-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HOPARjf6UrRyjVDPvdV91LkawVOOR1VsWDZMoJzWX70wI4ibi+7b/wov0MGbFHrB 0ZomIkW3gz7Y/UC2vyx+ow== 0000310103-95-000026.txt : 19951208 0000310103-95-000026.hdr.sgml : 19951208 ACCESSION NUMBER: 0000310103-95-000026 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951207 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT ENERGY CORP CENTRAL INDEX KEY: 0000310103 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 060869582 STATE OF INCORPORATION: CT FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08369 FILM NUMBER: 95599880 BUSINESS ADDRESS: STREET 1: 855 MAIN STREET CITY: BRIDGEPORT STATE: CT ZIP: 06604 BUSINESS PHONE: 2033828111 MAIL ADDRESS: STREET 1: 855 MAIN ST STREET 2: 855 MAIN ST CITY: BRIDGEPORT STATE: CT ZIP: 06604 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1995 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) Registrant's telephone number, including area code (203) 579-1732 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock ($1 par value) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: (Title of Class) None 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant based on the closing price of such stock as of November 24, 1995: $181,839,941 Class Outstanding at November 24, 1995 -------------------------- -------------------------------- Common Stock, $1 par value 8,870,241 An index of exhibits to this Annual Report on Form 10-K may be found on Page 17 hereof. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- 1. Portions of Connecticut Energy Corporation's 1995 Annual Report to Shareholders are incorporated into Part II. 2. Portions of Connecticut Energy Corporation's Definitive Proxy Statement dated December 13, 1995 are incorporated into Part III. PART I ------ CONNECTICUT ENERGY CORPORATION ------------------------------ Item 1. Business - ----------------- Connecticut Energy Corporation ("Company") is a public utility holding company primarily engaged in the retail distribution of natural gas for residential, commercial and industrial uses through its principal subsidiary, The Southern Connecticut Gas Company ("Southern"), a Connecticut public service company. Southern's predecessor companies, New Haven Gas Company and The Bridgeport Gas Company, were originally incorporated in Connecticut in 1847 and 1849, respectively. The Company is exempt from registration under the Public Utility Holding Company Act of 1935. Southern serves approximately 154,000 customers in Connecticut, primarily in 22 towns along the southern Connecticut coast from Westport to Old Saybrook, which includes the urban communities of Bridgeport and New Haven. Southern is also authorized to lay mains and sell gas in an additional ten towns in its service area, but does not currently provide any service to these towns. As of September 30, 1995, the Company, through its subsidiary, had 532 full-time employees all of whom were employees of Southern. A breakdown of Southern's revenues for the twelve months ended September 30, 1995 was 58.2% residential, 20.5% commercial, 7.8% industrial and 13.5% interruptible and other. Southern is the sole distributor of natural gas, other than bottled gas, in Southern's service area. Oil and electricity compete with gas in most industrial and commercial markets and for residential space and water heating. In general, Southern's firm rates currently are lower than electric rates for heating and, on average, are generally competitive with fuel oil. Southern's gas sales are affected by seasonal factors, and it experiences higher revenues during the winter months. In fiscal 1995, the Company formed two new nonutility subsidiaries, Total Energy Services Group, Inc. ("TESG") and Connecticut Energy Development Corporation ("CEDC"). TESG is initially expected to engage in activities relating to the selling, planning, purchasing and management of various energy services to commercial and industrial end users. CEDC is an equity holder in an entity formed to purchase and market natural gas and potentially may participate in other nonregulated activities. Customers General. From 1991 through 1995, the average number of on-system customers served by Southern grew from approximately 151,500 to 154,200. Southern provides two types of gas sales service to its on-system customers--firm and interruptible. Firm service is provided to residential, commercial and industrial customers who require a continuous gas supply throughout the year. Firm service for residential use includes service to multi-family units. Southern serves approximately 175,000 firm residential units. Interruptible service is available to those commercial and industrial customers and multi- family residential dwellings that have dual fuel capabilities which allow them to alternate between natural gas and another fuel source. Southern provides transportation service to certain commercial and industrial customers on an interruptible basis. The gas transported by Southern is owned by those commercial and industrial customers. Additionally, Southern has the approval of the Connecticut Department of Public Utility Control ("DPUC") to participate in the off-system sales market. If gas supplies are available after meeting on-system loads, Southern sells to customers within Connecticut or in out-of-state markets. These sales are on an interruptible basis and the customers to which these sales are made are not permanent customers of Southern. Firm Sales. In 1995, firm sales represented approximately 87% of operating revenues and approximately 39% of total gas throughput. Firm sales to industrial customers are likely to constitute a smaller percentage of Southern's future total sales due to the changing character of the local economy and continuing regulatory developments affecting the natural gas industry. Refer to the section entitled "Rates and Regulation" for further detail. Southern concentrates on customer additions that are the most cost- effective to achieve. During the mid-1980s, when many residential family developments were being constructed, Southern extended mains to those developments, thereby adding groups of customers for heating as well as appliance loads at a relatively low capital cost per customer. Over the past three years, new construction has slowed dramatically, and Southern has focused on adding load along its existing mains, which generally requires a lower capital outlay. Approximately 50% of the residences along Southern's mains heat with natural gas, and the conversion of these homes to natural gas heat has been a major factor in increased load growth during the current economic slowdown. Interruptible Sales, Transportation and Special Contract Services. Interruptible sales and transportation services are priced flexibly and competitively compared to the price of alternate fuels being paid by larger commercial and industrial customers. Southern's interruptible sales fluctuate depending primarily upon the relative prices of alternate fuels and natural gas as well as the availability of gas not needed to serve firm customers. In addition to interruptible sales, Southern transports gas, on an interruptible basis, for delivery to certain large commercial and industrial users. Because of recent regulatory developments, end-users can contract more easily than in the past for transportation service on interstate pipelines to transport natural gas supplies purchased from producers/suppliers, rather than purchase gas solely from the local gas distribution company. In Southern's service areas, gas is transported to the customers' premises using interstate pipeline transportation and Southern's distribution system. Interruptible transportation revenues are considerably less than revenues from gas sales because customers pay only a fee for the transportation service, whereas gas sales revenues include the costs of gas sold. Southern provides service to The Connecticut Light and Power Company's Devon generating station in accordance with rates specified in a Special Contract for the Transportation of Gas. In 1995, interruptible sales, transportation and special contract services represented approximately 13% of operating revenues and approximately 59% of total gas throughput. Combined interruptible sales and transportation services have generally increased since 1988 because of (1) higher alternate fuel prices, (2) Southern's ability to negotiate its interruptible prices under flexible pricing arrangements, (3) changes in the regulatory environment which encouraged such sales and (4) customers' increased desire for cost containment. See section entitled "Rates and Regulation" for further discussion of Southern's flexible pricing and margin sharing mechanism for on-system interruptible service. To the extent Southern negotiates its monthly prices for interruptible services below its monthly standard offering price, lower margins may result. Southern's average margins on interruptible transportation service are less than its average margins on firm sales and are usually equal to or slightly less than its average margins on interruptible sales. The Company does not believe that the loss of any single customer or a few customers would have a long-term, material adverse effect upon Southern's business. Marketing. Southern focuses its marketing efforts on three objectives: (1) to increase the number of households using natural gas for heating and hot water, (2) to improve system load factor by promoting additional interruptible sales and (3) to add new sales and retain existing sales to commercial and industrial customers through the use of both traditional and off-peak applications for natural gas. Marketing programs emphasize growth from within the existing distribution system and addition of high load factor usage of natural gas such as water heating, air conditioning and electric power generation. In the residential heating market, 2,366 customers were added in 1995 compared to 2,504 customers in 1994 and 1,865 in 1993. Residential conversions to natural gas accounted for 68% of total new customer additions in 1995 compared to 61% in 1994 and 80% in 1993. Southern's residential marketing includes the following programs: (1) a conversion burner program; (2) a high-efficiency heating program; (3) a trade ally program and (4) service contracts for natural gas heating equipment. Southern also uses employee incentives to promote heating conversions. In the commercial and industrial market segments, emphasis is on adding new firm and interruptible sales while retaining existing load. During 1995, Southern added almost 788,000 Mcf of annualized new sales compared to approximately 861,500 Mcf of annualized new sales in 1994. Firm sales accounted for approximately 65% of this total compared to approximately 75% in 1994. Marketing programs for commercial and industrial customers include (1) a program to promote the use of high efficiency equipment; (2) a sales program offering customers the option of financing new equipment through Southern; (3) a conversion burner leasing program which provides customers with a low-cost opportunity to switch to natural gas and (4) a major customer retention program. During 1996, firm transportation service will be available in Connecticut. This will provide an opportunity for Southern to add new customers in this business segment. Sales to cooling and cogeneration markets represent the potential for increasing interruptible natural gas usage. Advances in natural gas cooling technology along with environmental and operational advantages continue to increase the competitiveness of natural gas cooling in commercial buildings and for industrial process applications. During 1995, Southern added 927 tons of natural gas cooling. This represents slightly more than 18,600 Mcf of new off-peak load. Since 1991, Southern has added 9,402 tons of natural gas cooling. Southern's marketing programs for natural gas cooling and cogeneration utilize customized rebates to encourage conversion. Natural gas vehicles ("NGV") represent an emerging market opportunity to increase interruptible gas usage. Southern has pursued this market aggressively and has operational NGV fueling sites at the following customer locations: (1) Southern New England Telephone -- fueling 11 vehicles at its New Haven corporate headquarters; (2) United States Postal Service -- fueling 62 vehicles at its East Haven office and (3) R.R. Donnelley and Sons -- converting 4 heavy duty lift trucks to natural gas with the potential of adding 18 more lift trucks to fuel at its Old Saybrook site. In addition, Southern has entered into an agreement with the town of Westport to provide natural gas fueling at a municipal site initially to fuel 8 police vehicles and 10 Norwalk Transit System buses. An additional 10 police vehicles and 4 police buses will begin fueling at the site during the next two years. The Company has also entered into agreements to provide trial NGV fuel service for the South Central Regional Water Authority and the Bridgeport Hydraulic Company. Gas Supply. Southern's long-term supply sources include the following: (1) Canadian supplies purchased from Alberta Northeast Gas Limited ("Alberta Northeast") with transportation on Iroquois Gas Transmission System, L.P. ("Iroquois"); (2) transportation and storage services from Tennessee Gas Pipeline Company ("Tennessee") with direct purchase of supply from producers and marketers; (3) transportation and storage services from Texas Eastern Transmission Corporation ("Texas Eastern") with direct purchase of supply from producers and marketers; (4) transportation services from Algonquin Gas Transmission Company ("Algonquin") of natural gas purchased from producers and marketers; (5) transportation and storage service from CNG Transmission Corporation ("CNG Transmission"); (6) transportation service from Transcontinental Gas Pipeline Corporation ("Transco"); (7) storage and transportation service from National Fuel Gas Supply Corporation ("National Fuel") and (8) liquid and vapor supplies from Distrigas of Massachusetts Corporation ("Distrigas"). These arrangements result in gas deliveries into Southern's service territory through interconnections with three interstate pipelines: Algonquin, Iroquois and Tennessee. In addition to Southern's long-term firm supply arrangements, Southern purchases spot supplies and utilizes interruptible transportation services from interstate pipeline companies. Southern's supply, transportation and storage agreements do not provide for minimum payments, but do require Southern to pay a fixed demand charge regardless of the amount of gas transported or stored. The Federal Energy Regulatory Commission ("FERC") regulates interstate pipeline companies in connection with the rates charged to Southern for transportation and storage of natural gas. The following table shows Southern's sources of purchased gas for the periods indicated: Years Ended September 30, (Millions of cubic feet) 1995 1994 1993 ----------------------------- Algonquin (2) 53 229 Tennessee (7) 24 0 Texas Eastern 0 0 372 Alberta Northeast 12,573 12,631 12,446 Other* 20,646 18,586 15,731 ------ ------ ------ Total 33,210 31,294 28,778 ------ ------ ------ Propane 0 0 33 Net Inventory Changes 172 (388) (1,362) Transportation 17,346 3,396 1,653 ------ ------ ------ Total Throughout 50,728 34,302 29,102 ====== ====== ====== *Includes liquified natural gas and producers/marketers Domestic Supply Prior to 1992, Southern purchased sales service from Tennessee, Texas Eastern and Algonquin combined with a small amount of storage service with Penn-York Energy Corporation ("Penn-York"), as well as a storage service through Algonquin delivered on a "best efforts" basis. With implementation of FERC Order No. 636, Southern has converted these supply arrangements from fully bundled sales and storage services to unbundled storage and transportation services. On July 1, 1992, Southern converted its long-term sales contract with Tennessee to firm transportation and firm storage services. Under the transportation contract, Southern has 13,336,000 Mcf of pipeline capacity available on an annual basis. Southern's storage contract with Tennessee provides storage of 1,195,329 Mcf, which includes an increase of 21,329 Mcf, effective December 1, 1994, resulting from settlement of several FERC dockets. Under FERC Order No. 636, the storage contract was unbundled into a storage and a transportation contract. These contracts expire in the year 2000. Two other transportation contracts with Tennessee provide 516,000 Mcf of firm transportation annually and expire in the year 2000 as well. Southern has elected not to renew its firm storage contract for 150,000 Mcf of winter season supply with Penn-York and the contract will expire on March 31, 1996. Southern will switch storage service from Penn-York to Tennessee, better utilizing the Tennessee storage acquired through the restructuring process and the additional storage acquired from the settlement described above. The firm transportation for delivery of Tennessee storage will continue until the year 2000. On June 1, 1993, Texas Eastern's former sales service was converted to a firm transportation service. This service provides for 5,972,000 Mcf of pipeline capacity on an annual basis. Additionally, Texas Eastern provides 1,383,000 Mcf of storage service and 12,108,000 Mcf of transportation service on an annual basis. These contracts expire in the year 2012. Southern has a storage service contract with CNG Transmission under which Southern has 100 days of storage service available and 648,000 Mcf annually. The storage gas is transported by Texas Eastern and Algonquin under firm transportation contracts. The remaining term of the contract is 17 years. Under other contracts, CNG Transmission provides 773,000 Mcf of annual firm storage service and 1,028,000 Mcf of annual transportation service. This gas is stored by CNG Transmission and delivered to Southern under transportation contracts with Texas Eastern and Algonquin. Algonquin furnishes only transportation services to Southern. The deliveries which Algonquin makes to Southern are gas supplies transported by other pipelines interconnected to Algonquin. Much of the transportation and storage service through Texas Eastern and Algonquin is of the "no notice" type, which allows Southern to make nominations for deliveries of gas on less than 24-hour notice and obtain daily contractual entitlements without incurring penalties. These services allow Southern to meet sudden and dramatic shifts in demand and assure reliability to meet customer requirements. Southern also has multiple purchase agreements with producers and marketers for firm supply behind its storage and transportation agreements. These agreements range from 365-day availability of supply to 90-day peaking supply, with contract terms ranging from 90 days to six years. Southern pays a monthly reservation charge but has no monthly purchase obligation under these agreements. Commodity prices are based on price indexes by supply area. Canadian Supply In January 1992, Southern began receiving Canadian supply under its long- term contracts with Alberta Northeast with firm transportation provided by Iroquois which became an open access transporter consistent with FERC regulations effective September 1, 1993. These supply contracts with Alberta Northeast provide Southern with 12,775,000 Mcf of firm Canadian supply annually. Supply agreements with Alberta Northeast have remaining terms of 8 to 12 years, and the transportation agreement with Iroquois has a remaining term of 16 years. Supplemental Supply Southern has an agreement with Distrigas to purchase 328,000 Mcf annually on a firm basis. This contract continues for seven years and includes provisions for either vapor or liquid delivery, with an option to increase maximum daily delivery over the term of the contract. Additionally, Southern has interruptible purchase contracts with Distrigas. Supplemental gas supplies from on-site liquified natural gas ("LNG") and liquified propane air storage facilities are available to meet peak and winter demand requirements. FERC Order No. 636 Effective November 1, 1993, the FERC in Order No. 636 mandated the unbundling of pipeline services, thereby fostering a competitive natural gas market through equal and open access to pipeline transportation capacity by all suppliers and users. Through the issuance of Order No. 636, the FERC removed the pipelines' competitive advantage of bundling gas supplies and all related transportation and storage services as a package and required pipelines to sell transportation and storage services separately. Now customers of pipelines and local gas distribution companies can choose among alternative sellers of natural gas and pipeline services. To complement Order No. 636, the FERC adopted Order No. 547 wherein the FERC issued blanket marketing certificates to all parties who are not interstate pipelines. These certificates allow entities such as Southern to make sales for resale in interstate commerce at negotiated rates, with pre-granted abandonment. Transactions under these certificates do not subject the holders to any other regulations under the Natural Gas Policy Act of 1978. FERC Order No. 636 Transition Costs As a result of FERC Order No. 636, costs are being incurred by Southern's interstate pipeline suppliers to convert existing bundled sales services to unbundled transportation and storage services. These transition costs include unrecovered gas costs, gas supply realignment costs, stranded investment costs and new facilities costs. On July 8, 1994, the DPUC issued a Decision in Docket No. 94-01-12, DPUC Generic Review of Connecticut Gas Local Distribution Companies: Implementation of the FERC Order No. 636 ("Docket No. 94-01-12"). The DPUC addressed, among other things, the mechanisms for recovery of transition costs. Southern has paid approximately $16,345,000 in transition costs as of September 30, 1995. Southern has substantially recovered this amount through the various recovery mechanisms authorized by the DPUC in Docket No. 94-01-12. Of this total, $4,461,000 represents unrecovered gas costs and $11,884,000 represents gas supply realignment costs and stranded investment costs. Tennessee transition costs included in this amount are still being litigated, subject to refund of any overbilling at the time of a FERC decision or a settlement. Straight-fixed-variable ("SFV") rates are now in effect on the pipelines serving Southern having replaced modified-fixed-variable rates. Pipeline demand charges have increased under SFV rate design while pipeline usage charges have decreased. The change in gas cost due to SFV rates, specifically, the adjustment between pipeline demand and usage charges, has been incorporated in Southern's new base cost of gas approved by the DPUC. Although the implementation of Order No. 636 initially increased gas costs, the resulting market competition, increased throughput and recovery of transition costs have decreased average gas costs during the past year. Post-FERC Order No. 636 Opportunities Southern initiated an off-system sales program which maximizes the use of its gas supply contracts, improves the usage of Southern's capacity on pipeline systems and lowers gas costs to firm customers through established margin sharing mechanisms. Pursuant to the DPUC Decision regarding FERC Order No. 636, Southern is allowed to enter into off-system sales for periods of less than one year without the prior approval of the DPUC. Capacity release programs are available on all interstate pipelines serving Southern, and Southern has actively participated in these programs. Capacity releases result in direct reductions to Southern's cost since pipeline demand charges recovered from a replacement shipper flow back as a reduction on the pipeline's monthly invoice. CEDC has joined with seven other eastern United States natural gas distribution companies or their affiliates to form the East Coast Natural Gas Cooperative, L.L.C to access competitively priced gas supplies. Southern has experienced reduced gas costs as a result of this cooperative. Rates and Regulation Connecticut Regulation. Southern is subject to the jurisdiction of the DPUC as to accounting, rates, charges, operating matters and the issuance of securities, both equity and debt, other than borrowings maturing in twelve months or less. Southern's firm sales rates change monthly pursuant to a DPUC approved Purchased Gas Adjustment clause ("PGA"), under which purchased gas costs above or below a specified base cost are charged or credited to customers. In setting authorized rates for Southern, the DPUC allows prospective adjustments to a historical test year. Forward-looking adjustments to the mid- point of the rate year (the first year that rates will be in effect) for rate base, revenues, expenses and capital structure are allowed. The DPUC has found that these refinements provide for better synchronization of the ratemaking components. Costs used by the DPUC in determining Southern's rates may not be the same as actual costs incurred by Southern during the period rates are in effect. The sales used in establishing rates are based on "normal" weather patterns. Actual rates of return realized may not necessarily equal the authorized rates of return. On April 23, 1993, Southern filed an application with the DPUC for an increase in rates designed to produce additional revenues of approximately $27,900,000 or 13.67% over test year revenues. Southern's base rates had not been increased since April 1990. On December 1, 1993, the DPUC issued a final Decision on Southern's latest rate request. The Decision incorporated the Partial Settlement of Certain Issues ("Partial Settlement") which was previously approved by the DPUC in September 1993 and resolved most of the significant financial aspects of Southern's original rate request, including an increase in base rates of $13,400,000 based upon Southern's sales forecast as originally filed, an allowed return on equity of 11.45% and the implementation of a Weather Normalization Adjustment. In addition, Southern was permitted to recover previously deferred costs over amortization periods from three to five years associated with shortfalls in energy assistance, the certified hardship arrearage forgiveness program, environmental remediation expenditures, economic development programs and undepreciated gas holder costs. The Partial Settlement also provided for current recovery of post- retirement health care expenses accrued under Statement of Financial Accounting Standards No. 106 and the establishment of a target margin, net of gross earnings tax, of $4,000,000 for on-system sales and transportation to Southern's interruptible customers with excess margins shared between firm customers and shareholders on an 80%/20% split. As part of the Partial Settlement, Southern agreed that, except for certain adverse events, it would not file a general application to increase rates which would become effective on or before November 30, 1995. On November 18, 1994, the DPUC initiated Docket No. 94-11-12, DPUC Review of Connecticut Local Distribution Companies' Cost of Service Study Methodologies ("Docket No. 94-11-12"). This proceeding was an outgrowth of the DPUC's Decision in Docket No. 94-01-12 wherein the DPUC stated that it was its intent to have unbundled services, including a cost based firm transportation rate, available to all commercial and industrial customers no later than April 1, 1996. On August 2, 1995, the DPUC issued a final Decision in Docket No. 94-11-12 after reviewing the Cost of Service proposals and ancillary criteria put forward by all Connecticut gas distributors for unbundled service options for customers. The DPUC stated that firm transportation should be available to all commercial and industrial gas customers in conformance with the framework and guidelines established in this proceeding. Federal Regulation. Southern is affected by various federal regulations, including regulations which (1) provide for emergency authority and curtailment allocations under the Natural Gas Policy Act of 1978 when pipeline supplies are limited and (2) establish certain retail policies for natural gas utilities under the Public Utility Regulatory Policies Act of 1978. Southern is also subject to the Natural Gas Pipeline Safety Act of 1968 with respect to the construction, operation and maintenance of its mains, services and LNG facilities as well as other federal regulations pertaining to safety standards concerning such facilities. Currently, these federal regulations have a minimal impact on Southern's day-to-day operations. Southern must comply with various federal, state and local regulation with respect to environmental matters (including hazardous waste regulation) and local zoning and other regulations. To date, such regulations have not materially impacted Southern's capital expenditures, earnings or operations. Regulations promulgated under the Clean Air Act Amendments of 1990 and the Energy Policy Act of 1992, which require reduced pollution levels and certain energy efficiency standards, have begun to affect Southern. Among other things, the Clean Air Act Amendments (1) impose stringent vehicle emissions standards beginning in 1994; (2) mandate the gradual phase-in of alternative fuel vehicles for fleets of more than 10 vehicles beginning in 1998 and (3) require power plants to phase in significant emission reductions of sulfur dioxide and nitrogen oxide by the year 2000. Similarly, the Energy Policy Act of 1992 (1) requires that federal agencies begin phasing-in the use of alternative fuels in vehicles in 1993; (2) offers tax incentives to private parties who use or facilitate the use of alternative fuel vehicles and (3) requires a lessening reliance on foreign fuels. Over time, these regulations will likely lead to an increasing demand for natural gas. Southern already has begun to participate in the expanded markets for natural gas emerging due to these regulatory mandates. Since 1986, FERC has effected major changes in the regulations governing the natural gas industry, especially FERC Order No. 636. Although the Company is not subject to FERC jurisdiction, FERC's actions increase competition in the natural gas industry by requiring interstate pipeline companies to provide gas transportation to others on a non-discriminatory basis. This increased competition may assist Southern, at least in the short-term, by replacing some higher cost gas supplies with less costly supplies. For additional discussion on the impact of FERC Order No. 636, see the section entitled "FERC Order No. 636." 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. 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." Until the DEP conducts a comprehensive review, no discussions with it addressing the extent, timing and type of remedial action, if any, can occur. Given the DEP's response, 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, based upon the provisions of the Partial Settlement in Southern's last rate order, that 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. Item 2. Properties - ------------------- The Company's physical plant and properties consist primarily of Southern's gas distribution facilities. Southern had 2,082 miles of main and 120,581 service units as of September 30, 1995. It leases office space in Bridgeport, New Haven, Orange and Madison, owns properties in Bridgeport and New Haven that were formerly manufacturing sites and owns propane air facilities in New Haven and Trumbull. In 1992, Southern entered into an operating lease which consolidated administrative functions at one location in Bridgeport, Connecticut. The lease is for a period of 20 years. In 1993, Southern entered into an operating lease for the purpose of consolidating its operating centers at one location in Orange, Connecticut. The lease is for a period of 20 years. In 1995, the LNG plant lease agreement was renewed for two consecutive terms of 12 years. The lease contains an option to purchase the plant for a purchase price based on the then fair market sales value of the unit as defined therein. Substantially all of Southern's utility properties and plant are subject to the lien of the indenture and supplemental indentures securing its first mortgage bonds. It is management's opinion that the physical plant and properties as described herein is suitable and adequate for the purpose of delivering gas for customer use. Item 3. Legal Proceedings - -------------------------- No material legal proceedings, other than ordinary litigation incidental to the business, are pending. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ None. PART II ------- Item 5. Market for Common Stock and Related Stockholder Matters - ---------------------------------------------------------------- Common Stock Data - ----------------- The Company's common stock is listed for trading on the New York Stock Exchange. The Company's common stock symbol is CNE. The following table shows the high and low price range of the Company's common stock and quarterly dividends paid. Market Price and Dividend Data - ------------------------------ 1995 Quarter ended High Low Dividend - ------------------ ---- --- -------- December 31, 1994 $22 $18 5/8 $0.325 March 31, 1995 20 1/4 18 1/2 0.325 June 30, 1995 20 5/8 18 5/8 0.325 September 30, 1995 20 1/2 18 7/8 0.325 1994 Quarter ended High Low Dividend - ------------------ ---- --- -------- December 31, 1993 $26 $23 $0.32 March 31, 1994 25 20 0.32 June 30, 1994 22 1/2 20 1/4 0.325 September 30, 1994 22 1/4 20 1/4 0.325 As of September 1995, the Company and its predecessors have paid 343 consecutive quarterly cash dividends. Cash dividends have been paid since 1850, and the Company currently expects that dividends will continue to be paid in the future. The major source of funds for payment of the Company's dividends is the dividends received on the shares of Southern's common stock owned by the Company. Southern's indenture relating to long-term debt and its Amended and Restated Certificate of Incorporation contain restrictions as to the declaration or payment of cash dividends on, or the reacquisition of, capital stock. Under the most restrictive of such provisions, $21,886,000 of retained earnings at September 30, 1995 were available for such purposes. The approximate number of shareholders of record of the Company's common stock as of November 24, 1995 was 11,618. Item 6. Selected Financial Data - -------------------------------- The presentation under the "Eleven Year Financial Summary" for the five years in the period ended September 30, 1995 on pages 36 and 37 of Connecticut Energy Corporation's 1995 Annual Report to Shareholders is incorporated by reference herein. Item 7. Management's Discussion and Analysis of Financial Condition - -------------------------------------------------------------------- and Results of Operations - ------------------------- "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 13 to 19 of Connecticut Energy Corporation's 1995 Annual Report to Shareholders is incorporated by reference herein. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Consolidated Statements of Income, Consolidated Balance Sheets, Consolidated Statements of Changes in Common Shareholders' Equity, Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements on pages 20 to 34 and the Report of Independent Accountants on page 35 of Connecticut Energy Corporation's 1995 Annual Report to Shareholders are incorporated by reference herein. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------ Financial Disclosure - -------------------- None. PART III -------- Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ Information required in this item regarding directors is contained in the Company's definitive Proxy Statement at pages 2 to 4 which will be mailed to shareholders on or about December 13, 1995, and is incorporated by reference herein. A list of executive officers of the registrant and Southern follows: Executive Officers of Connecticut Energy Corporation ---------------------------------------------------- and --- The Southern Connecticut Gas Company ------------------------------------ Position and Business Experience for the Name and Age Past 5 Years - -------------------------- ------------------------------------------------- J. R. Crespo, 53 Chairman, President and Chief Executive Officer of the Company and Southern (1990), President and Chief Executive Officer of the Company and Southern (1989). Thomas A. Trotta, 58 Executive Vice President and Chief Operating Officer of Southern (1995), Senior Vice President and Chief Operating Officer of Southern (1992), Senior Vice President, Operations of Southern (1991), Vice President, Sales and Customer Services of Southern (1989). Vincent L. Ammann, Jr., 36 Vice President and Chief Accounting Officer of the Company and Group Vice President of Southern (1994), Vice President and Chief Accounting Officer of the Company and Southern (1991), Controller of Southern (1990). Carol A. Forest, 47 Vice President, Finance, Chief Financial Officer and Treasurer of the Company and Southern (1991), Vice President, Finance and Chief Financial Officer of the Company (1985) and Southern (1984). Michael H. Pinto, 68 Vice President, Government Affairs of the Company (1991), Director, Governmental Relations of Southern (1990). J. Richard Tiano, 51 Vice President, General Counsel and Secretary of the Company and Southern (1988). Salvatore A. Ardigliano, 46 Vice President, Marketing and Gas Supply Services of Southern (1995), Vice President, Gas Supply Services of Southern (1995), Group Director, Gas Supply Services of Southern (1993), Director, Gas Control of Southern (1992), Director, Marketing and Energy Services of Southern (1991), Director, Energy Services of Southern (1990). Frank L. Esposito, 63 Vice President, Human Resources of Southern (1995), Vice President, Human Resources and Corporate Services of Southern (1992), Vice President, Human Resources of Southern (1991), Director, Human Resources of Southern (1982). James P. Healy, 53 Vice President, Energy Services Planning of Southern (1995), Vice President, Information Technology of Southern (1992), Senior Vice President, Corporate Development of Southern (1986). Ernest W. Karkut, 53 Vice President, Purchasing and Plant Services of Southern (1994), Vice President, Customer Support Services of Southern (1992), Assistant Vice President, Customer Support Services of Southern (1991), Assistant Vice President, Financial Planning and Treasurer of Southern (1991), Assistant Vice President, Financial Planning of Southern (1989). Peter D. Loomis, 47 Group Vice President, Customer and Operating Services of Southern (1995), Vice President, Distribution and Customer Service of Southern (1992), Group Director, Customer Services (1991), Director, Consumer Service (1989). Larry S. McGaughy, 48 Vice President, Corporate Engineering and Special Projects of Southern (1995), Vice President, Marketing and Corporate Engineering of Southern (1994), Vice President, Marketing and Gas Control of Southern (1991), Vice President, Corporate Planning and Marketing of Southern (1990). Group Director, Sales and Marketing of Southern (1990). Phyllis A. O'Brien, 50 Vice President, Accounting and Regulatory Services of Southern (1994), Vice President, Corporate and Regulatory Planning of Southern (1993), Group Director, Corporate Regulatory and Supply Planning of Southern (1991), Group Director, Planning, Rates and Regulatory Affairs of Southern (1991), Director, Planning, Rates and Regulatory Affairs of Southern (1990). Patricia A. Younger, 53 Vice President, Customer Relations of Southern (1995), Group Director, Customer Relations of Southern (1994), Director, Customer Information and Collections of Southern (1994), Director, Credit and Collections of Southern (1993), Manager, Credit and Collections of Southern (1986). Item 11. Executive Compensation - -------------------------------- Information required in this Item is contained in the Company's definitive Proxy Statement on pages 8 to 10 which will be mailed to shareholders on or about December 13, 1995, and is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ Information required in this Item is contained in the Company's definitive Proxy Statement on page 4 which will be mailed to shareholders on or about December 13, 1995, and is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- Information required in this Item is contained in the Company's definitive Proxy Statement on pages 5 and 10 which will be mailed to shareholders on or about December 13, 1995, and is incorporated by reference herein. PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------------------------------------------------------------------------- (a) List of documents filed as part of this Report: 1. Financial Statements -------------------- Among the responses to this Item 14 (a) are the following financial statements which are incorporated by reference herein in Item 8 above: (i) Consolidated Balance Sheets for the years ended September 30, 1995 and 1994. (ii) Consolidated Statements of Income for the years ended September 30, 1995, 1994 and 1993. (iii) Consolidated Statements of Changes in Common Shareholders' Equity for the years ended September 30, 1995, 1994 and 1993. (iv) Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994 and 1993. (v) Notes to Consolidated Financial Statements. (vi) Report of Independent Accountants. 2. Financial Statements and Supplementary Data required by Item 8 -------------------------------------------------------------- (A) Schedule Description Page -------- ----------- ---- Report of Independent Accountants on Financial Statement Schedules 21 II Valuation and Qualifying Accounts 22 All other schedules are omitted because they are not required, are inapplicable, or the information is otherwise shown in the financial statements or notes thereto. 3. Exhibits Required by Item 601 of Securities and Exchange Commission ------------------------------------------------------------------- Regulation S-K -------------- (A) The following such exhibits are filed as a separate section of this report. Exhibits -------- (3) Certificate of Incorporation and By-Laws ---------------------------------------- The Amended and Restated Certificate of Incorporation of Connecticut Energy Corporation is incorporated herein by reference to Item 6 of the Company's Form 10-Q filed for the quarter ended March 31, 1991 at pages 14 through 22. The Amended and Restated By-Laws of Connecticut Energy Corporation are incorporated herein by reference to Item 6 of the Company's Form 10-Q filed for the quarter ended March 31, 1995 at pages 20 through 31. The Amended and Restated Certificate of Incorporation of The Southern Connecticut Gas Company is incorporated herein by reference to Item 6 of Form 10-Q filed for the quarter ended June 30, 1990 at pages 40 through 51. The Amended and Restated By-Laws of The Southern Connecticut Gas Company are incorporated herein by reference to Item 6 of the Company's Form 10-Q filed for the quarter ended March 31, 1995 at pages 32 through 41. (4) Instruments Defining Rights of Security Holders, Including Indentures --------------------------------------------------------------------- (i) Indenture between The Bridgeport Gas Light Company and The Bridgeport City Trust Company, as Trustee, dated as of March 1, 1948. Incorporated herein by reference in Exhibit 4(b) (1) to Registration Statement 2-10566. (ii) In addition to the Indenture referred to in 4 (i) hereof, there have been twenty-six indentures supplemental thereto and a Financing Agreement among The Southern Connecticut Gas Company, Industrial Leasing Trust No. 3, Industrial Leasing Corporation, The Travelers Insurance Company and The Connecticut Bank and Trust Company, Trustee dated as of April 1, 1972, copies of all of which the Company agrees to furnish to the Commission upon request. (10) Material Contracts ------------------ (i) Gas Purchase and Sales Agreement between The Southern Connecticut Gas Company and Tenngasco Corporation, Tenngasco Exchange Corporation, Tenngasco Marketing Corporation, Tenneco Oil Company, Houston Oil and Minerals Corporation, Tinco, Ltd., Tenneco Exploration, Ltd. and Tenneco Exploration II, Ltd., dated April 11, 1985, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1986 at pages 42 to 72. (ii) Storage Service Agreement between Penn-York Energy Corporation and The Southern Connecticut Gas Company, dated January 1, 1988, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1987 at pages 166 to 171. (iii) Interruptible Gas Transportation Contract and Amendment No. 1, thereto, among Tenngasco Corporation, The Southern Connecticut Gas Company and The United Illuminating Co., dated May 14, 1987 and August 1, 1989, respectively, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1989 at pages 238 to 258. (iv) Amendment No. 2 to Interruptible Gas Transportation Contract among Tenngasco Corporation, The Southern Connecticut Gas Company and The United Illuminating Company, dated November 1, 1990, incorporated by reference to Form 10-K for the transition period from January 1, 1990 to September 30, 1990 at pages 90 to 91. (v) Gas Transportation Contract between Iroquois Gas Transmission System, L.P. and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.32 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (vi) Gas Sales Agreement No. 1 by and between Alberta Northeast Gas Limited and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.33 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (vii) Gas Sales Agreement No. 2 by and between Alberta Northeast Gas Unlimited and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.34 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (viii) Gas Sales Agreement by and between Alberta Northeast Gas Limited and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.35 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (ix) Gas Sales Agreement by and between Alberta Northeast Gas Limited and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.36 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (x) Gas Sales Agreement by and between Alberta Northeast Gas Limited and The Southern Connecticut Gas Company, dated February 7, 1991, incorporated by reference to Exhibit 10.37 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (xi) Storage Service Transportation Contract between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, dated November 1, 1990, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1992 at pages 182 to 190. (xii) Storage Service Agreement between CNG Transmission Corporation and The Southern Connecticut Gas Company, dated October 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 130 to 137. (xiii) Gas Storage Contract between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, dated September 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 138 to 142. (xiv) Gas Transportation Agreement between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, dated August 19, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 143 to 151. (xv) Gas Transportation Agreement between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, dated August 19, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 152 to 159. (xvi) Service Agreement between Texas Eastern Transmission Corporation and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 160 to 170. (xvii) Service Agreement between Texas Eastern Transmission Corporation and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 171 to 180. (xviii) Service Agreement between Texas Eastern Transmission Corporation and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 181 to 192. (xix) Service Agreement between Texas Eastern Transmission Corporation and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 193 to 204. (xx) Service Agreement between Texas Eastern Transmission Corporation and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 214 to 220. (xxi) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 221 to 227. (xxii) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 228 to 235. (xxiii) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 236 to 243. (xxiv) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 244 to 251. (xxv) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated June 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 252 to 257. (xxvi) Service Agreement between Algonquin Gas Transmission Company and The Southern Connecticut Gas Company, dated October 1, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 258 to 277. Executive Compensation Plans and Arrangements --------------------------------------------- (xxvii) Employment Agreement between The Southern Connecticut Gas Company and J. R. Crespo, dated March 24, 1992, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1992 at pages 213 to 229. (xxviii) Amended and Restated Deferred Compensation Agreement between The Southern Connecticut Gas Company and J. R. Crespo, dated October 21, 1993, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993 at pages 278 to 288. (xxix) The Southern Connecticut Gas Company Board of Directors Retirement Plan, dated October 1, 1992, is incorporated by reference to Form 10-K for the fiscal year ended September 30, 1994 at pages 27 to 30. (xxx) The Southern Connecticut Gas Company, Management Compensation Plan, dated October 1, 1992, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1992 at pages 251 to 253. (xxxi) Agreements between The Southern Connecticut Gas Company and Philip R. Marsilius and Henry Chauncey, Jr. related to deferred compensation as directors, dated December 27, 1988 and December 31, 1988, incorporated by reference to Form 10-K for the fiscal year ended December 31, 1988 at pages 58 to 62 and pages 63 to 67. (xxxii) Supplemental Retirement Benefits Plan dated October 1, 1993, incorporated by reference to Form 10-Q for the quarter ended December 31, 1993 at pages 25 to 28. (xxxiii) Agreement between The Southern Connecticut Gas Company and Helen B. Wasserman related to deferred compensation as a director, dated December 31, 1994, is filed herewith at pages 25 to 29. (13) Annual Report to Security Holders --------------------------------- Connecticut Energy Corporation's 1995 Annual Report to Shareholders is filed herewith at pages 30 to 77. (21) Subsidiaries of the Registrant ------------------------------ A list of Connecticut Energy Corporation's subsidiaries is filed herewith at page 78. (27) Financial Data Schedule ----------------------- Financial Data Schedule UT is submitted only in electronic format to the Securities and Exchange Commission. (b) No reports on Form 8-K were filed during the last quarter of 1995. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE - ----------------------------------------------------------------- To the Board of Directors and Shareholders of Connecticut Energy Corporation: Our report on the consolidated financial statements of Connecticut Energy Corporation has been incorporated by reference in this Form 10-K from page 35 of the 1995 Annual Report to Shareholders of Connecticut Energy Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. New York, New York November 1, 1995 CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3 (No. 33-47684-3) and Form S-8 (No. 33-39245 and 33-51763) of Connecticut Energy Corporation of our report dated November 1, 1995, on our audits of the consolidated financial statements and financial statement schedule of Connecticut Energy Corporation as of September 30, 1995 and 1994, and for the years ended September 30, 1995, 1994 and 1993, appearing on page 35 of the 1995 Annual Report to Shareholders of Connecticut Energy Corporation which is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. New York, New York December 6, 1995 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS CONNECTICUT ENERGY CORPORATION Years Ended September 30, 1995, 1994 and 1993 (in thousands) Col. A Col. B Col. C Col. D Col. E - ------ ------ ------ ------ ------ Additions --------- Balance at Charged to Charged to Balance Beginning Costs and Other at End of Description of Period Expenses Accounts Deductions Period - ----------- --------- -------- -------- ---------- ------ Allowance for Doubtful Accounts 1995 (1) $ 3,747 $ 6,548 $ 2,235 (2) $ 8,977 (3) $ 3,553 1994 (1) $ 4,251 $ 6,962 $ 1,482 (2) $ 8,948 (3) $ 3,747 1993 (1) $ 4,074 $ 4,324 $ 4,627 (4) $ 8,774 (3) $ 4,251 Notes: - ------ (1) Reserve deducted in the Balance Sheet from the asset to which it applies (2) Recoveries on accounts previously charged off (3) Accounts charged off as uncollectible (4) Recoveries on accounts previously charged off and deferral of energy assistance shortfalls SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) CONNECTICUT ENERGY CORPORATION ------------------------------ /s/ J. R. Crespo - ----------------------------------------- by: J. R. Crespo, Chairman, President and Chief Executive Officer Dated: November 28, 1995 - ------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Henry Chauncey, Jr. /s/ Samuel M. Sugden - -------------------------------------- -------------------------------------- by: Henry Chauncey, Jr., Director by: Samuel M. Sugden, Director Dated: November 27, 1995 Dated: November 28, 1995 /s/ James P. Comer /s/ Christopher D. Turner - -------------------------------------- -------------------------------------- by: James P. Comer, M.D., Director by: Christopher D. Turner, Director Dated: November 28, 1995 Dated: November 21, 1995 /s/ J. R. Crespo /s/ Helen B. Wasserman - -------------------------------------- -------------------------------------- by: J. R. Crespo, Chairman, by: Helen B. Wasserman, Director President and Chief Executive Officer Dated: November 28, 1995 Dated: November 28, 1995 /s/ Richard F. Freeman /s/ Vincent L. Ammann, Jr. - -------------------------------------- -------------------------------------- by: Richard F. Freeman, Director by: Vincent L. Ammann, Jr. Dated: November 28, 1995 Vice President and Chief Accounting Officer, (Principal Accounting Officer) Dated: November 28, 1995 /s/ Richard M. Hoyt /s/ Carol A. Forest - -------------------------------------- -------------------------------------- by: Richard M. Hoyt, Director by: Carol A. Forest, Vice President, Dated: November 28, 1995 Finance, Chief Financial Officer and Treasurer, (Principal Financial Officer) Dated: November 28, 1995 /s/ Paul H. Johnson /s/ J. Richard Tiano - -------------------------------------- -------------------------------------- by: Paul H. Johnson, Director by: J. Richard Tiano, Vice President, Dated: November 28, 1995 General Counsel and Secretary Dated: November 28, 1995 /s/ Newman M. Marsilius, III - --------------------------------------- by: Newman M. Marsilius, III, Director Dated: November 28, 1995 EX-10 2 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made and entered into as of this 31st day of December, 1994 by and between Helen B. Wasserman (hereinafter called "Director") and THE SOUTHERN CONNECTICUT GAS COMPANY (hereinafter called "the Company"). 1. The Company shall accrue on December 31 of each year during which Director serves as a member on the Company's Board of Directors $7,000.00 of the fees payable to the Director by the Company for attendance at Board of Director and Committee meetings during each such year, and shall credit such amount to a special account on its books (hereinafter referred to as the "Deferral Account"). In addition, the Company shall accrue as interest on December 31 of each year an amount equal to 8% of the total balance in Director's name in this Deferral Account at the end of the preceding year, and this amount shall also be credited to this Deferral Account. 2. The aggregate amount of deferred compensation, together with interest accrued thereon, credited to Director's Deferral Account shall be paid in a lump sum, or if Director elects, in installments at such times and in such amounts as are set forth in Schedule A attached hereto. Such election must be made by written notice and delivered to the Secretary of the Company. Any change in such election may be made by giving written notice delivered to the Secretary of the Company and shall apply only to income covered by this Agreement which is earned after the date such notice has been delivered to the Secretary. The first installment (or the lump sum) shall be paid promptly on the first day of the first month of the calendar year following the year in which Director ceases to be a Director, and subsequent installments, if any, shall be paid promptly at such times and in such amounts as are set forth in Schedule A attached hereto until the entire amount credited to Director's Deferral Account shall have been paid. 3. If Director should die before amounts credited to Director's Deferral Account have been distributed, the payment of amounts in Director's Deferral Account shall be made to the Director's designated Beneficiary at such times and in such amounts as provided in Schedule B attached hereto. If Director does not designate a Beneficiary in Schedule B attached hereto, or in the event that the Beneficiary designated by Director shall have predeceased the Director, the balance in Director's Deferral Account shall be paid promptly to Director's estate. 4. Director may at any time terminate an election to defer payment of compensation by written notice delivered to the Secretary of the Company. Such termination shall become effective as of the end of the calendar year in which notice of termination is given with respect to compensation payable for services as a Director during a subsequent calendar year or years. Amounts credited to Director's Deferral Account prior to the effective date of termination shall not be affected thereby and shall be paid in accordance with Paragraphs 2 and 3 above. Termination of the election to defer payments for any particular year or years shall not preclude Director from again electing to defer payments with respect to any calendar year subsequent to the year in which such election to defer is made. 5. The amounts credited to Director in the Deferral Account shall not be held by the Company in a trust, escrow or similar fiduciary capacity, and neither Director nor any legal representative of Director shall have any ownership rights to or a security interest in the amount. Any claim pursuant to the terms of this Agreement shall be treated as a claim by a general unsecured creditor of the Company. 6. This Agreement shall apply to all fees subject to this Agreement which are earned subsequent to the date of this Agreement. The parties to this Agreement indicate their acceptance of its terms by signing in the signature spaces provided below. /s/ Helen B. Wasserman ------------------------------------ Director THE SOUTHERN CONNECTICUT GAS COMPANY By /s/ Vincent L. Ammann, Jr. -------------------------------- SCHEDULE A I hereby elect, pursuant to Paragraph 2 of the Deferred Compensation Agreement, to receive payments from my Deferral Account in 5 yearly equal installments, commencing on the first day of the first month of the calendar year following the year in which I attain the age of 70-1/2 years and cease to be a Director and continuing until the entire amount credited by my Deferral Account shall have been paid. /s/ Helen B. Wasserman ------------------------------------ Director October 25, 1994 ------------------------------------ Date SCHEDULE B I hereby designate, pursuant to Paragraph 3 of the Deferred Compensation Agreement, Edward Wasserman as Beneficiary entitled to receive the amounts credited to my Deferral Accounts. Such amounts shall be paid on the first day of the first month of the calendar year following the year of my death and continuing until the entire amount credited to my Deferral Account shall have been paid. /s/ Helen B. Wasserman ------------------------------------ Director October 25, 1994 ------------------------------------ Date EX-13 3 Connecticut Energy Corporation Avenues of Opportunity 1995 Annual Report Business Profile Connecticut Energy Corporation (Connecticut Energy or Company) is a holding company primarily engaged in the retail distribution of natural gas for residential, commercial and industrial uses through its principal subsidiary, The Southern Connecticut Gas Company (Southern). Southern delivers natural gas in 22 Connecticut communities to approximately 154,000 customers which include approximately 175,000 firm residential units. The Company also has two nonutility subsidiaries, Connecticut Energy Development Corporation and Total Energy Services Group, Inc. [MAP] In towns currently served Square miles 524 Population 770,870 Number of households 322,636 Miles of gas main in service 2,082 In Connecticut Square miles 5,012 Population 3,275,276 Number of households 1,351,825 -- Algonquin Gas Transmission Co. -- Iroquois Gas Transmission Co. -- Tennessee Gas Pipeline Co. Dividends Connecticut Energy, through its predecessor companies, has paid cash dividends on its common stock since 1850, the longest consecutive dividend payment record of any utility or nonfinancial company listed on the New York Stock Exchange. In September 1995, the Company paid its 343rd consecutive quarterly dividend. The dividend has increased in 14 of the last 15 years. Stock Listing Information Connecticut Energy's common stock is listed on the New York Stock Exchange under the ticker symbol "CNE." Quotes may be obtained in daily newspapers where it is listed under "ConnEn" in the New York Stock Exchange composite table. In 1994, Connecticut Energy was selected for inclusion in the newly formed Standards & Poor's SmallCap 600 index. Investment and Shareholder Information is on pages 41 and 42. Highlights Years ended September 30, 1995 1994 % Change Financial (dollars in thousands, except per share) Operating revenues $232,093 $240,873 (3.6) Gross margin 116,510 114,003 2.2 Net income 14,060 12,843 9.5 Net income per share 1.60 1.58 1.3 Dividends paid per share 1.30 1.29 0.8 Total assets 370,088 352,920 4.9 Common shareholders' equity 131,561 125,719 4.6 Long-term debt 119,322 119,917 (0.5) Total capitalization 250,883 245,636 2.1 Return on average common equity (%) 10.52 10.84 (3.0) Other Weighted average common shares outstanding 8,773,878 8,134,021 7.9 Shares outstanding at year end 8,865,210 8,700,266 1.9 Shareholders of record 11,688 12,094 (3.4) Shareholders in dividend reinvestment plan 6,683 6,621 0.9 Institutional ownership (shares) 1,860,000 1,842,000 1.0 Average number of customers 154,216 152,564 1.1 Number of employees at year end 532 572 (7.0) Earnings Dollars Per Share [CHART] 2.00 1.50 1.33 1.38 1.43 1.50 1.58 1.60 1.00 0.50 0.00 '90 '91 '92 '93 '94 '95 Net Income Dollars In Thousands [CHART] 15,000 14060 12,000 11053 12843 9,000 8219 9004 10227 6,000 3,000 0 '90 '91 '92 '93 '94 '95 To Our Shareholders [PHOTO] Fiscal 1995 marked the evolution of a new era in the natural gas industry and the onset of a new direction for our Company. Our primary focus last year was to position Connecticut Energy Corporation to compete successfully in the market-driven business environment of the future. Throughout the year, we achieved numerous accomplishments to strengthen our core foundation, while creating the building blocks to capitalize on new growth opportunities and to secure future energy markets. Let me begin by highlighting our performance over the past year. It gives me great pleasure to report that Connecticut Energy Corporation once again achieved record earnings. Net income grew to a record level of $14,060,000, which produced record earnings of $1.60 per share of common stock. Fiscal 1995 marks the sixth consecutive year in which we have achieved our goal to maintain steady growth in earnings in spite of external variables. I know of no other gas distribution company in the United States that will be able to make this claim. Unprecedented Growth Changes in the marketplace and regulatory environment were clearly reflected in the dramatic growth in our volumes. Our total throughput of approximately 50 billion cubic feet (Bcf) represented an increase of 50 percent over last year's record level. Sales and transportation services to nonfirm customers -- both on and off-system -- surpassed all previous records at 29.7 Bcf, representing 60 percent of total throughput. Clearly, the source of future growth has changed significantly over the past year. In order to remain competitive, we must be able to provide a broad array of service options to customers in addition to traditional sales and transportation services. The New Energy Business The energy business of the future will operate very differently than it has, and the concept of the local utility as the only source of energy will eventually disappear. Options will exist to meet heating, cooling and vehicular energy demands. The level of sophistication of customers will increase as they look for competitive pricing, outstanding service and a commitment from their energy provider to meet their needs. Our Company has positioned itself to respond to these needs -- in effect, to provide a total energy service, far beyond what we can deliver now. Our level of success will depend in large part upon our ability to recognize and make the most of our business strengths. Accordingly, we will build on our outstanding reputation and expertise in providing the services necessary to meet the needs of existing and future customers. The natural gas industry has already changed significantly. The unbundling of supply and transportation on interstate pipelines has resulted in sales off-system, capacity release arrangements and other innovative strategies that have benefited our customers and the Company. In addition, many aspects of our business have been simplified and made more efficient by improving technology. These developments underscore that the traditional rules of "business as usual" will not survive in the natural gas industry of tomorrow. Ongoing organizational review and restructuring continue to prepare our Company for this challenge. The Approach The three areas which our Company will focus its efforts to capitalize on opportunities in the new energy business are: (1) coordination of natural gas purchasing and sales efforts; (2) maximization of off-system sales through effective use of our strategically located storage capacity; and (3) expansion of our operations from a local natural gas distribution company to a regional provider of total energy services. This approach utilizes our existing facilities and business strengths, specifically the expertise the Company and its predecessors have gained from nearly one hundred fifty years in the energy business. At the same time, we recognize the advantage of establishing strategic joint ventures that will allow us to benefit from the skills and resources of other players in the energy business. The key to growing our new business can be summed up in three words: cooperate, optimize and diversify. 2 Cooperate: East Coast Natural Gas Cooperative, L.L.C. Early in fiscal 1995, we created a new subsidiary, Connecticut Energy Development Corporation, to pursue investment opportunities related to the purchase and sale of natural gas supplies both in and out of Connecticut. One of the initial ventures of this subsidiary was to join with seven other East Coast companies to form a cooperative to ensure reliability by sharing resources and to purchase, sell and store gas supplies for the individual and collective advantage of the members. This venture, the East Coast Natural Gas Cooperative, L.L.C. (Coop), has enabled our Company to procure and negotiate favorably priced, high volume gas supply purchases. We expect our participation in the Coop will continue to reduce gas costs while ensuring supply during peak times. Optimize: LNG Facility Joint Venture Storage capacity is perhaps the most valuable asset in the deregulated natural gas industry. Effective use of our liquified natural gas (LNG) facility will be critical to our future success. Accordingly, we have been assessing and planning how best to maximize this facility, strategically located astride a major interstate pipeline in the center of our service territory. The LNG facility presents marketing opportunities beyond our distribution system and, in fact, has the potential to become a "hub" for peaking services through the use of the interconnections we have with three major interstate pipelines. Until now, the LNG facility was considered for regulatory purposes to be part of our distribution system and an intrastate facility; thus, its uses were limited. We are presently engaged in the process of expanding the use of this facility to include interstate transactions. Together with a joint venture partner, we will seek the necessary state and federal approvals to expand the use of the LNG facility outside of our service territory and beyond state lines. With storage in the Northeast at a premium, we are confident that this venture will serve us well with many customers in this region. Diversify: Total Energy Services Group, Inc. In August 1995, Connecticut Energy Corporation created Total Energy Services Group, Inc. In addition to participating in the LNG joint venture, this subsidiary will enable us to offer complete energy services to commercial and industrial customers throughout Connecticut and New England. We have studied the market and concluded that customers are looking for a "total energy" provider. As the gas industry "unbundles," we will be in an excellent position to provide value to customers by managing their total energy needs. We will evaluate a customer's particular requirements, recommend and negotiate equipment acquisitions, service that equipment, and plan and manage the optimal total energy package for that business including managing its air emissions credits. This venture offers us the opportunity to capitalize on our expertise and elevate our Company to a position of leadership, innovation and excellence in the new energy marketplace. Performance for Our Shareholders Providing value to our shareholders over the long term continues to be our primary corporate objective. For six years we have shown consecutive earnings per share growth, and we have succeeded in dramatically reducing our dividend payout ratio, while at the same time maintaining dividend growth at the industry average. We have also been successful in strengthening our financial profile and improving our fundamentals as a result of our consistent annual growth in earnings. Just as our marketplace has changed with the emergence of deregulation, so too has the risk and return profile of utilities. Greater earnings volatility can be expected as competition emerges and intensifies, and dividend payout targets have been lowered to accommodate a potentially less predictable stream of earnings. Investors will begin to expect a greater portion of their total return to come from price appreciation in the future. Drawing the Roadmap for Tomorrow The demands of our industry's transformation require a company that is willing to accept and embrace change. Today we are on the verge of initiating a plan that aggressively and creatively responds to the industry challenges and opportunities of tomorrow. It is imperative that I take this opportunity to thank the members of our Board of Directors for their strong support and contribution to our performance during a particularly challenging and exciting year. Equally important, I would like to thank our union employees, especially the union leadership, for their strong commitment to the success of the Company. Supported by all our dedicated employees and our strong resources, Connecticut Energy Corporation is focused on the horizon. As we chart our course through the landscape of change, we hold in our hands a clear roadmap to guide us in securing future energy markets. /s/ J. R. Crespo J. R. Crespo Chairman, President and Chief Executive Officer 3 Capacity and Supply Management Connecticut Energy Corporation and its principal subsidiary, The Southern Connecticut Gas Company (Southern), are located at the gateway to New England. Our location, combined with direct connections to the three interstate pipelines which transport natural gas into our system and the rest of New England, gives us a unique strategic advantage. In addition, we have a storage facility in the center of our service area from which we can provide load balancing and certain hub services. We have researched the most profitable direction in which to use this specific combination of resources, and we have developed an approach which effectively utilizes our existing facilities and business strengths. In the last few years we have seen our firm sales volumes remain between 20 and 23 billion cubic feet (Bcf). The growth in nonfirm sales, transportation and off-system deliveries, however, has been dramatic. In fiscal 1993, the first year in which our supply contracts were unbundled, our nonfirm deliveries were approximately 6 Bcf. At the end of fiscal 1994, we began to supply another electric generating station, and our nonfirm deliveries increased to 10.5 Bcf. This year marked the first full year in which the Connecticut Department of Public Utility Control (DPUC) allowed us to make off-system sales, and nonfirm deliveries more than doubled to 29.7 Bcf. Although the volumes are significant, per unit margins on nonfirm deliveries are smaller than on firm sales. Therefore, we have taken steps to create new business units to generate additional margins and profits. If we are to continue our goal of year-over-year growth in earnings, we must be able to augment our regulated earnings capacity with contributions to earnings from new unregulated growth opportunities. Total Throughput Billion Cubic Feet (Bcf) [CHART] 50 29.68 20.02 40 10.51 30 6.30 22.73 22.09 20 10 0 '93 '94 '95 // Firm // Nonfirm 4 "We enjoy the unique strategic advantage of having direct connections to New England's three interstate pipelines and a storage facility, providing significant opportunities for growth." As part of our research, we have identified potential partners with whom joint ventures can be formed to complement our resources. In the past year, we created two new non-regulated subsidiaries, Connecticut Energy Development Corporation (CEDC) and Total Energy Services Group, Inc. CEDC was formed principally to obtain an equity interest in the East Coast Natural Gas Cooperative, L.L.C., an alliance of eight local distribution companies (LDCs) which will share resources, purchase gas collectively and take advantage of marketing opportunities. As a result of this participation, we have realized gas cost savings from discounts to indexed gas prices. We spent a great deal of time in 1995 to create the preliminary building blocks for the development of a total energy subsidiary. Market research has indicated enormous potential within and outside of Southern's service territory for providing energy commodities and services to large commercial and industrial customers. We expect this subsidiary to be operational in early fiscal 1996. Another major undertaking throughout 1995 was our work to create a joint venture opportunity utilizing our LNG facility. We are in the process of preparing contracts and the necessary regulatory filings. An important component of this project is the completion of a 20" main which will tie our expansion alternatives to areas with the greatest growth potential and enable us to move gas more readily throughout our system. 5 Deregulation and Emerging Markets Deregulation The Connecticut DPUC continues to be one of the more progressive utility regulatory bodies in the United States. The natural gas distribution companies in the state have worked with the DPUC over the last year to develop a framework of unbundled rates that will be in place in fiscal 1996 for all commercial and industrial customers. In essence, unbundling will provide a new two-way avenue of opportunity. In one direction, we are able to provide services and supplies for commercial and industrial businesses outside of our franchise area as well as those we currently serve. In the other direction, if the businesses Southern serves find they can purchase supplies more economically from another entity, they will have the ability to do so. Since our distribution system is needed to convey the supplies, however, Southern will receive transportation margins. The rates for our new firm transportation service have been designed to protect Southern's margins. We will receive the same margin from firm transportation service as we do from firm sales to commercial and industrial customers, which significantly minimizes our risk. As our Company and our industry move further into the competitive energy market, there is an additional challenge to address: the issue of maintaining a competitive edge while shouldering the government imposed business costs which other energy suppliers do not bear. These societal costs come in a variety of forms, the most burdensome of which are hardship customer costs and arrearage forgiveness plans. Historically, these costs have been embedded in Southern's rate structure during years when revenues and customers were virtually assured. In this competitive environment, however, we need to peel away these cost layers. We have been working with our legislators and regulators to remove these burdens which distort the price of our service. We succeeded in having legislation passed which requires out-of-state marketers to pay gross earnings tax, and we were responsible for a bill which lowers the tax on natural gas sold as motor fuel. These are just two examples of our vigilance in leveling this competitive playing field. Emerging Markets We have seen a marked increase in deliveries of natural gas to two of the electric generating plants located in Southern's territory. In fiscal 1994, 6 "Deregulation and our unique combination of resources are enabling us to pursue new avenues of opportunity." these deliveries were under 4 Bcf but rose to 19 Bcf in fiscal 1995. We have also made progress in the cogeneration market. After lengthy negotiations with Yale University to provide natural gas to their planned 13.5 megawatt cogeneration facility, we have crossed the first hurdle in this process. This spring, the DPUC approved our contract, allowing us to go forward with further planning. We are gradually expanding our cooling market with a number of new applications installed this year. Quinnipiac College (pictured on page 9) installed two-300 ton natural gas absorption chillers in its new School of Law Center, after noting the energy cost savings from installing similar units in its School of Business two years ago. Desiccant dehumidification units, which are more efficient than conventional cooling, have been installed in supermarkets, retail stores and a university library. With this type of cooling, not only is the air cooled, but humidity is extracted from the air allowing a more comfortable environment at a more economical temperature setting. Hospitals, nursing homes and an ice skating rink are other locations with which we have negotiated for cooling installations this year. In total, we have added 927 tons of cooling in fiscal 1995. The natural gas vehicle (NGV) market continues to expand as the foundation infrastructure grows. In addition to previous contracts to provide fuel for vehicles owned by a local telephone utility and for the 62 postal trucks in East Haven, we signed a five year contract this year with the town of Westport. Under that contract, we installed a fueling station, which will serve the town's 10 new dual-fuel transit district buses, eight of the town's police department vehicles and eventually other municipal vehicles. "Fuelmaker" units, which are small on-site overnight fueling stations, have also been installed for two local water company fleets, and we are continuing discussions with several other fleet owners. 7 Traditional Markets Our residential customer base continues to be the foundation of our revenues and margins. Since the majority of these customers use natural gas for space and water heating, they provide a steady and stable revenue stream. This allows us a significant advantage over distribution companies with a larger commercial and industrial base. Even with extreme variations in temperatures, our Weather Normalization Adjustment (WNA) eliminates the risk of weather related margin loss for the Company and the risk of excessive heating bills for the customer. Thus, we have firm margins we can count on while we aggressively pursue additional nonfirm business and new markets. In fiscal 1994, the WNA worked to the benefit of our customers. In fiscal 1995, it benefitted the Company and its shareholders. Southern is the only gas distribution company in New England to have weather normalization. Southern added nearly 2,400 new residential heating customers during fiscal 1995 by continuing promotions to noncustomers along mains, particularly condominium owners who use electricity for heating. We expect to add about the same number in the coming year, again mainly from existing homes along our mains. We have recently seen increased conversion interest from homeowners who are concerned about the liability associated with having an underground oil tank. Unless we can provide outstanding customer service, we will not be able to maintain and grow our customer base. We continue to monitor criteria that we have used as benchmarks of our service. The "utility scorecard," which the DPUC instituted last year to rate customer service for all state utilities, rated Southern as the best among Connecticut's gas Customers Served Per Employee [CHART] 300 291 250 254 267 200 150 100 50 0 '93 '94 '95 8 "Our traditional customer base continues to be the foundation of our revenues and margins." distributors for both years. We have recently installed a state-of-the-art telephone routing and monitoring service for customer calls, which has cut the average call waiting time from more than a minute down to 31 seconds. We also developed a pilot program to schedule times for service appointments on customer premises and be there within two hours. Since March, 98 percent of these appointments were kept within this time frame. All of these factors are important to our customers, so we are continually challenged to meet and exceed the standards we have set. As an integral part of the community, nearly 50 percent of our workforce is involved in volunteer activities. This year's highlight was our involvement with the 1995 Special Olympics World Games held in New Haven. We engineered and installed the cauldron burner of the huge Olympic Torch, which burned a natural gas "flame of hope" continuously for nine days for the 7,000 athletes, their coaches and their families. Our natural gas vehicles paced four torch runs and the Special Olympics Marathon, and nearly 100 of our employees volunteered their time to help make this major event for Connecticut a success. 9 The Changing Business Profile We have demonstrated our ability to pursue the traditional and emerging avenues of growth which are unfolding before us on the changing landscape. Although our firm customers have traditionally provided the largest portion of our revenues and margins, we are now exploring other new opportunities to enable us to maintain our record of increased earnings each year. With unbundled services at the federal and state levels and fewer regulatory constraints, there are greater opportunities for growth but considerably more competition. As our operating environment evolves from the regulated distribution of natural gas to a more competitive and deregulated energy business, there can be greater earnings volatility than previously expected from utilities. To prepare for these changes, we have strengthened our financial profile over the last few years. Our equity ratio is now over 52 percent. We have been deliberate in significantly reducing our dividend payout ratio while maintaining dividend growth. Our steady and consistent growth in earnings over the past six years has enabled us to improve our fundamentals significantly. We have also been successful in managing our costs. Operation and maintenance expenses were nearly three percent below last year, and they were reduced to 45 percent of Dividend Payout Dollars Per Share [CHART] 2.00 1.50 1.58 1.60 1.50 1.33 1.38 1.43 1.28 1.29 1.30 1.23 1.24 1.27 1.00 0.50 0.00 '90 '91 '92 '93 '94 '95 / / Earnings / / Dividends 10 "Our earnings record demonstrates that we have constructed firm footings on which to grow." margins. We have continued stringent cost control measures by looking at every aspect of operations, from restructuring departments where it makes sense, to using the most cost effective technology. Connecticut Energy's management made a commitment to shareholders six years ago to achieve steady and consistent growth in earnings despite external variables. In spite of a slow economy and low oil prices, we again achieved growth in earnings per share. Although our business has changed, our commitment to our shareholders has remained steadfast. We are operating in a dynamic new marketplace with little room for error. Our earnings record illustrates our commitment to our shareholders and demonstrates that we have constructed firm footings from which to branch out to new markets. Operations and Maintenance Expenses as a Percent of Margin Dollars In Millions [CHART] 120 64.00 59.80 53.00 100 55.00 54.20 45.00 80 60 40 20 0 '93 '94 '95 / / O&M Expenses / / Margin 11 Financial Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 13 Consolidated Statements of Income ............................. 20 Consolidated Balance Sheets ................................... 21 Consolidated Statements of Changes in Common Shareholders' Equity ................................. 22 Consolidated Statements of Cash Flows ......................... 23 Notes to Consolidated Financial Statements .................... 24 Management Responsibility for Financial Statements ............ 35 Report of Independent Accountants ............................. 35 Eleven Year Financial Summary ................................. 36 Operating Data ................................................ 38 Glossary ...................................................... 40 Investment Information ........................................ 41 Shareholder Information ....................................... 42 Corporate Directory ........................................... 44 12 Connecticut Energy Corporation Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net Income Connecticut Energy Corporation's ("Connecticut Energy" or "Company") consolidated net income for the fiscal years ended September 30 is detailed below:
(in thousands, except per share) 1995 1994 1993 - ------------------------------------------------------------------------------ Net Income $14,060 $12,843 $11,053 - ------------------------------------------------------------------------------ Net income per share $1.60 $1.58 $1.50 - ------------------------------------------------------------------------------ Weighted average shares outstanding 8,774 8,134 7,377 - ------------------------------------------------------------------------------
Net income for 1995 was a record for the Company and has increased approximately 9% as compared to 1994. Factors affecting the improved results for 1995 were as follows: additional interruptible and off-system margins earned and retained by the Company's principal subsidiary, The Southern Connecticut Gas Company ("Southern"), a 6.6% rate increase implemented by Southern on December 9, 1993, the continued conversion of residential nonheating customers to heating customers and lower operations and maintenance expenses. Net income in 1994 increased approximately 16% as compared to 1993. This increase was primarily due to the implementation of a 6.6% rate increase in December 1993 by Southern, the ability to retain additional interruptible margins earned due to the changes in the annual margin sharing period and target made by the Connecticut Department of Public Utility Control ("DPUC") and the conversion of residential nonheating customers to heating customers. Total Sales and Transportation Volumes Southern's total volumes of gas sold and transported reached a record level of 49,698 MMcf in 1995, which was a 50% increase over 1994. The 1995 level was higher principally due to increases in interruptible sales, transportation volumes in accordance with a special contract for The Connecticut Light and Power Company's ("CL&P") Devon generating station which began in July 1994 and off-system sales. Throughput in 1994 was approximately 17% higher than in 1993, principally due to increased firm and interruptible sales, as well as transportation volumes for CL&P's Devon station. Firm Sales Volumes Firm sales volumes were approximately 12% lower in 1995 as compared to 1994. This decrease was primarily attributable to weather that was approximately 14% warmer than 1994 and, to a lesser extent, customers switching between the firm and interruptible rate classes and slightly lower usage per customer. This decrease was partially offset by new customer additions and the continued conversion of nonheating customers to heating customers. Firm sales volumes were approximately 3% higher in 1994 as compared to 1993 principally due to weather that was approximately 5% colder than 1993 and the continued conversion of nonheating customers to heating customers. Connecticut Energy Corporation 13 Interruptible Sales and Transportation Volumes The chart below depicts volumes of gas both sold to and transported for interruptible customers, off-system sales and transportation volumes under special contract with CL&P as well as gross margins earned and retained due to the margin sharing mechanism on these services:
(in thousands) 1995 1994 1993 - -------------------------------------------------------------------------------- Gross margin earned $13,702 $ 7,421 $5,560 - -------------------------------------------------------------------------------- Gross margin retained $ 7,390 $ 5,346 $3,272 - -------------------------------------------------------------------------------- Volumes sold and transported (MMcf) 29,680 10,509 6,296 - --------------------------------------------------------------------------------
Margins earned on volumes delivered to interruptible customers vary depending upon the relationship of the market price for alternate fuels to the cost of natural gas and related transportation. Additionally, margins earned, net of gross earnings tax, from interruptible services in excess of an annual target are allocated through a margin sharing mechanism between firm customers and Southern. Margins earned and retained by Southern were higher for 1995 as compared to 1994. The increase in margins retained for 1995 was principally attributable to higher levels of interruptible sales due to warmer winter weather and competitive gas prices as well as Southern's ability to share margins earned from selling and transporting gas off-system pursuant to the DPUC's Decision regarding the implementation of Federal Energy Regulatory Commission's ("FERC") Order No. 636. Margins earned and retained in 1994 were greater than 1993 principally due to the change in the margin sharing year and an increase in the target margin level from $2,000,000 to $4,000,000 in accordance with the DPUC's Decision in Southern's latest rate case. Gross Margin The Company's gross margin increased by approximately 2% for 1995 as compared to 1994. This increase can be principally attributed to higher margins earned and retained from interruptible services. Additionally, gross margin for 1995 was affected by the collection of approximately $6,853,000 from firm customers through the operation of the Weather Normalization Adjustment ("WNA") implemented in December of 1993. The WNA collections helped offset the effects of lower firm sales volumes resulting from weather that was approximately 10% warmer than normal during 1995. Gross margin was approximately 14% higher in 1994 as compared to 1993. This increase was primarily attributable to Southern's implementation of a 6.6% rate increase in December 1993 and its ability to retain additional interruptible margins earned due to the change in the annual margin sharing period and target made by the DPUC in the 1993 rate Decision and the conversion of existing residential nonheating customers to heating customers. Gross margin for 1994 was also impacted by the return to customers of approximately $2,900,000 through the operation of the WNA. Southern's firm rates include a Purchased Gas Adjustment clause ("PGA") which allows Southern to pass through to its customers, through periodic adjustments to amounts billed, increased or decreased costs incurred for purchased gas as compared to base rate levels without affecting gross margin. Adjustments related to Southern's PGA decreased revenues and gas costs for 1995 by approximately $3,756,000 and increased revenues and gas costs for 1994 and 1993 by $6,885,000 and $13,797,000, respectively. 