ITEM 1. BUSINESS
THE COMPANY
Bay State Gas Company ("Bay State" or the "Company") was incorporated in 1974 as a Massachusetts corporation. However, Bay State's predecessor companies' operations began in 1847, and consecutive quarterly dividends have been paid by these entities or Bay State since 1853. The Company is primarily a gas distribution utility that provides local transportation service in the greater Brockton, Lawrence, and Springfield, Massachusetts areas. Additionally, the Company also offers additional energy products and services to its customers, and invests in energy ventures. Approximately 94% of all revenues are generated from providing local transportation and natural gas sales with 83% of these annual revenues coming from the Company's Massachusetts service area. Bay State has seven subsidiaries within its corporate organization. Northern Utilities, Inc. ("Northern") is a gas distribution utility operating in the Portland and Lewiston areas in Maine and the Portsmouth area in New Hampshire. Granite State Gas Transmission, Inc. ("Granite") is an interstate gas transmission and supply company operating in the states of Maine, New Hampshire, Massachusetts, and Vermont. Granite has five wholly owned subsidiaries, Bay State Energy Development, Inc., which owns an equity interest in the MASSPOWER cogeneration partnership, Natural Gas Development Corp., a corporation established to invest in the Portland Natural Gas Transmission System ("PNGTS"), a proposed natural gas transmission pipeline in northern New England, Bay State Energy Enterprises, Inc., which owns an equity interest in KBC Energy Services, a partnership which markets natural gas supplies and energy-related services on a nonregulated basis to end-users, EnergyUSA, Inc. (formerly Energy Asset Funding, Inc.), a corporation established to provide non-regulated energy products and services, and LNG Development Corp., established to invest in the proposed liquefied natural gas storage facility in Wells, Maine.
Natural gas sales in New England are seasonal, and the Company's results of operations reflect this seasonality. Accordingly, results of operations are typically most favorable in the second quarter of the Company's fiscal year (three months ended March 31), with results of operations being next most favorable in the first quarter, while losses are commonly incurred in the third and fourth quarters. The quarterly operating results for 1996 and 1995 are described further in Note 9 of "Notes to Consolidated Financial Statements", Part II, Item 8, Financial Statements and Supplementary Data.
The Company's customers generally are billed monthly on a cycle basis in therms. One therm equals 100,000 British thermal units (1 Btu), the heat content of approximately 100 cubic feet of gas. 1,000,000 Btu (1 MMBtu), or ten therms are the energy equivalent of approximately 1,000 cubic feet of natural gas or 7.14 gallons of home heating oil.
Local Transportation
In 1996 almost all of Bay State's customers purchased bundled local transportation and natural gas, with only 459 of Bay State's 294,000 customers electing to purchase unbundled local transportation. The tables below show the net change in transportation customers and throughput volumes for the past three years.
TABLE 1 -- NET LOCAL TRANSPORTATION CUSTOMER GROWTH Yearly Increase in Number of Customers
TABLE 2 -- CHANGE IN THROUGHPUT VOLUMES Yearly Increase (Decrease) - Thousands of MMBtu*
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* Volumes have not been adjusted for weather variations.
COMPETITION
The Company's principal competitors are fuel-oil retailers and electric utilities. Increases in demand for natural gas are primarily driven by the rate of economic growth and new construction within the Company's service territories, and by the marketing and pricing of competing fuels.
In the residential market, the Company should continue to benefit from the New England region's market and growth potential. There are approximately 127,000 households along the Company's mains and additional homes located short distances from existing gas mains that use no gas at all. In addition, the Company anticipates additional growth from the estimated 43,000 existing residential nonheating customers. These are attractive markets for the Company and represent an opportunity to increase gas sales with little or no capital investment.
As part of its efforts to unbundle transportation from gas sales service, the Company is sponsoring one of the first residential pilot programs to allow customers to purchase gas from among competing nonregulated natural gas marketers. This program will bring the benefits of competition and encourage increased system throughput.
For commercial and industrial customers, environmental issues are an important issue in choosing an energy source. Since natural gas is the cleanest burning fossil fuel, using natural gas can assist companies in complying with the Clean Air Act and underground oil storage tank legislation.
Finally, the Company markets gas to large users on a seasonal or interruptible basis. Approximately 51% of these interruptible volumes in 1996 were sold to five electric utilities for electric power generation. The remainder were sold to approximately 110 industrial customers equipped to burn either natural gas or fuel oil. Price is the key competitive factor in this market, and the Company pursues interruptible sales through a flexible pricing structure designed to remain competitive with other fuels. Substantially all net margins from interruptible sales are passed back to firm customers through cost of gas adjustment clauses (see "Rates and Regulations").
NATURAL GAS SALES
The natural gas sales portion of the Company's bundled service does not currently provide a profit margin. However, as almost all of the Company's 294,000 local transportation customers purchase bundled transportation and natural gas, minimizing gas costs is an important part of the Company's business.
The Company's strategy of balancing gas purchase costs and security of supply is achieved by optimizing the mix and terms of natural gas contracts with the use of supplemental liquefied natural gas and propane to meet peak winter demand. The Company maintains a diversified gas supply portfolio of domestic and Canadian gas supply contracts with producers.
CAPACITY REQUIREMENTS
The Company currently transports natural gas from Canada through a converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC"). An agreement has been reached to extend the PPLC lease
from March 31, 1997 to April 30, 1998. Long-term, two projects to replace the pipeline capacity provided by the PPLC lease are being pursued, a 2.0 million MMBtu liquefied natural gas storage facility in Wells, Maine, and the Portland Natural Gas Transmission System. For further discussion of these projects see Note 8 of "Notes to Consolidated Financial Statements", Part II, Item 8, Financial Statements and Supplementary Data.
REGULATION AND RATES
The Company and its subsidiaries, are subject, where applicable, to regulation by the Massachusetts Department of Public Utilities ("MADPU"), the New Hampshire Public Utilities Commission ("NHPUC"), the Maine Public Utilities Commission ("MPUC") and the Federal Energy Regulatory Commission ("FERC") with respect to rates, adequacy of service, issuance of securities, accounting, and other matters.
The tariff schedules of the local distribution companies provide for declining block rates which result in reductions in the unit price as usage increases, and for seasonal rates that charge customers more per unit for gas purchased during the high-demand winter heating season and less per unit during summer months. These schedules also contain cost of gas adjustment ("CGA") clauses that permit the distribution companies to pass on to firm customers increases or decreases in recovered natural gas costs. Substantially all gas supplier refunds and profits from interruptible sales are returned to firm customers through the CGA clauses.
As a result of a third party fuel inventory financing program instituted by the Company in 1982, fuel inventory and the related administrative and carrying costs are also recovered through the CGA clauses. In addition, the MADPU allows recovery of the following through the CGA: 1) the working capital costs associated with purchased gas costs; 2) remediation costs associated with waste materials from former gas manufacturing sites; and 3) costs associated with MDPU-approved energy conservation and load management programs.
The following table provides the most recent rate activity of the Company by state and federal jurisdictions:
TABLE 4 -- RATE ACTIVITY
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(a) Rate increase filed with the FERC 10/1/96, new rates, subject to refund, will be effective 4/1/97.
(b) The revenue increase was granted under a step adjustment filing allowing recovery of certain costs under the terms of the Settlement Agreement effective 9/30/91; no return was requested or ordered.
(c) An overall revenue-neutral rate redesign was filed with the MADPU. The goal of the rate redesign was to implement rates that more closely reflect the actual costs associated with serving different customers. New rates were effective January 1, 1996.
FRANCHISES
The utility franchise rights of the Company are non-exclusive. Competition from other companies in the distribution of gas, however, is restricted without prior approval of the applicable local and state governmental agencies.
The laws of the Commonwealth of Massachusetts permit a municipality, by appropriate vote of its residents, to enter the gas business and purchase the facilities of the utility serving such municipality. If the utility is not willing to sell, the municipality may construct a plant or acquire one from another source. The Company is not aware of any municipality which intends to seek approval of such action.
Energy Products & Services
For a discussion of Energy Products & Services see "Energy Products & Services" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Energy Ventures
For a discussion of Energy Ventures, see "Energy Ventures" in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
EMPLOYEES
The Company employed 1,061 persons at September 30, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of the principal executive officers of the Registrant as of November 15, 1996 are listed below along with their business experience during the past five years. All principal executive officers are elected annually by the Board of Directors at the Directors' first meeting following the annual meeting of shareholders. There are no family relationships among these officers, except as noted below, nor is there any arrangement or understanding between any officer and any other person pursuant to which the officer was selected.
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(a) Charles H. Tenney II, Director, is the stepfather of Roger A. Young, Chairman of the Board of Directors.
ITEM 2.

ITEM 2. PROPERTIES
The Company holds franchise rights to lay gas mains in the streets and public places of various service territories in Massachusetts, Maine, and New Hampshire.
As of September 30, 1996, the Company's system consisted of approximately 5,360 miles of distribution mains; 132 miles of transmission lines, with requisite accessory pumping and regulating stations; LNG liquefaction, vaporization and storage facilities; propane storage tanks; 269,113 services (small pipe connecting mains with piping on the customers' premises) and 293,677 meters installed on customers' premises.
The Company also leases a transmission line which is 166 miles in length running from the Canadian border through Vermont and New Hampshire and terminating in South Portland, Maine (see Item 1. Business, "Capacity Requirements").
The transmission and distribution system is for the most part located on or under public streets, and other public places or on private property not owned by the Company, with the easements from or consent of the respective owners.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is working with federal and state environmental agencies to assess the extent and environmental impact of and appropriate remedial action for waste materials from former gas manufacturing sites (see Note 8 of "Notes to the Consolidated Financial Statements", Part II, Item 8, Financial Statements and Supplementary Data).
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders through solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of the Company is listed on both the New York Stock Exchange and the Boston Stock Exchange. The ticker symbol is "BGC" and common listings in the financial press include "BayStGas" and "BaySGs". As of November 15, 1996, the Company had approximately 10,820 shareholders of record. The number of shareholders indicated does not reflect the number of persons or entities who hold their common stock in nominee name through various brokerage firms or other entities. Information regarding cash dividends declared on common stock is included in Note 9 of "Notes to the Consolidated Financial Statements", Item 8, Financial Statements and Supplementary Data.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Listed below is the required selected financial data for the Company's last five fiscal years.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Year in Review
During 1996, Bay State Gas Company ("Bay State" or the "Company") achieved record earnings while implementing changes to respond to the deregulation of the industry. Net income was $27.1 million in 1996 compared to $23.1 million in 1995, and earnings per share were $2.00. This is a 17.0% increase from the $1.71 earned one year ago. Common stock dividends declared in 1996 were $1.52 per share, 2.7% higher than the prior year. This was the thirteenth consecutive year of increased common stock dividends, and it completes the 143rd year of consecutive quarterly dividends. The current annualized dividend is equivalent to $1.54 per share.
Earnings for the fiscal year increased primarily due to the weather, which was 9.2% colder than the prior year and 2.8% colder than normal within the Company's service territories. The impact of the colder than normal weather was offset somewhat by increases in operating expenses, primarily payroll, outside services, and property taxes.
The Company operates in three related business segments (see note 1). Revenues and income before interest and taxes for 1996 from the three business segments were as follows:
Local Transportation
Income before interest and taxes from this regulated segment is approximately 91% of the total for the Company. The following table details the components of Local Transportation revenues for the past three years:
The majority of customers purchase bundled transportation and natural gas. Some larger commercial, industrial, and interruptible customers have elected to purchase unbundled transportation service requiring them to manage their own gas purchasing, balancing, and storage functions. Profit margins from interruptible customers and spot sales to other utilities are passed back to firm customers through reduced gas costs (see note 1). The following table details the revenues from transportation and natural gas sales by customer type:
TRANSPORTATION REVENUES
Transportation revenues increased 8.9% from 1995 to 1996. This $14.2 million increase in revenues was primarily attributable to the colder weather and increased use per customer. The 9.2% change in the weather from year to year resulted in a $7.9 million increase in transportation revenues. The following table displays the degree days for the past three years:
In addition, customer growth of 2.3% continued to exceed the industry average, with the addition of almost 6,500 customers in 1996 and 1995, up from 4,800 in 1994.
NATURAL GAS SALES
The natural gas sales portion of the bundled service does not currently provide a profit margin. However, as all but 460 of the 294,000 Local Transportation customers purchase bundled transportation and gas commodity sales service, minimizing gas costs is an important part of the Company's competitive strategy.
The goal is to balance gas purchase costs and security of supply by optimizing the mix and terms of natural gas contracts with the use of underground storage and supplemental liquefied natural gas and propane to meet peak winter demand. In order to achieve this mix, a diversified gas supply portfolio of domestic and Canadian gas supply contracts with producers is maintained. Natural gas sales rates include cost of gas adjustment clauses ("CGA") pursuant to which gas purchase costs and other costs are recovered from customers. The following table details these recovered gas costs:
Recovered gas costs decreased by 3.6%, or $8.5 million, in 1996. These lower gas costs were the result of a decline in fixed purchase costs due to an increase in winter-only supply contracts, combined with pipeline refunds, which were being passed back to customers during the period. The increase in supplemental fuel costs in 1996 is the result of the colder weather, requiring the Company to purchase more supplemental supplies than in the previous year.
OTHER REVENUES
Other revenues primarily consist of customer service revenues, merchandise sales, conversion burner rentals, and liquefaction services.
Energy Products & Services
Revenues from Energy Products & Services for the last three years include the following:
As is the case with revenues generated in the Local Transportation segment, propane revenues are significantly affected by the weather. In 1996, revenues from the sale of propane increased 34.2%, or $2.6 million, primarily from growth in the wholesale business and the colder weather. Sales volumes for propane increased from 7.4 million gallons in 1995 to 11.2 million gallons in 1996.
Revenues from water heater rentals increased by 7.5% in 1996 after increasing by 8.1% and 7.0% in 1995 and 1994, respectively. The increase in 1996 is primarily the result of a continued increase in the number of units rented. Moderate price increases also contributed to the growth in rental revenues in 1995 and 1994.
Energy Ventures
This business segment currently manages an interstate pipeline, and participates in three major projects: MASSPOWER, an operating cogeneration facility; the Portland Natural Gas Transmission System ("PNGTS"); and the Wells LNG facility ("Wells LNG"). Operating revenues and income within Energy
Ventures are generated by the interstate pipeline, which had operating income of $398,000, $1.3 million, and $70,000 in 1996, 1995, and 1994, respectively. Income from the investment in MASSPOWER resulted in pre-tax earnings of $1.2 million and $296,000 for the years 1996 and 1995, and a loss of $813,000 in 1994, its first year of operation. The Company is currently seeking buyers for its 17.5% equity interest in MASSPOWER, which has been a successful investment, but does not represent a future core business. PNGTS and Wells LNG are two investments in the development stage that produced earnings in the form of equity Allowance for Funds Used During Construction ("AFUDC") totaling $1.0 million in 1996 and $175,000 in 1995 (see note 8).
Operating Expenses
Operations expenses increased by $12.2 million in 1996 after decreasing by $3.9 million in 1995 and $1.5 million in 1994. Increases in operations expenses were primarily the result of increases in payroll and propane fuel purchases, due to the colder weather, and increases in outside services.
Higher plant balances have resulted in continuing increases in depreciation expense. Taxes, other than income taxes, increased primarily due to higher property taxes. Annual increases in property tax rates and assessments, combined with the growth in plant, increased property taxes by $966,000, $601,000, and $808,000 in 1996, 1995, and 1994, respectively.
Interest Expense and Dividend Requirements on Preferred Stock
Interest expense for the Company decreased 5.3%, to $16.1 million in 1996 from $17.0 million in 1995, due to a decrease in interest expense related to refunds due customers, recording of AFUDC of $1.3 million, and a reduction of short-term debt following the sale of the rental assets. Dividend requirements on preferred stock were relatively flat for the comparative periods.
Results of Operations, 1995 and 1994
During 1995, net income decreased $1.4 million due to weather that was 6.4% warmer than normal in the service territories. In 1994, net income increased $1.7 million with colder than normal weather. In both years the Company had a growing customer base. Operating revenues for 1995 decreased by $45.2 million primarily due to the warmer weather, decreases in the cost of gas, and increased pipeline refunds being returned to customers. In 1994, operating revenues increased by $50.9 million, primarily due to customer additions combined with an increase in the cost of gas and colder weather.
Recovered gas costs decreased 15.0% to $235.3 million in 1995. This decrease was the result of the warmer weather, which reduced fuel costs, and pipeline refunds, which were returned to customers during this period. In 1994, recovered gas costs increased 17.6% to $276.9 million. This increase was the result of rising transmission costs, and of industry deregulation or unbundling, combined with increases in supplemental fuel costs, demand-side management program costs, and transition costs.
Operation expenses decreased by $3.9 million and $1.5 million in 1995 and 1994, respectively. In 1995, the decrease was the result of reduced bad debt expense, due to improved collections from customers and other cost control measures. In 1994, the decrease in operations expenses was due to cost reductions from an internal review of operations performed early in 1994.
In 1995, interest expense increased $1.9 million due to overcollections of recovered natural gas costs, and higher than anticipated pipeline supplier refunds. Interest expense increased $2.2 million in 1994, due to higher levels of long-term debt outstanding during the year, higher short-term debt rates, and a decrease in AFUDC.
Liquidity and Capital Resources
Natural gas sales in New England are seasonal, and the Company's cash flows reflect this seasonality. Approximately 74% of annual revenues are generated during the heating season, which results in a high level of cash flows from operations from late winter through early summer. Short-term borrowings are typically
highest in the fall and early winter as a result of completion of the annual construction program and seasonal working capital requirements. The Company has been able to access the financial markets to meet its capital requirements and does not anticipate a change in its access to, or the availability of, capital in the coming year.
Cash Flows from Operating Activities
Cash flows from operations decreased by $65.4 million in 1996 despite an increase in net income. However, cash flows from operating activities prior to changes in working capital were comparable to the two previous years at $56.1 million, $55.0 million, and $53.5 million, for 1996, 1995, and 1994, respectively. In 1996, working capital requirements were higher than in previous years because of increased deferred gas costs. This increase is the result of pipeline refunds, which were returned to customers, and of a change to the CGA structure in the Massachusetts service territory. This change in the CGA requires the deferral of peak period demand charges incurred in the summer to the upcoming winter period. In addition, cash contributions of $8.0 million were made to employee benefit plans in 1996.
Cash Flows From Investing Activities
Investments are made in property, plant, and equipment to improve and protect the distribution system, and to expand the system to meet customer demand. The sale of rental assets provided $20.7 million in additional cash, which enabled the company to reduce the levels of debt financing during the year. Other investments include expenditures primarily for PNGTS and Wells LNG, which were $5.7 million, $4.3 million, and $1.0 million in 1996, 1995, and 1994, respectively (see note 8). Capital expenditures for 1997 are estimated to be approximately $62 million.
Cash Flows From Financing Activities
Cash flows from financing activities increased primarily due to a $33.2 million increase in short-term debt. In 1995 and 1994 the decline in cash flows from financing activities reflects a reduction in debt issuances as a result of strong cash flows from operations.
The Company has a shelf registration statement covering up to $125.0 million of senior unsecured debt securities, under which $65.0 million in notes has been issued as of September 30, 1996. The Company has access to $90.0 million in bank lines of credit. In early 1995, the Dividend Reinvestment Plan was converted to a market purchase plan, eliminating new equity issuances under this plan.
Impact of Inflation
The rates charged to transportation customers may not be increased without formal proceedings before regulatory authorities. Accordingly, in the absence of authorized rate increases and except for changes in recovered gas costs, which are reflected in customer rates, the Company must look to performance improvements and higher sales volumes, particularly from highly profitable market segments, to offset inflationary increases in its costs of operations. Current rates only permit the Company to recover its historical cost of utility plant and give no recognition to the current cost of replacing facilities. The Company has an obligation to make a rate filing in 1997 in Massachusetts that includes a proposal for a form of performance-based rates.
Environmental Issues
The Company continues to work with federal and state environmental agencies to assess the extent and environmental impact of waste materials that exist at or near former gas manufacturing sites. The costs of such assessments and any related remediation determined to be necessary will be funded from traditional sources of capital and recovered from customers (see note 8).
New Accounting Standard
In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be Disposed Of." This statement, effective for fiscal year 1997, requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It is not expected that the adoption of this standard will have a material impact on the results of operations, financial condition, or cash flows.
Forward Looking Information
This report and other Company reports contain forward looking statements. The Company cautions that, while it believes such statements to be reasonable and makes them in good faith, they almost always vary from actual results, and the differences between assumed facts or basis and actual results can be material, depending upon the circumstances. Investors should be aware of important factors that could have a material impact on future results. These factors include, but are not limited to, weather, the regulatory environment, financial market conditions, interest rate fluctuations, customers' preferences, unforeseen competition, and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the Company.
ITEM 8.

ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS EXCEPT PER SHARE AMOUNTS
The accompanying notes are an integral part of these statements.
BAY STATE GAS COMPANY
CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1996 AND 1995, IN THOUSANDS
The accompanying notes are an integral part of these statements.
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION SEPTEMBER 30, 1996 AND 1995, IN THOUSANDS
The accompanying notes are an integral part of these statements.
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS EXCEPT SHARE AMOUNTS
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*Dividend reinvestment, employee savings, and key employee stock option plans.
The accompanying notes are an integral part of these statements.
BAY STATE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994, IN THOUSANDS
The accompanying notes are an integral part of these statements.
BAY STATE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations. Bay State Gas Company (the "Company") operates in three energy-related segments: Local Transportation, Energy Products & Services, and Energy Ventures. Bay State's Local Transportation business serves approximately 294,000 natural gas customers in Massachusetts, New Hampshire, and Maine. The Company's nonregulated Energy Products & Services segment offers energy commodities and related equipment and services to approximately 89,000 customers throughout New England under the brand name, "EnergyUSA." Bay State's Energy Ventures segment develops businesses and projects that are closely related to the Company's core businesses.
Basis of presentation and principles of consolidations. The preparation of consolidated financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. It is expected that actual results will not be materially different from those estimates.
The consolidated financial statements include the accounts of Bay State Gas Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. Certain information in the prior period financial statements has been reclassified to conform with the current period's presentation.
Regulation and operations. The Company is subject to regulation with respect to rates, accounting, and other matters, where applicable, by the Massachusetts Department of Public Utilities ("MADPU"), the New Hampshire Public Utilities Commission, the Maine Public Utilities Commission ("MPUC"), and the Federal Energy Regulatory Commission ("FERC"). The Company's accounting policies conform to generally accepted accounting principles and reflect the effects of the ratemaking process in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation."
Plant. Plant is stated at original cost and consists of utility plant and non-utility plant assets. The original cost of depreciable units of utility plant retired, together with the cost of removal, net of salvage, is charged to accumulated depreciation. The costs of maintenance, repairs, and replacements of minor items are charged to expense as incurred.
Depreciation is provided for all classes of plant on a group straight-line basis in amounts equivalent to overall composite rates of 3.66% for 1996, and 3.88% for 1995 and 1994.
Allowance for funds used during construction ("AFUDC"). AFUDC is the estimated cost of funds used for construction purposes. Such allowances are charged to plant and reported as other income (cost of equity funds) or a reduction of interest expense (cost of borrowed funds). AFUDC was $2.8 million, $748,000, and $457,000 for 1996, 1995, and 1994, respectively. The increases in AFUDC are the results of the Company's spending on its investments in PNGTS and Wells LNG.
Investments. The Company accounts for its partnership investments by the equity method.
Cash and temporary cash investments. The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Local Transportation, natural gas sales, and deferred gas costs. Local Transportation revenues and natural gas sales are based on the volume of gas transported or sold at billing rates authorized by regulatory authorities and include unbilled revenues for transportation services and gas delivered, but not billed. The Company's rates include cost of gas adjustment ("CGA") clauses pursuant to which gas and certain other costs are recovered from customers. Any differences between gas costs incurred and amounts collected are deferred for recovery from or refund to customers in future periods. Also included in natural gas sales are sales
to interruptible customers and spot sales for resale. Substantially all profit margins from these types of sales are used to reduce gas costs to customers through CGA clauses.
Environmental costs. In accordance with orders of regulatory authorities, the Company defers costs incurred to remediate environmental damage. Deferred environmental costs in Massachusetts and New Hampshire are amortized to expense over periods of seven to 10 years as they are recovered from customers. The Company has received approval from the MPUC for deferral of environmental costs and a filing for a recovery mechanism has been made (see note 8).
Income taxes. Beginning in 1994, deferred taxes are provided for using the asset and liability method for temporary differences between financial and tax reporting. Deferred income taxes are recognized for the expected tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting basis and tax basis of assets and liabilities (see note 2).
Pension and other employee benefit plans. The Company has noncontributory defined benefit pension plans covering substantially all employees. Benefits under the plans are generally based on years of service and the level of compensation during the final years of employment. Other postretirement benefits consist of certain health and life insurance benefits for retired and active employees hired before September 30, 1990.
Postemployment benefits consist of workers compensation claims, long-term disability payments, and medical coverage continuation payments. These costs are generally recognized on the accrual method of accounting over the expected periods of employee service based on actuarial assumptions (see note 7).
Earnings per share. Earnings per common share have been computed by dividing earnings applicable to common stock by the weighted average number of shares of common stock outstanding during each year.
Stock-based compensation. On October 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation." Pursuant to SFAS 123, stock-based compensation, such as the Key Employee Long-Term Incentive Plan, is recognized as expense using a fair-value accounting method. The adoption of this accounting standard did not have a material impact on cash flows, financial condition, or results of operations (see note 3).
New accounting standards. In fiscal year 1997, SFAS 121 will require a review of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. It is not expected that the adoption of this standard will have a material impact on cash flows, financial condition, or the results of operations.
NOTE 2. INCOME TAXES
The components of income tax expense are as follows:
The annual provision for deferred income taxes is comprised of the following:
The Company's effective income tax rate for fiscal years 1996, 1995, and 1994 is 39%, consisting of a federal income tax rate of 35% and state income taxes, net of federal benefit, of 4%. Temporary differences that resulted in deferred income tax assets and liabilities as of September 30, 1996 and 1995 are as follows:
At September 30, 1996 and 1995, unamortized deferred investment tax credits included in long-term deferred taxes amounted to $5.4 million and $5.8 million, respectively.
NOTE 3. CAPITALIZATION
Common stock. A Key Employee Long-Term Incentive Plan ("KELTIP") awards performance shares to all executive officers and certain key employees. All or a portion of the performance shares become vested and earned at the end of the three-year period beginning on the date the award was granted, depending on the total return to shareholders for such period. No awards were made in 1996, but 50,160 and 55,500 performance shares were awarded in 1994 and 1995, respectively. Compensation expense will be recorded when shares are vested and earned equal to the value of the vested shares. No compensation expense was recorded in 1996.
A Key Employee Stock Option Plan provided for the granting of options to key employees to purchase an aggregate of 1,050,000 shares of common stock. While it is anticipated that no further options will be granted under this plan, previously granted options may continue to be exercised through 2002.
Options are exercisable upon grant and expire within 10 years from the date of grant. Option activity is as follows:
A Shareholder Rights Plan provides one right ("Right") to buy one share of common stock at a purchase price of $70 for each share of common stock issued and to be issued. The Rights expire on November 30, 1999 and only become exercisable, or separately transferable, 10 days after a person or group acquires, or announces an intention to acquire, beneficial ownership of 20% or more of the Company's common stock. The Rights are redeemable by the Board at a price of $.01 per Right, at any time prior to the acquisition by a person or a group of beneficial ownership of 20% or more of the Company's common stock. Once a person or group acquires more than 20% of the Company's common stock, however, the Rights may not be redeemed.
At September 30, 1996, there were 385,000 authorized but unissued shares of common stock reserved for the Dividend Reinvestment Plan ("DRP"). On December 1, 1994, the DRP was converted to a market based plan. It is anticipated that no further shares will be issued under this plan.
Cumulative preferred stock and long-term debt. The cumulative preferred stocks rank equally and are preferred over common stock in voluntary liquidation at the redemption price in effect at the time of such voluntary liquidation and in involuntary liquidation at the par value per share, in each case plus accrued dividends, except for the $3.80 Series, $50 par value, which has a voluntary liquidation value of $83 per share and a set involuntary liquidation value of $81.50 per share, plus accrued dividends.
Sinking fund requirements and maturities. Annual sinking fund requirements and maturities of long-term debt and preferred stock for the next five years and thereafter are as follows:
As of September 30, 1996, long-term debt agreements contain no provisions restricting the payment of dividends on common stock. All debt is unsecured.
As of September 30, 1996 and 1995, $18.0 million and $6.0 million of long-term debt were outstanding under revolving credit agreements at weighted average interest rates of 5.85% and 6.23%, respectively.
Fair values of financial instruments. The estimated fair values of the Company's financial instruments are summarized below.
The fair values of capital lease obligations are estimated using the present value of the minimum lease payments discounted at market rates. The fair values of long-term debt are estimated based on current rates offered to the Company for debt of the same remaining maturities. The carrying amounts for cash and temporary cash investments, accounts receivable, accounts payable, accrued liabilities, and short-term debt approximate their fair values, due to the short-term nature of these instruments.
NOTE 4. LEASES
Noncancelable operating and capital leases have been entered into for the use of certain facilities and equipment. The operating lease agreements generally contain renewal options. The capital leases relate to liquefied natural gas storage facilities. Certain leases contain renewal and purchase options and escalation clauses.
Future annual minimum rental payments under long-term noncancelable leases at September 30, 1996, are as follows:
In 1996, the Company entered into a sale-leaseback agreement for its rental water heaters and conversion burners, which increased operating lease expense by $3.1 million over 1995. In conformity with its regulatory accounting requirements, rent expense is recorded as if all leases were operating leases. The following rentals were charged to operating expenses:
Interest included in capital lease payments was $173,000, $253,000, and $328,000 in 1996, 1995, and 1994, respectively.
NOTE 5. SHORT-TERM DEBT AND LINES OF CREDIT
The Company has unsecured bank lines of credit aggregating $90.0 million for which it pays commitment fees, and access to an additional $30.0 million under the Fuel Purchase Agreements as described in note 6.
NOTE 6. FUEL PURCHASE AGREEMENTS
Up to $30.0 million can be raised through credit agreements (the "Agreements") underlying the Fuel Purchase Agreements with a corporation established to provide financing, through borrowing on a demand basis or selling supplemental gas inventories. Any inventories sold must be repurchased and any associated carrying costs paid when the gas is withdrawn from storage. All gas costs, carrying costs, and administrative charges are fully recoverable through the CGA approved in each state regulatory jurisdiction. The Agreements contain an expiration date of September 1998.
NOTE 7. PENSION AND EMPLOYEE BENEFIT PLANS
Pension plans. The funded status of the Company's pension plans as of September 30, 1996 and 1995, is as follows:
Plan assets are primarily invested in marketable pooled funds holding equity and corporate debt securities and cash equivalents. Certain changes in items shown above are not recognized as they occur, but are systematically amortized over subsequent periods. Unrecognized amounts as of September 30, 1996 and 1995, are as follows:
The discount rate and expected long-term rate of return on plan assets used in determining the actuarial present value of projected benefit obligation were 8.0% and 9.0% for both 1996 and 1995. The rate of increase in future compensation levels used was 4.5% and 5.0%, for 1996 and 1995, respectively. Net pension cost for 1996, 1995, and 1994 included the following components:
Postretirement benefits other than pensions. The present value of the accumulated postretirement benefit obligation other than pensions was $24.6 million at September 30, 1996 and 1995. The expense recognized was $2.6 million, $2.7 million, and $2.8 million for 1996, 1995, and 1994, respectively. The components of expense for 1996, 1995 and 1994 are as follows:
The funded status of the Company's other postretirement benefit plans as of September 30, 1996 and 1995 is as follows:
Plan assets are held in voluntary employee benefit association ("VEBA") trusts and medical funds in the pension plans. VEBA assets are invested in common stocks, bonds, and cash equivalents.
