SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-8369
CONNECTICUT ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-0869582
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
855 Main Street
Bridgeport, Connecticut 06604
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code
(800) 760-7776
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------- -----------------------------------------
Common Stock ($1 par value) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 20, 1998:
$289,281,972
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at November 20, 1998
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Common Stock, $1 par value 10,331,499
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Connecticut Energy Corporation's 1998 Annual Report to Shareholders
are incorporated into Part II and Part IV. Portions of Connecticut Energy
Corporation's Definitive Proxy Statement dated December 11, 1998 are
incorporated into Part III.
PART I
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CONNECTICUT ENERGY CORPORATION
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and its
subsidiaries and their representatives may, from time to time, make written
or oral statements, including statements contained in the Company's filings
with the Securities and Exchange Commission and in its annual report to
shareholders, including its Form 10-K, 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 Form 10-K regarding the Company's financial
position and strategic initiatives and addressing industry developments are
forward-looking statements. Where, in any forward-looking statement, the
Company, or its management, expresses an expectation or belief as to future
results, such expectation or belief is expressed in good faith and believed
to have a reasonable basis, but there can be no assurance that the statement
of expectation or belief will result or be achieved or accomplished. Factors
which could cause actual results to differ materially from those stated in
the forward-looking statements may include, but are not limited to, general
and specific economic, financial and business conditions; federal and state
regulatory, legislative and judicial developments which affect the Company or
significant groups of its customers; the impact of competition on the Company's
revenues; fluctuations in weather from normal levels; changes in development
and operating costs; the availability and cost of natural gas; the
availability and terms of capital; exposure to environmental liabilities;
the costs and effects of unanticipated legal proceedings; the successful
implementation and achievement of internal performance goals; the impact of
unusual items resulting from ongoing evaluations of business strategies and
asset valuations; and changes in business strategy.
Item 1. Business
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General
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 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 158,000 customers in Connecticut, primarily in
22 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 10
towns in its service area, but does not currently provide any service to
these towns.
The percentage of the Company's revenues contributed by each class of
customers for the last three fiscal years was as follows:
Years ended September 30, 1998 1997 1996
- ----------------------------------------------------------------------
Residential 58.9% 57.9% 58.0%
Commercial firm 17.7 19.5 21.4
Industrial firm 3.9 4.3 6.5
Firm transportation and firm contract 5.5 2.4 0.3
Interruptible and other 14.0 15.9 13.8
----- ----- -----
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.
Through its nonutility subsidiary, CNE Energy Services Group, Inc. ("CNE
Energy"), the Company provides an array of energy products and services to
commercial and industrial customers throughout New England and New York.
The company also participates in a natural gas purchasing cooperative through
another nonutility subsidiary, CNE Development Corporation. A third
nonutility subsidiary, CNE Venture-Tech, Inc., invests in ventures that offer
technologically advanced energy-related products.
In September 1997, CNE Energy formed a joint venture with Delmarva Power &
Light Company's bulk energy group. The venture operates under the name
Conectiv/CNE Energy Services, LLC and sells natural gas, electricity, fuel
oil and other services and markets a full range of energy-related planning,
financial, operational and maintenance services to commercial, industrial and
municipal customers in New England and New York. In February 1998, the
venture formed an alliance with Berkshire Energy Marketing, a division of
the Massachusetts natural gas distribution utility, Berkshire Gas Company.
The alliance markets energy commodities and services to commercial and
industrial customers in western Massachusetts, eastern New York and southern
Vermont.
As the result of a merger of Delmarva Power & Light Company and Atlantic
Energy, Inc., a holding company under the name Conectiv was formed. In
September 1998, CNE Energy and Conectiv Energy Supply, Inc., a subsidiary of
Conectiv, formed two joint ventures, Total Peaking Services, LLC ("TPS")
and CNE Peaking, LLC ("CNEP").
TPS, headquartered in Bridgeport, Connecticut, operates a 1.2 billion cubic
foot liquefied natural gas ("LNG") open access storage facility in Milford,
Connecticut. The facility has access to three major natural gas pipelines in
New England: Algonquin Gas Transmission Company, Iroquois Gas Transmission
System, L.P. and Tennessee Gas Pipeline Company. TPS has received Federal
Energy Regulatory Commission ("FERC") approval of its market-based tariffs
and is prepared to store and redeliver customer-owned LNG at the Milford
facility beginning this winter.
CNEP provides a firm in-market supply source to assist energy marketers and
local gas distribution companies ("LDCs") in meeting the maximum demands of
their customers by offering firm supplies for peak-shaving and emergency
deliveries. CNEP operates out of Newark, Delaware.
As of September 30, 1998, the Company, through its subsidiaries, had 488
full-time employees, the majority of whom were employees of Southern.
Customers
General
From 1993 through 1998, the average number of on-system customers served by
Southern grew from approximately 152,200 to 157,800. 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 181,000 firm residential
units. Interruptible service is available to those customers 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,
industrial and multi-family 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 can sell 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, Firm Transportation and Firm Contract
In 1998, firm services represented approximately 86% of operating revenues and
approximately 61% 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 section entitled "Rates
and Regulation" for further detail).
Southern provides firm contract sales service to Yale University in accordance
with rates specified in a DPUC-approved special contract for the sale of gas to
this facility. Southern and CNE Energy provide firm transportation contract
service to a 520 megawatt electric generating plant in Bridgeport in accordance
with a DPUC-approved contract.
Southern concentrates on customer additions that are the most cost-effective to
achieve. Over the past several years, Southern has focused on adding load along
its existing mains, which generally requires a lower capital outlay than adding
load requiring new main. Approximately 59% 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, which include off-system 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 LDCs. In Southern's service area, gas is transported to
customers using interstate pipeline transportation and Southern's distribution
system.
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 transportation service to The Connecticut Light and Power
Company's Devon electric generating station in accordance with rates specified
in a special contract for the transportation of gas.
In 1998, interruptible sales, transportation and special contract services
represented approximately 13% of operating revenues and approximately 37% 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's marketing focus has undergone change in the last year. While
Southern continues to aggressively pursue new residential and commercial
heating customers, markets which are increasingly being targeted include
power generating plants, marketers and aggregators. Marketing emphasis on
customer incentive programs has increased to also include building business
relationships with this new customer group in addition to architects, engineers
and municipalities. By recognizing these marketers as customers rather than
competitors, Southern expects the marketer to establish and finance incentive
programs with input from Southern. If Southern is allowed to exit the merchant
function and becomes solely a distribution company, the key element to its
future growth will be increasing system throughput.
Southern's sales force has established an automated database to track
consumer trends and reduce the amount of time necessary to enter a new
business authorization into its costing network.
Residential Market
In the residential heating market, despite record low oil prices, 1,943
customers were added in 1998 compared to 2,641 customers in 1997 and 1,866 in
1996. Residential conversions accounted for 63% of these additions in 1998,
compared to 60% in 1997 and 52% in 1996. Southern's residential marketing
programs include a conversion burner program and an employee generated leads
program for heating conversions. Southern has also established relationships
with manufacturers and distributors in an effort to utilize their resources
to attract new business.
Commercial and Industrial Markets
In the commercial and industrial markets, emphasis is placed on adding new firm
and interruptible sales. Marketing programs for commercial and industrial
customers include a program offering customers the option of financing new
equipment through Southern and a conversion burner leasing program which
provides customers with a low cost opportunity to switch to natural gas.
Additionally, Southern's commercial and industrial sales group has embarked
on a load retention program.
Effective April 1, 1996, firm transportation service became available to
commercial and industrial customers. As of September 30, 1998, there were
1,789 firm transportation customers representing 2,094 accounts purchasing
natural gas directly from marketers. The trend is for more of Southern's
commercial and industrial customers to exercise choice once they become aware
of its benefits. Southern encourages all eligible commercial and industrial
customers to proactively learn more about their options.
The commercial marketing programs are targeted toward increasing natural gas
consumption in the industrial sector by promoting the productivity, product
quality, efficiency and environmental benefits of modern natural gas
technologies to industrial plant managers and specifiers. For example,
natural gas fired desiccant dehumidification equipment has begun to receive
acceptance in supermarket and ice-rink applications.
With the continuing deregulation of energy markets and advancements in natural
gas turbine technologies, cogeneration is a viable economic solution for many
industrial customers. For example, in 1998, Yale University installed a 13.5
megawatt cogeneration system that will provide both electricity and steam for
many of its facilities. The new state-of-the-art cogeneration facility uses
three gas turbines and other modern equipment to generate electricity and
steam from natural gas to provide heating and cooling to the central campus.
The Bridgeport Energy combined cycle generating plant is representative of new
energy marketplace dynamics created by deregulation. The facility buys its gas
supplies through third party marketers. Southern then transports the supplies
to the plant via its new 11-mile natural gas distribution facility that links
the plant with the Iroquois Gas Transmission System. This plant has the
capability of consuming up to 30,000,000 Mcf of volume annually.
Natural Gas Vehicles
Natural gas vehicles ("NGVs") represent another opportunity to increase the base
load usage of natural gas. Southern has been active in this market, and it is
estimated that there will be more natural gas vehicles operating in its service
area by January 1, 1999. Existing customers include the U.S. Postal Service,
R.R. Donnelley and Sons Company, South Central Regional Water Authority, BHC
Company and the town of Westport.
More fleets expect to add natural gas vehicles during the next five years as
federal legislation requires fleets to "phase-in" the use of cleaner alternate
fuel vehicles. Natural gas is the leading alternate fuel for vehicle use.
The strategic location of Southern's franchise area, which lies along the
Interstate 95 and 91 corridor, is key to maximizing the profitability of the
existing distribution system, specifically for natural gas vehicular fueling
use.
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 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 100 days of storage service with 648,000 Mcf of annual delivery.
The remaining term of this contract is 14 years. Under other contracts
which have remaining terms of five to nine 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
that 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, which is delivered to customers under its transportation
agreements or stored under its storage agreements for later delivery during
peak periods. These agreements vary in terms of delivery obligations and the
contract terms range from one month to three 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 four to eight years, and the transportation agreement with Iroquois
has a remaining term of 13 years.
Supplemental Supply
Southern has an agreement with Distrigas to purchase 328,000 Mcf annually on a
firm basis. This contract continues for four 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 LNG and liquefied propane air storage facilities are available to
meet peak and winter demand requirements (see section entitled "Connecticut
Regulation" for the Decision in Docket No. 96-04-30).
Recent FERC Initiatives
The FERC recently announced several initiatives that will affect regulation of
the natural gas industry. On July 29, 1998, the FERC issued a Notice of Inquiry
in Docket No. RM98-12. In this proceeding, the FERC is seeking comments about
the need to change its current regulatory policies relating to (1) the pricing
of existing capacity, (2) the pricing of new capacity, (3) the use of index
rates and benchmark adjustments to streamline rate filings, (4) means to
employ performance-based incentive regulation, (5) the use of market-based
rates for turn back capacity, (6) the use of market-based rates for unsubscribed
capacity and (7) methods to negotiate pre-construction risk among parties to an
expansion of pipeline capacity.
On the same date that it issued its Notice of Inquiry, the FERC also issued a
Notice of Proposed Rulemaking in Docket No. RM98-10. In this proceeding, the
FERC proposes the removal of price caps in the short-term market and proposes
revised regulations that would subject all released capacity to an auction
process. The FERC is also proposing to permit pipelines to negotiate the
terms and conditions of transportation service under limited conditions.
On September 30, 1998, the FERC initiated two additional proceedings. In Docket
No. RM98-9, the FERC proposes to modify its regulations governing applications
to construct new pipeline capacity. Among other things, the FERC proposes to
expand the scope of pipeline certificate authorizations to allow pipelines to
replace and abandon more facilities than are currently covered by the blanket
certificate, including replacements involving incrementally larger replacement
pipe. In addition, the FERC proposes to establish an environmental checklist
intended to add certainty to the environmental review aspect of certificate
applications.
Also on September 30, 1998, the FERC announced a Notice of Proposed Rulemaking
in Docket No. RM98-16 to expand the use of collaborative procedures for
applicants proposing to build new pipeline facilities as well as hydroelectric
projects. The proposed regulations are intended to bring applicants and
potentially affected parties together in a pre-filing collaborative process
to resolve significant issues, including issues likely to be raised in the
environmental review process.
The above-mentioned initiatives are subject to the outcome of notice and comment
procedures and have not yet taken the form of final, binding regulations.
Therefore, it is difficult to ascertain the precise impact they will have on
the business interest of LDCs like Southern.
Recent Pipeline Rate Case Decisions
On July 29, 1998, the FERC issued a Decision in the Iroquois Rate Case, Docket
No. RP97-126. As a result of the FERC's Decision, Southern will experience a
reduction in rates of approximately $2,300,000 per year, or 28%. The new
rates became effective August 31, 1998. Iroquois has filed a request for
rehearing and will have further opportunity to appeal the FERC's Decision.
The FERC issued final approval of a Joint Stipulation and Agreement Amending a
Global Settlement in Texas Eastern Docket No. RP98-198 on October 29, 1998. In
this settlement between Texas Eastern and its customers, Texas Eastern will
reduce its book depreciation rates as a funding mechanism to permit more rapid
collection of gas contract reformation costs, the roll-in of certain rates, and
a reduction in its rates. Texas Eastern agreed to accept all risks associated
with turnback of capacity until December 31, 2003 and a rate moratorium until
that date. Reductions in rates to Southern will be approximately $6,200,000.
On August 31, 1998, CNG Transmission filed with the FERC an uncontested
Stipulation Agreement of Settlement in Docket No. RP97-406. The FERC issued
final approval of the settlement on November 24, 1998. Southern will
experience a 23% reduction in rates and the roll-in of GSS-II storage over
the next five years.
Off-System Sales
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 under flexible terms and
pricing for periods of less than one year without prior approval of the DPUC.
In fiscal 1998, Southern dispatched approximately 4,484,100 Mcf of volume as
part of its off-system sales program.
Off-system sales are performed by Southern through an effective trading
operation established over the last three years. Southern has established a
recognized sales function in various natural gas markets in the United States.
Southern's customers include other LDCs, marketers, electric generation and
wholesale customers. Southern has pooling agreements and a unique asset base
enabling it to deliver reliably and competitively along a significant portion
of the eastern pipeline grid under the full range of operating and marketing
conditions.
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 major eastern U.S. natural gas distribution
companies or their affiliates to form the East Coast Natural Gas Cooperative,
LLC to access competitively priced gas supplies. Southern has experienced
reduced gas costs and increased operational flexibility as a result of the
activities of the Cooperative.
Rates and Regulation
Connecticut Regulation
General
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 12 months or less. Southern's
firm sales rates change monthly pursuant to a DPUC-approved Purchased Gas
Adjustment clause, 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.
Rate Review Docket
In July 1998, the DPUC issued a Decision in Docket 97-12-21, DPUC Financial and
Operational Review of the Southern Connecticut Gas Company. In this portion of
the Docket, the DPUC initiated hearings which determined that the Company
overearned historically and was likely to do so for the projected 12-month
period ending June 30, 1999. The DPUC, therefore, ordered an interim
rate decrease of $528,000 per year for the Company's firm sales customers.
This reduction was implemented on July 8, 1998.
The second phase of Docket 97-12-21 involves a four-year financial and
operational review as required by Section 16-19a of the General Statutes of
Connecticut. This section states: "The Department of Public Control shall,
at intervals of not more than four years from the last previous general rate
hearing of each gas and electric company having more than 75,000 customers,
conduct a complete review and investigation of the financial and operating
records of each such company..." The company expects to receive a Decision
in this docket in December 1998.
Unbundling of Natural Gas Services
In August 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 firm
transportation rates are designed to provide Southern with the same margins
provided by bundled services.
In August 1997, the DPUC initiated a generic docket, Docket 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 has conducted this proceeding in two phases. The first phase addressed
issues relating to firm transportation service in its present form regarding
delivery of sales and transportation service by LDCs and marketers. The DPUC
reopened each LDC's latest rate case to consider proposed changes to its
respective tariffs and rates. An Interim Decision was approved on October 28,
1998 which affected the way LDCs administer firm transportation services by
providing for changes in the load balancing provisions in the LDCs' tariffs as
well as for enhanced billing options for customers. The Interim Decision is
scheduled to be finalized in January 1999. The second phase of this
proceeding will investigate such issues as residential unbundling, codes of
conduct for LDCs and marketers, and public policy issues. A schedule has not
yet been established for this phase.
Sublease of Liquefied Natural Gas Plant
In August 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
included the sublease of the LNG tank and related facilities from Southern to
CNE Energy, which would, in turn, sublease the LNG facility to TPS. TPS has
received FERC approval of its market-based tariffs and is prepared to store
and redeliver customer-owned LNG beginning this winter.
Interruptible Margin Sharing
In January 1996, Southern requested a reopening of its 1993 rate proceeding to
propose a plan to redirect excess on-system interruptible margins, which would
otherwise be returned to ratepayers, for calendar years 1996, 1997 and 1998 to
two programs to fund certain economic development initiatives in Bridgeport and
to provide grants to customers to reduce Southern's hardship assistance
balances. 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 the programs. Southern's proposal related to the economic
development initiatives in Bridgeport included job training and services,
certain loan subsidies and health promotion outreach services. Redirection
of ratepayer margins for hardship assistance balances benefits Southern's
hardship customers by reducing their accounts receivable arrearages and
benefits 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 funding of the Bridgeport economic
development initiatives, the imposition of a cap of $6,000,000 per year of
ratepayer margins to be split equally between the programs and certain
implementation and status reporting requirements.
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 regulations 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 alternate
fuel vehicles for fleets of more than 10 vehicles beginning in 1998 and (3)
require power plants to phase-in significant emission reductions of sulfur
dioxide and nitrogen oxide by the year 2000. Similarly, the Energy Policy
Act of 1992 (1) requires that federal agencies begin phasing-in the use of
alternate fuels in vehicles in 1993, (2) offers tax incentives to private
parties who use or facilitate the use of alternate fuel vehicles and (3)
requires a lessening reliance on foreign fuels. In 1996, the FERC also
issued Order No. 888, mandating that electric utilities provide open access
transmission at wholesale. This Order has expanded opportunities for the
sale of power from gas fired generating units. 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, the FERC has effected major changes in the regulations governing the
natural gas industry, especially FERC Order No. 636 which mandated the
unbundling of interstate pipeline services. The actions by the FERC have
increased competition in the natural gas industry by requiring interstate
pipeline companies to provide gas transportation to others on a
nondiscriminatory basis.
The FERC has also been involved in oversight of the Gas Industry Standards
Board, a group comprised of interstate pipelines and shippers. The Board's
actions to standardize essential terms of interstate pipeline transportation
have an effect on the manner in which Southern interacts with suppliers and
pipeline companies. The FERC has also announced recent rulemaking
initiatives governing the prices and terms under which pipeline customers,
including Southern, can purchase capacity or resell the capacity they
currently hold, a point discussed in the section entitled "Gas Supply,
Recent FERC Initiatives." These initiatives, if adopted, will also affect
Southern's decisions regarding the acquisition and retention of interstate
pipeline capacity; however, the nature of such impacts cannot now be
predicted.
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 has conferred with officials of the DEP, including the DEP liaison for
the Department of Transportation's U.S. Highway Route Number 95 Corridor
expansion project, to establish priorities in connection with the
environmental assessments. As a result of those conferences, Southern and the
DEP have negotiated and executed a Consent Order with respect to the Pine Street
site located in Bridgeport. Pursuant to the Consent Order, Southern has agreed
to undertake an investigation of the Pine Street site and its immediate
surrounding area to determine potential sources of contamination and remediate
contamination which may be found to have emanated or be emanating from the Pine
Street site as a result of Southern's activities on the site. The schedule and
scope of the investigation have been agreed to by Southern and the DEP. As a
result of this Consent Order, Southern has recorded and deferred $150,000 for
costs related to this site investigation. When the investigation is complete,
Southern should be able to propose to the DEP what, if any, plan for remediation
is appropriate for the site. Until such investigation is complete, management
cannot predict the cost, if any, of any appropriate remediation for the Pine
Street site.
Neither can management, at this time, predict the costs for any future site
analysis and remediation for the remaining two sites, 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 local distribution companies 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,
results of operations or cash flows.
Year 2000 Readiness Disclosure
Like other companies which use business-application software programs and rely
on a computing infrastructure that includes embedded systems, the so-called Year
2000 issue also affects the Company and its subsidiaries. Certain of the
Company's software programs and computing infrastructure that use
two-digit years, rather than four-digit years, to define the applicable year
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in the computer or device shutting down, performing
incorrect computations or performing inconsistently.
In 1996, the Company began a project to address Year 2000 issues. It has been
implementing individual strategies targeted at the specific nature of the Year
2000 issues in each of the following areas: (1) business-application systems,
(2) embedded systems, (3) vendor and supplier relationships, (4) customers
and (5) contingency planning. The Company's Year 2000 project is proceeding
on schedule.
To coordinate its comprehensive Year 2000 program, the Company established a
Year 2000 Task Force, chaired by the Vice President, General Counsel and
Secretary who reports directly to the Chairman and Chief Executive Officer.
The Year 2000 Task Force includes executive management and employees with
expertise from various disciplines including, but not limited to, information
technology, operations, engineering, finance, facilities and communications,
internal audit, purchasing and law. In addition, the Company has utilized
the expertise of outside consultants to assist in the implementation of the
Year 2000 program in such areas as project initiation and planning, business-
application system inventory and analysis, business-application system
remediation, business-application system replacement, and embedded systems
inventory and analysis.
The Company's principal subsidiary, Southern, is subject to regulation from the
DPUC, among other governmental agencies. At the DPUC's request, Southern has
previously reported the progress of its Year 2000 program to the DPUC on three
separate occasions. On October 23, 1998, the DPUC announced that it was seeking
to engage the services of a consultant to perform an audit of the computer
systems at all of Connecticut's major utility companies, including Southern,
to assess their readiness to handle the changeover to the Year 2000.
See Management's Discussion and Analysis in the Company's 1998 Annual Report to
Shareholders for further detail regarding the Year 2000 issue as it relates to
the Company's operations.
The estimates and conclusions herein contain forward-looking statements and are
based on management's best estimates of future events. Risks to completing the
Year 2000 Program include the availability of resources, the Company's ability
to discover and correct the potential Year 2000 sensitive problems which could
have a serious impact on specific facilities, and the ability of suppliers to
bring their systems into Year 2000 compliance.
Item 2. Properties
- -------------------
The Company's physical plant and properties primarily consist of Southern's gas
distribution facilities. Southern had 2,157 miles of main and 123,631 service
units as of September 30, 1998. 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
12 years. The lease contains an option to purchase the plant for a purchase
price based on the then fair market sales value of the unit as defined therein.
During 1998, Southern subleased the LNG facility to CNE Energy. CNE Energy, in
turn, subleased the LNG facility to TPS. Southern will continue to operate the
LNG facility under an agreement with TPS and will remain primarily responsible
for the lease payments in the event that the sublessees do not make the
required payments.
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., et al., Connecticut Superior Court -
Middletown, 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 ("CUTPA") 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. In response to the court's granting a motion to strike the Complaint
on the grounds of misjoinder filed by Southern and another defendant, the
plaintiffs again amended their Complaint to add causes of action in conspiracy
to violate the CUTPA and conspiracy to violate the antitrust laws. All three
defendants filed motions to strike that complaint. The court struck all counts
except the claim of conspiracy to violate the antitrust laws. The plaintiff
contractor then sued each LDC separately, in their respective judicial
districts, and Southern was sued in Bridgeport Superior Court, alleging the
original class action claims of violation of the CUTPA, and tortious
interference with business expectancies. The association plaintiffs and the
contractor also sued all the LDCs, again in Middletown, alleging conspiracy
to violate the CUTPA. Southern filed a motion to dismiss. There are,
therefore, currently three pending cases against Southern. The plaintiffs moved
to consolidate all five lawsuits against the LDCs and to transfer them to the
new Complex Litigation Docket. Southern objected to consolidation, but agreed
to the transfer. The complex litigation judge in Waterbury accepted the cases
and denied the plaintiffs' motion to consolidate. She ordered the case against
Connecticut Natural Gas alone proceed to prepare for a trial in August of 1999,
stayed discovery on the remaining cases, and ordered the remaining cases to
proceed to the point of closing the pleadings. The judge will rule on
Southern's pending motion to dismiss in the conspiracy to violate the CUTPA
case. Southern has prepared a motion to strike part of the Bridgeport case.
Southern has answered the antitrust conspiracy case. The plaintiffs seek
declaratory and injunctive relief. The plaintiffs seek treble damages in
excess of $15,000, punitive damages and attorneys' fees. Southern intends to
defend itself vigorously in these lawsuits, which management believes are
without merit. In the opinion of management, resolution of these lawsuits 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 Equity 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 ticker 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, 1998 and 1997.
Market Price and Dividend Data
1998 Quarters ended High Low Dividend
- ------------------- ---- --- --------
December 31, 1997 $30 7/16 $22 3/4 $0.33
March 31, 1998 $30 3/4 $25 11/16 $0.33
June 30, 1998 $32 1/4 $25 5/8 $0.335
September 30, 1998 $29 11/16 $25 1/16 $0.335
1997 Quarters ended High Low Dividend
- ------------------- ---- --- --------
December 31, 1996 $22 1/4 $19 7/8 $0.33
March 31, 1997 $24 3/8 $21 $0.33
June 30, 1997 $24 1/4 $22 1/4 $0.33
September 30, 1997 $24 15/16 $22 3/8 $0.33
As of September 1998, the Company and its predecessors have paid 355 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, $46,838,000 of
retained earnings at September 30, 1998 was available for such purposes.
The approximate number of shareholders of record of the Company's common stock
as of November 20, 1998 was 9,770.
Item 6. Selected Financial Data
- --------------------------------
The presentation under the "Eleven Year Financial Summary" for the five-year
period ended September 30, 1998 on pages 42 and 43 of the Company's 1998 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 15 to 25 of the Company's 1998 Annual Report to
Shareholders is incorporated by reference herein.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
Not applicable.
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 26 to 40
and the Report of Independent Accountants on page 41 of the Company's 1998
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 11, 1998, and is incorporated by reference
herein. A list of executive officers of the registrant and Southern follows:
<TABLE>
<CAPTION>
<S> <C>
Executive Officers of Connecticut Energy Corporation
and
The Southern Connecticut Gas Company
Name and Age Position and Business Experience for the Past Five Years
- ------------------ --------------------------------------------------------
J. R. Crespo, 56 Chairman, President and Chief Executive Officer of the
Company and Southern (1990).
Thomas A. Trotta, 61 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).
Vincent L. Ammann, Jr., 39 Vice President and Chief Accounting Officer of the Company
and Vice President, Technology Applications of Southern (1997),
Vice President and Chief Accounting Officer of the Company and
Vice President, Information Technology of Southern (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).
Samuel W. Bowlby, 60 Vice President, General Counsel and Secretary of the Company and
Southern (1997), Partner, Tyler, Cooper & Alcorn, New Haven, CT
(1970-1997).
Carol A. Forest, 50 Vice President, Finance, Chief Financial Officer, Treasurer and
Assistant Secretary of the Company and Southern (1996), Vice
President, Finance, Chief Financial Officer and Treasurer of the
Company and Southern (1991).
Janet L. Janczewski, 54 Senior Corporate Counsel and Assistant Secretary of the Company
and Southern (1997), Corporate Counsel of Southern (1989).
Larry S. McGaughy, 51 Vice President of the Company, President of CNE Development
Corporation and President of CNE Energy (1998), President of CNE
Energy (1996), Vice President, Corporate Engineering and Special
Projects of Southern (1995), Vice President, Marketing and Corporate
Engineering of Southern (1994), Vice President, Marketing and Gas
Control of Southern (1991).
Michael H. Pinto, 71 Vice President, Government Affairs of the Company (1991).
Salvatore A. Ardigliano, 49 Group Vice President and Chief Information Officer of Southern (1998),
Group Vice President of Southern (1998), 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).
Peter D. Loomis, 50 Group Vice President, Operations of Southern (1998), Group Vice
President, Customer and Operating Services of Southern (1995),
Vice President, Distribution and Customer Service of Southern (1992).
Phyllis A. O'Brien, 53 Group Vice President of Southern (1996), Vice President, Accounting
and Regulatory Services of Southern (1994), Vice President, Corporate
and Regulatory Planning of Southern (1993).
David Silverstone, 52 Group Vice President and Chief Administrative Officer of Southern
(1998), Group Vice President of Southern (1998), Partner, Silverstone
and Koontz (1983-1998).
Ernest W. Karkut, 56 Vice President, Purchasing and Plant Services of Southern (1994), Vice
President, Customer Relations of Southern (1993).
Diane Nunn, 50 Vice President, Distribution and Gas Control Services (1998), Vice
President, Customer and Distribution Services of Southern (1998),
Group Director, Customer and Distribution Services of Southern (1996),
Director, Human Resources of Southern (1990).
Patricia A. Younger, 56* 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 February 1, 1998.
</TABLE>
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 11, 1998, 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 11, 1998, and is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Information required in this Item is contained in the Company's definitive Proxy
Statement on pages 10 to 12, which will be mailed to shareholders on or about
December 11, 1998, 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,
1998, 1997 and 1996.
(ii) Consolidated Balance Sheets for the years ended September 30, 1998
and 1997.
(iii) Consolidated Statements of Changes in Common Shareholders' Equity
for the years ended September 30, 1998, 1997 and 1996.
(iv) Consolidated Statements of Cash Flows for the years ended September
30, 1998, 1997 and 1996.
(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 Schedule 21
II Valuation and Qualifying Accounts 22
All other schedules are omitted because they are not required, are inapplicable,
or the information is otherwise shown in the financial statements or notes
thereto.
3. Exhibits Required by Item 601 of Securities and Exchange Commission
-------------------------------------------------------------------
Regulation S-K
--------------
(A) The following such exhibits are filed as a separate section of this
report.
Exhibits
--------
(3) Certificate of Incorporation and By-Laws
----------------------------------------
The Amended and Restated Certificate of Incorporation of Connecticut Energy
Corporation is incorporated herein by reference to Item 6 of the Company's
Form 10-Q filed for the quarter ended March 31, 1991 at pages 14 through 22.
The Amended and Restated By-Laws of Connecticut Energy Corporation are
incorporated herein by reference to Item 6 of the Company's Form 10-Q filed
for the quarter ended March 31, 1995 at pages 20 through 31.
The Amended and Restated Certificate of Incorporation of The Southern
Connecticut Gas Company is incorporated herein by reference to Item 6 of
Form 10-Q filed for the quarter ended June 30, 1990 at pages 40 through 51.
The Amended and Restated By-Laws of The Southern Connecticut Gas Company
are incorporated herein by reference to Item 6 of the Company's Form 10-Q
filed for the quarter ended March 31, 1995 at pages 32 through 41.
(4) Instruments Defining Rights of Security Holders, Including Indentures
---------------------------------------------------------------------
(i) Shareholder Rights Plan, dated July 28, 1998, incorporated
by reference to Form 8-K dated July 28, 1998.
(ii) 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 to Exhibit 4(b) (1) to Connecticut Energy
Corporation Registration Statement 2-10566.
(iii) In addition to the Indenture referred to in 4 (i) hereof,
there have been 27 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, incorporated by reference to Form 10-K for the fiscal year ended
September 30, 1996 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, incorporated by reference to Form 10-K for the fiscal
year ended September 30, 1996 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,
incorporated by reference to Form 10-K for the fiscal year ended September 30,
1996 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,
incorporated by reference to Form 10-K for the fiscal year ended September 30,
1996 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, incorporated by reference
to Form 10-K for the fiscal year ended September 30, 1996 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, incorporated by reference to Form 10-K
for the fiscal year ended September 30, 1996 at pages 64 to 73.
(xxx) The Southern Connecticut Gas Company Board of Directors
Retirement Plan, dated October 1, 1997, incorporated by reference to Form
10-Q for the quarter ended December 31, 1997 at pages 20 to 23.
(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) Agreement between The Southern Connecticut Gas Company and Henry
Chauncey, Jr. related to deferred compensation as a director, dated December 31,
1988, incorporated by reference to Form 10-K for the fiscal year ended December
31, 1988 at 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, incorporated by reference to Form 10-K for
the fiscal year ended September 30, 1996 at pages 74 to 83.
(xxxvi) Agreement between The Southern Connecticut Gas Company and
Connecticut Energy Corporation and Thomas A. Trotta related to change in
control, dated October 1, 1996, incorporated by reference to Form 10-K for
the fiscal year ended September 30, 1996 at pages 94 to 104.
(xxxvii) Connecticut Energy Corporation 1997 Restricted Stock Award
Plan, dated January 28, 1997, incorporated by reference to Form 10-Q for the
quarter ended March 31, 1997 at pages 23 to 35.
(xxxviii) Connecticut Energy Corporation Non-Employee Director Stock
Plan, dated January 28, 1997, incorporated by reference to Form 10-Q for the
quarter ended March 31, 1997 at pages 36 to 40.
(xxxix) Agreement between The Southern Connecticut Gas Company and
Connecticut Energy Corporation and Samuel W. Bowlby related to change in
control, dated July 1, 1997, incorporated by reference to Form 10-Q for the
quarter ended March 31, 1998 at pages 21 to 31.
(xxxx) Agreement between The Southern Connecticut Gas Company and
Connecticut Energy Corporation and David Silverstone related to change in
control, dated April 1, 1998, incorporated by reference to Form 10-Q for the
quarter ended June 30, 1998 at pages 21 to 30.
(13) Annual Report to Security Holders
---------------------------------
The Company's 1998 Annual Report to Shareholders is filed herewith at
pages 25 to 53. Such exhibit includes only those portions thereof which are
expressly incorporated by reference in this Form 10-K.
(21) Subsidiaries of the Registrant
------------------------------
A list of the Company's subsidiaries is filed herewith at page 54.
(27) Financial Data Schedule
-----------------------
Financial Data Schedule UT is submitted only in electronic format to the
Securities and Exchange Commission.
(B) Reports on Form 8-K filed during the last quarter of 1998:
Form 8-K, dated July 28, 1998, concerning the Company's Shareholder Rights Plan
was filed with the Securities and Exchange Commission on August 4, 1998.
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
-----------------------------------------------------------------
To the Board of Directors and Shareholders
of Connecticut Energy Corporation:
Our audits of the consolidated financial statements referred to in our report
dated October 30, 1998 appearing on page 41 of the 1998 Annual Report to
Shareholders of Connecticut Energy Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report
on Form 10-K) also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
October 30, 1998
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. 333-25691) and Form S-8
(No. 33-39245 and 33-51763) of Connecticut Energy Corporation of our report
dated October 30, 1998, on our audits of the consolidated financial statements
and financial statement schedule of Connecticut Energy Corporation as of
September 30, 1998 and 1997, and for the years ended September 30, 1998, 1997
and 1996, appearing on page 41 of the 1998 Annual Report to Shareholders of
Connecticut Energy Corporation which is incorporated by reference in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
New York, New York
December 4, 1998
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CONNECTICUT ENERGY CORPORATION
Years Ended September 30, 1998, 1997 and 1996
(in thousands)
<S> <C> <C> <C> <C> <C>
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
1998 (1) $2,948 $7,735 $1,946 (2) $10,564 (3) $2,065
1997 (1) $2,742 $7,297 $2,851 (2) $9,942 (3) $2,948
1996 (1) $3,553 $6,549 $1,826 (2) $9,186 (3) $2,742
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
</TABLE>
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.
CONNECTICUT ENERGY CORPORATION
(Registrant)
By: /s/ J. R. Crespo
--------------------------------------
J. R. Crespo, Chairman,
President and Chief Executive Officer
Dated: November 24, 1998
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.
By: /s/ Henry Chauncey, Jr. By: /s/ Newman M. Marsilius
----------------------------- ------------------------------
Henry Chauncey, Jr., Director Newman M. Marsilius, Director
Dated: November 24, 1998 Dated: November 24, 1998
By: /s/ James P. Comer By: /s/ Samuel M. Sugden
------------------------------ ------------------------------
James P. Comer, M.D., Director Samuel M. Sugden, Director
Dated: November 24, 1998 Dated: November 30, 1998
By: /s/ J. R. Crespo By: /s/ Christopher D. Turner
------------------------------ ------------------------------
J. R. Crespo, Chairman, Christopher D. Turner,
President and Chief Executive Officer Director
Dated: November 24, 1998 Dated: November 19, 1998
By: /s/ Richard F. Freeman By: /s/ Helen B. Wasserman
------------------------------ ------------------------------
Richard F. Freeman, Director Helen B. Wasserman, Director
Dated: November 24, 1998 Dated: November 24, 1998
By: /s/ Richard M. Hoyt By: /s/ Vincent L. Ammann, Jr.
------------------------------ ------------------------------
Richard M. Hoyt, Director Vincent L. Ammann, Jr.
Dated: November 24, 1998 Vice President and Chief
Accounting Officer (Principal
Accounting Officer)
Dated: November 24, 1998
By: /s/ Paul H. Johnson By: /s/ Carol A. Forest
------------------------------ ------------------------------
Paul H. Johnson, Director Carol A. Forest,
Dated: November 24, 1998 Vice President, Finance,
Chief Financial Officer,
Treasurer and Assistant
Secretary (Principal Financial
Officer)
Dated: November 24, 1998
<PAGE>
CONNECTICUT ENERGY CORPORATION
MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and its
subsidiaries and their representatives may, from time to time, make written or
oral statements, including statements contained in the Company's filings with
the Securities and Exchange Commission and in its annual report to shareholders,
including its Form 10-K for the fiscal year ended September 30, 1998, 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
revenues; fluctuations in weather from normal levels; changes in development and
operating costs; the availability and cost of natural gas; the availability and
terms of capital; exposure to environmental liabilities; the costs and effects
of unanticipated legal proceedings; the successful implementation and
achievement of internal performance goals; the impact of unusual items resulting
from ongoing evaluations of business strategies and asset valuations; and
changes in business strategy.
RESULTS OF OPERATIONS
Net Income
The Company's consolidated net income is detailed below:
<TABLE>
<CAPTION>
(in thousands, except per share)
Years ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $19,011 $16,441 $15,165
- -------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 1.88 $ 1.81 $ 1.70
- -------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 10,104 9,096 8,924
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income for 1998 was a record for the Company. Net income increased
approximately 16% and earnings per share were approximately 4% higher compared
to 1997. Factors which contributed to increased net income for 1998 included
higher firm margins earned by the Company's principal subsidiary, The Southern
Connecticut Gas Company ("Southern"), lower taxes, higher other income and lower
total interest expense. Additionally, the Company's nonutility subsidiaries
contributed approximately $0.17 to earnings per share in 1998, representing
approximately 9% of consolidated earnings per share for the year. The
contribution to 1998 earnings by the nonutility subsidiaries was principally due
to revenues generated by a contract to transport natural gas to an electric
generating plant located at the Bridgeport Harbor Station and the sale of 50%
interests in Total Peaking Services, LLC ("TPS") and CNE Peaking, LLC ("CNEP"),
joint ventures of the Company's nonutility subsidiary, CNE Energy Services
Group, Inc. ("CNE Energy"), to Conectiv Energy Supply, Inc., a subsidiary of
Conectiv.
Partially offsetting these positive impacts on net income for 1998 were lower
interruptible margins and higher operating expenses in the areas of operations,
maintenance and depreciation.
Net income for 1997 increased approximately 8% compared to 1996. Factors
which contributed to increased net income for 1997 included higher firm margins
earned by Southern, lower operations and maintenance expenses, lower provisions
for 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.
15
<PAGE>
CONNECTICUT ENERGY CORPORATION
Total Sales and Transportation Volumes
The Company's total volumes of gas sold and transported were 36,260 MMcf in
1998, representing a decrease of approximately 21% compared to 1997. This
decrease occurred in all sales categories and was primarily attributable to
warmer weather and the competitive price of certain alternate fuels. Higher
volumes of firm transportation and firm volumes under a contract to transport
natural gas to an electric generating plant in Bridgeport during the 1998 period
partially offset the overall decrease in 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.
Firm Sales, Firm Transportation and Firm Contract Volumes
The Company's firm volumes for 1998 increased approximately 3% compared to
1997. This was primarily due to an increase in firm transportation and firm
contract volumes, growth in Southern's customer base and the continued
conversions of nonheating customers to heating customers. The overall increase
in this category was partially offset by lower firm sales due to weather that
was approximately 7% warmer than in 1997.
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 in 1996. Growth in Southern's customer base and the
conversions of nonheating customers to heating customers partially offset the
overall decrease in this category.
Interruptible Sales and Transportation Volumes
Margins earned on volumes delivered to interruptible customers vary depending
upon the relationship of the market price for alternate fuels to the cost of
natural gas and related transportation. Margins earned, net of gross earnings
tax, from on-system interruptible services in excess of an annual target were
allocated through a margin sharing mechanism between Southern and its firm
customers. Beginning June 1, 1996, excess on-system margins earned that would
have been returned to Southern's firm customers have been redirected, with
Connecticut Department of Public Utility Control ("DPUC") approval, to fund
certain economic development and hardship assistance programs (see section
entitled "Regulatory Matters" for further detail). Off-system margins earned,
net of gross earnings tax, continue to be shared between Southern and its firm
customers. Gross margin retained represents the difference between gross margin
earned and margin to be allocated through the margin sharing mechanism.
The chart below depicts Southern's 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:
<TABLE>
<CAPTION>
(dollars in thousands)
Years ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross margin earned $ 9,867 $12,872 $12,674
- ---------------------------------------------------------------------------------------------------------------------
Gross margin retained $ 5,981 $ 7,242 $ 7,643
- ---------------------------------------------------------------------------------------------------------------------
Volumes sold and transported (MMcf) 13,690 23,794 17,211
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross margin earned and retained by Southern in 1998 was lower compared to
1997 principally due to the competitive price of other energy sources compared
to natural gas.
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
The Company's gross margin in 1998 was approximately 2% higher than in 1997.
The increase in gross margin was principally attributed to higher firm margins,
which were a record for the Company. The increase in gross margin was partially
offset by lower interruptible margins retained in 1998.
16
<PAGE>
CONNECTICUT ENERGY CORPORATION
The Company's gross margin in 1997 was relatively unchanged compared to 1996.
Higher firm margins, which were attributed to growth in Southern's customer
base, were partially offset by lower interruptible margins retained as well as
lower revenues earned from bailment activities.
Southern's firm rates include a Weather Normalization Adjustment ("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 1998 was
approximately 9% warmer than normal, the operation of the WNA collected
approximately $6,093,000 from firm customers compared to a collection of
approximately $2,252,000 in 1997 and a return of approximately $2,771,000 to
firm customers in 1996.
Southern's firm sales rates include a Purchased Gas Adjustment clause ("PGA")
which allows Southern to flow back to its customers, through periodic
adjustments to amounts billed, increased or decreased costs incurred for
purchased gas compared to base rate levels without affecting gross margin.
Adjustments related to Southern's PGA increased revenues and gas costs for 1998,
1997 and 1996 by approximately $11,050,000, $6,206,000 and $6,717,000,
respectively.
Operations Expense
Operations expense increased approximately 10% in 1998 compared to 1997
primarily due to higher costs for labor, partly due to early retirement
incentives paid to union employees during the third quarter of 1998; outside
services; customer service; uncollectibles; conservation expense; regulatory
commission expense; and certain other general and administrative expenses. Also
contributing to the increase in operations expense compared to last year were
higher costs related to the Company's Restricted Stock Award Plan and higher
operations expense recorded by the Company's nonutility subsidiaries. Partially
offsetting the overall increase in operations expense for 1998 were lower
expenses in the areas of pensions and postretirement health care as well as
lower amortizations related to Southern's certified hardship forgiveness program
due to the conclusion of the amortization period as of December 31, 1996.
Operations expense was approximately 2% lower in 1997 compared to 1996
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. The overall decrease in 1997
operations expense was partially offset by increases in costs incurred for
outside services, insurance premiums and the Restricted Stock Award Plan
established in 1997.
Beginning in 1994, the DPUC has allowed Southern to recover certain deferred
shortfalls in energy assistance funding from various state and federal agencies
related to the 1991/92 and 1992/93 heating seasons as well as deferred costs
associated with Southern's certified hardship forgiveness program. Accordingly,
included in operations expense for 1998, 1997 and 1996 was approximately
$620,000, $1,619,000 and $2,987,000, respectively, related to these
amortizations.
Depreciation Expense
Depreciation expense for Southern has increased in each of the last three
years due to additions to plant in service.
Federal and State Income Taxes
The total provision for federal and state income taxes decreased
approximately 28% in 1998 compared to 1997 primarily due to a lower effective
tax rate. The lower effective tax rate was principally due to the tax treatment
of premiums paid for the refinancing of long-term debt in 1998 as well as the
tax treatment of uncollectibles and property 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.
Municipal, Gross Earnings and Other Taxes
Municipal, gross earnings and other taxes decreased approximately 12% in 1998
compared to 1997. The decrease was primarily due to the DPUC Decision which
required Southern to change its accounting treatment for accruing property taxes
(see section entitled "Regulatory Matters" for further detail) and, to a lesser
extent, lower gross earnings tax due to lower revenues.
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.
17
<PAGE>
CONNECTICUT ENERGY CORPORATION
Other (Income) Deductions, Net
Other income for 1998 was higher compared to 1997 primarily due to the
recognition of a gain in connection with the sale of a 50% interest in TPS by
CNE Energy, the favorable operating results of the Company's nonutility
subsidiaries and an increase in investment income related to investments in
nonqualified employee benefit plan trusts.
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 Federal Energy Regulatory Commission's ("FERC") Order No.
636 and the recognition of a payment received in connection with a joint venture
formed by CNE Energy in 1997.
Interest Expense
Total interest expense decreased approximately 4% in 1998 compared to 1997
primarily due to lower short-term interest expense related to lower average
short-term borrowings, lower long-term debt expense due to debt repayments and
lower short-term interest expense on pipeline refunds not yet returned to firm
customers. Partially offsetting the decrease in total interest expense was an
increase in short-term interest expense on deferred purchased gas costs and
borrowings by CNE Energy to finance a project to construct the distribution
facilities to transport natural gas to the Bridgeport Harbor Station electric
generating plant (see section entitled "Regulatory Matters" for further detail).
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.
The Company obtains short-term funds at the most competitive rates by
utilizing bank borrowings at money market rates. Short-term interest rates
averaged 6.02% in 1998 compared to 5.71% in 1997 and 5.81% in 1996.
Inflation
Inflation as measured by the Consumer Price Index for all urban consumers was
approximately 1.6%, 2.7% and 2.8% for 1998, 1997 and 1996, 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
Rate Review Docket
In accordance with Connecticut statutes, Southern is undergoing a periodic
review of rates and services by the DPUC that commenced in January 1998. A
periodic review entails a complete review by the DPUC of Southern's financial
and operating records. Public hearings are held to determine whether Southern's
current rates are unreasonably discriminatory or more or less than just,
reasonable and adequate.
On July 8, 1998 Southern received a Decision regarding the "overearnings"
portion of the rate review docket. According to Connecticut statutes, the DPUC
may review a utility which earns 100 basis points or more over its allowed rate
of return for six consecutive months. In its Decision, the DPUC ordered a rate
reduction of $528,000 on an annual basis. Management cannot predict the
financial or operational impact of any Decision which may result from the review
which is still ongoing.
Special Contract with Duke Energy Trading and Marketing
Southern received a Decision from the DPUC on its special contract with Duke
Energy Trading and Marketing to transport natural gas to a 520 megawatt electric
generating plant in Bridgeport. Under the contract, Southern will own, operate
and maintain the 16-inch, nearly 11-mile gas main; and CNE Energy will be solely
responsible for financing the project and its maintenance costs. This
effectively removes any risk from Southern or its ratepayers for any future
operating and maintenance costs. Construction was completed and the plant
commenced operations in July 1998.
18
<PAGE>
CONNECTICUT ENERGY CORPORATION
Change in Accounting Treatment for Property Taxes
In October 1997, Southern requested that the DPUC consider a proposed change
in Southern's accounting treatment for property taxes which would allow Southern
to account for such taxes as a prepaid expense. This method is consistent with
the practice of other major public service companies in Connecticut. Southern
had been accruing for property taxes in the year prior to the payment date. On
November 19, 1997, under the reopened Docket No. 93-03-09, Application of The
Southern Connecticut Gas Company to Increase Its Rates and Charges, the DPUC
approved Southern's proposal. The stipulations in the Decision ordered Southern
to reduce its reserve for property taxes by approximately $3,722,000, with 50%,
or approximately $1,861,000, flowing through as a one-time reduction to property
tax expense and the remaining 50% refunded to firm customers through the
operation of the PGA in three equal amounts during the second quarter of fiscal
1998.
Unbundling of Natural Gas Services Docket
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 local gas distribution
companies ("LDCs") for the use of their distribution systems.
In August 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 has conducted this
proceeding in two phases. The first phase addressed issues relating to firm
transportation service in its present form regarding delivery of sales and
transportation service by LDCs and marketers. The DPUC reopened each LDC's
latest rate case to consider proposed changes to its respective tariffs and
rates. An interim Decision was approved on October 28, 1998 which affected the
way LDCs administer firm transportation services by providing for changes in the
load balancing provisions in the LDCs' tariffs as well as for enhanced billing
options for customers. The second phase of this proceeding will investigate such
issues as residential unbundling, codes of conduct for LDCs and marketers, and
public policy issues.
Sublease of Liquefied Natural Gas Plant
In August 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 included the sublease of the LNG tank and related facilities
from Southern to CNE Energy, which would, in turn, sublease the LNG facility to
TPS. TPS has received FERC approval of its market-based tariffs and is prepared
to store and redeliver customer-owned LNG beginning this winter.
Interruptible Margin Sharing
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 firm 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 and to provide grants to customers to
reduce Southern's hardship assistance balances. 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 the two programs. Southern's
proposal related to the economic development initiatives in Bridgeport included
job training and services, certain loan subsidies and health promotion outreach
services. Redirection of ratepayer margins for hardship assistance balances
benefits Southern's hardship customers by reducing their accounts receivable
arrearages and benefits 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 funding of economic development initiatives,
the imposition of a cap of $6,000,000 per year of ratepayer margins to be split
equally between the programs, and certain implementation and status reporting
requirements.
19
<PAGE>
CONNECTICUT ENERGY CORPORATION
Year 2000
General
Like other companies which use business-application software programs and
rely on a computing infrastructure that includes embedded systems, the so-called
Year 2000 issue also affects the Company and its subsidiaries. Certain of the
Company's software programs and computing infrastructure that use two-digit
years, rather than four-digit years, to define the applicable year may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in the computer or device shutting down, performing incorrect computations or
performing inconsistently.
In 1996, the Company began a project to address Year 2000 issues. It has been
implementing individual strategies targeted at the specific nature of the Year
2000 issues in each of the following areas: (1) business-application systems;
(2) embedded systems; (3) vendor and supplier relationships; (4) customers; and
(5) contingency planning. The Company's Year 2000 project is proceeding on
schedule.
To coordinate its comprehensive Year 2000 program, the Company established a
Year 2000 Task Force, chaired by the Vice President, General Counsel and
Secretary who reports directly to the Chairman and Chief Executive Officer. The
Year 2000 Task Force includes executive management and employees with expertise
from various disciplines including, but not limited to, information technology,
operations, engineering, finance, facilities and communications, internal audit,
purchasing and law. In addition, the Company has utilized the expertise of
outside consultants to assist in the implementation of the Year 2000 program in
such areas as project initiation and planning, business-application system
inventory and analysis, business-application system remediation,
business-application system replacement, and embedded systems inventory and
analysis.
The Company's principal subsidiary, Southern, is subject to regulation from
the DPUC, among other governmental agencies. At the DPUC's request, Southern has
previously reported the progress of its Year 2000 program to the DPUC on three
separate occasions. On October 23, 1998, the DPUC announced that it was seeking
to engage the services of a consultant to perform an audit of the computer
systems at all of Connecticut's major utility companies, including Southern, to
assess their readiness to handle the changeover to the year 2000.
Business-Application Systems
In March 1997, the Company completed its inventory and assessment of all of
its business-application systems. This assessment has assisted management in
developing a remediation plan consisting of replacing certain equipment,
modifying certain software to recognize the turn of the century, replacing
certain software systems with new systems that, in addition to providing
additional business management information, recognize four-digit years, and
eliminating certain software and equipment.
By July 31, 1998, the Company had completed modifications to all of its
Financial, Accounting, Purchasing, Inventory Control and Work Management
business applications targeted for version upgrade by use of internal staff and
outside resources. The Company has tested and placed back into the production
environment business applications for the above-mentioned business functions. No
additional Year 2000 remediation is needed for these systems.
The Company initiated a project to update the Payroll and Human Resources
business-application systems to the Year 2000 compliant versions of the
software. This project should be completed in March 1999.
In December 1997, the Company began a project to replace its Customer
Information System with a vendor supplied business-application system. The
project uses internal staff, resources from the system vendor and resources from
outside business-application system consultants. The system is installed on a
computer central processing unit and is being tested at the present time. The
project plan includes a scheduled completion in April 1999 when the system is
installed in a production environment.
In September 1998, the Company began a project to upgrade the existing System
Control and Data Acquisition System, which is used to monitor the flow of gas
throughout the Company's distribution system, with a version that is Year 2000
compliant. The project should be completed in December 1998.
In August 1998, the Company began a project to upgrade the existing Field
Service Management system, which is used to assign and dispatch service
technicians, with a version that is Year 2000 compliant. The project should be
completed in April 1999.
20
<PAGE>
CONNECTICUT ENERGY CORPORATION
In January 1998, the Company completed a project to upgrade all of the
Personal Computer ("PC") software and Network software with versions that are
Year 2000 compliant. As part of this project, all of the Company's PCs were
upgraded or replaced and all of the Company's servers were upgraded or replaced.
No additional Year 2000 remediation is needed for this hardware and software.
Embedded Systems
The Company performed a review of its equipment that includes embedded
systems. This review identified a number of components that are potentially date
sensitive. The Company has contacted manufacturers of those components that it
has identified as critical to operations and continues to contact other
manufacturers of embedded components to determine whether their components are
Year 2000 compliant. A test plan will be developed by the end of 1998 and
executed in early 1999 to test the gas distribution network for embedded
systems.
The Company also plans to test the equipment associated with its LNG
operations to ensure that it is Year 2000 compliant.
The quality of the responses received from manufacturers of other
equipment, the estimated impact of the individual system on the Company and the
ability of the Company to perform meaningful tests will influence its decision
to conduct independent testing of embedded systems.
Vendors and Suppliers
The Company has contacted, in writing, vendors and suppliers of products and
services that it considers critical to its operations. These contacts have
included suppliers of interstate transportation capacity, natural gas producers,
financial institutions, and electric, telephone and water companies. The quality
of the responses received from vendors and suppliers is not uniform. As a
result, the Company will continue to work with these vendors and suppliers to
determine their level of Year 2000 compliance. The Company will evaluate the
degree of its vendors' and suppliers' readiness and, to the extent the Company
cannot test or verify readiness, will develop a contingency plan which may
include considering new business relationships with alternate providers of
products and services as necessary and to the extent alternatives are available.
Customers
The Company has no single customer, residential, commercial or industrial,
which generates a material portion of the Company's annual revenues. The Company
continues to identify its major firm, interruptible and transportation
customers. The Company does not currently have any formal information concerning
the Year 2000 compliance status of its major customers, but has received
indications that many of its customers are working on Year 2000 compliance. The
Company will communicate with its major customers to attempt to identify their
level of Year 2000 compliance. The Company will remind them about potential
vulnerability of application systems and of embedded systems. The Company will
inform them that they should assess the need to include potential remediation
and/or replacement of these systems as part of their Year 2000 programs. This
activity is planned for completion by December 15, 1998.
Contingency Planning
The Company's Year 2000 strategies include contingency planning, encompassing
business continuity both within the Company and in the external business
environment. The planning effort includes critical Company areas such as
computing, networks, vendors and suppliers, operations, personnel, and business
systems as well as systems and infrastructure external to the Company. As part
of its normal business practice, the Company maintains plans to follow during
emergency circumstances, some of which could arise from Year 2000-related
problems. Its contingency planning for the Year 2000 will address various
alternatives and will include assessing a variety of scenarios that could emerge
which will require the Company to react. Presently, the Company continues to
develop its contingency plans for potential Year 2000-related problems.
21
<PAGE>
CONNECTICUT ENERGY CORPORATION
Potential Risks
The Company believes the most significant potential risks to its internal
operations are as follows: (1) the ability to use electronic devices to control
and operate its distribution system; (2) the ability to render timely bills to
its customers; and (3) the ability to maintain continuous operation of its
computer systems. The Company's Year 2000 program addresses each of these risks
and the remediation or replacement of these systems is well underway.
Furthermore, the contingency plan will outline alternatives in the event that
any Year 2000-related situations may occur.
The Company relies on the producers of natural gas and suppliers of
interstate transportation capacity to deliver natural gas to the Company's
distribution system. External infrastructure, such as electric, telephone, and
water service, is necessary for the Company's basic operations as well as the
operations of many of its customers. Should any of these critical vendors fail,
the impact of any such failure could become a significant challenge to the
Company's ability to meet the demands of its customers, to operate its
distribution system and to communicate with its customers. It could also have a
material adverse financial impact, including but not limited to, lost sales
revenues, increased operating costs and claims from customers related to
business interruptions. The Company's program to address Year 2000 issues
emphasizes continued monitoring and/or testing of the progress of these critical
vendors and suppliers toward meeting the projected completion of their Year 2000
programs.
Financial Implications
The Company currently expects to generate nonrecurring expenses of
approximately $300,000 to $500,000 over the three fiscal-year period ending
September 30, 1999, for business application systems remediation, embedded
systems replacement, and certain existing business-applications system
replacement. Over the same time period, the Company will capitalize costs of
approximately $9,000,000 to $11,000,000 incurred to replace certain existing
business-application software systems with new systems that will be Year 2000
operational and provide additional business management information.
Each of the components of the Company's Year 2000 program is progressing and
the Company believes it is taking all reasonable steps necessary to be able to
operate successfully through and beyond the turn of the century.
New Legislation
On October 19, 1998, the Year 2000 Information and Readiness Disclosure Act
("Y2K Readiness Act") was signed into federal law to encourage the disclosure
and exchange of information about computer processing problems, solutions, test
practices and test results, and related matters in connection with the
transition to the year 2000. The Company expects to benefit from the Y2K
Readiness Act in that it will significantly reduce the potential liability of
the Company for sharing most types of Year 2000 information.
The estimates and conclusions herein contain forward-looking statements and
are based on management's best estimates of future events. Risks to completing
the Year 2000 Program include the availability of resources, the Company's
ability to discover and correct the potential Year 2000 sensitive problems which
could have a serious impact on specific facilities, and the ability of suppliers
to bring their systems into Year 2000 compliance.
Recent Accounting Developments
Effective October 1, 1998, the Company will adopt Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and presentation of comprehensive income and
its components in general-purpose financial statements and requires that all
items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Adoption of this Statement is
not expected to have a significant impact on the Company's financial condition
or results of operations.
Effective October 1, 1999, the Company will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this Statement is not expected to
have a significant impact on the Company's financial condition or results of
operations.
22
<PAGE>
CONNECTICUT ENERGY CORPORATION
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:
<TABLE>
<CAPTION>
Shared
Connecticut Connecticut
As of September 30, 1998 Energy Southern Energy/Southern Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
</TABLE>
Effective January 1, 1998, Connecticut Energy and Southern entered into an
agreement with one bank for a shared committed line of credit in the amount of
$20,000,000, replacing an existing line that expired on December 20, 1997. The
new agreement extends the credit line term until December 31, 1998, and the
initial term may be extended from year to year thereafter dependent upon the
operating cash requirements of the Company and its subsidiary and approval by
the bank. As of September 30, 1998, unused lines of credit totaled $54,600,000.
Operating cash flows for 1998 were slightly lower compared to 1997 primarily
due to lower accrued taxes, pipeline refunds which were returned to firm
customers and lower liabilities related to margins earned which were used to
fund certain economic development initiatives in Bridgeport. The decrease in
operating cash flows in 1998 was partially offset by collections from customers
through the operation of the PGA.
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 were
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 were the effect of warmer weather on
the operation of the PGA and lower accounts payable balances.
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.
Investing Activities
Capital Expenditures
Capital expenditures, net of contributions in aid of construction,
approximated $24,614,000 in 1998, $28,443,000 in 1997 and $25,180,000 in 1996.
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 1999 will approximate $30,000,000. Approximately
$24,500,000 of budgeted capital expenditures has been allocated to Southern, of
which approximately 25% 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 1999-2003 period, it is
estimated that total expenditures for new plant and equipment will range between
$130,000,000 and $150,000,000.
Energy Ventures
In September 1997, CNE Energy formed a joint venture with Delmarva Power &
Light Company's bulk energy group. The venture operates under the name
Conectiv/CNE Energy Services, LLC and sells natural gas, electricity, fuel oil
and other services and markets a full range of energy-related planning,
financial, operational and maintenance services to commercial, industrial and
municipal customers in New England and New York. In February 1998, the venture
formed an alliance with Berkshire Energy Marketing, a division of the
Massachusetts natural gas distribution utility, Berkshire Gas Company. The
alliance markets energy commodities and services to commercial and industrial
customers in western Massachusetts, eastern New York and southern Vermont.
23
<PAGE>
CONNECTICUT ENERGY CORPORATION
As the result of a merger of Delmarva Power & Light Company and Atlantic
Energy, Inc., a holding company under the name Conectiv was formed. In September
1998, CNE Energy and Conectiv Energy Supply, Inc., a subsidiary of Conectiv,
formed two joint ventures, TPS and CNEP.
TPS, headquartered in Bridgeport, Connecticut, operates a 1.2 billion cubic
foot LNG open access storage facility in Milford, Connecticut. The facility has
access to three major natural gas pipelines in New England: Algonquin Gas
Transmission Company, Iroquois Gas Transmission System, L.P. and Tennessee Gas
Pipeline Company. TPS has received FERC approval of its market-based tariffs and
is prepared to store and redeliver customer-owned LNG at the Milford facility
beginning this winter.
CNEP provides a firm in-market supply source to assist energy marketers and
LDCs in meeting the maximum demands of their customers by offering firm supplies
for peak-shaving and emergency deliveries. CNEP operates out of Newark,
Delaware.
Bridgeport Harbor Station Plant
In July 1998, Southern completed construction on the distribution facilities
needed to transport natural gas from a gate station in Stratford, Connecticut,
to a new 520 megawatt electric generating plant in Bridgeport. The gas turbine
plant is the largest nonnuclear generating plant in Connecticut and has the
capacity to provide enough electricity to service up to 260,000 homes.
Other Investments
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 as a limited partner. This 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 a period of three to five years from the initial investment date.
Financing Activities
Common Stock Dividends
In June 1998 and June 1996, the quarterly dividend paid per share on the
Company's common stock was increased to $0.335 and $0.33 per share, or an annual
indicated dividend rate of $1.34 and $1.32 per share, respectively.
Public Offering
In November 1997, the Company completed a public sale of 1,035,000 shares of
its common stock at a price of $24.25 per share and received net proceeds of
approximately $24,224,000. The proceeds of this sale were used for the repayment
of Southern's short-term debt.
MTN Program
In 1996, Southern initiated an MTN program, 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 are used to reduce short-term borrowings
primarily incurred in connection with Southern's capital expenditure program and
for other general corporate purposes. In August 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%.
In September 1998, Southern issued and sold $17,000,000 in secured MTNs.
These MTNs have a weighted average rate of 6.71% and a weighted average life of
25.5 years. They will be redeemed through payments of $3,000,000 and $14,000,000
in the years 2003 and 2028, respectively. Proceeds from the sale were used to
repurchase $12,073,000 of Series T and Series U First Mortgage Bonds. These
long-term debt securities had sinking fund requirements and principal payments
of $12,527,000 during the 1998-2019 period. The DPUC has allowed the deferral of
the unamortized issuance costs of the aforementioned MTNs as well as the
premiums related to the repurchase of these notes. The total of these
unamortized issuance costs and repurchase premiums was approximately $4,857,000,
which will be amortized over the average life of this series of MTNs.
Term Loan Agreement
In May 1998, CNE Energy entered into a term loan agreement with a bank to be
utilized to reimburse Southern for costs incurred to construct distribution
facilities to transport natural gas to an electric generating plant in
24
<PAGE>
CONNECTICUT ENERGY CORPORATION
Bridgeport. Borrowings were completed in August 1998. As of September 30, 1998,
borrowings for the construction of these facilities totaled $12,328,000.
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.
Other
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 has conferred with officials of the DEP, including the DEP liaison
for the Department of Transportation's U.S. Highway Route Number 95 Corridor
expansion project, to establish priorities in connection with the environmental
assessments. As a result of those conferences, Southern and the DEP have
negotiated and executed a Consent Order with respect to the Pine Street site
located in Bridgeport. Pursuant to the Consent Order, Southern has agreed to
undertake an investigation of the Pine Street site and its immediate surrounding
area to determine potential sources of contamination and remediate contamination
which may be found to have emanated or be emanating from the Pine Street site as
a result of Southern's activities on the site. The schedule and scope of the
investigation have been agreed to by Southern and the DEP. As a result of this
Consent Order, Southern has recorded and deferred $150,000 for costs related to
this site investigation. When the investigation is complete, Southern should be
able to propose to the DEP what, if any, plan for remediation is appropriate for
the site. Until such investigation is complete, management cannot predict the
cost, if any, of any appropriate remediation for the Pine Street site.
Neither can management, at this time, predict the costs for any future site
analysis and remediation for the remaining two sites, 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 local
distribution companies 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, results of operations or cash flows.
25
<PAGE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share)
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues $242,431 $252,008 $261,093
Purchased gas 120,572 132,672 141,628
- -----------------------------------------------------------------------------------------------------------------------------
Gross margin 121,859 119,336 119,465
- -----------------------------------------------------------------------------------------------------------------------------
Operating Expenses:
Operations 51,471 46,773 47,821
Maintenance 3,701 3,579 3,784
Depreciation 16,904 15,774 14,752
Federal and state income taxes 6,438 8,935 7,606
Municipal, gross earnings and other taxes 13,525 15,386 16,838
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 92,039 90,447 90,801
- -----------------------------------------------------------------------------------------------------------------------------
Operating income 29,820 28,889 28,664
- -----------------------------------------------------------------------------------------------------------------------------
Other (income) deductions, net (2,331) (1,229) 546
- -----------------------------------------------------------------------------------------------------------------------------
Interest Expense:
Interest on long-term debt and
amortization of debt issue costs 12,086 12,321 11,065
Other interest, net 1,054 1,356 1,888
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 13,140 13,677 12,953
- -----------------------------------------------------------------------------------------------------------------------------
Net Income $ 19,011 $ 16,441 $ 15,165
- -----------------------------------------------------------------------------------------------------------------------------
Net income per share - basic $ 1.89 $ 1.81 $ 1.70
- -----------------------------------------------------------------------------------------------------------------------------
Net income per share - diluted $ 1.88 $ 1.81 $ 1.70
- -------------------------------------------------------------------------------------------- --------------------------------
Dividends paid per share $ 1.33 $ 1.32 $ 1.31
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - basic 10,051,868 9,060,308 8,924,299
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding - diluted 10,104,115 9,095,521 8,924,299
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share)
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility Plant:
Plant in service, at cost $406,948 $396,263
Construction work in progress 5,767 3,412
- -----------------------------------------------------------------------------------------------------------------------------
Gross utility plant 412,715 399,675
Less: accumulated depreciation 137,493 130,553
- -----------------------------------------------------------------------------------------------------------------------------
Net utility plant 275,222 269,122
Nonutility property, net 4,526 3,343
- -----------------------------------------------------------------------------------------------------------------------------
Net utility plant and other property 279,748 272,465
- -----------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 10,091 6,644
Accounts and notes receivable (less allowance for doubtful
accounts of $2,065 in 1998 and $2,948 in 1997) 26,921 29,179
Accrued utility revenues, net 2,511 2,541
Unrecovered purchased gas costs 2,529 5,523
Inventories 10,491 2,606
Prepaid expenses 5,863 4,067
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 58,406 60,560
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Charges and Other Assets:
Unamortized debt expenses 10,841 6,038
Unrecovered deferred income taxes 49,800 42,929
Other 60,606 42,289
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred charges and other assets 121,247 91,256
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $459,401 $424,281
- -----------------------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
Common Shareholders' Equity:
Common stock - par value $1 per share:
authorized - 20,000,000 shares;
issued and outstanding -10,289,692 in 1998;
9,172,468 in 1997 $ 10,290 $ 9,172
Capital in excess of par value 119,961 94,540
Unearned compensation (310) (1,068)
Retained earnings 47,685 42,297
Adjustment for minimum pension liability (net of income taxes) (473) (427)
- -----------------------------------------------------------------------------------------------------------------------------
Total common shareholders' equity 177,153 144,514
- -----------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock -- --
Long-Term Debt 150,007 134,073
- -----------------------------------------------------------------------------------------------------------------------------
Total capitalization 327,160 278,587
- -----------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term borrowings 22,400 31,400
Current maturities of long-term debt 1,321 4,654
Accounts payable 10,499 12,609
Federal, state and deferred income taxes 1,537 5,017
Property and other accrued taxes 2,024 4,567
Interest payable 3,386 3,499
Customers' deposits 1,627 1,718
Refunds due customers 454 2,627
Other 4,886 3,892
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 48,134 69,983
- -----------------------------------------------------------------------------------------------------------------------------
Deferred Credits:
Deferred income taxes 72,884 64,917
Deferred investment tax credits 2,684 2,976
Other 8,389 7,818
- -----------------------------------------------------------------------------------------------------------------------------
Total deferred credits 83,957 75,711
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies 150 --
- -----------------------------------------------------------------------------------------------------------------------------
Total capitalization and liabilities $459,401 $424,281
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
27
<PAGE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES
IN COMMON SHAREHOLDERS' EQUITY
(dollars in thousands, except per share)
<TABLE>
<CAPTION>
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, 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
Public Offering 1,035,000 1,035 23,189 -- -- -- 24,224
Issuance through Dividend
Reinvestment Plan 81,324 82 2,208 -- -- -- 2,290
Issuance through Non-Employee
Director Stock Plan 900 1 24 -- -- -- 25
Unearned compensation -- -- -- 758 -- -- 758
Net income -- -- -- -- 19,011 -- 19,011
Dividends paid on common stock
($1.33 per share) -- -- -- -- (13,623) -- (13,623)
Adjustment for minimum pension
liability (net of income taxes) -- -- -- -- -- (46) (46)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 10,289,692 $10,290 $119,961 $ (310) $47,685 $(473) $177,153
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
28
<PAGE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(dollars in thousands)
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 19,011 $ 16,441 $ 15,165
Adjustments to Reconcile Net Income to Net Cash:
Depreciation and amortization 18,065 16,704 15,747
Provision for losses on accounts receivable 7,735 7,297 6,549
(Increase) Decrease in Assets:
Accounts and notes receivable (5,477) (5,603) (13,966)
Accrued utility revenues, net 30 67 67
Unrecovered purchased gas costs 2,994 (5,523) 2,972
Inventories 2,115 2,725 (2,216)
Prepaid expenses (2,096) (2,607) 140
Unamortized debt expenses (185) (42) (383)
Deferred charges and other assets (6,231) (5,593) (6,229)
Increase (Decrease) in Liabilities:
Accounts payable (2,110) (1,641) 4,664
Accrued taxes (6,023) 1,605 577
Refundable purchased gas costs -- (520) 520
Other current liabilities (1,383) 2,594 (293)
Deferred income taxes and investment tax credits 854 1,303 1,743
Deferred credits and other liabilities 482 1,611 (2,635)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 27,781 28,818 22,422
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital expenditures (24,681) (28,504) (25,251)
Contributions in aid of construction 67 61 71
Proceeds from (payments for) retirement of utility plant 33 462 (487)
Investment in special contract distribution main (11,394) -- --
Energy ventures (777) (1,458) (1,910)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (36,752) (29,439) (27,577)
- -----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends paid on common stock (13,623) (12,014) (11,696)
Issuance of common stock 27,297 2,553 2,931
Issuance of long-term debt 29,328 -- 20,000
Repayments of long-term debt (4,654) (595) (594)
Repurchase of long-term debt (12,073) -- --
Payment of premium on repurchase of long-term debt (4,857) -- --
(Decrease) increase in short-term borrowings (9,000) 12,200 (5,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,418 2,144 5,641
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 3,447 1,523 486
Cash and cash equivalents at beginning of year 6,644 5,121 4,635
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 10,091 $ 6,644 $ 5,121
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year for:
Interest $ 13,321 $14,200 $ 12,228
Income taxes $ 9,050 $ 5,041 $ 6,625
</TABLE>
Supplemental Schedule of Noncash
Investing and Financing Activities:
In the year ended September 30, 1998, 900 shares of unregistered common
stock were issued pursuant to the Non-Employee Director Stock Plan.
In the year ended September 30, 1997, 52,247 shares of unregistered common
stock were issued pursuant to the Company's 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.
29
<PAGE>
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.
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 and deferred charges 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.
Through its nonutility subsidiary, CNE Energy Services Group, Inc. ("CNE
Energy"), the Company provides an array of energy products and services to
commercial and industrial customers throughout New England and New York. The
Company also participates in a natural gas purchasing cooperative through
another nonutility subsidiary, CNE Development Corporation. A third nonutility
subsidiary, CNE Venture-Tech, Inc., invests in ventures that offer
technologically advanced energy-related products.
In September 1997, CNE Energy formed a joint venture with Delmarva Power &
Light Company's bulk energy group. The venture operates under the name
Conectiv/CNE Energy Services, LLC and sells natural gas, electricity, fuel oil
and other services and markets a full range of energy-related planning,
financial, operational and maintenance services to commercial, industrial and
municipal customers in New England and New York. In February 1998, the venture
formed an alliance with Berkshire Energy Marketing, a division of the
Massachusetts natural gas distribution utility, Berkshire Gas Company. The
alliance markets energy commodities and services to commercial and industrial
customers in western Massachusetts, eastern New York and southern Vermont.
As the result of a merger of Delmarva Power & Light Company and Atlantic
Energy, Inc., a holding company under the name Conectiv was formed. In September
1998, CNE Energy and Conectiv Energy Supply, Inc., a subsidiary of Conectiv,
formed two joint ventures, Total Peaking Services, LLC ("TPS") and CNE Peaking,
LLC ("CNEP").
TPS, headquartered in Bridgeport, Connecticut, operates a 1.2 billion cubic
foot liquefied natural gas ("LNG") open access storage facility in Milford,
Connecticut. The facility has access to three major natural gas pipelines in New
England: Algonquin Gas Transmission Company, Iroquois Gas Transmission System,
L.P. and Tennessee Gas Pipeline Company. TPS has received Federal Energy
Regulatory Commission approval of its market-based tariffs and is prepared to
store and redeliver customer-owned LNG at the Milford facility beginning this
winter.
CNEP provides a firm in-market supply source to assist energy marketers and
local gas distribution companies ("LDCs") in meeting the maximum demands of
their customers by offering firm supplies for peak-shaving and emergency
deliveries. CNEP operates out of Newark, Delaware.
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.
30
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
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, 1998 and 1997 of
$74,955 and $63,606, respectively. These amounts are included in deferred
charges and other assets and deferred credits in the consolidated balance sheets
and are solely due to the application of the provisions of SFAS 71.
Effective April 1, 1996, the DPUC deregulated the sale of natural gas to firm
commercial and industrial customers by giving these customers an option to
purchase natural gas from independent brokers or marketers. Commercial and
industrial customers electing to purchase natural gas in this manner pay a
DPUC-approved firm transportation rate to LDCs for the use of their distribution
systems.
Southern is one of three Connecticut LDCs whose firm transportation rates are
designed to provide the same margins earned from bundled services. Because these
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 22 Connecticut towns
from Westport to Old Saybrook, including the urban communities of Bridgeport and
New Haven. Southern bills its customers on a cycle basis throughout each month
and accrues revenues related to volumes of gas consumed by 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 an annual DPUC review of
Southern's filing, which was last approved in December 1997, Southern is allowed
to include as part of its monthly PGA a separate CAM factor to recover these
deferred charges. Firm transportation customers, who are not subject to the PGA,
are charged a specific CAM.
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).
31
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
Federal Income Taxes
The Company and its eligible subsidiaries file a consolidated federal income
tax return. Federal income taxes are deferred under the liability method in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred income taxes are
provided for all differences between financial statement and tax basis of assets
and liabilities. Additional deferred income taxes and offsetting regulatory
assets or liabilities are recorded to recognize that income taxes will be
recoverable or refundable through future revenues. 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.
Net Income per Share
Net income per share is computed based upon the weighted average number of
common shares outstanding during each year.
Effective October 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share." This Statement establishes
standards for the computation and presentation of earnings per share ("EPS") by
all entities with publicly held common stock or potential common stock. The
Statement replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures. The sole
difference between basic and diluted EPS relates to the common shares granted
under the Company's Restricted Stock Award Plan. Adoption of this Statement did
not have a significant impact on the Company's financial condition or results of
operations.
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 the property, plus 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, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Conservation costs $ 5,004 $ 4,881
Energy assistance funding shortfall 262 882
Environmental evaluation costs 684 718
Gas holder costs 62 308
Hardship heating customer accounts receivable arrearages 16,399 13,439
Hardship heating customer assistance grant program 1,748 634
Investment in energy ventures 4,195 3,418
Investment in special contract distribution main 11,394 --
LNG facility 207 --
Nonqualified benefit plans 3,023 2,302
Prepaid pension and postretirement medical contributions 14,207 13,228
Other 3,421 2,479
- -----------------------------------------------------------------------------------------------------------------------------
$60,606 $42,289
- -----------------------------------------------------------------------------------------------------------------------------
</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.
32
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
Deferred Credits
Deferred credits include amounts related to the following:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Economic development initiatives $ 397 $1,339
Insurance reserves 1,153 1,122
Interruptible margin sharing 1,210 877
Nonqualified benefit plans 3,522 2,961
Other 2,107 1,519
- -----------------------------------------------------------------------------------------------------------------------------
$ 8,389 $7,818
- -----------------------------------------------------------------------------------------------------------------------------
</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 (see Note 6, "Common Shareholders' Equity," for further detail).
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
Effective October 1, 1998, the Company will adopt Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and presentation of comprehensive income and
its components in general-purpose financial statements and requires that all
items required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Adoption of this Statement is
not expected to have a significant impact on the Company's financial condition
or results of operations.
Effective October 1, 1999, the Company will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This Statement establishes standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Adoption of this Statement is not expected to
have a significant impact on the Company's financial condition or results of
operations.
This Statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Adoption of this
Statement is not expected to have a significant impact on the Company's
financial condition or results of operations.
NOTE 2 - PROVISION FOR INCOME TAXES
The provision for income taxes includes the following:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes currently payable - federal $ 4,840 $ 4,220 $ 5,463
Taxes currently payable - state 1,793 1,232 1,669
- -----------------------------------------------------------------------------------------------------------------------------
6,633 5,452 7,132
Deferred taxes - federal/state (195) 3,483 474
- -----------------------------------------------------------------------------------------------------------------------------
Total income tax provision $ 6,438 $ 8,935 $ 7,606
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Sources and tax effects of items which gave rise to deferred tax expense are
as follows:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amortization of deferred investment tax credits $ (292) $ (292) $ (292)
Depreciation 1,468 1,775 1,817
Minimum tax credits -- -- 439
Unrecovered purchased gas costs (1,048) 2,180 (1,288)
Other (323) (180) (202)
- -----------------------------------------------------------------------------------------------------------------------------
$ (195) $ 3,483 $ 474
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
The following table reconciles the income tax provision calculated using the
federal statutory tax rate to the actual income tax expense:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal tax rate 35% 35% 35%
Allowance for doubtful accounts,
including amounts forgiven and deferred (5) (1) (3)
Conservation costs -- (1) (4)
Cost to retire assets, net of salvage (1) (1) (1)
Depreciation differences 3 3 4
Investment tax credits (1) (1) (1)
Pension contribution 2 (1) (3)
Premium paid - cancellation of bonds (7) -- --
Property taxes - effect of accounting treatment change (3) -- --
State taxes, net of federal tax benefit 5 3 5
Other, net (3) (1) 1
- -----------------------------------------------------------------------------------------------------------------------------
Effective tax rate 25% 35% 33%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Deferred income tax liabilities (assets) are composed of the following:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Tax effect of temporary differences for:
Depreciation $25,523 $24,056
Regulatory assets - income taxes 49,800 42,929
- -----------------------------------------------------------------------------------------------------------------------------
Gross liabilities 75,323 66,985
- -----------------------------------------------------------------------------------------------------------------------------
Contributions in aid of construction (758) (741)
Nonqualified benefit plans (1,124) (928)
Other (557) (399)
- -----------------------------------------------------------------------------------------------------------------------------
Gross assets (2,439) (2,068)
- -----------------------------------------------------------------------------------------------------------------------------
Net deferred income tax liability - long-term $72,884 $64,917
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1998 and 1997, the balance sheet caption "Federal, state
and deferred income taxes" includes approximately $885 and $1,933, respectively,
of current deferred federal and state income taxes.
NOTE 3 - LONG-TERM DEBT
Long-term debt outstanding consists of the following:
<TABLE>
As of September 30, 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First Mortgage Bonds:
Series L, 8%, due March 1, 1998 $ -- $ 4,200
Series T, 10.02%, due September 1, 2003 -- 2,727
Series U, 9.70%, due July 31, 2019 -- 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
- -----------------------------------------------------------------------------------------------------------------------------
102,000 118,727
Medium-Term Notes:
MTN1, Series 1, 7.50%-7.95%, due August 3, 2026 20,000 20,000
MTN1, Series 2, 5.95%-6.88%, due September 15, 2028 17,000 --
- -----------------------------------------------------------------------------------------------------------------------------
37,000 20,000
Term Loan:
Term loan, due August 1, 2005 12,328 --
Less: current maturities of long-term debt 1,321 4,654
- -----------------------------------------------------------------------------------------------------------------------------
$150,007 $134,073
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
Series W First Mortgage Bonds are due in bullet payments in the years 2021
and 2031, respectively. Series V, X and Y are due in single payments in the
years 2020, 2012 and 2013, respectively. Substantially all of the utility plant
of Southern is subject to the lien of its mortgage bond indenture dated March 1,
1948, as supplemented from time to time. See Note 6, "Common Shareholders'
Equity," for dividend restrictions.
In May 1998, CNE Energy entered into a term loan agreement with a bank to
be utilized to reimburse Southern for costs incurred to construct
distribution facilities to transport natural gas to an electric generating
plant in Bridgeport. Borrowings were completed in August 1998. The interest
rate on outstanding borrowings will vary in accordance with prevailing
interest rates.
In September 1998, Southern issued and sold $17,000 in secured Medium-Term
Notes ("MTN1, Series 2"). These notes have a weighted average rate of 6.71%
and a weighted average life of 25.5 years. They will be redeemed through
payments of $3,000 and $14,000 in the years 2003 and 2028, respectively.
Proceeds from the sale of MTN1, Series 2, were used to repurchase $12,073 of
Series T and Series U First Mortgage Bonds. The DPUC has allowed the deferral
of the unamortized issuance costs of the aforementioned MTNs as well as the
premiums related to the repurchase of these notes. The total of these
unamortized issuance costs and repurchase premiums was approximately $4,857
which will be amortized over the average life of this series of MTNs.
Principal maturities for the five fiscal years subsequent to September 30,
1998 are as follows: 1999 - $1,321; 2000 - $1,585; 2001 - $1,761; 2002 -
$1,761; 2003 - $4,761; total - $11,189.
Expenses incurred in connection with long-term borrowings are normally
amortized on a straightline basis over the respective lives of the issues
giving rise thereto.
NOTE 4 - SHORT-TERM BORROWINGS
The Company follows the practice of borrowing from banks on a short-term
basis. The following information relates to these borrowings:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding $22,400 $31,400
Weighted average interest rate 5.73% 6.61%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1998, Connecticut Energy and Southern have credit lines
with a number of banks as detailed below:
<TABLE>
<CAPTION>
Shared
Connecticut
Connecticut Energy/
Energy Southern Southern Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Committed Lines $ 5,000 $ 32,000 $ 20,000 $ 57,000
Uncommitted Lines -- $ 10,000 $ 10,000 $ 20,000
</TABLE>
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 $88, $115 and
$110 for the years ended September 30, 1998, 1997 and 1996, respectively. As of
September 30, 1998, unused lines of credit totaled $54,600.
NOTE 5 - REDEEMABLE PREFERRED STOCK
The following table summarizes the shares of preferred stock authorized,
issued and outstanding:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
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,
$46,838 of Southern's retained earnings as of September 30, 1998 was available
for such purposes.
In 1997, the Company established a Restricted Stock Award Plan and issued
52,247 shares of unregistered common stock to five senior officers of the
Company and its subsidiaries. The purpose of the Restricted 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 Restricted 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.
In 1997, the Company also established a Non-Employee Director Stock Plan. The
purpose of the Non-Employee 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 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, 1998, 1,800 shares have been issued under the
Non-Employee Director Stock Plan.
The Company 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, 1998, there were
674,308 shares reserved for issuance under the DRP and Target Plan.
NOTE 7 - EMPLOYEE BENEFITS
Pension 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 Internal Revenue Code ("IRC").
A regulatory adjustment has been made to the net periodic pension cost for
fiscal years 1997 and 1996 to reflect the amount of pension cost that is
realized through the ratemaking process.
The Company recorded an additional minimum liability of $1,036 and $797 as
of September 30, 1998 and 1997, 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 $228 and $85
as of September 30, 1998 and 1997, respectively, which represents unrecognized
prior service costs; and in 1998 and 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:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefit earned during the period $ 2,284 $ 2,255 $ 2,179
Interest cost on projected benefit obligation 5,438 5,370 4,846
Actual return on plan assets (4,430) (21,078) (9,372)
Net amortization and deferral (2,442) 14,912 3,959
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost 850 1,459 1,612
Regulatory adjustment -- 58 233
- ------------------------------------------------------------------------------------------------------------------------------
Net pension cost $ 850 $ 1,517 $ 1,845
- ------------------------------------------------------------------------------------------------------------------------------
Portion capitalized to utility plant $ 179 $ 357 $ 351
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
The following table sets forth the funded status of Southern's pension plans:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
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 $(63,238) $ (2,302) $(55,770) $ (1,814)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $(69,765) $ (2,525) $(61,451) $ (1,965)
- ------------------------------------------------------------------------------------------------------------------------------
Actuarial present value of
projected benefit obligation $(78,902) $ (3,251) $(70,143) $ (2,527)
Plan assets at fair value 97,560 -- 98,207 --
- ------------------------------------------------------------------------------------------------------------------------------
Projected benefit obligation less than
(in excess of) plan assets 18,658 (3,251) 28,064 (2,527)
Transition obligation 321 -- 490 --
Prior service cost 3,115 228 3,608 250
Unrecognized (gain) loss (11,606) 1,534 (21,220) 1,109
Adjustment required to recognize
minimum liability -- (1,036) -- (797)
- ------------------------------------------------------------------------------------------------------------------------------
Prepaid pension cost (liability), net $ 10,488 $ (2,525) $ 10,942 $ (1,965)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Key assumptions used in the determination of the projected benefit
obligations and the fair value of plan assets were:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6-3/4% 7-1/2% 8%
Salary increase rate 4% 4-3/4% 5-3/4%
Expected rate of return on assets 9-1/2% 9-1/2% 9-1/4%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The majority of the assets of the pension plans are invested in common stock,
fixed income securities and balanced mutual funds, with the balance in cash and
short-term investments.
Southern maintains 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 of the Company and its
subsidiaries.
Retirement Savings Plan
Southern maintains a savings plan ("Target 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 $778, $782 and $808 for years ended September 30, 1998, 1997 and 1996,
respectively.
Postretirement Health Care Benefits
Southern provides certain health care benefits for retired employees of
Southern and certain affiliates who were hired prior to November 1, 1995.
Substantially all employees may become eligible for those benefits if they have
reached age 55 and have completed at least five years of service with the
Company before retirement. Health care benefits are also extended to qualifying
dependents.
37
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
The postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefit attributed to service during the period $ 369 $ 354 $ 405
Interest cost on accumulated postretirement benefit obligation 1,207 1,223 1,198
Actual return on plan assets (589) (1,619) (837)
Net amortization and deferral 415 1,694 1,037
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost 1,402 1,652 1,803
Regulatory adjustment -- 31 122
- ------------------------------------------------------------------------------------------------------------------------------
Net postretirement benefit cost $ 1,402 $ 1,683 $ 1,925
- ------------------------------------------------------------------------------------------------------------------------------
Portion capitalized to utility plant $ 294 $ 396 $ 366
- ------------------------------------------------------------------------------------------------------------------------------
</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.
In 1994, a Voluntary Employees' Beneficiary Association ("VEBA") trust was
established as permitted under Section 501(c)(9) of the IRC. The majority of the
assets of the VEBA trust are 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:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ (9,332) $ (9,148)
Fully eligible active plan participants (2,749) (2,028)
Other active plan participants (6,081) (5,451)
- ------------------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation (18,162) (16,627)
Plan assets at fair value 9,771 7,988
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation
(in excess of) less than plan assets (8,391) (8,639)
Unamortized transition obligation 11,517 12,285
Unrecognized gain (3,154) (4,442)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ (28) $ (796)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 7 1/2% for pre-age 65 claims and 6 1/2% 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 6 3/4%. A one percentage point change in the assumed health care
cost trend rate would change the service cost and interest cost components of
the net periodic postretirement benefit cost by approximately $7 and $43,
respectively, and would change the accumulated postretirement health care
benefit obligation by approximately $646.
NOTE 8 - LEASES
Total rental expense was $3,050, $2,830 and $3,035 for the years ended
September 30, 1998, 1997 and 1996, respectively. The 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, 1998 are as follows:
<TABLE>
<CAPTION>
Years ending September 30, 1999 2000 2001 2002 2003 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Office space $2,130 $2,098 $2,087 $2,087 $2,218 $22,918
LNG plant 609 609 609 609 609 10,649
Other 76 76 76 67 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total commitment $2,815 $2,783 $2,772 $2,763 $2,827 $33,567
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
In 1995, the LNG plant lease agreement was renewed for two consecutive terms
of 12 years. The lease contains an option to purchase the plant at a price
based on the then fair market sales value of the unit as defined therein.
During 1998, Southern subleased the LNG facility to CNE Energy. CNE Energy,
in turn, subleased the LNG facility to TPS. Southern will continue to operate
the LNG facility under an agreement with TPS and will remain primarily
responsible for the lease payments in the event that the sublessees do not make
the required payments.
NOTE 9 - QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Dec. 31, March 31, June 30, Sept. 30,
1998 Quarters ended 1997 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $76,507 $100,773 $38,002 $27,149
Gross margin 34,031 52,599 20,155 15,074
Operating income (loss) 9,366 18,376 2,222 (144)
Net income (loss) 6,166 15,250 (1,019) (1,386)
Net income (loss) per share-diluted* 0.64 1.49 (0.10) (0.13)
- ------------------------------------------------------------------------------------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30,
1997 Quarters ended 1996 1997 1997 1997
- ------------------------------------------------------------------------------------------------------------------------------
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-diluted 0.60 1.67 (0.13) (0.32)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Calculated on the basis of diluted weighted average shares outstanding during
the applicable quarter.
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 long-term debt is as follows:
<TABLE>
<CAPTION>
As of September 30, 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt (including current maturities) $151,328 $181,854 $138,727 $160,196
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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."
39
<PAGE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED STATEMENTS
(dollars in thousands, except per share)
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 has conferred with officials of the DEP, including the DEP liaison
for the Department of Transportation's U.S. Highway Route Number 95 Corridor
expansion project, to establish priorities in connection with the environmental
assessments. As a result of those conferences, Southern and the DEP have
negotiated and executed a Consent Order with respect to the Pine Street site
located in Bridgeport. Pursuant to the Consent Order, Southern has agreed to
undertake an investigation of the Pine Street site and its immediate surrounding
area to determine potential sources of contamination and remediate contamination
which may be found to have emanated or be emanating from the Pine Street site as
a result of Southern's activities on the site. The schedule and scope of the
investigation have been agreed to by Southern and the DEP. As a result of this
Consent Order, Southern has recorded and deferred $150 for costs related to this
site investigation. When the investigation is complete, Southern should be able
to propose to the DEP what, if any, plan for remediation is appropriate for the
site. Until such investigation is complete, management cannot predict the cost,
if any, of any appropriate remediation for the Pine Street site.
Neither can management, at this time, predict the costs for any future site
analysis and remediation for the remaining two sites, 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 local distribution companies 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,
results of operations or cash flows.
NOTE 12 - NONUTILITY OPERATIONS
The Company has two nonutility subsidiaries that engage in activities related
to the purchasing and marketing of natural gas as well as the selling, planning,
purchasing and management of various energy services to commercial and
industrial end users. In addition, another nonutility subsidiary focuses on
investing in technology companies and participating in ventures with technology
partners serving the utility industry.
In fiscal 1998, the Company's nonutility subsidiaries contributed
approximately $0.17 to earnings per share, representing approximately 9% of
consolidated earnings per share for the year. The contribution to 1998 earnings
by the nonutility subsidiaries was principally due to revenues generated by a
contract to transport natural gas to an electric generating plant located at the
Bridgeport Harbor Station and the sale of 50% interests in TPS and CNEP, joint
ventures of the Company's nonutility subsidiary, CNE Energy, to Conectiv Energy
Supply, Inc., a subsidiary of Conectiv.
The chart below depicts net income, earnings per share and total assets for
the Company's nonutility operations:
<TABLE>
<CAPTION>
Years ended September 30, 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 1,707 $ 418 $ (167)
Earnings per share - diluted $ 0.17 $ 0.05 $ (0.02)
Total assets $ 25,370 $ 4,887 $ 2,504
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
CONNECTICUT ENERGY CORPORATION
MANAGEMENT RESPONSIBILITY FOR
FINANCIAL STATEMENTS
The management of Connecticut Energy Corporation is responsible for the
preparation and integrity of the consolidated financial statements and all other
financial information included in this annual report. The financial statements
were prepared in conformity with generally accepted accounting principles
consistently applied and they necessarily include amounts which are based on
estimates and judgments made with due consideration to materiality.
Management maintains a system of internal accounting controls which it
believes provides reasonable assurance that Company policies and procedures are
complied with, assets are safeguarded and transactions are executed in
accordance with appropriate corporate authorization and recorded in a manner
which permits management to meet its responsibility for the preparation of
financial statements. The Company's system of controls includes the
communication and enforcement of written policies and procedures.
The Audit Committee of the Board of Directors, comprised of non-employee
directors, meets periodically and as necessary with management, the internal
auditors and PricewaterhouseCoopers LLP to review audit plans and results and
the Company's accounting, financial reporting and internal control practices,
procedures and results. Both PricewaterhouseCoopers LLP 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, Treasurer Chief Accounting Officer
and Assistant Secretary
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Connecticut Energy Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in common shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Connecticut Energy Corporation and its subsidiaries at September 30, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
New York, New York
October 30, 1998
41
<PAGE>
CONNECTICUT ENERGY CORPORATION
ELEVEN YEAR FINANCIAL SUMMARY
(dollars in thousands, except per share)
Financial information presented for 1998 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.
<TABLE>
<CAPTION>
1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Operating revenues $ 242,431 $ 252,008 $ 261,093 $ 232,093
Purchased gas 120,572 132,672 141,628 115,583
Gross margin 121,859 119,336 119,465 116,510
Operations and maintenance expenses 55,172 50,352 51,605 52,856
Depreciation and depletion 16,904 15,774 14,752 14,050
Federal income taxes 4,598 7,703 5,937 5,901
Other taxes 15,365 16,618 18,507 16,817
Other (income) deductions, net (2,331) (1,229) 546 519
Total interest expense 13,140 13,677 12,953 12,307
Subsidiary preferred stock dividends -- -- -- --
Income before cumulative effect
of accounting change $ 19,011 $ 16,441 $ 15,165 $ 14,060
Cumulative effect of accounting change -- -- -- --
Net income $ 19,011 $ 16,441 $ 15,165 $ 14,060
Net income per share before cumulative
effect of accounting change (d) $ 1.88 $ 1.81 $ 1.70 $ 1.60
Net income per share (d) $ 1.88 $ 1.81 $ 1.70 $ 1.60
Annual dividend paid per common share (d) $ 1.33 $ 1.32 $ 1.31 $ 1.30
- ----------------------------------------------------------------------------------------------------------------------------
*Capitalization
Common shareholders' equity $ 177,153 $ 144,514 $ 137,961 $ 131,561
Redeemable preferred stock -- -- --- --
Long-term debt 150,007 134,073 138,727 119,322
---------------------------------------------------------------------------------------------------------------------------
Total capitalization $ 327,160 $ 278,587 $ 276,688 $ 250,883
- ----------------------------------------------------------------------------------------------------------------------------
*Capitalization (% of total)
Common shareholders' equity 54.1 51.9 49.9 52.4
Redeemable preferred stock -- -- -- --
Long-term debt 45.9 48.1 50.1 47.6
- ----------------------------------------------------------------------------------------------------------------------------
Total capitalization 100.0% 100.0% 100.0% 100.0%
- ----------------------------------------------------------------------------------------------------------------------------
*Common Stock (d)
Shares outstanding at end of period 10,289,692 9,172,468 9,012,267 8,865,210
Book value per share at end of period $ 17.22 $ 15.76 $ 15.31 $ 14.84
Market value per share at end of period $ 27.00 $ 24.69 $ 20.00 $ 19.38
Average daily trading volume 15,000 9,000 9,000 5,000
Shareholders of record at end of period 9,863 10,546 11,274 11,688
Institutional ownership (%) 35 25 20 21
- ----------------------------------------------------------------------------------------------------------------------------
Assets
Gross utility plant $ 412,715 $399,675 $ 376,109 $ 354,847
Net utility plant $ 275,222 $269,122 $ 257,761 $ 247,603
Capital expenditures (e) $ 24,614 $ 28,443 $ 25,180 $ 27,609
Total assets $ 459,401 $424,281 $ 399,228 $ 370,088
- ----------------------------------------------------------------------------------------------------------------------------
Ratios (%)
Operations and maintenance expense
as a % of gross margin 45.3 42.2 43.2 45.4
Dividend payout as a % of earnings 70.7 72.9 77.1 81.3
Effective federal tax rate 19.0 32.0 28.0 30.0
Return on ending common equity 10.7 11.4 11.0 10.7
Price to earnings 14.4 13.6 11.8 12.1
Dividend yield 4.9 5.3 6.6 6.7
Market price as a % of book value 156.8 156.7 130.6 130.6
- ----------------------------------------------------------------------------------------------------------------------------
<FN>
*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.
</FN>
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
(a)(b)(c) (a)(c)
$240,873 $212,762 $203,011 $179,172 $174,059 $171,218 $156,978
126,870 113,045 104,163 86,778 84,154 81,794 71,787
114,003 99,717 98,848 92,394 89,905 89,424 85,191
54,244 45,023 46,881 42,475 44,085 42,636 38,869
13,031 12,051 11,327 10,540 10,664 10,297 8,533
3,938 3,474 2,287 4,324 3,819 4,740 5,839
17,778 16,044 16,025 15,238 14,431 14,560 14,146
586 510 531 349 (228) 356 713
11,575 11,530 11,536 10,428 10,156 8,598 7,653
8 32 34 36 39 403 751
$ 12,843 $ 11,053 $ 10,227 $ 9,004 $ 6,939 $ 7,834 $ 8,687
-- -- -- -- 1,280 -- --
$ 12,843 $ 11,053 $ 10,227 $ 9,004 8,219 $ 7,834 $ 8,687
$ 1.58 $ 1.50 $ 1.43 $ 1.38 $ 1.12 $ 1.28 $ 1.49
$ 1.58 $ 1.50 $ 1.43 $ 1.38 $ 1.33 $ 1.28 $ 1.49
$ 1.29 $ 1.28 $ 1.265 $ 1.24 $ 1.23 $ 1.20 $ 1.17
- -----------------------------------------------------------------------------------------------------------------------------
$ 125,719 $ 99,853 $ 92,605 $ 88,622 $ 74,413 $ 75,001 $ 73,311
-- 638 687 736 786 835 6,429
$ 119,917 120,511 $ 94,106 $ 87,378 91,506 79,686 69,137
----------------------------------------------------------------------------------------------------------------------------
$ 245,636 $221,002 $187,398 $176,736 $ 166,705 $ 155,522 $148,877
- -----------------------------------------------------------------------------------------------------------------------------
51.2 45.2 49.4 50.1 44.6 48.2 49.2
-- 0.3 0.4 0.4 0.5 0.6 4.3
48.8 54.5 50.2 49.5 54.9 51.2 46.5
- ----------------------------------------------------------------------------------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
- -----------------------------------------------------------------------------------------------------------------------------
8,700,266 7,488,467 7,234,921 7,096,634 6,250,161 6,176,665 6,088,017
$ 14.45 $ 13.33 $ 12.80 $ 12.49 $ 11.91 $ 12.14 $ 12.04
$ 21.63 $ 24.88 $ 22.25 $ 19.00 $ 16.63 $ 17.63 $ 14.50
5,500 9,000 4,500 5,000 2,950 4,200 2,850
12,094 11,094 9,153 9,163 7,382 7,493 7,662
21 18 18 14 15 16 16
- -----------------------------------------------------------------------------------------------------------------------------
$331,953 $313,951 $293,687 $273,862 $255,446 $241,624 $255,236
$234,495 $221,800 $210,054 $198,695 $189,108 $181,358 $166,970
$ 26,618 $ 26,070 $ 22,634 $ 20,331 $ 23,102 $ 23,184 $ 19,471
$352,920 $299,795 $269,504 $247,969 $229,600 $239,327 $214,458
- ----------------------------------------------------------------------------------------------------------------------------
47.6 45.2 47.4 46.0 49.0 47.7 45.6
81.6 85.3 88.5 89.9 92.5 93.8 78.5
23.0 24.0 18.0 32.0 35.0 37.0 38.0
10.2 11.1 11.0 10.2 11.0 10.4 11.8
13.7 16.6 15.6 13.8 12.5 13.8 9.7
6.0 5.1 5.7 6.5 7.4 6.8 8.1
149.7 186.6 173.8 152.1 139.6 145.2 120.04
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(b) Includes the cumulative effect of accounting change for municipal property
taxes which increased earnings by $0.21 per share.
(c) The write down of the value of oil and gas properties reduced earnings by
$0.10 per share in 1990 and 1989.
(d) Adjusted to reflect the Company's 3-for-2 stock split in October 1989.
(e) Stated net of contributions in aid of construction.
</FN>
</TABLE>
43
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
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME, BALANCE SHEETS AND STATEMENTS OF CASH
FLOWS OF CONNECTICUT ENERGY CORPORATION AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 275,222
<OTHER-PROPERTY-AND-INVEST> 4,526
<TOTAL-CURRENT-ASSETS> 58,406
<TOTAL-DEFERRED-CHARGES> 121,247
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 459,401
<COMMON> 10,290
<CAPITAL-SURPLUS-PAID-IN> 119,961
<RETAINED-EARNINGS> 47,685
<TOTAL-COMMON-STOCKHOLDERS-EQ> 177,153
0
0
<LONG-TERM-DEBT-NET> 150,007
<SHORT-TERM-NOTES> 22,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,321
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 108,520
<TOT-CAPITALIZATION-AND-LIAB> 459,401
<GROSS-OPERATING-REVENUE> 242,431
<INCOME-TAX-EXPENSE> 6,438
<OTHER-OPERATING-EXPENSES> 206,173
<TOTAL-OPERATING-EXPENSES> 212,611
<OPERATING-INCOME-LOSS> 29,820
<OTHER-INCOME-NET> 2,331
<INCOME-BEFORE-INTEREST-EXPEN> 32,151
<TOTAL-INTEREST-EXPENSE> 13,140
<NET-INCOME> 19,011
0
<EARNINGS-AVAILABLE-FOR-COMM> 19,011
<COMMON-STOCK-DIVIDENDS> 13,623
<TOTAL-INTEREST-ON-BONDS> 12,086
<CASH-FLOW-OPERATIONS> 27,781
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.88
</TABLE>
