<PAGE> 1
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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, 1995
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)
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
<S> <C>
Common Stock, $3.33 1/3 par value New York Stock Exchange
Boston Stock Exchange
</TABLE>
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. [ ]
Aggregate market value of registrant's voting stock held by non-affiliates
as of November 15, 1995 was $332,038,791*.
On November 15, 1995, the Company had 13,357,394 shares of Common Stock
outstanding.
<TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<CAPTION>
DOCUMENTS PART OF FORM 10-K
--------- -----------------
<S> <C>
Portions of the Proxy Statement for the Annual Meeting of Common
Shareholders to be held on January 25, 1996............................ Part III
</TABLE>
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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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<PAGE> 2
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PART I PAGE
----
<S> <C> <C>
Item 1. Business:
The Company............................................................. 3
Local Transportation Markets and Competition............................ 3
Natural Gas Sales....................................................... 4
Capacity Requirements................................................... 4
Regulation and Rates.................................................... 5
Franchises.............................................................. 6
Other Energy Products and Services...................................... 6
Energy Ventures......................................................... 6
Employees............................................................... 6
Executive Officers of the Registrant.................................... 6
Item 2. Properties.............................................................. 7
Item 3. Legal Proceedings....................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 8
Item 6. Selected Financial Data................................................. 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 8
Item 8. Financial Statements and Supplementary Data............................. 14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant...................... 30
Item 11. Executive Compensation.................................................. 30
Item 12. Security Ownership of Certain Beneficial Owners and Management..........
Item 13. Certain Relationships and Related Transactions.......................... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......... 31
Signatures.............................................................. 33
Exhibit Index........................................................... 34
</TABLE>
2
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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 Brockton,
Lawrence, and Springfield, Massachusetts areas. Additionally, the Company also
offers additional energy products and services to its customers, including
commodity sales of natural gas, and invests in energy ventures. Approximately
95% of all revenues are generated from providing local transportation and
natural gas sales with 84% of these annual revenues coming from the Company's
Massachusetts service area. Bay State has five 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 four wholly owned
subsidiaries, Bay State Energy Development, Inc., which owns an equity interest
in the MASSPOWER cogeneration partnership, Natural Gas Development Corp., a
corporation established to invest in the Portland Natural Gas Transmission
System ("PNGTS"), a proposed natural gas transmission pipeline in northern New
England, Bay State Energy Enterprises, Inc., which owns a equity interest in KBC
Energy Services, a partnership which markets natural gas supplies and
energy-related services on a nonregulated basis to commercial and industrial
end-users and Energy Asset Funding Inc., a corporation established to provide
financing for energy-related equipment.
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 1995 and 1994 are
described further in Note 9 of "Notes to Consolidated Financial Statements,"
Part II, Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's customers generally are billed monthly on a cycle basis in
therms. One therm equals 100,000 British thermal units (1 Btu), the heat content
of approximately 100 cubic feet of gas. 1,000,000 Btu (1 MMBtu), or ten therms
are the energy equivalent of approximately 1,000 cubic feet of natural gas or
7.14 gallons of home heating oil.
LOCAL TRANSPORTATION MARKETS AND COMPETITION
In 1995, 97% of Bay State's customers purchased bundled local
transportation and natural gas and the remaining 3% elected to purchase
unbundled local transportation. The tables below show the net change in
transportation customers and throughput volumes for the past three years.
<TABLE>
TABLE 1 -- NET LOCAL TRANSPORTATION CUSTOMER GROWTH
Yearly Increase in Number of Customers
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Residential......................................... 5,161 4,015 4,954
Commercial and Industrial........................... 1,256 800 852
Unbundled transportation............................ 76 9 --
----- ----- -----
Net increase in number of customers................. 6,493 4,824 5,806
===== ===== =====
</TABLE>
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<TABLE>
TABLE 2 -- CHANGE IN THROUGHPUT VOLUMES
Yearly Increase (Decrease) -- Thousands of MMBtu*
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Residential........................................ (2,727) 848 1,144
Commercial and industrial.......................... (2,696) 1,150 1,395
Sales to other utilities........................... 1,569 1 (402)
Interruptible and other............................ 8,128 (766) (2,923)
Unbundled transportation........................... 1,923 12,222 2,619
------ ------ ------
Total increase in throughput....................... 6,197 13,455 1,833
====== ====== ======
<FN>
- ---------------
* Volumes have not been normalized for weather variations.
</TABLE>
The Company's principal competitors are unregulated fuel-oil retailers and
regulated 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
150,000 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 44,000 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.
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 59% of these interruptible volumes in 1995
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 all but 85 of the Company's
287,000 local transportation customers purchase bundled transportation and
natural gas, minimizing gas costs is an important part of the Company's
business.
The Company's strategy of balancing gas purchase costs and security of
supply is achieved by optimizing the mix and terms of natural gas contracts with
the use of supplemental liquefied natural gas and propane to meet peak winter
demand. The Company maintains a diversified gas supply portfolio of domestic and
Canadian gas supply contracts with producers.
CAPACITY REQUIREMENTS
Bay State has capacity contracts for the transmission of natural gas to its
distribution system from the producing areas of North America. The Company
currently transports natural gas from Canada through a converted oil pipeline
leased from the Portland Pipe Line Corporation ("PPLC"). The PPLC lease
currently extends to March 31, 1997. An agreement with PPLC to extend the lease
through the 1997-1998 heating season is being sought. Short-term contingency
plans have been developed for supplying customers in Maine and New Hampshire
through the 1997-1998 heating season in the event that the lease is not
extended. Long-term, two projects to replace the pipeline capacity provided by
the PPLC lease are being pursued, a 2.0 million MMBtu liquefied natural gas
storage facility in Wells, Maine, and PNGTS. For further discussion of these
4
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projects see Note 8 of "Notes to Consolidated Financial Statements," Part II,
Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REGULATION AND RATES
The Company and its subsidiaries, are subject, where applicable, to
regulation by the Massachusetts Department of Public Utilities ("MADPU"), the
New Hampshire Public Utilities Commission ("NHPUC"), the Maine Public Utilities
Commission ("MPUC") and the Federal Energy Regulatory Commission ("FERC") with
respect to rates, adequacy of service, issuance of securities, accounting, and
other matters.
The tariff schedules of the local distribution companies provide for
declining block rates which result in reductions in the unit price as usage
increases, and for seasonal rates that charge customers more per unit for gas
purchased during the high-demand winter heating season and less per unit during
summer months. These schedules also contain cost of gas adjustment ("CGA")
clauses that permit the distribution companies to pass on to firm customers
increases or decreases in recovered natural gas costs. Substantially all gas
supplier refunds and profits from interruptible sales are returned to firm
customers through the CGA clauses.
As a result of a third party fuel inventory financing program instituted by
the Company in 1982, fuel inventory and the related administrative and carrying
costs are also recovered through the CGA clauses. In addition, the MADPU allows
recovery of the following through the CGA: 1) the working capital costs
associated with purchased gas costs; 2) clean-up costs associated with waste
materials from former gas manufacturing sites; and 3) costs associated with
MDPU-approved energy conservation and load management programs.
The Company offers special contracts to large volume industrial customers
in its Massachusetts service area and natural gas transportation service to
industrial end-user customers in both its Massachusetts and New Hampshire
jurisdictions. Contracts for such service are individually filed with and
approved by the MADPU and NHPUC and are in effect for specified periods of time.
The following table provides the most recent rate activity of the Company
by state and federal jurisdictions:
<TABLE>
TABLE 4 -- RATE ACTIVITY
<CAPTION>
REQUESTED INCREASES GRANTED INCREASE
--------------------------- -----------------------------------------
RETURN ON RETURN ON
DATE AMOUNT COMMON AMOUNT COMMON DATE
JURISDICTION FILED (IN MILLIONS) EQUITY (IN MILLIONS) EQUITY EFFECTIVE
- ------------ -------- ------------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NHPUC.................... 9/15/95 $ .3 (a) $ .3 (a) 11/1/95
MADPU.................... 4/14/95 $ .0 (b) (b) (b) (b)
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
NHPUC.................... 9/21/92 $ .6 (a) $ 0.5 (a) 11/1/92
MADPU.................... 4/16/92 $20.6 13.00% $11.5 11.40% 11/1/92
NHPUC.................... 7/18/91 $ 2.5 13.95% $ 1.3 (c) 9/30/91
FERC..................... 5/31/91 $ .9 15.75% $ .4 (c) 7/1/92
<FN>
- ---------------
(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 has been filed with the MADPU. The
goal of the rate redesign is to implement rates that more closely reflect
the actual costs associated with serving different customers. New rates are
expected to be effective early in calender 1996.
(c) The revenue increase was granted pursuant to a stipulation. No percentage
return on common equity related to the revenue increase was referenced in
the order.
</TABLE>
5
<PAGE> 6
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.
OTHER ENERGY PRODUCTS AND SERVICES
For a discussion of Other Energy Products and Services see "Other Energy
Products and Services" in Part II, Item 7, Management's Discussion and Analysis
of Financial Condition and Results of Operations.
ENERGY VENTURES
For a discussion of Income (Loss) from Investments in Energy Ventures, see
"Income (Loss) from Investments in Energy Ventures" in Part II, Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES
The Company employed 1,062 persons at September 30, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of the principal executive officers of the
Registrant as of November 15, 1995 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.
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
---------------------- ---------------------------------------
<S> <C>
Roger A. Young, 49, President (Chief Executive
Officer)(a).................................... Director, President, and Chief Executive
Officer.
Joel L. Singer, 39, Executive Vice President
(Chief Operating Officer)...................... Director, Executive Vice President, and
Chief Operating Officer since 1995;
Director of Arthur D. Little Inc.'s North
American Natural Gas Practice, Cambridge,
MA, 1993 to 1995, Manager Natural Gas
Sales/Vice President Petrofino Gas
Pipeline, American Petrofino, Dallas, TX,
1989 to 1993.
Thomas W. Sherman, 55, Executive Vice President
(Chief Financial and Accounting Officer and
Treasurer)..................................... Director, Executive Vice President, and
Chief Financial Officer; Treasurer since
1994.
Dwight G. Curley, 58, Senior Vice President...... Senior Vice President since 1992; Vice
President 1990 to 1992.
James A. Burke, 56, Vice President............... Vice President.
John F. Doucette, 51, Vice President............. Vice President.
<FN>
- ---------------
(a) Charles H. Tenney II, Chairman of the Board of Directors, is the stepfather
of Roger A. Young, President and Chief Executive Officer.
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
---------------------- ---------------------------------------
<S> <C>
Philip W. Kallaugher, 53, Vice President......... Vice President since 1993; Division
Manager of the Brockton division 1988 to
1992.
Thomas A. Sacco, 54, Vice President.............. Vice President.
James D. Simpson, 45, Vice President............. Vice President since 1993; Director of
Rates and Economic Analysis 1992 to 1993;
Director of Rates 1988 to 1992.
John R. Snow, 54, Vice President................. Vice President.
Stephen J. Curran, 49, Controller................ Controller.
</TABLE>
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, 1995, the Company's system consisted of approximately
5,306 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; 259,185 services
(small pipe connecting mains with piping on the customers' premises) and 287,213
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, alleys, avenues, and other public places or on private
property not owned by the Company, with the permission or consent of the
respective owners.
ITEM 3. LEGAL PROCEEDINGS
The Company is working with federal and state environmental agencies to
assess the extent and environmental impact of and appropriate remedial action
for waste materials from former gas manufacturing sites (see Note 8 of "Notes to
the Consolidated Financial Statements," Part II, Item 8, Financial Statements
and Supplementary Data).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
FISCAL 1995 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
High..................................... $25 1/8 $25 3/4 $25 1/2 $25 1/4
Low...................................... 22 1/2 22 1/4 23 1/8 22 7/8
FISCAL 1994
-----------
High..................................... $32 $28 3/8 $25 5/8 $25 3/8
Low...................................... 27 7/8 23 7/8 23 5/8 23 1/2
</TABLE>
The common stock of the Company is listed on both the New York Stock
Exchange and the Boston Stock Exchange. The ticker symbol is "BGC" and common
listings in the financial press include "BayStGas" and "BaySGs." As of November
15, 1995, the Company had approximately 11,336 shareholders of record. The
number of shareholders indicated does not reflect the number of persons or
entities who hold their common stock in nominee name through various brokerage
firms or other entities. Information regarding cash dividends declared on common
stock is included in Note 9 of "Notes to the Consolidated Financial Statements,"
Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ITEM 6. SELECTED FINANCIAL DATA
Listed below is the required selected financial data for the Company's last
five fiscal years.
<TABLE>
<CAPTION>
In thousands, except per share amounts 1995 1994 1993 1992 1991
- -------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total operating revenues.............. $418,118 $463,280 $412,410 $372,859 $350,162
Income from continuing operations..... 23,128 24,485 22,807 18,363 15,817
Earnings per average common share from
continuing operations............... $ 1.71 $ 1.85 $ 1.75 $ 1.41 $ 1.32
Total assets.......................... 630,355 614,798 563,000 498,930 452,153
Long-term obligations under capital
leases.............................. 1,611 2,719 3,747 4,700 5,585
Capitalization:
Common equity....................... 219,873 215,389 200,088 187,032 146,042
Preferred sock...................... 5,149 5,293 5,392 20,512 20,677
Long-term debt...................... 199,000 191,000 176,000 116,139 131,775
Cash dividends declared per common
share............................... $ 1.48 $ 1.44 $ 1.40 $ 1.36 $ 1.31
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Year In Review
During 1995, Bay State Gas Company ("Bay State" or the "Company") continued
to respond to the changing energy industry while experiencing warmer than normal
weather. During 1995, the weather was 11% warmer than the prior year and 6%
warmer than normal within the Company's service territories. The following table
displays the degree days for the past three years:
<TABLE>
<CAPTION>
PERCENTAGE
DEGREE COLDER/(WARMER)
YEAR DAYS THAN NORMAL
---- ------- ----------------
<S> <C> <C>
1995............................................... 6,589 (6.4)%
1994............................................... 7,366 5.2 %
1993............................................... 7,180 2.7 %
</TABLE>
Bay State responded to the warmer weather by implementing several cost
saving and service-related program improvements that not only minimized the
impact of the weather on net income for 1995, but will also positively impact
earnings in future years.
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<PAGE> 9
Net income was $23.1 million in 1995 compared to $24.5 million in 1994, and
earnings per share were $1.71. This compares to $1.85 one year ago. The common
stock dividends declared in 1995 were $1.48 per share, 2.8% higher than the
prior year. This was the twelfth consecutive year of increased common stock
dividends, and it completes the 142nd year of consecutive quarterly dividends.
The current annualized dividend is equivalent to $1.50 per share.
Local Transportation
<TABLE>
The following table details the components of local transportation revenues
for the past three years:
<CAPTION>
In millions 1995 1994 1993
----------- ------ ------ ------
<S> <C> <C> <C>
Bundled revenues....................................... $156.3 $164.0 $157.3
Unbundled revenues..................................... 4.3 2.5 .4
------ ------ ------
Total.................................................. $160.6 $166.5 $157.7
====== ====== ======
</TABLE>
The majority of Bay State's customers purchase bundled local transportation
and natural gas. Some larger commercial and industrial customers have elected to
purchase unbundled local transportation, requiring them to now manage their own
gas purchasing, balancing, and storage functions.
Local transportation revenues decreased 3.6% from 1994 to 1995. This
decrease in revenues was primarily attributable to the warmer weather
experienced in the Company's service territories during 1995, which reduced
transportation, or throughput, to firm customers. The 11% change in weather from
year to year would have resulted in a $7.1 million decrease in transportation
revenues. However, the Company added almost 6,500 customers in 1995, up from
4,800 and 5,800 in 1994 and 1993, respectively. This 2.3% growth in the customer
base somewhat offset the negative impact of the weather on revenues.
Additionally, total system throughput increased from 77.8 million MMBtu in
1994 to 84.0 million MMBtu in 1995 as the Company utilized its capacity during
the warmer weather by supplying additional volumes to interruptible customers.
The profit margins from these customers are passed back to the Company's firm
customers through reduced gas costs.
Natural Gas Sales
The natural gas sales portion of the Company's bundled service does not
currently provide a profit margin. However, as all but 85 of the Company's
287,000 local transportation customers purchase bundled local transportation and
natural gas, minimizing gas costs is an important part of the Company's
business.
The Company's strategy of balancing gas 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.
The Company's rates include cost of gas adjustment clauses ("CGA") pursuant
to which natural gas purchase costs and other costs are recovered from
customers. The following table details these costs:
<TABLE>
<CAPTION>
In millions 1995 1994 1993
----------- ------ ------ ------
<S> <C> <C> <C>
Gas demand................................................ $ 45.0 $ 33.7 $ 61.7
Gas commodity............................................. 112.5 138.8 149.1
------ ------ ------
Total purchase costs................................. 157.5 172.5 210.8
------ ------ ------
Transmission costs........................................ 53.9 58.5 1.8
Supplemental fuels........................................ 14.5 26.1 17.1
DSM & environmental programs.............................. 6.7 11.4 3.0
Transition costs.......................................... 2.7 8.4 2.7
------ ------ ------
Total..................................................... $235.3 $276.9 $235.4
====== ====== ======
</TABLE>
9
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Recovered natural gas costs decreased by 15%, or $41.6 million, in 1995.
This decrease was the result of a decline in purchase costs combined with
decreases in supplemental fuel costs, demand-side management program ("DSM")
costs, and transition costs. The decrease in purchase costs reflect a
combination of the effect of the new competitive gas supply environment and the
impact of the warm weather on demand. The decrease in supplemental fuel costs
also reflect the warmer weather, as well as renegotiated contracts with
supplemental fuel suppliers. DSM programs are aimed at motivating customers to
use natural gas responsibly and, at the same time, cost the Company less than
the incremental gas supply these customers would have used otherwise. As these
programs have become fully implemented, their costs to customers have been
reduced.
The Federal Energy Regulatory Commission ("FERC") is permitting gas
pipeline companies, including those from which the Company purchases a
significant portion of its natural gas supplies and storage services, to bill
their customers for prudently incurred costs of transitioning into the
deregulated environment. These costs significantly declined in 1995 and should
continue to decline in the future. The Company has regulatory approval to
recover these costs through the CGA.
Other Energy Products and Services
<TABLE>
Revenues from other energy products and services include the following:
<CAPTION>
In thousands 1995 1994 1993
------------ ------- ------- -------
<S> <C> <C> <C>
Propane................................................ $ 7,603 $ 7,110 $ 6,762
Equipment rentals...................................... 6,976 6,265 5,877
Equipment service...................................... 5,447 3,984 3,683
Liquefaction........................................... 1,017 1,181 974
Other.................................................. 1,244 1,306 2,010
------- ------- -------
Total.................................................. $22,287 $19,846 $19,306
======= ======= =======
</TABLE>
As is the case with revenues generated from local transportation, propane
revenues are also significantly impacted by the weather. However, in 1995, the
Company was able to expand its propane business to compensate for the
weather-related decrease in demand. Sales volumes for propane increased from 6.8
million gallons in 1994 to 7.4 million gallons in 1995.
Revenues from equipment rentals and service increased by over 21% or $2.2
million in 1995 after increasing by 7% and 4% in 1994 and 1993, respectively.
This significant increase in 1995 is primarily the result of moderate price
increases and new service offerings combined with an increase in the number of
units rented and serviced.
Operating Expenses
Operations expenses decreased by $3.9 million in 1995 after decreasing by
$1.5 million in 1994 and increasing by $7.5 million in 1993. As the result of
lower accounts receivable balances and improved collections from customers
through special payment arrangements, bad debt expense was reduced by $2.5
million in 1995. The remaining decrease reflects other cost control measures.
Higher plant balances, an outcome of customer growth, 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 $601,000, $808,000, and $821,000 in 1995, 1994, and 1993, respectively.
10
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Income (Loss) from Investments in Energy Ventures
<TABLE>
The following table details the components of income (loss) from investments in energy
ventures for the past three years:
<CAPTION>
In thousands 1995 1994 1993
------------ ---- ----- -----
<S> <C> <C> <C>
MASSPOWER............................................ $296 $(813) $(431)
KBC.................................................. (44) -- --
---- ----- -----
Total................................................ $252 $(813) $(431)
==== ===== =====
</TABLE>
Bay State has operating results from two investments in energy ventures:
MASSPOWER, a cogeneration facility, and KBC Energy Services ("KBC"), a
partnership with Connecticut Natural Gas Corporation and Koch Gas Services
Company, which markets natural gas supplies and energy-related services on a
nonregulated basis to commercial and industrial end-users.
Interest Expense and Dividend Requirements on Preferred Stock
In 1995, the Company incurred additional interest expense due to
overcollections of recovered natural gas costs, a result of lower than
forecasted wellhead costs, and higher than anticipated pipeline supplier
refunds. Dividend requirements on preferred stock were relatively flat for the
comparative periods.
Results of Operations, 1994 and 1993
Net income increased $1.7 million and $4.4 million in 1994 and 1993,
respectively. In both years the Company experienced colder than normal weather
and had a growing customer base. The 1993 net income increase also reflected the
result of a rate increase in the Company's Massachusetts service area.
Operating revenues for 1994 and 1993 increased by $50.9 million and $39.6
million, respectively. In both years, this growth was primarily due to customer
additions, combined with an increase in the cost of gas and the colder weather.
The increase in 1993 operating revenues also reflected the Massachusetts rate
increase, which was effective in November 1992. Recovered natural gas costs
increased 17.6% and 9.3% in 1994 and 1993, respectively. The 1994 increase was
the result of higher combined purchase and transmission costs, and additional
increases in supplemental fuel costs, DSM program costs, and transition costs
while the 1993 increase was primarily the result of higher natural gas commodity
prices both under long-term contracts and from the spot market. These costs
represent a bundled product and transmission cost for most of 1993.
Operations expenses decreased by $1.5 million in 1994, after increasing by
$7.5 million in 1993. The decrease was the net result of the absence of costs
related to the union work stoppages, which occurred in 1993, and higher bad debt
expense related to the colder winter weather experienced in 1994. Also
contributing to the decrease in 1994 operations expenses was the effect of an
internal review of operations and corporate structure performed early in 1994.
This review resulted in a flatter, more efficient organization requiring almost
5% fewer employees. The largest increases in operating expenses in 1993 were in
employee benefits and outside services. The higher employee benefit expenses in
1993 included an increase in postretirement benefit costs, resulting from the
implementation of Statement of Financial Accounting Standards No. 106, and the
establishment of an accrual for an employee severance plan. Outside services
included an abnormal level of costs related to the union work stoppages and
regulatory restructuring costs.
Interest expense increased $2.2 million in 1994 due to higher levels of
long-term debt outstanding during the year, higher short-term debt rates, and a
decrease in the debt portion of AFUDC. Total interest expense for 1993 was
comparable to the prior year.
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
11
<PAGE> 12
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.
<TABLE>
Cash flows from operating activities
<CAPTION>
In millions 1995 1994 1993
----------- ------ ------ ------
<S> <C> <C> <C>
Net cash provided by operating activities........ $ 73.7 $ 66.1 $ 15.6
</TABLE>
Cash flows from operations improved by $7.6 million in 1995 despite a
decrease in net income primarily as the result of decreasing accounts receivable
balances, increases in refunds due customers, and lower cash contributions to
benefit plans. Refunds from upstream pipelines totaled approximately $15.8
million in 1995 as compared to $9.4 million in 1994. This amount will be
refunded to customers in the near future, contributing to reduced gas prices.
The Company made cash contributions to its benefit plans of $3.2 million, $15.3
million, and $15.0 million in 1995, 1994, and 1993, respectively.
<TABLE>
Cash flows from investing activities
<CAPTION>
In millions 1995 1994 1993
----------- ------ ------ ------
<S> <C> <C> <C>
Net cash used in investing activities............ $(57.9) $(52.2) $(51.4)
</TABLE>
The Company invests in property, plant, and equipment to improve and
protect its distribution system, and to expand its system to meet customer
demand. As a result of planned spending, capital expenditures for property,
plant, and equipment increased $2.1 million in 1995. Capital expenditures for
1996 are estimated to be approximately $53.0 million.
The remaining increase in investing activities for 1995 relates to
expenditures on energy ventures. These expenditures were $4.6 million, $1.0
million, and $4.8 million in 1995, 1994, and 1993, respectively. In 1993, a
one-time equity investment was made in MASSPOWER of $4.2 million. Capital
expenditures for energy ventures for 1996 are estimated to be approximately $6.3
million (see note 8).
<TABLE>
Cash flows from financing activities
<CAPTION>
In millions 1995 1994 1993
----------- ------ ------ ------
<S> <C> <C> <C>
Net cash provided by (used in) financing
activities..................................... $(17.0) $(11.2) $ 35.8
</TABLE>
As was the case in 1994, the 1995 decline in cash flows from financing
activities reflects a reduction in debt issuances as a result of strong cash
flows from operations. The Company has a shelf registration statement covering
up to $125.0 million of senior unsecured debt securities, under which $65.0
million in notes has been issued as of September 30, 1995. The Company has
access to $77.0 million in bank lines of credit. In early 1995, the Dividend
Reinvestment Plan was converted to a market purchase plan, eliminating new
equity issuances under this plan.
The Company is in the final stages of completing a sale and lease-back
arrangement for equipment rental assets with a financing company, through which
approximately $20.7 of additional capital will be made available. This, along
with continuing strong operating cash flows, will enable the Company to fund its
operating and investing activities without extensive long-term debt or equity
issuances in 1996.
Impact of Inflation
The rates charged to transportation customers may not be increased without
formal proceedings before regulatory authorities. Accordingly, in the absence of
authorized rate increases and except for changes in recovered gas costs, which
are reflected in customer rates, the Company must look to performance
improvements and higher sales volumes, particularly from highly profitable
market segments, to offset inflationary increases in its costs of operations.
Current rates only permit the Company to recover its historical cost of utility
plant and give no recognition to the current cost of replacing facilities.
Although no new material
12
<PAGE> 13
rate proceedings are currently planned, under the current regulatory process,
management believes the cost of utility plant additions will be recognized in
setting future rate levels.
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 located primarily in Massachusetts. The
costs of such assessments and any related remediation determined to be necessary
will be funded from traditional sources of capital and recovered from customers
(see note 8).
New Accounting Standard
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of." This statement, which is effective for years beginning after December 15,
1995, requires the Company to review long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company does not expect that the adoption of this
standard will have a material impact on the results of operations, financial
condition, or cash flows of the Company.
