SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 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)
(800) 760-7776
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
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 6, 1998
- -------------------------- -------------------------------
Common Stock, $1 par value 10,230,431
<TABLE>
PART 1. FINANCIAL INFORMATION
CONNECTICUT ENERGY CORPORATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share)
(Unaudited)
<CAPTION>
<S> <C> <C>
Three Months Ended
Dec. 31,
----------------------
1997 1996
---- ----
Operating Revenues............................................ $ 76,507 $ 74,873
Purchased gas................................................. 42,476 40,309
--------- ---------
Gross margin.................................................. 34,031 34,564
Operating Expenses:
Operations.................................................. 12,789 13,148
Maintenance................................................. 938 915
Depreciation................................................ 4,240 3,911
Federal and state income taxes.............................. 4,496 3,353
Municipal, gross earnings and other taxes................... 2,202 4,231
--------- ---------
Total operating expenses...................................... 24,665 25,558
--------- ---------
Operating income.............................................. 9,366 9,006
Other (income) deductions, net................................ (57) 264
Interest Expense:
Interest on long-term debt and amortization
of debt issue costs....................................... 3,068 3,082
Other interest, net......................................... 189 251
--------- ---------
Total interest expense........................................ 3,257 3,333
--------- ---------
Net Income.................................................... $ 6,166 $ 5,409
========= =========
Net income per share - Basic.................................. $ 0.64 $ 0.60
========= =========
Net income per share - Diluted................................ $ 0.64 $ 0.60
========= =========
Dividends paid per share...................................... $ 0.33 $ 0.33
========= =========
Weighted average common shares outstanding
during period - Basic....................................... 9,617,544 9,016,065
--------- ---------
Weighted average common shares outstanding
during period - Diluted..................................... 9,669,791 9,016,065
--------- ---------
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
<CAPTION>
<S> <C> <C>
Dec. 31, Sept. 30,
1997 1997
--------- ---------
(Unaudited)
Assets
- ------
Utility Plant:
Gross utility plant........................................ $404,953 $399,675
Less: accumulated depreciation............................ 134,396 130,553
-------- --------
Net utility plant.......................................... 270,557 269,122
Nonutility property, net..................................... 4,036 3,343
-------- --------
Net utility plant and other property......................... 274,593 272,465
-------- --------
Current Assets:
Cash and cash equivalents.................................. 7,133 6,644
-------- --------
Accounts receivable........................................ 50,490 32,127
Less: allowance for doubtful accounts................... 2,940 2,948
-------- --------
Net accounts receivable.................................. 47,550 29,179
-------- --------
Accrued utility revenues, net.............................. 7,691 2,541
Unrecovered purchased gas costs............................ 8,266 5,523
Inventories................................................ 13,931 12,606
Prepaid expenses........................................... 1,532 4,067
-------- --------
Total current assets......................................... 86,103 60,560
-------- --------
Deferred Charges and Other Assets:
Unamortized debt expenses.................................. 5,979 6,038
Unrecovered deferred income taxes.......................... 42,925 42,929
Other...................................................... 43,951 42,289
-------- --------
Total deferred charges and other assets...................... 92,855 91,256
-------- --------
Total assets................................................. $453,551 $424,281
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
<CAPTION>
<S> <C> <C>
Dec. 31, Sept. 30,
1997 1997
--------- ---------
(Unaudited)
Capitalization and Liabilities
- ------------------------------
Common Shareholders' Equity:
Common Stock: authorized-20,000,000 shares, par value
$1 per share, issued and outstanding--10,227,063 shares;
9,172,468 shares............................................. $ 10,227 $ 9,172
Capital in excess of par value............................... 118,564 94,540
Unearned Compensation........................................ (1,261) (1,068)
Retained earnings............................................ 45,093 42,297
Adjustment for minimum pension liability (net of
income taxes).............................................. (427) (427)
-------- --------
Total common shareholders' equity.............................. 172,196 144,514
-------- --------
Long-term debt................................................. 134,073 134,073
-------- --------
Total capitalization........................................... 306,269 278,587
-------- --------
Current Liabilities:
Short-term borrowings........................................ 25,900 31,400
Current maturities of long-term debt......................... 4,654 4,654
Accounts payable............................................. 16,109 12,609
Federal, state and deferred income taxes..................... 7,684 5,017
Other accrued taxes.......................................... 3,675 4,567
Interest payable............................................. 2,803 3,499
Customers' deposits.......................................... 1,878 1,718
Refunds due customers........................................ 3,456 2,627
Other........................................................ 4,362 3,892
-------- --------
Total current liabilities...................................... 70,521 69,983
-------- --------
Deferred Credits:
Deferred income taxes and investment tax credits............. 68,219 67,893
Other........................................................ 8,542 7,818
-------- --------
Total deferred credits......................................... 76,761 75,711
-------- --------
Total capitalization and liabilities........................... $453,551 $424,281
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
<S> <C> <C>
Three Months Ended
Dec. 31,
----------------------
1997 1996
---- ----
Net cash used by operating activities...................... $ (9,463) $(8,857)
-------- -------
Cash Flows from Investing Activities:
Capital expenditures..................................... (6,360) (5,924)
Contributions in aid of construction..................... 16 28
Payments for retirement of utility plant................. (47) (113)
Energy ventures.......................................... 327 ---
-------- -------
Net cash used by investing activities...................... (6,064) (6,009)
-------- -------
Cash Flows from Financing Activities:
Dividends paid on common stock........................... (3,370) (2,975)
Issuance of common stock................................. 24,886 616
(Decrease) Increase in short-term borrowings............. (5,500) 17,900
-------- -------
Net cash provided by financing activities.................. 16,016 15,541
-------- -------
Net increase in cash and cash equivalents.................. 489 675
Cash and cash equivalents at beginning of period........... 6,644 5,121
-------- -------
Cash and cash equivalents at end of period................. $ 7,133 $ 5,796
======== =======
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest................................................. $ 4,130 $ 4,223
Income taxes............................................. $ 1,500 $ ---
See Notes to Consolidated Financial Statements.
</TABLE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(Unaudited)
1. The unaudited consolidated financial statements presented herein should
be read in conjunction with the consolidated financial statements of
Connecticut Energy Corporation ("Connecticut Energy" or "Company") for the
fiscal year ended September 30, 1997 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.
In preparing the financial statements in conformity with generally accepted
accounting principles, the Company uses estimates. Estimates are disclosed
when there is a reasonable possibility for change in the near term. For this
purpose, near term is defined as a period of time not to exceed one year from
the date of the financial statements. The Company's financial statements
have been prepared based on management's estimates of the impact of regulatory,
legislative and judicial developments on the Company or significant groups of
its customers. The recorded amounts of certain accruals, reserves, deferred
charges and assets could be materially impacted if circumstances change which
affect these estimates.
2. The Company's principal subsidiary, The Southern Connecticut Gas Company
("Southern"), prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"), which requires a
cost-based, rate-regulated enterprise such as Southern to reflect the impact
of regulatory decisions in its financial statements. The Connecticut
Department of Public Utility Control's ("DPUC") actions through the ratemaking
process can create regulatory assets in which costs are allowed for ratemaking
purposes in a period other than the period in which the costs would be charged
to expense if the reporting entity were unregulated.
In the application of SFAS 71, Southern follows accounting policies that
reflect the impact of the rate treatment of certain events or transactions.
The most significant of these policies include the recording of deferred gas
costs, deferred conservation costs, deferred hardship heating customer
accounts receivable arrearages, deferred environmental evaluation costs and
an unfunded deferred income tax liability, with a corresponding unrecovered
asset, to account for temporary differences previously flowed through to
ratepayers.
Southern had net regulatory assets as of December 31, 1997 and September
30, 1997 of $64,426 and $63,606, respectively. These amounts are included in
deferred charges and other assets and deferred credits in the consolidated
balance sheets and are solely due to the application of the provisions of
SFAS 71.
Effective April 1, 1996, the DPUC deregulated the sale of natural gas to
firm commercial and industrial customers by giving these customers an option
to purchase natural gas from independent brokers or marketers. Commercial
and industrial customers electing to purchase natural gas in this manner pay
a DPUC-approved firm transportation rate to the local gas distribution company
("LDCs") for the use of its distribution system.
Southern is one of three Connecticut LDCs whose firm transportation rates
are designed to provide the same margins earned from bundled services. Because
the new rates are margin neutral, there has not been any impact upon Southern's
ability to recover deferred costs through cost-based rate regulation. Firm
transportation rates have eliminated only the gas cost component of the rates
previously charged to these customers. The Company has not experienced any
adverse impact on its earnings or results of operations from this change in
rate structure. Additionally, the DPUC's initiatives for competition have not
been directed toward services for certain groups of customers, including
service to residential classes, which represent the majority of Southern's
total throughput and gross margin.
Management believes that Southern continues to meet the requirements of
SFAS 71 because Southern's rates for regulated services provided to its
customers are subject to DPUC approval; are designed to recover Southern's
costs of providing regulated services and continue to be subject to cost-of-
service based rate regulation by the DPUC.
3. Due to the seasonal nature of gas sales for space heating purposes by
Southern, the results of operations for the three months ended December 31,
1997 are not indicative of the results to be expected for the fiscal year
ending September 30, 1998.
4. Deferred charges and other assets include amounts related to the following:
Dec 31, Sept. 30,
As of 1997 1997
- -----------------------------------------------------------------------------
Conservation costs $ 5,032 $ 4,881
Energy assistance funding shortfall 732 882
Environmental evaluation costs 668 718
Gas holder costs 246 308
Hardship heating customer accounts receivable arrearages 13,657 13,439
Hardship heating customer assistance grant program 2 634
Investment in energy ventures 2,458 3,418
Nonqualified benefit plans 2,451 2,302
Prepaid pension and postretirement medical contributions 15,047 13,228
Other 3,658 2,479
------- -------
$43,951 $42,289
======= =======
Southern has been allowed to recover various deferred charges in rates over
periods ranging from three to five years in accordance with the DPUC's Decision
in Southern's latest rate case.
5. Deferred credits include amounts related to the following:
Dec. 31, Sept. 30,
As of 1997 1997
- -----------------------------------------------------------------------------
Economic development initiatives $1,337 $1,339
Insurance reserves 1,363 1,122
Interruptible margin sharing 870 877
Nonqualified benefit plans 3,110 2,961
Other 1,862 1,519
------ ------
$8,542 $7,818
====== ======
6. Southern has identified coal tar residue at three sites in Connecticut
resulting from 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. See section in
Management's Discussion and Analysis entitled "Environmental Matters" for
further detail.
7. Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement establishes standards for the computation and presentation of
earnings per share ("EPS") by all entities with publicly held common stock or
potential common stock. The statement replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures. The sole difference between basic and
diluted EPS relates to the common shares granted under the Company's
restricted stock award plan.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and its
subsidiaries and their representatives may, from time to time, make written or
oral statements, including statements contained in the Company's filings with
the Securities and Exchange Commission and in its annual report to shareholders,
including its Form 10-K for the fiscal year ended September 30, 1997 and this
quarterly report on Form 10-Q, which constitute or contain "forward-looking"
information as that term is defined in the Private Securities Litigation
Reform Act of 1995.
All statements other than the financial statements and other statements of
historical facts included in this quarterly report regarding the Company's
financial position and strategic initiatives and addressing industry
developments are forward-looking statements. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief
as to future results, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that
the statement of expectation or belief will result or be achieved or
accomplished. Factors which could cause actual results to differ materially
from those stated in the forward-looking statements may include, but are
not limited to, general and specific economic, financial and business
conditions; federal and state regulatory, legislative and judicial
developments which affect the Company or significant groups of its customers;
the impact of competition on the Company's revenues; fluctuations in weather
from normal levels; changes in development and operating costs; the
availability and cost of natural gas; the availability and terms of capital;
exposure to environmental liabilities; the costs and effects of unanticipated
legal proceedings; the successful implementation and achievement of internal
performance goals; the impact of unusual items resulting from ongoing
evaluations of business strategies and asset valuations; and changes in
business strategy.
RESULTS OF OPERATIONS
Net Income
- ----------
Connecticut Energy Corporation's ("Connecticut Energy" or "Company")
consolidated net income for the three months ended December 31, 1997 and 1996
is detailed below:
Three Months Ended
December 31,
------------------
(in thousands, except per share) 1997 1996
---- ----
Net Income $6,166 $5,409
====== ======
Net income per share - Diluted $ 0.64 $ 0.60
====== ======
Weighted average common shares outstanding - Diluted 9,670 9,016
------ ------
Net income for the three months ended December 31, 1997 increased
approximately 14% compared to the three months ended December 31, 1996
principally due to lower total operating expenses as well as higher
non-operating income.
Total Sales and Transportation Volumes
- --------------------------------------
Total volumes of gas sold and transported by the Company's principal
subsidiary, The Southern Connecticut Gas Company ("Southern"), for the three
months ended December 31, 1997 were 11,001 MMcf, a decrease of approximately
7% compared to the corresponding 1996 period. This decrease was primarily
attributable to lower on-system interruptible sales and off-system
transportation volumes and was partially offset by higher firm transportation
and off-system sales volumes.
Firm Sales and Transportation Volumes
- -------------------------------------
Firm sales and transportation volumes for the three months ended
December 31, 1997 increased approximately 3% compared to the corresponding
1996 period. The increase was primarily due to service under Southern's firm
transportation tariffs, growth in Southern's customer base and the conversions
of nonheating customers to heating customers.
Interruptible Sales and Transportation Volumes
- ----------------------------------------------
Margins earned on volumes delivered to interruptible customers vary
depending upon the relationship of the market price for alternate fuels to
the cost of natural gas and related transportation. Margins earned, net of
gross earnings tax, from on-system interruptible services in excess of an
annual target were allocated through a margin sharing mechanism between
Southern and its firm customers. Beginning June 1, 1996, excess on-system
margins earned that would have been returned to Southern's firm customers
have been redirected, with Connecticut Department of Public Utility Control
("DPUC") approval, to fund certain economic development and hardship
assistance programs. Off-system margins earned, net of gross earnings tax,
continue to be shared between Southern and its firm customers.
The chart below depicts volumes of gas sold to and transported for on-system
interruptible customers, off-system sales volumes and off-system transportation
volumes under a special contract with The Connecticut Light and Power Company
for its Devon electric generating station as well as gross margins earned and
retained due to the margin sharing mechanism on these services for the three
months ended December 31, 1997 and 1996:
Three Months Ended
December 31,
------------------
(dollars in thousands) 1997 1996
---- ----
Gross margin earned $2,398 $3,396
====== ======
Gross margin retained $ 699 $1,072
====== ======
Volumes sold and transported (MMcf) 3,950 4,961
------ ------
Gross margin retained represents the difference between gross margin earned
and margin to be allocated through the margin sharing mechanism. Gross margin
earned and retained by Southern was lower for the three months ended
December 31, 1997 compared to the corresponding 1996 period principally due
to the competitive price of other energy sources compared to natural gas.
Volumes for the three months ended December 31, 1997 were lower compared to
the corresponding 1996 period primarily because of decreases in on-system
interruptible sales and off-system transportation volumes due to the reason
previously mentioned. An increase in off-system sales activity partially
offset this decrease.
Gross Margin
- ------------
The Company's gross margin for the three months ended December 31, 1997 was
approximately 2% lower compared to the corresponding 1996 period. This
decrease was principally attributed to slightly lower firm and interruptible
margins earned by Southern.
Southern's firm rates include a Weather Normalization Adjustment clause
("WNA") which allows Southern to charge or credit the non-gas portion of its
firm rates to reflect deviations from normal weather. Because weather during
the three months ended December 31, 1997 was approximately 6% colder than
normal, the operation of the WNA returned approximately $1,475,000 to firm
customers. This compares to a return to firm customers during the three
months ended December 31, 1996 of approximately $50,000.
Southern's firm sales rates include a Purchased Gas Adjustment clause
("PGA") which allows Southern to flow back to its customers, through periodic
adjustments to amounts billed, increased or decreased costs incurred for
purchased gas compared to base rate levels without affecting gross margin.
The operation of Southern's PGA increased revenues and gas costs for the
three months ended December 31, 1997 and 1996 by approximately $4,516,000 and
$1,286,000, respectively.
Operations Expense
- ------------------
Operations expense for the three months ended December 31, 1997 decreased
approximately 3% compared to the corresponding 1996 period primarily due to
lower expense for labor, lower amortizations related to Southern's certified
hardship forgiveness program due to the conclusion of the amortization period
as of December 31, 1996 and lower pension costs. Partially offsetting the
impact of these decreases were increased costs related to outside services,
regulatory commission expense and certain other general and administrative
expenses.
Depreciation Expense
- --------------------
Depreciation expense for the three months ended December 31, 1997 increased
approximately 8% compared to the corresponding 1996 period. The increase was
primarily due to additions to plant in service by Southern.
Federal and State Income Taxes
- ------------------------------
The total provision for federal and state income taxes for the three months
ended December 31, 1997 increased approximately 34% compared to the
corresponding 1996 period. This increase was primarily due to higher pre-tax
income. Additionally, the tax treatment of conservation expenditures,
uncollectibles and the inability to make tax-deductible employee benefit plan
contributions contributed to the increase.
Municipal, Gross Earnings and Other Taxes
- -----------------------------------------
Municipal, gross earnings and other taxes decreased approximately 48% for
the three months ended December 31, 1997 compared to the corresponding 1996
period. This was primarily due to the DPUC Decision which required Southern to
change its accounting treatment for accruing property taxes. See section
entitled "Regulatory Matters" for further detail.
Other (Income) Deductions, Net
- ------------------------------
Other income for the three months ended December 31, 1997 was higher
compared to the corresponding 1996 period primarily due to the contribution
to earnings by one of the Company's nonutility subsidiaries in the 1997
quarter compared to a net loss in the 1996 quarter and an increase in
investment income related to nonqualified employee benefit plans.
Interest Expense
- ----------------
Total interest expense decreased approximately 2% for the three months ended
December 31, 1997 compared to the corresponding 1996 period primarily due to
higher interest income on unrecovered purchased gas costs. The increase in
interest income was partially offset by higher interest expense on margin
sharing balances.
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 capital
expenditure programs and other corporate purposes, Connecticut Energy and
Southern have credit lines with a number of banks as detailed below:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Shared
Connecticut Connecticut
Energy Southern Energy/Southern Total
- -----------------------------------------------------------------------------------------------------
As of December 31, 1997:
Committed lines $5,000,000 $32,000,000 --- $37,000,000
Uncommitted lines --- $10,000,000 $10,000,000 $20,000,000
</TABLE>
Effective January 1, 1998, Connecticut Energy and Southern entered into an
agreement with one bank for a shared committed line of credit in the amount of
$20,000,000, replacing an existing line that expired on December 20, 1997. The
new agreement extends the credit line term until December 31, 1998, and the
initial term may be extended from year to year thereafter dependent upon the
operating cash requirements of the Company and its subsidiary and approval by
the bank. At December 31, 1997, the Company had unused lines of credit of
$31,100,000. 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.
Operating cash flows for the three months ended December 31, 1997 compared
to the corresponding 1996 period were negatively impacted by higher accounts
receivable balances and a smaller comparative increase in accounts payable
balances. Also contributing to the reduction in operating cash flows in the
1997 period was a decrease in liabilities related to margins earned which are
used to fund certain economic development initiatives in Bridgeport and to
provide grants to customers to reduce Southern's hardship assistance balances.
The increase in cash requirements in the 1997 period was partially offset by
a lower comparative increase in unrecovered purchased gas costs balances in
contrast to the three months ended December 31, 1996.
Investing Activities
- --------------------
Capital expenditures approximated $6,344,000 and $5,896,000 for the three
months ended December 31, 1997 and 1996, respectively. On an annual basis,
Southern relies upon cash flows from 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
- --------------------
In November 1997, the Company completed a public sale of 1,035,000 shares of
its common stock at a price of $24.25 per share and received net proceeds of
approximately $24,224,000. The proceeds of this sale were used for the
repayment of Southern's short-term debt. The method, timing and amounts of
any future financings by the Company or its subsidiaries will depend on a
variety of factors, including capitalization ratios, coverage ratios,
interest costs, the state of the capital markets and general economic
conditions.
Regulatory Matters
- ------------------
In October 1997, Southern requested that the DPUC consider a proposed
change in Southern's accounting treatment for property taxes, which would
account for such taxes as a prepaid expense. This method is consistent with
the practice of other major public service companies in Connecticut.
Southern had been accruing for property taxes in the year prior to the
payment date. On November 19, 1997, under the reopened Docket No. 93-03-09,
Application of The Southern Connecticut Gas Company to Increase Its Rates
and Charges, the DPUC approved Southern's proposal. The stipulations in the
Decision ordered Southern to reduce its reserve for property taxes by
approximately $3,722,000, with fifty percent, or approximately $1,861,000,
flowing through as a one-time reduction to property tax expense and the
remaining fifty percent to be refunded to firm customers through the
operation of the PGA in three equal amounts during the second quarter of
fiscal 1998.
In accordance with Connecticut statutes, Southern is undergoing a periodic
review of rates and services by the DPUC that commenced in January 1998. A
periodic review entails a complete review by the DPUC of Southern's financial
and operating records. Public hearings will be held to determine whether
Southern's current rates are unreasonably discriminatory or more or less than
just, reasonable and adequate. Management cannot predict the financial or
operational impact of any decision which may result from this review.
One of the Company's nonutility subsidiaries, CNE Energy Services Group
("CNE Energy"), has received approval for a Certificate of Public Convenience
and Necessity from the Federal Energy Regulatory Commission ("FERC"). The
certificate would allow CNE Energy to operate the liquefied natural gas
facility, which is currently part of Southern's regulated operations, as a
storage and peaking plant for CNE Energy's customers. The original partner
for the venture, PanEnergy Plus Milford Ventures Company, has found this
relationship is no longer consistent with its business strategies. As a
result, CNE Energy expects to announce a new venture partner within the next
few months. CNE Energy will be filing tariffs with the FERC and waiting for
its approval before operating the plant.
Environmental Matters
- ---------------------
Southern has identified coal tar residue at three sites in Connecticut
resulting from 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
residue 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 ("DEP") and the United States Environmental
Protection Agency of the presence of coal tar residue at the sites. On
November 9, 1994, the DEP informed Southern that it had performed a
preliminary review of the information provided to it by Southern and had
determined that, based on current priorities and limited staff resources, a
comprehensive review of site conditions and subsequent participation by the
DEP "are not possible at this time."
On September 8, 1997, Southern received a letter from the DEP informing it
that the three sites had been entered on the Connecticut Inventory of Hazardous
Waste Sites. The letter states that the site located on Pine Street in
Bridgeport, Connecticut may be of particular interest to the state of
Connecticut because of its proximity to the Connecticut Department of
Transportation expansion project of the U.S. Highway Route Number 95
Corridor. Placement of the sites on the Inventory of Hazardous Waste Sites
means that the DEP may pursue remedial action pursuant to the Connecticut
General Statutes.
Each site is located in an area that permits Southern to voluntarily
perform any remedial action. Connecticut law also allows Southern to retain
a Licensed Environmental Professional to conduct further environmental
assessments and, if necessary, to develop remedial action plans in accordance
with Connecticut Remediation Standard Regulations. Southern intends to
confer with officials of the DEP and the Department of Transportation to
establish priorities in connection with the environmental assessments.
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. While such future analytical and cleanup costs could possibly be
significant, management believes, based upon the provisions of the Partial
Settlement in Southern's most recent rate order and regulatory precedent with
other local gas distribution companies in Connecticut, that Southern will be
able to recover these costs through its customer rates. Although the method,
timing and extent of any recovery remain uncertain, management currently does
not expect that the incurrence of such costs will materially adversely impact
the Company's financial condition or results of operations.
PART II- OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 10 - Executive Compensation Plans and Arrangements
The Southern Connecticut Gas Company Board of Directors Retirement
Plan, effective October 1, 1997, is filed herewith at pages 20 to 23.
Exhibit 27 - Financial Data Schedule
Submitted only in electronic format to the Securities and Exchange
Commission.
(b) Reports on Form 8-K:
Form 8-K, dated November 12, 1997, concerning the Company's fiscal
1997 results of operations was filed with the Commission on
November 12, 1997.
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 13, 1998 /s/ Vincent L. Ammann, Jr.
----------------- -----------------------------
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer
THE SOUTHERN CONNECTICUT GAS COMPANY
BOARD OF DIRECTORS RETIREMENT PLAN
The retirement plan set forth herein is known as The Southern
Connecticut Gas Company Board of Directors Retirement Plan (the "Plan").
The Plan shall be effective October 1, 1997 and shall continue in effect
until amended, superseded or terminated as provided for herein.
1. Definitions: The following terms when used in this Plan with initial
capital letters shall have the meanings assigned to them below:
(a) "Annual Retainer" means the annual retainer payable to members of the
Board of Directors during the Plan Year in which the Eligible Director
retires from membership on the Board of Directors.
(b) "Change in Control" of the Company shall be deemed to have occurred if:
(i) Less than 2/3 of the total membership of the Board of Directors
of the Company shall be Continuing Directors; or
(ii) The shareholders of the Company shall approve a merger or
consolidation of the Company or a plan of complete liquidation
of the Company or an agreement for the sale or disposition by
the Company of all or substantially all of the Corporation's
assets.
In connection with this definition of "Change in Control," the
capitalized terms in the definition are defined as follows:
(a) "Acquiring Person" means any Person who is or becomes a
"beneficial owner" as defined in Rule 13d-3 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") of 20% of the voting
securities of the Company; (b) "Affiliate" and "Associate" shall have
the meanings ascribed to such terms in Rule 12b-2 of the General Rules
and Regulations under the Exchange Act; (c) "Continuing Director" means
any member of the Board of Directors of the Company who was a member
of the Board on October 1, 1997 and any successor of that Continuing
Director while such successor is a member of the Board of Directors of
the Company and who is not an Acquiring Person or an Affiliate or
Associate of any Acquiring Person and who is elected to succeed the
Continuing Director by a majority of the Continuing Directors; and
(d) "Person" shall have the meaning assigned to it in Section 13(d)
and 14(d) of the Exchange Act.
(c) "Code" means the Internal Revenue Code of 1954, as amended. All
references to any section of the Code shall be deemed to refer not only
to such section but also to any amendment thereof and any successor
statutory provision.
(d) "Company" means The Southern Connecticut Gas Company and any person,
firm or corporation which may succeed to the business of the Company
by merger, consolidation or otherwise and which, by appropriate action,
shall adopt the Plan.
(e) "Effective Date" means October 1, 1997.
(f) "Eligible Director" means a member of the Board of Directors of the
Company eligible to receive payments in accordance with the terms of
the Plan.
(g) "Plan" means The Southern Connecticut Gas Company Board of Directors
Retirement Plan and as it may hereafter be amended.
(h) "Plan Year" means the fiscal year October 1 - September 30.
(i) "Retirement Date" means the date on which the Eligible Director retires
from the Board of Directors of the Company.
2. Eligibility: If an individual, duly elected to the Board of Directors of
the Company, receives a retainer as a Director for ten (10) full years, has
attained the age of at least 60 and is sitting as a Director at his or her
Retirement Date, such individual shall be an Eligible Director entitled to
retire and receive payments in accordance with the terms of this Plan.
3. Payments: An Eligible Director shall receive an annual payment, payable
in monthly installments commencing on the first day of the month following
his or her Retirement Date, of an amount equal to the Annual Retainer
payable to Directors during the Plan Year in which the Eligible Director
retires; provided, however, that in no case shall the retiring Eligible
Director be paid an annual payment in excess of the Annual Retainer paid
to such Director during the Plan Year in which such Director attained the
age of 65. Such retirement payments shall continue for a period of ten
(10) years from his or her Retirement Date or the life of the Eligible
Director, whichever is shorter. If a Director dies before payments under
this Plan are to be made, the Director's estate shall have no claim on any
amounts accrued for such Director.
4. Accrual of Payments, Funding and Trust Accounting: The Company shall accrue
on a monthly basis the total amount of the monthly payments to be paid to
Eligible Directors calculated on the net present value due and owing to each
Eligible Director. Such amounts shall be a credit to a special account on
the Company's books designated "Directors' Retirement Account."
The Company shall not be required to fund or otherwise segregate assets for
the payments to Eligible Directors. Notwithstanding the foregoing, the
Company shall establish a trust fund (or amend an existing trust fund) (the
"Trust"). The Company shall contribute an amount that it determines to be
sufficient to actuarially fund the Eligible Directors' monthly payments
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 funding. The Trust shall be a
"rabbi trust" and shall be embodied in a trust agreement with an
institutional trustee (the "Trustee"). Payments to Eligible Directors
shall be paid from the funds in the "rabbi trust" by the Trustee to the
extent not paid by the Company. The Trustee shall establish an account
(an "Account") for this Plan to which shall be credited annually the
Company's total contribution to be made pursuant to this Section 4.
The account shall be credited with interest as earned, including realized
and unrealized investment gains and 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. The Trust may
contain funds contributed to the Directors Retirement Plan that
became effective on October 1, 1992.
5. Directors' Contributions: This Plan is a non-contribution retirement plan.
6. Qualification of Plan: This Plan is a non-qualified plan as defined in
Sections 401(a) and 501(a) of the Code.
7. Restrictions on Transfers: No Eligible Director shall assign, transfer or
pledge any right or claim which such Eligible Director may have under this
Plan.
8. Successors to Company: This Plan shall inure to the benefit of and be
enforceable by a Director, his or her heirs, executors, administrators,
successors and assigns. This Plan shall be binding upon the Company and
its successors and assigns. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of its business and/or assets
expressly to assume all obligations under the Plan and agree to administer
and make all payments under the Plan in accordance with its terms.
9. Accounting: The Company, at no cost to Eligible Directors, shall annually,
or at other times deemed appropriate by the Company's management, retain
the services of counsel, independent accountants and actuaries to assure
that the accounting accruals are consistent with the terms of this Plan
and applicable laws. To the extent permitted by law, the Company shall be
entitled to rely upon all tables, valuations, certificates, opinions and
reports furnished by any actuary, accountant, counsel or other person(s)
employed or engaged for such purposes.
10. Expenses of Administration: All expenses that shall arise in connection
with the administration of the Plan including, but not limited to, the
compensation of any actuary, accountant, counsel, other experts or other
person who shall be appointed by the Company in connection with the
administration thereof, shall be paid by the Company.
11. Amendment: Prior to a Change in Control of the Company, the Company
reserves the right to amend, modify, suspend or terminate the Plan by
action of its Board of Directors, provided, however, that no such action
shall operate to recapture for the Company any payments previously made
to an Eligible Director under the Plan, nor, except to the extent
necessary to meet the requirements of any governmental authority, to
deprive an Eligible Director of any benefit due such Eligible Director
under the Plan. After the occurrence of a Change of Control, this Plan
may not be amended in any way that would adversely affect or deprive an
Eligible Director of benefits under the Plan.
12. Notices: Any notices required or permitted to be given under this Plan
shall be in writing and shall be deemed to have been given when
delivered, or when mailed, if mailed by registered or certified mail,
return receipt requested to the respective addresses of the Company and
Eligible Director or to such other address as any party hereto shall
designate to the other party in writing.
13. Severability: The provisions of the Plan are severable. The invalidity
or unenforceability of any provision of the Plan shall not affect the
validity or enforceability of any other provision.
14. Governing Law: This Plan shall be governed by and interpreted in
accordance with the substantive of laws of the State of Connecticut, except
as any such laws may be preempted by federal law.
15. Prior Director Retirement Plan: This Plan supersedes and replaces the
Company's Board of Directors Retirement Plan that became effective on
October 1, 1992.
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