UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-7727
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CONNECTICUT NATURAL GAS CORPORATION
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(Exact name of registrant as specified in its charter)
Connecticut 06-0383860
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Columbus Boulevard, Hartford, Connecticut 06103
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(Address of principal executive offices) (Zip Code)
(203) 727-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report).
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (applicable only
to Corporate Issuers). Number of shares of common stock outstanding as of
the close of business on April 23, 1996: 9,930,480.
FINANCIAL STATEMENTS
CONNECTICUT NATURAL GAS CORPORATION
The condensed financial statements included herein have been prepared
by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although the Company believes that
the disclosures are adequate to make the information presented not
misleading, it is suggested that these condensed financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K. In the opinion
of the Company, all adjustments necessary to present fairly the consolidated
financial position of the Connecticut Natural Gas Corporation as of March
31, 1996 and 1995 and the results of its operations and its cash flows for
the three months, six months and twelve months ended March 31, 1996 and 1995
have been included. The results of operations for such interim periods are
not necessarily indicative of the results for the full year.
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
March 31, Sept. 30, March 31,
ASSETS 1996 1995 1995
------ --------- --------- ---------
Plant and Equipment:
Regulated energy $ 393,400 $ 387,906 $ 374,310
Nonregulated energy 64,000 63,937 63,205
Construction work in progress 3,615 3,564 2,854
--------- --------- ---------
461,015 455,407 440,369
Less-Allowance for depreciation 140,087 133,314 126,654
--------- --------- ---------
320,928 322,093 313,715
--------- --------- ---------
Investments, at equity 5,549 5,743 5,463
--------- --------- ---------
Current Assets:
Cash and cash equivalents 21,167 3,042 13,477
Accounts and notes receivable 63,796 31,504 50,352
Allowance for doubtful accounts (5,699) (4,590) (4,834)
Accrued utility revenue 16,187 5,093 11,504
Inventories 2,687 14,511 8,671
Prepaid expenses 3,069 6,095 3,450
--------- --------- ---------
101,207 55,655 82,620
--------- --------- ---------
Deferred Charges and Other Assets:
Unrecovered future taxes 48,641 51,634 49,997
Recoverable transition costs 3,899 4,636 5,634
Other assets 20,177 25,278 27,755
--------- --------- ---------
72,717 81,548 83,386
--------- --------- ---------
$ 500,401 $ 465,039 $ 485,184
========= ========= =========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS (Concluded)
(Thousands of Dollars)
March 31, Sept. 30, March 31,
CAPITALIZATION AND LIABILITIES 1996 1995 1995
------------------------------ --------- --------- ---------
Capitalization:
Common Stock $ 31,045 $ 31,045 $ 31,045
Capital in excess of par value 74,018 74,018 74,018
Retained Earnings 60,204 45,522 54,891
--------- --------- ---------
165,267 150,585 159,954
Unearned compensation -
Restricted stock awards (286) (371) (400)
Treasury stock (129) (103) (103)
--------- --------- ---------
Common stock equity 164,852 150,111 159,451
Preferred stock, not subject to
mandatory redemption 902 904 906
Long-term debt 149,372 150,390 153,283
--------- --------- ---------
315,126 301,405 313,640
--------- --------- ---------
Notes Payable Under Revolving Credit
Agreements - - 1,000
--------- --------- ---------
Current Liabilities:
Current portion of long-term debt 3,923 3,921 3,885
Notes payable and commercial paper - 4,200 -
Accounts payable and accrued expenses 39,791 46,341 40,663
Refundable purchased gas costs 22,937 2,300 12,369
Accrued liabilities 11,898 6,539 8,291
--------- --------- ---------
78,549 63,301 65,208
--------- --------- ---------
Deferred Credits:
Deferred income taxes 47,048 37,985 44,099
Unfunded deferred income taxes 48,641 51,634 49,997
Investment tax credits 3,313 3,423 3,533
Refundable taxes 3,501 3,365 3,367
Accrued transition costs - - 634
Other 4,223 3,926 3,706
--------- --------- ---------
106,726 100,333 105,336
--------- --------- ---------
$ 500,401 $ 465,039 $ 485,184
========= ========= =========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars except for per share data)
Three Months Ended
March 31,
-----------------------------
1996 1995
---------- ----------
Operating Revenues $ 130,606 $ 105,540
Less: Cost of Energy 73,314 56,573
State Gross Receipts Tax 4,854 4,215
---------- ----------
Operating Margin 52,438 44,752
---------- ----------
Other Operating Expenses:
Operations & maintenance expenses 15,814 13,986
Depreciation 4,416 4,287
Income taxes 13,031 7,902
Other taxes 1,944 1,919
---------- ----------
35,205 28,094
---------- ----------
Operating Income 17,233 16,658
---------- ----------
Other Income (Deductions):
Allowance for equity funds used
during construction 38 33
Equity in partnership earnings 282 159
Other income (deductions) (127) (255)
Income Taxes (86) (115)
---------- ----------
107 (178)
---------- ----------
Interest and Debt Expense 3,452 3,556
---------- ----------
Net Income 13,888 12,924
Less-Dividends on Preferred Stock 15 16
---------- ----------
Net Income Applicable to Common Stock $ 13,873 $ 12,908
========== ==========
Income Per Average Share of
Common Stock $ 1.40 $ 1.30
========== ==========
Dividends Per Share of Common Stock $ 0.37 $ 0.37
========== ==========
Average Common Shares Outstanding
During the Period 9,931,120 9,931,279
========== ==========
CONNECTICUT NATURAL GAS CORPORATION "UNAUDITED"
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars except for per share data)
Six Months Ended
March 31,
-----------------------------
1996 1995
---------- ----------
Operating Revenues $ 221,068 $ 182,071
Less: Cost of Energy 122,386 98,456
State Gross Receipts Tax 8,644 7,440
---------- ----------
Operating Margin 90,038 76,175
---------- ----------
Operating Expenses:
Operations & maintenance expenses 29,312 25,849
Depreciation 8,799 8,501
Income taxes 19,461 12,082
Other taxes 3,866 3,708
---------- ----------
61,438 50,140
---------- ----------
Operating Income 28,600 26,035
---------- ----------
Other Income (Deductions):
Allowance for equity funds used
during construction 83 63
Equity in partnership earnings 684 534
Other deductions (236) (508)
Income Taxes (238) (133)
---------- ----------
293 (44)
---------- ----------
Interest and Debt Expense 6,831 6,983
---------- ----------
Net Income 22,062 19,008
Less-Dividends on Preferred Stock 31 31
---------- ----------
Net Income Applicable to Common Stock $ 22,031 $ 18,977
========== ==========
Income Per Average Share of
Common Stock $ 2.22 $ 1.91
========== ==========
Dividends Per Share of Common Stock $ 0.74 $ 0.74
========== ==========
Average Common Shares Outstanding
During the Period 9,931,199 9,922,658
========== ==========
CONNECTICUT NATURAL GAS CORPORATION "UNAUDITED"
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars except for per share data)
Twelve Months Ended
March 31,
-----------------------------
1996 1995
---------- ----------
Operating Revenues $ 314,182 $ 270,028
Less: Cost of Energy 171,693 143,906
State Gross Receipts Tax 12,500 10,828
---------- ----------
Operating Margin 129,989 115,294
---------- ----------
Operating Expenses:
Operations & maintenance expenses 56,692 53,486
Depreciation 17,275 16,643
Income taxes 16,809 9,100
Other taxes 7,489 7,294
---------- ----------
98,265 86,523
---------- ----------
Operating Income 31,724 28,771
---------- ----------
Other Income (Deductions):
Allowance for equity funds used
during construction 126 53
Equity in partnership earnings 1,182 950
Other deductions (602) (611)
Nonrecurring items 3,624 -
Income Taxes (1,942) (434)
---------- ----------
2,388 (42)
---------- ----------
Interest and Debt Expense 14,039 13,734
---------- ----------
Net Income 20,073 14,995
Less-Dividends on Preferred Stock 62 64
---------- ----------
Net Income Applicable to Common Stock $ 20,011 $ 14,931
========== ==========
Income Per Average Share of
Common Stock $ 2.01 $ 1.53
========== ==========
Dividends Per Share of Common Stock $ 1.48 $ 1.48
========== ==========
Average Common Shares Outstanding
During the Period 9,931,239 9,730,343
========== ==========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
Cash Flows from Operations $ 41,130 $ 39,539
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (3,895) (5,771)
Other investing activities 999 (535)
-------- --------
Net cash used in investing activities (2,896) (6,306)
-------- --------
Cash Flows from Financing Activities:
Dividends paid (3,689) (3,690)
Other stock activity, net - 109
Principal retired on long-term debt (152) (320)
Short-term debt (14,100) (17,000)
-------- --------
Net cash used by
financing activities (17,941) (20,901)
-------- --------
Increase in Cash and
Cash Equivalents 20,293 12,332
Cash and Cash Equivalents at
Beginning of Period 874 1,145
-------- --------
Cash and Cash Equivalents at
End of Period $ 21,167 $ 13,477
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Thousands of Dollars)
Three Months Ended
March 31,
----------------------
1996 1995
---- ----
Schedule Reconciling Earnings to
Cash Flows from Operations:
Income $ 13,888 $ 12,924
-------- --------
Adjustments to reconcile income
to net cash:
Depreciation and amortization 4,561 4,126
Deferred income taxes, net 8,810 6,643
Equity in partnership earnings (282) (159)
Change in assets and liabilities:
Accounts receivable (20,383) (12,124)
Accrued utility revenue 5,476 5,634
Inventories 8,646 9,162
Purchased gas costs 17,488 12,279
Prepaid expenses (899) (813)
Accounts payable and accrued expenses 7,007 2,514
Other assets/liabilities (3,182) (647)
-------- --------
Total adjustments 27,242 26,615
-------- --------
Cash flows from operations $ 41,130 $ 39,539
======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 2,135 $ 2,210
======== ========
Income taxes $ 2,313 $ 1,318
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Six Months Ended
March 31,
----------------------
1996 1995
---- ----
Cash Flows from Operations $ 37,839 $ 40,429
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (7,899) (9,927)
Other investing activities 783 (1,038)
-------- --------
Net cash used in investing activities (7,116) (10,965)
-------- --------
Cash Flows from Financing Activities:
Dividends paid (7,380) (7,380)
Issuance of common stock - 8,474
Other stock activity, net (2) 109
Principal retired on long-term debt (1,016) (816)
Short-term debt (4,200) (17,500)
-------- --------
Net cash used by
financing activities (12,598) (17,113)
-------- --------
Increase in Cash and
Cash Equivalents 18,125 12,351
Cash and Cash Equivalents at
Beginning of Period 3,042 1,126
-------- --------
Cash and Cash Equivalents at
End of Period $ 21,167 $ 13,477
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Thousands of Dollars)
Six Months Ended
March 31,
----------------------
1996 1995
---- ----
Schedule Reconciling Earnings to
Cash Flows from Operations:
Income $ 22,062 $ 19,008
-------- --------
Adjustments to reconcile income
to net cash:
Depreciation and amortization 9,062 8,478
Deferred income taxes, net 9,089 7,164
Equity in partnership earnings (684) (534)
Cash distributions received from
investments 360 168
Change in assets and liabilities:
Accounts receivable (31,001) (21,142)
Accrued utility revenue (11,094) (7,790)
Inventories 11,824 9,655
Purchased gas costs 20,637 16,138
Prepaid expenses 3,026 6,657
Accounts payable and accrued expenses 3,436 3,269
Other assets/liabilities 1,122 (642)
-------- --------
Total adjustments 15,777 21,421
-------- --------
Cash flows from operations $ 37,839 $ 40,429
======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 6,232 $ 6,312
======== ========
Income taxes $ 6,920 $ 2,246
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Twelve Months Ended
March 31,
----------------------
1996 1995
---- ----
Cash Flows from Operations $ 51,247 $ 47,603
-------- --------
Cash Flows from Investing Activities:
Capital expenditures (24,811) (28,893)
Other investing activities 892 (1,238)
-------- --------
Net cash used in investing activities (23,919) (30,131)
-------- --------
Cash Flows from Financing Activities:
Dividends paid (14,761) (14,472)
Issuance of common stock - 8,474
Other stock activity, net (4) 51
Issuance of long-term debt - 20,000
Principal retired on long-term debt (3,873) (3,847)
Short-term debt (1,000) (15,600)
-------- --------
Net cash used by
financing activities (19,638) (5,394)
-------- --------
Increase in Cash and
Cash Equivalents 7,690 12,078
Cash and Cash Equivalents at
Beginning of Period 13,477 1,399
-------- --------
Cash and Cash Equivalents at
End of Period $ 21,167 $ 13,477
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Thousands of Dollars)
Twelve Months Ended
March 31,
----------------------
1996 1995
---- ----
Schedule Reconciling Earnings to
Cash Flows from Operations:
Income $ 20,073 $ 14,995
-------- --------
Adjustments to reconcile income
to net cash:
Depreciation and amortization 17,800 17,132
Deferred income taxes, net 2,822 3,553
Equity in partnership earnings (1,182) (950)
Cash distributions received from
investments 528 408
Change in assets and liabilities:
Accounts receivable (10,544) 11,163
Accrued utility revenue (4,683) 1,072
Inventories 5,984 (1,341)
Purchased gas costs 10,568 (3,490)
Prepaid expenses 381 (962)
Accounts payable and accrued expenses 7,726 2,713
Other assets/liabilities 1,774 3,310
-------- --------
Total adjustments 31,174 32,608
-------- --------
Cash flows from operations $ 51,247 $ 47,603
======== ========
Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 12,366 $ 12,184
======== ========
Income taxes $ 13,641 $ 9,513
======== ========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1996
(Thousands of Dollars)
(1) Rate Matters
In January, 1996 the Connecticut Department of Public Utility Control
(the "DPUC") approved final natural gas rates related to a rate
increase of $8,900 or 3.64% allowed by the DPUC in October, 1995.
These final rates became effective on February 9, 1996. As part of
this decision, the DPUC also approved the Company's Firm Transportation
rates for Commercial and Industrial customers, effective April 1, 1996.
(See "Management's Discussion and Analysis," "Competitive Environment")
(2) Short-term Debt
The Company maintains a number of credit lines with financial
institutions. One of the lines of credit with a bank for $9,000 was
due to expire on February 18, 1996. It was extended for one year at
that time.
The Company's $20,000 revolving credit agreement with a large regional
bank was due to expire on March 30, 1996. The Company exercised its
option to extend this agreement for one year at that time.
(3) Subsequent Event - Increased Investment in Iroquois
On April 30, 1996 the Company acquired an additional 2.47% ownership
interest in the Iroquois Gas Transmission System Partnership
("Iroquois") for an investment of approximately $5,200 with funds from
working capital. The Company's total share of Iroquois, which is held
by the Company's wholly-owned subsidiary ENI Transmission Company, is
now 4.87%. As a result of this increase in ownership interest, the
Company's guarantee of a letter of credit for Iroquois is also 4.87%,
equivalent to approximately $1,658 at April 30, 1996.
Iroquois is in the process of negotiating a final settlement with State
and Federal authorities regarding certain environmental allegations
asserted by them. The Company expects that a potential settlement will
be reached within the current year. The Company has provided for its
anticipated share of the potential settlement in its financial records.
If the settlement is finalized, the Company expects that any additional
costs associated with the allegations will not be material.
(4) Reclassifications
Certain prior year amounts have been reclassified to conform with
current year classifications.
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
MARCH 31, 1996
(Thousands of Dollars Except Per Share Amounts)
RESULTS OF OPERATIONS
A significantly colder winter and the increase in natural gas rates granted
to the Company by the Connecticut Department of Public Utility Control (the
"DPUC"), effective in October, 1995, are the primary reasons for the higher
earnings recorded in the three, six and twelve months ended March 31, 1996
when compared to the same periods of fiscal, 1995. Second quarter, 1996
earnings per share were $1.40, compared to $1.30 recorded for the same
quarter of fiscal, 1995. Six and twelve months ended March, 1996 earnings
per share were $2.22 and $2.01, respectively as compared to $1.91 and $1.53,
respectively, for fiscal, 1995. Earnings recorded for the twelve months
ended March 31, 1996 include two nonrecurring items: a gain of $.24 per
share from a negotiated settlement for the termination of a steam supply
contract; and a charge of $(.05) per share in connection with legal matters
related to the Company's interest in the Iroquois Gas Transmission System
partnership ("Iroquois"). Without the effect of these two items, earnings
per share for this period would be $1.82.
Operating Margin
The following table presents the changes in revenues, gas operating margin
and gas throughput for all periods presented in the statements of income:
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- --------
Gas Revenues $124,661 $100,212 $209,856 $172,038 $291,824 $248,045
======== ======== ======== ======== ======== ========
Gas Operating Margin $ 48,457 $ 41,218 $ 82,387 $ 69,567 $115,729 $101,394
======== ======== ======== ======== ======== ========
Gas Throughput (mmcf)
Firm Sales 11,261 9,811 18,577 16,200 23,739 21,160
Interruptible Sales 2,353 2,759 4,854 5,285 8,123 8,604
Off-System Sales 1,511 2,195 5,189 4,925 16,528 11,351
Transportation
Services 1,093 2,011 2,147 3,964 5,878 7,548
------ ------ ------ ------ ------ ------
Total System
Throughput 16,218 16,776 30,767 30,374 54,268 48,663
====== ====== ====== ====== ====== ======
Gas operating margin is equal to gas revenues less the cost of gas and
Connecticut gross revenues tax. In all reported periods ending March 31,
1996, gas operating margin is higher as compared to the same periods of
fiscal, 1995. The two principal factors behind this increase in gas
operating margin are new, higher gas rates allowed by the DPUC beginning in
the first quarter of fiscal, 1996, and the significantly colder winter
heating season weather experienced in the Company's service area in fiscal,
1996. The higher volumes of gas sold to firm customers during this time
multiplied the effect of the higher gas rates. These benefits were somewhat
offset by fewer sales to interruptible customers and somewhat lower
interruptible margins because of higher gas costs associated with these
sales.
Operations and Maintenance Expenses
The October, 1995, rate decision issued by the DPUC allowed the Company to
begin to amortize expenses that had been previously deferred pending the
outcome of the rate proceedings. Because of these additional amortizations
and a increases in a few other specific items, higher operations and
maintenance expenses have been recorded in fiscal, 1996. Increases have
been in the categories of wages and salaries, pension costs, insurance-
related costs, employee benefits, regulatory commission and rate proceedings
expenses and outside purchased services. The colder fiscal, 1996 winter has
also resulted in increased bad debt accruals related to hardship customers.
Collectively, these have generated an overall increase in operations and
maintenance expenses when comparing the three, six and twelve months ended
March, 1996 to 1995.
Income Taxes
Income taxes are higher in all periods of fiscal, 1996, primarily because of
higher taxable income and the absence of the flow through of cost of removal
benefits recognized during fiscal 1995. The higher effective tax rate is
caused primarily by the turn around in recent years of flow-through book tax
depreciation differences of older plant. These higher taxes were included
in the determinatin of the Company's rates from the last rate decision.
Because of these differences, and the lack of other offsetting tax benefits,
the Company's effective tax rate is higher in 1996 than the previous
periods. Because of this higher effective tax rate, the Company will tend
to record higher tax expenses in the winter quarters and receive a greater
tax benefit in the summer months, thus reducing net income during the
heating season and reducing the net losses normally experienced during the
summer season.
Other Income (Deductions)
Other income (deductions) in all reported periods ended March, 1996 have
benefited the reconfiguration of certain life insurance plans. The impact
of this benefit has been partially offset by the costs of terminating the
Company's Gas Roots regulated propane service program, as directed by the
DPUC late in fiscal, 1995.
Two nonrecurring items were recorded in the twelve months ended March, 1996:
a one-time pretax benefit of $4,124 from the negotiated settlement of a
contract termination agreement with the nonregulated operations' principal
steam supplier and a charge of $500 for the Company's share of expenses in
connection with legal matters related to its ownership interest in Iroquois.
(See "Material Changes in Financial Condition," "Investing Activities").
Reduced promotional expenses also provided a benefit to the twelve months
ended March, 1996.
Interest and Debt Expense
Interest expense between the comparable quarter and six months ended periods
is relatively unchanged. During the earlier part of this fiscal year, more
short-term borrowings were required to pay for higher volumes of gas needed
to supply customers during the colder winter weather. The interest incurred
for these borrowings was offset by lower short-term borrowing rates. In
addition, during the second quarter of fiscal, 1996, available cash from
operations, a result of the colder winter and commensurate higher sales,
reduced the need to borrow for working capital. In the first six months of
fiscal, 1996, the Company also recorded higher interest expense related to
merchandise receivables and transition costs.
Higher fiscal, 1996 interest expense for the twelve months ended period is
attributed to interest related to pipeline refunds and deferred gas costs.
Earnings from Nonregulated Operations
Earnings contributed by nonregulated operations were $.08, $.15 and $.47 per
share, respectively, for the quarter, six and twelve months ended March 31,
1996, compared to $.09, $.18 and $.39 per share for the same periods ended
March 31, 1995. Twelve months ended March, 1996 earnings include $.24 per
share from the settlement related to the termination agreement negotiated
with a supplier of steam in the fourth quarter of fiscal, 1995, and a charge
of $(.05) in connection with legal matters related to the Company's
ownership interest in Iroquois. (See "Material Changes in Financial
Condition," "Investing Activities").
Lower fiscal, 1996 nonregulated contributions to earnings from operations
were the result of higher fixed costs of produced steam, attributed to labor
and equipment maintenance expenses, reduced chilled water sales for cooling,
because of lower building occupancy levels, and initial operating losses
related to new nonregulated subsidiaries, ENServe Corporation and ENI Gas
Services, Inc. The benefit of higher sales for steam and hot water heating,
generated because of the colder winter weather, partially offset these
negative impacts to nonregulated earnings.
MATERIAL CHANGES IN FINANCIAL CONDITION
Cash flows from operations funded both net investing and net financing
activities during the three, six and twelve months ended March, 1996, as
they did in the same periods of fiscal, 1995. The level of cash and cash
equivalents on hand at March 31, 1996 is also significantly greater than
levels on hand in 1995. The higher levels of cash from operations are
attributed to higher operating margins, primarily because of higher gas
rates, compounded by the impact of greater volumes sold because of the
colder winter weather. The six and twelve months ended March, 1996 also
reflect the receipt of the balance of the settlement amount due from the
termination of the steam supply contract with the nonregulated operations'
principal steam supplier. The six and twelve months ended March, 1995 cash
flows from operations were supplemented by debt and equity issues which were
used to permanently finance outstanding short-term borrowings and for
working capital.
Investing Activities
On April 30, 1996 the Company acquired an additional 2.47% ownership
interest in Iroquois for an investment of approximately $5,200 with funds
from working capital. The Company's total share of Iroquois, which is held
by the Company's wholly-owned subsidiary ENI Transmission Company, is now
4.87%. As a result of this increase in ownership interest, the Company's
guarantee of a letter of credit for Iroquois has also increased to 4.87%,
equivalent to approximately $1,658 at April 30, 1996.
Iroquois is in the process of negotiating a final settlement with State and
Federal authorities regarding certain environmental allegations asserted by
them. The Company expects that a potential settlement will be reached
within the current year. The Company has provided for its anticipated share
of the potential settlement in its financial records. If the settlement is
finalized, the Company expects that any additional costs associated with the
allegations will not be material.
Financing Activities
The Company maintains a number of credit lines with financial institutions.
One of the lines of credit with a bank for $9,000 was due to expire on
February 18, 1996. It was extended for one year at that time.
The Company's $20,000 revolving credit agreement with a large regional bank
was due to expire on March 30, 1996. The Company exercised its option to
extend this agreement for one year at that time.
Rate Matters
In January, 1996 the DPUC approved final natural gas rates related to a rate
increase of $8,900 or 3.64% allowed by the DPUC in October, 1995. These
final rates became effective on February 9, 1996. As part of this decision,
the DPUC also approved the Company's Firm Transportation ("FTS") rates for
Commercial and Industrial customers, effective April 1, 1996.
Similar FTS rates have also been approved for Connecticut's other local
natural gas distribution companies ("LDC"). These rates allow commercial
and industrial customers to purchase their gas from independent brokers and
to pay their LDC only for the transportation of that gas through its gas
lines. In addition, each LDC offers a similar package of ancillary services
from which an FTS customer can choose to ensure that its business will have
an adequate supply of gas in the event that its broker does not meet its
commitment or if the customer's gas use requirements exceed its contractual
purchase.
Competitive Environment
In recent years, the natural gas industry has undergone structural changes
in response to Federal regulatory policy intended to increase competition.
In 1992, the Federal Energy Regulatory Commission (the "FERC") issued Order
636, which required all interstate gas pipelines to provide "unbundled," or
separate, gas transportation and storage services and to discontinue their
bundled merchant sales operations, which included the gas acquisition
function. The impact of the FERC Order 636 and the resulting deregulation
of the gas industry has continued to heighten competition and has changed
the nature of the Company's business.
In the past, the three segments of the natural gas industry had defined
roles and relationships. Producers explored, drilled for and processed
natural gas. The pipelines purchased natural gas from the producers and
transported it to LDCs. The LDCs purchased the gas and transportation
services from the pipeline companies. To bring natural gas into a
competitive open market, the FERC demanded that the pipelines separate or,
"unbundle" the natural gas purchases, the transportation and the balancing
services which they had sold as a package to LDCs.
In the late 1980's, in anticipation of this restructured environment, the
Company put in place arrangements for the direct purchase of gas from
producers and marketers as well as for the transportation of such gas to its
service territory. In response to the FERC Order 636, in August, 1995, the
DPUC issued a decision ordering Connecticut LDCs to unbundle their gas
services. New, firm transportation service rates were approved by the DPUC
and went into effect for the LDCs on April 1, 1996. With the implementation
of these new rates, the Company's commercial and industrial natural gas
customers have an expanded opportunity to purchase natural gas directly from
producers or marketers. The Company, and the other Connecticut LDCs, thus
have become natural gas transporters and compete with each other and with
other gas marketers and providers for the sale of natural gas to such
customers.
The Company has been preparing for this local impact of the FERC Order 636
environment since 1988. Since that time the Company's large commercial and
industrial interruptible customers have had the opportunity to contract for
the purchase of their own supply of gas directly from a third-party
supplier. Any such customer must also arrange for transportation services
from the Company to deliver this gas to its premises.
While unbundling has provided the opportunity for the Company to service and
supply large commercial and industrial customers outside of its franchise
area, it has also allowed other gas service companies to have access to the
Company's customers within its service territory by allowing these customers
the opportunity to purchase their gas supplies from any source. However,
when such customers purchase their gas from other suppliers, the Company's
distribution system is required to deliver their supplies, for which the
Company receives a transportation margin.
Since 1993, the Company has also offered off-system sales of short-term gas
supplies and transportation services by contract. For these sales, the
Company competes with other sellers and suppliers of natural gas services.
As the natural gas distribution business becomes more competitive,
management believes the principal factor for determining success is likely
to be price, followed closely by customer loyalty and satisfaction.
The Company has posted the lowest weighted average cost of gas of all
Connecticut LDCs for seven consecutive years. For its fifth consecutive
year the Company has posted the lowest firm unit cost of natural gas for all
Connecticut LDC's.
The Company's nonregulated operations have been subject to the slow economic
conditions in the Hartford, Connecticut area. The district heating and
cooling operations have had to produce more costly steam as a result of the
1995 termination of a steam supply contract. These factors may adversely
affect the Company's district heating and cooling operations' ability to
maintain steam, hot and chilled water rates at current levels.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
3 (ii) Bylaws of the Company, as amended
10 (lxxxvii) Irrevocable Standby Letter of Credit by and between
Energy Networks, Inc. and The Bank of Nova Scotia, dated
March 20, 1996
27 Financial Data Schedule
99 (i) Exhibit Index
SIGNATURE
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 NATURAL GAS CORPORATION
Date 04/30/96 By: S/ Andrew H. Johnson
-------------------- -----------------------------------
(Andrew H. Johnson)
Treasurer and Chief Accounting Officer
(On behalf of the registrant and as
Chief Accounting Officer)