<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 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)
599 Research Parkway
Connecticut 06-1236430 Meriden, CT 06450-1030
- ---------------- ------------ ---------------------- ------------
(State or other (I.R.S. Employer (Address of principal (Zip Code)
jurisdiction of Identification No.) executive offices)
incorporation or
organization)
(203) 639-4000
------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 7, 1998 was $303,472,555.04 based on the closing price of
$28.81 per share. On December 7, 1998, the Company had 10,583,887 shares of
common stock outstanding.
Documents Incorporated by Reference Part of Form 10-K
- ----------------------------------- ------------------
Annual Report to Shareholders for the
Fiscal Year Ended September 30, 1998 Part II
Proxy Statement For Annual Shareholders'
Meeting to be held on January 29, 1999 Part III
<PAGE>
YANKEE ENERGY SYSTEM, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I
Item 1. Business...................................................................................
The Company ........................................................................
Gas Markets and Customers...........................................................
Gas Supply .........................................................................
Regulation and Rates ...............................................................
Energy Services ....................................................................
Competition ........................................................................
Environmental Matters ..............................................................
Franchises .........................................................................
Employees ..........................................................................
Forward-Looking Statements .........................................................
Item 2. Properties ................................................................................
Item 3. Legal Proceedings .........................................................................
Item 4. Submission of Matters to a Vote of Security Holders .......................................
Executive Officers of the Company .........................................................
PART II
Item 5. Market for Company's Common Equity and Related Stockholders Matters........................
Item 6. Selected Financial Data ...................................................................
Item 7. Management's Discussion and Analysis of Financial Conditions and Results Of Operations.....
Item 7a. Quantitative and Qualitative Disclosures About Market Risk ................................
Item 8. Financial Statements and Supplementary Data................................................
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.......
PART III
Item 10. Directors and Executive Officers of the Company............................................
Item 11. Executive Compensation.....................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................
Item 13. Certain Relationships and Related Transactions ............................................
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................
Signatures.................................................................................
</TABLE>
<PAGE>
PART 1
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 183,000 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 position itself in the market place as a provider of a full range of
energy-related mechanical services to commercial, industrial and institutional
customers.
Yankee Energy Services Company ("YESCo") provides comprehensive building
automation services, including engineering, installing, and maintaining building
control systems through its YESCo Controls Division and comprehensive heating
ventilation and air-conditioning ("HVAC"), boiler and refrigeration equipment
services and installation through its YESCo Mechanical Services Division.
During fiscal 1998, YESCo's Power Division also provided expertise related to
the production of thermal and/or electric power. R.M. Services, Inc., directly
and under contract with Dun and Bradstreet Receivables Management Services,
provides residential collection services for companies throughout the United
States, and Yankee Energy Financial Services Company ("Yankee Financial")
provides a full range of equipment and home improvement financing services
through various programs, such as the Hometown Energy Loan Program. Finally,
NorConn Properties, Inc. ("NorConn"), owns selected system real estate and
leases it to Yankee Gas.
After completing a recent review of the various operating functions of YESCo,
management of the Company has decided to focus the efforts of YESCo on its
Controls and HVAC lines of business and to significantly reduce its cost
structure. As a result, the Company intends to dispose of the assets of the
YESCo Power Division in fiscal 1999. In addition, the Company has restructured
its HVAC business, including the consolidation of four locations into one
operating center, the elimination of redundant administrative and operating
positions and better focusing its business both geographically by ceasing all
non-Connecticut activities and operationally by discontinuing its HVAC equipment
sales operation.
GAS MARKETS AND CUSTOMERS
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 1998 was 47.1 billion
cubic feet ("Bcf"). In fiscal 1998, total gas operating revenues were comprised
of the following: 47% residential; 26% commercial; 18% industrial; and the
remaining 9% 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
<PAGE>
services to customers who purchase gas from sources other than Yankee Gas. In
addition, Yankee Gas performs gas exchanges and capacity releases to marketers
to reduce its overall gas expense.
Firm Sales. In fiscal 1998, total firm gas sales of 26 Bcf accounted for
approximately 84% of total throughput and approximately 84% of the Company's
total operating revenues. Firm gas sales, particularly sales for residential
space heating, are highly seasonal. In fiscal 1998, about 65% 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 1998.
FISCAL 1998 FIRM SALES
<TABLE>
<CAPTION>
Volumes as
Average Number Volumes a Percent of
of Customers in Bcf Revenues Firm Sales
-------------- ------- -------- ------------
<S> <C> <C> <C> <C>
Residential 160,917 11.9 $134,359,345 46
Commercial 17,762 6.9 66,726,188 26
Industrial 1,728 7.3 36,051,517 28
------- ---- ------------ ---
180,407 26.1 $237,137,050 100%
</TABLE>
Interruptible Sales. In fiscal 1998, total interruptible gas sales of 4.9
Bcf accounted for approximately 16% of total throughput and approximately 7% of
the Company's total 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 authorization from the Connecticut Department of Public Utility
Control (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
1998.
FISCAL 1998 INTERRUPTIBLE SALES
<TABLE>
<CAPTION>
Average Number Volumes
of Customers in Bcf Revenues
-------------- ------- --------
<S> <C> <C> <C>
Commercial and Industrial 241 4.9 $20,066,670
</TABLE>
Transportation Services. Yankee Gas offers firm and interruptible
transportation service to its industrial and commercial customers. In fiscal
1998, total transportation sales accounted for approximately 8% of the Company's
total operating revenues. 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 arrangements with the transmission pipelines
to deliver their gas to the Yankee Gas distribution system. Industrial and
commercial 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.
<PAGE>
Market Expansion Strategy. The Company is near completion of a customer and
market segmentation study that the Company believes will provide an in-depth
analysis of customer use of the Company's products and services and will be used
to identify additional sales opportunities. As this study is completed,
marketing information about current customers and new opportunities will direct
the Company's efforts to expand its distribution service. These efforts are
expected to focus 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
infrared heating, cooling and electric generation. The Company also emphasizes
attracting new commercial and industrial customers within 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 110 natural gas vehicles.
GAS SUPPLY
In 1992, the Federal Energy Regulatory Commission ("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' 1998 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 99.9 percent of the year.
The following table sets forth sources of fiscal 1998 gas supply (including
purchases for storage injections):
<TABLE>
<CAPTION>
Percent of
Source Total Supply
------ ------------
<S> <C>
Alberta Northeast Gas, Limited 54.76
Other Canadian Supplies 21.72
Domestic Supply 23.51
Other (Peaking) 0.01
------
Total 100.00%
</TABLE>
<PAGE>
Yankee Gas is entitled to purchase 68,460 thousand cubic feet ("Mcf") per
day of gas, or about 25 Bcf annually, from Canadian gas suppliers. The sales
contracts between Yankee Gas and its Canadian suppliers expire in 2003 and 2006.
Most of the gas purchased from the Canadian suppliers is delivered in the United
States by the Iroquois Gas Transmission System, L.P. ("Iroquois"). The
transportation contract between Yankee Gas and Iroquois expires in 2011.
During fiscal 1998, Yankee Gas' largest Canadian supplier was Alberta
Northeast Gas, Limited ("ANE"). ANE is an entity formed by several utilities in
the Northeast to aggregate the purchase of gas from Western Canada and to
facilitate its sale to local gas distribution company ("LDC") owners at the
United States-Canadian border. Yankee Gas held a 15.9 percent equity interest in
ANE until July 1, 1998 at which time Yankee Gas reduced its equity interest to
5.3 percent.
Yankee Gas also holds pipeline transportation and storage service contracts
with Tennessee Gas Pipeline Company ("Tennessee"), Algonquin Gas Transmission
Company ("Algonquin"), Texas Eastern Transmission Corporation ("Texas Eastern"),
CNG Transmission Corporation ("CNG Transmission"), Transcontinental Gas Pipe
Line Company ("Transco"), and National Fuel Gas Supply Corporation ("National
Fuel") as summarized below:
TRANSPORTATION SERVICE CONTRACTS:
<TABLE>
<CAPTION>
Annual Transport
Pipeline Quantity Expiration
-------- -------- ----------
<S> <C> <C>
Tennessee 27.7 Bcf 2000-2017
Algonquin 39.6 Bcf 1999-2014
Texas Eastern 38.2 Bcf 2000-2014
CNG Transmission 2.7 Bcf 2003-2012
Transco 0.63 Bcf 2008
National Fuel 2.63 Bcf 1999-2003
</TABLE>
STORAGE SERVICE CONTRACTS:
<TABLE>
<CAPTION>
Annual Storage
Pipeline Quantity Expiration
-------- -------- ----------
<S> <C> <C>
Tennessee 1.9 Bcf 2000
Texas Eastern 1.7 Bcf 2012-2013
CNG Transmission 1.4 Bcf 2003-2012
National Fuel 0.8 Bcf 1999
</TABLE>
Although several contracts are scheduled to terminate during 1999 and 2000,
they may be continued on a year to year basis by mutual consent of the parties.
Yankee Gas has terminated its National Fuel storage and 2 Bcf of its National
Fuel transportation effective March 31, 1999. Yankee Gas has also terminated 1.8
Bcf of Algonquin transportation effective October 31, 1999. Yankee Gas has
entered comprehensive gas supply agreements with Engage Energy US, L.P.
("Engage") and TransCanada Gas Services Inc. ("TransCanada") which optimize
portions of its supply portfolio. Specifically, the Engage agreement
<PAGE>
optimizes gas supply delivered to Yankee Gas by Algonquin and expires in 2000
while the TransCanada agreement optimizes gas supply delivered by Tennessee and
expires in 2001. Under these agreements, the supplier delivers Yankee Gas' full
fuel requirements on the respective pipeline while optimizing the value of the
supply and associated transportation and storage during off-peak conditions. The
agreements also provide Yankee Gas with enhanced supply flexibility.
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 curtailed.
Yankee Gas supplements pipeline gas with a propane-air mixture produced at
facilities within Yankee Gas' service territory and with contracted peaking gas
supplies. In fiscal 1998, these gas supplies comprised less than 1 percent of
Yankee Gas' total supply.
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.
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.
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
between actual purchased gas costs and the costs included in Yankee Gas' base
rates. In 1997, the DPUC conducted a review of the Connecticut LDCs' PGA
mechanism to determine if any changes were warranted. The most significant
change approved by the DPUC was the authorization for LDCs to pass on to
customers the costs of the Connecticut Gross Earnings Tax related to PGA
revenues.
Yankee Gas' rate order, effective for service rendered on and after October
1, 1992, allowed a return on equity (ROE) of 12.43 percent and provided for
favorable accounting treatment for environmental cleanup costs, post-retirement
benefits and certain other major items.
On August 25, 1996, Yankee Gas filed an application with the DPUC for a
Financial and Operation Review (Review) of Yankee Gas. This Review was required
under Connecticut law because Yankee Gas had not undergone a rate proceeding
within the four years preceding the 1996 application. The DPUC issued a decision
on July 9, 1997, which called for a reduction of Yankee Gas' ROE from 12.43
percent to 11.15 percent. The DPUC believed that lower interest rates and
allowed rates of return for other Connecticut
<PAGE>
utilities justified a lower ROE for Yankee Gas. On October 1, 1997, the DPUC
approved an amendment to the settlement agreement between Yankee Gas and the
Connecticut Office of Consumer Counsel that, among other things, required Yankee
Gas to credit $3.2 million to firm sales customers through the PGA during fiscal
1998. As of September 30, 1998, the entire $3.2 million had been accrued and
approximately $2.9 million had been credited to firm sales customers. The
remaining $0.3 million has been included in the Company's annual deferred fuel
calculation and credited to firm sales customers beginning in October 1998.
Pursuant to the settlement agreement with the Connecticut Office of
Consumer Counsel, Yankee Gas agreed not to apply for a rate increase prior to
October 1, 2000, except in the event of certain circumstances that would have a
significant adverse effect on 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.
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, 1998, Yankee Gas has
paid approximately $20.5 million of transition costs and an additional $2.5
million are anticipated. To date, Yankee Gas has collected $46.3 million through
a combination of credits received from pipeline refunds, capacity release
agreements, deferred gas costs credits, off system sales margins and excess
interruptible margins. The DPUC approved the settlement agreement in January
1996 and an amendment thereto in October 1997 between Yankee Gas and the
Connecticut Office of Consumer Counsel that permits Yankee Gas to retain
over-collected transition cost credits to offset certain deferred regulatory
assets. As of September 30, 1998, excess collections of approximately $25.8
million were applied against the deferred regulatory assets specified in the
agreement.
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. In October, 1998, the DPUC issued a decision making a number of
modifications to the commercial and industrial firm transportation program.
These modifications, which will become effective on January 1, 1999, are
designed to simplify and improve the program based on the initial firm
transportation experience. As of September 30, 1998, Yankee Gas had
approximately 3,100 customers under 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 these customers who will purchase 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. The DPUC's decision did not address
Yankee Gas' revenue requirement.
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.
<PAGE>
ENERGY SERVICES
On May 6, 1998, Yankee Gas filed an application with the DPUC to
discontinue on-demand, non-contract service work. Following the issuance of a
draft decision requiring Yankee Gas to continue to provide this type of service
work, Yankee Gas withdrew its application. Yankee Gas intends to petition the
DPUC for an increase in the applicable service rates. This decision will not
have a material impact on the Company's financial condition or results of
operations.
The Company has refocused its mission to diversify into energy-related
businesses. This has resulted in a restructuring of YESCo, which included
consolidation of facilities and elimination of certain positions of the HVAC
division and a decision to close down the Power Division and sell its Power
Projects. The elimination of redundant administrative and operating positions
better focuses the business both geographically by ceasing all non-Connecticut
activities and operationally by discontinuing HVAC equipment sales operation.
YESCo provides comprehensive building automation services, including
engineering, installing, and maintaining building control systems through its
YESCo Controls Division and comprehensive HVAC, boiler and refrigeration
equipment services and installation through its YESCo Mechanical Services
Division. During fiscal 1998, YESCo's Power Division also provided expertise
related to the production of thermal and/or electric power.
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 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
believes that deregulation of the sale of natural gas has created an opportunity
for its commercial and industrial customers to achieve savings on the purchase
price of natural gas by helping its customers lower the purchase price of
natural gas. The Company believes it will achieve more throughput through its
distribution system. This volume increase is expected to result in higher
transportation margin. The Company further believes that increasing competition
in gas marketing will result in growth in the Company's gas distribution
business. There can be no assurance, however, that such deregulation and
increased competition in gas marketing will have a beneficial effect on the
Company's results of operations.
Federal regulation also permits customers within Yankee Gas' distribution
system to connect directly with transmission pipelines and bypass Yankee Gas'
distribution system. A Connecticut statute currently prohibits an interstate
pipeline from bypassing a 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. There is, however, a potential risk
of loss of revenues from bypass of Yankee Gas' distribution system.
<PAGE>
One of Yankee Gas' largest customers during fiscal 1998 was the Foxwoods
Hotel and Casino (Foxwoods), operated by the Mashantucket Pequot Indian Tribe,
(the "Pequots"). The City of Norwich, Connecticut has completed construction of
a pipeline extending from its distribution system to Foxwoods and began service
to Foxwoods on December 1, 1998. Norwich, pursuant to its agreement with the
Pequots, will become the sole provider of gas transportation service to the
Pequots. The Company is currently negotiating with the Pequots to recover its
investment in facilities previously constructed to serve them.
ENVIRONMENTAL MATTERS
The Company is subject to federal and state environmental regulation of
its operations and properties and has an ongoing monitoring program to review
compliance with existing environmental standards. Such regulation may result in
future environmental liabilities that may include significant expenses to
remove, contain or remediate contamination, including coal tar deposits, caused
by operations of former gas manufacturing plants by Yankee Gas' predecessor
companies prior to the introduction of pipeline gas into the region during the
1950s. Those predecessor companies disposed of the coal tar 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"). Eight of the fourteen sites are
currently 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.
Significant remediation efforts have been conducted at three of these
properties. In addition, the Company has developed a cost estimate for the
remaining sites based on various factors including the probability of clean-up.
The Company recorded a liability of $35 million in fiscal year 1993 for future
environmental cleanup.
Recovery of remediation costs has been specifically allowed by Yankee Gas'
1992 rate case decision. Currently, $325,000 is allowed annually in rates and an
additional $2.5 million annually may be deferred. If costs are expected to
exceed $2.5 million on an annual basis, Yankee Gas is required to petition the
DPUC for review and additional authorization. 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 expects to finance environmental remediation expenditures
through a combination of internally generated funds, short-term debt and through
funds received 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, which funds have totaled $9.6 million as of
September 30, 1998.
Management does not believe that the Company's environmental expenditures
will have a material adverse effect on its operations, liquidity or financial
position, based on known facts and existing laws and regulations and the
anticipated period over which expenditures will be made.
<PAGE>
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.
EMPLOYEES
Yankee Energy has no employees. Its subsidiaries employ approximately 830
people.
FORWARD-LOOKING STATEMENTS
This report contains 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. Such
forward-looking statements, including statements regarding the Company's
expectations for demand and sales of natural gas and related services, 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, weather and other factors,
certain environmental matters, internal and/or third party delays or failures in
achieving Year 2000 compliance and other risks described in this report and the
Company's other filings with the Securities and Exchange Commission.
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 245,000 Mcf. 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 buildings in
Meriden, Waterbury, Torrington, Mystic, 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.
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Municipal Tax Assessment. 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 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 assessed by the City. Yankee
Gas is currently in the process of litigating this retroactive reassessment and
the Court recently recommended that the parties attempt mediation/arbitration of
the issue. The parties have begun the process and are currently selecting a
mediator acceptable to both. Although it is anticipated that the outcome of the
City's 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.
Licensing Issue. In November 1995, The Connecticut Heating and Cooling
Contractors Association, Inc. and others filed a purported class action suit
against Yankee Gas and Connecticut's two other LDCs, Connecticut Natural Gas
Corporation and The Southern Connecticut Gas Company in Connecticut Superior
Court. The action alleges that the LDCs unfairly competed with licensed plumbers
and contractors by performing customer service work using employees who did not
possess Connecticut state trade licenses. In January 1998, the court struck 31
of the plaintiffs' 32 counts contained in their complaint, leaving one count
alleging violations of Connecticut's antitrust statute. The court also ruled
that although the plaintiffs' action purported to be a class action, the
plaintiffs 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.
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 affirmed on appeal. In 1995, the
Connecticut General Assembly enacted legislation that established prospectively
a separate procedure for State certification of gas service employees.
Recently, the lawsuits were transferred to the Complex Litigation Docket
of the Superior Court where the presiding judge chose to try the case against
Connecticut Natural Gas ("CNG") first and no other material action in Yankee
Gas' lawsuit will be taken pending the outcome of the CNG trial which is
expected to commence in August 1999. While the ultimate results of the suits
cannot be determined, management does not expect that they 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 1998.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
NAME AGE POSITION AND BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- ---- --- -------------------------------------------------------
Charles E. Gooley 45 President and Chief Executive Officer of the Company
and Chairman and Chief Executive Officer of its direct
subsidiaries, Yankee Gas, Yankee Financial, YESCo and
NorConn since September 1998 and President of Yankee
Gas since May 1997. Previously, he served as Executive
Vice President of the Company and its direct
subsidiaries, Yankee Gas, YESCo, NorConn, and Yankee
Financial, from July 1994 to September 1998, and as
Vice President, General Counsel and Assistant Secretary
of the Company from July 1989 to July 1994.
J. Kingsley Fink 46 Vice President-Operations of Yankee Gas since October
1997. Previously, he was President of his own
consulting company from 1996 to 1997. Prior thereto he
served in various operating positions at Florida Power
and Light Company over a 14-year period.
Mary J. Healey 47 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.
Thomas J. Houde 51 Vice President of the Company and its direct
subsidiary, Yankee Gas, since January 1992. Previously,
he served as Director, Corporate Planning, Rates and
Economic Analysis of Yankee Gas from March 1990 to
December 1991.
Steven P. Laden 50 Vice President of the Company and its direct
subsidiary, Yankee Gas 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.
Ellen J. Quinn 42 Vice President of the Company and Yankee Gas since May
1995. Previously, she served as Director, Corporate and
Environmental Planning from October 1992 to May 1995,
and as Manager, Corporate and Environmental Planning
from March 1990 to October 1992.
James M. Sepanski 41 Vice President and Chief Financial Officer of the
Company and its direct subsidiaries, Yankee Gas, YESCo,
NorConn, and Yankee Financial, and President of RM
Services, Inc., since July 1997. From 1989 to June
1997, he was a partner at Arthur Andersen LLP.
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.
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Yankee Energy declared and paid regular quarterly cash dividends in fiscal
1997 and 1998. The dividend paid for the first two quarters of 1997 was $.325
per share and $.335 per share in the last two quarters of 1997. The dividend
paid for the first two quarters of 1998 was $.335 per share and $.345 per share
in the last two quarters of 1998. Other information required by this item is
incorporated herein by reference to Yankee Energy's 1998 Annual Report to
Shareholders ("1998 Annual Report"), subsection entitled "Shareholder and Stock
Information".
ITEM 6. SELECTED FINANCIAL DATA
Information required by this item is incorporated herein by reference to the
1998 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
1998 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 1998 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
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 29, 1999 (the "1999 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 1999 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
1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain transactions of the Company is incorporated
herein by reference to the 1999 Proxy Statement.
<PAGE>
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 1998 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, 1998, 1997 and 1996.
(iii) Consolidated Balance Sheets at September 30, 1998 and 1997.
(iv) Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
(v) Consolidated Statements of Capitalization at September 30,
1998 and 1997.
(vi) Consolidated Statements of Common Shareholders' Equity for the
years ended September 30,1998, 1997 and 1996.
(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, 1998, 1997 and 1996............... S-2
3. Exhibits:
Exhibits for Yankee Energy are listed in the Index to Exhibits.. E-1
(b) Reports on Form 8-K:
On October 29, 1997, the Company filed a Current Report on Form 8-K dated
October 1, 1997, reporting in Item 5 thereof the final decision of the
Connecticut Department of Public Utility Control in the Financial and
Operational Review of Yankee Gas Services Company.
On October 5, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, reporting in Item 5 thereof the resignation of Branko Terzic
as Chairman, CEO and President of the Company and its subsidiaries and the
appointment by the Board of Directors of Charles E. Gooley as his successor.
<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 8, 1998 By /s/ Charles E. Gooley
---------------------
Charles E. Gooley
President, Chief Executive Officer and a Director
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 8, 1998 President, Chief Executive /s/ Charles E. Gooley
---------------------
Officer and a Director Charles E. Gooley
December 8, 1998 Vice President and /s/ James M. Sepanski
---------------------
Chief Financial Officer James M. Sepanski
December 8, 1998 Controller /s/ Nicholas A. Rinaldi
-----------------------
Nicholas A. Rinaldi
December 8, 1998 Chairman of the Board /s/ Emery G. Olcott
--------------------
Emery G. Olcott
December 8, 1998 Director /s/ Sanford Cloud, Jr.
----------------------
Sanford Cloud, Jr.
December 8, 1998 Director /s/ Eileen S. Kraus
-------------------
Eileen S. Kraus
December 8, 1998 Director /s/ John J. Rando
-----------------
John J. Rando
December 8, 1998 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 annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated November 16, 1998. 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 states 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 16, 1998
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1998
SCHEDULE II
(Thousands of Dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------------------
(1) (2)
Balance at Charged to Charged to
beginning costs and other accounts- Deductions- Balance at
Description of period expenses describe describe end of period
- ----------------------------------------------------------------------------------------------------------------------------------
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
<S> <C> <C> <C> <C> <C>
Reserves for uncollectible
accounts $7,713 $6,477 $0 $6,058(a) $ 8,132
====== ====== == ========= =======
Other property and
investment impairment:
$ 0 $2,037 $0 $ 0 $ 2,037
------ ------ -- --------- -------
TOTAL $7,713 $8,514 $0 $6,058 $10,169
RESERVES NOT APPLIED AGAINST ASSETS:
Injuries and
damages(b) $1,038 $ 300 $0 $ 751 $ 587
Medical(d) $1,042 $2,246 $0 $2,408(e) $ 880
Restructuring $ 0 $ 925 $0 $ 0 $ 925
------ ------ -- --------- -------
TOTAL $2,080 $3,471 $0 $3,159 $ 2,392
====== ====== == ========= =======
</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>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEAR ENDED SEPTEMBER 30, 1997
SCHEDULE II
(Thousands of Dollars)
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Additions
----------------------------------
(1) (2)
Balance at Charged to Charged to
beginning costs and other accounts- Deductions- Balance at
Description of period expenses describe describe end of period
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Reserves for uncollectible
accounts $7,259 $4,673 $0 $4,219(a) $7,713
RESERVES NOT APPLIED AGAINST ASSETS:
Injuries and
damages (b) $1,510 $1,230 $0 $1,702(c) $1,038
Medical(d) $1,118 $2,385 $0 $2,461 $1,042
------ ------ -- ------ ------
TOTAL $2,628 $3,615 $0 $4,163 $2,080
====== ====== == ====== ======
</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, 1996
SCHEDULE II
(Thousands of Dollars)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
ADDITIONS
----------------------------------
(1) (2)
Balance at Charged to Charged to
beginning costs and other accounts- Deductions- Balance at
Description of period expenses describe describe end of period
- ----------------------------------------------------------------------------------------------------------------------------------
RESERVES DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
<S> <C> <C> <C> <C> <C>
Reserves for uncollectible
accounts $5,481 $5,608 $0 $3,830(a) $7,259
RESERVES NOT APPLIED
AGAINST ASSETS:
Injuries and
damages(b) $ 801 $1,462 $0 $ 753(c) $1,510
Medical(d) $1,273 $2,277 $0 $2,382(e) $1,118
------ ------ -- --------- ------
Total $2,074 $3,689 $0 $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>
INDEX TO EXHIBITS
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 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 dated July 20, 1989
between United Bank & Trust Company, as Trustee of the
Trust of the 401(k) Employee Stock Ownership Plan and The
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 of Trust
dated April 1, 1992 between Yankee Gas and The Connecticut
National Bank, as (Incorporated by reference to Form 1992
("Form S-3")).
<PAGE>
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 Indenture 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).
4.15 Fourth Supplemental Indenture of Mortgage and Deed of
Trust dated April 1, 1997 between Yankee Gas and Fleet
National Bank, as Trustee. (Incorporated by reference to
Form 10-K for the fiscal year ended September 30, 1997,
File No. 0-10721 ("1997 Form 10-K")).
4.16 Bond Purchase Agreement dated April 1, 1997 between Yankee
Gas and Purchaser. (Incorporated by reference to 1997 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
(Incorporated by reference to Form 10-K for the fiscal
year ended September 30, 1996, File No. 0-10721 ("1996
Form 10-K")).
10.6+ 1991 Long-Term Incentive Compensation Plan (Incorporated
by reference to Proxy Statement dated December 24, 1990).
<PAGE>
10.7+ Non-Employee Directors' Stock Compensation Plan
(Incorporated by reference Form 10-K for the fiscal year
ended September 30, 1991, File No. 0-17605 ("1991 Form 10-
K").
10.8+ Severance Pay Plan (Incorporated by reference to 1991 Form
10-K).
10.9 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")).
10.10 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).
10.11 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).
10.12 Transportation Agreement dated February 7, 1991 between
Iroquois Gas System, L.P. ("Iroquois") and Yankee Gas for
transportation of Canadian gas purchased (Incorporated by
reference to Form S-1).
10.13 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).
10.14 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).
10.15 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).
10.16 Service Agreement dated February 7, 1991 between ANE and
Yankee Gas for purchase of gas from TransCanada Pipelines
(Incorporated by reference to Form S-1).
10.17+ Form of Change in Control Executive Severance Agreement
for Charles E. Gooley, Mary J. Healey, Thomas J. Houde,
Steven P. Laden, Ellen J. Quinn, James M. Sepanski, and J.
Kingsley Fink (Incorporated by reference to 1995 Form 10-
K).
10.18 $60 million Revolving Credit Agreement among Yankee Gas
and several banks dated February 2, 1995. (Incorporated by
reference to 1995 Form 10-K).
10.19 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).
<PAGE>
10.20 Stipulation and Agreement dated January 3, 1996 between
Yankee Gas and the Office of Consumer Counsel.
(Incorporated by reference to 1996 Form 10-K).
10.21*+ 1996 Long-Term Incentive Compensation Plan, as amended.
10.22 Amendment to Stipulation and Agreement dated October 1,
1997 between Yankee Gas and Connecticut Office of Consumer
Counsel. (Incorporated by reference to 1997 Form 8-K).
10.23 Credit Agreement dated as of June 11, 1998 by and among
Yankee Energy System, Inc., the lenders identified
therein, and the Bank of New York as administrative agent
for each of the lenders (Incorporated by reference to Form
10-Q for the quarter ended June 30, 1998, File No. 0-
10721).
10.24+* Severance Agreement and Release by and between Michael E.
Bielonko and Yankee Energy System, Inc. dated as of
September 10, 1998.
10.25+* Separation Agreement and General Release by and among
Branko Terzic, Yankee Energy System, Inc. and Yankee Gas
Services Company dated as of September 29, 1998.
11* Statement re: Computation of per share earnings.
13* 1998 Annual Report to Shareholders.
21* Subsidiaries of the registrant.
23* Consent of Arthur Andersen LLP.
27* Financial Data Schedule.
* Filed herewith.
+ Management contract or compensatory plan.
<PAGE>
INDEX TO EXHIBITS
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 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 dated July 20, 1989
between United Bank & Trust Company, as Trustee of the Trust
of the 401(k) Employee Stock Ownership Plan and The 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 of Trust dated
April 1, 1992 between Yankee Gas and The Connecticut
National Bank, as (Incorporated by reference to Form 1992
("Form S-3")).
<PAGE>
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 Indenture 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).
4.15 Fourth Supplemental Indenture of Mortgage and Deed of Trust dated
April 1, 1997 between Yankee Gas and Fleet National Bank, as
Trustee. (Incorporated by reference to Form 10-K for the fiscal
year ended September 30, 1997, File No. 0-10721 (?1997 Form 10-
K?)).
4.16 Bond Purchase Agreement dated April 1, 1997 between Yankee Gas
and Purchaser. (Incorporated by reference to 1997 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 (Incorporated by
reference to Form 10-K for the fiscal year ended September 30,
1996, File No. 0-10721 ("1996 Form 10-K")).
10.6+ 1991 Long-Term Incentive Compensation Plan (Incorporated by
reference to Proxy Statement dated December 24, 1990).
<PAGE>
10.7+ Non-Employee Directors' Stock Compensation Plan
(Incorporated by reference Form 10-K for the fiscal year
ended September 30, 1991, File No. 0-17605 ("1991 Form 10-
K").
10.8+ Severance Pay Plan (Incorporated by reference to 1991 Form
10-K).
10.9 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")).
10.10 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).
10.11 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).
10.12 Transportation Agreement dated February 7, 1991 between
Iroquois Gas System, L.P. ("Iroquois") and Yankee Gas for
transportation of Canadian gas purchased (Incorporated by
reference to Form S-1).
10.13 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).
10.14 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).
10.15 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).
10.16 Service Agreement dated February 7, between ANE and Yankee
Gas for purchase of gas from TransCanada Pipelines
(Incorporated by reference to Form S-1).
10.17+ Form of Change in Control Executive Severance Agreement
for Charles E. Gooley, Mary J. Healey, Thomas J. Houde,
Steven P. Laden, Ellen J. Quinn, James M. Sepanski, and J.
Kingsley Fink (Incorporated by reference to 1995 Form 10-
K).
10.18 $60 million Revolving Credit Agreement among Yankee Gas
and several banks dated February 2, 1995. (Incorporated by
reference to 1995 Form 10-K).
10.19 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).
<PAGE>
10.20 Stipulation and Agreement dated January 3, 1996 between
Yankee Gas and the Office of Consumer Counsel. (Incorporated
by reference to 1996 Form 10-K).
10.21*+ 1996 Long-Term Incentive Compensation Plan, as amended.
10.22 Amendment to Stipulation and Agreement dated October 1, 1997
between Yankee Gas and Connecticut Office of Consumer
Counsel. (Incorporated by reference to 1997 Form 8-K).
10.23 Credit Agreement dated as of June 11, 1998 by and among
Yankee Energy System, Inc., the lenders identified therein,
and the Bank of New York as administrative agent for each of
the lenders (Incorporated by reference to Form 10-Q for the
quarter ended June 30, 1998, File No. 0-10721).
10.24+* Severance Agreement and Release by and between Michael E.
Bielonko and Yankee Energy System, Inc. dated as of
September 10, 1998.
10.25+* Separation Agreement and General Release by and among Branko
Terzic, Yankee Energy System, Inc. and Yankee Gas Services
Company dated as of September 29, 1998.
11* Statement re: Computation of per share earnings.
13* 1998 Annual Report to Shareholders.
21* Subsidiaries of the registrant.
23* Consent of Arthur Andersen LLP.
27* Financial Data Schedule.
* Filed herewith.
+ Management contract or compensatory plan.
<PAGE>
EXHIBIT 10.21
YANKEE ENERGY SYSTEM, INC.
1996 LONG-TERM INCENTIVE COMPENSATION PLAN
Amended October 27, 1998
SECTION 1. PURPOSE.
-------
The purposes of the 1996 Long-Term Incentive Compensation Plan (the "Plan")
are (i) to attract and retain outstanding executives in key management portions
of Yankee Energy System, Inc. (the "Company"), its parent (if any) and any
subsidiaries of the Company (collectively the "Related Corporations"), (ii) to
promote the achievement of long-term corporate goals through the use of
performance-based incentives, (iii) to create parallel interests between
executives and shareholders by providing for some portion of executive
compensation in the form of common stock, and (iv) to reward performance and to
foster Company identification on the part of key middle managers.
The Plan will provide a means whereby officers, executive and managerial
employees of the Company and any Related Corporations may (a) purchase stock in
the Company pursuant to options which qualify as "incentive stock options"
("Incentive Stock Options") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), (b) purchase stock in the Company pursuant to
options granted hereunder which do not qualify as Incentive Stock Options ("Non-
Qualified Options"); (c) may be awarded stock in the Company ("Awards"); and (d)
may receive stock appreciation rights ("SARs"). Both Incentive Stock Options
and Non-Qualified Options are referred to hereafter individually as an "Option"
and collectively as "Options." As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation" as those
terms are defined in Section 424 of the Code. Options, Awards and SARs are
referred to hereafter individually as a "Plan Benefit" and collectively as "Plan
Benefits." Officers, executive and managerial employees of the Company and any
Related Corporations are referred to herein as "Participants."
SECTION 2. ADMINISTRATION.
--------------
2.1 BOARD OF DIRECTORS AND THE COMMITTEE.
------------------------------------
The Plan will be administered by the Board of Directors of the Company
whose construction and interpretation of the terms and provisions hereof shall
be final and conclusive. The Board of Directors may in its sole discretion
grant Options, issue shares upon exercise of such Options, grant Awards and
grant SARs all as provided in the Plan. The Board of Directors shall have
authority, subject to the express provisions of the Plan, to construe the Plan
and its related agreements, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
respective Option, Award and SAR agreements, which need not be identical, and to
make all other determinations in the judgment of the Board of Directors
necessary or desirable
<PAGE>
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any related agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board of Directors may delegate any or all of its powers under
the Plan to the Organization and Compensation Committee or other Committee (the
"Committee") appointed by the Board of Directors consisting of at least two
members of the Board of Directors, who shall serve at the discretion of the
Board of Directors. If Plan Benefits are to be approved solely by the Committee,
the members of the Committee shall at all times be: (i) "outside directors" as
that term is defined in Treas. Reg. (S)1.162-27(e)(3) (or any successor
regulation); and (ii) "non-employee directors" within the meaning of Rule 16b-3
(or any successor rule) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as such terms are interpreted from time to time. If the
Committee is so appointed, all references to the Board of Directors herein shall
mean and relate to such Committee, unless the context otherwise requires.
2.2 COMPLIANCE WITH SECTION 162(M) OF THE CODE.
------------------------------------------
Section 162(m) of the Code generally limits the tax deductibility to
publicly held companies of compensation in excess of $1,000,000 paid to certain
"covered employees" ("Covered Employees"). It is the Company's intention to
preserve the deductibility of such compensation to the extent it is reasonably
practicable and to the extent it is consistent with the Company's compensation
objectives. For purposes of this Plan, Covered Employees of the Company shall
be those employees of the Company described in Section 162(m)(3) of the Code.
SECTION 3. ELIGIBILITY.
-----------
3.1 INCENTIVE STOCK OPTIONS.
-----------------------
Participants shall be eligible to receive Incentive Stock Options pursuant
to the Plan; provided that no Participant shall be granted any Incentive Stock
Option under the Plan who, at the time such Option is granted, owns, directly or
indirectly, Common Stock of the Company possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of its Related
Corporations, unless the requirements of Section 6.6(b) hereof are satisfied.
In determining whether this 10% threshold has been reached, the stock
attribution rules of Section 424(d) of the Code shall apply.
3.2 NON-QUALIFIED OPTIONS, AWARDS AND SARS.
--------------------------------------
Non-Qualified Options, Awards and SARs may be granted to any Participant,
subject to Section 8 with respect to Annual Incentive Awards and Section 9 with
respect to Long-Term Incentive Awards.
3.3 GENERALLY.
---------
<PAGE>
The Board of Directors may take into consideration a Participant's
individual circumstances in determining whether to grant Plan Benefits.
Granting of Plan Benefits for any individual shall neither entitle that
individual to, nor disqualify that individual from, participation in any other
grant of Plan Benefits.
3.4 STOCK OWNERSHIP GUIDELINES POLICY.
---------------------------------
Compliance with the Company's Stock Ownership Guidelines Policy, as adopted
by the Board of Directors on September 23, 1997 and as amended from time to
time, is required in order to be eligible to receive Plan Benefits.
Noncompliance with the Stock Ownership Guidelines Policy will result in the
suspension of eligibility of the Participant for awards of Plan Benefits;
provided, however, that prior awards of Plan Benefits (whether or not vested)
and eligibility for Awards under Section 8 or Section 9 if the Participant was
in compliance at the beginning of the fiscal year or Performance Cycle, as the
case may be, shall not be affected by noncompliance.
SECTION 4. STOCK SUBJECT TO PLAN.
---------------------
Subject to adjustment as provided in Sections 11 and 12 hereof, the stock
to be offered under the Plan shall consist of shares of the Company's Common
Stock, $5.00 par value, (the "Common Stock") and the maximum number of shares
which will be reserved for issuance, and in respect of which Plan Benefits may
be granted pursuant to the provisions of the Plan, shall not exceed in the
aggregate five hundred twenty-two thousand four hundred seventy seven (522,477)
shares. Such shares may be authorized and unissued shares, treasury shares or
shares purchased on the open market. If an Option or SAR granted hereunder
shall expire or terminate for any reason without having been exercised in full,
or if the Company shall reacquire any unvested shares issued pursuant to Awards,
any such shares so reacquired shall again be available for subsequent grants of
Plan Benefits under the Plan. Stock issued pursuant to the Plan may be subject
to such restrictions on transfer, repurchase rights or other restrictions as
shall be determined by the Board of Directors.
SECTION 5. GRANTING OF PLAN BENEFITS.
-------------------------
Plan Benefits may be granted under the Plan at any time after adoption of
the Plan by the Board of Directors and prior to October 22, 2006; provided,
however, that nothing in the Plan shall be construed to obligate the Company to
grant Plan Benefits to a Participant or anyone claiming under or through a
Participant. The date of grant of Plan Benefits under the Plan will be the date
specified by the Board of Directors at the time the Board of Directors grants
such Plan Benefits; provided, however, that such date shall not be prior to the
date on which the Board of Directors takes such action. The Board of Directors
shall have the right, with the consent of a Participant, to convert an Incentive
Stock Option granted under the Plan to a Non-Qualified Option pursuant to
Section 6.7. Plan Benefits may be granted alone or in addition to other grants
under the Plan.
SECTION 6. SPECIAL PROVISIONS APPLICABLE TO OPTIONS AND SARS.
-------------------------------------------------
<PAGE>
6.1 PURCHASE PRICE AND SHARES SUBJECT TO OPTIONS AND SARS.
-----------------------------------------------------
(a) The purchase price per share of Common Stock deliverable upon
the exercise of an Option shall be determined by the Board of Directors;
provided, however, that the exercise price shall not be less than 100% of
-------- -------
the fair market value of such Common Stock on the day the Option is granted
(except as modified in Section 6.6(b) hereof in the case of an Incentive
Stock Option ).
(b) Options granted under the Plan may provide for the payment of
the exercise price by delivery of (i) cash or a check payable to the order
of the Company in an amount equal to the exercise price of such Options,
(ii) shares of Common Stock of the Company owned by the Participant having
a fair market value equal in amount to the exercise price of the Options
being exercised, or (iii) any combination of (i) and (ii). The fair market
value of any shares of the Company's Common Stock which may be delivered
upon exercise of an Option shall be determined by the Board of Directors.
The Board of Directors may also permit Participants, either on a selective
or aggregate basis, to simultaneously exercise Options and sell the shares
of Common Stock thereby acquired, pursuant to a brokerage or similar
arrangement, approved in advance by the Board of Directors, and to use the
proceeds from such sale as payment of the purchase price of such shares.
(c) If, at the time an Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such Option is
granted (the "Determination Date") and shall mean (i) the average (on the
Determination Date) of the high and low prices of the Common Stock on the
principal national securities exchange on which the Common Stock is traded,
if such Common Stock is then traded on a national securities exchange; (ii)
the last reported sale price (on the Determination Date) of the Common
Stock on The Nasdaq Stock Market if the Common Stock is not then traded on
a national securities exchange; or (iii) the closing bid price (or average
of bid prices) last quoted (on the Determination Date) by an established
quotation service for over-the-counter securities, if the Common Stock is
not reported on The Nasdaq Stock Market. However, if the Common Stock is
not publicly traded at the time an Option is granted under the Plan, "fair
market value" shall be deemed to be the fair value of the Common Stock as
determined by the Board of Directors after taking into consideration all
factors which it deems appropriate, including, without limitation, recent
sale and offer prices of the Common Stock in private transactions
negotiated at arm's length.
(d) The maximum number of shares with respect to which Options or
SARs may be granted to any employee, including any cancellations or
repricings which may occur, shall be limited to 50,000 shares in any
calendar year.
6.2 DURATION OF OPTIONS AND SARS.
----------------------------
Subject to Section 6.6(b) hereof, each Option and SAR and all rights
thereunder shall be
<PAGE>
expressed to expire on such date as the Board of Directors may determine, but in
no event later than ten years from the day on which the Option or SAR is granted
and shall be subject to earlier termination as provided herein.
6.3 EXERCISE OF OPTIONS AND SARS.
----------------------------
(a) Subject to Section 6.6(b) hereof, each Option and SAR granted
under the Plan shall be exercisable at such time or times and during such
period as shall be set forth in the instrument evidencing such Option or
SAR. To the extent that an Option or SAR is not exercised by a Participant
when it becomes initially exercisable, it shall not expire but shall be
carried forward and shall be exercisable, on a cumulative basis, until the
expiration of the exercise period. No partial exercise may be for less
than ten (10) full shares of Common Stock (or its equivalent).
(b) The Board of Directors shall have the right to accelerate the date
of exercise of any installments of any Option or SAR; provided that the
Board of Directors shall not accelerate the exercise date of any
installment of any Option granted to a Participant as an Incentive Stock
Option (and not previously converted into a Non-Qualified Option pursuant
to Section 6.7) if such acceleration would violate the annual vesting
limitation contained in Section 422(d)(1) of the Code, which provides
generally that the aggregate fair market value (determined at the time the
Option is granted) of the stock with respect to which Incentive Stock
Options granted to any Participant are exercisable for the first time by
such Participant during any calendar year (under all plans of the Company
and any Related Corporations) shall not exceed $100,000.
6.4 NONTRANSFERABILITY OF OPTIONS AND SARS.
--------------------------------------
No Option or SAR granted under the Plan shall be assignable or transferable
by the Participant, either voluntarily or by operation of law, except by will or
the laws of descent and distribution or, with respect to Non-Qualified Options
and SARs, pursuant to a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the
rules promulgated thereunder. During the life of the Participant, the Option or
SAR shall be exercisable only by him or her. If any Participant should attempt
to dispose of or encumber his or her Options or SARs, other than in accordance
with the applicable terms of a Non-Qualified Stock Option Agreement or SAR
Agreement, his or her interest in such Options or SARs shall terminate.
6.5 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH ON OPTIONS AND SARS.
----------------------------------------------------------------
(a) If a Participant ceases to be employed by the Company or a Related
Corporation for any reason, including retirement but other than death, any
Option or SAR granted to such Participant under the Plan shall immediately
terminate; provided, however, that in the case of a Participant who
-------- -------
terminates employment as the result of permanent and total disability,
normal retirement as defined in the Company's pension plan or early
retirement with approval of the Board of Directors, any portion of such
Option or SAR which
<PAGE>
was otherwise exercisable on the date of termination of the Participant's
employment may be exercised within a one-year period following the date on
which the Participant ceased to be so employed, or within the three-month
period following such date in the case of an Incentive Stock Option, but in
no event after the expiration of the exercise period. Any such exercise may
be made only to the extent of the number of shares subject to the Option or
SAR which were purchasable or exercisable on the date of such termination
of employment. If the Participant dies during the applicable one-year or
three-month period, the Option or SAR shall be exercisable by the
Participant's personal representatives, heirs or legatees to the same
extent and during the same period that the Participant could have exercised
the Option or SAR on the date of his or her death.
(b) If the Participant dies while an employee of the Company or any
Related Corporation, any Option or SAR granted to such Participant under
the Plan shall be exercisable by the Participant's personal
representatives, heirs or legatees, for the purchase of or exercise
relative to that number of shares and to the same extent that the
Participant could have exercised the Option or SAR on the date of his or
her death. The Option or SAR or any unexercised portion thereof shall
terminate unless so exercised prior to the earlier of the expiration of one
year from the date of such death or the expiration of the exercise period.
6.6 DESIGNATION OF INCENTIVE STOCK OPTIONS; LIMITATIONS.
---------------------------------------------------
Options granted under the Plan which are intended to be Incentive Stock
Options qualifying under Section 422 of the Code shall be designated as
Incentive Stock Options and shall be subject to the following additional terms
and conditions:
(a) Dollar Limitation. The aggregate fair market value (determined at
-----------------
the time the option is granted) of the Common Stock for which Incentive
Stock Options are exercisable for the first time during any calendar year
by any person under the Plan (and all other incentive stock option plans of
the Company and any Related Corporations) shall not exceed $100,000. In
the event that Section 422(d)(1) of the Code is amended to alter the
limitation set forth therein so that following such amendment such
limitation shall differ from the limitation set forth in this Section
6.6(a), the limitation of this Section 6.6(a) shall be automatically
adjusted accordingly.
(b) 10% Shareholder. If any Participant to whom an Incentive Stock
---------------
Option is to granted pursuant to the provisions of the Plan is on the date
of grant the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any Related
Corporations, then the following special provisions shall be applicable to
the Incentive Stock Option granted to such individual:
(i) The option price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock on the date of grant; and
(ii) The option exercise period shall not exceed five years from
the date
<PAGE>
of grant.
In determining whether the 10% threshold has been reached, the stock
attribution rules of Section 424(d) of the Code shall apply.
(c) Except as modified by the preceding provisions of this Section
6.6, all of the provisions of the Plan shall be applicable to Incentive
Stock Options granted hereunder.
6.7 CONVERSION OF INCENTIVE STOCK OPTIONS INTO NON-QUALIFIED OPTIONS;
-----------------------------------------------------------------
TERMINATION OF INCENTIVE STOCK OPTIONS.
--------------------------------------
The Board of Directors, at the written request of any Participant, may in
its discretion take such actions as may be necessary to convert such
Participant's Incentive Stock Options (or any installments or portions of
installments thereof) that have not been exercised on the date of conversion
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the Participant is an employee of the
Company or a Related Corporation at the time of such conversion. Such actions
may include, but not be limited to, extending the exercise period or reducing
the exercise price of the appropriate installments of such Options. At the time
of such conversion, the Board of Directors (with the consent of the Participant)
may impose such conditions on the exercise of the resulting Non-Qualified
Options as the Board of Directors in its discretion may determine, provided that
such conditions shall not be inconsistent with the Plan. Nothing in the Plan
shall be deemed to give any Participant the right to have such Participant's
Incentive Stock Options converted into Non-Qualified Options, and no such
conversion shall occur until and unless the Board of Directors takes appropriate
action. The Board of Directors, with the consent of the Participant, may also
terminate any portion of any Incentive Stock Option that has not been exercised
at the time of such termination.
6.8 STOCK APPRECIATION RIGHTS.
-------------------------
An SAR is the right to receive, without payment, an amount equal to the
excess, if any, of the fair market value of a share of Common Stock on the date
of exercise over the grant price, which amount will be multiplied by the number
of shares with respect to which the SARs shall have been exercised. The grant
of SARs under the Plan shall be subject to the following terms and conditions
and shall contain such additional terms and conditions, not inconsistent with
the express terms of the Plan, as the Board of Directors shall deem desirable:
(a) Grant. SARs may be granted in tandem with, in addition to or
completely independent of any Plan Benefit.
(b) Grant Price. The grant price of an SAR may be the fair market
value of a share of Common Stock on the date of grant or such other price
as the Board of Directors may determine.
(c) Exercise. An SAR may be exercised by a Participant in accordance
with procedures established by the Board of Directors or as otherwise
provided in any agreement
<PAGE>
evidencing any SARs. The Board of Directors may provide that an SAR shall
be automatically exercised on one or more specified dates.
(d) Form of Payment. Payment upon exercise of an SAR may be made in
cash, in shares of Common Stock or any combination thereof, as the Board of
Directors shall determine, provided, however, that any SAR exercised upon
or subsequent to the occurrence of a Change in Control (as defined in
Section 12(b) hereof) shall be paid in cash.
(e) Fair Market Value. Fair market value shall be determined in
accordance with Section 6.1(c) with the "Determination Date" being
determined by reference to the date of grant or the date of exercise of an
SAR, as applicable.
6.9 RIGHTS AS A SHAREHOLDER.
-----------------------
The holder of an Option or SAR shall have no rights as a shareholder with
respect to any shares covered by the Option or SAR until the date of issue of a
stock certificate to him or her for such shares. Except as otherwise expressly
provided in the Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.
6.10 SPECIAL PROVISIONS APPLICABLE TO NON-QUALIFIED OPTIONS AND SARS
----------------------------------------------------------------
GRANTED TO COVERED EMPLOYEES.
----------------------------
In order for the full value of Non-Qualified Options or SARs granted to
Covered Employees to be deductible by the Company for federal income tax
purposes, the Company may intend for such Non-Qualified Options or SARs to be
treated as "qualified performance-based compensation" as described in Treas.
Reg. (S)1.162-27(e) (or any successor regulation). In such case, Non-Qualified
Options or SARs granted to Covered Employees shall be subject to the following
additional requirements:
(a) such options and rights shall be granted only by the Board of
Directors; and
(b) the exercise price of such Options and the grant price of such
SARs granted shall in no event be less than the fair market value of the
Common Stock as of the date of grant of such Options or SARs.
