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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 September 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 November 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.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
September 30, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $342 603 $339 476
Less - Accumulated depreciation 90 953 85 162
251 650 254 314
Add - Construction work in progress 1 628 719
253 278 255 033
CURRENT ASSETS
Cash 1 362 4 862
Advances to affiliates 5 320 -
Accounts receivable 12 580 33 352
Unbilled revenues 3 632 20 892
Inventories, at average cost 23 119 25 754
Prepaid taxes -
Property 5 357 2 861
Income 7 275 619
Other 1 188 1 076
59 833 89 416
DEFERRED CHARGES
Transition costs 6 616 19 201
Other 17 595 17 155
24 211 36 356
$337 322 $380 805
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
September 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 367 6 837
99 531 106 001
Long-term debt, less current
sinking fund requirements 91 750 91 750
191 281 197 751
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 1 778 2 669
Other 26 990 33 214
Refundable gas costs 27 870 27 832
Accrued local property and other taxes 5 646 3 317
Other 7 552 6 928
73 486 77 610
73 486 113 780
DEFERRED CREDITS
Accumulated deferred income taxes 34 495 32 699
Unamortized investment tax credits and other 31 444 28 764
Transition costs 6 616 7 811
72 555 69 274
COMMITMENTS AND CONTINGENCIES
$337 322 $380 805
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
Three Months Ended Nine Months Ended
1995 1994 1995 1994
(Dollars in Thousands)
GAS OPERATING REVENUES $ 42 127 $ 46 979 $217 861 $246 118
OPERATING EXPENSES
Cost of gas sold 26 601 32 281 122 364 145 996
Other operation and maintenance 19 582 20 664 64 636 66 883
Depreciation 978 930 6 800 6 577
Taxes -
Income (3 544) (4 157) 3 390 5 016
Local property 572 508 3 961 3 555
Payroll and other 615 580 2 198 2 150
44 804 50 806 203 349 230 177
OPERATING INCOME (LOSS) (2 677) (3 827) 14 512 15 941
OTHER INCOME 519 296 927 404
INCOME (LOSS) BEFORE INTEREST
CHARGES (2 158) (3 531) 15 439 16 345
INTEREST CHARGES
Long-term debt 2 046 2 128 6 147 6 386
Other interest charges 1 023 455 3 253 1 309
Allowance for borrowed funds
used during construction (34) (15) (62) (29)
3 035 2 568 9 338 7 666
NET INCOME (LOSS) (5 193) (6 099) 6 101 8 679
RETAINED EARNINGS -
Beginning of period 5 560 9 476 6 837 7 840
Dividends on common stock - (1 429) (12 571) (14 571)
RETAINED EARNINGS -
End of period $ 367 $ 1 948 $ 367 $ 1 948
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 6 101 $ 8 679
Effects of noncash items -
Depreciation and amortization 9 242 10 599
Deferred income taxes and investment
tax credits, net 1 262 3 465
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 27 279 36 740
Transition costs, net 11 390 (4 524)
All other operating items 5 805 (7 990)
Net cash provided by operating activities 61 079 46 969
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (10 456) (11 351)
Allowance for borrowed funds used
during construction (62) (29)
Advances to affiliates (5 320) -
Net cash used for investing activities (15 838) (11 380)
FINANCING ACTIVITIES
Payment of dividends (12 571) (14 571)
Payment of short-term borrowings (24 950) (31 425)
Advances from (payments to) affiliates (11 220) 10 275
Net cash used for financing activities (48 741) (35 721)
Net decrease in cash (3 500) (132)
Cash at beginning of period 4 862 1 297
Cash at end of period $ 1 362 $ 1 165
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 7 847 $ 6 657
Income taxes $ 8 550 $ 3 202
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 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 will 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 September 30, 1995 and December
31, 1994 were as follows:
September 30, December 31,
1995 1994
(Dollars in Thousands)
Transition costs $ 6 616 $19 201
Postretirement benefit costs 7 187 5 367
Environmental costs 2 537 2 346
Total regulatory assets $16 340 $26 914
The regulatory liabilities, included in deferred credits-other and
principally related to income taxes, amounted to $9.7 million and $9.9
million at September 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
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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 September
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 was estimated for 1995.
As of September 30, 1995, the Company's construction expenditures
amounted to approximately $10.5 million, including an allowance for funds
used during construction. The latest estimate of expenditures for 1995
is approximately $17 million. 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. At September 30, 1995, a regulatory
asset totaling $6.6 million was reflected in deferred charges. In
addition, a related liability of $6.6 million was reflected in deferred
credits. Any further transition costs will be recovered by the Company
through the CGA as incurred.
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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 nine months ended
September 30, 1995 and 1994 and unit sales for these periods is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
1995 and 1994 1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $(4 852) (10.3)% $(28 257) (11.5)%
Operating Expenses -
Cost of gas sold (5 680) (17.6) (23 632) (16.2)
Other operation and maintenance (1 082) (5.2) (2 247) (3.4)
Depreciation 48 5.2 223 3.4
Taxes -
Federal and state income 613 14.7 (1 626) (32.4)
Local property and other 99 9.1 454 8.0
(6 002) (11.8) (26 828) (11.7)
Operating Income 1 150 30.0 (1 429) (9.0)
Other Income 223 75.3 523 129.5
Income Before Interest Charges 1 373 38.9 (906) (5.5)
Interest Charges 467 18.2 1 672 21.8
Net Income $ 906 14.9 $ (2 578) (29.7)
Firm Unit Sales - BBTU 181 5.6 (2 364) (8.4)
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Inter- Off- Quasi- Trans-
Total Firm ruptible System Firm portation
Three Months Ended
September 30, 1995 6 890 3 387 308 976 579 1 640
September 30, 1994 8 351 3 206 4 129 - - 1 016
Nine Months Ended
September 30, 1995 36 678 25 752 899 3 356 1 449 5 222
September 30, 1994 36 878 28 116 6 766 - - 1 996
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
Operating revenues for the current nine months decreased $28.3 million or
11.5% due to a reduction in the cost of gas sold of $23.6 million and lower
interruptible unit sales offset, in part, by higher transportation volume and
off-system and quasi-firm unit sales that began in 1994. During the current
quarter, operating revenues decreased by $4.9 million or 10.3% due primarily
to a $5.7 million decrease in the cost of gas sold and lower interruptible
unit sales partially offset by higher transportation volume, off-system and
quasi-firm sales and an increase in firm unit sales.
Firm unit sales decreased 8.4% in the current nine-month period as sales
to all customer classes reflect the mild weather conditions experienced
throughout the region in the first quarter compared to a colder than normal
first quarter last year. Firm unit sales were 5.6% higher during the current
quarter as heating degree days totaled 249 compared to 207 for the same period
in 1994. Although interruptible sales decreased dramatically during both
periods, 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 being deferred pending DPU approval of the
Company's margin sharing proposals that are expected to be filed later this
year for quasi-firm sales and early next year for off-system sales.
Other Operation and Maintenance
Other operation and maintenance decreased for the current nine months by
$2.2 million or 3.4% due to a decline in distribution and customer service
expenses mainly due to fewer leak repair activities and a reduction in meter
work ($1.1 million), lower customer relations and customer contact expenses
due primarily to workforce reductions resulting from the automation of meter
reading ($746,000), a lower provision for bad debts reflecting the level of
billed sales ($656,000), a decline in conservation and load management
expenses (340,000), decreased engineering expenses due to lower environmental
costs (262,000) and the Company's continuing cost-containment efforts. These
decreases were partially offset by higher costs associated with the leasing of
automated meter reading (AMR) equipment ($1.1 million), an increase in labor
costs ($771,000) and higher insurance and benefits expenses ($215,000). Other
operation and maintenance decreased by $1.1 million or 5.2% during the current
quarter due primarily to a lower level of C&LM costs ($655,000), a decline in
distribution and customer service expenses ($592,000) and lower customer
relations and customer contact expenses ($221,000), offset, in part, by higher
costs associated with the leasing of AMR equipment ($394,000) and increased
labor costs ($436,000).
Depreciation and Taxes
Depreciation expense increased during the current three and nine-month
periods 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 both periods was
due to higher rates and assessments.
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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 were 18.2% and 21.8% higher during the current
three and nine-month periods due to an increase in interest on deferred gas
costs offset somewhat by a decline in short-term interest charges reflecting a
lower average level of short-term borrowings. The Company had no short-term
borrowings throughout the entire third quarter.
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 current nine-month period. For
further information on these matters, refer to the Company's 1994 Annual
Report on Form 10-K.
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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
Effective October 1, 1995, John A. Whalen, formerly the Company's
Comptroller, was appointed Vice President and General Manager of
COM/Energy Services Company, an affiliate of the Company. James D.
Rappoli, the Company's Financial Vice President and Treasurer,
assumed Mr. Whalen's former duties as Comptroller.
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
nine months ended September 30, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1995.
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COMMONWEALTH GAS COMPANY
SIGNATURE
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 and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: November 13, 1995