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 December 31, 1993
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 February 3, 1994
Common Stock, $1 par value 7,535,227
An index of exhibits to this Quarterly Report on Form 10-Q
may be found on Page 23 hereof.
<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 Twelve Months Ended
December 31, December 31,
------------------- --------------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues.................... $ 66,714 $ 64,163 $ 215,313 $ 211,480
Purchased gas......................... 36,607 34,803 114,849 110,508
_________ _________ _________ _________
Gross margin.......................... 30,107 29,360 100,464 100,972
Operating Expenses:
Operations.......................... 11,360 10,342 42,349 43,012
Maintenance......................... 863 874 3,681 3,607
Depreciation and depletion.......... 3,208 3,009 12,250 11,491
Federal and state income taxes...... 2,681 2,644 3,858 3,719
Municipal, gross earnings and
other taxes....................... 3,923 3,942 15,678 15,670
_________ _________ _________ ________
Total operating expenses.............. 22,035 20,811 77,816 77,499
_________ _________ _________ _________
Operating income...................... 8,072 8,549 22,648 23,473
Other deductions, net................. 232 69 673 453
Interest Expense and Preferred Stock
Dividends:
Interest on long-term debt and
amortization of debt issue costs.. 2,731 2,313 10,363 9,121
Other interest and preferred stock
dividends, net.................... 111 330 1,398 1,913
_________ _________ _________ _________
Total interest expense and preferred
stock dividends..................... 2,842 2,643 11,761 11,034
_________ _________ _________ _________
Net Income............................ $ 4,998 $ 5,837 $ 10,214 $ 11,986
========= ========= ========= =========
Net income per share.................. $ 0.67 $ 0.80 $ 1.37 $ 1.67
========= ========= ========= =========
Dividends paid per share.............. $ 0.32 $ 0.32 $ 1.28 $ 1.2725
_________ _________ _________ _________
Weighted average number of common
shares outstanding during period.... 7,498,194 7,284,225 7,431,351 7,182,024
_________ _________ _________ _________
</TABLE>
See Notes to Consolidated Financial Statements on page 6.
<PAGE> 2
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
Dec. 31, Sept. 30, Dec. 31,
1993 1993 1992
--------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
- ------
Utility Plant:
Gross utility plant....................................................... $ 318,475 $ 313,951 $ 300,353
Less--accumulated depreciation............................................ 95,125 92,151 86,439
_______ _______ _______
Net utility plant....................................................... 223,350 221,800 213,914
Nonutility property, net.................................................. 9 9 499
_______ _______ _______
Net utility plant and other property........................................ 223,359 221,809 214,413
_______ _______ _______
Current Assets:
Cash and cash equivalents................................................. 3,148 2,214 3,782
_______ _______ _______
Accounts receivable....................................................... 36,624 22,654 37,778
Less--allowance for doubtful accounts..................................... 3,680 4,251 4,560
_______ _______ _______
Net accounts receivable..................................................... 32,944 18,403 33,218
_______ _______ _______
Accrued utility revenues, net............................................. 7,586 2,307 6,345
Unrecovered purchased gas costs........................................... 10,650 5,975 4,510
Inventories............................................................... 15,723 16,312 11,685
Prepaid expenses.......................................................... 1,530 1,565 1,201
_______ _______ _______
Total current assets........................................................ 71,581 46,776 60,741
_______ _______ _______
Deferred Charges:
Unamortized debt expenses................................................. 6,440 6,466 6,489
Recoverable future taxes.................................................. 33,943 --- ---
Other..................................................................... 26,147 24,744 15,450
_______ _______ _______
Total deferred charges and other assets..................................... 66,530 31,210 21,939
_______ _______ _______
Total assets................................................................ $ 361,470 $ 299,795 $ 297,093
======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements on page 6.
