1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1998
Commission file number 1-7479
-----------------
BAY STATE GAS COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-2548120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Friberg Parkway, Westborough, Massachusetts 01581-5039 (508/836-7000)
(Address and telephone number of principal executive offices)
-----------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
----- -----------------------------
Common Stock, $3.33 1/3 par value 13,525,014 Shares
2
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings - Three months, six months and
twelve months ended March 31, 1998 and 1997................................ 3
Consolidated Balance Sheets at March 31, 1998, 1997
and September 30, 1997..................................................... 5
Consolidated Statements of Capitalization at March 31,
1998, 1997 and September 30, 1997.......................................... 6
Consolidated Statements of Cash Flows - Six months and
twelve months ended March 31, 1998 and 1997................................ 7
Notes to Consolidated Financial Statements................................. 8
Independent Auditors' Report............................................... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................... 16
Item 2. Changes in Securities................................................ 16
Item 3. Defaults Upon Senior Securities...................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................. 16
Item 5. Other Information.................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................... 16
SIGNATURES.................................................................... 17
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share amounts)
Three months ended Six months ended
March 31, March 31,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Operating revenues $173,557 $199,894 $326,953 $336,946
Operating expenses:
Recovered natural gas costs 86,597 117,092 165,864 190,577
Other cost of goods sold 8,338 3,120 15,856 5,417
Operations 26,425 25,084 54,972 48,530
Merger costs (Note 2) 1,009 - 2,567 -
Maintenance 2,704 2,385 4,966 5,325
Depreciation and amortization 7,389 7,350 14,854 14,150
Other taxes, principally property taxes 3,913 3,696 7,079 7,011
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 136,375 158,727 266,158 271,010
- ----------------------------------------------------------------------------------------------------------------------
Operating income 37,182 41,167 60,795 65,936
- ----------------------------------------------------------------------------------------------------------------------
Other income:
Income from investments 523 692 863 1,423
AFUDC equity and other 806 538 1,270 784
- ----------------------------------------------------------------------------------------------------------------------
Income before interest and income taxes 38,511 42,397 62,928 68,143
- ----------------------------------------------------------------------------------------------------------------------
Interest income (43) (71) (96) (172)
Interest expense 4,969 4,517 9,599 8,877
Federal and state taxes on income 13,519 15,017 21,641 23,300
- ----------------------------------------------------------------------------------------------------------------------
Net income 20,066 22,934 31,784 36,138
Dividend requirements on preferred stock 47 72 118 144
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 20,019 $ 22,862 $ 31,666 $ 35,994
======================================================================================================================
Average number of shares outstanding - basic 13,521 13,442 13,514 13,440
======================================================================================================================
BASIC EARNINGS PER SHARE $ 1.48 $ 1.70 $ 2.34 $ 2.68
======================================================================================================================
Average number of shares outstanding - diluted 13,787 13,574 13,743 13,584
======================================================================================================================
DILUTED EARNINGS PER SHARE $ 1.45 $ 1.68 $ 2.30 $ 2.65
======================================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.395 $ 0.385 $ 0.79 $ 0.77
======================================================================================================================
The accompanying notes are an integral part of these statements.
Page 3
4
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share amounts)
Twelve months ended
March 31,
1998 1997
- -----------------------------------------------------------------------------
Operating revenues $463,735 $451,653
Operating expenses:
Recovered natural gas costs 238,352 248,746
Other cost of goods sold 20,869 7,903
Operations 101,452 89,012
Restructuring costs 11,213 -
Merger costs (Note 2) 2,567 -
Maintenance 10,210 10,503
Depreciation and amortization 29,190 27,562
Other taxes, principally property taxes 13,319 13,062
- -----------------------------------------------------------------------------
Total operating expenses 427,172 396,788
- -----------------------------------------------------------------------------
Operating income 36,563 54,865
- -----------------------------------------------------------------------------
Other income:
Income from sale of subsidiary 13,344 -
Income from investments 2,107 2,304
AFUDC equity and other 3,322 1,616
- -----------------------------------------------------------------------------
Income before interest and income taxes 55,336 58,785
- -----------------------------------------------------------------------------
Interest income (212) (324)
Interest expense 18,518 17,112
Federal and state taxes on income 15,321 16,711
- -----------------------------------------------------------------------------
Net income 21,709 25,286
Dividend requirements on preferred stock 261 289
- -----------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 21,448 $ 24,997
=============================================================================
Average number of shares outstanding - basic 13,494 13,426
=============================================================================
BASIC EARNINGS PER SHARE $ 1.59 $ 1.86
=============================================================================
Average number of shares outstanding - diluted 13,685 13,569
=============================================================================
DILUTED EARNINGS PER SHARE $ 1.57 $ 1.84
=============================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 1.58 $ 1.54
=============================================================================
The accompanying notes are an integral part of these statements.
Page 4
5
BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, September 30,
1998 1997 1997
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS:
Plant, at cost $737,882 $720,631 $740,266
Accumulated depreciation and amortization 225,546 208,521 216,965
- ------------------------------------------------------------------------------------------------------------
Net plant 512,336 512,110 523,301
- ------------------------------------------------------------------------------------------------------------
Investments (note 4) 28,552 20,228 19,382
Prepaid benefit plans 21,366 18,851 21,941
Other long-term assets 15,635 9,029 8,064
Current assets:
Cash and temporary cash investments 5,631 15,605 3,672
Accounts receivable, less allowances of
$5,367, $5,824 and $4,138 96,440 91,952 32,713
Unbilled revenues 9,577 9,989 3,708
Deferred gas costs 24,895 21,014 39,764
Inventories, at average cost 23,778 19,486 30,473
Other 4,981 5,478 4,828
- ------------------------------------------------------------------------------------------------------------
Total current assets 165,302 163,524 115,158
- ------------------------------------------------------------------------------------------------------------
Regulatory assets:
Income taxes 12,499 10,914 11,045
Other 27,635 32,259 23,228
- ------------------------------------------------------------------------------------------------------------
$783,325 $766,915 $722,119
============================================================================================================
CAPITALIZATION AND LIABILITIES:
Capitalization: (note 3)
Common stock equity $255,774 $253,939 $234,378
Preferred stock equity - 5,010 4,917
Long-term debt, net 238,592 216,500 229,500
- ------------------------------------------------------------------------------------------------------------
Total capitalization 494,366 475,449 468,795
- ------------------------------------------------------------------------------------------------------------
Long-term liabilities:
Deferred taxes 88,820 81,574 81,770
Other long-term liabilities 20,215 16,539 13,583
- ------------------------------------------------------------------------------------------------------------
Total long-term liabilities 109,035 98,113 95,353
- ------------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 4)
Current liabilities:
Short-term debt 62,691 69,500 51,625
Current maturity of long-term debt 5,247 18,000 5,000
Accounts payable 47,271 52,654 41,404
Fuel purchase commitments 14,343 12,008 22,817
Refunds due customers 25,017 10,457 25,802
Deferred and accrued taxes 17,613 22,789 3,326
Other 7,742 7,945 7,997
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 179,924 193,353 157,971
- ------------------------------------------------------------------------------------------------------------
$783,325 $766,915 $722,119
============================================================================================================
The accompanying notes are an integral part of these statements.
Page 5
6
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands)
March 31, September 30,
1998 1997 1997
- -----------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Common stock equity:
Common stock, $3.33 1/3 par value, authorized
36,000,000 shares; 13,525,014, 13,441,974 and
13,506,594 shares outstanding $ 45,094 $ 44,812 $ 45,025
Paid-in-capital 103,461 102,045 103,126
Retained earnings 107,219 107,082 86,227
- -----------------------------------------------------------------------------------------------------------
Total common stock equity 255,774 253,939 234,378
- -----------------------------------------------------------------------------------------------------------
Cumulative preferred stock:
Redeemable cumulative preferred stock - 5,010 4,917
- -----------------------------------------------------------------------------------------------------------
Total cumulative preferred stock - 5,010 4,917
- -----------------------------------------------------------------------------------------------------------
Long-term debt:
Revolving credit agreement - 18,000 18,000
Notes 243,839 216,500 216,500
- -----------------------------------------------------------------------------------------------------------
Total long-term debt 243,839 234,500 234,500
Less current maturities of long-term debt 5,247 18,000 5,000
- -----------------------------------------------------------------------------------------------------------
Long-term debt, net 238,592 216,500 229,500
- -----------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION $494,366 $475,449 $468,795
===========================================================================================================
The accompanying notes are an integral part of these statements.
Page 6
7
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six months ended Twelve months ended
March 31, March 31,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,784 $ 36,138 $ 21,709 $ 25,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,854 14,150 29,190 27,562
Deferred income taxes (5,316) 779 (6,140) 7,174
Gain from sale of subsidiary - - (13,344) -
Investment income and AFUDC (1,799) (1,817) (3,909) (3,659)
Changes in operating assets and liabilities:
Accounts receivable (61,006) (64,809) (1,767) (11,542)
Unbilled revenues (5,869) (6,280) 412 (32)
Accounts payable 3,899 20,796 (7,351) 12,025
Taxes 25,156 20,747 6,582 (1,245)
Deferred gas costs and refunds due customers 14,084 6,463 10,679 (19,689)
Other (2,856) (5,379) (4,636) (10,046)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,931 20,788 31,425 25,834
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant (25,588) (23,576) (54,390) (52,586)
Proceeds from sale of subsidiary - - 17,000 -
Proceeds from sale of assets 21,985 - 32,130 -
Other investments (7,941) (855) (9,257) (1,932)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,544) (24,431) (14,517) (54,518)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 404 311 1,698 786
Dividends on common stock (10,674) (10,352) (21,311) (20,675)
Dividends on preferred stock (118) (144) (261) (289)
Issuances of long-term debt 30,000 20,000 30,000 25,000
Retirements of preferred stock and long-term debt (30,106) - (30,199) (37)
Short-term debt 11,066 4,850 (6,809) 28,500
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 572 14,665 (26,882) 33,285
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND TEMPORARY CASH INVESTMENTS 1,959 11,022 (9,974) 4,601
Cash and temporary cash investments at beginning of period 3,672 4,583 15,605 11,004
- ------------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 5,631 $ 15,605 $ 5,631 $ 15,605
==============================================================================================================================
Supplemental cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 10,265 $ 9,784 $ 19,710 $ 19,240
==============================================================================================================================
Income taxes $ 2,559 $ 2,513 $ 14,757 $ 9,976
==============================================================================================================================
SUPPLEMENTARY NON-CASH INFORMATION:
In November 1997, all the common stock of Savage-Alert, Inc. was acquired
through a combination of cash and long-term notes. The non-cash portion of this
transaction amounted to $3.8 million in note issuances.
The accompanying notes are an integral part of these statements.
Page 7
8
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
NOTE 1 - ACCOUNTING POLICY
The accompanying consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, the consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position, results of operations and cash flows
for all periods shown. Certain information in the prior period financial
statements has been reclassified to conform with the current period's
presentation. It is suggested that these financial statements and accompanying
notes be read in conjunction with the financial statements and the notes
included in the annual report to shareholders for the fiscal year ended
September 30, 1997 and the subsequent quarterly report of December 31, 1997.
Because of the seasonal nature of the Company's business, the results of
operations for the three and six months ended March 31, 1998 and 1997 are not
necessarily indicative of the results for the full fiscal year.
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per
Share," has been adopted, which requires the presentation of basic and diluted
earnings per share. Dividends paid to preferred stockholders are subtracted from
net income to arrive at earnings applicable to common stock. Basic earnings per
share computations are based on the weighted average number of shares of common
stock outstanding. Diluted earnings per share is based on the weighted average
number of common shares and dilutive common stock equivalent shares outstanding
during each period. The difference between average number of shares
outstanding-basic and average number of shares outstanding-diluted is the
dilutive effect of options outstanding under the Key Employee Stock Option Plan
(note 3.) Earnings per share amounts for all periods have been restated to
conform to SFAS 128.
NOTE 2 - MERGER
On May 27, 1998, at a Special Meeting of the Common Shareholders, the Company's
Common Shareholder's will be asked to consider and vote upon the Agreement and
Plan of Merger dated December 18, 1997, as amended and restated as of March 4,
1998, by and between NIPSCO Industries, Inc. ("Industries") and the Company that
provides for the merger of Bay State with and into a corporation to be organized
as a wholly owned subsidiary of Industries. Consummation of the merger is
subject to satisfaction of certain conditions, including obtaining regulatory
approvals. Assuming timely regulatory approvals, it is expected that the closing
of the merger will occur before September 30, 1998. Petitions have been filed
with each state regulatory agency seeking approval of the merger.
NOTE 3 - CAPITALIZATION
KESOP. 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 for the
quarter is as follows:
------------------------------------------------------------
Options outstanding and exercisable Shares
------------------------------------------------------------
December 31, 1997 601,915
------------------------------------------------------------
Options issued -
------------------------------------------------------------
Options exercised (13,000)
------------------------------------------------------------
March 31, 1998 588,915
============================================================
Page 8
9
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
LONG-TERM DEBT ISSUANCE. On February 11, 1998, $30 million of 6.26% notes to
mature in 2028 were issued. $25 million of the proceeds were used to pay down an
outstanding $25 million, 9.45% note and $4.9 million were used to retire
outstanding preferred stock.
PREFERRED STOCK REDEMPTION. On January 23, 1998, notice of redemption was
provided to holders of record of preferred shares, and effective March 1, 1998,
all preferred shares were redeemed and are no longer outstanding.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CAPACITY REQUIREMENTS. Natural gas imported from Canada is transported through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
Portland Natural Gas Transmission System ("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 pipeline link with Canadian gas
suppliers. This project has been certificated by the Federal Energy Regulatory
Commission ("FERC") and plans to provide service by November 1998. To guarantee
the availability of supply in case of a possible delay in PNGTS construction, an
option has been secured from PPLC to extend its lease until April 1999.
INVESTMENTS. The following table summarizes investments (in thousands):
1998
Ownership Investments at March 31,
percentages 1998 1997
----------------------------------------------------------------
PNGTS 19.06% $20,037 $ 9,701
Wells LNG 100.0% 8,481 7,078
MASSPOWER -- - 3,415
Other -- 34 34
----------------------------------------------------------------
Total $28,552 $20,228
----------------------------------------------------------------
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 all of its other necessary regulatory approvals. PNGTS to plans to
begin construction in early June 1998, with an in-service date by November 1998.
On March 31, 1998, an additional 1.3% ownership interest in PNGTS was acquired
when one of the partners left the project and sold its interest at book value to
the partnership. On April 3, 1998, 50% of the Company's 19.06% ownership
interest in PNGTS was sold to Industries at book value.
Wells LNG is a proposed 2 Bcf liquefied natural gas storage facility to be
located in Wells, Maine, which has received all required authorizations, except
final approval by the FERC, which is expected during the summer of 1998.
Completion of Wells LNG is not expected before the winter of 2000-2001.
Amounts invested in PNGTS and Wells LNG consist principally of the Company's
share of the costs of developing each project and the carrying cost on these
expenditures. Full recovery of these investments is dependent upon the receipt
of satisfactory regulatory treatment.
Page 9
10
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
(Unaudited)
LONG-TERM OBLIGATIONS. Long-term contracts are in place 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 requirements.
ENVIRONMENTAL ISSUES. Like other companies in the natural gas industry, the
Company is a party to governmental actions associated with former gas
manufacturing sites. Management estimates that, 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, $4.9 million
has been accrued with an offsetting charge to a regulatory asset. Accrued
regulatory assets do not earn a return and are not collected from customers
until cash is expended. Environmental expenditures for the quarters ended March
31, 1998 and 1997 were $452,000 and $283,000, respectively. Exclusive of the
$4.9 million amount accrued for future expenditures mentioned above, at March
31, 1998 and 1997, approximately $5.9 million and $4.9 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, employee benefits, and environmental
response costs have been recorded. Based on its assessments of decisions by
regulatory authorities, management believes that all regulatory assets will be
settled at recorded amounts through specific provisions of current and future
rate orders.
LITIGATION. The Company is involved in various legal actions and claims arising
in the normal course of business. Based on its current assessment of the facts
of law, and consultation with outside counsel, management does not believe that
the outcome of any action or claim will have a material adverse effect upon the
consolidated financial position, results of operations, or liquidity of the
Company.
NOTE 5 - RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the twelve months ended March 31,
1998, and for the years ended September 30 are set forth below.
