FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
/ x / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-35965
NORTH SHORE GAS COMPANY
(Exact name of registrant as specified in its charter)
Illinois 36-1558720
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
122 South Michigan Avenue, Chicago, Illinois 60603
(Address of principal executive offices) (Zip Code)
(312) 431-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes / x / No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
3,625,887 shares of Common Stock, without par value, outstanding at
July 31, 1994.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30,
---------------- ----------------- -----------------
1994 1993 1994 1993 1994 1993
------ ------ ------ ------ ------ ------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $23,658 $25,489 $146,247 $132,813 $160,868 $145,271
Transportation of customer-
owned gas 2,371 2,305 9,118 9,833 11,036 11,823
Other 350 292 842 800 1,083 1,023
------- ------ ------- ------- ------- -------
Total Operating Revenues 26,379 28,086 156,207 143,446 172,987 158,117
------- ------ ------- ------- ------- -------
OPERATING EXPENSES:
Gas costs 14,232 15,355 98,529 85,623 106,706 91,724
Operation 5,686 5,808 17,300 18,599 22,865 24,934
Maintenance 795 770 2,202 2,218 3,255 3,037
Depreciation 1,744 1,601 5,052 4,655 6,589 5,760
Taxes - Income 100 59 6,414 5,984 5,218 4,823
- State & local revenue 1,703 1,954 10,068 9,626 11,064 10,550
- Other 318 532 1,416 1,640 1,958 2,193
------ ------ ------- ------- ------- -------
Total Operating Expenses 24,578 26,079 140,981 128,345 157,655 143,021
------ ------ ------- ------- ------- -------
OPERATING INCOME 1,801 2,007 15,226 15,101 15,332 15,096
------ ------ ------- ------- ------- -------
OTHER INCOME:
Interest income 200 223 251 558 355 599
Miscellaneous 113 81 1,447 277 1,502 296
------ ------ ------- ------- ------- -------
Total Other Income 313 304 1,698 835 1,857 895
------ ------ ------- ------- ------- -------
GROSS INCOME 2,114 2,311 16,924 15,936 17,189 15,991
------ ------ ------- ------- ------- -------
INCOME DEDUCTIONS:
Interest on long-term debt 1,544 1,743 4,661 4,953 6,315 6,294
Other interest 27 21 290 448 323 572
Amortization of debt discount
and expense 30 30 91 82 120 99
Miscellaneous 5 -- 16 24 21 26
------ ------ ------ ------ ------- -------
Total Income Deductions 1,606 1,794 5,058 5,507 6,779 6,991
------ ------ ------ ------ ------- -------
NET INCOME APPLICABLE TO
COMMON STOCK $ 508 $ 517 $ 11,866 $ 10,429 $ 10,410 $ 9,000
------ ------ ------- ------- ------- -------
------ ------ ------- ------- ------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1994 September 30, 1993
(Unaudited) 1993 (Unaudited)
----------- ----------- -----------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS
Property, plant and equipment,
at original cost $255,001 $248,580 $239,986
Less - Accumulated depreciation 79,209 75,110 74,577
------- ------- -------
Net property, plant and equipment 175,792 173,470 165,409
Gas supply advances and investments 115 117 121
------- ------- -------
TOTAL CAPITAL INVESTMENTS - NET 175,907 173,587 165,530
------- ------- -------
CURRENT ASSETS
Cash 463 472 2,139
Cash equivalents 18,500 -- 3,150
Trust fund, utility construction -- 4,243 13,788
Receivables -
Customers, net of allowance for
uncollectible accounts of $980,
$855, and $902, respectively 10,396 5,836 9,600
Other 1,595 3,835 1,625
Accrued unbilled revenues 1,780 3,839 2,005
Materials and supplies, at average cost 2,114 1,979 2,638
Gas in storage, at last-in, first-out cost 17,188 25,351 15,906
Gas costs recoverable through rate adjustments 2,721 8,479 9,581
Prepayments 516 397 574
------- ------- -------
TOTAL CURRENT ASSETS 55,273 54,431 61,006
------- ------- -------
DEFERRED CHARGES 12,302 7,413 6,846
------- ------- -------
TOTAL PROPERTIES AND OTHER ASSETS $243,482 $235,431 $233,382
------- ------- -------
------- ------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, June 30,
1994 September 30, 1993
(Unaudited) 1993 (Unaudited)
----------- ---------- -----------
(Thousands, except share data)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stockholder's Equity:
Common stock, without par value
Authorized - 5,000,000 shares
Outstanding - 3,625,887 shares $ 24,757 $ 24,757 $ 24,757
Retained earnings 62,224 55,652 58,667
------- ------- -------
Total Common Stockholder's Equity 86,981 80,409 83,424
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 76,925 80,925 80,925
