Bay State Gas reports record earnings for fiscal 1996.

WESTBOROUGH, Mass.--(BUSINESS WIRE)--Oct. 24, 1996--Bay State Gas Company (NYSE:BGC) is announcing record earnings of $2.00 per share for the fiscal year ended September 30, 1996, compared to $1.71 per share reported one year ago.

Earnings per share increased 17% ($0.29), primarily due to colder weather, sales growth, and income from our investment in MASSPOWER. These increases were offset somewhat by operating expenses, primarily payroll, outside services, and property taxes.

"We're extremely pleased to report record earnings during a year in which we successfully completed a major corporate restructuring that positions Bay State for growth in the deregulated competitive energy industry of the future," said Bay State president and chief operating officer, Joel L. Singer.

For the quarter ended September 30, the company reported a loss of $0.60 per share, compared to a loss of $0.48 per share for the year-ago period. The major reason for the $0.12 increase in the quarterly loss was an increase in operating expenses. Losses during the quarters ending June and September are typical for natural gas distribution companies, due to the seasonal decline in demand for natural gas heating.

More than 6,400 Bay State Customers Enroll in Residential Natural Gas Pilot Program

More than 6,400 of Bay State's Western Massachusetts customers chose to participate in the company's residential natural gas pilot program, Pioneer Valley Customer Choice, during the two-month enrollment period ending October 1. This pilot is the first of its kind in New England, and one of the largest and most aggressive natural gas pilot programs in the country. Participating customers will have the opportunity to purchase their own natural gas directly from independent marketers for the first time ever, beginning in November, while continuing to rely on Bay State to deliver the natural gas to their homes.

"We're enthusiastic about the response we received to our pilot program," Singer said, "both from marketers and residential customers." Participating customers will be purchasing natural gas directly from among nine participating marketers: NorAm Energy Management; Broad Street/EnergyOne; Green Mountain Energy Partners LLC; KBC Energy Services; WEPCO Gas; National Fuel Resources, Inc.; Western Gas Resources, Inc.; AllEnergy Marketing Company, Inc.; and Total/Louis Dreyfus Energy Services LLC. According to Bay State, the top four marketers enrolled approximately 75% of the pilot participants.

"Customers participating in the pilot will be purchasing gas under a variety of different pricing options offered by different marketers. Pilot participants are expected to realize approximately 5%-10% savings on their total gas bill," Singer continued.

"For Bay State, the pilot represents a 'learning laboratory' in which the company will learn how to operate in a deregulated, unbundled operating environment. Through the pilot, we're learning to work together with marketers as 'trade allies' to expand use of natural gas in our service territories. Given the success of the pilot so far, we are anxious to look for opportunities to expand the program to other customers on our system," he added.

According to Singer, marketers will be offering customers not only competitively priced energy in the future, but also a wide variety of energy-related products and services.

Comprehensive Program Announced for Staff Reductions

Bay State recognizes the importance of aggressively managing its costs and restructuring the company to compete in a deregulated operating environment. As announced earlier this month, the company plans to reduce its clerical and professional workforce by approximately 70 positions (12.5% of clerical/professional staff) this coming year. Bay State expects to accomplish these reductions through early retirement and enhanced severance programs.

According to Singer, the company is also developing a new 'Learning Network' that will provide all employees with access to a wide range of resources for skill development, career transition, retraining, and outplacement to assist them with career and personal transitions.

"The company expects to defer approximately $7.5 million in related early retirement, severance, and outplacement program costs, subject to regulatory approval," Singer said. "Once fully implemented, these workforce reductions should result in annual operating savings of $4.8 million."

Employee-led teams have developed plans for reorganizing business processes, improving process efficiencies, and investing in new technology to further reduce costs. Plans include the introduction of new technologies such as a mobile customer-service data system, an automated mapping system, and an Integrated Voice Response (IVR) phone system, which are expected to cost approximately $3.5 million.

Movement Expected Toward Performance Based Rates

As deregulation accelerates changes throughout the retail utility industry during the upcoming years and increases the importance of cost management, Bay State will support regulatory changes that enable its shareholders and customers to share in the benefits of the company's continued productivity and efficiency efforts. Bay State has begun to prepare a performance based rate proposal, which it intends to make prior to May 1997.

According to Singer, the company's aggressive cost management strategy has enabled it to avoid frequent rate increases as a primary means of growing revenues. Bay State has increased earnings primarily through customer growth, and has filed only two rate increases in the past 12 years. This long-standing focus on cost control should enable Bay State to adapt quickly to a deregulated operating environment where cost containment will become increasingly important to its success.

New Hampshire Regulators Approve Step Adjustment

Bay State's subsidiary, Northern Utilities, Inc., reached a settlement with the New Hampshire Public Utilities Commission (NHPUC) staff for a $193,000 step adjustment, its fifth such request since 1992. As Northern Utilities invests capital to maintain the integrity and reliability of its distribution system, step adjustments allow recovery of certain associated nonrevenue-producing costs without the expense and delay of conventional rate cases. Including the step adjustment expected next week, the company's New Hampshire utility operation has recovered $1.3 million for system enhancements since its first step adjustment was approved in 1992.

Granite State Files Rate Increase

Bay State's Granite State Gas Transmission, Inc. pipeline affiliate filed for a $3.7 million rate increase this month with the Federal Energy Regulatory Commission, which will improve the Company's cash flow. This increase is due primarily to the additional cost of extending the company's lease of the Portland Gas Pipeline for another year, through April 1998. Granite State expects approved rates to become effective on April 1, 1997.

Plans Continue for Proposed PNGTS Pipeline and Wells LNG Project

Bay State continues to participate in the development of the Portland Natural Gas Transmission System (PNGTS), a proposed 224-mile pipeline to be built from the U.S./Canada border near Beecher Falls, Vermont to Haverhill, Mass. The international consortium formed to sponsor PNGTS, of which a Bay State affiliate is a member, formed an independent operating company this month, PNGTS Operating Co., LLC. Other consortium members include affiliates of Gaz Metropolitain, Tenneco Energy, TransCanada PipeLines, MCN Investment Corporation, and U.S. Generating Company. PNGTS is expected to be in service in November, 1998.

Another major energy initiative, Wells LNG, received state environmental permits from the Maine Board of Environmental Protection this summer. Utility regulators in Maine and New Hampshire had previously approved the agreement between Northern Utilities and Granite State for service from the Wells facility. Due to a request by the Federal Energy Regulatory Commission last month for a more intensive site analysis, completion of the site is expected to be delayed by one year to 1999.

FINANCIAL HIGHLIGHTS

                                       1996                1995

                       (In thousands except per-share amounts.)

Three Months

Operating revenues                 $ 46,989           $  48,870
Net loss                          $  (7,992)          $  (6,435)
Loss per average common share     $   (0.60)          $   (0.48)
Avg. number of common shares
   outstanding                       13,417              13,351


Twelve Months

Operating revenues                 $428,784            $418,118
Net income                         $ 27,072            $ 23,128
Earnings per average common share  $   2.00            $   1.71
Avg. number of common shares
   outstanding                       13,397              13,342

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Bay State Gas Company operates in three energy-related business segments -- Local Transportation, Energy Products & Services, and Energy Ventures. Bay State's Local Transportation business serves almost 300,000 natural gas customers in New England, and geographically, is the largest gas utility in New England, serving the states of Massachusetts, New Hampshire, and Maine. The company's nonregulated Energy Products & Services segment offers energy commodities and related equipment and services to approximately 88,000 customers throughout New England under the brand name, "EnergyUSA." Bay State's Energy Ventures segment develops businesses and projects which are closely related to the company's core businesses. Additional information about Bay State is available on the World Wide Web at "http://www.bgc.com/bgc/."

This release contains 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. Factors include, but are not limited to, the regulatory environment, customers' preferences, unforeseen competition, and other uncertainties, all of which are difficult to predict, and many of which are beyond the control of the company.

CONTACT: Bay State Gas Company

Carol Churchill, 508/836-7370