SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
__________
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT JANUARY 31, 1998 10,475,797
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income:
Three Months Ended December 31, 1997
and 1996
Consolidated Balance Sheets:
December 31, 1997 and
September 30, 1997
Consolidated Statements of Cash Flows:
Three Months Ended December 31, 1997
and 1996
Notes to Consolidated Financial Statements
Report on Review by Independent
Public Accountants
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclsoures
About Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
__________________
1997 1996
____ ____
(Thousands of Dollars, except
share information)
Revenues:
Utility Revenues $ 97,118 $ 94,632
Nonutility Revenues 5,477 1,050
______ ______
Total Revenues 102,595 95,682
______ ______
Operating Expenses:
Cost of Gas/Goods Sold 56,139 51,257
Operations 15,233 13,587
Maintenance 1,191 1,600
Depreciation and amortization 4,678 4,326
Taxes other than income taxes 5,020 5,873
______ ______
Total Operating Expenses 82,261 76,643
______ ______
Operating Income 20,334 19,039
Other Income (Expense):
Other Income, net 69 2
Interest Charges, net (2,974) (3,248)
______ ______
Income Before Income taxes 17,429 15,793
Provision For Income Taxes 8,338 6,914
______ ______
Net Income $ 9,091 $ 8,879
______ _____
______ _____
Basic Earnings per Common Share $ 0.87 $ 0.85
______ _____
______ _____
Diluted Earnings per Common Share $ 0.87 $ 0.85
______ _____
______ _____
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1997 1997
____ ____
(UNAUDITED)
(Thousands of Dollars)
ASSETS
Utility Plant, at original cost $ 531,416 $ 524,221
Less: Accumulated provision for
depreciation 196,403 192,506
_________ _________
335,013 331,715
Construction work in progress 18,724 19,150
_________ _________
Total Net Utility Plant 353,737 350,865
_________ _________
Other Property and Investments 21,646 19,311
_________ _________
Current Assets:
Cash and temporary cash investments 1,612 2,239
Accounts receivable, net 53,425 27,002
Fuel supplies 4,482 10,370
Other materials and supplies 2,839 2,186
Accrued utility revenues 19,390 4,667
Prepaid taxes --- 8,031
Deferred gas costs, current portion 1,937 2,034
Other 9,494 5,901
_________ _________
Total Current Assets 93,179 62,430
_________ _________
Deferred Gas Costs 6,068 8,364
Recoverable Environmental
Cleanup Costs 31,968 31,667
Recoverable Income Taxes 9,430 11,038
Recoverable Postretirement
Benefits Costs 1,523 1,515
Other Deferred Debits 15,597 15,174
________ ________
Total Assets $ 533,148 $ 500,364
________ ________
________ ________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1997 1997
____ ____
(UNAUDITED)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,473,552
shares outstanding at December 31, 1997
and 10,454,414 oustanding at
September 30, 1997 $ 52,368 $ 52,272
Capital surplus, paid in 88,387 88,003
Retained earnings 32,019 26,431
Employee stock ownership
plan guarantee (600) (1,000)
________ _______
Total Common Shareholders' Equity 172,174 165,706
Long-term debt, net of current portion 134,865 135,265
________ _______
Total Capitalization 307,039 300,971
________ _______
Current Liabilities:
Notes payable to banks 62,200 39,000
Long-term debt, current portion 4,017 4,017
Accounts payable 24,065 22,741
Accrued interest 3,614 2,008
Accrued taxes 2,050 ---
Pipeline transition costs payable 3,458 3,538
Other 6,132 6,480
________ ________
Total Current Liabilities 105,536 77,784
________ ________
Accumulated Deferred Income Taxes 67,325 68,205
Accumulated Deferred Investment
Tax Credits 8,608 8,703
Reserve for Environmental Cleanup Costs 35,000 35,000
Postretirement Benefits Obligation 3,099 2,840
Other Deferred Credits 6,541 6,861
_______ _______
Commitments and Contingencies (Note 4) --- ---
_______ _______
Total Capitalization and
Liabilities $ 533,148 $ 500,364
________ ________
________ ________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1997 1996
____ ____
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,091 $ 8,879
Adjusted for the following:
Depreciation 4,678 4,326
Equity earnings from investments (4) (64)
Deferred income taxes, net 633 1,779
Deferred gas costs activity and other
non-cash items 1,705 394
Changes in working capital:
Accounts receivable and accrued
utility revenues (41,146) (31,465)
Accounts payable 1,324 6,174
Prepaid taxes 10,081 7,118
Other working capital
(excludes cash) 2,900 1,945
_______ _______
Net cash provided by operating
acitivies (10,738) (914)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuance 493 ---
Retirement of long-term debt (400) (400)
Increase in short-term debt 23,200 6,400
Cash dividends-common stock (3,503) (3,396)
_______ _______
Net cash provided by
financing activities 19,790 2,604
_______ _______
INVESTMENT IN PLANT AND OTHER:
Utility Plant (6,986) (5,628)
Other property and investments (2,693) (1,038)
______ _______
Net cash used for plant and other (9,679) (6,666)
______ _______
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS FOR THE PERIOD (627) (4,976)
CASH AND TEMPORARY INVESTMENTS,
BEGINNING OF PERIOD 2,239 7,853
_______ _______
CASH AND TEMPORARY CASH INVESTMENTS,
END OF PERIOD $ 1,612 $ 2,877
_______ _______
_______ _______
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 1,750 $ 3,254
Income taxes $ 6 $ 0
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the Annual Report of
Yankee Energy System, Inc. (YES or the Company) on Form 10-K
for the fiscal year ended September 30, 1997 (1997 Form
10-K), including the audited financial statements (and notes
thereto) incorporated by reference therein. In the opinion
of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting
only of normal recurring accruals)necessary to present
fairly the financial position of the Company as of December
31, 1997, and its results of operations for the three months
ended December 31, 1997 and 1996 and cash flows for the
three months ended December 31, 1997 and 1996. The results
of operations for the three months ended December 31, 1997
and 1996 are not necessarily indicative of the results
expected for a full year, due mainly to the highly seasonal
nature of the gas business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas), is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which includes
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires a
cost-based, rate-regulated enterprise such as Yankee Gas to
reflect the impact of regulatory decisions in its financial
statements. The DPUC, through the rate regulation process,
can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an
unregulated enterprise.
Following the provisions of FAS 71, Yankee Gas has recorded
regulatory assets or liabilities as appropriate primarily
related to deferred gas costs, pipeline transition costs,
hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefits costs. The
specific amounts related to these items are disclosed in the
consolidated balance sheets. For additional information
about these items see the 1997 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, Yankee Gas believes that
its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71.
3) EARNINGS PER SHARE
Basic earnings per common share were computed by dividing
net income by the weighted average number of common shares
outstanding during the quarter. For the quarters ended
December 31, 1997 and 1996, the weighted average common
shares outstanding were 10,461,989 and 10,449,554
respectively. Diluted earnings per common share for the
quarters ended December 31, 1997 and 1996 were determined on
the assumptions that the outstanding stock options, if
dilutive, were converted. For the quarters ended December
31, 1997 and 1996, the diluted weighted average common
shares outstanding were 10,466,688 and 10,451,097,
respectively, including dilutive stock options of 4,699 and
1,543, respectively. In fiscal 1998, the Company adopted
the Statement of Financial Accounting Standards No. 128,
"Earnings per Share" (FAS 128). As a result, the Company's
reported earnings per share for the quarter ended December
31, 1996 was restated. The effect of this accounting change
on previously reported earnings per share data was
immaterial.
4) COMMITMENTS AND CONTINGENCIES
The Company faces a number of contingencies which arise
during the normal course of business and which have been
discussed in Note 9 (entitled "Commitments and
Contingencies")to the Consolidated Financial Statements
included in the Company's 1997 Form 10-K Report. Except as
disclosed below, for the quarter ended December 31, 1997,
there have been no material changes in the matters discussed
in Note 9, to the Company's 1997 Form 10K Report.
DPUC Settlement: On January 3, 1996, the DPUC issued a
Final Decision in reopened Docket No. 92-02-19. The Docket
allows for recovery of certain deferred regulatory assets
with the stipulation that Yankee Gas would not increase its
rates before October 1, 1998, except in the event of certain
circumstances which would adversely affect Yankee Gas'
financial condition. Yankee Gas may apply a portion of
excess transition credits received from pipeline refunds,
interruptible excess margin, deferred gas costs, capacity
release activity, and off-system sales margin to certain
regulatory assets. As of December 31, 1997, excess
collections of approximately $25.4 million were applied
against the deferred regulatory assets specified in the
decision.
Firm Transportation: On January 24, 1996, the DPUC issued a
Final Decision on Docket No. 92-02-19 Reopen I. The Decision
allows Yankee Gas to offer a broad array of service options
to commercial and industrial FT customers. Yankee Gas
implemented these new FT rates and services on April 1,
1996, and as of December 31, 1997 had approximately 2,000
customers under the new FT service. A switch by existing
sales customers to transportation tariffs will result in
decreased revenues for Yankee Gas as the portion of revenues
representing gas costs will now be borne directly by those
customers. Yankee Gas, however, does not expect customer
conversions to transportation services to affect its net
income because the cost of gas has traditionally been a pass
through item with no income impact. This Decision did not
address Yankee Gas' revenue requirement.
Rate Review: On August 25, 1996, Yankee Gas filed an
application with the DPUC for a Financial and Operational
Review (Review). This Review was required under Connecticut
statute since Yankee Gas had not undergone a rate proceeding
within the last four years. Yankee Gas' last rate
application was approved on August 26, 1992, and this Review
was necessary to comply with the statute. On July 9, 1997,
the DPUC issued its decision in Docket No. 96-08-05. The
DPUC decision, which is not a rate order, called for a
lowering of Yankee Gas' authorized Return on Equity (ROE)
from 12.43 percent to 11.15 percent. The DPUC believed that
lower current interest rates and recently allowed rates of
return for other Connecticut utilities justified a lower ROE
for Yankee Gas. On October 1, 1997, the DPUC approved a
settlement whereby Yankee Gas will credit approximately $3.2
million to firm sales customers through the Purchased Gas
Adjustment (PGA) during the period November 1997 through
March 1998. As of December 31, 1997 approximately $1.0
million has been credited to firm sales customers. The
settlement also allows Yankee Gas to maintain its base rates
until the end of fiscal year 2000, resulting in an eight-
year period in which Yankee Gas will have gone without an
increase in its base rates.
Tax/Legal Issues: In fiscal 1996, Yankee Gas received
revised property tax bills from the City of Meriden,
Connecticut (the City). The City is asserting a claim for
approximately $5.0 million for 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 in the process of
litigating this retroactive reassessment. Although it is
anticipated that the outcome of this claim will not have a
material impact on the Company, based on the information
available at this time, management cannot predict what the
ultimate impact might be.
In November 1995, a purported class action suit was filed
against Yankee Gas and the state's two other LDCs by the
Connecticut Heating and Cooling Contractors' Association,
Inc. et al, claiming the LDCs engaged in, among other
things, 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 state trade
licenses.
The LDCs asserted that such licenses were 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 upheld an administrative ruling
against the LDCs' position, which was affirmed on appeal.
In 1995, the Connecticut General Assembly enacted
legislation that established, on a going-forward basis, a
separate procedure for state certification of gas service
employees.
On January 27, 1998, the judge in this matter struck 31 out
of the plaintiffs' 32 counts contained in their complaint.
The plaintiffs will have until February 11, 1998 to replead.
In addition to the court's decision to strike those counts,
it also noted that although the plaintiffs' action purports
to be a class action, it is not because to date, the
plaintiffs have failed to obtain certification as a class
action.
While the ultimate results of the purported 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.
Tax Audits: The Company is currently under audit by the
State of Connecticut regarding its Gross Earnings Tax
returns for the calendar years 1994, 1995, and 1996.
The Company has been notified by the City of Naugatuck,
Connecticut that it will be auditing the Company's Personal
Property Tax Schedules for the years 1995, 1996, and 1997.
On January 30, 1998 the Company received notification from
the Internal Revenue Service (IRS) that it will be
conducting an audit of the Company's 1995 Tax Return.
All of these audits are in preliminary stages, and therefore
the Company does not have sufficient information to
determine the amount, if any, of additional liability that
may result from these proceedings. However, the Company
does not anticipate any of these audits to have a material
effect on its financial position.
5) FORWARD-LOOKING STATEMENTS
This report may contain statements which, to the extent they
are not recitations of historical fact, constitute "forward-
looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (Reform Act). Such
forward-looking statements involve risks and uncertainties.
Actual results may differ materially from such forward-
looking statements for reasons including, but not limited
to, changes to and developments in the legislative and
regulatory environments affecting the Company's business,
the impact of competitive products and services, changes in
the natural gas industry caused by deregulation and other
factors, and certain environmental matters, as well as such
other factors as set forth in the Company's Form 10-K for
the year ended September 30, 1997.
6) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to
conform with current year presentation.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Yankee Energy System, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Yankee Energy System, Inc. (a Connecticut corporation) and
subsidiaries (the Company) as of December 31, 1997, and the
related consolidated statements of income and cash flows for the
three-month period then ended. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Yankee Energy System,
Inc. as of September 30, 1997 (not presented herein), and, in our
report dated November 7, 1997, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying condensed balance sheet as of September
30, 1997 is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
Arthur Andersen LLP
Hartford, Connecticut
February 2, 1998
ITEM 2. Management's Discussion and Analysis of Financial
Conditon and Results of Operations
This section contains management's assessment of the financial
condition of Yankee Energy System, Inc. (YES or the Company) and
the principal factors which had an impact on the results of
operations in the periods presented. This discussion should be
read in conjunction with the Company's Annual Report on Form 10-K
for the year ended September 30, 1997, including the audited
consolidated financial statements (and notes thereto)
incorporated by reference therein.
FINANCIAL CONDITION
OVERVIEW
Consolidated earnings were $9.1 million for the three months
ended December 31, 1997 compared to $8.9 million for the same
period a year earlier. Both the corresponding basic and diluted
earnings per share were $0.87 and $0.85 for the three months
ended December 31, 1997 and 1996, respectively.
Earnings for the first quarter of fiscal year 1998 increased
slightly due to weather that was 6 percent colder than the same
period last year. The resulting increase in revenues was
partially offset by customer bill credits of approximately $1.0
million due to the rate review settlement reached with the DPUC
in October 1997. The financial performance of the Company's non-
regulated subsidiaries improved over the same period in fiscal
1997, and additional process improvement and efficiencies are
expected during the fiscal year.
RESULTS OF OPERATIONS
COMPARISON OF THE FIRST QUARTER OF FISCAL 1998 WITH THE FIRST
QUARTER OF FISCAL 1997
OPERATING REVENUES
Operating revenues increase $6.9 million in the first quarter of
fiscal 1998 compared with the same period in the prior fiscal
year. The components of the change in operating revenues are as
follows:
Changes in Operating Revenues
(Millions of Dollars)
Increase/(Decrease)
Firm sales and other $ 0.2
Firm transportation 3.5
_____
Subtotal firm sales, transportation and
other (excluding gas cost recoveries) 3.7
Interruptible/off-system sales and
transportation
(excluding gas cost recoveries) (1.3)
_____
Total (excluding gas cost recoveries) 2.4
Gas cost recoveries 0.1
_____
Change in utility revenues 2.5
Nonutility revenues 4.4
_____
Total change in operating revenue $ 6.9
_____
_____
The corresponding changes in Yankee Gas' throughput were as
follows:
Quarter Ended
December 31, Increase/
1997 1996 (Decrease)
(Mcf - thousands)
Firm sales 9,351 9,697 (346)
Firm transportation 2,249 627 1,622
Interruptible/off-system sales 1,766 2,114 (348)
Interruptible transportation 1,327 1,471 (144)
_______ _______ ______
Total change in throughput 14,693 13,909 784
_______ _______ ______
_______ _______ ______
The change in operating revenues primarily reflects weather that
was 6 percent colder and an increase in customers of
approximately 2,500 in the first quarter of fiscal 1998 compared
to the same period in fiscal 1997. With the introduction of firm
transportation on April 1, 1996 as an option for customers,
revenues continue to shift from firm sales to firm
transportation. Revenues from nonutility operations increased
$4.4 million in the first quarter of fiscal 1998 compared to the
same period in fiscal 1997, due to increased nonutility
operations and additional acquisitions.
Gas cost recoveries increased due to higher per-unit gas costs in
the first quarter of fiscal 1998 compared to the same period in
fiscal 1997.
OPERATING EXPENSES
Total operating expenses increased $5.6 million in the first
quarter of fiscal 1998 compared with the same period in the prior
year as a result of the following items:
- Cost of gas increased $1.3 million for the three months
ended December 31, 1997 compared to the three months
ended December 31, 1996 due to higher per-unit gas
costs. Cost of goods sold increased $3.6 million in
the first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997 due to increased nonutility
activity.
- Operations and maintenance expenses increased $1.2
million in the first quarter of fiscal 1998 compared to
the first quarter of fiscal 1997 due primarily to
increased expenses related to non-regulated subsidiary
activity.
- Depreciation expense increased $0.4 million in the
first quarter of fiscal 1998 compared to the first
quarter of fiscal 1997 primarily due to additions in
plant, property and investments.
- Taxes other than income taxes decreased $0.9 million in
the first quarter of fiscal year 1998 compared to the
first quarter of fiscal year 1997. The 1998 decrease
was primarily due to lower unemployment taxes and lower
Connecticut gross earnings taxes as a result of an
increase in sales to gross earnings tax exempt
customers this fiscal year compared to last year at
this time.
Federal and state income taxes increased $1.4 million primarily
due to higher taxable income and a higher effective tax rate for
the three months ended December 31, 1997 compared to the three
months ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at December 31, 1997 totaled
$1.6 million. Principal sources of cash for the three months
ended December 31, 1997 were net income and short-term debt.
These funds were used primarily for dividend payments and capital
expenditures and to reduce long-term debt.
Expenditures for plant, property and investments totaled $9.7
million for the first three months of fiscal 1998, reflecting a
$3.0 million increase over the first three months of fiscal 1997.
During the first three months of fiscal 1998, additions were
primarily funded through short-term debt.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures create a need for short-term borrowing
to supplement internally generated funds. As of December 31,
1997, Yankee Gas had a revolving line of credit of $60 million
with a group of five banks. Under the agreement, funds may be
borrowed on a short-term revolving basis using either fixed or
variable rate loans. Yankee Gas also had uncommitted credit
lines of $27 million as of December 31, 1997. At December 31,
1997, Yankee Gas had $54.5 million outstanding on its agreements.
Yankee Energy had $7.7 million outstanding at December 31, 1997
on its $15 million committed line of credit which is used to fund
the acquisitions and other capital requirements of the
unregulated businesses.
The long-term credit needs of Yankee Gas are being met by a first
mortgage bond indenture which provides for the issuance of bonds
from time to time, subject to certain issuance tests. At
December 31, 1997, indenture requirements, including the required
coverage ratio, would allow for the issuance of an additional
$223 million of bonds at an assumed interest rate of 6.9 percent.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In
order to satisfy certain provisions of the arrangement, Yankee
Gas has provided a letter of credit for $1.5 million. The
Company's results of operations are unaffected by the hedge
transaction given that it passes through the cost of the hedge to
either the commodity trading firm or its customer depending on
the difference in the fixed and floating prices for gas.
Yankee Gas expects to incur expenditures for coal tar remediation
efforts, which is more fully discussed in Note 9 to the
Consolidated Financial Statements, included in the Company's 1997
Form 10-K Report. Yankee Gas expects to finance such
expenditures through a combination of internally generated funds,
short-term debt, and through insurance settlements, which have
totaled $9.6 million as of December 31, 1997.
One of Yankee Gas' largest customers, the Foxwoods Hotel and
Casino (Foxwoods), (which is operated by the Mashentucket Pequot
Indian Tribe), generates approximately $650,000 in annual margin.
The City of Norwich, Connecticut has begun construction of a
pipeline extending from their distribution system to Foxwoods.
This will provide an alternative source of supply to the
Mashentucket Pequots. Yankee Gas believes that it will have the
opportunity to compete to retain gas throughput to Foxwoods as
well as the continuing utilization of the existing distribution
system on tribal lands.
The Company is currently implementing new systems and enhancing
existing systems to address year 2000 issues. Management
believes that all system changes will be installed and tested
prior to the manifestation of year 2000 issues. However, if such
changes are not completed timely, the year 2000 issue may have a
material impact on the operations of the Company. Currently, all
such charges associated with system enhancements have and will
continue to be expensed and the costs of new systems will be
capitalized as appropriate and are not expected to be
significant.
Management is currently reviewing the organizational structure of
various operating functions of Yankee Gas as well as the
continuing necessity for certain operations centers. Changes, if
any, are expected to occur in the second or third quarter of the
fiscal year and are not expected to have a material impact on
the Company's financial condition.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
PART II OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Yankee Energy Shareholders on
January 30, 1998, the following directors were elected
to three year terms expiring in 2001: Eileen S. Kraus,
Branko Terzic, and Patricia M. Worthy. Mrs. Kraus
received 8,820,621 votes for and 134,556 votes against.
Mr. Terzic received 8,818,824 votes for and 136,353
votes against. Ms. Worthy received 8,793,846 votes for
and 161,331 votes against. Shareholders also ratified
the appointment of Arthur Andersen LLP as the Company's
independent auditors. Arthur Andersen LLP received
8,691,482 votes for, 173,999 votes against and 89,696
abstained from the voting.
Item 5. OTHER INFORMATION
Nicholas Trivisonno, Chairman and CEO of ACNielson,
resigned from the Board of Directors on January 30,
1998. Trivisonno also held the position of Chairman of
the Audit Committee.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto
duly authorized.
YANKEE ENERGY SYSTEM, INC.
___________________________
(Registrant)
Date: February 13, 1998 /s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer and
Treasurer
Date: February 13, 1998 /s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller