UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 No. 1-8369
CONNECTICUT ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
Connecticut 06-0869582
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
855 Main Street
Bridgeport, Connecticut 06604
(Address of principal executive offices) (Zip Code)
(203) 579-1732
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check 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.
Class Outstanding at August 3, 1994
Common Stock, $1 par value 8,663,279
<PAGE> 1
<TABLE>
PART 1. FINANCIAL INFORMATION
CONNECTICUT ENERGY CORPORATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues..................... $ 36,835 $ 33,779 $ 215,387 $ 189,555 $ 238,594 $ 211,902
Purchased gas.......................... 16,704 17,256 114,659 101,648 126,056 111,741
--------- --------- --------- --------- --------- ---------
Gross margin........................... 20,131 16,523 100,728 87,907 112,538 100,161
Operating Expenses:
Operations........................... 11,741 9,585 38,066 31,780 47,617 42,245
Maintenance.......................... 954 974 3,174 2,861 4,005 3,773
Depreciation and depletion........... 3,269 3,018 9,746 9,031 12,766 11,834
Federal and state income taxes....... (1,147) (1,470) 9,041 6,731 6,131 2,843
Municipal, gross earnings and
other taxes........................ 3,535 3,501 14,120 13,124 16,693 15,710
--------- --------- --------- --------- --------- ---------
Total operating expenses............... 18,352 15,608 74,147 63,527 87,212 76,405
--------- --------- --------- --------- --------- ---------
Operating income....................... 1,779 915 26,581 24,380 25,326 23,756
Other deductions, net.................. 125 124 372 395 487 560
Interest Expense and Preferred Stock
Dividends:
Interest on long-term debt and
amortization of debt issue costs... 2,727 2,531 8,191 7,376 10,760 9,619
Other interest and preferred stock
dividends, net..................... 265 527 605 1,328 894 1,815
--------- --------- --------- --------- --------- ---------
Total interest expense and preferred
stock dividends...................... 2,992 3,058 8,796 8,704 11,654 11,434
--------- --------- --------- --------- --------- ---------
Net (Loss) Income...................... $ (1,338) $ (2,267) $ 17,413 $ 15,281 $ 13,185 $ 11,762
========= ========= ========= ========= ========= =========
Net (loss) income per share............ $ (0.16) $ (0.31) $ 2.19 $ 2.08 $ 1.68 $ 1.61
========= ========= ========= ========= ========= =========
Dividends paid per share............... $ 0.325 $ 0.32 $ 0.965 $ 0.96 $ 1.285 $ 1.28
--------- --------- --------- --------- --------- ---------
Weighted average number of common
shares outstanding during period..... 8,589,334 7,408,961 7,955,326 7,350,620 7,829,706 7,305,352
--------- --------- --------- --------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements on Page 6.
<PAGE> 2
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, Sept. 30, June 30,
Assets 1994 1993 1993
- - ------ ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Utility Plant:
Gross utility plant............................... $ 324,431 $ 313,951 $ 306,453
Less--accumulated depreciation.................... 97,529 92,151 89,799
--------- --------- ---------
Net utility plant............................... 226,902 221,800 216,654
Nonutility property, net.......................... 2,586 9 9
--------- --------- ---------
Net utility plant and other property................ 229,488 221,809 216,663
--------- --------- ---------
Current Assets:
Cash and cash equivalents......................... 5,918 2,214 6,738
--------- --------- ---------
Accounts receivable............................... 41,363 22,654 38,049
Less--allowance for doubtful accounts............. 4,645 4,251 5,451
--------- --------- ---------
Net accounts receivable............................. 36,718 18,403 32,598
--------- --------- ---------
Accrued utility revenues, net..................... 2,494 2,307 1,640
Unrecovered purchased gas costs................... ---- 5,975 ----
Inventories....................................... 11,777 16,312 15,265
Prepaid expenses.................................. 1,974 1,565 1,613
--------- --------- ---------
Total current assets................................ 58,881 46,776 57,854
--------- --------- ---------
Deferred Charges:
Unamortized debt expenses......................... 6,379 6,466 6,468
Recoverable future taxes.......................... 33,313 ---- ----
Other............................................. 29,107 24,744 20,692
--------- --------- ---------
Total deferred charges.............................. 68,799 31,210 27,160
--------- --------- ---------
Total assets........................................ $ 357,168 $ 299,795 $ 301,677
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements on Page 6.
<PAGE> 3
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
June 30, Sept. 30, June 30,
Capitalization and Liabilities 1994 1993 1993
- - ------------------------------ ----------- ---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Common Shareholders' Equity:
Common Stock--par value $1 per share: authorized--20,000,000 shares, issued and
outstanding--8,654,850 shares; 7,488,467 shares; 7,446,615 shares.............. $ 8,655 $ 7,488 $ 7,446
Capital in excess of par value................................................... 84,352 62,808 61,853
Retained earnings................................................................ 39,143 29,665 36,283
Adjustment for minimum pension liability......................................... (108) (108) ----
--------- --------- ---------
Total common shareholders' equity.................................................. 132,042 99,853 105,582
--------- --------- ---------
Preferred Stock:
The Southern Connecticut Gas Company Redeemable Preferred Stock: authorized--
200,000 shares, par value $100 per share--4.75% cumulative series, issued and
outstanding--0 shares; 6,500 shares; 6,500 shares.............................. ---- 650 650
authorized--600,000 shares, par value $1 per share, none issued
Preference Stock:
The Southern Connecticut Gas Company: authorized--1,000,000 shares, par value
$1 per share, none issued
Connecticut Energy Corporation: authorized--1,000,000 shares, par value $1 per
share, none issued
Preferred stock expense............................................................ ---- (12) (12)
--------- --------- ---------
Total preferred stock.............................................................. ---- 638 638
--------- --------- ---------
Long-term debt..................................................................... 120,371 120,511 108,965
--------- --------- ---------
Total capitalization............................................................... 252,413 221,002 215,185
--------- --------- ---------
Current Liabilities:
Short-term borrowings............................................................ 6,700 23,500 27,000
Current maturities of long-term debt............................................. 594 595 594
Accounts payable................................................................. 8,589 11,960 10,948
Refunds due customers............................................................ 3,387 1,964 2,142
Federal, state and deferred income taxes......................................... 10,006 3,634 6,682
Property and other accrued taxes................................................. 7,348 5,173 6,790
Interest payable................................................................. 2,264 2,916 2,187
Customer deposits................................................................ 1,951 2,058 2,083
Refundable purchased gas costs................................................... 1,850 ---- 4,637
Other accrued liabilities........................................................ 2,750 1,818 1,856
--------- --------- ---------
Total current liabilities.......................................................... 45,439 53,618 64,919
--------- --------- ---------
Deferred Credits:
Deferred income taxes and investment tax credits................................. 52,217 17,814 17,858
Other deferred credits........................................................... 7,099 7,361 3,715
--------- --------- ---------
Total capitalization and liabilities............................................... $ 357,168 $ 299,795 $ 301,677
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements on Page 6.
<PAGE> 4
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended Twelve Months Ended
June 30, June 30,
----------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Cash Provided by Operating Activities: $ 24,339 $ 16,131 $ 21,462 $ 15,014
-------- -------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures................................ (17,334) (17,939) (25,531) (24,838)
Proceeds from sale of headquarters property......... ---- 2,005 ---- 2,005
Proceeds from sale of subsidiary.................... ---- 180 ---- 180
Contributions in aid of construction................ 42 13 95 84
Payments for retirement of utility plant............ (541) (120) (697) (306)
-------- -------- -------- --------
Net cash used in investing activities................. (17,833) (15,861) (26,133) (22,875)
-------- -------- -------- --------
Cash Flows from Financing Activities:
Dividends paid on common stock...................... (7,935) (7,074) (10,325) (9,370)
Issuance of common stock............................ 22,711 4,769 23,708 6,108
Issuance of long-term debt.......................... ---- 15,000 12,000 15,000
Repayments of long-term debt........................ (140) (140) (594) (68)
Redemption of preferred stock....................... ---- (50) ---- (50)
Early redemption of preferred stock................. (638) ---- (638) ----
Decrease in short-term borrowings................... (16,800) (11,300) (20,300) (900)
-------- -------- -------- --------
Net cash (used in) provided by financing activities... (2,802) 1,205 3,851 10,720
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.. 3,704 1,475 (820) 2,859
Cash and cash equivalents at beginning of period...... 2,214 5,263 6,738 3,879
-------- -------- -------- --------
Cash and cash equivalents at end of period............ $ 5,918 $ 6,738 $ 5,918 $ 6,738
======== ======== ======== ========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................ $ 9,529 $ 8,980 $ 11,651 $ 11,150
Income taxes........................................ $ 2,065 $ 2,747 $ 2,065 $ 3,977
</TABLE>
See Notes to Consolidated Financial Statements on Page 6.
<PAGE> 5
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited consolidated financial statements presented herein should
be read in conjunction with the consolidated financial statements of
Connecticut Energy Corporation ("Company") for the fiscal year ended
September 30, 1993 as presented in the Annual Report on Form 10-K . In
the opinion of management, the accompanying financial information
reflects all adjustments which are necessary to provide a fair
presentation of the interim periods shown. All such adjustments are of a
normal recurring nature.
2. Because sales of gas for space heating purposes by The Southern
Connecticut Gas Company ("Southern") are dependent upon weather
conditions and typically are greater during the winter months, the results of
operations for the nine months ended June 30, 1994 are not indicative
of the results to be expected for the full fiscal year.
3. Included in other deferred charges are amounts related to the
deferral of certain hardship heating customer accounts receivable arrearages
totalling $9,949,000, $6,894,000 and $6,873,000 at June 30, 1994,
September 30, 1993 and June 30, 1993, respectively; the deferral of
certain shortfalls in energy assistance funding related to the 1991/92
and 1992/93 heating seasons amounting to $2,790,000, $3,100,000 and
$3,003,000 at June 30, 1994, September 30, 1993 and June 30, 1993,
respectively; prepaid pension contributions of $6,355,000, $5,532,000
and $5,532,000 at June 30, 1994, September 30, 1993 and June 30, 1993,
respectively, and an intangible pension asset of $3,652,000 at June 30, 1994
and September 30, 1993.
4. Included in other deferred credits are amounts related to a minimum
pension liability totaling $3,816,000 at June 30, 1994 and September 30, 1993.
5. In addition to providing pension benefits, Southern provides certain
health care and insurance benefits for retired employees. Southern's
employees become eligible for those benefits if they reach age 55 and have
completed at least 10 years of service. Prior to October 1, 1993, Southern
<PAGE> 6
recognized the cost of providing these benefits in accordance with
funding allowed in the Department of Public Utility Control's ("DPUC")
1990 rate decision. Effective October 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" which requires accrual
accounting for postretirement benefits during the employee's years of service
with Southern. Please refer to Footnote 5 in the registrant's Form 10-Q
for the period ended December 31, 1993 for additional information.
6. Effective October 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
SFAS 109 establishes financial accounting and reporting standards for deferred
income taxes using an asset and liability approach. Please refer to
Footnote 6 in the registrant's Form 10-Q for the period ended December 31,
1993 for additional information.
7. Southern has identified coal tar residue at three sites in Connecticut
resulting from historic coal gasification operations conducted at those
sites by Southern's predecessors from the late 1800s through the first part
of this century. Many gas distribution companies throughout the country
carried on such gas manufacturing operations during the same period.
The coal tar discovered at Southern's three sites is not designated a
hazardous material by any federal or Connecticut agency, but some of its
constituents are classified as hazardous.
On April 27, 1992, Southern notified the Connecticut Department of
Environmental Protection and the United States Environmental Protection
Agency of the presence of coal tar residue on the three sites. As a
result of this notification, further discussions would address the extent
and type of remedial action, if any, as well as the time period for such
action. Because this process is at an early stage, management cannot at this
time predict the costs of any future site analysis and remediation,
if any, nor when such costs, if any, may be incurred. Such future analytical
and cleanup costs could possibly be significant.
Based upon the provisions of a DPUC approved Partial Settlement
in Southern's most recent rate order, management believes that Southern
will properly be able to recover the costs of investigation and remediation,
if any, from its customers. The method, timing and extent of any
<PAGE> 7
recovery remain uncertain, but management currently does not expect that the
incurrence of such costs will have a material adverse effect on the Company's
financial condition or results of operations.
8. In September 1993, Southern received notification of the results
of audits by the City of New Haven pursuant to Connecticut's omitted property
statute. The City of New Haven claimed that Southern owed approximately
$2,600,000 in additional personal property taxes related to years 1990 through
1992; however, Southern was not aware of any audit finding of significant
omissions of personal property required to be declared. Instead, the City
of New Haven's claim was based on the assessor's retroactive reassessment
of Southern's personal property. Southern initiated legal actions against
the City of New Haven which alleged that, among other things, the City of
New Haven had no statutory authority to issue tax bills based upon
retroactive reassessments of previously declared property on which taxes
were paid and that the City of New Haven's contingent fee agreement with
the firm which audited Southern's records was illegal. Southern also
instituted legal actions challenging the City of New Haven's assessment of
Southern's personal property for the 1993 Grand List.
On June 29, 1994, Southern and the City of New Haven entered into
a Stipulation and Agreement ("Agreement") in settlement of these court
actions. The Agreement provided for a $200,000 payment related to the tax
years 1990 through 1992 without conceding liability on any of the issues
involved; and a resolution of the disputed 1993 personal property
assessment, which resulted in a reduction of the original 1993 assessment of
approximately $1,500,000 to a new assessment of approximately $800,000.
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Income
- - ----------
Connecticut Energy Corporation's ("Company") consolidated net income for
the three, nine and twelve months ended June 30, 1994 and 1993 is detailed
below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(000s omitted)
Net (Loss)Income $(1,338) $(2,267) $17,413 $15,281 $13,185 $11,762
======= ======= ======= ======= ======= =======
Net (Loss)Income
Per Share $ (0.16) $ (0.31) $ 2.19 $ 2.08 $ 1.68 $ 1.61
======= ======= ======= ======= ======= =======
Weighted Average
Shares Outstanding 8,589 7,409 7,955 7,351 7,830 7,305
----- ----- ----- ----- ----- -----
</TABLE>
Factors affecting the improved results for the three and nine
month periods ended June 30, 1994 were the implementation of a 6.6%
rate increase on December 9, 1993 by The Southern Connecticut Gas
Company ("Southern") and Southern's ability to retain additional
interruptible margins earned due to the changes in the annual margin
sharing period and target made by the Department of Public Utility
Control ("DPUC") in the recent rate decision for Southern.
Partially offsetting these increases were higher operations expenses
in the areas of uncollectibles, wages, which included some overtime
costs due to the colder winter weather, employee benefit costs
primarily due to the adoption of Statement of Financial Accounting
Standards No. 106 ("SFAS 106"), depreciation, lease costs and
increased taxes due to higher year-to-date pre-tax income and higher
revenues. Earnings for the comparative nine month period ended June
30, 1993 were positively impacted by a regulatory decision of the
DPUC wherein the DPUC allowed Southern to defer shortfalls in energy
assistance from state and federal agencies. This decision allowed
Southern to reduce significantly its provision for uncollectibles
during the nine month period ended June 30, 1993. Results for the
three and nine months ended June 30, 1994 were also affected by
higher interest costs due to the issuance of $15,000,000 and
<PAGE> 9
$12,000,000 in additional long-term debt in December 1992 and
September 1993, respectively. The increase in long-term debt costs
for both 1994 periods was offset by lower other interest costs.
For the twelve months ended June 30, 1994, margins increased
principally due to the recently implemented rate increase by
Southern as well as the changes in the margin sharing year and
target as previously discussed. Partially offsetting these
increased margins were higher operations expenses in the areas of
wages, uncollectibles, employee benefit costs principally due to the
adoption of SFAS 106, lease costs and other general and
administrative expenses, as well as higher depreciation expense,
income and gross receipt taxes and long-term debt costs. The
provision for income taxes for the fiscal year ended September 30,
1992 benefitted from a lower effective tax rate primarily due to the
tax benefit associated with the premium paid by Southern for the
repurchase of $52,750,000 of outstanding long term debt. This
benefit positively impacted the provision for the twelve months
ended June 30, 1993.
Operating Revenues
- - ------------------
The Company's operating revenues for the three, nine and twelve
months ended June 30, 1994 were approximately 9%, 14% and 13% higher
than the corresponding periods ended June 30, 1993. These increases
are primarily due to the impact of a 6.6% increase in Southern's
rates implemented on December 9, 1993, higher collections through
the operation of Southern's Purchased Gas Adjustment Clause ("PGA"),
colder weather for all 1994 periods, and the addition of more
heating customers. In Southern's most recent rate proceeding, the
DPUC approved the implementation of a Weather Normalization
Adjustment ("WNA") under which the non-gas portion of Southern's
firm rates is charged or credited monthly to reflect deviations from
normal weather. The implementation of the WNA occurred in January
of 1994. Since the weather for the quarter ended June 30, 1994 was
14% warmer than normal, the WNA stabilized Southern's margins by
collecting approximately $900,000 from firm customers for the
quarter ended June 30, 1994. For the nine months ended June 30,
1994, weather was approximately 4% colder than normal and Southern
returned approximately $2,700,000 to firm customers through the
operation of the WNA.
<PAGE> 10
Firm Sales Volumes
- - ------------------
The volumes of gas sold to firm customers by Southern for the
three months ended June 30, 1994 decreased approximately 10% as
compared to the corresponding 1993 period. This decrease was
primarily due to a slightly lower use of gas per customer and a
change in mix of business.
The volumes of gas sold to firm customers by Southern for the
nine and twelve months ended June 30, 1994 increased approximately
4% as compared to the corresponding 1993 periods. These increases
were primarily attributable to weather being approximately 6% colder
for the nine and twelve months ended June 30, 1994 than the
corresponding 1993 periods and to increases in the number of heating
customers.
Interruptible Sales and Transportation Volumes
- - ----------------------------------------------
The chart below depicts volumes of gas both sold to and
transported for interruptible customers by Southern as well as gross
margins earned and retained on these sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
(000s omitted)
Gross Margin Earned $1,437 $1,283 $4,712 $4,040 $6,231 $5,605
====== ====== ====== ====== ====== ======
Gross Margin Retained $1,383 $ 976 $3,530 $1,826 $4,976 $3,316
====== ====== ====== ====== ====== ======
Volumes Sold and Transported
(MMcf) 1,499 1,256 5,151 4,680 6,767 6,727
----- ----- ----- ----- ----- -----
</TABLE>
Margins earned on volumes delivered to interruptible customers
vary depending upon the relationship of the market price for
alternate fuels to the cost of natural gas and related
transportation. Additionally, margins earned, net of gross receipt
taxes, from interruptible service in excess of an annual target are
allocated through a margin sharing mechanism between firm customers
and Southern. Margins earned and retained by Southern were higher
for the three, nine and twelve months ended June 30, 1994 as
compared to the corresponding 1993 periods. The increase in margins
retained for all 1994 periods is principally attributable to the
<PAGE> 11
change in the margin sharing year and an increase in the target
margin level in accordance with the DPUC's latest rate order
involving Southern.
Purchased Gas Expense
- - ---------------------
Purchased gas expense for the nine and twelve month periods
ended June 30, 1994 increased approximately 13% as compared to the
corresponding 1993 periods due primarily to increased gas costs
through operation of the PGA, a higher base cost of gas and higher
firm sales volumes. In addition, gas costs were higher for the
three, nine and twelve month periods ended June 30, 1994 due to the
suspension of the flow-through of approximately $1,543,000 in gas
cost credits until the DPUC issues a decision regarding the recovery
mechanism for deferred transition costs. (See section entitled
"FERC Order No. 636 Transition Costs".)
Additionally, during the twelve months ended June 30, 1993,
Southern recorded an increase in its purchased gas expense to
recover approximately $3,287,000 of previously deferred take-or-pay,
contract buy-out and contract buy-down costs in accordance with a
DPUC decision.
Operations Expense
- - ------------------
Operations expense for the three, nine and twelve months ended
June 30, 1994 increased 22%, 20% and 13%, respectively, as compared
to the corresponding 1993 periods. For the three, nine and twelve
month periods ended June 30, 1994, approximately 40%, 50% and 47%
of these increases, respectively, are a result of a higher provision
for uncollectible accounts. In December 1992, the DPUC allowed
Southern to defer certain shortfalls in energy assistance funding
from various state and federal agencies related to the 1991/92 and
1992/93 heating seasons. This DPUC decision positively impacted
Southern's provision for uncollectible accounts for the three, nine
and twelve months ended June 30, 1993. Southern has been allowed
to recover these deferred costs as well as deferred costs associated
with Southern's certified hardship forgiveness program beginning
January 1, 1994 in accordance with the DPUC's latest rate decision.
Accordingly, included in operating expenses for the three, nine and
twelve months ended June 30, 1994 is approximately $747,000,
<PAGE> 12
$1,493,000 and $1,493,000, respectively, relating to these
amortizations. The remainder of these increases are due to higher
employee benefit costs relating to the adoption and the current
recovery of postretirement health care expenses accrued under SFAS
106, as well as increases in other operations expenses such as
wages, lease costs, and general and administrative expenses.
Maintenance Expense
- - -------------------
Maintenance expense for the nine and twelve months ended June
30, 1994 increased approximately 11% and 6%, respectively, as
compared to the same 1993 periods. These increases were primarily
attributable to a higher level of maintenance activity due to the
colder winter weather and higher labor and material costs associated
with Southern's mains.
Depreciation and Depletion
- - --------------------------
Depreciation expense for the three, nine and twelve months
ended June 30, 1994 increased approximately 8% as compared to the
corresponding 1993 periods because of additions to plant in service
by Southern.
Federal and State Income Taxes
- - ------------------------------
The total provision for federal and state income taxes for the
three, nine and twelve months ended June 30, 1994 increased as
compared to the corresponding 1993 periods. The increases for the
three and nine months ended June 30, 1994, as compared to the three
and nine months ended June 30, 1993, resulted from a lower pre-tax
loss for the three months ended June 30, 1994 and higher pre-tax
income for the nine months ended June 30, 1994, coupled with higher
effective tax rates for both 1994 periods due to the flow-through
tax effect of the amortization of previously deferred costs. For
the twelve months ended June 30, 1994, the tax provision was higher
because of the combination of a higher effective tax rate for that
period principally due to the flow-through tax effect of the
amortization of previously deferred costs and a non-recurring tax
benefit associated with a bond repurchase premium which positively
affected the provision for Federal and State Income Taxes for the
twelve months ended June 30, 1993.
<PAGE> 13
Municipal, Gross Earnings and Other Taxes
- - -----------------------------------------
Municipal, gross earnings and other taxes increased for the
nine and twelve months ended June 30, 1994 approximately 8% and 6%,
respectively, as compared to the corresponding 1993 periods,
primarily due to higher provisions for gross earnings taxes because
of higher revenues.
Total Interest Expense and Preferred Stock Dividends
- - ----------------------------------------------------
Total interest expense and preferred stock dividends for the
three months ended June 30, 1994 was approximately 2% lower when
compared with the corresponding 1993 period, but increased
approximately 1% and 2%, respectively, for the nine and twelve
months ended June 30, 1994 as compared to the corresponding 1993
periods. These increases are primarily due to higher long-term
interest costs associated with the issuance of $15,000,000 of Series
X First Mortgage Bonds in December 1992 and $12,000,000 of Series
Y First Mortgage Bonds in September 1993. Partially offsetting
higher long-term interest costs was the recovery of higher interest
income primarily related to deferred transition costs arising from
implementation of Federal Energy Regulatory Commission ("FERC")
Order No. 636 by interstate pipelines and lower interest costs
related to interstate pipeline refunds. Additionally, short-term
interest costs were lower for the three, nine and twelve month
period ended June 30, 1994 primarily due to lower average short-term
borrowings.
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
- - --------------------
The seasonal nature of Southern's business creates large short-
term cash demands primarily to finance gas purchases, customer
accounts receivable and certain tax payments. To provide these
funds, as well as funds for its capital expenditure program and
other corporate purposes, Southern has committed lines of credit
with a number of banks totaling $30,000,000 and uncommitted lines
of credit with two of its banks totalling $14,000,000, in addition
to a revolving credit line agreement for up to $20,000,000 with one
of its banks. This latter agreement has a revolving credit feature
through December 21, 1996, followed by a term loan period through
December 21, 2000. At June 30, 1994, Southern had unused lines of
credit of $57,300,000. Because of the availability of short-term
credit and the ability to issue long-term debt and additional
equity, management believes it has adequate financial flexibility
to meet its anticipated cash needs.
Operating cash flows for the nine months ended June 30, 1994
were positively affected by higher net income, higher accrued tax
balances, lower fuel inventories and higher refundable purchased gas
cost balances. Partially offsetting these positive cash flows were
higher accounts receivable balances, higher deferred transition cost
balances and lower accounts payable balances.
Operating cash flows for the twelve months ended June 30, 1994
were positively affected by higher net income, lower inventory
costs, higher accrued tax balances and higher refundable purchased
gas cost balances. Partially offsetting these positive effects on
cash flows were higher accounts receivable balances, higher deferred
transition cost balances and lower accounts payable balances.
Rate Matters
- - ------------
On December 1, 1993, the DPUC issued a final Decision on
Southern's latest rate request. This Decision incorporated the
Partial Settlement of Certain Issues ("Partial Settlement") which
was previously approved by the DPUC and resolved most of the
<PAGE> 15
significant financial aspects of Southern's original rate request,
including an increase in base rates of $13,400,000 based upon
Southern's sales forecast as originally filed, an allowed return on
equity of 11.45% and the implementation of a weather normalization
adjustment. In addition, Southern was permitted to recover
previously deferred costs over amortization periods from three to
five years associated with shortfalls in energy assistance, the
certified hardship arrearage forgiveness program, environmental
remediation expenditures, economic development programs and
undepreciated gas holder costs.
The Partial Settlement also provides for current recovery of
postretirement health care expenses accrued under SFAS 106 and the
establishment of a target margin, net of gross receipts tax, of
$4,000,000 for sales and transportation to Southern's interruptible
customers with excess margins shared between firm customers and
shareholders on an 80%/20% split. As part of this Partial
Settlement, Southern agreed that, except for certain adverse events,
it would not file a general application for an increase in rates
that would become effective on or before November 30, 1995.
Investing Activities
- - --------------------
Capital expenditures approximated $17,292,000 and $17,926,000
for the nine month periods ended June 30, 1994 and 1993,
respectively, and $25,436,000 and $24,754,000 for the twelve month
periods ended June 30, 1994 and 1993, respectively. On an annual
basis, Southern relies upon cash flow provided by operating
activities to fund a portion of these expenditures, with the
remainder funded by short-term borrowings and, at some later date,
long-term debt and capital stock financings.
Financing Activities
- - --------------------
As of June, 1994 the quarterly dividend paid per share on the
Company's common stock was increased to $0.325 per share or an
annual indicated dividend rate of $1.30 per share.
On March 10, 1994, the Company completed a public sale of
1,000,000 shares of common stock at a price of $20 1/8 per share and
received net proceeds of $19,375,000. The proceeds were used for
<PAGE> 16
the repayment of short-term debt and for other general corporate
purposes. The method, timing and amounts of any future financings
by the Company or its subsidiary will depend on a variety of
factors, including capitalization ratios, coverage ratios, interest
costs, the state of the capital markets and general economic
conditions.
On December 30, 1993, Southern redeemed all outstanding shares
of its 4 3/4%, $100 par value preferred stock. The redemption price
was 100% of par value plus accrued dividends through December 30,
1993.
In September 1993, Southern issued and sold $12,000,000 of
Series Y First Mortgage Bonds at a rate of 7.08% to one lender in
a private placement. These bonds have a life of 20 years and are
required to be redeemed through a payment of $12,000,000 on October
1, 2013. Proceeds from the sale of Series Y Bonds were used
principally to reduce short-term borrowings incurred primarily in
connection with Southern's capital expenditure program.
In December 1992, Southern issued and sold $15,000,000 of
Series X First Mortgage Bonds at a rate of 7.67% to one lender in
a private placement. These bonds have a life of 20 years and are
required to be redeemed through a payment of $15,000,000 on December
15, 2012. Proceeds from the sale of the Series X Bonds were used
principally to reduce short-term borrowings incurred primarily in
connection with Southern's capital expenditure program.
Take-or-Pay, Contract Buy-Out and Contract Buy-Down Costs
- - ---------------------------------------------------------
Prior to 1992, Southern deferred amounts paid to its interstate
pipeline suppliers related to take-or-pay, contract buy-out and
contract buy-down costs and accrued and deferred interest on its
unrecovered payments. On November 20, 1991, the DPUC issued a
Decision regarding the method of recovery of these deferred amounts.
The Decision did not provide recovery of incurred and deferred
interest.
As of June 30, 1994, Southern has recovered approximately
$5,374,000 from firm customers through the suspension of the flow-
through of purchased gas cost credits, $1,343,000 from the
suspension of the flow-through of pipeline refunds and $528,000 from
<PAGE> 17
interruptible customers through the application of the uniform
volumetric surcharge in accordance with the DPUC Decisions.
Approximately $800,000 will continue to be recovered from
interruptible customers through the uniform volumetric surcharge.
FERC Order No. 636 Transition Costs
- - -----------------------------------
As a result of FERC's Order No. 636 issued by the Federal
Energy Regulatory Commission ("FERC"), costs are being incurred by
Southern's interstate pipeline suppliers to convert existing
"bundled" sales services to "unbundled" transportation and storage
services. These transition costs include: (1) unrecovered gas
costs, (2) gas supply realignment costs, (3) stranded investment
costs and (4) new facilities costs.
Southern has incurred approximately $7,640,000 in transition
costs as of June 30, 1994. Of this total, approximately $4,571,000
represent unrecovered gas costs, $2,645,000 represent gas supply
realignment costs and the remaining $424,000 represent stranded
investment costs. On July 8, 1994, the DPUC issued a Decision
regarding implementation of FERC Order No. 636 by the Connecticut
local gas distribution companies. The DPUC addressed, among other
things, the mechanism for the recovery of deferred transition costs.
Under this mechanism, the DPUC has allowed the recovery of the
unrecovered gas cost balances from the suspension of flow-through
of purchased gas cost credits attributable to the twelve month
period ended August 31, 1993 as well as refunds received from
interstate pipelines. Additionally, any subsequent refunds from
interstate pipelines as well as any credits received by Southern for
release of its capacity on interstate pipelines during all future
years ending August 31, shall be used to offset Southern's payments
of unrecovered gas costs until fully recovered.
Gas supply realignment costs as well as stranded investment
costs are to be recovered by Southern as follows: (1) retention of
50% of margins derived through off-system sales; (2) retention of
50% of all interruptible margins earned above Southern's target
level; (3) retention of pipeline refunds or deferred gas cost
credits for the 1992/93 period and all subsequent annual deferred
gas cost periods that are in excess of the estimated unrecovered gas
cost portion of transition costs; (4) retention of any capacity
release credits received from pipelines in excess of those needed
<PAGE> 18
for unrecovered purchased gas costs and (5) if needed, a per unit
surcharge applied to firm customers' bills, which will be evaluated
in subsequent annual deferred gas cost proceedings. There is no
hierarchy in the use of the first four recovery measures, and any
and all could be utilized as available. Southern expects to recover
its transition costs obligation over a three year period.
Environmental Matters
- - ---------------------
Southern has identified coal tar residue at three sites in
Connecticut. This residue results from historic coal gasification
operations conducted at those sites by Southern's predecessors from
the late 1800s through the first part of this century. Many gas
distribution companies throughout the country carried on such gas
manufacturing operations during the same period. The coal tar
discovered at Southern's three sites is not designated a hazardous
material by any federal or Connecticut agency, but some of its
constituents are classified as hazardous.
On April 27, 1992, Southern notified the Connecticut Department
of Environmental Protection and the United States Environmental
Protection Agency of the presence of coal tar residue on the three
sites. As a result of this notification, further discussions would
address the extent and type of remedial action, if any, as well as
the time period over which such action would occur.
Because this process is at an early stage, management cannot
at this time predict the costs of any future site analysis and
remediation, if any, nor can it estimate when any such costs, if
any, would be incurred. Such future analytical and cleanup costs
could possibly be significant.
Based upon the provisions of a DPUC approved Partial Settlement
in Southern's most recent rate case, management believes that
Southern will properly be able to recover the costs of investigation
and remediation, if any, through its customer rates. The method,
timing and extent of any recovery remain uncertain, but management
currently does not expect that such costs will have a material
adverse effect on the Company's financial condition or results of
operations.
<PAGE> 19
Personal Property Tax Audits
- - ----------------------------
In September 1993, Southern received notification of the
results of audits by the City of New Haven pursuant to Connecticut's
omitted property statute. The City of New Haven claimed that
Southern owed approximately $2,600,000 in additional personal
property taxes related to years 1990 through 1992; however,
Southern was not aware of any audit finding of significant omissions
of personal property required to be declared. Instead, the City of
New Haven's claim was based on the assessor's retroactive
reassessment of Southern's personal property. Southern initiated
legal actions against the City of New Haven which alleged that,
among other things, the City of New Haven had no statutory authority
to issue tax bills based upon retroactive reassessments of
previously declared property on which taxes were paid and that the
City of New Haven's contingent fee agreement with the firm which
audited Southern's records was illegal. Southern also instituted
legal actions challenging the City of New Haven's assessment of
Southern's personal property for the 1993 Grand List.
On June 29, 1994, Southern and the City of New Haven entered
into a Stipulation and Agreement ("Agreement") in settlement of
these court actions. The Agreement provided for a $200,000
payment related to the tax years 1990 through 1992 without conceding
liability on any of the issues involved; and a resolution of the
disputed 1993 personal property assessment, which resulted in a
reduction of the original 1993 assessment of approximately
$1,500,000 to a new assessment of approximatley $800,000.
Consolidation of Operating Facilities
- - -------------------------------------
On March 30, 1993 Southern entered into an operating lease to
consolidate its operating centers at one central geographic location
in Orange, Connecticut. These operating centers were located in
three cities within Southern's service territory. The DPUC approved
certain accounting treatment relative to the consolidation of the
operating centers at one location which included the transfer of the
net book value of Southern's former operating centers from utility
property to nonutility property after the completion of the
relocation. The relocation of Southern's operating facilities was
completed in the second quarter.
<PAGE> 20
PART II- OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the
quarter.
<PAGE> 21
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.
CONNECTICUT ENERGY CORPORATION
(Registrant)
DATE: August 11, 1994 /s/ Vincent L. Ammann, Jr.
--------------- ----------------------
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer
<PAGE> 22
