-----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, N/6fe/GU406YQI4zD1VBWeoRvS0x8TsbZyO4ZY5hSlsbyRMijmsH5TgrWH6fE1MT M2rdy6NA3at61zfF0E4fyQ== 0000310103-94-000035.txt : 19940817 0000310103-94-000035.hdr.sgml : 19940817 ACCESSION NUMBER: 0000310103-94-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 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: 1934 Act SEC FILE NUMBER: 001-08369 FILM NUMBER: 94543344 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 June 30, 1994 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File No. 1-8369 CONNECTICUT ENERGY CORPORATION (Exact name of registrant as specified in its charter) Connecticut 06-0869582 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 855 Main Street Bridgeport, Connecticut 06604 (Address of principal executive offices) (Zip Code) (203) 579-1732 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 3, 1994 Common Stock, $1 par value 8,663,279 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 Nine Months Ended Twelve Months Ended June 30, June 30, June 30, ------------------ ----------------- ------------------- 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- Operating Revenues..................... $ 36,835 $ 33,779 $ 215,387 $ 189,555 $ 238,594 $ 211,902 Purchased gas.......................... 16,704 17,256 114,659 101,648 126,056 111,741 --------- --------- --------- --------- --------- --------- Gross margin........................... 20,131 16,523 100,728 87,907 112,538 100,161 Operating Expenses: Operations........................... 11,741 9,585 38,066 31,780 47,617 42,245 Maintenance.......................... 954 974 3,174 2,861 4,005 3,773 Depreciation and depletion........... 3,269 3,018 9,746 9,031 12,766 11,834 Federal and state income taxes....... (1,147) (1,470) 9,041 6,731 6,131 2,843 Municipal, gross earnings and other taxes........................ 3,535 3,501 14,120 13,124 16,693 15,710 --------- --------- --------- --------- --------- --------- Total operating expenses............... 18,352 15,608 74,147 63,527 87,212 76,405 --------- --------- --------- --------- --------- --------- Operating income....................... 1,779 915 26,581 24,380 25,326 23,756 Other deductions, net.................. 125 124 372 395 487 560 Interest Expense and Preferred Stock Dividends: Interest on long-term debt and amortization of debt issue costs... 2,727 2,531 8,191 7,376 10,760 9,619 Other interest and preferred stock dividends, net..................... 265 527 605 1,328 894 1,815 --------- --------- --------- --------- --------- --------- Total interest expense and preferred stock dividends...................... 2,992 3,058 8,796 8,704 11,654 11,434 --------- --------- --------- --------- --------- --------- Net (Loss) Income...................... $ (1,338) $ (2,267) $ 17,413 $ 15,281 $ 13,185 $ 11,762 ========= ========= ========= ========= ========= ========= Net (loss) income per share............ $ (0.16) $ (0.31) $ 2.19 $ 2.08 $ 1.68 $ 1.61 ========= ========= ========= ========= ========= ========= Dividends paid per share............... $ 0.325 $ 0.32 $ 0.965 $ 0.96 $ 1.285 $ 1.28 --------- --------- --------- --------- --------- --------- Weighted average number of common shares outstanding during period..... 8,589,334 7,408,961 7,955,326 7,350,620 7,829,706 7,305,352 --------- --------- --------- --------- --------- ---------
See Notes to Consolidated Financial Statements on Page 6. 2 CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, Sept. 30, June 30, Assets 1994 1993 1993 - - ------ ----------- ---------- ----------- (Unaudited) (Unaudited) Utility Plant: Gross utility plant............................... $ 324,431 $ 313,951 $ 306,453 Less--accumulated depreciation.................... 97,529 92,151 89,799 --------- --------- --------- Net utility plant............................... 226,902 221,800 216,654 Nonutility property, net.......................... 2,586 9 9 --------- --------- --------- Net utility plant and other property................ 229,488 221,809 216,663 --------- --------- --------- Current Assets: Cash and cash equivalents......................... 5,918 2,214 6,738 --------- --------- --------- Accounts receivable............................... 41,363 22,654 38,049 Less--allowance for doubtful accounts............. 4,645 4,251 5,451 --------- --------- --------- Net accounts receivable............................. 36,718 18,403 32,598 --------- --------- --------- Accrued utility revenues, net..................... 2,494 2,307 1,640 Unrecovered purchased gas costs................... ---- 5,975 ---- Inventories....................................... 11,777 16,312 15,265 Prepaid expenses.................................. 1,974 1,565 1,613 --------- --------- --------- Total current assets................................ 58,881 46,776 57,854 --------- --------- --------- Deferred Charges: Unamortized debt expenses......................... 6,379 6,466 6,468 Recoverable future taxes.......................... 33,313 ---- ---- Other............................................. 29,107 24,744 20,692 --------- --------- --------- Total deferred charges.............................. 68,799 31,210 27,160 --------- --------- --------- Total assets........................................ $ 357,168 $ 299,795 $ 301,677 ========= ========= =========
