SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-8369
CONNECTICUT ENERGY CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Connecticut 06-0869582
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
855 Main Street
Bridgeport, Connecticut 06604
(Address of Principal Executive Offices) (Zip Code)
(800) 760-7776
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 6, 1999
-------------------------- -----------------------------
Common Stock, $1 par value 10,389,232
<TABLE>
PART 1. FINANCIAL INFORMATION
CONNECTICUT ENERGY CORPORATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share)
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
---- ---- ---- ----
Operating Revenues ............................. $ 35,377 $ 38,002 $ 203,135 $ 215,282
Purchased gas .................................. 12,461 17,847 89,414 108,497
------------ ------------ ------------ ------------
Gross margin ................................... 22,916 20,155 113,721 106,785
Operating Expenses:
Operations ................................ 12,166 11,517 38,020 37,688
Maintenance ............................... 817 903 2,745 2,887
Depreciation .............................. 4,338 4,081 13,371 12,561
Federal and state income taxes ............ (2,851) (1,806) 12,581 12,604
Municipal, gross earnings and other taxes . 3,390 3,238 12,319 11,081
------------ ------------ ------------ ------------
Total operating expenses ....................... 17,860 17,933 79,036 76,821
------------ ------------ ------------ ------------
Operating income ............................... 5,056 2,222 34,685 29,964
Other deductions (income), net ................. 978 (8) 947 (259)
Merger-related expenses ........................ 1,537 --- 1,537 ---
------------ ------------ ------------ ------------
Income before interest expense ................. 2,541 2,230 32,201 30,223
------------ ------------ ------------ ------------
Interest Expense:
Interest on long-term debt and amortization
of debt issue costs .................... 3,199 2,984 9,608 9,091
Other interest, net ....................... 108 265 518 735
------------ ------------ ------------ ------------
Total interest expense ......................... 3,307 3,249 10,126 9,826
------------ ------------ ------------ ------------
Net (Loss) Income .............................. $ (766) $ (1,019) $ 22,075 $ 20,397
============ ============ ============ ============
Net (loss) income per share - basic ............ $ (0.07) $ (0.10) $ 2.15 $ 2.04
============ ============ ============ ============
Net (loss) income per share - diluted .......... $ (0.07) $ (0.10) $ 2.13 $ 2.03
============ ============ ============ ============
Dividends paid per share ....................... $ 0.335 $ 0.335 $ 1.005 $ 0.995
------------ ------------ ------------ ------------
Weighted average common shares outstanding
during period - basic ..................... 10,283,429 10,197,554 10,260,586 9,995,647
------------ ------------ ------------ ------------
Weighted average common shares outstanding
during period - diluted ................... 10,375,443 10,249,801 10,352,600 10,047,894
------------ ------------ ------------ ------------
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
---- ---- ---- ----
Net (Loss) Income ...................... $ (766) $ (1,019) $ 22,075 $ 20,397
-------- -------- -------- --------
Other comprehensive income, net of tax:
Minimum pension liability adjustment (473) (427) (473) (427)
-------- -------- -------- --------
Total other comprehensive income ....... (473) (427) (473) (427)
-------- -------- -------- --------
Comprehensive (Loss) Income ............ $ (1,239) $ (1,446) $ 21,602 $ 19,970
======== ======== ======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
<S> <C> <C>
June 30, Sept. 30,
1999 1998
--------- ---------
(Unaudited)
Assets
- ------
Utility Plant:
Gross utility plant ................................................... $421,971 $412,715
Less: accumulated depreciation ....................................... 145,411 137,493
-------- --------
Net utility plant ..................................................... 276,560 275,222
Nonutility property, net ................................................. 9,842 4,526
-------- --------
Net utility plant and other property ..................................... 286,402 279,748
-------- --------
Current Assets:
Cash and cash equivalents ............................................ 5,966 10,091
-------- --------
Accounts receivable .................................................. 35,530 28,986
Less: allowance for doubtful accounts ............................... 2,752 2,065
-------- --------
Net accounts receivable .............................................. 32,778 26,921
-------- --------
Accrued utility revenues, net ........................................ 2,548 2,511
Unrecovered purchased gas costs ...................................... --- 2,529
Inventories .......................................................... 6,260 10,491
Prepaid expenses ..................................................... 1,086 5,863
-------- --------
Total current assets ..................................................... 48,638 58,406
-------- --------
Deferred Charges and Other Assets:
Unamortized debt expenses ........................................... 10,601 10,841
Unrecovered deferred income taxes ................................... 49,832 49,800
Other ............................................................... 68,154 60,606
-------- --------
Total deferred charges and other assets .................................. 128,587 121,247
-------- --------
Total assets ............................................................. $463,627 $459,401
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share)
<S> <C> <C>
June 30, Sept. 30,
1999 1998
--------- ---------
(Unaudited)
Capitalization and Liabilities
- ------------------------------
Common Shareholders' Equity:
Common stock: authorized--30,000,000
shares, par value $1 per share, issued and
outstanding--10,387,615 shares; 10,289,692
shares ............................................................... $ 10,388 $ 10,290
Capital in excess of par value ....................................... 123,715 119,961
Unearned compensation ................................................ (1,550) (310)
Retained earnings .................................................... 59,340 47,685
Adjustment for minimum pension liability (net of
income taxes) .................................................... (473) (473)
--------- ---------
Total common shareholders' equity ....................................... 191,420 177,153
--------- ---------
Long-term debt .......................................................... 148,458 150,007
--------- ---------
Total capitalization .................................................... 339,878 327,160
--------- ---------
Current Liabilities:
Short-term borrowings ............................................... 4,150 22,400
Current maturities of long-term debt ................................ 1,629 1,321
Accounts payable .................................................... 9,553 10,499
Federal, state and deferred income taxes ............................ 5,969 1,537
Other accrued taxes ................................................. 2,878 2,024
Interest payable .................................................... 2,548 3,386
Customers' deposits ................................................. 1,667 1,627
Refunds due customers ............................................... 118 454
Refundable purchased gas costs ...................................... 3,764 ---
Other ............................................................... 6,053 4,886
--------- ---------
Total current liabilities ............................................... 38,329 48,134
--------- ---------
Deferred Credits:
Deferred income taxes and investment
tax credits ...................................................... 76,231 75,568
Other ............................................................... 9,101 8,389
--------- ---------
Total deferred credits .................................................. 85,332 83,957
--------- ---------
Commitments and contingencies ........................................... 88 150
--------- ---------
Total capitalization and liabilities .................................... $ 463,627 $ 459,401
========= =========
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
CONNECTICUT ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<S> <C> <C>
Nine Months Ended
June 30,
--------------------
1999 1998
---- ----
Net cash provided by operating activities ...................................... $ 45,999 $ 22,305
-------- --------
Cash Flows from Investing Activities:
Capital expenditures ....................................................... (20,165) (18,773)
Contributions in aid of construction ....................................... 1,160 39
Payments for retirement of utility plant ................................... (236) (110)
Investment in special contract distribution main ........................... (1,211) ---
Energy ventures ............................................................ (2,373) 42
-------- --------
Net cash used by investing activities .......................................... (22,825) (18,802)
-------- --------
Cash Flows from Financing Activities:
Dividends paid on common stock ............................................. (10,420) (10,181)
Issuance of common stock ................................................... 2,612 26,090
Repayments of long-term debt ............................................... (1,241) (4,200)
Decrease in short-term borrowings .......................................... (18,250) (16,217)
-------- --------
Net cash used by financing activities .......................................... (27,299) (4,508)
-------- --------
Net decrease in cash and cash equivalents ...................................... (4,125) (1,005)
Cash and cash equivalents at beginning of period ............................... 10,091 6,644
-------- --------
Cash and cash equivalents at end of period ..................................... $ 5,966 $ 5,639
======== ========
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest ................................................................... $ 10,458 $ 10,634
Income taxes ............................................................... $ 7,250 $ 8,350
Supplemental Schedule of Noncash
Investing and Financing Activities:
On January 31, 1999, 700 shares of unregistered common stock were issued
pursuant to the Company's Non-Employee Director Stock Plan.
On October 1, 1998, 39,767 shares of unregistered common stock were issued
pursuant to the Company's Restricted Stock Award Plan.
See Notes to Consolidated Financial Statements.
</TABLE>
CONNECTICUT ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
(Unaudited)
Note 1 - Summary of Significant Accounting Policies
General
The unaudited consolidated financial statements presented herein should be
read in conjunction with the consolidated financial statements of Connecticut
Energy Corporation ("Connecticut Energy" or "Company") for the fiscal year ended
September 30, 1998 as presented in its Annual Report on Form 10-K. In the
opinion of management, the accompanying financial information reflects all
adjustments that are necessary to provide a fair presentation of the interim
periods shown. All such adjustments are of a normal recurring nature.
In preparing the financial statements in conformity with generally
accepted accounting principles, the Company uses estimates. Estimates are
disclosed when there is a reasonable possibility for change in the near term.
For this purpose, near term is defined as a period of time not to exceed one
year from the date of the financial statements. The Company's financial
statements have been prepared based on management's estimates of the impact of
regulatory, legislative and judicial developments on the Company or significant
groups of its customers. The recorded amounts of certain accruals, reserves, and
deferred charges and other assets could be materially impacted if circumstances
change which affect these estimates.
Accounting for the Effects of Regulation
The Company's principal subsidiary, The Southern Connecticut Gas Company
("Southern"), prepares its financial statements in accordance with the
provisions of Statement of Financial Accounting Standards No. 71, "Accounting
for the Effects of Certain Types of Regulation" ("SFAS 71"), which requires a
cost-based, rate-regulated enterprise, such as Southern, to reflect the impact
of regulatory decisions in its financial statements. The Connecticut Department
of Public Utility Control's ("DPUC") actions through the ratemaking process can
create regulatory assets in which costs are allowed for ratemaking purposes in a
period other than the period in which the costs would be charged to expense if
the reporting entity were unregulated.
In the application of SFAS 71, Southern follows accounting policies that
reflect the impact of the rate treatment of certain events or transactions. The
most significant of these policies include the recording of deferred gas costs,
deferred conservation costs, deferred hardship heating customer accounts
receivable arrearages, deferred environmental evaluation costs and an unfunded
deferred income tax liability, with a corresponding unrecovered asset, to
account for temporary differences previously flowed through to ratepayers.
Southern had net regulatory assets as of June 30, 1999 and September 30,
1998 of $75,429 and $74,955, 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 unbundled 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 local gas distribution companies
("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 sales services.
Because the 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 residential
classes, which represent the majority of Southern's total throughput and gross
margin.
Management believes that Southern continues to meet the requirements of
SFAS 71 because Southern's rates for regulated services provided to its
customers are subject to DPUC approval; are designed to recover Southern's costs
of providing regulated services; and continue to be subject to cost-of-service
based rate regulation by the DPUC.
Deferred Charges and Other Assets
Deferred charges and other assets include amounts related to the
following:
<TABLE>
<S> <C> <C>
June 30, Sept. 30,
As of 1999 1998
- -----------------------------------------------------------------------------
Conservation costs ..................................... $ 3,869 $ 5,004
Energy assistance funding shortfall .................... --- 262
Environmental evaluation costs ......................... 947 684
Gas holder costs ....................................... --- 62
Hardship heating customer accounts receivable arrearages 19,461 16,399
Hardship heating customer assistance grant program ..... 3,493 1,748
Investment in energy ventures .......................... 6,568 4,195
Investment in special contract distribution main, net .. 11,976 11,394
Liquefied natural gas, net ............................. 209 207
Nonqualified benefit plans ............................. 3,703 3,023
Prepaid pension and postretirement medical contributions 14,207 14,207
Other .................................................. 3,721 3,421
-------- --------
$ 68,154 $ 60,606
======== ========
</TABLE>
Southern has been allowed to recover various deferred charges in rates
over periods ranging from three to five years in accordance with the DPUC's
Decision in Southern's latest rate case.
Deferred Credits
Deferred credits include amounts related to the following:
<TABLE>
<S> <C> <C>
June 30, Sept. 30,
As of 1999 1998
- -----------------------------------------------------------------------------
Economic development initiatives ....................... $ 371 $ 397
Insurance reserves ..................................... 1,545 1,153
Interruptible margin sharing ........................... 477 1,210
Nonqualified benefit plans ............................. 4,041 3,522
Other .................................................. 2,667 2,107
------- -------
$ 9,101 $ 8,389
======= =======
</TABLE>
Utility Operating Results
Due to the seasonal nature of gas sales for space heating purposes by
Southern, the results of operations for the nine months ended June 30, 1999 are
not indicative of the results to be expected for the fiscal year ending
September 30, 1999.
Common Shareholders' Equity
On October 1, 1998, 39,767 shares of unregistered common stock were issued
to six senior officers pursuant to the Company's Restricted Stock Award Plan.
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.
Recent Accounting Developments
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), has been amended by
Statement of Financial Accounting Standards No. 137. The effective date of SFAS
133 has been amended to become effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000; therefore, it will become effective for the
Company on October 1, 2000.
Effective October 1, 1998, the Company adopted 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.
Note 2 - Commitments and Contingencies
Environmental Matters
Southern has identified coal tar residue at three sites in Connecticut
resulting from coal gasification operations conducted at those sites by
Southern's predecessors from the late 1800s through the first part of this
century. Many gas distribution companies throughout the country carried on such
gas manufacturing operations during the same period. See section in Management's
Discussion and Analysis entitled "Environmental Matters" for further details.
Note 3 - Merger Agreement
On April 23, 1999, the Boards of Directors of Energy East Corporation
("Energy East") and Connecticut Energy announced that the companies have signed
a definitive merger agreement under which Connecticut Energy will become a
wholly-owned subsidiary of Energy East in a transaction which is valued at
$617,000 including the assumption of debt. See section in Management's
Discussion and Analysis entitled "Connecticut Energy Corporation/Energy East
Corporation Merger" for further details.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Connecticut Energy Corporation ("Connecticut Energy" or "Company") and its
subsidiaries and their representatives may, from time to time, make written or
oral statements, including statements contained in the Company's filings with
the Securities and Exchange Commission and in its annual report to shareholders,
including its Form 10-K for the fiscal year ended September 30, 1998 and this
quarterly report on Form 10-Q, which constitute or contain "forward-looking"
information as that term is defined in the Private Securities Litigation Reform
Act of 1995.
All statements other than the financial statements and other statements of
historical facts included in this quarterly report 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; changes in
business strategy; and estimates of future costs or the effect on future
operations as a result of events that could result from the Year 2000 issue
described further herein.
RESULTS OF OPERATIONS
Net Income
- ----------
The Company's consolidated net income for the three and nine months ended
June 30, 1999 and 1998 is detailed below:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------- -------------------
(in thousands, except per share) 1999 1998 1999 1998
---- ---- ---- ----
Net (loss) income $ (766) $ (1,019) $ 22,075 $ 20,397
======== ======== ======== ========
Net (loss) income per share - diluted $ (0.07) $ (0.10) $ 2.13 $ 2.03
======== ======== ======== ========
Weighted average common shares outstanding - diluted 10,375 10,250 10,353 10,048
-------- -------- -------- --------
</TABLE>
The net loss for the three months ended June 30, 1999 was approximately
25% lower than the net loss recorded in the corresponding 1998 period. This was
primarily due to higher firm margins earned by the Company's principal
subsidiary, The Southern Connecticut Gas Company ("Southern"), and its
nonutility subsidiary, CNE Energy Services Group, Inc. ("CNE Energy"), and
higher credits for state and federal income taxes. The reduction in net
loss for the 1999 quarter was partially offset by lower interruptible
margins, higher operations and depreciation expenses, higher gross earnings tax,
higher other deductions, merger-related expenses and higher interest expense
on long-term debt.
Net income for the nine months ended June 30, 1999 was 8% higher compared
to the nine months ended June 30, 1998 primarily due to higher firm margins
earned by Southern and CNE Energy. The increase in net income was partially
offset by lower interruptible margins, higher operations and depreciation
expenses, higher property taxes, higher other deductions, merger-related
expenses and higher interest expense on long-term debt.
Total Sales and Transportation Volumes
- --------------------------------------
Total volumes of gas sold and transported for the three months ended June
30, 1999 were approximately 5,866 MMcf, or approximately 7% higher, compared to
the corresponding 1998 period primarily due to an increase in firm contract and
off-system transportation volumes. Lower off-system sales volumes for the 1999
quarter were partially offsetting.
Total volumes of gas sold and transported for the nine months ended June
30, 1999 were approximately 28,420 MMcf, or approximately 3% lower, compared to
the nine months ended June 30, 1998. Lower interruptible volumes for the nine
months ended June 30, 1999 were partially offset by an increase in firm volumes.
