<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED DECEMBER 31, 1997
Commission file number 1-7479
-----------------
BAY STATE GAS COMPANY
(Exact name of registrant as specified in its charter)
Massachusetts 04-2548120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Friberg Parkway, Westborough, Massachusetts 01581-5039 (508/836-7000)
(Address and telephone number of principal executive offices)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 1998
----- -------------------------------
Common Stock, $3.33 1/3 par value 13,524,474 Shares
<PAGE> 2
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings - Three months and
twelve months ended December 31, 1997 and 1996................... 3
Consolidated Balance Sheets at December 31, 1997, 1996
and September 30, 1997........................................... 4
Consolidated Statements of Capitalization at December 31,
1997, 1996 and September 30, 1997................................ 5
Consolidated Statements of Cash Flows - Three months and
twelve months ended December 31, 1997 and 1996................... 6
Notes to Consolidated Financial Statements....................... 7
Independent Auditors' Report..................................... 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 16
Item 2. Changes in Securities...................................... 16
Item 3. Defaults Upon Senior Securities............................ 16
Item 4. Submission of Matters to a Vote of Security Holders........ 16
Item 5. Other Information.......................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 17
SIGNATURES.......................................................... 18
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Twelve months ended
December 31, December 31,
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenues $153,356 $137,006 $489,931 $433,103
Operating expenses:
Recovered natural gas costs 79,267 73,485 268,847 229,991
Other cost of goods sold 7,518 2,296 15,653 7,553
Operations 28,506 23,401 99,964 90,536
Merger costs (Note 2) 1,558 - 1,558 -
Restructuring costs - - 11,213 -
Maintenance 2,262 2,940 9,894 11,004
Depreciation and amortization 7,465 6,801 29,151 26,597
Other taxes, principally property taxes 3,166 3,315 13,102 12,887
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 129,742 112,238 449,382 378,568
- -------------------------------------------------------------------------------------------------------------
Operating income 23,614 24,768 40,549 54,535
- -------------------------------------------------------------------------------------------------------------
Other income:
Income from sale of subsidiary - - 13,344 -
Income from investments 341 732 2,276 2,957
AFUDC equity and other 464 244 3,055 1,506
- -------------------------------------------------------------------------------------------------------------
Income before interest and income taxes 24,419 25,744 59,224 58,998
- -------------------------------------------------------------------------------------------------------------
Interest income (134) (103) (366) (340)
Interest expense 4,711 4,360 18,194 17,054
Federal and state taxes on income 8,123 8,283 16,819 16,387
- -------------------------------------------------------------------------------------------------------------
Net income 11,719 13,204 24,577 25,897
Dividend requirements on preferred stock 71 73 286 293
- -------------------------------------------------------------------------------------------------------------
EARNINGS APPLICABLE TO COMMON STOCK $ 11,648 $ 13,131 $ 24,291 $ 25,604
=============================================================================================================
Average basic number of shares outstanding 13,508 13,437 13,473 13,415
=============================================================================================================
BASIC EARNINGS PER SHARE $ 0.86 $ 0.98 $ 1.80 $ 1.91
=============================================================================================================
Average diluted number of share outstanding 13,665 13,574 13,605 13,546
=============================================================================================================
DILUTED EARNINGS PER SHARE $ 0.85 $ 0.97 $ 1.79 $ 1.89
=============================================================================================================
DIVIDENDS DECLARED PER COMMON SHARE $ 0.395 $ 0.385 $ 1.57 $ 1.53
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE> 4
BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1996 1997
- -------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C> <C>
ASSETS:
Plant, at cost $735,933 $714,454 $740,266
Accumulated depreciation and amortization 223,453 203,869 216,965
- -------------------------------------------------------------------------------------------------------
Net plant 512,480 510,585 523,301
- -------------------------------------------------------------------------------------------------------
