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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, 1997
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, 1997
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, 1997 AND DECEMBER 31, 1996
ASSETS
(Dollars in thousands)
March 31, December 31,
1997 1996
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $361,144 $358,783
Less - Accumulated depreciation 106,922 102,278
254,222 256,505
Add - Construction work in progress 1,018 836
255,240 257,341
CURRENT ASSETS
Cash 2,455 421
Accounts receivable 66,720 47,329
Unbilled revenues 9,844 20,885
Inventories, at average cost 9,078 24,704
Prepaid taxes -
Property 841 3,061
Income - 5,619
Other 1,996 981
90,934 103,000
DEFERRED CHARGES
Regulatory assets 23,027 23,522
Other 5,231 5,067
28,258 28,589
$374,432 $388,930
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1997 1996
(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 27,429 10,856
126,593 110,020
Long-term debt, less current sinking
fund requirements 74,450 74,450
201,043 184,470
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 31,375 58,200
Advances from affiliates 7,335 10,400
38,710 68,600
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliated companies 1,251 3,081
Other 29,054 32,904
Accrued taxes -
Income 2,425 -
Local property and other 2,968 3,060
Other 20,762 18,091
60,110 60,786
98,820 129,386
DEFERRED CREDITS
Accumulated deferred income taxes 38,072 37,088
Unamortized investment tax credits and other 5,612 5,660
Other 30,885 32,326
74,569 75,074
$374,432 $388,930
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
GAS OPERATING REVENUES $132,313 $123,725
OPERATING EXPENSES
Cost of gas sold 74,640 64,150
Other operation and maintenance 19,702 22,554
Depreciation 4,472 4,335
Taxes -
Income 10,450 10,374
Local property 2,603 2,443
Payroll and other 1,321 976
113,188 104,832
OPERATING INCOME 19,125 18,893
OTHER INCOME 76 207
INCOME BEFORE INTEREST CHARGES 19,201 19,100
INTEREST CHARGES
Long-term debt 1,656 1,964
Other interest charges 983 782
Allowance for borrowed funds
used during construction (11) (6)
2,628 2,740
NET INCOME 16,573 16,360
RETAINED EARNINGS -
Beginning of period 10,856 10,495
Dividends on common stock - (8,571)
RETAINED EARNINGS -
End of period $ 27,429 $ 18,284
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
OPERATING ACTIVITIES
Net income $ 16,573 $ 16,360
Effects of noncash items -
Depreciation and amortization 5,471 4,996
Deferred income taxes and investment
tax credits, net 775 820
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 13,424 9,489
All other operating items (1,682) (1,927)
Net cash provided by operating activities 34,561 29,738
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (2,626) (1,381)
Allowance for borrowed funds used
during construction (11) (6)
Advances to affiliates - (5,500)
Net cash used for investing activities (2,637) (6,887)
FINANCING ACTIVITIES
Payment of dividends - (8,571)
Payment of short-term borrowings (26,825) (12,200)
Advances to affiliates (3,065) (1,850)
Net cash used for financing activities (29,890) (22,621)
Net increase in cash 2,034 230
Cash at beginning of period 421 2,113
Cash at end of period $ 2,455 $ 2,343
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,974 $ 1,961
Income taxes $ 1,513 $ 5,768
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 has 636 regular employees including 418 (66%) who are
represented by three collective bargaining units with agreements which
will remain in effect until September 1998, March 2002 and June 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 1996 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,
1997 and 1996 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.
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters
by the Massachusetts Department of Public Utilities (DPU).
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COMMONWEALTH GAS COMPANY
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.
Effective 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. SFAS No. 121 did not have an impact on the
Company's financial position or results of operations upon adoption.
This result may change as modifications are made to the current
regulatory framework including utility industry restructuring efforts in
Massachusetts. If all or a separable portion of the Company's operations
becomes no longer subject to the provisions of SFAS No. 71, a write-off
of related regulatory assets and liabilities would be required, unless
some form of transition cost recovery continues through rates established
and collected for the Company's remaining regulated operations. In
addition, the Company would be required to determine any impairment to
the carrying costs of deregulated plant and inventory assets.
The principal regulatory assets included in deferred charges were as
follows:
March 31, Dec. 31,
1997 1996
(Dollars in Thousands)
Postretirement benefits costs including
pensions $10,501 $ 9,972
FERC Order 636 transition costs 8,624 9,680
Environmental costs 3,902 3,870
Total regulatory assets $23,027 $23 522
On April 15, 1997, the DPU issued an accounting ruling allowing the
Company to include in cost-of-service postretirement benefits costs and to
amortize the deferred balance of $10.5 million at March 31, 1997 associated
with these costs over a period not to exceed ten years beginning April 1997.
The principal regulatory liability, reflected in deferred credits-other
and relating to income taxes, was $8.6 million at March 31, 1997 and December
31, 1996.
(3) Commitments
Construction Program
The Company is engaged in a continuous construction program presently
estimated at $92 million for the five-year period 1997 through 2001. Of that
amount, $17.8 million is estimated for 1997. As of March 31, 1997, the
Company's actual construction expenditures amounted to approximately $2.6
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,
1997 and 1996 is shown below:
Three Months
Ended March 31,
1997 and 1996
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $ 8,588 6.9%
Operating Expenses -
Cost of gas sold 10,490 16.4
Other operation and maintenance (2,852) (12.6)
Depreciation 137 3.2
Taxes -
Federal and state income 76 0.7
Local property and other 505 14.8
8,356 8.0
Operating Income 232 1.2
Other Income (131) (63.3)
Income Before Interest Charges 101 0.5
Interest Charges (112) (4.1)
Net Income $ 213 1.3
Firm Unit Sales BBTU (937) (5.2)
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, 1997 18,508 17,257 451 797 3
March 31, 1996 18,940 18,194 357 249 140
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
For the first three months of 1997, operating revenues increased $8.6
million or 6.9% due primarily to a higher level of cost of gas sold ($10.5
million) offset, in part, by lower firm unit sales (937 BBTU or $1.3 million
under prior year) and lower conservation and load management (C&LM) costs
($874,000).
The decline in firm unit sales for the first three months of 1997 reflects
significant decreases to all customer segments including residential (5.2%),
commercial (5.5%) and industrial (6.0%) that were due primarily to milder
weather experienced in this region as compared to a much colder period in
1996. For the current quarter, heating degree days totaled 2,965, 10.3% lower
than last year and 7.1% below the normal level of 3,192. The fluctuation in
non-firm sales reflects the competitive environment that currently exists in
the natural gas industry.
Other Operation and Maintenance
For the current quarter, other operation and maintenance declined by $2.9
million (12.6%) due primarily to lower labor costs resulting from 8.2% decline
in the number of regular employees ($1.0 million), lower C&LM costs ($874,000)
and the reversal in the current period of an accrual relating to a vacation
time adjustment resulting from a 1996 labor dispute ($814,000).
Depreciation and Taxes
Depreciation increased by 3.2% during the first quarter due to a higher
level of depreciable plant. The increase in local property and other taxes of
nearly 15% was due primarily to an increase in state unemployment taxes
($408,000) related to the 1996 labor dispute.
Other Income and Interest Charges
Other income decreased by ($131,000) 63.3% during the first three months
of 1997 due primarily to declines in revenues associated with the Company's
merchandising program for water heaters and heating systems ($51,000) and
interest income related to deferred gas costs ($31,000).
Total interest charges decreased $112,000 due to lower interest charges
relating to deferred gas costs ($559,000) and a decline in long-term debt
interest charges ($308,000) due to the retirement of $10 million in long-term
debt at the end of 1996 as well as scheduled sinking fund payments. This was
somewhat offset by an increase in interest on short-term borrowings ($602,000)
due to a higher average level of short-term borrowings. Short-term interest
rates remained favorable at approximately 5.6% for both periods.
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. In April, the Company
recorded an additional liability and corresponding regulatory asset of $1.2
million due to an increase in the site clean-up cost estimate for an MGP site
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COMMONWEALTH GAS COMPANY
for which the Company was previously cited as a Potentially Responsible Party.
The DPU has approved recovery of costs associated with MGP sites. The Company
is also involved in certain other known or potentially contaminated sites
where the associated costs may not be recoverable in rates. For further
information on other related environmental matters, refer to the Company's
1996 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, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 1997.
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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, 1997