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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 June 30, 2003
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission File Number 2-23416
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BOSTON GAS COMPANY
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.)
52 SECOND AVENUE, WALTHAM, MASSACHUSETTS 02453
----------------------------------------------
(Address of principal executive offices)
(Zip Code)
781-466-5000
------------
(Registrant's telephone number, including area code)
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__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes__ No X
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
- ---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
(In Thousands of Dollars) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Revenues $ 161,718 $ 101,771 $ 564,224 $ 346,062
Cost of gas sold 103,637 46,885 390,689 180,371
--------------------- -------------------- -------------------- ---------------------
Operating Margin 58,081 54,886 173,535 165,691
Operating Expenses:
Operations and maintenance 39,724 39,784 69,932 73,316
Depreciation and amortization 17,880 14,378 32,556 28,756
Operating taxes 4,591 4,754 10,465 10,214
--------------------- -------------------- -------------------- ---------------------
Total Operating Expenses 62,195 58,916 112,953 112,286
--------------------- -------------------- -------------------- ---------------------
Operating Income (4,114) (4,030) 60,582 53,405
--------------------- -------------------- -------------------- ---------------------
Other Income 224 64 136 367
Interest Expense:
Long-term debt 4,192 4,050 8,384 8,248
Other 11,976 11,262 21,249 23,393
--------------------- -------------------- -------------------- ---------------------
Total Interest Expense 16,168 15,312 29,633 31,641
--------------------- -------------------- -------------------- ---------------------
Income Before Income Taxes (20,058) (19,278) 31,085 22,131
Income Taxes
Current (6,404) (2,102) 10,181 10,536
Deferred (1,807) (5,611) 1,133 (2,354)
--------------------- -------------------- -------------------- ---------------------
Total Income Tax Expense (Benefit) (8,211) (7,713) 11,314 8,182
--------------------- -------------------- -------------------- ---------------------
Net (Loss)Income (11,847) (11,565) 19,771 13,949
Preferred stock dividends 226 249 452 499
--------------------- -------------------- -------------------- ---------------------
Net Income (Loss) applicable for Common
Stock $ (12,073) $ (11,814) $ 19,319 $ 13,450
===================== ==================== ==================== =====================
Other Comprehensive Income - - - -
--------------------- -------------------- -------------------- ---------------------
Total Comprehensive Income $ (12,073) $ (11,814) $ 19,319 $ 13,450
===================== ==================== ==================== =====================
The accompanying notes are an integral part of these financial statements.
2
BOSTON GAS COMPANY
BALANCE SHEETS
UNAUDITED
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(In Thousands of Dollars) 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Property:
Gas plant, at cost $ 1,200,383 $ 1,194,842
Construction in progress 50,782 10,415
Less-Accumulated depreciation (498,771) (470,556)
---------------------------- -----------------------------
752,394 734,701
---------------------------- -----------------------------
Current assets:
Cash and temporary cash investments 1,785 2,168
Accounts receivable 157,916 123,681
Allowance for uncollectible accounts (22,151) (14,666)
Accounts receivable-affiliates 14,095 4,195
Accrued utility revenue 16,236 66,619
Deferred gas costs 83,481 68,647
Natural Gas and other inventories, at average cost 64,091 74,549
Material and supplies, at average cost 4,688 4,754
Other 2,109 7,118
---------------------------- -----------------------------
322,250 337,065
---------------------------- -----------------------------
Other Assets:
Goodwill 790,285 790,285
Deferred postretirement costs 54,303 44,360
Deferred charges and other assets 93,577 96,378
---------------------------- -----------------------------
938,165 931,023
---------------------------- -----------------------------
Total Assets $ 2,012,809 $ 2,002,789
============================ =============================
The accompanying notes are an integral part of these financial statements.
3
BOSTON GAS COMPANY
BALANCE SHEETS
UNAUDITED
- --------------------------------------------------------------------------------------------------------------------------------
June 30, December 31,
(In Thousands of Dollars) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND CAPITALIZATION
Capitalization
Common stock, $100 par value-authorized and outstanding
514,184 shares $ 51,418 $ 51,418
Amounts in excess in par value 560,575 560,575
Accumulated deficit (3,498) (22,817)
Accumulated other comprehensive loss (9,823) (9,823)
---------------------------- ------------------------
Total common stockholder's investment 598,672 579,353
Cumulative Preferred stock, $1 par value, liquidation
preference $25 per share-562,700 shares outstanding
at June 30, 2003 and December 31, 2002, respectively 13,852 13,840
Long-term obligations, less current portion 222,563 222,563
---------------------------- ------------------------
Total Capitalization 835,087 815,756
---------------------------- ------------------------
Advance from KeySpan 650,000 650,000
---------------------------- ------------------------
Total Capitalization and Advance from KeySpan 1,485,087 1,465,756
---------------------------- ------------------------
Commitments and Contingencies(See Note 7)
Current Liabilities
Current portion of long-term obligations 840 840
Notes payable utility pool 145,569 67,174
Notes payable utility pool - gas inventory financing 51,203 83,907
Accounts payable 52,058 67,108
Accounts payable - affiliates 27,005 64,272
Accrued taxes 2,155 4,495
Accrued interest 4,361 4,334
Other 1,906 4,843
---------------------------- ------------------------
285,097 296,973
---------------------------- ------------------------
Deferred Credits and Other Liabilities
Deferred income tax 141,134 141,408
Unamortized investment tax credits 1,293 1,714
Postretirement benefits obligation 54,297 53,747
Environmental liability 28,418 28,831
Other 17,483 14,360
---------------------------- ------------------------
242,625 240,060
---------------------------- ------------------------
Total Capitalization and Liabilities $ 2,012,809 $ 2,002,789
============================ ========================
The accompanying notes are an integral part of these financial statements.
4
BOSTON GAS COMPANY
STATEMENTS OF CASH FLOWS
UNAUDITED
- -----------------------------------------------------------------------------------------------------------------------------------
For the Six Months Ended June 30,
(In Thousands of Dollars) 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 19,771 $ 13,949
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 32,556 28,756
Deferred income tax 1,133 (2,354)
Changes in assets and liabilities
Accounts receivable and accrued utility revenue 23,633 45,509
Natural Gas and other inventories 10,524 14,571
Deferred gas costs (14,834) (26,923)
Accounts payable (15,050) (9,705)
Net affiliate receivable/payable (47,167) 41,306
Other (6,011) (12,368)
------------------------------ ---------------------------------
Net Cash Provided by Operating Activities 4,555 92,741
------------------------------ ---------------------------------
Investing Activities
Capital expenditures (50,177) (50,809)
------------------------------ ---------------------------------
Net Cash Used in Investing Activities (50,177) (50,809)
------------------------------ ---------------------------------
Financing Activities
Changes in notes payable - utility money pool 78,395 (71,233)
Changes in gas inventory financing - utility money pool (32,704) (23,127)
Capital contribution from KNE LLC - 50,000
Dividends paid on preferred stock (452) (499)
------------------------------ ---------------------------------
Net Cash Provided by (Used in) Financing Activities 45,239 (44,859)
------------------------------ ---------------------------------
Net Increase in Cash and Cash Equivalents $ (383) $ (2,927)
============================== =================================
Cash and Cash Equivalents at Beginning of Period 2,168 3,104
------------------------------ ---------------------------------
Cash and Cash Equivalents at End of Period $ 1,785 $ 177
============================== =================================
The accompanying notes are an integral part of these financial statements.
5
BOSTON GAS COMPANY
------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
UNAUDITED
---------
June 30, 2003
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1. Basis of Presentation and Other Information
-------------------------------------------
General
Boston Gas Company d/b/a KeySpan Energy Delivery New England (the
"Company", "we", "us" and "our") 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
("PUHCA") of 1935, as amended.
Basis of Presentation
The accounting records are maintained in accordance with the Uniform System
of Accounts prescribed by the Massachusetts Department of
Telecommunications and Energy (the "Department"). The accounting policies
of the Company conform to generally accepted accounting principles and
reflect the effects of the rate-making process in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 71, "Accounting for the
Effects of Certain Types of Regulation". This statement recognizes the
ability of regulators, through the ratemaking process, to create future
economic benefits and obligations affecting rate-regulated companies.