Investments (note 4) 21,975 19,441 19,382
Prepaid benefit plans 21,653 19,674 21,941
Other long-term assets 11,164 9,709 8,064
Current assets:
Cash and temporary cash investments 2,620 7,153 3,672
Accounts receivable, less allowances of
$4,288, $2,829 and $4,138 71,085 61,815 32,713
Unbilled revenues 13,499 10,443 3,708
Deferred gas costs 43,577 42,078 39,764
Inventories, at average cost 50,422 27,707 30,473
Other 4,288 5,271 4,828
- -------------------------------------------------------------------------------------------------------
Total current assets 185,491 154,467 115,158
- -------------------------------------------------------------------------------------------------------
Regulatory assets:
Income taxes 12,148 11,059 11,045
Other 28,535 31,155 23,228
- -------------------------------------------------------------------------------------------------------
$793,446 $756,090 $722,119
=======================================================================================================
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common stock equity (note 3) $241,048 $236,297 $234,378
Preferred stock equity 4,917 5,010 4,917
Long-term debt, net 234,028 216,500 229,500
- -------------------------------------------------------------------------------------------------------
Total capitalization 479,993 457,807 468,795
- -------------------------------------------------------------------------------------------------------
Long-term liabilities:
Deferred taxes 85,910 81,184 81,770
Other long-term liabilities 21,268 17,163 13,583
- -------------------------------------------------------------------------------------------------------
Total long-term liabilities 107,178 98,347 95,353
- -------------------------------------------------------------------------------------------------------
Commitments and contingencies (note 4)
Current liabilities:
Short-term debt 90,000 86,500 51,625
Current maturity of long-term debt 5,000 18,000 5,000
Accounts payable 56,524 47,783 41,404
Fuel purchase commitments 24,067 22,988 22,817
Refunds due customers 17,558 9,862 25,802
Deferred and accrued taxes 5,720 7,269 3,326
Other 7,406 7,534 7,997
- -------------------------------------------------------------------------------------------------------
Total current liabilities 206,275 199,936 157,971
- -------------------------------------------------------------------------------------------------------
$793,446 $756,090 $722,119
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1996 1997
- ---------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C> <C>
Common stock equity:
Common stock, $3.33 1/3 par value, authorized
36,000,000 shares; 13,515,094, 13,443,594 and
13,506,594 shares outstanding $ 45,035 $ 44,812 $ 45,025
Paid-in-capital 103,475 102,089 103,126
Retained earnings 92,538 89,396 86,227
- ---------------------------------------------------------------------------------------------------------
Total common stock equity 241,048 236,297 234,378
- ---------------------------------------------------------------------------------------------------------
Cumulative preferred stock:
Redeemable cumulative preferred stock 4,917 5,010 4,917
- ---------------------------------------------------------------------------------------------------------
Total cumulative preferred stock 4,917 5,010 4,917
- ---------------------------------------------------------------------------------------------------------
Long-term debt:
Revolving credit agreement 18,000 18,000 18,000
Notes 221,028 216,500 216,500
- ---------------------------------------------------------------------------------------------------------
Total long-term debt 239,028 234,500 234,500
Less current maturities of long-term debt 5,000 18,000 5,000
- ---------------------------------------------------------------------------------------------------------
Long-term debt, net 234,028 216,500 229,500
- ---------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION $479,993 $457,807 $468,795
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
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BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Three months ended Twelve months ended
December 31, December 31,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,719 $ 13,204 $ 24,577 $ 25,897
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,465 6,801 29,151 26,597
Deferred income taxes 3,274 1,744 3,133 8,203
Gain from sale of subsidiary - - (13,344) -
Investment income and AFUDC (800) (824) (4,067) (4,242)
Changes in operating assets and liabilities:
Accounts receivable (38,372) (34,672) (9,270) (9,429)
Unbilled revenues (9,791) (6,734) (3,056) 1,702
Accounts payable 15,120 15,924 8,741 3,865
Taxes 2,157 3,727 (1,045) (3,682)
Deferred gas costs and refunds due customers (12,057) (15,196) 6,197 (34,142)
Other 1,361 (2,518) 3,154 (11,337)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (19,924) (18,544) 44,171 3,432
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to plant (16,912) (14,910) (60,650) (49,957)
Proceeds from sale of subsidiary - - 17,000 -
Proceeds from sale of building - - 10,145 -
Other investments (2,072) (933) (3,310) (4,572)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,984) (15,843) (36,815) (54,529)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 359 356 1,609 1,648
Dividends on common stock (5,335) (5,176) (21,147) (20,525)
Dividends on preferred stock (71) (73) (286) (293)
Issuances of long-term debt 4,528 20,000 4,528 25,000
Retirements of preferred stock and long-term debt - - (93) (5,134)
Short-term debt 38,375 21,850 3,500 52,550
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 37,856 36,957 (11,889) 53,246
- ----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND TEMPORARY CASH INVESTMENTS (1,052) 2,570 (4,533) 2,149
Cash and temporary cash investments at beginning of period 3,672 4,583 7,153 5,004
- ----------------------------------------------------------------------------------------------------------------------------
Cash and temporary cash investments at end of period $ 2,620 $ 7,153 $ 2,620 $ 7,153
============================================================================================================================
Supplemental cash flow information: Cash paid during the period for:
Interest (net of amounts capitalized) $ 5,479 $ 5,799 $ 18,908 $ 19,231
============================================================================================================================
Income taxes $ 2,122 $ 2,509 $ 14,324 $ 11,441
============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
Page 6
<PAGE> 7
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Unaudited)
NOTE 1 - ACCOUNTING POLICY
The accompanying consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and, therefore, do not include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, the consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals) necessary
to present fairly the Company's financial position, results of operations and
cash flows for all periods shown. Certain information in the prior period
financial statements has been reclassified to conform with the current period's
presentation. It is suggested that these financial statements and accompanying
notes be read in conjunction with the financial statements and the notes
included in the Company's annual report to shareholders for the year ended
September 30, 1997.
Because of the seasonal nature of the Company's business, the results of
operations for the three months ended December 31, 1997 and 1996 are not
necessarily indicative of the results for the full fiscal year.
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," which changes the method for computing earnings per share
and requires the Company to present basic and diluted earnings per share. All
prior periods have been restated to reflect the application of Statement No.
128.
NOTE 2 - MERGER COSTS
On December 18, 1997 the Company signed a definitive Merger Agreement with
NIPSCO Industries, Inc., a holding company in Indiana that is exempt from all
provisions of the Public Utility Holding Company Act of 1935, except section 9
(a) 2. The agreement was filed on December 30, 1997 on Form 8-K, which outlines
the various management actions that must be taken to consummate the merger, as
well as the shareholder, federal and state regulatory approvals that must be
received before this merger can be effective. The Company expects that all such
approvals will be received in the fall of 1998. The Company has recorded $1.6
million of merger related costs for legal, consulting, and business advisory
services. In future quarters, the Company expects to incur $6 million in
additional merger costs.
NOTE 3 - CAPITALIZATION
KESOP. A Key Employee Stock Option Plan provides for the granting of options to
key employees to purchase an aggregate of 1,050,000 shares of common stock.
Options are exercisable upon grant and expire within 10 years from the date of
grant. Outstanding options are exercisable through 2002. Option activity for the
quarter is as follows:
-------------------------------------------------------
Options outstanding and exercisable Shares
-------------------------------------------------------
September 30, 1997 502,500
-------------------------------------------------------
Options issued 107,915
-------------------------------------------------------
Options exercised (8,500)
-------------------------------------------------------
December 31, 1997 601,915
=======================================================
FINANCING. On January 9, 1998, the Company executed a sale/leaseback of 158,000
automatic meter reading devices with Fleet Capital Corporation. The Company
received $18.0 million from the sale and will use the proceeds to reduce
short-term debt and pay general corporate expenses. The leaseback qualifies as
an operating lease for accounting and tax purposes and has a term of 11 years.
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<PAGE> 8
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Unaudited)
PREFERRED STOCK REDEMPTION. On January 23, 1998, the Company provided a notice
of redemption to holders of record of Bay State Preferred Shares, and effective
March 1, 1998, all Bay State Preferred Shares will be redeemed and will no
longer be outstanding.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CAPACITY REQUIREMENTS. The Company currently transports natural gas imported
from Canada through a converted oil pipeline leased from the Portland Pipe Line
Corporation ("PPLC"). Portland Natural Gas Transmission System ("PNGTS"), a
long-term capacity addition, is currently planned by a consortium of energy
investors, including an affiliate of the Company, to provide a permanent
pipeline link with Canadian gas suppliers. This project has been certificated by
the Federal Energy Regulatory Commission ("FERC") and plans to provide service
by November 1998. As insurance against a possible delay, the Company has secured
an option from PPLC to extend its lease until April 1999.
INVESTMENTS. The following table summarizes the Company's investments
(in thousands):
Ownership Investments at December 31,
percentages 1997 1996
----------------------------------------------------------------------
PNGTS 17.8% $13,767 $8,873
Wells LNG 100.0% 8,174 7,507
MASSPOWER -- - 2,852
Other -- 34 209
-----------------------------------------------------------------------
Total $21,975 $19,441
-----------------------------------------------------------------------
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 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 to be
located in Wells, Maine. In July 1997, the FERC issued a favorable Final
Environmental Impact Statement to the Company that found the facility is
environmentally acceptable and can be constructed and operated with limited
adverse environmental impact. While the project was originally proposed in late
1994, and has received all other required authorizations, completion of the
project is not expected before the winter of 2000-2001 and remains subject to
final approval by the FERC.
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 cost on these expenditures. Full recovery of these investments is
dependent upon the receipt of satisfactory regulatory treatment.
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<PAGE> 9
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Unaudited)
ACQUISITION. On November 18, 1997 EnergyUSATM, a nonregulated subsidiary of Bay
State Gas, purchased 100% of the outstanding stock of Savage-ALERT, Inc.
("Savage"). In accordance with Accounting Principles Board Opinion No. 16 the
Company adopted the purchase method of accounting and has recorded the operating
results of Savage for the two months ended December 31, 1997, as well as the
assets and related liabilities as of October 31, 1997. The results of this
acquisition are not material to the consolidated financial statements.
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.
ENVIRONMENTAL ISSUES. Like other companies in the natural gas industry, the
Company is a party to governmental actions associated with former gas
manufacturing sites. Management estimates that, exclusive of insurance
recoveries, if any, expenditures to remediate and monitor known environmental
sites will range from $4.9 million to $10.0 million. Accordingly, the Company
has accrued $4.9 million with an offsetting charge to a regulatory asset.
Environmental expenditures for the quarters ended December 31, 1997 and 1996
were $586,000 and $258,000, respectively. Exclusive of amounts accrued for
future expenditures, at December 31, 1997 and 1996, approximately $5.9 million
and $4.8 million, respectively, of environmental expenditures had been deferred
for future recovery from customers. Deferred environmental costs are being
recovered from customers over five to 10 years.
REGULATORY MATTERS. Significant regulatory assets arising from the rate-making
process associated with income taxes, employee benefits, and environmental
response costs have been recorded. Based on its assessments of decisions by
regulatory authorities, management believes that all regulatory assets will be
settled at recorded amounts through specific provisions of current and future
rate orders.
Bay State recently received approval from the Massachusetts Department of
Telecommunications and Energy for new rates associated with a unique "two-year
rate plan," which is a form of a price-cap incentive rate mechanism. The plan
was developed through a settlement process involving the Massachusetts Attorney
General's Office, the Massachusetts Division of Energy Resources, and Local 273
of the Utility Workers Union of America.
As a result of this settlement, beginning on January 1, 1998, Bay State's rates
increased $1.8 million on an annual basis in order to recover safety-related and
compliance-related costs associated with maintenance of its natural gas pipeline
distribution system. In addition, as part of the settlement, Bay State agreed to
share earnings above an 11.4% return of equity, on a 50/50 basis, with its
customers and shareholders. Due to its fiscal 1997 financial performance, the
Company will reduce rates to customers by $206,000 from January 1, 1998 through
October 31, 1998.
LITIGATION. The Company is involved in various legal actions and claims arising
in the normal course of business. Based on its current assessment of the facts
of law, and consultation with outside counsel, management does not believe that
the outcome of any action or claim will have a material adverse effect upon the
consolidated financial position, results of operations, or liquidity of the
Company.
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<PAGE> 10
Notes to Consolidated Financial Statements
December 31, 1997 and 1996
(Unaudited)
NOTE 5 - RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for the twelve months ended December 31,
1997, and for the years ended September 30 are set forth below.
<TABLE>
<CAPTION>
Year ended September 30
December -------------------------------------------
(Dollars in thousands) 1997 1997 1996 1995 1994 1993
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $24,577 $26,062 $27,072 $23,128 $24,485 $22,807
Adjustments:
Income taxes 16,819 16,979 16,953 14,575 15,642 13,726
Fixed charges (see below) 21,788 21,192 20,187 19,365 17,359 15,906
-----------------------------------------------------
Total adjusted earnings $63,184 $64,233 $64,212 $57,068 $57,486 $52,439
=====================================================
Fixed charges:
Total interest expense $18,582 $18,255 $17,345 $17,300 $15,305 $13,610
Interest component of rents 3,206 2,937 2,842 2,065 2,054 2,296
-----------------------------------------------------
Total fixed charges $21,788 $21,192 $20,187 $19,365 $17,359 $15,906
=====================================================
Ratio of earnings to fixed charges 2.90 3.03 3.18 2.95 3.31 3.30
=====================================================
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
Bay State Gas Company
We have reviewed the consolidated balance sheets and statements of
capitalization of Bay State Gas Company and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of earnings and cash flows for
the three months and twelve months then ended. These consolidated financial
statements are the responsibility of the Company's management.
We have conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of Bay
State Gas Company and subsidiaries as of September 30, 1997, and the related
consolidated statements of earnings and cash flows for the year then ended (not
presented herein); and, in our report dated October 22, 1997, we expressed an
unqualified opinion on those consolidated financial statements.
KPMG PEAT MARWICK LLP
Boston, Massachusetts
January 19, 1998
Page 11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS AND DIVIDENDS
For the three months ended December 31, 1997, operating revenues were $153.4
million, up from $137.0 million in the prior year, while diluted earnings per
average common share was $0.85 versus $0.97 a year earlier. The decrease in
earnings per share is primarily attributable to costs relating to the Company's
previously announced planned merger with NIPSCO Industries, Inc. resulting in
decreased earnings per share of approximately $0.11. In addition, earnings were
negative affected by the recording of $0.07 per share in additional compensation
expense related to Bay State's stock-based incentive pay plan. Weather, which
was about 4% colder than normal, improved earning by $0.05 per share. Excluding
the effect of these items, weather- and merger-adjusted earnings this past
quarter would have been $0.99 per share, compared to normalized earnings per
share of $0.99 for the same period last year.
For the twelve-month period ended December 31, 1997, diluted earnings per
average common share were $1.79 compared to $1.89 for the same period the year
before. The company added about 4,600 customers during the past 12 months, which
will support future earnings.
Dividends declared per common share were $.395 for the three-month period ended
December 31, 1997, compared to $.385 for the same period last year. This
quarterly dividend represents an annualized dividend rate of $1.58 per common
share, up from the $1.54 annualized dividend last year. For the twelve-month
period ended December 31, 1997, dividends declared were $1.57, compared to $1.53
for the same period in the prior year.
