-----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, NA6+ktFV5+Dy+PTklJKSalZSQUKAb1u53RuoF28WujlG0GFuGPOHRommKOXkSQT7 2Wl3u0YvKCnGd+zHm9nnrg== 0000310103-96-000032.txt : 19961209 0000310103-96-000032.hdr.sgml : 19961209 ACCESSION NUMBER: 0000310103-96-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961206 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: 96677054 BUSINESS ADDRESS: STREET 1: 855 MAIN STREET CITY: BRIDGEPORT STATE: CT ZIP: 06604 BUSINESS PHONE: 2033828111 MAIL ADDRESS: STREET 1: 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, 1996 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 22, 1996: $192,735,190 Class Outstanding at November 22, 1996 - ------------------------------ -------------------------------- Common Stock, $1 par value 9,016,851 An index of exhibits to this Annual Report on Form 10-K begins on page 15 hereof. DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- 1. Portions of Connecticut Energy Corporation's 1996 Annual Report to Shareholders are incorporated into Part II. 2. Portions of Connecticut Energy Corporation's Definitive Proxy Statement dated December 13, 1996 are incorporated into Part III. PART I ------ CONNECTICUT ENERGY CORPORATION ------------------------------ Item 1. Business - ----------------- General 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 156,000 customers in Connecticut, primarily in twenty-two towns along the southern Connecticut coast from Westport to Old Saybrook, which include 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. The percentage of Southern's revenues contributed by each class of customers for the last three fiscal years was as follows: Years ended September 30, 1996 1995 1994 - ---------------------------------------------------------------------------- Residential 58.0% 58.2% 60.6% Commercial firm 21.4 20.5 21.1 Industrial firm 6.5 7.8 8.9 Interruptible and other 14.1 13.5 9.4 ----- ----- ----- 100.0% 100.0% 100.0% Southern is the sole distributor of natural gas, other than bottled gas, in its 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 are currently 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 nonutility subsidiaries, CNE Energy Services Group, Inc. ("CNE Energy") and CNE Development Corporation ("CNE Development"). CNE Energy engages in activities relating to the selling, planning, purchasing and management of various energy services to commercial and industrial end users. CNE Development is an equity holder in an entity formed to purchase and market natural gas and may potentially participate in other nonregulated activities. In October 1996, the Company formed a new nonutility subsidiary, CNE Venture-Tech, Inc. ("CNE Venture-Tech"). CNE Venture-Tech is expected to participate or invest in information technology ventures including, but not limited to, providing related services. It is anticipated that CNE Venture-Tech will enter into strategic alliances with other vendors in the information technology business to provide services to utilities and other businesses. As of September 30, 1996, the Company, through its subsidiaries, had 509 full-time employees, the majority of whom were employees of Southern. Customers General From 1992 through 1996, the average number of on-system customers served by Southern grew from approximately 152,100 to 156,100. Southern provides three types of gas service to its on-system customers--firm sales, firm transportation and interruptible. Firm service is provided to residential, commercial and industrial customers who require a continuous gas supply throughout the year. 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. Firm service for residential use includes service to multi-family units. Firm transportation is available to commercial and industrial customers who have secured their own gas supply and require that Southern transport this supply on its distribution system. Southern also provides transportation service to certain commercial and industrial customers on an interruptible basis, where the gas transported is owned by those 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. The customers to whom these sales are made are not permanent customers of Southern. Firm Sales and Transportation In 1996, firm services represented approximately 86% of operating revenues and approximately 55% 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. See "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 several years, 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. The conversion of these homes from an alternate fuel to natural gas heat has been a major factor in increased load growth. Interruptible Sales, Transportation and Special Contract Services Interruptible sales and transportation services are priced flexibly and competitively compared to the price paid for alternate fuels by larger commercial and industrial customers. Southern's interruptible sales fluctuate primarily due to the relative price differentials between 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 consumers. 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 ("LDC"). In Southern's service area, gas is transported to customers 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. Gas sales revenues include the cost 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 ("Special Contract"). In 1996, interruptible sales, transportation and Special Contract services represented approximately 13% of operating revenues and approximately 42% of total gas throughput. Southern's average margins on interruptible transportation service are less than its average margins on firm sales and are usually less than its average margins on interruptible sales. To the extent Southern negotiates its monthly prices for interruptible services below its monthly standard offering price, lower margins may result. 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 General 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 interruptible applications for natural gas. Marketing programs emphasize growth from within the existing distribution system and the addition of high load factor usage of natural gas such as water heating, air conditioning and electric power generation. Residential Market In the residential heating market, 1,866 customers were added in 1996 compared to 2,366 customers in 1995 and 2,504 in 1994. Residential conversions accounted for 52% of these additions in 1996 as compared to 68% in 1995 and 61% in 1994. Southern's residential marketing programs include (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. Commercial and Industrial Markets In the commercial and industrial markets, emphasis is on adding new firm and interruptible sales while retaining existing load. Marketing programs for commercial and industrial customers include (1) a program to promote the use of high efficiency equipment, (2) a 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. Effective April 1, 1996, firm transportation service became available to commercial and industrial customers. Thus far, some customers have opted for the service, choosing to purchase their natural gas directly from marketers. In these cases, Southern offers customers the opportunity to purchase additional services such as balancing or stand-by services. Sales to cooling and cogeneration markets represent the potential for increasing 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 1996, Southern added 510 tons of natural gas cooling. This represents almost 8,400 Mcf of new interruptible load. Since 1991, Southern has added 9,912 tons of natural gas cooling. Natural Gas Vehicles Natural gas vehicles ("NGV") represent a significant opportunity to increase the base load usage of natural gas. Southern has been actively developing projects in this market, primarily to serve centrally-fueled fleets with on-site fueling. Thus far, almost one hundred natural gas vehicles are in use by customers in Southern's service area. These customers include the U.S. Postal Service, The Southern New England Telephone Company, R. R. Donnelley and Sons, South Central Regional Water Authority, Bridgeport Hydraulic Company and the town of Westport, Connecticut. During fiscal 1996, Southern's NGV marketing emphasis shifted to developing NGV projects that serve multiple customers from a single site. This approach improves the attractiveness of NGV projects for fleet customers and potential station developers. Fleet owners can avoid constructing an on-site NGV fueling station by purchasing fuel at an off-site facility. Station developers can take advantage of economies of scale to improve profitability by pooling volumes to serve multiple customers. Also, these stations can serve customers phasing-in NGVs and small fleets. CNE Development is in the preliminary stages of forming a joint venture with Trillium-U.S.A., a unit of Westcoast Energy, to develop NGV service oriented projects within and outside Southern's service area. The venture's first proposed project is to construct an NGV fueling station on a site in Stratford, Connecticut to initially serve Prime Time Shuttle ("Prime Time"), a major airport shuttle service. A Memorandum of Understanding between CNE Development, Trillium-U.S.A. and Prime Time establishes that Prime Time has agreed to have up to 120 Dodge maxi-vans converted to use only compressed natural gas as fuel and to purchase a minimum of 500,000 gasoline gallon equivalents, or almost 61,000 Mcf of natural gas fuel, from the station during its first five years of operation to fuel these vehicles. During years two through five, minimum fuel usage is expected to rise to accomodate additional stations near Danbury, Connecticut, and Bradley Airport as may be required as Prime Time's operations expand. The initial station will also provide natural gas fueling for other Stratford area fleets and for vehicles traveling through the area on I-95. Gas Supply General Southern's long-term supply sources include (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"), (5) transportation and storage services from CNG Transmission Corporation ("CNG Transmission"), (6) transportation service from Transcontinental Gas Pipeline Corporation ("Transco"), (7) 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 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. Domestic Supply Southern's domestic supply arrangements consist mainly of purchasing storage and transportation services from interstate pipelines. Producers and marketers provide the gas supply to support these services. Southern has firm transportation and firm storage contracts with Tennessee. 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 1,195,000 Mcf of storage capacity. These contracts expire in the year 2000. Two other transportation contracts with Tennessee provide 516,000 Mcf of firm transportation service annually and expire in the year 2000. A transportation contract with Texas Eastern provides 5,972,000 Mcf of capacity on an annual basis. Additional contracts with Texas Eastern provide 1,383,000 Mcf of storage service and 12,108,000 Mcf of transportation service on an annual basis. Contracts with Texas Eastern expire in the year 2012. Southern has storage service contracts with CNG Transmission. One contract provides one hundred days of storage service with 648,000 Mcf of annual delivery. The remaining term of this contract is sixteen years. Under other contracts which have remaining terms of seven to eleven years, CNG Transmission provides 773,000 Mcf of annual firm storage service and 1,028,000 Mcf of annual transportation service. The 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 interstate pipelines interconnected to Algonquin. Southern has multiple, diverse purchase agreements with producers and marketers for firm supply behind its storage and transportation agreements. These agreements vary in terms of delivery obligations and the contract terms range from one month to five 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 or are negotiated. Canadian Supply Southern receives Canadian supply under its long-term contracts with Alberta Northeast with firm transportation provided by Iroquois. 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 six to ten years, and the transportation agreement with Iroquois has a remaining term of fifteen years. Supplemental Supply Southern has an agreement with Distrigas to purchase 328,000 Mcf annually on a firm basis. This contract continues for six years and includes a provision 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 liquefied natural gas ("LNG") and liquefied propane air storage facilities are available to meet peak and winter demand requirements. Southern is in the process of obtaining necessary approvals to sublease its LNG facility. Under new agreements, Southern would be able to purchase peaking supply without supporting the entire cost of the LNG facility, positioning Southern to lower the cost of peaking supply. See section entitled "Connecticut Regulation" for the Decision in Docket No. 96-04-30. FERC Order No. 636 In FERC Order No. 636, the FERC took the latest step in its decade-long restructuring of the natural gas industry, gradually withdrawing from direct regulation of certain industry sectors in favor of a policy of "light-handed regulation" when market forces make that possible. Effective November 1, 1993, FERC Order No 636 mandated the unbundling of interstate 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, FERC removed the pipelines' competitive advantage of bundling sales of gas supplies with all related transportation and storage services and required pipelines to sell transportation and storage services separately. FERC Order No. 636 resulted in costs being incurred by Southern's interstate pipeline suppliers as they unbundled their services. FERC has allowed transition costs to be recovered by pipelines from their customers. Southern has recovered transition costs through the various recovery mechanisms authorized by the DPUC in Docket No. 94-01-12. Included in the recovery are Tennessee transition costs, which are still being litigated, subject to refund of any overbilling at the time of a FERC decision or settlement. Straight-fixed-variable ("SFV") rates are in effect on the pipelines serving Southern as a result of FERC Order No. 636. Pipeline demand charges increased under SFV rate design, while pipeline usage charges decreased. The change in gas costs due to SFV rates were incorporated in Southern's base cost of gas approved by the DPUC. Although the initial implementation of FERC Order No. 636 increased gas costs, the resultant market competition, increased throughput, capacity release and recovery of transition costs have continued to decrease average gas costs. On July 16, 1996, the U.S. Court of Appeals for the District of Columbia ("Court"), Circuit in UNITED DISTRIBUTION COMPANIES V. FERC, 88 F.3d 1105 (D.C. Cir. 1996), upheld FERC Order No. 636, "in its broad contours and in most of its specifics." The Court remanded a number of issues to FERC for further explanation. No portion of FERC Order No. 636 was vacated as the Court awaits FERC's response. Until the FERC takes final action on remand, FERC Order No. 636 will be left in place as currently formulated. Post-FERC Order No. 636 Opportunities Southern's off-system sales program 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 prior approval of the DPUC. Capacity release programs are available on all interstate pipelines serving Southern, and Southern actively participates in these programs. Demand charges recovered from a replacement shipper flow back as a reduction on the pipeline's monthly invoice. These demand reductions are used to lower gas costs to firm customers through established margin sharing mechanisms approved by the DPUC. CNE Development has joined six other eastern U.S. 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 the activities 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 postretirement health care expenses accrued under Statement of Financial Accounting Standards No. 106 and the establishment of a target margin, net of gross earnings tax, 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. In January 1996, Southern requested a reopening of the 1993 rate proceeding to propose a plan to redirect excess on-system margins to be returned to ratepayers for calendar years 1996, 1997 and 1998 to fund certain economic development initiatives in Bridgeport ("BEDI") and to provide grants to customers to reduce Southern's current hardship assistance balances ("HAB"). Southern estimated that margins to be earned over the proposed three-year period would be approximately $14,000,000, which would be divided equally between BEDI and HAB. Southern's proposal related to the BEDI included job training and services, certain loan subsidies and health promotion outreach services. Redirection of ratepayer margins for HAB would benefit Southern's hardship customers by reducing their accounts receivable arrearages and would benefit Southern by reducing its provision for uncollectibles for such accounts. On April 26, 1996, the DPUC issued a final Decision regarding Southern's proposal. The DPUC effectively approved Southern's proposal with certain modifications in the direction of BEDI funding initiatives, the imposition of a cap of $6,000,000 per year of ratepayer margins to be split between BEDI and HAB and certain implementation and status reporting requirements. 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. Effective April 1, 1996, commercial and industrial gas customers in Connecticut can contract for their gas supplies from sources other than the LDCs and pay the LDCs only for the transportation of that gas through their distribution systems at DPUC approved rates. The new firm transportation rates are designed to provide Southern with the same margins provided by bundled services. On August 21, 1996, the DPUC issued a final Decision in Docket No. 96-04-30, APPLICATION OF THE SOUTHERN CONNECTICUT GAS COMPANY TO DISPOSE OF A PORTION OF ITS PLANT AND EQUIPMENT. The DPUC approved certain proposals made by Southern regarding the operation of its LNG tank and related facilities, which include the sublease of the LNG tank and related facilities from Southern to its nonregulated affiliate, CNE Energy, which would, in turn, sublease the LNG facility to Total Peaking Services, L.L.C. ("TPS"). The members of TPS are CNE Energy and PanEnergy Plus Milford Ventures Company, a wholly-owned subsidiary of EnergyPlus Ventures Company which, in turn, is a wholly-owned subsidiary of PanEnergy Corp. Under an agreement with TPS, Southern will purchase peaking service at a pre-established price structure for five years. After that, Southern will have the right, but not the obligation, to continue purchasing peaking service from TPS at the then prevailing market prices. This arrangement will give Southern the benefit of available peaking service without the burden of supporting the entire cost of the LNG facilities. TPS will assume responsibility for paying the rent due under the LNG tank lease. Accordingly, Southern will benefit from revenues received from TPS and from reductions to be realized in carrying costs, depreciation expense, operations expense and gross earnings taxes. Due to differences between the ratemaking recognition of such savings compared to the additional demand charges from the peaking services agreement, Southern provided a mitigation plan to delay including the demand charges in the PGA mechanism to better match the rate treatment of the costs and benefits of Southern's application. While this transaction has been approved by the DPUC, it will also require approval by the FERC. The transaction will not be effective unless all necessary regulatory approvals are received on terms and conditions acceptable to the parties. 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), 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 ten 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 nondiscriminatory basis. This increased competition may assist Southern, at least in the short-term, by replacing some higher cost gas supplies with less costly supplies. Refer to the section entitled "FERC Order No. 636" for further detail. 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 latest 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 2,099 miles of main and 121,679 service units as of September 30, 1996. 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 a propane air facility in Trumbull. In 1995, the LNG plant lease agreement was renewed for two consecutive terms of twelve 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 are suitable and adequate for the purpose of delivering gas for customer use. Item 3. Legal Proceedings - -------------------------- In a class action styled CONNECTICUT HEATING & COOLING CONTRACTORS ASSOCIATION, INC. V. CONNECTICUT NATURAL GAS CORP., CONNECTICUT SUPERIOR COURT - MIDDLESEX, two trade associations and two plumbing and heating contractors in November 1995 sued Southern as well as the other Connecticut LDCs for violations of the Connecticut Unfair Trade Practices Act and tortious interference with business expectancies in connection with the LDCs provision of service and maintenance to heating, cooling and ventilating systems and appliances. An Amended Complaint was filed in response to motions filed by the defendants in which one of the two contractor plaintiffs was removed from the case. The plaintiffs seek declaratory and injunctive relief. The plaintiffs seek treble damages in excess of $15,000, punitive damages and attorneys' fees. Southern and one of the other defendants have filed a Motion to Strike the Complaint on the grounds of misjoinder of causes of action. These motions are expected to be argued and decided before the end of the year. Southern intends to vigorously defend itself in this suit, which management believes is without merit. In the opinion of management, resolution of this lawsuit is not expected to have a material adverse impact on the Company's financial condition or results of operations. 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 quarterly high and low price ranges of the Company's common stock and quarterly dividends paid during the years ended September 30, 1996 and 1995. Market Price and Dividend Data 1996 Quarter ended High Low Dividend - ------------------ ---- --- -------- December 31, 1995 $22 1/2 $19 $0.325 March 31, 1996 $22 1/4 $18 5/8 $0.325 June 30, 1996 $20 7/8 $18 7/8 $0.33 September 30, 1996 $20 3/8 $19 $0.33 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 As of September 1996, the Company and its predecessors have paid 347 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 are the dividends received on the shares of Southern's common stock owned by the Company. Southern's indentures relating to long-term debt 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, $25,492,000 of retained earnings at September 30, 1996 was available for such purposes. The approximate number of shareholders of record of the Company's common stock as of November 22, 1996 was 11,162. Item 6. Selected Financial Data - -------------------------------- The presentation under the "Eleven Year Financial Summary" for the five- year period ended September 30, 1996 on pages 34 and 35 of the Company's 1996 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 11 to 17 of the Company's 1996 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 18 to 31 and the Report of Independent Accountants on page 33 of the Company's 1996 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, 1996, 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, 54 Chairman, President and Chief Executive Officer of the Company and Southern (1990). Thomas A. Trotta, 59 Senior Vice President of the Company and Executive Vice President and Chief Operating Officer of Southern (1996), 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). Vincent L. Ammann, Jr., 37 Vice President and Chief Accounting Officer of the Company (1996), 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). Carol A. Forest, 48 Vice President, Finance, Chief Financial Officer and Treasurer of the Company and Southern (1991). Michael H. Pinto, 69 Vice President, Government Affairs of the Company (1991), Director, Governmental Relations of Southern (1990). J. Richard Tiano, 52 Vice President, General Counsel and Secretary of the Company and Southern (1988). Salvatore A. Ardigliano, 47 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). Frank L. Esposito, 64* Vice President, Human Resources of Southern (1995), Vice President, Human Resources and Corporate Services of Southern (1992), Vice President, Human Resources of Southern (1991). James P. Healy, 54 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, 54 Vice President, Purchasing and Plant Services of Southern (1994), Vice President, Customer Relations (1993), 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). Peter D. Loomis, 48 Group Vice President, Customer and Operating Services of Southern (1995), Vice President, Distribution and Customer Service of Southern (1992), Group Director, Customer Services (1991). Phyllis A. O'Brien, 51 Group Vice President, Accounting, Regulatory and Customer Relations of Southern (1996), 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). Patricia A. Younger, 54 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). *Retired effective November 1, 1996. Item 11. Executive Compensation - -------------------------------- Information required in this Item is contained in the Company's definitive Proxy Statement on pages 9 to 10, which will be mailed to shareholders on or about December 13, 1996, 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 pages 4 to 5, which will be mailed to shareholders on or about December 13, 1996, 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 page 11, which will be mailed to shareholders on or about December 13, 1996, 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 Statements of Income for the years ended September 30, 1996, 1995 and 1994. (ii) Consolidated Balance Sheets for the years ended September 30, 1996 and 1995. (iii) Consolidated Statements of Changes in Common Shareholders' Equity for the years ended September 30, 1996, 1995 and 1994. (iv) Consolidated Statements of Cash Flows for the years ended September 30, 1996, 1995 and 1994. (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 20 II Valuation and Qualifying Accounts 21 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-seven indentures supplemental thereto, copies of all of which the Company agrees to furnish to the Commission upon request. (10) Material Contracts ------------------ (i) Gas Transportation Contract between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, Contract No. 10783, dated June 1, 1995, is filed herewith at pages 24 to 32. (ii) Interruptible Gas Transportation Contract and Amendment No. 1, thereto, among Tenngasco Corporation, The Southern Connecticut Gas Company and The United Illuminating Company, 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. (iii) Amendment No. 2 to Interruptible Gas Transportation Contract and Amendment No. 1, thereto, 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. (iv) 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. (v) 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. (vi) Gas Sales Agreement No. 2 by and between Alberta Northeast Gas Limited 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. (vii) 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. (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 10.36 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 10.37 to Connecticut Energy Corporation's Registration Statement No. 33-40232. (x) Storage Service Transportation Contract between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, Contract No. 542, dated September 1, 1993, is filed herewith at pages 33 to 42. (xi) Storage Service Agreement (GSS) 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. (xii) Storage Service Agreement (GSS-TE) between CNG Transmission Corporation and The Southern Connecticut Gas Company, dated October 1, 1993, is filed herewith at pages 43 to 50. (xiii) Storage Service Agreement (GSS-II) between CNG Transmission Corporation and The Southern Connecticut Gas Company, dated September 1, 1993, is filed herewith at pages 51 to 56. (xiv) Gas Storage Contract and Amendment No. 1, thereto, between Tennessee Gas Pipeline Company and The Southern Connecticut Gas Company, dated December 1, 1994, and July 1, 1995, respectively, are filed herewith at pages 57 to 63. (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 143 to 151. (xvi) 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. (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 160 to 170. (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 171 to 180. (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 181 to 192. (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 193 to 204. (xxi) 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. (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 221 to 227. (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 228 to 235. (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 236 to 243. (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 244 to 251. (xxvi) 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. (xxvii) 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 --------------------------------------------- (xxviii) 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. (xxix) Amended and Restated Deferred Compensation Agreement between The Southern Connecticut Gas Company and Connecticut Energy Corporation and J. R. Crespo, dated November 8, 1996, is filed herewith at pages 64 to 73. (xxx) 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. (xxxi) 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. (xxxii) 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. (xxxiii) 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. (xxxiv) Agreement between The Southern Connecticut Gas Company and Helen B. Wasserman related to deferred compensation as a director, dated December 31, 1994, incorporated by reference to Form 10-K for the fiscal year ended September 30, 1995 at pages 25 to 29. (xxxv) Agreement between The Southern Connecticut Gas Company and Connecticut Energy Corporation and Carol A. Forest related to change in control, dated October 1, 1996, is filed herewith at pages 74 to 83. (xxxvi) Agreement between The Southern Connecticut Gas Company and Connecticut Energy Corporation and J. Richard Tiano related to change in control, dated October 1, 1996, is filed herewith at pages 84 to 93. (xxxvii) Agreement between The Southern Connecticut Gas Company and Connecticut Energy Corporation and Thomas A. Trotta related to change in control, dated October 1, 1996, is filed herewith at pages 94 to 104. (13) Annual Report to Security Holders --------------------------------- The Company's 1996 Annual Report to Shareholders is filed herewith at pages 105 to 150. (21) Subsidiaries of the Registrant ------------------------------ A list of the Company's subsidiaries is filed herewith at page 151. (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 1996. 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 33 of the 1996 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. - ---------------------------- Coopers & Lybrand L.L.P. New York, New York October 31, 1996 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 October 31, 1996, on our audits of the consolidated financial statements and financial statement schedule of Connecticut Energy Corporation as of September 30, 1996 and 1995, and for the years ended September 30, 1996, 1995 and 1994, appearing on page 33 of the 1996 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. - ---------------------------- Coopers & Lybrand L.L.P. New York, New York December 6, 1996 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS CONNECTICUT ENERGY CORPORATION Years Ended September 30, 1996, 1995 and 1994 (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 1996 (1) $3,553 $6,549 $1,826 (2) $9,186 (3) $2,742 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 Notes: - ----- (1) Reserve deducted in the Consolidated Balance Sheet from the asset to which it applies (2) Recoveries on accounts previously charged off (3) Accounts charged off as uncollectible 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 26, 1996 - ------------------------- 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 26, 1996 Dated: November 26, 1996 /s/ James P. Comer /s/ Christopher D. Turner - ------------------ ------------------------- by: James P. Comer, M.D., Director by: Christopher D. Turner, Director Dated: November 26, 1996 Dated: November 22, 1996 /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 26, 1996 Dated: November 26, 1996 /s/ Richard F. Freeman /s/ Vincent L. Ammann, Jr. - ---------------------- -------------------------- by: Richard F. Freeman, Director by: Vincent L. Ammann, Jr. Dated: November 26, 1996 Vice President and Chief Accounting Officer, (Principal Accounting Officer) Dated: November 26, 1996 /s/ Richard M. Hoyt /s/ Carol A. Forest - ------------------- ------------------- by: Richard M. Hoyt, Director by: Carol A. Forest, Vice President, Dated: November 26, 1996 Finance, Chief Financial Officer and Treasurer, (Principal Financial Officer) Dated: November 26, 1996 /s/ Paul H. Johnson /s/ J. Richard Tiano - ------------------- -------------------- by: Paul H. Johnson, Director by: J. Richard Tiano, Vice President, Dated: November 26, 1996 General Counsel and Secretary Dated: November 26, 1996 /s/ Newman M. Marsilius, III - ---------------------------- by: Newman M. Marsilius, III, Director Dated: November 26, 1996 EX-10 2 THIS AGREEMENT is made and entered into as of the 1st day of June, 1995, by and between TENNESSEE GAS PIPELINE COMPANY, a Delaware Corporation, hereinafter referred to as "Transporter" and SOUTHERN CONNECTICUT GAS CO THE, a CONNECTICUT Corporation, hereinafter referred to as "Shipper." Transporter and Shipper shall collectively be referred to herein as the "Parties." ARTICLE I DEFINITIONS 1.1 TRANSPORTATION QUANTITY (TQ) - shall mean the maximum daily quantity of gas which Transporter agrees to receive and transport on a firm basis, subject to Article II herein, for the account of Shipper hereunder on each day during each year during the term hereof, which shall be 1,025 dekatherms. Any limitations of the quantities to be received from each Point of Receipt and/or delivered to each Point of Delivery shall be as specified on Exhibit "A" attached hereto. 1.2 EQUIVALENT QUANTITY - shall be as defined in Article I of the General Terms and Conditions of Transporter's FERC Gas Tariff. ARTICLE II TRANSPORTATION Transportation Service - Transporter agrees to accept and receive daily on a firm basis, at the Point(s) of Receipt from Shipper or for Shipper's account such quantity of gas as Shipper makes available up to the Transportation Quantity, and to deliver to or for the account of Shipper to the Point(s) of Delivery an Equivalent Quantity of gas. ARTICLE III POINT(S) OF RECEIPT AND DELIVERY The Primary Point(s) of Receipt and Delivery shall be those points specified on Exhibit "A" attached hereto. ARTICLE IV All facilities are in place to render the service provided for in this Agreement. ARTICLE V QUALITY SPECIFICATIONS AND STANDARDS FOR MEASUREMENT For all gas received, transported and delivered hereunder the Parties agree to the Quality Specifications and Standards for Measurement as specified in the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1. To the extent that no new measurement facilities are installed to provide service hereunder, measurement operations will continue in the manner in which they have previously been handled. In the event that such facilities are not operated by Transporter or a downstream pipeline, then responsibility for operations shall be deemed to be Shipper's. ARTICLE VI RATES AND CHARGES FOR GAS TRANSPORTATION 6.1 TRANSPORTATION RATES - Commencing upon the effective date hereof, the rates, charges, and surcharges to be paid by Shipper to Transporter for the transportation service provided herein shall be in accordance with Transporter's Rate Schedule FT-A and the General Terms and Conditions of Transporter's FERC Gas Tariff. 6.2 INCIDENTAL CHARGES - Shipper agrees to reimburse Transporter for any filing or similar fees, which have not been previously paid for by Shipper, which Transporter incurs in rendering service hereunder. 6.3 CHANGES IN RATES AND CHARGES - Shipper agrees that Transporter shall have the unilateral right to file with the appropriate regulatory authority and make effective changes in (a) the rates and charges applicable to service pursuant to Transporter's Rate Schedule FT-A, (b) the rate schedule(s) pursuant to which service hereunder is rendered, or (c) any provision of the General Terms and Conditions applicable to those rate schedules. Transporter agrees that Shipper may protest or contest the aforementioned filings, or may seek authorization from duly constituted regulatory authorities for such adjustment of Transporter's existing FERC Gas Tariff as may be found necessary to assure Transporter just and reasonable rates. ARTICLE VII BILLINGS AND PAYMENTS Transporter shall bill and Shipper shall pay all rates and charges in accordance with Articles V and VI, respectively, of the General Terms and Conditions of Transporter's FERC Gas Tariff. ARTICLE VIII GENERAL TERMS AND CONDITIONS This Agreement shall be subject to the effective provisions of Transporter's Rate Schedule FT-A and to the General Terms and Conditions incorporated therein, as the same may be changed or superseded from time to time in accordance with the rules and regulations of the FERC. ARTICLE IX REGULATION 9.1 This Agreement shall be subject to all applicable and lawful governmental statutes, orders, rules and regulations and is contingent upon the receipt and continuation of all necessary regulatory approvals or authorizations upon terms acceptable to Transporter. This Agreement shall be void and of no force and effect if any necessary regulatory approval is not so obtained or continued. All Parties hereto shall cooperate to obtain or continue all necessary approvals or authorizations, but no Party shall be liable to any other Party for failure to obtain or continue such approvals or authorizations. 9.2 The transportation service described herein shall be provided subject to Subpart G, Part 284, of the FERC Regulations. ARTICLE X RESPONSIBILITY DURING TRANSPORTATION Except as herein specified, the responsibility for gas during transportation shall be as stated in the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1. ARTICLE XI WARRANTIES 11.1 In addition to the warranties set forth in Article IX of the General Terms and Conditions of Transporter's FERC Gas Tariff, Shipper warrants the following: (a) Shipper warrants that all upstream and downstream transportation arrangements are in place, or will be in place as of the requested effective date of service, and that it has advised the upstream and downstream transporters of the receipt and delivery points under this Agreement and any quantity limitations for each point as specified on Exhibit "A" attached hereto. Shipper agrees to indemnify and hold Transporter harmless for refusal to transport gas hereunder in the event any upstream or downstream transporter fails to receive or deliver gas as contemplated by this Agreement. (b) Shipper agrees to indemnify and hold Transporter harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses (including reasonable attorneys fees) arising from or out of breach of any warranty by Shipper herein. 11.2 Transporter shall not be obligated to provide or continue service hereunder in the event of any breach of warranty. ARTICLE XII TERM 12.1 This Agreement shall be effective as of the 1st day of June, 1995, and shall remain in force and effect until the 31st day of May, 2000,("Primary Term") and on a month to month basis thereafter unless terminated by either Party upon at least thirty (30) days prior written notice to the other Party; provided, however, that if the Primary Term is one year or more, then unless Shipper elects upon one year's prior written notice to Transporter to request a lesser extension term, the Agreement shall automatically extend upon the expiration of the Primary Term for a term of five years and shall automatically extend for successive five year terms thereafter unless Shipper provides notice described above in advance of the expiration of a succeeding term; provided further, if the FERC or other governmental body having jurisdiction over the service rendered pursuant to this Agreement authorizes abandonment of such service, this Agreement shall terminate on the abandonment date permitted by the FERC or such other governmental body. 12.2 Any portions of this Agreement necessary to resolve or cash- out imbalances under this Agreement as required by the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1, shall survive the other parts of this Agreement until such time as such balancing has been accomplished; provided, however, that Transporter notifies Shipper of such imbalance no later than twelve months after the termination of this Agreement. 12.3 This Agreement will terminate automatically upon written notice from Transporter in the event Shipper fails to pay all of the amount of any bill for service rendered by Transporter hereunder in accord with the terms and conditions of Article VI of the General Terms and Conditions of Transporter's FERC Tariff. ARTICLE XIII NOTICE Except as otherwise provided in the General Terms and Conditions applicable to this Agreement, any notice under this Agreement shall be in writing and mailed to the post office address of the Party intended to receive the same, as follows: TRANSPORTER: TENNESSEE GAS PIPELINE COMPANY P.O. Box 2511 Houston, Texas 77252-2511 Attention: Transportation Marketing SHIPPER: NOTICES: SOUTHERN CONNECTICUT GAS CO THE 855 MAIN STREET BRIDGEPORT, CT 06604-4918 Attention: PAT ZYCHEK BILLING: SOUTHERN CONNECTICUT GAS CO THE 855 MAIN STREET BRIDGEPORT, CT 06604-4918 Attention: PAT ZYCHEK or to such other address as either Party shall designate by formal written notice to the other. ARTICLE XIV ASSIGNMENTS 14.1 Either Party may assign or pledge this Agreement and all rights and obligations hereunder under the provisions of any mortgage, deed of trust, indenture, or other instrument which it has executed or may execute hereafter as security for indebtedness. Either Party may, without relieving itself of its obligation under this Agreement, assign any of its rights hereunder to a company with which it is affiliated. Otherwise, Shipper shall not assign this Agreement or any of its rights hereunder, except in accord with Article III, Section 11 of the General Terms and Conditions of Transporter's FERC Gas Tariff. 14.2 Any person which shall succeed by purchase, merger, or consolidation to the properties, substantially as an entirety, of either Party hereto shall be entitled to the rights and shall be subject to the obligations of its predecessor in interest under this Agreement. ARTICLE XV MISCELLANEOUS 15.1 The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of the state of texas, without regard to the doctrines governing choice of law. 15.2 If any provisions of this Agreement is declared null and void, or voidable, by a court of competent jurisdiction, then that provision will be considered severable at either Party's option; and if the severability option is exercised, the remaining provisions of the Agreement shall remain in full force and effect. 15.3 Unless otherwise expressly provided in this Agreement or Transporter's Gas Tariff, no modification of or supplement to the terms and provisions stated in this agreement shall be or become effective until Shipper has submitted a request for change through the TENN-SPEED 2 System and Shipper has been notified through TENN-SPEED 2 of Transporter's agreement to such change. 15.4 Exhibit "A" attached hereto is incorporated herein by reference and made a part hereof for all purposes. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed as of the date first hereinabove written. TENNESSEE GAS PIPELINE COMPANY BY:____________________________ Agent and Attorney-in-Fact SOUTHERN CONNECTICUT GAS CO THE BY:____________________________ TITLE: ________________________ DATE: _________________________ GAS TRANSPORTATION AGREEMENT (For Use Under FT-A Rate Schedule) EXHIBIT "A" AMENDMENT #0 TO GAS TRANSPORTATION AGREEMENT DATED June 1, 1995 BETWEEN TENNESSEE GAS PIPELINE COMPANY AND SOUTHERN CONNECTICUT GAS CO THE SOUTHERN CONNECTICUT GAS CO THE EFFECTIVE DATE OF AMENDMENT: June 1, 1995 RATE SCHEDULE: FT-A SERVICE PACKAGE: 10783 SERVICE PACKAGE TQ: 1,025 Dth Meter Meter Name Interconnect Party Name County ST Zone R/D LEG Meter-TQ Billable-TQ - ----- ---------- ----------------------- ------ -- ---- --- --- -------- ----------- 020578 Penn-NFG-Andrews National Fuel Gas Supply Potter PA 04 R 300 1,025 1,025 Settlement SA Corp. Total Receipt TQ: 1,025 1,025 020313 Southern-Trumbull, Conn. Southern Connecticut Gas Fairfield CT 06 D 300 1,025 1,025 Co. NUMBER OF RECEIPT POINTS AFFECTED: 1 NUMBER OF DELIVERY POINTS AFFECTED: 1 Note: Exhibit "A" is a reflection of the contract and all amendments as of the amendment effective date.
EX-10 3 THIS AGREEMENT is made and entered into as of the 1st day of September, 1993, by and between TENNESSEE GAS PIPELINE COMPANY, a Delaware Corporation, hereinafter referred to as "Transporter" and SOUTHERN CONNECTICUT GAS CO THE, a CONNECTICUT Corporation, hereinafter referred to as "Shipper." Transporter and Shipper shall collectively be referred to herein as the "Parties." ARTICLE I DEFINITIONS 1.1 TRANSPORTATION QUANTITY (TQ) - shall mean the maximum daily quantity of gas which Transporter agrees to receive and transport on a firm basis, subject to Article II herein, for the account of Shipper hereunder on each day during each year during the term hereof, which shall be 9,408 dekatherms (Dth). Any limitations of the quantities to be received from each Point of Receipt and/or delivered to each Point of Delivery shall be as specified on Exhibit "A" attached hereto. 1.2 EQUIVALENT QUANTITY - shall be as defined in Article I of the General Terms and Conditions of Transporter's FERC Gas Tariff. ARTICLE II TRANSPORTATION Transportation Service - Transporter agrees to accept and receive daily on a firm basis, at the Point(s) of Receipt from Shipper or for Shipper's account such quantity of gas as Shipper makes available up to the Transportation Quantity, and to deliver to or for the account of Shipper to the Point(s) of Delivery an Equivalent Quantity of gas. ARTICLE III POINT(S) OF RECEIPT AND DELIVERY The Primary Point(s) of Receipt and Delivery shall be those points specified on Exhibit "A" attached hereto. ARTICLE IV All facilities are in place to render the service provided for in this Agreement. ARTICLE V QUALITY SPECIFICATIONS AND STANDARDS FOR MEASUREMENT For all gas received, transported and delivered hereunder the Parties agree to the Quality Specifications and Standards for Measurement as specified in the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1. To the extent that no new measurement facilities are installed to provide service hereunder, measurement operations will continue in the manner in which they have previously been handled. In the event that such facilities are not operated by Transporter then responsibility for operations shall be deemed to be Shipper's. ARTICLE VI RATES AND CHARGES FOR GAS TRANSPORTATION 6.1 TRANSPORTATION RATES - Commencing upon the date of execution, the rates, charges, and surcharges to be paid by Shipper to Transporter for the transportation service provided herein shall be in accordance with Transporter's Rate Schedule FT-A and the General Terms and Conditions of Transporter's FERC Gas Tariff. 6.2 INCIDENTAL CHARGES - Shipper agrees to reimburse Transporter for any filing or similar fees, which have not been previously paid for by Shipper, which Transporter incurs in rendering service hereunder. 6.3 CHANGES IN RATES AND CHARGES - Shipper agrees that Transporter shall have the unilateral right to file with the appropriate regulatory authority and make effective changes in (a) the rates and charges applicable to service pursuant to Transporter's Rate Schedule FT-A, (b) the rate schedule(s) pursuant to which service hereunder is rendered, or (c) any provision of the General Terms and Conditions applicable to those rate schedules. Transporter agrees that Shipper may protest or contest the aforementioned filings, or may seek authorization from duly constituted regulatory authorities for such adjustment of Transporter's existing FERC Gas Tariff as may be found necessary to assure Transporter just and reasonable rates. ARTICLE VII BILLINGS AND PAYMENTS Transporter shall bill and Shipper shall pay all rates and charges in accordance with Articles V and VI, respectively, of the General Terms and Conditions of Transporter's FERC Gas Tariff. ARTICLE VIII GENERAL TERMS AND CONDITIONS This Agreement shall be subject to the effective provisions of Transporter's Rate Schedule FT-A and to the General Terms and Conditions incorporated therein, as the same may be changed or superseded from time to time in accordance with the rules and regulations of the FERC. ARTICLE IX REGULATION 9.1 This Agreement shall be subject to all applicable and lawful governmental statutes, orders, rules and regulations and is contingent upon the receipt and continuation of all necessary regulatory approvals or authorizations upon terms acceptable to Transporter. This Agreement shall be void and of no force and effect if any necessary regulatory approval is not so obtained or continued. All Parties hereto shall cooperate to obtain or continue all necessary approvals or authorizations, but no Party shall be liable to any other Party for failure to obtain or continue such approvals or authorizations. 9.2 The transportation service described herein shall be provided subject to Part 284, Subpart G of the FERC Regulations. ARTICLE X RESPONSIBILITY DURING TRANSPORTATION Except as herein specified, the responsibility for gas during transportation shall be as stated in the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1. ARTICLE XI WARRANTIES 11.1 In addition to the warranties set forth in Article IX of the General Terms and Conditions of Transporter's FERC Gas Tariff, Shipper warrants the following: (a) Shipper warrants that all upstream and downstream transportation arrangements are in place, or will be in place as of the requested effective date of service, and that it has advised the upstream and downstream transporters of the receipt and delivery points under this Agreement and any quantity limitations for each point as specified on Exhibit "A" attached hereto. Shipper agrees to indemnify and hold Transporter harmless for refusal to transport gas hereunder in the event any upstream or downstream transporter fails to receive or deliver gas as contemplated by this Agreement. (b) Shipper agrees to indemnify and hold Transporter harmless from all suits, actions, debts, accounts, damages, costs, losses and expenses (including reasonable attorneys fees) arising from or out of breach of any warranty by Shipper herein. 11.2 Transporter shall not be obligated to provide or continue service hereunder in the event of any breach of warranty. ARTICLE XII TERM 12.1 This Contract shall be effective as of the 1st day of September, 1993, and shall remain in force and effect until the 1st day of November, 2000, ("Primary Term") and on a month to month basis thereafter unless terminated by either Party upon at least thirty (30) days prior written notice to the other Party; provided, however, that if the Primary Term is one year or more, then unless Shipper elects upon one year's prior written notice to Transporter to request a lesser extension term, the Agreement shall automatically extend upon the expiration of the Primary Term for a term of five years and shall automatically extend for successive five year terms thereafter unless Shipper provides notice described above in advance of the expiration of a succeeding term; provided further, if the FERC or other governmental body having jurisdiction over the service rendered pursuant to this Agreement authorizes abandonment of such service, this Agreement shall terminate on the abandonment date permitted by the FERC or such other governmental body. 12.2 Any portions of this Agreement necessary to resolve or cash- out imbalances under this Agreement as required by the General Terms and Conditions of Transporter's FERC Gas Tariff Volume No. 1, shall survive the other parts of this Agreement until such time as such balancing has been accomplished. 12.3 This Agreement will terminate upon notice from Transporter in the event Shipper fails to pay all of the amount of any bill for service rendered by Transporter hereunder in accord with the terms and conditions of Article VI of the General Terms and Conditions of Transporter's FERC Tariff. ARTICLE XIII NOTICE Except as otherwise provided in the General Terms and Conditions applicable to this Agreement, any notice under this Agreement shall be in writing and mailed to the post office address of the Party intended to receive the same, as follows: TRANSPORTER: TENNESSEE GAS PIPELINE COMPANY P.O. Box 2511 Houston, Texas 77252-2511 Attention: Transportation Marketing SHIPPER: NOTICES: SOUTHERN CONNECTICUT GAS COMPANY 855 Main Street P.O. Box 1540 Bridgeport, CT 06601 Attention: Paul Rossi, Director of Gas Suppply BILLING: SOUTHERN CONNECTICUT GAS COMPANY 855 Main Street P.O. Box 1540 Bridgeport, CT 06601 Attention: Pat Zychek, Manager Gas Supply Planning or to such other address as either Party shall designate by formal written notice to the other. ARTICLE XIV ASSIGNMENTS 14.1 Either Party may assign or pledge this Agreement and all rights and obligations hereunder under the provisions of any mortgage, deed of trust, indenture, or other instrument which it has executed or may execute hereafter as security for indebtedness. Either Party may, without relieving itself of its obligation under this Agreement, assign any of its rights hereunder to a company with which it is affiliated. Otherwise, Shipper shall not assign this Agreement or any of its rights hereunder, except in accord with Article III, Section 11 of the General Terms and Conditions of Transporter's FERC Gas Tariff. 14.2 Any person which shall succeed by purchase, merger, or consolidation to the properties, substantially as an entirety, of either Party hereto shall be entitled to the rights and shall be subject to the obligations of its predecessor in interest under this Agreement. ARTICLE XV MISCELLANEOUS 15.1 The interpretation and performance of this contract shall be in accordance with and controlled by the laws of the state of Texas, without regard to the doctrines governing choice of law. 15.2 If any provisions of this Agreement is declared null and void, or voidable, by a court of competent jurisdiction, then that provision will be considered severable at either Party's option; and if the severability option is exercised, the remaining provisions of the Agreement shall remain in full force and effect. 15.3 Unless otherwise expressly provided in this Agreement or Transporter's Gas Tariff, no modification of or supplement to the terms and provisions stated in this agreement shall be or become effective, except by the execution of by both Parties of a written amendment. 15.4 Exhibit "A" attached hereto is incorporated herein by reference and made a part hereof for all purposes. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed in several counterparts as of the date first hereinabove written. TENNESSEE GAS PIPELINE COMPANY BY:____________________________ Agent and Attorney-in-Fact SOUTHERN CONNECTICUT GAS COMPANY BY:____________________________ TITLE: ________________________ DATE: _________________________ GAS TRANSPORTATION AGREEMENT (For Use Under FT-A Rate Schedule) EXHIBIT "A" TO GAS TRANSPORTATION AGREEMENT DATED September 1, 1993 BETWEEN TENNESSEE GAS PIPELINE COMPANY AND SOUTHERN CONNECTICUT GAS CO THE SERVICE PACKAGE: 542 SERVICE PACKAGE TQ: 9,408 Dth AMENDMENT EFFECTIVE DATE: September 1, 1993 Interconnect Min. Meter AMD Meter Name Party Name County ST Zone R/D LEG Meter-TQ Press. Notes - ----- --- ---------- ------------ ------ -- ---- --- --- -------- ------ ----- 070018 0 TGP - ISS-Northern Storage Potter PA 04 R 300 9,408 2/ Withdra 020126 0 Southern-Bridgeport, Conn. Connecticut Natural Gas Fairfield CT 06 D 300 9,408 100 lbs. 1/ Corp. 020313 0 Southern-Trumbull, Conn. Southern Conn. Gas Co. Fairfield CT 06 D 300 9,408 100 lbs. 1/ 020425 0 Southern Conn.-Milford Southern Conn. Gas Co. New Haven CT 06 D 300 7,800 100 lbs. 1/ Conn. Alg. 020490 0 Southern-Westport, Conn. Southern Conn. Gas Co. Fairfield CT 06 D 300 9,408 100 lbs. 1/ 1/ THE SUM OF TRANSPORTER'S DELIVERIES TO SHIPPER FOR ALL TRANSPORTATION CONTRACTS CONVERTED FROM FIRM SALES CANNOT EXCEED THE FOLLOWING QUANTITIES: Meter Dth/Day - ----- ------- 020490 15,390 020126 30,780 020313 20,000 020425 7,800 060018 8,060 020578 781 2/ METER 070018 IS FOR NOMINATION PURPOSES ONLY AND DOES NOT DENOTE CAPACITY AT THIS SPECIFIC POINT. NUMBER OF RECEIPT POINTS: 1 NUMBER OF DELIVERY POINTS: 4
EX-10 4 SERVICE AGREEMENT APPLICABLE TO THE STORAGE OF NATURAL GAS UNDER RATE SCHEDULE GSS (SECTION 7 (c)) AGREEMENT made as of this first day of October 1993, by and between CNG TRANSMISSION CORPORATION, a Delaware corporation, hereinafter called "Pipeline," and SOUTHERN CONNECTICUT GAS COMPANY, a Connecticut corporation, hereinafter called "Customer." WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree that Pipeline will store natural gas for Customer during the term, at the rates and on the terms and conditions hereinafter provided and, with respect to gas delivered by each of the parties to the other, under and subject to Pipeline's Rate Schedule GSS and all of the General Terms and Conditions contained in Pipeline's FERC Gas Tariff and any revisions thereof that may be made effective hereafter: ARTICLE I Quantities Beginning as of October 1, 1993 and thereafter for the remaining term of this agreement, Customer agrees to deliver to Pipeline and Pipeline agrees to receive for storage in Pipeline's underground storage properties, and Pipeline agrees to inject or cause to be injected into storage for Customer's account, store, withdraw from storage, and deliver to Customer and Customer agrees to receive, quantities of natural gas as set forth on Exhibit A, attached hereto. ARTICLE II Rate A. For storage service rendered by Pipeline to Customer hereunder, Customer shall pay Pipeline in accordance with Rate Schedule GSS contained in Pipeline's effective FERC Gas Tariff or any effective superseding rate schedule. Said rate schedule or superseding rate schedule and any revisions thereof which shall be filed and made effective shall apply to and be part of this Agreement. Pipeline shall have the right to propose to and file with the Federal Energy Regulatory Commission or other body having jurisdiction, changes and revisions of any effective rate schedule, or to propose and file superseding rate schedules, for the purpose of changing the rate, charges, and other provisions thereof effective as to Customer; provided, however, that any request by Pipeline to amend the terms and conditions of Rate Schedule GSS must be consistent with the terms and conditions of Article VII, Part 2, Paragraph (F) of the stipulation filed on March 31, 1993 by Pipeline in Docket No. RS92-14 and conform to the requirements of Section 7 (b) of the Natural Gas Act, if applicable, and provided further that Pipeline and Customer agree that they will not seek to place in effect a change in any aspect of the terms and conditions under Section 8 of Rate Schedule GSS for a period of two years from the date of such request. The filing of requests, changes and revisions of Rate Schedule GSS shall be without prejudice to the right of Customer to contest or oppose such requests, filings or revisions and their effectiveness. B. The Storage Demand Charge and the Storage Capacity charge provided in the aforesaid rate schedule shall commence on October 1, 1993. ARTICLE III Term of Agreement Subject to all the terms and conditions herein, this Agreement shall be effective as of October 1, 1993, and shall continue in effect for a primary term through and including March 31, 2006, and for subsequent annual terms of April 1 through March 31 thereafter, until either party terminates this Agreement by giving written notice to the other at least twenty-four months prior to the start of an annual term. ARTICLE IV Points of Receipt and Delivery The Points of Receipt for Customer's tender of storage injection quantities, and the Point(s) of Delivery for withdrawals from storage shall be specified on Exhibit A, attached hereto. ARTICLE V Special Operating Conditions For the sole purpose of calculating Customer's Storage Gas Balance to determine the initial decline in Customer's Daily Entitlement, Pipeline shall multiply Customer's actual Storage Gas Balance by a factor of 1.176. For purposes other than calculating the initial decline in Customer's Daily Entitlement, Customer's Storage Gas Balance shall remain equal to Customer's actual inventory in storage. ARTICLE VI Miscellaneous A. No change, modification or alteration of this Agreement shall be or become effective until executed in writing by the parties hereto; provided, however, that the parties do not intend that this Article VI.A. requires a further written agreement either prior to the making of any requests of filing permitted under Article II hereof or prior to the effectiveness of such request or filing after Commission approval, provided further, however, that nothing in this Agreement shall be deemed to prejudice any position the parties may take as to whether the request, filing or revision permitted under Article II must be made under Section 7 or section 4 of Natural Gas Act. B. Any notice, request or demand provided for in this Agreement, or any notice which either party may desire to give the other, shall be in writing and sent to the following addresses: Pipeline: CNG Transmission Corporation 445 West Main Street Clarksburg, West Virginia 26301 Attention: Vice President, Marketing and Customer Services Customer: Southern Connecticut Gas Company P.O. Box 1540 855 Main Street Bridgeport, CT 06604 Attention: Rod Cranford or at such other address as either party shall designate by formal written notice. C. No presumption shall operate in favor of or against either party hereto as a result of any responsibility either party may have had for drafting this Agreement. D. The subject headings of the provisions of this Agreement are inserted for the purpose of convenient reference, and are not intended to become a part of or to be considered in any interpretations of such provisions. ARTICLE VII Prior Contracts This Service Agreement shall supersede and cancel, as of the effective date, the Service Agreements for storage service between Customer and Pipeline dated June 1, 1993. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officials as of the day and year first above written. CNG TRANSMISSION CORPORATION (Pipeline) By:______________________________ Its: Vice President SOUTHERN CONNECTICUT GAS COMPANY By:_____________________________ Its:____________________________ (Title) EXHIBIT A To The GSS (Section 7 (c)) Storage Service Agreement Dated October 1, 1993 Between CNG Transmission Corporation and Southern Connecticut Gas Company A. Quantities The quantities of natural gas storage service which Customer may utilize under this Service Agreement, as well as Customer's applicable Billing Determinants, are as follows: 1. Storage Capacity of 650,588 Dekatherms (Dt), and 2. Storage Demand of 6,090 Dt per day. B. Points of Receipt and Delivery 1. The Points of Receipt for Customer's tender of storage injection quantities, and the maximum quantities and character of service for each point shall be as set forth below. Pipeline will use due care and diligence to assure and Customer will use due care and diligence to cause its transporter to assure, that uniform pressures will be maintained at the Receipt Points as responsibly may be required to render service hereunder, but Pipeline will not be required to accept gas at less than the minimum pressures specified herein. a. Up to 3,614 Dt per Day at the interconnection of the facilities of Pipeline and Texas Eastern Transmission Corporation ("Texas Eastern") or Transcontinental Gas Pipe Line Corporation ("Transco") or other pipeline (s) in Clinton County, Pennsylvania, known as the Leidy Interconnection, at a pressure of not less than one thousand d(1,000) pounds per square inch gauge ("psig"). b. Up to 3,614 Dt per Day at the "Texas Eastern Market Zone 2 Point" which shall consist of any combination of the following points: 1. The interconnection of the facilities of Pipeline and Texas Eastern or other pipeline(s) in Westmoreland County, Pennsylvania, known as the Oakford Interconnection, at a pressure of not less than five hundred seventy-five (575) psig. 2. An existing point of interconnection between Pipeline and Texas Eastern Transmission Corporation ("Texas Eastern") located in Noble County, Ohio, at Texas Eastern Measuring Station 450, at the operating pressure existing at the point of delivery. 3. An existing point of interconnection between Pipeline and Texas Eastern located in Monroe County, Ohio, at Texas Eastern Measuring Station 471, at a pressure of not less than two hundred (200) psig. 4. An existing point of interconnection between Pipeline and Texas Eastern located in Monroe County, Ohio, at Texas Eastern Measuring Station 983, at a pressure of not less than three hundred (300) psig. 5. An existing point of interconnection between Pipeline and Texas Eastern located in Monroe County, Ohio, at Texas Eastern Measuring Station 004, at the pressure provided for in the General Terms and Conditions of Texas Eastern's FERC Gas Tariff. 6. An existing point of interconnection between Pipeline and Texas Eastern located in Marshall County, West Virginia at Texas Eastern Measuring Station 372, at the operating pressure existing at the point of delivery. 7. An existing point of interconnection between Pipeline and Texas Eastern located in Green County, Pennsylvania at Texas Eastern Measuring Station 037, at the pressure provided for in the General Terms and Conditions of Texas Eastern's FERC Gas Tariff. 8. An existing point of interconnection between Pipeline and Texas Eastern located in Somerset County, Pennsylvania at Texas Eastern Measuring Station 051, at the pressure provided for in the General Terms and Conditions of Texas Eastern's FERC Gas Tariff. 2. The quantity of gas which Customer shall be entitled to tender to Pipeline for injection into storage at the Leidy Interconnection on a firm basis on any Day during the Storage Year shall be one-one hundred eightieth (1/180th) of Customer's Storage Capacity whenever Customer's Storage Gas Balance is less than or equal to one half of Customer's Storage Capacity, and one-two hundred fourteenth (1/214th) of Customer's Storage Capacity whenever Customer's Storage Gas Balance is greater than one half of Customer's Storage Capacity. 3. The Points of Delivery for withdrawals from storage, and the maximum quantities and character of service for each point, shall be as set forth below. Pipeline will use due care and diligence to assure, and Customer will use due care and diligence to cause its transporter to assure, that uniform pressures will be maintained at the Delivery Points as reasonably may be required to render service hereunder, and Pipeline will use due care and diligence to deliver gas (or cause gas to be delivered) within the pressure limitations specified herein. a. Up to 6,090 Dt per Day at the interconnection of the facilities of Pipeline and Texas Eastern or other Pipeline(s) in Westmoreland County, Pennsylvania, known as the Oakford Interconnection, at a pressure of not less than eight hundred fifty (850) psig. b. Up to 6,090 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern, in Franklin County, Pennsylvania, known at the Chambersburg Interconnection, on an interruptible basis if operating conditions permit, at a pressure of not more than seven hundred (700) psig. c. Up to 6,090 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern, in Greene County, Pennsylvania, known as the Crayne Interconnection, on an interruptible basis if operating conditions permit, at a pressure of not more than eight hundred sixty-five (865) psig. d. Up to 6,090 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern, in Cambria County, Pennsylvania, known as the Rager Mountain Interconnection, on an interruptible basis if mutually agreed between Pipeline and Customer, at the operating pressure existing at the point of delivery. e. Up to 6,090 Dt per Day at the interconnection of the facilities of Pipeline and Texas Eastern or Transco or other pipeline(s) in Clinton County, Pennsylvania, known as the Leidy Interconnection, at a pressure of not less than one-thousand, two-hundred (1,200) psig, if, in Pipeline's sole opinion, its operating or other circumstances permit. EX-10 5 SERVICE AGREEMENT APPLICABLE TO THE STORAGE OF NATURAL GAS UNDER RATE SCHEDULE GSS-II AGREEMENT made as of this first day of September 1993, by and between CNG TRANSMISSION CORPORATION, a Delaware corporation, hereinafter called "Pipeline," and SOUTHERN CONNECTICUT GAS COMPANY, a Connecticut corporation, hereinafter called "Customer." WITNESSETH: That in consideration of the mutual covenants herein contained, the parties hereto agree that Pipeline will store natural gas for Customer during the term, at the rates and on the terms and conditions hereinafter provided and, with respect to gas delivered by each of the parties to the other, under and subject to Pipeline's Rate Schedule GSS-II and all of the General Terms and Conditions contained in Pipeline's FERC Gas Tariff and any revisions thereof that may be made effective hereafter: ARTICLE I Quantities Beginning as of October 1, 1993 and thereafter for the remaining term of this agreement, Customer agrees to deliver to Pipeline and Pipeline agrees to receive for storage in Pipeline's underground storage properties, and Pipeline agrees to inject or cause to be injected into storage for Customer's account, store, withdraw from storage, and deliver to Customer and Customer agrees to receive, quantities of natural gas as set forth on Exhibit A, attached hereto. ARTICLE II Rate A. For storage service rendered by Pipeline to Customer hereunder, Customer shall pay Pipeline in accordance with Rate Schedule GSS-II contained in Pipeline's effective FERC Gas Tariff or any effective superseding rate schedule. Said rate schedule or superseding rate schedule and any revisions thereof which shall be filed and made effective shall apply to and be part of this Agreement. Pipeline shall have the right to propose to and file with the Federal Energy Regulatory Commission or other body having jurisdiction, changes and revisions of any effective rate schedule, or to propose and file superseding rate schedules, for the purpose of changing the rate, charges, and other provisions thereof effective as to Customer; provided, however, that any request by Pipeline to amend the terms and conditions of Rate Schedule GSS-II must be consistent with the terms and conditions of Article VII, Part 2, Paragraph (F) of the stipulation filed on March 31, 1993 by Pipeline in Docket No. RS92-14 and conform to the requirements of Section 7 (b) of the Natural Gas Act, if applicable, and provided further that Pipeline and Customer agree that they will not seek to place in effect a change in any aspect of the terms and conditions under Section 8 of Rate Schedule GSS-II for a period of two years from the date of such request. The filing of requests, changes and revisions of Rate Schedule GSS-II shall be without prejudice to the right of Customer to contest or oppose such requests, filings or revisions and their effectiveness. B. The Storage Demand Charge and the Storage Capacity charge provided in the aforesaid rate schedule shall commence on October 1, 1993. ARTICLE III Term of Agreement Subject to all the terms and conditions herein, this Agreement shall be effective as of October 1, 1993, and shall continue in effect for a primary term through and including March 31, 2012, and for subsequent annual terms of April 1 through March 31 thereafter, until either party terminates this Agreement by giving written notice to the other at least twenty-four months prior to the start of an annual term. ARTICLE IV Points of Receipt and Delivery The Points of Receipt for Customer's tender of storage injection quantities, and the Point(s) of Delivery for withdrawals from storage shall be specified on Exhibit A, attached hereto. ARTICLE V Special Operating Conditions For the sole purpose of calculating Customer's Storage Gas Balance to determine the initial decline in Customer's Daily Entitlement, Pipeline shall multiply Customer's actual Storage Gas Balance by a factor of 1.176. For purposes other than calculating the initial decline in Customer's Daily Entitlement, Customer's Storage Gas Balance shall remain equal to Customer's actual inventory in storage. ARTICLE VI Miscellaneous A. No change, modification or alteration of this Agreement shall be or become effective until executed in writing by the parties hereto; provided, however, that the parties do not intend that this Article V.A. requires a further written agreement either prior to the making of any requests of filing permitted under Article II hereof or prior to the effectiveness of such request or filing after Commission approval, provided further, however, that nothing in this Agreement shall be deemed to prejudice any position the parties may take as to whether the request, filing or revision permitted under Article II must be made under Section 7 or section 4 of Natural Gas Act. B. Any notice, request or demand provided for in this Agreement, or any notice which either party may desire to give the other, shall be in writing and sent to the following addresses: Pipeline: CNG Transmission Corporation 445 West Main Street Clarksburg, West Virginia 26301 Attention: Vice President, Marketing and Customer Services Customer: Southern Connecticut Gas Company P.O. Box 1540 855 Main Street Bridgeport, CT 06604 Attention: Rod Cranford or at such other address as either party shall designate by formal written notice. C. No presumption shall operate in favor of or against either party hereto as a result of any responsibility either party may have had for drafting this Agreement. D. The subject headings of the provisions of this Agreement are inserted for the purpose of convenient reference, and are not intended to become a part of or to be considered in any interpretations of such provisions. ARTICLE VII Prior Contracts This Service Agreement shall supersede and cancel, as of the effective date, the Service Agreements for storage service between Customer and Pipeline dated May 25, 1992. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized officials as of the day and year first above written. CNG TRANSMISSION CORPORATION (Pipeline) By:______________________________ Its: Vice President SOUTHERN CONNECTICUT GAS COMPANY By:______________________________ Its:_____________________________ (Title) EXHIBIT A To The Storage Service Agreement Dated September 1993 Between CNG Transmission Corporation and Southern Connecticut Gas Company A. Quantities The quantities of natural gas storage service which Customer may utilize under this Service Agreement, as well as Customer's applicable Billing Determinants, are as follows: 1. Storage Capacity of 666,667 Dekatherms (Dt), and 2. Storage Demand of 6,667 Dt per day. B. Points of Receipt and Delivery 1. The Points of Receipt for Customer's tender of storage injection quantities, and the maximum quantities and character of service for such point shall be as set forth below. Each of the parties will use due care and diligence to assure that uniform pressures will be maintained at the Receipt Point as reasonably may be required to render service hereunder, but Pipeline will not be required to accept gas at less than the minimum pressure specified herein. Up to 3,704 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern Transmission Corporation ("Texas Eastern"), in Fayette County, Pennsylvania, known as the North Summit Interconnection, at a pressure of not less than seven hundred (700) pounds per square inch ("psig"). 2. The points of Delivery for withdrawals from storage, and the maximum quantities and character of service for each point, shall be as set forth below. Each of the parties will use due care and diligence to assure that Points as reasonably may be required to render service hereunder, but Pipeline will not be required to deliver gas at greater than the maximum pressures specified herein. a. Up to 6,667 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern, in Fayette County, Pennsylvania, known as the North Summit Interconnection, at a pressure of not more than one thousand (1,000) psig. b. Up to 6,667 Dt per Day at an existing point of interconnection between the facilities of Pipeline and Texas Eastern, in Greene County, Pennsylvania, known as the Crayne Interconnection, on an interruptible basis if operating conditions permit, at a pressure of not more than eight hundred sixty-five (865) psig. c. Up to 6,667 Dt per Day at the interconnection of the facilities of Pipeline and Texas Eastern or other pipeline(s) in Westmoreland County, Pennsylvania, known as the Oakford Interconnection, on an interruptible basis if operating conditions permit, at a pressure of not less than eight hundred fifty (850) psig. 3. Pipeline shall deliver on a firm basis up to Customer's Storage Demand, as adjusted pursuant to Section 8 of Rate Schedule GSS-II and Article V of this Service Agreement. EX-10 6 This Contract is made as of the 1st day of December, 1994, by and between TENNESSEE GAS PIPELINE COMPANY, a Delaware corporation herein called "Transporter," and THE SOUTHERN CONNECTICUT GAS CO, a CONNECTICUT Corporation, herein called "Shipper." Transporter and Shipper collectively shall be referred to herein as the "Parties." ARTICLE I - SCOPE OF AGREEMENT Following the commencement of service hereunder, in accordance with the terms of Transporter's Rate Schedule FS, and of this Agreement, Transporter shall receive for injection for Shipper's account a daily quantity of gas up to Shipper's Maximum Injection Quantity of 8,208 dekatherms (Dth) and Maximum Storage Quantity (MSQ) of 1,231,189 (Dth) (on a cumulative basis) and on demand shall withdraw from Shipper's storage account and deliver to Shipper a daily quantity of gas up to Shipper's Maximum Daily Withdrawal Quantity (MDWQ) of 13,679 Dth; provided however, that when Shipper's storage balance is equal to or less than 30% of the MSQ but greater than 20% of the MSQ, the Maximum Daily Withdrawal Quantity shall be 11,797 Dth; and provided further, that when Shipper's storage balance is less than or equal to 20% of the MSQ, the Maximum Daily Withdrawal Quantity shall be 9,408 Dth. For demand charge purposes, the MDWQ for balances greater than 30% of the MSQ shall be used. ARTICLE II - SERVICE POINT The point or points at which the gas is to be tendered for delivery by Transporter to Shipper under this Agreement shall be at the storage service point at Transporter's Compressor Station 313. ARTICLE III - PRICE 1. Shipper agrees to pay Transporter for all natural gas storage service furnished to Shipper hereunder, including compensation for system fuel and losses, at Transporter's legally effective rate or at any effective superseding rate applicable to the type of service specified herein. Transporter's present legally effective rate for said service is contained in Transporter's Tariff as filed with the Federal Energy Regulatory Commission. 2. Shipper agrees to reimburse Transporter for any filing or similar fees, which have not been previously paid by Shipper, which Transporter incurs in rendering service hereunder. 3. Shipper agrees that Transporter shall have the unilateral right to file with the appropriate regulatory authority and make changes effective in (a) the rates and charges applicable to service pursuant to Transporter's Rate Schedule FS, (b) the rate schedule(s) pursuant to which service hereunder is rendered, or (c) any provision of the General Terms and Conditions applicable to those rate schedules. Transporter agrees that Shipper may protest or contest the aforementioned filings, or may seek authorization from duly constituted regulatory authorities for such adjustment of Transporter's existing FERC Gas Tariff as may be found necessary to assure Transporter just and reasonable rates. ARTICLE IV - INCORPORATION OF RATE SCHEDULE AND TARIFF PROVISIONS This agreement shall be subject to the terms of Transporter's Rate Schedule FS, as filed with the Federal Energy Regulatory Commission, together with the General Terms and Conditions applicable thereto (including any changes in said Rate Schedule or General Terms and Conditions as may from time to time be filed and made effective by Transporter). ARTICLE V - TERM OF AGREEMENT This Agreement shall be effective as of the December 1, 1994, and shall remain in force and effect until November 1, 2000, ("Primary Term") and on a month-to- month basis thereafter unless terminated by either Party upon at least thirty (30) days prior written notice to the other Party; provided, however, that if the Primary Term is one year or more, then unless Shipper elects upon one year's prior written notice to Transporter to request a lesser extension term, the Agreement shall automatically extend upon the expiration of the Primary Term for a term of five years; and shall automatically extend for successive five year terms thereafter unless Shipper provides notice described above in advance of the expiration of a succeeding term; provided further, if the FERC or other governmental body having jurisdiction over the service rendered pursuant to this Agreement authorizes abandonment of such service, this Agreement shall terminate on the abandonment date permitted by the FERC or such other governmental body. This Agreement will terminate upon notice from Transporter in the event Shipper fails to pay all of the amount of any bill for service rendered by Transporter hereunder in accordance with the terms and conditions of Article VI of the General Terms and Conditions of Transporter's Tariff. ARTICLE VI - NOTICES Except as otherwise provided in the General Terms and Conditions applicable to this Agreement, any notice under this Agreement shall be in writing and mailed to the post office address of the Party intended to receive the same, as follows: TRANSPORTER: TENNESSEE GAS PIPELINE COMPANY P. O. Box 2511 Houston, Texas 77252-2511 Attention: Transportation Services SHIPPER: NOTICES: THE SOUTHERN CONNECTICUT GAS CO 855 MAIN STREET P.O. BOX 1540 BRIDGEPORT, CT 06601 Attention: Daniel F. Commella BILLING: THE SOUTHERN CONNECTICUT GAS CO 855 MAIN STREET P.O. BOX 1540 BRIDGEPORT, CT 06601 Attention: Daniel F. Commella or to such other address as either Party shall designate by formal written notice to the other. ARTICLE VII - ASSIGNMENT Any company which shall succeed by purchase, merger or consolidation to the properties, substantially as an entirety, of Transporter or of Shipper, as the case may be, shall be entitled to the rights and shall be subject to the obligations of its predecessor in title under this Agreement. Otherwise no assignment of the Agreement or any of the rights or obligations thereunder shall be made by Shipper, except pursuant to the General Terms and Conditions of Transporter's FERC Gas Tariff. It is agreed, however, that the restrictions on assignment contained in this Article shall not in any way prevent either Party to the Agreement from pledging or mortgaging its rights thereunder as security for its indebtedness. ARTICLE VIII - MISCELLANEOUS 8.1 The interpretation and performance of this Agreement shall be in accordance with and controlled by the laws of the State of Texas, without regard to doctrines governing choice of law. 8.2 If any provision of this Agreement is declared null and void, or voidable, by a court of competent jurisdiction, then that provision will be considered severable at either Party's option; and if the severability option is exercised, the remaining provisions of the Agreement shall remain in full force and effect. 8.3 Unless otherwise expressly provided in this Agreement or Transporter's Tariff, no modification of or supplement to the terms and provisions stated in this Agreement shall be or become effective until Shipper has submitted a request for change through the TENN-SPEED 2 System and Shipper has been notified through TENN-SPEED 2 of Transporter's agreement to such change. 8.4 Transporter and Shipper agree that this Agreement, as of the date hereof, shall supersede and cancel the Gas Storage Contract Number 636, dated September 1, 1993 between the Parties hereto. IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their authorized agents. TENNESSEE GAS PIPELINE COMPANY BY:______________________________ Agent and Attorney-in-Fact THE SOUTHERN CONNECTICUT GAS CO BY ___________________________ TITLE ___________________________ DATE ___________________________ GAS STORAGE SERVICE AGREEMENT EXHIBIT "A" TO FIRM GAS STORAGE SERVICE AGREEMENT DATED DECEMBER 1, 1994 BETWEEN TENNESSEE GAS PIPELINE COMPANY AND THE SOUTHERN CONNECTICUT GAS CO SERVICE PACKAGE MSQ: 1,231,189 MAXIMUM DAILY INJECTION QUANTITY: 8,208 Dth MAXIMUM DAILY WITHDRAWAL QUANTITY (MDWQ): Storage Balance Storage Balance Maximum Daily Withdrawal From Dth To Dth Quantity Dth - --------------- --------------- ------------------------ 369,358 1,231,189 13,679 Ratchet 0 246,239 369,357 11,797 Ratchet 1 0 246,238 9,408 Ratchet 2 SERVICE POINT: Compressor Station 313 INJECTION METER: 060018 TGP-NORTHERN STORAGE INJECTION WITHDRAWAL METER: 070018 TGP-NORTHERN STORAGE WITHDRAWAL Storage Storage Balance Balance MDIQ Meter Meter Name County ST Zone I/W LEG From To MDWQ - ----- ---------- ------ -- ---- --- --- ------- ------- ---- 060018 TGP - Northern Storage Injection Potter PA 04 I 300 8,208 070018 TGP - Northern Storage Withdrawal Potter PA 04 W 300 369,358 1,231,189 13,679 Ratchet 0 246,239 369,357 11,797 Ratchet 1 0 246,238 9,408 Ratchet 2
EX-10 7 AMENDED AND RESTATED DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made as of the 8th day of November, 1996 and amends and restates effective as of the date of execution hereof, the Deferred Compensation Agreement dated as of the 17th day of January, 1989 and amended as of the 24th day of March, 1992, and the 21st day of October, 1993 by and between THE SOUTHERN CONNECTICUT GAS COMPANY, a Connecticut corporation with a principal place of business at 855 Main Street, Bridgeport, Connecticut 06604 ("Southern"), and CONNECTICUT ENERGY CORPORATION, a Connecticut corporation with a principal place of business at 885 Main Street, Bridgeport, Connecticut 06604 (the "Corporation") and J.R. CRESPO, of 560 Hulls Highway, Southport, Connecticut 06490 (the "Executive"). WHEREAS, the Corporation has employed the Executive as the President and Chief Executive Officer of its wholly owned subsidiary, Southern, since January 17, 1989, as President and Chief Executive Officer of the Corporation since April 18, 1989, and as Chairman of the Board of Directors of Southern and the Corporation since April 24, 1990; and WHEREAS, to induce the Executive to remain in its employment, the Corporation deems it appropriate to give certain further assurances with respect to compensation to be deferred and become payable upon the termination of the Executive's employment with the Corporation; NOW, THEREFORE, it is hereby agreed as follows: 1. Definitions. The following terms when used herein with initial capital letters shall, unless the context clearly requires to the contrary, have the meanings assigned to them below: (a) "Annual Compensation" means annual base pay in effect at the time in question plus incentive compensation in the amount most recently previously received by the Executive. (b) "Cause", for purposes of the Employment Agreement dated March 24, 1992 among the Executive, the Corporation and Southern, Means the Executive's gross negligence, willful misconduct or conviction of a felony, which negligence, misconduct or conviction has a demonstrable and material adverse affect upon the Corporation or Southern, provided that the Corporation or Southern shall have given the Executive written notice of the alleged negligence or misconduct and the Executive shall have failed to cure such negligence or misconduct within 30 days after his receipt of such notice. The Executive shall be deemed to have been terminated for Cause effective upon the effective date stated in a written notice of such termination delivered by the Corporation or Southern to the Executive and accompanied by the resolution duly adopted by the affirmative vote of not less than 2/3 of the entire membership of the Board of Directors of the Corporation or Southern at a meeting of said Board (after reasonable notice to the Executive and an opportunity for the Executive, with his counsel present, to be heard before the Board) finding that, in the good faith opinion of the Board of Directors of the Corporation or Southern, the Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive's termination, provided that the effective date shall not be less than 30 days from the date such notice is given. (c) "Change in Control" of the Corporation shall be deemed to have occurred if: (i) Any Person is or becomes an Acquiring Person; (ii) Less than 2/3 of the total membership of the Board of Directors of the Corporation shall be Continuing Directors; or (iii) The shareholders of the Corporation shall approve a merger or consolidation of the Corporation or a plan of complete liquidation of the Corporation or an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets. In connection with the preceding definition of "Change in Control", the capitalized terms therein are defined as follows: (iv) "Acquiring Person" means any Person who is or becomes a "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Corporation representing 20% or more of the combined voting power of the Corporation's then outstanding voting securities, unless such person has filed Schedule 13G and all Required amendments thereto with respect to its holdings and continues to hold such securities for investment in a manner qualifying such Person to utilize Schedule 13G for reporting of ownership. (v) "Affiliate" and "Associate" shall have the respective meaning ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect as of the date hereof. (vi) "Continuing Directors" means any member of the Board of Directors of the Corporation who was a member of said Board prior to the date hereof and any successor of a Continuing Director while such successor is a member of the Board of Directors of the Corporation who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person and who is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors. (vii) "Person" shall have the meaning assigned to it in Section 13(d) and 14(d) of the Exchange Act. (d) "Disability" means the Executive's permanent disability as evidenced by the Executive's inability by reason or physical or mental impairment or illness to fulfill his obligation hereunder for the reasonably foreseeable future, as determined by the Board of Directors of Southern and the Company after considering all relevant medical evidence. (e) "Final Average Annual Pay" means the total base pay plus incentive compensation paid to the Executive in those 60 consecutive months out of the 120 months (or such shorter period as shall have elapsed since the Executive's date of hire) immediately preceding a Termination of Employment in which the Executive's pay and compensation was the highest, divided by five (or the lesser number of years, to the nearest 1/12th, since the Executive's date of hire). (f) "Good Reason", for purposes of the Employment Agreement dated March 24, 1992 among the Executive, the Corporation and Southern, means: (i) An adverse change in the Executive's status, duties or responsibilities as an Executive of the Corporation or Southern; (ii) Failure of the Corporation or Southern to pay or provide the Executive in a timely fashion the salary or benefits to which he is entitled under any Employment Agreement between the Corporation or Southern and the Executive then in effect or under any benefit plans or policies in which the Executive was then participating (including, without limitation, any incentive, bonus, stock option, restricted stock, health, accident, disability, life insurance, thrift, vacation pay, deferred compensation and retirement plans or policies); (iii) The reduction of the Executive's salary (except in connection with a uniform and general reduction of salaried employee's compensation effected by the Corporation or Southern); (iv) The taking of any action by the Corporation or Southern (including the elimination of a plan without providing substitutes therefore, the reduction of the Executive's awards thereunder or failure to continue the Executive's participation therein) that would substantially diminish the aggregate projected value of the Executive's awards or benefits under the Corporation's or Southern's benefit plans or policies described in Section 1(f)(ii) in which the Executive was then participating; provided, however, that the Board of Directors may determine at any time to discontinue Southern's Management Incentive Compensation Plan for years beginning January 1, 1990 and thereafter. The Executive further acknowledges that awards under such Plan may vary from year to year and that, under the terms of such Plan, no awards or reduced awards may be made in any particular year. (v) A failure by the Corporation or Southern to obtain from any successors the assent to this Agreement contemplated by Section 12 hereof; or (vi) The relocation of the principal office at which the Executive is to perform his services on behalf of the Corporation or Southern to a location outside the State of Connecticut or a substantial increase in the Executive's business travel obligations. Any circumstances described in this Section 1(f) shall constitute Good Reason even if such circumstances would not constitute a breach by the Corporation or Southern of the terms of the Employment Agreement among the Corporation, Southern and the Executive then in effect. The Executive shall be deemed to have terminated his employment for Good Reason effective upon the effective date stated in a written notice of such termination given by him to the Corporation and Southern setting forth in reasonable detail the facts and circumstances claimed to provide the basis for termination, provided that the effective date may not precede, nor be more than 60 days from, the date such notice is given. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (g) "Qualifying Surviving Spouse" means the Executive's widow to whom he has been married for more than one year at the time of benefit payment commencement pursuant to this Agreement. (h) "SCG Pension Plan Benefit" means the benefit payable to the Executive pursuant to the provisions of the SCG Pension Plan. "SCG Pension Plan" collectively means The Southern Connecticut Gas Company Pension Plan for Salaried Employees, as amended from time to time, and The Southern Connecticut Gas Company Benefit Equalization Plan, as amended from time to time. 2. Term of Agreement. The term of this Agreement shall be coterminous with the term of the Executive's Employment Agreement with the Corporation and Southern entered into March 24, 1992 and, unless this Amended and Restated Agreement is expressly amended or rescinded, upon any extension or renewal of the Executive's employment by the Corporation and Southern, the term hereof shall continue during the Executive's continued employment by the Corporation and Southern. 3. Compensation upon Termination of Employment. The Executive shall be entitled to receive compensation ("Deferred Compensation") following the termination of his employment with the Corporation and Southern unless such termination shall be by reason of the Executive's death. (The phrase "Termination of Employment" is hereinafter used to describe a termination of employment other than death.) The annual Deferred Compensation payable in equal monthly installments of 1/12 of the annual amount for the Executive's life, commencing on the first day of the month following the Termination of Employment, shall be the percentage of the Executive's Final Average Annual Pay specified below for the Executive's Age at Termination (augmented, if appropriate, by 5 years, as provided in subparagraph (b) below)(subject to the Executive's right to elect an actuarial equivalent form of benefit as provided in subparagraph (a) (ii) below) reduced by the SCG Pension Plan Benefit the Executive is entitled to receive at the earliest permissible commencement date of such benefits. The Executive is not required to elect commencement of his SCG Pension Benefits prior to his attainment of age 65, even though Deferred Compensation becomes payable pursuant to this Agreement at an earlier age, but the Deferred Compensation payable pursuant hereto shall be reduced without regard to the Executive's actual receipt of such benefits. Prior to the earliest permissible commencement date of SCG Pension Plan Benefits, the Deferred Compensation payable hereunder shall not be reduced. (a) In the event of a Termination of Employment for reasons other than the Executive's disability or Change in Control: (i) the following amount is payable: Annual Deferred Compensation Amount Age at Payable as a Percentage of Termination Final Average Annual Pay ----------- ------------------------ 62 or later 65% 61 63% 60 60% 59 58% 58 56% 57 55% 56 53% 55 50% 54 44% 53 38% The percentages will be interpolated for termination at other than the Executive's birthday. (ii) In lieu of the applicable payments for the life of the Executive specified in the preceding paragraph (i), the Executive may elect to have the Deferred Compensation paid as an actuarial equivalent payment to the Executive with a percentage (not less than 50% nor more than 100%) of such amount payable to the Executive's Qualifying Surviving Spouse for her life; provided, however, that the Executive may so elect without Southern's prior written consent only if the Executive's SCG Retirement Benefit is also payable in the form of a joint and survivor annuity providing payment of a similar percentage of the Executive's benefit to his Qualifying Surviving Spouse. Actuarial equivalence shall be determined on the same basis as the SCG Pension Plan. (b) In the event of a Change of Control, the Executive shall be entitled to the Deferred Compensation described in paragraph (a) but the amount shall be determined based upon his actual age at termination plus five (5) years. (c) If the Executive's employment is terminated by reason of the Executive's Disability, the Executive shall be entitled to receive a benefit from the date of such Disability to the Executive's 65th birthday in an amount equal to 60% of the Executive's Annual Compensation at the time of his termination by reason of Disability, which disability benefit shall be reduced by SCG Pension Plan and social security benefits (if any) paid to the Executive by reason of the Executive's Disability. Upon attainment of age 65, the Executive shall be entitled to annual Deferred Compensation as provided in paragraph 3(a)(i) for termination after age 62, commencing on the first day of the month following his 65th birthday, based on his Final Average Annual Pay at the time of this Termination of Employment by reason of Disability. 4. Life Insurance and Death Benefits. If the Executive is insurable at standard rates at the time such coverage is sought, and provided that the premium cost is deductible by Southern and payment thereof does not jeopardize either the deductibility of premiums paid by Southern for life insurance on other employees or the exclusion of the cost thereof from the taxable income of such other employees, Southern will obtain and pay the premiums on guaranteed renewable term life insurance on the Executive during his continued employment by Southern in an amount equal to the difference between coverage provided under Southern's group life insurance for salaried employees and 2 1/2 times the Executive's Annual Compensation from time to time in effect. Southern shall not, however, be obligated hereunder to increase the Executive's coverage more frequently than once in any 12 consecutive month period. The Executive may designate the beneficiary of such insurance in his discretion. If the Executive is not insurable at standard rates upon commencement of employment, no coverage need be provided under this Section 4. If the Executive becomes uninsurable at standards rates after coverage is effected under this Section 4, only coverage obtained prior to the Executive's uninsurability (including renewal, extension or coverage increase privileges included in such coverage) need be provided by Southern. Southern may require the Executive to bear the cost of any such renewal, extension, or coverage increase privilege in excess of standard rates. The Executive shall be responsible for the payment of personal income taxes imposed upon him by reason of his receipt of the coverage provided pursuant to this Section 4. 5. Vesting. The interest of the Executive in any benefit accrued hereunder shall be fully vested and nonforfeitable at all times. 6. Funding and Trust Accounts. (a) Neither the Corporation nor Southern shall be required to fund or otherwise segregate assets for the payment of Deferred Compensation under this Agreement. Notwithstanding the foregoing, however, as soon as practicable after October 21, 1993, Southern shall establish a trust fund (or amend an existing trust fund) (the "Trust"). Southern shall calculate the amount of Deferred Compensation expected to be payable under this agreement. Each year thereafter, Southern shall contribute an amount that it determines to be sufficient to actuarially fund the Deferred Compensation expected to be paid under this Agreement. Southern shall update its calculation of the expected Deferred Compensation and review such funding levels once a year as of January 1 and, if needed to maintain the funding on a sound actuarial basis, increase or decrease the level of such funding. (b) The Trust shall be a "rabbi trust" and shall be embodied in a trust agreement with an institutional trustee (the "Trustee"). Deferred Compensation shall be paid from the funds in the "rabbi trust" by the Trustee to the extent not paid by Southern. The Trustee shall establish an account (an "Account") for this Agreement which shall be credited annually with the contributions to be made pursuant to preceding paragraph and with earnings attributable thereto, including realized and unrealized investment gains and losses. The establishment of the Account is solely for accounting and funding purposes and shall not otherwise restrict the use of the funds in the Trust. 7. Notices. Any notices required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given when delivered, or when mailed, if mailed by registered or certified mail, return receipt requested, to the respective addresses of the parties set forth above, or to such other address as any party hereto shall designate to the other party in writing pursuant to the terms of this Section 7. 8. Severability. The provisions of this Agreement are severable, and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of any other provision. 9. Governing Law. This Amended and Restated Agreement shall be governed by and interpreted in accordance with the substantive of laws of the State of Connecticut. 10. Supersedure. This Amended and Restated Agreement shall cancel and supersede all prior agreements relating to the payment of deferred compensation between the Executive and the Corporation and Southern, except the Employment Agreement executed as of the 24th day of March, 1992. 11. Waiver of Breach. The waiver by a party of a breach of any provision of this Amended and Restated Agreement shall not operate or be construed as a waiver of any prior or subsequent breach by any of the parties hereto. 12. Binding Agreement. This Amended and Restated Agreement shall inure to the benefit of and be enforceable by the Executive, his heirs, executors, administrators, successors and assigns. This Amended and Restated Agreement shall be binding upon the Corporation, Southern and their successors and assigns. The Corporation and Southern shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation and Southern expressly to assume and agree to perform this Amended and Restated Agreement in accordance with its terms. The Corporation and Southern shall obtain such assumption and agreement prior to the effectiveness of any succession. 13. Arbitration. If the Executive so elects, any dispute or controversy arising under or in connection with this Amended and Restated Agreement shall be settled exclusively by arbitration in the city nearest to the Executive's principal residence which has an office of the American Arbitration Association, by one arbitrator in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The Corporation and Southern hereby waive their right to contest the personal jurisdiction or venue of any court, federal or state, in an action brought to enforce this Agreement or any award of an arbitrator hereunder which action is brought in the jurisdiction in which such arbitration could have been conducted pursuant to this provision. 14. Executive's Expenses. The Corporation and Southern, or the successor of either of such companies, shall pay or reimburse the Executive (or, if appropriate, his Qualified Surviving Spouse) for all costs, including reasonable attorney's fees and expenses of litigation and arbitration, incurred by the Executive (or his Qualified Surviving Spouse) in successfully contesting or disputing any action taken by the Corporation and Southern, or the successor of either of such companies, purportedly pursuant to this Amended and Restated Agreement or in successfully seeking to obtain or enforce any right or benefit provided by this Amended and Restated Agreement. 15. Counterparts. This Amended and Restated Agreement may be executed in one or more counterparts; each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated Agreement to be executed as of the day and year first above written. CONNECTICUT ENERGY CORPORATION By______________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating and Salary Committee THE SOUTHERN CONNECTICUT GAS COMPANY By______________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating and Salary Committee EXECUTIVE By______________________________________ J. R. Crespo EX-10 8 AGREEMENT THIS AGREEMENT, made as of the 1st day of October, 1996, by and among The Southern Connecticut Gas Company, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("Southern"), and Connecticut Energy Corporation, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("the Company"), and Carol A. Forest, an individual residing at 157 Old Dyke Road, Trumbull, Connecticut 06611 (the "Executive"). WHEREAS, Executive serves as Vice President, Finance, Chief Financial Officer and Treasurer of the Company and Southern; and WHEREAS, Southern and the Company seek to retain Executive in these positions; and WHEREAS, Executive desires to continue his/her employment with Southern and the Company in accordance with the terms set forth below; NOW, THEREFORE, in consideration of the remuneration and other benefits to be provided by Southern and the Company and the services to be provided by Executive, and in consideration of other mutual promises herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following terms when used herein with initial capital letters shall, unless the context clearly requires to the contrary, have the meanings assigned to them below: (a) "Cause" means the Executive's gross negligence, willful misconduct or conviction of a felony, which negligence, misconduct or conviction has a demonstrable and material adverse affect upon the Company or Southern, provided that the Company or Southern shall have given the Executive written notice of the alleged negligence or misconduct and the Executive shall have failed to cure such negligence or misconduct within 30 days after his/her receipt of such notice. The Executive shall be deemed to have been terminated for Cause effective upon the effective date stated in a written notice of such termination delivered by the Company or Southern to the Executive and accompanied by the resolution duly adopted by the affirmative vote of not less than 2/3 of the entire membership of the Board of Directors of the Company or Southern at a meeting of said Board (after reasonable notice to the Executive and an opportunity for the Executive, with his/her counsel present, to be heard before the Board) finding that, in the good faith opinion of the Board of Directors of the Company or Southern, the Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive's termination, provided that the effective date shall not be less than 30 days from the date such notice is given. (b) "Change in Control" of the Company shall be deemed to have occurred if: (i) Any Person is or becomes an Acquiring Person; (ii) Less than 2/3 of the total membership of the Board of Directors of the Company shall be Continuing Directors; or (iii) The shareholders of the Company shall approve a merger or consolidation of the Company or a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. In connection with the preceding definition of "Change in Control", the capitalized terms therein are defined as follows: (iv) "Acquiring Person" means any Person who is or becomes a "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding voting securities, unless such person has filed Shedule 13G and all required amendments thereto with respect to its holdings and continues to hold such securities for investment in a manner qualifying such Person to utilize Schedule 13G for reporting of ownership. (v) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect as of the date hereof. (vi) "Continuing Directors" means any member of the Board of Directors of the Company who was a member of said Board prior to the date hereof and any successor of a Continuing Director while such successor is a member of the Board of Directors of the Company who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person and who is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors. (vii) "Person" shall have the meaning assigned to it in Section 13(d) and 14(d) of the Exchange Act. (c) "Good Reason" means: (i) An adverse change in the Executive's status, duties or responsibilities as an Executive of the Company or Southern; (ii) Failure of the Company or Southern to pay or provide the Executive in a timely fashion the salary or benefits to which he is entitled under any Employment Agreement between the Company or Southern and the Executive then in effect or under any benefit plans or policies in which the Executive was then participating (including, without limitation, any incentive, bonus, stock option, restricted stock, health, accident, disability, life insurance, thrift, vacation pay, deferred compensation and retirement plans or policies); (iii) The reduction of the Executive's salary (except in connection with a uniform and general reduction of salaried employees' compensation effected by the Company or Southern); (iv) The taking of any action by the Company or Southern (including the elimination of a plan without providing substitutes therefore, the reduction of the Executive's awards thereunder or failure to continue the Executive's participation therein) that would substantially diminish the aggregate projected value of the Executive's awards or benefits under the Company's or Southern's benefit plans or policies described in Section 1(c)(ii) in which the Executive was then participating; provided, however, that the Board of Directors may determine at any time to discontinue Southern's Management Incentive Compensation Plan. The Executive further acknowledges that awards under such Plan may vary from year to year and that, under the terms of such Plan, no awards or reduced awards may be made in any particular year. (v) A failure by the Company or Southern to obtain from any successors the assent to this Agreement contemplated by Section 12 hereof; or (vi) The relocation of the principal office at which the Executive is to perform his/her services on behalf of the Company or Southern to a location outside the State of Connecticut or a substantial increase in the Executive's business travel obligations. The Executive shall be deemed to have terminated his/her employment for Good Reason effective upon the effective date stated in a written notice of such termination given by him/her to the Company and Southern setting forth in reasonable detail the facts and circumstances claimed to provide the basis for termination, provided that the effective date may not precede, nor be more than 60 days from, the date such notice is given. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (d) "Qualifying Surviving Spouse" means the Executive's widow to whom he has been married for more than one year at the time of benefit payment commencement pursuant to this Agreement. 2. EMPLOYMENT: Southern and the Company shall employ Executive and Executive hereby accepts such employment upon the terms and conditions hereinafter set forth. 3. TERM OF EMPLOYMENT: The term of this Agreement shall begin on October 1, 1996, and shall continue thereafter until terminated by either party by written notice given to the other party at least thirty (30) days prior to the effective date of any such termination. The effective date of the termination shall be the date stated in such notice, provided that if the Company or Southern specifies an effective date that is more than thirty (30) days following the date of such notice, the Executive may, upon thirty (30) days' written notice to the Company or Southern, accelerate the effective date of such termination. 4. COMPENSATION: For all services rendered by Executive under this Agreement, Southern shall pay Executive an annual base salary, payable at such times as is customary for Southern to pay its officers, in such amount as Southern's Board of Directors shall establish from time to time. Executive's base salary is subject to upward or downward revision by the Board of Directors at such time as the Board generally increases or reduces the salary rates of other officers of Southern. Executive shall also participate in Southern's Management Incentive Compensation Plan (the "Plan") for such years as the Board of Directors determines the Plan shall be in effect. Executive shall be entitled to any other benefits available to officers and employees of Southern generally. 5. CHANGE IN CONTROL: If a Change in Control of the Company shall have occurred, and Executive's employment by the Company or Southern is terminated effective as of a date within three (3) years after the date of such Change in Control for any reason other than (1) his/her death, (2) his/her Disability, (3) his/her retirement on his/her Normal Retirement Date, (4) by the Company for Cause, or (5) by Executive without Good Reason, Executive shall be under no further obligation to perform services for the Company or Southern and shall be entitled to receive the following payments: (a) The Company or Southern shall pay to Executive his/her full base salary through the effective date of the termination within five (5) business days thereafter and all benefits and awards (including both the cash and stock components) to which Executive is entitled under any benefit plans or policies in which he was a participant prior to the Change in Control, at the time such payments are due pursuant to the terms of such benefit plans or policies as in effect immediately prior to the Change in Control. (b) In addition to the entitlements set forth in Section 3(a), the Company or Southern shall pay to Executive, in a lump sum not later than ten (10) business days following the effective date of the termination: (i) an amount equal to three (3) times Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control; (ii) an amount equal to three (3) times the greater of (A) the highest amount of the actual bonus awarded to Executive in the five (5) fiscal years immediately preceding the year in which the Change in Control occurred or (B) an amount equal to the amount Executive would have been awarded under the Company's bonus plan in effect immediately prior to the Change in Control for the fiscal year in which the Change of Control occurred had he continued to render services to the Company at the same level of performance, at the same level of salary, and in the same position as immediately prior to the Change in Control; (iii) an amount equal to three (3) times the greater of (A) the largest annual contribution made by Southern (or the Company, or by both) to The Southern Connecticut Gas Company TARGET Plan for Salaried and Certain Other Executives on Executive's behalf during the five (5) fiscal years immediately preceding the year in which the Change of Control occurred or (B) an amount equal to the contribution the Company would have made to said Plan on his/her behalf for the fiscal year in which the Change of Control occurred had he participated in said Plan for the entire fiscal year, received a base salary equal to the salary he was receiving immediately prior to the Change in Control and had he elected to contribute to the Plan the same percentage of his/her base salary as he was contributing on said date; and (iv) an amount equal to thirty five percent (35%) of Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control (as compensation for medical, life insurance and other benefits lost as a result of termination of his/her employment). (v) If a payment may be increased by reference to an alternate calculation which cannot be made by the time the payment is due, payment of the lesser known amount shall be made when due, and if any additional amount becomes due, such additional amount shall be paid within ten (10) days after the information upon which calculation of such payment is dependent first becomes available. The amount of all payments due to Executive pursuant to this Section 5(b) shall be reduced by four percent (4%) for each full calendar month by which the date which is two (2) years from the effective date of the Executive's termination extends beyond his/her Normal Retirement Date (as that term is defined in The Southern Connecticut Gas Company Pension Plan for Salaried Employees). Upon entering into this Agreement and for a period of fourteen (14) days following each anniversary of the date hereof (the "Election Period"), the Executive may, in writing, direct the Company or Southern to pay any amounts to which he is entitled under this Section 5(b) in five (5) equal annual installments, with the first such installment payable within ten (10) business days of the effective date of the termination and each successive installment payable on the anniversary of the effective date of the termination or the next following business day if such date is not a business day (the "Deferred Payment Election"). A Deferred Payment Election, once made, cannot be revoked except during an Election Period; provided, however, no Deferred Payment Election can be made or revoked by Executive during an Election Period that occurs after a Change in Control or at a time when, in the judgment of the Company, a Change in Control may occur within sixty (60) days of such Election Period. (c) The Company or Southern shall pay or provide to Executive, or his/her widow or children as the case may be, such amounts and benefits as may be required so that the pension and other post-retirement benefits paid or made available to him/her, his/her widow and his/her children are equal to those, if any, which would have been paid under The Southern Connecticut Gas Company Pension Plan for Salaried Executives as in effect immediately prior to the Change in Control, assuming Executive continued in the employ of the Company or Southern at the same salary until the third anniversary of the effective date of the termination of his/her employment or until his/her Normal Retirement Date, whichever is earlier. (d) Executive shall not be required to mitigate the amount of any payment provided in this Section 5, nor shall any payment or benefit provided for in this Section 5 be offset by any compensation earned by him/her as the result of employment by another employer, by retirement benefits, or by offset against any amount claimed to be owed by the Executive to the Company or Southern, or otherwise. (e) If any payment to Executive required by this Section 5 is not made within the time for such payment specified herein, the Company or Southern shall pay to him/her interest on such payment at the legal rate payable from time to time upon judgments in the State of Connecticut from the date such payment is payable under the terms hereof until paid. (f) If any payment or benefit to Executive provided for in this Agreement is subject to the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended, (which tax, together with any similar tax hereafter imposed is referred to in this Agreement as the "Excise Tax") the Company or Southern shall pay to him/her an additional amount such that the total amount of the payments to or for the benefit of Executive under this Agreement (including payments made pursuant to this Section 5(f)), net of the Excise Tax and all other applicable federal, state and local taxes shall equal the total amount of the payments and benefits to which Executive would have been entitled under this Agreement but for this Section 5(f), net of all applicable federal, state and local taxes except the Excise Tax. The amount of the payment to Executive under this Section 5(f) shall be estimated by the Company's independent auditors based upon the following assumptions: (i) All payments to Executive under this Agreement and all other payments and benefits to him/her in connection with a Change in Control of the Company shall be deemed to be "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" shall be deemed to be subject to the Excise Tax unless, in the written opinion of tax counsel selected by the Company's independent auditors, (a signed copy of which opinion shall be delivered to Executive) such payment or benefits are not subject to the Excise Tax; (ii) Except to the extent that the total of the payments and benefits to Executive under this Agreement exceeds the total of the "excess parachute payments" made to him/her, no such payments or benefits shall be deemed to be part of the "base amount" within the meaning of Section 280G(b)(3) of the Code; and (iii) Executive shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year. The estimated amount of the payment due to Executive pursuant to this Section 5(f) shall be paid to him/her in a lump sum not later than thirty (30) business days following the effective date of termination. In the event that the amount of the estimated payment is less than the amount actually due to him/her under this Section 5(f), the amount of any such shortfall shall be paid to him/her within ten (10) days after the existence of the shortfall is discovered. 6. DUTIES: Executive shall serve as in such capacities and with such titles as may be assigned to him/her by the Board of Directors of Southern and the Company, and shall assume such duties as the Board of Directors of Southern and the Company shall assign to him/her. 7. TERMINATION: Subject to the applicable provisions of Section 5 of this Agreement, Executive's employment pursuant to this Agreement may be terminated by Southern or the Company on thirty (30) days written notice at any time, with or without Cause. Executive's term of employment shall also terminate upon his/her death or permanent disability. Such terminations shall not constitute a termination of employment without Cause for purposes of Section 5 of this Agreement. Permanent disability shall mean Executive's inability by reason of physical or mental impairment or illness to fulfill his/her obligation hereunder for the reasonably foreseeable future, as determined by the Board of Directors of Southern and the Company after considering all relevant medical evidence. 8. AMENDMENT: Amendment of the terms of this Agreement shall not be valid unless made in writing and signed by duly authorized representatives of Southern and the Company and by Executive. 9. EXECUTIVE'S EXPENSES: The Company and Southern, or the successor of either of such companies, shall pay or reimburse Executive (or, if appropriate, his/her Qualified Surviving Spouse) for all costs, including reasonable attorney's fees and expenses of litigation and arbitration, incurred by Executive (or his/her Qualified Surviving Spouse) in successfully contesting or disputing any action taken by the Company and Southern, or the successor of either of such companies, purportedly pursuant to Section 5 of this Employment Agreement or in successfully seeking to obtain or enforce any right or benefit provided by Section 5 of this Employment Agreement. 10. NOTICES: Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered or sent by registered or certified mail postage prepaid, properly addressed (if to Executive, at his/her residence address as then reflected in the Company's personnel records; if to Southern and the Company, at 855 Main Street, Bridgeport, Connecticut 06604, Attention: Vice President, Human Resources or at such other address as the executive offices of the Company may be located), return receipt requested, and shall be deemed given as of the date of delivery or personally delivered or of mailing if properly mailed. 11. WAIVER OF BREACH: The waiver by Southern or the Company of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any prior or subsequent breach by Executive. 12. INTEGRATION: This Agreement shall be the sole and exclusive Agreement among Southern, the Company, and Executive, and any other agreements or arrangements among them are hereby superseded, canceled, and made void and of no effect. 13. BINDING AGREEMENT: This Agreement shall inure to the benefit of and be enforceable by Executive, his/her heirs, executors, administrators, successors, and assigns. This Agreement shall be binding upon the Company, Southern and their successors and assigns. The Company and Southern shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company and Southern expressly to assume and agree to perform this Agreement in accordance with its terms. The Company and Southern shall obtain such assumption and agreement prior to the effectiveness of any succession. The obligations of this Agreement may not be assigned by Executive. 14. COUNTERPARTS: This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15. CHOICE OF LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut (except that, if application of Connecticut's choice of law rules would result in this Agreement being governed, construed or interpreted in accordance with the substantive law of a jurisdiction other than Connecticut, Connecticut's choice of law rules shall not supersede or vary the choice of law made by this Section 15). 16. SEVERABILITY: The provisions of this Agreement are severable, and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. THE SOUTHERN CONNECTICUT GAS COMPANY By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating and Salary Committee CONNECTICUT ENERGY CORPORATION By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating Salary Committee ______________________________________________ Carol A. Forest EX-10 9 AGREEMENT THIS AGREEMENT, made as of the 1st day of October, 1996, by and among The Southern Connecticut Gas Company, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("Southern"), and Connecticut Energy Corporation, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("the Company"), and J. Richard Tiano, an individual residing at 38 Penny Lane, Woodbridge, Connecticut 06525 (the "Executive"). WHEREAS, Executive serves as Vice President, General Counsel and Secretary of the Company and Southern; and WHEREAS, Southern and the Company seek to retain Executive in these positions; and WHEREAS, Executive desires to continue his/her employment with Southern and the Company in accordance with the terms set forth below; NOW, THEREFORE, in consideration of the remuneration and other benefits to be provided by Southern and the Company and the services to be provided by Executive, and in consideration of other mutual promises herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following terms when used herein with initial capital letters shall, unless the context clearly requires to the contrary, have the meanings assigned to them below: (a) "Cause" means the Executive's gross negligence, willful misconduct or conviction of a felony, which negligence, misconduct or conviction has a demonstrable and material adverse affect upon the Company or Southern, provided that the Company or Southern shall have given the Executive written notice of the alleged negligence or misconduct and the Executive shall have failed to cure such negligence or misconduct within 30 days after his/her receipt of such notice. The Executive shall be deemed to have been terminated for Cause effective upon the effective date stated in a written notice of such termination delivered by the Company or Southern to the Executive and accompanied by the resolution duly adopted by the affirmative vote of not less than 2/3 of the entire membership of the Board of Directors of the Company or Southern at a meeting of said Board (after reasonable notice to the Executive and an opportunity for the Executive, with his/her counsel present, to be heard before the Board) finding that, in the good faith opinion of the Board of Directors of the Company or Southern, the Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive's termination, provided that the effective date shall not be less than 30 days from the date such notice is given. (b) "Change in Control" of the Company shall be deemed to have occurred if: (i) Any Person is or becomes an Acquiring Person; (ii) Less than 2/3 of the total membership of the Board of Directors of the Company shall be Continuing Directors; or (iii) The shareholders of the Company shall approve a merger or consolidation of the Company or a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. In connection with the preceding definition of "Change in Control", the capitalized terms therein are defined as follows: (iv) "Acquiring Person" means any Person who is or becomes a "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding voting securities, unless such person has filed Schedule 13G and all required amendments thereto with respect to its holdings and continues to hold such securities for investment in a manner qualifying such Person to utilize Schedule 13G for reporting of ownership. (v) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect as of the date hereof. (vi) "Continuing Directors" means any member of the Board of Directors of the Company who was a member of said Board prior to the date hereof and any successor of a Continuing Director while such successor is a member of the Board of Directors of the Company who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person and who is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors. (vii) "Person" shall have the meaning assigned to it in Section 13(d) and 14(d) of the Exchange Act. (c) "Good Reason" means: (i) An adverse change in the Executive's status, duties or responsibilities as an Executive of the Company or Southern; (ii) Failure of the Company or Southern to pay or provide the Executive in a timely fashion the salary or benefits to which he is entitled under any Employment Agreement between the Company or Southern and the Executive then in effect or under any benefit plans or policies in which the Executive was then participating (including, without limitation, any incentive, bonus, stock option, restricted stock, health, accident, disability, life insurance, thrift, vacation pay, deferred compensation and retirement plans or policies); (iii) The reduction of the Executive's salary (except in connection with a uniform and general reduction of salaried employees' compensation effected by the Company or Southern); (iv) The taking of any action by the Company or Southern (including the elimination of a plan without providing substitutes therefore, the reduction of the Executive's awards thereunder or failure to continue the Executive's participation therein) that would substantially diminish the aggregate projected value of the Executive's awards or benefits under the Company's or Southern's benefit plans or policies described in Section 1(c)(ii) in which the Executive was then participating; provided, however, that the Board of Directors may determine at any time to discontinue Southern's Management Incentive Compensation Plan. The Executive further acknowledges that awards under such Plan may vary from year to year and that, under the terms of such Plan, no awards or reduced awards may be made in any particular year. (v) A failure by the Company or Southern to obtain from any successors the assent to this Agreement contemplated by Section 12 hereof; or (vi) The relocation of the principal office at which the Executive is to perform his/her services on behalf of the Company or Southern to a location outside the State of Connecticut or a substantial increase in the Executive's business travel obligations. The Executive shall be deemed to have terminated his/her employment for Good Reason effective upon the effective date stated in a written notice of such termination given by him/her to the Company and Southern setting forth in reasonable detail the facts and circumstances claimed to provide the basis for termination, provided that the effective date may not precede, nor be more than 60 days from, the date such notice is given. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (d) "Qualifying Surviving Spouse" means the Executive's widow to whom he has been married for more than one year at the time of benefit payment commencement pursuant to this Agreement. 2. EMPLOYMENT: Southern and the Company shall employ Executive and Executive hereby accepts such employment upon the terms and conditions hereinafter set forth. 3. TERM OF EMPLOYMENT: The term of this Agreement shall begin on October 1, 1996, and shall continue thereafter until terminated by either party by written notice given to the other party at least thirty (30) days prior to the effective date of any such termination. The effective date of the termination shall be the date stated in such notice, provided that if the Company or Southern specifies an effective date that is more than thirty (30) days following the date of such notice, the Executive may, upon thirty (30) days' written notice to the Company or Southern, accelerate the effective date of such termination. 4. COMPENSATION: For all services rendered by Executive under this Agreement, Southern shall pay Executive an annual base salary, payable at such times as is customary for Southern to pay its officers, in such amount as Southern's Board of Directors shall establish from time to time. Executive's base salary is subject to upward or downward revision by the Board of Directors at such time as the Board generally increases or reduces the salary rates of other officers of Southern. Executive shall also participate in Southern's Management Incentive Compensation Plan (the "Plan") for such years as the Board of Directors determines the Plan shall be in effect. Executive shall be entitled to any other benefits available to officers and employees of Southern generally. 5. CHANGE IN CONTROL: If a Change in Control of the Company shall have occurred, and Executive's employment by the Company or Southern is terminated effective as of a date within three (3) years after the date of such Change in Control for any reason other than (1) his/her death, (2) his/her Disability, (3) his/her retirement on his/her Normal Retirement Date, (4) by the Company for Cause, or (5) by Executive without Good Reason, Executive shall be under no further obligation to perform services for the Company or Southern and shall be entitled to receive the following payments: (a) The Company or Southern shall pay to Executive his/her full base salary through the effective date of the termination within five (5) business days thereafter and all benefits and awards (including both the cash and stock components) to which Executive is entitled under any benefit plans or policies in which he was a participant prior to the Change in Control, at the time such payments are due pursuant to the terms of such benefit plans or policies as in effect immediately prior to the Change in Control. (b) In addition to the entitlements set forth in Section 3(a), the Company or Southern shall pay to Executive, in a lump sum not later than ten (10) business days following the effective date of the termination: (i) an amount equal to three (3) times Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control; (ii) an amount equal to three (3) times the greater of (A) the highest amount of the actual bonus awarded to Executive in the five (5) fiscal years immediately preceding the year in which the Change in Control occurred or (B) an amount equal to the amount Executive would have been awarded under the Company's bonus plan in effect immediately prior to the Change in Control for the fiscal year in which the Change of Control occurred had he continued to render services to the Company at the same level of performance, at the same level of salary, and in the same position as immediately prior to the Change in Control; (iii) an amount equal to three (3) times the greater of (A) the largest annual contribution made by Southern (or the Company, or by both) to The Southern Connecticut Gas Company TARGET Plan for Salaried and Certain Other Executives on Executive's behalf during the five (5) fiscal years immediately preceding the year in which the Change of Control occurred or (B) an amount equal to the contribution the Company would have made to said Plan on his/her behalf for the fiscal year in which the Change of Control occurred had he participated in said Plan for the entire fiscal year, received a base salary equal to the salary he was receiving immediately prior to the Change in Control and had he elected to contribute to the Plan the same percentage of his/her base salary as he was contributing on said date; and (iv) an amount equal to thirty five percent (35%) of Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control (as compensation for medical, life insurance and other benefits lost as a result of termination of his/her employment). (v) If a payment may be increased by reference to an alternate calculation which cannot be made by the time the payment is due, payment of the Lesser known amount shall be made when due, and if any additional amount becomes due, such additional amount shall be paid within ten (10) days after the information upon which calculation of such payment is dependent first becomes available. The amount of all payments due to Executive pursuant to this Section 5(b) shall be reduced by four percent (4%) for each full calendar month by which the date which is two (2) years from the effective date of the Executive's termination extends beyond his/her Normal Retirement Date (as that term is defined in The Southern Connecticut Gas Company Pension Plan for Salaried Employees). Upon entering into this Agreement and for a period of fourteen (14) days following each anniversary of the date hereof (the "Election Period"), the Executive may, in writing, direct the Company or Southern to pay any amounts to which he is entitled under this Section 5(b) in five (5) equal annual installments, with the first such installment payable within ten (10) business days of the effective date of the termination and each successive installment payable on the anniversary of the effective date of the termination or the next following business day if such date is not a business day (the "Deferred Payment Election"). A Deferred Payment Election, once made, cannot be revoked except during an Election Period; provided, however, no Deferred Payment Election can be made or revoked by Executive during an Election Period that occurs after a Change in Control or at a time when, in the judgment of the Company, a Change in Control may occur within sixty (60) days of such Election Period. (c) The Company or Southern shall pay or provide to Executive, or his/her widow or children as the case may be, such amounts and benefits as may be required so that the pension and other post-retirement benefits paid or made available to him/her, his/her widow and his/her children are equal to those, if any, which would have been paid under The Southern Connecticut Gas Company Pension Plan for Salaried Executives as in effect immediately prior to the Change in Control, assuming Executive continued in the employ of the Company or Southern at the same salary until the third anniversary of the effective date of the termination of his/her employment or until his/her Normal Retirement Date, whichever is earlier. (d) Executive shall not be required to mitigate the amount of any payment provided in this Section 5, nor shall any payment or benefit provided for in this Section 5 be offset by any compensation earned by him/her as the result of employment by another employer, by retirement benefits, or by offset against any amount claimed to be owed by the Executive to the Company or Southern, or otherwise. (e) If any payment to Executive required by this Section 5 is not made within the time for such payment specified herein, the Company or Southern shall pay to him/her interest on such payment at the legal rate payable from time to time upon judgments in the State of Connecticut from the date such payment is payable under the terms hereof until paid. (f) If any payment or benefit to Executive provided for in this Agreement is subject to the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended, (which tax, together with any similar tax hereafter imposed is referred to in this Agreement as the "Excise Tax") the Company or Southern shall pay to him/her an additional amount such that the total amount of the payments to or for the benefit of Executive under this Agreement (including payments made pursuant to this Section 5(f)), net of the Excise Tax and all other applicable federal, state and local taxes shall equal the total amount of the payments and benefits to which Executive would have been entitled under this Agreement but for this Section 5(f), net of all applicable federal, state and local taxes except the Excise Tax. The amount of the payment to Executive under this Section 5(f) shall be estimated by the Company's independent auditors based upon the following assumptions: (i) All payments to Executive under this Agreement and all other payments and benefits to him/her in connection with a Change in Control of the Company shall be deemed to be "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" shall be deemed to be subject to the Excise Tax unless, in the written opinion of tax counsel selected by the Company's independent auditors, (a signed copy of which opinion shall be delivered to Executive) such payment or benefits are not subject to the Excise Tax; (ii) Except to the extent that the total of the payments and benefits to Executive under this Agreement exceeds the total of the "excess parachute payments" made to him/her, no such payments or benefits shall be deemed to be part of the "base amount" within the meaning of Section 280G(b)(3) of the Code; and (iii) Executive shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year. The estimated amount of the payment due to Executive pursuant to this Section 5(f) shall be paid to him/her in a lump sum not later than thirty (30) business days following the effective date of termination. In the event that the amount of the estimated payment is less than the amount actually due to him/her under this Section 5(f), the amount of any such shortfall shall be paid to him/her within ten (10) days after the existence of the shortfall is discovered. 6. DUTIES: Executive shall serve as in such capacities and with such titles as may be assigned to him/her by the Board of Directors of Southern and the Company, and shall assume such duties as the Board of Directors of Southern and the Company shall assign to him/her. 7. TERMINATION: Subject to the applicable provisions of Section 5 of this Agreement, Executive's employment pursuant to this Agreement may be terminated by Southern or the Company on thirty (30) days written notice at any time, with or without Cause. Executive's term of employment shall also terminate upon his/her death or permanent disability. Such terminations shall not constitute a termination of employment without Cause for purposes of Section 5 of this Agreement. Permanent disability shall mean Executive's inability by reason of physical or mental impairment or illness to fulfill his/her obligation hereunder for the reasonably foreseeable future, as determined by the Board of Directors of Southern and the Company after considering all relevant medical evidence. 8. AMENDMENT: Amendment of the terms of this Agreement shall not be valid unless made in writing and signed by duly authorized representatives of Southern and the Company and by Executive. 9. EXECUTIVE'S EXPENSES: The Company and Southern, or the successor of either of such companies, shall pay or reimburse Executive (or, if appropriate, his/her Qualified Surviving Spouse) for all costs, including reasonable attorney's fees and expenses of litigation and arbitration, incurred by Executive (or his/her Qualified Surviving Spouse) in successfully contesting or disputing any action taken by the Company and Southern, or the successor of either of such companies, purportedly pursuant to Section 5 of this Employment Agreement or in successfully seeking to obtain or enforce any right or benefit provided by Section 5 of this Employment Agreement. 10. NOTICES: Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered or sent by registered or certified mail postage prepaid, properly addressed (if to Executive, at his/her residence address as then reflected in the Company's personnel records; if to Southern and the Company, at 855 Main Street, Bridgeport, Connecticut 06604, Attention: Vice President, Human Resources or at such other address as the executive offices of the Company may be located), return receipt requested, and shall be deemed given as of the date of delivery or personally delivered or of mailing if properly mailed. 11. WAIVER OF BREACH: The waiver by Southern or the Company of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any prior or subsequent breach by Executive. 12. INTEGRATION: This Agreement shall be the sole and exclusive Agreement among Southern, the Company, and Executive, and any other agreements or arrangements among them are hereby superseded, canceled, and made void and of no effect. 13. BINDING AGREEMENT: This Agreement shall inure to the benefit of and be enforceable by Executive, his/her heirs, executors, administrators, successors, and assigns. This Agreement shall be binding upon the Company, Southern and their successors and assigns. The Company and Southern shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company and Southern expressly to assume and agree to perform this Agreement in accordance with its terms. The Company and Southern shall obtain such assumption and agreement prior to the effectiveness of any succession. The obligations of this Agreement may not be assigned by Executive. 14. COUNTERPARTS: This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15. CHOICE OF LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut (except that, if application of Connecticut's choice of law rules would result in this Agreement being governed, construed or interpreted in accordance with the substantive law of a jurisdiction other than Connecticut, Connecticut's choice of law rules shall not supersede or vary the choice of law made by this Section 15). 16. SEVERABILITY: The provisions of this Agreement are severable, and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. THE SOUTHERN CONNECTICUT GAS COMPANY By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating and Salary Committee CONNECTICUT ENERGY CORPORATION By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating Salary Committee ______________________________________________ J. Richard Tiano EX-10 10 AGREEMENT THIS AGREEMENT, made as of the 1st day of October, 1996, by and among The Southern Connecticut Gas Company, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("Southern"), and Connecticut Energy Corporation, a company incorporated in the State of Connecticut with executive offices at 855 Main Street, Bridgeport, Connecticut ("the Company"), and Thomas A. Trotta, an individual residing at 8 Zephyr Road, Trumbull, Connecticut 06611 (the "Executive"). WHEREAS, Executive serves as Executive Vice President and Chief Operating Officer of Southern and Senior Vice President of the Company; and WHEREAS, Southern and the Company seek to retain Executive in these positions; and WHEREAS, Executive desires to continue his/her employment with Southern and the Company in accordance with the terms set forth below; NOW, THEREFORE, in consideration of the remuneration and other benefits to be provided by Southern and the Company and the services to be provided by Executive, and in consideration of other mutual promises herein contained, the parties hereby agree as follows: 1. DEFINITIONS. The following terms when used herein with initial capital letters shall, unless the context clearly requires to the contrary, have the meanings assigned to them below: (a) "Cause" means the Executive's gross negligence, willful misconduct or conviction of a felony, which negligence, misconduct or conviction has a demonstrable and material adverse affect upon the Company or Southern, provided that the Company or Southern shall have given the Executive written notice of the alleged negligence or misconduct and the Executive shall have failed to cure such negligence or misconduct within 30 days after his/her receipt of such notice. The Executive shall be deemed to have been terminated for Cause effective upon the effective date stated in a written notice of such termination delivered by the Company or Southern to the Executive and accompanied by the resolution duly adopted by the affirmative vote of not less than 2/3 of the entire membership of the Board of Directors of the Company or Southern at a meeting of said Board (after reasonable notice to the Executive and an opportunity for the Executive, with his/her counsel present, to be heard before the Board) finding that, in the good faith opinion of the Board of Directors of the Company or Southern, the Executive was guilty of conduct constituting Cause hereunder and setting forth in reasonable detail the facts and circumstances claimed to provide the basis for the Executive's termination, provided that the effective date shall not be less than 30 days from the date such notice is given. (b) "Change in Control" of the Company shall be deemed to have occurred if: (i) Any Person is or becomes an Acquiring Person; (ii) Less than 2/3 of the total membership of the Board of Directors of the Company shall be Continuing Directors; or (iii) The shareholders of the Company shall approve a merger or consolidation of the Company or a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. In connection with the preceding definition of "Change in Control", the capitalized terms therein are defined as follows: (iv) "Acquiring Person" means any Person who is or becomes a "beneficial owner" (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of securities of the Company representing 20% or more of the combined voting power of the Company's then outstanding voting securities, unless such person has filed Schedule 13G and all required amendments thereto with respect to its holdings and continues to hold such securities for investment in a manner qualifying such Person to utilize Schedule 13G for reporting of ownership. (v) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act as in effect as of the date hereof. (vi) "Continuing Directors" means any member of the Board of Directors of the Company who was a member of said Board prior to the date hereof and any successor of a Continuing Director while such successor is a member of the Board of Directors of the Company who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person and who is recommended or elected to succeed the Continuing Director by a majority of the Continuing Directors. (vii) "Person" shall have the meaning assigned to it in Section 13(d) and 14(d) of the Exchange Act. (c) "Good Reason" means: (i) An adverse change in the Executive's status, duties or responsibilities as an Executive of the Company or Southern; (ii) Failure of the Company or Southern to pay or provide the Executive in a timely fashion the salary or benefits to which he is entitled under any Employment Agreement between the Company or Southern and the Executive then in effect or under any benefit plans or policies in which the Executive was then participating (including, without limitation, any incentive, bonus, stock option, restricted stock, health, accident, disability, life insurance, thrift, vacation pay, deferred compensation and retirement plans or policies); (iii) The reduction of the Executive's salary (except in connection with a uniform and general reduction of salaried employees' compensation effected by the Company or Southern); (iv) The taking of any action by the Company or Southern (including the elimination of a plan without providing substitutes therefore, the reduction of the Executive's awards thereunder or failure to continue the Executive's participation therein) that would substantially diminish the aggregate projected value of the Executive's awards or benefits under the Company's or Southern's benefit plans or policies described in Section 1(c)(ii) in which the Executive was then participating; provided, however, that the Board of Directors may determine at any time to discontinue Southern's Management Incentive Compensation Plan. The Executive further acknowledges that awards under such Plan may vary from year to year and that, under the terms of such Plan, no awards or reduced awards may be made in any particular year. (v) A failure by the Company or Southern to obtain from any successors the assent to this Agreement contemplated by Section 12 hereof; or (vi) The relocation of the principal office at which the Executive is to perform his/her services on behalf of the Company or Southern to a location outside the State of Connecticut or a substantial increase in the Executive's business travel obligations. The Executive shall be deemed to have terminated his/her employment for Good Reason effective upon the effective date stated in a written notice of such termination given by him/her to the Company and Southern setting forth in reasonable detail the facts and circumstances claimed to provide the basis for termination, provided that the effective date may not precede, nor be more than 60 days from, the date such notice is given. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder. (d) "Qualifying Surviving Spouse" means the Executive's widow to whom he has been married for more than one year at the time of benefit payment commencement pursuant to this Agreement. 2. EMPLOYMENT: Southern and the Company shall employ Executive and Executive hereby accepts such employment upon the terms and conditions hereinafter set forth. 3. TERM OF EMPLOYMENT: The term of this Agreement shall begin on October 1, 1996, and shall continue thereafter until terminated by either party by written notice given to the other party at least thirty (30) days prior to the effective date of any such termination. The effective date of the termination shall be the date stated in such notice, provided that if the Company or Southern specifies an effective date that is more than thirty (30) days following the date of such notice, the Executive may, upon thirty (30) days' written notice to the Company or Southern, accelerate the effective date of such termination. 4. COMPENSATION: For all services rendered by Executive under this Agreement, Southern shall pay Executive an annual base salary, payable at such times as is customary for Southern to pay its officers, in such amount as Southern's Board of Directors shall establish from time to time. Executive's base salary is subject to upward or downward revision by the Board of Directors at such time as the Board generally increases or reduces the salary rates of other officers of Southern. Executive shall also participate in Southern's Management Incentive Compensation Plan (the "Plan") for such years as the Board of Directors determines the Plan shall be in effect. Executive shall be entitled to any other benefits available to officers and employees of Southern generally. 5. CHANGE IN CONTROL: If a Change in Control of the Company shall have occurred, and Executive's employment by the Company or Southern is terminated effective as of a date within three (3) years after the date of such Change in Control for any reason other than (1) his/her death, (2) his/her Disability, (3) his/her retirement on his/her Normal Retirement Date, (4) by the Company for Cause, or (5) by Executive without Good Reason, Executive shall be under no further obligation to perform services for the Company or Southern and shall be entitled to receive the following payments: (a) The Company or Southern shall pay to Executive his/her full base salary through the effective date of the termination within five (5) business days thereafter and all benefits and awards (including both the cash and stock components) to which Executive is entitled under any benefit plans or policies in which he was a participant prior to the Change in Control, at the time such payments are due pursuant to the terms of such benefit plans or policies as in effect immediately prior to the Change in Control. (b) In addition to the entitlements set forth in Section 3(a), the Company or Southern shall pay to Executive, in a lump sum not later than ten (10) business days following the effective date of the termination: (i) an amount equal to three (3) times Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control; (ii) an amount equal to three (3) times the greater of (A) the highest amount of the actual bonus awarded to Executive in the five (5) fiscal years immediately preceding the year in which the Change in Control occurred or (B) an amount equal to the amount Executive would have been awarded under the Company's bonus plan in effect immediately prior to the Change in Control for the fiscal year in which the Change of Control occurred had he continued to render services to the Company at the same level of performance, at the same level of salary, and in the same position as immediately prior to the Change in Control; (iii) an amount equal to three (3) times the greater of (A) the largest annual contribution made by Southern (or the Company, or by both) to The Southern Connecticut Gas Company TARGET Plan for Salaried and Certain Other Executives on Executive's behalf during the five (5) fiscal years immediately preceding the year in which the Change of Control occurred or (B) an amount equal to the contribution the Company would have made to said Plan on his/her behalf for the fiscal year in which the Change of Control occurred had he participated in said Plan for the entire fiscal year, received a base salary equal to the salary he was receiving immediately prior to the Change in Control and had he elected to contribute to the Plan the same percentage of his/her base salary as he was contributing on said date; and (iv) an amount equal to thirty five percent (35%) of Executive's annual base salary on the effective date of the termination or, if higher, immediately prior to the Change in Control (as compensation for medical, life insurance and other benefits lost as a result of termination of his/her employment). (v) If a payment may be increased by reference to an alternate calculation which cannot be made by the time the payment is due, payment of the lesser known amount shall be made when due, and if any additional amount becomes due, such additional amount shall be paid within ten (10) days after the information upon which calculation of such payment is dependent first becomes available. The amount of all payments due to Executive pursuant to this Section 5(b) shall be reduced by four percent (4%) for each full calendar month by which the date which is two (2) years from the effective date of the Executive's Termination extends beyond his/her Normal Retirement Date (as that term is defined in The Southern Connecticut Gas Company Pension Plan for Salaried Employees). Upon entering into this Agreement and for a period of fourteen (14) days Following each anniversary of the date hereof (the "Election Period"), the Executive may, in writing, direct the Company or Southern to pay any amounts to which he is entitled under this Section 5(b) in five (5) equal annual installments, with the first such installment payable within ten (10) business days of the effective date of the termination and each successive installment payable on the anniversary of the effective date of the termination or the next following business day if such date is not a business day (the "Deferred Payment Election"). A Deferred Payment Election, once made, cannot be revoked except during an Election Period; provided, however, no Deferred Payment Election can be made or revoked by Executive during an Election Period that occurs after a Change in Control or at a time when, in the judgment of the Company, a Change in Control may occur within sixty (60) days of such Election Period. (c) The Company or Southern shall pay or provide to Executive, or his/her widow or children as the case may be, such amounts and benefits as may be required so that the pension and other post-retirement benefits paid or made available to him/her, his/her widow and his/her children are equal to those, if any, which would have been paid under The Southern Connecticut Gas Company Pension Plan for Salaried Executives as in effect immediately prior to the Change in Control, assuming Executive continued in the employ of the Company or Southern at the same salary until the third anniversary of the effective date of the termination of his/her employment or until his/her Normal Retirement Date, whichever is earlier. (d) Executive shall not be required to mitigate the amount of any payment provided in this Section 5, nor shall any payment or benefit provided for in this Section 5 be offset by any compensation earned by him/her as the result of employment by another employer, by retirement benefits, or by offset against any amount claimed to be owed by the Executive to the Company or Southern, or otherwise. (e) If any payment to Executive required by this Section 5 is not made within the time for such payment specified herein, the Company or Southern shall pay to him/her interest on such payment at the legal rate payable from time to time upon judgments in the State of Connecticut from the date such payment is payable under the terms hereof until paid. (f) If any payment or benefit to Executive provided for in this Agreement is subject to the excise tax imposed pursuant to Section 4999 of the Internal Revenue Code of 1986, as amended, (which tax, together with any similar tax hereafter imposed is referred to in this Agreement as the "Excise Tax") the Company or Southern shall pay to him/her an additional amount such that the total amount of the payments to or for the benefit of Executive under this Agreement (including payments made pursuant to this Section 5(f)), net of the Excise Tax and all other applicable federal, state and local taxes shall equal the total amount of the payments and benefits to which Executive would have been entitled under this Agreement but for this Section 5(f), net of all applicable federal, state and local taxes except the Excise Tax. The amount of the payment to Executive under this Section 5(f) shall be estimated by the Company's independent auditors based upon the following assumptions: (i) All payments to Executive under this Agreement and all other payments and benefits to him/her in connection with a Change in Control of the Company shall be deemed to be "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments" shall be deemed to be subject to the Excise Tax unless, in the written opinion of tax counsel selected by the Company's independent auditors, (a signed copy of which opinion shall be delivered to Executive) such payment or benefits are not subject to the Excise Tax; (ii) Except to the extent that the total of the payments and benefits to Executive under this Agreement exceeds the total of the "excess parachute payments" made to him/her, no such payments or benefits shall be deemed to be part of the "base amount" within the meaning of Section 280G(b)(3) of the Code; and (iii) Executive shall be deemed to pay federal, state and local taxes at the highest marginal rate of taxation for the applicable calendar year. The estimated amount of the payment due to Executive pursuant to this Section 5(f) shall be paid to him/her in a lump sum not later than thirty (30) business days following the effective date of termination. In the event that the amount of the estimated payment is less than the amount actually due to him/her under this Section 5(f), the amount of any such shortfall shall be paid to him/her within ten (10) days after the existence of the shortfall is discovered. 6. DUTIES: Executive shall serve as in such capacities and with such titles as may be assigned to him/her by the Board of Directors of Southern and the Company, and shall assume such duties as the Board of Directors of Southern and the Company shall assign to him/her. 7. TERMINATION: Subject to the applicable provisions of Section 5 of this Agreement, Executive's employment pursuant to this Agreement may be terminated by Southern or the Company on thirty (30) days written notice at any time, with or without Cause. Executive's term of employment shall also terminate upon his/her death or permanent disability. Such terminations shall not constitute a termination of employment without Cause for purposes of Section 5 of this Agreement. Permanent disability shall mean Executive's inability by reason of physical or mental impairment or illness to fulfill his/her obligation hereunder for the reasonably foreseeable future, as determined by the Board of Directors of Southern and the Company after considering all relevant medical evidence. 8. AMENDMENT: Amendment of the terms of this Agreement shall not be valid unless made in writing and signed by duly authorized representatives of Southern and the Company and by Executive. 9. EXECUTIVE'S EXPENSES: The Company and Southern, or the successor of either of such companies, shall pay or reimburse Executive (or, if appropriate, his/her Qualified Surviving Spouse) for all costs, including reasonable attorney's fees and expenses of litigation and arbitration, incurred by Executive (or his/her Qualified Surviving Spouse) in successfully contesting or disputing any action taken by the Company and Southern, or the successor of either of such companies, purportedly pursuant to Section 5 of this Employment Agreement or in successfully seeking to obtain or enforce any right or benefit provided by Section 5 of this Employment Agreement. 10. NOTICES: Any notice required or permitted to be given under this Agreement shall be sufficient if in writing and personally delivered or sent by registered or certified mail postage prepaid, properly addressed (if to Executive, at his/her residence address as then reflected in the Company's personnel records; if to Southern and the Company, at 855 Main Street, Bridgeport, Connecticut 06604, Attention: Vice President, Human Resources or at such other address as the executive offices of the Company may be located), return receipt requested, and shall be deemed given as of the date of delivery or personally delivered or of mailing if properly mailed. 11. WAIVER OF BREACH: The waiver by Southern or the Company of a breach of any provision of this Agreement by Executive shall not operate or be construed as a waiver of any prior or subsequent breach by Executive. 12. INTEGRATION: This Agreement shall be the sole and exclusive Agreement among Southern, the Company, and Executive, and any other agreements or arrangements among them are hereby superseded, canceled, and made void and of no effect. 13. BINDING AGREEMENT: This Agreement shall inure to the benefit of and be enforceable by Executive, his/her heirs, executors, administrators, successors, and assigns. This Agreement shall be binding upon the Company, Southern and their successors and assigns. The Company and Southern shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company and Southern expressly to assume and agree to perform this Agreement in accordance with its terms. The Company and Southern shall obtain such assumption and agreement prior to the effectiveness of any succession. The obligations of this Agreement may not be assigned by Executive. 14. COUNTERPARTS: This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 15. CHOICE OF LAW: This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut (except that, if application of Connecticut's choice of law rules would result in this Agreement being governed, construed or interpreted in accordance with the substantive law of a jurisdiction other than Connecticut, Connecticut's choice of law rules shall not supersede or vary the choice of law made by this Section 15). 16. SEVERABILITY: The provisions of this Agreement are severable, and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year first above written. THE SOUTHERN CONNECTICUT GAS COMPANY By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating and Salary Committee CONNECTICUT ENERGY CORPORATION By______________________________________________ Henry Chauncey, Jr., duly authorized Chairman, Nominating Salary Committee _____________________________________________ Thomas A. Trotta EX-13 11 - ------------------------------------------------------------------------------- Connecticut Energy Corporation 1996 Annual Report Southern Connecticut Gas Service First! CNE Energy Services Group, Inc. CNE Development Corporation CNE Venture-Tech, Inc. ...into the next millennium Business Profile Connecticut Energy Corporation is a holding company primarily engaged in the retail distribution of natural gas through its wholly-owned subsidiary, The Southern Connecticut Gas Company, which delivers natural gas in 22 Connecticut communities to over 156,000 customers. The Company also has three nonutility subsidiaries: CNE Energy Services Group, Inc. provides an array of energy commodities and services to commercial and industrial customers throughout New England; CNE Development Corporation participates in a natural gas purchasing cooperative; and CNE Venture-Tech, Inc. participates in ventures providing information technology to utility companies. Corporate Structure - ------------------------------------------------------------------------------- Connecticut Energy Corporation - - - ------------------------------------------------------------------------------- - - - - - - - - CNE The Southern CNE CNE Energy Serives Connecticut Gas Venture-Tech, Development Group, Inc. Company Inc. Corporation - - ---------------------- - - - -------------------------------------------- - - - - - - - - - Total/Louis Operating & East Coast Dreyfus Maintenance Total Peaking Natural Gas Energy Services, Services Services, L.L.C. Cooperative, L.L.C. L.L.C. - ------------------------------------------------------------------------------- Highlights Years ended September 30, 1996 1995 % Change - ------------------------------------------------------------------------------- FINANCIAL (dollars in thousands, except per share) - ------------------------------------------------------------------------------- Operating revenues $261,093 $232,093 12.5 Gross margin 119,465 116,510 2.5 Net income 15,165 14,060 7.9 Net income per share 1.70 1.60 6.2 Dividends paid per share 1.31 1.30 0.8 Total assets 399,228 370,088 7.9 Common shareholders' equity 137,961 131,561 4.9 Long-term debt 138,727 119,322 16.3 Return on average common equity (%) 10.87 10.52 3.3 - ------------------------------------------------------------------------------- OTHER - ------------------------------------------------------------------------------- Weighted average common shares outstanding 8,924,299 8,773,878 1.7 Shares outstanding at year end 9,012,267 8,865,210 1.7 Shareholders of record 11,274 11,688 (3.5) Shareholders in dividend reinvestment plan 6,110 6,683 (8.6) Institutional ownership (shares) 1,821,000 1,860,000 (2.1) Average number of customers 156,085 154,216 1.2 - ------------------------------------------------------------------------------- Dividends Connecticut Energy, through its predecessor companies, has paid cash dividends on its common stock since 1850, the longest consecutive dividend pay ment record of any nonfinancial company listed on the New York Stock Exchange. In September 1996, the Company paid its 347th consecutive quarterly dividend. The dividend has increased in nineteen of the last twenty 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. Investment and Shareholder Information is on pages 39, 40 and 41. Net Income (dollars in millions) '91 '92 '93 '94 '95 '96 9.0 10.2 11.1 12.8 14.1 15.2 Earnings (dollars per share) '91 '92 '93 '94 '95 '96 1.38 1.43 1.50 1.58 1.60 1.70 1 [photo of chairman] To Our Shareholders: Fiscal 1996 was truly a watershed year for Connecticut Energy Corporation. At this time last year, I provided you with a preview of the numerous new opportunities available to us in an increasingly deregulated environment, and I outlined our plans to capitalize on them. It is my privilege now to report on our success in executing these plans and to share the impressive results we achieved for you in 1996. I am pleased to describe the many exciting changes we have made and the strategic joint ventures we have formed, all of which have been built upon our successful planning efforts in this and prior years. CONTINUED EARNINGS GROWTH Our first responsibility to you rests with our commitment to continued long-term earnings growth. I am pleased to report that, once again, we have achieved record earnings. Earnings for fiscal 1996 grew to $1.70 per share from $1.60 per share last year, an increase of six percent. Fiscal 1996 marks the seventh consecutive year in which we have succeeded in achieving growth in annual earnings per share. This is an extraordinary record, and one which is unmatched by any other natural gas distribution company in the United States. Net income reached a record level of $15,165,000, an increase of nearly eight percent over the $14,060,000 earned last year. As a demonstration of our confidence in continuing to meet our earnings growth objectives in the future, we have also increased your annual indicated dividend to $1.32 per share while continuing to reduce our dividend payout ratio to 77 percent in fiscal 1996. Our current payout ratio is over seventeen percent lower than it was seven years ago, making our target payout ratio of 75 percent now clearly within reach. CORE UTILITY BUSINESS Margins from our utility business, The Southern Connecticut Gas Company (Southern), have been and will remain the anchor of our earnings for the near future. Southern continues to add customers in its core firm markets by concentrating efforts along its existing distribution system, as well as in non-core markets, which are beginning to play a more important role in its revenue mix. Southern's on-system gas deliveries reached an all time high of 31.5 billion cubic feet (Bcf), including record firm deliveries of 22.8 Bcf. Gross margins grew to a new high of $119,465,000, and operations and maintenance expenses decreased by over two percent from the prior year. Southern has succeeded in lowering its operations and maintenance expense as a percentage of margins to 43 percent, an achievement which sets us apart from the rest of the industry. This was accomplished while continuing to improve customer service. Additionally, the Connecticut Department of Public Utility Control (DPUC) has recognized Southern for having the best customer service record of the state's three natural gas distribution companies for the third consecutive year. COMPETITIVE ENERGY MARKETPLACE Our plans are securely in place as the regulated utility environment transforms itself into a competitive energy marketplace where traditional boundaries are evaporating. In response to these 2 changes, we have expanded the two unregulated subsidiaries we added to our business structure last year, and we have developed a third unregulated subsidiary. These unregulated initiatives are directly related to our core business, and they leverage our years of solid experience with the unique expertise of the nationally renowned partners we have chosen for joint ventures. Our unregulated subsidiaries, through which we will be able to capture new markets within and outside of Southern's service area, will be our engines for growth as we approach the 21st century. CNE Development Corporation, our first unregulated subsidiary, was initially formed as an equity partner in the East Coast Natural Gas Cooperative (Co-op) to purchase large volume supplies and thus, lower gas costs for our customers. The Co-op expanded this venture by forming an agreement with Tejas Power to offer storage utilization service and unbundled sales. CNE Energy Services Group, Inc. (CNE Energy) has established strategic alliances and joint ventures with nationally recognized leaders in the energy market. A joint venture with Louis Dreyfus Energy, an international energy commodities trader and price risk manager, has quickly developed an impressive commercial and industrial customer base throughout New England. This partnership has also established strategic marketing alliances with distribution companies in New Hampshire, Rhode Island and Massachusetts to provide an entry into those commercial and industrial markets. Our approach of forming strategic alliances has given Connecticut Energy an early start in establishing a strong market presence in New England as unbundling evolves. Another critical joint venture involving CNE Energy will transform our liquefied natural gas (LNG)facility into an interstate peaking "hub." This venture, called Total Peaking Services (TPS), has been formed with PanEnergy Corporation, one of the country's largest natural gas producers, transporters and marketers. Once again, we have drawn on our reputation and our knowledge of the New England markets and combined these with PanEnergy's expertise in storage and marketing. Once final regulatory approvals are complete, we expect that this joint venture will begin contributing to earnings in fiscal 1997. Our third unregulated subsidiary, CNE Venture-Tech, Inc., will involve partnerships with companies which have developed information technology systems that are used to help utilities operate in a more efficient way. Although over the near term, the growth in Connecticut Energy's unregulated ventures will come from CNE Energy's joint ventures, over the longer term, information systems and other technology ventures could produce even greater growth opportunities than energy marketing. Information technology business alliances will become an important vehicle to differentiate Connecticut Energy from its competitors. A STRONG FOUNDATION; A BRIGHT FUTURE We can attribute our success to the strong foundation of industry experience we have built over the years and to a dedicated Board of Directors and workforce. Our Board of Directors has provided their guidance and expertise, and I want to express my appreciation for their ongoing support for our initiatives. I would also like to compliment all of our employees for their high level of commitment and teamwork, which have allowed us to work more efficiently than we did just a few years ago. Contributing to those efforts, our labor union negotiated a new five year contract in March which included changes in work practices that allow more operational flexibility. I would like to take this opportunity to also thank Frank L. Esposito, Vice President, Human Resources, who recently retired after 46 years of dedicated service. His experience in labor relations and valued counsel have played a key role in our success. In order to succeed in the new energy world, we must move forward with a clear sense of vision, focusing on those efforts that will enable us to expand our business and add value to our shareholders and customers. Our dynamic new marketplace offers us a unique opportunity to embrace competition and prosper in areas which were previously beyond our reach. We made enlightened decisions and took aggressive actions in 1996 to respond to these changes, establishing strategic new ventures related to energy products and services and information technology applications. We have firmly put the building blocks in place to guide Connecticut Energy into the next millennium. Our achievements last year are yet another milepost along the continuous road to success. Our search for excellence and success will always be an endless journey! /s/ J. R. Crespo - ---------------- J. R. Crespo Chairman, President and Chief Executive Officer 3 Southern Connecticut Gas Service First! We have continued to expand our customer base by concentrating on heating conversions, especially along our existing distribution system in the residential market. We are also working with our trade allies, vendors and architects to expand our commercial and industrial business to increase the efficiency of the system we currently have in place. 4 CHANGES LEADING TO 1997 Although the deregulation of the natural gas industry began on a federal level in the 1980s, it was only in this past year that a landmark regulatory Decision on unbundling initiated gas deregulation at the state level. The Connecticut DPUC accepted Southern's recommendation that unbundled service be made available to all commercial and industrial customers, both firm and interruptible. As of April 1, 1996, those customers have had the option to buy gas from Southern or any other supplier. A critical component of this proceeding was DPUC approval of firm transportation rates that are margin neutral; that is, Southern receives the same margins from firm transportation service as it does from firm sales, so earnings will not be negatively impacted if customers switch to firm transportation and buy their gas from other suppliers. IMPLICATIONS OF DEREGULATION FOR OUR CUSTOMERS In Connecticut, firm transportation is currently available for commercial and industrial customers only. However, we are preparing for the time when all customers will have the ability to choose their gas suppliers. We will be ready to meet their needs as a merchant or a distributor. In an environment where customer choice is available, providing excellent customer service will remain one of Southern's main priorities. We are proud of the fact that for three years in a row the "scorecard" released by the DPUC has rated Southern's overall quality of service the best among Connecticut's three gas distribution companies. IMPLICATIONS OF DEREGULATION FOR GAS SUPPLY PLANNING Just a few years ago, Southern restructured its supply contracts with pipelines during the first wave of federal deregulation. With non-core customers now playing a larger role in our revenue mix and with firm customers purchasing supplies from other sources, our role as a gas merchant may begin to diminish. Our supply contracts going forward will become more flexible and reflect lower contracted volumes, and our risks and obligations during peak demand periods will also be reduced. This period of "decontracting" has allowed Southern to craft an agreement to sublease its LNG facility to our unregulated subsidiary which will develop it as a storage hub. This not only allows revenue producing utilization of and profit from this facility, it also reduces operating costs for Southern and its customers. IMPLICATIONS OF DEREGULATION FOR THE COMMUNITIES WE SERVE Our distribution system operates in a 22 town service area. Although our newer subsidiaries are dealing with customers in many other states, Southern's focus will remain on its service territory. During the second half of 1996, the DPUC approved an innovative proposal we submitted to help Bridgeport's economic and community development initiatives and to assist Southern's hardship customers to pay their bills. Over a three year period, the DPUC is allowing Southern to redirect interruptible margins which are normally shared with firm customers. This innovative public/ private partnership, which the DPUC applauded, will help our community, our customers and our shareholders. Customers Served Per Employee 267 290 307 '94 '95 '96 5 CNE Energy Services Group, Inc. "Deregulation of energy markets brings about new opportunities to meet the needs of new customers. The CNE Energy Services Group of companies are well positioned to give us a significant competitive advantage in the New England energy marketplace." /s/ Larry S. McGaughy - --------------------- Larry S. McGaughy President 6 As our core business changes, Connecticut Energy's other businesses are expected to grow rapidly with the opportunity to market energy supplies and related services beyond our traditional service area. CNE Energy Services Group, Inc. expects to become a major regional marketer of gas supplies, oil, and eventually electricity, through marketing alliances with nationally recognized energy companies. STRATEGIC ALLIANCES CNE Energy has formed two significant strategic alliances. The first is a joint venture with Louis Dreyfus Energy which combines Connecticut Energy's unique knowledge of regional energy markets with our partner's strength in energy commodity procurement, delivery and price risk management. In May, the joint venture established marketing alliances with gas distribution companies located in New Hampshire and Rhode Island, which provide access to additional customers extending into Massachusetts and Maine. These alliances allow an introduction for CNE Energy to the commercial and industrial customer base of these distribution companies, which do not have unregulated marketing subsidiaries. A TOTAL PACKAGE Other strategic alliances with engineering and mechanical contracting firms have enabled us to provide maintenance services in addition to energy supply contracts. Being able to go beyond energy commodities to offer total energy related services will be an important aspect in growing and retaining customers in an unregulated energy marketplace. CNE Energy has made outstanding progress in its first full year of operation, especially considering that gas deregulation only began in Connecticut on April 1, 1996. Our joint venture has contracted with over 300 metered commercial and industrial accounts, including the municipal accounts of the city of New Haven and 61 Stop & Shop stores located throughout our state. In the future, the potential electric loads for regional chain customers like Stop & Shop are huge as we move forward into electric deregulation. TOTAL PEAKING SERVICES The second joint venture formed by CNE Energy was with PanEnergy Corporation, one of the leading energy companies in the country. The venture, Total Peaking Services, L.L.C. (TPS), will create an interstate winter peaking services "marketing hub" using our LNG facility and our distribution system's interconnections with three major interstate pipelines. Formation of this venture requires both federal and state approval. A major hurdle was passed this August when we secured Connecticut regulatory approvals to move the LNG facility out of the regulated utility and into the unregulated joint venture. The successful outcome of this docket was a critical step in making the TPS joint venture a reality. Securing federal regulatory approval is the last requirement before the venture can commence operation. As we await final Federal Energy Regulatory Commission (FERC) approval, we are actively pursuing the market for peaking service sales for the upcoming winter. Bids have been submitted to the East Coast Natural Gas Cooperative as a group, and the members have been contacted individually for peaking sales this winter. We hope to have FERC approval in the first quarter of fiscal 1997, and it is our goal to have TPS operational by January 1. In addition to producing new revenue, this joint venture will continue to provide peaking services to our utility customers and produce savings for Southern, since Southern will be reimbursed for operating the plant. CNE Energy now has the ability to offer equipment replacement, parts, materials and contracted maintenance services in addition to energy commodities. - ----------------------------------------------------------------------------- * Total Peaking Services will create an interstate winter peaking services "marketing hub" using our LNG facility. 7 CNE Development Corporation "In this deregulated environment, our company can provide a total, competitively-priced package of energy services tailored to each client's needs, and to the extent that this lowers the cost of doing business here, we will contribute to a stronger economy in the region." /s/ Thomas A. Trotta - -------------------- Thomas A. Trotta President Since its formation last year, CNE Development Corporation has been a partner in the East Coast Natural Gas Cooperative, L.L.C., a group of seven natural gas distribution companies that collectively serves over three million customers and purchases large volume supplies at a discount. The Co-op entered into an agreement with Tejas Power in April of this year to offer storage utilization service and unbundled sales to further profit from its pooled resources. By optimizing the members' assets in combination with Tejas' storage, members of the Co-op will realize significantly lower delivered gas costs. We are in the preliminary stages of a joint venture which represents an exciting opportunity in the natural gas vehicle market. We recently signed a memorandum of understanding to convert 120 vehicles which will be used as transportation from Connecticut cities to airports in Connecticut, New York City and New Jersey. The agreement calls for the natural gas equivalent of 500,000 gallons of gasoline to be used in the first year increasing to the equivalent of 800,000 gallons in years two, three, four and five. We are currently in the process of negotiating and preparing final agreements and, barring unforseen circumstances, we should have an operational facility by mid-1997. This will be the first airport transportation service in the Northeast to convert its fleet to natural gas. As a member of the East Coast Natural Gas Cooperative, CNE Development Corporation has the purchasing power of over three million customers behind it. - ----------------------------------------------------------------------------- 8 CNE Venture-Tech, Inc. Although over the near term the growth in Connecticut Energy's unregulated ventures will come from CNE Energy's joint ventures, over the longer term, information systems and other technology ventures could produce even greater growth opportunities than energy marketing. We expect utilities will continue the recent trend of relying on technology to improve operational efficiencies, enhance customer service and address the demands of a changing environment. The level of special skills required to develop and implement these solutions has fueled the growth of technology companies focused on utility applications. Consequently, prospects from technology alliances will become an important vehicle to differentiate Connecticut Energy from other energy companies. During 1996, we completed our first Connecticut Energy five year Strategic Plan at the holding company level which included a significant role for a technology business in our vision for the future. We took our first steps in that direction by creating a new unregulated subsidiary, CNE Venture-Tech, Inc., to invest in technology opportunities related to the utility industry. CNE Venture-Tech will focus on making investments in successful technology companies and participating in new ventures with technology partners serving the utility industry. We believe we can capitalize on our knowledge of the industry, our physical location, our contacts on the East Coast and our business development skills to build a successful network of technology companies that will add value to Connecticut Energy shareholders. "CNE Venture-Tech will partner with those companies that share our vision of technology for utilities -- to unlock the power of data delivered where and when it has the greatest value." /s/ Vincent L. Ammann, Jr. - -------------------------- Vincent L. Ammann, Jr. Senior Vice President The trend in utilities is to continue relying on technology to improve operational efficiencies, enhance customer service and address the demands of a changing environment. - ------------------------------------------------------------------------------ 9 Financial Table of Contents Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 11 Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . 18 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 19 Consolidated Statements of Changes in Common Shareholders' Equity . . . . . . . . . . . . . . . . . . . . . . 20 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . 21 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 22 Management Responsibility for Financial Statements . . . . . . . . . . . 32 Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . 33 Eleven Year Financial Summary . . . . . . . . . . . . . . . . . . . . . . 34 Operating Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Investment Information . . . . . . . . . . . . . . . . . . . . . . . . . 39 Obtaining Shareholder Account Information . . . . . . . . . . . . . . . . 40 Obtaining Company Information . . . . . . . . . . . . . . . . . . . . . . 41 Corporate Directory . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 10 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) 1996 1995 1994 - ------------------------------------------------------------------------------ Net Income $15,165 $14,060 $12,843 - ------------------------------------------------------------------------------ Net income per share $1.70 $1.60 $1.58 - ------------------------------------------------------------------------------ Weighted average shares outstanding 8,924 8,774 8,134 - ------------------------------------------------------------------------------ Net income for 1996 was a record for the Company and increased approximately 8% compared to 1995. Factors affecting the improved results for 1996 were increased firm margins earned by the Company's principal subsidiary, The Southern Connecticut Gas Company ("Southern"), due to higher usage per customer, customer growth and conversions of nonheating customers to heating customers as well as lower operations expense. Partially offsetting the benefits of increased margins and lower operations expense were higher costs for depreciation, taxes and interest. Net income for 1995 increased approximately 9% compared to 1994. Factors affecting the improved results for 1995 were additional interruptible and off-system margins earned and retained by Southern, a 6.6% rate increase implemented by Southern in December 1993, the continued conversion of residential nonheating customers to heating customers and lower operations and maintenance expenses. TOTAL SALES AND TRANSPORTATION VOLUMES Southern's total volumes of gas sold and transported were 40,055 MMcf in 1996, which was a 19% decrease from 1995. The 1996 level was lower principally because of reductions in interruptible and off-system sales and transportation volumes due to the colder weather as well as the competitive price of certain alternate fuels. Partially offsetting these decreases were increases in firm sales and transportation volumes. Throughput in 1995 was 50% higher than in 1994 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. FIRM SALES AND TRANSPORTATION VOLUMES Firm sales and transportation volumes for 1996 were a record and were approximately 14% higher compared to 1995. This increase was principally due to weather that was approximately 17% colder than 1995, which contributed to higher usage per firm customer. Growth in Southern's firm customer base and the conversion of nonheating customers to heating customers also contributed to the increase in firm sales volumes. Additionally, service under Southern's firm transportation tariffs commenced during the third quarter of fiscal 1996. See section entitled "Rate Matters" for additional information regarding Southern's firm transportation tariffs. Firm sales volumes were approximately 12% lower in 1995 compared to 1994. This decrease was primarily attributable to weather that was approximately 14% warmer than 1994 and, to a lesser extent, customer switching between 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. Connecticut Energy Corporation 11 INTERRUPTIBLE SALES AND TRANSPORTATION VOLUMES Margins earned on volumes delivered to interruptible customers vary depending upon the relationship of the market price for alternate fuels to the cost of natural gas and related transportation. Additionally, margins earned, net of gross earnings tax, from interruptible services in excess of an annual target were allocated through a margin sharing mechanism between firm customers and Southern. Beginning June 1, 1996, excess on-system margins earned that would have been returned to firm customers have been redirected, with Connecticut Department of Public Utility Control ("DPUC") approval, to fund certain economic development and hardship assistance programs. See section entitled "Rate Matters" for additional information regarding this DPUC Decision. The chart below depicts volumes of gas sold to and transported for interruptible customers, off-system sales volumes and off-system transportation volumes under the special contract with CL&P as well as gross margins earned and retained due to the margin sharing mechanism on these services for the fiscal years ended September 30: (in thousands) 1996 1995 1994 - ------------------------------------------------------------------------------ Gross margin earned $12,674 $13,702 $7,421 - ------------------------------------------------------------------------------ Gross margin retained $ 7,643 $ 7,390 $5,346 - ------------------------------------------------------------------------------ Volumes sold and transported (MMcf) 17,211 29,680 10,509 - ------------------------------------------------------------------------------ Margins retained by Southern were higher for 1996 compared to 1995 principally due to the absence of allocating margins earned to recover previously deferred transition costs. Margins earned and retained by Southern were higher for 1995 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. GROSS MARGIN The Company's gross margin increased by approximately 3% for 1996 compared to 1995. This increase was principally attributed to higher margins earned from firm sales and services and higher margins retained from interruptible sales and services. Southern's firm rates include a Weather Normalization Adjustment clause ("WNA") which allows Southern to charge or credit the non-gas portion of its firm rates to reflect deviations from normal weather. Because weather during 1996 was approximately 4% colder than normal, the operation of the WNA returned approximately $2,771,000 to firm customers. Gross margin increased by approximately 2% for 1995 compared to 1994. This increase was 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 WNA. The WNA collections helped offset the effects of lower firm sales volumes resulting from weather that was approximately 10% warmer than normal during 1995. Southern's firm rates also include a Purchased Gas Adjustment clause ("PGA") which allows Southern to flow through to its customers, through periodic adjustments to amounts billed, increased or decreased costs incurred for purchased gas compared to base rate levels without affecting gross margin. Adjustments related to Southern's PGA increased revenues and gas costs for 1996 and 1994 by approximately $6,717,000 and $6,885,000, respectively, and decreased revenues and gas costs for 1995 by approximately $3,756,000. 12 Connecticut Energy Corporation OPERATIONS EXPENSE Operations expense was approximately 3% lower in 1996 compared to 1995. This decrease was principally due to lower costs for labor, increased rates for service on customer premises and lower pension and postretirement health care costs. Partially offsetting these positive effects on operations expense was an increase in regulatory commission expense. Operations expense was approximately 2% lower in 1995 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. 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 1994 in accordance with the DPUC's 1993 rate Decision. Accordingly, included in operations expense for 1996, 1995 and 1994 were approximately $2,987,000, $2,987,000 and $1,726,000 related to these amortizations. DEPRECIATION 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 1996 by approximately 2% compared to 1995 primarily due to higher pre-tax income. Although pre-tax income was higher in fiscal 1996, the benefits related to the current deductibility of conservation program expenses, uncollectible accounts and various employee benefit plan contributions caused the effective tax rate to be slightly lower than in fiscal 1995. The total provision for federal and state income taxes increased in 1995 by approximately 38% 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. MUNICIPAL, GROSS EARNINGS AND OTHER TAXES Municipal, gross earnings and other taxes increased approximately 10% in 1996 compared to 1995. This increase was principally due to a higher provision for property taxes, higher gross earnings taxes due to higher revenues and higher sales and use taxes. Municipal, gross earnings and other taxes decreased approximately 6% in 1995 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 taxes imposed on Southern's personal property. INTEREST EXPENSE Total interest expense increased approximately 5% in 1996 compared to 1995. Higher long-term debt costs for 1996 were associated with the issuance of $20,000,000 in secured Medium-Term Notes ("MTN") in August 1996. Additionally, interest costs associated with higher average short-term borrowings, deferred gas costs and the operation of the margin sharing mechanism contributed to this increase. Connecticut Energy Corporation 13 Total interest expense increased approximately 6% in 1995 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 costs and average 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. The Company 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 5.81% in 1996 compared to 5.99% in 1995 and 3.74% in 1994. INFLATION Inflation as measured by the Consumer Price Index for all urban consumers was approximately 2.8%, 2.8% and 3.0% for 1996, 1995 and 1994, respectively. 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 are generally 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 21, 1996, the DPUC issued a final Decision in Docket No. 96-04-30, APPLICATION OF THE SOUTHERN CONNECTICUT GAS COMPANY TO DISPOSE OF A PORTION OF ITS PLANT AND EQUIPMENT. The DPUC approved certain proposals made by Southern regarding the operation of its liquefied natural gas ("LNG") tank and related facilities, which include the sublease of the LNG tank and related facilities from Southern to its nonregulated affiliate, CNE Energy Services Group, Inc. ("CNE Energy"), which would, in turn, sublease the LNG facility to Total Peaking Services, L.L.C. ("TPS"). The members of TPS are CNE Energy and PanEnergy Plus Milford Ventures Company, a wholly-owned subsidiary of EnergyPlus Ventures Company which, in turn, is a wholly-owned subsidiary of PanEnergy Corp. Under an agreement with TPS, Southern will purchase peaking service at a pre-established price structure for five years. After that, Southern will have the right, but not the obligation, to continue purchasing peaking service from TPS at the then prevailing market prices. This arrangement will give Southern the benefit of available peaking service without the burden of supporting the entire cost of the LNG facilities. TPS will assume responsibility for paying the rent due under the LNG tank lease. Accordingly, Southern will benefit from revenues received from TPS and from reductions to be realized in carrying costs, depreciation expense, operations expense and gross earnings taxes. Due to differences between the ratemaking recognition of such savings compared to the additional demand charges from the peaking services agreement, Southern provided a mitigation plan to delay including the demand charges in the PGA mechanism to better match the rate treatment of the costs and benefits of Southern's application. While this transaction has been approved by the DPUC, it will also require approval by the FERC. The transaction will not be effective unless all necessary regulatory approvals are received on terms and conditions acceptable to the parties. Pursuant to Southern's 1993 rate order, which incorporated the provisions of the previously approved PARTIAL SETTLEMENT OF CERTAIN ISSUES ("Partial Settlement"), a target margin, net of gross earnings tax, was established for on-system sales and transportation to Southern's interruptible customers. Margins earned in excess of this target were shared between customers and Southern on an 80%/20% split. 14 Connecticut Energy Corporation In January 1996, Southern requested a reopening of the 1993 rate proceeding to propose a plan to redirect excess on-system margins to be returned to ratepayers for calendar years 1996, 1997 and 1998 to fund certain economic development initiatives in Bridgeport ("BEDI") and provide grants to customers to reduce Southern's current hardship assistance balances ("HAB"). Southern estimated that margins to be earned over the proposed three-year period would be approximately $14,000,000, which would be divided equally between BEDI and HAB. Southern's proposal related to the BEDI included job training and services, certain loan subsidies and health promotion outreach services. Redirection of ratepayer margins for HAB would benefit Southern's hardship customers by reducing their accounts receivable arrearages and would benefit Southern by reducing its provision for uncollectibles for such accounts. On April 26, 1996, the DPUC issued a final Decision regarding Southern's proposal. The DPUC effectively approved Southern's proposal with certain modifications in the direction of BEDI funding initiatives, the imposition of a cap of $6,000,000 per year of ratepayer margins to be split between BEDI and HAB and certain implementation and status reporting requirements. 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. Effective April 1, 1996, commercial and industrial gas customers in Connecticut can contract for their gas supplies from sources other than the local gas distribution companies ("LDC") and pay the LDCs only for the transportation of that gas through their distribution systems at DPUC approved rates. The new firm transportation rates are designed to provide Sout hern with the same margins provided by bundled services. 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 and Southern have committed lines of credit with a number of banks totaling $5,000,000 and $32,000,000, respectively. Additionally, uncommitted lines of credit exist with two banks totaling $18,000,000; and Southern has a revolving credit line agreement for up to $20,000,000 with one bank. This latter agreement has a revolving Connecticut Energy Corporation 15 credit feature through December 21, 1996, followed by a term loan period through December 21, 2000. At September 30, 1996, the Company had unused lines of credit of $55,800,000. 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 1996 compared to 1995 were negatively impacted by higher accounts receivable, inventory, prepaid pension, postretirement health care and deferred certified hardship customer arrearage balances as well as lower balances related to Southern's interruptible margin sharing mechanism. These items were partially offset by higher net income and higher accounts payable, accrued tax and refundable purchased gas cost balances. 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. INVESTING ACTIVITIES Capital expenditures approximated $25,200,000 in 1996, $27,600,000 in 1995 and $26,600,000 in 1994. Southern relies upon cash flows 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. Capital expenditures in 1997 will approximate $27,600,000. Approximately $23,600,000 of budgeted capital expenditures has been allocated to Southern, of which approximately 24% is earmarked for new business. The majority of Southern's remaining planned capital expenditures are to improve, protect and maintain its existing gas distribution system. Over the 1997-2001 period, it is estimated that total exp enditures for new plant and equipment will range between $110,000,000 and $130,000,000. The Company, through its nonutility subsidiary, CNE Energy, funded a joint venture with Louis Dreyfus Energy Corp. in December 1995. The venture provides, among other things, natural gas, fuel oil and other energy products to customers located in New England as well as a full range of energy-related financial, operational and maintenance services to commercial, industrial and municipal customers located in the region. In October 1996, the Company formed a new nonutility subsidiary, CNE Venture-Tech, Inc. ("CNE Venture-Tech"). CNE Venture-Tech is expected to participate or invest in information technology ventures including, but not limited to, providing related services. It is anticipated that CNE Venture-Tech will enter into strategic alliances with other vendors in the information technology business to provide services to utilities and other businesses. FINANCING ACTIVITIES Southern initiated an MTN program in fiscal 1996, which was approved by the DPUC. The program permits the issuance, from time to time, of up to $75,000,000 of secured MTNs over a four-year period in varying amounts and with varying terms. Proceeds from the sale of the MTNs will be used to reduce short-term borrowings incurred primarily in connection with Southern's capital expenditure program and for other general corporate purposes. On August 1, 1996, Southern made its first issuance and sale under the program of $20,000,000 in MTNs at a weighted average rate of 7.84%. As of June 1996, the quarterly dividend paid per share on the Company's common stock was increased to $0.33 per share, or an annual indicated dividend rate of $1.32 per share. 16 Connecticut Energy Corporation 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 $100 par value 4 3/4% cumulative preferred stock. The redemption price was 100% of par value plus accrued dividends through December 30, 1993. Financing plans for 1997 include a proposed sale to the public of approximately 1,000,000 shares of common stock during the latter part of fiscal 1997. The proceeds of this sale will be used for the repayment of short-term debt and for other general corporate purposes. The method, timing and amounts of any future financings by the Company or its subsidiaries will depend on a variety of factors, including capitalization ratios, coverage ratios, interest costs, the state of the capital markets and general economic conditions. 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. These strategies may include business combinations with other compan ies 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 may actually occur, or as to the ultimate effect thereof on the financial condition or competitive position of the Company. 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 latest 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 17 Consolidated Statements of Income (dollars in thousands, except per share) Years Ended September 30, 1996 1995 1994 - ----------------------------------------------------------------------------- OPERATING REVENUES $261,093 $232,093 $240,873 Purchased gas 141,628 115,583 126,870 - ----------------------------------------------------------------------------- Gross margin 119,465 116,510 114,003 - ----------------------------------------------------------------------------- OPERATING EXPENSES: Operations 47,821 49,113 50,209 Maintenance 3,784 3,743 4,035 Depreciation 14,752 14,050 13,031 Federal and state income taxes 7,606 7,436 5,402 Municipal, gross earnings and other taxes 16,838 15,282 16,314 - ----------------------------------------------------------------------------- Total operating expenses 90,801 89,624 88,991 - ----------------------------------------------------------------------------- Operating income 28,664 26,886 25,012 - ----------------------------------------------------------------------------- Other deductions, net 546 519 586 - ----------------------------------------------------------------------------- INTEREST EXPENSE AND PREFERRED STOCK DIVIDENDS: Interest on long-term debt and amortization of debt issue costs 11,065 10,859 10,920 Other interest, net and preferred stock dividends 1,888 1,448 663 - ----------------------------------------------------------------------------- Total interest expense and preferred stock dividends 12,953 12,307 11,583 - ----------------------------------------------------------------------------- NET INCOME $ 15,165 $ 14,060 $ 12,843 - ----------------------------------------------------------------------------- Net income per share $ 1.70 $ 1.60 $ 1.58 - ----------------------------------------------------------------------------- Dividends paid per share $ 1.31 $ 1.30 $ 1.29 - ----------------------------------------------------------------------------- Weighted average common shares outstanding 8,924,299 8,773,878 8,134,021 - ----------------------------------------------------------------------------- See notes to consolidated financial statements. 18 Connecticut Energy Corporation Consolidated Balance Sheets (dollars in thousands, except per share)
As of September 30, 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Utility Plant: Plant in service, at cost $372,776 $350,715 Construction work in progress 3,333 4,132 - ------------------------------------------------------------------------------------------------------------------------------- Gross utility plant 376,109 354,847 Less: accumulated depreciation 118,348 107,244 - ------------------------------------------------------------------------------------------------------------------------------- Net utility plant 257,761 247,603 Nonutility property, net 2,804 2,541 - ------------------------------------------------------------------------------------------------------------------------------- Net utility plant and other property 260,565 250,144 - ------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents 5,121 4,635 Accounts and notes receivable (less allowance for doubtful accounts of $2,742 in 1996 and $3,553 in 1995) 30,873 23,456 Accrued utility revenue, net 2,608 2,675 Unrecovered purchased gas costs -- 2,972 Inventories 15,331 13,115 Prepaid expenses 1,841 2,247 - ------------------------------------------------------------------------------------------------------------------------------- Total current assets 55,774 49,100 - ------------------------------------------------------------------------------------------------------------------------------- DEFERRED CHARGES AND OTHER ASSETS: Unamortized debt expenses 6,238 6,090 Unrecovered deferred income taxes 41,435 37,717 Other 35,216 27,037 - ------------------------------------------------------------------------------------------------------------------------------- Total deferred charges and other assets 82,889 70,844 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $399,228 $370,088 - ------------------------------------------------------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES COMMON SHAREHOLDERS' EQUITY: Common stock -- par value $1 per share: authorized -- 20,000,000 shares; issued and outstanding -- 9,012,267 in 1996; 8,865,210 in 1995 $ 9,012 $ 8,865 Capital in excess of par value 91,079 88,295 Retained earnings 37,870 34,401 - ------------------------------------------------------------------------------------------------------------------------------- Total common shareholders' equity 137,961 131,561 - ------------------------------------------------------------------------------------------------------------------------------- REDEEMABLE PREFERRED STOCK -- -- LONG-TERM DEBT 138,727 119,322 - ------------------------------------------------------------------------------------------------------------------------------- Total capitalization 276,688 250,883 - ------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Short-term borrowings 19,200 24,200 Current maturities of long-term debt 595 594 Accounts payable 14,250 9,586 Federal, state and deferred income taxes 2,424 2,525 Property and other accrued taxes 5,555 4,877 Interest payable 3,569 3,311 Customers' deposits 1,826 1,843 Refundable purchased gas costs 520 -- Other 3,747 4,281 - ------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 51,686 51,217 - ------------------------------------------------------------------------------------------------------------------------------- DEFERRED CREDITS: Deferred income taxes 62,112 56,359 Deferred investment tax credits 3,269 3,561 Other 5,473 8,068 - ------------------------------------------------------------------------------------------------------------------------------- Total deferred credits 70,854 67,988 - ------------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies -- -- - ------------------------------------------------------------------------------------------------------------------------------- Total capitalization and liabilities $399,228 $370,088 - -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. Connecticut Energy Corporation 19 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 OCTOBER 1, 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 Issuance through dividend reinvestment plan 147,057 147 2,784 -- -- 2,931 Net income -- -- -- 15,165 -- 15,165 Dividends paid on common stock ($1.31 per share) -- -- -- (11,696) -- (11,696) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 9,012,267 $9,012 $91,079 $ 37,870 -- $137,961 - --------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 20 Connecticut Energy Corporation Consolidated Statements of Cash Flows (dollars in thousands)
Years Ended September 30, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,165 $ 14,060 $ 12,843 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH: Depreciation and amortization 15,747 14,985 13,844 Provision for losses on accounts receivable 6,549 6,548 6,962 (INCREASE) DECREASE IN ASSETS: Accounts and notes receivable (13,966) (6,306) (12,248) Accrued utility revenue, net 67 (45) (323) Unrecovered purchased gas costs 2,972 1,551 1,452 Inventories (2,216) 1,563 1,634 Prepaid expenses 140 (400) (282) Unamortized debt expense (383) (7) (87) Deferred charges and other assets (6,229) (1,860) (4,852) INCREASE (DECREASE) IN LIABILITIES: Accounts payable 4,664 (1,300) (1,661) Accrued taxes 577 (1,452) 47 Refundable purchased gas costs 520 -- -- Other current liabilities (293) 82 597 Deferred income taxes and investment tax credits 1,743 2,627 1,706 Deferred credits and other liabilities (2,635) 4,323 177 - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 22,422 34,369 19,809 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (25,251) (27,641) (26,669) Contributions in aid of construction 71 32 51 Payments for retirement of utility plant (487) (390) (779) Energy ventures (1,910) -- -- Other -- 40 28 - -------------------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (27,577) (27,959) (27,369) - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid on common stock (11,696) (11,413) (10,754) Issuance of common stock 2,931 3,195 23,669 Issuance of long-term debt 20,000 -- -- Repayments of long-term debt (594) (594) (594) Redemption of preferred stock -- -- (638) (Decrease) increase in short-term borrowings (5,000) 5,400 (4,700) - -------------------------------------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 5,641 (3,412) 6,983 - -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 486 2,998 (577) Cash and cash equivalents at beginning of year 4,635 1,637 2,214 - -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 5,121 $ 4,635 $ 1,637 - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION CASH PAID DURING THE YEAR FOR: Interest $ 12,228 $ 11,701 $ 11,332 Income taxes $ 6,625 $ 6,636 $ 4,252
See notes to consolidated financial statements. Connecticut Energy Corporation 21 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 1 -- Summary of Significant Accounting Policies GENERAL Connecticut Energy Corporation's ("Connecticut Energy" or "Company") consolidated financial statements include the accounts of all subsidiary companies, and all significant intercompany transactions and accounts have been eliminated. The Company's principal subsidiary, The Southern Connecticut Gas Company ("Southern"), is subject to regulation 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 ("GAAP") as applied to regulated public utilities and are in accordance with the accounting requirements and ratemaking practices of the DPUC. In preparing the financial statements in conformity with GAAP, the Company uses estimates. Estimates are disclosed when there is a reasonable possibility for change in the near term. For this purpose, near term is define d as a period of time not to exceed one year from the date of the financial statements. The Company's financial statements have been prepared based on management's estimates of the impact of regulatory, legislative and judicial developments on the Company or significant groups of its customers. The recorded amounts of certain accruals, reserves, deferred charges and assets could be materially impacted if circumstances change which affect these estimates. LINE OF BUSINESS Connecticut Energy is a public utility holding company primarily engaged in the retail distribution of natural gas for residential, commercial and industrial uses through its utility subsidiary, Southern. In December 1994, the Company formed a nonutility subsidiary, CNE Development Corporation ("CNE Development"). CNE Development is an equity holder in an entity formed to purchase and market natural gas and may potentially participate in other nonregulated activities. In August 1995, the Company formed another nonutility subsidiary, CNE Energy Services Group, Inc. ("CNE Energy"). CNE Energy engages in activities relating to the selling, planning, purchasing and management of various energy services to commercial and industrial end users. In October 1996, the Company formed a new nonutility subsidiary, CNE Venture-Tech, Inc. ("CNE Venture-Tech"). CNE Venture-Tech is expected to participate or invest in information technology ventures including, but not limited to, providing related services. It is anticipated that CNE Venture-Tech will enter into strategic alliances with other vendors in the information technology business to provide services to utilities and other businesses. ACCOUNTING FOR THE EFFECTS OF REGULATION 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 were unregulated. In the application of SFAS 71, Southern follows accounting policies that reflect the impact of the rate treatment of certain events or transactions that are permitted to differ from GAAP. The most significant of these policies include the recording of deferred gas costs, deferred environmental evaluation costs and an unfunded deferred income tax liability, with a corresponding unrecovered asset, to account for temporary differences previously flowed through to ratepayers. Southern had net regulatory assets as of September 30, 1996 and 1995 of $59,281 and $51,708, respectively. These amounts are included in deferred charges and deferred credits in the consolidated balance sheets and are solely due to the application of the provisions of SFAS 71. 22 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) During fiscal 1996, the DPUC approved regulations designed to increase competition in the natural gas industry in Connecticut by giving commercial and industrial gas customers the ability to purchase gas from independent brokers and marketers and by allowing local gas distribution companies ("LDC") to charge firm transportation rates for use of their distribution systems. The firm transportation rates are designed to provide Southern with the same margins provided by the bundled services. While the DPUC's actions encourage a competitive environment by deregulating certain activities, the Company believes that it continues to meet the requirements of SFAS 71. 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 twenty-two 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 customers, 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. CONSERVATION ADJUSTMENT MECHANISM In a Decision dated August 23, 1995, the DPUC provided the Connecticut LDCs with guidelines by which conservation-related expenditures not included in current rates charged would be evaluated by the DPUC for recovery through a Conservation Adjustment Mechanism ("CAM"). Based upon a DPUC review of Southern's monthly PGA filing in January 1996, Southern is allowed to include as part of its monthly PGA a separate CAM factor to recover these deferred charges. 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 WNA was implementated in January 1994 and operates for ten months of the year (September through June). 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 ("IRC"), income tax reductions to Southern resulting from such items as liberalized depreciation on 1981 to 1996 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 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 adopted SFAS 109 on 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, 1996, the Company has a deferred tax liability and a corresponding regulatory asset of approximately $41,435 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. Connecticut Energy Corporation 23 Notes to Consolidated Financial Statements (dollars in thousands, except per share) NET INCOME PER SHARE Net income per share is computed based upon the weighted average number of common shares outstanding during each year. 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. DEPRECIATION For financial accounting purposes, depreciation of utility plant is computed using 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. 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. DEFERRED CHARGES AND OTHER ASSETS Deferred charges and other assets include amounts related to the following: As of September 30, 1996 1995 - ------------------------------------------------------------------------------ Hardship heating customer accounts receivable arrearages $11,753 $10,223 Energy assistance funding shortfall 1,502 2,122 Prepaid pension and postretirement medical contributions 11,395 7,969 Conservation costs 3,954 1,840 Environmental evaluation costs 915 1,111 Nonqualified benefit plans 1,160 1,051 Gas holder costs 554 800 Investment in energy ventures 1,960 50 Other 2,023 1,871 - ------------------------------------------------------------------------------ $35,216 $27,037 - ------------------------------------------------------------------------------ Southern has been allowed to recover various deferred charges in rates over periods ranging from three to five years in accordance with the DPUC's Decision in Southern's latest rate case. DEFERRED CREDITS Deferred credits include amounts related to the following: As of September 30, 1996 1995 - ------------------------------------------------------------------------------ Interruptible margin sharing $ 556 $4,851 Nonqualified benefit plans 2,574 2,190 Insurance reserve 722 853 Other 1,621 174 - ------------------------------------------------------------------------------ $5,473 $8,068 - ------------------------------------------------------------------------------ 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. 24 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) 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. 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 to account for temporary differences previously flowed through to ratepayers. In addition, the Company has a deferred tax liability of $3,269 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 the following: Years ended September 30, 1996 1995 1994 - ------------------------------------------------------------------------------ Taxes currently payable -- federal $5,463 $3,817 $2,958 Taxes currently payable -- state 1,669 1,535 1,464 - ------------------------------------------------------------------------------ $7,132 $5,352 $4,422 - ------------------------------------------------------------------------------ Deferred taxes -- federal 474 2,084 980 - ------------------------------------------------------------------------------ Total income tax provision $7,606 $7,436 $5,402 - ------------------------------------------------------------------------------ Sources and tax effects of items which gave rise to deferred taxes are as follows: Years ended September 30, 1996 1995 1994 - ------------------------------------------------------------------------------ Amortization of deferred investment tax credits $ (292) $ (292) $ (292) Unrecovered purchased gas costs (1,288) (542) (508) Depreciation 1,817 1,956 1,779 Minimum tax credits 439 1,024 452 Other (202) (62) (451) - ------------------------------------------------------------------------------ $ 474 $2,084 $ 980 - ------------------------------------------------------------------------------ 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, 1996 1995 1994 - ------------------------------------------------------------------------------ U.S. statutory federal tax rate 35% 35% 35% Depreciation differences 4% 3% 4% Allowance for doubtful accounts, including amounts forgiven and deferred (3%) 1% (7%) Investment tax credits (1%) (1%) (2%) Cost to retire assets, net of salvage (1%) (1%) (2%) State taxes, net of federal tax benefit 5% 5% 5% Pension contribution (3%) (2%) (2%) Conservation expenses (4%) (3%) -- Reduction due to graduated tax rates -- -- (.6%) Other, net 1% (2%) (.4%) - ------------------------------------------------------------------------------ Effective tax rate 33% 35% 30% - ------------------------------------------------------------------------------ Connecticut Energy Corporation 25 Notes to Consolidated Financial Statements (dollars in thousands, except per share) Deferred income tax liabilities (assets) are composed of the following: As of September 30, 1996 1995 - ----------------------------------------------------------------------------- TAX EFFECT OF TEMPORARY DIFFERENCES FOR: Depreciation $22,281 $20,464 Items previously flowed through 41,435 37,717 Alternative minimum tax -- (440) Contributions in aid of construction (715) (689) Nonqualified benefit plans (793) (658) Other (96) (35) - ----------------------------------------------------------------------------- Net deferred income tax liability -- long-term $62,112 $56,359 - ----------------------------------------------------------------------------- As of September 30, 1996 and 1995, the balance sheet caption "Federal, state and deferred income taxes" included approximately $247 and $1,023, respectively, of current deferred federal and state income taxes and approximately $0 and $440, respectively, of minimum tax credits available to reduce federal income taxes to be paid in future periods. Note 3 -- Long-Term Debt Long-term debt outstanding consists of the following: As of September 30, 1996 1995 - ----------------------------------------------------------------------------- FIRST MORTGAGE BONDS: Series L, 8%, due March 1, 1998 $ 4,340 $ 4,480 Series T, 10.02%, due September 1, 2003 3,182 3,636 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 - ----------------------------------------------------------------------------- $119,322 $119,916 - ----------------------------------------------------------------------------- MEDIUM-TERM NOTES: Series MTN, 7.50% - 7.95%, due August 3, 2026 20,000 -- Less: amounts due within one year 595 594 - ----------------------------------------------------------------------------- $138,727 $119,322 - ----------------------------------------------------------------------------- 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. 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. In August 1996, Southern issued and sold $20,000 in secured medium-term notes. These notes have a weighted average rate of 7.84% and a weighted average life of 25 years. They will be redeemed through payments of $5,000 and $15,000 in the years 2006 and 2026, respectively. Proceeds from the sale were principally used to reduce short-term borrowings incurred primarily in connection with Southern's construction program. The aggregate annual sinking fund contributions and principal maturities for the five fiscal years subsequent to September 30, 1996 are as follows: 1997 -- $595; 1998 -- $4,654; 1999 -- $455; 2000 -- $454; 2001 -- $455; total -- $6,613. 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. 26 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) 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: As of September 30, 1996 1995 1994 - ----------------------------------------------------------------------------- BANK LOANS: Outstanding $19,200 $19,200 $12,800 Weighted average interest rate 6.10% 6.79% 5.41% COMMERCIAL PAPER: Outstanding -- $ 5,000 $ 6,000 Weighted average interest rate -- 5.97% 4.95% - ----------------------------------------------------------------------------- As of September 30, 1996, Connecticut Energy and Southern have committed short-term bank credit lines totaling $5,000 and $32,000, respectively, a portion of which supports the issuance of commercial paper. Additionally, uncommitted lines of credit exist with two banks totaling $18,000. Southern also has a revolving credit/term loan agreement with one bank. 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. As of September 30, 1996, Southern had no outstanding borrowings under this agreement. The fee for this facility is 1/8 of 1% per annum. As of September 30, 1996, the Company had unused lines of credit of $55,800. In lieu of compensating balances, Southern pays fees for its lines of credit which are approximately 1/4 of 1% of the amount of the line of credit. The aggregate annual commitment fees on these lines were $110, $96 and $124 for the years ended September 30, 1996, 1995 and 1994, respectively. Note 5 -- Redeemable Preferred Stock The following table summarizes the shares of preferred stock authorized, issued and outstanding: As of September 30, 1996 1995 - ----------------------------------------------------------------------------- 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 Southern's indentures relating to long-term debt 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, $25,492 of Southern's retained earnings as of September 30, 1996 was available for such purposes. Connecticut Energy Corporation 27 Notes to Consolidated Financial Statements (dollars in thousands, except per share) The Company currently issues common stock through the Dividend Reinvestment and Stock Purchase Plan ("DRP") and an employee savings plan ("Target Plan"). 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. As of September 30, 1996, there were 1,260,838 shares reserved for issuance under the DRP and Targ et Plan. Note 7 -- Employee Benefits RETIREMENT PLANS Southern maintains two noncontributory pension plans covering substantially all of its employees and employees of certain affiliates. 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 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 $63 and $23 at September 30, 1996 and 1995, respectively, representing the excess of the accumulated benefit obligation over the fair value of plan assets and accrued pension costs. This liability is offset by an intangible asset of $63 and $23 at September 30, 1996 and 1995, respectively, which represents unrecognized prior service costs. The net periodic pension cost includes the following components: Years ended September 30, 1996 1995 1994 - ----------------------------------------------------------------------------- Service cost benefit earned during the period $ 2,179 $ 1,868 $ 2,117 Interest cost on projected benefit obligation 4,846 4,686 4,263 Actual return on plan assets (9,372) (12,603) (1,986) Net amortization and deferral 3,959 8,135 (1,829) - ----------------------------------------------------------------------------- Net periodic pension cost $ 1,612 $ 2,086 $ 2,565 Regulatory adjustment 233 233 22 - ----------------------------------------------------------------------------- Net pension cost $ 1,845 $ 2,319 $ 2,587 - ----------------------------------------------------------------------------- Portion capitalized to utility plant $ 351 $ 441 $ 439 - ----------------------------------------------------------------------------- The following table sets forth the funded status of Southern's pension plans:
As of September 30, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- PLANS WHERE: Plans Where: ASSETS ACCUMULATED Assets Accumulated EXCEED BENEFITS Exceed Benefits ACCUMULATED EXCEED Accumulated Exceed BENEFITS ASSETS Benefits Assets - -------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligation: Vested benefit obligation $(50,819) $ (747) $(50,481) $ (457) - -------------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $(55,986) $ (914) $(54,827) $ (637) - -------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of projected benefit obligation $(65,618) $(1,560) $(64,718) $(1,591) Plan assets at fair value 79,526 -- 70,177 -- - -------------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation less than (in excess of) plan assets $ 13,908 $(1,560) $ 5,459 $(1,591) Transition obligation 658 -- 827 -- Prior service cost 4,102 273 3,178 295 Unrecognized (gain) loss (8,818) 368 (2,601) 635 Adjustment required to recognize minimum liability -- (63) -- (23) - -------------------------------------------------------------------------------------------------------------------------------- Prepaid pension cost (liability), net $ 9,850 $ (982) $ 6,863 $ (684) - --------------------------------------------------------------------------------------------------------------------------------
28 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: 1996 1995 1994 - ----------------------------------------------------------------------------- Discount rate 8% 7 1/4% 8 1/2% Salary increase rate 5 3/4% 5 1/4% 5 1/2% Expected rate of return on assets 9 1/4% 9 1/2% 9% - ----------------------------------------------------------------------------- The 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 and employees of certain affiliates who meet minimum service and age requirements. Employees may elect to contribute to the plan through payroll deductions on either a taxable or a tax-deferred basis as permitted by Section 401(k) of the IRC. Participants receive a matching contribution of 50% of the first 6% of annual compensation and become vested in the matching contribution over a five year period. Benefits are payable upon retirement, death, disability or termination of employment. Amounts expensed under the plan were $808, $816 and $795 for years ended September 30, 1996, 1995 and 1994, 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 have reached 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 an employee's years of service with Southern. Southern has elected to amortize the transition obligation over twenty 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 totaled $367, was deferred and is being recovered over a three year period. The postretirement benefit costs include the following components: Years ended September 30, 1996 1995 1994 - ----------------------------------------------------------------------------- Service cost benefit attributed to service during the period $ 405 $ 340 $ 598 Interest cost on accumulated postretirement benefit obligation 1,198 1,401 1,282 Actual return on plan assets (837) (594) (113) Net amortization and deferral 1,037 1,071 880 - ----------------------------------------------------------------------------- Net periodic postretirement benefit cost $1,803 $2,218 $2,647 Regulatory adjustment 122 122 (275) - ----------------------------------------------------------------------------- Net postretirement benefit cost $1,925 $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. The 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. Connecticut Energy Corporation 29 Notes to Consolidated Financial Statements (dollars in thousands, except per share) The following table reconciles the funded status of the plan with the amounts recognized in the consolidated balance sheets: As of September 30, 1996 1995 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ (8,796) $ (8,866) Fully eligible active plan participants (2,174) (2,692) Other active plan participants (4,865) (5,493) - ----------------------------------------------------------------------------- Total accumulated postretirement benefit obligation $(15,835) $(17,051) Plan assets at fair value 5,372 3,757 - ----------------------------------------------------------------------------- Accumulated postretirement benefit obligation (in excess of) less than plan assets $(10,463) $(13,294) Unamortized transition obligation 13,053 13,820 Unrecognized (gain) loss (3,811) (2,131) - ----------------------------------------------------------------------------- (Accrued) postretirement benefit obligation $ (1,221) $ (1,605) - ----------------------------------------------------------------------------- The expected long-term rate of return on plan assets is 9 1/4%. The assumed initial health care cost trend rates used to measure the expected cost of benefits are 9% for pre-age 65 claims and 8% for post-age 65 claims. The rates decline to 5% by the years 2004 and 2002, respectively. The weighted average discount rate used to measure the accumulated postretirement benefit obligation is 8%. 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 $6 and $45, respectively, and would change the accumulated postretirement health care benefit obligation by approximately $573. Note 8 -- Leases Total rental expense was $3,035, $3,074 and $2,864 for the years ended September 30, 1996, 1995 and 1994, 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, 1996 are as follows:
Years ended September 30, 1997 1998 1999 2000 2001 Thereafter - -------------------------------------------------------------------------------------------------------------------------------- Office space $2,037 $2,111 $2,111 $2,087 $2,087 $27,222 LNG plant 608 609 608 609 608 11,869 Other 75 72 54 -- -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total Commitment $2,720 $2,792 $2,773 $2,696 $2,695 $39,091 - --------------------------------------------------------------------------------------------------------------------------------
In 1995, the liquefied natural gas ("LNG") plant lease agreement was renewed for two consecutive terms of twelve years. The lease contains an option to purchase the plant at a price based on the then fair market sales value of the unit as defined therein. Note 9 -- Quarterly Financial Data (Unaudited)
Dec. 31, March 31, June 30, Sept. 30, 1996 Quarters ended 1995 1996 1996 1996 - -------------------------------------------------------------------------------------------------------------------------------- Operating revenues $69,775 $120,189 $43,954 $27,175 Gross margin 32,282 53,423 21,127 12,633 Operating income (loss) 8,248 18,107 2,737 (428) Net income (loss) 5,029 14,635 (684) (3,815) Net income (loss) per share* 0.57 1.64 (0.08) (0.42) - -------------------------------------------------------------------------------------------------------------------------------- Dec. 31, March 31, June 30, Sept. 30, 1995 Quarters 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) - -------------------------------------------------------------------------------------------------------------------------------- *Calculated on the basis of weighted average shares outstanding during the applicable quarter.
30 Connecticut Energy Corporation Notes to Consolidated Financial Statements (dollars in thousands, except per share) Note 10 -- Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS The carrying amount approximates fair value because of the short-term maturity of those instruments. LONG-TERM DEBT The fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The estimated fair value of the Company's financial instruments is as follows:
As of September 30, 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value - -------------------------------------------------------------------------------------------------------------------------------- Long-term debt (including current maturities) $(139,322) $(150,808) $(119,916) $(138,171) - --------------------------------------------------------------------------------------------------------------------------------
Note 11 -- 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 latest 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 31 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 32 Connecticut Energy Corporation 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, 1996 and 1995 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, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1996 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. /s/ Coopers & Lybrand L.L.P. - ---------------------------- Coopers & Lybrand L.L.P. New York, New York October 31, 1996 Connecticut Energy Corporation 33 Eleven Year Financial Summary Financial information presented for 1996 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)
1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Operating revenues $261,093 $232,093 $240,873 $212,762 Purchased gas 141,628 115,583 126,870 113,045 Gross margin 119,465 116,510 114,003 99,717 Operations and maintenance expenses 51,605 52,856 54,244 45,023 Depreciation and depletion 14,752 14,050 13,031 12,051 Federal income taxes 5,937 5,901 3,938 3,474 Other taxes 18,507 16,817 17,778 16,044 Other deductions (income), net 546 519 586 510 Interest expense 12,953 12,307 11,575 11,530 Subsidiary preferred stock dividends -- -- 8 32 Income before cumulative effect of accounting change $ 15,165 $ 14,060 $ 12,843 $ 11,053 Cumulative effect of accounting change -- -- -- -- Net income $ 15,165 $ 14,060 $ 12,843 $ 11,053 Net income per share before cumulative effect of accounting change (e) $ 1.70 $ 1.60 $ 1.58 $ 1.50 Net income per share (e) $ 1.70 $ 1.60 $ 1.58 $ 1.50 Annual dividend paid per common share (e) $ 1.31 $ 1.30 $ 1.29 $ 1.28 - -------------------------------------------------------------------------------------------------------------------------------- *CAPITALIZATION Common shareholders' equity $137,961 $131,561 $125,719 $ 99,853 Redeemable preferred stock -- -- -- 638 Long-term debt 138,727 119,322 119,917 120,511 - -------------------------------------------------------------------------------------------------------------------------------- Total capitalization $276,688 $250,883 $245,636 $221,002 - -------------------------------------------------------------------------------------------------------------------------------- *CAPITALIZATION (% OF TOTAL) Common shareholders' equity 49.9 52.4 51.2 45.2 Redeemable preferred stock -- -- -- 0.3 Long-term debt 50.1 47.6 48.8 54.5 - -------------------------------------------------------------------------------------------------------------------------------- Total capitalization 100.0% 100.0% 100.0% 100.0% - -------------------------------------------------------------------------------------------------------------------------------- *COMMON STOCK (E) Shares outstanding at end of period 9,012,267 8,865,210 8,700,266 7,488,467 Book value per share at end of period $ 15.31 $ 14.84 $ 14.45 $ 13.33 Market value per share at end of period $ 20.00 $ 19.38 $ 21.63 $ 24.88 Average daily trading volume 9,000 5,000 5,500 9,000 Shareholders of record at year end 11,274 11,688 12,094 11,094 Percent of institutional ownership 20 21 21 18 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Gross utility plant $376,109 $354,847 $331,953 $313,951 Net utility plant $257,761 $247,603 $234,495 $221,800 Capital expenditures $ 25,180 $ 27,609 $ 26,618 $ 26,070 Oil and gas properties, net -- -- -- -- Total assets $399,228 $370,088 $352,920 $299,795 - -------------------------------------------------------------------------------------------------------------------------------- RATIOS (% OF TOTAL) Operations and maintenance expense as a % of gross margin 43.2 45.4 47.6 45.2 Dividend payout as a % of earnings 77.1 81.3 81.6 85.3 Effective federal tax rate 28.0 30.0 23.0 24.0 *Return on ending common equity 11.0 10.7 10.2 11.1 Price to earnings 11.8 12.1 13.7 16.6 Dividend yield 6.6 6.7 6.0 5.1 Market price as a % of book value 130.6 130.6 149.7 186.6 - -------------------------------------------------------------------------------------------------------------------------------- * 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 $0.21 per share. (c) The writedown of the value of oil and gas properties reduced earnings by $0.10 per share in 1990 and 1989, $0.05 per share in 1987 and $0.03 per share in 1986.
34 Connecticut Energy Corporation
1992 1991 1990 1989 1988 1987 1986 - -------------------------------------------------------------------------------------------------------------------------------- (a)(b)(c) (a)(c) (c) (c)(d) $203,011 $179,172 $174,059 $171,218 $156,978 $157,867 $156,028 104,163 86,778 84,154 81,794 71,787 75,337 79,333 98,848 92,394 89,905 89,424 85,191 82,530 76,695 46,881 42,475 44,085 42,636 38,869 38,218 36,011 11,327 10,540 10,664 10,297 8,533 8,427 7,487 2,287 4,324 3,819 4,740 5,839 6,325 5,270 16,025 15,238 14,431 14,560 14,146 13,617 13,487 531 349 (228) 356 713 276 261 11,536 10,428 10,156 8,598 7,653 7,484 6,848 34 36 39 403 751 849 1,244 $ 10,227 $ 9,004 $ 6,939 $ 7,834 $ 8,687 $ 7,334 $ 6,087 -- -- 1,280 -- -- -- 1,911 $ 10,227 $ 9,004 $ 8,219 $ 7,834 $ 8,687 $ 7,334 $ 7,998 $ 1.43 $ 1.38 $ 1.12 $ 1.28 $ 1.49 $ 1.38 $ 1.16 $ 1.43 $ 1.38 $ 1.33 $ 1.28 $ 1.49 $ 1.38 $ 1.53 $ 1.265 $ 1.24 $ 1.23 $ 1.20 $ 1.17 $ 1.12 $ 1.12 $ 92,605 $ 88,622 $ 74,413 $ 75,001 $ 73,311 $ 61,187 $ 58,731 687 736 786 835 6,429 7,270 8,112 94,106 87,378 91,506 79,686 69,137 64,461 58,714 $187,398 $176,736 $166,705 $155,522 $148,877 $132,918 $125,557 49.4 50.1 44.6 48.2 49.2 46.0 46.8 0.4 0.4 0.5 0.6 4.3 5.5 6.4 50.2 49.5 54.9 51.2 46.5 48.5 46.8 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 7,234,921 7,096,634 6,250,161 6,176,665 6,088,017 5,346,879 5,277,276 $ 12.80 $ 12.49 $ 11.91 $ 12.14 $ 12.04 $ 11.45 $ 11.13 $ 22.25 $ 19.00 $ 16.63 $ 17.63 $ 14.50 $ 13.67 $ 16.00 4,500 5,000 2,950 4,200 2,850 2,550 4,500 9,153 9,163 7,382 7,493 7,662 7,577 7,960 18 14 15 16 16 13 N/A $293,687 $273,862 $255,446 $241,624 $ 222,236 $204,947 $191,589 $210,054 $198,695 $189,108 $181,358 $ 166,970 $155,289 $144,509 $ 22,634 $ 20,331 $ 23,102 $ 23,184 $ 19,471 $ 17,790 $ 20,543 $ 496 $ 542 $ 605 $ 698 $ 1,760 $ 1,889 $ 2,564 $269,504 $247,969 $229,600 $239,327 $ 214,458 $193,842 $186,449 47.4 46.0 49.0 47.7 45.6 46.3 47.0 88.5 89.9 92.5 93.8 78.5 81.2 73.2 18.0 32.0 35.0 37.0 38.0 44.0 42.0 11.0 10.2 11.0 10.4 11.8 12.0 13.6 15.6 13.8 12.5 13.8 9.7 9.9 10.5 5.7 6.5 7.4 6.8 8.1 8.2 7.0 173.8 152.1 139.6 145.2 120.4 119.4 143.8 (d) Includes the cumulative effect of accounting change for unbilled revenues which increased earnings by $0.37 per share. (e) Adjusted to reflect the Company's 3-for-2 stock split in October 1989.
Connecticut Energy Corporation 35 Operating Data
Years ended September 30, 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------ Table 1 Analysis by Utility Customer Class Averaged Over Twelve Months (a) - ------------------------------------------------------------------------------------------------------------------------------ Residential nonheating - ------------------------------------------------------------------------------------------------------------------------------ Mcf* consumption per customer 23 22 23 24 24 24 Annual revenue per customer $ 319 $ 317 $ 317 $ 299 $ 300 $ 289 Rate per Mcf $ 14.05 $ 14.11 $ 13.74 $ 12.62 $ 12.35 $ 12.04 Margin per Mcf $ 8.77 $ 8.96 $ 8.36 $ 7.63 $ 7.52 $ 7.61 Annual number of customers 33,977 34,419 35,170 36,184 37,444 39,186 - ------------------------------------------------------------------------------------------------------------------------------ Residential heating - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 112 98 115 110 108 97 Annual revenue per customer $ 1,180 $ 1,078 $ 1,187 $ 1,074 $ 1,045 $ 904 Rate per Mcf $ 10.51 $ 11.03 $ 10.35 $ 9.73 $ 9.70 $ 9.36 Margin per Mcf $ 5.28 $ 6.01 $ 5.03 $ 4.81 $ 4.81 $ 4.95 Annual number of customers 105,888 104,067 102,043 100,872 99,706 97,406 - ------------------------------------------------------------------------------------------------------------------------------ Residential apartments - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 1,505 1,585 2,132 2,132 2,149 2,006 Annual revenue per customer $ 12,109 $ 12,919 $ 16,611 $ 15,294 $ 15,217 $ 13,401 Rate per Mcf $ 8.05 $ 8.15 $ 7.79 $ 7.18 $ 7.08 $ 6.68 Margin per Mcf $ 2.93 $ 3.23 $ 2.59 $ 2.35 $ 2.33 $ 2.38 Annual number of customers 922 843 751 751 739 725 - ------------------------------------------------------------------------------------------------------------------------------ Commercial firm - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 460 403 452 444 435 387 Annual revenue per customer $ 3,927 $ 3,522 $ 3,826 $ 3,527 $ 3,440 $ 2,917 Rate per Mcf $ 8.53 $ 8.75 $ 8.47 $ 7.95 $ 7.90 $ 7.53 Margin per Mcf $ 3.32 $ 3.73 $ 3.15 $ 3.03 $ 3.02 $ 3.13 Annual number of customers 13,823 13,412 13,142 12,965 12,831 12,758 Annual number of heating customers 8,292 8,005 7,813 7,630 7,541 7,498 - ------------------------------------------------------------------------------------------------------------------------------ Industrial firm - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 1,757 1,856 2,199 2,085 1,925 1,754 Annual revenue per customer $ 13,956 $ 14,362 $ 16,568 $ 14,935 $ 13,691 $ 11,812 Rate per Mcf $ 7.74 $ 7.74 $ 7.53 $ 7.16 $ 7.11 $ 6.73 Margin per Mcf $ 2.63 $ 2.82 $ 2.30 $ 2.30 $ 2.32 $ 2.40 Annual number of customers 1,224 1,258 1,274 1,283 1,287 1,305 Annual number of heating customers 709 722 731 728 716 716 - ------------------------------------------------------------------------------------------------------------------------------ Firm transportation - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 10,590 -- -- -- -- -- Annual revenue per customer $ 22,273 -- -- -- -- -- Rate per Mcf $ 2.10 -- -- -- -- -- Margin per Mcf $ 2.08 -- -- -- -- -- Annual number of customers 31 -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------ Interruptible - ------------------------------------------------------------------------------------------------------------------------------ Mcf consumption per customer 35,566 42,212 37,870 30,545 23,035 21,933 Annual revenue per customer $135,899 $128,705 $121,940 $105,892 $ 86,215 $104,186 Rate per Mcf $ 3.83 $ 3.05 $ 3.22 $ 3.47 $ 3.74 $ 4.75 Margin per Mcf $ 1.17 $ 1.14 $ 0.87 $ 0.88 $ 0.99 $ 1.39 Annual number of customers 220 217 184 152 136 127 - ------------------------------------------------------------------------------------------------------------------------------ Number of total customers 156,085 154,216 152,564 152,207 152,143 151,507 - ------------------------------------------------------------------------------------------------------------------------------ *Mcf -- one thousand cubic feet; MMcf -- one million cubic feet
36 Connecticut Energy Corporation Operating Data
Years ended September 30, 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------- Table 2 Percentage of Operating Revenues - ---------------------------------------------------------------------------------------------------------------------------- Purchased gas 54.2 49.8 52.7 53.1 51.3 48.4 Operations 18.3 21.2 20.8 19.4 21.3 21.7 Maintenance 1.4 1.6 1.7 1.7 1.8 2.0 Depreciation and depletion 5.7 6.0 5.4 5.7 5.6 5.9 Taxes 9.4 9.8 9.0 9.2 9.0 10.9 - ---------------------------------------------------------------------------------------------------------------------------- Purchased gas and operating expenses 89.0 88.4 89.6 89.1 89.0 88.9 - ---------------------------------------------------------------------------------------------------------------------------- Interest expense and other deductions, net 5.2 5.5 5.1 5.7 6.0 6.1 Earnings applicable to common stock 5.8 6.1 5.3 5.2 5.0 5.0 - ---------------------------------------------------------------------------------------------------------------------------- Total 100.0 100.0 100.0 100.0 100.0 100.0 - ---------------------------------------------------------------------------------------------------------------------------- Table 3 Revenue by Customer Class (dollars in thousands) - ---------------------------------------------------------------------------------------------------------------------------- Residential $151,560 $135,061 $145,975 $131,632 $ 127,224 $110,062 Commercial firm 55,846 47,558 50,838 46,022 44,316 37,538 Industrial firm 16,929 18,190 21,339 19,180 17,696 15,557 Firm transportation 690 -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total firm revenue $225,025 $200,809 $218,152 $196,834 $ 189,236 $163,157 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible, transportation and special contract $ 33,790 $ 29,576 $ 21,127 $ 14,697 $ 12,478 $ 14,814 Other 2,278 1,708 1,594 1,231 1,297 1,201 - ---------------------------------------------------------------------------------------------------------------------------- Total operating revenues $261,093 $232,093 $240,873 $212,762 $203,011 $179,172 - ---------------------------------------------------------------------------------------------------------------------------- Margin by Customer Class (a) - ---------------------------------------------------------------------------------------------------------------------------- Residential $ 73,734 $ 72,480 $ 71,643 $ 63,391 $ 62,449 $ 57,153 Commercial firm 20,522 20,005 19,315 17,265 16,946 15,446 Industrial firm 5,293 6,507 6,688 6,111 5,794 5,491 Firm transportation 683 -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total firm margin $100,232 $ 98,992 $ 97,646 $ 86,767 $ 85,189 $ 78,090 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible, transportation and special contract $ 6,188 $ 5,755 $ 4,258 $ 2,427 $ 3,666 $ 5,302 - ---------------------------------------------------------------------------------------------------------------------------- Total margins $106,420 $104,747 $101,904 $ 89,194 $ 88,855 $ 83,392 - ---------------------------------------------------------------------------------------------------------------------------- Table 4 Gas Throughput in MMcf* (b) - ---------------------------------------------------------------------------------------------------------------------------- Residential 14,036 12,280 14,038 13,635 13,233 11,790 Commercial firm 6,365 5,402 5,902 5,786 5,583 4,935 Industrial firm 2,115 2,336 2,787 2,673 2,476 2,287 Firm transportation (c) 328 -- -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total firm throughput 22,844 20,018 22,727 22,094 21,292 19,012 - ---------------------------------------------------------------------------------------------------------------------------- Interruptible, transportation and special contract (c)(d) 17,211 29,680 10,509 6,296 7,992 8,784 Other uses (e) 1,272 1,030 1,066 712 517 521 - ---------------------------------------------------------------------------------------------------------------------------- Total requirements 41,327 50,728 34,302 29,102 29,801 28,317 - ---------------------------------------------------------------------------------------------------------------------------- Peak day delivery in MMcf 217 254 227 204 183 189 - ---------------------------------------------------------------------------------------------------------------------------- Degree days -- actual 5,798 4,970 5,750 5,467 5,354 4,654 Degree days as percentage of "normal" 104% 90% 104% 99% 97% 85% - ---------------------------------------------------------------------------------------------------------------------------- (a) Margin in this table is calculated as revenue minus purchased gas costs and gross earnings tax. (b) Sales volumes from the residential, commercial firm and industrial firm classes of customers reflect volumes delivered but not yet billed at year end. (c) Transportation volumes represent customer-owned gas transported directly to end users, which includes volumes under a special contract for transportation to Connecticut Light and Power Company's (CL&P) Devon generating station. (d) Interruptible service balances daily available supply and demand sales. Southern or the customer can terminate interruptible service at any time. (e) Includes gas used by Southern and unaccounted for gas.
Connecticut Energy Corporation 37 Glossary Firm (Core) 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. Liquefied Natural Gas (LNG) -- Natural gas liquefied 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 -- Interruptible gas service provided to parties outside of a utility's own distribution system. Purchased Gas Adjustment clause (PGA) -- A mechanism by which firm customers are charged or credited for purchased gas costs above or below base rate levels, as prescribed by the DPUC. Throughput -- The amount of gas carried within or outside of 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. Unbundling -- Separating the sale of the natural gas commodity from the service of transporting natural gas to the local distribution company or the end user. 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. 38 Connecticut Energy Corporation Investment Information NAIC STOCK SELECTION DATA The National Association of Investors Corporation (NAIC) is an organization with over 350,000 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 in the Eleven Year Financial Summary on pages 34 and 35. 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 - ------------------------------------------------------------------------------------------------------------------------------ Federal Gross margin Pretax (fed.) net income Net % Yield Price range P-E ratio $ $ per $ % of tax income Earned Dividend Pay- on avg. $ $ Year mil. share mil. g.m. $ mil. $ mil. $ $ out price high low high low - ------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------ 1996 119.5 13.39 21.1 17.7 5.9 15.2 1.70 1.31 77 6.4 22 1/2 18 5/8 13.2 11.0 - ------------------------------------------------------------------------------------------------------------------------------ 5 Yr. avg. 109.7 13.61 17.0 15.4 4.3 12.7 1.56 1.29 83 5.9 24 3/8 19 1/4 15.7 12.3 - ------------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Information - ------------------------------------------------------------------------------------------------------------------------------ Quarter Gross margin $ mil. Pretax (fed.) net income $ mil. Earned per share $ Dividends paid per share $ ended 1996 1995 1994 1996 1995 1994 1996 1995 1994 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 12/31 32.3 32.2 30.1 7.5 7.2 7.2 .57 .57 .67 .325 .325 .320 - ------------------------------------------------------------------------------------------------------------------------------ 3/31 53.4 53.3 50.5 22.0 22.7 20.0 1.64 1.79 1.77 .325 .325 .320 - ------------------------------------------------------------------------------------------------------------------------------ 6/30(a) 21.1 19.1 20.1 (1.4) (2.7) (2.7) (.08) (.23) (.16) .330 .325 .325 - ------------------------------------------------------------------------------------------------------------------------------ 9/30(a) 12.7 11.9 13.3 (7.0) (7.2) (7.7) (.42) (.52) (.53) .330 .325 .325 - ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------ Market price $ Trading volume Quarter 1996 1995 1994 in thousands ended high low close high low close high low close 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 12/31 22 1/2 19 22 1/4 22 18 5/8 19 1/2 26 23 24 7/8 435.5 330.0 266.3 - ------------------------------------------------------------------------------------------------------------------------------ 3/31 22 1/4 18 5/8 19 1/8 20 1/4 18 1/2 19 1/8 25 20 21 1/4 482.0 264.3 508.7 - ------------------------------------------------------------------------------------------------------------------------------ 6/30 20 7/8 18 7/8 19 20 5/8 18 5/8 19 5/8 22 1/2 20 1/4 20 1/4 406.1 336.2 336.3 - ------------------------------------------------------------------------------------------------------------------------------ 9/30 20 3/8 19 20 20 1/2 18 7/8 19 3/8 22 1/4 20 1/4 21 5/8 405.0 229.5 262.2 - ------------------------------------------------------------------------------------------------------------------------------ (a) 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 39 Obtaining Shareholder Account Information TRANSFER AGENT Boston EquiServe, formerly Bank of Boston, is the Transfer Agent and Registrar for Connecticut Energy Corporation (CNE-NYSE) common stock. NO STOCK TRANSFER OR SHAREHOLDER ACCOUNT ACTIVITY TAKES PLACE AT THE CONNECTICUT ENERGY CORPORATION OFFICES. There are four ways to obtain information about your shareholder account: BOSTON EQUISERVE INVESTOR RELATIONS REPRESENTATIVES are available Monday through Friday from 9:00 a.m. to 6:00 p.m. E.S.T. by dialing (800) 736-3001, then pressing "0" to speak with a representative. Please have your social security number available. For hearing impaired shareholders TTY/TDD service is available at (800) 952-9245. Please speak with a representative if you need to: * Change your account mailing address * Report a lost or stolen dividend check or stock certificate 24 HOUR INTERACTIVE PHONE SERVICE is available to obtain the following: * Share balance * Dividend reinvestment and stock purchase plan enrollment form * Dividend reinvestment plan account statement * Direct deposit of dividends enrollment form * Duplicate 1099 form * Stock transfer instructions package Call (800) 736-3001 and follow the interactive prompts. Please have your social security number available. BOSTON EQUISERVE'S INTERNET PAGE [HTTP://WWW.EQUISERVE.COM] allows shareholders to expedite mail requests to investor relations representatives for information such as: * Direct deposit enrollment forms * Dividend reinvestment and stock purchase plan enrollment forms In addition, shareholders may also DOWNLOAD * Stock transfer forms and instructions * W-9 certification forms MAIL REQUESTS can be sent to Boston EquiServe Investor Relations, Mail Stop 45-02-09, P.O. Box 644, Boston, MA 02102-0644. 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 safekeeping in a plan account for the recipient. For further information call Connecticut Energy Corporation at (800) 760-7776. Allow at least two weeks for the transfer to occur. 40 Connecticut Energy Corporation Obtaining Company Information ANNUAL MEETING The Annual Meeting of Shareholders will take place Tuesday, January 28, 1997 at 10 a.m. in the Trumbull Marriott Hotel, 180 Hawley Lane, Trumbull, Connecticut. QUARTERLY EARNINGS RELEASES Press releases are issued when the Company announces quarterly financial results. For the 1997 quarters, results should appear in the Wall Street Journal Digest of Earnings on or about January 29, April 24, July 24 and November 6. 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, or fax your request to Judith Falango at (203) 382-8672. 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, or fax your request at (203) 382-8672. 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: * Most recent stock quotes (updated throughout the trading day) * 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 at the address [HTTP://WWW.CONNENERGY.COM]. AUDIO CASSETTE For visually impaired shareholders or prospective investors, our annual report is available on audio cassettes. The tapes are made by the Connecticut unit of Recordings for the Blind and Dyslexic. Please call (800) 760-7776 to request a copy. Connecticut Energy Corporation 41 Corporate Directory BOARD OF DIRECTORS - ---------------------------------------------- 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 J.R. Crespo Chairman, President and Chief Executive Officer, Connecticut Energy Corporation and The Southern Connecticut Gas Company 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 OFFICERS - ---------------------------------------------- CONNECTICUT ENERGY CORPORATION J.R. Crespo Chairman and Chief Executive Officer of Connecticut Energy and its Subsidiaries; President of Connecticut Energy and The Southern Connecticut Gas Company Thomas A. Trotta Senior Vice President of Connecticut Energy; Executive Vice President and Chief Operating Officer of The Southern Connecticut Gas Company Vincent L. Ammann, Jr. Vice President and Chief Accounting Officer Carol A. Forest Vice President, Finance, Chief Financial Officer and Treasurer of Connecticut Energy and The Southern Connecticut Gas Company; Vice President and Treasurer of Subsidiaries Michael H. Pinto Vice President, Government Affairs J. Richard Tiano Vice President, General Counsel and Secretary of Connecticut Energy and its Subsidiaries THE SOUTHERN CONNECTICUT GAS COMPANY Peter D. Loomis Group Vice President, Customer and Operating Services Phyllis A. O'Brien Group Vice President, Accounting, Regulatory and Customer Relations Salvatore A. Ardigliano Vice President, Marketing and Gas Supply Services James P. Healy Vice President, Energy Services Planning Ernest W. Karkut Vice President, Purchasing and Plant Services Patricia A. Younger Vice President, Customer Relations CNE ENERGY SERVICES GROUP, INC. Larry S. McGaughy President Joseph F. Feeley Vice President and Chief Financial Officer Robert A. Cables Vice President, Marketing and Energy Services CNE DEVELOPMENT CORPORATION Thomas A. Trotta President Salvatore A. Ardigliano Vice President Joseph F. Feeley Vice President and Chief Financial Officer CNE VENTURE-TECH, INC. Thomas A. Trotta President Vincent L. Ammann, Jr. Senior Vice President Joseph F. Feeley Vice President and Chief Financial Officer INDEPENDENT ACCOUNTANTS - ---------------------------------------------- Coopers & Lybrand L.L.P. 1301 Avenue of the Americas New York, NY 10019-6013 LABOR UNION LEADERSHIP - ---------------------------------------------- UNITED STEEL WORKERS OF AMERICA LOCAL 12000 Gabriel Gambardella President Francis J. O'Connor Vice President [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. 42 Connecticut Energy Corporation [logo] Connecticut Energy Corporation 855 Main Street Bridgeport Connecticut 06604 EX-21 12 EXHIBIT 21 SUBSIDIARIES OF CONNECTICUT ENERGY CORPORATION Name State of Incorporation ---- ---------------------- The Southern Connecticut Gas Company Connecticut CNE Development Corporation Connecticut CNE Energy Services Group, Inc. Connecticut CNE Venture-Tech, Inc. Connecticut EX-27 13
UT 1,000 YEAR SEP-30-1996 SEP-30-1996 PER-BOOK 257,761 2,804 55,774 82,889 0 399,228 9,012 91,079 37,870 137,961 0 0 138,727 19,200 0 0 595 0 0 0 102,745 399,228 261,093 7,606 224,823 232,429 28,664 (546) 28,118 12,953 15,165 0 15,165 11,696 11,065 22,422 1.70 1.70
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