SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) November 12, 1997
Connecticut Energy Corporation
(Exact Name of Registrant as Specified in Charter)
Connecticut 1-8369 06-0869582
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
855 Main Street, Bridgeport, Connecticut 06604
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (800) 760-7776
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(Former Name or Former Address, if Changed Since Last Report)
ITEM 5. OTHER EVENTS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and
its subsidiaries and their representatives may, from time to time, make written
or oral statements, including statements contained in the Company's filings with
the Securities and Exchange Commission ("SEC") and in its annual report to
shareholders, including its Form 10-K for the fiscal year ended September 30,
1997, which constitute or contain "forward-looking" information as that term is
defined in the Private Securities Litigation Reform Act of 1995.
All statements other than the financial statements and other statements
of historical facts included in this annual report to shareholders regarding the
Company's financial position and strategic initiatives and addressing industry
developments are forward-looking statements. Where, in any forward-looking
statement, the Company, or its management, expresses an expectation or belief as
to future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
Factors which could cause actual results to differ materially from those stated
in the forward-looking statements may include, but are not limited to, general
and specific economic, financial and business conditions; federal and state
regulatory, legislative and judicial developments which affect the Company or
significant groups of its customers; the impact of competition on the Company's
revenue; fluctuations in weather from normal levels; changes in development and
operating costs; the availability and cost of natural gas; the availability and
terms of capital; exposure to environmental liabilities; the costs and effects
of unanticipated legal proceedings; the successful implementation and
achievement of internal performance goals; the impact of unusual items resulting
from ongoing evaluations of business strategies and asset valuations; and
changes in business strategy.
RESULTS OF OPERATIONS
Net Income
The Company's consolidated net income for the fiscal years ended
September 30 is detailed below:
(in thousands, except per share) 1997 1996 1995
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Net Income $16,441 $15,165 $14,060
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Net income per share $ 1.81 $ 1.70 $ 1.60
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Weighted average common
shares outstanding 9,096 8,924 8,774
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Net income for fiscal 1997 was a record for the Company and increased
approximately 8% compared to fiscal 1996. Factors which contributed to increased
net income for 1997 included higher firm margins earned by the Company's
principal subsidiary, The Southern Connecticut Gas Company ("Southern"), lower
operations and maintenance expenses, lower gross earnings and property taxes and
lower other interest expense. Partially offsetting these positive impacts on net
income were slightly lower interruptible margins and higher costs for
depreciation, income taxes and long-term debt interest.
Net income for 1996 increased approximately 8% compared to 1995.
Factors affecting the improved results for 1996 were increased firm margins
earned by Southern due to higher usage per customer, customer growth and
conversion of nonheating customers to heating customers and lower operations
expense. Partially offsetting the benefits of increased margins and lower
operations expense were higher costs for depreciation, taxes and interest.
Total Sales and Transportation Volumes
Southern's total volumes of gas sold and transported were 45,646 MMcf
in 1997, which was a 14% increase from 1996. The 1997 level was higher
principally due to increases in off-system sales and off-system
transportation volumes. Partially offsetting these increases were lower firm
sales volumes due to warmer weather and lower volumes for on-system
interruptible services due to the competitive price of certain alternate fuels.
Throughput in 1996 was 19% lower than in 1995 principally because of
reductions in interruptible sales, off-system sales and off-system
transportation volumes due to colder weather as well as the competitive price of
certain alternate fuels. Partially offsetting these decreases were increases in
firm sales and transportation volumes.
Firm Sales and Transportation Volumes
Firm sales and transportation volumes for 1997 were approximately 4%
lower compared to 1996. This decrease was principally due to weather that was
approximately 7% warmer than 1996. Growth in Southern's customer base and the
continued conversions of nonheating customers to heating customers partially
offset the overall decrease in this category.
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.
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 on-system interruptible services in excess of an
annual target were allocated through a margin sharing mechanism between Southern
and its firm customers.
Beginning June 1, 1996, excess on-system margins earned that would have
been returned to Southern's firm customers have been redirected, with
Connecticut Department of Public Utility Control ("DPUC") approval, to fund
certain economic development and hardship assistance programs. See section
entitled "Regulatory Matters" for additional information regarding this DPUC
Decision.
The chart below depicts volumes of gas sold to and transported for
on-system interruptible customers, off-system sales volumes and off-system
transportation volumes under a special contract with The Connecticut Light and
Power Company for its Devon electric generating station as well as gross margin
earned and retained due to the margin sharing mechanism on these services for
the fiscal years ended September 30:
(dollars in thousands) 1997 1996 1995
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Gross margin earned $12,872 $12,674 $13,702
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Gross margin retained $ 7,242 $ 7,643 $ 7,390
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Volumes sold and transported (MMcf) 23,794 17,211 29,680
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Gross margin earned by Southern in 1997 was higher than in 1996
principally due to increased off-system sales and off-system transportation
activity. Lower margin retained for 1997 was principally due to the change in
the sharing mechanism for certain off-system services as of April 1, 1996 which
increased the allocation of margins to be returned to firm customers from 50%
to 85%.
Gross margin retained by Southern was higher for 1996 compared to 1995
principally due to the absence of allocating margins earned to recover
previously deferred transition costs.
Gross Margin
The Company's gross margin in 1997 was relatively unchanged compared to
1996. Firm margins, which were a record for the Company, were attributed to
growth in Southern's customer base, but were partially offset by lower
interruptible margins retained as well as lower revenues earned from bailment
activities.
The Company's gross margin increased approximately 3% for 1996 compared
to 1995. This increase was principally due 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
1997 was approximately 3% warmer than normal, the operation of the WNA
collected approximately $2,252,000 from firm customers compared to a return of
approximately $2,771,000 to firm customers in fiscal 1996.
Southern's firm sales rates also include a Purchased Gas Adjustment
clause ("PGA") which allows Southern to flow back to its customers, through
periodic adjustments to amounts billed, increased or decreased costs incurred
for purchased gas compared to base rate levels without affecting gross margin.
Adjustments related to Southern's PGA increased revenues and gas costs for 1997
and 1996 by approximately $6,206,000 and $6,717,000, respectively, and decreased
revenues and gas costs for 1995 by approximately $3,756,000.
Operations Expense
Operations expense was approximately 2% lower in 1997 compared to
1996. This decrease was principally due to lower costs for labor, pensions,
postretirement health care and regulatory commission expense, increased rates
for service on customer premises and a lower insurance reserve for general
claims. Additionally, a higher provision for uncollectibles in 1997 was more
than offset by lower amortizations related to Southern's certified hardship
forgiveness program due to the conclusion of the amortization period as of
December 31, 1996. The overall decrease in operations expense in 1997 was
partially offset by increases in costs incurred for outside services,
insurance premiums and the recently established Restricted Stock Award Plan.
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.
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.
Accordingly, included in operations expense for 1997, 1996 and 1995 was
approximately $1,619,000, $2,987,000 and $2,987,000, respectively, 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
approximately 17% in 1997 compared to 1996 primarily due to higher pre-tax
income.
The total provision for federal and state income taxes increased
approximately 2% in 1996 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.
Municipal, Gross Earnings and Other Taxes
Municipal, gross earnings and other taxes decreased approximately 9% in
1997 compared to 1996. This decrease was primarily due to lower gross earnings
taxes as a result of lower revenues and a lower provision for property taxes
because of the establishment of a lower mill rate in the city of New Haven,
Connecticut.
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.
Other (Income) Deductions, Net
Other income for 1997 was higher compared to 1996 primarily due to the
receipt of approximately $974,000 in interest income from one of Southern's
interstate pipeline suppliers related to Southern's prepayment of transition
costs associated with the Federal Energy Regulatory Commission's Order No. 636
and the recognition of a payment received in connection with a newly formed
subsidiary joint venture. See section entitled "Investing Activities" for
additional information regarding this new joint venture.
Interest Expense
Total interest expense increased approximately 6% in 1997 compared
to 1996. Higher long-term debt costs for 1997 were associated with the
issuance of $20,000,000 in secured Medium-Term Notes ("MTN") in
August 1996. Higher short-term debt costs due to higher average short-term
borrowings and higher short-term interest expense on pipeline refunds not yet
returned to firm customers were more than offset by lower short-term interest
expense on deferred gas cost balances.
Total interest expense increased approximately 5% in 1996 compared to
1995. Higher long-term debt costs for 1996 were associated with the MTN
issuance. 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.
The Company borrows short-term funds at the most competitive rates
by utilizing commercial paper and bank borrowings at money market rates.
Short-term interest rates averaged 5.71% in 1997 compared to 5.81% in 1996
and 5.99% in 1995.
Inflation
Inflation as measured by the Consumer Price Index for all urban
consumers was approximately 2.7%, 2.8% and 2.8% for 1997, 1996 and 1995,
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.
Regulatory Matters
Effective April 1, 1996, the DPUC deregulated the sale of natural gas
to firm commercial and industrial gas customers in Connecticut by giving these
customers an option to purchase natural gas from independent brokers or
marketers. Commercial and industrial customers electing to purchase natural gas
in this manner pay a DPUC - approved firm transportation rate to the local gas
distribution company ("LDCs") for the use of its distribution system.
On August 21, 1997, the DPUC initiated a generic docket, Docket No.
97-07-11, DPUC Generic Investigation into Issues Associated with the Unbundling
of Natural Gas Services by Connecticut Local Distribution Companies, to
investigate issues associated with the unbundling of natural gas firm sales and
transportation services by LDCs in Connecticut, including Southern. The DPUC
intends to conduct this proceeding in two phases. The first phase will address
issues relating to firm transportation service in its present form regarding
delivery of sales and transportation service by LDCs and marketers. Depending on
the findings for this phase, the DPUC may reopen a particular LDC's last rate
case to consider any proposed changes to its respective tariffs and rates. The
second phase of this proceeding will investigate such issues as residential
unbundling, codes of conduct for LDCs and marketers and public policy issues.
Southern, in accordance with Connecticut statutes, will undergo a
periodic review of rates and services by the DPUC commencing in or after
December 1997 if it does not file for a rate increase. A periodic review entails
a complete review by the DPUC of Southern's financial and operating records.
Public hearings will be held to determine whether the current rates are
unreasonably discriminatory or more or less than just, reasonable and adequate.
If Southern determines that a rate increase is required, a general rate case
will be filed in lieu of a rate review.
In February 1997, the Company and Southern requested a reopening of a
DPUC Decision dated December 13, 1978, Docket No. 77-08-28, Application of The
Southern Connecticut Gas Company for Approval of Corporate Reorganization and
Merger and Formation of a Holding Company, for the purpose of addressing changed
conditions in the Company's operations since 1978, which include the dissolution
of certain subsidiaries and deregulation of the natural gas marketplace
resulting from recent federal and state regulatory actions. On May 21, 1997, the
DPUC issued a Decision in the reopened docket. The Decision modified or
eliminated several conditions relating to the Company's nonregulated
subsidiaries. The Company believes those subsidiaries will now have more
flexibility to compete in the rapidly changing energy market on both a
financial and operational basis.
On April 23, 1997, the DPUC issued a final Decision in Docket No.
96-01-28, DPUC Review of the Purchased Gas Adjustment Clause. In this docket,
the DPUC conducted a review to determine what modifications, if any, should be
made to the PGA clause utilized by Connecticut's three LDCs. This review was
conducted to consider the impact of deregulation on the gas industry. In its
Decision, the DPUC determined that the PGA clause should continue because it
has been found to be an effective tool in controlling volatility in earnings
resulting from the instability of gas prices.
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, was a wholly-owned subsidiary of PanEnergy
Corp. (now Duke Energy Corporation).
The DPUC granted approval to move the LNG facility out of Southern and
into an unregulated venture. However, federal approval necessary to finalize
this venture and commence interstate operations is still pending.
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 collected in excess of this target were shared between
customers and Southern on an 80%/20% split.
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 collected 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
equally between BEDI and HAB and certain implementation and status reporting
requirements.
Recent Accounting Developments
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128"), which will be effective for the interim period ending December 31, 1997.
This statement establishes standards for the computation and presentation of
earnings per share ("EPS") by all entities with publicly held common stock or
potential common stock. The statement replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of basic
and diluted EPS on the face of the income statement for all entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. The adoption of SFAS 128 is required by October 1,
1997, and the Company intends to adopt this statement prospectively. The impact
of this standard is not expected to have a material effect on the Company's
reported EPS.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The seasonal nature of Southern's business creates large short-term
cash demands primarily to finance gas purchases, customer accounts receivable
and certain tax payments. To provide these funds, as well as funds for capital
expenditure programs and other corporate purposes, Connecticut Energy and
Southern have credit lines with a number of banks as detailed below:
Shared
Connecticut Connecticut
Energy Southern Energy/Southern Total
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Committed Lines $5,000,000 $32,000,000 $20,000,000 $57,000,000
Uncommitted Lines -- $10,000,000 $10,000,000 $20,000,000
At September 30, 1997, the Company had unused lines of credit of
$45,600,000. 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 1997 were higher compared to 1996. The
increase was principally due to lower accounts receivable balances due to warmer
weather and more aggressive collection efforts, the receipt of pipeline refunds
which are in the process of being returned to customers, lower inventory
balances and higher comparative balances of deferred credits. Partially
offsetting the overall increase in operating cash flows was the effect of warmer
weather on the operation of the PGA and lower accounts payable balances.
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.
Investing Activities
Capital expenditures approximated $28,443,000 in 1997, $25,200,000 in
1996 and $27,600,000 in 1995. Capital expenditures for 1997 were approximately
13% higher compared to 1996 due to the impact of less severe winter weather on
construction activity. 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 1998 will approximate $33,300,000.
Approximately $22,800,000 of budgeted capital expenditures has been allocated to
Southern, of which approximately 28% 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 1998-2002 period, it is
estimated that total expenditures for new plant and equipment will range between
$110,000,000 and $130,000,000.
In September 1997, the Company's nonutility subsidiary, CNE Energy,
formed a joint venture with Delmarva Power & Light Company's bulk energy group.
The alliance was formed to sell natural gas, electricity, fuel oil and other
services in New York and New England. The new energy marketing and sales company
will operate under the name Conectiv/CNE Energy Services, LLC ("Conectiv/CNE").
In addition to selling energy products, Conectiv/CNE will market a full range of
energy-related planning, financial, operational and maintenance services to
commercial, industrial and municipal customers located in New York and New
England. This alliance replaces the joint venture between CNE Energy and Louis
Dreyfus Energy Corp. which was terminated on August 31, 1997.
In September 1997, Southern announced it will construct the
distribution facilities needed to transport natural gas from a gate station in
Stratford, Connecticut to a new 520 megawatt electric generating plant located
approximately ten miles away at the site of United Illuminating Company's
Bridgeport Harbor Station. Included in the Company's 1998 capital expenditures
budget is approximately $8,500,000 for this construction. When completed, the
gas turbine plant will be the largest nonnuclear generating plant in Connecticut
and will have the capacity to provide enough electricity to service up to
260,000 homes. Final contract negotiations with Duke Energy Trading and
Marketing, LLC are still ongoing. Once completed, the contract will be submitted
to the DPUC for review and approval.
In August 1997, the Company's nonutility subsidiary, CNE Venture-Tech,
Inc. ("CNE Venture-Tech"), made an initial investment in the Nth Power
Technologies Fund I ("Nth Power") as a limited partner. Nth Power's venture
capital fund invests in companies that produce or market technologically
advanced, innovative energy-related products. Participation in the fund may
provide business opportunities to its limited partners. CNE Venture-Tech is
committed to invest up to $5,000,000 in the fund over the next three years.
Financing Activities
Financing plans for 1998 include a proposed sale to the public of up to
1,035,000 shares of common stock. 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.
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.
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
companies as well as acquisitions of related or unrelated businesses. The
Company may, from time to time, be engaged in preliminary discussions regarding
one or more of these potential strategies. No assurances can be given as to
whether any potential transaction of the type described 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."
On September 8, 1997, Southern received a letter from the DEP informing
it that the three sites had been entered on the Connecticut Inventory of
Hazardous Waste Sites. The letter states that the site located on Pine Street
in Bridgeport, Connecticut may be of particular interest to the state of
Connecticut because of its proximity to the Connecticut Department of
Transportation expansion project of the U.S. Highway Route Number 95 Corridor.
Placement of the sites on the Inventory of Hazardous Waste Sites means that the
DEP may pursue remedial action pursuant to the Connecticut General Statutes.
Each site is located in an area that permits Southern to voluntarily
perform any remedial action. Connecticut law also allows Southern to retain a
Licensed Environmental Professional to conduct further environmental assessments
and, if necessary, to develop remedial action plans in accordance with
Connecticut Remediation Standard Regulations. Southern intends to confer with
officials of the DEP and the Department of Transportation to establish
priorities in connection with the environmental assessments.
Management cannot at this time predict the costs of any future site
analysis and remediation, if any, nor can it estimate when any such costs, if
any, would be incurred. While such future analytical and cleanup costs could
possibly be significant, management believes, based upon the provisions of the
Partial Settlement in Southern's most recent rate order and regulatory precedent
with other LDCs in Connecticut, 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.
<TABLE>
<CAPTION>
Connecticut Energy Corporation
Consolidated Statements of Income
(dollars in thousands, except per share)
Years ended September 30, 1997 1996 1995
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<S> <C> <C> <C>
Operating Revenues $252,008 $261,093 $232,093
Purchased gas 132,672 141,628 115,583
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Gross margin 119,336 119,465 116,510
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Operating Expenses:
Operations 46,773 47,821 49,113
Maintenance 3,579 3,784 3,743
Depreciation 15,774 14,752 14,050
Federal and state income taxes 8,935 7,606 7,436
Municipal, gross earnings and
other taxes 15,386 16,838 15,282
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Total operating expenses 90,447 90,801 89,624
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Operating income 28,889 28,664 26,886
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Other (income) deductions, net (1,229) 546 519
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Interest Expense:
Interest on long-term debt and
amortization of debt issue costs 12,321 11,065 10,859
Other interest, net 1,356 1,888 1,448
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Total interest expense 13,677 12,953 12,307
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Net Income $ 16,441 $ 15,165 $ 14,060
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Net income per share $ 1.81 $ 1.70 $ 1.60
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Dividends paid per share $ 1.32 $ 1.31 $ 1.30
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Weighted average common shares
outstanding 9,095,521 8,924,299 8,773,878
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See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Connecticut Energy Corporation
Consolidated Balance Sheets
(dollars in thousands, except per share)
As of September 30, 1997 1996
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<S> <C> <C>
Assets
Utility Plant:
Plant in service, at cost $396,263 $372,776
Construction work in progress 3,412 3,333
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Gross utility plant 399,675 376,109
Less: accumulated depreciation 130,553 118,348
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Net utility plant 269,122 257,761
Nonutility property, net 3,343 2,804
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Net utility plant and other property 272,465 260,565
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Current Assets:
Cash and cash equivalents 6,644 5,121
Accounts and notes receivable (less allowance for doubtful
accounts of $2,948 in 1997 and $2,742 in 1996) 29,179 30,873
Accrued utility revenues, net 2,541 2,608
Unrecovered purchased gas costs 5,523 --
Inventories 12,606 15,331
Prepaid expenses 4,067 1,841
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Total current assets 60,560 55,774
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Deferred Charges and Other Assets:
Unamortized debt expenses 6,038 6,238
Unrecovered deferred income taxes 42,929 41,435
Other 42,289 35,216
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Total deferred charges and other assets 91,256 82,889
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Total assets $424,281 $399,228
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Capitalization and Liabilities
Common Shareholders' Equity:
Common stock -- par value $1 per share:
authorized -- 20,000,000 shares;
issued and outstanding -- 9,172,468 in 1997;
9,012,267 in 1996 $ 9,172 $ 9,012
Capital in excess of par value 94,540 91,079
Unearned compensation (1,068) --
Retained earnings 42,297 37,870
Adjustment for minimum pension liability
(net of income taxes) (427) --
- -------------------------------------------------------------------------------
Total common shareholders' equity 144,514 137,961
- -------------------------------------------------------------------------------
Redeemable Preferred Stock -- --
Long-Term Debt 134,073 138,727
- -------------------------------------------------------------------------------
Total capitalization 278,587 276,688
- -------------------------------------------------------------------------------
Current Liabilities:
Short-term borrowings 31,400 19,200
Current maturities of long-term debt 4,654 595
Accounts payable 12,609 14,250
Federal, state and deferred income taxes 5,017 2,424
Property and other accrued taxes 4,567 5,555
Interest payable 3,499 3,569
Customers' deposits 1,718 1,826
Refundable purchased gas costs -- 520
Refunds due customers 2,627 202
Other 3,892 3,545
- -------------------------------------------------------------------------------
Total current liabilities 69,983 51,686
- -------------------------------------------------------------------------------
Deferred Credits:
Deferred income taxes 64,917 62,112
Deferred investment tax credits 2,976 3,269
Other 7,818 5,473
- -------------------------------------------------------------------------------
Total deferred credits 75,711 70,854
- -------------------------------------------------------------------------------
Commitments and contingencies -- --
- -------------------------------------------------------------------------------
Total capitalization and liabilities $424,281 $399,228
- -------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Connecticut Energy Corporation
Consolidated Statements of Changes in Common Shareholders' Equity
(dollars in thousands, except per share)
Adjust- Total
ment for Common
Common Stock Capital in Unearned Minimum Share-
Number Par Excess of Compen- Retained Pension holders'
of Shares Value Par Value sation Earnings Liability Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance through dividend
reinvestment plan 107,054 107 2,205 -- -- -- 2,312
Issuance through restricted
stock award plan and non-
employee director stock plan 53,147 53 1,256 -- -- -- 1,309
Unearned compensation -- -- -- $(1,068) -- -- (1,068)
Net income -- -- -- -- 16,441 -- 16,441
Dividends paid on common stock
($1.32 per share) -- -- -- -- (12,014) -- (12,014)
Adjustment for minimum
pension liability
(net of income taxes) -- -- -- -- -- $(427) (427)
- ----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 9,172,468 $9,172 $94,540 $(1,068) $ 42,297 $(427) $144,514
- ----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
Connecticut Energy Corporation
Consolidated Statements of Cash Flows
(dollars in thousands)
Years ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $16,441 $15,165 $14,060
Adjustments to Reconcile Net Income to Net Cash:
Depreciation and amortization 16,704 15,747 14,985
Provision for losses on accounts receivable 7,297 6,549 6,548
(Increase) Decrease in Assets:
Accounts and notes receivable (5,603) (13,966) (6,306)
Accrued utility revenues, net 67 67 (45)
Unrecovered purchased gas costs (5,523) 2,972 1,551
Inventories 2,725 (2,216) 1,563
Prepaid expenses (2,607) 140 (400)
Unamortized debt expenses (42) (383) (7)
Deferred charges and other assets (5,593) (6,229) (1,860)
Increase (Decrease) in Liabilities:
Accounts payable (1,641) 4,664 (1,300)
Accrued taxes 1,605 577 (1,452)
Refundable purchased gas costs (520) 520 --
Other current liabilities 2,594 (293) 82
Deferred income taxes and investment tax credits 1,303 1,743 2,627
Deferred credits and other liabilities 1,611 (2,635) 4,323
- -------------------------------------------------------------------------------
Net cash provided by operating activities 28,818 22,422 34,369
- -------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (28,504) (25,251) (27,641)
Contributions in aid of construction 61 71 32
Proceeds from (payments for) retirement
of utility plant 462 (487) (390)
Energy ventures (1,458) (1,910) --
Other -- -- 40
- -------------------------------------------------------------------------------
Net cash used by investing activities (29,439) (27,577) (27,959)
- -------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends paid on common stock (12,014) (11,696) (11,413)
Issuance of common stock 2,553 2,931 3,195
Issuance of long-term debt -- 20,000 --
Repayments of long-term debt (595) (594) (594)
Increase (decrease) in short-term borrowings 12,200 (5,000) 5,400
- -------------------------------------------------------------------------------
Net cash provided (used) by financing activities 2,144 5,641 (3,412)
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,523 486 2,998
Cash and cash equivalents at beginning of year 5,121 4,635 1,637
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,644 $ 5,121 $ 4,635
- -------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $14,200 $12,228 $11,701
Income taxes $ 5,041 $ 6,625 $ 6,636
Supplemental Schedule of Noncash
Investing and Financing Activities:
In the year ended September 30, 1997, 52,247 shares of unregistered common
stock were issued pursuant to the Company's 1997 Restricted Stock Award Plan and
900 shares of unregistered common stock were issued pursuant to the Non-Employee
Director Stock Plan.
See notes to consolidated financial statements.
</TABLE>
Connecticut Energy Corporation
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. Certain prior year amounts have been reclassified to conform with
the current format of financial statement presentation.
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 defined
as a period of time not to exceed one year from the date of the financial
statements. The Company's financial statements have been prepared based on
management's estimates of the impact of regulatory, legislative and judicial
developments on the Company or significant groups of its customers. The recorded
amounts of certain accruals, reserves, deferred charges and assets could be
materially impacted if circumstances change which affect these estimates.
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 fiscal 1995, the Company formed two nonutility subsidiaries, CNE
Development Corporation ("CNE Development") and CNE Energy Services Group, Inc.
("CNE Energy"). CNE Development is an equity holder in an entity formed to
purchase and market natural gas and may potentially participate in other
nonregulated activities; CNE Energy engages in activities relating to the
selling, planning, purchasing and management of various energy services to
commercial and industrial end users. In September 1997, CNE Energy formed a
joint venture with Delmarva Power & Light Company's bulk energy group. The
alliance was formed to sell natural gas, electricity, fuel oil and other
services in New York and New England. The new energy marketing and sales company
will operate under the name Conectiv/CNE Energy Services, LLC ("Conectiv/CNE").
In addition to selling energy products, Conectiv/CNE will market a full range of
energy-related planning, financial, operational and maintenance services to
commercial, industrial and municipal customers located in New York and New
England. This alliance replaces the joint venture between CNE Energy and Louis
Dreyfus Energy Corp. which was terminated on August 31, 1997.
In October 1996, the Company formed another nonutility subsidiary, CNE
Venture-Tech, Inc. ("CNE Venture-Tech"). CNE Venture-Tech focuses on investing
in technology companies and participating in ventures with technology partners
serving the utility industry. In August 1997, CNE Venture-Tech made an initial
investment in the Nth Power Technologies Fund I ("Nth Power") as a limited
partner. Nth Power's venture capital fund invests in companies that produce or
market technologically advanced, innovative energy-related products.
Participation in the fund may provide business opportunities to its limited
partners.
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.
The most significant of these policies include the recording of deferred gas
costs, deferred conservation costs, deferred hardship heating customer accounts
receivable arrearages, deferred environmental evaluation costs and an unfunded
deferred income tax liability, with a corresponding unrecovered asset, to
account for temporary differences previously flowed through to ratepayers.
Southern had net regulatory assets as of September 30, 1997 and 1996
of $63,606 and $59,281, respectively. These amounts are included in deferred
charges and other assets and deferred credits in the consolidated balance sheets
and are solely due to the application of the provisions of SFAS 71.
Effective April 1, 1996, the DPUC deregulated the sale of natural gas
to firm commercial and industrial customers by giving these customers an option
to purchase natural gas from independent brokers or marketers. Commercial and
industrial customers electing to purchase natural gas in this manner pay a
DPUC-approved firm transportation rate to the local gas distribution company
("LDCs") for the use of its distribution system.
Southern is one of three Connecticut LDCs whose firm transportation
rates are designed to provide the same margins earned from bundled services.
Because the new rates are margin neutral, there has not been any impact upon
Southern's ability to recover deferred costs through cost-based rate regulation.
Firm transportation rates have eliminated only the gas cost component of the
rates previously charged to these customers. The Company has not experienced any
adverse impact on its earnings or results of operations from this change in rate
structure. Additionally, the DPUC's initiatives for competition have not been
directed toward services for certain groups of customers, including service to
residential classes, which represent the majority of Southern's total throughput
and gross margin.
Management believes that Southern continues to meet the requirements
of SFAS 71 because Southern's rates for regulated services provided to its
customers are subject to DPUC approval; are designed to recover Southern's costs
of providing regulated services and continue to be subject to cost-of-service
based rate regulation by the DPUC.
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 sales 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 implemented
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 1997 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, 1997 and 1996, the Company had a deferred tax
liability and corresponding regulatory asset of approximately $42,929 and
$41,435, respectively, 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.
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
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% for
all years presented. 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:
<TABLE>
<CAPTION>
As of September 30, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Conservation costs $ 4,881 $ 3,954
Energy assistance funding shortfall 882 1,502
Environmental evaluation costs 718 915
Gas holder costs 308 554
Hardship heating customer accounts receivable arrearages 13,439 11,753
Hardship heating customer assistance grant program 634 --
Investment in energy ventures 3,418 1,960
Nonqualified benefit plans 2,302 1,160
Prepaid pension and postretirement medical contributions 13,228 11,395
Other 2,479 2,023
- -------------------------------------------------------------------------------
$42,289 $35,216
- -------------------------------------------------------------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
As of September 30, 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Economic development initiatives $1,339 $ 675
Insurance reserves 1,122 722
Interruptible margin sharing 877 556
Nonqualified benefit plans 2,961 2,574
Other 1,519 946
- -------------------------------------------------------------------------------
$7,818 $5,473
- -------------------------------------------------------------------------------
</TABLE>
Stock-Based Compensation Plan
The Company applies the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to
its restricted stock award plan in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," as permitted by
SFAS 123.
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.
Recent Accounting Developments
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which will be effective
for the interim period ending December 31, 1997. This statement establishes
standards for the computation and presentation of earnings per share ("EPS") by
all entities with publicly held common stock or potential common stock. The
statement replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation. The
adoption of SFAS 128 is required by October 1, 1997, and the Company intends to
adopt this statement prospectively. The impact of this standard is not expected
to have a material effect on the Company's reported EPS.
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 $2,976 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, 1997 1996 1995
- ------------------------------------------------------------------------------
Taxes currently payable-- federal $4,220 $5,463 $3,817
Taxes currently payable-- state 1,232 1,669 1,535
- ------------------------------------------------------------------------------
$5,452 $7,132 $5,352
Deferred taxes-- federal 3,483 474 2,084
- ------------------------------------------------------------------------------
Total income tax provision $8,935 $7,606 $7,436
- ------------------------------------------------------------------------------
Sources and tax effects of items which gave rise to deferred taxes are
as follows:
Years ended September 30, 1997 1996 1995
- ------------------------------------------------------------------------------
Amortization of deferred investment tax credits $ (292) $ (292) $ (292)
Unrecovered purchased gas costs 2,180 (1,288) (542)
Depreciation 1,775 1,817 1,956
Minimum tax credits -- 439 1,024
Other (180) (202) (62)
- ------------------------------------------------------------------------------
$3,483 $ 474 $2,084
- ------------------------------------------------------------------------------
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, 1997 1996 1995
- ------------------------------------------------------------------------------
Statutory federal tax rate 35% 35% 35%
Depreciation differences 3 4 3
Allowance for doubtful accounts,
including amounts forgiven and deferred (1) (3) 1
Investment tax credits (1) (1) (1)
Cost to retire assets, net of salvage (1) (1) (1)
State taxes, net of federal tax benefit 3 5 5
Pension contribution (1) (3) (2)
Conservation costs (1) (4) (3)
Other, net (1) 1 (2)
- -----------------------------------------------------------------------------
Effective tax rate 35% 33% 35%
- -----------------------------------------------------------------------------
Deferred income tax liabilities (assets) are composed of the following:
As of September 30, 1997 1996
- ------------------------------------------------------------------------------
Tax effect of temporary differences for:
Depreciation $24,056 $22,281
Regulatory assets -- income taxes 42,929 41,435
Contributions in aid of construction (741) (715)
Nonqualified benefit plans (928) (793)
Other (399) (96)
- ------------------------------------------------------------------------------
Net deferred income tax liability - long-term $64,917 $62,112
- ------------------------------------------------------------------------------
As of September 30, 1997 and 1996, the balance sheet caption "Federal,
state and deferred income taxes" included approximately $1,933 and $(247),
respectively, of current deferred federal and state income taxes.
Note 3 -- Long-Term Debt
Long-term debt outstanding consists of the following:
As of September 30, 1997 1996
- ------------------------------------------------------------------------------
First Mortgage Bonds:
Series L, 8%, due March 1, 1998 $ 4,200 $ 4,340
Series T, 10.02%, due September 1, 2003 2,727 3,182
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
- ------------------------------------------------------------------------------
$118,727 $119,322
Medium-Term Notes:
Series MTN, 7.50% - 7.95%, due August 3, 2026 20,000 20,000
Less: amounts due within one year 4,654 595
- ------------------------------------------------------------------------------
$134,073 $138,727
- ------------------------------------------------------------------------------
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, 1997 are as
follows: 1998 -- $4,654; 1999 -- $455; 2000 -- $454; 2001 -- $455; 2002 -- $455;
total -- $6,473.
Expenses incurred in connection with long-term borrowings are normally
amortized on a straightline method over the respective lives of the issues
giving rise thereto.
Note 4 -- Short-Term Borrowings
The Company follows the practice of borrowing on a short-term basis
from banks and through the sale of commercial paper. The following information
relates to these borrowings:
As of September 30, 1997 1996
- ------------------------------------------------------------------------------
Bank Loans:
Outstanding $31,400 $19,200
Weighted average interest rate 6.61% 6.10%
Commercial Paper:
Outstanding -- --
Weighted average interest rate -- --
- ------------------------------------------------------------------------------
As of September 30, 1997, Connecticut Energy and Southern have lines
of credit with a number of banks as detailed below:
Shared
Connecticut
Connecticut Energy/
Energy Southern Southern Total
- ------------------------------------------------------------------------------
Committed Lines $5,000 $32,000 $20,000 $57,000
Uncommitted Lines -- $10,000 $10,000 $20,000
As of September 30, 1997, the Company had unused lines of credit of
$45,600. In lieu of compensating balances, Southern pays fees for its committed
lines of credit which are approximately 1/5 of 1% of the amount of the line of
credit. The aggregate annual commitment fees on these lines were $115, $110 and
$96 for the years ended September 30, 1997, 1996 and 1995, respectively.
Note 5 -- Redeemable Preferred Stock
The following table summarizes the shares of preferred stock
authorized, issued and outstanding:
As of September 30, 1997 1996
- -----------------------------------------------------------------------------
The Southern Connecticut Gas Company:
Cumulative preferred stock, $100 par value
Authorized 200,000 200,000
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,
$29,633 of Southern's retained earnings as of September 30, 1997 was available
for such purposes.
During the second quarter of fiscal 1997, 52,247 shares of unregistered
common stock were issued to five senior officers of the Company pursuant to the
Company's 1997 Restricted Stock Award Plan ("Stock Award Plan"). The purpose of
the Stock Award Plan is to motivate participants to work toward achieving
corporate objectives beneficial to the Company and its shareholders by
awarding them shares of common stock which become vested upon achievement of the
objectives. The total number of shares that may be issued under the Stock Award
Plan may not exceed 300,000. This number is subject to adjustment to prevent the
dilution or enlargement of any rights of any participant with respect to his or
her stock. Such shares are exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.
Also during the second quarter of fiscal 1997, the Company established
a Non-Employee Director Stock Plan ("Director Stock Plan"). The purpose of the
Director Stock Plan is to align the interests of non-employee directors with the
Company's shareholders by awarding them shares of common stock. The total number
of shares that may be issued under the Director Stock Plan may not exceed
13,000. This number is subject to adjustment to prevent the dilution or
enlargement of any rights of any participant with respect to his or her stock.
As of September 30, 1997, 900 shares have been issued under the Director
Stock Plan.
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, 1997, there were 1,086,056 shares reserved for issuance under the
DRP and Target 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 $797 and $63 as
of September 30, 1997 and 1996, 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 $85 and $63 as
of September 30, 1997 and 1996, respectively, which represents unrecognized
prior service costs; and in 1997, the balance (net of income taxes) was charged
to a separate component of shareholders' equity.
The net periodic pension cost includes the following components:
Years ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------
Service cost benefit earned during the period $ 2,255 $ 2,179 $ 1,868
Interest cost on projected benefit obligation 5,370 4,846 4,686
Actual return on plan assets (21,078) (9,372) (12,603)
Net amortization and deferral 14,912 3,959 8,135
- -------------------------------------------------------------------------------
Net periodic pension cost $ 1,459 $ 1,612 $ 2,086
Regulatory adjustment 58 233 233
- -------------------------------------------------------------------------------
Net pension cost $ 1,517 $ 1,845 $ 2,319
- -------------------------------------------------------------------------------
Portion capitalized to utility plant $ 357 $ 351 $ 441
- -------------------------------------------------------------------------------
The following table sets forth the funded status of Southern's pension
plans:
<TABLE>
<CAPTION>
As of September 30, 1997 1996
- --------------------------------------------------------------------------------------------------------
Plans Where: Plans Where:
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested benefit obligation $(55,770) $(1,814) $(50,819) $ (747)
- --------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $(61,451) $(1,965) $(55,986) $ (914)
- --------------------------------------------------------------------------------------------------------
Actuarial present value of
projected benefit obligation $(70,143) $(2,527) $(65,618) $(1,560)
Plan assets at fair value 98,207 -- 79,526 --
- --------------------------------------------------------------------------------------------------------
Projected benefit obligation less than
(in excess of) plan assets $ 28,064 $(2,527) $ 13,908 $(1,560)
Transition obligation 490 -- 658 --
Prior service cost 3,608 250 4,102 273
Unrecognized (gain) loss (21,220) 1,109 (8,818) 368
Adjustment required to recognize
minimum liability -- (797) -- (63)
- --------------------------------------------------------------------------------------------------------
Prepaid pension cost (liability), net $ 10,942 $(1,965) $ 9,850 $ (982)
- --------------------------------------------------------------------------------------------------------
</TABLE>
Key assumptions used in the determination of the projected benefit
obligations and the fair value of plan assets were:
1997 1996 1995
- ------------------------------------------------------------------------------
Discount rate 7 1/2% 8 % 7 1/4%
Salary increase rate 4 3/4% 5 3/4% 5 1/4%
Expected rate of return on assets 9 1/2% 9 1/4% 9 1/2%
- ------------------------------------------------------------------------------
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 $782, $808
and $816 for years ended September 30, 1997, 1996 and 1995, respectively.
Postretirement Health Care Benefits
In addition to providing pension benefits, Southern provides certain
health care benefits for its retired employees and retired employees of certain
affiliates. Substantially all 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 recovered over a three
year period, which concluded in December 1996.
The postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Years ended September 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefit attributed to service during the period $ 354 $ 405 $ 340
Interest cost on accumulated postretirement benefit obligation 1,223 1,198 1,401
Actual return on plan assets (1,619) (837) (594)
Net amortization and deferral 1,694 1,037 1,071
- ------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 1,652 $1,803 $2,218
Regulatory adjustment 31 122 122
- ------------------------------------------------------------------------------------------------------------
Net postretirement benefit cost $ 1,683 $1,925 $2,340
- ------------------------------------------------------------------------------------------------------------
</TABLE>
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.
The following table reconciles the funded status of the plan with the
amounts recognized in the consolidated balance sheets:
As of September 30, 1997 1996
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ (9,148) $ (8,796)
Fully eligible active plan participants (2,028) (2,174)
Other active plan participants (5,451) (4,865)
- ------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation $(16,627) $(15,835)
Plan assets at fair value 7,988 5,372
- ------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
(in excess of) less than plan assets $ (8,639) $(10,463)
Unamortized transition obligation 12,285 13,053
Unrecognized (gain) loss (4,442) (3,811)
- ------------------------------------------------------------------------------
(Accrued) prepaid postretirement benefit obligation $ (796) $ (1,221)
- ------------------------------------------------------------------------------
The expected long-term rate of return on plan assets is 9 1/2%. The
assumed initial health care cost trend rates used to measure the expected cost
of benefits are 8% for pre-age 65 claims and 7% for post-age 65 claims. The
rates decline to 4 1/2% by the years 2004 and 2002, respectively. The weighted
average discount rate used to measure the accumulated postretirement benefit
obligation is 7 1/2%. 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 $44,
respectively, and would change the accumulated postretirement health care
benefit obligation by approximately $591.
Note 8 -- Leases
Total rental expense was $2,830, $3,035 and $3,074 for the years ended
September 30, 1997, 1996 and 1995, 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, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending September 30, 1998 1999 2000 2001 2002 Thereafter
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office space $2,136 $2,130 $2,098 $2,087 $2,087 $25,136
LNG plant 609 608 609 608 609 11,259
Other 72 54 -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total commitment $2,817 $2,792 $2,707 $2,695 $2,696 $36,395
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
Dec. 31, March 31, June 30, Sept. 30,
1997 Quarters ended 1996 1997 1997 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $74,873 $106,866 $44,026 $26,243
Gross margin 34,564 51,130 21,487 12,155
Operating income (loss) 9,006 17,800 2,461 (378)
Net income (loss) 5,409 15,211 (1,205) (2,974)
Net income (loss) per share* 0.60 1.67 (0.13) (0.32)
- ---------------------------------------------------------------------------------------------------
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)
- ---------------------------------------------------------------------------------------------------
*Calculated on the basis of weighted average shares outstanding during the applicable quarter.
</TABLE>
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, 1997 1996
- -------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
Long-term debt
(including current maturities) $(138,727) $(160,196) $(139,322) $(150,808)
- -------------------------------------------------------------------------------
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."
On September 8, 1997, Southern received a letter from the DEP informing
it that the three sites had been entered on the Connecticut Inventory of
Hazardous Waste Sites. The letter states that the site located on Pine Street in
Bridgeport, Connecticut may be of particular interest to the state of
Connecticut because of its proximity to the Connecticut Department of
Transportation expansion project of the U.S. Highway Route Number 95 Corridor.
Placement of the sites on the Inventory of Hazardous Waste Sites means that the
DEP may pursue remedial action pursuant to the Connecticut General Statutes.
Each site is located in an area that permits Southern to voluntarily
perform any remedial action. Connecticut law also allows Southern to retain a
Licensed Environmental Professional to conduct further environmental assessments
and, if necessary, to develop remedial action plans in accordance with
Connecticut Remediation Standard Regulations. Southern intends to confer with
officials of the DEP and the Department of Transportation to establish
priorities in connection with the environmental assessments.
Management cannot at this time predict the costs of any future site
analysis and remediation, if any, nor can it estimate when any such costs, if
any, would be incurred. While such future analytical and cleanup costs could
possibly be significant, management believes, based upon the provisions of the
Partial Settlement in Southern's most recent rate order and regulatory precedent
with other LDCs in Connecticut, 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.
Management Responsibility for Financial Statements
The management of Connecticut Energy Corporation is responsible for the
preparation and integrity of the consolidated financial statements and all other
financial information included in this annual report. The financial statements
were prepared in conformity with generally accepted accounting principles
consistently applied and they necessarily include amounts which are based on
estimates and judgments made with due consideration to materiality.
Management maintains a system of internal accounting controls which
it believes provides reasonable assurance that Company policies and procedures
are complied with, assets are safeguarded and transactions are executed in
accordance with appropriate corporate authorization and recorded in a manner
which permits management to meet its responsibility for the preparation of
financial statements. The Company's system of controls includes the
communication and enforcement of written policies and procedures.
The Audit Committee of the Board of Directors, comprised of
non-employee directors, meets periodically and as necessary with management,
the internal auditors and Coopers & Lybrand L.L.P. to review audit plans and
results and the Company's accounting, financial reporting and internal control
practices, procedures and results. Both Coopers & Lybrand L.L.P. and the
Company's internal audit department have full and free access to all levels
of management.
/s/ Carol A. Forest /s/ Vincent L. Ammann, Jr.
Carol A. Forest Vincent L. Ammann, Jr.
Vice President, Finance, Vice President and
Chief Financial Officer and Treasurer Chief Accounting Officer
Report of Independent Accountants
To the Board of Directors and Shareholders
of Connecticut Energy Corporation
We have audited the accompanying consolidated balance sheets of
Connecticut Energy Corporation and its subsidiaries (the Company) as of
September 30, 1997 and 1996 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, 1997. 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1997 in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
New York, New York
October 31, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Connecticut Energy Corporation on Form S-3 (File No. 333-25691) of our report
dated October 31, 1997, on our audits of the consolidated financial statements
of Connecticut Energy Corporation as of September 30, 1997 and 1996, and for the
three years in the period ended September 30, 1997, which report is included in
the Form 8-K of Connecticut Energy Corporation dated November 12, 1997. We also
consent to the reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
New York, New York
November 12, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CONNECTICUT ENERGY CORPORATION
(Registrant)
Date: November 12, 1997 By: /s/Carol A. Forest
----------------- ----------------------------------
Carol A. Forest
Vice President, Finance, Chief
Financial Officer and Treasurer
