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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, 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 November 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
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
ASSETS
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $354 197 $348 284
Less - Accumulated depreciation 99 822 92 881
254 375 255 403
Add - Construction work in progress 879 738
255 254 256 141
CURRENT ASSETS
Cash 814 2 113
Accounts receivable 17 537 40 505
Unbilled revenues 5 766 22 850
Inventories, at average cost 26 380 18 625
Prepaid taxes -
Property 5 388 3 094
Income 7 687 384
Other 1 256 1 138
64 828 88 709
DEFERRED CHARGES
Transition costs 10 141 11 711
Other 22 963 18 054
33 104 29 765
$353 186 $374 615
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
September 30, December 31,
1996 1995
(Unaudited)
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 3 718 10 495
102 882 109 659
Long-term debt, less maturing debt and
current sinking fund requirements 78 100 78 100
180 982 187 759
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 35 675 12 200
Advances from affiliates 755 1 850
Maturing long-term debt 10 000 10 000
46 430 24 050
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliates 2 885 2 229
Other 16 436 37 471
Refundable gas costs 14 317 33 034
Accrued local property and other taxes 5 435 3 435
Other 6 138 6 827
48 861 86 646
95 291 110 696
DEFERRED CREDITS
Accumulated deferred income taxes 37 205 35 586
Unamortized investment tax credits and other 29 567 28 863
Transition costs 10 141 11 711
76 913 76 160
COMMITMENTS AND CONTINGENCIES
$353 186 $374 615
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, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
Three Months Ended Nine Months Ended
1996 1995 1996 1995
GAS OPERATING REVENUES $ 48 872 $ 42 127 $240 982 $217 861
OPERATING EXPENSES
Cost of gas sold 32 801 26 601 137 765 122 364
Other operation and maintenance 21 694 19 582 67 483 64 636
Depreciation 1 007 978 6 853 6 800
Taxes -
Income (4 081) (3 544) 5 641 3 390
Local property 579 572 4 022 3 961
Payroll and other 377 615 1 893 2 198
52 377 44 804 223 657 203 349
OPERATING INCOME (LOSS) (3 505) (2 677) 17 325 14 512
OTHER INCOME 166 519 484 927
INCOME (LOSS) BEFORE INTEREST
CHARGES (3 339) (2 158) 17 809 15 439
INTEREST CHARGES
Long-term debt 1 964 2 046 5 893 6 147
Other interest charges 714 1 023 2 293 3 253
Allowance for borrowed funds
used during construction (8) (34) (27) (62)
2 670 3 035 8 159 9 338
NET INCOME (LOSS) (6 009) (5 193) 9 650 6 101
RETAINED EARNINGS -
Beginning of period 12 583 5 560 10 495 6 837
Dividends on common stock (2 856) - (16 427) (12 571)
RETAINED EARNINGS -
End of period $ 3 718 $ 367 $ 3 718 $ 367
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
1996 1995
OPERATING ACTIVITIES
Net income $ 9 650 $ 6 101
Effects of noncash items -
Depreciation and amortization 8 274 9 242
Deferred income taxes and investment
tax credits, net 968 1 262
Change in working capital, exclusive of cash,
advances to affiliates and interim financing (15 203) 27 279
All other operating items (4 598) 17 195
Net cash provided by (used for)
operating activities (909) 61 079
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (6 316) (10 456)
Allowance for borrowed funds used
during construction (27) (62)
Advances to affiliates - (5 320)
Net cash used for investing activities (6 343) (15 838)
FINANCING ACTIVITIES
Payment of dividends (16 427) (12 571)
Proceeds from (payment of) short-term borrowings 23 475 (24 950)
Payments to affiliates (1 095) (11 220)
Net cash provided by (used for)
financing activities 5 953 (48 741)
Net decrease in cash (1 299) (3 500)
Cash at beginning of period 2 113 4 862
Cash at end of period $ 814 $ 1 362
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 7 190 $ 7 847
Income taxes $ 11 990 $ 8 550
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.
On September 8, 1996, a contract was ratified resolving a labor
dispute with a collective bargaining unit that represents approximately
356 (52%) of the Company's regular employees. The agreement that covered
this bargaining unit expired on March 31, 1996. Work performed by these
employees had been disrupted since that time and essential tasks were
completed by management personnel and external contractors. Employees
represented by the bargaining unit returned to work on September 22,
1996. The new six-year agreement will expire on March 31, 2002.
(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 September
30, 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, regulatory liabilities established by the Company are 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 September
30, 1996, SFAS No. 121 did not have an impact on the Company's 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:
Sept. 30, Dec. 31,
1996 1995
(Dollars in thousands)
Transition costs $10 141 $11 711
Postretirement benefit costs including
pensions 9 517 7 744
Environmental costs 3 807 3 786
Total regulatory assets $23 465 $23 241
The principal regulatory liability, reflected in deferred credits-
other and relating to income taxes, was $8.4 million and $8.6 million at
September 30, 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. Approximately $17.7 million of that amount is estimated for 1996.
As of September 30, 1996, the Company's construction expenditures
amounted to approximately $6.3 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 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 and nine months ended
September 30, 1996 and 1995 and unit sales for these periods is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
1996 and 1995 1996 and 1995
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $ 6 745 16.0% $ 23 121 10.6%
Operating Expenses -
Cost of gas sold 6 200 23.3 15 401 12.6
Other operation and maintenance 2 112 10.8 2 847 4.4
Depreciation 29 3.0 53 0.8
Taxes -
Federal and state income (537) (15.2) 2 251 66.4
Local property and other (231) (19.5) (244) (4.0)
7 573 16.9 20 308 10.0
Operating Income (828) (30.9) 2 813 19.4
Other Income (353) (68.0) (443) (47.8)
Income Before Interest Charges (1 181) (54.7) 2 370 15.4
Interest Charges (365) (12.0) (1 179) (12.6)
Net Income $ (816) (15.7) $ 3 549 58.2
Firm Unit Sales - BBTU 328 9.7 3 059 11.9
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, 1996 6 832 3 715 498 723 307 1 589
September 30, 1995 6 890 3 387 308 976 579 1 640
Nine Months Ended
September 30, 1996 37 101 28 811 1 394 1 676 792 4 428
September 30, 1995 36 678 25 752 899 3 356 1 449 5 222
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
For the first nine months of 1996, operating revenues increased $23.1
million or 10.6% due to higher gas prices which contributed to an increase in
the cost of gas sold ($15.4 million) and higher firm and interruptible unit
sales offset, in part, by a lower level of conservation and load management
(C&LM) costs ($2.1 million), lower off-system and quasi-firm unit sales and a
decline in transportation volume. During the third quarter, operating
revenues increased 16% due to higher gas prices which led to an increase in
the cost of gas sold. The impact of the higher level of firm and
interruptible unit sales was virtually offset by reductions in C&LM costs,
off-system and quasi-firm unit sales and a slight decline in transportation
volume. The fluctuation in non-firm sales during the current quarter and
nine-month period have little to no impact on net income.
Firm unit sales increased nearly 12% during the current nine months as
sales to all customer classes were higher due to the colder than normal
weather experienced throughout the region, particularly during the first
quarter compared to a milder period last year. For the first nine months of
1996, heating degree days were nearly 10% higher compared to the same period
in 1995. A growing customer base, including customers formerly receiving
quasi-firm sales service, also contributed to the increase in firm unit sales
in both reporting periods.
The decrease in off-system and quasi-firm sales had no impact on net
income during the current quarter and first nine months of 1996. A portion of
the margin realized on these sales reduces the cost of gas sold to firm
customers and the remaining amount is deferred. In December 1995, the Company
filed a margin-sharing proposal with the DPU related to the deferred margins
on quasi-firm sales and a ruling has not yet been issued by the DPU.
Other Operation and Maintenance
For the current quarter, other operation and maintenance increased $2.1
million or 10.8% due primarily to the net impact of a labor dispute as
previously discussed in Note 1 of Notes to Condensed Financial Statement filed
under Item 1 of this report. The $2.9 million, or 4.4%, increase during the
nine-month period also reflects the net impact of the labor dispute offset, in
part, by a reduction in the provision for bad debts ($260,000).
Depreciation and Taxes
Depreciation expense increased during the current three and nine months
due to higher levels of depreciable plant-in-service. The change in federal
and state income taxes in both periods reflect fluctuations in the level of
pretax income. The 19.5% and 4% reductions in local property and other taxes
for the current quarter and nine-month period, respectively, was due primarily
to lower payroll-related taxes reflecting, in part, the previously discussed
labor dispute. There were no significant changes in local property taxes for
the quarter or year-to-date period.
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COMMONWEALTH GAS COMPANY
Other Income and Interest Charges
The decrease in interest income of $443,000 and $353,000 for the current
quarter and nine months, respectively, reflects a decline in interest received
by the Company in connection with its participation in the COM/Energy Money
Pool. The decline for the nine-month period was offset, somewhat, by higher
merchandising and jobbing revenue ($234,000) relating to greater sales of
design heating systems.
For the current nine-month period, interest charges decreased $1.2
million or 12.6% due primarily to a decline in interest on deferred gas costs
($978,000) and a reduction in long-term interest charges ($246,000) reflecting
scheduled sinking fund payments. Despite slightly lower short-term borrowing
rates, short-term interest charges increased ($65,000) due to a higher average
level of short-term borrowings. The above factors also contributed to the
current quarter interest reduction of $365,000 or 12%.
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 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
nine months ended September 30, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1996.
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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, 1996