UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 1999
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
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1558100
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
40 MARKET STREET, LOWELL, MASSACHUSETTS 01852
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(Address of principal executive offices) (Zip Code)
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 April 30, 1999 was 8,949,981.
COLONIAL GAS COMPANY
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INDEX
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PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 1999 and 1998 3
Twelve Months Ended March 31, 1999 and 1998 4
Consolidated Condensed Balance Sheets -
March 31, 1999, December 31, 1998 and
March 31, 1998 5-6
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 7
Twelve Months Ended March 31, 1999 and 1998 8
Notes to Consolidated Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-13
PART II - OTHER INFORMATION
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
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(UNAUDITED)
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Three Months Ended
March 31,
---------------------
1999 1998
--------- ----------
(In Thousands Except
Per Share Amounts)
Operating Revenues $87,994 $77,822
Cost of gas sold 46,713 40,917
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Operating Margin 41,281 36,905
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Operating Expenses:
Operations 7,427 6,650
Maintenance 1,313 1,067
Depreciation and Amortization 3,783 3,184
Taxes, other than income 1,364 1,254
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Total Operating Expenses 13,887 12,155
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Income Taxes 9,788 8,675
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Utility Operating Income 17,606 16,075
Other Operating Income:
Energy Trucking revenues 1,061 406
Energy Trucking expenses, including income
taxes and interest 1,137 361
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Energy Trucking net (loss) income (76) 45
Other, net of income taxes (44) 51
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Total Other Operating (Loss) Income (120) 96
Non-Operating Income, Net 87 176
Merger Costs, Net (227) -
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Income Before Interest and Debt Expense 17,346 16,347
Interest and Debt Expense 2,230 2,135
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Net Income $15,116 $14,212
======= =======
Average Common Shares Outstanding 8,922 8,703
======= =======
Income per Average Common Share $ 1.69 $ 1.63
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Dividends Paid per Common Share $ .345 $ .335
======= =======
(See accompanying notes to consolidated condensed financial statements)
3
COLONIAL GAS COMPANY AND SUBSIDIARIES
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CONSOLIDATED CONDENSED STATEMENTS OF INCOME
-------------------------------------------
(UNAUDITED)
-----------
Twelve Months Ended
March 31,
---------------------
1999 1998
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(In Thousands Except
Per Share Amounts)
Operating Revenues $178,151 $181,901
Cost of gas sold 93,923 99,655
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Operating Margin 84,228 82,246
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Operating Expenses:
Operations 28,569 29,257
Maintenance 5,040 4,425
Depreciation and Amortization 14,034 12,260
Taxes, other than income 5,266 5,132
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Total Operating Expenses 52,909 51,074
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Income Taxes 8,930 9,216
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Utility Operating Income 22,389 21,956
Other Operating Income:
Energy Trucking revenues 4,378 4,596
Energy Trucking expenses, including income
taxes and interest 4,466 4,305
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Energy Trucking net (loss) income (88) 291
Other, net of income taxes 223 317
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Total Other Operating Income 135 608
Non-Operating Income, Net 851 659
Merger Costs, Net (1,353) -
-------- --------
Income Before Interest and Debt Expense 22,022 23,223
Interest and Debt Expense 8,829 8,264
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Net Income $ 13,193 $ 14,959
======== ========
Average Common Shares Outstanding 8,835 8,640
======== ========
Income per Average Common Share $ 1.49 $ 1.73
======== ========
Dividends Paid per Common Share $ 1.38 $ 1.34
======== ========
(See accompanying notes to consolidated condensed financial statements)
4
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
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ASSETS
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March 31, December 31, March 31,
1999 1998 1998
----------- ------------- -----------
(Unaudited) (Unaudited)
(In Thousands)
Utility Property:
At original cost $ 398,360 $ 394,222 $370,317
Accumulated depreciation (105,444) (102,009) (91,523)
--------- --------- --------
Net utility property 292,916 292,213 278,794
Non-Utility Property - Net 6,981 7,129 7,567
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Net property 299,897 299,342 286,361
--------- --------- --------
Capital Leases - Net 1,583 1,583 2,614
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Current Assets:
Cash and cash equivalents 5,779 3,125 3,092
Accounts receivable 33,930 14,591 29,991
Allowance for doubtful accounts (1,647) (1,350) (3,561)
Accrued utility revenues 5,123 7,876 5,447
Unbilled gas costs (372) 18,195 8,118
Fuel and other inventories 8,971 12,712 10,122
Prepayments and other current assets 6,451 12,419 6,791
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Total current assets 58,235 67,568 60,000
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Deferred Charges and Other Assets:
Unrecovered deferred income taxes 8,155 8,349 8,820
Unrecovered demand side management
costs 6,646 6,661 8,122
Unrecovered environmental expenses -
incurred 2,724 3,633 4,135
Unrecovered environmental expenses -
accrued 200 200 707
Unrecovered transition costs - accrued 700 700 2,800
Other 12,960 12,968 12,202
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Total deferred charges
and other assets 31,385 32,511 36,786
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Total Assets $ 391,100 $ 401,004 $385,761
