie Chart) 1998 TONNAGE BY COMMODITY Coal 31.30% Grain 63.50% Other 5.20% (Bar Chart) TON MILES BY COMMODITY (IN MILLIONS) Coal Grain Other ---- ----- ----- 1994 15.20% 4.40% 15.70% 1995 15.20% 5.20% 16.40% 1996 15.70% 4.80% 15.60% 1997 13.60% 4.50% 15.00% 1998 13.30% 3.70% 15.10% "Other" includes sand, stone, gravel, iron, scrap, steel, coke, phosphate, other commodities and towing for others. In 1998, ton miles declined 3% primarily due to an 8% decline in the average length of haul, which resulted principally from lower coal and grain export tonnage. In 1997, ton miles declined 8% due to the lower tonnage, as discussed above, partially offset by longer average hauls, particularly for coal. In addition to changes in ton miles transported, Midland's revenues and net earnings are affected by other factors such as competition, operating conditions and the segment of the river system traveled. In 1997 and again in 1998, river navigation was significantly affected by adverse weather conditions. In 1998, multiple tropical storms, flooding and lock delays affected operations, while record flooding, ice and lock repairs slowed production and reduced tonnage levels in 1997, as described further in the "Competition" section. The following table summarizes Midland's backlog of transportation and terminaling business under multi-year contracts: December 31, 1998 1997 ----- ----- Tons (in millions) 128.4 123.2 Revenues (in millions) $496.6 $412.1 Portions of revenue backlog not expected to be filled within the current year 74% 66% The 1998 revenue backlog (which is based on contracts that extend beyond December 31, 1999) is shown at prices in effect on December 31, 1998, which are generally subject to certain cost escalation/de-escalation provisions. Since services under many of the multi-year contracts are based on customer requirements, Midland has estimated its backlog based on its forecast of the anticipated requirements of these contract customers. The 4% increase in tonnage backlog from 1997 mainly reflects new multi-year agreements, in addition to extended terms on current multi-year contracts. Partially offsetting these increases are elapsing terms of current multi-year contracts as they draw closer to maturity, including those excluded from the calculation as they enter their final 10-K/6 year. The 21% increase in revenue backlog exceeded the increase in the tonnage backlog due to the mix change of the forecasted backlog tonnage as longer haul commodities generally produce higher revenues on a tonnage basis. Electric utilities, which traditionally have entered into multi-year transportation and coal supply agreements, have begun to shorten the term of some agreements for a variety of reasons such as Clean Air Act requirements and increasing competitive pressures resulting from the ongoing deregulation of the electric power industry. These factors have also led to changes in the sourcing of coal by utilities, leading to changes in traffic patterns. The only significant raw material required by Midland is the diesel fuel to operate its towboats. Diesel fuel is purchased from a variety of sources and Midland regards the availability of diesel fuel as adequate for its operations. SEASONALITY Revenues during winter months tend to be lower than revenues for the remainder of the year due to the freezing of some northern waterways, increased coal consumption by electric utilities during the summer months and the fall harvest of grain. COMPETITION Midland's marine transportation business competes on the basis of price, service and equipment quality and availability. Midland's primary competitors include other barge lines and railroads. There are a number of companies offering transportation services on the waterways served by Midland. Price competition between barge lines intensifies as barge supply exceeds demand. During the past few years, barge supply has increased as the industry has built more barges than it has retired. Partially offsetting in 1998 were poor operating conditions and lock delays which consumed barge days and absorbed some of the additional capacity. In addition, the strength of the U.S. dollar and weak foreign economies reduced demand for U.S. exports of coal and grain in 1998 and 1997. As a result of these factors and lower fuel costs in 1998, market rates have fallen as competition has intensified. In 1998 the revenues from an operating subsidiary of Cinergy Corp. and the combined revenues from two operating subsidiaries of The Southern Company each accounted for more than 10% of Midland's consolidated revenues under multi-year coal transportation agreements. In 1997 a subsidiary of Cinergy Corp. accounted for approximately 10% of Midland's consolidated revenues. No other customer, or group of customers under common control, accounted for more than 10% of revenues in 1998, 1997 or 1996. On the basis of past experience and its competitive position, Midland considers that the simultaneous loss of several of its largest customers, while possible, is unlikely to happen. Midland's multi-year transportation and terminaling contracts expire at various dates from March 2000 through December 2007. During 1998, approximately 48% of Midland's revenues resulted from multi-year contracts. A substantial portion of the contracts provide for rate adjustments based on changes in various costs, including diesel fuel costs, and, additionally, contain "force majeure" clauses that excuse performance by the parties to the contracts when performance is prevented by circumstances beyond their reasonable control. Many of these contracts also have provisions for termination for specified causes, such as material breach of contract, environmental restrictions on the burning of coal, or loss by the customer of an underlying commodity supply contract. Penalties for termination for such causes are not generally specified. However, some contracts provide that in the event of an uncured material breach by Midland that results in termination of the contract, Midland would be responsible for reimbursing the customer for the differential between the contract price and the cost of substituted performance. Improvements in operating efficiencies have permitted barge operators to maintain comparatively low rate structures. Consequently, the barge industry has generally been able to retain its competitive position with alternate methods, primarily railroads, for the transportation of bulk commodities, particularly when the origin and destination of such movements are near or contiguous to navigable waterways. Towboats, such as those operated by Midland, are capable of moving in one tow (barge configuration) approximately 22,500 tons of cargo (equivalent to 225 one hundred-ton capacity railroad cars) on the Ohio River and upper Mississippi River and approximately 60,000 tons (equivalent to 600 one hundred-ton capacity railroad cars) on the lower Mississippi River, where there are no locks to transit. Barge transportation costs per ton mile are generally below those of railroads. ENVIRONMENTAL MATTERS Midland is subject to the provisions of the Federal Water Pollution Control Act, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, the Superfund Amendment and Reauthorization Act, the Resource Conservation and Recovery Act of 1976 and the Oil Pollution Act of 1990 which permit the Coast Guard and the Environmental Protection Agency to assess penalties and clean-up costs for 10-K/7 oil, hazardous substances, and hazardous waste discharges. Midland is further subject to comparable state environmental statutes in the states where it operates. Some of these acts also allow third parties to seek damages for losses caused by such discharges. Compliance with these acts has had no material effect on Midland's capital expenditures, earnings, or competitive position, and no such effect is currently anticipated. PROPERTIES As of December 31, 1998, Midland's marine equipment consisted of 2,414 dry cargo barges and 87 towboats. Approximately half of this equipment is either mortgaged to secure Midland's equipment financing obligations or chartered under long-term leases from third parties. In 1998, Midland's capital expenditures were $46.6 million. These expenditures were made principally for the purchase of new barges and for renewal of equipment. In 1999 Midland expects to spend approximately $42 million for capital equipment, primarily for the purchase of new barges. EMPLOYEES As of December 31, 1998, Midland employed approximately 1,300 persons, of whom approximately 29% are represented by labor unions. One of Midland's collective bargaining agreements, covering approximately 100 employees, expires in 1999. GENERAL ENVIRONMENTAL MATTERS Certain information with respect to Eastern's compliance with federal and state environmental statutes may be found in Item 1(c) under "Natural Gas Distribution" and "Marine Transportation" and Note 12. EMPLOYEES Eastern and its wholly-owned subsidiaries employed approximately 2,900 employees at December 31, 1998. ITEM 2. PROPERTIES Information with respect to this item may be found in Item 1(c) under "Natural Gas Distribution" and "Marine Transportation." Such information is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS Information with respect to certain legal proceedings may be found in Notes 12 and 14 and in Item 1(c) hereof under "Natural Gas Distribution" and "Marine Transportation." Such information is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders in the fourth quarter of 1998. 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 62 1991 Fred C. Raskin President and Chief Operating Officer 50 1998 J. Mark Cook Senior Vice President, President of Midland 55 1998 Walter J. Flaherty Senior Vice President and Chief Financial Officer 50 1992 L. William Law, Jr. Senior Vice President, General Counsel and Secretary 54 1995 Chester R. Messer Senior Vice President, President of Boston Gas and Essex Gas 57 1988
BUSINESS EXPERIENCE J. Atwood Ives joined Eastern in 1991 as Chairman and Chief Executive Officer. He has served as a Trustee of Eastern since 1989. Fred C. Raskin was Senior Vice President and President of Midland from 1991 until returning to Eastern in 1998 as President and Chief Operating Officer. He has been an employee of Eastern or its subsidiaries since 1978. 10-K/8 J. Mark Cook was elected Senior Vice President and President of Midland in October 1998. He was President of Cyprus Foote Mineral Company from 1996 to 1998. He was Chairman and President of Cyprus Australia Coal Company from 1995 to 1996. He was Senior Vice President, Western Operations for Cyprus Amax Coal Company from 1993 to 1994. 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. L. William Law, Jr. has been General Counsel and Secretary of Eastern since 1987. He has been an employee of Eastern or its subsidiaries since 1975. Chester R. Messer has been an employee of Boston Gas since 1963. 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, 1998 was 6,000. Information with respect to this item may be found in the sections captioned "Dividends Declared Per Share" and "Stock Price Range" appearing on the inside back cover of the annual report to shareholders for the year ended December 31, 1998. Such information is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Information with respect to this item may be found in the section captioned "Six-Year Financial Review" appearing on page 28 of the annual report to shareholders for the year ended December 31, 1998. Such information is incorporated herein by reference. 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. Eastern's acquisition of Essex Gas on September 30, 1998 has been accounted for as a pooling of interests, as discussed in Note 2 of Notes to Financial Statements. Accordingly, Eastern's financial statements include Essex Gas' financial information for all periods. Additionally, Boston Gas and Essex Gas are combined and presented herein as natural gas distribution (LDC segment). Midland Enterprises is reported as marine transportation. Other services includes the results of ServicEdge and AMR Data. In June 1998 the U.S. Supreme Court held the Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act") to be unconstitutional as applied to Eastern. As discussed in Note 14, the reversal of the Coal Act reserve resulted in an extraordinary gain of $74.5 million pre-tax, $48.4 million net, or $2.13 per share, in the second quarter of 1998. In October 1997 Eastern signed a definitive agreement to acquire Colonial Gas, a Massachusetts gas distribution utility serving 155,000 customers northwest of Boston and on Cape Cod. As discussed in Note 3, the agreement provides for the merger of Colonial Gas into Eastern for $37.50 per share of Colonial Gas stock, payable in Eastern common stock and $150.0 million in cash which will be financed from currently available resources. The exchange ratio for the stock portion of the consideration will be based upon Eastern's stock closing price for a ten-day period prior to the closing, subject to a collar mechanism. The transaction is expected to close in mid-1999, subject to receipt of satisfactory regulatory approvals. The merger has been approved by shareholders of both companies. The merger is expected to be tax-free to Eastern. 1998 COMPARED TO 1997 The Company reported net earnings of $106.0 million, or $4.67 per share, in 1998, compared to net earnings of $55.9 million, or $2.49 per share, in 1997. (Per share figures are presented on a diluted basis, as described in Note 1.) Excluding extraordinary items described in Notes 5 and 14, the cumulative effect of an accounting change described in Note 13 and other material nonrecurring items from each year's results, Eastern's earnings and earnings per share declined 8% to $50.8 million, or 9% to $2.24 per share, in 1998 versus $55.4 million, or $2.47 per share, in 1997. 10-K/9 (In millions) 1998 1997 Change ----- ------- ------ REVENUES Natural gas distribution $667.1 $ 754.5 (11.6)% Marine transportation 261.1 269.2 (3.0)% Other services 7.1 - nm ------ -------- Total $935.3 $1,023.7 (8.6)% ====== ======== The decrease in consolidated revenues from 1997 to 1998 primarily reflects decreases for natural gas distribution, including the impact of warmer weather, the migration from firm gas sales to transportation-only service and lower gas costs, partially offset by sales to new customers. (In millions) 1998 1997 Change ---- ---- ------ OPERATING EARNINGS Natural gas distribution $ 88.9 $ 87.8 1.3% Marine transportation 26.6 34.6 (23.1)% Other services (9.0) (1.5) nm Headquarters (6.1) (5.6) (8.9)% ------ ------ Total $100.4 $115.3 (12.9)% ====== ====== The decrease in consolidated operating earnings from 1997 to 1998 primarily reflects reduced volumes, lower rates and higher costs for marine transportation and startup costs associated with ServicEdge. NATURAL GAS DISTRIBUTION Revenues in 1998 decreased $87.4 million, or 11.6%, compared to 1997, primarily reflecting warmer weather ($50 million), the migration of customers from firm sales to transportation-only service ($22 million), lower gas costs ($17 million), and the absence of a 1997 nonrecurring increase in revenues ($9 million) related to a change in the recovery mechanism for the portion of bad debts associated with gas costs. Growth in throughput was partially offsetting. Weather for calendar 1998 was 9% warmer than normal and 13% warmer than 1997. The revenue decrease associated with customer migration and lower gas costs has no impact on operating earnings as the LDC segment earns all of its margins on the local distribution of gas and none on the sale of the commodity or the passthrough of gas costs. Operating earnings in 1998 increased $1.1 million, or 1.3%, as lower operating costs ($9 million), throughput growth ($4 million), and modestly higher average rates were mostly offset by the negative impact of warmer weather ($16 million) and higher depreciation expense. The decrease in operating costs primarily reflects weather-related reductions and continued cost control measures, as well as the absence of a $9 million charge related to Boston Gas' decision to exit the gas appliance service business in 1997. The operating earnings impact of this latter charge was essentially offset by the absence of the nonrecurring revenue increase related to the bad debt recovery mechanism, as described above. The absence of a $2 million gain in 1997 on the settlement of pension obligations was offset by the impact of conforming Essex Gas' historical periods with those of Eastern which increased 1998 operating earnings by $2 million, reflecting the inclusion of Essex Gas' operating earnings for December 1997 and the exclusion of its operating loss for September 1998, as described in Note 2. MARINE TRANSPORTATION Revenues in 1998 decreased $8.1 million, or 3.0%, reflecting lower ton mile production and lower rates resulting from weaker market conditions. A strong U.S. dollar and economic problems in Asia combined to significantly reduce long haul export coal and grain demand, which in turn created excess barge capacity and placed downward pressure on rates. Tonnage transported in 1998 increased 5% over 1997, while ton miles declined 3% due to shorter average trip lengths, primarily reflecting the reduced long-haul export tonnage. Total coal tonnage increased 8% with coal tonnage shipped under multi-year contracts to utility customers increasing 12%. Coal ton miles declined 3%, however, due to the decline in long-haul export coal shipments. For the second straight year, extreme adverse weather conditions significantly increased operating costs and reduced productivity. While 1997 experienced significant spring flooding on the Ohio River, multiple tropical storms and hurricanes along the Gulf Coast continually disrupted intra-coastal and nearby inland operations in 1998. In addition, the Ohio River experienced extended periods of low water conditions, resulting in prolonged lock delays and mandated traffic restrictions. These operating difficulties disrupted traffic patterns, lowered fleet productivity and materially increased operating expenses. Lower fuel prices, which dropped 23% per gallon in 1998, were partly offsetting. Reflecting these operating and market issues, operating earnings declined $8.0 million, from 1997. 10-K/10 OTHER SERVICES Revenues of $7.1 million include $5.6 million from ServicEdge and $1.5 million from AMR Data, which commenced operations in 1998 and 1997, respectively. Their operating loss of $9.0 million primarily reflects costs associated with starting these new businesses, principally ServicEdge. OTHER The $2.4 million reduction in net interest expense reflects the use of short-term investments to redeem $50.0 million of 9.9% Midland debt in March 1998, the issuance of $75.0 million of 6.25% (effective rate 7.5%) debt by Midland in September, and lower short-term debt to finance the LDC segment's working capital requirements. Eastern recognized an extraordinary loss of $2.3 million pre-tax, $1.5 million net, or $.06 per share, on redeeming the Midland debt, as discussed in Note 5. The $9.6 million improvement in Other, net reflects increased realized gains on investments in 1998 and the absence of a charge recorded in 1997 to reflect Eastern's share of a former joint venture's operating losses, as reflected in Note 10. Eastern's effective tax rate in 1998 was 36%. In 1997 the rate was 33%, primarily because of adjustments relating to prior year returns, as described in Note 11. Net earnings for 1998 include $8.2 million, or $.36 per share, for the cumulative effect of changing Boston Gas' method of accounting for unbilled revenues to an accrual method, as described in Note 13. 1997 COMPARED TO 1996 (In millions) 1997 1996 Change ---- ---- ------ REVENUES Natural gas distribution $ 754.5 $ 755.4 (.1)% Marine transportation 269.2 301.9 (10.8)% -------- ------- Total $1,023.7 $1,057.3 (3.2)% ======== ======== The decrease in consolidated revenues from 1996 to 1997 primarily reflects decreased demand and lower rates at marine transportation and lower average usage and the migration of customers from firm gas sales to transportation- only service, partially offset by sales to new customers, at natural gas distribution. (In millions) 1997 1996 Change ---- ---- ------ OPERATING EARNINGS Natural gas distribution $ 87.8 $ 77.3 13.6% Marine transportation 34.6 58.4 (40.8)% Headquarters (7.1) (5.5) (29.1)% ------ ------ Total $115.3 $130.2 (11.4)% ====== ====== The decrease in operating earnings from 1996 to 1997 primarily reflects the impact of decreased revenues and poor operating conditions at marine transportation, partially offset by higher rates and lower operating expenses at the LDC segment. NATURAL GAS DISTRIBUTION Revenues in 1997 were about the same as in 1996, primarily because lower average customer usage, the migration of customers from firm sales to transportation-only service and the impact of comparatively warmer weather were offset by sales to new customers and the full year impact of Boston Gas' 1996 rate increase. Weather for 1997 was 3% colder than normal, but 2% warmer than 1996. Operating earnings increased $10.5 million, or 13.6%, from 1996, primarily reflecting growth in throughput, lower operating expenses, higher rates and Boston Gas' $2.0 million gain on the settlement of pension obligations, partially offset by the margin impact of lower average usage and warmer weather. Boston Gas recorded nonrecurring revenues of $9 million related to a change, pursuant to its 1996 rate ruling, regarding the recovery mechanism for the portion of its bad debt expense associated with gas costs. This income was largely offset by a charge of approximately $9 million related to Boston Gas' decision to exit the gas appliance service business. 