<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
None
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 March 16, 1998
Common Stock, $25 par value 2,857,000 shares
The Company meets the conditions set forth in General Instruction I(1)(a) and
(b) of Form 10-K as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
Documents Incorporated by Reference Part in Form 10-K
None Not Applicable
List of Exhibits begins on page 34 of this report.
<PAGE 2>
COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business........................................ 3
General....................................... 3
Gas Supply
General..................................... 3
Hopkinton LNG Facility...................... 4
Rates and Regulation.......................... 5
Competition................................... 6
Construction and Financing.................... 7
Employees..................................... 7
Item 2. Properties...................................... 7
Item 3. Legal Proceedings............................... 8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters..................... 9
Item 7. Management's Discussion and Analysis of
Results of Operations........................... 10
Item 8. Financial Statements and Supplementary Data..... 15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 34
Signatures.................................................. 38
<PAGE 3>
COMMONWEALTH GAS COMPANY
PART I.
Item 1. Business
General
Commonwealth Gas Company (the Company) is engaged in the distribution
and sale of natural gas at retail to approximately 237,000 customers in a
1,067 square mile area which includes 49 communities in eastern, southeastern
and central Massachusetts. The approximate year-round population of this
service area is 1,128,000.
The Company, which was organized in 1851 under the laws of the
Commonwealth of Massachusetts, operates under the jurisdiction of the
Massachusetts Department of Telecommunication and Energy (DTE), formerly the
Massachusetts Department of Public Utilities, which regulates retail rates,
accounting, issuance of securities and other matters. The Company is a
wholly-owned subsidiary of Commonwealth Energy System ("System"), which,
together with its subsidiaries, is collectively referred to as "the system."
Since the date of its organization the Company has, from time to time,
acquired the property and franchises of, or merged with, other gas companies.
The Company is the only gas distribution utility in its service area
and, by virtue of its existing franchises, no other gas distribution utility
may extend its operations into the Company's service area without the
authorization of the DTE. Alternative sources of energy are available to
customers within the service territory, but competition from these sources has
not been a significant factor affecting the Company's firm gas sales to
existing customers. Even with the higher cost of storage and liquefied
natural gas (LNG), which is required to supplement pipeline supply, the
overall long-term cost of gas has been competitive with the cost of
alternative fuel sources for most of the Company's customers.
Of the Company's 1997 firm gas unit sales, 56.9% was sold to residential
customers, 28.6% to commercial customers, 9.0% to industrial customers and
5.5% to other customers. Capital expenditures are required to bring gas into
areas of anticipated growth and both the distribution capability and gas
supply must be available when new development begins or potential customers
will seek alternative sources of fuel. Certain industrial customers with
dual-fuel capability can convert from gas to alternative fuels under terms of
contracts which permit interruption of their service upon short notice or at
contractually scheduled times.
Gas Supply
(a) General
The Company purchases transportation, storage and balancing services
from Tennessee Gas Pipeline Company (Tennessee) and Algonquin Gas Transmission
Company (and other upstream pipelines that bring gas from the supply wells to
the final transporting pipelines) and purchases all of its gas supplies from
third-party vendors, utilizing firm contracts with terms of less than one
year. The vendors vary from small independent marketers to major gas and oil
companies.
<PAGE 4>
COMMONWEALTH GAS COMPANY
In addition to firm transportation and gas supplies mentioned above, the
Company utilizes contracts for underground storage and LNG facilities to meet
its winter peaking demands. The underground storage contracts are a
combination of existing and new agreements which are the result of Federal
Energy Regulatory Commission (FERC) Order 636 service unbundling. The LNG
facilities, described below, are used to liquefy and store pipeline gas during
the warmer months for use during the heating season.
The Company entered into a multi-party agreement in 1992 to assume a
portion of Boston Gas Company's contracts to purchase Canadian gas supplies
from Alberta Northeast (ANE) and have the volumes delivered by the Iroquois
Gas Transmission System and Tennessee pipelines. The ANE gas supply contract
was filed with the DTE and hearings were completed in April 1993. The DTE
approved the ANE gas supply contract in November 1995. The Company is
presently in negotiations with the parties to allow for final execution of all
pertinent agreements and contracts.
The Company began transporting gas on its distribution system in 1990
for end-users. As of December 31, 1997 there were 218 customers using this
transportation service, accounting for 8,462 BBTU or approximately 16% of
total throughput.
(b) Hopkinton LNG Facility
A portion of the Company's gas supply during the heating season is
provided by Hopkinton LNG Corp. (Hopkinton), a wholly-owned subsidiary of the
System. The facility consists of a liquefaction and vaporization plant and
three above-ground cryogenic storage tanks having an aggregate capacity of
3 million MCF of natural gas.
In addition, Hopkinton owns a satellite vaporization plant and two
above-ground cryogenic storage tanks located in Acushnet, Massachusetts with
an aggregate capacity of 500,000 MCF of natural gas that are filled with LNG
trucked from Hopkinton.
The Company has contracts for LNG service with Hopkinton extending on a
year to year basis with notice of termination required five years in advance
of the anticipated termination date. The Company and Hopkinton are currently
evaluating the contracts to determine if amendments to the contracts should be
negotiated in light of the ongoing deregulation of the natural gas industry.
Current contract payments include a demand charge sufficient to cover
Hopkinton's fixed charges and an operating charge which covers liquefaction
and vaporization expenses. The Company furnishes pipeline gas during the
period April 15 to November 15 each year for liquefaction and storage. As the
need arises, LNG is vaporized and placed in the distribution system of the
Company.
Based upon information presently available regarding projected growth in
demand and estimates of availability of future supplies of pipeline gas, the
Company believes that its present sources of gas supply are adequate to meet
existing load and allow for future growth in sales.
<PAGE 5>
COMMONWEALTH GAS COMPANY
Rates and Regulation
(a) Automatic Adjustment Clauses
The Company has a Standard Seasonal Cost of Gas Adjustment rate schedule
(CGA) that provides for the recovery, from firm customers, of purchased gas
and conservation and load management costs not recovered through base rates.
These schedules, which require DTE approval, are estimated semi-annually and
include credits for gas pipeline refunds and profit margins applicable to
capacity release, off-system sales and interruptible sales. Actual gas costs
are reconciled annually as of October 31, and any difference is included as an
adjustment in the calculation of the decimals for the two subsequent six-month
periods.
Periodically, the Company is required to file a long-range forecast of
the energy needs and requirements of its market area and annual supplements
thereto with the DTE. To approve this long-range forecast and resource plans,
the DTE must find, among other things, that the Company's projected firm load
is reasonable and based on proven and verifiable forecasting methods and data,
and that the Company assembles its supply portfolio based on a prudent
resource planning process that can be reasonably expected to meet projected
demands on a cost efficient basis. The Company filed its forecast, covering
the period November 1996 through October 2001, with the DTE on December 20,
1996.
(b) Gas Demand and Transition Costs
The Company is obligated, as part of its pipeline transportation
contracts, storage contracts and gas purchase contracts, to pay monthly demand
charges which are recovered from customers through the CGA.
As a direct result of implementation of FERC Order 636, most pipeline
companies are incurring transition costs which include the cost of
restructuring gas supply contracts, the value of facilities that were
supporting the gas sales function and are no longer used and useful for
transportation only services, the cost of contracts with upstream pipeline
companies and various miscellaneous costs. These costs are billed to the
Company and other local distribution companies.
