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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
Commission File Number 1-7479
------------------------
BAY STATE GAS COMPANY
(Exact name of registrant as specified in its charter)
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MASSACHUSETTS 04-2548120
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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300 FRIBERG PARKWAY, WESTBOROUGH, MASSACHUSETTS 01581-5039 (508/836-7000)
(Address and telephone number of principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $3.33 1/3 par value New York Stock Exchange
Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of registrant's voting stock held by non-affiliates
as of November 14, 1997 was $363,065,216*.
On November 14, 1997 the Company had 13,508,594 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENTS PART OF FORM 10-K
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Portions of the Proxy Statement for the
Annual Meeting of Common Shareholders Part III
to be held on January 22, 1998.
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* Calculated by excluding all shares held by directors and executive officers of
Registrant, without conceding that all such persons are "affiliates" of the
Registrant for purposes of the Federal securities laws.
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business:
The Company............................................................... 3
Utility................................................................... 3
Competition............................................................... 4
Natural Gas Sales......................................................... 4
Capacity Requirements..................................................... 4
Regulation and Rates...................................................... 5
Franchises................................................................ 6
Energy Products & Services................................................ 6
Energy Ventures........................................................... 6
Employees................................................................. 6
Executive Officers of the Registrant...................................... 6
Item 2. Properties................................................................ 7
Item 3. Legal Proceedings......................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders....................... 7
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters................................................................. 8
Item 6. Selected Financial Data................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 9
Item 8. Financial Statements and Supplementary Data............................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.............................................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant....................... 33
Item 11. Executive Compensation................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management........... 33
Item 13. Certain Relationships and Related Transactions........................... 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 34
Signatures............................................................... 36
Exhibit Index............................................................ 37
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PART I.
ITEM 1. BUSINESS
THE COMPANY
Bay State Gas Company ("Bay State" or the "Company") was incorporated in
1974 as a Massachusetts corporation. However, Bay State's predecessor companies'
operations began in 1847, and consecutive quarterly dividends have been paid by
these entities or Bay State since 1853. The Company is primarily a gas
distribution utility that provides local transportation service in the greater
Brockton, Lawrence, and Springfield, Massachusetts areas. Additionally, the
Company also offers additional energy products and services to its customers,
and invests in energy ventures. Approximately 93% of all revenues are generated
from providing local transportation and natural gas sales with 82% of these
annual revenues coming from the Company's Massachusetts service area. Bay State
has seven subsidiaries within its corporate organization. Northern Utilities,
Inc. ("Northern") is a gas distribution utility operating in the Portland and
Lewiston areas in Maine and the Portsmouth area in New Hampshire. Granite State
Gas Transmission, Inc. ("Granite") is an interstate gas transmission and supply
company operating in the states of Maine, New Hampshire, Massachusetts, and
Vermont. Granite has five wholly owned subsidiaries, Natural Gas Development
Inc., a corporation established to invest in the Portland Natural Gas
Transmission System ("PNGTS"), a proposed natural gas transmission pipeline in
northern New England, Bay State Energy Enterprises, Inc., EnergyUSA, Inc., a
corporation established to provide non-regulated energy products and services,
EnergyEXPRESS, Inc., which markets non-regulated commodity to commercial and
residential customers, and LNG Development Corp., established to invest in the
proposed liquefied natural gas storage facility in Wells, Maine.
Natural gas sales in New England are seasonal, and the Company's results of
operations reflect this seasonality. Accordingly, results of operations are
typically most favorable in the second quarter of the Company's fiscal year
(three months ended March 31), with results of operations being next most
favorable in the first quarter, while losses are commonly incurred in the third
and fourth quarters. The quarterly operating results for 1997 and 1996 are
described further in Note 10 of "Notes to Consolidated Financial Statements",
Part II, Item 8, Financial Statements and Supplementary Data.
The Company's customers generally are billed monthly on a cycle basis in
therms. One therm equals 100,000 British thermal units (1 Btu), the heat content
of approximately 100 cubic feet of gas. 1,000,000 Btu (1 MMBtu), or ten therms
are the energy equivalent of approximately 1,000 cubic feet of natural gas or
7.14 gallons of home heating oil.
UTILITY
In 1997 almost all of Bay State's customers purchased bundled local
transportation and natural gas, with only 8,000 of Bay State's 300,000 customers
electing to purchase unbundled local transportation. The tables below show the
net change in transportation customers and throughput volumes for the past three
years.
TABLE 1 -- NET UTILITY CUSTOMER GROWTH
Yearly Increase in Number of Customers
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1997 1996 1995
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Residential..................................... (1,532) 5,342 5,161
Commercial/industrial........................... 54 748 1,256
Transportation only............................. 7,301 374 76
------ ----- -----
Net increase in number of customers............. 5,823 6,464 6,493
====== ===== =====
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TABLE 2 -- CHANGE IN THROUGHPUT VOLUMES
Yearly Increase (Decrease) -- Thousands of MMBtu*
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1997 1996 1995
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Residential................................... (592) 3,201 (2,727)
Commercial/industrial......................... (1,374) 1,180 (2,696)
Sales to other utilities...................... (56) 1,872 1,569
Interruptible and other....................... 3,092 (9,389) 8,128
Transportation only........................... 7,132 931 1,923
------ ------ ------
Total increase (decrease) in throughput....... 8,202 (2,205) 6,197
====== ====== ======
</TABLE>
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* Volumes have not been adjusted for weather variations.
COMPETITION
The Company's principal competitors are fuel-oil retailers and electric
utilities. Increases in demand for natural gas are primarily driven by the rate
of economic growth and new construction within the Company's service
territories, and by the marketing and pricing of competing fuels.
In the residential market, the Company should continue to benefit from the
New England region's market and growth potential. There are approximately
102,000 households along the Company's mains and additional homes located short
distances from existing gas mains that use no gas at all. In addition, the
Company anticipates additional growth from the estimated 42,000 existing
residential nonheating customers. These are attractive markets for the Company
and represent an opportunity to increase gas sales with little or no capital
investment.
As part of its efforts to unbundle transportation from gas sales service,
the Company sponsored one of the first residential pilot programs to allow
customers to purchase gas from among competing nonregulated natural gas
marketers. In July 1997 the Company expanded the pilot program to include small
business customers. These programs will bring the benefits of competition and
encourage increased system throughput.
For commercial and industrial customers, environmental issues are an
important issue in choosing an energy source. Since natural gas is the cleanest
burning fossil fuel, using natural gas can assist companies in complying with
the Clean Air Act and underground oil storage tank legislation.
Finally, the Company markets gas to large users on a seasonal or
interruptible basis. Approximately 66% of these interruptible volumes in 1997
were sold to five electric utilities for electric power generation. The
remainder were sold to approximately 110 industrial customers equipped to burn
either natural gas or fuel oil. Price is the key competitive factor in this
market, and the Company pursues interruptible sales through a flexible pricing
structure designed to remain competitive with other fuels. Substantially all net
margins from interruptible sales are passed back to firm customers through cost
of gas adjustment clauses (see "Rates and Regulations").
NATURAL GAS SALES
The natural gas sales portion of the Company's bundled service does not
currently provide a profit margin. However, as almost all of the Company's
300,000 utility customers purchase bundled transportation and natural gas,
minimizing gas costs is an important part of the Company's business.
The Company's strategy of balancing gas purchase costs and security of
supply is achieved by optimizing the mix and terms of natural gas contracts with
the use of supplemental liquefied natural gas and propane to meet peak winter
demand. The Company maintains a diversified gas supply portfolio of domestic and
Canadian gas supply contracts with producers.
CAPACITY REQUIREMENTS
The Company currently transports natural gas imported from Canada through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
PNGTS, a long-term capacity addition, is
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currently planned by a consortium of energy investors, including an affiliate of
the Company, to provide a permanent pipeline link with Canadian gas suppliers.
This project has been certificated by the FERC and plans to provide service by
November 1998. As insurance against a possible delay, the Company has secured an
option from PPLC to extend its lease until April 1999. For further discussion
see Note 9 of "Notes to Consolidated Financial Statements", Part II, Item 8,
Financial Statements and Supplementary Data.
REGULATION AND RATES
The Company and its subsidiaries, are subject, where applicable, to
regulation by the Massachusetts Department of Public Utilities ("MADPU"), the
New Hampshire Public Utilities Commission ("NHPUC"), the Maine Public Utilities
Commission ("MPUC") and the Federal Energy Regulatory Commission ("FERC") with
respect to rates, adequacy of service, issuance of securities, accounting, and
other matters.
The tariff schedules of the local distribution companies provide for
declining block rates which result in reductions in the unit price as usage
increases, and for seasonal rates that charge customers more per unit for gas
purchased during the high-demand winter heating season and less per unit during
summer months. These schedules also contain cost of gas adjustment ("CGA")
clauses that permit the distribution companies to pass on to firm customers
increases or decreases in recovered natural gas costs. Substantially all gas
supplier refunds and profits from interruptible sales are returned to firm
customers through the CGA clauses.
As a result of a third party fuel inventory financing program instituted by
the Company in 1982, fuel inventory and the related administrative and carrying
costs are also recovered through the CGA clauses. In addition, the MADPU allows
recovery of the following through the CGA: 1) the working capital costs
associated with purchased gas costs; 2) remediation costs associated with waste
materials from former gas manufacturing sites; and 3) costs associated with
MDPU-approved energy conservation and load management programs.
The following table provides the most recent rate activity of the Company
by state and federal jurisdictions:
TABLE 4 -- RATE ACTIVITY
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REQUESTED INCREASES GRANTED INCREASE
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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>
FERC......................... 10/1/96 $ 3.4 13.50% $ 2.9 11.75% 4/1/97
NHPUC........................ 9/15/96 $ .2 (a) $ .2 (a) 11/1/96
NHPUC........................ 9/15/95 $ .3 (a) $ .3 (a) 11/1/95
MADPU........................ 4/14/95 $ .0 (b) (b) (b) 1/1/96
NHPUC........................ 9/14/94 $ .1 (a) $ .1 (a) 11/1/94
FERC......................... 4/29/94 $ 1.6 14.20% $ 1.1 11.50% 11/1/94
NHPUC........................ 9/20/93 $ .3 (a) $ .3 (a) 11/1/93
</TABLE>
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(a) The revenue increase was granted under a step adjustment filing allowing
recovery of certain costs under the terms of the Settlement Agreement effective
9/30/91; no return was requested or ordered.
(b) An overall revenue-neutral rate redesign was filed with the MADPU. The goal
of the rate redesign was to implement rates that more closely reflect the actual
costs associated with serving different customers. New rates were effective
January 1, 1996.
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FRANCHISES
The utility franchise rights of the Company are non-exclusive. Competition
from other companies in the distribution of gas, however, is restricted without
prior approval of the applicable local and state governmental agencies.
The laws of the Commonwealth of Massachusetts permit a municipality, by
appropriate vote of its residents, to enter the gas business and purchase the
facilities of the utility serving such municipality. If the utility is not
willing to sell, the municipality may construct a plant or acquire one from
another source. The Company is not aware of any municipality which intends to
seek approval of such action.
ENERGY PRODUCTS & SERVICES
For a discussion of Energy Products & Services see "Energy Products &
Services" in Part II, Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations.
ENERGY VENTURES
For a discussion of Energy Ventures, see "Energy Ventures" in Part II, Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations.
EMPLOYEES
The Company employed 1,005 persons at September 30, 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of the principal executive officers of the
Registrant as of November 14, 1997 are listed below along with their business
experience during the past five years. All principal executive officers are
elected annually by the Board of Directors at the Directors' first meeting
following the annual meeting of shareholders. There are no family relationships
among these officers, except as noted below, nor is there any arrangement or
understanding between any officer and any other person pursuant to which the
officer was selected.
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NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
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Roger A. Young, 51, Chairman of the Board
of Directors (Chief Executive
Officer)(a).............................. Chairman of the Board of Directors since 1996;
Chief Executive Officer since 1990; Director
since 1975; President, 1981 to 1995.
Joel L. Singer, 41, President (Chief
Operating Officer)....................... President since 1996, Director and Chief
Operating Officer since 1995, Executive Vice
President, 1995; Director of Arthur D. Little
Inc.'s North American Natural Gas Practice,
Cambridge, MA, 1993 to 1995, Manager Natural Gas
Sales/Vice President Petrofina Gas Pipeline,
American Petrofina, Dallas, TX, 1989 to 1993.
Thomas W. Sherman, 57, Executive Vice
President (Chief Financial and Accounting
Officer and Treasurer)................... Director, Executive Vice President, and Chief
Financial Officer; Treasurer since 1994.
William L. Glascock, 52, Senior Vice
President................................ Senior Vice President 1997; Senior Vice
President Nationsbank 1992 to 1996.
Richard P. Cencini, 50, Vice President..... Vice President 1997; Leader, Regulatory Pricing
1996 to 1997; Director Regulatory Affairs 1992
to 1996.
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NAME, AGE AND POSITION BUSINESS EXPERIENCE DURING PAST 5 YEARS
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Carol A. Collins, 44, Vice President....... Vice President 1997; Leader, Services Delivery
1996 to 1997; Manager Information Systems
Development 1993 to 1996; Manager Technology
Research & Applications 1990 to 1993.
Debra P. Cornish, 38, Vice President....... Vice President 1997; Leader, Culture Development
1996 to 1997; Manager Compensation and Employee
Relations 1993 to 1996; Performance Analyst 1991
to 1993.
James D. Simpson, 47, Vice President....... Vice President since 1993; Director of Rates and
Economic Analysis 1992 to 1993; Director of
Rates 1988 to 1992.
John R. Snow, 56, Vice President........... Vice President.
Thomas J. Aruffo, 39, Vice President....... Vice President 1997; Vice President Fidelity
Investments 1996 to 1997; Director Information
Systems Prudential Insurance Company of America
1993 to 1996.
Stephen J. Curran, 51, Controller.......... Controller.
</TABLE>
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(a) Charles H. Tenney II, Director, is the stepfather of Roger A. Young,
Chairman of the Board of Directors.
