<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 MARCH 31, 1998 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT APRIL 30, 1998 10,499,430
<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
March 31,
1998 1997
_______ ______
(Thousands of Dollars,
except per share amounts)
<S> <C> <C>
Revenues
Utility Revenues $106,325 $126,570
Nonutility Revenues 6,868 998
_______ _______
Total Revenues 113,193 127,568
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 60,876 71,735
Operations 14,919 14,338
Maintenance 1,424 1,718
Depreciation and Amortization 5,055 4,485
Taxes other than Income Taxes 7,091 7,677
_______ _______
Total Operating Expenses 89,365 99,953
_______ _______
Operating Income 23,828 27,615
Other Income/Expense:
Other Income, net 181 71
Interest Expense, net 3,954 3,304
_______ _______
Income Before Income Taxes 20,055 24,382
Provision for Income Taxes 9,245 10,904
_______ _______
Net Income $ 10,810 $ 13,478
_______ _______
_______ _______
Basic Earnings per Common Share $ 1.03 $ 1.29
_______ _______
_______ _______
Basic Weighted Average Shares
Outstanding 10,483 10,450
_______ _______
_______ _______
Diluted Earnings Per Common Share $ 1.03 $ 1.29
_______ _______
_______ _______
Diluted Weighted Average Shares
Outstanding 10,493 10,452
_______ _______
_______ _______
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION> Six Months Ended
March 31,
1998 1997
____ ____
(Thousands of Dollars,
except per share amounts)
<S> <C> <C>
Revenues
Utility Revenues $203,443 $221,201
Nonutility Revenues 12,345 2,048
_______ _______
Total Revenues 215,788 223,249
_______ _______
Operating Expenses:
Cost of Gas/Goods Sold 117,015 122,992
Operations 30,152 27,925
Maintenance 2,615 3,318
Depreciation and Amortization 9,733 8,811
Taxes other than Income Taxes 12,111 13,549
________ ________
Total Operating Expenses 171,626 176,595
_______ _______
Operating Income 44,162 46,654
Other Income/Expense:
Other Income, net 250 72
Interest Expense, net 6,928 6,552
_______ _______
Income Before Income Taxes 37,484 40,174
Provision for Income Taxes 17,583 17,817
_______ _______
Net Income $ 19,901 $ 22,357
_______ _______
_______ _______
Basic Earnings Per Common Share $ 1.90 $ 2.14
_______ _______
_______ _______
Basic Weighted Average Shares
Outstanding 10,473 10,450
_______ _______
_______ _______
Diluted Earnings Per Common Share $ 1.90 $ 2.14
_______ _______
_______ _______
Diluted Weighted Average Shares
Outstanding 10,480 10,451
________ _______
________ _______
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, September 30,
1998 1997
________ ___________
(Unaudited)
(Thousands of Dollars)
<S>
ASSETS <C> <C>
Utility Plant, at original cost $536,167 $524,221
Less: Accumulated provision for
depreciation 200,345 192,506
________ ________
335,822 331,715
Construction work in progress 21,387 19,150
________ ________
Total Net Utility Plant 357,209 350,865
________ ________
Other Property and Investments 22,106 19,311
________ ________
Current Assets:
Cash and temporary cash
investments 4,197 2,239
Accounts receivable, net 61,524 27,002
Fuel supplies 1,989 10,370
Other materials and supplies 2,544 2,186
Accrued utility revenues 14,485 4,667
Prepaid taxes --- 8,031
Deferred gas costs, current portion 1,937 2,034
Other 3,902 5,901
_______ _______
Total Current Assets 90,578 62,430
_______ _______
Deferred Gas Costs, net --- 8,364
Recoverable Environmental
Cleanup Costs 33,737 31,667
Recoverable Income Taxes 9,831 11,038
Recoverable Postretirement
Benefits Costs 1,608 1,515
Other Deferred Debits 14,413 15,174
_______ _______
Total Assets $529,482 $500,364
_______ ________
_______ ________
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION> March 31, September 30,
1998 1997
_________ ____________
(Unaudited)
(Thousands of Dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,495,711
shares outstanding at March 31, 1998
and 10,454,414 outstanding at
September 30, 1997 $ 52,479 $ 52,272
Capital surplus, paid in 88,817 88,003
Retained earnings 39,319 26,431
Employee stock ownership
plan guarantee (600) (1,000)
________ ________
Total Common Shareholders' Equity 180,015 165,706
Long-term debt, net of
current portion 134,615 135,265
_______ _______
Total Capitalization 314,630 300,971
_______ _______
Current Liabilities:
Notes payable to banks 38,500 39,000
Long-term debt, current portion 4,017 4,017
Accounts payable 18,021 22,741
Accrued interest 3,066 2,008
Accrued taxes 16,866 ---
Pipeline transition costs payable 3,057 3,538
Other 5,463 6,480
_______ _______
Total Current Liabilities 88,990 77,784
_______ _______
Deferred Gas Costs, net 9,270 ---
Accumulated Deferred Income Taxes 63,513 68,205
Accumulated Deferred Investment
Tax Credits 8,514 8,703
Reserve for Environmental
Cleanup Costs 35,000 35,000
Postretirement Benefits Obligation 3,184 2,840
Other Deferred Credits 6,381 6,861
Commitments and Contingencies (Note 4) --- ---
________ ________
Total Capitalization and
Liabilities $529,482 $500,364
________ ________
________ ________
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION> Six Months Ended
March 31,
__________________
1998 1997
____ ____
(Thousands of Dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $19,901 $22,357
Adjusted for the following:
Depreciation and amortization 9,733 8,811
Equity earnings from investments (77) (117)
Deferred income taxes, net (3,674) (3,473)
Deferred gas costs activity and
other non-cash items 16,025 11,337
Changes in working capital:
Accounts receivable and accrued
utility revenues (44,340) (44,845)
Accounts payable (4,720) (7,377)
Prepaid taxes 24,897 23,977
Other working capital
(excludes cash) 9,694 11,899
_______ _______
Net cash provided by
operating activities 27,439 22,569
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock
issuance 1,040 1
Retirement of long-term debt (650) (650)
Decrease in short-term debt (500) (3,500)
Cash dividends-common stock (7,013) (6,792)
________ ________
Net cash used for financing
activities (7,123) (10,941)
________ ________
INVESTMENT IN PLANT AND OTHER:
Utility Plant (14,945) (11,619)
Other property and investments (3,413) (1,973)
________ ________
Net cash used for plant and other (18,358) (13,592)
________ _______
Net Increase (Decrease) in Cash and Temporary
Cash Investments for the Period 1,958 (1,964)
Cash and Temporary Cash Investments,
beginning of period 2,239 7,853
________ ________
Cash and Temporary Cash Investments,
end of period $ 4,197 $ 5,889
________ _______
________ _______
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts
capitalized $ 6,228 $ 6,743
Income taxes $ 856 $ 1,279
</TABLE>
The accompanying notes are an integral part of these consolidated
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. (the Company) on Form 10-K for
the fiscal year ended September 30, 1997 (1997 Form 10-K),
including the audited financial statements (and notes
thereto) incorporated by reference therein and the Company's
quarterly report on Form 10-Q for the quarter ended December
31, 1997. 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 March 31, 1998, and its results of operations
for the three and six months ended March 31, 1998 and 1997
and cash flows for the six months ended March 31, 1998 and
1997. The results of operations for the three and six
months ended March 31, 1998 and 1997 are not necessarily
indicative of the results expected for a full year, due
mainly to the highly seasonal nature of the gas business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas), is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which includes
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires a cost-
based, rate-regulated enterprise such as Yankee Gas to
reflect the impact of regulatory decisions in its financial
statements. The DPUC, through the rate regulation process,
can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an
unregulated enterprise.
Following the provisions of FAS 71, Yankee Gas has recorded
regulatory assets or liabilities as appropriate primarily
related to deferred gas costs, pipeline transition costs,
hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefits costs. The
specific amounts related to these items are disclosed in the
consolidated balance sheets. For additional information
about these items see the 1997 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, Yankee Gas believes that
its use of regulatory accounting is appropriate and in
accordance with the provisions of FAS 71.
3) EARNINGS PER SHARE
In fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS
128), which changes the method for computing earnings per
share and requires the Company to present basic and diluted
earnings per share. As a result, all prior periods have
been restated to reflect application of FAS 128. The effect
of this accounting change on previously reported earnings
per share data was immaterial.
4) COMMITMENTS AND CONTINGENCIES
The Company faces a number of contingencies which arise
during the normal course of business and which have been
discussed in Note 9 (entitled "Commitments and
Contingencies")to the Consolidated Financial Statements
included in the Company's 1997 Form 10-K Report. Except as
disclosed below, for the six months ended March 31, 1998,
there have been no material changes in the matters discussed
in Note 9, to the Company's 1997 Form 10K Report.
Rate Review: On July 9, 1997, the DPUC issued its decision
in Docket No. 96-08-05. The DPUC decision, which is not a
rate order, called for a lowering of Yankee Gas' authorized
Return on Equity (ROE) from 12.43 percent to 11.15 percent.
The DPUC believed that lower current interest rates and
recently allowed rates of return for other Connecticut
utilities justified a lower ROE for Yankee Gas. On October
1, 1997, the DPUC approved a settlement whereby Yankee Gas
will credit approximately $3.2 million to firm sales
customers through the Purchased Gas Adjustment (PGA) during
the period November 1997 through March 1998. As of March
31, 1998 approximately $2.5 million had been credited to
firm sales customers. The PGA credit was subsequently
extended through April 1998 to reduce the shortfall in the
amount refunded. Any remaining shortfall after April 1998
will be included in the annual deferred fuel calculation.
The settlement also allows Yankee Gas to maintain its base
rates until the end of fiscal year 2000, resulting in an
eight-year period in which Yankee Gas will have gone without
an increase in its base rates.
Legal Issues: In November 1995, a purported class action
suit was filed against Yankee Gas and the state's two other
LDCs by the Connecticut Heating and Cooling Contractors'
Association, Inc. et al,. 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.
On January 27, 1998, the judge in this matter struck 31 out
of the plaintiffs' 32 counts contained in their complaint
leaving only one count alleging violations of Connecticut's
anti-trust statute. The judge also noted that although the
plaintiffs action purports to be a class action, the
plaintiffs have failed to obtain certification as such.
Thereafter, the plaintiffs' filed another purported class
action against all three LDCs alleging unfair trade
practices and additional separate actions against each LDC
alleging various business torts. While the ultimate
resolution of the actions cannot be predicted, management
does not expect that they will have a material adverse
effect on the Company's consolidated results of operations
or financial position.
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 and the judge in this matter has recently
recommended that the parties attempt mediation/arbitration
of the issue. 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.
Tax Audits: The Company is currently under audit by the
State of Connecticut regarding its Gross Earnings Tax
returns for the calendar years 1994, 1995, and 1996.
The Company is currently under audit by the City of
Naugatuck, Connecticut regarding its Personal Property Tax
Schedules for the years 1995, 1996, and 1997.
The Company is currently under audit by the Internal Revenue
Service regarding its Federal Income Tax Return for the
calendar year 1995.
All of these audits are in preliminary stages, and therefore
the Company does not have sufficient information to
determine the amount, if any, of additional liability that
may result from these proceedings. However, the Company
does not anticipate any of these audits to have a material
effect on its financial position.
5) 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 Private
Securities Litigation Reform Act of 1995 (Reform Act). Such
forward-looking statements involve risks and uncertainties.
Actual results may differ materially from such forward-
looking statements for reasons including, but not limited
to, changes to and developments in the legislative and
regulatory environments affecting the Company's business,
the impact of competitive products and services, changes in
the natural gas industry caused by deregulation and other
factors, 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, 1997.
6) 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.
7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
<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 March 31, 1998, and the related
consolidated statements of income for the three-month and six-
month periods then ended, and cash flows for the six-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, 1997 (not presented herein), and, in our
report dated November 7, 1997, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying balance sheet as of September 30, 1997
is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
Arthur Andersen LLP
Hartford, Connecticut
April 27, 1998
<PAGE>
ITEM 2. Management's Discussion and Analysis
RESULTS OF OPERATIONS
Consolidated earnings were $10.8 million for the three months
ended March 31, 1998 compared to $13.5 million for the same
period a year earlier. The corresponding basic and diluted
earnings per share were $1.03 and $1.29 for the three months
ended March 31, 1998 and 1997, respectively.
Earnings for the second quarter of fiscal year 1998 decreased due
to weather that was 11 percent warmer than the same period last
year and 18 percent warmer than normal. The Company estimates
that the warmer weather in the current quarter reduced earnings
by $4.0 million or $0.38 per share compared with a normal level
of degree days. In addition, earnings decreased by approximately
$0.9 million or $0.09 per share for the three months ended March
31, 1998, due to customer bill credits which were the result of a
rate review settlement reached with the DPUC in October 1997. The
financial performance of the Company's non-regulated subsidiaries
improved over the same period in fiscal 1997. The expectation
for the remainder of the fiscal year, is for further growth and
performance improvement for unregulated operations as well as
continued efficiency improvement in the regulated business.
COMPARISON OF THE SECOND QUARTER OF FISCAL 1998 WITH THE SECOND
QUARTER OF FISCAL 1997
OPERATING REVENUES
Utility revenues decreased $20.2 million or 16.0 percent in the
second quarter of fiscal 1998 compared with the same period in
the prior fiscal year. This decrease was offset by a $5.9
million increase in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31, Increase/
1998 1997 (Decrease)
(Millions of Dollars)
<S> <C> <C> <C>
Firm sales $ 92,853 $113,787 $(20,934)
Firm transportation 5,419 1,985 3,434
Interruptible/off-system sales 5,409 8,878 (3,469)
Interruptible transportation 943 532 411
Other utility revenues 1,701 1,388 313
_______ _______ _______
Total Utility revenues 106,325 126,570 (20,245)
Nonutility revenues 6,868 998 5,870
_______ _______ _______
Total operating revenues $113,193 $127,568 $(14,375)
_______ _______ _______
_______ _______ _______
</TABLE>
The corresponding changes in Yankee Gas' throughput were as
follows:
<TABLE>
<CAPTION>
Quarter Ended
March 31, Increase/
(Mcf - thousands) 1998 1997 (Decrease)
<S> <C> <C> <C>
Firm sales 10,062 12,377 (2,315)
Firm transportation 2,849 1,241 1,608
Interruptible/
off-system sales 1,228 1,732 (504)
Interruptible
transportation 1,889 1,206 683
_______ ______ _____
Total throughput 16,028 16,556 (528)
_______ ______ _____
_______ ______ _____
</TABLE>
The change in utility revenues was due primarily to weather that
was 11 percent warmer than the prior year and customer bill
credits of $1.5 million which are reflected in the second
quarter of fiscal 1998. In addition, an increasing number of
commercial and industrial customers continue to shift from taking
sales gas to transportation service resulting in a decrease in
operating revenue. The increase in nonutility revenues in the
second quarter of fiscal 1998 compared to the same period in
fiscal 1997 is primarily due to additional activity resulting
from acquisitions.
OPERATING EXPENSES
Total operating expenses decreased $10.6 million in the second
quarter of fiscal 1998 compared with the same period in the prior
year as a result of the following items:
- Cost of gas decreased $15.3 million or 22 percent for
the three months ended March 31, 1998 compared to the
three months ended March 31, 1997 due primarily to a 20
percent reduction in the volume of sales gas.
- Cost of goods sold increased $4.4 million in the second
quarter of fiscal 1998 compared to the second quarter
of fiscal 1997 due to increased nonutility activity
resulting primarily from acquisitions.
- Operations and maintenance expenses increased $0.3
million, primarily due to increased expenses related to
non-regulated subsidiary activity, offset by decreases
in uncollectible and pension expenses from the utility
subsidiary.
- Depreciation and amortization expense increased $0.6
million, primarily due to additions in plant, property
and investments.
- Taxes other than income taxes decreased $0.6 million,
primarily due to lower Connecticut gross earnings taxes
in fiscal 1998 as a result of the reduction in
revenues, offset by a slight increase in municipal
taxes.
Interest expense increased $0.7 million primarily due to higher
short-term debt outstanding. This increase was partially offset
by a slight decrease in long-term debt interest expense,
primarily due to refinancing of long-term debt at more favorable
rates.
Federal and state income taxes decreased $1.7 million primarily
due to lower taxable income, partially offset by a higher
effective tax rate for the three months ended March 31, 1998
compared to the three months ended March 31, 1997.
COMPARISON OF THE FIRST SIX MONTHS OF FISCAL 1998 WITH THE FIRST
SIX MONTHS OF FISCAL 1997
OPERATING REVENUES
Utility revenues decreased $17.8 million or 8.0 percent in the
first six months of fiscal 1998 compared with the same period in
the prior fiscal year. This decrease was offset by a $10.3
million increase in operating revenues from nonutility
operations. The components of the change in operating revenues
are as follows:
<TABLE>
<CAPTION>
Six Months Ended
March 31, Increase/
1998 1997 (Decrease)
(Millions of Dollars)
<S> <C> <C> <C>
Firm sales $175,358 $196,573 $(21,215)
Firm transportation 9,938 3,057 6,881
Interruptible/off-system sales 13,459 18,594 (5,135)
Interruptible transportation 1,488 996 492
Other utility revenues 3,200 1,981 1,219
_______ _______ _______
Total utility revenues 203,443 221,201 (17,758)
Nonutility revenues 12,345 2,048 10,297
_______ _______ _______
Total operating revenues $215,788 $223,249 $ (7,461)
_______ _______ _______
_______ _______ _______
</TABLE>
<PAGE>
The corresponding changes in Yankee Gas' throughput were as
follows:
<TABLE>
<CAPTION>
Six Months Ended
March 31, Increase/
(Mcf - thousands) 1998 1997 (Decrease)
<S> <C> <C> <C>
Firm sales 19,413 22,072 (2,659)
Firm transportation 5,098 1,868 3,230
Interruptible/
off-system sales 2,994 3,847 (853)
Interruptible
transportation 3,216 2,677 539
______ ______ ______
Total throughput 30,721 30,464 257
______ ______ ______
______ ______ ______
</TABLE>
The change in operating revenues from utilities primarily
reflects weather that was 3.7 percent warmer in fiscal 1998 and
customer bill credits of $2.5 million. In addition, an
increasing number of commercial and industrial customers continue
to shift from taking sales gas to transportation service
resulting in a decrease in operating revenue. Offsetting these
changes was an increase in nonutility revenues in the first six
months of fiscal 1998 compared to the same period in fiscal 1997.
OPERATING EXPENSES
Total operating expenses decreased $5.0 million in the first six
months of fiscal 1998 compared with the same period in the prior
year as a result of the following items:
- Cost of gas decreased $14.0 million or 11 percent for
the six months ended March 31, 1998 compared to the six
months ended March 31, 1997 due primarily to a 14
percent decrease in the volume of sales gas.
- Cost of goods sold increased $8.0 million in the first
six months of fiscal 1998 compared to the first six
months of fiscal 1997 due to increased nonutility
activity.
- Operations and maintenance expenses increased $1.5
million, primarily due to increased expenses related to
nonutility activity, offset by decreases in
uncollectible, maintenance and pension expenses,
related to the utility subsidiary.
- Depreciation and amortization expense increased $0.9
million, primarily due to additions in plant, property
and investments.
- Taxes other than income taxes decreased $1.4 million,
primarily due to lower Connecticut gross earnings taxes
in fiscal 1998 as a result of the reduction in revenues
and lower unemployment taxes, partially offset by an
increase in municipal taxes.
Interest expense increased $0.4 million mainly due to higher
short-term debt outstanding. This was partially offset by a
decrease in interest expense associated with lower long-term debt
outstanding and lower interest rates.
Federal and state income taxes decreased $0.2 million primarily
due to lower taxable income, offset by a higher effective tax
rate for the six months ended March 31, 1998 compared to the six
months ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at March 31, 1998 totaled
$4.2 million. Principal sources of cash for the six months ended
March 31, 1998 were net income, common stock issued, and deferred
gas costs. These funds were used primarily for dividend
payments, investment in plant, property and investments, changes
in working capital and reducing short- and long-term debt.
Expenditures for plant, property and investments totaled $18.4
million for the first six months of fiscal 1998, reflecting a
$5.1 million increase over the first six months of fiscal 1997.
During the first six months of fiscal 1998, additions were
primarily funded through short-term debt.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures create a need for short-term borrowing
to supplement internally generated funds. As of March 31, 1998,
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 March 31, 1998. At March 31, 1998, Yankee Gas had
$27.0 million outstanding under its agreements. Yankee Energy had
$11.5 million outstanding at March 31, 1998 under its $15 million
committed line of credit which is used to fund acquisitions and
other capital requirements of the unregulated businesses.
Management is currently contemplating new long-term debt
financing in fiscal 1999 for the purposes of replacing a portion
of the existing short-term debt outstanding and to refinance
Series A, Tranche D which becomes redeemable by the Company in
August 1999.
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 March
31, 1998, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $201 million
of bonds at an assumed interest rate of 6.9 percent.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In
order to satisfy certain provisions of the arrangement, Yankee
Gas has provided a letter of credit for $1.5 million, as of March
31, 1998. 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 expects to incur expenditures for coal tar remediation
efforts, which is more fully discussed in Note 9 to the
Consolidated Financial Statements, included in the Company's 1997
Form 10-K Report. Yankee Gas expects to finance such
expenditures through a combination of internally generated funds,
short-term debt, and through insurance settlements, which have
totaled $9.6 million as of March 31, 1998.
RECENT DEVELOPMENTS
One of Yankee Gas' largest customers, the Foxwoods Hotel and
Casino (Foxwoods), operated by the Mashantucket Pequot Indian
Tribe, generates approximately $650,000 in annual margin. The
City of Norwich, Connecticut has begun construction of a pipeline
extending from their distribution system to Foxwoods. This will
provide an alternative source of supply to the Mashantucket
Pequots. Yankee Gas believes that it will have the opportunity
to compete to retain gas throughput to Foxwoods as well as the
continuing utilization of the existing distribution system on
tribal lands.
The Company is currently implementing new systems and enhancing
existing systems to address year 2000 issues. Management
believes that all system changes will be installed and tested
prior to the manifestation of year 2000 issues. However, if such
changes are not completed timely, the year 2000 issue may have a
material impact on the operations of the Company. Currently, all
such charges associated with system enhancements have and will
continue to be expensed and the costs of new systems will be
capitalized as appropriate and are not expected to be
significant.
Management has recently reviewed the organizational structure of
various operating functions of Yankee Gas. Management has
determined that the most efficient and cost-effective way for the
Company to operate is to provide repairs, inspections and other
equipment work for only those residential customers who have
purchased a service contract. The Company has filed an
application with the DPUC for approval to cease providing these
non-contract services. If the application is approved, the
Company will no longer repair or inspect appliances of
residential customers who do not purchase a service contract.
The Company will continue to respond to all gas emergencies
within our service area. This change is not expected to have a
material impact on the Company's financial condition.
The Company recently announced an alliance between its wholly-
owned subsidiary RM Services (RMS) and Dun & Bradstreet
Receivable Management Services (D&B). The alliance allows RMS to
extend its collections in the transitioning energy and
telecommunication industries under the D&B name. RMS has
extensive experience and specialized skills in residential
utility collection practices and computer aided calling
technology. This alliance provides for new opportunities in the
deregulated energy and telecommunications industries as well as
in other industries.
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable.
PART II OTHER INFORMATION
Item 5. OTHER INFORMATION
None.
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: May 12, 1998 /s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
Date: May 12, 1998 /s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller
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