The Company is collecting all contract restructuring costs from its
customers through the CGA as permitted by the DTE.
(c) Regulatory Matters
In May 1994, the Company requested the DTE to change the back-up service
charges under its firm transportation rate. Back-up charges result when the
Company sells gas from its system supplies to a customer whose off-system gas
supply has failed or is temporarily unavailable for reasons beyond the
customer's control. The change involved an upward indexing of back-up charges
based on changes in the gas supply demand costs occasioned by FERC Order 636.
On December 22, 1994, the DTE approved the Company's requested change
effective January 1, 1995. This change, which has no effect on revenue,
results in a more equitable recovery of pipeline capacity costs between
Commonwealth Gas' total requirements and transportation customers.
<PAGE 6>
COMMONWEALTH GAS COMPANY
(d) Quasi-firm, Off-system Gas Sales and Capacity Release Services
Pursuant to regulatory approval, the Company offers quasi-firm sales
service, providing a level of service between interruptible and firm, to
customers with dual-fuel capability. Such sales were minimal during 1997
totaling 51 BBTU. Under a margin-sharing agreement approved by the DTE on
January 15, 1997, the Company will retain 25% of the gross margins realized on
these sales above a certain threshold amount as set from year to year. The
remaining margins will be credited to firm customers through the CGA.
The Company also utilizes the off-system sales and capacity release
markets as a means to sell excess resources. Off-system sales totaled 3,572
BBTU in 1997, while 15,481 BBTU of capacity was sold in the capacity release
market. A margin-sharing agreement for these sales was approved by the DTE on
February 14, 1996 allowing the Company to retain 25% of the gross margins
realized above a certain threshold amount as set from year to year with the
remaining margins credited to firm customers through the CGA. As a result of
this margin-sharing agreement, the Company retained approximately $644,000 in
1997.
(e) Conservation and Load Management Program
The Company offers conservation measures to its residential and multi-
family customers through programs approved by the DTE in June 1992. The
Company recovers the costs of these programs via separately stated
Conservation Charge (CC) decimals. The programs have been extended through
subsequent DTE approvals, the most noteworthy being the settlement agreement
approved on November 23, 1994 which enabled the Company to recover "lost
margins" from customers effective January 1995. Specifically, the settlement
allows the Company to remain whole while it offers programs that reduce sales,
by recovering through the CC decimal the portion of the lost margins revenue
associated with saved therms resulting from conservation program
installations. The Company collected $1.6 million in lost margins during
1997.
(f) Gas Industry Restructuring
As more fully discussed in "Management's Discussion and Analysis of
Results of Operations" in Item 7 of this report, the Company has undertaken a
DTE directive to establish a common set of guiding principles and procedures
for the comprehensive unbundling of the natural gas industry in Massachusetts.
Competition
The Company faces competition from suppliers of fuel oil, propane and
electricity and also, for large commercial and industrial customers, from
other suppliers of natural gas. The Company is continuously developing and
implementing strategies to deal with the increasingly competitive environment.
FERC Order 636 marked the beginning of the deregulation and
restructuring of the natural gas industry. In addition to opening up customer
markets to competition, the regulations shifted many supply-related
responsibilities to local distribution companies including direct gas
purchases from suppliers, pipelines and producers, transportation services and
<PAGE 7>
COMMONWEALTH GAS COMPANY
storage services. The Company has developed a gas control and information
system that has purchasing and tracking systems. This ability, coupled with
aggressive planning and procurement strategies, will secure the Company's
existing market share and permit the expansion of core and non-core supply
capabilities.
The Company's substantial LNG and storage capabilities provide it with
the reliability needed during the coldest winter days and the flexibility to
sell capacity when supply and pricing conditions are favorable. Through
expanding non-firm and transportation sales, the Company has been able to
maximize the use of its gas supply and transportation system resulting in a
lower cost of gas for firm customers helping the Company to remain competitive
in its traditional markets.
On February 6, 1997, due to the dramatically changing nature of the
electric and gas industries, the System announced the consolidation of
management personnel of affiliated companies Cambridge Electric Light Company
(Cambridge Electric), Commonwealth Electric Company (Commonwealth Electric),
COM/Energy Services Company and the Company effective on that date. The
Company and these affiliates continue to operate under their existing company
names. The consolidation process for these companies involved the merging of
similar functions and activities to eliminate duplication in order to create
the most efficient and cost-effective operation possible. As part of this
consolidation effort, the Company initiated a voluntary Personnel Reduction
Program that ultimately resulted in a decrease of 100 regular employees
(approximately 15%) in 1997.
Construction and Financing
Information concerning the Company's financing and construction programs
is contained in Note 6(a) of the Notes to Financial Statements filed under
Item 8 of this report.
Employees
The Company has 558 regular employees, a decline of 15% compared to last
year. Approximately 69% of these employees are represented by three
collective bargaining units. One agreement, representing approximately 2% of
regular employees, is scheduled to expire in September 1998. The other two
agreements remain in effect through March 31, 2002 and June 30, 2002.
Although a labor dispute with one collective bargaining unit occurred during
1996, employee relations have generally been satisfactory since the dispute
was resolved in September 1996.
Item 2. Properties
The Company's principal gas properties consist of distribution mains,
services and meters necessary to maintain reliable service to customers. At
December 31, 1997, the gas system included 2,811 miles of gas distribution
lines, 167,777 services and 245,246 customer meters together with the
necessary measuring and regulating equipment.
In addition, the Company owns a central headquarters and service
building in Southborough, Massachusetts, five district office buildings and
various natural gas receiving and take stations.
<PAGE 8>
COMMONWEALTH GAS COMPANY
The Company's property is subject to encumbrances under its Indenture of
Trust and First Mortgage Bonds.
Item 3. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
<PAGE 9>
COMMONWEALTH GAS COMPANY
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
(a) Principal Market
Not applicable. The Company is a wholly-owned subsidiary of
Commonwealth Energy System.
(b) Number of Shareholders at December 31, 1997
One
(c) Frequency and Amount of Dividends Declared in 1997 and 1996
1997 1996
Per Share Per Share
Declaration Date Amount Declaration Date Amount
April 25, 1997 $2.00 January 24, 1996 $3.00
December 22, 1997 1.30 April 11, 1996 1.75
$3.30 July 25, 1996 1.00
$5.75
(d) Future dividends may vary depending upon the Company's earnings
and capital requirements as well as financial and other conditions
existing at that time.
<PAGE 10>
COMMONWEALTH GAS COMPANY
Item 7. 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 Statements of Income and is presented to
facilitate an understanding of the results of operations. This discussion
should be read in conjunction with the Notes to Financial Statements filed
under Item 8 of this report.
