<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, 1994
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, 1994
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
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
ASSETS
(Unaudited)
September 30, December 31,
1994 1993
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $333 368 $323 607
Less - Accumulated depreciation 83 083 77 155
250 285 246 452
Add - Construction work in progress 1 100 400
251 385 246 852
CURRENT ASSETS
Cash 1 165 1 297
Accounts receivable 19 107 33 239
Unbilled revenues 4 972 29 068
Inventories, at average cost 28 325 27 789
Prepaid taxes -
Property 5 012 2 629
Income 1 400 1 812
Other 1 327 992
61 308 96 826
DEFERRED CHARGES
Order 636 transition costs 20 047 21 938
Other 15 720 11 067
35 767 33 005
$348 460 $376 683
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1994 AND DECEMBER 31, 1993
CAPITALIZATION AND LIABILITIES
(Unaudited)
September 30, December 31,
1994 1993
(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 1 948 7 840
101 112 107 004
Long-term debt, less current
sinking fund requirements 95 400 95 400
196 512 202 404
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 9 550 40 975
Advances from affiliates 13 110 2 835
22 660 43 810
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliates 2 920 1 811
Other 9 645 32 944
Refundable gas costs 33 719 13 253
Accrued local property and other taxes 5 252 2 940
Other 7 427 6 661
62 613 61 259
85 273 105 069
DEFERRED CREDITS
Accumulated deferred income taxes 31 947 30 176
Unamortized investment tax credits and other 28 010 25 901
Order 636 transition costs 6 718 13 133
66 675 69 210
$348 460 $376 683
See accompanying notes.
<PAGE 4>
COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(Unaudited)
Three Months Ended Nine Months Ended
1994 1993 1994 1993
(Dollars in Thousands)
GAS OPERATING REVENUES $46 979 $48 190 $246 118 $223 376
OPERATING EXPENSES
Cost of gas sold 32 281 33 825 145 996 128 528
Other operation and maintenance 20 664 19 627 66 883 63 688
Depreciation 930 864 6 577 6 004
Taxes -
Income (4 157) (3 588) 5 016 4 779
Local property 508 469 3 555 3 367
Payroll and other 580 622 2 150 2 214
50 806 51 819 230 177 208 580
OPERATING INCOME (LOSS) (3 827) (3 629) 15 941 14 796
OTHER INCOME 296 149 404 261
INCOME (LOSS) BEFORE INTEREST
CHARGES (3 531) (3 480) 16 345 15 057
INTEREST CHARGES
Long-term debt 2 128 1 588 6 386 4 762
Other interest charges 455 765 1 309 2 131
Allowance for borrowed funds
used during construction (15) (9) (29) (18)
2 568 2 344 7 666 6 875
NET INCOME (LOSS) (6 099) (5 824) 8 679 8 182
RETAINED EARNINGS -
Beginning of period 9 476 6 750 7 840 6 994
Dividends on common stock (1 429) (1 203) (14 571) (15 453)
RETAINED EARNINGS -
End of period $ 1 948 $ (277) $ 1 948 $ (277)
See accompanying notes.
<PAGE 5>
COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(Unaudited)
1994 1993
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 8 679 $ 8 182
Effects of non-cash items -
Depreciation and amortization 10 599 7 581
Deferred income taxes and investment
tax credits, net 3 465 1 514
Change in working capital, exclusive of cash
and interim financing 36 740 3 378
All other operating items (12 514) (5 233)
Net cash provided by operating activities 46 969 15 422
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (11 351) (14 766)
Allowance for borrowed funds used
during construction (29) (18)
Net cash used for investing activities (11 380) (14 784)
FINANCING ACTIVITIES
Payment of dividends (14 571) (15 453)
Proceeds from (payment of) short-term borrowings (31 425) 5 525
Advances from affiliates 10 275 10 060
Net cash provided by (used for)
financing activities (35 721) 132
Net increase (decrease) in cash (132) 770
Cash at beginning of period 1 297 10
Cash at end of period $ 1 165 $ 780
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 6 657 $ 6 437
Income taxes $ 3 202 $ 5 956
See accompanying notes.
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COMMONWEALTH GAS COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Accounting Policies
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 Company's significant accounting policies are described in Note
1 of Notes to Financial Statements included in its 1993 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.
The Company has established various regulatory assets and
liabilities in cases where the Massachusetts Department of Public
Utilities (DPU) and/or the Federal Energy Regulatory Commission (FERC)
have permitted, or are expected to permit, recovery of specific costs
over time. Similarly, certain regulatory liabilities established by the
Company are required to be refunded to customers over time. As of
September 30, 1994, principal regulatory assets included in deferred
charges were $20 million for transition costs associated with FERC Order
No. 636, $4.7 million for postretirement benefit costs and $2.3 million
for environmental clean-up costs. The principal regulatory liability,
reflected in deferred credits, was $9.8 million related to income taxes.
