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 MARCH 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT APRIL 30, 1999 10,623,484
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
1999 1998
_______ ______
(In thousands,except
per share amounts)
Revenues
Utility revenues $110,871 $106,325
Nonutility revenues 6,573 6,868
_______ _______
Total revenues 117,444 113,193
_______ _______
Operating expenses:
Cost of gas/goods sold 59,482 60,805
Operations 16,318 14,990
Maintenance 1,605 1,424
Depreciation and amortization 5,273 5,055
Taxes other than income taxes 7,731 7,091
_______ _______
Total operating expenses 90,409 89,365
_______ _______
Operating income 27,035 23,828
Other income/expense:
Other income, net 18 181
Interest expense, net 3,741 3,954
_______ _______
Income before income taxes 23,312 20,055
Provision for income taxes 11,862 9,245
_______ _______
Net Income $ 11,450 $ 10,810
_______ _______
_______ _______
Basic and Diluted Earnings Per
Common Share $ 1.08 $ 1.03
_______ _______
_______ _______
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended
March 31,
1999 1998
____ ____
(In thousands, except
per share information)
Revenues
Utility revenues $188,053 $203,443
Nonutility revenues 14,392 12,345
_______ _______
Total revenues 202,445 215,788
_______ _______
Operating expenses:
Cost of gas/goods sold 102,314 117,212
Operations 30,704 29,955
Maintenance 3,043 2,615
Depreciation and amortization 10,359 9,733
Taxes other than income taxes 12,924 12,111
________ ________
Total operating expenses 159,344 171,626
_______ _______
Operating income 43,101 44,162
Other income/expense:
Other income, net 79 250
Interest expense, net 7,263 6,928
_______ _______
Income before income taxes 35,917 37,484
Provision for income taxes 16,621 17,583
_______ _______
Net Income $ 19,296 $ 19,901
_______ _______
_______ _______
Basic and Diluted Earnings Per
Common Share $ 1.82 $ 1.90
_______ _______
_______ _______
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
1999 1998
________ ___________
(Unaudited)
(In thousands)
ASSETS
Utility Plant, at original cost $562,440 $547,098
Less: Accumulated provision for
depreciation 214,867 207,872
________ ________
347,573 339,226
Construction work in progress 24,165 28,707
________ ________
Total net utility plant 371,738 367,933
________ ________
Other property and investments 13,147 12,778
Assets held for sale 15,523 12,361
Current assets:
Cash and temporary cash
investments 10,986 1,881
Accounts receivable, net 61,597 35,946
Fuel supplies 1,354 1,418
Other materials and supplies 2,091 1,972
Accrued utility revenues 10,945 4,028
Deferred gas costs, current portion 1,827 1,879
Prepaid expenses and other 4,595 25,327
_______ _______
Total current assets 93,395 72,451
_______ _______
Deferred gas costs, net --- 8,601
Recoverable environmental
cleanup costs 33,493 33,670
Recoverable income taxes 4,986 10,673
Recoverable postretirement
benefits costs 1,844 1,725
Other deferred debits 13,868 15,092
_______ _______
Total Assets $547,994 $535,284
_______ ________
_______ ________
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
1999 1998
_________ ____________
(Unaudited)
(In thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,621,389
shares outstanding at March 31, 1999
and 10,545,362 outstanding at
September 30, 1998 $ 53,107 $ 52,727
Capital surplus, paid in 90,761 89,818
Retained earnings 35,034 23,047
Employee stock ownership
plan guarantee (200) (600)
________ ________
Total common shareholders' equity 178,702 164,992
Long-term debt, net of
current portion 164,000 131,048
_______ _______
Total capitalization 342,702 296,040
_______ _______
Current liabilities:
Notes payable to banks 16,500 75,700
Long-term debt, current portion 20,615 4,217
Accounts payable 12,330 19,643
Accrued taxes 18,799 ---
Accrued interest 3,518 3,176
Pipeline transition costs payable 2,035 2,516
Other 5,274 8,402
_______ _______
Total current liabilities 79,071 113,654
_______ _______
Deferred gas costs, net 11,608 ---
Accumulated deferred income taxes 60,066 72,816
Accumulated deferred investment
tax credits 8,137 8,325
Liability for environmental
cleanup costs 35,000 35,000
Postretirement benefits obligation 3,522 3,353
Other deferred credits 7,888 6,096
Commitments and contingencies (Note 4) --- ---
________ ________
Total Capitalization and
Liabilities $547,994 $535,284
________ ________
________ ________
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
March 31,
__________________
1999 1998
____ ____
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $19,296 $19,901
Adjusted for the following:
Depreciation and amortization 10,359 9,733
Equity earnings from investments 154 (77)
Deferred income taxes, net (7,251) (3,674)
Deferred gas costs activity and
other non-cash items 22,940 16,025
Changes in working capital:
Accounts receivable and accrued
utility revenues (32,568) (44,340)
Prepaid expenses and other 39,531 (4,720)
Accounts payable (7,313) 24,897
Other working capital
(excludes cash) (6,281) 9,694
_______ _______
Net cash provided by
operating activities 38,867 27,439
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock
issuance 1,188 1,040
Issuance of long-term debt 50,000 ---
Retirement of long-term debt (650) (650)
Decrease in short-term debt (59,200) (500)
Cash dividends (7,309) (7,013)
________ ________
Net cash used for financing
activities (15,971) (7,123)
________ ________
INVESTMENT IN PLANT AND OTHER:
Utility plant (12,938) (14,945)
Other property and investments (853) (3,413)
________ ________
Net cash used for plant and other (13,791) (18,358)
________ _______
Net Increase in Cash and Temporary
Cash Investments for the Period 9,105 1,958
Cash and Temporary Cash Investments,
beginning of period 1,881 2,239
________ ________
Cash and Temporary Cash Investments,
end of period $10,986 $ 4,197
________ _______
________ _______
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts
capitalized $ 7,468 $ 6,228
Income taxes $ 351 $ 856
The accompanying notes are an integral part of these consolidated
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, 1998 (1998 Form 10-K),
including the audited financial statements (and notes
thereto) incorporated by reference therein and the Company's
quarterly report on Form 10-Q for the quarter ended December
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 March 31, 1999, and its results of operations
for the three and six months ended March 31, 1999 and 1998
and cash flows for the six months ended March 31, 1999 and
1998. The results of operations for the three and six
months ended March 31, 1999 and 1998 are not necessarily
indicative of the results expected for a full year, due
mainly to the highly seasonal nature of the gas business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas), is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which includes
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires a cost-
based, rate-regulated enterprise such as Yankee Gas to
reflect the impact of regulatory decisions in its financial
statements. The DPUC, through the rate regulation process,
can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an
unregulated enterprise.
Following the provisions of FAS 71, Yankee Gas has recorded
regulatory assets or liabilities as appropriate, primarily
related to deferred gas costs, pipeline transition costs,
hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefit costs. The specific
amounts related to these items are disclosed in the
consolidated balance sheets. For additional information
about these items see the 1998 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, Yankee Gas believes that its
use of regulatory accounting in accordance with the provisions
of FAS 71 is appropriate and its regulatory assets are
probable of recovery.
3) EARNINGS PER SHARE
The Company computes and presents basic and diluted earnings
per share. The basic weighted average shares outstanding for
the three months ended March 31, 1999 and 1998 were
10,608,406 and 10,483,265, respectively, and for the six
months ended March 31, 1999 and 1998 were 10,587,947 and
10,472,510, respectively. The diluted weighted average
shares outstanding for the three months ended March 31, 1999
and 1998 were 10,616,244 and 10,492,271, respectively, and
for the six months ended March 31, 1999 and 1998 were
10,601,952 and 10,479,491, respectively. As such, there is
no difference between basic and diluted earnings per share.
4) COMMITMENTS AND CONTINGENCIES
The Company faces a number of contingencies which arise
during the normal course of business and which have been
discussed in Note 9 (entitled "Commitments and
Contingencies") to the Consolidated Financial Statements
included in the Company's 1998 Form 10-K Report. Except as
disclosed below, for the six months ended March 31, 1999,
there have been no material changes in the matters discussed
in Note 9 to the Company's 1998 Form 10-K Report.
YESCo Power Division: The Company's wholly-owned subsidiary,
Yankee Energy Services Company (YESCo), is currently
negotiating the sale of its more significant Power division
investments with several interested parties. These
investments include an operating land fill gas (LFG) fueled
generating facility in Brookhaven, NY, interests in two
operating cogeneration facilities, development stage
projects and other less significant assets. The total
investment at March 31, 1999 is approximately $15.5 million.
Management expects that the sale of the Power division
assets will have no material effect on the Company's
consolidated balance sheets.
One of Yankee Gas' largest customers was the Foxwoods Hotel
and Casino (Foxwoods) operated by the Mashantucket Pequot
Indian Tribe (Pequots). The City of Norwich, Connecticut,
pursuant to an agreement with the Pequots, became the sole
provider of gas transportation service to the Pequots.
Yankee Gas has made a claim against the Pequots for payment
for distribution facilities, which Yankee Gas constructed
pursuant to agreement with the Pequots, which claim seeks to
compensate Yankee Gas for its investment. Yankee Gas has on-
reservation distribution facilities totaling approximately
$0.4 million and off-reservation distribution facilities
totaling approximately $4.9 million. Yankee Gas is
evaluating the Pequots' response to the claim in an effort
to resolve the dispute consensually before any legal action
is taken.
5) FORWARD-LOOKING STATEMENTS
This report contains statements which, to the extent they
are not recitations of historical fact, constitute "forward-
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. When used in
this report, the words "anticipate," "plan," "believe,"
"estimate," "expect," and similar expressions as they
relate to the Company or its management are intended to
identify forward-looking statements. All forward-looking
statements involve risks and uncertainties. Actual results
may differ materially from those discussed in, or implied
by, the forward-looking statements for reasons including,
but not limited to, changes to and developments in the
legislative and regulatory environments affecting the
Company's business, the impact of competitive products and
services, changes in the natural gas industry caused by
deregulation and other factors, certain environmental
matters and internal and/or third party delays or failures
in achieving Year 2000 compliance, as well as such other
factors as set forth in the Company's Form 10-K for the year
ended September 30, 1998 and in other filings with the
Securities and Exchange Commission.
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 March 31, 1999, and the related
consolidated statements of income for the three- and six-month
period then ended and cash flows for the six-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, 1998 (not presented
herein), and, in our report dated November 16, 1998, 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, 1998 is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
Arthur Andersen LLP
Hartford, Connecticut
April 26, 1999
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net income was $11.5 million for the three months
ended March 31, 1999, compared to $10.8 million for the same
period a year earlier. The corresponding basic and diluted
earnings per share were $1.08 and $1.03 for the three months
ended March 31, 1999 and 1998, respectively.
Earnings for the second quarter of fiscal year 1999 increased
approximately five percent due to weather that was 15 percent
colder than the same period last year. Operating income
increased 14 percent over the same period last year, partially
offset by an increase in income taxes due to a higher effective
tax rate. This quarter's overall earnings were negatively
impacted by two items. First, weather again played a role by
virtue of a seven percent warmer-than-normal quarter. Management
estimates that warmer weather reduced earnings by $1.4 million,
or $0.13 per share. The prior year's quarter experienced even
warmer than normal weather with management estimating a weather-
related reduction to earnings of $3.9 million, or $0.38 per
share. Second, a metering problem with an industrial customer
resulted in approximately $0.4 million in lost margin during the
second quarter. The prior year's quarter was also negatively
impacted by customer bill credits of $0.9 million, or $0.09 per
share, as part of a rate review settlement reached with the
Connecticut Department of Public Utility Control.
A favorable impact to this quarter's results was the continuing
operations from nonutility subsidiaries, which performed at a
break even level. The recent financial performance at Yankee
Energy Services Company (YESCo) reflects the cost reduction
initiatives that have now been fully implemented. R. M. Services
(RMS), our receivables management company, again positively
contributed to quarterly results. As a result of continuing
growth for its collection services, RMS is completing a new call
center in East Hartford, Connecticut, which is expected to be
operational in the third quarter.
COMPARISON OF THE SECOND QUARTER OF FISCAL 1999 WITH THE SECOND
QUARTER OF FISCAL 1998
OPERATING REVENUES
Utility revenues increased $4.5 million, or 4 percent, in the
second quarter of fiscal 1999 compared with the same period in
the prior fiscal year. This increase was partially offset by a
$0.3 million decrease in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
Three Months Ended
March 31, Increase/
1999 1998 (Decrease)
(In thousands)
Firm sales $ 94,766 $ 92,853 $ 1,913
Firm transportation 8,801 5,419 3,382
Interruptible/off-system sales 4,923 5,409 (486)
Interruptible transportation 700 943 (243)
Other utility revenues 1,681 1,701 (20)
_______ _______ _______
Total Utility revenues 110,871 106,325 4,546
Nonutility revenues 6,573 6,868 (295)
_______ _______ _______
Total operating revenues $117,444 $113,193 $ 4,251
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Three Months Ended
March 31, Increase/
(Mcf - thousands) 1999 1998 (Decrease)
Firm sales 10,229 9,902 327
Firm transportation 4,116 3,008 1,108
Interruptible/
off-system sales 1,468 1,228 240
Interruptible
transportation 955 1,889 (934)
_______ ______ _____
Total throughput 16,768 16,027 741
_______ ______ _____
_______ ______ _____
The change in utility revenues was due primarily to weather that
was 15 percent colder than the prior year. The colder weather in
the second quarter of the fiscal 1999 heating season directly
increased sales to firm sales customers. However, this increase
was partially offset by interruptible customers switching to
alternative fuels as a result of continued lower oil prices. The
slight decrease in nonutility revenues in the second quarter of
fiscal 1999 compared to the same period in fiscal 1998 is
primarily due to the reorganization of YESCo's operations, offset
by an increase in RMS' revenues due to expansion of its
collection business.
OPERATING EXPENSES
Total operating expenses increased $1.0 million in the second
quarter of fiscal 1999 compared to the same period in the prior
year as a result of the following items:
- - Cost of gas decreased $1.3 million, or 2 percent, for
the three months ended March 31, 1999 compared to the three months
ended March 31, 1998 due primarily to the continued shift of
customers to transportation service, partially offset by an
increase in costs due to additional firm sales.
- - Cost of goods sold increased slightly in the second
quarter of fiscal 1999 compared to the second quarter of fiscal
1998 due to increased nonutility activity resulting primarily from
an expansion of RMS'collection business, partially offset by the
corresponding decrease in YESCo's revenues due to management's
reorganization of YESCo.
- - Operations and maintenance expenses increased $1.5
million, primarily due to increases in Yankee Gas expenses for
pension, uncollectible accounts, and data center operations.
These increases were offset by a slight decrease in nonutility
expenses due to cost reduction initiatives implemented by YESCo.
- - Depreciation and amortization expense increased $0.2
million, primarily due to additions in plant, property
and investments.
- - Taxes other than income taxes increased $0.6 million,
primarily due to higher Connecticut gross earnings taxes as a
result of the increase in revenues.
INTEREST EXPENSE
Interest expense decreased $0.2 million primarily due to lower
short-term debt outstanding. This decrease was partially offset
by an increase in long-term debt interest expense, primarily due
to a $50 million new long-term debt financing completed in
January 1999.
INCOME TAXES
Federal and state income taxes increased $2.6 million primarily
due to higher pre-tax income and a higher effective tax rate for
the three months ended March 31, 1999 compared to the three
months ended March 31, 1998. The second quarter effective tax
rate reflects a retroactive adjustment to the effective tax rate
for the six months ended March 31, 1999.
COMPARISON OF THE FIRST SIX MONTHS OF FISCAL 1999 WITH THE FIRST
SIX MONTHS OF FISCAL 1998
OPERATING REVENUES
Utility revenues decreased $15.4 million, or 8 percent, in the
first six months of fiscal 1999 compared with the same period in
the prior fiscal year. This decrease was offset by a $2.0 million
increase in operating revenues from nonutility operations. The
components of the change in operating revenues are as follows:
Six Months Ended
March 31, Increase/
1999 1998 (Decrease)
(In thousands)
Firm sales $158,596 $175,358 $(16,762)
Firm transportation 15,799 9,938 5,861
Interruptible/off-system sales 9,613 13,459 (3,846)
Interruptible transportation 1,605 1,488 117
Other utility revenues 2,440 3,200 (760)
_______ _______ _______
Total utility revenues 188,053 203,443 (15,390)
Nonutility revenues 14,392 12,345 2,047
_______ _______ _______
Total operating revenues $202,445 $215,788 $(13,343)
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Six Months Ended
March 31, Increase/
(Mcf - thousands) 1999 1998 (Decrease)
Firm sales 17,322 19,254 (1,932)
Firm transportation 7,298 5,257 2,041
Interruptible/
off-system sales 2,801 2,994 (193)
Interruptible
transportation 2,329 3,216 (887)
______ ______ ______
Total throughput 29,750 30,721 (971)
______ ______ ______
______ ______ ______
The change in utility revenues was due to a combination of items
directly related to warmer than normal weather experienced over
the past two heating seasons. Firm sales continue to decrease as
an increasing number of commercial and industrial customers
continued to shift from gas sales to transportation service
resulting in a decrease in utility revenues. The switch to
transportation has no effect on margin because the cost of gas
has traditionally been a pass through item. Interruptible
revenues decreased primarily as a result of lower oil prices in
the first six months of fiscal 1999 compared to the same period
in the prior year, which enabled these customers to use a less
costly alternative fuel. These decreases were partially offset
by an increase in nonutility revenues in the second quarter of
fiscal 1999 compared to the same period in fiscal 1998. This
increase was primarily due to an increase in R.M. Services'
revenues due to expansion of its collection business, offset by a
slight decrease in YESCo's revenues due to management's
reorganization of YESCo.
OPERATING EXPENSES
Total operating expenses decreased $12.3 million in the first six
months of fiscal 1999 compared with the same period in the prior
year as a result of the following items:
- - Cost of gas decreased $16.6 million, or 15 percent, for
the six months ended March 31, 1999 compared to the six months
ended March 31, 1998 due primarily to the weather impact on firm
sales customers and the continued increase in transportation
customers.
- - Cost of goods sold increased $1.8 million in the first
six months of fiscal 1999 compared to the first six months of
fiscal 1998 due to expansion of R.M. Services' collection
business, partially offset by the corresponding decrease in
YESCo's revenues due to management's reorganization of YESCo.
- - Operations and maintenance expenses increased $1.2
million, primarily due to increases in data center operation
expense, expenses related to nonutility activity, uncollectible
expense and pension expenses.
- - Depreciation and amortization expense increased $0.6
million, primarily due to additions in plant, property
and investments.
- - Taxes other than income taxes increased $0.8 million,
primarily due to increases in Connecticut unemployment taxes and
municipal taxes in fiscal 1999.
INTEREST EXPENSE
Interest expense increased $0.3 million mainly due to higher
short-term debt outstanding during the six months ended March 31,
1999 and higher interest on long-term debt, primarily due to a
$50 million new long-term debt financing completed in January
1999.
INCOME TAXES
Federal and state income taxes decreased $1.0 million primarily
due to lower pre-tax income for the six months ended March 31,
1999 compared to the six months ended March 31, 1998, partially
offset by a slight increase in the effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at March 31, 1999 totaled
$11.0 million. Cash provided by operating activities was $38.9
million in the second quarter of fiscal 1999. The increase in
cash provided by operating activities was primarily due to a
decrease in working capital requirements. The Company also
generated cash through financing activities, primarily by the
issuance of new common stock and issuance of long-term debt.
Cash from operating activities and financing activities was used
primarily for repayments of short-term debt, dividend payments
and capital expenditures in the first six months of fiscal 1999.
Expenditures for investment in plant, property and investments
totaled $13.8 million for the first six months of fiscal 1999.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures creates a need for short-term borrowing
to supplement internally generated funds. As of March 31, 1999,
Yankee Gas had a revolving line of credit of $60 million with a
group of four 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 $20
million as of March 31, 1999. At March 31, 1999, Yankee Gas had
no amounts outstanding under its agreements. Yankee Energy had
$16.5 million outstanding at March 31, 1999 under its $25 million
committed line of credit, which is used to fund development of
the Company's nonutilty businesses. In January 1999, Yankee Gas
completed a $50 million new long-term debt financing at 6.2
percent, for the purposes of replacing a portion of the existing
outstanding short-term debt. Yankee Gas plans to redeem its
Series A Tranche D First Mortgage Bonds in August 1999, with cash
on hand and short-term debt available at that time. Series A
Trance D First Mortgage Bonds become eligible for early
redemption 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 March
31, 1999, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $174 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 $1.75 million, as of
March 31, 1999. The Company's results of operations are
unaffected by the hedge transaction given that it passes through
the cost of the hedge to either the commodity trading firm or its
customer depending on the difference in the fixed and floating
prices for gas.
The Company entered into an interest rate swap transaction in
February 1999. The $49,000,000 (notional amount) agreement had
the effect of converting the interest obligations on Yankee Gas'
$19,000,000, 10.07% Bonds and $30,000,000, 7.19% Bonds to
variable rates. Under the agreement, the Company receives the
stated fixed rate and pays a floating rate based on a "basket"
of interest rate indices, as determined in six month intervals.
Net receipts or payments under the agreement are recognized as
adjustments to interest expense.
YEAR 2000
The Company is currently implementing new information systems and
enhancing existing information systems to address Year 2000
issues, which could have significant adverse effects on the
Company if not properly resolved. In fiscal 1995, the Company
began testing and remediation for Year 2000 problems and has
assigned dedicated personnel to its Year 2000 project.
Remediated programs are being tested prior to being declared
compliant.
As of March 31, 1999, YES has completed the inventory and the
assessment of risk phases of the Year 2000 project for all
mainframe systems. The Company is currently in the remediation
and testing phases. As part of the process, a detailed inventory
of all hardware and software currently utilized by the Company
has been prepared, and a timetable has been established to ensure
testing of all applications. The scope of the assessment phase
also included the Company's interface systems with significant
suppliers, government agencies and other third parties. However,
there can be no guarantee that the systems of these third parties
will be converted on a timely basis and will not have an adverse
effect on the Company's operations or systems.
All mainframe systems that are being remediated are now in the
implementation phase, which as of March 31, 1999 was
approximately 98 percent complete. In addition to remediating
existing systems, the Company purchased a new human resource
information system (HRIS) and a new customer service (CS) system.
These systems were purchased to improve functionality of the
application software and to improve efficiency and customer
service. In addition, any Year 2000 issues associated with these
systems will be eliminated. The new HRIS system became
operational January 1, 1999 and the new CS system is expected to
be operational in July 1999.
For non-mainframe systems, the Company has developed a test
environment to carry out the remainder of the remediation
program. The inventory and risk assessment phase of all non-
mainframe systems has been completed. The completion of the
remediation/replacement and testing phases is expected by
September 1999. As of March 31, 1999, the Company installed a
new supervisory control and data acquisition system (SCADA
system), which monitors gas flows and pressures within the gas
distribution system. This eliminated any Year 2000 issues
associated within that system.
The Company currently estimates that total cost to update all of
the Company's systems for Year 2000 compliance will be
approximately $21.8 million, including approximately $0.6 million
for the new HRIS system, $19.4 million for the new CS system and
$1.3 million for the new SCADA system. All such costs associated
with system enhancements have and will continue to be expensed as
incurred and the costs of new systems will be capitalized as
appropriate. As of March 31, 1999, the Company expensed
approximately $0.5 million and capitalized approximately $19.0
million, of these costs. The remaining costs will be incurred
during fiscal 1999. These costs have been financed through
short-term borrowing and internally generated funds.
The primary business risk associated with Year 2000 is the
Company's ability to continue to transport and distribute gas to
its customers without interruption. In the event the Company
and/or its suppliers and vendors are unable to remediate the Year
2000 problem prior to January 1, 2000, operations of the Company
could be significantly impacted. In order to mitigate this risk,
the Company is developing contingency plans to continue
operations through manual intervention and other procedures
should it become necessary to do so. Such procedures are
expected to include back-up power supply for its critical
pipeline and storage operations and, if necessary, curtailment of
supply. The Company expects to complete its operational
contingency plans by the end of fiscal 1999.
Although the Company expects its systems to be Year 2000
compliant on or before December 31, 1999, it cannot predict the
outcome or the success of its Year 2000 program, or that the
costs required to address the Year 2000 issue, or that the impact
of a failure to achieve substantial Year 2000 compliance, will
not have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Commodity Market Risk
Yankee Gas is subject to market risk due to fluctuations in the
price of natural gas. All of Yankee Gas' sales are designed to
fully recover the cost of gas. Yankee Gas passes on to its firm
customers changes in gas costs from those reflected in its
tariffs under purchased gas adjustment provisions allowed by the
Connecticut Department of Public Utility Control. Interruptible
and off-system sales are priced competitively at not less than
the cost of gas associated with those sales plus applicable taxes
and margin.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In
order to satisfy certain provisions of the arrangement, Yankee
Gas has provided a letter of credit for $1.75 million, as of
March 31, 1999. The Company's results of operations are
unaffected by the hedge transaction given that it passes through
the cost of the hedge to either the commodity trading firm or its
customer depending on the difference in the fixed and floating
prices for gas.
Interest Rate Risk
The Company entered into an interest rate swap transaction in
February 1999. The $49,000,000 (notional amount) agreement had
the effect of converting the interest obligations on Yankee Gas'
$19,000,000, 10.07% Bonds and $30,000,000, 7.19% Bonds to
variable rates. Under the agreement, the Company receives the
stated fixed rate and pays a floating rate based on a "basket"
of interest rate indices, as determined in six month intervals.
Net receipts or payments under the agreement are recognized as
adjustments to interest expense. The maximum exposure to the
Company is $250,000 per year.
In addition, both Yankee Energy and Yankee Gas have committed and
uncommitted lines of credit with variable interest rates.
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the Shareholders of the Company was held on
January 29, 1999. At the Annual Meeting, the shareholders elected
Sanford Cloud, Jr. and John J. Rando as directors to three year
terms expiring at the 2001 Annual Meeting of Shareholders. There
were 8,850,119 votes for and 156,466 votes against for Mr. Cloud
and 8,852,264 votes for and 154,321 votes against for Mr. Rando.
The shareholders also ratified the appointment by the Board of
Directors of Arthur Andersen LLP as the Company's independent
auditors for the fiscal year ending September 30, 1999. There
were 8,734,272 votes for, 185,544 votes against and 86,769
abstentions with respect to such ratification.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 4.1 - Bond Purchase Agreement dated January
1, 1999between Yankee Gas and the Purchasers
identified therein.
Exhibit 4.2 - Fifth Supplemental Indenture of
Mortgage and of Trust dated January 1, 1999 between
Yankee Gas and The Bank of New York as trustee.
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: May 12, 1999 /s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
Date: May 12, 1999 /s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller