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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549-1004
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
None
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 March 15, 1997
Common Stock, $25 par value 2,857,000 shares
The Company meets the conditions set forth in General Instruction J(1)(a) and
(b) of Form 10-K as a wholly-owned subsidiary and is therefore filing this
Form with the reduced disclosure format.
Documents Incorporated by Reference Part in Form 10-K
None Not Applicable
List of Exhibits begins on page 34 of this report.
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COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1996
TABLE OF CONTENTS
PART I
PAGE
Item 1. Business........................................ 3
General....................................... 3
Gas Supply
General..................................... 3
Hopkinton LNG Facility...................... 4
Rates and Regulation.......................... 5
Competition................................... 6
Construction and Financing.................... 7
Employees..................................... 7
Item 2. Properties...................................... 7
Item 3. Legal Proceedings............................... 8
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters..................... 9
Item 7. Management's Discussion and Analysis of
Results of Operations........................... 10
Item 8. Financial Statements and Supplementary Data..... 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 33
Signatures.................................................. 39
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COMMONWEALTH GAS COMPANY
PART I.
Item 1. Business
General
Commonwealth Gas Company (the Company) is engaged in the distribution
and sale of natural gas at retail to approximately 234,500 customers in a
1,067 square mile area which includes 49 communities in eastern, southeastern
and central Massachusetts. The approximate year-round population of this
service area is 1,128,000.
The Company, which was organized in 1851 under the laws of the
Commonwealth of Massachusetts, operates under the jurisdiction of the
Massachusetts Department of Public Utilities (DPU), which regulates retail
rates, accounting, issuance of securities and other matters. The Company is a
wholly-owned subsidiary of Commonwealth Energy System ("System"), which,
together with its subsidiaries, is collectively referred to as "the system."
Since the date of its organization the Company has, from time to time,
acquired the property and franchises of, or merged with, other gas companies.
The Company is the only gas distribution utility in its service area
and, by virtue of its existing franchises, no other gas distribution utility
may extend its operations into the Company's service area without the
authorization of the DPU. Alternative sources of energy are available to
customers within the service territory, but competition from these sources has
not been a significant factor affecting the Company's firm gas sales to
existing customers. Even with the higher cost of storage and liquefied
natural gas (LNG), which is required to supplement pipeline supply, the
overall long-term cost of gas has been competitive with the cost of
alternative fuel sources for most of the Company's customers.
Of the Company's 1996 firm gas unit sales, 55.5% was sold to residential
customers, 28.2% to commercial customers, 10.9% to industrial customers and
5.4% to other customers. Capital expenditures are required to bring gas into
areas of anticipated growth and both the distribution capability and gas
supply must be available when new development begins or potential customers
will seek alternative sources of fuel. Certain industrial customers with
dual-fuel capability can convert from gas to alternative fuels under terms of
contracts which permit interruption of their service upon short notice or at
contractually scheduled times.
Gas Supply
(a) General
The Company purchases transportation, storage and balancing services
from Tennessee Gas Pipeline Company (Tennessee) and Algonquin Gas Transmission
Company (and other upstream pipelines that bring gas from the supply wells to
the final transporting pipelines) and purchases all of its gas supplies from
third-party vendors, utilizing firm contracts with terms ranging from less
than one year to three or more years. The vendors vary from small independent
marketers to major gas and oil companies.
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COMMONWEALTH GAS COMPANY
In addition to firm transportation and gas supplies mentioned above, the
Company utilizes contracts for underground storage and LNG facilities to meet
its winter peaking demands. The underground storage contracts are a
combination of existing and new agreements which are the result of Order 636
service unbundling. The LNG facilities, described below, are used to liquefy
and store pipeline gas during the warmer months for use during the heating
season.
The Company entered into a multi-party agreement in 1992 to assume a
portion of Boston Gas Company's contracts to purchase Canadian gas supplies
from Alberta Northeast (ANE) and have the volumes delivered by the Iroquois
Gas Transmission System and Tennessee pipelines. The ANE gas supply contract
was filed with the DPU and hearings were completed in April 1993. The DPU
approved the ANE gas supply contract in November 1995. The Company is
presently in negotiations with the parties to allow for final execution of all
pertinent agreements and contracts.
The Company began transporting gas on its distribution system in 1990
for end-users. As of December 31, 1996 there were 66 customers using this
transportation service, accounting for 6,192 BBTU or approximately 11.8% of
system throughput.
(b) Hopkinton LNG Facility
A portion of the Company's gas supply during the heating season is
provided by Hopkinton LNG Corp. (Hopkinton), a wholly-owned subsidiary of the
System. The facility consists of a liquefaction and vaporization plant and
three above-ground cryogenic storage tanks having an aggregate capacity of
3 million MCF of natural gas.
In addition, Hopkinton owns a satellite vaporization plant and two
above-ground cryogenic storage tanks located in Acushnet, Massachusetts with
an aggregate capacity of 500,000 MCF of natural gas and are filled with LNG
trucked from Hopkinton.
The Company has contracts for LNG service with Hopkinton extending on a
year to year basis with notice of termination required five years in advance
of the anticipated termination date. The Company and Hopkinton are currently
evaluating the contracts to determine if amendments to the contracts should be
negotiated in light of the ongoing deregulation of the natural gas industry.
Current contract payments include a demand charge sufficient to cover
Hopkinton's fixed charges and an operating charge which covers liquefaction
and vaporization expenses. The Company furnishes pipeline gas during the
period April 15 to November 15 each year for liquefaction and storage. As the
need arises, LNG is vaporized and placed in the distribution system of the
Company.
Based upon information presently available regarding projected growth in
demand and estimates of availability of future supplies of pipeline gas, the
Company believes that its present sources of gas supply are adequate to meet
existing load and allow for future growth in sales.
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COMMONWEALTH GAS COMPANY
Rates and Regulation
(a) Automatic Adjustment Clauses
The Company has a Standard Seasonal Cost of Gas Adjustment rate schedule
(CGA) which provides for the recovery, from firm customers, of purchased gas
and conservation and load management costs not recovered through base rates.
These schedules, which require DPU approval, are estimated semi-annually and
include credits for gas pipeline refunds and profit margins applicable to
interruptible and other non-firm sales. Actual gas costs are reconciled
annually as of October 31, and any difference is included as an adjustment in
the calculation of the decimals for the two subsequent six-month periods.
Periodically, the Company is required to file a long-range forecast of
the energy needs and requirements of its market area and annual supplements
thereto with the Department of Public Utilities (DPU). To approve this long-
range forecast and resource plans, the DPU must find, among other things, that
the Company's projected firm load is reasonable and based on proven and
verifiable forecasting methods and data, and that the Company assembles its
supply portfolio based on a prudent resource planning process that can be
reasonably expected to meet projected demands on a cost efficient basis. The
Company filed its forecast, covering the period November 1996 through October
2001, with the DPU on December 20, 1996.
(b) Gas Demand and Transition Costs
The Company is obligated, as part of its pipeline transportation
contracts, storage contracts and gas purchase contracts, to pay monthly demand
charges which are recovered from customers through the CGA.
As a direct result of implementation of Order 636, most pipeline
companies are incurring transition costs which include the cost of
restructuring gas supply contracts, the value of facilities that were
supporting the gas sales function and are no longer used and useful for
transportation only services, the cost of contracts with upstream pipeline
companies and various miscellaneous costs. These costs are billed to the
Company and other local distribution companies.
The Company is collecting all contract restructuring costs from its
customers through the CGA as permitted by the DPU.
(c) Regulatory Matters
In May 1994, the Company requested the DPU to change the back-up service
charges under its firm transportation rate. Back-up charges result when the
Company sells gas from its system supplies to a customer whose off-system gas
supply has failed or is temporarily unavailable for reasons beyond the
customer's control. The change involved an upward indexing of backup charges
based on changes in the gas supply demand costs occasioned by Order 636. On
December 22, 1994, the DPU approved the Company's requested change effective
January 1, 1995. This change, which has no effect on revenue, results in a
more equitable recovery of pipeline capacity costs between Commonwealth Gas'
total requirements and transportation customers.
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COMMONWEALTH GAS COMPANY
(d) Quasi-firm and Off-system Gas Sales Services
Pursuant to regulatory approval, the Company offers quasi-firm sales
service, providing a level of service between interruptible and firm, to
customers with dual-fuel capability. Such sales totaled 1,066 BBTU in 1996.
Under a margin-sharing agreement approved by the DPU on January 15, 1997, the
Company will retain 25% of the gross margins realized on these sales above a
certain threshold amount as set from year to year. The remaining margins will
be credited to firm customers through the CGA.
The Company also utilizes the off-system sales and capacity release
markets as a means to sell excess resources. Off-system sales totaled 2,420
BBTU in 1996, while 14,773 BBTU of capacity was sold in the capacity release
market. A margin-sharing agreement for these sales was approved by the DPU on
February 14, 1996 allowing the Company to retain 25% of the gross margins
realized above a certain threshold amount as set from year to year with the
remaining margins credited to firm customers through the CGA. None of the
margin sharing allowed by this agreement will occur until mid-1997.
(e) Conservation and Load Management Program
The Company offers conservation measures to its residential and multi-
family customers through programs approved by the DPU in June 1992. The
Company recovers the costs of these programs via separately stated
Conservation Charge (CC) decimals. The programs have been extended through
subsequent DPU approvals, the most noteworthy being the settlement agreement
approved on November 23, 1994 which enabled the Company to recover "lost
margins" from customers effective January 1995. Specifically, the settlement
allows the Company to remain whole while it offers programs that reduce sales,
by recovering through the CC decimal the portion of the lost margins revenue
associated with all saved therms resulting from conservation program
installations. The Company collected $2.4 million in lost margins during
1996.
(f) Potential Impact of Regulatory Restructuring
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." In March 1995, the Financial Accounting
Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of." Both of these
statements could have an adverse effect on the Company's financial position
and results of operations. For additional information on these statements,
refer to Note 2(b) of Notes to Financial Statements filed under Item 8 of this
report.
Competition
The Company faces competition from suppliers of fuel oil, propane and
electricity and also, for large commercial and industrial customers, from
other suppliers of natural gas. The Company is continuously developing and
implementing strategies to deal with the increasingly competitive environment.
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COMMONWEALTH GAS COMPANY
FERC Order 636 marked the beginning of the deregulation and
restructuring of the natural gas industry. In addition to opening up customer
markets to competition, the regulations shifted many supply-related
responsibilities to local distribution companies including direct gas
purchases from suppliers, pipelines and producers, transportation services and
storage services. The Company has developed a gas control and information
system that has purchasing and tracking systems. This ability, coupled with
aggressive planning and procurement strategies, will secure the Company's
existing market share and permit the expansion of core and non-core supply
capabilities.
The Company's substantial LNG and storage capabilities provide it with
the reliability needed during the coldest winter days and the flexibility to
sell capacity when supply and pricing conditions are favorable. Through
expanding non-firm and transportation sales, the Company has been able to
maximize the use of its gas supply and transportation system resulting in a
lower cost of gas for firm customers helping the Company to remain competitive
in its traditional markets.
On February 6, 1997, due to the dramatically changing nature of the
electric and gas industries, the System announced the consolidation of
management personnel of affiliated companies Cambridge Electric Light Company
(Cambridge Electric), Commonwealth Electric Company (Commonwealth Electric),
COM/Energy Services Company and the Company effective on that date. Cambridge
Electric, Commonwealth Electric and the Company will continue to operate under
their existing company names. The consolidation process for these companies
will involve the merging of similar functions and activities to eliminate
duplication in order to create the most efficient and cost-effective operation
possible and will ultimately result in the elimination of approximately 300
(15% of the system) positions system-wide.
Construction and Financing
Information concerning the Company's financing and construction programs
is contained in Note 6(a) of the Notes to Financial Statements filed under
Item 8 of this report.
Employees
The Company has 658 regular employees which is 5.9% lower than last
year's level. Approximately 65% of these employees are represented by three
collective bargaining units with agreements in effect through September 18,
1998, March 31, 2002 and June 30, 2002. Refer to Note 1 of Notes to Financial
Statements filed under Item 8 of this report for additional information
regarding employee relations.
Item 2. Properties
The Company's principal gas properties consist of distribution mains,
services and meters necessary to maintain reliable service to customers. At
the end of 1996, the gas system included 2,791 miles of gas distribution
lines, 165,926 services and 243,083 customer meters together with the
necessary measuring and regulating equipment.
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COMMONWEALTH GAS COMPANY
In addition, the Company owns a central headquarters and service
building in Southborough, Massachusetts, five district office buildings and
various natural gas receiving and take stations.
The Company's property is subject to encumbrances under its Indenture of
Trust and First Mortgage Bonds.
Item 3. Legal Proceedings
The Company is not a party to any pending material legal proceeding.
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COMMONWEALTH GAS COMPANY
PART II.
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
(a) Principal Market
Not applicable. The Company is a wholly-owned subsidiary of
Commonwealth Energy System.
(b) Number of Shareholders at December 31, 1996
One
(c) Frequency and Amount of Dividends Declared in 1996 and 1995
1996 1995
Per Share Per Share
Declaration Date Amount Declaration Date Amount
January 24, 1996 $3.00 January 25, 1995 $1.75
April 11, 1996 1.75 April 21, 1995 2.65
July 25, 1996 1.00 $4.40
$5.75
(d) Future dividends may vary depending upon the Company's earnings
and capital requirements as well as financial and other conditions
existing at that time.
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COMMONWEALTH GAS COMPANY
Item 7. 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 Statements of Income and is presented to
facilitate an understanding of the results of operations. This discussion
should be read in conjunction with the Notes to Financial Statements filed
under Item 8 of this report.
A summary of the period to period changes in the principal items
included in the accompanying Statements of Income for the years ended December
31, 1996 and 1995 and unit sales for these periods is shown below:
Years Ended Years Ended
December 31, December 31,
1996 and 1995 1995 and 1994
Increase (Decrease)
(Dollars in Thousands)
Gas Operating Revenues $ 33,566 10.9 % $(16,804) (5.2)%
Operating Expenses -
Cost of gas sold 28,553 16.9 (19,657) (10.4)
Other operation
and maintenance 4,523 5.3 (2,756) (3.1)
Depreciation 405 4.2 97 1.0
Taxes -
Federal and state income 613 6.3 1,686 21.1
Local property 145 2.5 462 8.7
Payroll and other (433) (15.4) 103 3.8
33,806 12.0 (20,065) (6.6)
Operating Income (240) (0.9) 3,261 13.8
Other Income (298) (24.2) 812 192.9
Income Before Interest Charges (538) (1.9) 4,073 16.9
Interest Charges (1,098) (9.2) 1,412 13.4
Net Income $ 560 3.5 $ 2,661 19.6
Unit Sales (BBTU)
Firm 2,535 6.6 % (81) (0.2)%
Interruptible 562 42.4 (1,437) (52.0)
Off-system (1,623) (40.1) (2,358) (36.8)
Quasi-firm (840) (44.1) 1,419 291.4
634 1.4 (2,457) (5.1)
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COMMONWEALTH GAS COMPANY
The following is a summary of unit sales, transportation volume and customers
for the periods indicated:
Years Ended December 31,
1996 1995 1994
Unit Sales (BBTU):
Residential 22,759 21,336 21,515
Commercial 11,558 10,710 10,728
Industrial 4,468 4,445 4,401
Other 2,208 1,967 1,895
Total firm 40,993 38,458 38,539
Off-System 2,420 4,043 6,401
Quasi-Firm 1,066 1,906 487
Interruptible 1,886 1,324 2,761
Total sales 46,365 45,731 48,188
Transportation 6,192 6,791 3,003
Total 52,557 52,522 51,191
Customers at End of Period:
Residential 213,474 212,329 211,075
Commercial 18,907 18,761 18,466
Industrial 930 933 928
Other 1,169 1,168 1,140
Total 234,480 233,191 231,609
Operating Revenues, Cost of Gas Sold and Unit Sales
In 1996, operating revenues increased by $33.6 million due to higher
gas costs ($28.6 million) and higher firm unit sales ($6.9 million), including
transportation, offset, in part, by lower conservation and load management
(C&LM) costs ($2.8 million). The higher gas costs reflect both higher prices
from suppliers and the increased unit sales to customers. In 1995, operating
revenues decreased by $16.8 million or 5.2% mainly due to a decrease in the
cost of gas sold ($19.7 million), lower C&LM costs ($910,000) and a decrease
in unit sales. Partially offsetting these decreases were higher
transportation revenues ($2.3 million).
The cost of gas sold in 1996 and 1995 reflects changes in price, sales
levels, Order 636 transition costs and refunds received from gas suppliers.
The colder weather experienced during the first half of 1996 led to the
6.6% increase in firm unit sales for the year. Non-firm sales have fluctuated
during 1996 and 1995 reflecting the competitive market conditions for energy
resources. Interruptible sales have no impact on net income since all of the
margins from these sales are flowed back to firm customers through the CGA.
The aforementioned margin-sharing agreements for off-system and quasi-firm
sales have a positive impact on earnings while reducing the cost of gas to
firm customers.
The customer level increased slightly in 1996 and 1995 mainly due to
new home construction and conversion activity.
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COMMONWEALTH GAS COMPANY
Other Operating Expenses
In 1996, other operation and maintenance increased by $4.5 million or
5.3% primarily due to the net impact of a labor dispute ($3.8 million), higher
liability insurance costs due to increased reserve requirements ($1.6 million)
and an accrual due to a 1996 vacation time carry-over related to the labor
dispute ($800,000) offset, in part, by lower C&LM costs ($2.8 million).
In 1995, other operation and maintenance decreased by $2.8 million or
3.1% mainly due to lower C&LM costs ($910,000), lower distribution expenses
due to fewer leak repair activities ($699,000), a decreased provision for bad
debts ($640,000), lower insurance and employee benefit costs ($471,000) and
decreased engineering expenses ($392,000). Also contributing to the decrease
were net savings in several areas resulting primarily from the implementation
of automated meter reading (AMR) ($100,000). These decreases were partially
offset by increased labor costs ($1.2 million).
Depreciation and Taxes
The increase in depreciation expense in both 1996 and 1995 resulted
from higher levels of depreciable plant-in-service.
The increase in federal and state income taxes in 1996 and 1995 was due
to the respective levels of pretax income. The change in payroll and other
taxes in both periods reflects the level of payroll costs in each period. The
increase in local property taxes during both 1996 and 1995 was due to higher
tax rates and assessments in the Company's service territory.
Other Income and Interest Charges
Other income decreased by $298,000 in 1996 due primarily to a $591,000
reduction in interest income received by the Company in connection with its
participation in the COM/Energy Money Pool partially offset by a $452,000
increase in revenues associated with the Company's merchandising program for
water heaters and heating systems. In 1995, other income increased by
$812,000 due primarily to interest income received by the Company in
connection with its participation in the COM/Energy Money Pool.
Total interest charges decreased by $1.1 million in 1996 primarily due
to lower interest on deferred gas costs and pipeline refunds and the
retirement of $10 million of long-term debt in October 1996. These decreases
were partially offset by higher short-term interest charges reflecting a
higher level of bank borrowings during the year. Total interest charges
increased by $1.4 million in 1995 mainly due to higher interest on deferred
gas costs offset, in part, by a decrease in short-term interest charges
reflecting lower levels of short-term debt.
Forward-Looking Statements
This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements" and
are 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
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COMMONWEALTH GAS COMPANY
actual results to differ materially from those stated in the forward-looking
statements. Those factors include developments in the legislative, regulatory
and competitive environment, certain environmental matters, demands for
capital expenditures and the availability of cash from various sources, and
uncertainty as to regulatory approval of the full recovery of regulatory
assets and other stranded costs.
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 a $2.8 million liability that reflects its best
estimate (based on current information) of the costs to be incurred in
connection with 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 associated costs may not be recoverable in rates.
In 1994, the Company recorded an estimated liability (and a charge to
operations) of $500,000 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 estimate its ultimate liability for
future environmental remediation costs. However, in view of the Company's
current assessment of its environmental responsibilities, existing legal
requirements and regulatory policies, management does not believe that these
matters will have a material adverse impact on the Company's results of
operations or financial position.
Effective January 1, 1997, the Company will adopt the provisions of
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities."
This Statement provides authoritative guidance for recognition, measurement,
display and disclosure of environmental remediation liabilities in financial
statements. The Company has recorded environmental remediation liabilities
net of amounts paid of $2.8 million at December 31, 1996. Upon adoption of
SOP 96-1, the Company's estimated liability will not incrementally change and
further, management does not believe that SOP 96-1 will have a material
adverse effect on the Company's results of operations or financial position.
Item 8. Financial Statements and Supplementary Data
The Company's financial statements required by this item are filed
herewith on pages 15 through 32 of this report.
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COMMONWEALTH GAS COMPANY
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
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COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1996
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Commonwealth Gas Company:
We have audited the accompanying balance sheets of COMMONWEALTH GAS
COMPANY (a Massachusetts corporation and wholly-owned subsidiary of
Commonwealth Energy System) as of December 31, 1996 and 1995, and the related
statements of income, retained earnings and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements and
the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Commonwealth Gas
Company as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting prin-
ciples.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
to financial statements and schedule is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein in relation to the basic financial statements taken as
a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 19, 1997.
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COMMONWEALTH GAS COMPANY
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
PART II.
FINANCIAL STATEMENTS
Balance Sheets at December 31, 1996 and 1995
Statements of Income for the Years Ended December 31, 1996, 1995 and
1994
Statements of Retained Earnings for the Years Ended December 31, 1996,
1995 and 1994
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and
1994
Notes to Financial Statements
PART IV.
SCHEDULE
II Valuation and Qualifying Accounts for the Years Ended December 31,
1996, 1995 and 1994
SCHEDULES OMITTED
All other schedules are not submitted because they are not applicable or
not required or because the required information is included in the
financial statements or notes thereto.
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COMMONWEALTH GAS COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
(Dollars in Thousands)
PROPERTY, PLANT AND EQUIPMENT, at original cost $358,783 $348,284
Less - Accumulated depreciation 102,278 92,881
256,505 255,403
Add - Construction work in progress 836 738
257,341 256,141
CURRENT ASSETS
Cash 421 2,113
Accounts receivable -
Affiliated companies 242 188
Customers, less reserves of $2,738,000 in 1996
and $2,691,000 in 1995 47,087 40,317
Unbilled revenues 20,885 22,850
Inventories, at average cost -
Natural gas 23,084 17,339
Materials and supplies 1,620 1,286
Prepaid taxes -
Property 3,061 3,094
Income 5,619 384
Other 981 1,138
103,000 88,709
DEFERRED CHARGES
Regulatory assets 23,522 23,241
Other 5,067 6,524
28,589 29,765
$388,930 $374,615
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 18>
COMMONWEALTH GAS COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
CAPITALIZATION AND LIABILITIES
1996 1995
(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 10,856 10,495
110,020 109,659
Long-term debt, less maturing issues and
current sinking fund requirements 74,450 78,100
184,470 187,759
CURRENT LIABILITIES
Interim Financing -
Notes payable to banks 58,200 12,200
Advances from affiliates 10,400 1,850
Maturing long-term debt - 10,000
68,600 24,050
Other Current Liabilities -
Current sinking fund requirements 3,650 3,650
Accounts payable -
Affiliated companies 3,081 2,229
Other 32,904 36,985
Customer deposits 952 1,354
Accrued local property and other taxes 3,060 3,435
Accrued interest 458 1,938
Other 16,681 37,055
60,786 86,646
129,386 110,696
DEFERRED CREDITS
Accumulated deferred income taxes 37,088 35,586
Unamortized investment tax credits 5,660 5,862
Other 32,326 34,712
75,074 76,160
COMMITMENTS AND CONTINGENCIES
$388,930 $374,615
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 19>
COMMONWEALTH GAS COMPANY
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
(Dollars in Thousands)
GAS OPERATING REVENUES $342,488 $308,922 $325,726
OPERATING EXPENSES
Cost of gas sold 197,665 169,112 188,769
Other operation 75,279 72,138 74,636
Maintenance 12,829 11,577 11,809
Depreciation 10,061 9,656 9,559
Amortization 1,342 1,212 1,238
Taxes -
Income 10,282 9,669 7,983
Local property 5,943 5,798 5,336
Payroll and other 2,385 2,818 2,715
315,786 281,980 302,045
OPERATING INCOME 26,702 26,942 23,681
OTHER INCOME 935 1,233 421
INCOME BEFORE INTEREST CHARGES 27,637 28,175 24,102
INTEREST CHARGES
Long-term debt 7,604 8,174 8,488
Other interest charges 3,264 3,827 2,073
Allowance for borrowed funds used
during construction (20) (55) (27)
10,848 11,946 10,534
NET INCOME $ 16,789 $ 16,229 $ 13,568
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 20>
COMMONWEALTH GAS COMPANY
STATEMENTS OF RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
(Dollars in Thousands)
Balance at beginning of year $10,495 $ 6,837 $ 7,840
Add (Deduct):
Net income 16,789 16,229 13,568
Cash dividends on common stock (16,428) (12,571) (14,571)
Balance at end of year $10,856 $10,495 $ 6,837
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 21>
COMMONWEALTH GAS COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
(Dollars in Thousands)
OPERATING ACTIVITIES
Net income $16,789 $16,229 $13,568
Effects of noncash items -
Depreciation and amortization 12,034 12,983 15,159
Deferred income taxes 4,249 (4,026) 3,883
Investment tax credits (202) (203) (205)
Change in working capital exclusive
of cash and interim financing -
Accounts receivable and unbilled
revenues (4,859) (9,111) 8,063
Income taxes (5,235) 235 1,193
Local property and other taxes (342) (115) 145
Accounts payable and other (31,407) 15,985 17,925
Deferred postretirement benefit costs (2,228) (2,376) (2,306)
FERC Order 636 transition costs, net - 11,390 (2,585)
All other operating items (3,267) 10,908 (7,393)
Net cash provided by (used for)
operating activities (14,468) 51,899 47,447
INVESTING ACTIVITIES
Additions to property, plant and
equipment (exclusive of AFUDC) (11,676) (16,252) (17,994)
Allowance for borrowed funds used
during construction (20) (55) (27)
Net cash used for investing activities (11,696) (16,307) (18,021)
FINANCING ACTIVITIES
Payment of dividends (16,428) (12,571) (14,571)
Proceeds from (payment of) short-term
borrowings 46,000 (12,750) (16,025)
Proceeds from (payment of) affiliate
borrowings 8,550 (9,370) 8,385
Long-term debt issue refunded (10,000) - -
Retirement of long-term debt
through sinking funds (3,650) (3,650) (3,650)
Net cash provided by (used for)
financing activities 24,472 (38,341) (25,861)
Net increase (decrease) in cash (1,692) (2,749) 3,565
Cash at beginning of period 2,113 4,862 1,297
Cash at end of period $ 421 $ 2,113 $ 4,862
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest (net of amounts capitalized) $10,619 $11,035 $ 9,799
Income taxes $14,165 $ 8,118 $ 4,636
The accompanying notes are an integral part of these financial statements.
<PAGE>
<PAGE 22>
COMMONWEALTH GAS COMPANY
NOTES TO 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 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 companies and several non-regulated companies.
The Company is engaged in the distribution and sale of natural gas at
retail to approximately 234,500 customers in a 1,067 square-mile area which
includes 49 communities in eastern, southeastern and central Massachusetts
including New Bedford, Cambridge, Plymouth and Worcester. The approximate
year-round population of this service area is 1,128,000.
The Company has 658 regular employees including 426 (65%) who are repre-
sented by three collective bargaining units. On September 8, 1996, a
contract was ratified, following a five-month labor dispute, with a
collective bargaining unit that represents approximately 52% of regular
employees. The new six-year agreement will remain in effect through March
31, 2002.
(2) Significant Accounting Policies
(a) Principles of Accounting
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Certain prior year amounts are reclassified from time to time to conform
with the presentation used in the current year's financial statements.
(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. Effective 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.
SFAS No. 121 did not have an impact on the Company's financial position or
<PAGE>
<PAGE 23>
COMMONWEALTH GAS COMPANY
results of operations upon adoption. This result may change as
modifications are made to the current regulatory framework including
utility industry restructuring efforts in Massachusetts. 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 at
December 31, 1996 and 1995 were as follows:
1996 1995
(Dollars in Thousands)
FERC Order 636 transition costs $ 9,680 $11,711
Postretirement benefit costs including
pensions 9,972 7,744
Environmental costs 3,870 3,786
Total regulatory assets $23,522 $23,241
The principal regulatory liability, reflected in deferred credits-other
and relating to income taxes, was $8.6 million at December 31, 1996 and 1995.
As of December 31, 1996, $13.6 million of the Company's regulatory assets and
all of its regulatory liabilities are reflected in rates charged to
customers. Regulatory assets are being recovered over a weighted average
period of approximately 8 years. A request for recovery of the
postretirement benefits costs is in process and DPU approval is expected
during 1997.
(c) Transactions with Affiliates
Operating revenues include sales of gas to affiliate Cambridge Electric
Light Company as follows:
1996 1995 1994
(Dollars in Thousands)
Cost $ 11 $ 289 $1,493
Margin - 64 220
Total $ 11 $ 353 $1,713
The margin realized on these sales is credited to firm customers through
the Cost of Gas Adjustment (CGA).
Other intercompany transactions include payments by the Company for
management, accounting, data processing and other services provided by
COM/Energy Services Company. In addition, the Company incurred costs paid to
affiliate Hopkinton LNG Corp. for liquefaction and vaporization services that
amounted to $10,124,000, $9,988,000 and $10,126,000 in 1996, 1995 and 1994,
respectively. Transactions with system companies are subject to review by
the DPU.
<PAGE>
<PAGE 24>
COMMONWEALTH GAS COMPANY
(d) Operating Revenues
Customers are billed for their use of gas on a cycle basis throughout
the month. To reflect revenues in the proper period, the estimated amount of
unbilled sales revenue is recorded each month.
The Company is permitted to bill customers currently for total gas
costs, certain conservation and load management costs and environmental costs
through adjustment clauses. Amounts recoverable under the adjustment clauses
are subject to review and adjustment by the DPU. The amount of such costs
incurred by the Company but not yet reflected in customers' bills is recorded
as unbilled revenues.
(e) Depreciation
Depreciation is provided using the straight-line method at rates
intended to amortize the original cost and the estimated cost of removal less
salvage of properties over their estimated economic lives. The Company's
composite depreciation rate, based on average depreciable property in
service, was 2.94% in 1996, 2.90% in 1995 and 2.98% in 1994.
(f) Maintenance
Expenditures for repairs of property and replacement and renewal of
items determined to be less than units of property are charged to maintenance
expense. Additions, replacements and renewals of property considered to be
units of property are charged to the appropriate plant accounts. Upon
retirement, accumulated depreciation is charged with the original cost of
property units and the cost of removal less salvage.
(g) Allowance for Funds Used During Construction
Under applicable rate-making practices, the Company is permitted to
include an allowance for funds used during construction (AFUDC) as an element
of its depreciable property costs. This allowance is based on the amount of
construction work in progress that is not included in the rate base on which
the Company earns a return. An amount equal to the AFUDC capitalized in the
current period is reflected in the accompanying statements of income.
While AFUDC does not provide funds currently, these amounts are
recoverable in revenues over the service life of the constructed property.
The amount of AFUDC recorded was at a weighted average rate of 6% in 1996,
6.50% in 1995 and 4.75% in 1994.
(3) Income Taxes
For financial reporting purposes, the Company provides federal and state
income taxes on a separate return basis. However, for federal income tax
purposes, the Company's taxable income and deductions are included in the
consolidated income tax return of the System, and it makes tax payments or
receives refunds on the basis of its tax attributes in the tax return in
accordance with applicable regulations.
<PAGE>
<PAGE 25>
COMMONWEALTH GAS COMPANY
The following is a summary of the provisions for income taxes for the
years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
(Dollars in Thousands)
Federal -
Current $ 5,220 $11,602 $ 3,585
Deferred 3,508 (3,155) 3,405
Investment tax credits (202) (203) (205)
8,526 8,244 6,785
State -
Current 1,015 2,296 720
Deferred 713 (618) 667
1,728 1,678 1,387
10,254 9,922 8,172
Amortization of regulatory liability
relating to deferred income taxes 28 (253) (189)
Total federal and state
income taxes $10,282 $ 9,669 $ 7,983
Deferred tax liabilities and assets are determined based on the
difference between the financial statement basis and tax basis of assets and
liabilities using enacted tax rates in effect in the year in which the
differences are expected to reverse.
Accumulated deferred income taxes consisted of the following in 1996 and
1995:
1996 1995
(Dollars in Thousands)
Liabilities
Property-related $43,751 $42,361
Postretirement benefits plan 3,903 2,933
All other 1,602 1,734
49,256 47,028
Assets
Investment tax credit 3,653 3,783
Pension plan 3,458 3,099
Regulatory liability 3,010 2,992
Inventory repricing 3,202 4,047
All other 2,363 3,707
15,686 17,628
Accumulated deferred income taxes, net $33,570 $29,400
The net year-end deferred income tax liability above is net of current
deferred tax assets of $3,518,000 in 1996 and $6,186,000 in 1995 which are
included in other deferred charges in the accompanying Balance Sheets.
<PAGE>
<PAGE 26>
COMMONWEALTH GAS COMPANY
The total income tax provision set forth on the previous page
represents 38% in 1996 and 37% in both 1995 and 1994 of income before such
taxes. The following table reconciles the statutory federal income tax rate
to these percentages:
1996 1995 1994
Federal statutory rate 35% 35% 35%
Federal income tax expense at statutory levels $ 9,475 $9,064 $7,543
Increase (Decrease) from statutory rate:
State tax net of federal tax benefit 1,123 1,091 902
Amortization of investment tax credits (202) (203) (205)
Amortization of excess deferred reserves 28 (253) (189)
Tax versus book depreciation (123) (16) -
Other (19) (14) (68)
$10,282 $9,669 $7,983
Effective federal tax rate 38% 37% 37%
(4) Long-Term Debt and Interim Financing
(a) Long-Term Debt
Long-term debt outstanding, exclusive of current maturities and current
sinking fund requirements, collateralized by substantially all of the
Company's property, is as follows:
Original Balance December 31,
Issue 1996 1995
(Dollars in Thousands)
First Mortgage Bonds -
8.99%, Series I, due 2001 $40,000 $14,450 $18,100
9.95%, Series J, due 2020 25,000 25,000 25,000
7.11%, Series K, due 2033 35,000 35,000 35,000
$74,450 $78,100
Under terms of its indenture, the Company is required to make periodic
sinking fund payments for retirement of outstanding long-term debt. The
Company may purchase its outstanding bonds in advance of sinking fund
requirements under favorable conditions. The required sinking fund payments
and balances of maturing debt issues for the five years subsequent to
December 31, 1996 are as follows:
Sinking Fund Maturing Debt
Year Requirements Issues Total
(Dollars in Thousands)
1997 $3,650 $ - $3,650
1998 3,650 - 3,650
1999 3,650 - 3,650
2000 3,650 - 3,650
2001 - 3,500 3,500
<PAGE>
<PAGE 27>
COMMONWEALTH GAS COMPANY
(b) Notes Payable to Banks
The Company and other system companies maintain both committed and
uncommitted lines of credit for the short-term financing of their
construction programs and other corporate purposes. As of December 31, 1996,
system companies had $135 million of committed lines that will expire at
varying intervals in 1997. These lines are normally renewed upon expiration
and require annual fees up to .1875% of the individual line. At December 31,
1996, the uncommitted lines of credit totaled $20 million. Interest rates on
the outstanding borrowings generally are at an adjusted money market rate and
averaged 5.6% and 6.1% in 1996 and 1995, respectively. The Company's notes
payable to banks totaled $58,200,000 and $12,200,000 at December 31, 1996 and
1995, respectively.
(c) Advances from Affiliates
The Company had short-term notes payable to the System totaling
$5,495,000 and $1,425,000 at December 31, 1996 and 1995, respectively. These
notes are written for a term of up to 11 months and 29 days. Interest is at
the prime rate and is adjusted for changes in that rate during the term of
the notes. This rate averaged 8.3% and 8.8% in 1996 and 1995, respectively.
The Company is a member of the COM/Energy Money Pool (the Pool), an
arrangement among the subsidiaries of the System, whereby short-term cash
surpluses are used to help meet the short-term borrowing needs of the utility
subsidiaries. In general, lenders to the Pool receive a higher rate of
return than they otherwise would on such investments, while borrowers pay a
lower interest rate than those available from banks. Interest rates on the
outstanding borrowings are based on the monthly average rate the Company
would otherwise have to pay banks, less one-half the difference between that
rate and the monthly average U.S. Treasury Bill weekly auction rate. The
borrowings are for a period of less than one year and are payable upon
demand. Rates on these borrowings averaged 5.3% and 5.8% in 1996 and 1995,
respectively. The Company had borrowings from the Pool of $4,905,000 and
$425,000 at December 31, 1996 and 1995, respectively.
(d) Disclosures about Fair Value of Financial Instruments
The fair value of certain financial instruments included in the
accompanying balance sheets as of December 31, 1996 and 1995 are as follows:
1996 1995
(Dollars in Thousands)
Carrying Fair Carrying Fair
Value Value Value Value
Long-Term Debt $78,100 $ 85,289 $91,750 $103,055
The carrying amount of cash, notes payable to banks and advances from
affiliates approximates the fair value because of the short maturity of these
financial instruments.
<PAGE>
<PAGE 28>
COMMONWEALTH GAS COMPANY
The estimated fair value of long-term debt is based on quoted market
prices of the same or similar issues or on the current rates offered for debt
with the same remaining maturity. The fair values shown above do not purport
to represent the amounts at which those obligations would be settled.
(5) Employee Benefit Plans
(a) Pension
The Company has a noncontributory pension plan covering substantially
all regular employees who have attained the age of 21 and have completed a
year of service. Pension benefits are based on an employee's years of
service and compensation. The Company makes monthly contributions to the
plan consistent with the funding requirements of the Employee Retirement
Income Security Act of 1974.
Components of pension expense and related assumptions to develop pension
expense were as follows:
1996 1995 1994
(Dollars in Thousands)
Service cost $ 2,310 $ 1,912 $ 2,278
Interest cost 7,172 7,094 6,378
Return on plan assets - (gain)/loss (13,542) (18,598) 1,345
Net amortization and deferral 7,445 12,909 (6,297)
Total pension expense 3,385 3,317 3,704
Transfers from affiliated
companies, net 487 463 478
Less: Amounts capitalized
and deferred 292 342 336
Net pension expense $ 3,580 $ 3,438 $ 3,846
Discount rate 7.25% 8.50% 7.25%
Assumed rate of return 8.75 9.00 8.50
Rate of increase in future compensation 4.25 5.00 4.50
Pension expense reflects the use of the projected unit credit method
which is also the actuarial cost method used in determining future funding of
the plan. The funded status of the Company's pension plan (using a
measurement date of December 31) is as follows:
<PAGE>
<PAGE 29>
COMMONWEALTH GAS COMPANY
1996 1995
(Dollars in Thousands)
Accumulated benefit obligation:
Vested $(74,341) $(71,818)
Nonvested (9,084) (7,805)
$(83,425) $(79,623)
Projected benefit obligation $(99,811) $(96,032)
Plan assets at fair market value 101,182 91,168
Projected benefit obligation
(greater) less than plan assets 1,371 (4,864)
Unamortized transition obligation 3,098 3,717
Unrecognized prior service cost 4,824 5,327
Unrecognized gain (16,566) (10,685)
Accrued pension liability $ (7,273) $ (6,505)
The following actuarial assumptions were used in determining the plan's
year-end funded status:
1996 1995
Discount rate 7.50% 7.25%
Rate of increase in future compensation 4.25 4.25
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect pension
expense in future years.
(b) Other Postretirement Benefits
Certain employees are eligible for postretirement benefits if they meet
specific requirements. These benefits could include health and life
insurance coverage and reimbursement of Medicare Part B premiums. Under
certain circumstances, eligible employees are required to make contributions
for postretirement benefits.
To fund its postretirement benefits, the Company makes contributions to
various voluntary employees' beneficiary association (VEBA) trusts that were
established pursuant to section 501(c)(9) of the Internal Revenue Code (the
Code). The Company also makes contributions to a subaccount of its pension
plan pursuant to section 401(h) of the Code to fund a portion of its
postretirement benefit obligation. The Company contributed approximately
$4.3 million and $4.4 million to these trusts during 1996 and 1995,
respectively.
<PAGE>
<PAGE 30>
COMMONWEALTH GAS COMPANY
The net periodic postretirement benefit cost for the years ended
December 31, 1996 and 1995 include the following components and related
assumptions:
1996 1995
(Dollars in Thousands)
Service cost $ 551 $ 452
Interest cost 2,878 2,848
Return on plan assets (1,348) (1,408)
Amortization of transition obligation
over 20 years 1,700 1,700
Net amortization and deferral 482 811
Total postretirement benefit cost 4,263 4,403
Transfers to affiliated companies, net 520 524
Less: Amounts capitalized and deferred 2,612 2,834
Net postretirement benefits cost $ 2,171 $ 2,093
Discount rate 7.25% 8.50%
Assumed rate of return 8.75 9.00
Rate of increase in future compensation 4.25 5.00
The funded status of the Company's postretirement benefits plan using a
measurement date of December 31, 1996 and 1995 is as follows:
1996 1995
(Dollars in Thousands)
Accumulated postretirement benefit obligation:
Retirees $ (24,302) $ (24,263)
Fully eligible active plan participants (3,456) (3,848)
Other active plan participants (10,885) (11,318)
(38,643) (39,429)
Plan assets at fair market value 12,636 9,086
Accumulated postretirement benefit obligation
greater than plan assets (26,007) (30,343)
Unamortized transition obligation 27,203 28,904
Unrecognized (gain) loss (1,196) 1,439
$ - $ -
<PAGE>
<PAGE 31>
COMMONWEALTH GAS COMPANY
The following actuarial assumptions were used in determining the plan's
estimated accumulated postretirement benefit obligation (APBO) and funded
status for 1996 and 1995:
1996 1995
Discount rate 7.50% 7.25%
Rate of increase in future compensation 4.25 4.25
Medicare Part B premiums 9.50 12.20
Medical care 7.00 8.00
Dental care 5.00 5.00
The above dental rate remains constant through the year 2007. Rates for
Medicare Part B premiums and medical care decrease to 3.1% and 5%,
respectively, by 2007 and remain at that level thereafter. A one percent
change in the medical trend rate would have $460,000 impact on the Company's
annual expense and would change the APBO by approximately $4.6 million.
Plan assets consist primarily of fixed-income and equity securities.
Fluctuations in the fair market value of plan assets will affect post-
retirement benefit expense in future years.
The Company has recently requested a ruling from the DPU as it seeks to
fully recover its postretirement benefits costs. In addition, the Company
has requested to amortize its deferred balance of $10 million over a period
not to exceed ten years. While the Company is unable to predict the ultimate
outcome of its request, it believes that it is probable that the DPU will
authorize similar treatment as provided to its affiliate Commonwealth
Electric.
(c) Savings Plan
The Company has an Employees Savings Plan that provides for Company
contributions equal to contributions by eligible employees of up to four
percent of each employee's compensation rate. Effective January 1, 1993, the
rate was increased to five percent for those employees no longer eligible for
postretirement health benefits. The Company's contribution was $1,100,000 in
1996, $1,439,000 in 1995 and $1,447,000 in 1994.
(6) Commitments and Contingencies
(a) Construction and Financing Program
The Company is engaged in a continuous construction program presently
estimated at $92 million for the five-year period 1997 through 2001. Of that
amount, $17.8 million is estimated for 1997. The program is subject to
periodic review and revision because of factors such as changes in business
conditions, rates of customer growth, effects of inflation, equipment
delivery schedules, licensing delays, availability and cost of capital and
environmental factors.
<PAGE>
<PAGE 32>
COMMONWEALTH GAS COMPANY
(b) LNG Service Contract
The Company has long-term contracts with Hopkinton LNG Corp., a wholly-
owned subsidiary of the System, for liquefaction and vaporization services.
The contracts extend on a year-to-year basis, subject to the giving of a
notice to terminate by the Company at least five years in advance of the
anticipated termination date.
(7) Gas Refunds
During 1996, 1995 and 1994, the Company received refunds from its gas
suppliers in settlement of several rate cases that had been pending before
the FERC. Operating revenues and the cost of gas sold have been reduced by
the amounts refunded to firm customers totaling $7,656,000 in 1996,
$9,061,000 in 1995 and $6,077,000 in 1994.
(8) Lease Obligations
The Company leases equipment and office space under arrangements that
are classified as operating leases. These lease agreements are for terms of
one year or longer. Leases currently in effect contain no provisions that
prohibit the Company from entering into future lease agreements or
obligations.
Future minimum lease payments, by period and in the aggregate, of non-
cancelable operating leases consisted of the following at December 31, 1996:
Operating Leases
(Dollars in Thousands)
1997 $ 5,344
1998 4,572
1999 3,954
2000 2,930
2001 2,222
Beyond 2001 9,551
Total future minimum lease payments $28,573
Total rent expense for all operating leases, except those with terms of
a month or less, amounted to $5,027,000 in 1996, $4,931,000 in 1995 and
$3,699,000 in 1994. There were no contingent rentals and no sublease rentals
for the years 1996, 1995 and 1994.
(9) Environmental Matters
The Company is subject to laws and regulations administered by federal,
state and local authorities relating to the quality of the environment.
These regulations authorize federal and state regulatory agencies to identify
and remediate hazardous waste sites and to seek recovery from statutorily
liable parties (usually referred to as potentially responsible parties or
PRPs), or to order these PRPs to undertake the clean-up themselves. (Refer to
"Environmental Matters" filed under Item 7 of this report for additional
information.)
<PAGE>
<PAGE 33>
COMMONWEALTH GAS COMPANY
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Index to Financial Statements
Financial statements and notes thereto of the Company together
with the Report of Independent Public Accountants, are filed under
Item 8 of this report and listed on the Index to Financial
Statements and Schedules (page 16).
(a) 2. Index to Financial Statement Schedules
Filed herewith at page indicated is financial statement schedule
of the Company:
Schedule II - Valuation and Qualifying Accounts - Years Ended
December 31, 1996, 1995 and 1994 (page 38).
(a) 3. Exhibits:
Notes to Exhibits -
a. Unless otherwise designated, the exhibits listed below are
incorporated by reference to the appropriate exhibit numbers and
the Securities and Exchange Commission file numbers indicated in
parentheses.
b. During 1981, New Bedford Gas and Edison Light Company sold its gas
business and properties to the Company and changed its corporate
name to Commonwealth Electric Company.
c. The following is a glossary of acronyms used throughout the
Exhibit Index:
<PAGE>
<PAGE 34>
COMMONWEALTH GAS COMPANY
AGT Algonquin Gas Transmission Company
CE Commonwealth Electric Company
CEC Canal Electric Company
CEL Cambridge Electric Light Company
CES Commonwealth Energy System
CG Commonwealth Gas Company
CNG CNG Transmission Corporation
HOPCO Hopkinton LNG Corp.
NBGEL New Bedford Gas and Edison Light Company
TET Texas Eastern Transmission Corporation
TGP Tennessee Gas Pipeline Company
TGT Tennessee Gas Transmission Corporation
Exhibit Index:
Exhibit 3. Articles of incorporation and by-laws.
3.1.1 Articles of incorporation of CG (Exhibit 1 to the CG 1991 Form 10-
K, File No. 2-1647).
3.1.2 By-laws of CG, as amended (Exhibit 2 to the CG 1992 Form 10-K,
File No. 2-1647).
Exhibit 4. Instruments defining the rights of security holders, including
indentures.
4.1. Indentures of Trust or Supplemental Indenture of Trust
(as filed by the Registrant, except First Supplemental which was
filed by the System)
1. Original Indenture on Form S-1 (Feb., 1949) (Exhibit 7(a), File
No. 2-7820).
2. First Supplemental on Form S-1 (Mar., 1950) (Exhibit 7(a), File
No. 2-8418).
3. Second Supplemental on Form S-1 (Nov., 1952) (Exhibit 4(a)(2),
File No. 2-10445).
4. Third Supplemental on Form S-1 (Nov., 1952) (Exhibit 4(a)(3), File
No. 2-10445).
5. Fourth Supplemental on Form S-9 (Oct. 1954) (Exhibit 2(b)(5), File
No. 2-15089).
6. Fifth Supplemental on Form S-9 (Mar., 1956) (Exhibit 2(b)(6), File
No. 2-15089).
7. Sixth Supplemental on Form S-9 (Apr., 1957) (Exhibit 2(b)(7), File
No. 2-15089).
8. Seventh Supplemental on Form S-9 (June 1959) (Exhibit 2(b)(8),
File No. 2-20532).
9. Eighth Supplemental on Form S-9 (Sept. 1961) (Exhibit 2(b)(9),
File No. 2-20532).
10. Ninth Supplemental on Form 8-K (Aug. 1962) (Exhibit A, File No. 2-
1647).
11. Tenth Supplemental on Form 10-K (1970) (Exhibit 2, File No. 2-
1647).
<PAGE>
<PAGE 35>
COMMONWEALTH GAS COMPANY
12. Eleventh Supplemental on Form S-1 (June, 1972) (Exhibit 4(b)(2),
File No. 2-48556).
13. Twelfth Supplemental on Form S-1 (Aug., 1973) (Exhibit
4(b)(3), File No. 2-48556).
14. Thirteenth Supplemental on Form 10-K (1992) (Exhibit 1, File No.
2-1647).
15. Fourteenth Supplemental on Form 10-K (1990) (Exhibit 1, File No.
2-1647).
16. Fifteenth Supplemental on Form 10-K (1982) (Exhibit 1, File No. 2-
1647).
17. Sixteenth Supplemental on Form 10-K (1986) (Exhibit 1, File No. 2-
1647).
18. Seventeenth Supplemental on Form 10-K (1990) (Exhibit 2, File No.
2-1647).
19. Eighteenth Supplemental on Form 10-Q (March, 1994) (Exhibit 1,
File No. 2-1647).
Exhibit 10. Material Contracts.
10.1. Natural Gas Purchase Contracts.
10.1.3 Gas Service Contract between HOPCO and NBGEL dated September 1,
1971 for the performance of liquefaction, storage and vaporization
services and the operation and maintenance of an LNG Facility
located at Acushnet, MA (Exhibit 8 to the CG 1984 Form 10-K, File
No. 2-1647).
10.1.3.1 Supplement 1 to Gas Service Contract between HOPCO and NBGEL dated
September 1, 1973 and September 14, 1977 (Exhibit 5(c)5 to the CES
Form S-16 (June 1979), File No. 2-64731).
10.1.4 Gas Service Contract between HOPCO and CG dated September 1, 1971
for the performance of liquefaction, storage and vaporization
services and the operation of LNG facilities located in Hopkinton,
MA (Exhibit 9 to the CG 1984 Form 10-K, File No. 2-1647).
10.1.4.1 Amendments to 10.1.3 and 10.1.4 as amended December 1, 1976
(Exhibits 2 and 3 to the CG 1986 Form 10-K, File No. 2-1647).
10.1.4.2 Supplement 2 to 10.1.4 dated September 30, 1982 (Exhibit 2 to the
CG 1992 Form 10-K, File No. 2-1647).
10.1.5 Supplement 1 to Gas Service Contract between HOPCO and CG dated
September 14, 1977 (Exhibit 5(c)6 to the CES Form S-16 (June
1979), File No. 2-64731).
10.1.6 Firm Storage Service Transportation Contract by and between TGT
and CG providing for firm transportation of natural gas from
Consolidated Gas Transmission Corporation dated December 15, 1985
(Exhibit 1 to the CG 1985 Form 10-K, File No. 2-1647).
10.1.7 Gas Sales Agreement by and between Enron Gas Marketing, Inc. and
CG relating to the sale and purchase of natural gas on an
interruptible basis, dated June 17, 1986 (Exhibit 3 to the CG Form
10-Q (June 1986), File No. 2-1647).
<PAGE>
<PAGE 36>
10.1.8 Service Agreement dated December 14, 1985 and an amendment thereto
dated May 15, 1986 by and between TET and CG to receive, transport
and deliver to points of delivery natural gas for the account of
the CG dated December 14, 1985 (Exhibit 5 to the CG Form 10-Q
(June 1986), File No. 2-1647).
10.1.9 Gas Transportation Agreement by and between TET and CG to receive
transport and deliver on an interruptible basis, certain
quantities of natural gas for the account of CG dated January 31,
1986 (Exhibit 6 to the CG Form 10-Q (June 1986), File No. 2-1647).
10.1.10 1986 Consolidating Supplement to CG Service Contract and NBGEL by
and between CG and HOPCO dated December 31, 1986 amending and
consolidating the CG Service Contract and the New Bedford Gas
Service Contract both as amended December 1, 1976 and supplemented
September 14, 1977 (Exhibit 2 to the CG Form 10-Q (March 1988),
File No. 2 -1647).
10.1.11 Service Agreement dated May 19, 1988, by and between TET and CG,
whereby TET agrees to receive, transport and deliver natural gas
to CG (Exhibit 1 to the CG Form 10-Q (September 1988), File No. 2-
1647).
10.1.12 Gas Transportation Agreement by and between AGT and CG to receive,
transport and deliver certain quantities of natural gas on a firm
basis for the account of CG dated December 1, 1988 (Exhibit 2 to
the CG 1988 Form 10-K, File No. 2-1647).
10.1.13 Gas Sales Agreement between Tejas Power Corporation (seller) and
CG (purchaser) for the purchase of spot market gas, dated February
21, 1989 with a contract term of at least one year (Exhibit 2 to
the CG Form 10-Q (March 1989), File No. 2-1647).
10.1.14 Gas Sales Agreement between Vitol (seller) and CG (purchaser) for
the purchase of spot market gas, dated April 5, 1988, with a
contract term of at least one year (Exhibit 1 to the CG Form 10-Q
(June 1989), File No. 2-1647).
10.1.15 Gas Storage Agreement between Steuben Gas Storage Company and CG
(customer) for the storage and delivery of customer's natural gas
to and from underground gas storage facilities, dated May 23,
1989, with a contract term of at least one year (Exhibit 4 to the
CG Form 10-Q (June 1989), File No. 2-1647).
10.1.16 Gas Sales Agreement between Fina Oil and Chemical Company (seller)
and CG (purchaser) for the purchase of spot market gas, dated July
10, 1989, with a contract term of at least one year (Exhibit 3 to
the CG Form 10-Q (September 1989), File No. 2-1647).
10.1.17 Gas Sales Agreement Panenergy (seller) and CG (purchaser) for the
purchase of spot market gas, dated August 14, 1989, with a
contract term of at least one year (Exhibit 4 to the CG Form 10-Q
(September 1989), File No. 2-1647).
<PAGE>
<PAGE 37>
COMMONWEALTH GAS COMPANY
10.1.18 Gas Sales Agreement between LGN&E (seller) and CG (purchaser) for
the purchase of firm gas, dated August 15, 1990, with a contract
term of at least six years (Exhibit 1 to the CG Form 10-Q
(September 1990), File No. 2-1647).
10.1.19 Transportation Agreement between AGT and CG to provide for firm
transportation of natural gas on a daily basis, dated December 1,
1988 (Exhibit 3 to the CG 1991 Form 10-K, File No. 2-1647).
10.1.20 Gas Sales Agreement between AGT and CG to reduce the volume of
Rate Schedule F-1, dated October 15, 1990 (Exhibit 5 to the CG
1991 Form 10-K, File No. 2-1647).
10.1.21 Transportation Agreement between AGT and CG for Rate Schedule AFT-
1, Agreement No. 90103, dated November 1, 1990 (Exhibit 6 to the
CG 1991 Form 10-K, File No. 2-1647).
10.1.22 Transportation Agreement between TGP and CG dated September 1,
1991 (Exhibit 9 to the CG 1991 Form 10-K, File No. 2-1647).
10.1.23 Transportation Agreement between CNG and CG to provide for
transportation of natural gas on a daily basis from Steuben Gas
Storage Company to TGP, dated September 24, 1991 (Exhibit 10 to
the CG 1991 Form 10-K, File No. 2-1647).
10.1.24 Service Line Agreement by and between CG and Milford Power Limited
Partnership dated March 12, 1992 for a term ending January 1, 2013
(Exhibit 1 to the CG Form 10-Q (March 1992), File No. 2-1647).
10.2 Other Agreements.
10.2.1 Pension Plan for Employees of Commonwealth Energy System and
Subsidiary Companies as amended and restated January 1, 1993
(Filed as Exhibit 1 to the System's Form 10-Q (September 1993),
File No. 1-7316).
10.2.2 Employees Savings Plan for Employees of Commonwealth Energy System
and Subsidiary Companies as amended and restated January 1, 1993
(Filed as Exhibit 2 to the System's Form 10-Q (September 1993),
File No. 1-7316).
Filed herewith:
Exhibit 27.
Financial Data Schedule for the year ended December 31, 1996
(Filed herewith as Exhibit 1)
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1996.
<PAGE>
<PAGE 38>
SCHEDULE II
COMMONWEALTH GAS COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
(Dollars in Thousands)
Additions
Balance Provision Deductions Balance
Beginning Charged to Accounts at End
Description of Year Operations Recoveries Written Off of Year
Allowance for
Doubtful Accounts Year Ended December 31, 1996
$ 2,691 $ 4,381 $ 1,213 $ 5,547 $ 2,738
Year Ended December 31, 1995
$ 2,827 $ 4,855 $ 1,375 $ 6,366 $ 2,691
Year Ended December 31, 1994
$ 3,162 $ 5,496 $ 1,405 $ 7,236 $ 2,827
<PAGE>
<PAGE 39>
COMMONWEALTH GAS COMPANY
FORM 10-K DECEMBER 31, 1996
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: WILLIAM G. POIST
William G. Poist,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Principal Executive Officers:
WILLIAM G. POIST March 27, 1997
William G. Poist,
Chairman of the Board and
Chief Executive Officer
R. D. WRIGHT March 27, 1997
Russell D. Wright,
President and Chief Operating Officer
Principal Financial and Accounting Officer:
JAMES D. RAPPOLI March 27, 1997
James D. Rappoli,
Financial Vice President and Treasurer
A majority of the Board of Directors:
WILLIAM G. POIST March 27, 1997
William G. Poist, Director
JAMES D. RAPPOLI March 27, 1997
James D. Rappoli, Director
R. D. WRIGHT March 27, 1997
Russell D. Wright, Director
<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-K of Commonwealth Gas Company for
fiscal year ended December 31, 1996 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000022620
<NAME> COMMONWEALTH GAS COMPANY
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> YEAR
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 257,341
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 103,000
<TOTAL-DEFERRED-CHARGES> 28,589
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 388,930
<COMMON> 71,425
<CAPITAL-SURPLUS-PAID-IN> 27,739
<RETAINED-EARNINGS> 10,856
<TOTAL-COMMON-STOCKHOLDERS-EQ> 110,020
0
0
<LONG-TERM-DEBT-NET> 74,450
<SHORT-TERM-NOTES> 68,600
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 3,650
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 132,210
<TOT-CAPITALIZATION-AND-LIAB> 388,930
<GROSS-OPERATING-REVENUE> 342,488
<INCOME-TAX-EXPENSE> 10,061
<OTHER-OPERATING-EXPENSES> 305,725
<TOTAL-OPERATING-EXPENSES> 315,786
<OPERATING-INCOME-LOSS> 26,702
<OTHER-INCOME-NET> 935
<INCOME-BEFORE-INTEREST-EXPEN> 27,637
<TOTAL-INTEREST-EXPENSE> 10,848
<NET-INCOME> 16,789
0
<EARNINGS-AVAILABLE-FOR-COMM> 16,789
<COMMON-STOCK-DIVIDENDS> 16,428
<TOTAL-INTEREST-ON-BONDS> 7,604
<CASH-FLOW-OPERATIONS> (14,468)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
