<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 June 30, 1999
---------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 2-23416
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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
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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.
<PAGE>
FORM 10-Q
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 For The
Three Months Ended Six Months Ended
------------------- -------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES $96,958 $107,763 $355,191 $374,965
Cost of gas sold 44,498 54,237 185,236 209,763
------- -------- -------- --------
OPERATING MARGIN 52,460 53,526 169,955 165,202
OPERATING EXPENSES:
Other operating expenses 35,126 32,500 77,273 73,169
Maintenance 6,727 4,771 14,511 10,824
Depreciation and amortization 10,997 10,519 28,471 27,759
Income taxes (1,677) 508 16,209 17,290
------- -------- -------- --------
Total Operating Expenses 51,173 48,298 136,464 129,042
------- -------- -------- --------
OPERATING EARNINGS 1,287 5,228 33,491 36,160
OTHER EARNINGS, NET 420 184 727 276
------- -------- -------- --------
EARNINGS BEFORE INTEREST EXPENSE 1,707 5,412 34,218 36,436
INTEREST EXPENSE:
Long-term debt 4,194 4,192 8,387 8,384
Other, including amortization
of debt expense 107 264 421 840
Less - Interest during construction (237) (97) (285) (136)
------- -------- -------- --------
Total Interest Expense 4,064 4,359 8,523 9,088
------- -------- -------- --------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE (2,357) 1,053 25,695 27,348
CUMULATIVE EFFECT OF ACCOUNTING
CHANGE AFTER TAX - - - 8,193
NET EARNINGS (LOSS) (2,357) 1,053 25,695 35,541
Preferred Stock Dividends 481 481 963 963
------- -------- -------- --------
NET EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $(2,838) $ 572 $ 24,732 $ 34,578
------- -------- -------- --------
COMMON STOCK DIVIDENDS $ - $ - $ 20,336 $ 12,649
------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
FORM 10-Q
Page 3
BOSTON GAS COMPANY AND SUBSIDIARY
- ---------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
June 30, June 30, December 31,
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
ASSETS
GAS PLANT, at cost $914,995 $866,273 $914,017
Construction work-in-progress 30,529 24,813 11,644
Less-Accumulated depreciation 395,838 354,761 368,609
-------- -------- --------
Total Net Plant 549,686 536,325 557,052
-------- -------- --------
CURRENT ASSETS:
Cash and cash equivalents 31,602 9,549 878
Accounts receivable, less reserves
of $14,552 and $16,840 at
June 30, 1999 and 1998,
respectively, and $15,651 at
December 31, 1998 69,771 77,971 64,258
Accrued utility margin 2,272 2,393 14,147
Deferred gas costs - 24,979 54,292
Natural gas and other inventories 31,237 29,285 41,375
Materials and supplies 3,491 3,096 2,852
Prepaid expenses 2,591 2,466 2,255
-------- -------- --------
Total Current Assets 140,964 149,739 180,057
-------- -------- --------
OTHER ASSETS:
Deferred postretirement benefits cost 75,888 81,247 78,567
Deferred charges and other assets 43,401 47,255 43,483
-------- -------- --------
Total Other Assets 119,289 128,502 122,050
-------- -------- --------
TOTAL ASSETS $809,939 $814,566 $859,159
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
FORM 10-Q
Page 4
BOSTON GAS COMPANY AND SUBSIDIARY
- ---------------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<TABLE>
<CAPTION>
(In Thousands)
June 30 June 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 183,252 174,239 178,857
-------- -------- --------
Total Common Stockholder's Investment 277,903 268,890 273,508
Cumulative preferred stock, $1 par value,
1,200,000 shares authorized and outstanding 29,377 29,343 29,360
Long-term obligations, less current portion 210,373 210,962 210,675
-------- -------- --------
Total Capitalization 517,653 509,195 513,543
GAS INVENTORY FINANCING 30,543 29,185 48,299
-------- -------- --------
Total Capitalization and Gas Inventory
Financing 548,196 538,380 561,842
-------- -------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 590 533 561
Notes payable - - 28,900
Accounts payable 30,970 40,425 48,986
Accrued taxes 3,252 2,855 959
Accrued income taxes 17,856 23,364 10,282
Accrued interest 4,277 4,340 4,414
Customer Deposits 2,038 2,220 2,187
Refundable gas costs 5,853 - -
Refunds Due Customers 733 1,095 140
-------- -------- --------