OPERATING REVENUES
Revenues and income before interest and taxes for the Company's three business
segments for the three months ended December 31, 1997 and 1996 were as follows:
Operating Income (loss) before
revenues interest and taxes
-----------------------------------------------------------------------------
In thousands 1997 1996 1997 1996
-----------------------------------------------------------------------------
Utility $142,932 $132,658 $24,459 $25,408
Energy Products & Services 12,060 5,582 (448) (319)
Energy Ventures - - 408 655
Eliminations (1,636) (1,234) - -
------------------------------------------------------------------------------
Total $153,356 $137,006 $24,419 $25,744
------------------------------------------------------------------------------
Page 12
<PAGE> 13
UTILITY
The following table details the components of Utility revenues for the three
months ended December 31, 1997 and 1996:
In thousands 1997 1996
-------------------------------------------------------------
Transportation revenues $ 58,837 $ 54,628
Natural gas sales 79,267 73,485
-------------------------------------------------------------
Transportation and natural gas sales 138,104 128,113
Other revenues 4,828 4,545
-------------------------------------------------------------
Total revenues $142,932 $132,658
-------------------------------------------------------------
Primarily as the result of colder weather, transportation revenues increased
7.7% for the three months ended December 1997 compared to the same period last
year. For the three-month period ended December 31, 1997, the weather was 4.4%
colder than normal and 6.3% colder than the comparative period in 1996. Revenues
were also positively impacted in fiscal year 1997 by the addition of 4,600
customers and changes in gas usage per customer.
For the three-month period ended December 31, 1997, revenues from natural gas
sales grew by 7.9%, primarily due to higher billed gas costs in the current
fiscal year and a larger number of customers.
Other revenues primarily consist of customer service revenues, merchandise
sales, utility consulting revenues, conversion burner rentals, and liquefaction
services. The increase in other revenues for the comparable three-month periods
is primarily the result of utility consulting revenue.
ENERGY PRODUCTS & SERVICES
The following table details the components of Energy Products & Services
revenues for the three months ended December 31, 1997 and 1996:
In thousands 1997 1996
--------------------------------------------------
EnergyUSA(TM)
Home Services(SM) $5,705 $5,413
Business Services(SM) 4,812 169
EnergyEXPRESS(TM) 1,543 -
---------------------------------------------------
Total $12,060 $5,582
---------------------------------------------------
The significant increase in Business Service(SM) revenues is primarily due to
the growth of the energy advisory service business and the November 1997
acquisition of Savage-ALERT, Inc. In November 1997, EnergyUSA(TM) purchased 100%
of the outstanding stock of Savage-ALERT, Inc. The operating results of Savage
for the two months ended December 31, 1997 increased revenues by $2.1 million.
ENERGY VENTURES
Energy Ventures develops business opportunities and projects which are closely
related to the Company's core businesses. Currently this segment participates in
the development of two major projects: PNGTS and the Wells LNG facility ("Wells
LNG"). Current year earnings are from the PNGTS and Wells LNG investment in the
form of Investment Income and Allowance for Funds Used During Construction
("AFUDC"). Prior year earnings also include earnings from the investment in
MASSPOWER of $450,000. This investment was sold in fiscal 1997.
Page 13
<PAGE> 14
OPERATING EXPENSES
Total operating expenses, for the three months ended December 31, 1997 were
$129.7 million, compared to $112.2 million for the prior year. Operating
expenses for the twelve-month period ended December 31, 1997 were $449.3 million
compared to $378.6 million for the prior twelve months. The increase for the
three-month period is primarily attributable to merger costs, outside services
and bad debts. The increase for the twelve-month period is primarily
attributable to the write-off of restructuring costs discussed in the 1997
annual report.
YEAR 2000 COSTS
A Company-wide program is underway to prepare the Company's computer systems and
applications for the year 2000. It is anticipated that internal staff costs as
well as consulting and other expenses will be incurred during this program. An
assessment study has begun which is anticipated to cost approximately $700,000.
This study will determine the scope of the Company's year 2000 problem, develop
a framework for addressing those problems and provide an estimate of the cost of
resolution. The study will be completed by summer 1998. If the replacement of
certain systems is the recommended course of action, the cost of those
replacement systems would be recorded as assets and amortized. All other costs
associated with this issue will be expensed in the period incurred.
