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 September 30, 2001
------------------
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
-------
COLONIAL GAS COMPANY
D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3480443
------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
617-723-5512
--------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------
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.
FORM 10-Q
PAGE 2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Company or group of companies for which report is filed:
COLONIAL GAS COMPANY ("Company")
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------------
(In Thousands)
For the For the
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
------- -------- -------- --------
(Predecessor) (Predecessor)
OPERATING REVENUES $19,482 $ 16,222 $183,716 $129,275
Cost of gas sold 12,919 9,568 120,717 67,161
------- -------- -------- --------
Operating Margin 6,563 6,654 62,998 62,114
------- -------- -------- --------
OPERATING EXPENSES:
Operations 6,427 6,395 19,775 16,660
Maintenance 749 783 2,508 2,645
Depreciation and amortization 3,643 1,746 11,143 10,515
Amortization of goodwill 2,334 1,506 7,001 4,518
Income taxes (4,598) (5,630) 2,635 4,143
Taxes, other than income 1,071 776 3,553 3,428
Restructuring Charge - 7,000 - 7,000
------- -------- -------- --------
Total Operating Expenses 9,626 12,576 46,615 48,909
------- -------- -------- --------
OPERATING EARNINGS (LOSS) (3,064) (5,922) 16,384 13,205
OTHER EARNINGS (LOSS), NET (4) (280) (75) 278
------- -------- -------- --------
EARNINGS (LOSS) BEFORE INTEREST EXPENSE (3,068) (6,202) 16,309 13,483
------- -------- -------- --------
INTEREST EXPENSE:
Long-term debt 2,133 2,133 6,382 6,400
Other, including amortization
of debt expense 4,050 1,916 12,546 5,239
Less - Interest during construction (22) (22) (90) (57)
------- -------- -------- --------
Total Interest Expense 6,161 4,027 18,838 11,582
------- -------- -------- --------
NET EARNINGS (LOSS) $(9,227) $(10,229) $ (2,530) $ 1,901
======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
FORM 10-Q
PAGE 3
COLONIAL GAS COMPANY
- --------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In Thousands)
September 30, September 30, December 31,
2001 2000 2000
----------- ----------- ------------
(Predecessor)
ASSETS
GAS PLANT, at cost $ 401,290 $ 387,423 $ 394,509
Construction work-in-progress 17,292 10,756 7,751
Less-Accumulated depreciation (130,518) (120,522) (119,564)
--------- --------- ---------
Net plant 288,064 277,657 282,696
--------- --------- ---------
CURRENT ASSETS:
Cash and cash equivalents 151 204 124
Accounts receivable, less reserves
of $3,779 and $2,900 at
September 30, 2001 and 2000,
respectively, and $2,964 at
December 31, 2000 11,884 5,509 24,285
Accounts receivable - affiliates 8,449 13,181 5,235
Accrued utility revenue 2,806 2,051 22,414
Unbilled gas costs receivable 29,289 19,621 33,550
Natural gas and other inventories 20,960 18,185 13,246
Materials and supplies 1,575 2,272 1,709
Prepaid expenses 162 389 262
--------- --------- ---------
Total Current Assets 75,276 61,412 100,825
--------- --------- ---------
OTHER ASSETS:
Goodwill, net of amortization 364,849 234,713 371,850
Deferred charges and other assets 4,430 4,821 4,077
--------- --------- ---------
Total Other Assets 369,279 239,534 375,927
--------- --------- ---------
TOTAL ASSETS $ 732,619 $ 578,603 $ 759,448
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
FORM 10-Q
PAGE 4
COLONIAL GAS COMPANY
- --------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In Thousands)
September 30, September 30, December 31,
2001 2000 2000
----------- ----------- ------------
(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 4,326 3,909 6,856
-------- -------- --------
Total common stockholder's investment 257,884 221,758 210,414
Long-term obligations, less current portion 120,620 120,620 120,621
-------- -------- --------
Total Capitalization 378,504 342,378 331,035
-------- -------- --------
ADVANCE FROM KEYSPAN 200,000 - 250,000
ADVANCE FROM EASTERN - 100,000 -
-------- -------- --------
Total Capitalization and advances 578,504 442,378 581,035
-------- -------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 247 573 572
Notes payable - utility pool 24,554 - 47,209
Notes payable-utility pool gas inventory financing 19,394 - 19,216
Notes payable - 45,800 -
Gas inventory financing - 15,020 -
Accounts payable 21,724 16,033 38,765
Accounts payable-affiliates 1,988 - 6,486
Accrued income taxes 121 1,087 291
Accrued interest 18,947 2,667 4,263
Customer deposits 596 632 738
Refunds due customers 528 3,361 2,681
Other 1,774 597 781
-------- -------- --------
Total Current Liabilities 89,873 85,770 121,002
-------- -------- --------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes 41,938 34,271 36,641
Unamortized investment tax credits 2,453 2,656 2,605
Postretirement benefits obligation 6,844 5,436 5,972
Other 13,007 8,092 12,193
-------- -------- --------
Total Reserves and Deferred Credits 64,242 50,455 57,411
-------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $732,619 $578,603 $759,448
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