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 September
30, 1994 and 1993 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
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
(2) Commitments
(a) Construction Program
The Company is engaged in a continuous construction program
presently estimated at $112.4 million for the five-year period 1994
through 1998. Of that amount, $21.9 million is estimated for 1994. As
of September 30, 1994, the Company's construction expenditures amounted
to approximately $11.4 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 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 de-
lays, availability and cost of capital and environmental regula-
tions.
(b) FERC Order No. 636
As a result of implementing FERC Order No. 636 (Order 636), each
interstate pipeline company is allowed to collect certain transition
costs from their customers that resulted from the pipelines' need to buy
out gas supply contracts entered into prior to the issuance of Order 636.
The Company has been billed a total of approximately $24.5 million from
Tennessee Gas Pipeline Company (Tennessee), Algonquin Gas Transmission
Company and Texas Eastern Transmission Company (Texas Eastern) through
September 30, 1994.
As of October 29, 1993, the Company received preliminary DPU autho-
rization to recover these costs, with carrying charges, through the cost
of gas adjustment (CGA) over a four-year period that began in November
1993. As a result, a regulatory asset totaling $20 million was reflected
in deferred charges as of September 30, 1994. In addition, a related
liability of $6.7 million was reflected in deferred credits.
After extensive negotiations between Texas Eastern, Tennessee and
their customers (including the Company), settlements were reached
regarding a number of transition obligation issues. The settlement with
Texas Eastern, which was recently approved by FERC, calls for the
pipeline to absorb approximately 20% of all transition costs incurred
from June 1993 forward. This agreement also provides for an extended
billing period and annual caps on the collection of future costs. The
Company believes that the absorption requirement will give the pipeline
incentive to minimize future costs.
The settlement with Tennessee, which has yet to be approved by FERC,
will lower one element of the Company's transition obligation by approx-
imately $1 million. Further negotiations are underway with Tennessee to
craft a total settlement similar to that achieved with Texas Eastern.
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COMMONWEALTH GAS COMPANY
The Company is continuing to negotiate with the pipelines on several
other issues. As a result, the Company is unable to predict its final
transition obligation at this time, however, based on these and
subsequent settlement activities, the Company will adjust its regulatory
asset and liability accounts accordingly.
<PAGE 9>
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, 1994 and 1993 is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
1994 and 1993 1994 and 1993
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $(1 211) (2.5)% $22 742 10.2 %
Operating Expenses
Cost of gas sold (1 544) (4.6) 17 468 13.6
Other operation and
maintenance 1 037 5.3 3 195 5.0
Depreciation 66 7.6 573 9.5
Taxes -
Federal and state income (569) (15.9) 237 5.0
Local property and other (3) (0.3) 124 2.2
(1 013) 2.0 21 597 10.4
Operating Income (198) (5.5) 1 145 7.7
Other Income 147 98.7 143 54.8
Income Before Interest Charges (51) (1.5) 1 288 8.6
Interest Charges 224 9.6 791 11.5
Net Income $ (275) (4.7) $ 497 6.1
Firm Unit Sales BBTU
Increase 82 2.6 1 164 4.3
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Three Months Nine Months
Period Ended Total Firm Interruptible Total Firm Interruptible
September 30, 1994 7 335 3 206 4 129 34 882 28 116 6 766
September 30, 1993 4 350 3 124 1 226 28 849 26 952 1 897
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COMMONWEALTH GAS COMPANY
Operating Revenues, Cost of Gas Sold and Unit Sales
Operating revenues for the first nine months of 1994 increased $22.7
million or 10.2% due to an increase in the cost of gas sold of $17.5 million,
increased unit sales and higher conservation and load management (C&LM)
charges of $2.5 million. For the current quarter, operating revenues
decreased by $1.2 million or 2.5% mainly due to a decrease in the cost of gas
sold of $1.5 million partially offset by higher C&LM charges of $500,000 and
higher unit sales. The Company is recovering in revenues current costs
associated with C&LM programs on a dollar-for-dollar basis through the
operation of a conservation charge decimal. To the extent that these expenses
increase or decrease from period to period based on customer participation, a
corresponding change will occur in revenues.
The cost of gas sold averaged $4.19 per MMBTU in the current nine-month
period compared to $4.46 for the same period last year. For the current
quarter, the cost of gas sold averaged $4.40 per MMBTU compared to $7.78 for
the third quarter last year. The decrease from both periods of last year was
mainly due to the inclusion of transition charges related to Order 636 in the
cost of gas sold last year. These charges totaled $6.8 million in the third
quarter and $9.6 million for the nine-month period. In the fourth quarter of
1993, these charges were reclassified as a regulatory asset pursuant to the
aforementioned DPU order issued on October 29, 1993. Also contributing to the
decrease in the current quarter were lower LNG costs and gas prices.
Partially offsetting the decreases in both periods was amortization related to
Order 636 transition costs and, in the current nine-month period, higher LNG
costs.
Firm unit sales for the first nine months of 1994 increased 4.3% due to
higher sales in all sectors as a result of the extremely cold weather
experienced throughout the region during the first quarter. Firm unit sales
were 2.6% higher during the current quarter despite slight decreases in
residential and commercial sales as industrial and other sales showed
continued improvement. Although interruptible sales increased significantly
during both periods, fluctuations in the level of interruptible sales have
little, if any, impact on net income.
Other Operating Expenses
In the current three and nine-month periods, other operation and
maintenance expense increased by $1 million and $3.2 million, respectively,
primarily due to higher C&LM charges ($464,000 and $2.5 million), increased
insurance and employee benefit costs ($668,000 and $685,000) and, in the
current nine-month period, higher costs associated with both the Company's
automated mapping system ($222,000) and the Gas Administration and Supply
System ($108,000). These increases were offset, in part, by company-wide cost
containment efforts and, in the current nine-month period, a decline in the
cost of services rendered by affiliate COM/Energy Services Company
attributable, in part, to a second quarter 1993 work force reduction.
Depreciation and Taxes
Depreciation increased due to higher levels of depreciable plant in
service. The change in federal and state income taxes for the current nine-
month period reflects the level of pretax income. The decrease in the current
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COMMONWEALTH GAS COMPANY
quarter was primarily due to the absence of a retroactive adjustment made in
the third quarter of 1993 to reflect the increase in the federal tax rate to
35% and, to a lesser extent, the level of pretax income. The 2.2% increase in
local property and other taxes for the current nine-month period was due to
higher tax rates and assessments in the Company's service territory.
Other Income and Interest Charges
Other income increased by $147,000 and $143,000 in the current three and
nine-month periods, respectively, due to higher merchandising and jobbing
revenues resulting from increased sales of design heating units ($170,000 and
$290,000) and interest related to a Massachusetts sales tax abatement ($14,000
and $58,000). These increases were partially offset in the current quarter by
lower interest on deferred gas costs ($21,000) and, in the current nine-month
period, by the absence of proceeds from a second quarter 1993 litigation
settlement ($193,000).
Total interest charges increased 9.6% and 11.5% during the current three
and nine-month periods due to the issuance of $35 million in new long-term
debt in December 1993 and, to a lesser extent, higher interest rates and
interest to be refunded to the Company's customers in connection with the
aforementioned sales tax abatement. Interest rates on bank borrowings
averaged 4.7% and 4.0% for the current three and nine-month periods compared
to 3.3% and 3.4% for the same periods a year ago.
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 costs associated with the assessment and clean-up of these sites are
recoverable in rates through the cost of gas adjustment clause pursuant to a
1990 DPU order over a seven-year amortization period without carrying costs.
The Company has recorded an estimated $2.3 million liability that reflects its
best estimate (based on current information) of the costs to be incurred in
connection with the assessment and remediation activities identified to this
point. The Company has also recorded a regulatory asset in anticipation of
recovery of these costs. The Company is unable to predict the total cost to
ultimately resolve these matters due to significant uncertainty as to the
actual site conditions and the extent of any associated remediation activities
and the assignment of responsibility. However, it is expected that all such
costs will continue to be recovered in rates as described above.
The Company is also involved in certain other known or potentially
contaminated sites where the accociated costs may not be recoverable in rates.
The Company has recorded an estimated liability (and a charge to operations)
of $300,000 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.
As noted above, the Company is unable to predict at this time the ultimate
cost to resolve these matters due to the uncertainties inherent in the site
investigation and remediation process.
<PAGE 12>
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
Filed herewith:
Exhibit 27 Financial Data Schedule for the nine months ended
September 30, 1994 (Filed herewith as Exhibit 1).
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
September 30, 1994.
<PAGE 13>
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 Officer:
JAMES D. RAPPOLI
James D. Rappoli,
Financial Vice President
and Treasurer
Principal Accounting Officer:
JOHN A. WHALEN
John A. Whalen,
Comptroller
Date: November 14, 1994
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income and statement of cash flows contained in
Form 10-Q of Commonwealth Gas Company for the nine months ended September 30,
1994 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000022620
<NAME> COMMONWEALTH GAS COMPANY
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