<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 March 31, 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
-------
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 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)
Three Months Ended
------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
OPERATING REVENUES $258,234 $267,204
Cost of gas sold 140,737 155,516
-------- --------
OPERATING MARGIN 117,497 111,688
OPERATING EXPENSES:
Other operating expenses 42,104 40,677
Maintenance 7,784 6,053
Depreciation and amortization 17,474 17,240
Income taxes 17,886 16,787
-------- --------
Total Operating Expenses 85,248 80,757
-------- --------
OPERATING EARNINGS 32,249 30,931
OTHER EARNINGS, NET 309 92
-------- --------
EARNINGS BEFORE INTEREST EXPENSE 32,558 31,023
INTEREST EXPENSE:
Long-term debt 4,194 4,192
Other, including amortization
of debt expense 316 576
Less - Interest during construction (4) (39)
-------- --------
Total Interest Expense 4,506 4,729
-------- --------
NET EARNINGS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 28,052 26,294
CUMULATIVE EFFECT OF ACCOUNTING CHANGE AFTER TAX - 8,193
-------- --------
NET EARNINGS 28,052 34,487
Preferred Stock Dividends 482 482
-------- --------
NET EARNINGS APPLICABLE TO COMMON STOCK $ 27,570 $ 34,005
======== ========
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)
March 31, March 31, December 31,
1999 1998 1998
----------- ----------- -------------
ASSETS
<S> <C> <C> <C>
GAS PLANT, at cost $914,017 $866,128 914,017
Construction work-in-progress 19,949 11,922 11,644
Less-Accumulated depreciation 385,837 345,861 368,609
-------- -------- --------
Total Net Plant 548,129 532,189 557,052
-------- -------- --------
CURRENT ASSETS:
Cash and cash equivalents 14,996 1,538 878
Accounts receivable, less reserves
of $15,406 and $17,048 at
March 31, 1999 and 1998,
respectively, and $15,651 at
December 31, 1998 115,676 136,160 64,258
Accrued utility margin 10,716 9,576 14,147
Deferred gas costs 2,437 32,062 54,292
Natural gas and other inventories 25,073 24,175 41,375
Materials and supplies 3,478 3,419 2,852
Prepaid expenses 1,157 1,844 2,255
-------- -------- --------
Total Current Assets 173,533 208,774 180,057
-------- -------- --------
OTHER ASSETS:
Deferred postretirement benefits cost 77,228 82,587 78,567
Deferred charges and other assets 44,863 48,352 43,483
-------- -------- --------
Total Other Assets 122,091 130,939 122,050
-------- -------- --------
TOTAL ASSETS $843,753 $871,902 $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)
March 31, March 31, 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 186,090 173,667 178,857
-------- -------- --------
Total Common Stockholder's Investment 280,741 268,318 273,508
Cumulative preferred stock, $1 par value,
1,200,000 shares authorized and outstanding 29,368 29,335 29,360
Long-term obligations, less current portion 210,526 211,101 210,675
-------- -------- --------
Total Capitalization 520,635 508,754 513,543
Gas Inventory Financing 31,533 31,610 48,299
-------- -------- --------
Total Capitalization and Gas Inventory
Financing 552,168 540,364 561,842
-------- -------- --------
CURRENT LIABILITIES:
Current portion of long-term obligations 575 520 561
Notes payable - 16,200 28,900
Accounts payable 44,793 60,477 48,986
Accrued taxes 4,283 4,568 959
Accrued income taxes 28,827 32,868 10,282
Accrued interest 8,425 8,494 4,414
Customer deposits 2,106 2,320 2,187
Refunds due customers 815 2,595 140
-------- -------- --------
TOTAL CURRENT LIABILITIES 89,824 128,042 96,429
OTHER LIABILITIES:
Deferred income taxes 77,244 76,542 75,981
Unamortized investment tax credits 4,871 5,719 5,082
Postretirement benefits obligation 80,215 82,721 81,067
Other 39,431 38,514 38,758
-------- -------- --------
Total Other Liabilities 201,761 203,496 200,888
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S INVESTMENT $843,753 $871,902 $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)
Three Months Ended
------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 28,052 $ 34,487
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 17,474 17,240
Deferred taxes 1,263 (2,586)
Other changes in assets and liabilities:
Accounts receivable (47,987) (55,878)
Inventory 15,676 20,312
Deferred gas costs 51,855 34,533
Deferred post-retirement benefits 487 786
Accounts payable (4,193) (1,454)
Accrued interest 4,011 4,122
Federal and state income taxes 18,545 21,694
Refunds due customers 675 (541)
Other 3,634 (788)
-------- --------
Net cash provided by operating activities 89,492 71,927
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (8,306) (9,204)
Net cost of removal (592) (978)
-------- --------
Net cash used for investing activities (8,898) (10,182)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Changes in notes payable, net (28,900) (23,500)
Changes in inventory financing (16,766) (23,892)
Amortization of preferred stock issuance costs 8 9
Cash dividends paid on common and preferred stock (20,818) (13,131)
-------- --------
Net cash used for financing activities (66,476) (60,514)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,118 1,231
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 878 307
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,996 $ 1,538
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest, net of amounts capitalized $ 826 $ 837
Income taxes $ (1,712) $ 3,193
</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
------------------------------------------
MARCH 31, 1999
--------------
1. ACCOUNTING POLICIES AND OTHER INFORMATION
-----------------------------------------
GENERAL
-------
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 Company's business. 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 pursuant to the rules and
regulations of the Securities and Exchange Commission. However, the
disclosures herein, when read with the annual report for 1998 filed on Form
10-K, are adequate to make the information presented not misleading.
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:
---------------------
Net earnings applicable to common stock for the first quarter of 1999 were
$27.6 million compared to $34.0 million for the same period of 1998. The
first quarter of 1998 includes a one-time increase in earnings of $8.2
million due to the cumulative effect of a change in accounting for revenue
recognition. Excluding the effect of this change, net earnings for the
first quarter of 1999 increased $1.8 million or 7% from the first quarter
of 1998. This improvement primarily reflects the impact of 9% colder
weather ($2.6 million), throughput growth ($1.0 million) and a $.7 million
gain on the settlement of pension obligations, partially offset by higher
operating costs ($3.0 million). The increase in operating costs primarily
reflects the impact of colder weather and system maintenance. Weather for
the first quarter of 1999 was 4.8% warmer than normal compared to the 12.8%
warmer weather experienced in the first quarter of 1998.
Revenues for the first quarter of 1999 declined $9.0 million or 3% from the
same period last year primarily due to lower non-firm sales ($20.5
million), the migration of customers from sales to transportation service
($5.3 million) and lower gas costs. Partially offsetting was the revenue
increase attributable to the comparatively colder weather ($15.2 million).
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 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, seven of its eleven "mission critical" business systems. Of the
remaining, one system was installed in the fourth quarter of 1998 with
certification testing to be completed by the end of April; and the
remaining three will be replaced by the second quarter of 1999. Eight of
sixteen "less than critical" application systems have completed
certification testing while the remaining eight 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 the Company's client-server and
data/voice communications infrastructure are scheduled for completion by
the second quarter of 1999. Replacements or remediation of non-compliant
E-mail and desktop hardware and software systems are on schedule for
completion by the second quarter of 1999. An end-to-end integration test
plan has been developed to test all business systems supporting mission
critical processes. The test plan will be executed during the third quarter
of 1999.
<PAGE>
FORM 10-Q
Page 8
With respect to embedded chip systems, the Company has completed an
inventory, assessment and remediation plan. Remediation, conversion and
testing are currently 50% complete and scheduled to be completed by the
third quarter of 1999.
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, 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 $13.5
million. Approximately 65% of these costs will be incurred under capital
projects that have or will result in added functionality while also
addressing Year 2000 issues. As of March 31, 1999 approximately $11.5
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 our data and voice
communication providers, electricity provider or a pipeline supplier.
Detailed plans to accommodate any one or a combination of these worse case
scenarios will be developed and tested 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 identifies the six
major sources of risk and their impact on mission critical processes. By
the second quarter of 1999,contingency plans will be developed for each
mission critical process that could be impacted by a loss in data and/or
voice communications, loss of electricity, or major disruption of gas
supply. Testing of these plans is scheduled during the third quarter of
1999.
<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, 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
- --------------------------
As a result of mediation, the Company has entered an agreement in principle
with Industrial National Leasing Company (INLC) that resolves the
litigation between Massachusetts LNG, Inc., the Company's wholly-owned
subsidiary and INLC over the LNG storage facilities in Salem and Lynn,
Massachusetts. The agreement provides for a lease of the facilities that
will expire June 30, 2014 and an end-of-term purchase option. On March 19,
1999, the court granted a 45-day stay to enable the parties to finalize an
agreement.
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 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.
Boston Gas Company
-------------------------------------------
(Registrant)
/s/ Joseph F. Bodanza
---------------------------------------------
J.F. Bodanza, Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
Dated: May 3, 1999
----------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 548,129
<OTHER-PROPERTY-AND-INVEST> 2,547
<TOTAL-CURRENT-ASSETS> 173,533
<TOTAL-DEFERRED-CHARGES> 42,316
<OTHER-ASSETS> 77,228
<TOTAL-ASSETS> 843,753
<COMMON> 51,418
<CAPITAL-SURPLUS-PAID-IN> 43,233
<RETAINED-EARNINGS> 186,090
<TOTAL-COMMON-STOCKHOLDERS-EQ> 280,741
29,368
0
<LONG-TERM-DEBT-NET> 208,905
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 31,533
<LONG-TERM-DEBT-CURRENT-PORT> 55
0
<CAPITAL-LEASE-OBLIGATIONS> 1,621
<LEASES-CURRENT> 520
<OTHER-ITEMS-CAPITAL-AND-LIAB> 291,010
<TOT-CAPITALIZATION-AND-LIAB> 843,753
<GROSS-OPERATING-REVENUE> 258,234
<INCOME-TAX-EXPENSE> 17,886
<OTHER-OPERATING-EXPENSES> 42,104
<TOTAL-OPERATING-EXPENSES> 85,248
<OPERATING-INCOME-LOSS> 32,249
<OTHER-INCOME-NET> 309
<INCOME-BEFORE-INTEREST-EXPEN> 32,558
<TOTAL-INTEREST-EXPENSE> 4,506
<NET-INCOME> 28,052
482
<EARNINGS-AVAILABLE-FOR-COMM> 27,570
<COMMON-STOCK-DIVIDENDS> 20,336
<TOTAL-INTEREST-ON-BONDS> 4,194
<CASH-FLOW-OPERATIONS> 89,492
<EPS-PRIMARY> 53.62
<EPS-DILUTED> 53.62
</TABLE>