ITEM 2. PROPERTIES
The Company holds franchise rights to lay gas mains in the streets and
public places of various service territories in Massachusetts, Maine, and New
Hampshire.
As of September 30, 1997, the Company's system consisted of approximately
5,428 miles of distribution mains; 132 miles of transmission lines, with
requisite accessory pumping and regulating stations; LNG liquefaction,
vaporization and storage facilities; propane storage tanks; 266,789 services
(small pipe connecting mains with piping on the customers' premises) and 299,506
meters installed on customers' premises.
The Company also leases a transmission line which is 166 miles in length
running from the Canadian border through Vermont and New Hampshire and
terminating in South Portland, Maine (see Item 1. Business, "Capacity
Requirements").
The transmission and distribution system is for the most part located on or
under public streets, and other public places or on private property not owned
by the Company, with the easements from or consent of the respective owners.
ITEM 3. LEGAL PROCEEDINGS
The Company is working with federal and state environmental agencies to
assess the extent and environmental impact of and appropriate remedial action
for waste materials from former gas manufacturing sites (see Note 9 of "Notes to
the Consolidated Financial Statements", Part II, Item 8, Financial Statements
and Supplementary Data).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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PRICE RANGE OF COMMON STOCK BY QUARTER
QUARTER ENDED
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DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
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FISCAL 1997
High.................. $30 5/8 $28 1/4 $27 5/8 $30 3/8
Low................... 26 3/4 25 1/8 25 3/8 26 1/4
FISCAL 1996
High.................. $29 1/2 $29 7/8 $28 3/4 $28 7/8
Low................... 24 26 1/2 26 1/8 25 3/8
</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
14, 1997, the Company had approximately 10,060 shareholders of record. The
number of shareholders indicated does not reflect the number of persons or
entities who hold their common stock in nominee name through various brokerage
firms or other entities. Information regarding cash dividends declared on common
stock is included in Note 10 of "Notes to the Consolidated Financial
Statements", Item 8, Financial Statements and Supplementary Data.
ITEM 6. SELECTED FINANCIAL DATA
Listed below is the required selected financial data for the Company's last
five fiscal years.
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<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total operating revenues............ $ 473,581 $ 428,843 $ 418,216 $ 463,280 $ 412,410
Net income.......................... $ 26,062 $ 27,072 $ 23,128 $ 24,485 $ 22,807
Earnings per average common share... $ 1.92 $ 2.00 $ 1.71 $ 1.85 $ 1.75
Total assets........................ $ 722,119 $ 684,253 $ 630,355 $ 614,798 $ 563,000
Long-term obligations under capital
leases............................ $ -- $ 694 $ 1,611 $ 2,719 $ 3,747
Capitalization:
Common equity....................... $ 234,378 $ 227,986 $ 219,873 $ 215,389 $ 200,088
Preferred stock..................... $ 4,917 $ 5,009 $ 5,149 $ 5,293 $ 5,392
Long-term debt...................... $ 229,500 $ 196,500 $ 199,000 $ 191,000 $ 176,000
Cash dividends declared per common
share............................. $ 1.56 $ 1.52 $ 1.48 $ 1.44 $ 1.40
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Bay State Gas Company ("Bay State" or the "Company") operates in three
related energy business segments: Utility, Energy Products & Services, and
Energy Ventures. The company's nonregulated Energy Products & Services business
segment markets products and services under the brand name, "EnergyUSA(TM)". Bay
State's Energy Ventures segment develops business opportunities and projects
which are closely related to the Company's core businesses.
YEAR IN REVIEW
In 1997, Bay State had net income of $26.1 million compared to $27.1
million in 1996 and earnings per share of $1.92 versus $2.00 one year ago. Net
income for 1997 was impacted by the effects of weather, the write-off of
restructuring costs, losses in EnergyUSA(TM), and the sale of a subsidiary which
owned a 17.5% equity investment in MASSPOWER.
Weather during 1997 was 2.1% warmer than normal and 4.9% warmer than fiscal
year 1996, implying weather-normalized earnings per share of $2.01 for fiscal
year 1997, up 9.2% from $1.84 for fiscal year 1996.
[YEAR IN REVIEW (1993-1997) BAR GRAPH]
Operating revenues and income before interest and taxes by business segment
for 1997 and 1996 were as follows:
OPERATING REVENUES
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IN MILLIONS 1997 1996
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Utility............................................ $455.6 $414.0
Energy Products & Services......................... 22.3 17.1
Eliminations....................................... (4.3) (2.3)
------ ------
Total......................................... $473.6 $428.8
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INCOME BEFORE INTEREST AND TAXES
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<CAPTION>
IN MILLIONS 1997 1996
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<S> <C> <C>
Utility.............................................. $47.9 $56.3
Energy Products & Services........................... (2.9) 2.4
Energy Ventures...................................... 16.0 1.8
Corporate costs...................................... (0.6) (0.2)
----- -----
Total........................................... $60.4 $60.3
===== =====
</TABLE>
The $8.4 million decrease in Utility income before interest and taxes is
primarily a result of the write-off of restructuring costs. In the fourth
quarter of fiscal year 1997, Bay State wrote off previously deferred
restructuring costs of $11.2 million, resulting in a $0.50 per share loss (see
Note 8 of "Notes to Consolidated Financial Statements", Part II, Item 8,
Financial Statements and Supplemental Data). These costs were incurred in order
to prepare the Company for the competitive environment of deregulation and
consisted of early retirement benefits for both union and nonunion employees,
consulting fees, and other related costs. These costs have been written off as
part of our proposed rate settlement in Massachusetts. Restructuring costs in
other jurisdictions of $1.7 million have been deferred and are being amortized
over three to five years.
In fiscal year 1997, income before interest and taxes for Energy Products &
Services decreased $5.3 million. During 1997 this business segment incurred
losses of $0.13 per share, which were primarily due to the costs of building the
staff and infrastructure needed to support the future growth of EnergyUSA(TM).
Income before interest and taxes increased $14.2 million in Energy
Ventures, primarily due to the sale of a subsidiary for $17.0 million in 1997.
As part of its strategy to focus on future core businesses, Bay State sold a
subsidiary which owned the Company's 17.5% equity investment in MASSPOWER, an
electric cogeneration facility, resulting in a $0.58 per share gain.
Common stock dividends declared in 1997 were $1.56 per share, 2.6% higher
than the prior year. This was the fourteenth consecutive year of increased
common stock dividends, and it completes the 144th year of consecutive quarterly
dividends. The current annualized dividend is equivalent to $1.58 per share.
UTILITY
The following table details the components of Utility Revenues for the past
three years:
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<CAPTION>
IN MILLIONS 1997 1996 1995
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<S> <C> <C> <C>
Bundled transportation........................ $164.9 $167.9 $156.6
Unbundled transportation...................... 12.4 6.8 4.2
------ ------ ------
Transportation revenues....................... 177.3 174.7 160.8
Natural gas sales............................. 262.6 226.8 235.0
------ ------ ------
Transportation and natural gas sales.......... 439.9 401.5 395.8
Other revenues................................ 15.7 12.5 8.1
------ ------ ------
Total revenues........................... $455.6 $414.0 $403.9
====== ====== ======
</TABLE>
The majority of customers purchase bundled transportation and natural gas
service. Some larger commercial, industrial, and interruptible customers have
elected to purchase unbundled transportation service, allowing them to manage
their own gas purchasing, balancing, and storage functions.
In November 1996, Bay State launched the Pioneer Valley Customer Choice
pilot program, which attracted about 6,500 residential gas customers in our
Western Massachusetts service area. The program gave residential customers the
opportunity to purchase their natural gas from a supplier of their choice. Bay
State continued to transport the gas to customers' homes, maintain the local
pipeline system, respond to emergencies, and read customers' gas meters.
In July 1997, Bay State received regulatory approval to expand its pilot
program to include all of Bay State's 83,000 residential and 6,000 small
business customers in its Western Massachusetts service area, as well as 10,000
small business customers in the company's Southeastern Massachusetts service
area. The
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expanded program - Choice Advantage from Bay State Gas - is designed to foster
competition within the Bay State Gas service territory and to enable the company
to continue to learn about gas supplier and consumer behavior.
The Company's earnings are unaffected by the shift from bundled to
unbundled service as the Company does not realize a profit margin on the natural
gas sales portion of bundled services.
TRANSPORTATION REVENUES
Total transportation revenues increased $2.6 million or 1.5% from 1996 to
1997. This increase is primarily attributable to customer growth offset by the
negative impact of warmer weather. Customer growth was 2.0% for fiscal year 1997
with the addition of 5,800 customers. Normalized firm throughput, which is a
better indicator of our system growth, increased by 3.7% to 55.7 Bcf in 1997.
Weather was 4.9% warmer in fiscal year 1997 than fiscal year 1996. If 1997
weather had been as cold as 1996 weather, 1997 transportation revenues would
have been $5.4 million higher. The following table displays the Degree Days for
the past three years:
<TABLE>
<CAPTION>
PERCENTAGE
(COLDER/(WARMER)
YEAR DEGREE DAYS THAN NORMAL
---- ----------- ---------------
<S> <C> <C>
1997............................................ 6,916 (2.1)%
1996............................................ 7,220 2.8 %
1995............................................ 6,589 (6.4)%
</TABLE>
NATURAL GAS SALES
The natural gas sales portion of the bundled service does not provide a
profit margin. However, as all but 8,000 of the Company's Utility customers
purchase bundled transportation and gas commodity sales service, minimizing gas
costs is an important part of the Company's competitive strategy.
The Company's goal is to balance gas purchase costs and security of supply
by optimizing the mix and terms of natural gas contracts with the use of
underground storage and supplemental liquefied natural gas and propane to meet
peak winter demand. Natural gas sales rates include cost of gas adjustment
clauses ("CGA") pursuant to which gas purchase costs and other costs are
recovered from customers. The following table details these Recovered Natural
Gas Costs:
<TABLE>
<CAPTION>
IN MILLIONS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gas demand....................................... $ 23.7 $ 25.2 $ 45.0
Gas commodity.................................... 167.2 120.0 112.2
------ ------ ------
Total purchase costs............................. 190.9 145.2 157.2
------ ------ ------
Transmission costs............................... 44.2 49.8 53.9
Supplemental fuels............................... 15.1 18.5 14.5
Other costs...................................... 12.4 13.3 9.4
------ ------ ------
Total....................................... $262.6 $226.8 $235.0
====== ====== ======
</TABLE>
Recovered natural gas costs increased by 16%, or $35.8 million, in 1997.
These higher gas costs were the result of an increase in gas commodity prices.
The decrease in supplemental fuel costs in 1997 is the result of warmer weather,
allowing the Company to use less supplemental supplies than in the previous
year.
OTHER REVENUES
Other revenues primarily consist of customer service revenues, merchandise
sales, conversion burner rentals, and liquefaction services. In 1997, other
revenues increased by 26%, or $3.2 million, primarily due to increased customer
service revenues.
11
<PAGE> 12
ENERGY PRODUCTS & SERVICES
Operating revenues from the Energy Products & Services business segment for
the last three years include the following:
<TABLE>
<CAPTION>
IN MILLIONS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
EnergyUSA(TM)
Home Services(SM)................................. $ 7.7 $ 6.9 $ 6.6
Business Services(SM)............................. 2.4 -- --
Energy EXPRESS(TM).................................. 12.2 10.2 7.6
----- ----- -----
Total.......................................... $22.3 $17.1 $14.2
===== ===== =====
</TABLE>
EnergyUSA Home Services(SM) offers water heater rentals, insurance programs
for heating system maintenance, energy-related financing, and a variety of other
products for residential customers. Home Services(SM) revenues have increased by
11.6% in 1997 after increasing by 4.5% in 1996. The increase in 1997 is
primarily the result of a continued increase in the number of water heater units
rented and an increase in rental rates.
In 1997, EnergyUSA(TM) introduced EnergyUSA Business Services(SM), which
manages the energy needs of commercial and industrial customers. Services
provided include strategic energy supply management, applied technology,
engineering design/build, and facilities management services.
EnergyEXPRESS(TM) markets energy commodities to the home and business
segments. In 1997, revenues from EnergyEXPRESS(TM) increased 19.6%, or $2.0
million, primarily due to higher propane fuel prices and an increase in
customers.
On October 1, 1997, EnergyUSA(TM) introduced a new service brand,
AccessUSA(SM) which will market security systems, telecommunications services,
satellite and cable TV services, and Internet services.
ENERGY VENTURES
Energy Ventures develops business opportunities and projects which are
closely related to the Company's core businesses. Currently this segment
participates in two major projects: the Portland Natural Gas Transmission System
("PNGTS"); and the Wells LNG facility ("Wells LNG"). Earnings from the PNGTS and
Wells LNG investments are in the form of Investment Income and Allowance for
Funds Used During Construction ("AFUDC") totaling $1.8 million and $2.0 million
in 1997 and 1996, respectively (see Note 9 of "Notes to Consolidated Financial
Statements", Part II, Item 8, Financial Statements and Supplemental Data).
On June 30, 1997, Bay State sold a subsidiary which owned the Company's
17.5% equity investment in MASSPOWER for $17 million resulting in an after-tax
gain of $7.8 million.
OPERATING EXPENSES
Other cost of goods sold primarily consists of the costs of the products
and services sold by Energy Products & Services, which for 1997 increased with
the level of sales activity in this business segment.
Operations expense increased by $4.9 million in 1997, primarily as a result
of a $6.3 million increase in Energy Products & Services costs offset by a $2.0
million decrease in Utility costs. Increases in Energy Products & Services
operations expense are primarily attributable to increases in payroll and the
staffing and infrastructure costs associated with developing the Energy Products
& Services business segment.
Restructuring costs consist of early retirement benefits, consulting fees,
and other costs related to preparing the Company for the competitive environment
of deregulation.
Higher plant balances have resulted in continuing increases in depreciation
expense. Taxes, other than income taxes, increased primarily due to higher
property taxes. Annual increases in property tax rates and assessments, combined
with the growth in plant, increased property taxes by $452,000, $966,000, and
$601,000 in 1997, 1996, and 1995, respectively.
