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 JUNE 30, 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 July 31, 1998
----- ----------------------------
Common Stock, $3.33 1/3 par value 13,535,414 Shares
2
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings - Three months, nine months and
twelve months ended June 30, 1998 and 1997............................ 3
Consolidated Balance Sheets at June 30, 1998, 1997
and September 30, 1997................................................ 5
Consolidated Statements of Capitalization at June 30,
1998, 1997 and September 30, 1997..................................... 6
Consolidated Statements of Cash Flows - Nine months and
twelve months ended June 30, 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
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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 Nine months ended
June 30, June 30
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------
Operating revenues $ 71,723 $ 84,624 $ 398,759 $ 421,580
Operating expenses:
Recovered natural gas costs 29,294 47,656 195,157 238,233
Other cost of goods sold 7,417 1,458 23,273 6,874
Operations 30,558 22,944 85,612 71,463
Merger costs (Note 2) 1,287 -- 3,854 --
Maintenance 2,432 2,595 7,398 7,905
Depreciation and amortization 7,389 7,374 22,244 21,525
Other taxes, principally property taxes 3,656 3,123 10,735 10,134
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 82,033 85,150 348,273 356,134
- ---------------------------------------------------------------------------------------------------------------
Operating income (loss) (10,310) (526) 50,486 65,446
- ---------------------------------------------------------------------------------------------------------------
Other income:
Income from sale of subsidiary -- 13,283 -- 13,283
Income from investments 352 881 1,215 2,304
AFUDC equity and other 651 1,680 1,922 2,375
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before interest and income taxes (9,307) 15,318 53,623 83,408
- ---------------------------------------------------------------------------------------------------------------
Interest income (62) (31) (158) (256)
Interest expense 4,207 4,990 13,807 13,867
Federal and state taxes on income (4,904) 4,261 16,737 27,561
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) (8,548) 6,098 23,237 42,236
Dividend requirements on preferred stock -- 72 118 216
- ---------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (8,548) $ 6,026 $ 23,119 $ 42,020
===============================================================================================================
Average number of shares outstanding - basic 13,526 13,450 13,518 13,443
===============================================================================================================
BASIC EARNINGS (LOSS) PER SHARE $ (0.63) $ 0.45 $ 1.71 $ 3.13
===============================================================================================================
Average number of shares outstanding - diluted 13,790 13,578 13,757 13,582
===============================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE $ (0.62) $ 0.44 $ 1.68 $ 3.09
===============================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.405 $ 0.395 $ 1.195 $ 1.165
===============================================================================================================
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share amounts)
Twelve months ended
June 30,
1998 1997
- -------------------------------------------------------------------------------
Operating revenues $ 450,850 $ 468,573
Operating expenses:
Recovered natural gas costs 219,990 261,975
Other cost of goods sold 26,829 8,083
Operations 108,993 91,892
Restructuring costs 11,213 --
Merger costs (Note 2) 3,854 --
Maintenance 10,036 10,445
Depreciation and amortization 29,204 28,318
Other taxes, principally property taxes 13,852 13,136
- --------------------------------------------------------------------------------
Total operating expenses 423,971 413,849
- --------------------------------------------------------------------------------
Operating income 26,879 54,724
- --------------------------------------------------------------------------------
Other income:
Income from sale of subsidiary -- 13,283
Income from investments 1,639 2,466
AFUDC equity and other 2,247 2,785
- --------------------------------------------------------------------------------
Income before interest and income taxes 30,765 73,258
- --------------------------------------------------------------------------------
Interest income (221) (354)
Interest expense 17,767 17,690
Federal and state taxes on income 6,156 21,678
- --------------------------------------------------------------------------------
Net income 7,063 34,244
Dividend requirements on preferred stock 190 288
- --------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 6,873 $ 33,956
================================================================================
Average number of shares outstanding - basic 13,512 13,437
================================================================================
BASIC EARNINGS PER SHARE $ 0.51 $ 2.53
================================================================================
Average number of shares outstanding - diluted 13,734 13,576
================================================================================
DILUTED EARNINGS PER SHARE $ 0.50 2.50
================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 1.59 1.55
================================================================================
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, September 30,
1998 1997 1997
- -----------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
ASSETS:
Plant, at cost $749,721 $722,142 $740,266
Accumulated depreciation and amortization 232,232 211,958 216,965
- -----------------------------------------------------------------------------------------------------
Net plant 517,489 510,184 523,301
- -----------------------------------------------------------------------------------------------------
Investments (note 4) 19,005 18,124 19,382
Prepaid benefit plans 21,076 18,361 21,941
Other long-term assets 15,504 8,731 8,064
Current assets:
Cash and temporary cash investments 5,047 4,962 3,672
Accounts receivable, less allowances of
$5,750, $6,526 and $4,138 58,302 51,258 32,713
Unbilled revenues 2,922 3,669 3,708
Deferred gas costs 38,196 22,282 39,764
Inventories, at average cost 29,973 25,320 30,473
Other 5,056 5,326 4,828
- -----------------------------------------------------------------------------------------------------
Total current assets 139,496 112,817 115,158
- -----------------------------------------------------------------------------------------------------
Regulatory assets: (note 4)
Income taxes 12,420 10,866 11,045
Other 29,195 32,682 23,228
- -----------------------------------------------------------------------------------------------------
$754,185 $711,765 $722,119
=====================================================================================================
CAPITALIZATION AND LIABILITIES:
Capitalization: (note 3)
Common stock equity $241,994 $255,467 $234,378
Preferred stock equity -- 4,986 4,917
Long-term debt, net 238,512 234,500 229,500
- -----------------------------------------------------------------------------------------------------
Total capitalization 480,506 494,953 468,795
- -----------------------------------------------------------------------------------------------------
Long-term liabilities:
Deferred taxes 89,487 80,421 81,770
Other long-term liabilities 18,616 14,571 13,583
- -----------------------------------------------------------------------------------------------------
Total long-term liabilities 108,103 94,992 95,353
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (note 4)
Current liabilities:
Short-term debt 53,700 14,000 51,625
Current maturity of long-term debt 5,243 -- 5,000
Accounts payable 38,753 37,403 41,404
Fuel purchase commitments 20,094 15,212 22,817
Refunds due customers 33,988 26,719 25,802
Deferred and accrued taxes 5,194 20,582 3,326
Other 8,604 7,904 7,997
- -----------------------------------------------------------------------------------------------------
Total current liabilities 165,576 121,820 157,971
- -----------------------------------------------------------------------------------------------------
$754,185 $711,765 $722,119
=====================================================================================================
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands)
June 30, September 30,
1998 1997 1997
- -------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Common stock equity:
Common stock, $3.33 1/3 par value, authorized
36,000,000 shares; 13,535,414, 13,480,474 and
13,506,594 shares outstanding $ 45,112 $ 44,940 $ 45,025
Paid-in-capital 103,689 102,727 103,126
Retained earnings 93,193 107,800 86,227
- -------------------------------------------------------------------------------------------------
Total common stock equity 241,994 255,467 234,378
- -------------------------------------------------------------------------------------------------
Cumulative preferred stock:
Redeemable cumulative preferred stock -- 4,986 4,917
- -------------------------------------------------------------------------------------------------
Total cumulative preferred stock -- 4,986 4,917
- -------------------------------------------------------------------------------------------------
Long-term debt:
Revolving credit agreement -- 18,000 18,000
Notes 243,755 216,500 216,500
- -------------------------------------------------------------------------------------------------
Total long-term debt 243,755 234,500 234,500
Less current maturities of long-term debt 5,243 -- 5,000
- -------------------------------------------------------------------------------------------------
Long-term debt, net 238,512 234,500 229,500
- -------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION $480,506 $494,953 $468,795
=================================================================================================
The accompanying notes are an integral part of these statements.
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine months ended Twelve months ended
June 30, June 30,
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,237 $ 42,236 $ 7,063 $ 34,244
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 22,244 21,525 29,204 28,318
Deferred income taxes 5,463 (495) 6,571 5,620
Gain from sale of subsidiary -- (7,829) -- (7,829)
Investment income and AFUDC (2,643) (2,239) (3,274) (7,196)
Changes in operating assets and liabilities:
Accounts receivable (22,868) (24,115) (4,323) (10,344)
Accounts payable (4,619) 5,285 (618) 3,708
Taxes 2,705 13,255 (14,491) 1,309
Deferred gas costs and refunds due customers 9,754 21,457 (8,645) 1,280
Prepaid benefit plans 865 8,372 (2,715) 6,106
Other (3,331) (19,471) 3,713 (15,517)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,807 57,981 12,485 39,699
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant (39,828) (38,422) (54,542) (52,583)
Proceeds from sale of subsidiary -- 17,000 -- 17,000
Proceeds from sale of assets 34,388 10,524 34,388 10,524
Other investments (10,256) (1,276) (11,151) (1,492)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,696) (12,174) (31,305) (26,551)
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 650 1,122 1,134 1,493
Dividends on common stock (16,153) (15,661) (21,480) (20,824)
Dividends on preferred stock (118) (216) (190) (288)
Issuances of long-term debt 30,000 20,000 30,000 25,000
Retirements of preferred stock and long-term debt (30,190) (23) (30,259) (47)
Short-term debt 2,075 (50,650) 39,700 (17,750)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (13,736) (45,428) 18,905 (12,416)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND TEMPORARY CASH INVESTMENTS 1,375 379 85 732
Cash and temporary cash investments at beginning of period 3,672 4,583 4,962 4,230
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 5,047 $ 4,962 $ 5,047 $ 4,962
====================================================================================================================================
Supplemental cash flow information: Cash paid during the period for:
Interest (net of amounts capitalized) $ 13,964 $ 14,543 $ 18,602 $ 19,270
====================================================================================================================================
Income taxes $ 7,985 $ 8,462 $ 14,234 $ 9,471
====================================================================================================================================
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.
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Notes to Consolidated Financial Statements
June 30, 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 reports of December 31, 1997 and
March 31, 1998.
Because of the seasonal nature of the Company's business, the results of
operations for the three and nine months ended June 30, 1998 and 1997 are not
necessarily indicative of the results for the full fiscal year.
NOTE 2 - MERGER
On May 27, 1998, at a Special Meeting of the Common Shareholders, the Company's
Common Shareholder's approved 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
in late 1998. Regulatory agencies in New Hampshire and Maine have approved the
merger. The Massachusetts Department of Energy and Telecommunications has held
hearings on the matter and is expected to issue an order in August 1998.
Approvals of this type are customary for utility mergers and are prerequisites
for Security and Exchange Commission approval.
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
-----------------------------------------------------------------
March 31, 1998 588,915
-----------------------------------------------------------------
Options issued -
-----------------------------------------------------------------
Options exercised (10,400)
-----------------------------------------------------------------
June 30, 1998 578,515
=================================================================
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Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
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. Construction has begun and PNGTS is scheduled to provide service by
the end of calendar 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 June 30,
percentages 1998 1997
------------------------------------------------------------------------------
PNGTS 9.53% $10,174 $ 10,712
Wells LNG 100.0% 8,797 7,378
Other -- 34 34
------------------------------------------------------------------------------
Total $19,005 $18,124
------------------------------------------------------------------------------
PNGTS is an interstate pipeline that will extend 292 miles from the U.S./Canada
border to the New Hampshire-Massachusetts border. The project has secured
contracts for service to the New England market and has received all the
necessary regulatory approvals. Construction began in early June 1998.
Wells LNG is a proposed 2 Bcf liquefied natural gas storage facility to be
located in Wells, Maine, which has received all required authorizations. Final
approval by the FERC was received May 27, 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.
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, future expenditures to remediate and monitor known
environmental sites will likely be $5.0 million at a minimum. Accordingly, $5.0
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 June 30, 1998 and 1997 were $697,000 and $279,000, respectively. Exclusive
of the $5.0 million amount accrued for future expenditures mentioned above, at
June 30, 1998 and 1997, approximately $6.4 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.
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Notes to Consolidated Financial Statements
June 30, 1998 and 1997
(Unaudited)
ENVIRONMENTAL ISSUES (CONTINUED)
It is expected that a material gain will be recorded in the fiscal fourth
quarter of 1998 resulting from agreements with insurance companies to contribute
toward environmental costs associated with the former gas manufacturing sites.
It is anticipated that the net gain will be shared equally between customers and
shareholders and that the shareholders' portion will have a positive, material
affect on fourth quarter earnings.
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 June 30,
1998, and for the years ended September 30 are set forth below.
June Year ended September 30
------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
Earnings:
Net Income $ 7,063 $26,062 $27,072 $23,128 $24,485 $22,807
Adjustments:
Income taxes 6,156 16,979 16,953 14,575 15,642 13,726
Fixed charges (see below) 22,478 21,192 20,187 19,365 17,359 15,906
-----------------------------------------------------------------------------
Total adjusted earnings $35,697 $64,233 $64,212 $57,068 $57,486 $52,439
=============================================================================
Fixed charges:
Total interest expense $17,996 $18,255 $17,345 $17,300 $15,305 $13,610
Interest component of rents 4,482 2,937 2,842 2,065 2,054 2,296
-----------------------------------------------------------------------------
Total fixed charges $22,478 $21,192 $20,187 $19,365 $17,359 $15,906
=============================================================================
Ratio of earnings to fixed charges 1.59 3.03 3.18 2.95 3.31 3.30
=============================================================================
Note 6 - Earnings (Loss) Per Share
Basic earnings (loss) per share is based upon the weighted average common
shares outstanding during each period. Diluted earnings (loss) per share is
based upon the weighted average of common shares and dilutive common stock
equivalent shares outstanding during each period. The weighted average number
of shares (in thousands) used to compute diluted earnings (loss) per share
consisted of the following:
Three months ended Nine months ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
Average common shares
outstanding during the year - basic 13,526 13,450 13,518 13,443
Average common equivalent
shares due to stock options 246 128 239 139
------ ------ ------ ------
Average common shares - diluted 13,790 13,578 13,757 13,582
====== ====== ====== ======
Twelve months ended
June 30
1998 1997
------ ------
Average common shares
outstanding during the year - basic 13,512 13,437
Average common equivalent
shares due to stock options 222 139
------ ------
Average common shares - diluted 13,734 13,576
====== ======
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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 June 30, 1998 and
1997, and the related consolidated statements of earnings for the three months,
nine months, and twelve months then ended and the related statements of cash
flows for the nine 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
July 28, 1998
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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 June 30, 1998, operating revenues were $71.7 million,
down from $84.6 million in the prior year, while diluted earnings per average
common share were a loss of $0.62 versus income of $0.44 a year earlier.
Revenues decreased primarily due to lower natural gas commodity costs ( and
weather, which was about 6.4% warmer than the prior year, 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 prior year quarter having a
$0.58 per share gain from the sale of a subsidiary recorded during the period.
Warmer than normal weather reduced earnings approximately $0.05 per share, and
costs relating to the previously announced planned merger with NIPSCO
Industries, Inc. ("Industries"), including a payout from a stock based incentive
plan, reduced earnings by $0.20 per share in the current period. Excluding the
effect of these unusual items (weather and merger-related), earnings this past
quarter would have been a loss of $0.37 per share compared to a loss of $0.18
per share for the same period last year. Losses for the quarters ended June and
September are typical for natural gas utilities due to the seasonal decline in
demand for natural gas heating.
For the nine months ended June 30, 1998 diluted earnings per share were $1.68,
down 45% from $3.09 a year earlier. The decrease in earnings for these periods
is primarily the result of costs relating to the planned merger, warmer than
normal weather that reduced earnings $0.22 per share and the effect of a $0.58
per share gain from the sale of a subsidiary recorded in the prior year. Merger
related costs, which were primarily financial and legal advisory costs and
incentive compensation payouts, decreased earnings by approximately $0.45 per
share. About 5,900 customers were added during the past 12 months, which will
support future earnings.
Looking forward to the fiscal fourth quarter of 1998, the Company's financial
results, as compared to the year-earlier period, will be positively affected by
the restructuring costs of $0.50 per share it reported during the fourth quarter
last year, which will not recur.
In addition, a significant gain is expected to be recorded in the fiscal fourth
quarter of 1998 resulting from agreements with insurance companies for them to
contribute toward environmental costs associated with the cleanup of gas
manufacturing sites. Regulatory treatment allows for the equal sharing of the
net gain between customers and shareholders, so this gain will positively impact
fiscal fourth quarter earnings.
Dividends declared per common share were $.405 for the three-month period ended
June 30, 1998, compared to $.395 for the same period last year. For the
twelve-month period ended June 30, 1998, dividends declared were $1.59, compared
to $1.55 for the same period in the prior year.
Page 12
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OPERATING REVENUES
Revenues and income before interest and taxes for the three business segments
for the nine months ended June 30, 1998 and 1997 were as follows:
Operating Income (loss) before
revenues interest and taxes
- ----------------------------------------------------------------------------------
In thousands 1998 1997 1998 1997
- ----------------------------------------------------------------------------------
Utility $ 364,802 $ 408,396 $ 55,282 $ 69,658
Energy Products &
Services 37,180 16,759 (3,182) (1,271)
Energy Ventures -- -- 1,523 15,021
Eliminations (3,223) (3,575) -- --
- ----------------------------------------------------------------------------------
Total $ 398,759 $ 421,580 $ 53,623 $ 83,408
- ----------------------------------------------------------------------------------
UTILITY
The following table details the components of Utility revenues for the nine
months ended June 30, 1998 and 1997:
In thousands 1998 1997
------------------------------------------------------------------------------
Transportation only customers $ 16,061 $ 8,937
Transportation for gas sales customers 141,000 148,847
Natural gas sales 195,157 237,979
------------------------------------------------------------------------------
Transportation and natural gas sales 352,218 395,763
Other revenues 12,584 12,633
------------------------------------------------------------------------------
Total revenues $364,802 $408,396
------------------------------------------------------------------------------
Transportation only customer revenues increased by 80% as a result of the
increase in Choice Advantage Pilot Program customers (from 6,700 customers to
over 22,000 customers), as well an increase from 900 to 6,000 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.
Transportation for gas sales customers revenues decreased 5.3% for the nine
months ended June 1998 compared to the same period last year as the result of
14,900 customers switching from being gas sales customer to being transportation
only customers.
For the nine-month period ended June 30, 1998, revenues from natural gas sales
declined by 18%, 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.
Page 13
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ENERGY PRODUCTS & SERVICES
The following table details the components of Energy Products & Services
revenues for the nine months ended June 30, 1998 and 1997:
In thousands 1998 1997
----------------------------------------------------------------------------
EnergyUSA (TM)
Business Services(SM) $17,133 $ 502
Home Services(SM) 6,952 5,940
EnergyEXPRESS(TM) 13,095 10,317
----------------------------------------------------------------------------
Total $37,180 $16,759
----------------------------------------------------------------------------
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 eight months ended June 30, 1998 increased Business Services revenues by
$12.0 million.
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"),
respectively. Prior year earnings also include earnings from the investment in
MASSPOWER of $1.4 million and a gain on the sale of a subsidiary holding the
MASSPOWER investment of $13.3 million.
OPERATING EXPENSES
Total operating expenses, for the three- and nine-month periods ended June 30,
1998 were $82.0 million and $348.3 million, compared to $85.2 million and $356.1
million for the same periods in the prior year. The decrease for the three- and
nine-month periods is primarily attributable to lower natural gas commodity
costs, offset by higher merger related costs and increased costs associated with
the growth in the Energy Products & Services segment. In connection with the
proposed merger with Industries, $4.1 million in stock based compensation
expense and $3.9 million of financial and legal advisory fee expense has been
paid. The Energy Products & Services segment has been impacted by the
acquisition of Savage, which increased the size of the unregulated business
operations substantially.
YEAR 2000 COSTS
A Company wide program is underway to prepare computer systems and other
applications for the year 2000. An assessment study, the first phase of the
Company's Year 2000 program, is underway to determine the full scope of the
year 2000 problem with respect to hardware, software and embedded chips, to
assist in the development of a framework and timetable for addressing all Year
2000 problems and to provide an estimate of the cost of remediation. As part of
its program, the company has undertaken a vendor management program to
determine the Year 2000 readiness of its vendors with a goal to obtaining
reasonable assurances that there will not be any interruptions in the supply of
goods and services. In addition, the Company has begun an initiative to provide
information to each entity that electronically receives information from the
Company or sends information to the Company about the steps being taken by the
Company in connection with Year 2000 compliance and to obtain information about
each such entity's Year 2000 readiness.
To date approximately $700,000 has been expended on Year 2000 issues. The
assessment study will not be completed until late summer of 1998, but
preliminary analysis shows that Year 2000 program costs may exceed $5 million
(including the $700,000 spent to date). The Company's estimate of Year 2000
costs includes the cost of replacing any system if the replacement date of such
system has been accelerated. 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 Year 2000
issues will be expensed.
Due to the complexity of the Year 2000 problem and the reliance by the Company
on certain critical vendors and suppliers, there can be no guarantees that the
Company will achieve Year 2000 compliance or that critical vendors and
suppliers will achieve Year 2000 compliance. At this time, the Company cannot
assess the effect on the Company of such non-compliance. The Company expects to
include contingency plans as part of its Year 2000 study in an effort to
mitigate the risks of any non-compliance by third parties.
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15
INTEREST EXPENSE AND DIVIDEND REQUIREMENTS ON PREFERRED STOCK
Interest expense for the nine-month period ended June 30, 1998 was $13.8
million, compared to $13.9 million for the same period last year. Cash from the
sale of assets in the third quarter of 1997 reduced the level of short-term debt
for much of 1998, thereby reducing interest expense for the period. By June 30,
1998, short-term debt had returned to a normal June level. During the period, a
9.45% $25 million note was retired and replaced with a 6.26% $30 million note,
further reducing interest expense.
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 decreased over the twelve-month period
ending June 30, 1998, primarily due to the decrease in net income and increased
levels of deferred gas costs.
Capital expenditures for plant increased by $1.4 million for the nine-month
period and $2.0 million for the twelve-month period ended June 30, 1998, as
compared to the same periods the year before. The increases are the result of
spending to increase the number of customers using the system, upgrades to
computer systems and to expand the unregulated Energy Products & Services
segment.
The sale of automated meter reading devices provided $22.0 million and the sale
of 50% of the Company's interest in the PNGTS project provided $12.4 million in
the periods ending June 1998, while 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 periods ended June 1997.
Long-term debt, excluding current maturities, increased $4.0 million during the
12-months ended June 30, 1998, primarily due to funds borrowed to retire $4.9
million of preferred stock in the second quarter and the non-cash issuance of
debt to acquire Savage-Alert, Inc. in the first quarter. Total short-term debt,
including current maturities of long-term debt, increased approximately $44.9
million from June 30, 1997 to June 30, 1998, as short-term debt returned to a
normal level after being unusually low following the sale of a subsidiary and
the headquarters building the year before.
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 general regulatory environment and regulatory treatment
of the gain associated with the insurance settlement, 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 third
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 May 27, 1998, the Company's Common Shareholders approved the
Agreement and Plan of Merger dated December 18, 1997, as amended and restated as
of March 4, 1998, by and between Industries and the Company that provided for
the merger of Bay State with and into a corporation to be organized as a wholly
owned subsidiary of Industries as follows:
For merger 10,557,462 78.54%
Against merger 147,285 1.09%
Abstain 91,286 0.67%
No vote 2,646,941 19.70%
---------- ------
Shares outstanding 13,442,974 100.00%
========== ======
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 June 30,
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: August 14, 1998