<PAGE>
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, 1998
-------------------------
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 2-23416
-------
BOSTON GAS COMPANY
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-1103580
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE BEACON STREET, BOSTON, MASSACHUSETTS 02108
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
617-742-8400
--------------------------------------------------
(Registrant's telephone number, including area code)
NONE
---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Common stock of Registrant at the date of this report was 514,184 shares, all
held by Eastern Enterprises.
<PAGE>
FORM 10Q
Page 2
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
Company or group of companies for which report is filed:
BOSTON GAS COMPANY AND SUBSIDIARY ("Company")
CONSOLIDATED STATEMENTS OF EARNINGS
- -----------------------------------
<TABLE>
<CAPTION>
(In Thousands)
For The Three Months Ended For The Nine Months Ended
-------------------------- -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
------- ------- ------ -------
<S> <C> <C> <C> <C>
OPERATING REVENUES $62,684 $57,874 $469,920 $510,155
Cost of gas sold 25,108 20,847 256,051 293,799
------- ------- -------- --------
OPERATING MARGIN 37,576 37,027 213,869 216,356
OPERATING EXPENSES:
Other operating expenses 31,370 32,406 104,539 113,865
Maintenance 5,686 4,839 16,510 16,068
Depreciation and amortization 7,551 7,323 35,310 33,805
Income taxes (4,403) (5,520) 17,241 14,267
------- ------- -------- --------
Total Operating Expenses 40,204 39,048 173,600 178,005
------- ------- -------- --------
OPERATING EARNINGS (LOSS) (2,628) (2,021) 40,269 38,351
OTHER EARNINGS, NET 237 134 513 320
------- ------- -------- --------
EARNINGS (LOSS) BEFORE INTEREST EXPENSE (2,391) (1,887) 40,782 38,671
INTEREST EXPENSE:
Long-term debt 4,192 4,191 12,576 12,576
Other, including amortization
of debt expense 108 118 948 1,311
Less - Interest during construction (157) (183) (293) (398)
------- ------- -------- --------
Total Interest Expense 4,143 4,126 13,231 13,489
------- ------- -------- --------
NET EARNINGS (LOSS) (6,534) (6,013) 27,551 25,182
Preferred Stock Dividends 482 482 1,445 1,445
------- ------- -------- --------
NET EARNINGS (LOSS)
APPLICABLE TO COMMON STOCK $(7,016) $(6,495) $ 26,106 $ 23,737
------- ------- -------- --------
COMMON STOCK DIVIDENDS $ - $ - $ 12,649 $ 16,351
------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FORM 10Q
Page 3
BOSTON GAS COMPANY AND SUBSIDIARY
- ---------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
Sept. 30, Sept. 30, Dec. 31,
1998 1997 1997
------- ------ -------
<S> <C> <C> <C>
ASSETS
GAS PLANT, at cost $866,147 $813,474 $866,784
Construction work-in-progress 38,038 37,898 2,715
Less-Accumulated depreciation 359,108 320,537 329,918
-------- -------- --------
Total Net Plant 545,077 530,835 539,581
-------- -------- --------
CURRENT ASSETS:
Cash and cash equivalents 509 2,048 307
Accounts receivable, less reserves
of $16,626 and $16,136 at
September 30, 1998 and 1997,
respectively, and $15,783 at
December 31, 1997 41,210 33,390 89,859
Deferred gas costs 48,853 49,750 66,595
Natural gas and other inventories 40,092 49,458 44,590
Materials and supplies 3,137 4,347 3,316
Prepaid expenses 2,150 3,300 1,777
-------- -------- --------
Total Current Assets 135,951 142,293 206,444
-------- -------- --------
OTHER ASSETS:
Deferred post-retirement benefits cost 79,907 85,086 83,926
Deferred charges and other assets 44,974 27,485 48,206
-------- -------- --------
Total Other Assets 124,881 112,571 132,132
-------- -------- --------
TOTAL ASSETS $805,909 $785,699 $878,157
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FORM 10Q
Page 4
BOSTON GAS COMPANY AND SUBSIDIARY
- ---------------------------------
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
