UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
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|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the quarterly period ended September 30, 1998
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OR
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|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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For the transition period from to
COMMISSION FILE NUMBER 0-10007
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COLONIAL GAS COMPANY
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(Exact name of registrant as specified in its charter)
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Massachusetts 04-1558100
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
40 Market Street, Lowell, Massachusetts 01852
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (978) 322-3000
Former name, former address and former fiscal year, if changed since last
report: Not applicable
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 |_|
The number of shares of the registrant's common stock, $3.33 par value,
outstanding as of November 1, 1998 was 8,853,349.
COLONIAL GAS COMPANY
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income -
Three Months Ended September 30, 1998 and 1997
Nine Months Ended September 30, 1998 and 1997
Consolidated Condensed Balance Sheets -
September 30, 1998, December 31, 1997
and September 30, 1997
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997
Notes to Consolidated Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLONIAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
September 30,
1998 1997
(In Thousands Except
Per Share Amounts)
Operating Revenues $ 12,347 $ 14,877
Cost of gas sold 6,197 8,587
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Operating Margin 6,150 6,290
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Operating Expenses:
Operations 6,717 7,055
Maintenance 1,187 1,078
Depreciation and Amortization 3,524 2,976
Taxes, other than income 1,218 1,253
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Total Operating Expenses 12,646 12,362
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Income Taxes (Credit) (3,250) (3,029)
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Utility Operating Loss (3,246) (3,043)
Other Operating Income (Loss):
Energy Trucking revenues 373 2,470
Energy Trucking expenses, including
income taxes and interest 414 2,018
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Energy Trucking Net Income (Loss) (41) 452
Other, net of income taxes 66 66
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Total Other Operating Loss 25 518
Non-Operating Income, Net 204 52
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Income (Loss) Before Interest and Debt (3,017) (2,473)
Expense
Interest and Debt Expense 2,196 2,093
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Net Loss $ (5,213) $ (4,566)
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Average Common Shares Outstanding 8,806 8,620
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=========== ===========
Loss per Average Common Share $ (0.59) $ (0.53)
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=========== ===========
Dividends Paid per Common Share $ .345 $ .335
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(See accompanying notes to consolidated condensed financial statements)
COLONIAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
(In Thousands Except
Per Share Amounts)
Operating Revenues $115,854 $124,866
Cost of gas sold 60,777 68,621
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Operating Margin 55,077 56,245
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Operating Expenses:
Operations 20,326 21,608
Maintenance 3,390 3,338
Depreciation and Amortization 9,937 8,921
Taxes, other than income 3,966 4,029
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Total Operating Expenses 37,619 37,896
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Income Taxes 4,374 4,974
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Utility Operating Income 13,084 13,375
Other Operating Income:
Energy Trucking revenues 1,395 4,260
Energy Trucking expenses, including
income taxes and interest 1,600 3,949
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Energy Trucking Net Income (205) 311
(Loss)
Other, net of income taxes 224 172
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Total Other Operating Income 19 483
Non-Operating Income, Net 640 299
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Income Before Interest and Debt Expense 13,743 14,157
Interest and Debt Expense 6,517 5,931
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Net Income $ 7,226 $ 8,226
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Average Common Shares Outstanding 8,750 8,576
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Income per Average Common Share $ 0.83 $ 0.96
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Dividends Paid per Common Share $ 1.025 $ 1.005
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(See accompanying notes to consolidated condensed financial statements)
COLONIAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
September December September
30, 31, 30,
1998 1997 1997
------------ ------------ ------------
(Unaudited) (Unaudited)
(In Thousands)
Utility Property:
At original cost $387,950 $362,742 $356,141
Accumulated depreciation (98,443) (88,210) (91,233)
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Net utility property 289,507 274,532 264,908
Non-Utility Property - Net 7,293 7,312 6,701
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Net property 296,800 281,844 271,609
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Capital Leases - Net 1,680 2,630 2,392
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Current Assets:
Cash and cash equivalents 1,139 259 1,563
Accounts receivable - net 4,728 18,585 4,599
Accrued utility revenues 710 7,417 723
Unbilled gas costs 14,582 19,266 13,694
Fuel and other inventories 15,990 12,959 14,495
Prepayments and other current 12,214 9,481 9,487
assets
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Total current assets 49,363 67,967 44,561
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Deferred Charges and Other
Assets:
Unrecovered deferred income 8,432 9,014 9,192
taxes
Unrecovered environmental
expenses - incurred 3,622 3,833 3,641
Unrecovered environmental
expenses - accrued 307 707 656
Unrecovered transition costs 2,800 2,800 4,500
- accrued
Other 20,482 20,196 19,871
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Total deferred charges
and other assets 35,643 36,550 37,860
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Total Assets $383,486 $388,991 $356,422
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(See accompanying notes to consolidated condensed financial statements)
COLONIAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND CAPITALIZATION
September December September
30, 31, 30,
1998 1997 1997
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(Unaudited) (Unaudited)
(In Thousands)
Capitalization:
Common equity:
Common Stock - part value $ 3.33
per share Authorized -
15,000 shares
Issued and outstanding -
8,845, 8,688, 8,647 $29,455 $28,931 $28,794
Premium on common stock 61,162 57,277 56,517
Retained earnings 34,178 35,924 31,011
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Total Common equity 124,795 122,132 116,322
Long-term debt 110,000 100,102 100,144
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Total capitalization 234,795 222,234 216,466
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Capital Lease Obligations 1,041 1,617 1,471
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Current Liabilities:
Current maturities of
long-term debt 144 10,164 10,161
Current capital lease 639 1,013 921
obligations
Notes payable 51,300 49,400 34,600
Gas inventory purchase 11,860 14,895 9,934
obligations
Accounts payable 8,522 15,674 9,390
Other 11,293 11,362 11,767
Total current 83,758 102,508 76,773
liabilities
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Deferred Credits and Reserves:
Deferred income taxes-funded 44,339 41,443 39,126
Deferred income taxes-unfunded 8,432 9,014 9,192
Accrued environmental expenses 307 707 656
Accrued transition costs 2,800 2,800 4,500
Other 8,014 8,668 8,238
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Total deferred credits and 63,892 62,632 61,712
reserves
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Total Capitalization and $383,486 $388,991 $356,422
Liabilities
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(See accompanying notes to consolidated condensed financial statements)
COLONIAL GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
1998 1997
(In Thousands)
Cash Flows From Operating Activities:
Net income $ 7,226 $ 8,226
Adjustments to reconcile net income to 15,291 14,158
net cash
Changes in current assets and liabilities 10,321 16,283
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Net cash provided by operating 32,838 38,667
activities
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Cash Flows From Investing Activities:
Capital expenditures (24,977) (23,084)
Non-utility capital expenditures (369) (1,142)
Change in deferred accounts 447 (1,460)
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Net cash used in investing (24,899) (25,686)
activities
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Cash Flows From Financing Activities:
Dividends paid on Common Stock (8,973) (8,535)
Issuance of Common Stock 4,409 2,724
Issuance of long-term debt, net of issuance cost 29,166 14,870
Retirement of long-term debt, including premiums (30,526) (5,113)
Change in notes payable 1,900 (15,800)
Change in gas inventory purchase (3,035) (3,105)
obligations
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Net cash used in financing (7,059) (14,959)
activities
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Net increase (decrease) in cash and cash 880 (1,978)
equivalents
Cash and cash equivalents at beginning of 259 3,541
period
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Cash and cash equivalents at end of period $ 1,139 1,563
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Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest - net of amount capitalized $ 8,154 $ 7,480
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Income and franchise taxes $ 3,555 $ 6,109
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(See accompanying notes to consolidated condensed financial statements)
COLONIAL GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position
as of September 30, 1998 and 1997 and results of operations for the three and
nine month periods ended September 30, 1998 and 1997 and cash flows for the
nine month period ended September 30, 1998 and 1997.
2. Due to the significant impact of gas used for space heating during the
heating season (November-April) and the Company's seasonal rate structure,
the results of operations for the three month and nine month periods ending
September 30, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
3. During the nine months ended September 30, 1998, the Company issued 157,000
shares of Common Stock, $3.33 par value, under a Dividend Reinvestment and
Common Stock Purchase Plan and under an Employee Savings Plan. As a result,
Common Stock, $3.33 par value, increased $524,000 and Premium on Common Stock
increased $3,885,000.
4. Contingencies
Reference is made to Note I/Contingencies of the Notes to Consolidated
Financial Statements contained within the Company's 1997 Annual Report to
Stockholders.
5. Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
6. On October 17, 1998, the Company and Eastern Enterprises, a Massachusetts
business trust ("Eastern"), entered into an Agreement and Plan of
Reorganization which provides for the merger of the Company with and into a
subsidiary of Eastern, as a result of which the Company would become a
wholly-owned subsidiary of Eastern. Eastern's other subsidiaries presently
include two other Massachusetts natural gas distribution companies, Boston
Gas Company and Essex County Gas Company. Under the Agreement, the
outstanding shares of the Company's common stock will convert into the right
to receive cash and Eastern common stock as set forth in the Agreement.
Completion of the merger is subject to approval of the Company's stockholders
and, if required, Eastern's shareholders and receipt of satisfactory
regulatory approvals, including approval of the Massachusetts Department of
Telecommunications and Energy and the Securities and Exchange Commission and
antitrust clearance.
7. Financial results for the nine month period ended September 30, 1998 were
affected by the implementation of an improved customer billing system in May,
1998 that enables the Company to bill customers using pro-rated seasonal
rates. As a result, bills sent during May, 1998 for gas consumed in April,
1998 reflected the Company's higher winter rates, increasing operating margin
by $1,121,000 or $0.08 per share, for the nine month period ended September
30, 1998. Because November, 1998 bills for October, 1998 usage will reflect
the Company's lower summer rates, this billing refinement will have the
opposite impact in the fourth quarter of 1998, and therefore have minimal
effect on calendar year earnings. The financial results of the nine month
period ended September 30, 1997 have not been restated.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Results of Operations
Three Months Ended September 30, 1998 and 1997
The Company's net loss for the three months ended September 30, 1998 was
$5,213,000, or $.59 per share, which is $647,000, or 14%, more than the loss of
$4,566,000, or $.53 per share, reported for the same period last year. The
Company typically incurs losses for the second and third quarters while
reporting profits for the first and fourth quarters. This is due to
significantly higher natural gas sales throughout the colder months to meet
customers' heating needs. Approximately 90% of the Company's residential
customers are heating accounts.
The Company's operating margin decreased $140,000, or 2.2%, during the period
due to a 1.5% decrease in total gas sold and transported caused by weather which
was 25% warmer than last year and 42% warmer than normal.
Total operating expenses increased by $284,000, or 2.3%, primarily due to a
$548,000, or 18%, increase in depreciation and amortization expense caused by an
increase in utility plant and the installation of new software systems.
Operations and maintenance expenses, decreased by $229,000, or 2.8%, primarily
due to savings in bad debt expenses and insurance expenses.
Total other operating income decreased $493,000 for the period primarily due
to the financial performance of Transgas Inc. ("Transgas"), the Company's energy
trucking subsidiary. Transgas recorded a loss of $41,000 for the three month
period ended September 30, 1998 compared to a profit of $452,000 for the
three-month period ended September 30, 1997. Warmer weather during the winter of
1997-98 led to a 77% decrease in the demand for hauls of liquefied natural gas
("LNG") -- the principal hauling commodity of Transgas.
Interest and debt expense increased by $103,000, or 4.9%, primarily due to an
increase in short-term interest expense.
Nine Months Ended September 30, 1998 and 1997
Net income for the nine months ended September 30, 1998 was $7,226,000, or
$0.83 per share, compared to $8,226,000, or $0.96, per share for the comparable
1997 period.
The Company's operating margin decreased $1,168,000, or 2.1%, during the
period due to a 9.2% decrease in total gas sold and transported caused by
weather which was 12% warmer than last year and 13% warmer than normal.
Effective in the second quarter of 1998, with the implementation of an improved
customer billing system, bills sent during May for gas consumed in April were
refined to reflect the Company's higher winter rates. This billing refinement
resulted in an increase to operating margin of $1,121,000 or $0.08 per share
during the period. It will have the opposite impact in the fourth quarter of
1998 because November bills for October usage will now reflect the Company's
lower summer rates. Overall, therefore, the billing refinement is expected to
have a minimal effect on calendar year earnings.
Operations and maintenance expenses decreased $1,230,000, or 4.9% during the
period, due primarily to decreased insurance expenses and bad debt expenses.
Depreciation and amortization expense increased $1,016,000, or 11%, caused by a
$29,000,000, or 8.8%, increase in utility property. The decrease in operations
and maintenance expense offset the increase in depreciation and amortization,
resulting in the $277,000, or 0.7%, decrease in total operations expense.
Income taxes decreased $600,000, or 12%, due to a lower level of utility
income subject to tax.
Total other operating income decreased $464,000, or 96%, due to the financial
results of Transgas. A 55% decrease in Transgas' LNG hauls during the first nine
months of 1998 led to a $516,000 decrease in energy trucking net income. The
decreased LNG hauls were primarily due to the warmer than normal weather during
the winter of 1997-98.
Interest and debt expense increased by $586,000, or 9.9% due to an increase in
short-term interest expense.
Liquidity and Capital Resources
On October 7, 1998, the Company issued $10,000,000 of 5-year First Mortgage
Bonds under its Medium Term Note Program (Series B), with an effective rate of
5.50%.
Year 2000
State of Readiness
The Company has identified information technology ("IT") systems and
embedded chip systems which are "mission critical", i.e. those which would have
a significant adverse impact on the operation of its core business and the core
business of its subsidiary, Transgas, in the event of a Year 2000 ("Y2K")
problem. Using its own specialized IT Department personnel, the Company is in
the process of finalizing procedures for checking mission critical IT systems
for Y2K compliance and expects those procedures to be finalized by the end of
1998. It is anticipated that any necessary testing, upgrading, replacement or
other remediation of mission critical IT systems will be completed by the end of
the second quarter of 1999. Other "less than critical" IT systems are also
scheduled to be checked and tested and/or upgraded, as required, by the end of
the second quarter of 1999.
With respect to embedded chip systems, the Company expects to complete its
inventory, assessment and action plan in the last quarter of 1998. Any necessary
testing, upgrading, replacement or other remediation would then be scheduled for
completion by the end of the second quarter of 1999.
The Company is also in the process of identifying material third party
relationships for whom a detailed survey and assessment of Y2K readiness will be
undertaken and completed during the last quarter of 1998. Any necessary testing
and implementation of risk mitigation strategies for high risk vendors would
then be scheduled for completion by the end of the second quarter of 1999.
Notwithstanding the Company's efforts with third parties, there can be no
assurance that the systems of third parties on which the Company's systems rely
will be timely converted or that any such failure to convert by a third party
would not have an adverse effect on the Company's operations.
The Company's merger with Eastern Enterprises is expected to be completed
mid-year 1999 and in connection with that pending merger, the Company
anticipates addressing certain Year 2000 issues through system integrations with
Boston Gas Company, Eastern's largest gas utility subsidiary.
Cost of Year 2000 Remediation
Based on its current information, without any system integrations with
Boston Gas Company, Colonial believes the cost of its Year 2000 compliance could
approximate $1.5 million. Substantially all of this would be incurred in the
future. System integrations with Boston Gas could significantly decrease this
amount.
Risks of Year 2000 Issues and Contingency Plans
Based on its current information, the Company anticipates that its mission
critical systems (including hardware, software and embedded chips) which may not
presently be capable of handling Year 2000 data, will be upgraded to be so
capable or replaced by systems that are so capable by mid-year 1999. The Company
believes its worst case Y2K scenario would be if the interstate pipelines
transporting natural gas to its distribution system shut down or malfunctioned
in a way that seriously affected gas pressures or volumes. The Company is in the
process of assessing the Y2K readiness of those pipelines and also plans to
develop a contingency plan by mid-year 1999 to avoid disruption of service to
its customers and those of its subsidiary, Transgas. Pending Merger into Eastern
Enterprises
On October 17, 1998, the Company and Eastern Enterprises, a Massachusetts
business trust ("Eastern"), entered into an Agreement and Plan of Reorganization
which provides for the merger of the Company with and into a subsidiary of
Eastern, as a result of which the Company will become a wholly-owned subsidiary
of Eastern. Eastern's other subsidiaries presently include two other
Massachusetts natural gas distribution companies, Boston Gas Company and Essex
County Gas Company. Under the Agreement, the outstanding shares of the Company's
common stock will convert into the right to receive cash and Eastern common
stock as set forth in the Agreement. Completion of the merger is subject to
approval of the Company's stockholders and, if required, Eastern's shareholders
and receipt of satisfactory regulatory approvals, including approval of the
Massachusetts Department of Telecommunications and Energy and the Securities and
Exchange Commission and antitrust clearance.
Forward-Looking Information
This report and other Company reports and statements issued or made from time
to time contain forward looking statements which are subject to the inherent
uncertainties in predicting future results and conditions. Certain factors that
could cause actual results to differ materially from those projected in these
forward looking statements include, but are not limited to, the ability to
successfully integrate the operations of the Company with Eastern and its
subsidiaries, variations in weather, changes in the regulatory environment,
customer's preferences on energy sources, general economic conditions, increased
competition, the ability of the Company to address Y2K non-compliant situations
and other uncertainties, all of which are difficult to predict and many of which
are beyond the control of the Company.
PART II - OTHER INFORMATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 Form of Employment Agreement* dated as of October 13, 1998 by and
between Colonial Gas Company and its executives (individual
agreements were executed by the Company with F. L. Putnam, Jr., F L.
Putnam, III, C. W. Sawyer, N. Stavropoulos, J. P. Harrington and
certain other officers).
10.2 Employment Agreement* dated as of October 13, 1999 by and between
Colonial Gas Company, Transgas Inc. and V. W. Baur.
10.3 Colonial Gas Company Retention Bonus Plan* effective as of October 19,
1998.
27 Financial Rate Schedule.
* Management Contracts
b. Reports on Form 8-K
As reported on the Form 8-K filed by the Company with the Securities and
Exchange Commission on October 21, 1998, the Company and Eastern Enterprises
entered into an Agreement and Plan of Reorganization dated October 17, 1998, a
copy of which is filed as an Exhibit to Form 10-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLONIAL GAS COMPANY
(Registrant)
Date: November 10, 1998 s/F. L. Putnam, III
F. L. Putnam, III
President and Chief Executive Officer
Date: November 10, 1998 s/Nickolas Stavropoulos
Nickolas Stavropoulos
Executive Vice President - Finance,
Marketing and Chief Financial Officer