See Notes to Consolidated Financial Statements on Page 6. 3 CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, Sept. 30, June 30, Capitalization and Liabilities 1994 1993 1993 - - ------------------------------ ----------- ---------- ----------- (Unaudited) (Unaudited) Common Shareholders' Equity: Common Stock--par value $1 per share: authorized--20,000,000 shares, issued and outstanding--8,654,850 shares; 7,488,467 shares; 7,446,615 shares.............. $ 8,655 $ 7,488 $ 7,446 Capital in excess of par value................................................... 84,352 62,808 61,853 Retained earnings................................................................ 39,143 29,665 36,283 Adjustment for minimum pension liability......................................... (108) (108) ---- --------- --------- --------- Total common shareholders' equity.................................................. 132,042 99,853 105,582 --------- --------- --------- Preferred Stock: The Southern Connecticut Gas Company Redeemable Preferred Stock: authorized-- 200,000 shares, par value $100 per share--4.75% cumulative series, issued and outstanding--0 shares; 6,500 shares; 6,500 shares.............................. ---- 650 650 authorized--600,000 shares, par value $1 per share, none issued Preference Stock: The Southern Connecticut Gas Company: authorized--1,000,000 shares, par value $1 per share, none issued Connecticut Energy Corporation: authorized--1,000,000 shares, par value $1 per share, none issued Preferred stock expense............................................................ ---- (12) (12) --------- --------- --------- Total preferred stock.............................................................. ---- 638 638 --------- --------- --------- Long-term debt..................................................................... 120,371 120,511 108,965 --------- --------- --------- Total capitalization............................................................... 252,413 221,002 215,185 --------- --------- --------- Current Liabilities: Short-term borrowings............................................................ 6,700 23,500 27,000 Current maturities of long-term debt............................................. 594 595 594 Accounts payable................................................................. 8,589 11,960 10,948 Refunds due customers............................................................ 3,387 1,964 2,142 Federal, state and deferred income taxes......................................... 10,006 3,634 6,682 Property and other accrued taxes................................................. 7,348 5,173 6,790 Interest payable................................................................. 2,264 2,916 2,187 Customer deposits................................................................ 1,951 2,058 2,083 Refundable purchased gas costs................................................... 1,850 ---- 4,637 Other accrued liabilities........................................................ 2,750 1,818 1,856 --------- --------- --------- Total current liabilities.......................................................... 45,439 53,618 64,919 --------- --------- --------- Deferred Credits: Deferred income taxes and investment tax credits................................. 52,217 17,814 17,858 Other deferred credits........................................................... 7,099 7,361 3,715 --------- --------- --------- Total capitalization and liabilities............................................... $ 357,168 $ 299,795 $ 301,677 ========= ========= =========
See Notes to Consolidated Financial Statements on Page 6. 4 CONNECTICUT ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended Twelve Months Ended June 30, June 30, ----------------- ------------------- 1994 1993 1994 1993 ---- ---- ---- ---- Net Cash Provided by Operating Activities: $ 24,339 $ 16,131 $ 21,462 $ 15,014 -------- -------- -------- -------- Cash Flows from Investing Activities: Capital expenditures................................ (17,334) (17,939) (25,531) (24,838) Proceeds from sale of headquarters property......... ---- 2,005 ---- 2,005 Proceeds from sale of subsidiary.................... ---- 180 ---- 180 Contributions in aid of construction................ 42 13 95 84 Payments for retirement of utility plant............ (541) (120) (697) (306) -------- -------- -------- -------- Net cash used in investing activities................. (17,833) (15,861) (26,133) (22,875) -------- -------- -------- -------- Cash Flows from Financing Activities: Dividends paid on common stock...................... (7,935) (7,074) (10,325) (9,370) Issuance of common stock............................ 22,711 4,769 23,708 6,108 Issuance of long-term debt.......................... ---- 15,000 12,000 15,000 Repayments of long-term debt........................ (140) (140) (594) (68) Redemption of preferred stock....................... ---- (50) ---- (50) Early redemption of preferred stock................. (638) ---- (638) ---- Decrease in short-term borrowings................... (16,800) (11,300) (20,300) (900) -------- -------- -------- -------- Net cash (used in) provided by financing activities... (2,802) 1,205 3,851 10,720 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.. 3,704 1,475 (820) 2,859 Cash and cash equivalents at beginning of period...... 2,214 5,263 6,738 3,879 -------- -------- -------- -------- Cash and cash equivalents at end of period............ $ 5,918 $ 6,738 $ 5,918 $ 6,738 ======== ======== ======== ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest............................................ $ 9,529 $ 8,980 $ 11,651 $ 11,150 Income taxes........................................ $ 2,065 $ 2,747 $ 2,065 $ 3,977
