<PAGE 1>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 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.
<PAGE 2>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
ASSETS
(Dollars in thousands)
September 30, December 31,
1998 1997
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $385,010 $375,083
Less - Accumulated depreciation 119,216 110,661
265,794 264,422
Add - Construction work in progress 3,352 570
269,146 264,992
CURRENT ASSETS
Cash 9 1,867
Accounts receivable 22,985 49,323
Unbilled revenues 3,111 19,121
Inventories, at average cost 26,165 24,526
Prepaid taxes -
Property 5,868 3,176
Income 12,331 5,640
Other 1,021 1,234
71,490 104,887
DEFERRED CHARGES
Regulatory assets 20,404 20,873
Other 5,684 5,214
26,088 26,087
$366,724 $395,966
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
September 30, 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 11,874 16,871
111,038 116,035
Long-term debt, less current sinking
fund requirements 105,800 105,800
216,838 221,835
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 13,725 39,325
Advances from affiliates 6,575 -
20,300 39,325
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliates 4,713 1,869
Other 16,120 32,450
Accrued taxes -
Local property and other 5,932 3,366
Other 24,186 20,595
54,601 61,930
74,901 101,255
DEFERRED CREDITS
Accumulated deferred income taxes 39,335 38,322
Unamortized investment tax credits 5,312 5,461
Other 30,338 29,093
74,985 72,876
$366,724 $395,966
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands - unaudited)
Three Months Ended Nine Months Ended
1998 1997 1998 1997
GAS OPERATING REVENUES $ 40,349 $ 41,911 $205,438 $235,286
OPERATING EXPENSES
Cost of gas sold 25,309 28,009 113,472 136,034
Other operation and maintenance 19,284 18,717 59,341 65,411
Depreciation 1,083 1,040 7,583 7,280
Taxes -
Income (3,469) (3,832) 3,842 4,281
Local property 573 609 4,294 4,445
Payroll and other 583 668 2,321 2,632
43,363 45,211 190,853 220,083
OPERATING INCOME (LOSS) (3,014) (3,300) 14,585 15,203
OTHER INCOME 666 232 946 319
INCOME BEFORE INTEREST
CHARGES (2,348) (3,068) 15,531 15,522
INTEREST CHARGES
Long-term debt 2,186 1,690 6,558 5,002
Other interest charges 511 896 1,884 2,805
Allowance for borrowed funds
used during construction (27) (33) (56) (65)
2,670 2,553 8,386 7,742
NET INCOME (LOSS) (5,018) (5,621) 7,145 7,780
RETAINED EARNINGS -
Beginning of period 18,321 18,543 16,871 10,856
Dividends on common stock (1,429) - (12,142) (5,714)
RETAINED EARNINGS -
End of period $ 11,874 $ 12,922 $ 11,874 $ 12,922
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands - unaudited)
1998 1997
OPERATING ACTIVITIES
Net income $ 7,145 $ 7,780
Effects of noncash items -
Depreciation and amortization 9,297 9,622
Deferred income taxes and investment
tax credits, net (583) 793
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 24,210 26,799
All other operating items 1,950 (2,254)
Net cash provided by operating activities 42,019 42,740
INVESTING ACTIVITIES
Additions to property, plant and equipment
(inclusive of AFUDC) (12,710) (11,794)
Advances to affiliates - (6,300)
Net cash used for investing activities (12,710) (18,094)
FINANCING ACTIVITIES
Payment of dividends (12,142) (5,714)
Payment of short-term borrowings (25,600) (43,200)
Proceeds from (payments to) affiliates 6,575 (10,400)
Long-term debt issues - 35,000
Net cash used for financing activities (31,167) (24,314)
Net increase (decrease) in cash (1,858) 332
Cash at beginning of period 1,867 421
Cash at end of period $ 9 $ 753
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 8,035 $ 6,486
Income taxes $ 9,837 $ 6,059
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 603 regular employees including 407 (67%) who are
represented by three collective bargaining units with contracts in place
until March and June of 2002 and April of 2003.
