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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 June 30, 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 August 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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Item 1. Financial Statements
COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
ASSETS
(Dollars in thousands)
June 30, December 31,
1997 1996
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $363,672 $358,783
Less - Accumulated depreciation 108,434 102,278
255,238 256,505
Add - Construction work in progress 2,385 836
257,623 257,341
CURRENT ASSETS
Cash 1,534 421
Accounts receivable 37,145 47,329
Unbilled revenues 7,946 20,885
Inventories, at average cost 17,411 24,704
Prepaid taxes -
Property - 3,061
Income 4,739 5,619
Other 1,948 981
70,723 103,000
DEFERRED CHARGES
Regulatory assets 21,532 23,522
Other 5,034 5,067
26,566 28,589
$354,912 $388,930
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
June 30, 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 18,543 10,856
117,707 110,020
Long-term debt, less current sinking
fund requirements 74,450 74,450
192,157 184,470
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 23,325 58,200
Advances from affiliates 1,225 10,400
24,550 68,600
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliated companies 2,151 3,081
Other 21,707 32,904
Accrued local property and other taxes 899 3,060
Other 36,274 18,091
64,681 60,786
89,231 129,386
DEFERRED CREDITS
Accumulated deferred income taxes 38,400 37,088
Unamortized investment tax credits and other 5,561 5,660
Other 29,563 32,326
73,524 75,074
$354,912 $388,930
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
1997 1996 1997 1996
GAS OPERATING REVENUES $ 61,062 $ 68,385 $193,375 $192,110
OPERATING EXPENSES
Cost of gas sold 33,385 40,814 108,025 104,964
Other operation and maintenance 26,992 23,235 46,694 45,789
Depreciation 1,768 1,511 6,240 5,846
Taxes -
Income (2,337) (652) 8,113 9,722
Local property 1,233 1,000 3,836 3,443
Payroll and other 643 540 1,964 1,516
61,684 66,448 174,872 171,280
OPERATING INCOME (622) 1,937 18,503 20,830
OTHER INCOME 11 111 87 318
INCOME BEFORE INTEREST
CHARGES (611) 2,048 18,590 21,148
INTEREST CHARGES
Long-term debt 1,656 1,965 3,312 3,929
Other interest charges 926 797 1,909 1,579
Allowance for borrowed funds
used during construction (21) (13) (32) (19)
2,561 2,749 5,189 5,489
NET INCOME (LOSS) (3,172) (701) 13,401 15,659
RETAINED EARNINGS -
Beginning of period 27,429 18,284 10,856 10,495
Dividends on common stock (5,714) (5,000) (5,714) (13,571)
RETAINED EARNINGS -
End of period $ 18,543 $ 12,583 $ 18,543 $ 12,583
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands)
(Unaudited)
1997 1996
OPERATING ACTIVITIES
Net income $ 13,401 $ 15,659
Effects of noncash items -
Depreciation and amortization 7,579 6,985
Deferred income taxes and investment
tax credits, net 856 918
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 37,285 14,276
All other operating items (1,454) (3,987)
Net cash provided by operating activities 57,667 33,851
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (6,758) (3,233)
Allowance for borrowed funds used
during construction (32) (19)
Advances to affiliates - (4,200)
Net cash used for investing activities (6,790) (7,452)
FINANCING ACTIVITIES
Payment of dividends (5,714) (13,571)
Payment of short-term borrowings (34,875) (12,200)
Payments to affiliates (9,175) (1,850)
Net cash used for financing activities (49,764) (27,621)
Net increase (decrease) in cash 1,113 (1,222)
Cash at beginning of period 421 2,113
Cash at end of period $ 1,534 $ 891
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 4,855 $ 3,990
Income taxes $ 6,106 $ 9,453
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 623 regular employees including 413 (66%) who are
represented by three collective bargaining units with agreements which
will remain in effect until September 1998, March 2002 and June 2002.
During the second quarter of 1997, the system initiated a voluntary
personnel reduction program. For additional information, see the
"Personnel Reduction Program" section under Management's Discussion and
Analysis of Results of Operations.
(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 June 30,
1997 and 1996 reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals, except for those described
in the "Personnel Reduction Program" section under Management's
Discussion and Analysis of Results of Operations) 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 and the accrual of costs associated with the personnel
reduction program referred to above.
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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.
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:
June 30, Dec. 31,
1997 1996
(Dollars in Thousands)
Postretirement benefits costs including
pensions $10,123 $ 9,972
FERC Order 636 transition costs 8,054 9,680
Environmental costs 3,355 3,870
Total regulatory assets $21,532 $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 $8.5 and $8.6 million at June 30,
1997 and December 31, 1996, respectively.
(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
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COMMONWEALTH GAS COMPANY
2001. Of that amount, $17.8 million is estimated for 1997. As of June
30, 1997, the Company's actual construction expenditures amounted to
approximately $6.8 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.
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 six months ended June 30,
1997 and 1996 is shown below:
Three Months Six Months
Ended June 30, Ended June 30,
1997 and 1996 1997 and 1996
Increase (Decrease)
(Dollars in thousands)
Gas Operating Revenues $(7,323) (10.7)% $ 1,265 0.7 %
Operating Expenses -
Cost of gas sold (7,429) (18.2) 3,061 2.9
Other operation and maintenance 3,757 16.2 905 2.0
Depreciation 257 17.0 394 6.7
Taxes -
Federal and state income (1,685) (258.4) (1,609) (16.6)
Local property and other 336 21.8 841 17.0
(4,764) (7.2) 3,592 2.1
Operating Income (2,559) (132.1) (2,327) (11.2)
Other Income (100) (90.1) (231) (72.6)
Income Before Interest Charges (2,659) (129.8) (2,558) (12.1)
Interest Charges (188) (6.8) (300) (5.5)
Net Income $(2,471) (352.5) $ (2,258) (14.4)
Firm Unit Sales - BBTU (98) (1.4) (1,035) (4.1)
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, 1997 7,990 6,804 428 735 23
June 30, 1996 8,506 6,902 539 704 361
Six Months Ended
June 30, 1997 26,498 24,061 879 1,532 26
June 30, 1996 27,430 25,096 896 953 485
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
For the first six months of 1997, operating revenues showed a slight
increase of approximately $1.2 million due primarily to an increase in the
cost of gas sold offset by lower conservation and load management (C&LM) costs
($2.1 million). During the current quarter, operating revenues decreased $7.3
million or 10.7% due primarily to a $7.4 million decrease in the cost of gas
sold reflecting declines in both firm and non-firm unit sales. Revenues for
both the current quarter and year-to-date period also include the recognition
of margins earned on off-system contracts ($644,000).
The decline in firm unit sales for the first half of 1997 reflects
decreases to all customer segments including residential (3.4%), commercial
(4.3%) and industrial (10.4%) that were due primarily to milder weather
experienced in this region as compared to a much colder period in 1996.
Degree days for the current six-month period totaled 3,933, 7.3% lower than
last year and 3.6% below the normal level of 4,081. For the current quarter,
degree days were 3.6% higher than the 1996 total of 934 due to a slightly
cooler than average Spring. The fluctuations in non-firm sales for both the
current quarter and year-to-date period reflect the competitive environment
that currently exists in the natural gas industry. A portion of the margin
realized on these sales reduces the cost of gas sold to firm customers.
Other Operation and Maintenance
For the current quarter, other operation and maintenance increased $3.8
million or 16.2% due to one-time costs ($6.8 million) related to a Personnel
Reduction Program (PRP) initiated during the current quarter (as further
discussed below). The impact of the PRP was offset somewhat by the absence of
costs related to the 1996 labor dispute ($1.7 million) and lower C&LM costs
($1.3 million).
Depreciation and Taxes
Depreciation expense increased during the current six-month period and
the current quarter due to higher levels of depreciable plant-in-service. The
change in federal and state income taxes in both periods reflects the lower
level of pretax income.
The 17% increase in local property and other taxes for the current six-
month-period is due to an increase in state unemployment taxes ($448,000)
related to the 1996 labor dispute and higher property tax assessments and
rates ($393,000).
Other Income and Interest Charges
The decrease in other income for both the current quarter and six-month
period reflects a decline in revenues associated with the Company's
merchandising program for water heaters and conversion burners and interest
related to deferred gas costs.
Total interest charges decreased 5.5% during the current six-month period
due to lower interest charges on deferred gas costs ($769,000) and a decline
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COMMONWEALTH GAS COMPANY
in long-term interest costs ($617,000). The impact of these factors was
offset by an increase in interest on short-term borrowings ($1.1 million) due
to a higher 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. 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
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.
Proposed Long-term Financing
On June 12, 1997, the Company received approval from the DPU for a
proposed financing plan which includes $35 million of long-term debt. The
proceeds from this financing, which is expected to be completed in the third
quarter, will be used to retire short-term debt incurred for the purpose of
temporarily financing additions to property, plant and equipment and for
general working capital needs.
Personnel Reduction Program
As initially discussed in the Company's 1996 Annual Report on Form 10-K
filed with the Securities and Exchange Commission, the Company announced the
details of a system-wide voluntary Personnel Reduction Program (PRP) in May
1997. The goal of the PRP is to achieve a reduced, more efficient and more
productive workforce in response to the significant regulatory changes facing
the System's companies. This action follows the recent management
consolidation of the system's electric and gas operations. The expectation is
that the workforce will be reduced by 15% to 20%.
The PRP is offered to substantially all regular and part-time employees
of the system. Eligibility for employees covered by collective bargaining
agreements is subject to negotiation. The election period is from May 13
through August 29, 1997. The system reserves the right to limit the number of
participants in the program to 300; however, the system expects the final
participation level to exceed this amount.
The program provides severance based on years of service, the continu-
ation of certain health and dental insurance for specified periods and limited
reimbursement for certain educational and/or outplacement services.
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COMMONWEALTH GAS COMPANY
Currently, approximately 14% of the Company's employees have applied for
the PRP. The Company estimates that the cost of termination benefits as
described above, including a portion of costs for certain affiliates will
approximate $6.8 million which was recorded in the second quarter and had an
after-tax income impact of $4.1 million. The payback period is expected to be
less than one year.
Gas Industry Restructuring
On July 18, 1997, the DPU requested that the Massachusetts gas utility
industry initiate a statewide restructuring. The ten utilities, including
Commonwealth Gas, are directed to begin a collaborative process that will
establish guiding principles and specific procedures for unbundling rates and
services for all customers. The process is required to begin on or before
August 15, 1997 and a report is to be submitted to the DPU no later than
November 15, 1997.
The DPU listed six principles that it considers important to the success
of a competitive natural gas market that will provide safe and reliable
service at the lowest possible cost to customers. The natural gas market
would: (1) provide the broadest possible choice; (2) provide all customers
with an opportunity to share in the benefits of increased competition; (3)
ensure full and fair competition in the gas supply market; (4) functionally
separate supply from local distribution services; (5) support and further the
goals of environmental regulation; and lastly (6) rely on incentive regulation
where a fully competitive market cannot or presently does not exist.
In addition, the DPU outlined several specific issues that it expects the
collaborative to address: (1) services that can be offered on a competitive
basis; (2) terms and condition of service; (3) consumer protections and social
programs; (4) mitigation of gas-related and non-gas related transition costs;
(5) third-party supplier qualifications; and (6) curtailment principles. The
DPU also suggested that the collaborative reconsider the pricing and provision
of interruptible transportation services.
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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
six months ended June 30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended June
30, 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: August 14, 1997