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 DECEMBER 31, 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 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(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 CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT JANUARY 31, 2000 10,632,754
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
__________________
1999 1998
____ ____
(In thousands, except per
share amounts)
Revenues:
Utility revenues $ 82,486 $ 77,182
Nonutility revenues 8,375 7,819
______ ______
Total revenues 90,861 85,001
______ ______
Operating expenses:
Cost of gas/goods sold 46,148 42,715
Operations 15,181 14,570
Maintenance 1,609 1,438
Merger expenses 1,501 --
Depreciation and amortization 5,922 5,086
Taxes other than income taxes 4,971 5,160
______ ______
Total operating expenses 75,332 68,969
______ ______
Operating income 15,529 16,032
Other income/expense:
Other income, net (115) 95
Interest expense, net 3,937 3,522
______ ______
Income before income taxes 11,477 12,605
Provision for income taxes 4,811 4,759
______ ______
Net Income $ 6,666 $ 7,846
______ _____
______ _____
Basic and Diluted Earnings
per Common Share $ 0.63 $ 0.74
______ _____
______ _____
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1999 1999
____ ____
(UNAUDITED)
(In thousands)
ASSETS
Utility Plant, at original cost $ 595,243 $ 591,882
Less: Accumulated provision for
depreciation 228,035 223,142
_________ _________
367,208 368,740
Construction work in progress 13,692 12,308
_________ _________
Total net utility plant 380,900 381,048
_________ _________
Other property and investments 17,026 15,593
Assets held for sale 18,542 15,352
Current assets:
Cash and temporary cash investments 3,508 1,736
Accounts receivable, net 53,060 38,952
Fuel supplies 1,459 1,316
Other materials and supplies 1,658 1,994
Accrued utility revenues 21,143 6,705
Prepaid expenses and other 14,526 18,165
_________ _________
Total current assets 95,354 68,868
_________ _________
Deferred gas costs, net 6,130 7,244
Recoverable environmental
cleanup costs 34,077 33,816
Recoverable income taxes 2,808 4,166
Recoverable postretirement
benefits costs 1,625 1,236
Other deferred debits 10,909 12,963
________ ________
Total Assets $ 567,371 $ 540,286
________ ________
________ ________
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1999 1999
____ ____
(UNAUDITED)
(In thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,632,764
shares outstanding at December 31, 1999
and 10,633,666 outstanding at
September 30, 1999 $ 53,164 $ 53,168
Capital surplus, paid in 90,935 90,847
Retained earnings 24,455 21,564
_______ _______
Total common shareholders' equity 168,554 165,579
Long-term debt, net of current portion 163,050 163,050
________ _______
Total capitalization 331,604 328,629
________ _______
Current liabilities:
Notes payable to banks 76,500 56,000
Long-term debt, current portion 1,200 1,200
Accounts payable 20,768 23,013
Accrued taxes 6,964 --
Accrued interest 4,393 3,322
Pipeline transition costs payable 1,298 1,539
Other 5,990 6,456
________ ________
Total current liabilities 117,113 91,530
________ ________
Accumulated deferred income taxes 64,743 65,843
Accumulated deferred investment
Tax Credits 7,854 7,948
Liability for environmental
cleanup costs 35,000 35,000
Postretirement benefits obligation 4,080 3,691
Other deferred credits 6,977 7,645
_______ _______
Commitments and contingencies (Note 4) --- ---
_______ _______
Total Capitalization and
Liabilities $ 567,371 $ 540,286
________ ________
________ ________
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1999 1998
____ ____
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,666 $ 7,846
Adjusted for the following:
Depreciation and amortization 5,922 5,086
Equity earnings from investments (74) (82)
Deferred income taxes, net 164 (595)
Deferred gas costs activity and other
non-cash items (2,081) 4,180
Changes in working capital:
Accounts receivable and accrued
utility revenues (28,546) (23,162)
Prepaid expenses and other 3,639 12,640
Accounts payable 4,719 (2,428)
Other working capital
(excludes cash) 604 (4,702)
_______ _______
Net cash used for operating
activities (8,987) (1,217)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuance 84 648
Retirement of long-term debt -- (400)
Increase in short-term debt 20,500 10,800
Cash dividends (3,775) (3,651)
_______ _______
Net cash provided by
financing activities 16,809 7,397
_______ _______
INVESTMENT IN PLANT AND OTHER:
Utility plant (5,184) (6,080)
Other property and investments (866) (101)
______ _______
Net cash used for plant and other (6,050) (6,181)
______ _______
NET INCREASE (DECREASE)IN CASH AND TEMPORARY
CASH INVESTMENTS FOR THE PERIOD 1,722 (1)
CASH AND TEMPORARY INVESTMENTS,
BEGINNING OF PERIOD 1,736 1,881
_______ _______
CASH AND TEMPORARY CASH INVESTMENTS,
END OF PERIOD $ 3,508 $ 1,880
_______ _______
_______ _______
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 3,686 $ 3,863
Income taxes $ 0 $ 0
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the Annual Report of
Yankee Energy System, Inc. (the Company) on Form 10-K for
the fiscal year ended September 30, 1999 (1999 Form 10-K),
including the audited financial statements (and notes
thereto). In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all
adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position of the
Company as of December 31, 1999, and its results of
operations and cash flows for the three months ended
December 31, 1999 and 1998. The results of operations for
the three months ended December 31, 1999 and 1998 are not
necessarily indicative of the results expected for a full
year, due mainly to the highly seasonal nature of the gas
business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas), is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which includes
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires a cost-
based, rate-regulated enterprise such as Yankee Gas to
reflect the impact of regulatory decisions in its financial
statements. The DPUC, through the rate regulation process,
can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an
unregulated enterprise.
Following the provisions of FAS 71, Yankee Gas has recorded
regulatory assets or liabilities as appropriate, primarily
related to deferred gas costs, pipeline transition costs,
hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefit costs. The specific
amounts related to these items are disclosed in the
consolidated balance sheets. For additional information
about these items see the 1999 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, Yankee Gas believes that its
use of regulatory accounting in accordance with the provisions
of FAS 71 is appropriate and its regulatory assets are
probable of recovery.
3) EARNINGS PER SHARE
The Company computes and presents basic and diluted earnings
per share. The basic weighted average shares outstanding for
the three months ended December 31, 1999 and 1998 were
10,633,069 and 10,567,933, respectively. The diluted
weighted average shares outstanding for the three months
ended December 31, 1999 and 1998 were 10,649,596 and
10,587,412, respectively. As such, there is no measurable
difference between basic and diluted earnings per share.
4) COMMITMENTS AND CONTINGENCIES
The Company faces a number of contingencies which arise
during the normal course of business and which have been
discussed in Note 9 (entitled "Commitments and
Contingencies") to the Consolidated Financial Statements
included in the Company's 1999 Form 10-K Report. Except as
disclosed below, for the three months ended December 31,
1999, there have been no material changes in the matters
discussed in Note 9 to the Company's 1999 Form 10-K Report.
YESCo Power Division: The Company's wholly-owned subsidiary,
Yankee Energy Services Company (YESCo), is currently
negotiating the sale of its more significant Power Division
investments with several interested parties. These
investments include an operating land fill gas (LFG) fueled
generating facility in Brookhaven, NY, interests in two
operating cogeneration facilities, two additional
development stage LFG projects and other less significant
assets. The total investment at December 31, 1999 is
approximately $18.5 million. Management expects that the
sale of the Power Division assets will have no material
effect on the Company's consolidated results of operations
or financial position.
Tax Audits: The Company recently settled the audit of the
1995 Federal Income Tax return with the Internal Revenue
Service. The settlement will have no material effect on
operating results or financial position.
5) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
7) MERGER COSTS
On June 15, 1999, the Boards of Directors of Northeast
Utilities and the Company announced that the companies entered
into an Agreement and Plan of Merger pursuant to which the
Company would become a wholly-owned subsidiary of Northeast
Utilities in a transaction which is valued at $679 million and
includes the assumption of debt. See section in Management's
Discussion and Analysis entitled "Yankee Energy System,
Inc./Northeast Utilities Merger" for further detail. For the
quarter ended December 31, 1999, the Company has recorded $1.5
million of merger related costs for legal, consulting and
business advisory services. In future quarters the Company
expects to incur approximately $2.5 million in additional
merger costs. All costs in connection with the merger will be
expensed as incurred.
8) REPORTABLE SEGMENTS
Yankee Energy operates principally in two segments: utility
and nonutility. The utility segment is a regulated natural
gas distribution company. The nonutility segment is composed
of energy-related services, consumer collection services and
financial services. The accounting policies of each
reportable segment are the same as those described in the
summary of significant accounting policies. The Company
accounts for intercompany sales in accordance with existing
tariffs and contracts. Yankee Energy evaluates performance
based on profitability and growth potential of each segment.
