Berkshire Gas Company
COMPETING IN A NEW ERA OF DEREGULATION
Providing solutions to our customers' changing energy needs is what has kept
Berkshire Gas ahead of the competition for more than 140 years.
Deregulation has brought new competition to our western Massachusetts
service area and Berkshire Gas continues to strengthen its market share.
Dynamic strategies, innovative ideas and excellent customer relations are
among the Company's competitive advantages. These are clearly demonstrated
when our customers make energy choices. Our report to you this year
highlights the competitive nature of the deregulated marketplace and the
steps Berkshire Gas has taken to expand its market share.
FINANCIAL HIGHLIGHTS
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For the Fiscal Year Ended June 30,
1996/1995 1995/1994
OPERATIONS ($000) 1996 1995 % Change 1994 % Change
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Operating Revenues $ 46,050 $ 47,934 -3.9% $ 53,029 -9.6%
Operating Margin 25,835 23,114 11.8 25,144 -8.1
Operating and Other Income 12,042 9,418 27.9 11,201 -15.9
Net Income 4,213 2,529 66.6 3,673 -31.1
Earnings Available for Common Stock 3,521 1,835 91.9 2,953 -37.9
COMMON SHARE DATA
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Earnings Per Share $ 1.65 $ 0.92 79.3% $ 1.69 -45.6%
Dividends Per Share 1.105 1.10 0.5 1.085 1.4
Book Value Per Share 13.75 13.16 4.5 12.99 1.3
Market Price (Year-End) 15.38 15.00 2.5 16.25 -7.7
Average Shares of Common Stock Outstanding
(000's) 2,129.2 1,990.5 7.0 1,751.8 13.6
Number of Registered Common Shareholders 1,881 1,878 0.2 1,835 2.3
OTHER DATA
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Gross Utility Plant ($000) $ 96,571 $ 91,863 5.1% $ 86,098 6.7%
Net Utility Plant ($000) 71,215 69,326 2.7 66,191 4.7
Capital Expenditures ($000) 6,507 7,746 -16.0 5,112 51.5
Total Gas Sold and Transported (MCF-000's) 8,075 7,392 9.2 7,362 0.4
Total Natural Gas Customers 32,129 31,925 0.6 31,445 1.5
Propane Gallons Sold (000's) 4,251 3,738 13.7 3,904 -4.3
To Our Shareholders
A New Era Of Competition
As the theme of this year's report indicates, the natural gas industry
is becoming increasingly competitive. Having started with the interstate
pipelines several years ago, deregulation has expanded consumer choice by
opening markets and fostering a more competitive environment. The ongoing
move toward complete deregulation of the energy industry will continue and
change will become the only constant.
Our report this year discusses many facets of deregulation and their
potential to reshape traditional energy markets. As noted in our report to
you a year ago, Berkshire Gas has been well ahead of the curve in planning
for deregulation and tailoring our organization to capitalize on change.
More importantly, we have endeavored to work proactively with a unique
vision of the possibilities created by an overall restructuring of our
industry. While it is safe to say that our business will never be the same,
it is also assured that the possibilities for growth and opportunity have
never been greater.
As we enter a new era of open competition, we are exploring ways of
expanding our business into arenas that we had never before been able to
consider. In many ways we are currently benefiting from elements of
deregulation that we had seen and acted on early. Our vision and our
commitment to structuring operations, skill levels, programs and initiatives
have positioned Berkshire Gas as a leader in its markets by making it
possible to effectively compete against the most aggressive rivals.
(Picture of Joseph T. Kelley, Chairman of the Board)
COMPETING SUCCESSFULLY
We are realizing many early successes as an era of expanded
competition dawns on our industry. Energy marketers have been actively
soliciting some of the larger energy users in our service area. We are more
than willing to work with marketers and to advise our customers relative to
their energy options in an effort to assure that they receive the best
possible energy service. To date however, these customers have chosen to
stay with Berkshire Gas for both their supply and energy transportation,
citing service and experience as their primary reasons.
Ongoing implementation of new technology, the realignment of staff to
meet changing needs and a work force of dedicated employees have made it
possible to achieve greater levels of productivity, performance and success
during the year.
Increased sales, largely attributable to more normal winter
temperatures and a growing customer base, resulted in an annual sendout of
more than 8 Billion Cubic Feet("BCF")of natural gas to our customers, an
all-time Company record. This is a testament both to our marketing and
customer retention efforts, as well as to the integrity of our distribution
system and the planning that has been done to accommodate growth and
expansion within our delivery network.
At the same time, we have been successful at controlling costs while
also making substantial new investments in technology and the redesign of
work systems to better meet the needs of our customers and to enhance our
overall competitive position. Operating expenses were down for the second
consecutive year, having been reduced by 11% over the past two years.
Improved productivity and lower operating costs are making it possible to
continue to invest in the future of the Company.
As a result of the ongoing success of many of the initiatives and new
undertakings discussed here, and in last year's report, we have continued to
improve performance and the Company's overall financial position. We are
pleased to report 1996 earnings of $1.65 per share, up approximately 80%
from the prior year's earnings of $.92 per share. These earnings represent
an average return on common equity of 12.3%.
Further reflecting improvements in performance and confidence in the
Company's future, our Board of Directors voted to approve an increase in the
annual dividend paid on Common Stock this past June, bringing it to $1.12
per share from $1.10 on an annual basis. We look forward to measured
dividend growth in the future as part of our commitment to providing
shareholders a fair return on their investment.
COMPETITIVE ADVANTAGES
We are and will be successful competitors in the deregulated
marketplace, not only because of our ability to change before the markets,
but because of inherent competitive advantages, outlined in the text of this
report, that solidly position the Company for the future. Our customers
recognize that our strength, our experience, our flexibility, our
determination and our commitment to first-class service make Berkshire Gas
the best choice for energy in our service area. In the event that
customers opt to purchase gas supplies elsewhere, we also stand ready to
work with energy marketers as a transporter of gas for those customers. We
are uniquely positioned for change, making it possible to compete in new
arenas and to aggressively pursue transportation markets with equal
determination and success.
TECHNOLOGY AND PRODUCTIVITY
A commitment to technology as a means of providing better service at
lower cost has been a component of our vision for the future for many years.
Countless hours of planning, substantial investment and reliance on experts,
have made it possible to develop and implement systems that ultimately yield
better service to our customers and improved performance.
We are proud to report that one such initiative, automated meter
reading, is progressing as planned toward full implementation by the end of
calender 1997. The benefits of this technology are being realized today as
we improve customer satisfaction while also reducing costs and enhancing the
overall efficiency of our meter reading and billing operations.
Additionally, the Company is continuing to redesign and implement its
internal information network. Integrating systems and information
throughout the Company represents a substantial undertaking and our progress
to date has been commendable. Once complete, these advances will provide us
with yet another advantage over our competition with further improvements in
customer service, internal scheduling, communications, productivity and
performance. As a Company, we are committed to these initiatives and others
that are being planned. Automation makes it possible to better use our
human resources in areas of the business that are changing and demand the
attention of highly skilled and trained employees.
Change can be both unsettling and exciting. In our business, it has
become a part of everyday life. In looking back at the many changes that
our industry and our work environment have undergone in recent years, our
employees are to be commended for openly embracing this change. The
Berkshire Gas work force has made it possible for the business to evolve, to
improve and to compete aggressively and successfully in new and open
markets.
(Picture of Scott S. Robinson, President and Chief Executive Officer)
BOARD RETIREMENTS
We would also like to recognize the years of dedication and commitment
provided to the Company by Board members William S. Goedecke and Joseph T.
Kelley as they retire from the Board of Directors. As our Chairman, Mr.
Kelley has guided Berkshire Gas through more than 40 years of growth and
success, and we are grateful. Over the course of Mr. Goedecke's tenure, we
have been fortunate to benefit from his vision and experience. We thank
these gentlemen for more than 59 years of combined service and wish them the
very best in retirement.
FUTURE INITIATIVES
The future of the deregulated natural gas industry is exciting and the
opportunities are boundless. The playing field is in many ways undefined as
regulators too are attempting to determine their role in the competitive
energy marketplace. As such, every part of our business from top to bottom
is being re-evaluated within the context of competition.
Management is also evaluating the structure of the business to make
sure that our enterprise is organized in the most efficient manner possible
and in such a way that not only enhances our ability to compete but also
rewards exploration of new avenues for revenue growth.
This is an era for new thinking in the natural gas industry, an era
that cannot be constrained by past practice or conventional thought.
Deregulation has opened markets and is providing access to new dimensions
for growth and success. It is now our responsibility to seize the spirit of
competition and to creatively, insightfully and aggressively explore new
ventures, new methods and new sources of revenue. This is being done today
and we will continue to focus on this with the interest of our customers and
the expectations of our shareholders uppermost in our minds.
Thank you for your support of our efforts on your behalf and for your
interest in Berkshire Gas.
/s/ J. T. Kelley
Joseph T. Kelley
Chairman of the Board
/s/ Scott S. Robinson
Scott S. Robinson
President & Chief Executive Officer
COMPETING IN A NEW ERA OF DEREGULATION
The recent completion of the Olympics in Atlanta brings to mind the
spirit of open competition, where strength, flexibility, experience and
drive separate the medalists from the rest of the pack.
These same winning attributes are elements of the Berkshire Gas
competitive strategy for an open and deregulated marketplace. Unlike a
sporting event where the rules are firmly set and the objectives clearly
defined, the venue of the deregulated industry is much less clear. The
rules are constantly changing. The playing field is without boundaries and
the field of competitors is ever-expanding. While deregulation brings
risks, there are also many new opportunities for further growth and success.
The deregulation of wellhead gas prices, the opening of interstate and
local pipelines to all suppliers and the emergence of third-party marketers
of gas supply are the results of federal deregulation that culminated in
1993. With state-level changes on the horizon, Berkshire Gas has embraced
the spirit of change and moved aggressively to take advantage of
deregulation. This report focuses on the Company's competitive advantages,
made possible through forethought, creativity and capability in a rapidly
changing and deregulated energy marketplace.
STRENGTH
One of the Company's greatest strengths is its ability to manage gas
supply. With deregulation, Berkshire Gas has been an innovator in supply
purchasing and administration. In 1990, Berkshire Gas co-founded the
Mansfield Consortium with five other local distribution companies. This
purchasing consortium allows the Company to secure supplies of gas at
competitive prices with very favorable terms. By passing these savings on
to customers, the Company is able to offer competitive rates. Deregulation
also has provided the Company with additional sources of revenue, such as
the opportunity to sell gas supply on the open market when conditions are
favorable.
Berkshire Gas also has been proactive in securing contracts with large
gas users that give the Company flexibility in times of peak demand. In one
case, a local cogeneration plant allows Berkshire Gas to purchase supplies
when needed, at a cost below that of alternative peak supplies. In another,
Berkshire Gas has negotiated interruptible contracts with very large
customers that give the Company versatility in meeting peak demand. The
Company's strengths in securing low-cost and dependable supply are a
powerful advantage when competing against natural gas marketers or other
fuel suppliers for existing and new customers.