A summary of the period to period changes in the principal items
included in the accompanying Statements of Income for the years ended December
31, 1997 and 1996 and unit sales for these periods is shown below:
Years Ended Years Ended
December 31, December 31,
1997 and 1996 1996 and 1995
Increase (Decrease)
(Dollars in thousands)
Gas Operating Revenues $(11,353) (3.3)% $ 33,566 10.9 %
Operating Expenses -
Cost of gas sold (6,452) (3.3) 28,553 16.9
Other operation
and maintenance (4,468) (5.0) 4,523 5.3
Depreciation 421 4.2 405 4.2
Taxes -
Federal and state income (629) (6.1) 613 6.3
Local property 372 6.3 145 2.5
Payroll and other 840 35.2 (433) (15.4)
(9,916) (3.1) 33,806 12.0
Operating Income (1,437) (5.4) (240) (0.9)
Other Income (256) (27.4) (298) (24.2)
Income Before Interest Charges (1,693) (6.1) (538) (1.9)
Interest Charges (347) (3.2) (1,098) (9.2)
Net Income $(1,346) (8.0) $ 560 3.5
Unit Sales (BBTU)
Firm (2,279) (5.6) % 2,535 6.6 %
Interruptible (4) (0.2) 562 42.4
Off-system 253 10.5 (1,623) (40.1)
Quasi-firm (1,015) (95.2) (840) (44.1)
(3,045) (6.6) 634 1.4
<PAGE 11>
COMMONWEALTH GAS COMPANY
The following is a summary of unit sales, transportation volume and customers
for the periods indicated:
Years Ended December 31,
1997 1996 1995
Unit Sales (BBTU):
Residential 22,043 22,759 21,336
Commercial 11,077 11,558 10,710
Industrial 3,483 4,468 4,445
Other 2,111 2,208 1,967
Total firm 38,714 40,993 38,458
Off-System 2,673 2,420 4,043
Quasi-Firm 51 1,066 1,906
Interruptible 1,882 1,886 1,324
Total sales 43,320 46,365 45,731
Transportation 8,478 6,192 6,791
Total 51,798 52,557 52,522
Customers at End of Period:
Residential 215,757 213,474 212,329
Commercial 19,292 18,907 18,761
Industrial 934 930 933
Other 1,181 1,169 1,168
Total 237,164 234,480 233,191
Operating Revenues, Cost of Gas Sold and Unit Sales
During 1997, operating revenues decreased by $11.4 million or 3.3% due
to a 6.6% decline in total unit sales, lower conservation and load management
(C&LM) costs ($1.8 million) and to a lesser extent, lower gas costs. Revenues
for 1997 also include the recognition of margins earned on off-system
contracts ($644,000). In 1996, operating revenues increased by $33.6 million
due to higher gas costs ($28.6 million) and higher firm unit sales ($6.9
million), including transportation, offset, in part, by lower conservation and
load management (C&LM) costs ($2.8 million). The higher gas costs reflect
both higher prices from suppliers and the increased unit sales to customers.
The cost of gas sold in 1997 and 1996 reflects changes in gas prices,
sales levels, margin-sharing agreements on non-firm sales and refunds received
from gas suppliers.
The decline in firm unit sales for 1997 reflects decreases to all
customer segments including residential (3.1%), commercial (4.2%) and
industrial (22%) that were due primarily to milder weather experienced in this
region during the first quarter as compared to a much colder period in 1996.
Degree days for 1997 totaled 6,463, 3.6% lower than last year and 1.2% below
the normal level of 6,541. The significant fluctuations in non-firm sales for
1997 and 1996 continue to reflect the competitive environment that currently
exists in the natural gas industry. Interruptible sales have no impact on net
income since all of the margins from these sales are flowed back to firm
customers through the CGA.
<PAGE 12>
COMMONWEALTH GAS COMPANY
The number of customers increased slightly in 1997 and 1996 due mainly
to new residential and commercial construction activity, reflecting an
improving economic environment.
Other Operating Expenses
During 1997, other operation and maintenance decreased by $4.5 million
or 5% due to the absence of net costs associated with a 1996 labor dispute
($4.6 million), lower labor costs resulting from a decrease in the number of
employees through attrition and a Personnel Reduction Program (PRP) ($5.7
million), reduced maintenance costs relating to distribution ($2.2 million)
and lower C&LM costs ($1.8 million). These decreases were partially offset by
a one-time charge ($6.8 million) related to the PRP initiated during the
second quarter and higher postretirement benefit costs ($2 million) reflecting
the full recognition of expense and amortization of previously deferred costs
associated with postretirement benefits.
The goal of the PRP was to achieve a reduced, more efficient and more
productive workforce in response to the significant regulatory changes facing
the Company. In 1997, approximately 15% of the Company's employees
voluntarily terminated employment as a result of the PRP. The payback period
for the cost of the PRP is expected to be about one year. This action
followed the consolidation of the system's electric and gas operations earlier
in 1997.
In 1996, other operation and maintenance increased by $4.5 million or
5.3% primarily due to the net impact of the labor dispute, higher liability
insurance costs due to increased reserve requirements ($1.6 million) and an
accrual for a 1996 vacation time carry-over related to the labor dispute
($800,000) offset, in part, by lower C&LM costs ($2.8 million).
Depreciation and Taxes
The 4.2% increase in depreciation in both 1997 and 1996 resulted from
higher levels of depreciable plant-in-service.
The fluctuation in federal and state income taxes during 1997 and 1996
was due to the respective levels of pre-tax income. The change in payroll and
other taxes for 1997 and 1996 reflects additional payroll-related costs
associated with the 1996 labor dispute. The increase in local property taxes
during both 1997 and 1996 was due to higher tax rates and assessments in the
Company's service territory.
Other Income and Interest Charges
During 1997, other income decreased $256,000 or 27.4% due primarily to
a reduction in interest income ($167,000) in connection with the Company's
participation in the COM/Energy Money Pool (the Pool) and the absence of
interest ($74,000) relating to a Massachusetts income tax abatement received
in 1996. In 1996, other income decreased by $298,000 due primarily to a
reduction in interest income ($591,000) relating to the Company's
participation in the Pool offset by a $452,000 increase in revenues associated
with the Company's merchandising program for water heaters and heating
systems.
<PAGE 13>
COMMONWEALTH GAS COMPANY
For 1997, total interest charges decreased $347,000 due primarily to
lower interest on deferred gas costs ($1 million) and a decline in interest
costs relating to long-term debt ($365,000) reflecting the impact of a sinking
fund payment and debt that was retired in October 1996. The impact of these
factors was offset, in part, by an increase in short-term interest ($783,000)
due to a higher average level of borrowings, higher interest relating to gas
refunds ($194,000) and higher interest charges relating to contested tax
issues ($115,000). Total interest charges decreased by $1.1 million in 1996
primarily due to lower interest on deferred gas costs and pipeline refunds and
the retirement of $10 million of long-term debt in October 1996. These
decreases were partially offset by higher short-term interest charges
reflecting a higher level of borrowings during the year.
Long-term Financing
On September 26, 1997, the Company issued $10 million of First Mortgage
Sinking Fund Bonds (Series L, 6.54% due 2007) and $25 million of First
Mortgage Bonds (Series M, 7.04% due 2017). The proceeds of $35 million were
used to retire short-term debt that had been incurred to temporarily finance
additions to property, plant and equipment and for general working capital
needs. This financing had been approved by the DTE on June 12, 1997.
Forward-Looking Statements
This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements" and
are intended to be subject to the safe harbor protection provided by the
Private Securities Litigation Reform Act of 1995. A number of important
factors affecting the Company's business and financial results could cause
actual results to differ materially from those stated in the forward-looking
statements. Those factors include developments in the legislative, regulatory
and competitive environment, certain environmental matters, demands for
capital expenditures and the availability of cash from various sources.