TOTAL CURRENT LIABILITIES 65,569 74,832 96,429
-------- -------- --------
OTHER LIABILITIES:
Deferred income taxes 73,853 76,505 75,981
Unamortized investment tax credits 4,661 5,506 5,082
Postretirement benefits obligation 79,590 82,095 81,067
Other 38,070 37,248 38,758
-------- -------- --------
Total Other Liabilities 196,174 201,354 200,888
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S INVESTMENT $809,939 $814,566 $859,159
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
FORM 10-Q
Page 5
BOSTON GAS COMPANY AND SUBSIDIARY
- ---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<TABLE>
<CAPTION>
(In Thousands)
For The Six Months Ended
------------------------
June 30, June 30,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 25,695 $ 35,541
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 28,471 27,759
Deferred taxes (2,128) (2,623)
Other changes in assets and liabilities:
Accounts receivable 6,362 9,495
Inventory 9,499 15,525
Deferred gas costs 60,145 41,616
Deferred post-retirement benefits 1,202 1,500
Accounts payable (18,016) (21,506)
Accrued interest (137) (32)
Federal and state income taxes 7,574 12,188
Refunds due customers 593 (2,041)
Other 1,198 (3,394)
-------- --------
Net cash provided by operating activities 120,458 114,028
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,865) (22,854)
Net cost of removal (1,931) (2,320)
-------- --------
Net cash used by investing activities (21,796) (25,174)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in short-term debt, net (28,900) (39,700)
Changes in inventory financing (17,756) (26,317)
Changes in preferred stock 17 17
Cash dividends paid on common and preferred stock (21,299) (13,612)
-------- --------
Net cash used by financing activities (67,938) (79,612)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 30,724 9,242
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 878 307
-------- --------
Cash and cash equivalents at end of period $ 31,602 $ 9,549
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 9,362 $ 9,558
Income taxes $ 11,121 $ 13,456
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
FORM 10-Q
Page 6
BOSTON GAS COMPANY AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1999
-------------
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 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.
<PAGE>
FORM 10-Q
Page 7
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------------------------------------------------------------------------------
OF OPERATIONS:
- --------------
RESULTS OF OPERATIONS
SECOND QUARTER
The second quarter reflects a net loss of $2.8 million compared to net earnings
applicable to common stock of $.6 million for the second quarter of 1998. This
decline primarily reflects higher operating costs, lower capitalized expenses
and the impact of 1% warmer weather partially offset by throughput growth.
Revenues for the second quarter of 1999 declined $10.8 million from the second
quarter of 1998 primarily due to lower gas costs, the migration of customers
from sales to transportation service and warmer weather, partially offset by
throughput growth.
YEAR-TO-DATE
Net earnings applicable to common stock for the first six months of 1999 were
$24.7 million compared to $34.6 million for the same period of 1998. 1998
results 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 for the first six months of 1999 decreased $1.7
million. This reduction primarily reflects higher operating costs and lower
capitalized expenses somewhat offset by throughput growth, the impact of colder
weather and a gain on the settlement of pension obligations. Weather for the
first six months of 1999 was 3% warmer than normal but 7% colder than 1998.
Revenues for the first six months of 1999 declined $19.8 million or 5% from the
same period last year primarily due to lower non-firm sales ($20 million), the
migration of customers from sales to transportation service ($9 million)and
lower gas costs. Partially offsetting was the revenue increase attributable to
colder weather and throughput growth. 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 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 substantially 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 is finalizing and testing its contingency plans to address
major external and internal risk 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.