------- ------- -------
TOTAL CAPITALIZATION 163,906 161,334 164,349
------- ------- -------
CURRENT LIABILITIES
Interim loans -- 5,400 --
Accounts payable 18,300 16,296 14,548
Dividends payable on common stock 1,668 1,559 1,958
Customer gas service and credit deposits 1,991 4,583 2,020
Sinking fund payments and maturities
due within one year -
Long-term debt 4,000 4,000 4,000
Accrued taxes 3,234 3,013 5,657
Gas sales revenue refundable through
rate adjustments 9,230 958 1,031
Accrued interest 1,190 2,100 1,249
Temporary LIFO liquidation credit 2,924 -- 6,721
------- ------- -------
TOTAL CURRENT LIABILITIES 42,537 37,909 37,184
------- ------- -------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 16,905 14,184 12,523
Investment tax credits being amortized
over the average lives of related property 4,092 4,197 4,216
Other 16,042 17,807 15,110
------- ------- -------
TOTAL RESERVES AND DEFERRED CREDITS 37,039 36,188 31,849
------- ------- -------
TOTAL CAPITALIZATION AND LIABILITIES $243,482 $235,431 $233,382
------- ------- -------
------- ------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
------------------
1994 1993
------ ------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $11,866 $10,429
Adjustments to reconcile net income to net cash:
Depreciation 5,052 4,655
Deferred income taxes and investment tax credits - net 757 (499)
Change in other deferred credits and reserves 94 (186)
Change in deferred charges (4,889) 172
Other 2 4
------ ------
12,882 14,575
Change in certain current assets and liabilities:
Receivables - net (2,320) (6,127)
Accrued unbilled revenues 2,059 1,066
Materials and supplies (135) (595)
Gas in storage 8,163 9,465
Rate adjustments recoverable or refundable 14,030 (4,502)
Accounts payable 2,004 2,538
Customer gas service and credit deposits (2,592) (2,887)
Accrued taxes 221 4,859
Accrued interest (910) (636)
Temporary LIFO liquidation credit 2,924 6,721
Other (119) (171)
------- ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,207 24,306
------- ------
INVESTING ACTIVITIES:
Capital expenditures - construction (7,770) (13,079)
Other assets 396 147
------- -------
NET CASH USED IN INVESTING ACTIVITIES (7,374) (12,932)
------- -------
FINANCING ACTIVITIES:
Interim loans - net (5,400) (20,000)
Issuance of long-term debt -- 40,000
Trust fund, utility construction 4,243 (13,788)
Retirement of long-term debt (4,000) (11,566)
Dividends paid on common stock (5,185) (3,916)
------ ------
NET CASH USED IN FINANCING ACTIVITIES (10,342) (9,270)
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 18,491 2,104
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 472 3,185
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,963 $ 5,289
------ ------
------ ------
<FN>
( ) Denotes red figure.
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
PART I. FINANCIAL INFORMATION (Continued)
June 30, 1994
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared by North Shore Gas Company (Company) in conformity with
the rules and regulations of the Securities and Exchange
Commission (SEC) and reflect all adjustments that are, in the
opinion of management, necessary to present fairly the results
for the interim periods herein and to prevent the information
from being misleading.
Certain footnote disclosures and other information, normally
included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted from these interim financial statements, pursuant to SEC
rules and regulations. Therefore, the statements should be read
in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1993.
The business of the Company is influenced by seasonal
weather conditions because a large element of the Company's
customer load consists of gas used for space heating.
Weather-related deliveries can, therefore, have a significant
positive or negative impact on net income. Accordingly, the
results of operations for the interim periods presented are not
indicative of the results to be expected for all or any part of
the balance of the current fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
2(a) Revenue Recognition
Gas sales revenues for retail customers are recorded on
the accrual basis for all gas delivered during the month,
including an estimate for gas delivered but unbilled at the
end of each month.
2(b) Statement of Cash Flows
For purposes of the balance sheet and the statement of
cash flows, the Company considers all short-term liquid
investments with maturities of three months or less to be
cash equivalents.