The accumulated other postretirement benefit obligation for 1996 and 1995 was determined using an assumed discount rate of 8.0%, an expected long-term pre-tax rate of return on plan assets of 9.0%, and a health care cost trend rate of 8.0% and 9.0%, in 1996 and 1995, respectively, decreasing to 6.0% by the year 1998. An annual 1% increase in the health care cost trend rate would increase the accumulated postretirement benefit obligation by $2.4 million and the cost for 1996 by $262,000.
Return on prepayments of postretirement benefits. As permitted by regulatory authorities, noncash returns of $1.5 million, $1.7 million, and $857,000 for 1996, 1995, and 1994, respectively, have been recorded on amounts of prepayments associated with employee post-retirement benefit plans other than pensions. Regulators permit the accrual of returns on these prepayments because the plan funding will significantly reduce the future costs of the plans.
Postemployment benefits, other than pensions. The present value of the accumulated benefit obligation was $4.9 million at September 30, 1996 and 1995.
Employee savings plan. Employee Savings Plans ("ESP") provide eligible employees with an incentive to save and invest regularly. The ESP are defined contribution plans, which allow eligible employees to defer a portion of their salaries to employee-funded pretax retirement savings accounts. Matching contributions to certain employee deferrals were $836,000, $813,000, and $784,000 in 1996, 1995, and 1994, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Capacity requirements. The Company currently transports natural gas from Canada through a converted oil pipeline leased from the Portland Pipe Line Corporation ("PPLC"). An agreement has been reached with PPLC to extend the lease to April 1998, which the FERC approved on September 11, 1996. Long-term, the Company is participating in two projects to replace the pipeline capacity provided by the PPLC lease, a two million MMBtu liquefied natural gas storage facility in Wells, Maine ("Wells LNG"), and Portland Natural Gas Transmission System ("PNGTS").
Investment recovery. The following table summarizes the Company's current investments:
PNGTS is a partnership that has proposed building a 272-mile interstate pipeline from the US/Canada border to Haverhill, Massachusetts. On March 1, 1996, PNGTS signed an agreement to sell 40% of the partnership to two new equity partners, who will also be shippers on the completed pipeline. This sale reduced the Company's ownership percentage to 17.8%. On July 31, 1996, the FERC issued a preliminary determination that the pipeline project is required by public convenience and necessity. The PNGTS project is scheduled to be completed and available for service in November 1998.
In July 1996, the Company refiled its Wells LNG application with the FERC to reflect the evolution of the project from being primarily a baseload facility to one that will be used to meet peak winter demands. The Company signed a precedent agreement, which obligates Gaz Metropolitain to accept 50% of the storage capacity of this facility upon release by the Company at the time of inception of service on PNGTS. Gaz Metropolitain also has the option of becoming a 50% partner in this proposed facility.
In August 1996, the Public Utility Commissions in both Maine and New Hampshire made formal decisions in support of this project. In September 1996, the FERC issued a "Notice of Intent" to the Company to prepare a supplement to its January 1996 Draft Environmental Impact Statement to consider alternate sites. The Company now expects a 1999 in-service date.
Amounts invested in PNGTS and Wells LNG consist principally of the Company's share of feasibility, engineering, legal, other costs of developing each project, and the carrying costs on these expenditures. Recovery of expenditures on these investments is dependent upon, among other things, successful completion of the projects and the terms of required regulatory approvals. While their completion is subject to a number of factors beyond the Company's control, the Company believes that these projects will be successful.
KBC Energy Services ("KBC") markets natural gas supplies and energy-related services on a nonregulated basis to end users.
MASSPOWER is a cogeneration facility, which has been in operation since 1993. The Company is seeking buyers for its 17.5% equity interest in MASSPOWER.
Long-term obligations. The Company has long-term contracts for the purchase, storage, and delivery of gas supplies. Certain of these contracts contain minimum purchase provisions, which in the opinion of management, are not in excess of the Company's requirements.
Environmental issues. Like other companies in the natural gas industry, the Company is party to governmental actions associated with former gas manufacturing sites. Management estimates that, exclusive of insurance recoveries, if any, expenditures to remediate and monitor known environmental sites will range from $4.9 million to $10.0 million. Accordingly, a $4.9 million liability, with an offsetting charge to a regulatory asset (see note 1), has been accrued. Environmental expenditures for 1996, 1995, and 1994 were $2.5 million, $387,000, and $129,000, respectively. Exclusive of amounts accrued for future expenditures, at September 30, 1996 and 1995, approximately $4.7 million and $3.0 million of environmental expenditures had been deferred for future recovery from customers.
Regulatory matters. Effective January 1, 1996, the Company implemented new rates approved by the MADPU that more closely reflect the actual costs associated with serving different customers.
On October 1, 1996 a $3.7 million increase in pipeline revenues was filed with the FERC. This increase is primarily due to the additional cost of extending the Portland Pipe Line lease to April 1998. New rates are expected to take effect April 1, 1997. The Company has an obligation to prepare a rate filing in Massachusetts prior to May 1997, which includes a proposal for performance-based rates.
Significant regulatory assets arising from the rate-making process associated with income taxes, employee benefits, and environmental response costs have been recorded. Based on its assessments of decisions by regulatory authorities, management believes that all regulatory assets will be settled at recorded amounts through specific provisions of current and future rate orders.
Litigation. The Company is involved in various legal actions and claims arising in the normal course of business. Based on its current assessment of the facts of law, and consultations with outside counsel,
management does not believe that the outcome of any action or claim will have a material effect upon the consolidated financial position, results of operations, or liquidity of the Company.
NOTE 9. UNAUDITED QUARTERLY FINANCIAL DATA
In thousands except per share amounts.
In the opinion of management, quarterly financial data includes all adjustments, consisting only of normal recurring accruals, necessary for a fair representation of such information. Revenue and income amounts vary significantly due to seasonal weather conditions.
REPORT OF MANAGEMENT
The management of Bay State Gas Company and its subsidiaries has the responsibility for preparing the accompanying financial statements. We believe the financial statements were prepared in conformity with generally accepted accounting principles. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements.
To fulfill its responsibility, management maintains a system of internal control that has been designed to provide reasonable assurance as to the integrity and reliability of the financial statements and the safeguarding of Company assets.
The Company has established statements of corporate policy relating to conflict of interest and conduct of business and annually receives from appropriate employees confirmation of compliance with these policies.
The Company's financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The independent accountants are elected by the Company's Directors and report any recommendations concerning the Company's system of internal control to the Audit Committee of the Board of Directors. The Audit Committee meets periodically with Management, internal auditors, and KPMG Peat Marwick LLP, to review and monitor the Company's financial reporting, accounting practices, and business conduct.
Although there are inherent limitations in any system of internal control, management believes that as of September 30, 1996, the Company's system of internal control was adequate to accomplish the objectives discussed herein.
ROGER A. YOUNG THOMAS W. SHERMAN Chairman of the Board and Chief Financial Officer Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders of BAY STATE GAS COMPANY
We have audited the accompanying consolidated balance sheets and statements of capitalization of Bay State Gas Company and subsidiaries as of September 30, 1996 and 1995, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended September 30, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bay State Gas Company and subsidiaries at September 30, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation in 1996.
KPMG PEAT MARWICK LLP
Boston, Massachusetts October 24, 1996
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Directors of the Registrant as set forth on pages 2, 3, and 4 of the 1997 annual meeting proxy statement, dated December 9, 1996, is incorporated herein by reference. Information relating to the Executive Officers of the Registrant is contained in Part I, Item 1, Business.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of the Registrant's executive officers as set forth on pages 7 through 14 of the 1997 annual meeting proxy statement, dated December 9, 1996, is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding the security ownership of certain beneficial owners and management as set forth on pages 4 and 5 of the 1997 annual meeting proxy statement, dated December 9, 1996, is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions as set forth on pages 4, 6 and 14 of the 1997 annual meeting proxy statement, dated December 9, 1996, is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THE REPORT:
(1) The following financial statements are included herein under Part II, Item 8, Financial Statements and Supplementary Data.
