<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
____________
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT JULY 31, 1997 10,454,414
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Income:
Three and Nine Months Ended June 30, 1997
and 1996
Consolidated Balance Sheets:
June 30, 1997 and September 30, 1996
Consolidated Statements of Cash Flows:
Nine Months Ended June 30, 1997
and 1996
Notes to Consolidated Financial
Statements
Report on Review by Independent
Public Accountants
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures
about Market Risk
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
<TABLE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION> Three Months Ended
June 30,
1997 1996
_______ ______
(Thousands of Dollars,
except share information)
<S> <C> <C>
Revenues:
Utility Revenues $ 58,289 $ 60,061
Nonutility Revenues 1,146 75
_______ _______
Total Revenues 59,435 60,136
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 31,056 31,342
Operations 14,695 14,771
Maintenance 1,393 1,547
Depreciation 4,477 4,180
Taxes other than income taxes 5,151 5,124
_______ _______
Total Operating Expenses 56,772 56,964
_______ _______
Operating Income 2,663 3,172
Other Income (Expense)
Other Income, net 79 3,126
Interest Charges, net (3,251) (3,871)
_______ ______
(Loss)Income Before Income Taxes (509) 2,427
(Benefit)Provision for Income Taxes (67) 605
_______ ______
Net (Loss) Income (442) 1,822
_______ _______
_______ _______
(Loss)Earnings
per Common Share $ (0.04) $ 0.17
_______ _______
_______ _______
Common Shares
Outstanding (Average) 10,451,034 10,449,554
__________ __________
__________ __________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION> Nine Months Ended
June 30,
1997 1996
____ ____
(Thousands of Dollars,
except share information)
<S> <C> <C>
Revenues:
Utility Revenues $279,490 $297,703
Nonutiltiy Revenues 3,194 191
_______ _______
Total Revenues 282,684 297,894
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 154,048 165,335
Operations 42,620 42,855
Maintenance 4,711 4,777
Depreciation 13,011 12,467
Taxes other than income taxes 18,700 19,220
_______ _______
Total Operating Expenses 233,090 244,654
_______ _______
Operating Income 49,594 53,240
Other Income (Expense)
Other Income, net 151 5,607
Interest Charges, net (10,080) (11,740)
_______ _______
Income Before Income Taxes 39,665 47,107
Provision for Income Taxes 17,750 20,120
_______ _______
Net Income $ 21,915 $ 26,987
_______ _______
_______ _______
Earnings per Common Share $ 2.10 $ 2.59
_______ _______
_______ _______
Common Shares
Outstanding (Average) 10,450,074 10,430,410
__________ __________
__________ __________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, September 30,
1997 1996
________ _________
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
ASSETS
Utility Plant, at original cost $517,185 $499,446
Less: Accumulated provision for
depreciation 188,995 177,943
________ ________
328,190 321,503
Construction work in progress 15,335 13,985
________ ________
Total Net Utility Plant 343,525 335,488
________ ________
Other Property and Investments 16,920 14,894
________ ________
Current Assets:
Cash and temporary cash
investments 2,577 7,853
Accounts receivable, net 37,440 25,623
Fuel supplies 5,838 11,465
Other materials and supplies 1,926 1,706
Accrued utility revenues 2,817 5,775
Prepaid taxes --- 2,925
Other 1,099 4,373
_______ _______
Total Current Assets 51,697 59,720
_______ _______
Deferred Gas Costs --- 3,948
Recoverable Environmental
Cleanup Costs 31,091 34,370
Recoverable Income Taxes 10,803 14,559
Recoverable Postretirement
Benefits Costs 1,226 1,861
Other Deferred Debits 13,423 13,909
_______ _______
Total Assets $468,685 $478,749
_______ ________
_______ ________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION> June 30, September 30,
1997 1996
_________ ____________
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,453,514
shares outstanding at June 30, 1997
and 10,449,554 outstanding at
September 30, 1996 $ 52,268 $ 52,248
Capital surplus, paid in 88,037 87,947
Retained earnings 34,892 23,271
Employee stock ownership
plan guarantee (1,000) (1,400)
________ ________
Total Common Shareholders' Equity 174,197 162,066
Long-term debt, net of
current portion 138,632 109,282
_______ _______
Total Capitalization 312,829 271,348
_______ _______
Current Liabilities:
Notes payable to banks 3,000 20,300
Long-term debt, current portion 4,017 34,017
Accounts payable 14,596 22,571
Accrued interest 3,351 3,494
Accrued taxes 7,564 ---
Pipeline transition costs payable 3,778 422
Other 6,124 7,411
_______ _______
Total Current Liabilities 42,430 88,215
_______ _______
Deferred Gas Costs 707 ---
Accumulated Deferred Income Taxes 49,126 49,934
Unfunded Deferred Income Taxes 10,657 14,488
Accumulated Deferred Investment
Tax Credits 8,797 9,080
Reserve for Environmental
Cleanup Costs 35,000 35,000
Unfunded Postretirement
Benefits Costs 2,726 3,361
Other Deferred Credits 6,413 7,323
______ ______
Commitments and Contingencies (Note 3)
Total Capitalization and
Liabilities $468,685 $478,749
________ ________
________ ________
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC.AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION> Nine Months Ended
June 30,
__________________
1997 1996
____ ____
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $21,915 $26,987
Adjusted for the following:
Depreciation 13,011 12,467
Equity earnings from investments (60) (2,755)
Gain on sale of investment
in Iroquois --- (2,688)
Deferred income taxes, net (1,166) (2,002)
Deferred gas costs activity and
other non-cash items 10,469 15,910
Changes in working capital:
Accounts receivable and accrued
utility revenues (8,859) (13,720)
Accounts payable (7,975) 797
Accrued taxes 10,489 13,404
Other working capital
(excludes cash) 7,492 6,337
_______ _______
Net cash provided by
operating activities 45,316 54,737
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 20 265
Premium on common stock 67 944
Issuance of long-term debt 30,000 2,150
Retirement of long-term debt (30,650) (2,450)
Decrease in
short-term debt (17,300) (28,520)
Cash dividends-common stock (10,294) (9,957)
________ ________
Net cash used for financing
activities (28,157) (37,568)
________ ________
INVESTMENT IN PLANT AND OTHER:
Utility Plant, net of allowance for other
funds used during construction (19,958) (15,634)
Other property and investments (2,477) (1,996)
Iroquois distribution --- 2,625
Proceeds from Iroquois sale --- 22,192
_______ ________
Net cash provided by (used for)
plant and other investments (22,435) 7,187
________ _______
Net Increase (Decrease)in Cash and Temporary
Cash Investments for the Period (5,276) 24,356
Cash and Temporary Cash Investments,
beginning of period 7,853 725
________ ________
Cash and Temporary Cash Investments,
end of period $ 2,577 $25,081
________ _______
________ _______
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts
capitalized $ 9,793 $10,046
Income taxes $ 9,779 $14,213
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the Annual Report of
Yankee Energy System, Inc. (Yankee Energy or the Company) on
Form 10-K for the fiscal year ended September 30, 1996(1996
Form 10-K),including the audited financial statements (and
notes thereto)incorporated by reference therein and the
Company's quarterly reports on Form 10-Q for the quarters
ended December 31, 1996 and March 31, 1997 (first and second
quarter Form 10Q). In the opinion of the Company, the
accompanying unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the financial position
of the Company as of June 30, 1997, and its results of
operations for the three and nine months ended June 30, 1997
and 1996 and cash flows for the nine months ended June 30,
1997 and 1996. The results of operations for the three and
nine months ended June 30, 1997 and 1996 are not necessarily
indicative of the results expected for a full year, due
mainly to the highly seasonal nature of the gas business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas) is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which include
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" (FAS No. 71). FAS No. 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 No. 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. For additional information
about these items see the 1996 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, the Company believes that
its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS No. 71.
3) COMMITMENTS AND CONTINGENCIES
TRANSITION COSTS - ORDER NO. 636: The three major pipeline
systems serving Yankee Gas (Iroquois Gas Transmission System
(Iroquois), Tennessee Gas Pipeline Company and Algonquin Gas
Transmission Company and its affiliate, Texas Eastern
Transmission Company), have all restructured their services
pursuant to Federal Energy Regulatory Commission (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.
On July 8, 1994, the DPUC issued a decision on the
implementation of FERC Order No. 636 by the Connecticut
Local Distribution Companies (LDC's). The DPUC is allowing
the LDC's 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 June 30, 1997, Yankee Gas has paid approximately
$19.2 million of transition costs and an additional $3.8
million are anticipated. To date, Yankee Gas has collected
$42.9 million through a combination of credits received from
gas supplier refunds, deferred gas costs, excess
interruptible margin, off-system sales margin, and capacity
release activity.
On January 3, 1996, the DPUC approved a Settlement Agreement
between Yankee Gas and the Office of Consumer Counsel (OCC).
This Settlement Agreement provides for the retention of
overcollected transition cost credits to offset certain
deferred regulatory assets. As a result of this Settlement
Agreement, Yankee Gas has stipulated that, except in the
event of certain circumstances which would adversely affect
Yankee Gas' financial condition, it will not increase its
rates prior to October 1, 1998. As of June 30, 1997, excess
collections of approximately $23.7 million were applied
against the deferred regulatory assets specified in the
Settlement Agreement.
FIRM TRANSPORTATION: 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 was intended to investigate
the issues surrounding the development of firm
transportation (FT) rates at the state level in response to
FERC Order No. 636. The Decision provides guidelines for
the development of FT rates to be offered by the State's
three LDC's, one of which is Yankee Gas.
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 June 30, 1997 had approximately 1,100
customers under the new FT service. Existing customers who
switch to transportation tariffs will result in decreased
revenues for Yankee Gas as the 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 because the
cost of gas has traditionally been a pass through item with
no income impact.
This Decision did not address Yankee Gas' revenue
requirement; Yankee Gas has maintained 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 was required under Connecticut statute if Yankee Gas
had not undergone a rate proceeding within the last four
years. Since Yankee Gas' last rate application was approved
on August 26,1992, this Review was necessary to comply with
the statute.
On July 9, 1997, the DPUC issued its decision in Docket No.
96-08-05. The DPUC decision, which is not a rate order,
calls for a lowering of Yankee Gas' authorized Return on
Equity (ROE) from 12.43 percent to 11.15 percent. The DPUC
believed that lower current interest rates and recently
allowed rates of return for other Connecticut utilities
justified a lower ROE for Yankee Gas. The decision does not
call for any change in customer rates or reductions in
Yankee Gas' revenues. The decision offers Yankee
Gas the option of making a proposal by September 2, 1997,
which would apply any revenues in excess of the 11.15
percent ROE, which the DPUC estimates to be $3.2 million, to
the amortization of regulatory assets or to increasing plant
investment. Yankee Gas management is currently evaluating
these alternatives, as well as other options, to address
this issue. If Yankee Gas does not choose to make a
proposal, the DPUC will initiate a full rate case
proceeding.
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 $2.0 million issued to the
commodity trading firm collateralizing the commodity
contract.
There have been no other material developments in this area.
For a detailed description of the items that comprise
commitments and contingencies of the Company, see the 1996
Form 10-K.
4) 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.
5) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year classifications.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Yankee Energy System, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Yankee Energy System, Inc. (a Connecticut corporation) and
subsidiaries (the Company) as of June 30, 1997, and the related
consolidated statements of income for the three-month and nine-
month periods then ended and cash flows for the nine-month
period then ended. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Yankee Energy System,
Inc. as of September 30, 1996 (not presented herein), and, in our
report dated November 7, 1996, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying condensed balance sheet as of September
30, 1996 is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
Arthur Andersen LLP
Hartford, Connecticut
July 29, 1997
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This section contains management's assessment of the financial
condition of Yankee Energy System, Inc. (Yankee Energy or the
Company) and the principal factors which had an impact on the
results of operations in the periods presented. This discussion
should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended September 30, 1996, including the
audited consolidated financial statements (and notes thereto)
incorporated by reference therein, and the Company's quarterly
reports on Form 10-Q for the quarters ended December 31, 1996 and
March 31, 1997.
FINANCIAL CONDITION
OVERVIEW
For the quarter ended June 30, 1997 the Company recorded a
consolidated net loss of $0.04 per share based on 10,451,034
average common shares, compared to earnings of $0.17 per share
for the same period a year earlier. The earnings for the quarter
ended June 30, 1996 include the April 30, 1996 sale of the
Company's Iroquois investment that resulted in a net after-tax
gain of $2.5 million or $0.24 per share. Excluding the gain on
the Iroquois sale, the Company would have recorded a net loss of
$0.07 per share for the quarter ended June 30, 1996.
For the nine months ended June 30, 1997, earnings were $2.10 per
share based on 10,450,074 average common shares, compared to
$2.59 per share for the nine months ended June 30, 1996. The
decrease in earnings for the nine month period ended June 30,
1997 was due in part to the effect of the gain on the sale of the
Company's Iroquois investment and to weather that was
approximately five percent warmer, compared to the same period a
year earlier. Also contributing to the decline in earnings were
the operating losses of Yankee Energy's non-utility subsidiaries
which are expected to continue in the fourth quarter.
The Company recorded lower income tax expense as a result of
lower pre-tax net income for the three and nine month periods
ended June 30, 1997 compared to the three and nine month periods
ended June 30, 1996.
RESULTS OF OPERATIONS
COMPARISON OF THE THIRD QUARTER OF FISCAL 1997 WITH THE THIRD
QUARTER OF FISCAL 1996
REVENUES AND SALES
Utility operating revenues decreased $1.8 million and were
partially offset by a $1.1 million increase in non-utility
revenues in the third quarter of fiscal 1997 compared with the
same period in the prior fiscal year. The increase in non-
utility revenues was due primarily to Yankee Energy Services
Company (YESCo) acquisitions. For a detailed description of
YESCo, see page 1 of the 1996 Form 10-K. The components of the
change in operating revenues are as follows:
<TABLE>
<CAPTION>
Changes in Operating Revenues
(Millions of Dollars)
Increase/(Decrease)
<S> <C>
Firm sales and other $ (1.1)
Transportation 2.1
_____
Subtotal firm sales, transportation
and other
(excluding gas cost recoveries) 1.0
_____
Interruptible/off system sales and
transportation
(excluding gas costs recoveries) 0.6
_____
Total - Excluding gas cost recoveries 1.6
Gas cost recoveries (3.4)
_____
Change in utility revenues (1.8)
Non-utility operations 1.1
_____
Total change in operating revenues $ (0.7)
_____
_____
</TABLE>
Firm sales and other revenues (excluding gas cost recoveries)
decreased for the third quarter of fiscal 1997 compared to the
same period in fiscal 1996. This decrease in firm sales was
primarily caused by customers converting from sales gas to
transportation-only service.
Interruptible revenue increased $0.6 million for the three months
ended June 30, 1997 compared to the three months ended June 30,
1996 primarily due to the availability of competitively priced
gas/transportation service for interruptible customers.
Gas cost recoveries decreased due to lower firm sales in the
third quarter of fiscal 1997 compared to the same period in
fiscal 1996.
The corresponding changes in the Company's throughput were as
follows:
<TABLE>
<CAPTION>
Quarter Ended June 30,
1997 1996 Increase
(Mcf - thousands)
<S> <C> <C> <C>
Firm sales and
transportation 6,647 6,046 601
Interruptible/off system
sales and transportation 3,366 2,834 532
______ ______ ______
Total 10,013 8,880 1,133
______ ______ ______
______ ______ ______
</TABLE>
OPERATING EXPENSES
Total other operating expenses decreased $0.2 million in the
third quarter of fiscal 1997 compared with the same period in the
prior year as a result of the following items:
- Cost of gas/goods sold decreased $0.3 million for the
three months ended June 30, 1997 compared to the three
months ended June 30, 1996 due to lower firm sales
offset by higher per-unit gas costs. This decrease was
also partially offset by an increase in non-utility
subsidiary activity.
- Operations and maintenance expenses decreased $0.2
million in the third quarter of fiscal 1997 compared to
the third quarter of fiscal 1996 primarily due to a
decrease in uncollectible expense and lower Yankee Gas
payroll as a result of the Company's business
transformation. This decrease was partially offset by
an increase in non-utility subsidiary activity.
- Depreciation expense increased $0.3 million due to an
increase in depreciable utility and non-utility plant
assets as of June 30, 1997 compared to June 30, 1996.
OTHER INCOME, NET decreased $3.0 million in the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996
primarily due to the effect of the gain on the Iroquois sale
recognized in the prior year third quarter ended June 30, 1996.
Excluding the gain on the sale of the Company's interest in
Iroquois, other income decreased $0.3 million in the third
quarter of fiscal 1997 compared to the third quarter of fiscal
1996. This decrease is primarily due to lower interest income
earned from temporary cash investments in the third quarter of
fiscal 1997 compared to the same period a year earlier.
INTEREST charges decreased $0.6 million for the three months
ended June 30 1997 compared to the same period ended June 30,
1996 due to lower levels of debt and lower interest expense on
Yankee Gas' deferred fuel balance in the current period.
INCOME TAXES, FEDERAL AND STATE decreased $0.7 million primarily
due to lower taxable income for the three months ended June 30,
1997 compared to the three months ended June 30, 1996.
COMPARISON OF THE FIRST NINE MONTHS OF FISCAL 1997 WITH THE FIRST
NINE MONTHS OF FISCAL 1996
REVENUES AND SALES
Utility operating revenues decreased $18.2 million and were
partially offset by a $3.0 million increase in non-utility
revenues in the first nine months of fiscal 1997 compared with
the same period in the prior fiscal year. The increase in non-
utility revenues was due primarily to YESCo acquisitions. The
components of the change in operating revenues are as follows:
<TABLE>
<CAPTION>
Changes in Operating Revenues
(Millions of Dollars)
Increase/(Decrease)
<S> <C>
Firm sales and other $ (8.5)
Transportation 5.0
_____
Subtotal firm sales, transportation
and other
(excluding gas cost recoveries) (3.5)
_____
Interruptible/off system sales and
transportation
(excluding gas costs recoveries) 0.1
_____
Total - Excluding gas cost
recoveries (3.4)
Gas cost recoveries (14.8)
_____
Change in utility revenues (18.2)
Non-utility operations 3.0
_____
Total change in operating revenues $(15.2)
_____
_____
</TABLE>
Firm and other revenues (excluding gas cost recoveries) decreased
for the first nine months of fiscal 1997 compared to the same
period in fiscal 1996 due to a 10 percent decrease in firm gas
heating sales. The decrease in firm revenue resulted from
weather that was five percent warmer this year compared to last
year and from firm sales customers switching to transportation
only service. This revenue decrease was partially offset by an
increase in firm transportation.
Gas cost recoveries decreased due to lower firm sales in fiscal
year 1997 compared to fiscal year 1996.
The corresponding changes in the Company's throughput were as
follows:
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1997 1996 Increase/(Decrease)
(Mcf - thousands)
<S> <C> <C> <C>
Firm sales and
transportation 30,586 30,920 (334)
Interruptible/off system
sales and transportation 9,891 8,210 1,681
______ ______ ______
Total 40,477 39,130 1,347
______ ______ ______
______ ______ ______
</TABLE>
OPERATING EXPENSES
Total other operating expenses decreased $11.6 million in the
first nine months of fiscal 1997 compared with the same period in
the prior year as a result of the following items:
- Cost of gas/goods sold decreased $11.3 million for the
nine months ended June 30, 1997 compared to the nine
months ended June 30, 1996 due to lower firm sales
offset by higher per-unit gas costs in fiscal 1997
compared to fiscal 1996. This decrease was also
partially offset by an increase in non-utility
subsidiary activity.
- Operations and maintenance expenses decreased $0.3
million in the first nine months of fiscal 1997
compared with the same period a year earlier due
primarily to lower uncollectible expense and lower
Yankee Gas payroll as a result of the Company's
business transformation. This decrease was partially
offset by an increase in non-utility subsidiary
activity.
- Depreciation expense increased $0.5 million due to an
increase in depreciable utility and non-utility plant
assets as of June 30, 1997 compared to June 30, 1996.
- Taxes other than income taxes decreased $0.5 million
for the nine months ended June 30, 1997 compared to the
nine months ended June 30, 1996 primarily due to lower
Connecticut Gross Earnings taxes resulting from lower
revenues in fiscal 1997. This decrease was partially
offset by an increase in municipal property taxes due
to higher assessments.
OTHER INCOME, NET decreased $5.5 million in the first nine months
of fiscal 1997 due primarily to the absence of earnings
associated with the equity investment which Housatonic formerly
held in Iroquois. This interest was sold on April 30, 1996.
INTEREST charges decreased $1.7 million for the nine months ended
June 30, 1997 compared to the same period ended June 30, 1996 due
to lower levels of debt and lower interest expense on Yankee Gas'
deferred fuel balance in the current period.
INCOME TAXES, FEDERAL AND STATE decreased $2.4 million primarily
due to lower taxable income as a result of warmer weather and the
operating losses of Yankee Energy's non-utility subsidiaries for
the nine months ended June 30, 1997 compared to the same period
ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at June 30, 1997 totaled $2.6
million. Principal sources of cash for the nine months ended
June 30, 1997 were operating activities. These funds were used
primarily to reduce short-term debt, meet sinking fund
requirements, dividend payments and capital expenditures.
Expenditures for utility plant and other investments totaled
$22.4 million for the first nine months of fiscal 1997,
reflecting a $4.8 million increase from the same period in fiscal
1996. During the first nine months of fiscal 1997, construction
additions were supported by short-term debt and cash from
operations.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures may create a need for short-term
borrowing to supplement internally generated funds. As of June
30, 1997, Yankee Gas had a revolving line of credit of $60
million with a group of five banks. Under the agreement, funds
may be borrowed on a short-term revolving basis using either
fixed or variable rate loans. Yankee Gas also had uncommitted
credit lines of $27 million as of June 30, 1997. At June 30,
1997, Yankee Gas had $3 million outstanding borrowings on its
agreements. Yankee Energy had no outstanding borrowings at June
30, 1997 on its $15 million committed line of credit.
The long-term credit needs of Yankee Gas are being met by a first
mortgage bond indenture which provides for the issuance of bonds
from time to time, subject to certain issuance tests. At June
30, 1997, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $191 million
of bonds at an assumed interest rate of 7.8 percent.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. The Company has
hedged these commitments with the purchase of natural gas swaps.
In order to satisfy certain provisions of the arrangement, the
Company has provided a letter of credit for $2.0 million. The
Company's results of operations are unaffected by the hedge
transaction given that it passes through the cost of the hedge to
either the commodity trading firm or its customer depending on
the difference in the fixed and floating prices for gas.
Yankee Gas has received approximately $3.3 million in fiscal 1997
from insurance settlements for recovery of coal tar remediation
costs. As of June 30, 1997 total recoveries received from
insurance settlements are $9.1 million. Future recoveries
expected from insurance settlements cannot be determined at this
time but they are not expected to be significant. For further
information concerning coal tar remediation, please see the 1996
Form 10-K.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Not applicable.
<PAGE>
PART II - OTHER INFORMATION
Item 5. OTHER INFORMATION
On May 22, 1997, the Board of Directors of Yankee
Energy appointed John J. Rando a member of the Board in
order to fill one of two vacancies. Mr Rando's term as
director expires in 1999. Mr. Rando is vice president
and general manager of the Services Division of Digital
Equipment Corporation. Mr. Rando's experience and
enthusiasm will make a valuable addition to the Board.
Yankee Energy announced on July 7, 1997 that James M.
Sepanski has joined the Company as its chief financial
officer. Mr. Sepanski was formerly a partner at Arthur
Andersen, LLP, New York City. He has specialized in
the utility industry with most of his experience in
electric and gas utilities, both domestically and
internationally, which the Company believes will
contribute to its growth and success.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
__________________________
(Registrant)
Date: August 12, 1997 /s/ James M. Sepanski
___________________________
James M. Sepanski
Vice President and
Chief Financial Officer
Date: August 12, 1997 /s/ Nicholas A. Rinaldi
___________________________
Nicholas A. Rinaldi
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,577
<SECURITIES> 0
<RECEIVABLES> 45,848
<ALLOWANCES> 8,408
<INVENTORY> 7,764
<CURRENT-ASSETS> 51,697
<PP&E> 532,520
<DEPRECIATION> 188,995
<TOTAL-ASSETS> 468,685
<CURRENT-LIABILITIES> 42,430
<BONDS> 142,649
0
0
<COMMON> 52,268
<OTHER-SE> 121,929
<TOTAL-LIABILITY-AND-EQUITY> 468,685
<SALES> 282,684
<TOTAL-REVENUES> 282,684
<CGS> 154,048
<TOTAL-COSTS> 154,048
<OTHER-EXPENSES> 74,786
<LOSS-PROVISION> 4,256
<INTEREST-EXPENSE> 10,080
<INCOME-PRETAX> 39,665
<INCOME-TAX> 17,750
<INCOME-CONTINUING> 21,915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,915
<EPS-PRIMARY> 2.10
<EPS-DILUTED> 2.10
</TABLE>