Year ended September 30
March -------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
Earnings:
Net income $21,709 $26,062 $27,072 $23,128 $24,485 $22,807
Adjustments:
Income taxes 15,321 16,979 16,953 14,575 15,642 13,726
Fixed charges (see below) 22,412 21,192 20,187 19,365 17,359 15,906
----------------------------------------------------------------------------------
Total adjusted earnings $59,442 $64,233 $64,212 $57,068 $57,486 $52,439
==================================================================================
Fixed charges:
Total interest expense $18,818 $18,255 $17,345 $17,300 $15,305 $13,610
Interest component of rents 3,594 2,937 2,842 2,065 2,054 2,296
----------------------------------------------------------------------------------
Total fixed charges $22,412 $21,192 $20,187 $19,365 $17,359 $15,906
==================================================================================
Ratio of earnings to fixed charges 2.65 3.03 3.18 2.95 3.31 3.30
==================================================================================
Page 10
11
Independent Auditors' Report
- ----------------------------
The Board of Directors
Bay State Gas Company
We have reviewed the consolidated balance sheets and statements of
capitalization of Bay State Gas Company and subsidiaries as of March 31, 1998
and 1997, and the related consolidated statements of earnings for the three
months, six months, and twelve months then ended and the related statements of
cash flows for the six months and twelve months then ended. These consolidated
financial statements are the responsibility of the Company's management.
We have conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of Bay
State Gas Company and subsidiaries as of September 30, 1997, and the related
consolidated statements of earnings and cash flows for the year then ended (not
presented herein); and, in our report dated October 22, 1997, we expressed an
unqualified opinion on those consolidated financial statements.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
April 29, 1998
Page 11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS
For the three months ended March 31, 1998, operating revenues were $173.6
million, down from $199.9 million in the prior year, while diluted earnings per
average common share were $1.45 versus $1.68 a year earlier. Revenues decreased
primarily due to weather, which was about 10.8% warmer than the prior year, and
lower natural gas commodity costs, offset by new customers added to the
distribution system and increased revenues in the unregulated Energy Products &
Services business segment. The decrease in earnings per share is primarily
attributable to the warmer weather and to costs relating to the previously
announced planned merger with NIPSCO Industries, Inc. ("Industries".) Weather
decreased quarterly earnings by $0.29 per share in the current year, compared to
what they would have been in normal weather. Merger costs, which were primarily
financial and legal advisory costs, decreased earnings by approximately $0.06
per share. Excluding the effect of these unusual items (weather and
merger-related), earnings this past quarter would have been $1.80 per share
compared to $1.74 per share for the same period last year.
For the six months ended March 31, 1998 diluted earnings per share were $2.30,
down 13% from $2.65 a year earlier. For the twelve-month period ended March 31,
1998, diluted earnings per average common share were $1.57 compared to $1.84 for
the same period the year before. The decrease in earnings for these periods is
primarily the result of costs relating to the planned merger and to stock based
compensation expense that has been accrued. Merger costs, which were primarily
financial and legal advisory costs, decreased earnings by approximately $0.18
per share and the stock based compensation expense accrual decreased earnings by
approximately $0.07 per share for both periods. The twelve-month period also
includes the effects of a $0.58 per share gain from the sale of a subsidiary and
the write-off of restructuring costs of $0.50 per share. Increased depreciation,
amortization and interest expense caused most of the remaining decline in
earnings. About 4,900 customers were added during the past 12 months, which will
support future earnings.
Dividends declared per common share were $.395 for the three-month period ended
March 31, 1998, compared to $.385 for the same period last year. For the
twelve-month period ended March 31, 1998, dividends declared were $1.58,
compared to $1.54 for the same period in the prior year. On May 7, 1998, the
quarterly common stock dividend was increased 2.5% to .405 per share, indicating
an annualized dividend of $1.62 per share.
OPERATING REVENUES
Revenues and income before interest and taxes for the three business segments
for the six months ended March 31, 1998 and 1997 were as follows:
Operating Income (loss) before
revenues interest and taxes
- -------------------------------------------------------------------------------
In thousands 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Utility $303,994 $326,957 $63,342 $67,520
Energy Products &
Services 25,514 12,427 (1,462) (1,049)
Energy Ventures - - 1,048 1,672
Eliminations (2,555) (2,438) - -
- -------------------------------------------------------------------------------
Total $326,953 $336,946 $62,928 $68,143
- -------------------------------------------------------------------------------
Page 12
13
UTILITY
The following table details the components of Utility revenues for the six
months ended March 31, 1998 and 1997:
In thousands 1998 1997
-----------------------------------------------------------------
Transportation only customers $ 10,835 $ 6,449
Transportation for gas sales customers 118,486 121,717
Natural gas sales 165,867 190,449
-----------------------------------------------------------------
Transportation and natural gas sales 295,188 318,615
Other revenues 8,806 8,342
-----------------------------------------------------------------
Total revenues $303,994 $326,957
-----------------------------------------------------------------
Transportation only customer revenues increased by 68% as a result of the
increase in Choice Advantage Pilot Program customers (from 6,600 customers to
over 25,000 customers), as well a 200% increase in the number of commercial and
industrial transportation customers. The Choice Advantage Pilot Program is an
unbundling initiative that is giving selected Massachusetts customers the
opportunity to choose their gas supplier.
Primarily as the result of weather that was 6.9% warmer than normal,
transportation for gas sales customers revenues decreased 2.7% for the six
months ended March 1998 compared to the same period last year. Revenues were
positively impacted by the addition of 4,900 customers.
For the six-month period ended March 31, 1998, revenues from natural gas sales
declined by 12.9%, primarily due to lower billed gas costs in the current
period, the increase in transportation only customers and warmer weather, offset
by a larger number of customers.
Other revenues primarily consist of customer service revenues, merchandise
sales, conversion burner rentals and consulting revenues. The increase in other
revenues for the comparable six-month periods is primarily the result of
increased utility consulting revenue.
ENERGY PRODUCTS & SERVICES
The following table details the components of Energy Products & Services
revenues for the six months ended March 31, 1998 and 1997:
In thousands 1998 1997
--------------------------------------------------------------
EnergyUSA(TM)
Business Services(SM) $10,616 $ 414
Home Services(SM) 5,047 4,120
AccessUSA 7 -
EnergyEXPRESS(TM) 9,844 7,893
--------------------------------------------------------------
Total $25,514 $12,427
--------------------------------------------------------------
The significant increase in Business Services(SM) revenues is primarily due to
the growth of the energy advisory service business and the November 1997
acquisition of Savage-ALERT, Inc. In November 1997, EnergyUSA(TM) purchased 100%
of the outstanding stock of Savage-ALERT, Inc. The operating results of Savage
for the five months ended March 31, 1998 increased Business Services revenues by
$6.6 million.
Page 13
14
ENERGY VENTURES
Energy Ventures develops business opportunities and projects which are closely
related to the core businesses. Currently this segment participates in the
development of two major projects: PNGTS and the Wells LNG facility. Current
year earnings are from the PNGTS and Wells LNG investment in the form of
Investment Income and Allowance for Funds Used During Construction ("AFUDC").
Prior year earnings also include earnings from the investment in MASSPOWER of
$1.0 million. This investment was sold in fiscal 1997.
OPERATING EXPENSES
Total operating expenses, for the three- and six-month periods ended March 31,
1998 were $136.4 million and $266.2 million, compared to $158.7 million and
$271.0 million for the same periods in the prior year. Operating expenses for
the twelve-month period ended March 31, 1998 were $427.2 million compared to
$396.8 million for the prior twelve months. The decrease for the three- and
six-month periods is primarily attributable to lower natural gas commodity
costs, offset by higher merger costs, other cost of goods sold, and increased
costs associated with the growth in the Energy Products & Services segment. The
increase for the twelve-month period is primarily attributable to the write-off
of restructuring costs discussed in the 1997 annual report, increased costs
associated with the growth in the Energy Products & Services segment and
increased other cost of goods sold. All periods have been impacted by the
acquisition of Savage, which increased the size of the unregulated business
operations substantially.
In connection with the proposed merger with Industries, $1.6 million in stock
based compensation expense has been accrued and $900,000 of financial advisory
fee expense has been recorded and paid. If the proposed merger is approved by
shareholders at a Special Meeting on May 27, 1998, an additional $1.3 million in
stock based compensation expense will be recorded in the third quarter, and the
entire amount accrued will be paid to eligible employees during the third
quarter. Additionally, if the merger is approved by shareholders, approximately
$900,000 in financial advisory fee expense will be accrued and paid in the third
quarter. If the merger is completed, an additional $1.9 million in financial
advisory fee expense will be recorded as of the effective date of the merger.
YEAR 2000 COSTS
A Company-wide program is underway to prepare computer systems and other
applications for the year 2000. Management expects to complete the program in a
timely manner and that there will be no disruption of the Company's ability to
deliver services to its customers. An assessment study is underway which is
anticipated to cost approximately $840,000. This study is determining the full
scope of the year 2000 problem, developing a framework for addressing all the
problems and providing an estimate of the cost of remediation. The study will
not be completed until summer of 1998, but preliminary analysis shows that
program costs will exceed $5.0 million. A vendor management program has been
undertaken to ensure an uninterrupted supply of goods and services, and an
initiative has begun to assure that each entity that electronically receives
information from the Company or sends information to the Company is aware of the
steps being taken and is taking appropriate steps of its own to address the
problem. If the replacement of certain systems is the recommended course of
action, the cost of those replacement systems would be recorded as assets and
amortized. All other costs associated with this issue will be expensed.
INTEREST EXPENSE AND DIVIDEND REQUIREMENTS ON PREFERRED STOCK
Interest expense for the six-month period ended March 31, 1998 was $9.6 million,
compared to $8.9 million for the same period last year. For the twelve months
ended March 31, 1998, interest expense was $18.5 million, compared to $17.1
million for 1997. The increase in interest expense for both periods is primarily
the result of increased levels of long- and short-term debt.
Page 14
15
Dividend requirements on preferred stock were lower for all comparative periods
due to the March 1, 1998 redemption of all outstanding preferred stock, which
also eliminated future dividend requirements on preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
The seasonal nature of the gas distribution business creates large short-term
working capital requirements to finance customers accounts receivable and
deferred gas costs, as well as construction expenditures. Short-term funds are
obtained from the issuance of commercial paper, traditional bank lines of
credit, and demand loans under Fuel Purchase Agreements.
Cash flows from operating activities have increased over the twelve-month period
ending March 31, 1998, primarily due to increased collections of deferred gas
costs.
Capital expenditures for plant increased by $2.0 million for the six-month
period and $1.8 million for the twelve-month period ended March 31, 1998, as
compared to the same periods the year before. The increases are primarily
attributable to increased spending on automated meter reading devices, which was
financed through two sale/leasebacks in 1998, which combined to provide cash of
$22.0 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, during the twelve months ended
March 1998.
Long-term debt increased $9.3 million during the 12-months ended March 31, 1998,
primarily due to funds borrowed to retire $4.9 million of preferred stock and
the non-cash issuance of debt to acquire Savage-Alert, Inc. Total net short-term
debt is down approximately $19.6 million from March 31, 1997 to March 31, 1998,
primarily due to the sales of a subsidiary, the Westborough office building and
automated meter reading devices.
On March 1, 1998, all $4.9 million of preferred shares were redeemed.
NEW ACCOUNTING PRONOUNCEMENT
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132 ("SFAS 132"), "Employer's Disclosures
About Pensions and Other Postretirement Benefits." The implementation of SFAS
132 will revise certain footnote disclosures and add new disclosures related to
pensions and other postretirement benefit plans. However, it does not change the
measurement and recognition requirements for those plans, and therefore, will
not have any impact on financial results. Implementation of SFAS 132 is required
beginning in fiscal year 1999.
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, 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.
Page 15
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings instituted in the second
quarter of 1998, and there were no material developments during the
quarter in legal proceedings disclosed in previous filings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 24, 1998, a notice of a Special Meeting of Common
Shareholders, a proxy and a proxy statement were sent to shareholders inviting
shareholders to attend the Special Meeting May 27, 1998. At the Special Meeting
of the Common Shareholders, the Company's Common Shareholder's will be asked to
consider and vote upon the Agreement and Plan of Merger dated December 18, 1997,
as amended and restated as of March 4, 1998, by and between NIPSCO Industries,
Inc. ("Industries") and the Company that provides for the merger of Bay State
with and into a corporation to be organized as a wholly owned subsidiary of
Industries.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Consent of KPMG Peat Marwick LLP re: Registration
Statement No. 33-57702
27. Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended March 31,
1998:
Page 16
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY STATE GAS COMPANY
---------------------
(Registrant)
By: /s/ Thomas W. Sherman
--------------------------------
Thomas W. Sherman
Executive Vice President and Chief
Financial and Accounting Officer
By: /s/ Stephen J. Curran
--------------------------------
Stephen J. Curran
Controller
Date: May 14, 1998
Page 17