Sept. 30, Sept. 30, Dec. 31,
1998 1997 1997
--------- -------- ---------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDER'S INVESTMENT
CAPITALIZATION:
Stockholder's investment -
Common stock, $100 par value,
514,184 shares authorized and outstanding $ 51,418 $ 51,418 $ 51,418
Amounts in excess of par value 43,233 43,233 43,233
Retained earnings 165,770 141,366 152,312
-------- -------- --------
Total Common Stockholder's Investment 260,421 236,017 246,963
Cumulative preferred stock, $1 par value,
1,200,000 shares authorized and outstanding 29,351 29,318 29,326
Long-term obligations, less current portion 210,820 211,367 211,236
-------- -------- --------
Total Capitalization 500,592 476,702 487,525
GAS INVENTORY FINANCING 39,192 48,059 55,502
-------- -------- --------
Total Capitalization and Gas Inventory
Financing 539,784 524,761 543,027
-------- -------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 547 494 507
Notes payable 6,300 5,600 39,700
Accounts payable 38,893 42,316 61,931
Accrued taxes 1,641 2,229 1,392
Accrued income taxes 5,706 9,594 11,174
Accrued interest 8,572 8,530 4,372
Customer deposits 2,178 2,302 2,360
Refunds due customers 458 3,609 3,136
-------- -------- --------
TOTAL CURRENT LIABILITIES 64,295 74,674 124,572
-------- -------- --------
OTHER LIABILITIES:
Deferred income taxes 77,229 74,704 79,128
Unamortized investment tax credits 5,294 6,157 5,931
Post-retirement benefits obligation 81,584 83,657 83,274
Other 37,723 21,746 42,225
-------- -------- --------
Total Other Liabilities 201,830 186,264 210,558
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S INVESTMENT $805,909 $785,699 $878,157
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FORM 10Q
Page 5
BOSTON GAS COMPANY AND SUBSIDIARY
- --------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
For The Nine Months Ended
-------------------------
Sept. 30, Sept. 30,
1998 1997
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 27,551 $ 25,182
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 35,310 33,805
Deferred taxes (1,899) (1,573)
Other changes in assets and liabilities:
Accounts receivable 48,649 43,442
Inventory 4,677 (709)
Deferred gas costs 17,742 25,587
Accounts payable (23,038) (30,997)
Accrued interest 4,200 4,191
Federal and state income taxes (5,468) 20,005
Refunds due customers (2,678) 225
Other 754 2,495
-------- --------
Net cash provided by operating activities 105,800 121,653
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (38,096) (36,806)
Net cost of removal (3,723) (3,196)
-------- --------
Net cash used for investing activities (41,819) (40,002)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt, net (33,400) (51,400)
Changes in inventory financing (16,310) (7,535)
Changes in preferred stock 25 25
Cash dividends paid on common and preferred stock (14,094) (22,167)
-------- --------
Net cash used for financing activities (63,779) (81,077)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 202 574
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 307 1,474
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 509 $ 2,048
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, net of amounts capitalized $ 10,006 $ 10,299
Income taxes $(25,270) $ (3,481)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
FORM 10Q
Page 6
BOSTON GAS COMPANY AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SEPTEMBER 30, 1998
------------------
1. ACCOUNTING POLICIES AND OTHER INFORMATION
-----------------------------------------
General
-------
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. 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 1997 Annual Report filed on Form 10-K with the Securities and
Exchange Commission.
SEASONAL ASPECT
---------------
The amount of the Company's natural gas firm throughput for purposes of
space heating is directly related to the ambient air temperature.
