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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 1-7479
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BAY STATE GAS COMPANY
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2548120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 FRIBERG PARKWAY, WESTBOROUGH, MASSACHUSETTS 01581-5039 (508/836-7000)
(Address and telephone number of principal executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $3.33 1/3 par value New York Stock Exchange
Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of registrant's voting stock held by non-affiliates
as of November 15, 1996 was $362,225,960*.
On November 15, 1996 the Company had 13,438,594 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENTS PART OF FORM 10-K
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Portions of the Proxy Statement for the Annual Meeting of Common
Shareholders to be held on January 23, 1997............................ Part III
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* Calculated by excluding all shares held by directors and executive officers of
Registrant, without conceding that all such persons are "affiliates" of the
Registrant for purposes of the Federal securities laws.
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Business:
The Company............................................................. 3
Local Transportation -- Markets and Competition......................... 3
Natural Gas Sales....................................................... 4
Capacity Requirements................................................... 4
Regulation and Rates.................................................... 5
Franchises.............................................................. 6
Energy Products & Services.............................................. 6
Energy Ventures......................................................... 6
Employees............................................................... 6
Executive Officers of the Registrant.................................... 6
Item 2. Properties.............................................................. 7
Item 3. Legal Proceedings....................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 8
Item 6. Selected Financial Data................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 8
Item 8. Financial Statements and Supplementary Data............................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 30
Item 11. Executive Compensation.................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 30
Item 13. Certain Relationships and Related Transactions.......................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 31
Signatures.............................................................. 33
Exhibit Index........................................................... 34
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PART I.
ITEM 1. BUSINESS
THE COMPANY
Bay State Gas Company ("Bay State" or the "Company") was incorporated in
1974 as a Massachusetts corporation. However, Bay State's predecessor companies'
operations began in 1847, and consecutive quarterly dividends have been paid by
these entities or Bay State since 1853. The Company is primarily a gas
distribution utility that provides local transportation service in the greater
Brockton, Lawrence, and Springfield, Massachusetts areas. Additionally, the
Company also offers additional energy products and services to its customers,
and invests in energy ventures. Approximately 94% of all revenues are generated
from providing local transportation and natural gas sales with 83% of these
annual revenues coming from the Company's Massachusetts service area. Bay State
has seven subsidiaries within its corporate organization. Northern Utilities,
Inc. ("Northern") is a gas distribution utility operating in the Portland and
Lewiston areas in Maine and the Portsmouth area in New Hampshire. Granite State
Gas Transmission, Inc. ("Granite") is an interstate gas transmission and supply
company operating in the states of Maine, New Hampshire, Massachusetts, and
Vermont. Granite has five wholly owned subsidiaries, Bay State Energy
Development, Inc., which owns an equity interest in the MASSPOWER cogeneration
partnership, Natural Gas Development Corp., a corporation established to invest
in the Portland Natural Gas Transmission System ("PNGTS"), a proposed natural
gas transmission pipeline in northern New England, Bay State Energy Enterprises,
Inc., which owns an equity interest in KBC Energy Services, a partnership which
markets natural gas supplies and energy-related services on a nonregulated basis
to end-users, EnergyUSA, Inc. (formerly Energy Asset Funding, Inc.), a
corporation established to provide non-regulated energy products and services,
and LNG Development Corp., established to invest in the proposed liquefied
natural gas storage facility in Wells, Maine.
Natural gas sales in New England are seasonal, and the Company's results of
operations reflect this seasonality. Accordingly, results of operations are
typically most favorable in the second quarter of the Company's fiscal year
(three months ended March 31), with results of operations being next most
favorable in the first quarter, while losses are commonly incurred in the third
and fourth quarters. The quarterly operating results for 1996 and 1995 are
described further in Note 9 of "Notes to Consolidated Financial Statements",
Part II, Item 8, Financial Statements and Supplementary Data.
The Company's customers generally are billed monthly on a cycle basis in
therms. One therm equals 100,000 British thermal units (1 Btu), the heat content
of approximately 100 cubic feet of gas. 1,000,000 Btu (1 MMBtu), or ten therms
are the energy equivalent of approximately 1,000 cubic feet of natural gas or
7.14 gallons of home heating oil.
Local Transportation
In 1996 almost all of Bay State's customers purchased bundled local
transportation and natural gas, with only 459 of Bay State's 294,000 customers
electing to purchase unbundled local transportation. The tables below show the
net change in transportation customers and throughput volumes for the past three
years.
TABLE 1 -- NET LOCAL TRANSPORTATION CUSTOMER GROWTH
Yearly Increase in Number of Customers
1996 1995 1994
------ ------ ------
Residential......................................... 5,342 5,161 4,015
Commercial/industrial............................... 748 1,256 800
Transportation only................................. 374 76 9
----- ----- -----
Net increase in number of customers................. 6,464 6,493 4,824
===== ===== =====
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TABLE 2 -- CHANGE IN THROUGHPUT VOLUMES
Yearly Increase (Decrease) - Thousands of MMBtu*
1996 1995 1994
------ ------ ------
Residential........................................ 3,201 (2,727) 848
Commercial/industrial.............................. 1,180 (2,696) 1,150
Sales to other utilities........................... 1,872 1,569 1
Interruptible and other............................ (9,389) 8,128 (766)
Transportation only................................ 931 1,923 12,222
------ ------ ------
Total increase (decrease) in throughput............ (2,205) 6,197 13,455
====== ====== ======
- ---------------
* Volumes have not been adjusted for weather variations.
COMPETITION
The Company's principal competitors are fuel-oil retailers and electric
utilities. Increases in demand for natural gas are primarily driven by the rate
of economic growth and new construction within the Company's service
territories, and by the marketing and pricing of competing fuels.
In the residential market, the Company should continue to benefit from the
New England region's market and growth potential. There are approximately
127,000 households along the Company's mains and additional homes located short
distances from existing gas mains that use no gas at all. In addition, the
Company anticipates additional growth from the estimated 43,000 existing
residential nonheating customers. These are attractive markets for the Company
and represent an opportunity to increase gas sales with little or no capital
investment.
As part of its efforts to unbundle transportation from gas sales service,
the Company is sponsoring one of the first residential pilot programs to allow
customers to purchase gas from among competing nonregulated natural gas
marketers. This program will bring the benefits of competition and encourage
increased system throughput.
For commercial and industrial customers, environmental issues are an
important issue in choosing an energy source. Since natural gas is the cleanest
burning fossil fuel, using natural gas can assist companies in complying with
the Clean Air Act and underground oil storage tank legislation.
Finally, the Company markets gas to large users on a seasonal or
interruptible basis. Approximately 51% of these interruptible volumes in 1996
were sold to five electric utilities for electric power generation. The
remainder were sold to approximately 110 industrial customers equipped to burn
either natural gas or fuel oil. Price is the key competitive factor in this
market, and the Company pursues interruptible sales through a flexible pricing
structure designed to remain competitive with other fuels. Substantially all net
margins from interruptible sales are passed back to firm customers through cost
of gas adjustment clauses (see "Rates and Regulations").
NATURAL GAS SALES
The natural gas sales portion of the Company's bundled service does not
currently provide a profit margin. However, as almost all of the Company's
294,000 local transportation customers purchase bundled transportation and
natural gas, minimizing gas costs is an important part of the Company's
business.
The Company's strategy of balancing gas purchase costs and security of
supply is achieved by optimizing the mix and terms of natural gas contracts with
the use of supplemental liquefied natural gas and propane to meet peak winter
demand. The Company maintains a diversified gas supply portfolio of domestic and
Canadian gas supply contracts with producers.
CAPACITY REQUIREMENTS
The Company currently transports natural gas from Canada through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
An agreement has been reached to extend the PPLC lease
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from March 31, 1997 to April 30, 1998. Long-term, two projects to replace the
pipeline capacity provided by the PPLC lease are being pursued, a 2.0 million
MMBtu liquefied natural gas storage facility in Wells, Maine, and the Portland
Natural Gas Transmission System. For further discussion of these projects see
Note 8 of "Notes to Consolidated Financial Statements", Part II, Item 8,
Financial Statements and Supplementary Data.
REGULATION AND RATES
The Company and its subsidiaries, are subject, where applicable, to
regulation by the Massachusetts Department of Public Utilities ("MADPU"), the
New Hampshire Public Utilities Commission ("NHPUC"), the Maine Public Utilities
Commission ("MPUC") and the Federal Energy Regulatory Commission ("FERC") with
respect to rates, adequacy of service, issuance of securities, accounting, and
other matters.
The tariff schedules of the local distribution companies provide for
declining block rates which result in reductions in the unit price as usage
increases, and for seasonal rates that charge customers more per unit for gas
purchased during the high-demand winter heating season and less per unit during
summer months. These schedules also contain cost of gas adjustment ("CGA")
clauses that permit the distribution companies to pass on to firm customers
increases or decreases in recovered natural gas costs. Substantially all gas
supplier refunds and profits from interruptible sales are returned to firm
customers through the CGA clauses.
As a result of a third party fuel inventory financing program instituted by
the Company in 1982, fuel inventory and the related administrative and carrying
costs are also recovered through the CGA clauses. In addition, the MADPU allows
recovery of the following through the CGA: 1) the working capital costs
associated with purchased gas costs; 2) remediation costs associated with waste
materials from former gas manufacturing sites; and 3) costs associated with
MDPU-approved energy conservation and load management programs.
The following table provides the most recent rate activity of the Company by
state and federal jurisdictions:
TABLE 4 -- RATE ACTIVITY
REQUESTED INCREASES GRANTED INCREASE
--------------------------- -----------------------------------------
RETURN ON RETURN ON
DATE AMOUNT COMMON AMOUNT COMMON DATE
JURISDICTION FILED (IN MILLIONS) EQUITY (IN MILLIONS) EQUITY EFFECTIVE
- ------------------------- -------- ------------- --------- ------------- --------- ---------
FERC..................... 10/1/96 $ 3.7 13.50% (a) (a) (a)
NHPUC.................... 9/15/96 $ .2 (b) $ .2 (b) 11/1/96
NHPUC.................... 9/15/95 $ .3 (b) $ .3 (b) 11/1/95
MADPU.................... 4/14/95 $ .0 (c) (c) (c) 1/1/96
NHPUC.................... 9/14/94 $ .1 (b) $ .1 (b) 11/1/94
FERC..................... 4/29/94 $ 1.6 14.20% $ 1.1 11.50% 11/1/94
NHPUC.................... 9/20/93 $ .3 (b) $ .3 (b) 11/1/93
NHPUC.................... 9/21/92 $ .6 (b) $ 0.5 (b) 11/1/92
MADPU.................... 4/16/92 $20.6 13.00% $11.5 11.40% 11/1/92
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(a) Rate increase filed with the FERC 10/1/96, new rates, subject to refund,
will be effective 4/1/97.
(b) The revenue increase was granted under a step adjustment filing allowing
recovery of certain costs under the terms of the Settlement Agreement
effective 9/30/91; no return was requested or ordered.
(c) An overall revenue-neutral rate redesign was filed with the MADPU. The goal
of the rate redesign was to implement rates that more closely reflect the
actual costs associated with serving different customers. New rates were
effective January 1, 1996.
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FRANCHISES
The utility franchise rights of the Company are non-exclusive. Competition
from other companies in the distribution of gas, however, is restricted without
prior approval of the applicable local and state governmental agencies.
The laws of the Commonwealth of Massachusetts permit a municipality, by
appropriate vote of its residents, to enter the gas business and purchase the
facilities of the utility serving such municipality. If the utility is not
willing to sell, the municipality may construct a plant or acquire one from
another source. The Company is not aware of any municipality which intends to
seek approval of such action.
Energy Products & Services
For a discussion of Energy Products & Services see "Energy Products &
Services" in Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Energy Ventures
For a discussion of Energy Ventures, see "Energy Ventures" in Part II, Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES
The Company employed 1,061 persons at September 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of the principal executive officers of the
Registrant as of November 15, 1996 are listed below along with their business
experience during the past five years. All principal executive officers are
elected annually by the Board of Directors at the Directors' first meeting
following the annual meeting of shareholders. There are no family relationships
among these officers, except as noted below, nor is there any arrangement or
understanding between any officer and any other person pursuant to which the
officer was selected.
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------------------------------------------- ------------------------------------------
Roger A. Young, 50, Chairman of the Board of
Directors (Chief Executive Officer) (a)........ Chairman of the Board of Directors since
1996; Chief Executive Officer since 1990;
Director since 1975; President, 1981 to
1995.
Joel L. Singer, 40, President (Chief Operating
Officer)....................................... President since 1996, Director and Chief
Operating Officer since 1995, Executive
Vice President, 1995; Director of Arthur
D. Little Inc.'s North American Natural
Gas Practice, Cambridge, MA, 1993 to 1995,
Manager Natural Gas Sales / Vice President
Petrofina Gas Pipeline, American
Petrofina, Dallas, TX, 1989 to 1993.
Thomas W. Sherman, 56, Executive Vice President
(Chief Financial and Accounting Officer and
Treasurer)..................................... Director, Executive Vice President, and
Chief Financial Officer; Treasurer since
1994.
Dwight G. Curley, 59, Senior Vice President...... Senior Vice President since 1992; Vice
President 1990 to 1992.
James A. Burke, 57, Vice President............... Vice President.
John F. Doucette, 52, Vice President............. Vice President.
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NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------------------------------------------- ------------------------------------------
Philip W. Kallaugher, 54, Vice President......... Vice President since 1993; Division
Manager of the Brockton division 1988 to
1992.
James D. Simpson, 46, Vice President............. Vice President since 1993; Director of
Rates and Economic Analysis 1992 to 1993;
Director of Rates 1988 to 1992.
John R. Snow, 55, Vice President................. Vice President.
Stephen J. Curran, 50, Controller................ Controller.
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(a) Charles H. Tenney II, Director, is the stepfather of Roger A. Young,
Chairman of the Board of Directors.
ITEM 2. PROPERTIES
The Company holds franchise rights to lay gas mains in the streets and
public places of various service territories in Massachusetts, Maine, and New
Hampshire.
As of September 30, 1996, the Company's system consisted of approximately
5,360 miles of distribution mains; 132 miles of transmission lines, with
requisite accessory pumping and regulating stations; LNG liquefaction,
vaporization and storage facilities; propane storage tanks; 269,113 services
(small pipe connecting mains with piping on the customers' premises) and 293,677
meters installed on customers' premises.
The Company also leases a transmission line which is 166 miles in length
running from the Canadian border through Vermont and New Hampshire and
terminating in South Portland, Maine (see Item 1. Business, "Capacity
Requirements").
The transmission and distribution system is for the most part located on or
under public streets, and other public places or on private property not owned
by the Company, with the easements from or consent of the respective owners.
ITEM 3. LEGAL PROCEEDINGS
The Company is working with federal and state environmental agencies to
assess the extent and environmental impact of and appropriate remedial action
for waste materials from former gas manufacturing sites (see Note 8 of "Notes to
the Consolidated Financial Statements", Part II, Item 8, Financial Statements
and Supplementary Data).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
QUARTER ENDED
-----------------------------------------------------
FISCAL 1996 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
- ---------------------------------------------- ----------- -------- ------- ------------
High..................................... $29 1/2 $29 7/8 $28 3/4 $28 7/8
Low...................................... 24 26 1/2 26 1/8 25 3/8
FISCAL 1995
- ----------------------------------------------
High..................................... $25 1/8 $25 3/4 $25 1/2 $25 1/4
Low...................................... 22 1/2 22 1/4 23 1/8 22 7/8
The common stock of the Company is listed on both the New York Stock
Exchange and the Boston Stock Exchange. The ticker symbol is "BGC" and common
listings in the financial press include "BayStGas" and "BaySGs". As of November
15, 1996, the Company had approximately 10,820 shareholders of record. The
number of shareholders indicated does not reflect the number of persons or
entities who hold their common stock in nominee name through various brokerage
firms or other entities. Information regarding cash dividends declared on common
stock is included in Note 9 of "Notes to the Consolidated Financial Statements",
Item 8, Financial Statements and Supplementary Data.
ITEM 6. SELECTED FINANCIAL DATA
Listed below is the required selected financial data for the Company's last
five fiscal years.
In thousands, except per share amounts 1996 1995 1994 1993 1992
- ----------------------------------------- -------- -------- -------- -------- --------
Total operating revenues................. $428,784 $418,118 $463,280 $412,410 $372,707
Net income............................... $ 27,072 $ 23,128 $ 24,485 $ 22,807 $ 18,363
Earnings per average common share........ $ 2.00 $ 1.71 $ 1.85 $ 1.75 $ 1.41
Total assets............................. $684,253 $630,355 $614,798 $563,000 $498,930
Long-term obligations under capital
leases................................. $ 694 $ 1,611 $ 2,719 $ 3,747 $ 4,700
Capitalization:
Common equity............................ $227,986 $219,873 $215,389 $200,088 $187,032
Preferred stock.......................... $ 5,009 $ 5,149 $ 5,293 $ 5,392 $ 20,512
Long-term debt........................... $196,500 $199,000 $191,000 $176,000 $116,139
Cash dividends declared per common
share.................................. $ 1.52 $ 1.48 $ 1.44 $ 1.40 $ 1.36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year in Review
During 1996, Bay State Gas Company ("Bay State" or the "Company") achieved
record earnings while implementing changes to respond to the deregulation of the
industry. Net income was $27.1 million in 1996 compared to $23.1 million in
1995, and earnings per share were $2.00. This is a 17.0% increase from the $1.71
earned one year ago. Common stock dividends declared in 1996 were $1.52 per
share, 2.7% higher than the prior year. This was the thirteenth consecutive year
of increased common stock dividends, and it completes the 143rd year of
consecutive quarterly dividends. The current annualized dividend is equivalent
to $1.54 per share.
Earnings for the fiscal year increased primarily due to the weather, which
was 9.2% colder than the prior year and 2.8% colder than normal within the
Company's service territories. The impact of the colder than normal weather was
offset somewhat by increases in operating expenses, primarily payroll, outside
services, and property taxes.
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The Company operates in three related business segments (see note 1).
Revenues and income before interest and taxes for 1996 from the three business
segments were as follows:
OPERATING INCOME BEFORE
In millions REVENUES INTEREST AND TAXES
----------- --------- ------------------
Local Transportation................................ $411.3 $54.4
Energy Products & Services.......................... 17.3 2.5
Energy Ventures..................................... 0.2 2.7
------ -----
Total............................................... $428.8 $59.6
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Local Transportation
Income before interest and taxes from this regulated segment is
approximately 91% of the total for the Company. The following table details the
components of Local Transportation revenues for the past three years:
In millions 1996 1995 1994
----------- ------ ------ ------
Transportation for natural gas sales customers..... $167.8 $156.2 $164.0
Transportation only customers...................... 6.8 4.2 2.5
------ ------ ------
Transportation revenues............................ 174.6 160.4 166.5
Natural gas sales.................................. 226.8 235.3 276.9
------ ------ ------
Transportation and natural gas sales............... 401.4 395.7 443.4
Other.............................................. 9.9 8.1 7.7
------ ------ ------
Total revenues..................................... $411.3 $403.8 $451.1
====== ====== ======
The majority of customers purchase bundled transportation and natural gas.
Some larger commercial, industrial, and interruptible customers have elected to
purchase unbundled transportation service requiring them to manage their own gas
purchasing, balancing, and storage functions. Profit margins from interruptible
customers and spot sales to other utilities are passed back to firm customers
through reduced gas costs (see note 1). The following table details the revenues
from transportation and natural gas sales by customer type:
In millions 1996 1995 1994
----------- ------ ------ ------
Residential........................................ $212.0 $200.2 $230.0
Commercial/industrial.............................. 157.1 153.0 179.8
Interruptible...................................... 23.2 35.2 24.3
Sales to other utilities........................... 9.1 7.3 9.3
------ ------ ------
Total.............................................. $401.4 $395.7 $443.4
====== ====== ======
TRANSPORTATION REVENUES
Transportation revenues increased 8.9% from 1995 to 1996. This $14.2
million increase in revenues was primarily attributable to the colder weather
and increased use per customer. The 9.2% change in the weather from year to year
resulted in a $7.9 million increase in transportation revenues. The following
table displays the degree days for the past three years:
PERCENTAGE
COLDER/(WARMER)
YEAR DEGREE DAYS THAN NORMAL
---- ----------- ---------------
1996............................................... 7,220 2.8%
1995............................................... 6,589 (6.4%)
1994............................................... 7,366 5.2%
In addition, customer growth of 2.3% continued to exceed the industry
average, with the addition of almost 6,500 customers in 1996 and 1995, up from
4,800 in 1994.
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NATURAL GAS SALES
The natural gas sales portion of the bundled service does not currently
provide a profit margin. However, as all but 460 of the 294,000 Local
Transportation customers purchase bundled transportation and gas commodity sales
service, minimizing gas costs is an important part of the Company's competitive
strategy.
The goal is to balance gas purchase costs and security of supply by
optimizing the mix and terms of natural gas contracts with the use of
underground storage and supplemental liquefied natural gas and propane to meet
peak winter demand. In order to achieve this mix, a diversified gas supply
portfolio of domestic and Canadian gas supply contracts with producers is
maintained. Natural gas sales rates include cost of gas adjustment clauses
("CGA") pursuant to which gas purchase costs and other costs are recovered from
customers. The following table details these recovered gas costs:
In millions 1996 1995 1994
----------- ------ ------ ------
Gas demand........................................... $ 25.2 $ 45.0 $ 33.7
Gas commodity........................................ 120.0 112.5 138.8
------ ------ ------
Total purchase costs................................. 145.2 157.5 172.5
------ ------ ------
Transmission costs................................... 49.8 53.9 58.5
Supplemental costs................................... 18.5 14.5 26.1
Other................................................ 13.3 9.4 19.8
------ ------ ------
Total................................................ $226.8 $235.3 $276.9
====== ====== ======
Recovered gas costs decreased by 3.6%, or $8.5 million, in 1996. These
lower gas costs were the result of a decline in fixed purchase costs due to an
increase in winter-only supply contracts, combined with pipeline refunds, which
were being passed back to customers during the period. The increase in
supplemental fuel costs in 1996 is the result of the colder weather, requiring
the Company to purchase more supplemental supplies than in the previous year.
OTHER REVENUES
Other revenues primarily consist of customer service revenues, merchandise
sales, conversion burner rentals, and liquefaction services.
Energy Products & Services
Revenues from Energy Products & Services for the last three years include the
following:
In millions 1996 1995 1994
----------- ----- ----- -----
Propane................................................. $10.2 $ 7.6 $ 7.1
Water heater rentals.................................... 4.3 4.0 3.7
Appliance repair insurance.............................. 2.8 2.6 1.4
----- ----- -----
Total................................................... $17.3 $14.2 $12.2
===== ===== =====
As is the case with revenues generated in the Local Transportation segment,
propane revenues are significantly affected by the weather. In 1996, revenues
from the sale of propane increased 34.2%, or $2.6 million, primarily from growth
in the wholesale business and the colder weather. Sales volumes for propane
increased from 7.4 million gallons in 1995 to 11.2 million gallons in 1996.
Revenues from water heater rentals increased by 7.5% in 1996 after
increasing by 8.1% and 7.0% in 1995 and 1994, respectively. The increase in 1996
is primarily the result of a continued increase in the number of units rented.
Moderate price increases also contributed to the growth in rental revenues in
1995 and 1994.
Energy Ventures
This business segment currently manages an interstate pipeline, and
participates in three major projects: MASSPOWER, an operating cogeneration
facility; the Portland Natural Gas Transmission System ("PNGTS"); and the Wells
LNG facility ("Wells LNG"). Operating revenues and income within Energy
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Ventures are generated by the interstate pipeline, which had operating income of
$398,000, $1.3 million, and $70,000 in 1996, 1995, and 1994, respectively.
Income from the investment in MASSPOWER resulted in pre-tax earnings of $1.2
million and $296,000 for the years 1996 and 1995, and a loss of $813,000 in
1994, its first year of operation. The Company is currently seeking buyers for
its 17.5% equity interest in MASSPOWER, which has been a successful investment,
but does not represent a future core business. PNGTS and Wells LNG are two
investments in the development stage that produced earnings in the form of
equity Allowance for Funds Used During Construction ("AFUDC") totaling $1.0
million in 1996 and $175,000 in 1995 (see note 8).
Operating Expenses
Operations expenses increased by $12.2 million in 1996 after decreasing by
$3.9 million in 1995 and $1.5 million in 1994. Increases in operations expenses
were primarily the result of increases in payroll and propane fuel purchases,
due to the colder weather, and increases in outside services.
Higher plant balances have resulted in continuing increases in depreciation
expense. Taxes, other than income taxes, increased primarily due to higher
property taxes. Annual increases in property tax rates and assessments, combined
with the growth in plant, increased property taxes by $966,000, $601,000, and
$808,000 in 1996, 1995, and 1994, respectively.
Interest Expense and Dividend Requirements on Preferred Stock
Interest expense for the Company decreased 5.3%, to $16.1 million in 1996
from $17.0 million in 1995, due to a decrease in interest expense related to
refunds due customers, recording of AFUDC of $1.3 million, and a reduction of
short-term debt following the sale of the rental assets. Dividend requirements
on preferred stock were relatively flat for the comparative periods.
Results of Operations, 1995 and 1994
During 1995, net income decreased $1.4 million due to weather that was 6.4%
warmer than normal in the service territories. In 1994, net income increased
$1.7 million with colder than normal weather. In both years the Company had a
growing customer base. Operating revenues for 1995 decreased by $45.2 million
primarily due to the warmer weather, decreases in the cost of gas, and increased
pipeline refunds being returned to customers. In 1994, operating revenues
increased by $50.9 million, primarily due to customer additions combined with an
increase in the cost of gas and colder weather.
Recovered gas costs decreased 15.0% to $235.3 million in 1995. This
decrease was the result of the warmer weather, which reduced fuel costs, and
pipeline refunds, which were returned to customers during this period. In 1994,
recovered gas costs increased 17.6% to $276.9 million. This increase was the
result of rising transmission costs, and of industry deregulation or unbundling,
combined with increases in supplemental fuel costs, demand-side management
program costs, and transition costs.
Operation expenses decreased by $3.9 million and $1.5 million in 1995 and
1994, respectively. In 1995, the decrease was the result of reduced bad debt
expense, due to improved collections from customers and other cost control
measures. In 1994, the decrease in operations expenses was due to cost
reductions from an internal review of operations performed early in 1994.
In 1995, interest expense increased $1.9 million due to overcollections of
recovered natural gas costs, and higher than anticipated pipeline supplier
refunds. Interest expense increased $2.2 million in 1994, due to higher levels
of long-term debt outstanding during the year, higher short-term debt rates, and
a decrease in AFUDC.
Liquidity and Capital Resources
Natural gas sales in New England are seasonal, and the Company's cash flows
reflect this seasonality. Approximately 74% of annual revenues are generated
during the heating season, which results in a high level of cash flows from
operations from late winter through early summer. Short-term borrowings are
typically
11
12
highest in the fall and early winter as a result of completion of the annual
construction program and seasonal working capital requirements. The Company has
been able to access the financial markets to meet its capital requirements and
does not anticipate a change in its access to, or the availability of, capital
in the coming year.
Cash Flows from Operating Activities
In millions 1996 1995 1994
------------------------------------------------------- ---- ----- -----
Net cash provided by operating activities.............. $7.1 $72.5 $66.1
Cash flows from operations decreased by $65.4 million in 1996 despite an
increase in net income. However, cash flows from operating activities prior to
changes in working capital were comparable to the two previous years at $56.1
million, $55.0 million, and $53.5 million, for 1996, 1995, and 1994,
respectively. In 1996, working capital requirements were higher than in previous
years because of increased deferred gas costs. This increase is the result of
pipeline refunds, which were returned to customers, and of a change to the CGA
structure in the Massachusetts service territory. This change in the CGA
requires the deferral of peak period demand charges incurred in the summer to
the upcoming winter period. In addition, cash contributions of $8.0 million were
made to employee benefit plans in 1996.
Cash Flows From Investing Activities
In millions 1996 1995 1994
--------------------------------------------------- ------ ------ ------
Net cash used in investing activities.............. $(34.7) $(56.9) $(52.2)
Investments are made in property, plant, and equipment to improve and
protect the distribution system, and to expand the system to meet customer
demand. The sale of rental assets provided $20.7 million in additional cash,
which enabled the company to reduce the levels of debt financing during the
year. Other investments include expenditures primarily for PNGTS and Wells LNG,
which were $5.7 million, $4.3 million, and $1.0 million in 1996, 1995, and 1994,
respectively (see note 8). Capital expenditures for 1997 are estimated to be
approximately $62 million.
Cash Flows From Financing Activities
In millions 1996 1995 1994
---------------------------------------------------- ----- ------ ------
Net cash provided by (used in) financing
activities........................................ $29.6 $(17.0) $(11.2)
Cash flows from financing activities increased primarily due to a $33.2
million increase in short-term debt. In 1995 and 1994 the decline in cash flows
from financing activities reflects a reduction in debt issuances as a result of
strong cash flows from operations.
The Company has a shelf registration statement covering up to $125.0
million of senior unsecured debt securities, under which $65.0 million in notes
has been issued as of September 30, 1996. The Company has access to $90.0
million in bank lines of credit. In early 1995, the Dividend Reinvestment Plan
was converted to a market purchase plan, eliminating new equity issuances under
this plan.
Impact of Inflation
The rates charged to transportation customers may not be increased without
formal proceedings before regulatory authorities. Accordingly, in the absence of
authorized rate increases and except for changes in recovered gas costs, which
are reflected in customer rates, the Company must look to performance
improvements and higher sales volumes, particularly from highly profitable
market segments, to offset inflationary increases in its costs of operations.
Current rates only permit the Company to recover its historical cost of utility
plant and give no recognition to the current cost of replacing facilities. The
Company has an obligation to make a rate filing in 1997 in Massachusetts that
includes a proposal for a form of performance-based rates.
12
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Environmental Issues
The Company continues to work with federal and state environmental agencies
to assess the extent and environmental impact of waste materials that exist at
or near former gas manufacturing sites. The costs of such assessments and any
related remediation determined to be necessary will be funded from traditional
sources of capital and recovered from customers (see note 8).
New Accounting Standard
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed
Of." This statement, effective for fiscal year 1997, requires the Company to
review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. It is not expected that the adoption of this standard will have a
material impact on the results of operations, financial condition, or cash
flows.
Forward Looking Information
This report and other Company reports contain forward looking statements.
The Company cautions that, while it believes such statements to be reasonable
and makes them in good faith, they almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Investors should be aware of
important factors that could have a material impact on future results. These
factors include, but are not limited to, weather, the regulatory environment,
financial market conditions, interest rate fluctuations, customers' preferences,
unforeseen competition, and other uncertainties, all of which are difficult to
predict, and many of which are beyond the control of the Company.
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ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS EXCEPT PER SHARE
AMOUNTS
1996 1995 1994
-------- -------- --------
Operating revenues......................................... $428,784 $418,118 $463,280
-------- -------- --------
Operating expenses:
Recovered natural gas costs.............................. 226,836 235,270 276,900
Operations............................................... 96,262 84,076 88,005
Maintenance.............................................. 10,395 8,545 8,744
Depreciation and amortization............................ 26,307 26,026 24,209
Other taxes, principally property taxes.................. 12,739 11,362 11,306
-------- -------- --------
Total operating expenses................................... 372,539 365,279 409,164
-------- -------- --------
Operating income........................................... 56,245 52,839 54,116
-------- -------- --------
Other income (expense):
Income (loss) from investments........................... 1,103 252 (813)
AFUDC equity and other................................... 2,293 1,057 1,435
-------- -------- --------
Income before interest and income taxes.................... 59,641 54,148 54,738
-------- -------- --------
Interest income............................................ (447) (573) (545)
Interest expense........................................... 16,063 17,018 15,156
Federal and state taxes on income (note 2)................. 16,953 14,575 15,642
-------- -------- --------
Net income................................................. 27,072 23,128 24,485
Dividend requirements on preferred stock................... 293 299 309
-------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK........................ $ 26,779 $ 22,829 $ 24,176
======== ======== ========
Average number of common shares outstanding................ 13,397 13,342 13,086
======== ======== ========
EARNINGS PER SHARE......................................... $ 2.00 $ 1.71 $ 1.85
======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE........................ $ 1.52 $ 1.48 $ 1.44
======== ======== ========
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995, IN THOUSANDS
1996 1995
-------- --------
ASSETS
Plant, at cost....................................................... $701,204 $683,347
Accumulated depreciation and amortization............................ 198,389 184,942
-------- --------
Net plant............................................................ 502,815 498,405
-------- --------
Investments in energy ventures (note 8).............................. 17,601 9,768
Prepaid benefit plans (note 7)....................................... 26,733 21,470
Other long-term assets............................................... 9,697 8,898
Current assets:
Cash and temporary cash investments................................ 4,583 2,581
Accounts receivable, less allowances of $3,557 and $4,232.......... 27,143 22,244
Unbilled revenues.................................................. 3,709 3,747
Deferred gas costs................................................. 27,447 13,191
Inventories, at average cost (note 6).............................. 24,699 19,326
Other.............................................................. 6,059 5,797
-------- --------
Total current assets....................................... 93,640 66,886
-------- --------
Regulatory assets:
Income taxes....................................................... 12,105 10,595
Other.............................................................. 21,662 14,333
-------- --------
$684,253 $630,355
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements and note 3):
Common stock equity................................................ $227,986 $219,873
Preferred stock equity............................................. 5,009 5,149
Long-term debt..................................................... 196,500 199,000
-------- --------
Total capitalization....................................... 429,495 424,022
-------- --------
Long-term liabilities:
Deferred taxes (note 2)............................................ 80,854 73,329
Other long-term liabilities........................................ 16,650 14,781
-------- --------
Total long-term liabilities................................ 97,504 88,110
-------- --------
Commitments and contingencies (note 8)
Current liabilities:
Short-term debt (note 5)........................................... 64,650 31,500
Current maturity of long-term debt (note 3)........................ 18,000 --
Accounts payable................................................... 31,858 29,165
Fuel purchase commitments (note 6)................................. 21,332 15,801
Refunds due customers.............................................. 10,427 28,928
Deferred and accrued taxes (note 2)................................ 3,174 4,836
Other.............................................................. 7,813 7,993
-------- --------
Total current liabilities.................................. 157,254 118,223
-------- --------
$684,253 $630,355
======== ========
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SEPTEMBER 30, 1996 AND 1995, IN THOUSANDS
1996 1995
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
Common stock equity:
Common stock, $3.33 1/3 par value, authorized
36,000,000 shares; 13,428,244 and 13,353,394
shares outstanding........................... $ 44,761 $ 44,511
Paid-in capital................................. 101,784 100,339
Retained earnings............................... 81,441 75,023
-------- ----- -------- -----
Total common stock equity............... 227,986 53.1 219,873 51.9
-------- ----- -------- -----
Cumulative preferred stock; $100 par value,
authorized 200,000 shares; $50 par value,
authorized 150,000 shares
Non-redeemable:
$100 par value, 5% series; 16,862 shares
outstanding.................................. 1,686 1,686
$50 par value, 7.2% series; 17,710 shares
outstanding.................................. 886 886
-------- ----- -------- -----
Total non-redeemable.................... 2,572 .6 2,572 .6
-------- ----- -------- -----
Redeemable, $100 par value:
4.7% series; 10,627 and 11,127 shares
outstanding 1,063 1,113
Redeemable, $50 par value:
$3.80 series; 5,693 and 6,367 shares
outstanding.................................. 284 318
5 5/8% series; 5,199 and 5,761 shares
outstanding.................................. 260 288
$3.25 series; 16,599 and 17,164 shares
outstanding.................................. 830 858
-------- ----- -------- -----
Total redeemable........................ 2,437 .6 2,577 .6
-------- ----- -------- -----
Total cumulative preferred stock 5,009 1.2 5,149 1.2
-------- ----- -------- -----
Long-term debt:
Revolving Credit Agreement, due 1997............ 18,000 6,000
6.30% Notes, due 1998........................... 5,000 5,000
6.00% Notes, due 2000........................... 10,000 10,000
6.00% Notes, due 2001........................... 5,000 5,000
7.42% Notes, due 2001........................... 10,000 10,000
6.625% Notes, due 2002.......................... 5,000 5,000
7.25% Notes, due 2002........................... 20,000 20,000
7.37 - 7.55% Notes, due 2002.................... 28,000 28,000
6.00% Notes, due 2003........................... 15,000 15,000
6.58% Notes, due 2005........................... 10,000 10,000
6.93% Notes, due 2010........................... 10,000 10,000
9.20% Notes, due 2011........................... 8,500 10,000
6.43% Notes, due 2020........................... 10,000 --
9.28% Notes, due 2021........................... -- 5,000
8.15% Notes, due 2022........................... 12,000 12,000
7.625% Notes, due 2023.......................... 10,000 10,000
9.70% Notes, due 2031........................... 13,000 13,000
9.45% Notes, due 2031........................... 25,000 25,000
-------- ----- -------- -----
Total long-term debt.................... 214,500 199,000
Less current maturities......................... 18,000 --
-------- ----- -------- -----
Long-term debt, net..................... 196,500 45.7 199,000 46.9
-------- ----- -------- -----
TOTAL CAPITALIZATION.................... $429,495 100.0 $424,022 100.0
======== ===== ======== =====
The accompanying notes are an integral part of these statements.
16
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS EXCEPT SHARE
AMOUNTS
CUMULATIVE
COMMON STOCK PREFERRED STOCK
----------------------------------------- -----------------------
PAR PAID-IN RETAINED NON-
SHARES VALUE CAPITAL EARNINGS REDEEMABLE REDEEMABLE
---------- ------- -------- ------- ---------- ----------
BALANCE AT SEPTEMBER 30,
1993....................... 12,890,112 $42,967 $ 90,713 $66,408 $2,572 $2,820
Net income................... 24,485
Dividends declared:
Preferred stock............ (309)
Common stock............... (18,831)
Common stock issued:
DRP*....................... 372,379 1,242 8,115
KESOP*..................... 28,000 93 577
Capital stock expense........ (62)
Redemption of preferred
stock...................... (198) 189 (99)
---------- ------- -------- ------- ------ ------
BALANCE AT SEPTEMBER 30,
1994....................... 13,290,491 44,302 99,145 71,942 2,572 2,721
Net income................... 23,128
Dividends declared:
Preferred stock............ (299)
Common stock............... (19,748)
Common stock issued:
DRP*....................... 42,103 140 864
KESOP*..................... 20,800 69 360
Capital stock expense........ (17)
Redemption of preferred
stock...................... (13) (144)
---------- ------- -------- ------- ------ ------
BALANCE AT SEPTEMBER 30,
1995....................... 13,353,394 44,511 100,339 75,023 2,572 2,577
Net income................... 27,072
Dividends declared:
Preferred stock............ (293)
Common stock............... (20,361)
Common stock issued:
KESOP*..................... 74,850 250 1,467
Redemption of preferred
stock...................... (22) (140)
---------- ------- -------- ------- ------ ------
BALANCE AT SEPTEMBER 30,
1996....................... 13,428,244 $44,761 $101,784 $81,441 $2,572 $2,437
========== ======= ======== ======= ====== ======
- ---------------
*Dividend reinvestment, employee savings, and key employee stock option plans.
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 27,072 $ 23,128 $ 24,485
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 26,307 26,026 24,209
Deferred income taxes..................................... 6,743 6,908 5,254
Investment income and AFUDC............................... (3,981) (1,051) (457)
Changes in operating assets and liabilities:
Accounts receivable....................................... (4,899) 3,249 (1,342)
Accounts payable.......................................... 2,693 1,871 (268)
Taxes..................................................... (2,390) (3,257) 3,428
Deferred gas costs and refunds due customers.............. (32,758) 12,492 17,291
Other..................................................... (11,649) 3,162 (6,547)
-------- -------- --------
Net cash provided by operating activities................... 7,138 72,528 66,053
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant.......................................... (50,731) (53,336) (51,214)
Proceeds from sale of rental assets......................... 20,667 -- --
Other investments........................................... (4,623) (3,553) (956)
-------- -------- --------
Net cash used in investing activities....................... (34,687) (56,889) (52,170)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................... 1,717 1,416 9,767
Dividends on common stock................................... (20,361) (19,748) (18,831)
Dividends on preferred stock................................ (293) (299) (309)
Issuance of long-term debt.................................. 22,000 20,000 25,000
Retirements of preferred stock and long-term debt........... (6,662) (12,157) (14,099)
Short-term debt............................................. 33,150 (6,250) (12,700)
-------- -------- --------
Net cash provided by (used in) financing activities......... 29,551 (17,038) (11,172)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................... 2,002 (1,399) 2,711
Cash and temporary cash investments at beginning of
period.................................................... 2,581 3,980 1,269
-------- -------- --------
Cash and temporary cash investments at end of period........ $ 4,583 $ 2,581 $ 3,980
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)................... $ 18,134 $ 16,355 $ 15,659
======== ======== ========
Income taxes........................................... $ 11,935 $ 8,720 $ 9,026
======== ======== ========
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations. Bay State Gas Company (the "Company") operates in
three energy-related segments: Local Transportation, Energy Products & Services,
and Energy Ventures. Bay State's Local Transportation business serves
approximately 294,000 natural gas customers in Massachusetts, New Hampshire, and
Maine. The Company's nonregulated Energy Products & Services segment offers
energy commodities and related equipment and services to approximately 89,000
customers throughout New England under the brand name, "EnergyUSA." Bay State's
Energy Ventures segment develops businesses and projects that are closely
related to the Company's core businesses.
Basis of presentation and principles of consolidations. The preparation of
consolidated financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses. It is
expected that actual results will not be materially different from those
estimates.
The consolidated financial statements include the accounts of Bay State Gas
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated. Certain information in the prior
period financial statements has been reclassified to conform with the current
period's presentation.
Regulation and operations. The Company is subject to regulation with
respect to rates, accounting, and other matters, where applicable, by the
Massachusetts Department of Public Utilities ("MADPU"), the New Hampshire Public
Utilities Commission, the Maine Public Utilities Commission ("MPUC"), and the
Federal Energy Regulatory Commission ("FERC"). The Company's accounting policies
conform to generally accepted accounting principles and reflect the effects of
the ratemaking process in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Plant. Plant is stated at original cost and consists of utility plant and
non-utility plant assets. The original cost of depreciable units of utility
plant retired, together with the cost of removal, net of salvage, is charged to
accumulated depreciation. The costs of maintenance, repairs, and replacements of
minor items are charged to expense as incurred.
Depreciation is provided for all classes of plant on a group straight-line
basis in amounts equivalent to overall composite rates of 3.66% for 1996, and
3.88% for 1995 and 1994.
Allowance for funds used during construction ("AFUDC"). AFUDC is the
estimated cost of funds used for construction purposes. Such allowances are
charged to plant and reported as other income (cost of equity funds) or a
reduction of interest expense (cost of borrowed funds). AFUDC was $2.8 million,
$748,000, and $457,000 for 1996, 1995, and 1994, respectively. The increases in
AFUDC are the results of the Company's spending on its investments in PNGTS and
Wells LNG.
Investments. The Company accounts for its partnership investments by the
equity method.
Cash and temporary cash investments. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
Local Transportation, natural gas sales, and deferred gas costs. Local
Transportation revenues and natural gas sales are based on the volume of gas
transported or sold at billing rates authorized by regulatory authorities and
include unbilled revenues for transportation services and gas delivered, but not
billed. The Company's rates include cost of gas adjustment ("CGA") clauses
pursuant to which gas and certain other costs are recovered from customers. Any
differences between gas costs incurred and amounts collected are deferred for
recovery from or refund to customers in future periods. Also included in natural
gas sales are sales
19
20
to interruptible customers and spot sales for resale. Substantially all profit
margins from these types of sales are used to reduce gas costs to customers
through CGA clauses.
Environmental costs. In accordance with orders of regulatory authorities,
the Company defers costs incurred to remediate environmental damage. Deferred
environmental costs in Massachusetts and New Hampshire are amortized to expense
over periods of seven to 10 years as they are recovered from customers. The
Company has received approval from the MPUC for deferral of environmental costs
and a filing for a recovery mechanism has been made (see note 8).
Income taxes. Beginning in 1994, deferred taxes are provided for using the
asset and liability method for temporary differences between financial and tax
reporting. Deferred income taxes are recognized for the expected tax
consequences of temporary differences by applying enacted statutory tax rates,
applicable to future years, to differences between the financial reporting basis
and tax basis of assets and liabilities (see note 2).
Pension and other employee benefit plans. The Company has noncontributory
defined benefit pension plans covering substantially all employees. Benefits
under the plans are generally based on years of service and the level of
compensation during the final years of employment. Other postretirement benefits
consist of certain health and life insurance benefits for retired and active
employees hired before September 30, 1990.
Postemployment benefits consist of workers compensation claims, long-term
disability payments, and medical coverage continuation payments. These costs are
generally recognized on the accrual method of accounting over the expected
periods of employee service based on actuarial assumptions (see note 7).
Earnings per share. Earnings per common share have been computed by
dividing earnings applicable to common stock by the weighted average number of
shares of common stock outstanding during each year.
Stock-based compensation. On October 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-based Compensation." Pursuant to SFAS 123, stock-based compensation,
such as the Key Employee Long-Term Incentive Plan, is recognized as expense
using a fair-value accounting method. The adoption of this accounting standard
did not have a material impact on cash flows, financial condition, or results of
operations (see note 3).
New accounting standards. In fiscal year 1997, SFAS 121 will require a
review of long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. It is not expected that the adoption of this standard will have a
material impact on cash flows, financial condition, or the results of
operations.
NOTE 2. INCOME TAXES
The components of income tax expense are as follows:
In thousands 1996 1995 1994
------------ ------- ------- -------
Current:
Federal............................................ $ 8,785 $ 6,699 $ 8,918
State.............................................. 1,824 1,368 1,870
------- ------- -------
Total current.............................. 10,609 8,067 10,788
------- ------- -------
Deferred:
Federal............................................ 5,551 5,799 4,716
State.............................................. 1,192 1,109 538
------- ------- -------
Total deferred............................. 6,743 6,908 5,254
------- ------- -------
Deferred investment tax credits, net................. (399) (400) (400)
------- ------- -------
Total income tax expense................... $16,953 $14,575 $15,642
======= ======= =======
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21
The annual provision for deferred income taxes is comprised of the
following:
In thousands 1996 1995 1994
------------ ------ ------- -------
Accelerated tax depreciation.......................... $3,858 $ 3,681 $ 2,962
Capitalized overhead.................................. (418) (2,225) 174
Pension............................................... 771 1,252 1,283
Demand-side management costs.......................... 545 1,569 (1,981)
Postretirement benefits............................... (537) 1,002 2,135
Investment in MASSPOWER............................... 494 602 1,119
Deferred gas costs.................................... -- 551 (750)
Other................................................. 2,030 476 312
------ ------- -------
Total deferred income tax expense........... $6,743 $ 6,908 $ 5,254
====== ======= =======
The Company's effective income tax rate for fiscal years 1996, 1995, and
1994 is 39%, consisting of a federal income tax rate of 35% and state income
taxes, net of federal benefit, of 4%. Temporary differences that resulted in
deferred income tax assets and liabilities as of September 30, 1996 and 1995 are
as follows:
In thousands 1996 1995
------------ ------- -------
Deferred income tax assets:
Allowance for doubtful accounts.............................. $ 1,562 $ 1,716
Inventory and overhead costs................................. 1,998 1,702
Unamortized investment tax credits 3,495 3,753
Other........................................................ 2,461 2,600
------- -------
Total deferred income tax assets..................... 9,516 9,771
------- -------
Deferred income tax liabilities:
Prepaid pension and other benefits........................... 13,148 12,860
Plant related................................................ 73,759 69,717
Other........................................................ 6,884 3,217
------- -------
Total deferred income tax liabilities................ 93,791 85,794
------- -------
Net deferred income tax liability.............................. $84,275 $76,023
======= =======
At September 30, 1996 and 1995, unamortized deferred investment tax credits
included in long-term deferred taxes amounted to $5.4 million and $5.8 million,
respectively.
NOTE 3. CAPITALIZATION
Common stock. A Key Employee Long-Term Incentive Plan ("KELTIP") awards
performance shares to all executive officers and certain key employees. All or a
portion of the performance shares become vested and earned at the end of the
three-year period beginning on the date the award was granted, depending on the
total return to shareholders for such period. No awards were made in 1996, but
50,160 and 55,500 performance shares were awarded in 1994 and 1995,
respectively. Compensation expense will be recorded when shares are vested and
earned equal to the value of the vested shares. No compensation expense was
recorded in 1996.
A Key Employee Stock Option Plan provided for the granting of options to
key employees to purchase an aggregate of 1,050,000 shares of common stock.
While it is anticipated that no further options will be granted under this plan,
previously granted options may continue to be exercised through 2002.
Options are exercisable upon grant and expire within 10 years from the date
of grant. Option activity is as follows:
OPTION PRICE
OPTIONS OUTSTANDING AND EXERCISABLE SHARES PER SHARE
----------------------------------- ------- ---------------
September 30, 1993...................................... 704,500 $17.75 - $22.00
Options exercised....................................... (28,000) $17.75 - $22.00
-------
September 30, 1994...................................... 676,500 $17.75 - $22.00
Options exercised....................................... (20,800) $17.75 - $19.63
-------
September 30, 1995...................................... 655,700 $17.75 - $22.00
Options exercised....................................... (74,850) $17.75 - $22.00
-------
September 30, 1996...................................... 580,850 $17.75 - $22.00
-------
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A Shareholder Rights Plan provides one right ("Right") to buy one share of
common stock at a purchase price of $70 for each share of common stock issued
and to be issued. The Rights expire on November 30, 1999 and only become
exercisable, or separately transferable, 10 days after a person or group
acquires, or announces an intention to acquire, beneficial ownership of 20% or
more of the Company's common stock. The Rights are redeemable by the Board at a
price of $.01 per Right, at any time prior to the acquisition by a person or a
group of beneficial ownership of 20% or more of the Company's common stock. Once
a person or group acquires more than 20% of the Company's common stock, however,
the Rights may not be redeemed.
At September 30, 1996, there were 385,000 authorized but unissued shares of
common stock reserved for the Dividend Reinvestment Plan ("DRP"). On December 1,
1994, the DRP was converted to a market based plan. It is anticipated that no
further shares will be issued under this plan.
Cumulative preferred stock and long-term debt. The cumulative preferred
stocks rank equally and are preferred over common stock in voluntary liquidation
at the redemption price in effect at the time of such voluntary liquidation and
in involuntary liquidation at the par value per share, in each case plus accrued
dividends, except for the $3.80 Series, $50 par value, which has a voluntary
liquidation value of $83 per share and a set involuntary liquidation value of
$81.50 per share, plus accrued dividends.
Sinking fund requirements and maturities. Annual sinking fund requirements
and maturities of long-term debt and preferred stock for the next five years and
thereafter are as follows:
REDEEMABLE
LONG-TERM PREFERRED MAXIMUM
In thousands DEBT STOCK CASH REQUIRED
------------ -------- ---------- -------------
1997........................................ $ 18,000 $ 180 $ 18,180
1998........................................ 5,000 180 5,180
1999........................................ 833 180 1,013
2000........................................ 10,833 143 10,976
2001........................................ 834 143 977
Thereafter.................................. 179,000 1,611 180,611
-------- ------ --------
Total....................................... $214,500 $2,437 $216,937
======== ====== ========
As of September 30, 1996, long-term debt agreements contain no provisions
restricting the payment of dividends on common stock. All debt is unsecured.
As of September 30, 1996 and 1995, $18.0 million and $6.0 million of
long-term debt were outstanding under revolving credit agreements at weighted
average interest rates of 5.85% and 6.23%, respectively.
Fair values of financial instruments. The estimated fair values of the
Company's financial instruments are summarized below.
ESTIMATED
CARRYING FAIR
In thousands AMOUNT VALUE
------------ -------- --------
September 30, 1996
Capital lease obligations............................. $ 1,612 $ 1,621
Long-term debt........................................ $196,500 $220,376
September 30, 1995
Capital lease obligations............................. $ 2,720 $ 2,749
Long-term debt........................................ $199,000 $212,365
The fair values of capital lease obligations are estimated using the
present value of the minimum lease payments discounted at market rates. The fair
values of long-term debt are estimated based on current rates offered to the
Company for debt of the same remaining maturities. The carrying amounts for cash
and temporary cash investments, accounts receivable, accounts payable, accrued
liabilities, and short-term debt approximate their fair values, due to the
short-term nature of these instruments.
22
23
NOTE 4. LEASES
Noncancelable operating and capital leases have been entered into for the
use of certain facilities and equipment. The operating lease agreements
generally contain renewal options. The capital leases relate to liquefied
natural gas storage facilities. Certain leases contain renewal and purchase
options and escalation clauses.
Future annual minimum rental payments under long-term noncancelable leases
at September 30, 1996, are as follows:
CAPITAL OPERATING
In thousands LEASES LEASES
------------ ------- ---------
1997................................................. $1,004 $ 5,581
1998................................................. 726 5,096
1999................................................. -- 4,623
2000................................................. -- 3,794
2001................................................. -- 3,465
Thereafter -- 6,784
------ -------
Future minimum lease payments........................ 1,730 $29,343
=======
Less amount representing interest.................... 118
------
Present value of future minimum lease payments....... $1,612
======
In 1996, the Company entered into a sale-leaseback agreement for its rental
water heaters and conversion burners, which increased operating lease expense by
$3.1 million over 1995. In conformity with its regulatory accounting
requirements, rent expense is recorded as if all leases were operating leases.
The following rentals were charged to operating expenses:
CAPITAL OPERATING
In thousands LEASES LEASES
------------ ------- ---------
1996..................................... $1,281 $8,007
1995..................................... $1,281 $5,437
1994..................................... $1,281 $5,179
Interest included in capital lease payments was $173,000, $253,000, and
$328,000 in 1996, 1995, and 1994, respectively.
NOTE 5. SHORT-TERM DEBT AND LINES OF CREDIT
1996 1995
------- -------
Unsecured bank lines of credit
Principal outstanding (thousands)................... $24,650 $21,500
Weighted average interest rate...................... 6.18% 6.97%
Commercial paper
Principal outstanding (thousands)................... $40,000 $10,000
Weighted average interest rate...................... 5.42% 5.80%
Total short-term debt
Principal outstanding (thousands)................... $64,650 $31,500
Weighted average interest rate...................... 5.71% 6.60%
The Company has unsecured bank lines of credit aggregating $90.0 million
for which it pays commitment fees, and access to an additional $30.0 million
under the Fuel Purchase Agreements as described in note 6.
NOTE 6. FUEL PURCHASE AGREEMENTS
Up to $30.0 million can be raised through credit agreements (the
"Agreements") underlying the Fuel Purchase Agreements with a corporation
established to provide financing, through borrowing on a demand basis or selling
supplemental gas inventories. Any inventories sold must be repurchased and any
associated carrying costs paid when the gas is withdrawn from storage. All gas
costs, carrying costs, and administrative charges are fully recoverable through
the CGA approved in each state regulatory jurisdiction. The Agreements contain
an expiration date of September 1998.
23
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NOTE 7. PENSION AND EMPLOYEE BENEFIT PLANS
Pension plans. The funded status of the Company's pension plans as of
September 30, 1996 and 1995, is as follows:
In thousands 1996 1995
------------ ------- -------
Vested benefits................................................ $67,364 $58,877
Nonvested benefits............................................. 1,312 1,196
------- -------
Accumulated benefit obligation................................. 68,676 60,073
Additional benefits related to future compensation levels...... 11,938 12,247
------- -------
Projected benefit obligation................................... 80,614 72,320
Plan assets at fair value...................................... 92,342 81,896
------- -------
Plan assets in excess of plan benefit obligations.............. $11,728 $ 9,576
======= =======
Plan assets are primarily invested in marketable pooled funds holding
equity and corporate debt securities and cash equivalents. Certain changes in
items shown above are not recognized as they occur, but are systematically
amortized over subsequent periods. Unrecognized amounts as of September 30, 1996
and 1995, are as follows:
In thousands 1996 1995
------------ ------- -------
Unrecognized net gain.......................................... $ 1,970 $ 6,010
Unrecognized prior service cost................................ (4,480) (5,178)
Unrecognized net transaction obligation........................ (3,866) (4,849)
Prepaid pension costs included in the Consolidated Balance
Sheets....................................................... 18,104 13,593
------- -------
Plan assets in excess of plan benefit obligations.............. $11,728 $ 9,576
======= =======
The discount rate and expected long-term rate of return on plan assets used
in determining the actuarial present value of projected benefit obligation were
8.0% and 9.0% for both 1996 and 1995. The rate of increase in future
compensation levels used was 4.5% and 5.0%, for 1996 and 1995, respectively. Net
pension cost for 1996, 1995, and 1994 included the following components:
In thousands 1996 1995 1994
------------ ------- ------- -------
Service cost-benefits earned............... $ 2,052 $ 1,790 $ 2,021
Interest cost on benefit obligations....... 6,292 5,668 5,580
Actual return on plan assets............... (8,210) (9,762) (129)
Net amortization and deferral.............. 2,309 4,431 (4,642)
------- ------- -------
Net pension cost........................... $ 2,443 $ 2,127 $ 2,830
======= ======= =======
Postretirement benefits other than pensions. The present value of the
accumulated postretirement benefit obligation other than pensions was $24.6
million at September 30, 1996 and 1995. The expense recognized was $2.6 million,
$2.7 million, and $2.8 million for 1996, 1995, and 1994, respectively. The
components of expense for 1996, 1995 and 1994 are as follows:
In thousands 1996 1995 1994
------------ ------- ------- ------
Interest cost......................................... $ 1,880 $ 1,872 $2,112
Service cost.......................................... 453 445 575
Actual return on assets............................... (2,355) (2,848) (365)
Net amortization...................................... 1,656 2,581 848
Deferred.............................................. 967 613 (388)
------- ------- ------
Other postretirement benefit expense.................. $ 2,601 $ 2,663 $2,782
======= ======= ======
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25
The funded status of the Company's other postretirement benefit plans as of
September 30, 1996 and 1995 is as follows:
In thousands 1996 1995
------------ -------- --------
Retirees..................................................... $ 12,511 $ 12,742
Fully eligible active employees.............................. 4,165 3,992
Other active employees....................................... 7,983 7,961
-------- --------
Accumulated other postretirement benefit obligation.......... 24,659 24,695
Fair value of plan assets.................................... (20,791) (18,133)
Unrecognized net transition obligation....................... (21,469) (22,732)
Unrecognized net gain........................................ 8,069 6,711
-------- --------
Prepaid other postretirement benefits recorded in the
Consolidated Balance Sheets................................ $ 9,532 $ 9,459
======== ========
Plan assets are held in voluntary employee benefit association ("VEBA")
trusts and medical funds in the pension plans. VEBA assets are invested in
common stocks, bonds, and cash equivalents.
The accumulated other postretirement benefit obligation for 1996 and 1995
was determined using an assumed discount rate of 8.0%, an expected long-term
pre-tax rate of return on plan assets of 9.0%, and a health care cost trend rate
of 8.0% and 9.0%, in 1996 and 1995, respectively, decreasing to 6.0% by the year
1998. An annual 1% increase in the health care cost trend rate would increase
the accumulated postretirement benefit obligation by $2.4 million and the cost
for 1996 by $262,000.
Return on prepayments of postretirement benefits. As permitted by
regulatory authorities, noncash returns of $1.5 million, $1.7 million, and
$857,000 for 1996, 1995, and 1994, respectively, have been recorded on amounts
of prepayments associated with employee post-retirement benefit plans other than
pensions. Regulators permit the accrual of returns on these prepayments because
the plan funding will significantly reduce the future costs of the plans.
Postemployment benefits, other than pensions. The present value of the
accumulated benefit obligation was $4.9 million at September 30, 1996 and 1995.
Employee savings plan. Employee Savings Plans ("ESP") provide eligible
employees with an incentive to save and invest regularly. The ESP are defined
contribution plans, which allow eligible employees to defer a portion of their
salaries to employee-funded pretax retirement savings accounts. Matching
contributions to certain employee deferrals were $836,000, $813,000, and
$784,000 in 1996, 1995, and 1994, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Capacity requirements. The Company currently transports natural gas from
Canada through a converted oil pipeline leased from the Portland Pipe Line
Corporation ("PPLC"). An agreement has been reached with PPLC to extend the
lease to April 1998, which the FERC approved on September 11, 1996. Long-term,
the Company is participating in two projects to replace the pipeline capacity
provided by the PPLC lease, a two million MMBtu liquefied natural gas storage
facility in Wells, Maine ("Wells LNG"), and Portland Natural Gas Transmission
System ("PNGTS").
Investment recovery. The following table summarizes the Company's current
investments:
INVESTMENTS
OWNERSHIP -------------------
PERCENTAGES 1996 1995
----------- ------- -------
MASSPOWER............................... 17.5% $ 2,404 $ 2,394
PNGTS................................... 17.8% 7,974 3,793
Wells LNG............................... 100.0% 7,131 3,521
KBC..................................... 33.3% 58 6
Other................................... -- 34 54
----- ------- ------
Total................................... $17,601 $ 9,768
===== ======= ======
25
26
PNGTS is a partnership that has proposed building a 272-mile interstate
pipeline from the US/Canada border to Haverhill, Massachusetts. On March 1,
1996, PNGTS signed an agreement to sell 40% of the partnership to two new equity
partners, who will also be shippers on the completed pipeline. This sale reduced
the Company's ownership percentage to 17.8%. On July 31, 1996, the FERC issued a
preliminary determination that the pipeline project is required by public
convenience and necessity. The PNGTS project is scheduled to be completed and
available for service in November 1998.
In July 1996, the Company refiled its Wells LNG application with the FERC
to reflect the evolution of the project from being primarily a baseload facility
to one that will be used to meet peak winter demands. The Company signed a
precedent agreement, which obligates Gaz Metropolitain to accept 50% of the
storage capacity of this facility upon release by the Company at the time of
inception of service on PNGTS. Gaz Metropolitain also has the option of becoming
a 50% partner in this proposed facility.
In August 1996, the Public Utility Commissions in both Maine and New
Hampshire made formal decisions in support of this project. In September 1996,
the FERC issued a "Notice of Intent" to the Company to prepare a supplement to
its January 1996 Draft Environmental Impact Statement to consider alternate
sites. The Company now expects a 1999 in-service date.
Amounts invested in PNGTS and Wells LNG consist principally of the
Company's share of feasibility, engineering, legal, other costs of developing
each project, and the carrying costs on these expenditures. Recovery of
expenditures on these investments is dependent upon, among other things,
successful completion of the projects and the terms of required regulatory
approvals. While their completion is subject to a number of factors beyond the
Company's control, the Company believes that these projects will be successful.
KBC Energy Services ("KBC") markets natural gas supplies and energy-related
services on a nonregulated basis to end users.
MASSPOWER is a cogeneration facility, which has been in operation since
1993. The Company is seeking buyers for its 17.5% equity interest in MASSPOWER.
Long-term obligations. The Company has long-term contracts for the
purchase, storage, and delivery of gas supplies. Certain of these contracts
contain minimum purchase provisions, which in the opinion of management, are not
in excess of the Company's requirements.
Environmental issues. Like other companies in the natural gas industry,
the Company is party to governmental actions associated with former gas
manufacturing sites. Management estimates that, exclusive of insurance
recoveries, if any, expenditures to remediate and monitor known environmental
sites will range from $4.9 million to $10.0 million. Accordingly, a $4.9 million
liability, with an offsetting charge to a regulatory asset (see note 1), has
been accrued. Environmental expenditures for 1996, 1995, and 1994 were $2.5
million, $387,000, and $129,000, respectively. Exclusive of amounts accrued for
future expenditures, at September 30, 1996 and 1995, approximately $4.7 million
and $3.0 million of environmental expenditures had been deferred for future
recovery from customers.
Regulatory matters. Effective January 1, 1996, the Company implemented new
rates approved by the MADPU that more closely reflect the actual costs
associated with serving different customers.
On October 1, 1996 a $3.7 million increase in pipeline revenues was filed
with the FERC. This increase is primarily due to the additional cost of
extending the Portland Pipe Line lease to April 1998. New rates are expected to
take effect April 1, 1997. The Company has an obligation to prepare a rate
filing in Massachusetts prior to May 1997, which includes a proposal for
performance-based rates.
Significant regulatory assets arising from the rate-making process
associated with income taxes, employee benefits, and environmental response
costs have been recorded. Based on its assessments of decisions by regulatory
authorities, management believes that all regulatory assets will be settled at
recorded amounts through specific provisions of current and future rate orders.
Litigation. The Company is involved in various legal actions and claims
arising in the normal course of business. Based on its current assessment of the
facts of law, and consultations with outside counsel,
26
27
management does not believe that the outcome of any action or claim will have a
material effect upon the consolidated financial position, results of operations,
or liquidity of the Company.
NOTE 9. UNAUDITED QUARTERLY FINANCIAL DATA
In thousands except per share amounts.
QUARTER ENDED
-----------------------------------------------
1996 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
---- ----------- -------- ------- ------------
Operating revenues................ $ 132,775 $181,296 $67,724 $ 46,989
Operating income.................. $ 26,458 $ 40,851 $ (338) $(10,726)
Net income (loss)................. $ 14,378 $ 23,545 $(2,859) $ (7,992)
Per average common share:
Income (loss)................... $ 1.07 $ 1.75 $ (.22) $ (.60)
Dividend declared and paid...... $ .375 $ .375 $ .385 $ .385
1995
----
Operating revenues................ $ 119,286 $174,269 $75,693 $ 48,870
Operating income.................. $ 20,616 $ 39,016 $ 186 $ (6,979)
Net income (loss)................. $ 10,477 $ 21,376 $(2,290) $ (6,435)
Per average common share:
Income (loss)................... $ .78 $ 1.60 $ (.18) $ (.48)
Dividend declared and paid...... $ .365 $ .365 $ .375 $ .375
In the opinion of management, quarterly financial data includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
representation of such information. Revenue and income amounts vary
significantly due to seasonal weather conditions.
27
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REPORT OF MANAGEMENT
The management of Bay State Gas Company and its subsidiaries has the
responsibility for preparing the accompanying financial statements. We believe
the financial statements were prepared in conformity with generally accepted
accounting principles. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
To fulfill its responsibility, management maintains a system of internal
control that has been designed to provide reasonable assurance as to the
integrity and reliability of the financial statements and the safeguarding of
Company assets.
The Company has established statements of corporate policy relating to
conflict of interest and conduct of business and annually receives from
appropriate employees confirmation of compliance with these policies.
The Company's financial statements have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The independent accountants are
elected by the Company's Directors and report any recommendations concerning the
Company's system of internal control to the Audit Committee of the Board of
Directors. The Audit Committee meets periodically with Management, internal
auditors, and KPMG Peat Marwick LLP, to review and monitor the Company's
financial reporting, accounting practices, and business conduct.
Although there are inherent limitations in any system of internal control,
management believes that as of September 30, 1996, the Company's system of
internal control was adequate to accomplish the objectives discussed herein.
ROGER A. YOUNG THOMAS W. SHERMAN
Chairman of the Board and Chief Financial Officer
Chief Executive Officer
28
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
BAY STATE GAS COMPANY
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Bay State Gas Company and subsidiaries as of September 30,
1996 and 1995, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1996. 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bay State Gas Company and
subsidiaries at September 30, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for stock-based compensation in 1996.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 24, 1996
29
30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Registrant as set forth on pages
2, 3, and 4 of the 1997 annual meeting proxy statement, dated December 9, 1996,
is incorporated herein by reference. Information relating to the Executive
Officers of the Registrant is contained in Part I, Item 1, Business.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Registrant's executive officers
as set forth on pages 7 through 14 of the 1997 annual meeting proxy statement,
dated December 9, 1996, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners
and management as set forth on pages 4 and 5 of the 1997 annual meeting proxy
statement, dated December 9, 1996, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions as set
forth on pages 4, 6 and 14 of the 1997 annual meeting proxy statement, dated
December 9, 1996, is incorporated herein by reference.
30
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
(1) The following financial statements are included herein under Part II,
Item 8, Financial Statements and Supplementary Data.
Consolidated Statements of Earnings for the Years ended September 30,
1996, 1995, and 1994
Consolidated Balance Sheets as of September 30, 1996 and 1995
Consolidated Statements of Capitalization as of September 30, 1996 and
1995
Consolidated Statements of Shareholders' Equity for the Years ended
September 30, 1996, 1995, and 1994
Consolidated Statements of Cash Flows for the Years ended September 30,
1996, 1995, and 1994
Independent Auditors' Report
(2) The following additional data should be read in conjunction with the
financial statements included in Part II, Item 8, Financial Statements and
Supplementary Data. Schedules not included herein have been omitted because they
are not required or are not applicable, or the required information is shown in
such financial statements or notes thereto.
PAGES IN
FORM 10-K
----------
VIII Consolidated Valuation and Qualifying Accounts - 1996, 1995, and 1994
Independent Auditors' Report
(3) Exhibits -- See Exhibit index on page 34.
(B) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the fourth quarter of
fiscal 1996.
31
32
SCHEDULE VIII
BAY STATE GAS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- ----------- ------------ ---------- ------------- ----------
YEAR ENDED SEPTEMBER 30, 1996
Allowance for doubtful accounts........ $4,232 $5,444 $ 6,119 $3,557
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts........ $5,072 $5,007 $ 5,847 $4,232
YEAR ENDED SEPTEMBER 30, 1994
Allowance for doubtful accounts........ $4,468 $7,778 $ 7,174 $5,072
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
32
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAY STATE GAS COMPANY
/S/ THOMAS W. SHERMAN
By_________________________________
THOMAS W. SHERMAN
EXECUTIVE VICE PRESIDENT
Date: December 2, 1996
------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- ------------------------------------------ ------------------------------ -----------------
/S/ ROGER A. YOUNG Chairman of the Board; Chief December 2, 1996
- ---------------------------------------- Executive Officer; Director
ROGER A. YOUNG
(CHAIRMAN OF THE BOARD OF DIRECTORS)
/S/ JOEL L. SINGER President, Chief Operting December 2, 1996
- ---------------------------------------- Officer, Director
JOEL L. SINGER
(PRESIDENT)
/S/ THOMAS W. SHERMAN Chief Financial and Accounting December 2, 1996
- ---------------------------------------- Officer, Director
THOMAS W. SHERMAN
(EXECUTIVE VICE PRESIDENT)
/S/ LAWRENCE J. FINNEGAN Director December 2, 1996
- ----------------------------------------
LAWRENCE J. FINNEGAN
/S/ DOUGLAS W. HAWES Director December 2, 1996
- ----------------------------------------
DOUGLAS W. HAWES
/S/ WALTER C. IVANCEVIC Director December 2, 1996
- ----------------------------------------
WALTER C. IVANCEVIC
/S/ JOHN H. LARSON Director December 2, 1996
- ----------------------------------------
JOHN H. LARSON
/S/ JACK E. MCGREGOR Director December 2, 1996
- ----------------------------------------
JACK E. MCGREGOR
/S/ DANIEL J. MURPHY Director December 2, 1996
- ----------------------------------------
DANIEL J. MURPHY III
/S/ GEORGE W. SARNEY Director December 2, 1996
- ----------------------------------------
GEORGE W. SARNEY
/S/ CHARLES H. TENNEY II Director December 2, 1996
- ----------------------------------------
CHARLES H. TENNEY II
33
34
EXHIBIT INDEX
(3) Articles of incorporation and by-laws:
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------- ---------
*3.1 Articles of Incorporation Exhibit 3.1 to Form 10-Q dated
February 9, 1995 (File No. 1-7479)
*3.2 By-Laws, as amended Exhibit 3.2 to Form 10-Q dated
February 9, 1995 (File No. 1-7479)
- ---------------
<FN>
* Incorporated by reference to the indicated filing.
(4) Instruments defining the rights of security holders, including indentures:
The following is a listing of debt instruments defining the rights of
security holders, including indentures and/or note agreements for Bay State,
Northern, and Granite. None of these instruments represent any securities in an
amount authorized or outstanding which exceeds 10 % of the total assets of the
Company as of September 30, 1996. The Company will furnish the Securities and
Exchange Commission with copies of any of the instruments listed below upon
request.
Revolving Credit Agreement between Northern and The First National Bank of
Boston, to borrow up to $20,000,000, dated as of March 17, 1993, due March 17,
1997.
Indenture between Bay State and The First National Bank of Boston, Trustee,
dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the
following Notes have been issued under a Prospectus dated April 18, 1991:
- $ 8,500,000 Principal Amount of 9.20% Notes due June 6, 2011
- $25,000,000 Principal Amount of 9.45% Notes due September 5, 2031
- $12,000,000 Principal Amount of 8.15% Notes due August 26, 2022
- $ 4,000,000 Principal Amount of 7.55% Notes due November 1, 2002
- $ 1,000,000 Principal Amount of 7.55% Notes due October 2, 2002
- $ 5,000,000 Principal Amount of 7.45% Notes due December 16, 2002
- $ 5,000,000 Principal Amount of 7.38% Notes due December 31, 2002
- $ 7,000,000 Principal Amount of 7.375% Notes due November 1, 2002
- $ 1,000,000 Principal Amount of 7.375% Notes due December 31, 2002
- $ 5,000,000 Principal Amount of 7.37% Notes due December 31, 2002
- $20,000,000 Principal Amount of 7.25% Notes due August 5, 2002
Indenture between Bay State and The First National Bank of Boston, Trustee,
dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the
following Notes have been issued under a Prospectus dated April 7, 1993:
- $10,000,000 Principal Amount of 7.42% Notes due September 10, 2001
- $10,000,000 Principal Amount of 7.625% Notes due June 19, 2023
- $10,000,000 Principal Amount of 6.0% Notes due July 6, 2000
- $15,000,000 Principal Amount of 6.0% Notes due September 29, 2003
- $10,000,000 Principal Amount of 6.58% Notes due June 21, 2005
- $ 5,000,000 Principal Amount of 6.0% Notes due January 30, 2001
- $ 5,000,000 Principal Amount of 6.625% Notes due June 28, 2002
- $10,000,000 Principal Amount of 6.43% Notes due December 15, 2020
Note Purchase Agreement between Northern and First Colony Life Insurance
for the purchase and sale of $13,000,000 principal amount of 9.70% Notes dated
as of January 1, 1992, due September 1, 2031.
34
35
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $10,000,000 principal amount of
6.93% Notes dated as of September 29, 1995, due September 27, 2010.
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $5,000,000 principal amount of
6.30% Notes dated as of September 29, 1995, due September 30, 1998.
(10) Material contracts:
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------------------------------------------------- ------------------------------
*10.01 Key Employee Stock Option Plan covering key employees Exhibit 10.16 to Form 10-K for
of the Company 1989 (File No. 1-7479)
*10.02 Key Officer Deferred Compensation Plan covering the Exhibit 10.21 to Form 10-K for
Chairman of the Board of Directors, the President, 1992 (File No. 1-7479)
and all Vice Presidents of the Company
*10.03 Supplemental Executive Retirement Plan covering the Exhibit 10.22 to Form 10-K for
Chairman of the Board of Directors, the President, 1992 (File No. 1-7479)
and all Vice Presidents of the Company
*10.04 Key Employee Incentive Compensation Plan covering the Exhibit 10.23 to Form 10-K for
Chairman of the Board of Directors, the President, 1992 (File No. 1-7479)
and certain key employees of the Company
*10.05 Senior Advisory Agreement between Bay State and Filed herewith
Charles H. Tenney II, dated January 27, 1994
*10.06 Severance agreement between Bay State and each of the Exhibit 10.06 to Form 10-K for
executive officers of the Company 1995 (File No. 1-7479)
*10.07 Directors' Retirement Plan Exhibit 10.07 to Form 10-K for
1995 (File No. 1-7479)
*10.08 Key Employee Long-term Incentive Plan Filed herewith
(11) Statement re: computation of per share earnings, filed herewith.
(12) Statement re: computation of ratio of earnings to fixed charges, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Independent Auditors, filed herewith.
(27) Financial Data Schedule, filed herewith.
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* Incorporated by reference to the indicated filing.
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