FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
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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 0-10007
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COLONIAL GAS COMPANY
D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3480443
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
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(Address of principal executive offices)
(Zip Code)
617-742-8400
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(Registrant's telephone number, including area code)
None
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Former name, former address and former fiscal year,
if changed since last report.
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 [_]
Common stock of Registrant at the date of this report was 100 shares, all
held by Eastern Enterprises.
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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Company or group of companies for which report is filed:
COLONIAL GAS COMPANY ("Company")
CONSOLIDATED STATEMENTS OF EARNINGS
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(In Thousands)
For the Three Months Ended For the Six Months Ended
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June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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(Predecessor) (Predecessor)
OPERATING REVENUES $42,185 $26,718 $164,233 $113,053
Cost of gas sold 28,431 12,765 107,798 57,595
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Operating Margin 13,754 13,953 56,435 55,458
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OPERATING EXPENSES:
Operations 7,278 5,696 13,347 10,143
Maintenance 810 811 1,759 1,861
Depreciation and amortization 3,631 2,610 7,501 8,394
Amortization of goodwill 2,334 1,506 4,668 3,012
Income taxes (1,896) (38) 7,233 9,773
Taxes, other than income 1,018 989 2,481 2,654
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Total Operating Expenses 13,175 11,574 36,989 35,837
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OPERATING EARNINGS 579 2,379 19,446 19,621
OTHER EARNINGS (LOSS), NET 21 115 (71) 64
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EARNINGS BEFORE INTEREST EXPENSE 600 2,494 19,375 19,685
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INTEREST EXPENSE:
Long-term debt 2,133 2,133 4,249 4,266
Other, including amortization
of debt expense 4,290 1,945 8,496 3,323
Less - Interest during construction (46) (19) (67) (34)
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Total Interest Expense 6,377 4,059 12,678 7,555
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NET EARNINGS (LOSS) $(5,777) $(1,565) $ 6,697 $ 12,130
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The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL GAS COMPANY
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CONSOLIDATED BALANCE SHEETS
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(In Thousands)
June 30, June 30, December 31,
2001 2000 2000
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(Predecessor)
ASSETS
GAS PLANT, at cost $ 399,191 $ 390,746 $ 394,509
Construction work-in-progress 13,685 9,168 7,751
Less-Accumulated depreciation (127,041) (118,365) (119,564)
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Net plant 285,835 281,549 282,696
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CURRENT ASSETS:
Cash and cash equivalents 153 207 124
Accounts receivable, less reserves of $4,500 and
$3,524 at June 30, 2001 and 2000, respectively, and
$2,964 at December 31, 2000 26,636 16,876 24,285
Accounts receivable - affiliates 13,756 3,933 5,235
Accrued utility revenue 3,562 1,478 22,414
Unbilled gas costs receivable 28,174 12,708 33,550
Natural gas and other inventories 14,655 8,682 13,246
Materials and supplies 1,677 2,401 1,709
Prepaid expenses 71 225 262
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Total Current Assets 88,684 46,510 100,825
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OTHER ASSETS:
Goodwill, net of amortization 367,183 236,073 371,850
Deferred charges and other assets 4,527 5,777 4,077
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Total Other Assets 371,710 241,850 375,927
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TOTAL ASSETS $ 746,229 $ 569,909 $ 759,448
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The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL GAS COMPANY
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Consolidated Balance Sheets
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(In Thousands)
June 30, June 30, December 31,
2001 2000 2000
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(Predecessor)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stockholder's investment--Common stock,
$1 par value--Authorized and outstanding 100 shares $ - $ - $ -
Amounts in excess of par value 253,558 225,667 203,558
Retained earnings 13,553 6,321 6,856
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Total common stockholder's investment 267,111 231,988 210,414
Long-term obligations, less current portion 120,621 121,021 120,621
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Total Capitalization 387,732 353,009 331,035
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ADVANCE FROM KEYSPAN 200,000 - 250,000
ADVANCE FROM EASTERN - 100,000 -
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Total Capitalization and advances 587,732 453,009 581,035
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CURRENT LIABILITIES:
Current portion of long-term obligations 247 646 572
Notes payable - utility pool 21,204 - 47,209
Notes payable-utility pool gas inventory financing 12,560 - 19,216
Notes payable - 30,300 -
Gas inventory financing - 7,038 -
Accounts payable 19,257 14,486 38,765
Accounts payable-affiliates 15,369 - 6,486
Accrued income taxes 6,512 7,590 291
Accrued interest 16,587 3,064 4,263
Customer deposits 667 643 738
Refunds due customers 731 3,591 2,681
Other 943 671 781
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Total Current Liabilities 94,077 68,029 121,002
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RESERVES AND DEFERRED CREDITS:
Deferred income taxes 42,856 32,815 36,641
Unamortized investment tax credits 2,503 2,708 2,605
Postretirement benefits obligation 6,551 5,297 5,972
Other 12,510 8,051 12,193
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Total Reserves and Deferred Credits 64,420 48,871 57,411
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TOTAL CAPITALIZATION AND LIABILITIES $746,229 $569,909 $759,448
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The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL GAS COMPANY
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Consolidated Statements of Cash Flows
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(In Thousands)
For the Six Months Ended
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June 30, June 30,
2001 2000
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(Predecessor)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 6,697 $ 12,130
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization 12,169 11,780
Deferred taxes 6,215 539
Other changes in assets and liabilities:
Accounts receivable (10,872) (889)
Accrued utility revenue 18,852 11,522
Unbilled gas costs receivable 5,376 (3,831)
Inventories (1,377) 2,775
Accounts payable (19,508) (2,092)
Accounts payable--affiliates 8,883 (21,849)
Federal and state income taxes 6,221 11,772
Accrued Interest 12,324 (277)
Refunds due customers (1,950) (1,740)
Other (71) (720)
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Cash provided by operating activities 42,959 19,120
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (10,269) (6,592)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid on common stock - (6,039)
Change in equity 50,000 -
Change in advance from KeySpan (50,000) -
Change in notes payable (26,005) 1,300
Change in inventory financing (6,656) (7,971)
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Cash used for financing activities (32,661) (12,710)
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INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 29 (182)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 124 389
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 153 $ 207
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The accompanying notes are an integral part of these consolidated financial
statements.
COLONIAL GAS COMPANY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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JUNE 30, 2001
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ITEM 1. ACCOUNTING POLICIES AND OTHER INFORMATION
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GENERAL
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The Company is a wholly-owned subsidiary of Eastern Enterprises ("Eastern") and
an indirect wholly-owned subsidiary of KeySpan Corporation ("KeySpan"). The
consolidated financial statements include the accounts of the Company and its
affiliate, Massachusetts Fuel Inventory Trust (through December 31, 2000). All
material intercompany balances and transactions between the Company and its
subsidiary have been eliminated in consolidation.
It is the Company's opinion that the financial information contained in this
report reflects all adjustments necessary to present a fair statement of results
for the periods reported. All of these adjustments are of a normal recurring
nature. Results for the periods are not necessarily indicative of results to be
expected for the year, due to the seasonal nature of the Company's operations.
All accounting policies have been applied in a manner consistent with prior
periods, except for the method of accounting for depreciation and property taxes
during interim periods as discussed in "Interim Period Depreciation and Property
Tax Accounting". Such financial information is subject to year-end adjustments
and annual audit by independent public accountants.
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, the 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.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted in this Form 10-Q. Therefore these interim
financial statements should be read in conjunction with the Company's 2000
Annual Report filed on Form 10-K with the Securities and Exchange Commission.
MERGER
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On November 8, 2000, KeySpan acquired all the common stock of Eastern for $64.56
per share in cash. The transaction was accounted for using the purchase method
of accounting for business combinations. The purchase price was allocated to the
net assets acquired of Eastern and its subsidiaries based upon their fair value.
The historical cost basis of the Company's assets and liabilities, with minor
exceptions, was determined to represent fair value due to the existence of
regulatory-approved rate plans that are based upon the recovery of historical
costs and a fair return thereon. The allocation of the purchase price remains
subject to adjustment upon final valuation of certain acquired balances of the
Company. Under push-down accounting, the excess of the purchase price over the
fair value of the Company's net assets acquired, or goodwill, of approximately
$139 million has been recorded as an asset and is being amortized over a period
of 40 years. The push-down accounting resulted in a decrease to equity of $9
million, net of fair value adjustments of $2 million, and the recording of a
$250 million advance from KeySpan, $100 million of which was previously advanced
from Eastern.
Effective June 30, 2001, an additional $50 million was added to equity by
KeySpan, The Company, in turn, paid down the advance from KeySpan.
SEASONAL ASPECT
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The amount of the Company's natural gas firm throughput for purposes of space
heating is directly related to temperature conditions. Consequently, there is
less gas throughput during the summer months than during the winter months. In
addition, under its seasonal rate structure, the rates charged to customers
during November through April are higher than those charged during May through
October.
INTERIM PERIOD DEPRECIATION AND PROPERTY TAX ACCOUNTING
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To be consistent with KeySpan accounting policies, the Company, beginning in
2001, charges annual depreciation and property tax expense on an estimated basis
equally throughout the year. In prior years, the Company charged depreciation
and property tax expense in an amount equal to the percentage of the annual
volume of firm gas throughput projected for the month, applied to the estimated
annual depreciation and property tax expense.
WORKFORCE REDUCTION PROGRAM
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As a result of the KeySpan merger, the Company implemented a severance program
in an effort to reduce is workforce. In 2000, the Company recorded a merger-
related liability of $1.7 million associated with this severance program. During
the second quarter of 2001, payments approximating $0.2 million were made under
this program.
RECLASSIFICATIONS
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Certain prior quarter financial statement amounts have been reclassified for
consistent presentation with the current year.
RECENT ACCOUNTING PRONOUNCEMENTS
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On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other
Intangible Assets". The key concepts from the two interrelated Statements
include mandatory use of the purchase method of accounting for business
combinations, discontinuance of goodwill amortization, a revised framework for
testing goodwill impairment at a "reporting unit" level, and new criteria for
the identification and potential amortization of other intangible assets.
The Business Combination Statement is generally effective for combinations after
June 30, 2001. The Statement of Goodwill and Other Intangible Assets is
effective for the fiscal years beginning after December 15, 2001, however, for
business combinations consummated after June 30, 2001, the requirements to
discontinue goodwill amortization are effective upon issuance of the Statements.
The first part of the annual impairment test is to be performed within six
months of adopting the Statement on Goodwill and Other Intangible Assets.
We are currently evaluating the impact that these Statements will have on our
operations. We are currently amortizing goodwill of approximately $15 million on
an annual basis. As noted, effective January 1, 2002, goodwill will no longer be
subject to amortization, but instead will be tested for impairment.
In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". The standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the long-lived asset. Over time the
liability is accreted to its then present value, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2001, with earlier application encouraged. We are
currently evaluating the impact, if any, that this Statement may have on our
results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS:
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RESULTS OF OPERATIONS
SECOND QUARTER
The seasonal net loss for the second quarter of 2001 was $5.8 million, an
increase of $4.2 million, from the first quarter of 2000. Weather was 7% warmer
than normal and 13% warmer than 2000.
Operating revenues in the second quarter of 2001 increased $15.5 million,
principally due to higher gas prices.
Operating margin was virtually unchanged from the corresponding quarter in 2000.
Operations and maintenance expenses increased $1.6 million, due to a higher
provision for bad debts due to the higher gas prices and increased employee
benefit costs.
Depreciation and property taxes increased $1.0 million and $0.3 million,
respectively, principally due to the modification of recording these expenses
within the year as discussed under "Interim Period Depreciation and Property Tax
Accounting".
The second quarter of 2001 reflects increased amortization of goodwill of $0.8
million and higher interest and amortization of debt issuance costs of $3.0
million associated with the additional advance from KeySpan.
YEAR-TO-DATE
Net earnings for the first six months of 2001 were $6.7 million, a decrease of
$5.4 million, from the same period last year. Weather was 1.6% colder than
normal and slightly colder than 2000.
Operating revenues in the first six months of 2001 increased $51.2 million,
principally due to higher gas prices and the colder weather.
Operating margin increased $1.0 million, or 1.8%, principally due to customer
growth and the colder weather.
Operations and maintenance expenses increased $3.1 million, principally due to a
higher provision for bad debts due to the higher gas prices and increased
employee benefit costs.
Depreciation and property taxes decreased $0.9 million and $0.2 million,
respectively, principally due to the modification in the method of recording
these expenses within the year as discussed under "Interim Period Depreciation
and Property Tax Accounting".
The first six months of 2001 reflects increased amortization of goodwill of $1.7
million and higher interest and amortization of debt issuance costs of $6.0
million associated with the additional advance from KeySpan.
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.
Investors should be aware of important factors that could cause actual results
to differ materially from the 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 operations, temperatures above or below normal,
changes in economic conditions, including interest rates and fuel prices,
regulatory and court decisions, developments with respect to previously-
disclosed environmental liabilities and such other factors detailed from time to
time in reports filed by the Company with the SEC. Most of these factors are
difficult to predict accurately and are generally beyond the control of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that projected cash flow from operations, in combination
with currently available resources, is sufficient to meet 2001 capital
expenditures, working capital requirements, dividend payments and debt
repayments.
The Company expects capital expenditures for 2001 to be approximately $25
million. Capital expenditures will be primarily for system expansion associated
with customer growth and improvements to the delivery infrastructure.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) List of Exhibits
None
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
SIGNATURES
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It is the Company's opinion that the financial information contained in this
report reflects all normal, recurring adjustments necessary to present a fair
statement of results for the period reported, but such results are not
necessarily indicative of results to be expected for the year due to the
seasonal nature of the business of the Company. Except as otherwise herein
indicated, all accounting policies have been applied in a manner consistent with
prior periods. Such financial information is subject to year-end adjustments
and an annual audit by independent public accountants.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Colonial Gas Company
D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND
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(Registrant)
Joseph F. Bodanza
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J.F. Bodanza, Senior Vice President
Finance, Accounting and Regulatory Affairs
(Principal Financial and Accounting Officer)
Dated: August 14, 2001
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