Accordingly, we record these future economic benefits and obligations as
regulatory assets and regulatory liabilities on the Balance Sheet,
respectively.
It is the Company's opinion that the accompanying financial statements
contain all adjustments necessary to present fairly its financial position
as of June 30, 2003, and the results of its operations for the three and
six months ended June 30, 2003 and June 30, 2002, as well as cash flows for
the six months ended June 30, 2003 and June 30, 2002. 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.
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.
6
1. Basis of Presentation and Other Information (Continued)
-------------------------------------------------------
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 2002 Annual Report filed on Form 10-K with the Securities and
Exchange Commission ("SEC"). The December 31, 2002 financial statement
information has been derived from the 2002 audited financial statements.
2. Accounting Policies
-------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
143, "Accounting for Asset Retirement Obligations." SFAS 143 requires an
entity to record a liability and corresponding asset representing the
present value of legal obligations associated with the retirement of
tangible, long-lived assets. SFAS 143 was effective for fiscal years
beginning after June 2002.
We have completed our assessment of SFAS 143. Our asset base is primarily
composed of storage, and distribution assets which we believe operate in
perpetuity and, therefore, have indeterminate cash flow estimates. A legal
obligation exists due to certain safety requirements at final abandonment.
In addition, a legal obligation may be construed to exist with respect to
our LNG storage tanks due to clean up responsibilities upon cessation of
use. Since that exposure is in perpetuity and cannot be measured, no
liability will be recorded. Our asset retirement obligation will be
re-evaluated annually.
The Company recovers certain asset retirement costs through rates charged
to customers as a portion of depreciation expense. When depreciable
properties are retired, the original cost plus cost of removal less
salvage, is charged to accumulated depreciation. As of June 30, 2003, we
had removal costs recovered in excess of removal costs incurred totaling
$202.5 million.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated
by the primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 is effective for all new variable interest entities created
or acquired after January 31, 2003. For variable interest entities created
or acquired prior to February 1, 2003, the provisions of FIN 46 must be
applied for the first interim or annual period beginning after June 15,
2003. At the present time, we do not have any arrangements with variable
interest entities.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain instruments embedded in other contracts and for hedging
activities under Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This Statement: (i) clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative; (ii) clarifies when a derivative contains a
financing component; (iii) amends the definition of an underlying; and (iv)
amends certain other existing pronouncements. At this time, the Company has
7
no outstanding derivative instruments and does not expect the
implementation of this Statement to have an impact on our results of
operations, financial condition or cash flows. Further, as discussed in
more detail in Note 8 "Derivatives", the Company, from time to time,
employs weather derivatives which are outside the scope of SFAS 133. We
account for these derivatives pursuant to EITF 99-2 "Accounting for Weather
Derivatives".
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify certain financial instruments
as a liability (or an asset in some circumstances) when there is an
obligation to redeem the issuer's shares and either requires or may require
satisfaction of the obligation by transferring assets, or satisfy the
obligation by issuing additional equity shares subject to certain criteria.
This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of
the first interim period beginning after June 15, 2003. It is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
Statement and still existing at the beginning of the interim period of
adoption.
The Company presently has redeemable preferred stock which would meet the
criteria for classification as a liability under this pronouncement.
However, the Company plans to redeem all of the outstanding shares of this
series of preferred stock in the third quarter of 2003. As a result
adoption of this Statement is not expected to have an impact on our results
of operations, financial condition or cash flows.
3. 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.
4. Gas Supply Contracts
--------------------
During the first quarter of 2003, we had a portfolio management contract
with Entergy-Koch, under which Entergy-Koch provided all of the city gate
gas supply requirements at market prices and managed certain upstream
capacity, underground storage and term supply contracts for the Company.
The agreement with Entergy-Koch expired on March 31, 2003 and was renewed
through March 31, 2004 with an option to renew through March 31, 2006.