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 nine months ended June 30, 1994 are not indicative of the results to be expected for the full fiscal year. 3. Included in other deferred charges are amounts related to the deferral of certain hardship heating customer accounts receivable arrearages totalling $9,949,000, $6,894,000 and $6,873,000 at June 30, 1994, September 30, 1993 and June 30, 1993, respectively; the deferral of certain shortfalls in energy assistance funding related to the 1991/92 and 1992/93 heating seasons amounting to $2,790,000, $3,100,000 and $3,003,000 at June 30, 1994, September 30, 1993 and June 30, 1993, respectively; prepaid pension contributions of $6,355,000, $5,532,000 and $5,532,000 at June 30, 1994, September 30, 1993 and June 30, 1993, respectively, and an intangible pension asset of $3,652,000 at June 30, 1994 and September 30, 1993. 4. Included in other deferred credits are amounts related to a minimum pension liability totaling $3,816,000 at June 30, 1994 and September 30, 1993. 5. In addition to providing pension benefits, Southern provides certain health care and insurance benefits for retired employees. Southern's employees become eligible for those benefits if they reach age 55 and have completed at least 10 years of service. Prior to October 1, 1993, Southern 6 recognized the cost of providing these benefits in accordance with funding allowed in the Department of Public Utility Control's ("DPUC") 1990 rate decision. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" which requires accrual accounting for postretirement benefits during the employee's years of service with Southern. Please refer to Footnote 5 in the registrant's Form 10-Q for the period ended December 31, 1993 for additional information. 6. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 establishes financial accounting and reporting standards for deferred income taxes using an asset and liability approach. Please refer to Footnote 6 in the registrant's Form 10-Q for the period ended December 31, 1993 for additional information. 7. Southern has identified coal tar residue at three sites in Connecticut resulting from historic coal gasification operations conducted at those sites by Southern's predecessors from the late 1800s through the first part of this century. Many gas distribution companies throughout the country carried on such gas manufacturing operations during the same period. The coal tar discovered at Southern's three sites is not designated a hazardous material by any federal or Connecticut agency, but some of its constituents are classified as hazardous. On April 27, 1992, Southern notified the Connecticut Department of Environmental Protection and the United States Environmental Protection Agency of the presence of coal tar residue on the three sites. As a result of this notification, further discussions would address the extent and type of remedial action, if any, as well as the time period for such action. Because this process is at an early stage, management cannot at this time predict the costs of any future site analysis and remediation, if any, nor when such costs, if any, may be incurred. Such future analytical and cleanup costs could possibly be significant. Based upon the provisions of a DPUC approved Partial Settlement in Southern's most recent rate order, management believes that Southern will properly be able to recover the costs of investigation and remediation, if any, from its customers. The method, timing and extent of any 7 recovery remain uncertain, but management currently does not expect that the incurrence of such costs will have a material adverse effect on the Company's financial condition or results of operations. 8. In September 1993, Southern received notification of the results of audits by the City of New Haven pursuant to Connecticut's omitted property statute. The City of New Haven claimed that Southern owed approximately $2,600,000 in additional personal property taxes related to years 1990 through 1992; however, Southern was not aware of any audit finding of significant omissions of personal property required to be declared. Instead, the City of New Haven's claim was based on the assessor's retroactive reassessment of Southern's personal property. Southern initiated legal actions against the City of New Haven which alleged that, among other things, the City of New Haven had no statutory authority to issue tax bills based upon retroactive reassessments of previously declared property on which taxes were paid and that the City of New Haven's contingent fee agreement with the firm which audited Southern's records was illegal. Southern also instituted legal actions challenging the City of New Haven's assessment of Southern's personal property for the 1993 Grand List. On June 29, 1994, Southern and the City of New Haven entered into a Stipulation and Agreement ("Agreement") in settlement of these court actions. The Agreement provided for a $200,000 payment related to the tax years 1990 through 1992 without conceding liability on any of the issues involved; and a resolution of the disputed 1993 personal property assessment, which resulted in a reduction of the original 1993 assessment of approximately $1,500,000 to a new assessment of approximately $800,000. 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Income - - ---------- Connecticut Energy Corporation's ("Company") consolidated net income for the three, nine and twelve months ended June 30, 1994 and 1993 is detailed below:
Three Months Ended Nine Months Ended Twelve Months Ended June 30, June 30, June 30, ------------------ ----------------- ------------------- 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- (000s omitted) Net (Loss)Income $(1,338) $(2,267) $17,413 $15,281 $13,185 $11,762 ======= ======= ======= ======= ======= ======= Net (Loss)Income Per Share $ (0.16) $ (0.31) $ 2.19 $ 2.08 $ 1.68 $ 1.61 ======= ======= ======= ======= ======= ======= Weighted Average Shares Outstanding 8,589 7,409 7,955 7,351 7,830 7,305 ----- ----- ----- ----- ----- -----
Factors affecting the improved results for the three and nine month periods ended June 30, 1994 were the implementation of a 6.6% rate increase on December 9, 1993 by The Southern Connecticut Gas Company ("Southern") and Southern's ability to retain additional interruptible margins earned due to the changes in the annual margin sharing period and target made by the Department of Public Utility Control ("DPUC") in the recent rate decision for Southern. Partially offsetting these increases were higher operations expenses in the areas of uncollectibles, wages, which included some overtime costs due to the colder winter weather, employee benefit costs primarily due to the adoption of Statement of Financial Accounting Standards No. 106 ("SFAS 106"), depreciation, lease costs and increased taxes due to higher year-to-date pre-tax income and higher revenues. Earnings for the comparative nine month period ended June 30, 1993 were positively impacted by a regulatory decision of the DPUC wherein the DPUC allowed Southern to defer shortfalls in energy assistance from state and federal agencies. This decision allowed Southern to reduce significantly its provision for uncollectibles during the nine month period ended June 30, 1993. Results for the three and nine months ended June 30, 1994 were also affected by higher interest costs due to the issuance of $15,000,000 and 9 $12,000,000 in additional long-term debt in December 1992 and September 1993, respectively. The increase in long-term debt costs for both 1994 periods was offset by lower other interest costs. For the twelve months ended June 30, 1994, margins increased principally due to the recently implemented rate increase by Southern as well as the changes in the margin sharing year and target as previously discussed. Partially offsetting these increased margins were higher operations expenses in the areas of wages, uncollectibles, employee benefit costs principally due to the adoption of SFAS 106, lease costs and other general and administrative expenses, as well as higher depreciation expense, income and gross receipt taxes and long-term debt costs. The provision for income taxes for the fiscal year ended September 30, 1992 benefitted from a lower effective tax rate primarily due to the tax benefit associated with the premium paid by Southern for the repurchase of $52,750,000 of outstanding long term debt. This benefit positively impacted the provision for the twelve months ended June 30, 1993. Operating Revenues - - ------------------ The Company's operating revenues for the three, nine and twelve months ended June 30, 1994 were approximately 9%, 14% and 13% higher than the corresponding periods ended June 30, 1993. These increases are primarily due to the impact of a 6.6% increase in Southern's rates implemented on December 9, 1993, higher collections through the operation of Southern's Purchased Gas Adjustment Clause ("PGA"), colder weather for all 1994 periods, and the addition of more heating customers. In Southern's most recent rate proceeding, the DPUC approved the implementation of a Weather Normalization Adjustment ("WNA") under which the non-gas portion of Southern's firm rates is charged or credited monthly to reflect deviations from normal weather. The implementation of the WNA occurred in January of 1994. Since the weather for the quarter ended June 30, 1994 was 14% warmer than normal, the WNA stabilized Southern's margins by collecting approximately $900,000 from firm customers for the quarter ended June 30, 1994. For the nine months ended June 30, 1994, weather was approximately 4% colder than normal and Southern returned approximately $2,700,000 to firm customers through the operation of the WNA. 10 Firm Sales Volumes - - ------------------ The volumes of gas sold to firm customers by Southern for the three months ended June 30, 1994 decreased approximately 10% as compared to the corresponding 1993 period. This decrease was primarily due to a slightly lower use of gas per customer and a change in mix of business. The volumes of gas sold to firm customers by Southern for the nine and twelve months ended June 30, 1994 increased approximately 4% as compared to the corresponding 1993 periods. These increases were primarily attributable to weather being approximately 6% colder for the nine and twelve months ended June 30, 1994 than the corresponding 1993 periods and to increases in the number of heating customers. Interruptible Sales and Transportation Volumes - - ---------------------------------------------- The chart below depicts volumes of gas both sold to and transported for interruptible customers by Southern as well as gross margins earned and retained on these sales:
Three Months Ended Nine Months Ended Twelve Months Ended June 30, June 30, June 30, ------------------ ----------------- ------------------- 1994 1993 1994 1993 1994 1993 ---- ---- ---- ---- ---- ---- (000s omitted) Gross Margin Earned $1,437 $1,283 $4,712 $4,040 $6,231 $5,605 ====== ====== ====== ====== ====== ====== Gross Margin Retained $1,383 $ 976 $3,530 $1,826 $4,976 $3,316 ====== ====== ====== ====== ====== ====== Volumes Sold and Transported (MMcf) 1,499 1,256 5,151 4,680 6,767 6,727 ----- ----- ----- ----- ----- -----
Margins earned on volumes delivered to interruptible customers vary depending upon the relationship of the market price for alternate fuels to the cost of natural gas and related transportation. Additionally, margins earned, net of gross receipt taxes, from interruptible service in excess of an annual target are allocated through a margin sharing mechanism between firm customers and Southern. Margins earned and retained by Southern were higher for the three, nine and twelve months ended June 30, 1994 as compared to the corresponding 1993 periods. The increase in margins retained for all 1994 periods is principally attributable to the 11 change in the margin sharing year and an increase in the target margin level in accordance with the DPUC's latest rate order involving Southern. Purchased Gas Expense - - --------------------- Purchased gas expense for the nine and twelve month periods ended June 30, 1994 increased approximately 13% as compared to the corresponding 1993 periods due primarily to increased gas costs through operation of the PGA, a higher base cost of gas and higher firm sales volumes. In addition, gas costs were higher for the three, nine and twelve month periods ended June 30, 1994 due to the suspension of the flow-through of approximately $1,543,000 in gas cost credits until the DPUC issues a decision regarding the recovery mechanism for deferred transition costs. (See section entitled "FERC Order No. 636 Transition Costs".) Additionally, during the twelve months ended June 30, 1993, Southern recorded an increase in its purchased gas expense to recover approximately $3,287,000 of previously deferred take-or-pay, contract buy-out and contract buy-down costs in accordance with a DPUC decision. Operations Expense - - ------------------ Operations expense for the three, nine and twelve months ended June 30, 1994 increased 22%, 20% and 13%, respectively, as compared to the corresponding 1993 periods. For the three, nine and twelve month periods ended June 30, 1994, approximately 40%, 50% and 47% of these increases, respectively, are a result of a higher provision for uncollectible accounts. In December 1992, the DPUC allowed Southern to defer certain shortfalls in energy assistance funding from various state and federal agencies related to the 1991/92 and 1992/93 heating seasons. This DPUC decision positively impacted Southern's provision for uncollectible accounts for the three, nine and twelve months ended June 30, 1993. Southern has been allowed to recover these deferred costs as well as deferred costs associated with Southern's certified hardship forgiveness program beginning January 1, 1994 in accordance with the DPUC's latest rate decision. Accordingly, included in operating expenses for the three, nine and twelve months ended June 30, 1994 is approximately $747,000, 12 $1,493,000 and $1,493,000, respectively, relating to these amortizations. The remainder of these increases are due to higher employee benefit costs relating to the adoption and the current recovery of postretirement health care expenses accrued under SFAS 106, as well as increases in other operations expenses such as wages, lease costs, and general and administrative expenses. Maintenance Expense - - ------------------- Maintenance expense for the nine and twelve months ended June 30, 1994 increased approximately 11% and 6%, respectively, as compared to the same 1993 periods. These increases were primarily attributable to a higher level of maintenance activity due to the colder winter weather and higher labor and material costs associated with Southern's mains. Depreciation and Depletion - - -------------------------- Depreciation expense for the three, nine and twelve months ended June 30, 1994 increased approximately 8% as compared to the corresponding 1993 periods because of additions to plant in service by Southern. Federal and State Income Taxes - - ------------------------------ The total provision for federal and state income taxes for the three, nine and twelve months ended June 30, 1994 increased as compared to the corresponding 1993 periods. The increases for the three and nine months ended June 30, 1994, as compared to the three and nine months ended June 30, 1993, resulted from a lower pre-tax loss for the three months ended June 30, 1994 and higher pre-tax income for the nine months ended June 30, 1994, coupled with higher effective tax rates for both 1994 periods due to the flow-through tax effect of the amortization of previously deferred costs. For the twelve months ended June 30, 1994, the tax provision was higher because of the combination of a higher effective tax rate for that period principally due to the flow-through tax effect of the amortization of previously deferred costs and a non-recurring tax benefit associated with a bond repurchase premium which positively affected the provision for Federal and State Income Taxes for the twelve months ended June 30, 1993. 