UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________________________
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 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
--------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1558100
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
40 Market Street, Lowell, Massachusetts 01852
--------------------------------------- -----
(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 July 1, 1999 was 8,950,717
COLONIAL GAS COMPANY
--------------------
INDEX
-----
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Three Months Ended June 30, 1999 and 1998 3
Six Months Ended June 30, 1999 and 1998 4
Consolidated Condensed Balance Sheets -
June 30, 1999, December 31, 1998 and
June 30, 1998 5-6
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 7
Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9-11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
-----------
Three Months Ended
June 30,
-------
1999 1998
---- ----
(In Thousands Except
Per Share Amounts)
Operating Revenues $25,579 $25,684
Cost of gas sold 12,118 13,662
------- -------
Operating Margin 13,461 12,022
------- -------
Operating Expenses:
Operations 7,912 6,958
Maintenance 1,538 1,136
Depreciation and Amortization 3,783 3,229
Taxes, other than income 1,554 1,494
------- -------
Total Operating Expenses 14,787 12,817
------- -------
Income Taxes (Credit) (1,007) (1,051)
------- -------
Utility Operating Loss (319) 256
Other Operating Income (Loss):
Energy Trucking revenues 803 617
Energy Trucking expenses, including income
taxes and interest 880 825
------- -------
Energy Trucking loss (77) (208)
Other, net of income taxes (11) 107
------- -------
Total Other Operating Loss (88) (101)
Non-Operating Income, Net 138 260
Merger Related Expenses, Net of Income Tax (253) --
------- -------
Income (Loss) Before Interest and Debt Expense (522) 415
Interest and Debt Expense 2,275 2,186
------- -------
Net Loss $(2,797) $(1,771)
======= =======
Average Common Shares Outstanding 8,950 8,740
======= =======
Loss per Average Common Share $ (0.31) $ (0.20)
======= =======
Dividends Paid per Common Share $ .355 $ .345
======= =======
(See accompanying notes to consolidated condensed financial statements)
3
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
-----------------------------------------------
(UNAUDITED)
-----------
Six Months Ended
June 30,
--------
1999 1998
---- ----
(In Thousands Except
Per Share Amounts)
Operating Revenues $113,573 $103,507
Cost of gas sold 58,831 54,579
-------- --------
Operating Margin 54,742 48,928
-------- --------
Operating Expenses:
Operations 15,339 13,608
Maintenance 2,851 2,204
Depreciation and Amortization 7,565 6,413
Taxes, other than income 2,918 2,748
-------- --------
Total Operating Expenses 28,673 24,973
-------- --------
Income Taxes 8,782 7,624
-------- --------
Utility Operating Income 17,287 16,331
Other Operating Income (Loss):
Energy Trucking revenues 1,864 1,023
Energy Trucking expenses, including income
taxes and interest 2,017 1,186
-------- --------
Energy Trucking net loss (153) (163)
Other, net of income taxes (55) 158
-------- --------
Total Other Operating Income (Loss) (208) (5)
Non-Operating Income, Net 236 436
Merger Related Expenses, Net of Income Taxes (491) --
-------- --------
Income Before Interest and Debt Expense 16,824 16,762
Interest and Debt Expense 4,505 4,321
-------- --------
Net Income $ 12,319 $ 12,441
======== ========
Average Common Shares Outstanding 8,936 8,722
======== ========
Income per Average Common Share $ 1.38 $ 1.43
======== ========
Dividends Paid per Common Share $ 0.70 $ 0.68
======== ========
(See accompanying notes to consolidated condensed financial statements)
4
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
ASSETS
------
June 30, December 31, June 30,
1999 1998 1998
-------------- --------------- --------------
(Unaudited) (Unaudited)
(In Thousands)
Utility Property:
At original cost $ 403,274 $ 394,222 $379,866
Accumulated depreciation (109,383) (102,009) (94,832)
--------- --------- --------
Net utility property 293,891 292,213 285,034
Non-Utility Property - Net 6,829 7,129 7,423
--------- --------- --------
Net property 300,720 299,342 292,458
--------- --------- --------
Capital Leases - Net 1,667 1,583 1,740
--------- --------- --------
Current Assets:
Cash and cash equivalents 2,491 3,125 1,218
Accounts receivable 13,984 14,591 15,940
Allowance for doubtful accounts (1,657) (1,350) (3,420)
Accrued utility revenues 560 7,876 821
Unbilled gas costs (2,084) 18,195 8,125
Fuel and other inventories 12,359 15,618 12,144
Prepayments and other current assets 6,207 9,513 6,994
--------- --------- --------
Total current assets 31,860 67,568 41,822
--------- --------- --------
Deferred Charges and Other Assets:
Unrecovered deferred income taxes 7,961 8,349 8,626
Unrecovered Demand Side Management -
costs 6,431 6,661 8,058
Unrecovered environmental expenses -
incurred 2,774 3,633 3,349
Unrecovered environmental expenses -
accrued 200 200 607
Unrecovered transition costs - accrued 700 700 2,800
Other 13,146 12,968 12,898
--------- --------- --------
Total deferred charges
and other assets 31,212 32,511 36,338
--------- --------- --------
Total Assets $ 365,459 $ 401,004 $372,358
========= ========= ========
(See accompanying notes to consolidated condensed financial statements)
5
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED BALANCE SHEETS
-------------------------------------
LIABILITIES AND CAPITALIZATION
------------------------------
June 30, December 31, June 30,
1999 1998 1998
-------------- --------------- --------------
(Unaudited) (Unaudited)
(In Thousands)
Capitalization:
Common equity:
Common Stock - part value $ 3.33 per share
Authorized - 15,000 shares
Issued and outstanding - 8,951
8,910 and 8,766 $ 29,806 $ 29,669 $ 29,191
Premium on common stock 64,341 63,080 59,177
Retained earnings 42,238 36,173 42,433
-------- -------- --------
Total Common equity 136,385 128,922 130,801
Long-term debt 120,000 120,000 110,015
-------- -------- --------
Total capitalization 256,385 248,922 240,816
-------- -------- --------
Capital Lease Obligations 1,021 963 276
-------- -------- --------
Current Liabilities:
Current maturities of long-term debt 15 102 171
Current capital lease obligations 646 620 1,464
Notes payable 8,500 52,000 37,000
Gas inventory purchase obligations 8,269 14,125 8,084
Accounts payable 11,370 12,186 8,997
Other 17,604 10,550 12,070
-------- -------- --------
Total current liabilities 46,404 89,583 67,786
-------- -------- --------
Deferred Credits and Reserves:
Deferred income taxes-funded 45,445 44,555 43,364
Deferred income taxes-unfunded 7,961 8,349 8,626
Accrued environmental expenses 200 200 607
Accrued transition costs 700 700 2,800
Other 7,343 7,732 8,083
-------- -------- --------
Total deferred credits and reserves 61,649 61,536 63,480
-------- -------- --------
Total Capitalization and Liabilities $365,459 $401,004 $372,358
======== ======== ========
(See accompanying notes to consolidated condensed financial statements)
6
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(UNAUDITED)
-----------
Six Months Ended
June 30,
--------
1999 1998
---- ----
(In Thousands)
Cash Flows From Operating Activities:
Net income $ 12,319 $ 12,441
Adjustments to reconcile net income to net cash 4,852 8,166
Changes in current assets and liabilities 45,734 21,703
-------- --------
Net cash provided by operating activities 62,905 42,310
-------- --------
Cash Flows From Investing Activities:
Capital expenditures (9,559) (16,962)
Non-utility capital expenditures 19 (369)
Change in deferred accounts 305 209
-------- --------
Net cash used in investing activities (9,235) (17,122)
-------- --------
Cash Flows From Financing Activities:
Dividends paid on Common Stock (6,255) (5,932)
Issuance of Common Stock 1,398 2,160
Issuance of long-term debt, net of issuance costs (4) 9,238
Retirement of long-term debt (87) (10,484)
Change in notes payable (43,500) (12,400)
Change in gas inventory purchase obligations (5,856) (6,811)
-------- --------
Net cash used in financing activities (54,304) (24,229)
-------- --------
Net (decrease) increase in cash and cash equivalents (634) 959
Cash and cash equivalents at beginning of period 3,125 259
-------- --------
Cash and cash equivalents at end of period $ 2,491 $ 1,218
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest - net of amount capitalized $ 5,621 $ 5,358
======== ========
Income and franchise taxes $ 3,595 $ 3,608
======== ========
(See accompanying notes to consolidated condensed financial statements)
7
COLONIAL GAS COMPANY AND SUBSIDIARIES
-------------------------------------
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
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 June 30, 1999 and 1998 and results of operations for the three and six
month periods ended June 30, 1999 and 1998 and cash flows for the six month
period ended June 30, 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 and six month periods ending
June 30, 1999 and 1998 are not necessarily indicative of the results to be
expected for the full year.
3. During the six months ended June 30, 1999, the Company issued 41,000 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 $137,000 and Premium on Common Stock
increased $1,261,000.
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.
8
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
- ---------------------
Three Months Ended June 30, 1999 and June 30, 1998
--------------------------------------------------
The Company's net loss was $2,797,000, or $0.31 per share, for the quarter
ended June 30, 1999, an increase of $1,026,000 over the comparable 1998 period.
The Company typically incurs losses for the second and third quarters while
reporting profits for the first and fourth quarters. This is due to
significantly higher natural gas sales throughout the colder months to meet
customers' heating needs. Approximately 90% of the Company's residential
customers are heating accounts.
Although operating margin increased by $1,439,000, or 12%, it was more than
offset by increased operating expenses. Operations and maintenance expenses
increased by $1,356,000, or 17%, principally due to increases in payroll,
customer service expenses and system maintenance expenses. Depreciation and
amortization increased by $554,000, or 17%, due to increased utility plant to
support growth and the completion of the new customer information and billing
system in mid 1998. The second quarter of 1999 also included merger-related
expenses, after tax, of $253,000.
Interest and debt expense increased $89,000, or 4% for the three months ended
June 30, 1999 compared to the same period last year due to higher levels of
borrowing.
Six Months Ended June 30, 1999 and 1998
---------------------------------------
Net income for the six months ended June 30, 1999 was $12,319,000, or $1.38
per share, compared to $12,441,000, or $1.43 per share, for the same period in
1998. Weather in 1999, although 4.7% warmer than normal, was 8.3% colder than
1998. This, together with customer growth, resulted in increased operating
margin for the six month period ended June 30, 1999 of $5,814,000, or 11.9%,
compared to the six month period ended June 30, 1998.
Total operating expenses increased by $3,700,000, or 14.8%. Operations and
maintenance expenses increased by $2,378,000, or 15%, primarily due to the
reasons noted above for the three month period. Depreciation and amortization
expense increased by $1,152,000, or 18%, due to increased utility plant to
support growth and the completion of the new customer information and billing
system in mid 1998.
Other operating income (net of income taxes) decreased $203,000 from the
comparable 1998 period primarily as a result of a $213,000 decrease in
merchandise and jobbing net income.
Non-operating income (net of income taxes) decreased $200,000 from last year
primarily due to a reduction in the allowance for funds used during
construction.
9
Merger related expenses (net of income taxes) were $491,000 in 1999. These
costs are associated with the Company's pending merger with Eastern Enterprises.
Interest and debt expense increased $184,000, or 4% due to increased
borrowings.
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. The Massachusetts
Department of Telecommunications and Energy has approved the pending merger on
July 16, 1999. Anti-trust clearance has also been obtained. The pending merger
is expected to close on August 31, 1999, subject to the final approval of the
Securities and Exchange Commission.
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 has completed its Y2K work on approximately one half of its
mission critical systems, with the remaining mission critical systems to be
addressed through conversions to Y2K compliant Boston Gas systems during the
third quarter of 1999. The Company plans to complete its appropriate Y2K work
on non-mission critical IT systems within this same timeframe. In the event the
pending merger is not completed within the third quarter , 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 now completed its
inventory, assessment and action plan. The action plan consisted of testing,
upgrading, replacement or other remediation of embedded chips.
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
10
date, that the majority of the Company's firm gas suppliers and interstate
pipeline service providers achieved Y2K compliance 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 half of 1999, Y2K compliance expenses were
approximately $300,000. Substantially all remaining Y2K remediation costs are
expected to be incurred during the third quarter 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.
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, the completion of the merger with Eastern Enterprises,
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.
11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
- -----------------------------------------------------------
The Annual Meeting of Stockholders of the Company was held on April 21, 1999.
At the Annual Meeting, the Stockholders voted to re-elect all Class III Director
nominees as follows:
Victor W. Baur, with 7,210,719 shares voting for and 74,832 shares voting
against or withholding authority;
F.L. Putnam, III, with 7,209,991 shares voting for and 75,560 shares voting
against or withholding authority;
Richard A. Perkins, with 7,207,366 shares voting for and 78,185 shares voting
against or withholding authority; and
Andrew B. Sides, with 7,197,189 shares voting for and 88,362 shares voting
against or withholding authority.
It is anticipated that upon completion of the pending merger with Eastern
Enterprises, all Directors of the Company will be replaced.
Item 5. Other Information
- --------------------------
None
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a. Exhibits
--------
None
b. Reports on Form 8-K
-------------------
None
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COLONIAL GAS COMPANY
--------------------
(Registrant)
Date: August 11, 1999 s/F. L. Putnam, III
--------------- -------------------------------------
F. L. Putnam, III
President and Chief Executive Officer
Date: August 11, 1999 s/Nickolas Stavropoulos
--------------- -------------------------------------
Nickolas Stavropoulos
Executive Vice President - Finance,
Marketing and Chief Financial Officer
13