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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
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 2-1647
COMMONWEALTH GAS COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1989250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 1, 1994
Common Stock, $25 par value 2,857,000 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
March 31, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $325 722 $323 607
Less - Accumulated depreciation 81 372 77 155
244 350 246 452
Add - Construction work in progress 2 190 400
246 540 246 852
CURRENT ASSETS
Cash 2 304 1 297
Accounts receivable 67 179 33 239
Unbilled revenues 22 649 29 068
Inventories, at average cost 12 404 27 789
Prepaid taxes -
Property 914 2 629
Income - 1 812
Other 807 992
106 257 96 826
DEFERRED CHARGES
Order 636 transition costs 21 439 21 938
Other 12 616 11 067
34 055 33 005
$386 852 $376 683
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1994 1993
(Dollars in Thousands)
CAPITALIZATION
Common Equity -
Common stock, $25 par value -
Authorized and outstanding -
2,857,000 shares, wholly-owned by
Commonwealth Energy System (Parent) $ 71 425 $ 71 425
Amounts paid in excess of par value 27 739 27 739
Retained earnings 19 285 7 840
118 449 107 004
Long-term debt, less current sinking
fund requirements 95 400 95 400
213 849 202 404
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 7 725 40 975
Advances from affiliates 5 610 2 835
13 335 43 810
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliated companies 1 284 1 811
Other 33 274 32 944
Refundable gas costs 33 719 13 253
Accrued taxes -
Income 6 992 -
Local property and other 2 699 2 940
Other 7 383 6 661
89 001 61 259
102 336 105 069
DEFERRED CREDITS
Accumulated deferred income taxes 31 348 30 176
Unamortized investment tax credits and other 27 546 25 901
Order 636 transition costs 11 773 13 133
70 667 69 210
$386 852 $376 683
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
GAS OPERATING REVENUES $135 558 $120 892
OPERATING EXPENSES
Cost of gas sold 73 824 62 373
Other operation and maintenance 23 539 21 676
Depreciation 4 081 3 700
Taxes -
Income 11 197 10 623
Local property 2 110 2 024
Payroll and other 960 916
115 711 101 312
OPERATING INCOME 19 847 19 580
OTHER INCOME 156 55
INCOME BEFORE INTEREST CHARGES 20 003 19 635
INTEREST CHARGES
Long-term debt 2 129 1 587
Other interest charges 435 671
Allowance for borrowed funds
used during construction (6) (5)
2 558 2 253
NET INCOME 17 445 17 382
RETAINED EARNINGS -
Beginning of period 7 840 6 994
Dividends on common stock (6 000) (5 224)
RETAINED EARNINGS -
End of period $ 19 285 $ 19 152
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 17 445 $ 17 382
Effects of non-cash items -
Depreciation and amortization 5 696 4 454
Deferred income taxes and investment
tax credits, net 100 372
Change in working capital, exclusive of cash
and interim financing 19 318 3 240
All other operating items (1 002) (419)
Net cash provided by operating activities 41 557 25 029
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (4 069) (3 302)
Allowance for borrowed funds used
during construction (6) (5)
Net cash used for investing activities (4 075) (3 307)
FINANCING ACTIVITIES
Payment of dividends (6 000) (5 224)
Payment of short-term borrowings (33 250) (17 725)
Advances from affiliates 2 775 2 215
Net cash used for financing activities (36 475) (20 734)
Net increase in cash 1 007 988
Cash at beginning of period 1 297 10
Cash at end of period $ 2 304 $ 998
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 1 810 $ 2 219
Income taxes $ 1 333 $ 2 283
See accompanying notes.
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COMMONWEALTH GAS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
Commonwealth Gas Company (the Company) is a wholly-owned subsidiary
of Commonwealth Energy System. The parent company is referred to in this
report as the "System" and together with its subsidiaries is collectively
referred to as "the system."
The Company's significant accounting policies are described in Note
1 of Notes to Financial Statements included in its 1993 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
policies but considers each interim period as an integral part of an
annual period and makes allocations of certain expenses to interim
periods based upon estimates of revenue from firm sales for the year.
The Company has established various regulatory assets in cases where
the DPU has permitted, or is expected to permit, recovery of specific
costs over time. At March 31, 1994, principal regulatory assets included
in deferred charges were $21.4 million for transition costs associated
with Federal Energy Regulatory Commission (FERC) Order No. 636 as further
discussed in Note 2 and $3.9 million for postretirement benefits costs.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Principal items of expense which are allocated other than on
the basis of passage of time are depreciation and property taxes. These
expenses are recorded for interim reporting purposes based upon projected
gas revenue. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended March 31,
1994 and 1993 reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
amounts are reclassified from time to time to conform with the presenta-
tion used in the current period's financial statements.
The results for interim periods are not necessarily indicative of
results for the entire year because of variations in gas consumption due
to the heating season and also because of the Company's seasonal rate
structure.
(2) Commitments
(a) Construction Program
The Company is engaged in a continuous construction program
presently estimated at $112.4 million for the five-year period 1994
through 1998. Of that amount, $21.9 million is estimated for 1994. As
of March 31, 1994, the Company's actual construction expenditures
amounted to approximately $4.1 million, including an allowance for funds
used during construction. The Company expects to finance these
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COMMONWEALTH GAS COMPANY
expenditures on an interim basis with internally-generated funds and
short-term borrowings which are ultimately expected to be repaid with the
proceeds from the issuance of long-term debt and/or equity securities.
The program is subject to periodic review and revision because of
factors such as changes in business conditions, rates of growth, effects
of inflation, equipment delivery schedules, licensing delays, availabili-
ty and cost of capital and environmental regulations.
(b) FERC Order No. 636
On April 8, 1992, the FERC issued Order No. 636 (Order 636),
requiring interstate pipelines to unbundle (separate) existing gas sales
contracts into separate components (gas sales, transportation and storage
services). Order 636 provides mechanisms that will allow customers such
as the Company to reduce the level of firm services from pipelines and
permits the "brokering" of excess capacity on a temporary or permanent
basis. Order 636 also requires pipelines to provide transportation
services which allow customers to receive the same level of service they
had with bundled contracts. Pipelines were required to be operating
under Order 636 by November 1, 1993.
As a result of implementing Order 636, each pipeline company is
allowed to collect certain "transition costs" from their customers. The
Company has been billed a total of approximately $18.2 million from
Tennessee Gas Pipeline Company, Algonquin Gas Transmission Company and
Texas Eastern Transmission Company through March 31, 1994. It is
anticipated that as much as $45 million in transition costs could be
sought by these suppliers through a series of FERC filings over the 12 to
24 month period that began on June 1, 1993. The largest element of the
aforementioned transition costs results from the pipelines' need to buy
out gas supply contracts entered into prior to Order 636. The total
amount of such costs ultimately billed to the Company will vary depending
on the success of the pipelines in negotiating settlements with their
former suppliers, and final review by the FERC. The Company is actively
reviewing the prudency of transition costs billed in order to minimize
costs to its customers. The Company has recorded its estimated liability
based on amounts incurred by the respective pipelines as of March 31,
1994.
As of October 29, 1993, the Company received preliminary DPU
authorization to recover these costs, with carrying charges, through the
cost of gas adjustment (CGA) over a four-year period that began in
November 1993. As a result, a regulatory asset totaling $21.4 million is
reflected in deferred charges as of March 31, 1994. In addition, a
related liability of $11.8 million is reflected in deferred credits.
Also, approximately $7.9 million of the amount paid to the pipeline
companies relates to gas inventory costs being allocated new storage
services under Order 636. The Company will recover these inventory costs
through the CGA.
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COMMONWEALTH GAS COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying condensed statements of income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items included
in the condensed statements of income for the three months ended March 31,
1994 and 1993 is shown below:
Three Months
Ended March 31,
1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $14 666 12.1%
Operating Expenses -
Cost of gas sold 11 451 18.4
Other operation and maintenance 1 863 8.6
Depreciation 381 10.3
Taxes -
Federal and state income 574 5.4
Local property and other 130 4.4
14 399 14.2
Operating Income 267 1.4
Other Income 101 183.6
Income Before Interest Charges 368 1.9
Interest Charges 305 13.5
Net Income $ 63 0.4
Firm Unit Sales BBTU Increase 969 5.4
The following is a summary of unit sales for the periods indicated:
Three Months Ended Unit Sales - In Billions of British Thermal Units (BBTU)
Total Firm Interruptible
March 31, 1994 19 113 19 082 31
March 31, 1993 18 184 18 113 71
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COMMONWEALTH GAS COMPANY
Operating Revenues and Cost of Gas Sold
For the first three months of 1994, operating revenues increased $14.7
million or 12.1% due primarily to an increase in the cost of gas sold of $11.5
million, higher unit sales of 5.1% (reflecting record sendout in January) and
a higher level of conservation and load management (C&LM) costs of $1 million.
The Company has received approval from the DPU to recover in revenues current
costs associated with C&LM programs on a dollar-for-dollar basis through the
operation of a Conservation Charge decimal. To the extent that these expens-
es increase or decrease from period to period based on customer participation
a corresponding change will occur in revenues.
The cost of gas sold averaged $3.85 per MMBTU in the current quarter
compared to $3.43 per MMBTU for the first quarter of 1993. The higher cost of
gas is mainly attributable to the transition costs related to the implement-
ation of FERC Order 636.
Firm unit sales increased 5.4% due to improved sales in all sectors
resulting from the colder than normal weather conditions experienced through-
out the region during the quarter. The Company established all-time highs for
daily gas sendout on four different occasions in January, setting a new peak
day sendout on January 19 of 364,799 MMBTU. Prior to this period, the
previous all-time peak was 336,998 MMBTU set in January 1988. Although
interruptible sales decreased significantly during the first quarter of 1994,
fluctuations in the level of interruptible sales have little, if any, impact
on net income.
Operating Expenses
For the first quarter of 1994, other operation and maintenance expenses
increased $1.9 million or 8.6% due primarily to higher C&LM costs ($1 mil-
lion). Other significant items contributing to the increase were higher
distribution expenses mainly due to leak repair activities ($353,000), a
provision for potential environmental clean-up costs ($305,000), an increased
provision for bad debts due to higher unit sales ($176,000), higher pension
costs ($160,000) and costs associated with a new Gas Administration and Supply
System ($108,000). These increases were offset, in part, by a decline in the
cost of services rendered by affiliate COM/Energy Services Company due to a
second quarter 1993 work force reduction as well as lower postretirement
benefit costs. The change in federal and state income taxes was attributable
to a slightly higher level of pretax income as well as an increase in the
federal tax rate to 35%. The 4.4% increase in local property taxes was due to
higher tax rates and assessments in the Company's service territory.
Depreciation increased by 10.3% due to higher levels of depreciable plant-in-
service.
Other Income and Interest Charges
Other income increased during the first three months of 1994 due primarily
to interest income recorded in the current period related to a Massachusetts
sales tax abatement as well as carrying costs associated with Order 636
transition costs. The impact of these items was partially offset by lower
interest income on deferred gas costs.
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COMMONWEALTH GAS COMPANY
Total interest charges increased $305,000 or 13.5% due to the issuance of
$35 million in new long-term debt in December 1993 and, to a lesser extent,
interest to be refunded to the Company's customers in connection with the
aforementioned sales tax abatement. The impact of these items was offset
somewhat by a decrease in other interest charges reflecting a lower average
level of short-term borrowings that resulted from issuing the new long-term
debt.
Environmental Matters
The Company is participating in the assessment of a number of former
manufactured gas plant sites to determine if and to what extent such sites
have been contaminated and whether the Company may be responsible for remedial
actions.
The costs associated with the clean-up of these sites are recoverable in
rates through the cost of gas adjustment clause pursuant to a 1990 DPU order
that provides for recovery of such expenditures over a seven-year amortization
period without carrying costs. The Company has recorded an estimated $2.3
million liability that reflects its best estimate (based on current
information) of the costs to be incurred in connection with the various
activities to be undertaken at these sites. The Company has also recorded a
regulatory asset in anticipation of recovery of these costs in rates. The
Company is unable to predict the total cost to ultimately resolve these
matters due to significant uncertainty as to the actual site conditions and
extent of any associated remediation activities and the assignment of
responsibility. However, it is expected that all such costs will continue to
be recovered in rates as described above.
The Company is also involved in certain other known or potentially
contaminated sites with costs which may not be recoverable in rates. The
Company has recorded an estimated liability (and a charge to operations) of
$300,000 to cover the costs associated with assessment and remediation
activities. These estimates will be adjusted as further investigation and
assignment of responsibility occurs. As noted above, the Company is unable to
predict at this time the ultimate cost to resolve these matters due to the
uncertainties inherent in the site investigation and remediation process.
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COMMONWEALTH GAS COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4. Instruments defining the rights of security holders,
including indentures.
Filed herewith:
4.4.19 Eighteenth Supplemental Indenture dated December 1, 1993
to Indenture of Trust and First Mortgage Dated as of
February 1, 1949 (Filed herewith as Exhibit 1).
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 1994.
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COMMONWEALTH GAS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH GAS COMPANY
(Registrant)
Principal Financial Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Principal Accounting Officer:
JOHN A. WHALEN
John A. Whalen,
Comptroller
Date: May 13, 1994