<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
FORM 10-Q
__________
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________TO________
COMMISSION FILE NUMBER 0-10721
YANKEE ENERGY SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CONNECTICUT 06-1236430
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
599 RESEARCH PARKWAY
MERIDEN, CONNECTICUT 06450-1030
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER (203) 639-4000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
NUMBER OF SHARES OF COMMON STOCK ($5.00 PAR VALUE)
OUTSTANDING AT JANUARY 31, 1999 10,598,677
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
__________________
1998 1997
____ ____
(In thousands, except per
share amounts)
<S> <C> <C>
Revenues:
Utility revenues $ 77,182 $ 97,118
Nonutility revenues 7,819 5,477
______ ______
Total revenues 85,001 102,595
______ ______
Operating expenses:
Cost of gas/goods sold 42,832 56,406
Operations 14,386 14,931
Maintenance 1,438 1,191
Depreciation and amortization 5,086 4,678
Taxes other than income taxes 5,193 5,020
______ ______
Total operating expenses 68,935 82,226
______ ______
Operating income 16,066 20,369
Other income/expense:
Other income, net 61 34
Interest expense, net 3,522 2,974
______ ______
Income before income taxes 12,605 17,429
Provision for income taxes 4,759 8,338
______ ______
Net Income $ 7,846 $ 9,091
______ _____
______ _____
Basic and Diluted Earnings
per Common Share $ 0.74 $ 0.87
______ _____
______ _____
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
____ ____
(UNAUDITED)
(In thousands)
<S> <C> <C>
ASSETS
Utility Plant, at original cost $ 557,302 $ 547,098
Less: Accumulated provision for
depreciation 211,065 207,872
_________ _________
346,237 339,226
Construction work in progress 23,272 28,707
_________ _________
Total net utility plant 369,509 367,933
_________ _________
Other property and investments 12,970 12,778
Assets held for sale 14,153 12,361
Current assets:
Cash and temporary cash investments 1,880 1,881
Accounts receivable, net 50,166 35,946
Fuel supplies 1,215 1,418
Other materials and supplies 2,173 1,972
Accrued utility revenues 12,970 4,028
Deferred gas costs, current portion 1,833 1,879
Prepaid expenses and other 12,687 25,327
_________ _________
Total current assets 82,924 72,451
_________ _________
Deferred gas costs, net 6,092 8,601
Recoverable environmental
cleanup costs 33,569 33,670
Recoverable income taxes 9,681 10,673
Recoverable postretirement
benefits costs 1,764 1,725
Other deferred debits 14,319 15,092
________ ________
Total Assets $ 544,981 $ 535,284
________ ________
________ ________
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
____ ____
(UNAUDITED)
(In thousands)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization:
Common shares - $5.00 par value.
Authorized 20,000,000 shares; 10,598,677
shares outstanding at December 31, 1998
and 10,545,362 outstanding at
September 30, 1998 $ 52,993 $ 52,727
Capital surplus, paid in 90,301 89,818
Retained earnings 27,242 23,047
Employee stock ownership
plan guarantee (200) (600)
________ _______
Total common shareholders' equity 170,336 164,992
Long-term debt, net of current portion 131,048 131,048
________ _______
Total capitalization 301,384 296,040
________ _______
Current liabilities:
Notes payable to banks 86,500 75,700
Long-term debt, current portion 3,817 4,217
Accounts payable 17,215 19,643
Accrued interest 3,218 3,176
Pipeline transition costs payable 2,276 2,516
Other 5,628 8,402
________ ________
Total current liabilities 118,654 113,654
________ ________
Accumulated deferred income taxes 71,323 72,816
Accumulated deferred investment
Tax Credits 8,231 8,325
Liability for environmental
cleanup costs 35,000 35,000
Postretirement benefits obligation 3,437 3,353
Other deferred credits 6,952 6,096
_______ _______
Commitments and contingencies (Note 4) --- ---
_______ _______
Total Capitalization and
Liabilities $ 544,981 $ 535,284
________ ________
________ ________
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
____ ____
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,846 $ 9,091
Adjusted for the following:
Depreciation and amortization 5,086 4,678
Equity earnings from investments (82) (4)
Deferred income taxes, net (595) 633
Deferred gas costs activity and other
non-cash items 4,180 1,705
Changes in working capital:
Accounts receivable and accrued
utility revenues (23,162) (41,146)
Prepaid expenses and other 12,640 1,324
Accounts payable (2,428) 10,081
Other working capital
(excludes cash) (4,702) 2,900
_______ _______
Net cash used for operating
activities (1,217) (10,738)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from common stock issuance 648 493
Retirement of long-term debt (400) (400)
Increase in short-term debt 10,800 23,200
Cash dividends (3,651) (3,503)
_______ _______
Net cash provided by
financing activities 7,397 19,790
_______ _______
INVESTMENT IN PLANT AND OTHER:
