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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 June 30, 1996
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 August 1, 1996
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
JUNE 30, 1996 AND DECEMBER 31, 1995
ASSETS
(Dollars in thousands)
June 30, December 31,
1996 1995
(Unaudited)
PROPERTY, PLANT AND EQUIPMENT, at original cost $351 112 $348 284
Less - Accumulated depreciation 98 893 92 881
252 219 255 403
Add - Construction work in progress 958 738
253 177 256 141
CURRENT ASSETS
Cash 891 2 113
Advances to affiliates 4 200 -
Accounts receivable 31 693 40 505
Unbilled revenues 2 788 22 850
Inventories, at average cost 17 039 18 625
Prepaid taxes -
Property - 3 094
Income 1 296 384
Other 1 470 1 138
59 377 88 709
DEFERRED CHARGES
Transition costs 10 726 11 711
Other 22 044 18 054
32 770 29 765
$345 234 $374 615
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
CAPITALIZATION AND LIABILITIES
(Dollars in thousands)
June 30, December 31,
1996 1995
(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 12 583 10 495
111 747 109 659
Long-term debt, less maturing debt and
current sinking fund requirements 78 100 78 100
189 847 187 759
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks - 12 200
Advances from affiliates - 1 850
Maturing long-term debt 10 000 10 000
10 000 24 050
Other Current Liabilities -
Current sinking fund requirements 3 650 3 650
Accounts payable -
Affiliates 3 536 2 229
Other 23 936 37 471
Refundable gas costs 30 050 33 034
Accrued local property
and other taxes 605 3 435
Other 6 835 6 827
68 612 86 646
78 612 110 696
DEFERRED CREDITS
Accumulated deferred income taxes 36 972 35 586
Unamortized investment tax credits and other 29 167 28 863
Transition costs 10 726 11 711
76 865 76 160
COMMITMENTS AND CONTINGENCIES
$345 234 $374 615
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
1996 1995 1996 1995
GAS OPERATING REVENUES $ 68 385 $ 67 802 $192 110 $175 734
OPERATING EXPENSES
Cost of gas sold 40 814 42 265 104 964 95 763
Other operation and maintenance 23 235 21 489 45 789 45 054
Depreciation 1 511 1 423 5 846 5 822
Taxes -
Income (652) (869) 9 722 6 934
Local property 1 000 936 3 443 3 389
Payroll and other 540 632 1 516 1 583
66 448 65 876 171 280 158 545
OPERATING INCOME 1 937 1 926 20 830 17 189
OTHER INCOME 111 355 318 408
INCOME BEFORE INTEREST
CHARGES 2 048 2 281 21 148 17 597
INTEREST CHARGES
Long-term debt 1 965 2 047 3 929 4 101
Other interest charges 797 1 303 1 579 2 230
Allowance for borrowed funds
used during construction (13) (15) (19) (28)
2 749 3 335 5 489 6 303
NET INCOME (LOSS) (701) (1 054) 15 659 11 294
RETAINED EARNINGS -
Beginning of period 18 284 14 185 10 495 6 837
Dividends on common stock (5 000) (7 571) (13 571) (12 571)
RETAINED EARNINGS -
End of period $ 12 583 $ 5 560 $ 12 583 $ 5 560
See accompanying notes.
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COMMONWEALTH GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands)
(Unaudited)
1996 1995
OPERATING ACTIVITIES
Net income $ 15 659 $ 11 294
Effects of noncash items -
Depreciation and amortization 6 985 7 952
Deferred income taxes and investment
tax credits, net 918 1 576
Change in working capital, exclusive of cash,
advances to affiliates and interim financing 14 276 42 154
All other operating items (3 987) 17 649
Net cash provided by operating activities 33 851 80 625
INVESTING ACTIVITIES
Additions to property, plant and equipment
(exclusive of AFUDC) (3 233) (6 150)
Allowance for borrowed funds used
during construction (19) (28)
Advances to affiliates (4 200) (29 150)
Net cash used for investing activities (7 452) (35 328)
FINANCING ACTIVITIES
Payment of dividends (13 571) (12 571)
Payment of short-term borrowings (12 200) (24 950)
Payments to affiliates (1 850) (11 220)
Net cash used for financing activities (27 621) (48 741)
Net decrease in cash (1 222) (3 444)
Cash at beginning of period 2 113 4 862
Cash at end of period $ 891 $ 1 418
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of capitalized amounts) $ 3 990 $ 5 469
Income taxes $ 9 453 $ 3 570
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 is currently involved in negotiations to resolve a labor
dispute with a collective bargaining unit that represents approximately
356 (52%) of its regular employees. The agreement that covered this
bargaining unit expired on March 31, 1996 and work performed by these
employees has been disrupted since that time. A workforce of management
personnel and experienced contractors are performing all essential tasks.
Management is unable to predict the ultimate outcome of these
negotiations.
(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 1995 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 June 30,
1996 and 1995 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 Public Utilities (DPU).
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 DPU has
permitted or is expected to permit recovery of specific costs over time.
Similarly, regulatory liabilities established by the Company are required
to be refunded to customers over time. On January 1, 1996, the Company
adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of." SFAS No. 121 imposes
stricter criteria for regulatory assets by requiring that such assets be
probable of future recovery at each balance sheet date. As of June 30,
1996, SFAS No. 121 did not have an impact on its financial position or
results of operations. Management does not expect that the effects of
SFAS No. 121 will have a material impact on the Company in the
foreseeable future.
The principal regulatory assets included in deferred charges were as
follows:
June 30, Dec. 31,
1996 1995
(Dollars in thousands)
Transition costs $10 726 $11 711
Postretirement benefit costs including
pensions 8 889 7 744
Environmental costs 3 787 3 786
Total regulatory assets $23 402 $23 241
The principal regulatory liability, reflected in deferred credits-
other and relating to income taxes, was $8.4 million and $8.6 million at
June 30, 1996 and December 31, 1995, respectively.
(3) Commitments
Construction Program
The Company is engaged in a continuous construction program
presently estimated at $92 million for the five-year period 1996 through
2000. Approximately $17.7 million of that amount is estimated for 1996,
the majority of which is scheduled to be expended in the second half of
the year. As of June 30, 1996, the Company's construction expenditures
amounted to approximately $3.3 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
proceeds from the issuance of long-term debt and equity securities.
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COMMONWEALTH GAS COMPANY
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 six months ended June 30,
1996 and 1995 is shown below:
Three Months Six Months
Ended June 30, Ended June 30,
1996 and 1995 1996 and 1995
Increase (Decrease)
(Dollars in thousands)
Gas Operating Revenues $ 583 0.9 % $ 16 376 9.3 %
Operating Expenses -
Cost of gas sold (1 451) (3.4) 9 201 9.6
Other operation and maintenance 1 746 8.1 735 1.6
Depreciation 88 6.2 24 0.4
Taxes -
Federal and state income 217 25.0 2 788 40.2
Local property and other (28) (1.8) (13) (0.3)
572 0.9 12 735 8.0
Operating Income 11 0.6 3 641 21.2
Other Income (244) (68.7) (90) (22.1)
Income Before Interest Charges (233) (10.2) 3 551 20.2
Interest Charges (586) (17.6) (814) (12.9)
Net Income $ 353 33.5 $ 4 365 38.6
Firm Unit Sales - BBTU 648 10.4 2 731 12.2
The following is a summary of unit sales for the periods indicated:
Unit Sales - In Billions of British Thermal Units (BBTU)
Off- Quasi-
Total Firm Interruptible System Firm
Three Months Ended
June 30, 1996 8 506 6 902 539 704 361
June 30, 1995 8 179 6 254 438 967 520
Six Months Ended
June 30, 1996 27 430 25 096 896 953 485
June 30, 1995 26 206 22 365 591 2 380 870
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COMMONWEALTH GAS COMPANY
Operating Revenues and Unit Sales
Operating revenues for the first six months of 1996 increased $16.4
million (9.3%) due to an increase in the cost of gas sold ($9.2 million) and
higher firm and interruptible unit sales offset, in part, by a lower level of
conservation and load management (C&LM) costs ($1.2 million) and lower off-
system and quasi-firm unit sales. During the current quarter, operating
revenues increased slightly due primarily to increases in firm and
interruptible unit sales partially offset by a decrease in the cost of gas
sold of $1.5 million, lower C&LM costs ($401,000) and a decline in off-system
and quasi-firm unit sales.
Firm unit sales increased 12.2% in the first half of 1996 as sales to all
customer classes were higher due to the colder than normal weather experienced
throughout the region, particularly during the first quarter, compared to a
milder period last year. Degree days were nearly 11% higher than in the first
six months of 1995. Firm unit sales increased by 10.4% during the current
quarter as heating degree days were 4% higher than the same period last year.
Also, a growing customer base has contributed to the increase in firm unit
sales in both periods. Although non-firm sales have fluctuated during both
the first half of 1996 and the current quarter, they have had no impact on net
income. A portion of the margin realized on these sales reduces the cost of
gas sold to firm customers and the remaining amount is being deferred pending
approval of the Company's margin-sharing proposals. The proposal related to
quasi-firm sales was filed in December 1995 and a ruling is expected from the
DPU later this year. The proposal for off-system sales is expected to be
filed by the end of this year.
Other Operation and Maintenance
Other operation and maintenance increased by $735,000 or 1.6% in the
first half of 1996 due to the net impact of a labor dispute during the current
quarter (discussed in Note 1 of Notes to Condensed Financial Statements in
Item 1 of this report) and higher pension costs ($229,000) offset, in part, by
a decline in the level of C&LM costs ($247,000) and a lower provision for bad
debts ($94,000). Other operation and maintenance increased in the current
quarter by $1.7 million or 8.1% due, in part, to the net effect of costs
associated with the labor dispute, higher distribution expenses ($529,000)
mainly due to increases in leak repair activities and an increase in costs
associated with automated meter reading ($311,000) reflecting the leasing of
equipment. These increases are partially offset by a decrease in C&LM costs
($1.2 million) and a lower provision for bad debts ($215,000).
Depreciation and Taxes
Depreciation expense increased during the current six-month period and
the current quarter due to higher levels of depreciable plant-in-service. The
change in federal and state income taxes in both periods reflects the level of
pretax income.<PAGE>
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COMMONWEALTH GAS COMPANY
Other Income and Interest Charges
The decrease in other income for both the current six-month period and
the current quarter reflects a decline in interest income received by the
Company in connection with its participation in the COM/Energy Money Pool
partially offset by greater sales of design heating systems.
Total interest charges decreased 17.6% and 12.9% during the current three
and six-month periods due to a decline in interest on deferred gas costs, a
reduction in long-term interest charges reflecting scheduled sinking fund
payments and a decrease in short-term interest charges due to a lower average
level of short-term borrowings.
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 six months of 1996. For
further information on these matters, refer to the Company's 1995 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
six months ended June 30, 1996.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended June
30, 1996.
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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: August 14, 1996
<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 six months ended June 30, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000022620
<NAME> COMMONWEALTH GAS COMPANY
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