EASTERN ENTERPRISES History

Address:

9 Riverside Road
Weston, Massachusetts 02193
U.S.A.

Telephone: (617) 647-2300

Public Company
Incorporated: 1929 as Eastern Gas and Fuel Associates
Employees: 4,400
Sales: $950 million
Stock Exchanges: Boston New York Pacific

Company History:

Eastern Enterprises, a company with total assets of more than $1 billion, provides management and staff services to its largely self-financed and independently operated subsidiaries which are leaders in marine transportation, natural gas distribution, and water treatment system components and technology. Eastern's four principal subsidiaries are Midland Enterprises Inc. of Cincinnati, Boston Gas Company, WaterPro Supplies Corporation of Eden Prairie, Minnesota, and Ionpure Technologies Corporation of Lowell, Massachusetts.

Midland Enterprises, with ten subsidiaries of its own operating 2,499 barges and 100 boats, is the leading carrier of coal and other dry cargo on the country's inland waterways. Supporting that fleet are terminals, service and repair facilities, and a barge construction facility. Boston Gas Company is New England's largest natural gas distributor. Serving Boston and 73 other cities in eastern and central Massachusetts, Boston Gas has more than half a million customers. WaterPro is the largest United States distributor of components for the repair, improvement, and expansion of municipal water supply and wastewater collection systems. Ionpure manufactures and services ultrapure water purification systems for commercial and industrial use in the United States and abroad.

Eastern Enterprises was founded in 1929 when the Massachusetts Gas Company and some units of Koppers Company of Pittsburgh formed a voluntary association under the name Eastern Gas and Fuel Associates. Koppers, which was primarily engaged in the heavy construction business, then and for a number of years thereafter maintained controlling interest in the new company. Koppers built coke, steel, and chemical plants and considered Eastern to be a logical addition to its numerous enterprises.

Despite the fact that the new company was formed barely 100 days before the great stock market crash, Eastern Gas and Fuel Associates did well initially, selling fuel to the rail, steel, and shipping industries, as well as to electric utilities. It acquired several area gas companies and integrated them with Boston Consolidated Gas Company (now Boston Gas), combined Eastern and Koppers coal mines, and enlarged and modernized the Everett, Massachusetts, coke plant, which sold its coke oven gas as home heating and industrial fuel to Boston Gas. Other coke plants did the same with utilities in New Haven and Philadelphia.

In 1932 the crash that began on Wall Street three years earlier finally reached Eastern. Sales plummeted, workers were laid off, and those relatively few who remained with the company took significant pay cuts. 'For Eastern and all its people at that time, it was an experience not soon to be forgotten.... These were indeed difficult and testing years,' wrote John N. Philips, Eastern's chairman of the board, in the company's 1979 annual report. The difficult business climate was exacerbated by increased taxes imposed by the government in an attempt to turn around the economy and by the increasing strength of labor unions, who demanded better wages and working conditions and more job security.

But Eastern survived--just in time, as Philips noted--to be confronted by World War II and all the attendant problems and dislocations caused by the country's mobilization. Business was good during the war years, but the company struggled with rising costs and the loss of trained workers. Still, it weathered the war and was in sufficiently healthy condition by 1949 to join with three other investors in the formation of the Algonquin Gas Transmission Company, whose mission was to pipe natural gas to New England.

Eastern split from Koppers in 1950 to become an independent company at a time when the postwar economy was expanding rapidly. Although this expansion provided many opportunities for the company, it also posed some problems. Increasingly, coal was being replaced by oil and natural gas as an energy source. The rail industry was moving quickly from coal to diesel locomotives, leaving Eastern with an enormous hole in its coal market, which it succeeded in filling only by selling coal abroad to nations that were gearing up steel production facilities. Eastern's blast furnace and the coke plants in Everett and New Haven were closed, and the company's coal mines were kept in operation only because they became highly mechanized. On the other hand, Eastern's participation in Algonquin enabled it to take advantage of a major expansion of natural gas production in the Southwest and the eventual pipeline transmission of gas to the Northeast in 1953. The company's Boston Gas operation also moved into the home heating market, competing with the cheap oil being imported in increasing quantities from the Middle East. Overall, Eastern managed to adjust to the energy changes of the 1950s, and gains were made in productivity and wages; even employee benefit plans, including medical insurance, life insurance, and pensions, were established or improved.

In the 1960s, the company accelerated its search for opportunities to replace the operations it had closed and add new areas of development. In 1961 Eastern acquired Midland Enterprises Inc. and its operating subsidiary, a small barge company named the Ohio River Company. This company had revenues of $24 million, employed 900 workers, and operated a fleet of fewer than 700 vessels.

The Midland merger helped persuade Eastern that it was time to make changes in its organizational and financial structure. In 1963 it completed a transformation from a vertical to a horizontal organization, becoming a group of separate but related businesses, each retaining financial independence. During this period, for example, all coal operations were organized under a newly formed company called Eastern Associated Coal Corp., and Eastern disposed of its long-held and substantial investment in Norfolk and Western Railway. By the end of the 1960s, Eastern had managed to reduce and simplify its equity and debt, freeing its various holdings to operate on their own while retaining for itself the responsibilities of coordination and general direction.

A number of other changes were in store for Eastern during the 1970s. In March 1971 Eastern acquired the Chotin Transportation Co., an inland waterways barge line; at the same time, the company sold its fleet of coastal ships. In January 1972 Eastern acquired by statutory merger three small gas companies serving 25,000 customers in 15 eastern and central Massachusetts towns for $5.7 million. The following year, Boston Gas marked its 150th anniversary by acquiring for $28 million four more companies with a total of 175,000 customers in 28 communities north of Boston. Two more subsidiaries were created in 1978 to develop coal ventures and participate in oil and gas production in the Midwest and the West. In 1979, Eastern--still known then as Eastern Gas and Fuel Associates--marked its 50th anniversary, counting 15,000 stockholders, net sales and revenues of $860 million, and a work force of 9,800.

But 1979 was also a year of 'major belt-tightening,' as Eastern's three top executives, William J. Pruyn, Robert H. Freeman, and Robert W. Weinig, told company stockholders in Eastern's annual report. Weakness in the steel industry worldwide and an overabundance of coal reduced prices and profit margins in the company's coal operations. Higher labor and material costs were offset by cutting into the work force: one small coal mine was closed, activity at other mines were scaled back, and all coal operations were closely scrutinized.

Also of concern to the executives was the continued viability of the Philadelphia Coke Company in the face of increasingly tougher environmental regulations on coke oven emissions. The company was optimistic, however, about its gas and marine operations. Natural gas price advantages over other fuels resulted in record numbers of requests for residential, commercial, and industrial conversions. Supplies were sufficient, profit margins improved, and a large growth potential beckoned in view of the fact that only 35 percent of the homes in the Boston market area were using natural gas for central heating. Also of help was Midland, which had brought in $174 million in revenue in 1979. It had added a thousand workers, increased its fleet to 1,600 vessels, and expanded terminal and barge construction operations. Delighted with Midland's return on investment, Eastern budgeted $50 million for the marine transportation company's further growth in 1980, a 65 percent increase over 1979.

While the three executives planned $120 million in total capital expenditures to support growth in 1980, they nevertheless cautioned stockholders that they were concerned about uncertainties surrounding the national economy. Their concerns proved valid when two years later Eastern had to close the Philadelphia Coke Company. To combat this decline, Eastern began a series of sales and acquisitions in 1984, two of the purchases during that year costing nearly $100 million in cash. In December 1984, Federal Barge Lines was acquired and merged into Midland Enterprises.

In addition to these acquisitions, though, Eastern divested itself of a some holdings. In September 1985, Eastern sold its oil and gas businesses; the following year, the company sold its 36.8 percent interest in Algonquin Energy, Inc., to Texas Eastern Corp.; and on March 31, 1987, the company exchanged its coal operation for a 15.1 percent equity interest in Peabody Holding Company, Inc., the nation's largest coal producer. However, it sold off this investment in 1990 for $168 million cash.

In 1989 Eastern changed directions when it moved into an entirely new field by purchasing the Water Products Company for $40 million in cash. In order to reflect its new diversification more accurately, the company changed its name that year to Eastern Enterprises. To help guide the new company, J. Atwood Ives, a former vice chairman and chief financial officer of General Cinema Corporation, was brought on as a member of the board of trustees. Ives later replaced Robert Weinig as chairman and chief executive officer when Weinig retired in 1991.

Further new investments in the water products and processing field followed the Water Products purchase. In November 1989, Eastern paid $54 million in cash to Millipore Corporation for its Process Water Division, then renamed the new property Ionpure Technologies Corporation. In the fall, the company acquired E & H Utility Sales Inc. of Carol Stream, Illinois. And in January 1991, Eastern paid $36 million for some assets and operations of A&P Water and Sewer Supplies, a distributor of components for municipal water systems in the mid-Atlantic region.

In his first annual report to stockholders, Ives described 1991 as a 'disappointing year in which operating earnings declined 16 percent.' Contributing to the decline, said Ives, was the severity of the national recession and 13 percent warmer than normal weather in the Boston Gas service area, a factor that prevented Boston Gas from realizing the full benefits of an October 1990 rate increase of $19.3 million. Weather also affected Midland Enterprises as Midwestern utilities trimmed their coal deliveries because of the mild winter temperatures. Adverse conditions on the river system, including flooding on the Ohio and drought-caused low levels on the Mississippi, complicated operations. 'Never before in Eastern's history have weather-related influences affected the company's financial results as they did in 1991,' observed Ives.

In addition to the weather problems, the Water Products group was hit hard by tight credit, which reduced housing starts to the lowest levels since 1945, and many customers retreated from their intended capital spending programs. Net earnings were further reduced by nearly $9 million as a result of the company's early adoption of Statement of Financial Accounting Standards (SFAS) No. 106, which requires companies to recognize post-retirement employee health benefits as they are earned, not as they are paid, as had been the general practice previously. The company also set up or added to reserves for environmental remediation projects and some acquisition issues.

Net earnings for 1991 were $20.7 million, or 92 cents per share. Revenues did increase five percent to $993.1 million from $950 million in 1990, an increase due primarily to the Water Products Group acquisitions. Long-term debt was $327.4 million, up ten percent from the previous year. The good news was that operating expenses were reduced throughout the year, capital spending programs were maintained, WaterPro Supplies began to benefit from consolidation efficiencies, and Ionpure established operations in the United States and Europe.

As Eastern entered 1992 it believed its two established core businesses, Midland and Boston Gas, were well positioned to take advantage of market opportunities. Midland's operating efficiency continued to improve, Ives said, and the barge fleet was expanding. Boston Gas reported pipeline supplies up 30 percent since 1988 and expected more to become available in 1992. Ives pledged that in 1992 Eastern would re-examine its objectives to determine if Boston Gas and Midland could continue to provide attractive long-term returns, to ascertain the Water Products Group's potential for growth and profitability, and to identify which areas of investment would provide the most productive use of its capital.

Midland was heartened in the second half of 1991 by improving market conditions and the securing of new long-term contracts in established and new markets. In 1992 it anticipated increases in low-sulfur coal shipments from the western United States as Midwestern utilities prepared for compliance with the Clean Air Act. Increased coal and grain exports also were expected.

Boston Gas targeted 1992 marketing efforts on traditional residential, commercial, and industrial markets, as well as on new markets such as co-generation, gas-fired air conditioning and natural gas-powered vehicles. The company planned to continue its decades-long courting of the residential heating market, where nearly 40 percent of its existing customers still did not use natural gas for heating, and the commercial/industrial market where Boston Gas has only a 19 percent market share, a penetration level only half the average of gas distribution companies across the United States.

WaterPro, which distributes more than 9,000 products through 27 branches in 19 states, viewed the aging of the country's largely neglected municipal water supply infrastructure as a significant business opportunity. In addition, the Environmental Protection Agency had mandated more stringent quality standards for municipal water supply systems, a situation upon which WaterPro hoped to capitalize.

The worldwide market for ultrapure treatment systems and service was estimated at $1.8 billion by Ionpure, which set a 1992 objective to expand its share of that market. A key to achieving that goal was the continuing development and marketing of the company's proprietary technology: continuous deionization, or CDI. Ionpure claims that, unlike traditional systems, CDI is capable of continuous operation, eliminates the need to store and handle hazardous chemicals, requires less space, and has a small wastewater stream that can be discharged directly into municipal collection systems without expensive pretreatment.

Eastern Enterprises itself planned to explore additional alternatives for growth in 1992 and beyond and to lessen its susceptibility to weather and other external factors such as severe fluctuations in the national economy.

Principal Subsidiaries: Midland Enterprises, Inc.; Boston Gas Company; WaterPro Supplies Corp.; Ionpure Technologies Corp.

EASTERN ENTERPRISES History

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