10-K/11 MARINE TRANSPORTATION Revenues in 1997 decreased $32.7 million or 10.8%, primarily because of weak export demand for coal and grain, lower contractual requirements for utility and industrial coal and fewer barges. Weak demand depressed spot prices for nearly all commodities and traffic patterns were disrupted, reducing operational efficiency. Operating conditions in 1997 were worse than in 1996 and included record flooding on the Ohio River, long traffic delays related to low water and repairs to various key locks throughout the river system, all of which resulted in higher operating costs and lower fleet productivity than in 1996. As a result of weaker markets, the fleet replacement program was slowed and expiring charters of outside barges were not renewed. These decisions, in addition to delivery postponements due to production delays, reduced the size of Midland's barge fleet. Tonnage and ton miles decreased 13% and 8%, respectively, reflecting the weak markets and operating conditions discussed previously. A change in business mix and customer sourcing resulted in 5% longer average hauls. Coal tonnage and ton miles decreased 17% and 14%, respectively, from the record levels of 1996. Domestic coal volume, primarily for electric utilities, declined due to the nonrenewal of several multi-year contracts, unplanned plant outages and milder temperatures. Export coal and grain demand weakened as the strong dollar made U.S. supplies less competitive on the world market. Ongoing programs to lower vessel operating costs and administrative expenses partially offset the higher operating costs discussed above. Operating results at terminals were also lower, reflecting the reduced demand for coal transportation. As a result of the adverse market and operational issues discussed above, operating earnings decreased by $23.8 million, or 40.8%, in 1997. OTHER Other income primarily reflects losses of $5.5 million and $3.1 million in 1997 and 1996, respectively, representing Eastern's share of a former joint venture's operating losses. Eastern's effective tax rate in 1997 was 33%, which was 4% lower than in 1996, primarily because of adjustments related to prior year returns, as described in Note 11. YEAR 2000 ISSUES STATE OF READINESS Eastern has assessed the impact of year 2000 issues with respect to its information technology ("IT") and embedded chip systems as well as the Company's exposure to significant third party risks. In this regard, Eastern has initiated and completed substantial portions of its plans to replace or modify existing systems and technology and to assure that major customers and critical vendors are also addressing these issues. With respect to its IT systems, Boston Gas has tested and certified, as year 2000 ready, five of its eleven "mission critical" business systems. Replacement of the remaining six systems is in process and scheduled to be completed by June 30, 1999. All "less than critical" applications are scheduled to be tested and/or replaced by June 30, 1999. Conversion and testing of all mainframe hardware and software has been completed. Replacements are in process for client server, data/voice communications, e- mail and desktop hardware and software, with completion scheduled by June 30, 1999. With respect to embedded chip systems, Boston Gas has completed an inventory, an assessment and a remediation plan. All remediation, conversion and testing is scheduled for completion by September 30, 1999. Boston Gas has identified material third party relationships and expects to complete a detailed survey of third party readiness by March 31, 1999. Selected testing and implementation of risk mitigation strategies for significant vendors are scheduled for the second quarter of 1999. Year 2000 issues for Essex Gas are being addressed by integration of its systems with those of Boston Gas, which is scheduled for completion by March 31, 1999. Midland has modified and tested substantially all of its mainframe-based programs and systems, which have been operating on a new, year 2000 compliant mainframe since July 1998. All non-mainframe (server) based systems have been tested and have been modified except for its accounts receivable system, which is scheduled for completion by June 30, 1999. With respect to embedded chip systems, Midland has reviewed its major operating assets and their subsystems. Based on this review and actions taken, management believes year 2000 issues with regard to embedded chip technology will not impair operations. Midland has assessed third party risk with respect to significant suppliers, services and customers. Midland is actively seeking written confirmation of third party readiness. While many third parties express confidence in their year 2000 programs and project completion by mid-1999, they do not make 100% guarantees or assurances. 10-K/12 COST OF YEAR 2000 REMEDIATION Natural gas distribution and marine transportation expect the cost of year 2000 compliance to approximate $13.5 million and $2.1 million, respectively, as detailed in the following chart: Cost through Expected (In millions) December, 1998 subsequent cost - ------------------------------------------------------------------------------- Natural gas distribution -- capitalized $ 6.6 $2.1 -- expensed 3.6 1.2 -- capitalized .9 .3 Marine transportation -- expensed .7 .2 ----- ---- Total $11.8 $3.8 ===== ==== RISKS OF YEAR 2000 ISSUES Natural gas distribution and marine transportation have assessed the most reasonably likely worst case year 2000 scenario. Given its efforts to minimize the risk of year 2000 failure by its internal systems and its distribution network control systems, the LDC segment believes its worst case scenario would involve failures by a pipeline supplier or by suppliers of telecommunications, electricity or banking services. A short-term interruption in pipeline supplies would require the utilization of locally-stored liquefied natural gas supplies. A telecommunications or electric outage would require the LDC segment to enact business contingency and disaster recovery measures to enable the continuation of service to its customers. Midland believes its worst case scenario would involve failures by the Army Corps of Engineers, which operates the various lock and dam systems on the inland waterways, by rail services, which are essential for bringing commodities to the rivers for transit in barges, or by suppliers of telecommunications, electricity or banking services. Major delays to river traffic and customers could result in a loss of revenues. Such failures would require Midland to enact disaster recovery plans, use alternate service providers and seek other routes of navigation, to the extent possible. CONTINGENCY PLANS The LDC segment has initiated the development of a business contingency plan concerning year 2000 risks to its internal systems, embedded chips and significant suppliers. Business processes are expected to be assessed and prioritized by March 31, 1999. Detailed plans for critical business processes are expected to be developed and tested by September 30, 1999. Midland is developing a contingency plan, which it expects to complete by June 30, 1999. To the extent Midland believes that any supplier of critical goods or services poses a significant risk of year 2000 failure, it expects to locate backup providers by September 30, 1999. FORWARD-LOOKING INFORMATION This report and other company statements and statements issued or made from time to time contain certain "forward-looking statements" concerning projected future financial performance, expected plans or future operations. Eastern cautions that actual results and developments may differ materially from such projections or expectations. Investors should be aware of important factors that could cause actual results to differ materially from forward-looking projections or expectations. These factors include, but are not limited to: the effect of the Colonial Gas merger and other strategic initiatives on earnings and cash flow, Eastern's ability to successfully integrate its new gas distribution operations, temperatures above or below normal in eastern Massachusetts, changes in market conditions for barge transportation, adverse weather and operating conditions on the inland waterways, uncertainties regarding the profitability of ServicEdge, the timetable and cost for completion of Eastern's year 2000 plans, the impact of third parties' year 2000 issues, changes in economic conditions, including interest rates and the value of the dollar versus other currencies, regulatory and court decisions and developments with respect to Eastern's previously-disclosed environmental liabilities. Most of these factors are difficult to predict accurately and are generally beyond Eastern's control. 10-K/13 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 1999 capital expenditure and working capital requirements, potential funding of its environmental liabilities, normal debt repayments, anticipated dividends to shareholders and the planned acquisition of Colonial Gas. In addition to cash and marketable investments of $159.8 million at December 31, 1998, Eastern maintains $119.0 million of borrowing capacity under long-term revolving credit agreements, plus uncommitted lines, all of which are available for general corporate purposes. At December 31, 1998, there were borrowings of $8.9 million outstanding under these facilities. To meet working capital requirements which reflect the seasonal nature of its business, natural gas distribution had outstanding $37.8 million of short- term borrowings at December 31, 1998, a decrease of $5.2 million from the prior year, primarily reflecting lower balances for deferred gas costs. In addition, natural gas distribution maintains bank credit agreements which support the issuance of up to $80.0 million of gas inventory financing to fund its inventory of gas supplies. At December 31, 1998, natural gas distribution had outstanding $52.6 million of gas inventory financing for this purpose. In March 1998, Midland utilized currently available cash and short-term investments to redeem $50.0 million of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In September 1998, Midland issued $75.0 million of 6.25% (effective rate 7.5%) First Preferred Ship Mortgage Bonds due October 1, 2008, as discussed in Note 5. The $68.5 million net proceeds of the notes will be used to fund current and future capital expenditures for barges and other equipment. Eastern's capital structure is depicted in the chart below. Subject to the effects of strategic initiatives which Eastern might undertake, the Company expects to continue its policy of capitalizing its LDC segment and Midland with approximately equal amounts of equity and long-term debt. Boston Gas and Midland currently maintain "A" ratings with the major rating agencies. (Bar Chart) CAPITAL STRUCTURE ($ IN MILLIONS) 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Debt $387.90 $379.02 $367.68 $371.49 $385.52 Equity 403.00 426.47 461.01 484.47 546.07 Total Capital 790.90 805.49 828.69 855.96 931.59 (Bar Chart) INTEREST COVERAGE 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Natural Gas 4.8 4.7 5.9 6.4 6.8 Marine Transportation 4.0 5.7 5.8 4.5 4.9 (Reported pre-tax earnings plus depreciation, amortization and interest expense divided by interest expense.) Consolidated capital expenditures for 1999 are budgeted at approximately $110 million, with about 60% at Eastern's LDC segment and the balance at Midland. OTHER MATTERS Eastern is aware of certain non-utility sites, associated with former operations, for which it may have or share responsibility for environmental remediation or ongoing maintenance. Eastern has accrued a reserve of approximately $25 million at December 31, 1998, to cover the remediation and maintenance costs of these sites, the principal of which is a former coal tar processing facility in Everett, Massachusetts, as described in Note 12. While Eastern has provided reserves to cover the estimated probable costs of remediation and maintenance for environmental sites based on the information available at the present time, the extent of Eastern's potential liability at such sites is not yet determined. Eastern's natural gas distribution operations, like many other companies in the natural gas industry, are parties to government proceedings requiring investigation and possible remediation of former manufactured gas plant ("MGP") sites. Boston Gas and Essex Gas may have or share responsibility under applicable environmental law for remediation of 18 such sites, as described in Note 12. Boston Gas and Essex Gas are aware of 26 other MGP sites within their service territories. A subsidiary of New England Electric System has provided full indemnification to Boston Gas with respect to eight of these sites. At this time, there is substantial uncertainty as to whether Boston Gas or Essex Gas has or shares responsibility for remediating any of these other sites. No notice of responsibility has been issued to Boston Gas or Essex Gas for any of these sites from any governmental authority. 10-K/14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE NO. -------- Consolidated Statements of Operations 10-K/16 Consolidated Balance Sheets 10-K/17 Consolidated Statements of Cash Flows 10-K/18 Consolidated Statements of Shareholders' Equity 10-K/19 Notes to Financial Statements 10-K/20 Unaudited Quarterly Financial Information 10-K/34 Independent Auditors' Report 10-K/35 Management's Report on Responsibility 10-K/35 10-K/15 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, (In thousands, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- REVENUES $935,264 $1,023,740 $1,057,271 OPERATING COSTS AND EXPENSES: Operating costs 640,792 715,066 744,672 Selling, general and administrative expenses 118,546 122,035 115,136 Depreciation and amortization 75,521 71,322 67,229 -------- ---------- ---------- OPERATING EARNINGS 100,405 115,317 130,234 OTHER INCOME (EXPENSE): Interest income 7,582 8,997 9,419 Interest expense (33,584) (37,411) (37,290) Other, net 5,591 (4,033) (114) -------- ---------- ---------- EARNINGS BEFORE INCOME TAXES 79,994 82,870 102,249 Provision for income taxes 29,166 26,954 37,748 -------- ---------- ---------- EARNINGS BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE 50,828 55,916 64,501 Extraordinary items, net of tax: Reversal of Coal Act reserve 48,425 - - Loss on early extinguishment of debt (1,465) - - Cumulative effect of accounting change, net of tax 8,193 - - -------- ---------- ---------- NET EARNINGS $105,981 $ 55,916 $ 64,501 ======== ========== ========== BASIC EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $2.26 $2.50 $2.90 Extraordinary items, net of tax: Reversal of Coal Act reserve 2.16 - - Loss on early extinguishment of debt (.07) - - Cumulative effect of accounting change, net of tax .37 - - ----- ----- ----- BASIC EARNINGS PER SHARE $4.72 $2.50 $2.90 ===== ===== ===== DILUTED EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $2.24 $2.49 $2.88 Extraordinary items, net of tax: Reversal of Coal Act reserve 2.13 - - Loss on early extinguishment of debt (.06) - - Cumulative effect of accounting change, net of tax .36 - - ----- ----- ----- DILUTED EARNINGS PER SHARE $4.67 $2.49 $2.88 ===== ===== ===== The accompanying notes are an integral part of these financial statements. 10-K/16
CONSOLIDATED BALANCE SHEETS
December 31, (In thousands) 1998 1997 - ----------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and short-term investments $ 159,836 $ 175,709 Receivables, less reserves of $17,070 in 1998 and $17,220 in 1997 104,869 111,240 Inventories 55,866 61,336 Deferred gas costs 54,065 66,916 Other current assets 5,689 5,867 ---------- ---------- TOTAL CURRENT ASSETS 380,325 421,068 PROPERTY AND EQUIPMENT, AT COST 1,722,718 1,621,850 Less--accumulated depreciation 746,969 688,169 ---------- ---------- NET PROPERTY AND EQUIPMENT 975,749 933,681 OTHER ASSETS: Deferred postretirement health care costs 78,567 87,188 Investments 15,395 15,791 Deferred charges and other costs, less amortization 68,334 72,637 ---------- ---------- TOTAL OTHER ASSETS 162,296 175,616 ---------- ---------- TOTAL ASSETS $1,518,370 $1,530,365 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current debt $ 43,237 $ 48,378 Accounts payable 56,567 70,833 Accrued expenses 38,540 38,505 Other current liabilities 40,011 67,649 ---------- ---------- TOTAL CURRENT LIABILITIES 178,355 225,365 GAS INVENTORY FINANCING 52,644 59,310 LONG-TERM DEBT 385,519 371,492 RESERVES AND OTHER LIABILITIES: Deferred income taxes 134,911 107,804 Postretirement health care 97,197 98,382 Coal miners retiree health care - 57,000 Preferred stock of subsidiary 29,360 29,326 Other reserves 94,315 97,216 ---------- ---------- TOTAL RESERVES AND OTHER LIABILITIES 355,783 389,728 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Common stock $1.00 par value; Authorized shares-- 50,000,000; Issued shares--22,535,734 in 1998 and 22,438,298 in 1997 22,536 22,438 Capital in excess of par value 53,421 50,989 Retained earnings 470,576 410,756 Accumulated other comprehensive earnings (loss) (105) 1,867 Treasury stock at cost--10,461 shares in 1998 and 54,928 shares in 1997 (359) (1,580) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 546,069 484,470 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,518,370 $1,530,365 ========== ========== The accompanying notes are an integral part of these financial statements. 10-K/17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: NET EARNINGS $ 105,981 $ 55,916 $ 64,501 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary credit for reversal of Coal Act reserve (48,425) - - Extraordinary loss on early extinguishment of debt 1,465 - - Cumulative effect of accounting change (8,193) - - Depreciation and amortization 75,521 71,322 67,229 Income taxes and tax credits (1,876) 19,578 9,355 Net gain on sale of assets (4,837) (1,435) (2,541) Other changes in assets and liabilities: Receivables 19,864 (12,502) 3,996 Inventories 5,827 4,495 (10,886) Deferred gas costs 15,160 8,892 (6,358) Accounts payable (16,929) (7,345) 10,232 Other (9,302) 7,719 (7,089) --------- -------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 134,256 146,640 128,439 --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (113,712) (89,216) (119,783) Investments (7,624) 3,018 (16,737) Proceeds on sale of assets 15,956 7,290 3,210 Other (6,035) (1,966) (2,798) --------- -------- --------- NET CASH USED BY INVESTING ACTIVITIES (111,415) (80,874) (136,108) --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid (35,653) (35,255) (32,566) Changes in notes payable (10,800) (25,927) 12,050 Changes in gas inventory financing (7,300) 358 8,221 Proceeds from issuance of long-term debt 68,519 9,827 - Repayment of long-term debt (56,348) (5,801) (8,671) Other 7,920 1,581 3,469 --------- -------- --------- NET CASH USED BY FINANCING ACTIVITIES (33,662) (55,217) (17,497) --------- -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,821) 10,549 (25,166) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 170,657 160,108 185,274 --------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR 159,836 170,657 160,108 SHORT-TERM INVESTMENTS - 5,052 - --------- -------- --------- CASH AND SHORT-TERM INVESTMENTS $ 159,836 $175,709 $ 160,108 ========= ======== ========= The accompanying notes are an integral part of these financial statements. 10-K/18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated Other Common Capital In Comprehensive Stock Excess of Retained Income Treasury (In thousands) $1 Par Value Par Value Earnings (Loss) Stock Total - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 $22,289 $47,689 $359,036 $ 2,390 $ (4,931) $426,473 Comprehensive income: Net earning -- -- 64,501 -- -- -- Unrealized holding gains on investments, net -- -- -- 423 -- -- Pension liability adjustment, net -- -- -- (1,569) -- -- Total comprehensive income -- -- -- -- -- 63,355 Dividends declared -- $1.51 per share -- -- (33,204) -- -- (33,204) Issuance of stock, net 98 2,915 -- -- 1,376 4,389 ------- ------- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1996 22,387 50,604 390,333 1,244 (3,555) 461,013 Comprehensive income: Net earnings -- -- 55,916 -- -- -- Unrealized holding gains on investments, net -- -- -- 884 -- -- Pension liability adustment, net -- -- -- (261) -- -- Total comprehensive income -- -- -- -- -- 56,539 Dividends declared -- $1.61 per share -- -- (35,493) -- -- (35,493) Executive stock purchase loans -- (1,156) -- -- -- (1,156) Issuance of stock, net 51 1,541 -- -- 1,975 3,567 ------- ------- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1997 22,438 50,989 410,756 1,867 (1,580) 484,470 Comprehensive income: Net earning -- -- 105,981 -- -- -- Essex Gas excluded period -- -- (7,994) -- -- -- Unrealized holding losses on investments, net -- -- -- (2,448) -- -- Pension liability adjustment, net -- -- -- 476 -- -- Total comprehensive income -- -- -- -- -- 96,015 Dividends declared -- $1.65 per share -- -- (38,167) -- -- (38,167) Executive stock purchase loans -- (169) -- -- -- (169) Issuance of stock, net 98 2,601 -- -- 1,221 3,920 ------- ------- -------- ------- -------- -------- BALANCE AT DECEMBER 31, 1998 $22,536 $53,421 $470,576 $ (105) $ (359) $546,069 ======= ======= ======== ======= ======== ======== The accompanying notes are an integral part of these financial statements. 10-K/19
