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 December 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
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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 January 28, 1997: 10,634,496.
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 December
31, 1996 and 1995 and the results of its operations and its cash flows for
the three months and twelve months ended December 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)
Dec. 31, Sept. 30, Dec. 31,
ASSETS 1996 1996 1995
------ --------- --------- ---------
Plant and Equipment:
Regulated energy $ 407,837 $ 403,862 $ 391,297
Unregulated energy 60,726 60,515 64,021
Construction work in progress 4,276 6,417 3,645
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472,839 470,794 458,963
Less-Allowance for depreciation 148,194 145,042 137,106
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324,645 325,752 321,857
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Investments, at equity 10,673 9,914 5,859
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Current Assets:
Cash and cash equivalents 1,436 8,515 874
Accounts and notes receivable 41,596 29,852 42,503
Allowance for doubtful accounts (5,025) (4,819) (4,844)
Accrued utility revenue 16,375 4,180 21,663
Inventories 13,992 15,968 11,333
Prepaid expenses 3,708 10,920 2,170
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72,082 64,616 73,699
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Deferred Charges and Other Assets:
Unrecovered future taxes 44,812 44,812 49,210
Recoverable transition costs 2,128 2,858 4,210
Other assets 20,263 19,027 20,845
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67,203 66,697 74,265
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$ 474,603 $ 466,979 $ 475,680
========= ========= =========
"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED BALANCE SHEETS (Concluded)
(Thousands of Dollars)
Dec. 31, Sept. 30, Dec. 31,
CAPITALIZATION AND LIABILITIES 1996 1996 1995
------------------------------ --------- --------- ---------
Capitalization:
Common Stock $ 33,233 $ 33,233 $ 31,045
Capital in excess of par value 87,402 87,387 74,018
Retained Earnings 51,735 49,026 50,006
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172,370 169,646 155,069
Unearned compensation -
Restricted stock awards (1,342) (312) (358)
Treasury stock - (452) (103)
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Common stock equity 171,028 168,882 154,608
Preferred stock, not subject to
mandatory redemption 899 899 902
Long-term debt 135,474 136,432 149,525
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307,401 306,213 305,035
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Current Liabilities:
Current portion of long-term debt 14,069 13,968 3,922
Notes payable 9,000 - 14,100
Accounts payable and accrued expenses 41,221 40,721 41,945
Refundable purchased gas costs 3,315 6,012 5,449
Accrued liabilities 3,539 4,479 6,938
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71,144 65,180 72,354
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Deferred Credits:
Deferred income taxes 40,347 40,011 38,482
Unfunded deferred income taxes 44,812 44,812 49,210
Investment tax credits 3,148 3,203 3,368
Refundable taxes 3,445 3,445 3,202
Other 4,306 4,115 4,029
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96,058 95,586 98,291
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$ 474,603 $ 466,979 $ 475,680
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars except for per share data)
Three Months Ended
December 31,
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1996 1995
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Operating Revenues $ 89,269 $ 90,462
Less: Cost of Energy 50,567 49,072
State Gross Receipts Tax 3,470 3,790
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Operating Margin 35,232 37,600
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Other Operating Expenses:
Operations & maintenance expenses 13,485 13,498
Depreciation 4,412 4,383
Income taxes 5,978 6,430
Other taxes 1,936 1,922
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25,811 26,233
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Operating Income 9,421 11,367
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Other Income (Deductions):
Allowance for equity funds used
during construction 49 46
Equity in partnership earnings 851 402
Other deductions (168) (219)
Income Taxes (304) (42)
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428 187
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Interest and Debt Expense 3,133 3,380
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Net Income 6,716 8,174
Less-Dividends on Preferred Stock 16 16
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Net Income Applicable to Common Stock $ 6,700 $ 8,158
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Income Per Average Share of
Common Stock $ 0.63 $ 0.82
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Dividends Per Share of Common Stock $ 0.38 $ 0.37
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Average Common Shares Outstanding
During the Period 10,623,137 9,931,279
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CONNECTICUT NATURAL GAS CORPORATION "UNAUDITED"
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars except for per share data)
Twelve Months Ended
December 31,
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1996 1995
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Operating Revenues $ 314,170 $ 289,116
Less: Cost of Energy 176,670 154,953
State Gross Receipts Tax 11,390 11,861
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Operating Margin 126,110 122,302
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Operating Expenses:
Operations & maintenance expenses 58,242 54,863
Depreciation 17,794 17,146
Income taxes 13,912 11,680
Other taxes 7,604 7,464
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97,552 91,153
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Operating Income 28,558 31,149
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Other Income (Deductions):
Allowance for equity funds used
during construction 148 121
Equity in partnership earnings 2,486 1,059
Other income (deductions) 189 (938)
Nonrecurring items 892 3,624
Income Taxes (1,267) (1,763)
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2,448 2,103
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Interest and Debt Expense 13,469 14,143
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Net Income 17,537 19,109
Less-Dividends on Preferred Stock 63 63
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Net Income Applicable to Common Stock $ 17,474 $ 19,046
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Income Per Average Share of
Common Stock $ 1.69 $ 1.92
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Dividends Per Share of Common Stock $ 1.51 $ 1.48
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Average Common Shares Outstanding
During the Period 10,328,158 9,931,279
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Three Months Ended
December 31,
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1996 1995
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Cash Flows from Operations $ (7,186) $ (3,411)
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Cash Flows from Investing Activities:
Capital expenditures (3,623) (4,004)
Other investing activities 210 (96)
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Net cash used in investing activities (3,413) (4,100)
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Cash Flows from Financing Activities:
Dividends paid (4,007) (3,691)
Issuance of common stock - -
Other stock activity, net (616) (2)
Principal retired on long-term debt (857) (864)
Short-term debt 9,000 9,900
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Net cash provided by
financing activities 3,520 5,343
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Decrease in Cash and
Cash Equivalents (7,079) (2,168)
Cash and Cash Equivalents at
Beginning of Period 8,515 3,042
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Cash and Cash Equivalents at
End of Period $ 1,436 $ 874
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Thousands of Dollars)
Three Months Ended
December 31,
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1996 1995
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Schedule Reconciling Earnings to
Cash Flows from Operations:
Income $ 6,716 $ 8,174
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Adjustments to reconcile income
to net cash:
Depreciation and amortization 4,563 4,501
Deferred income taxes, net 281 279
Equity in partnership earnings (851) (402)
Cash distributions received from
investments 200 240
Change in assets and liabilities:
Accounts receivable (12,006) (10,618)
Accrued utility revenue (12,195) (16,570)
Inventories 1,976 3,178
Purchased gas costs (2,697) 3,149
Prepaid expenses 7,212 3,925
Accounts payable and accrued expenses 2,418 (3,571)
Other assets/liabilities (2,803) 4,304
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Total adjustments (13,902) (11,585)
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Cash flows from operations $ (7,186) $ (3,411)
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Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 4,936 $ 4,078
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Income taxes $ 1,517 $ 4,607
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Twelve Months Ended
December 31,
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1996 1995
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Cash Flows from Operations $ 34,388 $ 45,356
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Cash Flows from Investing Activities:
Capital expenditures (23,900) (26,687)
Nonrecurring Items 892 4,124
Other investing activities (913) (354)
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Net cash used in investing activities (23,920) (22,917)
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Cash Flows from Financing Activities:
Dividends paid (15,807) (14,762)
Issuance of common stock 15,557 -
Other stock activity, net (652) (7)
Principal retired on long-term debt (3,904) (4,041)
Short-term debt (5,100) (3,900)
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Net cash used by
financing activities (9,906) (22,710)
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Increase (Decrease) in Cash and
Cash Equivalents 562 (271)
Cash and Cash Equivalents at
Beginning of Period 874 1,145
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Cash and Cash Equivalents at
End of Period $ 1,436 $ 874
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Thousands of Dollars)
Twelve Months Ended
December 31,
----------------------
1996 1995
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Schedule Reconciling Earnings to
Cash Flows from Operations:
Income $ 17,537 $ 19,109
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Adjustments to reconcile income
to net cash:
Depreciation and amortization 17,971 17,365
Deferred income taxes, net 1,888 655
Equity in partnership earnings (2,486) (1,059)
Nonrecurring Items (892) (4,124)
Cash distributions received from
investments 1,901 240
Change in assets and liabilities:
Accounts receivable 1,572 (2,285)
Accrued utility revenue 5,288 (4,525)
Inventories (2,659) 6,500
Purchased gas costs (2,134) 5,359
Prepaid expenses (1,538) 467
Accounts payable and accrued expenses 87 3,345
Other assets/liabilities (2,147) 4,309
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Total adjustments 16,851 26,247
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Cash flows from operations $ 34,388 $ 45,356
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Supplemental Disclosures of Cash Flow
Information:
Cash Paid During the Period for:
Interest (net of amount capitalized) $ 13,051 $ 12,360
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Income taxes $ 14,543 $ 12,647
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"UNAUDITED"
CONNECTICUT NATURAL GAS CORPORATION
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
(Thousands of Dollars)
(1) Executive Restricted Stock Plan
On October 1, 1996 41,800 restricted shares of the Company's common
stock were granted to key employees under the executive restricted
stock plan. Restrictions lapse and the shares vest over a two to five
year period beginning October 1, 1998, as certain performance goals are
achieved.
(2) Investments
In December 1996 the Company made an additional $107 investment in KBC
Energy Services of New England ("KBC"), a joint venture partnership
with Bay State Gas Company and Koch Gas Services Company, bringing the
Company's total investment to date to $342. The Company has committed
to a total potential investment of $1,700 for KBC. KBC markets natural
gas supplies, other energy sources and energy management related
services on an unregulated basis to commercial and industrial end
users, primarily in New England.
(3) Proposed Holding Company
In November 1996 the Company announced its intention to reorganize
under a holding company structure wherein CTG Resources, Inc. ("CTG")
would become the holding company for the regulated and unregulated
businesses. Management believes that the proposed restructuring offers
the best means of providing the Company with the increased flexibility
to compete in the rapidly changing deregulated energy marketplace. The
Connecticut Department of Public Utility Control issued a decision
approving the Company's reorganization and the formation of the holding
company on November 27, 1996. The proposed holding company and
reorganization are still subject to shareholder approval at the
Company's Annual Meeting to be held on February 25, 1997.
(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
DECEMBER 31, 1996
(Thousands of Dollars Except Per Share Amounts)
RESULTS OF OPERATIONS
First quarter 1997 earnings per share were $.63, compared to $.82 recorded
for the first quarter of fiscal 1996. Twelve months ended December 31
earnings were $1.69 in fiscal 1997 and $1.92 in 1996. The twelve months
ended December 1996 include nonrecurring earnings of $.05 related to the
sale of a building and land. Earnings recorded for the twelve months ended
December 31, 1995 include a nonrecurring gain of $.24 per share from a
negotiated settlement for the termination of a steam supply contract and a
one-time charge of $(.05) per share in connection with legal matters related
to the Company's 4.87% interest in the Iroquois Gas Transmission System
partnership (Iroquois). Without the effect of these two items, earnings per
share for the twelve months ended periods would be $1.64 and $1.73 in fiscal
1997 and 1996, respectively.
Lower earnings in the first quarter of fiscal 1997 are the result of the
warmer weather in the Company's service area in December 1996, the first
full month of the Company's peak heating season.
The twelve months ended December 1996 earnings reflect a full year of higher
natural gas rates, granted to the Company by the Connecticut Department of
Public Utility Control (DPUC) effective in October 1995, and greater equity
in the earnings of Iroquois, as a result of the Company's increased
investment, lessened the negative impacts of higher operating expenses and a
higher effective income tax rate.
Operating Margin
Gas operating margin is equal to gas revenues less the cost of gas and
Connecticut gross revenues tax and was lower in the quarter and higher in
the twelve months ended December 31, 1996 as compared to 1995. 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 Twelve Months
Ended Ended
December 31, December 31,
1996 1995 1996 1995
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Gas Revenues $ 84,279 $ 85,195 $291,936 $267,375
======== ======== ======== ========
Gas Operating Margin $ 32,490 $ 33,930 $114,664 $108,684
======== ======== ======== ========
Commodity and
Transportation
Volumes(mmcf):
Firm Gas Sales 6,815 7,316 23,426 22,289
Interruptible Gas
Sales 2,829 2,501 8,926 8,529
Off-System Gas
Sales 3,247 3,678 12,004 17,213
Transportation
Services 1,160 1,054 4,442 6,795
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Total 14,051 14,549 48,798 54,826
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First quarter gas operating margin is lower in fiscal 1997 as compared to
fiscal 1996. This decline is attributed to lower natural gas sales,
especially to the firm class of customers, as a result of the warmer
December 1996 weather.
Higher firm rates approved by the DPUC effective October 1995 are the most
significant factor supporting the higher gas operating margin realized in
the twelve months ended December 1996 over the twelve months ended December
1995. Colder weather during this period amplified the impact of the higher
rates as a result of additional on-system gas sales. Higher gas costs
associated with interruptible sales have reduced the margins earned on those
sales in the twelve months ended December 1996, lessening the beneficial
effects to operating margin from the higher firm rates and colder weather.
Operations and Maintenance Expenses
Operations and maintenance expenses remained constant between the comparable
quarters. The twelve months ended December 1996 include the one-time costs
related to a voluntary early retirement program, recorded in September of
1996, and a full year of new amortizations of previously deferred expenses
allowed by the DPUC in its October 1995 rate decision. Together these
resulted in higher operations and maintenance expenses recorded for the
twelve months ended December 1996, as compared to the twelve months ended
December 1995. Higher expenses were recorded for wages and salaries, bad
debt expenses, due to higher sales, employee benefits, pensions, insurance
related costs, regulatory commission and rate proceedings expenses,
conservation programs and outside purchased services. Lower expenses were
recorded for computer hardware rentals and maintenance, because of
renegotiated contracts, and margins generated by service contract activity.
Income Taxes
In the quarter ending December 1996, as compared to the quarter ending
December 1995, the impact of an overall higher effective tax rate was
partially offset by lower taxable income.
The on-going turn around of flow-through book tax depreciation differences
on older plant and the absence of prior periods' cost of removal deductions
taken during fiscal 1996 have resulted in an overall higher effective income
tax rate in fiscal 1997 and higher income taxes in the twelve months ended
December 1996 over the twelve months ended December 1995.
These higher taxes were taken into consideration by the DPUC in determining
the new natural gas rates allowed in October 1995. 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 historically recorded during the summer season.
Other Income (Deductions)
Lower other deductions recorded in the three months ended December 1996,
and higher other income in the twelve months ended December 1996, as
compared to 1995, primarily reflect the absence of the costs associated with
terminating the Company's regulated propane service program. The twelve
months ended December 1996 also reflects the benefits of lower insurance
costs realized from the reconfiguration of certain executive plans.
Interest and Debt Expense
Lower interest expense recorded in both the three months and twelve months
ended December 1996, as compared to 1995, reflect lower levels of long-term
debt outstanding, as a result of scheduled sinking fund payments, and lower
interest related to pipeline refunds and deferred gas costs.
Earnings from Unregulated Operations
Unregulated earnings between the comparable quarters showed no significant
change from year to year. Twelve months ended December 1996 and 1995
unregulated earnings include $.05 and $.24 per share, respectively, from
nonrecurring items. These were the sale of a building and land in the
twelve months ended December 1996 and the settlement related to the
termination agreement negotiated with a supplier of steam in the twelve
months ended December 1995. The twelve months ended December 1995 also
include included a provision equivalent to $(.05) per share in connection
with legal matters related to the Company's interest in Iroquois. Absent
the impact of these nonrecurring items, unregulated earnings have remained
stable from year to year in these comparable reporting periods. Higher
earnings recorded from an increased partnership interest in Iroquois have
offset lower contributions to earnings from district heating and cooling
("DHC") and other energy services, resulting from increases in operating
expenses, and the absence of rental income from the building that was sold
in fiscal 1996.
MATERIAL CHANGES IN FINANCIAL CONDITION
Available cash on hand and short-term borrowings provided the necessary cash
for the Company's operations and construction expenditures during the first
quarter of both fiscal 1997 and 1996.
Outgoing cash flows from operations are frequently experienced during the
first quarter of the fiscal year which begins the winter heating season.
This occurs because high winter-heating-season out-going cash requirements
for natural gas purchases must be satisfied in advance of the future receipt
of in-coming cash from customer receivables. This lag between when gas is
consumed and when payment for it is received creates the need to provide
cash for operations from other sources. In fiscal 1997 this cash
requirement for operations has been even greater because of higher per-unit
gas costs.
In the twelve months ended December 31, 1996, available cash from
operations, together with the proceeds from the June 1996 issue of common
stock, funded both construction and all other financing activities.
Cash flows from investing activities in both the quarter and twelve months
ending December 31, 1995 reflect the receipt of the balance of the
settlement amount due from the termination of the steam supply contract with
the unregulated operations' principal steam supplier.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
(a) Exhibits
27 Financial Data Schedule
99 (i) Exhibit Index
(b) A report on Form 8-K, dated November 5, 1996, was filed on November 5,
1996 to file with the Commission, under Item 5. Other Information, the
contents of a press release issued by the Company on November 5, 1996
to announce earnings data for the fiscal year ended September 30, 1996
and to file unaudited financial statements for the fiscal year ended
September 30, 1996.
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 02/04/97 By: S/ Andrew H. Johnson
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(Andrew H. Johnson)
Treasurer and Chief Accounting Officer
(On behalf of the registrant and as
Chief Accounting Officer)