13
<PAGE> 14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993, IN THOUSANDS EXCEPT PER SHARE
AMOUNTS
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Operating revenues:
Local transportation..................................... $160,561 $166,534 $157,715
Energy products and services:
Natural gas sales...................................... 235,270 276,900 235,389
Other energy products and services..................... 22,287 19,846 19,306
-------- -------- --------
Total energy products and services............. 257,557 296,746 254,695
-------- -------- --------
Total operating revenues................................. 418,118 463,280.. 412,410
-------- -------- --------
Operating expenses:
Recovered natural gas costs............................ 235,270 276,900 235,389
Operations............................................. 84,076 88,005 89,455
Maintenance............................................ 8,545 8,744 8,525
Depreciation and amortization.......................... 26,026 24,209 21,562
Other taxes, principally property taxes................ 11,362 11,306 10,434
-------- -------- --------
Total operating expenses....................... 365,279 409,164 365,365
-------- -------- --------
Operating income......................................... 52,839 54,116 47,045
-------- -------- --------
Other income (expense):
Income (loss) from investments in energy ventures...... 252 (813) (431)
Interest income and other.............................. 1,630 1,980 2,830
Interest expense....................................... (17,018) (15,156) (12,910)
-------- -------- --------
Total other income (expense)................... (15,136) (13,989) (10,511)
-------- -------- --------
Income before income taxes............................... 37,703 40,127 36,534
-------- -------- --------
Federal and state taxes on income (note 2)............... 14,575 15,642 13,727
-------- -------- --------
Net income............................................... 23,128 24,485 22,807
Dividend requirements on preferred stock................. 299 309 562
-------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK...................... $ 22,829 $ 24,176 $ 22,245
======== ======== ========
Average number of common shares outstanding.............. 13,342 13,086 12,721
======== ======== ========
EARNINGS PER SHARE....................................... $ 1.71 $ 1.85 $ 1.75
======== ======== ========
DIVIDENDS DECLARED PER COMMON SHARE...................... $ 1.48 $ 1.44 $ 1.40
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE> 15
<TABLE>
BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1994, IN THOUSANDS
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Plant, at cost..................................................... $683,347 $636,601
Accumulated depreciation and amortization.......................... 184,942 166,229
-------- --------
Net plant.......................................................... 498,405 470,372
-------- --------
Investments in energy ventures (note 8)............................ 9,768 5,887
Prepaid benefit plans (note 7)..................................... 21,470 22,927
Other long-term assets............................................. 8,898 12,471
Current assets:
Cash and temporary cash investments.............................. 2,759 3,980
Accounts receivable, less allowances of $4,232 and $5,072........ 22,066 25,493
Unbilled revenues................................................ 3,747 3,661
Deferred gas costs............................................... 13,190 20,126
Inventories, at average cost (note 6)............................ 19,327 24,451
Other............................................................ 5,797 5,376
-------- --------
Total current assets..................................... 66,886 83,087
-------- --------
Regulatory assets:
Income taxes..................................................... 10,595 9,611
Other............................................................ 14,333 10,443
-------- --------
$630,355 $614,798
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements and note 3):
Common stock equity.............................................. $219,873 $215,389
Preferred stock equity........................................... 5,149 5,293
Long-term debt................................................... 199,000 191,000
-------- --------
Total capitalization..................................... 424,022 411,682
-------- --------
Long-term liabilities:
Deferred taxes (note 2).......................................... 73,329 71,038
Other long-term liabilities...................................... 15,401 12,593
-------- --------
Total long-term liabilities.............................. 88,730 83,631
-------- --------
Commitments and contingencies (note 8)
Current liabilities:
Short-term debt (note 5)......................................... 31,500 37,750
Accounts payable................................................. 28,704 27,294
Fuel purchase commitments (note 6)............................... 15,801 20,820
Refunds due customers............................................ 28,928 23,372
Deferred and accrued taxes (note 2).............................. 4,677 2,492
Other............................................................ 7,993 7,757
-------- --------
Total current liabilities................................ 117,603 119,485
-------- --------
$630,355 $614,798
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 16
<TABLE>
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SEPTEMBER 30, 1995 AND 1994, IN THOUSANDS
<CAPTION>
1995 1994
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Common stock equity:
Common stock, $3.33 1/3 par value, authorized
36,000,000 shares; 13,353,394 and 13,290,491
shares outstanding........................... $ 44,511 $ 44,302
Paid-in capital................................. 100,339 99,145
Retained earnings............................... 75,023 71,942
-------- ----- -------- -----
Total common stock equity............... 219,873 51.9 215,389 52.3
-------- ----- -------- -----
Cumulative preferred stock; $100 par value,
authorized 200,000 shares; $50 par value,
authorized 150,000 shares
Non-redeemable:
$100 par value, 5% series; 16,862 shares
outstanding.................................. 1,686 1,686
$50 par value, 7.2% series; 17,710 shares
outstanding.................................. 886 886
-------- ----- -------- -----
Total non-redeemable.................... 2,572 .6 2,572 .6
-------- ----- -------- -----
Redeemable, $100 par value:
4.7% series; 11,127 and 11,742 shares
outstanding.................................. 1,113 1,174
Redeemable, $50 par value:
$3.80 series; 6,367 and 6,767 shares
outstanding.................................. 318 339
5 5/8% series; 5,761 and 6,523 shares
outstanding.................................. 288 326
$3.25 series; 17,164 and 17,646 shares
outstanding.................................. 858 882
-------- ----- -------- -----
Total redeemable........................ 2,577 .6 2,721 .7
-------- ----- -------- -----
Total cumulative preferred stock........ 5,149 1.2 5,293 1.3
-------- ----- -------- -----
Long-term debt:
Revolving Credit Agreement, due 1997............ 6,000 18,000
6.30% Notes, due 1998........................... 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 --
7.25% Notes, due 2002........................... 20,000 20,000
7.37 - 7.55% Notes, due 2002.................... 28,000 28,000
6.00% Notes, due 2003........................... 15,000 15,000
6.58% Notes, due 2005........................... 10,000 10,000
6.93% Notes, due 2010........................... 10,000 --
9.20% Notes, due 2011........................... 10,000 10,000
9.28% Notes, due 2021........................... 5,000 5,000
8.15% Notes, due 2022........................... 12,000 12,000
7.625% Notes, due 2023.......................... 10,000 10,000
9.70% Notes, due 2031........................... 13,000 13,000
9.45% Notes, due 2031........................... 25,000 25,000
-------- ----- -------- -----
Total long-term debt.................... 199,000 46.9 191,000 46.4
-------- ----- -------- -----
TOTAL CAPITALIZATION.................... $424,022 100.0 $411,682 100.0
======== ===== ======== =====
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
<TABLE>
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993, IN THOUSANDS EXCEPT SHARE
AMOUNTS
<CAPTION>
CUMULATIVE
COMMON STOCK PREFERRED STOCK
--------------------------------------------- ------------------------
PAR PAID-IN RETAINED NON-
SHARES VALUE CAPITAL EARNINGS REDEEMABLE REDEEMABLE
---------- ------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30,
1992....................... 12,549,741 $41,832 $ 83,235 $ 61,965 $2,572 $ 17,940
Net income................... 22,807
Dividends declared:
Preferred stock............ (562)
Common stock............... (17,802)
Common stock issued:
DRP*....................... 270,871 903 6,177
KESOP*..................... 69,500 232 1,307
Redemption of preferred
stock...................... (6) (15,120)
---------- ------- -------- -------- ------ --------
BALANCE AT SEPTEMBER 30,
1993....................... 12,890,112 42,967 90,713 66,408 2,572 2,820
Net income................... 24,485
Dividends declared:
Preferred stock............ (309)
Common stock............... (18,831)
Common stock issued:
DRP*....................... 372,379 1,242 8,115
KESOP*..................... 28,000 93 577
Capital stock expense........ (62)
Redemption of preferred
stock...................... (198) 189 (99)
---------- ------- -------- -------- ------ --------
BALANCE AT SEPTEMBER 30,
1994....................... 13,290,491 44,302 99,145 71,942 2,572 2,721
Net income................... 23,128
Dividends declared:
Preferred stock............ (299)
Common stock............... (19,748)
Common stock issued:
DRP*....................... 42,103 140 864
KESOP*..................... 20,800 69 360
Capital stock expense........ (17)
Redemption of preferred
stock...................... (13) (144)
---------- ------- -------- -------- ------ --------
BALANCE AT SEPTEMBER 30,
1995....................... 13,353,394 $44,511 $100,339 $ 75,023 $2,572 $ 2,577
========== ======= ======== ======== ====== ========
- ---------------
<FN>
* Dividend reinvestment, employee saving, and key employee stock option plans.
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
<TABLE>
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993, IN THOUSANDS
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $23,128 $24,485 $22,807
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 26,026 24,209 21,562
Deferred income taxes................................... 6,908 5,254 6,803
Changes in operating assets and liabilities:
Accounts receivable..................................... 3,427 (1,342) (3,377)
Inventories and fuel purchase commitments............... 105 3,929 (1,570)
Accounts payable........................................ 1,410 (268) (1,699)
Deferred and accrued taxes.............................. (3,850) 3,428 (1,359)
Deferred gas costs and refunds due customers............ 12,492 17,291 (15,217)
Prepayments and other................................... 3,234 (10,933) (12,358)
------- ------- -------
Net cash provided by operating activities................. 73,739 66,053 15,592
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant (excluding AFUDC)...................... (53,336) (51,214) (46,639)
Investments in energy ventures............................ (4,586) (956) (4,779)
------- ------- -------
Net cash used in investing activities..................... (57,922) (52,170) (51,418)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 1,416 9,965 8,619
Dividends on common stock................................. (19,748) (18,831) (17,802)
Dividends on preferred stock.............................. (299) (309) (562)
Issuance of long-term debt................................ 20,000 25,000 81,000
Retirements of preferred stock and long-term debt......... (12,157) (14,297) (50,438)
Short-term debt........................................... (6,250) (12,700) 14,950
------- ------- -------
Net cash provided by (used in) financing activities....... (17,038) (11,172) 35,767
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY CASH
INVESTMENTS............................................. (1,221) 2,711 (59)
Cash and temporary cash investments at beginning of
period.................................................. 3,980 1,269 1,328
------- ------- -------
Cash and temporary cash investments at end of period...... $ 2,759 $ 3,980 $ 1,269
======= ======= =======
Supplemental cash flow information:
Cash paid during the year for:
Interest (net of amount capitalized).................... $16,355 $15,659 $12,788
======= ======= =======
Income taxes............................................ $ 8,720 $ 9,026 $ 8,428
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
BAY STATE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995, 1994, AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Bay State Gas Company and its wholly owned subsidiaries (the
"Company"). 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 FERC. The
Company's accounting policies conform to generally accepted accounting
principles and reflect the effects of the ratemaking process in accordance with
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation."
PLANT. Plant is stated at original cost and consists of utility plant and
non-utility plant assets. The original cost of depreciable units of plant
retired, together with the cost of removal, net of salvage, is charged to
accumulated depreciation. The costs of maintenance, repairs, and replacements of
minor items are charged to expense as incurred.
Depreciation is provided for all classes of plant on a group straight-line
basis in amounts equivalent to overall composite rates of 3.88% for 1995 and
1994 and 3.74% for 1993.
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 $748,000,
$457,000, and $2,028,000 for 1995, 1994, and 1993, 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.
LOCAL TRANSPORTATION, NATURAL GAS SALES, AND DEFERRED GAS COSTS. Local
transportation revenue 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 gas delivered, but not billed. The Company's rates
include cost of gas adjustment clauses pursuant to which gas and certain other
costs are recovered from customers. Any differences between gas costs incurred
and amounts billed are deferred for recovery from or refund to customers in
future periods. Also included in natural gas sales are sales to interruptible
customers. Substantially all net margins from interruptible sales are used to
reduce gas costs to customers through the cost of gas adjustment clauses.
ENVIRONMENTAL COSTS. In accordance with orders of regulatory authorities,
the Company defers costs incurred to remediate environmental damage. Such costs
are amortized to expense over periods of seven to 10 years as they are recovered
from customers (see note 8).
INCOME TAXES. On October 1, 1993, the Company adopted the asset and
liability method of accounting for income taxes as required by Statement of
Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." Pursuant to SFAS 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the tax
bases and the financial statement carrying amounts of existing assets and
liabilities. Prior year financial statements reflect deferred income taxes for
the tax effects of the timing differences between the recognition of revenue and
expense for income tax purposes and financial reporting purposes (see note 2).
19
<PAGE> 20
Investment tax credits related to plant additions prior to 1987 were
deferred and are being amortized as reductions of income tax expense over the
lives of the related assets.
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. Pension costs are recognized
on the accrual method of accounting over the expected periods of employee
service based on actuarial assumptions.
Statements of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefit Plans Other than Pensions" and No. 112,
"Employers' Accounting for Postemployment Benefits," were adopted on October 1,
1993, requiring the accrual method of accounting for the costs of postretirement
and postemployment benefits. 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 were previously recognized when paid. They are now accrued
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.
NEW ACCOUNTING STANDARDS. Effective for fiscal years beginning after
December 15, 1995, SFAS 121 will require a review of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. It is expected that the
adoption of this standard will not have a material impact on cash flows,
financial condition, or the results of operations.
NOTE 2. INCOME TAXES
<TABLE>
The components of income tax expense are as follows:
<CAPTION>
In thousands 1995 1994 1993
------------ ------- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................ $ 6,699 $ 8,918 $ 5,874
State.............................................. 1,368 1,870 1,450
------- ------- -------
Total current.............................. 8,067 10,788 7,324
------- ------- -------
Deferred:
Federal............................................ 5,799 4,716 5,726
State.............................................. 1,109 538 1,077
------- ------- -------
Total deferred............................. 6,908 5,254 6,803
------- ------- -------
Deferred investment tax credits, net................. (400) (400) (400)
------- ------- -------
Total income tax expense................... $14,575 $15,642 $13,727
======= ======= =======
</TABLE>
<TABLE>
The annual provision for deferred income taxes is comprised of the following:
<CAPTION>
In thousands 1995 1994 1993
------------ ------ ------ ------
<S> <C> <C> <C>
Deferred gas costs.................................. $ 551 $ (750) $1,599
Accelerated tax depreciation........................ 3,681 2,962 4,899
Capitalized overheads............................... (2,225) 174 (918)
Pension............................................. 1,252 1,283 397
Demand side management costs........................ 1,569 (1,981) (818)
Postretirement benefits............................. 1,002 2,135 893
Investment in MASSPOWER............................. 602 1,119 3
Other............................................... 476 312 748
------ ------ ------
Total deferred income tax expense......... $6,908 $5,254 $6,803
====== ====== ======
</TABLE>
20
<PAGE> 21
<TABLE>
A reconciliation of statutory federal income tax rates to the Company's effective income
tax rates is as follows:
<CAPTION>
In thousands 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C>
Federal income tax rate..................................... 35% 35% 35%
State income taxes, net of federal benefit.................. 4 4 4
Other....................................................... - - (1)
-- -- --
Effective income tax rate................................... 39% 39% 38%
== == ==
</TABLE>
<TABLE>
Temporary differences that resulted in deferred income tax assets and liabilities as of
September 30, 1995 and 1994 are as follows:
<CAPTION>
In thousands 1995 1994
------------ ------- -------
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts.............................. $ 1,716 $ 2,195
Inventory and overhead costs................................. 1,702 1,119
Unamortized investment tax credits........................... 3,753 3,983
Other........................................................ 2,600 3,709
------- -------
Total deferred income tax assets..................... 9,771 11,006
------- -------
Deferred income tax liabilities:
Prepaid pension and other benefits........................... 12,860 9,924
Plant related................................................ 69,717 66,834
Other........................................................ 3,217 2,379
------- -------
Total deferred income tax liabilities................ 85,794 79,137
------- -------
Net deferred income tax liability.............................. $76,023 $68,131
======= =======
</TABLE>
At September 30, 1995 and 1994, unamortized deferred investment tax credits
included in long-term deferred taxes amounted to $5.8 million and $6.2 million,
respectively.
As discussed in note 1, a new method of accounting for income taxes was
adopted as of October 1, 1993. The cumulative effect on the years prior to
October 1, 1993 of adopting the new method of accounting for income taxes had no
effect on net income because a regulatory asset of $9.6 million was recorded,
reflecting future amounts due from customers for the effects of the temporary
differences. The effect of the change on income tax expense for 1994 was not
significant because amounts of income tax expense which differ from amounts
calculated in accordance with currently effective rate orders for settlement
with customers in future periods have been deferred.
NOTE 3. CAPITALIZATION
COMMON STOCK. A Key Employee Stock Option Plan provided for the granting
of options to key employees to purchase an aggregate of 1,050,000 shares of
common stock. While it is anticipated that no further options will be granted
under this plan, previously granted options may continue to be exercised through
2002.
<TABLE>
Options are exercisable upon grant and expire within 10 years from the date of grant.
Option activity is as follows:
<CAPTION>
OPTION PRICE
OPTIONS OUTSTANDING AND EXERCISABLE SHARES PER SHARE
----------------------------------- ------- -------------
<S> <C> <C>
September 30, 1992........................................ 774,000 $17.75-$22.00
Options exercised......................................... (69,500) $17.75-$22.00
-------
September 30, 1993........................................ 704,500 $17.75-$22.00
Options exercised......................................... (28,000) $17.75-$22.00
-------
September 30, 1994........................................ 676,500 $17.75-$22.00
Options exercised......................................... (20,800) $17.75-$19.63
-------
September 30, 1995........................................ 655,700 $17.75-$22.00
-------
</TABLE>
21
<PAGE> 22
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, 1995, 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.
<TABLE>
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:
<CAPTION>
REDEEMABLE
LONG-TERM PREFERRED MAXIMUM
In thousands DEBT STOCK CASH REQUIRED
------------ --------- ---------- -------------
<S> <C> <C> <C>
1996........................................... $ -- $ 180 $ 180
1997........................................... 6,000 180 6,180
1998........................................... 5,000 180 5,180
1999........................................... 833 180 1,013
2000........................................... 10,833 143 10,976
Thereafter..................................... 176,334 1,714 178,048
-------- ------ --------
Total.......................................... $199,000 $2,577 $201,577
======== ====== ========
</TABLE>
As of September 30, 1995, long-term debt agreements contain no provisions
restricting the payment of dividends on common stock. All debt is unsecured.
As of September 30, 1995 and 1994, $6.0 million and $18.0 million of
long-term debt were outstanding under revolving credit agreements at weighted
average interest rates of 6.23% and 5.36%, respectively.
<TABLE>
FAIR VALUES OF FINANCIAL INSTRUMENTS. The estimated fair values of the Company's financial
instruments are as follows:
<CAPTION>
ESTIMATED
CARRYING FAIR
In thousands AMOUNT VALUE
------------ -------- --------
<S> <C> <C>
September 30, 1995
Capital lease obligations............................... $ 2,720 $ 2,749
Long-term debt.......................................... $199,000 $212,365
September 30, 1994
Capital lease obligations............................... $ 3,747 $ 3,805
Long-term debt.......................................... $191,000 $184,000
</TABLE>
The fair values of capital lease obligations are estimated using the
present value of the minimum lease payments discounted at market rates. The fair
values of long-term debt are estimated based on current rates offered to the
Company for debt of the same remaining maturities. The carrying amounts for cash
and temporary cash investments, accounts receivable, accounts payable, accrued
liabilities, and short-term debt approximate their fair values due to the
short-term nature of these instruments.
22
<PAGE> 23
NOTE 4. LEASES
Noncancelable operating and capital leases have been entered into for the
use of certain facilities and equipment. The operating lease agreements
generally contain renewal options. The capital leases relate to liquefied
natural gas storage facilities. Certain leases contain renewal and purchase
options and escalation clauses.
<TABLE>
Future annual minimum rental payments under long-term noncancelable leases at September 30, 1995,
are as follows:
<CAPTION>
CAPITAL OPERATING
In thousands LEASES LEASES
------------ ------ ---------
<S> <C> <C>
1996............................................................ $1,281 $1,836
1997............................................................ 1,004 1,597
1998............................................................ 726 1,149
1999............................................................ -- 760
2000............................................................ -- 214
------ -------
Future minimum lease payments................................... 3,011 $5,556
======
Less amount representing interest............................... 291
------
Present value of future minimum lease payments.................. $2,720
======
</TABLE>
<TABLE>
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:
<CAPTION>
CAPITAL OPERATING
In thousands LEASES LEASES
------------ ------ ---------
<S> <C> <C>
1995............................................................ $1,281 $ 5,437
1994............................................................ $1,281 $ 5,179
1993............................................................ $1,281 $ 5,697
</TABLE>
Interest included in capital lease payments was $253,000, $328,000, and
$397,000 in 1995, 1994, and 1993, respectively.
<TABLE>
NOTE 5. SHORT-TERM DEBT AND LINES OF CREDIT
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Unsecured bank lines of credit
Principal outstanding (thousands)............................ $21,500 $ 7,750
Weighted average interest rate............................... 6.97% 5.55%
Commercial paper
Principal outstanding (thousands)............................ $10,000 $30,000
Weighted average interest rate............................... 5.80% 4.82%
Total short-term debt
Principal outstanding (thousands)............................ $31,500 $37,750
Weighted average interest rate............................... 6.60% 4.97%
</TABLE>
At September 30, 1995, the Company had unsecured bank lines of credit
aggregating $77.0 million for which it pays commitment fees, and access to an
additional $30.0 million under the Fuel Purchase Agreements as described in note
6.
NOTE 6. FUEL PURCHASE AGREEMENTS
Up to $30.0 million can be raised through credit agreements (the
"Agreements") underlying the Fuel Purchase Agreements with a corporation
established to provide financing, through borrowing on a demand basis or selling
supplemental gas inventories. Any inventories sold must be repurchased and any
associated carrying costs paid when the gas is withdrawn from storage. All gas
costs, carrying costs, and administrative charges are fully recoverable through
the CGA approved in each state regulatory jurisdiction. The Agreements contain
an expiration date of September 1998.
23
<PAGE> 24
NOTE 7. PENSION AND EMPLOYEE BENEFIT PLANS
<TABLE>
PENSION PLANS. The funded status of the Company's pension plans as of September 30, 1995
and 1994, is as follows:
<CAPTION>
In thousands 1995 1994
------------ ---- ----
<S> <C> <C>
Vested benefits................................................ $58,877 $57,956
Nonvested benefits............................................. 1,196 1,103
------- -------
Accumulated benefit obligation................................. 60,073 59,059
Additional benefits related to future compensation levels...... 12,247 13,477
------- -------
Projected benefit obligation................................... 72,320 72,536
Plan assets at fair value...................................... 81,896 75,417
------- -------
Plan assets in excess of plan benefit obligations.............. $ 9,576 $ 2,881
======= =======
</TABLE>
Plan assets are primarily invested in marketable pooled funds holding
equity and corporate debt securities and in cash equivalents. Certain changes in
items shown above are not recognized as they occur, but are systematically
amortized over subsequent periods. Unrecognized amounts as of September 30, 1995
and 1994, are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
------------ ---- ----
<S> <C> <C>
Unrecognized net gain........................................ $ (6,010) $ (1,878)
Unrecognized prior service cost.............................. 5,178 6,420
Unrecognized net transition obligation....................... 4,849 5,832
Prepaid pension costs included in the Consolidated Balance
Sheets..................................................... (13,593) (13,255)
-------- --------
Plan assets in excess of plan benefit obligations............ $ 9,576 $ 2,881
======== ========
</TABLE>
The discount rate, rate of increase in future compensation levels, and
expected long-term rate of return on plan assets used in determining the
actuarial present value of the projected benefit obligation were 8.0%, 5.0%, and
9.0% for both 1995 and 1994. Net pension cost for 1995, 1994, and 1993 included
the following components:
<TABLE>
<CAPTION>
In thousands 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned......................... $ 1,790 $ 2,021 $ 1,654
Interest cost on benefit obligations................. 5,668 5,580 5,318
Actual return on plan assets......................... (9,762) (129) (6,886)
Net amortization and deferral........................ 14,431 (4,642) 2,862
------- ------- -------
Net pension cost..................................... $ 2,127 $ 2,830 $ 2,948
======= ======= =======
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. As described in note 1, the
Company adopted the accrual method of accounting for postretirement benefit
plans other than pensions in 1994. The change in the method of accounting had no
significant impact in 1994 as regulatory authorities permit the Company to defer
costs in excess of amounts recovered through rates for collection in future
periods. The present value of the accumulated benefit obligation was $24.7
million and $28.2 million, at September 30, 1995 and 1994, respectively. The
expense recognized was $2.7 million, $2.8 million, and $2.5 million for 1995,
1994, and 1993, respectively. The components of other postretirement benefit
expense for 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
------------ ---- ----
<S> <C> <C>
Interest cost................................................... $ 1,872 $2,112
Service cost.................................................... 445 575
Actual return on assets......................................... (2,848) (365)
Net amortization................................................ 2,581 848
Deferred........................................................ 613 (388)
------- ------
Other postretirement benefit expense............................ $ 2,663 $2,782
======= ======
</TABLE>
24
<PAGE> 25
<TABLE>
The funded status of the Company's other postretirement benefit plans as of September 30, 1995
and 1994, is as follows:
<CAPTION>
In thousands 1995 1994
------------ ---- ----
<S> <C> <C>
Retirees..................................................... $ 12,742 $ 14,616
Fully eligible active employees.............................. 3,992 4,325
Other active employees....................................... 7,961 9,243
-------- --------
Accumulated other postretirement benefit obligation.......... 24,695 28,184
Fair value of plan assets.................................... (18,133) (16,269)
Unrecognized net transition obligation....................... (22,732) (23,995)
Unrecognized net gain........................................ 6,711 882
-------- --------
Prepaid other postretirement benefits recorded in the
Consolidated Balance Sheets................................ $ 9,459 $(11,198)
======== ========
</TABLE>
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 was determined
using an assumed discount rate of 8.0% and an expected long-term pre-tax rate of
return on plan assets of 9.0% for both 1995 and 1994, and a health care cost
trend rate of 9.0% and 11.0% in 1995 and 1994, respectively, decreasing to 6.0%
by 1998. 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 1995 by $300,000.
RETURN ON PREPAYMENTS OF OTHER POSTRETIREMENT BENEFITS. As permitted by
regulatory authorities, noncash returns of $1,650,000, $857,000, and $286,000
for 1995, 1994, and 1993, 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 future costs of the plans.
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS. As described in note 1, the
accrual method of accounting for postemployment benefit plans was adopted in
1994. The change in the method of accounting had no significant impact in 1994
as the Company deferred costs in excess of amounts recovered through rates for
collection in future periods. The present value of the accumulated benefit
obligation was $4.9 million and $4.1 million, at September 30, 1995 and 1994,
respectively.
EMPLOYEE SAVINGS PLAN. Employee Savings Plans (the "ESP's") provides
eligible employees with an incentive to save and invest regularly. The ESP's 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 $813,000, $784,000, and
$601,000 in 1995, 1994, and 1993, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
CAPACITY REQUIREMENTS. The Company currently transports natural gas from
Canada through a converted oil pipeline leased from the Portland Pipe Line
Corporation ("PPLC"). The PPLC lease currently extends to March 31, 1997. An
agreement with PPLC to extend the lease through the 1997-1998 heating season is
being sought. Short-term contingency plans have been developed for supplying
customers in Maine and New Hampshire through the 1997-1998 heating season in the
event that the lease is not extended. Long-term, two projects to replace the
pipeline capacity provided by the PPLC lease are being pursued, a 2.0 million
MMBtu liquefied natural gas storage facility in Wells, Maine ("Wells LNG"), and
the Portland Natural Gas Transmission System ("PNGTS").
25
<PAGE> 26
<TABLE>
INVESTMENT RECOVERY. The following table summarizes the Company's current investment in energy ventures:
<CAPTION>
INVESTMENTS
OWNERSHIP ---------------
PERCENTAGES 1995 1994
----------- ---- ----
<S> <C> <C> <C>
MASSPOWER............................................ 17.5% $2,394 $2,957
PNGTS................................................ 29.0 3,793 2,645
Wells LNG............................................ 100.0 3,521 151
KBC.................................................. 33.3 6 --
Other................................................ -- 54 134
----- ------ ------
Total................................................ $9,768 $5,887
===== ====== ======
</TABLE>
PNGTS is an interstate pipeline that will extend 250 miles from the
US-Canadian border to the New Hampshire-Massachusetts border. By March 1, 1996,
PNGTS plans to file an application with the FERC for approval to construct and
operate the pipeline. The Company has entered into long-term agreements with
PNGTS for service on the pipeline. Such agreements are subject to state
regulatory review and approval in Massachusetts, Maine, and New Hampshire. In
November 1994, the Company filed an application with the FERC for approval to
construct and operate Wells LNG. The Company will file for approval from the
public utility commissions of Maine and New Hampshire of its agreement for
service from the LNG facility.
Recovery of investments in PNGTS and Wells LNG is dependent upon, among
other things, successful completion of the projects and the terms of required
regulatory approvals. While their completion is subject to a number of factors
beyond the Company's control, the Company believes that these projects will be
successful. Both of these projects are scheduled to be completed and available
for service by November 1998.
During 1995, the Company made an initial investment of $50,000 in KBC and
is committed to invest up to a total of $1.7 million. KBC began operations in
1995.
LONG-TERM OBLIGATIONS. The Company has long-term contracts for the
purchase, storage, and delivery of gas supplies. Certain of these contracts
contain minimum purchase provisions which, in the opinion of management, are not
in excess of the Company's requirements.
ENVIRONMENTAL ISSUES. Like other companies in the natural gas industry,
the Company is party to governmental actions associated with former gas
manufacturing sites. Management estimates that, exclusive of insurance
recoveries, if any, expenditures to remediate and monitor known environmental
sites will range from $3.9 million to $10.0 million. Accordingly, a $3.9 million
liability, with an offsetting charge to a regulatory asset (see note 1), has
been accrued. Environmental expenditures for 1995, 1994, and 1993 were $387,000,
$129,000, and $620,000, respectively. Exclusive of amounts accrued for future
expenditures, at September 30, 1995 and 1994, approximately $3.0 million of
environmental expenditures had been deferred for future recovery from customers.
REGULATORY MATTERS. On April 13, 1995, approval was received from the FERC
for a $1.1 million increase in annual pipeline revenues effective November 1,
1994.
An overall revenue-neutral rate redesign has been filed with the MADPU. The
goal of the rate redesign is to implement rates that more closely reflect the
actual costs associated with serving different customers. New rates are expected
to be effective early in calendar 1996.
Significant regulatory assets arising from the rate-making process
associated with income taxes, employee benefits, and environmental response
costs have been recorded. Based on its assessments of decisions by regulatory
authorities, management believes that all regulatory assets will be settled at
recorded amounts through specific provisions of current and future rate orders.
LITIGATION. The Company is involved in various legal actions and claims
arising in the normal course of business. Based on its current assessment of the
facts of law, and consultations with outside counsel, 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.
26
<PAGE> 27
NOTE 9. UNAUDITED QUARTERLY FINANCIAL DATA
In thousands except per share amounts.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
FISCAL 1995 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- ----------- -------- ------- ------------
<S> <C> <C> <C> <C>
Operating revenues................. $ 119,286 $174,269 $75,693 $ 48,870
Operating income (loss)............ $ 20,616 $ 39,016 $ 186 $ (6,979)
Net income (loss).................. $ 10,477 $ 21,376 $(2,290) $ (6,435)
Per average common share:
Income (loss).................... $ .78 $ 1.60 $ (.18) $ (.48)
Dividend declared and paid....... $ .365 $ .365 $ .375 $ .375
FISCAL 1994
-----------
Operating revenues................. $ 139,328 $210,019 $67,043 $ 46,890
Operating income (loss)............ $ 23,806 $ 40,757 $(1,827) $ (8,620)
Net income (loss).................. $ 11,798 $ 22,819 $(3,037) $ (7,095)
Per average common share:
Income (loss).................... $ .91 $ 1.75 $ (.24) $ (.54)
Dividend declared and paid....... $ .355 $ .355 $ .365 $ .365
</TABLE>
In the opinion of management, quarterly financial data includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
representation of such information. Revenue and income amounts vary
significantly due to seasonal weather conditions.
27
<PAGE> 28
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, which consists of three outside 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, 1995, the Company's system of
internal control was adequate to accomplish the objectives discussed herein.
ROGER A. YOUNG THOMAS W. SHERMAN
Chief Executive Officer Chief Financial Officer
28
<PAGE> 29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
BAY STATE GAS COMPANY
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Bay State Gas Company and subsidiaries as of September 30,
1995 and 1994, 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, 1995. 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, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1995 in conformity with generally accepted accounting principles.
As discussed in Notes 1, 2, and 7 to the consolidated financial statements,
the Company changed its methods of accounting for income taxes, postemployment
benefits and postretirement health and welfare benefits in 1994.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 24, 1995
29
<PAGE> 30
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Registrant as set forth on pages
3 and 4 of the 1996 annual meeting proxy statement, dated December 7, 1995, is
incorporated herein by reference. Information relating to the Executive Officers
of the Registrant is contained in Part I, Item 1, Business.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Registrant's executive officers
as set forth on pages 7 through 15 of the 1996 annual meeting proxy statement,
dated December 7, 1995, 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 5 and 6 of the 1996 annual meeting proxy
statement, dated December 7, 1995, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions as set
forth on pages 4, 6, 7 and 15 of the 1996 annual meeting proxy statement, dated
December 7, 1995, is incorporated herein by reference.
30
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
(1) The following financial statements are included herein under Part II,
Item 8, FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Consolidated Statements of Earnings for the Years ended September 30,
1995, 1994, and 1993
Consolidated Balance Sheets as of September 30, 1995 and 1994
Consolidated Statements of Capitalization as of September 30, 1995 and
1994
Consolidated Statements of Shareholders' Equity for the Years ended
September 30, 1995, 1994, and 1993
Consolidated Statements of Cash Flows for the Years ended September
30, 1995, 1994, and 1993 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.
<TABLE>
<CAPTION>
PAGES IN
FORM 10-K
----------
<S> <C> <C>
VIII Consolidated Valuation and Qualifying Accounts -- 1995, 1994 and 1993 32
Independent Auditors' Report 29
</TABLE>
(3) Exhibits -- See Exhibit index on page 34.
(B) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the fourth quarter of
fiscal 1995.
31
<PAGE> 32
<TABLE>
SCHEDULE VIII
BAY STATE GAS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
(IN THOUSANDS)
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS(A) PERIOD
- ----------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts......................... $5,072 $5,007 $ 5,847 $4,232
====== ====== ======= ======
YEAR ENDED SEPTEMBER 30, 1994
Allowance for doubtful accounts......................... $4,468 $7,778 $ 7,174 $5,072
====== ====== ======= ======
YEAR ENDED SEPTEMBER 30, 1993
Allowance for doubtful accounts......................... $4,251 $6,990 $ 6,773 $4,468
====== ====== ======= ======
<FN>
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
</TABLE>
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAY STATE GAS COMPANY
/S/ THOMAS W. SHERMAN
By ---------------------------------
THOMAS W. SHERMAN
EXECUTIVE VICE PRESIDENT
Date: December 1, 1995
------------------------------
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.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/S/ CHARLES H. TENNEY II Director December 1, 1995
- --------------------------------------
CHARLES H. TENNEY II
(CHAIRMAN OF THE BOARD OF DIRECTORS)
/S/ ROGER A. YOUNG Chief Executive Officer; December 1, 1995
- -------------------------------------- Director
ROGER A. YOUNG
(PRESIDENT)
/S/ JOEL L. SINGER Chief Operating Officer; December 1, 1995
- -------------------------------------- Director
JOEL L. SINGER
(EXECUTIVE VICE PRESIDENT)
/S/ THOMAS W. SHERMAN Chief Financial and Accounting December 1, 1995
- -------------------------------------- Officer; Director
THOMAS W. SHERMAN
(EXECUTIVE VICE PRESIDENT)
/S/ LAWRENCE J. FINNEGAN Director December 1, 1995
- --------------------------------------
LAWRENCE J. FINNEGAN
/S/ DOUGLAS W. HAWES Director December 1, 1995
- --------------------------------------
DOUGLAS W. HAWES
/S/ WALTER C. IVANCEVIC Director December 1, 1995
- --------------------------------------
WALTER C. IVANCEVIC
/S/ JOHN H. LARSON Director December 1, 1995
- --------------------------------------
JOHN H. LARSON
/S/ JACK E. MCGREGOR Director December 1, 1995
- --------------------------------------
JACK E. MCGREGOR
/S/ DANIEL J. MURPHY III Director December 1, 1995
- --------------------------------------
DANIEL J. MURPHY III
/S/ GEORGE W. SARNEY Director December 1, 1995
- --------------------------------------
GEORGE W. SARNEY
</TABLE>
33
<PAGE> 34
EXHIBIT INDEX
(3) Articles of incorporation and by-laws:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------- ---------
<C> <S> <C>
*3.1 Articles of Incorporation Exhibit 3.1 to Form 10-Q
dated February 9, 1995 (File No.
1-7479)
*3.2 By-Laws, as amended Exhibit 3.2 to Form 10-Q
dated February 9, 1995 (File No.
1-7479)
<FN>
- ---------------
* Incorporated by reference to the indicated filing.
</TABLE>
(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, 1995. The Company will furnish the Securities and
Exchange Commission with copies of any of the instruments listed below upon
request.
Revolving Credit Agreement between Northern and The First National Bank of
Boston, to borrow up to $20,000,000, dated as of March 17, 1993, due March 17,
1997.
Indenture between Bay State and The First National Bank of Boston, Trustee,
dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the
following Notes have been issued under a Prospectus dated April 18, 1991:
- $10,000,000 Principal Amount of 9.20% Notes due June 6, 2011
- $5,000,000 Principal Amount of 9.28% Notes due August 12, 2021
- $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
Note Purchase Agreement between Northern and First Colony Life Insurance
for the purchase and sale of $13,000,000 principal amount of 9.70% Notes dated
as of January 1, 1992, due September 1, 2031.
34
<PAGE> 35
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $10,000,000 principal amount of
6.93% Notes dated as of September 29, 1995, due September 27, 2010.
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $5,000,000 principal amount of
6.30% Notes dated as of September 29, 1995, due September 30, 1998.
<TABLE>
(10) Material contracts:
<CAPTION>
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------- ---------
<C> <S> <C>
*10.01 Key Employee Stock Option Plan covering key employees Exhibit 10.16 to Form 10-K
of the Company for 1989 (File No. 1-7479)
*10.02 Key Officer Deferred Compensation Plan covering the Exhibit 10.21 to Form 10-K
Chairman of the Board of Directors, the President, for 1992 (File No. 1-7479)
and all Vice Presidents of the Company
*10.03 Supplemental Executive Retirement Plan covering the Exhibit 10.22 to Form 10-K
Chairman of the Board of Directors, the President, for 1992 (File No. 1-7479)
and all Vice Presidents of the Company
*10.04 Key Employee Incentive Compensation Plan covering the Exhibit 10.23 to Form 10-K
Chairman of the Board of Directors, the President, for 1992 (File No. 1-7479)
and certain key employees of the Company
*10.05 Senior Advisory Agreement between Bay State and Exhibit 10.05 to Form 10-K
Charles H. Tenney II, dated January 27, 1994 for 1994 (File No. 1-7479)
10.06 Severance agreement between Bay State and each of the Filed herewith
executive officers of the Company
10.07 Directors' Retirement Plan Filed herewith
10.08 Key Employee Long-term Incentive Plan Filed herewith
(11) Statement re: computation of per share earnings, filed herewith.
(12) Statement re: computation of ratio of earnings to fixed charges, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Independent Auditors, filed herewith.
(27) Financial Data Schedule, filed herewith.
<FN>
- ---------------
* Incorporated by reference to the indicated filing.
</TABLE>
35
<PAGE> 1
EXHIBIT 10.06
BAY STATE GAS COMPANY
THREE-YEAR SEVERANCE AGREEMENT
THIS AGREEMENT, dated this day of , 19 ,
made effective as of the date on which a Change in Control (as
defined in paragraph 2) occurs, by and between Bay State Gas
Company, a Massachusetts corporation, (herein referred to as the
"Company") and having an
address at (the
"Employee").
W I T N E S S E T H T H A T:
WHEREAS, the Employee is an Employee of the Company and an
integral part of its management who participates in the
decision-making process relative to short- and long-term
planning and policy for the Company; and
WHEREAS, the Board of Directors of the Company, at its meeting
on January 26, 1989, determined that it would be in the best
interests of the Company, its shareholders and the Employee to
assure continuity in the management of the Company's
administration and operations in the event of a Change in
Control by entering into a severance Agreement to retain the
services of the Employee.
NOW, THEREFORE, it is hereby agreed by and between the parties
hereto as follows:
1. Employment. The Company agrees to continue the Employee in
its employ and the Employee agrees to remain in the employ of
the Company for the period stated in paragraph 4 hereof and upon
the other terms and conditions herein provided.
2. Change in Control. The term, "Change in Control:, shall
mean the occurrence of any of the following:
(a) the Company receives a report on Schedule 13D filed with
the Securities and Exchange Commission pursuant to Section 13(d)
of the Securities Exchange Act of 1934, as amended (hereinafter
referred to as the "Exchange Act"), disclosing that any person,
group, corporation or other entity is the beneficial owner,
directly or indirectly, of 25% or more of the outstanding common
stock of the Company;
(b) any person (as such term is defined in Section 13(d) of
the Exchange Act), group, corporation or other entity other than
the Company or a wholly-owned subsidiary of the Company,
purchases shares pursuant to a tender offer or exchange offer to
acquire any common stock of the Company (or securities
convertible into common stock) for cash, securities or any other
consideration, provided that after consummation of the offer,
the person, group, corporation or other entity in question is
the beneficial owner (as such term is defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of 25% or more
of the outstanding common stock of the Company (calculated as
provided in paragraph (d) of Rule 13d-3 under the Exchange Act
in the case of rights to acquire common stock);
(c) the stockholders of the Company approve (i) any
consolidation or merger of the Company in which the Company is
not the continuing or surviving corporation or pursuant to which
shares of common stock of the Company would be converted into
cash, securities or other property, or (ii) any sale, lease,
exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of
the Company; or
<PAGE> 2
(d) there shall have been a change in a majority of the
members of the Board of Directors of the Company within a
25-month period unless the election or nomination for election
by the Company's stockholders of each new director was approved
by the vote of two-thirds of the directors then still in office
who were in office at the beginning of the 25-month period.
3. Position and Responsibilities. During the period of
employment hereunder, the Employee agrees to serve the Company
in an executive capacity. Such service shall involve duties and
responsibilities at least equal in importance and scope to those
of the Employee's position immediately prior to the effective
date of this Agreement, as the Board of Directors, the Chairman
of the Board of Directors or Chief Executive Officer or any
other executive officer or any other executive officer of the
Company to whom the Employee reports may from time-to-time
determine. During said period, the Employee also agrees to
serve, if elected, as an officer and/or director of any
subsidiary or affiliate of the Company.
4. Term and Duties.
(a) The period of the Employee's employment under this
Agreement shall be deemed to have commenced as of the effective
date of this Agreement and shall continue for a period of 36
full calendar months thereafter.
(b) During the period of employment hereunder and except for
illness or incapacity and reasonable vacation periods, the
Employee's business time, attention, skill and efforts shall be
exclusively devoted to the business and affairs of the Company;
provided, however, that nothing in this Agreement shall preclude
the Employee from devoting time during reasonable periods
required for:
(i) serving as a director or member of a committee of any
company or organization involving no conflict of interest with
the Company or any of its subsidiaries or affiliates,
(ii) delivering lectures and fulfilling speaking
engagement, and
(iii) engaging in charitable and community activities,
provided that such activities do not materially affect or
interfere with the performance of the Employee's obligations to
the Company.
5. Compensation.
(a) For all services rendered by the Employee in any capacity
during employment under this Agreement, including services as an
executive, officer, director or member of any committee of the
Company or of any subsidiary of affiliate of the Company, the
Company shall pay the Employee a fixed salary at an annual rate
not less than the annual rate of salary being paid to Employee
immediately prior to the effective date of this Agreement. Such
salary shall be subject to such periodic percentage increases
after the effective date of this Agreement as the Company pays
generally to the Company's senior management employees from
time-to-time, and shall be payable in accordance with the
customary payroll practices of the Company. Such periodic
increases in salary, once granted, shall not be subject to
revocation.
(b) In addition to the salary payable under subsection (a),
above, the Company shall also pay to the Employee annual bonuses
in an amount at least equal to the amount of the last payment to
the Employee under any short-term incentive performance program
of the Company or any subsidiary of the Company in effect during
the 12-month period prior to the effective date of this
Agreement. Nothing in this subsection (b) shall be deemed to
require the Company to (i) have or continue an incentive
performance program in effect prior to the effective date of
this Agreement, or (ii) award to the Employee any bonuses under
such program prior to the effective date of this Agreement.
<PAGE> 3
(c) Nothing in this Agreement shall preclude or affect any
rights or benefits that may now or hereafter be provided for the
Employee or for which the Employee may be or become eligible
under any bonus or other form of compensation or employee
benefit plan now existing or that may hereafter be adopted or
awarded by the Company. Specifically, the Employee shall:
(i) participate in the Bay State Gas Company Retirement
Plan and any related excess benefit or supplemental retirement
program (hereinafter referred to collectively as the "Retirement
Program");
(ii) participate in any savings or thrift plan maintained
by the Company;
(iii) participate in any stock option, stock appreciation
right, equity incentive or deferred compensation plan maintained
by the Company;
(iv) participate in the Company's death benefit plans;
(v) participate in the Company's disability benefit plans;
(vi) participate in the Company's medical, dental and
health and welfare plans;
(vii) participate in equivalent successor plans of the
Company for which senior management employees are eligible; and
(viii) be provided with such employee perquisites as may be
provided under Company policy to employees with a comparable
level of responsibility.
provided, however, that nothing in this Agreement shall preclude
the Company from amending or terminating any such plan or
program, on the condition that such amendment or termination is
applicable to all of the Company's senior management employees
generally. For purposes of the foregoing, any plan or program
maintained by any subsidiary of the Company which is made
available to the senior management of the Company and its
subsidiaries taken as a whole, shall be deemed to be a plan or
program maintained by the Company.
6. Business Expense. The Company shall pay or reimburse the
Employee for all reasonable travel or other expenses incurred in
connection with the performance of the Employee's duties under
this Agreement in accordance with such procedures as the Company
may from time-to-time establish.
7. Additional Benefits. Nothing in this Agreement shall affect
the Employee's eligibility to participate in all group health,
dental, hospitalization, life, travel or accident or other
insurance plans or programs and all other perquisites (including
the use of a Company-owned car where applicable), fringe benefit
or retirement plans or additional compensation, including
termination pay programs, which the Company or any subsidiary of
the Company may hereafter, in their sole and absolute
discretion, elect to make available to the senior management
employees of the Company generally, and the Employee shall be
eligible to receive, during the period of employment under this
Agreement, all benefits and emoluments for which key employees
are eligible under every such plan, program, perquisite or
arrangement to the extent permissible under the general terms
and provisions thereof.
<PAGE> 4
8. Termination of Employment. Notwithstanding any other
provision of this Agreement, the Employee's employment under
this Agreement may be terminated:
(a) by the Company, in the event of the Employee's conviction
for the commission of a felony or in the event of Employee's
fraud or dishonesty which has resulted or is likely to result in
material economic damage to the Company or any of its
subsidiaries, as determined in good faith by the Directors of
the Company at a meeting of the Board of Directors at which the
Employee is provided and opportunity to be heard:
(b) by either the Company or the Employee, if the Employee
accepts employment or a consulting position with another company;
(c) by the Employee, if he determines in good faith that
there has been any (i) material change by the Company of the
Employee's functions, duties or responsibilities which change
would cause the Employee's position with the Company to become
of less dignity, responsibility, importance, prestige or scope
from that described in paragraph 3 above, including, without
limitation, a diminution in perquisites to which the Employee is
currently entitled, such as office size and status and
secretarial and clerical staff, (ii) assignment or reassignment
by the Company of the Employee to another place of employment
more than 50 miles from the Employee's current place of
employment, (iii) liquidation, dissolution, consolidation or
merger of the Company, or transfer of all or substantially all
of its assets, other than a transaction in which a successor
corporation or merger of the Company, or transfer of all or
substantially all of its assets, other than a transaction in
which a successor corporation with a net worth at least equal to
that of the Company immediately before such transaction assumes
this Agreement and all obligations and undertakings of the
Company hereunder, (iv) reduction in the Employee's total
compensation or any component thereof, as specified in paragraph
5 above, except as part of a salary reduction program affecting
the management employees of the Company and its subsidiaries
generally, or (v) notice to the Company, specifying the event
relied upon for such termination and given at any time within
one year after the occurrence of such event; or
(d) by the Company upon the Disability or death of the
Employee. For purposes of this Agreement, the term "Disability"
is defined as the inability of the Employee to engage in his
regular occupation for 12 consecutive months and the inability
thereafter to engage in any occupation in which the Employee
could reasonably expect to engage giving due consideration to
Employee's education, training and experience. The Employee
must be under the regular medical care of a physician in
connection with treatment for Disability.
9. Payments Upon Termination of Employment.
(a) In the event of any termination of the Employee's
employment hereunder (i) by the Employee pursuant to paragraph
8(c), above, or (ii) by the Company for any reason other than
one of those specified in paragraph 8(a), 8(b) or 8(d), above,
then, except for Subsection (iv), below, within five business
days after any such termination the Company shall pay to the
Employee the following amounts, and shall provide the Employee
with the following, as liquidated damages or severance pay, or
both:
<PAGE> 5
(i) a lump sum cash amount equal to the present value of
the product obtained by multiplying (1) the monthly amount of
the salary and bonus provided for in paragraphs 5(a) and 5(b)
above, which was being paid by the Company to the Employee at
the time of such termination, by (2) 36;
(ii) a lump sum cash amount equal to the present value of
the excess of (1) the aggregate benefit that would have been
paid under the Retirement Program described in paragraph
5(c)(i), above, as in effect on the date of this Agreement, if
the Employee had continued to be employed and to be entitled to
service credit for eligibility and benefit purposes during the
36-month period immediately following such termination, over (2)
the aggregate benefit actually payable under the Retirement
Program and any successor retirement program of the Company.
For purposes of such calculation, the following assumptions
shall apply: (1) that the Employee would continue to be
compensated during the 36-month period following termination at
an annual rate of compensation equal to that used to calculate
the payments provided by paragraph 9(a) above, calculated on the
basis of the compensation amount used in the benefit formula
under the Retirement Program; (2) that the Employee is fully
vested in the benefit payable under the Retirement Program; and
(3) that the aggregate benefit that would have been paid under
the Retirement Program is as of either the normal or early
retirement date for which the Employee would have qualified, if
the Employee were still employed on that date, whichever would
produce the highest present value amount payable under this
paragraph;
(iii) a lump sum cash amount equal to the present value of
the contributions which would have been made by the Company or
any subsidiary of the Company to the Employee's account pursuant
to any savings or thrift plan maintained by the Company or any
subsidiary of the Company in which the Employee was
participating immediately prior to such termination, calculated
as if the Employee had continued to be employed and to be
entitled to such contributions during the 36-month period
immediately following such termination, at a rate of
contribution equal to that made by the Company or any subsidiary
of the Company during the most recent contribution period
preceding such termination; and
<PAGE> 6
(iv) a lump sum cash amount payable within five business
days after the end of the 36-month period and equal to (1) the
economic benefit that the Employee is eligible to receive on any
outstanding Company stock options, based on assumptions
determined by the Stock Option Committee upon advice of an
independent financial advisor and (2) the spread on any Company
stock option which would have been granted to the Employee
during the 36-month period immediately following such
termination. For purposes hereof, the following assumptions
shall apply: (1) that the Employee continued to be employed
during such 36-month period, and (2) that the Employee continued
receiving annual grants of options to purchase a number of
shares of the Company's common stock equal to the number of
shares which the Employee is entitled to purchase under the
option or options that the Employee received in the calendar
year in which the Employee last received options to purchase
Company common stock (assuming such options are exercisable in
full), and calculated on the assumption that such options were
granted to the Employee at the beginning of each calendar year
during such 36-month period at the same time and at the same
exercise price as the option to purchase Company common stock
which is first granted to any other senior executive of the
Company during each such year; provided, however, that if the
Employee was granted an option to purchase Company common stock
during the calendar year in which is employment terminates and
prior to such termination of employment, no additional payments
shall be made to him under this paragraph 9(a)(iv) with respect
to such calendar year; further provided, that for purposes of
this paragraph 9(a)(iv), the spread shall be calculated based on
the closing price of the Company's common stock on the last
business day of such 36-month period; and further provided, that
if such 36-month period does not begin with the month of January
or end with the month of December, the payment to the Employee
under this paragraph 9(d) with respect to the calendar years in
which such 36-month period begins and ends shall be multiplied
by a fraction, the numerator of which is the number of months of
the 36-month period in such year and the denominator of which is
12. For purposes of this paragraph 9, the term "spread" means
the excess, if any, of the closing price on a national stock
exchange (or if the stock is no longer traded on a national
stock exchange, any regional or over-the-counter exchange on
which it is traded) of the Company's stock multiplied by the
number of the shares of Company common stock subject to a stock
option, over the option exercise price for such option.
Notwithstanding anything to the contrary in the paragraph
9(a)(iv), if as of the applicable calculation date, the
Company's common stock is no longer traded on any national,
regional or over-the-counter stock exchange, the fair market
value of the Company's common stock for purposes of determining
the amount of spread shall be the amount agreed to by the
Employee and the Company. However, if the Employee and the
Company are not able to agree on a fair market value within 10
days after the date payment is due to be made to the Employee
under this paragraph 9(a)(iv), the fair market value of a share
of the Company's common stock shall be determined by a qualified
and independent appraiser selected by the Assistant Regional
Director of the American Arbitration Association or his
delegate. Such appraiser shall deliver its final report to the
Company and the Employee immediately upon completion. The
determination of the appraiser shall be final and binding an all
parties and shall include interest on such amount computed from
the date payment is due at such rate as determined by the
arbitrator. Any payment to the Employee under paragraph
9(a)(iv), which was delayed pending such appraisal, shall be
made within five business days after the appraiser delivers its
report to the Company and the Employee. All fees, costs and
expenses associated with such appraisal (including those of the
arbitrator) shall be paid by the Company.
<PAGE> 7
(b) For purposes of calculating the lump sum cash payments
provided by paragraph 9(a)(i) through (iv), above, present value
shall be determined by using a discount factor equal to one
percentage point below the Prime Rate, compounded annually. The
"Prime Rate" shall be the base rate on corporate loans at large
U.S. money center commercial banks as reported in The Wall
Street Journal (or, if such rate is no longer published, such
other base rate on corporate loans by large money center
commercial banks in the United States to their most creditworthy
customers as published by any newspaper or periodical of general
circulation) as of the date on which termination shall have
occurred.
(c) For a period of 36 months (commencing with the month in
which termination shall have occurred), the Employee shall be
entitled to all Employee benefits provided for in paragraph
5(c)(iv) through (viii), above, as if the Employee were still
employed during such period under this Agreement, with benefits
based upon the compensation used to calculate the payments
provided by paragraph 9(a) above, and if and to the extent that
such benefits shall not be payable or provided under any such
plan, the Company shall pay or provide such benefits on an
individual basis. The benefits provided for in paragraph
5(c)(viii), above, in accordance with this paragraph 9(c) shall
be secondary to any comparable benefits provided by another
employer.
(d) Notwithstanding the termination of the Employee, in the
event a Change in Control occurs prior to a vote of the
shareholders of the company on the approval of the Bay State Gas
Company 1989 Stock Option Plan, as approved by the Board of
Directors of the Company on January 26, 1989, then, within five
business days of such Change in Control, the Company shall pay
to the Employee a lump sum cash amount equal to the economic
benefit that the Employee would have been eligible to receive on
any Company stock options granted subject to shareholder
approval, had the shareholders approved such Plan, based on
assumptions determined by the Stock Option Committee upon the
advice of an independent financial advisor.
(e) (i) In the event it shall be determined that any payment
or distribution by the Company to or for the benefit of the
Employee, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code") (or any successor thereto) or comparable
state or local tax or any interest or penalties with respect to
such excise tax or comparable state or local tax (such excise
tax, together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise Tax"), then
the Employee shall be entitled to receive an additional payment
(a "Gross-Up Payment"). The Gross-Up Payment shall be equal to
the sum of the Excise Tax and all taxes (including any interest
or penalties imposed with respect to such taxes) imposed upon
the Gross-Up Payment.
<PAGE> 8
(ii) If the Employee determines that a Gross-Up Payment is
required, the Employee shall so notify the Company in writing,
specifying the amount of Gross-Up Payment required and details
as to the calculation thereof. The Company shall within 30 days
either pay such Gross-Up Payment (net of applicable wage
withholding) to the Employee or furnish an unqualified opinion
from Independent Tax Counsel (as defined below), addressed to
the Employee and the Company, that there is substantial
authority (within the meaning of Section 6661 of the Code) for
the position that no Gross-Up Payment is required. "Independent
Tax Counsel: mean a lawyer with expertise in the area of
executive compensation tax law, who shall be selected by the
Employee and shall be reasonably acceptable to the Company, and
whose fees and disbursements shall be paid by the Company.
(iii) If the Internal Revenue Service or other tax authority
proposes in writing an adjustment to the income tax of the
Employee which would result in a Gross-Up Payment, the Employee
shall promptly notify the Company in writing and shall refrain
for at least thirty days after giving such notice, if so
permitted by law, from paying any tax (including interest,
penalties and additions to tax) asserted to be payable as a
result of such proposed adjustment. Before the expiration of
such period, the Company shall either pay the Gross-Up Payment
or provide an opinion from Independent Tax Counsel to the
Employee and the Company as to whether it is more likely than
not that the proposed adjustment would be successfully
challenged if the matter were to be litigated. If the opinion
provides that a challenge would be more likely than not to be
successful if the issue were litigated, and the Company requests
in writing that the Employee contest such proposed adjustment,
then the Employee shall content the proposed adjustment and
shall consult in good faith with the Company with respect to the
nature of all action to be taken in furtherance of the contest
of such proposed adjustment; provided that the Employee, after
such consultation with the Company, shall determine in his sole
discretion the nature of all action to be taken to contest such
proposed adjustment, including (A) whether any such action shall
initially be by way of judicial or administrative proceedings,
or both, (B) whether any such proposed adjustment shall be
contested by resisting payment thereof or by paying the same and
seeking a refund thereof, and (C) if the Employee shall
undertake judicial action with respect to such proposed
adjustment, the court or other judicial action with respect to
such proposed adjustment, the court or other judicial body
before which such action shall be commenced and the court or
other judicial body to which any appeals should be taken. The
Employee agrees to take appropriate appeals of any judicial
decision that would require the Company to pay a Gross-Up
Payment, provided the Company request in writing that the
Employee do so and provides an opinion from Independent Tax
Counsel to the Employee and the Company that it is more likely
than not to settle, compromise or otherwise terminate a contest
with the Internal Revenue Service or other tax authority with
respect to all or a portion of the proposed adjustment giving
rise to the Gross-Up Payment, if requested by the Company in
writing to do so at any time, in which case the Employee shall
be entitled to receive from the Company the Gross-Up Payment.
In no event shall the Employee compromise or settle all or any
portion of a proposed adjustment which would result in a
Gross-Up Payment without the written consent of the Company.
<PAGE> 9
The Employee shall not be required to take or continue any
action pursuant to this paragraph 9(d) unless the Company
acknowledges its liability under this Agreement in the event
that the Internal Revenue Service or other tax authority
prevails in the contest. The Company hereby agrees to indemnify
the Employee in a manner reasonably satisfactory to the Employee
for any fees, expenses, penalties, interest or additions to tax
which the Employee may incur as a result of contesting the
validity of any Excise Tax and to pay the Employee promptly upon
receipt of a written demand therefore all costs and expenses
which the Employee may incur in connection with contesting such
proposed adjustment (including reasonable fees and disbursements
of Independent Tax Counsel); provided, however, that the Company
shall not be required to pay any amount necessary to permit the
Employee's institution of a claim for refund under this
paragraph 9(d)(iii).
If the Employee shall have contested any proposed adjustment as
above provided, and for so long as the Employee shall be
required under the terms of this paragraph 9(d)(iii) to continue
such contest, the Company shall not be required to pay a
Gross-Up Payment until there occurs a Final Determination (ad
defined below) of the liability of the Employee for the tax and
any interest, penalties and additions to tax asserted to be
payable as a result of such proposed adjustment. A "Final
Determination" shall mean (A) a decision, judgment, decree or
other order by any court of competent jurisdiction, which
decision, judgment, decree or other order has become final after
all allowable appeals by either party to the action have been
exhausted, the time for filing such appeal has expired or the
Employee has no right under the terms hereof to request an
appeal, (B) a closing agreement entered into under Section 7121
of the Code or any other settlement agreement entered into in
connection with an administrative or judicial proceeding and
with the consent of the Employee, or (C) the expiration of the
time for instituting a claim for refund, or if such a claim was
filed, the expiration of the time for instituting suit with
respect thereto.
(iv) In the event the Employee receives any refund from the
Internal Revenue Service or other tax authority on account of an
overpayment of Excise Tax, such amount, together with that part
of any Gross-Up Payment attributable to such amount, shall be
promptly paid by the Employee to the Company.
10. Source of Payments. All payments provided for in paragraph
5, 6, 7 and 9 shall be paid in cash from the general funds of
the Company and its subsidiaries. The Company shall not be
required to establish or separate fund or other segregation of
assets to assure such payments.
<PAGE> 10
11. Litigation Expenses. In the event of any litigation or
other proceeding between the Company and the Employee with
respect to the subject matter of this Agreement and the
enforcement of rights hereunder, the Company shall reimburse the
Employee for all reasonable costs and expenses relating to such
litigation or other proceeding as they are incurred, including
reasonable attorneys' fees and expenses, regardless of whether
such litigation results in any settlement or judgment or order
in favor of any party; provided, however, that any claim or
action initiated by the Employee relating to this Agreement
shall have been made or brought after reasonable inquiry and
shall be well-grounded, in fact, and warranted by existing law
or a good faith argument for the extension, modification or
reversal of existing law, and that is not interposed for any
improper purpose, such as to harass or to cause unnecessary
delay or needless increase in the cost of litigation.
Notwithstanding any provision of Massachusetts law to the
contrary, in no event shall the Employee be required to
reimburse the Company for any of the costs and expenses relating
to such litigation or other proceeding. The obligation of the
Company under this paragraph 11 shall survive the termination
for any reason of this Agreement (whether such termination is by
the Company, by the Employee, upon the expiration of this
Agreement or otherwise).
12. Income Tax Withholding. The Company may withhold from any
payments made under this Agreement all federal, state, city or
other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
13. Entire Understanding. This Agreement contains the entire
understanding between the Company and the Employee with respect
to the subject matter hereof and supersedes any prior employment
agreement between the Company and the Employee.
14. Severability. If, for any reason, any one or more of the
provisions or part of a provision contained in this Agreement
shall be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall
not affect any other provision or part of a provision of this
Agreement not held so invalid, illegal or unenforceable, and
each other provision or part of a provision shall to the full
extent consistent with law continue in full force and effect.
15. Consolidation, Merger or Sales of Assets. Nothing in this
Agreement shall preclude the Company from consolidating or
merging into or with, or transferring all of substantially all
of its assets to, another corporation with a net worth at least
equal to that of the Company and which assumes this Agreement
and all obligations and undertakings of the Company hereunder.
Upon such a consolidation, merger or transfer of assets and
assumption, the term "the Company", as used herein shall mean
such other corporation and this Agreement shall continue in full
force and effect.
<PAGE> 11
16. Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be given in
writing and shall be deemed to have been duly given if delivered
or mailed, postage prepaid, first class as follows:
(a) To the company:
Bay State Gas Company
300 Friberg Parkway
Westborough, Massachusetts 01581-5039
Attention: Secretary
(b) To the employee:
at the address set forth
at the beginning of this Agreement.
or to such other address as either party shall have previously
specified in writing to the other.
17. No Attachment. Except as required by law, no right to
receive payments under this Agreement shall be subject to
anticipation, commutation, alienation, sale, assignment,
encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy or similar process or assignment by operation
of law, and any attempt, voluntary or involuntary, to effect any
such action shall be null, void and of no effect.
18. Binding Agreement. This Agreement shall be binding upon
and shall inure to the benefit of, the Employee and the Company
and their respective permitted successors and assigns.
19. Modification and Waiver. This Agreement may not be
modified or amended except by an instrument in writing signed by
the parties hereto. No term or condition of this Agreement
shall be deemed to have been waived, nor shall there be any
estoppel against the enforcement of any provision of this
Agreement except by written instrument signed by the party
charged with such waiver or estoppel. No such written waiver
shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a
waiver of such term or condition for the future or as to any act
other than that specifically waived.
<PAGE> 12
20. Headings of No Effect. The paragraph headings contained in
this Agreement are included solely for convenience of reference
and shall not in any way affect the meaning or interpretation of
any of the provisions of this Agreement.
21. Governing Law. This Agreement and its validity,
interpretation, performance and enforcement shall be governed by
the laws of the Commonwealth of Massachusetts, without giving
effect to the choice of law provisions in effect in such State.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officers thereunto duly authorized, and the
Employee has signed this Agreement, all as of the date first
above written.
BAY STATE GAS COMPANY
By:
By:
Officers list for Severance Agreement
Officer Agreement Date
Joel L. Singer October 2, 1995
Dwight G. Curley January 2, 1990
James D. Simpson December 15, 1993
Stephen J. Curran June 8, 1990
Phillip W. Kallaugher October 27, 1993
Roger A. Young May 5, 1989
Thomas W. Sherman May 5, 1989
Thomas A. Sacco May 5, 1989
John F. Doucette May 5, 1989
James A. Burke May 5, 1989
John R. Snow May 5, 1989
<PAGE> 1
EXHIBIT 10.07
BAY STATE GAS COMPANY
DIRECTORS' RETIREMENT PLAN
July 1, 1994
<PAGE> 2
PREAMBLE
The name of this plan is the "Bay State Gas Company Directors'
Retirement Plan" (the "Plan"). The Plan has been established by
Bay State Gas Company (the "Company") for the purpose of
providing retirement income to Directors of the Company who are
not officers of the Company. The Plan has been adopted by the
Board of Directors at their meeting April 28, 1994, and shall be
effective July 1, 1994.
<PAGE> 3
ARTICLE I
DEFINITIONS
1.1 "Compensation Committee" means the committee of the Board
of Directors charged with the responsibility for compensation
and employee benefit matters.
1.2 "Deferred Retirement Date" means the first day of the month
following the Participant's Normal Retirement Date in which i)
the Participant retires as a Director, or ii) if later, ceases
service as a Director Emeritus.
1.3 "Director Emeritus" means a retired member of the Board
of Directors who has been appointed by the Board of Directors to
act in an advisory, rather than voting, capacity.
1.4 "Normal Retirement Date" means the first day of the month in
which the Participant reaches age 65 and has 5 Years of Service
as a Director of Bay State Gas Company.
1.5 "Participant" means a Director of the Company who is not an
officer of the Company.
1.6 "Retainer" means the annual amount received by each
Director for services as a member of the Board of Directors of
the Company.
1.7 "Year of Service" means 12 consecutive months of service as
a non-employee Director. Each full month shall be counted as a
partial year, for example, if a Participant has 8 years and 3
full months of service at the time of retirement, it shall
counted as 8.25 Years of Service.
ARTICLE II
ELIGIBILITY FOR BENEFITS
2.1 Eligibility for Benefits. Each Participant is eligible to
retire and receive a benefit under the Plan beginning on the
later of the Participant's Normal Retirement Date or Deferred
Retirement Date.
<PAGE> 4
ARTICLE III
AMOUNT AND FORM OF RETIREMENT BENEFIT
3.1 Benefit at Normal or Postponed Retirement. The annual
retirement benefit payable commencing on a Participant's Normal
or Deferred Retirement Date will equal 10% of the Participant's
retainer for his or her final year of service, multiplied by the
number of Years of Service, provided, however, that the annual
benefit shall not exceed 100% of the Participant's retainer for
the final year of service.
3.2 Form of Benefit. The benefit determined under the Plan will
be payable as an annuity over a period equal to the lesser of,
i) the number of the Participant's Years of Service, or ii)
the life of the Participant.
ARTICLE IV
PAYMENT OF RETIREMENT BENEFITS
4.1 Time of Payment. The annual benefit determined under the
Plan will be payable
in quarterly installments on, or as soon as reasonably
practicable after, the fifth day of each of the calendar
quarters beginning on each January 1, April 1, July 1 and
October 1.
4.2 No Benefits at Death. There are no death benefits payable
under the Plan. However, a Participant who survives to the
first day of a new quarter, as described in 4.1 above, will be
entitled to receive the benefit payable for that quarter.
4.3 Pre-Retirement Termination. No benefits are payable under
the Plan if a Participant terminates service as a Director
before the completion of 5 Years of Service with Bay State Gas
Company and the attainment of age 65.
<PAGE> 5
ARTICLE V
MISCELLANEOUS
5.1 Termination, Amendment, Suspension. The Board of Directors
of the Company may, in its sole discretion, terminate, suspend,
or amend the Plan at any time or from time to time, in whole or
in part. The Compensation Committee may, in its sole
discretion, in special cases, including, but not limited to,
Participant illness or extraordinary service, modify or waive
ancillary Plan provisions to meet the needs of the situation.
However, no termination, amendment, suspension or modification
of the Plan will affect a retired Participant's right to
continue to receive a benefit in accordance with the Plan as in
effect on the date such Participant commenced to receive a
benefit hereunder, nor will any such termination, amendment,
suspension or modification result in a reduction of a
Participant's accrued benefit based on the Participant's
earnings and Service to the date of such change in the Plan.
5.2 No Other Rights. The Plan shall not be construed as
conferring on any person any right of any nature, other than the
right to receive benefits in accordance with the provisions of
the Plan.
5.3 Funding. The Plan is unfunded and the Company will make
payments of benefits under the Plan solely on a current basis
out of the general assets of the Company.
5.4 No Alienation or Assignment of Benefit. To the maximum
extent permitted by law, no benefit under the Plan shall be
assignable or subject in any manner to the claims of creditors
of the Company or to alienation, sale, transfer, pledge,
attachment, or encumbrance of any kind.
5.5 Administration. The Committee may adopt rules and
regulations to assist it in the administration of the Plan. The
Committee shall have the sole discretion and authority to
interpret the Plan, and any decision or other action taken under
the Plan shall be conclusive and binding on all persons having
an interest under the Plan.
5.6 Participant's Access to Documents. Each Participant will
receive a copy of the Plan.
5.7 Governing Law. The Plan shall be construed in accordance
with the laws of the Commonwealth of Massachusetts
<PAGE> 6
5.9 Headings. Headings are included for convenience of
reference only and are not to be used in interpreting the Plan.
Executed this 6th day of October, 1994.
BAY STATE GAS COMPANY
By /s/Paul G. Ford
----------------------------
Title: Senior Vice President
ATTEST:
By: Charles H. Tenney III
----------------------------
Title: Clerk
<PAGE> 7
BAY STATE GAS COMPANY
DIRECTORS' RETIREMENT PLAN
FIRST AMENDMENT
WHEREAS Bay State Gas Company (the "Company") adopted the Bay
State Gas Company Directors' Retirement Plan (the "Plan"),
effective July 1, 1994;
WHEREAS the Company reserved the right to amend the Plan in
Section 5.1 thereof; and
WHEREAS the Company desires further to amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows,
effective July 1, 1994:
1. A new Section 1.0 is hereby added before Section 1.1 of
Article I to read in its entirety as follows:
"1.0 "Change of Control" will be considered to have occurred
if:
(a) any person, entity or group of persons (other than the
Company or any wholly-owned subsidiary of the Company), within
the meaning of Sections 13(d) or 14(d) of the Exchange Act,
becomes the beneficial owner, within the meaning of Rule 13d-3
promulgated under such Act, directly or indirectly, of 25
percent or more of the Company's then outstanding shares of
common stock, par value $3.33 1/3 per share ("Common Stock");
(b) any person, entity or group of persons (other than the
Company or any wholly-owned subsidiary of the Company), after
purchasing Common Stock of the Company in a tender or exchange
offer, becomes the beneficial owner, directly or indirectly, of
25 percent or more of the Common Stock;
(c) the shareholders of the Company approve (i) a merger or
consolidation of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which the
shares of Common Stock would be converted into cash, securities
or other property, or (ii) any sale, lease, exchange or other
transfer of all or substantially all of the Company's assets; or
(d) there is a change in the composition of the Company's Board
of Directors within a 25-month period, unless such change has
been approved by two-thirds of the Directors then still in
office who were in office at the beginning of the 25-month
period."
2. A new Section 4.4 is hereby added after Section 4.3 to read
in its entirety as follows:
"4.4 Change of Control. Notwithstanding any other provision of
the Plan, if a Participant who was a Participant prior to a
Change of Control terminates service as a Director within two
years following such Change of Control, the Participant will be
entitled to a benefit in an amount equal to the benefit
determined under Section 3.1, based on the Participant's Years
of Service and final retainer as of the termination of his or
her service as a Director. Such benefit shall be payable as
provided under Sections 3.1, 3.2 and 4.1."
IN WITNESS WHEREOF, Bay State Gas Company has caused this
instrument to be executed by its duly authorized officer.
BAY STATE GAS COMPANY
By: /s/ Paul G. Ford
---------------------------
Date: 12/8/94 Title: Senior Vice President
<PAGE> 1
EXHIBIT 10.08
BAY STATE GAS COMPANY
KEY EMPLOYEE LONG-TERM INCENTIVE PLAN
1. Purposes of Plan
The purposes of the Bay State Gas Company Key Employee
Long-Term Incentive Plan (the "Plan") are to provide long-term
incentives for and to increase the opportunity for ownership in
Bay State Gas Company (the "Company") by those employees who are
directly responsible for the management, growth and success of
the Company's business.
2. Administration of Plan
The plan shall be administered by the Compensation Committee
(the "Committee") appointed by the Board of Directors of the
Company, which shall consist of two or more members of the Board
who qualify as disinterested persons, within the meaning of Rule
16b-3 promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and as outside directors, within
the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). No member of the Committee shall
be eligible to receive an award under the Plan.
The Committee shall act by a majority of its members, without
the necessity of a meeting. The Committee shall have full
power, discretion and authority to interpret and administer the
Plan, and any interpretation or other determination made, and
any action taken, by the Committee shall be conclusive and
binding on all persons having an interest under the Plan, except
as otherwise determined by the Board of Directors.
3. Participation
Each executive or management employee of the Company or an
affiliated company of Grade 35 or above and any other employee
designated by the Board of Directors of the Company who holds a
position which, by virtue of its scope, may have a material
effect on the performance of the Company or who is a significant
contributor to a specific project which is anticipated to have a
material effect on the Company's performance shall be eligible
to participate in the Plan.
4. Performance Shares
The maximum number of performance shares ("Performance Shares")
which may be awarded under the Plan is 500,000. Each
Performance Share shall, upon vesting in accordance with the
provisions of the Plan, be exchangeable for one share of the
Company's common stock, par value $3.33 1/3 per share ("Common
Stock") and a cash payment equal to the dividends paid on a
share of Common Stock during the performance period, as defined
below. The award of Performance Shares shall not entitle a
participant to any rights as a shareholder of the Company. Any
Performance Shares awarded under the Plan which are forfeited or
canceled may again be awarded under the Plan.
<PAGE> 2
5. Grant of Awards
The Committee may grant awards of Performance Shares to
eligible employees, who shall then become participants in the
Plan, as of October 1 of each year from 1994 through 2003,
inclusive. The Committee shall recommend and the Board of
Directors approve the eligible employees to whom awards are to
be granted and the amount of the award for each employee, except
that Performance Shares awarded to any one employee shall not
exceed 100,000 in the aggregate or the period the Plan is in
effect.
6. Vesting
A participant shall become entitled to payment of all or a
portion of the Performance Shares awarded to him or her in any
year at the end of the three-consecutive year period beginning
on the date the award is granted (a "Performance Period"), as
determined in accordance with Schedule A, depending on the
Compay's total return to shareholders for the Performance
Period.
Except as otherwise provided in Section 7, if a participant
terminates employment with the Company and its affiliates,
voluntarily or involuntarily, he or she shall forfeit all
Performance Shares awarded for the Performance Period in which
the termination of employment occurs.
7. Retirement, Disability or Death of Participant
In the event a participant terminates employment by reason of
retirement, disability or death, the participant shall be
entitled to payment of a portion of the Performance Shares
awarded to him or her for the Performance Period in which the
termination occurs. Such portion shall be equal to the award
determined under Section 6, based on the Company's total return
to shareholders for the Performance Period to the date of the
participant's termination of employment, multiplied by a
fraction equal to the portion of the Performance Period for
which the employee was employed by the Company or an affiliate.
A participant may designate a beneficiary, or revoke a
beneficiary designation, under the Plan at any time. However,
no designation or revocation shall be effective prior to its
receipt by the Committee.
For purposes of the Plan, disability means the complete and
permanent inability of an employee to perform his or her duties
under the terms of his or her employment. The determination of
disability shall be made by the Committee, in its sole
discretion, on the basis of evidence, including medical
examination and reports, satisfactory to the Committee.
8. Change of Control
In the event of a change of control of the Company, as defined
in this Section 8, each Participant shall be entitled to payment
of 50 percent of the Performance Shares awarded to him or her
for the Performance Period in which the change of control
occurs. A change of control shall be considered to have
occurred if:
<PAGE> 3
(a) any person, entity or group of persons (other than the
Company or any wholly-owned subsidiary of the Company), within
the meaning of sections 13(d) or 14(d) of the Exchange Act,
becomes the beneficial owner, within the meaning of Rule 13d-3
promulgated under such Act, directly or indirectly, of 25
percent of more of the Company's then outstanding shares of
commone stock, par value $3.33 1/3 per share ("Common Stock");
(b) any person, entity or group of persons (other than the
Company or any wholly-owned subsidiary of the Company), after
purchasing Common Stock of the Company in a tender or exchange
offer, becomes the beneficial owner, directly or indirectly, of
25 percent or more of the Common Stock;
(c) the shareholders of the Company approve (i) a merger or
consolidation of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which the
shares of Common Stock would be converted into cash, securities
or other property, or (ii) any sale, lease, exchange or other
transfer of all or substantially all of the Company's assets; or
(d) there is a change in the majority of the members of the
Company's Board of Directors within a 25-month period, unless
such change has been approved by two-thirds of the Directors
then still in office who were in office at the beginning of the
25-month period.
9. Payment of Awards
Payment of Performance Shares shall be made by the issuance of
the Company of an equal number of shares of Common Stock.
Shares shall be issued to the participant, or, in the event of
the participant's death, his or her beneficiary. Such shares
shall be made available from authorized and unissued shares or
treasury shares.
The participant (or beneficiary) shall also receive payment in
cash of an amount equal to the dividends paid during the
Performance Period on an equal number of shares of Common Stock.
Payment of Performance Shares and cash shall be made as soon as
practicable after the event giving rise to the participant's
entitlement to payment.
10. Nontransferability of Awards
Neither Performance Shares nor any interest of a participant
under the Plan shall be sold, transferred, pledged, assigned,
disposed of or encumbered, voluntarily or by operation of law.
11. Compliance with Securities Laws
If at any time the Company determines that the listing,
registration or qualification of Performance Shares or shares of
Common Stock issuable pursuant to an award of Performance Shares
on any securities exchange or under any federal or state law, or
the approval of any governmental entity, is necessary to the
issue or transfer of such shares, such Performance
<PAGE> 4
shares or shares of Common Stock may not be accepted unless the
listing, registration, qualification or approval is obtained.
However, the Company shall not be required to apply for or to
obtain such listing, registration, qualification or approval.
12. Forfeiture and Cancellation of Shares
Performance Shares awarded to a participant to which he or she
does not become entitled shall be forfeited and cancelled. The
Committee may also cancel Performance Shares with the written
consent of the participant to whom the Shares were awarded. In
the event of any cancellation, all rights of the participant
with respect to the cancelled Performance Shares shall
terminate, and the Shares shall be available for subsequent
award under the Plan.
13. Adjustments
In the event of any recapitalization, reclassification, stock
dividend, stock split, change in par value, merger,
consolidation or similar event involving a change in the capital
structure of the Company, the Committee may make such
adjustments in Performance Shares or awards and shares of Common
Stock available for issuance under the Plan, or the terms,
conditions or restrictions on such Performance Shares or awards,
as the Committee considers equitable.
14. Withholding
A participant or beneficiary receiving an award shall pay to
the Company the amount of any taxes required to be withheld with
respect to Common Stock issued to him or her under the Plan.
The Company may deduct from awards any taxes required to be
withheld on the cash portion of such award.
15. Amendment and Termination
The Company at any time may amend or terminate the Plan by
action of the Board of Directors. No amendment shall, without
the approval of the shareholders of the Company, cause the Plan
no longer to comply with Rule 16b-3 under the Exchange Act or
any listing requirement or no longer to be described in Section
162(m) (4) (C) of the Code. The termination or amendment of the
Plan shall not adversely affect any right or obligation with
respect to any award previously granted to a participant.
16. No Employment or Other Rights
No employee shall have any claim or right to the grant of an
award under the Plan. Neither the Plan nor any action taken by
the Company or the Committee under the Plan shall be construed
as giving any employee any right to be retained in the employ of
the Company or any affiliated company.
17. Shareholder Approval
The Plan shall be subject to the approval of the shareholders
of the Company. In the event such approval is not obtained, all
awards under the Plan shall be null and void and the Plan shall
be of no force and effect.
<PAGE> 5
18. Effective Date and Duration of Plan
Subject to Section 17, the Plan shall become effective as of
July 28, 1994. The Plan shall remain in effect for a period of
ten years commencing on such date, except that any awards
outstanding at the end of such period shall remain subject to
the terms, conditions and restrictions of the document
evidencing the award and the Plan as in effect at the date of
grant of the award.
19. Governing Law
The Plan shall be governed by the laws of the Commonwealth of
Massachusetts.
<PAGE> 6
SCHEDULE A
Performance of Bay State Gas Company Percentage of Award to
Participant
Rank Percentile
Under 16 Under 50th 0%
16 50th 50%
8 75th 75%
1 99th 100%
The performance of the Company shall be determined in relation
to the Edward D.
Jones & Co. Gas Distribution Index. For ranks and percentiles
between those listed, the percentage of an award to which a
participant becomes entitled shall be determined on the basis of
straight-line interpolation between listed values.
<PAGE> 7
BAY STATE GAS COMPANY
KEY EMPLOYEE LONG-TERM INCENTIVE PLAN
FIRST AMENDMENT
WHEREAS, Bay State Gas Company (the "Company") adopted the Bay
State Gas Company Key Employee Long-Term Incentive Plan (the
"Plan") effective as of July 28, 1994;
WHEREAS, the Company reserved the right to amend the Plan in
Section 15 thereof; and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows,
effective April 27, 1995:
1. The second sentence of Section 7 (beginning "Such portion
shall be") is hereby deleted in its entirety and a new sentence
substituted therefor to read as follows:
"Such portion shall be equal to the award determined under
Section 6, multiplied by a fraction equal to the portion of the
Performance Period for which the employee was employed by the
Company or an affiliate, except that, in the case of a
participant's disability or death, the Company's total return to
shareholders shall be determined as of the last day of the month
in which the participant's disability or death, as the case may
be, occurs."
2. The second sentence of the last paragraph of Section 7
(beginning "The determination of disability") is hereby deleted
in its entirety and a new sentence substituted therefor to read
as follows:
"The determination of disability, and of the date of
disability, shall be made by the Committee, in its sole
discretion, on the basis of evidence, including medical
examinations and reports, satisfactory to the Committee."
IN WITNESS WHEREOF, The Company has caused its duly authorized
officer to execute this instrument as of April 27, 1995.
BAY STATE GAS COMPANY
By: /s/ Paul G. Ford
-------------------------------
Title: Senior Vice President
<PAGE> 1
<TABLE>
EXHIBIT 11
BAY STATE GAS COMPANY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<CAPTION>
1995 1994 1993 1992 1991
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Primary earnings per share............................... $1.71 $1.85 $1.75 $1.41 $1.32
Dilutive effect of outstanding options to purchase common
stock.................................................. (0.01) (0.02) (0.03) (0.02) (0.01)
----- ----- ----- ----- -----
Fully diluted earnings per share......................... $1.70 $1.83 $1.72 $1.39 $1.31
===== ===== ===== ===== =====
</TABLE>
36
<PAGE> 1
<TABLE>
EXHIBIT 12
BAY STATE GAS COMPANY
STATEMENT RE: COMPUTATION IN SUPPORT OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<CAPTION>
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income......................................... $23,128 $24,485 $22,807 $18,363 $15,817
Adjustments:
Income taxes................................... 14,575 15,642 13,726 11,250 8,733
Fixed charges (as below)....................... 19,365 17,359 15,906 15,170 14,832
------- ------- ------- ------- -------
Total adjusted earnings.................... $57,068 $57,486 $52,439 $44,783 39,382
======= ======= ======= ======= =======
Fixed charges:
Total interest expense............................. $17,300 $15,305 $13,610 $13,073 $12,253
Interest component of rents........................ 2,065 2,054 2,296 2,097 2,579
------- ------- ------- ------- -------
Total fixed charges........................ $19,365 $17,359 $15,906 $15,170 $14,832
======= ======= ======= ======= =======
Ratio of earnings to fixed charges..................... 2.95 3.31 3.30 2.95 2.66
==== ==== ==== ==== ====
</TABLE>
37
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SEPTEMBER 30, 1995
Parent of Bay State Gas Company -- None
Subsidiaries of Registrant -- Northern Utilities, Inc.
-- Granite State Gas Transmission, Inc.
Subsidiaries of Granite State Gas Transmission, Inc. -- Bay State Energy
Development, Inc.
-- Natural Gas Development
Corp.
-- Bay State Energy
Enterprises, Inc.
-- Energy Asset Funding,
Inc.
Each subsidiary is wholly owned. Northern Utilities, Inc. and Granite State
Gas Transmission, Inc. are incorporated in the State of New Hampshire. Bay State
Energy Development, Inc., Bay State Energy Enterprises, Inc., and Energy Asset
Funding Inc. are incorporated in the Commonwealth of Massachusetts. Natural Gas
Development Corp. is incorporated in the State of Maine.
38
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
BAY STATE GAS COMPANY
We consent to incorporation by reference in the registration statements
(No. 33-39118, and No. 33-44156) on Form S-3 and in the registration statements
(No. 33-35897, No. 33-22300 and No. 33-22301) on Form S-8 of our report dated
October 24, 1995, relating to the consolidated balance sheets and statements of
capitalization of Bay State Gas Company and subsidiaries as of September 30,
1995 and 1994 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, 1995, which report is included in the September 30, 1995 annual
report on Form 10-K of Bay State Gas Company.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 1, 1995
39
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF BAY STATE GAS COMPANY FOR THE
YEAR ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 464,108
<OTHER-PROPERTY-AND-INVEST> 44,065
<TOTAL-CURRENT-ASSETS> 66,886
<TOTAL-DEFERRED-CHARGES> 24,928
<OTHER-ASSETS> 30,368
<TOTAL-ASSETS> 630,355
<COMMON> 44,511
<CAPITAL-SURPLUS-PAID-IN> 100,339
<RETAINED-EARNINGS> 75,023
<TOTAL-COMMON-STOCKHOLDERS-EQ> 219,873
0
5,149
<LONG-TERM-DEBT-NET> 199,000
<SHORT-TERM-NOTES> 31,500
<LONG-TERM-NOTES-PAYABLE> 181,000
<COMMERCIAL-PAPER-OBLIGATIONS> 18,000
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 1,611
<LEASES-CURRENT> 1,108
<OTHER-ITEMS-CAPITAL-AND-LIAB> 172,114
<TOT-CAPITALIZATION-AND-LIAB> 630,355
<GROSS-OPERATING-REVENUE> 418,118
<INCOME-TAX-EXPENSE> 14,575
<OTHER-OPERATING-EXPENSES> 365,279
<TOTAL-OPERATING-EXPENSES> 379,854
<OPERATING-INCOME-LOSS> 38,264
<OTHER-INCOME-NET> 1,882
<INCOME-BEFORE-INTEREST-EXPEN> 40,146
<TOTAL-INTEREST-EXPENSE> 17,018
<NET-INCOME> 23,128
299
<EARNINGS-AVAILABLE-FOR-COMM> 22,829
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</TABLE>
