FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 0-10007
COLONIAL GAS COMPANY
D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3480443
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
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(Address of principal executive offices)
(Zip Code)
617-742-8400
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(Registrant's telephone number, including area code)
None
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Common stock of Registrant at the date of this report was 100 shares, all
held by KeySpan New England, LLC.
The Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is filing this Form with the reduced
disclosure format.
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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Company or group of companies for which report is filed:
COLONIAL GAS COMPANY
Statements of Operations
- ------------------------
(Unaudited)
(In Thousands)
For the For the
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
OPERATING REVENUES $32,434 $ 42,185 $117,241 $164,233
Cost of gas sold 18,185 28,431 65,217 107,798
------- ------- ------ -------
Operating Margin 14,249 13,754 52,024 56,435
------- ------- ------ -------
OPERATING EXPENSES:
Operations and maintenance 8,041 8,088 15,355 15,106
Depreciation and amortization 3,965 3,631 7,931 7,501
Amortization of goodwill - 2,334 - 4,668
Operating taxes 1,082 1,018 2,144 2,481
------ ------- ------ ------
Total Operating Expenses 13,088 15,071 25,430 29,756
------ ------- ------ ------
OPERATING INCOME (LOSS) 1,161 (1,317) 26,594 26,679
OTHER INCOME (LOSS), NET 16 21 (7) (71)
------ ----- ------ -------
INCOME (LOSS) BEFORE INTEREST EXPENSE
AND INCOME TAXES 1,177 (1,296) 26,587 26,608
----- ------- ------ ------
INTEREST EXPENSE:
Long-term debt 1,957 2,133 4,083 4,249
Other, including Advance from KeySpan
and Utility Pool Borrowings 4,241 4,290 8,370 8,496
Less - Interest during construction (452) (46) (493) (67)
------ ----- ------ -------
Total Interest Expense 5,746 6,377 11,960 12,678
------ ----- ------ -------
INCOME TAXES:
Current (1,526) (2,531) 5,293 6,084
Deferred (317) 635 343 1,149
----- ------- ----- -----
Total Income Taxes (Benefit) (1,843) (1,896) 5,636 7,233
------- ------- ----- -----
NET INCOME (LOSS) $(2,726) $(5,777) $8,991 $6,697
======= ======= ===== =====
The accompanying notes are an integral part of these financial statements.
Colonial Gas Company
- --------------------
Balance Sheets
- --------------
Unaudited
(In Thousands)
June 30, December 31,
2002 2001
----------- ------------
ASSETS
GAS PLANT, at cost $420,184 $418,099
Construction work-in-progress 20,400 9,763
Less-Accumulated depreciation (140,688) (133,127)
-------- --------
299,896 294,735
-------- --------
CURRENT ASSETS:
Cash and cash equivalents - 121
Accounts receivable 23,146 23,240
Allowance for uncollectible accounts (4,166) (3,709)
Accounts receivable - affiliates 17,679 25,713
Accrued utility revenue 2,754 19,064
Deferred gas costs 6,102 15,579
Gas in Storage, at average cost 10,834 16,832
Materials and supplies, at average cost 743 695
Prepaid expenses 72 72
------ -------
57,164 97,607
------ -------
OTHER ASSETS:
Goodwill 377,652 377,652
Deferred charges and other assets 6,953 6,998
-------- --------
384,605 384,650
-------- --------
TOTAL ASSETS $741,665 $776,992
======== ========
The accompanying notes are an integral part of these financial statements.
Colonial Gas Company
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Balance Sheets
- --------------
Unaudited
(In Thousands)
June 30, December 31,
2002 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 269,430 269,430
Retained earnings 263 5,272
Accumulated comprehensive income (3,433) (5,281)
-------- -------
Total common stockholder's investment 266,260 269,421
Long-term obligations, less current portion 105,621 120,205
Advance from KeySpan Corporation 214,000 200,000
------- -------
Total Capitalization 585,881 589,626
-------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 248 296
Note payable utility pool 58,845 68,517
Note payable utility pool-gas inventory financing 9,238 21,958
Accounts payable 11,685 12,538
Accrued taxes 938 821
Accrued interest 3,504 8,726
Other 604 1,194
------- -------
85,062 114,050
------- -------
OTHER LIABILITIES:
Deferred income taxes 36,918 38,322
Unamortized investment tax credits 2,300 2,402
Postretirement benefits obligation 6,996 6,770
Other 24,508 25,822
-------- -------
70,722 73,316
-------- -------
TOTAL CAPITALIZATION AND LIABILITIES $741,665 $776,992
======== ========
The accompanying notes are an integral part of these financial statements.
Colonial Gas Company
--------------------
Statement of Cash Flows
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Unaudited
(In Thousands)
For the Six Months Ended
------------------------
June 30, June 30,
2002 2001
------------ ---------------
Cash flows from operating activities:
Net income $8,991 $6,697
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 7,931 12,169
Deferred taxes 343 1,149
Other changes in assets and liabilities:
Accounts receivable 677 (10,872)
Accounts receivable - affiliates 8,034 8,883
Accrued utility revenue 16,310 18,852
Deferred gas costs 9,477 5,376
Gas in Storage 5,950 (1,377)
Accounts payable (979) (19,508)
Accrued taxes 117 6,221
Accrued interest (5,222) 12,324
Other (2,431) 3,045
-------- --------
Cash provided by operating activities 49,198 42,959
------- --------
Cash flows from investing activities:
Capital expenditures (12,343) (10,269)
--------- ---------
Cash used for investing activities (12,343) (10,269)
--------- ---------
Cash flows from financing activities:
Repayment of long-term debt (15,000) -
Repayments of note payable-utility pool (9,256) (26,005)
Repayments of note payable
-gas inventory financing (12,720) (6,656)
(Repayment) Advance from KeySpan 14,000 (50,000)
Capital Contribution - 50,000
Dividend paid to KeySpan (14,000) -
-------- -------
Cash used for financing activities (36,976) (32,661)
-------- --------
Increase (decrease) in cash and cash equivalents (121) 29
Cash and cash equivalents at beginning of period 121 124
-------- -------
Cash and cash equivalents at end of period $ - $ 153
======== =======
The accompanying notes are an integral part of these financial statements.
COLONIAL GAS COMPANY
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NOTES TO FINANCIAL STATEMENTS
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UNAUDITED
---------
June 30, 2002
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1. ACCOUNTING POLICIES AND OTHER INFORMATION
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Colonial Gas Company d/b/a KeySpan Energy Delivery New England (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 KeySpan New England, LLC ("KNE LLC") 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 accompanying financial statements
contain all adjustments necessary to present fairly its financial position
as of June 30, 2002, and the results of its operations for the three and
six months ended June 30, 2002 and June 30, 2001, as well as cash flows for
the six months ended June 30, 2002 and June 30, 2001. 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. Other than as
noted, adjustments were of a normal recurring nature and 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.
2. Seasonal Aspect
---------------
The gas distribution business is influenced by seasonal weather conditions.
Annual revenues are principally realized during the heating season
(November 1, to April 30) as a result of the large proportion of heating
sales in these months. Accordingly, results of operations are most
favorable in the first quarter of the Company's fiscal year, followed by
the fourth quarter. Losses are generally incurred in the second and third
quarters.
3. Accounting for the Effects of Rate Regulation
---------------------------------------------
In 1999, the Massachusetts Department of Telecommunications and Energy (the
"Department") approved a rate plan resulting in a ten-year freeze of base
rates at current levels. Due to the length of the base rate freeze, the
Company was required to discontinue its application of Statement of
Financial Accounting Standards ("SFAS") No. 71 "Accounting for the Effects
of Certain Types of Regulation".
4. 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.
SFAS 142 allows for various valuation methodologies to test for impairment,
including a discounted cash flow method, as compared to an undiscounted
cash flow method, which was utilized under the previous standard.
Impairment is deemed to exist when the carrying amount of goodwill exceeds
its implied fair value. Upon adoption of SFAS 142, any amounts impaired
initially will be recorded as a cumulative effect of an accounting change
in the statement of income and any impairment thereafter will be recorded
as an operating expense. The discounted cash flow model requires broad
assumptions and significant judgement by management including, but not
limited to, projections of revenues, working capital, capital expenditures,
taxes and cost of capital.
The Company has completed its impairment tests and determined that no
impairment exists. Fair value was determined using a discounted cash flow
methodology. These impairment tests are required to be performed upon
adoption of SFAS 142 and at least annually thereafter. On an ongoing basis
(absent any impairment indicators), the Company expects to perform
impairment tests during the fourth quarter.
As discussed above, amortization of goodwill has been discontinued
effective January 1, 2002. For the three and six months ended June 30,
2001, goodwill amortization was $2.3 and $4.7 million, respectively. As
required by SFAS 142, below is a reconciliation of reported net income for
the three and six months ended June 30, 2001 and pro-forma net income, for
the same periods, adjusted for the discontinuance of goodwill amortization.
---------------------------------- ------------------------ ------------------- -------------------- --------------------
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
---------------------------------- ------------------------ ------------------- -------------------- --------------------
Net Income $(2,726) $ (5,777) $8,991 $6,697
Add back: goodwill amortization
- 2,334 - 4,668
---------------------------------- ------------------------ ------------------- -------------------- --------------------
Adjusted Net Income $(2,726) $ (3,443) $8,991 $11,365
---------------------------------- ------------------------ ------------------- -------------------- --------------------
In July of 2001, the Financial Accounting Standards Board ("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. The Company is currently evaluating the impact, if
any, that this Statement may have on its results of operations and
financial position.
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 the Company's results of operations and financial position.
5. Environmental Matters
---------------------
The Company, like many other companies in the natural gas industry, is
party to governmental proceedings requiring investigation and possible
remediation of former manufactured gas plant ("MGP") and related sites. The
Company may have or share responsibility under applicable environmental
laws for the remediation of one former MGP site and nine related satellite
disposal sites, as well as one non-MGP site and a federal superfund site.
As of June 30, 2002, the Company estimates the remaining cost of its
MGP-related environmental cleanup activities to be $2.7 million, which
amount has been accrued by the Company as a reasonable estimate of probable
cost for known sites. Expenditures incurred to date with respect to these
MGP-related activities total $13.2 million.
By a rate order issued on May 25, 1990, the Department approved, for
ratemaking purposes, recovery of all prudently incurred environmental
response costs associated with former MGP related sites over a seven-year
period without carrying charges.
The Company has received and responded to Requests for Information from the
U.S. Environmental Protection Agency ("EPA") pursuant to Section 104 of the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), regarding one federal superfund site that the EPA is currently
investigating. The Company cannot determine the amount of its liability at
this time.
6. Related Party Transactions
--------------------------
The Company, and all utility subsidiaries of KeySpan, participate in a
utility money pool established by KeySpan. KeySpan Corporate Services,
LLC("KCS"), a subsidiary service company of KeySpan, administers the money
pool and provides financing to the Company for working capital and gas
inventory. The money pool is funded, in part, through surplus funds in the
treasuries of money pool participants. Interest income or expense is
recorded by the Company for net funds advanced to or borrowed from the
money pool at an interest rate generally equal to KeySpan Corporation's
short-term borrowing rate. Interest incurred on gas inventory financing is
recovered through the cost of gas adjustment clause.
7. Long-Term Debt
--------------
On May 20, 2002, pursuant to a put option exercised by the holders, the
Company repaid $15 million for the 6.81% Series A First Mortgage Secured
Medium Term Notes, dated May 19, 1997 that had a maturity date of May 19,
2027. The Notes were repaid at par and there was no gain or loss
recognized. The Company borrowed the amount needed to redeem these Notes
through the utility money pool.
