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, 1996
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, 1996.
<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,
------------- ------------- --------------
1996 1995 1996 1995 1996 1995
----- ----- ----- ----- ----- -----
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $29,259 $21,160 $133,224 $109,869 $145,387 $122,502
Transportation of customer-
owned gas 3,017 2,813 11,716 10,968 13,936 13,035
Other 308 249 770 1,135 944 1,353
------- ------- -------- -------- -------- --------
Total Operating Revenues 32,584 24,222 145,710 121,972 160,267 136,890
------- ------- -------- -------- -------- --------
OPERATING EXPENSES:
Gas costs 16,981 11,229 78,511 67,131 84,194 73,644
Operation 6,357 5,386 18,612 15,312 24,895 21,446
Maintenance 813 697 2,354 2,176 3,178 3,039
Depreciation 1,961 1,816 5,673 5,358 7,553 7,166
Taxes - Income 970 297 9,545 6,184 7,996 4,416
- State & local revenue 1,972 1,682 9,756 8,202 10,712 9,097
- Other 542 523 1,588 1,634 2,178 2,169
------- ------- -------- -------- -------- --------
Total Operating Expenses 29,596 21,630 126,039 105,997 140,706 120,977
------- ------- -------- -------- -------- --------
OPERATING INCOME 2,988 2,592 19,671 15,975 19,561 15,913
------- ------- -------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest income 130 309 290 377 476 523
Interest on long-term debt (1,158) (1,468) (3,779) (4,438) (5,246) (6,012)
Other interest expense (124) (385) (742) (994) (1,039) (1,026)
Income taxes (708) (122) (1,375) (151) (1,449) (267)
Miscellaneous - net 1,633 2 3,177 37 3,180 187
-------- ------- ------- ------ ------ ------
Total Other Income
and Deductions (227) (1,664) (2,429) (5,169) (4,078) (6,595)
------- ------- ------- ------- ------ ------
NET INCOME APPLICABLE TO
COMMON STOCK $ 2,761 $ 928 $ 17,242 $ 10,806 $ 15,483 $ 9,318
======= ======= ======== ======== ======== ========
<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,
1996 September 30, 1995
(Unaudited) 1995 (Unaudited)
------- --------- --------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
- ---------------------------
CAPITAL INVESTMENTS
Property, plant and equipment,
at original cost $281,072 $272,869 $267,434
Less - Accumulated depreciation 92,105 86,950 85,283
-------- -------- --------
Net property, plant and equipment 188,967 185,919 182,151
Other investments 96 104 107
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 189,063 186,023 182,258
-------- -------- --------
CURRENT ASSETS:
Cash 174 239 208
Cash equivalets 8,691 2,845 17,378
Receivables -
Customers, net of allowance for
uncollectible accounts of $1,017,
$698, and $828, respectively 12,777 4,574 4,482
Other 7,072 594 161
Accrued unbilled revenues 2,210 2,716 1,848
Materials and supplies, at average cost 1,650 2,199 2,266
Gas in storage, at last-in, first-out cost 4,601 18,396 15,801
Gas costs recoverable through rate adjustments 2,190 4,073 1,348
Prepayments 498 347 535
------- ------- -------
TOTAL CURRENT ASSETS 39,863 35,983 44,027
------- ------- -------
OTHER ASSETS:
Regulatory assets 11,684 9,999 9,765
Deferred charges 2,674 2,628 2,884
-------- -------- --------
TOTAL OTHER ASSETS 14,358 12,627 12,649
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $243,284 $234,633 $238,934
======== ======== ========
<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,
1996 September 30, 1995
(Unaudited) 1995 (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 70,890 62,024 65,379
-------- -------- --------
Total Common Stockholder's Equity 95,647 86,781 90,136
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,704 72,724 72,724
-------- -------- --------
TOTAL CAPITALIZATION 160,351 159,505 162,860
-------- -------- --------
CURRENT LIABILITIES:
Interim loans 4,000 -- --
Accounts payable 17,563 14,289 11,218
Dividends payable on common stock 3,046 1,595 1,378
Customer gas service and credit deposits 2,347 5,564 3,498
Sinking fund payments and maturities
due within one year -
Long-term debt -- 4,000 4,000
Accrued taxes 8,208 1,269 5,088
Gas sales revenue refundable through
rate adjustments -- 10,944 13,077
Accrued interest 956 1,772 1,124
Temporary LIFO liquidation credit 10,790 -- 3,021
-------- -------- --------
TOTAL CURRENT LIABILITIES 46,910 39,433 42,404
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily
accelerated depreciation 19,820 19,094 15,771
Investment tax credits being amortized
over the average lives of related property 3,786 3,905 3,943
Other 12,417 12,696 13,956
-------- -------- --------
TOTAL DEFERRED CREDITS AND
OTHER LIABILITIES 36,023 35,695 33,670
-------- ------- --------
TOTAL CAPITALIZATION AND LIABILITIES $243,284 $234,633 $238,934
======== ======== ========
<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,
------------------
1996 1995
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $17,242 $10,806
Adjustments to reconcile net income to net cash:
Depreciation 5,673 5,358
Deferred income taxes and investment tax credits - net 340 1,541
Change in deferred credits and other liabilities (11) (1,373)
Change in other assets (2,426) 552
Other 8 5
Change in current assets and liabilities:
Receivables - net (13,985) 655
Gas in storage 13,795 11,620
Gas costs recoverable 1,883 1,054
Accounts payable 3,274 (2,720)
Customer gas service and credit deposits (3,217) (2,379)
Accrued taxes 6,938 2,973
Gas sales revenue refundable (10,944) 3,301
Accrued interest (816) (1,614)
Temporary LIFO liquidation credit 10,790 3,021
Other 904 43
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,448 32,843
------- -------
INVESTING ACTIVITIES:
Capital expenditures - construction (9,134) (9,189)
Other assets 412 416
------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,722) (8,773)
------- -------
FINANCING ACTIVITIES:
Interim loans - net 4,000 --
Retirement of long-term debt (12,020) (4,201)
Dividends paid on common stock (6,925) (4,786)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES (14,945) (8,987)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,781 15,083
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,084 2,503
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,865 $17,586
======== =======
<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 items previously reported for the prior
periods have been reclassified to conform with the presentation in
the current periods.
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, 1995.
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 Regulated Operations
The Company's utility operations are subject to regulation
by the Illinois Commerce Commission (Commission). Regulated
operations are accounted for 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 such as the Commission. Regulatory
assets represent certain costs that are expected to be
recovered from customers through the ratemaking process. When
incurred, such costs are deferred as assets in the balance
sheet and subsequently recorded as expenses when those same
amounts are reflected 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, 1996 1995
----------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $4,823 $2,063
Interest paid 5,014 5,507
</TABLE>
2D Income Taxes
The Company follows the liability method of accounting for
deferred 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 are, in turn, debited
or credited to regulatory assets or liabilities.
2E Recovery of Gas Costs, Including Charges for Transition Costs
Pursuant to Federal Energy Regulatory Commission (FERC)
Order 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. (See Notes 4A and 4B.)
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 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 1992 through 1996 are currently
pending before the Commission.
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, 1996, such restrictions amounted to $11.6 million out of the
Company's total retained earnings of $70.9 million.
4. RATES AND REGULATION
4A Utility Rate Proceedings
Rate Order. On November 8, 1995, the Commission issued an order
approving changes in rates of the Company that are designed to
increase annual revenues by approximately $5.6 million, exclusive
of additional charges for revenue taxes. The Company was allowed
a rate of return on original-cost rate base of 9.75 per cent,
which reflects an 11.30 per cent cost of common equity. The new
rates were implemented on November 14, 1995. A group of
industrial transportation customers has appealed the Commission's
order to the Illinois Appellate Court. Any change made by the
Appellate Court would have a prospective effect only.
FERC Order 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 636 transition costs. The Commission issued
a final order in this proceeding on March 9, 1994. The order
provided for the full recovery of transition costs from the
Company's gas service customers and transportation customers to the
extent they contracted 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.
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. The Illinois Appellate Court, on
September 21, 1995, affirmed the Commission's order. A group of
industrial transportation customers of Illinois utilities filed a
petition for leave to appeal the Appellate Court's order to the
Illinois Supreme Court. If the Illinois Supreme Court accepts the
appeal, any change made by it to the Commission's order would have
a prospective effect only. (See Notes 2E and 4B.)
4B FERC Orders 636, 636-A, and 636-B
FERC Order 636 and successor orders require pipelines to 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 Gas Pipeline Company of America (Natural).
Charges by Natural 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 placed a cap
on the amount of GSR costs recoverable by Natural from the Company.
For the Company, that cap is approximately $25 million. 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. At June 30,
1996, the Company has made payments of $15.7 million and has
accrued an additional $4.4 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 at 6 sites for the purpose of
manufacturing gas and storing manufactured gas (Manufactured Gas
Sites). 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. One of the Manufactured Gas
Sites is discussed in more detail below. The Company, under the
supervision of the Illinois Environmental Protection Agency
(IEPA), is conducting investigations of other Manufactured Gas
sites. These investigations may require the Company to perform
additional investigation and remediation. The investigations are
in a preliminary stage and are expected to occur over an extended
period of time.
In 1990, the Company entered into an Administrative Order on
Consent (AOC) with the United States Environmental Protection
Agency (EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas site
located in Waukegan, Illinois, where manufactured gas and coking
operations were formerly conducted (Waukegan Site). The RI/FS is
comprised of an investigation to determine the nature and extent of
contamination at the Waukegan site and a feasibility study to
develop and evaluate possible remedial actions. The Company
entered into the AOC after being notified by the EPA that the
Company, General Motors Corporation (GMC) and Outboard Marine
Corporation were each a potentially responsible party (PRP) under
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA) with respect to the
Waukegan Site. A PRP is potentially liable for the cost of any
investigative and/or remedial work that the EPA determines is
necessary. 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.
The Company is accruing and deferring the costs it incurs in
connection with all of the Manufactured Gas Sites, including
related legal expenses, pending recovery through rates or from
insurance carriers or other entities. At June 30, 1996, the total
of the costs deferred by the Company, net of recoveries and amounts
billed to other entities, was $6.9 million. This amount includes
an estimate of the costs of completing the studies required by the
EPA at the Waukegan Site and the investigations being conducted
under the supervision of the IEPA referred to above. The amount
also includes an estimate of the costs of remediation at the
Waukegan Site at the minimum amount of the current estimated range
of such costs. The costs of remediation at the other sites cannot
be determined at this time. While the Company intends to seek
contribution from other entities for the costs incurred at the
sites, the full extent of such contributions cannot be determined
at this time.
The Company has filed suit against a number of insurance
carriers for the recovery of 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 1937 and 1986 for costs incurred or to be incurred by the
Company in connection with its Manufactured Gas sites in Waukegan.
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 their insurance carriers. Accordingly, the
costs deferred at June 30, 1996 have not been reduced to reflect
recoveries from insurance carriers.
Costs incurred by the Company for environmental activities
relating to former manufactured gas operations will be recovered
from insurance carriers or other entities or through rates for
utility service. Accordingly, management believes that the costs
incurred by the Company in connection with former manufactured gas
operations will not have a material adverse effect on the
financial position or results of operations of the Company. The
Company is recovering the costs of environmental activities
relating to its former manufactured gas operations, including
carrying charges on the unrecovered balances, under rate
mechanisms approved by the Commission. At June 30, 1996, it had
recovered $5.2 million of such costs through 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. Salomon has filed a counterclaim for
costs incurred and to be incurred by Salomon and Shattuck with
respect to the site.
5C Gasoline Release in Wheeling, Illinois
In June 1995, the Company received a letter from the IEPA
informing the Company that it was not in compliance with certain
provisions of the Illinois Environmental Protection Act which
prohibit water pollution within the State of Illinois. On November
14, 1995, the Illinois Attorney General filed a complaint in the
Circuit Court of Cook County naming the Company and four other
parties as defendants. The complaint alleges that the violations
are the result of a gasoline release that 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 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 Deferred
Credits and Other Liabilities - Other.
As a result of the Commission's accounting authorization, the
fiscal year 1995 portion of the settlement amount for the Company
was amortized (credited) to operation expense. The effect was to
offset increases in costs that the Company would incur during the
year. In fiscal 1995, the Company amortized approximately $1.4
million, or $1.1 million after income taxes.
7. BONDS REDEEMED
On December 18, 1995, the Company notified the trustee of its
intention to redeem $8 million aggregate principal amount of
Series I First Mortgage Bonds. The redemption, using the proceeds
of an interim short-term bank loan as well as other monies of the
Company, was completed on February 1, 1996.
8. EXPIRATION OF STORAGE CONTRACTS
The Company had certain natural gas storage contracts with
Natural that expired on or before December 1, 1995. Associated
with the expiration of the contracts, the Company realized a gain,
after income taxes, of approximately $909,000 in the third quarter
of fiscal 1996 and $1.8 million in both the nine and 12 months
ended June 30, 1996.
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 $1.8 million, to
$2.8 million, for the three months ended June 30, 1996, from the
results of last year's like quarter, due mainly to a rate increase
that went into effect for the Company on November 14, 1995. (See
Note 4A of the Notes to Consolidated Financial Statements.) In
addition, net income benefited from weather that was 26 per cent
colder than last year's period. Also, the current quarter was
aided by a gain associated with the expiration of certain natural
gas storage contracts. (See Note 8 of the Notes to Consolidated
Financial Statements.) These increases were partly offset by the
effect of last year's federal income tax settlement. (See Note 6
of the Notes to Consolidated Financial Statements).
Net income applicable to common stock increased $6.4 million, to
$17.2 million, and $6.2 million, to $15.5 million, for the current
nine- and 12-month periods, respectively, from the results of the
similar prior periods, due principally to higher gas deliveries,
mostly the result of weather that was 21 per cent and 22 per cent
colder than the previous respective periods. Both current periods
also benefited from the aforementioned rate increase and the gain
associated with the expiration of certain natural gas storage
contracts. These increases were offset, in part, by the prior
periods' recognition of the federal income tax settlement and the
gain from the sale of certain oil and gas rights.
<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, 1996 June 30,1996 June 30, 1996
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
from Prior Period from PriorPeriod from Prior Period
-------------------- ------------------- -------------------
(Thousands of dollars) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues (a) $2,320 20.5 $10,804 23.2 $11,212 20.7
Operation and
maintenance expenses 1,087 17.9 3,478 19.9 3,588 14.7
Depreciation expense 145 8.0 315 5.9 387 5.4
Income taxes 673 226.6 3,361 54.3 3,580 81.1
Other income and deductions (1,437) (86.4) (2,740) (53.0) (2,517) (38.2)
Net Income Applicable
to Common Stock 1,833 197.5 6,436 59.6 6,165 66.2
- -------------------------------------------------------------------------------------------
<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 $2.3 million, to $13.6 million,
$10.8 million, to $57.4 million, and $11.2 million, to $65.4
million, for the current three-, nine-, and 12-month periods,
respectively, reflecting increased gas deliveries, mainly caused by
colder weather in each of the more recent periods. The
aforementioned rate increase for the Company improved net operating
revenues in the current three-month period by about $1.1 million,
or $671,000 after income taxes. The rate increase benefited net
operating revenues in both the current nine- and 12-month periods
by about $4.1 million, and net income by $2.5 million.
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 increased $1.1 million, to
$7.2 million, for the current three-month period, due mainly to an
increase in environmental costs recovered through rates of $251,000
and the prior year's recognition of $240,000 for an IRS settlement.
(See Note 6 of the Notes to Consolidated Financial Statements.) In
addition, there was an increase of $444,000 in the provision for
injuries and damages.
Operation and maintenance expenses increased $3.5 million, to
$21 million, and $3.6 million, to $28.1 million, for the current
nine- and 12-month periods, due principally to the prior periods'
recognition of an IRS settlement of $1.3 million and $1.2 million,
respectively, plus an increase in environmental costs recovered
through rates of $1.1 million in each period. Also, increases
between periods resulted from the provision for injuries and
damages, group insurance expenses, and reengineering costs. In
addition, both prior periods included the benefit of $465,000 from
the sale of certain oil and gas rights. These increases were
partially offset by reduced pension expenses, primarily resulting
from a change in assumptions.
Depreciation Expense
Depreciation expense increased $145,000, to $2 million,
$315,000, to $5.7 million, and $387,000, to $7.6 million, for the
current three-, nine-, and 12-month periods, due chiefly to
depreciable property additions.
Income Taxes
Income taxes, exclusive of income taxes included in other income
and deductions, increased $673,000, to $970,000, $3.4 million, to
$9.5 million, and $3.6 million, to $8 million, for the current
three-, nine-, and 12-month periods, respectively, due mainly to
higher pre-tax income.
Other Income and Deductions
Other income and deductions decreased $1.4 million, $2.7
million, and $2.5 million, for the current three-, nine-, and
12-month periods, respectively, due primarily to the gain of
$909,000 in the three-month period and $1.8 million in both the
nine- and 12-month periods, after income taxes, associated with the
expiration of certain natural gas storage contracts. (See Note 8
of the Notes to Consolidated Financial Statements.) In addition,
all three periods benefited from decreased interest on long-term
debt reflecting a reduction in debt outstanding.
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 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 636
transition costs. The Illinois Appellate Court affirmed the
Commission's order on rehearing on September 21, 1995. (See Notes
2E, 4A, and 4B of the Notes to Consolidated Financial Statements.)
Reengineering Study. The Company has undertaken a major project to
reengineer its business processes with the goal of increasing
efficiency, responsiveness to customer needs, and cost
effectiveness.
<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,
------------------ ----------------- -------------------
1996 1995 1996 1995 1996 1995
----- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $25,076 $18,205 $112,257 $93,283 $123,008 $104,094
Commercial 3,411 2,344 16,953 13,491 18,139 14,900
Industrial 772 611 4,014 3,095 4,240 3,508
------- ------- -------- ------- -------- --------
29,259 21,160 133,224 109,869 145,387 122,502
Transportation
Residential 607 274 1,498 1,049 1,682 1,216
Commercial 1,056 1,403 5,652 5,878 6,634 6,892
Industrial 1,292 1,136 4,504 4,041 5,558 4,927
Contract Pooling 62 -- 62 -- 62 --
------- ------- ------- ------- -------- --------
3,017 2,813 11,716 10,968 13,936 13,035
------- ------- ------- ------- -------- --------
Other 308 249 770 1,135 944 1,353
------- ------- ------- ------- -------- --------
Total Operating Revenues 32,584 24,222 145,710 121,972 160,267 136,890
Less - Gas Costs 16,981 11,229 78,511 67,131 84,194 73,644
- Revenues Taxes 1,972 1,682 9,756 8,202 10,712 9,097
------- ------- ------- ------- -------- --------
Net Operating Revenues $13,631 $11,311 $57,443 $46,639 $65,361 $54,149
======= ======= ======= ======= ======== ========
Deliveries (MDth):
Gas Sales
Residential 3,710 3,387 21,208 17,490 22,780 18,852
Commercial 558 487 3,438 2,664 3,647 2,883
Industrial 137 135 882 652 932 733
------- ------- ------- ------- -------- --------
4,405 4,009 25,528 20,806 27,359 22,468
------- ------- ------- ------- -------- --------
Transportation (a)
Residential 527 117 1,167 525 1,221 573
Commercial 739 1,051 4,817 4,960 5,375 5,509
Industrial 1,381 1,374 4,970 5,034 6,307 6,385
------ ------ ------ ------- -------- --------
2,647 2,542 10,954 10,519 12,903 12,467
------ ------ ------ ------- -------- --------
Total Gas Sales
and Transportation 7,052 6,551 36,482 31,325 40,262 34,935
====== ====== ====== ======= ======== ========
Margin per Dth
delivered $1.93 $1.73 $1.57 $1.49 $1.62 $1.55
<FN>
(a) Volumes associated with contract pooling service are included
in the respective customer classes.
</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, 1996, such restrictions amounted to
$11.6 million out of total retained earnings of $70.9 million.
(See Note 3 of the Notes to Consolidated Financial Statements.)
Regulatory Actions. On November 8, 1995, the Commission issued an
order approving changes in rates of the Company. (See Note 4A of
the Notes to Consolidated Financial Statements.)
In September 1995, the Company filed a petition with the
Commission for approval of a performance-based rate program (PBR
Program) for gas costs. The objectives of the PBR Program are to
provide incentives to minimize gas supply and capacity costs in a
changing market and to pursue innovative gas supply-related
opportunities. Under specified conditions and up to certain
limits, the Company would share equally with gas sales customers
the savings or costs from this program. As modified by the Company
during the proceeding, the PBR Program would be for a pilot period
covering October 1, 1996 through fiscal year 1998 and was filed
pursuant to a new provision of the Illinois Public Utilities Act
which allows experiments in performance-based rates. Hearings on
the PBR Program proposal have been concluded. On June 5, 1996, the
Hearing Examiner issued his proposed order recommending that the
petition be denied. The Hearing Examiner's recommendation is not
binding on the Commission. The Company and the Commission Staff
have filed briefs opposing that recommendation and have presented
oral argument before the Commission, which is expected to enter an
order prior to the close of fiscal 1996.
Environmental Matters. The Company is conducting environmental
investigations and work at certain sites that were the location of
former manufactured gas 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.)
On November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming the Company
and four other parties as defendants. The complaint alleges
violations arising out of a gasoline release that 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
Company is currently evaluating this matter. (See Note 5C of the
Notes to Consolidated Financial Statements.)
Bonds Redeemed. On December 18, 1995, the Company notified the
trustee of its intention to redeem $8 million aggregate principal
amount of Series I First Mortgage Bonds. The redemption, using the
proceeds of an interim short-term bank loan as well as other monies
of the Company, was completed on February 1, 1996. (See Note 7 of
the Notes to Consolidated Financial Statements.)
Credit Lines. Peoples Gas has lines of credit of approximately
$129.4 million of which the Company may borrow up to $30 million to
cover its projected short-term needs. The lines of credit from
which the Company may borrow will expire on June 25, 1997.
Interest Coverage. The fixed charges coverage ratios for the
Company for the 12-months ended June 30, 1996, and for fiscal 1995
and 1994 were 4.97, 2.93, and 3.33, respectively.
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, 1996
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 7, 1996 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, AND 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-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 188,967
<OTHER-PROPERTY-AND-INVEST> 96
<TOTAL-CURRENT-ASSETS> 39,863
<TOTAL-DEFERRED-CHARGES> 2,674
<OTHER-ASSETS> 11,684
<TOTAL-ASSETS> 243,284
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 70,890
<TOTAL-COMMON-STOCKHOLDERS-EQ> 95,647
0
0
<LONG-TERM-DEBT-NET> 64,704
<SHORT-TERM-NOTES> 4,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 78,933
<TOT-CAPITALIZATION-AND-LIAB> 243,284
<GROSS-OPERATING-REVENUE> 145,710
<INCOME-TAX-EXPENSE> 9,545
<OTHER-OPERATING-EXPENSES> 116,494
<TOTAL-OPERATING-EXPENSES> 126,039
<OPERATING-INCOME-LOSS> 19,671
<OTHER-INCOME-NET> 2,092
<INCOME-BEFORE-INTEREST-EXPEN> 21,763
<TOTAL-INTEREST-EXPENSE> 4,521
<NET-INCOME> 17,242
0
<EARNINGS-AVAILABLE-FOR-COMM> 17,242
<COMMON-STOCK-DIVIDENDS> 6,925
<TOTAL-INTEREST-ON-BONDS> 3,696
<CASH-FLOW-OPERATIONS> 29,448
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
