SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (Fee required)
For the fiscal year ended June 30, 1998 or
-------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No fee required)
For the transition period from to
--------------------- ---------------------
Commission File Number 0-1857-3
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The Berkshire Gas Company
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(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-1731220
- ---------------------------------- ----------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
115 Cheshire Road, Pittsfield, MA 01201-1803
- ------------------------------------------- -------------
(Address of Principal Executive Offices) (Zip Code)
(413) 442-1511
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- ---------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 Per Share
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Aggregate market value of shares of Common Stock, $2.50 par value of
the Registrant held by non-affiliates as of July 31, 1998 was $46,983,840.
Total shares of common stock of the Registrant outstanding as of July 31,
1998 were 2,324,930.
Documents Incorporated by Reference:
1. The Berkshire Gas Company's Annual Report to Shareholders for the
fiscal year ended June 30, 1998 (Items 5, 6, 7, and 8 of Part II).
2. The Berkshire Gas Company's definitive Proxy Statement, to be filed on
October 2, 1998, pursuant to Regulation 14A under the Securities and
Exchange Act of 1934 (Items 10, 11, 12 and 13 of Part III).
FORM 10-K
THE BERKSHIRE GAS COMPANY
PART I
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Table of Contents
Item Page
Number Number
------ ------
Business 1 3
Properties 2 10
Legal Proceedings 3 11
Submission of Matters to a Vote of
Security Holders 4 11
Additional Items - 11
(Executive Officers of the Registrant)
PART II
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Market For Registrant's Common Equity and Related
Stockholder Matters 5 13
Selected Financial Data 6 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7 13
Financial Statements and Supplementary Data 8 13
Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 9 13
PART III
--------
Directors and Executive Officers of the Registrant 10 14
Executive Compensation 11 14
Security Ownership of Certain Beneficial
Owners and Management 12 14
Certain Relationships and Related Transactions 13 14
PART IV
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Exhibits, Independent Auditors' Report on
Supplemental Schedules, Financial Statement
Schedules, and Reports on Form 8-K 14 16
Item I. Business
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General
The Berkshire Gas Company (the "Company") was incorporated in the
Commonwealth of Massachusetts in 1853 and is a publicly-held utility engaged
in the distribution and sale of natural gas for residential, commercial and
industrial use. The Company also has an appliance rental division that
sells and leases gas burning equipment. Through its Berkshire Propane
division, the Company markets liquefied petroleum gas.
Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act
of 1995
This Annual Report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Actual
results could differ materially from those contemplated by such statements.
Such statements reflect management's current views, are based on many
assumptions and are subject to risks and uncertainties.
Certain important factors which could cause such results to differ
include risks associated with the Company's maintaining contracts with
specific customers, government regulation, the increasingly competitive
nature of the markets in which the Company is engaged, and dependence on key
personnel. These factors are not intended to represent a complete list of
the general or specific risks that may affect the Company.
Territory Served
The Company's utility service territory includes 19 communities in the
western portion of the Commonwealth of Massachusetts, including the cities
of Pittsfield and North Adams, the towns of Adams, Amherst, Great
Barrington, Greenfield and Williamstown, and twelve smaller municipalities.
The population of the area served is estimated at 190,000 and is primarily
residential in character, but the territory also includes industrial,
agricultural, educational, cultural and resort facilities. The Company also
markets propane throughout the western portion of Massachusetts, eastern New
York and southern Vermont. The Company currently serves over 32,000 natural
gas and 5,000 propane customers.
Customers
The largest group of natural gas customers is the residential class.
During the fiscal years ended June 30, 1998, 1997 and 1996, residential
consumers accounted for approximately 55%, 55% and 54%; commercial and
industrial consumers accounted for 41%, 40% and 42%; and transportation
consumers accounted for approximately 4%, 5% and 4% of operating revenues,
respectively. Transportation consumers account for approximately 8%, 9%, and
5% of operating margin for fiscal years 1998, 1997 and 1996, respectively.
Net income could be impacted by the loss of one or more significant
transportation consumers, who are all under contracts.
The number of natural gas customers increased 1% in 1998 over 1997,
from 33,887 to 34,166. Total Mcf sold and transported decreased from
8,079,811 Mcf in 1997 to 7,356,946 Mcf in 1998 primarily due to 10% warmer
than normal weather. Total natural gas customers by classification at June
30 in each of the previous five years were:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Residential 29,911 29,682 29,707 29,565 29,126
Commercial & Industrial 4,255 4,205 4,056 4,031 3,921
</TABLE>
Competition
Implementation of the Federal Energy Regulatory Commission's ("FERC")
Order 636 has increased the potential for competition in gas procurement,
supply and sale. FERC's actions have sought to encourage competition and
natural gas market efficiency through deregulation and "unbundling of
services" at the interstate pipeline level. This unbundling has changed the
historical relationships, whereby producers sold to pipelines, pipelines
sold to local distribution companies ("LDCs") such as Berkshire Gas and LDCs
sold to end-users. Now LDCs or end-users may utilize pipeline services
primarily for the transportation of gas purchased from third parties.
While historically the Company has been subject to competition from
electricity, oil, propane, coal and other fuels for heating, water heating,
cooking, air conditioning and industrial applications, regulatory changes
have created the competition among existing and new suppliers or marketers
of natural gas. The Company takes a very positive view of the changes
occurring within the natural gas industry. The advent of customer choice
should enhance the value of the Company's products and services. The
Company is taking an active role in the transformation of the industry at
the state level, through participation in collaborative proceedings
involving a wide range of market stakeholders and regulators.
The Company has formed a new division to pursue opportunities spawning
from the transformation of our industry. Berkshire Energy Marketing, in
alliance with Conectiv/CNE Energy Services, LLC, a major regional commodity
provider, will market electricity and fuel oil, as well as natural gas, in
our existing franchise area and nearby regions. The Company will continue
to perform the gas utility distribution function upon the completion of the
corporate restructuring and will remain subject to the regulatory authority
of the DTE.
Rates and Regulations
The Company is subject to the regulatory authority of the
Massachusetts Department of Telecommunications and Energy ("DTE"), formerly
the Massachusetts Department of Public Utilities, with respect to various
matters, including rates, financing, certain gas supply contracts, demand-
side management programs and planning and safety matters.
The principal rate classifications are residential, commercial and
industrial. The Company also offers five Quasi-Firm transportation rates
for large end-users as well as interruptible sales and transportation
service. The Company's rate structure is based on the cost of providing
service to each customer class. Current rates became effective January 1,
1994 with the exception of a revised Interruptible Transportation Rate which
became effective July 1, 1996 and Transportation Terms and Conditions which
became effective November 1, 1996.
Presently, the Company's residential rates are designed separately for
heating and non-heating purposes. Additionally, for the Company, like most
other utility companies in Massachusetts, subsidized rates are available to
residential customers who qualify for certain government entitlements.
These customers receive a 20% discount from the standard residential rates.
The commercial and industrial rates are based on load factor; that is, the
cost is based on how much gas is consumed and when it is consumed. Those
customers who use more than 30% of their annual usage in the summer are
considered high load factor; those using less than 30% of their annual usage
during the summer season are considered low load factor. There are seven
classifications of load factor rates.
The current firm rate structure is based on seasonal rates, whereby
base rates are higher in the winter (November through April) and lower in
the summer (May through October). In addition to the base rates, the
Company has a seasonal Cost of Gas Adjustment Clause ("CGAC") rate schedule,
pursuant to which the Company recovers (primarily variable) gas costs.
Charges under the CGAC rate schedule are added to the base rates and are
designed to recover higher gas costs in the winter and refund lower gas
costs in the summer.
The Company also provides several non-firm and special rates to meet
the varying needs of large customers. These rates include Interruptible
Sales Service whereby a customer is capable of either ceasing operations or
switching to an alternate fuel. Five Quasi-Firm Transportation Rates are
available for large end-users and provide firm transportation and optional
standby service for less than twelve months. Additionally, a Load
Management Rate is available for nonresidential customers who agree to
reduce demand to a predetermined minimum level on peak days. Finally, the
Company makes sales to primarily larger customers under special contracts
that reflect charges, levels, and terms of service different from those
under generally available tariffs. Often arrangements of this nature are
made to meet competitive challenges. Such contracts must be approved by the
DTE on an individual case basis.
In compliance with requirements set forth by the DTE, the Company
filed revenue-neutral, unbundled rates. The unbundled rates were submitted
in accordance with a request for a Joint Motion for Approval of the
Settlement Agreement ("the Settlement") reached by participants in the
Massachusetts Gas Unbundling Collaborative ("the Collaborative"). The
Settlement resulted from extensive discussions between the Parties to
resolve issues relating to the unbundling of the Company's rates for all
customer classes, as well as cost allocation and rate design. The Parties
supported the DTE's approval of the revised rate schedules with the intent
that new tariffs be implemented for effect November 1, 1998. The Joint
Motion for Approval of the Settlement Agreement was approved on August 14,
1998.
Additionally, on July 10, 1998, the ten investor-owned local
distribution companies filed a Joint Motion for Settlement Agreement ("the
Agreement") with the DTE relating to Model Terms and Conditions for
unbundled gas distribution services as set forth in the agreement. The LDCs
and the Marketer Group have agreed to many sections and have indicated where
further action is required by participants in the Collaborative following
the DTE's decision on capacity assignment and related issues, including
Interruptible Distribution Service.
On July 2, 1998, the DTE issued an Interlocutory Order on Procedural
Schedule. In that order, the DTE agreed to have unbundled rates in place
November 1, 1998. Second, the DTE stated they intend to review and issue a
decision on the Model Terms and Conditions no later than September 30, 1998.
Finally, the DTE intends to issue an order on capacity assignment and cost
responsibility by October 30, 1998. As a result of this schedule, the DTE
found that the introduction of comprehensive unbundling of LDCs services
should be implemented no later than April 1, 1999.
The Company is also subject to standards prescribed by the Secretary
of Transportation under the Natural Gas Pipeline Safety Act of 1968 with
respect to the design, installation, testing, construction and maintenance
of pipeline facilities. The enforcement of these standards has been
delegated to the DTE which has taken an active role in such enforcement,
including the application of civil penalties and the requirement of remedial
programs.
The regulation of prices, terms and conditions of interstate pipeline
transportation and sales of natural gas is subject to the jurisdiction of
FERC. The Company is not under the direct jurisdiction of FERC, but
monitors, and periodically participates in, proceedings before FERC which
involve the pipeline gas suppliers/transporters, the Company's operations,
and other matters pertinent to the Company's business. (See also
"Competition".)
Environmental Matters
Federal, state and local laws and regulations establishing standards
and requirements for protection of the environment have increased in number
and scope in recent years. The Company cannot predict the future impact of
such standards and requirements, which are subject to change and can be
retroactively applied.
During fiscal 1990, the DTE issued a generic ruling on cost recovery
for environmental cleanup costs with respect to former gas manufacturing
sites. Under the ruling, the Company will recover, excluding carrying
costs, over a seven-year period through the CGAC. This ruling also provides
for the sharing of any proceeds received from insurance carriers equally
between the Company and its ratepayers, and establishes maximum amounts that
can be recovered from customers in any one year.
During the year ended June 30, 1998, the Company continued the
analysis and field review of two parcels of real estate formerly used for
gas manufacturing operations, which had been found to contain coal tar
deposits and other substances associated with by-products of the gas
manufacturing process. The review and assessment process began in 1985 with
respect to site #1, which is owned by the Company, and in 1989 with respect
to site #2, which was formerly owned by the Company.
With the review and approval by the Massachusetts Department of
Environmental Protection ("MDEP"), work at site #1 has resulted in proposed
remedial activities which will be pursued in the near future, while site
monitoring will be continuous. Investigative activities are continuing at
site #2.
It is difficult to predict the potential financial impact of these
sites until first, the nature and risk is fully characterized, and second,
the remedial strategies and related technologies are determined. The
general philosophy of the Company is one of source removal and/or reduction
coupled with risk minimization.
Beginning in fiscal year 1999, the Company will begin remediation of
site #1 at a projected cost of $1,300,000. Assuming successful
implementation, it is anticipated that through 2012 the level of
expenditures for both sites will range from $3,290,000 to $12,302,000. The
Company has recorded the most likely amount of $3,290,000 in accordance with
SFAS No. 5. Ultimate expenditures cannot be determined until a remedial
action plan for site #2 is developed and approved by MDEP, along with plans
for post remediation monitoring of both sites. The Company's unamortized
costs at June 30, 1998, were $800,000 and should be recovered using the
formula discussed above.
FERC Order 636 provides for 100% recovery by pipelines of any
"Transition Costs" prudently incurred as a result of industry restructuring.
As these costs have been and may be approved in the future, they have been
and will be passed through to the Company as demand charges associated with
the transportation of gas through the pipeline. Under current rate
structures, these costs are recovered through the CGAC.
Seasonality
The Company's business has a distinct seasonal quality because a large
percentage of its sendout serves residential and commercial heating loads.
Gas operating revenues reflect the seasonal nature of the business. Such
revenues are affected by temperature variations between the heating and non-
heating seasons and by seasonal pricing differentials embodied in the
Company's effective schedule of rates and charges for gas services. (See
also "RATES AND REGULATIONS".)
Employee Relations
The Company has 156 employees, approximately 51% of whom are
represented by the United Steelworkers of America, AFL-CIO-CLC, under a
contract which remains in effect until March 31, 2000. Relations with
employees are generally satisfactory.
Gas Supply
The Company's portfolio of firm natural gas contracts consists of
Aquila Energy Marketing (2,683 Mcf/day); Boundary Gas (1,050 Mcf/day);
Natural Gas Clearinghouse, "Cosmic" (2,682 Mcf/day) and NGC "636"(4,920
Mcf/day); and Tenngasco Corporation(7,599 Mcf/day). The remaining terms of
the Company's gas supply contracts range from approximately three years to
five years.
Under the terms of a fuel purchase agreement executed with U.S.
Generating Company (formerly Altresco, Inc.) on December 11, 1992, the
Company is entitled to receive gas peaking service of up to 7,310 Mcf per
day during the Winter Period of November 1 through March 31 of each year
(not to exceed 307,018 Mcf for each Winter Period) and back-up gas supplies
of up to 30,702 Mcf per day in the event of proration or curtailment of firm
gas supplies (including propane).
In addition, the Company executed two contracts with Distrigas of
Massachusetts Corporation ("DOMAC") which entitled the Company to receive up
to 5,409 Mcf per day of vaporized Liquified Natural Gas ("LNG"). These
contracts are renewable from year to year.
The Company estimates that its supply of natural gas and supplemental
sources under contract are adequate to meet the anticipated needs of the
Company's customers for the foreseeable future. The annual sources of
supply are as follows: firm long-haul pipeline natural gas, including
storage gas, 8,459,574 Mcf; natural gas peaking service (U.S. Generating
Company) 307,000 Mcf; ("DOMAC") 1,920,995 Mcf; and Liquefied Petroleum Gas,
13,800 Mcf (daily capability). Additional pipeline supplies designated as
"best efforts" or "interruptible" are available from time to time, but are
subject to daily curtailment at the suppliers'/transporters' discretion.
The Company has five Liquefied Petroleum Gas ("LPG") plants and one
temporary portable LNG vaporizing unit which are utilized on peak days to
supplement the pipeline natural gas supply. By supplementing its natural
gas supply with LPG, the Company is able to meet its customers' requirements
during peak periods. The Company's pipeline deliveries combined with LPG
facilities' storage capacity yield a maximum daily sendout of approximately
54,900 Mcf. Actual maximum daily sendout due to degree day severity during
the 1997-98 heating season was 40,110 Mcf, which occurred on December 31,
1997, with an average temperature of 5 degrees Fahrenheit. During the
fiscal year ended June 30, 1998, the Company purchased an aggregate of
5,359,707 Mcf of interstate pipeline natural gas at an average cost of
$4.1532 per Mcf. The average cost in each of the three preceding years
ended June 30 was: 1997 - $4.3635; 1996 - $3.7234; and 1995 - $3.2820. The
composition of gas supply for customer requirements during the fiscal year
ended June 30, 1998, was: 99.96% natural gas and .04% LNG and LPG.
On April 16, 1997, the FERC approved an unopposed settlement offer of
Tennessee Gas Pipeline Company which disposed of 34 FERC dockets and some 39
appeals of FERC orders pending in the D.C. circuit. The settlement
established a cost sharing mechanism between Tennessee and its customers.
As a result of the order, Tennessee implemented a reduced Gas Supply
Realignment ("GSR") surcharge retroactively for the two-year period of
January 1, 1997, through December 31, 1998. On June 30, 1997, the Company
received a refund from Tennessee of $323,456.95 representing excess GSR
surcharges from January through March 1997. The refund is currently being
returned to Berkshire's customers through the Company's CGAC. The GSR
surcharges that remain to be charged to Berkshire by Tennessee through
December 1998 will not significantly affect the Company's competitiveness.
The GSR surcharges will be absorbed by all of Berkshire's customer classes.
Item 2. Properties
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The Company has approximately 669 miles of distribution mains, the
major portion of which are constructed of coated steel, plastic or cast
iron. Berkshire owns and operates five auxiliary liquefied petroleum gas
plants for supplementing its supply of natural gas. (See "Business - Gas
Supply".) The Company has five terminal stations receiving gas from the
interstate pipeline.
All the principal properties of the Company are owned in fee, subject
to the lien of the mortgage securing the Company's First Mortgage Bond, and
are also subject to covenants, restrictions, easements, leases, rights-of-
way and other similar minor encumbrances or defects common to properties of
comparable size and character; none of which in the opinion of the Company's
management materially interferes with the Company's use of its properties in
order to conduct its business. The Company's gas mains are primarily
located under public highways and streets. Where they are under private
property, the Company has obtained easements or rights-of-way from the
record holders of title. These easements and rights are deemed by the
Company to be adequate for the purposes for which they are being used.
Item 3. Legal Proceedings
- --------------------------
With reference to the matters discussed in Item I "Environmental
Matters", the Company notified its present and former insurance carriers
that it has incurred and will incur further costs associated with the
previously-referenced coal tar deposits, for which it will seek coverage
under applicable insurance policies. No litigation has yet commenced and it
is not possible to determine the extent to which recovery of costs will
ultimately be obtained from such insurance carriers.
The Company is also involved with other legal proceedings incidental
to its business. At the present time the Company cannot predict the
outcomes of these proceedings and also believes that the outcome will not
have a material adverse impact on its overall financial position or results
of operations.
Item 4. Submission of Matters To A Vote Of Security Holders
- ------------------------------------------------------------
On May 8, 1998 a special meeting was held where shareholders voted and
approved the formation of a holding company structure.
Additional Items
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Executive Officers of the Registrant
The table set forth below shows the names, titles and ages of all
executive officers of the Registrant as of June 30, 1998. There is no
family relationship among officers of the Registrant. There is no
arrangement between any of the officers and any other person(s) pursuant to
which such officer has or is to be elected as an officer.
<TABLE>
<CAPTION>
Served in This
Name Title Capacity Since Age
- ---- ----- -------------- ---
<S> <S> <C> <C>
S.S. Robinson President and Chief 10-28-87 58
Executive Officer
M.J. Marrone Vice President, Treasurer 10-28-87 56
and Chief Financial Officer
R.M. Allessio Vice President, Utility 11-07-97 48
Operations
L.H. Hotman* Vice President, Business 11-07-97 55
Development
</TABLE>
The executive officers are elected annually.
Listed below is a brief account of the business of each of the above
executive officers during the past five years.
<TABLE>
<CAPTION>
Name Capacity in Which Served During Past Five Years
- ---- -----------------------------------------------
<S> <S>
S.S. Robinson President and Chief Executive Officer
M.J. Marrone Vice President, Treasurer and Chief Financial Officer
R.M. Allessio Vice President, Utility Operations; Vice President of
Marketing and Distribution; Director of Marketing and
Distribution; Director of Engineering and Distribution;
Chief Engineer
L.H. Hotman* Vice President, Business Development; Vice President of
Supply, Rates & Planning; Vice President of Supply, Rates
& Marketing
<F*> Resigned effective July 13, 1998
</TABLE>
PART II
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Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The number of registered common shareholders of record of the
Registrant as of the close of business on July 31, 1998, was 1,920. The
other information required is contained in The Berkshire Gas Company's
Annual Report to Shareholders for the fiscal year ended June 30, 1998,
("Registrant's Annual Report") on page 31, under the heading "Quarterly
Financial Information". This information is hereby incorporated by
reference in this report.
Item 6. Selected Financial Data
- --------------------------------
The information required is contained in Registrant's Annual Report on
pages 14 - 15, under the heading "10-Year Comparative Summary of Operations
and Statistics". This information is hereby incorporated by reference in
this report.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
The information required is contained in Registrant's Annual Report on
pages 16 - 18, under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations". This information is hereby
incorporated by reference in this report.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The information required is contained in Registrant's Annual Report on
pages 19 - 31, in the financial statements of The Berkshire Gas Company for
the years ended June 30, 1998, 1997 and 1996, together with the related
notes to financial statements, under the heading "Independent Auditors'
Report", and under the heading "Quarterly Financial Information". This
information is hereby incorporated by reference in this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
--------
Items 10, 11, 12 and 13
- -----------------------
The information required regarding the Executive Officers of the
Registrant is included in Part I under "Additional Items". Certain other
information called for by Items 10, 11, 12 and 13 has been omitted from this
report pursuant to General Instruction G(3), and is incorporated herein by
reference from the definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Company's last fiscal year.
PART IV
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Item 14. Exhibits, Independent Auditors' Report on Supplemental Schedules,
- ---------------------------------------------------------------------------
Financial Statement Schedules and Reports on Form 8-K
- -----------------------------------------------------
(a) 1. Financial Statements
--------------------
The following financial statements and related notes are contained in
the Registrant's Annual Report for the fiscal year ended June 30,
1998, and are incorporated herein by reference.
Report of Independent Auditors.
Statements of Income for the years ended June 30, 1998, 1997 and 1996.
Balance Sheets, June 30, 1998, 1997 and 1996.
Statements of Shareholders' Equity for the years ended June 30, 1998,
1997 and 1996.
Statements of Cash Flows for the years ended June 30, 1998, 1997 and
1996.
Notes to Financial Statements.
Selected Quarterly Financial Data (unaudited) for the years ended June
30, 1998, 1997 and 1996.
2. Independent Auditors' Report on Supplemental Schedules
------------------------------------------------------
Deloitte &
Touche LLP
- ----------- --------------------------------------------
City Place Telephone:(860)280-3000
185 Asylum Street Facsimile:(860)280-3051
Hartford, Connecticut 06103-3402
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTAL SCHEDULES
To the Shareholders of
The Berkshire Gas Company:
We have audited the financial statements of The Berkshire Gas Company as of
June 30, 1998, 1997 and 1996 and for each of the three fiscal years in the
period ended June 30, 1998 and have issued our report thereon dated August
12, 1998;such financial statements and report are included in The Berkshire
Gas Company's Annual Report to Shareholders and are incorporated herein by
reference. Our audits also included the financial statement schedules of
The Berkshire Gas Company, listed in item 14. These financial statement
schedules are the responsibility of The Berkshire Gas Company's management.
Our responsibility is to express an opinion based on our audits. In our
opinion, such financial schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
/s/ Deloitte & Touche LLP
August 12, 1998
- --------------
Deloitte Touch
Tohmatsu
International
- --------------
3. Financial Statement Schedules
-----------------------------
The information called for by this item appears under the
caption "Financial Statement Schedules and Exhibits Filed with
Annual Report on Form 10-K" (page 1 hereof). Such information
is incorporated by reference herein.
4. Exhibits
--------
The information called for by this item appears under the
caption "Financial Statement Schedules and Exhibits Filed with
Annual Report on Form 10-K" (page 1 hereof). Such information
is incorporated by reference herein.
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.
Date: August 26, 1998 By: /s/ SCOTT S. ROBINSON
----------------------------------
Scott S. Robinson, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons in the
capacities on the dates indicated.
Signatures Capacity Date
- ---------- -------- ----
/s/ FRANKLIN M. HUNDLEY Director August 26, 1998
- ---------------------------
Franklin M. Hundley
Chairman of the Board
/s/ SCOTT S. ROBINSON Principal Executive August 26, 1998
- --------------------------- Officer; Director
Scott S. Robinson
President and Chief
Executive Officer
/s/ MICHAEL J. MARRONE Principal Financial August 26, 1998
- --------------------------- & Accounting Officer
Michael J. Marrone
Vice President, Treasurer
and Chief Financial Officer
/s/ GEROGE R. BALDWIN Director August 26, 1998
- ---------------------------
George R. Baldwin
/s/ JOHN W. BOND Director August 26, 1998
- ---------------------------
John W. Bond
/s/ PAUL L. GIOIA Director August 26, 1998
- ---------------------------
Paul L. Gioia
/s/ JAMES R. KEYS Director August 26, 1998
- ---------------------------
James R. Keys
/s/ ROBERT B. TRASK Director August 26, 1998
- ---------------------------
Robert B. Trask
THE BERKSHIRE GAS COMPANY
FINANCIAL STATEMENT SCHEDULES
and
EXHIBITS
Filed With
ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
Certain of the following exhibits are filed herewith or will be filed
herewith by amendment. Certain other of the following exhibits have
heretofore been filed with the Commission and pursuant to Rule 411 are
incorporated herein by reference.
Exhibit
Number Description
- ------- -----------
4(a) First Mortgage Indenture and Deed of Trust, dated as of July 1, 1954,
between Pittsfield Coal Gas Company (now The Berkshire Gas Company)
and Chemical Corn Exchange Bank (now Chemical Bank), Trustee. Filed
as Exhibit 4(c) to the Company's Registration Statement on Form S-1,
Registration Statement No. 2-19808, and incorporated herein by
reference.
4(b) First Supplemental Indenture, dated as of June 1, 1956, between the
Company and Chemical Corn Exchange Bank (now Chemical Bank), Trustee.
Filed as Exhibit 4(d) to the Company's Registration Statement on Form
S-1, Registration Statement No. 2-19808, and incorporated herein by
reference.
4(c) Second Supplemental Indenture, dated as of October 1, 1957, between
the Company and Chemical Corn Exchange Bank (now Chemical Bank),
Trustee. Filed as Exhibit 4(e) to the Company's Registration
Statement on Form S-2, Registration Statement No. 2-19808, and
incorporated herein by reference.
4(d) Third Supplemental Indenture, dated as of October 1, 1958, between
the Company and Chemical Corn Exchange Bank (now Chemical Bank),
Trustee. Filed as Exhibit 4(f) to the Company's Registration
Statement on Form S-1, Registration Statement No. 2-19808, and
incorporated herein by reference.
4(e) Fourth Supplemental Indenture, dated as of August 1, 1960, between
the Company and Chemical Bank New York Trust Company (now Chemical
Bank), Trustee. Filed as Exhibit 4(e) to the Company's Registration
Statement on Form S-2, File No. 33-1492, and incorporated herein by
reference.
4(f) Fifth Supplemental Indenture, dated as of June 1, 1962, between the
Company and Chemical Bank New York Trust Company (now Chemical Bank),
Trustee. Filed as Exhibit 4(f) to the Company's Registration
Statement on Form S-2, File No. 33-1492, and incorporated herein by
reference.
4(g) Sixth Supplemental Indenture, dated as of February 1, 1965, between
the Company and Chemical Bank New York Trust Company (now Chemical
Bank), Trustee. Filed as Exhibit 4(g) to the Company's Registration
Statement on Form S-2, File No. 33-1492, and incorporated herein by
reference.
4(h) Seventh Supplemental Indenture, dated as of October 1, 1965, between
the Company and Chemical Bank New York Trust Company (now Chemical
Bank), Trustee. Filed as Exhibit 4(h) to the Company's Registration
Statement on Form S-2, File No. 33-1492, and incorporated herein by
reference.
4(i) Eighth Supplemental Indenture, dated as of September 1, 1967, between
the Company and Chemical Bank New York Trust Company (now Chemical
Bank), Trustee. Filed as Exhibit 4(i) to the Company's Registration
Statement on Form S-2, File No. 33-1492, and incorporated herein by
reference.
4(j) Ninth Supplemental Indenture, dated as of April 1, 1969, between the
Company and Chemical Bank, Trustee. Filed as Exhibit 4(j) to the
Company's Registration Statement on Form S-2, File No. 33-1492, and
incorporated herein by reference.
4(k) Tenth Supplemental Indenture, dated as of March 1, 1972, between the
Company and Chemical Bank, Trustee. Filed as Exhibit 4(k) to the
Company's Registration Statement on Form S-2, File No. 33-1492, and
incorporated herein by reference.
4(l) Eleventh Supplemental Indenture, dated as of April 15, 1975, between
the Company and Chemical Bank, Trustee. Filed as Exhibit 4(l) the
Company's Registration Statement on Form S-2, File No. 33-1492, and
incorporated herein by reference.
4(m) Twelfth Supplemental Indenture, dated as of November 27, 1978,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(m) to the Company's Registration Statement on Form S-2, File No.
33-1492, and incorporated herein by reference.
4(n) Thirteenth Supplemental Indenture, dated as of October 15, 1981,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(n) to the Company's Registration Statement on Form S-2, File No.
33-1492, and incorporated herein by reference.
4(o) Fourteenth Supplemental Indenture, dated as of August 19, 1983,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(o) to the Company's Registration Statement on Form S-2, File No.
33-1492, and incorporated herein by reference.
4(p) Fifteenth Supplemental Indenture, dated as of August 19, 1985,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(p) to the Company's Registration Statement on Form S-2,
Registration No. 33-1492, and incorporated herein by reference.
4(q) Sixteenth Supplemental Indenture, dated as of January 1, 1988,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(q) to the Company's Registration Statement on Form S-3,
Registration No. 33-27785, and incorporated herein by reference.
4(r) Seventeenth Supplemental Indenture, dated as of February 1, 1989,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(r) to the Company's Registration Statement on Form S-3,
Registration Statement No. 33-27785, and incorporated herein by
reference.
4(s) Eighteenth Supplemental Indenture, dated as of September 1, 1991,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(x) to the Company's Registration Statement on Form S-3,
Registration Statement No. 33-64302, and incorporated herein by
reference.
4(t) Nineteenth Supplemental Indenture, dated as of September 1, 1992,
between the Company and Chemical Bank, Trustee. Filed as Exhibit
4(z) to the Company's Registration Statement on Form S-3,
Registration Statement No. 33-64302, and incorporated herein by
reference.
4(u) Debenture Indenture, dated as of November 1, 1986, between the
Company and Centerre Trust Company of St. Louis (now Boatmen's Trust
Company), as Trustee. Filed as Exhibit 4(q) to the Company's
Registration Statement on Form S-2, Registration Statement No. 33-
9509, and incorporated herein by reference.
4(v) Senior Note Agreement, dated as of July 1, 1990, between the Company
and Allstate Life Insurance Company. Filed as Exhibit 4(w) to the
Company's Registration Statement on Form S-3, Registration Statement
No. 33-64302, and incorporated herein by reference.
4(w) Charter of the Company. Filed as Exhibit 3(a) to the Company's Form
8, amending the Company's Form 10-Q for the fiscal quarter ended
September 30, 1984, File No. 0-1857-3, and incorporated herein by
reference.
4(x) Amendment to the Company's Charter, dated October 30, 1985. Filed as
Exhibit 3(b) to the Company's Registration Statement on Form S-2,
Registration Statement No. 33-1492, and incorporated herein by
reference.
4(y) Amendment to the Company's Charter, dated July 14, 1986. Filed as
Exhibit 3(a) to the Company's Form 10-K for the fiscal year ended
June 30, 1986, File No. 0-1857-3, and incorporated herein by
reference.
4(z) Amendment to the Company's Charter, dated October 28, 1986. Filed as
Exhibit 4(v) to the Company's Registration Statement on Form S-3,
Registration Statement No. 33-27785, and incorporated herein by
reference.
4(aa) Amendment to the Company's Charter, dated June 15, 1992. Filed as
Exhibit 4(y) to the Company's Registration Statement on Form S-3,
Registration Statement No. 33-64302, and incorporated herein by
reference.
4(bb) Amendment to the Company's Charter, dated July 29, 1994. Filed as
Exhibit 4(bb) on the Company's Registration Statement on Form S-2,
Registration Statement No. 33-83828, and is incorporated herein by
reference thereto.
4(cc) Amendment to the Company's Charter, dated September 10, 1996. Filed
as part of Exhibit 3(i) to the Company's form 10-Q for the fiscal
quarter ended December 13, 1996. File No. 0-1857-3, and incorporated
herein by reference.
4(dd) Senior Note Agreement, dated November 1, 1996, between the Company
and First Colony Life Insurance Company. Filed as Exhibit 4 to the
Company's form 10-Q for the fiscal quarter ended December 31, 1996.
File No. 0-1857-3, and incorporated herein by reference.
10(a) Employment Contract between the Company and Scott S. Robinson. Filed
as Exhibit 10(f) to the Company's Form 10-K for the fiscal year ended
June 30, 1985, File No. 01857-3, and incorporated herein by
reference.
10(b) Contract for the operation and maintenance of a cogeneration pipeline
between the Company and Altresco Financial, Inc., dated December 11,
1992. Filed as Exhibit 10(n) to the Company's Form 10-K for the
fiscal year ended June 30, 1993, File No. 0-18573, and incorporated
herein by reference.
10(c) Year-to-year contract for the purchase of propane gas between the
Company and Enron Gas Liquids, dated June 1, 1993. Filed as Exhibit
10(c) on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(d) Contract for the transportation of natural gas under IT rate schedule
between the Company and Tennessee Gas Pipeline Company, contract
number 103250-8, dated September 1, 1993. Filed as Exhibit 10(d) on
the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(e) Contract for the transportation of natural gas under FT-A rate
schedule between the Company and Tennessee Gas Pipeline Company,
contract number 2030, dated September 1, 1993. Filed as Exhibit
10(e) on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(f) Contract for the transportation of natural gas under FT-A rate
schedule between the Company and Tennessee Gas Pipeline Company,
contract number 2064, dated September 1, 1993. Filed as Exhibit
10(f) on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(g) Contract for the transportation of natural gas under FT-A rate
schedule between the Company and Tennessee Gas Pipeline Company,
contract number 779, dated September 1, 1993. Filed as Exhibit 10(g)
on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(h) Contract for the transportation of natural gas under CGT-NE rate
schedule between the Company and Tennessee Gas Pipeline Company,
contract number 2063, dated September 1, 1993. Filed as Exhibit
10(h) on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(i) Contract for the purchase of natural gas between the Company and
Tenngasco Corporation, dated September 14, 1993. Filed as Exhibit
10(I) on the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(j) Contract for the purchase of natural gas between the Company and
Natural Gas Clearinghouse, dated as of November 1, 1993. Filed as
Exhibit 10(j) on the Company Registration Statement on Form S-2,
Registration Statement No. 33-83828, and is incorporated herein by
reference thereto.
10(k) Gas Storage Agreement between the Company and Tennessee Gas Pipeline
Company, dated as of September 1, 1993. Filed as Exhibit 10(k) on
the Company Registration Statement on Form S-2, Registration
Statement No. 33-83828, and is incorporated herein by reference
thereto.
10(l) Company Corporate Incentive Compensation Plan ("ICP"). Filed as
Exhibit 10(l) on the Company Registration Statement on Form S-2,
Registration Statement No. 33-83828, and is incorporated herein by
reference thereto.
10(m) Severance Agreement, dated September 28, 1993, by and between the
Company and Robert M. Allessio. Filed as Exhibit 10(n) on the
Company Registration Statement on Form S-2, Registration Statement
No. 33-83828, and is incorporated herein by reference thereto.
10(n) Severance Agreement, dated October 15, 1993, by and between the
Company and Michael J. Marrone. Filed as Exhibit 10(o) on the
Company Registration Statement on Form S-2, Registration Statement
No. 33-83828, and is incorporated herein by reference thereto.
10(o) Severance Agreement, dated October 15, 1993, by and between the
Company and Cheryl M. Clark. Filed as Exhibit 10(q) on the Company
Registration Statement on Form S-2, Registration Statement No. 33-
83828, and is incorporated herein by reference thereto.
13(a) Annual Report to Shareholders
Filed Herewith:
A copy of the Company's Annual Report to Shareholders for fiscal year
ended June 30, 1998.
27(a) Financial Data Schedule
Filed Herewith:
Financial Data Schedule for the fiscal year ended June 30, 1998.
EXHIBIT 13
BERKSHIRE GAS COMPANY 1998 ANNUAL REPORT
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CONTENTS
Financial Highlights 1
President's Letter to Shareholders 2
A Timeline for a Prosperous Future 4
Berkshire Energy Resources 6
Berkshire Energy Marketing 8
The Massachusetts Natural Gas Collaborative 10
Berkshire Propane 11
Service Area 12
Financial Review 13
Officers and Directors 32
A TIMELINE FOR A PROSPEROUS FUTURE
Berkshire Gas has been positioning itself for change in the industry for more
than a decade. First offering transportation service in 1987 and fixed-price
contracts in 1993, the Company has a long track record of developing and
offering new and innovative services, many of which are now being adopted as
fundamental tenets of the deregulated marketplace. This combination of vision
and experience will continue to serve us well as the industry moves toward full
and final deregulation.
FINANCIAL HIGHLIGHTS
- --------------------
For the Fiscal Year Ended June 30,
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998/1997 1997/1996
OPERATIONS 1998 1997 % Change 1996 % Change
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 49,859 $ 48,463 2.9% $ 46,050 5.2%
Operating Margin 25,329 25,253 0.3 25,835 -2.3
Operating and Other Income 10,711 11,527 -7.1 12,042 -4.3
Net Income 2,794 3,556 -21.4 4,213 -15.6
Earnings Available for Common Stock 2,778 3,316 -16.2 3,521 -5.8
COMMON SHARE DATA
- -----------------
Earnings Per Share $ 1.23 $ 1.52 -19.1% $ 1.65 -7.9%
Dividends Per Share 1.145 1.125 1.8 1.105 1.8
Book Value Per Share 14.48 14.18 2.1 13.75 3.1
Market Price (Year-End) 23.25 16.00 45.3 15.38 4.0
Average Shares of Common Stock Outstanding 2,263.6 2,181.5 3.8 2,129.2 2.5
Number of Registered Common Shareholders 1,912 1,902 0.5 1,881 1.1
OTHER DATA
- ----------
Gross Utility Plant $106,654 $101,983 4.6% $ 96,571 5.6%
Net Utility Plant 75,283 73,640 2.2 71,215 3.4
Capital Expenditures 6,945 7,393 -6.1 6,507 13.6
Total Gas Sold and Transported (MCF) 7,357 8,080 -8.9 8,075 0.1
Total Natural Gas Customers 34,166 33,887 0.8 33,763 0.4
Propane Gallons Sold 4,927 4,443 10.9 4,251 4.5
</TABLE>
TO OUR SHAREHOLDERS
This has been a very exciting year for the Company and for the natural
gas industry as deregulation takes hold in Massachusetts.
The regulated energy marketplace is being transformed into a market-based
arena with the ultimate goal of introducing competition by providing consumers
with a choice of suppliers from whom they can purchase their energy.
Working closely with natural gas utilities, regulators, marketers,
customers and other interested parties, we have been intimately involved in
shaping the changing marketplace as part of a collaborative process organized
by the Department of Telecommunications and Energy (DTE), formerly known as
the Department of Public Utilities (DPU).
As part of this dynamic process, which is further detailed in this
report, we have worked to craft the ground rules for doing business in
deregulated markets and to assure a fair and level playing field for all
parties.
Berkshire Gas views deregulation as opportunity. The move to open and
competitive markets will allow us to broaden the scope of our vision for the
future. Now, for the first time, we will be in a position to drive change in
the energy marketplace and to capitalize on these changes by expanding our
energy-related offerings and enterprises without the delay of regulation.
As this year's report illustrates, Berkshire Gas has been positioning
itself for change in the industry for more than a decade. First offering
transportation service in 1987 and fixed-price contracts in 1993, the Company
has a long track record of developing and offering new and innovative services,
many of which are now being adopted as fundamental tenets of the deregulated
marketplace. This combination of vision and experience will continue to serve
us well as the industry moves toward full and final deregulation.
HOLDING COMPANY
The nature of doing business in dynamic markets requires a corporate
structure with the agility to drive and capitalize on change. After a careful
assessment of present operations in light of future needs, the most significant
restructuring in the Company's history was undertaken with the decision to
pursue the formation of a holding company.
The Company initially petitioned the DTE for approval to form the holding
company in the fall of 1997. Following preliminary approval of that petition in
January, shareholders approved the proposal at a special meeting held in May of
this year. The Company has since filed for the DTE's final consent and
anticipates a favorable ruling prior to the end of the calendar year. Formal
adoption of the new corporate structure will follow shortly thereafter.
The holding company, which will be known as Berkshire Energy Resources,
has been organized as a Massachusetts Business Trust and will initially have
as its subsidiaries Berkshire Gas, Berkshire Propane and Berkshire Energy
Marketing. Current Berkshire Gas shares will automatically be converted to
shares in the new holding company on a one for one basis. No action will be
necessary on the part of shareholders.
A holding company structure will provide the legal and functional
separation of the Company's regulated and non-regulated business activities.
It will also provide the flexibility necessary to compete in non-regulated
markets without regulatory delay.
Under the new corporate structure, the current operation of Berkshire Gas
and Berkshire Propane will be largely unaffected. Berkshire Gas will continue
to operate as a regulated natural gas utility serving western Massachusetts. As
well, Berkshire Propane will continue its retail sale of propane throughout
western Massachusetts, eastern New York and southern Vermont in an unregulated
business environment.
A new subsidiary, Berkshire Energy Marketing, which currently operates as
a division of the Berkshire Gas Company, will also be engaged in the sale of
energy in the unregulated business arena.
