SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-8369
CONNECTICUT ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-0869582
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
855 Main Street
Bridgeport, Connecticut 06604
(Address of Principal Executive Offices) (Zip Code)
(800) 760-7776
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 7, 1998
Common Stock, $1 par value 10,271,068
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
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenues $ 38,002 $ 44,026 $ 215,282 $ 225,765
Purchased gas 17,847 22,539 108,497 118,584
----------- ---------- ----------- ---------
Gross margin 20,155 21,487 106,785 107,181
Operating Expenses:
Operations 11,517 11,482 37,688 38,120
Maintenance 903 853 2,887 2,781
Depreciation 4,081 3,988 12,561 11,810
Federal and state income taxes (1,806) (865) 12,604 11,330
Municipal, gross earnings and
other taxes 3,238 3,568 11,081 13,873
---------- ---------- ---------- ---------
Total operating expenses 17,933 19,026 76,821 77,914
---------- ---------- ---------- ---------
Operating income 2,222 2,461 29,964 29,267
Other (income) deductions, net (8) 171 (259) (420)
Interest Expense:
Interest on long-term debt and
amortization of debt issue costs 2,984 3,079 9,091 9,242
Other interest, net 265 416 735 1,030
---------- ---------- ---------- --------
Total interest expense 3,249 3,495 9,826 10,272
---------- ---------- ---------- --------
Net (Loss) Income $ (1,019) $ (1,205) $ 20,397 $ 19,415
========== ========== ========== =========
Net (loss) income per share -
Basic $ (0.10) $ (0.13) $ 2.04 $ 2.15
========== ========== ========== =========
Net (loss) income per share -
Diluted $ (0.10) $ (0.13) $ 2.03 $ 2.14
========== ========== ========== =========
Dividends paid per share $ 0.335 $ 0.33 $ 0.995 $ 0.99
---------- --------- ---------- ---------
Weighted average common shares
outstanding during period -
Basic 10,197,554 9,076,783 9,995,647 9,046,928
---------- --------- --------- ---------
Weighted average common shares
outstanding during period -
Diluted 10,249,801 9,129,030 10,047,894 9,076,400
---------- --------- ---------- ---------
See Notes to Consolidated Financial Statements.
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
June 30, Sept. 30,
1998 1997
--------- ---------
(Unaudited)
Assets
- ------
Utility Plant:
Gross utility plant $408,172 $399,675
Less: accumulated depreciation 134,080 130,553
-------- --------
Net utility plant 274,092 269,122
Nonutility property, net 4,383 3,343
-------- --------
Net utility plant and other property 278,475 272,465
-------- --------
Current Assets:
Cash and cash equivalents 5,639 6,644
-------- --------
Accounts receivable 38,400 32,127
Less: allowance for doubtful accounts 1,427 2,948
-------- --------
Net accounts receivable 36,973 29,179
-------- --------
Accrued utility revenues, net 2,646 2,541
Unrecovered purchased gas costs --- 5,523
Inventories 9,828 12,606
Prepaid expenses 5,155 4,067
-------- --------
Total current assets 60,241 60,560
-------- --------
Deferred Charges and Other Assets:
Unamortized debt expenses 5,896 6,038
Unrecovered deferred income taxes 44,589 42,929
Other 54,408 42,289
-------- --------
Total deferred charges and other assets 104,893 91,256
-------- --------
Total assets $443,609 $424,281
======== ========
See Notes to Consolidated Financial Statements.
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
June 30, Sept. 30,
1998 1997
--------- ---------
(Unaudited)
Capitalization and Liabilities
- ------------------------------
Common Shareholders' Equity:
Common stock: authorized-20,000,000
shares, par value $1 per share, issued and
outstanding-10,268,453 shares; 9,172,468
shares $ 10,268 $ 9,172
Capital in excess of par value 119,454 94,540
Unearned compensation (988) (1,068)
Retained earnings 52,513 42,297
Adjustment for minimum pension liability
(net of income taxes) (427) (427)
--------- ---------
Total common shareholders' equity 180,820 144,514
--------- ---------
Long-term debt 134,073 134,073
--------- ---------
Total capitalization 314,893 278,587
--------- ---------
Current Liabilities:
Short-term borrowings 15,183 31,400
Current maturities of long-term debt 454 4,654
Accounts payable 8,689 12,609
Federal, state and deferred income taxes 8,378 5,017
Other accrued taxes 2,598 4,567
Interest payable 2,669 3,499
Customers' deposits 1,711 1,718
Refunds due customers 369 2,627
Refundable purchased gas costs 5,664 ---
Other 5,029 3,892
--------- ---------
Total current liabilities 50,744 69,983
--------- ---------
Deferred Credits:
Deferred income taxes and investment
tax credits 70,447 67,893
Other 7,525 7,818
--------- ---------
Total deferred credits 77,972 75,711
--------- ---------
Total capitalization and liabilities $443,609 $424,281
========= =========
See Notes to Consolidated Financial Statements.