13 Municipal, Gross Earnings and Other Taxes - - ----------------------------------------- Municipal, gross earnings and other taxes increased for the nine and twelve months ended June 30, 1994 approximately 8% and 6%, respectively, as compared to the corresponding 1993 periods, primarily due to higher provisions for gross earnings taxes because of higher revenues. Total Interest Expense and Preferred Stock Dividends - - ---------------------------------------------------- Total interest expense and preferred stock dividends for the three months ended June 30, 1994 was approximately 2% lower when compared with the corresponding 1993 period, but increased approximately 1% and 2%, respectively, for the nine and twelve months ended June 30, 1994 as compared to the corresponding 1993 periods. These increases are primarily due to higher long-term interest costs associated with the issuance of $15,000,000 of Series X First Mortgage Bonds in December 1992 and $12,000,000 of Series Y First Mortgage Bonds in September 1993. Partially offsetting higher long-term interest costs was the recovery of higher interest income primarily related to deferred transition costs arising from implementation of Federal Energy Regulatory Commission ("FERC") Order No. 636 by interstate pipelines and lower interest costs related to interstate pipeline refunds. Additionally, short-term interest costs were lower for the three, nine and twelve month period ended June 30, 1994 primarily due to lower average short-term borrowings. 14 LIQUIDITY AND CAPITAL RESOURCES Operating Activities - - -------------------- The seasonal nature of Southern's business creates large short- term cash demands primarily to finance gas purchases, customer accounts receivable and certain tax payments. To provide these funds, as well as funds for its capital expenditure program and other corporate purposes, Southern has committed lines of credit with a number of banks totaling $30,000,000 and uncommitted lines of credit with two of its banks totalling $14,000,000, in addition to a revolving credit line agreement for up to $20,000,000 with one of its banks. This latter agreement has a revolving credit feature through December 21, 1996, followed by a term loan period through December 21, 2000. At June 30, 1994, Southern had unused lines of credit of $57,300,000. Because of the availability of short-term credit and the ability to issue long-term debt and additional equity, management believes it has adequate financial flexibility to meet its anticipated cash needs. Operating cash flows for the nine months ended June 30, 1994 were positively affected by higher net income, higher accrued tax balances, lower fuel inventories and higher refundable purchased gas cost balances. Partially offsetting these positive cash flows were higher accounts receivable balances, higher deferred transition cost balances and lower accounts payable balances. Operating cash flows for the twelve months ended June 30, 1994 were positively affected by higher net income, lower inventory costs, higher accrued tax balances and higher refundable purchased gas cost balances. Partially offsetting these positive effects on cash flows were higher accounts receivable balances, higher deferred transition cost balances and lower accounts payable balances. Rate Matters - - ------------ On December 1, 1993, the DPUC issued a final Decision on Southern's latest rate request. This Decision incorporated the Partial Settlement of Certain Issues ("Partial Settlement") which was previously approved by the DPUC and resolved most of the 15 significant financial aspects of Southern's original rate request, including an increase in base rates of $13,400,000 based upon Southern's sales forecast as originally filed, an allowed return on equity of 11.45% and the implementation of a weather normalization adjustment. In addition, Southern was permitted to recover previously deferred costs over amortization periods from three to five years associated with shortfalls in energy assistance, the certified hardship arrearage forgiveness program, environmental remediation expenditures, economic development programs and undepreciated gas holder costs. The Partial Settlement also provides for current recovery of postretirement health care expenses accrued under SFAS 106 and the establishment of a target margin, net of gross receipts tax, of $4,000,000 for sales and transportation to Southern's interruptible customers with excess margins shared between firm customers and shareholders on an 80%/20% split. As part of this Partial Settlement, Southern agreed that, except for certain adverse events, it would not file a general application for an increase in rates that would become effective on or before November 30, 1995. Investing Activities - - -------------------- Capital expenditures approximated $17,292,000 and $17,926,000 for the nine month periods ended June 30, 1994 and 1993, respectively, and $25,436,000 and $24,754,000 for the twelve month periods ended June 30, 1994 and 1993, respectively. On an annual basis, Southern relies upon cash flow provided by operating activities to fund a portion of these expenditures, with the remainder funded by short-term borrowings and, at some later date, long-term debt and capital stock financings. Financing Activities - - -------------------- As of June, 1994 the quarterly dividend paid per share on the Company's common stock was increased to $0.325 per share or an annual indicated dividend rate of $1.30 per share. On March 10, 1994, the Company completed a public sale of 1,000,000 shares of common stock at a price of $20 1/8 per share and received net proceeds of $19,375,000. The proceeds were used for 16 the repayment of short-term debt and for other general corporate purposes. The method, timing and amounts of any future financings by the Company or its subsidiary will depend on a variety of factors, including capitalization ratios, coverage ratios, interest costs, the state of the capital markets and general economic conditions. On December 30, 1993, Southern redeemed all outstanding shares of its 4 3/4%, $100 par value preferred stock. The redemption price was 100% of par value plus accrued dividends through December 30, 1993. In September 1993, Southern issued and sold $12,000,000 of Series Y First Mortgage Bonds at a rate of 7.08% to one lender in a private placement. These bonds have a life of 20 years and are required to be redeemed through a payment of $12,000,000 on October 1, 2013. Proceeds from the sale of Series Y Bonds were used principally to reduce short-term borrowings incurred primarily in connection with Southern's capital expenditure program. In December 1992, Southern issued and sold $15,000,000 of Series X First Mortgage Bonds at a rate of 7.67% to one lender in a private placement. These bonds have a life of 20 years and are required to be redeemed through a payment of $15,000,000 on December 15, 2012. Proceeds from the sale of the Series X Bonds were used principally to reduce short-term borrowings incurred primarily in connection with Southern's capital expenditure program. Take-or-Pay, Contract Buy-Out and Contract Buy-Down Costs - - --------------------------------------------------------- Prior to 1992, Southern deferred amounts paid to its interstate pipeline suppliers related to take-or-pay, contract buy-out and contract buy-down costs and accrued and deferred interest on its unrecovered payments. On November 20, 1991, the DPUC issued a Decision regarding the method of recovery of these deferred amounts. The Decision did not provide recovery of incurred and deferred interest. As of June 30, 1994, Southern has recovered approximately $5,374,000 from firm customers through the suspension of the flow- through of purchased gas cost credits, $1,343,000 from the suspension of the flow-through of pipeline refunds and $528,000 from 17 interruptible customers through the application of the uniform volumetric surcharge in accordance with the DPUC Decisions. Approximately $800,000 will continue to be recovered from interruptible customers through the uniform volumetric surcharge. FERC Order No. 636 Transition Costs - - ----------------------------------- As a result of FERC's Order No. 636 issued by the Federal Energy Regulatory Commission ("FERC"), costs are being incurred by Southern's interstate pipeline suppliers to convert existing "bundled" sales services to "unbundled" transportation and storage services. These transition costs include: (1) unrecovered gas costs, (2) gas supply realignment costs, (3) stranded investment costs and (4) new facilities costs. Southern has incurred approximately $7,640,000 in transition costs as of June 30, 1994. Of this total, approximately $4,571,000 represent unrecovered gas costs, $2,645,000 represent gas supply realignment costs and the remaining $424,000 represent stranded investment costs. On July 8, 1994, the DPUC issued a Decision regarding implementation of FERC Order No. 636 by the Connecticut local gas distribution companies. The DPUC addressed, among other things, the mechanism for the recovery of deferred transition costs. Under this mechanism, the DPUC has allowed the recovery of the unrecovered gas cost balances from the suspension of flow-through of purchased gas cost credits attributable to the twelve month period ended August 31, 1993 as well as refunds received from interstate pipelines. Additionally, any subsequent refunds from interstate pipelines as well as any credits received by Southern for release of its capacity on interstate pipelines during all future years ending August 31, shall be used to offset Southern's payments of unrecovered gas costs until fully recovered. Gas supply realignment costs as well as stranded investment costs are to be recovered by Southern as follows: (1) retention of 50% of margins derived through off-system sales; (2) retention of 50% of all interruptible margins earned above Southern's target level; (3) retention of pipeline refunds or deferred gas cost credits for the 1992/93 period and all subsequent annual deferred gas cost periods that are in excess of the estimated unrecovered gas cost portion of transition costs; (4) retention of any capacity release credits received from pipelines in excess of those needed 18 for unrecovered purchased gas costs and (5) if needed, a per unit surcharge applied to firm customers' bills, which will be evaluated in subsequent annual deferred gas cost proceedings. There is no hierarchy in the use of the first four recovery measures, and any and all could be utilized as available. Southern expects to recover its transition costs obligation over a three year period. Environmental Matters - - --------------------- Southern has identified coal tar residue at three sites in Connecticut. This residue results from historic coal gasification operations conducted at those sites by Southern's predecessors from the late 1800s through the first part of this century. Many gas distribution companies throughout the country carried on such gas manufacturing operations during the same period. The coal tar discovered at Southern's three sites is not designated a hazardous material by any federal or Connecticut agency, but some of its constituents are classified as hazardous. On April 27, 1992, Southern notified the Connecticut Department of Environmental Protection and the United States Environmental Protection Agency of the presence of coal tar residue on the three sites. As a result of this notification, further discussions would address the extent and type of remedial action, if any, as well as the time period over which such action would occur. Because this process is at an early stage, management cannot at this time predict the costs of any future site analysis and remediation, if any, nor can it estimate when any such costs, if any, would be incurred. Such future analytical and cleanup costs could possibly be significant. Based upon the provisions of a DPUC approved Partial Settlement in Southern's most recent rate case, management believes that Southern will properly be able to recover the costs of investigation and remediation, if any, through its customer rates. The method, timing and extent of any recovery remain uncertain, but management currently does not expect that such costs will have a material adverse effect on the Company's financial condition or results of operations. 19 Personal Property Tax Audits - - ---------------------------- In September 1993, Southern received notification of the results of audits by the City of New Haven pursuant to Connecticut's omitted property statute. The City of New Haven claimed that Southern owed approximately $2,600,000 in additional personal property taxes related to years 1990 through 1992; however, Southern was not aware of any audit finding of significant omissions of personal property required to be declared. Instead, the City of New Haven's claim was based on the assessor's retroactive reassessment of Southern's personal property. Southern initiated legal actions against the City of New Haven which alleged that, among other things, the City of New Haven had no statutory authority to issue tax bills based upon retroactive reassessments of previously declared property on which taxes were paid and that the City of New Haven's contingent fee agreement with the firm which audited Southern's records was illegal. Southern also instituted legal actions challenging the City of New Haven's assessment of Southern's personal property for the 1993 Grand List. On June 29, 1994, Southern and the City of New Haven entered into a Stipulation and Agreement ("Agreement") in settlement of these court actions. The Agreement provided for a $200,000 payment related to the tax years 1990 through 1992 without conceding liability on any of the issues involved; and a resolution of the disputed 1993 personal property assessment, which resulted in a reduction of the original 1993 assessment of approximately $1,500,000 to a new assessment of approximatley $800,000. Consolidation of Operating Facilities - - ------------------------------------- On March 30, 1993 Southern entered into an operating lease to consolidate its operating centers at one central geographic location in Orange, Connecticut. These operating centers were located in three cities within Southern's service territory. The DPUC approved certain accounting treatment relative to the consolidation of the operating centers at one location which included the transfer of the net book value of Southern's former operating centers from utility property to nonutility property after the completion of the relocation. The relocation of Southern's operating facilities was completed in the second quarter. 20 PART II- OTHER INFORMATION Items 1, 2, 3, 4 and 5 are inapplicable. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: None (b) Reports on Form 8-K: There were no reports filed on Form 8-K during the quarter. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CONNECTICUT ENERGY CORPORATION (Registrant) DATE: August 11, 1994 /s/ Vincent L. Ammann, Jr. --------------- ---------------------- Vincent L. Ammann, Jr. Vice President and Chief Accounting Officer 22 -----END PRIVACY-ENHANCED MESSAGE-----