INTEREST EXPENSE AND DIVIDEND REQUIREMENTS ON PREFERRED STOCK
Interest expense for the three-month period ended December 31, 1997 was $4.7
million, compared to $4.4 million for the same period last year. For the twelve
months ended December 31, 1997, interest expense was $18.2 million, compared to
$17.1 million for 1996. The increase in interest expense for the twelve month
period is primarily the result of increased levels of long- and short-term debt.
Dividend requirements on preferred stock were relatively flat for the
comparative periods.
LIQUIDITY AND CAPITAL RESOURCES
The seasonal nature of the gas distribution business creates large short-term
working capital requirements to finance customers accounts receivable and
deferred gas costs, as well as construction expenditures. Short-term funds are
obtained from the issuance of commercial paper, traditional bank lines of
credit, and demand loans under Fuel Purchase Agreements.
Total net short-term debt is up approximately $3.5 million from December 31,
1996 to December 31, 1997.
Cash flows from operating activities have increased over the twelve-month period
ending December 31, 1997, primarily due to deferred gas costs and refunds due
customers .
Capital expenditures for plant increased by $2.0 million for the three-month
period and $10.7 million for the twelve-month period ended December 31, 1997, as
compared to the year before. The increase is primarily attributable to the
increased spending on automated meter reading devices which were financed
through a sale/leaseback in January 1998 as discussed in Note 3. The sale of a
subsidiary and the sale/leaseback of Bay State's Westborough headquarters
building and 10 acres of land provided additional cash of $17.0 million and
$10.1 million, respectively, during the twelve months ended December 1997.
Page 14
<PAGE> 15
FORWARD LOOKING INFORMATION
This report and other Company reports contain forward looking statements. The
Company cautions that, while it believes such statements to be reasonable and
makes them in good faith, they almost always vary from actual results, and the
differences between assumed facts or basis and actual results can be material,
depending upon the circumstances. Investors should be aware of important factors
that could have a material impact on future results. These factors include, but
are not limited to, the regulatory environment, customers' preferences,
unforeseen competition, and other uncertainties, all of which are difficult to
predict, and many of which are beyond the control of the Company.
Page 15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceedings instituted in the first
quarter of 1998, and there were no material developments during the
quarter in legal proceedings disclosed in previous filings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1997, a notice of the annual meeting of common
shareholders, a proxy and a proxy statement were sent to shareholders.
At the annual meeting held on January 22, 1998, shareholders approved
the following items :
1. To elect the following two directors for terms of three years
expiring at the annual meeting of shareholders in 2001:
Nominee Jack E. McGregor Joel L. Singer
Votes for: 11,196,337 11,192,012
Votes against or withheld: 185,720 190,045
Abstentions: None None
Broker non-votes: None None
Directors with continuing terms of office are as follows: Lawrence J. Finnegan,
Douglas W. Hawes, John H. Larson, Daniel J. Murphy III, George W. Sarney, Thomas
W. Sherman, Charles H. Tenney II, and Roger A. Young.
ITEM 5. OTHER INFORMATION
None.
Page 16
<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Consent of KPMG Peat Marwick LLP re: Registration
Statement No. 33-57702
27. Financial Data Schedule
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1997:
Date Filed Items Reported
---------- --------------
December 31, 1997 Item 5. Other Events
Item 7. Financial Statements, Pro Forma
Financial Information and
Exhibits
Page 17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BAY STATE GAS COMPANY
----------------------------------------
(Registrant)
By: /s/ Thomas W. Sherman
------------------------------------
Thomas W. Sherman
Executive Vice President and Chief
Financial and Accounting Officer
By: /s/ Stephen J. Curran
------------------------------------
Stephen J. Curran
Controller
Date: February 11, 1998
Page 18
<PAGE> 1
EXHIBIT 15
The Board of Directors
Bay State Gas Company
Gentlemen:
Re: Registration Statement No. 33-57702
With respect to the subject registration statement, we acknowledge our awareness
of the use therein of our report dated January 19, 1998 related to our review of
interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the meaning
of sections 7 and 11 of the Act.
Very truly yours,
KPMG PEAT MARWICK LLP
Boston, Massachusetts
February 12, 1998
Page 19
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