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
2(b) Statement of Cash Flows (Continued)
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<TABLE>
<CAPTION>
For the nine months
ended June 30, 1994 1993
----------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $5,902 $3,145
Interest paid 5,803 5,977
</TABLE>
2(c) Income Taxes
In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred
income taxes required by the Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income
Taxes." Under the liability method, deferred income taxes
have been recorded using currently enacted tax rates for
the differences between the tax basis of assets and
liabilities and the basis reported in the financial
statements. Due to the effects of regulation on the
Company, certain adjustments made to deferred income taxes
to reflect the adoption of SFAS No. 109 are, in turn,
debited or credited to regulatory assets or liabilities.
Such adjustments had no material impact on financial
position or results of operations of the Company.
2(d) Recovery of Gas Costs, Including Charges for Take-or-Pay and
Transition Costs
Under the tariffs of the Company, the difference for any
fiscal year between costs recoverable through the Gas
Charge and revenues billed to customers under the Gas
Charge is refunded or recovered over a 12-month billing
cycle beginning the following January 1. Consistent with
these tariff provisions, such difference for any month is
recorded either as a current liability or as a current
asset (with a contra entry to Gas Costs), and the fiscal
year-end balance is amortized over the 12-month period
beginning the following January 1.
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
2(d) Recovery of Gas Costs, Including Charges for Take-or-Pay
and Transition Costs (Continued)
The Illinois Commerce Commission (Commission) conducts
annual proceedings regarding, for each gas utility, the
reconciliation of revenues from the Gas Charge and related
costs incurred for gas. In such proceedings, costs
recovered by a utility through the Gas Charge are subject
to challenge. Such proceedings regarding the Company for
fiscal years 1991 through 1993 are currently pending before
the Commission.
Pursuant to Federal Energy Regulatory Commission (FERC)
Order No. 500, and successor orders, pipelines were allowed
to direct-bill firm sales customers for a portion of
so-called "past" take-or-pay costs. These costs arose from
the settlement of liabilities under agreements between
pipelines and producers whereby pipelines were required to
pay for contracted supplies, whether or not they were
taken. The Company has recovered all take-or-pay charges,
billed by its pipeline supplier, through the Gas Charge.
Although additional recoveries may be required in the
future, any amount is anticipated to be insignificant.
Pursuant to FERC Order No. 636 and successor orders,
pipelines are allowed to recover from their customers
so-called transition costs. These costs arise from the
restructuring of pipeline service obligations required by
the 636 Orders. The Company is currently recovering
pipeline charges for transition costs through an existing
provision of the Gas Charge. The Commission entered an
order on March 9, 1994, providing for the full recovery of
all such charges from customers. (See Notes 4(a) and 4(b).)
3. COVENANTS REGARDING RETAINED EARNINGS
The Company's indenture relating to its first mortgage bonds
contains provisions and covenants restricting the payment of cash
dividends and the purchase or redemption of capital stock. At
June 30, 1994, such restrictions amounted to $11.6 million out of
the Company's total retained earnings of $62.2 million.
4. RATES AND REGULATION
4(a) Utility Rate Proceedings
On September 30, 1992, the Commission issued an order in
its consolidated proceedings, initiated in March 1991,
regarding the appropriate ratemaking treatment of costs
incurred by Illinois utilities, including the Company and
Peoples Gas, in connection with the investigation and
treatment of residues associated with past manufactured gas
operations ("environmental costs"). In its order, the
Commission approved rate recovery of environmental costs
but required that such recovery occur over a five-year
period without recovery of carrying charges on unrecovered
balances. Reimbursements of environmental costs from
insurance carriers or other entities are to be netted
against costs and reflected in rates over a five-year
period. In November 1992, several parties, including the
Company and Peoples Gas, appealed the Commission's order to
the Illinois Appellate Court. On December 29, 1993, the
Third District Appellate Court issued its opinion affirming
the Commission's order in the consolidated proceedings. On
April 6, 1994, the Illinois Supreme Court allowed an appeal
of the Appellate Court's decision. Any change made
pursuant to the Supreme Court's order on appeal would have
a prospective effect only.
On September 15, 1993, the Commission entered an order
initiating an investigation into the appropriate means of
recovery by Illinois gas utilities of pipeline charges for
FERC Order No. 636 transition costs. The Commission issued
a final order in this proceeding on March 9, 1994. The
order provides for the full recovery of transition costs
from the Company's sales customers and transportation
customers to the extent they contract for firm standby
service. The Citizens Utility Board and State's Attorney
of Cook County filed an application for rehearing of the
March 9 order with the Commission. On May 4, 1994, the
Commission granted rehearing, limited to the question of
the allocation of transition costs. (See Notes 2(d) and
4(b).)
4(b) FERC Orders 636, 636-A, and 636-B
On April 8, 1992, the FERC issued Order No. 636, and on
August 3, 1992, the FERC issued Order No. 636-A. On
November 27, 1992, the FERC issued Order No. 636-B, which
substantially confirmed Order Nos. 636 and 636-A. There
are numerous appeals of the 636 Orders pending before the
Federal Circuit Court of Appeal for the D.C. Circuit.
4. RATES AND REGULATION (Continued)
4(b) FERC Orders 636, 636-A, and 636-B (Continued)
The 636 Orders required substantial restructuring of the
service obligations of interstate pipelines. Among other
things, the 636 Orders mandated "unbundling" of existing
pipeline gas sales services. Mandatory unbundling requires
pipelines to sell separately the various components of
their gas sales services (gathering, transportation and
storage services, and gas supply). These components were
previously combined or "bundled" in gas services such as
those purchased by the Company. To address concerns raised
by utilities about reliability of service to their service
territories, the 636 Orders required pipelines to offer a
"no-notice" transportation service under which firm
transporters can receive delivery of gas up to their
contractual capacity level on any day without prior
scheduling. Further, the 636 Orders provided for
mechanisms for pipelines to recover prudently incurred
transition costs associated with the restructuring process.
The FERC initiated individual restructuring proceedings
for each interstate pipeline. Each pipeline submitted a
proposal to bring it into compliance with the requirements
of the 636 Orders. The restructured tariffs of Natural Gas
Pipeline Company of America (Natural), the pipeline serving
the Company, went into effect December 1, 1993. Several
appeals of the orders approving Natural's restructured
tariffs are pending before the Federal Circuit Court of
Appeal for the D.C. Circuit.
As part of the restructuring process, the Company
elected necessary levels of restructured services,
including no-notice services, from the menu of restructured
services offered by Natural. Also during 1993, the Company
took the steps necessary to obtain reliable gas supply as a
replacement for the bundled merchant service supply which
was no longer available from Natural to any significant
extent.
Under the 636 Orders, pipelines must make separate rate
filings to recover transition costs. There are four
categories of such costs, the largest of which for the
Company is gas supply realignment (GSR) costs. The Company
is subject to charges for transition cost recovery by
Natural. Charges for Natural's transition costs commenced
on January 1, 1994. While the total amount of the
transition costs expected to be billed to the Company by
Natural is uncertain at this time, such total amount is
expected to be substantial. The Company is currently
recovering transition costs through the Gas Charge. On
February 1, 1994, Natural filed a Stipulation and Agreement
(S & A) with the FERC addressing GSR costs. On May 12,
1994, the FERC issued an order approving, with
modifications, the S & A. In response to that order,
Natural filed a revised S & A on
4. RATES AND REGULATION (Continued)
4(b) FERC Orders 636, 636-A, and 636-B (Continued)
July 19, 1994. If approved by the FERC, the revised S & A
would place a cap of approximately $25 million on the
amount of GSR costs recoverable by Natural from the
Company.
The 636 Orders are not expected to have a material
adverse effect on financial position or results of
operations of the Company. (See Notes 2(d) and 4(a).)
5. ENVIRONMENTAL MATTERS
5(a) Former Manufactured Gas Plant Sites
The Company, its predecessors, and certain former
affiliates operated facilities in the past for
manufacturing gas and storing manufactured gas. In
connection with manufacturing and storing gas, various
by-products and waste materials were produced, some of
which might have been disposed of on sites where the
facilities were located. Under certain laws and
regulations relating to the protection of the environment,
the Company might be required to undertake remedial action
with respect to some of these materials, if found at the
sites. Two sites in Waukegan, Illinois, are the subjects
of investigations (discussed below) initiated by the United
States Environmental Protection Agency (EPA).
In May 1990, the Company was notified by the EPA that
the EPA had documented the release or threatened release of
hazardous substances, pollutants, and contaminants at a
site located in Waukegan, Illinois, where manufactured gas
and coking operations were formerly conducted (Waukegan I
Site). Also, the Company, General Motors Corporation
(GMC), and Outboard Marine Corporation were notified that
each may be a potentially responsible party (PRP) under the
Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA)
with respect to the Waukegan I Site. A PRP is
potentially liable for the cost of any investigative and/or
remedial work that the EPA determines is necessary.
