-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rf5SmujvftlGKonMmPx6MMiT32OkjU7/uf/0kfIoYouvog0B2mglEKIiqIQj0T/m DQF+si7h6IezoKd4ICpbuA== 0000310103-99-000017.txt : 19990811 0000310103-99-000017.hdr.sgml : 19990811 ACCESSION NUMBER: 0000310103-99-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONNECTICUT ENERGY CORP CENTRAL INDEX KEY: 0000310103 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 060869582 STATE OF INCORPORATION: CT FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08369 FILM NUMBER: 99682907 BUSINESS ADDRESS: STREET 1: 855 MAIN STREET CITY: BRIDGEPORT STATE: CT ZIP: 06604 BUSINESS PHONE: 8007607776 MAIL ADDRESS: STREET 1: 855 MAIN ST CITY: BRIDGEPORT STATE: CT ZIP: 06604 10-Q 1 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 PART 1. FINANCIAL INFORMATION CONNECTICUT ENERGY CORPORATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share) (Unaudited) 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.
CONNECTICUT ENERGY CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (Unaudited) 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.
CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share) 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.
CONNECTICUT ENERGY CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share) 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.
CONNECTICUT ENERGY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) 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.
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: 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 ======== ========
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: 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 ======= =======
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: 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 -------- -------- -------- --------
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: 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 ------ ------ ------ ------
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: 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
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 EX-3 2 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. EX-27 3
UT 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. 1,000 9-MOS SEP-30-1999 JUN-30-1999 PER-BOOK 276,560 9,842 48,638 128,587 0 463,627 10,388 123,715 59,340 191,420 0 0 148,458 4,150 0 0 1,629 0 0 0 117,970 463,627 203,135 12,581 155,869 168,450 34,685 (947) 32,201 10,126 22,075 0 22,075 10,420 9,608 45,999 2.15 2.13
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