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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 2-23416
BOSTON GAS COMPANY
D/B/A KEYSPAN ENERGY DELIVERY NEW ENGLAND
-----------------------------------------
(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 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:
BOSTON GAS COMPANY
- ------------------
Statements of Operations
- ------------------------
(Unaudited)
(In Thousands)
For the For the
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
OPERATING REVENUES $64,424 $ 84,462 $410,486 $633,525
Cost of gas sold 23,832 47,836 204,203 437,727
------ ------ ------- -------
Operating Margin 40,592 36,626 206,283 195,798
OPERATING EXPENSES:
Operations and maintenance 43,836 38,981 117,141 116,077
Depreciation and amortization 14,918 13,204 43,675 39,796
Amortization of goodwill - 4,839 - 14,518
Operating Taxes 4,014 5,734 14,229 18,249
----- ----- ------ ------
Total Operating Expenses 62,768 62,758 175,045 188,640
------ ------ ------- -------
OPERATING INCOME (LOSS) (22,176) (26,132) 31,238 7,158
OTHER INCOME (EXPENSE), NET (52) 335 315 629
--- --- --- ---
INCOME (LOSS) BEFORE INTEREST EXPENSE
AND INCOME TAXES (22,228) (25,797) 31,553 7,787
------- ------- ------ -----
INTEREST EXPENSE:
Long-term debt 4,192 4,208 12,439 12,626
Other, including Advance from KeySpan
and Utility Pool Borrowings 13,564 11,822 38,725 32,257
Less - Interest during construction (519) (213) (2,275) (403)
---- ---- ------ ----
Total Interest Expense 17,237 15,817 48,889 44,480
------ ------ ------ ------
INCOME TAXES:
Current (28,403) (14,461) (17,867) (7,749)
Deferred 12,380 (478) 10,024 (1,997)
------ ---- ------ ------
Total Income Taxes (Benefit) (16,023) (14,939) (7,843) (9,746)
------- ------- ------ ------
NET LOSS (23,442) (26,675) (9,493) (26,947)
Preferred Stock Dividends 250 274 750 822
--- --- --- ---
NET LOSS APPLICABLE TO COMMON STOCK $(23,692) $ (26,949) $ (10,243) $ (27,769)
======== ========= ========= =========
The accompanying notes are an integral part of these financial statements.
Boston Gas Company
Balance Sheets
(Unaudited)
(In Thousands)
September 30, December 31,
2002 2001
---- ----
ASSETS
Gas plant, at cost $ 1,075,949 $ 1,070,610
Construction work-in-progress 100,313 27,875
Less-Accumulated depreciation (460,762) (425,163)
-------- --------
715,500 673,322
------- -------
CURRENT ASSETS:
Cash and cash equivalents 1,379 3,104
Accounts receivable 61,667 95,393
Allowance for uncollectible accounts (9,317) (14,730)
Accounts receivable - affiliates - 8,851
Accrued utility revenue 6,721 50,693
Deferred gas costs 72,240 15,670
Gas in Storage, at average cost 77,203 79,544
Materials and supplies, at average cost 4,678 3,996
Prepaid expenses 773 377
--- ---
215,344 242,898
------- -------
OTHER ASSETS:
Goodwill, net of amortization 790,285 790,285
Regulatory asset - deferred postretirement benefits cost 43,310 42,585
Regulatory asset - deferred environmental 34,051 35,096
Deferred charges and other assets 17,465 21,165
------ ------
885,111 889,131
------- -------
TOTAL ASSETS $ 1,815,955 $ 1,805,351
=========== ===========
The accompanying notes are an integral part of these financial statements.