12
<PAGE> 13
OTHER INCOME
Other income increased $14.6 million in 1997, primarily due to the $13.3
million pre-tax gain on the sale of a subsidiary which owned the Company's 17.5%
equity investment in MASSPOWER.
INTEREST EXPENSE
Interest expense for the Company increased 6.4%, to $17.8 million in 1997
from $16.8 million in 1996, due to an increase in the levels of long-term debt.
RESULTS OF OPERATIONS, 1996 AND 1995
During 1996, net income increased $3.9 million, due to weather that was
2.8% colder than normal within the Company's service territories. In 1995, net
income decreased $1.4 million with warmer-than-normal weather. In both years the
Company had a growing customer base. As a result of the colder weather in fiscal
year 1996, operating revenues increased by $10.6 million. In 1995, operating
revenues decreased by $45.2 million primarily due to the warmer weather,
decreases in the cost of gas, and increased pipeline refunds being returned to
customers.
Recovered natural gas costs decreased 3.5% to $226.8 million in 1996. These
lower gas costs were the result of a decline in fixed purchase costs and
pipeline refunds. In 1995, recovered natural gas costs decreased 15.0% to $235.0
million. This decrease was the result of the warmer weather, which reduced fuel
costs, and pipeline refunds.
Operations expense increased by $9.6 million in 1996 after decreasing by
$3.9 million in 1995. In 1996, the increase was primarily the result of
increases in payroll and propane fuel, due to the colder weather, and increases
in outside services. In 1995, the decrease was the result of reduced bad debt
expense and other cost control measures.
IMPACT OF INFLATION
Inflation did not have a significant impact on the Company's operations in
1997, 1996, or 1995.
LIQUIDITY AND CAPITAL RESOURCES
Natural gas sales in New England are seasonal, and the Company's cash flows
reflect this seasonality. Approximately 74% of annual revenues are generated
during the heating season, which results in a high level of cash flow from
operations from late winter through early summer. Short-term borrowings are
typically highest in the fall and early winter as a result of completion of the
annual construction program and seasonal working capital requirements. The
Company has been able to access the financial markets to meet its capital
requirements and does not anticipate a change in its access to, or the
availability of, capital in the coming year. In 1997, liquidity improved
significantly as a result of the sale of MASSPOWER and the sale/leaseback of the
Westborough building.
CASH FLOWS FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
IN MILLIONS 1997 1996 1995
------ ---- ------
<S> <C> <C> <C>
Net cash provided by operating
activities.............................. $ 44.5 $7.1 $ 72.5
</TABLE>
Cash flows from operations increased by $37.4 million in 1997, primarily as
the result of increases in accounts payable and deferred gas costs and refunds
due customers. Cash flows from operating activities prior to changes in
operating assets and liabilities were $39.2 million, $56.1 million, and $55.0
million for 1997, 1996, and 1995, respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
<TABLE>
<CAPTION>
IN MILLIONS 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net cash used in investing
activities.......................... $(32.7) $(34.7) $(56.9)
</TABLE>
13
<PAGE> 14
Investments are made in utility property, plant, and equipment to improve
and protect the distribution system, and to expand the system to meet customer
demand. As a result of planned spending, capital expenditures for property,
plant, and equipment increased $6.9 million in 1997. This increase is primarily
attributable to the increased spending on automated meter reading devices of
$6.5 million. Capital expenditures for 1998 are estimated to be approximately
$62 million.
The sale of a subsidiary and the sale/leaseback of Bay State's Westborough
headquarters building and 10 acres of land provided additional cash of $17.0
million and $10.1 million, respectively. The sale of rental assets provided
$20.7 million in additional cash during 1996.
Other investments include expenditures primarily for PNGTS and Wells LNG,
which were $2.5 million, $5.7 million, and $4.3 million in 1997, 1996, and 1995,
respectively (see Note 9 of "Notes to Consolidated Financial Statements", Part
II, Item 8, Financial Statements and Supplemental Data).
CASH FLOWS FROM FINANCING ACTIVITIES
<TABLE>
<CAPTION>
IN MILLIONS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net cash provided by (used in)
financing activities........... $(12.8) $29.6 $(17.0)
</TABLE>
Cash flows from financing activities decreased primarily due to the Company
paying down $13 million of short-term debt in 1997 as compared with borrowing
$33 million of short-term debt in 1996.
The Company has a shelf registration statement covering up to $125.0
million of senior unsecured debt securities, under which $95.0 million in notes
has been issued as of September 30, 1997. The Company has access to $90.0
million in bank lines of credit.
ENVIRONMENTAL ISSUES
The Company continues to work with federal and state environmental agencies
to assess the extent and environmental impact of waste materials that exist at
or near former gas manufacturing sites. The costs of such assessments and any
related remediation determined to be necessary will be funded from traditional
sources of capital and recovered from customers (see Note 9 of "Notes to
Consolidated Financial Statements", Part II, Item 8, Financial Statements and
Supplementary Data).
NEW ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued three new
accounting standards effective for fiscal year 1998. Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," requires the
Company to present basic and diluted earnings per share. Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income,"
requires the Company to report comprehensive income and its components.
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information," requires the Company
to report financial and descriptive information about the Company's reportable
operating segments. It is expected that the adoption of these standards will not
have a material impact on financial results.
FORWARD LOOKING INFORMATION
This report and other Company reports contain forward looking statements.
The Company cautions that, while it believes such statements to be reasonable
and makes them in good faith, they almost always vary from actual results, and
the differences between assumed facts or basis and actual results can be
material, depending upon the circumstances. Investors should be aware of
important factors that could have a material impact on future results. These
factors include, but are not limited to, weather, the regulatory environment,
customers' preferences, unforeseen competition, and other uncertainties, all of
which are difficult to predict, and many of which are beyond the control of the
Company.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
IN THOUSANDS EXCEPT PER SHARE AMOUNTS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Operating revenues............................................ $473,581 $428,843 $418,216
-------- -------- --------
Operating expenses:
Recovered natural gas costs.............................. 262,571 226,836 235,005
Other cost of goods sold................................. 10,328 5,805 3,435
Operations............................................... 95,455 90,509 80,903
Restructuring costs (note 8)............................. 11,213 -- --
Maintenance.............................................. 10,573 10,426 8,636
Depreciation and amortization............................ 28,486 26,311 26,026
Other taxes, principally property taxes.................. 13,251 12,741 11,362
-------- -------- --------
Total operating expenses...................................... 431,877 372,628 365,367
Operating income.............................................. 41,704 56,215 52,849
-------- -------- --------
Other income:
Income from sale of subsidiary (note 9).................. 13,344 -- --
Income from investments.................................. 2,667 2,502 427
AFUDC equity and other................................... 2,653 1,594 965
-------- -------- --------
Income before interest and income taxes....................... 60,368 60,311 54,241
-------- -------- --------
Interest income............................................... (515) (477) (567)
Interest expense.............................................. 17,842 16,763 17,105
Federal and state taxes on income (note 2).................... 16,979 16,953 14,575
-------- -------- --------
Net income.................................................... 26,062 27,072 23,128
Dividend requirements on preferred stock...................... 288 293 299
-------- -------- --------
Earnings applicable to common stock........................... $ 25,774 $ 26,779 $ 22,829
======== ======== ========
Average number of common shares outstanding................... 13,455 13,397 13,342
======== ======== ========
Earnings per share............................................ $ 1.92 $ 2.00 $ 1.71
======== ======== ========
Dividends declared per common share........................... $ 1.56 $ 1.52 $ 1.48
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE> 16
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Plant, as cost..................................................... $740,266 $701,204
Accumulated depreciation and amortization.......................... 216,965 198,389
-------- --------
Net plant.......................................................... 523,301 502,815
-------- --------
Investments (note 9)............................................... 19,382 17,601
Prepaid benefit plans (note 7)..................................... 21,941 26,733
Other long-term assets............................................. 8,064 9,697
Current assets:
Cash and temporary cash investments........................... 3,672 4,583
Accounts receivable, less allowances of $4,138 and $3,557..... 32,713 27,143
Unbilled revenues............................................. 3,708 3,709
Deferred gas costs............................................ 39,764 27,447
Inventories, at average cost (note 6)......................... 30,473 24,699
Other......................................................... 4,828 6,059
-------- --------
Total current assets............................................... 115,158 93,640
-------- --------
Regulatory assets:
Income taxes.................................................. 11,045 12,105
Other......................................................... 23,228 21,662
-------- --------
$722,119 $684,253
======== ========
CAPITALIZATION AND LIABILITIES
Capitalization (see accompanying statements and note 3):
Common stock equity........................................... $234,378 $227,986
Preferred stock equity........................................ 4,917 5,009
Long-term debt................................................ 229,500 196,500
-------- --------
Total capitalization............................................... 468,795 429,495
-------- --------
Long-term liabilities:
Deferred taxes (note 2)....................................... 81,770 80,854
Other long-term liabilities................................... 13,583 16,650
-------- --------
Total long-term liabilities........................................ 95,353 97,504
-------- --------
Commitments and contingencies (note 9)
Current liabilities:
Short-term debt (note 5)...................................... 51,625 64,650
Current maturity of long-term debt (note 3)................... 5,000 18,000
Accounts payable.............................................. 41,404 31,858
Fuel purchase commitments (note 6)............................ 22,817 21,332
Refunds due customers......................................... 25,802 10,427
Deferred and accrued taxes (note 2)........................... 3,326 3,174
Other......................................................... 7,997 7,813
-------- --------
Total current liabilities.......................................... 157,971 157,254
-------- --------
$722,119 $684,253
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
16
<PAGE> 17
CONSOLIDATED STATEMENTS OF CAPITALIZATION
YEARS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
IN THOUSANDS 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; 13,506,594 and 13,428,244 shares outstanding... $ 45,025 $ 44,761
Paid-in capital.......................................... 103,126 101,784
Retained earnings........................................ 86,227 81,441
-------- ----- -------- -----
Total common stock equity................................ 234,378 50.0 227,986 53.1
-------- ----- -------- -----
Cumulative preferred stock; $100 par value, authorized
200,000 shares; $50 par value, authorized 150,000
shares
Non-redeemable:
$100 par value, 5% series; 16,862 shares outstanding..... 1,686 1,686
$50 par value, 7.2% series; 17,710 shares outstanding.... 886 886
-------- ----- -------- -----
Total non-redeemable..................................... 2,572 0.5 2,572 0.6
-------- ----- -------- -----
Redeemable, $100 par value:
4.7% series; 10,127 and 10,627 shares outstanding........ 1,013 1,063
Redeemable, $50 par value:
$3.80 series; 5,315 and 5,693 shares outstanding......... 266 284
5 5/8% series; 5,199 shares outstanding.................. 260 260
$3.25 series; 16,125 and 16,599 shares outstanding....... 806 830
-------- ----- -------- -----
Total redeemable......................................... 2,345 0.5 2,437 .6
-------- ----- -------- -----
Total cumulative preferred stock......................... 4,917 1.0 5,009 1.2
-------- ----- -------- -----
Long-term debt:
Revolving Credit Agreement, due 2001..................... 18,000 18,000
6.30% Notes, due 1998.................................... 5,000 5,000
6.00% Notes, due 2000.................................... 10,000 10,000
6.00% Notes, due 2001.................................... 5,000 5,000
7.42% Notes, due 2001.................................... 10,000 10,000
6.625% Notes, due 2002................................... 5,000 5,000
7.25% Notes, due 2002.................................... 20,000 20,000
7.37 - 7.55% Notes, due 2002............................. 28,000 28,000
6.00% Notes, due 2003.................................... 15,000 15,000
6.58% Notes, due 2005.................................... 10,000 10,000
6.375% Notes, due 2006................................... 20,000 --
6.93% Notes, due 2010.................................... 10,000 10,000
9.20% Notes, due 2011.................................... 8,500 8,500
6.43% Notes, due 2020.................................... 10,000 10,000
8.15% Notes, due 2022.................................... 12,000 12,000
7.625% Notes, due 2023................................... 10,000 10,000
9.70% Notes, due 2031.................................... 13,000 13,000
9.45% Notes, due 2031.................................... 25,000 25,000
-------- ----- -------- -----
Total long-term debt..................................... 234,500 214,500
Less current maturities.................................. 5,000 18,000
-------- ----- -------- -----
Long-term debt, net...................................... 229,500 49.0 196,500 45.7
-------- ----- -------- -----
Total capitalization..................................... $468,795 100.0 $429,495 100.0
======== ===== ======== =====
</TABLE>
The accompanying notes are an integral part of these statements.
17
<PAGE> 18
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK PREFERRED STOCK
----------------------------------------------- ------------------------
IN THOUSANDS EXCEPT SHARE PAID-IN RETAINED NON-
AMOUNTS SHARES PAR VALUE CAPITAL EARNINGS REDEEMABLE REDEEMABLE
---------- --------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER 30,
1994...................... 13,290,491 $44,302 $ 99,145 $ 71,942 $2,572 $2,721
Net income.................. 23,128
Dividends declared:
Preferred stock........ (299)
Common stock........... (19,748)
Common stock issued:
DRP*................... 42,103 140 864
KESOP*................. 20,800 69 360
Capital stock expense....... (17)
Redemption of preferred
stock..................... (13) (144)
---------- ------- -------- -------- ------ ------
BALANCE AT SEPTEMBER 30,
1995...................... 13,353,394 44,511 100,339 75,023 2,572 2,577
Net income.................. 27,072
Dividends declared:
Preferred stock........ (293)
Common stock........... (20,361)
Common stock issued:
KESOP*................. 74,850 250 1,467
Redemption of preferred
stock..................... (22) (140)
---------- ------- -------- -------- ------ ------
BALANCE AT SEPTEMBER 30,
1996...................... 13,428,244 44,761 101,784 81,441 2,572 2,437
Net income.................. 26,062
Dividends declared:
Preferred stock........ (288)
Common stock........... (20,988)
Common stock issued:
KESOP*................. 78,350 264 1,354
Redemption of preferred
stock..................... (12) (92)
---------- ------- -------- -------- ------ ------
BALANCE AT SEPTEMBER 30,
1997...................... 13,506,594 $45,025 $103,126 $ 86,227 $2,572 $2,345
========== ======= ======== ======== ====== ======
</TABLE>
* Dividend reinvestment and key employee stock option plans.
The accompanying notes are an integral part of these statements.
18
<PAGE> 19
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995.
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 26,062 $ 27,072 $ 23,128
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 28,486 26,311 26,026
Deferred income taxes.................................... 1,603 6,743 6,908
Gain from sale of subsidiary............................. (13,344) -- --
Investment income and AFUDC.............................. (3,568) (3,981) (1,051)
Changes in operating assets and liabilities:
Accounts receivable...................................... (5,570) (4,899) 3,249
Accounts payable......................................... 9,546 2,693 1,871
Taxes.................................................... 525 (2,390) (3,257)
Deferred gas costs and refunds due customers............. 3,058 (32,758) 12,492
Other.................................................... (2,258) (11,653) 3,162
-------- -------- --------
Net cash provided by operating activities..................... 44,540 7,138 72,528
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant............................................ (57,638) (50,731) (53,336)
Proceeds from sale of subsidiary.............................. 17,000 -- --
Proceeds from sale of building................................ 10,145 -- --
Proceeds from sale of rental assets........................... -- 20,667 --
Other investments............................................. (2,171) (4,623) (3,553)
-------- -------- --------
Net cash used in investing activities......................... (32,664) (34,687) (56,889)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock...................................... 1,618 1,717 1,416
Dividends on common stock..................................... (20,988) (20,361) (19,748)
Dividends on preferred stock.................................. (288) (293) (299)
Issuance of long-term debt.................................... 20,000 22,000 20,000
Retirements of preferred stock and long-term debt............. (104) (6,662) (12,157)
Short-term debt............................................... (13,025) 33,150 (6,250)
-------- -------- --------
Net cash provided by (used in) financing activities........... (12,787) 29,551 (17,038)
-------- -------- --------
Net increase (decrease) in cash and temporary cash
investments................................................. (911) 2,002 (1,399)
Cash and temporary cash investments at beginning of period.... 4,583 2,581 3,980
======== ======== ========
Cash and temporary cash investments at end of period.......... $ 3,672 $ 4,583 $ 2,581
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized)..................... $ 19,229 $ 18,134 $ 16,355
======== ======== ========
Income taxes............................................. $ 14,711 $ 11,935 $ 8,720
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. Bay State Gas Company ("Bay State" or the "Company")
operates in three related energy segments: Utility, Energy Products & Services,
and Energy Ventures. Bay State's Utility segment serves about 300,000 natural
gas customers in the states of Massachusetts, New Hampshire, and Maine. The
Company's non-regulated Energy Products & Services segment serves about 88,000
residential, commercial, and industrial customers throughout New England, and
markets products and services under the brand name, "EnergyUSA(TM)." Bay State's
Energy Ventures segment develops business opportunities and projects which are
closely related to the Company's core businesses.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION. The preparation of
consolidated financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses. It is
expected that actual results will not be materially different from those
estimates.
The consolidated financial statements include the accounts of Bay State Gas
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated. Certain information in the prior
period financial statements has been reclassified to conform with the current
period's presentation.
REGULATION AND OPERATIONS. The Company is subject to regulation with
respect to rates, accounting, and other matters, where applicable, by the
Massachusetts Department of Public Utilities ("MADPU"), the New Hampshire Public
Utilities Commission, the Maine Public Utilities Commission, and the Federal
Energy Regulatory Commission ("FERC"). The Company's accounting policies conform
to generally accepted accounting principles and reflect the effects of the
ratemaking process in accordance with Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
PLANT. Plant is stated at original cost and consists of utility plant and
Energy Products & Services plant assets. The original cost of depreciable units
of utility plant retired, together with the cost of removal, net of salvage, is
charged to accumulated depreciation. The costs of maintenance, repairs, and
replacements of minor items are charged to expense as incurred.
Depreciation is provided for all classes of utility plant on a group
straight-line basis in amounts equivalent to overall composite rates of 3.63%
for 1997, 3.66% for 1996, and 3.88% for 1995. Depreciation for plant used by the
Energy Products & Services business segment is provided for on a straight-line
basis over the estimated useful lives of the assets.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC). AFUDC is the
estimated cost of funds used for construction purposes. Such allowances are
charged to plant and reported as other income (cost of equity funds) or a
reduction of interest expense (cost of borrowed funds). AFUDC was $901,000, $1.4
million, and $573,000 for 1997, 1996, and 1995, respectively.
INVESTMENTS. The Company accounts for its partnership investments by the
equity method.
CASH AND TEMPORARY CASH INVESTMENTS. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
TRANSPORTATION, NATURAL GAS SALES, AND DEFERRED GAS COSTS. Transportation
revenues and natural gas sales are based on the volume of gas transported or
sold at billing rates authorized by regulatory authorities and include unbilled
revenues for transportation services and gas delivered, but not billed. The
Company's rates include cost of gas adjustment ("CGA") clauses pursuant to which
gas and certain other costs are recovered from customers. Any differences
between gas costs incurred and amounts collected are deferred for recovery from
or refund to customers in future periods. Also included in natural gas sales are
sales to
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interruptible customers and spot sales for resale. Substantially all profit
margins from these types of sales are used to reduce gas costs to customers
through CGA clauses.
ENVIRONMENTAL COSTS. In accordance with orders of regulatory authorities,
the Company defers costs incurred to remediate environmental damage. Deferred
environmental costs in Massachusetts, Maine, and New Hampshire are amortized to
expense over periods of five to 10 years as they are recovered from customers.
INCOME TAXES. Deferred taxes are provided for using the asset and
liability method for temporary differences between financial and tax reporting.
Deferred income taxes are recognized for the expected tax consequences of
temporary differences by applying enacted statutory tax rates, applicable to
future years, to differences between the financial reporting basis and tax basis
of assets and liabilities (see note 2).
PENSION AND OTHER EMPLOYEE BENEFIT PLANS. The Company has noncontributory
defined benefit pension plans covering substantially all employees. Benefits
under the plans are generally based on years of service and the level of
compensation during the final years of employment. Other postretirement benefits
consist of certain health and life insurance benefits for retired and active
employees hired before September 30, 1990. Postemployment benefits consist of
workers compensation claims, long-term disability payments, and medical coverage
continuation payments. These costs are generally recognized on the accrual
method of accounting over the expected periods of employee service based on
actuarial assumptions (see note 7).
EARNINGS PER SHARE. Earnings per common share have been computed by
dividing earnings applicable to common stock by the weighted average number of
shares of common stock outstanding during each year.
STOCK-BASED COMPENSATION. On October 1, 1995, the Company adopted
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-based Compensation." Pursuant to SFAS 123, stock-based compensation
for employees and Directors is recognized as expense using a fair-value
accounting method. The adoption of this accounting standard did not have a
material impact on cash flows, financial condition, or results of operations
(see note 3).
ACCOUNTING FOR LONG-LIVED ASSETS. In 1997, the Company adopted Statement
of Financial Accounting Standard No. 121, "Accounting for Long-lived Assets,"
which requires a review of long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The adoption of this standard did not have a material impact on
cash flows, financial condition, or the results of operations.
NEW ACCOUNTING STANDARDS. The Financial Accounting Standards Board has
issued three new accounting standards effective for fiscal year 1998. SFAS 128
requires the presentation of basic and diluted earnings per share, SFAS 130
requires reporting comprehensive income and its components, and SFAS 131
requires reporting financial and descriptive information about reportable
operating segments. It is expected that the adoption of these standards will not
have a material impact on cash flows, financial condition, or the results of
operations.
21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2
INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal........................... $12,891 $ 8,785 $ 6,699
State............................. 2,885 1,824 1,368
------- ------- -------
Total current................ 15,776 10,609 8,067
------- ------- -------
Deferred:
Federal........................... 1,292 5,551 5,799
State............................. 311 1,192 1,109
------- ------- -------
Total deferred............... 1,603 6,743 6,908
------- ------- -------
Deferred investment tax credits, net... (400) (399) (400)
------- ------- -------
Total income tax expense............... $16,979 $16,953 $14,575
======= ======= =======
</TABLE>
The annual provision for deferred income taxes is comprised of the
following:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accelerated tax depreciation............ $ 5,557 $3,858 $ 3,681
Capitalization overheads................ (827) (418) (2,225)
Pension................................. 342 771 1,252
Demand-side-management costs............ (709) 545 1,569
Restructuring costs..................... (2,543) -- --
Postretirement benefits................. 348 (537) 1,002
Investment in MASSPOWER................. (2,212) 494 602
Other................................... 1,647 2,030 1,027
------- ------ -------
Total deferred tax expense.............. $ 1,603 $6,743 $ 6,908
======= ====== =======
</TABLE>
The Company's effective income tax rate for fiscal years 1997, 1996, and
1995 is 39%, consisting of a federal income tax rate of 35% and state income
taxes, net of federal benefit, of 4%. Temporary differences that resulted in
deferred income tax assets and liabilities as of September 30, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Deferred income tax assets:
Allowance for doubtful accounts.................. $ 1,828 $ 1,562
Restructuring costs.............................. 2,543 --
Inventory and overhead costs..................... 2,943 1,998
Unamortized investment tax credits............... 3,235 3,495
Other............................................ 2,636 2,461
------- -------
Total deferred income tax assets............ 13,185 9,516
------- -------
Deferred income tax liabilities:
Prepaid pension and other benefits............... 13,746 13,148
Plant related.................................... 78,533 73,759
Other............................................ 5,724 6,884
------- -------
Total deferred income tax liabilities....... 98,003 93,791
------- -------
Net deferred income tax liability................ $84,818 $84,275
======= =======
</TABLE>
At September 30, 1997 and 1996, unamortized deferred investment tax credits
included in long-term deferred taxes amounted to $5.0 million and $5.4 million,
respectively.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3
CAPITALIZATION
COMMON STOCK. A Stock Performance Sharing Plan (formerly Key Employee
Long-Term Incentive Plan) awards performance shares to certain employees. All or
a portion of the performance shares become vested and earned at the end of the
three-year period beginning on the date the award was granted, depending on the
total return to shareholders for such period. Performance shares eligible for
payment in fiscal year 1999 and 1998 are 74,471 and 41,986, respectively.
Compensation expense equal to the value of the vested shares will be recorded
when it is likely that vested shares will be paid out. No compensation expense
was recorded in 1997 or 1996.
A Key Employee Stock Option Plan provides for the granting of options to
key employees to purchase an aggregate of 1,050,000 shares of common stock.
Options are exercisable upon grant and expire within 10 years from the date of
grant. Outstanding options are exercisable through 2002. Option activity is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
AND EXERCISABLE SHARES OPTION PRICE PER SHARE
------------------- ------ ----------------------
<S> <C> <C>
September 30, 1994............................ 676,500 $17.75 - $22.00
Options exercised............................. (20,800) $17.75 - $19.63
------- ---------------
September 30, 1995............................ 655,700 $17.75 - $22.00
Options exercised............................. (74,850) $17.75 - $22.00
------- ---------------
September 30, 1996............................ 580,850 $17.75 - $22.00
Options exercised............................. (78,350) $17.75 - $22.00
------- ---------------
September 30, 1997............................ 502,500 $17.75 - $22.00
======= ===============
</TABLE>
On January 1, 1997 the Company adopted the Stock Accumulation Plan for
certain outside Directors of the Company. Its intent is to align the interests
of the outside Directors with the interests of the Company's shareholders by
paying a portion of their annual retainer in common stock of the Company. During
1997, the Company reacquired 1,620 shares for reissuance under this plan.
A Shareholder Rights Plan provides one right ("Right") to buy one share of
common stock at a purchase price of $70 for each share of common stock issued
and to be issued. The Rights expire on November 30, 1999 and only become
exercisable, or separately transferable, 10 days after a person or group
acquires, or announces an intention to acquire, beneficial ownership of 20% or
more of the Company's common stock. The Rights are redeemable by the Board at a
price of $.01 per Right, at any time prior to the acquisition by a person or a
group of beneficial ownership of 20% or more of the Company's common stock. Once
a person or group acquires more than 20% of the Company's common stock, however,
the Rights may not be redeemed.
At September 30, 1997, there were 385,000 authorized but unissued shares of
common stock reserved for the Dividend Reinvestment Plan ("DRP"). On December 1,
1994, the DRP was converted to a market-based plan. It is anticipated that no
further shares will be issued under this plan.
CUMULATIVE PREFERRED STOCK AND LONG-TERM DEBT. The cumulative preferred
stocks rank equally and are preferred over common stock in voluntary liquidation
at the redemption price in effect at the time of such voluntary liquidation and
in involuntary liquidation at the par value per share, in each case plus accrued
dividends, except for the $3.80 Series, $50 par value, which has a voluntary
liquidation value of $83 per share and a set involuntary liquidation value of
$81.50 per share, plus accrued dividends.
23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SINKING FUND REQUIREMENTS AND MATURITIES. Annual sinking fund requirements
and maturities of long-term debt and preferred stock for the next five years and
thereafter are as follows:
<TABLE>
<CAPTION>
LONG-TERM REDEEMABLE MAXIMUM
IN THOUSANDS DEBT PREFERRED STOCK CASH REQUIRED
--------- --------------- -------------
<S> <C> <C> <C>
1998.................................. $ 5,000 $ 180 $ 5,180
1999.................................. 833 180 1,013
2000.................................. 10,833 143 10,976
2001.................................. 33,833 143 33,976
2002.................................. 53,833 124 53,957
Thereafter............................ 130,168 1,575 131,743
-------- ------ --------
Total................................. $234,500 $2,345 $236,845
======== ====== ========
</TABLE>
As of September 30, 1997, long-term debt agreements contain no provisions
restricting the payment of dividends on common stock. All debt is unsecured.
As of September 30, 1997 and 1996, $18.0 million of long-term debt was
outstanding under revolving credit agreements at weighted average interest rates
of 5.96% and 5.85%, respectively.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The estimated fair values of the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
IN THOUSANDS AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
September 30, 1997
Capital lease obligations............................ $ 694 $ 697
Long-term debt....................................... $234,500 $245,619
September 30, 1996
Capital lease obligations............................ $ 1,612 $ 1,621
Long-term debt....................................... $196,500 $220,376
</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.