In September 1990, the Company entered into an
Administrative Order on Consent (AOC) with the EPA and the
Illinois Environmental Protection Agency (IEPA) to
implement and conduct a remedial investigation/feasibility
study (RI/FS) of the Waukegan
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
I Site. The RI/FS is comprised of an investigation to
determine the nature and extent of contamination at the
site and a feasibility study to develop and evaluate
possible remedial actions. Other parties identified as
PRPs did not enter into the AOC. Under the terms of the
AOC, the Company is responsible for the cost of the RI/FS.
The Company believes, however, that it will recover a
significant portion of the costs of the RI/FS from other
entities. GMC has agreed to share equally with the Company
in funding of the RI/FS cost, without prejudice to GMC's or
the Company's right to seek a lesser cost responsibility at
a later date.
In September 1991, the Company, the Elgin, Joliet and
Eastern Railway (EJ&E), and the North Shore Sanitary
District (NSSD) each received an administrative order (AO)
issued by the EPA. The AO directed all three entities to
remove and dispose of all visible free tar in a pit located
within a separate site in Waukegan, Illinois (Waukegan II
Site) and to conduct a study to determine the extent of
contamination of the tar from the pit to the surrounding
property. All of the work under the AO has been completed.
The Company has entered into a settlement agreement with
NSSD with respect to costs incurred under the AO and
intends to recover an appropriate amount of the remaining
costs from EJ&E.
The Company, in cooperation with the IEPA, is
conducting investigations of other sites (a total of three)
to determine whether remedial action might be necessary.
The investigations were initiated pursuant to an informal
request by the IEPA. To the best of the Company's
knowledge, similar informal requests have been made by the
IEPA to other major Illinois gas and electric utilities.
The Company has engaged environmental consulting firms to
assist in the Company's investigations. At this time,
except for the Waukegan I Site (discussion below), it is
not known what, if any, remedial action will be necessary
at the sites or, if necessary, what the cost of any such
action would be.
The Company is accruing and deferring the costs it
incurs in connection with all of the sites, including
related legal expenses, pending recovery through rates or
from insurance carriers or other entities. As of June 30,
1994, the total of the costs deferred by the Company, net
of recoveries and amounts billed to other entities, was
$6.4 million. This amount includes an estimate of the
costs of completing the studies required by the EPA at the
Waukegan I Site and the Waukegan II Site and the
investigations initiated at the request of the IEPA at the
other sites referred to above. The amount also includes an
estimate of the costs of remediation at the Waukegan I
Site, at the minimum amount of the current estimated range
of such costs. The costs of remediation at the other sites
cannot be determined until more is known about the nature
and extent of contamination and the
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
remedial action, if any, to be required by the EPA or the
IEPA. While the Company intends to seek contribution from
other entities for the costs incurred at the sites, the
full extent of such contributions cannot be determined at
this time.
The Company has filed suit against a number of
insurance carriers for the recovery of costs associated
with the investigation and remediation of residues from its
former manufactured gas operations. The suit asks the
court to declare that the insurers are liable under
policies in effect between 1938 and 1985 for costs incurred
or to be incurred by the Company in connection with its
former manufactured gas sites. The Company is also asking
the court to award damages stemming from the insurers'
breach of their contractual obligation to defend and
indemnify the Company against these costs. At this time,
management cannot determine the timing and extent of the
Company's recovery of costs from its insurance carriers.
Accordingly, the costs deferred as of June 30, 1994 have
not been reduced to reflect recoveries from insurance
carriers.
Costs incurred by the Company for environmental
activities relating to the sites of its former manufactured
gas operations will be recovered from insurance carriers or
other entities or through rates for utility service.
Accordingly, management believes that the costs incurred by
the Company in connection with the sites will not have a
material adverse effect on its financial position or
results of operations. The Company is authorized to
recover the costs of environmental activities relating to
its former manufactured gas operations under a rate
mechanism approved by the Commission. As of June 30, 1994,
it had recovered $3.6 million of such costs through rates.
(See Note 4(a) for a discussion of proceedings regarding
the recovery of such costs through utility rates.)
5(b) Denver Site
In February 1994, the Company received a demand from a
responsible party under CERCLA for reimbursement, indemnification
and contribution for response costs incurred at a site in
Denver, Colorado. The demand alleges that the Company is a
successor-in- interest to certain companies that were
allegedly responsible during the period 1934-1941 for the
disposal of mineral processing wastes containing radium and
other hazardous substances at the site. The cost of the
remedy at the site has been estimated to be approximately
$31 million. The Company is in the process of examining
this claim and is currently unable to determine what
liability, if any, it may have for response costs relating
to the site.
6. TAX MATTERS
On September 30, 1993, the Company received notification
from the Internal Revenue Service (IRS) that settlement of past
income tax returns had been reached for fiscal years 1978 through
1990. The IRS settlement resulted in a March 1994 payment of
principal and interest to the Company in total amount of
approximately $3 million, or $2 million after income taxes. The
Company has received regulatory authorization to defer the
recording of the settlement amount in income for fiscal year
1993, and to record its portion of the settlement amount in
income for fiscal years 1994 and 1995. The Company has
represented to the Commission that, having received this
accounting authorization, it will not file a request for an
increase in base rates before December 1994. The regulatory
treatment of the IRS settlement having been resolved in November
1993, the Company included $1.4 million, or about $1 million
after income taxes, in income for that month; the amount after
income taxes is included in Other Income - Miscellaneous. At
June 30, 1994, approximately $2 million is included in Reserves
and Deferred Credits - Other. The Company will amortize its
remaining portion of the settlement amount in income in fiscal
year 1995, the effect of which will be to offset increases in
costs that the utility will incur during that year.
7. ISSUANCE OF BONDS
On March 30, 1993, the Company filed a shelf registration
with the SEC for the issuance of $40 million aggregate principal
amount of first mortgage bonds. On May 13, 1993, the Company
issued a portion of those first mortgage bonds in an aggregate
principal amount of $15 million at 6.37 percent due May 1, 2003.
Proceeds of the offering were used to refund approximately $11
million aggregate principal amount of the Company's previously
issued first mortgage bonds and for general corporate purposes.
The Company expects to issue all or a portion of the remaining
bonds during fiscal 1995 and/or fiscal 1996. Proceeds of the
future offering will be used for general corporate purposes.
8. INTEREST-RATE ADJUSTMENTS
Effective November 1, 1993, the rate of interest on the
Company's Adjustable-Rate Bonds, Series J, was fixed at 8 percent
until maturity, November 1, 2020.
9. RETIREMENT AND OTHER POSTEMPLOYMENT BENEFITS
In December 1990, the Financial Accounting Standards Board
(FASB) issued SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The Company
adopted SFAS No. 106 effective October 1, 1993. SFAS No. 106
requires the accrual of the expected costs of such benefits
during the employees' years of service. The Accumulated
Postretirement Benefit Obligation as of October 1, 1993, was
approximately $8.7 million. The unfunded obligation will be
amortized over 20 years. The cost for fiscal 1994 is
approximately $1.3 million.
Due to expected regulatory treatment, the adoption of SFAS
No. 106 will not have a material effect on financial position or
results of operations.
In November 1992, the FASB issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This statement requires
the accrual of certain benefits provided to former or inactive
employees after employment but before retirement. Adoption of
SFAS No. 112 is required by the Company no later than fiscal
1995. The Company does not expect the adoption of SFAS No. 112
to have a material effect on financial position or results of
operations.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income applicable to common stock decreased $9,000, to
$508,000, for the current three-month period, due primarily to
lower gas deliveries resulting from weather that was 13 percent
warmer than the corresponding period of the prior year.
Net income applicable to common stock increased $1.4
million, to $11.9 million and $1.4 million, to $10.4 million, for
the current nine- and 12-month periods, respectively. Results
for the current nine- and 12-month periods include the recording
of one-half of an IRS settlement, increasing net income by about
$1 million. (See Note 6 of the Notes to Consolidated Financial
Statements.) In addition, both current periods benefited from
weather that was 2 percent colder than the corresponding periods
of the prior year.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended 12 Months Ended
June 30, June 30, June 30,
1994 Over 1993 1994 Over 1993 1994 Over 1993
------------------ ------------------ ----------------
(Thousands of dollars) Amount % Amount % Amount %
- - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues* $(333) (3.1) $(587) (1.2) $(626) (1.1)
Operation and
maintenance expenses (97) (1.5) (1,315) (6.3) (1,851) (6.6)
Depreciation expense 143 8.9 397 8.5 829 14.4
Income taxes 41 69.5 430 7.2 395 8.2
Other income 9 3.0 863 103.4 962 107.5
Income deductions (188) (10.5) (449) (8.2) (212) (3.0)
Net Income Applicable
to Common Stock (9) (1.7) 1,437 13.8 1,410 15.7
<FN>
( ) Denotes red figure.
* Operating revenues, net of gas costs and revenue taxes.
</TABLE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
RESULTS OF OPERATIONS (Continued)
Net Operating Revenues
Gross revenues of the Company have been affected in recent
years by some customers who purchase gas directly from producers
and marketers, rather than from the Company, and also by changes
in the unit cost of the Company's gas purchases. These direct
customer purchases have no effect on net income because the
Company provides transportation service for such gas volumes and
recovers margins similar to those applicable to conventional gas
sales. Changes in the unit cost of gas do not significantly
affect net income because the Company's tariffs provide for
dollar-for-dollar recovery of gas costs. (See Note 2(d) of the
Notes to Consolidated Financial Statements.) The Company's
tariffs also provide for dollar-for-dollar recovery of the cost
of revenue taxes imposed by the State and various municipalities.
Since income is not significantly affected by changes in
revenue from customers' direct gas purchases rather than from the
Company, changes in gas costs, or changes in revenue taxes, the
discussion below pertains to "net operating revenues" (operating
revenues, net of gas costs and revenue taxes). The Company
considers net operating revenues to be a more pertinent measure
of operating results than gross revenues.
Net operating revenues decreased $333,000, to $10.4 million,
$587,000, to $47.6 million, and $626,000, to $55.2 million, for
the current three-, nine-, and 12-month periods, respectively,
due mainly to a reduction of environmental clean-up costs
recovered through rates. The current nine- and 12-month periods
benefited from weather that was 2 percent colder than the weather
in the respective periods of the prior year.
Operation and Maintenance
Operation and maintenance expenses decreased $97,000, to
$6.5 million, $1.3 million, to $19.5 million, and $1.9 million,
to $26.1 million, for the current three, nine-, and 12-month
periods, respectively, due primarily to lower environmental
clean-up costs recovered through rates.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
RESULTS OF OPERATIONS (Continued)
Depreciation Expense
Depreciation expense increased $143,000, to $1.7 million,
$397,000, to $5.1 million, and $829,000, to $6.6 million, for the
current three-, nine-, and 12-month periods, respectively, due
chiefly to depreciable property additions.
Income Taxes
Income taxes increased $41,000, to $100,000, in the current
three-month period, due principally to higher pre-tax income and
decreased adjustments to deferred taxes.
Income taxes (exclusive of the $324,000 included in other
income related to the IRS settlement) increased $430,000, to $6.4
million, in the current nine-month period, due principally to
higher pre-tax income and the federal income tax rate change from
34 percent to 35 percent effective January 1, 1993.
Income taxes (exclusive of the $324,000 included in other
income related to the IRS settlement) increased $395,000, to $5.2
million, in the current 12-month period, due primarily to higher
pre-tax income and the aforementioned tax rate change, offset in
part by adjustments to reduce current taxes accrued.
Other Income
Other income increased $863,000, to $1.7 million and
$962,000, to $1.9 million, in the current nine- and 12-month
periods, respectively, due mainly to recording the IRS settlement
of about $1 million after income taxes (see Note 6 of the Notes
to Consolidated Financial Statements), partially offset by lower
cash balances available for investment.
Income Deductions
Income deductions decreased $188,000, to $1.6 million and
$449,000, to $5.1 million, for the current three- and nine-month
periods, due mainly to reduced interest on long-term debt. In
addition, the current nine-month period includes reduced interest
on interim loans.
Income deductions decreased $212,000, to $6.8 million, for
the current 12-month period, due primarily to lower interest on
interim loans, amounts refundable to customers, gas bill credit
deposits, and budget accounts.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
RESULTS OF OPERATIONS (Continued)
Other Matters
Weather variations affect the volumes of gas delivered for
heating purposes and, therefore, can have a significant positive
or negative impact on net income.
On September 30, 1993, the Company received notification
from the IRS that settlement of past income tax returns had been
reached for fiscal years 1978 through 1990. The IRS settlement
resulted in a March 1994 payment of principal and interest to the
Company in total amount of approximately $3 million, or $2
million after income taxes. (See Note 6 of the Notes to
Consolidated Financial Statements.)
In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred income
taxes required by SFAS No. 109. (See Note 2(c) of the Notes to
Consolidated Financial Statements.)
In November 1992, the FASB issued SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." This statement requires
the accrual of certain benefits provided to former or inactive
employees after employment but before retirement. SFAS No. 112
requires adoption by the Company no later than fiscal 1995. (See
Note 9 of the Notes to Consolidated Financial Statements.)
Effective October 1, 1993, the Company adopted SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." This statement requires the accrual of the expected
costs of such benefits during the employees' years of service.
(See Note 9 of the Notes to Consolidated Financial Statements.)
In 1992, the FERC issued Order No. 636 and successor orders
that require substantial restructuring of the service obligations
of interstate pipelines. (See Notes 2(d), 4(a), and 4(b) of the
Notes to Consolidated Financial Statements.)
On September 15, 1993, the Commission entered an order
initiating an investigation into the appropriate means of
recovery by Illinois gas utilities of pipeline charges for FERC
Order No. 636 transition costs. The Commission issued a final
order in this proceeding on March 9, 1994. (See Notes 2(d),
4(a), and 4(b) of the Notes to Consolidated Financial
Statements.)
The Company is undertaking a major project to reengineer its
operations with the goal of increasing efficiency, responsiveness
to customer needs and cost effectiveness. The project is expected
to commence in September, 1994 and to continue for at least two years.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Indenture Restrictions. The Company's indenture relating to its
first mortgage bonds contains provisions and covenants
restricting the payment of cash dividends and the purchase or
redemption of capital stock. At June 30, 1994, such restrictions
amounted to $11.6 million out of total retained earnings of $62.2
million. (See Note 3 of the Notes to Consolidated Financial
Statements.)
Interest Coverage. The Company's fixed charges coverage ratios
for the 12 months ended June 30, 1994, and for fiscal 1993 and
1992 were 3.36, 2.91, and 4.20, respectively. The current
12-month period ratio reflects the recording of the Company's
fiscal 1994 portion of the IRS settlement in income. (See Note 6
of the Notes to Consolidated Financial Statements.) The fiscal
1992 ratio includes a net gain of $3.8 million on the sale of
property at Deerfield.
Environmental Matters. The Company is conducting environmental
investigations and work at certain sites that were the location
of former manufactured gas operations. (See Note 5(a) of the
Notes to Consolidated Financial Statements.)
In February 1994, the Company received a demand from a
responsible party under CERCLA for reimbursement,
indemnification and contribution for response costs
incurred at a site in Denver, Colorado. The demand alleges
that the Company is a successor-in-interest to certain companies
that were allegedly responsible during the period 1934-1941 for
the disposal of mineral processing wastes containing radium and
other hazardous substances at the site. The cost of the remedy
at the site has been estimated to be approximately $31 million.
The Company is in the process of examining this claim and is
currently unable to determine what liability, if any, it may have
for response costs relating to the site. (See Note 5(b) of the
Notes to Consolidated Financial Statements.)
Regulatory Actions. On September 30, 1992, the Commission issued
an order in its consolidated proceedings, initiated in March
1991, regarding the appropriate ratemaking treatment of
environmental costs incurred by Illinois utilities, including the
Company. In its order, the Commission approved rate recovery of
environmental costs but required that such recovery occur over a
five-year period without recovery of carrying charges on
unrecovered balances. (See Note 4(a) of the Notes to
Consolidated Financial Statements.)
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Bonds Issued. On March 30, 1993, the Company filed a shelf
registration with the SEC for the issuance of $40 million
aggregate principal amount of first mortgage bonds. On May 13,
1993, the Company issued a portion of those first mortgage bonds
in an aggregate principal amount of $15 million at 6.37 percent
due May 1, 2003. (See Note 7 of the Notes to Consolidated
Financial Statements.)
Credit Lines. On February 1, 1994, Peoples Gas reduced its
lines of credit to approximately $154 million from $184 million
in effect since November 1, 1993. The Company was authorized to
borrow up to $20 million of the aggregate $154 million to cover
its projected short-term credit needs. On July 1, 1994, Peoples
Gas reduced its lines of credit to approximately $131 million of
which the Company may borrow up to $30 million, under agreements
that will expire on June 29, 1995, to cover its projected
short-term credit needs.
North Shore Gas Company
PART II. OTHER INFORMATION
June 30, 1994
Item 1. Legal Proceedings
See Note 5 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Reports on Form 8-K filed during the quarter ended
June 30, 1994
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
North Shore Gas Company
-----------------------
(Registrant)
August 12, 1994 By: /s/ K. S. BALASKOVITS
--------------- ------------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
-----------------------------
Principal Accounting Officer
