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 December 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.)
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)
122 South Michigan Avenue, Chicago, Illinois
(Former address, if changed since last report)
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
January 31, 1995.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
-------------------- -------------------
1994 1993 1994 1993
------- ------- ------- --------
(Thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $ 36,741 $ 46,304 $ 149,317 $149,648
Transportation of customer-
owned gas 3,570 3,265 11,490 11,464
Other 674 224 1,509 1,038
-------- ------- -------- -------
Total Operating Revenues 40,985 49,793 162,316 162,150
-------- ------- ------- -------
OPERATING EXPENSES:
Gas costs 23,160 30,732 97,470 96,408
Operation 5,042 5,299 23,177 23,197
Maintenance 715 649 3,130 3,149
Depreciation 1,732 1,554 7,038 6,276
Taxes- Income 1,998 2,356 4,372 5,004
- State & local revenue 2,612 3,166 10,408 10,503
- Other 527 495 1,984 2,153
-------- ------- -------- -------
Total Operating Expenses 35,786 44,251 147,579 146,690
-------- ------- -------- -------
OPERATING INCOME 5,199 5,542 14,737 15,460
------- -------- -------- --------
OTHER INCOME:
Interest income 15 22 389 541
Miscellaneous 34 1,182 423 1,426
------- ------- ------- --------
Total Other Income 49 1,204 812 1,967
------- ------- ------- --------
GROSS INCOME 5,248 6,746 15,549 17,427
------- ------- ------- --------
INCOME DEDUCTIONS:
Interest on long-term debt 1,470 1,573 6,102 6,629
Other interest 271 155 439 364
Amortization of debt discount
and expense 28 30 119 118
Miscellaneous 7 5 22 11
------ ------- ------ ------
Total Income Deductions 1,776 1,763 6,682 7,122
------ ------- ------ ------
NET INCOME APPLICABLE
TO COMMON STOCK $ 3,472 $ 4,983 $ 8,867 $ 10,305
--------- ------- --------- -------
--------- ------- --------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 September 30, 1993
(Unaudited) 1994 (Unaudited)
----------- ----------- -----------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $ 262,116 $259,375 $250,873
Less - Accumulated depreciation 82,288 80,639 76,247
---------- -------- --------
Net property, plant and equipment 179,828 178,736 174,626
Other investments 108 112 117
---------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 179,936 178,848 174,743
---------- -------- --------
CURRENT ASSETS:
Cash 327 353 1,627
Cash equivalents -- 2,150 --
Receivables -
Customers, net of allowance for
uncollectible accounts of $718,
$889, and $760, respectively 14,123 5,173 17,243
Other 2,317 820 5,395
Accrued unbilled revenues 8,913 2,361 10,242
Materials and supplies, at average cost 1,997 1,953 2,128
Gas in storage, at last-in, first-out cost 19,744 27,421 18,859
Gas costs recoverable through rate adjustments 4,220 2,402 7,202
Prepayments 169 377 206
--------- -------- --------
TOTAL CURRENT ASSETS 51,810 43,010 62,902
--------- -------- --------
DEFERRED CHARGES 12,678 12,506 11,443
--------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $ 244,424 $234,364 $249,088
--------- -------- --------
--------- -------- --------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1994 September 30, 1993
(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 60,873 58,923 58,895
------- ------- -------
Total Common Stockholder's Equity 85,630 83,680 83,652
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 72,863 76,925 76,925
------- ------- -------
TOTAL CAPITALIZATION 158,493 160,605 160,577
------- ------- -------
CURRENT LIABILITIES:
Interim loans 10,135 -- 16,900
Accounts payable 15,705 13,938 17,706
Dividends payable on common stock 1,523 1,813 1,740
Customer gas service and credit deposits 7,316 5,877 4,112
Sinking fund payments and maturities,
due within one year -
Long-term debt 4,000 4,000 4,000
Accrued taxes 3,696 2,115 4,587
Gas sales revenue refundable through
rate adjustments 9,720 9,776 987
Accrued interest 1,107 2,738 1,180
Temporary LIFO liquidation credit (822) -- 1,189
------ ------ ------
TOTAL CURRENT LIABILITIES 52,380 40,257 52,401
------ ------ ------
RESERVES AND DEFERRED CREDITS:
Deferred income taxes - primarily
accelerated depreciation 14,614 13,894 14,988
Investment tax credits being amortized
over the average lives of related property 4,015 4,052 4,158
Other 14,922 15,556 16,964
------ ------ ------
TOTAL RESERVES AND DEFERRED CREDITS 33,551 33,502 36,110
------ ------ ------
TOTAL CAPITALIZATION AND LIABILITIES $ 244,424 $234,364 $249,088
-------- ------- -------
-------- ------- -------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------
1994 1993
------ -------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 3,472 $ 4,983
Adjustments to reconcile net income to net cash:
Depreciation 1,732 1,554