Consolidated Statements of Earnings for the Years ended September 30, 1996, 1995, and 1994 Consolidated Balance Sheets as of September 30, 1996 and 1995 Consolidated Statements of Capitalization as of September 30, 1996 and Consolidated Statements of Shareholders' Equity for the Years ended September 30, 1996, 1995, and 1994 Consolidated Statements of Cash Flows for the Years ended September 30, 1996, 1995, and 1994 Independent Auditors' Report
(2) The following additional data should be read in conjunction with the financial statements included in Part II, Item 8, Financial Statements and Supplementary Data. Schedules not included herein have been omitted because they are not required or are not applicable, or the required information is shown in such financial statements or notes thereto.
(3) Exhibits -- See Exhibit index on page 34.
(B) REPORTS ON FORM 8-K:
The Company did not file a report on Form 8-K during the fourth quarter of fiscal 1996.
SCHEDULE VIII
BAY STATE GAS COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 1996, 1995, AND 1994 (IN THOUSANDS)
- ---------------
(a) Write-off of uncollectible accounts, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BAY STATE GAS COMPANY
/S/ THOMAS W. SHERMAN By_________________________________ THOMAS W. SHERMAN EXECUTIVE VICE PRESIDENT
Date: December 2, 1996 ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
(4) Instruments defining the rights of security holders, including indentures:
The following is a listing of debt instruments defining the rights of security holders, including indentures and/or note agreements for Bay State, Northern, and Granite. None of these instruments represent any securities in an amount authorized or outstanding which exceeds 10 % of the total assets of the Company as of September 30, 1996. The Company will furnish the Securities and Exchange Commission with copies of any of the instruments listed below upon request.
Revolving Credit Agreement between Northern and The First National Bank of Boston, to borrow up to $20,000,000, dated as of March 17, 1993, due March 17, 1997.
Indenture between Bay State and The First National Bank of Boston, Trustee, dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the following Notes have been issued under a Prospectus dated April 18, 1991:
- $ 8,500,000 Principal Amount of 9.20% Notes due June 6, 2011 - $25,000,000 Principal Amount of 9.45% Notes due September 5, 2031 - $12,000,000 Principal Amount of 8.15% Notes due August 26, 2022 - $ 4,000,000 Principal Amount of 7.55% Notes due November 1, 2002 - $ 1,000,000 Principal Amount of 7.55% Notes due October 2, 2002 - $ 5,000,000 Principal Amount of 7.45% Notes due December 16, 2002 - $ 5,000,000 Principal Amount of 7.38% Notes due December 31, 2002 - $ 7,000,000 Principal Amount of 7.375% Notes due November 1, 2002 - $ 1,000,000 Principal Amount of 7.375% Notes due December 31, 2002 - $ 5,000,000 Principal Amount of 7.37% Notes due December 31, 2002 - $20,000,000 Principal Amount of 7.25% Notes due August 5, 2002
Indenture between Bay State and The First National Bank of Boston, Trustee, dated as of April 1, 1991, for Senior Unsecured Debt Securities under which the following Notes have been issued under a Prospectus dated April 7, 1993:
- $10,000,000 Principal Amount of 7.42% Notes due September 10, 2001 - $10,000,000 Principal Amount of 7.625% Notes due June 19, 2023 - $10,000,000 Principal Amount of 6.0% Notes due July 6, 2000 - $15,000,000 Principal Amount of 6.0% Notes due September 29, 2003 - $10,000,000 Principal Amount of 6.58% Notes due June 21, 2005 - $ 5,000,000 Principal Amount of 6.0% Notes due January 30, 2001 - $ 5,000,000 Principal Amount of 6.625% Notes due June 28, 2002 - $10,000,000 Principal Amount of 6.43% Notes due December 15, 2020
Note Purchase Agreement between Northern and First Colony Life Insurance for the purchase and sale of $13,000,000 principal amount of 9.70% Notes dated as of January 1, 1992, due September 1, 2031.
Note Purchase Agreement between Northern and the Mutual Life Insurance Company of New York for the purchase and sale of $10,000,000 principal amount of 6.93% Notes dated as of September 29, 1995, due September 27, 2010.
Note Purchase Agreement between Northern and the Mutual Life Insurance Company of New York for the purchase and sale of $5,000,000 principal amount of 6.30% Notes dated as of September 29, 1995, due September 30, 1998.
(10) Material contracts:
(11) Statement re: computation of per share earnings, filed herewith.
(12) Statement re: computation of ratio of earnings to fixed charges, filed herewith.
(21) Subsidiaries of the Registrant, filed herewith.
(23) Consent of Independent Auditors, filed herewith.
(27) Financial Data Schedule, filed herewith. - ---------------
* Incorporated by reference to the indicated filing.


Item 1. Business. --------
(a) General Development of Business. Alfa Corporation is a holding ------------------------------- company for Alfa Life Insurance Corporation (Life), Alfa Insurance Corporation (AIC), Alfa General Insurance Corporation (AGI), Alfa Financial Corporation (AFC), Alfa Investment Corporation, Alfa Realty, Inc. (ARI), and Alfa Agency Mississippi, Inc. The Registrant's property and casualty insurance subsidiaries are rated "A++ Superior" and its life subsidiary is rated "A+ Superior" by A. M. Best Company, the leading rating organization in the insurance industry. The Registrant's commercial paper ratings are A-1+ by Standard & Poors and P-1 by Moody's Investors Service. The commercial paper is guaranteed by an affiliate, Alfa Mutual Insurance Company.
Until August 1, 1987, Registrant's life insurance subsidiary was its principal source of revenue. Effective that date Registrant's property and casualty subsidiaries entered into a pooling agreement with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual Group pursuant to which premiums, losses, loss adjustment expenses and other underwriting expenses attributable to the direct property and casualty insurance business of each party are pooled and reallocated among the parties. Under the pooling agreement, sixty five percent of the pooled business is allocated to Registrant's subsidiaries, Alfa Insurance Corporation and Alfa General Insurance Corporation.
The majority of the Company's Property Casualty Premiums are derived from the Company's participation in the Pooling Agreement.
(b) Information as to Industry Segments. Prior to August 1, 1987, ----------------------------------- Registrant considered it operated in one main reportable segment, that being the life insurance industry which is operated through its subsidiary, Life. Effective August 1, 1987, Registrant entered into a property and casualty Pooling Agreement. Because of the Pooling Agreement, Registrant substantially increased its property and casualty insurance business. As a result Registrant is now engaged in two major industry segments, the life and property and casualty insurance industries. The Information as to Industry Segments contained in Note 13 to Financial Statements on page 37 of Registrant's Annual Report is incorporated herein by reference.
(c) Narrative Description of Business. Registrant is a holding company --------------------------------- organized and existing under the laws of the State of Delaware. Until August 1, 1987, Registrant's life insurance business was its principal source of revenue. Life directly writes individual life insurance policies consisting primarily of ordinary whole life, term life, interest sensitive whole life and universal life products. Life maintains an agency force in Alabama, Georgia and Mississippi.
(i) Life offers several different types of whole life and term insurance products. As of December 31, 1996, Life had in excess of $9.4 billion of life insurance in force. As of December 31, for each year indicated the Company had insurance in force as follows:
I-1
The following table shows Life's premiums and policy charges by type of policy and life insurance operating income for the years ended December 31, 1996, 1995, and 1994:
Life generally reinsures all life insurance risks in excess of $200,000 on any one life. The purpose of this is to limit the liability of Life with respect to any one risk and afford it a greater diversification of its exposure. When Life reinsures a portion of its risk it must cede the premium income to the company who reinsures the risk, thereby decreasing the income of Registrant.
Life performs various underwriting procedures and blood testing for AIDS and other diseases before issuance of insurance.
In addition to the income from premiums of life insurance contracts, Life's income is directly affected by its investment income or loss from its investment portfolio. The capital and reserves of the Registrant are invested in assets comprising its investment portfolio. The insurance laws prescribe the nature and quality of investments that may be made, and included in its investment portfolio are qualified state, municipal and federal obligations, high quality corporate bonds and stocks, mortgage backed securities, mortgages and certain other assets.
Property and Casualty Insurance. Registrant's two property and -------------------------------- casualty subsidiaries, Alfa Insurance Corporation and Alfa General Insurance Corporation, are direct writers of preferred and standard risk property and casualty insurance in Georgia and Mississippi. Registrant's business is predominantly in personal, rather than commercial lines, including automobile, homeowner and fire insurance and similar policies. These companies also write limited commercial lines (church and business owner's insurance). Registrant also assumes property and liability insurance written in Alabama through the pooling agreement.
I-2
The following table sets forth the components of property and casualty insurance earned premiums, net underwriting income, underwriting margin and operating income for the years ended December 31, 1996, 1995 and 1994 including the business written through the property and casualty pooling agreement:
Pooling Agreement. Effective August 1, 1987, the Company entered into ----------------- a property and casualty insurance Pooling Agreement (the "Pooling Agreement") with Alfa Mutual Insurance Company (Mutual), and other members of the Mutual Group. The Mutual Group is a direct writer primarily of personal lines of property and casualty insurance in Alabama. The Company's subsidiaries similarly are direct writers in Georgia and Mississippi. Both the Mutual Group and the Company write preferred risk automobile, homeowner, farmowner and mobile home insurance, fire and allied lines, standard risk automobile and homeowner insurance, and a limited amount of commercial insurance, including church, and businessowner insurance. Under the terms of the Pooling Agreement, the Company cedes to Mutual all of its property and casualty business. All of the Mutual Group's direct property and casualty business (together with the property and casualty business ceded by the Company) is included in the pool. Until September 30, 1994, Mutual retroceded 50% of the pooled premiums, losses, loss adjustment expenses and other underwriting expenses to the Company while retaining 50% of these amounts itself. On October 1, 1994, the Company increased its participation in the Pooling Agreement. Mutual currently retrocedes 65% of the pool to the Company and retains 35% within the Mutual Group. On October 1, 1996, the Pooling Agreement was amended in conjunction with the restructuring of the Alfa Insurance Group's catastrophe protection program. Effective November 1, 1996, the allocation of catastrophe costs among the members of the pool was changed to better reflect the economics of catastrophe finance. The amendment limits Alfa Corporation's participation in any single catastrophic event or series of disasters to its pool share (65%) of $10 million unless the loss exceeds $249 million on a 100% basis in which case the Company's share in the loss would be based upon its amount of surplus relative to the other members of the group. Currently, the Company's share of losses exceeding $249 million would be 13%. The change will allow the catastrophe reinsurance buying decision to be made on a group basis which will benefit each member of the group. The Company's participation in the Pooling Agreement may be changed or terminated without the consent or approval of the Company's shareholders, and the Pooling Agreement may be terminated by any party thereto upon 90 days notice.
The Boards of Directors of the Mutual Group and of the Registrant's property and casualty insurance subsidiaries have established the pool participation percentages and must approve any changes in such participation. The Alabama Insurance Department reviewed the Pooling Agreement and determined that its implementation did not require its approval.
I-3
A committee consisting of two members of the Boards of Directors of the Mutual Group, two members of the Board of Directors of the Registrant and Goodwin Myrick, as chairman of each such Board, has been established to review and approve any changes in the Pooling Agreement. The committee is responsible for matters involving actual or potential conflicts of interest between the Registrant and the Mutual Group and for attempting to ensure that, in operation, the Pooling Agreement is equitable to all parties. Conflicts in geographic markets are currently minimal because the Mutual Group writes property and casualty insurance only in Alabama and at present all of such insurance written by the Registrant is outside of Alabama. The Pooling Agreement is intended to reduce conflicts which could arise in the selection of risks to be insured by the participants by making the results of each participant's operations dependent on the results of all of the Pooled Business. Accordingly, the participants should have substantially identical direct underwriting ratios for the Pooled Business as long as the Pooling Agreement remains in effect.
The participation of Registrant in the Pooling Agreement may be changed or terminated without the consent or approval of the shareholders, and the Pooling Agreement may be terminated by any party thereto upon 90 days notice. Any such termination, or a change in Registrant's allocated share of the Pooled Business, inclusion of riskier business or certain types of reinsurance assumed in the pool, or other changes to the Pooling Agreement, could have a material adverse impact on Registrant's earnings. Participants' respective abilities to share in the Pooled Business are subject to regulatory capital requirements.
Relationship with Mutual Group. The Registrant's business and ------------------------------ operations are substantially integrated with and dependent upon the management, personnel and facilities of Mutual. Under a Management and Operating Agreement with Mutual all management personnel are provided by Mutual and Registrant reimburses Mutual for field office expenses and operations services rendered by Mutual in the areas of advertising, sales administration, underwriting, legal, sales, claims, management, accounting, securities and investment, and other services rendered by Mutual to Registrant.
Mutual periodically conducts time usage and related expense allocation studies. Mutual charges Registrant for its allocable and directly attributable salaries and other expenses, including office facilities in Montgomery, Alabama.
The Board of Directors of Registrant consisted at year end of eleven members, six of whom serve on the Executive Committee of the Boards of the Mutual Group and two of whom are Executive Officers of Registrant.
Mutual owns 16,201,538 shares, or 39.72%, and Alfa Mutual Fire Insurance Company owns 4,515,286 shares, or 11.07%, of Registrant's Outstanding Common Stock.
Other Business - --------------
Registrant operates five other subsidiaries which are not considered to be significant by SEC Regulations. These subsidiaries are Alfa Financial Corporation (AFC), a lending institution, Alfa Investment Corporation, a real estate investment business and its wholly owned subsidiary, Alfa Builders, Inc., a construction company, Alfa Realty, Inc., a real estate sales agency, and Alfa Agency Mississippi, Inc.
AFC is a lending institution engaged principally in making consumer loans. These loans are available through substantially all agency offices of Registrant.
I-4
Alfa Investment Corporation is a Florida corporation engaged in the real estate investment business. Alfa Builders, Inc. is engaged in the construction business in Alabama and is also engaged in real estate investments.
Alfa Realty, Inc., is engaged in the business of listing and selling real estate in the Montgomery and Autauga County, Alabama, areas.
Alfa Agency Mississippi Inc. places substandard insurance risks with third party insurers for a commission.
(ii) - (ix). Not applicable.
(x) Both the life and property and casualty insurance businesses are highly competitive. There are numerous insurance companies in Registrant's area of operation and throughout the United States. Many of the companies which are in direct competition with the Registrant have been in business for a much longer period of time, have a larger volume of business, offer a more diversified line of insurance coverage, and have greater financial resources than Registrant. In its life and property and casualty insurance businesses, Registrant competes with other insurers in the sale of insurance products to consumers and the recruitment and retention of qualified agents. Registrant believes that the main competitive factors in its business are price, name recognition and service. Registrant believes that it competes effectively in these areas in Alabama. In Georgia and Mississippi, however, the Registrant's name is not as well recognized.
Registrant's insurance subsidiaries are subject to licensing and supervision by the governmental agencies in the jurisdictions in which they do business. The nature and extent of such regulation varies, but generally has its source in State Statutes which delegate regulatory, supervisory and administrative powers to State Insurance Commissioners. Such regulation, supervision and administration relate, among other things, to standards of solvency which must be met and maintained, licensing of the companies and the benefit of policyholders, periodic examination of the affairs and financial condition of the Registrant, annual and other reports required to be filed on the financial condition and operation of the Registrant. Life insurance rates are generally not subject to prior regulatory approval. Rates of property and casualty insurance are subject to regulation and approval of regulatory authorities.
The Mutual Group and Registrant's insurance subsidiaries are subject to the Alabama Insurance Holding Company Systems Regulatory Act and are subject to reporting to the Alabama Insurance Department and to periodic examination of their transactions and regulation under the Act with Mutual being considered the controlling party.
(xi-xii) Not applicable.
(xiii) The Registrant has no management or operational employees. Registrant and its subsidiaries have a Management and Operating Agreement with Mutual whereby Registrant and its subsidiaries reimburse Mutual for salaries and expenses of employees provided to Registrant under the Agreement. Involved are employees in the areas of Life Underwriting, Life Processing, Accounting, Sales, Administration, Legal, Files, Data Processing, Programming, Research, Policy Issuing, Claims, Investments, and Management. At December 31, 1996, Registrant was represented by 474 agents in Alabama who are employees of Mutual. Registrant's property and casualty subsidiaries had 113 independent exclusive agents in Georgia and Mississippi at December 31, 1996.
I-5
Item 2.

Item 2. Properties. ----------
(a) Physical Properties of Registrant and Its Subsidiaries. The ------------------------------------------------------- Registrant leases it home office facilities in Montgomery, Alabama,from Mutual.
Registrant and its subsidiaries own several investment properties, none of which are material to Registrant's business.
(b) Oil and Gas Operations. Not applicable. ----------------------
Item 3.

Item 3. Legal Proceedings. -----------------
Various legal proceedings arising in the normal course of business with policyholders and agents are in process at December 31, 1996. These legal proceedings involve alleged breaches of contract, torts, including bad faith and fraud claims based on alleged wrongful or fraudulent acts of agents and miscellaneous other causes of action. Many of these lawsuits involve claims for punitive damages. The likelihood or extent of a punitive damage award in any one of these given cases is not possible to predict. Although the Alfa Insurance Group including Alfa Corporation and its subsidiaries have such legal proceedings filed against it in which punitive damages are sought, to date, no such lawsuit has resulted in the award of any significant amount of damages against the Company. Based upon information presently available, applicable law and the defenses available to Alfa Corporation and its subsidiaries, management does not consider the contingent liabilities which might arise from pending litigation to be material in relation to the financial position, result of operations, or cash flows of the Company. Management's opinion is based upon the company's experience in dealing with such claims and the historical results of such claims against the Company. However, it should be noted that in Alabama, where the company has substantial business, the frequency of large punitive damage awards, bearing little or no relation to the actual damages awarded by juries, continues to exist, creating the potential for unpredictable material adverse judgements in any given suit.
Item 4.

Item 4. Submission of Matters to Vote of Security Holders. -------------------------------------------------
Not applicable.
Executive Officers of the Registrant: - ------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following is included as an unnumbered item in part I of this report in lieu of being included in the proxy statement for the annual meeting of stockholders to be held April 24, 1997.
I-6
The following is a list of name and ages of all of the executive officers of the Registrant indicating all positions and offices with the Registrant held by such person and each such person's principal occupation or employment during the past five years. No person other than those listed below has been chosen to become an executive officer of the Registrant.
I-7
Part II -------
Item 5.

Item 5. Market for Registrant's Common Stock and Related Security Holder ---------------------------------------------------------------- Matters. --------
The "Stockholder Information" section on the Inside Back Cover of Registrant's annual report to security holders for the fiscal year ended December 31, 1996, is incorporated herein by reference.
Item 6.

Item 6. Selected Financial Data. ------------------------
The "Selected Financial Data" section on pages 6 and 7 of the Registrant's annual report to security holders for the year ended December 31, 1996, is incorporated herein by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations. --------------
The "Management's Discussion and Analysis" section on pages 14 through 20 of the Registrant's annual report to security holders for the fiscal year ended December 31, 1996, is incorporated herein by reference.
Item 8.

Item 8. Financial Statements and Supplementary Data. --------------------------------------------
The Financial Statements on pages 21 through 40 of the Registrant's annual report to security holders for the fiscal year ended December 31, 1996, are incorporated herein by reference.
Item 9.

Item 10. Directors and Executive Officers of the Registrant. --------------------------------------------------
For information with respect to the Executive Officers of the Registrant see Executive Officers of the Registrant at the end of Part I of this Report. For information with respect to the Directors of the Registrant, see Election of Directors on Page 2 of the Proxy statement for the annual meeting of stockholders to be held April 24, 1997 which is incorporated herein by reference.
Item 11.

Item 11. Executive Compensation. ----------------------
The information set forth under the caption "Executive Compensation" on Page 6 of the Proxy Statement for the annual meeting of stockholders to be held April 24, 1997, except for the report of the Compensation Committee and Performance Graph, is incorporated herein by reference.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------
The information appearing on Pages 2 through 4 of the Proxy Statement for the annual meeting of stockholders to be held April 24, 1997, relating to the security ownership of certain beneficial owners and management is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions. ----------------------------------------------
The information set forth under the caption "Executive Compensation" on Page 6 of the Proxy Statement for the annual meeting of stockholders to be held April 24, 1997, is incorporated herein by reference.
III-1
Part IV -------
Item 14.

Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8-K. ------------------------------------------------------------
(a) The following documents are filed as part of this report: 1. Financial Statements. --------------------
Report of Independent Certified Public Accountants for 1996, 1995, and 1994.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the three years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the three years ended December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Selected Quarterly Financial Data.
2. Financial Statement Schedules. -----------------------------
Included in Part IV of this report:
IV-1
Schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable.
3. Exhibits. --------
Exhibit (3) - Articles of Incorporation and By- Laws of the Registrant are incorporated by reference from Registrant's 10-K for the year ended December 31, 1987.
Exhibit (10(a)) Amendment No. 2 to Management and Operating Agreement effective January 1, 1992 is incorporated by reference from Registrant's 10-K for the year ended December 31, 1992.
(10(b)) Insurance Pooling Agreement is incorporated by reference from registrant's 10-K for the year ended December 31, 1987.
Exhibit (13) Registrant's Annual Report to Security Holders for the fiscal year ended December 31, 1996. Such report, except for the portions incorporated herein by reference, is furnished to the Commission for information only and is not deemed filed as part of this report.
Exhibit (19) Employee Stock Purchase Plan and 1993 Stock Incentive Plan are incorporated by reference from registrant's 10-K for the year ended December 31, 1993.
Exhibit (23) Consents of Independent Accountants
(b) Reports on Form 8-K. -------------------
An 8-K report was filed on February 19, 1997 reporting the retirement of Phil Richardson effective April 1, 1997 and the promotion of Ken Wallis to the position of Executive Vice President, Operations and Assistant to the President.
IV-2
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors Alfa Corporation Montgomery, Alabama:
We have audited the accompanying consolidated balance sheets of Alfa Corporation and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alfa Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
Our audits for the years ended December 31, 1996 and 1995, were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedules I through V for the years ended December 31, 1996 and 1995, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole for the years ended December 31, 1996 and 1995.
KPMG Peat Marwick LLP
Birmingham, Alabama February 4, 1997
IV-3(a)
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors Alfa Corporation Montgomery, Alabama
We have audited the consolidated financial statements and the financial statement schedules of Alfa Corporation and subsidiaries (The Company) for the year ended December 31, 1994 as listed in the index on page IV-1 of this Form 10-K. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial statement schedules referred to above present fairly, in all material respects, the results of Alfa Corporation and its subsidiaries operations and its cash flows for the year ended December 31, 1994 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Birmingham, Alabama February 2, 1995
IV-3(b)
ALFA CORPORATION AND SUBSIDIARIES SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES FOR THE YEAR ENDED DECEMBER 31, 1996
------------
IV-4
ALFA CORPORATION (PARENT COMPANY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS DECEMBER 31, 1996 AND 1995
-----------
IV-5
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-------------
IV-6
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
IV-7
ALFA CORPORATION SCHEDULE III - SUPPLEMENTAL INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
IV-8
ALFA CORPORATION AND SUBSIDIARIES SCHEDULE IV - REINSURANCE FOR YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
*These amounts are subject to the pooling agreement.
IV-9
ALFA CORPORATION AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
IV-10
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ALFA CORPORATION
BY /S/ --------------------------- Goodwin L. Myrick President
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Chairman of the Board Director and Principal /s/ Executive Officer March 31, 1997 - ----------------------------- -------------------- (Goodwin L. Myrick) (Date)
Senior Vice President Finance, (Principal /s/ Financial Officer) March 31, 1997 - ----------------------------- -------------------- (Donald Price) (Date)
Vice President and Controller (Principal /s/ Accounting Officer) March 31, 1997 - ----------------------------- -------------------- (John D. Holley) (Date)
/s/ Director March 31, 1997 - ----------------------------- -------------------- (Jerry A. Newby) (Date)
/s/ Director March 31, 1997 - ----------------------------- -------------------- (James E. Mobley) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (James A. Tolar, Jr.) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (John W. Morris) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (Milborn N. Chesser) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (James I. Harrison, Jr.) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (Young J. Boozer) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (John R. Thomas) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (B. Phil Richardson) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (Boyd E. Christenberry) (Date)
/s/ Director March 31, 1997 - ------------------------------ -------------- (Ken Wallis) (Date)