<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
AMENDMENT NO.1
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13, or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
YANKEE ENERGY SYSTEM, INC.
--------------------------
(Exact name of registrant as specified in charter)
The undersigned registrant hereby amends the following items, financial
statements, exhibits, or other portions of its annual report on Form 10-K for
the fiscal year ended September 30, 1993:
Part IV, EXHIBIT 13.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
---------------------------
(Registrant)
By: /s/ Charles E. Gooley
------------------------
(Signature)
Vice President and General Counsel
Date: January 11, 1994
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Part IV Exhibits, Financial Statements, Schedules and Reports on 8-K.
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The Company's Exhibit 13 to its Form 10-K filed on December 29,1993
inadvertently omitted certain 1993 financial information. The Company files
herewith an amended Exhibit 13 containing the information previously omitted.
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EXHIBIT 13
YANKEE ENERGY SYSTEM, INC.
1993 Annual Report
LEADERSHIP IN ACTION
(ART APPEARS HERE)
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Yankee Energy System, Inc. (Yankee Energy or the Company) is the parent of
Yankee Gas Services Company (Yankee Gas), Housatonic Corporation (Housatonic),
NorConn Properties, Inc. (NorConn), Yankee Energy Financial Services Company
(Yankee Financial) and Yankee Energy Production Services, Inc. (Yankee
Production).
Company Profile
Yankee Gas, the principal subsidiary, is a natural gas distribution company
regulated by the Connecticut Department of Public Utility Control (DPUC) and
provides natural gas service to about 176,000 customers in 67 Connecticut
communities.
Housatonic is a single purpose corporation holding a 10.5 percent interest in
the Iroquois Gas Transmission System (Iroquois). Iroquois has constructed a
pipeline that brings Canadian gas into the Northeast and is regulated by the
Federal Energy Regulatory Commission (FERC).
NorConn owns the Company's corporate office building and leases it to Yankee
Gas.
Yankee Financial was formed to facilitate the growth in gas sales by providing
financing for natural gas installations.
Yankee Production is a new subsidiary created in 1993 for the primary purpose of
stimulating gas sales for Yankee Gas by funding gas-fired electric generation
projects at selected customer sites.
The Cover
Top:
Sharon Sekellick, Director-Resource Planning, and John Smith, Vice President,
discuss opportunitiesto expand natural gas service.
Bottom:
Distribution mechanics Paul Barkley and John Girolamo maintain underground
facilities to ensure reliable service to Yankee Gas customers.
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Contents
Highlights 1
President's Letter 2
Profitability and Shareholder Value 5
Customer Satisfaction 7
Expanding Markets and Market Growth 9
Employee Competence & Safety 10
Directors and Officers 12
Financial and Statistical Section 13
Shareholder and Stock Information 31
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1993 HIGHLIGHTS
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Year Ended September 30, 1993 1992 % Change
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Financial (Thousands)
Operating Revenues $302,657 $278,760 8.6%
Net Income 17,479 15,701 11.3%
Net Income (Excluding accounting change) 17,479 13,135 33.1%
Capital Expenditures 23,280 33,728 (48.1)%
Net Utility Plant 308,384 303,715 1.5%
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Common Stock (Per Share Data)
Earnings Per Share $1.70 $1.72 (1.2)%
Earnings Per Share (Excluding accounting
change) $1.70 $1.44 18.1%
Stock Price (End of Year) $26.50 $20.25 30.9%
Quarterly Dividend (End of Year) $.29 $.2766 4.8%
Yield (End of Year) 4.4% 5.5% (20.0)%
Common Shares Outstanding (Average) 10,287,683 9,125,183 12.7%
Book Value Per Share (End of Year) $13.86 $12.59 10.1%
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Operations
Sales and Transportation (MMcf) 40,689 39,351 3.4%
Degree Days (Normal 6,174) 6,232 5,995 4.0%
Customers (Average)* 176,418 175,876 0.3%
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* Customers have been restated to reflect the number of customer accounts rather
than the number of dwelling units.
[GRAPHS APPEAR HERE]
1
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Yankee Energy System, Inc. will soon celebrate its fifth anniversary as an
independent company. In our first annual report to you, we announced our
intention of establishing and improving the Company's position in the energy
industry. Our achievements in meeting this and other objectives set by your
Board of Directors have been detailed in each of our past annual reports.
To Our Shareholders
Foremost among the many accomplishments achieved since the Company's beginning
is the continued improvement in its financial position. The 1993 fiscal year
represented the fourth consecutive year in which the Company's overall financial
condition improved; earnings for the year rose to $1.70 from $1.44 in 1992.
This welcome increase was the result of new rates implemented on October 1, 1992
by Yankee Gas, continued emphasis on cost containment and growth from aggressive
sales and marketing efforts.
Increased earnings and a continuing favorable outlook allowed your Board of
Directors to take two major steps to enhance shareholder value last year.
First, the Board increased dividends per share of common stock to an
annualized level of $1.16 in 1993 versus $1.11 in 1992. This increase, on a
percentage basis, was greater than the average for the gas utility industry.
Second, the Board declared a three-for-two stock split that entitled holders to
one additional share of common stock for every two held on the record date.
These actions have helped to bring greater attention to the Company as an
attractive investment with long-term growth possibilities.
Almost five years ago we wrote you of the optimism we had in our newly
independent company. That optimism was based upon the belief that, by using the
talents and enthusiasm of our employees and relying on the generous counsel of
our Board of Directors, we would accomplish our objectives. The numerous
successes achieved since then are a direct result of the exceptional talent
assembled within this Company and the willingness to challenge the traditional
approach to problem solving. I take great personal satisfaction in their many
and continuing accomplishments.
(PICTURE APPEARS HERE)
Standing
William O. Bailey
Chairman of the Board
Seated
Philip T. Ashton
President and Chief Executive Officer
2
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The positive record, both financial and operational, this Company has achieved
in the past years is firmly based in meeting goals set annually through a formal
planning process to guide the Company forward. Development of each year's
Business Plan begins with a thorough understanding of our strengths, weaknesses
and opportunities and the identification of key objectives by your Management
and Board. Using these as background and with the input of many people, a
clear and substantive Plan is produced for the next year and several years that
follow. Attainment of the current Plan's ambitious objectives should bring
continued success to the Company.
This planning process will be particularly critical in the future. The Company
faces a Connecticut economy that continues to struggle with a diminishing
defense industry, significant job losses and limited new construction.
Competition among all energy providers has increased, particularly within the
gas industry, as the impacts of Federal Energy Regulatory Commission orders
increase the threat of bypass by others within our franchise area. Continued
overproduction by OPEC depresses oil prices, adding to market pressures.
Yet we still see opportunities in our service area because natural gas is so
underutilized. To take advantage of these opportunities, the 1994 Business Plan
again places heavy emphasis on marketing measures. Our current competitive
position toward othr fuels will be maintained by continuing cost containment
efforts and avoiding a rate increase in the near term. Since so much of our
future success depends upon the efforts and capabilities of our employees, the
1994 Plan also places special emphasis on further developing their skills to
help them meet future challenges. Such investments in our employees are among
the wisest and most profitable to be made.
It is with great sadness that I announce the retirement of our Chairman of the
Board, William O. Bailey, to be effective at the close of the Annual Meeting
scheduled for February 25, 1994. Bill's strong leadership and guidance has
been invaluable to this Company and its management and to the successes achieved
so far. He leaves a much stronger Company that is positioned for continued
success in the future. All of us in the Yankee family join together in
expressing our sincere thanks to Bill for his significant contributions to
Yankee. We wish him the very best in his retirement.
/s/ Philip T. Ashton
Philip T. Ashton
President and Chief Executive Officer
3
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(ART APPEARS HERE)
Federal Paper Board Company in Sprague is Connecticut's largest paper mill.
Yankee's aggressive expansion of its distribution system has helped to fuel
companies such as Federal.
4
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Yankee Energy has increased earnings in each of the past four years and
dividends in each of the last three years. Earnings increases for the next few
years will be driven by sales growth and cost containment rather than increasing
rates to our customers. This is critical to the Company's ability to compete in
the energy market.
Profitability and Shareholder Value
During 1993, the Company reduced the number of authorized employees by five
percent and will reassign existing personnel in the future as needed to meet
business objectives. In addition, capital expenditures, except those needed to
serve new customers, will be held to less than 75 percent of our annual
depreciation expense. Other cost control initiatives are included in the
Company's Business Plan.
During the last fiscal year the Company raised over $41 million in new capital
at attractive rates from an equity and bond offering. The proceeds were used to
refund maturing bonds, strengthen the Company's equity position and retire
short-term debt.
Our newest subsidiary, Yankee Production, was established to assist customers
interested in generating their own electricity using natural gas. Yankee
Production will fund feasibility studies and invest in projects as appropriate.
These projects not only will increase gas sales, but also are expected to
provide good investment returns. Yankee Financial, formed in 1992, continues to
provide financing for purchases of gas - utilizing equipment by customers of
Yankee Gas.
(ART APPEARS HERE)
Michael Blelonko, Vice President, Treasurer and Chief Financial Officer, reviews
financial projections with Sarah Sanders, Assistant Treasurer.
(ART APPEARS HERE)
YES shares continued to perform well in fiscal 1993 closing the year at 26-1/2.
5
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(ART APPEARS HERE)
The Foxwoods Casino, on the Mashantucket Pequot reservation in Ledyard, is the
largest in the western hemisphere and relies on natural gas air conditioning to
provide comfort for its guests.
6
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Yankee Gas frequently surveys its customers to determine whether customers'
expectations are being met or exceeded. These customer satisfaction surveys
indicate that Yankee Gas customers continue to be pleased with the quality of
service the Company provides. Leadership never rests, however, and the Company
must continue to seek innovative and cost effective ways to provide an even
higher level of service to its customers.
