<PAGE>
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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 MARCH 31, 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 April 30, 1994.
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NORTH SHORE GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
--------------------- --------------------- ---------------------
1994 1993 1994 1993 1994 1993
------- ------ ------ ------ ------ ------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $ 76,285 $ 63,234 $ 122,588 $ 107,324 $ 162,698 $ 141,634
Transportation of customer-
owned gas 3,481 3,975 6,747 7,528 10,969 11,816
Other 267 280 492 507 1,026 970
------- ------- -------- -------- -------- --------
Total Operating Revenues 80,033 67,489 129,827 115,359 174,693 154,420
------- ------- -------- -------- -------- --------
OPERATING EXPENSES:
Gas costs 53,565 42,143 84,297 70,267 107,830 87,925
Operation 6,315 6,525 11,614 12,791 22,987 24,142
Maintenance 757 677 1,406 1,449 3,229 3,085
Depreciation 1,754 1,584 3,308 3,054 6,446 5,779
Taxes - Income 3,958 3,784 6,314 5,925 5,177 5,363
- State and local revenue 5,199 4,387 8,365 7,672 11,315 10,335
- Other 603 584 1,098 1,107 2,172 2,191
------- ------- -------- -------- -------- --------
Total Operating Expenses 72,151 59,684 116,402 102,265 159,156 138,820
------- ------- -------- -------- -------- --------
OPERATING INCOME 7,882 7,805 13,425 13,094 15,537 15,600
------- ------- -------- -------- -------- --------
OTHER INCOME:
Interest income 29 192 51 336 378 462
Miscellaneous 153 108 1,334 195 1,471 4,043
------- ------- -------- -------- -------- --------
Total Other Income 182 300 1,385 531 1,849 4,505
------- ------- -------- -------- -------- --------
GROSS INCOME 8,064 8,105 14,810 13,625 17,386 20,105
------- ------- -------- -------- -------- --------
INCOME DEDUCTIONS:
Interest on long-term debt 1,544 1,659 3,117 3,210 6,514 5,901
Other interest 110 156 264 427 317 633
Amortization of debt discount
and expense 30 28 61 52 120 85
Miscellaneous 5 1 10 24 16 28
------- ------- -------- -------- -------- --------
Total Income Deductions 1,689 1,844 3,452 3,713 6,967 6,647
------- ------- -------- -------- -------- --------
NET INCOME APPLICABLE TO
COMMON STOCK $ 6,375 $ 6,261 $ 11,358 $ 9,912 $ 10,419 $ 13,458
------- ------- -------- -------- -------- --------
------- ------- -------- -------- -------- --------
</TABLE>
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
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<PAGE>
NORTH SHORE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
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 $ 253,080 $ 248,580 $ 234,456
Less - Accumulated depreciation 77,990 75,110 73,216
-------- -------- --------
Net property, plant and equipment 175,090 173,470 161,240
Gas supply advances and investments 115 117 121
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 175,205 173,587 161,361
-------- -------- --------
CURRENT ASSETS
Cash 1,319 472 1,584
Cash equivalents 10,800 -- 1,800
Trust fund, utility construction -- 4,243 18,169
Receivables -
Customers, net of allowance for
uncollectible accounts of $958,
$855, and $828, respectively 26,958 5,836 20,983
Other 5,907 3,835 1,518
Accrued unbilled revenues 6,946 3,839 7,314
Materials and supplies, at average cost 2,082 1,979 2,346
Gas in storage, at last-in, first-out cost 11,735 25,351 11,050
Gas costs recoverable through rate adjustments 4,065 8,479 11,339
Prepayments 650 397 728
-------- -------- --------
TOTAL CURRENT ASSETS 70,462 54,431 76,831
-------- -------- --------
DEFERRED CHARGES 12,346 7,413 6,799
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $ 258,013 $ 235,431 $ 244,991
-------- -------- --------
-------- -------- --------
</TABLE>
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
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<PAGE>
NORTH SHORE GAS COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, March 31,
1994 September 30, 1993
(Unaudited) 1993 (Unaudited)
----------- ------------- -----------
CAPITALIZATION AND LIABILITIES (Thousands, except share data)
<S> <C> <C> <C>
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 63,384 55,652 60,108
-------- -------- --------
Total Common Stockholder's Equity 88,141 80,409 84,865
Long-term debt, exclusive of sinking
fund payments and maturities due within one year 76,925 80,925 76,300
-------- -------- --------
TOTAL CAPITALIZATION 165,066 161,334 161,165
-------- -------- --------
CURRENT LIABILITIES
Interim loans -- 5,400 --
Accounts payable 18,298 16,296 17,528
Dividends payable on common stock 1,885 1,559 1,958
Customer gas service and credit deposits 1,749 4,583 1,861
Sinking fund payments and maturities
due within one year -
Long-term debt 4,000 4,000 4,500
Accrued taxes 7,184 3,013 6,937
Gas sales revenue refundable through rate adjustments 6,845 958 1,201
Accrued interest 2,730 2,100 1,803
Temporary LIFO liquidation credit 13,838 -- 15,698
-------- -------- --------
TOTAL CURRENT LIABILITIES 56,529 37,909 51,486
-------- -------- --------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 16,037 14,184 12,533
Investment tax credits being amortized
over the average lives of related property 4,118 4,197 4,262
Other 16,263 17,807 15,545
-------- -------- --------
TOTAL RESERVES AND DEFERRED CREDITS 36,418 36,188 32,340
-------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $ 258,013 $ 235,431 $ 244,991
-------- -------- --------
-------- -------- --------
</TABLE>
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The Notes to Consolidated Financial Statements are an integral part of these
statements.
-4-
<PAGE>
NORTH SHORE GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
--------------------------
1994 1993
------ ------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 11,358 $ 9,912
Adjustments to reconcile net income to net cash:
Depreciation 3,308 3,054
Deferred income taxes and investment tax credits - net 410 (581)
Change in other deferred credits and reserves (180) 387
Change in deferred charges (4,933) 219
Other 2 4
-------- --------
9,965 12,995
Change in certain current assets and liabilities:
Receivables - net (23,193) (17,403)
Accrued unbilled revenues (3,107) (4,243)
Gas in storage 13,616 14,321
Rate adjustments recoverable or refundable 10,300 (6,090)
Accounts payable 2,002 5,518
Customer gas service and credit deposits (2,834) (3,046)
Accrued taxes 4,171 6,139
Temporary LIFO liquidation credit 13,838 15,698
Other 274 (710)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 25,032 23,179
-------- --------
INVESTING ACTIVITIES:
Capital expenditures - construction (5,186) (7,229)
Other assets 258 67
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,928) (7,162)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt -- 25,000
Retirement of long-term debt (4,000) (691)
Trust fund, utility construction 4,243 (18,169)
Interim loans - net (5,400) (20,000)
Dividends paid on common stock (3,300) (1,958)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (8,457) (15,818)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,647 199
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 472 3,185
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,119 $ 3,384
-------- --------
-------- --------
<FN>
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( ) Denotes red figure.
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
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<PAGE>
NORTH SHORE GAS COMPANY
PART I. FINANCIAL INFORMATION (Continued)
MARCH 31, 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.
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<PAGE>
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>
<S> <C> <C>
For the six months
ended March 31, 1994 1993
--------------------------------------------------------
(Thousands)
Income taxes paid $4,644* $3,145
Interest paid 2,711 3,660
<FN>
* Excludes income taxes paid on the interest portion of the IRS
settlement refund received in March. (See Note 6.)
</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.
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<PAGE>
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 March 31, 1994, such restrictions
amounted to $11.6 million out of the Company's total retained earnings of $63.4
million.
-8-
<PAGE>
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 February 2, 1994, a petition for leave to appeal the Third District
Court's decision to the Illinois Supreme Court was filed. On April 6,
1994, the Illinois Supreme Court granted that petition. 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.
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<PAGE>
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 are 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 with the FERC addressing GSR costs. If approved
by the FERC, the Stipulation and Agreement would place a cap on the amount
of GSR costs recoverable by Natural from the Company.
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<PAGE>
4. RATES AND REGULATION (Continued)
4(b) FERC Orders 636, 636-A, and 636-B (Continued)
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 (commonly called Superfund) 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 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,
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<PAGE>
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
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
March 31, 1994, the total of the costs deferred by the Company, net of
recoveries and amounts billed to other entities, was $6.5 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 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.
-12-
<PAGE>
5. ENVIRONMENTAL MATTERS (Continued)
5(a) Former Manufactured Gas Plant Sites (Continued)
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 March 31, 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 March 31, 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 Superfund Site
In February 1994, the Company received a demand from a responsible
party under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 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.
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<PAGE>
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 March 31, 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 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.
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<PAGE>
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
at October 1, 1993, was approximately $8.6 million. The unfunded obligation
will be amortized over 20 years. The estimated cost for fiscal 1994 is
approximately $1.4 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.
10. GAIN ON DISPOSITION OF PROPERTY
In June 1992, the Company completed the sale of certain property at its
former Deerfield sub-shop. The sale resulted in a $3.8 million gain, net of
selling expenses and income taxes.
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<PAGE>
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 increased $114,000, to $6.4 million,
and $1.4 million, to $11.4 million, for the current three- and six-month
periods, respectively. Net income applicable to common stock decreased
$3.0 million, to $10.4 million, for the current 12-month period. All three
current periods benefited from weather that was colder than the weather in the
corresponding periods of the prior year. Results for the current six- 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.) The prior 12-month period included the $3.8 million net
gain on the sale of certain property. (See Note 10 of the Notes to Consolidated
Financial Statements.)
A summary of variations affecting income between periods is presented
below, with explanations of significant differences following:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended 12 Months Ended
March 31, March 31, March 31,
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* $ 310 1.5 $ (255) (0.7) $ (612) (1.1)
Operation and
maintenance expenses (130) (1.8) (1,220) (8.6) (1,011) (3.7)
Depreciation expense 170 10.7 254 8.3 667 11.5
Income taxes 174 4.6 389 6.6 (186) (3.5)
Other income (118) (39.3) 854 160.8 (2,656) (59.0)
Income deductions (155) (8.4) (261) (7.0) 320 4.8
Net Income Applicable
to Common Stock 114 1.8 1,446 14.6 (3,039) (22.6)
<FN>
- - -------------------------------------------------------------------------------
( ) Denotes red figure.
* Operating revenues, net of gas costs and revenue taxes.
</TABLE>
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<PAGE>
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 increased $310,000, to $21.3 million, for the three-
month period due chiefly to the impact of weather that was 8 percent colder than
the year-ago period, offset in part, by lower environmental clean-up costs
recovered in rates.
Net operating revenues decreased $255,000, to $37.2 million, and $612,000,
to $55.5 million, for the six- and 12-month periods, due mainly to a reduction
of environmental clean-up costs recovered through rates, partially offset by
weather that was 4 and 2 percent colder than the weather in the respective
periods of the prior year.
OPERATION AND MAINTENANCE
Operation and maintenance expenses decreased $130,000, to $7.1 million,
$1.2 million, to $13.0 million, and $1.0 million, to $26.2 million, for the
current three, six-, and 12-month periods, due primarily to lower environmental
clean-up costs recovered through rates.
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION (Continued)
RESULTS OF OPERATIONS (Continued)
DEPRECIATION EXPENSE
Depreciation expense increased $170,000, to $1.8 million, $254,000, to $3.3
million, and $667,000, to $6.4 million, for the current three-, six-, and 12-
month periods, respectively, due chiefly to depreciable property additions.
INCOME TAXES
Income taxes increased $174,000, to $4.0 million, and $389,000, to $6.3
million (exclusive of the $324,000 included in other income related to the IRS
settlement), in the current three- and six-month periods, respectively, due
principally to higher pre-tax income and the increase in federal income tax
rates.
Income taxes (exclusive of the $324,000 included in other income related to
the IRS settlement) decreased $186,000, to $5.2 million, in the current 12-month
period, due principally to lower pre-tax income and adjustments to reduce
current taxes accrued, offset in part by the increase in federal income tax
rates.
OTHER INCOME
Other income decreased $118,000, to $182,000, for the current three-month
period, due mainly to lower cash balances available for investment.
Other income increased $854,000, to $1.4 million, in the six-month period
and decreased $2.7 million, to $1.8 million, in the 12-month period. Both
current six- and 12-month periods include recording the IRS settlement of about
$1 million after income taxes. (See Note 6 of the Notes to Consolidated
Financial Statements.) In addition, the prior 12-month period included the net
gain on the sale of certain property at Deerfield. (See Note 10 of the Notes to
Consolidated Financial Statements.)
INCOME DEDUCTIONS
Income deductions decreased $155,000, to $1.7 million, and $261,000, to
$3.5 million, for the current three- and six-month periods, due mainly to
reduced interest on long-term debt and interim loans.
Income deductions increased $320,000, to $7.0 million, for the current 12-
month period, due primarily to increased interest on long-term debt, partially
offset by lower interest on interim loans, amounts refundable to customers, and
budget accounts.
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<PAGE>
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.)
-19-
<PAGE>
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 March 31, 1994,
such restrictions amounted to $11.6 million out of total retained earnings of
$63.4 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 March 31, 1994, and for fiscal 1993 and 1992 were 3.29, 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 the net gain on the sale of property at Deerfield. (See Note 10 of the
Notes to Consolidated Financial Statements.)
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 the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 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.
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. The
Commission also required that the Company amend the environmental cost-recovery
provisions of its tariff to conform with the order. (See Note 4(a) of the Notes
to Consolidated Financial Statements.)
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<PAGE>
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 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 may borrow up to $20 million of the aggregate $154 million to cover
its projected short-term credit needs.
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<PAGE>
NORTH SHORE GAS COMPANY
PART II. OTHER INFORMATION
MARCH 31, 1994
ITEM 1. LEGAL PROCEEDINGS
See Note 5 of the Notes to Consolidated Financial Statements for a
discussion pertaining to environmental matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Company's sole stockholder acted by written consent in lieu
of an annual meeting of stockholders on March 31, 1994.
b. On March 31, 1994, the following persons were elected Directors
of the Company by written consent and comprise the entire Board
of Directors of the Company: Kenneth S. Balaskovits, J. Bruce
Hasch, James Hinchliff, Michael S. Reeves, and Richard E. Terry.
c. The following matter was voted upon by written consent in lieu of
an annual meeting of stockholders:
1. The election of nominees for Directors who will serve for a
one-year term or until their respective successors shall be duly
elected. The nominees, all of whom were elected, were as follows:
Kenneth S. Balaskovits, J. Bruce Hasch, James Hinchliff, Michael S.
Reeves, and Richard E. Terry. The Secretary of the Company certified
the following vote tabulations:
FOR WITHHELD
--------- --------
Kenneth S. Balaskovits . . . . . . . . 3,625,887 0
J. Bruce Hasch . . . . . . . . . . . . . . 3,625,887 0
James Hinchliff . . . . . . . . . . . . . 3,625,887 0
Michael S. Reeves . . . . . . . . . . . . 3,625,887 0
Richard E. Terry . . . . . . . . . . . . 3,625,887 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K filed during the quarter ended March 31, 1994
None
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<PAGE>
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)
May 11, 1994 By: K. S. BALASKOVITS
------------- -----------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
-----------------------------
Principal Accounting Officer
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