-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, hOCShW3168bTDWdYpglpYIqr3DpNsLfSOrMCOuMzkGV3K6pxyF2fTaxMCfxepxHs 4A6SA/H5dLA5ioB3dHNI1g== 0000310103-94-000012.txt : 19940208 0000310103-94-000012.hdr.sgml : 19940208 ACCESSION NUMBER: 0000310103-94-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT ENERGY CORP CENTRAL INDEX KEY: 0000310103 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 060869582 STATE OF INCORPORATION: CT FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 34 SEC FILE NUMBER: 001-08369 FILM NUMBER: 94504732 BUSINESS ADDRESS: STREET 1: 855 MAIN STREET CITY: BRIDGEPORT STATE: CT ZIP: 06604 BUSINESS PHONE: 2033828111 MAIL ADDRESS: STREET 1: 855 MAIN ST STREET 2: 855 MAIN ST CITY: BRIDGEPORT STATE: CT ZIP: 06604 10-Q 1 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. 1 PART 1. FINANCIAL INFORMATION CONNECTICUT ENERGY CORPORATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share) (Unaudited)
Three Months Ended Twelve Months Ended December 31, December 31, ------------------- -------------------- 1993 1992 1993 1992 ---- ---- ---- ---- 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 _________ _________ _________ _________
See Notes to Consolidated Financial Statements on page 6. 2 CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
Dec. 31, Sept. 30, Dec. 31, 1993 1993 1992 --------- --------- --------- (Unaudited) (Unaudited) 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 ======= ======= =======
See Notes to Consolidated Financial Statements on page 6. 3 CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
Dec. 31, Sept. 30, Dec. 31, 1993 1993 1992 --------- --------- --------- (Unaudited) (Unaudited) 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 ======= ======= =======
See Notes to Consolidated Financial Statements on page 6. 4 CONNECTICUT ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Three Months Ended Twelve Months Ended December 31, December 31, ------------------ ------------------- 1993 1992 1993 1992 ---- ---- ---- ---- 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
See Notes to Consolidated Financial Statements on page 6. 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 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: 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. 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. 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. 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 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, 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 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 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. 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 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 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. 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 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 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 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. 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. 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 EX-1 2 EXHIBIT 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 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 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 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. -----END PRIVACY-ENHANCED MESSAGE-----