BERKSHIRE ENERGY MARKETING
The Company began its move into competitive energy markets with the
formation of Berkshire Energy Marketing earlier this year.
As the industry moves toward the stated goal of deregulation by offering
customers choice in selecting their energy supplier, new players are entering
local energy markets. In establishing Berkshire Energy Marketing as an
unregulated energy marketer, the Company is able to compete with these
suppliers for customers and earn margins on the sale of energy in the newly
opened markets.
Aided by knowledge of the local market and the needs of area customers,
the Berkshire Energy Marketing subsidiary will provide the convenience of
one-stop energy shopping by offering natural gas, electricity and oil at
competitive prices. To further enhance its capabilities and position in the
market, Berkshire Energy Marketing has entered into a strategic marketing
alliance with Conectiv/CNE Energy Services, LLC, a major regional energy
services company.
Moving early into emerging markets provides strategic advantages as the
Company enters the competitive arenas being created by deregulation. We are
excited about this move and its future prospects.
(Picture of Scott S. Robinson in center of page)
STRATEGIC MARKETING ALLIANCE
The value of strategic alliances in business cannot be understated. With
the move toward open competition, the Company sought to align the local
resources of Berkshire Energy Marketing with the expertise of an established
energy marketer who could provide many of the "back room" services, including
the acquisition of attractively priced supplies of natural gas and oil on the
commodity markets and access to electric generation.
After extensive review and an intensive interview process with a wide
range of capable candidate companies, Conectiv/CNE Energy Services, LLC, was
chosen as the firm that could best complement Berkshire Energy Marketing's
strengths. In February of this year, the Company entered into a multi-year
strategic marketing alliance with Conectiv/CNE.
Conectiv/CNE is a joint venture of CNE Energy Services Group, Inc., a
subsidiary of Connecticut Energy Corporation, and Conectiv, a full-service
energy company created by a merger between Delmarva Power and Atlantic Energy.
By combining the experience and enthusiasm of three strong companies in a
strategic business alliance that will be truly customer-focused and able to
provide a full range of energy-related products and services at competitive
prices, the Company has ambitiously demonstrated its intent to move
aggressively in the pursuit of energy-related opportunities in the world of
deregulation.
DIVIDEND INCREASE
The Company's Board of Directors is committed to enhancing shareholder
value and maximizing return. A number of initiatives over the past year,
including corporate restructuring and the consummation of a strategic marketing
alliance, are intended to contribute to shareholder value. Favorable
recognition of these efforts by investors and analysts alike contributed to the
considerable increase in the Company's stock price. During fiscal 1998,
Berkshire Gas stock rose from $16.00 per share on June 30, 1997, to $23.25 per
share on June 30, 1998, a full 45% increase in value.
As part of the Board's commitment to shareholder return, they voted for
the fourth time in as many years to increase the quarterly dividend paid on
Common Stock. The vote, which was taken in June, increased the quarterly
dividend from $.285 to $.29 per share. This raised the annual payout from
$1.14 to $1.16 per share.
PERFORMANCE
Perhaps more so than in any year in recent memory, unusual weather has
been a topic of news reports across the nation. Weather, arising from the
phenomenon known as El Nino and other natural causes, has been far from normal
in virtually every region of the country.
Western Massachusetts has certainly seen its share of unusual weather
over the past year, particularly during the heating season. Temperatures over
the course of the winter season were 6% warmer than the preceding year and a
full 10% warmer than the traditional twenty-year average. While we have made
great strides in insulating performance from warmer than normal weather, the
timing and extreme nature of weather during this past winter did have an impact
on earnings of approximately $.49 per share. Long-range forecasts are
predicting a return to more normal weather patterns which should favorably
influence future earnings.
In addition to unusual weather, investments being made by the Company to
capitalize on opportunities associated with deregulation have also affected
earnings. To date, the cost of forming a holding company for the purposes of
enhancing the Company's position in competitive markets has reduced earnings by
approximately $.07 per share.
Despite unusual weather and the cost of restructuring, earnings for the
year were a respectable $1.23 per share. Had weather been normal, earnings
could likely have been in the neighborhood of $1.79 per share, absent any costs
associated with restructuring. For this reason, we are confident that our
business is well positioned for future success and we will continue to
optimally align our resources to achieve that goal.
BEYOND DEREGULATION
As I stated at the outset of this letter, this has indeed been an
exciting year. Change will be healthy for our industry and for the region in
which we do business. Building on more than 145 years of experience, we will
continue to serve traditional markets and we look forward to the many benefits
and opportunities that competitive markets will bring. We will grow our
business through diversification while at the same time expanding revenues from
our core business of transporting natural gas to new and existing customers.
Working with marketers, we can expand natural gas usage and at the same time
strengthen the regional economy by assuring the availability of low cost
energy.
We are pleased that you have chosen to join us as a shareholder as we
move into a new era for our industry in Massachusetts and as we prepare for
continued success in the next millennium and beyond.
/s/ Scott S. Robinson
Scott S. Robinson
President & Chief Executive Officer
A Timeline for a Prosperous Future
For more than a decade, Berkshire Gas has been developing competitive
strategies that have since become major tenets of deregulation.
The past decade has seen a revolution in the natural gas industry.
Constant and far-reaching change, with impacts from the wellhead to the
consumer's meter, has been the result of federal and state deregulation aimed
at promoting competition and providing choice to energy consumers.
Berkshire Gas has always believed its primary goal as a utility is to
deliver natural gas safely and dependably at the lowest possible cost. With
that in mind, there has been an ongoing focus on structuring both operations
and the services offered to best meet the needs of customers. In achieving this
goal, valuable experience has been gained in the areas of open market supply
management, transportation and natural gas marketing.
For more than a decade, Berkshire Gas has been developing competitive
strategies that have since become major tenets of deregulation, while at the
same time creating a flexible organizational structure to capitalize on the
opportunities of an open marketplace. This report focuses on a number of
pivotal steps taken by the Company as the industry moves toward full
deregulation. It also utilizes a timeline to visually depict benchmarks
spanning the last decade of innovative and progressive achievements that have
placed us well ahead of the competition and positioned for continued
prosperity.
Long before the arrival of deregulation of the natural gas industry in
Massachusetts, Berkshire Gas was actively engaged in seeking new and innovative
approaches that offered its customers expanded options in the purchase of
natural gas supplies. The concept of offering customers purchasing options has
come to be the fundamental goal of deregulation now taking hold in the natural
gas industry. This timeline traces a decade of progressive actions taken by the
Company that harnessed the concepts of competitiveness and customer choice
years before they became the foundation of a deregulated marketplace.
1987/88
FORMATION OF BERKSHIRE ENERGY
Recognizing the opportunities created by open access to interstate
pipeline transportation, and the federal deregulation of wellhead gas prices,
Berkshire Gas formed its Berkshire Energy division to purchase competitively
priced natural gas on the spot market for delivery to large Commercial and
Industrial customers.
FIRST TRANSPORTATION RATE OFFERED
Berkshire Gas developed and obtained approval to offer a flat rate to
deliver natural gas to its largest customers. This combination of open-market
supply and low delivery cost made natural gas even more competitive with oil.
FIRST CUSTOMER CHOOSES TRANSPORTATION SERVICE
Amherst College became the first customer to benefit from the synergy of
the availability of spot market gas and an innovative flat rate transportation
service offered by Berkshire Gas.
1990
JOINT GAS PURCHASING CONSORTIUM FORMED
Berkshire Gas worked with a number of other New England natural gas
utilities to organize the joint purchasing Mansfield Consortium. The group's
combined buying power enabled the Company to secure gas supplies at some of
the most favorable rates in the marketplace. It also allowed the Company to
diversify its supply options, further enhancing overall flexibility.
(Picture of Amherst College)
Amherst College, whose distinguished alumni include Calvin Coolidge, the
30th president of the United States, was the first customer to take advantage
of the Company's ability to purchase natural gas on the spot market.
Diversifying for Future Growth
Berkshire Energy Resources
In a dynamic marketplace, change is the one constant. The ability to
quickly capitalize on change could well be the most critical element of success
in the deregulated energy industry. To do this, the Company is reorganizing its
corporate structure by forming a holding company to provide greater
flexibility.
The new holding company -- Berkshire Energy Resources -- will enable the
Company to separate regulated and non-regulated operations, making it possible
to pursue new opportunities in competitive energy markets without regulatory
delay while, at the same time, allowing Berkshire Gas to continue to serve the
traditional utility customer.
The holding company will have three subsidiaries: Berkshire Gas, the
natural gas utility; Berkshire Propane, retail supplier of propane in western
Massachusetts, eastern New York and southern Vermont; and Berkshire Energy
Marketing, a subsidiary engaged in the sale of natural gas, electricity and oil
in open markets.
This new structure will provide greater flexibility, new avenues for
profitability and broader opportunities to enhance shareholder return. Perhaps
the greatest advantage of the new organization is the ability to pursue
unregulated business opportunities without regulatory delay. Capitalizing on
these opportunities is a key element in the Company's strategy for long-term
growth.
(Chart of new holding company structure)
BerkshireSM
- ----------------
energy resources
1991/92
INTERSTATE DEREGULATION BEGINS
Berkshire Gas was no longer restricted to purchasing natural gas supplies
solely from its primary pipeline supplier. Instead, the Company had the
flexibility to secure a portion of its gas supplies on the competitively priced
open market for the first time and began to negotiate long-term supply
contracts with third-party suppliers. The Company also gained control of
significant storage areas, increasing its capability to buy gas at lower prices
in the off-season for peak winter usage.
REDUCED GAS COSTS ENHANCE COMPETITIVE POSITION
With the ability to secure gas supplies on the open market, the Company
was able to continually reduce its overall cost of gas. As these savings were
realized, Berkshire Gas lowered its rates five times over an 18-month period,
resulting in significant savings for customers. These savings also enhanced the
competitive position of natural gas in the Company's service area and promoted
additional usage.
1992/93
INTERSTATE DEREGULATION COMPLETE
With the exit of the Company's primary pipeline supplier from the sale of
natural gas, Berkshire Gas completed the conversion of its natural gas supply
to long-term contracts with third-party suppliers. These contracts improved the
Company's flexibility and security of supply while maintaining a least-cost
supply strategy.
1993
FIRST FIXED-PRICE CONTRACTS OFFERED
Through the innovative blending of existing tariffs, the Company offered
fixed-price contracts to its largest industrial customers. This provided
customers with a convenient fixed price for annual budgeting purposes, while
reinforcing the competitive position of natural gas in the marketplace.
1995/96
CUSTOMERS OPT FOR CHOICE
As deregulation moved to the state level, Berkshire Gas began a campaign
to introduce its customers to the new opportunities associated with
deregulation as well as options that would be available to them. Individualized
informational briefings were conducted in 1995 as a service to Commercial and
Industrial customers, many of whom took advantage of the competitive
marketplace in 1996.
(Picture of Specialty Minerals)
Specialty Minerals Inc. of Adams, Massachusetts, a large Commercial and
Industrial customer, was the first to utilize the Company's transportation
service. Specialty Minerals uses dependable natural gas to fuel its production
of precipitated calcium carbonate, which is used in products ranging from
paper, paints, plastics and floor tiles to food supplements and chewing gum.
Expanding Opportunities
Berkshire Energy Marketing
Berkshire Energy Marketing, an entity established for the marketing of
one-stop energy services in unregulated markets, formed a strategic marketing
alliance in February with Conectiv/CNE Energy Services, LLC, a major regional
energy services company.
The combination of the market knowledge, experience and expertise of
Berkshire Energy Marketing professionals with Conectiv/CNE's supply acquisition
strength and experience, provides significant leverage to successfully compete
in the deregulated natural gas and electric marketplace. The alliance further
fortifies Berkshire Energy Marketing's capability to provide Commercial and
Industrial customers with competitive energy prices and one-stop energy
services for all of their needs, including natural gas, electricity and oil.
By providing competitively priced, one-stop energy services, Berkshire
Energy Marketing can extend its reach into new markets, providing advantageous
energy options for the benefit of customers and shareholders alike.
(Picture of Financial Trading Room)
Competitively priced energy supplies are secured daily on the commodities
exchange and made available to Berkshire Energy customers as part of the
Company's strategic alliance with Conectiv/CNE.
1997
GAS COLLABORATIVE BREAKS NEW GROUND
In an effort to define the competitive landscape of the deregulated
natural gas marketplace in Massachusetts, the Company took an active role in
the Massachusetts Natural Gas Collaborative, a forum of industry leaders under
the guidance of the Department of Telecommunications and Energy. The
Collaborative's goal is to provide customers with the flexibility to choose
their natural gas supplier by April 1, 1999.
HOLDING COMPANY APPROVAL PENDING
Culminating a decade of innovative activity aimed at positioning the
organization for success in a deregulated marketplace, the Company sought to
restructure its operations through the formation of a holding company. The new
entity, Berkshire Energy Resources, will segregate the Company's regulated and
non-regulated business activities, thereby providing the flexibility necessary
to aggressively pursue emerging and innovative opportunities in the changing
marketplace without regulatory delay.
1998
MARKETING AFFILIATE ESTABLISHED
In a further effort to capitalize on the many benefits offered by
deregulation, the Company established Berkshire Energy Marketing for the
purpose of providing non-regulated energy services to new and existing
customers. This new division offers customers one-stop shopping for natural
gas, electricity, fuel oil, and related services. At the same time, the
Company aligned the strength of its local market knowledge with the supply
resources and expertise of a major regional energy services company.
RATES UNBUNDLED TO FACILITATE CHOICE
By the fall of 1998, Berkshire Gas anticipates it will begin to issue new
customer bills that clearly distinguish the various components of supply and
delivery. With unbundled supply costs, customers will begin to understand the
competitive portion of their utility bill so that they may take advantage of
the potential for lower prices brought by deregulation.
(Picture of meter shop employee adjusting a Metretek metering system)
Meter shop personnel complete the installation of an advanced Metretek
metering system for a commercial customer. The new technology facilitates the
use of transportation service by automatically monitoring and collecting data
relative to the purchase, sale, delivery, tracking, accounting and billing of
transportation gas.
SHAPING THE COMPETITIVE MARKETPLACE
The Massachusetts Natural Gas Collaborative
Over the past year, Berkshire Gas has been an active participant in an
effort to define the ground rules for open competition in a deregulated
marketplace in Massachusetts. Under the guidance of the Department of
Telecommunications and Energy, the Company is working arm-in-arm with other
industry leaders in a collaborative endeavor whose goal is to ensure that the
playing field for this marketplace is fair and level, and that it benefits
both customers and the industry as a whole.
The collaborative includes representatives from all of the industry's
stakeholders, including other natural gas utilities, energy marketers,
Commercial and Industrial customers, state regulators and consumer advocates.
This groundbreaking forum is overseeing the most far-reaching transformation
since the industry was established.
The collaborative plans to complete its work by 1999, resulting in a
natural gas market that promotes customer choice, ensures full and fair
competition, and continues programs that protect the needy and provide for
market-driven environmental efforts.
(Picture of Management Group during a briefing on the Collaborative)
Members of the Company's Management Group receive a briefing on the
latest developments in the Massachusetts Natural Gas Collaborative's ongoing
effort to define the ground rules for doing business in the deregulated energy
marketplace.
Implementing Advanced Technologies
Berkshire Propane
Long committed to providing first-rate customer service, Berkshire
Propane, the Company's retail propane division, has adopted some of the most
advanced technology available in the industry, improving the accuracy and
efficiency of customer metering and billing operations.
New on-board computers have been installed in each of the division's
delivery trucks, allowing drivers to access account information from the
computer at each stop and print an invoice that is left with the customer.
The computer records the entire day's delivery information, which is
later downloaded automatically to Berkshire Propane's central billing system,
eliminating the need for clerks to re-enter data. The new system saves time and
money, improves efficiency, and frees office staff for other important customer
service activities.
The anticipated savings are so significant that the new system should pay
for itself in less than three years. Ready adoption and implementation of
cost-effective technology is an important element of Berkshire Propane's
strategy to lower costs, improve service, increase efficiency and enhance
profitability.
(Picture of Propane employee using new computer technology in truck and
employee using new computer technology in the office)
From start to finish, new computer technology tracks customer delivery
and billing information, greatly improving both accuracy and efficiency while
also saving time.
Service Area
Berkshire Gas provides natural gas service in 19 cities and towns in
western Massachusetts with a total population of 190,000. Propane service is
provided to more than 100 communities in western Massachusetts, eastern New
York and southern Vermont.
The panoramic beauty, renowned cultural attractions and popular resorts
in the Berkshire Gas service area provide year-round recreational activities
for residents and visitors alike. Some choose the serenity of viewing fall
foliage or attending world-famous music and theater festivals, while the
adventurous opt for unspoiled hiking trails, scenic golf courses and some of
the best skiing in the East. The Company is proud to bring true energy choice
to the customers who share its love for the changing seasons, while at the same
time steadfastly protecting the area's delicate environmental balance.
(Picture of people enjoying different seasonal recreational activities)
(Map of Berkshire Gas and Berkshire Propane service area)
Financial Review
- ----------------
10-Year Comparative Summary of Operations and Statistics 14
Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Financial Statements:
Statements of Income 19
Balance Sheets 20
Statements of Shareholders' Equity 21
Statements of Cash Flows 22
Notes to Financial Statements 23
Independent Auditors' Report 29
Quarterly Financial Information 31
Officers and Directors 32
10-Year Comparative Summary of Operations and Statistics
- --------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended June 30,
OPERATIONS ($000) 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 49,859 $ 48,463 $ 46,050 $ 47,934 $ 53,029
Cost of Gas Sold 24,530 23,210 20,215 24,820 27,885
--------------------------------------------------------
Operating Margin 25,329 25,253 25,835 23,114 25,144
--------------------------------------------------------
Net Income 2,794 3,556 4,213 2,529 3,673
Earnings Available for Common Stock 2,778 3,316 3,521 1,835 2,953
COMMON SHARE DATA
- -----------------
Earnings Per Share $ 1.23 $ 1.52 $ 1.65 $ 0.92 $ 1.69
Annualized Dividends Per Share 1.16 1.14 1.12 1.10 1.10
Dividends Declared Per Share 1.145 1.125 1.105 1.10 1.085
Book Value Per Share 14.48 14.18 13.75 13.16 12.99
Market Price (Year-End) 23.25 16.00 15.38 15.00 16.25
Average Shares of Common Stock
Outstanding (000s) 2,263.6 2,181.5 2,129.2 1,990.5 1,751.8
CAPITALIZATION ($000)
- ---------------------
Common Equity $ 33,536 $ 31,365 $ 29,595 $ 27,688 $ 22,946
Preferred Stock 321 363 8,406 8,448 8,491
Long-Term Debt 34,000 40,000 31,999 30,983 31,083
--------------------------------------------------------
Total Capitalization $ 67,857 $ 71,728 $ 70,000 $ 67,119 $ 62,520
--------------------------------------------------------
% OF TOTAL
- ----------
Common Equity 49.4% 43.7% 42.3% 41.2% 36.7%
Preferred Stock 0.5 0.5 12.0 12.6 13.6
Long-Term Debt 50.1 55.8 45.7 46.2 49.7
RATIOS (%)
- ----------
Payout Ratio 93% 74% 67% 120% 65%
Market-to-Book Ratio 161 113 112 114 125
Return on Average Common Equity 8.6 10.9 12.3 7.2 13.3
PROPERTY ($000)
- ---------------
Capital Expenditures $ 6,945 $ 7,393 $ 6,507 $ 7,746 $ 5,112
Pipeline Construction 0 0 0 0 0
Gross Utility Plant 106,654 101,983 96,571 91,863 86,098
Net Utility Plant 75,283 73,640 71,215 69,326 66,191
Net Non-Utility Plant 6,364 6,096 5,949 5,962 5,715
Total Assets 101,897 101,688 93,660 87,741 90,991
GAS SALES (MCF-000s)
- --------------------
Residential 2,548 2,730 2,814 2,513 2,839
Commercial & Industrial 2,261 2,289 2,626 2,305 2,625
Interruptible 542 592 522 1,104 807
--------------------------------------------------------
Total Natural Gas Sales 5,351 5,611 5,962 5,922 6,271
--------------------------------------------------------
GAS TRANSPORTED (MCF-000s)
- --------------------------
Firm Transportation 1,307 1,409 1,073 1,130 874
Interruptible Transportation 699 1,060 1,040 340 217
--------------------------------------------------------
Total Gas Sold and Transported 7,357 8,080 8,075 7,392 7,362
--------------------------------------------------------
Propane Gallons Sold 4,927 4,443 4,251 3,738 3,904
OTHER STATISTICS
- ----------------
Customer Meters 34,166 33,887 33,763 33,596 33,047
Maximum Daily MCF Sendout 43,643 44,734 44,161 45,760 43,934
Minimum Daily MCF Sendout 7,481 7,847 8,381 8,216 8,114
Degree Days 6,506 6,953 7,402 6,748 7,651
20-Year Average Degree Days 7,241 7,301 7,300 7,354 7,356
Number of Employees 156 153 153 160 173
</TABLE>
10-Year Comparative Summary of Operations and Statistics
<TABLE>
<CAPTION>
For the Years Ended June 30,
OPERATIONS ($000) 1993 1992 1991 1990 1989
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 47,132 $ 47,969 $ 41,408 $ 39,476 $ 37,274
Cost of Gas Sold 24,831 26,741 22,341 20,280 20,953
--------------------------------------------------------
Operating Margin 22,301 21,228 19,067 19,196 16,321
--------------------------------------------------------
Net Income 2,810 1,952 1,462 2,047 1,769
Earnings Available for Common Stock 2,066 1,849 1,377 1,955 1,671
COMMON SHARE DATA
- -----------------
Earnings Per Share $ 1.20 $ 1.10 $ 0.83 $ 1.21 $ 1.05
Annualized Dividends Per Share 1.08 1.08 1.08 1.28 1.28
Dividends Declared Per Share 1.08 1.08 1.23 1.28 1.28
Book Value Per Share 12.30 12.13 12.07 12.40 12.40
Market Price (Year-End) 18.00 14.75 13.00 14.50 17.25
Average Shares of Common Stock
Outstanding (000s) 1,718.5 1,687.7 1,655.6 1,622.6 1,595.1
CAPITALIZATION ($000)
- ---------------------
Common Equity $ 21,326 $ 20,626 $ 20,155 $ 20,299 $ 19,904
Preferred Stock 9,026 9,111 1,196 1,290 1,378
Long-Term Debt 25,413 26,564 28,156 29,147 23,066
--------------------------------------------------------
Total Capitalization $ 55,765 $ 56,301 $ 49,507 $ 50,736 $ 44,348
--------------------------------------------------------
% OF TOTAL
- ----------
Common Equity 38.2% 36.6% 40.7% 40.1% 44.9%
Preferred Stock 16.2 16.2 2.4 2.5 3.1
Long-Term Debt 45.6 47.2 56.9 57.4 52.0
RATIOS (%)
- ----------
Payout Ratio 90% 98% 130% 106% 122%
Market-to-Book Ratio 146 122 108 117 139
Return on Average Common Equity 9.8 9.1 6.8 9.7 8.4
PROPERTY ($000)
- ---------------
Capital Expenditures $ 5,458 $ 5,165 $ 4,245 $ 6,438 $ 12,308
Pipeline Construction 5,659 1,539 4,526 6,475 0
Gross Utility Plant 83,016 79,942 76,404 71,805 65,657
Net Utility Plant 65,846 64,840 63,277 60,558 55,991
Net Non-Utility Plant 5,004 8,965 10,627 8,119 2,882
Total Assets 91,891 92,124 95,971 83,680 65,240
GAS SALES (MCF-000s)
- --------------------
Residential 2,730 2,639 2,347 2,545 2,547
Commercial & Industrial 2,681 2,703 2,480 2,778 2,702
Interruptible 1,012 1,468 1,092 1,163 1,026
--------------------------------------------------------
Total Natural Gas Sales 6,423 6,810 5,919 6,486 6,275
--------------------------------------------------------
GAS TRANSPORTED (MCF-000s)
- --------------------------
Firm Transportation 289 0 0 0 0
Interruptible Transportation 0 0 0 169 118
--------------------------------------------------------
Total Gas Sold and Transported 6,712 6,810 5,919 6,655 6,393
--------------------------------------------------------
Propane Gallons Sold 3,522 3,158 2,927 2,789 2,588
OTHER STATISTICS
Customer Meters 32,565 32,207 31,711 31,260 30,954
Maximum Daily MCF Sendout 39,446 38,237 37,095 38,012 37,480
Minimum Daily MCF Sendout 7,371 8,060 6,855 7,294 7,228
Degree Days 7,396 7,210 6,261 7,045 7,581
20-Year Average Degree Days 7,341 7,348 7,432 7,474 7,474
Number of Employees 181 180 185 191 194
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
(Dollars in Thousands Except Share and Per Share Amounts)
1998 in Review
- --------------
In 1998, Berkshire Gas had Earnings Available for Common Stock of $2,778,
or $1.23 per share as compared to $3,316 or $1.52 in 1997. Earnings for 1998
were impacted by unseasonably warm weather and non-recurring costs related to
the reorganization discussed below. The number of degree days in 1998 was
6,506, a 6% decrease from the prior year and 10% less than the 20-year
average. The effects of the warmer weather on natural gas and propane sales
reduced earnings approximately $.49 per share.
The Company is in the process of forming a holding company to facilitate
entry into competitive energy markets created by deregulation. Shareholder
approval for the formation of a holding company was obtained on May 8, 1998.
The process is ongoing and management expects to complete the reorganization
prior to the end of Fiscal Year 1999. Costs related to the corporate
reorganization has impacted earnings by $.07 per share in 1998.
The Company's Board of Directors voted to increase the quarterly dividend
paid on Common Stock to $.29 per share or $1.16 on an annual basis, confirming
the Company's continued commitment to provide a fair return to shareholders.
Results of Operations
- ---------------------
1998 vs. 1997
Earnings per share for 1998 were $1.23 on $2,778 of Earnings Available
for Common Stock, as compared with $1.52 and $3,316 in 1997. The $.29 or 19.08%
decrease in earnings is due primarily to 10% warmer than normal weather and
costs related to corporate restructuring. The book value per share rose to
$14.48 from $14.18 in 1997.
Operating Margin on sales of natural gas increased $76 or .3% as compared
to 1997. Operating Margin (Operating Margin or Gross Profit = Operating
Revenues Net of Cost of Gas Sold) is primarily affected by the level of firm
gas sold and transported. Interruptible gas sold and transported has no effect
on Operating Margin since those margins are flowed back to the firm customers.
The Company's sales are affected by weather as the majority of its firm
customers use natural gas for heating. Changes in the cost of natural gas does
not affect Operating Margin as these changes are recovered or returned to
customers through the Cost of Gas Adjustment Clause ("CGAC"). The increase in
Operating Margin in 1998 is a direct result of increased sales volumes during
the winter period, despite warmer temperatures. An increase in the number of
Commercial and Industrial customers has had the effect of stabilizing margins
as these customers are less weather sensitive.
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Firm MCF Sold and Transported 6,116 6,428
Operating Margin $25,329 $25,253
Average Operating Margin Per Firm MCF $ 4.14 $3.93
</TABLE>
Other Operating Expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Transmission and Distribution $ 3,484 $ 3,420
Customer Accounts 3,271 3,029
Administrative and General 4,149 4,382
Other 1,462 1,231
- ------------------------------------------------------------
TOTAL $12,366 $12,062
============================================================
</TABLE>
Other Operating Expenses increased $304 or 3% from 1997 results. Customer
Accounts increased $242 reflecting the development and implementation of new
information systems company wide. Administrative and General decreased $233
from 1997 primarily due to reduced costs related to the Company's pension plan
and insurance, partially offset by costs incurred for the restructuring to a
holding company. The holding company structure provides the flexibility
necessary to compete in non-regulated markets without delays of regulation.
Other Expenses increased $231 resulting from increased marketing costs and
other gas supply and production costs.
Depreciation Expense increased by $151 in 1998 over 1997 due to an
increase in depreciable assets.
Other Income decreased $437 or 18.5% from 1997. The decrease was
primarily lower propane revenues reflecting warmer weather and lower interest
income on the undercollection of prior period gas costs through the CGAC.
Due to the increase of long-term debt used to retire the 8.4% Preferred
Stock series, Interest Expense increased $414 which was partially offset by a
reduction of $224 in the requirements for Preferred Stock Dividends. As a
result of replacing Preferred Stock with debt, a tax savings of $86 was
realized.
Income Taxes decreased $567 from 1997 due to lower taxable earnings.
Common Stock dividends increased $146 due to additional shares
outstanding through the Company's Dividend Reinvestment Program ("DRIP") over
the twelve-month period and, to a lesser extent, an increase in the quarterly
dividends to $.29 per share from $.285 per share, effective the fourth quarter
of 1998.
Results of Operations
- ---------------------
1997 vs. 1996
Earnings available for Common Stock were $3,316 for 1997 as compared to
$3,521 for 1996; Earnings Per Share of Common Stock based on the average number
of shares outstanding for the same periods were $1.52 and $1.65, respectively.
The $.13 or 7.9% decrease in per share earnings from 1996 is due primarily to
9% warmer weather during the heating season. This decrease was offset in part
by lower costs through debt restructuring and increased transportation
revenues.
Operating Margin decreased $582 or 2.3% as compared with 1996. Operating
Margin is primarily affected by the change in the level of firm gas sold and
transported. The decrease from 1996 is primarily due to lower volumes of firm
residential and commercial gas sold resulting from warmer than normal weather,
particularly during the winter heating season when temperatures averaged 9%
warmer than 1996, partially offset by higher transportation revenues and an
increase in the number of customers.
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Firm MCF Sold and Transported 6,428 6,513
Operating Margin $25,253 $25,835
Average Operating Margin Per Firm MCF $ 3.93 $ 3.97
</TABLE>
Other Operating Expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Transmission and Distribution $ 3,420 $ 3,304
Customer Accounts 3,029 3,172
Administrative and General 4,382 3,814
Other 1,231 1,192
- -------------------------------------------------------------
TOTAL $12,062 $11,482
=============================================================
</TABLE>
Other Operating Expenses increased $580 or 5.1% from 1996 levels. The
increase reflects higher Administrative and General Costs of $568 due to higher
professional fees. These costs reflect the Company's development of a strategic
plan as the gas industry deregulates, the implementation of an early retirement
program and higher workers compensation insurance. Other Operating Expenses
also reflects increased Transmission and Distribution expense of $116 offset by
lower Customer Accounts expense of $143, a result of the recent conversion to
an automated meter reading system.
Depreciation Expense increased by $174 in 1997 over 1996 due to an
increase in depreciable assets.
Other Income increased $821 or 53.5% from 1996. The increase was
primarily due to higher interest of $379 on the undercollection of prior period
gas costs through the CGAC, higher Propane revenue of $296 due to increased
gross margin and customer growth, and an increase in jobbing revenues of $149
due to increased activity.
Interest Expense increased $505 or 14.5% due to the increase in long-term
debt used to retire the $8,000, 8.4% Preferred Stock series and the cost of
short-term debt to finance undercollected gas costs.
Income Taxes decreased $420 from 1996 due to lower taxable earnings.
Dividends declared on Preferred Stock decreased $452 due to the
retirement of the 8.4% Preferred Stock in the second quarter of fiscal 1997.
Overall cost of capital, which includes long-term and short-term interest, CGAC
interest and dividends on Preferred Stock, decreased due to the Company's debt
restructuring.
Common Stock dividends increased $104 due to additional shares
outstanding through the Company's DRIP over the twelve month period, and to a
lesser extent, an increase in quarterly dividends to $.285 per share from $.28
per share, effective the fourth quarter of 1997.
Year 2000 Compliance
- --------------------
The Company has identified all significant applications that will require
modification to ensure Year 2000 Compliance. Internal and external sources are
being used to make the required modifications and test Year 2000 Compliance.
The Company believes that the most critical risk relates to the
replacement and modification of its business application software. In early
fiscal 1999, the Company expects to have completed the replacement of the
Company's core business applications which support customer service, billing,
inventory, engineering, finance and accounting. This upgrade was initiated in
the normal course of addressing business needs.
The Company has also assessed the other areas of its business not related
to its core information systems. Presently, the Company believes that these
other areas, which include automated meter reading, dispatch, administrative
and distribution can be modified or upgraded without disruption of service or
material cost.
Due to the complexity of the Year 2000 problem and the reliance on
certain critical vendors and suppliers, there can be no guarantees that the
Company will achieve Year 2000 compliance or that critical vendors and
suppliers will achieve Year 2000 compliance. At this time, the Company cannot
assess the effect on the Company of such non-compliance. The Company expects to
include contingency plans as part of its Year 2000 study in an effort to
mitigate the risks of any non-compliance by third parties.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
Liquidity and Capital Resources
- -------------------------------
Cash flows from operating activities have decreased from the twelve
months ended June 30, 1997, primarily due to a reduction of the refunds from
gas suppliers. Capital requirements have been generally funded by primarily
internal sources, and to a lesser extent, external sources. The issuance of
long-term financing is dependent on management's evaluation of need, financial
market conditions and other factors. Short-term financing is used to meet
seasonal cash requirements.
The Company initially finances construction expenditures and other
funding needs primarily with short-term bank borrowings, and to a lesser extent
with the reinvestment of dividends. The Company continually evaluates its
short-term borrowing position and based on prevailing interest rates, market
conditions, and other considerations, makes determinations regarding conversion
of short-term borrowings to long-term debt or equity. As part of this process
during the second quarter of fiscal 1997, the Company repurchased the 80,000
shares of the 8.4% Preferred Stock at $117 per share. To finance these
redemptions, the Company sold a $16,000 Senior Note at 7.8% due 2021. At June
30, 1996, in accordance with SFAS No. 6 the Company had classified $7,999 of
Notes Payable to Banks as Long-Term Debt in anticipation of the Senior Note
transaction.
The Company's capital expenditures were $6,945 in 1998, $7,393 in 1997,
and $6,507 in 1996. These construction expenditures primarily represent
investments in new and replacement mains and services. The Company expects
fiscal 1999 capital expenditures to total approximately $6,000. Construction
expenditures will be financed primarily through internal sources, the
reinvestment of dividends and to a lesser extent, short term borrowings.
Beginning June 15, 1993, the Company's Share Owner Dividend Reinvestment
and Stock Purchase Plan allowed for the sale of Common Stock shares at a 3%
discount to plan participants to increase cash flow to support current
construction expenditures.
As of June 30, 1998, the Company had lines of credit aggregating $22,500,
of which $15,415 remained unused.
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 expenditures to remediate and monitor known
environmental sites will range from $3,290 to $12,302. In accordance with SFAS
No. 5, the Company has recorded the most likely cost of $3,290. The Company's
unamortized costs at June 30, 1998, were $800 and should be recovered over a
seven-year period through the CGAC.
Capitalization at June 30, 1998, excluding current redemption
requirements of long-term debt, consisted of 50.1% long-term debt, 49.4% common
equity, and 0.5% preferred stock.
It is management's view that the Company has adequate access to capital
markets and will have sufficient capital resources, both internal and external,
to meet anticipated capital requirements.
Inflation
- ---------
The accompanying financial statements reflect the historical cost of
events and transactions, regardless of the purchasing power of the dollar at
the time. Due to the capital intensive nature of the Company's business, the
most significant impact of inflation is on the Company's depreciation of
utility plant. Rate regulation, to which the Company is subject, allows
recovery through its rates of only the historical cost of utility plant as
depreciation. The Company expects that any higher costs experienced upon
replacement of existing facilities will be recovered through the normal
regulatory process.
STATEMENTS OF INCOME
- --------------------
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues $ 49,859 $ 48,463 $ 46,050
Cost of Gas Sold 24,530 23,210 20,215
- -----------------------------------------------------------------------------
Operating Margin 25,329 25,253 25,835
- -----------------------------------------------------------------------------
Other Operating Expenses 12,366 12,062 11,482
Depreciation 4,171 4,020 3,846
- -----------------------------------------------------------------------------
Total 16,537 16,082 15,328
- -----------------------------------------------------------------------------
Utility Operating Income 8,792 9,171 10,507
Other Income - Net 1,919 2,356 1,535
- -----------------------------------------------------------------------------
Operating and Other Income 10,711 11,527 12,042
Interest Expense 4,392 3,978 3,473
Other Taxes 1,870 1,771 1,714
- -----------------------------------------------------------------------------
Pre-tax Income 4,449 5,778 6,855
Income Taxes 1,655 2,222 2,642
- -----------------------------------------------------------------------------
NET INCOME $ 2,794 $ 3,556 $ 4,213
=============================================================================
Earnings Available for Common Stock $ 2,778 $ 3,316 $ 3,521
=============================================================================
Average Shares of Common Stock Outstanding 2,263.6 2,181.5 2,129.2
- -----------------------------------------------------------------------------
Basic and Diluted Earnings Per Share
of Common Stock $ 1.23 $ 1.52 $ 1.65
=============================================================================
</TABLE>
Reference should be made to Notes to Financial Statements.
BALANCE SHEETS
- --------------
(In Thousands)
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Utility Plant:
Utility Plant-at original cost $106,654 $101,983 $96,571
Less: Accumulated Depreciation 31,371 28,343 25,356
- --------------------------------------------------------------------------------------
Utility Plant-Net 75,283 73,640 71,215
- --------------------------------------------------------------------------------------
Other Property:
Other Property-at original cost 12,784 11,983 11,229
Less: Accumulated Depreciation 6,420 5,887 5,280
- --------------------------------------------------------------------------------------
Other Property-Net 6,364 6,096 5,949
- --------------------------------------------------------------------------------------
Current Assets:
Cash and Cash Equivalents 160 356 196
Accounts Receivable 6,096 7,255 6,466
Other Receivables 181 332 347
Inventories 4,261 3,665 3,070
Prepayments and Other 979 689 307
Prepaid Taxes 370 96 249
Recoverable(Refundable) Gas Costs 224 1,404 (831)
- --------------------------------------------------------------------------------------
Total Current Assets 12,271 13,797 9,804
- --------------------------------------------------------------------------------------
Deferred Debits:
Unamortized Debt Expense - Net 2,200 2,302 729
Capital Stock Expense - Net 275 319 508
Environmental Cleanup Costs 800 819 973
Other 1,414 1,425 1,192
- --------------------------------------------------------------------------------------
Total Deferred Debits 4,689 4,865 3,402
- --------------------------------------------------------------------------------------
Recoverable Environmental Cleanup Costs 3,290 3,290 3,290
- --------------------------------------------------------------------------------------
TOTAL ASSETS $101,897 $101,688 $93,660
======================================================================================
CAPITALIZATION AND LIABILITIES
Common Shareholders' Equity:
Common Stock $ 5,790 $ 5,529 $ 5,382
Premium on Common Stock 18,835 17,097 16,330
Retained Earnings 8,911 8,739 7,883
- --------------------------------------------------------------------------------------
Total Common Shareholders' Equity 33,536 31,365 29,595
- --------------------------------------------------------------------------------------
Redeemable Cumulative Preferred Stock 321 363 8,406
- --------------------------------------------------------------------------------------
Long-Term Debt (less current maturities) 34,000 40,000 31,999
- --------------------------------------------------------------------------------------
Current Liabilities:
Notes Payable to Banks 7,085 6,480 3,636
Current Maturities of Long-Term Debt 6,000 0 0
Accounts Payable 3,024 3,513 3,176
Other Current Liabilities 3,098 4,621 2,453
- --------------------------------------------------------------------------------------
Total Current Liabilities 19,207 14,614 9,265
- --------------------------------------------------------------------------------------
Other Liabilities 1,676 1,561 1,159
- --------------------------------------------------------------------------------------
Unamortized Investment Tax Credit 1,139 1,209 1,280
- --------------------------------------------------------------------------------------
Deferred Income Taxes 8,728 9,286 8,666
- --------------------------------------------------------------------------------------
Reserve for Recoverable Environmental Cleanup Costs 3,290 3,290 3,290
- --------------------------------------------------------------------------------------
TOTAL CAPITALIZATION AND LIABILITIES $101,897 $101,688 $93,660
======================================================================================
</TABLE>
Reference should be made to Notes to Financial Statements.
STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Redeemable
Cumulative
Common Stock Preferred Stock
-------------------------------------- ------------------
Par Retained
Shares Value Premium Earnings Shares Cost
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 2,103,432 $5,259 $15,711 $ 6,718 84,478 $8,448
Issuance through Dividend Reinvestment
Program 49,160 123 619
Net Income 4,213
Dividends on Preferred Stock (692)
Dividends on Common Stock (2,356)
Redemption of Preferred Stock (423) (42)
- --------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 2,152,592 5,382 16,330 7,883 84,055 8,406
Issuance through Dividend Reinvestment
Program 59,059 147 767
Net Income 3,556
Dividends on Preferred Stock (240)
Dividends on Common Stock (2,460)
Redemption of Preferred Stock (80,423) (8,043)
- --------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 2,211,651 5,529 17,097 8,739 3,632 363
Issuance through Dividend Reinvestment
Program 104,263 261 1,738
Net Income 2,794
Dividends on Preferred Stock (16)
Dividends on Common Stock (2,606)
Redemption of Preferred Stock (420) (42)
- --------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 2,315,914 $5,790 $18,835 $8,911 3,212 $ 321
========================================================================================================
</TABLE>
Reference should be made to Notes to Financial Statements.
STATEMENTS OF CASH FLOWS
- ------------------------
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 2,794 $ 3,556 $ 4,213
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 5,110 4,897 4,732
Provision for Losses on Accounts Receivable 1,065 973 1,225
Refundable(Recoverable)Gas Costs 1,180 (2,235) (3,286)
Deferred Income Taxes (558) 620 1,802
Changes in Assets and Liabilities Which Provided
(Used) Cash:
Accounts and Other Receivables 245 (1,747) (1,192)
Inventories (596) (595) 166
Unamortized Debt Expense 0 (169) (196)
Accounts Payable (489) 337 85
Prepaid Taxes (274) 153 (374)
Consumer Rebates and Other (1,668) 2,108 (2,368)
- -----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,809 7,898 4,807
- -----------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Capital Expenditures and Disposal Costs (6,945) (7,393) (6,507)
- -----------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (6,945) (7,393) (6,507)
- -----------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Dividends Paid (2,622) (2,700) (3,048)
Current Maturities of Long-Term Debt 0 0 (900)
Proceeds from (Principal Payments on) Issuance of
Long-Term Debt 0 16,000 (6,983)
Proceeds from (Principal Payments on) Notes Payable
Borrowings-Net 605 (5,155) 11,635
Redemption of Preferred Stock (Including Call Premium) (42) (9,360) (42)
Proceeds from Other Stock Transactions 1,999 870 742
- -----------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing
Activities (60) (345) 1,404
- -----------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (196) 160 (296)
Cash and Cash Equivalents at Beginning of Year 356 196 492
- -----------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 160 $ 356 $ 196
=========================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash Paid During the Year for:
Interest (net of amount capitalized) $ 4,178 $ 3,974 $ 3,336
Income Taxes (net of refund) 2,553 1,527 1,281
=========================================================================================
Supplemental Disclosures of Financing Activities:
</TABLE>
In 1996, the Company reclassified $7,999 from Short-Term Notes Payable to
Long-Term Debt.
(See footnote on Long-Term Debt)
===============================================================================
Reference should be made to Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(Dollars in Thousands, Except Share and Per-Share Amounts)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
The Berkshire Gas Company ("the Company") is a publicly owned utility
engaged in the distribution and sale of natural gas for residential, commercial
and industrial use, as well as the transportation of natural gas for larger
industrial users. The Company also sells and leases gas-burning equipment, and
markets liquefied petroleum gas through its Berkshire Propane operation.
Berkshire Gas has formed a marketing alliance with Conectiv/CNE Energy
Services, LLC, a major regional energy services company, to sell natural gas,
electricity, fuel oil and other energy service products in the Company's
service territory and surrounding areas, and operates as a division called
Berkshire Energy Marketing. The Company's utility service territory encompasses
portions of three counties in western Massachusetts. It also markets propane
throughout the western portion of Massachusetts, eastern New York and southern
Vermont. The Company is subject to regulation by the Massachusetts Department
of Telecommunications and Energy ("DTE") as it relates to utility service. The
Company's accounting policies conform to Generally Accepted Accounting
Principles ("GAAP") as applied to public utilities giving effect to the
accounting practices and policies of the DTE.
Income Taxes
- -------------------------------------------------------------------------------
The Company uses the liability method in calculating deferred income
taxes. The Company records deferred income tax liabilities for temporary
differences between the basis of assets and liabilities for financial reporting
and income tax purposes at tax rates expected to be in effect during the
periods the temporary differences reverse.
The Company has excess deferred taxes which has resulted in the recording
of a regulatory liability. The regulatory liability reflects amounts due to the
ratepayers which will be refunded through the regulatory process.
Depreciation
- -------------------------------------------------------------------------------
The Company depreciates its utility plant at straight line rates approved
by the DTE. The current composite depreciable rate is 4.04% and has been in
effect since April 1, 1993. Depreciable non-utility property consists of rental
equipment, propane tanks and related equipment used in the Company's liquefied
petroleum gas operations, and is depreciated at annual rates ranging from 2.5%
to 20.0%.
Revenues
- -------------------------------------------------------------------------------
Customer meters are read on a cycle basis throughout each month. After
the reading is prepared, customers are billed for their gas usage and any
applicable monthly rental fee. At the time of billing, revenues are recorded.
Pursuant to the DTE, the Company is required to recover increases in gas
costs and to refund any decreases in gas costs by way of the Cost of Gas
Adjustment Clause ("CGAC"). A gas adjustment charge or refund for estimated gas
costs as compared with actual gas costs and any profit on the sale of
interruptible volumes are included in the monthly customer billings via the
CGAC. Any difference between actual and estimated gas costs, plus interest, is
accrued or deferred and is recorded in the month the related revenue is billed.
Unamortized Debt Expense
- -------------------------------------------------------------------------------
The issuance costs associated with long-term debt are deferred and
amortized over the life of the issue.
Investment Tax Credit
- -------------------------------------------------------------------------------
The unamortized balance of the Investment Tax Credit ("ITC") relating to
machinery and equipment acquisitions up through 1986 is deducted from federal
income taxes and is deferred on the balance sheet, as prescribed by the DTE,
and is being amortized over the expected lives of the applicable assets. The
unamortized balance of the ITC for the years ended June 30, 1998, 1997 and
1996, was $1,139, $1,209 and $1,280, respectively. The amortized portion for
the years ended June 30, 1998, 1997 and 1996, was $70, $71 and $75,
respectively.
Utility Plant
- -------------------------------------------------------------------------------
The cost of maintenance, repairs and the renewal of items determined to
be less than full units of plant property are charged to maintenance expense
accounts. The cost of betterments and the renewal of full units of plant
property are charged to plant property accounts. Costs include materials, labor
and indirect charges for engineering, general and administrative and
supervisory services. The book value of plant property replaced, retired or
sold is concurrently removed from such plant property accounts and charged to
accumulated depreciation along with its associated removal costs, less any
salvage value.
A functional classification for the cost of utility plant at June 30 is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Transmission and Distribution Plant $ 92,388 $ 87,206 $82,255
General Plant 9,125 9,387 9,498
Manufactured Gas Production Plant 4,544 4,518 4,485
Construction in Progress 597 872 333
- --------------------------------------------------------------------
TOTAL $106,654 $101,983 $96,571
====================================================================
</TABLE>
Transmission and distribution plant consists of mains, the installed
costs of services and meters, land, rights of way and measuring and regulating
station equipment which is used to deliver and to monitor gas used by the
customer.
General plant consists of structures and their improvements, office
furniture and equipment, including computers, and transportation equipment.
The manufactured gas production plant consists of land, gas mixing
equipment and liquefied petroleum gas equipment used to supplement natural gas
volumes during the peak season in order to meet customer demand.
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.
Effective December 31, 1997, the Company, as required, retroactively
adopted Statement of Financial Accounting Standards No. 128 "Earnings Per
Share" ("SFAS"). The statement established new standards for computing and
presenting earnings per share ("EPS") and required restatement of prior years
information. As such, EPS for all prior periods presented has been restated to
conform with SFAS 128. Due to the capital structure of the Company basic and
diluted EPS are equal.
Estimates
- -------------------------------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
- -------------------------------------------------------------------------------
Details of accounts receivable, net of allowance for doubtful accounts,
as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Utility Service $5,426 $6,386 $5,781
Merchandise and Jobbing 50 103 117
Liquefied Petroleum 620 766 568
- -----------------------------------------------------------
TOTAL - Net $6,096 $7,255 $6,466
===========================================================
</TABLE>
The allowance for doubtful accounts as of June 30, 1998, 1997 and 1996,
respectively, is: Utility - $900, $900, and $720; Merchandise - $27, $43 and
$33; Liquefied Petroleum - $47, $78 and $63.
INVENTORIES
- -------------------------------------------------------------------------------
Materials, supplies and liquefied petroleum used in the non-utility
operations are valued at the lower of average cost or market value; liquefied
petroleum used in the utility operations is valued at cost, and natural gas is
recorded at cost. The details of these inventories as of June 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Materials and Supplies $1,814 $1,675 $1,492
Natural Gas 2,313 1,844 1,330
Liquefied Petroleum 134 146 248
- -----------------------------------------------------------
TOTAL - Net $4,261 $3,665 $3,070
===========================================================
</TABLE>
RECLASSIFICATION
- -------------------------------------------------------------------------------
The Company has reclassified certain amounts for prior years to conform
with the 1998 presentation.
COMMON STOCK
- -------------------------------------------------------------------------------
The Company offers a plan for the purchase of Common Stock whereby all
participants in the plan are eligible to purchase shares at a 3% discount of
the high and low sales price for the five consecutive trading days ending on
and including the day of purchase. Participants can purchase shares by either
reinvesting dividends on Common Stock already held and/or through optional cash
payments.
The Charter provisions applicable to the 4.8% Cumulative Preferred Stock,
the First Mortgage Indenture and the 7.8% Senior Note contain restrictions on
the use of retained earnings for the payment of cash dividends on, or purchases
of, Common Stock. At June 30, 1998, the Company's retained earnings were
$8,911. At such date, under the most restrictive of these provisions, $5,138 of
the retained earnings were unrestricted.
REDEEMABLE CUMULATIVE PREFERRED STOCK
- -------------------------------------------------------------------------------
(Actual Shares and Dollars)
The Company has one series of 4.8% Cumulative Preferred Stock authorized.
The redemption price per share (as well as the amount due on voluntary
liquidation) is $100.00. The provisions of the 4.8% Cumulative Preferred Stock
require the Company to offer to purchase up to 450 shares at par annually on
September 15. Pursuant thereto, the Company purchased 420, 423 and 423 shares
during fiscal years 1998, 1997 and 1996, respectively.
During fiscal 1997, the Company repurchased the 80,000 shares of the 8.4%
Preferred Stock at $117 per share (see Long-Term Debt footnote).
LONG-TERM DEBT
- -------------------------------------------------------------------------------
Details regarding the Company's First Mortgage Bond, Senior and
Medium-Term Notes Payable as of June 30 are as follows:
<TABLE>
<CAPTION>
Interest Final
Description Rate Maturity 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Mortgage Bond:
Series P 10.06 2019 10,000 10,000 10,000
Senior Note: 9.60 2020 8,000 8,000 8,000
Medium-Term Note: 6.88 1999 6,000 6,000 6,000
Senior Note: 7.80 2021 16,000 16,000 7,999
- ---------------------------------------------------------------------------
40,000 40,000 31,999
Less Current Maturities 6,000 0 0
- ---------------------------------------------------------------------------
TOTAL $34,000 $40,000 $31,999
===========================================================================
</TABLE>
All interest rates are fixed except the Medium-Term Note, which is
variable based upon the LIBOR six month rate and which is convertible at the
option of the Company to a fixed rate based upon the lender's cost of funds
rate. The aggregate amount of maturities due are: 1999 - $6,000; 2000 - 2003 -
$0; and $34,000 maturing thereafter per the dates in the table above.
The First Mortgage Bond is collateralized by substantially all of the
utility plant.
During 1997, in conjunction with the Company's cost containment policies,
the Company revised its capital structure to lower its borrowing costs. The
Company issued a $16,000, 7.8% Senior Note and used the proceeds to redeem
80,000 shares of the 8.4% Preferred Stock and to refinance $7,999 of short-term
bank debt. At June 30, 1996, for financial reporting purposes, the Company had
classified the $7,999 of short-term bank debt as long-term in anticipation of
the issuance of the 7.8% Senior Note. The Indentures of the Series P Mortgage
Bond and 7.8% Senior Note contain certain restrictive and financial covenants,
principally a fixed-charge ratio, return on equity, and limitation on funded
debt. As of June 30, 1998, the Company was not in violation of any such
covenants.
SHORT-TERM LOANS AND COMPENSATING BALANCES
- -------------------------------------------------------------------------------
The Company has lines of credit aggregating $22,500 with various banks,
of which $15,415 remained unused as of June 30, 1998. The lines of credit are
reviewed periodically with various banks and may be renewed or cancelled. In
connection with these lines of credit, the Company borrows at less than the
prime rate. In lieu of compensating balance requirements, the Company pays
commitment fees on a portion of its credit lines equating to 3/8 of 1% on
$4,000 with the various banks.
Information as to short-term borrowings is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance Outstanding at June 30 $ 7,085 $ 6,480 $ 3,636
Maximum Amount of Borrowings at Any Month-End 14,600 19,190 10,410
Average Borrowings During the Year 9,528 12,434 6,561
Average Interest Rate at End of Year 6.75% 6.72% 6.40%
Weighted Average Interest Rate During the Year 6.67% 6.44% 6.46%
</TABLE>
OTHER CURRENT LIABILITIES
- -------------------------------------------------------------------------------
Details of other current liabilities as of June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Accrued Interest $ 884 $ 927 $ 769
Retirement Plan 350 192 292
Dividends Declared 675 635 776
Accrued Consumer Rebates 523 2,251 139
Other 666 616 477
- ---------------------------------------------------------------
TOTAL $3,098 $4,621 $2,453
===============================================================
</TABLE>
Accrued consumer rebates represent refunds received from a major supplier
of natural gas to the Company. The refunds are associated with suppliers' rate
cases before FERC, and are to be refunded to the ratepayer during the next
fiscal year.
LEASE COMMITMENTS
- -------------------------------------------------------------------------------
The Company is committed under operating leases having an initial lease
term of one year or more expiring on various dates. Rental expense under all
long-term operating leases aggregated $962, $695 and $204 in fiscal 1998, 1997
and 1996, respectively. The minimum future obligations under long-term
noncancelable leases in effect at June 30, 1998, were as follows:
1999 $1,128
2000 771
2001 572
2002 371
2003 47
-----------------------------------------
Total $2,889
=========================================
INCOME TAXES
- -------------------------------------------------------------------------------
The difference in the effective tax rate compared with the statutory tax
rate is shown in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Tax at Statutory Rate 34% 34% 34%
State Taxes (Net of Federal Benefit) 4.3 4.5 4.4
Investment Tax Credit (1.6) (1.2) (1.1)
Permanent Differences 0.5 1.2 1.2
- ------------------------------------------------------------------
Effective Tax Rate 37.2% 38.5% 38.5%
==================================================================
</TABLE>
A summary of the tax provision is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Federal Income - Current $1,904 $1,393 $ 790
Federal Income - Deferred (542) 437 1,391
State - Current 390 285 190
State - Deferred (97) 107 271
- -------------------------------------------------------------
TOTAL $1,655 $2,222 $2,642
=============================================================
</TABLE>
The components of the net deferred income tax liability at June 30 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Liabilities:
Investment Tax Credit $ 436 $ 467 $ 512
Excess Tax over Book Depreciation 8,924 8,837 8,802
Environmental Response Costs 171 228 225
- -----------------------------------------------------------------------
Total Deferred Liabilities 9,531 9,532 9,539
- -----------------------------------------------------------------------
Deferred Assets:
(Recoverable) Refundable Gas Costs (99) 301 (545)
Other (704) (547) (328)
- -----------------------------------------------------------------------
Total Deferred Assets (803) (246) (873)
- -----------------------------------------------------------------------
Total Net Deferred Income Taxes $8,728 $9,286 $8,666
=======================================================================
</TABLE>
CONTINGENCIES
- -----------------------------------------------------------------------
Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
scope in recent years. The Company cannot predict the future impact of such
standards and requirements, which are subject to change and can be
retroactively applied.
During fiscal 1990, the DTE issued a generic ruling on cost recovery for
environmental cleanup with respect to former gas manufacturing sites. Under the
ruling, the Company will recover annual cleanup costs, excluding carrying
costs, over a seven-year period through the CGAC. This ruling also provides for
the sharing of any proceeds received from insurance carriers equally between
the Company and its ratepayers, and establishes maximum amounts that can be
recovered from customers in any one year.
During the year ended June 30, 1998, the Company continued the analysis
and field review of two parcels of real estate formerly used for gas
manufacturing operations, which had been found to contain coal tar deposits and
other substances associated with by-products of the gas manufacturing process.
The review and assessment process began in 1985 with respect to site #1, which
is owned by the Company, and in 1989 with respect to site #2, which was
formerly owned by the Company.
With the review and approval of the Massachusetts Department of
Environmental Protection ("MDEP"), work at site #1 has resulted in proposed
remedial activities which will be pursued in the near future, while site
monitoring activities will be continuous. Investigative activities are
continuing at site #2.
It is difficult to predict the potential financial impact of the sites
until first, the nature and risk is fully characterized, and second, the
remedial strategies and related technologies are determined. The general
philosophy of the Company is one of source removal and/or reduction coupled
with risk minimization.
Beginning in fiscal year 1999, the Company will begin remediation of site
#1 at a projected cost of $1,300. Assuming successful implementation, it is
anticipated that through 2012 the level of expenditures for the sites will
range from $3,290 to $12,302. The Company has recorded the most likely cost of
$3,290 in accordance with SFAS No. 5. Ultimate expenditures cannot be
determined until a remedial action plan for site #2 is developed and approved
by the MDEP, along with plans for post remediation monitoring of both sites.
The Company's unamortized costs at June 30, 1998, were $800 and should be
recovered using the formula discussed above.
FERC Order 636 provides for 100% recovery by pipelines of any "Transition
Costs" prudently incurred as a result of industry restructuring. As these costs
have been and may be approved in the future, they have been and will be passed
through to the Company as demand charges associated with the transportation of
gas through the pipeline. Under current rate structures, these costs are
recovered through the CGAC.
Legal Matters
- -----------------------------------------------------------------------
The Company is involved with other legal proceedings incidental to its
business. At the present time the Company cannot predict the outcome of these
proceedings and also believes that the outcomes will not have a material
adverse impact on its overall financial position or results of operations.
OTHER INCOME
- -----------------------------------------------------------------------
A condensed summary of the Company's non-utility operations before income
tax (included in the "Statements of Income" under "Other
Income - Net") as of June 30 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------
<S> <C> <C> <C>
Merchandise and Jobbing:
Sales $1,149 $1,064 $ 892
Cost of Sales and Expenses 836 730 718
- ------------------------------------------------------------
Net 313 334 174
- ------------------------------------------------------------
Appliance Rentals:
Revenues 1,452 1,410 1,404
Expenses 819 797 774
- ------------------------------------------------------------
Net 633 613 630
- ------------------------------------------------------------
Liquefied Petroleum Gas:
Sales 5,100 5,469 4,634
Cost of Sales and Expenses 4,613 4,657 4,118
- ------------------------------------------------------------
Net 487 812 516
- ------------------------------------------------------------
Miscellaneous Net 486 597 215
- ------------------------------------------------------------
TOTAL $1,919 $2,356 $1,535
============================================================
</TABLE>
POST-RETIREMENT BENEFITS
- -----------------------------------------------------------------------
The Company has non-contributory funded retirement income plans covering
substantially all employees. The cost of the plans is actuarially determined,
and it is the Company's policy to fund accrued pension costs.
The net pension cost in 1998, 1997 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 496 $ 556 $ 608
Interest Cost 1,295 1,242 1,222
Return on Plan Assets:
Actual (6,175) (2,019) (3,491)
Deferred 4,478 447 1,955
- --------------------------------------------------------------------
Net Recognized Return on Plan Assets (1,697) (1,572) (1,536)
Other 64 283 218
- --------------------------------------------------------------------
Net Pension Cost $ 158 $ 509 $ 512
====================================================================
</TABLE>
The funded status and accrued pension cost for the defined benefit plans
at June 30 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Fair Value of Plan Assets $27,664 $22,281 $20,593
Projected Benefit Obligation 19,827 17,146 16,946
- ----------------------------------------------------------------------------
Excess of Fair Value of Plan Assets Over
Projected Benefit Obligation 7,837 5,135 3,647
Unrecognized Net Gain (10,017) (7,674) (6,213)
Unrecognized Prior Service Cost 900 1,000 953
Unrecognized Net Obligation (at transition) 930 1,110 1,290
- ----------------------------------------------------------------------------
Accrued Pension Cost $ (350) $ (429) $ (323)
============================================================================
Accumulated Benefit Obligation $17,174 $14,597 $14,240
============================================================================
Vested Benefit Obligation $ 8,873 $14,577 $14,151
============================================================================
Assumed Discount Rate 7.75% 7.75% 7.50%
Assumed Rate of Compensation Increase 4.125% 4.125% 4.125%
Expected Rate of Return on Plan Assets 8.75% 8.75% 9.25%
- ----------------------------------------------------------------------------
</TABLE>
Plan assets are invested in equity securities, debt securities and cash
equivalents, and the balance is in other investments, principally real estate.
The benefit formula is based either on the number of years of service or the
employee's average base salary for the five years yielding the highest average.
The Company maintains a 401(k)Post-Retirement Plan for all Company
employees. The Company matches up to 3 1/2% of a participating employee's
annual salary. The expense for the years ended June 30, 1998, 1997 and 1996,
related to the 401(k)Plan was $226, $219 and $222, respectively.
Fair Value of Financial Instruments
- -------------------------------------------------------------------------------
Because of the short maturity of certain assets, which include Cash, Cash
Equivalents and Accounts Receivable, and certain liabilities, which include
Accounts Payable, these instruments are stated at amounts which approximate
fair value.
Long-Term Debt:
- -------------------------------------------------------------------------------
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair values of existing debt. As of
June 30, 1998, the estimated fair values of the Series P Mortgage Bond are
$12,344, $12,281 and $13,006. The estimated fair values of the 9.6% Senior Note
are $9,044, $9,052 and $9,596, respectively. As of June 30, 1998 and 1997, the
estimated fair values of the 7.8% Senior Note are $15,155 and $15,704. There
was no value to be assigned for the 7.8% Senior Note in 1996 as this debt had
not been incurred as of that date. The Medium-Term Note carries a variable
interest rate and matures within one year. As such, the carrying value
approximates fair value.
Redeemable Preferred Stock:
- -------------------------------------------------------------------------------
It was not practicable to estimate the fair value of the 4.8% Redeemable
Preferred Stock as any resultant difference between the fair value and its
carrying value is immaterial.
INDEPENDENT AUDITORS' REPORT
- ----------------------------
Deloitte &
Touche LLP
- ----------
City Place Telephone:(860)280-3000
185 Asylum Street Facsimile:(860)280-3051
Hartford, Connecticut 06103-3402
To the Shareholders of
The Berkshire Gas Company:
We have audited the accompanying balance sheets of The Berkshire Gas Company
(the "Company") as of June 30, 1998, 1997 and 1996, and the related statements
of income, shareholders' equity and of cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these 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 audit 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, such financial statements present fairly, in all material
respects, the financial position of the Company at June 30, 1998, 1997 and
1996, and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
August 12, 1998
QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
A comparison of unaudited quarterly financial information is presented on
page 31.
ANNUAL MEETING
- -------------------------------------------------------------------------------
The annual meeting of shareholders will be held in Pittsfield,
Massachusetts, at the Crowne Plaza Pittsfield Hotel, on Friday, November 6,
1998, at 10:00 A.M.
SHARE OWNER DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
- -------------------------------------------------------------------------------
The Company has a program which allows for the reinvestment of dividends
and optional cash payments to purchase additional shares of the Company's
Common Stock at a 3% discount. The Plan is available to all shareholders of 10
or more shares and provides a convenient method to acquire additional shares
without fees or other charges. Shareholders who wish to take advantage of the
Plan or want additional information may do so by contacting:
The Berkshire Gas Company
Attn: Secretary of the Share Owner Dividend
Reinvestment and Stock Purchase Plan Committee
115 Cheshire Road
Pittsfield, Massachusetts 01201-1803
(413) 442-1511
TRANSFER AGENT
- -------------------------------------------------------------------------------
State Street Bank and Trust Company
P.O. Box 8200
Boston, Massachusetts 02266-8200
STOCK LISTING
- -------------------------------------------------------------------------------
The Common Stock of The Berkshire Gas Company is traded on the National
Over-the-Counter Market and is quoted through the NASDAQ National Market System
under the symbol BGAS.
FORM 10-K INFORMATION
- -------------------------------------------------------------------------------
Upon written request to the address below, a copy of the Company's
current Form 10-K Annual Report, as filed with the Securities and Exchange
Commission, will be provided to any shareholder without charge.
The Berkshire Gas Company
Attn: Corporate Clerk
115 Cheshire Road
Pittsfield, Massachusetts 01201-1803
- -------------------------------------------------------------------------------
This report has been prepared for the purposes of information and record
only and not in connection with the sale or offer for sale of securities, or
any solicitation of an offer to buy securities.
QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
For the Fiscal Year Ended June 30,
(In Thousands, Except Per-Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
1998 First Second Third Fourth
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating Revenues $4,480 $14,177 $22,969 $ 8,233
Operating and Other Income (Loss) (69) 3,346 6,360 1,074
Income (Loss) Before Income Taxes (1,374) 1,724 4,419 (320)
Net Income (Loss) (836) 1,076 2,739 (185)
Earnings (Loss) Per Share (0.38) 0.47 1.20 (0.08)
Dividends Declared Per Share 0.285 0.285 0.285 0.29
Prices of Common Shares:
High 17 3/8 23 1/2 25 5/8 24 3/4
Low 15 1/4 16 1/4 21 1/2 21 5/8
1997
- -------------------------------------------------------------------------------
Operating Revenues $4,117 $12,109 $21,803 $10,434
Operating and Other Income (Loss) (165) 3,298 6,834 1,560
Income (Loss) Before Income Taxes (1,143) 1,826 4,932 163
Net Income (Loss) (708) 1,124 3,042 98
Earnings (Loss) Per Share (0.41) 0.48 1.38 0.06
Dividends Declared Per Share 0.28 0.28 0.28 0.285
Prices of Common Shares:
High 16 3/4 18 17 1/2 16
Low 14 7/8 15 1/4 15 1/4 15
1996
- -------------------------------------------------------------------------------
Operating Revenues $4,153 $11,952 $21,059 $8,886
Operating and Other Income 133 3,163 7,198 1,547
Income (Loss) Before Income Taxes (925) 1,849 5,495 436
Net Income (Loss) (574) 1,138 3,387 262
Earnings (Loss) Per Share (0.35) 0.45 1.50 0.04
Dividends Declared Per Share 0.275 0.275 0.275 0.28
Prices of Common Shares:
High 15 1/2 17 16 3/4 16
Low 14 15 15 14 3/4
</TABLE>
The Common Stock of The Berkshire Gas Company is traded on the National
Over-the-Counter Market and is quoted through the NASDAQ National Market System
(BGAS). Primarily because of the relatively small number of shareholders and
the infrequency of trading, the average of the high and low sales prices noted
above do not necessarily reflect actual transactions.
Earnings per Common Share have been computed based on average Common
Shares outstanding in each period after recognition of Preferred Stock
dividends.
It is currently the policy of the Board of Directors to declare cash
dividends payable in July, October, January and April. The dividend rate is
reassessed regularly in light of existing conditions, the needs of the Company
and the interests of shareholders.
The sum of the quarterly earnings (loss) per share amounts may not equal
the annual income per share due to the issuance of Common Stock and rounding.
Officers
- -------------------------------------------------------------------------------
SCOTT S. ROBINSON ROBERT M. ALLESSIO
President and Chief Executive Officer Vice President, Utility Operations
MICHAEL J. MARRONE CHERYL M. CLARK
Vice President, Treasurer and Chief Clerk of the Corporation
Financial Officer
Directors
- -------------------------------------------------------------------------------
GEORGE R. BALDWIN** SCOTT S. ROBINSON*
Area Chairman, President and Chief
Arthur J. Gallagher & Co., Executive Officer, The Bekshire
a national insurance brokerage firm Gas Company
JOHN W. BOND* ** ROBERT B. TRASK**
President, Kimbell Financial, Inc., President, The Fitzpatrick Companies,
a financial services company formerly Country Curtains, Inc., a
mail order/retail firm dealing in
PAUL L. GIOIA** household window treatments and
Of Counsel, LeBoeuf, Lamb, Greene & accessories
MacRae, a law firm
FRANKLIN M. HUNDLEY*
Chairman of the Board,
The Berkshire Gas Company
Of Counsel,
Rich, May, Bilodeau & Flaherty, P.C.,
a law firm
JAMES R. KEYS
President, J.R. Keys & Assoc. Inc.,
a marketing and government relations
consulting firm
* Executive Committee
** Audit Committee
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