Gas Industry Restructuring
On July 18, 1997, the DTE directed the ten Massachusetts gas utilities,
including the Company, to initiate a collaborative process that will establish
guiding principles and specific procedures for unbundling rates and services
for all customers.
The DTE 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 DTE outlined several specific issues that it expects
the collaborative to address: (1) services that can be offered on a
competitive basis; (2) terms and conditions of service; (3) consumer
<PAGE 14>
COMMONWEALTH GAS COMPANY
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 DTE also suggested that the collaborative
reconsider the pricing and provision of interruptible transportation services.
On August 18, 1997, the DTE noted that the development of unbundling
principles and procedures constitutes only a part of the effort necessary to
develop full customer choice for gas service. The DTE recognized that each
local distribution company will be filing a comprehensive unbundling proposal
at some later date. In the interim, the DTE directed those companies that do
not currently have unbundled rates, including Commonwealth Gas, to have such
rates in effect no later than November 1, 1998.
Commonwealth Gas and eight other gas utilities initiated the Massachu-
setts Gas Unbundling Collaborative (the Collaborative) on September 15, 1997,
to explore and develop generic principles to achieve the goals set forth by
the DTE. Collaborative participants represented a broad array of stakeholder
interests including the utilities, natural gas marketers, interstate pipe-
lines, producers, energy consultants, unions, consumer advocates and represen-
tatives for the DTE, the Massachusetts Attorney General, and the Massachusetts
Division of Energy Resources.
On November 15, 1997, the Collaborative filed a status report with the
DTE that outlined its progress in moving the gas industry to a more competi-
tive structure that provides all customers with meaningful access to competi-
tive markets consistent with public-policy objectives. The status report
summarized the substantive issues that had been the subject of Collaborative
discussion, including: (1) the disposition of interstate pipeline capacity;
(2) the unbundling of rates; (3) customer enrollment, billing, termination,
and information exchange procedures; and, (4) consumer protections, low-income
discounts, and competitive supplier registration. The status report also
established a schedule to implement a final unbundling plan by November 1,
1998.
In accordance with that schedule, the Collaborative submitted with the
DTE a Rate Unbundling Status Report on January 16, 1998. The report detailed
an overall process for developing unbundled rates consistent with the DTE's
rate structure goals of efficiency, fairness, simplicity, continuity and
earnings stability. In response to the Collaborative's proposal, the DTE
ordered the Company to submit, no later than April 15, 1998, a consensus-based
settlement, or partial settlement, of unbundled rate tariffs designed
according to the general concepts set forth in the report.
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 1997, 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 Commonwealth Gas was previously cited as a Potentially
Responsible Party. The DTE has approved recovery of costs associated with MGP
sites.
<PAGE 15>
COMMONWEALTH GAS COMPANY
The Company is also involved in other known or potentially contaminated
sites where the associated costs may not be recoverable in rates and have
recorded in prior years an estimated liability (and a charge to operations) of
$500,000 to cover the expected costs associated with assessment and
remediation activities. These estimates are reviewed and adjusted
periodically as further investigation and assignment of responsibility occurs.
The Company is unable to estimate its ultimate liability for future
environmental remediation costs. However, in view of the Company's current
assessment of its environmental responsibilities, existing legal requirements
and regulatory policies, management does not believe that these matters will
have a material adverse effect on the Company's results of operations or
financial position.
On January 1, 1997, the Company adopted the provisions of Statement of
Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP 96-1 pro-
vides authoritative guidance for recognition, measurement, display and
disclosure of environmental remediation liabilities in financial statements.
The Company has recorded environmental remediation liabilities net of amounts
paid of $1.3 million at December 31, 1997. The adoption of SOP 96-1 did not
have a material adverse effect on the Company's results of operations or
financial position.
Year 2000
The Company has been involved in the Year 2000 compliancy since 1996.
A complete inventory and review of software, information processing and
delivery systems has been completed, and work continues on computer systems
wherever necessary. While some computer systems have already been updated,
tested and placed in production, the system expects to complete the balance of
the modifications by early 1999.
Expenditures incurred by the system through 1997 to review existing
computer systems and to modify existing software and applications amounted to
nearly $900,000, and it is estimated that approximately $2.6 million will be
incurred in 1998 and 1999.
Management believes that, with appropriate modifications, the Company
will be fully compliant regarding all Year 2000 issues and will continue to
provide its products and services uninterrupted through the millennium change.
Failure to become fully compliant could have a significant impact on the
Company's operations.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements required by this item are filed
herewith on pages 16 through 33 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE 16>
COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1997
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Commonwealth Gas Company:
We have audited the accompanying balance sheets of COMMONWEALTH GAS
COMPANY (a Massachusetts corporation and wholly-owned subsidiary of
Commonwealth Energy System) as of December 31, 1997 and 1996, and the related
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commonwealth Gas
Company as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting prin-
ciples.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
to financial statements and schedule is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1998.
<PAGE 17>
COMMONWEALTH GAS COMPANY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PART II.
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1997 and 1996
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995
Statements of Retained Earnings for the Years Ended December 31, 1997,
1996 and 1995
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995
Notes to Financial Statements
PART IV.
SCHEDULE
II Valuation and Qualifying Accounts for the Years Ended December 31,
1997, 1996 and 1995
SCHEDULES OMITTED
All other schedules are not submitted because they are not applicable or
not required or because the required information is included in the
financial statements or notes thereto.
<PAGE 18>
COMMONWEALTH GAS COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
(Dollars in thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $375,083 $358,783
Less - Accumulated depreciation 110,661 102,278
264,422 256,505
Add - Construction work in progress 570 836
264,992 257,341
CURRENT ASSETS
Cash 1,867 421
Accounts receivable -
Affiliated companies 592 242
Customers, less reserves of $2,853 in 1997
and $2,738 in 1996 48,731 47,087
Unbilled revenues 19,121 20,885
Inventories, at average cost -
Natural gas 23,301 23,084
Materials and supplies 1,225 1,620
Prepaid taxes -
Property 3,176 3,061
Income 5,640 5,619
Other 1,234 981
104,887 103,000
DEFERRED CHARGES
Regulatory assets 20,873 23,522
Other 5,214 5,067
26,087 28,589
$395,966 $388,930
The accompanying notes are an integral part of these financial statements.
<PAGE 19>
COMMONWEALTH GAS COMPANY
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
CAPITALIZATION AND LIABILITIES
1997 1996
(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 16,871 10,856
116,035 110,020
Long-term debt, less maturing issues and
current sinking fund requirements 105,800 74,450
221,835 184,470
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 39,325 58,200
Advances from affiliates - 10,400
Maturing long-term debt - -
39,325 68,600
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliated companies 1,869 3,081
Other 32,450 32,904
Customer deposits 1,006 952
Accrued local property and other taxes 3,366 3,060
Accrued interest 1,038 458
Other 18,551 16,681
61,930 60,786
101,255 129,386
DEFERRED CREDITS
Accumulated deferred income taxes 38,322 37,088
Unamortized investment tax credits 5,461 5,660
Other 29,093 32,326
72,876 75,074
COMMITMENTS AND CONTINGENCIES
$395,966 $388,930
The accompanying notes are an integral part of these financial statements.
<PAGE 20>
COMMONWEALTH GAS COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
GAS OPERATING REVENUES $331,135 $342,488 $308,922
OPERATING EXPENSES
Cost of gas sold 191,213 197,665 169,112
Other operation 74,402 75,279 72,138
Maintenance 10,580 14,171 12,789
Depreciation 10,482 10,061 9,656
Taxes -
Income 9,653 10,282 9,669
Local property 6,315 5,943 5,798
Payroll and other 3,225 2,385 2,818
305,870 315,786 281,980
OPERATING INCOME 25,265 26,702 26,942
OTHER INCOME 679 935 1,233
INCOME BEFORE INTEREST CHARGES 25,944 27,637 28,175
INTEREST CHARGES
Long-term debt 7,251 7,604 8,174
Other interest charges 3,250 3,244 3,772
10,501 10,848 11,946
NET INCOME $ 15,443 $ 16,789 $ 16,229
The accompanying notes are an integral part of these financial statements.
<PAGE 21>
COMMONWEALTH GAS COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
Balance at beginning of year $10,856 $10,495 $ 6,837
Add (Deduct):
Net income 15,443 16,789 16,229
Cash dividends on common stock (9,428) (16,428) (12,571)
Balance at end of year $16,871 $10,856 $10,495
The accompanying notes are an integral part of these financial statements.
<PAGE 22>
COMMONWEALTH GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
(Dollars in thousands)
OPERATING ACTIVITIES
Net income $15,443 $16,789 $16,229
Effects of noncash items -
Depreciation and amortization 13,190 12,034 12,983
Deferred income taxes 746 4,249 (4,026)
Investment tax credits (199) (202) (203)
Change in working capital exclusive
of cash and interim financing -
Accounts receivable and unbilled
revenues (230) (4,859) (9,111)
Income taxes (21) (5,235) 235
Local property and other taxes 191 (342) (115)
Accounts payable and other 763 (31,407) 15,985
Deferred postretirement benefit costs (414) (2,228) (2,376)
FERC Order 636 transition costs, net - - 11,390
All other operating items (2,278) (3,267) 10,908
Net cash provided by (used for)
operating activities 27,191 (14,468) 51,899
INVESTING ACTIVITIES
Additions to property, plant and
equipment (inclusive of AFUDC) (18,392) (11,696) (16,307)
FINANCING ACTIVITIES
Payment of dividends (9,428) (16,428) (12,571)
Proceeds from (payment of) short-term
borrowings (18,875) 46,000 (12,750)
Proceeds from (payment of) affiliate
borrowings (10,400) 8,550 (9,370)
Long-term debt issues 35,000 - -
Long-term debt issue refunded - (10,000) -
Retirement of long-term debt
through sinking funds (3,650) (3,650) (3,650)
Net cash provided by (used for)
financing activities (7,353) 24,472 (38,341)
Net increase (decrease) in cash 1,446 (1,692) (2,749)
Cash at beginning of period 421 2,113 4,862
Cash at end of period $ 1,867 $ 421 $ 2,113
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,162 $10,619 $11,035
Income taxes $ 8,916 $14,165 $ 8,118
The accompanying notes are an integral part of these financial statements.
<PAGE 23>
COMMONWEALTH GAS COMPANY
NOTES TO 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 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 companies and several non-regulated companies.
The Company is engaged in the distribution and sale of natural gas at
retail to approximately 237,000 customers in a 1,067 square-mile area which
includes 49 communities in eastern, southeastern and central Massachusetts
including New Bedford, Cambridge, Plymouth and Worcester. The approximate
year-round population of this service area is 1,128,000.
The Company has 558 regular employees including 387 (69%) who are repre-
sented by three collective bargaining units. In September 1998, a
collective bargaining unit representing approximately 2% of regular
employees is scheduled to expire and two additional contracts (together
representing approximately 67% of regular employees) are scheduled to
expire in March and June of 2002.
During the second quarter of 1997, the system initiated a voluntary
personnel reduction program. As a result of this program, the Company's
total number of regular employees declined by approximately 15%.
(2) Significant Accounting Policies
(a) Principles of Accounting
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain prior year amounts are reclassified from time to time to conform
with the presentation used in the current year's financial statements.
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters by the
Massachusetts Department of Telecommunications and Energy (DTE), formerly
the Massachusetts Department of Public Utilities.
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 DTE has permitted or is
<PAGE 24>
COMMONWEALTH GAS COMPANY
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 at
December 31, 1997 and 1996 were as follows:
1997 1996
(Dollars in thousands)
Postretirement benefit costs $ 9,607 $ 9,972
FERC Order 636 transition costs 7,336 9,680
Environmental costs 3,930 3,870
Total regulatory assets $20,873 $23,522
The principal regulatory liability, reflected in deferred credits-other
and relating to income taxes, was $8.3 million and $8.6 million at December
31, 1997 and 1996, respectively. As of December 31, 1997, $18.9 million of
the Company's regulatory assets and all of its regulatory liabilities are
reflected in rates charged to customers. Regulatory assets, including
postretirement benefit costs, are being recovered over a weighted average
period of approximately 8 years. These regulatory assets will be a
component that will be included in the Company's consensus-based settlement
to be submitted to the DTE no later than April 15, 1998.
(c) Transactions with Affiliates
Operating revenues include sales of gas to affiliate Cambridge Electric
Light Company as follows:
1997 1996 1995
(Dollars in thousands)
Cost $ - $ 11 $ 289
Margin - - 64
Total $ - $ 11 $ 353
The margin realized on these sales is credited to firm customers through
the Cost of Gas Adjustment (CGA).
Other intercompany transactions include payments by the Company for
management, accounting, data processing and other services provided by
COM/Energy Services Company. In addition, the Company incurred costs paid to
affiliate Hopkinton LNG Corp. for liquefaction and vaporization services that
<PAGE 25>
COMMONWEALTH GAS COMPANY
amounted to $10,172,000, $10,124,000 and $9,988,000 in 1997, 1996 and 1995,
respectively. Transactions with system companies are subject to review by
the DTE.
(d) Operating Revenues
Customers are billed for their use of gas on a cycle basis throughout
the month. To reflect revenues in the proper period, the estimated amount of
unbilled sales revenue is recorded each month.
The Company is permitted to bill customers currently for total gas
costs, certain conservation and load management costs and environmental costs
through adjustment clauses. Amounts recoverable under the adjustment clauses
are subject to review and adjustment by the DTE. The amount of such costs
incurred by the Company but not yet reflected in customers' bills is recorded
as unbilled revenues.
(e) Depreciation
Depreciation is provided using the straight-line method at rates
intended to amortize the original cost and the estimated cost of removal less
salvage of properties over their estimated economic lives. The Company's
composite depreciation rate, based on average depreciable property in
service, was 2.95% in 1997, 2.94% in 1996 and 2.90% in 1995.
(f) Maintenance
Expenditures for repairs of property and replacement and renewal of
items determined to be less than units of property are charged to maintenance
expense. Additions, replacements and renewals of property considered to be
units of property are charged to the appropriate plant accounts. Upon
retirement, accumulated depreciation is charged with the original cost of
property units and the cost of removal less salvage.
(g) Allowance for Funds Used During Construction
Under applicable rate-making practices, the Company is permitted to
include an allowance for funds used during construction (AFUDC) as an element
of its depreciable property costs. This allowance is based on the amount of
construction work in progress that is not included in the rate base on which
the Company earns a return. An amount equal to the AFUDC capitalized in the
current period is reflected in other interest charges in the accompanying
Statements of Income and amounted to $55,000, $20,000 and $55,000 in 1997,
1996 and 1995, respectively.
While AFUDC does not provide funds currently, these amounts are
recoverable in revenues over the service life of the constructed property.
The amount of AFUDC recorded was at a weighted average rate of 5.75% in 1997,
6% in 1996 and 6.50% in 1995.
(3) Income Taxes
For financial reporting purposes, the Company provides federal and state
income taxes on a separate return basis. However, for federal income tax
purposes, the Company's taxable income and deductions are included in the
<PAGE 26>
COMMONWEALTH GAS COMPANY
consolidated income tax return of the System, and it makes tax payments or
receives refunds on the basis of its tax attributes in the tax return in
accordance with applicable regulations.
The following is a summary of the provisions for income taxes for the
years ended December 31, 1997, 1996 and 1995:
1997 1996 1995
(Dollars in thousands)
Federal -
Current $ 7,544 $ 5,220 $11,602
Deferred 775 3,508 (3,155)
Investment tax credits (199) (202) (203)
8,120 8,526 8,244
State -
Current 1,562 1,015 2,296
Deferred 168 713 (618)
1,730 1,728 1,678
9,850 10,254 9,922
Amortization of regulatory liability
relating to deferred income taxes (197) 28 (253)
Total federal and state
income taxes $ 9,653 $10,282 $ 9,669
Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
Accumulated deferred income taxes consisted of the following in 1997 and
1996:
1997 1996
(Dollars in thousands)
Liabilities
Property-related $44,730 $43,751
Postretirement benefits plan 3,877 3,903
All other 1,691 1,602
50,298 49,256
Assets
Investment tax credit 3,524 3,653
Pension plan 2,921 3,458
Regulatory liability 2,883 3,010
Inventory repricing 2,948 3,202
All other 3,359 2,363
15,635 15,686
Accumulated deferred income taxes, net $34,663 $33,570
The net year-end deferred income tax liability above is net of current
deferred tax assets of $3,659,000 in 1997 and $3,518,000 in 1996 which are
included in other deferred charges in the accompanying Balance Sheets.
<PAGE 27>
COMMONWEALTH GAS COMPANY
The total income tax provision set forth on the previous page
represents 38% in 1997 and 1996 and 37% in 1995 of income before such taxes.
The following table reconciles the statutory federal income tax rate to these
percentages:
1997 1996 1995
Federal statutory rate 35% 35% 35%
Federal income tax expense at statutory levels $ 8,784 $ 9,475 $9,064
Increase (Decrease) from statutory rate:
State tax net of federal tax benefit 1,124 1,123 1,091
Amortization of investment tax credits (200) (202) (203)
Amortization of excess deferred reserves (197) 28 (253)
Tax versus book depreciation 19 (123) (16)
Other 123 (19) (14)
$ 9,653 $10,282 $9,669
Effective federal tax rate 38% 38% 37%
(4) Long-Term Debt and Interim Financing
(a) Long-Term Debt
Long-term debt outstanding, exclusive of current maturities and current
sinking fund requirements, collateralized by substantially all of the
Company's property, is as follows:
Original Balance December 31,
Issue 1997 1996
(Dollars in thousands)
First Mortgage Bonds -
8.99%, Series I, due 2001 $40,000 $ 10,800 $14,450
9.95%, Series J, due 2020 25,000 25,000 25,000
7.11%, Series K, due 2033 35,000 35,000 35,000
6.54%, Series L, due 2007 10,000 10,000 -
7.04%, Series M, due 2017 25,000 25,000 -
$105,800 $74,450
Under terms of its indenture, the Company is required to make periodic
sinking fund payments for retirement of outstanding long-term debt. The
Company may purchase its outstanding bonds in advance of sinking fund
requirements under favorable conditions. The required sinking fund payments
and balances of maturing debt issues for the five years subsequent to
December 31, 1997 are as follows:
Sinking Fund Maturing Debt
Year Requirements Issues Total
(Dollars in thousands)
1998 $3,650 $ - $3,650
1999 3,650 - 3,650
2000 3,650 - 3,650
2001 5,079 3,500 8,579
2002 1,429 - 1,429
<PAGE 28>
COMMONWEALTH GAS COMPANY
(b) Notes Payable to Banks
The Company and other system companies maintain both committed and
uncommitted lines of credit for the short-term financing of their
construction programs and other corporate purposes. As of December 31, 1997,
system companies had $145 million of committed lines that will expire at
varying intervals in 1997. These lines are normally renewed upon expiration
and require annual fees up to .1875% of the individual line. At December 31,
1997, the uncommitted lines of credit totaled $10 million. Interest rates on
the outstanding borrowings generally are at an adjusted money market rate and
averaged 5.8% and 5.6% in 1997 and 1996, respectively. The Company's notes
payable to banks totaled $39,325,000 and $58,200,000 at December 31, 1997 and
1996, respectively.
(c) Advances from Affiliates
The Company had no notes payable to the System at December 31, 1997
compared to $5,495,000 at December 31, 1996. These notes are written for a
term of up to 11 months and 29 days. Interest is at the prime rate and is
adjusted for changes in that rate during the term of the notes. This rate
averaged 8.5% and 8.3% during 1997 and 1996, respectively.
The Company is a member of the COM/Energy Money Pool (the Pool), an
arrangement among the subsidiaries of the System, whereby short-term cash
surpluses are used to help meet the short-term borrowing needs of the utility
subsidiaries. In general, lenders to the Pool receive a higher rate of
return than they otherwise would on such investments, while borrowers pay a
lower interest rate than those available from banks. Interest rates on the
outstanding borrowings are based on the monthly average rate the Company
would otherwise have to pay banks, less one-half the difference between that
rate and the monthly average U.S. Treasury Bill weekly auction rate. The
borrowings are for a period of less than one year and are payable upon
demand. Rates on these borrowings averaged 5.4% and 5.3% during 1997 and
1996, respectively. The Company had no borrowings from the Pool at December
31, 1997 compared to $4,905,000 at December 31, 1996.
(d) Disclosures about Fair Value of Financial Instruments
The fair value of certain financial instruments included in the
accompanying balance sheets as of December 31, 1997 and 1996 are as follows:
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
(Dollars in thousands)
Long-Term Debt $109,450 $122,744 $78,100 $85,289
The carrying amount of cash, notes payable to banks and advances from
affiliates approximates the fair value because of the short maturity of these
financial instruments.
<PAGE 29>
COMMONWEALTH GAS COMPANY
The estimated fair value of long-term debt is based on quoted market
prices of the same or similar issues or on the current rates offered for debt
with the same remaining maturity. The fair values shown above do not purport
to represent the amounts at which those obligations would be settled.
(5) Employee Benefit Plans
(a) Pension
The Company has a noncontributory pension plan covering substantially
all regular employees who have attained the age of 21 and have completed a
year of service. Pension benefits are based on an employee's years of
service and compensation. The Company makes monthly contributions to the
plan consistent with the funding requirements of the Employee Retirement
Income Security Act of 1974.
Components of pension expense and related assumptions to develop pension
expense were as follows:
1997 1996 1995
(Dollars in thousands)
Service cost $ 2,252 $ 2,310 $ 1,912
Interest cost 7,242 7,172 7,094
Return on plan assets - (gain)/loss (17,925) (13,542) (18,598)
Net amortization and deferral 11,244 7,445 12,909
Total pension expense 2,813 3,385 3,317
Transfers from affiliated
companies, net 515 487 463
Less: Amounts capitalized
and deferred 375 292 342
Net pension expense $ 2,953 $ 3,580 $ 3,438
Discount rate 7.50% 7.25% 8.50%
Assumed rate of return 8.75 8.75 9.00
Rate of increase in future compensation 4.25 4.25 5.00
Pension expense reflects the use of the projected unit credit method
which is also the actuarial cost method used in determining future funding of
the plan. The funded status of the plan (using a measurement date of
December 31) is as follows:
<PAGE 30>
COMMONWEALTH GAS COMPANY
1997 1996
(Dollars in thousands)
Accumulated benefit obligation:
Vested $ (95,346) $(74,341)
Nonvested (12,524) (9,084)
$(107,870) $(83,425)
Projected benefit obligation $(120,179) $(99,811)
Plan assets at fair market value 114,394 101,182
Projected benefit obligation
(greater) less than plan assets (5,785) 1,371
Unamortized transition obligation 2,477 3,098
Unrecognized prior service cost 4,317 4,824
Unrecognized gain (8,874) (16,566)
Accrued pension liability $ (7,865) $ (7,273)
The following actuarial assumptions were used in determining the plan's
year-end funded status:
1997 1996
Discount rate 7.00% 7.50%
Rate of increase in future compensation 3.75 4.25
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect pension
expense in future years.
(b) Other Postretirement Benefits
Certain employees are eligible for postretirement benefits if they meet
specific requirements. These benefits could include health and life
insurance coverage and reimbursement of Medicare Part B premiums. Under
certain circumstances, eligible employees are required to make contributions
for postretirement benefits.
To fund its postretirement benefits, the Company makes contributions to
various voluntary employees' beneficiary association (VEBA) trusts that were
established pursuant to section 501(c)(9) of the Internal Revenue Code (the
Code). The Company also makes contributions to a subaccount of its pension
plan pursuant to section 401(h) of the Code to fund a portion of its
postretirement benefit obligation. The Company contributed approximately
$3.7 million, $4.3 million and $4.4 million to these trusts during 1997, 1996
and 1995, respectively.
<PAGE 31>
COMMONWEALTH GAS COMPANY
The net periodic postretirement benefit cost for the years ended
December 31, 1997, 1996 and 1995 include the following components and related
assumptions:
1997 1996 1995
(Dollars in thousands)
Service cost $ 441 $ 551 $ 452
Interest cost 2,788 2,878 2,848
Return on plan assets (2,462) (1,348) (1,408)
Amortization of transition obligation
over 20 years 1,700 1,700 1,700
Net amortization and deferral 1,297 482 811
Total postretirement benefit cost 3,764 4,263 4,403
Transfers to affiliated companies, net 484 520 524
Less: Amounts capitalized and deferred 86 2,612 2,834
Net postretirement benefits cost $ 4,162 $ 2,171 $ 2,093
Discount rate 7.50% 7.25% 8.50%
Assumed rate of return 8.75 8.75 9.00
Rate of increase in future compensation 4.25 4.25 5.00
The funded status of the Company's plan using a measurement date of
December 31, 1997 and 1996 is as follows:
1997 1996
(Dollars in thousands)
Accumulated postretirement benefit obligation:
Retirees $ (32,945) $ (24,302)
Fully eligible active plan participants (5,163) (3,456)
Other active plan participants (9,163) (10,885)
(47,271) (38,643)
Plan assets at fair market value 16,720 12,636
Accumulated postretirement benefit obligation
greater than plan assets (30,551) (26,007)
Unamortized transition obligation 25,501 27,203
Unrecognized (gain) loss 5,050 (1,196)
$ - $ -
The following actuarial assumptions were used in determining the plan's
estimated accumulated postretirement benefit obligation (APBO) and funded
status for 1997 and 1996:
1997 1996
Discount rate 7.00% 7.50%
Rate of increase in future compensation 3.75 4.25
Medicare Part B premiums 3.10 9.50
Medical care 6.75 7.00
Dental care 4.50 5.00
<PAGE 32>
COMMONWEALTH GAS COMPANY
The above dental rate remains constant through the year 2007. Rates for
Medicare Part B premiums and medical care decrease to 3.1% and 4.5%,
respectively, by 2007 and remain at that level thereafter. A one percent
change in the medical trend rate would have $398,000 impact on the Company's
annual expense and would change the APBO by approximately $5.7 million.
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect post-
retirement benefit expense in future years.
On April 15, 1997, the DTE issued an accounting ruling allowing the
Company to include postretirement benefits costs in cost-of-service 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 that began in April
1997.
(c) Savings Plan
The Company has an Employees Savings Plan that provides for Company
contributions equal to contributions by eligible employees of up to four
percent of each employee's compensation rate. Effective January 1, 1993, the
rate was increased to five percent for those employees no longer eligible for
postretirement health benefits. The Company's contribution was $1,366,000 in
1997, $1,100,000 in 1996 and $1,439,000 in 1995.
(6) Commitments and Contingencies
(a) Construction and Financing Program
The Company is engaged in a continuous construction program presently
estimated at $93 million for the five-year period 1998 through 2002. Of that
amount, $17.9 million is estimated for 1998. The program is subject to
periodic review and revision because of factors such as changes in business
conditions, rates of customer growth, effects of inflation, equipment
delivery schedules, licensing delays, availability and cost of capital and
environmental factors.
(b) LNG Service Contract
The Company has long-term contracts with Hopkinton LNG Corp., a wholly-
owned subsidiary of the System, for liquefaction and vaporization services.
The contracts extend on a year-to-year basis, subject to the giving of a
notice to terminate by the Company at least five years in advance of the
anticipated termination date.
(7) Gas Refunds
During 1997, 1996 and 1995, the Company received refunds from its gas
suppliers in settlement of several rate cases that had been pending before
the FERC. Operating revenues and the cost of gas sold have been reduced by
the amounts refunded to firm customers totaling $2,374,000 in 1997,
$7,656,000 in 1996 and $9,061,000 in 1995.
<PAGE 33>
COMMONWEALTH GAS COMPANY
(8) Lease Obligations
The Company leases equipment and office space under arrangements that
are classified as operating leases. These lease agreements are for terms of
one year or longer. Leases currently in effect contain no provisions that
prohibit the Company from entering into future lease agreements or
obligations.
Future minimum lease payments, by period and in the aggregate, of non-
cancelable operating leases consisted of the following at December 31, 1997:
Operating Leases
(Dollars in thousands)
1998 $ 4,884
1999 3,688
2000 2,629
2001 2,176
2002 2,176
Beyond 2002 7,376
Total future minimum lease payments $22,929
Total rent expense for all operating leases, except those with terms of
a month or less, amounted to $4,866,000 in 1997, $5,027,000 in 1996 and
$4,931,000 in 1995. There were no contingent rentals and no sublease rentals
for the years 1997, 1996 and 1995.
(9) Environmental Matters
The Company is subject to laws and regulations administered by federal,
state and local authorities relating to the quality of the environment.
These regulations authorize federal and state regulatory agencies to identify
and remediate hazardous waste sites and to seek recovery from statutorily
liable parties (usually referred to as potentially responsible parties or
PRPs), or to order these PRPs to undertake the clean-up themselves. (Refer to
"Environmental Matters" filed under Item 7 of this report for additional
information.)
