<PAGE 1> 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, 1995 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, 1995 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. <PAGE 2> PART I - FINANCIAL INFORMATION Item 1. Financial Statements COMMONWEALTH GAS COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1995 AND DECEMBER 31, 1994 ASSETS (Unaudited) June 30, December 31, 1995 1994 (Dollars in Thousands) PROPERTY, PLANT AND EQUIPMENT, at original cost $338 640 $339 476 Less - Accumulated depreciation 90 537 85 162 248 103 254 314 Add - Construction work in progress 1 747 719 249 850 255 033 CURRENT ASSETS Cash 1 418 4 862 Advances to affiliates 29 150 - Accounts receivable 26 011 33 252 Unbilled revenues 2 517 20 892 Inventories, at average cost 17 947 25 754 Prepaid taxes - Property - 2 861 Income - 619 Other 1 586 1 076 78 629 89 416 DEFERRED CHARGES Transition costs 7 205 19 201 Other 16 577 17 155 23 782 36 356 $352 261 $380 805 See accompanying notes. <PAGE 3> COMMONWEALTH GAS COMPANY CONDENSED BALANCE SHEETS JUNE 30, 1995 AND DECEMBER 31, 1994 CAPITALIZATION AND LIABILITIES (Unaudited) June 30, December 31, 1995 1994 (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 5 560 6 837 104 724 106 001 Long-term debt, less current sinking fund requirements 91 750 91 750 196 474 197 751 CURRENT LIABILITIES Interim Financing - Notes payable to banks - 24 950 Advances from affiliates - 11 220 - 36 170 Other Current Liabilities - Current sinking fund requirements 3 650 3 650 Accounts payable - Affiliates 2 710 2 669 Other 38 746 33 214 Refundable gas costs 29 685 27 832 Accrued taxes - Income 910 - Local property and other 711 3 317 Other 6 859 6 928 83 271 77 610 83 271 113 780 DEFERRED CREDITS Accumulated deferred income taxes 34 710 32 699 Unamortized investment tax credits and other 30 601 28 764 Transition costs 7 205 7 811 72 516 69 274 COMMITMENTS AND CONTINGENCIES $352 261 $380 805 See accompanying notes. <PAGE 4> COMMONWEALTH GAS COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (Unaudited) Three Months Ended Six Months Ended 1995 1994 1995 1994 (Dollars in Thousands) GAS OPERATING REVENUES $ 67 802 $ 63 581 $175 734 $199 139 OPERATING EXPENSES Cost of gas sold 42 265 39 890 95 763 113 714 Other operation and maintenance 21 489 22 680 45 054 46 219 Depreciation 1 423 1 566 5 822 5 647 Taxes - Income (869) (2 024) 6 934 9 173 Local property 936 937 3 389 3 047 Payroll and other 632 611 1 583 1 571 65 876 63 660 158 545 179 371 OPERATING INCOME (LOSS) 1 926 (79) 17 189 19 768 OTHER INCOME (EXPENSE) 355 (48) 408 108 INCOME (LOSS) BEFORE INTEREST CHARGES 2 281 (127) 17 597 19 876 INTEREST CHARGES Long-term debt 2 047 2 129 4 101 4 258 Other interest charges 1 303 419 2 230 854 Allowance for borrowed funds used during construction (15) (8) (28) (14) 3 335 2 540 6 303 5 098 NET INCOME (LOSS) (1 054) (2 667) 11 294 14 778 RETAINED EARNINGS - Beginning of period 14 185 19 285 6 837 7 840 Dividends on common stock (7 571) (7 142) (12 571) (13 142) RETAINED EARNINGS - End of period $ 5 560 $ 9 476 $ 5 560 $ 9 476 See accompanying notes. <PAGE 5> COMMONWEALTH GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1994 (Unaudited) 1995 1994 (Dollars in Thousands) OPERATING ACTIVITIES Net income $ 11 294 $ 14 778 Effects of noncash items - Depreciation and amortization 7 952 8 214 Deferred income taxes and investment tax credits, net 1 576 (63) Change in working capital, exclusive of cash, advances to affiliates and interim financing 42 154 44 637 Transition costs, net 11 390 (3 128) All other operating items 6 259 (1 049) Net cash provided by operating activities 80 625 63 389 INVESTING ACTIVITIES Additions to property, plant and equipment (exclusive of AFUDC) (6 150) (8 303) Allowance for borrowed funds used during construction (28) (14) Advances to affiliates (29 150) - Net cash used for investing activities (35 328) (8 317) FINANCING ACTIVITIES Payment of dividends (12 571) (13 142) Payment of short-term borrowings (24 950) (40 975) Payments to affiliates (11 220) (860) Net cash used for financing activities (48 741) (54 977) Net increase (decrease) in cash (3 444) 95 Cash at beginning of period 4 862 1 297 Cash at end of period $ 1 418 $ 1 392 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 5 469 $ 4 893 Income taxes $ 3 570 $ 1 225 See accompanying notes. <PAGE 6> 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 1994 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 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, the regulatory liabilities established by the Company are required to be refunded to customers over time. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. Based on the current regulatory framework, the Company accounts for the economic effects of regulation in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation" and does not expect that SFAS 121, which the Company expects to adopt on January 1, 1996, will have a material impact on its financial position or results of operations. However, this conclusion may change in the future if changes are made in the current regulatory framework or as competitive factors influence wholesale and retail pricing in this industry. The principal regulatory assets included in deferred charges at June 30, 1995 and December 31, 1994 were as follows: June 30, Dec. 31, 1995 1994 (Dollars in Thousands) Transition costs $ 7 205 $19 201 Postretirement benefit costs including pensions 6 674 5 367 Environmental costs 2 537 2 346 Total regulatory assets $16 416 $26 914 The regulatory liabilities, included in deferred credits-other and principally related to income taxes, amounted to $9.8 million and $9.9 million at June 30, 1995 and December 31, 1994, respectively. 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 <PAGE 7> COMMONWEALTH GAS COMPANY 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, 1995 and 1994 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 present- ly estimated at $106.4 million for the five-year period 1995 through 1999. Approximately $21.2 million of that amount is estimated for 1995, the majority of which is scheduled to be expended in the second half of the year. As of June 30, 1995, the Company's construction expenditures amounted to approximately $6.2 million, including an allowance for funds used during construction. 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 In May 1995, the DPU allowed the Company to accelerate recovery of its FERC Order No. 636 transition costs that were incurred to date. These costs had been deferred and accumulated as a regulatory asset and were being recovered through the cost of gas adjustment (CGA) over a four-year period that began in November 1993. The costs are now being recovered through the CGA over a one-year period that began May 1, 1995. The accelerated recovery period was permitted by the DPU due to the minimal impact on customers' bills. Any further transition costs will be recovered by the Company through the CGA as incurred. At June 30, 1995, a regulatory asset totaling $7.2 million was reflected in deferred charges. In addition, a related liability of $7.2 million was reflected in deferred credits. <PAGE 8> 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, 1995 and 1994 is shown below: Three Months Six Months Ended June 30, Ended June 30, 1995 and 1994 1995 and 1994 Increase (Decrease) (Dollars in Thousands) Gas Operating Revenues $ 4 221 6.6 % $(23 405) (11.8)% Operating Expenses - Cost of gas sold 2 375 6.0 (17 951) (15.8) Other operation and maintenance (1 191) (5.3) (1 165) (2.5) Depreciation (143) (9.1) 175 3.1 Taxes - Federal and state income 1 155 57.1 (2 239) (24.4) Local property and other 20 1.3 354 7.7 2 216 3.5 (20 826) (11.6) Operating Income 2 005 2 538.0 (2 579) (13.0) Other Income 403 839.6 300 277.8 Income Before Interest Charges 2 408 1 896.1 (2 279) (11.5) Interest Charges 795 31.3 1 205 23.6 Net Income $ 1 613 60.5 $ (3 484) (23.6) Firm Unit Sales - BBTU 427 7.3 (2 545) (10.2) The following is a summary of unit sales for the periods indicated: Unit Sales - In Billions of British Thermal Units (BBTU) Off- Quasi- Total Firm Interruptible System Firm Three Months Ended June 30, 1995 8 179 6 254 438 967 520 June 30, 1994 8 012 5 827 2 185 - - Six Months Ended June 30, 1995 26 206 22 365 591 2 380 870 June 30, 1994 27 190 24 910 2 280 - - <PAGE 9> COMMONWEALTH GAS COMPANY Operating Revenues and Unit Sales Operating revenues for the first six months of 1995 decreased $23.4 million or 11.8% due to a reduction in the cost of gas sold of $18 million and lower firm and interruptible unit sales offset, in part, by off-system and quasi-firm unit sales that began in 1994. During the current quarter, operating revenues increased by $4.2 million or 6.6% due primarily to a $2.4 million increase in the cost of gas sold, higher firm unit sales and off- system and quasi-firm sales, partially offset by a decline in interruptible sales. Firm unit sales decreased 10.2% in the first half of 1995 as sales to all customer classes were lower due to the mild weather experienced throughout the region in the first quarter compared to a colder than normal first quarter last year. Firm unit sales were 7.3% higher during the current quarter as heating degree days totaled 892 compared to 797 for the same period in 1994. Although interruptible sales declined significantly during both the first half and the second quarter of 1995, fluctuations in these sales have little, if any, impact on net income. Off-system and quasi-firm sales have contributed to the Company's total sales but, at this time, have no impact on net income. One-half of the margin realized on these sales is used to reduce the cost of gas to firm customers. The remaining half is deferred pending DPU approval of the Company's margin sharing proposal that is expected to be filed later this year. Other Operation and Maintenance Other operation and maintenance declined for the first half of 1995 by $1.2 million or 2.5% mainly due to the Company's continuing cost-containment efforts, a lower provision for bad debts ($599,000), reflecting lower billed sales and improved collection experience, a reduction in engineering costs due to the timing of payments related to the Company's automated mapping system ($262,000) and a decline in distribution and customer service expenses due to fewer leak repair activities and a reduction in meter work ($479,000). These decreases were partially offset by higher costs associated with automated meter reading ($686,000), higher C&LM expenses ($315,000), an increase in labor costs ($335,000) and higher insurance and benefits expenses ($178,000). Other operation and maintenance decreased by $1.2 million or 5.3% during the current quarter due to continuing cost-containment efforts, lower insurance and benefits expenses ($485,000), a decline in the level of C&LM costs ($247,000), a lower provision for bad debts ($134,000) and a decline in distribution and customer service expenses ($108,000) offset, in part, by higher expenses associated with automated meter reading ($385,000) and increased labor costs ($447,000). Depreciation and Taxes Depreciation expense increased during the current six-month period due to higher levels of depreciable plant-in-service. The change in federal and state income taxes in both periods reflects the level of pretax income. The increase in local property and other taxes for the current six-month period was due to higher rates and assessments. <PAGE 10> COMMONWEALTH GAS COMPANY Other Income and Interest Charges The increase in other income for both periods was due primarily to interest income received by the Company in connection with its participation in the COM/Energy Money Pool. This was partially offset by lower merchandising and jobbing revenue. Total interest charges increased 31.3% and 23.6% during the current three and six-month periods due to higher interest on deferred gas costs offset somewhat by a decline in short-term interest charges reflecting a lower average level of short-term borrowings. 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 Company is also involved in certain other known or potentially contaminated sites where the associated costs may not be recoverable in rates. There were no significant new developments that occurred during the first six months of 1995. For further information on these matters, refer to the Company's 1994 Annual Report on Form 10-K. <PAGE 11> 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 27 - Financial Data Schedule Filed herewith as Exhibit 1 is the Financial Data Schedule for the six months ended June 30, 1995. (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended June 30, 1995. <PAGE 12> 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 14, 1995