Firm Sales, Firm Transportation and Firm Contract Volumes
- ---------------------------------------------------------
The Company's firm volumes for the three and nine months ended June 30,
1999 increased approximately 12% and 13%, respectively, compared to the
corresponding 1998 periods. This was primarily due to firm volumes generated by
a contract to transport natural gas to an electric generating plant in
Bridgeport and the continued growth in Southern's residential customer base. The
increase in firm volumes for the nine months ended June 30, 1999 was also
attributed to higher firm transportation volumes and was partially offset by
lower industrial firm sales primarily due to customers' switching to firm
transportation services.
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. Gross margin
retained represents the difference between gross margin earned and margin to be
allocated through the margin sharing mechanism.
The chart below depicts volumes of gas sold to and transported for
on-system interruptible customers, off-system sales volumes and off-system
transportation volumes under a special contract with The Connecticut Light and
Power Company for its Devon electric generating station as well as gross margins
earned and retained due to the margin sharing mechanism on these services for
the three and nine months ended June 30, 1999 and 1998:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ ------------------
(dollars in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Gross margin earned $1,419 $2,068 $5,345 $7,267
====== ====== ====== ======
Gross margin retained $1,266 $1,618 $3,299 $4,536
====== ====== ====== ======
Volumes sold and transported (MMcf) 2,247 2,280 6,728 9,921
------ ------ ------ ------
</TABLE>
Gross margins earned and retained by Southern were lower for the three and
nine months ended June 30, 1999 compared to the corresponding 1998 periods
principally due to the competitive price of certain other energy sources
compared to natural gas.
For the nine months ended June 30, 1999, interruptible volumes sold and
transported were lower for all interruptible categories, with the exception of
on-system transportation. Lower off-system sales and off-system transportation
volumes were primarily responsible for the decrease in interruptible volumes.
The reduction in off-system sales volumes was primarily due to the elimination
of off-system sales activity by Southern as of April 1, 1999. See section
entitled "Gas Supply Management Agreement" for further details.
Gross Margin
- ------------
The Company's gross margin for the three and nine months ended June 30,
1999 was approximately 14% and 6% higher, respectively, compared to the
corresponding 1998 periods. The increase in the 1999 periods was principally
attributed to higher firm margins earned by Southern and CNE Energy resulting
from revenues generated by a contract to transport natural gas to an electric
generating plant in Bridgeport, which began operations in July 1998; increases
in firm transportation revenues; and increases in Southern's residential
customer base. Also contributing to the increase in gross margin, to a lesser
extent, were the Company's other nonutility operations. Lower interruptible
margins for the three and nine months ended June 30, 1999 partially offset the
overall increase in gross margin compared to the same periods last year.
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 the three and
nine months ended June 30, 1999 was approximately 13% and 9% warmer than normal,
respectively, the operation of the WNA collected approximately $1,434,000 and
$5,977,000, respectively, from firm customers. This compares to a collection
from firm customers during the three and nine months ended June 30, 1998 of
approximately $1,140,000 and $6,017,000, respectively.
Southern's firm sales rates include a Purchased Gas Adjustment clause
("PGA") which allows Southern to flow back to its customers, through periodic
adjustments to amounts billed, increased or decreased costs incurred for
purchased gas compared to base rate levels, without affecting gross margin. The
operation of Southern's PGA decreased revenues and gas costs for the three
months ended June 30, 1999 by approximately $77,000 and increased revenues and
gas costs for the nine months ended June 30, 1999 by approximately $1,405,000.
For the three and nine months ended June 30, 1998, PGA adjustments increased
revenues and gas costs by approximately $1,275,000 and $10,576,000,
respectively.
Operations Expense
- ------------------
Operations expense for the three months ended June 30, 1999 increased
approximately 6% compared to the corresponding 1998 period. The increase was
primarily due to higher costs for health insurance, collection agency fees and
the Company's Restricted Stock Award Plan. A lower provision for uncollectibles
and lower costs for outside services partially offset the increase in
operations expense in the 1999 period.
Depreciation Expense
- --------------------
Depreciation expense for the three and nine months ended June 30, 1999
increased approximately 6% compared to the corresponding 1998 periods. The
increase in the 1999 periods was primarily due to additions to plant in service
by Southern.
Federal and State Income Taxes
- ------------------------------
The federal and state income tax credit for the three months ended June
30, 1999 was approximately 58% higher compared to the corresponding 1998 period
primarily due to a reduction during the 1999 quarter of the Company's accrual
for prior years' taxes.
Municipal, Gross Earnings and Other Taxes
- -----------------------------------------
Municipal, gross earnings and other taxes for the three and nine months
ended June 30, 1999 were approximately 5% and 11% higher, respectively, compared
to the corresponding 1998 periods. The increase in the 1999 quarter compared to
last year was primarily due to higher gross earnings tax. Lower gross earnings
tax for the nine months ended June 30, 1999 was more than offset by the absence
of a reduction to property tax expense which occurred in the corresponding 1998
period as a result of a DPUC Decision which 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 quarter ended March 31,
1998.
Other Deductions (Income), Net
- ------------------------------
The increase in other deductions for the three and nine months ended June
30, 1999 was primarily due to a reduction in equity earnings in CNE Energy due
to its joint venture, Conectiv/CNE Energy Services, LLC, and, to a lesser
extent, higher promotional expenses recorded by Southern.
Merger-Related Expenses
- -----------------------
In the quarter ended June 30, 1999, the Company began recording
merger-related expenses. As of June 30, 1999, the Company has recorded
$1,537,000 of such expenses which are primarily comprised of investment banking
and legal fees. See section entitled "Connecticut Energy Corporation/Energy
East Corporation Merger" for further details.
Interest Expense
- ----------------
Total interest expense increased approximately 2% and 3% for the three and
nine months ended June 30, 1999, respectively, compared to the corresponding
1998 periods primarily due to an increase in long-term debt related to the
financing of the construction of distribution facilities to transport natural
gas to an electric generating plant in Bridgeport. In the 1999 quarter, the
increase in total interest expense was partially offset by lower interest
expense on short-term borrowings and lower interest expense on deferred
purchased gas cost balances. For the nine months ended June 30, 1999, the
increase in total interest expense was partially offset by lower interest
expense on short-term borrowings and lower interest expense related to pipeline
refunds not yet returned to firm customers.
Year 2000 Readiness Disclosure
- ------------------------------
General
Before the Company's Year 2000 program began, many of its software
programs and computing infrastructure used two-digit years, rather than
four-digit years, to define the applicable year. Computer hardware and software
using two-digit years may recognize a date using "00" as the year 1900 rather
than the year 2000. This so-called Year 2000 issue could result in the computer
or device shutting down, performing incorrect computations or performing
inconsistently. If not corrected, those systems could cause the Company to
experience service problems, report inaccurate data or issue inaccurate bills.
Since 1996, the Company has been working on various aspects of the Year
2000 issue. It has been implementing individual strategies targeted at the
specific nature of the Year 2000 issue 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 and is nearing completion.
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, customer service, marketing, 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.
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 multiple occasions. In January 1999, the
DPUC retained the services of an information technology consultant to perform a
due diligence study of Year 2000 readiness at each of Connecticut's
investor-owned utilities, including Southern. On June 9, 1999, the DPUC released
the consultant's report, which favorably comments on Southern's Year 2000
program. The DPUC opened Docket No. 99-06-22 and is scheduled to hold a hearing
on August 16, 1999 at which Southern will testify as to its Year 2000
readiness. The final decision is expected on September 22, 1999.
Southern separately expects the DPUC's auditors to continue periodic Year
2000-related monitoring of Southern and the other investor-owned utilities
throughout the remainder of 1999 to coordinate contingency plans and customer
communications strategies.
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.
While the Company is conducting additional testing, the Company remains
confident that these applications are Year 2000 ready.
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 is completed and the system is Year 2000 ready.
In December 1997, the Company began a project to replace its Customer
Information System with a vendor supplied business-application system. The
project is completed. The project team completed Year 2000 testing of the new
system and determined that the Customer Information System is Year 2000 ready.
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 is complete, tested and the system is Year 2000
ready.
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 is complete
and the system is Year 2000 ready.
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.
In January 1999, all of the Company's PCs were checked for Year 2000 readiness
and some software modifications were completed as needed. The Company's supplier
of desktop and network operating systems, Microsoft, has been releasing multiple
updates to various products that must be installed to make them Year 2000 ready.
All of the announced upgrades have been installed and all of the Company's PCs
will be checked again for Year 2000 readiness in August 1999. The Company will
continue to update its programs as required by any subsequent Year 2000-related
releases.
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. The Company tested mission critical functions related to
gas control and distribution and confirmed that the embedded systems related to
measuring and monitoring gas flow are Year 2000 compliant. In April 1999, the
Company tested the gas control and distribution systems' ability to function
without computers, in the event of a power failure, telecommunications failure
or computer system failure. The test demonstrated that even without back-up
electric power, which the Company does have but chose not to use for this test,
and telecommunications, the gas continued to flow through the distribution
system and the system integrity was maintained.
The Company's test of the gas control and distribution systems also
verified that equipment associated with its LNG operations can function even
without back-up electric power, telecommunications or computers, which the
Company has but chose not to use for this test.
Vendors and Suppliers
The Company has contacted, in writing, vendors and suppliers of products
and services that it considers important to its operations. These contacts have
included, among others, suppliers of interstate transportation capacity, natural
gas producers, financial institutions and electric, telephone and water
companies. Most vendors have responded, but 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 has evaluated the degree of its vendors'
and suppliers' readiness and has developed appropriate contingency plans that,
among other things, establish various vendor and supplier redundancies. In
addition, the Company's contingency plan calls for increasing certain inventory
levels during the last calendar quarter of 1999 to provide ample supplies in the
event certain vendors fail to deliver goods due to the Year 2000. With respect
to those vendors and suppliers identified by the Company as critical to the
Company's operations, the Company has conducted in-depth interviews with all
vendors, including suppliers of interstate transportation capacity, natural gas
producers, and all vendors supplying electric, telephone and water services to
the Company's operations. The Company believes its critical vendors will be
fully prepared for the Year 2000.
Customers
The Company has no single customer, residential, commercial or
industrial, which generates a material portion of the Company's annual revenues.
The Company identified its major firm, interruptible and transportation
customers and communicated with these major customers to attempt to identify
their level of Year 2000 compliance. Many of these customers have their own Year
2000 projects in progress and the Company has not been informed that these
customers anticipate any Year 2000 related failures that would affect their
consumption of natural gas. The Company contacted each of its major customers to
exchange Year 2000 readiness information during the spring of 1999.
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.
All of the members of the Company's senior management team have participated in
various aspects of the Company's contingency planning efforts. 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. The
Company has completed its contingency plan for the Year 2000. This contingency
plan, which will be coordinated with various parties including critical vendors
and revised as needed during the remainder of 1999, addresses various
alternatives and includes plans for a variety of scenarios that could emerge
which will require the Company to react.
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 completed. Furthermore,
the contingency plan outlines 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 $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 completed or
nearing completion 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.
Year 2000 Readiness Disclosure
The discussion contained herein is a "Year 2000 Readiness Disclosure" as
defined in the federal Year 2000 Readiness Disclosure Act.
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.
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>
<S> <C> <C> <C> <C>
Shared
Connecticut Connecticut
Energy Southern Energy/Southern Total
- ---------------------------------------------------------------------------------------
As of June 30, 1999:
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. The credit line has been extended until December 31, 1999. This
term may be further 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 June 30, 1999, unused lines of credit totaled $72,850,000.
Operating cash flows were higher for the nine months ended June 30, 1999
compared to the corresponding 1998 period primarily due to a decrease in prepaid
expenses, a higher comparative decrease in gas inventories, a lower comparative
increase in other deferred assets, a higher comparative increase in accrued
taxes and lower comparative decreases in accounts payable balances and
refunds due customers. Partially offsetting the increase in operating cash
flows for the 1999 period were lower collections from customers through the
operation of the PGA.
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, net of contributions in aid of construction,
approximated $19,005,000 and $18,734,000 for the nine months ended June 30, 1999
and 1998, respectively. On an annual basis, 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.
Regulatory Matters
- ------------------
In accordance with Connecticut statutes, Southern has undergone 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 in Docket No. 97-12-21,
Financial and Operational Review of The Southern Connecticut Gas Company - Phase
I 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.
On February 10, 1999, the DPUC issued a Decision in Docket No. 97-12-21
on the periodic review. In this Decision, the DPUC found Southern's present rate
structure to be more than just and adequate for both the current and projected
operating and financial needs of the company. In this Decision, the DPUC
proposed that Southern's allowed rate of return on common equity be adjusted
from 11.45% to 10.61%, which would produce an overall allowed return on rate
base of 9.65%. It also stated that Southern was overearning by approximately
$9,400,000. Part of the overearning resulted from an exclusion from rate base of
50% of the costs incurred to construct a 20-inch gas trunkline to assist
Southern in transporting gas throughout its system. This exclusion was based
upon the DPUC's belief that these costs should be divided between regulated and
nonregulated operations. This exclusion from rate base totaled approximately
$5,422,000. The DPUC has stated that this allocation will be reviewed in future
proceedings and could be revised based upon the relative benefits that this
trunkline project brings to regulated and nonregulated operations.
In its Decision, the DPUC ordered Southern to submit a proposal for
allocating the overearnings by March 25, 1999 or file an application for a rate
case no later than July 15, 1999.
In response to the DPUC's Decision on the periodic review, Southern has
filed an appeal in Connecticut Superior Court regarding the claimed disallowance
of the 20-inch gas trunkline from rate base and has opted to file a
comprehensive rate case, which includes proposals for incentive-based rates.
Additionally, Southern's rate case application with the DPUC, Docket No.
99-04-18, DPUC Review of The Southern Connecticut Gas Company's Rates and
Charges, requests an increase in rates designed to produce additional annual
revenues of approximately $24,195,000. This would increase Southern's projected
annual revenues by approximately 10.56%. Southern has not had an increase in its
base rates since December 1993. There are no assurances that the requested rates
will be approved, in whole or in part.
The rate case is expected to take between 150 to 180 days to conclude
following the application date of July 15, 1999. If new rates are approved, they
would become effective by January 2000.
The DPUC has separated Docket No. 99-04-18 into two phases. Phase I
addresses Southern's overearnings and Phase II addresses Southern's request for
a rate increase.
On July 1, 1999, in Phase I of Docket No. 99-04-18, Southern and The
Office of Consumer Counsel reached a Settlement Agreement which results in an
immediate rate reduction for firm sales customers. In accordance with the
Agreement, which was approved by the DPUC, Southern will reduce its rates
by $1,300,000 on an annual basis. Both the $1,300,000 rate reduction and
the $528,000 rate reduction ordered by the DPUC in Docket No. 97-12-21 will
remain in effect until the date new rates are effective pursuant to a DPUC Order
in Phase II of Docket No. 99-04-18.
Gas Supply Management Agreement
- -------------------------------
On February 26, 1999, Southern received a Decision from the DPUC regarding
a gas supply management agreement entered into with an outside vendor. In its
Decision, the DPUC approved Southern's agreement with Sempra Energy Trading
Corp. ("Sempra"), titled Natural Gas Annual Supply and Delivery Service and
Asset Optimization Agreement ("Sempra Agreement"), in its entirety, including
85%/15% margin sharing with firm customers and shareholders, respectively. Under
the Sempra Agreement, Sempra will manage certain of Southern's gas assets and
Southern will transfer to Sempra the ability to make off-system sales and
receive capacity release funds. In return, Sempra will pay a management fee to
Southern, which will be included as part of the calculation to determine the
margin to be shared with firm customers through the operation of the PGA. The
term of the Sempra Agreement is one year, beginning April 1, 1999 and ending
March 31, 2000. The margin sharing arrangement approved in the Decision will
replace the current margin sharing mechanism for off-system sales and capacity
releases as approved by the DPUC in January 1996 in Docket No. 93-03-09,
Application of The Southern Connecticut Gas Company to Increase Its Rates and
Charges - Reopening I; however, it does not affect Southern's existing on-system
interruptible margin sharing mechanism.
Connecticut Energy Corporation/Energy East Corporation Merger
- -------------------------------------------------------------
On April 23, 1999, the Boards of Directors of Energy East Corporation
("Energy East") and Connecticut Energy announced that the companies have signed
a definitive merger agreement under which Connecticut Energy will become a
wholly-owned subsidiary of Energy East in a transaction which is valued at
$617,000,000 including the assumption of debt.
Shareholders of Connecticut Energy will receive $42.00 per share, 50%
payable in stock and 50% in cash. Shareholders will be able to specify the
percentage of the consideration they wish to receive in stock and in cash
subject to pro-ration. Connecticut Energy shareholders who elect to receive
stock will receive between 1.43 and 1.82 shares of Energy East stock for each
share of Connecticut Energy stock, depending on the average price of Energy
East's stock during a 20-day period prior to closing. This equates to a collar
of between $23.10 and $29.40 for Energy East shares. Based upon Energy East's
closing price of $26.25 on April 22, 1999, the Connecticut Energy shareholder
would receive 1.60 Energy East shares for each Connecticut Energy share. The
transaction is expected to be tax-free to Connecticut Energy shareholders to the
extent they receive common stock of Energy East. The combination will be
accounted for using the purchase method of accounting.
The merger is conditioned on, among other things, the approval of
Connecticut Energy shareholders and various regulatory agencies, including the
DPUC and the Securities and Exchange Commission. The companies anticipate that
these approvals can be obtained within 12 months. A special meeting of
Connecticut Energy shareholders is scheduled on September 14, 1999 to vote on
this matter.
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
Items 1, 2, 3, 4 and 5 are inapplicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - Certificate of Incorporation and By-Laws
(i) The Amended and Restated Certificate of Incorporation of Connecticut
Energy Corporation is filed herewith at pages 30 to 40.
Exhibit 10 - Material Contracts
(i) On July 15, 1999, Connecticut Energy Corporation, Energy East
Corporation and Merger Co. executed the First Amendment to the
Agreement and Plan of Merger by and among Connecticut Energy
Corporation, Energy East Corporation and Merger Co. The text of this
amendment is included in the Agreement and Plan of Merger by and among
Connecticut Energy Corporation, Energy East Corporation and Merger Co.,
which is incorporated by reference to Appendix A to the proxy
statement/prospectus filed as part of Energy East Corporation's
Registration Statement No. 333-83437.
(ii) Employment Agreement by and among Energy East Corporation,
Connecticut Energy Corporation, or its successor, and J. R. Crespo,
dated April 23, 1999, incorporated by reference to Exhibit 10.1 to
Energy East Corporation's Registration Statement No. 333-83437.
(iii) First Amendment to Employment Agreement by and among Energy East
Corporation, Connecticut Energy Corporation, or its successor, and J.
R. Crespo, dated July 15, 1999, incorporated by reference to Exhibit
10.2 to Energy East Corporation's Registration Statement No.
333-83437.
Exhibit 27 - Financial Data Schedule
Submitted only in electronic format to the Securities and Exchange
Commission.
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONNECTICUT ENERGY CORPORATION
(Registrant)
Date: August 10, 1999 By: /s/ Vincent L. Ammann, Jr.
--------------- ---------------------------
Vincent L. Ammann, Jr.
Vice President and
Chief Accounting Officer
CONNECTICUT ENERGY CORPORATION
Amended and Restated
Certificate of Incorporation
1. The name of the corporation is Connecticut Energy Corporation (the
"Company").
2. The authorized capital stock of the Company shall consist of one
class of preference stock and one class of common stock as follows:
(a) A class of preference stock which is designated
"Preference Stock". The authorized shares of Preference Stock are
1,000,000 shares having the par value of $1 per share.
(b) A class of common stock which is designated "Common
Stock". The authorized shares of Common Stock are 30,000,000 shares
having the par value of $1 per share.
3. The nature of the business to be transacted, and the purposes to be
promoted or carried out by the Company are as follows:
(a) To invest in, dispose of, buy, sell and otherwise deal in
stocks, bonds and securities of other corporations, and without
limiting the generality of the foregoing, to invest in the securities
of (i) corporations primarily engaged in operations relating to natural
resources and sources of energy and businesses incidental thereto and
(ii) public service companies.
(b) To explore for, drill for, develop, produce, collect,
store, transport, dispose of and otherwise deal in oil, natural gas,
fossil fuel reserves and other fuel sources.
(c) To engage in any other lawful act or activity for which
corporations may be formed under the Stock Corporation Act of the State
of Connecticut.
4. The terms, limitations and relative rights and preferences of each
class of shares are as follows:
(a) The Board of Directors is authorized, from time to time,
to divide the Preference Stock into and issue one or more additional
series, and to fix and determine the number of shares (within the
limits of the authorized but unissued shares of Preference Stock) in
each series, and to determine the terms (including the consideration
for the shares of each such series), limitations and relative rights
and preferences of such Preference Stock and the variations as among
series (all as permitted under Sections 33-340 and 33-341, Connecticut
General Statutes, revision of 1958 as amended or any equivalent section
as may hereafter be enacted).
(b) Subject to the terms, limitations and relative rights and
preferences of the Preference Stock as determined by the Board of
Directors according to its authority set forth above, the holders of
the Common Stock of the Company shall have and possess all rights
appertaining to capital stock under applicable law except as
hereinafter limited.
(c) Authorized shares of Common Stock may be issued and
disposed of from time to time in such amounts, on such terms and for
such consideration as may be fixed and determined by the Board of
Directors.
(d) Holders of Common Stock shall have no preemptive rights to
subscribe to any future issues of any class of Preference Stock now or
hereafter authorized; nor shall they have any preemptive rights to
subscribe to any shares of Common Stock issued upon the exercise of any
conversion privilege appertaining to any class of Preference Stock; nor
to subscribe to any future issues of bonds, debentures, notes or other
evidences of indebtedness which are convertible into stock of any
class, nor to subscribe to any future issues of shares of Common Stock
offered, sold or exchanged for cash or for any consideration other than
cash. Holders of shares of any class of Preference Stock shall have no
preemptive rights to subscribe to any future issues of Common Stock or
shares of any class of Preference Stock, nor to any future issues of
bonds, debentures, notes or other evidences of indebtedness which are
convertible into stock of any class.
(e) Except as may be provided by the Board of Directors with
respect to the Preference Stock, or as provided by law, the holders of
the Preference Stock shall have no voting power or right to notice of
any meetings of shareholders.
5. The minimum amount of stated capital with which this Company shall
do or commence business shall not be less than One Thousand Dollars.
6. The following provisions are inserted for the management of the
business and the conduct of the affairs of the Company, and for further
definition, limitation and regulation of the powers of the Company and its
directors and shareholders:
(a) the business, property and affairs of the company shall be
managed by, or under the direction of, its board of directors. The
number of the directors of the Company (exclusive of directors (the
"Preference Stock Directors") who may be elected by a separate vote of
the holders of then outstanding shares of any class or series of
Preference Stock) shall be fixed from time to time by the By-Laws of
the Company.
(b) The Board of Directors (exclusive of Preference Stock
Directors) shall be divided into three (3) classes, as nearly equal in
number as possible, as shall be provided in the By-Laws of the Company.
At an annual meeting of shareholders in 1984, one class shall be
elected to hold office for a term expiring at the 1985 annual meeting,
one class shall be elected to hold office for a term expiring at the
1986 annual meeting and one class shall be elected to hold office for a
term expiring at the 1987 annual meeting. At each annual meeting of
shareholders of the Company, the date of which shall be fixed by or
pursuant to the By-Laws of the Company, the successors of the class of
directors whose term shall expire at that meeting shall be elected to
hold office for a term expiring at the annual meeting of shareholders
held in the third year following their year of election. Each director
shall hold office until his successor shall have been duly elected and
qualified. The election of directors need not be by ballot unless the
By-Laws so provide. No decrease in the number of directors shall
shorten the term of any incumbent director.
(c) Advance notice of nominations for the election of
directors shall be given in the manner and to the extent provided in
the By-Laws of the Company.
(d) Subject to the rights of the holders of any class or
series of Preference Stock then outstanding, newly created
directorships resulting from any increase in the authorized number of
directors or any vacancies in the Board of Directors from death,
resignation, retirement, disqualification, removal from office or other
cause shall be filled solely by the Board of Directors, acting by the
affirmative vote of not less than a majority of the directors then in
office, even though less than a quorum of the Board of Directors. Any
director so chosen shall hold office until the next election of the
class for which such director shall have been chosen and until his
successor shall be elected and qualified. The shareholders of the
Company shall have no right to fill any vacancies, whether resulting
from an increase in the authorized number of directors or otherwise.
(e) Subject to the rights of holders of any class or series of
Preference Stock then outstanding, any director or the entire Board of
Directors of the Company may be removed only for cause and only by
affirmative vote of (i) the Board of Directors, acting by not less than
a majority of the Directorships or (ii) the holders of eighty percent
(80%) of the combined voting power of the then outstanding shares of
Voting Stock, voting together as a single class. For the purposes of
this Article 6(e), (1) "cause" shall exist only if a director (i) has
been convicted of a felony in a final adjudication or (ii) has been
adjudged in a final adjudication to have wilfully engaged in gross
misconduct materially and demonstrably injurious to the Company and (2)
"final adjudication" shall mean a judgment by a court of competent
jurisdiction which becomes final (i) after completion of all
proceedings for direct review or (ii) after expiration of the time to
obtain initial or further direct review, no such review having been
taken.
(f) As long as the Company owns or controls eighty percent
(80%) or more of the shares of common stock of The Southern Connecticut
Gas Company or any successor thereof ("Southern"), the Board of
Directors of the Company is authorized to consider, in exercising its
judgment on any decision which may come before it, the effect of such
decision on (i) the ratepayers of Southern, (ii) the employees of
Southern, (iii) the economy and residents of the communities served by
Southern, and (iv) the ability of Southern to carry out its duties as a
public service company. The foregoing shall not limit the right of the
Board of Directors to consider all other factors which it may deem
relevant in connection with any such decision.
(g) Notwithstanding any other provisions in this Amended and
Restated Certificate of Incorporation or the By-Laws of the Company
(and notwithstanding the fact that a lesser percentage may be specified
by law or the By-Laws of the Company), the By-Laws of the Company may
be adopted, repealed or amended only upon the affirmative vote of (i)
the holders of eighty percent (80%) of the combined voting power of the
then outstanding shares of Voting Stock, voting together as a single
class, or (ii) the Board of Directors acting by not less than a
majority of the entire Board of Directors.
7. Any action required or permitted to be taken by the shareholders of
the Company must be effected at a duly called annual or special meeting of
shareholders of the Company and may not be effected by any consent in writing by
less than all shareholders of the Company entitled to vote thereon. Except as
otherwise required by law and subject to the rights of the holders of any class
or series of Preference Stock then outstanding, special meetings of the
shareholders may be called only by the Board of Directors acting by not less
than a majority of the entire Board of Directors or as otherwise provided in the
By-Laws. Notice of any special meeting of shareholders shall be given as
provided in the By-Laws.
8. The vote of shareholders of the Company required to approve Business
Combinations (as hereinafter defined) shall be as set forth in this Article 8.
Section 1. In addition to any affirmative vote required by law or by
this Amended and Restated Certificate of Incorporation and except as otherwise
expressly provided in Section 2 of this Article 8:
(a) any merger or consolidation of the Company with (i) any
Interested Shareholder or (ii) any other corporation (whether or not
itself an Interested Shareholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested
Shareholder; or
(b) any sale, lease, exchange, transfer, mortgage, pledge,
grant of security interest or other disposition (in one transaction or
a series of transactions) to or with any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder of, or directly or
indirectly relating to (i) all or substantially all of the assets of
the Company or (ii) assets of the Company or any of its Subsidiaries
representing in the aggregate more than seventy-five percent (75%) of
the total value of the assets of the Company and its consolidated
Subsidiaries as reflected on the most recent consolidated balance sheet
of the Company and its consolidated Subsidiaries prepared in accordance
with generally accepted accounting principles then in effect; or
(c) (i) any sale, lease, exchange, transfer, mortgage, pledge,
grant of security interest or other disposition (in one transaction or
a series of transactions) to or with any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder of, or directly or
indirectly relating to any assets of the Company or of any Subsidiary
having an aggregate Fair Market Value of $5,000,000 or more, but less
than the amount referred to in clause (ii) of paragraph (b) of this
Section 1, or (ii) any merger or consolidation of any Subsidiary of the
Company having assets with an aggregate Fair Market Value of $5,000,000
or more in a transaction not covered by paragraph (b) of this Section 1
with (x) any Interested Shareholder or (y) any other corporation
(whether or not itself an Interested Shareholder) which is, or after
such merger or consolidation would be, an Affiliate or Associate of an
Interested Shareholder; or
(d) the issuance or sale by the Company or any Subsidiary (in
one transaction or a series of transactions) to any Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder
of any securities of the Company or any Subsidiary in exchange for
cash, securities or other property (or a combination thereof) having an
aggregate Fair Market Value of $5,000,000 or more, other than the
issuance of securities upon the conversion of convertible securities of
the Company or any Subsidiary which were not acquired by such
Interested Shareholder (or such Affiliate or Associate) from the
Company or a Subsidiary; or
(e) the adoption of any plan or proposal for the liquidation
or dissolution of the Company proposed by or on behalf of any
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder; or
(f) any reclassification of securities (including any reverse
stock split) or recapitalization of the Company, or any merger or
consolidation of the Company with any of its Subsidiaries, or any other
transaction (whether or not with or into or otherwise involving any
Interested Shareholder), which in any such case has the effect,
directly or indirectly, or increasing the proportionate share of the
outstanding shares of any class or series of stock (or securities
convertible into stock) of the Company or any Subsidiary which is
directly or indirectly beneficially owned by any Interested Shareholder
or any Affiliate or Associate of any Interested Shareholder;
shall not be consummated unless (i) such consummation shall have been approved
by the affirmative vote of the holders of at least eighty percent (80%) of the
combined voting power of the then outstanding shares of Voting Stock, voting
together as a single class, (ii) such consummation shall have been approved by
the affirmative vote of a majority of the combined voting power of the then
outstanding shares of Voting Stock held by Disinterested Shareholders, voting
together as a single class, and (iii) a proxy or information statement shall
have been mailed at least thirty (30) days prior to the votes specified in (i)
and (ii) above to all holders of voting stock of the company, which proxy or
information statement shall (w) describe the Business Combination, (x) include
in a prominent place the recommendations, if any, of a majority of the
Disinterested Directors as to the advisability or inadvisability of the Business
Combination, (y) if deemed advisable by a majority of the Disinterested
Directors, include an opinion of a reputable investment banking firm or other
expert as to the fairness or unfairness of the terms of the Business Combination
from the point of view of the shareholders other than the Interested Shareholder
(such investment banking firm to be selected by a majority of the Disinterested
Directors and to be paid a reasonable fee for their services by the Company upon
receipt of such opinion), and (z) be responsive to the pertinent provisions of
the Securities Exchange Act of 1934, as amended, (the "Act") and the rules and
regulations thereunder, or any subsequent provisions replacing such Act, rules
or regulations, whether or not such proxy or information statement is required
by law to be furnished to any holders of the Voting Stock of the Company. The
affirmative votes referred to in clauses (i) and (ii) of the preceding sentence
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage may be specified, by law or in any agreement with any
national securities exchange or otherwise.
Section 2. The provisions of Section 1 of this Article 8 shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law and any other
provisions of this Amended and Restated Certificate of Incorporation if all the
considerations specified in any of the following paragraphs (a), (b), (c) or (d)
are met:
(a) (i) such Business Combination shall have been approved by
a majority of the Disinterested Directors and (ii) the Interested
Shareholder involved in such Business Combination (x) acquired such
status as an Interested Shareholder in a manner substantially
consistent with an agreement or memorandum of understanding approved by
the Board of Directors prior to the time such Interested Shareholder
became an Interested Shareholder and (y) has complied with all
requirements imposed by such agreement or memorandum of understanding;
or
(b) in the case of any Business Combination described in
paragraph (c) or (d) of Section 1 of this Article 8, such Business
Combination shall have been approved by a majority of the Disinterested
Directors; or
(c) all of the six conditions specified in the following
clauses (i) through (vi) shall have been met:
(i) the transaction constituting the Business
Combination shall provide for a consideration to be received
by all holders of each class of Common Stock in exchange for
all their shares of Common Stock, and the aggregate amount of
(x) the cash and (y) the Fair Market Value as of the date of
the consummation of the Business Combination of any
consideration other than cash, to be received per share by
holders of Common Stock in such Business Combination shall be
at least equal to the highest of the following:
(A) (if applicable) the highest per share
price (including any brokerage commissions, transfer
taxes and soliciting dealers' fees) paid in order to
acquire any shares of such class of Common Stock
beneficially owned by the Interested Shareholder
which were acquired (i) within the two (2) year
period immediately prior to the Announcement Date or
(ii) in the transaction in which it became an
Interested Shareholder, whichever is higher; and
(B) the Fair Market Value per share of such
class of Common Stock on the Announcement Date or on
the Determination Date, whichever is higher; and
(C) (if applicable) the price per share
equal to the Fair Market Value per share of such
class of Common Stock determined pursuant to
paragraph (c)(i)(B) above, multiplied by the ratio of
(1) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting
dealers' fees) paid in order to acquire any shares of
such class of Common Stock beneficially owned by the
Interested Shareholder which were acquired within the
two (2) year period immediately prior to the
Announcement Date to (2) the Fair Market Value per
share of such class of Common Stock on the first day
in such two (2) year period upon which any shares of
such class of Common Stock referred to in the
foregoing clause (1) were acquired; and
(ii) the transaction constituting the Business
Combination shall provide for a consideration to be received
by all holders of each class or series of outstanding
Preference Stock in exchange for all of their shares of
Preference Stock, and the aggregate amount of (x) the cash and
(y) the Fair Market Value as of the date of the consummation
of the Business Combination of any consideration other than
cash, to be received per share by holders of shares of such
Preference Stock shall be at least equal to the highest of the
following (it being intended that the requirements of this
clause (c)(ii) shall be required to be met with respect to
every class and series of such outstanding Preference Stock,
whether or not the Interested Shareholder beneficially owns
any shares of a particular class or series of Preference
Stock):
(A)(if applicable) the highest per
share price (including any brokerage commissions,
transfer taxes and soliciting dealers' fees) paid
in order to acquire any shares of such class
or series of Preference Stock beneficially owned by
the Interested Shareholder which were acquired (i)
within the two (2) year period immediately prior to
the Announcement Date or (ii) in the transaction in
which it became an Interested Shareholder, whichever
is higher; and
(B) (if applicable) the highest preferential
amount per share to which the holders of shares of
such class or series of Preference Stock are entitled
in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the
Company; and
(C) the Fair Market Value per share of such
class or series of Preference Stock on the
Announcement Date or on the Determination Date,
whichever is higher; and
(D) (if applicable) the price per share
equal to the Fair Market Value per share of such
class or series of Preference Stock determined
pursuant to Paragraph (c)(ii)(C) above, multiplied
by the ratio of (1) the highest per share price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid in order to
acquire any shares or such class or series of
Preference Stock beneficially owned by the Interested
Shareholder which were acquired within the two (2)
year period immediately prior to the Announcement
Date to (2) the Fair Market Value per share of such
class or series of Preference Stock on the first day
in such two (2) year period upon which any shares of
such class or series of Preference Stock referred to
in the foregoing clause (1) were acquired; and
(iii) the consideration to be received by holders of
a particular class or series of outstanding Common Stock or
Preference Stock shall be in cash or in the same form as was
previously paid in order to acquire shares of such class or
series of Common Stock or Preference Stock which are
beneficially owned by the Interested Shareholder and, if the
Interested Shareholder beneficially owns shares of any class
or series of Common Stock or Preference Stock which were
acquired with varying forms of consideration, the form of
consideration to be received by holders of such class or
series of Common Stock or Preference Stock shall be either
cash or the form used to acquire the largest number of shares
of such class or series of Common Stock or Preference Stock
beneficially owned by it; and
(iv) after such Interested Shareholder has become an
Interested Shareholder and prior to the consummation of such
Business Combination:
(A) except as approved by a majority of the
Disinterested Directors, there shall have been no
failure to declare and pay at the regular dates
therefor the full amount of any dividends (whether or
not cumulative) payable on any Preference Stock;
(B) there shall have been (1) no reduction
in the annual rate of dividends paid on any class of
Common Stock (except as necessary to reflect any
subdivision of such Common Stock), except as approved
by a majority of the Disinterested Directors, and (2)
an increase in such annual rate of dividends (as
necessary to prevent any such reduction) in the event
of any reclassification (including any reverse stock
split), recapitalization, reorganization or any
similar transaction which has the effect of reducing
the number of outstanding shares of any class of
Common Stock, unless the failure so to increase such
annual rate is approved by a majority of the
Disinterested Directors; and
(C) such Interested Shareholder shall not
have become the beneficial owner of any additional
shares of Voting Stock except as part of the
transaction in which it became an Interested
Shareholder; and
(v) after such Interested Shareholder has become an
Interested Shareholder, such Interested Shareholder shall not
have received the benefit, directly or indirectly (except
proportionately as a shareholder), of any loans, advances,
guarantees, pledges or other financial assistance provided by
the Company or any Subsidiary, whether in anticipation of or
in connection with such Business Combination or otherwise; and
(vi) a proxy or information statement shall be mailed
at least on the earlier of (1) thirty (30) days prior to any
vote on the Business Combination or (2) if no vote on such
Business Combination is required, sixty (60) days prior to the
completion of the Business Combination, to all holders of
Voting Stock of the Company (whether or not shareholder
approval of the Business Combination is required), which proxy
or information statement shall (w) describe the Business
Combination, (x) include in a prominent place the
recommendations, if any, of a majority of the Disinterested
Directors as to the advisability or inadvisability of the
Business Combination, (y) if deemed advisable by a majority of
the Disinterested Directors, include an opinion of a reputable
investment banking firm or other expert as to the fairness or
unfairness of the terms of the Business Combination from the
point of view of the shareholders other than the Interested
Shareholder (such investment banking firm to be selected by a
majority of the Disinterested Directors and to be paid a
reasonable fee for their services by the Company upon receipt
of such opinion), and (z) be responsive to the pertinent
provisions of the Act and the rules and regulations
thereunder, or any subsequent provisions replacing such Act,
rules or regulations, whether or not such proxy or information
statement is required by law to be furnished to any holders of
the Voting Stock of this Company; or
(d) in the case of any Business Combination described in
Paragraph (a) or (f) of Section 1 of this Article 8, (i) such Business
Combination shall have been approved by a majority of the Disinterested
Directors, (ii) such Business Combination shall not have resulted,
directly or indirectly, in an increase of more than ten percent (10%)
in the total amount of shares of any class or series of stock or
securities convertible into stock of the Company or any Subsidiary
which was directly or indirectly beneficially owned by any Interested
Shareholder and all Affiliates and Associates of such Interested
Shareholder at the time of the approval of such Business Combination by
a majority of the Disinterested Directors, and (iii) such Business
Combination shall not have been consummated within a period of two (2)
years after the consummation of any other Business Combination
described in Paragraph (a), (b), (c), (d), (e) or (f) of Section 1 of
this Article 8 (whether or not such other Business Combination shall
have been approved by a majority of the Disinterested Directors) which
had the effect, directly or indirectly, of increasing the proportionate
share of the outstanding shares of any class or series of stock or
securities convertible into stock of the Company or any Subsidiary
which was directly or indirectly beneficially owned by such Interested
Shareholder or any Affiliate or Associate of such Interested
Shareholder.
Section 3. For the purposes of this Article 8:
(a) A "person" shall mean any individual, firm, corporation,
partnership, trust or other entity.
(b) "Voting Stock" shall mean stock of all classes and series
of the Company entitled to vote generally in the election of directors.
(c) "Interested Shareholder" shall mean any person (other than
the Company or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly,
of ten percent (10%) of more of the combined voting power of
the then outstanding shares of Voting Stock; or
(ii) is an Affiliate of the Company and at any time
within the two (2) year period immediately prior to the date
in question was the beneficial owner, directly or indirectly,
of ten percent (10%) or more of the combined voting power of
the then outstanding shares of Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to
the beneficial ownership of any shares of Voting Stock which
were at any time within the two (2) year period immediately
prior to the date in question beneficially owned by an
Interested Shareholder, if such assignment or succession shall
have occurred in the course of a transaction or series of
transactions not involving a public offering within the
meaning of the Securities Act of 1933.
(d) "Business Combination" shall mean any transaction which is
referred to in any one or more of paragraphs (a) through (f) of
Section 1 of this Article 8.
(e) "Disinterested Shareholder" shall mean a beneficial owner
of the Company's Voting Stock who is not an Interested
Shareholder or an Affiliate or an Associate of an Interested
Shareholder.
(f) A person shall be a "beneficial owner" of any Voting
Stock:
(i) which such person or any of its
Affiliates or Associates beneficially owns, directly or
indirectly, or
(ii) which such person or any of its Affiliates or
Associates has (x) the right to acquire (whether such right is
exercisable immediately or only after the passage of time),
pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights,
warrants or options, or otherwise, or (y) the right to vote or
to direct the vote pursuant to any agreement, arrangement or
understanding; or
(iii) which is beneficially owned, directly or
indirectly, by any person with which such person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Voting Stock.
(g) For the purposes of determining whether a person is an
Interested Shareholder pursuant to Paragraph (c) of this Section 3, the
number of shares of Voting Stock deemed to be outstanding shall include
shares deemed owned by such person through application of Paragraph (f)
of this Section 3 but shall not include any other shares of Voting
Stock which may be issuable to other persons pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion rights,
exchange rights, warrants or options, or otherwise.
(h) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Act as in effect on March 24, 1984.
(i) "Subsidiary" shall mean any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the Company; provided, however, that, for the purposes
of the definition of Interested Shareholder set forth in Paragraph (c)
of this Section 3, the term "Subsidiary" shall mean only a corporation
of which a majority of each class of equity security is owned, directly
or indirectly, by the Company.
(j) "Disinterested Director" means any member of the Board of
Directors of the Company who is unaffiliated with, and not a nominee
of, the Interested Shareholder and was a member of the Board of
Directors prior to the time that the Interested Shareholder became an
Interested Shareholder, and any successor of a Disinterested Director
who is unaffiliated with, and not a nominee of, the Interested
Shareholder and who is recommended to succeed a Disinterested Director
by a majority of Disinterested Directors then on the Board of
Directors.
(k) "Fair Market Value" means: (i) in the case of stock, the
highest closing sale price during the thirty (30) day period
immediately preceding the date in question of a share of such stock on
the Composite Tape for New York Stock Exchange-Listed Stocks, or, if
such stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on the
principal United States securities exchange registered under the Act on
which such stock is listed, or, if such stock is not listed on any such
exchange, the highest closing bid quotation with respect to a share of
such stock during the thirty (30) day period preceding the date in
question on the National Association of Securities Dealers, Inc.
Automated Quotations System or any system then in use, or, if no such
quotations are available, the fair market value on the date in question
of a share of such stock as determined by a majority of the
Disinterested Directors in good faith; and (ii) in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of the Disinterested
Directors in good faith.
(l) "Announcement Date" means the date of the first public
announcement of the proposed Business Combination.
(m) "Determination Date" means the date on which the
Interested Shareholder became an Interested Shareholder.
Section 4. A majority of the Disinterested Directors of the Company
shall have the power and duty to determine, on the basis of information known to
them after reasonable inquiry, all facts necessary to determine compliance with
this Article 8, including, without limitation, (a) whether a person is an
Interested Shareholder, (b) the number of shares of Voting Stock beneficially
owned by any person, (c) whether a person is an Affiliate or Associate of
another person, (d) whether the requirements of Section 2 of this Article 8 have
been met with respect to any Business Combination, and (e) whether the assets
which are the subject of any Business Combination, or the consideration to be
received for the issuance or sale of securities by the Company or any Subsidiary
in any Business Combination (i) has an aggregate Fair Market Value of $5,000,000
or more or (ii) represents in the aggregate more than seventy-five percent (75%)
of the total value of the assets of the Company and its consolidated
Subsidiaries as reflected on the most recent consolidated balance sheet of the
Company and its consolidated Subsidiaries prepared in accordance with generally
accepted accounting principles then in effect; and the good faith determination
of a majority of the Disinterested Directors on such matters shall be conclusive
and binding for all purposes of this Article 8.
Section 5. Nothing contained in this Article 8 shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by law.
9. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation and the By-Laws of the Company (and notwithstanding
the fact that a lesser percentage may be specified by law or the By-Laws of the
Company):
(a) The affirmative vote of the holders of eighty (80%) of the
combined voting power of the then outstanding shares of Voting Stock,
voting together as a single class, shall be required to amend or repeal
or adopt any provision inconsistent with Articles 6 and 7 of this
Amended and Restated Certificate of Incorporation; provided, however,
that any such amendment, repeal or adoption that has been recommended
to the shareholders by the affirmative vote of not less than two-thirds
(66-2/3%) of the Disinterested Directors (as defined in Section 3 of
Article 8 of this Amended and Restated Certificate of Incorporation)
shall require only the vote, if any, required under the applicable
provision of the Connecticut Stock Corporation Act. For purposes of
this subsection (a) of this Article 9 only, if at the time when any
such amendment, repeal or adoption is under consideration, there is no
Interested Shareholder (in which event, the definition of Disinterested
Director in subparagraph (j) of Section 3 of Article 8 would be
inapplicable), the "Disinterested Directors" shall be deemed to be
those persons who are then members of the Board of Directors and who
are not then and have not been affiliated with or nominees of any
person who is or has been an Interested Shareholder.
(b) The affirmative vote of the holders of eighty percent
(80%) of the combined voting power of the then outstanding shares of
Voting Stock, voting together as a single class, and the affirmative
vote of the majority of the combined voting power of the then
outstanding shares of Voting Stock held by Disinterested Shareholders
(as defined in Section 3 of Article 8 of this Amended and Restated
Certificate of Incorporation), voting together as a single class, shall
be required to amend or repeal or adopt any provision inconsistent with
this Article 9 or Article 8 of this Amended and Restated Certificate of
Incorporation; provided, however, that any such amendment, repeal or
adoption that has been recommended to shareholders by the affirmative
vote of not less than two-thirds (66-2/3%) of the Disinterested
Directors at a time when there is no Interested Shareholder, as defined
in Section 3 of Article 8 of the Amended and Restated Certificate of
Incorporation, shall require only the vote, if any, required under the
applicable provision of the Connecticut Stock Corporation Act. For
purposes of this subsection (b) of this Article 9 only, the
"Disinterested Directors" shall be deemed to be those persons who are
then members of the Board of Directors and who are not then and have
not been affiliated with or nominees of any person who has been an
Interested Shareholder.
10. The personal liability of a director of the Company to the Company
or its shareholders for monetary damages for breach of duty as a director shall
be limited to the compensation received by the director for serving the Company
as a director during the year of the violation if such breach did not: (a)
involve a knowing and culpable violation of law by the director, (b) enable the
director or an associate, as defined in subsection (2) of Section 33-374(b) of
the Business Corporation Act, to receive an improper personal gain, (c) show a
lack of good faith and a conscious disregard for the duty of the director to the
Company under circumstances in which the director was aware that his conduct or
omission created an unjustifiable risk of serious injury to the Company, (d)
constitute a sustained or unexcused pattern of inattention that amounted to an
abdication of the director's duty to the Company, or (e) create liability under
Section 33-32l of the Business Corporation Act. This provision shall not limit
or preclude the liability of a director for any act or omission occurring prior
to the effective date of this Article 10.
<TABLE> <S> <C>
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<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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 276,560
<OTHER-PROPERTY-AND-INVEST> 9,842
<TOTAL-CURRENT-ASSETS> 48,638
<TOTAL-DEFERRED-CHARGES> 128,587
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 463,627
<COMMON> 10,388
<CAPITAL-SURPLUS-PAID-IN> 123,715
<RETAINED-EARNINGS> 59,340
<TOTAL-COMMON-STOCKHOLDERS-EQ> 191,420
0
0
<LONG-TERM-DEBT-NET> 148,458
<SHORT-TERM-NOTES> 4,150
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,629
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 117,970
<TOT-CAPITALIZATION-AND-LIAB> 463,627
<GROSS-OPERATING-REVENUE> 203,135
<INCOME-TAX-EXPENSE> 12,581
<OTHER-OPERATING-EXPENSES> 155,869
<TOTAL-OPERATING-EXPENSES> 168,450
<OPERATING-INCOME-LOSS> 34,685
<OTHER-INCOME-NET> (947)
<INCOME-BEFORE-INTEREST-EXPEN> 32,201
<TOTAL-INTEREST-EXPENSE> 10,126
<NET-INCOME> 22,075
0
<EARNINGS-AVAILABLE-FOR-COMM> 22,075
<COMMON-STOCK-DIVIDENDS> 10,420
<TOTAL-INTEREST-ON-BONDS> 9,608
<CASH-FLOW-OPERATIONS> 45,999
<EPS-BASIC> 2.15
<EPS-DILUTED> 2.13
</TABLE>