FLEXIBILITY
One of the main goals of deregulation is to provide choice to energy
consumers. In offering choice, one of the Company's key competitive
advantages over outside marketers and suppliers is flexibility. Berkshire
Gas provides great latitude for its commercial, industrial and residential
customers by using its experience in gas supply, its knowledge of the
interstate pipeline and storage systems, and its ability to manage peak
demand.
Berkshire Gas also has demonstrated great flexibility in customizing
rates for commercial and industrial users. Also called special contracts,
these customized rates are created from the broad palette of the Company's
previously approved rate tariffs. Berkshire Gas' marketing and supply
professionals "package" rates to meet the specific needs of a customer or
class of customers. Special contracts offer an important competitive
advantage for the Company because they provide high-volume customers with
fixed rates, which facilitate operational budgeting.
EXPERIENCE
The ability to provide the high level of service and technological
expertise required by commercial and industrial users is one of the
Company's greatest competitive advantages over marketers, who have no
presence in the local community. With a 143-year reputation for service,
Berkshire Gas has been a leader in applied gas technologies for all types of
businesses. Berkshire Gas customers can rely on experienced professionals
who work diligently to assure the availability of supply at the best
possible price and can feel secure in the knowledge that experienced
technicians are available 24 hours a day, 365 days a year.
The high level of service and expertise also is evident in the
technical and engineering support Berkshire Gas makes available for
commercial and industrial customers of all sizes. Expertise in
distribution, new technology, energy efficiency and conservation are
representative of the technical assistance that Berkshire Gas provides in
meeting the energy needs of its customers. Additional assistance for customers
with unique needs is made available through the Institute for Gas
Technology and the Gas Research Institute.
Berkshire Gas invests in training and equipment to offer the most
advanced technologies and best service possible. That investment continues
to yield additional demand by new and existing customers. Berkshire Gas
customers have come to rely on the Company's long-standing experience in the
energy marketplace. That experience not only provides a competitive
advantage for Berkshire Gas, but also enhances our customers' competitive
positions in their markets.
DRIVE
The value of competitive qualities such as strength, flexibility and
experience is best seen when applied to customer needs by the Company's
determined approach to marketing and customer service. Berkshire Gas
customers appreciate the flexibility and depth of experience and knowledge
that the Company brings to their energy requirements.
As veteran energy consultants, Berkshire Gas representatives regularly
help customers analyze all options and costs for a comprehensive picture of
possible solutions. They honestly compare and present the costs and
benefits of natural gas over alternative fuels and compare the costs and
supply risks associated with gas marketers to the stability and savings
offered by Berkshire Gas. This drive to provide and offer customers true
energy savings, backed with the highest level of service, has translated
into exceptional customer loyalty.
As the energy market recreates itself, Berkshire Gas continues its
tradition of creative and progressive management. As a result of
deregulation, many local distribution companies have chosen to abandon the
sale of natural gas on a retail basis, confining themselves to the
transportation of supply from third-party marketers. Berkshire Gas however,
remains committed to being a merchant, not simply a transporter of gas,
while it remains profitable to do so and an equitable return can be made for
shareholders. When it is economically wise for customers to purchase from a
third party, Berkshire Gas works with those customers to help negotiate
the best supply and price while also earning transportation revenue.
The true value of the Company's competitive advantages of strength,
flexibility, experience and drive can be illustrated no more clearly than in
the stories of customers who have made competitive decisions over the past
year in selecting an energy source and supplier that would best meet the
expanding energy needs of their own businesses. As the following profiles
show, the Company has established the tools, ideas, and strategies necessary
not only to meet the expanding demands of existing customers, but to
continue to grow its share of the market well into the next century.
Customer Profile
HARDIGG INDUSTRIES
Berkshire Gas has played a critical role in meeting the energy needs
at Hardigg Industries, a family-owned plastics molding business located in
South Deerfield, Massachusetts. This year, as Hardigg's energy demand
continued to grow with its business, Berkshire Gas provided energy solutions
to help the company remain competitive.
Hardigg is a world leader in the design and development of products
that cushion and protect complex electronics during shipment. Its reusable
shipping cases are trusted by such notable customers as CNN, the Department
of Defense and NASA to protect extremely sensitive equipment, ranging from
mobile broadcast studios to replacement units for the Hubble Space
Telescope. "Our business is not making shipping cases, but rather
protecting delicate equipment in harsh environments," says Vice President
Jamie Hardigg.
The company began designing reusable shipping containers commercially
in 1970, and has since completed more than 10,000 original designs, offering
more than 250 off-the-shelf sizes. The U. S. Naval Aviation Service alone
uses more than 100,000 Hardigg containers. With on-site capabilities that
include a high-tech engineering department, custom molding processes, test
labs, moldmaking and a machine shop, Hardigg's capabilities are virtually
limitless.
The firm uses rotational molding equipment and high-quality,
polyethylene resins to produce the light, durable cases, which can withstand
temperatures ranging from -65 to 160 degrees Fahrenheit. The ability to
maintain precise temperatures during the molding process, as well as the
capability to quickly raise and lower mold temperatures, are key factors in
Hardigg's selection of natural gas as its fuel of choice. Clean-burning
natural gas also is unlikely to contaminate the plastic, an important
process control when your cases must meet tight military specifications to
ensure protection from humidity, sand, salt spray and the pounding they may
experience during shipment and rapid deployment.
Hardigg Industries has come to rely on the comprehensive services that
Berkshire Gas has provided in meeting its energy needs for more than 20
years. That's why Hardigg turned to Berkshire Gas for advice after being
approached by a competing independent natural gas marketer. The Company's
history of providing professional, low-cost service, as well as advanced
engineering expertise for distribution system upgrades, provided a
competitive advantage and was a key deciding factor for Hardigg. Berkshire
Gas also customized rates to meet the company's needs and, through its
experience with supply management, could provide firm service - a promise
the marketer couldn't make. Hardigg's choice of Berkshire Gas reflects the
loyalty that the Company has earned through its focus on customer service
and continued commitment to energy technology development and
implementation.
COMPETITIVE ADVANTAGES
Berkshire Gas vs.
Natural Gas Marketer
* Engineering Expertise
* Reliable Firm Service
* Customized Rates
(Picture of Hardigg Industry employee)
The value Berkshire Gas adds through engineering expertise, customized rates
and uninterrupted service guarantees led Hardigg Industries to choose the
Company over an independent natural gas marketer to meet its expanding
energy needs. Hardigg uses high-tech rotational molding processes at its
South Deerfield, Massachusetts, facility to produce durable shipping cases
for sensitive electronics, as well as specialty products, such as light
weight kayaks and plastic barriers that protect shopping carts in
supermarket parking lots.
(Picture of Hardigg Industry employees inside building)
Customer Profile
HILLSIDE PLASTICS
If the folks at Hillside Plastics seem a little bit sweet on maple
syrup, it's understandable. The company is the nation's largest
manufacturer of plastic containers for pure maple syrup. Check the bottom of
a plastic jug of pure maple syrup: If it says SugarhillTM, it was made by
Hillside Plastics in Turners Falls, Massachusetts. And just as Berkshire Gas
competes by providing flexible energy solutions for its customers, Hillside has
built its success on creating innovative products for the maple syrup industry.
According to Dick Haas, who founded the company in 1969, pure maple
syrup is sold by color, not taste. The problem with polyethylene bottles is
that oxygen permeates the sidewall and darkens the syrup. Hillside Plastics
has patented a coating process that serves as an oxygen barrier to increase
shelf life. The process, which took 15 years to develop, has been in
production for six years.
And the maple syrup business is booming. Volume producers are making
the conversion from tin containers to plastic and Hillside is helping
smaller producers create their own niche by providing customized containers
with private labels. The company even ships metric-sized bottles for maple
syrup producers in Canada.
Haas said that about 50 percent of Hillside's business is maple syrup
containers, and that his company serves the majority of the market. The
other 50 percent involves producing containers for restaurants supplies,
such as vinegar and olive oil, and other products, including windshield
wiper fluid, swimming pool chemicals, and janitorial supplies.
Peter Haas, Dick's son and the plant's general manager, said that
flexibility is the firm's competitive edge. "We have unique machines," he
said. "We can do color changes, size changes, weight changes - all very
quickly. We can offer one customer five different items on the same trailer
load and can do it competitively. That's our niche: meeting customer
demand."
Flexibility in meeting customer demand was also a factor in Hillside's
choice of Berkshire Gas as its primary fuel source. Hillside's 38 percent
growth last year and mounting energy costs led the company to re-evaluate
its energy needs and options. Previously, electricity had powered the
company's operations and propane had fueled its central heating. As the
business continued to grow, the competitive advantages of natural gas
provided the obvious solution to the company's growing energy costs.
Hillside management, compelled by the cost advantages of natural gas over
the electricity and the competitive strengths of Berkshire Gas, elected to
convert a substantial portion of its total energy consumption to natural
gas.
Berkshire Gas demonstrated its flexibility by extending its natural
gas distribution system in Turners Falls, and by providing the technical
support Hillside needed to convert many of its operations to natural gas.
The Company's ability to customize rates, expand its distribution network
and provide technical support are key competitive advantages that make it
possible for customers such as Hillside Plastics to remain competitive well
into the future.
(Picture of Hillside employee)
Hillside Plastics, the nation's largest manufacturer of plastic containers
for pure maple syrup, has converted a substantial portion of its energy
usage from electricity to natural gas. The company, located in Turners
Falls, Massachusetts, cited the competitive advantages Berkshire Gas
offers, including flexibility, technical support and customized rates, as
key factors in its decision.
COMPETITIVE ADVANTAGES
Berkshire Gas vs. Electric
* Cost Savings
* Customized Rates
* Technical Conversion Support
Customer Profile
DELFTREE CORPORATION
Natural gas and Delftree mushrooms have become a recipe for success
for gourmet chefs in the world's finest restaurants. Chefs demand natural
gas because it gives them the greatest control over cooking temperature and
Delftree shiitake (pronounced shih-TAH-kee) mushrooms because of their
hearty flavor and firm, beef-like texture. Now Delftree Corporation in
North Adams, Massachusetts, which grows the mushrooms in a unique facility,
has given new meaning to this winning combination by choosing Berkshire Gas
to replace coal as its primary energy source. In Delftree's case, Berkshire
Gas helped President Bill Greenwald conclude that reliable natural gas was
his best alternative.
Greenwald takes great pride in the closely guarded, state-of-the-art
method that enables him to organically grow his gourmet mushrooms. But the
key to Greenwald's success is no secret: He analyzes every option before
taking action. "I'm not a big fan of risk," he said. "I don't like to
gamble."
Greenwald didn't consider it a gamble when he left his job as a
mechanical engineer at Stanley Tools in Shaftsbury, Vt., to join the Lundy
Mushroom Company in 1982. His engineering skills and interest in biology
were perfect qualifications for fine-tuning the proprietary equipment used
to process and pasteurize the specialized substrate needed to produce
gourmet mushrooms. And, as Greenwald predicted when he bought the company a
few years later, the company's niche market responded enthusiastically to
his product.
