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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, 1997
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 Identification No.)
incorporation or organization)
300 FRIBERG PARKWAY, WESTBOROUGH, MASSACHUSETTS 01581-5039 (508/836-7000)
(Address and telephone number of principal executive offices)
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 14, 1997 was $363,065,216*.
On November 14, 1997 the Company had 13,508,594 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 Part III
to be held on January 22, 1998.
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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
PAGE
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PART I
Item 1. Business:
The Company............................................................... 3
Utility................................................................... 3
Competition............................................................... 4
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.............................................................. 9
Item 8. Financial Statements and Supplementary Data............................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 33
Item 11. Executive Compensation................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 33
Item 13. Certain Relationships and Related Transactions........................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 34
Signatures............................................................... 36
Exhibit Index............................................................ 37
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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 93% of all revenues are generated
from providing local transportation and natural gas sales with 82% 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, Natural Gas Development
Inc., 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., EnergyUSA, Inc., a
corporation established to provide non-regulated energy products and services,
EnergyEXPRESS, Inc., which markets non-regulated commodity to commercial and
residential customers, 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 1997 and 1996 are
described further in Note 10 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.
UTILITY
In 1997 almost all of Bay State's customers purchased bundled local
transportation and natural gas, with only 8,000 of Bay State's 300,000 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 UTILITY CUSTOMER GROWTH
Yearly Increase in Number of Customers
1997 1996 1995
------ ------ ------
Residential..................................... (1,532) 5,342 5,161
Commercial/industrial........................... 54 748 1,256
Transportation only............................. 7,301 374 76
------ ----- -----
Net increase in number of customers............. 5,823 6,464 6,493
====== ===== =====
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TABLE 2 -- CHANGE IN THROUGHPUT VOLUMES
Yearly Increase (Decrease) -- Thousands of MMBtu*
1997 1996 1995
------ ------- -------
Residential................................... (592) 3,201 (2,727)
Commercial/industrial......................... (1,374) 1,180 (2,696)
Sales to other utilities...................... (56) 1,872 1,569
Interruptible and other....................... 3,092 (9,389) 8,128
Transportation only........................... 7,132 931 1,923
------ ------ ------
Total increase (decrease) in throughput....... 8,202 (2,205) 6,197
====== ====== ======
- ---------------
* 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
102,000 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 42,000 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 sponsored one of the first residential pilot programs to allow
customers to purchase gas from among competing nonregulated natural gas
marketers. In July 1997 the Company expanded the pilot program to include small
business customers. These programs 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 66% of these interruptible volumes in 1997
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
300,000 utility 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 imported from Canada through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
PNGTS, a long-term capacity addition, is
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currently planned by a consortium of energy investors, including an affiliate of
the Company, to provide a permanent pipeline link with Canadian gas suppliers.
This project has been certificated by the FERC and plans to provide service by
November 1998. As insurance against a possible delay, the Company has secured an
option from PPLC to extend its lease until April 1999. For further discussion
see Note 9 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 $ 3.4 13.50% $ 2.9 11.75% 4/1/97
NHPUC........................ 9/15/96 $ .2 (a) $ .2 (a) 11/1/96
NHPUC........................ 9/15/95 $ .3 (a) $ .3 (a) 11/1/95
MADPU........................ 4/14/95 $ .0 (b) (b) (b) 1/1/96
NHPUC........................ 9/14/94 $ .1 (a) $ .1 (a) 11/1/94
FERC......................... 4/29/94 $ 1.6 14.20% $ 1.1 11.50% 11/1/94
NHPUC........................ 9/20/93 $ .3 (a) $ .3 (a) 11/1/93
- ---------------
(a) 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.
(b) 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 1,005 persons at September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of the principal executive officers of the
Registrant as of November 14, 1997 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, 51, 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, 41, 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, 57, Executive Vice
President (Chief Financial and Accounting
Officer and Treasurer)................... Director, Executive Vice President, and Chief
Financial Officer; Treasurer since 1994.
William L. Glascock, 52, Senior Vice
President................................ Senior Vice President 1997; Senior Vice
President Nationsbank 1992 to 1996.
Richard P. Cencini, 50, Vice President..... Vice President 1997; Leader, Regulatory Pricing
1996 to 1997; Director Regulatory Affairs 1992
to 1996.
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NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
---------------------- ---------------------------------------
Carol A. Collins, 44, Vice President....... Vice President 1997; Leader, Services Delivery
1996 to 1997; Manager Information Systems
Development 1993 to 1996; Manager Technology
Research & Applications 1990 to 1993.
Debra P. Cornish, 38, Vice President....... Vice President 1997; Leader, Culture Development
1996 to 1997; Manager Compensation and Employee
Relations 1993 to 1996; Performance Analyst 1991
to 1993.
James D. Simpson, 47, Vice President....... Vice President since 1993; Director of Rates and
Economic Analysis 1992 to 1993; Director of
Rates 1988 to 1992.
John R. Snow, 56, Vice President........... Vice President.
Thomas J. Aruffo, 39, Vice President....... Vice President 1997; Vice President Fidelity
Investments 1996 to 1997; Director Information
Systems Prudential Insurance Company of America
1993 to 1996.
Stephen J. Curran, 51, 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, 1997, the Company's system consisted of approximately
5,428 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; 266,789 services
(small pipe connecting mains with piping on the customers' premises) and 299,506
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 9 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
PRICE RANGE OF COMMON STOCK BY QUARTER
QUARTER ENDED
-----------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
FISCAL 1997
High.................. $30 5/8 $28 1/4 $27 5/8 $30 3/8
Low................... 26 3/4 25 1/8 25 3/8 26 1/4
FISCAL 1996
High.................. $29 1/2 $29 7/8 $28 3/4 $28 7/8
Low................... 24 26 1/2 26 1/8 25 3/8
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
14, 1997, the Company had approximately 10,060 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 10 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 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Total operating revenues............ $ 473,581 $ 428,843 $ 418,216 $ 463,280 $ 412,410
Net income.......................... $ 26,062 $ 27,072 $ 23,128 $ 24,485 $ 22,807
Earnings per average common share... $ 1.92 $ 2.00 $ 1.71 $ 1.85 $ 1.75
Total assets........................ $ 722,119 $ 684,253 $ 630,355 $ 614,798 $ 563,000
Long-term obligations under capital
leases............................ $ -- $ 694 $ 1,611 $ 2,719 $ 3,747
Capitalization:
Common equity....................... $ 234,378 $ 227,986 $ 219,873 $ 215,389 $ 200,088
Preferred stock..................... $ 4,917 $ 5,009 $ 5,149 $ 5,293 $ 5,392
Long-term debt...................... $ 229,500 $ 196,500 $ 199,000 $ 191,000 $ 176,000
Cash dividends declared per common
share............................. $ 1.56 $ 1.52 $ 1.48 $ 1.44 $ 1.40
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Bay State Gas Company ("Bay State" or the "Company") operates in three
related energy business segments: Utility, Energy Products & Services, and
Energy Ventures. The company's nonregulated Energy Products & Services business
segment markets products and services under the brand name, "EnergyUSA(TM)". Bay
State's Energy Ventures segment develops business opportunities and projects
which are closely related to the Company's core businesses.
YEAR IN REVIEW
In 1997, Bay State had net income of $26.1 million compared to $27.1
million in 1996 and earnings per share of $1.92 versus $2.00 one year ago. Net
income for 1997 was impacted by the effects of weather, the write-off of
restructuring costs, losses in EnergyUSA(TM), and the sale of a subsidiary which
owned a 17.5% equity investment in MASSPOWER.
Weather during 1997 was 2.1% warmer than normal and 4.9% warmer than fiscal
year 1996, implying weather-normalized earnings per share of $2.01 for fiscal
year 1997, up 9.2% from $1.84 for fiscal year 1996.
[YEAR IN REVIEW (1993-1997) BAR GRAPH]
Operating revenues and income before interest and taxes by business segment
for 1997 and 1996 were as follows:
OPERATING REVENUES
IN MILLIONS 1997 1996
------ ------
Utility............................................ $455.6 $414.0
Energy Products & Services......................... 22.3 17.1
Eliminations....................................... (4.3) (2.3)
------ ------
Total......................................... $473.6 $428.8
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INCOME BEFORE INTEREST AND TAXES
IN MILLIONS 1997 1996
----- -----
Utility.............................................. $47.9 $56.3
Energy Products & Services........................... (2.9) 2.4
Energy Ventures...................................... 16.0 1.8
Corporate costs...................................... (0.6) (0.2)
----- -----
Total........................................... $60.4 $60.3
===== =====
The $8.4 million decrease in Utility income before interest and taxes is
primarily a result of the write-off of restructuring costs. In the fourth
quarter of fiscal year 1997, Bay State wrote off previously deferred
restructuring costs of $11.2 million, resulting in a $0.50 per share loss (see
Note 8 of "Notes to Consolidated Financial Statements", Part II, Item 8,
Financial Statements and Supplemental Data). These costs were incurred in order
to prepare the Company for the competitive environment of deregulation and
consisted of early retirement benefits for both union and nonunion employees,
consulting fees, and other related costs. These costs have been written off as
part of our proposed rate settlement in Massachusetts. Restructuring costs in
other jurisdictions of $1.7 million have been deferred and are being amortized
over three to five years.
In fiscal year 1997, income before interest and taxes for Energy Products &
Services decreased $5.3 million. During 1997 this business segment incurred
losses of $0.13 per share, which were primarily due to the costs of building the
staff and infrastructure needed to support the future growth of EnergyUSA(TM).
Income before interest and taxes increased $14.2 million in Energy
Ventures, primarily due to the sale of a subsidiary for $17.0 million in 1997.
As part of its strategy to focus on future core businesses, Bay State sold a
subsidiary which owned the Company's 17.5% equity investment in MASSPOWER, an
electric cogeneration facility, resulting in a $0.58 per share gain.
Common stock dividends declared in 1997 were $1.56 per share, 2.6% higher
than the prior year. This was the fourteenth consecutive year of increased
common stock dividends, and it completes the 144th year of consecutive quarterly
dividends. The current annualized dividend is equivalent to $1.58 per share.
UTILITY
The following table details the components of Utility Revenues for the past
three years:
IN MILLIONS 1997 1996 1995
------ ------ ------
Bundled transportation........................ $164.9 $167.9 $156.6
Unbundled transportation...................... 12.4 6.8 4.2
------ ------ ------
Transportation revenues....................... 177.3 174.7 160.8
Natural gas sales............................. 262.6 226.8 235.0
------ ------ ------
Transportation and natural gas sales.......... 439.9 401.5 395.8
Other revenues................................ 15.7 12.5 8.1
------ ------ ------
Total revenues........................... $455.6 $414.0 $403.9
====== ====== ======
The majority of customers purchase bundled transportation and natural gas
service. Some larger commercial, industrial, and interruptible customers have
elected to purchase unbundled transportation service, allowing them to manage
their own gas purchasing, balancing, and storage functions.
In November 1996, Bay State launched the Pioneer Valley Customer Choice
pilot program, which attracted about 6,500 residential gas customers in our
Western Massachusetts service area. The program gave residential customers the
opportunity to purchase their natural gas from a supplier of their choice. Bay
State continued to transport the gas to customers' homes, maintain the local
pipeline system, respond to emergencies, and read customers' gas meters.
In July 1997, Bay State received regulatory approval to expand its pilot
program to include all of Bay State's 83,000 residential and 6,000 small
business customers in its Western Massachusetts service area, as well as 10,000
small business customers in the company's Southeastern Massachusetts service
area. The
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expanded program - Choice Advantage from Bay State Gas - is designed to foster
competition within the Bay State Gas service territory and to enable the company
to continue to learn about gas supplier and consumer behavior.
The Company's earnings are unaffected by the shift from bundled to
unbundled service as the Company does not realize a profit margin on the natural
gas sales portion of bundled services.
TRANSPORTATION REVENUES
Total transportation revenues increased $2.6 million or 1.5% from 1996 to
1997. This increase is primarily attributable to customer growth offset by the
negative impact of warmer weather. Customer growth was 2.0% for fiscal year 1997
with the addition of 5,800 customers. Normalized firm throughput, which is a
better indicator of our system growth, increased by 3.7% to 55.7 Bcf in 1997.
Weather was 4.9% warmer in fiscal year 1997 than fiscal year 1996. If 1997
weather had been as cold as 1996 weather, 1997 transportation revenues would
have been $5.4 million higher. The following table displays the Degree Days for
the past three years:
PERCENTAGE
(COLDER/(WARMER)
YEAR DEGREE DAYS THAN NORMAL
---- ----------- ---------------
1997............................................ 6,916 (2.1)%
1996............................................ 7,220 2.8 %
1995............................................ 6,589 (6.4)%
NATURAL GAS SALES
The natural gas sales portion of the bundled service does not provide a
profit margin. However, as all but 8,000 of the Company's Utility customers
purchase bundled transportation and gas commodity sales service, minimizing gas
costs is an important part of the Company's competitive strategy.
The Company's 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. 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 Natural
Gas Costs:
IN MILLIONS 1997 1996 1995
---- ---- ----
Gas demand....................................... $ 23.7 $ 25.2 $ 45.0
Gas commodity.................................... 167.2 120.0 112.2
------ ------ ------
Total purchase costs............................. 190.9 145.2 157.2
------ ------ ------
Transmission costs............................... 44.2 49.8 53.9
Supplemental fuels............................... 15.1 18.5 14.5
Other costs...................................... 12.4 13.3 9.4
------ ------ ------
Total....................................... $262.6 $226.8 $235.0
====== ====== ======
Recovered natural gas costs increased by 16%, or $35.8 million, in 1997.
These higher gas costs were the result of an increase in gas commodity prices.
The decrease in supplemental fuel costs in 1997 is the result of warmer weather,
allowing the Company to use less 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. In 1997, other
revenues increased by 26%, or $3.2 million, primarily due to increased customer
service revenues.
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ENERGY PRODUCTS & SERVICES
Operating revenues from the Energy Products & Services business segment for
the last three years include the following:
IN MILLIONS 1997 1996 1995
---- ---- ----
EnergyUSA(TM)
Home Services(SM)................................. $ 7.7 $ 6.9 $ 6.6
Business Services(SM)............................. 2.4 -- --
Energy EXPRESS(TM).................................. 12.2 10.2 7.6
----- ----- -----
Total.......................................... $22.3 $17.1 $14.2
===== ===== =====
EnergyUSA Home Services(SM) offers water heater rentals, insurance programs
for heating system maintenance, energy-related financing, and a variety of other
products for residential customers. Home Services(SM) revenues have increased by
11.6% in 1997 after increasing by 4.5% in 1996. The increase in 1997 is
primarily the result of a continued increase in the number of water heater units
rented and an increase in rental rates.
In 1997, EnergyUSA(TM) introduced EnergyUSA Business Services(SM), which
manages the energy needs of commercial and industrial customers. Services
provided include strategic energy supply management, applied technology,
engineering design/build, and facilities management services.
EnergyEXPRESS(TM) markets energy commodities to the home and business
segments. In 1997, revenues from EnergyEXPRESS(TM) increased 19.6%, or $2.0
million, primarily due to higher propane fuel prices and an increase in
customers.
On October 1, 1997, EnergyUSA(TM) introduced a new service brand,
AccessUSA(SM) which will market security systems, telecommunications services,
satellite and cable TV services, and Internet services.
ENERGY VENTURES
Energy Ventures develops business opportunities and projects which are
closely related to the Company's core businesses. Currently this segment
participates in two major projects: the Portland Natural Gas Transmission System
("PNGTS"); and the Wells LNG facility ("Wells LNG"). Earnings from the PNGTS and
Wells LNG investments are in the form of Investment Income and Allowance for
Funds Used During Construction ("AFUDC") totaling $1.8 million and $2.0 million
in 1997 and 1996, respectively (see Note 9 of "Notes to Consolidated Financial
Statements", Part II, Item 8, Financial Statements and Supplemental Data).
On June 30, 1997, Bay State sold a subsidiary which owned the Company's
17.5% equity investment in MASSPOWER for $17 million resulting in an after-tax
gain of $7.8 million.
OPERATING EXPENSES
Other cost of goods sold primarily consists of the costs of the products
and services sold by Energy Products & Services, which for 1997 increased with
the level of sales activity in this business segment.
Operations expense increased by $4.9 million in 1997, primarily as a result
of a $6.3 million increase in Energy Products & Services costs offset by a $2.0
million decrease in Utility costs. Increases in Energy Products & Services
operations expense are primarily attributable to increases in payroll and the
staffing and infrastructure costs associated with developing the Energy Products
& Services business segment.
Restructuring costs consist of early retirement benefits, consulting fees,
and other costs related to preparing the Company for the competitive environment
of deregulation.
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 $452,000, $966,000, and
$601,000 in 1997, 1996, and 1995, respectively.
12
13
OTHER INCOME
Other income increased $14.6 million in 1997, primarily due to the $13.3
million pre-tax gain on the sale of a subsidiary which owned the Company's 17.5%
equity investment in MASSPOWER.
INTEREST EXPENSE
Interest expense for the Company increased 6.4%, to $17.8 million in 1997
from $16.8 million in 1996, due to an increase in the levels of long-term debt.
RESULTS OF OPERATIONS, 1996 AND 1995
During 1996, net income increased $3.9 million, due to weather that was
2.8% colder than normal within the Company's service territories. In 1995, net
income decreased $1.4 million with warmer-than-normal weather. In both years the
Company had a growing customer base. As a result of the colder weather in fiscal
year 1996, operating revenues increased by $10.6 million. In 1995, operating
revenues 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.
Recovered natural gas costs decreased 3.5% to $226.8 million in 1996. These
lower gas costs were the result of a decline in fixed purchase costs and
pipeline refunds. In 1995, recovered natural gas costs decreased 15.0% to $235.0
million. This decrease was the result of the warmer weather, which reduced fuel
costs, and pipeline refunds.
Operations expense increased by $9.6 million in 1996 after decreasing by
$3.9 million in 1995. In 1996, the increase was primarily the result of
increases in payroll and propane fuel, due to the colder weather, and increases
in outside services. In 1995, the decrease was the result of reduced bad debt
expense and other cost control measures.
IMPACT OF INFLATION
Inflation did not have a significant impact on the Company's operations in
1997, 1996, or 1995.
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 flow from
operations from late winter through early summer. Short-term borrowings are
typically 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. In 1997, liquidity improved
significantly as a result of the sale of MASSPOWER and the sale/leaseback of the
Westborough building.
CASH FLOWS FROM OPERATING ACTIVITIES
IN MILLIONS 1997 1996 1995
------ ---- ------
Net cash provided by operating
activities.............................. $ 44.5 $7.1 $ 72.5
Cash flows from operations increased by $37.4 million in 1997, primarily as
the result of increases in accounts payable and deferred gas costs and refunds
due customers. Cash flows from operating activities prior to changes in
operating assets and liabilities were $39.2 million, $56.1 million, and $55.0
million for 1997, 1996, and 1995, respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
IN MILLIONS 1997 1996 1995
------ ------ ------
Net cash used in investing
activities.......................... $(32.7) $(34.7) $(56.9)
13
14
Investments are made in utility property, plant, and equipment to improve
and protect the distribution system, and to expand the system to meet customer
demand. As a result of planned spending, capital expenditures for property,
plant, and equipment increased $6.9 million in 1997. This increase is primarily
attributable to the increased spending on automated meter reading devices of
$6.5 million. Capital expenditures for 1998 are estimated to be approximately
$62 million.
The sale of a subsidiary and the sale/leaseback of Bay State's Westborough
headquarters building and 10 acres of land provided additional cash of $17.0
million and $10.1 million, respectively. The sale of rental assets provided
$20.7 million in additional cash during 1996.
Other investments include expenditures primarily for PNGTS and Wells LNG,
which were $2.5 million, $5.7 million, and $4.3 million in 1997, 1996, and 1995,
respectively (see Note 9 of "Notes to Consolidated Financial Statements", Part
II, Item 8, Financial Statements and Supplemental Data).
CASH FLOWS FROM FINANCING ACTIVITIES
IN MILLIONS 1997 1996 1995
---- ---- ----
Net cash provided by (used in)
financing activities........... $(12.8) $29.6 $(17.0)
Cash flows from financing activities decreased primarily due to the Company
paying down $13 million of short-term debt in 1997 as compared with borrowing
$33 million of short-term debt in 1996.
The Company has a shelf registration statement covering up to $125.0
million of senior unsecured debt securities, under which $95.0 million in notes
has been issued as of September 30, 1997. The Company has access to $90.0
million in bank lines of credit.
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 9 of "Notes to
Consolidated Financial Statements", Part II, Item 8, Financial Statements and
Supplementary Data).
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued three new
accounting standards effective for fiscal year 1998. Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," requires the
Company to present basic and diluted earnings per share. Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income,"
requires the Company to report comprehensive income and its components.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information," requires the Company
to report financial and descriptive information about the Company's reportable
operating segments. It is expected that the adoption of these standards will not
have a material impact on financial results.
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,
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.
14
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1997 1996 1995
---- ---- ----
Operating revenues............................................ $473,581 $428,843 $418,216
-------- -------- --------
Operating expenses:
Recovered natural gas costs.............................. 262,571 226,836 235,005
Other cost of goods sold................................. 10,328 5,805 3,435
Operations............................................... 95,455 90,509 80,903
Restructuring costs (note 8)............................. 11,213 -- --
Maintenance.............................................. 10,573 10,426 8,636
Depreciation and amortization............................ 28,486 26,311 26,026
Other taxes, principally property taxes.................. 13,251 12,741 11,362
-------- -------- --------
Total operating expenses...................................... 431,877 372,628 365,367
Operating income.............................................. 41,704 56,215 52,849
-------- -------- --------
Other income:
Income from sale of subsidiary (note 9).................. 13,344 -- --
Income from investments.................................. 2,667 2,502 427
AFUDC equity and other................................... 2,653 1,594 965
-------- -------- --------
Income before interest and income taxes....................... 60,368 60,311 54,241
-------- -------- --------
Interest income............................................... (515) (477) (567)
Interest expense.............................................. 17,842 16,763 17,105
Federal and state taxes on income (note 2).................... 16,979 16,953 14,575
-------- -------- --------
Net income.................................................... 26,062 27,072 23,128
Dividend requirements on preferred stock...................... 288 293 299
-------- -------- --------
Earnings applicable to common stock........................... $ 25,774 $ 26,779 $ 22,829
======== ======== ========
Average number of common shares outstanding................... 13,455 13,397 13,342
======== ======== ========
Earnings per share............................................ $ 1.92 $ 2.00 $ 1.71
======== ======== ========
Dividends declared per common share........................... $ 1.56 $ 1.52 $ 1.48
======== ======== ========
The accompanying notes are an integral part of these statements.
15
16
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
ASSETS
IN THOUSANDS 1997 1996
---- ----
Plant, as cost..................................................... $740,266 $701,204
Accumulated depreciation and amortization.......................... 216,965 198,389
-------- --------
Net plant.......................................................... 523,301 502,815
-------- --------
Investments (note 9)............................................... 19,382 17,601
Prepaid benefit plans (note 7)..................................... 21,941 26,733
Other long-term assets............................................. 8,064 9,697
Current assets:
Cash and temporary cash investments........................... 3,672 4,583
Accounts receivable, less allowances of $4,138 and $3,557..... 32,713 27,143
Unbilled revenues............................................. 3,708 3,709
Deferred gas costs............................................ 39,764 27,447
Inventories, at average cost (note 6)......................... 30,473 24,699
Other......................................................... 4,828 6,059
-------- --------
Total current assets............................................... 115,158 93,640
-------- --------
Regulatory assets:
Income taxes.................................................. 11,045 12,105
Other......................................................... 23,228 21,662
-------- --------
$722,119 $684,253
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements and note 3):
Common stock equity........................................... $234,378 $227,986
Preferred stock equity........................................ 4,917 5,009
Long-term debt................................................ 229,500 196,500
-------- --------
Total capitalization............................................... 468,795 429,495
-------- --------
Long-term liabilities:
Deferred taxes (note 2)....................................... 81,770 80,854
Other long-term liabilities................................... 13,583 16,650
-------- --------
Total long-term liabilities........................................ 95,353 97,504
-------- --------
Commitments and contingencies (note 9)
Current liabilities:
Short-term debt (note 5)...................................... 51,625 64,650
Current maturity of long-term debt (note 3)................... 5,000 18,000
Accounts payable.............................................. 41,404 31,858
Fuel purchase commitments (note 6)............................ 22,817 21,332
Refunds due customers......................................... 25,802 10,427
Deferred and accrued taxes (note 2)........................... 3,326 3,174
Other......................................................... 7,997 7,813
-------- --------
Total current liabilities.......................................... 157,971 157,254
-------- --------
$722,119 $684,253
======== ========
The accompanying notes are an integral part of these statements.
16
17
CONSOLIDATED STATEMENTS OF CAPITALIZATION
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
1997 1996
------------------- -------------------
IN THOUSANDS AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
Common stock equity:
Common stock, $3.33 1/3 par value, authorized 36,000,000
shares; 13,506,594 and 13,428,244 shares outstanding... $ 45,025 $ 44,761
Paid-in capital.......................................... 103,126 101,784
Retained earnings........................................ 86,227 81,441
-------- ----- -------- -----
Total common stock equity................................ 234,378 50.0 227,986 53.1
-------- ----- -------- -----
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 0.5 2,572 0.6
-------- ----- -------- -----
Redeemable, $100 par value:
4.7% series; 10,127 and 10,627 shares outstanding........ 1,013 1,063
Redeemable, $50 par value:
$3.80 series; 5,315 and 5,693 shares outstanding......... 266 284
5 5/8% series; 5,199 shares outstanding.................. 260 260
$3.25 series; 16,125 and 16,599 shares outstanding....... 806 830
-------- ----- -------- -----
Total redeemable......................................... 2,345 0.5 2,437 .6
-------- ----- -------- -----
Total cumulative preferred stock......................... 4,917 1.0 5,009 1.2
-------- ----- -------- -----
Long-term debt:
Revolving Credit Agreement, due 2001..................... 18,000 18,000
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
6.375% Notes, due 2006................................... 20,000 --
6.93% Notes, due 2010.................................... 10,000 10,000
9.20% Notes, due 2011.................................... 8,500 8,500
6.43% Notes, due 2020.................................... 10,000 10,000
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..................................... 234,500 214,500
Less current maturities.................................. 5,000 18,000
-------- ----- -------- -----
Long-term debt, net...................................... 229,500 49.0 196,500 45.7
-------- ----- -------- -----
Total capitalization..................................... $468,795 100.0 $429,495 100.0
======== ===== ======== =====
The accompanying notes are an integral part of these statements.
17
18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
CUMULATIVE
COMMON STOCK PREFERRED STOCK
----------------------------------------------- ------------------------
IN THOUSANDS EXCEPT SHARE PAID-IN RETAINED NON-
AMOUNTS SHARES PAR VALUE CAPITAL EARNINGS REDEEMABLE REDEEMABLE
---------- --------- -------- -------- ---------- ----------
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
Net income.................. 26,062
Dividends declared:
Preferred stock........ (288)
Common stock........... (20,988)
Common stock issued:
KESOP*................. 78,350 264 1,354
Redemption of preferred
stock..................... (12) (92)
---------- ------- -------- -------- ------ ------
BALANCE AT SEPTEMBER 30,
1997...................... 13,506,594 $45,025 $103,126 $ 86,227 $2,572 $2,345
========== ======= ======== ======== ====== ======
* Dividend reinvestment and key employee stock option plans.
The accompanying notes are an integral part of these statements.
18
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995.
IN THOUSANDS 1997 1996 1995
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 26,062 $ 27,072 $ 23,128
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 28,486 26,311 26,026
Deferred income taxes.................................... 1,603 6,743 6,908
Gain from sale of subsidiary............................. (13,344) -- --
Investment income and AFUDC.............................. (3,568) (3,981) (1,051)
Changes in operating assets and liabilities:
Accounts receivable...................................... (5,570) (4,899) 3,249
Accounts payable......................................... 9,546 2,693 1,871
Taxes.................................................... 525 (2,390) (3,257)
Deferred gas costs and refunds due customers............. 3,058 (32,758) 12,492
Other.................................................... (2,258) (11,653) 3,162
-------- -------- --------
Net cash provided by operating activities..................... 44,540 7,138 72,528
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant............................................ (57,638) (50,731) (53,336)
Proceeds from sale of subsidiary.............................. 17,000 -- --
Proceeds from sale of building................................ 10,145 -- --
Proceeds from sale of rental assets........................... -- 20,667 --
Other investments............................................. (2,171) (4,623) (3,553)
-------- -------- --------
Net cash used in investing activities......................... (32,664) (34,687) (56,889)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock...................................... 1,618 1,717 1,416
Dividends on common stock..................................... (20,988) (20,361) (19,748)
Dividends on preferred stock.................................. (288) (293) (299)
Issuance of long-term debt.................................... 20,000 22,000 20,000
Retirements of preferred stock and long-term debt............. (104) (6,662) (12,157)
Short-term debt............................................... (13,025) 33,150 (6,250)
-------- -------- --------
Net cash provided by (used in) financing activities........... (12,787) 29,551 (17,038)
-------- -------- --------
Net increase (decrease) in cash and temporary cash
investments................................................. (911) 2,002 (1,399)
Cash and temporary cash investments at beginning of period.... 4,583 2,581 3,980
======== ======== ========
Cash and temporary cash investments at end of period.......... $ 3,672 $ 4,583 $ 2,581
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)..................... $ 19,229 $ 18,134 $ 16,355
======== ======== ========
Income taxes............................................. $ 14,711 $ 11,935 $ 8,720
======== ======== ========
The accompanying notes are an integral part of these statements.
19
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Bay State Gas Company ("Bay State" or the "Company")
operates in three related energy segments: Utility, Energy Products & Services,
and Energy Ventures. Bay State's Utility segment serves about 300,000 natural
gas customers in the states of Massachusetts, New Hampshire, and Maine. The
Company's non-regulated Energy Products & Services segment serves about 88,000
residential, commercial, and industrial customers throughout New England, and
markets products and services under the brand name, "EnergyUSA(TM)." Bay State's
Energy Ventures segment develops business opportunities and projects which are
closely related to the Company's core businesses.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION. 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, 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
Energy Products & Services 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 utility plant on a group
straight-line basis in amounts equivalent to overall composite rates of 3.63%
for 1997, 3.66% for 1996, and 3.88% for 1995. Depreciation for plant used by the
Energy Products & Services business segment is provided for on a straight-line
basis over the estimated useful lives of the assets.
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 $901,000, $1.4
million, and $573,000 for 1997, 1996, and 1995, respectively.
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.
TRANSPORTATION, NATURAL GAS SALES, AND DEFERRED GAS COSTS. 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 to
20
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, Maine, and New Hampshire are amortized to
expense over periods of five to 10 years as they are recovered from customers.
INCOME TAXES. 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
for employees and Directors 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).
ACCOUNTING FOR LONG-LIVED ASSETS. In 1997, the Company adopted Statement
of Financial Accounting Standard No. 121, "Accounting for Long-lived Assets,"
which requires 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. The adoption of this standard did not have a material impact on
cash flows, financial condition, or the results of operations.
NEW ACCOUNTING STANDARDS. The Financial Accounting Standards Board has
issued three new accounting standards effective for fiscal year 1998. SFAS 128
requires the presentation of basic and diluted earnings per share, SFAS 130
requires reporting comprehensive income and its components, and SFAS 131
requires reporting financial and descriptive information about reportable
operating segments. It is expected that the adoption of these standards will not
have a material impact on cash flows, financial condition, or the results of
operations.
21
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2
INCOME TAXES
The components of income tax expense are as follows:
IN THOUSANDS 1997 1996 1995
---- ---- ----
Current:
Federal........................... $12,891 $ 8,785 $ 6,699
State............................. 2,885 1,824 1,368
------- ------- -------
Total current................ 15,776 10,609 8,067
------- ------- -------
Deferred:
Federal........................... 1,292 5,551 5,799
State............................. 311 1,192 1,109
------- ------- -------
Total deferred............... 1,603 6,743 6,908
------- ------- -------
Deferred investment tax credits, net... (400) (399) (400)
------- ------- -------
Total income tax expense............... $16,979 $16,953 $14,575
======= ======= =======
The annual provision for deferred income taxes is comprised of the
following:
IN THOUSANDS 1997 1996 1995
---- ---- ----
Accelerated tax depreciation............ $ 5,557 $3,858 $ 3,681
Capitalization overheads................ (827) (418) (2,225)
Pension................................. 342 771 1,252
Demand-side-management costs............ (709) 545 1,569
Restructuring costs..................... (2,543) -- --
Postretirement benefits................. 348 (537) 1,002
Investment in MASSPOWER................. (2,212) 494 602
Other................................... 1,647 2,030 1,027
------- ------ -------
Total deferred tax expense.............. $ 1,603 $6,743 $ 6,908
======= ====== =======
The Company's effective income tax rate for fiscal years 1997, 1996, and
1995 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, 1997 and 1996 are
as follows:
IN THOUSANDS 1997 1996
---- ----
Deferred income tax assets:
Allowance for doubtful accounts.................. $ 1,828 $ 1,562
Restructuring costs.............................. 2,543 --
Inventory and overhead costs..................... 2,943 1,998
Unamortized investment tax credits............... 3,235 3,495
Other............................................ 2,636 2,461
------- -------
Total deferred income tax assets............ 13,185 9,516
------- -------
Deferred income tax liabilities:
Prepaid pension and other benefits............... 13,746 13,148
Plant related.................................... 78,533 73,759
Other............................................ 5,724 6,884
------- -------
Total deferred income tax liabilities....... 98,003 93,791
------- -------
Net deferred income tax liability................ $84,818 $84,275
======= =======
At September 30, 1997 and 1996, unamortized deferred investment tax credits
included in long-term deferred taxes amounted to $5.0 million and $5.4 million,
respectively.
22
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3
CAPITALIZATION
COMMON STOCK. A Stock Performance Sharing Plan (formerly Key Employee
Long-Term Incentive Plan) awards performance shares to certain 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. Performance shares eligible for
payment in fiscal year 1999 and 1998 are 74,471 and 41,986, respectively.
Compensation expense equal to the value of the vested shares will be recorded
when it is likely that vested shares will be paid out. No compensation expense
was recorded in 1997 or 1996.
A Key Employee Stock Option Plan provides for the granting of options to
key employees to purchase an aggregate of 1,050,000 shares of common stock.
Options are exercisable upon grant and expire within 10 years from the date of
grant. Outstanding options are exercisable through 2002. Option activity is as
follows:
OPTIONS OUTSTANDING
AND EXERCISABLE SHARES OPTION PRICE PER SHARE
------------------- ------ ----------------------
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
Options exercised............................. (78,350) $17.75 - $22.00
------- ---------------
September 30, 1997............................ 502,500 $17.75 - $22.00
======= ===============
On January 1, 1997 the Company adopted the Stock Accumulation Plan for
certain outside Directors of the Company. Its intent is to align the interests
of the outside Directors with the interests of the Company's shareholders by
paying a portion of their annual retainer in common stock of the Company. During
1997, the Company reacquired 1,620 shares for reissuance under this plan.
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, 1997, 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.
23
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
LONG-TERM REDEEMABLE MAXIMUM
IN THOUSANDS DEBT PREFERRED STOCK CASH REQUIRED
--------- --------------- -------------
1998.................................. $ 5,000 $ 180 $ 5,180
1999.................................. 833 180 1,013
2000.................................. 10,833 143 10,976
2001.................................. 33,833 143 33,976
2002.................................. 53,833 124 53,957
Thereafter............................ 130,168 1,575 131,743
-------- ------ --------
Total................................. $234,500 $2,345 $236,845
======== ====== ========
As of September 30, 1997, long-term debt agreements contain no provisions
restricting the payment of dividends on common stock. All debt is unsecured.
As of September 30, 1997 and 1996, $18.0 million of long-term debt was
outstanding under revolving credit agreements at weighted average interest rates
of 5.96% and 5.85%, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The estimated fair values of the
Company's financial instruments are as follows:
CARRYING ESTIMATED
IN THOUSANDS AMOUNT FAIR VALUE
-------- ----------
September 30, 1997
Capital lease obligations............................ $ 694 $ 697
Long-term debt....................................... $234,500 $245,619
September 30, 1996
Capital lease obligations............................ $ 1,612 $ 1,621
Long-term debt....................................... $196,500 $220,376
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.
24
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 lease relates to a liquefied
natural gas storage facility. Certain leases contain renewal and purchase
options and escalation clauses. Future annual minimum rental payments under
long-term noncancelable leases at September 30, 1997, are as follows:
CAPITAL OPERATING
IN THOUSANDS LEASES LEASES
------- ---------
1998............................................... $ 726 $ 6,930
1999............................................... -- 6,567
2000............................................... -- 5,879
2001............................................... -- 5,642
2002............................................... -- 5,595
Thereafter......................................... -- 21,352
----- -------
Future minimum lease payments...................... 726 $51,965
=======
Less amount representing interest.................. 32
-----
Present value of future minimum lease payments..... $ 694
=====
On May 30, 1997, Bay State completed the purchase, sale, and leaseback of
the Easton LNG facility. The lease is a 15-year operating lease with a number of
early termination options.
On June 30, 1997 Bay State executed a sale and leaseback of its
Westborough, Massachusetts headquarters building. Bay State sold the 88,000
square-foot building and ten acres of land for $10.1 million. The Company then
leased back the building, under an operating lease, with a 15-year term and two
five-year options to extend. 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
------- ---------
1997.............................................. $ 1,096 $10,258
1996.............................................. $ 1,281 $ 8,007
1995.............................................. $ 1,281 $ 5,437
Interest included in capital lease payments was $119,000, $173,000, and
$253,000 in 1997, 1996, and 1995, respectively.
NOTE 5
SHORT-TERM DEBT AND LINES OF CREDIT
IN THOUSANDS 1997 1996
---- ----
Unsecured bank lines of credit
Principal outstanding (thousands)............. $26,625 $24,650
Weighted average interest rate................ 6.72% 6.18%
Commercial paper
Principal outstanding (thousands)............. $25,000 $40,000
Weighted average interest rate................ 5.62% 5.42%
Total short-term debt
Principal outstanding (thousands)............. $51,625 $64,650
Weighted average interest rate................ 6.19% 5.71%
25
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2000.
NOTE 7
PENSION AND EMPLOYEE BENEFIT PLANS
PENSION PLANS. The funded status of the Company's pension plans as of
September 30, 1997 and 1996, is as follows:
IN THOUSANDS 1997 1996
---- ----
Vested benefits.................................... $61,060 $67,364
Nonvested benefits................................. 978 1,312
------- -------
Accumulated benefit obligation..................... 62,038 68,676
Additional benefits related to future compensation
levels........................................... 9,138 11,938
------- -------
Projected benefit obligation....................... 71,176 80,614
Plan assets at fair value.......................... 86,907 92,342
------- -------
Plan assets in excess of plan benefits
obligation....................................... $15,731 $11,728
======= =======
Plan assets are primarily invested in marketable pooled funds holding
equity and corporate debt securities and cash equivalents. Plan assets decreased
in 1997 as a result of early retirement benefits paid as part of the Company's
restructuring (see note 8). The majority of early retirees selected the option
of receiving their pension benefits in the form of a lump-sum payment rather
than the traditional pension annuity. 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, 1997 and 1996, are as follows:
IN THOUSANDS 1997 1996
---- ----
Unrecognized net gain.............................. $ 9,634 $ 1,970
Unrecognized prior service cost.................... (4,311) (4,480)
Unrecognized net transaction obligation............ (2,683) (3,866)
Prepaid pension costs included in the Consolidated
Balance Sheets................................... 13,091 18,104
------- -------
Plan assets in excess of plan benefit
obligations...................................... $15,731 $11,728
======= =======
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 1997 and 1996. The rate of increase in future
compensation levels used was 4.5% for 1997 and 1996. Net pension cost for 1997,
1996, and 1995 included the following components:
IN THOUSANDS 1997 1996 1995
---- ---- ----
Service cost-benefits earned.............. $ 1,883 $ 2,052 $ 1,790
Interest cost on benefit obligations...... 5,731 6,292 5,668
Actual return on plan assets.............. (14,753) (8,210) (9,762)
Net amortization and deferral............. 9,242 2,309 4,431
Restructuring - early retirement.......... 4,923 -- --
-------- ------- -------
Net pension cost.......................... $ 7,026 $ 2,443 $ 2,127
======== ======= =======
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The present value of the
accumulated benefit obligation for postretirement benefits other than pensions
was $23.5 million and $24.7 million, at September 30, 1997 and 1996,
respectively. The expense recognized was $6.6 million, $2.6 million, and $2.7
million for 1997, 1996, and 1995, respectively. The components of expense are as
follows:
IN THOUSANDS 1997 1996 1995
---- ---- ----
Interest cost.............................. $ 1,775 $ 1,880 $ 1,872
Service cost............................... 307 453 445
Actual return on plan assets............... (3,649) (2,355) (2,848)
Net amortization........................... 2,352 1,656 2,581
Deferred................................... 1,815 967 613
Restructuring - early retirement........... 3,995 -- --
------- ------- -------
Other postretirement benefit expense....... $ 6,595 $ 2,601 $ 2,663
======= ======= =======
The funded status of the Company's other postretirement benefit plans as of
September 30, 1997 and 1996 is as follows:
IN THOUSANDS 1997 1996
---- ----
Retirees........................................... $ 12,324 $ 12,511
Fully eligible active employees.................... 3,768 4,165
Other active employees............................. 7,405 7,983
-------- --------
Accumulated other postretirement benefit
obligation....................................... 23,497 24,659
Fair value of plan assets.......................... (25,772) (20,791)
Unrecognized net transition obligation............. (17,025) (21,469)
Unrecognized net gain.............................. 11,548 8,069
-------- --------
Prepaid other postretirement benefits recorded in
the Consolidated Balance Sheets.................. $ 7,752 $ 9,532
======== ========
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 1997 and 1996 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 5.0% and 8.0%, in 1997 and 1996,
respectively. An annual 1% increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation by $2.2 million and
the cost for 1997 by $220,000.
RETURN ON PREPAYMENTS OF POSTRETIREMENT BENEFITS. As permitted by
regulatory authorities, noncash returns of $1.7 million, $1.5 million, and $1.7
million for 1997, 1996, and 1995, respectively, have been recorded on amounts of
prepayments associated with employee postretirement 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.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS. The present value of the
accumulated benefit obligation for postemployment benefits other than pensions
was $4.9 million at September 30, 1997 and 1996.
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 $1.2 million, $1.3 million, and
$1.2 million in 1997, 1996, and 1995, respectively.
NOTE 8
RESTRUCTURING COSTS
The Company has been restructured in response to deregulation within the
natural gas industry. The Company spent a total of $13.1 million on
restructuring which consisted primarily of early retirement programs for certain
employees, consulting fees, and other related costs. Eighty-six employees
(approximately 8.5% of the workforce) accepted an offer of enhanced retirement
benefits which resulted in $4.9 million in additional pension benefits and $4.0
million in additional medical benefits to be funded by the Company's pension and
VEBA plans. At September 30, 1997, all restructuring costs incurred in the
Massachusetts jurisdiction were expensed, resulting in an $11.2 million charge
to income. These costs had been initially deferred pending regulatory approval
of the Company's petition to amortize these costs over future periods. During
the fourth quarter, the Company withdrew its Massachusetts petition as part of a
negotiated settlement in the Performance-based Rate filing (see note 9). The
September 30, 1997 balance of $1.7 million is deferred for amortization in
future periods in other jurisdictions.
NOTE 9
COMMITMENTS AND CONTINGENCIES
LONG-TERM OBLIGATIONS. The Company has long-term contracts for the
purchase, storage, and transportation of approximately half of the Company's 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.
The Company currently transports natural gas imported from Canada through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
PNGTS, a long-term capacity addition, is currently planned by a consortium of
energy investors, including an affiliate of the Company, to provide a permanent
pipe-line link with Canadian gas suppliers. This project has been certificated
by the FERC and plans to provide service by November 1998. As insurance against
a possible delay, the Company has secured an option from PPLC to extend its
lease until April 1999.
INVESTMENT RECOVERY. The following table summarizes the Company's current
investments:
INVESTMENTS
OWNERSHIP ------------------
PERCENTAGE 1997 1996
--------- ------- -------
PNGTS........................................ 17.8% $11,470 $ 7,974
Wells LNG.................................... 100.0% 7,878 7,131
MASSPOWER.................................... -- -- 2,404
Other........................................ -- 34 92
------- -------
Total........................................ $19,382 $17,601
======= =======
PNGTS is an interstate pipeline that will extend 292 miles from the
U.S./Canada border to the New Hampshire-Massachusetts border. The FERC issued a
Certificate of Public Convenience and Necessity for the PNGTS project in
September 1997. The project has secured contracts for service to the New England
market and has received most of its other necessary regulatory approvals. PNGTS
expects to receive final federal and state regulatory authorizations later this
year. In addition, the project is dependent upon approval by the Canadian
National Energy Board ("NEB") of various facilities to accommodate the delivery
of
28
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
western Canadian natural gas into the PNGTS system at the U.S./Canada border
near Pittsburg, NH. The decision of the NEB is expected to be received in the
Spring of 1998. Subject to regulatory approvals and completion of financing,
PNGTS plans to begin construction in the Spring of 1998, and to provide service
by November 1998.
Wells LNG is a proposed 2 Bcf liquefied natural gas storage facility in
Wells, Maine. In July 1997, the FERC issued a Final Environmental Impact
Statement to the Company determining that the proposed Wells LNG facility would
result in limited adverse environmental impact during construction and
operation. The Company is currently engaged in settlement discussions to resolve
all issues in this FERC certificate proceeding. The project was originally
proposed in November 1994, and has obtained all federal and state environmental
approvals. Because of regulatory delays, completion of the project is not
expected before the winter of 2000.
Additional investments by the Company will be required in 1998 and later
years to complete these projects. Amounts invested in PNGTS and Wells LNG
consist principally of the Company's share of the costs of developing each
project and the carrying costs on these expenditures. Full recovery of these
investments is dependent upon the receipt of satisfactory regulatory treatment.
On June 30, 1997 the Company sold a subsidiary which owned the Company's
17.5% equity investment in MASSPOWER electric cogeneration facility for $17.0
million.
ACQUISITIONS. EnergyUSA(TM) has an agreement to purchase the outstanding
stock of Savage-Alert, Inc. The purchase price, consisting of cash and notes, is
not material to the consolidated financial position of the Company.
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, the Company
has accrued $4.9 million with an offsetting charge to a regulatory asset (see
note 1). Environmental expenditures for 1997, 1996, and 1995 were $1.2 million,
$2.5 million, and $387,000, respectively. Exclusive of amounts accrued for
future expenditures, at September 30, 1997 and 1996, approximately $4.9 million
and $4.7 million, respectively, of environmental expenditures had been deferred
for future recovery from customers. Deferred environmental costs are being
recovered from customers over five to 10 years.
REGULATORY MATTERS. Significant regulatory assets arising from the
rate-making process associated with income taxes, company restructuring costs,
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.
Bay State is awaiting approval from the MADPU on its Performance-based Rate
filing. The plan provides Bay State with near-term rate recovery of costs
relating to the maintenance of our distribution system and industry unbundling,
while providing customers with a "cap" on prices, and an incentive for Bay State
to lower its future costs.
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, 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.
29
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10
UNAUDITED QUARTERLY FINANCIAL DATA
QUARTER ENDED
--------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
1997
Operating revenues................................ $ 137,000 $199,879 $84,624 $ 52,078
Operating income (loss)........................... $ 24,759 $ 41,212 $ (526) $(23,741)
Net income (loss)................................. $ 13,204 $ 22,934 $ 6,098 $(16,174)
Per average common share:
Income (loss)................................ $ 0.98 $ 1.70 $ .45(A) $ (1.21)(B)
Dividend declared and paid................... $ .385 $ .385 $ .395 $ .395
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
1996
Operating revenues................................ $ 132,740 $181,336 $67,737 $ 47,030
Operating income (loss)........................... $ 26,459 $ 40,846 $ (338) $(10,752)
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
In the opinion of management, quarterly financial date 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.
- ---------------
A -- In the third quarter of fiscal year 1997, Bay State sold a subsidiary which
held a 17.5% equity investment in MASSPOWER resulting in a $0.58 per share
gain.
B -- In the fourth quarter of fiscal year 1997, Bay State wrote off previously
deferred restructuring costs resulting in a $0.50 per share loss.
30
31
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, 1997, 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
31
32
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 22, 1997
32
33
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 and 3 of the 1998 annual meeting proxy statement, dated December 9, 1997, 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 8 through 13 of the 1998 annual meeting proxy statement,
dated December 9, 1997, 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 1998 annual meeting proxy
statement, dated December 9, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions as set
forth on page 15 of the 1998 annual meeting proxy statement, dated December 9,
1997, is incorporated herein by reference.
33
34
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, 1997,
1996, and 1995
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Capitalization as of September 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years ended
September 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years ended September 30,
1997, 1996, and 1995 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 -- 1997, 1996, and 1995
(3) Exhibits -- See Exhibit index on page 37.
(b) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the fourth quarter of
fiscal 1997.
34
35
SCHEDULE VIII
BAY STATE GAS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS(a) PERIOD
- ----------- ------------ ---------- ------------- ----------
YEAR ENDED SEPTEMBER 30, 1997
Allowance for doubtful accounts........... $3,557 $6,429 $5,848 $4,138
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
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
35
36
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
By /s/ THOMAS W. SHERMAN
----------------------------------
THOMAS W. SHERMAN
EXECUTIVE VICE PRESIDENT
Date: December 8, 1997
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 8, 1997
- ------------------------------------------ Executive Officer; Director
ROGER A. YOUNG
(CHAIRMAN OF THE BOARD)
/s/ JOEL L. SINGER President; Chief Operating December 8, 1997
- ------------------------------------------ Officer; Director
JOEL L. SINGER
(PRESIDENT)
/s/ THOMAS W. SHERMAN Chief Financial and Accounting December 8, 1997
- ------------------------------------------ Officer; Director
THOMAS W. SHERMAN
(EXECUTIVE VICE PRESIDENT)
/s/ LAWRENCE J. FINNEGAN Director December 8, 1997
- ------------------------------------------
LAWRENCE J. FINNEGAN
/s/ DOUGLAS W. HAWES Director December 8, 1997
- ------------------------------------------
DOUGLAS W. HAWES
/s/ WALTER C. IVANCEVIC Director December 8, 1997
- ------------------------------------------
WALTER C. IVANCEVIC
/s/ JOHN H. LARSON Director December 8, 1997
- ------------------------------------------
JOHN H. LARSON
/s/ JACK E. MCGREGOR Director December 8, 1997
- ------------------------------------------
JACK E. MCGREGOR
/s/ DANIEL J. MURPHY III Director December 8, 1997
- ------------------------------------------
DANIEL J. MURPHY III
/s/ GEORGE W. SARNEY Director December 8, 1997
- ------------------------------------------
GEORGE W. SARNEY
/s/ CHARLES H. TENNEY II Director December 8, 1997
- ------------------------------------------
CHARLES H. TENNEY II
36
37
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 May 2, 1996
(File No. 1-7479)
- ---------------
* 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, 1997. 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, 1997, due March 17,
2001.
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, 2025
- $20,000,000 Principal Amount of 6.375% Notes due December 15, 2006
37
38
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.
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, 1996, 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, 1996, due September 30, 1998.
(10) Material contracts:
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------------------------------------------------- ------------------------------
*10.01 Key Employee Stock Option Plan covering key employees
of the Company....................................... Exhibit 10.16 to Form 10-K for
1989 (File No. 1-7479)
*10.02 Key Employee Deferred Compensation Plan covering the
Chairman of the Board of Directors, the President,
and Vice Presidents of the Company................... Exhibit 10.21 to Form 10-K for
1992 (File No. 1-7479)
*10.03 Supplemental Executive Retirement Plan covering the
Chairman of the Board of Directors, the President,
and Vice Presidents of the Company................... Exhibit 10.22 to Form 10-K for
1992 (File No. 1-7479)
*10.04 Senior Advisory Agreement between Bay State and
Charles H. Tenney II, dated January 27, 1995......... Exhibit 10.05 to Form 10-K for
1996 (File No. 1-7479)
10.05 Severance agreements between Bay State and each of
the executive officers of the Company................ Filed herewith
*10.06 Directors' Retirement Plan........................... Exhibit 10.07 to Form 10-K for
1995 (File No. 1-7479)
*10.07 Stock Performance Sharing Plan (formerly Key Employee
Long-term Incentive Plan)............................ Filed herewith
*10.08 Stock Accumulation Plan for Outside Directors........ 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.
- ---------------
* Incorporated by reference to the indicated filing.
38