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 March 31, 2002 ---------------- 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) 617-742-8400 ----------------------------------------------- (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") Statement of Earnings - --------------------- Unaudited (In Thousands) For the Three Months Ended -------------------------- March 31, March 31, 2002 2001 ----------- ----------- OPERATING REVENUES ............................. $84,807 $122,048 Cost of gas sold .......................... 47,032 79,367 ------- -------- Operating Margin .......................... 37,775 42,681 ------- -------- OPERATING EXPENSES: Operations ................................ 5,923 6,069 Maintenance ............................... 1,391 949 Depreciation and amortization ............. 3,965 3,870 Amortization of goodwill .................. - 2,334 Income taxes .............................. 7,479 9,129 Taxes, other than income .................. 1,063 1,463 ------- -------- Total Operating Expenses .................. 19,821 23,814 ------- -------- OPERATING EARNINGS ............................. 17,954 18,867 OTHER EARNINGS (LOSS), NET ..................... (23) (92) ------- -------- EARNINGS BEFORE INTEREST EXPENSE ............... 17,931 18,775 ------- -------- INTEREST EXPENSE: Long-term debt ............................ 2,127 2,116 Other, including amortization of debt expense ........................... 4,128 4,207 Less - Interest during construction ....... (41) (22) ------- -------- Total Interest Expense .................... 6,214 6,301 ------- -------- NET EARNINGS ................................... $11,717 $ 12,474 ======= ======== The accompanying notes are an integral part of these financial statements. FORM 10-Q Page 3 Colonial Gas Company - -------------------- Balance Sheets - -------------- Unaudited (In Thousands) March 31, March 31, December 31, 2002 2001 2001 ----------- ----------- ------------ ASSETS GAS PLANT, at cost ............................. $ 418,788 $ 395,343 $ 418,099 Construction work-in-progress ............. 14,359 11,557 9,763 Less-Accumulated depreciation ............. (136,932) (123,595) (133,127) --------- --------- --------- Net plant ......................... 296,215 283,305 294,735 --------- --------- --------- CURRENT ASSETS: Cash and cash equivalents ................. 153 6,090 121 Accounts receivable, less reserves of $4,078 and $4,420 at March 31, 2002 and 2001, respectively, and $3,709 at December 31, 2001 ...................... 36,042 50,972 19,531 Accounts receivable - affiliates .......... 27,869 87 25,713 Accrued utility revenue ................... 11,688 20,800 19,064 Deferred gas costs ........................ 5,824 37,509 15,579 Natural gas and other inventories ......... 6,403 4,086 16,832 Materials and supplies .................... 807 1,511 695 Prepaid expenses .......................... 72 170 72 -------- --------- --------- Total Current Assets .............. 88,858 121,225 97,607 -------- --------- --------- OTHER ASSETS: Goodwill .................................. 377,652 369,516 377,652 Deferred charges and other assets ......... 4,937 4,345 6,998 --------- --------- --------- Total Other Assets ................ 382,589 373,861 384,650 --------- --------- --------- TOTAL ASSETS ................................... $ 767,662 $ 778,391 $ 776,992 ========= ========= ========= The accompanying notes are an integral part of these financial statements. FORM 10-Q Page 4 Colonial Gas Company - -------------------- Balance Sheets - -------------- Unaudited (In Thousands) March 31, March 31, December 31, 2002 2001 2001 ------------------ ----------------- ---------------- CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common stockholder's investment- Common stock, $1 par value- Authorized-200,000 shares; outstanding-100 shares ............... $ - $ - $ - Amounts in excess of par value .................................. 269,430 203,558 269,430 Retained earnings ................................................. 2,989 19,330 5,272 Accumulated comprehensive income .................................. (5,281) - (5,281) -------- -------- -------- Total common stockholder's investment ........................... 267,138 222,888 269,421 Long-term obligations, less current portion ....................... 120,620 120,484 120,205 -------- -------- -------- Total Capitalization ............................................ 387,758 343,372 389,626 Advance from KeySpan .............................................. 214,000 250,000 200,000 -------- -------- -------- Total Capitalization and Advance ................................ 601,758 593,372 589,626 -------- -------- -------- CURRENT LIABILITIES: Current portion of long-term obligations ......................... 247 384 296 Note payable utility pool ........................................ 51,957 47,327 68,517 Note payable utility pool-gas inventory financing ................ 8,580 5,995 21,958 Accounts payable ................................................. 16,530 34,242 12,538 Accounts payable-affiliates ...................................... - 17,671 - Accrued taxes .................................................... 1,267 1,187 896 Accrued state income taxes ....................................... 659 2,167 (75) Accrued interest ................................................. 12,497 10,597 8,726 Customer deposits ................................................ 462 717 538 Refunds due customers ............................................ 163 1,318 303 Other ............................................................ 155 61 353 -------- -------- ------- Total Current Liabilities ................................... 92,517 121,666 114,050 -------- -------- ------- OTHER LIABILITIES: Deferred income taxes ............................................ 39,033 42,375 38,322 Unamortized investment tax credits ............................... 2,351 2,554 2,402 Postretirement benefits obligation ............................... 6,721 6,263 6,770 Other ............................................................ 25,282 12,161 25,822 -------- -------- ------- Total Other Liabilities ....................................... 73,387 63,353 73,316 -------- -------- ------- TOTAL CAPITALIZATION AND LIABILITIES .................................. $767,662 $778,391 $776,992 ======== ======== ======== The accompanying notes are an integral part of these financial statements. FORM 10-Q Page 5 Colonial Gas Company - -------------------- Statement of Cash Flows - ----------------------- Unaudited (In Thousands) For the Three Months Ended -------------------------- March 31, March 31, 2002 2001 ------------ --------------- Cash flows from operating activities: Net earnings ........................................................ $ 11,717 $ 12,474 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization ................................... 3,965 6,204 Deferred taxes .................................................. 711 5,734 Other changes in assets and liabilities: Accounts receivable ........................................ (18,667) (21,539) Accrued utility revenue .................................... 7,376 1,614 Deferred gas costs ......................................... 9,755 (3,959) Inventories ................................................ 10,317 9,358 Accounts payable ........................................... 3,992 6,662 State income taxes ......................................... 734 1,876 Accrued interest ........................................... 3,771 6,334 Other ...................................................... 1,372 (834) -------- -------- Cash provided by operating activities .................................... 35,043 23,924 -------- -------- Cash flows from investing activities: Capital expenditures, net of retirements ............................ (5,073) (4,855) -------- -------- Cash used for investing activities ....................................... (5,073) (4,855) -------- -------- Cash flows from financing activities: (Repayments to) proceeds from note payable-utility pool ............. (16,560) 118 (Repayments to) note payable-inventory financing .................... (13,378) (13,221) Advance from KeySpan ................................................ 14,000 - Dividend paid to KeySpan ............................................ (14,000) - -------- -------- Cash used for financing activities ....................................... (29,938) (13,103) -------- -------- Increase in cash and cash equivalents .................................... 32 5,966 Cash and cash equivalents at beginning of period ......................... 121 124 -------- -------- Cash and cash equivalents at end of period ............................... $ 153 $ 6,090 ======== ======== The accompanying notes are an integral part of these financial statements. FORM 10-Q Page 6 COLONIAL GAS COMPANY -------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- MARCH 31, 2002 -------------- 1. ACCOUNTING POLICIES AND OTHER INFORMATION ----------------------------------------- General ------- Colonial Gas Company (the "Company") is a gas distribution company engaged in the transportation and sale of natural gas to residential, commercial and industrial customers. The Company's service territory includes 24 municipalities located northwest of Boston and on Cape Cod. The Company is a wholly-owned subsidiary of Eastern Enterprises ("Eastern") and an indirect wholly-owned subsidiary of KeySpan Corporation ("KeySpan"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended. 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. 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 2001 Annual Report filed on Form 10-K with the Securities and Exchange Commission. The December 31, 2001 financial statement information has been derived from the audited financial statements. Merger and Goodwill ------------------- 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. 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 $388 million was recorded as an asset and was amortized based on a 40-year period, through December 31, 2001. FORM 10-Q Page 7 Recent Accounting Pronouncements -------------------------------- On January 1, 2002, the Company adopted SFAS 141, "Business Combinations", and SFAS 142 "Goodwill and Other Intangible Assets". The key concepts from the two interrelated Statements include mandatory use of the purchase method when 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. Other changes to existing accounting standards involve the amount of goodwill to be used in determining the gain or loss on the disposal of assets, and a requirement to test goodwill for impairment at least annually. The annual impairment test is to be performed within six months of adopting SFAS 142 with any resulting impairment reflected as either a change in accounting principle, or a charge to operations in the financial statements. We have completed our analysis for the Company, determining that no impairment exists. For the three months ended March 31, 2001, goodwill amortization of $2.3 million was recorded. As required by SFAS 142, below is a reconciliation of reported net income for the three months ended March 31, 2001 and pro-forma net income, for the same period, adjusted for the discontinuance of goodwill amortization. Three Months Three Months Ended Ended March 31, 2002 March 31, 2001 -------------- -------------- Net Earnings ............. $ 11,717 $ 12,474 Add back: goodwill amortization ........... - $ 2,334 -------- -------- Adjusted net earnings .... $ 11,717 $ 14,808 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 will capitalize a cost by increasing the carrying amount of the related 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 and financial condition. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was effective January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS No. 144 retains the fundamental provisions of SFAS No. 121 and expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The implementation of this Statement, effective January 1, 2002, did not have an impact on our results of operations and financial condition. FORM 10-Q Page 8 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. Reclassifications ----------------- Certain prior quarter financial statement amounts have been reclassified for consistent presentation with the current year. FORM 10-Q Page 9 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------------- RESULTS OF OPERATIONS: ---------------------- RESULTS OF OPERATIONS Net earnings for the first quarter of 2002 were $11.7 million, a decrease of $.8 million, or 6%, from the first quarter of 2001. Weather was 12% warmer than normal and 16% warmer than 2001. Operating revenues in the first quarter of 2002 decreased $37.2 million, or 31%, principally due to decreases in cost of gas charged to customers and the warmer weather. Operating margin decreased $4.9 million, or 11%, principally due to the warmer weather. Operations and maintenance expense increased $.3 million, or 4.2%. In accordance with SFAS 142, as of January 1, 2002, the company no longer amortizes goodwill. The first quarter of 2001 reflects amortization of goodwill of $2.3 million. LIQUIDITY AND CAPITAL RESOURCES The Company believes that projected cash flow from operations, in combination with currently available resources, is sufficient to meet 2002 capital expenditures, working capital requirements, dividend payments and normal debt repayments. On March 31, 2002, the Company received $14 million and recorded an additional advance to KeySpan. The Company paid a dividend to KeySpan of $14 million. The Company expects capital expenditures for 2002 to be approximately $31 million and cost of removal to be approximately $1 million. Actual capital expenditures for the first quarter were $5 million. Capital expenditures will be largely for system expansion to meet customer growth and improvements to the distribution system. FORM 10-Q Page 10 FORWARD-LOOKING INFORMATION Certain statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts, are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, pursuit of potential future acquisition opportunities and sources of funding, are forward-looking statements. Such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties and actual results may differ materially from those discussed in such statements. Among the factors that could cause actual results to differ materially are: general economic conditions, especially in Massachusetts; available sources and cost of fuel; federal and state regulatory initiatives that increase competition, threaten cost and investment recovery, and impact rate structures; the ability of the Company to successfully reduce its cost structure; inflationary trends and interest rates; and other risks detailed from time to time in other reports and other documents filed by the Company with SEC. For any of these statements, the Company claims the protection of the safe harbor for forward-looking information contained in the Private Securities Litigation Reform Act of 1995, as amended. FORM 10-Q Page 11 PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL AND REGULATORY PROCEEDINGS - ----------------------------------------- On November 1, 2001, the Massachusetts Department of Telecommunications and Energy ("Department") issued an order requiring all Massachusetts electric and gas utilities to develop service quality plans effective January 1, 2002. On April 17, 2002, the Department issued an order approving the Company's Service Quality Plan that was filed with the Department on March 1, 2002. Service quality will be separately tracked and measured against historical benchmarks. The Department may assess a penalty against a company that fails to meet its service quality benchmarks. The penalty amount can be up to 2% of the company's distribution revenues. Each measurement period will be a calendar year. The first measurement period began on January 1, 2002. 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 In our Report on Form 8-K, dated April 5, 2002, we disclosed that on March 29, 2002, our Board of Directors, upon recommendation of the Audit Committee, determined not to renew the engagement of Arthur Andersen LLP as independent public accountants and appointed Deloitte & Touche LLP as our independent public accountants. FORM 10-Q Page 12 SIGNATURES - ---------- 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) /s/ Joseph F. Bodanza ----------------------------------------------- J.F. Bodanza, Senior Vice President Finance, Accounting and Regulatory Affairs (Principal Financial and Accounting Officer) Dated: May 15, 2002 ------------