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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 2-1647
COMMONWEALTH GAS COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-1989250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Main Street, Cambridge, Massachusetts 02142-9150
(Address of principal executive offices) (Zip Code)
(617) 225-4000
(Registrant's telephone number, including area code)
(Former name, address and fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [x] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock May 1, 1998
Common Stock, $25 par value 2,857,000 shares
The Company meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
March 31, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $377,465 $375,083
Less - Accumulated depreciation 116,633 110,661
260,832 264,422
Add - Construction work in progress 1,043 570
261,875 264,992
CURRENT ASSETS
Cash 1,439 1,867
Accounts receivable 66,813 49,323
Unbilled revenues 9,870 19,121
Inventories, at average cost 15,858 24,526
Prepaid taxes -
Property 811 3,176
Income - 5,640
Other 989 1,234
95,780 104,887
DEFERRED CHARGES
Regulatory assets 20,224 20,873
Other 5,412 5,214
25,636 26,087
$383,291 $395,966
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
March 31, December 31,
1998 1997
(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 30,579 16,871
129,743 116,035
Long-term debt, less current sinking
fund requirements 105,800 105,800
235,543 221,835
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 8,400 39,325
Advances from affiliates 600 -
9,000 39,325
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliates 3,210 1,869
Other 17,173 32,450
Accrued taxes -
Income 473 -
Local property and other 2,914 3,366
Other 37,682 20,595
65,102 61,930
74,102 101,255
DEFERRED CREDITS
Accumulated deferred income taxes 38,954 38,322
Unamortized investment tax credits 5,411 5,461
Other 29,281 29,093
73,646 72,876
$383,291 $395,966
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
GAS OPERATING REVENUES $108,788 $132,313
OPERATING EXPENSES
Cost of gas sold 55,545 74,640
Other operation and maintenance 19,850 19,702
Depreciation 4,658 4,472
Taxes -
Income 8,456 10,450
Local property 2,727 2,603
Payroll and other 1,119 1,321
92,355 113,188
OPERATING INCOME 16,433 19,125
OTHER INCOME 180 76
INCOME BEFORE INTEREST CHARGES 16,613 19,201
INTEREST CHARGES
Long-term debt 2,186 1,656
Other interest charges 719 972
2,905 2,628
NET INCOME 13,708 16,573
RETAINED EARNINGS -
Beginning of period 16,871 10,856
Dividends on common stock - -
RETAINED EARNINGS -
End of period $ 30,579 $ 27,429
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 13,708 $ 16,573
Effects of noncash items -
Depreciation and amortization 5,614 5,471
Deferred income taxes and investment
tax credits, net 207 775
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 11,851 13,424
All other operating items 1,392 (1,682)
Net cash provided by operating activities 32,772 34,561
INVESTING ACTIVITIES
Additions to property, plant and equipment
(inclusive of AFUDC) (2,875) (2,637)
FINANCING ACTIVITIES
Payment of short-term borrowings (30,925) (26,825)
Proceeds from (payments to) affiliates 600 (3,065)
Net cash used for financing activities (30,325) (29,890)
Net increase (decrease) in cash (428) 2,034
Cash at beginning of period 1,867 421
Cash at end of period $ 1,439 $ 2,455
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 2,738 $ 1,974
Income taxes $ 1,864 $ 1,513
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 591 regular employees including 402 (68%) who are
represented by three collective bargaining units. In September 1998, a
collective bargaining unit representing approximately 2% of regular
employees is scheduled to expire. Two additional contracts (together
representing approximately 66% of regular employees) will remain in
effect until March and June of 2002.
(2) Significant Accounting Policies
(a) Principles of Accounting
The Company's significant accounting policies are described in Note
2 of Notes to Financial Statements included in its 1997 Annual Report on
Form 10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
policies but considers each interim period as an integral part of an
annual period and makes allocations of certain expenses to interim
periods based upon estimates of revenue from firm sales for the year.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
expenses. Principal items of expense which are allocated other than on
the basis of passage of time are depreciation and property taxes. These
expenses are recorded for interim reporting purposes based upon projected
gas revenue. Income tax expense is recorded using the statutory rates in
effect applied to book income subject to tax recorded in the interim
period.
The unaudited financial statements for the periods ended March 31,
1998 and 1997 reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals) necessary to summarize
fairly the results for such periods. In addition, certain prior period
amounts are reclassified from time to time to conform with the presenta-
tion used in the current period's financial statements.
The results for interim periods are not necessarily indicative of
results for the entire year because of variations in gas consumption due
to the heating season and also because of the Company's seasonal rate
structure.
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COMMONWEALTH GAS COMPANY
(b) Regulatory Assets and Liabilities
The Company is regulated as to rates, accounting and other matters
by the Massachusetts Department of Telecommunications and Energy (DTE).
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 expected to permit recovery of specific costs over time.
If all or a separable portion of the Company's operations becomes no
longer subject to the provisions of SFAS No. 71, a write-off of related
regulatory assets and liabilities would be required, unless some form of
transition cost recovery continues through rates established and
collected for the Company's remaining regulated operations. In addition,
the Company would be required to determine any impairment to the carrying
costs of deregulated plant and inventory assets.
The principal regulatory assets included in deferred charges were as
follows:
March 31, December 31,
1998 1997
(Dollars in thousands)
Postretirement benefits costs $ 9,347 $ 9,607
FERC Order 636 transition costs 6,994 7,336
Environmental costs 3,883 3,930
$20,224 $20,873
The principal regulatory liability, reflected in deferred credits-
other and relating to income taxes, was $8.3 million at March 31, 1998 and
December 31, 1997. These regulatory assets will be a component that will
be included in the Company's consensus-based settlement expected to be
submitted to the DTE by May 15, 1998.
(3) Commitments
Construction 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. As of March 31, 1998,
the Company's actual construction expenditures amounted to approximately
$2.9 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 months ended March 31,
1998 and 1997 is shown below:
Three Months
Ended March 31,
1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Gas Operating Revenues $(23,525) (17.8)%
Operating Expenses -
Cost of gas sold (19,095) (25.6)
Other operation and maintenance 148 0.8
Depreciation 186 4.2
Taxes -
Federal and state income (1,994) (19.1)
Local property and other (78) (2.0)
(20,833) (18.4)
Operating Income (2,692) (14.1)
Other Income 104 136.8
Income Before Interest Charges (2,588) (13.5)
Interest Charges 277 10.5
Net Income $ (2,865) (17.3)
Firm Unit Sales BBTU (2,799) (16.2)
The following is a summary of unit sales and transportation for the
periods indicated:
Throughput - In Billions of British Thermal Units (BBTU)
Three Months Ended Interruptible Off-
Total Firm and Other System Transportation
March 31, 1998 19,180 14,458 526 1,037 3,159
March 31, 1997 20,098 17,257 454 797 1,590
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
Operating revenues for the first three months of 1998 decreased $23.5
million or 17.8% due primarily to 16% decline in firm unit sales and, to a
lesser extent, lower gas costs.
The decline in firm unit sales for the first three months of 1998 reflects
significant decreases to all customer segments including residential (11.3%),
commercial (16.5%) and industrial (48.2%) that were due primarily to milder
winter weather experienced in our service area. For the current quarter,
heating degree days totaled 2,755, 7.1% lower than last year and 13.7% below
the normal level of 3,192. The fluctuation in non-firm sales reflects the
competitive environment that currently exists in the natural gas industry.
Other Operation and Maintenance
The minimal increase in other operation and maintenance costs for the
current quarter reflects higher costs ($1.2 million) relating to information
technology, telecommunications and network services which includes costs
associated with Year 2000 compliance, an increase in postretirement benefits
costs ($597,000) reflecting the full recognition of expense and amortization
of previously deferred costs associated with postretirement benefits and
higher conservation and load management costs ($260,000). The impact of these
factors was essentially offset by lower labor costs ($1.1 million) relating to
a personnel reduction program (PRP) implemented during the second quarter of
1997 and lower maintenance costs ($431,000) relating primarily to the gas
distribution areas, and lower liability insurance costs ($162,000) due to a
decrease in reserve requirements.
Depreciation and Taxes
Depreciation increased by 4.2% during the first quarter of 1998 due to a
higher level of depreciable plant. The fluctuation in federal and state
income taxes for the first quarter was due to the lower level of pretax
income. Local property and other taxes decreased approximately 2% due
primarily to lower payroll costs resulting from the PRP discussed above
($202,000), offset somewhat by an increase in local property taxes of $124,000
reflecting higher valuations and rates.
Other Income and Interest Charges
For the current quarter, other income increased $105,000 due primarily to
higher revenues associated with the Company's merchandising program for water
heaters and heating systems.
Total interest charges increased 10.6% for the current quarter due
primarily to higher long-term debt interest charges ($521,000) resulting from
the issuance of two new series of long-term debt in late September 1997 and an
increase in interest charges ($252,000) relating to deferred gas costs.
Offsetting these increases were declines in interest on short-term borrowings
($504,000) due primarily to a lower average level of borrowings reflecting the
use of proceeds from the new long-term debt issues.
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COMMONWEALTH GAS COMPANY
Environmental Matters
The Company is participating in the assessment of a number of former
manufactured gas plant (MGP) sites and alleged MGP waste disposal locations to
determine if and to what extent such sites have been contaminated and whether
the Company may be responsible for remedial actions. The DTE 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 1997 Annual Report on
Form 10-K.
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 protections and
social programs; (4) mitigation of gas related and non-gas related transition
costs; (5) third-party supplier qualifications; and (6) curtailment princi-
ples. 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 the Company, to have such rates
in effect by 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, labor unions, consumer advocates and
representatives for the DTE, the Massachusetts Attorney General's Office, and
the Massachusetts Division of Energy Resources.
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COMMONWEALTH GAS COMPANY
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 competitive
structure that provides all customers with meaningful access to competitive
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 to 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, by 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. Subsequently, the DTE granted the Company a
one-month extension to reach a settlement with the Collaborative's
participants.
On March 18, 1998, the Collaborative filed a second status report that
summarized the progress made by the Collaborative since it had last updated
the DTE on its activities. The Collaborative reported that it had made
substantial progress in the areas of rate unbundling and terms and conditions
for unbundled services. The report also described at least two policy issues,
capacity disposition and cost responsibility, on which the Collaborative's
participants require specific regulatory guidance before completing a
comprehensive framework for the transition to a more competitive market
structure. In response to the March report, the DTE issued a Notice of
Inquiry to address the Collaborative's unresolved issues. On May 1, 1998, the
Company filed initial written comments in the proceeding arguing in favor of a
mandatory capacity assignment proposal.
Year 2000
The Company has been involved in 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.
Costs associated with Year 2000 compliancy are being expensed as incurred.
The total cost of this project is expected to be funded with internally
generated funds.
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.
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COMMONWEALTH GAS COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
three months ended March 31, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 1998.
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COMMONWEALTH GAS COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH GAS COMPANY
(Registrant)
Principal Financial and
Accounting Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Date: May 15, 1998