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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 June 30, 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 August 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
JUNE 30, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
June 30, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $330 630 $323 607
Less - Accumulated depreciation 82 548 77 155
248 082 246 452
Add - Construction work in progress 1 110 400
249 192 246 852
CURRENT ASSETS
Cash 1 392 1 297
Accounts receivable 39 952 33 239
Unbilled revenues 4 808 29 068
Inventories, at average cost 19 992 27 789
Prepaid taxes -
Property - 2 629
Income - 1 812
Other 927 992
67 071 96 826
DEFERRED CHARGES
Order 636 transition costs 20 821 21 938
Other 12 669 11 067
33 490 33 005
$349 753 $376 683
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
June 30, 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 9 476 7 840
108 640 107 004
Long-term debt, less current
sinking fund requirements 95 400 95 400
204 040 202 404
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 40 975
Advances from affiliates 1 975 2 835
1 975 43 810
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliated companies 1 577 1 811
Other 30 358 32 944
Refundable gas costs 27 965 13 253
Accrued taxes -
Income 4 840 -
Local property and other 828 2 940
Other 6 828 6 661
76 046 61 259
78 021 105 069
DEFERRED CREDITS
Accumulated deferred income taxes 31 692 30 176
Unamortized investment tax credits and other 27 112 25 901
Order 636 transition costs 8 888 13 133
67 692 69 210
$349 753 $376 683
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
Three Months Ended Six Months Ended
1994 1993 1994 1993
(Dollars in Thousands)
GAS OPERATING REVENUES $ 63 581 $ 54 294 $199 139 $175 186
OPERATING EXPENSES
Cost of gas sold 39 890 32 330 113 714 94 703
Other operation and maintenance 22 680 22 385 46 219 44 061
Depreciation 1 566 1 440 5 647 5 140
Taxes -
Income (2 024) (2 256) 9 173 8 367
Local property 937 874 3 047 2 898
Payroll and other 611 676 1 571 1 592
63 660 55 449 179 371 156 761
OPERATING INCOME (LOSS) (79) (1 155) 19 768 18 425
OTHER INCOME (EXPENSE) (48) 57 108 112
INCOME (LOSS) BEFORE INTEREST
CHARGES (127) (1 098) 19 876 18 537
INTEREST CHARGES
Long-term debt 2 129 1 587 4 258 3 174
Other interest charges 419 695 854 1 366
Allowance for borrowed funds
used during construction (8) (4) (14) (9)
2 540 2 278 5 098 4 531
NET INCOME (LOSS) (2 667) (3 376) 14 778 14 006
RETAINED EARNINGS -
Beginning of period 19 285 19 152 7 840 6 994
Dividends on common stock (7 142) (9 026) (13 142) (14 250)
RETAINED EARNINGS -
End of period $ 9 476 $ 6 750 $ 9 476 $ 6 750
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 14 778 $ 14 006
Effects of non-cash items -
Depreciation and amortization 8 214 6 324
Deferred income taxes and investment
tax credits, net (63) 1 529
Change in working capital, exclusive of cash
and interim financing 44 637 21 254
All other operating items (4 177) (4 856)
Net cash provided by operating activities 63 389 38 257
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (8 303) (7 627)
Allowance for borrowed funds used
during construction (14) (9)
Net cash used for investing activities (8 317) (7 636)
FINANCING ACTIVITIES
Payment of dividends (13 142) (14 250)
Payment of short-term borrowings (40 975) (14 275)
Payments to affiliates (860) (1 085)
Net cash used for financing activities (54 977) (29 610)
Net increase in cash 95 1 011
Cash at beginning of period 1 297 10
Cash at end of period $ 1 392 $ 1 021
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 4 893 $ 4 330
Income taxes $ 1 225 $ 4 770
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 collec-
tively 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 and
liabilities in cases where the Massachusetts Department of Public
Utilities (DPU) and/or the Federal Energy Regulatory Commission (FERC)
have permitted, or are expected to permit, recovery of specific costs
over time. Similarly, certain regulatory liabilities established by the
Company are expected to be refunded to customers over time. As of June,
30 1994, principal regulatory assets included in deferred charges were
$20.8 million for transition costs associated with FERC Order No. 636,
$4.3 million for postretirement benefit costs and $2.3 million for
environmental clean-up costs. The regulatory liability, reflected in
deferred credits, was $9.9 million related to income taxes.
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 June 30,
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.
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COMMONWEALTH GAS COMPANY
(2) Commitments
(a) Construction Program
The Company is engaged in a continuous construction program present-
ly 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 June
30, 1994, the Company's construction expenditures amounted to approxi-
mately $8.3 million, including an allowance for funds used during con-
struction. The Company expects to finance these expenditures on an
interim basis with internally-generated funds and short-term borrowings
which are ultimately expected to be repaid with proceeds from the
issuance of long-term debt and 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
As a result of implementing FERC Order No. 636 (Order 636), each
interstate pipeline company is allowed to collect certain transition
costs from their customers that resulted from the pipelines' need to buy
out gas supply contracts entered into prior to the issuance of Order 636.
The Company has been billed a total of approximately $21.1 million from
Tennessee Gas Pipeline Company (Tennessee), Algonquin Gas Transmission
Company (Algonquin) and Texas Eastern Transmission Company (Texas
Eastern) through June 30, 1994. It was initially anticipated that as
much as $45 million in transition costs would be sought by these
suppliers through a series of FERC filings over a 12 to 24 month period
that began on June 1, 1993.
As of October 29, 1993, the Company received preliminary DPU autho-
rization 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 $20.8 million is reflect-
ed in deferred charges as of June 30, 1994. In addition, a related
liability of $8.9 million is reflected in deferred credits.
After extensive negotiations between Texas Eastern, Tennessee and
their customers (including the Company), settlements were reached
regarding a number of transition obligation issues. The settlement with
Texas Eastern, which was recently approved by FERC, calls for the
pipeline to absorb approximately 20% of all transition costs incurred
from June 1993 forward. This agreement also provides for an extended
billing period and annual caps on the collection of future costs. The
Company believes that the absorption requirement will give the pipeline
incentive to minimize future costs.
The settlement with Tennessee, which has yet to be approved by FERC,
will lower one element of the Company's transition obligation by approx-
imately $1 million. Further negotiations are underway with Tennessee to
craft a total settlement similar to that achieved with Texas Eastern.
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COMMONWEALTH GAS COMPANY
Negotiations continue with the pipelines on several other issues.
As a result the Company is unable to predict its final transition
obligation at this time, however, based on these and subsequent
settlement activities, the Company will adjust its regulatory asset and
liability accounts accordingly.
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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 and six months ended June
30, 1994 and 1993 is shown below:
Three Months Six Months
Ended June 30, Ended June 30,
1994 and 1993 1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $ 9 287 17.1 % $23 953 13.7 %
Operating Expenses -
Cost of gas sold 7 560 23.4 19 011 20.1
Other operation and
maintenance 295 1.3 2 158 4.9
Depreciation 126 8.8 507 9.9
Taxes -
Federal and state income 232 10.3 806 9.6
Local property and other (2) (0.1) 128 2.9
8 211 14.8 22 610 14.4
Operating Income 1 076 93.2 1 343 7.3
Other Income (105) (184.2) (4) (3.6)
Income Before Interest Charges 971 88.4 1 339 7.2
Interest Charges 262 11.5 567 12.5
Net Income $ 709 21.0 $ 772 5.5
Firm Unit Sales - BBTU
Increase 115 2.0 1 084 4.5
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Three Months Six Months
Period Ended Total Firm Interruptible Total Firm Interruptible
June 30, 1994 8 367 5 828 2 539 27 547 24 910 2 637
June 30, 1993 6 328 5 713 615 24 499 23 826 673
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COMMONWEALTH GAS COMPANY
Operating Revenues, Cost of Gas Sold and Unit Sales
Operating revenues for the first six months of 1994 increased $24 million
or 13.7% due mainly to an increase in the cost of gas sold of $19 million,
increased total unit sales and higher conservation and load management (C&LM)
costs of $2 million. During the current quarter, operating revenues increased
by $9.3 million or 17.1% primarily due to a $7.6 million increase in the cost
of gas sold, higher conservation and load management costs of $1 million and
higher total unit sales. 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 expenses increase or decrease from period to period
based on customer participation a corresponding change will occur in revenue.
The cost of gas sold averaged $4.77 per MMBTU in the current quarter as
compared to $5.11 for the same period of 1993. This decrease was due to lower
gas prices and a decline in LNG costs offset somewhat by transition costs
related to Order 636. For the current six-month period, the cost of gas sold
averaged $4.13 per MMBTU as compared to $3.87 for the same period of 1993 due
to higher gas prices during the first quarter and, to a lesser extent,
transition costs related to Order 636 and higher LNG costs.
Firm unit sales increased 4.5% in the first half of 1994 due to higher
sales in all sectors as a result of the extremely cold weather conditions
experienced throughout the region during the first quarter. Firm unit sales
were 2% higher during the current quarter as industrial sales improved.
Although interruptible sales increased significantly during both the first
half and the second quarter of 1994, fluctuations in the level of
interruptible sales have little, if any, impact on net income.
Other Operating Expenses
The higher level of other operation and maintenance expense during the
current three and six-month periods was due, in part, to higher costs
associated with the Company's C&LM programs ($1 million and $2 million,
respectively,) which are being recovered currently in revenues. Also
contributing to the increase in the current six-month period were higher costs
associated with a new Gas Administration and Supply System ($145,000) and
higher engineering expenses attributable to the Company's automated mapping
system ($359,000). Somewhat offsetting these increases in both periods was a
decline in the cost of services rendered by affiliate COM/Energy Services
Company due to a second quarter 1993 work force reduction and, in the current
quarter, lower employee benefit costs.
Depreciation and Taxes
Depreciation increased due to higher levels of depreciable plant-in-
service. The change in federal and state income taxes in both periods
reflects the higher level of pretax income and, to a lesser extent, an
increase in the federal tax rate to 35%. The 2.9% increase in local property
and other taxes for the six-month period was due to higher tax rates and
assessments in the Company's service territory.
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COMMONWEALTH GAS COMPANY
Other Income and Interest Charges
The decrease in other income for the current quarter and the first half
of 1994 was due primarily to the absence of proceeds from a second quarter
1993 litigation settlement ($193,000) and lower interest income on deferred
gas costs ($40,000 and $45,000, respectively). This was partially offset in
the current quarter and the first half of this year by higher merchandising
and jobbing revenue ($118,000 and $120,000, respectively) and also, for the
current six-month period, interest income related to a Massachusetts sales tax
abatement ($44,000) and carrying costs associated with Order 636 transition
costs ($91,000).
Total interest charges increased 11.5% and 12.5% during the current three
and six-month periods due to the issuance of $35 million in new long-term debt
in December 1993 and, to a lesser extent for the six-month period, interest to
be refunded to the Company's customers in connection with the aforementioned
sales tax abatement. This increase is offset somewhat by a decrease in other
interest charges reflecting a lower average level of short-term borrowings
that resulted from the issuance of the new long-term debt.
Environmental Matters
The Company is participating in the assessment of a number of former
manufactured gas plant (MGP) sites and alleged MGP waste disposal locations 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 assessment and
remediation activities identified to this point. 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 expected 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
None
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended June
30, 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: August 12, 1994