Deferred income taxes and investment tax credits - net 599 246
Change in other deferred credits and reserves (550) (325)
Change in deferred charges (172) (4,030)
Other 4 --
----- -----
5,085 2,428
Change in current assets and liabilities:
Receivables - net (10,447) (12,967)
Accrued unbilled revenues (6,552) (6,403)
Gas in storage 7,677 6,492
Rate adjustments recoverable or refundable (1,874) 1,306
Accounts payable 1,767 1,410
Customer gas service and credit deposits 1,439 (471)
Accrued taxes 1,581 1,574
Accrued interest (1,631) (920)
Temporary LIFO liquidation credit (822) 1,189
Other 165 43
------ -----
NET CASH USED IN OPERATING ACTIVITIES (3,612) (6,319)
------ ------
INVESTING ACTIVITIES:
Capital expenditures - construction (2,974) (2,841)
Other assets 150 131
----- ------
NET CASH USED IN INVESTING ACTIVITIES (2,824) (2,710)
----- -----
FINANCING ACTIVITIES:
Interim loans - net 10,135 11,500
Trust fund, utility construction -- 4,243
Retirement of long-term debt (4,062) (4,000)
Dividends paid on common stock (1,813) (1,559)
----- -----
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,260 10,184
----- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,176) 1,155
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,503 472
----- -----
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 327 $ 1,627
------ -----
------ -----
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
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 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.
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<TABLE>
<CAPTION>
For the three months
ended December 31, 1994 1993
-------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $ 618 $1,157
Interest paid 2,456 2,638
</TABLE>
2C 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.
2D 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 1994 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
December 31, 1994, such restrictions amounted to $11.6 million
out of the Company's total retained earnings of $60.9 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. 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 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 such environmental costs but required
that the recovery occur over a five-year period without recovery
of carrying charges on unrecovered balances. Reimbursements of
environmental costs from insurance carriers or other entities are
to be netted against costs and reflected in rates over a
five-year period. In November 1992, several parties, including
the Company and Peoples Gas, appealed the Commission's order to
the Illinois Appellate Court. On December 29, 1993, the Third
District Appellate Court issued its opinion affirming the
Commission's order in the consolidated proceedings. On April 6,
1994, the Illinois Supreme Court allowed an appeal of the
Appellate Court's decision. Any change made pursuant to the
Supreme Court's order on appeal would have a prospective effect
only. (See Note 5.)
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 2D 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. 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 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 December 31, 1994, the Company has accrued
$8.4 million and has made payments of $6.2 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 2D 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 December 31, 1994, the total
of the costs deferred by the Company, net of recoveries and
amounts billed to other entities, was $7.2 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 December 31,
1994, 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 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
December 31, 1994, it had recovered $3.7 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 quarter ended December 31, 1994,
the Company amortized approximately $440,000, or $330,000 after
income taxes, leaving a remaining balance of about $1 million
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 decreased $1.5 million,
to $3.5 million, for the three-months ended December 31, 1994,
from the results of last year's similar quarter. Results for the
current three-months were adversely affected by: (1) lower gas
deliveries resulting from weather that was about 20 percent
warmer than the year-ago quarter, and (2) a timing difference in
recognizing benefits from a previously announced federal income
tax settlement ($330,000 after income taxes that was recognized
in the current year's first quarter versus about $1.1 million
after income taxes recognized in the last year's first quarter).
An additional $760,000 from the settlement will be recognized
during the remainder of fiscal 1995. (See Note 6 of the Notes to
Consolidated Financial Statements.) Benefiting quarterly results
were the sales of certain oil and gas interests.
Net income applicable to common stock decreased $1.4 million,
to $8.9 million, for the current 12-month period from the results
of last year's like period. Results for the current 12 months
were negatively impacted by lower gas deliveries resulting from
weather that was 7 percent warmer than the prior year's like
period and by the timing difference in recognizing benefits from
the tax settlement. Further affecting the 12-months ended
results were increased operating expenses that were partially
offset by sales of certain oil and gas interests.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<TABLE>
<CAPTION>
Three Months Ended 12 Months Ended
December 31, December 31,
1994 Over 1993 1994 Over 1993
------------------- -----------------
(Thousands of dollars) Amount Percent Amount Percent
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues (a) $(682) (4.3) $(801) (1.5)
Operation and maintenance expenses (191) (3.2) (39) (0.1)
Depreciation expense 178 11.5 762 12.1
Income taxes (358) (15.2) (632) (12.6)
Other income (1,155) (95.9) (1,155) (58.7)
Income deductions 13 0.7 (440) (6.2)
Net Income (1,511) (30.3) (1,438) (14.0)
- -------------------------------------------------------------------------
</TABLE>
(a) Operating revenues, net of gas costs and revenue taxes.
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 2D 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 $682,000, to $15.2 million,
and $801,000, to $54.4 million, for the current three- and
12-month periods, respectively. The three-month period included
weather that was about 20 percent warmer than the similar
year-ago quarter resulting in lower gas deliveries. Temperatures
in the Chicago area during the current three-months through
December were the warmest in the last 23 years. Warmer weather
in the current 12-months also resulted in lower gas deliveries.
Both current periods benefited from the sales of certain oil and
gas interests.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased $191,000, to $5.8
million, for the current three-month period, due primarily to
recognizing approximately $440,000 for the fiscal 1995
first-quarter's portion of the balance of the IRS settlement (see
Note 6 of the Notes to Consolidated Financial Statements) plus
lower environmental clean-up costs recovered through rates.
These items were partially offset by higher operating expenses.
Depreciation Expense
Depreciation expense increased $178,000, to $1.7 million, and
$762,000, to $7.0 million, for the current three- and 12-month
periods, respectively, due chiefly to depreciable property
additions.
Income Taxes
Income taxes decreased $358,000, to $2.0 million, in the
current three-month period, and $632,000, to $4.4 million, in the
current 12-month period, due principally to lower pre-tax income.
Other Income
Other income decreased $1.2 million, to $49,000, and $1.2
million, to $812,000, for the current three- and 12-month
periods, respectively, due primarily to recognizing one-half of
the IRS settlement of about $1.1 million after income taxes in
last year's first quarter. (See Note 6 of the Notes of
Consolidated Financial Statements.)
Income Deductions
Income deductions decreased $440,000, to $6.7 million, for the
current 12-month period, due mainly to reduced interest on
long-term debt and commercial paper, partially offset by
increased interest on amounts refundable to customers.
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 2D, 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
2D, 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.
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 December 31, 1994, such
restrictions amounted to $11.6 million out of total retained
earnings of $60.9 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 Commission's order is on appeal before
the Illinois Supreme Court. (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 December 31, 1994 and for fiscal
1994, and 1993 were 2.99, 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 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
December 31, 1994
Date of Earliest Event Reported - December 9,
1994
Item 5. Other Events
Rates and Regulation
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)
February 9, 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> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 179828
<OTHER-PROPERTY-AND-INVEST> 108
<TOTAL-CURRENT-ASSETS> 51810
<TOTAL-DEFERRED-CHARGES> 12678
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 244424
<COMMON> 24757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 60873
<TOTAL-COMMON-STOCKHOLDERS-EQ> 85630
0
0
<LONG-TERM-DEBT-NET> 72863
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 10135
<LONG-TERM-DEBT-CURRENT-PORT> 4000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 71796
<TOT-CAPITALIZATION-AND-LIAB> 244424
<GROSS-OPERATING-REVENUE> 40985
<INCOME-TAX-EXPENSE> 1998
<OTHER-OPERATING-EXPENSES> 33788
<TOTAL-OPERATING-EXPENSES> 35786
<OPERATING-INCOME-LOSS> 5199
<OTHER-INCOME-NET> 14
<INCOME-BEFORE-INTEREST-EXPEN> 5213
<TOTAL-INTEREST-EXPENSE> 1741
<NET-INCOME> 3472
0
<EARNINGS-AVAILABLE-FOR-COMM> 3472
<COMMON-STOCK-DIVIDENDS> 1813
<TOTAL-INTEREST-ON-BONDS> 1470
<CASH-FLOW-OPERATIONS> (3612)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