NOTES TO FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The consolidated financial statements include the accounts of Eastern Enterprises ("Eastern"), and its natural gas distribution subsidiaries, Boston Gas Company ("Boston Gas") and Essex Gas Company ("Essex Gas"), its marine transportation subsidiary, Midland Enterprises Inc. ("Midland"), and its other subsidiaries, ServicEdge Partners, Inc. ("ServicEdge") and AMR Data Corp. ("AMR Data"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period, the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. As discussed in Note 2, amounts have been restated under the pooling of interests method of accounting to include the operations of Essex Gas, acquired on September 30, 1998. 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 include the following: December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Supplemental gas supplies $45,266 $48,722 Other materials, supplies and marine fuel 10,600 12,614 ------- ------- $55,866 $61,336 ======= ======= Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) or average cost method. Regulatory assets and liabilities: Boston Gas is subject to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the Effects of Certain Types of Regulation" during the periods presented. Essex Gas discontinued the application of SFAS No. 71 as of September 30, 1998, as discussed in Note 2. Regulatory assets represent probable future revenue associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. Regulatory assets include the following: December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Postretirement benefit costs $ 78,567 $ 87,188 Environmental costs 20,990 18,852 Other 1,365 3,789 -------- -------- $100,922 $109,829 ======== ======== Regulatory liabilities total $9,479,000 and $11,079,000 at December 31, 1998 and 1997, respectively, and relate primarily to income taxes. As of December 31, 1998 regulatory assets and regulatory liabilities are being reflected in rates charged to customers over periods from one to 21 years. 10-K/20 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Other current liabilities include the following: December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Coal miners retiree health care premiums $ - $19,500 Reserves for insurance claims 10,739 11,980 Dividend payable 9,455 8,359 Pipeline refunds due utility customers 192 4,703 Other 19,625 23,107 ------- ------- $40,011 $67,649 ======= ======= Revenue recognition: As described in Note 13, Boston Gas changed its revenue accounting method in 1998 to record estimated unbilled revenues at the end of accounting periods. As described in Note 2, Essex Gas adopted the unbilled revenue method upon acquisition. Midland recognizes revenue on tows in progress on the percentage-of-completion method based on miles traveled. ServicEdge recognizes contract revenues over the life of the contract, matching revenues with anticipated expenses and other revenues when billed. 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: Years - --------------------------------------------------------------- Gas utility plant 14-82 Boats and barges 23-30 Buildings 20-30 Furniture, fixtures and other equipment 3-25 Leaseholds shorter of useful life or term of lease Earnings per share: SFAS No. 128, "Earnings per Share," requires the computation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is determined by giving effect to the exercise of stock options using the treasury stock method. (In thousands, except per share Years Ended December 31, amounts) 1998 1997 1996 - -------------------------------------------------------------------------------- Earnings before extraordinary items and accounting change $50,828 $55,916 $64,501 ======= ======= ======= Weighted-average shares 22,474 22,329 22,245 Dilutive effect of options 206 169 169 ------- ------- ------- Adjusted weighted-average shares 22,680 22,498 22,414 ======= ======= ======= Basic earnings per share before extraordinary items and accounting change $2.26 $2.50 $2.90 ===== ===== ===== Diluted earnings per share before extraordinary items and accounting change $2.24 $2.49 $2.88 ===== ===== ===== Comprehensive Income: Effective January 1, 1998, Eastern adopted SFAS No. 130, "Reporting Comprehensive Income." This statement requires presentation of the components of comprehensive earnings, including the changes in equity from non-owner sources such as unrealized gains on securities and minimum pension liability adjustments, which are reflected on Eastern's consolidated statements of shareholders' equity. 10-K/21 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following is a summary of the reclassification adjustments and the income tax effects for the components of other comprehensive income:
Unrealized Holding Gains (Losses) on Reclassification Investments Adjustments for Pension Arising During Gains Included Net Unrealized Liability (In thousands) the Period in Net Income Gains (Losses) Adjustment Total - -------------------------------------------------------------------------------------------------------------------------- 1996 Pretax $1,465 $(1,042) $ 423 $(2,399) $(1,976) Income tax benefit - - - 830 830 ------ ------- ------- ------- ------- Net change $1,465 $(1,042) $ 423 $(1,569) $(1,146) ====== ======= ======= ======= ======= 1997 Pretax $2,210 $(1,313) $ 897 $ (401) $ 496 Income tax benefit (expense) 12 (25) (13) 140 127 ------ ------- ------- ------- ------- Net change $2,222 $(1,338) $ 884 $ (261) $ 623 ====== ======= ======= ======= ======= 1998 PRETAX $ 105 $(1,873) $(1,768) $ 732 $(1,036) INCOME TAX (EXPENSE) (680) - (680) (256) (936) ------ ------- ------- ------- ------- NET CHANGE $ (575) $(1,873) $(2,448) $ 476 $(1,972) ====== ======= ======= ======= =======
The income tax expense against 1998 unrealized gains reflects the unavailability of capital loss carryforwards to offset unrealized gains at December 31, 1998. Pending Accounting Changes: There are no authoritative accounting standards pending that will materially affect Eastern's reported financial position or results of operations when adopted. 2. ESSEX GAS MERGER On September 30, 1998, Eastern completed a merger with Essex Gas by exchanging approximately 2,047,000 shares of its common stock for all of the common stock of Essex Gas. Each share of Essex Gas was exchanged for 1.183985 shares of Eastern common stock. The merger was accounted for as a pooling of interests and the accompanying consolidated financial statements include the accounts of Essex Gas for all periods. Prior to the merger, Essex Gas' fiscal year ended on August 31. Accordingly, the accompanying consolidated statement of operations includes the year ended December 31, 1998 of Eastern combined with the period from December 1, 1997 through December 31, 1998, excluding the month of September 1998 of Essex Gas. The financial statements for 1997 and 1996 include years ended December 31 for Eastern combined with the years ended August 31 for Essex Gas. Pre-merger financial results for the separate companies and the combined amounts in the consolidated statements of operations, include the nine months ended September 30, 1998 of Eastern combined with the nine months ended August 31, 1998 of Essex Gas and the years ended December 31, 1997 and 1996 of Eastern combined with the years ended August 31, 1997 and 1996 of Essex Gas are as follows: Nine Months Ended September 30, Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ Revenues: Eastern $635,442 $ 970,204 $1,007,342 Essex Gas 41,786 53,536 49,929 -------- ---------- ---------- Combined $677,228 $1,023,740 $1,057,271 ======== ========== ========== Earnings before extraordinary item: Eastern $ 28,717 $ 51,950 $ 60,665 Essex Gas 2,478 3,966 3,836 -------- ---------- ---------- Combined $ 31,195 $ 55,916 $ 64,501 ======== ========== ========== The combined financial statements include adjustments to conform the accounting policies of Essex Gas with those of Eastern. The primary adjustment conformed Essex Gas' method of adoption of SFAS No. 106, "Employers" Accounting for Postretirement Benefits Other Than Pensions" with Eastern's adoption by immediately recognizing 10-K/22 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) the transition obligation of approximately $4.1 million at the date of adoption, September 1, 1994. Since Essex Gas had received regulatory approval to fully recover the SFAS No. 106 costs in rates, a regulatory asset was recorded for the transition obligation and there was no adjustment to income during the pre-merger period. Transaction fees totaled $9,776,000 pre-tax, of which $2,788,000 was incurred and expensed during the nine month period ending September 30, 1998. An additional $750,000 of transaction fees were incurred and expensed in 1997. The remaining $6,238,000 was expensed by Essex Gas in September 1998. Transaction fees primarily include investment banking fees and other professional fees. In approving the Essex Gas merger, the Massachusetts Department of Telecommunication and Energy (the "DTE"), approved a plan for Essex Gas customers immediately reducing rates by 5% and freezing base rates for ten years. Because of the length of the base rate freeze, Essex Gas is unable to continue its application of SFAS No. 71, and, effective September 30, 1998, wrote off net regulatory assets approximating $4,500,000 pre-tax or $2,873,000 net, which primarily consisted of deferred postretirement health care costs. In addition, Essex Gas was required to adopt a revenue method which reflects full accrual accounting and which resulted in a minor nonrecurring gain. In conforming Essex Gas' historical periods based on a fiscal year ending August 31 with Eastern's operations and changing Essex Gas' fiscal year-end, consolidated results for the year ended December 31, 1998 include Essex Gas' results for December 1997 and December 1998 and exclude its results for September 1998. Essex Gas' revenues and net earnings for December 1997 were $7,262,000 and $995,000, respectively. Essex Gas' revenues and net loss for September 1998 were $1,374,000 and $8,121,000, respectively. The September 1998 net loss reflected transaction and integration expenses of $5,088,000 and the aforementioned write off of regulatory assets. Essex Gas' revenues and net earnings for the three months ended November 30, 1997 were $9,035,000 and $127,000, respectively. The consolidated statement of cash flows for 1998 includes the effect of Essex Gas' excluded periods of ($2,103,000) for net operating activity, ($2,178,000) for net investing activity and $4,574,000 for net financing activity. These amounts are reflected in the other captions in the consolidated statement of cash flows. 3. PLANNED MERGER WITH COLONIAL GAS COMPANY On October 17, 1998 Eastern signed a definitive agreement that provides for the merger of Colonial Gas Company ("Colonial Gas") into Eastern for $37.50 per share of Colonial Gas stock, payable in Eastern stock and $150.0 million in cash. The exchange ratio for the stock portion of the consideration will be based upon Eastern's average closing stock price for the ten trading day period ending on the third trading day prior to closing, subject to a collar mechanism. The transaction is expected to close in mid-1999, subject to receipt of satisfactory regulatory approvals. The merger is expected to be tax-free to Eastern and will be accounted for using the purchase method of accounting. 4. BUSINESS SEGMENT INFORMATION Effective January 1, 1998, Eastern adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Pursuant to SFAS No. 131, Eastern's two reportable segments are natural gas distribution and marine transportation. Natural gas distribution, which includes Boston Gas and Essex Gas, provides services to customers in eastern and central Massachusetts, and marine transportation, which includes Midland, operates boats and barges on the inland waterways. Other services include ServicEdge and AMR Data. Segment information, including operating results and other financial data, is presented below: (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Revenues: Natural gas distribution $ 667,106 $ 754,481 $ 755,391 Marine transportation 261,061 269,259 301,880 Other services 7,097 - - ---------- ---------- ---------- $ 935,264 $1,023,740 $1,057,271 ========== ========== ========== Operating earnings: Natural gas distribution $ 88,913 $ 87,773 $ 77,291 Marine transportation 26,634 34,614 58,415 Other services (9,043) (1,481) - Headquarters(1) (6,099) (5,589) (5,472) ---------- ---------- ---------- $ 100,405 $ 115,317 $ 130,234 ========== ========== ========== (1) Reflects unallocated corporate general and administrative expenses. 10-K/23 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Identifiable assets, net of depreciation and reserves: Natural gas distribution $ 952,576 $ 974,021 $ 970,282 Marine transportation 379,676 356,350 353,928 Other(1) 186,118 199,994 190,643 ---------- ---------- ---------- $1,518,370 $1,530,365 $1,514,853 ========== ========== ========== Capital expenditures: Natural gas distribution $ 66,248 $ 62,283 $ 66,532 Marine transportation 46,621 25,700 47,851 Other 843 1,233 5,400 ---------- ---------- ---------- $ 113,712 $ 89,216 $ 119,783 ========== ========== ========== Depreciation and amortization: Natural gas distribution $ 50,870 $ 47,786 $ 44,305 Marine transportation 23,838 22,675 22,554 Other 813 861 370 ---------- ---------- ---------- $ 75,521 $ 71,322 $ 67,229 ========== ========== ========== Interest expense: Natural gas distribution $ 22,565 $ 23,067 $ 22,695 Marine transportation 10,830 13,713 14,295 Other 189 631 300 ---------- ---------- ---------- $ 33,584 $ 37,411 $ 37,290 ========== ========== ========== Income tax provision: Natural gas distribution $ 27,121 $ 24,792 $ 22,185 Marine transportation 6,534 8,464 17,566 Other (4,489) (6,302) (2,003) ---------- ---------- ---------- $ 29,166 $ 26,954 $ 37,748 ========== ========== ========== (1) Primarily includes cash and short-term investments. Natural gas distribution operations are subject to Massachusetts statutes applicable to gas utilities. Their revenues, earnings and cash flows are highly seasonal as most of their firm sales and transportation are directly related to temperature levels. These operations purchase gas supplies from a variety of domestic and Canadian producers and marketers, under a combination of long-term commitments, firm winter service agreements and spot purchases. These operations have diversified their gas supplies across major North American producing regions. A significant portion of marine transportation operations relate to multi- year transportation contracts. Based on past experience and its competitive position, management considers that the simultaneous loss of several of its largest customers, while possible, is unlikely to happen. 5. LONG-TERM OBLIGATIONS AND CURRENT DEBT Credit agreements and lines of credit: Eastern maintains credit agreements with groups of banks, which provide for the borrowings by Eastern and its subsidiaries of up to $119,000,000 at various times through December 31, 2001. The interest rate for borrowings is the agent bank's prime rate or, at the borrower's option, various pricing alternatives. The agreements require facility fees ranging from 9.5 to 37.5 basis points on the commitments. At December 31, 1998 and 1997, $8,935,000 and $3,313,000 were outstanding, respectively. Boston Gas utilizes a portion of the credit agreement to back its commercial paper borrowings. Included in current debt were $37,835,000 and $43,013,000 of commercial paper with a weighted average interest rate of 5.30% and 6.19% at December 31, 1998 and 1997, respectively. In addition, Eastern, Boston Gas and Essex Gas have various uncommitted lines of credit which are utilized for working capital needs and provide for interest at the bank's prime rate or, at the borrower's option, various pricing alternatives. Gas inventory financing: Boston Gas and Essex Gas maintain credit agreements with groups of banks, which provide for the borrowing of up to $80,000,000 for the exclusive purpose of funding their inventory of gas 10-K/24 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) supplies or for backing commercial paper issued for the same purpose. All costs related to this funding are recoverable from customers. Boston Gas and Essex Gas had $52,644,000 and $59,310,000 of commercial paper or bank borrowings outstanding to fund their inventory of gas supplies at December 31, 1998 and 1997, respectively. Since the commercial paper is supported by a long-term credit agreement, these borrowings have been classified as non- current in the accompanying consolidated balance sheets. The Boston Gas credit agreement includes a one-year revolving credit facility which may be converted to a two-year term loan at the option of Boston Gas if the one-year revolving credit facility is not renewed by the banks. Boston Gas may select the agent bank's prime rate or, at Boston Gas' option, various pricing alternatives. The Boston Gas agreement requires a facility fee of 8.5 basis points on the commitment. No borrowings were outstanding under this agreement during 1998 and 1997. Description of long-term debt: December 31, (In thousands) 1998 1997 - ------------------------------------------------------------------------------ NATURAL GAS DISTRIBUTION: 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 50,000 6.80%-7.25% Medium-Term Notes, Series C, due 2012-2025 60,000 60,000 7.28%-10.25% First Mortgage Bonds due 1999-2020 21,000 22,200 8.15% - 8.625% Debenture due 2006-2017 7,199 7,199 8.50% Mortgage Note - 360 Capital leases 532 605 Less -- current portion (660) (1,014) -------- -------- NATURAL GAS DISTRIBUTION 238,071 239,350 -------- -------- MARINE TRANSPORTATION: First Preferred Ship Mortgages 9.9% Bonds, due 2008 - 48,108 6.25% Bonds, due 2008, effective 7.50% 68,619 - 8.1%-9.85% Medium-Term Notes, Series A, due 2002-2012 67,423 67,683 Capital leases 16,148 20,702 Less--current portion (4,742) (4,351) -------- -------- MARINE TRANSPORTATION 147,448 132,142 -------- -------- TOTAL LONG-TERM DEBT $385,519 $371,492 ======== ======== Natural gas distribution Medium-Term Notes are not callable prior to maturity. The First Mortgage Bonds are secured by substantially all the plant assets of Essex Gas. The marine transportation First Preferred Ship Mortgage Bonds and Medium- Term Notes are secured by certain transportation equipment. The Medium-Term Notes are not callable prior to maturity. In March 1998, marine transportation utilized currently available cash to call $50,000,000 of 9.9% First Preferred Ship Mortgage Bonds, due 2008. In extinguishing this debt, marine transportation recognized an extraordinary charge of $2,254,000 pre-tax, $1,465,000 net, or $.06 per share. In September 1998, marine transportation issued $75,000,000 of 6.25% First Preferred Ship Mortgage Bonds maturing October 1, 2008. Proceeds of $68,500,000 were net of $6,000,000 incurred on treasury rate lock agreements entered into in the second and third quarters in order to hedge the underlying treasury interest rate, and other costs. The debt has an effective annual interest rate of 7.50%. Capital leases consist of equipment lease obligations with a weighted average interest rate of 10.0%. Minimum lease payments under these agreements are due in installments through 2005. Debt payment requirements and maturities, net of amounts acquired in advance, are $5,402,000, $5,881,000, $4,838,000, $5,345,000 and $1,040,000 for 1999 through 2003, respectively, and cumulatively $368,415,000 thereafter. 10-K/25 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Five-year operating lease commitments: In addition to the 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 2079. Total rents charged to expense were $10,294,000 in 1998, $10,887,000 in 1997 and $13,840,000 in 1996. Future minimum lease commitments under operating leases are $8,185,000, $6,579,000, $5,261,000, $3,377,000, $1,455,000 for 1999 through 2003, respectively, and cumulatively $4,551,000 thereafter. 6. PREFERRED STOCK OF SUBSIDIARY Boston Gas has outstanding 1,200,000 shares of 6.421% Cumulative Preferred Stock, which is non-voting and has a liquidation value of $25 per share. The preferred stock requires 5% annual sinking fund payments beginning on September 1, 1999 with a final redemption on September 1, 2018. At the option of Boston Gas, the annual sinking fund payment may be increased to 10%. The preferred stock is not callable prior to 2003. 7. STOCK PLANS Eastern has three stock option plans which provide for the issuance of non-qualified stock options, incentive stock options and stock appreciation rights ("SARs") to its officers, non-employee trustees and key employees. On September 30, 1998, two stock option plans of Essex Gas were terminated. 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. No SARs have been granted since 1991. In 1995, the right to exercise outstanding SARs was effectively eliminated. Eastern applies Accounting Principles Board Opinion 25 in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans and its employee stock purchase plan. Had compensation cost for Eastern's plans been determined applying SFAS No. 123, "Accounting for Stock- Based Compensation," Eastern's net earnings would have been reduced by $542,000 or $.02 per share in 1998, $418,000 or $.02 per share in 1997 and by $304,000 or $.01 per share in 1996. The weighted average fair value of options granted during 1998, 1997 and 1996 was $42.86, $33.63, and $35.96, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted- average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yields of 4.0% in each year; expected volatilities of 16.5%, 17.8% and 18.3%; risk-free interest rates of 5.0%, 6.1% and 5.4%; and an expected life of 5.0 years for each year. Shares available for future grants under these stock option plans were 666,927 at December 31, 1998, 934,760 at December 31, 1997 and 1,093,110 at December 31, 1996. Option activity during the past three years was as follows: Average Option Stock Price Options SARs --------------------------------- OUTSTANDING AT DECEMBER 31, 1995 $26.13 712,025 95,220 Granted 35.96 133,200 - Exercised 22.99 (44,320) - Surrendered - - (7,170) Canceled 29.20 (24,899) (350) ------- ------- OUTSTANDING AT DECEMBER 31, 1996 $27.96 776,006 87,700 Granted 33.63 161,700 - Exercised 24.57 (52,140) - Surrendered - - (22,500) Canceled 35.52 (3,350) - ------- ------- OUTSTANDING AT DECEMBER 31, 1997 $29.21 882,216 65,200 Granted 42.86 220,850 - Exercised 23.38 (65,843) - Surrendered - - (20,720) Canceled 36.22 (43,000) - ------- ------- OUTSTANDING AT DECEMBER 31, 1998 $32.19 994,223 44,480 ======= ======= 10-K/26 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Stock options exercisable at December 31, 1998 and 1997 were for 561,342 shares and 512,006 shares, respectively. At December 31, 1998, the range of exercise prices of outstanding and exercisable options was $23.44 to $43.59 and $23.44 to $37.00, respectively, with a weighted-average remaining contractual life of options outstanding of 6.0 years. Under restricted stock plans for key employees and non-employee trustees, Eastern awarded 5,500 shares in 1998 and 4,400 shares in 1997 and 1996. Eastern recognized compensation expense of $70,000 in 1998, $109,000 in 1997 and $305,000 in 1996 in accordance with the vesting terms of these and prior awards. Shares available for future awards under these plans were 27,800 at December 31, 1998 and 33,300 at December 31, 1997. 8. 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 (as amended, the "1990 Rights Agreement") between Eastern and BankBoston, N.A., the current Rights Agent, 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, subject to adjustment to prevent dilution. The rights become exercisable on the 10th business day after a person acquires 10% or more of Eastern's stock or commences a tender offer for 10% or more of Eastern's stock or such later date as the board determines. The rights may be redeemed by Eastern at any time prior to the 10th day after a 10% position has been acquired at a price of $.01 per right. Eastern may exchange any outstanding rights at any time after a person acquires 10% or more of Eastern stock, but before such person beneficially owns 50% or more of Eastern's stock, for shares of common stock of Eastern at an initial exchange ratio of one share for each right, subject to adjustment and subject to other limitations contained in the 1990 Rights Agreement. 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 10% of Eastern's common stock, 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. On July 22, 1998 Eastern declared a dividend of one purchase right (a "New Right") for every outstanding share of Eastern common stock. The New Rights will be distributed at the close of business upon the earlier to occur of (i) the date of redemption by Eastern of Eastern's rights issued pursuant to the 1990 Rights Agreement discussed above, and (ii) February 18, 2000, to shareholders of record as of the close of business on such date. The terms of the New Rights are set forth in a Rights Agreement dated as of July 22, 1998 (the "New Rights Agreement") between Eastern and BankBoston, N.A., as Rights Agent. Each New Right would initially entitle the holder to purchase from Eastern one share of Eastern common stock at a price of $160 per share, subject to adjustment. The New Rights will expire on July 22, 2008, or upon the earlier redemption of the New Rights. The material terms of the New Rights Agreement are substantially similar to the terms of the 1990 Rights Agreement discussed above. 9. INTEREST EXPENSE Years Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Interest on long-term debt $29,866 $32,636 $32,778 Other, including amortization of debt expense 2,282 3,485 3,142 Less--capitalized interest (490) (636) (570) Subsidiary preferred stock dividends 1,926 1,926 1,940 ------- ------- ------- INTEREST EXPENSE $33,584 $37,411 $37,290 ======= ======= ======= INTEREST PAYMENTS $32,362 $36,660 $35,945 ======= ======= ======= 10. OTHER INCOME (EXPENSE) Years Ended December 31 (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Net gain on sale of assets $ 4,948 $ 778 $ 2,775 Equity in loss of AllEnergy - (5,472) (3,087) Other 643 661 198 ------- ------- ------- $ 5,591 $(4,033) $ (114) ======= ======= ======= 10-K/27 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In December 1997, Eastern sold its 50% interest in AllEnergy Marketing Company, L.L.C. for $5,375,000, which approximated the net book value of its investment at September 30, 1997. Eastern accounted for its investment in AllEnergy using the equity method. 11. 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, 1998 1997 1996 - ------------------------------------------------------------------------------ Statutory rate 35% 35% 35% State taxes, net of Federal benefit 4 3 3 Capital loss utilization (2) - - Adjustment - (4) - Other (1) (1) (1) -- -- -- Effective rate 36% 33% 37% == == == The adjustment in 1997 reflects the resolution of Federal tax audit issues on the sale of a subsidiary in 1993 and inventory capitalization in 1994. Following is a summary of the provision for income taxes: Years Ended December 31, (In thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ Federal $22,747 $13,152 $24,262 State 5,429 4,498 3,205 ------- ------- ------- TOTAL CURRENT PROVISION 28,176 17,650 27,467 Federal 1,470 9,706 8,616 State (480) (402) 1,665 ------- ------- ------- TOTAL DEFERRED PROVISION 990 9,304 10,281 ------- ------- ------- PROVISION FOR INCOME TAXES $29,166 $26,954 $37,748 ======= ======= ======= TAX PAYMENTS $32,567 $ 8,758 $30,325 ======= ======= ======= Significant items making up deferred tax assets and deferred tax liabilities are as follows: December 31, (In thousands) 1998 1997 - -------------------------------------------------------------------------------- Coal miners retiree health care $ - $ 26,761 Unbilled revenue - 17,513 Environmental reserves 7,495 7,886 Other 35,339 35,321 --------- --------- TOTAL DEFERRED TAX ASSETS 42,834 87,481 Accelerated depreciation (161,209) (156,868) Deferred gas costs (12,332) (27,418) Other (20,818) (21,704) --------- --------- TOTAL DEFERRED TAX LIABILITIES (194,359) (205,990) --------- --------- TOTAL DEFERRED TAXES $(151,525) $(118,509) ========= ========= 10-K/28 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 12. ENVIRONMENTAL MATTERS Eastern is aware of certain non-utility sites, associated with former operations, for which it may have or share environmental remediation responsibility or ongoing maintenance. Eastern has a reserve of approximately $25 million in total at December 31, 1998 to cover the remediation and maintenance of these sites, the principal of which is a former coal tar processing facility (the "Facility") in Everett, Massachusetts. While Eastern has provided reserves to cover the estimated probable costs of remediation and maintenance for environmental sites based on the information available at the present time, the extent of Eastern's potential liability at such sites is not yet determined. 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 it 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 Massachusetts Department of Environmental Protection ("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 pay 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 have identified compounds that may be associated with coal tar and/or oil in soil and ground water at the site and adjacent areas, including the riverbed. In addition to the DEP, the National Oceanic and Atmospheric Administration and the Coast Guard have been involved in river sediment investigation and remediation discussions. During 1995 and 1996, Eastern conducted and received the results of certain sediment sampling which confirmed findings of contamination in the riverbed. The Coast Guard has been working with the DEP since July 1998 to bring about a remedial solution that would abate the continuing sheening problem in the Island End River. Eastern, Beazer and Allied-Signal have proposed a remedial solution, a major element of which is the utilization of a containment structure. In December 1998, the Coast Guard notified these companies that it did not believe that a containment structure was the most effective remedial alternative and purported to require these companies to submit a plan for dredging in the Island End River. The companies believe the apparent regulatory preference for full-scale dredging is unsupportable and they intend to continue to argue for containment as the principal preferred remedial response. There can be no assurance that the regulators will ultimately agree. In light of uncertainties as to the full 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 recover remediation costs from its insurers. Eastern's natural gas distribution operations, like many other companies in the natural gas industry, are parties to governmental proceedings requiring investigation and possible remediation of former manufactured gas plant ("MGP") sites. Boston Gas and Essex Gas may have or share responsibility under applicable environmental laws for the remediation of 18 such sites. A subsidiary of New England Electric System ("NEES") has assumed responsibility for remediating 10 of these sites, subject to a limited contribution from Boston Gas. Boston Gas and Essex Gas have estimated their potential share of the costs of investigating and remediating former MGP sites in accordance with SFAS No. 5, "Accounting for Contingencies," and the American Institute of Certified Public Accountants Statement of Position 96-1, "Environmental Remediation Liabilities." These operations have recorded liabilities of $18.8 million, which represents their best estimate at this time of remediation costs, which may reasonably be estimated to range from $18 million to $36 million. However, there can be no assurance that such costs will not vary considerably from these estimates. Factors that may bear on costs differing from estimates include, without limit, changes in regulatory standards, changes in remediation technologies and practices and the type and extent of contaminants discovered at the sites. Boston Gas and Essex Gas are aware of 26 other former MGP sites within their service territories. The NEES subsidiary has provided full indemnification to Boston Gas with respect to eight of these sites. At this time, there is substantial uncertainty as to whether Boston Gas or Essex Gas have or share responsibility for remediating any of these other sites. No notice of responsibility has been issued to Boston Gas or Essex Gas for any of these sites from any governmental environmental authority. 10-K/29 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) By a rate order issued on May 25, 1990, the DTE approved the recovery of all prudently incurred environmental response costs associated with former MGP sites over separate, seven-year amortization periods, without a return on the unamortized balance. Eastern's natural gas operations have recognized an insurance receivable of $3.4 million, reflecting a negotiated settlement with an insurance carrier for environmental expense indemnity, and a regulatory asset of $15.4 million, representing the expected rate recovery of environmental remediation costs, net of the insurance settlement. Eastern currently believes, in light of the indemnity agreement with the NEES subsidiary and the DTE rate order on environmental cost recovery, that it is not probable that such costs will materially affect its financial condition or results of operations. 13. UNBILLED REVENUE ACCOUNTING CHANGE During the fourth quarter of 1998, Boston Gas changed its method of accounting for unbilled revenues, retroactively applied as of January 1, 1998. Previously, substantially all revenues were 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 in which gas is billed to customers. Under the new method, the estimated margin on unbilled revenues is recorded at the end of each accounting period. The accrual method of accounting for revenues, that is the recording of unbilled revenues, is preferable to continuing on the billed method and is the prevalent method in the utility industry. The cumulative effect of this accounting change at January 1, 1998 was to increase net earnings by $8,193,000, or $.36 per share. The effect of this accounting change was to increase earnings before extraordinary items and accounting changes by $405,000, or $.02 per share, for the year ended December 31, 1998. The pro forma effect of retroactively applying this method to 1997 and 1996 was not material. 14. COAL MINERS RETIREE HEALTH CARE On June 25, 1998 the U.S. Supreme Court ruled that the Coal Industry Retiree Health Benefit Act of 1992 ("Coal Act") is unconstitutional as applied to Eastern. Accordingly, previously recorded reserves not used, less associated expenses, resulted in an extraordinary gain of $74,500,000 pre-tax, $48,425,000 net, or $2.13 per share, in the second quarter of 1998. In 1993, Eastern recorded a reserve of $70,000,000 ($45,500,000 net of tax, or $1.88 per share) to provide for its estimated undiscounted obligations under the Coal Act with respect to notices of responsibility received from the Social Security Administration in that year. The notices claimed that Eastern was responsible for health care and death benefit premiums for certain retired coal miners and their beneficiaries who were said to have worked for Eastern's Coal Division prior to the transfer of those operations to a subsidiary in 1965. Principally due to receipt of additional notices, in 1995 Eastern recorded an additional reserve of $10,000,000 ($6,500,000 net of tax or $.30 per share). Provisions to establish these reserves were accounted for as extraordinary items. Eastern never paid any premiums under the Coal Act. 15. RETIREE BENEFITS Eastern and its subsidiaries, through various company-administered plans and other union retirement and welfare plans, provide retirement benefits for the majority of their employees, including pension and certain health care and life insurance benefits. Normal retirement age ranges from 60 to 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, excluding Essex Gas employees, hired before 1993 who are participants in the pension plans become eligible for postretirement 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, where applicable, in sufficient amounts to satisfy the "Minimum Funding Standards" of the Employee Retirement Income Security Act ("ERISA"). 10-K/30 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Effective January 1, 1998, Eastern adopted SFAS No. 132, "Employers" Disclosures about Pensions and Other Postretirement Benefits," which revises prior disclosure requirements. The information for 1997 and 1996 has been restated to conform to the 1998 presentation. The net cost for these plans and agreements charged to expense was as follows: Pensions Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Service cost $ 5,250 $ 5,145 $ 4,983 Interest cost on projected benefit obligation 13,300 12,808 12,259 Expected return on plan assets (17,049) (15,820) (14,119) Amortization of prior service cost 1,552 1,501 1,444 Amortization of transitional obligation 424 424 424 Recognized actuarial gain (599) (263) (89) Settlement and curtailment gain (490) (2,314) (44) ------- ------- -------- Total net pension cost of company- administered plans 2,388 1,481 4,858 Multi-employer union retirement and welfare plans 475 270 293 ------- ------- -------- Total net pension cost $ 2,863 $ 1,751 $ 5,151 ======= ======= ======== Health Care Years Ended December 31, (In thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Service cost $ 1,066 $ 1,007 $ 1,003 Interest cost on accumulated benefits obligation 7,425 7,147 7,165 Expected return on plan assets (2,131) (1,585) (1,224) Amortization of prior service cost (1,374) (1,170) (1,135) Recognized actuarial gain (399) (229) (187) Regulatory deferral 5,359 4,841 5,470 ------- ------- ------- Total net retiree health care cost $ 9,946 $10,011 $11,092 ======= ======= ======= The tables above do not reflect retirement enhancements at Boston Gas, for pension and health care of $3,224,000 and $143,000 respectively, which were related to its decision in 1997 to exit the gas appliance service business. 10-K/31 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The following tables set forth the change in benefit obligation and plan assets, reconciliation of funded status and amounts recognized in other comprehensive income of company-administered plans and amounts recorded in Eastern's consolidated balance sheets as of December 31, 1998 and 1997 using actuarial measurement dates as of October 1, 1998 and 1997:
Pensions Health Care (In thousands) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Balance at beginning of year $181,330 $173,623 $102,239 $ 98,572 Service cost 5,330 5,145 1,076 1,007 Interest cost 13,494 12,808 7,455 7,147 Plan amendments 1,264 995 - - Curtailment (gain) (635) - (85) - Settlement (gain) (294) (2,314) - - Special termination benefits 3,868 - 698 - Benefits paid (10,159) (7,897) (6,642) (6,542) Settlement payments - (7,891) - - Actuarial (gain) or loss 3,869 6,861 (514) 2,055 -------- -------- -------- -------- Balance at end of year $198,067 $181,330 $104,227 $102,239 ======== ======== ======== ======== CHANGE IN PLAN ASSETS Fair value at beginning of year $241,734 $201,819 $ 25,263 $ 18,805 Actual return on plan assets (6,789) 55,001 439 5,994 Employer contributions 1,121 702 6,936 7,006 Benefits paid (10,159) (7,897) (6,642) (6,542) Settlement payments - (7,891) - - Administrative expenses (61) - - - -------- -------- -------- -------- Fair value at end of year $225,846 $241,734 $ 25,996 $ 25,263 ======== ======== ======== ======== RECONCILIATION OF FUNDED STATUS Funded status $ 27,779 $ 60,404 $(78,231) $(76,976) Contributions for fourth quarter 208 205 1,591 1,572 Unrecognized actuarial (gain) (35,646) (64,351) (10,292) (11,339) Unrecognized transition obligation 734 1,301 - - Unrecognized prior service 15,075 15,879 (10,265) (11,639) -------- -------- -------- -------- Net amount recognized at end of year $ 8,150 $ 13,438 $(97,197) $(98,382) ======== ======== ======== ======== AMOUNTS RECOGNIZED IN BALANCE SHEET Prepaid benefit cost $ 23,416 $ 24,264 $ - $ - Accrued benefit liability (20,383) (15,929) (97,197) (98,382) Intangible asset 3,032 2,286 - - Accumulated other comprehensive income 2,085 2,817 - - -------- -------- -------- -------- Net amount $ 8,150 $ 13,438 $(97,197) $(98,382) ======== ======== ======== ======== Other comprehensive income (loss), pre-tax $ (732) $ 401 $ - $ - ======== ======== ======== ========
To fund health care benefits under its collective bargaining agreements, Boston Gas and Essex Gas maintain voluntary employee beneficiary associations, to which they make contributions from time to time. Essex Gas made contributions during 1997 of $560,241. Plan assets are invested in debt and equity marketable securities. 10-K/32 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Following are the weighted-average assumptions used in developing the projected benefit obligation for 1998, 1997 and 1996: 1998 1997 1996 ---- ---- ---- Discount rate 7.25% 7.5% 7.5% Return on plan assets 8.5% 8.5% 8.5% Increase in future compensation 4.5%-5.0% 4.75%-5.0% 4.75%-6.0% Health care inflation trend 8.0% 7.0-8.75% 7.0-9.5% The health care inflation trend is assumed to be 8.0% in 1999 and decrease gradually to 5.0% for 2005. A one-percentage-point increase (decrease) in the assumed health care trend rate for 1998 would have the following effects: One-Percentage One-Percentage (In thousands) Point Increase Point Decrease - ------------------------------------------------------------------------------- Total of service and interest cost components $ 637 $ (550) Postretirement benefit obligation $7,998 $(6,915) See Note 2 for discussion of the adjustment conforming Essex Gas' method of adoption of SFAS No. 106. 16. FAIR VALUES OF FINANCIAL INSTRUMENTS Pursuant to SFAS No. 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, 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 other comprehensive income. The difference between the fair value and the original cost of these securities is a net unrealized gain of $1,249,000 and $3,697,000, in 1998 and 1997, respectively. The following methods and assumptions were used to estimate the fair value disclosures for financial instruments. Cash and short-term investments and short-term debt: The carrying amounts approximate fair value because of the short maturity of those instruments. Short-term debt includes notes payable and gas inventory financing. Marketable securities and investments: Marketable securities and investments include marketable securities classified as available for sale. Pursuant to SFAS No. 115 the carrying value is the fair value. 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) 1998 1997 - ------------------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- -------- -------- -------- Cash and short-term investments $159,836 $159,836 $175,709 $175,709 Marketable securities and investments 15,801 15,801 16,030 16,030 Short-term debt 90,479 90,479 102,323 102,323 Long-term debt 390,921 443,927 376,857 422,370 Preferred stock of subsidiary 29,360 30,076 29,326 31,525
10-K/33 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 17. UNAUDITED QUARTERLY FINANCIAL INFORMATION Unaudited quarterly financial information for 1998 has been restated to reflect the retroactive change of accounting described in Note 13.