(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, certain expenses which relate to more than one interim
period are allocated to other periods to more appropriately match
revenues and expenses. Principal items of expense which are allocated
other than on the basis of passage of time are depreciation and property
taxes. These expenses are recorded for interim reporting purposes based
upon projected gas revenue. Income tax expense is recorded using the
statutory rates in effect applied to book income subject to tax recorded
in the interim period.
The unaudited financial statements for the periods ended September
30, 1998 and 1997 reflect, in the opinion of the Company, all adjustments
(consisting of only normal recurring accruals, except for a one-time
charge recorded in June 1997 as described in Management's Discussion and
Analysis of Results of Operations) necessary to summarize fairly the
results for such periods. In addition, certain prior period amounts are
reclassified from time to time to conform with the presentation 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:
September 30, December 31,
1998 1997
(Dollars in thousands)
Postretirement benefits costs $ 8,923 $ 9,607
FERC Order 636 transition costs 6,310 7,336
Environmental costs 5,171 3,930
$20,404 $20,873
The principal regulatory liability, reflected in deferred credits-
other and relating to income taxes, was $8.2 million at September 30, 1998
and $8.3 million at December 31, 1997.
(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 September 30,
1998, the Company's actual construction expenditures amounted to
approximately $12.7 million, including an allowance for funds used during
construction. The Company expects to finance these expenditures on an
interim basis with internally-generated funds and short-term borrowings
which are ultimately expected to be repaid with the proceeds from the
issuance of long-term debt and/or equity securities.
The program is subject to periodic review and revision because of
factors such as changes in business conditions, rates of growth, effects
of inflation, equipment delivery schedules, licensing delays, availability
and cost of capital and environmental regulations.
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COMMONWEALTH GAS COMPANY
Item 2. Management's Discussion and Analysis of Results of Operations
The following is a discussion of certain significant factors which have
affected operating revenues, expenses and net income during the periods
included in the accompanying Condensed Statements of Income. This discussion
should be read in conjunction with the Notes to Condensed Financial Statements
appearing elsewhere in this report.
A summary of the period to period changes in the principal items included
in the Condensed Statements of Income for the three and nine months ended
September 30, 1998 and 1997 is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
1998 and 1997 1998 and 1997
Increase (Decrease)
(Dollars in thousands)
Gas Operating Revenues $(1,562) (3.7)% $(29,848) (12.7)%
Operating Expenses -
Cost of gas sold (2,700) (9.6) (22,562) (16.6)
Other operation and maintenance 567 3.0 (6,070) (9.3)
Depreciation 43 4.1 303 4.2
Taxes -
Federal and state income 363 9.5 (439) (10.3)
Local property and other (121) (9.5) (462) (6.5)
(1,848) (4.1) (29,230) (13.3)
Operating Income 286 8.7 (618) (4.1)
Other Income 434 187.1 627 196.6
Income Before Interest Charges 720 23.5 9 0.1
Interest Charges 117 4.6 644 8.3
Net Income $ 603 10.7 $ (635) (8.2)
Firm Unit Sales - BBTU (425) (14.0) (4,921) (18.2)
The following is a summary of total throughput for the periods indicated:
Total Throughput - In Billions of British Thermal Units (BBTU)
Total
Interruptible Total Trans- Through-
Firm and Other Sales portation put
Three Months Ended
September 30, 1998 2,602 959 3,561 2,456 6,017
September 30, 1997 3,027 1,020 4,047 2,325 6,372
Nine Months Ended
September 30, 1998 22,167 3,876 26,043 7,855 33,898
September 30, 1997 27,088 3,457 30,545 6,454 36,999
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
Operating revenues for the current quarter and nine-month period of 1998
decreased by $1.6 million and $29.8 million, respectively, due primarily to
the significant declines in total unit sales. Also affecting revenues in both
periods was a lower average cost of gas.
The decline in firm unit sales for both current periods reflects
significant decreases in sales to all customer segments that were caused by
the milder winter weather experienced in our region. The fluctuation in non-
firm sales reflects the competitive environment that currently exists in the
natural gas industry.
Other Operation and Maintenance
The $6.1 million decrease in other operation and maintenance costs for the
current nine-month period reflects the absence of costs associated with a
Personnel Reduction Program (PRP) that was initiated during the second quarter
of last year ($6.7 million) and the resulting labor savings realized during
this period ($2.1 million). Also contributing to the decline was a decrease
of $457,000 in services company costs and a reduction of $427,000 in the
provision for bad debts. Partially offsetting these factors were higher costs
($4 million) relating to the outsourcing of the information technology,
telecommunications and network services function that include costs associated
with Year 2000 compliance. The $567,000 increase in other operation and
maintenance costs for the current quarter was mainly attributable to higher
costs ($1.3 million) relating to information technology and related services
as detailed above offset, in part, by labor savings realized during the period
($328,000) related to the PRP.
Depreciation and Taxes
Depreciation increased slightly during the current quarter and nine-month
period due to a higher level of depreciable plant. The fluctuation in federal
and state income taxes for both periods was due to the levels of pretax
income. Local property and other taxes decreased in both current periods due
primarily to lower payroll costs resulting from the PRP discussed above.
Other Income and Interest Charges
For both the current quarter and nine-month period, the increase in other
income was due primarily to higher revenues associated with the Company's
merchandising program for water heaters and heating systems.
For the current quarter and nine-month period, total interest charges
increased $117,000 and $644,000, respectively, due primarily to higher long-
term interest charges ($496,000 and $1.6 million) resulting from the issuance
of two new series of long-term debt in late September 1997 and, in the nine-
month period, an increase in interest charges related to deferred gas costs
($306,000). These increases were partially offset by declines in interest on
short-term borrowings of $370,000 in the current quarter and $1.2 million in
the nine-month period due mainly 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
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 the Company, to have such rates
in effect no later than November 1, 1998.
The Company and eight other gas utilities initiated the Massachusetts 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 pipelines,
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
an 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. On June 8, 1998, the DTE, as part of
the aforementioned Notice of Inquiry, received final comments regarding the
feasibility of implementing comprehensive unbundling for all local
distribution companies by November 1, 1998. On June 29, 1998, the Company and
three other Massachusetts local distribution companies submitted unbundled
rate settlements to the DTE for consideration.
The DTE issued a procedural order regarding the Notice of Inquiry on
July 2, 1998 which stated that the introduction of comprehensive unbundling
for all classes of customers for all local distribution companies is not
feasible by November 1, 1998. The DTE stated that unbundled rates for the
four local distribution companies that filed settlements on June 29, 1998
(including the Company) shall be in place by November 1, 1998 and that
comprehensive unbundling shall be implemented no later than April 1, 1999.
Also, as part of the July 2, 1998 procedural order, the DTE ordered that a set
of proposed Model Terms and Conditions be submitted by the Collaborative no
later than July 15, 1998. These Model Terms and Conditions were submitted on
July 10, 1998 but a decision has not yet been issued by the DTE.
<PAGE 12>
COMMONWEALTH GAS COMPANY
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer
program that has date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a temporary
inability to process transactions or engage in normal business activities.
The system has been involved in Year 2000 compliancy since 1996.
The system, on a coordinated basis and with the assistance of RCG
Information Technologies and other consultants, is addressing the Year 2000
issue. The system has inventoried and assessed all date sensitive information
and transaction processing computer systems and determined that a substantial
portion of its software needed to be modified or replaced. Plans have been
developed and are being implemented to correct and test all affected systems,
with priorities assigned based on the importance of the activity. The system
has identified the software and hardware installations that will be necessary.
All installations are expected to be completed and tested by mid-1999. The
system has also inventoried its non-information technology systems that may be
date sensitive, (facilities, electric and gas operations, energy
supply/production and distribution), that use embedded technology such as
micro-controllers and micro-processors. The system anticipates that these
systems will be updated or replaced as necessary and tested by mid-1999.
Modifying and testing the system's information and transaction processing
systems from 1996 through 2000 is currently expected to cost $6 to $7 million,
including approximately $900,000 incurred through 1997 and $1.6 million spent
during the first nine months of 1998. Approximately $1.2 million is expected
to be spent in the fourth quarter of this year and the balance of $2.5 to $3
million in 1999 and 2000. Year 2000 costs have been expensed as incurred and
will continue to be funded from operations.
The system has initiated formal communications with its significant
suppliers to determine the extent to which the system may be vulnerable to
their failure to correct their own Year 2000 issues. The system has not
received enough responses to its survey to make an accurate assessment of the
Year 2000 readiness of its suppliers. Failure of the system's significant
suppliers to address Year 2000 issues could have a material adverse effect on
the system's operations, although it is not possible at this time to quantify
the amount of business that might be lost or the costs that could be incurred
by the system.
In addition, parts of the global infrastructure, including national
banking systems, electrical power grids, gas pipelines, transportation
facilities, communications and governmental activities, may not be fully
functional after 1999. Infrastructure failures could significantly reduce the
system's ability to acquire energy and its ability to serve its customers as
effectively as they are now being served. The system is identifying elements
of the infrastructure that are critical to its operations and is obtaining
information as to the expected Year 2000 readiness of these elements.
<PAGE 13>
COMMONWEALTH GAS COMPANY
The system has started its contingency planning for critical operational
areas that might be affected by the Year 2000 issue if compliance by the
system is delayed. System gas and electric operations currently have
emergency operating plans as well as information technology disaster recovery
plans as components of its standard operating procedures. These plans will be
enhanced to identify potential Year 2000 risks to normal operations and the
appropriate reaction to these potential failures including contingency plans
that may be required for any third parties that fail to achieve Year 2000
compliance. All necessary contingency plans are expected to be completed by
early 1999, although in certain cases, especially infrastructure failures,
there may be no practical alternative course of action available to the
system.
The system is working with other energy industry entities, both regionally
and nationally with respect to Year 2000 readiness and is cooperating in the
development of local and wide-scale contingency planning.
While the system believes its efforts to address the Year 2000 issue will
be successful in avoiding any material adverse effect on the system's
operations or financial condition, it recognizes that failing to resolve Year
2000 issues on a timely basis would, in a "most reasonably likely worst case
scenario," significantly limit its ability to acquire and distribute energy
and process its daily business transactions for a period of time, especially
if such failure is coupled with third party or infrastructure failures.
Similarly, the system could be significantly affected by the failure of one or
more significant suppliers, customers or components of the infrastructure to
conduct their respective operations after 1999. Adverse affects on the system
could include, among other things, business disruption, increased costs, loss
of business and other similar risks.
The foregoing discussion regarding Year 2000 project timing, effective-
ness, implementation and costs includes forward-looking statements that are
based on management's current evaluation using available information. Factors
that might cause material changes include, but are not limited to, the
availability of key Year 2000 personnel, the readiness of third parties, and
the system's ability to respond to unforeseen Year 2000 complications.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts possibly
including fixed-price gas supply contracts) be recorded on the balance sheet
as either an asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
<PAGE 14>
COMMONWEALTH GAS COMPANY
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
and may be implemented as of the beginning of any fiscal quarter after
issuance but cannot be applied retroactively. SFAS No. 133 must be applied to
derivative instruments and certain derivative instruments embedded in hybrid
contracts that were issued, acquired or substantively modified after December
31, 1997 and, at the company's election, before January 1, 1998.
The Company has not yet quantified the impacts of adopting SFAS No. 133 on
its financial statements and has not determined the timing of its method of
adopting SFAS No. 133.
Forward-Looking Statements
This discussion contains statements which, to the extent it is not a
recitation of historical fact, constitute "forward-looking statements" and is
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 reflected in the forward-looking
statements or projected amounts. Those factors include developments in the
legislative, regulatory and competitive environment, certain environmental
matters, demands for capital and the availability of cash from various
sources.
<PAGE 15>
COMMONWEALTH GAS COMPANY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Filed herewith as Exhibit 1 is the Financial Data Schedule for the
nine months ended September 30, 1998.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1998.
<PAGE 16>
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: November 13, 1998