<PAGE> 3
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<CAPTION>
Dec. 31, Sept. 30, Dec. 31,
1993 1993 1992
--------- --------- ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Capitalization and Liabilities
- ------------------------------
Common Shareholders' Equity:
Common Stock--par value $1 per share: authorized--20,000,000shares, issued and
outstanding--7,530,924 shares; 7,488,467 shares; 7,346,135 shares............ $ 7,531 $ 7,488 $ 7,346
Capital in excess of par value................................................. 63,771 62,808 59,497
Retained earnings.............................................................. 32,261 29,665 31,571
Adjustment for minimum pension liability....................................... (108) (108) ---
_______ _______ _______
Total common shareholders' equity.............................................. 103,455 99,853 98,414
_______ _______ _______
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; 7,000 shares.......................... --- 650 700
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) (13)
_______ _______ _______
Total preferred stock.......................................................... --- 638 687
_______ _______ _______
Long-term debt................................................................. 120,511 120,511 109,106
_______ _______ _______
Total capitalization........................................................... 223,966 221,002 208,207
_______ _______ _______
Current Liabilities:
Short-term borrowings........................................................ 38,900 23,500 28,300
Current maturities of long-term debt......................................... 595 595 594
Accounts payable............................................................. 16,117 11,960 18,279
Refunds due customers........................................................ 993 1,964 3,273
Federal, state and deferred income taxes..................................... 6,009 3,634 4,129
Property and other accrued taxes............................................. 7,659 5,173 7,348
Interest payable............................................................. 2,321 2,916 2,175
Customer deposits............................................................ 2,314 2,058 2,203
Other accrued liabilities.................................................... 2,537 1,818 2,047
_______ _______ _______
Total current liabilities...................................................... 77,445 53,618 68,348
_______ _______ _______
Deferred Credits:
Deferred income taxes........................................................ 52,068 17,814 18,004
Other deferred credits....................................................... 7,991 7,361 2,534
_______ _______ _______
Total capitalization and liabilities........................................... $ 361,470 $ 299,795 $ 297,093
======= ======= =======
</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>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
1993 1992 1993 1992
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Cash (used by) provided by Operating Activities: $ (7,520) $ 497 $ 5,236 $ 17,569
_______ _______ _______ _______
Cash Flows from Investing Activities:
Capital expenditures................................ (4,845) (7,004) (23,977) (24,616)
Proceeds from sale of headquarter's property........ --- --- 2,005 ---
Proceeds from sale of subsidiaries.................. --- --- 180 ---
Contributions in aid of construction................ 23 (2) 91 125
(Payments for) proceeds from retirement of
utility plant.... ................................ (89) 56 (421) (261)
_______ _______ _______ _______
Net cash used in investing activities................ (4,911) (6,950) (22,122) (24,752)
_______ _______ _______ _______
Cash Flows from Financing Activities:
Dividends paid on common stock...................... (2,403) (2,341) (9,525) (9,152)
Issuance of common stock............................ 1,006 2,313 4,459 4,654
Issuance of long-term debt.......................... --- 15,000 12,000 15,000
Repayments of long-term debt........................ --- --- (594) (4,068)
Repurchase of long-term debt and subordinated notes. --- --- --- ---
Redemption of preferred stock....................... --- --- (50) (50)
Early redemption of preferred stock................. (638) --- (638) ---
Increase (Decrease) in short-term borrowings........ 15,400 (10,000) 10,600 1,700
_______ _______ _______ _______
Net cash provided by financing activities............ 13,365 4,972 16,252 8,084
_______ _______ _______ _______
Net increase (decrease) in cash and cash equivalents. 934 (1,48l) (634) 901
Cash and cash equivalents at beginning of period..... 2,214 5,263 3,782 2,881
_______ _______ _______ _______
Cash and cash equivalents at end of period........... $ 3,148 $ 3,782 $ 3,148 $ 3,782
======= ======= ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest............................................ 3,669 3,163 11,608 10,721
Income taxes........................................ --- 931 1,816 5,773
</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 three months ended
December 31, 1993 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 $7,145,000, $6,894,000 and
$4,000,000 at December 31, 1993, September 30, 1993 and December
31, 1992, respectively; the deferral of certain shortfalls in
energy assistance funding related to the 1991/92 and 1992/93
heating seasons amounting to $3,100,000, $3,100,000 and
$2,350,000 at December 31, 1993; September 30, 1993 and December
31, 1992, respectively; prepaid pension contributions of
$5,662,000, $5,532,000 and $4,616,000 at December 31, 1993,
September 30, 1993, and December 31, 1992, respectively, and an
intangible pension asset of $3,652,000 at December 31, 1993 and
September 30, 1993.
4. Included in other deferred credits are amounts related to a
minimum pension liability totaling $3,816,000 at December 31,
1993 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 recognized
the cost of providing these benefits by expensing $350,000
annually in excess of paid medical claims 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" ("FAS 106") which requires accrual
<PAGE> 6
accounting for postretirement during the employee's years of
service with Southern. Southern has elected to amortize the
transition obligation over 20 years. In the Connecticut
Department of Public Utility Control's ("DPUC") Decision on
Southern's latest rate request, Southern was allowed current
recovery of FAS 106 costs through customer base rates which
became effective December 9, 1993. The expense of implementing
FAS 106 prior to full recovery in rates was deferred and is being
recovered over a three year period.
The estimated postretirement benefit costs, before any
regulatory adjustment, for the fiscal year ending September 30,
1994 is approximately $2,647,000 which includes the following
components:
Service Cost $ 598,000
Interest Cost 1,282,000
Actual Return on Plan Assets (106,000)
Amortization of Transition Obligation 873,000
__________
$2,647,000
==========
The expected long-term rate of return on plan assets is
8.5%. The assumed initial health care cost trend rates used to
measure the expected cost of benefits in 1993 are 14.5% for
pre-age 65 claims and 9% for post-age 65 claims. The rates
decline to 6% by the year 2010. The weighted average discount
rate used to measure the accumulated postretirement benefit
obligation was 7.0%. A one percentage point increase in the
assumed health care cost trend rate would increase the service
cost and interest cost components of the net periodic
postretirement benefit cost by approximately $152,000 and would
increase the accumulated postretirement benefit obligation for
health care benefits by approximately $1,160,000.
In 1990, Southern amended the Pension Plan for Salaried and
Certain Other Employees to establish an account within the
Pension Plan trust as permitted under Section 401(h) of the
Internal Revenue Code to fund a portion of Southern's anticipated
future postretirement benefit liability with amounts allowed
through the ratemaking process. Through the use of the existing
trust and the establishment of a Voluntary Employees' Benefit
Association Trust as permitted under Section 501(c)(9) of the
Internal Revenue Code, Southern plans to fund its full
postretirement benefit expense under FAS 106.
The following table reconciles the funded status of the plan
with the amount recognized in the Consolidated Balance Sheet as
of December 31, 1993:
<PAGE> 7
Accumulated postretirement benefit obligation:
Retirees $ 7,503,000
Fully eligible active plan participants 3,837,000
Other active plan participants 7,701,000
Total Accumulated Postretirement ___________
Benefit Obligation $19,041,000
Plan assets at fair value (1,330,000)
Accumulated Postretirement Benefit Obligation ___________
in excess of plan assets 17,711,000
Unamortized transition obligation (17,247,000)
___________
Accrued Postretirement Benefit Obligation $ 464,000
===========
The accumulated postretirement benefit obligation was
measured utilizing the assumptions described above.
6. In February 1992, the Financial Accounting Standards Board
("FASB") issued the Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109
establishes financial accounting and reporting standards for
deferred income taxes using an asset and liability approach. FAS
109 requires, among other things, the recognition of the effect
on deferred taxes of enacted tax rate and law changes in the year
in which they occur. The Company has adopted FAS 109, effective
October 1, 1993, and has adjusted deferred tax balances to
reflect the differences between the tax and financial statement
basis of all assets and liabilities, regardless of whether
deferred taxes had been previously provided. Deferred tax
liabilities have been reduced to the extent they had been
previously provided at federal statutory rates in excess of the
rates in effect on the effective date of adoption. The Company
recorded an additional deferred tax liability and a corresponding
regulatory asset of approximately $33,943,000 at the date of
adoption. The effect of the adoption of FAS 109 on net income is
not material since this adjustment will be recognized in income
in future periods as the temporary differences reverse.
<PAGE> 8
7. The registrant's principal subsidiary, The Southern
Connecticut Gas Company, ("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 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. 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.
<PAGE> 9
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 and twelve months ended December 31,
1993 and 1992 is detailed below:
Three Months Ended Twelve Months Ended
December 31, December 31,
(000's omitted) 1993 1992 1993 1992
------------------ -------------------
Net Income $4,998 $5,837 $10,214 $11,986
====== ====== ======= =======
Net Income Per Share $ 0.67 $ 0.80 $ 1.37 $ 1.67
Weighted Average ====== ====== ======= =======
Shares Outstanding 7,498 7,284 7,431 7,182
______ ______ _______ _______
Factors affecting the decrease in net income for the three
month period ended December 31, 1993 were slightly warmer
weather, which was partially mitigated by the implementation of a
6.6% rate increase on December 9, 1993, higher operations
expenses in the areas of uncollectibles, insurance costs, wages,
depreciation, and lease costs. Earnings for the three month
period ended December 31, 1992 were positively impacted by a
regulatory decision by the Connecticut Department of Public
Utility Control ("DPUC") that allowed the Company's subsidiary,
The Southern Connecticut Gas Company ("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 months ended
December 31, 1992. Results for the three months ended
December 31, 1993 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 was partially offset by
lower short-term interest costs.
<PAGE> 10
For the twelve months ended December 31, 1993, net income
was affected by slightly warmer weather, higher depreciation
expense, and higher interest costs. Higher operations expenses
in the areas of wages, lease costs, insurance costs, and other
general and administrative expenses were more than offset by the
reduction to Southern's provision for uncollectibles due to the
allowed deferral of energy assistance shortfalls during the
fiscal year ended September 30, 1993. Additionally, the results
for the twelve months ended December 31, 1992 were positively
affected by the retention of approximately $1,550,000 in
interruptible margins earned due to the suspension of Southern's
margin sharing mechanism.
Operating Revenues
The Company's operating revenues for the three and twelve
months ended December 31, 1993 were approximately 4% and 2%
higher than the corresponding periods ended December 31, 1992.
These increases are primarily due to increased usage by more
heating customers, higher collections through the operation of
Southern's Purchased Gas Adjustment Clause ("PGA"), and the
partial impact of a 6.6% rate increase that was implemented on
December 9, 1993. Additionally, operating revenues during the
twelve months ended December 31, 1992 were positively affected by
the retention of approximately $1,550,000 in interruptible
margins due to the suspension of Southern's margin sharing
mechanism.
Firm Sales Volumes
The volumes of gas sold to firm customers by Southern for
the three and twelve months ended December 31, 1993 increased
approximately 2% when compared with the corresponding 1992
periods. These increases are primarily attributable to increases
in the number of heating customers which more than offset weather
<PAGE> 11
experienced during the three and twelve months ended December 31,
1993 which was approximately 1% and 2% warmer than the
corresponding 1992 periods.
Interruptible Sales and Transportation Volumes
Below is a chart depicting volumes of gas both sold and
transported by Southern to interruptible customers:
Three Months Ended
December 31 %
Volumes (Mmcf) 1993 1992 Change
- -------------- ------------------ ------
Interruptible Sales 1,667 1,102 51%
Interruptible Transportation 26 400 (94%)
_____ _____ ___
Total Interruptible Volumes 1,693 1,502 13%
===== ===== ===
Twelve Months Ended
December 31 %
Volumes (Mmcf) 1993 1992 Change
- -------------- ------------------- ------
Interruptible Sales 5,208 3,578 46%
Interruptible Transportation 1,279 3,851 (67%)
_____ _____ ___
6,487 7,429 (13%)
===== ===== ===
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 gas 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.
Volumes delivered and margins earned for the three months ended
December 31, 1993 were higher than the corresponding 1992 period,
however, margins retained by Southern were lower for the three
months ended December 31, 1993. Although volumes delivered
during the twelve months ended December 31, 1993 were lower than
the twelve months ended December 31, 1992, total margins earned
during the twelve months ended December 31, 1993 were greater
than the twelve months ended December 31, 1992. Margins retained
by Southern during the twelve months ended December 31, 1993,
however, were lower than the twelve months ended December 31,
<PAGE> 12
1992 because the DPUC allowed Southern to suspend the margin
sharing mechanism during 1992.
Purchased Gas Expense
Purchased gas expense for the three and twelve month periods
ended December 31, 1993 increased approximately 5% and 4%,
respectively, when compared with the corresponding 1992 periods
due primarily to increased gas costs collected through the PGA,
and higher firm sales volumes.
Additionally, during the twelve months ended December 31,
1992, Southern recorded an increase in its purchased gas expense
to recover approximately $3,215,000 of previously deferred
take-or-pay, contract buy-out and contract buy-down costs in
accordance with a DPUC decision on this matter.
Operations Expense
Operations expense for the three months ended December 31,
1993 increased 10% when compared with the same 1992 period.
Nearly half of this increase is the 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 uncollectibles for the three
months ended December 31, 1992. The remainder of this increase
is due to higher levels of other operations expenses such as
wages, insurance costs and lease expense.
Operations expense for the twelve months ended December 31,
1993 decreased approximately 2% when compared to the
<PAGE> 13
corresponding 1992 period. This decrease was principally
attributable to the positive impact on Southern's provision for
uncollectible accounts due to the DPUC decision regarding
deferral on energy assistance shortfalls during the fiscal year
ended September 30, 1993. This decrease more than offset
increases in other operations expenses such as wages, lease
costs, and general and administrative expenses.
Depreciation and Depletion
Depreciation expense for the three and twelve months ended
December 31, 1993 increased approximately 7% when compared with
the corresponding 1992 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 and twelve months ended December 31, 1993 remained
relatively unchanged when compared with the corresponding 1992
periods. Lower pre-tax income for the three and twelve months
ended December 31, 1993, when compared with the three and twelve
months ended December 31, 1992, was offset by higher effective
tax rates for both 1993 periods due to the flow-through tax
effect of the amortization of previously deferred costs. The
effective tax rates for the three and twelve months ended
December 31, 1992 were lower principally due to the impact of the
deferral of energy assistance shortfalls.
Total Interest Expense and Preferred Stock Dividends
Total interest expense and preferred stock dividends for the
three and twelve month period ended December 31, 1993 increased
approximately 8% and 7%, respectively, when compared with the
<PAGE> 14
corresponding 1992 periods. This increase is 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.
Offsetting these higher long-term interest costs were lower
short-term interest costs due to lower average short-term
borrowings as well as lower short-term interest rates for the
1993 periods. Additionally, for the three months ended December
31, 1993, interest income related to deferred FERC Order No.
636 transition costs have partially offset the increases due to
higher long-term debt costs.
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, 1995,
followed by a term loan period through December 21, 1999. At
December 31, 1993, Southern had unused lines of credit of
$25,100,000. 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.
<PAGE> 15
Operating cash flows for the three months ended December 31,
1993 were negatively affected by lower net income, the return to
firm customers of pipeline refunds received in prior periods and
higher unrecovered purchased gas cost balances. Additionally,
although at typical levels at this time of year for a gas
distribution company, accounts payable balances increased at a
faster pace during the three months ended December 31, 1992,
which positively affected operating cash flows for that period.
Operating cash flows for the twelve months ended December
31, 1993 were negatively affected by lower net income, higher
unrecovered purchased gas cost balances, higher inventory costs
as a result of the purchase of natural gas in storage due to the
restructuring of Southern's contracts with its interstate
pipeline suppliers as a result of the Federal Energy Regulatory
Commission's ("FERC") Order No. 636, incrementally higher
accounts payable balances, a higher deferred asset relating to
Southern's certified hardship forgiveness program, and the
timing of certain pension contributions.
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 would 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
<PAGE> 16
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 Statement of
Financial Accounting Standards No. 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 $4,822,000 and $7,006,000
for the three months ended December 31, 1993 and 1992,
respectively, and $23,886,000 and $24,491,000 for the twelve
months ended December 31, 1993 and 1992, 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 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
<PAGE> 17
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.
Financing plans for 1994 include a proposed public sale by
the Company of up to 1,000,000 shares of common stock which is
expected to take place in the second quarter of fiscal 1994. The
proceeds of this anticipated sale will be 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 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.
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, pending the DPUC's Decision
on this matter. 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.
<PAGE> 18
As of December 31, 1993, 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 $404,000 from interruptible customers through the
application of the uniform volumetric surcharge in accordance
with the DPUC Decisions on this matter. Approximately $876,000
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 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,
by the 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,
will be recoverable from the pipelines' former sales customers.
Southern has incurred approximately $5,222,000 in transition
costs as of December 31, 1993. As instructed by the DPUC,
Southern has deferred these costs pending a DPUC hearing
regarding the method by which these amounts are to be collected
from customers through retail sales. Additionally, Southern
currently expects to pay gas supply realignment costs that will
be incurred by its interstate pipeline suppliers through demand
surcharges, as well as stranded costs and new facilities costs as
they are included in each interstate pipeline's general rate
filings. 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
<PAGE> 19
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 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, time and extent of any recovery remain
uncertain, but management currently does not expect that such
<PAGE> 20
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
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
which would consolidate its operating centers at one central
geographic location in Orange, Connecticut. These operating
<PAGE> 21
centers are currently located in three cities within Southern's
service territory. The DPUC has approved certain accounting
treatment relative to the consolidation of the operating centers
at one location. The relocation of Southern's operating
facilities to the new facility is currently in progress and is
expected to be completed by the end of February.
<PAGE> 22
PART II- OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
Item 6. Exhibits and Reports on Form 8-K
None
(a) Exhibits:
Executive Compensation Plans and Arrangements
Exhibit 10(a) Supplemental Retirement Benefits Plan
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter.
<PAGE> 23
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: February 7, 1994 /s/ Vincent L. Ammann, Jr.
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer
THE SOUTHERN CONNECTICUT GAS COMPANY
SUPPLEMENTAL RETIREMENT BENEFITS PLAN
OCTOBER 1, 1993
1. Purpose
To ensure that key employees received a sufficient level of
retirement income, The Southern Connecticut Gas Company
("Company") adopts this Supplemental Retirement Benefits Plan
(the "SERP"), effective as of October 1, 1993. The SERP shall
provide benefits to those key employees of the Company selected
by the Board of Directors of the Company ("Board") in accordance
with the terms and conditions set forth herein.
2. Eligibility and Participation
All officers of the Company shall be eligible to participate
in the SERP. The Board shall select from among those officers
(taking into account any recommendations of the President of the
Company and the Nominating and Salary Committee of the Board) and
shall designate those who will participate in the SERP (an
"Eligible Participant"). The Board may delegate this authority
and any other authority conferred on it hereunder to the
Nominating and Salary Committee of the Board. If it does, all
references herein to the Board shall be deemed to refer to the
Nominating and Salary Committee, unless the context indicates
otherwise.
3. Retirement Benefits
(a) Upon the termination of an Eligible Participant's
employment for any reason (other than death) after reaching age
62, the Company shall pay to the Eligible Participant an annual
pension equal to sixty percent (60%) of the Average Annual
Compensation as such term is defined in The Southern Connecticut
Gas Company Pension Plan for Salaried and Certain Other Employees
(the "Qualified Plan") (without limitation on the dollar amount
of compensation as may be imposed on the Qualified Plan under the
Internal Revenue Code of 1986, as amended) less the amounts
payable under the Qualified Plan and the Benefit Equalization
Plan of The Southern Connecticut Gas Company (the "Equalization
Plan"). Subject to the Eligible Participant's election of a form
of payment pursuant to Paragraph (c) of the Section 3, such
amount is defined as the Supplemental Pension.
(b) If an Eligible Participant dies after age 62 while
employed by the Company, the Company shall pay to the Surviving
Spouse, as defined in the Qualified Plan, of the Eligible
Participant, a gross benefit computed on the basis that the
<PAGE>
Eligible Participant had retired on the day before his death and
then died having elected a Qualified Joint and Survivor Annuity
as defined in the Qualified Plan. The gross benefit shall be
offset by amounts payable to the Surviving Spouse under the
Qualified Plan and the Equalization Plan.
(c) The Supplemental Pension shall be paid in monthly
installments equal to one-twelfth (1/12) of the annual amount set
forth in paragraphs (a) or (b) of this Section 3 as applicable,
commencing on the first day of the month following the month in
which an Eligible Participant's employment terminates. The
Eligible Participant's election of a payment form under the
Qualified Plan shall determine the payment form of the
Supplemental Pension. In the event the spouse of the Eligibile
Participant predeceases the Eligible Participant who elected a
Qualified Joint and Survivor Annuity, the Life Annuity
restoration provision of the Qualified Plan shall apply to the
Supplemental Pension. Actuarial equivalence shall be based on
the same factors used for determining actuarial equivalence under
the Qualified Plan. The last payment of the Supplemental Pension
shall be made as of the first day of the calendar month in which
the Eligible Participant dies or, if payments of the Supplemental
Pension are being made under a joint and survivor annuity, as of
the first day of the month of the beneficiary's death.
4. Funding and Trust Accounts
(a) The Company shall not be required to fund or otherwise
segregate assets for the payment of Supplemental Pensions to
Eligible Participants. Notwithstanding the foregoing, however,
as soon as practicable after the effective date of the Plan, the
Company shall establish a trust fund (or amend an existing trust
fund) (the "Trust"). The Company shall calculate the amount of
an Eligible Participant's Supplemental Pension as of the date he
becomes an Eligible Participant. Each year thereafter, the
Company shall contribute an amount that it determines to be
sufficient to actuarially fund the Eligible Participant's
Supplemental Pension under this Plan. The Company shall review
such funding levels once a year as of January 1 and, if needed to
maintain the funding on a sound actuarial basis, increase or
decrease the level of such funding.
(b) The Trust shall be a "rabbi trust" and shall be
embodied in a trust agreement with an institutional trustee (the
"Trustee") as soon as practicable after the effective date of the
Plan. Supplemental Pensions shall be paid from the funds in the
"rabbi trust" by the Trustee to the extend not paid by the
Company. The Trustee shall establish an account (an "Account")
for this SERP to which shall be credited annually, the Company's
total contribution to be made pursuant to paragraph 4(a) of this
Section 4. The Account shall be credited with interest as
earned, including realized and unrealized investment gains and
<PAGE>
losses. The establishment of the Account is solely for
accounting and funding purposes and shall not otherwise restrict
the use of the funds in the Trust.
5. Benefits Upon Termination of Employment Prior to Age 62
If an Eligible Participant terminates employment for any
reason before the Eligible Participant attains age 62, no
benefits under this Plan shall be paid to the Eligible
Participant.
6. Employment Rights
Nothing in this Plan shall confer upon a Participant the
right to continue in the employ of the Company or affect any
right the Company may have to terminate the Participant's
employment.
7. Assignment
Except as otherwise provided in this Paragraph 7, this Plan
shall inure to the benefit of and be binding upon the Company,
its successors and assigns, and to the Participant and his heirs,
executors, administrators and legal representatives. The
Participant's rights under this Plan shall not be assignable by
the Participant, and, without his written consent, the Company's
liabilities under the Plan shall be assignable by the Company
only to any corporation or other entity resulting from the
reorganization, merger or consolidation of the Company with any
other corporation or entity or any corporation or entity to which
the Company may sell all or substantially all of its business
and/or assets. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of its business and/or
assets, by agreement in form and substance satisfactory to the
Eligible Participant to expressly assume and agree to perform its
liability to such Eligible Participant under the Plan in the same
manner and to the same extent that the Company would be required
to perform it if no such succession had taken place. As used in
the Plan, "the Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets which
executes and delivers the agreement provided for in this
Paragraph 7 or which otherwise becomes bound by all the terms and
provisions of the Plan by operation of law.
8. Amendment and Termination
The Board may amend, supersede or terminate the Plan at any
time. Each Eligible Participant shall be entitled to receive upon
termination of employment at or after age 62 all benefits that an
Eligible Participant has accrued as of the date the Plan is
amended, superseded or terminated.
9. Severability
The provisions of this Plan are severable. If any provision
<PAGE>
of this Plan shall be held invalid or unenforceable, such
invalidity of unenforceability shall not affect or render invalid
or unenforceable any other provision of this Plan, and the Plan
shall be carried out as if such invalid or unenforceable
provision were not contained herein.
10. Headings; Rules of Construction
Paragraph headings are used herein for convenience of
reference only and shall not affect the meaning of any provision
of the Plan. Whenever the context so requires, the use of the
masculine gender shall be deemed to include the feminine and vice
versa, and the use of the singular shall be deemed to include the
plural and vice versa.
11. Governing Law
This Plan shall be governed by and construed in accordance
with the laws of the State of Connecticut.