<PAGE 34>
COMMONWEALTH GAS COMPANY
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Index to Financial Statements
Financial statements and notes thereto of the Company together
with the Report of Independent Public Accountants, are filed under
Item 8 of this report and listed on the Index to Financial
Statements and Schedules (page 15).
(a) 2. Index to Financial Statement Schedules
Filed herewith at page indicated is the following financial
statement schedule of the Company:
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 1997, 1996 and 1995 (page 37).
(a) 3. Exhibits:
Notes to Exhibits -
a. Unless otherwise designated, the exhibits listed below are
incorporated by reference to the appropriate exhibit numbers and
the Securities and Exchange Commission file numbers indicated in
parentheses.
b. The following is a glossary of acronyms used throughout the
Exhibit Index:
CES Commonwealth Energy System
CG Commonwealth Gas Company
CNG CNG Transmission Corporation
TGP Tennessee Gas Pipeline Company
Exhibit Index:
Exhibit 3. Articles of incorporation and by-laws.
3.1.1 Articles of incorporation of CG (Exhibit 1 to the CG 1991 Form
10-K, File No. 2-1647).
3.1.2 By-laws of CG, as amended (Exhibit 2 to the CG 1992 Form 10-K,
File No. 2-1647).
Exhibit 4. Instruments defining the rights of security holders, including
indentures.
4.1. Indentures of Trust or Supplemental Indenture of Trust
(as filed by the Registrant, except First Supplemental which was
filed by the System)
1. Original Indenture on Form S-1 (Feb., 1949) (Exhibit 7(a), File
No. 2-7820).
<PAGE 35>
COMMONWEALTH GAS COMPANY
2. First Supplemental on Form S-1 (Mar., 1950) (Exhibit 7(a), File
No. 2-8418).
3. Second Supplemental on Form S-1 (Nov., 1952) (Exhibit 4(a)(2),
File No. 2-10445).
4. Third Supplemental on Form S-1 (Nov., 1952) (Exhibit 4(a)(3), File
No. 2-10445).
5. Fourth Supplemental on Form S-9 (Oct. 1954) (Exhibit 2(b)(5), File
No. 2-15089).
6. Fifth Supplemental on Form S-9 (Mar., 1956) (Exhibit 2(b)(6), File
No. 2-15089).
7. Sixth Supplemental on Form S-9 (Apr., 1957) (Exhibit 2(b)(7), File
No. 2-15089).
8. Seventh Supplemental on Form S-9 (June 1959) (Exhibit 2(b)(8),
File No. 2-20532).
9. Eighth Supplemental on Form S-9 (Sept. 1961) (Exhibit 2(b)(9),
File No. 2-20532).
10. Ninth Supplemental on Form 8-K (Aug. 1962) (Exhibit A, File No. 2-
1647).
11. Tenth Supplemental on Form 10-K (1970) (Exhibit 2, File No. 2-
1647).
12. Eleventh Supplemental on Form S-1 (June, 1972) (Exhibit 4(b)(2),
File No. 2-48556).
13. Twelfth Supplemental on Form S-1 (Aug., 1973) (Exhibit
4(b)(3), File No. 2-48556).
14. Thirteenth Supplemental on Form 10-K (1992) (Exhibit 1, File No.
2-1647).
15. Fourteenth Supplemental on Form 10-K (1990) (Exhibit 1, File No.
2-1647).
16. Fifteenth Supplemental on Form 10-K (1982) (Exhibit 1, File No. 2-
1647).
17. Sixteenth Supplemental on Form 10-K (1986) (Exhibit 1, File No. 2-
1647).
18. Seventeenth Supplemental on Form 10-K (1990) (Exhibit 2, File No.
2-1647).
19. Eighteenth Supplemental on Form 10-Q (March, 1994) (Exhibit 1,
File No. 2-1647).
Filed herewith:
4.4.20 Nineteenth Supplemental Indenture dated September 1, 1997 to
Indenture of Trust and First Mortgage Dated as of February 1, 1949
(Filed herewith as Exhibit 1).
Exhibit 10. Material Contracts.
10.1. Natural Gas Purchase Contracts.
10.1.1 Transportation Agreement between CNG and CG to provide for
transportation of natural gas on a daily basis from Steuben Gas
Storage Company to TGP, dated September 24, 1991 (Exhibit 10 to
the CG 1991 Form 10-K, File No. 2-1647).
<PAGE 36>
COMMONWEALTH GAS COMPANY
10.2 Other Agreements.
10.2.1 Pension Plan for Employees of Commonwealth Energy System and
Subsidiary Companies as amended and restated January 1, 1993
(Filed as Exhibit 1 to the System's Form 10-Q (September 1993),
File No. 1-7316).
10.2.2 Employees Savings Plan for Employees of Commonwealth Energy System
and Subsidiary Companies as amended and restated January 1, 1993
(Filed as Exhibit 2 to the System's Form 10-Q (September 1993),
File No. 1-7316).
10.2.2.1 First Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective October 1, 1994. (Exhibit 1 to CES
Form S-8 (January 1995), File No. 1-7316).
10.2.2.2 Second Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective April 1, 1996. (Exhibit 1 to CES
Form 10-K/A Amendment No. 1 (April 30, 1996), File No. 1-7316).
10.2.2.3 Third Amendment to the Employees Savings Plan of Commonwealth
Energy System and Subsidiary Companies, as amended and restated as
of January 1, 1993, effective January 1, 1997. (Exhibit 1 to CES
Form 10-K/A Amendment No. 1 (April 29, 1997), File No. 1-7316).
Filed herewith:
Exhibit 27.
Financial Data Schedule for the year ended December 31, 1997
(Filed herewith as Exhibit 2).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1997.
<PAGE 37>
SCHEDULE II
COMMONWEALTH GAS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Dollars in thousands)
Additions
Balance Provision Deductions Balance
Beginning Charged to Accounts at End
Description of Year Operations Recoveries Written Off of Year
Allowance for
Doubtful Accounts Year Ended December 31, 1997
$ 2,738 $ 4,979 $ 1,333 $ 6,197 $ 2,853
Year Ended December 31, 1996
$ 2,691 $ 4,381 $ 1,213 $ 5,547 $ 2,738
Year Ended December 31, 1995
$ 2,827 $ 4,855 $ 1,375 $ 6,366 $ 2,691
<PAGE 38>
COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: WILLIAM G. POIST
William G. Poist,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
WILLIAM G. POIST March 31, 1998
William G. Poist,
Chairman of the Board
R. D. WRIGHT March 31, 1998
Russell D. Wright,
Vice Chairman and Chief Executive Officer
DEBORAH A. MCLAUGHLIN March 31, 1998
Deborah A. Mclaughlin,
President and Chief Operating Officer
Principal Financial and Accounting Officer:
JAMES D. RAPPOLI March 31, 1998
James D. Rappoli,
Financial Vice President and Treasurer
A majority of the Board of Directors:
DEBORAH A. MCLAUGHLIN March 31, 1998
Deborah A. McLaughlin, Director
WILLIAM G. POIST March 31, 1998
William G. Poist, Director
JAMES D. RAPPOLI March 31, 1998
James D. Rappoli, Director
R. D. WRIGHT March 31, 1998
Russell D. Wright, Director