SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) March 1, 2000
Commission File Number 1-5324
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NORTHEAST UTILITIES
--------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2147929
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
174 BRUSH HILL AVENUE, WEST SPRINGFIELD, MASSACHUSETTS 01090-0010
- ------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 785-5871
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name or former address, if changed since last report)
Item 2. Acquisition or Disposition of Assets.
On March 1, 2000, Northeast Utilities ("NU") completed the
acquisition (the "Merger") of Yankee Energy System, Inc. ("Yankee") pursuant
to the terms of the previously reported Agreement and Plan of Merger, dated
as of June 14, 1999 (the "Merger Agreement"), by and between NU and Yankee.
Yankee merged with and into NU Acquisition Corp., a Connecticut
corporation and wholly owned subsidiary of NU ("NUAC"), with NUAC surviving
the Merger, effective as of March 1, 2000. NUAC has been renamed "Yankee
Energy System, Inc." Each share of Yankee common stock was converted into
the right to receive consideration of $45 per share consisting of cash and
common shares of NU. The conversion ratio was determined through arm's
length negotiations. NU borrowed the funds used for the cash portion of the
consideration, approximately $261.4 million, through a Term Loan Agreement
dated March 1, 2000 with a group of banks led by Canadian Imperial Bank of
Commerce, New York Agency, as Administrative Agent. NU issued 11,144,760 of
NU Common Shares to Yankee shareholders for the share portion of the
transaction.
The Merger Agreement is incorporated herein by reference from NU's
Current Report on Form 8-K for an event dated June 14, 1999, and is listed
herein as Exhibit 2.1. A copy of NU's press release announcing the
effectiveness of the Merger is included as Exhibit 99.1. The foregoing
description of the Merger is qualified in its entirety by reference to such
Exhibits.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Yankee Energy System, Inc.
(b) Pro Forma Financial Information.
(c) Exhibits.
Exhibit Description
Number
2.1 Agreement and Plan of Merger, dated as of June 14, 1999, by and
between Northeast Utilities and Yankee Energy System, Inc. (filed as
Exhibit 1 to NU's Current Report on Form 8-K for an event dated
June 14, 1999, and incorporated herein by reference)
99.1 Press Release dated March 1, 2000.
SIGNATURE
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 hereunto duly authorized.
NORTHEAST UTILITIES
By: /s/ David R. McHale
Name: David R. McHale
Title: Vice President & Treasurer
Dated: March 1, 2000
Item 7. (a) Yankee Energy System, Inc. and Subsidiaries Financial Statements
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- -------------------------------------------------------------------------------
Revenues:
Utility revenues $275,619 $283,839 $318,954
Nonutility revenues 27,863 30,928 6,087
-------- -------- --------
Total revenues 303,482 314,767 325,041
-------- -------- --------
Operating expenses:
Cost of gas/goods sold 152,376 169,287 176,757
Operations 61,353 61,964 58,569
Maintenance 6,343 5,978 6,382
Merger expenses 1,981 - -
Nonrecurring charges 4,436 - -
Depreciation and amortization 21,560 19,789 18,130
Taxes other than income taxes 20,809 20,431 22,519
-------- -------- --------
Total operating expenses 264,422 281,885 282,357
-------- -------- --------
Operating income 39,060 32,882 42,684
Other income/expense:
Other income, net 243 174 159
Interest expense, net 14,604 13,853 12,463
-------- -------- --------
Income before income taxes 24,699 19,203 30,380
Provision for income taxes 11,324 8,320 13,423
-------- -------- --------
Net income $ 13,375 $ 10,883 $ 16,957
======== ======== ========
Basic and diluted earnings per
common share $ 1.26 $ 1.04 $ 1.62
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AT SEPTEMBER 30, 1999 1998
- -------------------------------------------------------------------------------
ASSETS
Utility plant, at original cost $591,882 $547,098
Less-Accumulated provision for depreciation 223,142 207,872
-------- --------
368,740 339,226
Construction work in progress 12,308 28,707
-------- --------
Total net utility plant 381,048 367,933
-------- --------
Other property and investments 15,593 12,778
Assets held for sale 15,352 12,361
Current assets:
Cash and temporary cash investments 1,736 1,881
Accounts receivable, less accumulated provision
for uncollectible accounts of $5,979 in 1999
and $8,132 in 1998 38,952 35,946
Fuel supplies 1,316 1,418
Other materials and supplies 1,994 1,972
Accrued utility revenues 6,705 4,028
Prepaid expenses and other 18,165 25,327
-------- --------
Total current assets 68,868 70,572
-------- --------
Deferred gas costs 7,244 10,480
Recoverable environmental cleanup costs 33,816 34,084
Recoverable income taxes 4,166 10,673
Recoverable postretirement benefits costs 1,236 1,725
Other deferred debits 12,963 14,678
-------- --------
Total assets $540,286 $535,284
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements):
Common shareholders' equity $165,579 $164,992
Long-term debt, net of current portion 163,050 131,048
-------- --------
Total capitalization 328,629 296,040
-------- --------
Current liabilities:
Notes payable to banks 56,000 75,700
Long-term debt, current portion 1,200 4,217
Accounts payable 23,013 19,643
Accrued interest 3,322 3,176
Pipeline transition costs payable 1,539 2,516
Other 6,456 8,402
-------- --------
Total current liabilities 91,530 113,654
-------- --------
Accumulated deferred income taxes 65,843 72,816
Accumulated deferred investment tax credits 7,948 8,325
Reserve for environmental cleanup costs 35,000 35,000
Postretirement benefits obligation 3,691 3,353
Other deferred credits 7,645 6,096
Commitments and contingencies (Note 9)
-------- --------
Total capitalization and liabilities $540,286 $535,284
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------------------------------------------------------------
Cash Flows From Operating Activities:
Net income $ 13,375 $ 10,883 $ 16,957
Adjusted for the following:
Depreciation and amortization 21,560 19,789 18,130
Asset impairment, nonrecurring charge - 2,037 -
Equity earnings from investments (372) (216) (105)
Deferred income taxes, net (843) 4,598 6,927
Deferred gas costs activity and
other non-cash items 6,031 (3,688) (5,007)
Changes in working capital:
Accounts receivable and accrued
utility revenues (5,683) (8,305) (271)
Prepaid expenses and other 7,162 (11,395) (5,106)
Accounts payable and accrued
liabilities 3,370 (3,098) 170
Other working capital
(excludes cash) (1,720) 7,885 (3,089)
-------- -------- --------
Net cash provided by operating
activities 42,880 18,490 28,606
Cash Flows From Financing Activities:
Net proceeds from common
stock issuance 1,193 2,232 105
Issuance of long-term debt 50,000 - 30,000
Retirement of long-term debt (21,015) (4,017) (34,017)
(Decrease) increase in
short-term debt (19,700) 36,700 18,700
Cash dividends (14,858) (14,267) (13,797)
-------- -------- --------
Net cash (used for) provided by
financing activities (4,380) 20,648 991
Investment In Plant And Other:
Utility plant (31,881) (34,649) (31,320)
Other property, investments
and assets held for sale (6,764) (4,847) (3,891)
-------- -------- --------
Net cash used for plant and other (38,645) (39,496) (35,211)
Net Decrease In Cash and Temporary Cash
Investments For The Period (145) (358) (5,614)
Cash and Temporary Cash Investments,
beginning of period 1,881 2,239 7,853
-------- -------- --------
Cash and Temporary Cash Investments,
end of period $ 1,736 $ 1,881 $ 2,239
======== ======== ========
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $ 15,313 $ 13,273 $ 14,203
Income taxes $ 3,884 $ 6,469 $ 12,140
The accompanying notes are an integral part of these consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(IN THOUSANDS)
AT SEPTEMBER 30, 1999 1998
- -------------------------------------------------------------------------------
Common shareholders' equity:
Common shares - $5 par value, authorized 20,000,000
shares; 10,633,666 and 10,545,362 shares outstanding
at September 30, 1999 and 1998 $ 53,168 $ 52,727
Capital surplus, paid in 90,978 89,949
Unearned compensation-restricted stock awards (a) (131) (131)
Retained earnings 21,564 23,047
Employee stock ownership plan guarantee (b) - (600)
-------- --------
Total common shareholders' equity 165,579 164,992
-------- --------
Long-term debt:
First mortgage bonds (c)
Maturity Interest rates
2004 10.03% - 20,165
2005 6.75% 20,000 20,000
2009 6.20% 50,000 -
2012 7.19% 30,000 30,000
2019 10.07% 19,000 19,000
2022 8.48% 20,000 20,000
2023 8.63% 20,000 20,000
-------- --------
Total first mortgage bonds 159,000 129,165
Term loan agreement, 6.24%, due February, 2003 (c) 5,250 5,500
Guarantee of employee stock ownership plan term
loan agreement, 10.38%, final maturity July, 1999 (b) - 600
-------- --------
Total long-term debt 164,250 135,265
Less amounts due within one year (b)(c) 1,200 4,217
-------- --------
Long-term debt, net 163,050 131,048
-------- --------
Total capitalization $328,629 $296,040
======== ========
(a) Consistent with the terms of the Non-Employee Directors' Stock Compensation
Plan, incentive awards of 225 shares and 1,200 shares of restricted common
stock were granted to directors during 1999 and 1998, respectively. Under
the directors' plan, the market value of the restricted stock awards has
been recorded as unearned compensation and is shown as a separate component
of shareholders' equity. The earned compensation is charged to
administrative and general expense as shares become vested. Earned
compensation was approximately $30,100 for fiscal 1999 and $29,000 for
fiscal 1998.
Consistent with the terms of the Long-Term Incentive Compensation Plans
of the Company, incentive awards of 25,600 and 1,711 shares of restricted
common stock were granted to employees during 1999 and 1998, respectively.
Under the Long-Term Compensation Plans, the market value of the restricted
stock awards has been recorded as unearned compensation and is shown as a
separate component of shareholders' equity. The earned compensation is
charged to administrative and general expense as shares become vested.
Earned compensation was approximately $253,000 for fiscal 1999 and $78,000
for fiscal 1998.
(b) On July 20, 1989, Yankee Energy became guarantor of a term loan agreement
between the Trustee for the Company's 401(k) Employee Stock Ownership Plan
(ESOP), and a commercial bank, in the amount of $4,000,000. The proceeds
were used by the Trustee exclusively to acquire outstanding shares of
Yankee Energy common stock pursuant to the terms of the Company's ESOP.
The final maturity date of the agreement was July 1, 1999.
(c) Long-term debt maturities and cash sinking fund requirements on debt
outstanding at September 30, 1999 for each of the fiscal years 2000 through
2004 (excluding early redemption options the Company may utilize) are
$1,200,000; $1,200,000; $1,200,000; $5,450,000; and $950,000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S EQUITY
(In thousands)
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Employee
Stock
Capital Ownership
Common Surplus, Retained Plan
Shares Paid In Earnings (a) Guarantee Total
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 $52,248 $87,947 $23,271 ($1,400) $162,066
Net income 16,957 16,957
Issuance of 4,860 common shares -
$5 par value 24 81 105
Cash dividends on common shares -
$1.32 per share (13,797) (13,797)
Employee stock ownership plan
loan repayment 400 400
Unearned compensation-restricted
stock awards (b) (25) (25)
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $52,272 $88,003 $26,431 ($1,000) $165,706
Net income 10,883 10,883
Issuance of 90,948 common shares -
$5 par value 455 1,777 2,232
Cash dividends on common shares -
$1.36 per share (14,267) (14,267)
Employee stock ownership plan
loan repayment 400 400
Unearned compensation-restricted
stock awards (b) 38 38
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $52,727 $89,818 $23,047 ($600) $164,992
Net income 13,375 13,375
Issuance of 88,304 common shares -
$5 par value 441 752 1,193
Cash dividends on common shares -
$1.40 per share (14,858) (14,858)
Employee stock ownership plan
loan repayment 600 600
Unearned compensation-restricted
stock awards (b) 277 277
- --------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 $53,168 $90,847 $21,564 $0 $165,579
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Yankee Gas has dividend restrictions imposed by its Bond Purchase
Agreements. At September 30, 1999, retained earnings available for
common dividends under the terms of the Series A agreement and Series B
and C agreements totaled approximately $40.5 million and $50.8 million,
respectively.
(b) See note (a) of the Consolidated Statements of Capitalization.
The accompanying notes are an integral part of these consolidated financial
statements.
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company: Yankee Energy System, Inc. ("YES" or the "Company"),
headquartered in Meriden, Connecticut, is a diversified company
specializing in the distribution, conversion, and control of energy
to meet our customers' needs. Our principal operating subsidiary is
Yankee Gas Services Company ("Yankee Gas"). Yankee Gas, the largest
natural gas distribution company in Connecticut, provides service to
more than 185,000 customers in 69 cities and towns.
On June 14, 1999, the Company and Northeast Utilities ("NU") entered
into an Agreement and Plan of Merger ("Merger Agreement") providing
for a merger transaction ("Merger") between the Company and NU.
Pursuant to the Merger Agreement, the Company will merge with and
into Merger Sub, 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. Shareholders of Yankee Energy
will receive $45.00 a share, 45% payable in NU shares and 55% payable
in cash. The Merger will be accounted for using the purchase method
of accounting. On October 12, 1999, the shareholders of the Company
approved the Merger. The Merger is conditioned on, among other
things, the approval of the various regulatory agencies, including the
Connecticut Department of Public Utility Control ("DPUC") and the
Securities and Exchange Commission. The Company expects the Merger
to close in the first half of fiscal 2000.
The Company's other operating subsidiaries support the core business
in natural gas distribution, or allow the Company to expand its
growing business in energy-related services. Yankee Energy Services
Company ("YESCo") provides a wide range of energy-related services for
its customers. YESCo Controls division provides comprehensive
building automation with engineering, installation and maintenance of
building control systems. YESCo Mechanical Services division provides
comprehensive heating, ventilation and air-conditioning ("HVAC"),
boiler and refrigeration equipment services and installation. In
addition to Yankee Gas and YESCo, two other subsidiaries are taking
advantage of opportunities by offering services once exclusively
provided to local energy customers to a broader marketplace. R.M.
Services, Inc. ("RMS"), through its alliance with Dun & Bradstreet
Management Receivables Services, provides consumer collection services
for companies throughout the United States, and Yankee Energy
Financial Services Company ("Yankee Financial") provides a full range
of equipment and home improvement financing options through programs
like the Hometown Energy Loan Program. NorConn Properties, Inc.
("NorConn") owns selected system real estate, which it leases to
Yankee Gas. Additional company information can be found at the
Company web site, www.yankeeenergy.com.
Principles of Consolidation: The consolidated financial statements
of the Company include the accounts of all subsidiaries. Intercompany
transactions have been eliminated in consolidation.
Public Utility Regulation: Yankee Gas is subject to regulation for
rates and other matters by the DPUC and follows accounting policies
prescribed by the DPUC. The Company prepares its financial statements
in accordance with generally accepted accounting principles, which
include 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 rate making 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. Yankee Gas continues
to be subject to cost-of-service-based rate regulation by the DPUC.
Based upon current regulation and recent regulatory decisions, the
Company believes that its use of regulatory accounting in accordance
with the provisions of FAS 71 is appropriate.
Revenues: Utility revenues are based on authorized rates applied to
each customer's use of gas. Rates can be changed only through a
formal proceeding before the DPUC. At the end of each accounting
period, a revenue estimate for the amount of gas delivered but
unbilled is recorded.
Merger Costs: The Company has recorded approximately $2.0 million of
costs for legal, consulting and financial advisory services related
to the Merger. These costs have been expensed as incurred.
Depreciation: The provision for utility depreciation is calculated
using the straight-line method based on estimated remaining useful
lives of depreciable utility plant in service, adjusted for net
salvage value and removal costs as approved by the DPUC. The
depreciation rates for the several classes of plant in service are
equivalent to an overall composite rate of 3.3 percent in fiscal years
1999, 1998 and 1997.
Purchased Gas Adjustment Clause ("PGA"): The DPUC-approved rates
include an adjustment clause under which gas costs above or below
base rate levels are charged or credited to customers. As prescribed
by the DPUC, differences between the actual purchased gas costs and
the current cost recovery are deferred and recovered or refunded over
future periods.
Equity Accounting: The Company accounts for YESCo's investments in
energy production facilities using the equity method, recording
their proportionate share of earnings (losses) with corresponding
increases (decreases) in their investment. Distributions received
reduce the carrying amount of these investments.
Income Taxes: Differences exist between the periods in which
transactions affect income in the financial statements and the
periods in which they affect the determination of income subject to
tax. The tax effect of such timing differences is accounted for in
accordance with the ratemaking treatment required by the DPUC. As of
September 30, 1999, the Company has a deferred tax liability and a
corresponding regulatory asset of approximately $4 million. These
deferred amounts represent book/tax differences for which the tax
impacts were not recognized in the financial statements (or included
in the rates) at the time the differences occurred (flow-through
accounting), but for which the additional taxes due at the time the
differences reverse will be recoverable from ratepayers.
Cash and Temporary Cash Investments: Cash and temporary cash
investments includes cash on hand and short-term investments which
are highly liquid in nature and have original maturities of three
months or less.
Reclassifications: Certain prior year amounts have been reclassified
to conform with current year classifications.
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.
Earnings per Share: The Company is required to compute and present
basic and diluted earnings per share. The basic weighted average
shares outstanding for fiscal 1999, 1998 and 1997 were 10,609,293,
10,495,806 and 10,451,165, respectively, and the diluted weighted
average shares outstanding for fiscal 1999, 1998 and 1997 were
10,623,017, 10,499,810 and 10,453,318, respectively. As such, there
is no measurable difference between basic and diluted earnings per
share.
Recent Accounting Pronouncements: In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires the Company to recognize all derivatives
as either assets or liabilities in the consolidated balance sheets and
measure those instruments at fair value. Management is currently
evaluating the impact of this standard and believes the adoption
will not materially impact the Company's consolidated financial
position, results of operations or cash flows. This statement is
effective for the Company in the first quarter of fiscal year 2001.
NOTE 2) INCOME TAX EXPENSE
The components of the federal and state income tax provisions are:
YEARS ENDED SEPTEMBER 30, 1999 1998 1997
--------------------------------------------------------------------
(In thousands)
Charged to income:
Current income taxes:
Federal $ 9,631 $2,252 $ 4,509
State 2,726 624 1,979
------- ------ -------
Total current 12,357 2,876 6,488
------- ------ -------
Deferred income taxes, net:
Investment tax credit (377) (377) (377)
Federal (55) 5,528 6,004
State (601) 293 1,308
------- ------ -------
Total deferred (1,033) 5,444 6,935
------- ------ -------
Total income tax expense $11,324 $8,320 $13,423
======= ====== =======
Deferred income tax liabilities (assets) are comprised of the
following:
AT SEPTEMBER 30, 1999 1998
---------------------------------------------------------------------
(In thousands)
Depreciation $71,854 $75,238
Other (6,011) (2,422)
------- -------
Net deferred income tax liability $65,843 $72,816
======= =======
The differences between the effective income tax rate recorded by the
Company and the statutory federal tax rate are reconciled as follows:
1999 1998 1997
---- ---- ----
Federal statutory rate 35.0% 35.0% 35.0%
Tax effect of differences:
Depreciation 6.1 9.3 5.1
State income taxes net
of federal benefit 5.6 3.1 6.9
Merger expenses 2.5 - -
Pension accrual (1.4) (4.0) (0.1)
Miscellaneous (1.9) (0.1) (2.7)
----- ----- -----
Effective income tax rate 45.9% 43.3% 44.2%
===== ===== =====
NOTE 3) LEASES
The Company has entered into operating lease agreements for the use of
office equipment, vehicles and buildings. For fiscal 1999, 1998 and
1997, these lease payments were $2,274,000, $1,999,000 and $2,064,000,
respectively. Future minimum lease payments, excluding associated
costs such as property taxes, state use taxes, insurance and
maintenance, under long-term noncancelable leases as of September 30,
1999, are approximately:
Year (In Thousands)
---- --------------
2000 $1,851
2001 1,568
2002 1,239
2003 655
2004 497
After 2005 333
------
Future minimum lease payments $6,143
======
NOTE 4) POSTRETIREMENT BENEFITS
The Company has a noncontributory defined benefit retirement plan,
covering employees of Yankee Gas and RMS. Benefits are based on
years of service and employees' highest consecutive 60 months of
compensation during the last 120 months of employment. It is the
Company's policy to fund annually an amount at least equal to that
which will satisfy the requirements of the Employee Retirement Income
Security Act and the Internal Revenue Code. No contributions were
required or made in fiscal 1999, 1998 and 1997. Pension assets are
invested primarily in equity securities and investment grade bonds.
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits", which standardizes the disclosure
requirements for pension and other postretirement benefits, eliminates
certain disclosure, and requires additional information on the
changes in the benefit obligations and fair value of plan assets.
The components of net pension cost (income) were:
YEARS ENDED SEPTEMBER 30, 1999 1998
------------------------- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 73,352 $64,845
Service cost 2,425 2,099
Interest cost 5,022 4,814
Amendments - 717
Actuarial loss (gain) (9,244) 3,961
Benefits paid (3,261) (3,084)
-------- -------
Benefit obligation at end of year $ 68,294 $73,352
======== =======
Change in plan assets:
Fair value of plan assets at
beginning of year $ 88,837 $89,966
Actual return on plan assets 15,339 1,955
Benefits paid (3,261) (3,084)
-------- -------
Fair value of plan assets at end of year $100,915 $88,837
======== =======
Funded status $ 32,621 $15,485
Unrecognized transition asset (531) (617)
Unrecognized prior service cost 625 665
Unrecognized net actuarial loss (32,888) (16,629)
-------- -------
Accrued pension cost (income) $ (173) $(1,096)
======== ========
YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------ ---- ---- ----
(In thousands)
Net pension cost includes the following components:
Service cost $ 2,425 $ 2,099 $ 1,992
Interest cost 5,022 4,814 4,522
Expected return on plan assets (7,851) (7,958) (6,413)
Amortization of transition asset (86) (86) (86)
Amortization of prior service cost 40 26 (3)
Recognized net actuarial gain (473) (1,135) (517)
------- ------- -------
Net periodic pension cost (income) $ (923) $(2,240) $ (505)
======= ======= =======
Weighted-average assumptions:
Discount rate 7.50% 7.00% 7.50%
Expected long-term rate of return 9.00% 9.00% 9.00%
Compensation/progression rate 4.00% 4.00% 4.50%
Pension cost for 1999, 1998, and 1997 includes $85,000 in cost of
living increases each year for NU retirees who were previously
employed in the gas business operated by The Connecticut Light and
Power Company, a subsidiary of NU. These payments were agreed to at
the time of divestiture from NU. During fiscal 1994, the Company
adopted an Excess Benefit Plan ("EBP") that provides retirement
benefits to executive officers and other key management staff. The
EBP recognizes total compensation and service that would otherwise be
disregarded due to Internal Revenue Code limitations on compensation
in determining benefits under the regular retirement plan. The EBP is
not funded and benefits are paid from general corporate assets when
due.
NOTE 5) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides certain health care and life insurance benefits
to its retired Yankee Gas and RMS employees. The Company recognizes
the cost of postretirement benefits over the employment period that
encompasses eligibility to receive such benefits. On July 1, 1990,
in accordance with terms of the divestiture, Yankee Gas began
compensating NU for a portion of NU's liability for certain health
care and life insurance expenses of retirees or surviving spouses.
Yankee Gas and NU will share costs in a defined manner until June 30,
2005. The cost of providing those benefits for NU retirees was
approximately $1,283,000 for the fiscal year ended September 30, 1999
and $1,032,000 and $1,103,000 for the comparable periods in 1998 and
1997, respectively.
The Company has established two Internal Revenue Code Section
501(c)(9) Voluntary Employee Beneficiary Association ("VEBA") Trusts,
one for union employees and one for non-union employees, to fund its
future liabilities for retiree health care and life insurance
benefits. Contributions to the VEBA Trusts totaled $1.3 million for
fiscal 1999 and $1.1 million for fiscal 1998. Assets of the VEBA
Trusts are invested primarily in equity securities and investment
grade bonds.
For Yankee Gas, the DPUC is allowing $1.7 million of associated
expenses to be recovered in rates and up to an additional $1.5 million
annually, which is being collected through a rate settlement process,
which is more fully described in Note 9, Commitments and Contingencies
(Transition Costs-Order No. 636).
The components of net pension cost (income) were:
YEARS ENDED SEPTEMBER 30, 1999 1998
------------------------- ---- ----
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 27,465 $ 21,803
Service cost 1,253 922
Interest cost 1,892 1,597
Employee contribution 59 57
Actuarial loss (gain) (3,227) 4,181
Benefits paid (967) (1,095)
-------- --------
Benefit obligation at end of year $ 26,475 $ 27,465
======== ========
Change in plan assets:
Fair value of plan assets at
beginning of year $ 11,893 $ 10,790
Actual return on plan assets 1,851 1,309
Employer contribution 1,292 832
Employee contribution 59 57
Benefits paid (967) (1,095)
-------- --------
Fair value of plan assets at end of year $ 14,128 $ 11,893
======== ========
Funded status $(12,347) $(15,572)
Unrecognized transition obligation 11,856 12,731
Unrecognized net actuarial loss (6,527) (2,529)
-------- --------
Accrued benefit cost $ (7,018) $ (5,370)
======== ========
YEARS ENDED SEPTEMBER 30, 1999 1998 1997
- ------------------------ ---- ---- ----
(In thousands)
Net pension cost includes the following components:
Service cost $1,253 $ 922 $ 913
Interest cost 1,892 1,597 1,685
Expected return on plan assets (1,080) (1,076) (713)
Amortization of transition
obligation 875 876 875
Recognized net actuarial gain - (253) (88)
Other adjustments or deferrals - - 210
------ ------ ------
Net periodic pension cost $2,940 $2,066 $2,882
====== ====== ======
Weighted-average assumptions:
Discount rate 7.50% 7.00% 7.50%
Expected return of plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.00% 4.00% 4.50%
Health care cost trend rate
- First year 6.00% 7.00% 8.00%
- Ultimate 5.00% 5.00% 5.00%
Trend rates are assumed to decrease one percent per year until they
reach the ultimate rate. A one percent increase in the weighted
average trend rate assumption of health care claims would result in a
12 percent increase in accumulated benefit obligations and a 16
percent increase in net periodic postretirement benefit costs.
NOTE 6) STOCK-BASED COMPENSATION
Yankee Energy established Long-Term Incentive Compensation Plans in
1991 and 1996. Options on 73,400 and 20,500 shares of common stock
were granted under the 1996 plan, in fiscal 1998 and 1999,
respectively. Under the terms of the options granted, the exercise
price of any option may not be less than 100 percent of the fair
market value of the common stock on the date of the grant. The
stock options generally vest over a five year period, with 20 percent
becoming exercisable on each of the first five anniversaries of the
grant. All stock options expire ten years from the date of grant.
Options granted to a senior executive were accelerated and deemed
fully vested as of September 30, 1998, as part of a severance
agreement (see Note 9 Commitments and Contingencies). The Company
recorded expenses in fiscal 1998 of approximately $101,000 due to the
change in the measurement date.
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation costs
have been recognized for stock option awards. Had compensation costs
of option awards been determined under a fair value alternative method
as stated in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the Company would have
been required to value such options and record such amounts in the
financial statements as compensation expense. Pro forma net income
and net income per share for fiscal 1999, 1998 and 1997 would have
been $13,297,000 and $1.25, $10,832,000 and $1.03, and $16,919,000
and $1.62, respectively. For purposes of this calculation, the
Company arrived at the fair value of each stock grant at the date of
grant by using the Black Scholes option pricing model with the
following weighted average assumptions used for grants for the fiscal
years ended September 30, 1999 and 1998: risk-free interest rate of
5.5 and 5.7 percent, respectively, expected life of 5.0 years,
expected volatility of 30 and 17 percent, respectively, and a dividend
yield of 3.3 and 5.3 percent, respectively. No stock options were
granted for the fiscal year ended September 30, 1997.
The following summarizes stock option transactions for the fiscal
years ended September 30, 1999, 1998 and 1997:
- ------------------------------------------------------------------------------
Average Number
Option Prices Price of Shares
- ------------------------------------------------------------------------------
Outstanding Options September 30, 1996 $21.38-$23.69 $22.73 115,000
Exercised $21.63-$23.69 $21.73 (4,860)
Canceled $21.63-$23.69 $22.97 (8,980)
-------
Outstanding Options September 30, 1997 $21.38-$23.69 $22.75 101,160
Granted $23.13-$26.19 $24.63 73,400
Exercised $21.63-$23.69 $21.93 (8,240)
Canceled $21.63-$23.72 $23.01 (45,260)
-------
Outstanding Options September 30, 1998 $21.63-$26.19 $23.85 121,060
Granted $29.31 $29.31 20,500
Exercised $21.63-$26.19 $24.25 (60,860)
Canceled $21.63-$23.72 $23.57 (7,800)
-------
Outstanding Options September 30, 1999 $21.63-$29.31 $25.08 72,900
=======
At September 30, 1999, 1998, and 1997, there were 42,612 options,
63,388 options, and 38,136 options exercisable, respectively, which
have weighted average exercise prices of $26.16 per share, $24.24
per share, and $22.20 per share, respectively.
NOTE 7) SHORT-TERM DEBT
Yankee Gas has arranged a $60 million revolving line of credit with
a group of three banks whereby funds may be borrowed on a short-term
revolving basis using either fixed or variable rate loans. Yankee Gas
had $34.5 million and $63.2 million outstanding under its agreements
at September 30, 1999 and 1998, respectively. In addition, Yankee
Energy had $21.5 and $12.5 million outstanding at September 30, 1999
and 1998, respectively, on a $15 million line of credit and a $10
million uncommited line of credit. The weighted average interest rates
on short-term debt at September 30, 1999 and 1998 were 5.5 percent and
5.8 percent, respectively.
NOTE 8) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and temporary cash investments approximates
fair value. The fair values of the Company's first mortgage bonds,
which are fixed rate long-term debt, are based upon borrowing rates
currently available to the Company. Adjustable rate securities are
assumed to have a fair value equal to their carrying value. The
carrying amount of the first mortgage bonds (including current
maturities) was $159,000,000 and $129,165,000 as of September 30, 1999
and 1998, respectively. The fair value was $152,577,000 and
$144,100,000 as of September 30, 1999 and 1998, respectively. These
fair values have been reported to meet the disclosure requirements
of Statement of Financial Accounting Standards No. 107, "Disclosures
About Fair Values of Financial Instruments," and do not purport to
represent the amounts at which those obligations would be settled.
NOTE 9) COMMITMENTS AND CONTINGENCIES
Construction Program: The Company's estimated capital expenditures
for fiscal 2000 are $30.8 million. The Company intends to use $29.0
million of these estimated expenditures to maintain the reliability
of the distribution system and in projects that will generate or
support gas sales and transportation activities.
Environmental Matters: Fourteen sites containing coal tar became the
property of Yankee Gas at divestiture from NU in 1989. Contamination
at these sites was caused by operations of former manufactured gas
plants at those locations. Yankee Gas has reported the results of its
environmental studies to the Connecticut Department of Environmental
Protection ("DEP"). The DEP has not required that any remedial
action be undertaken to date. However, eight of the fourteen sites are
presently listed on the Connecticut Inventory of Hazardous Waste
Sites. Inclusion of a site on this list indicates that remediation
may be required in the future.
Remediation has been conducted at three of these properties. In
addition, Yankee Gas has developed a cost estimate for the remaining
sites based on various factors including the probability of clean-up.
As a result of this effort, Yankee Gas recorded a liability of $35
million in fiscal 1993 for future environmental clean-up with a
corresponding regulatory asset. Recovery of remediation costs has
been specifically allowed by Yankee Gas' 1992 rate case decision.
Presently, $325,000 is allowed annually in rates. If costs are
expected to exceed $2.5 million on an annual basis, Yankee Gas is
required to review such expenditures with the DPUC. The DPUC has
stated that "to the extent that coal tar remediation expenses are
prudently incurred, they should be allowed as proper operating
expenses," and therefore, management continues to believe a regulatory
asset is appropriate for this item.
Yankee Gas has received $9.6 million from certain of its insurance
carriers in settlement of certain claims for actual or potential
contamination at certain sites that may give rise to environmental
liabilities. The terms of the aforementioned settlements are subject
to confidentiality provisions in agreements between Yankee Gas and its
insurance carriers. The proceeds are being reflected as reductions
in the regulatory asset associated with recoverable environmental
clean-up costs, as shown in the accompanying balance sheets.
Transition Costs-Order No. 636: On April 8, 1992, the Federal Energy
Regulatory Commission ("FERC") issued Order No. 636 on pipeline
restructuring. In essence, the FERC found that absent the unbundling
of traditional merchant services, pipelines would not be able to
achieve the FERC's long-term goal of open access and provide
transportation services that are indifferent to the seller of the gas.
Order No. 636 acknowledges that the restructuring of the pipelines'
traditional services will cause pipelines to incur transition costs in
several areas and provides mechanisms for the pipelines to fully
recover prudently incurred transition costs attributable to the
implementation of Order No. 636.
On July 8, 1994, the DPUC issued a decision on the implementation of
FERC Order No. 636 by the Connecticut Local Distribution Companies
("LDCs"). The DPUC is allowing the LDCs to offset the transition costs
billed by pipelines under Order No. 636 with recoveries from capacity
release activity, refunds of deferred gas costs, gas supplier refunds,
off-system sales margin and interruptible margin earned in excess of
target amounts. Through September 30, 1999, Yankee Gas paid
approximately $21.5 million of transition costs and an additional $1.5
million is anticipated. To date, Yankee Gas has collected $53.6 million
through a combination of credits received from gas supplier refunds,
deferred gas costs, excess interruptible margin, off-system sales
margin, and capacity release agreements.
On January 3, 1996, the DPUC issued a Final Decision in reopened Docket
No. 92-02-19. The Docket allows for recovery of certain deferred
regulatory assets with the stipulation that Yankee Gas would not
increase its rates before October 1, 1998, except in the event of
certain circumstances which would adversely affect Yankee Gas'
financial condition. Yankee Gas may apply a portion of excess
transition credits received from pipeline refunds, interruptible
excess margin, deferred gas costs, capacity release activity, and
off-system sales margin to certain regulatory assets. As of
September 30, 1999, excess collections of approximately $32.1 million
were applied against the deferred regulatory assets specified in the
decision.
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
would credit approximately $3.2 million to firm sales customers through
the PGA during fiscal year 1998. The settlement also allowed 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 fiscal 1996, Yankee Gas received revised property
tax bills from the City of Meriden, Connecticut ("City") for tax years
1991 through 1994. The City is asserting a claim for approximately
$5.0 million for back taxes and interest resulting from the
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 using a different methodology than that previously accepted by
the City. Subsequent to the filing of the lawsuit against the City,
Yankee Gas appealed the succeeding reassessment and currently is in the
process of also litigating the revaluation of the subject personal
property for the tax years 1995 through 1998. Although it is
anticipated that the outcome of this claim will not have a material
impact on the Company's financial statements, based on the information
available at this time, management cannot predict what the ultimate
impact might be.
In November 1995, a purported class action suit was filed against
Yankee Gas and the state's two other LDCs by the Connecticut Heating
and Cooling Contractors' Association, Inc. et al. On December 21,
1999, the action was settled with the plaintiffs and is awaiting the
court's confirmation. The settlement does not have a material adverse
effect on the Company's consolidated results of operations or financial
position.
The Company is not a party to any other litigation other than ordinary
routine litigation incident to the operations of the Company or its
subsidiaries. In the opinion of management, the resolution of such
litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
Tax Audits: The Company is currently under audit by the State of
Connecticut regarding the Company's Sales and Use Tax returns for
the calendar years 1996, 1997 and 1998, by the City of Naugatuck,
Connecticut regarding the Company's Personal Property Tax Schedules
for the years 1995, 1996 and 1997, and by the Internal Revenue Service
("IRS") regarding the Company's Federal Income Tax returns for the
calendar years 1995 and 1996. The Company is responding to all
information document requests put forth by the auditors. At this
time, except for the audit of the 1995 Federal Income Tax Return,
the Company does not have sufficient information to determine the
amount, if any, of additional liability that may result from these
proceedings. The Company is expecting a formal proposal from the IRS
regarding adjustments to the 1995 Federal Income Tax Return. The
Company does not anticipate that any of these audits, including the
audit of the 1995 Federal Income Tax Return, will have a material
effect on its consolidated results of operations or financial position.
Nonrecurring Charges: In connection with YESCo's HVAC restructuring
and impairments of certain Power division assets, the Company recorded
a pre-tax charge of approximately $3.5 million in the fourth quarter
of fiscal 1998. Of the total charge, $1.6 million represents
impairment of HVAC and Power divisions' long-lived assets such as
property and goodwill and $1.9 million pertains to YESCo restructuring
charges such as lease costs, severance and other exit costs. In
addition, in the fourth quarter of fiscal 1998, the Company recorded a
pre-tax charge for severance of approximately $0.9 million, due to the
resignation of two senior executives. As of September 30, 1999, all
amounts accrued have been paid and no additional charges were required.
The Company is currently negotiating the sale of its more significant
Power Division investments with several interested parties. These
investments include an operating land fill gas fueled generating
facility in Brookhaven, NY, interests in two operating cogeneration
facilities, development stage projects and other less significant
assets. The total investment at September 30, 1999 is approximately
$15.4 million and is reflected as assets held for sale in the
consolidated balance sheets. 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.
NOTE 10) RISK MANAGEMENT ACTIVITIES
Gas Supply Hedging Activities: Yankee Gas has gas service agreements
with two customers to supply gas at fixed prices. Because Yankee Gas
purchases gas on a variable price basis, it has hedged gas prices with
derivatives to respond to customers' needs for fixed pricing. Both
agreements are similar in structure in that Yankee Gas executed a
commodity swap contract with a commodity trading firm. Under a master
commodity swap agreement, the price of a specified quantity of gas is
fixed over the term of the gas service agreement with the customer.
In both cases, Yankee Gas is acting as an agent, using its credit to
provide fixed pricing to its customers, using a commodity swap.
Yankee Gas' 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. Also, the
customers are accountable for all costs incurred by Yankee Gas to
execute and maintain the commodity swap contract.
Of the two gas service hedging agreements currently in force, only
one is material relative to the significance of gas volumes being
hedged. This agreement has a ten-year term and requires Yankee Gas
to supply approximately one BCF of gas per year, with relatively low
margin, at a fixed price that began August 1, 1995. The price is
allowed to escalate by a predetermined rate every year after the first
year. The commodity swap contract for this hedging agreement was
executed August 17, 1994. Yankee Gas is responsible for margin calls
collateralizing the commodity swap contract from August 17, 1994
through the term of the gas service agreement. Currently, Yankee Gas
has a letter of credit in the amount of $1.75 million issued to the
commodity trading firm collateralizing the commodity contract.
Interest Rate Swap: The Company uses swap instruments with financial
institutions to exchange fixed rate interest obligations to a blend
between fixed and variable rate obligations without exchanging the
underlying notional amounts. These instruments convert high fixed
interest rate obligations to variable rates. The notional amounts
parallel the underlying debt levels and are used to measure interest
to be paid or received and do not represent the exposure to credit
loss. As of September 30, 1999, Yankee Energy had outstanding
agreements with a total notional value of $49 million and a positive
mark-to-market position of approximately $63,000. The difference
between the amounts paid and received under the swaps is accrued and
recorded as an adjustment to interest expense over the life of the
swap instruments.
NOTE 11) REPORTABLE SEGMENTS
Yankee Energy operates principally in two segments: utility and
nonutility. The utility segment is a regulated natural gas
distribution company. The nonutility segement is composed of
energy-related services, consumer collection services and financial
services. The accounting policies of each reportable segment are the
same as those described in the summary of significant accounting
policies. The Company accounts for intercompany sales in accordance
with existing tariffs and contracts. Yankee Energy evaluates
performance based on profitability and growth potential of each
segment. Financial data for reportable segments is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Depreciation & Interest Income Net
(In Thousands) Revenues Amortization Expense Taxes Income
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999
Utility $275,619 $19,646 $13,526 $12,923 $15,907
Nonutility 31,084 1,914 1,310 (963) 139
Parent/Eliminations (3,221) - (232) (636) (2,671)A
-------- ------- ------- ------- -------
Total $303,482 $21,560 $14,604 $11,324 $13,375
======== ======= ======= ======= =======
Year ended September 30, 1998
Utility $283,839 $18,213 $12,909 $12,868 $16,978
Nonutility 33,759 1,576 1,456 (4,124) (5,389)B
Parent/Eliminations (2,831) - (512) (424) (706)C
-------- ------- ------- ------- -------
Total $314,767 $19,789 $13,853 $ 8,320 $10,883
======== ======= ======= ======= =======
Year ended September 30, 1997
Utility $318,993 $16,868 $12,335 $14,999 $19,739
Nonutility 8,631 1,260 913 (1,576) (2,934)
Parent/Eliminations (2,583) 2 (785) - 152
-------- ------- ------- ------- -------
Total $325,041 $18,130 $12,463 $13,423 $16,957
======== ======= ======= ======= =======
</TABLE>
A - Parent loss includes non-tax deductible merger expenses of
$1.9 million.
B - Nonutility loss includes nonrecurring restructuring charges and
asset impairment associated with YESCo. After-tax, these amounts
were approximately $2.7 million.
C - Parent loss includes an after-tax charge for severance, due to
the resignation of two senior executives of approximately $0.5
million.
At September 30, (In thousands) 1999 1998
--------------------------------------------------------------------
Total Plant and Other Investments
Utility $381,343 $368,227
Nonutility 15,298 12,484
-------- --------
Total Plant and Other Investments $396,641 $380,711
-------- --------
Other Assets
Utility $121,189 $132,357
Nonutility 49,360 39,647
Less intercompany receivables (26,904) (17,431)
-------- --------
Total Other Assets $143,645 $154,573
-------- --------
Total Assets $540,286 $535,284
======== ========
NOTE 12) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table provides information with respect to the
consolidated quarterly results of operations for the fiscal
years ended September 30, 1999 and 1998, and reflects the seasonal
nature of the Company's operations. The results of any one quarter
during the year are not indicative of the results of future quarters.
(In thousands, except per share amounts)
- -------------------------------------------------------------------------------
Fiscal Year 1999 December 31 March 31 June 30 September 30
- -------------------------------------------------------------------------------
Operating revenues $ 85,001 $117,444 $ 56,221 $ 44,816
Operating income (loss) 16,066 27,035 1,112 (5,153)
Net income (loss) 7,846 11,450 (2,108) (3,813)
Basic and diluted earnings
(loss) per common share (1) $ 0.74 $ 1.08 $ (0.20) $ (0.36)
- -------------------------------------------------------------------------------
Quarter Ended
Fiscal Year 1998 December 31 March 31 June 30 September 30
- -------------------------------------------------------------------------------
Operating revenues $102,595 $113,193 $ 54,327 $ 44,652
Operating income (loss) 20,334 23,828 402 (11,682)
Net income (loss) 9,091 10,810 (1,902) (7,116)
Basic and diluted earnings
(loss) per common share (1) $ 0.87 $ 1.03 $ (0.18) $ (0.68)
(1) Basic and diluted earnings (loss) per common share were calculated on
the basic weighted average common shares outstanding of 10,609,293 and
10,495,806 and the diluted weighted average common shares outstanding of
10,623,017 and 10,499,810 for the twelve months ended September 30, 1999
and 1998, respectively.
Item 7.(b) Pro Forma Financial Information
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed balance sheet as of December 31,
1999 and the unaudited pro forma combined condensed income statement for the
year ended December 31, 1999 combine the historical information of Northeast
Utilities System (NU) and Yankee Energy System, Inc. (Yankee) to give the
effect of the proposed acquisition of Yankee by NU, which is expected to
close as early as the first quarter of 2000. The proposed acquisition is
accounted for using the purchase method of accounting where NU is deemed to
have acquired Yankee. Under the purchase method of accounting, tangible and
identifiable intangible assets acquired and liabilities assumed are recorded
at their estimated fair values. The excess of the purchase price, including
estimated fees and expenses related to the merger, over the net assets
acquired is classified as goodwill on the accompanying unaudited pro forma
combined condensed balance sheet. The estimated fair values and useful lives
of assets acquired and liabilities assumed, which were utilized in the
calculation of goodwill, are based on reported balance sheet data and are
subject to final valuation adjustments in accordance with generally accepted
accounting principles. The unaudited pro forma financial statements do not
reflect the anticipated synergies arising from the acquisition, which are
expected to occur after the acquisition date. For purposes of reflecting the
pro forma amounts, the balance sheet has given effect to the acquisition as
if it had occurred at December 31, 1999 and the income statement has given
effect to the acquisition as if it had occurred on January 1, 1999.
The unaudited pro forma combined condensed financial statements assume that
the total merger consideration paid to Yankee shareholders will be equal to
$479.0 million with 55% of the outstanding Yankee shares each being exchanged
for cash consideration of $45.00 per share and 45% of the outstanding Yankee
shares each being exchanged for a number of NU common shares with a value
equal to $45.00. The merger consideration was determined assuming that the
merger would be consummated within six months of Yankee shareholder approval
of the merger agreement. If the closing of the merger has not occurred by the
end of such six-month period, the cash consideration equal to $45.00 per share
will be adjusted upwards by $.005 for each day after such six-month period
through the day prior to the earlier of the closing date or a final
termination date after which there will be no further adjustments. The per
share stock consideration is a number of NU shares equal to the cash
consideration divided by the average trading price of NU shares over a
specified period prior to the closing of the merger.
The following unaudited pro forma financial statements should be read in
conjunction with the consolidated historical financial statements and related
notes of NU, which are included in the NU Current Report on Form 8-K filed on
February 29, 2000 and the consolidated historical financial statements and
related notes of Yankee, which are included in the Yankee Form 10-K filed on
December 29, 1999. NU has provided all the information included below regarding
NU, Yankee and their respective subsidiaries.
The following unaudited pro forma combined condensed financial statements are
for illustrative purposes only. They are not necessary indicative of the
financial position or operating results that would have occurred had these
transactions been completed on those dates, as assumed above, nor is the
information necessarily indicative of future financial position or operating
results. Results of operations and financial position in the first year after
consummation could differ significantly from the unaudited pro forma combined
condensed financial statements, which are based on past operations. Future
operations will be affected by various factors including operating performance,
energy market developments and other matters.
The December 31, 1999 historical financial statements of NU and Yankee were
derived from audited financial statements but do not include all disclosures
required by GAAP.
NORTHEAST UTILITIES SYSTEM COMBINED CONDENSED BALANCE SHEET
GIVING EFFECT TO THE YANKEE ENERGY SYSTEM MERGER
ACTUAL AND PRO FORMA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
Northeast Utilities Yankee Energy Giving Effect
System Systems, Inc. Pro Forma to proposed
(Historical) (Historical) Adjustments Transactions
12/31/99 9/30/99 (Unaudited) (Unaudited)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Utility plant, net $3,947,434 $381,048 $ 4,328,482
Other property and investments 888,181 30,945 919,126
Current Assets:
Cash and cash equivalents 255,154 1,736 $(263,789 (A) 256,890
263,789 (C)
Accounts receivable, net 310,190 38,952 349,142
Other current assets 505,936 28,180 534,116
Regulatory assets and deferred 3,781,157 59,425 2,300 (C) 3,842,882
Purchase Price in Excess of Net Assets
Acquired 319,062 (B) 319,062
---------- -------- --------- -----------
Total assets $9,688,052 $540,286 $ 321,362 $10,549,700
========== ======== ========= ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shareholder's euity $2,083,311 $165,579 $ 47,273 (D) $ 2,296,163
Preferred stock not subject
to mandatory redemption 136,200 - 136,200
Preferred stock subject
to mandatory redemption 121,288 - 121,288
Long-term debt 2,372,341 163,050 2,535,391
---------- -------- --------- -----------
Total Capitalization 4,713,140 328,629 47,273 5,089,042
---------- -------- --------- -----------
Minority interest in
consolidated subsidiaries 100,000 - 100,000
Obligations under capital lease 62,824 - 62,824
Short-term debt 278,000 56,000 263,789 (C) 597,789
Other current liabilities 1,292,462 35,530 10,300 (C)(E) 1,338,292
Accumulated deferred income tax 1,688,114 65,843 1,753,957
Other long-term obligations 1,553,512 54,284 1,607,796
---------- -------- --------- -----------
Total Capitalization and Liabilities $9,688,052 $540,286 $ 321,362 $10,549,700
========== ======== ========= ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
NORTHEAST UTILITIES SYSTEM COMBINED CONDENSED INCOME STATEMENTS
GIVING EFFECT TO THE YANKEE ENERGY SYSTEM MERGER
ACTUAL AND PRO FORMA
(DOLLARS IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
Pro Forma
Northeast Utilities Yankee Energy Giving Effect
System Systems Pro Forma to Proposed
(Historical) (Historical) Adjustments Transactions
For the twelve month period ended: (12/31/99) (9/30/99) (Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $4,471,251 $303,482 $4,774,733
Operating Expenses:
Operation -
Fuel, purchased and net
interchange power/gas 1,898,314 152,376 2,050,690
Other 855,917 63,334 919,251
Maintenance 340,419 6,343 346,762
Depreciation 302,305 21,560 323,865
Amortization of Excess of
Purchase Price over Net
Assets Acquired $ 7,977 (F)
Amortization of regulatory assets, net 596,437 - 596,437
Federal and state income taxes 180,883 11,324 192,207
Taxes other than income taxes 261,353 20,809 282,162
Gain on sale of utility plant (308,914) - (308,914)
----------- ---------- -------- -----------
Total operating expenses 4,126,714 275,746 7,977 4,410,437
----------- ---------- -------- -----------
Operating Income/(Loss) 344,537 27,736 (7,977) 364,296
Other Income/(Expense):
Nuclear unrecoverable costs (71,066) - (71,066)
Interest charges, net (263,651) (14,604) (23,403)(C) (301,658)
Income taxes, net 82,272 - 9,361 (H) 91,633
Other, net (35,121) 243 (34,878)
----------- ---------- -------- -----------
Income/(Loss) before dividends 56,971 13,375 (22,019) 48,327
Preferred dividends of subsidiaries 22,755 - 22,755
----------- ---------- -------- -----------
Net income/(loss) $ 34,216 $ 13,375 ($22,019) $ 25,572
=========== ========== ======== ===========
Earnings/(Loss) Earnings Per
Common Share--Basic and Diluted $0.26 $1.26 $0.18
=========== ========== ===========
Common Shares Outstanding (average) 131,415,126 10,576,117 (79,957) (I) 141,911,286
=========== ========== ======== ===========
</TABLE>
See accompanying Notes to Unaudited Pro Forma Combined Condensed Financial
Statements.
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
GIVING EFFECT TO THE YANKEE ENERGY SYSTEM MERGER
Note A. Cash Consideration
Cash consideration to be paid to Yankee shareholders will be paid
from proceeds from a NU short-term debt offering. NU has reflected pro forma
adjustments for the issuance of short-term debt for the full amount payable
in cash. (See Note C).
Note B. Goodwill
Reflects the recognition of the excess amount of the purchase price
over the net assets acquired, calculated as follows:
(000's)
Purchase Price, assumed value of common
stock and cash consideration (based on
10,658,138 Yankee shares outstanding at
December 31, 1999 at $45 per share) $479,616
Estimated Direct Costs to be incurred in
consummating the proposed merger 8,000
--------
487,616
Net Assets of Yankee (168,554)
--------
Excess of purchase price over net assets acquired $319,062
========
Note C. Short-term Debt
Reflects the issuance of $263.8 million principal amount of 8.0%
amortizing notes payable, the proceeds of which will used to fund the cash
consideration paid to Yankee shareholders.
An estimate of $2.3 million of Debt Issuance Costs has also been
reflected as a pro forma adjustment related to this debt issuance. As the debt
has a one-year term, the debt issuance costs have been fully amortized in the
income statement.
Note D. Common Shareholders' Equity
Based on the assumption that 55% of the outstanding Yankee shares are
each exchanged for cash consideration of $45.00 per share and 45% of the
outstanding Yankee shares are each exchanged for a number of NU common
shares with a value equal to $45.00. The merger consideration was determined
assuming that the merger would be consummated within six months of Yankee
shareholder approval of the merger agreement. If the closing of the merger
has not occurred by the end of such-six months period, the cash consideration
equal to $45.00 per share will be adjusted upwards by $.005 for each day after
such six-month period through the day prior to the earlier of the closing date
or a final termination date. The per share stock consideration is a number of
NU shares equal to the cash consideration divided by the average trading
price of Northeast shares over a specified period prior to the closing of the
merger.
Reflects the issuance of 10,496,160 shares of NU common stock at an
assumed issuance price of $20.5625 per share, net of the elimination of Yankee
common shareholders equity.
In late 1999, NU arranged forward share purchase transactions with
two financial institutions for approximately 10 million shares. NU will
continue to accrue interest on those purchases until they are settled.
The forward share purchase transactions can be settled in cash or NU shares.
If they are settled in cash prior to the close of the NU/CEI merger,
then NU's outstanding shares would be approximately 10 million shares less
than reflected in the pro forma financial statements.
Note E. Merger Related Costs
NU and Yankee will incur direct expenses related to the merger,
including accounting and consulting fees. The pro forma adjustments include
an estimate for NU's merger-related costs of $8.0 million, which is included
in goodwill. Yankee expects to incur approximately $5.0 million of merger-
related costs, which it will expense as incurred.
Note F. Amortization of Goodwill
Represents the amortization of goodwill, which is not tax deductible,
over a 40-year period.
Note G. Interest Expense, net
Represents the interest expense related to the issuance of $263.8
million principal amount of 8.0% notes payable and the amortization of deferred
financing costs over one year.
Note H. Income taxes
Income Taxes on the pro forma income statements have been based on a
rate of 40%. A tax benefit has not been provided for goodwill, since it is not
tax deductible.
Note I. Common Shares Outstanding (average)
Reflects the issuance of 10,496,160 NU common shares at an assumed
issuance price of $20.5625 at December 31, 1999, net of the elimination of
Yankee shares outstanding.
NORTHEAST UTILITIES, YANKEE ENERGY SYSTEM COMPLETE MERGER
Integration of two companies under way
CONTACT:
NU: Terrence McIntosh
YES: Sandy St. Pierre
Office:
(860)-665-5208
(203)-639-4661
After Hours:
(860)-286-2000
(203)-269-1112
BERLIN, Conn., March 1, 2000 - Northeast Utilities (NYSE:NU), New England's
largest electric utility system, and Yankee Energy System, Inc., (NYSE:YES)
parent of Yankee Gas Services Company, the state's largest natural gas
distribution company, have completed their merger. The closing of the merger
comes nearly nine months after the two companies first announced their intent
to combine.
"This is a great day for our companies, our customers and the state of
Connecticut," said Michael G. Morris, chairman, president and CEO of NU. "The
combination of our two companies broadens the diversity of products and
services we can offer our customers, increases the opportunities for our
employees and cements our commitment to the communities we serve across the
state."
Charles E. Gooley, president and CEO of Yankee Energy agrees. "This is the
first day of a very bright future for Yankee Energy. With NU as our partner,
we will now have the resources to strategically grow our business in ways we
could not have done on our own. For Yankee Gas, it means new opportunities to
expand our natural gas distribution system, while at the same time, opening
new doors of growth potential for our unregulated subsidiaries."
The merger received final approval from the Securities and Exchange
Commission (SEC) on January 31, 2000 and shortly thereafter YES shareholders
were mailed election forms, asking them to decide if they wished to receive
cash, NU shares or a combination of both in exchange for each of their YES
shares. Under the terms of the merger, NU will pay $45 for each YES share,
payable 45 percent in NU shares and 55 percent cash. Elections made by
shareholders are subject to adjustment to meet these terms and the election
deadline for YES shareholders is March 3, 2000. NU will issue over 11 million
shares to YES shareholders.
In addition, YES shareholders who receive NU shares, as opposed to cash, will
be eligible to receive NU's dividend of 10 cents per share, payable on March
31, 2000 to NU shareholders of record, as of March 6, 2000. In the
transaction, NU will pay $478 million for all of YES common equity.
YES shareholders approved the merger agreement, in which YES becomes a
subsidiary of NU, on October 12, 1999. The Connecticut Department of Public
Utility Control issued its final approval December 29, 1999. SEC approval
came a month later. YES will retain its corporate name.
Merger transition under way
The integration of the two companies is now under way with the merger
closing. Several transition teams have been at work since last summer to
prepare the companies for integration. They identified at least $10 million
in savings for the combined companies over the next five years, with
opportunities for more synergies yet to be explored.
Among the recommendations approved by a Transition Steering Committee -
chaired by Morris and Gooley - are centralizing many support services for
Yankee Energy at NU, some facility changes over time and conversion of
Yankee's Information Technology (IT) infrastructure to NU's IT
infrastructure.
A major goal of the merger is to enhance and broaden services to customers.
Yankee Gas will expand the hours of its Customer Service Center this spring
to help the Company better handle the peaks and volumes of customer calls.
Yankee's Customer Service Call Center is currently open Monday through
Friday, 8 a.m. - 5:30 p.m.; its new hours will be 7 a.m. - 10 p.m., Monday
through Friday, and 8 a.m. - 8 p.m. on Saturday. Yankee Gas serves 185,000
customers in 69 cities and towns across Connecticut.
There are some changes for Yankee's unregulated subsidiaries, too. Yankee
Energy Services Company (YESCo) will be integrated with NU's unregulated
subsidiary, Select Energy. And NorConn, Yankee's subsidiary that leases and
manages real estate for Yankee Gas, will be transferred to NU. R.M. Services
and Yankee Energy Financial Services will remain part of Yankee Energy
System.
This press release contains forward-looking statements within the meaning of
Section 21E of the Securities and Exchange Act of 1934. The forward-looking
statements are subject to various risks and uncertainties. Discussion of
factors that could cause actual results to differ materially from
management's projections, forecasts, estimates and expectations may include
factors that are beyond the company's ability to control or estimate
precisely, such as estimates of future market conditions, the ability to
realize cost savings and the terms associated with obtaining regulatory
approvals. Other factors include, but are not limited to, weather conditions,
economic conditions in the company's service territory, fluctuations in
energy-related commodity prices, marketing efforts and other uncertainties.
Other risk factors are detailed from time to time in the two companies' SEC
reports.
