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, 1995
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.)
24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)
(312) 240-4000
(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, 1995.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Six Twelve
Months Ended Months Ended Months Ended
March 31, March 31, March 31,
------------- --------------- --------------
1995 1994 1995 1994 1995 1994
----- ----- ----- ----- ----- -----
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $51,969 $76,285 $88,709 $122,588 $125,000 $162,698
Transportation of customer-
owned gas 4,584 3,481 8,155 6,747 12,593 10,969
Other 212 267 886 492 1,454 1,026
------- ------ ------ ------- ------- -------
Total Operating Revenues 56,765 80,033 97,750 129,827 139,047 174,693
------- ------ ------ ------- ------- -------
OPERATING EXPENSES:
Gas costs 32,741 53,565 55,902 84,297 76,647 107,830
Operation 4,884 6,315 9,927 11,614 21,747 22,987
Maintenance 765 757 1,480 1,406 3,137 3,229
Depreciation 1,810 1,754 3,542 3,308 7,094 6,446
Taxes - Income 3,919 3,958 5,916 6,314 4,333 5,177
- State & local revenue 3,908 5,199 6,520 8,365 9,117 11,315
- Other 584 603 1,110 1,098 1,964 2,172
------- ------ ------ ------- ------- -------
Total Operating Expenses 48,611 72,151 84,397 116,402 124,039 159,156
------- ------ ------ ------- ------- -------
OPERATING INCOME 8,154 7,882 13,353 13,425 15,008 15,537
------- ------ ------ ------- ------- -------
OTHER INCOME:
Interest income 53 29 68 51 414 378
Miscellaneous 15 153 49 1,334 285 1,471
------ ------ ------ ------ ------ -----
Total Other Income 68 182 117 1,385 699 1,849
------ ------ ------ ------ ------ -----
GROSS INCOME 8,222 8,064 13,470 14,810 15,707 17,386
------ ------ ------ ------ ------ ------
INCOME DEDUCTIONS:
Interest on long-term debt 1,441 1,544 2,911 3,117 5,999 6,514
Other interest 338 110 609 264 667 317
Amortization of debt discount
and expense 30 30 59 61 119 120
Miscellaneous 7 5 13 10 24 16
----- ----- ----- ----- ------ -----
Total Income Deductions 1,816 1,689 3,592 3,452 6,809 6,967
----- ----- ----- ----- ----- -----
NET INCOME APPLICABLE TO
COMMON STOCK $ 6,406 $ 6,375 $ 9,878 $ 11,358 $ 8,898 $ 10,419
======= ====== ====== ====== ======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
------------ ----------- ---------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $265,270 $259,375 $253,080
Less - Accumulated depreciation 83,957 80,639 77,990
------- ------- -------
Net property, plant and equipment 181,313 178,736 175,090
Other investments 107 112 115
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 181,420 178,848 175,205
--------- -------- --------
CURRENT ASSETS:
Cash 7,311 353 1,319
Cash equivalents 8,275 2,150 10,800
Receivables -
Customers, net of allowance for
uncollectible accounts of $801,
$889, and $958, respectively 13,932 5,173 26,958
Other 1,218 820 5,907
Accrued unbilled revenues 5,466 2,361 6,946
Materials and supplies, at average cost 2,188 1,953 2,082
Gas in storage, at last-in, first-out cost 12,569 27,421 11,735
Gas costs recoverable through rate adjustments 408 2,402 4,065
Prepayments 678 377 650
------- ------- -------
TOTAL CURRENT ASSETS 52,045 43,010 70,462
------- ------- -------
DEFERRED CHARGES 13,312 12,506 12,346
------- ------- -------
TOTAL PROPERTIES AND OTHER ASSETS $246,777 $234,364 $258,013
======= ======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
1995 September 30, 1994
(Unaudited) 1994 (Unaudited)
----------- ------------- ----------
(Thousands of Dollars)
<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 65,828 58,923 63,384
------- ------- -------
Total Common Stockholder's Equity 90,585 83,680 88,141
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 72,806 76,925 76,925
------- ------- -------
TOTAL CAPITALIZATION 163,391 160,605 165,066
------- ------- -------
CURRENT LIABILITIES:
Accounts payable 12,705 13,938 18,298
Dividends payable on common stock 1,450 1,813 1,885
Customer gas service and credit deposits 4,106 5,877 1,749
Sinking fund payments and maturities,
due within one year -
Long-term debt 4,000 4,000 4,000
Accrued taxes 6,213 2,115 7,184
Gas sales revenue refundable through
rate adjustments 14,666 9,776 6,845
Accrued interest 1,761 2,738 2,730
Temporary LIFO liquidation credit 5,102 -- 13,838
------- ------- -------
TOTAL CURRENT LIABILITIES 50,003 40,257 56,529
------- ------- -------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes - primarily
accelerated depreciation 15,209 13,894 16,037
Investment tax credits being amortized
over the average lives of related property 3,979 4,052 4,118
Other 14,195 15,556 16,263
------- ------- -------
TOTAL RESERVES AND DEFERRED CREDITS 33,383 33,502 36,418
------- ------- ------
TOTAL CAPITALIZATION AND LIABILITIES $246,777 $234,364 $258,013
======= ======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</FN>
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
March 31,
------------------
1995 1994
------- --------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 9,878 $11,358
Adjustments to reconcile net income to net cash:
Depreciation 3,542 3,308
Deferred income taxes and investment tax credits - net 1,073 410
Change in other deferred credits and reserves (1,192) (180)
Change in deferred charges (806) (4,933)
Other 5 2
Change in current assets and liabilities:
Receivables - net (9,157) (23,193)
Accrued unbilled revenues (3,105) (3,107)
Gas in storage 14,852 13,616
Rate adjustments recoverable or refundable 6,884 10,300
Accounts payable (1,233) 2,002
Customer gas service and credit deposits (1,771) (2,834)
Accrued taxes 4,098 4,171
Accrued interest (977) 630
Temporary LIFO liquidation credit 5,102 13,838
Other (537) (356)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,656 25,032
-------- --------
INVESTING ACTIVITIES:
Capital expenditures - construction (6,406) (5,186)
Other assets 288 258
-------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,118) (4,928)
-------- -------
FINANCING ACTIVITIES:
Interim loans - net -- (5,400)
Trust fund, utility construction -- 4,243
Retirement of long-term debt (4,119) (4,000)
Dividends paid on common stock (3,336) (3,300)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (7,455) (8,457)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 13,083 11,647
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,503 472
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $15,586 $12,119
======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these statements.
</FN>
</TABLE>
North Shore Gas Company
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, 1994.
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
2A 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.
2B Basis of Accounting
The Company accounts for its regulated operations in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." This standard controls the application of
generally accepted accounting principles for companies whose
rates are determined by an independent regulator. Regulatory
assets represent certain costs which have been or are expected
to be recovered from customers through the ratemaking process.
When such costs occur, they are deferred as assets in the
balance sheet and recorded as expenses when like amounts are
included in rates.
2C 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.
<TABLE>
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<CAPTION>
For the six months
ended March 31, 1995 1994
--------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $2,063 $4,644
Interest paid 3,362 2,711
</TABLE>
2D Income Taxes
In March 1993, the Company adopted, effective October 1,
1992, the liability method of accounting for deferred income
taxes required by 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.
2E Recovery of Gas Costs, Including Charges for 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.
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 1995 are currently pending before the Commission.
Pursuant to Federal Energy Regulatory Commission (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 the Gas Charge. The Commission entered an order on
March 9, 1994, providing for the full recovery of all such
charges from customers. In September 1994, the Commission
entered orders on rehearing that retained the provision for
full recovery from customers. (See Notes 4A and 4B.)