Financial data for reportable segments is as follows:
(In thousands) Depreciation/ Interest Income Net
Revenues Amortization Expense Taxes Income
Quarter ended December 31, 1999
Utility $82,486 $5,366 $3,469 $5,184 $8,134
Nonutility 9,207 556 464 (285) 160
Parent/
Eliminations (832) -- 4 (88) (1,628)A
______ ______ _____ ______ _____
Total $90,861 $5,922 $3,937 $4,811 $6,666
Quarter ended December 31, 1998
Utility $77,182 $4,590 $3,224 $5,330 $8,352
Nonutility 8,605 496 279 (190) (150)
Parent/
Eliminations (786) -- 19 (381) (356)
______ ______ _____ _____ _____
Total $85,001 $5,086 $3,522 $4,759 $7,846
A - Parent Loss includes non-tax deductible merger expenses of
$1.5 million.
At December 31, (In thousands) 1999 1998
Total plant and other investments
Utility $381,194 $369,803
Nonutility 16,732 12,676
_______ _______
Total plant and other investments $397,926 $382,479
Other assets
Utility $146,604 $142,744
Nonutility 51,914 40,346
Less intercompany receivables (29,073) (20,588)
_______ _______
Total other assets $169,445 $162,502
_______ _______
Total assets $567,371 $544,981
_______ _______
_______ _______
9) FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they are
not recitations of historical fact, constitute "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in
this report, the words "anticipate," "plan," "believe,"
"estimate," "expect," and similar expressions as they relate
to the Company or its management are intended to identify
forward-looking statements. All forward-looking statements
involve risks and uncertainties. Actual results may differ
materially from those discussed in, or implied by, the
forward-looking statements for reasons including, but not
limited to, changes to and developments in the legislative and
regulatory environments affecting the Company's business, the
impact of competitive products and services, changes in the
natural gas industry caused by deregulation and other factors,
certain environmental matters, as well as such other factors
as set forth in the Company's Form 10-K for the year ended
September 30, 1999 and in other filings with the Securities
and Exchange Commission.
REPORT OF INDEPENDENT PUBLIC To Yankee Energy System, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Yankee Energy System, Inc. (a Connecticut corporation) and
subsidiaries (the Company) as of December 31, 1999, and the
related
consolidated statements of income for the three-month period ended
December 31, 1999 and 1998 and the consolidated statement of cash
flows for the three-month period ended December 31, 1999 and 1998.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Yankee
Energy System, Inc. as of September 30, 1999 (not presented
herein), and, in our report dated November 15, 1999, we expressed
an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of September 30, 1999 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
Arthur Andersen LLP
Hartford, Connecticut
February 7, 2000
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net income was $6.7 million for the three months
ended December 31, 1999, compared to income of $7.8 million for
the same period a year earlier. The corresponding basic and
diluted earnings per share were $0.63 and $0.74 for the three
months ended December 31, 1999 and 1998, respectively.
Results for the quarter ended December 31, 1999 include merger-
related expenses which totaled approximately $1.5 million, or
$0.14 per share, and are associated with the Company's merger
agreement with Northeast Utilities signed on June 14, 1999.
Earnings, exclusive of merger expenses, for the first quarter of
fiscal year 2000 increased approximately $0.3 million or $0.03 per
share compared to the same period last year. However, earnings
for the quarter were still negatively impacted by weather that was
12 percent warmer-than-normal. Management estimates warmer
weather reduced earnings by $1.8 million or $0.17 per share. The
prior year's quarter experienced weather that was 11 percent
warmer than normal with management estimating a weather related
reduction to earnings of $1.7 million or $0.16 per share.
The improvement shown in the quarter to quarter performance,
exclusive of merger related expenses, is directly tied to the
performance of the Company's unregulated subsidiaries, primarily
at Yankee Energy Services Company (YESCo) and R.M. Services (RMS).
YESCo has continued to benefit from cost control measures and RMS
continues to contribute positively from its expanding business.
Yankee Gas' performance remained consistent with the same period
in the prior year. Yankee Gas improved its margins approximately
5 percent, which was offset by increases in operation and
depreciation expenses.