8. Regulation
----------
On November 1, 2001, the 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 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.
9. Derivatives
-----------
On April 1, 2002 the Company adopted Implementation Issue C16 of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" as
amended and interpreted incorporating SFAS 137 and 138 and certain
implementation issues (collectively "SFAS 133"). Issue C16 establishes new
criteria that must be satisfied in order for contracts that combine a
forward contract and a purchased option contract to be exempted as normal
purchases and sales.
Based upon a review of our physical gas purchase commodity contracts, the
Company determined that certain contracts can no longer be exempted as
normal purchases from the requirements of SFAS 133. As a result, and
effective April 1, 2002, such contracts are required to be recorded on the
Balance Sheet at fair value and had a calculated fair value at that date of
$0.1 million. At June 30, 2002, the fair value of these contracts was $0.1
million. All gas and related transportation costs are currently recovered
from customers through the gas adjustment clause. Therefore, changes in the
market value of these contracts will be recorded as an accounts receivable
or accounts payable on the Balance Sheet.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
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RESULTS OF OPERATIONS
Net Income for the six months ended June 30, 2002 was $9.0 million, an
increase of $2.3 million over the corresponding period in the prior year.
This increase is primarily due to the discontinuance of goodwill
amortization offset, in part, by a decline in operating margin and income
taxes.
Operating revenues for the six-month period ended June 30, 2002 declined
$47 million, or 28.6%, from the six month period ended June 30, 2001.
Approximately 91% of this decline was due to a significant decrease in the
cost of gas sold to customers. Cost of gas sold to customers for the
six-month period ended June 30, 2002 decreased $42.6 million, or 39.5%,
from 2001. This decline was due to both a decrease in throughput of 16% and
a decline in the average commodity price of gas of 26%. Decreased
throughput was due to significantly warmer weather (10.7%).
Variations in gas costs have little or no impact on operating results as
the current gas rate structure includes a gas adjustment clause, pursuant
to which any difference between actual gas costs incurred and gas costs
billed to customers are deferred and refunded to or collected from
customers in a subsequent period.
Operating margin (revenues less cost of gas sold) for the six-month period
ended June 30, 2002 decreased $4.4 million, or 7.8%, from the six-month
period ended June 30, 2001. The decline was primarily ($5.4 million) driven
by warmer weather, offset, in part, by an increase of $1 million in
increased sales due to customer growth.
In accordance with SFAS 142, as of January 1, 2002, the Company is no
longer amortizing goodwill. For the six-month period ended June 30, 2001,
amortization of goodwill was $4.7 million.
Income tax expense for the six-month period ended June 30, 2002 decreased
approximately $1.6 million, or 22%, from 2001. The decrease is primarily
attributable to lower pre-tax earnings before goodwill amortization
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that projected cash flow from operations, in
combination with currently available resources (i.e. borrowings from
KeySpan), is sufficient to meet 2002 capital expenditures, working capital
requirements and normal debt repayments.
On March 31, 2002, the Company received an additional advance of $14
million from KeySpan. The Company paid a dividend to KeySpan of $14
million.
On May 20, 2002, the Company repaid $15 million for the 6.81% Series A
First Mortgage Secured Medium Term Notes. The Company financed this
repayment by borrowing from the money pool. For further details, see Note 7
to the Financial Statements "Long-Term Debt".
The Company expects capital expenditures for 2002 to be approximately $31
million. Actual capital expenditures for the six-month period ending June
30, 2002 were $12.3 million. Capital expenditures are largely for system
expansion associated with customer growth and improvements to the
distribution infrastructure.
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 the 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.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- --------------------------
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) List of Exhibits
99.1* Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed Herewith
(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.
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
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(Registrant)
/s/Joseph F. Bodanza
----------------------------------------------
J.F. Bodanza, Senior Vice President
Finance, Accounting and Regulatory Affairs
(Principal Financial and Accounting Officer)
Dated: August 14, 2002