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, 1995, such restrictions amounted to $11.6 million out of
the Company's total retained earnings of $54.2 million.
4. RATES AND REGULATION
4A Utility Rate Proceedings
Rate Filing. On December 16, 1994, the Company filed with the
Commission proposed changes in rates that are designed to increase
annual revenues by about $10.1 million, exclusive of additional
charges for revenue taxes. The Company is seeking a rate of
return on original-cost rate base of 10.50 percent, which reflects
a 12.6 percent cost of common equity.
The Company expects that the Commission, following its usual
practices, will not issue a decision regarding the Company's rate
increase request until November 1995. The Company cannot predict
the outcome of its rate increase request.
Environmental Cost Recovery. In 1992, the Commission issued an
order in its consolidated proceedings, initiated in 1991, regarding
the appropriate ratemaking treatment of environmental costs
relating to past manufactured gas operations 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
over a five-year period, but required the utilities to "share" the
environmental costs by disallowing rate 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
1992, several parties, including the Company and Peoples Gas,
appealed the Commission's order to the Illinois Appellate Court.
In 1993, the Third District Appellate Court issued its opinion
affirming the Commission's order in the consolidated proceedings,
which decision was subsequently appealed to the Illinois Supreme
Court. In April 1995, the Illinois Supreme Court upheld in part
and reversed in part the Commission's order. The Supreme Court
upheld the Commission in ruling that environmental costs are
recoverable through rates. The Supreme Court also ruled that the
Commission's approval of a rate recovery method called a "rider"
(the method utilized by the Company and Peoples Gas) as the
preferred mechanism for recovery of environmental costs is within
the Commission's authority. The Supreme Court reversed the part of
the Commission's order that required the utilities to share
environmental costs by disallowing recovery of carrying charges on
unrecovered balances. The order was remanded to the Commission for
further proceedings consistent with the Supreme Court's opinion.
Any change made pursuant to the Supreme Court's decision will have
a prospective effect only.
FERC Order No. 636 Cost Recovery. 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 gas service 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. In September 1994, the Commission
entered orders on rehearing. In its orders on rehearing, the Commission
continued to provide for full recovery of transition costs, but directed
that, effective November 1, 1994, gas supply realignment (GSR)
costs (one of the four categories of transition costs) be recovered
on a uniform volumetric basis from all transportation and sales
customers. In December 1994, a group of industrial transportation
customers of Illinois utilities appealed the Commission's orders on
rehearing to the Illinois Appellate Court. Any change made
pursuant to the Illinois Appellate Court's order on appeal would
have a prospective effect only. (See Notes 2E and 4B.)
4B FERC Orders 636, 636-A, and 636-B
In 1992, the FERC issued Order Nos. 636, 636-A, and 636-B.
Numerous appeals of the 636 Orders are pending before the Federal
Circuit Court of Appeal for the D.C. Circuit.
The 636 Orders require substantial restructuring of the service
obligations of interstate pipelines. Among other things, the 636
Orders mandated "unbundling" of existing pipeline gas sales
services. Further, the 636 Orders provided for mechanisms for
pipelines to recover prudently incurred transition costs associated
with the restructuring process.
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 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 GSR costs. The
Company is subject to charges for transition cost recovery by
Natural. Charges for transition costs commenced on January 1,
1994. On September 29, 1994, the FERC approved a Stipulation and
Agreement (Agreement) filed by Natural. The Agreement places a cap
of approximately $25 million on the amount of GSR costs recoverable
by Natural from the Company. However, subject to this cap, the
level of costs that the Company will incur is dependent primarily
upon the future market price of natural gas and pipeline
negotiations with producers. The Company is currently recovering
transition costs through the Gas Charge. As of March 31, 1995, the
Company has accrued $10.2 million and has made payments of $7.8
million toward the cap.
The 636 Orders are not expected to have a material adverse
effect on financial position or results of operations of the
Company. (See Notes 2E and 4A.)
5. ENVIRONMENTAL MATTERS
5A 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 rather than sold. 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 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. In December 1994,
the Company filed suit against EJ&E in the District Court for the
Northern District of Illinois, seeking recovery of response costs
incurred by the Company at the Waukegan II Site.
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, 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, 1995, the total of
the costs deferred by the Company, net of recoveries and amounts
billed to other entities, was $7.1 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 by other entities
for the costs incurred at the sites, the 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 environmental costs relating to 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, 1995, have not been reduced to
reflect recoveries from insurance carriers.
Costs incurred by the Company for environmental activities at
the sites 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 recovering the costs of environmental activities relating to
its former manufactured gas operations under a rate mechanism
approved by the Commission. As of March 31, 1995, it had
recovered $3.8 million of such costs through rates. (See Note 4A
for a discussion of proceedings regarding the recovery of such
costs through utility rates.)
5B Former Mineral Processing Site in Denver, Colorado
In February 1994, the Company received a demand from the S.W.
Shattuck Chemical Company, Inc. (Shattuck), a responsible party
under CERCLA, for reimbursement, indemnification and contribution
for response costs incurred at a former mineral processing site in
Denver, Colorado. Shattuck is a wholly owned subsidiary of
Salomon, Inc. (Salomon). 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 by Shattuck to be approximately $31 million.
Salomon has provided financial assurance for the performance of
the remediation at the site.
The Company does not believe that it has liability for the
response costs, but cannot determine the matter with certainty.
At this time, the Company cannot reasonably estimate what range of
loss, if any, may occur. In the event that the Company incurred
liability, it would pursue reimbursement from insurance carriers,
other responsible parties, if any, and through its rates for
utility service.
In November 1994, the Company filed a declaratory judgment
action against Salomon in the District Court for the Northern
District of Illinois. The suit asks the court to declare that the
Company is not liable for response costs incurred or to be
incurred at the Denver 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 1994 payments of principal and
interest to the Company in total amount of approximately $3
million, or $2.2 million after income taxes. The Company received
regulatory authorization to defer the recognition of the
settlement amount in income for fiscal year 1993, and to recognize
its portion of the settlement amount in income for fiscal years
1994 and 1995. The Company represented to the Commission that,
having received this accounting authorization, it would 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 $1.1 million
after income taxes, in income in 1994. The amount after income
taxes was included in Other Income - Miscellaneous. At September
30, 1994, approximately $1.4 million was included in Reserves and
Deferred Credits - Other.
As a result of the Commission's accounting authorization, the
fiscal year 1995 portion of the settlement amount for the Company
is being amortized (credited) to operation expense. The effect is
to offset increases in costs that the Company will incur during
the year. In the six months ended March 31, 1995, the Company
amortized approximately $1.1 million, or $810,000 after income
taxes, leaving a remaining balance of about $380,000 included in
Reserves and Deferred Credits - Other.
7. LONG-TERM DEBT
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 may issue all or a portion of the remaining bonds during
fiscal 1995 and/or fiscal 1996. Proceeds of any future offering
will be used for general corporate purposes.
8. POSTEMPLOYMENT BENEFITS
In November 1992, the Financial Accounting Standards Board
(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. The Company adopted SFAS No.
112 effective October 1, 1994. Implementation of this statement
did not 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 increased $31,000, to
$6.4 million, for the three-months ended March 31, 1995,
virtually flat from the results of last year's similar quarter.
The adverse effect of weather in the current three months that
was more than 12 percent warmer than the year-ago period was
tempered by the current quarter's benefit of recognizing about
$475,000 after income taxes from a previously announced federal
income tax settlement. (See Note 6 of the Notes to Consolidated
Financial Statements.)
Net income applicable to common stock decreased $1.5 million,
to $9.9 million, and $1.5 million, to $8.9 million for the
current six- and 12-month periods, respectively. Results for the
current six- and 12-month ended periods were hindered by weather
that was 16 percent warmer than the prior periods and by the
timing difference in recognizing benefits from the tax
settlement.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended Six Months Ended 12 Months Ended
March 31, 1995 March 31, 1995 March 31, 1995
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period from Prior Period
------------------ ------------------- ---------------------
(Thousands of dollars) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues (a) $(1,153) (5.4) $(1,837) (4.9) $(2,265) (4.1)
Operation and
maintenance expenses (1,423) (20.1) (1,613) (12.4) (1,332) (5.1)
Depreciation expense 56 3.2 234 7.1 648 10.1
Income taxes (39) (1.0) (398) (6.3) (844) (16.3)
Other income (114) (62.6) (1,268) (91.6) (1,150) (62.2)
Income deductions 127 7.5 140 4.1 (158) (2.3)
Net Income Applicable
to Common Stock 31 0.5 (1,480) (13.0) (1,521) (14.6)
- -----------------------------------------------------------------------------------------------
<FN>
(a) Operating revenues, net of gas costs and revenue taxes.
</FN>
</TABLE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Net Operating Revenues
Gross revenues of the Company are affected by changes in the
unit cost of the Company's gas purchases and do not include the
cost of gas supplies for customers who purchase gas directly from
producers and marketers rather than from the Company. The 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 2E 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' gas purchases from producers or marketers
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 $1.2 million, to $20.1
million, $1.8 million, to $35.3 million, and $2.3 million, to
$53.3 million, for the current three-, six-, and 12-month
periods, respectively. All three current periods were affected
by warmer weather than the respective year-ago periods.
See Other Matters - Operating Statistics for details of
selected financial and operating information by gas service
classification.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $1.4 million, to
$5.6 million, and $1.6 million, to $11.4 million, for the current
three- and six-month periods, respectively, due principally to
recognizing approximately $630,000 for the second quarter's
portion and $1.1 million for the fiscal 1995 to date portion of
the balance of the IRS settlement. (See Note 6 of the Notes to
Consolidated Financial Statements.) The current three-month
ended period included lower environmental costs recovered through
rates of about $111,000, and a decrease in the provision for
uncollectible accounts of about $116,000. The current six-month
ended period included lower environmental costs recovered through
rates of about $277,000, and a decrease in the provision for
uncollectible accounts of about $163,000.
Operation and maintenance expenses decreased $1.3 million, to
$24.9 million, for the 12-month period, due mainly to recognizing
about $1.1 million for the aforementioned IRS settlement in the
current period. Also, the current 12-month period included lower
environmental costs recovered through rates of about $546,000,
(see Note 4A of the Notes to Consolidated Financial Statements)
and a decrease in the provision for uncollectible accounts of
about $181,000. The decrease in the current 12-month period was
partially offset by an increase in group insurance expenses of
about $871,000 primarily due to the recognition of SFAS 106
costs.
Depreciation Expense
Depreciation expense increased $56,000, to $1.8 million,
$234,000, to $3.5 million, and $648,000, to $7.1 million for the
current three-, six-, and 12-month periods, respectively, due
chiefly to depreciable property additions.
Income Taxes
Income taxes, exclusive of amounts included in other income
related to an IRS settlement, declined $398,000, to $5.9 million,
in the current six-month period, and $844,000, to $4.3 million,
in the current 12-month period, due principally to lower pre-tax
income.
Other Income
Other income declined $114,000, to $68,000, for the current
three-month period, due mainly to reduced interest on amounts
recoverable from customers.
Other income declined $1.3 million, to $117,000, and $1.2
million, to $699,000, for the current six- and 12-month periods,
respectively, due primarily to the recognition of the IRS
settlement of about $1 million after income taxes in last year's
similar periods (see Note 6 of the Notes of Consolidated
Financial Statements) as well as reduced interest of $235,000 and
$180,000, respectively, on amounts recoverable from customers.
Income Deductions
Income deductions increased $127,000, to $1.8 million, and
$140,000, to $3.6 million, for the current three- and six-month
periods, respectively, due principally to increased interest on
amounts refundable to customers and increased interest on budget
accounts. These increases were partially offset by reduced
interest on long-term debt.
Income deductions decreased $158,000, to $6.8 million, for the
current 12-month period, due mainly to reduced interest on
long-term debt, partially offset by increased interest on amounts
refundable to customers and increased interest on budget
accounts.
Other Matters
Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income and
coverage ratios.
FERC Order 636 Costs. In 1992, the FERC issued Order No. 636 and
successor orders that required substantial restructuring of the
service obligations of interstate pipelines. (See Notes 2E, 4A,
and 4B 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 its orders
on rehearing in this proceeding in September 1994. (See Notes
2E, 4A, and 4B of the Notes to Consolidated Financial
Statements.)
Postemployment Benefits. In November 1992, the FASB issued SFAS
No. 112. This statement requires the accrual of certain benefits
provided to former or inactive employees after employment but
before retirement. SFAS No. 112 required adoption by the Company
no later than fiscal 1995. (See Note 8 of the Notes to
Consolidated Financial Statements.)
Reengineering Study. The Company is undertaking a major project
to reengineer its business processes with the goal of increasing
efficiency, responsiveness to customer needs, and cost
effectiveness. The project commenced in September 1994 and is
expected to continue for at least two years.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------ ------------------- -----------------
1995 1994 1995 1994 1995 1994
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $43,593 $61,035 $75,078 $ 99,639 $106,093 $133,460
Commercial 6,746 11,479 11,146 17,414 15,565 22,536
Industrial 1,630 3,771 2,485 5,535 3,342 6,702
------- ------ ------- ------- ------- -------
51,969 76,285 88,709 122,588 125,000 162,698
------- ------ ------- ------- ------- -------
Transportation
Residential 446 383 775 735 1,190 1,207
Commercial 2,545 1,938 4,474 3,798 6,726 5,912
Industrial 1,593 1,160 2,906 2,214 4,677 3,850
------- ------- ------- ------- ------- -------
4,584 3,481 8,155 6,747 12,593 10,969
------- ------- ------- ------- ------- -------
Other 212 267 886 492 1,454 1,026
------- ------- ------- ------- ------- -------
Total Operating Revenues 56,765 80,033 97,750 129,827 139,047 174,693
Gas Costs (32,741) (53,565) (55,902) (84,297) (76,647) (107,830)
Revenues Taxes (3,908) (5,199) (6,520) (8,365) (9,117) (11,315)
------- ------- ------- -------- -------- -------
Net Operating Revenues $20,116 $21,269 $35,328 $ 37,165 $ 53,283 $ 55,548
======= ======= ======= ======== ======= ======
Deliveries (MMcf):
Sales
Residential 8,753 9,766 14,103 15,992 18,339 20,707
Commercial 1,402 1,950 2,177 2,942 2,876 3,760
Industrial 360 557 518 821 701 1,037
------- ------- ------- ------- ------- ------
10,515 12,273 16,798 19,755 21,916 25,504
------- ------- ------- ------- ------- ------
Transportation
Residential 247 237 408 423 564 624
Commercial 2,316 2,111 3,909 3,797 5,376 5,283
Industrial 2,008 1,763 3,659 3,331 6,450 5,745
------- ------ ------ ------ ------ ------
4,571 4,111 7,976 7,551 12,390 11,652
------- ------ ------ ------ ------ ------
Total Sales
and Transportation 15,086 16,384 24,774 27,306 34,306 37,156
======= ======= ======= ======= ======= =======
Margin per Mcf
delivered $1.33 $1.30 $1.43 $1.36 $1.55 $1.49
</TABLE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
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, 1995, such
restrictions amounted to $11.6 million out of total retained
earnings of $54.2 million. (See Note 3 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 relating to past manufactured gas operations
incurred by Illinois utilities, including the Company and Peoples
Gas. In its order, the Commission approved rate recovery of such
environmental costs but required that the recovery occur over a
five-year period without recovery of carrying charges on
unrecovered balances. The part of the Commission's order that
disallowed recovery of carrying charges on unrecovered balances
has been reversed on appeal by the Illinois Supreme Court, which
has remanded the case to the Commission. (See Note 4A of the
Notes to Consolidated Financial Statements.)
The Company filed proposed changes in rates with the
Commission in December 1994. (See Note 4A 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 plant operations. (See Note 5A 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 (CERCLA) for
reimbursement, indemnification and contribution for response
costs incurred at a former mineral processing site in Denver,
Colorado. In November 1994, The Company filed a declaratory
judgment action asking the court to declare that the Company is
not liable for response costs relating to the site. (See Note 5B
of the Notes to Consolidated Financial Statements.)
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.)
Additional bonds are issuable by the Company, upon approval by
the Commission, subject to limitations imposed by certain
restrictive provisions of the Company's open-end mortgage and
supplements thereto. These restrictions are not expected to have
an impact on the Company's ability to issue additional debt, as
needed.
Credit Lines. Peoples Gas has lines of credit of approximately
$131 million of which the Company may borrow up to $30 million to
cover its projected short-term needs. Such Agreements will
expire on June 29, 1995.
Interest Coverage. Coverage ratios for the Company's fixed
charges for the 12-months ended March 31, 1995 and for fiscal
1994, and 1993 were 2.95, 3.33, and 2.91, respectively. The
decrease in the ratio for the current 12-months ended primarily
reflects lower pre-tax income. (See Results of Operations - Net
Income.)
PART II. OTHER INFORMATION
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. 1. The Board of Directors acted by written consent
in lieu of meeting on March 22, 1995 to adopt a
resolution amending the Company's Articles of
Incorporation to limit liability of the
Company's directors, to provide for
indemnification and the advancement of
expenses, and to recommend that the sole
shareholder of the Company approve said
resolution.
2. The Company's sole shareholder acted by written
consent in lieu of meeting on March 22, 1995 to
approve and adopt a resolution to amend the
Company's Articles of Incorporation.
3. The Company's sole shareholder acted by written
consent in lieu of an annual meeting of
shareholders on March 30, 1995.
b. On March 30, 1995, 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
shareholders:
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:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- -----------
<S> <C> <C>
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
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
---------- -------------------------------------
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
March 31, 1995
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)
May 11, 1995 By: /s/ K. S. BALASKOVITS
------------ ----------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
----------------------------
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS,
CONSOLIDATED STATEMENTS OF CASH FLOWS, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> MAR-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 181,313
<OTHER-PROPERTY-AND-INVEST> 107
<TOTAL-CURRENT-ASSETS> 52,045
<TOTAL-DEFERRED-CHARGES> 13,312
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 246,777
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 65,828
<TOTAL-COMMON-STOCKHOLDERS-EQ> 90,585
0
0
<LONG-TERM-DEBT-NET> 72,806
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 4,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 79,386
<TOT-CAPITALIZATION-AND-LIAB> 246,777
<GROSS-OPERATING-REVENUE> 97,750
<INCOME-TAX-EXPENSE> 5,916
<OTHER-OPERATING-EXPENSES> 78,481
<TOTAL-OPERATING-EXPENSES> 84,397
<OPERATING-INCOME-LOSS> 13,353
<OTHER-INCOME-NET> 45
<INCOME-BEFORE-INTEREST-EXPEN> 13,398
<TOTAL-INTEREST-EXPENSE> 3,520
<NET-INCOME> 9,878
0
<EARNINGS-AVAILABLE-FOR-COMM> 9,878
<COMMON-STOCK-DIVIDENDS> 3,336
<TOTAL-INTEREST-ON-BONDS> 2,911
<CASH-FLOW-OPERATIONS> 26,656
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
