-----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, WthVy+oD0ToVRpcFmY0CjCTxsG9X7EX0ZzM8xEmmQDZyV3qVdvo8OKGUSaRrF0hU D4yryszdH9HCXLKK64+XAw== 0000071304-97-000049.txt : 19971117 0000071304-97-000049.hdr.sgml : 19971117 ACCESSION NUMBER: 0000071304-97-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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-Q SEC ACT: SEC FILE NUMBER: 002-01647 FILM NUMBER: 97720709 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-Q 1 COMMONWEALTH GAS COMPANY UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549-1004 Form 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 2-1647 COMMONWEALTH GAS COMPANY (Exact name of registrant as specified in its charter) Massachusetts 04-1989250 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Main Street, Cambridge, Massachusetts 02142-9150 (Address of principal executive offices) (Zip Code) (617) 225-4000 (Registrant's telephone number, including area code) (Former name, address and fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class of Common Stock November 1, 1997 Common Stock, $25 par value 2,857,000 shares The Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q as a wholly-owned subsidiary and is therefore filing this Form with the reduced disclosure format. Item 1. Financial Statements COMMONWEALTH GAS COMPANY CONDENSED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 ASSETS (Dollars in thousands) September 30, December 31, 1997 1996 (Unaudited) PROPERTY, PLANT AND EQUIPMENT, at original cost $369,044 $358,783 Less - Accumulated depreciation 109,237 102,278 259,807 256,505 Add - Construction work in progress 1,866 836 261,673 257,341 CURRENT ASSETS Cash 753 421 Advances to affiliates 6,300 - Accounts receivable 19,043 47,329 Unbilled revenues 8,249 20,885 Inventories, at average cost 27,990 24,704 Prepaid taxes - Income 9,080 5,619 Property 5,747 3,061 Other 1,245 981 78,407 103,000 DEFERRED CHARGES Regulatory assets 20,886 23,522 Other 5,547 5,067 26,433 28,589 $366,513 $388,930 See accompanying notes. COMMONWEALTH GAS COMPANY CONDENSED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 CAPITALIZATION AND LIABILITIES (Dollars in thousands) September 30, December 31, 1997 1996 (Unaudited) CAPITALIZATION Common Equity - Common stock, $25 par value - Authorized and outstanding - 2,857,000 shares, wholly-owned by Commonwealth Energy System (Parent) $ 71,425 $ 71,425 Amounts paid in excess of par value 27,739 27,739 Retained earnings 12,922 10,856 112,086 110,020 Long-term debt, less current sinking fund requirements 109,450 74,450 221,536 184,470 CURRENT LIABILITIES Interim Financing - Notes payable to banks 15,000 58,200 Advances from affiliates - 10,400 15,000 68,600 Other Current Liabilities - Current sinking fund requirements 3,650 3,650 Accounts payable - Affiliated companies 3,131 3,081 Other 23,005 32,904 Accrued local property and other taxes 5,960 3,060 Other 20,614 18,091 56,360 60,786 71,360 129,386 DEFERRED CREDITS Accumulated deferred income taxes 39,052 37,088 Unamortized investment tax credits and other 5,510 5,660 Other 29,055 32,326 73,617 75,074 $366,513 $388,930 See accompanying notes. COMMONWEALTH GAS COMPANY CONDENSED STATEMENTS OF INCOME AND RETAINED EARNINGS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Dollars in thousands) (Unaudited) Three Months Ended Nine Months Ended 1997 1996 1997 1996 GAS OPERATING REVENUES $ 41,911 $ 48,872 $235,286 $240,982 OPERATING EXPENSES Cost of gas sold 28,009 32,801 136,034 137,765 Other operation and maintenance 18,717 21,694 65,411 67,483 Depreciation 1,040 1,007 7,280 6,853 Taxes - Income (3,832) (4,081) 4,281 5,641 Local property 609 579 4,445 4,022 Payroll and other 668 377 2,632 1,893 45,211 52,377 220,083 223,657 OPERATING INCOME (LOSS) (3,300) (3,505) 15,203 17,325 OTHER INCOME 232 166 319 484 INCOME (LOSS) BEFORE INTEREST CHARGES (3,068) (3,339) 15,522 17,809 INTEREST CHARGES Long-term debt 1,690 1,964 5,002 5,893 Other interest charges 896 714 2,805 2,293 Allowance for borrowed funds used during construction (33) (8) (65) (27) 2,553 2,670 7,742 8,159 NET INCOME (LOSS) (5,621) (6,009) 7,780 9,650 RETAINED EARNINGS - Beginning of period 18,543 12,583 10,856 10,495 Dividends on common stock - (2,856) (5,714) (16,427) RETAINED EARNINGS - End of period $ 12,922 $ 3,718 $ 12,922 $ 3,718 See accompanying notes. COMMONWEALTH GAS COMPANY CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Dollars in thousands) (Unaudited) 1997 1996 OPERATING ACTIVITIES Net income $ 7,780 $ 9,650 Effects of noncash items - Depreciation and amortization 9,622 8,274 Deferred income taxes and investment tax credits, net 793 968 Change in working capital, exclusive of cash, advances to affiliates and interim financing 26,799 (15,203) All other operating items (2,254) (4,598) Net cash provided by (used for) operating activities 42,740 (909) INVESTING ACTIVITIES Additions to property, plant and equipment (exclusive of AFUDC) (11,729) (6,316) Allowance for borrowed funds used during construction (65) (27) Advances to affiliates (6,300) - Net cash used for investing activities (18,094) (6,343) FINANCING ACTIVITIES Payment of dividends (5,714) (16,427) Proceeds from (payment of) short-term borrowings (43,200) 23,475 Payments to affiliates (10,400) (1,095) Long-term debt issues 35,000 - Net cash used for financing activities (24,314) 5,953 Net increase (decrease) in cash 332 (1,299) Cash at beginning of period 421 2,113 Cash at end of period $ 753 $ 814 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest (net of capitalized amounts) $ 6,486 $ 7,190 Income taxes $ 6,059 $ 11,990 See accompanying notes. COMMONWEALTH GAS COMPANY NOTES TO CONDENSED FINANCIAL STATEMENTS (1) General Information Commonwealth Gas Company (the Company) is a wholly-owned subsidiary of Commonwealth Energy System. The parent company is referred to in this report as the "System" and together with its subsidiaries is collectively referred to as "the system." The System is an exempt public utility holding company under the provisions of the Public Utility Holding Company Act of 1935 and, in addition to its investment in the Company, has interests in other utility and several non-regulated companies. The Company has 573 regular employees including 398 (70%) who are represented by three collective bargaining units with agreements which will remain in effect until September 1998, March 2002 and June 2002. During the second quarter of 1997, the system initiated a voluntary personnel reduction program. For additional information, see the "Personnel Reduction Program" section under Management's Discussion and Analysis of Results of Operations. (2) Significant Accounting Policies (a) Principles of Accounting The Company's significant accounting policies are described in Note 2 of Notes to Financial Statements included in its 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows these same basic accounting policies but considers each interim period as an integral part of an annual period and makes allocations of certain expenses to interim periods based upon estimates of revenue from firm sales for the year. Generally, expenses which relate to more than one interim period are allocated to other periods to more appropriately match revenues and expenses. Principal items of expense which are allocated other than on the basis of passage of time are depreciation and property taxes. These expenses are recorded for interim reporting purposes based upon projected gas revenue. Income tax expense is recorded using the statutory rates in effect applied to book income subject to tax recorded in the interim period. The unaudited financial statements for the periods ended September 30, 1997 and 1996 reflect, in the opinion of the Company, all adjustments (consisting of only normal recurring accruals, except for those described in the "Personnel Reduction Program" section under Management's Discussion and Analysis of Results of Operations) necessary to summarize fairly the results for such periods. In addition, certain prior period amounts are reclassified from time to time to conform with the presenta- tion used in the current period's financial statements. The results for interim periods are not necessarily indicative of results for the entire year because of variations in gas consumption due to the heating season and also because of the Company's seasonal rate structure and the accrual of costs associated with the personnel reduction program referred to above. COMMONWEALTH GAS COMPANY (b) Regulatory Assets and Liabilities The Company is regulated as to rates, accounting and other matters by the Massachusetts Department of Public Utilities (DPU). Based on the current regulatory framework, the Company accounts for the economic effects of regulation in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." The Company has established various regulatory assets in cases where the DPU has permitted or is expected to permit recovery of specific costs over time. 