10-Q 1 d10q.txt FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 ------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------- Commission File Number 0-10007 ------- COLONIAL GAS COMPANY D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND ------------------------------------------------------------ (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3480443 ------------------------------ -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108 ----------------------------------------------- (Address of principal executive offices) (Zip Code) 617-723-5512 -------------------------------------------------- (Registrant's telephone number, including area code) None -------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Common stock of Registrant at the date of this report was 100 shares, all held by Eastern Enterprises. FORM 10-Q PAGE 2 PART I. FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS ----------------------------- Company or group of companies for which report is filed: COLONIAL GAS COMPANY ("Company") CONSOLIDATED STATEMENTS OF EARNINGS -----------------------------------------
(In Thousands) For the For the Three Months Ended Nine Months Ended ------------------ ----------------- September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------- -------- -------- -------- (Predecessor) (Predecessor) OPERATING REVENUES $19,482 $ 16,222 $183,716 $129,275 Cost of gas sold 12,919 9,568 120,717 67,161 ------- -------- -------- -------- Operating Margin 6,563 6,654 62,998 62,114 ------- -------- -------- -------- OPERATING EXPENSES: Operations 6,427 6,395 19,775 16,660 Maintenance 749 783 2,508 2,645 Depreciation and amortization 3,643 1,746 11,143 10,515 Amortization of goodwill 2,334 1,506 7,001 4,518 Income taxes (4,598) (5,630) 2,635 4,143 Taxes, other than income 1,071 776 3,553 3,428 Restructuring Charge - 7,000 - 7,000 ------- -------- -------- -------- Total Operating Expenses 9,626 12,576 46,615 48,909 ------- -------- -------- -------- OPERATING EARNINGS (LOSS) (3,064) (5,922) 16,384 13,205 OTHER EARNINGS (LOSS), NET (4) (280) (75) 278 ------- -------- -------- -------- EARNINGS (LOSS) BEFORE INTEREST EXPENSE (3,068) (6,202) 16,309 13,483 ------- -------- -------- -------- INTEREST EXPENSE: Long-term debt 2,133 2,133 6,382 6,400 Other, including amortization of debt expense 4,050 1,916 12,546 5,239 Less - Interest during construction (22) (22) (90) (57) ------- -------- -------- -------- Total Interest Expense 6,161 4,027 18,838 11,582 ------- -------- -------- -------- NET EARNINGS (LOSS) $(9,227) $(10,229) $ (2,530) $ 1,901 ======= ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. FORM 10-Q PAGE 3 COLONIAL GAS COMPANY -------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
(In Thousands) September 30, September 30, December 31, 2001 2000 2000 ----------- ----------- ------------ (Predecessor) ASSETS GAS PLANT, at cost $ 401,290 $ 387,423 $ 394,509 Construction work-in-progress 17,292 10,756 7,751 Less-Accumulated depreciation (130,518) (120,522) (119,564) --------- --------- --------- Net plant 288,064 277,657 282,696 --------- --------- --------- CURRENT ASSETS: Cash and cash equivalents 151 204 124 Accounts receivable, less reserves of $3,779 and $2,900 at September 30, 2001 and 2000, respectively, and $2,964 at December 31, 2000 11,884 5,509 24,285 Accounts receivable - affiliates 8,449 13,181 5,235 Accrued utility revenue 2,806 2,051 22,414 Unbilled gas costs receivable 29,289 19,621 33,550 Natural gas and other inventories 20,960 18,185 13,246 Materials and supplies 1,575 2,272 1,709 Prepaid expenses 162 389 262 --------- --------- --------- Total Current Assets 75,276 61,412 100,825 --------- --------- --------- OTHER ASSETS: Goodwill, net of amortization 364,849 234,713 371,850 Deferred charges and other assets 4,430 4,821 4,077 --------- --------- --------- Total Other Assets 369,279 239,534 375,927 --------- --------- --------- TOTAL ASSETS $ 732,619 $ 578,603 $ 759,448 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. FORM 10-Q PAGE 4 COLONIAL GAS COMPANY -------------------- CONSOLIDATED BALANCE SHEETS ---------------------------
(In Thousands) September 30, September 30, December 31, 2001 2000 2000 ----------- ----------- ------------ (Predecessor) CAPITALIZATION AND LIABILITIES CAPITALIZATION: Common stockholder's investment - Common stock, $1 par value - Authorized and outstanding - 100 shares $ - $ - $ - Amounts in excess of par value 253,558 225,667 203,558 Retained earnings 4,326 3,909 6,856 -------- -------- -------- Total common stockholder's investment 257,884 221,758 210,414 Long-term obligations, less current portion 120,620 120,620 120,621 -------- -------- -------- Total Capitalization 378,504 342,378 331,035 -------- -------- -------- ADVANCE FROM KEYSPAN 200,000 - 250,000 ADVANCE FROM EASTERN - 100,000 - -------- -------- -------- Total Capitalization and advances 578,504 442,378 581,035 -------- -------- -------- CURRENT LIABILITIES: Current portion of long-term obligations 247 573 572 Notes payable - utility pool 24,554 - 47,209 Notes payable-utility pool gas inventory financing 19,394 - 19,216 Notes payable - 45,800 - Gas inventory financing - 15,020 - Accounts payable 21,724 16,033 38,765 Accounts payable-affiliates 1,988 - 6,486 Accrued income taxes 121 1,087 291 Accrued interest 18,947 2,667 4,263 Customer deposits 596 632 738 Refunds due customers 528 3,361 2,681 Other 1,774 597 781 -------- -------- -------- Total Current Liabilities 89,873 85,770 121,002 -------- -------- -------- RESERVES AND DEFERRED CREDITS: Deferred income taxes 41,938 34,271 36,641 Unamortized investment tax credits 2,453 2,656 2,605 Postretirement benefits obligation 6,844 5,436 5,972 Other 13,007 8,092 12,193 -------- -------- -------- Total Reserves and Deferred Credits 64,242 50,455 57,411 -------- -------- -------- TOTAL CAPITALIZATION AND LIABILITIES $732,619 $578,603 $759,448 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. FORM 10-Q PAGE 5 COLONIAL GAS COMPANY -------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS -------------------------------------
(In Thousands) For the Nine Months Ended ------------------------- September 30, September 30, 2001 2000 -------- -------- (Predecessor) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ (2,530) $ 1,901 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation and amortization 18,144 15,033 Deferred taxes 5,297 1,995 Other changes in assets and liabilities: Accounts receivable 12,401 10,478 Accounts receivable-affiliates (3,214) (13,181) Accrued utility revenue 19,608 9,079 Unbilled gas costs receivable 4,261 (8,874) Inventories (7,580) (6,599) Accounts payable (17,041) (545) Accounts payable affiliates (4,498) (17,916) Federal and state income taxes (170) 1,087 Accrued Interest 14,684 (269) Refunds due customers (2,153) (1,982) Other 2,131 9,378 -------- -------- Cash provided by (used for) operating activities 39,340 (415) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net of retirements (16,836) (10,067) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends paid on common stock - (6,039) Change in equity 50,000 - Change in advance from KeySpan (50,000) - Change in notes payable (22,655) 16,800 Change in inventory financing 178 11 Retirement of long-term debt, including premiums - (475) -------- -------- Cash provided by (used for) financing activities (22,477) 10,297 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27 (185) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 124 389 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 151 $ 204 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. FORM 10-Q PAGE 6 COLONIAL GAS COMPANY -------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ September 30, 2001 ------------------ 1. ACCOUNTING POLICIES AND OTHER INFORMATION ----------------------------------------- General ------- The Company is a wholly-owned subsidiary of Eastern Enterprises ("Eastern") and an indirect wholly-owned subsidiary of KeySpan Corporation ("KeySpan"). The consolidated financial statements include the accounts of the Company and its affiliate, Massachusetts Fuel Inventory Trust (through December 31, 2000). All material intercompany balances and transactions between the Company and its subsidiary have been eliminated in consolidation. It is the Company's opinion that the financial information contained in this report reflects all adjustments necessary to present a fair statement of results for the periods reported. All of these adjustments are of a normal recurring nature. Results for the periods are not necessarily indicative of results to be expected for the year, due to the seasonal nature of the Company's operations. All accounting policies have been applied in a manner consistent with prior periods, except for the method of accounting for depreciation and property taxes during interim periods as discussed in "Interim Period Depreciation and Property Tax Accounting". Such financial information is subject to year-end adjustments and annual audit by independent public accountants. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q. Therefore these interim financial statements should be read in conjunction with the Company's 2000 Annual Report filed on Form 10-K with the Securities and Exchange Commission. MERGER ------ On November 8, 2000, KeySpan acquired the common stock of Eastern for $64.56 per share in cash. The transaction was accounted for using the purchase method of accounting for business combinations. The purchase price was allocated to the net assets acquired of Eastern and its subsidiaries based upon their fair value. The historical cost basis of the Company's assets and liabilities, with minor exceptions, was determined to represent fair value due to the existence of regulatory-approved rate plans that are based upon the recovery of historical costs and a fair return thereon. The allocation of the purchase price remains subject to adjustment upon final valuation of certain acquired balances of the Company. Under push-down accounting, the excess of the purchase price over the FORM 10-Q PAGE 7 fair value of the Company's net assets acquired, or goodwill, of approximately $139 million has been recorded as an asset and is being amortized over a period of 40 years. The push-down accounting resulted in a decrease to equity of $9 million, net of fair value adjustments of $2 million, and the recording of a $250 million advance from KeySpan, $100 million of which was previously advanced from Eastern. Effective June 30, 2001, an additional $50 million was added to equity by KeySpan, The Company, in turn, paid down the advance from KeySpan. SEASONAL ASPECT --------------- The amount of the Company's natural gas firm throughput for purposes of space heating is directly related to temperature conditions. Consequently, there is less gas throughput during the summer months than during the winter months. In addition, under its seasonal rate structure, the rates charged to customers during November through April are higher than those charged during May through October. INTERIM PERIOD DEPRECIATION AND PROPERTY TAX ACCOUNTING ------------------------------------------------------- To be consistent with KeySpan accounting policies, the Company, beginning in 2001, charges annual depreciation and property tax expense on an estimated basis equally throughout the year. In prior years, the Company charged depreciation and property tax expense in an amount equal to the percentage of the annual volume of firm gas throughput projected for the month, applied to the estimated annual depreciation and property tax expense. WORKFORCE REDUCTION PROGRAM --------------------------- As a result of the KeySpan merger, the Company implemented a severance program in an effort to reduce is workforce. In 2000, the Company recorded a merger-related liability of $1.7 million associated with this severance program. During the third quarter of 2001, payments approximating $.3 million were made under this program. RECLASSIFICATIONS ----------------- Certain prior quarter financial statement amounts have been reclassified for consistent presentation with the current year. RECENT ACCOUNTING PRONOUNCEMENTS -------------------------------- On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". The key concepts from the two interrelated Statements include mandatory use of the purchase method of accounting for business combinations, discontinuance of goodwill amortization, a revised framework for testing goodwill impairment at a "reporting unit" level, and new criteria for the identification and potential amortization of other intangible assets. The Business Combination Statement is generally effective for combinations after June 30, 2001. The Statement of Goodwill and Other Intangible Assets is effective for the fiscal years beginning after December 15, 2001, however, for business FORM 10-Q PAGE 8 combinations consummated after June 30, 2001, the requirements to discontinue goodwill amortization are effective upon issuance of the Statements. The first part of the annual impairment test is to be performed within six months of adopting the Statement on Goodwill and Other Intangible Assets. We are currently evaluating the impact that these Statements will have on our operations. We are currently amortizing goodwill of approximately $15 million on an annual basis. As noted, effective January 1, 2002, goodwill will no longer be subject to amortization, but instead will be tested annually for impairment. In July of 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". The standard requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the long-lived asset. Over time the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. We are currently evaluating the impact, if any, that this Statement may have on our results of operations. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND ---------------------------------------------------------------------- RESULTS OF OPERATIONS: ---------------------- RESULTS OF OPERATIONS THIRD QUARTER The seasonal net loss for the third quarter of 2001 was $9.2 million, a decrease of $1.0 million, from the third quarter of 2000. Operating revenues in the third quarter of 2001 increased $3.3 million, principally due to higher gas prices. Operating margin approximated the margin from the corresponding quarter in 2000. Operations and maintenance expenses were unchanged from the corresponding quarter in 2000. Depreciation and property taxes increased $1.9 million and $0.3 million, respectively, principally due to the modification of recording these expenses within the year as discussed under "Interim Period Depreciation and Property Tax Accounting". The third quarter of 2001 reflects increased amortization of goodwill of $0.8 million and higher interest and amortization of debt issuance costs of $2.4 million associated with the additional $100 million advance from KeySpan. FORM 10-Q PAGE 9 YEAR-TO-DATE Net loss for the first nine months of 2001 was $2.5 million, compared to earnings of $1.9 million, from the same period last year. Weather was 1.4% colder than normal and 0.8% warmer than 2000. Operating revenues in the first nine months of 2001 increased $54 million, principally due to higher gas prices. Operating margin increased $0.9 million, or 1.4%, principally due to customer growth. Operations and maintenance expenses increased $3.0 million, principally due to a higher provision for bad debts associated with the higher gas prices and increased employee benefit costs. Depreciation and property taxes increased $0.6 million and $0.1 million, respectively, principally due to the modification in the method of recording these expenses within the year as discussed under "Interim Period Depreciation and Property Tax Accounting". The first nine months of 2001 reflects increased amortization of goodwill of $2.5 million and higher interest and amortization of debt issuance costs of $9.2 million associated with the additional $100 million advance from KeySpan. FORWARD-LOOKING INFORMATION This report and other Company reports and statements issued or made from time to time contain certain "forward-looking statements" concerning projected future financial performance, expected plans or future operations. The Company cautions that actual results and developments may differ materially from such projections or expectations. Investors should be aware of important factors that could cause actual results to differ materially from the forward-looking projections or expectations. These factors include, but are not limited to: the effect of strategic initiatives on earnings and cash flow, the impact of any merger- related activities, the ability to successfully integrate operations, temperatures above or below normal, changes in economic conditions, including interest rates and fuel prices, regulatory and court decisions, developments with respect to previously-disclosed environmental liabilities and such other factors detailed from time to time in reports filed by the Company with the SEC. Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. LIQUIDITY AND CAPITAL RESOURCES The Company believes that projected cash flow from operations, in combination with currently available resources, is sufficient to meet 2001 capital expenditures, working capital requirements, dividend payments and debt repayments. The Company expects capital expenditures for 2001 to be approximately $25 million. Capital expenditures will be primarily for system expansion associated with customer growth and improvements to the delivery infrastructure. FORM 10-Q PAGE 10 PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL PROCEEDINGS -------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) List of Exhibits None (b) Reports on Form 8-K No reports on Form 8-K have been filed during the quarter for which this report is filed. FORM 10-Q PAGE 11 SIGNATURES ---------- It is the Company's opinion that the financial information contained in this report reflects all normal, recurring adjustments necessary to present a fair statement of results for the period reported, but such results are not necessarily indicative of results to be expected for the year due to the seasonal nature of the business of the Company. Except as otherwise herein indicated, all accounting policies have been applied in a manner consistent with prior periods. Such financial information is subject to year-end adjustments and an annual audit by independent public accountants. Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Colonial Gas Company D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND ----------------------------------------- (Registrant) Joseph F. Bodanza ----------------------------------------- J.F. Bodanza, Senior Vice President Finance, Accounting and Regulatory Affairs (Principal Financial and Accounting Officer) Dated: November 14, 2001 --------------------------