Exhibit 13
(COVER)
YANKEE ENERGY SYSTEM, INC.
1994 ANNUAL REPORT
Photographs of:
Yankee employee, Michelle Morin, and son Christopher celebrate a
special fifth birthday.
Residence featuring 17 different uses of natural gas for
comfort and convenience.
Predictive dialer telephone equipment used for improved credit
and collections contacts.
Yankee Gas signature graphics, newly created for image
enhancement.
(INSIDE COVER)
COMPANY PROFILE
- ---------------
Yankee Energy System, Inc. (Yankee Energy) is the parent of
Yankee Gas Services Company (Yankee Gas). Housatonic Corporation
(Housatonic), NorConn Properties, Inc. (NorConn), Yankee Energy
Financial Services Company (Yankee Financial) and Yankee Energy
Production Services, Inc. (Yankee Production).
Yankee Gas, the principal subsidiary, is a natural gas
distribution company regulated by the Connecticut Department of
Public Utility Control (DPUC) and provides natural gas service to
about 177,000 customers in 67 Connecticut communities.
Housatonic is a single purpose corporation holding a 10.5
percent interest in the Iroquois Gas Transmission System
(Iroquois) - a pipeline that delivers Canadian gas into the
Northeast and is regulated by the Federal Energy Regulatory
Commission (FERC).
NorConn owns the Company's corporate office building and
another service building and leases both to Yankee Gas.
Yankee Financial provides customers with equipment financing
for natural gas installations.
Yankee Production funds gas-fired and other electric
generation projects at selected customer sites.
Yankee Gas Service Area
{Map of Yankee Gas Service Area with legend}
The Cover (captions)
- -------------------
Yankee employee, Michelle Morin and son Christopher celebrate a
special fifth birthday.
Residence featuring 17 different uses of natural gas for
comfort and convenience.
Predictive dialer telephone equipment used for improved credit
and collections contacts.
Yankee Gas signature graphics, newly created for image
enhancement.
Contents
- --------
Highlights 1
Chairman's Letter 2
Technology Achievements 4
Expanding Reliability 6
Directors and Officers 12
Financial and Statistical Section 13
Shareholder and Stock Information 31
PAGE 1
FINANCIAL HIGHLIGHTS
- --------------------
Graph showing dividends and earnings growth
Graph showing Book Value Per Share
FINANCIAL HIGHLIGHTS
Years Ended, September 30, 1994 1993 %Change
Financial (Thousands)
Operating Revenues $317,298 $302,657 4.8%
Net Income 18,605 17,479 6.4%
Net Income
(Before redemption premium) 19,485 17,479 11.5%
Capital Expenditures 28,493 23,280 22.4%
Net Utility Plant 315,063 308,384 2.2%
Common Stock (Per Share Data)
Earnings Per Share $ 1.81 $ 1.70 6.5%
Earnings Per Share
(Before redemption premium) 1.89 1.70 11.2%
Stock Price (End of Year) $ 21.50 $ 26.50 -18.9%
Quarterly Dividend (End of Year) $ 0.305 $ 0.29 5.2%
Yield (End of Year) 5.7% 4.4% 29.5%
Common Shares Outstanding
(Average) 10,287,683 10,287,683 ---
Book Value Per Share
(End of Year) $ 14.54 $ 13.86 4.9%
Operations
Sales and Transportation (MMcf) 43,150 40,689 6.0%
Degree Days (Normal 6,151) 6,454 6,232 3.6%
Customers (Average) 177,011 176,418 0.3%
PAGE 2
TO OUR SHAREHOLDERS
{Graphic: "Celebrating 5 Years 1989-1994}
Despite the lingering effects of the recession affecting
Connecticut's economy and an increasingly competitive
marketplace, I am pleased to report our fifth consecutive
increase in annual earnings. Yankee Energy earned $1.89 per
share for 1994, up from $1.70 in 1993. This continued improvement
is due to aggressive cost containment efforts, lower interest
charges and higher sales driven by weather 3.6% colder than 1993
and 4.9% colder than normal. In addition, the Board of Directors
increased the dividend to an annualized rate of $1.22 from $1.16
per share in June. This 5.2% increase was greater than any other
New England gas utility.
On July 1, 1994, we celebrated our fifth anniversary as an
independent publicly-traded company. Consistently meeting our
past strategic goals has allowed us to achieve or exceed
financial and operational parity with our New England peers. As
we move towards the year 2000 and beyond, Yankee Energy will
strive to become a dominant player in the region's energy
industry with Yankee Gas the premier gas distribution company in
New England. We will attain this vision for the future by
focusing on:
- Intensified marketing and sales efforts
- Maintaining strong cost management
- Transforming key business processes
- Increasing the contributions of subsidiaries
- Optimizing the gas supply portfolio
- Improving customer service quality and efficiency
The Company achieved numerous accomplishments in 1994, which
are detailed in the body of this report. Yankee Gas, our
principal subsidiary, had a significant impact on the financial
performance of Yankee Energy. For the second consecutive year,
operating costs were successfully contained without compromising
safety or service provided to our customers, and without
increases in staffing levels.
Our aggressive marketing efforts are continuing to expand
reliable natural gas service to new towns in Connecticut. Over
the past year, we extended service to Woodbury and Preston and
added major new customers in Groton and Southbury.
Our other subsidiaries are making greater contributions to
the overall success of Yankee Energy.
- Over the last year, Yankee Financial issued $5.6
million in loans to finance customer installations of gas
equipment.
- Yankee Production, created in 1993 to fund gas-fired
electric generation projects, invested $2.2 million in two such
facilities. In addition, Page D. Miller, with over 25 years
experience in manufacturing and cogeneration, was appointed Vice
President and will focus on developing new opportunities in this
business area.
- For the second consecutive year Housatonic Corporation,
which holds a 10.5 percent interest in the Iroquois Gas
Transmission System, contributed 17 cents per share towards
earnings.
- This summer NorConn, our real estate subsidiary opened
a new 23,000 square foot area service center in East Windsor.
None of this could have been done without the cooperation
and effort of our employees and their commitment to our new
Company theme, "You Get Our Best Energy". Yankee employees also
have demonstrated their commitment to the success of the Company
through their participation in the Very Satisfied Customer
process. This process, designed to make our corporate culture
even more customer oriented, has resulted in numerous
PAGE 3
employee-generated projects suggesting new and better ways to
conduct our business. This process of continuous improvement
will play a major role in our quest to become the premier energy
company in New England.
Key management changes occurred in 1994. John J. Smith,
Vice President of Operations for the Company's subsidiaries,
retired after 40 years of distinguished service to the Company
and its predecessors. In addition, I recently announced to the
Board of Directors my intention to retire as Chief Executive
Officer effective March 1, 1995, although I will continue to
serve
as Chairman for at least a year. My decision to retire as CEO
was made possible by two very positive changes in our senior
management team:
- On July 1, Charles E. Gooley was elected to the
position of Executive Vice President. Mr. Gooley was previously
Vice President and General Counsel for Yankee Energy and the
administrative officer of the Company's subsidiaries.
- On August 23, Branko Terzic, a former commissioner at
the Federal Energy Regulatory Commission and the Wisconsin Public
Service Commission, was elected President and Chief Operating
Officer.
Further, Mr. Terzic will assume the responsibilities of CEO
next March. His wealth of experience as a regulator and
consultant to the industry will help us immeasurably.
Finally, I regret to announce that Mr. John Armstrong
retired from the Board of Directors effective in December. Jack's
vision and wisdom were highly valued and he significantly
contributed to the steady record of the Company's successes. I
know you will join in expressing appreciation for his efforts.
With Mr. Terzic and Mr. Gooley overseeing the day-to-day
operations of the Company, I will focus on the Company's vision
and long term planning. I am ever confident that Yankee will
continue to fulfill the expectations of our shareholders, our
customers and all those who are stakeholders in our success.
{Photograph of Philip T. Ashton, Chairman and Chief Executive
Officer of the Company}
/s/ Philip T. Ashton
- --------------------
Philip T. Ashton
Chairman and Chief Executive Officer
PAGE 4
(Photograph of Yankee Gas Technology Award)
Caption: Philip T. Ashton quote "Reliability goes beyond good
service - it demands our best in all respects."
PAGE 5
(Photograph of Laptop Computer and GasCam)
Caption: Yankee Gas received the Greater Hartford Chamber of
Commerce Technology Business Leader of the Year Award. Company
accomplishments include:
- First natural gas utility in the nation to completely
automate meter reading.
- New England leader in developing infrastructure for
natural gas vehicles.
- Complete upgrade of data processing capabilities.
- First in New England to use GasCam, mobile camera
technology that internally inspects underground pipelines without
expensive excavation.
PAGE 6
EXPANDING RELIABILITY
- ---------------------
Yankee Gas begins its next five years with an aggressive
growth strategy designed to increase the Company's share of the
Connecticut energy marketplace. This strategy includes actively
helping Connecticut state agencies reduce their dependency on
foreign oil and assisting large customers to comply with federal
Clean Air Act Amendments. With this strategy guiding our efforts
over the past year, Yankee Gas continued to expand reliable
service throughout the State.
In 1994, Yankee Gas added the towns of Woodbury and Preston
to its service area. In Southbury, the Company's aggressive
marketing led to the addition of Pomperaug Woods, a private
retirement community with life care facilities, O&G Industries,
a leading manufacturer of asphalt, and the well known Heritage
Inn and Conference Center in Heritage Village.
The Foxwoods Casino in Ledyard continues to expand. In the
two years since it first opened, Foxwoods has become a major
tourist attraction in the State and has gained an international
reputation as one of the most successful casinos in the world.
Yankee Gas has expanded its facilities to meet their ever
increasing energy needs. A 12-mile main extension will enable
Yankee Gas to further expand its service to compete in the energy
market of Southeastern Connecticut.
Dow Chemical Corporation in Gales Ferry and Wyman Gordon in
Groton joined the growing number of industrial companies in the
State that are now able to receive the benefits of natural gas.
Yankee Gas continues to be in the forefront of promoting the
use of natural gas for vehicles as a means of improving the
State's air quality. Natural gas vehicles play a significant
role in the United States Department of Energy (D.O.E.) Clean
Cities programs. During 1994, through the Company's involvement,
Norwalk, Waterbury and New London were each designated a "Clean
City" by the D.O.E.