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 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 were as follows: September 30, Dec. 31, 1997 1996 (Dollars in Thousands) Postretirement benefits costs including pensions $ 9,866 $ 9,972 FERC Order 636 transition costs 7,685 9,680 Environmental costs 3,335 3,870 Total regulatory assets $20,866 $23,522 On April 15, 1997, the DPU issued an accounting ruling allowing the Company to include postretirement benefits costs in cost-of-service and to amortize the deferred balance of $10.5 million at March 31, 1997 associated with these costs over a period not to exceed ten years beginning April 1997. The principal regulatory liability, reflected in deferred credits- other and relating to income taxes, was $8.5 million and $8.6 million at September 30, 1997 and December 31, 1996, respectively. (3) Commitments Construction Program The Company is engaged in a continuous construction program presently estimated at $92 million for the five-year period 1997 through COMMONWEALTH GAS COMPANY 2001. Of that amount, $17.8 million is estimated for 1997. As of September 30, 1997, the Company's actual construction expenditures amounted to approximately $11.8 million, including an allowance for funds used during construction. The Company expects to finance these expenditures on an interim basis with internally-generated funds and short-term borrowings which are ultimately expected to be repaid with the proceeds from the issuance of long-term debt and/or equity securities. The program is subject to periodic review and revision because of factors such as changes in business conditions, rates of growth, effects of inflation, equipment delivery schedules, licensing delays, availability and cost of capital and environmental regulations. COMMONWEALTH GAS COMPANY Item 2. Management's Discussion and Analysis of Results of Operations The following is a discussion of major factors which have affected operating revenues, expenses and net income during the periods included in the accompanying condensed statements of income. This discussion should be read in conjunction with the Notes to Condensed Financial Statements appearing elsewhere in this report. A summary of the period to period changes in the principal items included in the condensed statements of income for the three and nine months ended September 30, 1997 and 1996 and unit sales for these periods is shown below: Three Months Nine Months Ended September 30, Ended September 30, 1997 and 1996 1997 and 1996 Increase (Decrease) (Dollars in thousands) Gas Operating Revenues $(6,961) (14.2)% $ (5,696) (2.4)% Operating Expenses - Cost of gas sold (4,792) (14.6) (1,731) (1.3) Other operation and maintenance (2,977) (13.7) (2,072) (3.1) Depreciation 33 3.3 427 6.2 Taxes - Federal and state income 249 6.1 (1,360) (24.1) Local property and other 321 33.6 1,162 19.6 (7,166) (13.7) (3,574) (1.6) Operating Income 205 5.8 (2,122) (12.2) Other Income 66 39.8 (165) (34.1) Income Before Interest Charges 271 8.1 (2,287) (12.8) Interest Charges (117) (4.4) (417) (5.1) Net Income $ 388 6.5 $ (1,870) (19.4) Firm Unit Sales - BBTU (688) (18.5) (1,723) (6.0) Total Unit Sales - BBTU (1,196) (22.8) (2,127) (6.5) The following is a summary of unit sales for the periods indicated: Unit Sales - In Billions of British Thermal Units (BBTU) Off- Quasi- Total Firm Interruptible System Firm Three Months Ended September 30, 1997 4,047 3,027 525 475 20 September 30, 1996 5,243 3,715 498 723 307 Nine Months Ended September 30, 1997 30,545 27,088 1,404 2,007 46 September 30, 1996 32,673 28,811 1,394 1,676 792 COMMONWEALTH GAS COMPANY Operating Revenues and Unit Sales Operating revenues for the third quarter of 1997 decreased approximately $7 million or 14.2% due primarily to a 22.8% decrease in total unit sales. Through the first nine months of this year, operating revenues decreased $5.7 million due to a 6.5% decline in total unit sales and lower conservation and load management (C&LM) costs ($2 million). Revenues for the current nine- month period also include the recognition of margins earned on off-system contracts ($644,000). The decline in firm unit sales for the first nine months of 1997 reflects decreases to all customer segments including residential (4.6%), commercial (4.9%) and industrial (18%) that were due primarily to milder weather experienced in this region during the first quarter as compared to a much colder period in 1996. Degree days for the current nine-month period totaled 4,147, 7% lower than last year and 3.5% below the normal level of 4,299. The significant fluctuations in non-firm sales for both the current quarter and year-to-date period reflect the competitive environment that currently exists in the natural gas industry. A portion of the margin realized on these sales reduces the cost of gas sold to firm customers. Other Operation and Maintenance For the current nine-month period, other operation and maintenance decreased approximately $2.1 million due to the absence of net costs associated with a 1996 labor dispute ($3.3 million), lower labor costs resulting from a decrease in the number of employees ($2.3 million), lower C&LM costs ($2 million), reduced maintenance costs relating to distribution ($1.1 million) and a decline in the provision for bad debts reflecting lower reserve requirements ($400,000). These decreases were offset, in part, by a one-time charge ($6.8 million) related to a Personnel Reduction Program initiated during the second quarter (as further discussed below) and higher postretirement benefits costs ($1.4 million) reflecting the full recognition of expenses and amortization of previously deferred costs associated with postretirement benefits. Depreciation and Taxes Depreciation expense increased during both periods due to higher levels of depreciable plant-in-service. The significant change in federal and state income taxes for the nine-month period reflects the lower level of pretax income. The $1.2 million increase in local property and other taxes for the current nine-month period is due to an increase in payroll-related taxes ($739,000) resulting from the 1996 labor dispute and higher property tax assessments and rates ($423,000). Other Income and Interest Charges The 34.1% decrease in other income for the nine-month period reflects a decline in interest related to deferred gas costs ($279,000) offset, in part, by an increase in revenues associated with the Company's merchandising program for water heaters and conversion burners ($111,000). COMMONWEALTH GAS COMPANY Total interest charges decreased 5.1% during the current nine-month period due to a decline in long-term interest costs ($891,000) and lower interest charges on deferred gas costs ($914,000). The impact of these factors was offset by an increase in interest on short-term borrowings ($1.4 million) due to a higher average level of borrowings. Environmental Matters The Company is participating in the assessment of a number of former manufactured gas plant (MGP) sites and alleged MGP waste disposal locations to determine if and to what extent such sites have been contaminated and whether the Company may be responsible for remedial actions. In April, the Company recorded an additional liability and corresponding regulatory asset of $1.2 million due to an increase in the site clean-up cost estimate for an MGP site for which the Company was previously cited as a Potentially Responsible Party. The DPU has approved recovery of costs associated with MGP sites. The Company is also involved in certain other known or potentially contaminated sites where the associated costs may not be recoverable in rates. For further information on other related environmental matters, refer to the Company's 1996 Annual Report on Form 10-K. Long-term Financing On September 26, 1997, the Company issued $10 million of First Mortgage Sinking Fund Bonds (Series L, 6.54% due 2007) and $25 million of First Mortgage Bonds (Series M, 7.04% due 2017). The proceeds of $35 million were used to retire short-term debt that had been incurred to temporarily finance additions to property, plant and equipment and for general working capital needs. This financing had been approved by the DPU on June 12, 1997. Personnel Reduction Program As initially discussed in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission, the Company announced the details of a system-wide voluntary Personnel Reduction Program (PRP) in May 1997. The goal of the PRP is to achieve a reduced, more efficient and more productive workforce in response to the significant regulatory changes facing the System's companies. This action follows the recent consolidation of the system's electric and gas operations. The expectation is that the workforce will be reduced by 15% to 20%. The PRP was offered to substantially all regular and part-time employees of the system. Eligibility for employees covered by collective bargaining agreements was subject to negotiation. The system reserves the right to limit the number of participants in the program to 300; however, the system expects the final participation level to exceed this amount. The program provides severance based on years of service, the continu- ation of certain health and dental insurance for specified periods and limited reimbursement for certain educational and/or outplacement services. COMMONWEALTH GAS COMPANY To date, approximately 13% of the Company's employees have terminated employment with the Company as a result of the PRP. The Company estimates that the cost of termination benefits as described above, including a portion of costs for certain affiliates, will approximate $6.8 million which was recorded in the second quarter and had an after-tax income impact of $4.1 million. The payback period is expected to be less than one year. Gas Industry Restructuring On July 18, 1997, the DPU directed the ten Massachusetts gas utilities, including Commonwealth Gas, to initiate a collaborative process that will establish guiding principles and specific procedures for unbundling rates and services for all customers. The process has begun with meetings among the various interested parties. A report is scheduled to be submitted to the DPU in mid-November. The DPU listed six principles that it considers important to the success of a competitive natural gas market that will provide safe and reliable service at the lowest possible cost to customers. The natural gas market would: (1) provide the broadest possible choice; (2) provide all customers with an opportunity to share in the benefits of increased competition; (3) ensure full and fair competition in the gas supply market; (4) functionally separate supply from local distribution services; (5) support and further the goals of environmental regulation; and lastly (6) rely on incentive regulation where a fully competitive market cannot or presently does not exist. In addition, the DPU outlined several specific issues that it expects the collaborative to address: (1) services that can be offered on a competitive basis; (2) terms and conditions of service; (3) consumer protections and social programs; (4) mitigation of gas-related and non-gas related transition costs; (5) third-party supplier qualifications; and (6) curtailment principles. The DPU also suggested that the collaborative reconsider the pricing and provision of interruptible transportation services. On August 18, 1997, the DPU noted that the development of unbundling principles and procedures constitutes only a part of the effort necessary to develop full customer choice for gas service. The DPU recognized that each local distribution company will be filing a comprehensive unbundling proposal at some later date. In the interim, the DPU directed those companies that do not currently have unbundled rates, including Commonwealth Gas, to have such rates in effect no later than November 1, 1998. COMMONWEALTH GAS COMPANY PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any pending material legal proceeding. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule Filed herewith as Exhibit 1 is the Financial Data Schedule for the nine months ended September 30, 1997. (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended September 30, 1997. COMMONWEALTH GAS COMPANY SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMONWEALTH GAS COMPANY (Registrant) Principal Financial and Accounting Officer: JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer Date: November 14, 1997 EX-27 2
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-Q of Commonwealth Gas Company for the nine months ended September 30, 1997 and is qualified in its entirety by reference to such financial statements. 0000022620 COMMONWEALTH GAS COMPANY 1,000 DEC-31-1997 SEP-30-1997 9-MOS PER-BOOK 261,673 0 78,407 26,433 0 366,513 71,425 27,739 12,922 112,086 0 0 109,450 15,000 0 0 3,650 0 0 0 126,327 366,513 235,286 4,281 215,802 220,083 15,203 319 15,522 7,742 7,780 0 7,780 5,714 5,002 42,740 0 0
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