24
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4
LEASES
Noncancelable operating and capital leases have been entered into for the
use of certain facilities and equipment. The operating lease agreements
generally contain renewal options. The capital lease relates to a liquefied
natural gas storage facility. Certain leases contain renewal and purchase
options and escalation clauses. Future annual minimum rental payments under
long-term noncancelable leases at September 30, 1997, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
IN THOUSANDS LEASES LEASES
------- ---------
<S> <C> <C>
1998............................................... $ 726 $ 6,930
1999............................................... -- 6,567
2000............................................... -- 5,879
2001............................................... -- 5,642
2002............................................... -- 5,595
Thereafter......................................... -- 21,352
----- -------
Future minimum lease payments...................... 726 $51,965
=======
Less amount representing interest.................. 32
-----
Present value of future minimum lease payments..... $ 694
=====
</TABLE>
On May 30, 1997, Bay State completed the purchase, sale, and leaseback of
the Easton LNG facility. The lease is a 15-year operating lease with a number of
early termination options.
On June 30, 1997 Bay State executed a sale and leaseback of its
Westborough, Massachusetts headquarters building. Bay State sold the 88,000
square-foot building and ten acres of land for $10.1 million. The Company then
leased back the building, under an operating lease, with a 15-year term and two
five-year options to extend. In conformity with its regulatory accounting
requirements, rent expense is recorded as if all leases were operating leases.
The following rentals were charged to operating expenses:
<TABLE>
<CAPTION>
CAPITAL OPERATING
IN THOUSANDS LEASES LEASES
------- ---------
<S> <C> <C>
1997.............................................. $ 1,096 $10,258
1996.............................................. $ 1,281 $ 8,007
1995.............................................. $ 1,281 $ 5,437
</TABLE>
Interest included in capital lease payments was $119,000, $173,000, and
$253,000 in 1997, 1996, and 1995, respectively.
NOTE 5
SHORT-TERM DEBT AND LINES OF CREDIT
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Unsecured bank lines of credit
Principal outstanding (thousands)............. $26,625 $24,650
Weighted average interest rate................ 6.72% 6.18%
Commercial paper
Principal outstanding (thousands)............. $25,000 $40,000
Weighted average interest rate................ 5.62% 5.42%
Total short-term debt
Principal outstanding (thousands)............. $51,625 $64,650
Weighted average interest rate................ 6.19% 5.71%
</TABLE>
25
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has unsecured bank lines of credit aggregating $90.0 million
for which it pays commitment fees, and access to an additional $30.0 million
under the Fuel Purchase Agreements as described in note 6.
NOTE 6
FUEL PURCHASE AGREEMENTS
Up to $30.0 million can be raised through credit agreements (the
"Agreements") underlying the Fuel Purchase Agreements with a corporation
established to provide financing, through borrowing on a demand basis or selling
supplemental gas inventories. Any inventories sold must be repurchased and any
associated carrying costs paid when the gas is withdrawn from storage. All gas
costs, carrying costs, and administrative charges are fully recoverable through
the CGA approved in each state regulatory jurisdiction. The Agreements contain
an expiration date of September 2000.
NOTE 7
PENSION AND EMPLOYEE BENEFIT PLANS
PENSION PLANS. The funded status of the Company's pension plans as of
September 30, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Vested benefits.................................... $61,060 $67,364
Nonvested benefits................................. 978 1,312
------- -------
Accumulated benefit obligation..................... 62,038 68,676
Additional benefits related to future compensation
levels........................................... 9,138 11,938
------- -------
Projected benefit obligation....................... 71,176 80,614
Plan assets at fair value.......................... 86,907 92,342
------- -------
Plan assets in excess of plan benefits
obligation....................................... $15,731 $11,728
======= =======
</TABLE>
Plan assets are primarily invested in marketable pooled funds holding
equity and corporate debt securities and cash equivalents. Plan assets decreased
in 1997 as a result of early retirement benefits paid as part of the Company's
restructuring (see note 8). The majority of early retirees selected the option
of receiving their pension benefits in the form of a lump-sum payment rather
than the traditional pension annuity. Certain changes in items shown above are
not recognized as they occur, but are systematically amortized over subsequent
periods. Unrecognized amounts as of September 30, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Unrecognized net gain.............................. $ 9,634 $ 1,970
Unrecognized prior service cost.................... (4,311) (4,480)
Unrecognized net transaction obligation............ (2,683) (3,866)
Prepaid pension costs included in the Consolidated
Balance Sheets................................... 13,091 18,104
------- -------
Plan assets in excess of plan benefit
obligations...................................... $15,731 $11,728
======= =======
</TABLE>
26
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The discount rate and expected long-term rate of return on plan assets used
in determining the actuarial present value of projected benefit obligation were
8.0% and 9.0% for both 1997 and 1996. The rate of increase in future
compensation levels used was 4.5% for 1997 and 1996. Net pension cost for 1997,
1996, and 1995 included the following components:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned.............. $ 1,883 $ 2,052 $ 1,790
Interest cost on benefit obligations...... 5,731 6,292 5,668
Actual return on plan assets.............. (14,753) (8,210) (9,762)
Net amortization and deferral............. 9,242 2,309 4,431
Restructuring - early retirement.......... 4,923 -- --
-------- ------- -------
Net pension cost.......................... $ 7,026 $ 2,443 $ 2,127
======== ======= =======
</TABLE>
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The present value of the
accumulated benefit obligation for postretirement benefits other than pensions
was $23.5 million and $24.7 million, at September 30, 1997 and 1996,
respectively. The expense recognized was $6.6 million, $2.6 million, and $2.7
million for 1997, 1996, and 1995, respectively. The components of expense are as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest cost.............................. $ 1,775 $ 1,880 $ 1,872
Service cost............................... 307 453 445
Actual return on plan assets............... (3,649) (2,355) (2,848)
Net amortization........................... 2,352 1,656 2,581
Deferred................................... 1,815 967 613
Restructuring - early retirement........... 3,995 -- --
------- ------- -------
Other postretirement benefit expense....... $ 6,595 $ 2,601 $ 2,663
======= ======= =======
</TABLE>
The funded status of the Company's other postretirement benefit plans as of
September 30, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
---- ----
<S> <C> <C>
Retirees........................................... $ 12,324 $ 12,511
Fully eligible active employees.................... 3,768 4,165
Other active employees............................. 7,405 7,983
-------- --------
Accumulated other postretirement benefit
obligation....................................... 23,497 24,659
Fair value of plan assets.......................... (25,772) (20,791)
Unrecognized net transition obligation............. (17,025) (21,469)
Unrecognized net gain.............................. 11,548 8,069
-------- --------
Prepaid other postretirement benefits recorded in
the Consolidated Balance Sheets.................. $ 7,752 $ 9,532
======== ========
</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 for 1997 and 1996 was determined using an assumed discount
rate of 8.0%, an expected long-term pre-tax rate of return on plan assets of
9.0%, and a health care cost trend rate of 5.0% and 8.0%, in 1997 and 1996,
respectively. An annual 1% increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation by $2.2 million and
the cost for 1997 by $220,000.
RETURN ON PREPAYMENTS OF POSTRETIREMENT BENEFITS. As permitted by
regulatory authorities, noncash returns of $1.7 million, $1.5 million, and $1.7
million for 1997, 1996, and 1995, respectively, have been recorded on amounts of
prepayments associated with employee postretirement benefit plans other than
pensions. Regulators permit the accrual of returns on these prepayments because
the plan funding will significantly reduce the future costs of the plans.
27
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
POSTEMPLOYMENT BENEFITS OTHER THAN PENSIONS. The present value of the
accumulated benefit obligation for postemployment benefits other than pensions
was $4.9 million at September 30, 1997 and 1996.
EMPLOYEE SAVINGS PLAN. Employee Savings Plans ("ESP") provide eligible
employees with an incentive to save and invest regularly. The ESP are defined
contribution plans, which allow eligible employees to defer a portion of their
salaries to employee-funded pretax retirement savings accounts. Matching
contributions to certain employee deferrals were $1.2 million, $1.3 million, and
$1.2 million in 1997, 1996, and 1995, respectively.
NOTE 8
RESTRUCTURING COSTS
The Company has been restructured in response to deregulation within the
natural gas industry. The Company spent a total of $13.1 million on
restructuring which consisted primarily of early retirement programs for certain
employees, consulting fees, and other related costs. Eighty-six employees
(approximately 8.5% of the workforce) accepted an offer of enhanced retirement
benefits which resulted in $4.9 million in additional pension benefits and $4.0
million in additional medical benefits to be funded by the Company's pension and
VEBA plans. At September 30, 1997, all restructuring costs incurred in the
Massachusetts jurisdiction were expensed, resulting in an $11.2 million charge
to income. These costs had been initially deferred pending regulatory approval
of the Company's petition to amortize these costs over future periods. During
the fourth quarter, the Company withdrew its Massachusetts petition as part of a
negotiated settlement in the Performance-based Rate filing (see note 9). The
September 30, 1997 balance of $1.7 million is deferred for amortization in
future periods in other jurisdictions.
NOTE 9
COMMITMENTS AND CONTINGENCIES
LONG-TERM OBLIGATIONS. The Company has long-term contracts for the
purchase, storage, and transportation of approximately half of the Company's gas
supplies. Certain of these contracts contain minimum purchase provisions, which
in the opinion of management, are not in excess of the Company's requirements.
The Company currently transports natural gas imported from Canada through a
converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC").
PNGTS, a long-term capacity addition, is currently planned by a consortium of
energy investors, including an affiliate of the Company, to provide a permanent
pipe-line link with Canadian gas suppliers. This project has been certificated
by the FERC and plans to provide service by November 1998. As insurance against
a possible delay, the Company has secured an option from PPLC to extend its
lease until April 1999.
INVESTMENT RECOVERY. The following table summarizes the Company's current
investments:
<TABLE>
<CAPTION>
INVESTMENTS
OWNERSHIP ------------------
PERCENTAGE 1997 1996
--------- ------- -------
<S> <C> <C> <C>
PNGTS........................................ 17.8% $11,470 $ 7,974
Wells LNG.................................... 100.0% 7,878 7,131
MASSPOWER.................................... -- -- 2,404
Other........................................ -- 34 92
------- -------
Total........................................ $19,382 $17,601
======= =======
</TABLE>
PNGTS is an interstate pipeline that will extend 292 miles from the
U.S./Canada border to the New Hampshire-Massachusetts border. The FERC issued a
Certificate of Public Convenience and Necessity for the PNGTS project in
September 1997. The project has secured contracts for service to the New England
market and has received most of its other necessary regulatory approvals. PNGTS
expects to receive final federal and state regulatory authorizations later this
year. In addition, the project is dependent upon approval by the Canadian
National Energy Board ("NEB") of various facilities to accommodate the delivery
of
28
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
western Canadian natural gas into the PNGTS system at the U.S./Canada border
near Pittsburg, NH. The decision of the NEB is expected to be received in the
Spring of 1998. Subject to regulatory approvals and completion of financing,
PNGTS plans to begin construction in the Spring of 1998, and to provide service
by November 1998.
Wells LNG is a proposed 2 Bcf liquefied natural gas storage facility in
Wells, Maine. In July 1997, the FERC issued a Final Environmental Impact
Statement to the Company determining that the proposed Wells LNG facility would
result in limited adverse environmental impact during construction and
operation. The Company is currently engaged in settlement discussions to resolve
all issues in this FERC certificate proceeding. The project was originally
proposed in November 1994, and has obtained all federal and state environmental
approvals. Because of regulatory delays, completion of the project is not
expected before the winter of 2000.
Additional investments by the Company will be required in 1998 and later
years to complete these projects. Amounts invested in PNGTS and Wells LNG
consist principally of the Company's share of the costs of developing each
project and the carrying costs on these expenditures. Full recovery of these
investments is dependent upon the receipt of satisfactory regulatory treatment.
On June 30, 1997 the Company sold a subsidiary which owned the Company's
17.5% equity investment in MASSPOWER electric cogeneration facility for $17.0
million.
ACQUISITIONS. EnergyUSA(TM) has an agreement to purchase the outstanding
stock of Savage-Alert, Inc. The purchase price, consisting of cash and notes, is
not material to the consolidated financial position of the Company.
ENVIRONMENTAL ISSUES. Like other companies in the natural gas industry,
the Company is party to governmental actions associated with former gas
manufacturing sites. Management estimates that, exclusive of insurance
recoveries, if any, expenditures to remediate and monitor known environmental
sites will range from $4.9 million to $10.0 million. Accordingly, the Company
has accrued $4.9 million with an offsetting charge to a regulatory asset (see
note 1). Environmental expenditures for 1997, 1996, and 1995 were $1.2 million,
$2.5 million, and $387,000, respectively. Exclusive of amounts accrued for
future expenditures, at September 30, 1997 and 1996, approximately $4.9 million
and $4.7 million, respectively, of environmental expenditures had been deferred
for future recovery from customers. Deferred environmental costs are being
recovered from customers over five to 10 years.
REGULATORY MATTERS. Significant regulatory assets arising from the
rate-making process associated with income taxes, company restructuring costs,
employee benefits, and environmental response costs have been recorded. Based on
its assessments of decisions by regulatory authorities, management believes that
all regulatory assets will be settled at recorded amounts through specific
provisions of current and future rate orders.
Bay State is awaiting approval from the MADPU on its Performance-based Rate
filing. The plan provides Bay State with near-term rate recovery of costs
relating to the maintenance of our distribution system and industry unbundling,
while providing customers with a "cap" on prices, and an incentive for Bay State
to lower its future costs.
