<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, 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 2-23416
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BOSTON GAS COMPANY
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(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
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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 514,184 shares, all
held by Eastern Enterprises.
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Page 2
PART I. FINANCIAL INFORMATION
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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)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September,30, September 30, September 30,
1999 1998 1999 1998
------- ------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES $62,164 $62,777 $417,355 $437,743
Cost of gas sold 23,579 25,194 208,815 234,956
------- ------- -------- --------
Operating Margin 38,585 37,583 208,540 202,787
OPERATING EXPENSES:
Operations 32,626 31,370 109,899 104,539
Maintenance 6,533 5,686 21,044 16,510
Depreciation and amortization 7,846 7,551 36,317 35,310
Income taxes (4,872) (4,401) 11,337 12,894
------- ------- -------- --------
Total Operating Expenses 42,133 40,206 178,597 169,253
------- ------- -------- --------
OPERATING EARNINGS (LOSS) (3,548) (2,623) 29,943 33,534
OTHER EARNINGS, NET 1,178 237 1,905 513
------- ------- -------- --------
EARNINGS (LOSS) BEFORE INTEREST EXPENSE (2,370) (2,386) 31,848 34,047
INTEREST EXPENSE:
Long-term debt 4,194 4,192 12,581 12,576
Other, including amortization
of debt expense 199 108 620 948
Less - Interest during construction (333) (157) (618) (293)
------- ------- -------- --------
Total Interest Expense 4,060 4,143 12,583 13,231
------- ------- -------- --------
NET EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (6,430) (6,529) 19,265 20,816
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE AFTER TAX - - - 8,193
------- ------- -------- --------
NET EARNINGS (LOSS) (6,430) (6,529) 19,265 29,009
Preferred Stock Dividends 466 482 1,429 1,445
------- ------- -------- --------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $(6,896) $(7,011) $ 17,836 $ 27,564
======= ======= ======== ========
COMMON STOCK DIVIDENDS $ - $ - $ 20,336 $ 12,649
------- ------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Page 3
Boston Gas Company and Subsidiary
- ---------------------------------
Consolidated Balance Sheets
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<TABLE>
<CAPTION>
(In Thousands)
September 30, September 30, December 31,
1999 1998 1998
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
GAS PLANT, at cost $ 914,229 $ 866,147 $ 914,017
Construction work-in-progress 44,604 38,038 11,644
Less-Accumulated depreciation (387,265) (359,108) (368,609)
--------- --------- ---------
Total Net Plant 571,568 545,077 557,052
--------- --------- ---------
CURRENT ASSETS:
Cash and cash equivalents 4,215 509 878
Accounts receivable, less reserves
of $12,959 and $16,626 at
September 30, 1999 and 1998,
respectively, and $15,651 at
December 31, 1998 49,450 41,182 62,250
Accounts receivable - affiliates - 28 2,008
Accrued utility margin 3,099 2,400 14,147
Deferred gas costs 20,092 48,853 54,292
Supplemental gas inventories 45,733 40,092 41,375
Materials and supplies 4,251 3,137 2,852
Prepaid expenses 1,737 2,150 2,255
--------- --------- ---------
Total Current Assets 128,577 138,351 180,057
--------- --------- ---------
OTHER ASSETS:
Deferred postretirement benefits cost 74,548 79,907 78,567
Deferred charges and other assets 42,987 44,974 43,483
--------- --------- ---------
Total Other Assets 117,535 124,881 122,050
--------- --------- ---------
TOTAL ASSETS $ 817,680 $ 808,309 $ 859,159
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Page 4
Boston Gas Company and Subsidiary
- ---------------------------------
Consolidated Balance Sheets
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
September 30, September 30, December 31,
1999 1998 1998
------------- ------------- ------------
<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 176,357 167,229 178,857
-------- -------- --------
Total Common Stockholder's Investment 271,008 261,880 273,508
Cumulative preferred stock, $1 par value,
(liquidation preference, $25 per share)
1,200,000 shares authorized and
1,080,000 shares outstanding 26,447 29,351 29,360
Long-term obligations, less current portion 224,890 210,820 210,675
-------- -------- --------
Total Capitalization 522,345 502,051 513,543
GAS INVENTORY FINANCING 42,238 39,192 48,299
-------- -------- --------
Total Capitalization and Gas Inventory
Financing 564,583 541,243 561,842
-------- -------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 605 547 561
Notes payable - 6,300 28,900
Accounts payable 37,775 38,893 48,703
Accounts payable - affiliates 1,296 - 283
Accrued taxes 1,659 1,641 959
Accrued income taxes 2,334 6,647 10,282
Accrued interest 8,511 8,572 4,414
Customer deposits 1,993 2,178 2,187
Refunds due customers 723 458 140
-------- -------- --------
Total Current Liabilities 54,896 65,236 96,429
-------- -------- --------
OTHER LIABILITIES:
Deferred income taxes 75,594 77,229 75,981
Unamortized investment tax credits 4,450 5,294 5,082
Postretirement benefits obligation 78,795 81,584 81,067
Other 39,362 37,723 38,758
-------- -------- --------
Total Other Liabilities 198,201 201,830 200,888
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S INVESTMENT $817,680 $808,309 $859,159
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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Page 5