Boston Gas Company
Balance Sheets
(Unaudited)
(In Thousands)
September 30, December 31,
2002 2001
---- ----
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common stockholder's investment -
Common stock, $100 par value,
514,184 shares authorized and outstanding $ 51,418 $ 51,418
Amounts in excess of par value 410,575 360,575
Retained earnings (29,612) (19,368)
Accumulated other comprehensive income (450) (692)
---- ----
Total Common Stockholder's Investment 431,931 391,933
Cumulative preferred stock, $1 par value,
(liquidation preference, $25 per share)
Authorized shares-1,200,000;
Outstanding shares-562,700 and 622,700 at
September 30, 2002 and December 31, 2001 13,834 15,289
Long-term obligations, less current portion 222,563 223,403
------- -------
Total Capitalization 668,328 630,625
Advance from KeySpan 650,000 650,000
------- -------
Total Capitalization and Advance from KeySpan 1,318,328 1,280,625
--------- ---------
CURRENT LIABILITIES:
Current portion of long-term obligations 840 586
Note payable utility money pool 132,759 147,350
Note payable utility money pool-gas inventory financing 75,086 85,401
Accounts payable 37,686 99,608
Accounts payable-affiliates 50,979 -
Accrued taxes 6,386 5,740
Accrued income taxes (6,306) (2,432)
Accrued interest 9,594 11,377
Customer deposits 1,291 1,884
Other current liabilities 1,112 157
----- ---
309,427 349,671
------- -------
OTHER LIABILITIES:
Deferred income taxes 85,872 73,609
Unamortized investment tax credits 1,925 2,556
Postretirement benefits obligation 49,912 50,901
Environmental liability 30,311 31,878
Other 20,180 16,111
------ ------
188,200 175,055
------- -------
TOTAL CAPITALIZATION AND LIABILITIES $1,815,955 $1,805,351
========== ==========
The accompanying notes are an integral part of these financial statements.
Boston Gas Company
Statements of Cash Flows
(Unaudited)
(In Thousands)
For The Nine Months Ended
-------------------------
September 30, September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss $ (9,493) $ (26,947)
Adjustments to reconcile net loss to
cash provided by (used in) operating activities:
Depreciation and amortization 43,675 54,314
Deferred taxes 10,024 (1,997)
Other changes in assets and liabilities:
Accounts receivable 28,313 23,685
Accrued utility revenue 43,972 61,202
Accounts receivable/payable-affiliates 59,830 (15,991)
Deferred gas costs (56,570) 35,064
Inventories 1,659 (19,819)
Accounts payable (61,922) (22,627)
Accrued interest (1,783) 38,294
Accrued taxes (3,228) (12,760)
Other 1,785 15,941
----- ------
Cash provided by operating activities 56,262 128,359
------ -------
Cash flows from investing activities:
Capital expenditures (80,830) (72,348)
------- -------
Cash used for investing activities (80,830) (72,348)
------- -------
Cash flows from financing activities:
Changes in advance from KeySpan 50,000
Capital Contribution from KNE LLC 50,000 -
Changes in notes payable - utility money pool (14,591) (49,246)
Changes in gas inventory financing - utility money pool (10,315) (6,279)
Redemption of preferred stock (1,500) (1,458)
Dividends paid on common and preferred stock (751) (50,822)
---- -------
Cash provided (used) for financing activities 22,843 (57,805)
------ -------
Decrease in cash and cash equivalents (1,725) (1,794)
Cash and cash equivalents at beginning of period 3,104 3,916
----- -----
Cash and cash equivalents at end of period $ 1,379 $ 2,122
========= ========
The accompanying notes are an integral part of these financial statements.
BOSTON GAS COMPANY
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
SEPTEMBER 30, 2002
------------------
1. Accounting Policies and Other Information
-----------------------------------------
Boston 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 Boston and 73
other communities in eastern and central Massachusetts. 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
perod 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 2001 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 test 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 and
was not recorded in 2002. For the three and nine months ended
September 30, 2001, goodwill amortization was $4.8 and $14.5 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 thousands of dollars)
-------------------------------------- ------------------ ------------------- ------------------ --------------------
Three Months Three Months Nine months Nine months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
-------------------------------------- ------------------ ------------------- ------------------ --------------------
Net loss applicable to
common stock $(23,692) $(26,949) $ (10,243) $ (27,769)
Add back: goodwill
amortization - 4,839 - 14,518
-------------------------------------- ----------------- ------------------- ------------------- -------------------
Adjusted net loss $(23,692) $(22,110) $ (10,243) $(13,251)
-------------------------------------- ----------------- ------------------- ------------------- -------------------
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 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") operations,
including former operating plants, gas holder locations and satellite
sites. The Company may have or share responsibility under applicable
environmental laws for the remediation of 19 such sites. A subsidiary
of New England Electric System has assumed responsibility for
remediating 11 of these sites, subject to a limited contribution from
the Company. In addition, the Company is aware of 31 other former MGP
related sites within its service territory. At this time, there is
substantial uncertainty as to whether the Company has or shares
responsibility for remediating any of these sites.
