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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, 1995
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, 1995
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, 1995 AND DECEMBER 31, 1994
ASSETS
(Unaudited)
March 31, December 31,
1995 1994
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $336 151 $339 476
Less - Accumulated depreciation 89 531 85 162
246 620 254 314
Add - Construction work in progress 940 719
247 560 255 033
CURRENT ASSETS
Cash 2 349 4 862
Advances to affiliates 12 165 -
Accounts receivable 55 599 33 352
Unbilled revenues 14 212 20 892
Inventories, at average cost 13 244 25 754
Prepaid taxes -
Property 885 2 861
Income - 619
Other 1 043 1 076
99 497 89 416
DEFERRED CHARGES
Order 636 transition costs 18 447 19 201
Other 17 169 17 155
35 616 36 356
$382 673 $380 805
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
MARCH 31, 1995 AND DECEMBER 31, 1994
CAPITALIZATION AND LIABILITIES
(Unaudited)
March 31, December 31,
1995 1994
(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 14 185 6 837
113 349 106 001
Long-term debt, less current sinking
fund requirements 91 750 91 750
205 099 197 751
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 24 950
Advances from affiliates - 11 220
- 36 170
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliated companies 1 556 2 669
Other 33 996 33 214
Refundable gas costs 51 279 27 832
Accrued taxes -
Income 4 233 -
Local property and other 2 776 3 317
Other 7 722 6 928
105 212 77 610
105 212 113 780
DEFERRED CREDITS
Accumulated deferred income taxes 34 146 32 699
Unamortized investment tax credits and other 30 292 28 764
Order 636 transition costs 7 924 7 811
72 362 69 274
$382 673 $380 805
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
GAS OPERATING REVENUES $107 932 $135 558
OPERATING EXPENSES
Cost of gas sold 53 498 73 824
Other operation and maintenance 23 565 23 539
Depreciation 4 399 4 081
Taxes -
Income 7 803 11 197
Local property 2 453 2 110
Payroll and other 951 960
92 669 115 711
OPERATING INCOME 15 263 19 847
OTHER INCOME 53 156
INCOME BEFORE INTEREST CHARGES 15 316 20 003
INTEREST CHARGES
Long-term debt 2 054 2 129
Other interest charges 927 435
Allowance for borrowed funds
used during construction (13) (6)
2 968 2 558
NET INCOME 12 348 17 445
RETAINED EARNINGS -
Beginning of period 6 837 7 840
Dividends on common stock (5 000) (6 000)
RETAINED EARNINGS -
End of period $ 14 185 $ 19 285
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1994
(Unaudited)
1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $ 12 348 $ 17 445
Effects of noncash items -
Depreciation and amortization 8 116 5 696
Deferred income taxes and investment
tax credits, net 1 218 100
Change in working capital, exclusive of cash,
advances to affiliates, and interim financing 27 173 19 318
All other operating items 4 323 (1 002)
Net cash provided by operating activities 53 178 41 557
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (2 343) (4 069)
Allowance for borrowed funds used
during construction (13) (6)
Advances to affiliates (12 165) -
Net cash used for investing activities (14 521) (4 075)
FINANCING ACTIVITIES
Payment of dividends (5 000) (6 000)
Payment of short-term borrowings (24 950) (33 250)
Advances from affiliates (11 220) 2 775
Net cash used for financing activities (41 170) (36 475)
Net increase (decrease) in cash (2 513) 1 007
Cash at beginning of period 4 862 1 297
Cash at end of period $ 2 349 $ 2 304
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest, net of amounts capitalized $ 2 047 $ 1 810
Income taxes $ 1 604 $ 1 333
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 1994 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 in cases where
the Massachusetts Department of Public Utilities (DPU) and/or the Federal
Energy Regulatory Commission have permitted or are expected to permit
recovery of specific costs over time. Similarly, the regulatory
liabilities established by the Company are required to be refunded to
customers over time. In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed Of" (SFAS 121). SFAS 121 imposes stricter criteria for
regulatory assets by requiring that such assets be probable of future
recovery at each balance sheet date. Based on the current regulatory
framework, the Company accounts for the economic effects of regulation in
accordance with the provisions of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation" and does not expect that SFAS
121, which the Company expects to adopt on January 1, 1996, will have a
material impact on its financial position or results of operations.
However, this conclusion may change in the future as competitive factors
influence wholesale and retail pricing in this industry. The principal
regulatory assets included in deferred charges at March 31, 1995 and
December 31, 1994 were as follows:
March 31, Dec. 31,
1995 1994
(Dollars in Thousands)
FERC Order 636 transition costs $18 447 $19 201
Postretirement benefit costs including
pensions 6 054 5 367
Environmental costs 2 499 2 346
Total regulatory assets $27 000 $26 914
The principal regulatory liabilities, reflected in deferred credits-
other and relating to income taxes, were $9.8 million and $9.9 million at
March 31, 1995 and December 31, 1994, respectively.
Generally, expenses which relate to more than one interim period are
allocated to other periods to more appropriately match revenues and
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COMMONWEALTH GAS COMPANY
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,
1995 and 1994 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.
(2) Commitments
(a) Construction Program
The Company is engaged in a continuous construction program
presently estimated at $106.4 million for the five-year period 1995
through 1999. Of that amount, $21.2 million is estimated for 1995. As
of March 31, 1995, the Company's actual construction expenditures
amounted to approximately $2.4 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/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, availabili-
ty and cost of capital and environmental regulations.
(b) FERC Order No. 636
As a result of implementing FERC Order 636 (Order 636), each
interstate pipeline company is allowed to collect certain transition
costs from its 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 $22.4 million from
Tennessee Gas Pipeline Company, Algonquin Gas Transmission Company and
Texas Eastern Transmission Company through March 31, 1995.
In May 1995, the DPU allowed the Company to accelerate recovery of
the transition costs that were incurred to date. These costs had been
deferred and accumulated as a regulatory asset and were being recovered
through the cost of gas adjustment (CGA) over a four-year period that
began in November 1993. The costs are now being recovered through the
CGA over a one-year period that began May 1, 1995. The accelerated
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COMMONWEALTH GAS COMPANY
recovery period was permitted by the DPU due to the minimal impact on
customers' bills. Any further transition costs will be recovered by the
Company through the CGA as incurred. At March 31, 1995, a regulatory
asset totaling $18.4 million was reflected in deferred charges. In
addition, a related liability of $7.9 million was reflected in deferred
credits.
<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 months ended March 31,
1995 and 1994 is shown below:
Three Months
Ended March 31,
1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $(27 626) (20.4)%
Operating Expenses -
Cost of gas sold (20 326) (27.5)
Other operation and maintenance 26 0.1
Depreciation 318 7.8
Taxes -
Federal and state income (3 394) (30.3)
Local property and other 334 10.9
(23 042) (19.9)
Operating Income (4 584) (23.1)
Other Income (103) (66.0)
Income Before Interest Charges (4 687) (23.4)
Interest Charges 410 16.0
Net Income $ (5 097) (29.2)
Firm Unit Sales BBTU (3 020) (15.8)
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Three Months Ended Off- Quasi-
Total Firm Interruptible System Firm
March 31, 1995 18 027 16 111 153 1 413 350
March 31, 1994 19 178 19 131 47 - -
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
For the first three months of 1995, operating revenues decreased $27.6
million or 20.4% due primarily to a decrease in the cost of gas sold of $20.3
million and lower firm unit sales of 15.8% offset, in part, by higher
interruptible and other sales and a higher level of conservation and load
management (C&LM) costs of $562,000.
Firm unit sales decreased 15.8% as all customer segments showed declines
due to the extremely mild weather conditions experienced during the first
quarter compared to a colder than normal period last year. Although
interruptible sales increased during the first quarter of 1994, these sales
had no effect on net income since the margin from these sales are flowed back
to firm customers through the CGA. Off-system and quasi-firm sales continued
to contribute to the Company's total sales but had no impact on net income.
The margin from these sales was shared with one-half used to reduce the cost
of gas to firm customers and the other deferred pending DPU approval of the
Company's margin-sharing proposal that is expected to be filed later this
year.
Operating Expenses
For the first quarter of 1995, other operation and maintenance expenses
increased by just $26,000 or less than 1% due to higher insurance and benefit
costs ($663,000), higher C&LM costs ($562,000) and costs associated with the
Company's Automated Meter Reading System ($301,000). These increases were
almost entirely offset by continued cost-containment efforts, a lower
provision for bad debts ($465,000) reflecting lower billed sales, a decline in
amortization related to environmental costs ($314,000) and reduced labor costs
($112,000) reflecting a decline in the number of employees through attrition.
Depreciation and Taxes
Depreciation increased by 7.8% due to higher levels of depreciable plant-
in-service. The change in federal and state income taxes was attributable to
the lower level of pretax income. The increase in local property taxes was
due to higher tax rates and assessments in the Company's service territory.
Other Income and Interest Charges
Other income decreased by $103,000 during the first three months of 1994
due primarily to the absence of interest related to a Massachusetts sales tax
abatement received in the first quarter of last year and lower sales of design
heating systems.
Total interest charges increased $410,000 or 16% mainly due to higher
interest expense on deferred gas costs offset, in part, by lower interest
costs due to lower levels of short-term bank borrowings.
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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 Company is also
involved in certain other known or potentially contaminated sites where the
associated costs may not be recoverable in rates. There were no significant
new developments that occurred during the first quarter of 1995. For further
information on these matters, refer to the Company's 1994 Annual Report on
Form 10-K.
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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, 1995.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended March
31, 1995.
<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: May 15, 1995
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet, statement of income, statement of retained earnings and
statement of cash flows contained in Form 10-Q of Commonwealth Gas Company for
the three months ended March 31, 1995 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
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<NAME> COMMONWEALTH GAS COMPANY
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