FORM 10-Q
PAGE 5
COLONIAL GAS COMPANY
- --------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(In Thousands)
For the Nine Months Ended
-------------------------
September 30, September 30,
2001 2000
-------- --------
(Predecessor)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (2,530) $ 1,901
Adjustments to reconcile net earnings to
cash provided by operating activities:
Depreciation and amortization 18,144 15,033
Deferred taxes 5,297 1,995
Other changes in assets and liabilities:
Accounts receivable 12,401 10,478
Accounts receivable-affiliates (3,214) (13,181)
Accrued utility revenue 19,608 9,079
Unbilled gas costs receivable 4,261 (8,874)
Inventories (7,580) (6,599)
Accounts payable (17,041) (545)
Accounts payable affiliates (4,498) (17,916)
Federal and state income taxes (170) 1,087
Accrued Interest 14,684 (269)
Refunds due customers (2,153) (1,982)
Other 2,131 9,378
-------- --------
Cash provided by (used for) operating activities 39,340 (415)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (16,836) (10,067)
-------- --------
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 (22,655) 16,800
Change in inventory financing 178 11
Retirement of long-term debt, including premiums - (475)
-------- --------
Cash provided by (used for) financing activities (22,477) 10,297
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27 (185)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 124 389
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 151 $ 204
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
FORM 10-Q
PAGE 6
COLONIAL GAS COMPANY
--------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 30, 2001
------------------
1. ACCOUNTING POLICIES AND OTHER INFORMATION
-----------------------------------------
General
-------
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
------
On November 8, 2000, KeySpan acquired 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
FORM 10-Q
PAGE 7
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
---------------
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
-------------------------------------------------------
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
---------------------------
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 third quarter of 2001, payments approximating $.3
million were made under this program.
RECLASSIFICATIONS
-----------------
Certain prior quarter financial statement amounts have been reclassified
for consistent presentation with the current year.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
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
FORM 10-Q
PAGE 8
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
annually 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, 2002, 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
----------------------------------------------------------------------
RESULTS OF OPERATIONS:
----------------------
RESULTS OF OPERATIONS
THIRD QUARTER
The seasonal net loss for the third quarter of 2001 was $9.2 million, a
decrease of $1.0 million, from the third quarter of 2000.
Operating revenues in the third quarter of 2001 increased $3.3 million,
principally due to higher gas prices.
Operating margin approximated the margin from the corresponding quarter in
2000.
Operations and maintenance expenses were unchanged from the corresponding
quarter in 2000.
Depreciation and property taxes increased $1.9 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 third quarter of 2001 reflects increased amortization of goodwill of
$0.8 million and higher interest and amortization of debt issuance costs of
$2.4 million associated with the additional $100 million advance from
KeySpan.
FORM 10-Q
PAGE 9
YEAR-TO-DATE
Net loss for the first nine months of 2001 was $2.5 million, compared to
earnings of $1.9 million, from the same period last year. Weather was 1.4%
colder than normal and 0.8% warmer than 2000.
Operating revenues in the first nine months of 2001 increased $54 million,
principally due to higher gas prices.
Operating margin increased $0.9 million, or 1.4%, principally due to
customer growth.
Operations and maintenance expenses increased $3.0 million, principally due
to a higher provision for bad debts associated with the higher gas prices
and increased employee benefit costs.
Depreciation and property taxes increased $0.6 million and $0.1 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 nine months of 2001 reflects increased amortization of goodwill
of $2.5 million and higher interest and amortization of debt issuance costs
of $9.2 million associated with the additional $100 million 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.
FORM 10-Q
PAGE 10
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(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.
FORM 10-Q
PAGE 11
SIGNATURES
- ----------
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
-----------------------------------------
(Registrant)
Joseph F. Bodanza
-----------------------------------------
J.F. Bodanza, Senior Vice President
Finance, Accounting and Regulatory Affairs
(Principal Financial and Accounting Officer)
Dated: November 14, 2001
--------------------------