SECTION 7. SPECIAL PROVISIONS APPLICABLE TO AWARDS.
---------------------------------------
7.1 GRANTS OF AWARDS.
----------------
The Board of Directors may grant a Participant an Award subject to such
terms and conditions as the Board of Directors deems appropriate, including,
without limitation: restrictions on the pledging, sale, assignment, transfer or
other disposition of such shares; the requirement that the Participant forfeit
all or a portion of such shares back to the Company upon voluntary or other
termination (for any reason other than death, permanent and total disability,
normal retirement as
<PAGE>
defined in the Company's pension plan or early retirement with the approval of
the Board); and provisions disallowing a Participant receiving an Award from
making, in connection with such Award, the election permitted under Section
83(b) of the Code.
7.2 CONDITIONS.
----------
Approvals of Awards may be subject to the following conditions:
(a) Each Participant receiving an Award shall enter into an agreement
(a "Stock Restriction Agreement") with the Company, if required by the
Board of Directors, in a form specified by the Board of Directors agreeing
to such terms and conditions of the Award as the Board of Directors deems
appropriate.
(b) The Board of Directors may determine that the Company will not
issue certificates for shares until the restrictions on such shares have
lapsed.
(c) Shares issued and transferred to a Participant pursuant to an
Award may, if required by the Board of Directors, be deposited with the
Treasurer or other officer of the Company designated by the Board of
Directors to be held until the lapse of the restrictions upon such shares,
and each Participant shall execute and deliver to the Company stock powers
enabling the Company to exercise its rights hereunder.
(d) Certificates for shares issued pursuant to an Award shall, if the
Company shall deem it advisable, bear a legend to the effect that they are
issued subject to specified restrictions.
(e) Certificates representing the shares issued pursuant to an Award
shall be registered in the name of the Participant and shall be owned by
such Participant. Such Participant shall be the holder of record of such
shares for all purposes, including voting and receipt of dividends paid
with respect to such shares.
7.3 NONTRANSFERABILITY.
------------------
Shares issued pursuant to an Award may not be sold, assigned, transferred,
alienated, commuted, anticipated, or otherwise disposed of (except by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of ERISA or the rules
promulgated thereunder), or pledged or hypothecated as collateral for a loan or
as security for the performance of any obligation, or be otherwise encumbered,
and are not subject to attachment, garnishment, execution or other legal or
equitable process, prior to the lapse of restrictions on such shares, and any
attempt at action in contravention of this Section shall be null and void. If
any Participant should attempt to dispose of or encumber his or her shares
issued pursuant to an Award prior to the lapse of the restrictions imposed on
such shares, his or her interest in such shares awarded to him or her shall
terminate.
7.4 EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH ON AWARDS.
------------------------------------------------------
<PAGE>
If, prior to the lapse of restrictions applicable to Awards, the
Participant ceases to be an employee of the Company or the Related Corporations
for any reason other than death, permanent and total disability, normal
retirement or early retirement with the approval of the Board of Directors,
Awards to such Participant, as to which restrictions have not lapsed, shall be
forfeited to the Company, effective on the date of the Participant's termination
of employment. The Board of Directors shall have the sole power to decide in
each case whether leaves of absence shall be deemed a termination of employment.
SECTION 8. SPECIAL PROVISIONS APPLICABLE TO ANNUAL INCENTIVE AWARDS.
--------------------------------------------------------
8.1 FORM OF ANNUAL INCENTIVE AWARDS.
-------------------------------
Effective with the fiscal year ending September 30, 1998, Annual Incentive
Awards may be granted to eligible Participants based on performance against
predetermined goals for a fiscal year of the Company. The Annual Incentive
Awards shall be calculated and be payable in cash, less applicable withholding
and FICA; provided, however, that Participants may elect to have all or part of
Annual Incentive Awards paid in restricted shares of Common Stock. The portion
of an Annual Incentive Award paid in restricted shares of Common Stock shall be
an Award within the meaning of, and shall comply with, Section 7 of the Plan, as
modified by this Section 8 and other provisions of the Plan applicable to
Awards.
8.2 ELIGIBILITY.
-----------
A Participant must be in a position eligible for participation for a period
of six months or more during the fiscal year. Any Annual Incentive Award to a
Participant who has been in an eligible position for at least six months, but
less than the entire fiscal year, shall be prorated based on the actual number
of days that the Participant was in such eligible position.
8.3 MAXIMUM ANNUAL INCENTIVE AWARD.
------------------------------
For each fiscal year, the Board of Directors will determine the maximum
Annual Incentive Award for each Participant or class of Participants, expressed
as a percentage of salary range midpoints in effect at the beginning of that
fiscal year; provided that any Participant whose salary exceeds the salary range
midpoint on October 1, 1997 or on the date the individual becomes a Participant
will have the Annual Incentive Award calculated on the basis of such salary
amount until such time as the salary range midpoint exceeds the Participant's
salary.
8.4 INCENTIVE POOL.
--------------
The Annual Incentive Award Pool available for distribution to all
Participants shall be the sum of the products of the maximum Annual Incentive
Award percentages times the applicable salary or salary range midpoints of the
Participants, as adjusted retrospectively by the Board of Directors to reflect
actual profits for the fiscal year.
<PAGE>
8.5 PERFORMANCE MEASURES.
--------------------
The Board of Directors shall approve performance measures for each fiscal
year for the purpose of determining the percentage of the maximum Annual
Incentive Award to which each Participant or class of Participants is entitled.
The Board of Directors may also determine the relative weights to be given to
corporate and individual goals.
8.6 ELECTION FOR STOCK.
------------------
At the election of a Participant, all or part of the Annual Incentive Award
shall be an Award of Common Stock for that number of shares determined by
dividing the cash award by the per share price of the Common Stock, based on the
reported close price of the Common Stock on the New York Stock Exchange on the
last day of the fiscal year to which the Annual Incentive Award relates, or if
such information is not available as of such date, as of the first business day
prior to such date on which the Common Stock was traded. A Participant electing
to receive payment of all or part of an Annual Incentive Award in stock must
submit a written election form to the Company prior to the beginning of the
fiscal year to which such Annual Incentive Award relates; provided, however,
that with respect to the Company's 1998 fiscal year, such election will be valid
if it is made within 60 days after the beginning of the 1998 fiscal year.
8.7 COMPANY TAX CONTRIBUTION.
------------------------
With respect to the portion of an Annual Incentive Award payable in
restricted Common Stock, the Company agrees that, upon the lapsing of the
restrictions on any such Common Stock, it will make a cash payment to the
Participant in an amount equal to 20% of the value of such shares on the date
such restrictions lapse, which amount represents a Company contribution toward
any taxes otherwise due and owing by the Participant by virtue of the lapsing of
the restrictions on the Common Stock. For purposes of this Section 8.7, the
value of the shares on the date the restrictions are lifted shall be the fair
market value of the Common Stock on such date determined in accordance with
Section 6.1(c) or, if the information is not available as of such date, as of
the first business day prior to the date the restrictions lapse on which the
Common Stock was traded.
8.8 FRACTIONAL SHARES.
-----------------
No fractional shares of Common Stock shall be issued or delivered pursuant
to any Annual Incentive Award. The Board of Directors shall determine whether
cash shall be paid in lieu of such fractional shares or whether any rights
thereto shall be forfeited or otherwise eliminated.
8.9 DEFERRAL OF AWARD.
-----------------
If permitted by the Board of Directors, a Participant may elect to defer
payment of all or part of an Annual Incentive Award. Deferral of Annual
Incentive Awards shall be governed by such terms and conditions as the Board of
Directors shall authorize.
<PAGE>
8.10 TERMINATION OF EMPLOYMENT.
-------------------------
If a Participant's employment is terminated prior to payment of an Annual
Incentive Award, except for death, Disability, normal retirement (as defined in
the Company's pension plan) or early retirement with the permission of the
Board, the Annual Incentive Award shall be canceled. For purposes of this
Section 8, Disability shall mean the inability of a Participant, as determined
by the Board of Director, substantially to perform such Participant's regular
duties and responsibilities due to a medically determinable physical or mental
illness that has lasted (or can reasonably be expected to last) for a period of
six (6) months or longer.
SECTION 9. SPECIAL PROVISIONS APPLICABLE TO LONG-TERM INCENTIVE AWARDS.
-----------------------------------------------------------
9.1 FORMS OF LONG-TERM INCENTIVE AWARDS.
-----------------------------------
Effective October 1, 1997, Long-Term Incentive Awards may be granted to
eligible Participants at the close of each Performance Cycle based on the
Company's performance against predetermined Performance Goals for the
Performance Cycle. Long-Term Incentive Awards shall be calculated in cash and
be payable one-half in unrestricted shares of Common Stock, less applicable
withholding and FICA, and one-half in restricted shares of Common Stock. A
Long-Term Incentive Award shall be an Award within the meaning of, and shall
comply with, Section 7 of the Plan, as modified by this Section 9 and other
provisions of the Plan applicable to Awards.
9.2 ELIGIBILITY.
-----------
Participation in the Plan with respect to a Performance Cycle will be
limited to members of the Covered Group. The Covered Group for each Performance
Cycle shall be determined independently from any prior Performance Cycle.
9.3 LONG-TERM INCENTIVE AWARD LEVELS.
--------------------------------
(a) At the start of each Performance Cycle, the Chief Executive
Officer of the Company will recommend, for approval by the Board of
Directors, one or more specific Performance Goals for such Performance
Cycle for each Participant Group and the relative weights of each
Performance Goal (such weights to total 100%).
(b) The business criteria to be used for purposes of establishing
Performance Goals for Long-Term Incentive Awards shall be selected from
among the following alternatives, each of which may be based on absolute
standards or peer industry group comparatives and may be applied at various
organizational levels (e.g., corporate, business
<PAGE>
unit, division): (i) total shareholder return; (ii) stock price increase;
(iii) dividend payout as percentage of net income; (iv) return on equity;
(v) return on capital; (vi) cash flow; (vii) economic value added; (viii)
market share; (ix) customer/employee satisfaction as measured by survey
instruments; (x) earnings per share; (xi) revenue; (xii) workplace
diversity; (xiii) safety; (xiv) personal performance; (xv) productivity
measures; (xvi) diversification of business opportunities; (xvii) price to
earnings ratio; (xviii) expense ratios; (xix) total expenditures; (xx)
completion of key projects and (xxi) profit margin.
(c) At the start of each Performance Cycle, the Chief Executive
Officer of the Company will recommend, for approval by the Board of
Directors, with respect to each Performance Goal, the actual performance
results necessary to achieve the Threshold, Target and Maximum Performance
Levels.
(d) The Board of Directors may, in its sole discretion, modify
Performance Goals or the formula for applying such Performance Goals during
a Performance Cycle; provided, however, that any amendment of the
performance goals or formula will be made in good faith and in response to
unforeseen circumstances or significantly changed conditions; and provided,
further, that in no case may the Board of Directors adopt any such
modification that would increase a Long-Term Incentive Award otherwise
payable to a Covered Employee.
(e) A Participant's Award for any Performance Cycle with respect to
each Performance Goal applicable to that Participant shall be (i) the
Salary Range Midpoint applicable to the Participant at the start of the
Performance Cycle, (ii) multiplied by the relative weight of such
Performance Goal, (iii) with the product of (i) and (ii) multiplied by the
applicable percentage interpolated from those set forth in the applicable
table below, depending upon the Participant's Job Level and the actual
Performance Level of each of the Participant's Performance Goals in
relation to the Threshold, Target and Maximum Performance Levels. The
maximum amount of any Long-Term Incentive Award payable to a Participant
for any Performance Cycle shall not exceed $400,000. The Board of
Directors will certify in writing whether and the extent to which each
Participant has satisfied the Performance Goals for the Performance Cycle.
No Long-Term Incentive Award shall be paid with respect to a particular
Performance Goal unless the Threshold Performance Level has been achieved
with respect to that Performance Goal.
<TABLE>
<CAPTION>
=========================================================================================================
Percentage of Salary Range Midpoint
=========================================================================================================
<S> <C> <C> <C> <C>
Job Level Below Threshold Threshold Target Maximum
=========================================================================================================
. Chief Executive Officer 0% 25% 50% 100%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
. Executive Vice President 0% 20% 40% 80%
- ---------------------------------------------------------------------------------------------------------
. Vice President 0% 15% 30% 60%
- ---------------------------------------------------------------------------------------------------------
. Other Officers and Key 0% 10% 20% 40%
Employees
- ---------------------------------------------------------------------------------------------------------
</TABLE>
To the extent a Participant changes Job Levels and/or Participant
Groups during a Performance Cycle, the Board of Directors shall determine
the methodology for calculating the Participant's Long-Term Incentive Award
for such Performance Cycle.
9.4 PAYMENT OF LONG-TERM INCENTIVE AWARDS.
-------------------------------------
(a) Long-Term Incentive Awards will be paid within 60 days following
the Payment Date.
(b) Long-Term Incentive Awards shall be calculated in cash, but shall
be paid to Participants in shares of Common Stock based on the reported
close price of the Common Stock on the New York Stock Exchange on the
Payment Date, or if such information is not available as of the Payment
Date, as of the first business day prior to the Payment Date on which the
Common Stock was traded. Fifty percent of the Long-Term Incentive Award,
less applicable withholding and FICA taxes, shall be issued in unrestricted
Common Stock. Fifty percent of the Long-Term Incentive Award shall be
issued as an Award of restricted stock pursuant to Section 7.
(c) No fractional shares of Common Stock shall be issued or delivered
pursuant to any Long-Term Incentive Award. The Board of Directors shall
determine whether cash shall be paid in lieu of such fractional shares or
whether any rights thereto shall be forfeited or otherwise eliminated.
(d) If permitted by the Board of Directors, a Participant may elect to
defer payment of all or part of the Long-Term Incentive Award attributable
to a Performance Cycle. Deferral of awards shall be governed by such terms
and conditions as the Board of Directors shall authorize.
9.5 PARTICIPATION FOR A PORTION OF A PERFORMANCE CYCLE.
--------------------------------------------------
(a) If an individual becomes a Participant during a Performance Cycle,
but not later than the first day of the third Performance Year of the
Performance Cycle, the
<PAGE>
Participant shall be entitled to earn a pro rata Long-Term Incentive Award
for such Performance Cycle. The pro rata Long-Term Incentive Award shall be
determined by multiplying the Long-Term Incentive Award otherwise payable
by a fraction, the numerator of which is the number of whole months of
participation completed during such Performance Cycle, and the denominator
of which is the number of months in such Performance Cycle. This provision
may apply to more than one Performance Cycle.
(b) If a Participant is employed and is a member of the Covered Group
upon the completion of a Performance Cycle, the Participant's Long-Term
Incentive Award, if any, for that Performance Cycle shall become vested,
and thereafter shall only be forfeited for Cause. If, prior to the end of
a Performance Cycle, a Participant ceases employment with the Company or is
transferred or assigned to a position outside of the Covered Group, no
Long-Term Incentive Award shall be payable to such Participant with respect
to that Performance Cycle. Notwithstanding the above, if employment ceases
during the last Performance Year of a Performance Cycle as a result of the
Participant's Disability, death, reaching a Retirement Date under the
Qualified Retirement Plan or early retirement with the consent of the Board
of Directors, a pro rata Long-Term Incentive Award otherwise earned by such
Participant shall be payable. The pro rata Long-Term Incentive Award shall
be determined by multiplying the Long-Term Incentive Award otherwise
payable by a fraction, the numerator of which is the number of whole months
of participation completed during such Performance Cycle, and the
denominator of which is the number of months in such Performance Cycle. In
the event of the Participant's death, any such pro rata Long-Term Incentive
Award shall be paid to the Participant's Beneficiary. Any such pro rata
Long-Term Incentive Award may be forfeited for Cause.
(c) In the event of termination of this Section 9 or the Plan, the
Company shall be obligated to pay: (i) the Long-Term Incentive Award to
which each Participant would have been otherwise entitled for a Performance
Cycle completed before the date on which such termination occurs, and (ii)
a pro rata Long-Term Incentive Award earned by Participants for the
Performance Cycle next ending after the date on which such termination
occurs, determined by multiplying the Long-Term Incentive Award otherwise
payable by a fraction, the numerator of which is the number of whole months
of employment completed prior to the applicable event during such
Performance Cycle, and the denominator of which is the number of months in
such Performance Cycle; provided, however, that if the Board of Directors
is unable to differentiate performance as of the date on which such
termination occurs, it will defer to Target Performance Levels for purposes
of calculating Long-Term Incentive Awards. No Long-Term Incentive Award
shall be payable for any subsequent Performance Cycle. No amendment shall
result in any Participant receiving less than the amounts due in accordance
with the preceding sentence if termination had occurred on the date of that
amendment. Except for the foregoing, the Company shall have no further
obligations under this Section 9 or the Plan.
9.6 DEFINITIONS APPLICABLE TO SECTION 9.
-----------------------------------
(a) BENEFICIARY. The person, trustee or other entity designated by
-----------
the Participant,
<PAGE>
on a form established by the Company, to receive a benefit hereunder in the
case of the Participant's death. In the event that no Beneficiary has been
so named, or no named Beneficiary is living, the Participant's estate shall
be the Beneficiary.
(b) CAUSE. A determination by the Company that the Participant has
-----
engaged in activity in her or his dealings with the Company which, if
proved in a criminal proceeding, could result in the Participant's
conviction for a felony, or that is (i) grossly negligent or intentional
and (ii) results in material harm to Company.
(c) COVERED GROUP. The officers and selected key executives of the
-------------
Company who are approved by the Board of Directors for participation in the
Plan with respect to a particular Performance Cycle.
(d) DISABILITY. The inability of a Participant, as determined by the
----------
Board of Directors, substantially to perform such Participant's regular
duties and responsibilities due to a medically determinable physical or
mental illness that has lasted (or can reasonably be expected to last) for
a period of six (6) consecutive months or longer.
(e) JOB LEVEL. Each Participant's position shall be categorized in
---------
one of the following Job Levels: Chief Executive Officer; Executive Vice
President; Vice President; Other Officer or Key Employee. Jobs Levels
shall be a determining factor in calculating the magnitude of a
Participant's Long-Term Incentive Award.
(f) LONG-TERM INCENTIVE AWARD. An Award granted to a Participant
-------------------------
under this Section 9.
(g) PARTICIPANT. A member of the Covered Group.
-----------
(h) PARTICIPANT GROUP. One or more Participants who are subject to
-----------------
the same Performance Goals.
(i) PAYMENT DATE. The last date of the Performance Cycle. Because
------------
Performance Cycles overlap by one year, Payment Dates occur every two
years.
(j) PERFORMANCE CYCLE. The period of three consecutive Performance
-----------------
Years which precedes the year in which a Long-Term Incentive Award is paid.
The first Performance Cycle begins October 1, 1997. Each subsequent
Performance Cycle will begin at a two year interval from the commencement
of the previous Performance Cycle.
(k) PERFORMANCE GOAL. A goal established for a Participant Group with
----------------
respect to a particular Performance Cycle, as described in Section 9.6(j).
(l) PERFORMANCE LEVEL. A measure of the achievement of a Performance
-----------------
Goal. For each Performance Goal, a Threshold, Target and Maximum
Performance Level shall be designated. At the end of a Performance Cycle,
an actual Performance Level shall be
<PAGE>
determined by the Board of Directors through interpolation of the
designated Performance Levels.
(m) PERFORMANCE YEAR. A twelve consecutive month period within a
----------------
Performance Cycle, which begins on October 1 and ends on September 30.
(n) QUALIFIED RETIREMENT PLAN. The Yankee Energy System, Inc.
-------------------------
Retirement Plan or the Yankee Energy System, Inc. 401(k) Employee Stock
Ownership Plan.
(o) SALARY RANGE MIDPOINT. An amount announced by the Board of
---------------------
Directors at the start of each Performance Cycle with respect to each Job
Level within the Covered Group.
SECTION 10. REQUIREMENTS OF LAW.
-------------------
10.1 VIOLATIONS OF LAW.
-----------------
No shares shall be issued and delivered upon exercise of any Option or the
making of any Award or the payment of any SAR unless and until, in the opinion
of counsel for the Company, any applicable registration requirements of the
Securities Act of 1933, any applicable listing requirements of any national
securities exchange on which stock of the same class is then listed, and any
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery, shall have been fully complied with. Each
Participant may, by accepting Plan Benefits, be required to represent and agree
in writing, for himself or herself and for his or her transferees by will or the
laws of descent and distribution, that the stock acquired by him, her or them is
being acquired for investment. The requirement for any such representation may
be waived at any time by the Board of Directors.
10.2 COMPLIANCE WITH RULE 16B-3.
--------------------------
The intent of this Plan is to qualify for the exemption provided by Rule
16b-3 under the Exchange Act. To the extent any provision of the Plan does not
comply with the requirements of Rule 16b-3, it shall be deemed inoperative to
the extent permitted by law and deemed advisable by the Board of Directors and
shall not affect the validity of the Plan. In the event Rule 16b-3 is revised
or replaced, the Board of Directors may exercise discretion to modify this Plan
in any respect necessary to satisfy the requirements of the revised exemption or
its replacement.
SECTION 11. RECAPITALIZATION.
----------------
In the event that dividends are payable in Common Stock of the Company or
in the event there are splits, sub-divisions or combinations of shares of Common
Stock of the Company, the number of shares available under the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares deliverable upon the exercise thereafter of any Option previously
<PAGE>
granted shall be increased or decreased proportionately, as the case may be,
without change in the aggregate purchase price, the number of shares subject to
Awards as to which restrictions have not lapsed shall be increased or decreased
proportionately, as the case may be, and the number of shares to which granted
SARs relate shall be increased or decreased proportionately, as the case may be,
and the grant price of such SARs shall be decreased or increased
proportionately, as the case may be.
SECTION 12. CHANGE IN CONTROL AND REORGANIZATION.
------------------------------------
(a) For purposes of this Plan, a Change in Control shall mean (i) the
acquisition by a third person, including a "person" as defined in Section
13(d)(3) of the Exchange Act, of beneficial ownership (as defined in Rule
13d-3 under the Exchange Act) directly or indirectly, of securities of the
Company representing twenty-five percent (25%) or more of the total number
of votes that may be cast for the election of the directors of the Company;
or (ii) as the result of, or in connection with, any tender or exchange
offer, merger, consolidation or other business combination, sale of assets
or one or more contested elections, or any combination of the foregoing
transactions, the persons who were directors of the Company shall cease to
constitute a majority of the Board of the Company. In the event of a
Change of Control of the Company, except as the Board of Directors may
expressly provide otherwise, all restrictions and conditions applicable to
Awards then outstanding shall be deemed satisfied as of the date of the
Change of Control and all Options awarded at least six (6) months prior to
the Change of Control shall be exercisable as of such date. Any SAR
exercised upon or subsequent to the occurrence of a Change in Control shall
be paid in cash.
(b) In the case of any tender or exchange offer, merger, consolidation
or other business combination or sale of all or substantially all of the
assets of the Company, which does not constitute a Change in Control, or in
the case of a reorganization or liquidation of the Company, the Board of
Directors of the Company, or the board of directors of any corporation
assuming the obligations of the Company hereunder shall, as to outstanding
Plan Benefits, (i) make appropriate provision for the protection of any
such outstanding Plan Benefits by the substitution on an equitable basis of
appropriate stock of the Company or of the merged, consolidated or
otherwise reorganized corporation which will be issuable in respect of the
shares of Common Stock of the Company; provided only that the excess of the
aggregate fair market value of the shares subject to the Plan Benefits
immediately after such substitution over the purchase price thereof is not
more than the excess of the aggregate fair market value of the shares
subject to such Plan Benefits immediately before such substitution over the
purchase price thereof, (ii) upon written notice to the Participants,
provide that all unexercised Plan Benefits must be exercised within a
specified number of days of the date of such notice or such Plan Benefits
will be terminated, or (iii) upon written notice to the Participants,
provide that the Company or the merged, consolidated or otherwise
reorganized corporation shall have the right, upon the effective date of
any such merger, consolidation, sale of assets or reorganization, to
purchase all Plan Benefits held by each Participant and unexercised as of
that date at an amount equal to the aggregate fair market value on such
date
18
<PAGE>
of the shares subject to the Plan Benefits held by such Participant over
the aggregate purchase or grant price therefor, such amount to be paid in
cash or, if stock of the merged, consolidated or otherwise reorganized
corporation is issuable in respect of the shares of the Common Stock of the
Company, then, in the discretion of the Board of Directors, in stock of
such merged, consolidated or otherwise reorganized corporation equal in
fair market value to the aforesaid amount. In any such case the Board of
Directors shall, in good faith, determine fair market value and may, in its
discretion, advance the lapse of any waiting or installment periods and
exercise dates.
SECTION 13. NO SPECIAL EMPLOYMENT RIGHTS.
----------------------------
Nothing contained in the Plan or in any Plan Benefit documentation shall
confer upon any Participant receiving a grant of any Plan Benefit any right with
respect to the continuation of his or her employment by the Company (or any
Related Corporation) or interfere in any way with the right of the Company (or
any Related Corporation), subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Participant from the rate in
existence at the time of the grant of any Plan Benefit. Whether an authorized
leave of absence or absence in military or government service shall constitute
termination of employment shall be determined by the Board of Directors in
accordance with applicable law.
SECTION 14. AMENDMENT OF THE PLAN.
---------------------
The Board of Directors may at any time and from time to time suspend or
terminate all or any portion of the Plan or modify or amend the Plan in any
respect. The termination or any modification or amendment of the Plan shall
not, without the consent of an recipient of any Plan Benefit, affect his or her
rights under any Plan Benefit previously granted. With the consent of the
affected Participant, the Board of Directors may amend outstanding agreements
relating to any Plan Benefit in a manner not inconsistent with the Plan. The
Board of Directors hereby reserves the right to amend or modify the terms and
provisions of the Plan and of any outstanding Options to the extent necessary to
qualify any or all Options under the Plan for such favorable federal income tax
treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code, provided, however, that
the consent of a Participant is required if such amendment or modification would
cause unfavorable income tax treatment for such Participant.
SECTION 15. WITHHOLDING.
-----------
The Company's obligation to deliver shares of stock upon the exercise of
any Option or SAR or the granting of an Award and to make payment upon exercise
of any SAR shall be subject to the satisfaction by the Participant of all
applicable federal, state and local income and employment tax withholding
requirements.
19
<PAGE>
SECTION 16. EFFECTIVE DATE AND DURATION OF THE PLAN.
---------------------------------------
16.1 EFFECTIVE DATE.
--------------
The Plan shall become effective when adopted by the Board of Directors, but
no Incentive Stock Option granted under the Plan shall become exercisable unless
and until the Plan shall have been approved by the Company's shareholders. If
such shareholder approval is not obtained within 12 months after the date of the
Board's adoption of the Plan, then any Incentive Stock Options previously
granted under the Plan shall terminate and no further Incentive Stock Options
shall be granted. Subject to such limitation, Options, SARs and Awards may be
granted under the Plan at any time after the effective date and before the date
fixed herein for termination of the Plan.
16.2 DURATION.
--------
Unless sooner terminated in accordance with Section 12 hereof, the Plan
shall terminate upon the earlier of (i) the tenth anniversary of the date of its
adoption by the Board of Directors or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to any
Awards or the exercise or cancellation of Options and SARs granted hereunder.
If the date of termination is determined under (i) above, then Plan Benefits
outstanding on such date shall continue to have force and effect in accordance
with the provisions of the instruments evidencing such Plan Benefits.
SECTION 17. GOVERNING LAW.
-------------
The Plan and all actions taken thereunder shall be governed by the laws of
the State of Connecticut.
20
<PAGE>
EXHIBIT 10.24
SEVERANCE AGREEMENT AND RELEASE
--------------------------------
This SEVERANCE AGREEMENT AND RELEASE ("Agreement") is made by and between
Michael E. Bielonko of Berlin, Connecticut (hereinafter referred to as the
"Employee") and YANKEE ENERGY SYSTEM, INC. ("Company"), in light of the
following circumstances:
WHEREAS, Employee is currently employed by Company in the position of
President, Yankee Energy Services Company; and
WHEREAS, Company is eliminating, consolidating or restructuring various
positions in connection with a reorganization of its operations; and
WHEREAS, Employee and Company have agreed the employment relationship
between them shall terminate, effective as of the date set forth in this
Agreement; and
WHEREAS, to avoid the costs, burdens and uncertainties of any disputes
which might exist or which may arise, Employee and Company now wish to resolve,
compromise and finally settle any and all matters related to Employee's
employment with and separation from Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, Employee and Company, acting of their own free will, hereby
agree as follows:
1. Employee's position is eliminated as of September 1, 1998 (the
"Termination Date"). The Termination Date shall be Employee's last day of
employment with Company, and Employee shall not be deemed an employee of Company
for any purpose after such date.
2. Company will provide severance payments and benefits to Employee as
set forth in this paragraph.
(a) Company shall pay Employee a severance benefit equal to one year
of Employee's current annual salary. Such severance benefit shall be paid to
Employee on a weekly basis through December 31, 1998 and then a lump sum payment
for the remainder in January.
(b) $5,000 in lieu of Company car and health benefits.
(c) Company shall select and pay for an outplacement program for
Employee for a maximum period of twelve (12) months, commencing on or about the
Termination Date.
(d) $20,000 lump sum payment;
<PAGE>
(e) All severance payments shall be subject to tax withholding as
required by law, as well as other deductions authorized by Employee, and shall
be paid to Employee in accordance with Company's normal payroll cycle. Employee
acknowledges that, except as set forth above, no payments of any kind shall be
owed to him by Company, whether characterized as salary, severance payments,
consulting fees or in any other manner.
(f) Employee may exercise his vested stock options for a period of
one month through October 1, 1998 in the amounts set forth in the attachment
hereto.
3. For and in consideration of the payments and benefits described in
Paragraph 2 above, Employee, for him or herself, and for his or her heirs,
executors, administrators, successors and assigns, covenants not to sue, and
knowingly releases and forever discharges Company, together with its parent,
subsidiaries, affiliates, officers, directors, agents, employees, and
representatives ("Released Parties") of and from any and all claims, demands,
obligations, liabilities and causes of action, of whatsoever kind or nature in
law, equity or otherwise, which Employee now has or ever had against Company or
any of the Released Parties, (including, but not limited to, state wrongful
discharge, tort, defamation, breach of contract and breach of the duty of good
faith and fair dealing, and causes of action and claims under the Employee's
Retirement Income Security Act of 1974, 29 U.S.C. '1001 et seq., Title VII of
-- ---
the Civil Rights Act of 1964, 42 U.S.C. ''2000e et seq., the Civil Rights Act of
-- ----
1991, 42 U.S.C. '' 1981 et seq., the Connecticut Fair Employment Practices Act,
-- ----
Conn. Gen. Stat. '45a-51 et seq., the Americans with Disabilities Act, 42 U.S.C.
-- ----
' 12101 et seq., the Age Discrimination in Employment Act, 29 U.S.C. ''621 et
-- ---- --
seq., and all other federal, state or local antidiscrimination laws, or workers'
- ----
compensation laws, ordinances or regulations), for any losses, injuries or
damages (including, but not limited to, back pay, front pay, liquidated,
compensatory or punitive damages, attorneys' fees, litigation costs and any
federal or state income tax or social security tax obligations for which
Employee may be liable as a result of this Agreement), resulting from or arising
out of or in any way connected with Employee's employment relationship with
Company or Employee's separation from Company's employ.
4. Nothing in this Agreement shall be construed to constitute a waiver by
Employee of:
(a) Employee's right to seek enforcement of Company's obligations
under this Agreement.
(b) Employee's rights under the unemployment compensation laws of the
State of Connecticut. Company agrees that it will not contest any claims filed
by Employee for unemployment compensation benefits, so long as Employee is
available for and is actively seeking suitable employment.
5. This Agreement sets forth the entire Agreement between Employee and
Company, and fully supersedes any and all prior agreements or understandings,
written or oral, between the parties pertaining to Employee's employment with
and separation from Company. Employee and Company expressly acknowledge and
agree that neither party will make any claim or demand and each hereby waives
any rights either may now have or may
<PAGE>
hereafter have or claim to have, based upon any alleged oral alteration,
amendment, modification or any other alleged change in this Agreement.
6. The validity, effect and operation of this Agreement shall be
determined by the laws of the State of Connecticut. This Agreement shall be
interpreted in accordance with the plain meaning of its terms and not strictly
for or against either of the parties hereto.
7. Should Employee commence or prosecute any action or proceeding
contrary to the provisions of this Agreement, he or she agrees to indemnify
Company for all costs, including court costs and reasonable attorneys' fees,
incurred by Company in the defense of such action or in establishing or
maintaining the application or validity of this Agreement or the provisions
thereof. If any of the provisions, terms or clauses of this Agreement are
declared illegal, unenforceable or ineffective in a legal forum or by operation
of law, those provisions, terms and clauses shall be deemed severable, such that
all other provisions, terms and clauses of this Agreement shall remain valid and
binding upon both parties, provided, however, that Company's obligations to make
the payments and provide the benefits set forth in paragraph 2 above is
expressly conditioned on the validity of the release set forth in paragraph 3
above in its entirety. In the event Employee challenges the validity of such
release in any respect, he or she will be liable to Company for the repayment of
such sums. Except as otherwise provided specifically in this Agreement, in the
event any party to this Agreement claims that the other party has failed to
comply with the terms of this Agreement, the remedy for the party claiming the
breach shall be an appropriate legal action to require the other party to comply
with the Agreement and to obtain damages resulting from the breach, including
all costs incurred by the non-breaching party, including court costs and
reasonable attorney's fees in prosecuting any such legal action.
8. Employee acknowledges and agrees that:
(a) Employee was given twenty-one (21) days from the date of his or
her receipt of this Agreement to consider this Agreement;
(b) Employee has read this entire Agreement and fully understands its
terms;
(c) Employee was advised to consult with an attorney prior to signing
this Agreement, and has had the opportunity to review this Agreement with an
attorney;
(d) Employee is voluntarily entering into this Agreement; and
(e) Employee would not otherwise be entitled to the payments and
benefits provided by this Agreement under subparagraphs 2(b), (c) and (d).
(f) Employee has been privy to the Company's and its Parent's and
affiliates' confidential, proprietary and trade secret information, and that
Employee has an obligation and fiduciary duty not to use such information for
personal benefit, that such information is not to be disclosed to anyone outside
the Company, and that Employee has returned any such confidential information in
whatever form it existed.
<PAGE>
(g) Employee understands and agrees that for a period of one year
Employee shall not, undertake or engage in any employment, occupation or
business enterprise that is competitive with the HVAC service business and
activities of the Company within the geographic market of the Company defined as
Connecticut and Massachusetts and will not solicit any customers of the Company
or otherwise attempt to disrupt the business activities of the Company without
the consent of the Company which consent can be withheld by the Company in its
sole discretion.
The Employee and the Company acknowledge and agree that they have
attempted to limit Employee's ability to compete with the Company only to a
reasonable extent. It is the desire and intent of the parties hereto that the
provisions of this covenant shall be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. However, the Company and Employee agree that if a court
finds that the scope of any one or more of the provisions shall, for any reason,
be invalid, illegal, excessively broad, unreasonable, or unenforceable in any
respect, then the court may modify the covenant to render it reasonable.
9. This Agreement shall not become effective or enforceable until seven
(7) days following its execution by Employee. Prior to the expiration of this
seven-day period, Employee may revoke assent to this Agreement by giving written
notice to Company's President.
10. Employee and Company acknowledge that the terms of this Agreement
constitute confidential information that may be considered proprietary
information to either or both parties, and, except as otherwise set forth
herein, agree to not disclose the terms hereof to any third party.
11. Employee and Company agree not to libelously or slanderously either
disparage or do harm to the reputation of each other,
12. Any dispute regarding the validity, effect, operation, interpretation
or application of this Agreement shall be resolved by arbitration under the
American Arbitration Association's rules and procedures for resolution of
employment disputes. The results of such arbitration shall be final and binding
unless otherwise provided by law.
13. If either the Company or Employee shall waive any breach of any
provision of this Agreement, neither the Company nor Employee shall be deemed to
have waived any preceding or succeeding breach of the same or any other
provision of the Agreement.
IN WITNESS WHEREOF, the aforementioned parties, intending to be legally
bound hereby, have executed this Agreement this 10th day of September, 1998.
/s/Michael E. Bielonko
- -------------------------------
Employee
<PAGE>
YANKEE ENERGY SYSTEM, INC.
By: /s/Ellen Quinn
--------------------
<PAGE>
EXHIBIT 10.25
SEPARATION AGREEMENT AND GENERAL RELEASE
----------------------------------------
THIS SEPARATION AGREEMENT AND GENERAL RELEASE is made as of the 29th day of
September, 1998 (hereinafter referred to as the "Settlement Agreement"), by and
among Branko Terzic (hereinafter referred to as "Terzic") and Yankee Energy
System, Inc. (hereinafter referred to as "YES") and Yankee Gas Services Company
(hereinafter referred to as "Yankee Gas").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Terzic, YES and Yankee Gas are parties to an Employment Agreement
dated September 15, 1994 pursuant to which Terzic has been serving as Chairman,
Chief Executive Officer and a Director of Yankee Gas and Chairman, President,
Chief Executive Officer and a Director of YES (the "Employment Agreement");
WHEREAS, Terzic is a participating member in YES' existing Long-Term Incentive
Compensation Plans (the "Plans");
WHEREAS, Terzic has elected to resign his employment with Yankee Gas and YES
effective at the close of business on September 29, 1998 (the "Resignation
Date"); and
WHEREAS, Terzic, Yankee Gas and YES desire to settle fully and finally any
differences, rights and duties arising among them, including, but in no way
limited to, any differences, rights, and duties that have arisen or might arise
out of or are in any way related to the Employment Agreement, the Plans,
Terzic's employment with Yankee Gas and YES, and the conclusion of such
employment;
NOW, THEREFORE, in consideration of the covenants and mutual promises herein
contained, it is agreed as follows:
FIRST: This Settlement Agreement shall not in any way be construed as an
-----
admission by Yankee Gas, YES or Terzic that any party has any valid claims
whatsoever against the other party, and Yankee Gas, YES and Terzic specifically
deny any liability to or for any wrongful acts against one another.
SECOND: Terzic represents that he has not filed against Yankee Gas and YES
------
or any of their respective, parents, subsidiaries and affiliates and each of
their respective stockholders, predecessors, successors, assigns, agents,
directors, officers, employees and representatives, (collectively, the "Related
Persons"), any complaints, charges or lawsuits with any governmental agency or
any court arising out of Terzic's employment by Yankee Gas and YES, any
ownership or purported ownership of any stock of Yankee Gas and YES or any of
their parents, subsidiaries or affiliates or any other matter arising on or
prior to the date hereof. Terzic covenants and
<PAGE>
agrees that he will not, directly or indirectly, commence or prosecute, or
assist in the filing, in any court or local and state administrative agency any
claim or charge, against Yankee Gas and YES or any of their Related Persons,
arising out of any of the matters set forth in this Settlement Agreement or
based upon any common law or statutory claim against Yankee Gas and YES or any
of the Related Persons that can be brought under Federal law or the law of any
state; provided, however, that this shall not limit Terzic from commencing a
proceeding for the sole purpose of enforcing his rights under this Settlement
Agreement.
THIRD: Yankee Gas hereby agrees to pay Terzic in a lump sum, an amount
-----
equal to twice Terzic's current base salary (excluding any bonus or other
compensation amounts), less all applicable payroll deductions, such payment to
be made on a date selected by Yankee Gas not later than October 15, 1998, but in
no event earlier than the expiration of the seven-day period referred to in
Section Twenty-Second (the "Separation Payment"). Terzic acknowledges and
agrees that the Separation Payment and the provision of the other benefits
described herein exceed any payment to which Terzic would otherwise have been
entitled under the Employment Agreement or otherwise. Terzic further
acknowledges and agrees that he shall not be entitled to receive any additional
bonus payments other than those that have been previously paid and that other
than as specifically set forth in this Settlement Agreement, he is not due any
compensation, including compensation for unpaid salary, unpaid bonus, or accrued
or unused vacation time or vacation pay.
FOURTH: YES covenants and agrees that all of Terzic's unvested stock
------
options to purchase stock of YES shall vest on or prior to the Resignation Date.
Terzic shall be entitled to exercise all of his options to purchase stock in YES
in accordance with the terms and conditions of YES' stock option agreements and
the Plans. Notwithstanding the foregoing or anything else contained in the
stock option agreements or the Plans, Terzic acknowledges and agrees that
Terzic's options to purchase stock in YES shall expire on the first anniversary
of the Resignation Date. In addition, Terzic's 4,000 restricted common shares
of YES shall vest and be deemed unrestricted on or prior to the Resignation
Date.
FIFTH: Yankee Gas shall provide Terzic with continued medical coverage
-----
under its medical plan as amended from time to time by Yankee Gas in its sole
discretion until the earliest of (i) March 31, 1999; or (ii) the date that
Terzic becomes eligible to receive health care coverage offered by a subsequent
employer. Thereafter, Terzic shall be entitled to extend his medical coverage,
at his expense, in accordance with the terms and conditions of COBRA and the
limitations thereof.
SIXTH: YES, at its sole expense, shall provide reasonable outplacement
-----
service through Lee Hecht Harrison to Terzic for a period of six (6) months
following the Resignation Date.
SEVENTH: Yankee Gas shall pay Terzic the amount of $18,462, less all
-------
applicable withholding taxes, such sum representing the unused portion of
Terzic's 1998 vacation days, such payment to be made within thirty (30) days of
the Resignation Date.
EIGHTH: Yankee Gas and YES shall deem Terzic to be fully vested, as of
------
December 31,
<PAGE>
1998, in ten (10) years of service under YES' Retirement Plan and Excess Benefit
Plan.
NINTH: Terzic shall return to Yankee Gas the leased vehicle that is
-----
currently being provided to him no later than October 2, 1998. Terzic shall
have the right, until October 30, 1998, to purchase said vehicle for a price
equal to the cost Yankee Gas would incur itself to purchase the vehicle under
the terms of the related lease.
TENTH: (a) Terzic agrees and acknowledges that during the course of his
-----
employment with Yankee Gas and YES he had confidential information about and
which is the property of Yankee Gas and YES. Such confidential information
includes, but is not limited to, customers, trade practices, pricing and other
competitive practices, trade secrets, computer access and source codes,
financial data and know-how of Yankee Gas and YES, their parents, subsidiaries
and affiliates.
(b) Terzic agrees and acknowledges that Yankee Gas and YES are
engaged in a competitive business and that any disclosure, divulgence, use or
revelation of any confidential information would be highly detrimental to Yankee
Gas and YES and that serious loss of business and other damage may result
therefrom.
(c) At all times hereafter, Terzic will maintain the
confidentiality of all information relating to the business, customers, trade
practices, pricing and other competitive practices, trade secrets, computer
access and source codes, financial data and know-how of Yankee Gas and YES,
their parents, subsidiaries and affiliates, and Terzic will not, directly or
indirectly, make any disclosure thereof to anyone, or make any use thereof, on
his own behalf or on behalf of any third party, without Yankee Gas' and YES'
prior written consent. Terzic has returned or will immediately return to Yankee
Gas and YES all computers (except the Dell laptop currently in Mr. Terzic's
possession), pagers, portable telephones, facsimile machines, customer lists,
computer disks, reports, files, memoranda, records and software, credit cards,
cardkey passes, door and file keys, computer access codes or disks and
instructional manuals, and other physical or personal property which he received
or prepared or helped prepare in connection with his employment with Yankee Gas
and YES or his service as an employee of Yankee Gas and YES, their subsidiaries
and affiliates, and Terzic has not retained and will not retain any copies,
duplicates, reproductions or excerpts thereof. Terzic agrees to take all
necessary actions, if required by and at the cost of Yankee Gas and YES, to vest
such property rights in Yankee Gas and YES. This subsection (c) shall not apply
to speeches and articles on utility industry topics written by Terzic during the
course of his employment and available to the public as of the date of this
Agreement.
ELEVENTH: Not later than October 2, 1998, Terzic shall submit an itemized
--------
listing of any unreimbursed business expenses incurred by him on behalf of
Yankee Gas and YES. Within five business days following receipt of such list,
Yankee Gas or YES will reimburse Terzic for all such ordinary and reasonable
business expenses incurred by him through the Resignation Date.
TWELFTH: Effective as of the Resignation Date, Terzic hereby resigns all
-------
positions with Yankee Gas and YES and their respective subsidiaries and
affiliates as an officer, employee
<PAGE>
or member of any board of directors. As used herein, the term "affiliates" shall
include all utility industry-related organizations with respect to which Terzic
serves at the request of or in connection with the business of either Yankee Gas
or YES but shall not include other non-profit organizations in which Mr. Terzic
continues to serve solely in an individual capacity.
THIRTEENTH: Terzic agrees that he shall not make any statements or
----------
comments to the media concerning Yankee Gas, YES, any of the of the Related
Parties, his employment with Yankee Gas and YES, or the termination thereof
without the prior written consent of Yankee Gas or YES, except to generally
endorse and explain the "Statement of Branko Terzic" referred to below. Nothing
in this Agreement shall prohibit Terzic from media discussions concerning his
plans or planning for future employment nor inhibit him from sharing his
opinions concerning the natural gas industry without mention, directly or
indirectly, of Yankee Gas, YES or any of the Related Persons.
The parties agree that a mutually-agreed press release relating to Terzic's
termination of employment shall be publicly released by Yankee Energy, and that
concurrently with such release Terzic shall be entitled to publicly release a
separate statement which will be reviewed in advance and approved by Yankee
Energy, such approval not to be unreasonably withheld.
FOURTEENTH: The parties recognize that in view of the nature of Terzic's
-----------
employment and the nature of the confidential information of Yankee Gas and YES
to which he has had access during the course of his employment, that in the
event of a breach or threatened breach by Terzic of his obligations hereunder,
Yankee Gas or YES shall be entitled, if it so elects to institute and prosecute
proceedings in any court of competent jurisdiction, either in law or in equity,
to obtain damages for any breach or to enforce the specific performance thereof.
Without limiting the generality of the foregoing, the parties acknowledge that a
breach or threatened breach by Terzic of any of the obligations set forth in
paragraph TENTH of this Settlement Agreement would cause irreparable harm to
Yankee Gas and YES, that Yankee Gas and YES have no adequate remedy at law, and,
therefore, Yankee Gas and YES would be entitled to injunctive relief with
respect thereto.
FIFTEENTH: The parties agree to keep the terms of this Settlement
---------
Agreement completely confidential except that (i) such terms may be disclosed to
legal counsel or tax accountants on a confidential basis or as may be necessary
to obtain enforcement thereof, (ii) Yankee Gas and YES may disclose the terms
hereof to the extent required, in the opinion of counsel, by applicable law or
regulation, and (iii) Terzic may disclose the terms hereof to members of his
family (and Terzic shall be responsible for any violation of the confidentiality
provisions of this Agreement by family members) or, upon prior notice to Yankee
Energy, in response to a subpoena or court order which Yankee Energy shall have
a reasonable opportunity to contest.
SIXTEENTH: As a material inducement to enter into this Settlement
---------
Agreement and to make the Separation Payment and provide the other benefits set
forth herein, Terzic knowingly and voluntarily releases, acquits and forever
discharges Yankee Gas, YES and the Related Persons, from any and all charges,
complaints, claims, liabilities, obligations, promises,
<PAGE>
agreements, controversies, damages, actions, causes of action, suits, rights,
demands, costs, losses, debts and expenses of any nature whatsoever, known or
unknown, suspected or unsuspected, foreseen or unforeseen, matured or unmatured
(collectively, "Claims"), which, from the beginning of the world up to and
including the date hereof, exists, have existed, or may arise from any matter
whatsoever occurring, including, but not limited to, any Claims arising out of
or in any way related to (i) the Employment Agreement; (ii) the ownership or
purported ownership of any stock of Yankee Gas and YES or any of their parents,
subsidiaries or affiliates; (iii) the Plans; and (iv) Terzic's employment with
Yankee Gas and YES and the conclusion thereof, which Terzic or any of his heirs,
executors, administrators, successors and assigns ever had, now has or at any
time hereafter may have, own or hold against Yankee Gas, YES or any of the
Related Persons. By executing this Settlement Agreement, Terzic is waiving all
Claims against Yankee Gas, YES and the Related Persons arising under federal,
state and local labor and anti-discrimination laws and any other restriction on
the right to terminate employment, including, without limitation, the Age
Discrimination in Employment Act ("ADEA"), the Family and Medical Leave Act,
Title VII of the Civil Rights Act, the Americans with Disabilities Act, the
Employees Retirement Income Security Act of 1974, and the Connecticut Fair
Employment Practices Act, all as amended, including but not limited to, claims
based upon race, color, age, religion, sex, national origin, ancestry, sexual
orientation, marital status, mental or physical disability and harassment based
on any of these categories or any other protected category and any Claims based
on the right to the payment of wages, vacation, pension benefits or any other
employee benefit. Nothing herein shall release any party from any obligation
under this Settlement Agreement.
SEVENTEENTH: The parties and Related Persons agree that they will not
-----------
make, or cause to be made, any statements, observations or opinions, or
communicate any information (whether written or oral) that disparages or is
likely in any way to harm the reputation of any party or any of the Related
Persons.
EIGHTEENTH: In the event of any breach by Yankee Gas and YES, Terzic may
----------
only institute an action for specific enforcement of the terms of this
Settlement Agreement and seek damages resulting from such breach. Terzic may
not institute any proceeding based on the claims related to his employment with
Yankee Gas and YES or the termination thereof.
NINETEENTH: In the event that Terzic breaches any of his obligations set
----------
forth in this Settlement Agreement, Yankee Gas and YES will no longer be
obligated to pay the Separation Payment (if it has not already been paid), and
Yankee Gas and YES shall be entitled to recover the Separation Payment as
liquidated damages for any such breach, together with all costs and attorneys'
fees incurred by Yankee Gas and YES or any of the Related Persons.
TWENTIETH: In the event of Terzic's death, Terzic's estate, designated
---------
beneficiary or legal representative shall be entitled to receive the Separation
Payment and other benefits set forth in this Settlement Agreement.
TWENTY-FIRST: The parties represent to the other that in executing this
------------
Settlement Agreement he or it does not rely and has not relied upon any
representation or statement not set
<PAGE>
forth herein made by the other party or by any of the other party's agents,
representatives, or attorneys with regard to the subject matter, basis or effect
of this Settlement Agreement or otherwise.
TWENTY-SECOND: Yankee Gas and YES have advised Terzic to consult with an
-------------
attorney of his choosing prior to the signing of this Settlement Agreement and
Terzic hereby represents to Yankee Gas and YES that he has been offered an
opportunity to consult with an attorney prior to the execution of this
Settlement Agreement. Terzic acknowledges that he has been given an opportunity
to consider the waiver of his rights under the ADEA and once he has signed this
Settlement Agreement, Terzic shall have seven additional days from the date of
execution to revoke his consent to the waiver of his rights under the ADEA.
This Settlement Agreement will not become effective or enforceable until the
seven-day period has expired.
TWENTY-THIRD: This Settlement Agreement will be governed by and construed
------------
and enforced under the laws of the State of Connecticut, without regard to its
conflict of laws rules.
TWENTY-FOURTH: In the event that any one or more of the provisions of this
-------------
Settlement Agreement is held to be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions will not in
any way be affected or impaired thereby. Moreover, if any one or more of the
provisions contained in this Settlement Agreement is held to be excessively
broad as to duration, scope, activity or subject, such provisions will be
construed by limiting and reducing them so as to be enforceable to the maximum
extent compatible with applicable law.
TWENTY-FIFTH: Terzic expressly represents and warrants that he has
------------
carefully read and fully understands that this Settlement Agreement is a general
release of all claims, whether known or unknown, and that he has executed this
Settlement Agreement voluntarily, without duress, coercion or undue influence
and with such advise from his attorney as appropriate.
TWENTY-SIXTH: This Settlement Agreement sets forth the entire agreement
------------
between the parties hereto and may not be changed without the written consent of
the parties. This Settlement Agreement supersedes all prior agreements and
understandings concerning the subject matter hereof and the parties acknowledge
and agree that the Employment Agreement shall be of no further force and effect
and that the parties shall have no further obligations under the Employment
Agreement. The parties may execute this Settlement Agreement in counterparts.
TWENTY-SEVENTH: This Settlement Agreement is intended to be binding upon
--------------
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
TWENTY-EIGHTH: Any dispute regarding this Agreement shall be exclusively
-------------
resolved by arbitration under the American Arbitration Association's rules and
procedures for resolution of employment disputes. The results of such
arbitration shall be final and binding.
BRANKO TERZIC YANKEE GAS SERVICES COMPANY
<PAGE>
/s/Branko Terzic /s/Charles E. Gooley
___________________________ By:____________________________
Name: Charles E. Gooley
Title: President
YANKEE ENERGY SYSTEM, INC.
/s/Emery G. Olcott
By:____________________________
Name:
Title:
<PAGE>
EXHIBIT 11
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Basic and Diluted Earnings Per Share Computation
<TABLE>
<CAPTION>
For the Years Ended September 30
--------------------------------
1998 1997 1996
---- ---- ----
(In thousands,except share data)
<S> <C> <C> <C>
Net Income 10,883 16,957 21,919
----------- ----------- -----------
Weighted Average Common Shares Outstanding
Basic 10,495,806 10,451,165 10,435,231
----------- ----------- -----------
Stock Options 5,605 2,153 2,230
----------- ----------- -----------
Diluted 10,501,411 10,453,318 10,437,461
----------- ----------- -----------
Basic Earnings
Per Share $ 1.04 $ 1.62 $ 2.10
----------- ----------- -----------
Diluted Earnings
Per Share $ 1.04 $ 1.62 $ 2.10
----------- ----------- -----------
</TABLE>
<PAGE>
EXHIBIT 13
1998 Yankee Energy System, Inc. Annual Report
YES
The Energy Magazine for Investors
Unlocking new growth
[PICTURE APPEARS HERE]
New data drives growth Natural gas stock Q&A
--------------------------------------------------------------------------
INSIDE
--------------------------------------------------------------------------
R.M. Services joins Dun & Bradstreet Getting Y2-capable
<PAGE>
Unlocking new growth at the core of our business
COMPANY PROFILE
Yankee Energy was founded in 1989 to provide natural gas distribution to
residential, commercial, and industrial customers in Connecticut. The demand for
natural gas has increased steadily, as has our ability to bring it to market and
produce a return. Here is a report on how Yankee continues to grow with the
demands of the southern New England energy market.
Yankee Energy System, Inc. (YES or the Company), headquartered in Meriden,
Connecticut, is a diversified company specializing in the distribution,
conversion and control of energy to meet our customers' needs. Our principal
operating subsidiary is Yankee Gas Services Company (Yankee Gas).
Yankee Gas, the largest natural gas distribution company in Connecticut,
provides service to more than 183,000 customers in 68 of the state's cities and
towns. The Company's other operating subsidiaries support our core business in
natural gas distribution, or allow us to expand our growing business in
energy-related services.
Yankee Energy Services Company (YESCo) provides a wide range of energy-related
services for its customers including comprehensive building automation with
engineering, installation, and maintenance of building control systems through
its YESCo Controls division, and comprehensive heating, ventilating and air
conditioning (HVAC), boiler and refrigeration equipment services and
installation through its YESCo Mechanical Services division.
In addition to Yankee Gas and YESCo, two other subsidiaries are taking advantage
of market opportunities. R.M. Services, Inc. provides collection services for
companies throughout the United States, and Yankee Energy Financial Services
Company provides a full range of equipment and home improvement financing
options through programs like the Hometown Energy Loan Program. Another
subsidiary, NorConn Properties, Inc. (NorConn) owns selected system real estate
and leases it to Yankee Gas.
Additional company information can be found at the YES web site,
www.yankeeenergy.com.
[CAPTION OF YEAR IN REVIEW APPEARS HERE]
YANKEE'S YEAR IN REVIEW 1998
Yankee Energy Stats
$315 million
Gross annual revenue for Yankee Energy hits the $315 million mark.
183,000 Utility Customers
and growing. In 1998, Yankee added nearly 2,000 more customers--residential,
commercial and industrial--to its base.
Key Characteristics
Strong management with diverse experience; attractive yield; solid dividend
growth for eight straight years; secure opportunities in basic natural gas
business; clearly articulated business strategy.
68 Towns
Yankee Gas' service area covers approximately half of Connecticut's land area
representing 44 percent of the state's 1.3 million households.
Four-year contract signed with International Brotherhood of Electrical Workers.
Three awards received for safety and environmental responsibility.
Charles E. Gooley named President and CEO; Emery G. Olcott assumes chairmanship.
Eight consecutive annual increase in shareholder dividend.
Yankee Financial forms national home energy loan program.
[PICTURE YANKEE GAS SERVICE AREA]
R.M. Services forms alliance with Dun and Bradstreet.
98 Financial HIGHLIGHTS
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 % Change
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
FINANCIAL (In thousands)
Utility revenues $ 283,839 $ 318,954 (11.0)%
Nonutility revenues $ 30,928 $ 6,087 408.1%
Net income $ 10,883 $ 16,957 (35.8)%
Capital expenditures $ 39,496 $ 35,211 12.2%
Net utility and nonutility plant $ 380,711 $ 370,176 2.8%
COMMON STOCK
Earnings per share $ 1.04 $ 1.62 (35.8)%
Stock price (end of year) $ 26.19 $ 23.69 10.6%
Quarterly dividend (end of year) $ 0.345 $ 0.335 3.0%
Yield (end of year) 5.3% 5.7% (7.7)%
Weighted average common
shares outstanding 10,495,806 10,451,165 0.4%
Book value per share (end of year) $ 15.65 $ 15.85 (1.3)%
OPERATIONS
Gas sales (MMcf) 31,077 38,022 (18.3)%
Gas transportation (MMcf) 16,070 10,912 47.3%
Degree days (normal 6,151) 5,502 5,979 (8.0)%
Customers (average) 183,070 181,242 1.0%
- ----------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Market Price Per Share $ 21.50 21.375 22.875 23.6875 26.1875
Book Value Per Share $ 14.536 14.596 15.509 15.85 15.646
Earnings $ 1.81 1.20 2.10 1.62 1.04
Dividends Paid $ 1.19 1.24 1.28 1.32 1.36
Cash Flow $ 31.7 38.5 36.4 28.6 18.5
In millions
------
</TABLE>
<PAGE>
Cover Stories & Features
COVER STORIES
[PICTURE APPEARS HERE] MESSAGE TO
SHAREHOLDERS
TECHNOLOGICAL
ADVANCEMENTS
[PICTURE APPEARS HERE]
[PICTURE APPEARS HERE]
FORECASTING GROWTH
IN 1999
4 YANKEE FINANCIAL
5 R.M. SERVICES
9 Y2K PREPARATIONS PROGRESS
10 Q&A: WHY A UTILITY STOCK?
12 QUESTIONS & ANSWERS
13 DIRECTORS AND OFFICERS
14 FINANCIAL INFORMATION
CONTENTS
1998 Yankee Energy System Annual Report
1
<PAGE>
[PICTURE APPEARS HERE]
Emery G. Olcott Charles E. Gooley
In September of 1998, your board of directors elected Charles E. Gooley, a
senior officer since the Company's inception, as President and CEO of the
Company and Emery G. Olcott, a director since 1989, as Chairman of the Board of
Directors.
TO OUR SHAREHOLDERS
After more than 17 years of combined experience with Yankee Energy, we are
privileged to have the opportunity to lead the Company into a new millennium.
And so it is an appropriate time to reflect on our accomplishments, our
challenges and, most important, to share with you our vision for the future of
this Company.
Yankee Energy has risen from relative obscurity in 1989 to being recognized as
one of the most progressive energy companies in the United States. We remain the
largest distributor of natural gas in Connecticut and Yankee has become an
identifiable brand name to Connecticut consumers. Because of our core strength
in the natural gas distribution business, we have returned a dividend to our
investors for the tenth consecutive year. We intend to focus and build on the
strengths of our core business.
Over the last two years, we have spent a great deal of
management time and attention on investments in power generation, building
control systems, and the installation and servicing of HVAC, boiler, and
refrigeration equipment. As we expanded the geographic reach of these energy
services businesses through our YESCo subsidiary, it became more difficult for
our newly formed YESCo organization to manage the new businesses, acquisitions,
and greater geographical reach. For the third consecutive year, YESCo failed to
reach profitability. This mandated a careful analysis that has led to this
conclusion: While there are opportunities in energy services we will continue to
exploit, we will only pursue them when they are complementary to our core
strengths and support the expansion of our natural gas distribution business.
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As a result of this new focus we have decided to divest all of the
power-generation assets located outside Connecticut. We will continue to assist
power generation developers in procuring reliable sources of natural gas for
their projects but we will tend to concentrate on such projects closer to home.
We continue to have confidence of our ability to operate the building controls
and HVAC businesses profitably. In fact, we have already taken steps to shift
existing HVAC capabilities under YESCo's operation to support our strength in
natural gas distribution services. We also have centralized YESCo's operations
to bring staff, dispatching, purchasing and billing under one roof.
These measures, combined with strict cost management, will enable us to price
our services aggressively, still earn reasonable returns, and continue to
provide excellent service to our customers. Then, once we have proven to you
that we can deliver reasonable returns in the energy services business, we will
consider expanding our investments in that sector. But our primary focus will
continue to be on energy services that enhance the use of natural gas in the
current 68-town Yankee Gas service area.
Our strategic plan to accomplish this will employ data secured through
advanced market research. The new data are showing us the precise areas where
natural gas expansion can be unlocked at the greatest level of profitability in
all customer segments. While we pursue these opportunities we will intensify the
cost-management strategies that have been successful in the past. Our base
natural gas prices have not increased since 1992 and we intend to continue to
avoid base price increases.
Because of our core strength in the natural gas distribution business, we have
returned a dividend to our investors for the tenth consecutive year.
Our primary focus will continue to be on energy services that enhance the use of
natural gas in the current 68-town Yankee Gas service area.
We will only pursue energy services when they are complementary to our core
strengths and support the expansion of our natural gas distribution business.
3
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Last year we reported progress in the area of firm transportation by our Yankee
Gas subsidiary, enabling commercial and industrial customers to purchase natural
gas from other suppliers. Since our profits are derived from the transportation
of natural gas and not the sale of natural gas itself, this area of business
promises greater opportunities for our customers to benefit from the direct
purchase of gas from another supplier at lower prices. Firm transportation
continues to provide excellent value to our non-residential customer base.
This, then, is the plan for increasing Yankee Energy's value to you, our
shareholders: achieve greater market share along our mains; contain costs;
capitalize on higher margin energy services opportunities; maintain our strong
presence in regulatory and legislative affairs; elevate customer service to new
heights; and develop non-weather-dependent revenue sources for the future.
Now, we'd like to share with you some exciting developments that have grown from
Yankee Energy's expertise in energy and energy management.
In the past year, our R.M. Services subsidiary has entered into an alliance with
Dun & Bradstreet Receivables Management Services, the world's largest supplier
of business-to-business credit management services. This new partnership will
put our consumer collections expertise to work for D&B clients, with a goal
being to unlock the massive national market of uncollected utility debt.
Yankee Energy Financial Services, which for years has offered home energy-
related financing to residential, commercial, and industrial customers here in
Connecticut, is now working in conjunction with the American Public Gas
Association to offer the Hometown Energy Loan Program. This national endeavor,
financed by Fannie Mae and administered by Yankee Financial based on its core
expertise in energy loans, markets home-energy improvement financing to more
than three million APGA customers. This effort will not affect Yankee
Financial's ability to continue to support Yankee Gas and YESCo by enabling
Connecticut customers to purchase equipment.
With this new direction set, and with promising new partnerships already at
work, we report to you that our earnings for 1998 were less than desired: $1.24
per share, exclusive of nonrecurring charges, down $0.38 from $1.62 in 1997.
Warm weather also diminished our financial results in 1998. Earnings for the
year were reduced by $0.42 per share due to warmer-than-normal temperatures.
Also reflected in 1998 results is a one-time charge against earnings of $0.20.
This is largely associated with the restructuring of our unregulated business
under YESCo.
With those restructuring charges behind us and a solid plan for the future, We
look forward with great enthusiasm to the second decade of your Company's
existence.
/s/ Charles E. Gooley /s/ Emery G. Olcott
Charles E. Gooley Emery G. Olcott
Chief Executive Officer Chairman of the Board
and President
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Yankee Financial teams with APGA and Fannie Mae in home energy loan program.
Yankee Energy is tapping into the national home energy improvement market
through a loan program based on a successful model developed by Yankee Energy
Financial Services Company. For years, Yankee Financial has helped Connecticut
customers finance natural gas-fueled energy systems and equipment. Yankee
Financial's role has become more than an added service; Yankee Financial is
involved in the negotiations YESCo conducts with its commercial and industrial
customers for energy equipment. In 1998, the sale and installation of several
cogeneration systems were possible because of Yankee Financial's ability to make
energy improvements affordable for the commercial and industrial sector, which
is where the greatest profit margins exist for the Company. And now, Connecticut
homeowners enjoy the convenience of qualifying for a loan over the phone or
electronically through Yankee Energy's web site. On the strength of its success,
Yankee Financial joined Fannie Mae and the American Public Gas Association
(APGA) in a national home energy-improvement program. The Hometown Energy Loan
Program (HELP) offers broad-based, low-cost home energy improvement financing.
"This opportunity grew directly from one of our core competencies in the natural
gas business," said Matthew Ide, manager of Finance Services. "We were
approached by the APGA based on our track record in providing energy financing
for homeowners here in our home state. We have the expertise in the utilities
sector to handle the types of loans this program brings to the market." Yankee
Financial will continue to provide financing programs for in-state commercial
and industrial customers. HELP works like this: APGA-member utilities in the
lower 48 states are eligible to participate. Their customers can finance home
improvements such as insulation, ductwork, windows, and heating and cooling
equipment up to $15,000 for up to 10 years, with locked-in interest rates.
Fannie Mae provides the capital. The utility markets the program to its
customers. Yankee provides a turnkey loan program and earns revenue on every
loan processed. There are no prepayment penalties, and utilities are protected
from losses on defaulted loans, thereby eliminating credit risk. "HELP is a
low-cost answer to every homeowner's desire to improve what is probably their
biggest investment," said Ide. "And it can connect Yankee Energy to an
additional 3.8 million potential loan customers nationwide. It's a good example
of how new revenue can grow from our bedrock business in serving natural gas
customers."
YANKEE'S R.M. SERVICES FORMS
PARTNERSHIP WITH DUN & BRADSTREET
Yankee Energy is taking advantage of the estimated $29.2 billion that goes
uncollected each year in utility industries through a new alliance with an
internationally renowned corporation. Dun & Bradstreet, the world leader in
industrial receivables management services, has joined forces with Yankee
Energy's R.M. Services, Inc., giving Dun & Bradstreet the ability to penetrate
the vast market of consumer receivables in regulated industries such as energy
and telecommunications. The new alliance, based at Yankee Energy's headquarters
in Meriden, Connecticut, gives Yankee a new revenue source that is independent
of New England winter weather. "A few years ago, R.M. Services reduced Yankee
Energy's bad debt by 50 percent and added $2.0 million to their bottom line
through state-of-the-art collection services," said Murry K. Staples, the firm's
vice president and general manager. "We're bringing that capability to our
alliance with Dun & Bradstreet. Now we can attract a wide range of clients."
Staples pointed out that companies can increase their overall value by reducing
bad debt. But advanced infrastructure such as professionally staffed call
centers and dedicated computer systems is needed to implement an aggressive
receivables collection program. The Dun & Bradstreet/R.M. Services partnership
immediately puts these resources -and extensive management expertise -- to work
for their clients. "R.M. Services' core strength in collecting unpaid consumer
utility bills was recognized by Dun & Bradstreet," said Staples. "Together,
we're capable of capitalizing on this huge market."
5
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[PICTURE APPEARS HERE]
Intelligent growth, driven by new data
ADVANCED MAPPING SYSTEMS AND MARKET ANALYSIS ARE
ENABLING INTELLIGENT, COST-EFFICIENT GROWTH FOR YANKEE ENERGY
In the past year, Yankee Gas added 1377 new residential customers and 451 new
commercial and industrial customers to its core natural gas business. These
increases in Yankee's customer base are part of a two-year trend that has seen a
customer growth rate nearly twice that experienced over the previous two years
(FY 95 and 96).
This growth reflects a shift in Yankee's sales strategy, which now provides
greater incentives for the sales force to develop more profitable areas of
business, particularly the commercial sector, where there has been an increase
of approximately 60 percent in the last year. Riding the momentum of this
success, Yankee's marketing efforts are taking on a sharp new focus through a
highly detailed market research study.
"The new data enable us to do several things better than we've done them
before," said John Ferrantino, director of Market Development. "First, we can
determine precisely where the greatest potential is for growth. Second, our
research shows that we can grow more efficiently by influencing the
preconstruction decision-making process surrounding natural gas. Third, we can
pinpoint markets where our cost of doing business is lowest and our
profitability greatest."
Seeing new potential in existing markets
Working with the Connecticut Economic Resource Center (CERC), Yankee has
developed grids that provide greater detail of the Yankee distribution system
and the location of businesses within each town eligible for natural gas
service.
This provides an easy-to-use visual analysis of potential prospects in relation
to the Yankee distribution system. "We've always known that the
commercial/industrial markets are where the greatest volume and profitability
exist," said Ferrantino. "Now we can target this part of our market with greater
efficiency."
6
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Lowering CDB
Another factor influencing Yankee's marketing efforts is the analysis of
service-installation costs. "We know our labor and material costs for connecting
new customers to our mains," said Ferrantino. "But different towns have
different ordinances and restrictions that affect our cost of doing business.
When we compare this information to forecasted statewide housing growth, we can
determine which parts of our service area offer the best potential for
profitable growth."
Building markets from the ground up
Different markets require different marketing approaches. While the residential
customers are the ones who pay the gas bill, they are typically not the ones who
specify the type of heating system for their home. This decision is heavily
influenced by the contractor or builder. By strengthening relationships with
this group, Yankee can achieve a greater return on its marketing efforts.
"For each of the past two years, we added approximately 1300 residential
customers, mainly former oil customers who switch to natural gas for performance
and environmental reasons, regardless of cost," said Ferrantino. "But the 80 to
96 percent efficiency of new natural gas heating systems means that less of the
commodity may be used. That means we must market more individual burner tips in
each customer site, whether it's a natural gas fireplace, grill, clothes dryer
or stove. The best way to do that is to go after the people in the business of
developing real estate. This will result in better market penetration in the
residential, commercial and industrial segments of our business."
[PICTURE APPEARS HERE]
Companies like the Bristol-Myers Squibb Pharmaceutical Research Institute in
Wallingford, are turning to Yankee for energy solutions that increase efficiency
and profitability. And all-gas housing complexes like Deep Brook Harbor,
Suffield (left), reflect Yankee's efforts to capitalize on residential markets
through marketing efforts with contractors and developers.
Pushing and pulling new market potential
Ferrantino describes the overall Yankee marketing plan in classic marketing
terms: While contractors, builders and architects are pushed to recommend and
specify natural gas from the outset of construction, residential and
commercial/industrial targets will be pulled into requesting natural gas with
consistent, focused sales and marketing efforts.
"We're smarter than we've ever been," said Ferrantino. "We better understand
where our markets are, how to reach them, and where we can do business at the
greatest level of profitability. We have all the tools to saturate our markets
efficiently."
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Technological advancements move forward
The driving force behind Yankee Energy's successful advancement is the effective
use of new systems that capture and organize data. Information concerning
markets and operations will be harnessed and directed toward greater expansion,
better service and improved overall performance. Here's how.
CCIS sharpens customer focus
Yankee is installing a new system for customer billing, customer data storage
and retrieval. The Customer Connection Information System (CCIS), to be
operational in April 1999, will bring the Company's customer service to a higher
level.
"CCIS instantly gives us a full view of the customer," said Project Director
Mike Marinaccio. "It shows the type of structure, the equipment in place, the
metering system, and the customer's service record, payment history, and usage
patterns. It strengthens our ability to serve all customers immediately and
efficiently."
HR software organizes internal data
Employees are people, but they also represent data. Payroll, benefits, training,
and job performance are just a few categories of information that need to be
logged and updated for every employee. A newly installed human resources system
by PeopleSoft(TM) is enabling Yankee to keep better records on employees and
maintain better employee relations.
"This Company employs 835 people," said Scott Waleski, director of Information
Services. "The PeopleSoft program lets us track individual benefits, vacation
time, flex time, payroll data, and other aspects of each person. It's a huge
boost to internal efficiency."
The new system also tracks the training and professional advancement of
employees. "It's an example of how technology can be used not only to organize
statistical data, but to help people develop," said Waleski.
E-business coordinates commodity flow
Yankee's Electronic Bulletin Board (EBB), implemented last year, continues to
improve the Company's communication with gas marketers. The system has
drastically reduced the paper and voice mail previously used to communicate with
those who sell the natural gas that flows through Yankee's distribution system.
According to Waleski, "Commodity marketers use the EBB to reserve capacity on
our mains, so we can forecast the volume of natural gas we'll need to
distribute. It improves the efficiency of both our external communications and
our business."
Virtual reality comes to gas cooling
Gas cooling has traditionally been difficult to sell. A new CD-based virtual
reality module is helping companies better understand this technology.
SolutionsPlus(TM), developed by Yankee's marketing department, is a first in the
industry. It is currently being used by gas companies throughout the country to
show potential customers the virtues of desiccant, absorption, and engine-driven
cooling systems in an interactive format.
The customized sales tool shows the configuration of a gas-cooling system at
work in a building, illustrating the flow of refrigerant and air throughout the
structure. The program also includes information on load-balancing, case
studies, and financing and installing equipment.
8
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[PICTURE APPEARS HERE]
SCADA: Enhancing total system control
Yankee's SCADA system (Supervisory Control and Data Acquisition), installed in
December of 1998, oversees all key functions in the Yankee natural gas
distribution network.
SCADA's role in Yankee's future cannot be undervalued. It enables the Company to
monitor the amount of commodity in the system, temperature and pressure readings
along every mile of main, the performance of natural gas transmission lines and
gate stations, and other important functions.
Because of the high level of control it provides, SCADA allows Yankee
to select which pipeline it opens to bring more natural gas into the Company's
distribution system. For example, if it is more efficient or cost-effective to
bring in more natural gas through the Algonquin pipeline rather than the
Tennessee pipeline, SCADA enables Yankee to issue the command through phone
lines and make the adjustment quickly and efficiently.
yankeeenergy.com wins award, and opens doors
Yankee's web site won "Best Energy Site" from the Web Marketing Association,
Inc., affirming Yankee's efforts to make it a front door to the Company for
everyone -- consumers, companies, gas marketers, regulators and investors.
There is a wealth of data available at the site and the design makes it easy for
lower-speed modems to move through it quickly.
The site includes a page for investors with real-time stock quotes and access to
detailed corporate information. Other features include access to gas usage data
for customers, and links to every Yankee subsidiary.
According to Steve Laden, vice president, Sales, Marketing and External Affairs,
"We are keeping the content and design interesting and interactive, so that once
people come through the front door, they stay for a while. And then come back
again."
Y2K Preparations Progress
Yankee began addressing Year 2000 systems issues in 1995. At the time of this
report, all mainframe computer systems are Y2K compliant. But the concerns over
Y2K consequences reach every level of corporate operations.
The PC systems within the Company are being prepared in a dedicated testing lab.
The LAN environment, embedded chip, and software equipment is being upgraded
simultaneously. Representatives from every department of the Company have been
assigned to make sure that Y2K issues are addressed. To ensure and expedite
clear, consistent communication, Yankee is using its intranet system to
continually update personnel on available resources, and the need to make
progress in this area.
Scott Waleski, director of Information Services for Yankee Gas, said "We got
a head start on this issue. The result is we're ahead of schedule for securing
operations in the new millennium, which in turn means we can focus on other
areas of technology that will improve our operations."
9
<PAGE>
Q&A
Why invest in a Natural Gas Utility Stock?
Daniel M. Fidell is a securities analyst with A.G. Edwards & Sons, Inc., a
full-service investment firm and NYSE member. Here he shares his views on the
value of investing in natural gas utilities stock.
Are natural gas stocks currently undervalued?
Our universe of gas utility stocks at A.G. Edwards consists of 41 companies [of
which Yankee Energy is one]. At current prices, gas utility stocks trade near 15
times estimated fiscal 1999 EPS, a valuation level approaching the group's five-
year low and below electric and water utility indices.
We've seen a roller coaster ride on Wall Street recently. How does market
turbulence factor into the decision of whether or not to buy a gas utility
stock?
Typically, gas utility stocks perform well during periods of overall
market uncertainty. Attractive yields and the ability to maintain
earnings growth despite an economic slowdown could make such stocks attractive
to investors if the volatility we've seen continues.
Since the share prices of gas utility stocks vary in accordance with long-term
interest rates and government bonds, tell us what's been happening in this area.
We're experiencing a favorable interest rate environment right now. Long-term
government bond yields have declined to a level near 5.2 percent without an
accompanying increase in the price of gas utility stocks. Consequently, the
potential returns of gas stocks related to government bonds have improved.
www.yankeeenergy.com
www.yankeeenergy.com
10
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What overall improvements do you see in how natural gas companies do business?
Gas utilities have worked hard to improve efficiency in the last few years. As a
result, earnings growth has increased, profitability ratios have risen, dividend
payout has decreased and balance sheets are stronger. And it looks like this
trend toward greater efficiency will continue. The other trend is toward
diversification. Many gas utilities have diversified their operations to include
nonregulated operations such as energy production, power generation,
consultation, and other energy-related ventures. Diversification is likely to
lead to increased earnings growth, albeit at a modest increase to the company's
overall risk profile.
What do you see with regard to demand for the commodity itself?
The American Gas Association indicated demand has increased 35 percent since
1986 in the United States. Still, only 65 percent of the residential homes in
the U.S. heat with natural gas. Market share expansion should continue for years
to come, especially in light of the fact that it's an environmentally friendly
fuel.
Describe your views on takeover and merger activity in this sector.
Consolidation activity within the sector is expected to continue going forward
and, as in the past, will most likely involve electric utilities paying a
premium price to acquire gas utilities. The median price paid for a gas utility
over the last three years has been approximately 20 times forward earnings, 2.3X
book value, 10.2X cash flow and $1,143 per customer, respectively.
11
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Yankee Energy Officers
Seven leaders. 115 years of experience.
Meet the people leading Yankee Energy. They have more than a century of
experience in the energy industry, with an average tenure of nine years here at
Yankee Energy. Their work is at the root of the Company's continuing new growth
in the business of natural gas distribution.
[PICTURE OF CHARLES E GOOLEY APPEARS HERE]
Charles E. Gooley
President and
Chief Executive Officer
[PICTURE OF MARY J. HEALEY APPEARS HERE]
Mary J. Healey
Vice President,
General Counsel and
Secretary
[PICTURE OF ELLEN J. QUINN APPEARS HERE]
Ellen J. Quinn
Vice President
[PICTURE OF STEVEN P. LADEN APPEARS HERE]
Steven P. Laden
Vice President
[PICTURE OF JAMES M. SEPANSKI APPEARS HERE]
James M. Sepanski
Vice President,
Chief Financial Officer and
Treasurer
[PICTURE OF THOMAS J. HOUDE APPEARS HERE]
Thomas J. Houde
Vice President
[PICTURE OF NICHOLAS A. RINALDI APPEARS HERE]
Nicholas A. Rinaldi
Controller
Board of Directors
[PHOTO OF SANFORD CLOUD, JR APPEARS HERE]
Sanford Cloud, Jr. /2/, /3/
President and
Chief Executive Officer
The National Conference for
Community and Justice
New York, NY
[PHOTO OF JOHN J. RANDO APPEARS HERE]
John J. Rando /2/, /3/
Senior Vice President and Group General Manager of Compaq Services at Compaq
Computer Corporation
Stow, MA
[PHOTO OF EMERY G. OLCOTT APPEARS HERE]
Emery G. Olcott /1/, /4/, /5/
Chairman
Yankee Energy System, Inc.
Chairman, President and
Chief Executive Officer
Packard BioScience Company
Meriden, CT
[PHOTO OF CHARLES E. GOOLEY APPEARS HERE]
Charles E. Gooley /1/
President and
Chief Executive Officer
Yankee Energy System, Inc.
Meriden, CT
[PHOTO OF EILEEN S. KRAUS APPEARS HERE]
Eileen S. Kraus /2/, /4/, /5/
Chairman, Connecticut Fleet National Bank
Hartford, CT
[PHOTO OF PATRICIA M. WORTHY APPEARS HERE]
Patricia M. Worthy /2/, /3/
Professor
Howard University
School of Law
Washington, D.C.
Committees of the Board
1 Executive 2 Audit 3 Finance 4 Organization and Compensation
5 Committee on Board Affairs
12
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FINANCIAL INFORMATION
Contents
Management's Discussion and Analysis
Management and Independent Public Accountants Reports
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Capitalization
Consolidated Statements of Common Shareholders' Equity
Notes to Consolidated Financial Statements
Selected Financial and Operating Data
Shareholder and Stock Information
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Yankee Energy System, Inc. (YES or the Company), headquartered in Meriden,
Connecticut, is a diversified company specializing in the distribution,
conversion, and control of energy to meet our customers' needs. Our principal
operating subsidiary is Yankee Gas Services Company (Yankee Gas). Yankee Gas,
the largest natural gas distribution company in Connecticut, provides service to
more than 183,000 customers in 68 cities and towns. The Company's other
operating subsidiaries support our core business in natural gas distribution, or
allow us to expand our growing business in energy-related services. Yankee
Energy Services Company (YESCo) provides a wide range of energy-related services
for its customers, including comprehensive building automation with engineering,
installation and maintenance of building control systems through its YESCo
Controls division, and comprehensive heating, ventilation and air-conditioning
(HVAC), boiler and refrigeration equipment services and installation through its
YESCo Mechanical Services division. During fiscal 1998, YESCo's Power division
also provided expertise related to the production of thermal and/or electric
power. In addition to Yankee Gas and YESCo, two other subsidiaries are taking
advantage of opportunities by positioning services once exclusively provided to
local energy customers to a broader marketplace. R.M. Services, Inc. (RMS),
through its alliance with Dun & Bradstreet Receivables Management Services,
provides consumer collection services for companies throughout the United
States, and Yankee Energy Financial Services Company (Yankee Financial) provides
a full range of equipment and home improvement financing options through
programs like the Hometown Energy Loan Program. NorConn Properties, Inc.
(NorConn) owns selected system real estate, which it leases to Yankee Gas.
Additional company information can be found at the Company web site,
www.yankeeenergy.com.
After completing a recent review of the various operating functions of YESCo,
management of the Company has decided to focus the efforts of YESCo primarily on
its controls and HVAC lines of business and to significantly reduce its cost
structure. As a result, the Company intends to dispose of the assets of YESCo's
Power division in fiscal 1999. In addition, the Company has restructured its
HVAC business, including the consolidation of locations and better focusing its
business both geographically and operationally.
The Company reported consolidated net income, exclusive of nonrecurring charges,
of $13.0 million, or basic and diluted earnings per share of $1.24, for its
fiscal year ended September 30, 1998. This compares with consolidated net income
of $16.9 million and $21.9 million, reflecting basic and diluted earnings per
share of $1.62 and $2.10, respectively, for fiscal years ended September 30,
1997 and 1996. Earnings for fiscal 1998 inclusive of nonrecurring items are
$10.9 million, or $1.04 basic and diluted earnings per share.
Earnings for fiscal year 1998 decreased due to warmer weather and customer bill
credits. In addition, earnings were unfavorably impacted by nonrecurring charges
related to the restructuring of the HVAC operations of YESCo, impairments of
certain YESCo Power division assets, and severance charges. In fiscal 1998,
weather was 11 percent warmer than normal and 8 percent warmer than the prior
fiscal year. Management estimates warmer weather reduced earnings by $4.4
million, or $0.42 per share, in the current fiscal year compared to normal, and
reduced earnings by $3.7 million, or $0.35 per share, compared to the prior
fiscal year. Customer bill credits resulting from a rate review settlement
approved by the Connecticut Department of Public Utility Control (DPUC) in
October 1997 reduced earnings by approximately $1.9
<PAGE>
million, or $0.18 per share, for the fiscal year ended September 30, 1998. In
the fourth quarter, the Company recorded restructuring charges for YESCo,
including the impact of management's decisions to restructure its HVAC
operations and dispose of the existing assets and projects under development for
the Power division. The HVAC restructuring includes the consolidation of four
locations into one operating center, thereby eliminating redundant
administrative and operating positions, and better focusing its business both
geographically, by discontinuing non-Connecticut activities, and operationally,
by discontinuing the HVAC equipment sales operation. The after-tax charge for
YESCo restructuring totaled $1.6 million, or $0.15 per share. YESCo recorded
losses of $3.0 million, exclusive of nonrecurring charges, and $2.7 million for
the years ended September 30, 1998 and 1997, respectively. Finally, Yankee
Energy recorded an after-tax charge for severance, due to the resignation of two
senior executives, of approximately $0.5 million, or $0.05 per share.
Earnings for fiscal 1997 decreased as compared to fiscal 1996 primarily due to
operating losses incurred by the Company's nonutility subsidiaries. Delays in
bringing new business on line and integrating these companies into YESCo
contributed to losses. These losses were partially offset by strong operating
performance at Yankee Gas during fiscal 1997 due primarily to a reduction in
operation and maintenance expense principally as a result of cost controls
implemented by the Company. Higher earnings in fiscal 1996 were primarily due to
colder weather in fiscal 1996 as compared with fiscal 1998 and 1997, and the
gain realized from the sale of the Company's equity interest in the Iroquois Gas
Transmission System (Iroquois). Earnings on the Company'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. Upon the sale of Iroquois, earnings for
fiscal 1996 reflected a gain of $2.5 million, or $0.24 per share. Thus, total
earnings related to the investment in Iroquois, including the gain on sale, were
$0.38 per share in fiscal 1996.
In fiscal 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (FAS 128), which changed 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
the application of FAS 128. The effect of this accounting change on previously
reported earnings per share data was immaterial. The basic weighted average
shares outstanding for fiscal 1998, 1997 and 1996 were 10,495,806, 10,451,165
and 10,435,231, respectively, and the diluted weighted average shares
outstanding for fiscal 1998, 1997 and 1996 were 10,501,411, 10,453,318 and
10,437,461, respectively.
RESULTS OF OPERATIONS
<PAGE>
OPERATING REVENUES
Utility revenues decreased $35.1 million, or 11 percent, in fiscal 1998 from
fiscal 1997 and decreased $20.1 million, or 6 percent, in fiscal 1997 from
fiscal 1996. These decreases were offset by increases in operating revenues from
nonutility operations of $24.8 million and $5.2 million, respectively. The
components of operating revenues for the past three years are provided in the
following table:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Firm sales $237,136 $276,299 $299,681
Firm transportation 18,709 7,433 258
Interruptible/off-system sales 20,303 29,183 32,332
Interruptible transportation 3,646 2,646 730
Other utility revenues 4,045 3,393 6,044
-------- -------- --------
Total utility revenues 283,839 318,954 339,045
Nonutility revenues 30,928 6,087 895
-------- -------- --------
Total operating revenues $314,767 $325,041 $339,940
-------- -------- --------
-------- -------- --------
Utility operating margin $139,655 $146,143 $149,857
-------- -------- --------
-------- -------- --------
Nonutility operating margin $ 6,356 $ 2,141 $ 579
-------- -------- --------
-------- -------- --------
</TABLE>
Throughput corresponding to utility revenues is as follows:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
<S> <C> <C> <C>
(Mcf-thousands)
Firm sales 26,116 31,447 35,139
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Firm transportation 9,426 4,059 178
Interruptible/off-system sales 4,961 6,575 9,513
Interruptible transportation 6,644 6,853 2,444
------ ------ ------
Total throughput 47,147 48,934 47,274
------ ------ ------
------ ------ ------
</TABLE>
The decrease in utility revenues in fiscal 1998 primarily reflected weather that
was 8 percent warmer in fiscal 1998 compared to fiscal 1997 and customer bill
credits during fiscal 1998 of $3.2 million. The warmer weather in the fiscal
1998 heating season directly reduced sales to firm sales customers. Firm sales
contribute the highest per-unit operating margin of all utility revenues, and
thus, the primary reason for the decrease in utility operating margin from
fiscal 1997. In addition, an increasing number of commercial and industrial
customers continued to shift from gas sales to transportation service resulting
in a decrease in utility revenues. Interruptible revenues have decreased
primarily as a result of lower oil prices in fiscal 1998 compared to fiscal
1997. The decrease in utility revenues from fiscal 1996 to fiscal 1997 primarily
reflected a decrease in firm sales volumes of approximately 11 percent. This
decrease primarily related to the shift of firm sales to firm transportation and
a decrease in residential sales volumes related to weather that was 5 percent
warmer than fiscal 1996. These decreases were partially offset by the increase
in firm and interruptible transportation from 1996 to 1997. Revenues from
nonutility operations increased $24.8 million from 1997 to 1998 and increased
$5.2 million from 1996 to 1997 due to the growth of nonutility subsidiaries,
primarily due to acquisitions.
OPERATING EXPENSES
Total operating expenses decreased $0.5 million in 1998 compared to 1997 and
decreased $10.8 million in 1997 compared to 1996 as a result of the following
items:
- - Cost of gas decreased $28.6 million, or 17 percent, in 1998 compared to
1997 and decreased $16.4 million, or 9 percent, in 1997 compared to 1996.
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 fiscal 1998 and fiscal 1997 decreases were due
primarily to an increase in deferred gas costs and a 16 percent and 9
percent decrease in utility revenues, excluding transportation revenues,
respectively, as a result of the warmer weather. Cost of gas was also
impacted by transportation customers who
<PAGE>
purchase their own gas supply, which is transported through the Yankee Gas
distribution systems.
- - Cost of goods sold increased $20.6 million in 1998 compared to 1997 and
$3.6 million in 1997 compared to 1996, due to increased YESCo activity from
acquisitions, particularly mechanical contracting.
- - Operation and maintenance expense decreased $3.5 million in 1998 compared
to 1997 and increased $0.1 million in 1997 compared to 1996. The 1998
decrease was primarily due to a decrease in uncollectible expense, as a
result of lower revenues from the warmer weather, and a decrease in pension
expense, offset by increases in nonutility operating expenses. The 1997
increase was primarily due to increased expenses related to nonutility
operations, partially offset by a decrease in Yankee Gas operation and
maintenance expense as a result of cost controls implemented by Yankee Gas.
- - Nonrecurring charges relate to restructuring charges for the HVAC
operations of YESCo, impairments of certain YESCo Power division assets and
severance expense. Restructuring charges for YESCo included the impact of
management's decisions to restructure its HVAC operations and dispose of
the existing assets and projects under development for the Power division.
The charge for YESCo restructuring matters totaled $3.5 million in the
fourth quarter of fiscal 1998. Also, in the fourth quarter of fiscal 1998,
YES recorded a charge for severance, of approximately $0.9 million, due to
the resignation of two senior executives.
- - Depreciation and amortization expense increased $1.7 million in 1998
compared to 1997 and increased $1.2 million in 1997 from 1996. The 1998 and
1997 increases were primarily due to additions in both plant assets and
investments.
- - Taxes other than income taxes decreased $2.1 million in 1998 compared to
1997 and increased $0.6 million in 1997 compared to 1996. The 1998 decrease
was primarily due to decreases in both gross earnings tax, due to lower
revenues in fiscal 1998 compared to fiscal 1997, and Connecticut
unemployment taxes due to lower than expected unemployment costs from
Yankee Gas' transformation project in fiscal 1995. The 1997 increase was
primarily due to higher Connecticut unemployment taxes and municipal taxes,
partially offset by lower gross earnings taxes resulting from lower
revenues in fiscal 1997 compared to fiscal 1996.
Other income remained consistent in 1998 compared to 1997 and decreased $5.4
million in 1997 compared to 1996. The 1997 decrease was primarily due to the
gain from the sale of investments associated with the Company's interest in
Iroquois in 1996 and the absence of earnings associated with Iroquois.
<PAGE>
Interest expense in 1998 increased $1.4 million as compared to 1997 primarily
due to higher levels of outstanding short-term debt, offset by a slight decrease
in outstanding long-term debt. Interest expense in 1997 decreased $2.5 million
as compared to 1996 primarily due to lower levels of debt and lower interest
expense on Yankee Gas' deferred fuel balance.
Federal and state income taxes decreased $5.1 million in 1998 compared to 1997,
and decreased $2.0 million in 1997 compared to 1996. The 1998 decrease was
primarily due to lower pre-tax income as a result of the warmer weather and
nonrecurring charges. The 1997 decrease was primarily due to lower taxable
income as a result of operating losses incurred by the Company's nonutility
subsidiaries. Please refer to Note 2 to the Consolidated Financial Statements
for additional information concerning the components of federal and state income
taxes.
One of Yankee Gas' largest customers is the Foxwoods Hotel and Casino
(Foxwoods), operated by the Mashantucket Pequot Indian Tribe (Pequots). The City
of Norwich, Connecticut has completed construction of a pipeline extending from
their distribution system to Foxwoods and began service to Foxwoods on December
1, 1998. Norwich, pursuant to an agreement with the Pequots, will become the
sole provider of gas transportation service to the Pequots. Foxwoods had
generated approximately $650,000 in annual margin for the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at September 30, 1998 totaled $1.9 million.
Cash provided by operating activities was $18.5 million in fiscal 1998, $28.6
million in fiscal 1997 and $36.4 million in fiscal 1996. The decrease in cash
provided by operating activities was primarily due to the decrease in net income
from the warmer weather and customer bill credits from the rate review
settlement with the DPUC in fiscal 1998. Additionally, an increase in YESCo's
working capital requirements for fiscal 1998 contributed to the decrease. Cash
provided by operating activities in fiscal 1998 was used primarily for changes
in working capital, dividend payments and capital expenditures. The Company
increased dividends paid per share to $1.36 in 1998, up 3.0 percent from the
$1.32 per share in 1997, the eighth straight year the Company has increased its
dividend. Expenditures for plant, property and investments totaled $39.4 million
in 1998 reflecting a $4.3 million increase from 1997. Fiscal 1998 capital
expenditures included approximately $8.4 million related to the installation of
a new customer service system. The Company's estimated capital expenditures for
fiscal 1999 is $30.5 million. The Company expects to finance the fiscal 1999
capital expenditures through a combination of internally generated funds and
short-term borrowings.
In addition to cash provided by operating activities, the Company
<PAGE>
generated cash through financing activities, primarily by the issuance of new
common stock and increases in short-term borrowings. During fiscal 1998, the
Company issued 82,708 new shares under its Shareholder Investment Plan and 8,240
shares under its Long-Term Incentive Plans. These new shares provided
approximately $2.2 million of new equity funding in fiscal 1998. In fiscal 1997,
the Company issued 4,860 new shares of common stock under its Long-Term
Incentive Plans.
The seasonal nature of gas revenues, inventory purchases and construction
expenditures create a need for short-term borrowing to supplement internally
generated funds. Short-term borrowings increased $36.7 million during fiscal
1998. Yankee Gas has arranged a $60 million revolving line of credit with a
group of four banks whereby funds may be borrowed on a short-term revolving
basis using either fixed or variable rate loans. Yankee Gas also has a $27
million credit line available on an uncommitted basis. Yankee Gas had $63.2
million outstanding under its agreements at September 30, 1998 and $36.3 million
outstanding at September 30, 1997. In addition, Yankee Energy had $12.5 million
and $2.7 million outstanding as of September 30, 1998 and 1997, respectively, on
a $25 million line of credit, which is available to fund the development of the
Company's nonutility businesses. The weighted average interest rates on short-
term borrowing at September 30, 1998 and 1997 were 5.8 percent and 6.0 percent,
respectively. Management is currently planning a $50 million new long-term debt
financing for Yankee Gas in fiscal 1999 for the purposes of replacing a portion
of the existing outstanding short-term debt and to refinance Yankee Gas' Series
A Tranche D First Mortgage Bonds, which become redeemable by Yankee Gas in
August 1999.
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, 1998, indenture
requirements, including the required coverage ratio, would allow for the
issuance of an additional $200 million of bonds at an assumed interest rate of 7
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 6.2 percent for the seven-
year term of the loan and requires an annual $250,000 sinking fund payment.
On April 1, 1997, Yankee Gas redeemed all $30 million Series A Tranche C First
Mortgage Bonds, which matured on that date. Yankee Gas used cash on hand and the
issuance of a $30 million principal amount of Series E First Mortgage Bonds on
April 1, 1997, through a private placement, to redeem the Series A Tranche C
First Mortgage Bonds. 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
<PAGE>
bonds will mature April 1, 2012 and interest is payable at an annual rate of 7.2
percent.
REGULATORY DEVELOPMENTS
On August 25, 1996, Yankee Gas filed an application with the DPUC for a
Financial and Operational Review (Review). This Review was required under
Connecticut statute since Yankee Gas' last rate approval was on August 26, 1992.
On July 9, 1997, the DPUC issued its decision in Docket No. 96-08-05. The DPUC
decision, which is not a rate order, called for a lowering of Yankee Gas'
authorized Return on Equity (ROE) from 12.43 percent to 11.15 percent. The DPUC
believed that lower current interest rates and recently allowed rates of return
for other Connecticut utilities justified a lower ROE for Yankee Gas. On October
1, 1997, the DPUC approved a settlement whereby Yankee Gas would credit
approximately $3.2 million to firm sales customers through the Purchased Gas
Adjustment Clause (PGA) during fiscal year 1998. As of September 30, 1998, the
entire $3.2 million has been accrued and approximately $2.9 million had been
credited to firm sales customers. The remaining $0.3 million has been included
in the Company's annual deferred fuel calculation and beginning in October 1998
was credited to firm sales customers. 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.
On January 3, 1996, the 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 agreement states that Yankee Gas may apply a portion of
credits received from pipeline refunds, excess interruptible margins, deferred
gas costs, capacity release agreements and off-system sale margins 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 Order No. 636.
Through September 30, 1998, Yankee Gas paid approximately $20.5 million of the
gas supply transition costs and an additional $2.5 million are anticipated. To
date, Yankee Gas has collected $46.3 million through a combination of credits
received from pipeline refunds, capacity release agreements, deferred gas costs,
off-system sale margins, and excess interruptible margins. These excess
collections of approximately $25.8 million have been applied against certain
regulatory assets in accordance with the January 3, 1996 DPUC decision.
On January 24, 1996, the DPUC issued a Final Decision on Docket No. 92-02-19
Reopen I (the Decision). The Decision enabled Yankee Gas to implement firm
transportation (FT) rates and services as contemplated in an August 2, 1995
decision. The
<PAGE>
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. On October 28, 1998, the DPUC issued an
Interim Decision on Docket No. 92-02-19 Reopen Re: Unbundling, that addressed
changes to the existing commercial and industrial FT program, effective January
1, 1999. These modifications are intended to make improvements to the existing
FT program based on the initial two-plus years of FT experience.
A switch by existing sales customers 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 those customers. Yankee Gas 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. As of September 30, 1998, Yankee Gas had approximately 3,100 customers
under the new FT service.
LEGAL PROCEEDINGS
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 using a different
methodology than that previously accepted by the City. Yankee Gas is currently
in the process of litigating this retroactive reassessment and the court 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.
In November 1995, a purported class action suit was filed in Connecticut
Superior Court 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 employees who did not
possess state trade licenses.
On January 27, 1998, the court 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 court 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. The LDCs have asserted that
<PAGE>
such licenses are not required for this work based on 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 LDC's
position which was affirmed on appeal. In 1995, the Connecticut General Assembly
enacted legislation that established prospectively a separate procedure for
state certification of gas service employees.
Recently, the lawsuits were transferred to the Complex Litigation Docket of the
Superior Court where the presiding judge chose to try the case against
Connecticut Natural Gas (CNG) first. No other material action in Yankee Gas'
lawsuit will be taken pending the outcome of the CNG trial which is expected to
commence in August 1999. 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 August 1997, CNG filed suit against Yankee Gas alleging that Yankee Gas'
plans to provide gas service to a 119 unit residential subdivision in the town
of Berlin violated CNG's utility franchise rights within that town. The lawsuit
was tried in the Connecticut Superior Court in January 1998. The court issued a
decision on October 30, 1998 in favor of CNG, and entered an order prohibiting
Yankee Gas from continuing to serve that particular subdivision within Berlin.
Yankee Gas' other existing activities within Berlin remain unaffected.
The Company has elected not to appeal this decision. The parties have been
ordered by the court to confer and agree on a suitable amount to be paid by CNG
to Yankee Gas as compensation for facilities constructed by Yankee Gas to serve
the subdivision. The Company does not anticipate that the outcome of this
lawsuit will have a material adverse effect on the Company's consolidated
results of operations or financial position.
TAX AUDITS
The Company is currently under audit by the State of Connecticut regarding the
Company's Gross Earnings Tax Returns for the calendar years 1994, 1995 and 1996,
by the City of Naugatuck, Connecticut regarding the Company's Personal Property
Tax Schedules for the years 1995, 1996 and 1997, and by the Internal Revenue
Service regarding the Company's Federal Income Tax Return for the calendar year
1995. The Company is responding to all information document requests put forth
by the auditors. At this time, the Company does not have sufficient information
to determine the amount, if any, of additional liability that may result from
these proceedings. At this time the Company does not anticipate that any of
these audits will have a material effect on its consolidated results of
operations or financial position.
ENVIRONMENTAL MATTERS
<PAGE>
Fourteen sites containing coal tar became the property of Yankee Gas at
divestiture from Northeast Utilities, in 1989. Contamination at these sites was
caused by operations of former manufactured gas plants at those locations.
Yankee Gas has reported the results of its environmental studies to the
Connecticut Department of Environmental Protection (DEP). The DEP has not
required that any remedial action be undertaken to date. However, eight of the
fourteen sites are presently listed on the Connecticut Inventory of Hazardous
Waste Sites. Inclusion of a site on this list indicates that remediation may be
required in the future.
Remediation has been conducted at three of these properties. In addition, Yankee
Gas has developed a cost estimate for the remaining sites based on various
factors including the probability of clean-up. As a result of this effort,
Yankee Gas recorded a liability of $35 million in fiscal 1993 for future
environmental clean-up. Recovery of remediation costs has been specifically
allowed by Yankee Gas' 1992 rate case decision. Presently, $325,000 is allowed
annually in rates. If costs are expected to exceed $2.5 million on an annual
basis, Yankee Gas is required to review such expenditures with the DPUC. The
DPUC has stated that "to the extent that coal tar remediation expenses are
prudently incurred, they should be allowed as proper operating expenses," and
therefore, management continues to believe a regulatory asset is appropriate for
this item.
Yankee Gas expects to finance such expenditures through a combination of
internally generated funds, short-term debt, and through insurance settlements,
of which $9.6 million has been received through September 30, 1998. 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.
YEAR 2000
The Company is currently implementing new information systems and enhancing
existing information systems to address Year 2000 issues, which could have
significant adverse effects on the Company if not properly resolved. In fiscal
1995, the Company began testing and remediation for Year 2000 problems and has
assigned dedicated personnel to its Year 2000 project. Remediated programs are
being tested prior to being declared compliant.
As of September 30, 1998, YES has completed the inventory and the assessment of
risk phases of the Year 2000 project for all mainframe systems. The Company is
currently in the remediation and testing phases. As part of the process, a
detailed inventory of all hardware and software currently utilized by the
Company has been prepared, and a timetable has been established to ensure
testing of all applications. The scope of the assessment phase also included the
Company's interface systems with significant
<PAGE>
suppliers, government agencies and other third parties. However, there can be no
guarantee that the systems of these third parties will be converted on a timely
basis and will not have an adverse effect on the Company's operations or
systems.
All mainframe systems that are being remediated are now in the testing phase,
which as of September 30, 1998, is approximately 95 percent complete. In
addition to remediating existing systems, the Company has purchased and is
currently installing a new human resource information system (HRIS) and a new
customer service (CS) system. These systems were purchased to improve
functionality of the application software and to improve efficiency and customer
service. In addition, any Year 2000 issues associated with these systems will be
eliminated. The new HRIS system is expected to be operational in January 1999
and the CS system is expected to be operational in April 1999. For all other
mainframe systems, the target date for completion of the remediation program is
December 1998, with some systems completed prior to this date.
For non-mainframe systems, except the supervisory control and data acquisition
system (SCADA system), which monitors gas flows and pressures within the
distribution system, the Company is developing a test environment to carry out
the remainder of the remediation program. The inventory and risk assessment
phase of all non-mainframe systems should be completed by the end of 1998,
followed by completion of the remediation/replacement and testing phases by June
1999. The Company is in the process of installing a new SCADA system, which will
eliminate any Year 2000 issues associated with that system. The new SCADA system
should be operational in December 1998.
The Company currently estimates that total costs to update all of the Company's
systems for Year 2000 compliance will be approximately $17.4 million, including
approximately $0.6 million for the new HRIS system, $15 million for the new CS
system and $1.3 million for the new SCADA system. All such costs associated with
system enhancements have and will continue to be expensed as incurred and the
costs of new systems will be capitalized as appropriate. As of September 30,
1998, 1997 and 1996, the Company expensed approximately $152,000, $217,000 and
$2,000, respectively, and capitalized approximately $9.7 million, $5.9 million
and $0.2 million, respectively, of these costs. The remaining costs will be
incurred in fiscal 1999. These costs have been financed through short-term
borrowing and internally generated funds.
The primary business risk associated with Year 2000 is the Company's ability to
continue to transport and distribute gas to its customers without interruption.
In the event the Company and/or its suppliers and vendors are unable to
remediate the Year 2000 problem prior to January 1, 2000, operations of the
Company could be significantly impacted. In order to mitigate this risk, the
Company is developing a contingency plan to continue
<PAGE>
operations through manual intervention and other procedures should it become
necessary to do so. Such procedures are expected to include back-up power supply
for its critical pipeline and storage operations and, if necessary, curtailment
of supply. The Company expects to complete its operational contingency plan by
the end of fiscal 1999.
Although the Company expects its systems to be Year 2000 compliant on or before
December 31, 1999, it cannot predict the outcome or the success of its Year 2000
program, or that the costs required to address the Year 2000 issue, or that the
impact of a failure to achieve substantial Year 2000 compliance, will not have a
material adverse effect on the Company's business, financial condition or
results of operations.
OTHER MATTERS
On May 6, 1998, the Company filed an application with the DPUC to discontinue
on-demand, non-contract service work. Hearings had been held on this matter and
the DPUC felt strongly that the Company should continue to provide this service
and would consider allowing the Company an increase in the applicable service
rates. The Company withdrew its application and has resumed providing this
service.
The Company's wholly-owned, nonregulated subsidiary, Yankee Financial, has
recently sold its loan receivable portfolio to an independent party and
recognized a small gain as a result of the sale. The transaction was recorded as
a sale for financial reporting purposes.
RMS, a wholly-owned subsidiary of the Company, recently entered into an
agreement with Dun & Bradstreet Receivable Management Services (D&B), under
which RMS will extend its collection activities in the transitioning energy,
telecommunication and other industries by supporting the extensive network of
D&B in its pursuit of additional consumer business. RMS has extensive experience
and specialized skills in residential utility collection practices and computer-
aided calling technology.
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements and Statement of Financial Accounting Standards No. 131, "Disclosure
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting standards for an enterprise's operating segments
and related disclosures about its products, services, major customers and the
countries in which the entity holds assets and reports revenues. In February
1998, the FASB issued Statement of Financial Accounting Standards No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits," which
revises disclosures, but does not change the measurement or recognition of
postretirement plans. Management is currently evaluating the impact of these
standards and believes their adoption will not impact the Company's consolidated
financial position, results of operations or cash flows, and any impact will be
limited to the form and content of its disclosures. All of these statements are
effective for the Company's fiscal year 1999.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is reviewing the requirements of the SOP and does not expect it to significantly
change its current accounting for software costs. SOP 98-1 is required to be
adopted by the Company for its fiscal year 2000.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires the Company to recognize all derivatives as either assets or
liabilities in the consolidated balance sheets and measure those instruments at
fair value. Management is currently evaluating the impact of this standard and
believes the adoption will not impact the Company's consolidated financial
position, results of operations or cash flows. This statement is effective for
the Company in the first quarter of fiscal year 2000.
FORWARD-LOOKING STATEMENTS
This report contains 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. 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, certain environmental matters, internal and/or third party delays or
failures in achieving Year 2000 compliance, as well as such other factors as set
forth in the Company's Form 10-K for the year ended September 30, 1998 and other
filings with the Securities and Exchange Commission.
<PAGE>
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.
Charles E. Gooley
President and
Chief Executive Officer
James M. Sepanski
Vice President,
Chief Financial Officer and Treasurer
<PAGE>
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, 1998 and 1997,
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,
1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Hartford, Connecticut
November 16, 1998
<PAGE>
<TABLE>
<CAPTION>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
For the Years Ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Revenues:
Utility revenues $283,839 $318,954 $339,045
Nonutility revenues 30,928 6,087 895
-------- -------- --------
Total Revenues 314,767 325,041 339,940
-------- -------- --------
Operating Expenses:
Cost of gas/goods sold 168,755 176,757 189,504
Operations 62,496 58,569 58,375
Maintenance 5,978 6,382 6,477
Nonrecurring charges 4,436 -- --
Depreciation and amortization 19,789 18,130 16,895
Taxes other than income taxes 20,431 22,519 21,949
-------- -------- --------
Total Operating Expenses 281,885 282,357 293,200
-------- -------- --------
Operating Income 32,882 42,684 46,740
Other Income/Expense:
Other income, net 174 159 5,572
Interest expense, net 13,853 12,463 14,942
-------- -------- --------
Income Before Income Taxes 19,203 30,380 37,370
Provision for Income Taxes 8,320 13,423 15,451
-------- -------- --------
Net Income $ 10,883 $ 16,957 $ 21,919
======== ======== ========
Basic and Diluted Earnings
per Common Share $1.04 $1.62 $2.10
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
At September 30, 1998 1997
<S> <C> <C>
ASSETS
Utility Plant, at original cost $547,098 $524,221
Less: Accumulated provision for depreciation 207,872 192,506
-------- --------
339,226 331,715
Construction work in progress 28,707 19,150
-------- --------
Total Net Utility Plant 367,933 350,865
-------- --------
Other Property and Investments 12,778 19,311
Assets held for sale 12,361 --
Current Assets:
Cash and temporary cash investments 1,881 2,239
Accounts receivable, less accumulated
provision for uncollectible accounts of
$8,132 in 1998 and $7,713 in 1997 35,946 27,002
Fuel supplies 1,418 10,370
Other materials and supplies 1,972 2,186
Accrued utility revenues 4,028 4,667
Deferred gas costs, current portion 1,879 2,034
Prepaid expenses and other 25,327 13,932
-------- --------
Total Current Assets 72,451 62,430
-------- --------
Deferred Gas Costs 8,601 8,364
Recoverable Environmental Cleanup Costs 33,670 31,667
Recoverable Income Taxes 10,673 11,038
Recoverable Postretirement Benefits Costs 1,725 1,515
Other Deferred Debits 15,092 15,174
-------- --------
Total Assets $535,284 $500,364
======== ========
</TABLE>
<TABLE>
CAPITALIZATION AND LIABILITIES
<S> <C> <C>
Capitalization (see accompanying statements):
Common shareholders' equity $164,992 $165,706
Long-term debt, net of current portion 131,048 135,265
-------- --------
Total Capitalization 296,040 300,971
-------- --------
Current Liabilities:
Notes payable to banks 75,700 39,000
Long-term debt, current portion 4,217 4,017
Accounts payable 19,643 22,741
Accrued interest 3,176 2,008
Pipeline transition costs payable 2,516 3,538
Other 8,402 6,480
Total Current Liabilities 113,654 77,784
-------- --------
Accumulated Deferred Income Taxes 72,816 68,205
Accumulated Deferred Investment Tax Credits 8,325 8,703
Reserve for Environmental Cleanup Costs 35,000 35,000
Postretirement Benefits Obligation 3,353 2,840
Other Deferred Credits 6,096 6,861
Commitments and Contingencies (Note 9) -- --
-------- --------
Total Capitalization and Liabilities $535,284 $500,364
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
For the Years Ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $10,883 $16,957 $ 21,919
Adjusted for the following:
Depreciation and amortization 19,789 18,130 16,895
Asset impairment, nonrecurring charge 2,037 - -
Equity earnings from investments (216) (105) (2,766)
Gain on sale of investment in Iroquois - - (2,688)
Deferred income taxes, net 4,598 6,927 9,267
Deferred gas costs activity and other
non-cash items (3,688) (5,007) (3,986)
Changes in working capital:
Accounts receivable and
accrued utility revenues (8,305) (271) (4,668)
Prepaid expenses and other (11,395) (5,106) (2,644)
Accounts payable (3,098) 170 4,271
Other working capital (excludes cash) 7,885 (3,089) 787
------- ------- -------
Net cash provided by
operating activities 18,490 $28,606 36,387
------- ------- -------
Cash Flows From Financing Activities:
Net proceeds from common
stock issuance 2,232 105 1,216
Issuance of long-term debt - 30,000 2,150
Retirement of long-term debt (4,017)(34,017) (5,817)
Increase (decrease) in
short-term debt 36,700 18,700 (8,225)
Cash dividends (14,267)(13,797) (13,357)
------- ------- -------
Net cash provided by (used for)
financing activities 20,648 991 (24,033)
------- ------- -------
Investment In Plant And Other:
Utility Plant (36,649)(31,320) (25,663)
Other property and investments (4,847) (3,891) (4,380)
Iroquois distribution - - 2,625
Proceeds from Iroquois sale - - 22,192
------- ------- -------
Net cash used for plant and
other (39,496)(35,211) (5,226)
------- ------- -------
Net Increase (Decrease) In Cash and
Temporary Cash Investments
For The Period (358) (5,614) 7,128
Cash and Temporary Cash Investments,
beginning of period 2,239 7,853 725
------- ------- -------
Cash and Temporary Cash Investments,
end of period $ 1,881 $ 2,239 $ 7,853
======= ======= =======
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest, net of amounts capitalized $13,273 $14,203 $13,484
Income taxes $ 6,469 $12,140 $14,213
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Capitalization
(In thousands)
At September 30, 1998 1997
<S> <C> <C>
Common Shareholders' Equity:
Common shares - $5 par value, authorized
20,000,000 shares; 10,545,362 and
10,454,414 shares outstanding at
September 30, 1998 and 1997 $ 52,727 $ 52,272
Capital surplus, paid in 89,949 88,151
Unearned compensation-restricted
stock awards (a) (131) (148)
Retained earnings 23,047 26,431
Employee stock ownership plan guarantee (b) (600) (1,000)
-------- --------
Total common shareholders' equity 164,992 165,706
-------- --------
Long-term Debt:
First mortgage bonds
Maturity Interest rates
2004 10.03% 20,165 23,532
2005 6.75% 20,000 20,000
2012 7.19% 30,000 30,000
2019 10.07% 19,000 19,000
2022 8.48% 20,000 20,000
2023 8.63% 20,000 20,000
-------- --------
Total first mortgage bonds 129,165 132,532
Term loan agreement, 6.24%
due February, 2003 5,500 5,750
Guarantee of employee stock ownership plan
term loan agreement, 10.38%,
due July, 1999 (b) 600 1,000
-------- --------
Total long-term debt 135,265 139,282
Less amounts due within one year (b)(c) 4,217 4,017
-------- --------
Long-term debt, net 131,048 135,265
-------- --------
Total Capitalization $296,040 $300,971
======== ========
</TABLE>
(a) Consistent with the terms of the Non-Employee Directors' Stock Compensation
Plan, incentive awards of 1,200 shares and 900 shares of restricted common stock
were granted to Directors during 1998 and 1997, respectively. Under the
directors' plan, the market value of the restricted stock awards has been
recorded as unearned compensation and is shown as a separate component of
shareholders' equity. The earned compensation is charged to administrative and
general expense as shares become vested. Earned compensation was approximately
$29,000 for fiscal 1998 and $22,000 for fiscal 1997.
Consistent with the terms of the Long-Term Incentive Compensation Plans of the
Company, incentive awards of 1,711 and 2,917 shares of restricted common stock
were granted to employees during 1998 and 1997, respectively. Under the Long-
Term Compensation Plans, the market value of the restricted stock awards has
been recorded as unearned compensation and is shown as a separate component of
shareholders' equity. The earned compensation is charged to administrative and
general expense as shares become vested. Earned compensation was approximately
$78,000 for fiscal 1998 and $44,000 for fiscal 1997.
(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 sinking fund requirement of $600,000.
(c) Long-term debt maturities and cash sinking fund requirements on debt
outstanding at September 30, 1998 for each of the fiscal years 1999 through 2003
(excluding the ESOP sinking fund requirement and early redemption options the
Company may utilize) are $3,617,000;$4,567,000; $4,567,000; $4,567,000; and
$8,817,000, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Consolidated Statements of Common Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
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, 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 (b) 112 112
------ ------ ------ ------ -------
Balance at
September
30, 1996 $52,248 $87,947 $23,271 $(1,400) $162,066
Net Income 16,957 16,957
Issuance of
4,860 common
shares - $5
par value 24 81 105
Cash dividends on
common shares -
$1.32 per share (13,797) (13,797)
Employee stock
ownership plan
loan repayment 400 400
Unearned compensation-
restricted stock
awards (b) (25) (25)
------ ------ ------ ------ -------
Balance at
September
30, 1997 $52,272 $88,003 $26,431 $(1,000) $165,706
Net Income 10,883 10,883
Issuance of
90,948
common shares -
$5 par value 455 1,777 2,232
Cash dividends
on common shares -
$1.36 per share (14,267) (14,267)
Employee stock
ownership plan
loan repayment 400 400
Unearned
compensation-
restricted stock
awards (b) 38 38
Balance at
September
30, 1998 $52,727 $89,818 $23,047 $ (600) $164,992
------ ------ ------ ------- -------
------ ------ ------ ------- -------
</TABLE>
(a) Yankee Gas has dividend restrictions imposed by its Bond Purchase
Agreements. At September 30, 1998, retained earnings available for common
dividends under the terms of the Series A Agreement and Series B and C
Agreements totaled approximately $39.3 million and $49.7 million, respectively.
(b) See note (a) of the Consolidated Statements of Capitalization.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1) Summary of Significant Accounting Policies
Yankee Energy System, Inc. (YES or the Company), headquartered in Meriden,
Connecticut, is a diversified company specializing in the distribution,
conversion, and control of energy to meet our customers' needs. Our principal
operating subsidiary is Yankee Gas Services Company (Yankee Gas). Yankee Gas,
the largest natural gas distribution company in Connecticut, provides service to
more than 183,000 customers in 68 cities and towns. The Company's other
operating subsidiaries support our core business in natural gas distribution, or
allow us to expand our growing business in energy-related services. Yankee
Energy Services Company (YESCo) provides a wide range of energy-related services
for its customers, with comprehensive building automation with engineering,
installation and maintenance of building control systems through its YESCo
Controls division, and comprehensive heating, ventilation and air-conditioning
(HVAC), boiler and refrigeration equipment services and installation through its
YESCo Mechanical Services division. During fiscal 1998, YESCo's Power division
also provided expertise related to the production of thermal and/or electric
power. In addition to Yankee Gas and YESCo, two other subsidiaries are taking
advantage of opportunities by offering services once exclusively provided to
local energy customers to a broader marketplace. R.M. Services, Inc. (RMS),
through its alliance with Dun & Bradstreet Management Receivables Services,
provides consumer collection services for companies throughout the United
States, and Yankee Energy Financial Services Company (Yankee Financial) provides
a full range of equipment and home improvement financing options through
programs like the Hometown Energy Loan Program. NorConn Properties, Inc.
(NorConn) owns selected system real estate, which it leases to Yankee Gas.
Additional company information can be found at the Company web site,
www.yankeeenergy.com.
Principles of Consolidation: The consolidated financial statements of the
Company include the accounts of all subsidiaries. Intercompany transactions have
been eliminated in consolidation.
Public Utility Regulation: Yankee Gas is subject to regulation for rates and
other matters by the 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.
<PAGE>
Following the provisions of FAS 71, Yankee Gas has recorded regulatory assets or
liabilities as appropriate primarily related to deferred gas costs, pipeline
transition costs, hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefit costs. The specific amounts related to
these items are disclosed in the consolidated balance sheets. Yankee Gas
continues to be subject to cost-of-service-based rate regulation by the DPUC.
Based upon current regulation and recent regulatory decisions, the Company
believes that its use of regulatory accounting in accordance with the provisions
of FAS 71 is appropriate.
Revenues: Utility revenues are based on authorized rates applied to each
customer's use of gas. Rates can be changed only through a formal proceeding
before the DPUC. At the end of each accounting period, a revenue estimate for
the amount of gas delivered but unbilled is recorded.
Depreciation: The provision for utility depreciation is calculated using the
straight-line method based on estimated remaining useful lives of depreciable
utility plant in service, adjusted for net salvage value and removal costs as
approved by the DPUC. The depreciation rates for the several classes of plant in
service are equivalent to an overall composite rate of 3.3 percent in fiscal
years 1998, 1997 and 1996.
Purchased Gas Adjustment Clause (PGA): The DPUC-approved rates include an
adjustment clause under which gas costs above or below base rate levels are
charged or credited to customers. As prescribed by the DPUC, differences between
the actual purchased gas costs and the current cost recovery are deferred and
recovered or refunded over future periods.
Equity Accounting: The Company accounts for YESCo's investments in energy
production facilities using the equity method, recording their proportionate
share of earnings (losses) with corresponding increases (decreases) in their
investment. Distributions received reduce the carrying amount of these
investments.
Income Taxes: Differences exist between the periods in which transactions affect
income in the financial statements and the periods in which they affect the
determination of income subject to tax. The tax effect of such timing
differences is accounted for in accordance with the ratemaking treatment
required by the DPUC. Additionally, in accordance with FAS 71, as of September
30, 1998, the Company has a deferred tax liability and a corresponding
regulatory asset of approximately $11 million, due to the effect of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Reclassifications: Certain prior year amounts have been reclassified to conform
with current year classifications.
<PAGE>
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings per Share: The Company follows the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (FAS 128), which requires
computing and presenting basic and diluted earnings per share. The effect of
this accounting change on previously reported earnings per share data was
immaterial. The basic weighted average shares outstanding for fiscal 1998, 1997
and 1996 were 10,495,806, 10,451,165 and 10,435,231, respectively, and the
diluted weighted average shares outstanding for fiscal 1998, 1997 and 1996 were
10,501,411, 10,453,318 and 10,437,461, respectively. As such, there is no
difference between basic and diluted earnings per share.
Recent Accounting Pronouncements: In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income," which requires that components of
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements and Statement of Financial
Accounting Standards No. 131," Disclosure About Segments of an Enterprise and
Related Information," which establishes annual and interim reporting standards
for an enterprise's operating segments and related disclosures about its
products, services, major customers and the countries in which the entity holds
assets and reports revenues. In February 1998, the FASB issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosure about Pensions
and Other Postretirement Benefits," which revises disclosure, but does not
change the measurement or recognition of postretirement benefit plans.
Management is currently evaluating the impact of these standards and believes
their adoption will not impact the Company's consolidated financial position,
results of operations or cash flows, and any impact will be limited to the form
and content of its disclosures. All of these statements are effective for the
Company's 1999 fiscal year.
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This SOP provides guidance on accounting for the
costs of computer software developed or obtained for internal use. The Company
is reviewing the requirements of the SOP and does not expect it to significantly
change its current accounting for software costs. SOP 98-1 is required to be
adopted by the Company for its fiscal year 2000.
<PAGE>
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires the Company to recognize all derivatives as either assets or
liabilities in the consolidated balance sheets and measure those instruments at
fair value. Management is currently evaluating the impact of this standard and
believes the adoption will not impact the Company's consolidated financial
position, results of operations or cash flows. This statement is effective for
the Company in the first quarter of fiscal year 2000.
Note 2) Income Tax Expense
The components of the federal and state income tax provisions are:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
(In thousands)
Charged to income:
<S> <C> <C> <C>
Current income taxes:
Federal $ 2,252 $ 4,509 $ 5,297
State 624 1,979 894
------- ------- -------
Total current 2,876 6,488 6,191
------- ------- -------
Deferred income taxes, net:
Investment tax credits (377) (377) (377)
Federal 5,528 6,004 8,158
State 293 1,308 1,479
------- ------- -------
Total deferred 5,444 6,935 9,260
------- ------- -------
Total income tax expense $ 8,320 $13,423 $15,451
------- ------- -------
------- ------- -------
</TABLE>
Deferred income tax liabilities (assets) are comprised of the following:
<PAGE>
<TABLE>
<CAPTION>
At September 30, 1998 1997
(In thousands)
<S> <C> <C>
Depreciation $75,238 $70,428
Other (2,422) (2,223)
------- -------
Net deferred income tax
liability $72,816 $68,205
------- -------
------- -------
</TABLE>
The differences between the effective income tax rate recorded by the Company
and the statutory federal tax rate are reconciled as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Tax effect of differences:
Depreciation 9.3 5.1 3.7
State income taxes net
of federal benefit 3.1 6.9 3.9
Pension accrual (4.0) (0.1) -
Miscellaneous (0.1) (2.7) (1.3)
---- ---- ----
Effective income tax rate 43.3% 44.2% 41.3%
---- ---- ----
---- ---- ----
</TABLE>
Note 3) Leases
The Company has entered into operating lease agreements for the use of office
equipment, vehicles and buildings. For fiscal 1998, 1997 and 1996, these lease
payments were $1,999,000, $2,064,000 and $1,939,000, respectively. Future
minimum lease payments, excluding associated costs such as property taxes, state
use taxes, insurance and maintenance, under long-term noncancelable leases as of
September 30, 1998, are approximately:
<PAGE>
<TABLE>
<CAPTION>
Year (In thousands)
<S> <C>
1999 $1,797
2000 1,457
2001 1,168
2002 748
2003 352
After 2003 541
______
Future minimum lease
payments $6,063
______
______
</TABLE>
Note 4) Postretirement Benefits
The Company has a noncontributory defined benefit retirement plan covering
employees of Yankee Gas and RMS. Benefits are based on years of service and
employees' highest consecutive 60 months of compensation during the last 120
months of employment. It is the Company's policy to fund annually an amount at
least equal to that which will satisfy the requirements of the Employee
Retirement Income Security Act and the Internal Revenue Code. No contributions
were required or made in fiscal 1998, 1997 and 1996. Pension assets are invested
primarily in equity securities and investment grade bonds.
The components of net pension cost (income) were:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Service cost $ 2,099 $ 1,992 $ 1,890
Interest cost 4,814 4,522 4,216
Net amortization (1,195) 13,128 4,373
Less: Return on plan assets 7,903 20,147 10,577
------- ------- -------
Net pension income $(2,185) $ (505) $ (98)
------- ------- -------
------- ------- -------
</TABLE>
Total pension cost resulted in income of $2,100,000, $420,000 and $13,000 for
the years ended September 30, 1998, 1997, and 1996, respectively. Pension cost
for 1998, 1997, and 1996 includes $85,000 in cost of living increases each year
for Northeast
<PAGE>
Utilities (NU System) retirees who were previously employed in the
gas business operated by The Connecticut Light and Power Company, a subsidiary
of NU System. These payments were agreed to at the time of divestiture from NU
System.
For calculating the plan's cost and year-end-funded status, the following
assumptions were used:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997 1996
<S> <C> <C> <C>
Discount rate 7.00% 7.50% 7.75%
Expected long-term rate
of return 9.00% 9.00% 9.00%
Compensation/progression rate 4.00% 4.50% 4.50%
</TABLE>
The following table represents the plan's funded status reconciled to amounts
included in the consolidated balance sheets:
<TABLE>
<CAPTION>
At September 30, 1998 1997
(In thousands)
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of
$54,942 and $50,045, respectively $59,874 $51,210
------- -------
Projected benefit obligation $73,352 $64,845
Less: Market value of plan assets $88,837 $89,966
------- -------
Plan surplus 15,485 25,121
Unrecognized transition amount (617) (703)
Unrecognized prior service cost 665 (26)
Unrecognized net gain (16,629) (27,728)
------- -------
Accrued pension liability $(1,096) $(3,336)
------- -------
------- -------
</TABLE>
<PAGE>
During fiscal 1994, the Company adopted an Excess Benefit Plan (EBP) that
provides retirement benefits to executive officers and other key management
staff. The EBP recognizes total compensation and service that would otherwise be
disregarded due to Internal Revenue Code limitations on compensation in
determining benefits under the regular retirement plan. The EBP is not funded
and benefits are paid from general corporate assets when due.
Note 5) Postretirement Benefits Other Than Pensions
The Company provides certain health care and life insurance benefits to its
retired Yankee Gas and RMS employees. The Company recognizes the cost of
postretirement benefits over the employment period that encompasses eligibility
to receive such benefits. On July 1, 1990, in accordance with terms of the
divestiture, Yankee Gas began compensating 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 System retirees was approximately $1,032,000 for the fiscal year ended
September 30, 1998 and $1,103,000 and $1,104,000 for the comparable periods in
1997 and 1996, respectively.
The Company has established two Internal Revenue Code Section 501(c)(9)
Voluntary Employee Beneficiary Association (VEBA) Trusts, one for union
employees and one for non-union employees, to fund its future liabilities for
retiree health care and life insurance benefits. Contributions to the VEBA
Trusts totaled $1.7 million for both fiscal 1998 and fiscal 1997. Assets of the
VEBA Trusts are invested primarily in equity securities and investment grade
bonds.
The components of net postretirement benefits costs were:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997
(In thousands)
<S> <C> <C>
Service cost $ 922 $ 913
Interest cost 1,597 1,685
Net transition amortization 876 875
Net other deferrals (20) 1,055
Less: Return on assets 1,309 1,646
------ ------
Net postretirement benefits costs $2,066 $2,882
------ ------
------ ------
</TABLE>
<PAGE>
For Yankee Gas, the DPUC is allowing $1.7 million of associated expenses to be
recovered in rates and up to an additional $1.5 million annually, which is being
collected through the rate settlement process.
For calculating the plan's year-end-funded status, as well as the postretirement
benefits costs, the following assumptions were used:
<TABLE>
<CAPTION>
Years Ended September 30, 1998 1997
<S> <C> <C>
Discount rate 7.00% 7.50%
Expected long-term rate of return 9.00% 9.00%
Health care cost trend rate
- First year 6.00% 8.00%
- Ultimate 5.00% 5.00%
</TABLE>
Trend rates are assumed to decrease one percent per year until they reach the
ultimate rate. A one percent increase in the weighted average trend rate
assumption of health care claims would result in a 17 percent increase in
accumulated benefit obligations and a 21 percent increase in net periodic
postretirement benefit costs.
The following table represents the postretirement benefit plan's funded status
reconciled to amounts included in the consolidated balance sheets:
<TABLE>
<CAPTION>
At September 30, 1998 1997
(In thousands)
<S> <C> <C>
Accumulated benefit obligation $ 27,465 $ 21,803
Less: Market value of assets 11,893 10,790
-------- --------
Accumulated benefit obligation in
excess of plan assets (15,572) (11,013)
Unrecognized transition amount 12,731 13,607
Unrecognized net gain (2,529) (6,730)
-------- --------
Accrued postretirement benefit
liability $ (5,370) $ (4,136)
-------- --------
-------- --------
</TABLE>
<PAGE>
Note 6) Stock-Based Compensation
Yankee Energy established Long-Term Incentive Compensation Plans in 1991 and
1996. Options on 63,800 and 73,400 shares of common stock were granted under the
1996 plan, in fiscal 1996 and 1998, respectively. Under the terms of the options
granted, the exercise price of any option may not be less than 100 percent of
the fair market value of the common stock on the date of the grant. The stock
options generally vest over a five year period, with 20 percent becoming
exercisable on each of the first five anniversaries of the grant. All stock
options expire ten years from the date of grant. Options granted to a senior
executive were accelerated and deemed fully vested as of September 30, 1998, as
part of a severance agreement (see Note 9). The Company recorded expenses of
approximately $101,000 due to the change in the measurement date.
The Company accounts for stock options in accordance with Accounting Principles
Board Opinion No. 25, under which no compensation costs have been recognized for
stock option awards. Had compensation costs of option awards been determined
under a fair value alternative method as stated in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company would have been required to value such options and record such amounts
in the financial statements as compensation expense. Pro forma net income and
net income per share for fiscal 1998, 1997 and 1996 would have been $10,832,000
and $1.03, $16,919,000 and $1.62, and $21,881,000 and $2.10, respectively. For
purposes of this calculation the Company arrived at the fair value of each stock
grant at the date of grant by using the Black Scholes option pricing model with
the following weighted average assumptions used for grants for the fiscal years
ended September 30, 1998 and September 30, 1996: risk-free interest rate of 5.7
and 5.4 percent, respectively, expected life of 5.0 years, expected volatility
of 17 and 18 percent, respectively, and a dividend yield of 5.3 and 5.7 percent,
respectively. No stock options were granted for the fiscal year ended September
30, 1997.
The following summarizes stock option transactions for the fiscal years ended
September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Weighted Number
Option Prices Average Price of Shares
<S> <C> <C> <C>
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Outstanding Options
September 30, 1995 $21.38-$21.63 $21.59 61,120
Granted $ 23.69 $23.69 63,800
Exercised $ 21.63 $21.63 (820)
Canceled $21.63-$23.69 $21.92 (9,100)
-------
Outstanding Options
September 30, 1996 $21.38-$23.69 $22.73 115,000
Exercised $21.63-$23.69 $21.73 (4,860)
Canceled $21.63-$23.69 $22.97 (8,980)
-------
Outstanding Options
September 30, 1997 $21.38-$23.69 $22.75 101,160
Granted $23.13-$26.19 $24.63 73,400
Exercised $21.63-$23.69 $21.93 (8,240)
Canceled $21.63-$23.72 $23.01 (45,260)
-------
Outstanding Options
September 30, 1998 $21.38-$26.19 $23.85 121,060
</TABLE>
At September 30, 1998, 1997, and 1996, there were 63,388 options, 38,136
options, and 21,000 options exercisable, respectively, which have weighted
average exercise prices of $24.24 per share, $22.20 per share, and $21.58 per
share, respectively.
Note 7) Short-Term Debt
Yankee Gas has arranged a $60 million revolving line of credit with a group of
four 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 $63.2
million and $36.3 million outstanding under its agreements at September 30, 1998
and 1997, respectively. In addition, Yankee Energy had $12.5 and $2.7 million
outstanding at September 30, 1998 and 1997, respectively, on a $25 million line
of credit. The weighted average interest rates on short-term debt at September
30, 1998 and 1997 were 5.8 percent and 6.0 percent, respectively.
Note 8) Fair Value of Financial Instruments
The carrying amount of cash and temporary cash investments approximates fair
value. The fair values of the Company's first mortgage bonds, which are fixed
rate long-term debt, are based upon borrowing rates currently available to the
Company.
<PAGE>
Adjustable rate securities are assumed to have a fair value equal to their
carrying value. The carrying amount of the first mortgage bonds (including
current maturities) was $129,165,000 and $132,532,000 as of September 30, 1998
and 1997, respectively. The fair value was $144,100,000 and $142,896,000 as of
September 30, 1998 and 1997, respectively. These fair values have been reported
to meet the disclosure requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Values of Financial Instruments," and
do not purport to represent the amounts at which those obligations would be
settled.
Note 9) Commitments and Contingencies
Construction Program: The Company's estimated capital expenditures for fiscal
1999 is $30.5 million. The Company intends to use $28.0 million of these
estimated expenditures to maintain the reliability of the distribution system
and in projects that will generate or support gas sales and transportation
activities.
Environmental Matters: Fourteen sites containing coal tar became the property
of Yankee Gas at divestiture from Northeast Utilities in 1989. Contamination at
these sites was caused by operations of former manufactured gas plants at those
locations. Yankee Gas has reported the results of its environmental studies to
the Connecticut Department of Environmental Protection (DEP). The DEP has not
required that any remedial action be undertaken to date. However, eight of the
fourteen sites are presently listed on the Connecticut Inventory of Hazardous
Waste Sites. Inclusion of a site on this list indicates that remediation may be
required in the future.
Remediation has been conducted at three of these properties. In addition, Yankee
Gas has developed a cost estimate for the remaining sites based on various
factors including the probability of clean-up. As a result of this effort,
Yankee Gas recorded a liability of $35 million in fiscal 1993 for future
environmental clean-up. Recovery of remediation costs has been specifically
allowed by Yankee Gas' 1992 rate case decision. Presently, $325,000 is allowed
annually in rates. If costs are expected to exceed $2.5 million on an annual
basis, Yankee Gas is required to review such expenditures with the DPUC. The
DPUC has stated that "to the extent that coal tar remediation expenses are
prudently incurred, they should be allowed as proper operating expenses," and
therefore, management continues to believe a regulatory asset is appropriate for
this item.
Yankee Gas has received 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
<PAGE>
settlements are subject to confidentiality provisions in agreements between
Yankee Gas and its insurance carriers. The proceeds are being reflected as
reductions in the regulatory asset associated with recoverable environmental
clean-up costs, as shown in the accompanying balance sheets.
Transition Costs-Order No. 636: On April 8, 1992, the Federal Energy Regulatory
Commission (FERC) issued Order No. 636 on pipeline restructuring. In essence,
the FERC found that absent the unbundling of traditional merchant services,
pipelines would not be able to achieve the FERC's long-term goal of open access
and provide transportation services that are indifferent to the seller of the
gas.
Order No. 636 acknowledges that the restructuring of the pipelines' traditional
services will cause pipelines to incur transition costs in several areas and
provides mechanisms for the pipelines to fully recover prudently incurred
transition costs attributable to the implementation of Order No. 636.
On July 8, 1994, the DPUC issued a decision on the implementation of FERC Order
No. 636 by the Connecticut Local Distribution Companies (LDCs). The DPUC is
allowing the LDCs to offset the transition costs billed by pipelines under Order
No. 636 with recoveries from capacity release activity, refunds of deferred gas
costs 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, 1998, Yankee Gas paid approximately $20.5 million of
transition costs and an additional $2.5 million is anticipated. To date, Yankee
Gas has collected $46.3 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, 1998, excess collections of
approximately $25.8 million were applied against the deferred regulatory assets
specified in the decision.
Firm Transportation: On January 24, 1996, the DPUC issued a Final Decision on
Docket No. 92-02-19 Reopen I (the Decision). The Decision enabled Yankee Gas to
implement firm transportation (FT) rates and services as contemplated in an
August 2, 1995 decision. The Decision allows Yankee Gas to offer a broad array
of service
<PAGE>
options to commercial and industrial FT customers. Yankee Gas implemented these
new FT rates and services on April 1, 1996. On October 28, 1998, the DPUC issued
an Interim Decision on Docket No. 92-02-19 Reopen Re: Unbundling, that addressed
changes to the existing commercial and industrial FT program, effective January
1, 1999. These modifications are intended to make improvements to the existing
FT program based on the initial two-plus years of FT experience.
A switch by existing sales customers 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 those customers. 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. As of September 30, 1998, Yankee Gas had approximately 3,100
customers under the new FT service.
Rate Review: On August 25, 1996, Yankee Gas filed an application with the DPUC
for a Financial and Operational Review (Review). This Review was required under
Connecticut statutes since Yankee Gas' last rate approval was on August 26,
1992. On July 9, 1997, the DPUC issued its decision in Docket No. 96-08-05. The
DPUC decision, which is not a rate order, called for a lowering of Yankee Gas'
authorized Return on Equity (ROE) from 12.43 percent to 11.15 percent. The DPUC
believed that lower current interest rates and recently allowed rates of return
for other Connecticut utilities justified a lower ROE for Yankee Gas. On October
1, 1997, the DPUC approved a settlement whereby Yankee Gas would credit
approximately $3.2 million to firm sales customers through the PGA during fiscal
year 1998. As of September 30, 1998, the entire $3.2 million has been accrued
and approximately $2.9 million had been credited to firm sales customers. The
remaining $0.3 million has been included in the Company's annual deferred fuel
calculation and beginning in October 1998 was credited back to firm sales
customers. 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.
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 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
<PAGE>
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 $1.5 million issued to the commodity trading firm
collateralizing the commodity contract.
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 using
a different methodology than that previously accepted by the City. Yankee Gas is
currently in the process of litigating this retroactive reassessment and the
court 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.
In November 1995, a purported class action suit was filed in Connecticut
Superior Court 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 employees who did not
possess state trade licenses.
On January 27, 1998, the court 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 court 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.
The LDCs have asserted that such licenses are not required for this work based
on statutory exemption enacted in 1965 and amended in 1967. However, in a
<PAGE>
separate proceeding, a Connecticut Superior Court has upheld an administrative
ruling against the LDC's position which was affirmed on appeal. In 1995, the
Connecticut General Assembly enacted legislation that established prospectively
a separate procedure for state certification of gas service employees.
Recently, the lawsuits were transferred to the Complex Litigation Docket of the
Superior Court where the presiding judge chose to try the case against
Connecticut Natural Gas (CNG) first. No other material action in Yankee Gas'
lawsuit will be taken pending the outcome of the CNG trial which is expected to
commence in August 1999. 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 August 1997, CNG filed suit against Yankee Gas alleging that Yankee Gas'
plans to provide gas service to a 119 unit residential subdivision in the town
of Berlin violated CNG's utility franchise rights within that town. The lawsuit
was tried in New Britain Superior Court in January 1998. The court issued a
decision on October 30, 1998 in favor of CNG, and entered an order prohibiting
Yankee Gas from continuing to serve that particular subdivision within Berlin.
Yankee Gas' other existing activities within Berlin remain unaffected.
The Company has elected not to appeal from this decision. The parties have been
ordered by the court to confer and agree on a suitable amount to be paid by CNG
to Yankee Gas as compensation for these facilities. The Company does not
anticipate that the outcome of this lawsuit will have a material adverse effect
on the Company's consolidated results of operations or financial position.
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, by the City of Naugatuck, Connecticut regarding its Personal Property Tax
Schedules for the years 1995, 1996, and 1997, and by the Internal Revenue
Service regarding its Federal Income Tax Return for the calendar year 1995. The
Company is responding to all information document requests put forth by the
auditors. At this time, 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 consolidated results of operations or financial
position.
Nonrecurring Charges: In connection with YESCo's HVAC restructuring and
impairments of certain Power division assets, the Company recorded a pre-tax
charge of approximately $3.5 million. Of the total charge, $1.6 million
represents impairment of HVAC and Power divisions' long-lived assets such as
property and goodwill and $1.9 million pertains to YESCo restructuring
<PAGE>
charges such as lease costs, severance and moving expenses. In addition, in the
fourth quarter of fiscal 1998, the Company recorded a charge for severance, due
to the resignation of two senior executives. In connection with these
resignations, a one-time pre-tax charge of approximately $0.9 million was
recorded relating to the estimated costs to the Company for severance expenses.
The Company has commenced marketing its existing Power investments, including an
operating landfill gas fueled generating facility in Brookhaven, NY, interests
in two operating cogeneration facilities, development stage projects and other
less significant assets. The total investment at September 30, 1998 is
approximately $12 million. Two of the development stage projects are land fill
gas (LFG) fueled generating facilities in the state of Illinois. Pursuant to
existing state legislation, electric utility purchases of LFG produced power are
entitled to a tax credit that is scheduled to expire on January 6, 1999. If not
reinstated, expiration of the tax credit could substantially impact the
economics of the Company's existing investment in these development stage
projects (approximately $3 million), as well as other LFG projects in that
state. The Company and its partners are closely monitoring and active in the
legislative process to address this matter. However, there can be no assurance
such legislation will ultimately be approved.
Note 10) 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, 1998
and 1997, 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>
(In thousands, except per share amounts)
Quarter Ended
Fiscal Year 1998 December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
Operating
revenues $102,595 $113,193 $54,327 $ 44,652
Operating income
(loss) 20,334 23,828 402 (11,682)
Net income (loss) 9,091 10,810 (1,902) (7,116)
Basic and diluted
earnings (loss) per
common share (1) $ 0.87 $ 1.03 $ (0.18) $ (0.68)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
Fiscal Year 1997 December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
Operating
revenues $ 95,681 $127,568 $59,435 $ 42,357
Operating income
(loss) 19,162 27,769 2,663 (6,910)
Net income (loss) 8,879 13,478 (442) (4,958)
Basic and diluted
earnings (loss) per
common share (1) $ 0.84 $ 1.29 $ (0.04) $ (0.47)
</TABLE>
(1) Basic and diluted earnings (loss) per common share were calculated on the
basic weighted average common shares outstanding of 10,495,806 and 10,451,165
and the diluted weighted average common shares outstanding of 10,501,411 and
10,453,318 for the twelve months ended September 30,1998 and 1997, respectively.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
Selected Financial and Operating Data
<TABLE>
<CAPTION>
September 30, 1998 1997 1996 1995 1994
Balance Sheet Data:
(In thousands)
<S> <C> <C> <C> <C> <C>
Net Utility
Plant $367,933 $350,865 $335,488 $324,870 $315,063
Total Assets 535,284 500,364 478,749 479,301 481,518
Total
Capitalization 296,040 300,971 271,348 292,802 276,513
Income and Share Data:
(In thousands, except per share amounts)
Operating
Revenues $314,767 $325,041 $339,940 $294,022 $317,298
Cost of Gas/
Goods Sold 168,755 176,757 189,504 155,404 168,816
Other O&M
Expenses 68,474 64,951 64,852 65,473 62,733
Depreciation and
Amortization 19,789 18,130 16,895 16,520 16,993
Net Income (1) 10,883 16,957 21,919 12,358 19,485
Earnings
per Share (1) $ 1.04 $ 1.62 $ 2.10 $ 1.20 $ 1.89
Revenues:
(In thousands)
Gas:
Residential $134,292 $140,750 $145,364 $127,493 $140,403
Commercial 73,495 95,098 103,787 88,983 95,286
Industrial 50,055 70,743 82,725 73,715 77,850
Miscellaneous 3,642 2,312 6,217 2,161 3,328
Transportation 22,355 10,051 952 1,631 431
-------- -------- -------- -------- --------
Total Gas $283,839 $318,954 $339,045 $293,983 $317,298
-------- -------- -------- -------- --------
Nonutility
Revenue 30,928 6,087 895 39 -
-------- -------- -------- -------- --------
Total Operating
Revenues $314,767 $325,041 $339,940 $294,022 $317,298
Sales and Transportation:
(Mcf-thousands)
Firm:
Residential 11,888 12,473 13,185 11,591 13,101
Commercial 6,930 9,222 10,521 9,022 9,998
Industrial 7,382 9,862 11,438 10,007 10,421
Transportation 9,426 4,059 178 589 128
Unbilled and
Other (84) (111) 969 793 245
-------- -------- -------- -------- --------
Total Firm 35,542 35,505 36,291 32,002 33,893
Non-Firm:
Commercial 1,293 1,595 1,746 1,809 1,549
Industrial 3,668 4,983 6,792 7,286 7,149
Transportation 6,644 6,853 2,444 3,654 559
-------- -------- -------- -------- --------
Total
Non-Firm 11,605 13,431 10,982 12,749 9,257
-------- -------- -------- -------- --------
Total Sales and
Transportation 47,147 48,936 47,273 44,751 43,150
Customers:
(Average)
Residential 160,917 159,541 157,526 156,539 155,874
Commercial (2) 17,910 18,930 19,313 19,167 19,156
Industrial (2) 1,821 2,005 2,112 2,145 1,980
Firm
Transportation 2,422 766 19 - -
Resale - - 2 1 1
-------- -------- -------- -------- --------
Total
Customers 183,070 181,242 178,972 177,852 177,011
Sources of Gas:
(Mcf-thousands)
Domestic 7,668 15,594 21,331 13,534 16,162
Canadian Gas
Firm 29,941 24,919 24,721 24,283 24,440
Spot Market Gas - 97 710 2,836 2,318
Produced Gas 4 34 19 9 30
Company Use/
Unaccounted For (440) (440) (509) (403) (592)
-------- -------- -------- -------- --------
Total Sources 32,173 40,204 46,272 40,259 42,358
Peak Day Data:
Peak Day Send
Out (Mcf per
day) (3) 260,470 250,448 239,348 250,518 262,794
Peak Day Date 3/12/98 1/17/97 2/05/96 2/06/95 1/19/94
Peak Day
Degree Days 50 55 62 59 55
Total Annual
Heating
Degree Days 5,502 5,979 6,302 5,595 6,454
</TABLE>
(1) Exclusive of an $879,900 charge, or $0.08 per share, resulting from the
early redemption premium on the Company's preferred stock in fiscal 1994.
(2) Non-firm transportation customers who utilize both gas sales and
transportation service are included in these customer categories. Average non-
firm transportation customers are as follows: 1998:19, 1997:18, 1996:12,
1995:23, and 1994:17.
(3) Converted from BTU-millions assuming 1,020 BTU per CF. 1994 sendout
includes one time delivery of 17,425 Mcf to Con Ed.
<PAGE>
SHAREHOLDER AND STOCK INFORMATION INFORMATION
Annual Meeting
The Annual Meeting of Shareholders will take place on Friday, January 29, 1999,
at 10:30 a.m. at the Ramada Plaza Hotel in Meriden, Connecticut.
Market for Common Stock
As of October 31, 1998, there were 24,255 holders of record of Yankee Energy
common stock. Yankee Energy's stock is quoted on the New York Stock Exchange
(NYSE) under the symbol "YES" although it is frequently presented as "YanEnS" in
various financial publications.
<TABLE>
<CAPTION>
High and Low Stock Prices and Dividend Information ($/Share)
Year Ended September 30, 1998 High Low Dividend
<S> <C> <C> <C>
First Quarter, 1998 26.813 22.563 0.335
Second Quarter, 1998 25.750 24.563 0.335
Third Quarter, 1998 24.750 22.563 0.345
Fourth Quarter, 1998 26.188 23.438 0.345
Year Ended September 30, 1997
First Quarter, 1997 23.625 21.250 0.325
Second Quarter, 1997 23.750 21.125 0.325
Third Quarter, 1997 24.750 21.000 0.335
Fourth Quarter, 1997 24.625 22.750 0.335
</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 1.888.451.0192 or
write:
For Transfers and Transfer Inquiries: All Other Inquiries:
ChaseMellon Shareholder Services, ChaseMellon Shareholder Services,
L.L.C. L.L.C.
85 Challenger Road P.O. Box 3315
Ridgefield Park, NJ 07660 South Hackensack, NJ 07606-1915
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:
Thomas D. Dorsey Phone 203.639.4643
Director, Investor Relations Fax 203.639.4667
Yankee Energy System, Inc. Email: [email protected]
599 Research Parkway
Meriden, CT 06450-1030
Yankee Energy will provide shareholders with a copy of its 1998 Annual Report to
the Securities and Exchange Commission on Form 10-K, without charge, upon
written request.
<PAGE>
YANKEEENERGY
- -----------------
[PICTURE APPEARS HERE]
<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 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.
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,
Alaska, Arizona, California, D.C., Hawaii, Idaho, Louisiana, Michigan,
Minnesota, New Jersey, South Carolina, Vermont and West Virginia; R.M. Services,
Inc. does business in Colorado, Illinois, Maine, Maryland, New York, North
Carolina, Ohio, Pennsylvania, Texas, and Utah under the name R.M. Connecticut
Services, Inc.; in Massachusetts under the name REC Management Services; and in
North Dakota under the name CT RMS, Inc.
<PAGE>
EXHIBIT 23
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.
/s/Arthur Andersen LLP
Hartford, Connecticut
December 14, 1998
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,881
<SECURITIES> 0
<RECEIVABLES> 44,078
<ALLOWANCES> (8,132)
<INVENTORY> 3,390
<CURRENT-ASSETS> 72,451
<PP&E> 575,805
<DEPRECIATION> 207,872
<TOTAL-ASSETS> 535,284
<CURRENT-LIABILITIES> 113,654
<BONDS> 135,265
0
0
<COMMON> 52,727
<OTHER-SE> 112,265
<TOTAL-LIABILITY-AND-EQUITY> 535,284
<SALES> 314,767
<TOTAL-REVENUES> 314,767
<CGS> 168,755
<TOTAL-COSTS> 168,755
<OTHER-EXPENSES> 113,130
<LOSS-PROVISION> 4,035
<INTEREST-EXPENSE> 13,853
<INCOME-PRETAX> 19,203
<INCOME-TAX> 8,320
<INCOME-CONTINUING> 10,883
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,883
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
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