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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, 1996
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, 1996
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, 1996 AND DECEMBER 31, 1995
ASSETS
(Unaudited)
March 31, December 31,
1996 1995
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $349 497 $348 284
Less - Accumulated depreciation 97 310 92 881
252 187 255 403
Add - Construction work in progress 726 738
252 913 256 141
CURRENT ASSETS
Cash 2 343 2 113
Advances to affiliates 5 500 -
Accounts receivable 58 435 40 505
Unbilled revenues 12 475 22 850
Inventories, at average cost 6 629 18 625
Prepaid taxes -
Property 565 3 094
Income - 384
Other 1 105 1 138
87 052 88 709
DEFERRED CHARGES
Order 636 transition costs 11 326 11 711
Other 19 732 18 054
31 058 29 765
$371 023 $374 615
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1996 1995
(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 18 284 10 495
117 448 109 659
Long-term debt, less current sinking
fund requirements 78 100 78 100
195 548 187 759
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 12 200
Advances from affiliates - 1 850
Maturing long-term debt 10 000 10 000
10 000 24 050
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliated companies 2 236 2 229
Other 30 451 37 471
Refundable gas costs 40 455 33 034
Accrued taxes -
Income 3 288 -
Local property and other 2 361 3 435
Other 6 307 6 827
88 748 86 646
98 748 110 696
DEFERRED CREDITS
Accumulated deferred income taxes 36 617 35 586
Unamortized investment tax credits and other 28 784 28 863
Order 636 transition costs 11 326 11 711
76 727 76 160
$371 023 $374 615
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
GAS OPERATING REVENUES $123 725 $107 932
OPERATING EXPENSES
Cost of gas sold 64 150 53 498
Other operation and maintenance 22 554 23 565
Depreciation 4 335 4 399
Taxes -
Income 10 374 7 803
Local property 2 443 2 453
Payroll and other 976 951
104 832 92 669
OPERATING INCOME 18 893 15 263
OTHER INCOME 207 53
INCOME BEFORE INTEREST CHARGES 19 100 15 316
INTEREST CHARGES
Long-term debt 1 964 2 054
Other interest charges 782 927
Allowance for borrowed funds
used during construction (6) (13)
2 740 2 968
NET INCOME 16 360 12 348
RETAINED EARNINGS -
Beginning of period 10 495 6 837
Dividends on common stock (8 571) (5 000)
RETAINED EARNINGS -
End of period $ 18 284 $ 14 185
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Unaudited)
1996 1995
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 16 360 $ 12 348
Effects of noncash items -
Depreciation and amortization 4 996 6 111
Deferred income taxes and investment
tax credits, net 820 1 218
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 9 489 27 173
All other operating items (1 927) 6 328
Net cash provided by operating activities 29 738 53 178
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (1 381) (2 343)
Allowance for borrowed funds used
during construction (6) (13)
Advances to affiliates (5 500) (12 165)
Net cash used for investing activities (6 887) (14 521)
FINANCING ACTIVITIES
Payment of dividends (8 571) (5 000)
Payment of short-term borrowings (12 200) (24 950)
Advances from affiliates (1 850) (11 220)
Net cash used for financing activities (22 621) (41 170)
Net increase (decrease) in cash 230 (2 513)
Cash at beginning of period 2 113 4 862
Cash at end of period $ 2 343 $ 2 349
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 1 961 $ 2 047
Income taxes $ 5 768 $ 1 604
See accompanying notes.
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COMMONWEALTH GAS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) General Information
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 System is an exempt public utility
holding company under the provisions of the Public Utility Holding
Company Act of 1935 and, in addition to its investment in the Company,
has interests in other utility and several non-regulated companies.
The Company is currently involved in negotiations with a collective
bargaining unit that represents approximately 364 (53%) of its regular
employees. The agreement that covered these employees expired on March
31, 1996. A workforce of management personnel and experienced
contractors are performing all essential tasks. Management is unable to
predict the ultimate outcome of these negotiations.
(2) Significant Accounting Policies
(a) Principles of Accounting
The Company's significant accounting policies are described in Note
2 of Notes to Financial Statements included in its 1995 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.
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,
1996 and 1995 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
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters
by the Massachusetts Department of Public Utilities (DPU).
Based on the current regulatory framework, the Company accounts for
the economic effects of regulation in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting
for the Effects of Certain Types of Regulation." 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.
Similarly, the regulatory liability established by the Company is
required to be refunded to customers over time. On January 1, 1996, the
Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121
imposes stricter criteria for regulatory assets by requiring that such
assets be probable of future recovery at each balance sheet date. As of
March 31, 1996, SFAS No. 121 did not have an impact on its financial
position or results of operations. Management does not expect that the
effects of SFAS No. 121 will have a material impact on the Company in the
foreseeable future.
The principal regulatory assets included in deferred charges were as
follows:
March 31, Dec. 31,
1996 1995
(Dollars in Thousands)
Transition costs $11 326 $11 711
Postretirement benefit costs including
pensions 8 392 7 744
Environmental costs 3 805 3 786
Total regulatory assets $23 523 $23 241
The principal regulatory liability, reflected in deferred credits-other
and relating to income taxes, was $8.5 million and $8.6 million at
March 31, 1996 and December 31, 1995, respectively.
(3) Commitments
Construction Program
The Company is engaged in a continuous construction program presently
estimated at $92 million for the five-year period 1996 through 2000. Of that
amount, $17.7 million is estimated for 1996. As of March 31, 1996, the
Company's actual construction expenditures amounted to approximately $1.4
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 the proceeds from the issuance of long-term debt
and/or equity securities.
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COMMONWEALTH GAS COMPANY
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, availability and
cost of capital and environmental regulations.
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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,
1996 and 1995 is shown below:
Three Months
Ended March 31,
1996 and 1995
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $ 15 793 14.6%
Operating Expenses -
Cost of gas sold 10 652 19.9
Other operation and maintenance (1 011) (4.3)
Depreciation (64) (1.5)
Taxes -
Federal and state income 2 571 32.9
Local property and other 15 2.6
12 163 13.1
Operating Income 3 630 23.8
Other Income 154 290.6
Income Before Interest Charges 3 784 24.7
Interest Charges (228) (7.7)
Net Income $ 4 012 32.5
Firm Unit Sales BBTU 2 083 12.9
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Three Months Ended Off- Quasi-
Total Firm Interruptible System Firm
March 31, 1996 18 940 18 194 357 249 140
March 31, 1995 18 027 16 111 153 1 413 350
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
For the first three months of 1996, operating revenues increased $15.8
million (14.6%) due primarily to a higher level of cost of gas sold ($10.7
million) that reflected a 12.9% increase in firm unit sales offset, in part,
by a lower level of conservation and load management (C&LM) costs ($803,000)
and a decrease in overall non-firm unit sales.
For the first quarter of 1996, firm unit sales increased 12.9% as sales to
all customer segments increased significantly due to the colder weather
experienced in the region as compared to a much more mild period last year.
Heating degree days totaled 3,324 this quarter compared to 2,914 during the
same period last year. Interruptible sales increased during the first quarter
of 1996 but these sales had no effect on net income since the margin from
these sales are flowed back to firm customers through the CGA. Off-system and
quasi-firm sales continued to contribute to the Company's total sales but had
no impact on net income. A portion of the margin realized on these sales
reduces the cost of gas sold to firm customers and the remaining amount is
deferred pending approval of the Company's margin-sharing proposals. The
proposal related to quasi-firm sales was filed in December 1995 and a ruling
is expected from the DPU later this year. The proposal for off-system sales
is expected to be filed by the end of this year.
Other Operation and Maintenance
For the current quarter, other operation and maintenance decreased by $1
million due primarily to lower C&LM costs ($803,000), a decline in insurance
and benefit costs ($147,000) and a decline in the provision for bad debts
($121,000).
Depreciation and Taxes
Depreciation decreased slightly during the first quarter. The change in
federal and state income taxes was due to the higher level of pretax income.
Other Income and Interest Charges
Other income increased by $154,000 during the first three months of 1996
due primarily to greater sales of design heating systems.
Total interest charges decreased $228,000 mainly due to scheduled sinking
fund payments and lower levels of short-term borrowings at more favorable
interest rates.
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 quarter of 1996. For further
information on these matters, refer to the Company's 1995 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
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
three months ended March 31, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 1996.
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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 and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 14, 1996