Consequently, there is less gas throughput during the summer months than
during the winter months. In order to more properly match depreciation and
property tax expense with margin each month, the Company charges to
depreciation and property tax expense an amount equal to the percentage of
the annual volume of firm gas throughput forecasted for the month, applied
to the estimated annual depreciation and property tax expense.
<PAGE>
FORM 10Q
Page 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS:
--------------
RESULTS OF OPERATIONS
Third Quarter
The seasonal net loss of $7.0 million for the third quarter of 1998 was $.5
million or 8% higher than the loss reported for the same period in 1997.
Excluding a third quarter 1997 tax benefit of $.9 million related to the
examination of prior years' tax returns, the 1998 third quarter net loss of
$7.0 million was $.4 million or 5% lower than last year. This improvement
primarily reflects throughput growth ($.3 million) and higher rates.
Revenues for the third quarter of 1998 increased $4.8 million from the
third quarter of 1997 primarily due to the pass through of higher gas costs
($7.4 million) and throughput growth, partially offset by the migration of
customers from sales to transportation service ($2.0 million).
YEAR-TO-DATE
Net earnings applicable to common stock for the first nine months of 1998
were $26.1 million, an increase of $2.4 million or 10% as compared to the
first nine months of 1997. Lower operating expenses ($5.5 million),
throughput growth ($1.9 million) and higher average rates were partially
offset by warmer weather ($4.9 million)and higher depreciation expense
reflecting continued investment in system expansion and replacement.
Weather was 9% warmer than normal in 1998, compared to near normal weather
in 1997. The decrease in operating costs primarily reflects weather-
related reductions and continued cost control measures.
Lower revenues for the first nine months of 1998 ($40.3 million) reflect
warmer weather ($26.0 million), the migration of customers from sales to
transportation service ($17.9 million) and lower gas costs ($15.6 million),
somewhat offset by throughput growth and higher non-firm sales. The
revenue decrease associated with lower gas costs and customer migration has
no impact on earnings as the Company earns all of its margins on the local
distribution of gas and none on the sale of the commodity itself.
YEAR 2000 ISSUES
STATE OF READINESS
The Company has assessed the impact of the year 2000 with respect to its
Information Technology ("IT") systems and embedded chip technology systems
as well as the Company's potential exposure to significant third party
risks. Accordingly, the Company has initiated and completed substantial
portions of a plan to replace or modify existing systems and technology as
required and to assure itself that major customers and critical vendors are
also addressing these issues.
With respect to IT systems, the Company has tested and certified as year
2000 ready, four of its eleven "mission critical" business systems. Of the
remaining, one system is scheduled for certification in the fourth quarter
of 1998; four are scheduled for replacement in the fourth quarter of 1998;
and the last two are scheduled for replacement by the second quarter of
1999. All "less than critical" application systems will be tested and/or
upgraded by the second quarter of 1999. Conversion and testing of all
mainframe hardware and systems software has been completed and the
remaining non-compliant components of our client-server and data/voice
communications infrastructure are scheduled for completion by the fourth
quarter of 1998. Replacements or remediation of non-compliant E-mail and
desktop hardware and software systems are scheduled for completion by the
second quarter of 1999.
<PAGE>
FORM 10Q
Page 8
With respect to embedded chip systems, the Company has completed an
inventory and expects to complete its assessment and action plan in the
fourth quarter of 1998. All remediation, conversion and testing are
scheduled for completion in the second quarter of 1999.
The Company has identified material third party relationships and expects
to complete a detailed survey and assessment of third party readiness by
the fourth quarter of 1998, with selected testing and implementation of
risk mitigation strategies for significant vendors scheduled for completion
by the second quarter of 1999. However, there can be no assurance that
third party systems, 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
The Company expects the cost of year 2000 compliance will approximate $13
million. Approximately 65% of these costs will be incurred under capital
projects that have or will result in added capabilities while also
addressing the year 2000 issues. As of September 30, 1998 approximately
$8.3 million of year 2000 compliance costs have been incurred.