LITIGATION. The Company is involved in various legal actions and claims
arising in the normal course of business. Based on its current assessment of the
facts of law, and consultations with outside counsel, management does not
believe that the outcome of any action or claim will have a material effect upon
the consolidated financial position, results of operations, or liquidity of the
Company.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS) DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
1997
Operating revenues................................ $ 137,000 $199,879 $84,624 $ 52,078
Operating income (loss)........................... $ 24,759 $ 41,212 $ (526) $(23,741)
Net income (loss)................................. $ 13,204 $ 22,934 $ 6,098 $(16,174)
Per average common share:
Income (loss)................................ $ 0.98 $ 1.70 $ .45(A) $ (1.21)(B)
Dividend declared and paid................... $ .385 $ .385 $ .395 $ .395
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
1996
Operating revenues................................ $ 132,740 $181,336 $67,737 $ 47,030
Operating income (loss)........................... $ 26,459 $ 40,846 $ (338) $(10,752)
Net income (loss)................................. $ 14,378 $ 23,545 $(2,859) $ (7,992)
Per average common share:
Income (loss)................................ $ 1.07 $ 1.75 $ (.22) $ (.60)
Dividend declared and paid................... $ .375 $ .375 $ .385 $ .385
</TABLE>
In the opinion of management, quarterly financial date includes all
adjustments, consisting only of normal recurring accruals, necessary for a fair
representation of such information. Revenue and income amounts vary
significantly due to seasonal weather conditions.
- ---------------
A -- In the third quarter of fiscal year 1997, Bay State sold a subsidiary which
held a 17.5% equity investment in MASSPOWER resulting in a $0.58 per share
gain.
B -- In the fourth quarter of fiscal year 1997, Bay State wrote off previously
deferred restructuring costs resulting in a $0.50 per share loss.
30
<PAGE> 31
REPORT OF MANAGEMENT
The management of Bay State Gas Company and its subsidiaries has the
responsibility for preparing the accompanying financial statements. We believe
the financial statements were prepared in conformity with generally accepted
accounting principles. Management also prepared the other information in the
annual report and is responsible for its accuracy and consistency with the
financial statements.
To fulfill its responsibility, management maintains a system of internal
control that has been designed to provide reasonable assurance as to the
integrity and reliability of the financial statements and the safeguarding of
Company assets.
The Company has established statements of corporate policy relating to
conflict of interest and conduct of business and annually receives from
appropriate employees confirmation of compliance with these policies.
The Company's financial statements have been audited by KPMG Peat Marwick
LLP, independent certified public accountants. The independent accountants are
elected by the Company's Directors and report any recommendations concerning the
Company's system of internal control to the Audit Committee of the Board of
Directors. The Audit Committee meets periodically with Management, internal
auditors, and KPMG Peat Marwick LLP, to review and monitor the Company's
financial reporting, accounting practices, and business conduct.
Although there are inherent limitations in any system of internal control,
management believes that as of September 30, 1997, the Company's system of
internal control was adequate to accomplish the objectives discussed herein.
Roger A. Young Thomas W. Sherman
Chairman of the Board and Chief Financial Officer
Chief Executive Officer
31
<PAGE> 32
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of
Bay State Gas Company
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Bay State Gas Company and subsidiaries as of September 30,
1997 and 1996, and the related consolidated statements of earnings,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bay State Gas Company and
subsidiaries at September 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1997 in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
October 22, 1997
32
<PAGE> 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Registrant as set forth on pages
2 and 3 of the 1998 annual meeting proxy statement, dated December 9, 1997, is
incorporated herein by reference. Information relating to the Executive Officers
of the Registrant is contained in Part I, Item 1, Business.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Registrant's executive officers
as set forth on pages 8 through 13 of the 1998 annual meeting proxy statement,
dated December 9, 1997, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners
and management as set forth on pages 4 and 5 of the 1998 annual meeting proxy
statement, dated December 9, 1997, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions as set
forth on page 15 of the 1998 annual meeting proxy statement, dated December 9,
1997, is incorporated herein by reference.
33
<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
(1) The following financial statements are included herein under Part II,
Item 8, Financial Statements and Supplementary Data
Consolidated Statements of Earnings for the Years ended September 30, 1997,
1996, and 1995
Consolidated Balance Sheets as of September 30, 1997 and 1996
Consolidated Statements of Capitalization as of September 30, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the Years ended
September 30, 1997, 1996, and 1995
Consolidated Statements of Cash Flows for the Years ended September 30,
1997, 1996, and 1995 Independent Auditors' Report
(2) The following additional data should be read in conjunction with the
financial statements included in Part II, Item 8, Financial Statements
and Supplementary Data. Schedules not included herein have been omitted
because they are not required or are not applicable, or the required
information is shown in such financial statements or notes thereto.
<TABLE>
<CAPTION>
PAGES IN
FORM 10-K
---------
<S> <C>
VIII Consolidated Valuation and Qualifying Accounts -- 1997, 1996, and 1995
</TABLE>
(3) Exhibits -- See Exhibit index on page 37.
(b) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the fourth quarter of
fiscal 1997.
34
<PAGE> 35
SCHEDULE VIII
BAY STATE GAS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
DESCRIPTION PERIOD EXPENSE DEDUCTIONS(a) PERIOD
- ----------- ------------ ---------- ------------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997
Allowance for doubtful accounts........... $3,557 $6,429 $5,848 $4,138
YEAR ENDED SEPTEMBER 30, 1996
Allowance for doubtful accounts........... $4,232 $5,444 $6,119 $3,557
YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts........... $5,072 $5,007 $5,847 $4,232
</TABLE>
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BAY STATE GAS COMPANY
By /s/ THOMAS W. SHERMAN
----------------------------------
THOMAS W. SHERMAN
EXECUTIVE VICE PRESIDENT
Date: December 8, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ ROGER A. YOUNG Chairman of the Board; Chief December 8, 1997
- ------------------------------------------ Executive Officer; Director
ROGER A. YOUNG
(CHAIRMAN OF THE BOARD)
/s/ JOEL L. SINGER President; Chief Operating December 8, 1997
- ------------------------------------------ Officer; Director
JOEL L. SINGER
(PRESIDENT)
/s/ THOMAS W. SHERMAN Chief Financial and Accounting December 8, 1997
- ------------------------------------------ Officer; Director
THOMAS W. SHERMAN
(EXECUTIVE VICE PRESIDENT)
/s/ LAWRENCE J. FINNEGAN Director December 8, 1997
- ------------------------------------------
LAWRENCE J. FINNEGAN
/s/ DOUGLAS W. HAWES Director December 8, 1997
- ------------------------------------------
DOUGLAS W. HAWES
/s/ WALTER C. IVANCEVIC Director December 8, 1997
- ------------------------------------------
WALTER C. IVANCEVIC
/s/ JOHN H. LARSON Director December 8, 1997
- ------------------------------------------
JOHN H. LARSON
/s/ JACK E. MCGREGOR Director December 8, 1997
- ------------------------------------------
JACK E. MCGREGOR
/s/ DANIEL J. MURPHY III Director December 8, 1997
- ------------------------------------------
DANIEL J. MURPHY III
/s/ GEORGE W. SARNEY Director December 8, 1997
- ------------------------------------------
GEORGE W. SARNEY
/s/ CHARLES H. TENNEY II Director December 8, 1997
- ------------------------------------------
CHARLES H. TENNEY II
</TABLE>
36
<PAGE> 37
EXHIBIT INDEX
(3) Articles of incorporation and by-laws:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION REFERENCE
------- ----------- ---------
<S> <C> <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 May 2, 1996
(File No. 1-7479)
</TABLE>
- ---------------
* Incorporated by reference to the indicated filing.
(4) Instruments defining the rights of security holders, including indentures:
The following is a listing of debt instruments defining the rights of
security holders, including indentures and/or note agreements for Bay State,
Northern, and Granite. None of these instruments represent any securities in an
amount authorized or outstanding which exceeds 10 % of the total assets of the
Company as of September 30, 1997. The Company will furnish the Securities and
Exchange Commission with copies of any of the instruments listed below upon
request.
Revolving Credit Agreement between Northern and The First National Bank of
Boston, to borrow up to $20,000,000, dated as of March 17, 1997, due March 17,
2001.
Indenture between Bay State and The First National Bank of Boston, Trustee,
dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the
following Notes have been issued under a Prospectus dated April 18, 1991:
<TABLE>
<S><C>
- $8,500,000 Principal Amount of 9.20% Notes due June 6, 2011
- $25,000,000 Principal Amount of 9.45% Notes due September 5, 2031
- $12,000,000 Principal Amount of 8.15% Notes due August 26, 2022
- $4,000,000 Principal Amount of 7.55% Notes due November 1, 2002
- $1,000,000 Principal Amount of 7.55% Notes due October 2, 2002
- $5,000,000 Principal Amount of 7.45% Notes due December 16, 2002
- $5,000,000 Principal Amount of 7.38% Notes due December 31, 2002
- $7,000,000 Principal Amount of 7.375% Notes due November 1, 2002
- $1,000,000 Principal Amount of 7.375% Notes due December 31, 2002
- $5,000,000 Principal Amount of 7.37% Notes due December 31, 2002
- $20,000,000 Principal Amount of 7.25% Notes due August 5, 2002
</TABLE>
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:
<TABLE>
<S><C>
- $10,000,000 Principal Amount of 7.42% Notes due September 10, 2001
- $10,000,000 Principal Amount of 7.625% Notes due June 19, 2023
- $10,000,000 Principal Amount of 6.0% Notes due July 6, 2000
- $15,000,000 Principal Amount of 6.0% Notes due September 29, 2003
- $10,000,000 Principal Amount of 6.58% Notes due June 21, 2005
- $5,000,000 Principal Amount of 6.0% Notes due January 30, 2001
- $5,000,000 Principal Amount of 6.625% Notes due June 28, 2002
- $10,000,000 Principal Amount of 6.43% Notes due December 15, 2025
- $20,000,000 Principal Amount of 6.375% Notes due December 15, 2006
</TABLE>
37
<PAGE> 38
Note Purchase Agreement between Northern and First Colony Life Insurance
for the purchase and sale of $13,000,000 principal amount of 9.70% Notes dated
as of January 1, 1992, due September 1, 2031.
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $10,000,000 principal amount of
6.93% Notes dated as of September 29, 1996, due September 27, 2010.
Note Purchase Agreement between Northern and the Mutual Life Insurance
Company of New York for the purchase and sale of $5,000,000 principal amount of
6.30% Notes dated as of September 29, 1996, due September 30, 1998.
(10) Material contracts:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION REFERENCE
- ------- ----------------------------------------------------- ------------------------------
<C> <S> <C>
*10.01 Key Employee Stock Option Plan covering key employees
of the Company....................................... Exhibit 10.16 to Form 10-K for
1989 (File No. 1-7479)
*10.02 Key Employee Deferred Compensation Plan covering the
Chairman of the Board of Directors, the President,
and Vice Presidents of the Company................... Exhibit 10.21 to Form 10-K for
1992 (File No. 1-7479)
*10.03 Supplemental Executive Retirement Plan covering the
Chairman of the Board of Directors, the President,
and Vice Presidents of the Company................... Exhibit 10.22 to Form 10-K for
1992 (File No. 1-7479)
*10.04 Senior Advisory Agreement between Bay State and
Charles H. Tenney II, dated January 27, 1995......... Exhibit 10.05 to Form 10-K for
1996 (File No. 1-7479)
10.05 Severance agreements between Bay State and each of
the executive officers of the Company................ Filed herewith
*10.06 Directors' Retirement Plan........................... Exhibit 10.07 to Form 10-K for
1995 (File No. 1-7479)
*10.07 Stock Performance Sharing Plan (formerly Key Employee
Long-term Incentive Plan)............................ Filed herewith
*10.08 Stock Accumulation Plan for Outside Directors........ Filed herewith
</TABLE>
(11) Statement re: computation of per share earnings, filed herewith.
(12) Statement re: computation of ratio of earnings to fixed charges, filed
herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Independent Auditors, filed herewith.
(27) Financial Data Schedule, filed herewith.
- ---------------
* Incorporated by reference to the indicated filing.
38
<PAGE> 1
EXHIBIT 10.5
BAY STATE GAS COMPANY
THREE-YEAR CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT, dated this 12th day of December 1996, 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 (the "Board"), at its
meeting on December 12, 1996, 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, as defined below, 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) any person (as such term is used in Section 13(d) of the
Securities and Exchange Act of 1934, as amended ("the Exchange Act) "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;
1
<PAGE> 2
(b) any Person 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 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 shareholders 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, other than a consolidation or
merger of the Company in which holders of its stock immediately prior to the
consolidation or merger have substantially the same proportionate ownership of
common stock of the surviving corporation immediately after the consolidation or
merger as immediately before, (ii) any consolidation or merger in which the
Company is the continuing or surviving corporation but in which the common
shareholders of the Company immediately prior to the consolidation or merger do
not hold at least a majority of the outstanding common stock of the continuing
or surviving corporation (except where such holders of common stock hold at
least a majority of the common stock of the corporation which owns all of the
common stock of the Company), (iii) 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 (iv) any merger or consolidation of the
Company where, after the merger or consolidation, one Person owns 100% of the
shares of stock of the Company (except where the common holders of the Company's
stock immediately prior to such merger or consolidation own at least 90% of the
outstanding stock of such Person immediately after such merger or
consolidation), provided, however, a Change in Control shall no longer be deemed
to exist under this paragraph (c) if the agreement for any approved transaction
under this paragraph (c) is terminated without consummation of the transaction
or the transaction otherwise is abandoned; or
(d) there shall have been a change in a majority of the members of the
Board within a 25-month period unless the election or nomination for election by
the Company's shareholders
2
<PAGE> 3
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
of the Company to whom the Employee reports may from time-to-time determine.
(This provision does not, however, provide such officer the authority to
determine whether there has been a material change in duties for purposes of
paragraph 8(c) hereof.) 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 which ends on the last day of the 36 calendar month period
which began on the later of (i) the date of the Change in Control which causes
this Agreement to be effective as provided in the first paragraph hereof, and
(ii) if the Change in Control is stockholder approval of a transaction pursuant
to paragraph 2(c), the date such transaction is consummated.
(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 engagements, and
3
<PAGE> 4
(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 or
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 provide to the Employee annual bonus opportunities at least equal
to the bonus opportunity provided 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, unless
reduction of either is a result of, and consistent with, a salary reduction
program or restructuring of the compensation program affecting the management
employees of the Company, parent company and/or its subsidiaries. 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.
(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:
4
<PAGE> 5
(i) participate in the Bay State Gas Company Retirement Plan and
any related excess benefit or supplemental retirement program
(hereinafter the restated excess benefit or supplemental retirement
program referred to as the "SERP" and all plans in this paragraph
5(c)(i) 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 or affiliate of the Company which is made
available to the senior management of the Company and its subsidiaries or
affiliates 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
5
<PAGE> 6
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 (provided, however, such termination pay
plans shall not apply to any termination to which the Employee will receive
benefits pursuant to paragraph 9 hereof), which the Company or any subsidiary or
affiliate 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.
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 the Employee's fraud or dishonesty
which has resulted or is likely to result in material economic damage to the
Company or any of its affiliates, 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 an 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 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,
6
<PAGE> 7
(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 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 base compensation or bonus opportunity except as part of, and
consistent with, a salary reduction program or restructuring of the compensation
program affecting the management employees of the Company, parent company and/or
its subsidiaries and affiliates generally, or (v) other material breach of this
Agreement by the Company, by written 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, the Company shall pay to the Employee the following
amounts as liquidated damages or severance pay, or both, within 30 days of such
termination:
(i) a lump sum cash amount equal to the present value of the
product obtained by multiplying 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 36;
7
<PAGE> 8
(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, and had terminated on the last day of
("Deemed Termination Date") the 36-month period immediately following
the actual date of 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)(i) 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
and entitled to receive a benefit under any plan or part of the
Retirement Program if age and service requirements (based on the age
on, and assumed service the Employee would have earned up to, the
Deemed Termination Date) satisfy the requirements for benefit payments
thereunder at any time; 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;
and
(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 or affiliate of the Company (excluding any Employee
elective deferrals or other Employee contributions) to the Employee's
account pursuant to any savings or thrift plan maintained by the
Company or any subsidiary or affiliate 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
8
<PAGE> 9
or any subsidiary or affiliate of the Company during the most recent
contribution period preceding such termination.
(b) For purposes of calculating the lump sum cash payments provided by
paragraph 9(a)(i) through (iii), above, present value shall be determined by
using a discount factor equal to one percentage point below the Prime Rate,
compounded annually, and mortality and other assumptions used in determining
lump sum payments under the Company's qualified defined benefit plan. 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 continue to 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)(v) and (vi), above, in accordance with this paragraph 9(c) shall
be secondary to any comparable benefits provided by another employer.
(d) (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
9
<PAGE> 10
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.
(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" means 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 contest 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
10
<PAGE> 11
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 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 requests 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 that the appeal would be successful. The Employee
further agrees 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.
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 therefor all costs and
expenses which the Employee may incur in connection with contesting
such proposed adjustment
11
<PAGE> 12
(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 (as 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 or affiliates. The Company shall-not be required to establish a
special or separate fund or other segregation of assets to assure such payments.
11. LITIGATION EXPENSES. In the event of any litigation or other
proceeding between the Company and the Employee with
12
<PAGE> 13
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 SALE OF ASSETS. Nothing in this Agreement
shall preclude the Company from consolidating or merging into or with, or
transferring all or substantially all of
13
<PAGE> 14
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.
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
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.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto after the date of a Change in
Control. No provision of this Agreement shall be interpreted to eliminate the
Board's right and
14
<PAGE> 15
authority to terminate this Agreement at any time other than when the Board is
in active discussions with another entity concerning a merger or similar
transaction which, if consummated, would result in a Change in Control. The
Board may not terminate this Agreement after the date of a Change in Control.
(b) 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.
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:___________________________
(Employee)
15
<PAGE> 1
BAY STATE GAS COMPANY
---------------------
STOCK PERFORMANCE SHARING PLAN
------------------------------
Amended And Restated Effective As Of October 1, 1997
<PAGE> 2
AMENDED AND RESTATED
BAY STATE GAS COMPANY
STOCK PERFORMANCE SHARING PLAN
Amended and Restated Effective as of October 1, 1997
1. Background and Purposes of the Plan
Bay State Gas Company (the "Company") adopted the Bay State Gas Company
Key Employee Long-Term Incentive Plan, as most recently amended and restated on
October 1, 1996 ("KELTIP") to provide long-term incentives and to increase the
opportunity for ownership of stock in the Company by those employees of the
Company and its affiliated companies who are directly responsible for the
management, growth and success of the Company's business.
Effective October 1, 1997, the KELTIP was amended and restated as the
Bay State Gas Company Stock Performance Sharing Plan (the "Plan"). In addition
to providing the incentives and opportunity enhancements fostered by the KELTIP,
the Plan is intended to achieve the following three goals by providing long-term
stock-based incentives to employees who contribute directly to the Company's
success and advancement of the Company's legitimate interests: (1) align the
interests of Company employees and shareholders; (2) encourage superior
employment performance; and (3) stimulate employee teamwork and commitment.
2. Administration of the Plan
The Plan shall be administered by the Compensation Committee (the
"Committee") appointed by the Board of Directors of the Company (the "Board"),
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.
The Committee shall (a) determine the number of participants eligible
for participation and, subject to the provisions of Section 3 hereof, the
criteria for such participation, (b) determine the number of shares to award to
each participant, provided however that the Committee shall not award any shares
to an officer of the Company without prior Board
<PAGE> 3
approval, and (c) set the maximum number of shares to be awarded under the Plan
and the performance measures; provided, however, that fifty percent of the
target Performance Shares shall vest if the Company's total return is in the
33rd or greater percentile of the group of companies to which the Company is
compared, unless the Board determines otherwise. The details of the goals and
measures of the Plan shall be established by the Committee.
All rights, powers, duties and responsibilities granted to the Committee
under this Plan may be delegated, in whole or in part, by the Committee to the
Company's Leader of Culture Development or to such other person(s) as the
Committee may deem appropriate, provided however that such delegation(s) shall
be ineffective to the extent, but only to the extent, that such delegation(s)
would result in adverse consequences under the provisions of Rule 16bA3 of the
Exchange Act and/or Section 162(m) of the Code.
3. Participation
All employees of the Company and it affiliated companies who meet such
criteria for participation in the Plan as shall be established from time to time
by the Committee, shall be eligible to participate in the Plan, provided
however, that in no event shall the Committee establish criteria or approve or
deny participant status to individuals in violation of any applicable federal or
state law.
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 (i) a
cash payment in an amount equal to the closing price for the Company's common
stock par value $3.33 1/3 per share ("Common Stock") as reported for trades on
the New York Stock Exchange on the last day on which such trades took place
immediately preceding the date of vesting (the "Exchange Price"), but in no
event shall such cash payment be less than the par value of such common stock,
which cash payment shall only be made on the condition that the participant
receiving such cash payment immediately invest all of such cash payment in
shares of Common Stock, which the Company shall make available to such
participant at a per share price equal to the Exchange Price, without brokerage
or other commissions of any kind, and (ii) an additional cash payment equal to
the dividends which would have been paid on all such shares of Common Stock if
owned by the participant 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.
5. Grant of Awards
The Committee shall grant awards of Performance Shares to the selected
employees, who shall then become participants in the Plan, as of October 1 of
each year from
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<PAGE> 4
1994 through 2003, inclusive. Performance Shares awarded to any one employee
shall not exceed 100,000 in the aggregate for the period the Plan is in effect.
In no event shall awards be granted to participating employees with respect to
any period for which the employee (i) received a performance rating of less than
3.0 (or its successor standard(s)), unless such requirement is waived by the
Committee, on a general or individual basis, after due deliberation, (ii) is
subject to disciplinary action, as determined by the Compensation Committee, or
(iii) is deemed by the Compensation Committee to have engaged in conduct
contrary or harmful to the interests of the Company.
6. Vesting
The Performance Shares awarded to a participant in any year shall vest
at the end of the three-consecutive year period beginning on the date the award
is granted (a "Performance Period"), depending on the Company's total return to
shareholders for the Performance Period, as determined by the Committee.
Except as otherwise provided in Section 7, if a participant terminates
employment with the Company and/or its affiliates, voluntarily or involuntarily,
or is otherwise inactive (as determined by the Committee) as of the date his or
her Performance Shares would otherwise vest, he or she shall forfeit all
Performance Shares awarded for the Performance Period in which the termination
of employment occurs or inactive status arises.
7. Retirement, Disability, Death or Termination 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
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 participant's disability or death, as the
case may be, occurs.
A participant whose employment is terminated for any reason other than
retirement, disability or death shall forfeit any award granted with respect to
the year of such termination. Without limiting the foregoing, effective October
1, 1997, a participant who is not actively employed, as determined by the
Compensation Committee, as of the date awards are granted for any Performance
Period and who is not entitled to a portion of such award based on retirement,
disability or death during the Performance Period shall not be eligible to
receive an award with respect to such period.
A participant may designate a beneficiary or revoke a beneficiary
designation, at any time. Such designation or revocation must be in writing and
received by the Culture Development Group to be effective. In absence of a
designation of a beneficiary, a deceased participant's award will be paid to the
participant's estate.
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<PAGE> 5
For purposes of the Plan, disability means the complete and permanent
inability of a participant to perform the participant's duties under the terms
of employment. The determination of disability and the date thereof shall be
made by the Committee in its sole discretion, on the basis of evidence,
including medical examinations 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 fifty 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:
(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
twenty-five percent or more of the Company's then outstanding shares of 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 twenty-five percent or more of the Company's then
outstanding shares of 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 twenty-five 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 twenty-five month period.
9. Payment of Awards
Payment of Performance Shares shall be made to the participant or, in
the event of the participant's death, his or her beneficiary. In the absence of
a designation of a beneficiary, payment shall be made to the participant's
estate on condition that the executor or administrator thereof immediately
invest such cash payment in Common Stock as provided herein. Shares of Common
Stock into which the cash payment made to a participant (or beneficiary) is to
be invested pursuant to the Plan shall be made available from authorized and
unissued shares or treasury shares of the Company.
-4-
<PAGE> 6
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 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 which do not become vested
shall be forfeited and canceled. The Committee may also cancel Performance
Shares with the written consent of the participant to whom the Performance
Shares were awarded. In the event of any cancellation, all rights of the
participant with respect to the canceled Performance Shares shall terminate, and
the Performance 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.
-5-
<PAGE> 7
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 thereto or make
provision satisfactory to the Committee for payment of any such taxes no later
than the date of the event creating the tax liability. In the Committee's
discretion, such tax obligations may be paid in whole or in part in shares of
Common Stock retained from the award creating the tax obligation. The Company
shall deduct from awards any taxes required to be withheld on the portion of
such award payable with respect to dividends which would have been paid on the
Common Stock during the Performance Period.
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 was approved by the shareholders of the Company at the Annual
Meeting on January 26, 1995. All amendments to the Plan shall be submitted to
the shareholders for approval if so required under Section 16(b) of the Exchange
Act. In the event such approval is not obtained, all awards made thereafter
under the Plan shall be null and void.
18. Effective Date and Duration of Plan
The Plan was adopted by the Board on July 28, 1994, to begin as of
October 1, 1994. The Plan shall remain in effect through the fiscal year ending
September 30, 2004, unless sooner terminated, 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.
-6-
<PAGE> 8
19. Governing Law
The Plan shall be governed by the laws of the Commonwealth of
Massachusetts.
-7-
<PAGE> 1
BAY STATE GAS COMPANY
STOCK ACCUMULATION PLAN FOR OUTSIDE DIRECTORS
ADOPTED EFFECTIVE JANUARY 1, 1997
Bay State Gas Company (the "Company") has adopted the Bay State Gas Company
Stock Accumulation Plan for Outside Directors.
1. PURPOSE AND BACKGROUND
The Stock Accumulation Plan for Outside Directors (the "Plan") is designed
to align the interests of the directors of the Company who are not employees of
the Company or its subsidiaries more closely with the interests of the Company's
shareholders by paying a portion of their compensation in Common Stock of the
Company. The Plan is intended to advance the interests of the Company by
providing these directors with an incentive to remain in the service of the
Company and to increase their efforts for the success of the Company.
2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings set
forth below unless the context clearly requires a different meaning:
(a) ACCOUNT. A Participant's Stock Account.
(b) AFFILIATE. Any corporation or business organization that is under
common control with the Company (as determined under Code section
414(b) or (c)), or that is a member of an affiliated service group
with the Company (as determined under Code section 414(m)).
(c) ANNIVERSARY DATE. The twelve-month anniversary of the date on which an
Outside Director is first elected or appointed to the Board as an
Outside Director.
(d) BOARD. The Bay State Gas Company Board of Directors.
(e) CESSATION OF SERVICE. The date on which an Outside Director ceases to
be an Outside Director on the Board.
(f) CHANGE OF CONTROL. For the purposes of this Plan, a Change of Control
means:
(i) The acquisition by any unrelated person of beneficial ownership
(as that term is used for purposes of the Exchange Act) of 20% or
more of the then outstanding shares of Company Common Stock or
the combined voting power of the then outstanding voting
securities of the Company
<PAGE> 2
entitled to vote generally in the election of directors. The term
"unrelated person" means any person other than (x) the Company
and its Subsidiaries, (y) an employee benefit plan or trust of
the Company or its Subsidiaries, and (z) a person who acquires
stock of the Company pursuant to an agreement with the Company
that is approved by the Board in advance of the acquisition,
unless the acquisition results in the persons who were directors
of the Company before the acquisition ceasing to constitute a
majority of the Board. For purposes of this subsection, a
"person" means an individual, entity or group, as that term is
used for purposes of the Exchange Act.
(ii) Approval by the shareholders of the Company of a reorganization,
merger, consolidation or other transaction (collectively a
"transaction") with respect to which the persons who were the
beneficial owners of the Company Common Stock and other voting
securities of the Company immediately prior to the transaction do
not, following the transaction, beneficially own, directly or
indirectly, more than 50% of the then outstanding shares of the
Company Common Stock (or common stock of the successor
corporation) or the combined voting power of the then outstanding
voting securities of the Company (or the successor corporation)
entitled to vote generally in the election of directors.
(iii) A liquidation or dissolution of the Company, or a sale or other
disposition of all or substantially all of the assets of the
Company.
(iv) As a result of any single or combination of the events described
in Section 2(f)(i), (ii) or (iii), individuals who, before the
first of such events, constituted the Board cease for any reason
to constitute at least a majority of the Board within two (2)
years of the last such event.
(h) COMPANY. Bay State Gas Company, and any successor by merger or
otherwise.
(i) COMPANY STOCK. The common stock, par value $3.33 , of the Company.
(j) DISABILITY. A condition, resulting from bodily injury or disease or
mental impairment, that renders, and for a six consecutive month
period has rendered, an Outside Director unable to perform the duties
of a director.
2
<PAGE> 3
Disability shall be determined by a licensed medical physician
selected by the Board.
(k) EFFECTIVE DATE. January 1, 1997.
(l) EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
(m) OUTSIDE DIRECTOR. A director on the Board who is not an employee of
the Company or any of its Subsidiaries or Affiliates.
(n) PLAN. The Bay State Gas Company Stock Accumulation Plan for Outside
Directors.
(o) RETAINER. The annual base retainer paid to all Outside Directors for
service on a Board. The term "Retainer" shall not include meeting
fees, travel expenses, fees or additional retainer for service on
committees of the Board, and fees or additional retainer for service
as chairman of the Board. When an Outside Director is first elected or
appointed to the Board, the Retainer shall be the annual retainer
payable for a full year, even if the Outside Director serves less than
a full year.
(p) RETIREMENT DATE. Age 65 with at least five Years of Service on the
Board.
(q) RULE 16B-3. Rule 16b-3 of the Securities and Exchange Commission
promulgated under the Exchange Act. A reference in the Plan to Rule
16b-3 shall include a reference to any corresponding rule (or number
redesignation) or any amendments to Rule 16b-3 enacted after the
Effective Date.
(r) YEAR OF SERVICE. A twelve-month period ending on an Anniversary Date
during which an Outside Director continuously serves on the Board. An
Outside Director shall be credited with a Year of Service in the year
in which a Cessation of Service occurs if the period from the last
Anniversary Date until Cessation of Service is at least six (6)
months.
3. PAYMENT OF RETAINER IN SHARES OF STOCK.
(a) Each person who is an Outside Director on January 1, 1997 and on each
anniversary thereof and who has not elected to opt out of the Plan as provided
for herein shall be paid such person's Retainer in shares of Common Stock as
provided in this Section 3. The Retainer shall, unless otherwise determined by
the Board, be payable once annually at the time of the Company's Annual Meeting
of Shareholders.
3
<PAGE> 4
(b) The shares of Common Stock payable pursuant to the Plan will be
purchased by the Company on the open market. The Company will purchase that
number of whole shares as is equal to the Retainer payable to all participants
in the Plan divided by the purchase price for such shares. Such shares shall be
held by the Company in a separate account for the benefit of the participants in
the Plan and the shares allocable to each participant shall be credited to a
Stock Account maintained for each such participant. Dividends shall accrue on
such shares and shall be payable to each Participant at the time of each payment
of vested shares to a participant from the Plan.
(c) The Common Stock credited to the Stock Account shall vest in
accordance with the provisions of Section 4 and shall be payable in accordance
with the provisions of Section 5 and 6.
4. VESTING
(a) Except in the case of death, Disability, Change of Control, attainment
of Retirement Date or in the event that a participant opts out of the Plan as
provided in for in Section 6(a)(ii), an Outside Director shall not be vested in
shares of Common Stock credited to his or her Stock Account as of a Retainer
payment date until the completion of two (2) Years of Service from such Retainer
payment date. Death, Disability, Change or Control, attainment of Retirement
Date or opting out of the Plan pursuant to Section 6(a)(ii) shall cause a
participant to immediately vest in all shares of Common Stock credited to such
participants Stock Account.
(b) If an Outside Director has a Cessation of Service other than due to
death, Disability, Change of Control, or attainment of Retirement Date before
completion of two (2) Years of Service from a Retainer payment date, the Outside
Director shall forfeit any shares of Common Stock credited to such Outside
Director's Stock Account with respect to any Retainer payment dates occurring
within such two year period. Any such forfeited shares shall be forfeited to the
Company to be dealt with by the Company in any manner deemed appropriate.
5. PAYMENT FROM ACCOUNTS.
(a) On each two year anniversary of a Retainer payment date, the Company
shall cause to be paid from the Plan to each participant that number of shares
of Common Stock with respect to which the participant is vested, together with
cash in an amount equal to all dividends which would have been paid on such
shares from the time that the Company purchased such shares for such participant
under the Plan to the date of payment of the shares to the participant.
(b) If an Outside Director has a Cessation of Service on account of death,
Disability or because such Outside Director
4
<PAGE> 5
has opted out of the Plan following the achievement of such Outside Director's
Retirement Date, the Outside Director's Stock Account will be distributed to the
Outside Director or his or her beneficiary within sixty (60) days following the
Cessation of Service or the date on which the Outside Director opts out of the
Plan, together with cash in an amount equal to all dividends which would have
been paid on such shares from the time that the Company purchased such shares
for such Outside Director under the Plan to the date of payment of the shares to
the Outside Director or his or her beneficiary.
(c) Following a Change in Control, an Outside Director's Stock Account
(together with cash in an amount equal to all dividends which would have been
paid on the shares in such Outside Director's Stock Account from the time that
the Company purchased such shares for such Outside Director to the date of
payment of the shares to the Outside Director) shall be distributed to such
Outside Director in such manner and at such time as the Outside Director may
elect by notice to the Company in writing.
6. OPTING OUT OF THE PLAN.
(a) An Outside Director may opt out of the Plan (i) at any time
following such Outside Director achieving his or her Retirement Date, (ii) upon
such Outside Director becoming the record or beneficial owner of shares of
Company Common Stock having a value equal to the amount specified in Schedule A
hereto, determined in the manner set forth in Schedule A, and (iii) at any time
following the occurrence of a Change in Control. Once an Outside Director opts
out of the Plan, such Outside Director may not thereafter again become a
participant in the Plan. An Outside Director who is entitled to opt out of the
Plan may do so by so notifying the Company in writing that he or she has elected
to opt out of the Plan, which notice shall state the basis on which the Outside
Director is entitled to so opt out of the Plan.
(b) The Compensation Committee of the Board may in its sole and
absolute discretion exempt any Outside Director from participation in the Plan
if the Compensation Committee determines that doing so is in the best interest
of the Company and appropriate under the circumstances.
(c) Outside Directors who are not participants in the Plan for any
reason shall be paid their Retainer in cash in accordance with the policies
adopted by the Board from time to time with respect to the payment of Retainers.
7. INTERPRETATION AND ADMINISTRATION OF THE PLAN.
This Plan shall be self-administering; provided, however, that to the
extent the Plan is not self-administering, the Plan shall be administered,
construed and interpreted by the
5
<PAGE> 6
Compensation Committee of the Board. The Compensation Committee of the Board
shall have all powers vested in it by the terms of the Plan. Any decision of the
Compensation Committee of the Board with respect to the Plan shall be final,
conclusive and binding upon all Outside Directors. The Clerk of the Company
shall be authorized to take or cause to be taken such actions of a ministerial
nature as shall be necessary to effectuate the intent and purposes of the Plan,
including establishing an account with a financial institution to hold shares of
Company Common Stock pursuant to the Plan, maintaining records of the Stock
Accounts of Outside Directors and arranging for distributions of Stock Accounts.
8. AMENDMENTS.
By action of the Board, the Board may from time to time make such changes
in and additions to the Plan as it may deem appropriate. Any change or addition
to the Plan shall not, without the consent of any Outside Director who is
adversely affected thereby, alter the vesting provisions applicable to any
payments of Common Stock previously made to the Outside Director pursuant to the
Plan.
9. BENEFICIARY.
An Outside Director may designate in writing on a form provided by and
delivered to the Company, one or more beneficiaries (which may include a trust)
to receive any payments that may become due under the Plan after the death of
the Outside Director. If an Outside Director fails to designate a beneficiary,
or no designated beneficiary survives the Outside Director, any payments to be
made with respect to the Outside Director after death shall be made to the
personal representative of the Outside Director's estate.
10. NOTICE.
All notices and other communications required or permitted to be given
under the Plan shall be in writing and shall be deemed to have been duly given
if delivered personally or mailed first class, postage prepaid, as follows: (a)
if to the Company, at its principal business address, to the attention of the
Clerk of the Company; (b) if to any Outside Director, at the last address of the
Outside Director known to the sender at the time the notice or other
communication is sent.
11. INTERPRETATION AND CONSTRUCTION.
This Plan is intended to comply with the provisions of Rule 16b-3 and shall
be construed to so comply. The terms of this Plan are subject to all present and
future rulings of the Securities and Exchange Commission with respect to Rule
16b-3. If any provision of the Plan would cause the Plan to fail to
6
<PAGE> 7
meet the requirements of Rule 16b-3, then that provision of the Plan shall be
void and of no effect. To the extent not inconsistent with the requirements of
Rule 16b-3, the Plan shall be construed and enforced according to the laws of
the Commonwealth of Massachusetts. Headings and captions are for convenience
only and have no substantive meaning. Reference to one gender includes the
other, and references to the singular and plural include each other.
7
<PAGE> 8
SCHEDULE A
Once a Plan participant owns Company Common Stock having a value (computed
in the manner hereinafter set forth) equal to at least six times the annual
retainer then in effect, such participant shall have the right to opt out of the
Plan, as provided for in Section 6 hereof. For purposes of determining whether a
participant meets the threshold requirement for opting out of the Plan, the
value of Company Common Stock shall be equal to the average of the closing
prices for such Common Stock on the New York Stock Exchange for the five trading
day period immediately preceding the Friday prior to the date of each Annual
Shareholder's meeting, with such determination of value to apply until the next
Annual Shareholders meeting.
8
<PAGE> 1
EXHIBIT 11
BAY STATE GAS COMPANY
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Primary earnings per share.................... $ 1.92 $ 2.00 $ 1.71 $ 1.85 $ 1.75
Dilutive effect of outstanding options to
purchase common stock....................... (0.01) (0.02) (0.01) (0.02) (0.03)
------ ------ ------ ------ ------
Fully diluted earnings per share.............. $ 1.91 $ 1.98 $ 1.70 $ 1.83 $ 1.72
====== ====== ====== ====== ======
</TABLE>
39
<PAGE> 1
EXHIBIT 12
BAY STATE GAS COMPANY
STATEMENT RE: COMPUTATION IN SUPPORT OF RATIO OF
EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Net income.......................... $26,062 $27,072 $23,128 $24,485 $22,807
Adjustments:
Income taxes................... 16,979 16,953 14,575 15,642 13,726
Fixed charges (as below)....... 21,192 21,522 19,365 17,359 15,906
------- ------- ------- ------- -------
Total adjusted earnings... $64,233 $65,547 $57,068 $57,486 $52,439
======= ======= ======= ======= =======
Fixed charges:
Total interest expense.............. $18,255 $17,345 $17,300 $15,305 $13,610
Interest component of rents......... 2,937 4,177 2,065 2,054 2,296
------- ------- ------- ------- -------
Total fixed charges....... $21,192 $21,522 $19,365 $17,359 $15,906
======= ======= ======= ======= =======
Ratio of earnings to fixed charges....... 3.03 3.05 2.95 3.31 3.30
======= ======= ======= ======= =======
</TABLE>
40
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SEPTEMBER 30, 1997
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. -- Natural Gas Development,
Inc.
-- Bay State Energy Enterprises, Inc.
-- EnergyUSA, Inc.
-- EnergyEXPRESS, Inc.
-- LNG Development Corp.
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 Enterprises, Inc., EnergyUSA, Inc., EnergyEXPRESS, Inc., LNG Development
Corp., and Natural Gas Development, Inc. are incorporated in the Commonwealth of
Massachusetts.
41
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Bay State Gas Company
The audits referred to in our report dated October 22, 1997, included the
related financial statement schedule as of September 30, 1997, and for each of
the years in the three-year period ended September 30, 1997, included in the
annual report on Form 10-K of Bay State Gas Company. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
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 22, 1997, relating to the consolidated balance sheets and statements of
capitalization of Bay State Gas Company and subsidiaries as of September 30,
1997 and 1996 and the related consolidated statements of earnings, shareholders'
equity and cash flows for each of the years in the three-year period ended
September 30, 1997, which report is included in the September 30, 1997 annual
report on Form 10-K of Bay State Gas Company.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
December 3, 1997
42
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 512,936
<OTHER-PROPERTY-AND-INVEST> 10,365
<TOTAL-CURRENT-ASSETS> 115,158
<TOTAL-DEFERRED-CHARGES> 34,273
<OTHER-ASSETS> 49,387
<TOTAL-ASSETS> 722,119
<COMMON> 45,025
<CAPITAL-SURPLUS-PAID-IN> 103,126
<RETAINED-EARNINGS> 86,227
<TOTAL-COMMON-STOCKHOLDERS-EQ> 234,378
0
4,917
<LONG-TERM-DEBT-NET> 229,500
<SHORT-TERM-NOTES> 51,625
<LONG-TERM-NOTES-PAYABLE> 229,500
<COMMERCIAL-PAPER-OBLIGATIONS> 18,000
<LONG-TERM-DEBT-CURRENT-PORT> 5,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 196,699
<TOT-CAPITALIZATION-AND-LIAB> 722,119
<GROSS-OPERATING-REVENUE> 473,581
<INCOME-TAX-EXPENSE> 16,979
<OTHER-OPERATING-EXPENSES> 431,877
<TOTAL-OPERATING-EXPENSES> 448,856
<OPERATING-INCOME-LOSS> 24,725
<OTHER-INCOME-NET> 19,179
<INCOME-BEFORE-INTEREST-EXPEN> 43,904
<TOTAL-INTEREST-EXPENSE> 17,842
<NET-INCOME> 26,062
288
<EARNINGS-AVAILABLE-FOR-COMM> 25,774
<COMMON-STOCK-DIVIDENDS> 20,988
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 44,540
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.91
</TABLE>