Boston Gas Company and Subsidiary
- ---------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
For The Nine Months Ended
-------------------------
September 30, September 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 19,265 $ 29,009
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 36,317 35,310
Deferred taxes (387) (1,899)
Other changes in assets and liabilities:
Accounts receivable 26,342 46,249
Inventories, including gas (5,757) 4,677
Deferred gas costs 34,200 17,742
Accounts payable (10,401) (23,038)
Accrued interest 4,097 4,200
Federal and state income taxes (7,948) (4,526)
Refunds due customers 583 (2,678)
Other 3,957 779
-------- --------
Net cash provided by operating activities 100,268 105,825
-------- --------
Cash flows from investing activities:
Capital expenditures (33,943) (38,096)
Net cost of removal (3,262) (3,723)
-------- --------
Net cash used by investing activities (37,205) (41,819)
-------- --------
Cash flows from financing activities:
Dividends paid on common and preferred stock (21,765) (14,094)
Changes in short-term debt, net (28,900) (33,400)
Changes in inventory financing (6,061) (16,310)
Redemption of preferred stock (3,000) -
-------- --------
Net cash used by financing activities (59,726) (63,804)
-------- --------
Net increase in cash and cash equivalents 3,337 202
Cash and cash equivalents at beginning of period 878 307
-------- --------
Cash and cash equivalents at end of period $ 4,215 $ 509
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 9,322 $ 10,006
======== ========
Income taxes $ 20,252 $ 25,270
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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BOSTON GAS COMPANY AND SUBSIDIARY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SEPTEMBER 30, 1999
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1. ACCOUNTING POLICIES AND OTHER INFORMATION
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General
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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 1998 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.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS:
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RESULTS OF OPERATIONS
Third Quarter
The seasonal net loss of $6.9 million for the third quarter of 1999 was $.1
million or 2% lower than the loss reported for the same period in 1998. The
slight improvement was primarily due to customer growth and other income of $.9
million resulting primarily from an agreement with the Internal Revenue Service
for prior years' tax examinations.
Operations and maintenance expenses increased $2.1 million, or 5.7%, principally
due to a charge of $2.2 million for an early retirement program and increased
distribution system maintenance partially offset by lower bad debt expense
reflecting improved collection experience and reduced property tax expense.
Year-to-date
Net earnings applicable to common stock for the first nine months of 1999 were
$17.8 million compared to $27.6 million for the same period of 1998. The nine
months of 1998 include a one-time increase in earnings of $8.2 million due to
the effect of a change in accounting for revenue recognition. Excluding this
accounting change, net earnings applicable to common stock for the first nine
months of 1999 decreased $1.5 million or 8% from the first nine months of 1998.
Operating margin increased $5.8 million, or 2.8%, principally due to colder
weather (7%) and customer growth. Weather for the first nine months of 1999 was
3% warmer than normal compared to the 10% warmer than normal weather experienced
in the first nine months of 1998.
Higher operations and maintenance expenses principally reflect the early
retirement charge of $2.2 million discussed above, increased information
technology expense and increased distribution system maintenance.
The revenue decrease of $20.4 million is principally due to lower gas costs,
customer migration, and decreases in non-firm revenue, all of which have 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 ISSUE
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 completed the replacement or modification of
existing systems and technology as required and assured itself that major
customers and critical vendors are also addressing these issues. In addition,
the Company has completed the development and testing of contingency plans to
address major external and internal risks that could potentially impact business
operations.
With respect to internal information systems, the Company has tested and
certified as Year 2000 ready, all eleven mission critical business systems and
all eighteen less
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Page 8
than critical business systems. Recertification of mission critical systems and
integration points has been completed. Conversion and certification testing of
all technology infrastructure components has been completed, including mainframe
and client-server hardware and software, data/voice communications and e-mail
systems. All telephone components have been certified as Year 2000 ready. All of
the Company's desktop hardware, operating system software and applications have
been certified as Year 2000 ready. To minimize the risk of corruption of
previously certified information systems, the Company has imposed a freeze on
changes to information systems and technology components, effective October 1,
1999. Production environment changes will be limited to emergency production
fixes and regulatory required changes.
With respect to embedded chip systems, the Company has completed its inventory,
assessment, remediation and certification testing of all date sensitive
components.
The Company has identified material third party relationships and has completed
a detailed survey of third party readiness. A readiness assessment has been
completed of all mission critical suppliers and risk mitigation plans have been
developed. The Company has implemented risk mitigation strategies as required.
However, there can be no assurance that third party systems, on which the
Company relies, 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 $13.9
million. Approximately 65% of these costs will be incurred under capital
projects that have resulted in added functionality while also addressing Year
2000 issues. As of September 30, 1999 approximately $12.9 million has been
incurred.
Risks of Year 2000 Issues
The Company has assessed the most reasonably 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
involve failures that impact data and voice communication providers, its
electricity provider or a pipeline supplier. Detailed plans to accommodate any
one or a combination of these worst case scenarios are addressed as part of the
Company's business contingency plans.
Contingency Plans
The Company has completed the development of business contingency plans in the
event that one or more of its internal systems, its embedded chip systems, or
its mission critical suppliers' systems experience a Year 2000 failure. An
impact analysis was completed which identified voice/data communications,
electricity and gas supply as the three major sources of external risk and their
impact on mission critical processes. Contingency plans have been developed and
desktop tests conducted for each risk area. Successful exercises were conducted
to test the Company's ability to deliver critical services in the event of a
failure or disruption in voice/data communications.
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Page 9
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 ability to successfully integrate natural gas
distribution operations, temperatures above or below normal in the Company's
service area, changes in economic conditions, including interest rates, the
functionality of programs and systems in the Year 2000, 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.
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 1999 capital
expenditures and working capital requirements, dividend payments and normal debt
repayments.
The Company expects capital expenditures for 1999 to be approximately $57
million. Capital expenditures will be largely for improvements to the
distribution system, for system expansion to meet customer demand and for
productivity improvements.
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PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
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
10.1 Change of Control Agreement, dated as of September 22, 1999, by
and between Eastern Enterprises, Boston Gas Company and Chester
R. Messer, II (incorporated by reference to Exhibit 10.11.5 to
the Quarterly Report on Form 10-Q of Eastern Enterprises for the
quarter ended September 30, 1999).
(b) No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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Page 11
SIGNATURES
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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.
Boston Gas Company
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(Registrant)
/s/ Joseph F. Bodanza
----------------------------------------------
J.F. Bodanza, Sr. Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: November 3, 1999
-----------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 571,568
<OTHER-PROPERTY-AND-INVEST> 2,547
<TOTAL-CURRENT-ASSETS> 128,577
<TOTAL-DEFERRED-CHARGES> 40,440
<OTHER-ASSETS> 74,548
<TOTAL-ASSETS> 817,680
<COMMON> 51,418
<CAPITAL-SURPLUS-PAID-IN> 43,233
<RETAINED-EARNINGS> 176,357
<TOTAL-COMMON-STOCKHOLDERS-EQ> 271,008
26,447
0
<LONG-TERM-DEBT-NET> 210,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 42,238
<LONG-TERM-DEBT-CURRENT-PORT> 58
0
<CAPITAL-LEASE-OBLIGATIONS> 14,890
<LEASES-CURRENT> 547
<OTHER-ITEMS-CAPITAL-AND-LIAB> 252,492
<TOT-CAPITALIZATION-AND-LIAB> 817,680
<GROSS-OPERATING-REVENUE> 417,355
<INCOME-TAX-EXPENSE> 11,337
<OTHER-OPERATING-EXPENSES> 109,899
<TOTAL-OPERATING-EXPENSES> 178,597
<OPERATING-INCOME-LOSS> 29,943
<OTHER-INCOME-NET> 1,905
<INCOME-BEFORE-INTEREST-EXPEN> 31,848
<TOTAL-INTEREST-EXPENSE> 12,583
<NET-INCOME> 19,265
1,429
<EARNINGS-AVAILABLE-FOR-COMM> 17,836
<COMMON-STOCK-DIVIDENDS> 20,336
<TOTAL-INTEREST-ON-BONDS> 12,581
<CASH-FLOW-OPERATIONS> 100,628
<EPS-BASIC> 34.69
<EPS-DILUTED> 34.69
</TABLE>