The next five years will feature a renewed commitment to
both present customers and new ones. The Company's theme "You Get
Our Best Energy" is a reflection of this commitment. Yankee Gas
employees continue to give their best energy to customers, while
providing an energy source that is superior to others.
{Photograph of David G. Leftwich, General Manager-Heritage Inn}
Caption: David G. Leftwich quote "We look forward to a long-term
relationship with Yankee Gas. I've been impressed with the
genuine personal service they have given us."
{Very Satisfied Customer Graphic}
Caption: Yankee Gas is committed to creating not just satisfied
but Very Satisfied Customers. All Company employees have received
Very Satisfied Customer training, an important first step in
cultivating and maintaining a customer oriented culture.
PAGE 7
(Photograph of couple at the Heritage Inn & Conference Center)
Caption: The Heritage Inn entertains 500 diners each week in
their warm and elegant New England setting.
PAGE 8
EXPANDING RELIABILITY
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The Yankee Gas relationship with Plainfield Public Schools
began three years ago when Business Manager Thomas Moon decided
to heat the town's newly constructed Shepherd Hill School with
natural gas. A year later, when problems with the high school's
two oil-fired boilers escalated, Mr. Moon turned to Yankee Gas
once again. It was time to replace the 1929 vintage heating
system. Confronted with squeezing a $300,000 purchase in the
school's tight capital budget, Yankee Energy was able to design a
tax-exempt equipment lease through its Yankee Financial
subsidiary to the advantage of the town's more flexible operating
budget.
Yankee Energy subsidiaries support the Company's core
natural gas distribution business.
Housatonic holds an ownership interest in the Iroquois Gas
Transmission System, which brings Canadian natural gas to the
Northeast. The availability of gas through Iroquois was key in
meeting customer needs as evidenced by our ability to provide
emergency assistance to New York City during last winter's cold
period.
Yankee Financial enhances gas sales by offering competitive
financing for customers' gas equipment. In addition to the
Plainfield tax-exempt loan, Yankee Financial stepped forward with
a $4.9 million financing deal for the gas-fired heating and
cooling system at the Foxwoods Casino. Yankee Financial has
several loans outstanding totaling $5.6 million with other
applications pending for future projects.
Yankee Production takes equity positions in gas-fired
electric generation projects. Yankee Production invested in two
cogeneration facilities in New Jersey in 1994. Energy analyses
for similar projects are ongoing and additional investments will
be made depending on their respective economic merits.
NorConn develops and implements advantageous financing
options to meet the Company's facilities needs. NorConn owns the
Company's corporate headquarters building and the East Windsor
Service Center which opened this year. NorConn leases both
buildings to Yankee Gas.
(Photograph of Thomas F. Moon, Business Manager-Plainfield Public
Schools)
Caption: Thomas F. Moon quote "When we had major heating
problems with our old oil system, Yankee Gas came through for us
when we needed it the most."
(Photograph of Lou Demers)
Caption: Lou Demers, supervisor of buildings and grounds, shows
off the new natural gas boiler at Plainfield High School
PAGE 9
(Photograph of children in classroom)
Caption: Gas heating comfort and innovative financing at
Plainfield Public Schools exemplifies the Yankee "Expanding
Reliability" philosophy.
PAGE 10
EXPANDING RELIABILITY
- ---------------------
The natural gas industry has undergone changes that have
resulted in a marked increase in competition among producers,
pipelines, local distribution companies and even customers. To
succeed in this fast changing and competitive environment, Yankee
Gas meets customers' needs in a variety of non-traditional ways.
Through innovative pricing, the Company was able to meet
Rand Whitney's need for a long- term fixed energy rate. Rand
Whitney, located in Montville, Connecticut, has the oldest
continually running paperboard mill in the United States. Yankee
Gas evaluated several supply options before developing a contract
that will provide a reliable gas supply with the additional
benefit of having the energy costs known over the next 10 years.
In other cases, the Company has developed supply
arrangements for customers with special requirements. In all
cases, reliability was among the prime reasons companies looked
to Yankee Gas to meet their long- term gas supply requirements.
Yankee Gas has also taken advantage of recent regulatory
changes in the gas industry that impact the way gas is
transported and marketed throughout the country. Among the many
tools now available is the ability to sell the Company's
reserved space in the interstate pipelines that carry the gas
from the Texas Gulf Coast to Connecticut when our need for the
gas is low. This more efficiently utilizes our assets and
significantly reduces our gas costs associated with pipeline
expense. Yankee Gas has been at the forefront in selling off-peak
pipeline space.
Another tool Yankee Gas has utilized is the ability to sell
gas outside of Connecticut. Whether due to higher alternate
energy costs or greater environmental restrictions, certain
markets outside our traditional service territory offer an
opportunity to generate additional revenue.
Innovative capacity releases and off-system sales have
contributed greatly to our decreased costs. Yankee will continue
to seek new ways and methods to expand reliability and remain in
the forefront of a competitive industry.
(Photograph of Jerry N. Couch, General Manager-Rand Whitney
Containerboard)
Caption: Jerry N. Couch quote "Rand Whitney depends on a
reliable source of energy with long-term pricing benefits.
Yankee Gas helps us accomplish that goal."
(Yankee Gas Graphic Symbol)
Caption: The new graphic look and theme was established to
provide an energetic image of Yankee Gas as a reliable supplier
of energy and superior service.
PAGE 11
(Photograph of Rand Whitney employees)
Caption: Rand Whitney's commitment to high standards led to
their decision to use natural gas for their major expansion
project.
PAGE 12
DIRECTORS AND OFFICERS
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Directors and Officers
- ----------------------
Philip T. Ashton (1)
Chairman and
Chief Executive Officer
Yankee Energy System, Inc.
Meriden, CT
Eileen S. Kraus (2,4,5)
President
Shawmut Bank Connecticut, N.A.
Hartford, CT and Vice Chairman,
Shawmut National Corporation
Boston, MA
Frederick M. Lowther (4,5)
Partner
Dickstein, Shapiro & Morin
Washington, D.C.
Thomas H. O'Brien (3,5)
President
O'Brien Associates
Garden City, NY
Leonard A. O'Connor (3)
Retired Vice President and
Chief Financial Officer
Yankee Energy System, Inc.
Meriden, CT
Emery G. Olcott (1,4,5)
President and
Chief Executive Officer
Canberra Industries, Inc.
Meriden, CT
Branko Terzic
President and
Chief Operating Officer
Yankee Energy System, Inc.
Meriden, CT
Nicholas L Trivisonno (1,2)
Executive Vice President -
Strategic Planning and
Group President
GTE Corporation
Stamford, CT
Officers of Yankee Energy System, Inc.
- --------------------------------------
Philip T. Ashton
Chairman and
Chief Executive Officer
Branko Terzic
President and
Chief Operating Officer
Charles E. Gooley
Executive Vice President
Michael E. Bielonko
Vice President, Treasurer and
Chief Financial Officer
Thomas J. Houde
Vice President
Mary J. Healey
Secretary and
Assistant General Counsel
Nicholas A. Rinaldi
Controller
Sarah K. Sanders
Assistant Treasurer
Committees of the Board
- -----------------------
1 Executive
2 Audit
3 Finance
4 Organization and Compensation
5 Committee on Directors
FINANCIAL INFORMATION
Contents
Management's Discussion and Analysis
Management and Independent Public Accountants Reports
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Capitalization
Consolidated Statements of Common Shareholders' Equity
Notes to Consolidated Financial Statements
Selected Financial and Operating Data
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
OVERVIEW
Yankee Energy System, Inc. (Yankee Energy or the Company) is a
holding company, headquartered in Connecticut, whose principal
operating subsidiary is Yankee Gas Services Company (Yankee Gas).
Yankee Gas provides retail distribution of natural gas to a
service area comprising 67 cities and towns in Connecticut which
cover approximately 2,200 square miles. The Company has four
nonregulated subsidiaries: Housatonic Corporation (Housatonic),
which owns a 10.5 percent equity interest in the Iroquois Gas
Transmission System, L.P. (Iroquois); NorConn Properties, Inc.
(NorConn), which owns selected system real estate; Yankee Energy
Financial Services Company (Yankee Financial), which provides
certain customers with financing to promote the sale of natural
gas and Yankee Energy Production Services, Inc. (Yankee
Production), whose purpose is to encourage additional natural gas
sales in special applications to large customers and to make
capital investments in such projects, including onsite electric
generation.
The Company's earnings per share increased to $1.89 in 1994,
exclusive of an $0.08 per share charge resulting from an early
redemption premium on the Company's preferred stock, from $1.70
in 1993 and $1.44 in 1992. The 1992 earnings per share are
exclusive of a $0.28 per share credit resulting from a change in
the Company's method of accounting for municipal property taxes
in October, 1991. The increase in 1994 earnings was due
primarily to higher firm sales from colder weather in fiscal 1994
and lower interest expense. The increase in 1993 earnings was in
part attributable to a rate increase implemented on October 1,
1992 by Yankee Gas and increased firm gas sales in fiscal 1993
compared to fiscal 1992.
Earnings on Housatonic's investment in Iroquois in both 1994 and
1993 were approximately $1.8 million and contributed $0.17 per
share in both periods. As of September 30, 1994, Housatonic's
investment in Iroquois totaled approximately $18.6 million.
Housatonic received net cash distributions of approximately $2.2
million in fiscal 1994 and $4.7 million in fiscal 1993.
The Company increased dividends paid to $1.19 in 1994 from $1.13
in 1993, an increase of 5.3 percent. Nonetheless, due to
improved earnings, the Company's dividend payout ratio improved
from 67 percent in 1993 to 63 percent in 1994 (exclusive of the
early redemption premium).
Earnings per share are based on 10,287,683 average common shares
outstanding during fiscal 1994 and 1993 and 9,125,183 in fiscal
1992. All per share amounts in this report have been adjusted to
reflect a three-for-two common stock split on June 28, 1993. The
Company issued an additional 775,000 shares of common stock
(1,162,500 shares restated for three-for-two common stock split)
on October 28, 1992.
RATE MATTERS
On April 8, 1992, the Federal Energy Regulatory Commission (FERC)
issued Order No. 636 on pipeline restructuring. In essence, the
FERC found that absent the unbundling of traditional merchant
services, pipelines would not be able to achieve the FERC's long-
term goal of open access and provide transportation services that
are indifferent to the seller of the gas. Order No. 636,
therefore, required all pipelines to implement restructuring of
their services by the winter of 1993-94. The three major
pipeline systems serving Yankee Gas (Iroquois Gas Transmission
System, Tennessee Gas Pipeline Company and Algonquin Gas
Transmission Company and its affiliate, Texas Eastern
Transmission Company), have all restructured pursuant to the FERC
directive. Iroquois was designed and constructed as a
transportation-only pipeline, and as such, its restructuring has
very minimal impact.
Order No. 636 acknowledges that the restructuring of the
pipelines' traditional services will cause pipelines to incur
transition costs in several areas and provides mechanisms for the
pipelines to fully recover prudently incurred transition costs
attributable to the implementation of Order No. 636.
On July 8, 1994, the Connecticut Department of Public Utility
Control (DPUC) issued a decision on the implementation of FERC
Order No. 636 by the Connecticut Local Distribution Companies
(LDCs). The DPUC is allowing the LDCs to offset the transition
costs billed by pipelines under Order No. 636 with any recoveries
from capacity release activity refunds or deferred gas costs
credits for the 1992-93 period and all subsequent annual deferred
gas costs, gas supplier refunds and fifty percent of off system
sales margins and interruptible margins earned in excess of
target amounts. With the exception of all subsequent annual
deferred gas costs credits, the DPUC has ordered that all
transition cost recovery dollars be applied immediately on a
monthly basis to the transition costs that have been or are
subsequently billed. All subsequent annual deferred gas costs
credits will be applied on an annual basis. If needed, a per
unit surcharge will be applied to firm customers' bills. The
DPUC believes that the recovery system detailed above will result
in all transition costs being recovered in approximately three
years.
Through September 30, 1994, Yankee Gas has paid approximately
$10.5 million of transition costs and an additional $0.6 million
are anticipated. To date, Yankee Gas has collected $7.7 million
through a combination of gas supplier refunds, deferred gas costs
credits and excess interruptible margins. Yankee Gas' management
anticipates full recovery of transition costs consistent with the
DPUC decision.
RESULTS OF OPERATIONS
OPERATING REVENUES
Operating revenues increased $14.6 million from 1993 to 1994 and
$23.9 million from 1992 to 1993. The components of the change in
operating revenues for the past two years are provided in the
following table:
(Millions of Dollars)
Increase/(Decrease)
Years Ended September 30, 1994 vs 1993 1993 vs 1992
Firm and other (excluding gas
cost recoveries):
Regulatory decision $ 0.2 $12.9
Sales, transportation
and other 3.9 3.8
_____ _____
Subtotal - Firm and
other 4.1 16.7
_____ _____
Interruptible (excluding gas
cost recoveries):
Sales and transportation - (1.1)
Margin sharing 0.5 1.0
____ _____
Subtotal -
Interruptible 0.5 (0.1)
____ _____
Total excluding gas cost
recoveries 4.6 16.6
Plus: Gas cost
recoveries 10.0 7.3
____ ____
Total $14.6 $23.9
_____ _____
_____ _____
The corresponding increases in the Company's throughput were as
follows:
(Mcf-thousands)
1994 vs 1993 1993 vs 1992
Firm sales and transportation 1,603 1,095
Interruptible sales and
transportation 858 243
_____ _____
Total 2,461 1,338
_____ _____
_____ _____
The increase in firm and other revenues from 1993 to 1994 was due
primarily to increased firm gas heating sales reflecting colder
weather experienced in 1994. Firm and other revenues increased
from 1992 to 1993 due primarily to the rate increase implemented
in October, 1992 and increased firm sales due to colder weather.
Despite an increase in interruptible sales from 1993 to 1994,
interruptible margin was essentially flat, reflecting a decrease
in per unit revenue in fiscal 1994 compared to fiscal 1993. This
per unit revenue decrease is attributable to an increasingly
competitive environment. Additionally, certain interruptible
customers were shut-off in January, 1994 due to high demand as a
result of twenty-eight percent colder weather compared to
January, 1993. Interruptible margins in excess of target amounts
earned in fiscal 1994 were applied to unrecovered transition
costs as allowed in the July 8, 1994 DPUC decision and resulted
in a reduction of the required sharing with firm customers of
interruptible margins in excess of target amounts when compared
to fiscal 1993. Higher gas costs in fiscal 1993, making gas less
economical for customers able to use alternative fuels, resulted
in a decrease in interruptible margin from fiscal 1992. This
decrease was partially offset by a reduction of the required
sharing with firm customers of interruptible margins in excess of
target amounts earned in fiscal 1993 compared to fiscal 1992.
Gas cost recoveries increased in fiscal 1994 compared to fiscal
1993 due to higher firm sales and the effect of less of an
underrecovery of gas costs in fiscal 1994 compared to fiscal
1993. Gas cost recoveries increased in fiscal 1993 compared to
fiscal 1992 due to higher firm sales and higher gas prices.
These factors were partially offset by the undercollection of
fiscal 1993 gas costs and the refund of the fiscal 1992
overcollection of gas costs from firm customers through the
Company's Purchased Gas Adjustment Clause (PGA).
COST OF GAS
Cost of gas increased $11.0 million in 1994 compared to 1993 and
increased $7.2 million in 1993 compared to 1992. The Company
defers differences between actual purchased gas costs and the
current cost recovery and recovers or refunds such differences in
future periods. This deferral results in an increase or decrease
to gas costs in each fiscal year. The fiscal 1994 deferral
reflected an underrecovery of gas costs that was less than the
underrecovery in fiscal 1993 and had the effect of increasing gas
costs in the current period. The fiscal 1993 increase was
primarily due to higher firm sales and higher unit gas prices.
These factors were partially offset by the undercollection of gas
costs in fiscal 1993 and the refund of a fiscal 1992 gas cost
overcollection.
OTHER OPERATING EXPENSES
Total other operating expenses increased $2.9 million in 1994
compared to 1993 and $12.5 million from 1992 to 1993 as a result
of the following items:
Operations expense increased $2.7 million in 1994 compared
to 1993 and $2.9 million in 1993 compared to 1992. The 1994
increase was due primarily to higher payroll and employee
benefits. The 1993 increase was due primarily to higher
expenses for postretirement benefits and the Company's
program to match payments for low income customers, both of
which were granted in the Company's August 26, 1992 rate
decision. Additionally, higher payroll contributed to the
1993 increase. These items were offset by lower medical
expense due to the implementation of a managed care plan to
control health care costs in 1993, employee contributions
and fewer major medical claims.
Depreciation expense decreased $0.1 million in 1994 compared
to 1993 and increased $1.0 million in 1993 compared to 1992.
The 1994 decrease was primarily due to a change in the
estimated cost of removal percentages for distribution
property and was partially offset by normal plant additions.
The 1993 increase was due to greater plant investment.
Federal and state income taxes, including the portion
contained in other income, decreased $0.1 million in 1994
compared to 1993. The $7.5 million increase (excluding the
tax effect of the change in method of accounting for
municipal property taxes) from 1993 to 1992 was primarily
due to higher income from operations in fiscal 1993, the
acceleration of deductions for property taxes and
postretirement benefits in fiscal 1992 and the increase in
the federal tax rate to 35 percent effective January 1,
1993. Please refer to Note 2 to the Consolidated Financial
Statements for additional information concerning the
components of federal and state income taxes.
Taxes other than income taxes decreased $0.5 million in 1994
compared to 1993 due to higher unemployment tax expense in
1993 associated with claims paid to Yankee Gas bargaining
unit employees during a ten-week work stoppage that ended on
January 4, 1993. The higher 1993 unemployment tax as well
as higher Connecticut gross earnings taxes and higher
municipal property taxes resulted in a $2.6 million increase
in taxes other than income taxes from 1992 to 1993.
Other income increased $0.1 million in 1994 compared to 1993 and
$2.7 million, exclusive of the one-time gain for property taxes,
in 1993 compared to 1992. The 1993 increase was primarily due to
higher earnings associated with Housatonic's investment in
Iroquois as the Iroquois pipeline became fully operational on
November 1, 1992 and interest earned on temporary cash
investments during 1993.
Interest expense decreased $0.8 million partly due to lower
interest on long-term debt resulting from the retirement of the
$15 million first mortgage bond in April, 1993. Additionally,
there was lower interest expense on the Company's PGA balance in
1994. Interest expense increased $1.0 million in fiscal 1993
compared to fiscal 1992 due partly to higher interest expense on
long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for utility plant and other investments totaled
$28.5 million in 1994 reflecting a $5.2 million increase from
1993. The 1994 increase was primarily due to a $2.2 million
investment in two cogeneration projects by Yankee Production and
a $1.8 million investment in a new operations building.
Cash flow (defined as net income adjusted for non-cash items such
as depreciation, deferred income taxes, the Company's non-cash
equity earnings from investments and the change in the method of
accounting for municipal property taxes) represents the cash
generated from operations available for capital expenditures,
dividends and other needs. Cash flows from operating activities
increased $0.7 million in fiscal 1994 compared to fiscal 1993.
On July 1, 1994, Yankee Gas redeemed all 600,000 outstanding
shares of its 9.125 percent cumulative preferred stock, $25 par
value. The Company used cash on hand to pay both the $15 million
par amount and the early redemption premium of $879,900.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures create a need for short-term borrowing
to supplement internally generated funds. Yankee Gas has
arranged a $40 million revolving line of credit with a group of
five banks whereby funds may be borrowed on a short-term
revolving basis using either fixed or variable rate loans. Yankee
Gas also has another $22 million of credit lines available on an
uncommitted basis. At September 30, 1994, Yankee Gas had $17.3
million outstanding on its agreements. In addition, Yankee
Energy (parent) had $7.3 million outstanding at September 30,
1994, on a $15 million line of credit.
The long-term credit needs of Yankee Gas are being met by a first
mortgage bond indenture that provides for the issuance of bonds
from time to time as the need arises, subject to certain issuance
tests. At September 30, 1994, indenture requirements, including
the required coverage ratio, would allow for the issuance of an
additional $101.5 million of bonds at an assumed interest rate of
8.96 percent. The Company is expected to refinance an $18
million first mortgage bond maturing in April, 1995.
On November 4, 1994, Yankee Energy filed a Form S-3 registration
statement with the Securities and Exchange Commission to issue up
to 1,200,000 shares of common stock under its proposed
Shareholder Investment Plan (Plan). The Plan provides existing
shareholders and their family members the ability to acquire
shares of common stock through dividend reinvestment or voluntary
cash purchases. The Company anticipates at least $3 million of
new equity funding that can be generated by the Plan annually as
needed for general corporate purposes. The Plan provides the
Company the option to use new shares of common stock or market
purchases.
At September 30, 1994, Housatonic's investment in Iroquois,
including its non-cash equity portion, was $18.6 million. On
November 1, 1992, a $20 million bank credit agreement utilized by
Housatonic for purposes of making its equity contributions to
Iroquois converted to a three-year variable rate term loan
requiring annual sinking fund payments. At September 30, 1994,
Housatonic had $6.75 million outstanding on this agreement, of
which $4.75 million was paid on November 1, 1994.
The Company's estimated construction expenditures for the fiscal
years 1995 through 1999 are $131 million, including $29 million
for 1995. The 1995 construction expenditures are expected to be
financed by a combination of internally generated funds and
short-term borrowings. For Yankee Gas, long-term debt maturities
and sinking fund requirements during this period total $64.8
million and are expected to be refinanced with additional debt
issues as they come due.
The estimated expenditures discussed above for the five-year
period 1995 to 1999 are exclusive of any expenditures for
remediation of coal tar contamination. As more fully discussed
in Note 8 to the Consolidated Financial Statements, the Company
expects to incur additional expenditures for remediation efforts,
most of which will be deferred for future recovery in rates.
Depending upon the timing and extent to which such costs occur,
the Company expects to finance such expenditures through a
combination of internally generated funds and short-term debt.
The Company is pursuing recovery of costs from insurance. It is
too soon to determine the probability of recovery or the amount
recoverable.
MANAGEMENT REPORT
The consolidated financial statements of Yankee Energy System,
Inc. and subsidiaries and other sections of this Annual Report
were prepared by management, which is responsible for their
integrity and objectivity. These financial statements, which
were audited by Arthur Andersen LLP, were prepared in accordance
with generally accepted accounting principles using estimates and
judgement, where required, and giving consideration to
materiality.
The Company maintains a system of internal controls over
financial reporting, which is designed to provide reasonable
assurance to the Company's management and Board of Directors
regarding the preparation of reliable published financial
statements. The system contains self-monitoring mechanisms, and
actions are taken to correct deficiencies as they are identified.
Even an effective internal control system, no matter how well
designed, has inherent limitations, including the possibility of
the circumvention or overriding of controls, and such systems can
provide only reasonable assurance with respect to financial
statement preparation. Further, because of changes in conditions,
internal control system effectiveness may vary over time.
Through established programs, the Company regularly emphasizes to
its management employees their internal control responsibilities
and policies prohibiting conflicts of interest. The Audit
Committee of the Board of Directors is composed entirely of
outside directors. This Committee meets periodically with
management, the internal auditors and the independent auditors to
review the activities of each and to discuss audit matters,
financial reporting and the adequacy of internal controls.
Management believes that its system of internal accounting
controls and control environment provide reasonable assurance
that its assets are safeguarded from loss or unauthorized use and
that its financial records, which are the basis for the
preparation of all financial statements, are reliable.
Philip T. Ashton,
Chairman and
Chief Executive Officer
Michael E. Bielonko,
Vice President, Treasurer and
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Yankee Energy
System, Inc.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Yankee Energy
System, Inc. (a Connecticut corporation) and subsidiaries (the
Company) as of September 30, 1994 and 1993, and the related
consolidated statements of income, common shareholders' equity
and cash flows, for each of the three years in the period ended
September 30, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Yankee Energy System, Inc. and subsidiaries as of September
30, 1994 and 1993 and the results of their operations and their
cash flows for each of the three years in the period ended
September 30, 1994, in conformity with generally accepted
accounting principles.
As explained in Note 1 to the financial statements, effective
October 1, 1993, the Company changed its method of accounting for
postretirement benefits other than pensions and income taxes. In
addition, effective October 1, 1991, the Company changed its
method of accounting for municipal property taxes.
Hartford, Connecticut Arthur Andersen LLP
November 21, 1994
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Thousands of Dollars, except share information)
For the Years Ended September 30, 1994 1993 1992
Operating Revenues $317,298 $302,657 $278,760
Less: Cost of Gas 168,816 157,816 150,616
________ ________ ________
Revenues, net of cost of gas 148,482 144,841 128,144
________ ________ ________
Other Operating Expenses:
Operations 54,980 52,282 49,402
Maintenance 7,753 6,860 6,844
Depreciation 16,993 17,133 16,086
Federal and state income taxes 14,624 14,643 8,647
Taxes other than income taxes 22,844 23,359 20,784
________ ________ ________
Total Other Operating Expenses 117,194 114,277 101,763
________ ________ ________
Operating Income 31,288 30,564 26,381
Other Income, net 3,184 3,008 1,839
________ ________ ________
Income Before Interest Charges 34,472 33,572 28,220
Interest Charges, net 14,165 14,996 13,988
________ ________ ________
Income Before Preferred Dividends,
Redemption Premium and
Change in Accounting Method 20,307 18,576 14,232
Preferred Dividends 822 1,097 1,097
________ ________ ________
Income Before Redemption Premium
and Change in Accounting Method 19,485 17,479 13,135
Premium on Early Redemption of
Preferred Stock (880) - -
Change in Method of Accounting for
Municipal Property Taxes (net of
income taxes of $1,944) - - 2,566
________ ________ ________
Net Income $18,605 $17,479 $15,701
________ ________ ________
________ ________ ________
Earnings per Common Share Before
Redemption Premium and Change
in Accounting Method $1.89 $1.70 $1.44
Effect of Redemption Premium on
Earnings per Common Share (0.08) - -
Effect of Accounting Change on
Earnings per Common Share - - 0.28
_____ _____ _____
Total Earnings per Common Share $1.81 $1.70 $1.72
_____ _____ _____
_____ _____ _____
Common Shares Outstanding
(Average) 10,287,683 10,287,683 9,125,183
__________ _________ _________
__________ _________ _________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Thousands of Dollars)
At September 30, 1994 1993
ASSETS
Utility Plant, at original cost $468,202 $445,912
Less: Accumulated provision for depreciation 164,327 149,300
_______ _______
303,875 296,612
Construction work in progress 11,188 11,772
_______ _______
Total Net Utility Plant 315,063 308,384
_______ _______
Other Property and Investments 28,609 23,543
_______ _______
Current Assets:
Cash and temporary cash investments 602 6,509
Accounts receivable, less accumulated
provision for uncollectible accounts of
$5,444 in 1994 and $4,914 in 1993 21,412 20,214
Fuel supplies 10,936 15,702
Other material and supplies 1,550 2,393
Recoverable gas costs 429 -
Accrued utility revenues 5,751 5,016
Prepaid Taxes 3,352 3,894
Other 3,933 4,618
_______ _______
Total Current Assets 47,965 58,346
_______ _______
Deferred Gas Costs 4,338 2,776
Recoverable Pipeline Transition Costs 3,432 7,531
Recoverable Environmental Cleanup Costs 36,467 36,104
Recoverable Income Taxes 32,198 -
Recoverable Postretirement Benefits Costs 1,419 -
Other Deferred Debits 12,027 4,609
________ ________
Total Assets $481,518 $441,293
________ ________
________ ________
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements):
Common shareholders' equity $149,547 $142,564
Preferred stock subject to
mandatory redemption - 15,000
Long-term debt 126,966 153,633
_______ _______
Total Capitalization 276,513 311,197
_______ _______
Current Liabilities:
Notes payable to banks 24,600 -
Long-term debt - current portion 26,667 8,667
Accounts payable 17,805 16,739
Accrued interest 4,124 4,081
Refundable gas costs 106 3,703
Pipeline transition costs payable 573 2,691
Other 4,483 4,026
_______ _______
Total Current Liabilities 78,358 39,907
_______ _______
Accumulated Deferred Income Taxes 41,439 38,441
Unfunded Deferred Income Taxes 32,150 -
Accumulated Deferred Investment Tax Credits 9,835 10,212
Reserve for Environmental Cleanup Costs 35,000 35,000
Unfunded Postretirement Benefits Costs 1,419 -
Other Deferred Credits 6,804 6,536
Commitments and Contingencies (Note 8)
________ ________
Total Capitalization and Liabilities $481,518 $441,293
________ ________
________ ________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Thousands of Dollars)
For the Years Ended September 30, 1994 1993 1992
Cash Flows From Operating Activities:
Income before preferred dividends $20,307 $18,576 $16,798
Adjusted for the following:
Depreciation 16,993 17,133 16,086
Equity earnings from investments (3,352) (3,443) (1,401)
Deferred income taxes, net 3,191 11,815 (3,256)
Deferred gas costs activity and other
non-cash items (9,203) (8,221) 9,890
Change in method of accounting for
municipal property taxes - - (4,510)
Changes in working capital:
Accounts receivable and
accrued utility revenues (1,933) (2,172) (3,830)
Accounts payable 1,066 4,196 2,021
Accrued taxes 542 (6,246) 3,318
Other working capital (excludes cash) 4,103 (614) (5,365)
______ _______ _______
Net cash provided by
operating activities 31,714 31,024 29,751
_______ _______ _______
Cash Flows From Financing Activities:
Net proceeds from common
stock issuance - 21,544 -
Net proceeds from long-term debt - 19,790 36,494
Early redemption-preferred stock (15,000) - -
Retirement of long-term debt (8,667) (20,750) (550)
Net increase (decrease) in
short-term debt 24,600 (15,300)(21,085)
Cash dividends-preferred stock (822) (1,097) (1,097)
Early redemption premium
preferred stock (880) - -
Cash dividends-common stock (12,242) (11,659) (9,916)
_______ _______ _______
Net cash (used for) provided by
financing activities (13,011) (7,472) 3,846
_______ _______ _______
Investment In Plant and Other:
Utility Plant, net of allowance for
other funds used during construction(22,790) (21,501)(30,837)
Other property and investments (5,703) (1,779) (2,891)
Iroquois distributions 3,883 5,775 -
_______ _______ _______
Net cash used for plant and
other investments (24,610) (17,505)(33,728)
_______ _______ _______
Net Increase (Decrease) In Cash and
Temporary Cash Investments For The Year(5,907) 6,047 (131)
Cash and Temporary Cash Investments,
beginning of year 6,509 462 593
_______ _______ _______
Cash and Temporary Cash Investments,
end of year $ 602 $6,509 $462
_______ _______ _______
_______ _______ _______
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized $14,420 $15,778 $14,451
Income taxes $11,195 $10,147 $10,123
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Capitalization
(Thousands of Dollars)
At September 30, 1994 1993
Common Shareholders' Equity:
Common shares - $5 par value, authorized
20,000,000 shares; 10,287,683 shares
outstanding at September 30, 1994
and 1993 $51,438 $51,438
Capital surplus, paid in 85,294 85,211
Unearned compensation-restricted
stock awards (a) (144) (281)
Retained earnings 15,159 8,796
Employee stock ownership plan guarantee (b) (2,200) (2,600)
_______ _______
Total Common Shareholders' Equity 149,547 142,564
_______ _______
Preferred Stock Subject to Mandatory Redemption-
$25 par value, 9.125% cumulative, 5,000,000
shares authorized and 600,000 shares out-
standing at September 30, 1993 (c) - 15,000
______ ______
Long-Term Debt:
First Mortgage Bonds (d)
Maturity Interest Rates
1995 9.86% 18,000 18,000
1997 9.90% 30,000 30,000
2004 10.03% 33,633 37,000
2019 10.07% 19,000 19,000
2022 8.48% 20,000 20,000
2023 8.63% 20,000 20,000
_______ _______
Total First Mortgage Bonds 140,633 144,000
Term Loan Agreement, variable rate,
due November, 1995 (d) 6,750 11,500
Note Purchase Agreement, 9.55%,
due November, 2000 (d) 4,050 4,200
Guarantee of Employee Stock Ownership Plan
Term Loan Agreement, 10.38%,
due July, 1999 (b) 2,200 2,600
_______ _______
Total Long-Term Debt 153,633 162,300
Less amounts due within one year (b)(d) 26,667 8,667
_______ _______
Long-Term Debt, Net 126,966 153,633
_______ _______
Total Capitalization $276,513 $311,197
________ ________
________ ________
(a) Consistent with the terms of the Non-Employee Directors'
Restricted Stock Plan, incentive awards of 1,350 shares of
restricted common stock were granted to Directors during 1994.
Under the Long-Term Incentive Compensation Plan, the market value
of the restricted stock awards has been recorded as unearned
compensation and is shown as a separate component of
shareholders' equity. The earned compensation is charged to
administrative and general expense as shares become vested.
Earned compensation was approximately $171,000 for fiscal 1994
and $109,000 for fiscal 1993.
(b) On July 20, 1989, Yankee Energy became guarantor of a term
loan agreement between the Trustee for the Company's 401(k)
Employee Stock Ownership Plan (ESOP), and a commercial bank, in
the amount of $4,000,000. The proceeds were used by the Trustee
exclusively to acquire outstanding shares of Yankee Energy common
stock pursuant to the terms of the Company's ESOP. The final
maturity date of the agreement is July 1, 1999 with an annual
sinking fund requirement of $400,000 for the fiscal years 1995
through 1998 and $600,000 for the 1999 fiscal year.
(c) On July 1, 1994, the Company redeemed all 600,000
outstanding shares of its 9.125 percent cumulative preferred
stock, $25 par value.
(d) Long-term debt maturities and cash sinking-fund requirements
on debt outstanding at September 30, 1994 for each of the fiscal
years 1995 through 1999 (excluding the ESOP sinking fund
requirement) are $26,267,000, $5,517,000, $33,517,000, $3,517,000
and $3,517,000, respectively.
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Common Shareholders' Equity
(Thousands of Dollars)
Employee
(a) Stock
Capital Retained Ownership
Common Surplus, Earnings Plan
Shares Paid In (Deficit) Guarantee Total
Balance at
September
30, 1991 $30,417 $84,454 $(2,809) $(3,400) $108,662
Net Income 15,701 15,701
Cash dividends
on common
shares - $1.09
per share (b) (9,916) (9,916)
Employee stock
ownership plan
loan repayment 400 400
Unearned compensation-
restricted stock
awards (c) 38 38
Amortization of
preferred stock
issuance expenses 6 6
_____ ______ ______ ______ _______
Balance at
September
30, 1992 30,417 84,498 2,976 (3,000) 114,891
Net Income 17,479 17,479
Issuance of 775,000
common shares -
$5 par value 3,875 18,794 22,669
Three-for-two
stock split (b) 17,146 (17,146) -
Cash dividends
on common
shares - $1.13
per share (b) (11,659) (11,659)
Employee stock
ownership plan loan
repayment 400 400
Common stock
issuance expenses (1,125) (1,125)
Unearned compensation-
restricted stock
awards (c) (97) (97)
Amortization of
preferred stock
issuance expenses 6 6
______ ______ ______ ______ _______
Balance at
September
30, 1993 51,438 84,930 8,796 (2,600) 142,564
Net Income before
redemption
premium 19,485 19,485
Cash dividends
on common shares -
$1.19 per
share (b) (12,242) (12,242)
Employee stock
ownership plan
loan repayment 400 400
Unearned compensation-
restricted
stock awards (c) 137 137
Amortization of
preferred stock
issuance expenses 83 83
Early redemption
premium on preferred
stock (d) (880) (880)
_______ _______ _______ _______ ________
Balance at
September
30, 1994 $51,438 $85,150 $15,159 $(2,200) $149,547
_______ _______ _______ _______ ________
_______ _______ _______ _______ ________
(a) Yankee Gas has dividend restrictions imposed by its Bond
Purchase Agreements. At September 30, 1994, retained earnings
available for common dividends under the terms of the Series A
agreement totaled approximately $24.0 million and $34.3 million
under the terms of the Series B and C agreements.
(b) Cash dividends on common shares have been restated for fiscal
years 1993 and 1992 to give retroactive effect to the three-for-
two stock split on June 28, 1993. Amount transferred to common
shares in fiscal year 1993 represents the par value of the
additional shares issued.
(c) See note (a) of the Consolidated Statements of
Capitalization.
(d) On July 1, 1994, the Company redeemed all 600,000 outstanding
shares of its 9.125 percent cumulative preferred stock, $25 par
value and paid a 5.866 percent early redemption premium of
$879,900.
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1) Summary of Significant Accounting Policies
The Company: Yankee Energy System, Inc. (Yankee Energy or the
Company) is a holding company, headquartered in Connecticut,
whose principal operating subsidiary is Yankee Gas Services
Company (Yankee Gas). Yankee Gas provides retail distribution of
natural gas to a service area comprising 67 cities and towns in
Connecticut which cover approximately 2,200 square miles. The
Company has four nonregulated subsidiaries: Housatonic
Corporation (Housatonic), which owns a 10.5 percent equity
interest in the Iroquois Gas Transmission System, L.P.
(Iroquois); NorConn Properties, Inc. (NorConn), which owns
selected system real estate; Yankee Energy Financial Services
Company (Yankee Financial), which provides certain customers with
financing to promote the sale of natural gas and Yankee Energy
Production Services, Inc. (Yankee Production), whose purpose is
to encourage additional natural gas sales in special applications
to large customers and to make capital investments in such
projects, including onsite electric generation.
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements of Yankee Energy include the accounts of all
subsidiaries. Intercompany transactions have been eliminated in
consolidation.
PUBLIC UTILITY REGULATION: Yankee Gas is subject to regulation
for rates and other matters by the Connecticut Department of
Public Utility Control (DPUC) and follows accounting policies
prescribed by the DPUC. Iroquois is subject to regulation by the
Federal Energy Regulatory Commission (FERC).
REVENUES: Revenues are based on authorized rates applied to each
customer's use of gas. Rates can be changed only through a
formal proceeding before the DPUC. At the end of each accounting
period, a revenue estimate for the amount of gas delivered but
unbilled is accrued.
DEPRECIATION: The provision for depreciation is calculated using
the straight-line method based on estimated remaining useful
lives of depreciable utility plant in service, adjusted for net
salvage value and removal costs as approved by the DPUC. The
depreciation rates for the several classes of plant in service
are equivalent to an overall composite rate of 3.7 percent in
fiscal year 1994, 3.9 percent in fiscal year 1993 and 3.8 percent
in fiscal year 1992.
PURCHASED GAS ADJUSTMENT CLAUSE (PGA): The DPUC-approved rates
include an adjustment clause under which gas costs above or below
base rate levels are charged or credited to customers. As
prescribed by the DPUC, differences between the actual purchased
gas costs and the current cost recovery are deferred and
recovered or refunded over future periods.
EQUITY ACCOUNTING: The Company accounts for Housatonic's
investment in Iroquois and Yankee Production's investments using
the equity method, recording their proportionate share of
earnings (losses) with corresponding increases (decreases) in
their investment. Distributions received reduce the carrying
amount of these investments.
INCOME TAXES: Differences exist between the periods in which
transactions affect income in the financial statements and the
periods in which they affect the determination of income subject
to tax. The tax effect of such timing differences is accounted
for in accordance with the ratemaking treatment required by the
DPUC.
Effective October 1, 1993, Yankee Energy adopted the provisions
of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," (FAS 109). FAS 109 supersedes
previously issued income tax accounting standards. As of
September 30, 1994, Yankee Energy recorded an additional deferred
tax liability and a regulatory asset of $32.2 million,
representing the probable future rate recovery from customers
when such deferred tax liability becomes payable. The deferred
tax liability primarily represents certain temporary differences
between the book and tax basis of utility plant for which
deferred taxes had not previously been recorded in accordance
with the regulatory rate practices of the DPUC. The adoption of
FAS 109 did not have a material effect on the Company's results
of operations or financial position.
POSTRETIREMENT BENEFITS: Effective October 1, 1993, Yankee
Energy adopted the provisions of Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," (FAS 106). The
provisions of FAS 106 require that Yankee Energy record the cost
of postretirement benefits over the employees' active service
periods rather than on a pay-as-you-go basis, as was Yankee
Energy's prior practice. The adoption of FAS 106 increased
assets and liabilities but did not have a negative impact on the
Company's results of operations or financial position.
CHANGES IN PREFERRED STOCK: On July 1, 1994, Yankee Gas redeemed
all 600,000 outstanding shares of its 9.125 percent cumulative
preferred stock, $25 par value. The Company used cash on hand to
pay both the $15 million par amount and an early redemption
premium of $879,900.
CHANGES IN COMMON STOCK: A three-for-two common stock split was
effected by the June 28, 1993 distribution of one additional
share of common stock for each two shares of common stock owned
by shareholders of record on June 7, 1993. All fiscal 1993 and
1992 per share amounts and numbers of common shares outstanding
presented in this report have been restated to give retroactive
effect to the stock split.
CHANGE IN THE METHOD OF ACCOUNTING FOR MUNICIPAL PROPERTY TAXES:
As of October 1, 1991, the Company changed its method of
accounting for municipal property taxes to provide a better
matching of property tax expense with the receipt of services
provided by the municipalities.
The cumulative effect of this change in accounting for municipal
property taxes, all of which is recognized in the quarter ending
December 31, 1991, is approximately $2.6 million (net of income
taxes of approximately $1.9 million), equivalent to $0.28 per
common share. After taking into account the one-time cumulative
change, the change in accounting method resulted in a minor
reduction of the amounts of property tax expense recorded in
fiscal 1992 and has had no significant effect on subsequent
property tax expense.
RECLASSIFICATIONS: Certain prior year amounts have been
reclassified to conform with current year classifications.
Note 2) Income Tax Expense
The components of the federal and state income tax provisions
are:
Years Ended September 30, 1994 1993 1992
(Thousands of Dollars)
Changed to income before change in accounting method:
Current income taxes:
Federal $ 8,496 $ 2,315 $ 9,170
State 3,081 1,325 4,112
_______ _______ _______
Total current 11,577 3,640 13,282
_______ _______ _______
Deferred income taxes, net:
Investment tax credits (377) (377) (377)
Federal 3,617 9,743 (2,885)
State 533 2,449 (2,093)
_______ _______ _______
Total Deferred 3,773 11,815 (5,355)
_______ _______ _______
Total income tax expense
charged to income before
change in accounting method $15,350 $15,455 $ 7,927
Change in accounting method - - 1,944
_______ _______ _______
Total income tax expense $15,350 $15,455 $ 9,871
_______ _______ _______
_______ _______ _______
The components of total income tax expense are classified as
follows:
Charged to operating expense $14,624 $14,643 $ 8,647
Charged (credited) to other
income 726 812 (720)
Change in accounting method - - 1,944
_______ _______ _______
Total income tax expense $15,350 $15,455 $ 9,871
_______ _______ _______
_______ _______ _______
Deferred income taxes are comprised of the tax effects of timing
differences as follows:
Investment tax credits $ (377) $ (377) $ (377)
Liberalized depreciation 3,789 3,581 2,072
Deferred gas costs (57) 7,770 (7,642)
Iroquois equity - - 400
Alternative minimum tax and other 418 841 192
_______ _______ _______
Deferred income taxes, net $ 3,773 $11,815 $(5,355)
_______ _______ _______
_______ _______ _______
In accordance with required regulatory treatment, deferred income
taxes are not provided for certain timing differences. This
treatment, along with other items, causes differences between the
statutory income tax rate and the effective income tax rate.
These differences between the effective income tax rate recorded
by the Company and the statutory federal tax rate are as follows:
Federal statutory income
tax rate 35.0% 34.8% 34.0%
Tax effect of differences:
Depreciation 3.5 5.1 4.9
State income taxes net
of federal benefit 6.0 7.6 6.4
Effective tax rate
adjustment 3.0 (2.0) 1.0
Shared interest savings (0.7) (1.0) (1.3)
Property taxes 1.9 1.4 (3.3)
Investment tax credit and
excess deferred taxes (1.1) (1.1) (1.4)
Capitalized overheads 0.2 0.4 (1.0)
Postretirement benefit
contribution (0.3) 2.0 (2.1)
Bad debt reserve and
amortization (2.8) (1.1) 0.2
Miscellaneous (1.7) (0.7) (0.4)
____ ____ ____
Effective income tax rate 43.0% 45.4% 37.0%
Note 3) Leases
Yankee Gas has entered into operating lease agreements for the
use of office equipment, vehicles and buildings. For fiscal
1994, 1993 and 1992, these rental payments were $1,739,000,
$1,762,000 and $1,789,000, respectively.
Future minimum rental payments, excluding associated costs such
as property taxes, state use taxes, insurance and maintenance,
under long-term noncancelable leases as of September 30, 1994,
are approximately:
Year Operating Leases
(Thousands of Dollars)
1995 $1,484
1996 1,327
1997 1,103
1998 880
1999 756
After 1999 2,419
Future minimum lease
payments $7,969
______
______
Note 4) Postretirement Benefits
The Company has a noncontributory defined benefit retirement plan
covering all regular employees. Benefits are based on years of
service and employees' highest consecutive sixty months of
compensation during the last one hundred twenty months of
employment. It is the Company's policy to fund annually an
amount at least equal to that which will satisfy the requirements
of the Employee Retirement Income Security Act and the Internal
Revenue Code. No contributions were required nor made in fiscal
1994. Pension assets are invested primarily in equity securities
and investment grade bonds.
The components of net pension cost were:
Years Ended September 30, 1994 1993 1992
(Thousands of Dollars)
Service cost $2,114 $1,928 $1,853
Interest cost 3,504 3,310 3,073
Net amortization (496) 2,376 (298)
Less: Return on plan assets 5,242 7,606 4,567
______ ______ ______
Net pension cost $ (120) $ 8 $ 61
______ ______ ______
______ ______ ______
For calculating net pension cost, the Company used discount rates
of 7.75 percent, 8.5 percent and 8.5 percent for 1994, 1993 and
1992, respectively. The assumed long-term rate of return was 9.0
percent for all years and the compensation progression rate was
assumed to be 5.0 percent, 5.5 percent and 5.5 percent for 1994,
1993 and 1992, respectively.
Total pension cost, part of which was charged to utility plant,
resulted in a credit of $35,000 for the year ended September 30,
1994, and an expense of $93,000 and $146,000 for the same periods
in 1993 and 1992, respectively. Pension cost for 1994, 1993 and
1992 includes $85,000 in cost of living increases each year for
Northeast Utilities (NU) retirees who were previously employed in
the gas business operated by The Connecticut Light and Power
Company (CL&P), a subsidiary of NU. These payments were agreed
to at the time of divestiture from NU.
For calculating the plan's year-end funded status, the following
assumptions were used:
Years Ended September 30, 1994 1993 1992
Discount rate 8.25% 8.5% 8.5%
Expected long-term rate
of return 9.00% 9.0% 9.0%
Compensation/progression rate 4.50% 5.5% 5.5%
The following table represents the plan's funded status
reconciled to the consolidated balance sheets:
At September 30, 1994 1993
(Thousands of Dollars)
Accumulated benefit obligation,
including $33,401 of vested benefits
at September 30, 1994 and $27,274 at
September 30, 1993 $34,691 $30,723
_______ _______
_______ _______
Projected benefit obligation $45,832 $40,900
Less: Market value of plan assets 57,394 58,876
Plan surplus 11,562 17,976
Unrecognized transition amount (961) (1,048)
Unrecognized prior service costs (34) (37)
Unrecognized net gain (11,795) (18,240)
________ ________
Accrued pension liability $(1,228) $(1,349)
________ ________
________ ________
During fiscal 1994, the Company adopted an excess benefit plan
(EBP) that provides retirement benefits to executive officers and
other key management staff. The EBP recognizes total
compensation and service that would otherwise be disregarded due
to Internal Revenue Code limitations on compensation in
determining benefits under the regular retirement plan. The EBP
also takes into consideration awards to some executives under the
Northeast Utilities Executive Incentive Compensation Program.
The plan is not funded and benefits are paid when due from
general corporate assets.
Note 5) Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance
benefits to its retired employees. On July 1, 1990, in
accordance with terms of the divestiture, Yankee Gas began
compensating the NU System for a portion of the NU System's
liability for certain health care and life insurance expenses of
retirees or surviving spouses. Yankee Gas and the NU System will
share costs in a defined manner until June 30, 2005. The cost of
providing those benefits for NU retirees was approximately
$969,000 for the fiscal year ended September 30, 1994 and
$869,000 and $930,000 for the comparable periods in 1993 and
1992, respectively.
Yankee Gas has established two Internal Revenue Code Section
501(c)(9) Voluntary Employee Beneficiary Association (VEBA)
Trusts, one for union employees and one for non-union employees,
to fund its future liabilities for retiree health care and life
insurance benefits. Contributions to the VEBA Trusts totaled
$0.772 million for fiscal 1994. Assets of the VEBA Trusts are
invested primarily in equity securities and investment grade
bonds.
Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," (FAS 106), which
requires, among other things, that other postretirement benefits
costs be recognized over the employment period that encompasses
eligibility to receive such benefits. The DPUC is allowing
$1.728 million of associated expenses to be recovered in rates
and has indicated its objective to grant full rate recovery
within a reasonable time frame of all FAS 106 related expenses.
On this basis, the Company is deferring for future recovery the
difference between the annual estimated expense and the portion
currently being collected in rates.
The components of net postretirement benefits costs were:
Year Ended September 30, 1994
(Thousands of Dollars)
Service cost $ 982
Interest cost 1,509
Net transition amortization 876
Net other deferrals (301)
Less: Return on assets (81)
_______
Net postretirement benefits costs $3,147
______
______
For calculating the plan's year-end funded status, as well as the
ensuing year's postretirement benefits costs, the following
assumptions were used:
<CAPTION?
Years Ended September 30,
1994 1993
Discount rate 8.25% 7.75%
Expected long-term rate of return 9.00% 9.00%
Health care cost trend rate
- First year 11.00% 12.00%
- Ultimate 5.00% 5.00%
Trend rates are assumed to decrease one percent per year until
they reach the ultimate rate. A one percent change in the
weighted average trend rate assumption of health care claims
would result in an eighteen percent increase in accumulated
benefit obligations and a twenty-two percent increase in net
periodic postretirement benefits costs.
The following table represents the postretirement benefit plan's
funded status reconciled to the consolidated balance sheets:
At September 30, 1994 1993
(Thousands of Dollars)
Accumulated benefit obligation $20,177 $19,644
Less: Market value of assets 2,700 2,193
Accumulated benefit obligation
(greater than) plan assets (17,477) (17,451)
Unrecognized transition amount 16,234 17,110
Unrecognized net gain (1,473) -
Accrued postretirement benefit
liability $(2,716) $ (341)
________ ________
________ ________
In November, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 112,
"Emloyers' Accounting for Post-Employment Benefits," (FAS 112).
This statement, which will be adopted during the first quarter of
fiscal 1995, establishes accounting standards for employers who
provide benefits, such as unemployment compensation, severance
benefits and disability benefits, to former or inactive employees
after employment but before retirement and requires recognition
of the obligation for these benefits. The Company does not
expect the adoption of FAS 112 to materially impact the Company's
results of operations or financial position.
Note 6) Short-Term Debt
Yankee Gas has arranged a $40 million revolving line of credit
with a group of five banks whereby funds may be borrowed on a
short-term revolving basis using either fixed or variable rate
loans. Yankee Gas also has another $22 million of credit lines
available on an uncommitted basis. At September 30, 1994, Yankee
Gas had $17.3 million outstanding under its agreements. In
addition, Yankee Energy (parent) had $7.3 million outstanding on
a $15 million line of credit at September 30, 1994. There was no
short-term debt outstanding at September 30, 1993.
Note 7) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each of the following financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS: The carrying amount
approximates fair value.
PREFERRED STOCK: The fair value of the Company's fixed rate
preferred stock is based upon the quoted market price for similar
issues. On July 1, 1994, the Company redeemed all 600,000
outstanding shares of its 9.125 percent cumulative preferred
stock.
FIRST MORTGAGE BONDS: The fair value of the Company's fixed rate
long-term debt is based upon borrowing rates currently available
to the Company. Adjustable rate securities are assumed to have a
fair value equal to their carrying value.
The carrying amount of the Company's financial instruments and
the estimated fair value at September 30, 1994 and 1993 are as
follows:
September 30, 1994 1993
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
Preferred stock
subject to
mandatory
redemption - - $ 15,000 $ 16,746
________ ________ ________ ________
First mortgage
bonds $140,633 $142,282 $144,000 $174,256
________ ________ ________ ________
The fair values shown above have been reported to meet the
disclosure requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Values of Financial
Instruments" and do not purport to represent the amounts at which
those obligations would be settled.
Note 8) Commitments and Contingencies
CONSTRUCTION PROGRAM: The Company's estimated construction
expenditures for the fiscal years 1995 through 1999 are $131
million, including $29 million for fiscal 1995. The Company
intends to use these estimated construction expenditures to
maintain the reliability of the distribution system in projects
that will generate gas sales and transportation revenues.
IROQUOIS: The Iroquois Gas Transmission System has been informed
by the U.S. Attorneys' Offices for the Northern, Southern and
Eastern Districts of New York that a civil investigation is
underway to determine whether Iroquois committed civil
environmental violations during construction of the pipeline. At
the outset of the investigation, Iroquois was notified of 26
alleged violations. In response, Iroquois denied that such
violations occurred and asserted that all concerns raised by
governmental authorities during construction had been fully
responded to. Iroquois has since been informed that the universe
of alleged violations initially raised is contained in certain
field reports prepared by a Federal/State Inter-Agency Task Force
which surveyed the right-of-way in connection with the right-of-
way restoration program. No proceedings in connection with this
civil investigation have been commenced by the federal government
against Iroquois.
In addition, Iroquois and its environmental consultant remain
subjects of a federal criminal investigation commenced in 1992.
This grand jury proceeding is being conducted by the U.S.
Attorney's Office for the Northern District of New York in
conjunction with the U.S. Environmental Protection Agency (EPA)
and the Federal Bureau of Investigation (FBI). An FBI press
release issued in July, 1992, described the focus of the inquiry
as whether Iroquois and possibly others violated federal
environmental law, provided false information or otherwise
concealed information in conjunction with the construction of the
base pipeline or otherwise used interstate mails or wire to
commit a fraud in connection with the construction of the base
pipeline. To date, no criminal charges have been filed.
Iroquois management, however, believes and has represented to the
Company that the pipeline construction and right-of-way
activities were conducted in a responsible manner. However,
Iroquois deems it probable that the U.S. Attorneys' Offices will
seek indictments and in them substantial fines and other
sanctions.
Iroquois and its counsel expect to meet with those conducting the
civil and criminal investigations, from time to time, both to
gain an informed understanding of the focus and direction of the
investigations in order to defend itself, and if and when
appropriate, to explore a range of possible resolutions
acceptable to all parties. No understandings or agreements have
been reached that have led Iroquois to make provision in its
financial statements for any dollar liability associated with
these proceedings.
Although it is not anticipated that the outcome of these
proceedings will have a material impact on the Company, based on
the information available at this time, management cannot predict
what the ultimate impact might be.
ENVIRONMENTAL MATTERS: The Company is subject to federal and
state environmental regulation of its operations and properties.
Such regulation may result in future environmental liabilities
that may include significant expenses incurred to remove, contain
or remediate contamination caused by operations of former
manufactured gas plant sites.
Pursuant to an Environmental Liability Sharing and Indemnity
Agreement, dated July 1, 1989, Yankee Gas and CL&P have allocated
potential environmental liabilities at sites previously owned by
CL&P and used in CL&P's gas business, and at sites not previously
owned by CL&P but which had prior uses in CL&P's gas business. As
part of that agreement, Yankee Gas and CL&P would share equally
the costs of environmental remediation at sites owned by CL&P
prior to July 1, 1989 and used in CL&P's gas business.
Additional on and off-site investigations of one such property
began in fiscal 1993 and will continue in fiscal 1995. Following
compilation of the additional data, a determination will be made
on the need to remediate.
Fourteen sites initially believed to contain coal tar became the
property of Yankee Gas at divestiture from Northeast Utilities.
Responsibility for future investigation and remediation at these
sites rests solely with Yankee Gas. Each of these sites has been
the subject of a field investigation and coal tar constituents
have been found in some soil and ground water samples. The
Company has reported the results of the environmental studies to
the Connecticut Department of Environmental Protection (DEP).
The DEP has not ordered that any remedial action be taken.
However, of the fourteen, seven sites are presently listed on the
Connecticut Inventory of Hazardous Waste Sites. Inclusion of a
site on this list indicates that remediation may be required in
the future.
During 1993, the Company conducted additional research and began
to prioritize the fourteen sites to further define any that may
require remediation. The Company identified four sites that are
likely to require remediation. The Company's proposed
prioritization was submitted to the DEP. Extensive site
investigations were then conducted at the four sites to define
the exent of contamination and begin remedial plans. Remedial
activity began at two sites during fiscal 1994 and will continue
at those locations during fiscal 1995. In addition, the Company
has developed a cost estimate for the remaining ten sites based
on the probability of cleanup. As a result of this effort, the
Company has recorded a liability of $35 million for future
environmental cleanup.
Recovery of remediation costs has been specifically allowed by
the Company's 1992 rate case decision. Presently, $325,000 is
allowed annually in rates. If costs are expected to exceed $2.5
million on an annual basis, the Company is required to go to the
DPUC for review. The DPUC has stated that "to the extent that
coal tar remediation expenses are prudently incurred, they should
be allowed as proper operating expenses".
The Company also believes that it has valid claims for insurance
recovery of remediation costs and intends to pursue those claims
against insurers.
TRANSITION COSTS - ORDER NO. 636: On April 8, 1992, the FERC
issued Order No. 636 on pipeline restructuring. In essence, the
FERC found that absent the unbundling of traditional merchant
services, pipelines would not be able to achieve the FERC's long-
term goal of open access and provide transportation services that
are indifferent to the seller of the gas. Order No. 636,
therefore, required all pipelines to implement restructuring of
their services by the winter of 1993-94. The three major
pipeline systems serving Yankee Gas (Iroquois Gas Transmission
System, Tennessee Gas Pipeline Company and Algonquin Gas
Transmission Company (Algonquin) and its affiliate, Texas Eastern
Transmission Company), have all restructured pursuant to the FERC
directive. Iroquois was designed and constructed as a
transportation-only pipeline, and as such, its restructuring has
very minimal impact.
Order No. 636 acknowledges that the restructuring of the
pipelines' traditional services will cause pipelines to incur
transition costs in several areas and provides mechanisms for the
pipelines to fully recover prudently incurred transition costs
attributable to the implementation of Order No. 636.
On July 8, 1994, the DPUC issued a decision on the implementation
of FERC Order No. 636 by the Connecticut Local Distribution
Companies (LDCs). The DPUC is allowing the LDCs to offset the
transition costs billed by pipelines under Order No. 636 with any
recoveries from capacity release activity refunds or deferred gas
costs credits for the 1992-93 period and all subsequent annual
deferred gas costs, gas supplier refunds and fifty percent of off
system sales margins and interruptible margins earned in excess
of target amounts. With the exception of all subsequent annual
deferred gas costs credits, the DPUC has ordered that all
transition cost recovery dollars be applied immediately on a
monthly basis to the transition costs that have been or are
subsequently billed. All subsequent annual deferred gas costs
credits will be applied on an annual basis. If needed, a per
unit surcharge will be applied to firm customers' bills. The
DPUC believes that the recovery system detailed above will result
in all transition costs being recovered in approximately three
years.
Through September 30, 1994, Yankee Gas has paid approximately
$10.5 million of transition costs and an additional $0.6 million
are anticipated. To date, Yankee Gas has collected $7.7 million
through a combination of gas supplier refunds, deferred gas costs
credits and excess interruptible margins. Yankee Gas' management
anticipates full recovery of transition costs consistent with the
DPUC decision.
TAKE-OR-PAY LIABILITY: Take-or-pay liabilities arose from the
inability or unwillingness of pipeline companies to take the
volumes of gas for which they had contracted with producers. To
avoid or settle litigation by producers to recover payment for
the contracted-for volumes, some pipeline companies, including
certain Yankee Gas suppliers, have negotiated or are negotiating
settlements of their contracts. The pipeline companies were
authorized by the FERC to recover from their customers a portion
of their settlement costs under guidelines set forth by the FERC.
Yankee Gas has collected approximately $7.8 million of its
current estimated take-or-pay cost of $8.4 million through
September 30, 1994. This take-or-pay cost reflects a revised
estimate from Algonquin during fiscal 1994. The collection was
accomplished primarily by retaining gas supplier refunds and
deferred gas costs credits that otherwise would have been
refunded to customers as prescribed by a November 20, 1991 DPUC
decision and through a surcharge applied to interruptible
customers. Management expects to recover the entire remaining
amount within the next two fiscal years.
GAS SUPPLY HEDGING ACTIVITIES: The Company has entered into
fixed-revenue-rate contracts with two customers for the delivery
of natural gas. The Company has hedged these commitments with
the purchase of natural gas swaps. In order to satisfy certain
provisions of the arrangement, the Company has provided a letter
of credit for $1.25 million. Management does not anticipate
these commitments to have a material negative impact on the
Company's financial condition or results of operation.
TAX AUDIT: The Company was recently informed by the Internal
Revenue Service that the Company's federal income tax returns for
1989 and 1990 were examined and no change in reported tax was
necessary for those periods.
Note 9) Quarterly Financial Data (Unaudited)
The following table provides information with respect to the
consolidated quarterly results of operations for the fiscal years
ended September 30, 1994 and 1993 and reflects the seasonal
nature of the Company's operations. The results of any one
quarter during the year are not indicative of the results of
future quarters.
Quarter Ended
Fiscal Year 1994 December 31 March 31 June 30 September 30
(Thousands of Dollars, except share information)
Operating
Revenues $91,786 $134,369 $53,612 $37,531
Operating Income
(Loss) 11,444 17,976 2,357 (489)
Net Income
(Loss) (1) 8,359 14,922 (563) (3,233)
Earnings (Loss)
per Common
Share (1) (2) $0.81 $1.45 ($0.05) $(0.32)
Quarter Ended
Fiscal Year 1993 December 31 March 31 June 30 September 30
Operating
Revenues $90,984 $123,624 $51,000 $37,049
Operating Income 11,690 16,621 2,151 102
Net Income (Loss) 7,812 13,839 (994) (3,178)
Earnings (Loss) per
Common Share (2) $0.76 $1.35 $(0.10) $(0.31)
(1) Exclusive of an $879,000 charge, or $0.08 per share,
resulting from the early redemption of the Company's 9.125
percent cumulative preferred stock.
(2) Earnings (Loss) per common share were calculated on the
average common shares outstanding of 10,287,683 for the
twelve months ended September 30, 1994 and 1993.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Selected Financial and Operating Data
September 30, 1994 1993 1992 1991 1990
Balance Sheet Data:
(Thousands)
Net Utility
Plant $315,063 $308,384 $303,715 $287,841 $271,256
Total Assets 481,518 441,293 393,227 356,269 320,533
Total
Capitalization 276,513 311,197 277,391 250,012 234,103
Income and Share Data:
(Thousands except share data)
Operating
Revenues $317,298 $302,657 $278,760 $234,458 $227,886
Cost of Gas 168,816 157,816 150,616 114,037 118,345
Other O&M
Expenses 62,733 59,142 56,246 55,009 51,037
Depreciation 16,993 17,133 16,086 14,039 14,596
Net Income (1) 19,485 17,479 13,135 10,844 8,854
Earnings
per Share (1) $1.89 $1.70 $1.44 $1.28 $1.09
Revenues:
(Thousands)
Residential $140,403 $133,846 $124,435 $100,959 $104,769
Commercial 95,286 93,045 85,920 69,746 69,378
Industrial 77,850 72,940 64,004 57,294 50,225
Miscellaneous 3,328 1,884 1,211 3,304 2,245
Transportation 431 942 3,190 3,155 1,269
Total $317,298 $302,657 $278,760 $234,458 $227,886
Sales and Transportation:
(Mcf-Thousands)
Firm:
Residential 13,101 12,691 12,312 11,029 12,175
Commercial 9,998 9,703 9,183 7,951 8,435
Industrial 10,421 9,600 8,058 8,098 6,532
Transportation 128 167 1,700 1,089 362
Unbilled and
Other 245 129 (58) (15) 38
Total Firm 33,893 32,290 31,195 28,152 27,542
Non-Firm:
Commercial 1,549 1,663 1,377 1,403 1,804
Industrial 7,149 5,336 3,632 3,240 3,889
Transportation 559 1,400 3,147 4,576 3,085
Total
Non-Firm 9,257 8,399 8,156 9,219 8,778
Total Sales and
Transportation 43,150 40,689 39,351 37,371 36,320
Customers:
(Average) (2)
Residential 155,874 155,385 154,934 154,116 154,211
Commercial (3) 19,156 19,139 19,056 18,928 18,711
Industrial (3) 1,980 1,893 1,885 1,872 1,851
Resale 1 1 1 1 1
Total 177,011 176,418 175,876 174,917 174,774
Sources of Gas:
(Mcf-Thousands)
Domestic 16,162 7,474 9,526 14,121 17,277
Canadian Gas
Firm 24,440 23,970 11,016 1,837 3,061
Spot Market Gas 2,318 8,155 14,386 16,191 12,770
Produced Gas 30 6 15 63 153
Company Use/
Unaccounted For (488) (608) (377) (487) (422)
Total 42,462 38,997 34,566 31,725 32,839
Peak Day Data:
Peak Day Send
Out (Mcf per
day) (4) 262,794 247,315 237,077 225,122 213,145
Peak Day Date 1/19/94 2/01/93 1/16/92 1/22/91 12/22/89
Peak Day
Degree Days 55 54 55 56 58
Total Annual
Degree Days 6,454 6,232 5,995 5,198 5,968
(1) Exclusive of an $879,900 charge, or $0.08 per share,
resulting from the early redemption premium on the Company's
preferred stock in fiscal 1994 and a $2,566,000 credit, or $0.28
per share, resulting from a change in the Company's method of
accounting for municipal property taxes in fiscal 1992. All per
share amounts have been restated to give retroactive effect to
the three-for-two stock split on June 28, 1993.
(2) Customer data has been restated to reflect the number of
customer accounts rather than the number of dwelling units.
Additionally, certain commercial customers have been reclassified
as industrial as a result of a change in the State of Connecticut
Gross Receipts Tax Statute which redefined the parameters of the
industrial classification.
(3) Transportation customers are included in these customer
categories. Average transportation customers are as follows:
1994:17, 1993:25, 1992:51, 1991:36 and 1990:7.
(4) Converted from BTU-millions assuming 1,033 BTU per cubic
foot.
(INSIDE BACK COVER)
SHAREHOLDER AND STOCK INFORMATION
- ---------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will take place on
Friday, February 25, 1995, at 10:30 a.m. at the Ramada Inn in
Meriden, Connecticut.
MARKET FOR COMMON STOCK
As of December 14, 1994, there were 32,223 holders of record
of Yankee Energy common stock. Yankee Energy's stock is quoted
on the New York Stock Exchange (NYSE) under the symbol "YES",
although it is frequently presented as "YanEnS" in various
financial publications.
High and Low Stock Prices and Dividend Information ($/Share)
------------------------------------------------------------
Year ended September 30, 1993 High Low Dividend
First Quarter, 1993 20.42 17.67 .277
Second Quarter, 1993 21.33 19.58 .277
Third Quarter, 1993 24.17 20.92 .290
Fourth Quarter, 1993 28.00 23.38 .290
Year ended September 30, 1994 High Low Dividend
First Quarter, 1994 29.25 24.00 .290
Second Quarter, 1994 25.50 22.38 .290
Third Quarter, 1994 25.38 20.00 .305
Fourth Quarter, 1994 25.00 20.00 .305
DIVIDENDS
Dividends are considered quarterly by the Board of Directors
and, if declared, are payable at the end of March, June,
September and December. The dividend record date is generally
three weeks prior to the dividend payable date. Yankee Energy
offers registered shareholders the ability to have quarterly
dividends deposited directly into a shareholder's bank account.
SHAREHOLDER INVESTMENT PLAN
The Yankee Energy Shareholder Investment Plan is
administered by the Company's stock transfer agent, Mellon
Securities Transfer Services (Mellon). The Plan provides
registered shareholders and their family members a convenient way
to acquire shares of common stock. Shares can be purchased by
having quarterly dividends automatically reinvested in additional
shares or by sending in funds to purchase additional shares. In
addition, holders of fewer than 100 shares may sell all their
shares at any time for no fee. The Plan also offers charitable
donation and share safekeeping services, as well. Copies of the
Plan are available from Mellon or Yankee Energy.
TRANSFER AGENT
Shareholders who have questions about their accounts or
desire to transfer their stock from one name to another should
contact Mellon at 1-800-288-9541 or write:
For Transfer and Transfer Inquiries:
Mellon Securities and Transfer Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
All Other Inquiries:
Mellon Securities Transfer Services
P.O. Box 750
Pittsburgh, PA 15230
YANKEE ENERGY NEWS AND INFORMATION
Yankee Energy has established a new toll-free news and
information service which includes current news releases, a
Chairman's message, earnings and dividend information, as well as
access to the transfer agent or the Company's Investor Relations
Department.
1-800-YES-9989
Shareholders, interested investors and analysts may also
contact Yankee Energy by calling or writing to:
Steven P. Eschbach, CFA
Investor Relations Manager
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
Phone 203-639-4459
Yankee Energy will provide shareholders with a copy of its
1994 Report Annual Report to the Securities and Exchange
Commission on Form 10-K, without charge, upon written request.
(Recycle Symbol) The financial review is printed on recycled
paper.
(OUTSIDE BACK COVER)
Graphic: Logo for the Special Olympics World Games Connecticut
1995
Yankee Energy Logo
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
203-639-4000
Caption: Yankee Gas is proud to be an official provider of the
Special Olympics World Games
GRAPHICS APPENDIX LIST
Page Where DESCRIPTION OF GRAPHIC OR
Graphic Appears CROSS-REFERENCE
14 Growth in Throughput. X axis contains
fiscal years ended 1990-1994. Y axis
contains billions of cubic feet. For
the fiscal years ended 1990-1994, the
throughput in billions of cubic feet was
36.3, 37.4, 39.4, 40.7 and 43.2,
respectively.
15 Growth in Margin. X axis contains
fiscal years ended 1990-1994. Y axis
contains millions of dollars. For the
fiscal years ended 1990-1994, the margin
in millions of dollars was 109.5, 120.4,
128.1, 144.8 and 148.5, respectively.
16 Permanent Capital Structure. X axis
contains fiscal years ended 1990-1994.
Y axis contains percentage of permanent
capital. For the fiscal years ended
1990-1994, common shareholders' equity
was 39, 43, 39, 45 and 49 percent of the
permanent capital structure,
respectively. For the fiscal years
ended 1990-1994, preferred stock was 6,
6, 5, 5 and 0 percent of the permanent
capital structure, respectively. For
the fiscal years ended 1990-1994, long-
term debt was 55, 51, 56, 50 and 51
percent of the permanent capital
structure respectively.