-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BNiD89q2CIUr+AKpzv2SerHsmEmnkifkI6UNt8VvhiyUosIxrtydsDm5+7wNkJ9q wm/00kaRxnzhVCRbgnwSvQ== 0000071304-97-000008.txt : 19970401 0000071304-97-000008.hdr.sgml : 19970401 ACCESSION NUMBER: 0000071304-97-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH GAS CO CENTRAL INDEX KEY: 0000022620 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS TRANSMISSION [4922] IRS NUMBER: 041989250 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 002-01647 FILM NUMBER: 97570679 BUSINESS ADDRESS: STREET 1: ONE MAIN ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6172254000 MAIL ADDRESS: STREET 1: P O BOX 9150 CITY: CAMBRIDGE STATE: MA ZIP: 02142-9150 FORMER COMPANY: FORMER CONFORMED NAME: WORCESTER GAS LIGHT CO DATE OF NAME CHANGE: 19720126 10-K 1 COM/GAS 1996 FORM 10-K 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. 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 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. 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. 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. 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. 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. 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. 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. 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) 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. 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 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. COMMONWEALTH GAS COMPANY Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 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. 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. 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. 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. 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. 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. 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. 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 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. 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. 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. 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 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. 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: 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. 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 $ - $ - 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. 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.) 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: 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). 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). 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). 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. 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 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 EX-27 2 COM/GAS 1996 FDS
UT 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. 0000022620 COMMONWEALTH GAS COMPANY 1,000 DEC-31-1996 DEC-31-1996 YEAR PER-BOOK 257,341 0 103,000 28,589 0 388,930 71,425 27,739 10,856 110,020 0 0 74,450 68,600 0 0 3,650 0 0 0 132,210 388,930 342,488 10,061 305,725 315,786 26,702 935 27,637 10,848 16,789 0 16,789 16,428 7,604 (14,468) 0 0
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