14 Connecticut Energy Corporation Operations Expense Operations expense was approximately 2% lower in 1995 as compared to 1994. This decrease was principally due to lower costs for labor, conservation programs, pensions, employee health insurance and other general and administrative expenses. This decrease was partially offset by a higher expense for uncollectible accounts. Operations expense was approximately 21% higher in 1994 as compared to 1993. Approximately 49% of this increase was a result of a higher expense for uncollectible accounts. The remainder of the increase was due to higher employee benefit costs related to the adoption and current recovery of postretirement health care expenses accrued under Statement of Financial Accounting Standards No. 106 ("SFAS 106"), as well as increases in other operations expenses such as wages, rent, insurance and other general and administrative expenses. In December 1992, the DPUC allowed Southern to defer certain shortfalls in energy assistance funding from various state and federal agencies related to the 1991/92 and 1992/93 heating seasons. The DPUC's action positively impacted Southern's provision for uncollectible accounts for 1993. Southern has been allowed to recover these costs as well as deferred costs associated with Southern's certified hardship forgiveness program beginning January 1, 1994 in accordance with the DPUC's latest rate Decision. Accordingly, included in operations expense for 1995 and 1994 were approximately $2,987,000 and $1,726,000 related to these amortizations. Maintenance Expense Maintenance expense for 1995 decreased approximately 7% as compared to 1994. This decrease was primarily attributable to lower labor and material costs associated with Southern's mains due to a lower level of maintenance activity resulting from warmer than normal weather experienced during 1995. Depreciation and Depletion Expense Depreciation expense for Southern has increased in each of the last three years because of additions to plant in service. Federal and State Income Taxes The total provision for federal and state income taxes increased in 1995 by approximately 38% as compared to 1994. This increase was primarily due to higher pre-tax income coupled with a higher effective tax rate for 1995. Results for 1995 were also impacted by the flow-through tax effect of the amortization of previously deferred costs. Partially offsetting these increases in the tax provision for 1995 were benefits related to the current deductibility of conservation program expenses and certain postretirement health care and pension costs. The total provision for federal and state income taxes increased in 1994 by approximately 41% as compared to 1993. This increase was primarily due to higher pre-tax income in 1994, coupled with a higher effective tax rate due to the flow-through tax effect of the amortization of previously deferred costs. Municipal, Gross Earnings and Other Taxes Municipal, gross earnings and other taxes decreased approximately 6% in 1995 as compared to 1994. This decrease was principally due to lower gross earnings taxes due to lower revenues, lower sales and use taxes and lower property tax expense primarily due to the successful litigation against the City of Bridgeport concerning personal property tax audits. Municipal, gross earnings and other taxes increased approximately 4% in 1994 as compared to 1993 principally due to a higher provision for gross earnings taxes because of higher revenues in 1994. Connecticut Energy Corporation 15 Interest Expense and Preferred Stock Dividends Total interest expense and preferred stock dividends increased approximately 6% in 1995 as compared to 1994. The increase was primarily due to higher weighted average short-term interest rates during 1995 and a higher interest expense related to average deferred gas cost and margin sharing balances. Partially offsetting the increased short-term debt costs was a lower expense related to refunds owed to customers from interstate pipeline suppliers. Total interest expense and preferred stock dividends remained relatively unchanged for 1994 as compared to 1993. Higher long-term interest costs associated with higher average borrowings from the issuance of $15,000,000 of Series X First Mortgage Bonds in December 1992 and $12,000,000 of Series Y First Mortgage Bonds in September 1993 were offset by the recovery of higher interest income primarily related to deferred transition costs arising from implementation of FERC Order No. 636 by interstate pipelines and lower interest costs related to interstate pipeline refunds. Additionally, short-term interest costs were lower in 1994 due to lower average short-term borrowings. Southern strives to borrow short-term funds at the most competitive rates by utilizing commercial paper and bank borrowings at money market rates. Short-term interest rates averaged 5.99% in 1995 as compared to 3.74% in 1994 and 3.47% in 1993. Inflation Inflation as measured by the Consumer Price Index for all urban consumers was approximately 2.8% in 1995 and 3.0% in 1994 and 1993. Operations and maintenance expenses increase as a result of inflation, as does depreciation expense due to higher replacement costs of plant and equipment. As a regulated utility, Southern's increases in expenses generally are recoverable from customers through rates approved by the DPUC. In management's opinion, inflation has not had a material impact on net income and the results of operations over the last three years. Rate Matters On August 2, 1995, the DPUC issued a final Decision in Docket No. 94-11-12, DPUC Review of Connecticut Local Distribution Companies' Cost of Service Study Methodologies. In this docket, the DPUC investigated the issues surrounding the development of firm transportation rates at the state level in response to FERC Order No. 636. In its Decision, the DPUC provided guidelines for the development of firm transportation rates to be offered by Connecticut's three local distribution companies ("LDCs"). Each LDC is required to file specific firm transportation rate proposals in separate company rate dockets. A firm transportation rate option will be implemented for the largest commercial and industrial customers upon the conclusion of each company's rate docket and will be available to all commercial and industrial customers no later than April 1, 1996. Southern filed its firm transportation rate proposal during the fourth quarter of fiscal 1995 in order to comply with the DPUC's Decision. This filing did not address Southern's revenue requirements and maintains the existing margin recovery and rates of return established in the last rate case Decision issued for Southern. On December 1, 1993, the DPUC issued a final Decision regarding Southern's rate request. The Decision incorporated the previously approved Partial Settlement of Certain Issues ("Partial Settlement") and resolved most of the significant financial aspects of Southern's original rate request, including an increase in base rates of $13,400,000 based upon Southern's sales forecast as originally filed, an allowed return on equity of 11.45% and the implementation of a weather normalization adjustment. In addition, Southern was permitted to recover previously deferred costs over amortization periods from three to five years associated with shortfalls in energy assistance, the certified hardship arrearage forgiveness program, environmental remediation expenditures, economic development programs and undepreciated gas holder costs. 16 Connecticut Energy Corporation The Partial Settlement also provided for current recovery of postretirement health care expenses accrued under SFAS 106 and the establishment of a target margin, net of gross earnings tax, of $4,000,000 for on-system sales and transportation to Southern's interruptible customers with excess margins shared between firm customers and shareholders on an 80%/20% split. As part of the Partial Settlement, Southern agreed that, except for certain adverse events, it would not file a general application to increase rates which would become effective on or before November 30, 1995. Recent Accounting Developments In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which will be effective for the Company's fiscal year ending September 30, 1997. This statement imposes stricter criteria for regulatory assets by requiring that such assets be probable of future recovery at each balance sheet date. The adoption of SFAS 121 is required by October 1, 1996, and the Company intends to adopt this statement prospectively. The impact of this new standard is not expected to have a material effect on the Company's financial condition or results of operations. LIQUIDITY AND CAPITAL RESOURCES Operating Activities The seasonal nature of Southern's business creates large short-term cash demands primarily to finance gas purchases, customer accounts receivable and certain tax payments. To provide these funds, as well as funds for its capital expenditure program and other corporate purposes, Connecticut Energy has committed lines of credit with a number of banks totalling $37,000,000. Of this total, Southern has committed lines of credit of $32,000,000 in addition to uncommitted lines of credit with two of its banks totalling $14,000,000 and a revolving credit line agreement for up to $20,000,000 with one of its banks. This latter agreement has a revolving credit feature through December 21, 1996, followed by a term loan period through December 21, 2000. At September 30, 1995, the Company had unused lines of credit of $46,800,000. Because of the availability of short-term credit and the ability to issue long-term debt and additional equity, management believes it has adequate financial flexibility to meet its anticipated cash needs. Operating cash flows for 1995 were positively affected by higher net income, the receipt of approximately $8,689,000 in interstate pipeline refunds used to offset previously deferred transition costs, higher balances related to Southern's interruptible margin sharing mechanism and lower accounts receivable balances. Operating cash flows in 1994 were positively affected by higher net income, lower gas inventories and lower deferred gas cost balances as well as the recovery of the majority of the transition cost balances paid to date. Partially offsetting these increases were higher accounts receivable balances. Investing Activities Capital expenditures approximated $27,600,000 in 1995, $26,600,000 in 1994 and $26,100,000 in 1993. Southern relies upon cash flow provided by operating activities to fund a portion of these expenditures, with the remainder funded by short-term borrowings and, at some later date, long-term debt and capital stock financings. Southern's capital expenditures in 1996 will approximate $26,000,000 of which 25% is budgeted for new business. The majority Connecticut Energy Corporation 17 of the remaining planned capital expenditures are to improve, protect and maintain its existing gas distribution system. Over the 1996 - 2000 period, Southern estimates that total expenditures for new plant and equipment will range between $110,000,000 and $130,000,000. In August 1995, the Company formed a new nonutility subsidiary, Total Energy Services Group, Inc. ("TESG"). TESG is initially expected to engage in activities relating to the selling, planning, purchasing and management of various energy services to commercial and industrial end users. In December 1994, the Company formed a new nonutility subsidiary, Connecticut Energy Development Corporation ("CEDC"). CEDC is initially expected to participate as an equity holder in an entity formed to purchase and market natural gas and potentially participate in other nonregulated activities. Financing Activities As of June 1994, the quarterly dividend paid per share on the Company's common stock was increased to $0.325 per share or an annual indicated dividend rate of $1.30 per share. In March 1994, the Company completed a public sale of 1,000,000 shares of common stock at a price of $20 1/8 per share and received net proceeds of $19,375,000. The proceeds were used for the repayment of short-term debt and for other general corporate purposes. In December 1993, Southern redeemed all outstanding shares of its 4 3/4% $100 par value cumulative preferred stock. The redemption price was 100% of par value plus accrued dividends through December 30, 1993. Southern issued and sold $12,000,000 in Series Y First Mortgage Bonds at a rate of 7.08% and $15,000,000 in Series X First Mortgage Bonds at a rate of 7.67% in September 1993 and December 1992, respectively. Each issuance was privately placed with single, separate lenders. The Series Y and Series X Bonds each have a life of 20 years and are required to be redeemed through payments of $12,000,000 and $15,000,000 on October 1, 2013 and December 15, 2012, respectively. Proceeds from the sales of Series Y and Series X Bonds were used principally to reduce short-term borrowings incurred primarily in connection with Southern's capital expenditure program. As of June 1992, the quarterly dividend paid per share on the Company's outstanding common stock was increased to $0.32 per share or an annual indicated dividend rate of $1.28 per share. Financing plans for 1996 include the potential establishment of a Medium Term Note ("MTN") program, subject to the approval of the DPUC. This program would permit the issuance of up to $75,000,000 of secured MTN's over a four-year period for varying amounts and terms. The current timetable would allow for the commencement of this program sometime in the spring of 1996. The method, timing and amounts of any future financings by the Company or Southern will depend on a variety of factors, including capitalization ratios, coverage ratios, interest costs, the state of the capital markets and general economic conditions. 18 Connecticut Energy Corporation In response to the competitive forces and regulatory changes being faced by the Company, the Company has from time to time considered, and expects to continue to consider, various strategies designed to enhance its competitive position and to increase its ability to adapt to and anticipate changes in its utility business. These strategies may include business combinations with other companies as well as acquisitions of related or unrelated businesses. The Company may from time to time be engaged in preliminary discussions regarding one or more of these potential strategies. No assurances can be given as to whether any potential transaction of the type described above may actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of the Company. FERC Order No. 636 Transition Costs As a result of FERC Order No. 636, costs are being incurred by Southern's interstate pipeline suppliers to convert existing "bundled" sales services to "unbundled" transportation and storage services. These transition costs include unrecovered gas costs, gas supply realignment costs, stranded investment costs and new facilities costs. Southern has paid approximately $16,345,000 in transition costs as of September 30, 1995. Of this total, $4,461,000 represents unrecovered gas costs and $11,884,000 represents gas supply realignment costs and stranded investment costs. On July 8, 1994, the DPUC issued a Decision regarding implementation of FERC Order No. 636 by the Connecticut local gas distribution companies. The DPUC prescribed, among other things, the various mechanisms for the recovery of deferred transition costs. As of September 30, 1995, Southern has recovered substantially all of its deferred transition costs through the use of the recovery mechanisms allowed by the DPUC. 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. 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." Until the DEP conducts a comprehensive review, no discussions with it addressing the extent, timing and type of remedial action, if any, can occur. Given the DEP's response, 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, based upon the provisions of the Partial Settlement in Southern's last rate order, that 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. Connecticut Energy Corporation 19 Consolidated Statements of Income (dollars in thousands, except per share)
Years ended September 30, 1995 1994 1993 - ----------------------------------------------------------------------------------------------------------------- Operating Revenues $ 232,093 $ 240,873 $ 212,762 Purchased gas 115,583 126,870 113,045 - ----------------------------------------------------------------------------------------------------------------- Gross margin 116,510 114,003 99,717 - ----------------------------------------------------------------------------------------------------------------- Operating Expenses: Operations 49,113 50,209 41,331 Maintenance 3,743 4,035 3,692 Depreciation and depletion 14,050 13,031 12,051 Federal and state income taxes 7,436 5,402 3,821 Municipal, gross earnings and other taxes 15,282 16,314 15,697 - ----------------------------------------------------------------------------------------------------------------- Total operating expenses 89,624 88,991 76,592 - ----------------------------------------------------------------------------------------------------------------- Operating income 26,886 25,012 23,125 - ----------------------------------------------------------------------------------------------------------------- Other deductions, net 519 586 510 - ----------------------------------------------------------------------------------------------------------------- Interest Expense and Preferred Stock Dividends: Interest on long-term debt and amortization of debt issue costs 10,859 10,920 9,945 Other interest, net and preferred stock dividends 1,448 663 1,617 - ----------------------------------------------------------------------------------------------------------------- Total interest expense and preferred stock dividends 12,307 11,583 11,562 - ----------------------------------------------------------------------------------------------------------------- Net Income $ 14,060 $ 12,843 $ 11,053 - ----------------------------------------------------------------------------------------------------------------- Net income per share $ 1.60 $ 1.58 $ 1.50 - ----------------------------------------------------------------------------------------------------------------- Dividends paid per share $ 1.30 $ 1.29 $ 1.28 - ----------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 8,773,878 8,134,021 7,377,419 - -----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 20 Connecticut Energy Corporation Consolidated Balance Sheets (dollars in thousands, except per share)
As of September 30, 1995 1994 - ------------------------------------------------------------------------------------------------------- Assets Utility Plant: Plant in service, at cost $350,715 $329,917 Construction work in progress 4,132 2,036 - ------------------------------------------------------------------------------------------------------- Gross utility plant 354,847 331,953 Less: accumulated depreciation 107,244 97,458 - ------------------------------------------------------------------------------------------------------- Net utility plant 247,603 234,495 Nonutility property, net 2,541 2,492 - ------------------------------------------------------------------------------------------------------- Net utility plant and other property 250,144 236,987 - ------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents 4,635 1,637 Accounts and notes receivable (less allowance for doubtful accounts of $3,553 in 1995 and $3,747 in 1994) 23,456 23,698 Accrued utility revenue, net 2,675 2,630 Unrecovered purchased gas costs 2,972 4,523 Inventories 13,115 14,678 Prepaid expenses 2,247 1,847 - ------------------------------------------------------------------------------------------------------- Total current assets 49,100 49,013 - ------------------------------------------------------------------------------------------------------- Deferred Charges: Unamortized debt expenses 6,090 6,317 Unrecovered deferred taxes 37,717 35,398 Other 27,037 25,205 - ------------------------------------------------------------------------------------------------------- Total deferred charges 70,844 66,920 - ------------------------------------------------------------------------------------------------------- Total assets $370,088 $352,920 - ------------------------------------------------------------------------------------------------------- Capitalization and Liabilities Common Shareholders' Equity: Common stock -- par value $1 per share: authorized -- 20,000,000 shares; issued and outstanding -- 8,865,210 in 1995; 8,700,266 in 1994 $ 8,865 $ 8,700 Capital in excess of par value 88,295 85,265 Retained earnings 34,401 31,754 - ------------------------------------------------------------------------------------------------------- Total common shareholders' equity 131,561 125,719 - ------------------------------------------------------------------------------------------------------- Redeemable preferred stock -- -- Long-term debt 119,322 119,917 - ------------------------------------------------------------------------------------------------------- Total capitalization 250,883 245,636 - ------------------------------------------------------------------------------------------------------- Current Liabilities: Short-term borrowings 24,200 18,800 Current maturities of long-term debt 594 594 Accounts payable 9,586 10,886 Refunds due customers 862 -- Federal, state and deferred income taxes 2,525 3,565 Property and other accrued taxes 4,877 5,289 Interest payable 3,311 3,315 Customers' deposits 1,843 1,901 Other accrued liabilities 3,419 4,137 - ------------------------------------------------------------------------------------------------------- Total current liabilities 51,217 48,487 - ------------------------------------------------------------------------------------------------------- Deferred Credits: Deferred income taxes 56,359 51,121 Deferred investment tax credits 3,561 3,853 Other 8,068 3,823 - ------------------------------------------------------------------------------------------------------- Total deferred credits 67,988 58,797 - ------------------------------------------------------------------------------------------------------- Commitments and contingencies -- -- - ------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $370,088 $352,920 - -------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Connecticut Energy Corporation 21 Consolidated Statements of Changes in Common Shareholders' Equity (dollars in thousands, except per share)
Adjustment Common Stock Capital for Total ----------------------- in Minimum Common Number Par Excess of Retained Pension Shareholders' of Shares Value Par Value Earnings Liability Equity - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1992 7,234,921 $7,235 $57,295 $ 28,075 -- $ 92,605 Issuance through dividend reinvestment plan 253,546 253 5,513 -- -- 5,766 Net income -- -- -- 11,053 -- 11,053 Dividends paid on common stock ($1.28 per share) -- -- -- (9,463) -- (9,463) Adjustment for minimum pension liability (net of income taxes) -- -- -- -- $(108) (108) - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1993 7,488,467 $7,488 $62,808 $ 29,665 $(108) $ 99,853 Public offering 1,000,000 1,000 18,375 -- -- 19,375 Issuance through dividend reinvestment plan 211,799 212 4,082 -- -- 4,294 Net income -- -- -- 12,843 -- 12,843 Dividends paid on common stock ($1.29 per share) -- -- -- (10,754) -- (10,754) Adjustment for minimum pension liability (net of income taxes) -- -- -- -- 108 108 - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1994 8,700,266 $8,700 $85,265 $ 31,754 -- $125,719 Issuance through dividend reinvestment plan 164,944 165 3,030 -- -- 3,195 Net income -- -- -- 14,060 -- 14,060 Dividends paid on common stock ($1.30 per share) -- -- -- (11,413) -- (11,413) - ------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1995 8,865,210 $8,865 $88,295 $ 34,401 -- $131,561 - -------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 22 Connecticut Energy Corporation Consolidated Statements of Cash Flows (dollars in thousands)
Years ended September 30, 1995 1994 1993 - --------------------------------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 14,060 $ 12,843 $ 11,053 Adjustments to Reconcile Net Income to Net Cash: Gain on sale of headquarters property -- -- (66) Loss on sale of subsidiaries -- -- 68 Depreciation, depletion and amortization 14,985 13,844 12,825 Provision for losses on accounts receivable 6,548 6,962 4,350 (Increase) Decrease in Assets: Accounts and notes receivable (6,306) (12,248) (3,923) Accrued utility revenue, net (45) (323) (274) Unrecovered purchased gas costs 1,551 1,452 (5,975) Inventories 1,563 1,634 (3,720) Prepaid expenses (400) (282) (495) Unamortized debt expense (7) (87) (244) Deferred charges and other assets (1,860) (4,852) (8,072) Increase (Decrease) in Liabilities: Accounts payable (1,300) (1,661) 3,636 Refunds due customers 862 (1,964) 1,432 Accrued taxes (1,452) 47 1,656 Other current liabilities (780) 2,561 (921) Deferred income taxes and investment tax credits 2,627 1,706 129 Deferred credits and other liabilities 4,323 177 1,794 - --------------------------------------------------------------------------------------------------- Net cash provided by operating activities 34,369 19,809 13,253 - --------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities: Capital expenditures (27,641) (26,669) (26,136) Proceeds from sale of headquarters property -- -- 2,005 Proceeds from sale of subsidiaries 40 28 180 Contributions in aid of construction 32 51 66 Payments for retirement of utility plant (390) (779) (276) - --------------------------------------------------------------------------------------------------- Net cash used by investing activities (27,959) (27,369) (24,161) - --------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities: Dividends paid on common stock (11,413) (10,754) (9,463) Issuance of common stock 3,195 23,669 5,766 Issuance of long-term debt -- -- 27,000 Repayments of long-term debt (594) (594) (594) Redemption of preferred stock -- (638) (50) Increase (decrease) in short-term borrowings 5,400 (4,700) (14,800) - --------------------------------------------------------------------------------------------------- Net cash (used) provided by financing activities (3,412) 6,983 7,859 - --------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 2,998 (577) (3,049) Cash and cash equivalents at beginning of year 1,637 2,214 5,263 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 4,635 $ 1,637 $ 2,214 - --------------------------------------------------------------------------------------------------- Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest $ 11,701 $ 11,332 $ 11,101 Income taxes $ 6,636 $ 4,252 $ 2,747
See notes to consolidated financial statements. Connecticut Energy Corporation 23 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 1 -- Summary of Significant Accounting Policies The consolidated financial statements include the accounts of all subsidiary companies. Connecticut Energy Corporation's ("Connecticut Energy" or "Company") principal subsidiary, The Southern Connecticut Gas Company ("Southern"), is subject to regulations by the Connecticut Department of Public Utility Control ("DPUC") with respect to rates charged for service and the maintenance of accounting records, among other things. Southern's accounting policies conform to generally accepted accounting principles as applied to regulated public utilities and are in accordance with the accounting requirements and ratemaking practices of the DPUC. All significant intercompany transactions and accounts have been eliminated. 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 DPUC's 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 was unregulated. In the application of SFAS 71, Southern follows accounting policies that reflect the impact of the rate treatment of certain events or transactions that are permitted to differ from generally accepted accounting principles. The most significant of these policies include the recording of deferred gas costs, pipeline transition costs, environmental evaluation costs, and an unfunded deferred income tax liability, with a corresponding unrecovered asset, for temporary differences previously flowed through to ratepayers. Based on current regulation and recent DPUC decisions, the Company believes that its use of regulatory accounting for Southern is appropriate and in accordance with the provisions of SFAS 71. Line of Business Operating revenues of the Company are derived primarily from Southern's operations as a retail natural gas distributor. Through former nonregulated subsidiaries, the Company was engaged in a limited amount of gas production and transportation activities. In February 1993, the assets and liabilities of these nonregulated subsidiaries were sold. In December 1994, the Company formed a new nonutility subsidiary, Connecticut Energy Development Corporation ("CEDC"). CEDC is initially expected to participate as an equity holder in an entity formed to purchase and market natural gas and potentially participate in other nonregulated activities. In August 1995, the Company formed a new nonutility subsidiary, Total Energy Services Group, Inc. ("TESG"). TESG is initially expected to engage in activities relating to the selling, planning, purchasing and management of various energy services to commercial and industrial end users. Utility Plant Utility plant is stated at original cost. The costs of additions and of major replacements of retired units are capitalized. Costs include labor, direct material and certain indirect charges such as engineering and supervision. Replacement of minor items of property and the cost of maintenance and repairs are included in maintenance expense. For normal retirements, the original cost of property, together with removal cost, less salvage value, is charged to accumulated depreciation when the property is retired and removed from service. 24 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Depreciation For financial accounting purposes, depreciation of utility plant is computed on the composite straightline rates prescribed by the DPUC. The annual composite rate allowed for book depreciation for Southern is 4.15%. Depreciation of transportation and power-operated equipment is computed separately and based on their estimated useful lives. For federal income tax purposes, the Company computes depreciation using accelerated methods. Federal Income Taxes In accordance with the requirements of the DPUC, the Economic Recovery Tax Act of 1981 and subsequent amendments to the Internal Revenue Code, income tax reductions to Southern resulting from such items as liberalized depreciation on 1981 to 1995 plant additions and investment tax credits on 1981 to 1986 plant additions are deferred and amortized to income over the useful lives of the related assets. Prior to 1981, Southern had treated the differences between tax and book depreciation on plant and equipment as adjustments to tax provisions ("flow-through method") and utilized the flow-through method on depreciation of pre-1981 assets. With specific permission from the DPUC, Southern also provides deferred federal income taxes for certain items, such as unrecovered purchased gas costs, that are reported in different time periods for tax purposes and financial reporting purposes. In addition, the oil and gas subsidiaries had provided deferred or prepaid taxes on all items directly related to exploration, drilling and transportation. In February 1992, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 establishes financial accounting and reporting standards for deferred income taxes using an asset and liability approach. SFAS 109 requires, among other things, the recognition of the effect on deferred taxes of enacted tax rate and law changes in the year in which they occur. The Company has adopted SFAS 109, effective October 1, 1993, and has adjusted deferred tax balances to reflect the differences between the tax and financial statement basis of all assets and liabilities, regardless of whether deferred taxes had been previously provided. Deferred tax liabilities have been reduced to the extent they had been previously provided at federal statutory rates in excess of the rates in effect on the effective date of adoption. In accordance with SFAS 71, as of September 30, 1995, the Company has a deferred tax liability and a corresponding regulatory asset of approximately $37,717 due to the adoption of SFAS 109. The effect of the adoption of SFAS 109 on net income is not material since this adjustment will be recognized in income in future periods as the temporary differences reverse. Utility Revenues The primary source of the Company's revenue is derived from Southern's retail distribution of natural gas. Southern's service area spans 22 Connecticut towns from Westport to Old Saybrook including the urban communities of Bridgeport and New Haven. Southern bills its customers on a cycle basis throughout each month and accrues revenues related to volumes of gas consumed by the customer but not billed at month end. The accrual of unbilled revenues is recorded net of related gas costs and accrued expenses. Purchased Gas Costs Southern's firm rates include a Purchased Gas Adjustment clause ("PGA"), under which purchased gas costs above or below base rate levels are charged or credited to customers. As prescribed by the DPUC, most differences between Southern's actual purchased gas costs and the current cost recovery are deferred for future recovery or refund through the PGA. Connecticut Energy Corporation 25 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Weather Normalization Adjustment Southern's firm rates include a Weather Normalization Adjustment ("WNA") under which the non-gas portion of these rates is charged or credited monthly to reflect deviations from normal temperatures. The implementation of the WNA occurred in January 1994 and operates for ten months of the year (September through June). Deferred Charges Included in other deferred charges are amounts related to the deferral of certain hardship heating customer accounts receivable arrearages totalling $10,223 and $10,211 in 1995 and 1994, respectively; the deferral of certain shortfalls in energy assistance funding related to the 1991/92 and 1992/93 heating seasons amounting to $2,122 and $2,742 in 1995 and 1994, respectively; prepaid pension and postretirement medical contributions of $7,969 and $6,355 in 1995 and 1994, respectively, and an intangible pension asset of $23 and $101 in 1995 and 1994, respectively. These deferred charges are among other miscellaneous deferred charges which Southern has been allowed to recover in rates over periods ranging from three to five years in accordance with the DPUC's Decision in Southern's last rate case. Deferred Credits Included in other deferred credits are amounts related to a minimum pension liability totalling $23 and $101 in 1995 and 1994, respectively, as more fully described in Note 7, "Employee Benefits." Also included are amounts related to Southern's interruptible margin sharing mechanisms totalling $4,851 and $604 in 1995 and 1994, respectively. Statement of Cash Flows For purposes of reporting cash flows, short-term investments having maturities of three months or less are considered to be cash equivalents. Inventories Inventories are stated at the lower of cost or market, cost generally being determined on the basis of the average cost method. Inventories consist primarily of fuel stock and smaller amounts of materials, supplies and appliances. Net Income Per Share Net income per share is computed based upon the weighted average number of common shares outstanding during each year. Note 2 -- Provision for Income Taxes Effective October 1, 1993, the Company adopted SFAS 109 and recorded a regulatory asset of $33,943 related to the cumulative amount of income taxes on temporary differences previously flowed through to ratepayers. In addition, the Company has a deferred tax liability of $3,561 related to future tax benefits to be flowed back to ratepayers associated with unamortized investment tax credits and decreases in both federal and state statutory tax rates. Both the regulatory asset and liability are recognized over the regulatory lives of the related taxable bases concurrent with the realization in rates. The provision for income taxes includes:
Years ended September 30, 1995 1994 1993 - -------------------------------------------------------------------------------------------- Taxes currently payable -- federal $3,817 $2,958 $ 968 Taxes currently payable -- state 1,535 1,464 347 - -------------------------------------------------------------------------------------------- $5,352 $4,422 $1,315 - -------------------------------------------------------------------------------------------- Deferred taxes -- federal $2,084 $ 980 $2,506 - -------------------------------------------------------------------------------------------- Total income tax provision $7,436 $5,402 $3,821 - --------------------------------------------------------------------------------------------
26 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Sources and tax effects of items which gave rise to deferred taxes are:
Years ended September 30, 1995 1994 1993 - -------------------------------------------------------------------------------------------- Amortization of deferred investment tax credits $ (292) $ (292) $ (292) Unrecovered purchased gas costs (542) (508) 2,378 Depreciation and depletion 1,956 1,779 1,664 Minimum tax credits 1,024 452 (1,111) Other (62) (451) (133) - -------------------------------------------------------------------------------------------- $2,084 $ 980 $2,506 - --------------------------------------------------------------------------------------------
The following table reconciles the income tax provision calculated using the federal statutory tax rate to the book provision for federal and state income taxes.
Years ended September 30, 1995 1994 1993 - -------------------------------------------------------------------------------------------- U. S. statutory federal tax rate 35% 35% 34.75% Depreciation differences 3% 4% 5% Allowance for doubtful accounts, including amounts forgiven and deferred 1% (7%) (16%) Investment tax credits (1%) (2%) (2%) Cost to retire assets, net of salvage (1%) (2%) (1%) State taxes, net of federal tax benefit 5% 5% 2% Pension contribution (2%) (2%) -- Conservation expenses (3%) -- -- Reduction due to graduated tax rates -- (.6%) (.75%) Other, net (2%) (.4%) 4% - -------------------------------------------------------------------------------------------- Effective tax rate 35% 30% 26% - --------------------------------------------------------------------------------------------
Deferred income tax liabilities (assets) are composed of the following:
As of September 30, 1995 1994 - ------------------------------------------------------------------------------- Tax effect of temporary differences for: Depreciation $20,464 $18,508 Items previously flowed through 37,717 35,398 Alternative minimum tax (440) (1,463) Investment tax credits 3,561 3,853 Contribution in aid of construction (689) (654) Pension contribution (658) (547) Other (35) (121) - ------------------------------------------------------------------------------- Net deferred income tax liability -- long-term $59,920 $54,974 - -------------------------------------------------------------------------------
At September 30, 1995 and 1994, the balance sheet caption, "Federal, state and deferred income taxes" included approximately $1,023 and $1,566, respectively, of current deferred federal and state income taxes; and approximately $440 and $1,463, respectively, of minimum tax credits available to reduce federal income taxes to be paid in future periods. Connecticut Energy Corporation 27 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 3 -- Long-Term Debt Long-term debt outstanding at September 30, 1995 and 1994 consisted of:
1995 1994 - -------------------------------------------------------------------------------- First Mortgage Bonds: Series L, 8%, due March 1, 1998 $ 4,480 $ 4,620 Series T, 10.02%, due September 1, 2003 3,636 4,091 Series U, 9.70%, due July 31, 2019 9,800 9,800 Series V, 9.85%, due July 31, 2020 15,000 15,000 Series W, 8.93% - 9.13%, due November 17, 2031 60,000 60,000 Series X, 7.67%, due December 15, 2012 15,000 15,000 Series Y, 7.08%, due October 1, 2013 12,000 12,000 - -------------------------------------------------------------------------------- 119,916 120,511 Less -- amounts due within one year 594 594 - -------------------------------------------------------------------------------- $119,322 $119,917 - --------------------------------------------------------------------------------
Under the provisions of Southern's mortgage bond indenture dated March 1, 1948, as supplemented from time to time, sinking fund payments are required at various dates for Series L and Series T First Mortgage Bonds. Series W First Mortgage Bonds are due in bullet payments in the years 2021 and 2031, respectively. Additionally, Series U, V, X and Y are due in single payments in the years 2019, 2020, 2012 and 2013, respectively. Substantially all of the utility plant of Southern is subject to the lien of its mortgage bond indentures. See Note 6, "Common Shareholders' Equity," for dividend restrictions. The aggregate annual sinking fund contributions and principal maturities for the five fiscal years subsequent to September 30, 1995 are as follows: 1996 -- $594; 1997 -- $595; 1998 -- $4,654; 1999 -- $455; 2000 -- $454; total -- $6,752. Expenses incurred in connection with long-term borrowings are normally amortized on a straightline method over the respective lives of the issues giving rise thereto. Note 4 -- Short-Term Borrowings The Company follows the practice of borrowing on a short-term basis from banks and through the sale of commercial paper. The following information relates to these borrowings for the years ended September 30, 1995, 1994 and 1993.
1995 1994 1993 - ----------------------------------------------------------------------------------------------- Bank Loans: Outstanding at the end of the year $19,200 $12,800 $10,500 Weighted average interest rate at year end 6.79% 5.41% 3.36% Average amount outstanding during year $13,318 $14,951 $15,879 Weighted average interest rate during year* 5.96% 3.74% 3.47% Maximum amount outstanding at any month end $29,000 $37,400 $29,200 Commercial Paper: Outstanding at the end of the year $ 5,000 $ 6,000 $13,000 Weighted average interest rate at year end 5.97% 4.95% 3.29% Average amount outstanding during year $ 2,595 $ 3,950 $11,517 Weighted average interest rate during year* 6.11% 3.74% 3.46% Maximum amount outstanding at any month end $ 6,000 $13,000 $16,000 - ----------------------------------------------------------------------------------------------- *Determined by dividing annual interest expense by average amount outstanding during the year.
28 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Connecticut Energy's committed short-term bank credit lines amounted to $37,000, a portion of which supports the issuance of commercial paper. Southern's share of the total committed credit lines amounted to $32,000. Southern also has uncommitted lines of credit with two of its banks totalling $14,000 in addition to a revolving credit/term loan agreement with one of its banks. This latter agreement provides an additional credit line of up to $20,000. The revolving credit feature is in effect through December 21, 1996 and is followed by a term loan period through December 21, 2000. At September 30, 1995, Southern had no outstanding borrowings under this agreement. The fee for this facility is 1/8 of 1% per annum. At September 30, 1995, the Company had unused lines of credit of $46,800. In lieu of compensating balances, Southern pays fees for its lines of credit which are approximately 3/10 of 1% of the amount of the line of credit. The aggregate annual commitment fees on these lines were $96, $124 and $102 for the years ended September 30, 1995, 1994 and 1993, respectively. Note 5 -- Redeemable Preferred Stock The following table summarizes the shares of preferred stock authorized, issued and outstanding at September 30, 1995 and 1994:
1995 1994 - ------------------------------------------------------------------------------ The Southern Connecticut Gas Company: Cumulative preferred stock, $100 par value: Authorized 200,000 200,000 4.75% issued and outstanding -- -- - ------------------------------------------------------------------------------ Preferred stock, $1 par value: Authorized 600,000 600,000 Issued and outstanding -- -- - ------------------------------------------------------------------------------ Preference stock, $1 par value: Authorized 1,000,000 1,000,000 Issued and outstanding -- -- - ------------------------------------------------------------------------------ Connecticut Energy Corporation: Preference stock, $1 par value: Authorized 1,000,000 1,000,000 Issued and outstanding -- -- - ------------------------------------------------------------------------------
Southern's $1 par value preferred stock ranks on a parity as to dividends and payments in liquidation with Southern's $100 par value preferred stock; while the preference stock is preferred as to dividends and payments in liquidation over Southern's common stock, it is subordinate to the other classes of preferred stock. Note 6 -- Common Shareholders' Equity The indentures relating to the long-term debt and the Amended and Restated Certificate of Incorporation of Southern contain restrictions as to the declaration or payment of cash dividends on capital stock and the reacquisition of capital stock. Under the most restrictive of such provisions, $21,886 of Southern's retained earnings at September 30, 1995 was available for such purposes. The Company currently issues common stock through the Dividend Reinvestment and Stock Purchase Plan ("DRP") and an employee savings plan ("Target Plan"). The Company formerly issued common stock through the Employee Stock Ownership Plan ("ESOP"); however, at the end of calendar year 1994, the assets of the ESOP were merged with the Target Plan. There were no contributions to the ESOP made during the years ended September 30, 1995 and 1994. The DRP permits shareholders to automatically reinvest their cash dividends or invest optional limited amounts of cash payments in newly issued shares or open market purchases of the Company's common stock. At September 30, 1995, there were 1,477,929 shares reserved for issuance under the DRP and Target Plan. Connecticut Energy Corporation 29 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 7 -- Employee Benefits Retirement Plans Southern maintains two noncontributory pension plans covering substantially all of its employees. The plan covering salaried employees provides pension benefits based on compensation during the five years before retirement and on years of service. The union plan provides negotiated benefits of stated amounts for each year of service. It is the Company's policy to fund annually the periodic pension cost of its retirement plans subject to the minimum and maximum contribution limitations of the Internal Revenue Code ("IRC"). A regulatory adjustment has been made to the net periodic pension cost to reflect the amount of pension cost that is realized through the ratemaking process. The Company recorded an additional minimum liability of $23 and $101 representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension costs at September 30, 1995 and 1994, respectively. This liability is offset by an intangible asset of $23 and $101 at September 30, 1995 and 1994, respectively, which represents unrecognized prior service costs and, in 1993, the balance (net of income taxes) was charged to a separate component of shareholders' equity. Net periodic pension cost for the years ended September 30, 1995, 1994 and 1993 included the following components:
1995 1994 1993 - ----------------------------------------------------------------------------------------------- Service cost benefits earned during the period $ 1,868 $ 2,117 $ 2,031 Interest cost on projected benefit obligation 4,686 4,263 3,923 Actual return on plan assets (12,603) (1,986) (6,817) Net amortization and deferral 8,135 (1,829) 2,883 - ----------------------------------------------------------------------------------------------- Net periodic pension cost $ 2,086 $ 2,565 $ 2,020 Regulatory adjustment 233 22 (177) - ----------------------------------------------------------------------------------------------- Net pension cost $ 2,319 $ 2,587 $ 1,843 - ----------------------------------------------------------------------------------------------- Portion capitalized to utility plant $ 441 $ 439 $ 328 - -----------------------------------------------------------------------------------------------
The following table sets forth the funded status of Southern's pension plans at September 30, 1995 and 1994:
September 30, 1995 September 30, 1994 Plans Where: Plans Where: - ------------------------------------------------------------------------------------------------------------------- Assets Accumulated Assets Accumulated Exceed Benefits Exceed Benefits Accumulated Exceed Accumulated Exceed Actuarial present value of benefit obligation: Benefits Assets Benefits Assets - ------------------------------------------------------------------------------------------------------------------- Vested benefit obligation $(50,481) $ (457) $(43,249) $ (3) - ------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $(54,827) $ (637) $(46,808) $(326) - ------------------------------------------------------------------------------------------------------------------- Actuarial present value of projected benefit obligation $(64,718) $(1,591) $(54,337) $(758) Plan assets at fair value 70,177 -- 58,217 -- - ------------------------------------------------------------------------------------------------------------------- Projected benefits obligation in excess of plan assets 5,459 (1,591) 3,880 (758) Transition obligation 827 -- 996 -- Prior service cost 3,178 295 3,582 317 Unrecognized (gain) loss (2,601) 635 (2,983) (18) Adjustment required to recognize minimum liability -- (23) -- (101) - ------------------------------------------------------------------------------------------------------------------- Prepaid pension cost (liability), net $ 6,863 $ (684) $ 5,475 $(560) - -------------------------------------------------------------------------------------------------------------------
30 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Key assumptions used in the determination of the projected benefit obligations and the fair value of plan assets were: 1995 1994 1993 - ------------------------------------------------------------------------- Discount rate 7 1/4% 8 1/2% 7% Salary increase rate 5 1/4% 5 1/2% 5% Expected rate of return on assets 9 1/2% 9% 9 1/4% - ------------------------------------------------------------------------- The significant majority of the assets of the pension plans is invested in common stock, fixed income securities and balanced mutual funds, with the balance in cash and short-term investments. Effective October 1, 1993, Southern established nonqualified pension programs to provide benefits on compensation in excess of the limitations imposed by the IRC and to provide additional retirement income to designated officers. Southern maintains a savings plan covering substantially all of its employees who meet minimum service and age requirements pursuant to which the participants may elect to contribute to the plan, through payroll deductions, 2% or more of their annual compensation either on an after-tax or a before-tax basis as permitted by Section 401(k) of the IRC. Participants receive a matching contribution of 50% of the first 6% of annual compensation. Participants vest over a five year period and benefits are paid to employees or their beneficiaries upon retirement, death, disability or termination. Amounts expensed under the plan were $816, $795 and $772 for years ended September 30, 1995, 1994 and 1993, respectively. Postretirement Health Care Benefits In addition to providing pension benefits, Southern provides certain health care benefits for retired employees. Substantially all of the Company's employees may become eligible for those benefits if they reach age 55 while working for the Company and have completed at least five years of service. Prior to October 1, 1993, Southern recognized the cost of providing these benefits by expensing $350 annually in excess of paid medical claims in accordance with funding provided by a rate decision in 1990. Effective October 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions" ("SFAS 106"), which requires accrual accounting for postretirement benefits during the employee's years of service with Southern. Southern has elected to amortize the transition obligation over 20 years. In the DPUC's Decision on Southern's latest rate request, Southern was allowed current recovery of SFAS 106 costs through customer base rates which became effective December 9, 1993. The expense of implementing SFAS 106 prior to full recovery in rates, which amounted to $367, was deferred and is being recovered over a three year period. The postretirement benefit costs for the years ended September 30, 1995 and 1994 include the following components: 1995 1994 - -------------------------------------------------------------------- Service cost $ 340 $ 598 Interest cost 1,401 1,282 Actual return on plan assets (594) (113) Net amortization and deferral 1,071 880 - -------------------------------------------------------------------- Net periodic postretirement benefit cost $2,218 $2,647 Regulatory adjustment 122 (275) - -------------------------------------------------------------------- Net postretirement benefit cost $2,340 $2,372 - -------------------------------------------------------------------- In 1990, Southern amended the Pension Plan for Salaried and Certain Other Employees to establish an account within the Pension Plan trust as permitted under Section 401(h) of the IRC to fund a portion of Southern's anticipated future postretirement health care benefits liability with amounts allowed through the ratemaking process. Through the use of the existing trust and the establishment in 1994 of a Voluntary Employees' Beneficiary Association ("VEBA") trust as permitted under Section 501(c)(9) of the IRC, Southern plans to fund its full postretirement benefit expense under SFAS 106. Connecticut Energy Corporation 31 Notes to Consolidated Financial Statements (dollars in thousands, except per share) The significant majority of the assets of the VEBA trust is invested in a diversified fund consisting of common stock and fixed income securities, with the balance in cash and short-term investments. The following table reconciles the funded status of the plan with the amounts recognized in the consolidated balance sheets as of September 30, 1995 and 1994: 1995 1994 - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees $ (8,866) $ (8,712) Fully eligible active plan participants (2,692) (3,262) Other active plan participants (5,493) (6,176) - ------------------------------------------------------------------------------ Total accumulated postretirement benefit obligation $(17,051) $(18,150) Plan assets at fair value 3,757 1,333 - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation in excess of plan assets $(13,294) $(16,817) Unamortized transition obligation 13,820 16,592 Unrecognized (gain) loss (2,131) (2,336) - ------------------------------------------------------------------------------ (Accrued) postretirement benefit obligation $ (1,605) $ (2,561) - ------------------------------------------------------------------------------ The expected long-term rate of return on plan assets is 9 1/2%. The assumed initial health care cost trend rates used to measure the expected cost of benefits were 10% for pre-age 65 claims and 8 1/2% for post-age 65 claims. The rates decline to 5% by the year 2004 and 2002, respectively. The weighted average discount rate used to measure the accumulated postretirement benefit obligation was 7 1/4%. A one percentage point change in the assumed health care cost trend rate would change the service cost and interest cost components of the net periodic postretirement benefit cost by approximately $14 and $50, respectively, and would change the accumulated postretirement benefit obligation for health care benefits by approximately $691. Note 8 -- Leases Total rental expense was $3,074, $2,864 and $2,405 for the years ended September 30, 1995, 1994 and 1993, respectively. Southern's approximate aggregate minimum rental commitments (exclusive of taxes, maintenance, etc.) under noncancelable operating leases for each of the five fiscal years subsequent to September 30, 1995 are in total: Commitment Office space LNG plant Other - ------------------------------------------------------------------------------ 1996 $ 2,050 $ 609 $252 1997 2,037 608 75 1998 2,111 609 72 1999 2,111 608 54 2000 2,087 609 -- Thereafter 29,309 12,476 -- - ------------------------------------------------------------------------------ Total commitment $39,705 $15,519 $453 - ------------------------------------------------------------------------------ In 1995, the liquified natural gas ("LNG") plant lease agreement was renewed for two consecutive terms of 12 years. The lease contains an option to purchase the plant for a purchase price based on the then fair market sales value of the unit as defined therein. In March 1993, Southern entered into an operating lease for the purpose of consolidating its operating centers at one location in Orange, Connecticut. The lease is for a period of 20 years. In October 1992, Southern entered into an operating lease which consolidated administrative functions at one location in Bridgeport, Connecticut. The lease is for a period of 20 years. 32 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 9 -- Supplementary Income Statement Information Amounts charged to costs and expenses for the years ended September 30, 1995, 1994 and 1993 included: 1995 1994 1993 - ------------------------------------------------------------------------------ Maintenance and repairs $ 3,743 $ 4,035 $ 3,692 Depreciation and depletion 14,050 13,031 12,051 Property taxes 3,557 3,821 4,450 Connecticut gross earnings tax 10,055 10,506 9,349 Connecticut corporation business tax 1,535 1,464 347 Other taxes 9 213 210 Federal Insurance Contribution Act 2,102 2,198 2,090 Taxes capitalized as part of utility plant (441) (424) (402) - ------------------------------------------------------------------------------ Note 10 -- Quarterly Financial Data (Unaudited) Dec. 31 March 31 June 30 Sept. 30 1995 Quarter ended 1994 1995 1995 1995 - ------------------------------------------------------------------------------ Operating revenues $65,523 $103,284 $39,755 $23,531 Gross margin 32,246 53,286 19,063 11,915 Operating income (loss) 8,072 18,988 1,203 (1,377) Net income (loss) 4,941 15,715 (1,985) (4,611) Net income (loss) per share* $ 0.57 $ 1.79 $ (0.23) $ (0.52) - ------------------------------------------------------------------------------ Dec. 31 March 31 June 30 Sept. 30 1994 Quarter ended 1993 1994 1994 1994 - ------------------------------------------------------------------------------ Operating revenues $66,714 $111,838 $36,835 $25,486 Gross margin 30,107 50,490 20,131 13,275 Operating income (loss) 8,072 16,730 1,779 (1,569) Net income (loss) 4,998 13,753 (1,338) (4,570) Net income (loss) per share* $ 0.67 $ 1.77 $ (0.16) $ (0.53) - ------------------------------------------------------------------------------ * Calculated on the basis of weighted average shares outstanding during the applicable quarter. Note 11 -- Disclosures About the Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents The carrying amount approximates fair value because of the short maturity of those instruments. Long-term debt The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The estimated fair values of the Company's financial instruments are as follows: As of September 30, 1995 1994 - ------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------ Long-term debt (including current maturities) $(119,916) $(138,171) $(120,511) $(124,905) - ------------------------------------------------------------------------------ Connecticut Energy Corporation 33 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 12 -- 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. 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." Until the DEP conducts a comprehensive review, no discussions with it addressing the extent, timing and type of remedial action, if any, can occur. Given the DEP's response, 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, based upon the provisions of the Partial Settlement in Southern's last rate order, that 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. FERC Order No. 636 Transition Costs As a result of Order No. 636 issued by the Federal Energy Regulatory Commission ("FERC"), costs are being incurred by Southern's interstate pipeline suppliers to convert existing "bundled" sales services to "unbundled" transportation and storage services. These transition costs include unrecovered gas costs, gas supply realignment costs, stranded investment costs and new facilities costs. Southern has paid approximately $16,345 in transition costs as of September 30, 1995. Of this total, $4,461 represents unrecovered gas costs and $11,884 represents gas supply realignment costs and stranded investment costs. On July 8, 1994, the DPUC issued a Decision regarding implementation of FERC Order No. 636 by the Connecticut local gas distribution companies. The DPUC prescribed, among other things, the various mechanisms for the recovery of deferred transition costs. As of September 30, 1995, Southern has recovered substantially all of its deferred transition costs through the use of the recovery mechanisms allowed by the DPUC. 34 Connecticut Energy Corporation Management Responsibility for Financial Statements The management of Connecticut Energy Corporation is responsible for the preparation and integrity of the consolidated financial statements and all other financial information included in this annual report. The financial statements were prepared in conformity with generally accepted accounting principles consistently applied and they necessarily include amounts which are based on estimates and judgments made with due consideration to materiality. Management maintains a system of internal accounting controls which it believes provides reasonable assurance that Company policies and procedures are complied with, assets are safeguarded and transactions are executed in accordance with appropriate corporate authorization and recorded in a manner which permits management to meet its responsibility for the preparation of financial statements. The Company's system of controls includes the communication and enforcement of written policies and procedures. The Audit Committee of the Board of Directors, comprised of non-employee directors, meets periodically and as necessary with management, the internal auditors and Coopers & Lybrand L.L.P. to review audit plans and results and the Company's accounting, financial reporting and internal control practices, procedures and results. Both Coopers & Lybrand L.L.P. and the Company's internal audit department have full and free access to all levels of management. /s/ Carol A. Forest /s/ Vincent L. Ammann, Jr. Carol A. Forest Vincent L. Ammann, Jr. Vice President, Finance, Vice President and Chief Financial Officer and Treasurer Chief Accounting Officer Report of Independent Accountants To the Board of Directors and Shareholders of Connecticut Energy Corporation We have audited the accompanying consolidated balance sheets of Connecticut Energy Corporation and its subsidiaries (the Company) as of September 30, 1995 and 1994 and the related consolidated statements of income, changes in common shareholders' equity and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Connecticut Energy Corporation and its subsidiaries as of September 30, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1995 in conformity with generally accepted accounting principles. As discussed in Notes 2 and 7 to the consolidated financial statements, in fiscal 1994 the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions. /c/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. New York, New York November 1, 1995 Connecticut Energy Corporation 35 Eleven Year Financial Summary Financial information presented for 1995 through 1990 is for the twelve month period ended September 30; all information for prior years is for the twelve month period ended December 31. (dollars in thousands, except per share)
1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------- Operations Operating revenues $232,093 $240,873 $212,762 $203,011 Purchased gas 115,583 126,870 113,045 104,163 Gross margin 116,510 114,003 99,717 98,848 Operations and maintenance expenses 52,856 54,244 45,023 46,881 Depreciation and depletion 14,050 13,031 12,051 11,327 Federal income taxes 5,901 3,938 3,474 2,287 Other taxes 16,817 17,778 16,044 16,025 Other deductions and (income), net 519 586 510 531 Interest expense 12,307 11,575 11,530 11,536 Subsidiary preferred stock dividends -- 8 32 34 Income before cumulative effect of accounting change $ 14,060 $ 12,843 $ 11,053 $ 10,227 Cumulative effect of accounting change -- -- -- -- Net income $ 14,060 $ 12,843 $ 11,053 $ 10,227 Net income per share before cumulative effect of accounting change (f) $ 1.60 $ 1.58 $ 1.50 $ 1.43 Net income per share (f) $ 1.60 $ 1.58 $ 1.50 $ 1.43 Annual dividend paid per common share (f) $ 1.30 $ 1.29 $ 1.28 $ 1.265 - -------------------------------------------------------------------------------------------------------------------- *Capitalization Common shareholders' equity $131,561 $125,719 $ 99,853 $ 92,605 Redeemable preferred stock -- -- 638 687 Long-term debt 119,322 119,917 120,511 94,106 - -------------------------------------------------------------------------------------------------------------------- Total capitalization $250,883 $245,636 $221,002 $187,398 - -------------------------------------------------------------------------------------------------------------------- *Capitalization (% of total) Common shareholders' equity 52.4 51.2 45.2 49.4 Redeemable preferred stock -- -- 0.3 0.4 Long-term debt 47.6 48.8 54.5 50.2 - -------------------------------------------------------------------------------------------------------------------- Total capitalization 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------------------------------------------- *Common Stock (f) Shares outstanding at end of period 8,865,210 8,700,266 7,488,467 7,234,921 Book value per share at end of period $ 14.84 $ 14.45 $ 13.33 $ 12.80 Market value per share at end of period $ 19.38 $ 21.63 $ 24.88 $ 22.25 Average daily trading volume 5,000 5,500 9,000 4,500 Shareholders of record at year end 11,688 12,094 11,094 9,153 Percent of institutional ownership 21 21 18 18 - -------------------------------------------------------------------------------------------------------------------- Assets Gross utility plant $354,847 $331,953 $313,951 $293,687 Net utility plant $247,603 $234,495 $221,800 $210,054 *Additions to utility plant (capital expenditures) $ 27,609 $ 26,618 $ 26,070 $ 22,634 Oil and gas properties, net -- -- -- $ 496 Total assets $370,088 $352,920 $299,795 $269,504 - -------------------------------------------------------------------------------------------------------------------- Ratios (% of total) Gross margin as a % of operating revenues 50.2 47.3 46.9 48.7 Dividend payout as a % of earnings 81.3 81.6 85.3 88.5 Effective federal tax rate 30.0 23.0 24.0 18.0 *Return on ending common equity 10.7 10.2 11.1 11.0 Price to earnings 12.1 13.7 16.6 15.6 Dividend yield 6.7 6.0 5.1 5.7 Market price as a % of book value 130.6 149.7 186.6 173.8 - -------------------------------------------------------------------------------------------------------------------- *Information used in the National Association of Investors Corporation (NAIC) stock selection format. (a) The results for the years ended September 30, 1990 and December 31, 1989 include the results for the three months ended December 31, 1989, which included the effects of the unusually cold weather experienced in the month of December and a writedown of the value of oil and gas properties. (b) Includes the cumulative effect of accounting change for municipal property taxes which increased earnings by $.21 per share. (c) The writedown of the value of oil and gas properties reduced earnings by $.10 per share in 1990 and 1989 and $.05 per share in 1987.
36 Connecticut Energy Corporation
1991 1990 1989 1988 1987 1986 1985 - -------------------------------------------------------------------------------------------------- (a)(b)(c) (a)(c) (c) (d) (e) $179,172 $174,059 $171,218 $156,978 $157,867 $156,028 $163,847 86,778 84,154 81,794 71,787 75,337 79,333 88,517 92,394 89,905 89,424 85,191 82,530 76,695 75,330 42,475 44,085 42,636 38,869 38,218 36,011 34,965 10,540 10,664 10,297 8,533 8,427 7,487 7,632 4,324 3,819 4,740 5,839 6,325 5,270 5,416 15,238 14,431 14,560 14,146 13,617 13,487 13,452 349 (228) 356 713 276 261 (12) 10,428 10,156 8,598 7,653 7,484 6,848 6,898 36 39 403 751 849 1,244 1,403 $ 9,004 $ 6,939 $ 7,834 $ 8,687 $ 7,334 $ 6,087 $ 5,576 -- 1,280 -- -- -- 1,911 -- $ 9,004 $ 8,219 $ 7,834 $ 8,687 $ 7,334 $ 7,998 $ 5,576 $ 1.38 $ 1.12 $ 1.28 $ 1.49 $ 1.38 $ 1.16 1.21 $ 1.38 $ 1.33 $ 1.28 $ 1.49 $ 1.38 $ 1.53 $ 1.21 $ 1.24 $ 1.23 $ 1.20 $ 1.17 $ 1.12 $ 1.12 $ 1.07 - -------------------------------------------------------------------------------------------------- $ 88,622 $ 74,413 $ 75,001 $ 73,311 $ 61,187 $ 58,731 $ 55,573 736 786 835 6,429 7,270 8,112 12,487 87,378 91,506 79,686 69,137 64,461 58,714 53,666 - -------------------------------------------------------------------------------------------------- $176,736 $166,705 $155,522 $148,877 $132,918 $125,557 $121,726 - -------------------------------------------------------------------------------------------------- 50.1 44.6 48.2 49.2 46.0 46.8 45.7 0.4 0.5 0.6 4.3 5.5 6.4 10.3 49.5 54.9 51.2 46.5 48.5 46.8 44.0 - -------------------------------------------------------------------------------------------------- 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------------------------- 7,096,634 6,250,161 6,176,665 6,088,017 5,346,879 5,277,276 5,209,677 $ 12.49 $ 11.91 $ 12.14 $ 12.04 $ 11.45 $ 11.13 $ 10.67 $ 19.00 $ 16.63 $ 17.63 $ 14.50 $ 13.67 $ 16.00 $ 12.25 5,000 2,950 4,200 2,850 2,550 4,500 3,150 9,163 7,382 7,493 7,662 7,577 7,960 7,778 14 15 16 16 13 N/A N/A - -------------------------------------------------------------------------------------------------- $273,862 $255,446 $241,624 $222,236 $204,947 $191,589 $172,396 $198,695 $189,108 $181,358 $166,970 $155,289 $144,509 $130,415 $ 20,331 $ 23,102 $ 23,184 $ 19,471 $ 17,790 $ 20,543 $ 17,344 $ 542 $ 605 $ 698 $ 1,760 $ 1,889 $ 2,564 $ 3,026 $247,969 $229,600 $239,327 $214,458 $193,842 $186,449 $173,211 - -------------------------------------------------------------------------------------------------- 51.6 51.6 52.2 54.3 52.3 49.2 46.0 89.9 92.5 93.8 78.5 81.2 73.2 88.4 32.0 35.0 37.0 38.0 44.0 42.0 44.0 10.2 11.0 10.4 11.8 12.0 13.6 10.0 13.8 12.5 13.8 9.7 9.9 10.5 10.1 6.5 7.4 6.8 8.1 8.2 7.0 8.7 152.1 139.6 145.2 120.4 119.4 143.8 114.8 - -------------------------------------------------------------------------------------------------- (d) Includes the cumulative effect of accounting change for unbilled revenues which increased earnings by $.37 per share. The writedown of the value of oil and gas properties in 1986 reduced earnings by $.03 per share. (e) The adoption of the new pension accounting standard in 1985 reduced pension costs and increased earnings by $.09 per share. The writedown of the value of oil and gas properties reduced earnings by $.12 per share. (f) Adjusted to reflect the Company's 3-for-2 stock split in October 1989.