========= ========= ========
(See accompanying notes to consolidated condensed financial statements)
5
COLONIAL GAS COMPANY AND SUBSIDIARIES
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CONSOLIDATED CONDENSED BALANCE SHEETS
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LIABILITIES AND CAPITALIZATION
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March 31, December 31, March 31,
1999 1998 1998
----------- ------------ -----------
(Unaudited) (Unaudited)
(In Thousands)
Capitalization:
Common equity:
Common Stock - par value $3.33 per share
Authorized - 15,000 shares
Issued and outstanding - 8,949,
8,910 and 8,728 shares $ 29,800 $ 29,669 $ 29,063
Premium on common stock 64,284 63,080 58,262
Retained earnings 48,212 36,173 47,219
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Total Common equity 142,296 128,922 134,544
Long-term debt 120,000 120,000 90,059
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Total capitalization 262,296 248,922 224,603
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Capital Lease Obligations 963 963 1,528
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Current Liabilities:
Current maturities of long-term debt 59 102 20,167
Current capital lease obligations 620 620 1,086
Notes payable 31,000 52,000 38,500
Gas inventory purchase obligations 7,722 14,125 9,088
Accounts payable 10,559 12,186 10,482
Other 16,708 10,550 17,268
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Total current liabilities 66,668 89,583 96,591
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Deferred Credits and Reserves:
Deferred income taxes-funded 44,748 44,555 42,626
Deferred income taxes-unfunded 8,155 8,349 8,820
Accrued environmental expenses 200 200 707
Accrued transition costs 700 700 2,800
Other 7,370 7,732 8,086
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Total deferred credits and reserves 61,173 61,536 63,039
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Total Capitalization and Liabilities $ 391,100 $ 401,004 $ 385,761
========== ============ ==========
(See accompanying notes to consolidated condensed financial statements)
6
COLONIAL GAS COMPANY AND SUBSIDIARIES
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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Three Months Ended
March 31,
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1999 1998
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(In Thousands)
Cash Flows From Operating Activities:
Net income $ 15,116 $ 14,212
Adjustments to reconcile net income to net cash (1,622) 3,719
Changes in current assets and liabilities 22,651 12,392
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Net cash provided by operating activities 36,145 30,323
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Cash Flows From Investing Activities:
Utility capital expenditures (4,669) (7,489)
Non-utility capital expenditures -- (378)
Change in deferred accounts 367 (734)
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Net cash used in investing activities (4,302) (8,602)
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Cash Flows From Financing Activities:
Dividends paid on Common Stock (3,078) (2,917)
Issuance of Common Stock 1,335 1,117
Issuance of long-term debt, net of issuance costs -- 9,658
Retirement of long-term debt, including premiums (43) (10,040)
Change in notes payable (21,000) (10,900)
Change in gas inventory purchase obligations (6,403) (5,807)
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Net cash used in financing activities (29,189) (18,889)
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Net increase (decrease) in cash and cash equivalents 2,654 2,832
Cash and cash equivalents at beginning of period 3,125 259
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Cash and cash equivalents at end of period $ 5,779 $ 3,092
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest - net of amount capitalized $ 3,957 $ 3,414
======== ========
Income and franchise taxes $ 265 $ 278
======== ========
(See accompanying notes to consolidated condensed financial statements)
7
COLONIAL GAS COMPANY AND SUBSIDIARIES
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
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Twelve Months Ended
March 31,
---------------------
1999 1998
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(In Thousands)
Cash Flows From Operating Activities:
Net income $ 13,193 $ 14,959
Adjustments to reconcile net income to net cash 11,451 19,528
Changes in current assets and liabilities 9,649 4,346
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Net cash provided by operating activities 34,293 38,833
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Cash Flows From Investing Activities:
Capital expenditures (28,272) (38,441)
Non-utility Capital expenditures -- (2,210)
Change in deferred accounts 2,087 (200)
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Net cash used in investing activities (26,185) (40,851)
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Cash Flows From Financing Activities:
Dividends paid on Common Stock (12,200) (11,578)
Issuance of Common Stock 6,759 3,832
Issuance of long-term debt, net of issuance costs 29,457 24,528
Retirement of long-term debt, including premiums (20,571) (15,155)
Change in notes payable (7,500) (1,600)
Change in gas inventory purchase obligations (1,366) 1,676
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Net cash (used in) provided by financing activities (5,421) 1,703
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Net decrease in cash and cash equivalents 2,687 (315)
Cash and cash equivalents at beginning of period 3,092 3,406
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Cash and cash equivalents at end of period $ 5,779 $ 3,092
========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest - net of amount capitalized $ 10,771 $ 10,067
========= =========
Income and franchise taxes $ 7,225 $ 7,258
========= =========
(See accompanying notes to consolidated condensed financial statements)
8
COLONIAL GAS COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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(UNAUDITED)
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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 March 31, 1999 and 1998 and results of operations for the three and
twelve month periods ended March 31, 1999 and 1998 and cash flows for the
three and twelve month periods ended March 31, 1999 and 1998.