At September 30, 2002, the Company estimates the remaining cost of its
MGP-related environmental cleanup activities to be $30.3 million,
which amount has been accrued by the Company as a reasonable estimate
of probable cost for known sites. This amount is reflected on the
balance sheet as an environmental liability. Expenditures incurred to
date with respect to these MGP-related activities total $16.2 million.
By a rate order issued on May 25, 1990, the Massachusetts Department
of Telecommunications and Energy (the "Department") approved the
recovery of all prudently incurred environmental response costs
associated with former MGP related sites over separate, seven-year
amortization periods, without a return on the unamortized balance. The
Company has recognized a regulatory asset of $34.0 million,
representing the expected rate recovery of environmental remediation
costs.
4. Seasonal Aspect
---------------
The gas distribution business is influenced by seasonal weather
conditions. Annual revenues are principally realized during the
heating season (November through April) 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
----------
The Company is regulated as to rates, accounting and other matters by
the Department. The financial statements reflect the ratemaking
policies and orders of these regulators and are subject to the
provisions of SFAS 71, "Accounting for the Effects of Certain Types of
Regulation." This statement recognizes the actions of regulators,
through the ratemaking process, to create future economic benefits and
obligations affecting rate-regulated companies. Regulatory assets have
been established that represent probable future revenue to the Company
associated with certain costs that will be recovered through the rate
making process. Regulatory liabilities represent probable future
reductions in revenues associated with the amounts that are due to be
credited to customers through the rate-making process.
The Company's rates for local transportation service had been governed
by a five-year performance-based rate plan (the "Plan") approved by
the Department's 1996 order in D.P.U. 96-50. The Plan expired on
October 31, 2002. During the second quarter of 2002, the Company filed
with the Department a request to extend the Plan for one year. In
September 2002, the Department denied this request. However, the
distribution rates established under this Plan continue to be
effective.
The Department's Order in D.P.U. 96-50 set a productivity factor (a
reduction to rates) at 1.5% and expanded the service quality penalty
beyond the $1 million proposed by the Company. The Company appealed
D.P.U. 96-50 and on January 16, 2001, the Department limited the
maximum service quality adjustment to $1 million and adjusted the
productivity factor to 1.0%, which included a 0.5% accumulated
inefficiencies factor. The Company appealed the imposition of the 0.5%
accumulated inefficiencies factor, and on March 7, 2002, the Court
ruled in favor of the Company and eliminated this factor, thereby
reducing the productivity factor to 0.5%.
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 Company's
failure to meet the Department's service quality standards is subject
to a maximum penalty equivalent to 2% of its distribution service
revenues. Each measurement period will be a calendar year. The first
measurement period began on January 1, 2002.
7. Derivatives
-----------
The utility tariff charged to customers for gas does not contain a
weather normalization adjustment. As a result, fluctuations from
normal weather may have a significant positive or negative effect on
the results of operations. To mitigate the effect of fluctuations from
normal weather on its financial position and cash flows, the Company
entered into weather collars during the quarter ended September 30,
2002. These derivatives will hedge a significant portion of expected
gas sales during the November 2002 - April 2003 winter season. The
collars have been established with a ceiling that reflects 1% colder
than normal weather and a floor that reflects 7% warmer than normal
weather. The Company will be required to make payments to its
counter-parties when actual weather is 1% or more colder than normal
based upon the 1975-1995 twenty year average. In the event that
weather is 7% or more warmer than normal, the counter-parties will be
required to make payment to the Company. These derivatives will be
accounted for by applying the "intrinsic value method" and are outside
the scope of SFAS 133.
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 $0.9
million. Since these contracts are for the purchase of natural gas
sold to firm gas sales customers, the accounting for these contracts
is subject to SFAS 71. Therefore, changes in the market value of these
contracts are recorded as a regulatory asset or regulatory liability
on the Balance Sheet.
8. Workforce Reduction Program
---------------------------
As a result of the acquisition of the Company by KeySpan, the Company
implemented a severance program in an effort to reduce its workforce.
In 2000, the Company recorded a liability of $6 million associated
with this severance program. During the year ended December 31, 2001,
the Company paid $1.3 million for this program and reduced this
liability by $3.3 million as a result of lower than anticipated costs
per employee. This severance program is targeted to reduce the
workforce by 80 employees and will continue through 2002. For the nine
months ended September 30, 2002, the Company has made additional
payments of $0.4 million under this program leaving a remaining
liability of approximately $1.0 million.
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 Boston. 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
The net loss applicable to common stock for the nine months ended September 30,
2002 was $10.2 million compared to a net loss of $27.8 million in the prior
year. The improvement of $17.6 million, or 63%, over the corresponding period in
the prior year is due primarily to an increase in operating margin and the
discontinuance of goodwill amortization offset, in part, by higher interest
expense and income taxes.
Operating revenues for the nine-month period ended September 30, 2002 declined
$223.0 million, or 35%, from 2001. The decrease was due to a decline of $233
million, or 53%, in the cost of gas sold to customers, as a result of a 13%
decrease in throughput and a 44% decline in the average commodity price of gas.
The decline in throughput was primarily due to significantly warmer weather
(13%) versus the prior year.
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 increased $10.5 million, or 5.4%, from the nine month
period ended September 30, 2001. Primarily contributing to the improvement was
an increase of $10.5 million in sales due to customer growth, a base rate
increase of $3.4 million, effective November 1, 2001, associated with the
Company's performance-based rate plan (see the Company's 2001 Form 10-K) and an
additional benefit of $5.6 million attributable to a favorable court decision
which resulted in the elimination of the "accumulated inefficiencies factor"
(See Note 6 to the Financial Statements "Regulation"). Other gas margins
associated with sales to non-core customers and rate incentives increased $4.1
million. These benefits to operating margin were partially offset by a reduction
of $13.1 million as a result of lower gas throughput due to the warmer weather.
Total operating expenses, excluding goodwill amortization, were consistent with
the prior year. Operations and maintenance expense increased slightly (0.9%)
over the prior year, primarily due to increased pension and other employee
benefit costs recorded in the third quarter. In addition, included in 2002
operations and maintenance expense, are allocated payroll taxes associated with
services provided by an affiliated company, whereas in 2001, these services were
provided by Company employees and the related taxes were charged to operating
taxes. These increases were offset, in part, by cost saving synergies realized
during the year resulting from prior initiatives as well as lower bad debt
expense due to the lower level of customer receivables.
Depreciation expense increased as a result of continued investments in the
distribution infrastructure. Operating taxes decreased primarily due to employer
taxes, as discussed above and a decline in property taxes. In accordance with
SFAS 142, as of January 1, 2002, the Company is no longer amortizing goodwill.
For the nine months ended September 30, 2001, amortization of goodwill was $14.5
million.
For the nine-month period ended September 30, 2002, interest expense on long
term debt is comparable to the prior year. For the nine-month period ended
September 30, 2002, other interest expense increased $6.5 million, or 20%,
versus 2001. This increase resulted from nine months of interest expense in 2002
versus three months of interest expense in 2001 on a $50 million Advance from
KeySpan made on June 30, 2001 and the reduction in interest income associated
with carrying charges on lower average deferred gas cost balances for the nine
month period ended September 30, 2002 versus the prior year. For the nine month
period ended September 30, 2002, interest capitalized for construction increased
$1.8 million over the prior year due to the significant increase in construction
work-in-progress over the prior year.
Income tax benefit for the nine-month period ended September 30, 2002 increased
approximately $1.9 million, or 20% from 2001. The decreased benefit is primarily
attributable to lower pre-tax losses before goodwill amortization expense.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2002, the Company received a capital contribution of $50.0 million
from KeySpan New England LLC. The proceeds were used to pay down borrowings from
the utility money pool.
On September 1, 2002, the Company made its required 5% $1.5 million annual
sinking fund payment on its 6.42% Cumulative Preferred Stock.
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 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, preferred dividend
payments and normal debt repayments.
The Company expects capital expenditures for 2002 to be approximately $113
million. Actual capital expenditures for the nine-month period ended September
30, 2002 were $80.8 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 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.
Boston 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 Boston 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 Boston 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