Customer Satisfaction and Service
During the 1990s, the competitive focus in Connecticut's energy market will be
on service quality. Our goal is to create very satisfied customers that are
convinced that Yankee Gas should be their energy provider. To this end, the
Company has begun conducting "Very Satisfied Customer" workshops. The goal of
this effort is to make the Yankee Gas culture even more customer oriented. By
the end of 1994, all employees will have received this valuable training.
Yankee Gas has demonstrated leadership by becoming the only natural gas utility
in the country to use automated meter reading technology exclusively in its
entire service area. In 1993, the Company completed a three-year effort that
allows meter reading operations for the entire system to be conducted with a
staff of only six employees. Yankee Gas customers will benefit by receiving
accurate and timely readings that virtually eliminate estimated bills.
In the Customer Service Center, an innovative Performance Monitoring Program was
implemented. This leadership initiative has resulted in a dramatic reduction in
the number of calls lost from customers hanging up before speaking with a
representative. In fact, Customer Service Center representatives have been able
to answer over 91% of incoming telephone calls with an average wait time of only
54 seconds.
Charles Gooley, Vice President and
General Counsel, and Lori Chadwick
(center), Manager-Customer Service
discuss customer satisfaction
improvement plans with employees.
[ART APPEARS HERE]
Jonathan Traylor and Kay-Ann
Carrafa, employees in central
dispatch, are the vital link between
customers and field service employees.
7
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(ART APPEARS HERE)
Always in the lead, Yankee Gas joined with Shell Oil Company to open the first
retail natural gas vehicle fueling station in Connecticut.
8
<PAGE>
Yankee Gas' role as an industry leader is most evident in its aggressive efforts
to expand its service area within Connecticut and increase the market share of
natural gas within towns already served. In 1993, this led to the expansion of
Yankee service into the towns of New Canaan, Barkhamsted, Franklin and Sprague.
Since it began independent operations in 1989, Yankee Gas has added eight towns
to its service area.
Expanding Markets and Market Growth
A highly motivated sales force supported by skilled engineering and operations
personnel have been instrumental in bringing natural gas service to new and
existing customers. Most notable of the Company's marketing efforts is the
promotion of new technologies that use natural gas, including air conditioning
and natural gas vehicles (NGVs).
In 1993, over 5,400 tons of new gas air conditioning load was added, including
2,850 tons at the Foxwoods Casino in Ledyard, making it the largest gas air
conditioning system in New England. 1993 sales associated with this expanding
market totaled 178,000 Mcf.
Yankee Gas has been at the forefront in promoting natural gas as an alternative
to gasoline as a motor vehicle fuel. The Company reached an agreement with the
Shell Oil Company to operate the first retail natural gas vehicle fueling
station in Connecticut near Bradley International Airport. Yankee Gas also owns
two refueling stations for its own vehicle fleet, with others planned for 1994,
to increase accessibility throughout our service area.
Thomas Houde (right), Vice
President, discusses natural gas
vehicle performance with Stephen
Persutti and John McKenna.
(ART APPEARS HERE)
Improved technology allows a
fast and easy natural gas fill-up.
9
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The high caliber of ou employees is at the root of all successes of the Company
over the years. The Company, therefore, is committed to maintaining a
challenging work environment that provides opportunities for all employees. Our
continued success is dependent upon a highly skilled, motivated, competent and
diverse workforce.
Employee Competence
To ensure that employees are as productive as possible, an Information
Technology Planning Process was completed in 1993, with implementation by the
end of fiscal year 1994. Management recognizes that a competitive advantage
will belong to those companies that utilize computer technology most
effectively. As part of the plan, Yankee Gas is upgrading most of its data
processing equipment. This represents an important first step toward improving
employee productivity.
To further maintain and improve employee competency levels, an enhanced employee
training program has been developed. A training center has been established
near our corporate offices in Meriden. This centralized training function will
serve to refine and sharpen employee skill levels.
Yankee Gas continues its commitment to maintaining an excellent safety record.
An aggressive system maintenance and replacement program has made our
distribution system one of the safest and most modern in the northeastern United
States.
Public and Employee Safety
The Company regularly has one of the best worker safety records of all New
England gas companies. A well organized safety audit program encourages
employee input regularly to identify and correct unsafe working conditions and
practices.
In 1993, an updated safety education program was developed for use in elementary
schools in our service area. This video-based program provides our youngest
consumers with the information they need to use natural gas in a safe and
efficient manner.
10
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[ART PAGE]
11
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Directors and Officers
Board of Directors
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William O. Bailey /1,2,4,5/
Chairman
MBIA, Inc., Armonk, NY
Chairman of the Board
Yankee Energy System, Inc.
PHILIP T. ASHTON /1,5/
President and
Chief Executive Officer
Yankee Energy System, Inc.
Meriden, CT
JOHN K. ARMSTRONG /2,3/
President
Armstrong Associates
Avon, CT
EILEEN S. KRAUS /2,4,6/
President
Shawmut Bank Connecticut, N.A.
Hartford, CT and
Vice Chairman,
Shawmut National Corporation
Boston, MA
FREDERICK M. LOWTHER /5,6/
Partner
Dickstein, Shapiro & Morin
Washington, D.C.
THOMAS H. O'BRIEN /3,5,6/
President
O'Brien Associates
Garden City, NY
LEONARD A. O'CONNOR /3/
Retired Vice President and
Chief Financial Officer
Yankee Energy System, Inc.
Meriden, CT
EMERY G. OLCOTT /1,4,6/
President and
Chief Executive Officer
Canberra Industries, Inc.
Meriden, CT
NICHOLAS L. TRIVISONNO /1,2/
Executive Vice President -
Strategic Planning and
Group President
GTE Corporation
Stamford, CT
Officers of Yankee Energy System, Inc.
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PHILIP T. ASHTON
President and
Chief Executive Officer
MICHAEL E. BIELONKO
Vice President, Treasurer and
Chief Financial Officer
CHARLES E. GOOLEY
Vice President and
General Counsel
THOMAS J. HOUDE
Vice President
JOHN J. SMITH
Vice President
MARY J. HEALEY
Secretary and
Assistant General Counsel
NICHOLAS A. RINALDI
Controller
SARAH K. SANDERS
Assistant Treasurer
Committees of the Board
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1 Executive
2 Audit
3 Finance
4 Organization and Compensation
5 Long Range Planning
6 Committee on Directors
12
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FINANCIAL INFORMATION
CONTENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS 14
MANAGEMENT AND INDEPENDENT PUBLIC ACCOUNTANTS REPORTS 18
CONSOLIDATED STATEMENTS OF INCOME 19
CONSOLIDATED BALANCE SHEETS 20
CONSOLIDATED STATEMENTS OF CASH FLOWS 21
CONSOLIDATED STATEMENTS OF CAPITALIZATION 22
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 24
SELECTED FINANCIAL AND OPERATING DATA 30
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13
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Management's Discussion and Analysis of
Financial Condition and Results of Operations
Financial Condition
OVERVIEW
Yankee Energy System, Inc. (Yankee Energy, or the Company) is a holding company,
headquartered in Connecticut, whose principal operating subsidiary is Yankee Gas
Services Company (Yankee Gas). Yankee Gas provides retail distribution of
natural gas to a service area comprising 67 cities and towns in Connecticut
which cover approximately 2,200 square miles. The Company has four nonregulated
subsidiaries: Housatonic Corporation (Housatonic) which owns a 10.5 percent
equity interest in the Iroquois Gas Transmission System, L.P. (Iroquois);
NorConn Properties, Inc. (NorConn), a real estate subsidiary; Yankee Energy
Financial Services Company (Yankee Financial) which provides certain customers
with financing to promote the sale of natural gas; and Yankee Energy Production
Services, Inc. (Yankee Production) whose purpose is to encourage additional
natural gas sales by Yankee Gas in special applications to large customers and
provide opportunities for capital investments in projects including onsite
electric generation.
The Company's earnings per share increased to $1.70 in 1993 from $1.44 in 1992
and $1.28 in 1991. The 1992 earnings per share are exclusive of a $0.28 per
share credit resulting from a change in the Company's method of accounting for
municipal property taxes in October, 1991. The increase in 1993 earnings was in
large part attributable to a rate increase implemented on October 1, 1992 by
Yankee Gas and increased firm gas sales in 1993. The increase in 1992 earnings
was attributable primarily to higher firm sales due to weather that was 15.3
percent colder in fiscal 1992 compared to fiscal 1991. Additionally, the
Company experienced lower income tax expense in fiscal 1992 compared to 1991 due
to the acceleration of deductions for property taxes and funding of
postretirement benefits.
The Iroquois Gas Transmission System was formed to construct, own and operate a
natural gas pipeline that transports gas from Canada to markets in the
northeastern United States. The Iroquois Pipeline became fully operational when
full firm capacity was reached on November 1, 1992, with 606,900 Mcf being
transported per day. Yankee Gas, on that date, began accepting its full
entitlement of 59,000 Mcf per day. Earnings on Housatonic's investment in
Iroquois in 1993 were approximately $1.8 million and contributed $0.17 per share
to current year earnings. The increase in earnings of approximately $1.5
million from 1992 to 1993 is due to the pipeline being fully operational for
eleven months during fiscal 1993. As of September 30, 1993, Housatonic's
investment in Iroquois totaled approximately $17.5 million. Housatonic received
net cash distributions of approximately $4.7 million during 1993.
The Company increased dividends paid to $1.13 in 1993 from $1.09 in 1992, an
increase of 3.7 percent. Nonetheless, due to improved earnings, the Company's
dividend payout ratio improved from 75 percent (exclusive of the one-time gain
for property taxes) in 1992 to 67 percent in 1993.
Earnings per share are based on 10,287,683, 9,125,183 and 8,468,933 average
common shares outstanding during fiscal 1993, 1992 and 1991, respectively. All
per share amounts in this report have been adjusted to reflect a three-for-two
common stock split on June 28, 1993. The Company issued an additional 775,000
shares of common stock (1,162,500 shares restated for the three-for-two common
stock split) on October 28, 1992.
RATE MATTERS
Yankee Gas' most recent rate order (effective for service rendered on and after
October 1, 1992) allows a return on equity of 12.43 percent and provides for
favorable accounting treatment, demonstrated by the following: 1) deferral of
the shortfall in collection of accounts receivable from hardship customers who
are protected by statute from service termination during winter months; 2)
annual expense level of $0.3 million for conservation programs and deferral of
amounts above this level not to exceed $1.1 million annually; 3) deferral of
expenditures incurred for the remediation of coal tar contamination in excess of
$0.5 million in fiscal 1993 and all amounts incurred thereafter; and 4) full
rate recovery within a reasonable time frame of all deferred expenses resulting
from the adoption of Statement of Financial Accounting Standards No. 106
"Employers' Accounting for Postretirement Benefits Other Than Pensions", (FAS
106). The decision also states that to the extent coal tar remediation expenses
are prudently incurred, they should be allowed as recoverable operating
expenses. The net effect of this treatment is to significantly reduce the
impact of the shortfall between the rate relief requested and that which was
granted.
Growth In Throughput
[GRAPH APPEARS HERE]
14
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It is management's opinion that deferred costs related to hardship customers,
conservation, environmental matters and postretirement benefits should be
properly recovered in future rates and therefore will not have a material
adverse effect on the Company's future financial condition or results of
operations.
Result of Operations
OPERATING REVENUES
Operating revenues increased $23.9 million from 1992 to 1993 and $44.3 million
from 1991 to 1992. The components of the change in operating revenues for the
past two years are provided in the following table.
<TABLE>
<CAPTION>
(Millions of Dollars)
Increase/(Decrease)
Years Ended September 30, 1993 vs 1992 1992 vs 1991
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<S> <C> <C>
Firm and other (excluding gas
cost recoveries):
Regulatory decision $12.9 $ 1.2
Sales, transportation and other 3.8 7.2
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Subtotal -- Firm and other 16.7 8.4
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Interruptible (excluding gas
cost recoveries):
Sales and transportation (1.1) (2.0)
Margin sharing 1.0 --
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Subtotal -- Interruptible (0.1) (2.0)
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Total excluding gas cost recoveries 16.6 6.4
Plus: Gas cost recoveries 7.3 37.9
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Total $23.9 $44.3
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</TABLE>
The increase in firm and other revenues from 1992 to 1993 was due primarily to
the rate increase implemented in October, 1992 and increased firm sales due to
higher gas heating sales reflecting the colder weather experienced in 1993.
Higher gas costs in fiscal 1993, making gas less economical for customers able
to use alternative fuels, resulted in a decrease in interruptible margin from
fiscal 1992. This decrease was partially offset by a reduction of the required
sharing with firm customers of interruptible margins in excess of target amounts
earned in fiscal 1993 compared to fiscal 1992.
Firm and other revenues increased from 1991 to 1992 primarily due to higher gas
heating sales reflecting the colder weather experienced in 1992. Interruptible
margins decreased overall from 1991 to 1992 as a result of lower oil prices,
enabling those customers who have the capability of using either fuel to
increase their use of oil.
Gas cost recoveries increased in fiscal 1993 compared to fiscal 1992 due to
higher firm sales and higher gas prices. These factors were partially offset by
the undercollection of fiscal 1993 gas costs and the refund of the fiscal 1992
overcollection of gas costs from firm customers through the Company s Purchased
Gas Adjustment Clause (PGA).
Gas cost recoveries increased from 1991 to 1992 primarily due to higher firm
sales resulting from colder weather in fiscal 1992, as well as the recovery of
gas costs which had been undercollected through base rates in the previous
fiscal year.
COST OF GAS
Cost of gas increased $7.2 million in 1993 compared to 1992 and increased $36.6
million in 1992 compared to 1991. The 1993 increase was primarily due to higher
firm sales and higher gas prices. These factors were partially offset by the
undercolletion of gas costs in fiscal 1993 and the refund of a fiscal 1992 gas
cost overcollection. The fiscal 1992 increase was due primarily to the revenue
increase (and related deferral of gas costs) associated with the overcollection
of gas costs from firm customers through the Company s PGA mechanism. In
addition, higher firm sales in fiscal 1992 contributed to the revenue and
deferral increase.
OTHER OPERATING EXPENSES
Total other operating expenses increased $12.5 million in 1993 compared to 1992
and $3.8 million from 1991 to 1992 as a result of the following items:
* Operations expense increased $2.9 million in 1993 compared to 1992 and $1.5
million in 1992 compared to 1991. The 1993 increase was due primarily to
higher expenses for postretirement benefits and the Company's program to
match payments for low income customers both of which were granted in the
Company's August 26,
Growth in Margin
[GRAPH APPEARS HERE]
15
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1992 rate decision. Additionally, higher payroll contributed to the 1993
increase. These items were offset by lower medical expense due to the
implementation of a managed care plan to control health care costs in 1993,
employee contributions and fewer major medical claims. The most significant
component of the 1992 increase was higher payroll and employee benefit
expenses.
* Depreciation expense increased $1.0 million in 1993 versus 1992 and $2.0
million in 1992 compared to 1991. Both increases were due to greater plant
investment.
* Federal and state income taxes, including the portion contained in other
income and excluding the tax effect of the change in method of accounting for
municipal property taxes, increased $7.5 million in 1993 compared to 1992 and
decreased $1.3 million in 1992 compared to 1991. The 1993 increase was
primarily due to higher income from operations in fiscal 1993, the
acceleration of deductions for property taxes and postretirement benefits in
fiscal 1992 and the increased federal tax rate to 35 percent effective
January 1, 1993. The 1992 decrease was caused by a lower effective income
tax rate in 1992 resulting from the accelerated deductions. Please refer to
Note 2 to the Financial Statements for additional information concerning the
components of federal and state income taxes.
* Taxes other than income taxes increased $2.6 million in 1993 compared to 1992
and $2.5 million in 1992 compared to 1991 due to higher Connecticut gross
earnings taxes and higher municipal property taxes in both periods.
Additionally, Connecticut unemployment tax increased during fiscal 1993. The
Company recorded additional accrued unemployment tax expense associated with
claims paid to Yankee Gas bargaining unit employees during a ten-week work
stoppage that ended on January 4, 1993.
Other income increased $2.7 million, exclusive of the one-time gain for property
taxes, in 1993 compared to 1992, primarily due to higher earnings associated
with Housatonic's investment in Iroquois and interest earned on temporary cash
investments during 1993.
In 1992, the Company changed its method of accounting for municipal property
taxes to provide a better matching of property tax expense with the receipt of
services provided by the municipalities. This change resulted in a one-time
increase in earnings of approximately $2.6 million net of income taxes of
approximately $1.9 million.
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for utility plant and other investments, including a $1.8 million
equity investment in Iroquois, totaled $23.2 million in 1993 reflecting a $10.5
million decrease from 1992, which included $2.9 million invested in Iroquois.
The decrease was due primarily to the deferral of construction activities during
the Company's ten-week work stoppage in fiscal 1993, the completion of the
Company's expansion into the Groton, Connecticut area, and the completion of the
Iroquois Pipeline and automated meter reading projects.
Cash flow (defined as net income adjusted for non-cash items such as
depreciation, deferred income taxes, the Company's equity earnings of Iroquois
and the change in the method of accounting for municipal property taxes)
represents the cash generated from operations available for capital
expenditures, dividends and other needs. Cash flows from operations increased
$1.3 million in fiscal 1993 compared to fiscal 1992.
On October 28, 1992, the Company issued 775,000 shares of common stock at $29.25
per share. Of the net proceeds of $21.8 million, $15 million was contributed to
Yankee Gas to support its financial condition and $6.7 million was contributed
to Housatonic to provide permanent capital for its equity investment in the
Iroquois Pipeline, which previously was funded with short-term debt. As a
result of this common stock offering and increased retained earnings, the
Company s financial strength improved in that common equity as a percentage of
total capitalization increased from 37 percent at September 30, 1992 to 45
percent at September 30, 1993.
The seasonal nature of gas revenues, inventory purchases and construction
expenditures create a need for short-term borrowing to supplement internally
generated funds. Yankee Gas has arranged a $40 million revolving line of credit
with a group of five banks whereby funds may be borrowed on a short-term
revolving basis using either fixed or variable rate loans. Yankee Gas also has
another $22 million of credit lines available on an uncommitted basis. At
September 30, 1993, Yankee Gas had no borrowings outstanding on its agreements.
In addition, Yankee Energy (parent) has a $7 million line of credit available.
The long-term credit needs of Yankee Gas are being met by a first mortgage bond
indenture that provides for the issuance of bonds from time to time as the need
arises, subject to certain issuance tests. On December 18,
16
<PAGE>
1992, Yankee Gas issued $20 million principal amount of Series C First Mortgage
Bonds. The bonds will mature in 2023 and interest is payable at an annual rate
of 8.63 percent. Proceeds from the sale of these bonds were used to redeem $15
million of Series A First Mortgage Bonds that matured in April, 1993. The
balance of the proceeds was used to reduce short-term debt. At September 30,
1993, indenture requirements, including the required coverage ratio, would allow
for the issuance of an additional $98 million of bonds at an assumed interest
rate of 8.96 percent.
At September 30, 1993, Housatonic's investment in Iroquois including its
non-cash equity portion, was $17.5 million. On November 1, 1992, a $20 million
bank credit agreement utilized by Housatonic for purposes of making its equity
contributions to Iroquois converted to a three-year variable rate term loan with
an outstanding principal balance of $14.25 million, requiring annual sinking
fund payments and including a prepayment option. One-third of the principal
amount is payable at the end of the first, second and third years of the term
loan. At September 30, 1993, Housatonic had $11.5 million outstanding on this
agreement.
The Company's estimated construction expenditures for the fiscal years 1994
through 1998 are $146 million, including $35 million for 1994. The 1994
construction expenditures are expected to be financed by a combination of
internally generated funds and short-term borrowings. For Yankee Gas, long-term
debt maturities and sinking fund requirements, including those for preferred
stock, during this period total $71 million and are expected to be refinanced
with additional debt issues as they come due.
The estimated expenditures discussed above for the five-year period 1994 to 1998
are exclusive of any expenditures for remediation of coal tar contamination. As
more fully discussed in Note 6 to the Financial Statements, the Company expects
that it is likely to incur additional expenditures for remediation efforts,
inclding that portion which will be deferred for future recovery in rates.
Depending upon the timing and extent to which such costs occur, the Company
expects to finance such expenditures through a combination of internally
generated funds and short-term debt.
On June 25, 1993, the Board of Directors approved the establishment of Yankee
Production whose purpose is to encourage additional natural gas sales by Yankee
Gas in special applications to large customers and provide opportunities for
capital investments in projects including onsite electric generation. Initial
capital for Yankee Production will be provided by internally generated cash and
short-term debt. The Company does not anticipate Yankee Production having a
material effect on the Company's financial condition or results of operations in
fiscal 1994.
On July 20, 1993, Yankee Gas filed an application with the Connecticut
Department of Public Utility Control (DPUC) for a new, lower rate agreement with
the Company's largest customer, Dexter Corporation (Dexter). Under the present
contract, Dexter has the option to cancel the contract after payment of
approximately $3.8 million in facilities fees. As Dexter has access to lower
priced gas, Yankee Gas was required to propose reduced charges to Dexter to
maintain the gas sales service. The proposed new rate agreement, which has
received interim approval from the DPUC, provides for a number of concessions by
Dexter that are expected to favorably impact Yankee Gas' operational
flexibility.
[GRAPH APPEARS HERE]
17
<PAGE>
MANAGEMENT REPORT
The consolidated financial statements of Yankee Energy System, lnc. and
subsidiaries and other sections of this Annual Report were prepared by
management, which is responsible for their integrity and objectivity. These
financial statements, which were audited by Arthur Andersen & Co., were prepared
in accordance with generally accepted accounting principles using estimates and
judgement, where required, and giving consideration to materiality.
The Company maintains a system of internal controls over financial reporting,
which is designed to provide reasonable assurance to the Company's management
and Board of Directors regarding the preparation of reliable published financial
statements. The system contains self-monitoring mechanisms, and actions are
taken to correct deficiencies as they are identified. Even an effective internal
control system, no matter how well designed, has inherent limitations, including
the possibility of the circumvention or overriding of controls, and such systems
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, internal control system
effectiveness may vary over time.
Through established programs, the Company regularly emphasizes to its management
employees their internal control responsibilities and policies prohibiting
conflicts of interest. The Audit Committee of the Board of Directors is composed
entirely of outside directors. This Committee meets periodically with
management, the internal auditors and the independent auditors to review the
activities of each and to discuss audit matters, financial reporting and the
adequacy of internal controls.
Management believes that its system of internal accounting controls and control
environment provide reasonable assurance that its assets are safeguarded from
loss or unauthorized use and that its financial records, which are the basis for
the preparation of all financial statements, are reliable.
PHILIP T. ASHTON, MICHAEL E. BIELONKO,
Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Yankee Energy System, Inc.:
We have audited the accompanying consolidated balance sheets and consolidated
statements of capitalization of Yankee Energy System, Inc. (a Connecticut
corporation) and subsidiaries (the Company) as of September 30, 1993 and 1992,
and the related consolidated statements of income, common shareholders' equity
and cash flows, for each of the three years in the period ended September 30,
1993. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Yankee Energy System, Inc. and
subsidiaries as of September 30, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1993, in conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, effective October 1, 1991,
the Company changed its method of accounting for municipal property taxes.
ARTHUR ANDERSEN & CO.
Hartford, Connecticut
November 19, 1993
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Thousands of Dollars, except share information)
For the Years Ended September 30, 1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES $302,657 $278,760 $234,458
LESS: COST OF GAS 157,816 150,616 114,037
- -------------------------------------------------------------------------------
Revenues, net of cost of gas 144,841 128,144 120,421
- -------------------------------------------------------------------------------
OTHER OPERATING EXPENSES:
Operations 52,282 49,402 47,919
Maintenance 6,860 6,844 7,090
Depreciation 17,133 16,086 14,039
Federal and state income taxes 14,643 8,647 10,656
Taxes other than income taxes 23,359 20,784 18,251
- -------------------------------------------------------------------------------
Total Other Operating Expenses 114,277 101,763 97,955
- -------------------------------------------------------------------------------
OPERATING INCOME 30,564 26,381 22,466
OTHER INCOME, NET 3,008 1,839 2,629
- -------------------------------------------------------------------------------
INCOME BEFORE INTEREST CHARGES 33,572 28,220 25,095
INTEREST CHARGES, NET 14,996 13,988 13,154
- -------------------------------------------------------------------------------
INCOME BEFORE CHANGE IN ACCOUNTING
METHOD 18,576 14,232 11,941
CHANGE IN METHOD OF ACCOUNTING FOR
MUNICIPAL PROPERTY TAXES (NET OF
INCOME TAXES OF $1,944) -- 2,566 --
- -------------------------------------------------------------------------------
INCOME BEFORE PREFERRED DIVIDENDS 18,576 16,798 11,941
PREFERRED DIVIDENDS 1,097 1,097 1,097
- -------------------------------------------------------------------------------
NET INCOME $ 17,479 $ 15,701 $ 10,844
- -------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE BEFORE
ACCOUNTING CHANGE $1.70 $1.44 $1.28
EFFECT OF ACCOUNTING CHANGE ON
EARNINGS PER SHARE -- 0.28 --
- -------------------------------------------------------------------------------
TOTAL EARNINGS PER COMMON SHARE $1.70 $1.72 $1.28
- -------------------------------------------------------------------------------
COMMON SHARES OUTSTANDING (AVERAGE) 10,287,683 9,125,183 8,468,933
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Thousands of Dollars)
At September 30, 1993 1992
------------------------------------------------------------------------------
<S> <C> <C>
ASSETS UTILITY PLANT, AT ORIGINAL COST $445,912 $432,764
Less: Accumulated provision for depreciation 149,300 134,101
-------------------------------------------------------------------------------
296,612 298,663
Construction work in progress 11,772 5,052
-------------------------------------------------------------------------------
Total Net Utility Plant 308,384 303,715
-------------------------------------------------------------------------------
OTHER PROPERTY AND INVESTMENTS 23,543 24,217
-------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and temporary cash investments 6,509 462
Accounts receivable, less accumulated
provision for uncollectible accounts of
$4,914,000 in 1993 and $4,298,000 in 1992 20,214 18,330
Fuel supplies 15,702 11,664
Other material and supplies 2,393 2,605
Accrued utility revenues 5,016 4,728
Other 8,512 6,723
-------------------------------------------------------------------------------
Total Current Assets 58,346 44,512
-------------------------------------------------------------------------------
Deferred Gas Costs and Other 7,385 5,783
Recoverable Pipeline Transition Costs 7,531 --
Recoverable Environmental Cleanup Costs 36,104 15,000
-------------------------------------------------------------------------------
TOTAL ASSETS $441,293 $393,227
-------------------------------------------------------------------------------
CAPITALIZATION AND CAPITALIZATION (SEE ACCOMPANYING STATEMENTS):
LIABILITIES Common shareholders' equity $142,564 $114,891
Preferred stock subject to mandatory redemption 15,000 15,000
Long-term debt 153,633 147,500
-------------------------------------------------------------------------------
Total Capitalization 311,197 277,391
-------------------------------------------------------------------------------
CURRENT LIABILITIES:
Notes payable to banks -- 15,300
Long-term debt -- current portion 8,667 15,550
Accounts payable 16,739 12,543
Accrued interest 4,081 4,348
Refundable gas costs 3,703 3,936
Pipeline transition costs payable 2,691 --
Other 4,026 6,895
-------------------------------------------------------------------------------
Total Current Liabilities 39,907 58,572
-------------------------------------------------------------------------------
Accumulated Deferred Income Taxes 38,441 27,048
Accumulated Deferred Investment Tax Credits 10,212 10,589
Reserve for Environmental Cleanup Costs 35,000 15,000
Other Deferred Credits 6,536 4,627
-------------------------------------------------------------------------------
Commitments and Contingencies (Note 6)
TOTAL CAPITALIZATION AND LIABILITIES $441,293 $393,227
-------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Thousands of Dollars)
For the Years Ended September 30, 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before preferred dividends $ 18,576 $ 16,798 $ 11,941
Adjusted for the following:
Depreciation 17,133 16,086 14,039
Iroquois equity earnings (3,443) (1,401) (1,406)
Deferred income taxes, net 11,815 (3,256) 2,906
Deferred gas cost activity and
other non-cash items (8,221) 9,890 (13,107)
Change in method of accounting for municipal
property taxes -- (4,510) --
Changes in working capital:
Accounts receivable and accrued utility revenues (2,172) (3,830) (164)
Accounts payable 4,196 2,021 779
Accrued taxes (6,246) 3,318 2,040
Other working capital (excludes cash) (614) (5,365) 4,045
- -----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 31,024 29,751 21,073
- -----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuance $ 21,544 -- 14,129
Net proceeds from long-term debt 19,790 36,494 --
Retirement of long-term debt (20,750) (550) (400)
Net increase (decrease) in short-term debt (15,300) (21,085) 13,233
Cash dividends-preferred stock (1,097) (1,097) (1,097)
Cash dividends-common stock (11,659) (9,916) (8,736)
- -----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (7,472) 3,846 17,129
- -----------------------------------------------------------------------------------------------------------
INVESTMENT IN PLANT AND OTHER:
Utility Plant, net of allowance for other
funds used during construction (21,501) (30,837) (29,731)
Other property and investments (1,779) (2,891) (8,189)
Iroquois distributions 5,775 -- --
- -----------------------------------------------------------------------------------------------------------
Net cash used for plant and other investments (17,505) (33,728) (37,920)
- -----------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS FOR THE YEAR 6,047 (131) 282
CASH AND TEMPORARY CASH INVESTMENTS, BEGINNING
OF YEAR 462 593 311
- -----------------------------------------------------------------------------------------------------------
CASH AND TEMPORARY CASH INVESTMENTS, END OF YEAR $ 6,509 $ 462 $ 593
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest, net of amounts capitalized $ 15,778 $ 14,451 $ 14,817
Income taxes $ 10,147 $ 10,123 $ 5,192
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
(Thousands of Dollars)
At September 30, 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
COMMON SHAREHOLDERS' EQUITY:
Common shares -- $5 par value, authorized
20,000,000 shares; 10,287,683 shares
outstanding at September 30, 1993 and
9,125,183 shares outstanding at
September 30, 1992 (a) $ 51,438 $ 30,417
Capital surplus, paid in 85,211 84,682
Unearned compensation-restricted stock awards (b) (281) (184)
Retained earnings 8,796 2,976
Employee stock ownership plan guarantee (c) (2,600) (3,000)
- --------------------------------------------------------------------------------
Total Common Shareholders' Equity 142,564 114,891
- --------------------------------------------------------------------------------
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION--
$25 par value, 9.125% cumulative, 5,000,000
shares authorized and 600,000 shares
outstanding at
September 30, 1993 and 1992 (d) 15,000 15,000
- --------------------------------------------------------------------------------
LONG-TERM DEBT:
First Mortgage Bonds (e)
Maturity Interest Rates
1993 9.87% -- 15,000
1995 9.86% 18,000 18,000
1997 9.90% 30,000 30,000
2004 10.03% 37,000 37,000
2019 10.07% 19,000 19,000
2022 8.48% 20,000 20,000
2023 8.63% 20,000 --
-------------------------------------------------------------------------------
Total First Mortgage Bonds 144,000 139,000
Term Loan Agreement, variable rate, due November,
1995 (e) 11,500 16,700
Note Purchase Agreement, 9.55%, due November, 2000 (e) 4,200 4,350
Guarantee of Employee Stock Ownership Plan
Term Loan Agreement, 10.38%, due July, 1999 (c) 2,600 3,000
- --------------------------------------------------------------------------------
Total Long-Term Debt 162,300 163,050
Less amounts due within one year (c) (e) 8,667 15,550
- --------------------------------------------------------------------------------
Long-Term Debt, Net 153,633 147,500
- --------------------------------------------------------------------------------
TOTAL CAPITALIZATION $311,197 $277,391
- --------------------------------------------------------------------------------
</TABLE>
(a) On October 28, 1992 the Company issued 775,000 shares of common stock at
$29.25 per share for a total outstanding on that date of 6,858,455 shares.
Numbers of common shares outstanding have been restated to give retroactive
effect to the three-for-two stock split on June 28, 1993.
(b) Consistent with the terms of the Non-Employee Directors Restricted Stock
Plan, incentive awards of 900 shares of restricted common stock were granted to
Directors during 1993. During 1993, restricted stock awards were also granted
to certain management employees of the Company. The number of common shares
purchased on the open market for initial restricted stock awards was 6,645 for
these management employees. The market value of the restricted stock awards for
all plans 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 $109,000 for 1993 and $53,000 for 1992.
(c) 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 is July 1, 1999 with an annual sinking fund requirement of
$400,000 for the fiscal years 1994 through 1998.
(d) The minimum sinking-fund provisions of the preferred stock of subsidiary
subject to mandatory redemption outstanding at September 30, 1993 for the fiscal
years 1994 through 1998 are $1,500,000 beginning in 1995.
(e) Long-term debt maturities and cash sinking-fund requirements on debt
outstanding at September 30, 1993 for each of the fiscal years 1994 through
1998 (excluding the ESOP sinking-fund requirement) are $8,267,000, $26,267,000,
$5,517,000, $33,517,000, and $3,517,000, respectively.
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Employee
Stock
Capital Retained Ownership
Common Surplus, Earnings Plan
(Thousands of Dollars) Shares Paid In (Deficit)(a) Guarantee Total
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1990 $27,167 $73,753 ($4,917) ($3,800) $92,203
Net Income 10,844 10,844
Issuance of 650,000 common shares --
$5 par value 3,250 11,863 15,113
Cash dividends on common shares --
$1.04 per share (c) (8,736) (8,736)
Employee stock ownership
plan loan repayment 400 400
Common stock issuance expenses (946) (946)
Unearned compensation-restricted
stock awards (b) (222) (222)
Amortization of preferred
stock issuance expenses 6 6
- ------------------------------------------------------------------------------------------------
Balance at September 30, 1991 30,417 84,454 (2,809) (3,400) 108,662
Net Income 15,701 15,701
Cash dividends on common shares --
$1.09 per share (c) (9,916) (9,916)
Employee stock ownership
plan loan repayment 400 400
Unearned compensation-restricted
stock awards (b) 38 38
Amortization of preferred
stock issuance expenses 6 6
- ------------------------------------------------------------------------------------------------
Balance at September 30, 1992 30,417 84,498 2,976 (3,000) 114,891
Net Income 17,479 17,479
Issuance of 775,000 common shares --
$5 par value 3,875 18,794 22,669
Three-for-two stock split (c) 17,146 (17,146) --
Cash dividends on common
shares -- $1.13 per share (c) (11,659) (11,659)
Employee stock ownership
plan loan repayment 400 400
Common stock issuance expenses (1,125) (1,125)
Unearned compensation-restricted
stock awards (b) (97) (97)
Amortization of preferred stock
issuance expenses 6 6
- ------------------------------------------------------------------------------------------------
Balance at September 30, 1993 $51,438 $84,930 $8,796 ($2,600) $142,564
================================================================================================
</TABLE>
(a) Yankee Gas has dividend restrictions imposed by its Bond Purchase
Agreements. At September 30, 1993, retained earnings available for common
dividends, under the terms of the Series A, B and C agreements totaled
approximately $19.0 million, $29.3 million and $29.3 million, respectively.
Additionally, dividends and sinking-fund payments on preferred stock of Yankee
Gas will be entitled to priority over the payment to the Company of dividends on
Yankee Gas common stock. The 9.125% Redeemable Preferred Stock has a sinking-
fund beginning in 1995 which will require a minimum annual redemption of $1.5
million.
(b) See note (b) of the Consolidated Statements of Capitalization.
(c) Cash dividends on common shares have been restated to give retroactive
effect to the three-for-two stock split on June 28, 1993. Amount transferred to
common shares represents par value of the additional shares issued.
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
- ------
SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
THE COMPANY: Yankee Energy System, Inc. (Yankee Energy, or the Company) is a
holding company, headquartered in Connecticut, whose principal operating
subsidiary is Yankee Gas Services Company (Yankee Gas). Yankee Gas provides
retail distribution of natural gas to a service area comprising 67 cities and
towns in Connecticut which cover approximately 2,200 square miles. The Company
has four nonregulated subsidiaries: Housatonic Corporation (Housatonic) which
owns a 10.5 percent equity interest in the Iroquois Gas Transmission System,
L.P. (Iroquois); NorConn Properties, Inc. (NorConn), a real estate subsidiary;
Yankee Energy Financial Services Company (Yankee Financial) which provides
certain customers with financing in order to promote the sale of natural gas;
and Yankee Energy Production Services, Inc. (Yankee Production) whose purpose is
to encourage additional natural gas sales by Yankee Gas in special applications
to large customers and provide opportunities for capital investments in projects
including onsite electric generation.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements of Yankee
Energy 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 Connecticut Department of Public Utility Control (DPUC) and
follows accounting policies prescribed by the DPUC. Iroquois is subject to
regulation by the Federal Energy Regulatory Commission (FERC).
REVENUES: 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 accrued.
DEPRECIATION: The provision for 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 3.9 percent in fiscal
year 1993, 3.8 percent in fiscal year 1992 and 3.6 percent in fiscal year 1991.
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.
IROQUOIS ACCOUNTING: The Company accounts for Housatonic's investment in
Iroquois using the equity method, recording its proportionate share of earnings
(losses) of Iroquois with corresponding increases (decreases) in its
investment. Distributions received from Iroquois reduce the carrying amount of
Housatonic's investment.
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.
In February, 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109). This statement is effective for fiscal years beginning after
December 15, 1992, and establishes financial accounting and reporting standards
for the effects of income taxes. The Company will adopt FAS 109 in the first
quarter of fiscal 1994 and will record a regulatory asset and an offsetting
deferred tax liability of approximately $31 million. This amount represents
primarily timing differences for which deferred taxes have not historically been
provided. It is expected that the regulatory asset will be recovered in future
rates. There will be no material effect on earnings as a result of the adoption
of FAS 109.
CHANGES IN COMMON STOCK: A three-for-two common stock split was effected by the
June 28, 1993 distribution of one additional share of common stock for each two
shares of common stock owned by shareholders of record on June 7, 1993. All per
share amounts and numbers of common shares outstanding presented in this report
have been restated to give retroactive effect to the stock split.
CHANGE IN THE METHOD OF ACCOUNTING FOR MUNICIPAL PROPERTY TAXES: As of October
1, 1991, the Company changed its method of accounting for municipal property
taxes to provide a better matching of property tax expense with the receipt of
services provided by the municipalities.
The cumulative effect of this change in accounting for municipal property taxes,
all of which is recognized in the quarter ending December 31, 1991, is
approximately $2.6 million (net of income taxes of approximately $1.9 million),
equivalent to $0.28 per common share. After taking into account the one-time
cumulative change, the change in accounting method resulted in a minor reduction
of the amounts of property tax expense recorded in fiscal 1992 and will have no
significant effect on future property tax expense.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform
with current year classifications.
24
<PAGE>
NOTE 2
- ----------
INCOME TAX
EXPENSE
The components of the federal and state income tax provisions are:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Years Ended September 30, 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Charged to income before change in
accounting method:
Current income taxes:
Federal $ 2,315 $ 9,170 $ 4,599
State 1,325 4,112 1,707
- --------------------------------------------------------------------------------
Total current 3,640 13,282 6,306
- --------------------------------------------------------------------------------
Deferred income taxes, net:
Investment tax credits (377) (377) (377)
Federal 9,743 (2,885) 2,123
State 2,449 (2,093) 1,160
- --------------------------------------------------------------------------------
Total deferred 11,815 (5,355) 2,906
Total income tax expense charged to
income before change in accounting
method $15,455 $ 7,927 $ 9,212
Change in accounting method -- 1,944 --
- --------------------------------------------------------------------------------
Total income tax expense $15,455 $ 9,871 $ 9,212
- --------------------------------------------------------------------------------
The components of total income tax
expense are classified as follows:
Charged to operating expenses $14,643 $ 8,647 $10,656
Credited to other income 812 (720) (1,444)
Change in accounting method -- 1,944 --
- --------------------------------------------------------------------------------
Total income tax expense $15,455 $ 9,871 $ 9,212
- --------------------------------------------------------------------------------
Deferred income taxes are comprised
of the tax effects of timing
differences as follows:
Investment tax credits $ (377) $ (377) $ (377)
Liberalized depreciation 3,581 2,072 1,922
Deferred gas costs 7,770 (7,642) 2,654
Iroquois equity -- 400 (536)
Alternative minimum tax and other 841 192 (757)
- --------------------------------------------------------------------------------
Deferred income taxes, net $11,815 $(5,355) $ 2,906
- --------------------------------------------------------------------------------
</TABLE>
In accordance with required regulatory treatment, deferred income taxes are not
provided for certain timing differences. This treatment, along with other
items, causes differences between the statutory income tax rate and the
effective tax rate. These differences between the effective income tax rate
recorded by the Company and the statutory federal tax rate are as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.8% 34.0% 34.0%
Tax effect of differences:
Depreciation 5.1 4.9 4.5
State income taxes net of
federal benefit 7.6 6.4 8.3
Effective tax rate adjustment (2.0) 1.0 1.7
Shared interest savings (1.0) (1.3) (1.6)
Property taxes 1.4 (3.3) (0.4)
Investment tax credit and excess
deferred taxes (1.1) (1.4) (2.0)
Capitalized overheads 0.4 (1.0) 0.2
Postretirement benefit contribution 2.0 (2.1) --
Bad debt reserve and amortization (1.1) 0.2 0.8
Miscellaneous (0.7) (0.4) (2.0)
- --------------------------------------------------------------------------------
Effective income tax rate 45.4% 37.0% 43.5%
- --------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
NOTE 3
- ------
LEASES
Yankee Gas has entered into operating lease agreements for the use of office
equipment, vehicles and buildings. For fiscal 1993, 1992 and 1991, these rental
payments were approximately $1,762,000, $1,789,000 and $2,120,000, respectively.
Future minimum rental payments, excluding associated costs such as property
taxes, state use taxes, insurance, and maintenance, under long-term
noncancelable leases as of September 30, 1993, are approximately:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Year Operating Leases
- --------------------------------------------------------------------------------
<S> <C>
1994 $1,484
1995 1,188
1996 931
1997 701
1998 594
After 1998 2,912
- --------------------------------------------------------------------------------
Future minimum lease payments $7,810
- --------------------------------------------------------------------------------
</TABLE>
NOTE 4
- ---------------
POST-EMPLOYMENT
BENEFITS
The Company has a noncontributory defined benefit retirement plan covering all
regular employees. Benefits are based on years of service and employees'
highest consecutive five years of compensation during the last ten years 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 nor made in fiscal 1993. Pension assets are invested primarily in
equity securities and investment grade bonds. The components of net pension
cost were:
<TABLE>
<CAPTION>
(Thousands of Dollars)
Years Ended September 30, 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,928 $ 1,853 $ 1,695
Interest cost 3,310 3,073 2,724
Net amortization 2,376 (298) 6,257
Less: Return on plan assets 7,606 4,567 9,987
- --------------------------------------------------------------------------------
Net pension cost $ 8 $ 61 $ 689
- --------------------------------------------------------------------------------
</TABLE>
Total pension cost, part of which was charged to utility plant, approximated
$93,000 for the year ended September 30, 1993, and $146,000 and $824,000 for the
same periods in 1992 and 1991, respectively. The 1993, 1992 and 1991 pension
expense includes $85,000, $85,000 and $135,000, respectively, in cost of living
increases for Northeast Utilities (NU) retirees who were previously employed in
the gas business operated by The Connecticut Light and Power Company (CL&P), a
subsidiary of NU. These payments were agreed to at the time of divestiture from
NU.
For calculating the plan's year-end funded status and pension cost, the
following assumptions were used:
<TABLE>
<CAPTION>
Years Ended September 30, 1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 8.5% 8.5% 8.5%
Expected long-term rate of return 9.0% 9.0% 9.0%
Compensation/progression rate 5.5% 5.5% 5.5%
- --------------------------------------------------------------------------------
</TABLE>
The following table represents the plan's funded status reconciled to the
consolidated balance sheet:
<TABLE>
<CAPTION>
(Thousands of Dollars)
At September 30, 1993 1992
- --------------------------------------------------------------------------------
<S> <C>
Accumulated benefit obligation, including
$27,274 of vested benefits at
September 30, 1993 and $24,041
at September 30, 1992 $ 30,723 $ 27,298
- --------------------------------------------------------------------------------
Projected benefit obligation 40,900 $ 39,254
Less: Market value of plan assets 58,876 52,441
- --------------------------------------------------------------------------------
Plan surplus 17,976 13,187
Unrecognized transition amount (1,048) (1,134)
Unrecognized prior service costs (37) (39)
Unrecognized net gain (18,240) (13,355)
- --------------------------------------------------------------------------------
Accrued pension liability $ (1,349) $ (1,341)
- --------------------------------------------------------------------------------
</TABLE>
26
<PAGE>
In addition to pension benefits, the Company provides certain health care and
life insurance benefits to its retired employees, and accounts for these
benefits on a cash basis consistent with current accounting requirements and
ratemaking treatment. On July 1, 1990, in accordance with terms of the
divestiture, Yankee Gas began compensating the NU System for a portion of the NU
System's liability for certain health care and life insurance expenses of
retirees or surviving spouses. Yankee Gas and the NU System will share costs in
a defined manner until June 30, 2005. The cost of providing those benefits for
both NU and Yankee Gas' retirees was approximately $1,300,000 for the fiscal
year ended September 30, 1993, and $1,200,000 and $780,000 for the comparable
periods in 1992 and 1991, respectively.
Statement of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," (FAS 106), effective for fiscal
years beginning after December 15, 1992, requires companies to accrue
postretirement benefits during employees' years of service. If FAS 106 were
adopted currently, preliminary actuarial estimates indicate the Company would
have a transitional benefit obligation liability of approximately $20 million
and initial additional benefit expenses of approximately $3.1 million annually.
Although the Company will not adopt FAS 106 until fiscal 1994, in the Company's
1992 rate decision, the DPUC accepted the appropriateness of the change from a
pay-as-you-go method of accounting for postretirement benefits to an accrual
method in accordance with FAS 106. Also, the DPUC allowed $1.728 million of
associated expense in rates and indicated its objective to grant full rate
recovery within a reasonable time frame of all allowed FAS 106 related
expenses. As a result, the adoption of FAS 106 will increase assets and
liabilities but will not negatively impact the Company's results of operations.
Yankee Gas 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.
NOTE 5
- ---------------
FAIR VALUE
OF FINANCIAL
INSTRUMENTS
In December, 1991, the FASB issued Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Values of Financial Instruments" (FAS 107).
This statement is effective for fiscal years ending after December 15, 1992, and
requires companies to disclose the estimated fair value of their financial
instruments for which it is practicable to estimate fair value.
The following methods and assumptions were used to estimate the fair value of
each of the following financial instruments:
CASH AND TEMPORARY CASH INVESTMENTS: The carrying amount approximates fair
value.
PREFERRED STOCK: The fair value of the Company's fixed rate preferred stock is
based upon the quoted market price for similar issues.
FIRST MORTGAGE BONDS: The fair value of the Company's first mortgage bonds is
based upon borrowing rates currently available to the Company.
The carrying amount of the Company's financial instruments and the estimated
fair value at September 30, 1993, are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Amount Value
(Thousands of Dollars)
- --------------------------------------------------------------------------------
<S> <C> <C>
Preferred stock subject to mandatory redemption $ 15,000 $ 16,746
- --------------------------------------------------------------------------------
First mortgage bonds $144,000 $174,256
- --------------------------------------------------------------------------------
</TABLE>
The fair values shown above have been reported to meet the disclosure
requirements of FAS 107 and do not purport to represent the amounts at which
those obligations would be settled.
NOTE 6
- ---------------
COMMITMENTS AND
CONTINGENCIES
CONSTRUCTION PROGRAM: The Company's estimated construction expenditures for the
fiscal years 1994 through 1998 are $146 million, including $35 million for
fiscal 1994. The Company intends to use these estimated construction
expenditures to maintain the reliability of the distribution system and in
projects that will generate gas sales.
IROQUOIS: The Iroquois Gas Transmission System is a natural gas pipeline that
transports gas purchased from Canadian producers to the northeastern United
States. This enables Yankee Gas to expand and diversify its gas supply
profile. Construction of the pipeline began on March 4, 1991 and full operation
began on November 1, 1992.
Iroquois has been informed by the U.S. Attorneys' Offices for the Northern,
Southern and Eastern Districts of New York that a civil investigation is
underway to determine whether Iroquois committed civil environmental violations
during construction of the pipeline. At the outset of the investigation,
Iroquois was notified of 26 alleged violations. In response, Iroquois denied
that such violations occurred and asserted that all concerns raised by
governmental
27
<PAGE>
authorities during construction had been fully responded to. Iroquois has since
been informed that the universe of alleged violations initially raised is
contained in certain field reports prepared by a Federal/State Inter-Agency Task
Force which surveyed the right-of-way in connection with the right-of-way
restoration program. Iroquois has advised the appropriate U.S. Attorneys'
Offices of its position that none of the matters referenced in field reports
issued to date represent violations of any law or governmental authorization.
No proceedings in connection with this civil investigation have been commenced
by the federal government against Iroquois.
In addition, a criminal investigation has been initiated against Iroquois and
its environmental consultant by the U.S. Attorneys' Office for the Northern
District of New York in conjunction with the U.S. Environmental Protection
Agency (EPA) and the Federal Bureau of Investigation (FBI). According to a
press release issued by the FBI, areas under investigation include possible
environmental violations, wire fraud, mail fraud, and providing false
information or concealment of information from federal agencies in conjunction
with the construction of the base pipeline. To date, no criminal charges have
been filed, and the Assistant U.S. Attorney in charge of the investigation has
stated that he is not yet ready to meet with Iroquois' attorneys to discuss the
specifics of the matter. Accordingly, no provision for liability, if any, that
may result has been made in the Iroquois financial statements. Iroquois
management, however, believes that the pipeline construction and right-of-way
activities were conducted in a legal and responsible manner, and that at the
conclusion of the aforementioned federal investigation, the U.S. Attorneys
involved and grand jury will reach the same conclusion. Any other conclusion
will be vigorously contested by Iroquois.
ENVIRONMENTAL MATTERS: The Company is subject to federal and state
environmental regulation of its operations and properties. Such regulation may
result in future environmental liabilities that may include significant expenses
incurred to remove, contain or remediate contamination caused by operations of
former manufactured gas plant sites.
Pursuant to an Environmental Liability Sharing and Indemnity Agreement, dated
July 1, 1989, Yankee Gas and CL&P have allocated potential environmental
liabilities at sites previously owned by CL&P and used in CL&P's gas business,
and at sites not previously owned by CL&P but which had prior uses in CL&P's gas
business. As part of that agreement, Yankee Gas and CL&P would share equally
the costs of environmental remediation at sites owned by CL&P prior to July 1,
1989, and used in CL&P's gas business. Additional on and off-site
investigations of one such property began in fiscal 1993 and will continue in
fiscal 1994. Following compilation of the additional data, a determination will
be made on the need to remediate.
Fourteen sites, initially believed to contain coal tar, became the property of
Yankee Gas at divestiture from Northeast Utilities. Responsibility for future
investigation and remediation at these sites rests solely with Yankee Gas. Each
of these sites has been the subject of a field investigation and coal tar
constituents have been found in some soil and ground water samples. The Company
has reported the results of the environmental studies to the Connecticut
Department of Environmental Protection (DEP). The DEP has not ordered that any
remedial action be taken. However, of the fourteen, seven 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.
During 1993, the Company conducted additional research and began to prioritize
the fourteen sites to further define any which may require remediation. The
Company has identified four sites which are likely to require remediation. The
Company's proposed prioritization has been submitted to the DEP. Extensive site
investigations were then conducted at the four sites to define extent of
contamination and begin remedial plans. In addition, the Company has developed
a cost estimate for the remaining ten sites based on the probability of
cleanup. As a result of this effort, the Company believes it is prudent to
record a liability of $35 million for future environmental cleanup.
Recovery of remediation costs has been specifically allowed by the Company's
recent rate case decision. Presently, $325,000 is allowed annually in rates.
If costs are expected to exceed $2.5 million on an annual basis, the Company is
required to go to the DPUC for review. The DPUC has stated that "to the extent
that coal tar remediation expenses are prudently incurred, they should be
allowed as proper operating expenses."
The Company has retained the services of a law firm to determine whether it has
valid claims for insurance recovery of remediation costs and if so, to pursue
those claims against insurers. The law firm is conducting an extensive review
of historical data on plant operations and insurance policies. Following
completion of the review, the Company will decide whether to pursue litigation
or settlement discussion with its insurers.
TRANSITION COSTS - ORDER NO. 636: On April 8, 1992, the FERC issued Order No.
636 on pipeline restructuring. In essence, the FERC found that absent the
unbundling of traditional merchant service, 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. The Order, therefore,
required all pipelines to implement restructuring of their services by the
28
<PAGE>
winter of 1993-94. The three major pipeline systems serving Yankee Gas,
Iroquois Gas Transmission System, Tennessee Gas Pipeline Company, and Algonquin
Gas Transmission Company and its affiliate, Texas Eastern Transmission Company,
have all restructured pursuant to the FERC directive. Iroquois was designed and
constructed as a transportation only pipeline, and as such, its restructuring
has very minimal impact.
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.
At a regularly scheduled proceeding on September 30, 1993 regarding the three
Connecticut Local Distribution Companies' (LDC) monthly purchased gas
adjustment, the DPUC instructed the three Connecticut LDCs to delay commencing
recovery of transition costs already paid to pipelines. While the DPUC Order in
this proceeding clearly acknowledges FERC jurisdiction with regard to the
prudency of these costs, it also recognizes that the total dollars could have a
significant effect on rates and indicates a separate proceeding will be
initiated to review the charges and determine appropriate ratemaking treatment.
Through September 30, 1993, Yankee Gas has paid approximately $4.8 million of
transition costs. These payments, as well as an additional $2.7 million
representing an estimate of additional transition cost liability likely to be
incurred by Yankee Gas, have been deferred for future recovery. This estimate
of $7.5 million may be subject to revision following future FERC orders. Yankee
Gas' management anticipates full recovery of transition costs in a manner
consistent with past DPUC practices.
TAKE-OR-PAY LIABILITY: Take-or-pay liabilities arose from the inability or
unwillingness of pipeline companies to take the volumes of gas for which they
had contracted with producers. To avoid or settle litigation by producers to
recover payment for the contracted-for volumes, some pipeline companies,
including certain Yankee Gas suppliers have negotiated or are negotiating
settlements of their contracts. The pipeline companies were authorized by the
FERC to recover from their customers a portion of their settlement costs under
guidelines set forth by the FERC.
Yankee Gas has collected approximately $8.5 million of its current estimated
total take-or-pay liability of $9.6 million through September 30, 1993. The
collection was accomplished primarily by retaining gas supplier refunds and
deferred gas cost credits which otherwise would have been refunded to customers
as prescribed by a November 20, 1991, DPUC decision and through a surcharge
applied to interruptible customers. Management expects to recover the entire
remaining amount within the next three fiscal years.
TAX AUDITS: The Company is currently undergoing an audit by the Internal
Revenue Service of the Company's 1989 through 1992 federal income tax returns
and a sales tax audit by the Connecticut Department of Revenue Services.
Management does not expect the outcome of these audits to have a material
negative impact on the Company's financial condition or results of
operations.
The following table provides information with respect to the consolidated
quarterly results of operations for the fiscal years ended September 30, 1993
and 1992, 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.
NOTE 7
- --------------
QUARTERLY
FINANCIAL DATA
(UNAUDITED)
(Thousands of Dollars, except share information)
<TABLE>
<CAPTION>
Quarter Ended
Fiscal Year 1993 December 31 March 31 June 30 September 30
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $90 984 $123,624 $51,000 $37,049
Operating Income 11,690 16,621 2,151 102
Net Income (Loss) 7,812 13,839 (994) (3,178)
Earnings (Loss) per Common
Share (1) $ 0.76 $ 1.35 $ (0.10) $ (0.31)
- --------------------------------------------------------------------------------
<CAPTION>
Fiscal Year 1992 December 31 March 31 June 30 September 30
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $76,149 $119,901 $49,460 $33,250
Operating Income (Loss) 9,055 15,064 2,495 (233)
Net Income (Loss) (2) 6,025 11,718 (1,196) (3,412)
Earnings (Loss) per Common
Share (1) (2) $ 0.66 $ 1.28 $ (0.13) $ (0.37)
- --------------------------------------------------------------------------------
</TABLE>
(1) Earnings (Loss) per common share were calculated on the average common
shares outstanding of 10,287,683 and 9,125,183 for the twelve months ended
September 30, 1993 and 1992, respectively.
(2) Exclusive of a $2,566,000 credit, or $0.28 per share, resulting from a
change in the Company's method of accounting for municipal property taxes in
first quarter fiscal 1992.
29
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
September 30, 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA: (Thousands)
Net Utility Plant $308,384 $303,715 $287,841 $ 271,256 $263,306
Total Assets 441,293 393,227 356,269 320,533 302,856
Total Capitalization 311,197 277,391 250,012 234,103 229,190
- ------------------------------------------------------------------------------------------
INCOME AND SHARE DATA: (Thousands
except share data)
Operating Revenues $302,657 $278,760 $234,458 $ 227,886 $213,583
Cost of Gas 157,816 150,616 114,037 118,345 114,360
Other O&M Expenses 59,142 56,246 55,009 51,037 41,182
Depreciation 17,133 16,086 14,039 14,596 13,879
Net Income (1) 17,479 13,135 10,844 8,854 5,700
Earnings per Share (1) $1.70 $1.44 $1.28 $1.09 $0.70
- ------------------------------------------------------------------------------------------
REVENUES: (Thousands)
Residential $133,846 $124,435 $100,959 $ 104,769 $102,842
Commercial 93,045 85,920 69,746 69,378 64,053
Industrial 72,940 64,004 57,294 50,225 43,562
Miscellaneous 1,884 1,211 3,304 2,245 2,906
Transportation 942 3,190 3,155 1,269 220
- ------------------------------------------------------------------------------------------
Total $302,657 $278,760 $234,458 $ 227,886 $213,583
- ------------------------------------------------------------------------------------------
SALES AND TRANSPORTATION:
(Mcf-Thousands)
Firm:
Residential 12,691 12,312 11,029 12,175 12,096
Commercial 9,703 9,183 7,951 8,435 7,839
Industrial 9,600 8,058 8,098 6,532 4,950
Transportation 167 1,700 1,089 362 --
Unbilled and Other 129 (58) (15) 38 92
- ------------------------------------------------------------------------------------------
Total Firm 32,290 31,195 28,152 27,542 24,977
- ------------------------------------------------------------------------------------------
Non-Firm:
Commercial 1,663 1,377 1,403 1,804 2,034
Industrial 5,336 3,632 3,240 3,889 5,018
Transportation 1,400 3,147 4,576 3,085 568
- ------------------------------------------------------------------------------------------
Total Non-Firm 8,399 8,156 9,219 8,778 7,620
- ------------------------------------------------------------------------------------------
Total Sales and Transportation 40,689 39,351 37,371 36,320 32,597
- ------------------------------------------------------------------------------------------
CUSTOMERS: (Average) (2)
Residential 155,385 154,934 154,116 154,211 152,578
Commercial (3) 19,669 19,551 19,379 19,103 18,042
Industrial (3) 1,363 1,390 1,421 1,459 1,430
Resale 1 1 1 1 1
- ------------------------------------------------------------------------------------------
Total 176,418 175,876 174,917 174,774 172,051
- ------------------------------------------------------------------------------------------
SOURCES OF GAS: (Mcf-Thousands)
Domestic 7,474 9,526 14,121 17,277 21,526
Canadian Gas Firm 23,970 11,016 1,837 3,061 3,362
Spot Market Gas 8,155 14,386 16,191 12,770 8,066
Produced Gas 6 15 63 153 121
Company Use/Unaccounted For (608) (377) (487) (422) (1,133)
- ------------------------------------------------------------------------------------------
Total 38,997 34,566 31,725 32,839 31,942
- ------------------------------------------------------------------------------------------
PEAK DAY DATA:
Peak Day Send Out (Mcf per day) (4) 247,315 237,077 225,122 213,145 197,076
Peak Day Date 2/1/93 1/16/92 1/22/91 12/22/89 1/4/89
Peak Day Degree Days 54 55 56 58 55
Total Annual Degree Days 6,232 5,995 5,198 5,968 6,109
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Exclusive of a $2,566,000 credit, or $0.28 per share, resulting from a
change in the Company's method of accounting for municiple property taxes in
fiscal 1992. All per share amounts have been restated to give retroactive effect
to the three-for-two stock split on June 28, 1993.
(2) Customer data has been restated to reflect the number of customer accounts
rather than the number of dwelling units.
(3) Transportation customers are included in these customer categories. Average
transportation customers are as follows: 1993:25, 1992:51, 1991:36, 1990:7 and
1989:4.
(4) Converted from BTU-millions assuming 1,033 BTU per cubic foot.
30
<PAGE>
Shareholder and Stock Information
Annual Meeting
The Annual Meeting of Shareholders will take place on Friday, February 25, 1994,
at 10:30 a.m. at the Ramada Inn in Meriden, Connecticut.
Market for Common Stock
As of December 9, 1993, there were 33,348 holders of record of Yankee Energy
common stock. Yankee Energy's stock is quoted on the New York Stock Exchange
(NYSE) under the symbol "YES", although it is frequently presented as "YanEnS"
in various financial publications.
YES Closing Stock Prices
Fiscal 1993
(GRAPH APPEARS HERE)
High and Low Stock Prices ($/Share)
<TABLE>
<CAPTION>
Year Ended September 30, 1993 High Low
- -----------------------------------------------
<S> <C> <C>
First Quarter 20.42 17.67
Second Quarter 21.33 19.58
Third Quarter 24.17 20.92
Fourth Quarter 28.00 23.38
</TABLE>
Dividends
Yankee Energy's Board of Directors declared four quarterly dividends on its
common stock during the fiscal year. The first two quarterly dividends were
$0.2766 per share and the third and fourth were for $0.29 per share. All stated
dividend rates have been adjusted for a three-for-two stock split effective June
28, 1993. Dividends are considered quarterly by the Board of Directors and, if
declared, are payable at the end of March, June, September and December. The
dividend record date is generally three weeks prior to the dividend payable
date.
Dividend Reinvestment and Voluntary Cash Investment Plan
The Yankee Energy Dividend Reinvestment and Voluntary Cash Investment Plan is
administered by the Company's stock transfer agent, Mellon Securities Transfer
Services (Mellon). The Plan offers registered shareholders a convenient way to
acquire additional shares of common stock. Shares can be purchased by having
quarterly dividends automatically reinvested in additional shares (Dividend
Reinvestment) or by sending in funds monthly to purchase additional shares
(Voluntary Cash Investment). Copies of the Plan are available from Mellon or
Yankee Energy.
Shareholder Information
Shareholders who have questions about their accounts or desire to transfer their
stock from one name to another should contact Mellon at 1-800-288-9541 or write:
For Transfers and Transfer Inquiries: All Other Inquiries:
MELLON SECURITIES MELLON SECURITIES
TRANSFER SERVICES TRANSFER SERVICES
85 CHALLENGER ROAD P. O. BOX 750
OVERPECK CENTRE PITTSBURGH, PA 15230
RIDGEFIELD PARK, NJ 07660
Form 10-K and Shareholder Inquiries
Yankee Energy will provide shareholders with a copy of its 1993 Annual Report to
the Securities and Exchange Commission on Form 10-K, without charge, upon
receipt of a written request sent to Sarah K. Sanders, Assistant Treasurer,
Yankee Energy System, Inc., 599 Research Parkway, Meriden, CT 06450-1030.
Shareholders with questions about Yankee Energy should also contact Sarah K.
Sanders at the above address.
The financial review is printed on recycled paper.
<PAGE>
YankeeEnergy
- ---------------------------------------------
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
203/639-4000
<PAGE>
GRAPHIC APPENDIX LIST
---------------------
COVER -- Top Picture
Sharon Sekellick, Director-Resource Planning, and John Smith, Vice
President, discuss opportunities to expand natural gas service.
Bottom Picture
Distribution mechanics Paul Barkley and John Girolamo maintain
underground facilities to ensure reliable service to Yankee Gas
customers.
Page 1 -- Two Graphs
Dividends Paid for Years 1990 through 1993
Earnings Per Share for Years 1989 through 1993
Page 2 -- Picture
William O. Bailey, Chairman of the Board (Standing) with Philip T.
Ashton, President and Chief Executive Officer (Seated)
Page 4 -- Picture
Federal Paper Board Company in Sprague, Connecticut. Woman on
forklift and big rolls of paper.
Page 5 -- Top Picture
Michael Bielonko, Vice President, Treasurer and Chief Financial
Officer, reviews financial projections with Sarah Sanders,
Assistant Treasurer.
Bottom Picture
New York Stock Exchange floor with YES ticker tape across picture
indicating YES shares closed at 26-1/2 on September 30, 1993.
Page 6 -- Picture
Outside shot of the Foxwoods Casino in Ledyard, Connecticut
Page 7 -- Top Picture
Charles Gooley, Vice President and General Counsel, and Lori
Chadwick (center), Manager-Customer Service discuss customer
satisfaction improvement plans with employees.
Bottom Picture
Jonathan Traylor and Kay-Ann Carrafa, employees in central dispatch
shown at computers.
Page 8 -- Picture
Yankee Gas natural gas refueling station in Waterbury with
superimposed Shell sign indicating partnership with the Shell Oil
Company.
Page 9 -- Top Picture
Thomas Houde (right), Vice President, discusses natural gas vehicle
performance with Stephen Persutti and John McKenna.
Bottom Picture
Front of natural gas vehicle showing where gas is put in.
Page 11 -- Map of Yankee Gas Service Territory
Top Pictures
(Left) Rick Hughes (Yankee Gas employee) shown with Ray O'Brien of
Kimberly Clark
(Right) Beverly Sweet (Yankee Gas employee) shown coordinating
community outreach programs.
Bottom Pictures
(Left) Jim Fino (Yankee Gas employee) shown with restaurant owner
and Yankee Gas customer.
(Middle) Red Cross volunteers shown handing out water bottles.
(Right) Yankee Gas van shown driving through neighborhood
automatically reading meters.
Page 14 -- One Graph
- Growth in Throughput for Years 1989 through 1993.
Page 15 -- One Graph
- Growth in Margin for Years 1989 through 1993.
Page 17 -- One Graph
- Permanent Capital Structure for Years 1989 through 1993.
Page 31 -- One Graph
- YES Closing Stock Prices for Fiscal Year 1993