RISKS OF YEAR 2000 ISSUES
The Company has assessed the most reasonable likely worst case year 2000
scenario. Given the Company's efforts to minimize the risk of year 2000
failure by its internal systems, the Company believes the worst case
scenario would occur if its primary telecommunications vendor and/or its
electricity supplier experiences a year 2000 failure which results in an
outage. An outage would require the Company to enact disaster recovery
measures to enable the continuation of service to its customers. Such
measures would include utilization of the Company's co-generation
capability for electrical power, relocating the customer inquiry function,
and use of a wireless network for communications.
CONTINGENCY PLANS
The Company expects to develop and put in place detailed business
contingency plans by the second quarter of 1999.
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, temperatures above or
below normal in the Company's service area, changes in economic conditions,
including interest rates, the timetable and cost for completing the
Company's Year 2000 plans, the impact of third parties Year 2000 issues,
regulatory and court decisions and developments with respect to previously-
disclosed environmental liabilities. Most of these factors are difficult
to predict accurately and are generally beyond the control of the Company.
<PAGE>
FORM 10Q
Page 9
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that projected cash flow from operations, in
combination with currently available resources, is more than sufficient to
meet 1998 capital expenditures, working capital requirements, dividend
payments and normal debt repayments.
Capital expenditures are now projected to be $61.1 million compared to the
original estimate of $58.7 million reflecting additional spending on
distribution system expansion and replacement.
<PAGE>
FORM 10Q
Page 10
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------
On July 1, 1998, the Superior Court issued an order granting Industrial
National Leasing Corporation's motion for partial summary judgement,
finding that Mass LNG's purchase rights under the Lease were limited to a
purchase at fair market value. Mass LNG intends to appeal this decision.
Other than the Massachusetts LNG, Inc. litigation and routine litigation
involving the Company's business, there are no material pending legal
proceedings involving the Company.
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) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
<PAGE>
FORM 10Q
Page 11
SIGNATURES
----------
It is the Company's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to 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.
Boston Gas Company
-------------------------------------
(Registrant)
/s/ Joseph F. Bodanza
-------------------------------------------------
J.F. Bodanza, Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: October 30, 1998
-----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 545,077
<OTHER-PROPERTY-AND-INVEST> 2,547
<TOTAL-CURRENT-ASSETS> 135,951
<TOTAL-DEFERRED-CHARGES> 42,427
<OTHER-ASSETS> 79,907
<TOTAL-ASSETS> 805,909
<COMMON> 51,418
<CAPITAL-SURPLUS-PAID-IN> 43,233
<RETAINED-EARNINGS> 165,770
<TOTAL-COMMON-STOCKHOLDERS-EQ> 260,421
29,351
0
<LONG-TERM-DEBT-NET> 209,453
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 6,300
<COMMERCIAL-PAPER-OBLIGATIONS> 39,192
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 1,367
<LEASES-CURRENT> 547
<OTHER-ITEMS-CAPITAL-AND-LIAB> 259,278
<TOT-CAPITALIZATION-AND-LIAB> 805,909
<GROSS-OPERATING-REVENUE> 469,920
<INCOME-TAX-EXPENSE> 17,241
<OTHER-OPERATING-EXPENSES> 104,539
<TOTAL-OPERATING-EXPENSES> 173,600
<OPERATING-INCOME-LOSS> 40,269
<OTHER-INCOME-NET> 513
<INCOME-BEFORE-INTEREST-EXPEN> 40,782
<TOTAL-INTEREST-EXPENSE> 13,231
<NET-INCOME> 27,551
1,445
<EARNINGS-AVAILABLE-FOR-COMM> 26,106
<COMMON-STOCK-DIVIDENDS> 12,649
<TOTAL-INTEREST-ON-BONDS> 12,576
<CASH-FLOW-OPERATIONS> 105,800
<EPS-PRIMARY> 50.77
<EPS-DILUTED> 50.77
</TABLE>