Utility plant (6,080) (6,986)
Other property and investments (101) (2,693)
______ _______
Net cash used for plant and other (6,181) (9,679)
______ _______
NET DECREASE IN CASH AND TEMPORARY
CASH INVESTMENTS FOR THE PERIOD (1) (627)
CASH AND TEMPORARY INVESTMENTS,
BEGINNING OF PERIOD 1,881 2,239
_______ _______
CASH AND TEMPORARY CASH INVESTMENTS,
END OF PERIOD $ 1,880 $ 1,612
_______ _______
_______ _______
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 3,863 $ 1,750
Income taxes $ 0 $ 6
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
<PAGE>
YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1) GENERAL
The accompanying unaudited consolidated financial statements
should be read in conjunction with the Annual Report of
Yankee Energy System, Inc. (the Company) on Form 10-K for
the fiscal year ended September 30, 1998 (1998 Form 10-K),
including the audited financial statements (and notes
thereto) incorporated by reference therein. In the opinion
of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present
fairly the financial position of the Company as of December
31, 1998, and its results of operations for the three months
ended December 31, 1998 and 1997 and cash flows for the
three months ended December 31, 1998 and 1997. The results
of operations for the three months ended December 31, 1998
and 1997 are not necessarily indicative of the results
expected for a full year, due mainly to the highly seasonal
nature of the gas business.
2) ACCOUNTING FOR THE EFFECTS OF REGULATION
The Company's wholly-owned subsidiary, Yankee Gas Services
Company (Yankee Gas), is subject to regulation by the
Connecticut Department of Public Utility Control (DPUC).
The Company prepares its financial statements in accordance
with generally accepted accounting principles which includes
the provisions of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation," (FAS 71). FAS 71 requires a cost-based,
rate-regulated enterprise such as Yankee Gas to
reflect the impact of regulatory decisions in its financial
statements. The DPUC, through the rate regulation process,
can create regulatory assets that result when costs are
allowed for ratemaking purposes in a period other than the
period in which the costs would be charged to expense by an
unregulated enterprise.
Following the provisions of FAS 71, Yankee Gas has recorded
regulatory assets or liabilities as appropriate, primarily
related to deferred gas costs, pipeline transition costs,
hardship customer receivables, environmental cleanup costs,
income taxes and postretirement benefit costs. The specific
amounts related to these items are disclosed in the
consolidated balance sheets. For additional information
about these items see the 1998 Form 10-K.
Yankee Gas continues to be subject to cost-of-service based
rate regulation by the DPUC. Based upon current regulation
and recent regulatory decisions, Yankee Gas believes that its
use of regulatory accounting in accordance with the provisions
of FAS 71 is appropriate and its regulatory assets are
probable of recovery.
3) EARNINGS PER SHARE
The Company computes and presents basic and diluted earnings
per share. The basic weighted average shares outstanding for
the quarters ended December 31, 1998 and 1997 were 10,567,933
and 10,461,989, respectively, and the diluted weighted average
shares outstanding for the quarters ended December 31, 1998
and 1997 were 10,587,412 and 10,466,543, respectively. As
such, there is no difference between basic and diluted
earnings per share.
4) COMMITMENTS AND CONTINGENCIES
The Company faces a number of contingencies which arise during
the normal course of business and which have been discussed in
Note 9 (entitled "Commitments and Contingencies") to the
Consolidated Financial Statements included in the Company's
1998 Form 10-K Report. Except as disclosed below, for the
three months ended December 31, 1998, there have been no
material changes in the matters discussed in Note 9 to the
Company's 1998 Form 10K Report.
YESCo Power Division: The Company's wholly-owned subsidiary,
Yankee Energy Services Company (YESCo), is currently
discussing the sale of its existing Power investments with
several interested parties. The Power investments include an
operating land fill gas (LFG) fueled generating facility in
Brookhaven, NY, interests in two operating cogeneration
facilities, development stage projects and other less
significant assets. The total investment at December 31, 1998
is approximately $14 million. Two of the development stage
projects are 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 was scheduled to expire on January 6, 1999.
Legislation to reinstate this tax credit was passed by the
Illinois legislature and signed into law January 29, 1999.
5) 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 and 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 in other filings with the
Securities and Exchange Commission.
6) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
7) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform
with current year presentation.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Yankee Energy System, Inc.:
We have reviewed the accompanying consolidated balance sheet of
Yankee Energy System, Inc. (a Connecticut corporation) and
subsidiaries (the Company) as of December 31, 1998, and the related
consolidated statements of income, and cash flows for the three-month period
then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review
of interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Yankee Energy
System, Inc. as of September 30, 1998 (not presented herein), and,
in our report dated November 16, 1998, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of
September 30, 1998 is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
Arthur Andersen LLP
Hartford, Connecticut
February 2, 1999
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Consolidated net income was $7.8 million for the three months ended
December 31, 1998, compared to $9.1 million for the same period a
year earlier. The corresponding basic and diluted earnings per
share were $0.74 and $0.87 for the three months ended December 31,
1998 and 1997, respectively.
Earnings for the first quarter of fiscal year 1999 decreased
primarily due to weather that was 14 percent warmer than the same
period last year and 11 percent warmer than normal. The Company
estimates that warmer than normal weather reduced earnings by $1.7
million or $0.16 per share in the current quarter as compared with
the prior year's quarter which experienced colder than normal
weather which increased earnings by $0.4 million or $0.04 per
share. Yankee Energy Services Company (YESCo), the Company's major
non-regulated subsidiary, had a slight loss for the quarter.
However, YESCo's results improved from the same period last year.
R.M. Services (RMS), another subsidiary of the Company, made a
positive contribution to earnings for the quarter ended December
31, 1998, despite a slight increase in expenses due to the
continued expansion of the business.
COMPARISON OF THE FIRST QUARTER OF FISCAL 1999 WITH THE FIRST
QUARTER OF FISCAL 1998
OPERATING REVENUES
Utility revenues decreased $19.9 million, or 20.5 percent, in the
first quarter of fiscal 1999 compared with the same period in the
prior fiscal year. This decrease was partially offset by a $2.3
million increase in operating revenues from nonutility operations.
The components of the change in operating revenues are as follows:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
December 31,
Increase/
1998 1997 (Decrease)
(In thousands)
<S> <C> <C> <C>
Firm sales $ 63,829 $ 82,505 $(18,676)
Firm transportation 6,999 4,520 2,479
Interruptible/off-system sales 4,690 8,049 (3,359)
Interruptible transportation 905 544 361
Other utility revenues 759 1,500 (741)
_______ _______ _______
Total utility revenues 77,182 97,118 (19,936)
Nonutility revenues 7,819 5,477 2,342
_______ _______ _______
Total operating revenues $ 85,001 $102,595 $(17,594)
_______ _______ _______
_______ _______ _______
</TABLE>
The corresponding changes in Yankee Gas' throughput were as
follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31, Increase/
1998 1997 (Decrease)
(Mcf - thousands)
<S> <C> <C> <C>
Firm sales 7,093 9,351 (2,258)
Firm transportation 3,182 2,249 933
Interruptible/off-system sales 1,332 1,766 (434)
Interruptible transportation 1,375 1,327 48
_______ _______ ______
Total throughput 12,982 14,693 (1,711)
_______ _______ ______
_______ _______ ______
</TABLE>
The change in utility revenues was due primarily to weather that
was 14 percent warmer than the prior year. The warmer weather in
the first quarter of the fiscal 1999 heating season directly
reduced sales to firm sales customers. Firm sales contribute the
highest per-unit operating margin of all utility revenues, and
thus, accounted for the primary reason for the decrease in utility
operating margin from the first quarter of fiscal 1998. 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. The switch to
transportation has no effect on margin because the cost of gas has
traditionally been a pass through item. Interruptible revenues
decreased primarily as a result of lower oil prices in the first
quarter of fiscal 1999 compared to the same period in the prior
year. The increase in nonutility revenues in the first quarter of
fiscal 1999 compared to the same period in fiscal 1998 is primarily
due to an increase in YESCo's revenues resulting from the full
integration of its acquisitions and an increase in R.M. Services'
revenues due to expansion of its collection business.
OPERATING EXPENSES
Total operating expenses decreased $13.3 million in the first
quarter of fiscal 1999 compared with the same period in the prior
year as a result of the following items:
- Cost of gas decreased $15.4 million, or 30 percent, for
the three months ended December 31, 1998 compared to the
three months ended December 31, 1997 due primarily to the
weather impact on utility revenues and the continued
increased in transportation customers.
- Cost of goods sold increased $1.8 million in the first
quarter of fiscal 1999 compared to the first quarter of
fiscal 1998 due to increased nonutility activity
resulting primarily from the full integration of YESCo
acquisitions and an expansion of RMS' business.
- Operations and maintenance expenses decreased $0.3
million, primarily due to decreases in Yankee Gas
expenses from payroll and selling expenses. These
decreases were offset by increases in expenses from
nonutility subsidiaries due to an increase in their
activity.
- Depreciation and amortization expense increased $0.4
million, primarily due to additions in plant, property
and investments.
- Taxes other than income taxes increased $0.2 million,
primarily due to higher Connecticut unemployment taxes,
offset by lower Connecticut gross earnings taxes as a
result of the reduction in revenues.
INTEREST EXPENSE
Interest expense increased $0.5 million primarily due to higher
short-term debt outstanding. This increase was partially offset by
a decrease in long-term debt interest expense, primarily due to
lower outstanding long-term debt.
INCOME TAXES
Federal and state income taxes decreased $3.6 million primarily due
to lower pre-tax income for the three months ended December 31,
1998 compared to the three months ended December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash and temporary cash investments at December 31, 1998 totaled
$1.9 million. Cash used for operating activities was $1.2 million
in the first quarter of fiscal 1999. The decrease in cash
provided by operating activities was primarily due to the decrease
in net income from the warmer weather. Additionally, an increase
in working capital requirements in the first quarter of fiscal 1999
contributed to the decrease. The Company generated cash through
financing activities, primarily by the issuance of new common stock
and increases in short-term borrowings. Cash from operating
activities and financing activities were used primarily for changes
in working capital, dividend payments and capital expenditures in
the first quarter of fiscal 1999. Expenditures for investment in
plant, property and investments totaled $6.2 million for the first
three months of fiscal 1999.
The seasonal nature of gas revenues, inventory purchases and
construction expenditures create a need for short-term borrowing to
supplement internally generated funds. As of December 31, 1998,
Yankee Gas had a revolving line of credit of $60 million with a
group of four banks. Under the agreement, funds may be borrowed on
a short-term revolving basis using either fixed or variable rate
loans. On January 29, 1999, this revolving line of credit was
renewed for another year, expiring on January 28, 2000. Yankee Gas
also had uncommitted credit lines of $27 million as of December 31,
1998. At December 31, 1998, Yankee Gas had $72.5 million
outstanding under its agreements. Yankee Energy had $14.0 million
outstanding at December 31, 1998 under its $25 million committed
line of credit which is used to fund development of the Company's
nonutilty businesses. In January 1999, Yankee Gas completed a $50
million new long-term debt financing at 6.2 percent, for the
purposes of replacing a portion of the existing outstanding short-term debt.
Yankee Gas plans to redeem its Series A Tranche D First
Mortgage Bonds in August 1999, with short-term debt available at
that time. Series A Trance D First Mortgage Bonds become eligible
for early redemption in August 1999.
The long-term credit needs of Yankee Gas are being met by a first
mortgage bond indenture which provides for the issuance of bonds
from time to time, subject to certain issuance tests. At December
31, 1998, indenture requirements, including the required coverage
ratio, would allow for the issuance of an additional $197 million
of bonds at an assumed interest rate of 7.1 percent.
Yankee Gas has entered into fixed revenue-rate contracts with two
customers for the delivery of natural gas. Yankee Gas has hedged
these commitments with the purchase of natural gas swaps. In order
to satisfy certain provisions of the arrangement, Yankee Gas has
provided a letter of credit for $1.75 million, as of December 31,
1998. The Company's results of operations are unaffected by the
hedge transaction given that it passes through the cost of the
hedge to either the commodity trading firm or its customer
depending on the difference in the fixed and floating prices for
gas.
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, became the sole
provider of gas transportation service to the Pequots. Foxwoods
had generated approximately $650,000 in annual margin for the
Company. Yankee Gas has made a claim against the Pequots for
payment for distribution facilities which Yankee Gas constructed
pursuant to agreement with the Pequots, which claim seeks to
compensate Yankee Gas for its investment. Yankee Gas is evaluating
the Pequots' response to the claim in an effort to resolve the
dispute consensually before any legal action is taken.
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 December 31, 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 was
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 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
implementation phase, which as of December 31, 1998 is
approximately 98 percent complete. In addition to remediating
existing systems, the Company purchased 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 became operational
January 1, 1999 and the CS system is expected to be operational in
April 1999.
For non-mainframe systems, except the supervisory control and data
acquisition system (SCADA system), which monitors gas flows and
pressures within the gas 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 has been completed as of December 31,
1998. The remediation/replacement and testing phases are scheduled
for completion 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 February 1999.
The Company currently estimates that total cost 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 $1.2
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 December 31, 1998, the Company expensed
approximately $0.4 million and capitalized approximately $15.7
million, of these costs. The remaining costs will be incurred
during 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 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
<PAGE>
PART II OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit 27 - Financial Data Schedule.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
YANKEE ENERGY SYSTEM, INC.
___________________________
(Registrant)
Date: February 12, 1999 /s/ James M. Sepanski
____________________________
James M. Sepanski
Vice President,
Chief Financial Officer
and Treasurer
Date: February 12, 1999 /s/ Nicholas A. Rinaldi
_____________________________
Nicholas A. Rinaldi
Controller
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<S> <C>
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0
0
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</TABLE>