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
June 30,
-----------------
1998 1997
---- ----
Net cash provided by operating activities $22,305 $26,255
------- -------
Cash Flows from Investing Activities:
Capital expenditures (18,773) (18,178)
Contributions in aid of construction 39 42
Payments for retirement of utility plant (110) (240)
Energy ventures 42 ---
------- -------
Net cash used by investing activities (18,802) (18,376)
------- -------
Cash Flows from Financing Activities:
Dividends paid on common stock (10,181) (8,994)
Issuance of common stock 26,090 3,107
Repayments of long-term debt (4,200) (140)
(Decrease) increase in short-term borrowings (16,217) 100
------- -------
Net cash (used) provided by financing activities (4,508) (5,927)
------- -------
Net (decrease) increase in cash and cash
equivalents (1,005) 1,952
Cash and cash equivalents at beginning of period 6,644 5,121
------- --------
Cash and cash equivalents at end of period $ 5,639 $ 7,073
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest $10,634 $ 11,486
Income taxes $ 8,350 $ 4,291
See Notes to Consolidated Financial Statements.
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
General
The unaudited consolidated financial statements presented herein should be read
in conjunction with the consolidated financial statements of Connecticut Energy
Corporation ("Connecticut Energy" or "Company") for the fiscal year ended
September 30, 1997 as presented in the Annual Report on Form 10-K. In the
opinion of management, the accompanying financial information reflects all
adjustments which are necessary to provide a fair presentation of the
interim periods shown. All such adjustments are of a normal recurring nature.
In preparing the financial statements in conformity with generally accepted
accounting principles, the Company uses estimates. Estimates are disclosed
when there is a reasonable possibility for change in the near term. For
this purpose, near term is defined as a period of time not to exceed one
year from the date of the financial statements. The Company's financial
statements have been prepared based on management's estimates of the impact of
regulatory, legislative and judicial developments on the Company or
significant groups of its customers. The recorded amounts of certain
accruals, reserves, deferred charges and assets could be materially impacted
if circumstances change which affect these estimates.
Accounting for the Effects of Regulation
The Company's principal subsidiary, The Southern Connecticut Gas Company
("Southern"), prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" ("SFAS 71"),
which requires a cost-based, rate-regulated enterprise such as Southern to
reflect the impact of regulatory decisions in its financial statements.
The Connecticut Department of Public Utility Control's ("DPUC") actions
through the ratemaking process can create regulatory assets in which costs
are allowed for ratemaking purposes in a period other than the period in
which the costs would be charged to expense if the reporting entity were
unregulated.
In the application of SFAS 71, Southern follows accounting policies that
reflect the impact of the rate treatment of certain events or transactions.
The most significant of these policies include the recording of deferred gas
costs, deferred conservation costs, deferred hardship heating customer
accounts receivable arrearages, deferred environmental evaluation costs and
an unfunded deferred income tax liability, with a corresponding unrecovered
asset, to account for temporary differences previously flowed through to
ratepayers.
Southern had net regulatory assets as of June 30, 1998 and September 30, 1997
of $64,593 and $63,606, respectively. These amounts are included in deferred
charges and other assets and deferred credits in the consolidated balance
sheets and are solely due to the application of the provisions of SFAS 71.
Effective April 1, 1996, the DPUC deregulated the sale of natural gas to
firm commercial and industrial customers by giving these customers an option to
purchase natural gas from independent brokers or marketers. Commercial and
industrial customers electing to purchase natural gas in this manner pay a
DPUC-approved firm transportation rate to the local gas distribution company
("LDCs") for the use of its distribution system.
Southern is one of three Connecticut LDCs whose firm transportation rates
are designed to provide the same margins earned from bundled services.
Because the new rates are margin neutral, there has not been any impact
upon Southern's ability to recover deferred costs through cost-based
rate regulation. Firm transportation rates have eliminated only the gas
cost component of the rates previously charged to these customers. The
Company has not experienced any adverse impact on its earnings or results
of operations from this change in rate structure. Additionally, the DPUC's
initiatives for competition have not been directed toward services for
certain groups of customers, including service to residential classes,
which represent the majority of Southern's total throughput and gross
margin.
Management believes that Southern continues to meet the requirements of SFAS 71
because Southern's rates for regulated services provided to its customers are
subject to DPUC approval, are designed to recover Southern's costs of
providing regulated services and continue to be subject to cost-of-service
based rate regulation by the DPUC.
Deferred Charges and Other Assets
Deferred charges and other assets include amounts related to the following:
June 30, Sept. 30,
As of 1998 1997
- -----------------------------------------------------------------------------
Conservation costs $ 4,741 $ 4,881
Energy assistance funding shortfall 374 882
Environmental evaluation costs 580 718
Gas holder costs 123 308
Hardship heating customer accounts receivable arrearages 16,368 13,439
Hardship heating customer assistance grant program 1,907 634
Investment in energy ventures 3,376 3,418
Nonqualified benefit plans 2,524 2,302
Prepaid pension and postretirement medical contributions 15,047 13,228
Investment in pipeline(1) 5,515 ---
Other 3,853 2,479
------- -------
$54,408 $42,289
======= =======
Southern has been allowed to recover various deferred charges in rates over
periods ranging from three to five years in accordance with the DPUC's
Decision in Southern's latest rate case.
Deferred Credits
Other deferred credits include amounts related to the following:
June 30, Sept. 30,
As of 1998 1997
- ------------------------------------------------------------------------------
Economic development initiatives $ 538 $1,339
Insurance reserves 1,148 1,122
Interruptible margin sharing 853 877
Nonqualified benefit plans 3,382 2,961
Other 1,604 1,519
------ ------
$7,525 $7,818
====== ======
(1) See section in Management's Discussion and Analysis entitled "Regulatory
Matters" for further detail.
Utility Operating Results
Due to the seasonal nature of gas sales for space heating purposes by
Southern, the results of operations for the nine months ended June 30, 1998
are not indicative of the results to be expected for the fiscal year ending
September 30, 1998.
Recent Accounting Developments
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). This
statement establishes standards for the computation and presentation of
earnings per share ("EPS") by all entities with publicly held common
stock or potential common stock. The statement replaces the presentation
of primary EPS with a presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The sole difference
between basic and diluted EPS relates to the common shares granted under the
Company's restricted stock award plan.
Note 2 - Commitments and Contingencies
Environmental Matters
Southern has identified coal tar residue at three sites in Connecticut
resulting from coal gasification operations conducted at those sites by
Southern's predecessors from the late 1800s through the first part of
this century. Many gas distribution companies throughout the country
carried on such gas manufacturing operations during the same period.
See section in Management's Discussion and Analysis entitled "Environmental
Matters" for further detail.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and its
subsidiaries and their representatives may, from time to time, make written
or oral statements, including statements contained in the Company's filings
with the Securities and Exchange Commission and in its annual report to
shareholders, including its Form 10-K for the fiscal year ended September
30, 1997 and this quarterly report on Form 10-Q, which constitute or contain
"forward-looking" information as that term is defined in the Private
Securities Litigation Reform Act of 1995.
All statements other than the financial statements and other statements of
historical facts included in this quarterly report regarding the Company's
financial position and strategic initiatives and addressing industry
developments are forward-looking statements. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or
belief as to future results, such expectation or belief is expressed in
good faith and believed to have a reasonable basis, but there can be no
assurance that the statement of expectation or belief will result or be
achieved or accomplished. Factors which could cause actual results to
differ materially from those stated in the forward-looking statements may
include, but are not limited to, general and specific economic, financial
and business conditions; federal and state regulatory, legislative and
judicial developments which affect the Company or significant groups of its
customers; the impact of competition on the Company's revenues; fluctuations
in weather from normal levels; changes in development and operating costs;
the availability and cost of natural gas; the availability and terms of
capital; exposure to environmental liabilities; the costs and effects
of unanticipated legal proceedings; the successful implementation and
achievement of internal performance goals; the impact of unusual items
resulting from ongoing evaluations of business strategies and asset
valuations; and changes in business strategy.
