<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K/A
Amendment No. 1
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 Identification No.)
incorporation or organization)
300 FRIBERG PARKWAY, WESTBOROUGH, MASSACHUSETTS 01581-5039 (508/836-7000)
(Address and telephone number of principal executive officers)
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>
<PAGE> 2
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K for the fiscal
year ended September 30, 1995, as set forth in the pages attached hereto.
Item 6. Selected Financial Data
Item 8. Financial Statements and Supplementary Data
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Bay State Gas Company
--------------------------------
(Registrant)
By: /s/ Thomas W. Sherman
----------------------------------
Thomas W. Sherman
Executive Vice President and Chief
Financial and Accounting Officer
Date: December 7, 1995
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 $372,707 $350,161
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>
<PAGE> 3
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> 4
<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> 5
<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> 6
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993, IN THOUSANDS EXCEPT SHARE
AMOUNTS
<TABLE>
<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
========= ======= ======== ======= ======== ========
</TABLE>
- ---------------
* Dividend reinvestment, employee saving, and key employee stock option plans.
The accompanying notes are an integral part of these statements.
17
<PAGE> 7
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993, IN THOUSANDS
<TABLE>
<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
Dividends from investment in MASSPOWER.................. 859 -- --
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> 8
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> 9
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> 10
<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> 11
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> 12
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> 13
NOTE 7. PENSION AND EMPLOYEE BENEFIT PLANS
Pension plans. The funded status of the Company's pension plans as of
September 30, 1995 and 1994, is as follows:
<TABLE>
<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........................ 4,431 (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> 14
The funded status of the Company's other postretirement benefit plans as of
September 30, 1995 and 1994, is as follows:
<TABLE>
<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> 15
<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> 16
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> 17
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> 18
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