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 periods ending March 31, 1999
and 1998 are not necessarily indicative of the results to be expected for the
full year.
3. During the three months ended March 31, 1999, the Company issued 38,000
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 $131,000 and Premium on Common Stock
increased $1,204,000.
4. Contingencies
Reference is made to Note I/Contingencies of the Notes to Consolidated
Financial Statements contained within the Company's 1998 Annual Report to
Stockholders.
5. Reclassifications are made periodically to previously issued financial
statements to conform to the current year presentation.
9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 and 1998
------------------------------------------
Net income for the three months ending March 31, 1999 increased $904,000 or 6.4%
to $15,116,000 compared to $14,212,000 for the same period last year. Weather
for the first quarter was 7.7% colder than the prior year (although 5.5% warmer
than normal), contributing to a $4,376,000 or 11.9% increase in operating
margin. Offsetting the increase in operating margin was a $1,023,000 or 13.3%
increase in operations and maintenance expense and a $599,000 increase in
depreciation and amortization. The increase in operations and maintenance
expense was principally due to an accrual relating to Colonial's incentive
compensation program, insurance refunds received in the first quarter of 1998,
and processing costs relating to Colonial's new customer system. Increased
depreciation and amortization was due to the addition of utility property and
the completion of our new customer and computer aided dispatch systems in mid-
1998. Income taxes increased $1,113,000 or 12.8% due to a higher level of
utility income subject to tax.
Other operating income (net of income taxes) decreased $216,000 from the
comparable 1998 period primarily as a result of a $121,000 decrease in net
income of Transgas Inc., the Company's energy trucking subsidiary, and a $95,000
decrease in merchandise and jobbing net income. Although Transgas' LNG hauls
and revenues were greater in the first quarter of 1999 than the first quarter of
1998, energy trucking activity was still below normal due to the warmer weather
and increases in expenses more than offset the increase in revenues.
Interest expense increased $95,000 or 4% for the three months ended March 31,
1999 compared to the same period last year due to higher levels of borrowing.
Twelve Months Ended March 31, 1999 and 1998
-------------------------------------------
Net income was $13,193,000 for the twelve months ending March 31, 1999, compared
with $14,959,000 for the comparable 1998 period. This $1,766,000 or 11.8%
decrease in net income primarily resulted from a $1,774,000 or 14.5% increase in
depreciation due to the addition of utility property and the completion of
Colonial's customer and computer aided dispatch systems in 1998, and $1,353,000
of merger-related costs, net of taxes.
These increased expenses were partially offset by a $1,982,000 or 2.4% increase
in gross margin resulting from customer growth and an increase in higher margin
sales.
Other operating income (net of income taxes) decreased $473,000 or 78% compared
to the comparable 1998 period. The net income of Transgas Inc. for the twelve
months
10
ended March 31, 1999 decreased $379,000, principally due to increased expenses.
Continued warmer than normal weather over the last two years has resulted in a
significant decrease in demand for energy trucking services. A decrease in
merchandise and jobbing net income of $94,000 also contributed to the reduced
other operating income.
Merger Related Expenses, Net
- ----------------------------
The Company recorded $227,000 and $1,353,000 of after-tax merger related
expenses for the three months and twelve months ending March 30, 1999,
respectively. These costs are associated with the Company's pending merger with
Eastern Enterprises.
Regulatory Matters
- ------------------
On October 17, 1998, the Company entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with Eastern Enterprises ("Eastern"), a
Massachusetts business trust which owns all of the outstanding stock of two
other Massachusetts local gas distribution companies, Boston Gas Company
("Boston Gas") and Essex Gas Company. The Merger Agreement 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. The pending
merger was approved by shareholders of Colonial and Eastern at separate special
shareholder meetings, which were held on February 10, 1999. Anti-trust
clearance has also been obtained. Completion of the pending merger is subject
to receipt of satisfactory regulatory approvals, including approval of the
Massachusetts Department of Telecommunications and Energy (the "DTE") and the
Securities and Exchange Commission. The DTE's evidentiary hearings on the
pending merger closed on April 23, 1999 and a decision is expected in due
course. The Company continues to anticipate that the merger will be completed
sometime around mid-year 1999.
Year 2000
- ---------
State of Readiness
------------------
In connection with that pending merger, the Company is addressing certain Year
2000 ("Y2K") issues through system integrations with Boston Gas, Eastern's
largest gas utility subsidiary. The Company has established, in concert with
Boston Gas, a specialized Y2K program team that is implementing a systematic
program of inventory, assessment and remediation. 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 the core business of
the Company and its subsidiary, Transgas, in the event of a Y2K problem, have
been identified. Through this Y2K program team, the Company is in the process
of testing, upgrading, replacing or remediating its mission critical IT systems.
The Company expects that its Y2K work on approximately one half of its mission
critical systems will be completed by the end of the second quarter of 1999,
with the remaining mission critical systems to be addressed through conversions
to Y2K
11
compliant Boston Gas systems during the beginning of the third quarter of 1999.
The Company plans to test and/or upgrade, as appropriate, non-mission critical
IT systems within this same timeframe. In the event the pending merger is not
completed within this timeframe, the Company anticipates entering into
appropriate contractual arrangements with Boston Gas to utilize certain of its
Y2K compliant systems.
With respect to embedded chip systems, the Company has completed its inventory
and is finalizing its assessment and action plan. Testing, upgrading,
replacement or other remediation of embedded chips is anticipated to be
substantially complete by the end of the second quarter of 1999.
The Company has identified critical third party vendors and continues to work
with them to keep apprised of their Y2K readiness. It appears, based on
information gathered to date, that the majority of the Company's firm gas
suppliers and interstate pipeline service providers anticipate being Y2K
compliant by the end of the second quarter of 1999, and that all are committed
to being Y2K compliant by the fourth 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.
Cost of Year 2000 Remediation
-----------------------------
Based on its current information, without any system integrations with Boston
Gas, the Company believes the cost of its Y2K compliance would approximate $1.5
million. With the system integrations expected with Boston Gas, the Company
anticipates actual Y2K remediation costs to be significantly lower than this
amount. During the first quarter of 1999, Y2K compliance expenses were less
than $100,000. Substantially all remaining Y2K remediation costs are expected
to be incurred during the second and third quarters of 1999.
Risks of Year 2000 Issues and Contingency Plans
-----------------------------------------------
Given its efforts to minimize the risk of Y2K failure by its internal systems
and its distribution network control systems, the Company believes its worst
case scenario would involve failures by a pipeline supplier or by
telecommunications and electricity services. A short term interruption in
pipeline supplies would require the utilization of locally-stored liquefied
natural gas supplies. A telecommunications or electric outage would require the
Company to enact business contingency and disaster recovery measures to enable
the continuation of service to its customers.
The Company has initiated the development of a business contingency plan
concerning Y2K risks to its internal systems, embedded chips and significant
suppliers. Detailed plans for critical business processes are expected to be
developed and tested by the end of the third quarter of 1999.
12
Forward Looking Information
- ---------------------------
This report and other Company reports 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, variations in weather, changes in the regulatory
environment, customers' preferences on energy sources, general economic
conditions, increased competition 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
--------
None
b. Reports on Form 8-K
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None
13
SIGNATURES
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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
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(Registrant)
Date: May 13, 1999 /s/ F. L. Putnam, III
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F. L. Putnam, III
President and Chief Executive Officer
Date: May 13, 1999 /s/ Nickolas Stavropoulos
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Nickolas Stavropoulos
Executive Vice President - Finance,
Marketing and Chief Financial Officer
14