In November 2002, the Company renewed its long-term capacity contracts with
Tennessee Gas Pipeline for the transportation of natural gas to the
Company's distribution territory.
8
5. Regulation
----------
The Company's gas rates for local distribution 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. However, the rates continue to be effective under this Plan. On April
16, 2003, we filed a base rate case and performance based-rate plan to be
effective in the fourth quarter of 2003. The filing requests an annual
revenue increase of approximately $62 million, a return on equity of 12.18%
and a performance based-rate plan term of five years. Proceedings with the
Department are presently ongoing. A final order is expected by October 31,
2003.
The Company is subject to deferral accounting requirements, as previously
ordered by the Department, for other postretirement benefit costs ("OPEB").
In addition, per Department approval dated January 28, 2003, we defer, and
record as either a regulatory asset or regulatory liability, the difference
between the level of pension expense ("pension") that is included in rates
charged to gas customers and the actuarial determined amounts. At June 30,
2003, a regulatory asset of $54.3 million, consisting of $46.1 million of
OPEB costs and $8.1 of pension costs, has been deferred and is included in
Deferred Postretirement Costs on the Balance Sheet.
6. Securities and Exchange Commission Regulation
---------------------------------------------
The Company, as a wholly owned subsidiary of KeySpan, is subject to the
jurisdiction of the SEC under PUHCA. The rules and regulations under PUHCA
generally limit the operations of a registered holding company to a single
integrated public utility system, plus additional energy-related
businesses. In addition, the principal regulatory provisions of PUHCA: (i)
regulate certain transactions among affiliates within a holding company
system including the payment of dividends by such subsidiaries to a holding
company; (ii) govern the issuance, acquisition and disposition of
securities and assets by a holding company and its subsidiaries; (iii)
limit the entry by registered holding companies and their subsidiaries into
businesses other than electric and/or gas utility businesses; and (iv)
require SEC approval for certain utility mergers and acquisitions.
As a result of an order issued by the SEC on November 8, 2000, in
connection with KeySpan's acquisition of KNE LLC and another affiliate,
EnergyNorth, Inc., and as amended on December 6, 2002 and February 14,
2003, we are committed through December 31, 2003 to have common equity of
at least 30% of total capitalization, including affiliated debt. At June
30, 2003, our common equity was 35.6% of total capitalization, including
affiliated debt.
7. Commitments and Contingencies
-----------------------------
Environmental
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 disposal sites.
We may have or share responsibility under applicable environmental laws for
the remediation of 19 such sites. A subsidiary of National Grid USA
(formerly New England Electric System) has assumed responsibility for
remediating 11 of these sites, subject to a limited contribution from the
Company. In addition, we are aware of 31 other former MGP related sites
within our service territory. The National Grid USA subsidiary has provided
9
full indemnification to the Company with respect to eight of the 31 sites.
At this time, there is substantial uncertainty as to whether we have or
share responsibility for remediating any of these other sites. However, no
notice of responsibility has been issued to us for these sites from any
governmental environmental authority.
The Company has estimated its potential share of the costs of investigating
and remediating the former MGP related sites and the non-MGP site in
accordance with SFAS No. 5, "Accounting for Contingencies," and the
American Institute of Certified Public Accountants Statement of Position
96-1, "Environmental Remediation Liabilities." The Company estimates the
remaining cost of its MGP-related environmental cleanup activities will be
$28.4 million, which amount has been accrued by us as a reasonable estimate
of probable cost for known sites. However, there can be no assurance that
actual costs will not vary considerably from these estimates. Factors that
may bear on actual costs differing from estimates include, without limit,
changes in regulatory standards, changes in remediation technologies and
practices and the type and extent of contaminants discovered at the sites.
Expenditures incurred to date with respect to these MGP-related activities
total $18.1 million.
By a rate order issued on May 25, 1990, 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 $36.1 million, representing the expected
rate recovery of environmental remediation costs. This amount is included
in Deferred Charges and Other Assets on the Balance Sheet.
Legal Matters
From time to time we are subject to various legal proceedings arising out
of the ordinary course of our business. We do not consider any of such
proceedings to be material to our business or likely to result in a
material adverse effect on our results of operations, financial condition
and cash flows.
8. Derivatives
-----------
The utility tariffs associated with the Company's operations currently do
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 our financial position and cash flows, we sold heating
degree-day call options and purchased heating-degree day put options for
the November 2002-March 2003 winter season.
Based on the terms of such contracts, we account for such instruments
pursuant to the requirements of EITF 99-2, "Accounting for Weather
Derivatives." In this regard, we account for such instruments using the
"intrinsic value method" as set forth in such guidance. During the first
quarter of 2003, weather was 10% colder than normal and, as a result, $11.9
million was recorded as a reduction to revenues.
As mentioned, derivative contracts are primarily used to manage exposure to
market risk arising from variations in weather. In the event of
nonperformance by a counterparty to a derivative contract, the desired
impact may not be achieved. The risk of counterparty nonperformance is
generally considered credit risk and is actively managed by assessing each
counterparty credit profile and negotiating appropriate levels of
collateral and credit support.
10
On April 1, 2002, we 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 our physical gas purchase commodity contracts, we
determined that certain contracts could no longer be exempted as normal
purchases from the requirements of SFAS 133. At June 30, 2003, the fair
value of these contracts was negligible. 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 deferred asset or deferred
liability on the Balance Sheet.
9. Related Party Transactions
--------------------------
Financing for the Company for working capital and gas inventory needs is
obtained through the Company's participation in a utility money pool. The
money pool is funded by commercial paper and operating funds of net lenders
to the pool and is administered by KeySpan Corporate Services LLC ("KCS"),
a subsidiary service company of KeySpan.
At June 30, 2003, we had outstanding borrowings of $145.6 million and $51.2
million for working capital and gas inventory, respectively. Interest
charged on outstanding borrowings is generally equal to KeySpan's short
term borrowing rate, plus a proportional share of the administrative costs
incurred in obtaining the required funds. All costs related to gas
inventory borrowings are recoverable from customers through the cost of gas
adjustment clause. The average interest rate for the six months ended June
30, 2003 was 2.79%.
As part of the acquisition by KeySpan in November 2000, the Company has
recorded $650 million in advances payable to KeySpan. Interest charges
equal interest incurred by KeySpan on debt borrowings issued by KeySpan.
The weighted-average interest rate on these borrowings is 7.78%. Issuance
expense is charged to the Company from KeySpan equal to the amortization of
actual issuance costs incurred by KeySpan on its debt borrowings. KeySpan
amortizes these costs over the life of the related KeySpan borrowings.
Interest expense incurred for the period ended June 30, 2003 and June 30,
2002 related to the working capital and gas inventory borrowings, as well
as the advances, were $27.8 and $28 million, respectively. These amounts
are included in Other Interest Expense (reported net of carrying charges on
deferred gas costs) on the Statement of Operations.
KCS also provides the Company with services, including executive and
administrative, corporate affairs, customer services, environmental
services, financial services (including accounting, auditing, risk
management, tax, treasury/finance), human resources, information
technology, legal, materials management and purchasing, and strategic
planning. KCS also purchases and/or develops and implements software and
purchases hardware used by the Company. The costs of these services are
charged to the Company via intercompany billings and settled on a monthly
basis. At June 30, 2003, the net affiliate payable associated with these
services was approximately $24.4 million. In addition, the Company has an
affiliate receivable associated with our portion of federal income taxes of
$29.2 million and an affiliate payable associated primarily with pension
funding and accrued interest of $28.0 million.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003
Net income applicable to common stock for the six months ended June 30,
2003 was $19.3 million compared to net income of $13.5 million in the prior
year. The improvement of $5.8 million, or 43%, over the corresponding
period of the prior year is due primarily to an increase in operating
margin as a result of extremely cold weather and customer growth.
Operating revenues for the six-month period ended June 30, 2003 increased
$218 million, or 63%, from 2002. The increase was a result of a 29%
increase in throughput and a 67% increase in the average commodity price of
gas. The increase in throughput was due to significantly colder weather
(30%) versus the prior year as well as customer additions and oil-to-gas
conversions.
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 six-months ended
June 30, 2003 increased $7.8 million, or 4.7%, from the six month period
ended June 30, 2002. Primarily contributing to the improvement was an
increase of $18.9 million due to the colder weather and $4.2 million due to
customer growth less attrition and conservation. These benefits to
operating margin were partially offset by an $11.9 million reduction to
revenues as a result of a weather derivative (See Note 8, "Derivatives")
and the absence of a $3.9 million favorable court decision recorded in the
first quarter of 2002(See the Company's 2002 Annual Report on Form 10-K,
Item 3 MD&A "Other Matters" for further explanation).
Total operating expenses were flat relative to the prior year. Lower
comparative allocated charges from KeySpan were offset, in part, by an
increase in uncollectible expense associated with an increase in revenues,
higher maintenance costs attributable to the colder weather and an increase
in depreciation expense as a result of higher property balances.
For the six months ended June 30, 2003, interest expense was $2.0 million
lower than the prior year due to a decline of $2.1 million, or 9.2%, in
Other Interest Expense. This decline is primarily due to lower interest
rates on short-term borrowings relative to the same period in the prior
year. This decline was offset by a decline in interest capitalized for
construction expenditures relative to the prior year.
Income tax expense for the six-month period ended June 30, 2003 increased
approximately $3.1 million, or 38% from 2002 primarily due to the increase
in pre-tax income.
12
LIQUIDITY AND CAPITAL RESOURCES
As discussed, the Company's revenues, earnings and cash flow are highly
seasonal in nature. 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 2003 capital expenditures, working capital
requirements, preferred dividend and redemption payments and normal debt
repayments.
The Company expects capital expenditures for 2003 to be approximately $100
million, including the costs of removal. Actual capital expenditures for
the six-month period ended June 30, 2003 were $50 million. Capital
expenditures are largely for system expansion associated with customer
growth and improvements to the distribution infrastructure.
The Company currently anticipates redeeming all of the 562,700 shares
outstanding of 6.421% non-voting Cumulative Preferred Stock during the
third quarter of 2003. These shares are currently redeemable at their
liquidation value of $25 per share plus accrued dividends. It is expected
that the redemption will be financed through the utility money pool.
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; our ability to successfully contract for natural gas
supplies required to meet the needs of our firm customers; available
sources and cost of fuel; implementation of new accounting standards;
retention of key personnel; 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; changes in political
conditions, acts of war or terrorism; changes in rates of return on overall
debt and equity markets that could have an adverse impact on the value of
pension assets; changes in accounting standards or GAAP which may require
adjustment to financial statements; 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.
13
Item 4. Controls and Procedures
The Company maintains "disclosure controls and procedures", as such term is
defined under Exchange Act Rule 13a-15(e), that are designed to ensure that
information required to be disclosed by the Company in the reports it files
or submits under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Operating Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
An evaluation of the effectiveness of the Company's disclosure controls and
procedures as of June 30, 2003 was conducted under the supervision and with
the participation of the Company's Chief Operating Officer and Chief
Financial Officer. Based on that evaluation, the Company's Chief Operating
Officer and Chief Financial Officer have concluded that the Company's
disclosure controls and procedures were adequate and designed to ensure
that material information relating to Boston Gas Company would be made
known to the Chief Operating Officer and Chief Financial Officer by others
within those entities, particularly during the periods when periodic
reports under the Exchange Act are being prepared. Furthermore, there has
been no change in the Company's internal control over financial reporting,
identified in connection with the evaluation of such control, that occurred
during the Company's last fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control
over financial reporting. Refer to the Certifications by the Company's
Chief Operating Officer and Chief Financial Officer filed as exhibits 31.1
and 31.2 to this report.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
31.1*Certification of the President and Chief Operating Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*Certification of the Senior Vice President and Chief Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1*Certification of the President and Chief Operating Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*Certification of the Senior Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
*filed herewith
(b) Reports on Form 8-K
None
15
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/ Joseph F. Bodanza
---------------------
J.F. Bodanza, Senior Vice President
and Chief Financial Officer
Dated: August 13, 2003
16