For the three months ended (In thousands, except per share amounts) Mar. 31, June 30, Sept. 30, Dec. 31, - ------------------------------------------------------------------------------------------------------- 1998: Revenues $352,922 $188,425 $135,881 $258,036 Operating earnings 55,624 11,804 (4,526) 37,503 Earnings before income taxes 50,344 6,393 (7,398) 30,655 EARNINGS BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $ 31,067 $ 3,882 $ (3,754) $ 19,633 Extraordinary items, net of tax (1,465) 48,425 - - Accounting change, net of tax 8,193 - - - -------- -------- -------- -------- NET EARNINGS $ 37,795 $ 52,307 $ (3,754) $ 19,633 ======== ======== ======== ======== BASIC EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $1.39 $ .16 $(.17) $.88 Extraordinary items, net of tax (.07) 2.16 - - Accounting change, net of tax .37 - - - ----- ----- ----- ---- Net earnings $1.69 $2.32 $(.17) $.88 ===== ===== ===== ==== DILUTED EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $1.37 $ .17 $(.17) $.87 Extraordinary items, net of tax (.06) 2.13 - - Accounting change, net of tax .36 - - - ----- ----- ----- ---- Net earnings $1.67 $2.30 $(.17) $.87 ===== ===== ===== ==== 1997: Revenues $385,063 $231,077 $142,184 $265,416 Operating earnings 53,223 24,321 3,301 34,472 Earnings before income taxes 44,502 15,595 (4,377) 27,150 NET EARNINGS $ 27,962 $ 12,169 $ (2,816) $ 18,601 ======== ======== ========= ======== Basic earnings per share $1.26 $.54 $(.13) $.83 ===== ==== ===== ==== Diluted earnings per share $1.25 $.54 $(.13) $.83 ===== ==== ===== ====
10-K/34 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As explained in Note 13 to the financial statements, effective January 1, 1998, the Company changed its method of accounting for unbilled revenues at Boston Gas Company. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 22, 1999 MANAGEMENT'S REPORT ON RESPONSIBILITY The management of Eastern 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. /s/ J. Atwood Ives /s/ Walter J. Flaherty /s/ James J. Harper J. Atwood Ives Walter J. Flaherty James J. Harper Chairman and Senior Vice President and Vice President and Chief Executive Officer Chief Financial Officer Controller 10-K/35 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 sections captioned "Information With Respect To Nominees and Trustees" appearing on pages 4 through 6 and "Section 16(a) Beneficial Ownership Reporting Compliance" appearing on page 13 and "Certain Transactions and Other Disclosures" appearing on page 18 of the 1999 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 sections captioned "Compensation of Executive Officers" appearing on pages 8 through page 10, "Compensation of Trustees" appearing on page 11, "Termination of Employment and Change of Control Arrangements" appearing on pages 11 through 13, "Compensation Committee Report" appearing on pages 13 through 16 and "Performance Graph" appearing on page 17 of the 1999 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 page 2 and "Stock Ownership of Trustees and Executive Officers" appearing on page 7 of the 1999 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 sections captioned "Compensation of Trustees" appearing on page 11 and "Certain Transactions and Other Disclosures" appearing on page 18 of the 1999 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 02493. 10-K/36 (3) LIST OF EXHIBITS 2.1 -- Agreement and Plan of Reorganization dated as of October 17, 1998, by and between Eastern and Colonial Gas Company (incorporated by reference to Exhibit 2.1 to current Report on Form 8-K of Colonial Gas Company dated October 17, 1998 (File No. 0-10007)). 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 (File no. 1-2297)).* 3.2 -- By-Laws of Eastern Enterprises, as amended through February 24, 1999. (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 Exhibit 1 to Form 8-K of Eastern dated March 1, 1990 (File no. 1-2297)).* 4.1.1 -- Agreement between Eastern and The First National Bank of Boston, dated January 30, 1995 (filed as Exhibit 4.1.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1994 (File no. 1-2297)).* 4.1.2 -- Amendment No. 2 to Common Stock Rights Agreement, dated as of July 22, 1998, between Eastern and BankBoston, N.A. (filed as Exhibit 99.1 to Form 8-K of Eastern filed July 28, 1998 (File no. 1-2297)).* 4.1.3 -- Rights Agreement, dated as of July 22, 1998, between Eastern and BankBoston, N.A. (filed as Exhibit 99.2 to Form 8-K of Eastern filed July 28, 1998 (File no. 1-2297)).* 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 -- 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)).* 10.5 -- Eastern's amended and restated Deferred Compensation Plan for Trustees, dated April 22, 1998 (filed as Exhibit 10.5.2 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File no. 1-2297)).*(a) 10.6 -- 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 (File no. 1-2297)).*(a) 10.7 -- Eastern's 1995 Stock Option Plan (filed as Exhibit 10.9 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1994 (File no. 1-2297)).*(a) 10.8 -- 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 (File no. 1-2297)).*(a) 10.8.1 -- Amendment to Eastern's Supplemental Executive Retirement Plan, dated December 8, 1995 (Filed as Exhibit 10.8.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1995 (File no. 1-2297)).*(a) 10.8.2 -- Amendment to Eastern's Supplemental Executive Retirement Plan (filed as Exhibit 10.7 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.9 -- 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 (File no. 1-2297)).*(a) 10.9.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of Boston, N.A. (filed as Exhibit 10.2 to Quarterly Report of Eastern on Form 10-Q for quarter June 30, 1995 (File no. 1-2297)).*(a) 10.9.2 -- Amendment to Trust Agreement between Eastern and the Key Trust Company of Ohio, N.A., as successor trustee, dated December 8, 1995 (filed as Exhibit 10.9.2 to Annual Report of Eastern on Form 10-K for year ended December 31, 1995 (File no. 1-2297)).*(a) 10.9.3 -- Amendment to Trust Agreement between Eastern and Key Trust Company of Ohio, N.A., as successor trustee, dated February 25, 1998 (filed as Exhibit 10.9.3 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File no. 1-2297)).*(a) 10.10 -- 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 (File no. 1-2297)).*(a) 10.11.1 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and J. Atwood Ives (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.11.2 -- Change of Control Agreement, dated as of September 1, 1998, by and between Eastern and Fred C. Raskin (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.11.3 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and Walter J. Flaherty (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.11.4 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and L. William Law, Jr. (filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.11.5 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and Chester R. Messer, II (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.11.6 -- Change of Control Agreement, dated as of November 16, 1998, by and between Eastern and J. Mark Cook.(a) 10.12 -- 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 (File no. 1-2297)).*(a) 10.13 -- 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 (File no. 1-2297)).*(a) 10.14 -- Letter Agreement, dated May 22, 1998, by and between Eastern and Richard R. Clayton.(a) 10.15 -- Employment Agreement, dated as of September 1, 1998, by and between Eastern and Fred C. Raskin (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 (File no. 1-2297)).*(a) 10.16 -- Eastern's Headquarters Retirement Plan, as amended (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter ended September 30, 1991 (File no. 1-2297)).*(a) 10.16.1 -- Amendment to Eastern's Headquarters Retirement Plan, dated April 27, 1995 (filed as Exhibit 10.1 to Quarterly Report of Eastern on Form 10-Q for the quarter June 30, 1995 (File no. 1-2297)).*(a) 10.16.2 -- Amendment to Eastern's Headquarters Retirement Plan, dated June 26, 1997 (filed as Exhibit 10.16.2 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1998 (File no. 1-2297)).*(a) 10.17 -- 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 quarter ended September 30, 1991 (File no. 1-2297)).*(a) 10.17.1 -- Amendment to Midland Enterprises Inc. Salaried Retirement Plan, dated November 4,1994 (filed as Exhibit 10.19.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1994 (File no. 1-2297)).*(a) 10.18 -- 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 (File no. 1-2297)).*(a) 10.18.1 -- Amendment to Boston Gas Company Retirement Plan, dated December 5, 1994 (filed as Exhibit 10.20.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1994 (File no. 1-2297)).*(a) 10.19 -- 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 (File no. 1-2297)).*(a) 10.19.1 -- Trust Agreement made as of April 28, 1995 between Eastern and the Key Trust Company of Ohio, N.A., as successor trustee (Filed as Exhibit 10.19.1 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).* 10.20 -- 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 (File no. 1-2297)).*(a) 10.20.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees, dated December 8, 1995 (filed as Exhibit 10.20.1 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(a) 10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan (Filed as Exhibit 10.21 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(a) 10.21.1 -- Amendment to Eastern's 1996 Non-Employee Trustees' Stock Option Plan (filed as Exhibit 10.21.1 to Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 (File no. 1-2297)).*(a) 10.22 -- 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 (File no. 1-2297)).*(a) 10.23 -- 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 (File no. 1-2297)).*(a) 10.24 -- 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 (File no. 1-2297)).*(a) 10.24.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December 8, 1995 (Filed as Exhibit 10.24.1 to Annual Report of Eastern on Form 10-K for the year ended December 31, 1995 (File no. 1-2297)).*(a) 10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25, 1996 (filed as Exhibit 10.24.2 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File no. 1-2297)).*(a) 10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended February 27, 1997 (filed as Exhibit 10.25 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File no. 1-2297)).* 10.26 -- Credit Agreement, dated as of December 31, 1994, by and between Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (filed as Exhibit 10.26 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File no. 1-2297)).* 10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31, 1995, by and among Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (filed as Exhibit 10.26.1 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File no. 1-2297)).* 10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31, 1996, by and among Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (filed as Exhibit 10.26.2 to Annual Report of Eastern on Form 10-K for year ended December 31, 1996 (File no. 1-2297)).* 13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1998. With the exception of the sections captioned "Six-Year Financial Summary" appearing on page 28 and "Stock Price Range" and "Dividends Declared Per Share" appearing on the inside back cover of the said annual report, which are incorporated by reference in Items 5 and 6 of this Form 10-K. Said annual report is not deemed filed as part of this report. 18.1 -- Letter from Arthur Andersen LLP Regarding Change in Accounting Principle. 21.1 -- Subsidiaries of the registrant. 23.1 -- Consent of Arthur Andersen LLP. 27.1 -- Financial Data Schedule for the twelve months ended December 31, 1998. 27.2 -- Restated Financial Data Schedule for the nine months ended September 30, 1998. 27.3 -- Restated Financial Data Schedule for the six months ended June 30, 1998. 27.4 -- Restated Financial Data Schedule for the three months ended March 31, 1998. 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 Eastern filed Current Reports on Form 8-K on October 14, 1998, October 26, 1998, November 23, 1998 and December 7, 1998. - ---------- *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. EASTERN ENTERPRISES AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND SCHEDULES DECEMBER 31, 1998 (SUBMITTED IN ANSWER TO ITEMS 14(A)(1) AND (2) OF FORM 10-K, SECURITIES AND EXCHANGE COMMISSION) FINANCIAL STATEMENTS 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 of Qualifying accounts and reserves Schedules not listed above are omitted as not applicable or not required under the rules of Regulation S-X. F-1 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 22, 1999. 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 subject 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. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 22, 1999 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports, dated January 22, 1999, included in, and incorporated by reference into, Eastern Enterprises Annual Report on this Form 10-K for the year ended December 31, 1998, into Eastern's previously filed Post-Effective Amendment No. 1 to Form S-16 Registration Statement No. 2-71614 on Form S-3, Form S-4 Registration Statement No. 333-69039 and Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862, No. 33-56424, No. 33-58873 and No. 333-69407. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts March 5, 1999 F-2 SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
ADDITIONS DEDUCTIONS ------------------------- ---------- CHARGES CHARGED FOR WHICH BALANCE TO COSTS CHARGED RESERVES BALANCE DECEMBER 31, AND TO OTHER WERE DECEMBER 31, DESCRIPTION 1997 EXPENSES ACCOUNTS CREATED 1998 - ----------- -------- ------- -------- -------- -------- Reserves deducted from assets -- Reserves for doubtful accounts ....... $ 17,220 $ 5,062 $ 120 $ (5,332) $ 17,070 ======== ======== ======== ======== ======== Reserves for loss on investments ..... $ 19 $ - $ - $ - $ 19 ======== ======== ======== ======== ======== Reserves included in liabilities -- Reserve for postretirement health care $ 98,382 $ 5,540 $ - $ (6,725) $ 97,197 Reserve for coal miner's retiree health care ........................ 76,500 (74,500) - (2,000) - Reserves for employee benefits ....... 25,236 14,092 1,486 (11,098) 29,716 Reserves for environmental expenses .. 25,920 71 82 (958) 25,115 Reserves for insurance claims ........ 13,171 3,869 1,968 (7,076) 11,932 Other ................................ 16,319 377 921 (6,460) 11,157 -------- -------- -------- -------- -------- Total liability reserves ........... $255,528 $(50,551) $ 4,457 $(34,317) $175,117 ======== ======== ======== ======== ======== F-3
SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
ADDITIONS DEDUCTIONS ------------------------- ---------- CHARGES CHARGED FOR WHICH BALANCE TO COSTS CHARGED RESERVES BALANCE DECEMBER 31, AND TO OTHER WERE DECEMBER 31, DESCRIPTION 1996 EXPENSES ACCOUNTS CREATED 1997 - ----------- -------- ------- -------- -------- -------- Reserves deducted from assets -- Reserves for doubtful accounts ....... $ 17,301 $ 5,818 $ 167 $ (6,066) $ 17,220 ======== ======= ===== ======== ======== Reserves for loss on investments ..... $ 19 $ - $ - $ - $ 19 ======== ======= ===== ======== ======== Reserves included in liabilities -- Reserve for postretirement health care ............................... $100,446 $ 4,578 $ - $ (6,642) $ 98,382 Reserve for coal miner's retiree health care ........................ 77,308 - - (808) 76,500 Reserves for employee benefits ....... 24,624 9,690 907 (9,985) 25,236 Reserves for environmental expenses .. 26,809 - 122 (1,011) 25,920 Reserves for insurance claims ........ 12,838 7,348 (530) (6,485) 13,171 Other ................................ 17,680 6,304 41 (7,706) 16,319 -------- ------- ----- -------- -------- Total liability reserves ........... $259,705 $27,920 $ 540 $(32,637) $255,528 ======== ======= ===== ======== ======== F-4
SCHEDULE II EASTERN ENTERPRISES AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
ADDITIONS DEDUCTIONS ------------------------- ---------- CHARGES CHARGED FOR WHICH BALANCE TO COSTS CHARGED RESERVES BALANCE DECEMBER 31, AND TO OTHER WERE DECEMBER 31, DESCRIPTION 1996 EXPENSES ACCOUNTS CREATED 1996 - ----------- -------- ------- -------- -------- -------- Reserves deducted from assets -- Reserves for doubtful accounts ....... $ 16,604 $13,555 $ 164 $(13,022) $ 17,301 ======== ======= ====== ======== ======== Reserves for loss on investments ..... $ 19 $ - $ - $ - $ 19 ======== ======= ====== ======== ======== Reserves included in liabilities -- Reserve for postretirement health care ............................... $102,387 $ 1,311 $3,725 $ (6,977) $ 100,446 Reserve for coal miners retiree health care ........................ 78,125 - - (817) 77,308 Reserves for employee benefits ....... 16,439 12,216 2,896 (6,927) 24,624 Reserves for environmental expenses .. 26,356 - 1,255 (802) 26,809 Reserves for insurance claims ........ 14,133 7,746 1,972 (11,013) 12,838 Other ................................ 18,537 5,212 (837) (5,232) 17,680 ======== ======= ====== ======== ======== Total liability reserves ........... $255,977 $26,485 $9,011 $(31,768) $259,705 ======== ======= ====== ======== ======== F-5
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 5, 1999 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 5th day of March, 1999. SIGNATURE TITLE Chairman and Chief Executive Officer and /s/ J. ATWOOD IVES Trustee - -------------------------- J. ATWOOD IVES /s/ FRED C. RASKIN President and Chief Operating Officer - -------------------------- FRED C. RASKIN /s/ WALTER J. FLAHERTY Senior Vice President and Chief Financial Officer - -------------------------- WALTER J. FLAHERTY /s/ JAMES R. BARKER Trustee - -------------------------- JAMES R. BARKER /s/ RICHARD R. CLAYTON Trustee - -------------------------- RICHARD R. CLAYTON /s/ JOHN D. CURTIN, JR. Trustee - -------------------------- JOHN D. CURTIN, JR. /s/ SAMUEL FRANKENHEIM Trustee - -------------------------- SAMUEL FRANKENHEIM /s/ LEONARD R. JASKOL Trustee - -------------------------- LEONARD R. JASKOL /s/ WENDELL J. KNOX Trustee - -------------------------- WENDELL J. KNOX /s/ RINA K. SPENCE Trustee - -------------------------- RINA K. SPENCE /s/ DAVID B. STONE Trustee - -------------------------- DAVID B. STONE F-6 EXHIBIT INDEX See Item 14(a)(3), "List of Exhibits," for statement of the location of exhibits incorporated by reference. EXHIBIT 2.1 -- Agreement and Plan of Reorganization, dated as of October 17, 1998 by and between Eastern and Colonial Gas Company (incorporated by reference). 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 February 24, 1999. 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 (incorporated by reference). 4.1.2 -- Amendment No. 2 to Common Stock Rights Agreement, dated as of July 22, 1998, between Eastern and BankBoston, N.A. (incorporated by reference). 4.1.3 -- Rights Agreement, dated as of July 22, 1998, between Eastern and BankBoston, N.A. (incorporated by reference). 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 -- Firm Gas Transportation Agreement between Boston Gas Company and Iroquois Gas Transmission System, L.P., dated as of February 7, 1991 (incorporated by reference). 10.5 -- Eastern's amended and restated Deferred Compensation Plan for Trustees, dated April 22, 1998 (incorporated by reference). 10.6 -- Eastern's 1982 Stock Option Plan, as amended (incorporated by reference). 10.7 -- Eastern's 1995 Stock Option Plan (incorporated by reference). 10.8 -- Eastern's Supplemental Executive Retirement Plan, as amended (incorporated by reference). 10.8.1 -- Amendment to Eastern's Supplemental Executive Retirement Plan, dated December 8, 1995 (incorporated by reference). 10.8.2 -- Amendment to Eastern's Supplemental Executive Retirement Plan (incorporated by reference). 10.9 -- Trust Agreement between Eastern and Shawmut Bank of Boston N.A., as amended (incorporated by reference). 10.9.1 -- Amendment to Trust Agreement between Eastern and Shawmut Bank of Boston, NA. (incorporated by reference). 10.9.2 -- Amendment to Trust Agreement between Eastern and the Key Trust Company of Ohio, N.A., as successor trustee, dated December 8, 1995 (incorporated by reference). 10.9.3 -- Amendment to Trust Agreement between Eastern and Key Trust Company of Ohio, N.A., as successor trustee, dated February 25, 1998 (incorporated by reference). 10.10 -- Eastern's Executive Incentive Compensation Plan, as amended (incorporated by reference). 10.11.1 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and J. Atwood Ives (incorporated by reference). 10.11.2 -- Change of Control Agreement, dated as of September 1, 1998, by and between Eastern and Fred C. Raskin (incorporated by reference). 10.11.3 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and Walter J. Flaherty (incorporated by reference). 10.11.4 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and L. William Law, Jr. (incorporated by reference). 10.11.5 -- Change of Control Agreement, dated as of July 22, 1998, by and between Eastern and Chester R. Messer, II (incorporated by reference). 10.11.6 -- Change of Control Agreement, dated as of November 16, 1998, by and between Eastern and J. Mark Cook. 10.12 -- Agreement dated November 27, 1991 between Eastern and J. Atwood Ives (incorporated by reference). 10.13 -- Agreement dated October 25, 1991 between Eastern and Richard R. Clayton (incorporated by reference). 10.14 -- Letter Agreement, dated May 22, 1998, by and between Eastern and Richard R. Clayton. 10.15 -- Employment Agreement, dated as of September 1, 1998, by and between Eastern and Fred C. Raskin (incorporated by reference). 10.16 -- Eastern's Headquarters Retirement Plan, as amended and restated (incorporated by reference). 10.16.1 -- Amendment to Eastern's Headquarters Retirement Plan, dated April 27, 1995 (incorporated by reference). 10.16.2 -- Amendment to Eastern's Headquarters Retirement Plan, dated June 26, 1997 (incorporated by reference). 10.17 -- Midland Enterprises Inc. Salaried Retirement Plan, as amended and restated (incorporated by reference). 10.17.1 -- Amendment to Midland Enterprises Inc. Salaried Retirement Plan, dated November 4, 1994 (incorporated by reference). 10.18 -- Boston Gas Company Retirement Plan, as amended and restated (incorporated by reference). 10.18.1 -- Amendment to Boston Gas Company Retirement Plan, dated December 5, 1994 (incorporated by reference). 10.19 -- Trust Agreement made as of October 2, 1987 between Eastern and The Bank of New York, as amended (incorporated by reference). 10.19.1 -- Trust Agreement made as of April 28, 1995 between Eastern and the Kely Trust Company of Ohio, N.A., as successor trustee (incorporated by reference). 10.20 -- Eastern's Retirement Plan for Non-Employee Trustees, as amended (incorporated by reference). 10.20.1 -- Amendment to Eastern's Retirement Plan for Non-Employee Trustees, dated December 8, 1995 (incorporated by reference). 10.21 -- Eastern's 1996 Non-Employee Trustees' Stock Option Plan (incorporated by reference). 10.21.1 -- Amendment to Eastern's 1996 Non-Employee Trustees' Stock Option Plan (incorporated by reference). 10.22 -- Eastern's 1992 Restricted Stock Plan (incorporated by reference). 10.23 -- Eastern's Restricted Stock Plan for Non-Employee Trustees (incorporated by reference). 10.24 -- Eastern's 1994 Deferred Compensation Plan (incorporated by reference). 10.24.1 -- Amendment to Eastern's Deferred Compensation Plan, dated December 8, 1995 (incorporated by reference). 10.24.2 -- Amendment to Eastern's Deferred Compensation Plan, dated July 25, 1996 (incorporated by reference). 10.25 -- Eastern Enterprises Executive Stock Purchase Loan Plan, as amended February 27, 1997 (incorporated by reference). 10.26 -- Credit Agreement, dated as of December 31, 1994, by and between Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (incorporated by reference). 10.26.1 -- Amendment No. 1 to Credit Agreement, dated as of December 31, 1995, by and among Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (incorporated by reference). 10.26.2 -- Amendment No. 2 to Credit Agreement, dated as of December 31, 1996, by and among Eastern, Boston Gas, Midland, the Banks named therein and The First National Bank of Boston, individually and as Agent (incorporated by reference). 13.1 -- Portions incorporated herein of annual report to shareholders for the year ended December 31, 1998. 18.1 -- Letter from Arthur Andersen LLP Regarding Change in Accounting Principle. 21.1 -- Subsidiaries of the registrant. 23.1 -- Consent of Arthur Andersen LLP. 27.1 -- Financial Data Schedule for the twelve months ended December 31, 1998. 27.2 -- Restated Financial Data Schedule for the nine months ended September 30, 1998. 27.3 -- Restated Financial Data Schedule for the six months ended June 30, 1998. 27.4 -- Restated Financial Data Schedule for the three months ended March 31, 1998. EX-3.2 2 BY-LAWS - AMENDED - THROUGH 2-24-1999 Exhibit 3.2 BY-LAWS OF EASTERN ENTERPRISES ---------------- Adopted July 18, 1929 Amended July 23, 1929 Amended December 18, 1941 Amended April 26, 1945 Amended April 19, 1972 Amended December 10, 1987 Amended April 27, 1989 Amended January 25, 1990 Amended April 23, 1992 Amended July 23, 1992 Amended February 24, 1999 ---------------- BY-LAWS OF EASTERN ENTERPRISES ---------- ARTICLE I. Reference herein to the Declaration of Trust shall apply to the Declaration of Trust establishing Eastern Enterprises, dated July 18, 1929, as the same may be from time to time amended. ARTICLE II. SECTION 1. Except as provided by the Declaration of Trust or these By-Laws, all the affairs and business of this trust shall be managed by the Trustees. SECTION 2. The Trustees may establish a fixed time and place for regular meetings and no call or notice of any such meeting shall be required. Immediately after the annual meeting of Shareholders, a meeting of the Trustees shall be held at the same place and no call or notice thereof shall be required. Special meetings of the Trustees may be held at any time and at any place when called by the President or by the written request of two or more of the Trustees then in office. Notice of such meetings shall be given by the Secretary or Assistant Secretary to each Trustee by mailing a copy to him, postage prepaid, at his usual address, not later than the third day before the meeting, or by telephoning or telegraphing him not later than twenty-six hours before the hour set for such meeting; provided that any meeting shall be valid without call or notice if all the Trustees are personally present or if each absent Trustee waives notice thereof either before or after the meeting by a writing signed by him or his authorized attorney. Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. Less than a quorum may adjourn a meeting of the Trustees from time to time and the meeting may be held as adjourned without further notice. Nothing in this section shall limit the powers of the Trustees to act by vote or resolution without a meeting as prescribed in Article 8 of the Declaration of Trust. SECTION 3. The Trustees shall cause to be kept in books provided for that purpose minutes of all meetings, and originals or copies of other votes or resolutions of the Trustees and minutes of all meetings of the Shareholders. SECTION 4. A Trustee may resign by delivering his or her resignation in writing to the Secretary or Assistant Secretary and such resignation shall take effect upon such delivery unless some other date shall be specified therein. SECTION 5. Each Trustee of this trust, by accepting nomination for election or reelection as a Trustee, shall thereby be subject to the following retirement policy, which may, however, be waived in any particular instance by vote of a majority of the Trustees then in office: no person shall be elected to serve as a Trustee of this trust after he or she shall have reached 68 years of age, except on the condition that his or her resignation as a Trustee take effect at the first annual meeting of Shareholders held after the date on which he or she reaches 70 years of age; provided, that a person who was a Trustee on July 1, 1992, and was 65 years of age or older on such date, may continue to serve as a Trustee and be reelected as such after reaching the age of 70 years, but only on the condition that his or her resignation as a Trustee take effect no later than the first annual meeting of Shareholders held after the date on which he or she reaches 72 years of age. ARTICLE III. OFFICERS, AGENTS, ETC. SECTION 1. The Trustees shall appoint a President, one or more Vice-Presidents, a Treasurer and a Secretary and such other officers and agents as the Trustees may from time to time deem appropriate, none of whom need be Trustees or Shareholders. Except as otherwise prescribed by the Trustees or in the Declaration of Trust or in these By-Laws, each officer shall have the powers and duties usually appertaining to a similar officer of a corporation and shall hold office during the pleasure of the Trustees. Any two or more offices except those of President and Vice President may be held by the same person. Subject to the provisions of Article 3 of the Declaration of Trust, the Treasurer shall have the care and custody of the funds of the trust estate, and shall if the Trustees so require give bond for the faithful discharge of his duties. Unless the two offices are held by one person the Treasurer shall be ex officio an Assistant Secretary and the Secretary shall be ex officio an Assistant Treasurer. SECTION 2. The Trustees may further appoint such committees as they may deem desirable and prescribe their powers, duties and tenure of office. SECTION 3. All agents or employees of this trust shall be subject to removal at any time by the Trustees or by the committee or person respectively appointing or employing them. SECTION 4. The Vice President, or any Vice President if there be more than one, shall in the absence or disability of the President perform the duties and exercise the powers of the President and shall perform such other duties as may be prescribed by the Trustees or by the President. The performance of any of the duties and the exercise of any of the powers of the President by any Vice President shall as to third parties be conclusive proof of his authority so to do. SECTION 5. Assistant Secretaries and Assistant Treasurers shall in the absence or disability of the Secretary or the Treasurer perform the duties and exercise the powers of their respective superiors in office and shall also perform such other duties as may be assigned to them by such superiors. The performance of any of the duties and the exercise of any of the powers of the Secretary or the Treasurer by any Assistant Secretary or any Assistant Treasurer, respectively, shall as to third parties be conclusive proof of his authority so to do. ARTICLE IV. EXECUTIVE COMMITTEE. SECTION 1. The Trustees may from time to time elect from their own number an Executive Committee of not less than three members, which committee may, and unless otherwise provided by the Trustees shall, be vested with all the powers and discretions which the Trustees possess, except as provided in Article 14 of the Declaration of Trust. Each member of the Executive Committee shall continue as a member during the pleasure of the Trustees and the Trustees may at any time dispense with the Executive Committee entirely. SECTION 2. The Executive Committee may establish a fixed time and place for regular meetings, and no call or notice of any such meeting shall be required. Special meetings of the Executive Committee may be held at any time and at any place when called by the President or by the written request of any member of the Executive Committee. Notice of such meeting shall be given by the Secretary or Assistant Secretary to each member of the Executive Committee by mailing a copy to him postage prepaid at his usual address not later than three days before the meeting or by telephoning or telegraphing him not later than twenty-six hours before the hour set for such meeting; provided that any meeting shall be valid without call or notice if all the members of the Executive Committee are personally present or if each absent member waives notice thereof either before or after the meeting by a writing signed by him or his authorized attorney. A majority of the members of the Executive Committee shall constitute a quorum, but less than a quorum may adjourn a meeting from time to time, and the meeting may be held as adjourned without further notice. SECTION 3. The Executive Committee may act by a vote or resolution at a meeting or by a written vote or resolution without a meeting signed by at least a majority of the members and with or without notice to the other members. ARTICLE V. EXECUTION OF INSTRUMENTS. All agreements, deeds, contracts, covenants, bonds, notes, checks, drafts, bills and other securities and instruments made, accepted or endorsed on behalf of this trust shall be signed by such officer or officers or person or persons as the Trustees shall from time to time authorize. Share certificates shall be signed by such officers as the Trustees shall from time to time designate. In case share certificates are countersigned by a transfer agent and registered by a registrar of this trust, one or more of the signatures of such officers may be facsimile. In case any one or more such officers whose signature shall appear on any share certificates shall cease to hold such office before such share certificates shall have been actually issued, such share certificates may nevertheless be issued with the same effect as if the person or persons whose signatures appear thereon had not ceased to hold such office. ARTICLE VI. FISCAL YEAR. Until otherwise determined by the Trustees, the fiscal year of this trust shall be the calendar year. ARTICLE VII. SEAL. The common seal of this trust shall consist of a flat-faced circular die with the name of this trust and the year "1929" on the circumference, and the words "A Massachusetts Voluntary Association" and "Common Seal" in the center. ARTICLE VIII. LOST, ETC., SHARE CERTIFICATES. In case a share certificate shall be lost, stolen or destroyed, or become mutilated, the Trustees, upon submission of evidence satisfactory to them of such fact, may issue a new share certificate and in that connection may require a bond of indemnity satisfactory to them. ARTICLE IX. INTEREST OF JOINT SHAREHOLDERS. In case share certificates are in the name of more than one person, they shall hold as joint tenants the entire interest therein and no future, limited or contingent interest therein shall be recognized other than that of trustee of an express trust, and then only subject to the provisions of Article 35 of the Declaration of Trust. ARTICLE X. CONTROL SHARE ACQUISITIONS. The provisions of Massachusetts General Laws Chapter 110D shall not apply to control share acquisitions of shares of beneficial interest of this trust. ARTICLE XI. TELEPHONIC AND ELECTRONIC VOTING. The delivery of a proxy on behalf of a holder of capital stock of this trust consistent with telephonic or electronically transmitted instructions obtained pursuant to procedures of this trust reasonably designed to verify that such instructions have been authorized by such Shareholder, shall constitute execution and delivery of the proxy by or on behalf of the Shareholder. ARTICLE XII. AMENDMENTS. These By-Laws, or any of them, may at any time and from time to time be altered, amended, added to or repealed, and new By-Laws adopted by vote or resolution of a majority of the Trustees then in office. EX-10.11.6 3 CHANGE OF CONTROL AGREEMENT - DATED 11-16-1998 Exhibit 10.11.6 AGREEMENT This Agreement by and between Eastern Enterprises, a Massachusetts business trust with its principal offices in Weston, Massachusetts ("Eastern"), Midland Enterprises, Inc., a corporation with its principal offices in Cincinnati, Ohio ("Midland") and Jonathan M. Cook (the "Executive"), is entered into as of the 16th day of November, 1998: W I T N E S S E T H T H A T: WHEREAS the Executive is an executive employee of Midland; and WHEREAS the Board of Trustees of Eastern (the "Board") and the Board of Directors of Midland (the "Midland Board") have determined that it is in the best interests of Eastern, Midland, Eastern's shareholders and the Executive to assure continuity in the management of Midland's administration and operations by entering into an agreement to provide the Executive with certain assurances pertaining to compensation and benefits in the event that a Change of Control, as defined below, should be under consideration or should have occurred. NOW, THEREFORE, it is hereby agreed by and between the parties hereto as follows: 1. EMPLOYMENT. Midland agrees that from and after the Effective Date as hereinafter defined it shall continue the Executive in its employ and the Executive agrees that from and after the Effective Date he shall remain in the employ of Midland, in each case for the period described in Section 4 hereof and upon the other terms and conditions herein provided. 2. CERTAIN DEFINITIONS: For purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "Cause" shall mean, subject to the provisions of this definition, (i) conviction of the Executive for (or a plea of nolo contendere by the Executive with respect to) a felony, or (ii) an act by the Executive of fraud or dishonesty which has resulted or is likely to result in material economic damage to Midland, Eastern or Eastern's subsidiaries. No purported termination of Executive shall be deemed a termination for Cause unless the Midland Board shall have made a determination that Cause exists nor unless, in the case of Cause asserted under clause (a)(ii) above, the Midland Board shall have given the Executive the opportunity, upon at least thirty (30) days' prior written notice, to appear and be heard with counsel before the Midland Board. (b) "Change of Control" shall mean the occurrence of any of the following after January 1, 1998: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) or group of "persons" (as so defined), other than Eastern, becomes a beneficial owner directly or indirectly of securities representing twenty-five percent (25%) or more of the combined voting power of the then outstanding voting securities of Eastern; or (ii) there is consummated a merger or consolidation ("merger") involving Eastern and immediately after such merger the beneficial owners immediately prior to such merger of the then outstanding voting securities of Eastern do not continue to own beneficially at least sixty percent (60%) of the voting securities of the entity or entities resulting from such merger; or (iii) there is consummated a sale, lease, exchange, spin-off or other transfer (any of the foregoing, a "transfer") of all or substantially all of the assets or business of Eastern and its subsidiaries, other than any such transfer resulting in beneficial ownership of not less than sixty percent (60%) of the assets or business so transferred or not less than sixty percent (60%) of the voting securities of the entity or entities to which such assets were transferred by the owners immediately prior to the transfer of the then outstanding voting securities of Eastern; or (iv) within any two-year period, individuals who at the beginning of such period constituted the Board of Trustees of Eastern cease for any reason to constitute a majority thereof; provided, that any trustee who is not in office at the beginning of such two-year period but whose election or nomination for election was approved by a vote of at least two-thirds of the trustees in office at the time of such approval who were either trustees of Eastern at the beginning of such period or who were elected to the Board of Trustees pursuant to an election which was, or for which the nomination for election was, previously so approved shall be deemed to have been in office at the beginning of such two-year period; or (v) Eastern sells or otherwise disposes of all or substantially all of its stock of Midland or Midland sells or otherwise disposes of all or substantially all of its assets, excluding in either case any transaction resulting in beneficial ownership of not less than fifty percent (50%) of the assets or business so transferred or not less than fifty percent (50%) of the voting securities of the entity or entities to which such assets were transferred by the owners immediately prior to the transfer of the then outstanding voting securities of Eastern. (c) "Code" shall mean the federal Internal Revenue Code of 1986, as amended. (d) "Disability" shall mean the Executive's demonstrated inability, over a continuous period of at least twelve (12) months, to perform the Executive's duties and responsibilities by reason of a disabling injury or condition that would qualify the Executive for benefits under the long term disability program maintained for employees of Midland. (e) "Effective Date" shall mean the date specified in Section 4(a) below. (f) "Good Reason" means any of the following unless promptly, fully and retroactively corrected by Midland (or by Eastern, in the case of any employee or executive benefit, benefit program, incentive program, or perquisite maintained by Eastern) or unless waived in writing by the Executive: (i) any reduction in the annual rate of base salary payable to the Executive below the higher of the annual rate at which base salary is then being paid to the Executive or the annual rate at which base salary was being paid to the Executive immediately prior to the Effective Date; (ii) the elimination of or any reduction in the bonus opportunities made available to the Executive under any bonus or incentive program; (iii) the elimination of or any reduction in any other employee or executive benefit, benefit program or perquisite then available to the Executive or the Executive's family or that was available to the Executive or the Executive's family immediately prior to the Effective Date, or any change in any such employee or executive benefit, benefit program or perquisite that would result in additional cost to the Executive or the Executive's family, in each case except for changes in broad-based employee benefit programs (that is, employee benefit programs available to non-officer employees generally as well as officers) that have a similar effect on both officer and non-officer participants generally in such programs; (iv) any material change in the Executive's duties, functions or responsibilities (including without limitation reporting lines); (v) any action resulting in a relocation of the Executive's regular place of employment to a location that is more than thirty-five (35) miles from the place where the Executive was regularly employed immediately prior thereto or immediately prior to the Effective Date; and (vi) any other material breach of this Agreement by Midland or Eastern. 3. POSITION AND RESPONSIBILITIES. During the period of employment hereunder, the Executive agrees to serve Midland in an executive capacity, subject to the terms of this Agreement. 4. TERM AND DUTIES. (a) The period of the Executive's employment under this Agreement shall be deemed to have commenced as of the date (the "Effective Date") which precedes by six (6) months the date of a Change of Control and shall continue for a period which ends on the last day of the twenty-four (24) calendar month period which begins on the date of such Change of Control. (b) During the period of employment hereunder and except for illness or incapacity and reasonable vacation periods, the Executive's business time, attention, skill and efforts shall be exclusively devoted to the business and affairs of Midland and its subsidiaries; provided, however, that nothing in this Agreement shall preclude the Executive from engaging in the following: (i) serving as a director, trustee or committee member in any company or organization, (ii) delivering lectures and fulfilling speaking engagements, and (iii) engaging in charitable and community activities, provided that such activities do not materially adversely affect or interfere with the performance of the Executive's obligations under this Agreement. 5. COMPENSATION AND BENEFITS. During the Executive's employment under this Agreement, Midland (or, to the extent provided below, Eastern) shall pay, provide and make available the following: (a) Midland shall pay the Executive base salary at an annual rate that is not less than the annual rate at which base salary was being paid to the Executive by Midland immediately prior to the Effective Date. (b) In addition to the salary payable under subsection (a) above, Midland and Eastern shall provide or make available to the Executive, from and after the Effective Date and during the term of the Executive's employment hereunder, bonus opportunities, benefits, and perquisites not less favorable, and on terms not less favorable, to the Executive than the bonus opportunities, benefits and perquisites provided or made available and on the terms provided or made available to the Executive immediately prior to the Effective Date. 6. BUSINESS EXPENSE. Midland shall pay or reimburse the Executive for all reasonable travel or other expenses incurred in connection with the performance of the Executive's duties under this Agreement in accordance with such procedures as Midland may from time to time establish. 7. TERMINATION OF EMPLOYMENT. Notwithstanding any other provision of this Agreement, the Executive's employment under this Agreement may be terminated: (a) by Midland for Cause (but only if such termination is accomplished in the manner specified in Section 2(a)); (b) by Midland other than for Cause pursuant to Section 7(a) and other than on account of Disability or death; (c) by the Executive for Good Reason; (d) by the Executive other than for Good Reason, Disability or death; or (e) by Midland or the Executive by reason of the Executive's Disability or death. Except in the case of termination by reason of the Executive's death or termination for Cause pursuant to Section 7(a), any termination by Midland of the Executive's employment under this Agreement shall take effect only after thirty (30) days' prior written notice by Midland to the Executive. 8. VESTING OF CERTAIN AWARDS AND BENEFITS. In the event of a Change of Control, the Executive shall be immediately vested in all shares of restricted stock of Eastern then held by Executive, and all stock options then held by the Executive that were awarded under Eastern's 1982 Stock Option Plan or 1995 Stock Option Plan (or any successor plan or plans) and that were not then exercisable shall become immediately exercisable. If the Executive's employment under this Agreement shall have been terminated under Section 7(b) or Section 7(c) above after the Effective Date but before the Change of Control, all shares of restricted stock held by the Executive immediately prior to termination of employment shall be vested and all stock options held by the Executive immediately prior to termination of employment (including replacement options, if any, issued in substitution for such stock options in connection with the Change of Control), whether or not otherwise exercisable, shall be exercisable for a period ending not earlier than the later of (i) the date such options would have been exercisable without regard to this Section 8, or (ii) thirty days following the Change of Control, subject in each case to consummation of the Change of Control; provided, that if stock options are not assumed (and no replacement options are issued) in connection with the Change of Control, clause (ii) shall not apply and Eastern shall provide the Executive the opportunity to exercise all of the stock options held by the Executive immediately prior to termination of employment (whether or not then exercisable) on the same basis as options held by active employees that become exercisable in connection with the Change of Control. The provisions of this Section 8 shall be in addition to, and not in limitation of, any rights that Executive may otherwise have to the vesting of benefits upon a Change of Control. Without limiting the foregoing, this Agreement shall be treated as a "COC Agreement" for purposes of the Eastern Enterprises Supplemental Executive Retirement Plan and the Eastern Enterprises Supplemental Retirement Plan for Certain Officers, each as from time to time amended. 9. PAYMENTS UPON TERMINATION OF EMPLOYMENT. (a) In the event of any termination of the Executive's employment during the term of this Agreement, if such termination is (1) by the Executive pursuant to Section 7(c), above, or (2) by Midland pursuant to Section 7(b) above, Midland shall pay to the Executive the sum of the following amounts within 30 days of such termination (provided, that if such termination of employment occurs after the Effective Date but before the Change of Control, the Executive shall be entitled to the payments described at (i), (ii) and (iii) below only upon consummation of the Change of Control): (i) a lump sum cash amount equal to the product of three (3) times the annual rate at which the Executive was being paid base salary immediately prior to such termination or immediately prior to the Effective Date, if greater; (ii) a lump sum cash amount equal to the product of three (3) times the target benefit or benefits under the Executive's annual bonus or incentive plan or plans in which the Executive was participating for the period including the date of termination or times the Executive's target benefit or benefits under the annual bonus or incentive plan or plans in which the Executive was participating for the period including the Effective Date if higher; and (iii) a lump sum cash amount equal to the product of (A) the Executive's target benefit or benefits for the bonus or incentive period or periods that include the date of termination (under the annual bonus or incentive plan or plans in which the Executive was participating at the time of termination), times a (B) a fraction, the numerator of which is the number of days elapsed in such bonus or incentive period or periods prior to the date of termination, and the denominator of which is three hundred sixty-five (365). In addition, upon termination of employment Midland shall promptly pay to the Executive any salary, bonuses, or other payments earned by the Executive but not yet paid as of the date of termination. (b) For a period of thirty-six (36) months commencing with the month in which a termination described in (a)(1) or (a)(2) above shall have occurred, the Executive and the Executive's family shall continue to be entitled to participate in Midland's or Eastern's medical, dental, life-insurance, disability and other welfare benefit plans and programs at a level of benefits at least as favorable to the Executive and the Executive's family, and on terms at least as favorable to the Executive and the Executive's family, as were available to the Executive and the Executive's family immediately prior to termination or immediately prior to the Effective Date (whichever is more favorable to the Executive and the Executive's family). For purposes of any such benefit that is based on the Executive's length of employment, the Executive shall be deemed credited with three (3) additional years of employment. For purposes of any such benefit that is based on the Executive's average compensation, the average taken into account shall not be less than the average that would be determined by assuming continued base salary and bonus or incentive payments for a period of three (3) years at the rates described at Section 9(a) above, and for purposes of any such benefit that is based on the Executive's compensation at termination of employment, there shall be taken into account the higher of the Executive's compensation at termination or the Executive's compensation immediately prior to the Effective Date. To the extent the continuation of benefits described in this paragraph cannot be accommodated under the plans or programs of Midland or Eastern then in effect, Midland shall provide for substantially equivalent alternative coverage and benefits for the Executive and the Executive's family. Notwithstanding the foregoing, Midland shall not be obligated to provide a benefit or coverage under this paragraph to the extent an equivalent or better benefit or coverage is available to the Executive or the Executive's family, on a basis that is at least as favorable to the Executive and the Executive's family, under a plan or program of another employer. Nothing in this paragraph shall be construed as requiring Midland or Eastern to pay severance in addition to the payments and benefits otherwise provided for in this Agreement. 10. CERTAIN TAX-RELATED PAYMENTS. (a) In the event it shall be determined that any "payment in the nature of compensation" (as that term is used in Section 280G of the Code) to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would be subject to the excise tax imposed by Section 4999 of the Code or comparable state or local tax or any interest or penalties with respect to such excise tax or comparable state or local tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then, subject to the following sentence, the cash payments described at Section 9(a)(i), (ii) and (iii) hereof (but excluding, for the avoidance of doubt, any payments referred to in the last sentence of Section 9(a)) shall be reduced, but not below zero, to the extent (and only to the extent) necessary to avoid the imposition of an Excise Tax. Notwithstanding the foregoing, if the preceding sentence would result in a reduction of more than ten percent (10%) in the Executive's total "parachute payments" (as that term is defined in Section 280G(b)(2) of the Code), or if the reduction described in the preceding sentence would not eliminate the Excise Tax, no reduction shall be made in the payments or benefits due to the Executive under this Agreement or otherwise and instead the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment"). The Gross-Up Payment shall be equal to the sum of the Excise Tax and all taxes (including any interest or penalties imposed with respect to such taxes) imposed upon the Gross-Up Payment. (b) If the Executive determines that a Gross-Up Payment is required, the Executive shall so notify Midland in writing, specifying the amount of Gross-Up Payment required and details as to the calculation thereof. Midland shall, within 30 days, either pay such Gross-Up Payment (net of applicable wage withholding) to the Executive or furnish an unqualified opinion from Independent Tax Counsel (as defined below), addressed to the Executive and Midland, that there is substantial authority (within the meaning of Section 6661 of the Code) for the position that no Gross-Up Payment is required. "Independent Tax Counsel" means a lawyer with expertise in the area of executive compensation tax law, who shall be selected by the Executive and shall be reasonably acceptable to Midland, and whose fees and disbursements shall be paid by Midland. (c) If the Internal Revenue Service or other tax authority proposes in writing an adjustment to the income tax of the Executive which would result in a Gross-Up Payment, the Executive shall promptly notify Midland in writing and shall refrain for at least thirty days after giving such notice, if so permitted by law, from paying any tax (including interest, penalties and additions to tax) asserted to be payable as a result of such proposed adjustment. Before the expiration of such period, Midland shall either pay the Gross-Up Payment or provide an opinion from Independent Tax Counsel to the Executive and Midland as to whether it is more likely than not that the proposed adjustment would be successfully challenged if the matter were to be litigated. If the opinion provides that a challenge would be more likely than not to be successful if the issue were litigated, and Midland requests in writing that the Executive contest such proposed adjustment, then the Executive shall contest the proposed adjustment and shall consult in good faith with Midland with respect to the nature of all action to be taken in furtherance of the contest of such proposed adjustment; provided that the Executive, after such consultation with Midland, shall determine in his sole discretion the nature of all action to be taken to contest such proposed adjustment, including (A) whether any such action shall initially be by way of judicial or administrative proceedings, or both (B) whether any such proposed adjustment shall be contested by resisting payment thereof or by paying the same and seeking a refund thereof, and (C) if the Executive shall undertake judicial action with respect to such proposed adjustment, the court or other judicial body before which such action shall be commenced and the court or other judicial body to which any appeals should be taken. The Executive agrees to take appropriate appeals of any judicial decision that would require Midland to pay a Gross-Up Payment, provided Midland requests in writing that the Executive do so and provides an opinion from Independent Tax Counsel to the Executive and Midland that it is more likely than not that the appeal would be successful. The Executive further agrees to settle, compromise or otherwise terminate a contest with the Internal Revenue Service or other tax authority with respect to all or a portion of the proposed adjustment giving rise to the Gross-Up Payment, if requested by Midland in writing to do so at any time, in which case the Executive shall be entitled to receive from Midland the Gross-Up Payment. In no event shall the Executive compromise or settle all or any portion of a proposed adjustment which would result in a Gross-Up Payment without the written consent of Midland, which consent shall not be unreasonably withheld. The Executive shall not be required to take or continue any action pursuant to this Section 10 unless Midland acknowledges its liability under this Agreement in the event that the Internal Revenue Service or other tax authority prevails in the contest. Midland hereby agrees to indemnify the Executive in a manner reasonably satisfactory to the Executive for any fees, expenses, penalties, interest or additions to tax which the Executive may incur as a result of contesting the validity of any Excise Tax and to reimburse the Executive promptly upon receipt of a written demand of the Executive for all costs and expenses which the Executive may incur in connection with contesting such proposed adjustment (including reasonable fees and disbursements of Independent Tax Counsel). If the Executive shall have contested any proposed adjustment as above provided, and for so long as the Executive shall be required under the terms of this Section 10(c) to continue such contest, Midland shall not be required to pay a Gross-Up Payment until there occurs a Final Determination (as defined below) of the liability of the Executive for the tax and any interest, penalties and additions to tax asserted to be payable as a result of such proposed adjustment. A "Final Determination" shall mean (A) a decision, judgment, decree or other order by any court of competent jurisdiction, which decision, judgment, decree or other order has become final after all allowable appeals by either party to the action have been exhausted, the time for filing such appeal has expired or the Executive has no right under the terms hereof to request an appeal, (B) a closing agreement entered into under Section 7121 of the Code or any other settlement agreement entered into in connection with an administrative or judicial proceeding and with the consent of the Executive, or (C) the expiration of the time for instituting a claim for refund, or if such a claim was filed, the expiration of the time for instituting suit with respect thereto. (d) In the event the Executive receives any refund from the Internal Revenue Service or other tax authority on account of an overpayment of Excise Tax, such amount, together with that part of any Gross-Up Payment attributable to such amount, shall be promptly paid by the Executive to Midland. 11. SOURCE OF PAYMENTS. Except as provided at Section 8 above, all payments provided for under this Agreement shall be paid or provided from the general assets of Midland and its subsidiaries or affiliates (to the extent not provided by insurance). Midland shall not be required to establish a special or separate fund or other segregation of assets to assure such payments. Nothing in this Section, however, shall be construed as restricting Midland's ability to establish or fund a so-called "rabbi trust" or similar arrangement to help Midland meet its liabilities hereunder, provided that the establishment or funding of such a trust or arrangement does not by its terms or by operation of law limit or purport to limit Midland's liabilities hereunder or otherwise adversely affect the Executive. 12. LITIGATION EXPENSES. In the event of any litigation or other proceeding between Midland or Eastern and the Executive with respect to the subject matter of this Agreement and the enforcement of rights asserted in good faith hereunder, or, in the event of termination of employment pursuant to Section 7(b) or Section 7(c) above, with respect to any other remuneration or benefits with respect to the Executive (including, without limitation, payments or benefits with respect to the Executive under any qualified or nonqualified pension or retirement agreement, plan, policy, program or arrangement), Midland shall reimburse the Executive for all costs and expenses relating to such litigation or other proceeding, including reasonable attorneys fees and expenses, promptly upon receipt of a written demand therefor and regardless of whether such litigation results in any settlement or judgment or order in favor of any party. Notwithstanding any provision of Ohio law to the contrary, in no event shall the Executive be required to reimburse Midland or Eastern for any of the costs and expenses relating to such litigation or other proceeding. 13. INCOME TAX WITHHOLDING. Midland and Eastern may withhold from any payments made under this Agreement all federal, state, city or other taxes as shall be required pursuant to any law or governmental regulation or ruling. 14. AGREEMENT NOT TO COMPETE, ETC. The Executive agrees that during the 36-month period beginning on the date the Executive's employment with Eastern and its subsidiaries, including Midland, is terminated during the term thereof pursuant to Section 7(b) or Section 7(c) above, he will not, within the states in which Eastern operates its business or in which any of Eastern's subsidiaries operates its business, engage, either as a principal, employee, partner, consultant or investor (other than through a 1% or smaller interest in a publicly traded entity) in a business which competes with any such business of Eastern or its subsidiaries. The Executive further agrees that, following any such termination of his employment, he will continue to comply with Eastern's policies and procedures regarding confidential information, as that term is hereinafter defined, and will never directly or indirectly use or disclose, except to the Executive's attorney or as required by judicial or regulatory process or order, any confidential information as so defined. For purposes of this paragraph, the term "confidential information" means any and all information (including without limitation information related to the development and implementation of business strategy, financial and operating forecasts, business policies and practices, and all other information related to the future conduct of business) (i) that the Executive has acquired in connection with his employment with Eastern and its subsidiaries, (ii) that is not generally known or available to others with whom Eastern or its subsidiaries do, or plan to, compete or do business, and (iii) that pertains to the business of, or belongs to, Eastern or its subsidiaries or a person described in clause (ii). The Executive agrees that if, at any time, pursuant to action of any court of competent jurisdiction, the operation of any part of this Section 14 shall be determined to be unlawful or otherwise unenforceable, then the coverage of this Section 14 shall be deemed to be restricted as to duration, geographical scope or otherwise, to the extent, but only to the extent, necessary to make this paragraph lawful and enforceable in the particular jurisdiction in which such determination is made. The Executive acknowledges and agrees that, were he to breach the provisions of this Section 14, the harm to Eastern and its subsidiaries would be irreparable. The Executive therefore agrees that in the event of such a breach or threatened breach, Eastern or its subsidiaries shall have the right to obtain preliminary and permanent injunctive relief against any such breach without having to post bond. Nothing herein shall prohibit Eastern or its subsidiaries from seeking damages for a breach by the Executive of this Section 14, but neither Eastern nor any other person shall withhold or offset any payments or benefits due or owing to the Executive under the terms of this Agreement or otherwise (including, without limitation, payments or benefits with respect to the Executive under any qualified or nonqualified pension or retirement agreement, plan, policy, program or arrangement), and all such payments and benefits shall be promptly paid or provided to the Executive in accordance with the terms of this Agreement (or such other agreement, plan, policy, program or arrangement, as the case may be) without regard to any breach or alleged or threatened breach by Executive of any provision of this Section 14. 15. ENTIRE UNDERSTANDING. This Agreement contains the entire understanding between Eastern, Midland and the Executive with respect to the subject matter hereof and supersedes any prior Change of Control or similar severance or salary continuation agreement between Midland or Eastern (including any of Eastern's subsidiaries other than Midland) and the Executive. 16. SEVERABILITY. If, for any reason, any one or more of the provisions or part of a provision contained in this Agreement shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision or part of a provision of this Agreement not held so invalid, illegal or unenforceable, and each other provision or part of a provision shall to the full extent consistent with law continue in full force and effect. 17. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this Agreement shall preclude Eastern or Midland from consolidating or merging into or with, or transferring all or substantially all of its assets to, another person that assumes this Agreement and all obligations and undertakings of Eastern or Midland, respectfully, hereunder. Upon such a consolidation, merger or transfer of assets and assumption, involving Eastern or Midland, the terms "Eastern" and "Midland", respectfully, as used herein shall mean such other person and this Agreement shall continue in full force and effect. 18. SURVIVAL OF OBLIGATIONS. The obligations of Eastern and Midland under this Agreement shall survive the termination for any reason of this Agreement (whether such termination is by Eastern, by Midland, by the Executive, upon the expiration of this Agreement or otherwise). 19. NOTICES. All notices, requests, demands and other communications required or permitted hereunder shall be given in writing and shall be deemed to have been duly given if delivered or mailed, registered or certified, postage prepaid with return receipt requested, as follows: (a) To Eastern: Eastern Enterprises 9 Riverside Road Weston, MA 02493 Attention: Legal Department (b) To Midland: Midland Enterprises, Inc. 300 Pike Street P.O. Box 1460 Cincinnati, OH 45201 Attention: Legal Department (with a copy to Eastern) (c) To the Executive: Jonathan M. Cook 5427 Old Course Drive Charlotte, NC 28277 or to such other address as either party shall have previously specified in writing to the other pursuant to this Section 19. 20. NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect. 21. BINDING AGREEMENT. This Agreement shall be binding upon (subject to Section 25(a))and shall inure to the benefit of the Executive, Eastern and Midland and their respective successors and assigns. 22. MODIFICATION AND WAIVER. (a) Prior to the Effective Date this Agreement may be modified, amended or terminated by the Board of Trustees of Eastern. From and after the Effective Date this Agreement may not be modified, amended or terminated except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement except by written instrument signed by the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 23. HEADINGS OF NO EFFECT. The paragraph headings contained in this Agreement are included solely for convenience of reference and shall not in any way affect the meaning or interpretation of any of the provisions of this Agreement. 24. GOVERNING LAW. This Agreement and its validity, interpretation, performance and enforcement shall be governed by the laws of the State of Ohio, without giving effect to the choice of law provisions in effect in such State. 25. MISCELLANEOUS. (a) Eastern shall be liable under this Agreement solely with respect to its obligations under Sections 5, 8, 9 and 21 hereof. (b) Reference is hereby made to the declaration of trust establishing Eastern Enterprises 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 said declaration as trustees and not personally, and no trustee, shareholder, officer or agent of Eastern Enterprises shall be held to any personal liability in connection with the affairs of said Eastern Enterprises, but the trust estate only is liable. IN WITNESS WHEREOF, Eastern and Midland have caused this Agreement to be executed by their respective officers thereunto duly authorized, and the Executive has signed this Agreement, all as of the date first above written. EASTERN ENTERPRISES By: /s/ J. Atwood Ives ------------------------- MIDLAND ENTERPRISES, INC. By: /s/ Robert L. Doettling ------------------------- By: /s/ Jonathan M. Cook ------------------------- Jonathan M. Cook EX-10.14 4 LETTER AGREEMENT DATED - 5-22-1998 Exhibit 10.14 May 22, 1998 Mr. Richard R. Clayton Eastern Enterprises 9 Riverside Road Weston, MA 02193 Dear Dick: This letter will confirm the agreement between you and Eastern Enterprises ("Eastern") concerning your status with Eastern. 1. Effective August 31, 1998, you hereby retire as an employee of Eastern and resign your position as president and chief operating officer of Eastern and as a member of any of its committees and the boards and committees of any of its affiliates and subsidiaries. The Compensation Committee has approved your retirement as contemplated by Eastern's supplemental executive retirement plan ("SERP"). 2. You will continue to serve as a Trustee of Eastern until the 1999 Annual Meeting of Shareholders although you may resign at any time. You shall receive no fees, retainers or other compensation for such service on the board. 3. You will be entitled to receive a pro rata share (through August 31, 1998) of the 1998 incentive award which you would have been entitled to receive, but for your retirement, under the Executive Incentive Compensation Plan, as determined by the Compensation Committee. 4. You will be entitled to receive a severance payment at the time of your retirement in an amount to be determined by the Compensation Committee in its discretion based on the value of your unvested stock options (other than options issued in 1998). 5. Effective August 31, 1998, you hereby waive any and all rights under your employment agreement with Eastern, dated October 25, 1991, and your salary continuation agreement with Eastern, dated July 28, 1994. 6. Commencing August 31, 1998, you will be retained as a consultant to Eastern, in which capacity you will render consulting services as requested by the Chairman and CEO of Eastern. The term of your engagement as a consultant hereunder shall be one year, ending August 31, 1999 (the "consulting period"). During the consulting period, you shall be available for 104 days of consulting work on a schedule agreed upon with the Chairman and CEO of Eastern. For this purpose, your time spent preparing for and attending meetings of the Board of Trustees shall be credited against your consulting commitment. 7. During the consulting period, Eastern shall pay you for your consulting services at the annual rate of $208,000, ($17,333.33 payable monthly), plus reimbursement of reasonable expenses. You will also be provided with a laptop computer for your consulting work during the consulting period. 8. All payments under paragraph 7 above shall be separate from and in addition to any benefits to which you may be entitled under Eastern's pension program, including the SERP, or other benefits available generally to retirees and former employees of Eastern. If you agree to the terms set forth above, please sign both copies of this letter in the space provided for below, and return one fully-executed copy to me. Reference is hereby made to the declaration of trust establishing Eastern Enterprises dated July 18, 1929, as amended, a copy of which is on file in the office of the Secretary of the Commonwealth of Massachusetts. The name, "Eastern Enterprises" refers to the trustees under said declaration of trust as trustees and not personally, and no trustee, shareholder, officer or agent of Eastern Enterprises shall be held to any personal liability in connection with the affairs of said Eastern Enterprises, but the trust estate only is liable. Sincerely, EASTERN ENTERPRISES By: /s/ J. Atwood Ives ------------------------ The foregoing is hereby accepted, agreed and confirmed. By: /s/ Richard R. Clayton ------------------------ Richard R. Clayton EX-13.1 5 PORTIONS - ANNUAL REPORT - YEAR ENDED 12-31-1998 Exhibit 13.1 SIX-YEAR FINANCIAL REVIEW
Years ended December 31, 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------ (In thousands, except per share data) REVENUES: Natural gas distribution $667,106 $ 754,481 $ 755,391 $698,123 $708,694 $659,310 Marine transportation 261,061 269,259 301,880 296,339 264,692 254,921 Other services 7,097 -- -- -- -- -- ------------------------------------------------------------------------------------------- TOTAL REVENUES 935,264 1,023,740 1,057,271 994,462 973,386 914,231 OPERATING EARNINGS: Natural gas distribution 88,913 87,773 77,291 69,264 73,438 56,421 Marine transportation 26,634 34,614 58,415 57,828 35,805 33,001 Other services (9,043) (1,481) -- -- -- -- Headquarters (6,099) (5,589) (5,472) (5,756) (4,221) (4,675) ------------------------------------------------------------------------------------------- TOTAL OPERATING EARNINGS 100,405 115,317 130,234 121,336 105,022 84,747 OTHER INCOME (EXPENSE): Interest income 7,582 8,997 9,419 5,633 1,953 3,213 Interest expense (33,584) (37,411) (37,290) (41,273) (41,001) (37,740) Other, net 5,591 (4,033) (114) 4,109 2,546 (1,241) ------------------------------------------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 79,994 82,870 102,249 89,805 68,520 48,979 Provision for income taxes 29,166 26,954 37,748 26,244 26,311 20,077 ------------------------------------------------------------------------------------------- EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE 50,828 55,916 64,501 63,561 42,209 28,902 Discontinued operations and accounting change (1) 8,193 -- -- -- 12,212 (58,182) Extraordinary items (2) 46,960 -- -- (6,500) -- (45,500) ------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $105,981 $ 55,916 $ 64,501 $ 57,061 $ 54,421 $(74,780) =========================================================================================== NUMBER OF COMMON SHARES: Outstanding at year end 22,525 22,383 22,248 22,097 22,272 22,758 Diluted weighted average 22,680 22,498 22,414 22,171 22,626 24,256 DILUTED PER SHARE DATA:(3) EARNINGS FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEMS AND ACCOUNTING CHANGE $2.24 $2.49 $2.88 $2.87 $1.87 $ 1.19 Discontinued operations and accounting change(1) 0.36 -- -- -- 0.54 (2.39) Extraordinary items(2) 2.07 -- -- (0.30) -- (1.88) ------------------------------------------------------------------------------------------- NET EARNINGS (LOSS) $4.67 $2.49 $2.88 $2.57 $2.41 $(3.08) =========================================================================================== Dividends declared $ 1.65 $ 1.61 $ 1.51 $ 1.42 $ 1.40 $ 1.40 Shareholders' equity 24.24 21.64 20.72 19.30 18.09 17.17 FINANL STATISTICS AND RATIOS: Cash from operating activities $ 134,256 $ 146,640 $ 128,439 $ 163,359 $ 121,885 $ 42,750 Capital expenditures 113,712 89,216 119,783 85,352 64,014 68,122 Depreciation and amortization 75,521 71,322 67,229 64,005 61,197 55,375 Total assets 1,518,370 1,530,365 1,514,853 1,463,924 1,422,830 1,439,726 Long-term debt 385,519 371,492 367,683 379,018 387,901 351,829 Shareholders' equity 546,069 484,470 461,013 426,473 403,004 390,723 Debt/equity ratio 41/59 43/57 44/56 47/53 49/51 47/53 Return on total capital(4) 8.0% 9.3% 10.6% 10.9% 8.5% 6.1% Return on equity(4) 9.9% 11.9% 14.6% 15.4% 10.6% 6.2% - ------------------------------------------------------------------------------------------------------------------------------- (1) Includes accounting change to adopt accrual method for unbilled revenue in 1998, and results from Water Products Group net of tax in 1994 and 1993. (2) Provision (credits) for Coal Act liabilities of $(74,500), $10,000 and $70,000 pre-tax in 1998, 1995 and 1993, respectively and loss on early extinguishment of debt of $2.3 million pre-tax in 1998. (3) Basic earnings per share from continuing operations before extraordinary items and accounting change were $2.26, $2.50, $2.90, $2.88 and $1.19 for 1998 through 1993, respectively. (4) Based on earnings from continuing operations before extraordinary items and accounting change.
STOCK PRICE RANGE 1998 1997 QUARTER HIGH LOW HIGH LOW - ------- ---- --- ---- --- FIRST $45 5/8 $40 3/8 $36 3/8 $30 1/2 SECOND 44 3/4 37 5/8 35 7/8 30 1/2 THIRD 43 1/2 38 1/4 38 1/16 34 3/4 FOURTH 44 1/4 40 45 3/8 36 3/4 DIVIDENDS DECLARED PER SHARE QUARTER 1998 1997 - ------- ---- ---- FIRST $ .41 $ .40 SECOND .41 .40 THIRD .41 .40 FOURTH .42 .41 ----- ----- TOTAL $1.65 $1.61 ===== ===== EX-18.1 6 ACCNTANTS LTR./CHANGE IN ACCNTING PRINCIPLES Exhibit 18.1 January 22, 1999 Eastern Enterprises 9 Riverside Road Weston, MA 02193 Re: Form 10-K Report for the Year Ended December 31, 1998 Ladies and Gentlemen: This letter is written to meet the requirements of Regulation S-K calling for a letter from a registrant's independent public accountants whenever there has been a change in accounting principle or practice. During the fourth quarter of 1998, the Company's subsidiary, Boston Gas Company, changed its method of accounting for unbilled revenues, retroactively applied as of January 1, 1998, from recording revenue when billed to its customers based on its monthly meter reading schedule to estimating and accruing the amounts of revenues associated with service provided after billing through the end of the accounting period. According to management of Boston Gas Company, this change was made to better match revenues with service provided to customers and to be consistent with the prevalent method in the utility industry. We are of the opinion that Boston Gas Company's change in method of accounting is to an acceptable alternative method of accounting, which, based upon the reasons stated for the change and our discussions with Boston Gas Company management, is also preferable under the circumstances in this particular case. In arriving at this opinion, we have relied on the business judgment and business planning of Boston Gas Company's management. Very truly yours, /s/ Arthur Andersen LLP Arthur Andersen LLP EX-21.1 7 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 Essex Gas Company................ Massachusetts Midland Enterprises Inc. ........ Delaware EX-23.1 8 ACCOUNTANTS CONSENT Exhibit 23.1 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 22, 1999. 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 subject 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. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts January 22, 1999 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports, dated January 22, 1999, included in, and incorporated by reference into, Eastern Enterprises Annual Report on this Form 10-K for the year ended December 31, 1998, into Eastern's previously filed Post-Effective Amendment No. 1 to Form S-16 Registration Statement No. 2-71614 on Form S-3, Form S-4 Registration Statement No. 333-69039 and Form S-8 Registration Statements No. 2-77146, No. 33-19990, No. 33-40862, No. 33-56424, No. 33-58873 and No. 333-69407. /s/ Arthur Andersen LLP Arthur Andersen LLP Boston, Massachusetts March 5, 1999 EX-27.1 9 FDS FOR 12 MONTH PERIOD ENDING 12-31-98
5 This schedule contains summary financial information extracted from the consolidated statement of earnings and the consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1 159,836 0 121,939 17,070 55,866 380,325 1,722,718 746,969 1,518,370 178,355 385,519 29,360 0 22,536 523,533 1,518,370 667,106 935,264 489,160 715,623 93,330 12,733 33,584 79,994 29,166 50,828 0 46,960 8,193 105,981 4.72 4.67 EPS - Primary is EPS Basic per SFAS 128 EPS - Fully Diluted is EPS - Diluted per SFAS 128
EX-27.2 10 RESTATED FDS FOR 9 MONTH PERIOD ENDING 9-30-98
5 This schedule contains summary financial information extracted from the consolidated statement of earnings and the consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 167,501 0 81,949 17,862 56,176 345,864 1,699,539 735,068 1,476,399 151,035 387,311 29,351 0 22,508 518,665 1,476,339 479,529 677,228 356,565 520,181 73,103 10,110 24,495 49,339 18,144 31,195 0 49,960 8,193 86,348 3.84 3.80 EPS - Primary is EPS Basic per SFAS 128 EPS - Fully Diluted is EPS - Diluted per SFAS 128
EX-27.3 11 RESTATED FDS FOR 6 MONTH PERIOD ENDING 6-30-98
5 This schedule contains summary financial information extracted from the consolidated statement of earnings and the consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1 170,268 0 118,615 19,222 43,944 283,823 1,671,260 725,676 1,401,441 142,567 320,167 29,343 0 22,486 532,757 1,401,441 412,148 541,347 302,147 409,332 48,450 9,878 16,950 56,737 21,788 34,949 0 46,960 8,193 90,102 4.01 3.97 EPS - Primary is EPS Basic per SFAS 128 EPS - Fully Diluted is EPS - Diluted per SFAS 128
EX-27.4 12 RESTATED FDS FOR 3 MONTH PERIOD ENDING 3-31-98
5 This schedule contains summary financial information extracted from the consolidated statement of earnings and the consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 JAN-01-1998 MAR-30-1998 1 124,737 0 188,072 19,065 39,310 367,769 1,649,789 711,075 1,482,995 230,900 321,508 29,335 0 22,480 490,642 1,482,995 290,232 352,922 210,914 263,417 22,713 7,124 9,324 50,344 19,277 31,067 0 (1,465) 8,193 37,795 1.69 1.67 EPS - Primary is EPS Basic per SFAS 128 EPS - Fully Diluted is EPS - Diluted per SFAS 128
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