SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI-
TIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-10721
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Yankee Energy System, Inc.
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(Exact name of registrant as specified in its charter)
Connecticut 06-1236430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
599 Research Parkway, Meriden, CT 06450-1030
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Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 639-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, Par Value
$5 Per Share, and Common
Share Purchase Rights New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-
affiliates of the registrant at November 29, 1996 was
$229,354,613 based on the closing price of $22.00 per share.
On November 29, 1996, the Company had 10,449,554 shares of common
stock outstanding.
Documents Incorporated by Reference Part of Form 10-K
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Annual Report to Shareholders Part II
for the Fiscal Year Ended
September 30, 1996
Proxy Statement For Annual Part III
Shareholders' Meeting to be
Held on January 31, 1997
PART I
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ITEM 1. BUSINESS
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The Company
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Yankee Energy System, Inc. ("Yankee Energy" or the
"Company") is a public utility holding company incorporated in
Connecticut in 1989. The Company is primarily engaged in the
retail distribution of natural gas through its wholly-owned
subsidiary, Yankee Gas Services Company ("Yankee Gas"), a
Connecticut public service company. Yankee Gas serves
approximately 179,000 residential, commercial and industrial
customers in 68 cities and towns in Connecticut. The Company is
exempt from registration under the Public Utility Holding Company
Act of 1935.
The Company has four additional wholly-owned operating
subsidiaries which support the Company's core natural gas
distribution business or allow the Company to expand its business
of providing total energy services: NorConn Properties, Inc.
("NorConn"), which owns the Company's corporate office building
and another service building and leases both facilities to Yankee
Gas; R. M. Services, Inc. ("RMS") which provides
receivables management services to utilities and other
businesses. Yankee Energy Financial Services Company ("Yankee
Financial"), which provides energy equipment financing; and
Yankee Energy Services Company ("YESCo"), whose purpose is to
provide a full range of energy-related services for its customers
including consulting, fuel procurement management and development
for on-site generation and cogeneration systems, as well as
technical and operating support and equipment installation for
power plants and boilerhouses. YESCo also has three wholly-owned
subsidiaries: BVA Cogen, Inc. ("BVA"), a Delaware corporation
located in Massachusetts which develops customer-designed
cogeneration systems and distributes in the United States the
Deutz MWM Gas-Driven Engine/Generator sets used for on-site
electric generation and which also provides energy-related
services such as feasibility studies, design engineering, turnkey
installations and ongoing service contracts; YESCo Energy
Consulting Services, Inc., incorporated in November, 1996, which
provides energy planning consulting and fuel procurement
management services to industrial and commercial energy users;
and YESCo Industrial Energy Services, Inc., headquartered in East
Granby, Connecticut with several regional field offices, a
manufacturers' representative and service company acquired by
YESCo in July, 1996, which provides heating, ventilating and air-
conditioning services and designs automated temperature control
systems for the commercial and industrial market.
The Company may consider or explore opportunities to acquire
or invest in other gas distribution companies and/or other
energy-related businesses. The Company's overall investment in
unregulated businesses is limited to 20% of the Company's total
consolidated assets, pursuant to a cap imposed by the Connecticut
Department of Public Utility Control ("DPUC") at the time of the
Company's formation.
Gas Markets and Competition
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General. Yankee Gas operates the largest natural gas
distribution system in Connecticut as measured by number of
customers and size of service territory. Total throughput (sales
and transportation) for fiscal 1996 was 47.3 billion cubic feet
("Bcf"). In fiscal 1996, gas revenues were comprised of the
following: 43% residential; 31% commercial; 24% industrial; and
the remaining 2% other. Yankee Gas provides firm gas sales
service to customers who require a continuous gas supply
throughout the year, such as residential customers who rely on
gas for their heating, hot water, and cooking needs. Yankee Gas
also provides interruptible gas sales service to certain
commercial and industrial customers that have the capability to
switch from natural gas to an alternative fuel on short notice.
Yankee Gas can interrupt service to these customers during peak
demand periods. Yankee Gas offers firm and interruptible
transportation services to customers who purchase gas from
sources other than Yankee Gas. In addition, Yankee Gas performs
gas exchanges, off-system sales and capacity releases to other
local gas distribution companies ("LDCs") and marketers to reduce
its overall gas expense.
Firm Sales. In fiscal 1996, total firm gas sales of 35.1
Bcf accounted for approximately 74.3% of total gas sales and
approximately 88.3% of the Company's operating revenues. Firm
gas sales, particularly sales for residential space heating, are
highly seasonal. In fiscal 1996, about 62% of total firm sales
occurred in the five months from November through March. The
following tables set forth certain information with respect to
firm sales in fiscal 1996.
FISCAL 1996 FIRM SALES
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Average Number Volumes
of Customers in Bcf
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Residential 157,526 13.2
Commercial 19,179 10.5
Industrial 2,015 11.4
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178,720 35.1
Volumes as a
Percent of
Revenues Firm Sales
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Residential $145,364,000 38%
Commercial $ 95,463,000 30%
Industrial $ 58,717,000 32%
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$299,544,000 100%
Interruptible Sales. In fiscal 1996, total interruptible
gas sales of 8.5 Bcf accounted for approximately 18.1% of total
gas sales and approximately 9.5% of the Company's operating
revenues. The price charged for interruptible sales service is a
market price based on the cost of the customer's alternative
fuel, which is usually oil. Interruptible sales depend upon the
availability of gas supplies and, generally, have provided lower
margins than firm sales. Yankee Gas has the authorization from
the DPUC to engage in flexible pricing to meet market prices for
alternative fuels available to interruptible customers. The
following table sets forth certain information with respect to
interruptible sales in fiscal 1996.
FISCAL 1996 INTERRUPTIBLE SALES
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Average Number Volumes
of Customers in Bcf Revenues
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Commercial and
Industrial 231 8.5 $32,332,000
Transportation Services. Yankee Gas also offers firm and
interruptible transportation service to its customers. On
April 1, 1996, the DPUC authorized the Connecticut LDCs to
provide firm transportation to industrial and commercial
customers. These transportation services permit customers who
desire to purchase gas from sources other than Yankee Gas to do
so, provided they have made all the necessary transportation
arrangements with the transmission pipelines to deliver their gas
to the Yankee Gas distribution system. Customers can purchase
gas directly from producers and suppliers and contract for
transportation services rather than purchase gas solely from the
local distribution system. Generally, interruptible
transportation service is highly sensitive to alternative fuel
prices as well as to the availability of interstate pipeline
capacity into the region. Under existing tariff structures, the
financial condition of the Company is unaffected by customers
electing to use transportation service in lieu of making gas
purchases from Yankee Gas.
Market Expansion. Yankee Gas has increased efforts to
provide additional service throughout its service territory.
Yankee Gas concentrates its marketing efforts on increasing the
number of residential households using natural gas, increasing
the uses of natural gas by existing Yankee Gas customers, and
increasing the overall number of both large and small customers
through expansion of Yankee Gas' distribution system within its
service territory. In the residential market, Yankee Gas focuses
marketing efforts on households along Yankee Gas' existing mains
because they present opportunities to increase gas sales with
little or no capital investment. In the commercial and
industrial markets, the Company seeks to expand gas sales by
increasing sales to existing customers for both traditional and
innovative uses, such as cooling and cogeneration. The Company
also emphasizes attracting new commercial and industrial
customers within and without its service territory.
The emergence of natural gas vehicles creates a potential
new market for the natural gas industry. The establishment of
natural gas vehicle fueling stations however is essential to the
development of this market. Yankee Gas, in cooperation with
various oil companies and gasoline retailers, has opened retail
public natural gas vehicle refueling stations in Windsor Locks,
Norwalk, and Meriden, Connecticut. Yankee Gas operates two
refueling stations for its own fleet of approximately 100 natural
gas vehicles. The Company continues to evaluate various options
for the establishment and location of additional facilities.
Gas Supply
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In 1992, the FERC issued Order No. 636, which required
natural gas pipeline companies to separate or "unbundle" their
services. Prior to the issuance of Order No. 636, natural gas
pipeline companies sold pipeline services, such as gas
purchasing, storage and transportation, as a package. In 1993,
the interstate pipeline companies that provided natural gas to
Yankee Gas complied with Order No. 636. As a result, Yankee Gas
executed contracts with interstate pipeline companies for
services to transport gas from production and underground storage
areas to Yankee Gas' service territory to replace the traditional
merchant services previously provided by the pipeline companies.
Yankee Gas concurrently replaced the gas supply traditionally
obtained from the pipeline companies' merchant services with firm
purchases directly from producers and/or marketing companies.
The FERC continues to regulate the rates charged by interstate
pipeline companies for transportation and storage of natural gas,
but does not regulate the price of natural gas purchased by the
Company from producers and marketing companies.
Interstate pipelines delivered over 99.9 percent of Yankee
Gas' 1996 fiscal year requirements to its distribution system.
Interstate pipeline capacity enabled Yankee Gas to meet its firm
customers' requirements with pipeline supplies for more than 98.4
percent of the year.
The following table sets forth sources of fiscal 1996 gas
supply (including purchases for storage injections).
Percent of
Source Total Supply
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Alberta Northeast Gas, Limited 45.55
Direct Firm Purchases 45.60
Boundary Gas 7.29
Spot Market Purchase 1.52
Other (Propane) 0.04
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Total 100%
Yankee Gas is entitled to purchase 59,000 thousand cubic
feet ("Mcf") per day of gas, or about 21.5 Bcf annually, from
Alberta Northeast Gas, Limited ("ANE"). Yankee Gas holds a 15.9
percent equity interest in ANE, an entity formed by several
utilities in the Northeast to aggregate the purchase of natural
gas from Western Canada and to facilitate its sale to LDC owners
at the United States-Canadian Border. The sales contracts
between Yankee Gas and ANE expire in 2006. The gas purchased
from ANE is delivered in the United States by the Iroquois Gas
Transmission System, L.P. ("Iroquois") pipeline and the
transportation contract between Yankee Gas and Iroquois expires
in 2011.
Yankee Gas is also entitled to purchase 9,500 Mcf of gas per
day, or about 3.5 Bcf annually, from Boundary Gas, Inc.
("Boundary"). Yankee Gas owns a 10.4 percent equity interest in
Boundary, an LDC consortium which imports natural gas from
Canada. The sales contract between Yankee Gas and Boundary
expires in 2003.
Yankee Gas also holds pipeline transportation and storage
service contracts with a number of pipeline companies. Yankee
Gas has a transportation contract with Tennessee Gas Pipeline
Company ("Tennessee") which provides for 562,794 Mcf of pipeline
capacity on an annual basis. This transportation contract
expires in 2000, but may be continued on a year-to-year basis
after that with the mutual consent of the parties. Another long
term transportation contract with Tennessee provides for an
annual quantity of 511,000 Mcf and terminates in 2017. Yankee
Gas also has a storage contract with Tennessee which provides
approximately 1.8 Bcf of storage service on an annual basis.
This storage contract expires in 2000. Yankee Gas also has
transportation contracts with Algonquin Gas Transmission Company
("Algonquin") which provide for 42.4 Bcf of annual pipeline
capacity. These contracts expire in 2012. Texas Eastern
Transmission Company ("Texas Eastern") provides 38.7 Bcf of
annual pipeline capacity to Yankee Gas pursuant to contracts
which expire in 2000-2004. Under other contracts, Texas Eastern
provides 1.7 Bcf of annual storage service. Yankee Gas also has
transportation contracts with National Fuel Gas Supply
Corporation ("National Fuel") which provide 633,480 Mcf of
pipeline capacity on an annual basis and expire in 2003.
Furthermore, Yankee Gas has transportation contracts with
Transcontinental Gas Pipeline Corporation ("Transco") which
provide 615,125 Mcf of annual pipeline capacity and expire in
2008. Finally, 4.6 Bcf of annual pipeline capacity is provided
to Yankee Gas by CNG Transmission Corporation ("CNGT") pursuant
to transportation contracts which expire in 2003-2012. Under
other contracts, CNGT provides 1.4 Bcf of annual storage service
to Yankee Gas.
Yankee Gas has multiple natural gas purchase agreements with
producers and marketers which back Yankee Gas' transportation and
storage contracts. These purchase agreements provide a variety
of term lengths, pricing provisions and flexibility options to
meet Yankee Gas' current and future supply requirements.
In addition to its gas supply contracts, Yankee Gas also
participates in the spot market, buying gas supply on an "as
available" basis, to the extent such replacement is operationally
feasible and economically beneficial.
Yankee Gas does not have sufficient capacity entitlements on
the interstate pipelines to serve its firm customers with
pipeline-delivered gas at all times. During the winter,
therefore, whenever daily firm demand exceeds the amount of gas
delivered by the pipelines, service to interruptible customers is
interrupted and Yankee Gas supplements pipeline gas with a
propane-air mixture produced at facilities within Yankee Gas'
service territory. In fiscal 1996, such propane-air comprised
less than 0.4 percent of Yankee Gas' total supply. Although
Yankee Gas anticipates continued utilization of this relatively
expensive supplemental gas, the quantities to be used are
substantially decreased from prior periods due to the addition of
the ANE supplies transported by Iroquois.
Iroquois Gas Transmission System, L.P. In April 1996, the
Company's wholly-owned subsidiary, Housatonic Corporation, sold
its entire 10.5 percent interest in Iroquois to three of
Iroquois' existing limited partners for a purchase price of
approximately $22.2 million. The Company determined that the
continued ownership of an interest in an interstate pipeline does
not fit the Company's strategic plan to focus more on providing
energy distribution services to customers and energy conversion
services on customers' premises.
Regulation and Rates
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Federal Regulation. Although Yankee Gas is not subject to
FERC jurisdiction, the FERC does regulate the interstate
pipelines serving Yankee Gas' service territory. Yankee Gas,
therefore, is directly and substantially affected by the FERC's
policies and actions. Accordingly, Yankee Gas closely follows
and, when appropriate, participates in proceedings before the
FERC.
Connecticut Regulation. Yankee Gas is subject to regulation
by the DPUC, which, among other things, has jurisdiction over
rates, accounting procedures, certain dispositions of property
and plant, mergers and consolidations, issuances of securities,
standards of service, management efficiency and construction and
operation of distribution, production and storage facilities.
Yankee Gas sells gas to its retail customers under rate
schedules filed with and approved by the DPUC. Firm sales rates
are subject to monthly adjustments pursuant to a Purchased Gas
Adjustment ("PGA") clause approved by the DPUC. The PGA passes
through to customers most changes in the cost of gas purchased by
Yankee Gas. These adjustments are designed to collect or refund
differences in purchased gas costs from the costs included in the
base rates. Currently, the DPUC is conducting a review of the
Connecticut LDCs' PGA mechanism to determine if any
changes are warranted. Hearings have been held but no decision
has been rendered; until it is, the Company is unable to
determine the impact, if any, of any changes.
Yankee Gas' most recent rate order (effective for service
rendered on and after October 1, 1992) allowed a return on equity
of 12.43 percent and provided for favorable accounting treatment
for environmental cleanup costs, post-retirement benefits and
certain other major items.
The DPUC may, after a special public hearing, order an
interim rate decrease if it finds that Yankee Gas' return on
equity exceeds a reasonable rate of return and rates are more
than just, reasonable and adequate as determined by the DPUC.
The DPUC also is empowered to grant an interim rate increase
under compelling circumstances.
FERC Order No. 636. In implementing Order No. 636, the FERC
recognized that the restructuring of the pipelines' traditional
services would cause pipelines to incur transition costs in
several areas. The FERC has permitted certain transition costs
to be recovered by the pipeline companies from their customers.
In July 1994, the DPUC issued an order permitting the
recovery of transition costs billed by pipelines under Order No.
636 through various mechanisms authorized by the DPUC. Through
September 30, 1996, Yankee Gas has paid approximately $17.3
million of transition costs and an additional $0.7 million are
anticipated. To date, Yankee Gas has collected $34.5 million
through a combination of gas supplier refunds, deferred gas costs
credits and excess interruptible margins. In January 1996, the
DPUC approved a joint stipulation and agreement between Yankee
Gas and the Connecticut Office of Consumer Counsel which permits
Yankee Gas to retain over-collected transition cost credits to
offset certain deferred regulatory assets. In exchange, Yankee
Gas agreed not to increase its rates prior to October 1, 1998,
except in the event of certain circumstances which would
adversely affect Yankee Gas' financial condition. If such an
event arises, Yankee Gas has the option to apply to the DPUC for
a rate increase or to retain up to 80% of any off system sales
margin and excess interruptible margin.
In January 1996, the DPUC, in response to Order No. 636,
authorized the Connecticut LDCs to offer unbundled firm
transportation rates to its commercial and industrial customers.
The DPUC's decision permits Yankee Gas to offer a variety of
service options to its commercial and industrial firm
transportation customers. Yankee Gas implemented new firm
transportation rates and services in April 1996. As of September
30, 1996, Yankee Gas had 127 customers under the new firm
transportation service. The conversion by existing customers to
transportation service will result in decreased revenues for
Yankee Gas, as that portion of revenues representing gas costs
will be borne directly by the customer who will purchase its own
gas directly. Yankee Gas, however, does not expect customer
conversions to transportation services to affect its net income.
The DPUC's decision did not address Yankee Gas' revenue
requirement; Yankee Gas will maintain the existing margin
recovery and rates of return established in the last rate case
decision issued for Yankee Gas in 1992.
Order No. 636 also authorizes LDCs to make off system sales
or to release firm pipeline capacity and Yankee Gas has engaged
in these activities to maximize revenues and for effective gas
supply planning.
On August 25, 1996, the Company filed an application with
the DPUC relating to a Financial and Operation Review (Review) of
Yankee Gas. This Review is required to be undertaken by the DPUC
under Connecticut State law if the Company has not undergone a
rate proceeding within the last four years. Since Yankee Gas'
last rate application was approved on August 26, 1992, this
Review is necessary to comply with the statute. Hearings have
been tentatively scheduled for February 1997. The Company is not
able to determine at this time the financial or operational
impact of any decisions which may result from the Review, but
they are not expected to have a material impact on earnings.
Energy Services
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The Company has broadened its mission to diversify into
energy-related businesses. YESCo is engaged in the business of
providing a full range of energy-related services for customers,
including consulting, procurement and development for on-site
generation and cogeneration systems as well as technical and
operating support for power plants and boilerhouses. In fiscal
1996, YESCo began offering consulting services to help commercial
and industrial customers solve complex new energy purchasing
problems brought about by deregulation of the energy industry.
For additional information on YESCo see page 1.
Competition. Yankee Gas' principal competitors are
unregulated fuel-oil retailers and regulated electric utilities.
Natural gas competes with oil and electricity in many commercial
and industrial applications and in residential space and water
heating, clothes drying and cooking. Demand for natural gas is
affected by the marketing and pricing of competing sources of
energy.
Yankee Gas may also face competition from other LDCs. In
the past, LDCs did not directly compete with other LDCs for
retail customers because the territories they serve are fixed by
franchise. However, since 1993, LDCs began marketing efforts
within the service territory of other LDCs under blanket
certificates granted by the Federal Energy Regulatory Commission
("FERC"). These certificates allow gas to be sold, but not
necessarily delivered, in the service territory of another LDC.
Within Yankee Gas' service territory, Yankee makes available its
transportation services to move other parties' gas through its
distribution system. The Company's strategic plan focuses on its
core business of gas distribution and expansion of the
development of its energy services business through the efforts
of its unregulated subsidiary, YESCo, to help customers through
changes brought about by deregulation in the natural gas
industry.
Federal regulation also permits customers within Yankee Gas'
distribution system to connect directly with transmission
pipelines and bypass Yankee Gas' distribution system. No
interstate pipeline company, however, has physically bypassed
Yankee Gas' distribution system to provide retail service to
customers in Yankee Gas' service territory. A Connecticut
statute currently prohibits an interstate pipeline from bypassing
an LDC without the DPUC's prior approval. The Company believes
that Yankee Gas is successfully addressing the threat of bypass
by its industrial customers by understanding what services they
need and executing market-competitive gas service agreements.
Environmental Matters
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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 gas manufacturing
plant sites, including coal tar deposits. Coal tar is a by-
product of the gas manufacturing process used by Yankee Gas'
predecessor companies in the mid-20th century. Those predecessor
companies disposed of the coal tar deposits in accordance with
the standard operating practices of the time.
Fourteen sites containing coal tar became the property of
Yankee Gas at the time of divestiture from its former parent
company. Yankee Gas has reported the results of environmental
studies conducted at these sites to the Connecticut Department of
Environmental Protection ("DEP"). Seven of the fourteen sites
are presently listed on the Connecticut Inventory of Hazardous
Waste Sites. Inclusion of a site on this list is an indication
that remediation may be required in the future.
A program of remediation at two of these properties was
conducted during fiscal 1996. In addition, the Company has
developed a cost estimate for the remaining sites based on
various factors including the probability of clean-up.
Recovery of remediation costs has been specifically allowed
by Yankee Gas' 1992 rate case decision. Currently, $325,000 is
allowed annually in rates. If costs are expected to exceed $2.5
million on an annual basis, Yankee Gas 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 recorded a
liability of $35 million in fiscal year 1993 for future
environmental cleanup.
During fiscal 1996, the Company received funds from certain
of its insurance carriers in settlement of certain claims for
actual or potential contamination at certain sites that may give
rise to environmental liabilities. The terms of the
aforementioned settlements are subject to confidentiality
provisions in agreements between Yankee Gas and its insurance
carriers. Yankee Gas currently is actively pursuing additional
claims against some of its insurers.
Franchises
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Yankee Gas and its predecessors in interest have held valid
franchises to sell gas in the areas in which Yankee Gas supplies
gas service. Such franchises are perpetual but remain subject
to the power of alteration, amendment or repeal by the General
Assembly of the State of Connecticut, the power of revocation by
the DPUC and certain approvals, permits and consents of public
authorities and others prescribed by statute. Yankee Gas
franchises include, among other rights and powers, the rights and
powers to manufacture, generate, purchase, transmit and
distribute gas, to sell gas at wholesale to other utility
companies and municipalities and to erect and maintain certain
facilities on public highways and grounds, all subject to such
consents and approvals of public authorities and others as may be
required by law. The franchises include the power of eminent
domain.
Self-generation and Cogeneration
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With the current industry deregulation, two expanding gas
markets in Connecticut and elsewhere are self-generation and
cogeneration of electricity. Self-generation is the generation
of some or all of a user's electricity requirements, typically
for commercial or industrial purposes. Cogeneration involves
sequential production of electricity and thermal or mechanical
energy.
Under an agreement between Yankee Gas and The Dexter
Corporation ("Dexter"), Yankee Gas' largest customer, Dexter has
a contract to purchase annually approximately 3.9 Bcf of natural
gas sales service for use in its 56-megawatt cogeneration
facility for an initial term of 20 years (1989-2009).
Employees
- ---------
Yankee Energy and its subsidiaries employ approximately 619
people.
ITEM 2. PROPERTIES
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Yankee Gas' property consists primarily of its gas
distribution facilities including, distribution lines (mains and
services), meters, pumps, valves and pressure and flow
controllers. Yankee Gas owns various propane facilities with a
combined storage capacity equivalent to approximately 238,000 Mcf
and seven gas storage holders with a total capacity of
approximately 6.4 Bcf. In the opinion of management, Yankee Gas'
distribution system is in good condition. Virtually all of the
gas properties are subject to the lien of the Yankee Gas first
mortgage bond indenture. Yankee Gas also owns service facilities
in Meriden, Waterbury, Torrington, Mystic, Bristol, Shelton,
Bethel and Danielson, Connecticut.
NorConn owns the Company's headquarters building in Meriden,
Connecticut and currently leases it to Yankee Gas. This is the
site of the Company's corporate administrative and staff
functions including the Customer Service Center. NorConn also
owns and leases to Yankee Gas a service building in East Windsor.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Municipal Tax Assessment. In November 1995, Yankee Gas
received revised tax bills for the years 1991 through 1994 from
the City of Meriden, Connecticut (the "City"). The City is
asserting a claim for the payment of approximately $5.0 million
of back taxes and interest resulting from a retroactive
reassessment and revaluation of Yankee Gas' personal property
filings. The City did not locate or identify any property which
Yankee Gas omitted from its filings. The tax bills reflect a
reassessment of property at higher rates than those previously
accepted by the City. Yankee Gas is currently vigorously
contesting this retroactive reassessment. On November 17, 1995,
Yankee Gas filed a lawsuit in Connecticut Superior Court against
the City and certain City officials alleging that the Connecticut
state statutes prohibit the City from retroactively reassessing
personal property after grand lists are filed and requesting that
the City's order to pay additional taxes be invalidated.
Although no assurances can be given and no determination can be
made at this time as to the outcome of the City's claim or Yankee
Gas' lawsuit, the Company does not anticipate that the outcome of
this matter will have a material adverse effect on the Company's
consolidated results of operations or financial position.
Licensing Issue. In November 1995, The Connecticut Heating
and Cooling Contractors Association, Inc. and others filed a
class action suit against Yankee Gas and Connecticut's two other
LDCs, Connecticut Natural Gas Corporation and The Southern
Connecticut Gas Company, claiming the LDCs engaged in unfair
trade practices. The action alleges that the LDCs unfairly
competed with licensed plumbers and contractors by performing
customer service work using customer service employees who did
not possess Connecticut state trade licenses. The plaintiffs are
seeking injunctive relief and unspecified punitive and actual
damages. Yankee Gas is currently vigorously contesting this
lawsuit.
The LDCs have asserted that such licenses are not required
for this work based on a statutory exemption enacted in 1965 and
amended in 1967. However, in a separate proceeding, a
Connecticut Superior Court has upheld an administrative ruling
against the LDCs' position which was recently affirmed on appeal.
In 1995, the Connecticut General Assembly enacted legislation
that established prospectively a separate procedure for State
certification of gas service employees. While the ultimate
results of the class action suit cannot be determined, management
does not expect that it will have a material adverse effect on
the Company's consolidated results of operations or financial
position.
Other legal proceedings involving the Company and its
subsidiaries are litigation incidental to the conduct of the
Company's business which, in management's opinion, will not have
a material impact on the Company's financial condition or results
of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There was no matter submitted to a vote of security holders
during the fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
Position and Business Experience
Name Age During Past Five Years
- ---- --- ---------------------------------
Branko Terzic 49 Chairman, President and Chief Executive
Officer of the Company and its direct
subsidiaries. Mr. Terzic became
Chairman in August 1995, Chief
Executive Officer in March 1995 and
President in September 1994. From June
1993 to September 1994, Mr. Terzic was
Managing Director of Arthur Andersen
Economic Consulting, Washington, D.C.
From October 1990 to May 1993, he served
as a Commissioner of the Federal Energy
Regulatory Commission.
Charles E. Gooley 43 Executive Vice President of the Company,
and its direct subsidiaries, Yankee Gas
Services Company, NorConn Properties,
Inc., Housatonic Corporation, and Yankee
Energy Financial Services Company, since
July 1994. Previously, he served as Vice
President, General Counsel and Assistant
Secretary of the Company from July 1989
to July 1994.
Michael E. Bielonko 44 Vice President of the Company and its
direct subsidiaries since July 1989 and
Chief Financial Officer since July 1990.
From July 1989 to July 1990 and from
September 1992 to May 1995, he also
served as Treasurer of the Company.
Thomas J. Houde 49 Vice President of the Company and its
direct subsidiary, Yankee Gas Services
Company, since January 1992. Previously,
he served as Director, Corporate
Planning, Rates and Economic Analysis of
Yankee Gas from March 1990 to December
1991.
Mary J. Healey 45 Vice President, General Counsel and
Secretary of the Company and its
direct subsidiaries since January 1995.
Previously, she served as Secretary and
Assistant General Counsel of the Company
from January 1992 to January 1995 and as
Secretary and Counsel of the Company
from July 1989 to January 1992.
Ellen J. Quinn 40 Vice President of the Company and its
direct subsidiaries, Yankee Gas Services
Company and R.M. Services, Inc., since
May 1995. Previously, she served as
Director, Corporate and Environmental
Planning from October 1992 to May 1995,
as Manager, Corporate and Environmental
Planning from March 1990 to October 1992.
Steven P. Laden 48 Vice President of the Company and its
direct subsidiaries, Yankee Gas Services
Company and Yankee Energy Financial
Services Company, since July 1996. From
October 1991 to July 1996,he served as
Vice President of Marketing of Southern
Union Company, a company engaged in
various aspects of the energy business
including the distribution of natural
gas in Texas and Missouri.
All executive officers are elected annually by the Company's
Board of Directors. There are no family relationships among the
executive officers and directors nor are there any arrangements
or understandings between any executive officer and any other
person pursuant to which the officer was selected.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
--------------------------------------
Yankee Energy declared and paid regular quarterly cash
dividends in 1996. The dividend paid for the first two quarters
of 1996 was $.315 per share and $.325 per share in the last two
quarters of 1996. Other information required by this item is
incorporated herein by reference to Yankee Energy's 1996 Annual
Report to Shareholders ("1996 Annual Report"), on the inside back
cover, subsections entitled "Market for Common Stock", and
"Dividends".
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Information required by this item is incorporated herein by
reference to the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
-------------------------------------------------
Information required by this item is incorporated herein by
reference to the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Consolidated Financial Statements of Yankee Energy and
the Notes thereto, together with the report thereon of the
Company's Management and of Arthur Andersen LLP are incorporated
herein by reference to the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information regarding Yankee Energy's directors is
incorporated herein by reference to the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on January 31,
1997 (the "1997 Proxy Statement").
Information regarding the Company's executive officers
follows Item 4 in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding compensation of Yankee Energy's
executive officers, except the Report of the Organization and
Compensation Committee and the Stock Performance Graph, is
incorporated herein by reference to the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
-----------------------------------------------
Information regarding the beneficial ownership of shares of
Common Stock of the Company by certain persons is incorporated
herein by reference to the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain transactions of the Company is
incorporated herein by reference to the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
---------------------------------------------------
(a) 1. Financial Statements:
The following Consolidated Financial Statements of
Yankee Energy are incorporated herein by reference to the
Company's 1996 Annual Report in response to Item 8 hereof:
(i) Report of Independent Public Accountants
(ii) Consolidated Statements of Income for the years
ended September 30, 1996, 1995 and 1994.
(iii) Consolidated Balance Sheets at September 30, 1996
and 1995.
(iv) Consolidated Statements of Cash Flows for the
years ended September 30, 1996, 1995 and 1994.
(v) Consolidated Statements of Capitalization at
September 30, 1996 and 1995.
(vi) Consolidated Statements of Common Shareholders'
Equity for the years ended September 30, 1996,
1995 and 1994.
(vii) Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following schedules of the Company are included on
the attached pages as indicated:
Page
----
Report of Independent Public Accountants on Schedules...S-1
Schedule II Valuation and Qualifying Accounts and
Reserves for the years ended September
30, 1996, 1995 and 1994..................S-2
3. Exhibits:
Exhibits for Yankee Energy are listed in the Index
to Exhibits........................................E-1
(b)Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
--------------------------
(Registrant)
Date: December 4, 1996 By /s/ Branko Terzic
-----------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date Title Signature
- ---- ----- ---------
December 4, 1996 Chairman, President /s/Branko Terzic
and Chief Executive Branko Terzic
Officer
December 4, 1996 Vice President, /s/Michael E. Bielonko
Chief Financial Michael E. Bielonko
Officer
December 4, 1996 Controller /s/Nicholas A. Rinaldi
Nicholas A. Rinaldi
December 4, 1996 Director /s/Sanford Cloud, Jr.
Sanford Cloud, Jr.
December 4, 1996 Director /s/Eileen S. Kraus
Eileen S. Kraus
December 4, 1996 Director /s/Frederick M. Lowther
Frederick M. Lowther
December 4, 1996 Director /s/Leonard A. O'Connor
Leonard A. O'Connor
December 4, 1996 Director /s/Emery G. Olcott
Emery G. Olcott
December 4, 1996 Director /s/Nicholas L. Trivisonno
Nicholas L. Trivisonno
December 4, 1996 Director /s/Patricia M. Worthy
Patricia M. Worthy
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Yankee Energy System, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the financial statements included in Yankee Energy
System, Inc.'s (the Company) annual report to shareholders
incorporated by reference in this Form 10-K, and have issued our
report thereon dated November 7, 1996. Our audit was made for
the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index of financial statements
is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Hartford, Connecticut
November 7, 1996
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE
II Valuation and Qualifying Accounts and Reserves
for Years Ended September 30, 1996, 1995 and 1994
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1996
SCHEDULE II
(Thousands of Dollars)
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves
for
uncol-
lectible
accounts $5,481 $5,608 $ - $3,830(a) $7,259
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$ 801 $1,462 $ - $ 753(c) $1,510
Medical(d) 1,273 2,227 - 2,382(e) 1,118
_____ ______ ____ _______ _______
Total $2,074 $3,689 $ - $3,135 $2,628
______ ______ ____ ______ ______
______ ______ ____ ______ ______
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees, for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1995
SCHEDULE II
(Thousands of Dollars)
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves
for
uncol-
lectible
accounts $5,444 $3,475 $ - $3,438(a) $5,481
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$1,031 $ 803 $ - $1,033(c) $ 801
Medical(d) 1,085 3,675 - 3,487(e) 1,273
___ ______ ____ _______ _______
Total $2,116 $4,478 $ - $4,520 $2,074
______ ______ ____ ______ ______
______ ______ ____ ______ ______
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1994
SCHEDULE II
(Thousands of Dollars)
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves
for
uncol-
lectible
accounts $4,914 $4,233 $ - $3,703(a) $5,444
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$ 869 $ 700 $ - $ 538(c) $1,031
Medical(d) 861 3,142 - 2,918(e) 1,085
___ ______ ____ _______ _______
Total $1,730 $3,842 $ - $3,456 $2,116
______ ______ ____ ______ ______
______ ______ ____ ______ ______
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ----------------------
(3)
3.1 Restated Certificate of Incorporation of Yankee
Energy System, Inc. (the "Company") (Incorporated
by reference to Form 10 Registration Statement
dated April 14, 1989 and amendments thereto, File
No. 0-17605 ("Form 10")).
3.2 Amended Bylaws of the Company (Incorporated by
reference to Form 10).
(4)
4.1 Specimen of the Company's Common Stock
(Incorporated by reference to Form 10).
4.2 Rights Agreement between the Company and The
Connecticut Bank and Trust Company, N.A., as
Rights Agent, dated November 20, 1989
(Incorporated by reference to Form 8-A
Registration Statement dated December 7, 1989,
File No. 0-17605).
4.3 Amendment to Rights Agreement dated May 10, 1990
(Incorporated by reference to Form 8 dated May 30,
1990, File No. 0-17605).
4.4 Amendment to Rights Agreement dated January 23,
1991 (Incorporated by reference to Form 8 dated
January 31, 1991, File No. 0-17605).
4.5 Term Loan Agreement between NorConn Properties,
Inc. and Fleet Bank dated as of January 31, 1996.
(To be submitted to the Commission upon request.)
4.6 Bond Purchase Agreement dated July 1, 1989 between
Yankee Gas and the Purchasers identified therein
(Incorporated by reference to Form 10).
4.7 Indenture of Mortgage and Deed of Trust dated July
1, 1989 between Yankee Gas and The Connecticut
National Bank, as Trustee (Incorporated by
reference to Form 10).
4.8 Guaranty of the Company with Term Loan Agreement
dated July 20, 1989 between United Bank & Trust
Company, as Trustee of the Trust of the Company's
401(k) Employee Stock Ownership Plan and The First
National Bank of Boston (Incorporated by reference
to Form 10-K for the fiscal year ended December
31, 1989, File No. 0-17605 ("1989 Form 10-K")).
4.9 First Supplemental Indenture of Mortgage and Deed
of Trust dated April 1, 1992 between Yankee Gas
and The Connecticut National Bank, as Trustee
(Incorporated by reference to Form S-3
Registration Statement #33- 52750 dated October 2,
1992 ("Form S-3")).
4.10 Second Supplemental Indenture of Mortgage and Deed
of Trust dated December 1, 1992 between Yankee Gas
and The Connecticut National Bank, as Trustee
(Incorporated by reference to Form 10-K for the
fiscal year ended September 30, 1992, File No. 0-
17605 ("1992 Form 10-K")).
4.11 Bond Purchase Agreement dated April 1, 1992
between Yankee Gas and the Purchasers identified
therein (Incorporated by reference to Form S-3).
4.12 Bond Purchase Agreement dated December 1, 1992
between Yankee Gas and Purchaser identified
therein (Incorporated by reference to 1992 Form
10-K).
4.13 Third Supplemental of Mortgage and Deed of Trust
dated June 1, 1995 between Yankee Gas and Shawmut
Bank Connecticut, N.A., as Trustee. (Incorporated
by reference to Form 10-K for the fiscal year
ended September 30, 1995, File No. 0-10721 ("1995
Form 10-K")).
4.14 Bond Purchase Agreement dated June 22, 1995
between Yankee Gas and Purchaser identified
therein. (Incorporated by reference to 1995 Form
10-K).
(10)
10.1 Asset Transfer Agreement among Northeast Utilities
Service Company ("NUSCO"), The Connecticut Light
and Power Company ("CL&P"), the Company, Yankee
Gas and Housatonic Corporation dated June 30, 1989
(Incorporated by reference to Form 10).
10.2 Environmental Liability Sharing and Indemnity
Agreement dated June 30, 1989 between Yankee Gas
and CL&P (Incorporated by reference to Form 10).
10.3 Rate Case Decision dated August 26, 1992
(Incorporated by reference to 1992 Form 10-K).
10.4 Lease Agreement between Yankee Gas and NorConn
Properties, Inc. dated October 1, 1990
(Incorporated by reference to Form S-1
Registration Statement #33-40758 dated May 22,
1991 and amendment thereto dated June 18, 1991
("Form S-1")).
10.5* Non-Employee Director Deferred Compensation
Plan dated December 7, 1995.
10.6+ Long-Term Incentive Compensation Plan adopted
December 5, 1990 (Incorporated by reference
to Proxy Statement dated December 24, 1990).
10.7+ Annual Incentive Compensation Plan adopted
December 5, 1990 (Incorporated by reference
to Form 10-K for the fiscal year ended
September 30, 1991, File No. 0-17605 ("1991
Form 10-K")).
10.8+ Non-Employee Directors' Stock Compensation
Plan adopted March 21, 1991 (Incorporated by
reference to 1991 Form 10-K).
10.9 Severance Pay Plan adopted October 17,
1991(Incorporated by reference to 1991 Form
10-K).
10.10 Service Agreement #800308 dated June 1, 1993,
applicable to Rate Schedule FT-1 (Firm
Transportation) between Texas Eastern
Transmission Company ("Texas Eastern") and
Yankee Gas (Incorporated by reference to Form
10-K for the fiscal year ended September 30,
1993, File No. 0-17605 ("1993 Form 10-K")).
10.11 Service Agreement #1596 dated September 1,
1993, applicable to Rate Schedule FT-A (Firm
Transportation) between Tennessee Gas
Pipeline ("Tennessee") and Yankee Gas
(Incorporated by reference to 1993 Form
10-K).
10.12 Service Agreement #333 dated September 1,
1993, applicable to Rate Schedule FT-A (Firm
Transportation) between Tennessee and Yankee
Gas (Incorporated by reference to 1993 Form
10-K).
10.13 Transportation Agreement dated February 7,
1991 between Iroquois Gas Transmission
System, L.P. ("Iroquois") and Yankee Gas for
transportation of Canadian gas purchased
(Incorporated by reference to Form S-1).
10.14 Service Agreement dated February 7, 1991
between Alberta Northeast Gas Ltd. ("ANE")
and Yankee Gas for purchase of gas from ATCOR
Limited (Incorporated by reference to Form
S-1).
10.15 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from PROGAS Limited (Incorporated by
reference to Form S-1).
10.16 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from AEC Oil and Gas Company
(Incorporated by reference to Form S-1).
10.17 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from TransCanada Pipelines Limited
(Incorporated by reference to Form S-1).
10.18+ Employment Agreement between the Company and
Mr. Branko Terzic dated September 15, 1994
(Incorporated by reference to Form 10-K for
the fiscal year ended September 30,1994, File
No. 0-10721).
10.19+ Form of Change in Control Executive Severance
Agreement dated April 25, 1995 for Michael E.
Bielonko, Charles E. Gooley, Mary J. Healey,
and Thomas J. Houde. (Incorporated by
reference to 1995 Form 10-K).
10.20 $60 million Revolving Credit Agreement among
Yankee Gas and several banks dated February
2, 1995. (Incorporated by reference to 1995
Form 10-K).
10.21 Agreement for Systems Operations Services
among Yankee Gas and Integrated Systems
Solutions Corporation ("ISSC") dated August
12, 1991 (Incorporated by reference to 1992
Form 10-K).
10.22* Stipulation and Agreement dated January 3,
1996 between Yankee Gas and The Office of
Consumer Counsel, Docket No. 92-02-19
Reopened II.
11* Statement re: Computation of per share
earnings.
13* 1996 Annual Report to Shareholders.
21* Subsidiaries of the registrant.
23* Consent of Arthur Andersen LLP.
27* Financial date schedule pursuant to Article 5
of Regulation S-X for commercial/industrial
customers.
* Filed herewith.
+ Management contract or compensatory plan.