RESULTS OF OPERATIONS
Net Income
- ----------
The Company's consolidated net income for the three and nine months ended
June 30, 1998 and 1997 is detailed below:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------- ------------------
(in thousands, except per share) 1998 1997 1998 1997
---- ---- ---- ----
Net (Loss) Income $(1,019) $(1,205) $20,397 $19,415
======= ======= ======= =======
Net (loss) income per share - Diluted $ (0.10) $ (0.13) $ 2.03 $ 2.14
======= ======= ======= =======
Weighted average common shares outstanding - Diluted 10,250 9,129 10,048 9,076
------- ------- ------- -------
The net loss for the three months ended June 30, 1998 was approximately 15%
lower than the net loss recorded in the corresponding 1997 period. This
was principally due to lower taxes, lower interest expense and higher other
income. The reduction in net loss for the 1998 quarter was partially offset
by lower firm and interruptible margins.
Net income for the nine months ended June 30, 1998 increased approximately
5% compared to the nine months ended June 30, 1997 principally due to higher
firm margins, lower operations expense, lower property and gross earnings
taxes and lower interest expense. Partially offsetting the increase in
net income were lower interruptible margins, lower other income as well as
higher operating expenses for maintenance, depreciation and income taxes.
Results for both 1998 periods reflect the issuance of 1,035,000 shares of
common stock in November of 1997.
Total Sales and Transportation Volumes
- --------------------------------------
Total volumes of gas sold and transported by the Company's principal
subsidiary, The Southern Connecticut Gas Company ("Southern"), for the three
and nine months ended June 30, 1998 were approximately 5,500 and 29,201
MMcf, respectively, representing decreases of approximately 47% and
21% compared to the corresponding 1997 periods. These decreases occurred
in most sales categories and were primarily attributable to weather which
was approximately 18% and 7% warmer compared to the three and nine months
ended June 30, 1997, respectively. Higher volumes of firm transportation
during the three and nine months ended June 30, 1998 and higher off-system
sales volumes during the nine months ended June 30, 1998 partially offset
the overall decrease in sales and transportation volumes.
Firm Sales and Transportation Volumes
- -------------------------------------
Firm sales and transportation volumes for the three and nine months ended
June 30, 1998 decreased approximately 13% and 4%, respectively, compared
to the corresponding 1997 periods. This was due to lower firm sales
principally due to warmer weather in the 1998 periods. The overall decreases
in this category for the 1998 periods were partially offset by the continued
growth in Southern's firm customer base and by increases in firm
transportation volumes.
Interruptible Sales and Transportation Volumes
- ----------------------------------------------
Margins earned on volumes delivered to interruptible customers vary depending
upon the relationship of the market price for alternate fuels to the cost of
natural gas and related transportation. Margins earned, net of gross
earnings tax, from on-system interruptible services in excess of an annual
target were allocated through a margin sharing mechanism between Southern
and its firm customers. Beginning June 1, 1996, excess on-system margins
earned that would have been returned to Southern's firm customers have been
redirected, with Connecticut Department of Public Utility Control ("DPUC")
approval, to fund certain economic development and hardship assistance
programs. Off-system margins earned, net of gross earnings tax, continue
to be shared between Southern and its firm customers.
The chart below depicts volumes of gas sold to and transported for on-system
interruptible customers, off-system sales volumes and off-system
transportation volumes under a special contract with The Connecticut Light
and Power Company for its Devon electric generating station as well as gross
margins earned and retained due to the margin sharing mechanism on these
services for the three and nine months ended June 30, 1998 and 1997:
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
(dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
Gross margin earned $2,068 $2,690 $7,267 $9,736
====== ====== ====== ======
Gross margin retained $1,618 $2,435 $4,536 $6,385
====== ====== ====== ======
Volumes sold and transported (MMcf) 2,280 6,581 9,921 16,873
------ ------ ------ ------
Gross margin retained represents the difference between gross margin earned and
margin to be allocated through the margin sharing mechanism. Gross margin
earned and retained by Southern was lower for the three and nine months
ended June 30, 1998 compared to the corresponding 1997 periods principally
due to the competitive price of other energy sources compared to natural
gas.
Total interruptible volumes for the three and nine months ended June 30, 1998
were lower compared to the corresponding 1997 periods primarily due to
decreases in off-system transportation and on-system interruptible sales
volumes due to the competitive price of other energy sources compared to
natural gas. Off-system sales activity for the three months ended
June 30, 1998 was lower than the corresponding 1997 quarter, while an increase
in off-system sales activity for the nine months ended June 30, 1998
partially offset the overall decrease in this category for that period.
Gross Margin
- ------------
The Company's gross margin for the three months ended June 30, 1998 was
approximately 6% lower compared to the corresponding 1997 period. This
decrease was principally attributed to both lower firm and interruptible
margins. Gross margin for the nine months ended June 30, 1998 was
relatively unchanged compared to the corresponding 1997 period.
Southern's firm rates include a Weather Normalization Adjustment clause ("WNA")
which allows Southern to charge or credit the non-gas portion of its firm rates
to reflect deviations from normal weather. Because weather during the three
and nine months ended June 30, 1998 was approximately 8% and 9% warmer than
normal, respectively, the operation of the WNA collected approximately
$1,140,000 and $6,017,000, respectively, from firm customers. This compares to
a return to firm customers of approximately $803,000 during the three months
ended June 30, 1997 and a collection from firm customers of approximately
$2,369,000 during the nine months ended June 30, 1997.
Southern's firm sales rates include a Purchased Gas Adjustment clause ("PGA")
which allows Southern to flow back to its customers, through periodic
adjustments to amounts billed, increased or decreased costs incurred for
purchased gas compared to base rate levels without affecting gross margin.
The operation of Southern's PGA increased revenues and gas costs for the
three and nine months ended June 30, 1998 by approximately $1,275,000 and
$10,576,000, respectively. For the three and nine months ended June 30,
1997, PGA adjustments increased revenues and gas costs by approximately
$482,000 and $5,762,000, respectively.
Operations Expense
- ------------------
Operations expense for the nine months ended June 30, 1998 decreased
approximately 1% compared to the nine months ended June 30, 1997.
The decrease was primarily due to lower amortizations related to Southern's
certified hardship forgiveness program due to the conclusion of the
amortization period as of December 31, 1996 and lower pension and health
care costs. Partially offsetting the overall decrease in operations expense
for the 1998 period were higher expenses in the areas of labor, partly due
to early retirement incentives paid to union employees during the three months
ended June 30, 1998; outside services; regulatory commission expense and
certain other general and administrative expenses.
Depreciation Expense
- --------------------
Depreciation expense for the three and nine months ended June 30, 1998
increased approximately 2% and 6%, respectively, compared to the
corresponding 1997 periods. The increases were primarily due to additions
to plant in service by Southern.
Federal and State Income Taxes
- ------------------------------
Total federal and state income tax credits increased for the three months ended
June 30, 1998 compared to the corresponding 1997 period due to an adjustment to
the effective tax rate as well as a higher pre-tax loss for the 1998
quarter. The total provision for income taxes for the nine months ended
June 30, 1998 increased approximately 11% compared to the corresponding
1997 period primarily due to higher pre-tax income and a higher effective
tax rate. The higher effective tax rate was primarily caused by the tax
treatment of conservation expenditures and uncollectibles and the inability
to make tax-deductible employee benefit plan contributions.
Municipal, Gross Earnings and Other Taxes
- -----------------------------------------
Municipal, gross earnings and other taxes decreased approximately 9% and 20%
for the three and nine months ended June 30, 1998, respectively, compared
to the corresponding 1997 periods. For the three months ended June 30, 1998,
the decrease was primarily due to lower gross earnings tax due to lower
revenues and a lower provision for property taxes. For the nine months
ended June 30, 1998, the decrease was primarily due to the DPUC Decision
which required Southern to change its accounting treatment for accruing
property taxes (see section entitled "Regulatory Matters" for further
detail) and, to a lesser extent, lower gross earnings tax due to lower
revenues.
Other (Income) Deductions, Net
- ------------------------------
Other income for the three months ended June 30, 1998 was higher compared to
the corresponding 1997 period. This was primarily due to the contribution
to earnings by one of the Company's nonutility subsidiaries in the 1998
quarter compared to a net loss in the 1997 quarter. Other income for the
nine months ended June 30, 1998 was lower compared to the nine months ended
June 30, 1997 primarily due to the receipt of approximately $974,000 in
interest income in the 1997 period from one of Southern's interstate
pipeline suppliers related to Southern's prepayment of transition costs
associated with Federal Energy Regulatory Commission's ("FERC") Order
No. 636. The nine month period ended June 30, 1998 was also favorably
impacted by the operating results of the Company's nonutility subsidiaries.
Additionally, both 1998 periods benefited by an increase in investment
income related to investments in nonqualified employee benefit plan trusts.
Interest Expense
- ----------------
Total interest expense decreased approximately 7% and 4% for the three and nine
months ended June 30, 1998, respectively, compared to the corresponding 1997
periods primarily due to lower short-term interest expense related to lower
average short-term borrowings, lower long-term debt expense due to debt
repayments, lower short-term interest expense on pipeline refunds not yet
returned to firm customers and lower interest expense on transition costs.
Partially offsetting the decreases in total interest expense was an increase
in short-term interest expense on deferred purchased gas costs for the
three and nine months ended June 30, 1998.
Year 2000
- ---------
Many enterprises that rely on computer processing for critical functions have
been affected by the existence of certain systems that are not capable of
processing dates beyond December 31, 1999. To determine whether system
development plans need to be modified to include renovation of such
systems, an evaluation must be made of those systems that will be used in the
year 2000.
The Company has addressed this issue by expanding its computer system planning
process to include a complete inventory and assessment of the risks and
exposures of its hardware and software. Based on this review, management
believes that its current plans address the affected systems and that any
renovation activities will not have a material adverse impact on the
financial condition or the results of operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
- --------------------
The seasonal nature of Southern's business creates large short-term cash
demands primarily to finance gas purchases, customer accounts receivable
and certain tax payments. To provide these funds, as well as funds for
capital expenditure programs and other corporate purposes, Connecticut
Energy and Southern have credit lines with a number of banks as detailed
below:
Shared
Connecticut Connecticut
Energy Southern Energy/Southern Total
- ------------------------------------------------------------------------------
As of June 30, 1998:
Committed lines $5,000,000 $32,000,000 $20,000,000 $57,000,000
Uncommitted lines --- $10,000,000 $10,000,000 $20,000,000
Effective January 1, 1998, Connecticut Energy and Southern entered into an
agreement with one bank for a shared committed line of credit in the amount
of $20,000,000, replacing an existing line that expired on December 20, 1997.
The new agreement extends the credit line term until December 31, 1998, and
the initial term may be extended from year to year thereafter dependent upon
the operating cash requirements of the Company and its subsidiary and
approval by the bank. At June 30, 1998, unused lines of credit totaled
$66,300,000.
In May 1998, one of the Company's nonutility subsidiaries, CNE Energy Services
Group, Inc. ("CNE Energy"), entered into a term loan agreement with a bank.
Under this agreement, CNE Energy may borrow up to $15,000,000 to reimburse
Southern for costs incurred to construct distribution facilities to transport
natural gas to an electric generating plant in Bridgeport. Borrowings began
in May 1998.
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, 1998 compared to the
corresponding 1997 period were lower primarily due to a lower comparative
increase in accrued taxes and reductions in refunds due customers, transition
cost liability and liabilities related to margins earned which were used
to fund certain economic development initiatives in Bridgeport and to provide
grants to customers to reduce Southern's hardship assistance balances. The
decrease in operating cash flows in the 1998 period was partially offset by
collections from customers through the operation of the PGA and a lower
comparative increase in accounts receivable balances.
Investing Activities
- --------------------
Capital expenditures, net of contributions in aid of construction,
approximated $18,734,000 and $18,136,000 for the nine months ended June 30,
1998 and 1997, respectively. On an annual basis, Southern relies upon cash
flows from operating activities to fund a portion of these expenditures, with
the remainder funded by short-term borrowings and, at some later date,
long-term debt and capital stock financings.
Financing Activities
- --------------------
On May 26, 1998, the Board of Directors of the Company increased the
quarterly dividend on the Company's common stock to $0.335 per share, or an
indicated annual dividend rate of $1.34 per share.
In November 1997, the Company completed a public sale of 1,035,000 shares of
its common stock at a price of $24.25 per share and received net proceeds of
approximately $24,224,000. The proceeds of this sale were used for the
repayment of Southern's short-term debt. The method, timing and amounts of
any future financings by the Company or its subsidiaries will depend on a
variety of factors, including capitalization ratios, coverage ratios,
interest costs, the state of the capital markets and general economic
conditions.
Regulatory Matters
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In accordance with Connecticut statutes, Southern is undergoing a periodic
review of rates and services by the DPUC that commenced in January 1998. A
periodic review entails a complete review by the DPUC of Southern's financial
and operating records. Public hearings will be held to determine whether
Southern's current rates are unreasonably discriminatory or more or less than
just, reasonable and adequate.
On July 8, 1998 Southern received an interim Decision regarding the
"overearnings" portion of this docket. According to Connecticut statutes, a
utility which earns 100 basis points or more over its allowed rate of return
for six consecutive months may be reviewed by the DPUC. The DPUC ordered a
rate reduction of $528,000. Management cannot predict the financial or
operational impact of any final decision which may result from this review
which is still ongoing.
Southern received a Decision from the DPUC on its special contract with Duke
Energy Trading and Marketing to transport natural gas to a 520 megawatt
electric generating plant in Bridgeport. Under the contract,
Southern will own, operate and maintain the 16", nearly 11-mile main,
and CNE Energy will be solely responsible for financing the project and
its maintenance costs. This effectively removes any risk from Southern or
its ratepayers for any future operating and maintenance costs. Construction
was completed and the plant was operational in July 1998.
In October 1997, Southern requested that the DPUC consider a proposed change in
Southern's accounting treatment for property taxes, which would account for such
taxes as a prepaid expense. This method is consistent with the practice of
other major public service companies in Connecticut. Southern had been
accruing for property taxes in the year prior to the payment date. On
November 19, 1997, under the reopened Docket No. 93-03-09, Application of
The Southern Connecticut Gas Company to Increase Its Rates and Charges, the
DPUC approved Southern's proposal. The stipulations in the Decision ordered
Southern to reduce its reserve for property taxes by approximately $3,722,000,
with fifty percent, or approximately $1,861,000, flowing through as a one-time
reduction to property tax expense and the remaining fifty percent to be refunded
to firm customers through the operation of the PGA in three equal amounts
during the second quarter of fiscal 1998.
Environmental Matters
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Southern has identified coal tar residue at three sites in Connecticut
resulting from coal gasification operations conducted at those sites by
Southern's predecessors from the late 1800s through the first part of this
century. Many gas distribution companies throughout the country carried on
such gas manufacturing operations during the same period. The coal tar
residue is not designated a hazardous material by any federal or Connecticut
agency, but some of its constituents are classified as hazardous.
On April 27, 1992, Southern notified the Connecticut Department of
Environmental Protection ("DEP") and the United States Environmental
Protection Agency of the presence of coal tar residue at the sites. On
November 9, 1994, the DEP informed Southern that it had performed a
preliminary review of the information provided to it by Southern and had
determined that, based on current priorities and limited staff resources, a
comprehensive review of site conditions and subsequent participation by the
DEP "are not possible at this time."
On September 8, 1997, Southern received a letter from the DEP informing it that
the three sites had been entered on the Connecticut Inventory of Hazardous
Waste Sites. The letter states that the site located on Pine Street in
Bridgeport, Connecticut may be of particular interest to the state of
Connecticut because of its proximity to the Connecticut Department of
Transportation expansion project of the U.S. Highway Route Number 95 Corridor.
Placement of the sites on the Inventory of Hazardous Waste Sites means that
the DEP may pursue remedial action pursuant to the Connecticut General
Statutes.
Each site is located in an area that permits Southern to voluntarily perform
any remedial action. Connecticut law also allows Southern to retain a Licensed
Environmental Professional to conduct further environmental assessments and,
if necessary, to develop remedial action plans in accordance with Connecticut
Remediation Standard Regulations. Southern is currently conferring with
officials of the DEP to establish priorities in connection with the
environmental assessments.
Management cannot at this time predict the costs of any future site analysis
and remediation, if any, nor can it estimate when any such costs, if any, would
be incurred. While such future analytical and cleanup costs could possibly be
significant, management believes that, based upon the provisions of the
Partial Settlement in Southern's most recent rate order and regulatory
precedent with other local gas distribution companies in Connecticut,
Southern will be able to recover these costs through its customer rates.
Although the method, timing and extent of any recovery remain uncertain,
management currently does not expect that the incurrence of such costs will
materially adversely impact the Company's financial condition or results of
operations.
PART II- OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
Exhibit 10 - Agreement between The Southern Connecticut Gas
Company and Connecticut Energy Corporation and David Silverstone
related to change in control, dated April 1, 1998, is filed
herewith at pages 21 to 30.
Exhibit 27 - Financial Data Schedule
Submitted only in electronic format to the Securities and Exchange
Commission.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter.
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 12, 1998 By: /s/ Vincent L. Ammann, Jr.
--------------- ------------------------------
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer