10-Q 1 colgas-10q902.txt COLONIAL GAS CO. 10-Q SEPT. 30, 2002 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, 2002 ------------------- 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) 617-742-8400 ------------ (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 100 shares, all held by KeySpan New England, LLC. The Registrant meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is filing this Form with the reduced disclosure format. PART I. FINANCIAL INFORMATION ----------------------------- ITEM 1. FINANCIAL STATEMENTS ----------------------------- Company or group of companies for which report is filed: COLONIAL GAS COMPANY Statements of Operations

The accompanying notes are an integral part of these financial statements. Colonial Gas Company Balance Sheets

The accompanying notes are an integral part of these financial statements. Colonial Gas Company Balance Sheets

The accompanying notes are an integral part of these financial statements. Colonial Gas Company Statement of Cash Flows Unaudited (In Thousands) For the Nine Months Ended ------------------------- September 30, September 30, 2002 2001 -------------- --------------- Cash flows from operating activities: Net income (Loss) $2,525 $(2,530) Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 12,046 18,144 Deferred taxes (3,704) 1,759 Other changes in assets and liabilities: Accounts receivable 10,397 12,401 Accounts receivable/payable-affiliates 13,179 (7,712) Accrued utility revenue 17,470 19,608 Deferred gas costs 2,729 4,261 Gas in Storage 1,093 (7,580) Accounts payable (3,156) (17,041) Accrued taxes 75 (170) Accrued interest (5,619) 14,684 Other (4,032) 3,516 ------ ------ Cash provided by operating activities 43,003 39,340 ------- ------ Cash flows from investing activities: Capital expenditures (17,818) (16,836) ------- ------- Cash used for investing activities (17,818) (16,836) ------- ------- Cash flows from financing activities: Repayment of long-term debt (15,000) - Repayments of note payable-utility money pool (1,993) (22,655) Repayments of note payable - utility money pool -gas inventory financing (8,192) 178 (Repayment) Advance from KeySpan 14,000 (50,000) Capital Contribution - 50,000 Dividend paid to KeySpan (14,000) - ------- ------- Cash used for financing activities (25,185) (22,477) ------- ------- Increase (decrease) in cash and cash equivalents - 27 Cash and cash equivalents at beginning of period 121 124 -------- ------- Cash and cash equivalents at end of period $ 121 $ 151 ========= =======

The accompanying notes are an integral part of these financial statements. COLONIAL GAS COMPANY NOTES TO FINANCIAL STATEMENTS UNAUDITED September 30, 2002 ------------------ 1. Accounting Policies and Other Information ----------------------------------------- Colonial Gas Company d/b/a KeySpan Energy Delivery New England (the "Company") is a gas distribution company engaged in the transportation and sale of natural gas to residential, commercial and industrial customers. The Company's service territory includes 24 municipalities located northwest of Boston and on Cape Cod. The Company is a wholly-owned subsidiary of KeySpan New England, LLC ("KNE LLC") and an indirect wholly-owned subsidiary of KeySpan Corporation ("KeySpan"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended. It is the Company's opinion that the accompanying financial statements contain all adjustments necessary to present fairly its financial position as of September 30, 2002, and the results of its operations for the three and nine months ended September 30, 2002 and September 30, 2001, as well as cash flows for the nine months ended September 30, 2002 and September 30, 2001. Interim results are not necessarily indicative of results to be expected for the year, due to the seasonal nature of the Company's operations. Certain reclassifications were made to conform prior period financial statements with the current period financial statement presentation. Other than as noted, adjustments were of a normal recurring nature and accounting policies have been applied in a manner consistent with prior periods. 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 2001 Annual Report filed on Form 10-K with the Securities and Exchange Commission. The December 31, 2001 financial statement information has been derived from the audited financial statements. 2. Recent Accounting Pronouncements -------------------------------- On January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations", and SFAS 142 "Goodwill and Other Intangible Assets". The key concepts from the two interrelated Statements include mandatory use of the purchase method when 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. Other changes to existing accounting standards involve the amount of goodwill to be used in determining the gain or loss on the disposal of assets and a requirement to test goodwill for impairment at least annually. SFAS 142 allows for various valuation methodologies to test for impairment, including a discounted cash flow method, as compared to an undiscounted cash flow method utilized under the previous standard. Impairment is deemed to exist when the carrying amount of goodwill exceeds its implied fair value. Upon adoption of SFAS 142, any amounts impaired were to be recorded as a cumulative effect of an accounting change in the Statement of Operations, and any impairment thereafter will be recorded as an operating expense. The discounted cash flow model requires broad assumptions and significant judgement by management including, but not limited to, projections of revenues, working capital, capital expenditures, taxes and the cost of capital. The Company has completed its impairment tests and determined that no impairment exists. Fair value was determined using a discounted cash flow methodology. The test for impairment is required to be performed upon adoption of SFAS 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), the Company expects to perform impairment tests during the fourth quarter. As discussed above, amortization of goodwill has been discontinued effective January 1, 2002. For the three and nine months ended September 30, 2001, goodwill amortization was $2.3 and $7.0 million, respectively. As required by SFAS 142, below is a reconciliation of reported net income for the three and nine months ended September 30, 2001 and pro-forma net income, for the same periods, adjusted for the discontinuance of goodwill amortization.

In July of 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 143, "Accounting for Asset Retirement Obligations". The Statement 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 will capitalize a cost by increasing the carrying amount of the related 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 Statement 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 will have on the results of operations and financial position. SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," was effective January 1, 2002, and addresses accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and APB Opinion 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business." SFAS 144 retains the fundamental provisions of SFAS 121 and expands the reporting of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The implementation of this Statement, effective January 1, 2002, did not have an impact on the Company's results of operations and financial position. In June of 2002, the FASB issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue 94-3, "Liability recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity". This Statement is effective for exit or disposal activities initiated after December 31, 2002 with early application encouraged. 3. Environmental Matters --------------------- The Company, like many other companies in the natural gas industry, is party to governmental proceedings requiring investigation and possible remediation of former manufactured gas plant ("MGP") and related sites. The Company may have or share responsibility under applicable environmental laws for the remediation of one former MGP site and nine related satellite disposal sites, as well as one non-MGP site and a federal superfund site. As of September 30, 2002, the Company estimates the remaining cost of its MGP-related environmental cleanup activities to be $2.7 million, which amount has been accrued by the Company as a reasonable estimate of probable cost for known sites. Expenditures incurred to date with respect to these MGP-related activities total $13.3 million. By a rate order issued on May 25, 1990, the Massachusetts Department of Telecommunications and Energy (the "Department") approved, for ratemaking purposes, recovery of all prudently incurred environmental response costs associated with former MGP related sites over a seven-year period without carrying charges. The Company has received and responded to Requests for Information from the U.S. Environmental Protection Agency ("EPA") pursuant to Section 104 of the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), regarding one federal superfund site that the EPA is currently investigating. The Company cannot determine the amount of its liability at this time. 4. Seasonal Aspect --------------- The gas distribution business is influenced by seasonal weather conditions. Annual revenues are principally realized during the heating season (November 1, through April 30) as a result of the large proportion of heating sales in these months. In addition, under its seasonal rate structure, the rates charged to customers during the heating season are higher than the rates charged during the rest of the year. Accordingly, results of operations are most favorable in the first quarter of the Company's fiscal year, followed by the fourth quarter. Losses are generally incurred in the second and third quarters. 5. Related Party Transactions -------------------------- The Company, and all utility subsidiaries of KeySpan, participate in a utility money pool established by KeySpan. KeySpan Corporate Services, LLC, a subsidiary service company of KeySpan, administers the money pool and provides financing to the Company for working capital and gas inventory. The money pool is funded, in part, through surplus funds of money pool participants. Interest income or expense is recorded by the Company for net funds advanced to or borrowed from the money pool at an interest rate generally equal to KeySpan's short-term borrowing rate. Interest incurred on gas inventory financing is recovered from gas sales customers through the cost of gas adjustment clause. 6. Regulation ---------- In 1999, the Department approved a rate plan resulting in a ten-year freeze of base rates at current levels. Due to the length of the base rate freeze, the Company was required to discontinue its application SFAS 71 "Accounting for the Effects of Certain Types of Regulation". On November 1, 2001, the Department issued an order requiring all Massachusetts electric and gas utilities to develop service quality plans effective January 1, 2002. On April 17, 2002, the Department issued an order approving the Company's service quality plan that was filed with the Department on March 1, 2002. Service quality will be tracked and measured against historical benchmarks. The Department may assess a penalty against a company that fails to meet its service quality benchmarks. The penalty amount can be up to 2% of the Company's distribution revenues. Each measurement period will be a calendar year. The first measurement period began on January 1, 2002. 7. Derivatives ----------- On April 1, 2002 the Company adopted Implementation Issue C16 of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" as amended and interpreted incorporating SFAS 137 and 138 and certain implementation issues (collectively "SFAS 133"). Issue C16 establishes new criteria that must be satisfied in order for contracts that combine a forward contract and a purchased option contract to be exempted as normal purchases and sales. Based upon a review of its physical gas purchase commodity contracts, the Company determined that certain contracts could no longer be exempted as normal purchases from the requirements of SFAS 133. At September 30, 2002, the fair value of these contracts was recorded as a $0.6 million liability. All gas and related transportation costs are currently recovered from customers through the gas adjustment clause. Therefore, changes in the market value of these contracts are recorded as other assets or other liabilities on the Balance Sheet. 8. Long-Term Debt -------------- On May 20, 2002, pursuant to a put option exercised by the holders, the Company repaid $15 million for the 6.81% Series A First Mortgage Secured Medium Term Notes, dated May 19, 1997 that had a maturity date of May 19, 2027. The Notes were repaid at par and there was no gain or loss recognized. The Company borrowed the amount needed to redeem these Notes through the utility money pool. 9. Gas Supply Contracts -------------------- The Company had a portfolio management contract with El Paso Energy Marketing Company ("El Paso") under which El Paso provided the majority of the city gate supply requirements at market prices and managed certain upstream capacity, underground storage and term supply contracts for Colonial. The agreement with El Paso expired on October 31, 2002. The Company has negotiated a new portfolio management agreement with Entergy-Koch to replace the expired El Paso agreement. The new agreement with Entergy-Koch began on November 1, 2002 and extends through March 31, 2003. The Company recently renewed its long-term capacity contracts with Tennessee Gas Pipeline for the transportation of natural gas to the Company's distribution territory. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: ---------------------- RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Net Income for the nine months ended September 30, 2002 was $2.5 million, an increase of $5.0 million over the $2.5 million net loss for the corresponding period of the prior year. This increase is primarily due to the discontinuance of goodwill amortization offset, in part, by a decline in operating margin. Operating revenues for the nine-month period ended September 30, 2002 declined $48.4 million, or 26%, from the nine-month period ended September 30, 2001. The majority of this decline was due to a significant decrease in the cost of gas sold to customers. Cost of gas sold for the nine-month period ended September 30, 2002 decreased $44.3 million, or 37%, from 2001. This decline was due to both a decrease in throughput of 13% and a decline in the average commodity price of gas of 25%. Decreased throughput was principally due to significantly warmer weather (11%). The Company's gas rate structure includes a gas adjustment clause, pursuant to which gas costs are recovered in revenues. Further, variations between actual gas costs incurred and gas cost billed are deferred and refunded to or collected from customers in a subsequent period. As a result, fluctuations in the cost of gas sold have little or no impact on operating margin. Operating margin (revenues less cost of gas sold) for the nine-month period ended September 30, 2002 decreased $4 million, or 6%, from the nine-month period ended September 30, 2001. The decline was primarily driven by warmer weather ($5.6 million), offset, in part, by an increase of $1.6 million due to customer growth. In accordance with SFAS 142, as of January 1, 2002, the Company is no longer amortizing goodwill. For the nine-month period ended September 30, 2001, amortization of goodwill was $7 million. Income tax expense for the nine-month period ended September 30, 2002 decreased approximately $1.3 million, or 48%, from 2001. The decrease is primarily attributable to lower pre-tax earnings before goodwill amortization expense. LIQUIDITY AND CAPITAL RESOURCES As discussed, the Company's revenues, earnings and cash flow are highly seasonal. Since the majority of its revenues are billed during the heating season, significant cash flows are generated from late winter to early summer. Alternatively, in preparation for the upcoming heating season (i.e. purchasing and storing gas), short-term borrowings are highest during the late fall and early winter. The Company believes that projected cash flow from operations, in combination with currently available resources (i.e. utility money pool), is sufficient to meet 2002 capital expenditures, working capital requirements and normal debt repayments. On March 31, 2002, the Company received an additional advance of $14 million from KeySpan and then paid a dividend to KeySpan of $14 million. On May 20, 2002, the Company repaid $15 million for the 6.81% Series A First Mortgage Secured Medium Term Notes. The Company financed this repayment by borrowing from the money pool. For further details, see Note 8 to the Financial Statements "Long-Term Debt". The Company expects capital expenditures for 2002 to be approximately $25.0 million. Actual capital expenditures for the nine-month period ending September 30, 2002 were $17.8 million. Capital expenditures are largely for system expansion associated with customer growth and improvements to the distribution infrastructure. FORWARD-LOOKING INFORMATION Certain statements contained in this Form 10-Q concerning expectations, beliefs, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts, are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, all statements relating to our future outlook, anticipated capital expenditures, future cash flows and borrowings, pursuit of potential future acquisition opportunities and sources of funding, are forward-looking statements. Such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties and actual results may differ materially from those discussed in such statements. Among the factors that could cause actual results to differ materially are: general economic conditions, especially in Massachusetts; available sources and cost of fuel; federal and state regulatory initiatives that increase competition, threaten cost and investment recovery, and impact rate structures; the ability of the Company to successfully reduce its cost structure; inflationary trends and interest rates; and other risks detailed from time to time in other reports and other documents filed by the Company with the SEC. For any of these statements, the Company claims the protection of the safe harbor for forward-looking information contained in the Private Securities Litigation Reform Act of 1995, as amended. PART II. OTHER INFORMATION -------------------------- ITEM 1. LEGAL PROCEEDINGS -------------------------- None Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Operating Officer and Principal Financial and Accounting Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic SEC filings is recorded, processed and reported within the time periods specific in the SEC's rules and forms. Based upon that evaluation, the Chief Operating Officer and Principal Financial and Accounting Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in its periodic SEC filings. Changes In Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (a) List of Exhibits 99.1* Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed Herewith (b) Reports on Form 8-K None SIGNATURES ---------- 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) /s/J.F. Bodanza -------------------------- J.F. Bodanza, Senior Vice President Finance, Accounting and Regulatory Affairs (Principal Financial and Accounting Officer) Dated: November 14, 2002 Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange Act of 1934 I, Nickolas Stavropoulos, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Colonial Gas Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/Nickolas Stavropoulos ------------------------ Nickolas Stavropoulos President and Chief Operating Officer Certification Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange Act of 1934 I, Joseph F. Bodanza, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Colonial Gas Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Joseph F. Bodanza --------------------- Joseph F. Bodanza Senior Vice President, Finance, Accounting and Regulatory Affairs

COLONIAL GAS CO 10-Q