COMPARISON OF THE FIRST QUARTER OF FISCAL 2000 WITH THE FIRST
QUARTER OF FISCAL 1999
OPERATING REVENUES
Utility revenues increased $5.3 million, or 6.9 percent, in the
first quarter of fiscal 2000 compared with the same period in the
prior fiscal year. In addition, operating revenues from nonutility
operations increased $0.6 million or 7.1 percent. The components
of the change in operating revenues are as follows:
Three Months Ended
December 31,
Increase/
1999 1998 (Decrease)
(In thousands)
Firm sales $ 66,125 $ 63,829 $ 2,296
Firm transportation 7,405 6,999 406
Interruptible/off-system sales 7,097 4,690 2,407
Interruptible transportation 1,287 905 382
Other utility revenues 572 759 (187)
_______ _______ _______
Total utility revenues 82,486 77,182 5,304
Nonutility revenues 8,375 7,819 556
_______ _______ _______
Total operating revenues $ 90,861 $ 85,001 $ 5,860
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Three Months Ended
December 31, Increase/
1999 1998 (Decrease)
(Mcf - thousands)
Firm sales 7,565 7,226 339
Firm transportation 3,240 3,182 58
Interruptible/off-system sales 1,597 1,332 265
Interruptible transportation 2,027 1,241 786
_______ _______ ______
Total throughput 14,429 12,981 1,448
_______ _______ ______
_______ _______ ______
The increase in utility revenues was due primarily to growth in
residential sales and an increase in interruptible revenues as a
result of higher oil prices in the first quarter of fiscal 2000
compared to the first quarter of fiscal 1999. The increase in
nonutility revenues in the first quarter of fiscal 2000 compared
to the same period in fiscal 1999 is primarily due to the
increase in RMS revenues due to expansion of its collection
business.
OPERATING EXPENSES
Total operating expenses, excluding merger expenses, increased
$4.8 million in the first quarter of fiscal 2000 compared to the
same period in the prior year as a result of the following items:
- - Cost of gas increased $3.4 million, or 9 percent, for the three
months ended December 31, 1999 compared to the three months ended
December 31, 1998 due primarily to increases in interruptible gas
costs and increases in residential sales.
- - Cost of goods sold increased $0.1 million in the first quarter
of fiscal 2000 compared to the first quarter of fiscal 1999
primarily due to increased nonutility activity resulting
primarily from the continued expansion of RMS' collection
business.
- - Operations and maintenance expenses increased $0.8 million,
primarily due to increases in data processing expenses related to
Year 2000 and the new customer service system, and increases in
RMS' operating expenses due to its expansion. These increases
were offset by decreases in Yankee Gas' pension and medical
expenses and decreases in YESCo's operating expenses due to
implementation of cost reduction initiatives.
- - Depreciation and amortization expense increased $0.8 million,
primarily due to additions in plant, property and investments,
principally new computer systems added in fiscal 1999.
INTEREST EXPENSE
Interest expense increased $0.4 million mainly due to higher
interest on long-term debt due to higher outstanding balances and
lower capitalized interest due to less construction work in
progress than the same period in the prior year.
INCOME TAXES
Federal and state income taxes increased $0.1 million primarily
due to non-deductible merger expenses offset by lower income
before income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at December 31, 1999 totaled
$3.5 million. Cash used for operating activities was $9.0 million
in the first quarter of fiscal 2000. The decrease in cash
provided by operating activities was primarily due to an increase
in working capital requirements. The Company also generated cash
through financing activities, primarily through short-term
borrowings. Cash from operating activities and financing
activities was used primarily for working capital requirements,
dividend payments and capital expenditures in the first three
months of fiscal 2000. Expenditures for investment in plant,
property and investments totaled $6.0 million for the first three
months of fiscal 2000.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures creates a need for short-term borrowing
to supplement internally generated funds. As of December 31,
1999, Yankee Gas had a revolving line of credit of $60 million
with a group of three banks. Under the agreement, funds may be
borrowed on a short-term revolving basis using either fixed or
variable rate loans. At December 31, 1999, Yankee Gas had $52
million outstanding under its agreements. Yankee Energy had
$24.5 million outstanding at December 31, 1999 on a $15 million
committed line of credit and a $10 million uncommitted line of
credit, which are used to fund development of the Company's
nonutility businesses. In January 2000, all lines of credit were
renewed through November 2000.
The long-term credit needs of Yankee Gas are being met by a first
mortgage bond indenture which provides for the issuance of bonds
from time to time, subject to certain issuance tests. At
December 31, 1999, indenture requirements, including the required
coverage ratio, would allow for the issuance of an additional
$180 million of bonds at an assumed interest rate of 7.35
percent.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In
order to satisfy certain provisions of the arrangement, Yankee
Gas has provided a letter of credit for $1.75 million, as of
December 31, 1999. The Company's results of operations are
unaffected by the hedge transaction given that it passes through
the cost of the hedge to either the commodity trading firm or its
customer depending on the difference in the fixed and floating
prices for gas.
YEAR 2000
The Company implemented new information systems and enhanced
existing information systems to address Year 2000 issues. As of
January 31, 2000, the Company is not aware of any Year 2000-
related problems associated with our internal systems or software
or with the software and systems of our vendors, distributors or
suppliers. It is possible, however, that Year 2000-related
problems could arise at a later date. The Company has no plans at
this time to perform additional work, nor does it expect to
experience any material adverse effects on our business, financial
condition or results of operations from any vendor distributor or
supplier who may experience Year 2000 problems.
However, because the Company's continued Year 2000 compliance in
calendar 2000 is in part dependent on the continued Year 2000
compliance of third parties, there can be no assurance that the
Company's efforts alone have resolved all Year 2000 issues or that
key third parties will not experience Year 2000 compliance
failures as calendar year 2000 progresses.
The Company's cost associated with Year 2000 were approximately
$23.6 million in capital expenditures for new systems and $1.2
million in expenses related to software upgrades and
modifications.
YANKEE ENERGY SYSTEM, INC./NORTHEAST UTILITIES MERGER
On June 14, 1999, the Company and Northeast Utilities (NU) entered
into an Agreement and Plan of Merger (the Merger Agreement)
providing for a merger transaction between the Company and NU.
Pursuant to the Merger Agreement, the Company will merge with and
into Merger Sub (the Merger), a Connecticut corporation to be
formed by NU prior to the closing of the Merger as a wholly owned
subsidiary of NU. Merger Sub will be the surviving entity, but
will change its name to "Yankee Energy System, Inc." As a result
of the Merger, the Company will become a wholly owned subsidiary
of NU.
Shareholders of Yankee Energy will receive $45.00 a share (subject
to adjustment under certain circumstances), 45 percent payable in
NU shares and 55 percent payable in cash. The Merger will be
accounted for using the purchase method of accounting. On October
12, 1999, the shareholders of the Company approved the Merger. On
December 29, 1999, the DPUC issued a final decision approving the
Merger and determining that NU is financially, technologically and
managerially suitable and responsible to assume control of Yankee
Energy. On January 31, 2000 the Securities and Exchange
Commission issued its final approval on the Merger. The Company
expects the Merger to close in March 2000. Management expects the
Company's final reporting period to include significant changes
for, among other items, the acceleration of long-term compensation
attributable to the Merger with NU. On October 13, 1999,
Consolidated Edison, Inc. and NU announced a definitive merger
agreement to combine the two companies. That merger is expected
to close in third quarter of calendar year 2000.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Commodity Market Risk
Yankee Gas is subject to market risk due to fluctuations in the
price of natural gas. All of Yankee Gas' sales are designed to
fully recover the cost of gas. Yankee Gas passes on to its firm
customers changes in gas costs from those reflected in its tariffs
under purchased gas adjustment provisions allowed by the
Connecticut Department of Public Utility Control. Interruptible
and off-system sales are priced competitively at not less than the
cost of gas associated with those sales plus applicable taxes and
margin.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In
order to satisfy certain provisions of the arrangement, Yankee Gas
has provided a letter of credit for $1.75 million, as of December
31, 1999. The Company's results of operations are unaffected by
the hedge transaction given that it passes through the cost of the
hedge to either the commodity trading firm or its customer
depending on the difference in the fixed and floating prices for
gas.
Interest Rate Risk
The Company entered into an interest rate swap transaction in
February 1999. The $49,000,000 (notional amount) agreement had
the effect of converting the interest obligations on Yankee Gas'
$19,000,000, 10.07% Bonds and $30,000,000, 7.19% Bonds to variable
rates. Under the agreement, the Company receives the stated fixed
rate and pays a floating rate based on a "basket" of interest rate
indices, as determined in six month intervals. Net receipts or
payments under the agreement are recognized as adjustments to
interest expense. The maximum exposure to the Company is $250,000
per year.
In addition, both Yankee Energy and Yankee Gas have committed and
uncommitted lines of credit with variable interest rates.
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K
On October 27, 1999, the Company filed a Current
Report on Form 8-K dated October 12, 1999 reporting
in Item 5 thereof the Special Meeting of
Shareholders to approve an Agreement and Plan of
Merger dated June 14, 1999 between the Company and
Northeast Utilities, pursuant to which the Company
will become a wholly-owned subsidiary of Northeast
Utilities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
___________________________
(Registrant)
Date: February 14, 2000
/s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
Date: February 14, 2000
/s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller