FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 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
July 31, 1995.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Nine Twelve
Months Ended Months Ended Months Ended
June 30, June 30, June 30,
--------------- --------------- ---------------
1995 1994 1995 1994 1995 1994
------ ------ ------ ------ ------ ------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $21,160 $23,658 $109,869 $146,246 $122,502 $160,867
Transportation of customer-
owned gas 2,813 2,371 10,968 9,118 13,035 11,036
Other 249 350 1,135 843 1,353 1,084
------- ------ ------- ------- -------- -------
Total Operating Revenues 24,222 26,379 121,972 156,207 136,890 172,987
------- ------ ------- ------- -------- -------
OPERATING EXPENSES:
Gas costs 11,229 14,232 67,131 98,529 73,644 106,706
Operation 5,386 5,686 15,312 17,300 21,446 22,865
Maintenance 697 795 2,176 2,202 3,039 3,255
Depreciation 1,816 1,744 5,358 5,052 7,166 6,589
Taxes - Income 418 100 6,335 6,414 4,651 5,218
- State & local revenue 1,682 1,703 8,202 10,068 9,097 11,064
- Other 523 318 1,634 1,416 2,169 1,958
------- ------ -------- ------- ------- -------
Total Operating Expenses 21,751 24,578 106,148 140,981 121,212 157,655
------- ------ -------- ------- ------- -------
OPERATING INCOME 2,471 1,801 15,824 15,226 15,678 15,332
------- ------ -------- ------- ------- -------
OTHER INCOME:
Interest income 309 200 377 251 523 355
Miscellaneous 6 113 55 1,447 178 1,502
------- ------ ------- ------- ------ ------
Total Other Income 315 313 432 1,698 701 1,857
------- ------ ------- ------- ------ ------
GROSS INCOME 2,786 2,114 16,256 16,924 16,379 17,189
------- ------ ------- ------- ------ ------
INCOME DEDUCTIONS:
Interest on long-term debt 1,439 1,544 4,350 4,661 5,894 6,315
Other interest 385 27 994 290 1,026 323
Amortization of debt discount
and expense 30 30 88 91 118 120
Miscellaneous 4 5 18 16 23 21
------ ------ ------ ------ ------ -----
Total Income Deductions 1,858 1,606 5,450 5,058 7,061 6,779
------ ------ ------ ------ ------ -----
NET INCOME APPLICABLE TO
COMMON STOCK $ 928 $ 508 $ 10,806 $ 11,866 $ 9,318 $ 10,410
====== ====== ======= ====== ====== ======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, June 30,
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 $267,434 $259,375 $255,001
Less - Accumulated depreciation 85,283 80,639 79,209
-------- -------- --------
Net property, plant and equipment 182,151 178,736 175,792
Other investments 107 112 115
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 182,258 178,848 175,907
-------- -------- --------
CURRENT ASSETS
Cash 208 353 463
Cash equivalents 17,378 2,150 18,500
Receivables -
Customers, net of allowance for
uncollectible accounts of $828,
$889, and $980, respectively 4,482 5,173 10,396
Other 856 820 1,595
Accrued unbilled revenues 1,848 2,361 1,780
Materials and supplies, at average cost 2,266 1,953 2,114
Gas in storage, at last-in, first-out cost 15,801 27,421 17,188
Gas costs recoverable through rate adjustments 1,348 2,402 2,721
Prepayments 535 377 516
------- ------- -------
TOTAL CURRENT ASSETS 44,722 43,010 55,273
------- ------- -------
DEFERRED CHARGES 11,954 12,506 12,302
------- ------- -------
TOTAL PROPERTIES AND OTHER ASSETS $238,934 $234,364 $243,482
======= ======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, June 30,
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 65,379 58,923 62,224
------- -------- -------
Total Common Stockholder's Equity 90,136 83,680 86,981
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 72,724 76,925 76,925
------- -------- -------
TOTAL CAPITALIZATION 162,860 160,605 163,906
------- ------- -------
CURRENT LIABILITIES
Accounts payable 11,218 13,938 18,300
Dividends payable on common stock 1,378 1,813 1,668
Customer gas service and credit deposits 3,498 5,877 1,991
Sinking fund payments and maturities
due within one year -
Long-term debt 4,000 4,000 4,000
Accrued taxes 5,088 2,115 3,234
Gas sales revenue refundable through
rate adjustments 13,077 9,776 9,230
Accrued interest 1,124 2,738 1,190
Temporary LIFO liquidation credit 3,021 -- 2,924
------- ------ -------
TOTAL CURRENT LIABILITIES 42,404 40,257 42,537
------- ------ -------
RESERVES AND DEFERRED CREDITS
Deferred income taxes - primarily
accelerated depreciation 15,771 13,894 16,905
Investment tax credits being amortized
over the average lives of related property 3,943 4,052 4,092
