<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI-
TIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File Number 0-10721
-------
Yankee Energy System, Inc.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-1236430
- -----------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
599 Research Parkway, Meriden, CT 06450-1030
- -----------------------------------------------------------------
Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (203) 639-4000
---------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ------------------- ---------------------
Common Stock, Par Value
$5 Per Share, and Common
Share Purchase Rights New York Stock Exchange
- -----------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
- -----------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-
affiliates of the registrant at November 29, 1996 was
$229,354,613 based on the closing price of $22.00 per share.
On November 29, 1996, the Company had 10,449,554 shares of common
stock outstanding.
Documents Incorporated by Reference Part of Form 10-K
- ----------------------------------- -----------------
Annual Report to Shareholders Part II
for the Fiscal Year Ended
September 30, 1996
Proxy Statement For Annual Part III
Shareholders' Meeting to be
Held on January 31, 1997<PAGE>
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ------------------
The Company
- -----------
Yankee Energy System, Inc. ("Yankee Energy" or the
"Company") is a public utility holding company incorporated in
Connecticut in 1989. The Company is primarily engaged in the
retail distribution of natural gas through its wholly-owned
subsidiary, Yankee Gas Services Company ("Yankee Gas"), a
Connecticut public service company. Yankee Gas serves
approximately 179,000 residential, commercial and industrial
customers in 68 cities and towns in Connecticut. The Company is
exempt from registration under the Public Utility Holding Company
Act of 1935.
The Company has four additional wholly-owned operating
subsidiaries which support the Company's core natural gas
distribution business or allow the Company to expand its business
of providing total energy services: NorConn Properties, Inc.
("NorConn"), which owns the Company's corporate office building
and another service building and leases both facilities to Yankee
Gas; R. M. Services, Inc. ("RMS") which provides
receivables management services to utilities and other
businesses. Yankee Energy Financial Services Company ("Yankee
Financial"), which provides energy equipment financing; and
Yankee Energy Services Company ("YESCo"), whose purpose is to
provide a full range of energy-related services for its customers
including consulting, fuel procurement management and development
for on-site generation and cogeneration systems, as well as
technical and operating support and equipment installation for
power plants and boilerhouses. YESCo also has three wholly-owned
subsidiaries: BVA Cogen, Inc. ("BVA"), a Delaware corporation
located in Massachusetts which develops customer-designed
cogeneration systems and distributes in the United States the
Deutz MWM Gas-Driven Engine/Generator sets used for on-site
electric generation and which also provides energy-related
services such as feasibility studies, design engineering, turnkey
installations and ongoing service contracts; YESCo Energy
Consulting Services, Inc., incorporated in November, 1996, which
provides energy planning consulting and fuel procurement
management services to industrial and commercial energy users;
and YESCo Industrial Energy Services, Inc., headquartered in East
Granby, Connecticut with several regional field offices, a
manufacturers' representative and service company acquired by
YESCo in July, 1996, which provides heating, ventilating and air-
conditioning services and designs automated temperature control
systems for the commercial and industrial market.
The Company may consider or explore opportunities to acquire
or invest in other gas distribution companies and/or other
energy-related businesses. The Company's overall investment in
unregulated businesses is limited to 20% of the Company's total
consolidated assets, pursuant to a cap imposed by the Connecticut
Department of Public Utility Control ("DPUC") at the time of the
Company's formation.
Gas Markets and Competition
- ---------------------------
General. Yankee Gas operates the largest natural gas
distribution system in Connecticut as measured by number of
customers and size of service territory. Total throughput (sales
and transportation) for fiscal 1996 was 47.3 billion cubic feet
("Bcf"). In fiscal 1996, gas revenues were comprised of the
following: 43% residential; 31% commercial; 24% industrial; and
the remaining 2% other. Yankee Gas provides firm gas sales
service to customers who require a continuous gas supply
throughout the year, such as residential customers who rely on
gas for their heating, hot water, and cooking needs. Yankee Gas
also provides interruptible gas sales service to certain
commercial and industrial customers that have the capability to
switch from natural gas to an alternative fuel on short notice.
Yankee Gas can interrupt service to these customers during peak
demand periods. Yankee Gas offers firm and interruptible
transportation services to customers who purchase gas from
sources other than Yankee Gas. In addition, Yankee Gas performs
gas exchanges, off-system sales and capacity releases to other
local gas distribution companies ("LDCs") and marketers to reduce
its overall gas expense.
Firm Sales. In fiscal 1996, total firm gas sales of 35.1
Bcf accounted for approximately 74.3% of total gas sales and
approximately 88.3% of the Company's operating revenues. Firm
gas sales, particularly sales for residential space heating, are
highly seasonal. In fiscal 1996, about 62% of total firm sales
occurred in the five months from November through March. The
following tables set forth certain information with respect to
firm sales in fiscal 1996.
<TABLE>
<CAPTION>
FISCAL 1996 FIRM SALES
----------------------
Average Number Volumes
of Customers in Bcf
-------------- -------
<S> <C> <C>
Residential 157,526 13.2
Commercial 19,179 10.5
Industrial 2,015 11.4
------- ----
178,720 35.1
</TABLE>
<TABLE>
<CAPTION>
Volumes as a
Percent of
Revenues Firm Sales
-------- -------------
<S> <C> <C>
Residential $145,364,000 38%
Commercial $ 95,463,000 30%
Industrial $ 58,717,000 32%
------------ ----
$299,544,000 100%
</TABLE>
Interruptible Sales. In fiscal 1996, total interruptible
gas sales of 8.5 Bcf accounted for approximately 18.1% of total
gas sales and approximately 9.5% of the Company's operating
revenues. The price charged for interruptible sales service is a
market price based on the cost of the customer's alternative
fuel, which is usually oil. Interruptible sales depend upon the
availability of gas supplies and, generally, have provided lower
margins than firm sales. Yankee Gas has the authorization from
the DPUC to engage in flexible pricing to meet market prices for
alternative fuels available to interruptible customers. The
following table sets forth certain information with respect to
interruptible sales in fiscal 1996.
<TABLE>
<CAPTION>
FISCAL 1996 INTERRUPTIBLE SALES
-------------------------------
Average Number Volumes
of Customers in Bcf Revenues
-------------- -------- -----------
<S> <C> <C> <C>
Commercial and
Industrial 231 8.5 $32,332,000
</TABLE>
Transportation Services. Yankee Gas also offers firm and
interruptible transportation service to its customers. On
April 1, 1996, the DPUC authorized the Connecticut LDCs to
provide firm transportation to industrial and commercial
customers. These transportation services permit customers who
desire to purchase gas from sources other than Yankee Gas to do
so, provided they have made all the necessary transportation
arrangements with the transmission pipelines to deliver their gas
to the Yankee Gas distribution system. Customers can purchase
gas directly from producers and suppliers and contract for
transportation services rather than purchase gas solely from the
local distribution system. Generally, interruptible
transportation service is highly sensitive to alternative fuel
prices as well as to the availability of interstate pipeline
capacity into the region. Under existing tariff structures, the
financial condition of the Company is unaffected by customers
electing to use transportation service in lieu of making gas
purchases from Yankee Gas.
Market Expansion. Yankee Gas has increased efforts to
provide additional service throughout its service territory.
Yankee Gas concentrates its marketing efforts on increasing the
number of residential households using natural gas, increasing
the uses of natural gas by existing Yankee Gas customers, and
increasing the overall number of both large and small customers
through expansion of Yankee Gas' distribution system within its
service territory. In the residential market, Yankee Gas focuses
marketing efforts on households along Yankee Gas' existing mains
because they present opportunities to increase gas sales with
little or no capital investment. In the commercial and
industrial markets, the Company seeks to expand gas sales by
increasing sales to existing customers for both traditional and
innovative uses, such as cooling and cogeneration. The Company
also emphasizes attracting new commercial and industrial
customers within and without its service territory.
The emergence of natural gas vehicles creates a potential
new market for the natural gas industry. The establishment of
natural gas vehicle fueling stations however is essential to the
development of this market. Yankee Gas, in cooperation with
various oil companies and gasoline retailers, has opened retail
public natural gas vehicle refueling stations in Windsor Locks,
Norwalk, and Meriden, Connecticut. Yankee Gas operates two
refueling stations for its own fleet of approximately 100 natural
gas vehicles. The Company continues to evaluate various options
for the establishment and location of additional facilities.
Gas Supply
- ----------
In 1992, the FERC issued Order No. 636, which required
natural gas pipeline companies to separate or "unbundle" their
services. Prior to the issuance of Order No. 636, natural gas
pipeline companies sold pipeline services, such as gas
purchasing, storage and transportation, as a package. In 1993,
the interstate pipeline companies that provided natural gas to
Yankee Gas complied with Order No. 636. As a result, Yankee Gas
executed contracts with interstate pipeline companies for
services to transport gas from production and underground storage
areas to Yankee Gas' service territory to replace the traditional
merchant services previously provided by the pipeline companies.
Yankee Gas concurrently replaced the gas supply traditionally
obtained from the pipeline companies' merchant services with firm
purchases directly from producers and/or marketing companies.
The FERC continues to regulate the rates charged by interstate
pipeline companies for transportation and storage of natural gas,
but does not regulate the price of natural gas purchased by the
Company from producers and marketing companies.
Interstate pipelines delivered over 99.9 percent of Yankee
Gas' 1996 fiscal year requirements to its distribution system.
Interstate pipeline capacity enabled Yankee Gas to meet its firm
customers' requirements with pipeline supplies for more than 98.4
percent of the year.
The following table sets forth sources of fiscal 1996 gas
supply (including purchases for storage injections).
<TABLE>
<CAPTION>
Percent of
Source Total Supply
------- ------------
<S> <C>
Alberta Northeast Gas, Limited 45.55
Direct Firm Purchases 45.60
Boundary Gas 7.29
Spot Market Purchase 1.52
Other (Propane) 0.04
------
Total 100%
</TABLE>
Yankee Gas is entitled to purchase 59,000 thousand cubic
feet ("Mcf") per day of gas, or about 21.5 Bcf annually, from
Alberta Northeast Gas, Limited ("ANE"). Yankee Gas holds a 15.9
percent equity interest in ANE, an entity formed by several
utilities in the Northeast to aggregate the purchase of natural
gas from Western Canada and to facilitate its sale to LDC owners
at the United States-Canadian Border. The sales contracts
between Yankee Gas and ANE expire in 2006. The gas purchased
from ANE is delivered in the United States by the Iroquois Gas
Transmission System, L.P. ("Iroquois") pipeline and the
transportation contract between Yankee Gas and Iroquois expires
in 2011.
Yankee Gas is also entitled to purchase 9,500 Mcf of gas per
day, or about 3.5 Bcf annually, from Boundary Gas, Inc.
("Boundary"). Yankee Gas owns a 10.4 percent equity interest in
Boundary, an LDC consortium which imports natural gas from
Canada. The sales contract between Yankee Gas and Boundary
expires in 2003.
Yankee Gas also holds pipeline transportation and storage
service contracts with a number of pipeline companies. Yankee
Gas has a transportation contract with Tennessee Gas Pipeline
Company ("Tennessee") which provides for 562,794 Mcf of pipeline
capacity on an annual basis. This transportation contract
expires in 2000, but may be continued on a year-to-year basis
after that with the mutual consent of the parties. Another long
term transportation contract with Tennessee provides for an
annual quantity of 511,000 Mcf and terminates in 2017. Yankee
Gas also has a storage contract with Tennessee which provides
approximately 1.8 Bcf of storage service on an annual basis.
This storage contract expires in 2000. Yankee Gas also has
transportation contracts with Algonquin Gas Transmission Company
("Algonquin") which provide for 42.4 Bcf of annual pipeline
capacity. These contracts expire in 2012. Texas Eastern
Transmission Company ("Texas Eastern") provides 38.7 Bcf of
annual pipeline capacity to Yankee Gas pursuant to contracts
which expire in 2000-2004. Under other contracts, Texas Eastern
provides 1.7 Bcf of annual storage service. Yankee Gas also has
transportation contracts with National Fuel Gas Supply
Corporation ("National Fuel") which provide 633,480 Mcf of
pipeline capacity on an annual basis and expire in 2003.
Furthermore, Yankee Gas has transportation contracts with
Transcontinental Gas Pipeline Corporation ("Transco") which
provide 615,125 Mcf of annual pipeline capacity and expire in
2008. Finally, 4.6 Bcf of annual pipeline capacity is provided
to Yankee Gas by CNG Transmission Corporation ("CNGT") pursuant
to transportation contracts which expire in 2003-2012. Under
other contracts, CNGT provides 1.4 Bcf of annual storage service
to Yankee Gas.
Yankee Gas has multiple natural gas purchase agreements with
producers and marketers which back Yankee Gas' transportation and
storage contracts. These purchase agreements provide a variety
of term lengths, pricing provisions and flexibility options to
meet Yankee Gas' current and future supply requirements.
In addition to its gas supply contracts, Yankee Gas also
participates in the spot market, buying gas supply on an "as
available" basis, to the extent such replacement is operationally
feasible and economically beneficial.
Yankee Gas does not have sufficient capacity entitlements on
the interstate pipelines to serve its firm customers with
pipeline-delivered gas at all times. During the winter,
therefore, whenever daily firm demand exceeds the amount of gas
delivered by the pipelines, service to interruptible customers is
interrupted and Yankee Gas supplements pipeline gas with a
propane-air mixture produced at facilities within Yankee Gas'
service territory. In fiscal 1996, such propane-air comprised
less than 0.4 percent of Yankee Gas' total supply. Although
Yankee Gas anticipates continued utilization of this relatively
expensive supplemental gas, the quantities to be used are
substantially decreased from prior periods due to the addition of
the ANE supplies transported by Iroquois.
Iroquois Gas Transmission System, L.P. In April 1996, the
Company's wholly-owned subsidiary, Housatonic Corporation, sold
its entire 10.5 percent interest in Iroquois to three of
Iroquois' existing limited partners for a purchase price of
approximately $22.2 million. The Company determined that the
continued ownership of an interest in an interstate pipeline does
not fit the Company's strategic plan to focus more on providing
energy distribution services to customers and energy conversion
services on customers' premises.
Regulation and Rates
- --------------------
Federal Regulation. Although Yankee Gas is not subject to
FERC jurisdiction, the FERC does regulate the interstate
pipelines serving Yankee Gas' service territory. Yankee Gas,
therefore, is directly and substantially affected by the FERC's
policies and actions. Accordingly, Yankee Gas closely follows
and, when appropriate, participates in proceedings before the
FERC.
Connecticut Regulation. Yankee Gas is subject to regulation
by the DPUC, which, among other things, has jurisdiction over
rates, accounting procedures, certain dispositions of property
and plant, mergers and consolidations, issuances of securities,
standards of service, management efficiency and construction and
operation of distribution, production and storage facilities.
Yankee Gas sells gas to its retail customers under rate
schedules filed with and approved by the DPUC. Firm sales rates
are subject to monthly adjustments pursuant to a Purchased Gas
Adjustment ("PGA") clause approved by the DPUC. The PGA passes
through to customers most changes in the cost of gas purchased by
Yankee Gas. These adjustments are designed to collect or refund
differences in purchased gas costs from the costs included in the
base rates. Currently, the DPUC is conducting a review of the
Connecticut LDCs' PGA mechanism to determine if any
changes are warranted. Hearings have been held but no decision
has been rendered; until it is, the Company is unable to
determine the impact, if any, of any changes.
Yankee Gas' most recent rate order (effective for service
rendered on and after October 1, 1992) allowed a return on equity
of 12.43 percent and provided for favorable accounting treatment
for environmental cleanup costs, post-retirement benefits and
certain other major items.
The DPUC may, after a special public hearing, order an
interim rate decrease if it finds that Yankee Gas' return on
equity exceeds a reasonable rate of return and rates are more
than just, reasonable and adequate as determined by the DPUC.
The DPUC also is empowered to grant an interim rate increase
under compelling circumstances.
FERC Order No. 636. In implementing Order No. 636, the FERC
recognized that the restructuring of the pipelines' traditional
services would cause pipelines to incur transition costs in
several areas. The FERC has permitted certain transition costs
to be recovered by the pipeline companies from their customers.
In July 1994, the DPUC issued an order permitting the
recovery of transition costs billed by pipelines under Order No.
636 through various mechanisms authorized by the DPUC. Through
September 30, 1996, Yankee Gas has paid approximately $17.3
million of transition costs and an additional $0.7 million are
anticipated. To date, Yankee Gas has collected $34.5 million
through a combination of gas supplier refunds, deferred gas costs
credits and excess interruptible margins. In January 1996, the
DPUC approved a joint stipulation and agreement between Yankee
Gas and the Connecticut Office of Consumer Counsel which permits
Yankee Gas to retain over-collected transition cost credits to
offset certain deferred regulatory assets. In exchange, Yankee
Gas agreed not to increase its rates prior to October 1, 1998,
except in the event of certain circumstances which would
adversely affect Yankee Gas' financial condition. If such an
event arises, Yankee Gas has the option to apply to the DPUC for
a rate increase or to retain up to 80% of any off system sales
margin and excess interruptible margin.
In January 1996, the DPUC, in response to Order No. 636,
authorized the Connecticut LDCs to offer unbundled firm
transportation rates to its commercial and industrial customers.
The DPUC's decision permits Yankee Gas to offer a variety of
service options to its commercial and industrial firm
transportation customers. Yankee Gas implemented new firm
transportation rates and services in April 1996. As of September
30, 1996, Yankee Gas had 127 customers under the new firm
transportation service. The conversion by existing customers to
transportation service will result in decreased revenues for
Yankee Gas, as that portion of revenues representing gas costs
will be borne directly by the customer who will purchase its own
gas directly. Yankee Gas, however, does not expect customer
conversions to transportation services to affect its net income.
The DPUC's decision did not address Yankee Gas' revenue
requirement; Yankee Gas will maintain the existing margin
recovery and rates of return established in the last rate case
decision issued for Yankee Gas in 1992.
Order No. 636 also authorizes LDCs to make off system sales
or to release firm pipeline capacity and Yankee Gas has engaged
in these activities to maximize revenues and for effective gas
supply planning.
On August 25, 1996, the Company filed an application with
the DPUC relating to a Financial and Operation Review (Review) of
Yankee Gas. This Review is required to be undertaken by the DPUC
under Connecticut State law if the Company has not undergone a
rate proceeding within the last four years. Since Yankee Gas'
last rate application was approved on August 26, 1992, this
Review is necessary to comply with the statute. Hearings have
been tentatively scheduled for February 1997. The Company is not
able to determine at this time the financial or operational
impact of any decisions which may result from the Review, but
they are not expected to have a material impact on earnings.
Energy Services
- ---------------
The Company has broadened its mission to diversify into
energy-related businesses. YESCo is engaged in the business of
providing a full range of energy-related services for customers,
including consulting, procurement and development for on-site
generation and cogeneration systems as well as technical and
operating support for power plants and boilerhouses. In fiscal
1996, YESCo began offering consulting services to help commercial
and industrial customers solve complex new energy purchasing
problems brought about by deregulation of the energy industry.
For additional information on YESCo see page 1.
Competition. Yankee Gas' principal competitors are
unregulated fuel-oil retailers and regulated electric utilities.
Natural gas competes with oil and electricity in many commercial
and industrial applications and in residential space and water
heating, clothes drying and cooking. Demand for natural gas is
affected by the marketing and pricing of competing sources of
energy.
Yankee Gas may also face competition from other LDCs. In
the past, LDCs did not directly compete with other LDCs for
retail customers because the territories they serve are fixed by
franchise. However, since 1993, LDCs began marketing efforts
within the service territory of other LDCs under blanket
certificates granted by the Federal Energy Regulatory Commission
("FERC"). These certificates allow gas to be sold, but not
necessarily delivered, in the service territory of another LDC.
Within Yankee Gas' service territory, Yankee makes available its
transportation services to move other parties' gas through its
distribution system. The Company's strategic plan focuses on its
core business of gas distribution and expansion of the
development of its energy services business through the efforts
of its unregulated subsidiary, YESCo, to help customers through
changes brought about by deregulation in the natural gas
industry.
Federal regulation also permits customers within Yankee Gas'
distribution system to connect directly with transmission
pipelines and bypass Yankee Gas' distribution system. No
interstate pipeline company, however, has physically bypassed
Yankee Gas' distribution system to provide retail service to
customers in Yankee Gas' service territory. A Connecticut
statute currently prohibits an interstate pipeline from bypassing
an LDC without the DPUC's prior approval. The Company believes
that Yankee Gas is successfully addressing the threat of bypass
by its industrial customers by understanding what services they
need and executing market-competitive gas service agreements.
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 gas manufacturing
plant sites, including coal tar deposits. Coal tar is a by-
product of the gas manufacturing process used by Yankee Gas'
predecessor companies in the mid-20th century. Those predecessor
companies disposed of the coal tar deposits in accordance with
the standard operating practices of the time.
Fourteen sites containing coal tar became the property of
Yankee Gas at the time of divestiture from its former parent
company. Yankee Gas has reported the results of environmental
studies conducted at these sites to the Connecticut Department of
Environmental Protection ("DEP"). Seven of the fourteen sites
are presently listed on the Connecticut Inventory of Hazardous
Waste Sites. Inclusion of a site on this list is an indication
that remediation may be required in the future.
A program of remediation at two of these properties was
conducted during fiscal 1996. In addition, the Company has
developed a cost estimate for the remaining sites based on
various factors including the probability of clean-up.
Recovery of remediation costs has been specifically allowed
by Yankee Gas' 1992 rate case decision. Currently, $325,000 is
allowed annually in rates. If costs are expected to exceed $2.5
million on an annual basis, Yankee Gas is required to 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 recorded a
liability of $35 million in fiscal year 1993 for future
environmental cleanup.
During fiscal 1996, the Company received funds from certain
of its insurance carriers in settlement of certain claims for
actual or potential contamination at certain sites that may give
rise to environmental liabilities. The terms of the
aforementioned settlements are subject to confidentiality
provisions in agreements between Yankee Gas and its insurance
carriers. Yankee Gas currently is actively pursuing additional
claims against some of its insurers.
Franchises
- ----------
Yankee Gas and its predecessors in interest have held valid
franchises to sell gas in the areas in which Yankee Gas supplies
gas service. Such franchises are perpetual but remain subject
to the power of alteration, amendment or repeal by the General
Assembly of the State of Connecticut, the power of revocation by
the DPUC and certain approvals, permits and consents of public
authorities and others prescribed by statute. Yankee Gas
franchises include, among other rights and powers, the rights and
powers to manufacture, generate, purchase, transmit and
distribute gas, to sell gas at wholesale to other utility
companies and municipalities and to erect and maintain certain
facilities on public highways and grounds, all subject to such
consents and approvals of public authorities and others as may be
required by law. The franchises include the power of eminent
domain.
Self-generation and Cogeneration
- --------------------------------
With the current industry deregulation, two expanding gas
markets in Connecticut and elsewhere are self-generation and
cogeneration of electricity. Self-generation is the generation
of some or all of a user's electricity requirements, typically
for commercial or industrial purposes. Cogeneration involves
sequential production of electricity and thermal or mechanical
energy.
Under an agreement between Yankee Gas and The Dexter
Corporation ("Dexter"), Yankee Gas' largest customer, Dexter has
a contract to purchase annually approximately 3.9 Bcf of natural
gas sales service for use in its 56-megawatt cogeneration
facility for an initial term of 20 years (1989-2009).
Employees
- ---------
Yankee Energy and its subsidiaries employ approximately 619
people.
ITEM 2. PROPERTIES
----------
Yankee Gas' property consists primarily of its gas
distribution facilities including, distribution lines (mains and
services), meters, pumps, valves and pressure and flow
controllers. Yankee Gas owns various propane facilities with a
combined storage capacity equivalent to approximately 238,000 Mcf
and seven gas storage holders with a total capacity of
approximately 6.4 Bcf. In the opinion of management, Yankee Gas'
distribution system is in good condition. Virtually all of the
gas properties are subject to the lien of the Yankee Gas first
mortgage bond indenture. Yankee Gas also owns service facilities
in Meriden, Waterbury, Torrington, Mystic, Bristol, Shelton,
Bethel and Danielson, Connecticut.
NorConn owns the Company's headquarters building in Meriden,
Connecticut and currently leases it to Yankee Gas. This is the
site of the Company's corporate administrative and staff
functions including the Customer Service Center. NorConn also
owns and leases to Yankee Gas a service building in East Windsor.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Municipal Tax Assessment. In November 1995, Yankee Gas
received revised tax bills for the years 1991 through 1994 from
the City of Meriden, Connecticut (the "City"). The City is
asserting a claim for the payment of approximately $5.0 million
of back taxes and interest resulting from a retroactive
reassessment and revaluation of Yankee Gas' personal property
filings. The City did not locate or identify any property which
Yankee Gas omitted from its filings. The tax bills reflect a
reassessment of property at higher rates than those previously
accepted by the City. Yankee Gas is currently vigorously
contesting this retroactive reassessment. On November 17, 1995,
Yankee Gas filed a lawsuit in Connecticut Superior Court against
the City and certain City officials alleging that the Connecticut
state statutes prohibit the City from retroactively reassessing
personal property after grand lists are filed and requesting that
the City's order to pay additional taxes be invalidated.
Although no assurances can be given and no determination can be
made at this time as to the outcome of the City's claim or Yankee
Gas' lawsuit, the Company does not anticipate that the outcome of
this matter will have a material adverse effect on the Company's
consolidated results of operations or financial position.
Licensing Issue. In November 1995, The Connecticut Heating
and Cooling Contractors Association, Inc. and others filed a
class action suit against Yankee Gas and Connecticut's two other
LDCs, Connecticut Natural Gas Corporation and The Southern
Connecticut Gas Company, claiming the LDCs engaged in unfair
trade practices. The action alleges that the LDCs unfairly
competed with licensed plumbers and contractors by performing
customer service work using customer service employees who did
not possess Connecticut state trade licenses. The plaintiffs are
seeking injunctive relief and unspecified punitive and actual
damages. Yankee Gas is currently vigorously contesting this
lawsuit.
The LDCs have asserted that such licenses are not required
for this work based on a statutory exemption enacted in 1965 and
amended in 1967. However, in a separate proceeding, a
Connecticut Superior Court has upheld an administrative ruling
against the LDCs' position which was recently affirmed on appeal.
In 1995, the Connecticut General Assembly enacted legislation
that established prospectively a separate procedure for State
certification of gas service employees. While the ultimate
results of the class action suit cannot be determined, management
does not expect that it will have a material adverse effect on
the Company's consolidated results of operations or financial
position.
Other legal proceedings involving the Company and its
subsidiaries are litigation incidental to the conduct of the
Company's business which, in management's opinion, will not have
a material impact on the Company's financial condition or results
of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There was no matter submitted to a vote of security holders
during the fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
Position and Business Experience
Name Age During Past Five Years
- ---- --- ---------------------------------
Branko Terzic 49 Chairman, President and Chief Executive
Officer of the Company and its direct
subsidiaries. Mr. Terzic became
Chairman in August 1995, Chief
Executive Officer in March 1995 and
President in September 1994. From June
1993 to September 1994, Mr. Terzic was
Managing Director of Arthur Andersen
Economic Consulting, Washington, D.C.
From October 1990 to May 1993, he served
as a Commissioner of the Federal Energy
Regulatory Commission.
Charles E. Gooley 43 Executive Vice President of the Company,
and its direct subsidiaries, Yankee Gas
Services Company, NorConn Properties,
Inc., Housatonic Corporation, and Yankee
Energy Financial Services Company, since
July 1994. Previously, he served as Vice
President, General Counsel and Assistant
Secretary of the Company from July 1989
to July 1994.
Michael E. Bielonko 44 Vice President of the Company and its
direct subsidiaries since July 1989 and
Chief Financial Officer since July 1990.
From July 1989 to July 1990 and from
September 1992 to May 1995, he also
served as Treasurer of the Company.
Thomas J. Houde 49 Vice President of the Company and its
direct subsidiary, Yankee Gas Services
Company, since January 1992. Previously,
he served as Director, Corporate
Planning, Rates and Economic Analysis of
Yankee Gas from March 1990 to December
1991.
Mary J. Healey 45 Vice President, General Counsel and
Secretary of the Company and its
direct subsidiaries since January 1995.
Previously, she served as Secretary and
Assistant General Counsel of the Company
from January 1992 to January 1995 and as
Secretary and Counsel of the Company
from July 1989 to January 1992.
Ellen J. Quinn 40 Vice President of the Company and its
direct subsidiaries, Yankee Gas Services
Company and R.M. Services, Inc., since
May 1995. Previously, she served as
Director, Corporate and Environmental
Planning from October 1992 to May 1995,
as Manager, Corporate and Environmental
Planning from March 1990 to October 1992.
Steven P. Laden 48 Vice President of the Company and its
direct subsidiaries, Yankee Gas Services
Company and Yankee Energy Financial
Services Company, since July 1996. From
October 1991 to July 1996,he served as
Vice President of Marketing of Southern
Union Company, a company engaged in
various aspects of the energy business
including the distribution of natural
gas in Texas and Missouri.
All executive officers are elected annually by the Company's
Board of Directors. There are no family relationships among the
executive officers and directors nor are there any arrangements
or understandings between any executive officer and any other
person pursuant to which the officer was selected.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
--------------------------------------
Yankee Energy declared and paid regular quarterly cash
dividends in 1996. The dividend paid for the first two quarters
of 1996 was $.315 per share and $.325 per share in the last two
quarters of 1996. Other information required by this item is
incorporated herein by reference to Yankee Energy's 1996 Annual
Report to Shareholders ("1996 Annual Report"), on the inside back
cover, subsections entitled "Market for Common Stock", and
"Dividends".
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
Information required by this item is incorporated herein by
reference to the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
-------------------------------------------------
Information required by this item is incorporated herein by
reference to the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The Consolidated Financial Statements of Yankee Energy and
the Notes thereto, together with the report thereon of the
Company's Management and of Arthur Andersen LLP are incorporated
herein by reference to the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
-------------------------------------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------
Information regarding Yankee Energy's directors is
incorporated herein by reference to the Company's Proxy Statement
for its Annual Meeting of Shareholders to be held on January 31,
1997 (the "1997 Proxy Statement").
Information regarding the Company's executive officers
follows Item 4 in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information regarding compensation of Yankee Energy's
executive officers, except the Report of the Organization and
Compensation Committee and the Stock Performance Graph, is
incorporated herein by reference to the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
-----------------------------------------------
Information regarding the beneficial ownership of shares of
Common Stock of the Company by certain persons is incorporated
herein by reference to the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information regarding certain transactions of the Company is
incorporated herein by reference to the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
---------------------------------------------------
(a) 1. Financial Statements:
The following Consolidated Financial Statements of
Yankee Energy are incorporated herein by reference to the
Company's 1996 Annual Report in response to Item 8 hereof:
(i) Report of Independent Public Accountants
(ii) Consolidated Statements of Income for the years
ended September 30, 1996, 1995 and 1994.
(iii) Consolidated Balance Sheets at September 30, 1996
and 1995.
(iv) Consolidated Statements of Cash Flows for the
years ended September 30, 1996, 1995 and 1994.
(v) Consolidated Statements of Capitalization at
September 30, 1996 and 1995.
(vi) Consolidated Statements of Common Shareholders'
Equity for the years ended September 30, 1996,
1995 and 1994.
(vii) Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
The following schedules of the Company are included on
the attached pages as indicated:
Page
----
Report of Independent Public Accountants on Schedules...S-1
Schedule II Valuation and Qualifying Accounts and
Reserves for the years ended September
30, 1996, 1995 and 1994..................S-2
3. Exhibits:
Exhibits for Yankee Energy are listed in the Index
to Exhibits........................................E-1
(b)Reports on Form 8-K:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
--------------------------
(Registrant)
Date: December 4, 1996 By /s/ Branko Terzic
-----------------------
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
Date Title Signature
- ---- ----- ---------
December 4, 1996 Chairman, President /s/Branko Terzic
and Chief Executive Branko Terzic
Officer
December 4, 1996 Vice President, /s/Michael E. Bielonko
Chief Financial Michael E. Bielonko
Officer
December 4, 1996 Controller /s/Nicholas A. Rinaldi
Nicholas A. Rinaldi
December 4, 1996 Director /s/Sanford Cloud, Jr.
Sanford Cloud, Jr.
December 4, 1996 Director /s/Eileen S. Kraus
Eileen S. Kraus
December 4, 1996 Director /s/Frederick M. Lowther
Frederick M. Lowther
December 4, 1996 Director /s/Leonard A. O'Connor
Leonard A. O'Connor
December 4, 1996 Director /s/Emery G. Olcott
Emery G. Olcott
December 4, 1996 Director /s/Nicholas L. Trivisonno
Nicholas L. Trivisonno
December 4, 1996 Director /s/Patricia M. Worthy
Patricia M. Worthy
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Yankee Energy System, Inc.:
We have audited, in accordance with generally accepted auditing
standards, the financial statements included in Yankee Energy
System, Inc.'s (the Company) annual report to shareholders
incorporated by reference in this Form 10-K, and have issued our
report thereon dated November 7, 1996. Our audit was made for
the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index of financial statements
is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Hartford, Connecticut
November 7, 1996
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
SCHEDULE
II Valuation and Qualifying Accounts and Reserves
for Years Ended September 30, 1996, 1995 and 1994
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1996
SCHEDULE II
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
<S> <C> <C> <C> <C> <C>
Reserves
for
uncol-
lectible
accounts $5,481 $5,608 $ - $3,830(a) $7,259
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$ 801 $1,462 $ - $ 753(c) $1,510
Medical(d) 1,273 2,227 - 2,382(e) 1,118
_____ ______ ____ _______ _______
Total $2,074 $3,689 $ - $3,135 $2,628
______ ______ ____ ______ ______
______ ______ ____ ______ ______
</TABLE>
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees, for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1995
SCHEDULE II
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
<S> <C> <C> <C> <C> <C>
Reserves
for
uncol-
lectible
accounts $5,444 $3,475 $ - $3,438(a) $5,481
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$1,031 $ 803 $ - $1,033(c) $ 801
Medical(d) 1,085 3,675 - 3,487(e) 1,273
___ ______ ____ _______ _______
Total $2,116 $4,478 $ - $4,520 $2,074
______ ______ ____ ______ ______
______ ______ ____ ______ ______
</TABLE>
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1994
SCHEDULE II
(Thousands of Dollars)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
Additions
__________
(1) (2)
Charged
Balance Charged to Balance
at to other at end
beginning costs and accounts Deductions of
Descrip. of period expenses describe describe period
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
<S> <C> <C> <C> <C> <C>
Reserves
for
uncol-
lectible
accounts $4,914 $4,233 $ - $3,703(a) $5,444
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b)$ 869 $ 700 $ - $ 538(c) $1,031
Medical(d) 861 3,142 - 2,918(e) 1,085
___ ______ ____ _______ _______
Total $1,730 $3,842 $ - $3,456 $2,116
______ ______ ____ ______ ______
______ ______ ____ ______ ______
</TABLE>
(a) Amounts charged off as uncollectible after deducting
customers' deposits and recoveries of accounts previously charged
off.
(b) Provided to cover claims for injuries to employees for
workmen's compensation, for bodily injury to others and property
damage.
(c) Principally payments for various injuries and damages and
expenses in connection therewith.
(d) Provided to cover employee medical claims.
(e) Principally payments for various employee medical expenses
and expenses in connection therewith.
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS
<S> <C>
Exhibit
Number Description of Exhibit
- ------- ----------------------
(3)
3.1 Restated Certificate of Incorporation of Yankee
Energy System, Inc. (the "Company") (Incorporated
by reference to Form 10 Registration Statement
dated April 14, 1989 and amendments thereto, File
No. 0-17605 ("Form 10")).
3.2 Amended Bylaws of the Company (Incorporated by
reference to Form 10).
(4)
4.1 Specimen of the Company's Common Stock
(Incorporated by reference to Form 10).
4.2 Rights Agreement between the Company and The
Connecticut Bank and Trust Company, N.A., as
Rights Agent, dated November 20, 1989
(Incorporated by reference to Form 8-A
Registration Statement dated December 7, 1989,
File No. 0-17605).
4.3 Amendment to Rights Agreement dated May 10, 1990
(Incorporated by reference to Form 8 dated May 30,
1990, File No. 0-17605).
4.4 Amendment to Rights Agreement dated January 23,
1991 (Incorporated by reference to Form 8 dated
January 31, 1991, File No. 0-17605).
4.5 Term Loan Agreement between NorConn Properties,
Inc. and Fleet Bank dated as of January 31, 1996.
(To be submitted to the Commission upon request.)
4.6 Bond Purchase Agreement dated July 1, 1989 between
Yankee Gas and the Purchasers identified therein
(Incorporated by reference to Form 10).
4.7 Indenture of Mortgage and Deed of Trust dated July
1, 1989 between Yankee Gas and The Connecticut
National Bank, as Trustee (Incorporated by
reference to Form 10).
4.8 Guaranty of the Company with Term Loan Agreement
dated July 20, 1989 between United Bank & Trust
Company, as Trustee of the Trust of the Company's
401(k) Employee Stock Ownership Plan and The First
National Bank of Boston (Incorporated by reference
to Form 10-K for the fiscal year ended December
31, 1989, File No. 0-17605 ("1989 Form 10-K")).
4.9 First Supplemental Indenture of Mortgage and Deed
of Trust dated April 1, 1992 between Yankee Gas
and The Connecticut National Bank, as Trustee
(Incorporated by reference to Form S-3
Registration Statement #33- 52750 dated October 2,
1992 ("Form S-3")).
4.10 Second Supplemental Indenture of Mortgage and Deed
of Trust dated December 1, 1992 between Yankee Gas
and The Connecticut National Bank, as Trustee
(Incorporated by reference to Form 10-K for the
fiscal year ended September 30, 1992, File No. 0-
17605 ("1992 Form 10-K")).
4.11 Bond Purchase Agreement dated April 1, 1992
between Yankee Gas and the Purchasers identified
therein (Incorporated by reference to Form S-3).
4.12 Bond Purchase Agreement dated December 1, 1992
between Yankee Gas and Purchaser identified
therein (Incorporated by reference to 1992 Form
10-K).
4.13 Third Supplemental of Mortgage and Deed of Trust
dated June 1, 1995 between Yankee Gas and Shawmut
Bank Connecticut, N.A., as Trustee. (Incorporated
by reference to Form 10-K for the fiscal year
ended September 30, 1995, File No. 0-10721 ("1995
Form 10-K")).
4.14 Bond Purchase Agreement dated June 22, 1995
between Yankee Gas and Purchaser identified
therein. (Incorporated by reference to 1995 Form
10-K).