Delftree's markets now stretch from Toronto to New Orleans and from
New York to Los Angeles. Delftree currently owns approximately 5 percent of
the national market, selling about 250,000 pounds annually. To meet growing
demand, Greenwald has expanded the facility's growing capacity by 50
percent. And, after his usual careful analysis, he realized that the
competitive advantages Berkshire Gas offered made natural gas the clear
choice for his energy needs. Greenwald's calculations demonstrated that
although the cost per British Thermal Unit ("BTU") of coal is lower than
natural gas, coal-burning equipment is less than half as efficient as
gas-burning equipment and the high cost of coal-boiler maintenance more
than offsets the higher cost per BTU.
Berkshire Gas provided another competitive advantage by answering
Greenwald's reliability concerns. Natural gas gives him greater control
over temperature and there's no fear of arriving in the morning to find that
the climate-controlled growing area has gone cold. "When I added it all up, I
decided that the efficiency and reliability of natural gas gave Berkshire Gas
a solid competitive edge," Greenwald said. "And as I said, I don't like to
gamble."
(Picture of two Delftree employees)
Greater efficiency and a significant reduction in maintenance costs were the
competitive advantages cited by Bill Greenwald (right) and business partner
Steve Rich for converting Delftree Corporation's energy source from coal to
natural gas. Delftree grows some of the world's finest shiitake mushrooms
in its facility in North Adams, Massachusetts.
COMPETITIVE ADVANTAGES
Berkshire Gas vs. Coal
* Efficient, Clean-Burning Energy
* Significant Maintenance Savings
* Technical Conversion Support
Customer Profile
UPTON ENTERPRISES
Steve Upton is one of the most respected developers of upscale homes
in the Berkshire Gas service area. He's built top-quality condominiums,
luxurious mansions and facilities for a well-known Massachusetts landmark,
South Deerfield's Yankee Candle Company, which draws nearly 2 million
visitors each year. He always insists on the highest quality available, in
everything from work crews to building materials to energy. That's why he
again chose Berkshire Gas as the primary energy source for his latest
housing development.
Upton cited efficiency, availability, cost and cost volatility - a
lesson learned during the oil embargo - as key factors in choosing clean-
burning, efficient natural gas. The bottom line, however, is customer
satisfaction. "Some developers might have chosen oil, but I wanted a product
that's viewed as the Cadillac of the industry," Upton said. "It's
dependability, cleanliness, and efficiency make natural gas the product that
I want representing me in the quality homes I'm building. I also want a
company I can depend on to deliver that product and back it up with quality
service. That's Berkshire Gas."
Upton earned his reputation during the 1980s, building more than 130
condominiums in the South Deerfield area over a six-year period. He kept
stepping up the level of amenities until the condos had the look of large,
executive, single-family homes in a duplex format. "We worked for two years
straight with a total of two-and-a-half days off, including holidays," he
said. "We knew how to build, what to build and how to market our work."
Upton's new development is called Ridgecrest, which when completed
will comprise 26 upscale, single-family homes that he is now custom
building. Most will be 3,000 to 4,000 square feet, but some may be larger.
"I'm not selling lots, I'm selling homes," Upton said. "I will have final
architectural review of everything, from landscaping to the last nail."
Upton said he admires the drive Berkshire Gas demonstrated in
expediting the new gas main extension that serves Ridgecrest, providing the
engineering, design and permitting services that are not available from
other energy suppliers. He said upscale homebuyers know that natural gas is
the greatest energy value, because it's environmentally friendly and because
it outperforms any other fuel in terms of heating system recovery rates,
temperature control, BTU efficiency, equipment reliability and dependability
of supply. He noted that while today's affluent homeowners may be cooking
less, when they do cook it's on scaled-down, restaurant-style stoves. "They
have a level of sophistication and lifestyle that - in my opinion -
translates to natural gas,"he said. "They also demand the quality and
dependability of service that only Berkshire Gas can deliver."
(Picture of developer Steve Upton)
Berkshire Gas was the energy choice of developer Steve Upton (right) for
Ridgecrest, his new South Deerfield, Massachusetts, subdivision that, when
completed, will include 26 upscale homes. He said his affluent customers
prefer clean-burning, efficient, environmentally friendly natural gas to
oil.
COMPETITIVE ADVANTAGES
Berkshire Gas vs. Oil
* Homeowner Demand
* Competitive, Stable Cost
* Dependability, Cleanliness and Efficiency
BERKSHIRE PROPANE
Customer Profile
1896 HOUSE
The 1896 House in Williamstown, Massachusetts, and Berkshire Propane
have a lot in common: Both are in the comfort business: Both have a rich
history and both are working hard to remain atop a competitive market. And
like Berkshire Propane, 1896 House co-owners Sue Morelle and Denise Richer
have displayed a limitless source of energy, pouring their hearts and souls
into revitalizing the historic Berkshire landmark.
Morelle and Richer purchased the 16-unit, 1896 Motel in the mid-1980's
and immediately fell in love with the cultural environment of Williamstown
and the unspoiled, scenic beauty of the Berkshire hills. They also became
immersed in the renovations needed to bring the motel up to the competitive
standards of the Berkshire tourism industry. Three years ago, they
purchased a 12-unit motel directly across the road, made the necessary
renovations and renamed their establishment the 1896 Motels: Brookside &
Pondside.
The greatest challenge, however, lay ahead. The 1896 House
Restaurant, which they did not own was situated directly between their motel
properties. The restaurant/banquet facility had once been a highly regarded
host of Williamstown Theatre Festival cabaret performances, drawing upscale
clientele and Broadway-caliber performers. But the restaurant had sat idle
for several years, falling into a serious state of disrepair. Morelle and
Richer purchased the restaurant and began rennovations in January 1996.
The scope of the project was far greater than they had expected. They
invested more than $500,000 to renovate, decorate and furnish the
restaurant. This included major repairs, such as new floors, walls,
ceilings, and plumbing, as well as fine details, such as elegant wallpaper,
curtains, brass sconces and chandeliers. And when it came time to make
their energy decision, Berkshire Propane was the clear choice. "We had
considered using oil, but higher up-front costs and environmental concerns
were significant," Morelle said. "Our kitchen demanded gas, and Berkshire
Propane showed us how gas-fired duct furnaces would mesh better with our new
air-circulation system."
Miraculously, the renovations were completed in time for the opening
of the Williamstown Theatre Festival's popular cabaret, when the
restaurant's banquet room was dedicated to actor and part-time Williamstown
residents Christopher Reeve and his wife, Dana, who had first met in that
room in 1987. Now the hospitality and gracious dining facilities of the
1896 House are being enjoyed by skiers, admirers of brilliant fall foliage,
the families of Williams College students, and visitors to the Berkshire's
many cultural attractions, including Tanglewood, Williamstown Theatre
Festival, the Massachusetts Museum of Contemporary Art, the Berkshire
Theatre Festival and the Clark Art Institute.
So if you come to the 1896 House, you can sample New England-style
cuisine in two elegant dining rooms, both with large working fireplaces.
You can sit at the famous circular oak bar. You can enjoy cabaret
performances, weddings or large parties in the Reeves Room. And, summer or
winter, you'll welcome the comfort provided by Berkshire Propane.
(Picture of co-owners of 1896 House)
Berkshire Propane's competitive advantages, including superior cooking
temperature control and environmental friendliness, made it the energy
choice of 1896 House co-owners Denise Richer (left) and Sue Morelle, who
invested more than $500,000 to renovate their elegant restaurant in
Williamstown, Massachusetts.
COMPETITIVE ADVANTAGES
Berkshire Propane vs. Oil
* Superior Temperature Control for Cooking
* Lower Up-Front Costs
* Efficient, Clean-Burning Energy
COMPETITION AND THE FUTURE
Regardless of what actions regulators take in the future, it is
certain that competition will increase. It is also certain that Berkshire
Gas will work to assure future profitability by continuing to build upon its
competitive advantages in the energy marketplace. Through proactivity, the
Company will examine the open market to diversify and capitalize on new
strategic opportunities for growth and revenue enhacement. Through diligent
supply management, new efficiencies will be achieved and further flexibility
will be developed in the deregulated supply and transportation markets.
Through continued investment, Berkshire Gas will realize the benefits of new
technologies for its internal operations, as well as for those of its
customers. And through an ongoing process of improvement, each facet of the
Company's operations and structure will be benchmarked against the toughest
competitive standards.
With these competitive advantages, the Company will continue to build
on its solid foundation of excellent customer relations, earned through 143
years of service. By keeping sharp eyes on the competitive environment and
creative minds on customer needs, the Company is confident that this new era
of competition will also be a new era of success.
SERVICE AREA
The Berkshire Gas service area encompasses parts of three counties in
western Massachusetts and a portion of eastern New York, providing natural
gas services to 19 cities and towns with a total population of 190,000.
Propane service is provided to more than 100 communities in western
Massachusetts and neighboring eastern New York State.
Our service area is renowned for its scenic beauty, splendid fall
foliage, popular ski areas and numerous cultural attractions. Berkshire Gas
is proud to provide competitive advantages that meet the region's unique
energy demands without spoiling its delicate environmental balance, and
remains committed to its role as a respected corporate citizen.
(Map of area Berkshire Gas and Berkshire Propane services)
Financial Review
Contents
10-Year Comparative Summary
of Operations and Statistics........................... 14
Management's Discussion and Analysis
of Financial Condition and Results of Operations....... 16
Financial Statements:
Statements of Income and
Retained Earnings.................................... 19
Balance Sheets....................................... 20
Statements of Common Shareholders'
Equity and Redeemable Cumulative
Preferred Stock...................................... 21
Statements of Cash Flows............................. 22
Notes to Financial Statements........................ 23
Independent Auditors' Report......................... 29
Quarterly Financial Information........................ 31
Officers and Directors................................. 32
10-YEAR COMPARATIVE SUMMARY OF OPERATIONS AND STATISTICS
- --------------------------------------------------------------------------------
For the Years Ended June 30,
OPERATIONS ($000) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Operating Revenues $46,050 $47,934 $53,029 $47,132 $47,969
Cost of Gas Sold 20,215 24,820 27,885 24,831 26,741
-----------------------------------------------
Operating Margin 25,835 23,114 25,144 22,301 21,228
-----------------------------------------------
Net Income 4,213 2,529 3,673 2,810 1,952
Earnings Available for
Common Stock 3,521 1,835 2,953 2,066 1,849
COMMON SHARE DATA
- --------------------------------------------------------------------------------
Earnings Per Share $ 1.65 $ 0.92 $ 1.69 $ 1.20 $ 1.10
Annualized Dividends Per Share 1.12 1.10 1.10 1.08 1.08
Dividends Declared Per Share 1.105 1.10 1.085 1.08 1.08
Book Value Per Share 13.75 13.16 12.99 12.30 12.13
Market Price (Year-End) 15.38 15.00 16.25 18.00 14.75
Average Shares of Common Stock
Outstanding (000S) 2,129.2 1,990.5 1,751.8 1,718.5 1,687.7
CAPITALIZATION ($000)
- --------------------------------------------------------------------------------
Common Equity $29,595 $27,688 $22,946 $21,326 $20,626
Preferred Stock 8,406 8,448 8,491 9,026 9,111
Long-Term Debt 31,999 30,983 31,083 25,413 26,564
-----------------------------------------------
Total Capitalization $70,000 $67,119 $62,520 $55,765 $56,301
-----------------------------------------------
% OF TOTAL
- --------------------------------------------------------------------------------
Common Equity 42.3% 41.2% 36.7% 38.2% 36.6%
Preferred Stock 12.0 12.6 13.6 16.2 16.2
Long-Term Debt 45.7 46.2 49.7 45.6 47.2
RATIOS (%)
- --------------------------------------------------------------------------------
Payout Ratio 67% 120% 65% 90% 98%
Market-to-Book Ratio 112 114 125 146 122
Return on Average
Common Equity 12.3 7.2 13.3 9.8 9.1
PROPERTY ($000)
- --------------------------------------------------------------------------------
Capital Expenditures $ 6,507 $ 7,746 $ 5,112 $ 5,458 $ 5,165
Pipeline Construction 0 0 0 5,659 1,539
Gross Utility Plant 96,571 91,863 86,098 83,016 79,942
Net Utility Plant 71,215 69,326 66,191 65,846 64,840
Net Non-Utility Plant 5,949 5,962 5,715 5,004 8,965
Total Assets 94,242 91,983 90,991 91,891 92,124
GAS SALES (MCF-000S)
- --------------------------------------------------------------------------------
Residential 2,814 2,513 2,839 2,730 2,639
Commercial & Industrial 2,626 2,305 2,625 2,681 2,703
Interruptible 522 1,104 807 1,012 1,468
- --------------------------------------------------------------------------------
Total Natural Gas Sales 5,962 5,922 6,271 6,423 6,810
GAS TRANSPORTED (MCF-000S)
- --------------------------------------------------------------------------------
Firm Transportation 1,073 1,130 874 289 0
Interruptible Transportation 1,040 340 217 0 0
- --------------------------------------------------------------------------------
Total Gas Sold and Transported 8,075 7,392 7,362 6,712 6,810
- --------------------------------------------------------------------------------
Propane Gallons Sold 4,251 3,738 3,904 3,522 3,158
OTHER STATISTICS
- --------------------------------------------------------------------------------
Customer Meters 32,129 31,925 31,445 31,053 30,507
Maximum Daily MCF Sendout 44,161 45,760 43,934 39,446 38,237
Minimum Daily MCF Sendout 8,381 8,216 8,114 7,371 8,060
Degree Days 7,402 6,748 7,651 7,396 7,210
20-Year Average Degree Days 7,300 7,354 7,356 7,341 7,348
Number of Employees 153 160 173 181 180
10-YEAR COMPARATIVE SUMMARY OF OPERATIONS AND STATISTICS
- --------------------------------------------------------------------------------
For the Years Ended June 30,
OPERATIONS ($000) 1991 1990 1989 1988 1987
- --------------------------------------------------------------------------------
Operating Revenues $41,408 $39,476 $37,274 $34,992 $37,321
Cost of Gas Sold 22,341 20,280 20,953 19,619 21,033
-----------------------------------------------
Operating Margin 19,067 19,196 16,321 15,373 16,288
-----------------------------------------------
Net Income 1,462 2,047 1,769 1,757 2,364
Earnings Available for
Common Stock 1,377 1,955 1,671 1,653 2,253
COMMON SHARE DATA
- --------------------------------------------------------------------------------
Earnings Per Share $ 0.83 $ 1.21 $ 1.05 $ 1.14 $ 1.83
Annualized Dividends Per Share 1.08 1.28 1.28 1.28 1.22
Dividends Declared Per Share 1.23 1.28 1.28 1.235 1.15
Book Value Per Share 12.07 12.40 12.40 12.57 11.96
Market Price (Year-End) 13.00 14.50 17.25 16.75 18.50
Average Shares of Common Stock
Outstanding (000S) 1,655.6 1,622.6 1,595.1 1,444.7 1,232.9
CAPITALIZATION ($000)
- --------------------------------------------------------------------------------
Common Equity $20,155 $20,299 $19,904 $19,848 $14,866
Preferred Stock 1,196 1,290 1,378 1,465 1,559
Long-Term Debt 28,156 29,147 23,066 14,952 16,906
-----------------------------------------------
Total Capitalization $49,507 $50,736 $44,348 $36,265 $33,331
-----------------------------------------------
% OF TOTAL
- --------------------------------------------------------------------------------
Common Equity 40.7% 40.1% 44.9% 54.7% 44.6%
Preferred Stock 2.4 2.5 3.1 4.1 4.7
Long-Term Debt 56.9 57.4 52.0 41.2 50.7
RATIOS (%)
- --------------------------------------------------------------------------------
Payout Ratio 130% 106% 122% 112% 67%
Market-to-Book Ratio 108 117 139 133 155
Return on Average
Common Equity 6.8 9.7 8.4 9.5 15.8
PROPERTY ($000)
- --------------------------------------------------------------------------------
Capital Expenditures $ 4,245 $ 6,438 $12,308 $ 9,778 $ 6,983
Pipeline Construction 4,526 6,475 0 0 0
Gross Utility Plant 76,404 71,805 65,657 55,310 47,105
Net Utility Plant 63,277 60,558 55,991 46,576 39,163
Net Non-Utility Plant 10,627 8,119 2,882 2,616 2,531
Total Assets 95,971 83,680 65,240 56,886 49,979
GAS SALES (MCF-000S)
- --------------------------------------------------------------------------------
Residential 2,347 2,545 2,547 2,428 2,333
Commercial & Industrial 2,480 2,778 2,702 2,564 2,209
Interruptible 1,092 1,163 1,026 893 763
- --------------------------------------------------------------------------------
Total Natural Gas Sales 5,919 6,486 6,275 5,885 5,305
- --------------------------------------------------------------------------------
GAS TRANSPORTED (MCF-000S)
- --------------------------------------------------------------------------------
Firm Transportation 0 0 0 0 0
Interruptible Transportation 0 169 118 31 0
- --------------------------------------------------------------------------------
Total Gas Sold and Transported 5,919 6,655 6,393 5,916 5,305
- --------------------------------------------------------------------------------
Propane Gallons Sold 2,927 2,789 2,588 2,293 2,075
OTHER STATISTICS
- --------------------------------------------------------------------------------
Customer Meters 30,641 30,395 29,733 28,684 27,894
Maximum Daily MCF Sendout 37,095 38,012 37,480 38,917 35,469
Minimum Daily MCF Sendout 6,855 7,294 7,228 6,603 5,821
Degree Days 6,261 7,045 7,581 7,471 7,276
20-Year Average Degree Days 7,432 7,474 7,474 7,479 7,504
Number of Employees 185 191 194 182 155
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
(Dollars in Thousands Except Share and Per Share Amounts)
An Overview of 1996
- -------------------------------------------------------------------------------
The Company reported Net Income of $4,213, or $1.65 per share in 1996
compared to net earnings of $2,529, or $.92 per share in 1995. Net Income
was positively impacted by a return to more normal winter weather. The
number of degree days in 1996 was 7,402, an increase of 9.7% from the 1995
level and 1.4% over the 20 year average. The earnings represent a return on
average common equity of 12.3%, demonstrating the Company's continued
commitment to provide a fair return to shareholders. The book value per
share rose to $13.75 from $13.16 in 1995. At its June 1996 meeting, the
Company's Board of Directors approved an increase in the quarterly dividend
to $.28 per share or $1.12 on an annual basis. Efforts in cost containment
continued as employment levels were reduced for the third consecutive year.
The Company elected to restructure higher cost debt to lower interest costs.
Net Utility Plant increased to approximately $71,215, a 2.7% increase
from 1995, reflecting capital expenditures of $6,507. These expenditures
represent automation of the meter reading system as well as continued
expansion and upgrade of the distribution system.
Results of Operations
- ------------------------------------------------------------------------------
1996 vs. 1995
Earnings available for Common Stock were $3,521 for 1996 as compared
to $1,835 for 1995. Earnings Per Share of Common Stock based on the average
number of shares outstanding for the same periods were $1.65 and $.92,
respectively. The $.73 or 79.3% increase in per share earnings from 1995 is
due primarily to more normal weather during the heating season, lower
interest costs through debt restructuring and increased operating
efficiencies.
Berkshire Gas Company considers Operating Margin (Operating Margin or
Gross Profit=Operating Revenues Net of Cost of Gas Sold) to be a more
pertinent measure of operating results than operating revenues because
income is not significantly affected by changes in revenue due to similar
fluctuations in gas costs. The Company is required to recover from or
return to the customers through the Company's Cost of Gas Adjustment Clause
("CGAC") any changes in the cost of gas.
Operating Margin increased $2,721 or 11.8% as compared with 1995.
Operating Margin is primarily affected by the change in the level of firm
gas sold and transported. Interruptible gas sold and transported has no
effect on Operating Margin since those margins are flowed back to the firm
customer. The Company's sales are affected by weather, as the majority of
its firm customers use natural gas for heating. The increase from 1995 is
primarily due to higher volumes of firm gas sold due to 9.7% colder weather
than 1995, particularly during the winter heating season when temperatures
averaged 16.6% colder than the 1995 season.
1996 1995
---- ----
Firm MCF Sold and Transported 6,513 5,948
Operating Margin $25,835 $23,114
Average Operating Margin Per Firm MCF $3.97 $3.89
Other Operating Expenses consisted of the following:
1996 1995
---- ----
Transmission and Distribution $ 3,304 $ 3,400
Customer Accounts 3,172 2,740
Administrative and General 3,814 4,173
Other 1,192 1,276
------- -------
Total $11,482 $11,589
======= =======
Other Operating Expenses decreased $107 or .9% from 1995 levels. The
Company's cost containment efforts improved efficiency and reduced the
workforce. Decreased Transmission and Distribution expenses of $96 reflect
reductions in maintenance costs, and lower Administrative and General of
$359 are due to lower medical costs, legal fees, and other employee
benefits. Also contributing to the decrease was lower Other costs reflecting
savings in gas supply expenses and personnel reductions. Partially
offsetting these reductions was an increase in Customer Accounts, which is
primarily reflective of $482 of additional provision for bad debts.
Depreciation Expense increased by $222 in 1996 over 1995 due to an
increase in the amount of depreciable assets.
Other Income increased $19 from 1995. Propane revenues increased $197
from 1995 due to colder winter weather. Partially offsetting the increase
was lower jobbing revenue, appliance rentals and reduced interest income
resulting from changes in the balance of the overcollection of prior period
gas costs through the CGAC.
Interest Expense decreased $186 due to the retirement of long-term
debt and favorable borrowing rates. The Company called the 9.125%
Debentures and First Mortgage Bonds (Series K and M) and temporarily
financed this through lower-cost, short-term bank loans.
Income Taxes increased $1,117 from 1995 due to higher earnings in
1996.
Dividends Declared on Common Stock increased $141 due to additional
shares outstanding through the Company's Dividend Reinvestment Program
("DRIP") and to a lesser extent, an increase in quarterly dividends to $.28
per share, from $.275, effective the fourth quarter of 1996.
1995 vs. 1994
The decrease in earnings available for Common Stock for 1995 to $1,835
from $2,953 was primarily attributable to significantly warmer weather
during the heating season. The warmer weather was also the principal
component for the decrease to $.92 from $1.69 in earnings per share of
Common Stock based on the average number of shares outstanding. Per share
earnings decreased $.77 or 45.6% for 1995. In 1995, the issuance of 295,000
shares of Common Stock diluted earnings by $.11 per share, whereas in 1994,
proceeds from an insurance settlement increased earnings per share by $.23.
Operating Margin decreased $2,030 or 8.1% as compared with 1994.
Operating Margin is primarily affected by the change in the level of firm
gas sold and transported. Interruptible gas sold and transported has no
effect on Operating Margin since those margins are flowed back to the firm
customer. The Company's sales are affected by weather as the majority of its
firm customers use natural gas for heating. The decrease from 1994 is
primarily due to lower volumes of firm gas sold due to 11.8% warmer weather
than 1994, partially offset by higher volumes of gas sold and transported at
slightly lower margins from increased firm transportation volumes to
industrial customers.
1995 1994
---- ----
Firm MCF Sold and Transported 5,948 6,338
Operating Margin $23,114 $25,144
Average Operating Margin Per Firm MCF $3.89 $3.97
Other Operating Expenses consisted of the following:
1995 1994
---- ----
Transmission and Distribution $ 3,400 $ 3,407
Customer Accounts 2,740 3,162
Administrative and General 4,173 4,909
Other 1,276 1,431
------- -------
Total $11,589 $12,909
======= =======
Other Operating Expenses decreased $1,320 or 10.2% from 1994 levels.
The decrease in Other Operating Expenses primarily reflects lower Customer
Accounts expense of $422 due to lower levels of uncollectible accounts;
decreased Administrative & General costs due to lower insurance costs of
$254, lower employee welfare of $196 due to fewer medical claims, reduced
legal expense of $64, lower shareholders expense of $45, lower regulatory
expense of $49, and lower salaries and benefits of $138. Other costs were
$155 less than 1994, primarily due to lower professional fees associated
with restructuring supply contracts brought about by the Federal Energy
Regulatory Commission ("FERC") Order 636.
Depreciation Expense increased by $203 in 1995 over 1994 due to an
increase in the amount of depreciable assets.
Other Income decreased $871 from 1994. The decrease was primarily due
to an insurance settlement that was included in 1994 income in the amount of
$403 (net of taxes and amounts previously recorded). Propane revenue was
$170 less than 1994 due to the significantly warmer weather during the
heating season. Interest income was $60 less resulting from the
overcollection of prior period gas costs through the CGAC.
Interest Expense increased $178 due to higher long-term interest
expense resulting from semi-annual pricing of the Medium-Term Note,
partially offset by lower short-term interest due to lower levels of
borrowing. Other Taxes increased $70 due to higher personal property
valuations and rates.
Income Taxes decreased $887 from 1994 due to lower earnings in 1995.
Dividends Declared on Common Stock increased $312 due to additional
shares outstanding, and to a lesser extent, dividends increased $.015 per
share in 1995. The Company sold 295,000 shares of Common Stock during the
second quarter of fiscal 1995.
Liquidity and Capital Resources
- -------------------------------------------------------------------------------
Cash flows from operations, net of dividend payments, have generally
provided the principal liquidity to meet operating requirements. Capital
requirements have been generally funded by both internal and external
sources. The issuance of long-term financing is dependent on management's
evaluation of need, financial market conditions and other factors. Short-
term financing is used to meet seasonal cash requirements.
The Company initially finances construction expenditures and other
funding needs primarily with short-term bank borrowings, and to a lesser
extent, with the reinvestment of dividends. The Company continually
evaluates its short-term borrowing position and based on prevailing interest
rates, market conditions, etc., makes determinations regarding conversion of
short-term borrowings to long-term debt or equity. As part of this process
and in keeping with its cost containment program, the Company called First
Mortgage Bonds, Series K, 7.875% at $540 and Series M, 9.375% at $720 and
the 9.125% Debentures at $6,543 during the third quarter of fiscal 1996.
The Company is negotiating the repurchase of the 8.4% Preferred Stock of
$8,000, and has filed for approval with the MDPU, in June 1996, to issue
$16,000 in Senior Notes at 7.8% to finance these redemptions. During fiscal
1995, the Company sold 295,000 shares of Common Stock, netting proceeds of
$4,213 to repay short-term bank borrowings.
The Company's capital expenditures were $6,507 in 1996, $7,746 in
1995, and $5,112 in 1994. These construction expenditures primarily
represent investments in new and replacement mains and services, and the
conversion to automated meter reading. The Company expects fiscal 1997
capital expenditures to total approximately $8,000. Construction
expenditures will be financed initially through short-term borrowings and
refinanced by issuing long-term debt and/or equity, to the extent that
internally generated funds are not available.
Beginning June 15, 1993, the Company's Share Owner Dividend
Reinvestment and Stock Purchase Plan ("DRIP") allowed for the sale of Common
Stock shares at a 3.0% discount to plan participants to increase cash flow
to support current construction expenditures.
As of June 30, 1996, the Company had lines of credit aggregating
$24,000, of which $12,365 remained unused.
The Company's continued evaluation of its environmental protection
requirements has indicated that present estimates of investigative and
cleanup costs range from $3,290 to $12,302 and are expected to be incurred
through 2011. The anticipated level of expenditures has increased in 1996
from 1995, resulting from the Company's continuing analysis and review of
the sites and the commencement of clean-up activities at one site. The
Company has recorded the most likely costs of $3,290 in accordance with SFAS
No. 5. All costs, excluding carrying charges, are expected to be subject to
recovery over a seven-year period under a ruling issued by the MDPU.
Capitalization at June 30, 1996, excluding current redemption
requirements of long-term debt (of which there are currently none),
consisted of 45.7% long-term debt, 42.3% common equity, and 12.0% preferred
stock.
It is management's view that the Company has adequate access to
capital markets and will have sufficient capital resources, both internal
and external, to meet anticipated capital requirements.
Inflation
- -------------------------------------------------------------------------------
The accompanying financial statements reflect the historical cost of
events and transactions, regardless of the purchasing power of the dollar at
the time. Due to the capital intensive nature of the Company's business,
the most significant impact of inflation is on the Company's depreciation of
utility plant. Rate regulation, to which the Company is subject, allows
recovery through its rates of only the historical cost of utility plant as
depreciation. The Company expects that any higher costs experienced upon
replacement of existing facilities will be recovered through the normal
regulatory process.
New Accounting Policy
- -------------------------------------------------------------------------------
The Company has not yet adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment by estimating the future cash flows
expected to result from the use of the asset and its eventual disposition.
SFAS No. 121 is effective for the Company for the year ended June 30, 1997.
The Company has not determined the effect, if any, of adopting SFAS No. 121
on its financial statements.
STATEMENTS OF INCOME AND RETAINED EARNINGS
- ------------------------------------------------------------------------------
(In Thousands)
Years Ended June 30,
1996 1995 1994
- ------------------------------------------------------------------------------
Operating Revenues $46,050 $47,934 $53,029
Cost of Gas Sold 20,215 24,820 27,885
- ------------------------------------------------------------------------------
Operating Margin 25,835 23,114 25,144
- ------------------------------------------------------------------------------
Other Operating Expenses 11,482 11,589 12,909
Depreciation 3,846 3,624 3,421
- ------------------------------------------------------------------------------
Total 15,328 15,213 16,330
- ------------------------------------------------------------------------------
Utility Operating Income 10,507 7,902 8,814
Other Income - Net 1,535 1,516 2,387
- ------------------------------------------------------------------------------
Operating and Other Income 12,042 9,418 11,201
Interest Expense 3,473 3,667 3,489
Other Taxes 1,714 1,697 1,627
- ------------------------------------------------------------------------------
Pre-tax Income 6,855 4,054 6,085
Income Taxes 2,642 1,525 2,412
- ------------------------------------------------------------------------------
NET INCOME 4,213 2,529 3,673
Retained Earnings At Beginning of Period 6,718 7,098 6,048
- ------------------------------------------------------------------------------
Total 10,931 9,627 9,721
Dividends Declared:
Preferred Stock 692 694 720
Common Stock 2,356 2,215 1,903
- ------------------------------------------------------------------------------
Total Dividends 3,048 2,909 2,623
- ------------------------------------------------------------------------------
Retained Earnings at End of Period $ 7,883 $ 6,718 $ 7,098
==============================================================================
Earnings Available for Common Stock $ 3,521 $ 1,835 $ 2,953
==============================================================================
Average Shares of Common Stock Outstanding 2,129.2 1,990.5 1,751.8
- ------------------------------------------------------------------------------
Earnings Per Share of Common Stock $ 1.65 $ 0.92 $ 1.69
==============================================================================
Reference should be made to Notes to Financial Statements.
BALANCE SHEETS
- --------------------------------------------------------------------------------
(In Thousands) June 30,
1996 1995 1994
- --------------------------------------------------------------------------------
ASSETS
Utility Plant:
Utility Plant-at original cost $96,571 $91,863 $86,098
Less: Accumulated Depreciation 25,356 22,537 19,907
- --------------------------------------------------------------------------------
Utility Plant-Net 71,215 69,326 66,191
- --------------------------------------------------------------------------------
Other Property:
Other Property-at original cost 11,229 10,766 9,957
Less: Accumulated Depreciation 5,280 4,804 4,242
- --------------------------------------------------------------------------------
Other Property-Net 5,949 5,962 5,715
- --------------------------------------------------------------------------------
Current Assets:
Cash and Cash Equivalents 196 492 65
Accounts Receivable 6,466 6,612 8,687
Other Receivables 347 234 133
Inventories 3,070 3,236 3,629
Prepayments 307 178 146
- --------------------------------------------------------------------------------
Total Current Assets 10,386 10,752 12,660
- --------------------------------------------------------------------------------
Deferred Debits:
Unamortized Debt Expense 729 578 624
Capital Stock Expense 508 638 340
Environmental Cleanup Costs 973 1,046 1,030
Other 1,192 787 1,537
- --------------------------------------------------------------------------------
Total Deferred Debits 3,402 3,049 3,531
- --------------------------------------------------------------------------------
Recoverable Environmental Cleanup Costs 3,290 2,894 2,894
- --------------------------------------------------------------------------------
TOTAL ASSETS $94,242 $91,983 $90,991
================================================================================
CAPITALIZATION AND LIABILITIES
Common Shareholders' Equity:
Common Stock $ 5,382 $ 5,259 $ 4,417
Premium on Common Stock 16,330 15,711 11,431
Retained Earnings 7,883 6,718 7,098
- --------------------------------------------------------------------------------
Total Common Shareholders' Equity 29,595 27,688 22,946
- --------------------------------------------------------------------------------
Redeemable Cumulative Preferred Stock 8,406 8,448 8,491
- --------------------------------------------------------------------------------
Long-Term Debt (less current maturities) 31,999 30,983 31,083
- --------------------------------------------------------------------------------
Current Liabilities:
Notes Payable to Banks 3,636 0 6,580
Current Maturities of Long-Term Debt 0 900 900
Accounts Payable 3,176 3,091 2,776
Taxes Accrued (249) 125 (155)
Refundable Gas Costs 831 4,117 502
Other Current Liabilities 2,453 4,557 4,588
- --------------------------------------------------------------------------------
Total Current Liabilities 9,847 12,790 15,191
- --------------------------------------------------------------------------------
Other Liabilities 1,159 961 673
- --------------------------------------------------------------------------------
Unamortized Investment Tax Credit 1,280 1,355 1,430
- --------------------------------------------------------------------------------
Deferred Income Taxes 8,666 6,864 8,283
- --------------------------------------------------------------------------------
Reserve for Recoverable Environmental Cleanup Costs 3,290 2,894 2,894
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND OTHER CREDITS $94,242 $91,983 $90,991
================================================================================
Reference should be made to Notes to Financial Statements.
STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
AND REDEEMABLE CUMULATIVE PREFERRED STOCK
- -------------------------------------------------------------------------------
(In Thousands Except Share Amounts)
June 30,
1996 1995 1994
- -------------------------------------------------------------------------------
Common Shareholders' Equity:
Common Stock, $2.50 par value; shares authorized:
1996, 1995 and 1994 - 2,600,000
Shares issued and outstanding: 1996-2,152,592;
1995-2,103,432; 1994-1,766,909 $ 5,382 $ 5,259 $ 4,417
Premium on Common Stock 16,330 15,711 11,431
Retained Earnings 7,883 6,718 7,098
- -------------------------------------------------------------------------------
Total Common Shareholders' Equity $29,595 $27,688 $22,946
===============================================================================
Redeemable Cumulative Preferred Stock:
4.80%, $100 par value; 15,000 shares
authorized; issued and outstanding:
1996-4,055; 1995-4,478; 1994-4,906 $ 406 $ 448 $ 491
8.40%, $100 par value; 80,000 shares
authorized; issued and outstanding:
1996, 1995 and 1994-80,000 8,000 8,000 8,000
- -------------------------------------------------------------------------------
Total Redeemable Cumulative Preferred Stock $ 8,406 $ 8,448 $ 8,491
===============================================================================
Reference should be made to Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------
(In Thousands) Years Ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income............................................ $ 4,213 $ 2,529 $ 3,673
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization....................... 4,732 4,477 4,107
Provision for Losses on Accounts Receivable......... 1,225 741 1,274
Refundable (Recoverable) Gas Costs.................. (3,286) 3,615 1,521
Deferred Income Taxes............................... 1,802 (1,419) (1,553)
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts and Other Receivables...................... (1,192) 1,233 (3,027)
Inventories......................................... 166 393 (540)
Unamortized Debt Expense............................ (196) 0 (24)
Unamortized Capital Stock Expense................... 0 (155) 0
Accounts Payable.................................... 85 315 (271)
Taxes Accrued....................................... (374) 280 (70)
Consumer Rebates and Other.......................... (2,368) 960 2,977
- ----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities........... 4,807 12,969 8,067
- ----------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital Expenditures and Disposal Costs............... (6,507) (7,746) (5,112)
- ----------------------------------------------------------------------------------------
Net Cash Used in Investing Activities............... (6,507) (7,746) (5,112)
- ----------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends Paid........................................ (3,048) (2,909) (2,623)
Current Maturities of Long-Term Debt.................. (900) 0 (770)
Proceeds from (Principal Payments on)
Issuance of Long-Term Debt........................... (6,983) 100 5,670
Proceeds from (Principal Payments on)
Notes Payable Borrowings-Net......................... 11,635 (6,580) (5,260)
Proceeds from Issuance of Common Stock-Net............ 0 4,213 0
Proceeds from Other Stock Transactions-Net............ 700 580 34
- ----------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities. 1,404 (4,796) (2,949)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents.... (296) 427 6
Cash and Cash Equivalents at Beginning of Year.......... 492 65 59
- ----------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year................ $ 196 $ 492 $ 65
========================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (net of amount capitalized)................ $ 3,336 $ 3,452 $ 3,380
Income Taxes (net of refund)........................ 1,281 3,027 2,552
========================================================================================
Supplemental Disclosures of Financial Activities:
The Company has reclassified $7,999 from Short-Term Notes Payable to Long-Term Debt.
(See footnote on Long-Term Debt)
========================================================================================
Reference should be made to Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(Dollars in Thousands Except Share and Per Share Amounts)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The Berkshire Gas Company ("the Company") is a publicly owned utility
engaged in the distribution and sale of natural gas for residential,
commercial and industrial use, as well as the transportation of natural gas
for larger industrial users. The Company also sells and leases gas burning
equipment, and markets liquefied petroleum gas through its Berkshire Propane
operations. The Company's utility service territory encompasses portions of
three counties in western Massachusetts. It also markets propane throughout
the western portion of Massachusetts and eastern New York. The Company is
subject to regulation by the Massachusetts Department of Public Utilities
("MDPU"). The Company's accounting policies conform to Generally Accepted
Accounting Principles ("GAAP") as applied to public utilities giving effect
to the accounting practices and policies of the MDPU.
Income Taxes
- -------------------------------------------------------------------------------
The Company uses the liability method in calculating deferred income
taxes. The Company records deferred income tax liabilities for temporary
differences between the basis of assets and liabilities for financial
reporting and income tax purposes at tax rates expected to be in effect
during the periods the temporary differences reverse.
The Company has excess deferred taxes which has resulted in the
recording of a regulatory liability. The regulatory liability reflects
amounts due to the ratepayers which will be refunded through the regulatory
process.
Depreciation
- -------------------------------------------------------------------------------
The Company depreciates its utility plant at straight line rates
approved by the MDPU. The current composite depreciable rate is 4.04% and
as been in effect since April 1, 1993. Depreciable non-utility property
consists of rental equipment, propane tanks and related equipment used in
the Company's liquefied petroleum gas operations, and is depreciated at
annual rates ranging from 2.5% to 20.0%.
Revenues
- -------------------------------------------------------------------------------
Customer meters are read or estimated on a monthly basis. After the
reading or estimation is prepared, customers are billed for their gas usage
and any applicable monthly rental fee. At the time of billing, revenues are
recorded.
Pursuant to the MDPU, the Company is allowed to recover increases in
gas costs and to refund any decreases in gas costs by way of the Cost of Gas
Adjustment Clause ("CGAC"). A gas adjustment charge or refund for estimated
gas costs as compared with actual gas costs and any profit on the sale of
interruptible volumes are included in the monthly customer billings via the
CGAC. Any difference between actual and estimated gas costs plus interest
is accrued or deferred and is recorded in the month the related revenue is
billed.
Unamortized Debt Expense
- -------------------------------------------------------------------------------
The issuance costs associated with long-term debt are deferred and
amortized over the life of the issue.
Investment Tax Credit
- -------------------------------------------------------------------------------
The unamortized balance of the investment tax credit ("ITC") relating
to machinery and equipment acquisitions up through 1986 is deducted from
federal income taxes and is deferred on the balance sheet, as prescribed by
the MDPU, and is being amortized over the expected lives of the applicable
assets. The unamortized balance of the ITC for the years ended June 30,
1996, 1995 and 1994 was $1,280, $1,355 and $1,430, respectively. The
amortized portion for the years ended June 30, 1996, 1995 and 1994 was $75
for each of the three years.
Utility Plant
- -------------------------------------------------------------------------------
The cost of maintenance, repairs and the renewal of items determined
to be less than full units of plant property are charged to maintenance
expense accounts. The cost of betterments and the renewal of full units of
plant property are charged to plant property accounts. Costs include
materials, labor and indirect charges for engineering, general and
administrative and supervisory services. The book value of plant property
replaced, retired or sold is concurrently removed from such plant property
accounts and charged to accumulated depreciation along with its associated
removal costs, less any salvage value.
A functional classification for the cost of utility plant at June 30
is as follows:
1996 1995 1994
- ---------------------------------------------------------------
Transmission and
Distribution Plant....... $82,255 $77,128 $72,000
General Plant............. 9,498 9,549 8,995
Manufactured Gas
Production Plant......... 4,485 4,455 4,464
Construction in Progress.. 333 731 639
------------------------------------------------------------
Total.................. $96,571 $91,863 $86,098
===============================================================
Transmission and Distribution Plant consists of mains, services and
meters, the cost for their installation, land and rights of way, and
measuring and regulating station equipment which is used to deliver and to
monitor gas used by the customer.
General Plant consists of structures and their improvements, office
furniture and equipment, including computers, and transportation equipment.
The Manufactured Gas Production Plant consists of land, gas mixing
equipment and liquefied petroleum gas equipment used to supplement natural
gas volumes during the peak season in order to meet customer demand.
Estimates
- -------------------------------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
New Accounting Policy
- -------------------------------------------------------------------------------
The Company has not yet adopted the provisions of Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment by estimating the future cash flows
expected to result from the use of the asset and its eventual disposition.
SFAS No. 121 is effective for the Company for the year ended June 30, 1997.
The Company has not determined the effect, if any, of adopting SFAS No. 121
on its financial statements.
ACCOUNTS RECEIVABLE
- -------------------------------------------------------------------------------
Details of accounts receivable, net of allowance for doubtful
accounts, as of June 30 are as follows:
1996 1995 1994
- ---------------------------------------------------------------
Utility Service........... $5,781 $6,103 $8,133
Merchandise and Jobbing... 117 118 140
Liquefied Petroleum....... 568 391 414
- ---------------------------------------------------------------
Total - Net ........... $6,466 $6,612 $8,687
===============================================================
The allowance for doubtful accounts as of June 30, 1996, 1995 and
1994, respectively, is: Utility - $720, $832 and $727; Merchandise - $33,
$44 and $21; Liquefied Petroleum - $63, $74 and $68.
INVENTORIES
- -------------------------------------------------------------------------------
Materials, supplies and liquefied petroleum used in the non-utility
operations are valued at the lower of average cost or market value;
liquefied petroleum used in the utility operations is valued at cost, and
natural gas is recorded at cost. The details of these inventories as of
June 30 are as follows:
1996 1995 1994
- ---------------------------------------------------------------
Materials and Supplies.... $1,492 $1,284 $1,357
Natural Gas............... 1,330 1,702 2,088
Liquefied Petroleum....... 248 250 184
- ---------------------------------------------------------------
TOTAL - Net............ $3,070 $3,236 $3,629
===============================================================
RECLASSIFICATION
- -------------------------------------------------------------------------------
The Company has reclassified certain amounts for prior years to
conform with the 1996 presentation.
COMMON STOCK
- -------------------------------------------------------------------------------
Earnings per share of Common Stock are calculated after the
recognition of the dividend requirements for the Redeemable Cumulative
Preferred Stock of $692, $694 and $720 for the fiscal years ended June 30,
1996, 1995 and 1994, respectively. Earnings per share of Common Stock are
based on the average number of Common shares outstanding. The average
number of Common Stock shares outstanding for the fiscal years ended June
30, 1996, 1995 and 1994 were 2,129,173, 1,990,517 and 1,751,830,
respectively.
The Company issued shares pursuant to the Share Owner Dividend
Reinvestment and Stock Purchase Plan ("DRIP") of 49,160, 41,586 and 33,841
for a total of $742, $628 and $569 during fiscal 1996, 1995 and 1994,
respectively.
The Company has a plan for the purchase of Common Stock whereby all
participants in the plan are eligible to purchase shares of Common Stock at
a 3% discount on the average of the bid and asked prices for the five days
preceding and including the purchase date. Participants can purchase shares
by reinvesting dividends on Common Stock already held and/or through
optional cash payments.
During the current fiscal year, the Company has petitioned the MDPU
for approval of an additional 200,000 shares to be issued through the DRIP.
During fiscal 1995, the Company sold 295,000 shares of Common Stock in
a public offering. During fiscal 1994, 100,000 additional shares were
authorized and approved by the MDPU pursuant to the DRIP.
See "Redeemable Cumulative Preferred Stock" concerning the
restrictions on the payment of cash dividends on, or purchases of, Common
Stock.
REDEEMABLE CUMULATIVE PREFERRED STOCK
- -------------------------------------------------------------------------------
The Company has authorized two series of Cumulative Preferred Stock:
the 4.8% and the 8.4%. The redemption price per share for the 4.8%
Cumulative Preferred Stock (as well as the amount due on voluntary
liquidation) is $100.00. The provisions of the 4.8% Cumulative Preferred
Stock require the Company to offer to purchase up to 450 shares at par
annually on September 15. Pursuant thereto, the Company purchased 423
shares during 1996, 428 shares during the 1995 fiscal year, and 351 shares
during 1994.
The Company called and retired the 4,500 remaining shares of the 9.0%
Cumulative Preferred Stock in January 1994.
During the current fiscal year, the Company's Board of Directors has
approved, as part of its capital restructuring, the repurchase of the 8.4%
Preferred Stock (see Long-Term Debt footnote).
The provisions of the 8.4% Cumulative Preferred Stock provide for an
annual mandatory sinking fund of 5,334 shares at par commencing in the year
2003. The redemption price per share of the 8.4% Cumulative Preferred Stock
(as well as the amount due on a voluntary liquidation basis) is $105.10
beginning May 30, 2002, and thereafter gradually reduces to $100.
The Charter provisions applicable to the Cumulative Preferred Stock
and the First Mortgage Indenture contain restrictions on the use of retained
earnings for the payment of cash dividends on, or purchases of, Common
Stock. At June 30, 1996, the Company's retained earnings were $7,883. At
such date, under the most restrictive of these provisions, $4,110 of the
retained earnings were unrestricted.
LONG-TERM DEBT
- -------------------------------------------------------------------------------
Details regarding the Company's First Mortgage Bonds, Debentures,
Senior and Medium-Term Notes Payable, and sinking funds (due after one year)
as of June 30 are as follows:
Portions
Maturing
Interest Annually
Description Rate Through 1996 1995 1994
- --------------------------------------------------------------------
First Mortgage Bonds:
Series K 7.8750 1997 $ 0 $ 520 $ 540
M 9.3750 1998 0 720 800
P 10.0600 2019 10,000 10,000 10,000
Debenture: 9.1250 2006 0 5,743 5,743
Senior Note: 9.6000 2020 8,000 8,000 8,000
Medium-Term Note: 6.9220 1999 6,000 6,000 6,000
Proposed Senior Note: 7.8000 2021 7,999 0 0
- --------------------------------------------------------------------
TOTAL $31,999 $30,983 $31,083
====================================================================
All interest rates are fixed except in the case of the Medium-Term
Note, which is variable based upon the LIBOR six month rate and which is
convertible at the option of the Company to a fixed rate based upon the
lender's cost of funds rate. The aggregate amount of maturities due are:
1997 - $0; 1998 - $0; 1999 - $6,000; 2000 - $0; 2001 - $0, and $25,999
maturing thereafter per the dates in the table above.
The First Mortgage Bonds are collateralized by substantially all of
the utility plant.
In conjunction with the Company's cost containment incentives, the
Company is in the process of revising its capital structure to lower its
borrowing costs. During the year the Company called the outstanding First
Mortgage Bonds, Series K and M, and the 9.125% Debentures, temporarily
refinancing this debt with lower-cost, short-term bank notes payable. For
purposes of financial reporting, the Company has reclassified that amount
($7,999) to Long-Term Debt(Proposed Senior Note). To refinance that amount
long-term and purchase the 8.4% Cumulative Preferred Stock (see Redeemable
Cumulative Preferred Stock footnote), the Company has negotiated and
petitioned the MDPU for approval to sell a $16,000, 25-year Senior Note at a
7.8% interest rate. The Company anticipates completion of this transaction
in the first quarter of fiscal 1997.
SHORT-TERM LOANS AND COMPENSATING BALANCES
- -------------------------------------------------------------------------------
The Company has lines of credit aggregating $24,000 with various
banks, of which $12,365 remained unused as of June 30, 1996. The lines of
credit are reviewed periodically with various banks and may be renewed or
cancelled. In connection with these lines of credit, the Company borrows at
less than the prime rate. In lieu of compensating balance requirements, the
Company pays commitment fees on a portion of its credit lines equating to
3/8 of 1% on $5,500 with the various banks. At June 30, 1996, the Company
had reclassified $7,999 of short-term debt to long-term debt as discussed in
the Long-Term Debt footnote.
Information as to short-term borrowings is as follows:
1996 1995 1994
- ---------------------------------------------------------------
Balance Outstanding
at June 30............... $3,636 $ 0 $6,580
Maximum Amount of
Borrowings at Any
Month-End................ 10,410 10,470 20,570
Average Borrowings During
the Year................. 6,561 5,604 15,407
Average Interest Rate
at End of Year........... 6.40% 7.31% 5.04%
Weighted Average Interest
Rate During the Year..... 6.46% 6.60% 4.65%
OTHER CURRENT LIABILITIES
- -------------------------------------------------------------------------------
Details of other current liabilities as of June 30 are as follows:
1996 1995 1994
- --------------------------------------------------------
Accrued Interest............. $ 769 $ 839 $ 841
Insured Retirement Plan...... 292 377 414
Dividends Declared........... 776 752 660
Accrued Consumer Rebates..... 139 2,044 2,091
Other........................ 477 545 582
- --------------------------------------------------------
TOTAL..................... $2,453 $4,557 $4,588
========================================================
Accrued consumer rebates represent refunds received from a major
supplier of natural gas to the Company. The refunds are associated with the
suppliers' rate case before FERC, and are to be refunded to the ratepayer
during the next fiscal year.
Lease Commitment
- -------------------------------------------------------------------------------
The Company is committed under operating leases having an initial
lease term of one year or more expiring on various dates. Rental expense
under all long-term operating leases aggregated $204, $88 and $88 in fiscal
1996, 1995 and 1994, respectively. The minimum future obligations under
long-term noncancelable leases in effect at June 30, 1996, were as follows:
1997............................. $ 490
1998............................. 453
1999............................. 350
2000............................. 107
2001............................. 9
-----------------------------------------
Total............................ $1,409
=========================================
INCOME TAXES
- -------------------------------------------------------------------------------
The difference in the effective tax rate compared with the statutory
tax rate is shown in the following table:
1996 1995 1994
- --------------------------------------------------------------
Tax at Statutory Rate..... 34% 34% 34%
State Taxes (Net of
Federal Benefit)......... 4.4 4.5 4.6
Investment Tax Credit..... (1.1) (1.9) (1.2)
Permanent Differences..... 1.2 1.0 2.2
- --------------------------------------------------------------
Effective Tax Rate........ 38.5% 37.6% 39.6%
==============================================================
A summary of the tax provision is as follows:
1996 1995 1994
- --------------------------------------------------------------
Federal Income - Current....... $ 790 $2,169 $2,740
Federal Income - Deferred...... 1,391 (923) (751)
State - Current................ 190 512 571
State - Deferred............... 271 (233) (148)
- --------------------------------------------------------------
TOTAL....................... $2,642 $1,525 $2,412
==============================================================
The components of the net deferred income tax liability at June 30 were
as follows:
1996 1995 1994
- ----------------------------------------------------------------
Deferred Liabilities:
Investment Tax Credit......... $ 512 $ 558 $ 602
Excess Tax over
Book Depreciation............ 8,802 8,731 8,545
Environmental Response Costs 225 207 216
- ----------------------------------------------------------------
Total Deferred Liabilities 9,539 9,496 9,363
- ----------------------------------------------------------------
Deferred Assets:
Recoverable Gas Cost.......... $ (545) $(1,789) $ (354)
Other......................... (328) (843) (726)
- ----------------------------------------------------------------
Total Deferred Assets....... (873) (2,632) (1,080)
- ----------------------------------------------------------------
Total Net Deferred Income Taxes... $8,666 $ 6,864 $ 8,283
=================================================================
CONTINGENCIES
- -------------------------------------------------------------------------------
Federal, state and local laws and regulations establishing standards
and requirements for the protection of the environment have increased in
number and scope in recent years. The Company cannot predict the future
impact of such standards and requirements, which are subject to change and
can be retroactively applied.
During fiscal 1990, the MDPU issued a generic ruling on cost recovery
for environmental cleanup with respect to former gas manufacturing sites.
Under the ruling, the Company will recover annual cleanup costs, excluding
carrying costs, over a seven-year period through the CGAC. This ruling also
provides for the sharing of any proceeds received from insurance carriers
equally between the Company and its ratepayers, and establishes maximum
amounts that can be recovered from customers in any one year.
During the year ended June 30, 1996, the Company continued the
analysis and field review of two parcels of real estate formerly used for
gas manufacturing operations, which had been found to contain coal tar
deposits and other substances associated with by-products of the gas
manufacturing process. The review and assessment process began in 1985 with
respect to the first site, which is owned by the Company, and in 1989 with
respect to the second site, which was formerly owned by the Company. With
the review and approval of the Massachusetts Department of Environmental
Protection ("MDEP"), at one site, the investigative activities are
continuing, while at the second site, the investigative work is near
completion and remedial alternatives are being examined. It is difficult to
predict the potential financial impact of the sites until first, the nature
and risk is fully characterized, and second, the remedial strategies and
related technologies are determined. The general philosophy of the Company
is one of source removal and/or reduction coupled with risk minimization.
Assuming successful implementation, it is anticipated that through 2011 the
level of expenditures for the sites will range from $3,290 to $12,302. The
anticipated level of expenditures has increased in 1996 from 1995 resulting
from the Company's analysis and review of the sites and the commencement of
clean-up activities at the first site. The Company has recorded the most
likely cost of $3,290 in accordance with SFAS No. 5. Ultimate expenditures
cannot be determined until a remedial action plan can be developed and
approved by the MDEP. The Company's unamortized costs at June 30, 1996,
were $973 and should be recovered using the formula discussed above.
FERC Order 636 provides for 100% recovery by pipelines of any
"Transition Costs" prudently incurred as a result of industry restructuring.
As these costs have been and may be approved in the future, they have been
and will be passed through to the Company as demand charges associated with
the transportation of gas through the pipeline. Under current rate
structures, these costs are recovered through the CGAC.
Legal Matters
- -------------------------------------------------------------------------------
Claims against the Company by a general contractor, along with the
general contractor's bonding company, involved in the construction of a
transportation pipeline for which the Company served as developer have been
resolved. A settlement was approved by the Bankruptcy Court on February 16,
1996 and had no material financial impact on the Company.
The Company is also involved with other legal proceedings incidental
to its business. At the present time, the Company cannot predict the
outcome of these proceedings and also believes that the outcomes will not
have a material adverse impact on its overall financial position or results
of operations.
OTHER INCOME
- -------------------------------------------------------------------------------
A condensed summary of the Company's non-utility operations before
income tax (included in the "Statements of Income and Retained Earnings"
under "Other Income - Net") as of June 30 is as follows:
1996 1995 1994
- ------------------------------------------------------------
Merchandise and Jobbing:
Sales.......................... $ 892 $1,068 $1,438
Cost of Sales and Expenses..... 718 862 1,117
- ------------------------------------------------------------
Net.............................. 174 206 321
- ------------------------------------------------------------
Appliance Rentals:
Revenues....................... 1,404 1,380 1,314
Expenses....................... 774 671 580
- ------------------------------------------------------------
Net............................. 630 709 734
- ------------------------------------------------------------
Liquefied Petroleum Gas:
Sales.......................... 4,634 4,022 3,890
Cost of Sales and Expenses..... 4,118 3,703 3,463
- ------------------------------------------------------------
Net.............................. 516 319 427
- ------------------------------------------------------------
Miscellaneous Net................ 215 282 905
- ------------------------------------------------------------
TOTAL........................ $1,535 $1,516 $2,387
============================================================
POST-RETIREMENT BENEFITS
- -------------------------------------------------------------------------------
The Company has non-contributory funded retirement income plans
covering substantially all employees. The cost of the plans is actuarially
determined, and it is the Company's policy to fund accrued pension costs.
The net pension cost in 1996, 1995 and 1994 is summarized as follows:
1996 1995 1994
- -----------------------------------------------------------
Service Cost.............. $ 608 $ 634 $ 588
Interest Cost............. 1,222 1,135 1,100
Return on Plan Assets:
Actual................... (3,491) (1,009) (347)
Deferred................. 1,955 (397) (978)
- -----------------------------------------------------------
Net Recognized
Return on Plan Assets... (1,536) (1,406) (1,325)
Other..................... 218 259 249
- -----------------------------------------------------------
Net Pension Cost......... $ 512 $ 622 $ 612
===========================================================
The funded status and accrued pension cost for the defined benefit
plans at June 30 are as follows:
1996 1995 1994
- ---------------------------------------------------------------------------
Fair Value of Plan Assets................ $20,593 $17,267 $16,150
Projected Benefit Obligation............. 16,946 16,647 16,545
- ---------------------------------------------------------------------------
Excess (Deficiency) of Fair Value of
Plan Assets Over Projected Benefit
Obligation.............................. 3,647 620 (395)
Unrecognized Net Gain.................... (6,213) (3,315) (2,564)
Unrecognized Prior Service Cost.......... 953 930 1,001
Unrecognized Net Obligation
(at transition)......................... 1,290 1,469 1,649
- --------------------------------------------------------------------------
Accrued Pension Cost..................... $ (323) $ (296) $ (309)
==========================================================================
Accumulated Benefit Obligation........... $14,240 $13,314 $13,558
==========================================================================
Vested Benefit Obligation................ $14,151 $13,293 $13,182
==========================================================================
Assumed Discount Rate.................... 7.50% 7.00% 7.00%
Assumed Rate of Compensation Increase.... 4.125% 5.625% 5.875%
Expected Rate of Return on Plan Assets... 9.25% 9.25% 9.25%
- --------------------------------------------------------------------------
Plan assets are invested in equity securities, debt securities and
cash equivalents, and the balance is in other investments, principally real
estate. The benefit formula is based either on the number of years of
service or the employee's average base salary for the five years yielding
the highest average.
The Company maintains a 401(k) Post-Retirement Plan for all Company
employees. The Company matches up to 3.5% of a participating employee's
annual salary. The expense for the years ended June 30, 1996, 1995, and
1994 related to the 401(k) Plan was $222, $223 and $213, respectively.
Fair Value of Financial Instruments
- -------------------------------------------------------------------------------
Because of the short maturity of certain assets, which include Cash,
Cash Equivalents and Accounts Receivable, and certain liabilities, which
include Accounts Payable, these instruments are stated at amounts which
approximate fair value.
Long-Term Debt
- -------------------------------------------------------------------------------
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair values of existing debt.
As of June 30, 1996, the estimated fair values of the Series P Mortgage
Bonds and the Senior Note are $13,006 and $9,596, respectively. The Medium-
Term Note carries a variable interest rate and matures within three years.
As such, the carrying value approximates fair value.
Redeemable Preferred Stock
- -------------------------------------------------------------------------------
It was not practicable to estimate the fair value of the 4.8%
Redeemable Preferred Stock as any resultant difference between the fair
value and its carrying value is immaterial.
The fair value of the 8.4% Redeemable Preferred Stock is $9,360. The
fair value is representative of current market conditions and is based on
active negotiations with the current preferred shareholders relating to the
pending repurchase of outstanding shares (see Redeemable Cumulative
Preferred Stock footnote).
INDEPENDENT AUDITORS' REPORT
Deloitte &
Touche LLP
City Place Telephone:(860)280-3000
185 Asylum Street Facsimile:(860)280-3051
Hartford, Connecticut 06103-3402
To the Shareholders of
The Berkshire Gas Company:
We have audited the accompanying balance sheets of The Berkshire Gas Company
as of June 30, 1996, 1995 and 1994 and the related statements of income and
retained earnings, common shareholders' equity and redeemable cumulative
preferred stock and of cash flows for the years then ended. 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 audit 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, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1996, 1995 and
1994, and the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
August 19, 1996
QUARTERLY FINANCIAL INFORMATION
- -------------------------------
A comparison of unaudited quarterly financial information is presented
on page 31.
ANNUAL MEETING
- --------------
The annual meeting of shareholders will be held at the Berkshire
Hilton Inn, Pittsfield, Massachusetts, on November 13, 1996, at 10:00 A.M.
SHARE OWNER DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
- ---------------------------------------------------------
The Company has a program which allows for the reinvestment of
dividends and optional cash payments to purchase additional shares of the
Company's Common Stock at a 3% discount. The Plan is available to all
holders of 10 or more shares and provides a convenient method to acquire
additional shares without fees or other charges. Shareholders who wish to
take advantage of the Plan or want additional information may do so by
contacting:
The Berkshire Gas Company
Attn.: Secretary of the Share Owner Dividend
Reinvestment and Stock Purchase Plan Committee
115 Cheshire Road
Pittsfield, Massachusetts 01201-1879
(413) 445-0249
TRANSFER AGENT
- --------------
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
STOCK LISTING
- -------------
The Common Stock of The Berkshire Gas Company is traded on the
National Over-the-Counter Market and is quoted through the NASDAQ System
under the symbol BGAS.
FORM 10-K INFORMATION
- ---------------------
Upon written request to the Company at 115 Cheshire Road, Pittsfield,
Massachusetts 01201-1879, a copy of the Company's current Form 10-K Annual
Report, as filed with the Securities and Exchange Commission, will be
provided to any shareholder without charge.
- -------------------------------------------------------------------------------
This report has been prepared for the purposes of information and
record only and not in connection with the sale or offer for sale of
securities, or any solicitation of an offer to buy securities.
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QUARTERLY FINANCIAL INFORMATION
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For the Fiscal Year Ended June 30, (In Thousands Except Per Share Amounts)
(Unaudited)
1996 First Second Third Fourth
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Operating Revenues $4,153 $11,952 $21,059 $8,886
Operating and Other Income 133 3,163 7,198 1,547
Income (Loss) Before Income Taxes (925) 1,849 5,495 436
Net Income (Loss) (574) 1,138 3,387 262
Earnings (Loss) Per Share (0.35) 0.45 1.50 0.04
Dividends Declared Per Share 0.275 0.275 0.275 0.28
Prices of Common Shares:
High 15 1/2 17 16 3/4 16
Low 14 15 15 14 3/4
1995
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Operating Revenues $4,832 $12,086 $21,615 $9,401
Operating and Other Income (Loss) (124) 2,378 5,869 1,295
Income (Loss) Before Income Taxes (1,258) 1,036 4,180 96
Net Income (Loss) (766) 656 2,556 83
Earnings (Loss) Per Share (0.53) 0.23 1.14 (0.04)
Dividends Declared Per Share 0.275 0.275 0.275 0.275
Prices of Common Shares:
High 17 3/4 16 3/4 16 15 3/4
Low 16 14 1/4 14 3/4 14
1994
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Operating Revenues $4,542 $12,951 $25,948 $9,588
Operating and Other Income (Loss) (239) 2,881 7,290 1,269
Income (Loss) Before Income Taxes (1,249) 1,611 5,652 72
Net Income (Loss) (752) 1,013 3,507 (95)
Earnings (Loss) Per Share (0.54) 0.47 1.89 (0.15)
Dividends Declared Per Share 0.27 0.27 0.27 0.275
Prices of Common Shares:
High 19 19 18 1/4 17 1/4
Low 17 1/4 17 16 1/2 15 1/2
The Common Stock of The Berkshire Gas Company is traded on the
National Over-the-Counter Market and is quoted through the NASDAQ System
(BGAS). Primarily because of the relatively small number of shareholders
and the infrequency of trading, the average bid and asked prices noted above
do not necessarily reflect actual transactions.
Earnings per Common Share have been computed based on average Common
Shares outstanding in each period after recognition of Preferred Stock
dividends.
It is currently the policy of the Board of Directors to declare cash
dividends payable in July, October, January and April. The dividend rate is
reassessed regularly in light of existing conditions, the needs of the
Company and the interests of shareholders.
The sum of the quarterly earnings (loss) per share amounts may not
equal the annual income per share due to the issuance of Common Stock and
rounding.
OFFICERS DIRECTORS
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SCOTT S. ROBINSON GEORGE R. BALDWIN**
President and Chief Executive Officer Area Chairman,
Arthur J. Gallagher & Co.,
MICHAEL J. MARRONE a national insurance
Vice President, Treasurer and brokerage firm
Chief Financial Officer
JOHN W. BOND* **
LESLIE H. HOTMAN President,
Vice President, Supply, Rates and Planning Kimbell Securities Corp., a
securities broker/dealer;
ROBERT M. ALLESSIO real estate management
Vice President, Marketing and Distribution
PAUL L. GIOIA**
DONALD P. ATWATER of Counsel,
Vice President, Customer Services LeBoeuf, Lamb, Greene &
MacRae, a law firm
CHERYL M. CLARK
Clerk of the Corporation WILLIAM S. GOEDECKE**
First Vice President, Retired
Smith Barney Harris
Upham & Co., Inc.
an investment banking and
stock brokerage firm
FRANKLIN M. HUNDLEY*
Managing Director,
Rich, May, Bilodeau &
Flaherty, P.C., a law firm
JOSEPH T. KELLEY*
Chairman of the Board,
The Berkshire Gas Company
SCOTT S. ROBINSON*
President and Chief Executive
Officer,
The Berkshire Gas Company
ROBERT B. TRASK**
President, The Fitzpatrick
Companies, formerly
Country Curtains, Inc.,
a retail firm dealing in
household window treatments
and accessories
*Executive Committee
**Audit Committee