<PAGE>

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                               ----------------
                                   FORM 10-K
                               ----------------

  (Mark One)
 X  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

                  For the fiscal year ended December 31, 1999

                                      or

    Transition Report Pursuant to Section 13 or 15(d) of the Securities
    Exchange Act of 1934 For the transition period from        to
                         Commission File Number 1-8154

                               ESSEX GAS COMPANY
            (Exact name of Registrant as specified in its charter)
                      (Formerly Essex County Gas Company)

             Massachusetts                           04-1427020
    (State or other jurisdiction of     (I.R.S. Employer Identification No.)
    Incorporation or Organization)

           One Beacon Street                       (617) 742-8400
      Boston, Massachusetts 02108          (Registrant's Telephone Number)
    (Address of Principal Executive
               Offices)

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
               Title of Class                  Exchange
               --------------                  --------
<S>                                            <C>
                    None                         None
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                                     None

  Indicate by check mark whether 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.

                             Yes  X        No

  Indicate by check mark if 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
amendment to this Form 10-K.

  Indicate number of shares outstanding of registrant's common stock, no par
value, as of March 1, 2000.

        All common stock, 100 shares, are held by Eastern Enterprises.

  The registrant meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing this form with reduced
disclosure format.

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<PAGE>

                               ESSEX GAS COMPANY

                                   FORM 10-K

                      Fiscal Year Ended December 31, 1999

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
 Item No.                              Topic                               Page
 --------                              -----                               ----

 <C>      <S>                                                              <C>
                                      PART I
    1.    Business......................................................     1
          General.......................................................     1
          Competition...................................................     2
          Gas Throughput................................................     2
          Gas Supply....................................................     2
          Regulation....................................................     3
          Seasonality and Working Capital...............................     4
          Environmental Matters.........................................     4
          Employees.....................................................     4
    2.    Properties....................................................     5
    3.    Legal Proceedings.............................................     5
    4.    Submission of Matters to a Vote of Security Holders...........     5
          Glossary......................................................     6
                                      PART II

    5.    Market for the Registrant's Common Equity and Related
           Stockholder Matters..........................................     7
    6.    Selected Financial Data.......................................     7
    7.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations....................................     7
    8.    Financial Statements and Supplementary Data...................     9
    9.    Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure.....................................     9

                                     PART III

   10.    Directors and Executive Officers of the Registrant............    10
   11.    Executive Compensation........................................    10
   12.    Security Ownership of Certain Beneficial Owners and
           Management...................................................    10
   13.    Certain Relationships and Related Transactions................    10

                                      PART IV

   14.    Exhibits, Financial Statement Schedules and Reports on Form 8-
           K............................................................    11
</TABLE>
<PAGE>

                                    PART I

Item 1: Business.

General

  Essex Gas Company ("The Company") is a regulated public utility organized
under the laws of the Commonwealth of Massachusetts in 1853 that is engaged in
the transportation and sale of natural gas to approximately 43,000
residential, commercial and industrial customers in northeastern
Massachusetts. The Company operates in the cities of Haverhill, Newburyport,
and Amesbury and fourteen smaller municipalities covering an area of
approximately 280 square miles. The Company's service area is primarily
comprised of residential communities with a number of small commercial and
diverse industrial businesses.

  As discussed in Note 1 of the Notes to Consolidated Financial Statements,
pursuant to an Agreement and Plan of Merger dated as of December 19, 1997, by
and between the Company and Eastern Enterprises ("Eastern"), ECGC Acquisition
Gas Company, a wholly-owned subsidiary of Eastern, merged with and into the
Company on September 30, 1998, through an exchange of all of the Company's
stock for approximately 2,047,000 shares of Eastern common stock, with the
Company surviving the merger as a wholly-owned subsidiary of Eastern (the
"Acquisition"). On November 6, 1998, the Company changed its name from Essex
County Gas Company to Essex Gas Company. On December 7, 1998, the Company
changed its fiscal year end from August 31 to December 31, and accordingly has
prepared Consolidated Financial Statements for the period beginning September
1, 1998 and ending December 31, 1998 ("Transition Period").

  On November 4, 1999, Eastern signed a definitive agreement to be acquired by
KeySpan Corporation. Subject to receipt of satisfactory regulatory approvals
and the approval of Eastern shareholders, the transaction is expected to close
in mid to late 2000, although it is possible that the transaction will not
close until 2001.

  For definitions of certain industry specific terms, see the Glossary at the
end of Part I and appearing on page 6.

  The Company provides local transportation services and gas supply to all
customer classes. The Company's services are available on a firm and non-firm
basis. Firm transportation service and sales are provided under rate tariffs
and/or contracts filed with the Massachusetts Department of Telecommunications
and Energy ("Department"), that typically obligate the Company to provide
service without interruption throughout the year. Non-firm transportation
service 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.

  The Company offers unbundled services to all commercial/industrial users,
who are allowed to purchase local transportation from the Company separately
from the purchase of gas supply, which the customer may buy from third party
suppliers. The Company 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 Company 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, 1999, the Company had
approximately 98 firm transportation customers. Service to all residential
customers currently is on a bundled basis. Unbundled service to residential
customers is expected to be offered beginning in June 2000. While the
migration of customers to transportation-only service will lower the Company's
revenues, it has no impact on its operating earnings. The Company earns all of
its margins on the local distribution of gas and none on the resale of the
commodity itself.
<PAGE>

Competition

  The Company competes with other fuel distributors, primarily oil dealers and
electricity providers, throughout its service territory. The Company currently
serves approximately 53% of the potential customers within its service
territory.

Gas Throughput

  The following table provides information with respect to the volumes of gas
sold and transported by the Company in thousands of dekatherms ("Dth") during
the year ended December 31, 1999, the four months ended December 31, 1998 (the
"Transition Period") and the two fiscal years ended August 31, 1998.

<TABLE>
<CAPTION>
                                                Transition  Fiscal Years Ended
                                   Year Ended  Period Ended     August 31,
                                  December 31, December 31, -------------------
                                      1999         1998       1998      1997
                                  ------------ ------------ --------- ---------
                                                 (In thousands)
<S>                               <C>          <C>          <C>       <C>
Residential.....................     3,604          904         3,585     3,680
Commercial and Industrial ......     1,729          488         1,983     2,062
Interruptible...................        40          184            55       758
                                     -----        -----     --------- ---------
  Total Sales...................     5,373        1,576         5,623     6,500
Transportation of Customer-Owned
 Gas............................       487           13            30       --
                                     -----        -----     --------- ---------
  Total Throughput..............     5,860        1,589         5,653     6,500
                                     =====        =====     ========= =========
  Total Firm Throughput.........     5,557        1,405         5,568     5,742
                                     =====        =====     ========= =========
</TABLE>

  The above table excludes the effect of adopting the accrual method of
revenue recognition as discussed in Note 1 of Notes to Consolidated Financial
Statements.

  In 1999, residential customers comprised 90% of the customer base, while
commercial and industrial establishments accounted for the remaining 10%.
Volumetrically, residential customers accounted for 61% of total throughput
and 65% of total firm throughput, while commercial and industrial customers
accounted for 39% of total throughput and 35% of total firm throughput.

  No customer, or group of customers under common control, accounted for 2% or
more of total firm revenues in 1999.

Gas Supply

  The following table shows the sources of the Company's gas supply
requirements in thousands of Dth for the year ended December 31, 1999, the
Transition Period and the two fiscal years ended August 31, 1998.

<TABLE>
<CAPTION>
                                                                     Fiscal
                                                       Transition  Years Ended
                                          Year Ended  Period Ended August 31,
                                         December 31, December 31, ------------
                                             1999         1998     1998   1997
                                         ------------ ------------ -----  -----
                                                    (In thousands)
<S>                                      <C>          <C>          <C>    <C>
Gas Supply (Dth):
  Natural gas pipeline purchased........    4,551        2,023     4,952  5,376
  Underground storage withdrawal........      901          120       646  1,007
  Liquefied natural gas purchased.......      228           64       183    253
                                            -----        -----     -----  -----
    Total source of supply..............    5,680        2,207     5,781  6,636
Company use, unbilled and other.........     (307)        (631)     (158)  (136)
                                            -----        -----     -----  -----
  Total sales...........................    5,373        1,576     5,623  6,500
                                            =====        =====     =====  =====
</TABLE>

                                       2
<PAGE>

  The Company's supply requirements are purchased directly from producers and
marketers pursuant to contracts that have been approved by the Department or
by the Federal Energy Regulatory Commission ("FERC").

  Pipeline supplies are transported on interstate pipeline systems to the
Company'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 interstate pipeline company that provides firm
transportation service to the Company's service territory, the peak daily and
annual capacity and the contract expiration dates are as follows:

<TABLE>
<CAPTION>
                                              Capacity in Dth
                                             -----------------
              Pipeline                       Daily    Annual   Expiration Dates
              --------                       ------ ---------- ----------------
     <S>                                     <C>    <C>        <C>
     Tennessee Gas Pipeline Company......... 28,590 10,435,350    2003-2011
</TABLE>

  In 1999, the Company restructured its long-term capacity contracts with
Tennessee Gas Pipeline. As a result, no contracts expire before 2003.

  The Company also has two contracts with pipeline companies for the storage
of natural gas in underground storage fields in New York and Pennsylvania.
These contracts provide storage capacity of approximately 1.2 BCF and
approximately .009 BCF of peak day deliverability.

  In the fall of 1999, the Company, and its affiliates Boston Gas Company and
Colonial Gas Company, entered into a portfolio management contract with El
Paso Energy Marketing, Inc. For a three year term commencing November 1, 1999,
El Paso will provide all of the city gate supply requirements to the three
companies at market prices and manage certain of the companies' upstream
capacity, underground storage and term supply contracts. The Department
approved the contract in October 1999.

  Peak day firm throughput in BCF was 0.049 in 1999, 0.043 in 1998 and 0.047
in 1997. The Company has entered into an agreement with Distrigas of
Massachusetts Corporation which expires on October 31, 2006, that allows the
Company to purchase up to 4,000 Dth per day for 151 days of liquefied natural
gas ("LNG") in either liquid or vapor form. The Company, at its discretion,
may increase purchases under the contract by up to 2,000 Dth per day after
appropriate notice. The Company may also reduce quantities purchased if sales
fall below the normal 1994-95 heating season sendout.

  Through a wholly-owned subsidiary, the Company owns a LNG storage facility
located in Haverhill, Massachusetts. The LNG storage facility has storage
capacity of 410,000 Dth and daily sendout capacity of 30,000 Dth. At the same
location, the Company owns and operates a propane plant that has storage
capacity of approximately 42,000 Dth with total daily sendout capacity of
3,500 Dth. The Company considers its peak day sendout capacity, based on its
total supply resources, to be adequate to meet the requirements of its firm
customers.

Regulation

  The Company's operations are subject to Massachusetts statutes applicable to
gas utilities. Rates for transportation service, gas purchases and sales,
pipeline safety regulations, issuance of securities, and affiliate
transactions are regulated by the Department. Rates for firm transportation
and sales are subject to approval by, and are on file with, the Department. In
addition, the Company has a cost of gas adjustment clause ("CGAC") that 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. Similarly, through its
local distribution adjustment clause ("LDAC"), the Company recovers the costs
of remediating former manufactured gas plant sites from all firm customers,
including those purchasing gas supply from third parties.

                                       3
<PAGE>

  On September 30, 1998, the Company was acquired by Eastern, the Weston,
Massachusetts based owner of Boston Gas Company ("Boston Gas"). On September
17, 1998, the Department approved the merger and rate plan. Under the approved
rate plan, there was an immediate five percent price reduction for the
Company's customers and a ten year freeze of base rates. The freeze on base
rates is subject only to certain exogenous factors, such as changes in tax
laws, accounting changes, or regulatory, judicial, or legislative changes. As
a result of the rate plan, the Company discontinued its application of SFAS
No. 71, as described in Note 1 of Notes to Consolidated Financial Statements.
Gas supply savings resulted from the consolidation of the Company's resource
portfolio with the Boston Gas portfolio. Many of the administrative,
operations and maintenance functions of the Company have been integrated with
those of Boston Gas.

  All of the Company's 4,300 commercial and industrial customers are eligible
to purchase unbundled local transportation service from the Company and to
purchase their gas supply from third parties. As of December 31, 1999, the
Company had 98 firm transportation customers.

  Anticipating a date of June 1, 2000 for offering residential customers the
opportunity to purchase gas supply from third parties, the Department has
approved Model Terms and Conditions to which LDC tariffs for all residential
customers will substantially conform. The Model Terms and Conditions approved
by the Department are consistent with the Department's order of February 1,
1999, which provided that, for a five year transition period, LDC contractual
commitments to upstream capacity will be assigned on a mandatory, pro rata
basis to marketers selling gas supply to the LDC's customers. The approved
mandatory assignment method eliminates the possibility that the costs of
upstream capacity purchased by the Company to serve firm customers will be
absorbed by the LDC or other customers through the transition period. The
Department also found that, through the transition period, LDC's will retain
primary responsibility for upstream capacity planning and procurement to
assure that adequate capacity is available at Massachusetts city gates to
support customer requirements and growth. In year three of the five year
transition period, the Department intends to evaluate the extent to which the
upstream capacity market for Massachusetts is workably competitive based on a
number of factors, and accelerate or decelerate the transition period
accordingly. The Department's Model Terms and Conditions also require that
LDC's provide default and peaking supply services at cost-based rates.

Seasonality and Working Capital

  The Company's revenues, earnings and cash flows are highly seasonal as most
of its transportation services and sales are directly related to temperature
conditions. Because the majority of its revenues are billed in the November
through April heating season, significant cash flows are generated from late
winter to early summer. In addition, through the cost of gas adjustment
clause, the Company bills its customers over the heating season for the
majority of the pipeline demand charges paid by the Company over the entire
year. This difference, 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 Company may have or share responsibility under applicable environmental
law for the remediation of four former manufactured gas plants ("MGP"), one
former gas holder site associated with MGP operations and one non-MGP site,
and may share responsibility with respect to two federal superfund sites.
Information with respect to these matters may be found at Note 10 of Notes to
Consolidated Financial Statements. Such information is incorporated herein by
reference.

Employees

  As of December 31, 1999, the Company had 62 employees, 84% of whom are
organized in a local union with which the Company has a collective bargaining
agreement that expires in 2002. During 1999, the Company entered into a new
three-year agreement with the bargaining unit representing union employees.

                                       4
<PAGE>

Item 2: Properties.

  The Company's property consists primarily of its distribution system and
related facilities. The Company also owns a propane plant with a storage
capacity of 42,000 Dth. In addition, the Company, through its wholly-owned
subsidiary, LNG Storage, Inc., owns a LNG storage facility with a storage
capacity of 410,000 Dth.

  Substantially all of the properties owned by the Company, other than
expressly exempted property, are subject to a lien under the indenture
securing the Company's First Mortgage Bonds. The indenture calls for a trustee
or receiver to take possession of the property if there is a default under its
terms. The property exempted from the lien includes cash, receivables,
supplemental fuel inventories, materials and supplies, rental appliances,
office furniture and equipment, and the LNG storage facility.

  The Company leases a 30,000 square foot building which expires in October,
2005.

  On December 31, 1999, the Company's distribution system included
approximately 800 miles of gas mains, 37,000 services and 44,000 active
customer meters.

  The Company's gas mains and services are usually located on public ways or
private property not owned by it. In general, the Company's occupation of such
property is pursuant to easements, licenses, permits or grants of location.
Except as stated above, the principal items of property of the Company are
owned in fee.

  In 1999, the Company's capital expenditures were $5.1 million. Capital
expenditures were principally made for improvements to the distribution system
and for system expansion to meet customer growth. The Company plans to spend
approximately $8 million for similar purposes in 2000.

Item 3: Legal Proceedings.

  Other than certain routine claims incidental to its business, there are no
material pending legal proceedings involving the Company.

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 1999.

                                       5
<PAGE>

                                   Glossary

  BCF--Billions of cubic feet of natural gas at 1,000 Btu per cubic foot.

  Bundled Service--Two or more services tied together as a single product.
Services include gas sales at the city gate, interstate transportation, local
transportation, balancing daily swings in customer loads, storage, and peak-
shaving services.

  Capacity--The capability of pipelines and supplemental facilities to deliver
and/or store gas.

  City Gate--Physical interconnection between an interstate pipeline and the
local distribution company.

  Dekatherm--1,000 cubic feet of natural gas at 1,000 Btu per cubic foot.

  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 under either
filed rate tariffs or through individually negotiated contracts.

  Gas Marketer (Broker)--A non-regulated buyer and seller of gas.

  Interstate Transportation--Transportation of gas by an interstate pipeline
to the city gate.

  Local Distribution Company (LDC)--A utility that owns and operates a gas
distribution system for the delivery of gas supplies from the city gate to
end-user facilities.

  Local Transportation Service--Transportation of gas by the LDC from the city
gate to end-user facilities.

  Non-Firm Service--Sales and transportation service offered at a lower level
of reliability and cost. Under this service, the LDC can interrupt customers
on short notice, typically during the winter season. 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 energy
alternative.

  Throughput--Gas volume delivered to customers through the LDC's gas
distribution system.

  Unbundled Service--Service that is offered and priced separately, such as
separating the cost of gas commodity delivered to the LDC's city gate from the
cost of transporting the gas from the city gate to the end user. Unbundled
services can also include daily or monthly balancing, back-up or stand-by
services and pooling. With unbundled services, customers have the opportunity
to select only the services they desire.


                                       6
<PAGE>

                                    PART II

Item 5: Market for Registrant's Common Equity and Related Stockholder Matters.

  Eastern has been the holder of record of all the outstanding common equity
securities of the Company since September 30, 1998. Dividends paid to Eastern
amounted to $5.6 million in 1999.

Item 6: Selected Financial Data.

  Not required.

Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations.

RESULTS OF OPERATIONS

 1999 Compared to 1998

  Net earnings for the year ended December 31, 1999 were $5.9 million compared
to $4.3 million for the fiscal year ended August 31, 1998. The improvement in
earnings was principally due to lower operations and maintenance expenses,
merger related synergies resulting from reduced employee levels and associated
benefits, partially offset by a $1.3 million early retirement and severance
charge.

 The four months ended December 31, 1998 Compared to the four months ended
December 31, 1997

  Results for the four month period ended December 31, 1998 and 1997 are not
comparable due to the effect of merger related expenses, the impact of
discontinuing the application of Statement of Financial Accounting Standards
No. 71 "Accounting for the Effects of Certain Types of Regulation" ("SFAS No.
71") and the impact of 23% warmer weather than the prior year. Merger related
expenses for professional fees, termination benefits, and other related costs
were $7.9 million on a pre-tax basis. As a result of the rate plan and
extended base rate freeze, the Company was required to discontinue the
application of SFAS No. 71 and adopt the accrual method of accounting for
revenues. These changes resulted in an extraordinary charge of approximately
$2.9 million, net, principally due to the write off of regulatory assets
associated with postretirement benefits. The impact of significantly warmer
weather was offset by the adoption of the accrual method of accounting for
revenue.

 August 31, 1998 Compared to August 31, 1997

  Net earnings applicable to common stock for 1998 were $4.3 million, an
increase of $.3 million or 8% as compared to 1997. The increase primarily
reflects customer growth, the annualized effect of a base rate increase
granted by the Department effective December 1, 1996 and lower operations and
maintenance expense. The improvement in earnings was partially offset by
warmer weather and a higher charge for depreciation reflecting continued
investment in system replacement and expansion. Weather for 1998 was 11%
warmer than normal and 9% warmer than 1997.

YEAR 2000 ISSUE

  The Company experienced no significant issues as a result of the transition
from December 31, 1999 to January 1, 2000. The Company does not expect to
incur any significant Year 2000 related costs beyond January 2000. On
September 30, 1998, the Company was merged with Eastern, the parent company of
Boston Gas Company. In connection with the merger, the Company addressed any
remaining Year 2000 issues through conversion to systems operated by Boston
Gas Company.


FORWARD-LOOKING INFORMATION

  This report and other Company reports and statements issued or made from
time to time contain certain "forward-looking statements" concerning projected
future financial performance, expected plans or future operations. The Company
cautions that actual results and developments may differ materially from such
projections or expectations.

                                       7
<PAGE>

  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 strategic
initiatives on earnings and cash flow, the impact of any merger-related
activities, the ability to successfully integrate natural gas distribution
operations, temperatures above or below normal, changes in economic
conditions, including interest rates, regulatory and court decisions and
developments with respect to previously-disclosed environmental liabilities.
Most of these factors are difficult to predict accurately and are generally
beyond the control of the Company.

LIQUIDITY AND CAPITAL RESOURCES

  The Company has a $10 million line of credit for the exclusive purpose of
funding its fuel inventory.

  The Company expects capital expenditures for 2000 to be $8 million. Capital
expenditures will be primarily for improvements to the distribution system and
for system expansion to meet customer growth.

  The Company believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient to
meet 2000 capital expenditures, working capital requirements, dividend
payments and normal debt repayments.

OTHER MATTERS

 Regulatory and Accounting Issues

  The Company's operations are subject to Massachusetts statutes applicable to
gas utilities. Rates, gas purchases, pipeline safety regulations, issuance of
securities, and affiliate transactions are regulated by the Department. Rates
for firm transportation and sales are subject to approval by, and are on file
with, the Department. In addition, the Company has a cost of gas adjustment
clause ("CGAC") that 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. Similarly, through its local distribution adjustment clause
("LDAC"), the Company recovers the actual costs of remediating former
manufactured gas plant sites from all firm customers, including those
purchasing gas supply from third parties.

  On September 30, 1998, the Company was acquired by Eastern, the Weston,
Massachusetts based owner of Boston Gas Company ("Boston Gas"). On September
17, 1998, the Department approved the merger and rate plan. Under the approved
rate plan, there was an immediate five percent price reduction for the
Company's customers and a ten year freeze of base rates. The freeze on base
rates is subject only to certain exogenous factors, such as changes in tax
laws, accounting changes, or regulatory, judicial, or legislative changes. Gas
supply savings resulted from the consolidation of the Essex Gas resource
portfolio with the Boston Gas portfolio. As a result of the rate plan, the
Company discontinued its application of SFAS No. 71, as described in Note 1 of
Notes to Consolidated Financial Statements. Many of the administrative,
operations and maintenance functions of the Company have been integrated with
those of Boston Gas.

  All of the Company's 4,300 commercial and industrial customers are eligible
to purchase unbundled local transportation service from the Company and to
purchase their gas supply from third parties. As of December 31, 1999, the
Company had 98 firm transportation customers.

  Anticipating a date of June 1, 2000 for offering residential customers the
opportunity to purchase gas supply from third parties, the Department has
approved Model Terms and Conditions to which LDC tariffs for all residential
customers will substantially conform. The Model Terms and Conditions approved
by the Department are consistent with the Department's order of February 1,
1999, which provided that, for a five year transition period, LDC contractual
commitments to upstream capacity will be assigned on a mandatory, pro rata
basis to marketers selling gas supply to the LDC's customers. The approved
mandatory assignment method eliminates the possibility that the costs of
upstream capacity purchased by the Company to serve firm customers

                                       8
<PAGE>

will be absorbed by the LDC or other customers through the transition period.
The Department also found that, through the transition period, LDC's will
retain primary responsibility for upstream capacity planning and procurement
to assure that adequate capacity is available at Massachusetts city gates to
support customer requirements and growth. In year three of the five year
transition period, the Department intends to evaluate the extent to which the
upstream capacity market for Massachusetts is workably competitive based on a
number of factors, and accelerate or decelerate the transition period
accordingly. The Department's Model Terms and Conditions also require that
LDC's provide default and peaking supply services at cost-based rates.

 Environmental Matters

  The Company may have or share responsibility under applicable environmental
law for the remediation of four former manufactured gas plants ("MGP"), one
former gas holder site associated with MGP operations, and one non-MGP site,
and may share responsibility with respect to two federal superfund sites.
Information with respect to these matters may be found at Note 10 of Notes to
Consolidated Financial Statements. Such information is incorporated herein by
reference.

Item 8: Financial Statements and Supplementary Data

 Information with respect to this item appears commencing on Page F-1 of this
Report. Such information is incorporated herein by reference.

Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

  None.

                                       9
<PAGE>

                                    PART III

Item 10: Directors and Executive Officers of the Registrant.

  Not required.

Item 11: Executive Compensation.

  Not required.

Item 12: Security Ownership of Certain Beneficial Owners and Management.

  Not required.

Item 13: Certain Relationships and Related Transactions.

  Not required.

                                       10
<PAGE>

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

List of Financial Statements and Financial Statement Schedules.

  Information with respect to these items appears on Page F-1 of this Report.
Such information is incorporated herein by reference.

(3) List of Exhibits.

<TABLE>
     <C>    <S>
      3.1   --Restated Articles of Organization of Essex County Gas Company
              dated September 30, 1998, Amending Exhibit 3.1 to the Company's
              Form 10-Q for the quarter ended February 28, 1995. (Filed
              herewith).
      3.2    Articles of Amendment of Essex Gas Company amending Exhibit 3.1.2
             dated October 30, 1998. (Filed herewith).
      3.2.1  Bylaws of Essex County Gas Company, dated September 30, 1998
             amending Exhibit 3.2 to the Company's Form 10-Q for the quarter
             ended February 28, 1995. (Filed herewith).
      4.1   --Indenture dated as of June 1, 1986 between the Company and
              Centerre Trust Company of St. Louis, Trustee. (Filed as an
              Exhibit to Company's registration statement on Form S-2, filed
              June 19, 1986, File No. 33-6597).*
      4.2   --Eleventh Supplemental Indenture dated as of September 15, 1988,
              providing for a 10.25 percent Series due 2003. (Filed as Exhibit
              4.13 to the Company's Form 10-K for the fiscal year ended August
              31, 1988).*
      4.3   --Twelfth Supplemental Indenture dated as of December 1, 1990,
              providing for a 10.10 percent Series due 2020. (Filed as Exhibit
              4-14 to the Company's Form 10-Q for the quarter ended February
              28, 1991).*
      4.4   --Revolving Credit Agreement dated November 14, 1995 between Essex
              County Gas Company and the First National Bank of Boston. (Filed
              as Exhibit 4.5 to the Company's Form 10-Q for the quarter ended
              November 30, 1995).*
      4.5   --Fifteenth Supplemental Indenture dated as of December 1, 1996
              providing for a 7.28 percent Series due 2017. (Filed as Exhibit
              4.6 to the Company's Form 10-Q for the quarter ended February 28,
              1997).*
     10.1   --LNG Storage, Inc., Lease Indenture of Mortgage and Deed of Trust
              dated April 10, 1972 (Filed as an Exhibit to Company's
              registration statement on Form S-7, filed October 23, 1981, File
              No. 2-74531)*.
     10.2   --Haverhill Familee Investment Corporation--Lease of Corporate
              Headquarters dated November 1, 1975. (Filed as an Exhibit to
              Company's registration statement on Form S-7, filed October 23,
              1981, File No. 2-74531).*
     10.3   --Arlington Trust Company--Purchase Contract, Credit Agreement,
              Trust Agreement and Storage Agreement dated October 1, 1980.
              (Filed as an Exhibit to Company's registration statement on Form
              S-7, filed October 23, 1981, File No. 2-74531).*
     10.4   --Consolidated Gas Supply Corporation--Underground Storage Contract
              dated February 18, 1980. (Filed as an Exhibit to Company's
              registration statement on Form S-7, filed October 23, 1981, File
              No. 2-74531).*
     10.5   --Canadian Gas Transportation Contract between Tennessee Gas
              Pipeline Company and Essex County Gas Company dated December 1,
              1987. (Filed as an Exhibit to Company's Form 10-K for the year
              ended August 31, 1988).*
</TABLE>


                                       11
<PAGE>

<TABLE>
     <C>     <S>
     10.6    --Phase 2 Gas Sales Agreement between Boundary Gas and Essex
               County Gas Company dated September 14, 1987. (Filed as an
               Exhibit to Company's Form 10-K for the year ended August 31,
               1988).*
     10.7    --Bond Purchase Agreement dated December 1, 1990, between Allstate
               Life Insurance Company of New York, and Essex County Gas
               Company. (Filed as an Exhibit to Company's Form 10-Q for the
               quarter ended February 28, 1991).*
     10.8    --Iroquois Gas Transmission System, L.P. Gas Transportation
               Contract for Firm Reserved Service Dated February 7, 1991.
               (Filed as an Exhibit to Company's Form 10-Q for the quarter
               ended May 31, 1991).*
     10.9    --Alberta Northeast Gas Limited (ANE), Gas Sales Agreement No. 1
               dated February 7, 1991. (Filed as an Exhibit to Company's Form
               10-Q for the quarter ended May 31, 1991).*
     10.10   --Tennessee Gas Pipeline Transportation Contract dated February 7,
               1991. (Filed as Exhibit 10.16 to Company's Form 10-K for the
               fiscal year ended August 31, 1992).*
     10.11   --Tennessee Gas Pipeline Company Gas Storage Contract (SS-NE)
               TGP002099STO dated November 10, 1992. (Filed as Exhibit 10.22 to
               Company's Form 10-K for the fiscal year ended August 31, 1992).*
     10.12   --Gas Transportation Agreement between Essex County Gas Company
               and Tennessee Gas Pipeline Company (for use under FT-A Rate
               Schedule) dated September 1, 1993. (Filed as Exhibit 10.22 to
               Company's Form 10-K for the fiscal year ended August 31, 1993).*
     10.13   --Gas Transportation Agreement between Essex County Gas Company
               and Tennessee Gas Pipeline Company (for use under Transportation
               Service "CGT-NE" Rate Schedule) dated September 1, 1993. (Filed
               as Exhibit 10.24 to Company's Form 10-K for the fiscal year
               ended August 31, 1993).*
     10.13.1 --Agreement between Essex County Gas Company and Tennessee Gas
               Pipeline amending Exhibit 10.13 dated July 1, 1995. (Filed
               herewith).
     10.14   --Agreement between Essex County Gas Company and Tennessee Gas
               Pipeline Company amending Exhibit 10.22 dated July 1, 1995.
               (Filed herewith).
     10.15   --Gas Transportation Agreement between Essex County Gas Company
               and Tennessee Gas Pipeline Company (for use under Rate Schedule
               FS) dated September 1, 1993. (Filed as Exhibit 10.26 to
               Company's Form 10-K for the fiscal year ended August 31, 1993).*
     10.15.1 --Agreement between Essex County Gas Company and Tenenssee Gas
               Pipeline amending Exhibit 10.15 dated December 1, 1994. (Filed
               herewith).
     10.16   --Agreement between Essex Gas Company and Tennessee Gas Pipeline
               Company amending Exhibit 10.24 dated December 1, 1994 (Filed
               herewith).
     10.17   --Contract Restructuring Agreement between the Company and
               Tennessee Gas Pipeline dated as of August 2, 1999 amending
               Exhibit 10.20. (Filed herewith).
     10.18   --Redacted Gas Resource Portfolio Management and Gas Sales
               Agreement between the Company, Colonial Gas Company, Boston Gas
               Company and El Paso Energy Marketing Company dated as of
               September 14, 1999, as amended. (Filed as Exhibit 10.1 to the
               Form 10-K of Eastern Enterprises for the year ended December 31,
               1999, and incorporated herein by reference).
     10.19   --Gas Transportation Agreement between Essex Gas Company and
               Tennessee Gas Pipeline Company dated November 1, 1994 (for use
               under FT-A Rate Schedule). (Filed herewith).
     21      --Subsidiaries of the Registrant.
     27      --Financial Data Schedule for the twelve months ended December 31,
              1999.
</TABLE>

   There were no reports on Form 8-K filed in the fourth quarter of 1999.

--------
* Not filed herewith. In accordance with Rule 12(b) (32) of the General Rules
  and Regulations under the Securities and Exchange Act of 1934, references
  made to the document previously filed with the Commission.

                                      12
<PAGE>

                                  SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                          Essex Gas Company
                                              Registrant

                                                     Joseph F. Bodanza
                                          By: _________________________________
                                                     Joseph F. Bodanza
                                                 Senior Vice President and
                                                         Treasurer
                                                  (Principal Financial and
                                                    Accounting Officer)


Dated: March 14, 2000

  Pursuant to the requirement 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 14th day of March, 2000.

<TABLE>
<CAPTION>
              Signature                               Title
              ---------                               -----

<S>                                    <C>                                 <C>
          Chester R. Messer            Director and President
______________________________________
          Chester R. Messer

        Anthony J. DiGiovanni          Director and Senior Vice President
______________________________________
        Anthony J. DiGiovanni

          Joseph F. Bodanza            Director and Senior Vice President
______________________________________  and Treasurer (Principal Financial
          Joseph F. Bodanza             and Accounting Officer)

            J. Atwood Ives             Director
______________________________________
            J. Atwood Ives

            Fred C. Raskin             Director
______________________________________
           Fred C. Raskin

          Walter J. Flaherty           Director
______________________________________
          Walter J. Flaherty

         L. William Law, Jr.           Director
______________________________________
         L. William Law, Jr.
</TABLE>

                                      13
<PAGE>

                               ESSEX GAS COMPANY

           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
           (Information required by Items 8 and 14 (a) of Form 10-K)

<TABLE>
<S>                                                                <C>
Report of Independent Public Accountants..........................     F-17
  Consolidated Statements of Earnings for the Year Ended December
   31, 1999, the Transition Period Ended December 31, 1998 and the
   Fiscal Years Ended August 31, 1998 and 1997....................     F-2
  Consolidated Balance Sheets as of December 31, 1999 and 1998....  F-3 and F-4
  Consolidated Statements of Retained Earnings for the Year Ended
   December 31, 1999, the Transition Period Ended December 31,
   1998 and the Fiscal Years Ended August 31, 1998 and 1997.......     F-5
  Consolidated Statements of Cash Flows for the Year Ended
   December 31, 1999, the Transition Period Ended December 31,
   1998 and the Fiscal Years Ended August 31, 1998 and 1997.......     F-6
  Notes to Consolidated Financial Statements......................  F-7 to F-16
  Interim Financial Information for the Year Ended December 31,
   1999 and the Fiscal Year Ended August 31, 1998 (Unaudited).....     F-18
  Schedule for the Year Ended December 31, 1999, the Transition
   Period Ended December 31, 1998 and the Fiscal Years Ended
   August 31, 1998 and 1997.......................................
    II--Valuation and Qualifying Accounts......................... F-19 to F-21
</TABLE>

  Schedules other than those listed above have been omitted as the information
has been included in the consolidated financial statements and related notes
or is not applicable nor required.

                                      F-1
<PAGE>

                               ESSEX GAS COMPANY

                      CONSOLIDATED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
                                                Transition    Fiscal Years
                                   Year Ended  Period Ended Ended August 31,
                                  December 31, December 31, ------------------
                                      1999         1998       1998      1997
                                  ------------ ------------ --------  --------
                                                (In Thousands)
<S>                               <C>          <C>          <C>       <C>
Operating revenues...............   $44,096      $16,637    $ 50,820  $ 53,534
Cost of gas sold.................    18,165        7,554      24,154    27,272
                                    -------      -------    --------  --------
    Operating margin.............    25,931        9,083      26,666    26,262
                                    -------      -------    --------  --------
Operating expenses:
  Operations and maintenance.....     9,106        4,555      11,772    12,292
  Depreciation and amortization..     3,733        1,235       3,753     3,373
  Taxes, other than income.......     1,465          537       1,623     1,596
  Income taxes...................     3,415         (595)      2,399     2,280
  Merger related expenses........       --         7,904         --        --
                                    -------      -------    --------  --------
    Total operating expenses.....    17,719       13,636      19,547    19,541
                                    -------      -------    --------  --------
Operating earnings (loss)........     8,212       (4,553)      7,119     6,721
Other earnings, net..............       481           61         228       338
                                    -------      -------    --------  --------
Earnings (loss) before interest
 expense.........................     8,693       (4,492)      7,347     7,059
                                    -------      -------    --------  --------
Interest expense:
  Long-term debt.................     2,464          819       2,515     2,338
  Other, including amortization
   of debt expense...............       338          251         587       781
  Less--Interest during
   construction..................       (45)          (3)        (27)      (27)
                                    -------      -------    --------  --------
    Total interest expense.......     2,757        1,067       3,075     3,092
                                    -------      -------    --------  --------
Earnings (loss) before
 extraordinary item..............     5,936       (5,559)      4,272     3,967
Extraordinary item, net of tax...       --        (2,874)        --        --
                                    -------      -------    --------  --------
Net earnings (loss)..............   $ 5,936      $(8,433)   $  4,272  $  3,967
                                    =======      =======    ========  ========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-2
<PAGE>

                               ESSEX GAS COMPANY

                          CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
                                                             (In Thousands)
<S>                                                         <C>       <C>
Gas plant, at cost......................................... $117,476  $112,540
  Less--Accumulated depreciation...........................  (33,846)  (29,821)
                                                            --------  --------
    Net plant..............................................   83,630    82,719
                                                            --------  --------
Current assets:
  Cash.....................................................      122        66
  Accounts receivable less reserves of $748 at December 31,
   1999 and $745 at December 31, 1998......................    3,660     3,906
  Accrued utility margin...................................    2,414     2,285
  Deferred gas costs.......................................    2,828       --
  Natural gas and other inventories, at average cost.......    1,155     3,891
  Materials and supplies, at average cost..................      484       396
  Current income taxes.....................................      913     2,504
  Prepaid expenses.........................................       25       265
                                                            --------  --------
    Total current assets...................................   11,601    13,313
                                                            --------  --------
Other assets:
  Unamortized debt expense and other assets................    1,965     1,909
                                                            --------  --------
    Total other assets.....................................    1,965     1,909
                                                            --------  --------
    Total assets........................................... $ 97,196  $ 97,941
                                                            ========  ========
</TABLE>


  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-3
<PAGE>

                               ESSEX GAS COMPANY

                          CONSOLIDATED BALANCE SHEETS

                         CAPITALIZATION AND LIABILITIES

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ---------------
                                                                1999    1998
                                                               ------- -------
                                                               (In Thousands)
<S>                                                            <C>     <C>
Capitalization:
  Common stockholder's investment--
   Common stock, no par value, 200,000 authorized shares.
    Issued and outstanding 100 shares at December 31, 1999 and
     1998..................................................... $27,805 $27,805
   Unrealized gain (loss) on investments available for sale,
    net.......................................................      22     (24)
   Retained earnings..........................................   7,729   7,356
                                                               ------- -------
    Total common stockholder's investment.....................  35,556  35,137
                                                               ------- -------
Long-term obligations, less current portion...................  27,365  28,071
                                                               ------- -------
    Total capitalization......................................  62,921  63,208
                                                               ------- -------
Current liabilities:
  Current portion of long-term obligations....................     665     660
  Notes payable...............................................     --    8,935
  Notes payable to Parent Company.............................   4,000     --
  Accounts payable............................................   5,042   2,576
  Accounts payable, affiliate.................................   4,687     --
  Gas inventory financing.....................................   1,234   4,345
  Accrued interest............................................     290     445
  Taxes payable...............................................      54      21
  Refundable gas costs due customers..........................     --      198
  Refunds due customers.......................................      55      34
  Other.......................................................     148     553
                                                               ------- -------
    Total current liabilities.................................  16,175  17,767
                                                               ------- -------
Reserves and deferred credits:
  Deferred income taxes.......................................   8,967   7,359
  Unamortized investment tax credits..........................     977   1,048
  Deferred directors' fees....................................     176     977
  Retirement benefit liability................................   7,238   5,500
  Other reserves..............................................     742   2,082
                                                               ------- -------
    Total reserves and deferred credits.......................  18,100  16,966
                                                               ------- -------
    Total capitalization and liabilities...................... $97,196 $97,941
                                                               ======= =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-4
<PAGE>

                               ESSEX GAS COMPANY

                  CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

<TABLE>
<CAPTION>
                                                                Fiscal Years
                                                   Transition   Ended August
                                      Year Ended  Period Ended       31,
                                     December 31, December 31, ----------------
                                         1999         1998      1998     1997
                                     ------------ ------------ -------  -------
                                                  (In Thousands)
<S>                                  <C>          <C>          <C>      <C>
Balance at beginning of period......   $ 7,356      $16,515    $15,094  $13,834
  Net earnings (loss)...............     5,936       (8,433)     4,272    3,967
  Cash dividends on common stock....    (5,563)        (726)    (2,851)  (2,707)
                                       -------      -------    -------  -------
Balance at end of period............   $ 7,729      $ 7,356    $16,515  $15,094
                                       =======      =======    =======  =======
</TABLE>



  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-5
<PAGE>

                               ESSEX GAS COMPANY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                           Fiscal Years Ended
                                                               August 31,
                                                           --------------------
                                               Transition
                                  Year Ended  Period Ended
                                 December 31, December 31,
                                     1999         1998       1998       1997
                                 ------------ ------------ ---------  ---------
                                                (In Thousands)
<S>                              <C>          <C>          <C>        <C>
Cash flows from operating
 activities:
 Net earnings (loss)...........    $ 5,936      $(8,433)   $   4,272  $   3,967
 Adjustments to reconcile net
  earnings to cash provided by
  operating activities:
 Extraordinary charge related
  to discontinuance of SFAS
  No. 71.......................        --         2,874          --         --
 Depreciation and
  amortization, including
  amounts related to non-
  utility operations...........      4,228        1,463        4,167      3,788
 Deferred income taxes.........      1,608        1,769          383       (813)
 Other changes in assets and
  liabilities:
  Accounts receivable..........        117       (4,065)         874       (781)
  Inventories including fuel...      2,648          403            2       (132)
  Accounts payable.............      2,466          770       (1,069)      (971)
  Accounts payable,
   affiliates..................      4,687          --           --         --
  Supplier refund
   obligations.................         20         (125)      (1,408)     1,292
  Taxes payable/receivable.....      1,624       (1,127)      (1,370)     1,019
  Recoverable (refundable) gas
   costs.......................     (3,026)        (523)       1,042        150
  Deferred merger costs........        --         1,666       (1,666)       --
  Other, net...................     (1,113)        (211)        (215)       544
                                   -------      -------    ---------  ---------
   Cash provided by (used for)
    operating activities.......     19,195       (5,539)       5,012      8,063
                                   -------      -------    ---------  ---------
Cash flows from investing
 activities:
 Utility capital expenditures..     (5,074)      (1,476)      (6,591)    (6,895)
 Net cost of removal...........        245         (170)         (74)      (100)
 Purchase of investment........        --           --           --        (570)
 Sale of investment............        --           --           --         570
                                   -------      -------    ---------  ---------
   Cash used for investing
    activities.................     (4,829)      (1,646)      (6,665)    (6,995)
                                   -------      -------    ---------  ---------
Cash flows from financing
 activities:
 Dividends paid................     (5,563)        (726)      (2,851)    (2,707)
 Issuance of common stock......        --           --         1,447      1,049
 Issuance of long-term debt....        --           --           --       9,827
 Principal retired on long-term
  debt.........................       (701)        (675)        (885)      (855)
 Changes in gas inventory
  financing....................     (3,111)         288          249        450
 Changes in notes payable......     (4,935)       2,110        3,512     (8,626)
 Capital contribution from
  Eastern......................        --         6,000          --         --
 Payment of ESOP debt..........        --           --           --         (75)
                                   -------      -------    ---------  ---------
   Cash (used for) provided by
    financing activities.......    (14,310)       6,997        1,472       (937)
                                   -------      -------    ---------  ---------
Increase (decrease) in cash and
 cash equivalents..............         56         (188)        (181)       131
Cash at beginning of period....         66          254          435        304
                                   -------      -------    ---------  ---------
Cash at end of period..........    $   122      $    66    $     254  $     435
                                   =======      =======    =========  =========
Supplemental disclosure of cash
 flow information:
 Cash paid (received) during
  the period for:
   Interest, net of amounts
    capitalized................    $ 2,778      $ 1,441    $   3,058  $   3,228
                                   =======      =======    =========  =========
   Income taxes................    $  (166)     $   619    $   3,519  $   2,682
                                   =======      =======    =========  =========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.

                                      F-6
<PAGE>

                               ESSEX GAS COMPANY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Summary of Significant Accounting Policies

 General

  Essex Gas Company (the "Company") is a public utility engaged in the
distribution and sale of natural gas for residential, commercial and
industrial uses. Its service area is northeastern Massachusetts.

 Principles of Consolidation

  The consolidated financial statements include the accounts of LNG Storage,
Inc., a wholly-owned subsidiary. All material intercompany balances and
transactions have been eliminated.

  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 assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 Merger

  On September 30, 1998, the Company merged with ECGC Acquisition Company, a
wholly-owned subsidiary of Eastern Enterprises ("Eastern"), through the
exchange of all the Company's stock for approximately 2,047,000 shares of
Eastern common stock. The merger was accounted for as a pooling of interests
by Eastern.

  On December 7, 1998, the Company changed its fiscal year end from August 31
to December 31 to conform to Eastern's fiscal year end. The transition period
("Transition Period") ended December 31, 1998 reflects the results of
operations and cash flows for the four months then ended and precedes the
start of the new fiscal year. Unaudited financial results of operations for
the four months ended December 31, 1997 are reflected on a comparative basis
in Note 11 of the Notes to Consolidated Financial Statements.

  The merger related transaction fees, termination benefits and related
expenses charged against pre-tax earnings during the Transition Period totaled
$7,904,000.

  In connection with the merger, the Massachusetts Department of
Telecommunications and Energy ("the Department") approved a rate plan that
resulted in an immediate five percent price reduction through the cost of gas
adjustment clause ("CGAC") and a ten year freeze of base rates at current
levels. Given the length of the base rate freeze, the Company was required to
discontinue its application of Statement of Financial Accounting Standards
(SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation"
during the Transition Period. Accordingly, the Company wrote off net
regulatory assets of $4,835,000, consisting principally of postretirement
costs. In addition, the Company was required to adopt certain accounting
practices in order to comply with generally accepted accounting principles for
nonregulated entities and to maintain consistency with its new parent. As
such, the Company recorded a nonrecurring pre-tax gain of $335,000 due to the
adoption of a revenue method that reflects full accrual accounting, as
discussed below. Adjustments to reflect this new practice and the
discontinuance of SFAS No. 71 are included in the extraordinary item, net of
tax in the Consolidated Statements of Earnings.

 Regulation

  The Company's operations are subject to Massachusetts statutes applicable to
gas utilities.


                                      F-7
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(1) Summary of Significant Accounting Policies (continued)

  For the periods prior to the approval of the merger and rate plan, the
accounting policies conformed to generally accepted accounting principles as
applied to regulated public utilities and reflected the effects of the
ratemaking process in accordance with SFAS No. 71. Under SFAS No. 71, the
Company was allowed to defer certain costs that otherwise would be expensed in
recognition of the ability to recover them in future rates. As described
above, the Company discontinued application of SFAS No. 71 as a result of the
rate plan approved by the Department in connection with its approval of the
merger of the Company with Eastern.

 Gas Operating Revenues

  As previously mentioned, effective with the merger and the ten year base
rate freeze, the Company discontinued the application of SFAS No. 71,
resulting in a change in its method of accounting for revenues. Previously,
substantially all revenues were recorded when billed. Under the unbilled
method, gas operating revenues are accrued based upon the amount of gas
delivered to utility customers through the end of the accounting period.
Accrued Utility Margin of $2,414,000 and $2,285,000, as reported in the
Consolidated Balance Sheets at December 31, 1999 and 1998, respectively,
represent the accrual of unbilled operating revenues net of related gas costs.
The impact on Transition Period earnings due to this change was an increase in
margin of $2,285,000.

 Cost of Gas Adjustment Clause and Deferred Gas Costs

  The CGAC requires the Company to adjust its rates semi-annually for firm gas
sales to track changes in the cost of gas distributed, with an annual
adjustment of subsequent rates for any over or under recovery of actual costs
incurred. As a result, the Company defers the cost of any firm gas that has
been distributed, but is unbilled at the end of a period, to a period in which
the gas is billed to customers. The local distribution adjustment clause
("LDAC") allows the Company to recover from all firm customers the
amortization of environmental response costs associated with former
manufactured gas plant ("MGP") sites and FERC Order 636 transition costs.
These costs were previously recovered through the CGAC. Upon the
discontinuance of the application of SFAS No. 71 as of September 30, 1998, the
Company records amounts recoverable under the LDAC as revenue when it is
billable to its customers.

 Depreciation

  Depreciation is provided at rates designed to amortize the cost of
depreciable property, plant and equipment over their estimated remaining
useful lives. The composite depreciation rate, expressed as a percentage of
the average depreciable property in service for the year ended December 31,
1999, was 3.70% and for the Transition Period, was 3.69%. For the fiscal years
ended August 31, the composite rate was 3.70% in 1998 and 3.53% in 1997.

  Accumulated depreciation is charged with the original cost and cost of
removal, less salvage value, of units retired. Expenditures for repairs,
upkeep of units of property and renewal of minor items of property replaced
independently of the unit of which they are a part are charged to maintenance
expense as incurred.

 Pending Accounting Changes

  SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 137, is effective for fiscal quarters of
all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or a liability measured at
its fair value. SFAS No. 133 requires that changes in the derivative's fair
value be recognized

                                      F-8
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(1) Summary of Significant Accounting Policies (continued)

currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company has
not yet quantified the impact of adopting SFAS No. 133 on the consolidated
financial statements. However, SFAS No. 133 could increase volatility in
earnings and other comprehensive income.

 Reclassifications

  Certain prior year financial statement amounts have been reclassified for
consistent presentation with the current year.

(2) Common Stock

  Common stock activity for the previous two fiscal years, the Transition
Period and the current year are as follows:

<TABLE>
<CAPTION>
                                                      Number of
                                                        Shares     Common Stock
                                                      ----------  --------------
                                                                  (In Thousands)
   <S>                                                <C>         <C>
   BALANCE, AUGUST 31, 1996..........................  1,642,490     $19,235
   Dividend reinvestment plan........................     19,733         476
   Amortization of capital stock expense.............        --           37
   Employee stock plans..............................     17,794         438
   Sale of common stock..............................      5,301         135
                                                      ----------     -------
   BALANCE, AUGUST 31, 1997..........................  1,685,318      20,321
   Dividend reinvestment plan........................     12,652         477
   Amortization of capital stock expense.............        --           37
   Employee stock plans..............................     27,967         865
   Sale of common stock..............................      3,070         105
                                                      ----------     -------
   BALANCE, AUGUST 31, 1998..........................  1,729,007      21,805
   Merger with Eastern:
     Exchange of common stock........................ (1,729,007)        --
     Issuance of common stock to Eastern.............        100         --
   Capital contribution from Eastern.................        --        6,000
                                                      ----------     -------
   BALANCE, DECEMBER 31, 1998 and 1999...............        100     $27,805
                                                      ==========     =======
</TABLE>

(3) Income Taxes

  For the year ended December 31, 1999, and for the Transition Period ended
December 31, 1998, the Company was a member of an affiliated group of
companies that files a consolidated federal income tax return. For the years
ended August 31, 1998 and August 31, 1997, the Company was a member of a
different consolidated group. The Company follows the policy, established for
the group, of providing for income taxes that would be payable on a separate
company basis. The Company's effective income tax rate was 36.5% for the year
ended December 31, 1999, 9.7% for the Transition Period ended December 31,
1998 and 36% and 36.6% for the fiscal years ended August 31, 1998 and August
31, 1997, respectively. State taxes represent the majority of the difference
between the effective rate and the Federal income tax rate for August 31, 1997
and August 31, 1998. For the transition period ended December 31, 1998 and for
the year ended December 31, 1999, non-deductible merger related costs were the
major component affecting the effective tax rate.

                                      F-9
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(3) Income Taxes (continued)

A summary of the provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                               Fiscal Years
                                                   Transition  Ended August
                                      Year Ended  Period Ended      31,
                                     December 31, December 31, --------------
                                         1999         1998      1998    1997
                                     ------------ ------------ ------  ------
                                                 (In Thousands)
<S>                                  <C>          <C>          <C>     <C>
Current:
  Federal...........................    $2,107       $1,063    $1,948  $2,258
  State.............................       251           76       396     455
                                        ------       ------    ------  ------
Total Current Provision.............     2,358        1,139     2,344  $2,713
Deferred:
  Federal...........................        70       (1,365)      104    (299)
  State.............................       987         (346)       21     (64)
                                        ------       ------    ------  ------
Total Deferred Provision............     1,057       (1,711)      125    (363)
Amortization of investment tax
 credit.............................       --           (23)      (70)    (70)
                                        ------       ------    ------  ------
Provision for income taxes..........    $3,415       $ (595)   $2,399  $2,280
                                        ======       ======    ======  ======
</TABLE>

  Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Generally, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. The
Company recognized a 1% rate difference in the transition period ended
December 31, 1998 due to becoming a member of an affiliated group of companies
taxed at the 35% statutory rate.

  For income tax purposes, the Company uses accelerated depreciation and
shorter depreciation lives, as permitted by the Internal Revenue Code.
Deferred federal and state taxes are provided for the tax effects of all
temporary differences between financial reporting and taxable income.
Significant items making up deferred tax assets and liabilities at December
31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           1999         1998
                                                       ------------ ------------
                                                            (In Thousands)
<S>                                                    <C>          <C>
Assets:
  Post retirement benefits............................   $  1,218     $  2,402
  Other...............................................      3,930        2,778
                                                         --------     --------
  Total deferred tax assets...........................   $  5,148     $  5,180
                                                         ========     ========
Liabilities:
  Accelerated Depreciation............................   $(12,516)    $(12,213)
  Deferred Gas Costs..................................     (1,050)         --
  Other...............................................       (549)        (326)
                                                         --------     --------
  Total deferred tax liabilities......................   $(14,115)    $(12,539)
                                                         --------     --------
  Total net deferred taxes............................   $ (8,967)    $ (7,359)
                                                         ========     ========
</TABLE>

                                     F-10
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(4) Commitments

 Long-Term Obligations

  The following table provides information on long-term obligations:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 1999    1998
                                                                ------- -------
                                                                (In Thousands)
<S>                                                             <C>     <C>
First mortgage bonds:
  10.25%, due serially from 1994 to 2003....................... $ 2,400 $ 3,000
  10.10%, due serially from 2010 to 2020.......................   8,000   8,000
  7.28%, due serially from 2008 to 2016........................  10,000  10,000
Debentures:
  8.625%, due 2006.............................................   2,245   2,245
  8.15%, due 2017..............................................   4,914   4,954
Obligations under capital lease................................     471     532
                                                                ------- -------
  Total debt...................................................  28,030  28,731
  Less: Current portion........................................     665     660
                                                                ------- -------
    Total long-term debt....................................... $27,365 $28,071
                                                                ======= =======
</TABLE>

  Substantially all plant assets are pledged as collateral under the terms of
the Indenture of First Mortgage Bonds. Sinking fund requirements for the next
five years are $600,000 annually for the years 2000 through 2003.

  Annual maturities of capital lease obligations are $65,000, $71,000,
$77,000, $84,000 and $91,000 for the years 2000 through 2004, respectively,
and cumulatively $83,000 thereafter.

 Gas Inventory Financing

  The Company, with Department approval, finances its inventory of gas
supplies through a single purpose financing arrangement extending through
December 31, 2000. The credit agreement provides for a total commitment of up
to $10,000,000 and is secured by storage gas. All costs related to the
financing are recoverable from customers.

(5) Restriction on Retained Earnings

  Under the terms of the Indenture of First Mortgage Bonds, substantially all
of the Company's retained earnings in the amount of $6,895,000 as of December
31, 1999 were restricted as to the payment of cash dividends.

(6) Retiree Benefits

  Effective September 1, 1998, the Company adopted SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post-retirement Benefits," which revises
prior disclosure requirements. The information for fiscal years ended August
31, 1998 and 1997 have been restated to conform to the current presentation.

                                     F-11
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(6) Retiree Benefits (continued)

 Pension Plans

  The Company has two pension plans covering substantially all employees. 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"). The net periodic pension cost was as follows:

<TABLE>
<CAPTION>
                                                                   Fiscal
                                                     Transition  Years Ended
                                        Year Ended  Period Ended August 31,
                                       December 31, December 31, ------------
                                           1999         1998     1998   1997
                                       ------------ ------------ -----  -----
                                                  (In Thousands)
<S>                                    <C>          <C>          <C>    <C>
Service cost..........................     $143        $ 107     $ 319  $ 286
Interest cost on projected benefit
 obligation...........................      766          259       779    753
Expected return on plan assets........     (817)        (301)     (904)  (754)
Amortization of prior service cost....      119           55       164    139
Amortization of transition
 obligation...........................      (16)           3         9      9
Recognized actual gain................      --           (15)      (41)   --
Curtailment (gain) loss...............      130         (635)      --     --
                                           ----        -----     -----  -----
Total net pension cost................     $325        $(527)    $ 326  $ 433
                                           ====        =====     =====  =====
</TABLE>

  The table above does not reflect retirement pension enhancements of $527,000
and $623,000 for the fiscal year ended December 31, 1999 and the transition
period ended December 31, 1998, respectively.

 Postretirement Health Care

  Net periodic expenses for postretirement benefits other than pensions was as
follows:

<TABLE>
<CAPTION>
                                                                   Fiscal
                                                     Transition  Years Ended
                                        Year Ended  Period Ended August 31,
                                       December 31, December 31, ------------
                                           1999         1998     1998   1997
                                       ------------ ------------ -----  -----
                                                  (In Thousands)
<S>                                    <C>          <C>          <C>    <C>
Service cost..........................     $ 62         $ 38     $ 114  $ 103
Interest cost on accumulated benefit
 obligation...........................      409          120       359    345
Expected return on plan assets........     (119)         (34)     (102)   (62)
Amortization of prior service cost....       (9)         --        --     --
Amortization of transition
 obligation...........................        2           68       204    204
Curtailment gain......................      --           (85)      --     --
                                           ----         ----     -----  -----
Total net retiree health care cost....     $345         $107     $ 575  $ 590
                                           ====         ====     =====  =====
</TABLE>


  The table above does not reflect retirement health care enhancements of
$353,000 and $555,000 for the fiscal year ended December 31, 1999 and the
transition period ended December 31, 1998, respectively.

  As discussed in Note 1 of the Notes to Consolidated Financial Statements,
the Company conformed to Eastern's method of accounting for post-retirement
benefits other than pensions by recognizing the remaining unamortized
transition obligation of $3,000,000 during the Transition Period.


                                     F-12
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(6) Retiree Benefits (continued)

  The following tables set forth the change in benefit obligation and plan
assets and reconciliation of the funded status of Company plans and amounts
recorded in the Company's balance sheet as of December 31, 1999 and 1998 and
August 31, 1998, using actuarial measurement dates of October 1, 1999 and 1998
and August 31, 1998, respectively.

<TABLE>
<CAPTION>
                                        Pensions                           Health Care
                          ------------------------------------ ------------------------------------
                                        Transition    Fiscal                 Transition    Fiscal
                           Year Ended  Period Ended Year Ended  Year Ended  Period Ended Year Ended
                          December 31, December 31, August 31, December 31, December 31, August 31,
                              1999         1998        1998        1999         1998        1998
                          ------------ ------------ ---------- ------------ ------------ ----------
                                                       (In Thousands)
<S>                       <C>          <C>          <C>        <C>          <C>          <C>        <C>
Change in benefit
 obligation
Balance at beginning of
 period.................    $11,400      $ 11,721    $10,689     $ 5,710      $ 5,388     $ 4,858
Service cost............        143            80        319          62            9         114
Interest cost...........        766           195        778         409           29         359
Plan amendments.........        233            --         --        (168)          --          --
Curtailment (gain) or
 loss...................         98          (635)        --        (106)         (85)         --
Special termination
 benefits...............        527           623         --         353          555          --
Benefits paid...........       (898)         (161)      (642)       (274)         (21)       (256)
Actuarial (gain) or
 loss...................       (302)         (423)       577         (56)        (165)        313
                            -------      --------    -------     -------      -------     -------
Balance at end of
 period.................    $11,967      $ 11,400    $11,721     $ 5,930      $ 5,710     $ 5,388
                            =======      ========    =======     =======      =======     =======
Change in plan assets
Fair value, beginning of
 period.................    $10,003      $ 11,460    $10,211     $ 1,687      $ 1,754     $ 1,386
Actual return on plan
 assets.................      1,125        (1,296)     1,701         163          (46)         53
Employer contributions..         --            --        190           5           --         571
Benefits paid...........       (898)         (161)      (642)       (274)         (21)       (256)
                            -------      --------    -------     -------      -------     -------
Fair value, end of
 period.................    $10,230      $ 10,003    $11,460     $ 1,581      $ 1,687     $ 1,754
                            =======      ========    =======     =======      =======     =======
Reconciliation of funded
 status
Funded status...........    $(1,737)     $ (1,397)   $  (261)    $(4,349)     $(4,023)    $(3,634)
Unrecognized actuarial
 (gain) or loss.........     (1,181)         (668)    (1,766)        (40)         166         371
Unrecognized transition
 obligation.............       (143)         (159)       (16)         --           --          --
Unrecognized prior
 service................      1,102         1,118      1,472        (161)          --          --
                            -------      --------    -------     -------      -------     -------
Net amount recognized at
 end of period..........    $(1,959)     $ (1,106)   $  (571)    $(4,550)     $(3,857)    $(3,263)
                            =======      ========    =======     =======      =======     =======
Amounts recognized in
 balance sheet
Intangible asset........    $   525      $    537    $    35     $   --       $   --      $   --
Accrued benefit
 liability..............     (2,484)       (1,643)      (606)     (4,550)      (3,857)     (3,263)
                            -------      --------    -------     -------      -------     -------   ---
Net amount..............    $(1,959)     $ (1,106)   $  (571)    $(4,550)     $(3,857)    $(3,263)
                            =======      ========    =======     =======      =======     =======
</TABLE>

  Plan assets are invested in debt and equity marketable securities.

  To fund health care benefits under its collective bargaining agreements, the
Company maintains a Voluntary Employee Beneficiary Association ("VEBA") Trust
to which it makes contributions from time to time. Plan assets are invested in
debt and equity marketable securities.

  Following are the weighted-average assumptions used in developing the
projected benefit obligation:

<TABLE>
<CAPTION>
                                                                      August
                                                     December 31,       31,
                                                     --------------  ----------
                                                       1999    1998  1998  1997
                                                     --------  ----  ----  ----
      <S>                                            <C>       <C>   <C>   <C>
      Discount rate.................................      7.5% 7.25% 7.0%  7.5%
      Return on plan assets.........................      8.5%  8.5% 8.0%  8.0%
      Increase in future compensation...............  4.0-4.5%  5.0% 5.0%  5.0%
      Health care inflation trend................... 8.0-10.0%  8.0% 7.0%  8.0%
</TABLE>


                                     F-13
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(6) Retiree Benefits (continued)

  The health care inflation rate for 2000 is assumed to be 8.0% and 10.0% for
pre-65 and post-65 health care benefits, respectively. The rate is assumed to
decrease gradually to 5.0% in 2006 for pre-65 benefits (2008 for post-65
benefits) and remain at that level thereafter. A one percentage point increase
or decrease in the assumed health care trend rate for 1999 would have the
following effects:

<TABLE>
<CAPTION>
                                                One-Percentage One-Percentage
                                                Point Increase Point Decrease
                                                -------------- --------------
                                                       (In Thousands)
      <S>                                       <C>            <C>
      Service cost and interest cost
       components..............................      $ 24          $ (23)
      Post-retirement benefit obligation.......      $541          $(466)
</TABLE>

(7) Leases

  The Company is obligated under various lease agreements for certain
facilities and equipment used in operations. Total expenditures under
operating leases were $318,000 for year ended December 31, 1999, $51,000 for
the Transition Period and $285,000 and $299,000 for the fiscal years 1998 and
1997, respectively. The property classified as a capital lease as of December
31, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
                                                       December 31, December 31,
                                                           1999         1998
                                                       ------------ ------------
                                                            (In Thousands)
      <S>                                              <C>          <C>
      Buildings.......................................    $1,124       $1,124
      Less: Accumulated depreciation..................      (653)        (592)
                                                          ------       ------
                                                           $ 471       $  532
                                                          ======       ======
</TABLE>

  Depreciation expense of $61,000, $19,000, $54,000, and $50,000 along with
interest of $42,000, $15,000, $49,000, and $53,000 related to the capital
lease is included in other operating expenses for the year ended December 31,
1999, Transition Period ended December 31, 1998 and fiscal years ended August
31, 1998 and 1997, respectively.

  The Company also has various operating lease agreements for equipment,
vehicles and office space. The remaining minimum annual rental commitment for
these and all other non-cancelable leases is as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
                                                               Leases   Leases
                                                               ------- ---------
                                                                (In Thousands)
      <S>                                                      <C>     <C>
      2000....................................................  $ 103     $57
      2001....................................................    103      11
      2002....................................................    103     --
      2003....................................................    103     --
      Thereafter..............................................    186     --
                                                                -----     ---
      Total minimum lease payments............................    598     $68
                                                                          ===
      Less: Amount representing interest......................    127
                                                                -----
                                                                $ 471
                                                                =====
</TABLE>

                                     F-14
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(8) Fair Values of Financial Instruments

  The following methods and assumptions were used to estimate the fair values
of financial statements:

    Cash and Cash Equivalents--The carrying amounts approximate fair value.

    Short-Term Debt--The carrying amounts of the Company's short-term debt,
     including notes payable and gas inventory financing, approximate their
     fair value.

    Long-Term Debt--The fair value of long-term debt is estimated based on
     currently quoted market prices.

  The carrying amounts and estimated fair values of the Company's long-term
debt for the periods noted below are as follows:

<TABLE>
<CAPTION>
                                                                Carrying  Fair
                                                                 Amount   Value
                                                                -------- -------
                                                                 (In Thousands)
      <S>                                                       <C>      <C>
      December 31, 1999........................................ $28,030  $28,853
      December 31, 1998........................................ $28,731  $33,996
</TABLE>

(9) Related Party Transactions

  The Company incurred $400,000 in 1999 for legal, tax and corporate services
provided by Eastern. Included in the Consolidated Balance Sheet at December 31,
1999 is a note payable to Eastern in the amount of $4,000,000. Interest is
charged based on the quarterly short-term applicable federal rate issued by the
Internal Revenue Service, and was 5.45% as of December 31, 1999.

  Substantially all of the administrative functions and information technology
systems are integrated with those of Boston Gas Company, an affiliated company.
As allowed by the Department, Essex is charged for only those costs
incrementally incurred to provide these services.

(10) Environmental Matters

  The Company, like many other companies in the natural gas industry, is party
to governmental proceedings requiring investigation and possible remediation of
former manufactured gas plant ("MGP") operations, including former operating
plants and a gas holder site. The Company may have or share responsibility
under applicable environmental laws for the remediation of four former MGP's
and one former gas holder site, as well as for one non-MGP site. The Company
has estimated its potential share of the costs of investigating and remediating
these 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." The Company has recorded a
liability of approximately $300,000, which represents its best estimate at this
time of remediation costs. However, there can be no assurance that actual cost
will not vary considerably from this estimate. Factors that may bear on actual
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.

  The Company has received and responded to Requests for Information from the
U.S. Environmental Protection Agency ("EPA") pursuant to Section 104 of the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), regarding two federal superfund sites that the EPA is currently
investigating. It is not possible at this time to reasonably estimate the
amount of the Company's obligation for remediation of the sites; however, the
Company expects that its share, if any, will be de minimis.

                                      F-15
<PAGE>

                               ESSEX GAS COMPANY

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(10) Environmental Matters (continued)

  By a rate order issued on May 25, 1990, the Department approved recovery of
all prudently incurred environmental response costs associated with former MGP
related sites over separate, seven-year amortization periods, without a return
on the unamortized balance. The Company currently believes, in light of the
Department rate order, that it is not probable that actual costs will
materially affect its financial condition or results of operations.

(11) Selected Comparative Financial Information

<TABLE>
<CAPTION>
                                                           Four Months Ended
                                                       -------------------------
                                                       December 31, December 31,
                                                           1998         1997
                                                       ------------ ------------
                                                               Unaudited
<S>                                                    <C>          <C>
Operating Revenues....................................   $16,637      $16,297
                                                         -------      -------
Operating Margin......................................   $ 9,083      $ 8,539
                                                         -------      -------
Operating Expenses....................................   $13,636      $ 6,342
                                                         -------      -------
Earnings (loss) Before Extraordinary Item.............   $(5,559)     $ 1,189
                                                         -------      -------
Extraordinary Item, Net of Tax........................   $(2,874)     $    --
                                                         -------      -------
Net Earnings (loss)...................................   $(8,433)     $ 1,189
                                                         =======      =======
</TABLE>

  The significant increase in operating expenses for the four months ended
December 31, 1998 as compared to the four months ended December 31, 1997, is
primarily due to merger related expenses as discussed in Note 1.

  This financial information is presented herein for comparative purposes and
includes any adjustments which are, in the opinion of management, necessary
for a fair presentation.

(12) Merger

  On November 4, 1999, Eastern signed a definitive agreement to be acquired by
KeySpan Corporation. Subject to receipt of satisfactory regulatory approvals
and the approval of Eastern shareholders, the transaction is expected to close
in mid to late 2000, although it is possible that the transaction will not
close until 2001.

                                     F-16
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Essex Gas Company:

  We have audited the accompanying consolidated balance sheets of Essex Gas
Company (a Massachusetts corporation and wholly owned subsidiary of Eastern
Enterprises) and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, retained earnings and cash flows for the
year ended December 31, 1999, for the four-month period ended December 31,
1998, and each of the two years in the period ended August 31, 1998. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.

  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit 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 Essex Gas Company and
subsidiary as of December 31, 1999 and 1998, and the results of its operations
and its cash flows for the year ended December 31, 1999, the four-month period
ended December 31, 1998, and each of the two years in the period ended August
31, 1998, in conformity with accounting principles generally accepted in the
United States.

  Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the index to
consolidated financial statements are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits 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.

  As discussed in Note 1, as a result of the merger, the approved rate plan
and related discontinuance of SFAS No. 71, the Company changed certain
accounting practices to comply with generally accepted accounting principles
for non-regulated entities.

                                          Arthur Andersen LLP

Boston, Massachusetts
January 21, 2000


                                     F-17
<PAGE>

                               ESSEX GAS COMPANY

                         INTERIM FINANCIAL INFORMATION
             For the Two Years Ended December 31, 1999 (Unaudited)

<TABLE>
<CAPTION>
                                              Three Months Ended
                                 ----------------------------------------------
                                 March 31, June 30,  September 30, December 31,
                                   1999      1999        1999          1999
                                 --------- --------  ------------- ------------
                                                (In Thousands)
<S>                              <C>       <C>       <C>           <C>
Operating revenues..............  $22,049  $ 4,410      $3,718       $13,919
Operating margin................  $12,048  $ 2,707      $2,862       $ 8,314
Operating earnings (loss).......  $ 4,561  $  (859)     $  921       $ 3,589
Net earnings (loss).............  $ 3,969  $(1,346)     $  249       $ 3,064
</TABLE>

<TABLE>
<CAPTION>
                                                Three Months Ended
                                   --------------------------------------------
                                   February 28, May 31, August 31, December 31,
                                       1998      1998      1998        1998
                                   ------------ ------- ---------- ------------
                                                  (In Thousands)
<S>                                <C>          <C>     <C>        <C>
Operating revenues................   $23,028    $14,154   $4,604     $15,009
Operating margin..................   $11,695    $ 7,400   $2,728     $ 8,129
Operating earnings (loss).........   $ 3,902    $ 1,683   $  593     $ 2,953
Net earnings (loss)...............   $ 3,246    $ 1,000   $ (150)    $ 1,357
</TABLE>

  In the opinion of management, the quarterly financial data includes all
adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of such information. Quarterly data for the prior period
reflects the last three fiscal quarters for the fiscal year ended August 31,
1998 plus the three months ended December 31, 1998.

                                     F-18
<PAGE>

                                                                     SCHEDULE II

                               ESSEX GAS COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS
                      For the Year Ended December 31, 1999
                                 (In Thousands)

<TABLE>
<CAPTION>
                                          Additions
                                     -------------------
                          Balance,    Charged   Charged       Net        Balance,
                        December 31, (credited) to other  Deductions   December 31,
      Description           1998     to income  accounts from Reserves     1999
      -----------       ------------ ---------- -------- ------------- ------------
<S>                     <C>          <C>        <C>      <C>           <C>
RESERVES DEDUCTED FROM
 ASSETS:
  Reserves for doubtful
   accounts............    $  745      $  637    $ --        $ 634        $  748
                           ======      ======    =====       =====        ======
RESERVES INCLUDED IN
 LIABILITIES:
  Reserve for
   postretirement
   benefit cost........    $3,857      $  965    $ --        $  20        $4,802
  Reserve for self-
   insurance...........       100         166      --          --            266
  Reserve for
   environmental
   expenses............       377         --       --           77           300
  Reserve for pension..     1,643         709       84         --          2,436
                           ------      ------    -----       -----        ------
    Total reserves
     included in
     liabilities.......    $5,977      $1,840    $  84       $  97        $7,804
                           ======      ======    =====       =====        ======
</TABLE>

                                      F-19
<PAGE>

                                                                     SCHEDULE II

                               ESSEX GAS COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS
               For the Transition Period Ended December 31, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                        Additions
                                   -------------------
                         Balance,   Charged   Charged       Net        Balance,
                        August 31, (credited) to other  Deductions   December 31,
      Description          1998    to income  accounts from Reserves     1998
      -----------       ---------- ---------- -------- ------------- ------------
<S>                     <C>        <C>        <C>      <C>           <C>
RESERVES DEDUCTED FROM
 ASSETS:
  Reserves for doubtful
   accounts............   $  559     $  169    $ --        $(17)        $  745
                          ======     ======    =====       ====         ======
RESERVES INCLUDED IN
 LIABILITIES:
  Reserve for
   postretirement
   benefit cost........   $3,263     $  661    $ --        $ 67         $3,857
  Reserve for self-
   insurance...........      100        --       --         --             100
  Reserve for
   environmental
   expenses............      100        --       277        --             377
  Reserve for pension..      606        535      502        --           1,643
                          ------     ------    -----       ----         ------
    Total reserves
     included in
     liabilities.......   $4,069     $1,196    $ 779       $ 67         $5,977
                          ======     ======    =====       ====         ======
</TABLE>

                                      F-20
<PAGE>

                                                                     SCHEDULE II

                               ESSEX GAS COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS
                   For the Fiscal Year Ended August 31, 1998
                                 (In Thousands)

<TABLE>
<CAPTION>
                                        Additions
                                   -------------------
                         Balance,   Charged   Charged       Net       Balance,
                        August 31, (credited) to other  Deductions   August 31,
      Description          1997    to income  accounts from Reserves    1998
      -----------       ---------- ---------- -------- ------------- ----------
<S>                     <C>        <C>        <C>      <C>           <C>
RESERVES DEDUCTED FROM
 ASSETS:
  Reserves for doubtful
   accounts............  $   772     $ 431      $--        $ 644      $   559
                         =======     =====      ====       =====      =======
RESERVES INCLUDED IN
 LIABILITIES:
  Reserve for
   postretirement
   benefit cost........  $ 3,463     $ 575      $--        $ 775      $ 3,263
  Reserve for self-
   insurance...........      100       --        --          --           100
  Reserve for
   environmental
   expenses............      --        --        100         --           100
  Reserve for
   pension.............      479       326       --          199          606
                         -------     -----      ----       -----      -------
    Total reserves
     included in
     liabilities.......  $ 4,042     $ 901      $100       $ 974      $ 4,069
                         =======     =====      ====       =====      =======
</TABLE>

                                      F-21
<PAGE>

                                                                     SCHEDULE II

                               ESSEX GAS COMPANY

                       VALUATION AND QUALIFYING ACCOUNTS
                   For the Fiscal Year Ended August 31, 1997
                                 (In Thousands)

<TABLE>
<CAPTION>
                                        Additions
                                   -------------------
                         Balance,   Charged   Charged       Net       Balance,
                        August 31, (credited) to other  Deductions   August 31,
      Description          1996    to income  accounts from Reserves    1997
      -----------       ---------- ---------- -------- ------------- ----------
<S>                     <C>        <C>        <C>      <C>           <C>
RESERVES DEDUCTED FROM
 ASSETS:
  Reserves for doubtful
   accounts............   $  653     $  614    $ --        $495        $  772
                          ======     ======    =====       ====        ======
RESERVES INCLUDED IN
 LIABILITIES:
  Reserve for
   postretirement
   benefit cost........   $3,642     $  590    $ --        $769        $3,463
  Reserve for self-
   insurance...........      100        --       --         --            100
  Reserve for pension..        2        433       44        --            479
                          ------     ------    -----       ----        ------
    Total reserves
     included in
     liabilities.......   $3,744     $1,023    $  44       $769        $4,042
                          ======     ======    =====       ====        ======
</TABLE>

                                      F-22