Other 13,956 15,556 16,042
-------- ------- --------
TOTAL RESERVES AND DEFERRED CREDITS 33,670 33,502 37,039
-------- ------- --------
TOTAL CAPITALIZATION AND LIABILITIES $238,934 $234,364 $243,482
======== ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
June 30,
-------------------
1995 1994
-------- -------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $10,806 $11,866
Adjustments to reconcile net income to net cash:
Depreciation 5,358 5,052
Deferred income taxes and investment tax credits - net 1,541 1,077
Change in other deferred credits and reserves (1,373) (226)
Change in deferred charges 552 (4,889)
Other 5 2
Change in current assets and liabilities:
Receivables - net 655 (2,320)
Accrued unbilled revenues 513 2,059
Gas in storage 11,620 8,163
Rate adjustments recoverable or refundable 4,355 14,030
Accounts payable (2,720) 2,004
Customer gas service and credit deposits (2,379) (2,592)
Accrued taxes 2,973 221
Accrued interest (1,614) (910)
Temporary LIFO liquidation credit 3,021 2,924
Other (470) (254)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 32,843 36,207
-------- --------
INVESTING ACTIVITIES:
Capital expenditures - construction (9,189) (7,770)
Other assets 416 396
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (8,773) (7,374)
-------- --------
FINANCING ACTIVITIES:
Interim loans - net -- (5,400)
Trust fund, utility construction -- 4,243
Retirement of long-term debt (4,201) (4,000)
Dividends paid on common stock (4,786) (5,185)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (8,987) (10,342)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 15,083 18,491
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,503 472
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,586 $18,963
======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</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 nine months
ended June 30, 1995 1994
----------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $2,063 $5,902
Interest paid 5,507 5,803
</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 June
30, 1995, such restrictions amounted to $11.6 million out of the
Company's total retained earnings of $65.4 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 were designed to
increase annual revenues by about $10.1 million, exclusive of
additional charges for revenue taxes. In June 1995, the Company
lowered its request by $2.9 million, to $7.2 million, which is
based on a rate of return on original-cost rate base of 10.14
percent, reflecting a 12.0 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.
The Commission has until December 20, 1995 to issue its order on
remand. 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 June 30, 1995, the
Company has accrued $10.2 million and has made payments of $9.3
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 June 30, 1995, the total of the
costs deferred by the Company, net of recoveries and amounts
billed to other entities, was $7.4 million. This amount includes
an estimate of the costs of completing the studies required by the
EPA at the Waukegan I Site and the Waukegan II Site and the
investigations initiated at the request of the IEPA at the other
sites referred to above. The amount also includes an estimate of
the costs of remediation at the Waukegan I Site, at the minimum
amount of the current estimated range of such costs. The costs of
remediation at the other sites cannot be determined until more is
known about the nature and extent of contamination and the
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 June 30, 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 June 30, 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.
5C Gasoline Release in Wheeling, Illinois
In June 1995, the Company received a letter from the IEPA
informing the Company that it was in noncompliance with certain
provisions of the Illinois Environmental Protection Act which
prohibit water pollution within the State of Illinois. The letter
stated that the alleged violations were the result of a gasoline
release which occurred in Wheeling, Illinois in June 1992 when a
contractor who was installing a pipeline for the Company
accidentally struck a gasoline pipeline owned by West Shore
Pipeline Company. The letter further advised that the matter had
been referred to the Office of the Illinois Attorney General for
the preparation of a formal enforcement complaint.
The Company is currently evaluating this matter.
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 nine months ended June 30, 1995, the Company
amortized approximately $1.3 million, or $991,000 after income
taxes, leaving a remaining balance of about $140,000 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 $420,000, to
$928,000, for the three-months ended June 30, 1995. The current
three-month period benefited from higher natural gas deliveries,
partly due to increased fuel usage during this year's cooler
springtime weather. Earnings also benefited from the recognition
of a portion of a previously announced federal income tax
settlement. (See Note 6 of the Notes to Consolidated Financial
Statements.)
Net income applicable to common stock decreased $1.1 million, to
$10.8 million, and $1.1 million, to $9.3 million for the current
nine- and 12-month periods, respectively. Results for the current
nine- and 12-month ended periods were adversely affected by a
decline in natural gas deliveries resulting from weather that was
13 percent and 14 percent warmer than the respective prior periods.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended Nine Months Ended 12 Months Ended
June 30, 1995 June 30, 1995 June 30, 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) $867 8.3 $ (971) (2.0) $(1,068) (1.9)
Operation and
maintenance expenses (398) (6.1) (2,014) (10.3) (1,635) (6.3)
Depreciation expense 72 4.1 306 6.1 577 8.8
Income taxes 318 318.0 (79) (1.2) (567) (10.9)
Other income 2 0.6 (1,266) (74.6) (1,156) (62.3)
Income deductions 252 15.7 392 7.8 282 4.2
Net Income Applicable
to Common Stock 420 82.7 (1,060) (8.9) (1,092) (10.5)
-------------------------------------------------------------------------------------
<FN>
(a) Operating revenues, net of gas costs and revenue taxes.
</TABLE>
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 increased $867,000, to $11.3 million, for
the current three-month period, resulting mainly from higher gas
deliveries reflecting the colder weather in the period and an
increase in the number of customers.
Net operating revenues decreased $971,000, to $46.6 million, and
$1.1 million, to $54.1 million, for the current nine- and 12-month
periods, respectively, primarily reflecting warmer weather than in
the similar year-ago periods, partially offset by increased other
gas deliveries.
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 $398,000, to $6.1
million, $2.0 million, to $17.5 million, and $1.6 million, to $24.5
million, for the three-, nine-, and 12-month periods, respectively,
due principally to recognizing $240,000, $1.3 million, and $1.3
million in the respective current periods for the IRS settlement.
(See Note 6 of the Notes to Consolidated Financial Statements.)
Additionally, the current nine- and 12-month periods include lower
environmental costs recovered through rates of $294,000 and
$341,000, (see Note 4A of the Notes to Consolidated Financial
Statements) and a decrease in the provision for uncollectible
accounts of $174,000 and $183,000, respectively. The decrease in
the current 12-month period was partially offset by an increase in
group insurance expenses of $826,000 primarily due to the
recognition of SFAS 106 costs.
Depreciation Expense
Depreciation expense increased $72,000, to $1.8 million,
$306,000, to $5.4 million, and $577,000, to $7.2 million for the
current three-, nine-, and 12-month periods, respectively, due
chiefly to depreciable property additions.
Income Taxes
Income taxes increased $318,000, to $418,000, for the current
three-month period, due mainly to higher pre-tax income.
Income taxes, exclusive of amounts included in other income
related to an IRS settlement, declined $79,000, to $6.3 million, in
the current nine-month period, and $567,000, to $4.7 million, in
the current 12-month period, due principally to lower pre-tax
income.
Other Income
Other income declined $1.3 million, to $432,000, and $1.2
million, to $701,000, for the current nine- 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 $333,000 and $312,000,
respectively, on amounts recoverable from customers.
Income Deductions
Income deductions increased $252,000, to $1.9 million, $392,000,
to $5.5 million, and $282,000, to $7.1 million, for the current
three-, nine-, and 12-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.
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.
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
------------------ ----------------- -------------------
1995 1994 1995 1994 1995 1994
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $18,205 $20,205 $ 93,283 $119,844 $104,094 $132,363
Commercial 2,344 3,009 13,491 20,423 14,900 22,173
Industrial 611 444 3,095 5,979 3,508 6,331
------- ------- -------- -------- -------- --------
21,160 23,658 109,869 146,246 122,502 160,867
------- ------- -------- -------- -------- --------
Transportation
Residential 274 248 1,049 983 1,216 1,162
Commercial 1,403 1,237 5,878 5,035 6,892 5,960
Industrial 1,136 886 4,041 3,100 4,927 3,914
------- ------- -------- -------- -------- --------
2,813 2,371 10,968 9,118 13,035 11,036
------- ------- -------- -------- -------- --------
Other 249 350 1,135 843 1,353 1,084
------- ------- -------- -------- -------- --------
Total Operating Revenues 24,222 26,379 121,972 156,207 136,890 172,987
Gas Costs (11,229) (14,232) (67,131) (98,529) (73,644) (106,706)
Revenues Taxes (1,682) (1,703) (8,202) (10,068) (9,097) (11,064)
------- ------- -------- -------- -------- --------
Net Operating Revenues $11,311 $10,444 $ 46,639 $ 47,610 $ 54,149 $ 55,217
======= ======= ======== ======== ======== ========
Deliveries (MMcf):
Sales
Residential 3,387 2,874 17,490 18,866 18,852 20,433
Commercial 487 480 2,664 3,422 2,883 3,685
Industrial 135 102 652 924 733 988
------- ------- -------- -------- ------- --------
4,009 3,456 20,806 23,212 22,468 25,106
------- ------- -------- -------- ------- --------
Transportation
Residential 117 108 525 531 573 589
Commercial 1,051 918 4,960 4,715 5,509 5,277
Industrial 1,374 1,439 5,034 4,770 6,385 5,982
------- ------- -------- -------- ------- --------
2,542 2,465 10,519 10,016 12,467 11,848
------- ------- -------- -------- ------- --------
Total Sales
and Transportation 6,551 5,921 31,325 33,228 34,935 36,954
======= ======= ======== ======== ======= ========
Margin per Mcf
delivered $1.73 $1.76 $1.49 $1.43 $1.55 $1.49
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Indenture Restrictions. The Company's indenture relating to its
first mortgage bonds contains provisions and covenants restricting
the payment of cash dividends and the purchase or redemption of
capital stock. At June 30, 1995, such restrictions amounted to
$11.6 million out of total retained earnings of $65.4 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.)
In June 1995, the Company was informed by the Illinois
Environmental Protection Agency (IEPA) that an enforcement action
would be brought against the Company for violating certain
provisions of the Illinois Environmental Protection Act which
prohibit water pollution within the State of Illinois. According
to the IEPA, the alleged violations occurred as the result of a
gasoline spill which occurred in Wheeling, Illinois during June
1992 when a contractor who was installing a pipeline for the
Company accidentally struck a gasoline pipeline owned by West Shore
Pipeline Company. (See Note 5C 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 lines of credit will
expire on June 26, 1996.
Interest Coverage. Coverage ratios for the Company's fixed charges
for the 12-months ended June 30, 1995 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
June 30, 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)
August 10, 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> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> JUN-30-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 182,151
<OTHER-PROPERTY-AND-INVEST> 107
<TOTAL-CURRENT-ASSETS> 44,722
<TOTAL-DEFERRED-CHARGES> 11,954
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 238,934
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 65,379
<TOTAL-COMMON-STOCKHOLDERS-EQ> 90,136
0
0
<LONG-TERM-DEBT-NET> 72,724
<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> 72,074
<TOT-CAPITALIZATION-AND-LIAB> 238,934
<GROSS-OPERATING-REVENUE> 121,972
<INCOME-TAX-EXPENSE> 6,335
<OTHER-OPERATING-EXPENSES> 99,813
<TOTAL-OPERATING-EXPENSES> 106,148
<OPERATING-INCOME-LOSS> 15,824
<OTHER-INCOME-NET> 326
<INCOME-BEFORE-INTEREST-EXPEN> 16,150
<TOTAL-INTEREST-EXPENSE> 5,344
<NET-INCOME> 10,806
0
<EARNINGS-AVAILABLE-FOR-COMM> 10,806
<COMMON-STOCK-DIVIDENDS> 4,786
<TOTAL-INTEREST-ON-BONDS> 4,350
<CASH-FLOW-OPERATIONS> 32,843
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