Connecticut Energy Corporation 37 Operating Data
Years ended September 30, 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------- Table 1 Percentage of Operating Revenues Purchased gas 49.8 52.7 53.1 51.3 48.4 48.4 Operations 21.2 20.8 19.4 21.3 21.7 23.0 Maintenance 1.6 1.7 1.7 1.8 2.0 2.3 Depreciation and depletion 6.0 5.4 5.7 5.6 5.9 6.1 Taxes 9.8 9.0 9.2 9.0 10.9 10.5 - ---------------------------------------------------------------------------------------------------------------------------- Purchased gas and operating expenses 88.4 89.6 89.1 89.0 88.9 90.3 - ---------------------------------------------------------------------------------------------------------------------------- Interest expense and other deductions, net 5.5 5.1 5.7 6.0 6.1 5.7 Earnings applicable to common stock (a) 6.1 5.3 5.2 5.0 5.0 4.0 - ---------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 100.0 - ----------------------------------------------------------------------------------------------------------------------------
Table 2 Analysis by Customer Class Averaged Over 12 Months - ---------------------------------------------------------------------------------------------------------------------------- Residential nonheating - ---------------------------------------------------------------------------------------------------------------------------- Mcf* consumption per customer 22 23 24 24 24 26 Annual revenue per customer $ 317 $ 317 $ 299 $ 300 $ 289 $ 290 Rate per Mcf $ 14.11 $ 13.74 $ 12.62 $ 12.35 $ 12.04 $ 11.32 Margin per Mcf $ 8.96 $ 8.36 $ 7.63 $ 7.52 $ 7.61 $ 7.13 Annual number of customers 34,419 35,170 36,184 37,444 39,186 40,997 - ---------------------------------------------------------------------------------------------------------------------------- Residential heating - ---------------------------------------------------------------------------------------------------------------------------- Mcf consumption per customer 98 115 110 108 97 108 Annual revenue per customer $ 1,078 $ 1,187 $ 1,074 $ 1,045 $ 904 $ 941 Rate per Mcf $ 11.03 $ 10.35 $ 9.73 $ 9.70 $ 9.36 $ 8.69 Margin per Mcf $ 6.01 $ 5.03 $ 4.81 $ 4.81 $ 4.95 $ 4.56 Annual number of customers 104,067 102,043 100,872 99,706 97,406 95,240 - ---------------------------------------------------------------------------------------------------------------------------- Residential apartments - ---------------------------------------------------------------------------------------------------------------------------- Mcf consumption per customer 1,585 2,132 2,132 2,149 2,006 2,152 Annual revenue per customer $ 12,919 $ 16,611 $ 15,294 $ 15,217 $ 13,401 $ 13,141 Rate per Mcf $ 8.15 $ 7.79 $ 7.18 $ 7.08 $ 6.68 $ 6.11 Margin per Mcf $ 3.23 $ 2.59 $ 2.35 $ 2.33 $ 2.38 $ 2.08 Annual number of customers 843 751 751 739 725 707 - ---------------------------------------------------------------------------------------------------------------------------- Commercial - ---------------------------------------------------------------------------------------------------------------------------- Mcf consumption per customer 403 452 444 435 387 415 Annual revenue per customer $ 3,522 $ 3,826 $ 3,527 $ 3,440 $ 2,917 $ 2,902 Rate per Mcf $ 8.75 $ 8.47 $ 7.95 $ 7.90 $ 7.53 $ 6.99 Margin per Mcf $ 3.73 $ 3.15 $ 3.03 $ 3.02 $ 3.13 $ 2.85 Annual number of customers 13,412 13,142 12,965 12,831 12,758 12,717 Annual number of heating customers 8,005 7,813 7,630 7,541 7,498 7,479 - ---------------------------------------------------------------------------------------------------------------------------- Industrial firm - ---------------------------------------------------------------------------------------------------------------------------- Mcf consumption per customer 1,856 2,199 2,085 1,925 1,754 1,856 Annual revenue per customer $ 14,362 $ 16,568 $ 14,935 $ 13,691 $ 11,812 $ 11,584 Rate per Mcf $ 7.74 $ 7.53 $ 7.16 $ 7.11 $ 6.73 $ 6.24 Margin per Mcf $ 2.82 $ 2.30 $ 2.30 $ 2.32 $ 2.40 $ 2.16 Annual number of customers 1,258 1,274 1,283 1,287 1,305 1,334 Annual number of heating customers 722 731 728 716 716 722 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible - ---------------------------------------------------------------------------------------------------------------------------- Mcf consumption per customer 42,212 37,870 30,545 23,035 21,933 14,558 Annual revenue per customer $128,705 $121,940 $105,892 $ 86,215 $104,186 $ 56,657 Rate per Mcf $ 3.05 $ 3.22 $ 3.47 $ 3.74 $ 4.75 $ 3.89 Margin per Mcf $ 1.14 $ 0.87 $ 0.88 $ 0.99 $ 1.39 $ 1.06 Annual number of customers 217 184 152 136 127 136 - ---------------------------------------------------------------------------------------------------------------------------- Number of total customers 154,216 152,564 152,207 152,143 151,507 151,131 Cost per Mcf of gas $ 3.70 $ 4.22 $ 4.30 $ 4.02 $ 4.04 $ 3.71 - ---------------------------------------------------------------------------------------------------------------------------- *Mcf -- one thousand cubic feet; MMcf -- one million cubic feet
38 Connecticut Energy Corporation Operating Data
Years ended September 30, 1995 1994 1993 1992 1991 1990 - ---------------------------------------------------------------------------------------------------------------------------- Table 3 Revenue by Customer Class (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------- Residential $135,061 $145,975 $131,632 $127,224 $110,062 $111,321 Commercial firm 47,558 50,838 46,022 44,316 37,538 37,080 Industrial firm 18,190 21,339 19,180 17,696 15,557 15,527 - ---------------------------------------------------------------------------------------------------------------------------- Total firm revenue $200,809 $218,152 $196,834 $189,236 $163,157 $163,928 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible, transportation and special contract $ 29,576 $ 21,127 $ 14,697 $ 12,478 $ 14,814 $ 9,103 Other 1,708 1,594 1,231 1,297 1,201 1,028 - ---------------------------------------------------------------------------------------------------------------------------- Total operating revenues $232,093 $240,873 $212,762 $203,011 $179,172 $174,059 - ---------------------------------------------------------------------------------------------------------------------------- Margin by Customer Class (b) - ---------------------------------------------------------------------------------------------------------------------------- Residential $ 72,480 $ 71,643 $ 63,391 $ 62,449 $ 57,153 $ 57,913 Commercial firm 20,005 19,315 17,265 16,946 15,446 15,102 Industrial firm 6,507 6,688 6,111 5,794 5,491 5,379 - ---------------------------------------------------------------------------------------------------------------------------- Total firm margin $ 98,992 $ 97,646 $ 86,767 $ 85,189 $ 78,090 $ 78,394 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible, transportation and special contract $ 5,755 $ 4,258 $ 2,427 $ 3,666 $ 5,302 $ 3,383 - ---------------------------------------------------------------------------------------------------------------------------- Total margins $104,747 $101,904 $ 89,194 $ 88,855 $ 83,392 $ 81,777 - ---------------------------------------------------------------------------------------------------------------------------- Table 4 Sources of Gas Supply in MMcf* - ---------------------------------------------------------------------------------------------------------------------------- Tennessee Gas Pipeline (2) 24 -- 1,873 2,249 4,546 Algonquin Gas Transmission (7) 53 229 2,521 5,476 7,518 Texas Eastern -- -- 372 1,539 1,649 -- SCG Gas Quest -- -- -- -- -- 111 Distrigas 433 1,287 761 1,472 1,435 2,602 Producers/Marketers 20,155 17,213 14,958 13,750 11,505 8,394 Alberta Northeast 12,573 12,631 12,446 4,863 -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total 33,152 31,208 28,766 26,018 22,314 23,171 - ---------------------------------------------------------------------------------------------------------------------------- Additional storage supply: LNG 58 86 12 269 2 (22) Pipeline (c) 172 (388) (1,362) (1,345) -- (6) Propane -- -- 33 -- 2 113 - ---------------------------------------------------------------------------------------------------------------------------- Total additional supply 230 (302) (1,317) (1,076) 4 85 - ---------------------------------------------------------------------------------------------------------------------------- Total supply 33,382 30,906 27,449 24,942 22,318 23,256 - ---------------------------------------------------------------------------------------------------------------------------- Table 5 Gas Throughput in MMcf (d) - ---------------------------------------------------------------------------------------------------------------------------- Sales: Residential 12,280 14,038 13,635 13,233 11,790 12,957 Commercial firm 5,402 5,902 5,786 5,583 4,935 5,269 Industrial firm 2,336 2,787 2,673 2,476 2,287 2,478 Interruptible, transportation and special contract (e)(f) 29,680 10,509 6,296 7,992 8,784 6,668 Other uses (g) 1,030 1,066 712 517 521 572 - ---------------------------------------------------------------------------------------------------------------------------- Total requirements 50,728 34,302 29,102 29,801 28,317 27,944 - ---------------------------------------------------------------------------------------------------------------------------- Peak day delivery in Mcf 253,999 227,477 203,557 182,688 189,192 177,616 - ---------------------------------------------------------------------------------------------------------------------------- Degree days -- actual 4,970 5,750 5,467 5,354 4,654 5,523 Degree days as percentage of 'normal' 90% 104% 99% 97% 85% 100% - ---------------------------------------------------------------------------------------------------------------------------- (a) Before nonrecurring credit in 1990. (b) Margin in this table is calculated as revenue minus purchased gas costs and gross earnings tax. (c) Includes new storages acquired during 1992 and 1993 due to the restructuring of services under FERC Order No. 636. (d) Sales volumes from the residential, commercial firm and industrial firm classes of customers reflect volumes delivered but not yet billed at year end. (e) Interruptible service balances daily available supply and demand sales. Southern or the customer can terminate interruptible service at any time. (f) Transportation volumes represent customer-owned gas transported directly to end users, which includes volumes under a special contract for transportation to The Connecticut Light and Power Company's Devon generating station. (g) Includes gas used by Southern and unaccounted for gas.
Connecticut Energy Corporation 39 Glossary Balancing -- The process of reconciling the difference between gas deliveries contracted for and gas actually used on a daily basis. FERC Order No. 636 -- A mandate issued by the Federal Energy Regulatory Commission, effective November 1, 1993, which required pipeline companies to separate or "unbundle" the functions of selling and transporting natural gas. Firm Customers -- Customers with priority of supply using natural gas under contracts which anticipate no interruptions. Gross Margin -- For gas distribution business, operating revenues minus the cost of purchased gas equals the gross profit margin. The cost of gas is passed directly on to customers. Heating Degree Days -- The mean temperature for a single day subtracted from 65 degrees Fahrenheit, the temperature at which the average household begins using heat. Interruptible Customers -- Large industrial or commercial customers that have dual fuel capabilities whose service can be interrupted if capacity is needed to serve firm customers. LNG -- Liquified Natural Gas: natural gas liquified by reducing its temperature to minus 260 degrees Fahrenheit. Mcf -- One thousand cubic feet: a standard measurement of natural gas. MMcf: million cubic feet. Bcf: billion cubic feet. NGV -- Natural gas-powered vehicle. Off-System -- Providing gas service to parties outside of a company's own distribution system. Throughput -- The amount of gas carried on a distribution system, including gas sold to and transported for end users. Transportation Volumes -- Customer-owned gas purchased from a supply source and conveyed through a pipeline or distribution system. Weather Normalization Adjustment (WNA) -- Formula which adjusts customers' monthly bills to reflect normal weather patterns (based on the 30-year average temperature for each billing period), lowering bills during periods of colder than normal weather and raising them during warmer than normal periods. 40 Connecticut Energy Corporation Investment Information NAIC Stock Selection Data The National Association of Investors Corporation (NAIC) is an organization with over 250,000 members which provides investment education for the long-term, value-oriented investor in common stock. As a corporate member of NAIC, the following data is presented in NAIC's stock selection format. Historical balance sheet data can be found on pages 36 and 37 in the Eleven Year Financial Summary. Connecticut Energy is also a participant in NAIC's "Low Cost Investment Plan" which encourages members to make regular contributions to dividend reinvestment and stock purchase plans such as ours.
Income-Revenue Data Common Share Data - ---------------------------------------------------------------------------------------------------------------------------------- Pretax Federal Gross margin (fed.) net income Net Divi- % Yield Price range P-E ratio $ $ per $ % of tax income Earned dend Pay- on avg. $ $ Year mil. share(a) mil. g.m. $ mil. $ mil. $ $ out price high low high low - ---------------------------------------------------------------------------------------------------------------------------------- 1990 89.9 14.52 10.7 11.9 3.8 8.2(a) 1.33(a) 1.23 92 7.4 18 7/8 14 1/2 14.2 10.9 1991 92.4 14.11 13.3 14.4 4.3 9.0 1.38 1.24 90 7.4 19 3/8 14 1/4 14.0 10.3 1992 98.8 13.85 12.5 12.7 2.3 10.2 1.43 1.265 88 5.8 24 3/4 18 5/8 17.3 13.0 1993 99.7 13.52 14.6 14.6 3.5 11.1 1.50 1.28 85 5.5 26 1/2 20 1/8 17.7 13.4 1994 114.0 14.02 16.8 14.7 4.0 12.8 1.58 1.29 82 5.6 26 20 16.5 12.7 1995 116.5 13.28 20.0 17.1 5.9 14.1 1.60 1.30 81 6.4 22 18 1/2 13.8 11.6 5 Yr. avg. 104.3 13.76 15.4 14.7 4.0 11.4 1.50 1.28 85 6.1 23 3/4 18 3/8 15.9 12.2 - ----------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Information - ---------------------------------------------------------------------------------------------------------------------------------- Quarter Gross margin $ mil. Pretax (fed.) net income $ mil. Earned per share $ Dividends paid per share $ ended 1995 1994 1993 1995 1994 1993 1995 1994 1993 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- 12/31 32.2 30.1 29.4 7.2 7.2 8.1 .57 .67 .80 .325 .320 .320 3/31 53.3 50.5 42.0 22.7 20.0 16.3 1.79 1.77 1.59 .325 .320 .320 6/30(b) 19.1 20.1 16.5 (2.7) (2.7) (3.5) (.23) (.16) (.31) .325 .325 .320 9/30(b) 11.9 13.3 11.8 (7.2) (7.7) (6.3) (.52) (.53) (.57) .325 .325 .320 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------- Market price $ Trading volume Quarter 1995 1994 1993 in thousands ended high low close high low close high low close 1995 1994 1993 - ---------------------------------------------------------------------------------------------------------------------------------- 12/31 22 18 5/8 19 1/2 26 23 24 7/8 23 1/2 20 1/8 23 330.0 266.3 282.8 3/31 20 1/4 18 1/2 19 1/8 25 20 21 1/4 25 3/8 22 1/2 25 1/8 264.3 508.7 892.5 6/30 20 5/8 18 5/8 19 5/8 22 1/2 20 1/4 20 1/4 26 1/2 24 5/8 25 1/8 336.2 336.3 289.4 9/30 20 1/2 18 7/8 19 3/8 22 1/4 20 1/4 21 5/8 26 24 3/8 24 7/8 229.5 262.2 543.0 - ---------------------------------------------------------------------------------------------------------------------------------- (a) Includes the cumulative effect of accounting change in 1990. (b) It is not unusual for a company primarily engaged in the distribution of natural gas to incur a loss in quarters ending in June and September.
Connecticut Energy Corporation 41 Shareholder Information Annual Meeting The Annual Meeting of Shareholders will take place Tuesday, January 30, 1996 at 10 a.m. in the Trumbull Marriott Hotel, 180 Hawley Lane, Trumbull, Connecticut. Transfer Agent The First National Bank of Boston (Bank of Boston) is the Transfer Agent and Registrar for Connecticut Energy Corporation (CNE) common stock. No stock transfer or shareholder account activity takes place at the Connecticut Energy Corporation offices. Dividends -- Direct Deposit -- Reinvestment Dividends on common stock are declared quarterly by the Board of Directors and are usually paid on the last business day of each quarter. Your dividends can be directly deposited to your checking or savings account. This not only gives you the availability of funds the same day they are paid, it eliminates the worry of lost, stolen or mail delayed checks. The Dividend Reinvestment and Stock Purchase Plan provides shareholders with a convenient method of investing dividends and/or voluntary cash contributions in additional shares of the Company's stock without payment of any brokerage commission or service charge on purchases. Plan features include: - -- Cash contributions from $50 to $50,000 can be made and are invested monthly. - -- Bank draft authorization allows for automatic contributions to the Plan. - -- A "safekeeping" feature allows shareholders to have Bank of Boston hold their certificates. - -- Shareholders can establish or roll over Individual Retirement Accounts (IRA) through the Plan. If you need - -- to change your account mailing address - -- to report a lost or stolen dividend check or stock certificate - -- information about your shareholder account - -- information about transferring shares - -- an authorization form to join our Dividend Reinvestment and Stock Purchase Plan - -- a form to initiate the direct deposit of dividends Call Bank of Boston investor relations representatives toll free at: (800) 736-3001 or (800) 952-9245 TTY/TDD service for the hearing impaired Or write Bank of Boston, Investor Relations, Mail Stop 45-02-09, P.O. Box 644, Boston, MA 02102-0644 42 Connecticut Energy Corporation Shareholder Information (continued) Quarterly Earnings Releases Press releases are issued when the Company announces quarterly financial results. For the 1996 quarters, results should appear in the Wall Street Journal Digest of Earnings on or about January 31, April 24, July 24 and November 2. Chairman's Update Letters If your Connecticut Energy account is held in a brokerage account instead of your own name, we would like to send you a copy of the Chairman's Update which is enclosed with the dividend checks or dividend reinvestment statements of registered shareholders. Please call us at (800) 760-7776 and ask to be put on our mailing list for the Chairman's quarterly updates. Form 10-K To obtain a copy of Form 10-K or to request further financial information contact Judith Falango, Manager Investor and Shareholder Relations, at (800) 760-7776. Gift Certificates If you are transferring shares of stock from your Dividend Reinvestment and Stock Purchase Plan (Plan) account as a gift, we would be happy to supply you with a gift certificate. This allows the actual shares to remain in safe- keeping in a Plan account for the recipient. For further information call Connecticut Energy Corporation at (800) 760-7776. Allow two weeks for the transfer to occur. Internet Home Page Connecticut Energy Corporation has established a home page on the World Wide Web of the Internet. The following information, in addition to this annual report, is available through our home page: Forms 10-K and 10-Q Earnings news releases Chairman's update letters Dividend Reinvestment and Stock Purchase Plan Prospectus List of investment firms that follow Connecticut Energy You may access our home page on InvestorsEdge at the address (http://www.IRnet.com) by selecting "Corporate Profiles." Connecticut Energy Corporation 43 Corporate Directory Board of Directors Connecticut Energy Corporation and The Southern Connecticut Gas Company J.R. Crespo Chairman, President and Chief Executive Officer, Connecticut Energy Corporation and The Southern Connecticut Gas Company Henry Chauncey, Jr. Lecturer and Head of Management Program, Department of Epidemiology and Public Health, Yale School of Medicine James P. Comer, M.D. Maurice Falk Professor of Child Psychiatry, Yale Child Study Center and Associate Dean, Yale School of Medicine Richard F. Freeman President and Chief Executive Officer, Greater Bridgeport Area Foundation Richard M. Hoyt President and Chief Executive Officer, Chapin & Bangs Company Paul H. Johnson President and Chief Executive Officer, Gaylord Hospital Newman M. Marsilius III President and Chief Executive Officer, Producto-Moore Companies Samuel M. Sugden Chairman, LeBoeuf, Lamb, Greene & MacRae L.L.P. Christopher D. Turner Project Manager, Energy Sector Bechtel International Consulting Group Helen B. Wasserman Member, Board of Governors for Higher Education, State of Connecticut Independent Accountants Coopers & Lybrand L.L.P. 1301 Avenue of the Americas New York, NY 10019-6013 Officers Connecticut Energy Corporation J.R. Crespo Chairman, President and Chief Executive Officer Vincent L. Ammann, Jr. Vice President and Chief Accounting Officer Carol A. Forest Vice President, Finance, Chief Financial Officer and Treasurer Michael H. Pinto Vice President, Government Affairs J. Richard Tiano Vice President, General Counsel and Secretary The Southern Connecticut Gas Company J.R. Crespo Chairman, President and Chief Executive Officer Thomas A. Trotta Executive Vice President and Chief Operating Officer Carol A. Forest Vice President, Finance, Chief Financial Officer and Treasurer J. Richard Tiano Vice President, General Counsel and Secretary Labor Union Leadership United Steel Workers of America Local 12000 Gabriel Gambardella President Francis J. O'Connor Vice President Vincent L. Ammann, Jr. Group Vice President Peter D. Loomis Group Vice President, Customer and Operating Services Salvatore A. Ardigliano Vice President, Marketing and Gas Supply Services Frank L. Esposito Vice President, Human Resources James P. Healy Vice President, Energy Services Planning Ernest W. Karkut Vice President, Purchasing and Plant Services Larry S. McGaughy Vice President, Corporate Engineering and Special Projects Phyllis A. O'Brien Vice President, Accounting and Regulatory Services Patricia A. Younger Vice President, Customer Relations [RECYCLE LOGO] Continuing our commitment and concern for the environment as an integral part of our business responsibility, this entire document was printed on recycled paper containing 50% recovered fiber. 44 Connecticut Energy Corporation [LOGO] Connecticut Energy Corporation 855 Main Street Bridgeport Connecticut 06604 EX-21 4 EXHIBIT 21 SUBSIDIARIES OF CONNECTICUT ENERGY CORPORATION Name State of Incorporation ---- ---------------------- The Southern Connecticut Gas Company Connecticut Connecticut Energy Development Corporation Connecticut Total Energy Services Group, Inc. Connecticut EX-27 5
UT 1,000 YEAR SEP-30-1995 SEP-30-1995 PER-BOOK 247,603 2,541 49,100 70,844 0 370,088 8,865 88,295 34,401 131,561 0 0 119,322 19,200 0 5,000 594 0 0 0 94,411 370,088 232,093 7,436 197,771 205,207 26,886 (519) 26,367 12,307 14,060 0 14,060 11,413 10,859 34,369 1.60 1.60
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