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 March 31, 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 May 3, 1994
Common Stock, $1 par value 8,579,929
<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 Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------ ---------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues.................... $ 111,838 $ 91,613 $ 178,552 $ 155,776 $ 235,538 $ 213,440
Purchased gas......................... 61,348 49,589 97,955 84,392 126,608 111,630
--------- --------- --------- --------- --------- ---------
Gross margin.......................... 50,490 42,024 80,597 71,384 108,930 101,810
Operating Expenses:
Operations.......................... 14,965 11,853 26,325 22,195 45,461 42,527
Maintenance......................... 1,357 1,013 2,220 1,887 4,025 3,683
Depreciation and depletion.......... 3,269 3,004 6,477 6,013 12,515 11,644
Federal and state income taxes...... 7,507 5,557 10,188 8,201 5,808 3,678
Municipal, gross earnings and
other taxes......................... 6,662 5,681 10,585 9,623 16,659 15,446
--------- --------- --------- --------- --------- ---------
Total operating expenses.............. 33,760 27,108 55,795 47,919 84,468 76,978
--------- --------- --------- --------- --------- ---------
Operating income...................... 16,730 14,916 24,802 23,465 24,462 24,832
Other deductions, net................. 15 202 247 271 486 536
Interest Expense and Preferred Stock
Dividends:
Interest on long-term debt and
amortization of debt issue costs.. 2,733 2,532 5,464 4,845 10,564 9,351
Other interest and preferred stock
dividends, net.................... 229 471 340 801 1,156 1,940
--------- --------- --------- --------- --------- ---------
Total interest expense and preferred
stock dividends..................... 2,962 3,003 5,804 5,646 11,720 11,291
--------- --------- --------- --------- --------- ---------
Net Income............................ $ 13,753 $ 11,711 $ 18,751 $ 17,548 $ 12,256 $ 13,005
========= ========= ========= ========= ========= =========
Net income per share.................. $ 1.77 $ 1.59 $ 2.45 $ 2.40 $ 1.63 $ 1.80
========= ========= ========= ========= ========= =========
Dividends paid per share.............. $ 0.32 $ 0.32 $ 0.64 $ 0.64 $ 1.28 $ 1.28
--------- --------- --------- --------- --------- ---------
Weighted average number of common
shares outstanding during period.... 7,781,564 7,359,501 7,638,322 7,321,449 7,535,421 7,240,234
--------- --------- --------- --------- --------- ---------
</TABLE>
See Notes to Financial Statements on page 6.
<PAGE> 2
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
Mar. 31, Sept. 30, Mar. 31,
Assets 1994 1993 1993
- - ------ ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Utility Plant:
Gross utility plant.................................. $323,799 $313,951 $302,384
Less--accumulated depreciation....................... 97,251 92,151 87,781
-------- -------- --------
Net utility plant.................................. 226,548 221,800 214,603
Nonutility property, net........................... 9 9 11
-------- -------- --------
Net utility plant and other property................... 226,557 221,809 214,614
-------- -------- --------
Current Assets:
Cash and cash equivalents............................ 5,061 2,214 5,530
-------- -------- --------
Accounts and notes receivable........................ 64,397 22,654 59,193
Less--allowance for doubtful accounts................ 4,520 4,251 5,487
-------- -------- --------
Net accounts and notes receivable...................... 59,877 18,403 53,706
-------- -------- --------
Accrued utility revenues, net........................ 6,822 2,307 5,513
Unrecovered purchased gas costs...................... ---- 5,975 ----
Inventories.......................................... 8,678 16,312 10,416
Prepaid expenses..................................... 1,132 1,565 778
-------- -------- --------
Total current assets................................... 81,570 46,776 75,943
-------- -------- --------
Deferred Charges:
Unamortized debt expenses............................ 6,437 6,466 6,526
Recoverable future taxes............................. 32,702 ---- ----
Other................................................ 25,955 24,744 16,734
-------- -------- --------
Total deferred charges................................. 65,094 31,210 23,260
-------- -------- --------
Total assets........................................... $373,221 $299,795 $313,817
======== ======== ========
</TABLE>
See Notes to Financial Statements on page 6.
<PAGE> 3
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
Mar. 31, Sept. 30, Mar. 31,
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--8,573,048 shares; 7,488,467 shares; 7,397,797 shares.............. $ 8,573 $ 7,488 $ 7,398
Capital in excess of par value................................................... 82,965 62,808 60,681
Retained earnings................................................................ 43,279 29,665 40,924
Adjustment for minimum pension liability......................................... (108) (108) ----
-------- -------- --------
Total common shareholders' equity.................................................. 134,709 99,853 109,003
-------- -------- --------
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............................................................... 255,080 221,002 218,606
-------- -------- --------
Current Liabilities:
Short-term borrowings............................................................ 9,100 23,500 24,900
Current maturities of long-term debt............................................. 595 595 594
Accounts payable................................................................. 15,930 11,960 15,658
Refunds due customers............................................................ 128 1,964 2,445
Federal, state and deferred income taxes......................................... 13,382 3,634 9,478
Property and other accrued taxes................................................. 9,567 5,173 8,365
Interest payable................................................................. 3,353 2,916 2,978
Customer deposits................................................................ 2,348 2,058 2,231
Refundable purchased gas costs................................................... 2,495 ---- 4,938
Other accrued liabilities........................................................ 2,748 1,818 2,105
-------- -------- --------
Total current liabilities.......................................................... 59,646 53,618 73,692
-------- -------- --------
Deferred Credits:
Deferred income taxes and investment tax credits................................. 51,216 17,814 17,931
Other............................................................................ 7,279 7,361 3,588
-------- -------- --------
Total capitalization and liabilities............................................... $373,221 $299,795 $313,817
======== ======== ========
</TABLE>
See Notes to Financial Statements on page 6.
<PAGE> 4
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Six Months Ended Twelve Months Ended
March 31, March 31,
---------------- -------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Cash Provided by Operating Activities $13,350 $10,725 $15,879 $18,257
------- ------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures................................ (11,073) (12,900) (24,309) (24,324)
Proceeds from sale of headquarter's property........ ---- 2,005 ---- 2,005
Proceeds from sale of subsidiaries.................. ---- 180 ---- 180
Contributions in aid of construction................ 24 4 86 105
Payments for retirement of utility plant............ (381) (6) (652) (179)
------- ------- ------- -------
Net cash used in investing activities................. (11,430) (10,717) (24,875) (22,213)
------- ------- ------- -------
Cash Flows from Financing Activities:
Dividends paid on common stock...................... (5,137) (4,700) (9,900) (9,284)
Issuance of common stock............................ 21,242 3,549 23,459 5,377
Issuance of long-term debt.......................... ---- 15,000 12,000 15,000
Repayments of long-term debt........................ (140) (140) (594) (4,068)
Redemption of preferred stock....................... ---- (50) ---- (50)
Early redemption of preferred stock................. (638) ---- (638) ----
(Decrease) in short-term borrowings................. (14,400) (13,400) (15,800) (1,500)
------- ------- ------- -------
Net cash provided by financing activities............. 927 259 8,527 5,475
------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents.. 2,847 267 (469) 1,519
Cash and cash equivalents at beginning of period...... 2,214 5,263 5,530 4,011
------- ------- ------- -------
Cash and cash equivalents at end of period............ $ 5,061 $ 5,530 $ 5,061 $ 5,530
======= ======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................ $ 5,710 $ 5,383 $11,428 $10,788
Income taxes........................................ $ 226 $ 1,323 $ 1,650 $ 5,803
</TABLE>
See Notes to 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 six months ended March 31, 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 $6,553,000, $6,894,000 and $4,000,000 at March 31, 1994,
September 30, 1993 and March 31, 1993, respectively; the deferral of
certain shortfalls in energy assistance funding related to the 1991/92
and 1992/93 heating seasons amounting to $2,945,000, $3,100,000 and $2,800,000
at March 31, 1994, September 30, 1993 and March 31, 1993, respectively;
prepaid pension contributions of $6,355,000, $5,532,000 and $5,109,000 at
March 31, 1994, September 30, 1993 and March 31, 1993, respectively, and
an intangible pension asset of $3,652,000 at March 31, 1994 and
September 30, 1993.
4. Included in other deferred credits are amounts related to a minimum
pension liability totaling $3,816,000 at March 31, 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
provided in the 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.
<PAGE> 7
Based upon the provisions of a Department of Public Utility Control
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 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 claims that Southern owes approximately
$2,600,000 in additional personal property taxes related to years 1990
through 1992; however, Southern is not aware of any audit finding of
significant omissions of personal property required to be declared.
Instead, the City of New Haven's claim is based on the assessor's
retroactive reassessment of Southern's personal property. Southern has
initiated an action against the City of New Haven alleging that, among other
things, the City of New Haven has no statutory authority to issue tax bills
based upon retroactive reassessments of previously declared property on
which taxes were paid and the City of New Haven's contingent fee agreement
with the firm which audited Southern's records is illegal. Southern has
filed a similar court action against the City of Bridgeport seeking
similar relief as a result of property audits for the years 1989 through
1991 where claims of approximately $300,000 of additional personal property
taxes have been made. Southern intends to vigorously defend its position
through these court actions. Management believes that it will ultimately
prevail and that the resolution of these issues will not have a material
effect on the Company's financial condition or results of operations.
<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, six and twelve months ended March 31, 1994 and 1993 is detailed below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------ ---------------- ------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
(000s omitted)
<S> <C> <C> <C> <C> <C> <C>
Net Income $13,753 $11,711 $18,751 $17,548 $12,256 $13,005
======= ======= ======= ======= ======= =======
Net Income Per Share $ 1.77 $ 1.59 $ 2.45 $ 2.40 $ 1.63 $ 1.80
======= ======= ======= ======= ======= =======
Weighted Average
Shares Outstanding 7,782 7,360 7,638 7,321 7,535 7,240
------- ------- ------- ------- ------- -------
</TABLE>
Factors affecting the increase in net income for the three and six
month periods ended March 31, 1994 were the implementation of a 6.6% rate
increase on December 9, 1993, weather that was approximately 12% and 7%
colder for the three and six months ended March 31, 1994 when compared to
the corresponding 1993 periods, and the ability to retain additional
interruptible margins earned due to the changes in the annual margin
sharing period and target made in the recent rate decision for the Company's
subsidiary, The Southern Connecticut Gas Company ("Southern"). Partially
offsetting these increases were higher operations expenses in the areas of
uncollectibles, wages, which included some overtime costs due to the colder
weather, employee benefit costs primarily due to the adoption of Statement
<PAGE> 9
of Financial Accounting Standards No. 106 ("SFAS 106"), depreciation,
lease costs and increased taxes due to higher pre-tax income and higher
revenues. Earnings for the comparative three and six month periods ended
March 31, 1993 were positively impacted by a regulatory decision by the
Connecticut Department of Public Utility Control ("DPUC") wherein the DPUC
allowed Southern to defer shortfalls in energy assistance from state and
federal agencies. This decision allowed Southern to significantly reduce its
provision for uncollectibles during the three and six month periods ended
March 31, 1993. Results for the three and six months ended March 31, 1994
were also affected by higher interest costs due to the issuance of $15,000,000
and $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 partially offset by lower other interest costs.
For the twelve months ended March 31, 1994, increased margins principally
due to the recently implemented rate increase and weather that was
approximately 3% colder than the corresponding 1993 period were offset by
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. Additionally, higher
depreciation expenses, income and gross receipt taxes and higher long-term
debt costs contributed to the lower net income for the twelve months ended
March 31, 1994 when compared to the corresponding 1993 period. 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
<PAGE> 10
the premium paid by Southern for the repurchase of $52,750,000 of outstanding
long term debt. This benefit positively impacted the results for the twelve
months ended March 31, 1993.
Operating Revenues
- - --------- --------
The Company's operating revenues for the three, six and twelve months
ended March 31, 1994 were approximately 22%, 15% and 10% higher than the
corresponding periods ended March 31, 1993. These increases are primarily
due to the impact of a 6.6% increase in Southern's rates that was 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 increased usage due to more heating customers. As part of the 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. Although
the weather for the quarter ended March 31, 1994 was colder than normal,
the WNA moderated the effect of weather on customer bills by returning to
firm customers approximately $3,600,000 in credits on their bills.
Firm Sales Volumes
- - ---- ----- -------
The volumes of gas sold to firm customers by Southern for the three,
six and twelve months ended March 31, 1994 increased approximately 9%, 6%,
<PAGE> 11
and 3%, respectively, when compared with the corresponding 1993 periods.
These increases are primarily attributable to weather that was approximately
12%, 7% and 3% colder for the three, six and twelve months ended March 31,
1994, respectively, than the corresponding 1993 periods and to increases
in the number of heating customers.
Interruptible Sales and Transportation Volumes
- - ------------- ----- --- -------------- -------
Below is a chart depicting volumes of gas both sold to and transported
by Southern for interruptible customers:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
Volumes (MMcf) March 31, March 31, March 31,
- - -------------- ------------------ ---------------- -------------------
1994 1993 1994 1993 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Interruptible Sales 1,950 1,142 3,617 2,245 6,015 4,035
Interruptible Transportation 10 781 36 1,180 509 3,420
----- ----- ----- ----- ----- -----
Total Interruptible Volumes 1,960 1,923 3,653 3,425 6,524 7,455
===== ===== ===== ===== ===== =====
</TABLE>
Fluctuations between volumes sold or transported to Southern's
interruptible customers are due to vagaries in market prices for sales and
transportation services at the time of negotiations for such services.
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. Additionally, margins earned from interruptible service in
excess of an annual target are allocated between firm customers and Southern
through a margin sharing mechanism. Margins earned and retained by Southern
were higher for the three, six and twelve months ended March 31, 1994 when
compared to the corresponding 1993 periods. The increase in margins
<PAGE> 12
retained for all 1994 periods is principally attributable to the change
in the margin sharing year in accordance with Southern's latest rate order.
Purchased Gas Expense
- - --------- --- -------
Purchased gas expense for the three, six and twelve month periods
ended March 31, 1994 increased approximately 24%, 16% and 13%, respectively,
when compared with the corresponding 1993 periods due primarily to increased
gas costs collected through the PGA, a new base cost of gas and higher firm
sales volumes. In addition, gas costs were higher for the three, six and
twelve month periods ended March 31, 1994 due to the suspension of the
flow-through of approximately $1,543,000 in gas cost credits until a
DPUC decision regarding the recovery mechanism for deferred transition
costs is rendered.
Additionally, during the twelve months ended March 31, 1993, Southern
recorded an increase in its purchased gas expense to recover approximately
$3,285,000 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, six and twelve months ended March 31,
1994 increased 26%, 19% and 7%, respectively, when compared with the
<PAGE> 13
corresponding 1993 periods. For the three, six and twelve month periods
ended March 31, 1994, approximately 59%, 55% and 36% 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,
six and twelve months ended March 31, 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, six and twelve
months ended March 31, 1994 is approximately $750,000 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 three, six and twelve months ended
March 31, 1994 increased approximately 34%, 18% and 9%, respectively, when
compared with the same 1993 periods. These increases were primarily
attributable to a higher level of maintenance activity and higher labor
<PAGE> 14
and material costs associated with Southern's mains.
Depreciation and Depletion
- - ------------ --- ---------
Depreciation expense for the three, six and twelve months ended
March 31, 1994 increased approximately 9%, 8% and 7%, respectively, when
compared with 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,
six and twelve months ended March 31, 1994 increased 35%, 24% and 58%,
respectively, when compared with the corresponding 1993 periods. The
increases for the three and six months ended March 31, 1994, when compared
with the three and six months ended March 31, 1993, resulted from higher
pre-tax income 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 March 31, 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 March 31, 1993.
<PAGE> 15
Municipal, Gross Earnings and Other Taxes
- - ---------- ----- -------- --- ----- -----
Municipal, gross earnings and other taxes increased for the three, six
and twelve months ended March 31, 1994 approximately 17%, 10% and 8%,
respectively, when 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 March 31, 1994 was relatively unchanged when compared with the
corresponding 1993 period, but increased approximately 3% and 4%,
respectively, for the six and twelve months ended March 31, 1994 when
compared with 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
these higher long-term interest costs were 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 twelve month period ended March 31, 1994 due to lower
average short-term borrowings as well as lower short-term interest rates
for the twelve month period ended March 31, 1994.
<PAGE> 16
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 March 31, 1994, Southern had unused lines of
credit of $54,900,000. 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 six months ended March 31, 1994 were
positively affected by higher net income, higher accrued tax balances and
higher refundable purchased gas cost balances. Partially offsetting these
positive cash flows were higher accounts receivable balances due to the
colder weather experienced during the period, higher inventory costs
associated with the purchase of natural gas in storage as part of the
restructuring of Southern's contracts with its interstate pipeline suppliers
<PAGE> 17
as a result of the FERC Order No. 636, higher deferred transition cost
balances, refunds from interstate pipeline suppliers currently being
returned to firm customers and the timing of certain pension contributions.
Operating cash flows for the twelve months ended March 31, 1994 were
negatively affected by lower net income, deferred transition costs, higher
inventory costs as a result of the purchase of natural gas in storage, a
higher deferred asset relating to Southern's certified hardship forgiveness
program and the timing of certain pension contributions. Partially
offsetting these negative effects on cash flows were higher accrued tax
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 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 is 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.
<PAGE> 18
The Partial Settlement also provides for current recovery of
postretirement health care expenses accrued under SFAS 106 and the
establishment of a target margin for sales and transportation to Southern's
interruptible customers of $4,000,000 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, Southern would not apply for rate relief prior to November 30, 1995.
Investing Activities
- - --------- ----------
Capital expenditures approximated $11,049,000 and $12,896,000 for the
six month periods ended March 31, 1994 and 1993, respectively, and $24,223,000
and $24,219,000 for the twelve month periods ended March 31, 1994 and 1993,
respectively. Southern, on an annual basis, 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
- - --------- ----------
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 of this sale were used for 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
<PAGE> 19
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.
<PAGE> 20
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 March 31, 1994, Southern has recovered approximately $5,374,000
from firm customers through the suspension of the flow-through of purchased
gas credits, $1,343,000 from the suspension of the flow-through of pipeline
refunds and $474,000 from interruptible customers through the application
of the uniform volumetric surcharge in accordance with the DPUC Decisions
on this matter. Approximately $806,000 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, 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 four types: 1) unrecovered gas costs; 2) gas
supply realignment costs; 3) stranded costs and 4) new facilities costs.
Unrecovered gas costs are costs that have been incurred, but not yet recovered,
<PAGE> 21
by interstate pipelines when they were providing "bundled" sales service to
local gas distribution companies. These costs have been deemed "prudently
incurred costs" by the FERC and, therefore, recoverable from the pipelines'
former sales customers.
Southern has incurred approximately $6,660,000 in transition costs as of
March 31, 1994. As instructed by the DPUC, Southern has deferred these costs
pending a DPUC decision regarding the method by which these amounts are to be
collected from Southern's customers. Management is unable to determine
Southern's aggregate share of these transition costs but believes these
charges will be recoverable from customers through rates and, therefore,
will not materially impact its financial position or results of operations.
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
<PAGE> 22
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.
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 claims that Southern owes approximately
$2,600,000 in additional personal property taxes related to years 1990
through 1992; however, Southern is not aware of any audit finding of
<PAGE> 23
significant omissions of personal property required to be declared.
Instead, the City of New Haven's claim is based on the assessor's
retroactive reassessment of Southern's personal property. Southern has
initiated an action against the City of New Haven alleging that,
among other things, the City of New Haven has no statutory authority to
issue tax bills based upon retroactive reassessments of previously declared
property on which taxes were paid and the City of New Haven's contingent
fee agreement with the firm which audited Southern's records is illegal.
Southern has filed a similar court action against the City of Bridgeport
seeking similar relief as a result of property audits for the years 1989
through 1991 where claims of approximately $300,000 of additional personal
property taxes have been made. The Company intends to vigorously defend
its position through these court actions. Management believes that it
will ultimately prevail and that the resolution of these issues will not
have a material effect on the Company's financial condition or results of
operations.
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. The relocation of Southern's operating facilities has been
completed.
<PAGE> 24
PART II- OTHER INFORMATION
Items 1, 2, 3, and 5 are inapplicable.
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
(a) The Annual meeting of the registrant was held on January 25, 1994.
(b) Election of Directors:
For Against Abstain Non-Vote
--- ------- ------- --------
J. R. Crespo 6,045,176 75,782 0 0
Richard F. Freeman 6,038,101 82,857 0 0
Newman M. Marsilius, III 6,020,735 100,223 0 0
(c) Election to employ the firm of Coopers & Lybrand as the independent
accountants to audit the books and affairs of the registrant and the
subsidiaries of both it and of The Southern Connecticut Gas Company
for the 1994 fiscal year:
For Against Abstain Non-Vote
--- ------- ------- --------
Coopers & Lybrand 6,014,593 36,288 70,077 0
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> 25
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: May 12, 1994 /s/ Vincent L. Ammann, Jr.
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer
<PAGE> 26