(10)
10.1 Asset Transfer Agreement among Northeast Utilities
Service Company ("NUSCO"), The Connecticut Light
and Power Company ("CL&P"), the Company, Yankee
Gas and Housatonic Corporation dated June 30, 1989
(Incorporated by reference to Form 10).
10.2 Environmental Liability Sharing and Indemnity
Agreement dated June 30, 1989 between Yankee Gas
and CL&P (Incorporated by reference to Form 10).
10.3 Rate Case Decision dated August 26, 1992
(Incorporated by reference to 1992 Form 10-K).
10.4 Lease Agreement between Yankee Gas and NorConn
Properties, Inc. dated October 1, 1990
(Incorporated by reference to Form S-1
Registration Statement #33-40758 dated May 22,
1991 and amendment thereto dated June 18, 1991
("Form S-1")).
10.5* Non-Employee Director Deferred Compensation
Plan dated December 7, 1995.
10.6+ Long-Term Incentive Compensation Plan adopted
December 5, 1990 (Incorporated by reference
to Proxy Statement dated December 24, 1990).
10.7+ Annual Incentive Compensation Plan adopted
December 5, 1990 (Incorporated by reference
to Form 10-K for the fiscal year ended
September 30, 1991, File No. 0-17605 ("1991
Form 10-K")).
10.8+ Non-Employee Directors' Stock Compensation
Plan adopted March 21, 1991 (Incorporated by
reference to 1991 Form 10-K).
10.9 Severance Pay Plan adopted October 17,
1991(Incorporated by reference to 1991 Form
10-K).
10.10 Service Agreement #800308 dated June 1, 1993,
applicable to Rate Schedule FT-1 (Firm
Transportation) between Texas Eastern
Transmission Company ("Texas Eastern") and
Yankee Gas (Incorporated by reference to Form
10-K for the fiscal year ended September 30,
1993, File No. 0-17605 ("1993 Form 10-K")).
10.11 Service Agreement #1596 dated September 1,
1993, applicable to Rate Schedule FT-A (Firm
Transportation) between Tennessee Gas
Pipeline ("Tennessee") and Yankee Gas
(Incorporated by reference to 1993 Form
10-K).
10.12 Service Agreement #333 dated September 1,
1993, applicable to Rate Schedule FT-A (Firm
Transportation) between Tennessee and Yankee
Gas (Incorporated by reference to 1993 Form
10-K).
10.13 Transportation Agreement dated February 7,
1991 between Iroquois Gas Transmission
System, L.P. ("Iroquois") and Yankee Gas for
transportation of Canadian gas purchased
(Incorporated by reference to Form S-1).
10.14 Service Agreement dated February 7, 1991
between Alberta Northeast Gas Ltd. ("ANE")
and Yankee Gas for purchase of gas from ATCOR
Limited (Incorporated by reference to Form
S-1).
10.15 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from PROGAS Limited (Incorporated by
reference to Form S-1).
10.16 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from AEC Oil and Gas Company
(Incorporated by reference to Form S-1).
10.17 Service Agreement dated February 7, 1991
between ANE and Yankee Gas for purchase of
gas from TransCanada Pipelines Limited
(Incorporated by reference to Form S-1).
10.18+ Employment Agreement between the Company and
Mr. Branko Terzic dated September 15, 1994
(Incorporated by reference to Form 10-K for
the fiscal year ended September 30,1994, File
No. 0-10721).
10.19+ Form of Change in Control Executive Severance
Agreement dated April 25, 1995 for Michael E.
Bielonko, Charles E. Gooley, Mary J. Healey,
and Thomas J. Houde. (Incorporated by
reference to 1995 Form 10-K).
10.20 $60 million Revolving Credit Agreement among
Yankee Gas and several banks dated February
2, 1995. (Incorporated by reference to 1995
Form 10-K).
10.21 Agreement for Systems Operations Services
among Yankee Gas and Integrated Systems
Solutions Corporation ("ISSC") dated August
12, 1991 (Incorporated by reference to 1992
Form 10-K).
10.22* Stipulation and Agreement dated January 3,
1996 between Yankee Gas and The Office of
Consumer Counsel, Docket No. 92-02-19
Reopened II.
11* Statement re: Computation of per share
earnings.
13* 1996 Annual Report to Shareholders.
21* Subsidiaries of the registrant.
23* Consent of Arthur Andersen LLP.
27* Financial date schedule pursuant to Article 5
of Regulation S-X for commercial/industrial
customers.
</TABLE>
* Filed herewith.
+ Management contract or compensatory plan.
<PAGE>
EXHIBIT 10.5
YANKEE ENERGY SYSTEM, INC. NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION PLAN
PREAMBLE
WHEREAS, Yankee Energy System, Inc. (the "Company") desires to
establish an unfunded plan for the deferral of Fees and
Restricted Stock for non-employee directors; and
WHEREAS, the Company recognizes the unique qualifications of its
key directors and the valuable services that they have provided
to or for the Company;
NOW, THEREFORE, the Company hereby establishes the Yankee Energy
System, Inc. Non-Employee Director Deferred Compensation Plan
(the "Plan") as hereinafter provided:
ARTICLE I
GENERAL
Section 1.1 Effective Date. The provisions of the Plan shall be
effective as of the date on which the Plan is adopted by the
Board of Directors of the Company, subject to the approval of the
Plan by the holders of a majority of the shares of Common Stock
present or represented and entitled to vote at the annual meeting
of the Company's shareholders to be held on February 23, 1996 or
at any adjournment thereof. The rights, if any, of any person who
is no longer a Director of the Company shall be determined
pursuant to the Plan as in effect on the date such Director
terminated, unless a subsequently adopted provision of the Plan
is made specifically applicable to such person.
Section 1.2 Purpose. The purpose of the Plan is to aid the
Company in attracting and retaining Non-Employee Directors
capable of furthering the future success of the Company and to
further align their interests with the Company's other
shareholders by increasing their proprietary interest in the
Company.
Section 1.3 Participation. All Non-Employee Directors shall be
eligible to participate in the Plan.
Section 1.4 Plan Not Funded. The obligation of the Company to
make payments under this Plan constitutes nothing more than an
unsecured promise of the Company to make such payments. More
specifically, until benefits are distributed in accordance with
Article V herein, all amounts of Fees and Restricted Stock
deferred under the Plan, all property and rights purchased with
such amounts, and all income attributed to such amounts,
property, or rights shall remain solely the property and rights
of the Company subject only to claims of the Company's general
creditors.
ARTICLE II
DEFINITIONS AND USAGE
Section 2.1 Definitions. Wherever used in the Plan, the
following words and phrases shall have the meaning set forth
below unless the context plainly requires a different meaning:
- - "Account" means the account established on behalf of the
Participant as described in Section 4.1.
- - "Change in Control" means:
(a) A change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A as in effect on the date hereof pursuant to the
Securities Exchange Act of 1934, as amended, herein referred to
as the "Exchange Act"; provided that, without limitation, such a
change in control shall be deemed to have occurred at such time
as any Person hereafter becomes the "Beneficial Owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of 25 percent or more of the combined voting power of
the Company's Voting Securities. As used herein, "Person" means
any individual, corporation, partnership, group, association or
other "person" as such term is used in Section 14(d) of the
Exchange Act, other than the Company, Yankee Gas Services Company
or any employee benefit plan or plans sponsored by either,
"Voting Securities" means the Company's issued and outstanding
securities ordinarily having the right to vote at elections of
the Board of Directors of the Company.
(b) The occurrence of a change during any 25 consecutive
calendar months in the composition of the Board of Directors so
that the Continuing Directors (as hereafter defined) cease for
any reason to constitute a majority of the Board of Directors. As
used herein, "Continuing Directors" means the individuals who
were directors at the beginning of the 25-month period or whose
nomination for election or appointment to the Board of Directors
was approved by a vote of at least a majority of the then
Continuing Directors; or
c) There shall be consummated (i) any consolidation or
merger of the Company in which the Company is not the continuing
or surviving corporation or pursuant to which Voting Securities
(other than fractional shares) would be converted into cash,
securities, or other property, other than a merger of the Company
in which the holders of Voting Securities immediately prior to
the merger have the same proportionate ownership of common stock
of the surviving corporation immediately after the merger, (ii)
any sale, lease, exchange, or other transfer (in one transaction
or series of related transactions) of a majority (by value) of
the assets of the Company, provided that any such consolidation,
merger, sale, lease, exchange, or other transfer consummated at
the insistence of an appropriate public utility regulatory agency
shall not constitute a change in control; or
(d) Approval by the shareholders of the Company of any plan
or proposal for the liquidation or dissolution of the Company; or
(e) Determination by the Board of Directors that a change
in control has occurred for purposes of this Plan.
- - "Code" means the Internal Revenue Service Code of 1986, as
amended from time to time.
- - "Committee" means the Organization and Compensation
Committee of the Board of Directors.
- - "Common Stock" means the Common Stock, $5.00 par value per
share, of the Company.
- - "Deferral Agreement" means an agreement between the Company
and a Participant to defer Fees and Restricted Stock, which is
executed pursuant to Section 3.1.
- - "Director" means a member of the Board of Directors of the
Company.
- - "Disability" means, as determined by a licensed physician
chosen by the Committee, permanent and total disability, mental
or physical, which prevents a Participant from discharging the
duties and obligations of a Director or from otherwise providing
the services for which Fees are paid by the Company.
- - "Fees" means the total fees paid to a Director for service
on the Board of Directors of the Company including board
retainers, meeting fees, chair retainers, quarterly retainers
paid in the form of Common Stock and committee fees.
- - "Interest Factor" means the annual rate of interest
applicable for each month during the deferral period based upon
100% of the rate of Return on Rate Base for the average rolling
12 month period, as filed on a monthly basis with the Connecticut
Department of Public Utility Control. The Interest Factor for
each month shall be credited as of the last day of each such
month and shall be compounded monthly.
- - "Non-Employee Director" means a Director who is not an
employee of the Company or any subsidiary thereof.
- - "Participant" means any Non-Employee Director who has
executed a Deferral Agreement as described in Article III.
- - "Plan Year" means the twelve month period ended December 31.
- - "Restricted Stock" means restricted shares of the Company's
Common Stock awarded under the terms of the Non-Employee
Directors' Restricted Stock Plan, established by the Company in
1991.
- - "Retirement" means the date of a Participant's actual
retirement as a Director.
Section 2.2 Usage. Except where otherwise indicated by the
context, any masculine terminology used herein shall also
included the feminine and vice versa, and the definition of any
term herein in the singular shall also included the plural and
vice versa.
ARTICLE III
ELECTIONS
Section 3.1 Election to Defer Fees. Each Non-Employee Director
shall be permitted to elect to defer all or a portion of his Fees
for a Plan Year which would otherwise be payable by the Company,
by executing an irrevocable agreement to defer the receipt of
such Fees until the commencement of benefits in accordance with
Section 5.2. Such election must be made by the Director prior to
the first day of each Plan Year and shall apply only with respect
to Fees received for services performed as a Director for the
Company after the election is made. Any Fees deferred under this
Section 3.1 as well as any earnings attributable thereto shall be
paid to each Participant in accordance with Section 5.2.
Section 3.2 Election to Defer Restricted Stock. Each Non-
Employee Director shall be permitted to elect to defer all or a
portion of the Restricted Stock awarded to him in consideration
for his services as a Director, by executing an irrevocable
agreement to defer the receipt of the restricted stock until the
commencement of benefits in accordance with Section 5.2. Such
election must be made by the Director prior to the first day of
the Plan Year in which the Restricted Stock becomes vested. Any
Restricted Stock deferred under this Section 3.2 shall be paid to
the Director in accordance with Section 5.2.
Section 3.3 Election Procedure. Any election to defer Fees and
Restricted Stock under Sections 3.1 and 3.2 shall be made by
executing a Deferral Agreement.
ARTICLE IV
PARTICIPANTS' ACCOUNTS
Section 4.1 Establishment of Account. The Company will establish
and maintain Accounts for each Participant with respect to each
Deferral Agreement made pursuant to Article III by the
Participant. Each Account shall initially contain zero dollars
($0).
Section 4.2 Credits to the Accounts. Each Participant's Account
will be credited for the amount each Participant agrees to defer
pursuant to Article III and the Deferral Agreement. Deferred Fees
will be credited as a dollar amount to the Participant's Account
on the date they would otherwise be payable. All amounts credited
to each Account are credited solely for accounting and
computation purposes. The amounts credited to the Accounts are at
all times the assets of the Company subject to the claims of the
Company's general creditors. Participants shall not have any
right to receive any current or accumulated deferred Fees or
earnings until such time as determined under Article V of this
Plan. To the extent that any person, including a Participant,
acquires a right to receive payments from the Company under the
Plan such right shall be no greater than the right of any
unsecured general creditor of the Company. Furthermore, such
right may not be pledged, transferred or assigned in whole or in
part.
Section 4.3 Determination of Account Value. Each Participant may
elect one of the following options with respect to crediting of
earnings on his Account:
Option A: If this option is selected, the Participant's
Account will be credited monthly with the Interest Factor for
that month. For purposes of crediting the Interest Factor to the
Account, the balance of the Account shall include any Fees
credited in accordance with Section 4.2. Amounts withdrawn prior
to the last day of the Plan year shall be credited with the
Interest Factor calculated to the date of withdrawal.
Option B: If this option is selected, the Participant's
Account will be deemed to be invested in Common Stock of the
Company. In addition, the quarterly retainer Fees payable in the
form of Common Stock and the Restricted Stock that a Participant
elects to defer pursuant to Section 3.2 shall be deemed to be
invested in accordance with this Option B. The following
provisions will govern the crediting of the Account:
(a) For each Participant electing to participate in
Option B, the Company shall maintain a deferred money account
("Deferred Money Account") which shall periodically be converted
into a stock unit account ("Stock Unit Account") for each such
Participant.
(b) Deferred Fees of each Participant that are payable
in cash shall be credited as a dollar amount to the Participant's
Deferred Money Account on the date they otherwise would be
payable in accordance with Section 4.2 and shall be converted
into stock units quarterly at March 31, June 30, September 30 and
December 31 in each year by dividing the dollar balance of such
Deferred Money Account as of the end of each such quarter by the
last reported sales price per share of the Company's Common Stock
on the New York Stock Exchange on the last day upon which such
stock was traded during each such quarter. The number of stock
units for full shares so determined shall be credited to the
Participant's Stock Unit Account and the aggregate value thereof
at said closing price shall be charged to the Participant's
Deferred Money Account. Any cash balance remaining in the
Participant's Deferred Money Account after such charge shall be
used together with other subsequent credits thereto at the next
stock conversion period. Quarterly retainer Fees payable in the
form of Common Stock and Restricted Stock that a Participant
elects to defer pursuant to Section 3.2 shall be credited
directly to the Participant's Stock Unit Account.
(c) Additional credits will be made to each
Participant's Deferred Money Account in dollar amounts equal to
the cash dividends (or the fair market value of dividends paid in
property) the Participant would have received from time to time
had he been the owner on the record dates with respect thereto of
the number of shares of the Company's Common Stock equal to the
number of stock units in his Stock Unit Account on such dates.
Such credits shall be converted into stock units quarterly in the
same manner as deferred Fees are converted pursuant to Section
4.3(b). In the event of a merger, consolidation, reorganization,
recapitalization, stock dividend, stock split or other changes in
corporate structure or capitalization affecting the Common Stock,
such appropriate adjustment shall be made in the number of stock
units in each Participant's Stock Unit Account to prevent
dilution or enlargement of the rights of Participants.
Section 4.4 Decreases in Account. A Participant's Account shall
be reduced by the amount of any benefits distributed to or on
behalf of a Participant pursuant to Article V. Further, a
Participant's Account shall be reduced for any penalties,
withdrawal charges or similar assessments or charges actually
assessed against the value of any investment held in such Account
as a result of early withdrawal or payment under such investment.
Section 4.5 Statement of Account. A statement will be furnished
to each Participant stating the value of his Account following
the end of each calendar quarter.
ARTICLE V
DISTRIBUTION OF BENEFITS
Section 5.1 General. The value of each Account, as determined
under Article IV, shall determine and constitute the basis for
the value of the benefits payable to a Participant under this
Plan.
Section 5.2 Commencement of Benefit Payments. Except as provided
in Article VI, a Participant may elect on the Deferral Agreement
to receive payment of the amounts deferred under the Plan at (a)
a specified date in the future at least six months after the date
of such election or (b) after the date on which the Participant
ceases to be a Director for any reason including, but not limited
to, Disability, resignation, removal or Retirement. Provided,
however, that in no event may a Participant receive a
distribution of Common Stock unless at least six months have
passed since the last date on which the Director executed a
Deferral Agreement pursuant to Article III.
Section 5.3 Form of Benefit Payments. Except as provided in
Article VI, a Participant's benefit shall be paid in the form
provided under the Deferral Agreement. If the Participant's
Deferral Agreement does not provide for a form of payment, then
the Participant's benefit shall be paid in a single lump-sum cash
payment.
ARTICLE VI
DEATH BENEFITS
Section 6.1 Death Prior to Benefit Commencement. If a
Participant should die before payment of benefits has commenced
under the Plan, then the benefits otherwise payable with respect
to the Participant shall be paid to the Participant's estate in a
single sum payment as soon as administratively feasible following
the death of the Participant.
Section 6.2 Death Following Benefit Commencement. If a
Participant dies after the date payment of benefits has commenced
under the Plan, the Participant's estate shall be entitled to
payment of the remaining benefits in the form of a single sum
payment which shall be paid as soon as administratively feasible
following the death of the Participant.
ARTICLE VII
ADMINISTRATIVE COMMITTEE
Section 7.1 General. Except where otherwise specifically
indicated, responsibility for administration of this Plan shall
be that of the Organization and Compensation Committee of the
Board of Directors (the "Committee").
Section 7.2 Duties. The Committee shall have the following
rights and duties:
(a) No member of the Committee shall have any right to vote
or decide upon any matter relating to himself or to any of his
rights or benefits under any part of the Plan.
(b) The decision of the Committee in matters concerning the
Plan shall be final, binding and conclusive upon the Company and
upon any other person affected by such decision, subject to the
claims procedure hereinafter set forth.
(c) The Committee shall have the discretionary fiduciary
authority to interpret and construe the provisions of the Plan,
to decide any dispute which may arise regarding the rights of
Directors, whether or not they are Participants under the terms
of the Plan (see the claims procedure hereinafter set forth) and
whether or not such Participants are eligible for benefits, which
determinations and rules shall apply uniformly to all Directors
similarly situated.
(d) The Committee shall have the sole authority to
determine those individuals eligible to become Participants in
accordance with the provisions of the Plan.
(e) The Committee shall maintain full and complete records
of its deliberations and decisions. Its records shall contain all
relevant data pertaining to individual Participants and their
rights under the Plan. It has the duty to carry into effect all
such rights and benefits.
(f) The Committee shall cause the principal provisions of
the Plan to be communicated to each Participant, and a copy of
the Plan and other documents shall be available at the principal
office of the Company for inspection by each Participant at
reasonable times determined by the Committee.
ARTICLE VIII
CLAIMS PROCEDURE
Section 8.1 General. Any claim for benefits under the Plan shall
be filed by a Participant or his estate (claimant) of this Plan
by written communication which is made by the claimant, or by the
claimant's authorized representative which is reasonably
calculated to bring the claim to the attention of the Committee.
Section 8.2 Denials. If a claim for a Plan benefit is wholly or
partially denied, notice of the decision shall be furnished to
the claimant by the Committee within a reasonable period of time
after receipt of the claim by the Committee.
Section 8.3 Notice. Any claimant who is denied a claim for
benefits shall be furnished written notice setting forth:
(a) The specific reason or reasons for the denial;
(b) Specific reference to the pertinent Plan or Deferral
Agreement provision upon which the denial is based;
(c) A description of any additional material or information
necessary for the claimant to perfect the claim and an
explanation of the Plan's claim review procedure;
(d) An explanation of the Plan's claim review procedure.
Section 8.4 Appeals Procedure. In order that a claimant may
appeal the denial of a claim, a claimant or his duly authorized
representative:
(a) Must request a review by written application to the
Company's Board of Directors, or its designate, not later than
sixty (60) days after receipt by the claimant of written
notification of denial of a claim;
(b) May review pertinent documents; and
(c) May submit issues and comments in writing.
Section 8.5 Review. A decision on review of a denied claim
shall be made not later than sixty (60) days after receipt of a
request for review, unless special circumstances require an
extension of time for processing, in which case a decision shall
be rendered within a reasonable period of time, but not later
than 120 days after receipt of a request for review. The decision
on review shall be in writing and shall include the specific
reason(s) for the decision and the specific reference(s) to the
pertinent Plan or Trust Agreement provisions on which the
decision is based.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 9.1 Amendment of Plan. The Company reserves the right to
amend the Plan in any manner that it deems advisable, by a
written instrument signed by any authorized representative of the
Company. Provided, however, that any amendment which affects a
Participant's existing Account must be agreed to, in writing, by
the Participant to be effective, and provided further that if
shareholder approval of any amendment is necessary in order to
ensure compliance with Rule 16b-3 the Exchange Act, such
amendment shall be subject to approval by the shareholders by the
vote and in the manner required by Rule 16b-3 of the Exchange
Act.
Section 9.2 Termination of Plan. The Company reserves the right
to terminate this Plan at any time, provided that such
termination is prospective in effect or is otherwise agreed to in
writing by the Participant.
Section 9.3 No Assignment. The Participant shall not have the
power to transfer, assign, anticipate, mortgage or otherwise
encumber or dispose of in advance any interest in amounts payable
hereunder or any of the payments provided for herein, nor shall
any interest in amounts payable hereunder or in any payments be
subject to seizure for payment of any debts, judgments, alimony
or separate maintenance, or be reached or transferred by
operation of law in the event of bankruptcy, insolvency or
otherwise.
Section 9.4 Successors and Assigns. The provisions of this Plan
are binding upon and inure to the benefit of the Company, its
successors and assigns, and the Participant, his beneficiaries,
heirs, legal representatives and assigns.
Section 9.5 Governing Law. This Plan shall be subject to and
construed in accordance with the laws of the State of Connecticut
to the extent not preempted by the provisions of the Employee
Retirement Income Security Act of 1974, as amended.
ARTICLE X
TRUST
Section 10.1 Trust. The Trust under the Yankee Energy System,
Inc. Non-Employee Director Deferred Compensation Plan (the
"Trust") has been established by the execution of a Trust
Agreement with the Trustee thereunder and is intended to be
maintained as a "grantor trust" under Section 677 of the Code.
The assets of the Trust will be held, invested and disposed of by
the Trustee, in accordance with the terms of the Trust Agreement,
for the exclusive purpose of providing benefits for the
Participants and their beneficiaries. Notwithstanding any
provision of the Plan or the Trust Agreement to the contrary, the
assets of the Trust shall at all times be subject to the claims
of the Company's general creditors in the event of insolvency as
defined in the Trust Agreement or bankruptcy.
Section 10.2 Contributions and Expenses. The Company, from time
to time, shall make contributions to the Trust. All benefits
under the Plan shall be paid by the Trust. All expenses
chargeable to the Plan shall be paid by the Company. In the event
of a Change in Control, the Company shall make an irrevocable
contribution to the Trust in an amount sufficient to pay each
Participant or beneficiary the benefits to which Participants or
their beneficiaries would be entitled pursuant to the terms of
the Plan as of the date on which the Change in Control occurred.
Section 10.3 Trustee Duties. The powers, duties and
responsibilities of the Trustee shall be as set forth in the
Trust Agreement and nothing contained in the Plan, either
expressly or by implication, shall impose any additional powers,
duties or responsibilities upon the Trustee.
Section 10.4 Reversion to the Company. The Company shall have no
beneficial interest in the Trust and no part of the Trust shall
ever revert or be repaid to the Company, directly or indirectly,
except as otherwise provided in Section 10.1 above or in the
Trust Agreement.
IN WITNESS WHEREOF, the Company, by its duly authorized officers,
hereby adopts this Plan on this 7th day of December, 1995.
ATTEST/WITNESS YANKEE ENERGY SYSTEM, INC. (Company
Seal)
____________________ By:___________________________
___________________ ______________________________
Print Name Print Name and Title
Date:____________________
<PAGE>
EXHIBIT 11
<TABLE>
<CAPTION>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Earnings Per Share Computation
For the Years Ended September 30
--------------------------------
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
(Thousands of Dollars, Except Share Data)
Net Income $21,919 $12,358 $19,485
------- ------- -------
Average Common
Shares
Outstanding 10,435,196 10,332,447 10,287,683
---------- ---------- ----------
Earnings Per
Share $2.10(b) $1.20(b) $1.89(a)(b)
-------- -------- -----------
</TABLE>
(a) Exclusive of an $0.08 per share charge resulting from
an early redemption premium on the Company's preferred stock.
(b) Earnings per share information is the same on both a
primary and fully diluted basis as Yankee Energy System, Inc. has
a simple capital structure.
<PAGE>
EXHIBIT 13
Cover:
Background: Photo features dancers from The Hartford
Ballet's production of "Fire & Ice: A
Tribute to Russian Ballet" sponsored by
Yankee Energy System, Inc.
Top Center: Yankee Energy System, Inc.
Top Right Third: 1996 Annual Report
Full Cover Type: Vertical words (14)(adjectives)
describing company attributes:
discipline
performance
service
talent
teamwork
skill
imaginative
commitment
integrity
initiative
power
preparation
strength
ingenuity
Horizontal word: creative energy
<PAGE>
Inside Front Cover:
Company Profile
Yankee Energy System, Inc. (YES or the Company) is a
holding company, headquartered in Meriden, 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 68 cities and towns in
Connecticut. The Company has four additional wholly-
owned operating subsidiaries which either support the
Company's core natural gas distribution business or
allow the Company to expand its business of providing
comprehensive energy services.
Yankee Energy Services Company (YESCo), provides a full
range of energy related services for its customers
including consulting, fuel procurement management, and
development of on-site generation and cogeneration
systems as well as technical and operating support and
equipment installation for power plants and
boilerhouses. BVA Cogen, Inc. (YESCo BVA), acquired by
YESCo in August, 1995, is a cogeneration developer with
projects in operation throughout the Northeastern
United States. YESCo Industrial Energy Services, Inc.
(YESCo Industrial), acquired by YESCo in July, 1996,
provides heating, ventilation and air conditioning
services. YESCo Energy Consulting Services, Inc.
(YESCo Consulting), incorporated as a subsidiary of
YESCo in November, 1996, provides energy consulting and
guidance in the selection of energy suppliers and
related equipment and the purchase and transportation
of energy for energy users.
NorConn Properties, Inc. (NorConn), owns selected
system real estate and leases to Yankee Gas.
Yankee Energy Financial Services Company (Yankee
Financial), provides energy equipment financing.
R.M. Services, Inc. (RMS), provides receivables
management services to utilities and other businesses
nationwide.
Housatonic Corporation (Housatonic), held a 10.5
percent ownership interest in the Iroquois Gas
Transmission System, which it sold during the fiscal
year.
Right side of page:
Contents
1 Financial Highlights
2 Chairman's Letter
4 Yankee Energy System, Inc.
6 Yankee Gas Services Company
8 Yankee Energy Services Company
12 Directors and Officers
13 Financial and Statistical Section
33 Shareholder and Stock Information
Lower right:
Graphic - Map of Connecticut highlighting Yankee Gas
Service Area
Lower left:
Description of cover - Cover and background photos
feature dancers from the
Hartford Ballet's production
of "Fire & Ice: A Tribute to
Russian Ballet", choreographed
by Artistic Director Kirk
Peterson, sponsored by Yankee
Energy System, Inc.
End of Company Profile page.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 01
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Years Ended September 30, 1996 1995 % Change
<S> <C> <C> <C>
FINANCIAL (Thousands)
Operating Revenues $339,940 $294,022 15.6%
Net Income 21,919 12,358 77.4%
Capital Expenditures 30,031 26,562 13.1%
Net Utility Plant 335,488 324,870 3.3%
COMMON STOCK (Per Share Data)
Earnings per Share $2.10 $1.20 75.0%
Stock Price (End of Year) $22.88 $21.38 7.0%
Quarterly Dividend (End of Year) $0.325 $0.315 3.2%
Yield (End of Year) 5.7% 5.9% (3.6)%
Common Shares Outstanding
(Average) 10,435,196 10,332,447 1.0%
Book Value Per Share (End of
Year) $15.51 $14.60 6.3%
OPERATIONS
Sales and Transportation (MMcf) 47,274 44,751 5.6%
Degree Days (Normal 6,151) 6,302 5,595 12.6%
Customers (Average) 178,972 177,852 0.6%
</TABLE>
Bar graph at bottom of page showing the following information:
<TABLE>
<CAPTION>
Book Value Per Share Dividend Growth - Dividends Paid
($/Share)
<S> <C> <C> <C>
1992 $12.59 1992 $1.09
1993 $13.86 1993 $1.13
1994 $14.54 1994 $1.19
1995 $14.60 1995 $1.24
1996 $15.51 1996 $1.28
</TABLE>
<PAGE>
Upper left: Photo of Branko Terzic, Chairman, President and
CEO, Yankee Energy System, Inc. at The Bushnell,
Hartford, Connecticut
Text: Chairman's Letter
Yankee? That s that aggressive gas company, isn't it? was the
way one of our managers was greeted at a national conference. It
was an appropriate observation. This past year my colleagues and
I have made sure that the markets are aware of our Company and
its accomplishments.
Thus, I am delighted to report to you, in my second annual
letter, that earnings for the year were significantly higher than
1995. Earnings per share of $2.10 were up 75% from the $1.20
earned in 1995 and met financial community expectations.
Once again the weather played a predominant role in our earnings
since it is a primary factor affecting the revenues of our
principal subsidiary, Yankee Gas Services Company (Yankee Gas).
Unlike last year, however, this year s weather was favorable for
increased natural gas deliveries. Another factor contributing to
this year's earnings was the operational efficiency gained from
our business transformation process initiated in 1995.
The 1996 earnings include a net after tax gain of $0.24 per share
on the sale of our minority interest in the Iroquois Pipeline.
The decision to sell our interest in the Iroquois was based on
the realization that we could continue to experience the full
benefits of Iroquois gas transportation services by remaining a
customer and on the need to redirect investments to businesses
more directly compatible with our mission statement.
I am also pleased to report that the Board of Directors voted to
increase the dividend from $1.26 to $1.30 per share on an
annualized basis - the sixth consecutive year in which we have
increased the dividend.
We enter this year with a well trained and professional
management and employee team dedicated to increasing shareholder
value through the careful management of both the tangible and
intangible assets. This year the executive leadership team was
expanded with the creation of the position of Vice President for
Sales and Marketing. Steven P. Laden was elected to this new key
position from a similar position in Texas based on his successful
track record as a sales and marketing executive in both the
telecommunications and natural gas industries.
I believe it is important that you know something about the Chief
Executive Officer leading the management team. A graduate
engineer, I joined the Company in September, 1994 with twenty-
five years of experience in the industry including government
service as Member of the Federal Energy Regulatory Commission
Running Across Bottom of Page(s): Yankee Energy System, Inc.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 03
(1990-1993) and as Commissioner on the Wisconsin Public Service
Commission (1981-1986). In the private sector, I have held
executive or consultant positions with Arthur Andersen, AUS
Consultants, American Appraisal Associates and Wisconsin Electric
Power Company.
This past year, I have been a frequent, and frequently quoted,
speaker at industry events in North America before financial and
industry audiences. The purpose has been to both introduce Yankee
Energy System, Inc. (YES) as a relatively young company, to the
investing public and to help determine its future by
participating in national and international debates which will
frame new rules for a more competitive energy industry. The
results have been seen in increased coverage by analysts in
affirmation of our corporate strategy.
My experience in consulting to telecommunications, electric, gas,
water and other regulated industries and my travels around the
world on behalf of clients, prior to my joining YES, have given
me an opportunity to observe, worldwide, dramatic changes for
regulated industries across a full range of ownership structures,
regulatory environments and technologies.
Thus, I observe, at the local level, national trends being
followed. Our principal subsidiary, Yankee Gas, has unbundled
its gas supply and gas delivery services for all commercial and
industrial customers as of April 1, 1996 by order of the
Connecticut Department of Public Utility Control. Under the
direction of Charles E. Gooley, Executive Vice President, Yankee
Gas was well prepared for this change and is preparing for future
changes in the areas of retail customer choice and service
enhancements. Our investments in automatic meter reading and
computer aided dispatch technologies will allow us to earn a
competitive return as we evolve into an efficient and growing gas
delivery system.
Another lesson observed is that unbundling utility services
creates, for an innovative and creative energy service supplier,
new opportunities for enhanced customer services and revenue
growth in the areas of energy conversion, energy procurement,
HVAC systems and related areas. This is why we have established
Yankee Energy Services Company (YESCo) and assigned a veteran
executive, Michael E. Bielonko, to this growing sector of the
economy. Strategic acquisitions, such as YESCo Industrial Energy
Services, Inc. and BVA Cogen, Inc. have been made and additional
seasoned energy experts have been hired to serve customers needs
in this growing market.
In closing, I would remark that we have chosen the theme of
creative energy for this year s annual report because it
captures the dynamic plan we have set into motion. I promise our
shareholders that Yankee Energy System, Inc., will apply
creative energy to achieve our goal of increasing shareholder
value by providing imaginative and responsive solutions for the
energy customer. After your review of this annual report I hope
you share with me the confidence which I have in the strength of
our plan and the ability of our people to succeed in our
mission.
At "Yankee", we re happy to be known as that aggressive company
at national conferences or in the marketplace.
Bottom Right: Signature of Branko Terzic
Branko Terzic
Chairman, President
and Chief Executive Officer
<PAGE>
Background: Ballet Dancer
Top Right: It takes teamwork and preparation to carry
out the Company's mission.
Top Center: Photo of Branko Terzic.
Center Right: Photo of Branko Terzic.
Bottom: Photo of Branko Terzic conducting meeting.
Running Across Bottom of Page(s): preparation
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 05
Background: Ballet Dancers
Top Right: Photo Inset of Employees
YANKEE ENERGY SYSTEM, INC.
Last year was a year of change for YES. This year has been a year
of action. We began the year with our strategies for growth
largely in place. These strategies are based on our critical
assessment of the energy industry, both locally and nationally,
to determine how to position YES for a leadership role during a
period of dynamic change within the industry.
Both the electric and gas industries are in the process of
government restructuring, which will create greater competition
for both commodities. Customers are now able to procure,
competitively, the natural gas commodity and the transportation
of that gas to the city gate. In the state of Connecticut, the
sale of natural gas is opened to competition for commercial and
industrial customers. We anticipate that in the next few years
the sale of natural gas to residential customers will open to
competition as well. We also believe that in the near future a
similar option will be available to customers to purchase
electricity. In preparation for this event we acquired a license
from the Federal Energy Regulatory Commission to broker
electricity when the state moves in that direction.
In this new competitive environment two directions are open to
us: Sell the commodities themselves, or use our expertise to
assist customers in making and moving their energy choices. We
have opted not to pursue the commodity business, as we believe it
will be dominated by the large national commodity firms, and thus
offers us no real strategic advantage.
Yankee Energy System, Inc. was formed from the spin-off of the
gas services division from Northeast Utilities. Consequently, in
the beginning, nearly 100% of revenues came from the sales and
distribution of natural gas within our service territory. The
holding company structure of YES is allowing it to diversify
beyond the narrow function of the delivery of natural gas into
other areas where opportunities exist to create value and to gain
a competitive advantage. Our efforts are now centered on
building a future in which a larger percentage of our earnings
will come from faster growing competitive areas. In the process,
we are focusing exclusively on our areas of strength when we
select and develop subsidiaries to enhance our performance.
Our strategy is to position ourselves as consultants to the
customer for energy acquisition, and then to help the customer
most efficiently use that energy. We intend to provide to the
customer a package of energy alternatives from which to tailor
the best solution to their energy problems. We are an excellent
source of information for customers, and have all the necessary
expertise to help them make complicated energy decisions. Future
plans include expansion of the YES portfolio to include more
energy conversion services and different kinds of delivered
energy.
<PAGE>
Background: Ballet Dancers
Left Side: Photo Inset of Employee
YANKEE GAS SERVICES COMPANY
As the primary economic driver for YES, Yankee Gas plays a
pivotal role in our long-term plans. As we work to increase the
economic viability of our new YES subsidiaries, the goal for
Yankee Gas is not only to maintain, but improve its financial
strength so that it can continue to provide a strong economic
base. To achieve this goal, Yankee Gas has employed a three-
pronged approach, set into motion in 1995: Re-organize operations
to make them more customer-centered, reduce operating costs and
increase sales.
Last year we initiated a total restructuring of the company to
make our operations more customer-centered. Some major changes
have been implemented. Among these are the consolidation of all
the activities formerly directed from our three regional offices
into coordinated customer-focused processes. The result is
greatly improved efficiency in prioritizing projects and in the
allocation of resources. In our customer services group, we are
installing a computer system to dispatch service calls and manage
our work force more efficiently. We have consolidated our
telephone centers and up-graded our telephone technology to
handle customer questions and problems more quickly and
effectively.
Cost reduction was a major target of business transformation, a
total re-engineering process which began last year and has seen
vigorous implementation this year. The challenge has been to
find new and better ways of accomplishing our basic services at
the lowest cost possible, while striving to improve customer
satisfaction. For example, although this year we closed Yankee
Gas' six Connecticut business offices, we offset that by
contracting with 48 agencies statewide to accept payments.
Additionally, we purchased a mobile office to bring our services
to customers in multiple locations. As a result, a change that
might otherwise have been perceived by our customers as a loss of
convenience has actually increased convenience while cutting
operational costs. Proof of our continued success in meeting the
challenge to become more cost-effective and more customer-
centered at the same time is the fact that we have not raised our
base rates to customers in four years.
Another major change this year is the consolidation of our
marketing and sales divisions into one process under the
direction of a new Vice President of Sales & Marketing,
Steve n P. Laden. The strategy for the marketing division, in
the pursuit of increased sales, is to improve customer
satisfaction; to identify and pursue only the most profitable
sales targets; and to make our customers more aware of the full
scope of solutions natural gas offers to their total energy
requirements.
Running across bottom of page(s): discipline skill
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 07
Background: Ballet Dancers
Top Right: Ingenuity and commitment to service are the
cornerstone of our growth and success.
Top Right: Photo Inset of Employee
Center Left: Photo Inset of Employee
Bottom: Photo of Employees at Gas Control Center
<PAGE>
Background: Ballet Dancers
Top Left: Employee talent and skill have allowed us to
establish our consulting subsidiary.
Top Left: Photo Inset of Employee
Center: Photo Inset of Employees
Bottom: Photo of Employees at computers
Running across bottom of page(s): teamwork ingenuity
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 09
Background: Ballet Dancers
Center Right: Photo Inset of Employee
YANKEE ENERGY SERVICES COMPANY
The establishment of YESCo has provided Yankee Energy System,
Inc. with a highly flexible umbrella under which to pursue the
strategic goals for company growth established last year. The
specific task set forth for YESCo at that time was to become a
full-service provider of energy solutions for customers. Since
then we have successfully moved toward the realization of that
goal, through acquisition, and by converting some of the
Company's valuable intellectual assets into new sources of
income.
Our plan was to assemble a group of companies to help customers
plan for their energy acquisitions; acquire energy; design,
construct and operate their energy conversion devices; and manage
and maintain their energy equipment. At the beginning of last
year we began an exhaustive search for companies that would fit
into specific parameters we have set for acquisition. The
companies we have assembled to date in the implementation of our
acquisition plans provide most of the steps critical to the
energy conversion process. We began with the acquisition last
year of YESCo BVA , which gave us the capability of providing to
customers a broad range of services related to the on-site
generation of energy. This year we acquired YESCo Industrial, a
well-established manufacturers' representative and equipment
service company that provides heating, ventilation and air
conditioning services, and is a designer of automated temperature
control systems for the commercial and industrial market. The
acquisition of YESCo Industrial gives us the ability to help
customers maintain their energy equipment and to sell them energy
conversion and other related equipment.
This year also saw the establishment of a consulting arm under
the YESCo umbrella. The consulting division was initially
established to help customers deal with the unbundling of the
natural gas industry in Connecticut. YESCo Consulting is now
rapidly evolving into a general energy consulting service,
helping customers not only in the selection of an energy supplier
and the purchase and transportation of energy, but also in the
selection of the best type of energy and related equipment.
Our new plant operations and management division will take on the
engineering, procurement and construction responsibilities for
YESCo, and will also be capable of taking over the total
operation of a plant for customers seeking to out source the
running of their energy facilities.
<PAGE>
Background: Ballet Dancers
Bottom Left: Photo Inset of Employee
A second part of our strategy is to capitalize on areas of
expertise developed internally and make them available to a wider
market, thus creating additional revenue streams. This year, for
example, we took the expertise we had developed internally in the
area of collections and receivable management and established a
separate subsidiary, R.M. Services, Inc. (RMS) which has sold
those services to other utilities.
Yankee Energy Financial Services Company, YES' financing
subsidiary has expanded its mission this year to provide
financial services, not only to Yankee Gas, but also to the
companies in the YESCo group. This will enable us to specify and
finance the appropriate equipment for the customer, providing
"one-stop shopping" and increased convenience to our customers.
This assembly of companies has created powerful synergies within
the group. We are not only able to offer our customers a full
range of energy services, but each subsidiary is in a position to
provide sales leads to other divisions within YESCo. In addition,
each is in a position to bring new customers to Yankee Gas and to
help increase sales to existing customers. This complementary
relationship between the YESCo companies is expected to be a key
factor in the shaping of future growth and earnings for YES.
The combination of services now offered under the YESCo banner
strongly positions us to achieve the goals set forth in our new
mission statement: To provide imaginative and responsive
solutions for the energy market. As we move forward into this
exciting and challenging energy environment, we will continue to
look for opportunities that will contribute to the existing
synergies we have created and further enhance YES as a complete
energy services company. We approach the coming year with
confidence, enthusiasm and optimism, as our dynamic vision for
the creation of a full service energy company capable of
capturing a position of leadership in tomorrow's energy
marketplace comes closer to fruition.
Running across bottom of page(s): strength talent
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 11
Background: Ballet Dancers
Acquisitions such as YESCo BVA and YESCo Industrial have
strengthened our performance in the energy market.
Top Center: Photo Inset of Employee
Left Center: Photo Inset of Employees
Bottom: Photo of Employees inspecting engines
<PAGE>
DIRECTORS & OFFICERS
BOARD OF DIRECTORS
Branko Terzic 1
Chairman and Chief Executive Officer
Yankee Energy System, Inc.
Meriden, CT
Sanford Cloud, Jr. 2,3
President and Chief Executive Officer
The National Conference of Christians and Jews, Inc.
New York, NY
Eileen S. Kraus 2,4,5
Chairman, Connecticut
Fleet National Bank
Hartford, CT
Frederick M. Lowther 4,5
Partner
Dickstein, Shapiro, Morin & Oshinsky, LLP
Washington, D.C.
Leonard A. O'Connor 2,3
Retired Vice President and
Chief Financial Officer
Yankee Energy System, Inc.
Meriden, CT
Emery G. Olcott 1,4,5
President and Chief Executive Officer
Canberra Industries, Inc.
Meriden, CT
Nicholas L. Trivisonno 1,2,3
Chairman and Chief Executive Officer
ACNielsen
Stamford, CT
Patricia M. Worthy 2
Professor
Howard University
School of Law
Washington, D.C.
Top Right: Photo of Directors listed above.
OFFICERS OF YANKEE ENERGY SYSTEM, INC.
Branko Terzic
Chairman, President and Chief Executive Officer
Charles E. Gooley
Executive Vice President
Michael E. Bielonko
Vice President and Chief Financial Officer
Ellen J. Quinn
Vice President, Administration
Thomas J. Houde
Vice President, Rates and Resource Planning
Mary J. Healey
Vice President, General Counsel & Secretary
Steven P. Laden
Vice President, Sales and Marketing
Nicholas A. Rinaldi
Controller
Sarah K. Sanders
Treasurer
Bottom Right: Photo of Officers listed above.
Bottom Right: Committees of the Board
1 Executive
2 Audit
3 Finance
4 Organization and Compensation
5 Committee on Board Affairs
<PAGE>
Top Right: 13
FINANCIAL INFORMATION
CONTENTS
14 Management's Discussion and Analysis
18 Management and Independent Public Accountants Reports
19 Consolidated Statements of Income
20 Consolidated Balance Sheets
21 Consolidated Statements of Cash Flows
22 Consolidated Statements of Capitalization
23 Consolidated Statements of Common Shareholders' Equity
24 Notes to Consolidated Financial Statements
32 Selected Financial and Operating Data
<PAGE>
Top Left: 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Financial Condition
OVERVIEW
Yankee Energy System, Inc. (YES 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 68 cities and towns in Connecticut which cover
approximately 2,300 square miles. The Company has four additional
wholly-owned operating subsidiaries which support the Company's
core natural gas distribution business or allow the Company to
expand its business of providing comprehensive energy services:
Yankee Energy Services Company (YESCo), whose purpose is to
provide a full range of energy related services for its customers
including consulting, fuel procurement management, and
development of on-site generation and cogeneration systems as
well as technical and operating support and equipment
installation for power plants and boilerhouses; NorConn
Properties, Inc. (NorConn), which owns selected system real
estate; Yankee Energy Financial Services Company (Yankee
Financial), which provides energy equipment financing; and R.M.
Services, Inc. (RMS), which provides receivables management
services to utilities and other businesses. In addition, the
Company's wholly-owned subsidiary, Housatonic Corporation
(Housatonic), held a 10.5 percent ownership interest in the
Iroquois Gas Transmission System, L.P. (Iroquois), which it sold
during the fiscal year.
The Company reported consolidated net income of $21.9 million, or
earnings per share of $2.10, for the fiscal year ended September
30, 1996, which includes $2.5 million or $0.24 per share
resulting from a gain on the Company's sale of its Iroquois
investment. This compares with consolidated net income of $12.4
million and $18.6 million, reflecting earnings per share of $1.20
and $1.81, respectively, for fiscal years ended September 30,
1995 and 1994. Fiscal 1995 earnings reflect a one-time operating
charge of $5.4 million related to the Company's business
transformation efforts, or an after-tax effect of $0.30 per
share. Earnings for fiscal year 1994 reflect an $0.08 per share
charge resulting from an early redemption premium on the
Company's preferred stock. Earnings increased in 1996
principally due to (1) the colder weather experienced during the
fiscal year, (2) the gain realized on the sale of the Company's
10.5 percent equity interest in Iroquois, and (3) savings
resulting from the Company's business transformation. The
decrease in 1995 earnings from fiscal 1994 was due primarily to
warmer weather in fiscal 1995, higher expenses relating to the
Company's business transformation, and a provision for resolution
of a federal investigation of the Iroquois pipeline concerning
alleged environmental violations during its construction.
Earnings on Housatonic's investment in Iroquois for the first six
months of fiscal 1996 were approximately $1.5 million and
contributed $0.14 to earnings per share as compared to $0.4
million in fiscal 1995, or $0.04 per share. Housatonic's earnings
for fiscal 1995 reflected a $2.1 million provision representing
Housatonic's share of Iroquois' estimated charge associated with
the federal investigation. On April 30, 1996, the Company
announced the sale of Housatonic's entire 10.5 percent interest
in Iroquois. Earnings for fiscal 1996 reflect a $2.5 million net
after-tax gain from the sale, or $0.24 per common share, realized
in the third quarter of fiscal year 1996. Thus, total earnings
related to the investment in Iroquois, including the gain on
sale, were $0.38 per common share. For further information on
Iroquois, see Note 9 to the Consolidated Financial Statements.
The sale of the Company's investment in Iroquois was a critical
element of Yankee Energy's strategic plan, which includes placing
more attention and resources to the ongoing development of its
energy services business through its nonutility subsidiary,
YESCo.
On July 18, 1996, YESCo acquired YESCo Industrial Energy
Services, Inc. (YESCo Industrial). YESCo Industrial is a
manufacturers' representative and service company that provides
heating, ventilating, and air conditioning services and designs
automated temperature control systems for the industrial and
commercial market. This acquisition supports the Company's
strategic plan to expand the development of its energy services
business to help customers through the changes in regulation of
the natural gas industry. For further information on
acquisitions, see Note 10 to the Consolidated Financial
Statements.
The Company increased dividends paid per share to $1.28 in 1996,
up 3.2 percent from the $1.24 per share in 1995, the sixth
straight year the Company has increased its dividend.
Fiscal 1996 earnings per share are based on 10,435,196 average
common shares outstanding. Earnings per share were based on
10,322,447 and 10,287,683 average common shares outstanding for
fiscal years 1995 and 1994. The Company issued 52,212 new shares
of common stock during fiscal 1996 under its Shareholder
Investment Plan and 820 shares under its Long-Term Incentive
Compensation Plan.
REGULATORY MATTERS
On January 3, 1996, the Connecticut Department of Public Utility
Control (DPUC) issued a Final Decision in reopened Docket No. 92-
02-19 to approve a rate agreement Yankee Gas reached with the
Office of Consumer Counsel (OCC). The Decision allows for the
recovery of certain deferred regulatory assets with the
stipulation that Yankee Gas would not increase its rates before
October 1, 1998. The stipulation and agreement are effective
September 30, 1995 through September 30, 1998. Yankee Gas will
not be able to increase its rates prior to October 1, 1998 except
in the event of certain circumstances which would adversely
affect Yankee Gas' financial condition. If such an event arises,
Yankee Gas has the option to apply to the DPUC for a rate
increase or to retain up to 80 percent of any off-system sales
margin and excess interruptible margin.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 15
The agreement states that Yankee Gas may apply a portion of
credits received from pipeline refunds, excess interruptible
margin, deferred gas costs, capacity release agreements and off-
system sales margin to reduce or eliminate certain deferred
regulatory assets. These credits are provided by a mechanism
established by the DPUC for the Connecticut Local Distribution
Companies (LDCs) to recover the gas supply transition costs
relating to Federal Energy Regulatory Commission (FERC) Order No.
636.
Through September 30, 1996, Yankee Gas has paid approximately
$17.3 million of gas supply transition costs and an additional
$0.7 million are anticipated. To date, Yankee Gas has collected
$34.5 million through a combination of credits received from
pipeline refunds, capacity release agreements, deferred gas
costs, off-system sales margin, and excess interruptible margin.
These excess collections of approximately $17.2 million have been
applied against certain regulatory assets in accordance with the
January 3, 1996 DPUC decision.
On August 2, 1995, the DPUC issued a Final Decision in Docket No.
94-11-12, DPUC Review of Connecticut Local Distribution
Companies' Cost of Service Study Methodologies. The docket
investigated the issues surrounding the development of firm
transportation (FT) rates at the state level in response to FERC
Order No. 636. The Decision provided guidelines for the
development of FT rates to be offered by the state's three LDCs.
On January 24, 1996, the DPUC issued a Final Decision on Docket
92-02-19 Reopen I. This Decision enabled Yankee Gas to
implement FT rates and services as contemplated in the DPUC
August 2, 1995 decision referenced above. The Decision allows
Yankee Gas to offer a broad array of service options to
commercial and industrial FT customers. Yankee Gas implemented
these new FT rates and services on April 1, 1996, and as of
September 30, 1996, Yankee Gas had 127 customers under the new FT
service. Existing customers who switch to transportation tariffs
will result in decreased revenues for Yankee Gas as that portion
of revenues representing gas costs will now be borne directly by
the customer who will buy their own gas directly. Yankee Gas,
however, does not expect customer conversions to transportation
services to affect its net income.
This Decision did not address Yankee Gas' revenue requirement;
Yankee Gas will maintain the existing margin recovery and rates
of return established in the last rate case decision issued for
Yankee Gas in 1992.
On August 25, 1996, Yankee Gas filed an application with the DPUC
for a Financial and Operation Review (Review). This Review is
required under Connecticut statute if Yankee Gas has not
undergone a rate proceeding within the last four years. Since
Yankee Gas' last rate application was approved on August 26,
1992, this Review is necessary to comply with the statute.
Hearings have been tentatively scheduled for February 1997.
Yankee Gas is not able to determine at this time the financial or
operational impact of any decisions which may result from the
Review, but they are not expected to have a material impact on
earnings.
FORWARD-LOOKING STATEMENTS
This report may contain statements which, to the extent they are
not recitations of historical fact, constitute "forward-looking
statements" within the meaning of the Securities Litigation
Reform Act of 1995 (Reform Act). All such forward-looking
statements are intended to be subject to the safe harbor
protection provided by the Reform Act. A number of important
factors affecting the Company's business and financial results
could cause actual results to differ materially from those stated
in the forward-looking statements. Those factors include
developments in the legislative, regulatory and competitive
environment, gas industry restructuring and certain environmental
matters as well as such other factors as set forth in the
Company's Form 10-K for the year ended September 30, 1996.
RESULTS OF OPERATIONS
OPERATING REVENUES
Operating revenues increased $45.9 million from 1995 to 1996 and
decreased $23.3 million from 1994 to 1995. 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, 1996 vs 1995 1995 vs 1994
<S> <C> <C>
Firm and other (excluding gas
cost recoveries):
Sales, transportation
and other $ 12.4 $(10.7)
Interruptible/off-system (excluding
cost recoveries):
Sales and transportation (0.7) 4.1
Margin sharing 0.9 (0.8)
____ ____
Subtotal -
Interruptible 0.2 3.3
____ ____
Non-regulated operations 0.8 -
Total excluding gas cost
recoveries 13.4 (7.4)
Plus: Gas cost
recoveries 33.8 (13.4)
Amount applied to
transition costs (1.3) (2.5)
____ ____
Total $ 45.9 $(23.3)
_____ _____
_____ _____
</TABLE>
<PAGE>
Top Left: 16
The corresponding changes in Yankee Gas' throughput were as
follows:
<TABLE>
<CAPTION>
(Mcf-thousands)
Years Ended September 30, 1996 vs 1995 1995 vs 1994
<S> <C> <C>
Firm sales and transportation 4,074 (2,512)
Interruptible/off-system sales and
transportation (1,552) 4,113
_____ _____
Total 2,522 1,601
_____ _____
_____ _____
</TABLE>
Operating revenues reflect an increase in firm sales of
approximately 14.8 percent in fiscal 1996 compared to fiscal
1995, primarily related to a 13 percent colder heating season
than that of 1995. Interruptible sales, off-system sales and
transportation to others decreased approximately 11.5 percent
from 1995 to 1996. The decrease in firm and other revenues from
1994 to 1995 was due primarily to a decrease in firm sales,
resulting from weather that was 13 percent warmer in 1995,
partially off-set by an increase in off-system sales and
transportation. Revenues from non-regulated operations increased
$0.8 million over 1995 levels primarily due to the growth of
nonutility subsidiaries in fiscal 1996.
Gas cost recoveries increased in fiscal 1996 compared to fiscal
1995 due to higher firm sales and higher per-unit gas costs. Gas
cost recoveries decreased in fiscal 1995 compared to fiscal 1994
due to lower firm sales and lower per-unit gas costs.
OPERATING EXPENSES
Total operating expenses increased $34.1 million in 1996 compared
to 1995 and decreased $12.5 million in 1995 compared to 1994 as a
result of the following items:
Cost of gas increased $33.8 million in 1996 compared to 1995
and decreased $13.4 million in 1995 compared to 1994.
Yankee Gas defers differences between actual purchased gas
costs and the current cost recovery and recovers or refunds
such differences in future periods. This deferral results
in an increase or decrease to gas costs in each fiscal year.
The 1996 increase was primarily due to higher volumes of gas
purchased as a result of the colder weather and full
recovery of the prior year undercollection of gas costs.
The fiscal 1995 deferral reflected an underrecovery of gas
costs that was greater than the underrecovery in fiscal 1994
and had the effect of decreasing gas costs for fiscal 1995.
Operation and maintenance expense increased $4.9 million in
1996 compared to 1995 and decreased $2.6 million in 1995
compared to 1994. The 1996 increase was primarily due to
higher expenses for Yankee Gas for uncollectible accounts,
marketing incentives used to promote additional gas usage,
and increased expenses associated with the nonutility
operations. The 1995 decrease, compared to 1994, was due
primarily to lower expenses for Yankee Gas related to
uncollectible accounts and marketing incentives.
Depreciation expense increased $0.1 million in 1996 compared
to 1995 and decreased $0.5 million in 1995 from 1994 levels.
The 1995 decrease was primarily due to changes in the
estimated cost of removal percentages for distribution
property, which was partially offset by depreciation on
normal plant additions.
Taxes other than income taxes increased $0.5 million in 1996
compared to 1995 and decreased $1.4 million in 1995
compared to 1994. The 1996 increase was primarily due to
higher gross earnings taxes which resulted from higher
revenues in 1996 compared to 1995, and higher municipal
taxes, partially offset by a reduction in Connecticut state
unemployment taxes. This reduction was due to a decision by
the Connecticut Supreme Court concerning the Company's 1992
work stoppage and allowed the Company to reverse an accrual
for unemployment tax expense associated with claims paid to
Yankee Gas bargaining unit employees in 1992. The 1995
decrease was due to lower gross earnings taxes which
resulted from lower revenues.
Other income increased $2.7 million in 1996 compared to 1995 and
increased $0.8 million in 1995 compared to 1994. The 1996
increase was primarily due to the gain on the sale of the
Company's interest in Iroquois while the 1995 decrease relates to
the recognition of Housatonic's proportionate share of a
provision representing Iroquois' estimated charge associated with
a federal investigation concerning alleged environmental
violations.
Interest expense in 1996 decreased $0.2 million as compared to
1995 primarily due to lower levels of debt. This decrease was
partially offset by higher interest on Yankee Gas' Purchased Gas
Adjustment (PGA) balance in the current period. Interest expense
in 1995 increased $1.3 million as compared to 1994 partly due to
higher levels of short-term debt and higher interest on Yankee
Gas' PGA balance.
Federal and state income taxes increased $5.2 million in 1996
compared to 1995, and decreased $5.1 million in 1995 compared to
1994. The 1996 increase was primarily due to increased earnings
from operations over fiscal 1995, while the 1995 decrease
reflected decreased earnings from operations from 1994 levels.
Please refer to Note 2 to the Consolidated Financial Statements
for additional information concerning the components of federal
and state income taxes.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 17
LIQUIDITY AND CAPITAL RESOURCES
Expenditures for utility plant totaled $25.7 million in 1996
reflecting a $0.4 million increase from 1995, and was funded
primarily through cash generated from current operations.
Cash flow (defined as net income adjusted for non-cash items such
as depreciation, deferred income taxes and the Company's non-cash
equity earnings from investments) represents the cash generated
from operations available for capital expenditures, dividends and
other needs. Cash flows from operating activities decreased $2.7
million in fiscal 1996 compared to fiscal 1995, and increased
$6.7 million in fiscal 1995 compared to fiscal 1994.
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 $60 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 an additional $27 million of credit lines
available on an uncommitted basis. Yankee Gas had $20.3 million
outstanding under its agreements at September 30, 1996 and $17.7
million outstanding at September 30, 1995. In addition, Yankee
Energy (parent) had $10.8 million outstanding on a $15 million
line of credit at September 30, 1995; no amounts were outstanding
at September 30, 1996. The weighted average interest rates on
short-term borrowings at September 30, 1996 and 1995 was 5.6
percent and 6.0 percent, respectively.
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
restrictions. At September 30, 1996, indenture requirements,
including the required coverage ratio, would allow for the
issuance of an additional $154.0 million of bonds at an assumed
interest rate of 7.9 percent.
On February 1, 1996, the Company's system real estate subsidiary,
NorConn, secured a $6 million bank term loan to refinance two
existing real estate loans. Under the agreement, the interest
rate is fixed at 6.24 percent for the seven year term of the loan
and requires an annual $250,000 sinking fund payment.
On April 1, 1995, Yankee Gas redeemed all $18,000,000 Series A
Tranche B First Mortgage Bonds which matured on that date.
Yankee Gas used cash on hand and short-term bank debt to redeem
the bonds. On June 30, 1995, Yankee Gas issued $20 million
principal amount of Series D First Mortgage Bonds through a
private placement. The bonds were sold by the initial purchaser
to "qualified institutional buyers" as defined in and pursuant to
Rule 144A under the Securities Act of 1933. The bonds will
mature June 1, 2005 and interest is payable at an annual rate of
6.75 percent. Net proceeds from the sale of the bonds were used
to repay short-term indebtedness incurred to redeem Yankee Gas
Series A Tranche B Bonds, which matured April 1, 1995, and to
reduce short-term debt.
On July 1, 1994, Yankee Gas redeemed all 600,000 outstanding
shares of its 9.125 percent cumulative preferred stock, $25 par
value. Yankee Gas used cash on hand to pay both the $15 million
par amount and the early redemption premium of $879,900.
On November 4, 1994, Yankee Energy filed a Form S-3 registration
statement with the Securities and Exchange Commission to issue up
to 1,200,000 shares of common stock under its proposed
Shareholder Investment Plan (Plan). The Plan, which became
effective January 25, 1995, provides existing shareholders and
their family members the ability to acquire shares of common
stock through dividend reinvestment or voluntary cash purchases.
The Plan provides the Company the option to use new shares of
common stock or market purchases. The Company issued 53,032 new
shares which provided $1.2 million of new equity funding in
fiscal 1996. The new equity was used primarily to provide
capital contributions to the Company's nonregulated subsidiaries.
On November 1, 1995, Housatonic repaid a $2 million outstanding
balance on its three-year variable rate term loan. On April 1,
1996, Housatonic's 10.5 percent investment in Iroquois was sold,
realizing a gain of $2.5 million. The $22.2 million proceeds
from the sale of the Company's interest in Iroquois was used to
repay a $2.2 million loan with the remaining amount to be used
for nonutility investments and short-term loans to subsidiaries.
The Company's estimated capital expenditures for the fiscal years
1997 through 2001 are $183 million, including $37 million for
1997. Approximately $56 million, including $7 million for 1997
is for capital expenditures in nonutility operations. The 1997
capital expenditures are expected to be financed by a combination
of internally generated funds and short-term borrowing. For
Yankee Gas, long-term debt maturities and sinking fund
requirements will total $33.4 million in 1997. Approximately $30
million is expected to be refinanced with additional debt
issues.
The Company expects to incur additional expenditures, beyond
those noted above, for coal tar remediation efforts, which is
more fully discussed in Note 9 to the Consolidated Financial
Statements. The Company expects to finance such expenditures
through a combination of internally generated funds, short-term
debt, and through insurance settlements, which have totaled $5.8
million as of September 30, 1996.
<PAGE>
Top Left: 18
MANAGEMENT REPORT
The consolidated financial statements of Yankee Energy System,
Inc. 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 LLP, 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.
Branko Terzic,
Chairman, President and
Chief Executive Officer
Michael E. Bielonko,
Vice President and
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995 and the results of their operations and their
cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
November 7, 1996
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 19
<TABLE>
<CAPTION>
Consolidated Statements of Income
(Thousands of Dollars, except share information)
For the Years Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Revenues:
Utility revenues $339,065 $293,983 $317,298
Nonutility revenues 875 39 -
________ ________ ________
Total Revenues 339,940 294,022 317,298
________ ________ ________
Operating Expenses:
Cost of gas 189,188 155,378 168,816
Operations 58,483 53,857 54,980
Maintenance 6,477 6,251 7,753
Depreciation 16,649 16,520 16,993
Taxes other than income taxes 21,949 21,444 22,844
Organizational charges 208 5,391 -
________ _______ _______
Total Operating Expenses 292,954 258,841 271,386
________ ________ _______
Operating Income 46,986 35,181 45,912
Other Income(Expense):
Other income, net 5,674 2,960 2,208
Interest expense, net (15,290) (15,505) (14,165)
________ _______ ________
Income Before Income Taxes 37,370 22,636 33,955
Provision For Income Taxes 15,451 10,278 15,350
________ ________ ________
Net Income $21,919 $12,358 $18,605
________ ________ ________
________ ________ ________
Total Earnings per Common Share $2.10 $1.20 $1.81
_____ _____ _____
_____ _____ _____
Common Shares Outstanding
(Average) 10,435,196 10,332,447 10,287,683
__________ _________ _________
__________ _________ _________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Top Left: 20
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(Thousands of Dollars)
At September 30, 1996 1995
ASSETS
<S> <C> <C>
Utility Plant, at original cost $499,446 $488,540
Less: Accumulated provision for depreciation 177,943 174,522
_______ _______
321,503 314,018
Construction work in progress 13,985 10,852
_______ _______
Total Net Utility Plant 335,488 324,870
_______ _______
Other Property and Investments 14,894 30,565
_______ _______
Current Assets:
Cash and temporary cash investments 7,853 725
Accounts receivable, less accumulated
provision for uncollectible accounts of
$7,259 in 1996 and $5,481 in 1995 25,623 21,092
Fuel supplies 11,465 10,611
Other material and supplies 1,706 1,625
Recoverable gas costs 1 1,713
Accrued utility revenues 5,775 5,638
Prepaid Taxes 2,925 281
Other 4,372 4,069
_______ _______
Total Current Assets 59,720 45,754
_______ _______
Deferred Gas Costs 3,948 2,261
Recoverable Environmental Cleanup Costs 34,370 38,331
Recoverable Income Taxes 14,559 27,575
Recoverable Postretirement Benefits Costs 1,861 2,390
Other Deferred Debits 13,909 7,555
________ ________
Total Assets $478,749 $479,301
________ ________
________ ________
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
Capitalization (see accompanying statements):
Common shareholders' equity $162,066 $151,753
Long-term debt less current portion 109,282 141,049
_______ _______
Total Capitalization 271,348 292,802
_______ _______
Current Liabilities:
Notes payable to banks 20,300 28,525
Long-term debt - current portion 34,017 5,917
Accounts payable 22,571 18,300
Accrued interest 3,494 3,569
Other 7,833 7,252
_______ _______
Total Current Liabilities 88,215 63,563
_______ _______
Accumulated Deferred Income Taxes 49,934 39,513
Unfunded Deferred Income Taxes 14,488 27,557
Accumulated Deferred Investment Tax Credits 9,080 9,457
Reserve for Environmental Cleanup Costs 35,000 35,000
Unfunded Postretirement Benefits Costs 3,361 2,390
Other Deferred Credits 7,323 9,019
Commitments and Contingencies (Note 9)
________ ________
Total Capitalization and Liabilities $478,749 $479,301
________ ________
________ ________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 21
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(Thousands of Dollars)
For the Years Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Income before preferred dividends $21,919 $12,358 $20,307
Adjusted for the following:
Depreciation 16,649 16,520 16,993
Gain on sale of investment in Iroquois (2,688) - -
Equity earnings from investments (2,766) (2,552) (3,352)
Deferred income taxes, net 9,267 (1,545) 3,191
Deferred gas costs activity and other
non-cash items (3,740) 10,609 (9,203)
Changes in working capital:
Accounts receivable and
accrued utility revenues (4,668) (519) (1,933)
Accounts payable 4,271 495 1,066
Prepaid taxes (2,644) 3,071 542
Other working capital (excludes cash) 787 20 4,103
______ _______ _______
Net cash provided by
operating activities 36,387 38,457 31,714
_______ _______ _______
Cash Flows From Financing Activities:
Net proceeds from common
stock issuance 1,216 2,308 -
Net proceeds from long-term debt 2,150 20,000 -
Early redemption-preferred stock - - (15,000)
Retirement of long-term debt (5,817)(26,667) (8,667)
Net (decrease) increase in
short-term debt (8,225) 3,925 24,600
Cash dividends-preferred stock - - (822)
Early redemption premium -
preferred stock - - (880)
Cash dividends-common stock (13,357)(12,808) (12,242)
_______ _______ _______
Net cash used for financing activities (24,033)(13,242) (13,011)
_______ _______ _______
Investment In Plant and Other:
Utility Plant, net of allowance for
other funds used during construction(25,663)(25,311) (22,790)
Other property and investments (4,380) (1,251) (5,703)
Iroquois distributions 2,625 1,470 3,883
Proceeds from Iroquois sale 22,192 - -
_______ _______ _______
Net cash used for plant and
other investments (5,226)(25,092) (24,610)
_______ _______ _______
Net Increase (Decrease) In Cash and
Temporary Cash Investments For The Year 7,128 123 (5,907)
Cash and Temporary Cash Investments,
beginning of year 725 602 6,509
_______ _______ _______
Cash and Temporary Cash Investments,
end of year $7,853 $ 725 $ 602
_______ _______ _______
_______ _______ _______
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest, net of amounts capitalized $13,484 $14,412 $14,420
Income taxes $14,213 $ 8,681 $11,195
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Top left: 22
<TABLE>
<CAPTION>
Consolidated Statements of Capitalization
(Thousands of Dollars)
At September 30, 1996 1995
<S> <C> <C>
Common Shareholders' Equity:
Common shares - $5 par value, authorized
20,000,000 shares; 10,449,554, and
10,396,522 shares outstanding at
September 30, 1996 and 1995 $52,248 $51,982
Capital surplus, paid in 88,086 87,088
Unearned compensation-restricted
stock awards (a) (139) (226)
Retained earnings 23,271 14,709
Employee stock ownership plan guarantee (b) (1,400) (1,800)
_______ _______
Total Common Shareholders' Equity 162,066 151,753
_______ _______
Long-Term Debt:
First Mortgage Bonds (c)
Maturity Interest Rates
1997 9.90% 30,000 30,000
2004 10.03% 26,899 30,266
2005 6.75% 20,000 20,000
2019 10.07% 19,000 19,000
2022 8.48% 20,000 20,000
2023 8.63% 20,000 20,000
_______ _______
Total First Mortgage Bonds 135,899 139,266
Term Loan Agreement, variable rate,
due November, 1995 (c) - 2,000
Note Purchase Agreement, 9.55%,
due November, 2000 (c) - 3,900
Term Loan Agreement, 6.24%,
due February, 2003 (c) 6,000 -
Guarantee of Employee Stock Ownership Plan
Term Loan Agreement, 10.38%,
due July, 1999 (b) 1,400 1,800
_______ _______
Total Long-Term Debt 143,299 146,966
Less amounts due within one year (b)(c) 34,017 5,917
_______ _______
Long-Term Debt, Net 109,282 141,049
_______ _______
Total Capitalization $271,348 $292,802
________ ________
________ ________
</TABLE>
(a) 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 1996.
Under the Long-Term Incentive Compensation Plan the market value
of the restricted stock awards has been recorded as unearned
compensation and is shown as a separate component of
shareholders' equity. The earned compensation is charged to
administrative and general expense as shares become vested.
Earned compensation was approximately $117,000 for fiscal 1996
and $132,000 for fiscal 1995.
(b) On July 20, 1989, Yankee Energy became guarantor of a term
loan agreement between the Trustee for the Company's 401(k)
Employee Stock Ownership Plan (ESOP), and a commercial bank, in
the amount of $4,000,000. The proceeds were used by the Trustee
exclusively to acquire outstanding shares of Yankee Energy common
stock pursuant to the terms of the Company's ESOP. The final
maturity date of the agreement is July 1, 1999 with an annual
sinking fund requirement of $400,000 for the fiscal years 1996
through 1998 and $600,000 for the 1999 fiscal year.
(c) Long-term debt maturities and cash sinking-fund requirements
on debt outstanding at September 30, 1996 for each of the fiscal
years 1997 through 2001 (excluding the ESOP sinking fund
requirement) are $33,617,000, $3,617,000, $3,617,000, $4,567,000,
and $4,567,000 respectively.
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 23
<TABLE>
<CAPTION>
Consolidated Statements of Common Shareholders' Equity
(Thousands of Dollars)
Employee
Stock
Capital (a) Ownership
Common Surplus, Retained Plan
Shares Paid In Earnings Guarantee Total
<S> <C> <C> <C> <C> <C>
Balance at
September
30, 1993 $51,438 $84,930 $ 8,796 $(2,600) $142,564
Net Income
including
redemption
premium (b) 18,605 18,605
Cash dividends
on common
shares - $1.19
per share (12,242) (12,242)
Employee stock
ownership plan
loan repayment 400 400
Unearned compensation-
restricted stock
awards (c) 137 137
Amortization of
preferred stock
issuance expenses 83 83
_____ ______ ______ ______ _______
Balance at
September
30, 1994 51,438 85,150 15,159 (2,200) 149,547
Net Income 12,358 12,358
Issuance of
108,839 Common
Shares - $5
par value 544 1,764 2,308
Cash dividends on
common shares -
$1.24 per share (12,808) (12,808)
Employee stock
ownership plan
loan repayment 400 400
Common stock
issuance expenses (92) (92)
Unearned compensation-
restricted stock
awards (c) 40 40
_____ _______ _______ _______ _______
Balance at
September
30, 1995 51,982 86,862 14,709 (1,800) 151,753
Net Income 21,919 21,919
Issuance of
53,032
common shares -
$5 par value 266 973 1,239
Cash dividends
on common shares -
$1.28 per share (13,357) (13,357)
Employee stock
ownership plan
loan repayment 400 400
Unearned
compensation-
restricted stock
awards (c) 112 112
_______ _______ _______ _______ ________
Balance at
September
30, 1996 $52,248 $87,947 $23,271 $(1,400) $162,066
_______ _______ _______ _______ ________
_______ _______ _______ _______ ________
</TABLE>
(a) Yankee Gas has dividend restrictions imposed by its Bond
Purchase Agreements. At September 30, 1996, retained earnings
available for common dividends under the terms of the Series A
agreement totaled approximately $30.4 million and $40.8 million
under the terms of the Series B and C agreements.
(b) On July 1, 1994, the Company redeemed all 600,000 outstanding
of its 9.125 percent cumulative preferred stock, $25 par value
and paid a 5.866 percent early redemption premium of $879,900.
(c) See note (a) of the Consolidated Statements of
Capitalization.
The accompanying notes are an integral part of these financial
statements.
<PAGE>
Top Left: 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
THE COMPANY: Yankee Energy System, Inc. (YES 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 68 cities and towns in Connecticut which
cover approximately 2,300 square miles. The Company has four
additional wholly-owned operating subsidiaries which support the
Company's core natural gas distribution business or allow the
Company to expand its business of providing comprehensive energy
services: Yankee Energy Services Company (YESCo), whose purpose
is to provide a full range of energy related services for its
customers including consulting, fuel procurement management, and
development for on-site generation and cogeneration systems as
well as technical and operating support and equipment
installation for power plants and boilerhouses; NorConn
Properties, Inc. (NorConn), which owns selected system real
estate; Yankee Energy Financial Services Company (Yankee
Financial), which provides energy equipment financing; and R.M.
Services, Inc. (RMS), which provides receivables management
services to utilities and other businesses. In addition, the
Company's wholly-owned subsidiary, Housatonic Corporation
(Housatonic), held a 10.5 percent ownership interest in the
Iroquois Gas Transmission System, L.P. (Iroquois), which it sold
during the fiscal year.
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. The Company prepares its financial
statements in accordance with generally accepted accounting
principles which includes the provisions of Statement of
Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation," (FAS 71). FAS 71
requires a cost-based, rate-regulated enterprise such as Yankee
Gas to reflect the impact of regulatory decisions in its
financial statements. The DPUC, through the rate regulation
process, can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the period
in which the costs would be charged to expense by an unregulated
enterprise.
Following the provisions of FAS 71,the Company has recorded
regulatory assets or liabilities as appropriate primarily related
to deferred gas costs, pipeline transition costs, hardship
customer receivables, environmental cleanup costs, income taxes
and postretirement benefits costs. The specific amounts related
to these items are disclosed in the consolidated balance sheets.
Yankee Gas continues to be subject to cost-of-service based rate
regulation by the DPUC. Based upon current regulation and recent
regulatory decisions, the Company believes that its use of
regulatory accounting is appropriate and in accordance with the
provisions of FAS 71.
REVENUES: Utility revenues are based on authorized rates applied
to each customer's use of gas. Rates can be changed only through
a formal proceeding before the DPUC. At the end of each
accounting period, a revenue estimate for the amount of gas
delivered but unbilled is accrued.
DEPRECIATION: The provision for utility depreciation is
calculated using the straight-line method based on estimated
remaining useful lives of depreciable utility plant in service,
adjusted for net salvage value and removal costs as approved by
the DPUC. The depreciation rates for the several classes of
plant in service are equivalent to an overall composite rate of
3.3 percent in fiscal year 1996, 3.4 percent in fiscal year 1995
and 3.7 percent in fiscal year 1994.
PURCHASE 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. Currently, the DPUC is
conducting a review of the Connecticut Gas Utilities' PGA
mechanism to determine if any changes are warranted.
EQUITY ACCOUNTING: The Company accounts for YESCo's investments
in energy production facilities using the equity method,
recording their proportionate share of earnings (losses) with
corresponding increases (decreases) in their investment.
Distributions received reduce the carrying amount of these
investments.
INCOME TAXES: Differences exist between the periods in which
transactions affect income in the financial statements and the
periods in which they affect the determination of income subject
to tax. The tax effect of such timing differences is accounted
for in accordance with the ratemaking treatment required by the
DPUC.
The accompanying financial statements reflect a deferred tax
liability and a regulatory asset of $14.5 million and $27.6
million at September 30, 1996 and 1995, respectively,
representing the probable future rate recovery from customers
when such deferred tax liability becomes payable. The deferred
tax liability primarily represents certain temporary differences
between the book and tax basis of utility plant for which
deferred taxes had not previously been recorded in accordance
with the regulatory rate practices of the DPUC.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 25
LONG LIVED ASSETS: In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." This
Statement imposes stricter criteria for regulatory assets and in
evaluating that such assets be probable of future recovery at
each balance sheet date. Yankee Energy does not expect this
Statement to have a material impact on the financial position or
results of operations of Yankee Energy based on the current
regulatory structure in which Yankee Gas operates. This
conclusion may change in the future as competitive factors
influence wholesale and retail pricing in this industry.
CHANGES TO PREFERRED STOCK: On July 1, 1994, Yankee Gas redeemed
all 600,000 outstanding shares of its 9.125 percent cumulative
preferred stock, $25 par value. Yankee Gas used cash on hand to
pay both the $15 million par amount and an early redemption
premium of $879,900.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS: Certain prior year amounts have been
reclassified to conform with current year classifications.
Note 2 Income Tax Expense
<TABLE>
<CAPTION>
The components of the federal and state income tax provisions
are:
Years Ended September 30, 1996 1995 1994
(Thousands of Dollars)
Charged to income:
<S> <C> <C> <C>
Current income taxes:
Federal $ 5,297 $ 8,733 $ 8,496
State 894 3,090 3,081
________ _______ _______
Total current 6,191 11,823 11,577
________ _______ _______
Deferred income taxes, net:
Investment tax credits (377) (377) (377)
Federal 8,158 (108) 3,617
State 1,479 (1,060) 533
________ _______ _______
Total Deferred 9,260 (1,545) 3,773
________ _______ _______
Total income tax expense $15,451 $10,278 $15,350
_______ _______ _______
_______ _______ _______
</TABLE>
<TABLE>
<CAPTION>
Deferred income taxes are comprised of the tax effects of timing
differences as follows:
<S> <C> <C> <C>
Investment tax credits $ (377) $ (377) $ (377)
Liberalized depreciation 4,298 4,602 3,789
Deferred gas costs 3,517 (5,631) (57)
Alternative minimum tax
and other 1,822 (139) 418
_______ ______ ______
Deferred income taxes, net $ 9,260 $(1,545) $ 3,773
_______ _______ _______
_______ _______ _______
</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 income 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>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income
tax rate 35.0% 35.0% 35.0%
Tax effect of differences:
Depreciation 3.7 5.6 3.5
State income taxes net
of federal benefit 3.9 6.1 6.0
Effective tax rate
adjustment (3.0) (1.8) 3.0
Investment tax credit and
excess deferred taxes (1.0) (1.7) (1.1)
Bad debt reserve and
amortization 1.7 (1.9) (2.8)
Litigation reserve (2.0) 3.3 -
Remediation costs 1.4 - (3.6)
Miscellaneous 1.6 .8 3.0
_____ _____ _____
Effective income tax rate 41.3% 45.4% 43.0%
____ ____ ____
____ ____ ____
</TABLE>
<PAGE>
Top Left: 26
Note 3 Leases
Yankee Gas has entered into operating lease agreements for the
use of office equipment, vehicles,and buildings. For fiscal
1996, 1995 and 1994, these rental payments were $1,939,000,
$1,751,000, and $1,739,000, 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, 1996,
are approximately:
<TABLE>
<CAPTION>
Year Operating Leases
(Thousands of Dollars)
<S> <C>
1997 $1,857
1998 1,281
1999 1,122
2000 989
2001 689
After 2001 879
______
Future minimum lease
payments $6,817
______
______
</TABLE>
Note 4 Postretirement Benefits
The Company has a noncontributory defined benefit retirement plan
covering all regular employees of Yankee Gas, YESCo and RMS.
Benefits are based on years of service and employees' highest
consecutive sixty months of compensation during the last one
hundred twenty months of employment. It is the Company's policy
to fund annually an amount at least equal to that which will
satisfy the requirements of the Employee Retirement Income
Security Act and the Internal Revenue Code. No contributions
were
required or made in fiscal 1996 and 1995. Pension assets are
invested primarily in equity securities and investment grade
bonds.
The components of net pension cost were:
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995 1994
(Thousands of Dollars)
<S> <C> <C> <C>
Service cost $1,890 $1,817 $2,114
Interest cost 4,216 3,715 3,504
Net amortization 4,373 (461) (496)
Less: Return on plan assets 10,577 5,094 5,242
______ ______ ______
Net pension cost (credit) $ (98) $ (23) $ (120)
______ ______ ______
______ ______ ______
</TABLE>
In addition, in fiscal 1995 a cost of $2,734,000 was recognized
as a result of special termination benefits under the pension
plan and is included in the Company's 1995 Statement of Income
under the Organizational Charges category.
For calculating net pension cost, the Company used a discount
rate of 7.75 percent for 1996, 1995 and 1994. The assumed
long-term rate of return was 9.0 percent for all years and the
compensation progression rate was assumed to be 4.5 percent, 4.5
percent, and 5.0 percent for 1996,1995 and 1994, respectively.
Total pension cost, part of which was charged to utility plant,
resulted in income of $13,000 for the year ended September
30, 1996, an expense of $62,000 for the year ended September 30,
1995,and income of $35,000 for the year ended September 30, 1994.
Pension cost for 1996, 1995 and 1994 includes $85,000 in
cost of living increases each year 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, the following
assumptions were used:
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995 1994
<S> <C> <C> <C>
Discount rate 7.75% 7.75% 8.25%
Expected long-term rate
of return 9.00% 9.00% 9.00%
Compensation/progression rate 4.50% 4.50% 4.50%
</TABLE>
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 27
The following table represents the plan's funded status
reconciled to the consolidated balance sheets:
<TABLE>
<CAPTION>
At September 30, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Accumulated benefit obligation,
including $46,113 of vested benefits
at September 30, 1996 and $43,260 at
September 30, 1995 $47,220 $44,453
_______ _______
_______ _______
Projected benefit obligation $60,053 $56,614
Less: Market value of plan assets 72,969 66,089
_______ _______
Plan surplus 12,916 9,475
Unrecognized transition amount (789) (875)
Unrecognized prior service costs (28) (31)
Unrecognized net gain (15,940) (12,508)
________ ________
Accrued pension liability $(3,841) $(3,939)
________ ________
________ ________
</TABLE>
During fiscal 1994, the Company adopted an Excess Benefit Plan
(EBP) that provides retirement benefits to executive officers and
other key management staff. The EBP recognizes total
compensation and service that would otherwise be disregarded due
to Internal Revenue Code limitations on compensation in
determining benefits under the regular retirement plan. The EBP
is not funded and benefits are paid when due from general
corporate assets.
Note 5 Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance
benefits to its retired Yankee Gas, YESCo and RMS employees. 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 NU retirees was
approximately $1,104,000 for the fiscal year ended September 30,
1996 and $1,070,000 and $969,000 for the comparable periods in
1995 and 1994, respectively.
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. Contributions to the VEBA Trusts totaled
$1.728 million for both fiscal 1996 and 1995. Assets of the VEBA
Trusts are invested primarily in equity securities and investment
grade bonds.
The Company recognizes the cost of postretirement benefits over
the employment period that encompasses eligibility to receive
such benefits.
The components of net postretirement benefits costs were:
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Service cost $ 937 $ 847
Interest cost 1,644 1,453
Net transition amortization 875 876
Net other deferrals (28) 221
Less: Return on assets 729 698
_______ ______
Net postretirement benefits costs $2,699 $2,699
______ ______
______ ______
</TABLE>
For Yankee Gas, the DPUC is allowing $1.728 million of associated
expenses to be recovered in rates and up to an additional $1.5
million annually which is being collected through the rate
settlement process further described under Note 9 to the
Consolidated Financial Statements, as part of the DPUC re-opened
Docket No. 92-02-19.
For calculating the plan's year-end funded status, as well as the
ensuing year's postretirement benefits costs, the following
assumptions were used:
<TABLE>
<CAPTION>
Years Ended September 30, 1996 1995
<S> <C> <C>
Discount rate 7.75% 7.75%
Expected long-term rate of return 9.00% 9.00%
Health care cost trend rate
- First year 9.00% 10.00%
- Ultimate 5.00% 5.00%
</TABLE>
<PAGE>
Top Left: 28
Trend rates are assumed to decrease one percent per year until
they reach the ultimate rate. A one percent increase in the
weighted average trend rate assumption of health care claims
would result in an eighteen percent increase in accumulated
benefit obligations and a thirty percent increase in net
periodic postretirement benefits costs.
The following table represents the postretirement benefit plan's
funded status reconciled to the consolidated balance sheets:
<TABLE>
<CAPTION>
At September 30, 1996 1995
(Thousands of Dollars)
<S> <C> <C>
Accumulated benefit obligation $22,156 $21,596
Less: Market value of assets 6,613 4,737
_______ ______
Accumulated benefit obligation
(greater than) plan assets (15,543) (16,859)
Unrecognized transition amount 14,483 15,358
Unrecognized net gain (3,597) (2,186)
______ _______
Accrued postretirement benefit
liability $(4,657) $(3,687)
________ ________
________ ________
</TABLE>
In November, 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Post-Employment Benefits," (FAS 112).
This Statement, which was adopted during the first quarter of
fiscal 1995, establishes accounting standards for employers who
provide benefits, such as unemployment compensation, severance
benefits and disability benefits, to former or inactive employees
after employment but before retirement and requires recognition
of the obligation for these benefits. There was no material
impact on the Company's results of operations or financial
position as a result of the adoption of FAS 112.
Note 6 Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation." This Statement expands the
disclosure requirements associated with stock-based employee
compensation plans to include proforma financial information as
if the securities underlying the plans had been accounted for
using the "fair value based method" defined in the Statement.
The Company currently utilizes stock options and stock
appreciation rights as forms of stock-based compensation to which
this Statement will apply. The Company plans to adopt the
disclosure requirements in fiscal 1997, in accordance with the
effective date of the Statement. The adoption of this Statement
will have no impact on the Company's results of operations or
financial position.
Note 7 Short-Term Debt
Yankee Gas has arranged a $60 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 an additional $27 million of credit
lines available on an uncommitted basis. Yankee Gas had $20.3
million and $17.7 million outstanding under its agreements at
September 30, 1996 and 1995, respectively. In addition, Yankee
Energy (parent) had $10.8 million outstanding on a $15 million
line of credit at September 30, 1995; no amounts were outstanding
at September 30, 1996. The weighted average interest rates on
short-term debt at September 30, 1996 and 1995 was 5.6 percent
and 6.0 percent, respectively.
Note 8 Fair Value of Financial Instruments
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.
FIRST MORTGAGE BONDS: The fair value of the Company's fixed rate
long-term debt is based upon borrowing rates currently available
to the Company. Adjustable rate securities are assumed to have a
fair value equal to their carrying value.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 29
The carrying amount of the Company's financial instruments and
the estimated fair value at September 30, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
September 30, 1996 1995
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
(Thousands of Dollars)
<S> <C> <C> <C> <C>
First mortgage
bonds $135,899 $146,663 $139,266 $150,680
________ ________ ________ ________
</TABLE>
The fair values shown above have been reported to meet the
disclosure requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Values of Financial
Instruments," and do not purport to represent the amounts at
which those obligations would be settled.
Note 9 Commitments and Contingencies
CONSTRUCTION PROGRAM: The Company's estimated capital
expenditures for the fiscal years 1997 through 2001 are $183
million, including $37 million for fiscal 1997. The Company
intends to use $127 million over this period, including $30
million for fiscal 1997, of these estimated expenditures to
maintain the reliability of the distribution system and in
projects that will generate or support gas sales and
transportation activities. The remaining $56 million estimated,
including $7 million for fiscal 1997, is expected to be invested
in energy related projects and businesses.
IROQUOIS: On April 30, 1996, Housatonic sold its 10.5 percent
interest in the Iroquois pipeline. Housatonic recorded a $2.1
million provision in fiscal 1995, representing its share of
Iroquois' estimated charge associated with resolution of the
federal investigation of Iroquois concerning alleged
environmental violations during construction of the pipeline.
Housatonic was relieved of all federal investigation expenses at
the time of sale which resulted in an after-tax $2.5 million
gain.
ENVIRONMENTAL MATTERS: Fourteen sites containing coal tar became
the property of Yankee Gas at divestiture from Northeast
Utilities. Contamination at these sites was caused by operations
of former manufactured gas plants at those locations. Yankee Gas
has reported the results of its environmental studies to the
Connecticut Department of Environmental Protection (DEP). The
DEP has not required that any remedial action be undertaken to
date. However, 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.
A program of remediation at two of these properties was completed
during fiscal 1996. In addition, Yankee Gas has developed a cost
estimate for the remaining sites based on various factors
including the probability of clean-up. As a result of this
effort, Yankee Gas recorded a liability of $35 million in fiscal
year 1993 for future environmental clean-up.
Recovery of remediation costs has been specifically allowed by
Yankee Gas' 1992 rate case decision. Presently, $325,000 is
allowed annually in rates. If costs are expected to exceed $2.5
million on an annual basis, Yankee Gas is required to 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."
During fiscal 1996, Yankee Gas received funds from certain of its
insurance carriers in settlement of certain claims for actual or
potential contamination at certain sites that may give rise to
environmental liabilities. The terms of the aforementioned
settlements are subject to confidentiality provisions in
agreements between Yankee Gas and its insurance carriers. Yankee
Gas currently is actively pursuing additional claims against some
of its insurers. The proceeds are being reflected as reductions
in the regulatory asset associated with recoverable environmental
clean-up costs, as shown in the accompanying balance sheets.
TRANSITION COSTS - ORDER NO. 636: On April 8, 1992, the FERC
issued Order No. 636 on pipeline restructuring. In essence, the
FERC found that absent the unbundling of traditional merchant
services, pipelines would not be able to achieve the FERC's long-
term goal of open access and provide transportation services that
are indifferent to the seller of the gas. Order No. 636,
therefore, required all pipelines to implement restructuring of
their services by the winter of 1993-94. The three major
pipeline systems serving Yankee Gas (Iroquois, Tennessee Gas
Pipeline Company and Algonquin Gas Transmission Company and its
affiliate, Texas Eastern Transmission Company), have all
restructured pursuant to the FERC directive. Yankee Gas has
concurrently replaced the gas supply traditionally obtained from
the pipeline companies' merchant services with firm purchases
directly from producers and/or marketing companies.
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.
<PAGE>
Top Left: 30
On July 8, 1994, the DPUC issued a decision on the implementation
of FERC Order No. 636 by the Connecticut Local Distribution
Companies (LDCs). The DPUC is allowing the LDCs to offset the
transition costs billed by pipelines under Order No. 636 with
recoveries from capacity release activity, refunds of deferred
gas costs for the 1992-93 period and all subsequent annual
deferred gas costs, gas supplier refunds, off-system sales margin
and interruptible margin earned in excess of target amounts.
Through September 30, 1996, Yankee Gas has paid approximately
$17.3 million of transition costs and an additional $0.7 million
are anticipated. To date, Yankee Gas has collected $34.5 million
through a combination of credits received from gas supplier
refunds, deferred gas costs, excess interruptible margin, off-
system sales margin, and capacity release agreements.
On January 3, 1996, the DPUC issued a Final Decision in reopened
Docket No. 92-02-19. The Docket allows for recovery of certain
deferred regulatory assets with the stipulation that Yankee Gas
would not increase its rates before October 1, 1998, except in
the event of certain circumstances which would adversely affect
Yankee Gas' financial condition. Yankee Gas may apply a portion
of excess transition credits received from pipeline refunds,
interruptible excess margin, deferred gas costs, capacity release
activity, and off-system sales margin to certain regulatory
assets. As of September 30, 1996, excess collections of
approximately $17.2 million were applied against the deferred
regulatory assets specified in the decision.
GAS SUPPLY HEDGING ACTIVITIES: Yankee Gas has gas service
agreements with two customers to supply gas at fixed prices.
Because Yankee Gas purchases gas on a variable price basis, it
has found it necessary to hedge gas prices with derivatives to
respond to customers' needs for long-term fixed pricing. Both
agreements are similar in structure in that Yankee Gas executed a
commodity swap contract with a commodity trading firm. Under a
master commodity swap agreement, the price of a specified
quantity of gas is fixed over the term of the gas service
agreement with the customer. In both cases, Yankee Gas is acting
as an agent using its credit to provide fixed pricing to its
customers using a commodity swap. Yankee Gas' results of
operations are unaffected by the hedge transaction given that it
passes through the cost of the hedge to either the commodity
trading firm or its customer depending on the difference in the
fixed and floating prices for gas. Also, the customers are
accountable for all costs incurred by Yankee Gas to execute and
maintain the commodity swap contract.
Of the two gas service hedging agreements currently in force,
only one is material relative to the significance of gas volumes
being hedged. This agreement has a ten year term and requires
Yankee Gas to supply approximately one BCF of gas per year, with
relatively low margin, at a fixed price beginning August 1, 1995.
The price is allowed to escalate by a predetermined rate every
year after the first year. The commodity swap contract for this
hedging agreement was executed August 17, 1994. Yankee Gas is
responsible for margin calls collateralizing the commodity swap
contract from August 17, 1994 through the term of the gas service
agreement. Currently, Yankee Gas has a letter of credit in the
amount of $3.75 million issued to the commodity trading firm
collateralizing the commodity contract.
TAX/LEGAL ISSUES: In fiscal 1996, Yankee Gas received revised
property tax bills from the City of Meriden, Connecticut (the
City). The City is asserting a claim for approximately $5.0
million for back taxes and interest resulting from a retroactive
reassessment and revaluation of Yankee Gas' personal property
filings. The City did not locate or identify any property which
Yankee Gas omitted from its filings. The tax bills reflect a
reassessment of property at higher rates than those previously
accepted by the City. Yankee Gas is currently in the process of
litigating this retroactive reassessment. Although it is
anticipated that the outcome of this claim will not have a
material impact on the Company, based on the information
available at this time, management cannot predict what the
ultimate impact might be.
In November 1995, a class action suit was filed against Yankee
Gas and the state's two other LDCs by the Connecticut Heating
and Cooling Contractors' Association, Inc., claiming the LDCs
engaged in unfair trade practices. The action alleges that the
LDCs unfairly competed with licensed plumbers and contractors by
performing customer service work using customer service employees
who did not possess state trade licenses.
The LDCs have asserted that such licenses are not required for
this work based on a statutory exemption enacted in 1965 and
amended in 1967. However, in a separate proceeding, a
Connecticut Superior Court has upheld an administrative ruling
against the LDCs' position, which was recently affirmed on
appeal. In 1995, the Connecticut General Assembly enacted
legislation that established on a going-forward basis a separate
procedure for state certification of gas service employees.
While the ultimate results of the class action suit cannot be
determined, management does not expect that it will have a
material adverse effect on the Company's consolidated results of
operations or financial position.
<PAGE>
Top Right:
Yankee Energy System, Inc. and Subsidiaries 1996 Annual Report 31
Note 10 Acquisitions
On July 18, 1996, the Company's subsidiary, YESCo, acquired YESCo
Industrial Energy Services, Inc. (YESCo Industrial). YESCo
Industrial is a manufacturers' representative and service company
that provides heating, ventilating, and air conditioning services
and design automated temperature control systems for the
industrial and commercial market. This acquisition was accounted
for using the purchase method. YESCo Industrial's results of
operations have been included in the consolidated results of
operations since the date of acquisition. The impact of this
acquisition and its operations are not material to the financial
condition or results of operations of the Company.
Note 11 Quarterly Financial Data (Unaudited)
The following table provides information with respect to the
consolidated quarterly results of operations for the fiscal years
ended September 30, 1996 and 1995, 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.
<TABLE>
<CAPTION>
Quarter Ended
Fiscal Year 1996 December 31 March 31 June 30 September 30
(Thousands of Dollars, except share information)
<S> <C> <C> <C> <C>
Operating
Revenues $98,198 $139,559 $60,136 $42,046
Operating Income
(Loss) 20,219 29,849 3,172 (6,255)
Net Income
(Loss) 9,838 15,327 1,822 (5,068)
Earnings (Loss)
per Common
Share (1) $0.95 $1.47 $0.17 $(0.49)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
Fiscal Year 1995 December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
Operating
Revenues $82,284 $116,756 $55,101 $39,881
Operating Income
(Loss) 15,177 24,135 2,612 (6,743)
Net Income (Loss) 7,459 11,750 255 (7,106)
Earnings (Loss) per
Common Share (1) $0.73 $1.14 $0.02 $(0.69)
</TABLE>
(1) Earnings (Loss) per common share were calculated on the
average common shares outstanding of 10,435,196 and
10,332,447 for the twelve months ended September 30, 1996
and 1995, respectively.
<PAGE>
Top Left: 32
Selected Financial and Operating Data
<TABLE>
<CAPTION>
September 30, 1996 1995 1994 1993 1992
Balance Sheet Data:
(Thousands)
<S> <C> <C> <C> <C> <C>
Net Utility
Plant $335,488 $324,870 $315,063 $308,384 $303,715
Total Assets 478,749 479,301 481,518 441,293 393,227
Total
Capitalization 271,348 292,802 276,513 311,197 277,391
Income and Share Data:
(Thousands except share data)
Operating
Revenues $339,940 $294,022 $317,298 $302,657 $278,760
Cost of Gas 189,188 155,378 168,816 157,816 150,616
Other O&M
Expenses 64,960 60,108 62,733 59,142 56,246
Depreciation 16,649 16,520 16,993 17,133 16,086
Net Income (1) 21,919 12,358 19,485 17,479 13,135
Earnings
per Share (1) $2.10 $1.20 $1.89 $1.70 $1.44
Revenues:
(Thousands)
Gas:
Residential $145,364 $127,493 $140,403 $133,846 $124,435
Commercial 103,787 88,983 95,286 93,045 85,920
Industrial 82,725 73,715 77,850 72,940 64,004
Miscellaneous 6,217 2,161 3,328 1,884 1,211
Transportation 952 1,631 431 942 3,190
Total Gas $339,045 $293,983 $317,298 $302,657 $278,760
Nonutility
Revenue 875 39 -- -- --
Other 20 -- -- -- --
________ ________ ________ ________ ________
Total Operating
Revenues $339,940 $294,022 $317,298 $302,657 $278,760
Sales and Transportation:
(Mcf-Thousands)
Firm:
Residential 13,185 11,591 13,101 12,691 12,312
Commercial 10,521 9,022 9,998 9,703 9,183
Industrial 11,438 10,007 10,421 9,600 8,058
Transportation 178 589 128 167 1,700
Unbilled and
other 969 793 245 129 (58)
Total Firm 36,291 32,002 33,893 32,290 31,195
Non-Firm:
Commercial 1,746 1,809 1,549 1,663 1,377
Industrial 6,792 7,286 7,149 5,336 3,632
Transportation 2,444 3,654 559 1,400 3,147
Total
Non-Firm 10,982 12,749 9,257 8,399 8,156
Total Sales and
Transportation 47,273 44,751 43,150 40,689 39,351
Customers:
(Average)
Residential 157,526 156,539 155,874 155,385 154,934
Commercial (2) 19,313 19,167 19,156 19,139 19,056
Industrial (2) 2,112 2,145 1,980 1,893 1,885
Firm
Transportation 19 -- -- -- --
Resale 2 1 1 1 1
Total
Customers 178,972 177,852 177,011 176,418 175,876
Sources of Gas:
(Mcf-Thousands)
Domestic 21,331 13,534 16,162 7,474 9,526
Canadian Gas
Firm 24,721 24,283 24,440 23,970 11,016
Spot Market Gas 710 2,836 2,318 8,155 14,386
Produced Gas 19 9 30 6 15
Company Use/
Unaccounted For (1,285) (405) (488) (608) (377)
Total Sources 45,496 40,257 42,462 38,997 34,566
Peak Day Data:
Peak Day Send
Out (Mcf per
day) (3) 239,348 250,518 262,794 247,315 237,077
Peak Day Date 2/05/96 2/06/95 1/19/94 2/01/93 1/16/92
Peak Day
Degree Days 62 59 55 54 55
Total Annual
Heating
Degree Days 6,302 5,595 6,454 6,232 5,995
</TABLE>
(1) Exclusive of an $879,900 charge, or $0.08 per share,
resulting from the early redemption premium on the Company's
preferred stock in fiscal 1994 and a $2,566,000 credit, or $0.28
per share, resulting from a change in the Company's method of
accounting for municipal property taxes in fiscal 1992. All per
share amounts have been restated to give retroactive effect to
the three-for-two stock split on June 28, 1993.
(2) Transportation customers who utilize both gas service and
transportation service are included in these customer categories.
Average transportation customers are as follows: 1996:8, 1995:23,
1994:17, 1993:25, and 1992:51.
(3) Converted from BTU-millions assuming 1,030 BTU per CF. 1994
sendout includes one time delivery of 17,425 Mcf to Con Ed.
<PAGE>
Inside Back Cover:
Shareholder and Stock Information
Annual Meeting
The Annual Meeting of Shareholders will take place on Friday,
January 31, 1997, at 10:30 a.m. at the Ramada Plaza Hotel and
Conference Center in Meriden, Connecticut.
Market for Common Stock
As of October 31, 1996, there were 28,499 holders of record of
Yankee Energy common stock. Yankee Energy's stock is quoted on
the New York Stock Exchange (NYSE) under the symbol "YES"
although it is frequently presented as "YanEnS" in various
financial publications.
<TABLE>
<CAPTION>
High and Low Stock Prices and Dividend Information ($/Share)
<S> <C> <C> <C>
Year Ended September 30, 1996 High Low Dividend
First Quarter, 1996 25.500 20.875 0.315
Second Quarter, 1996 25.750 21.875 0.315
Third Quarter, 1996 22.500 20.375 0.325
Fourth Quarter, 1996 23.625 20.750 0.325
Year Ended September 30, 1995
First Quarter, 1995 22.625 20.375 0.305
Second Quarter, 1995 25.375 20.000 0.305
Third Quarter, 1995 22.875 19.500 0.315
Fourth Quarter, 1995 22.375 19.750 0.315
</TABLE>
Dividends
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. Yankee Energy offers
registered shareholders the ability to have quarterly dividends
deposited directly into their bank account.
Shareholder Investment Plan
The Yankee Energy Shareholder Investment Plan is administered by
the Company's stock transfer agent, ChaseMellon Shareholder
Services (ChaseMellon). The Plan provides registered
shareholders and their family members a convenient way to acquire
shares of common stock. Shares can be purchased by having
quarterly dividends automatically reinvested in additional shares
or by sending in funds to purchase additional shares. In
addition, holders of fewer than 100 shares may sell all their
shares at any time for no fee. The Plan also offers charitable
donation and share safekeeping services as well. Copies of the
Plan are available from ChaseMellon or Yankee Energy.
Transfer Agent
Shareholders who have questions about their accounts or desire to
transfer their stock from one name to another should contact
ChaseMellon at 1-800-288-9541 or write:
For Transfers and Transfer Inquiries:
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
All Other Inquiries:
ChaseMellon Shareholder Services
P.O. Box 590 Overpeck Centre
Ridgefield Park, NJ 07660
Yankee Energy News and Information
Yankee Energy has a toll-free news and information service which
includes current news releases, a Chairman s message, earnings
and dividend information as well as access to the transfer agent
or the Company's Investor Relations Department.
1-800-YES-9989
Shareholders, interested investors and analysts may also contact
Yankee Energy by calling or writing to:
Steven P. Eschbach, CFA
Investor Relations Manager
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
Phone 203-639-4459
Fax 203-639-4011
Email: [email protected]
Yankee Energy will provide shareholders with a copy of its 1996
Annual Report to the Securities and Exchange Commission on Form
10-K, without charge, upon written request.
<PAGE>
Back Cover
Bottom Left: Yankee Energy Logo and list of the Company and its
subsidiaries.
Web Site Address: http://www.yankeegas.com.
Yankee Energy System, Inc.
599 Research Parkway
Meriden, CT 06450-1030
203-639-4000
Yankee Energy Services Company
639 Research Parkway
Meriden, CT 06450-1030
203-639-4670
R. M. Services, Inc.
639 Research Parkway
Meriden, CT 06450-1030
203-639-4501
YESCo Industrial Energy Services, Inc.
11 C. Kripes Road
East Granby, CT 06026
860-653-5667
Yankee Gas Services Company
599 Research Parkway
Meriden, CT 06450-1030
203-639-4000
Yankee Energy Financial Services Company
599 Research Parkway
Meriden, CT 06450-1030
203-639-4462
BVA Cogen, Inc.
33 Christa McAuliffe Blvd.
Plymouth, MA 02360
508-746-5500
YESCo Energy Consulting Services, Inc.
639 Research Parkway
Meriden, CT 06450-1030
203-639-4670
<PAGE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Yankee Gas Services Company is a wholly-owned subsidiary of
the registrant. It is incorporated in Connecticut and does
business under its own name.
Yankee Energy Financial Services Company is a wholly-owned
subsidiary of the registrant. It is incorporated in Connecticut
and does business under its own name.
Yankee Energy Services Company (formerly known as Yankee
Energy Production Services Company) is a wholly-owned subsidiary
of the registrant. It is incorporated in Connecticut and does
business under its own name in Connecticut and New Jersey.
BVA Cogen, Inc. is a wholly-owned subsidiary of Yankee
Energy Services Company, a wholly-owned subsidiary of the
registrant. It is incorporated in Delaware and does business
under its own name in Massachusetts.
YESCO Industrial Energy Services, Inc. (formerly known as
Industrial Combustion, Inc.) is a wholly-owned subsidiary of
Yankee Energy Services Company, a wholly-owned subsidiary of the
registrant. It is incorporated in Connecticut and does business
under its own name in Connecticut and Massachusetts.
YESCO Energy Consulting Services, Inc. is a wholly-owned
subsidiary of Yankee Energy Services Company, a wholly-owned
subsidiary of the registrant. It is incorporated in Connecticut
and does business under its own name.
Housatonic Corporation is a wholly-owned subsidiary of the
registrant. It is incorporated in Connecticut and does business
under its own name.
NorConn Properties, Inc. is a wholly-owned subsidiary of the
registrant. It is incorporated in Connecticut and does business
under its own name.
R. M. Services, Inc. is a wholly-owned subsidiary of the
registrant. It is incorporated in Connecticut and does business
under its own name in Connecticut. R.M. Services, Inc. does
business in Pennsylvania under the name, R.M. Connecticut
Services, Inc. and in Massachusetts under the name, REC
Management Services.
Yankee Energy Marketing Company is a wholly-owned subsidiary
of the registrant. It is incorporated in Connecticut and does
business under its own name in Connecticut.
<PAGE>
Exhibit 23
(Arthur Andersen, LLP Letterhead)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the
incorporation of our reports included (or incorporated by
reference) in this Form 10-K, into the Company's previously filed
Registration Statement File No. 033-56323.
Hartford, Connecticut
December 4, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,853
<SECURITIES> 0
<RECEIVABLES> 32,882
<ALLOWANCES> (7,259)
<INVENTORY> 13,171
<CURRENT-ASSETS> 59,720
<PP&E> 513,431
<DEPRECIATION> 177,943
<TOTAL-ASSETS> 478,749
<CURRENT-LIABILITIES> 88,215
<BONDS> 143,329
0
0
<COMMON> 52,248
<OTHER-SE> 109,818
<TOTAL-LIABILITY-AND-EQUITY> 478,749
<SALES> 339,940
<TOTAL-REVENUES> 339,940
<CGS> 189,188
<TOTAL-COSTS> 189,188
<OTHER-EXPENSES> 286,941
<LOSS-PROVISION> 6,013
<INTEREST-EXPENSE> 15,290
<INCOME-PRETAX> 37,370
<INCOME-TAX> 15,451
<INCOME-CONTINUING> 21,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,919
<EPS-PRIMARY> 2.10
<EPS-DILUTED> 2.10
</TABLE>
<PAGE>
EXHIBIT 10.22
STATE OF CONNECTICUT
DEPARTMENT OF PUBLIC UTILITY CONTROL
RE:APPLICATION OF : DOCKET NO. 92-02-19
YANKEE GAS SERVICES COMPANY : (Reopened)
FOR AN INCREASE IN RATES -- :
REQUEST TO REOPEN FOR APPROVAL :
OF ACCOUNTING TREATMENT FOR :
RECOVERY OF DEFERRED EXPENSES : SEPTEMBER 11, 1995
STIPULATION AND AGREEMENT
WHEREAS:
A. Yankee Gas Services Company (the "Company") is
requesting that its last rate case, Docket No. 92-02-19 (the
"Rate Case"), be reopened in order to approve an accounting
treatment which will permit certain credits to be applied against
certain deferred expenses, as more particularly described below;
B. The Office of Consumer Counsel (the "OCC") and the
Company are or will be parties to the reopened proceeding;
C. The OCC and the Company believe that approval by the
Department of Public Utility Control (the "Department") of the
accounting treatment requested by the Company will resolve the
growing problem of such deferred expenses and will avoid the need
for a rate increase in a weak economy and a time of concern about
price competitiveness; and
D. The OCC and the Company believe that approval of the
requested accounting treatment is therefore in the best interests
of the Company's customers;
NOW, THEREFORE, in consideration of the foregoing, the
parties hereby stipulate and agree as follows:
1. Term
This stipulation and agreement shall become
effective as of September 30, 1995 and shall continue through
September 30, 1998, after which it shall expire.
2. Deferred Expenses
(a) Effective as of September 30, 1995, the
Company may apply the Transition Credits, as described in
Paragraph 3 hereof, to eliminate or reduce the following
expenses, which received deferred accounting treatment in the
Rate Case (Docket 92-02-19) or in the Department's Decisions in
Docket No. 92-01-02 or Docket No. 92-02-08 (the "Deferred
Expenses") and which are estimated to amount to:
<TABLE>
<CAPTION>
Millions of Dollars
Fiscal 95 Fiscal 98
<S> <C> <C>
Natural Gas Vehicle Program $ .54 $ .74
Economic Development Activities 1.27 2.02
Conservation Program 2.30 4.70
Compliance with FASB Statement No. 106, 2.39 6.29
"Employers' Accounting for Certain
Post Retirement Benefits Other Than
Pensions ("FAS 106")
Hardship Accounts and Matching 10.87 16.27
Payment Program
Total $17.37 $30.02
</TABLE>
(b) The Company will not implement a conservation
adjustment mechanism with respect to any period during the term
of this stipulation and agreement;
c) The Company shall apply not more than $1,500,000 of
Transition Credits against FAS 106 Compliance costs in any fiscal
year during the term set forth in Paragraph 1 hereof. However,
in its next rate case, the Company may seek recovery of such
deferred FAS 106 compliance costs not eliminated by applying said
$1,500,000 per fiscal year.
(d) It is understood and agree that OCC does not waive
any rights it has if the Company seeks recovery of any remaining
deferred balances at the end of this Agreement.
(e) This agreement is intended to cover deferred
expenses as specified above.
3. The Transition Credits.
(a) The credits to be applied against the Deferred Expenses
shall be provided by the mechanism established by the Department
in Docket No. 94-01-12 to pay the transition costs resulting from
the implementation of Federal Energy Regulatory Commission Order
No. 636 ("FERC Order 636) and will come from the following
sources, in the percentages specified below (the "Transition
Credits"):
<TABLE>
<CAPTION>
Percentage Available
Source For Deferred Expenses
<S> <C>
Capacity Release 100%
Deferred Gas Costs 100%
Off-System Sales 80%
Interruptible Excess Margin 80%
Pipeline Refunds 100%
</TABLE>
(b) As of July 31, 1995, Transition Credits available
for application against Deferred Expenses amounted to $7,752,710,
and it is anticipated that the Company will continue to receive
Transition Credits through September 30, 1998.
(c) The Company and OCC agree that absent this
agreement and the Department's Decision and Docket No. 94-01-12,
firm ratepayers would be entitled to receive:
<TABLE>
<CAPTION>
Percentage Available To
Source Return To Firm Ratepayers
<S> <C>
Capacity Release 100%
Deferred Gas Costs 100%
Off-System Sales 50%
Interruptible Excess Margin 50%
Pipeline Refunds 100%
</TABLE>
(d) OCC acknowledges that only 75% of Off-System Sales
and Interruptible Excess Margin were approved for application
toward transition costs in Docket No. 94-01-12, and does not
object to the Company's request that 80% of Off-System Sales and
Interruptible Excess Margin should be approved and made available
in connection with the Company's proposed accounting treatment,
including use in accordance with subparagraph 4 (b) hereof.
4. Rate Moratorium
(a) Except as set forth in the following subparagraph
4(b), the Company's rates shall not be increased prior to
September 30, 1998.
(b) If, beginning with the fiscal year ending
September 30, 1996, the Company's actual return on average equity
("ROE"), calculated on the cost of capital method and excluding
any non-recurring charges for discretionary items, (such as one-
time charges for voluntary early retirement program), is less
than 10.5% in any fiscal year during the term hereof, as
demonstrated by the Company's monthly ROE filing with the
Department for September of such year, the Company shall have the
option of (i) applying to the Department for a rate increase or
(ii) retaining up to 80% of any Off-System Sales Margin and
Excess Interruptible Margin as may be necessary to bring its ROE
for such year up to 10.5%.
(c) During the period in which this Agreement is in
effect , the Company and the OCC agree that transition cost
recoveries in excess of those necessary to resolve the deferred
balances in any given fiscal year will be returned to firm
ratepayers through the Purchased Gas Adjustment Mechanism (PGA).
(d) In the event that transition cost recoveries are
less than an amount necessary to resolve the deferred balances by
September 30, 1998, the Company may seek recovery of same in its
next rate case and OCC shall have the right to contest this
effort to recover.
(e) The parties hereto understand and agree that this
Agreement should permit recovery, in full, of the Deferred
Expenses set forth in Paragraph 2(a) hereof. However, in the
unlikely event that transition credits fall short of achieving
such recovery, then, the Company's rights are set forth in
Paragraph 4(d) hereof.
(f) The OCC shall have the right to examine and
contest operational and financial issues affecting the Company's
customers in subsequent proceedings before the Department and
nothing contained herein shall be deemed a waiver of that right.
5. General
(a) Upon execution of this stipulation and agreement
by both the OCC and the Company, it may be attached to the
Company's application and submitted to the Department.
(b) Such submission of this stipulation and agreement
to the Department shall constitute the joint request of the OCC
and the Company that the Department grant the requested reopener
and approve the Company's proposed accounting treatment in
accordance with the Company's application.
(c) The agreements contained herein are interdependent
and not severable, and they shall not be binding upon, or deemed
to represent positions of, the parties if they are not approved
in full by the Department.
Respectfully submitted,
YANKEE GAS SERVICES COMPANY
By_____________________________
Thomas J. Houde
Vice President
Rates & Resource Planning
OFFICE OF CONSUMER COUNSEL
By_____________________________
John F. Merchant
Consumer Counsel
