Think Energy
Berkshire Energy Resources is aggressively pursuing opportunities for
growth in today's changing and emerging energy markets. By capitalizing on
the flexibility of its new corporate structure, heightening its focus on
fueling customer growth and developing strategic programs to produce new
opportunities, the Company is realizing its goal of becoming a truly
integrated energy services company. This year's annual report provides an
overview of the innovative thinking, commitment to customer service and
proactive approach to growth opportunities that are driving Berkshire
Energy Resources toward achieving its goal of becoming the region's
acknowledged energy services leader. When you think energy, think Berkshire
Energy Resources.
FINANCIAL HIGHLIGHTS *
For the Fiscal Year Ended June 30,
(In Thousands, Except Per Share Amounts)
1999/1998 1998/1997
OPERATIONS 1999 1998 % Change 1997 % Change
- -----------------------------------------------------------------------------------------------------
Operating Revenues $ 50,733 $ 54,601 -7.1% $ 53,584 1.9%
Operating Margin 28,248 27,578 2.4 27,711 -0.5
Operating and Other Income 9,576 8,841 8.3 9,756 -9.4
Net Income 3,233 2,794 15.7 3,556 -21.4
Earnings Available for Common Shares 3,218 2,778 15.8 3,316 -16.2
COMMON SHARE DATA
- -----------------
Earnings Per Common Share $ 1.34 $ 1.23 8.9% $ 1.52 -19.1%
Dividends Per Share 1.165 1.145 1.7 1.125 1.8
Book Value Per Share 15.07 14.48 4.1 14.18 2.1
Market Price (Year-End) 22.50 23.25 -3.2 16.00 45.3
Average Shares of Common Shares
Outstanding 2,405.2 2,263.6 6.3 2,181.5 3.8
Number of Registered Common
Shareholders 1,977 1,912 3.4 1,902 0.5
OTHER DATA
- ----------
Gross Property, Plant and Equipment $124,412 $119,438 4.2% $113,966 4.8%
Net Property, Plant and Equipment 83,364 81,647 2.1 79,736 2.4
Capital Expenditures 6,735 6,945 -3.0 7,393 -6.1
Total Gas Sold and Transported (MCF) 7,880 7,357 7.1 8,080 -8.9
Total Natural Gas Customers 34,494 34,166 1.0 33,887 0.8
<F*> Beginning in fiscal 1999, financial statements are presented for
Berkshire Energy Resources, a holding company consolidating the
operations of The Berkshire Gas Company, Berkshire Propane, Inc., and
Berkshire Energy Marketing, Inc. Prior years were reported as The
Berkshire Gas Company, which included nonregulated operating divisions.
(Picture of Scott Robinson, President and CEO)
To Our Shareholders
Welcome to the first annual report issued by Berkshire Energy
Resources. With the formal adoption of a holding company corporate
structure in January of this year, The Berkshire Gas Company, formerly
listed on the NASDAQ under the symbol BGAS, became a member of the
Berkshire Energy Resources family. Listed on the NASDAQ under the symbol
BERK, Berkshire Energy Resources currently operates three subsidiaries, The
Berkshire Gas Company, Berkshire Propane and Berkshire Energy Marketing.
Berkshire Gas is a natural gas utility serving western Massachusetts
for more than 145 years. It provides natural gas service to 34,000
customers.
Berkshire Propane, established in 1955, provides retail propane
service across a 5,000-square-mile territory in western Massachusetts,
southern Vermont and eastern New York.
Berkshire Energy Marketing, established in 1998, provides one-stop
energy services to commercial and industrial customers in unregulated
energy commodity markets.
The adoption of a holding company structure represents one of the
biggest changes in the Company's history. As such, it reflects the
Company's aggressive efforts to drive change in the energy marketplace and
to strategically adapt and realign its resources to seize new opportunities
in the ever more competitive energy industry.
With separate subsidiaries for regulated and nonregulated operations,
Berkshire Energy Resources is structured to capitalize on changes in the
energy marketplace by expanding its energy-related offerings and
enterprises without delay. As the industry moves toward full and final
deregulation, a combination of vision and experience will continue to serve
the Company well. Opportunities have never been greater for Berkshire
Energy Resources as it looks toward diversification and continued growth.
Berkshire Gas
As Berkshire Energy Resources' core business, Berkshire Gas continues
to provide first-rate natural gas service to western Massachusetts.
With a focus on continued growth, ongoing efforts to increase market
share are being developed and implemented by the utility's Marketing
Department. One such initiative, highlighted in this year's report, aligns
our resources with outside energy engineering firms in an effort to expand
natural gas sales in our Commercial and Industrial market segment by
introducing new energy efficient technologies and methodologies to our
customers. Aided by our long-standing relationships with the Gas Research
Institute and the Institute for Gas Technology, this venture benefits all
parties and holds significant potential.
In a further effort to plan for future growth and to accommodate new
demand for natural gas service, Berkshire Gas has also been actively
engaged in planning and permitting a new facility for the storage of
liquefied natural gas (LNG) in the Town of Whately, Massachusetts. This is
the first such facility to be sited in Massachusetts in more than twenty
years. Similar projects are now being planned by utilities across the
Commonwealth.
After an extensive permitting process, which has included a multi-
year site selection and design process, Berkshire Gas submitted its
petition for approval to site and construct this facility to the
Massachusetts Energy Facilities Siting Board earlier this year. This
project was the subject of a series of regulatory hearings in June and has
been under exhaustive review by state regulators. The petition has been
approved by the Siting Board. An aggressive construction timetable is
planned which should make it possible for this facility to be in operation
for this year's heating season.
This facility will expand delivery capacity and enhance our ability
to serve growing demand for natural gas service in Franklin and Hampshire
counties in western Massachusetts. These counties represent the strongest
growth areas in the service territory.
Berkshire Gas is also exploring options to expand its natural gas
service territory in response to growing demand for service from commercial
and industrial enterprises as well as residential consumers. We look
forward to continuing our efforts with local officials in the Town of
Sunderland, Massachusetts, toward this end.
Berkshire Propane
Berkshire Propane is committed to the pursuit of new opportunities in
competitive energy markets. With a focus on growth, Berkshire Propane is
expanding its customer base and increasing sales volumes to enhance overall
performance.
In keeping with this business strategy, Berkshire Propane announced
its acquisition of County Propane of Great Barrington, Massachusetts, in
October of 1998. With this transaction, Berkshire Propane increased its
base of Massachusetts customers by approximately 8%. Operating
efficiencies achieved as a result of this purchase made it possible to
serve these new customers without any increase in personnel.
Berkshire Propane continues to realize real growth in customer
numbers across the remainder of its three-state service area as well. Over
the past year, its Vermont customer base has expanded by 39% with a
corresponding double-digit increase in gallons of propane sold. In its New
York market, gallons sold increased by double digits and customer numbers
also increased. Overall, sales volumes increased by better than 10% over
the year, despite significantly warmer than normal weather.
Plans to site satellite storage facilities are also in development.
These facilities will increase operating efficiencies, reduce costs and
strengthen our local presence in the markets that we serve.
Berkshire Propane continues to explore avenues for continued growth in
its Vermont and New York markets while also focusing on expanding its
influence in the highly competitive Massachusetts market.
Berkshire Energy Marketing
Berkshire Energy Marketing has worked diligently over the past year
selling natural gas supplies in unregulated markets, primarily to larger
commercial and industrial users.
As one of approximately twelve energy marketers currently competing
in the service area, Berkshire Energy Marketing capitalizes on its local
base and local presence, providing hands-on, year- round service to its
customers.
In keeping with the nature of the competitive markets, flexibility
and service have continued to be very strong selling points for Berkshire
Energy Marketing as it works to educate customers about their energy
options in the deregulated marketplace.
Shareholder Value
The prime focus of the Company's management and its Board of Trustees
is enhancing shareholder value and providing a fair return on shareholder
investment.
The achievements of the last year outlined in this letter and
throughout this report represent real investments in the success and
ultimately the value of the Company. We are focused on growing the Company
and enhancing performance while at the same time making investments in our
future on behalf of our shareholders. The adoption of a holding company
structure earlier this year was one such value-based investment that
provides a real asset to the Company and facilitates our entry into
competitive markets.
For the fifth consecutive year, the Company's Board of Trustees has
voted to increase the annual dividend paid on the Company's Common Shares.
The increase, which was effective with the dividend paid on July 15, 1999,
raised the annual dividend from $1.16 to $1.18 per share. With this vote,
the Board reaffirmed its commitment to a conservative, yet progressive
dividend policy that is intended to provide shareholders with a fair return
on their investment.
Performance
Weather trends seem to be a topic that is being discussed and
analyzed ever more frequently in the popular media. Whether these
discussions focus on global warming or turbulent weather, it is clear that
weather patterns over the course of the last decade have varied
significantly from statistical norms. These variances are of obvious
interest to the Company, as the lion's share of our revenues is derived
from serving the heating needs of our customers during the New England
winter.
Weather in our service area during the last fiscal year was, on
average, 12% warmer than normal. The norm is based on an average of
temperatures over the prior twenty years. Temperatures during the heating
season were 9% warmer than normal.
Recognizing this trend toward warmer winters years ago, we have
worked diligently to insulate the business as much as possible from the
influence of unusually warm weather. Our efforts have been positive in
this regard and we continue to explore additional ways to mitigate the
effect of warmer temperatures on overall performance.
One such measure the Company utilized this year was weather
insurance. As a hedge against warmer than normal weather, the Company made
a strategic decision to purchase insurance for the 1998-1999 heating
season. This insurance was intended to mitigate financial impacts
resulting from extended periods of warmer than normal winter temperatures.
The weather insurance provided coverage for the heating season
beginning November 1, 1998, and running through March 31, 1999. In
accordance with the terms of the policy, the Company received insurance
proceeds which partially offset revenues that would have been earned had
weather been normal.
Earnings for the year were $1.34 on revenues of $50.7 million as
compared to earnings of $1.23 on revenues of $54.6 million a year ago. The
9% increase in earnings is largely attributable to the receipt of weather
insurance proceeds as well as changes in the regulatory accounting for bad
debt expense.
For a number of years, the Company has offered its shareholders the
convenience of reinvesting their dividends toward the purchase of
additional shares in the Company through its Dividend Reinvestment Plan.
This program has been well received by our shareholders and has
enabled the Company to meet its capital needs. At the same time, the level
of additional investment has resulted in a dilution of earnings. This
dilution over the last twelve months has reduced per share earnings by
$.08. To prevent further dilution, the Company's Board of Trustees has
suspended the discount and optional cash payment provisions of the Plan.
Dividends may still be reinvested without the discount.
Y2K
The Year 2000 challenge is one that the Company has taken very
seriously. Over the course of the past year, we have been actively engaged
in assessing our exposure, and planning and implementing necessary remedial
action.
Our primary concern has been our core business applications, which
include software and hardware systems used for billing, customer service,
engineering and related activities. Fortunately, the Company's recently
completed upgrade of these systems and associated technology is Year 2000
compliant and testing of those systems has been completed.
The Company is also reviewing and taking remedial action associated
with a wide array of technologies used in the distribution of natural gas
to our customers. We are confident that our remedial efforts will be
complete by October 1999.
Additionally, the Company is developing contingency plans for
implementation in the event of unforeseen occurrences that may arise
internally or as a result of noncompliance of outside parties. Our efforts
in this area are near completion and will be ready for implementation, if
necessary, prior to year-end.
While we are taking the necessary actions internally, our ability to
provide service is contingent on assurances provided to us by our critical
vendors, associated utilities and service providers. We have aggressively
pursued assurances of compliance from these parties and will continue to
monitor their progress.
While no one is offering absolute assurances relative to the Year
2000 challenge, we are confident that our efforts and our planning have
been thorough and that our approach to this problem has been well
considered.
Summary
Berkshire Energy Resources is witnessing the dawn of a new day in the
energy industry, one for which we have planned and positioned the Company
and its resources for some time now. We look back at a year of significant
progress and we look at the challenges ahead as opportunities for future
growth and expansion.
I invite you to read the pages that follow and learn more about the
customers that we serve and about the many initiatives that have been taken
over the past year to improve operations, build revenues and enhance
performance.
Most of all, I would like to thank you for your interest in Berkshire
Energy Resources and for the confidence that you have placed in us by way
of your investment.
/s/Scott S. Robinson
Scott S. Robinson
President & Chief Executive Officer
Think Flexibility
The energy industry has never been more competitive. As their choice
of energy providers grows, customers are demanding competitive rates,
superior service and enhanced products. Unlike a traditional utility
business, the energy company of today must have the flexibility to move
quickly and decisively to create opportunity and seize success. Berkshire
Energy Resources is that dynamic company: poised to thrive in the
competitive energy marketplace.
The adoption of a more flexible organization is consistent with the
Company's rich history of driving change and capitalizing on opportunity.
Founded in 1853 as the Pittsfield Coal Gas Company, it became the first New
England distributor of pipeline natural gas in 1951. After acquiring The
Berkshire Gas Company in 1954 and adopting its name, the Company expanded
its operation with the acquisition of the Greenfield Gas Light Company in
1958.
Over the last decade, the Company has strategically aligned its
resources to capitalize on changes in the energy marketplace. Without
losing sight of its commitment to continued growth in its core business,
Berkshire Energy Resources has been actively shaping the changing
marketplace, working in collaboration with natural gas utilities,
regulators, marketers and customers. True corporate flexibility, a
prerequisite to success in today's marketplace, was realized with the
establishment of Berkshire Energy Resources as an energy holding company.
The holding company currently has three subsidiaries: Berkshire Gas, a
natural gas utility serving 19 cities and towns in western Massachusetts;
Berkshire Propane, a retail supplier of propane in western Massachusetts,
eastern New York and southern Vermont; and Berkshire Energy Marketing, an
unregulated full-service energy marketer. This flexible corporate structure
enables the Company to serve and expand its core business of natural gas
distribution, focusing on increasing load, while at the same time pursuing
growth opportunities in unregulated energy markets.
By diversifying its portfolio of energy services, Berkshire Energy
Resources has become the integrated energy services firm best equipped to
meet the growing needs of the unique region it serves. Its diverse customer
base includes commercial and industrial accounts, retail operations, world-
renowned cultural attractions, fast-growing technology firms and nationally
recognized academic institutions, to name a few. The region's economic
strength, natural beauty and rich heritage make it one of the most
desirable destinations in America. On the coming pages, you'll meet some of
the customers who found this region to be the perfect setting for their
enterprises and Berkshire Energy Resources to be the perfect choice for
their energy needs.
Dependability, fuel efficiency, competitive pricing and environmental
responsibility are just a few of the benefits that have motivated a diverse
range of customers to choose Berkshire Energy Resources as their energy
provider. Here is a small sample of the client base that the Company is proud
to serve.
(Berkshire Energy Resources logo with logo of each subsidiary)
(Map of service area)
Williams College
Williamstown, Massachusetts
One of the nation's premier liberal arts colleges, Williams is known for
the exceptional talent of its students and the dedication of its faculty.
The Norman Rockwell Museum
Stockbridge, Massachusetts
Maintains the world's largest collection of original Rockwell artwork,
including the Four Freedoms.
Tanglewood
Lenox, Massachusetts
Summer home of the Boston Symphony Orchestra, it draws thousands of
classical music lovers to the Berkshires annually.
General Dynamics Defense Systems
Pittsfield, Massachusetts
Designs and supports sophisticated systems for commercial and government
customers.
Lunt Silversmiths
Greenfield, Massachusetts
A world leader in precious metal personal accessories and home furnishings.
Greenfield Industries
Greenfield, Massachusetts
Manufactures a wide range of high-quality taps for domestic and
international customers.
Yankee Candle
Deerfield, Massachusetts
Manufacturer of "the world's most fragrant candles," attracting more than
2.5 million visitors annually.
Amherst College
Amherst, Massachusetts
Founded in 1821, Amherst is one of the most highly respected liberal arts
colleges in the United States, enrolling some 1,600 talented men and women.
Think Growth
Growth opportunities are realized by those with the initiative to
seek them, the knowledge to develop them and the vision to bring them to
fruition. Dedicated to providing its shareholders with a fair return,
Berkshire Energy Resources is pursuing multiple avenues for continued
growth in both new and traditional markets. The Company is taking advantage
of the knowledge and resources it has accumulated over nearly a century and
a half of service to create new opportunities and to expand its market
share by driving demand for its products and services.
The focus on expanding its markets and increasing capacity in areas
of rapid growth continues to serve the Company well. The Company is working
closely with regulators to site a state-of-the-art liquefied natural gas
(LNG) storage facility in the Town of Whately to ensure its ability to
continue to meet increasing demand along the vital Interstate 91 corridor
in Franklin and Hampshire counties, the fastest-growing area in its service
territory. This strategically located facility - which has been in
development for four years - will help the Company realize its vision of
increasing capacity at a fraction of the cost of expanding existing
distribution lines or installing new ones. In a similar move, Berkshire
Propane is exploring the strategic placement of a satellite propane storage
facility in southern Vermont that would empower the Company to reach new
markets, improve profitability and enhance its presence as a locally based
provider of clean-burning, efficient propane.
Information technology upgrades are also providing opportunities for
growth. A new information systems infrastructure has enabled the Berkshire
Gas Marketing Department to make more effective and efficient use of
information about its customers as a strategic tool. This comprehensive
customer data aids the Company in planning and developing targeted
marketing programs focused on increasing load and expanding revenues.
Combining the experience of nearly 150 years with innovative
strategies and new technology, Berkshire Energy Resources continues to
achieve the growth that keeps it well ahead of the competition. Berkshire
Energy Resources is building the energy services company of the future by
focusing on growth, capitalizing on its competitive advantages and
aggressively shaping the competitive landscape in the energy marketplace.
Food for Thought
Vegetarians and other with healthy appetites are helping to make
Lightlife Foods, located in Turners Falls, Massachusetts, a leader in the
natural foods industry. Lifelight has been operating around the clock to
meet the ever-growing domestic and international demand for its products.
Lightlife takes great pride in providing its customers with the very best
products that are 100% vegetarian and 100% natural, which means no
artificial additives of any kind. The company also is committed to the
ecological health of the planet, so it's no surprise that Lightlife chose
clean-burning natural gas to fuel its operations and its domestic hot water
system.
Expressive Energy
Randi and David Solin recently moved Solinglass Studios, a glass
blowing enterprise that produces one-of-a-kind artistic treasures, from
Santa Cruz, California, to Brattleboro, Vermont. The Solins have exhibited
their work all over the country and one of their pieces was commissioned
for the permanent White House collection. Glass blowing is very energy
intensive. They chose propane because it's dependable , claen, and burns
hot - and chose Berkshire Propane because of its competitive price and
peerless service. "Berkshire Propane did an amazing job for us," Randi
said. "They've really been a pleasure to work with."
Economical Expansion
By strategically placing a new liquefied natural gas (LNG) storage
facility in Whately, Massachusetts, Berkshire Gas will realize a vision
that's been four years in development and meet the growing demand of
Franklin County, one of the fastest-growing areas in its service territory.
Through this new facility, the Company will reinforce its deliverability
and support continued economic growth and increased demand for natural gas
in the area. The decision to build the facility makes good economic sense
as well, producing increased capacity at a fraction of the cost of
expanding existing distribution lines or installing new ones.
Think Customers
Berkshire Energy Resources is building the energy services company of
the future on a longstanding foundation of superior service and exceptional
value. Dedicated professionals throughout the Company are working to ensure
the continued satisfaction of existing customers and forging innovative
programs to win new ones. A number of initiatives are directed toward
educating commercial and industrial customers about new gas-energy
technologies and helping them realize the potential savings to be gained
through the conversion of their existing systems from competing fuels.
One exciting new program is the Fuel Blind Audit, designed to meet
the needs of commercial and industrial customers. Working together with its
customers, Berkshire Gas is employing this program to find opportunities to
expand base load while at the same time assuring its customers access to
the most efficient new energy technologies available.
The program begins with an exhaustive on-site investigation of the
customer's total energy use and expenditures, conducted by Berkshire Gas
marketing professionals and engineering firms specializing in energy
technologies with whom the Company has established cooperative working
partnerships. Potential applications of new gas-fired equipment and systems
are identified and a financial analysis is provided. From relatively simple
equipment, such as high-efficiency, gas-powered air conditioning, to
advanced cogeneration systems, significant cost savings often can be
achieved by replacing electricity with gas. The potential for customer
savings combined with the increased load for Berkshire Gas makes the
program a real "win-win" enterprise for the Company.
The Berkshire Gas Energy Management Program is another initiative
designed to encourage commercial and industrial customers to convert to
natural gas. By reducing the operation's conversion and upgrade costs,
Berkshire Gas can build load, improve a company's energy efficiency and
establish itself as an energy partner in a long-term relationship.
Customer satisfaction also has been a primary focus of Berkshire
Energy Marketing, which has developed a respectable portfolio of commercial
and industrial accounts in its first year of operation. Customers are being
won over by the Company's local presence, familiarity with the market,
dependable service and competitive pricing.
Through their long history of exceptional service, both Berkshire Gas
and Berkshire Propane have built strong brand identities that their
customers equate with quality, dependability and trust. This customer
loyalty creates opportunities throughout the Company to build sales and
enhance revenues.
Customer satisfaction will continue to play a major role in our
strategies for the future. By building on the rock-solid relationships it
has worked so hard to forge over the years, the Company is providing
lasting value not only to its customers, but to its shareholders, its
employees and the communities it serves.
Peak Efficiency
Clean-burning, efficient propane serves many unique needs at Jiminy
Peak in Hancock, Massachusetts, which draws in excess of 300,000 visitors
annually to its year-round resort, which includes a ski area, alpine slide,
conference center, restaurants and condominiums. All four of the resort's
on-site restaurants are fueled by Berkshire Propane, as are its laundry
facilities, and propane is being chosen over electric heat by
discriminating condominium owners for dependability and value. Propane is
the only energy source at the summit, so Jiminy's lift operators depend on
it for warmth. All year round, Jiminy's employees depend on Berkshire
Propane to keep them at their peak.
Dollars & Sense
A solid, long-term relationship and focus on customer service were
key factors in Crane & Company's decision to choose Berkshire Energy
Marketing as its transportation gas supplier. Founded in 1801 in Dalton,
Massachusetts, Crane is recognized worldwide for the quality of its 100%
cotton writing paper. Its most popular product, however, is the currency
paper it has produced for the U.S. Bureau of Engraving and Printing since
1879. "We looked at a number of alternatives," said Andy St. Pierre,
Crane's energy management engineer. "Our decision to go with Berkshire
Energy Marketing was based on two key factors: We've had a solid long-term
relationship and they offered the best price as well."
Selling Knowledge
Berkshire Gas has been teaming with specialists in energy
technologies to conduct innovative audits, such as this one at A.H. Rice
Corporation in Pittsfield, Massachusetts. These audits provide customers
with potential applications of new gas-fired equipment and a financial
analysis of potential savings through conversion from electricity to
natural gas. A.H. Rice manufactures customized threads and specialty braids
for high-end uses in the textile, automotive and aerospace industries. The
company is considering cogeneration to reduce total energy costs by
increasing its use of fuel-efficient natural gas and decreasing electricity
use.
(Picture of Berkshire Gas marketing representative reviewing audit with
two of A.H. Rice's employees)
Berkshire Gas has been teaming with specialists in energy
technologies to conduct innovative audits, such as this one at A.H. Rice
Corporation in Pittsfield, Massachusetts. These audits provide customers
with potential applications of new gas-fired equipment and a financial
analysis of potential savings through conversion from electricity to
natural gas. A.H. Rice manufactures customized threads and specialty braids
for high-end uses in the textile, automotive and aerospace industries. The
company is considering
Think Opportunity
Capitalizing on opportunity requires a great deal more than being in
the right place at the right time. In fact, the greatest achievements are
realized through a visionary approach that recognizes the opportunity for
success where it appears least likely. Such insight has generated an
amazing success story for the Massachusetts Museum of Contemporary Art,
which depends on Berkshire Gas to heat its 19 spacious galleries.
MASS MoCA is a thriving, vibrant laboratory for the fabrication and
presentation of new works in the visual and performing arts that has
blossomed in a former North Adams, Massachusetts, manufacturing complex
that once was the center of economic vitality for northern Berkshire
County. The triumphant reviews of its May opening in Time, USA Today and
The Wall Street Journal trumpeted the brilliance of MASS MoCA's mission to
be responsive to changes in art-making and art-presentation environments.
"I have seen the future," wrote one reviewer, "and it's MASS MoCA."
Just as MASS MoCA's vision has been transforming the art world,
Berkshire Energy Resources has been actively reshaping the energy
marketplace. The Company's flexibility ensures its forward-looking approach
to change in the energy industry, while its in-depth understanding of the
energy marketplace, active efforts in developing trends in new and emerging
markets and effective planning are continually creating new opportunities
to benefit both customers and shareholders.
The Berkshire Energy Resources vision encompasses the traditional
natural gas utility as well as multifaceted subsidiaries that comprise a
powerful new entity that is successfully competing in traditional and
competitive markets. With its new corporate structure in place and a
pervasive "think energy" philosophy, Berkshire Energy Resources is
proactively developing and implementing strategies for growth and
profitability. The Company is confident and excited about its prospects for
success in the energy markets of today, and the benefits it will provide
for its shareholders, customers and employees well into the future.
Rethinking Art
Thousands of art lovers are flocking to North Adams to visit the
Massachusetts Museum of Contemporary Art, the largest and most compelling
of the nation's new wave of modern art centers. Berkshire Gas is proud not
only to provide the clean-burning, efficient natural gas that heats MASS
MoCA's more than 100,000 square feet of exhibition space, but also to have
been one of the first corporate sponsors in this private-public venture
that is helping to revitalize North Adams. "Berkshire Gas stood by us
during our boot-strap days," said Joseph C. Thompson, MASS MoCA's director,
"and they continue to provide this institution with top- notch service,
excellent advice and friendly support."
Financial Review
- ----------------
10-Year Comparative Summary
of Operations and Statistics 12
Management's Discussion and
Analysis of Financial Condition
and Results of Operations 14
Financial Statements:
Consolidated Statements of Income 17
Consolidated Balance Sheets 18
Consolidated Statements of Shareholders'
Equity 19
Consolidated Statements of Cash Flows 20
Notes to Financial Statements 21
Independent Auditors' Report 29
Quarterly Financial Information 31
Officers and Trustees 32
10-Year Comparative Summary of Operations and Statistics
- --------------------------------------------------------
For the Years Ended June 30,
OPERATIONS ($000) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------
Operating Revenues $ 50,733 $ 54,601 $ 53,584 $ 50,405 $51,627
Cost of Gas Sold 22,485 27,023 25,873 22,368 26,541
- -------------------------------------------------------------------------------------------
Operating Margin 28,248 27,578 27,711 28,037 25,086
- -------------------------------------------------------------------------------------------
Net Income 3,233 2,794 3,556 4,213 2,529
Earnings Available for
Common Shareholders 3,218 2,778 3,316 3,521 1,835
COMMON SHARE DATA
- -----------------
Earnings Per Share $ 1.34 $ 1.23 $ 1.52 $ 1.65 $ 0.92
Annualized Dividends Per Share 1.18 1.16 1.14 1.12 1.10
Dividends Declared Per Share 1.165 1.145 1.125 1.105 1.10
Book Value Per Share 15.07 14.48 14.18 13.75 13.16
Market Price (Year-End) 22.50 23.25 16.00 15.38 15.00
Average Shares of Common Stock
Outstanding (000s) 2,405.2 2,263.6 2,181.5 2,129.2 1,990.5
CAPITALIZATION ($000)
Common Equity $ 37,896 $ 33,536 $ 31,365 $ 29,595 $27,688
Preferred Stock 312 321 363 8,406 8,448
Long-Term Debt 40,000 34,000 40,000 31,999 30,983
- -------------------------------------------------------------------------------------------
Total Capitalization $ 78,208 $ 67,857 $ 71,728 $ 70,000 $67,119
- -------------------------------------------------------------------------------------------
% OF TOTAL
- ----------
Common Equity 48.5% 49.4% 43.7% 42.3% 41.2%
Preferred Stock 0.4 0.5 0.5 12.0 12.6
Long-Term Debt 51.1 50.1 55.8 45.7 46.2
RATIOS (%)
- ----------
Payout Ratio 87% 93% 74% 67% 120%
Market to Book Ratio 149 161 113 112 114
Return on Average
Common Equity 9.0 8.6 10.9 12.3 7.2
PROPERTY ($000)
- ---------------
Capital Expenditures $ 6,735 $ 6,945 $ 7,393 $ 6,507 $ 7,746
Pipeline Construction 0 0 0 0 0
Gross Utility Plant 110,405 106,654 101,983 96,571 91,863
Net Utility Plant 76,330 75,283 73,640 71,215 69,326
Net Non-Utility Plant 7,034 6,364 6,096 5,949 5,962
Total Assets 105,485 101,897 101,688 93,660 87,741
GAS SALES (MCF-000s)
- --------------------
Residential 2,551 2,548 2,730 2,814 2,513
Commercial & Industrial 1,783 2,261 2,289 2,626 2,305
Interruptible 683 542 592 522 1,104
- -------------------------------------------------------------------------------------------
Total Natural Gas Sales 5,017 5,351 5,611 5,962 5,922
- -------------------------------------------------------------------------------------------
GAS TRANSPORTED (MCF-000s)
- --------------------------
Firm Transportation 1,858 1,307 1,409 1,073 1,130
Interruptible Transportation 1,005 699 1,060 1,040 340
- -------------------------------------------------------------------------------------------
Total Gas Sold and Transported 7,880 7,357 8,080 8,075 7,392
- -------------------------------------------------------------------------------------------
OTHER STATISTICS
- ----------------
Customer Meters 34,494 34,166 33,887 33,763 33,596
Maximum Daily MCF Sendout 43,818 43,643 44,734 44,161 45,760
Minimum Daily MCF Sendout 8,876 7,481 7,847 8,381 8,216
Degree Days 6,287 6,506 6,953 7,402 6,748
20-Year Average Degree Days 7,163 7,241 7,301 7,300 7,354
Number of Employees 164 150 153 153 160
10-Year Comparative Summary of Operations and Statistics
- --------------------------------------------------------
For the Years Ended June 30,
OPERATIONS ($000) 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------
Operating Revenues $ 56,846 $ 50,690 $ 51,153 $ 44,507 $42,008
Cost of Gas Sold 29,558 26,502 28,178 23,826 21,990
- -------------------------------------------------------------------------------------------
Operating Margin 27,288 24,188 22,975 20,681 20,018
- -------------------------------------------------------------------------------------------
Net Income 3,673 2,810 1,952 1,462 2,047
Earnings Available for
Common Shareholders 2,953 2,066 1,849 1,377 1,955
COMMON SHARE DATA
- -----------------
Earnings Per Share $ 1.69 $ 1.20 $ 1.10 $ 0.83 $ 1.21
Annualized Dividends Per Share 1.10 1.08 1.08 1.08 1.28
Dividends Declared Per Share 1.085 1.08 1.08 1.23 1.28
Book Value Per Share 12.99 12.30 12.13 12.07 12.40
Market Price (Year-End) 16.25 18.00 14.75 13.00 14.50
Average Shares of Common Stock
Outstanding (000s) 1,751.8 1,718.5 1,687.7 1,655.6 1,622.6
CAPITALIZATION ($000)
- ---------------------
Common Equity $ 22,946 $ 21,326 $ 20,626 $ 20,155 $20,299
Preferred Stock 8,491 9,026 9,111 1,196 1,290
Long-Term Debt 31,083 25,413 26,564 28,156 29,147
- -------------------------------------------------------------------------------------------
Total Capitalization $ 62,520 $ 55,765 $ 56,301 $ 49,507 $50,736
- -------------------------------------------------------------------------------------------
% OF TOTAL
- ----------
Common Equity 36.7% 38.2% 36.6% 40.7% 40.1%
Preferred Stock 13.6 16.2 16.2 2.4 2.5
Long-Term Debt 49.7 45.6 47.2 56.9 57.4
RATIOS (%)
- ----------
Payout Ratio 65% 90% 98% 130% 106%
Market to Book Ratio 125 146 122 108 117
Return on Average
Common Equity 13.3 9.8 9.1 6.8 9.7
PROPERTY ($000)
- ---------------
Capital Expenditures $ 5,112 $ 5,458 $ 5,165 $ 4,245 $ 6,438
Pipeline Construction 0 5,659 1,539 4,526 6,475
Gross Utility Plant 86,098 83,016 79,942 76,404 71,805
Net Utility Plant 66,191 65,846 64,840 63,277 60,558
Net Non-Utility Plant 5,715 5,004 8,965 10,627 8,119
Total Assets 90,991 91,891 92,124 95,971 83,680
GAS SALES (MCF-000s)
- --------------------
Residential 2,839 2,730 2,639 2,347 2,545
Commercial & Industrial 2,625 2,681 2,703 2,480 2,778
Interruptible 807 1,012 1,468 1,092 1,163
- -------------------------------------------------------------------------------------------
Total Natural Gas Sales 6,271 6,423 6,810 5,919 6,486
- -------------------------------------------------------------------------------------------
GAS TRANSPORTED (MCF-000s)
- --------------------------
Firm Transportation 874 289 0 0 0
Interruptible Transportation 217 0 0 0 169
- -------------------------------------------------------------------------------------------
Total Gas Sold and Transported 7,362 6,712 6,810 5,919 6,655
- -------------------------------------------------------------------------------------------
OTHER STATISTICS
- ----------------
Customer Meters 33,047 32,565 32,207 31,711 31,260
Maximum Daily MCF Sendout 43,934 39,446 38,237 37,095 38,012
Minimum Daily MCF Sendout 8,114 7,371 8,060 6,855 7,294
Degree Days 7,651 7,396 7,210 6,261 7,045
20-Year Average Degree Days 7,356 7,341 7,348 7,432 7,474
Number of Employees 173 181 180 185 191
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
(Dollars in Thousands, Except Share and Per Share Amounts)
1999 in Review
- --------------
In 1999, Berkshire Gas Company reorganized its corporate structure by
forming a holding company that will provide greater flexibility and new
opportunities for growth. The new holding company - Berkshire Energy
Resources - enables the Company to separate regulated and nonregulated
operations.
Berkshire Energy Resources has been organized as a Massachusetts
Business Trust and initially has as its subsidiaries: The Berkshire Gas
Company, Berkshire Propane, Inc., and Berkshire Energy Marketing, Inc.
Current operations of Berkshire Gas and Berkshire Propane will be largely
unaffected by the new corporate structure.
In 1999, Berkshire Energy Resources reported Earnings Available for
Common Shares of $3,218 or $1.34 per share as compared to $2,778 or $1.23
in 1998. Earnings were impacted by warmer weather during the heating
season. In fiscal 1999, weather was 12.2% warmer than the twenty-year
average resulting in decreased gas demand during the heating season. In
addition, the very positive response by our shareholders to the Dividend
Reinvestment Stock Purchase Plan has resulted in an $.08 per share dilution
on earnings. Lower sales revenues were partially offset by proceeds from
weather insurance.
Results of Operations
- ---------------------
1999 vs. 1998
Earnings per share for 1999 were $1.34 on $3,218 of Earnings
Available for Common Shares, as compared with $1.23 and $2,778 in 1998.
The $.11 or 8.9% increase in earnings is primarily due to proceeds from
weather insurance, lower bad debts as a result of a change in the recovery
mechanism for the portion of bad debt expense related to gas costs and a
reduction of pension costs due to growth in plan assets.
Operating Margin for both natural gas and propane increased $670 or
2.4% as compared to 1998.
Operating Margin on sales of natural gas increased $198 or 0.8% as
compared to 1998. Operating Margin (Operating Margin or Gross Profit =
Operating Revenues Net of Cost of Gas Sold) is primarily affected by the
level of firm gas sold and transported. Interruptible gas sold and
transported has minimal or no effect on Operating Margin since those
margins are primarily flowed back to the firm customers through rates. The
Company's sales are affected by weather as the majority of its firm
customers use natural gas for heating. Changes in the cost of natural gas
do not affect Operating Margin as these changes are recovered or returned
to customers through the Cost of Gas Adjustment Clause (CGAC).
The increase in Operating Margin in 1999 is a direct result of
increased sales volumes during the mid-winter period due to 9.9% colder
weather from January through March. Also, growth in the propane customer
base, in conjunction with the acquisition of a local propane dealer in
October 1998, contributed to the additional margins.
1999 1998
---- ----
Firm MCF Sold and Transported 6,192 6,116
Consolidated Operating Margin $28,248 $27,578
Other Operating Expenses consisted of the following:
1999 1998
---- ----
Transmission and Distribution $ 3,855 $ 3,484
Customer Accounts 2,618 3,271
Administrative and General 4,148 4,149
Propane Operations 2,045 1,628
Other 1,771 1,529
------- -------
TOTAL $14,437 $14,061
======= =======
Other Operating Expenses increased $376 or 2.7% from 1998 levels.
Increases in payroll and information technology were offset by lower
pension and employee benefits costs. Increases in Propane Operations
expenses were driven by customer growth. Partially offsetting these
increases was lower expense for bad debts due to a regulatory change in the
mechanism for the recovery of bad debts. The portion of bad debts related
to gas costs will now be recovered through the CGAC.
Other Income increased $591 or 36.9%, primarily representing proceeds
recognized from weather insurance. The Company purchased insurance to
protect against warmer than normal weather for the winter period
(November 1, 1998 through March 31, 1999).
Other Taxes increased $122 or 6.5% primarily due to increases in
plant property and municipal tax rates.
Income Taxes increased $306 due to a related increase in Pre-tax
Income.
Common Share Dividends increased $223 due to additional shares
outstanding through the Company's Dividend Reinvestment and Optional Cash
Purchase Plan (DRIP) over the twelve-month period, and to a lesser extent, an
increase in the quarterly dividend to $.295 per share from $.29 per share
effective the fourth quarter of 1999.
Results of Operations
- ---------------------
1998 vs. 1997
Earnings per share for 1998 were $1.23 on $2,778 of Earnings
Available for Common Shares, as compared with $1.52 and $3,316 in 1997.
The $.29 or 19.1% decrease in earnings was due primarily to 10% warmer than
normal weather and costs related to corporate restructuring. The book
value per share rose to $14.48 from $14.18 in 1997.
Operating Margin on sales of natural gas decreased $133 or 0.5% as
compared to 1997. The decrease in Operating Margin in 1998 was a direct
result of lower propane margins due to warmer temperatures, partially
offset by higher natural gas margins due to increased sales volumes during
the winter period. An increase in the number of commercial and industrial
customers had the effect of stabilizing margins as these customers tend to
be less weather sensitive.
1998 1997
---- ----
Firm MCF Sold and Transported 6,116 6,428
Consolidated Operating Margin $27,578 $27,711
Other Operating Expenses consisted of the following:
1998 1997
---- ----
Transmission and Distribution $ 3,484 $ 3,420
Customer Accounts 3,271 3,029
Administrative and General 4,149 4,382
Propane Operations 1,628 1,522
Other 1,529 1,231
------- -------
TOTAL $14,061 $13,584
======= =======
Other Operating Expenses increased $477 or 3.5% from 1997 results.
Customer Accounts increased $242 reflecting the development and
implementation of new information systems company-wide. Administrative and
General decreased $233 from 1997 primarily due to reduced costs related to
the Company's pension plan and insurance, partially offset by costs
incurred for the restructuring for a holding company. Other Expenses
increased $298 resulting from increased marketing costs and other gas
supply and production costs.
Depreciation Expense increased by $130 in 1998 over 1997 due to an
increase in depreciable assets.
Other Income decreased $76 or 4.5% from 1997. The decrease was
primarily due to lower interest income on the undercollection of prior
period gas costs through the CGAC.
Due to the increase of long-term debt used to retire the 8.4%
Preferred Stock, Interest Expense increased $414 which was partially offset
by a reduction of $224 in the requirements for Preferred Stock Dividends.
Replacing Preferred Stock with debt resulted in a tax savings of $86.
Income Taxes decreased $567 from 1997 due to lower taxable earnings.
Common Share dividends increased $146 due to additional shares
outstanding because of the Company's Dividend Reinvestment and Optional
Cash Payment Plan over the twelve-month period and, to a lesser extent, an
increase in the quarterly dividends to $.29 per share from $.285 per share,
effective the fourth quarter of 1998.
Year 2000 Compliance
- --------------------
The Company has identified all significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
sources are being used to make the required modifications and test Year
2000 compliance.
The Company believes that the most critical risk relates to the
replacement and modification of its business application software.
During the second quarter of fiscal 1999, the Company replaced its
core business applications which support customer service, billing,
collection, jobbing and engineering. This upgraded system is Year 2000
compliant. The installation and testing of the upgrade to the Company's
current finance, accounting, payroll and inventory system has been
completed. This system is Year 2000 compliant. These upgrades were
initiated in the normal course of addressing business needs.
The Company has also assessed the other areas of its business not
related to its core information systems. Presently, the Company believes
that these areas which include automated meter reading, dispatch,
administration and distribution, are being modified or upgraded without
disruption of service or material cost. Necessary upgrades and
replacements are expected to be completed by October 1999.
Due to the complexity of the Year 2000 problem and the reliance on
certain critical vendors and suppliers, there can be no guarantees that the
Company will achieve Year 2000 compliance or that critical vendors and
suppliers will achieve Year 2000 compliance. A vendor management program
has been undertaken as part of the Company's effort to obtain reasonable
assurances from key vendors that there will not be any interruptions in the
supply of goods and services as a result of the Year 2000 issues. The
Company is preparing strategies to address potential failures of
significant vendors in its contingency plans.
The Company is currently completing a business contingency plan
addressing Year 2000 risks associated with its internal systems and
critical vendors. The plan includes continuation strategies for critical
business processes and will be completed by September 1999.
The total cost to the Company of Year 2000 compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. Management has budgeted fifty
thousand dollars for fiscal year 2000 to address Year 2000 related
expenditures. These costs and the date on which the Company plans to
complete Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of
certain resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be achieved
and actual results could differ from those plans.
Liquidity and Capital Resources
- --------------------------------
Cash flows from operating activities have decreased from the twelve
months ended June 30, 1998, primarily due to an increase in accounts
receivable and less cash from recoverable gas costs. Capital requirements
have been primarily funded by internal sources, and to a lesser extent,
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 internal sources and with the reinvestment of
dividends. The Company continually evaluates its short-term borrowing
position, and based on prevailing interest rates, market conditions, and
other considerations, makes determinations regarding conversion of short-
term borrowings to long-term debt or equity. As part of this process
during the second quarter of fiscal 1997, the Company repurchased the
80,000 shares of its Preferred Stock at $117 per share. To finance these
redemptions, the Company sold a $16,000 Senior Note at 7.8% due 2021.
The Company's capital expenditures were $6,735, $6,945, and $7,393 in
1999, 1998, and 1997, respectively. These construction expenditures
primarily represent investments in new and replacement mains and services.
The Company expects fiscal 2000's capital expenditures to total
approximately $5,700. Construction expenditures will be financed primarily
through internal sources, short term borrowings and the reinvestment of
dividends.
As of June 30, 1999, the Company had lines of credit aggregating
$30,500, of which $23,400 remained unused.
Like other companies in the natural gas industry, the Company is a
party to governmental actions associated with former gas manufacturing
sites. Management estimates that expenditures to remediate and monitor
known environmental sites will range from $3,355 to $12,673. In accordance
with SFAS No. 5, the Company has recorded the most likely cost of $3,355.
The Company's unamortized costs at June 30, 1999, were $718 and should be
recovered over a seven-year period through the Local Distribution Adjustment
Clause (LDAC) (See Contingencies footnote).
Capitalization, at June 30, 1999, consisted of 51.1% long-term debt,
48.5% common equity, and 0.4% 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
businesses, the most significant impact of inflation is on the Company's
depreciation of utility plant. Rate regulation, to which The Berkshire Gas
Company is subject, allows recovery through its rates of only the
historical cost of utility plant as depreciation. It is expected that any
higher costs experienced upon replacement of existing facilities will be
recovered through the normal regulatory process.
CONSOLIDATED STATEMENTS OF INCOME
- ---------------------------------
(In Thousands, Except Per Share Amounts)
Years Ended June 30,
1999 1998 1997
----------------------------------
Operating Revenues $ 50,733 $ 54,601 $ 53,584
Cost of Gas Sold 22,485 27,023 25,873
- --------------------------------------------------------------------------
Operating Margin 28,248 27,578 27,711
- --------------------------------------------------------------------------
Other Operating Expenses 14,437 14,061 13,584
Depreciation 4,437 4,409 4,279
Other Taxes 1,992 1,870 1,771
Total 20,866 20,340 19,634
- --------------------------------------------------------------------------
Operating Income 7,382 7,238 8,077
Other Income - Net 2,194 1,603 1,679
- --------------------------------------------------------------------------
Operating and Other Income 9,576 8,841 9,756
Interest Expense 4,382 4,392 3,978
- --------------------------------------------------------------------------
Pre-tax Income 5,194 4,449 5,778
Income Taxes 1,961 1,655 2,222
- --------------------------------------------------------------------------
NET INCOME $ 3,233 $ 2,794 $ 3,556
==========================================================================
Earnings Available for Common Shares $ 3,218 $ 2,778 $ 3,316
==========================================================================
Average Common Shares Outstanding 2,405.2 2,263.6 2,181.5
- --------------------------------------------------------------------------
Basic and Diluted Earnings Per
Common Share $ 1.34 $ 1.23 $ 1.52
==========================================================================
Reference should be made to Notes to Financial Statements.
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(In Thousands) June 30,
1999 1998 1997
- --------------------------------------------------------------------------
ASSETS
Property, Plant and
Equipment - at original cost
Gas-related activities $110,405 $106,654 $101,983
Unregulated activities 14,007 12,784 11,983
- --------------------------------------------------------------------------
124,412 119,438 113,966
- --------------------------------------------------------------------------
Less: Accumulated depreciation
and amortization
Gas-related activities 34,075 31,371 28,343
Unregulated activities 6,973 6,420 5,887
- --------------------------------------------------------------------------
41,048 37,791 34,230
- --------------------------------------------------------------------------
Property, Plant and Equipment - Net
Gas-related activities 76,330 75,283 73,640
Unregulated activities 7,034 6,364 6,096
- --------------------------------------------------------------------------
83,364 81,647 79,736
- --------------------------------------------------------------------------
Current Assets:
Cash 117 160 356
Accounts and Other Receivables - Net 7,152 6,277 7,587
Recoverable Gas Costs 188 224 1,404
Inventories 4,301 4,261 3,665
Prepayments and Other 1,238 979 689
Prepaid Taxes 397 370 96
- --------------------------------------------------------------------------
Total Current Assets 13,393 12,271 13,797
- --------------------------------------------------------------------------
Deferred Debits:
Unamortized Debt Expense - Net 2,150 2,200 2,302
Capital Share Expense - Net 232 275 319
Environmental Cleanup Costs 718 800 819
Other 2,293 1,414 1,425
- --------------------------------------------------------------------------
Total Deferred Debits 5,393 4,689 4,865
- --------------------------------------------------------------------------
Recoverable Environmental Cleanup Costs 3,335 3,290 3,290
- --------------------------------------------------------------------------
TOTAL ASSETS $105,485 $101,897 $101,688
==========================================================================
CAPITALIZATION AND LIABILITIES
Common Shareholders' Equity:
Common Shares $ 28,596 $ 24,625 $ 22,626
Retained Earnings 9,300 8,911 8,739
- --------------------------------------------------------------------------
Total Common Shareholder's Equity 37,896 33,536 31,365
- --------------------------------------------------------------------------
Redeemable Cumulative Preferred Stock 312 321 363
- --------------------------------------------------------------------------
Long-Term Debt (less current maturities) 40,000 34,000 40,000
- --------------------------------------------------------------------------
Current Liabilities:
Notes Payable to Banks 7,100 7,085 6,480
Current Maturities of Long-Term Debt 0 6,000 0
Accounts Payable 2,636 3,024 3,513
Other Current Liabilities 2,628 3,098 4,621
- --------------------------------------------------------------------------
Total Current Liabilities 12,364 19,207 14,614
- --------------------------------------------------------------------------
Other Liabilities 1,538 1,676 1,561
- --------------------------------------------------------------------------
Unamortized Investment Tax Credit 1,070 1,139 1,209
- --------------------------------------------------------------------------
Deferred Income Taxes 8,970 8,728 9,286
- --------------------------------------------------------------------------
Reserve for Recoverable
Environmental Cleanup
Costs 3,335 3,290 3,290
- --------------------------------------------------------------------------
TOTAL CAPITALIZATION
AND LIABILITIES $105,485 $101,897 $101,688
==========================================================================
Reference should be made to Notes to Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
(In Thousands, Except Share Amounts)
Cumulative
Common Shares Preferred Stock
------------- ---------------
Number of Retained Number of
Shares Cost Earnings Shares Cost
- ------------------------------------------------------------------------------------
Balance at June 30, 1996 2,152,592 $21,712 $7,883 84,055 $8,406
Issuance through Dividend
Reinvestment Program 59,059 914
Net Income 3,556
Dividends on Preferred Stock (240)
Dividends on Common Shares (2,460)
Redemption of Preferred Stock (80,423) (8,043)
- ------------------------------------------------------------------------------------
Balance at June 30, 1997 2,211,651 22,626 8,739 3,632 363
Issuance through Dividend
Reinvestment Program 104,263 1,999
Net Income 2,794
Dividends on Preferred Stock (16)
Dividends on Common Shares (2,606)
Redemption of Preferred Stock (420) (42)
- -----------------------------------------------------------------------------------
Balance at June 30, 1998 2,315,914 24,625 8,911 3,212 321
Issuance through Dividend
Reinvestment Program 197,991 3,971
Net Income 3,233
Dividends on Preferred Stock (15)
Dividends on Common Shares (2,829)
Redemption of Preferred Stock (91) (9)
- ------------------------------------------------------------------------------------
Balance at June 30, 1999 2,513,905 $28,596 $9,300 3,121 $ 312
====================================================================================
Reference should be made to Notes to Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(In Thousands) Years Ended June 30,
-------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $3,233 $2,794 $3,556
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 5,092 5,110 4,897
Provision for Losses on Accounts Receivable 79 1,065 973
Recoverable Gas Costs 36 1,180 (2,235)
Deferred Income Taxes 242 (558) 620
Changes in Assets and Liabilities Which
Provided (Used) Cash:
Accounts and Other Receivables (954) 245 (1,747)
Inventories (40) (596) (595)
Unamortized Debt Expense (48) 0 (169)
Accounts Payable (388) (489) 337
Prepaid Taxes (27) (274) 153
Consumer Rebates and Other (1,666) (1,668) 2,108
- ------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,559 6,809 7,898
- ------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital Expenditures and Disposal Costs (6,735) (6,945) (7,393)
- ------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends Paid (2,844) (2,622) (2,700)
Proceeds from (Principal Payments on)
Issuance of Long-Term Debt 0 0 16,000
Proceeds from (Principal Payments on)
Notes Payable Borrowings-Net 15 605 (5,155)
Redemption of Preferred Stock (Including Call Premium) (9) (42) (9,360)
Proceeds from Other Stock Transactions 3,971 1,999 870
- ------------------------------------------------------------------------------------
Net Cash Provided (Used in) by Financing Activities 1,133 (60) (345)
Net (Decrease) Increase in Cash (43) (196) 160
Cash at Beginning of Year 160 356 196
- ------------------------------------------------------------------------------------
Cash at End of Year $ 117 $ 160 $ 356
- ------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (net of amount capitalized) $4,358 $4,178 $3,974
Income Taxes (net of refund). 1,849 2,553 1,527
=====================================================================================
Reference should be made to Notes to Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(Dollars in Thousands, Except Share and Per Share Amounts)
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
- ----------------------
The Berkshire Gas Company adopted a holding company corporate
structure effective December 31, 1998, to capitalize on competitive
opportunities associated with the deregulation of the natural gas industry.
The adoption of a holding company structure effectively reorganized and
segregated the Company's regulated business activities from its
nonregulated markets. The holding company, known as Berkshire Energy
Resources (the Company), has been organized as a Massachusetts Business
Trust and initially has as its subsidiaries: The Berkshire Gas Company,
Berkshire Propane, Inc., and Berkshire Energy Marketing, Inc.
Beginning with fiscal 1999, the financial statements and results of
operations for these subsidiaries/divisions have been reflected in the
accompanying consolidated financial statements. Prior years were reported
as The Berkshire Gas Company, which reported nonregulated operating
divisions under Other Income. Effective December 31, 1998, the outstanding
shares of The Berkshire Gas Company Common Stock were automatically
exchanged on a share-for-share basis for Berkshire Energy Resources Common
Shares (no par value), and Berkshire Energy Resources became the holding
company of The Berkshire Gas Company. The Berkshire Gas Company is a
subsidiary 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 commercial and industrial users, and also sells and
leases gas-burning equipment. The Berkshire Gas Company is subject to
regulation by the Massachusetts Department of Telecommunications and Energy
(DTE) as it relates to utility service. The Berkshire Gas 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 DTE.
Berkshire Propane is the retail propane subsidiary, which provides
service to more than 100 communities in western Massachusetts, eastern New
York and southern Vermont.
The Berkshire Energy Marketing, Inc. subsidiary has formed a marketing
alliance with Conectiv/CNE Energy Services, LLC, a major regional energy
services company, to sell natural gas, electricity, fuel oil and other energy
service products in the Company's service territory and surrounding areas.
Berkshire Propane and Berkshire Energy Marketing's accounting policies
conform to GAAP.
New Accounting Standards
- ------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130). This
statement establishes standards for reporting and display of comprehensive
income and its components in the financial statements. Adoption of SFAS
No. 130 disclosure is required in fiscal 1999 and will have no impact on
the Company's financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131). This
statement requires that public business enterprises report certain
additional information about operating segments. Adoption of SFAS No. 131
is required in fiscal 1999. The adoption of SFAS No. 131 will have no
impact on the Company's financial condition or results of operations.
In February 1998, the FASB issued SFAS No. 132 "Employers'
Disclosures about Pensions and Other Post-Retirement Benefits" (SFAS No.
132). This statement standardizes employers' disclosures requirements
about pension and other post-retirement benefit plans. Adoption of SFAS
No. 132 is required in fiscal 1999. The adoption of SFAS No. 132 will have
no impact on the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activites" (SFAS No. 133). This
statement establishes accounting and reporting standards for derivative
instruments and for hedging activities. Adoption of SFAS No. 133 is
required for fiscal years beginning after June 15, 2000. The Company is
aware of certain provisions which may impact the natural gas industry but
has not yet reviewed these provisions in detail against existing accounting
practices and disclosures. It is management's expectation that the
adoption of SFAS No. 133 will have no effect on the Company's financial
condition or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation", if fully
adopted, changes the methods for recognition of cost on plans similar to
those of the Company. The Company's management has evaluated this
statement and feels it will have no effect on the company.
Segment Information
- -------------------
The Company operates two segments: regulated activities and
unregulated diversified businesses. Gas-related activities consist
primarily of natural gas distribution to residential, commercial and
industrial customers, as well as the sale and leasing of gas burning
equipment. Diversified businesses consist primarily of distribution of
liquefied petroleum gas and energy marketing.
Intersegment sales are priced at fair market value. Information
about the Company's operations, by business segment, is presented below:
Revenues: 1999 1998 1997
- ------------------------------------------------------------------
Gas-related activities $ 45,772 $ 49,859 $ 48,462
Unregulated activities 4,961 4,742 5,122
- ------------------------------------------------------------------
Total $ 50,733 $ 54,601 $ 53,584
==================================================================
Pre-tax Operating Income: 1999 1998 1997
- ------------------------------------------------------------------
Gas-related activities $ 4,786 $ 4,006 $ 4,966
Unregulated activities 408 443 812
- ------------------------------------------------------------------
Total $ 5,194 $ 4,449 $ 5,778
==================================================================
Income Taxes: 1999 1998 1997
- ------------------------------------------------------------------
Gas-related activities $ 1,804 $ 1,484 $ 1,909
Unregulated activities 157 171 313
- ------------------------------------------------------------------
Total $ 1,961 $ 1,655 $ 2,222
==================================================================
Depreciation and Amortization: 1999 1998 1997
- ------------------------------------------------------------------
Gas-related activities $ 4,249 $ 4,171 $ 4,021
Unregulated activities 188 238 258
- ------------------------------------------------------------------
Total $ 4,437 $ 4,409 $ 4,279
==================================================================
Identifiable Assets: 1999 1998 1997
- ------------------------------------------------------------------
Gas-related activities $104,396 $100,876 $100,522
Unregulated activities 1,089 1,021 1,166
- ------------------------------------------------------------------
Total $105,485 $101,897 $101,688
==================================================================
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 DTE. The current composite depreciable rate is 4.04% and
has been in effect since April 1, 1993. Depreciable non-utility/unregulated
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 on a cycle basis throughout each month.
After the reading 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 DTE, The Berkshire Gas Company recovers the cost of
gas supplies by way of the Seasonal Cost of Gas Adjustment Clause (CGAC),
and recovers the cost of distribution charges through the Local
Distribution Adjustment Clause (LDAC). Gas costs to be recovered include
the cost of gas supplies, pipeline and storage capacity, certain bad debt
expenses, local production and storage expenses, and gas acquisition
expenses. The gas costs are offset by credits from supplier refunds and
margins from non-firm gas sales, capacity release, and off-system sales.
Any difference between actual and estimated 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 DTE, and is being amortized over the expected lives of the applicable
assets.
The unamortized balance of the ITC for the years ended June 30,
1999, 1998 and 1997, was $1,070, $1,139 and $1,209, respectively. The
amortized portion for the years ended June 30, 1999, 1998 and 1997, was
$69, $70 and $71.
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:
1999 1998 1997
- ---------------------------------------------------------------------
Transmission and
Distribution Plant $ 97,072 $ 92,388 $ 87,206
General Plant 8,235 9,125 9,387
Manufactured Gas
Production Plant 4,564 4,544 4,518
Construction in Progress 534 597 872
- ---------------------------------------------------------------------
Total $110,405 $106,654 $101,983
=====================================================================
Transmission and distribution plant consists of mains, the installed
costs of services and meters, land, 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.
Earnings per Share
- ------------------
Earnings per Common Share have been computed by dividing earnings
applicable to Common Shares by the weighted average number of shares of
Common Shares outstanding during each year.
Effective December 31, 1997, the Company, as required, retroactively
adopted Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" (SFAS No. 128). The statement established new standards for
computing and presenting earnings per share (EPS) and required restatement
of prior years information. As such, EPS for all prior periods presented
has been restated to conform with SFAS 128. Due to the capital structure
of the Company basic and diluted EPS are equal.
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.
ACCOUNTS RECEIVABLE
- -------------------
Details of accounts receivable, net of allowance for doubtful
accounts, as of June 30 are as follows:
1999 1998 1997
- ---------------------------------------------------------------
Gas-related activities $6,346 $5,476 $6,489
Unregulated activities 654 620 766
Other 152 181 332
- ---------------------------------------------------------------
Total - Net $7,152 $6,277 $7,587
===============================================================
The allowance for doubtful accounts as of June 30, 1999, 1998 and
1997, respectively, is: Gas-related activities - $1,000, $927, and $943;
Unregulated activities - $19, $47 and $78.
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 gas 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:
1999 1998 1997
- ---------------------------------------------------------------
Gas-related activities $4,137 $4,127 $3,519
Unregulated activities 164 134 146
- ---------------------------------------------------------------
Total - Net $4,301 $4,261 $3,665
===============================================================
RECLASSIFICATION
- ----------------
The Company has reclassified certain amounts for prior years to
conform with the 1999 presentation.
COMMON SHARES
- -------------
The Share Owner Dividend Reinvestment and Stock Purchase Plan (the
Plan) of Berkshire Energy Resources provides holders of record of Common
Shares of beneficial interest in the Company, a simple and convenient
method of investing in additional Common Shares by automatically
reinvesting cash dividends on all or a portion of their shares. The price
for shares purchased through the Plan shall be equal to the average of the
daily high and low sales prices for the Company's Common Shares (as quoted
in the NASDAQ National Market System) for the five consecutive trading days
prior to and including the date of purchase.
The Charter provisions applicable to the 4.8% Cumulative Preferred
Stock, the First Mortgage Indenture and the 7.8% Senior Note contain
restrictions on the use of The Berkshire Gas Company's retained earnings
for the payment of cash dividends on, or purchases of, Common Shares. At
June 30, 1999, The Berkshire Gas Company's retained earnings were $8,032.
At such date, under the most restrictive of these provisions, $4,259 of the
retained earnings were unrestricted.
REDEEMABLE CUMULATIVE PREFERRED STOCK
- -------------------------------------
(Actual Shares and Dollars)
The Company has one series of 4.8% Cumulative Preferred Stock
authorized. The redemption price per share (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
91, 420 and 423 shares during fiscal years 1999, 1998 and 1997,
respectively.
During fiscal 1997, the Company repurchased the 80,000 shares of the
8.4% Preferred Stock at $117 per share (see Long-Term Debt footnote).
LONG-TERM DEBT
- --------------
Details regarding the Company's First Mortgage Bond, Senior and
Medium-Term Notes Payable as of June 30 are as follows:
Interest Final
Description Rate Maturity 1999 1998 1997
- -------------------------------------------------------------------------
First Mortgage Bond:
Series P 10.06% 2019 $10,000 $10,000 $10,000
Senior Note: 9.60 2020 8,000 8,000 8,000
Medium-Term Note: 6.10 2004 6,000 6,000 6,000
Senior Note: 7.80 2021 16,000 16,000 16,000
- -------------------------------------------------------------------------
40,000 40,000 40,000
Less Current Portion 0 6,000 0
- -------------------------------------------------------------------------
Total $40,000 $34,000 $40,000
=========================================================================
The aggregate amount of maturities due are: 2000 - 2003 = $0; 2004 -
$6,000; 2005 - 2010 = $0; 2011 - 2018 = $11,640; and $22,360 maturing
thereafter per the dates in the table above.
The First Mortgage Bond is collateralized by substantially all of the
utility plant.
During 1997, in conjunction with the Company's cost containment
policies, the Company revised its capital structure to lower its borrowing
costs. The Company issued a $16,000, 7.8% Senior Note and used the
proceeds to redeem 80,000 shares of the 8.4% Preferred Stock. On April 1,
1999 the Company rolled-over the $6,000 Medium-Term Note at 6.10%, for a
five-year term. The Indentures of the Series P Mortgage Bond and 7.8%
Senior Note contain certain restrictive and financial covenants,
principally a fixed charge ratio, and limitation on funded debt. As of June
30, 1999, the Company was not in violation of any such covenants.
SHORT-TERM LOANS AND
COMPENSATING BALANCES
- ---------------------
The Company has lines of credit aggregating $30,500 with various
banks, of which $23,400 remained unused as of June 30, 1999. 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 0.28% on $9,000 with the various banks.
Information as to short-term borrowings is as follows:
1999 1998 1997
- ------------------------------------------------------------------
Balance Outstanding
at June 30 $ 7,100 $ 7,085 $ 6,480
Maximum Amount of
Borrowings at Any
Month-End 17,960 14,600 19,190
Average Borrowings During
the Year 11,701 9,528 12,434
Average Interest Rate
at End of Year 6.01% 6.75% 6.72%
Weighted Average Interest
Rate During the Year 6.31% 6.67% 6.44%
OTHER CURRENT LIABILITIES
- -------------------------
Details of other current liabilities as of June 30 are as follows:
1999 1998 1997
- ------------------------------------------------------------------
Accrued Interest $ 908 $ 884 $ 927
Retirement Plan 224 350 192
Dividends Declared 745 675 635
Accrued Consumer Rebates 116 523 2,251
Other 635 666 616
- ------------------------------------------------------------------
Total $2,628 $3,098 $4,621
==================================================================
Accrued consumer rebates represent refunds received from a major
supplier of natural gas to The Berkshire Gas Company. The refunds are the
result of suppliers' settlements with FERC and are to be refunded to
firm sales customers during the next fiscal year.
LEASE COMMITMENTS
- -----------------
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 $1,264, $962 and $695 in
fiscal 1999, 1998 and 1997, respectively. The minimum future obligations
under long-term noncancelable leases in effect at June 30, 1999, are as
follows:
2000 1,265
2001 1,201
2002 795
2003 265
2004 40
-----------------------------------------
Total $3,566
=========================================
INCOME TAXES
- ------------
The difference in the effective tax rate compared with the statutory
tax rate is shown in the following table:
1999 1998 1997
- -------------------------------------------------------------
Tax at Statutory Rate 34% 34% 34%
State Taxes (Net of
Federal Benefit) 4.5 4.3 4.5
Investment Tax Credit (1.3) (1.6) (1.2)
Permanent Differences 0.7 .5 1.2
- -------------------------------------------------------------
Effective Tax Rate 37.9% 37.2% 38.5%
=============================================================
A summary of the tax provision is as follows:
1999 1998 1997
- ------------------------------------------------------------
Federal Income - Current $1,446 $1,904 $1,393
Federal Income - Deferred 160 (542) 437
State - Current 307 390 285
State - Deferred 48 (97) 107
- ------------------------------------------------------------
Total $1,961 $1,655 $2,222
============================================================
The components of the net deferred income tax liability at
June 30 are as follows:
1999 1998 1997
- ------------------------------------------------------------
Deferred Liabilities:
Investment Tax Credit $ 410 $ 436 $ 467
Excess Tax over
Book Depreciation 9,086 8,924 8,837
Environmental Response Costs 135 171 228
- ------------------------------------------------------------
Total Deferred
Liabilities 9,631 9,531 9,532
- ------------------------------------------------------------
Deferred Assets:
Recoverable Gas Costs (70) (99) 301
Other (591) (704) (547)
- ------------------------------------------------------------
Total Deferred Assets (661) (803) (246)
- ------------------------------------------------------------
Total Net Deferred Income
Taxes $8,970 $8,728 $9,286
============================================================
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 DTE issued a generic ruling on cost recovery
for environmental cleanup with respect to former gas manufacturing sites.
Under the ruling, The Berkshire Gas Company will recover annual cleanup
costs, excluding carrying costs, over a seven-year period through the LDAC.
This ruling also provides for the sharing of any proceeds received from
insurance carriers equally between Berkshire Gas and its ratepayers, and
establishes maximum amounts that can be recovered from customers in any one
year.
During the year ended June 30, 1999, Berkshire Gas 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 site #1, which is owned by Berkshire Gas, and in 1989 with
respect to site #2, which it formerly owned.
With the review and approval of the Massachusetts Department of
Environmental Protection (MDEP), work at site #1 has resulted in proposed
remedial activities which are currently being permitted through local and
state agencies and will be pursued in the near future. Site monitoring
activities will continue for the foreseeable future.
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 is one of source removal and/or reduction coupled with
risk minimization.
Beginning in fiscal year 2000, Berkshire Gas will likely begin
remediation of site #1. It is anticipated that through 2014 the level of
expenditures for the sites will range from $3,335 to $12,673. The Company
has recorded the most likely cost of $3,335 in accordance with SFAS No. 5.
Ultimate expenditures cannot be determined until a remedial action plan for
site #2 is developed. The Company's unamortized costs at June 30, 1999,
were $718 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 Berkshire Gas as
demand charges associated with the transportation of gas through the
pipeline. Under current rate structures, these costs are recovered through
the LDAC.
Legal Matters
- -------------
The Company is 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/unregulated
operations before income tax (included in the "Consolidated Statements of
Income" under "Other Income - Net") as of June 30 is as follows:
1999 1998 1997
- ---------------------------------------------------------------
Merchandise and Jobbing:
Sales $1,100 $1,149 $1,064
Cost of Sales and
Expenses 855 836 730
- ---------------------------------------------------------------
Net 245 313 334
- ---------------------------------------------------------------
Appliance Rentals:
Revenues 1,544 1,452 1,410
Expenses 864 819 797
- ---------------------------------------------------------------
Net 680 633 613
- ---------------------------------------------------------------
Miscellaneous Net 1,269 657 732
- ---------------------------------------------------------------
Total $2,194 $1,603 $1,679
===============================================================
POST-RETIREMENT BENEFITS
- ------------------------
The Company has noncontributory 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 change in benefit obligations and plan assets for the years ended June
30, 1999, 1998 and 1997 are as follows:
1999 1998 1997
- --------------------------------------------------------------
Change in Benefit Obligations:
Benefit Obligations at Beginning
of Year $19,827 $17,146 $16,946
Service Cost 468 496 556
Interest Cost 1,311 1,295 1,242
Benefits Paid (807) (885) (774)
Plan Amendments 233 0 285
Actuarial Loss(Gain) (235) 1,775 (1,109)
- --------------------------------------------------------------
Benefit Obligations at End
of Year $20,797 $19,827 $17,146
==============================================================
Change in Plan Assets:
Fair Value of Plan Assets at
Beginning of Year $27,664 $22,281 $20,593
Actual Return on Plan Assets 2,879 6,175 2,019
Employer Contribution 0 0 404
Benefits Paid (807) (792) (735)
- --------------------------------------------------------------
Fair Value of Plan Assets at End
of Year $29,736 $27,664 $22,281
==============================================================
Funded Status $8,939 $7,837 $5,135
Unrecognized Net Gain (10,945) (10,017) (7,674)
Unrecognized Prior Service Cost 1,032 900 1,000
Unrecognized Net Obligation
(at Transition) 750 930 1,110
- --------------------------------------------------------------
Accrued Benefit Liability $ (224) $ (350) $ (429)
==============================================================
A summary of net periodic benefit(income)/cost for the years ended June 30,
1999, 1998 and 1997 are as follows:
1999 1998 1997
- --------------------------------------------------------------
Service Cost $ 468 $ 496 $ 556
Interest Cost 1,311 1,295 1,242
Return on Plan Assets:
Actual (2,879) (6,175) (2,019)
Deferred 850 4,478 447
- --------------------------------------------------------------
Net Recognized
Return on Plan Assets (2,029) (1,697) (1,572)
Other 124 64 283
- --------------------------------------------------------------
Net Pension (Income)/Cost $ (126) $ 158 $ 509
==============================================================
Significant assumptions used in determining pension expense and related
obligations for 1999, 1998 and 1997 are as follows:
1999 1998 1997
- ---------------------------------------------------------------
Assumed Discount Rate 6.75% 7.75% 7.75%
Assumed Rate of Compensation
Increase 3.375% 4.125% 4.125%
Expected Rate of Return
on Plan Assets 9.50% 8.75% 8.75%
- ---------------------------------------------------------------
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, 1999, 1998 and
1997, related to the 401(k)Plan was $233, $226, and $219, respectively.
Fair Value of Financial Instruments
- -----------------------------------
Because of the short maturity of certain assets, which include Cash,
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, 1999, 1998 and 1997, the estimated fair values of the Series
P Mortgage Bond are $11,165, $12,344, and $12,281, respectively. The
estimated fair values of the 9.6% Senior Note are $8,698, $9,044, and
$9,052, respectively. As of June 30, 1999, 1998 and 1997, the estimated
fair values of the 7.8% Senior Note are $15,863, $15,155 and $15,704,
respectively. The Medium-Term Note carried a variable interest rate for
1998 and 1997, and as such, the carrying value approximated fair value. As
a result of the roll-over in April with a fixed rate of interest, the fair
value as of June 30, 1999, of the Medium-Term Note is $4,675.
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.
Subsequent Events
- -----------------
During September 1999, the Company announced that it had reached
agreements to purchase two privately held plumbing and heating contractors
headquartered in Pittsfield, Massachusetts. These companies will operate
under Berkshire Services Solutions, a nonregulated subsidiary.
The annual sales of these companies at the time of acquisition were $3.7
million.
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
Berkshire Energy Resources:
We have audited the accompanying consolidated balance sheets of Berkshire
Energy Resources (as successor to The Berkshire Gas Company) (the
"Company") as of June 30, 1999, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity and cash flows for the years
then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30,
1999, 1998 and 1997, 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 /s/
- ----------------------------
Deloitte & Touche LLP
August 12, 1999
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 in Pittsfield,
Massachusetts, at the Crowne Plaza Hotel, on Thursday, November 4, 1999, 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 to purchase additional Common Shares of the Company. The
Plan is available to all shareholders 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:
Berkshire Energy Resources
Attn:Secretary of the Share Owner Dividend
Reinvestment and Stock Purchase Plan Committee
115 Cheshire Road
Pittsfield, Massachusetts 01201-1803
(413) 442-1511
TRANSFER AGENT
- --------------
State Street Bank and Trust Company
C/O EquiServe
P.O. Box 8200
Boston, Massachusetts 02266-8200
Shareholder Inquiries: 1-800-426-5523
STOCK LISTING
- -------------
The Common Shares of Berkshire Energy Resources are traded on the
National Over-the-Counter Market and are quoted through the NASDAQ National
Market System under the symbol BERK.
FORM 10-K INFORMATION
- ---------------------
Upon written request to the address below, 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.
Berkshire Energy Resources
Attn: Corporate Secretary
115 Cheshire Road
Pittsfield, Massachusetts 01201-1803
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.
CONSOLIDATED QUARTERLY FINANCIAL INFORMATION
- --------------------------------------------
For the Fiscal Year Ended June 30, (In Thousands, Except Per Share Amounts)
(Unaudited)
1999 First Second Third Fourth
- ------------------------------------------------------------------------------
Operating Revenues(Consolidated) $ 4,837 $13,320 $23,544 $ 9,031
Operating and Other Income(Loss) (356) 2,104 6,832 995
Income (Loss) Before Income Taxes (1,434) 948 5,706 (27)
Net Income (Loss) (876) 602 3,514 (8)
Earnings (Loss) Per Share (0.38) 0.25 1.43 (0.01)
Dividends Declared Per Share 0.29 0.29 0.29 0.295
Prices of Common Shares:
High 25.000 24.250 23.125 23.750
Low 19.500 20.000 18.500 16.250
1998 First Second Third Fourth
- ------------------------------------------------------------------------------
Operating Revenues(Consolidated) $ 5,052 $15,752 $24,768 $ 9,030
Operating and Other Income(Loss) (69) 3,345 6,360 1,074
Income (Loss) Before Income Taxes (1,374) 1,724 4,419 (320)
Net Income (Loss) (836) 1,076 2,739 (185)
Earnings (Loss) Per Share (0.38) 0.47 1.20 (0.08)
Dividends Declared Per Share 0.285 0.285 0.285 0.29
Prices of Common Shares:
High 17.375 23.500 25.625 24.750
Low 15.250 16.250 21.500 21.625
1997 First Second Third Fourth
- ------------------------------------------------------------------------------
Operating Revenues (Consolidated) $ 4,657 $13,723 $23,978 $11,225
Operating and Other Income (Loss) (165) 3,298 6,834 1,560
Income (Loss) Before Income Taxes (1,143) 1,826 4,932 163
Net Income (Loss) (708) 1,124 3,042 98
Earnings (Loss) Per Share (0.41) 0.48 1.38 0.06
Dividends Declared Per Share 0.28 0.28 0.28 0.285
Prices of Common Shares:
High 16.750 18.000 17.500 16.000
Low 14.875 15.250 15.250 15.000
The Common Shares of Berkshire Energy Resources are traded on the
National Over-the-Counter Market and are quoted through the NASDAQ National
Market System (BERK).
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 Trustees 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 Shares and
rounding.
The name "Berkshire Energy Resources" means the trustees for the time
being (as trustees but not individually) under a Declaration of Trust dated
2/17/98, as amended, which is hereby referred to, and a copy of which has
been filed with the Secretary of The Commonwealth of Massachusetts. Any
agreement, obligation or liability made, entered into or incurred by or on
behalf of said Berkshire Energy Resources binds only the trust estate, and
no shareholder, director, trustee, officer or agent assumes, or shall be
held to, any liability by reason thereof.
Officers
- --------
SCOTT S. ROBINSON ROBERT M. ALLESSIO
President and Chief Vice President
Executive Officer
MICHAEL J. MARRONE CHERYL M. CLARK
Vice President, Treasurer and Secretary of the
Chief Financial Officer Corporation
Trustees
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GEORGE R. BALDWIN** JAMES R. KEYS
President, President, J.R. Keys & Assoc. Inc.,
Baldwin & Co., a marketing and government relations
an investment firm consulting firm
JOHN W. BOND* ** SCOTT S. ROBINSON*
President, President and Chief
Kimbell Financial, Inc., Executive Officer,
a financial services company Berkshire Energy Resources
PAUL L. GIOIA** ROBERT B. TRASK**
Of Counsel, President, The
LeBoeuf, Lamb, Greene & MacRae, Fitzpatrick Companies,
a law firm formerly Country
Curtains, Inc., a
FRANKLIN M. HUNDLEY* mail order/retail firm
Chairman of the Board,
Berkshire Energy Resources
Of Counsel, * Executive Committee
Rich, May, Bilodeau & Flaherty, P.C.,
a law firm ** Audit Committee