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, 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 10,634,866
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June 30,
1999 1998
_______ ______
(In thousands,except
per share amounts)
Revenues
Utility revenues $ 49,786 $ 46,283
Nonutility revenues 6,435 8,044
_______ _______
Total revenues 56,221 54,327
_______ _______
Operating expenses:
Cost of gas/goods sold 27,991 27,766
Operations 14,976 15,271
Maintenance 1,399 1,375
Merger expenses 1,382 0
Depreciation and amortization 5,303 4,994
Taxes other than income taxes 4,058 4,519
_______ _______
Total operating expenses 55,109 53,925
_______ _______
Operating income 1,112 402
Other income/expense:
Other income, net 37 (185)
Interest expense, net 3,607 3,619
_______ _______
Loss before income taxes (2,458) (3,402)
Benefit for income taxes (350) (1,500)
_______ _______
Net Loss $ (2,108) $ (1,902)
_______ _______
_______ _______
Basic and Diluted Loss Per
Common Share $ (0.20) $ (0.18)
_______ _______
_______ _______
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,
1999 1998
____ ____
(In thousands, except
per share information)
Revenues
Utility revenues $237,839 $249,726
Nonutility revenues 20,827 20,389
_______ _______
Total revenues 258,666 270,115
_______ _______
Operating expenses:
Cost of gas/goods sold 130,305 144,781
Operations 45,680 45,423
Maintenance 4,442 3,990
Merger expenses 1,382 0
Depreciation and amortization 15,662 14,727
Taxes other than income taxes 16,982 16,630
________ ________
Total operating expenses 214,453 225,551
_______ _______
Operating income 44,213 44,564
Other income/expense:
Other income, net 116 65
Interest expense, net 10,870 10,547
_______ _______
Income before income taxes 33,459 34,082
Provision for income taxes 16,271 16,083
_______ _______
Net Income $ 17,188 $ 17,999
_______ _______
_______ _______
Basic and Diluted Earnings Per
Common Share $ 1.62 $ 1.72
_______ _______
_______ _______
The accompanying notes are an integral part of these financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1999 1998
________ ___________
(Unaudited)
(In thousands)
ASSETS
Utility Plant, at original cost $565,007 $547,098
Less: Accumulated provision for
depreciation 218,672 207,872
________ ________
346,335 339,226
Construction work in progress 29,106 28,707
________ ________
Total net utility plant 375,441 367,933
________ ________
Other property and investments 13,268 12,778
Assets held for sale 16,160 12,361
Current assets:
Cash and temporary cash
investments 5,443 1,881
Accounts receivable, net 43,485 35,946
Fuel supplies 1,332 1,418
Other materials and supplies 2,094 1,972
Accrued utility revenues 3,294 4,028
Deferred gas costs, current portion 1,744 1,879
Prepaid expenses and other 6,412 25,327
_______ _______
Total current assets 63,804 72,451
_______ _______
Deferred gas costs, net --- 8,601
Recoverable environmental
cleanup costs 33,454 33,670
Recoverable income taxes 4,498 10,673
Recoverable postretirement
benefits costs 1,840 1,725
Other deferred debits 14,116 15,092
_______ _______
Total Assets $522,581 $535,284
_______ ________
_______ ________
The accompanying notes are an integral part of these consolidated
financial statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, September 30,
1999 1998
_________ ____________
(Unaudited)
(In thousands)
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,632,746
shares outstanding at June 30, 1999
and 10,545,362 outstanding at
September 30, 1998 $ 53,164 $ 52,727
Capital surplus, paid in 91,134 89,818
Retained earnings 29,152 23,047
Employee stock ownership
plan guarantee (200) (600)
________ ________
Total common shareholders' equity 173,250 164,992
Long-term debt, net of
current portion 164,000 131,048
_______ _______
Total capitalization 337,250 296,040
_______ _______
Current liabilities:
Notes payable to banks 2,000 75,700
Long-term debt, current portion 20,615 4,217
Accounts payable 17,649 19,643
Accrued taxes 8,600 ---
Accrued interest 4,346 3,176
Pipeline transition costs payable 1,779 2,516
Other 5,473 8,402
_______ _______
Total current liabilities 60,462 113,654
_______ _______
Deferred gas costs, net 8,577 ---
Accumulated deferred income taxes 61,705 72,816
Accumulated deferred investment
tax credits 8,042 8,325
Liability for environmental
cleanup costs 35,000 35,000
Postretirement benefits obligation 3,606 3,353
Other deferred credits 7,939 6,096
Commitments and contingencies (Note 4)
________ ________
Total Capitalization and
Liabilities $522,581 $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)
Nine Months Ended
June 30,
__________________
1999 1998
____ ____
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,188 $17,999
Adjusted for the following:
Depreciation and amortization 15,662 14,727
Equity earnings from investments 229 (9)
Deferred income taxes, net (5,219) 381
Deferred gas costs activity and
other non-cash items 19,426 6,717
Changes in working capital:
Accounts receivable and accrued
utility revenues (6,805) (16,593)
Prepaid expenses and other 18,915 (4,215)
Accounts payable and accrued
liabilites 6,606 10,354
Other working capital
(excludes cash) (1,795) 7,582
_______ _______
Net cash provided by
operating activities 64,207 36,943
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock
issuance 1,553 1,630
Issuance of long-term debt 50,000 ---
Retirement of long-term debt (650) (650)
Increase (Decrease) in
short-term debt (73,700) 1,700
Cash dividends (11,083) (10,636)
________ ________
Net cash used for financing
activities (33,880) (7,956)
________ ________
INVESTMENT IN PLANT AND OTHER:
Utility plant (21,232) (23,909)
Other propertyinvestments and
assets held for sale (5,533) (4,191)
________ ________
Net cash used for plant and other (26,765) (28,100)
________ _______
Net Increase in Cash and Temporary
Cash Investments for the Period 3,562 887
Cash and Temporary Cash Investments,
beginning of period 1,881 2,239
________ ________
Cash and Temporary Cash Investments,
end of period $ 5,443 $ 3,126
________ _______
________ _______
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts
capitalized $10,327 $ 9,403
Income taxes $ 4,676 $ 9,406
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 reports on Form 10-Q for the quarters ended
December 31, 1998 and March 31, 1999. 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, 1999, and
its results of operations for the three and nine months
ended June 30, 1999 and 1998 and cash flows for the nine
months ended June 30, 1999 and 1998. The results of
operations for the three and nine months ended June 30, 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 June 30, 1999 and 1998 were
10,627,342 and 10,507,092, respectively, and for the nine
months ended June 30, 1999 and 1998 were 10,601,079 and
10,484,037, respectively. The diluted weighted average
shares outstanding for the three months ended June 30, 1999
and 1998 were 10,648,053 and 10,511,273, respectively, and
for the nine months ended June 30, 1999 and 1998 were
10,616,111 and 10,490,970, respectively. As such, there is
no material 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 nine months ended June 30, 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 June 30, 1999 is approximately $16.2 million.
Management expects that the sale of the Power Division
assets will have no material effect on the Company's
consolidated results of operations or financial position.
5) 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.
6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
7) MERGER COSTS
On June 15, 1999, the Boards of Directors of Northeast
Utilities and the Company announced that the companies
entered into an Agreement and Plan of Merger pursuant to
which the Company become a wholly-owned subsidiary of
Northeast Utilities in a transaction which is valued at $679
million and includes the assumption of debt. See section in
Management's Discussion and Analysis entitled "Yankee
Energy System, Inc./Northeast Utilities Merger" for further
detail. The Company has recorded $1.4 million of merger
related costs for legal, consulting and business advisory
services. In future quarters, the Company expects to incur
approximately $3.6 million in additional merger costs.
These additional costs will be incurred in connection with
the process of receiving stockholder and regulatory
approvals, and will be expensed as incurred.
8) 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.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1999, and the related
consolidated statements of income for the three-month and nine-
month periods ended June 30, 1999 and 1998 and the consolidated
statement of cash flows for the nine-month periods ended June 30,
1999 and 1998. 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
July 29, 1999
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net loss was $2.1 million for the three months ended
June 30, 1999, compared to a loss of $1.9 million for the same
period a year earlier. The corresponding basic and diluted
losses per share were $0.20 and $0.18 for the three months ended
June 30, 1999 and 1998, respectively.
Results for the quarter ended June 30, 1999 include merger-
related expenses which totaled approximately $1.4 million, or
$0.13 per share, and are associated with the Company's merger
agreement with Northeast Utilities signed on June 14, 1999.
Earnings for the third quarter of fiscal year 1999 increased
approximately $0.4 million due to weather that was 6 percent
colder than the same period last year. However, overall earnings
for the quarter were still negatively impacted by weather that
was 9 percent warmer-than-normal. Management estimates warmer
weather reduced earnings by $0.3 million or $0.03 per share. The
prior year's quarter experienced weather that was 14 percent
warmer than normal with management estimating a weather related
reduction to earnings of $1.0 million or $0.09 per share. In
addition, the prior year's quarter was also negatively impacted
by customer bill credits of $0.4 million or $0.04 per share as
part of a rate review settlement reached with the Connecticut
Department of Public Utility Control.
The substantial improvement shown in the quarter to quarter
performance, exclusive of merger related expenses, is directly
tied to the performance of the Company's unregulated
subsidiaries, chiefly at Yankee Energy Services Company (YESCo)
where losses have been significantly reduced as the result of
cost reduction initiatives begun at the end of the fourth quarter
of the last fiscal year. R.M. Services, the Company's
receivables management company, and Yankee Energy Financial
Services Company have also continued to perform well with both
contributing profits for the current quarter and for the current
nine month period as well.
COMPARISON OF THE THIRD QUARTER OF FISCAL 1999 WITH THE THIRD
QUARTER OF FISCAL 1998
OPERATING REVENUES
Utility revenues increased $3.5 million, or 8 percent, in the
third quarter of fiscal 1999 compared with the same period in the
prior fiscal year. This increase was partially offset by a $1.6
million decrease in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
Three Months Ended
June 30, Increase/
1999 1998 (Decrease)
(In thousands)
Firm sales $ 38,021 $ 36,208 $ 1,813
Firm transportation 5,227 4,730 497
Interruptible/off-system sales 4,145 3,820 325
Interruptible transportation 1,084 1,143 (59)
Other utility revenues 1,309 382 927
_______ _______ _______
Total Utility revenues 49,786 46,283 3,503
Nonutility revenues 6,435 8,044 (1,609)
_______ _______ _______
Total operating revenues $ 56,221 $ 54,327 $ 1,894
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Three Months Ended
June 30, Increase/
(Mcf - thousands) 1999 1998 (Decrease)
Firm sales 4,038 3,908 130
Firm transportation 2,365 2,286 79
Interruptible/
off-system sales 1,282 1,078 204
Interruptible
transportation 1,114 1,578 (464)
_______ ______ _____
Total throughput 8,799 8,850 (51)
_______ ______ _____
_______ ______ _____
The change in utility revenues was due primarily to weather that
was 6 percent colder than the prior year. The colder weather in
the third quarter of the fiscal 1999 heating season directly
increased volumes to firm customers. However, this increase was
partially offset by interruptible customers switching to
alternative fuels as a result of continued lower oil prices. The
decrease in nonutility revenues in the third quarter of fiscal
1999 compared to the same period in fiscal 1998 is primarily due
to the reorganization of YESCo's operations, partially offset by
an increase in RMS' revenues due to expansion of its collection
business.
OPERATING EXPENSES
Total operating expenses, excluding merger expenses, decreased
$0.2 million in the third quarter of fiscal 1999 compared to the
same period in the prior year as a result of the following items:
Cost of gas increased $2.0 million, or 9 percent, for the three
months ended June 30, 1999 compared to the three months ended June
30, 1998 due primarily to an increase in costs from additional
firm sales, partially offset by the continued shift of customers
to transportation service.
Cost of goods sold decreased $1.8 million in the third quarter of
fiscal 1999 compared to the third quarter of fiscal 1998 primarily
due to the decrease in YESCo's revenues as a result of
management's reorganization of YESCo, partially offset by
increased nonutility activity resulting primarily from an
expansion of RMS' collection business.
Operations and maintenance expenses decreased $0.3 million,
primarily due to decreases in nonutility expenses resulting from
cost reduction initiatives implemented by YESCo. These decreases
were offset by an increase in Yankee Gas' pension expense.
Depreciation and amortization expense increased $0.3 million,
primarily due to additions in plant, property and investments.
Taxes other than income taxes decreased $0.4 million, primarily
due to lower Connecticut gross earnings taxes as a result of a
decrease in taxable revenues.
INCOME TAXES
Federal and state income taxes benefit decreased $1.2 million
primarily due to lower pre-tax losses for the three months ended
June 30, 1999 compared to the three months ended June 30, 1998 and
the nondeductiblity of merger expenses for tax purposes.
COMPARISON OF THE FIRST NINE MONTHS OF FISCAL 1999 WITH THE FIRST
NINE MONTHS OF FISCAL 1998
OPERATING REVENUES
Utility revenues decreased $11.9 million, or 4.8 percent, in the
first nine months of fiscal 1999 compared with the same period in
the prior fiscal year. This decrease was offset by a $0.4 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/
1999 1998 (Decrease)
(In thousands)
Firm sales $196,615 $211,565 $(14,949)
Firm transportation 21,027 14,668 6,359
Interruptible/off-system sales 13,758 17,278 (3,520)
Interruptible transportation 2,689 2,631 58
Other utility revenues 3,750 3,584 166
_______ _______ _______
Total utility revenues 237,839 249,726 (11,886)
Nonutility revenues 20,827 20,389 437
_______ _______ _______
Total operating revenues $258,666 $270,115 $(11,449)
_______ _______ _______
_______ _______ _______
The corresponding changes in Yankee Gas' throughput were as
follows:
Nine Months Ended
June 30, Increase/
(Mcf - thousands) 1999 1998 (Decrease)
Firm sales 21,360 23,321 (1,961)
Firm transportation 9,663 7,384 2,279
Interruptible/
off-system sales 4,082 4,072 10
Interruptible
transportation 3,444 4,794 (1,350)
______ ______ ______
Total throughput 38,549 39,571 (1,022)
______ ______ ______
______ ______ ______
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
nine months of fiscal 1999 compared to the same period in the
prior year, which enabled these customers to use a less costly
alternative fuel. Increase in nonutility revenues 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, excluding merger expenses, decreased
$12.5 million in the first nine months of fiscal 1999 compared with
the same period in the prior year as a result of the following
items:
Cost of gas decreased $14.6 million, or 11.3 percent, for the nine
months ended June 30, 1999 compared to the nine months ended June
30, 1998 due primarily to the weather impact on firm sales
customers and the continued increase in transportation customers.
Cost of goods sold decreased $.2 million in the first nine months
of fiscal 1999 compared to the first nine months of fiscal 1998
due to the corresponding decrease in YESCo's revenues as a result
of management's reorganization of YESCo partially offset by
expansion of R.M. Services' collection business.
Operations and maintenance expenses increased $0.7 million,
primarily due to increases in data center operation expense,
uncollectible and pension expense.
Depreciation and amortization expense increased $0.9 million,
primarily due to additions in plant, property and investments.
Taxes other than income taxes increased $0.4 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
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 increased $0.2 million primarily
due to higher pre-tax income for the nine months ended June 30,
1999 compared to the nine months ended June 30, 1998 and the
nondeductibility of merger expenses for tax purposes partially
offset by a lower effective tax rate for the nine months ended
June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at June 30, 1999 totaled $5.4
million. Cash provided by operating activities was $59.9 million
in the third 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 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 nine months of fiscal 1999. Expenditures for investment in
plant, property and investments totaled $22.5 million for the
first nine 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 June 30, 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 June 30, 1999. At June 30, 1999, Yankee Gas had no
amounts outstanding under its agreements. Yankee Energy had $2.0
million outstanding at June 30, 1999 under its $15 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. On August 2, 1999 Yankee Gas
redeemed its Series A Tranche D First Mortgage Bonds with cash on
hand and short-term debt facilities.
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,
1999, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $163.0
million of bonds at an assumed interest rate of 7.04 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 June 30,
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.
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 June 30, 1999, YES 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 June 30, 1999 was approximately
99 percent complete. In addition to remediating existing systems,
the Company purchased a new human resource information system
(HRIS) and a new customer service system (CCIS). These systems
were purchased to improve functionality of the application
software and to improve efficiency and customer service. In
addition, the new systems eliminate any Year 2000 issues
associated with the original systems. The new HRIS system became
operational January 1, 1999 and the new CCIS system became
operational on July 12, 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. 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 with that system.
The Company currently estimates that total cost to update all of
the Company's systems for Year 2000 compliance will be
approximately $23.1 million, including approximately $0.6 million
for the new HRIS system, $19.8 million for the new CCIS 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 June 30, 1999, the Company expensed
approximately $0.3 million and capitalized approximately $21.4
million, of these costs. The remaining costs will be incurred
during calendar 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 its Y2K contingency plans,
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.
YANKEE ENERGY SYSTEM, INC./NORTHEAST UTILITIES MERGER
On June 14, 1999, the Company and Northeast Utilities (NU) entered
into an Agreement and Plan of Merger (the Merger Agreement)
providing for a merger transaction between the Company and NU.
Pursuant to the Merger Agreement, the Company will merge with and
into Merger Sub (the Merger), a Connecticut corporation to be
formed by NU prior to the closing of the Merger as a wholly owned
subsidiary of NU. Merger Sub will be the surviving entity, but
will change its name to "Yankee Energy System, Inc." As a result
of the Merger, the Company will become a wholly owned subsidiary
of NU. The transaction is valued at $679 million and includes the
assumption of debt of approximately $201 million. The combination
will be accounted for using the purchase method of accounting.
Under terms of the Merger Agreement, each share of Company's
common stock will be converted into the right to receive (i)
$45.00 in cash, subject to adjustment under certain circumstances
(the Cash Consideration), (ii) a number of shares of NU common
stock calculated pursuant to the Exchange Ratio (as described
below), or (iii) a combination of cash and shares of NU common
stock. The Exchange Ratio will be equal to the Cash Consideration
divided by the average of the closing prices of NU common stock
for a defined period prior to the closing.
The ability of Company shareholders to elect to receive cash, NU
common stock or a combination of the two will be subject to the
requirement that the aggregate number of shares of Company common
stock that may be converted into cash will be 55% of the issued
and outstanding shares of Company common stock prior to the Merger
and the aggregate number of shares of Company common stock that
may be converted into NU common stock will be 45% of the issued
and outstanding shares of Company common stock. In the event the
Company's shareholders elect to receive cash or NU common stock in
excess of these percentages, such amounts of cash and stock
receivable will be adjusted on a pro rata basis. The transaction
is expected to be tax free to the Company's shareholders to the
extent they receive common stock of NU.
The Merger is conditioned on, among other things, the approval of
the Company's shareholders and various regulatory agencies,
including the DPUC and the Securities and Exchange Commission.
The Company expects the Merger to close in the first half of next
year.
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 June 30,
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 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K
On June 18, 1999, the Company filed a Current
Report on Form 8-K dated June 14, 1999 reporting in
Item 5 thereof the execution of an Agreement and
Plan of Merger between the Company and Northeast
Utilities, pursuant to which the Company will
become a wholly-owned subsidiary of Northeast
Utilities.
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)
/s/ James M. Sepanski
Date: August 13, 1999 ___________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
/s/ Nicholas A. Rinaldi
Date: August 13, 1999 ____________________________
Nicholas A. Rinaldi
Controller