SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
____________
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 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 JULY 31, 1998 10,523,185
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June 30,
1998 1997
_______ ______
(Thousands of Dollars,
except per share amounts)
Revenues:
Utility Revenues $ 46,283 $ 58,289
Nonutility Revenues 8,044 1,146
_______ _______
Total Revenues 54,327 59,435
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 27,766 31,056
Operations 15,271 14,695
Maintenance 1,375 1,393
Depreciation and Amortization 4,994 4,632
Taxes other than Income Taxes 4,519 5,151
_______ _______
Total Operating Expenses 53,925 56,927
_______ _______
Operating Income 402 2,508
Other Income/Expense
Other (Expense) Income, net (185) 30
Interest Expense, net 3,619 3,047
_______ ______
Loss Before Income Taxes (3,402) (509)
Benefit for Income Taxes (1,500) (67)
_______ ______
Net Loss (1,902) (442)
_______ _______
_______ _______
Basic Loss Per Common Share $ (0.18) $ (0.04)
_______ _______
_______ _______
Basic Weighted Average Shares
Outstanding 10,507 10,451
_______ _______
_______ _______
Diluted Loss Per Common Share $ (0.18) $ (0.04)
_______ _______
_______ _______
Diluted Weighted Average Shares
Outstanding 10,512 10,453
_______ _______
_______ _______
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended
June 30,
1998 1997
____ ____
(Thousands of Dollars,
except per share amounts)
Revenues:
Utility Revenues $249,726 $279,490
Nonutility Revenues 20,389 3,194
_______ _______
Total Revenues 270,115 282,684
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 144,781 154,048
Operations 45,423 42,620
Maintenance 3,990 4,711
Depreciation and Amortization 14,727 13,443
Taxes other than Income Taxes 16,630 18,700
_______ _______
Total Operating Expenses 225,551 233,522
_______ _______
Operating Income 44,564 49,162
Other Income/Expense
Other Income, net 65 102
Interest Expense, net 10,547 9,599
_______ _______
Income Before Income Taxes 34,082 39,665
Provision for Income Taxes 16,083 17,750
_______ _______
Net Income $ 17,999 $ 21,915
_______ _______
_______ _______
Basic Earnings Per Common Share $ 1.72 $ 2.10
_______ _______
_______ _______
Basic Weighted Average Shares
Outstanding 10,484 10,450
_______ _______
_______ _______
Diluted Earnings Per Common Share $ 1.72 $ 2.10
_______ _______
_______ _______
Diluted Weighted Average Shares
Outstanding 10,491 10,452
________ ________
________ ________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1998 1997
________ _________
(Unaudited)
(Thousands of Dollars)
ASSETS
Utility Plant, at original cost $540,135 $524,221
Less: Accumulated provision for
depreciation 204,103 192,506
________ ________
336,032 331,715
Construction work in progress 25,469 19,150
________ ________
Total Net Utility Plant 361,501 350,865
________ ________
Other Property and Investments 22,415 19,311
________ ________
Current Assets:
Cash and temporary cash
investments 3,126 2,239
Accounts receivable, net 44,956 27,002
Fuel supplies 1,389 10,370
Other materials and supplies 2,310 2,186
Accrued utility revenues 3,306 4,667
Prepaid taxes --- 8,031
Deferred Gas cost, current portion 1,911 2,034
Other 6,643 5,901
_______ _______
Total Current Assets 63,641 62,430
_______ _______
Deferred Gas Costs, net --- 8,364
Recoverable Environmental
Cleanup Costs 33,719 31,667
Recoverable Income Taxes 8,105 11,038
Recoverable Postretirement
Benefits Costs 1,669 1,515
Other Deferred Debits 16,389 15,174
_______ _______
Total Assets $507,439 $500,364
_______ ________
_______ ________
The accompanying notes are an integral part of these financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1998 1997
_________ ____________
(Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,520,579
shares outstanding at June 30, 1998
and 10,454,414 outstanding at
September 30, 1997 $ 52,603 $ 52,272
Capital surplus, paid in 89,299 88,003
Retained earnings 33,794 26,431
Employee stock ownership
plan guarantee (600) (1,000)
________ ________
Total Common Shareholders' Equity 175,096 165,706
Long-term debt, net of
current portion 134,615 135,265
_______ _______
Total Capitalization 309,711 300,971
_______ _______
Current Liabilities:
Notes payable to banks 40,700 39,000
Long-term debt, current portion 4,017 4,017
Accounts payable 18,526 22,741
Accrued interest 3,288 2,008
Accrued taxes 2,323 ---
Pipeline transition costs payable 2,778 3,538
Other 5,279 6,480
_______ _______
Total Current Liabilities 76,911 77,784
_______ _______
Deferred Gas Costs 2,268 ---
Accumulated Deferred Income Taxes 65,936 68,205
Accumulated Deferred Investment
Tax Credits 8,420 8,703
Reserve for Environmental
Cleanup Costs 35,000 35,000
Postretirement Benefits Costs 3,268 2,840
Other Deferred Credits 5,925 6,861
Commitments and Contingencies (Note 4) --- ---
______ ______
Total Capitalization and
Liabilities $507,439 $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)
Nine Months Ended
June 30,
__________________
1998 1997
____ ____
(Thousands of Dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $17,999 $21,915
Adjusted for the following:
Depreciation and amortization 14,727 13,011
Equity earnings from investments (9) (60)
Deferred income taxes, net 381 (1,166)
Deferred gas costs activity and
other non-cash items 6,717 10,469
Changes in working capital:
Accounts receivable and accrued
utility revenues (16,593) (8,859)
Accounts payable (4,215) (7,975)
Prepaid taxes 10,354 10,489
Other working capital
(excludes cash) 7,582 7,492
_______ _______
Net cash provided by
operating activities 36,943 45,316
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock
issuance 1,630 87
Issuance of long-term debt -- 30,000
Retirement of long-term debt (650) (30,650)
Increase (decrease) in short-term
debt 1,700 (17,300)
Cash dividends (10,636) (10,294)
________ ________
Net cash used for financing
activities (7,956) (28,157)
________ ________
INVESTMENT IN PLANT AND OTHER:
Utility Plant (23,909) (19,958)
Other property and investments (4,191) (2,477)
_______ ________
Net cash used for plant and other (28,100) (22,435)
________ _______
Net Increase (Decrease)in Cash and Temporary
Cash Investments for the Period 887 (5,276)
Cash and Temporary Cash Investments,
beginning of period 2,239 7,853
________ ________
Cash and Temporary Cash Investments,
end of period $ 3,126 $ 2,577
________ _______
________ _______
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts
capitalized $ 9,403 $ 9,793
Income taxes $ 9,406 $ 9,779
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. (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 and the Company's
quarterly reports on Form 10-Q for the quarters ended
December 31, 1997 and March 31, 1998. 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 June 30, 1998, and
its results of operations for the three and nine months
ended June 30, 1998 and 1997 and cash flows for the nine
months ended June 30, 1998 and 1997. The results of
operations for the three and nine months ended June 30, 1998
and 1997 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
In fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS
128), which changes the method for computing earnings per
share and requires the Company to present basic and diluted
earnings per share. As a result, all prior periods have
been restated to reflect application of FAS 128. 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 nine months ended June 30, 1998,
there have been no material changes in the matters discussed
in Note 9, to the Company's 1997 Form 10K Report.
Rate Review: 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
fiscal year 1998. As of June 30, 1998 the entire $3.2
million has been accrued and approximately $2.9 million had
been credited to firm sales customers. The remaining $0.3
million has been included in the Company's annual deferred
fuel calculation and will be credited back to firm sales
customers beginning in October 1998. 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.
Legal Issues: In November 1995, a purported class action
suit was filed against Yankee Gas and the state's two other
Local Distribution Companies (LDCs) by the Connecticut
Heating and Cooling Contractors' Association, Inc. et al,.
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.
On January 27, 1998, the judge in this matter struck 31 out
of the plaintiffs' 32 counts contained in their complaint
leaving only one count alleging violations of Connecticut's
anti-trust statute. The judge also noted that although the
plaintiffs' action purports to be a class action, the
plaintiffs have failed to obtain certification as such.
Thereafter, the plaintiffs' filed another purported class
action against all three LDCs alleging unfair trade
practices and additional separate actions against each LDC
alleging various business torts. While the ultimate
resolution of the actions cannot be predicted, management
does not expect that they will have a material adverse
effect on the Company's consolidated results of operations
or financial position.
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 and the judge in this matter has recently
recommended that the parties attempt mediation/arbitration
of the issue. 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.
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, by the
City of Naugatuck, Connecticut regarding its Personal
Property Tax Schedules for the years 1995, 1996, and 1997,
and by the Internal Revenue Service regarding its Federal
Income Tax Return for the calendar year 1995. 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 June 30, 1998, and the related
consolidated statements of income for the three-month and
nine-month periods then ended, and cash flows for the nine-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 consolidated 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 consolidated 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
July 27, 1998
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net losses were $1.9 million for the three months
ended June 30, 1998 compared to $0.4 million for the same period
a year earlier. The corresponding basic and diluted losses per
share were $0.18 and $0.04 for the three months ended June 30,
1998 and 1997, respectively.
Earnings for the third quarter of fiscal year 1998 decreased
primarily due to weather that was 29 percent warmer than the same
period last year and 14 percent warmer than normal. The Company
estimates that warmer than normal weather reduced earnings by
$0.9 million or $0.09 per share in the current quarter as
compared with the prior year's quarter which experienced colder
than normal weather which impacted earnings by $1.5 million or
$0.15 per share. In addition, earnings decreased by
approximately $0.4 million or $0.04 per share for the three
months ended June 30, 1998, due to customer bill credits which
were the result of a rate review settlement reached with the DPUC
in October 1997. Yankee Energy Services Company (YESCo), the
Company's major non-regulated subsidiary, was positively affected
by the continued demand for HVAC and control services. These
positive effects were offset by delays in gaining regulatory
approvals for power projects.
For the nine months ended June 30, 1998 both the diluted and
basic earnings per share were $1.72 compared to $2.10 for the
nine months ended June 30, 1997. The decrease in earnings is due
to customer bill credits of approximately $1.9 million or $0.18
per share for the nine months ended June 30, 1998 and weather
that was 7 percent warmer than the same period last year and 10
percent warmer than normal. Management estimates that warmer
than normal weather reduced earnings by $4.5 million or $0.43 per
share for the nine months ended June 30, 1998, and by $0.9
million or $0.9 per share for the nine months ended June 30,
1997.
COMPARISON OF THE THIRD QUARTER OF FISCAL 1998 WITH THE THIRD
QUARTER OF FISCAL 1997
OPERATING REVENUES
Utility revenues decreased $12.0 million, or 21 percent, in the
third quarter of fiscal 1998 compared with the same period in the
prior fiscal year. This decrease was partially offset by a $6.9
million increase in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
Three Months Ended
June 30, Increase/
1998 1997 (Decrease)
(In Thousands)
Firm sales $ 36,208 $ 48,827 $(12,619)
Firm transportation 4,730 2,106 2,624
Interruptible/off-system sales 3,820 5,701 (1,881)
Interruptible transportation 1,143 989 154
Other utility revenues 382 666 (284)
_______ _______ _______
Total utility revenues 46,283 58,289 (12,006)
Nonutility revenues 8,044 1,146 6,898
_______ _______ _______
Total operating revenues $ 54,327 $ 59,435 $( 5,108)
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Three Months Ended
June 30, Increase/
(Mcf - thousands) 1998 1997 (Decrease)
Firm sales 3,908 5,567 (1,659)
Firm transportation 2,286 1,080 1,206
Interruptible/
off-system sales 1,078 1,459 (381)
Interruptible
transportation 1,578 1,907 (329)
_______ ______ _____
Total throughput 8,850 10,013 (1,163)
_______ ______ _____
_______ ______ _____
The change in utility revenues was due primarily to weather that
was 29 percent warmer than the prior year and customer bill
credits of $0.7 million which are reflected in the third quarter
of fiscal 1998. In addition, an increasing number of commercial
and industrial customers continue to shift from sales gas to
transportation service resulting in a decrease in operating
revenue. Interruptible revenues have decreased primarily as a
result of lower oil prices in the current third quarter compared
to the same period in the prior year. The increase in nonutility
revenues in the third quarter of fiscal 1998 compared to the same
period in fiscal 1997 is primarily due to additional activity
resulting from acquisitions.
OPERATING EXPENSES
Total operating expenses decreased $3.0 million in the third
quarter of fiscal 1998 compared with the same period in the prior
year as a result of the following items:
- Cost of gas decreased $9.1 million, or 30 percent, for
the three months ended June 30, 1998 compared to the
three months ended June 30, 1997 due primarily to a 21
percent reduction in utility revenues.
- Cost of goods sold increased $5.8 million in the third
quarter of fiscal 1998 compared to the third quarter of
fiscal 1997 due to increased nonutility activity
resulting primarily from acquisitions.
- Operations and maintenance expenses increased $0.6
million, primarily due to increases in payroll, data
center operations and expenses related to
non-regulated subsidiary activity, partially offset by
a decrease in pension expense from the utility
subsidiary.
- Depreciation and amortization expense increased $0.3
million, primarily due to additions in plant, property
and investments.
- Taxes other than income taxes decreased $0.6 million,
primarily due to lower Connecticut gross earnings taxes
in fiscal 1998 as a result of the reduction in
revenues.
INTEREST EXPENSE
Interest expense increased $0.6 million primarily due to higher
short-term debt outstanding. This increase was partially offset
by a decrease in long-term debt interest expense, primarily due
to refinancing of long-term debt at more favorable rates.
INCOME TAXES
Federal and state income taxes decreased $1.4 million primarily
due to lower pre-tax income for the three months ended June 30,
1998 compared to the three months ended June 30, 1997.
COMPARISON OF THE FIRST NINE MONTHS OF FISCAL 1998 WITH THE FIRST
NINE MONTHS OF FISCAL 1997
OPERATING REVENUES
Utility revenues decreased $29.8 million, or 11 percent, in the
first nine months of fiscal 1998 compared with the same period in
the prior fiscal year. This decrease was offset by a $17.2
million increase in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
Nine Months Ended
June 30, Increase/
1998 1997 (Decrease)
(In Thousands)
Firm sales $211,565 $245,399 $(33,834)
Firm transportation 14,668 5,163 9,505
Interruptible/off-system sales 17,278 24,296 (7,018)
Interruptible transportation 2,631 1,984 647
Other utility revenues 3,584 2,648 936
_______ _______ _______
Total utility revenues 249,726 279,490 (29,764)
Nonutility revenues 20,389 3,194 17,195
_______ _______ _______
Total operating revenues $270,115 $282,684 $(12,569)
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Nine Months Ended
June 30, Increase/
(Mcf - thousands) 1998 1997 (Decrease)
Firm sales 23,321 27,638 (4,317)
Firm transportation 7,384 2,948 4,436
Interruptible/
off-system sales 4,072 5,307 (1,235)
Interruptible
transportation 4,794 4,584 210
______ ______ ______
Total throughput 39,571 40,477 (906)
______ ______ ______
______ ______ ______
The change in utility operating revenues primarily reflects
weather that was 7 percent warmer in fiscal 1998 and customer
bill credits of $3.2 million. In addition, an increasing number
of commercial and industrial customers continued to shift from
sales gas to transportation service resulting in a decrease in
operating revenue. Interruptible revenues have decreased
primarily as a result of lower oil prices in the nine months
ended June 30, 1998 compared to the same period in the prior
year. Offsetting these changes was an increase in nonutility
revenues resulting from acquisitions.
OPERATING EXPENSES
Total operating expenses decreased $8.0 million in the first nine
months of fiscal 1998 compared with the same period in the prior
year as a result of the following items:
- Cost of gas decreased $23.0 million, or 15 percent, for
the nine months ended June 30, 1998 compared to the
nine months ended June 30, 1997 due primarily to a 11
percent decrease in utility revenues.
- Cost of goods sold increased $13.8 million in the first
nine months of fiscal 1998 compared to the first nine
months of fiscal 1997 due to increased nonutility
activity.
- Operations and maintenance expenses increased $2.1
million, primarily due to increases in data center
operation expense and expenses related to nonutility
activity, offset by decreases in uncollectible,
maintenance and pension expenses, related to the
utility subsidiary.
- Depreciation and amortization expense increased $1.3
million, primarily due to additions in plant, property
and investments.
- Taxes other than income taxes decreased $2.1 million,
primarily due to lower Connecticut gross earnings taxes
in fiscal 1998 as a result of the reduction in
revenues.
INTEREST EXPENSE
Interest expense increased $0.9 million mainly due to higher
short-term debt outstanding. This was partially offset by a
decrease in interest expense associated with lower long-term debt
outstanding and lower interest rates.
INCOME TAXES
Federal and state income taxes decreased $1.7 million primarily
due to lower pre-tax income for the nine months ended June 30,
1998 compared to the nine months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at June 30, 1998 totaled $3.1
million. Principal sources of cash for the nine months ended
June 30, 1998 were from operations, common stock issued through
the dividend reinvestment plan, and short-term debt. These funds
were used primarily for changes in working capital, dividend
payments, and investment in plant, property and investments.
Expenditures for investment in plant, property and investments
totaled $28.1 million for the first nine months of fiscal 1998,
reflecting a $5.7 million increase over the first nine months of
fiscal 1997.
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 June 30, 1998,
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 June 30, 1998. At June 30, 1998, Yankee Gas had
$26.7 million outstanding under its agreements. Yankee Energy had
$14.0 million outstanding at June 30, 1998 under its $25 million
committed line of credit which is used to fund acquisitions and
other capital requirements of the unregulated businesses.
Management is currently contemplating new long-term debt
financing in fiscal 1999 for the purposes of replacing a portion
of the existing short-term debt outstanding and to refinance
Series A, Tranche D which becomes redeemable by the Company in
August 1999.
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 June
30, 1998, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $210 million
of bonds at an assumed interest rate of 6.6 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, as of June
30, 1998. 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 June 30, 1998.
The Company is currently implementing new systems and enhancing
existing systems to address year 2000 issues. As part of that
process, a detailed inventory of all hardware and software
currently utilized by the Company has been prepared and a
timetable has been established to commence testing of all
applications. 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 material.
One of Yankee Gas' largest customers, the Foxwoods Hotel and
Casino (Foxwoods), operated by the Mashantucket 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 Mashantucket
Pequots. Yankee Gas believes that it will have the opportunity
to compete to retain gas throughput to Foxwoods.
RM Services (RMS), a wholly-owned subsidiary of the Company,
recently formed an alliance with Dun & Bradstreet Receivable
Management Services (D&B). The alliance allows RMS to extend its
collection activities in the transitioning energy,
telecommunication and other industries by supporting the
extensive network of D&B in its pursuit of additional consumer
business. RMS has extensive experience and specialized skills in
residential utility collection practices and computer-aided
calling technology.
RECENT DEVELOPMENTS
On May 6, 1998, the Company filed an application with the DPUC to
discontinue on demand, non-contract service work. Hearings have
been held on this matter and the Company is presently awaiting a
decision by the DPUC. Regardless of the outcome, this change is
not expected to have a material impact on the Company's financial
condition.
The Company's wholly-owned, nonregulated subsidiary, Yankee
Financial Services Company, has recently sold its receivable
portfolio to an independent party and recognized a small gain as
a result of the sale. The transaction was recorded as a sale for
financial reporting purposes.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 10.1 - Credit Agreement dated as of June 11,
1998 by and among Yankee Energy System, Inc., the Lenders
identified therein, and the Bank of New York as administrative
agent for each of the Lenders.
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: August 12, 1998 /s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
Date: August 12, 1998 /s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller