SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2000 Commission file number 0-449 - -------------------------------------------------------------------------------- FALL RIVER GAS COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-1298780 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 155 NORTH MAIN STREET, FALL RIVER, MASSACHUSETTS 02722 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 508-675-7811 - -------------------------------------------------------------------------------- "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 the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding at March 31,2000 - ---------------------------------- ----------------------------- Common stock,par value of $.83 1\3 2,214,388 shares FALL RIVER GAS COMPANY INDEX PAGE NO. -------- Part. I. Financial Position Consolidated Condensed Balance Sheets - March 31, 2000 and September 30, 1999 1 Consolidated Condensed Statements of Income - Six Months Ended March 31, 2000 and 1999 2 Consolidated Statements of Cash Flows - Six Months Ended March 31, 2000 and 1999 3 Management's discussion and Analysis of the Consolidated Condensed Statements of Income 4,5,6 Notes to Consolidated Condensed Financial Statements 7 Part II. Other Information 7 PART I. FINANCIAL INFORMATION FALL RIVER GAS COMPANY AND SUBSIDIARY CONSOLIDATED CONDENSED BALANCE SHEETS Unaudited MARCH 31, SEPTEMBER 30, ASSETS 2000 1999 ----------- ----------- Gas Plant, at original cost $63,100,667 $62,319,207 less accumulated depreciation 23,933,766 22,552,849 ----------- ----------- 39,166,901 39,766,358 ----------- ----------- Rental Property 6,090,237 6,069,442 less accumulated depreciation 1,850,548 1,887,415 ----------- ----------- 4,239,689 4,182,027 ----------- ----------- Current Assets: Cash 467,697 279,079 Accounts receivable, less allowance for doubtful accounts of $1,578,197 as of 3/31/00 and $1,064,497 as of 9/30/99 6,234,483 1,617,329 Inventories, at average cost Liquefied natural gas and propane 1,874,176 3,574,561 Materials and Supplies 1,418,354 1,345,614 Purchased gas costs deferred 2,649,016 3,627,483 Prepaid and Deferred Taxes 0 143,478 Prepayments and Other 751,295 710,005 ----------- ----------- 13,395,021 11,297,549 ----------- ----------- Deferred Charges: Regulatory Asset 370,504 426,313 Other 0 10,702 ----------- ----------- 370,504 437,015 ----------- ----------- $57,172,115 $55,682,949 =========== =========== STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION: Stockholders' investment-- Common stock, par value $.83-1/3 par, 2,951,334 authorized and 2,231,262 shares issued $ 1,859,385 $ 1,834,856 Premium paid in on common stock 5,649,209 5,086,794 Retained earnings ($6,865,648 restricted against payment of cash dividends as of 3/31/00 and as of 9/30/99) 11,860,873 10,661,885 ----------- ----------- 19,369,467 17,583,535 ----------- ----------- Long-term debt, less current sinking fund requirements First Mortgage Bonds--9.44% due 2020 6,500,000 6,500,000 First Mortgage Bonds--7.99% due 2026 7,000,000 7,000,000 First Mortgage Bonds--7.24% due 2027 6,000,000 6,000,000 ----------- ----------- 19,500,000 19,500,000 ----------- ----------- Total capitalization 38,869,467 37,083,535 ----------- ----------- CURRENT LIABILITIES: Notes payable to banks 4,900,000 5,800,000 Dividends Payable 0 528,567 Accounts Payable 2,326,224 1,798,662 Accrued taxes 175,784 0 Other - Commitment and Contingencies 2,797,645 2,488,776 ----------- ----------- 10,199,653 10,616,005 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 4,532,790 4,532,790 Unamortized investment tax credits 419,027 441,169 Regulatory Liability 383,763 383,763 Other 2,767,415 2,625,687 ----------- ----------- 8,102,995 7,983,409 ----------- ----------- $57,172,115 $55,682,949 =========== =========== See accompanying notes to consolidated condensed financial statements. 1 SUMMARIZED FINANCIAL INFORMATION FALL RIVER GAS COMPANY AND SUBSIDIARY CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS Unaudited Unaudited Three Months Ended Six Months Ended March 31 March 31 ---------------------------- ---------------------------- 2000 1999 2000 1999 ----------- ----------- ----------- ----------- GAS OPERATING REVENUES $21,036,442 $20,259,752 $31,004,742 $30,754,820 ----------- ----------- ----------- ----------- OPERATING EXPENSES Cost of gas sold 12,662,470 11,866,472 17,910,153 17,511,411 Other operation 3,340,573 3,410,617 6,506,085 6,546,307 Maintenance 486,467 384,151 932,079 733,449 Depreciation 1,109,581 1,081,876 1,588,063 1,548,446 Local Property and Other 619,250 656,439 939,346 1,003,780 Federal and State income taxes 904,946 925,576 917,180 967,768 ----------- ----------- ----------- ----------- Total operating expenses 19,123,287 18,325,131 28,792,906 28,311,161 ----------- ----------- ----------- ----------- OPERATING INCOME $ 1,913,155 $ 1,934,621 $ 2,211,836 $ 2,443,659 OTHER INCOME: Earnings of Fall River Gas Appliance Company, Inc. (a wholly-owned subsidiary) 184,320 226,394 351,407 467,494 Other 6,837 135 11,810 5,140 ----------- ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE 2,104,312 2,161,150 2,575,053 2,916,293 ----------- ----------- ----------- ----------- INTEREST EXPENSE AND OTHER: Long-term debt 401,825 401,825 803,650 803,650 Other 27,991 15,965 39,772 28,260 ----------- ----------- ----------- ----------- 429,816 417,790 843,422 831,910 ----------- ----------- ----------- ----------- NET INCOME $ 1,674,496 $ 1,743,360 $ 1,731,631 $ 2,084,383 RETAINED EARNINGS - BEGINNING OF PERIOD $10,719,020 $11,013,808 $10,661,885 $10,672,783 ADD - Dividends declared 0 0 528,567 526,173 DEDUCT - Dividends paid 532,643 526,721 1,061,210 1,052,892 RETAINED EARNINGS - END OF PERIOD ($6,865,648 restricted against payment of cash dividends as of 3/31/00 and 3/31/99 $11,860,873 $12,230,447 $11,860,873 $12,230,447 =========== =========== =========== =========== BASIC EARNINGS PER SHARE 0.75 0.79 0.78 0.95 =========== =========== =========== =========== AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 2,222,627 2,195,585 2,214,388 2,194,362 =========== =========== =========== =========== CASH DIVIDEND PAID PER COMMON SHARE 0.24 0.24 0.48 0.48 =========== =========== =========== =========== See accompanying notes to consolidated condensed financial statements. 2 FALL RIVER GAS COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS Unaudited Six Months Ended March 31 ----------------------------- 2000 1999 ----------- ----------- Cash Provided by (used for) Operating Activities: Net income $ 1,731,631 $ 2,084,383 Items not requiring (providing) cash: Depreciation 1,861,544 1,785,775 Deferred Income Taxes 143,478 401,160 Investment Tax Credits, net (22,142) (22,142) Change in working capital (1,012,996) (1,654,157) Other sources, net 150,093 467,187 ----------- ----------- Net cash used for operating activities 2,851,608 3,062,206 ----------- ----------- Investing Activities: Additions to utility property, plant and equipment (967,894) (1,001,884) Additions to nonutility property (320,830) (230,850) ----------- ----------- Net cash used by investing activities (1,288,724) (1,232,734) ----------- ----------- Financing activities: Cash dividends on common stock (1,061,210) (1,052,892) Common stock transactions 586,944 88,010 Increase (decrease) in notes payable to banks, net (900,000) (800,000) ----------- ----------- Net cash provided by financing activities (1,374,266) (1,764,882) ----------- ----------- Increase (decrease) in cash 188,618 64,590 Cash, beginning of period 279,079 356,005 ----------- ----------- Cash, end of period $ 467,697 $ 420,595 =========== =========== Changes in Components of Working Capital (excluding cash) (Increase) decrease in current assets: Special Deposits $ 19,050 $ 0 Accounts receivable (4,617,155) (5,398,167) Inventories 1,627,646 817,156 Prepayments and other (33,219) (39,697) Deferred gas cost 978,467 2,832,003 Increase (decrease) in current liabilities: Accounts payable 527,562 (786,087) Accrued taxes 175,784 521,586 Other 308,869 399,049 ----------- ----------- Change in Working Capital $(1,012,996) $(1,654,157) =========== =========== Supplemental disclosure of cash flow information: Cash paid during year for: Interest $ 995,269 $ 950,442 Income taxes $ 620,596 $ 620,792 See accompanying notes to consolidated condensed financial statements. 3 FALL RIVER GAS COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS Results of Operations Net income for the second quarter of fiscal 2000 was $1,674,500 or $0.75 per average share as compared with earnings of $1,743,400 or $0.79 for the second quarter in fiscal 1999. Earnings for this period was negatively impacted by the higher operating expenses compared to the identical period in 1999. Net income for the six months ended March 31, 2000 was $1,731,631 with earnings per average share at $0.78 compared to net income of $2,084,383 and earnings per average share of $0.95 for the same period in 1999. For the six month comparison, the Company experienced higher operating expenses and $160,000 non-taxable merger costs. During the second quarter of 2000 colder weather in which effective degree days rose 1.6% from 2,964 in 1999 to 3,010 in 2000 positively impacted firm sales. Firm sales volumes increased 3.9%, from 2,506,400 MCF in 1999 to 2,603,100 MCF in 2000. Operating revenues for the three months ended March 31, 2000 increased $776,700 to $21,036,400 from $20,259,700 in 1999. Cost of gas (CGA) revenues for the second quarter increased by $816,043 or 5.7%. Revenues increased due to the net changes in our CGA billings along with increased firm sales volume as stated above. The fiscal 2000 and 1999 CGA revenues, referred to above, have been computed on the current rate structure. In accordance with the Company's approved CGAC, increases or decreases in the cost of gas sold continue to be passed directly to our firm customers, dollar for dollar. Gas operating revenues for the six months ended March 31, 2000 increased $249,900, 0.8%, from $30,754,800 in 1999 to $31,004,700 in 2000. With the colder weather that the Company experienced during this period, in which effective degree days increased 0.8% from 4,911 in 1999 to 4,949 in 2000, total sales volumes increased slightly from 4,680,800 Mcf to 4,681,700 Mcf in 2000. The increase of operating revenues is attributable to increased CGA revenues and conservation program revenues and slightly higher base revenues due to colder weather. Operating expenses, excluding federal and state income taxes, for the three month comparison increased 4.7% from $17,399,600 in 1999 to $18,218,300 in 2000, an increase of $818,800. The most significant operation expense - cost of gas sold - increased by $796,000 for the three month comparison mainly due to the reasons discussed above. Other operation expenses including health benefits, payroll, and materials and supplies have decreased by $70,000, 2.0% lower than the comparable period in 1999. Total operating expenses, excluding federal and state income taxes, for the six month comparisons reflected a 1.9% increase from $27,343,400 to $27,875,700 an increase of $532,300. The most significant operation expense - cost of gas sold - increased by $398,700 for the six month comparison due mainly to the increase in the volumes of purchased gas and the higher commodity cost. Other operation expenses including health benefits, payroll, and materials and supplies have decreased by $40,200, 0.6% lower than the comparable period in 1999. 4 On October 5, 1999 the Company and Southern Union Company(Southern Union) announced that the board of directors had unanimously approved a definitive merger agreement. The agreement calls for Southern Union to acquire the Company in the transaction valued at approximately $75 million, including assumption of debt. Under the terms of the agreement, the Company shareholders will receive $23.50 per Fall River Gas share in Southern Union common stock or cash. The Company's shareholders can elect to receive Southern Union common stock, cash, or a combination of stock and cash, subject to proration and an adjustment formula. The transaction will require the approval of the holders of two thirds of the Company's outstanding shares, the Massachusetts Department of Telecommunication and Energy, the Pennsylvania Public Utility Commissions as well as regulators in Missouri, where Southern Union currently has operations. The Company had recognized approximately $160,000 of investment banking and legal fees in the first quarter related to its proposed merger agreement with Southern Union Company, which reduced earnings for the first six months by about $0.07 per share. Costs are included in operating expenses for the three and six months ended December 31, 1999 and March 31, 2000, respectively. Premium paid on common stock for the six month period increased $562,415 or 11.1% from $5,086,794 in September 1999 to $5,649,209 in March 2000. This increase was due to the continuing purchase and participation in the Company's Dividend Reinvestment Plan. Fall River Appliance Company earnings for the six months ended March 31, 2000 reflect a decrease of 25% or $116,100. Earnings decreased from $467,500 recorded in fiscal 1999 to $351,400. Fiscal 1999 included merchandise sales of 58 unit heaters to a new apartment complex under development. Capital Resources and Liquidity The Company's major capital requirement results from upgrading the efficiency of existing plant, as well as, to serve additional customers. For the six months ended March 31, 2000, capital expenditures totaled approximately $1,228,700. Cash flow patterns reflect the seasonality of the Company's business. The greatest demand for cash is in the late fall and winter as construction projects are brought to completion and accounts receivable balances rise. Capital expenditures and accounts receivable balances were financed by internally generated funds and supplemented by short- term borrowings. Factors that May Affect Future Results The Private Securities Litigation Reform Act of 1995 encourages the use of cautionary statements accompanying forward-looking statements. The preceding Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements concerning the impact of changes in the cost of gas and of the CGA mechanism on total margin; 5 projected capital expenditures and sources of cash to fund expenditures; and estimated costs of environmental remediation and anticipated regulatory approval of recovery mechanisms. The Company's future results, generally and with respect to such forward-looking statements, may be affected by many factors, among which are uncertainty as to the regulatory allowance of recovery of changes in the cost of gas; uncertain demands for capital expenditures and the availability of cash from various sources; uncertainty as to whether transportation rates will be reduced in future regulatory proceeding with resulting decreases in transportation margins; and uncertainty as to regulatory approval of the full recovery of environmental costs, transition costs and other regulatory assets. The Company had no factors that would create deluded earnings per share. The "Year 2000" Issue The Company has evaluated its principal computer systems and noninformation technology systems including, but not limited to, telecommunications systems, automated meter reading systems, SCADA, regulator stations, plant remote control systems and security systems to determine readiness for the year 2000. As of December 31, 1999, all principal systems have been modified, upgraded or replaced to ensure year 2000 capability. All principal systems were tested and completed by November 1999. To date no "Year 2000" problems have been identified. The cost incurred to complete the year 2000 readiness were not significant and will not have a material impact on the Company's financial position or results of operations. New Accounting Standards In June 1998, the FASB issued SFAS No. 133, ":Accounting for Derivative Instruments and Hedging Activities". SFAS 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 liability measured as its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for quality hedges allows a derivative's gains and losses to offset related results on the hedged item in the statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The new standard, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 is not expected to effect the Company's financial condition or results of operation. See accompanying notes to consolidated financial statements 6 FALL RIVER GAS COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The results of operation for the six month periods ending March 31, 2000 and 1999 are not necessarily indicative of the results to be expected for the full year. 2. 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 Company's financial position as of March 31, 2000 and 1999, and the results of operations for the six months ended and changes in financial position for the six months then ended. 3. The Company had no shares of its common stock reserved for officers and employees, options, warrants, conversions or other requirements at March 31, 2000. PART II. OTHER INFORMATION Not applicable. 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. FALL RIVER GAS COMPANY ------------------------------ (Registrant) PETER H. THANAS ------------------------------ (Signature) Date May 12, 2000 Peter H. Thanas, Treasurer, ------------- Chief Financial and Accounting Officer 7