Installation of an upgrade and replacement to two of these mission critical
systems scheduled for the third quarter of 1999 will include Year 2000 re-
certification testing. The Company has completed certification testing of fifty
percent of less than critical business systems, and the remaining are scheduled
for testing during the third quarter of 1999.
<PAGE>
FORM 10-Q
Page 8
An integration test plan designed to re-certify interfaces between mission
critical systems has been developed and will be executed during the third
quarter of 1999. 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 with the exception
of an upgrade to the call management server that is scheduled for the third
quarter. Eighty percent of the Company's desktop hardware, operating system
software and applications have been certified as Year 2000 ready with the
remaining desktops scheduled to be certified as part of the rollout of an
upgraded application in the third quarter of 1999. To minimize the risk of
corruption of previously certified information systems, the Company will impose
a freeze on changes to information systems and technology components, effective
October 1, 1999.
With respect to embedded chip systems, the Company has completed its inventory,
assessment, remediation and certification testing of all date sensitive
components containing embedded chips.
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 begun testing electronic interfaces with suppliers
where practicable, and 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 June 30, 1999 approximately $12.4 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 worse case scenarios are addressed as part of the
Company's business contingency planning process.
CONTINGENCY PLANS
The Company has initiated the development of a business contingency plan 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 has been 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. Plans have been developed and desk tested
for each of these risk areas. During the third quarter of 1999, all plans will
be finalized and tested via live drills.
<PAGE>
FORM 10-Q
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, 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.
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 $61
million. Capital expenditures will be largely for improvements to the
distribution system, for system expansion to meet customer demand and for
productivity improvements.
<PAGE>
FORM 10-Q
Page 10
PART II. OTHER INFORMATION
--------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
On April 30, 1999, the Company and Industrial National Leasing Corporation
(INLC) executed a lease agreement for the LNG storage facilities in Salem and
Lynn, Massachusetts and a stipulation of dismissal of the litigation filed by
Massachusetts LNG, Inc., the Company's wholly owned subsidiary, against INLC
relative to the lease for the storage facilities that expired on June 30, 1997.
Pursuant to the newly executed lease, the Company will have full access to the
Salem and Lynn storage facilities to meet system requirements through June 30,
2014, at which time it will have an option to purchase the facilities from INLC.
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 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 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, Sr. Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: July 30, 1999
--------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 549,686
<OTHER-PROPERTY-AND-INVEST> 2,547
<TOTAL-CURRENT-ASSETS> 140,964
<TOTAL-DEFERRED-CHARGES> 40,854
<OTHER-ASSETS> 75,888
<TOTAL-ASSETS> 809,939
<COMMON> 51,418
<CAPITAL-SURPLUS-PAID-IN> 43,233
<RETAINED-EARNINGS> 183,252
<TOTAL-COMMON-STOCKHOLDERS-EQ> 277,903
29,377
0
<LONG-TERM-DEBT-NET> 210,000
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 30,543
<LONG-TERM-DEBT-CURRENT-PORT> 70
0
<CAPITAL-LEASE-OBLIGATIONS> 372
<LEASES-CURRENT> 520
<OTHER-ITEMS-CAPITAL-AND-LIAB> 261,153
<TOT-CAPITALIZATION-AND-LIAB> 809,939
<GROSS-OPERATING-REVENUE> 355,191
<INCOME-TAX-EXPENSE> 16,209
<OTHER-OPERATING-EXPENSES> 77,273
<TOTAL-OPERATING-EXPENSES> 136,464
<OPERATING-INCOME-LOSS> 33,491
<OTHER-INCOME-NET> 421
<INCOME-BEFORE-INTEREST-EXPEN> 34,218
<TOTAL-INTEREST-EXPENSE> 8,523
<NET-INCOME> 25,695
963
<EARNINGS-AVAILABLE-FOR-COMM> 24,732
<COMMON-STOCK-DIVIDENDS> 20,336
<TOTAL-INTEREST-ON-BONDS> 8,387
<CASH-FLOW-OPERATIONS> 120,458
<EPS-BASIC> 48.12
<EPS-DILUTED> 48.12
</TABLE>
