FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 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
January 31, 1996.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ --------------------
1995 1994 1995 1994
------- ------- -------- --------
(Thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $38,853 $36,741 $124,145 $149,317
Transportation of customer-
owned gas 4,118 3,570 13,735 11,490
Other 188 674 822 1,509
------- ------- -------- --------
Total Operating Revenues 43,159 40,985 138,702 162,316
------- ------- -------- --------
OPERATING EXPENSES:
Gas costs 21,758 23,160 71,412 97,470
Operation 5,387 5,042 21,940 23,177
Maintenance 763 715 3,049 3,130
Depreciation 1,791 1,732 7,296 7,038
Taxes- Income 3,265 1,998 6,127 4,372
- State & local revenue 2,981 2,612 9,527 10,408
- Other 492 527 2,189 1,984
------- ------- -------- --------
Total Operating Expenses 36,437 35,786 121,540 147,579
------- ------- -------- --------
OPERATING INCOME 6,722 5,199 17,162 14,737
------- ------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest income 114 15 663 389
Interest on long-term debt (1,394) (1,498) (5,801) (6,221)
Other interest expense (323) (271) (1,343) (439)
Miscellaneous - net 62 27 75 401
------- ------- -------- --------
Total Other Income
and Deductions (1,541) (1,727) (6,406) (5,870)
------- ------- -------- --------
NET INCOME APPLICABLE
TO COMMON STOCK $ 5,181 $ 3,472 $ 10,756 $ 8,867
======= ======= ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1995 September 30, 1994
(Unaudited) 1995 (Unaudited)
----------- ------------ ------------
(Thousands)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $275,402 $272,869 $262,116
Less - Accumulated depreciation 88,292 86,950 82,288
Net property, plant and equipment 187,110 185,919 179,828
Other investments 102 104 108
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 187,212 186,023 179,936
-------- -------- --------
CURRENT ASSETS:
Cash 615 239 327
Cash equivalents -- 2,845 --
Receivables -
Customers, net of allowance for
uncollectible accounts of $821,
$698, and $718, respectively 15,960 4,574 14,123
Other 1,335 594 1,622
Accrued unbilled revenues 8,339 2,716 8,913
Materials and supplies, at average cost 2,292 2,199 1,997
Gas in storage, at last-in, first-out cost 17,078 18,396 19,744
Gas costs recoverable through rate adjustments 3,914 4,073 4,220
Prepayments 143 347 169
-------- -------- --------
TOTAL CURRENT ASSETS 49,676 35,983 51,115
-------- -------- --------
OTHER ASSETS:
Regulatory assets 11,170 9,999 10,420
Deferred charges 2,672 2,628 2,953
-------- -------- --------
TOTAL OTHER ASSETS 13,842 12,627 13,373
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $250,730 $234,633 $244,424
======== ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1995 September 30, 1994
(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 64,631 62,024 60,873
-------- -------- --------
Total Common Stockholder's Equity 89,388 86,781 85,630
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,704 72,724 72,863
-------- -------- --------
TOTAL CAPITALIZATION 154,092 159,505 158,493
-------- -------- --------
CURRENT LIABILITIES:
Interim loans 11,125 -- 10,135
Accounts payable 18,399 14,289 15,705
Dividends payable on common stock 2,574 1,595 1,523
Customer gas service and credit deposits 6,015 5,564 7,316
Sinking fund payments and maturities,
due within one year -
Long-term debt 8,000 4,000 4,000
Accrued taxes 6,326 1,269 3,696
Gas sales revenue refundable through
rate adjustments 5,765 10,944 9,720
Accrued interest 1,032 1,772 1,107
Temporary LIFO liquidation credit 1,389 -- (822)
-------- -------- --------
TOTAL CURRENT LIABILITIES 60,625 39,433 52,380
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily
accelerated depreciation 19,472 19,094 14,614
Investment tax credits being amortized
over the average lives of related property 3,865 3,905 4,015
Other 12,676 12,696 14,922
-------- -------- --------
TOTAL DEFERRED CREDITS AND
OTHER LIABILITIES 36,013 35,695 33,551
-------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $250,730 $234,633 $244,424
======== ======== ========
<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>
Three Months Ended
December 31,
-------------------
1995 1994
-------- ---------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 5,181 $ 3,472
Adjustments to reconcile net income to net cash:
Depreciation 1,791 1,732
Deferred income taxes and investment tax credits - net 249 599
Change in deferred credits and other liabilities 69 (550)
Change in other assets (1,215) (172)
Other 2 4
Change in current assets and liabilities:
Receivables - net (12,127) (10,447)
Accrued unbilled revenues (5,623) (6,552)
Gas in storage 1,318 7,677
Gas costs recoverable 159 (1,818)
Accounts payable 4,110 1,767
Customer gas service and credit deposits 451 1,439
Accrued taxes 5,057 1,581
Gas sales revenue refundable (5,179) (56)
Accrued interest (740) (1,631)
Temporary LIFO liquidation credit 1,389 (822)
Other 111 165
-------- ---------
NET CASH USED IN OPERATING ACTIVITIES (4,997) (3,612)
-------- ---------
INVESTING ACTIVITIES:
Capital expenditures - construction (3,187) (2,974)
Other assets 205 150
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (2,982) (2,824)
-------- ---------
FINANCING ACTIVITIES:
Interim loans - net 11,125 10,135
Retirement of long-term debt (4,020) (4,062)
Dividends paid on common stock (1,595) (1,813)
-------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,510 4,260
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,469) (2,176)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,084 2,503
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 615 $ 327
======== =========
<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, 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 three months
ended December 31, 1995 1994
-----------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $ (547) $ 618
Interest paid 2,309 2,456
</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 1991 through 1995 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
December 31, 1995, such restrictions amounted to $11.6 million out
of the Company's total retained earnings of $64.6 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.
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
incurred by Illinois utilities, including the Company, 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 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) 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.
On November 21, 1995, the Commission entered its order on remand.
Consistent with the Illinois Supreme Court's April 20, 1995
decision, the Commission, in its order on remand, reversed its
earlier order to allow utilities to recover carrying charges on
such environmental costs incurred on and after April 20, 1995, the
date of the Supreme Court's decision. (See Note 5A.)
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
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.
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 gave
notice of their intent 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 places 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 December
31, 1995, the Company has made payments of $12.5 million and has
accrued an additional $1.3 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, except for the Waukegan I Site, 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. At December 31, 1995, the total of
the costs deferred by the Company, net of recoveries and amounts
billed to other entities, was $7.8 million. This amount includes
an estimate of the costs of completing the studies required by the
EPA at the Waukegan I Site and the Waukegan II Site and the
investigations initiated at the request of the IEPA at the other
sites referred to above. The amount also includes an estimate of
the costs of remediation at the Waukegan I Site, at the minimum
amount of the current estimated range of such costs. The costs of
remediation at the other sites cannot be determined until more is
known about the nature and extent of contamination and the
remedial action, if any, to be required by the EPA or the IEPA.
While the Company intends to seek contribution from other entities
for the costs incurred at the sites, the full extent of such
contributions cannot be determined at this time.
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 at December 31, 1995, 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 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. At December
31, 1995, it had recovered $4 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. 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. LONG-TERM DEBT
7A Issuance of Bonds
In March 1993, the Company filed a shelf registration with the
SEC for the issuance of $40 million aggregate principal amount of
first mortgage bonds. In May 1993, the Company issued a portion
of those first mortgage bonds in an aggregate principal amount of
$15 million at 6.37 per cent 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 early in fiscal 1997.
Proceeds of any future offering will be used for general corporate
purposes.
7B 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.
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 $1.7 million, to
$5.2 million, for the three months ended December 31, 1995, from
the results of last year's like quarter, due mainly to increased
gas deliveries largely resulting from weather that was 34 per cent
colder than last year's period, which was abnormally warm. In
addition, net income benefited from a rate increase that went into
effect for the Company on November 14, 1995. (See Note 4A of the
Notes to Consolidated Financial Statements.) Last year's first
quarter was helped by a federal income tax settlement (see Note 6
of the Notes to Consolidated Financial Statements) and by the sale
of interests in certain oil and gas rights.
Net income applicable to common stock increased $1.9 million, to
$10.8 million, for the current 12-month period, from the results of
the similar prior period, due principally to increased gas
deliveries and weather that was 5 per cent colder than the previous
12 months. The current 12-month period also benefited from the
aforementioned rate increase. In addition, net income was
positively impacted by the timing difference in recognizing a
federal income tax settlement. These increases were offset, in
part, by the sale of interests in certain oil and gas rights in
the prior period.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended 12 Months Ended
December 31, 1995 December 31, 1995
Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period
------------------- -------------------
(Thousands of dollars) Amount % Amount %
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues (a) $3,207 21.1 $3,325 6.1
Operation and maintenance expenses 393 6.8 (1,318) (5.0)
Depreciation expense 59 3.4 258 3.7
Income taxes 1,267 63.4 1,755 40.1
Other income and deductions (186) (10.8) 536 9.1
Net income applicable to common stock 1,709 49.2 1,889 21.3
- -----------------------------------------------------------------------------
<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 $3.2 million, to $18.4 million,
and $3.3 million, to $57.8 million, for the current three- 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 both periods by about $$665,000,
and net income by $400,000. In addition, the 12-month period was
impacted by increased deliveries to large volume customers.
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 $393,000, to $6.2
million, for the current three-month period, due mainly to the
recognition in the prior year's first quarter of $465,000 from the
sale of interests in certain oil and gas rights and $443,000 for an
IRS settlement. (See Note 6 of the Notes to Consolidated Financial
Statements.) These increases were partially offset by reduced
pension expenses of $155,000, primarily resulting from a change
in assumptions. Also, outside services decreased by $97,000.
Operation and maintenance expenses decreased $1.3 million, to
$25 million, for the current 12-month period, due principally to an
increased credit of $567,000 between periods for the timing
difference in recognizing an IRS settlement. In addition, outside
services and pension expenses decreased $462,000 and $236,000,
respectively. These decreases were partially offset by the prior
year's benefit of $465,000 from the sale of interests in certain
oil and gas rights.
Depreciation Expense
Depreciation expense increased $258,000, to $7.3 million, for
the current 12-month period, due chiefly to depreciable property
additions.
Income Taxes
Income taxes increased $1.3 million, to $3.3 million, and $1.8
million, to $6.1 million, for the current three- and 12-month
periods, respectively, due mainly to higher pre-tax income.
Other Income and Deductions
Other income and deductions decreased $186,000, for the
current three-month period, due primarily to higher interest
income on amounts recoverable from customers and lower interest
expense on long-term debt.
Other income and deductions increased $536,000, for the
current 12-month period, due primarily to increased interest
expense on amounts refundable to customers and on budget accounts,
and decreased interest income on amounts recoverable from
customers. These increases were partially offset by reduced
interest expense on long-term debt and increased interest income.
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 Twelve Months Ended
December 31, December 31,
------------------ --------------------
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $33,242 $31,485 $105,792 $123,536
Commercial 4,536 4,401 14,812 20,298
Industrial 1,075 855 3,541 5,483
------- ------- -------- --------
38,853 36,741 124,145 149,317
------- ------- -------- --------
Transportation
Residential 399 328 1,303 1,127
Commercial 2,198 1,929 7,128 6,119
Industrial 1,521 1,313 5,304 4,244
------- ------- -------- --------
4,118 3,570 13,735 11,490
------- ------- -------- --------
Other 188 674 822 1,509
------- ------- -------- --------
Total Operating Revenues 43,159 40,985 138,702 162,316
Less - Gas Costs 21,758 23,160 71,412 97,470
- Revenues Taxes 2,981 2,612 9,527 10,408
------- ------- -------- --------
Net Operating Revenues $18,420 $15,213 $ 57,763 $ 54,438
======= ======= ======== ========
Deliveries (MDth):
Gas Sales
Residential 7,033 5,350 20,745 19,352
Commercial 1,027 775 3,125 3,424
Industrial 266 158 810 898
------- ------- -------- --------
8,326 6,283 24,680 23,674
------- ------- -------- --------
Transportation
Residential 209 160 628 553
Commercial 1,929 1,593 5,854 5,171
Industrial 1,752 1,652 6,471 6,205
------- ------- -------- --------
3,890 3,405 12,953 11,929
------- ------- -------- --------
Total Gas Sales
and Transportation 12,216 9,688 37,633 35,603
======= ======= ======== ========
Margin per Dth delivered $ 1.51 $ 1.57 $ 1.53 $ 1.53
</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 December 31, 1995, such restrictions amounted to
$11.6 million out of total retained earnings of $64.6 million.
(See Note 3 of the Notes to Consolidated Financial Statements.)
Regulatory Actions. On November 8, 1995, the Commission issued
orders approving changes in rates of the Company. (See Note 4A of
the Notes to Consolidated Financial Statements.)
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. 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. On November 21, 1995, the
Commission entered its order on remand. (See Note 4A of the Notes
to Consolidated Financial Statements.)
On September 29, 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 the program. The PBR Program would be
for a pilot period covering fiscal years 1996 through 1998 and was
filed pursuant to a new provision of the Illinois Public Utilities
Act which allows experiments in performance-based rates. The
Commission has commenced hearings on the PBR Program proposals, and
an order is expected during the third quarter 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 Issued. In March 1993, the Company filed a shelf
registration with the SEC for the issuance of $40 million aggregate
principal amount of first mortgage bonds. In May 1993, the Company
issued a portion of those first mortgage bonds in an aggregate
principal amount of $15 million at 6.37 per cent, due May 1, 2003.
(See Note 7A 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.
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 7B of
the Notes to Consolidated Financial Statements.)
Credit Lines. Peoples Gas has lines of credit of approximately
$131.1 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 26, 1996.
Interest Coverage. The fixed charges coverage ratios for the
Company for the 12-months ended December 31, 1995, and for fiscal
1995 and 1994 were 3.36, 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
December 31, 1995
Date of Report - November 15, 1995
Item 5. Other Events
Rates and Regulation
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
North Shore Gas Company
------------------------
(Registrant)
February 13, 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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> DEC-31-1995
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 187,110
<OTHER-PROPERTY-AND-INVEST> 102
<TOTAL-CURRENT-ASSETS> 49,676
<TOTAL-DEFERRED-CHARGES> 2,672
<OTHER-ASSETS> 11,170
<TOTAL-ASSETS> 250,730
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 64,631
<TOTAL-COMMON-STOCKHOLDERS-EQ> 89,388
0
0
<LONG-TERM-DEBT-NET> 64,704
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 11,125
<LONG-TERM-DEBT-CURRENT-PORT> 8,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 77,513
<TOT-CAPITALIZATION-AND-LIAB> 250,730
<GROSS-OPERATING-REVENUE> 43,159
<INCOME-TAX-EXPENSE> 3,265
<OTHER-OPERATING-EXPENSES> 33,172
<TOTAL-OPERATING-EXPENSES> 36,437
<OPERATING-INCOME-LOSS> 6,722
<OTHER-INCOME-NET> 176
<INCOME-BEFORE-INTEREST-EXPEN> 6,898
<TOTAL-INTEREST-EXPENSE> 1,717
<NET-INCOME> 5,181
0
<EARNINGS-AVAILABLE-FOR-COMM> 5,181
<COMMON-STOCK-DIVIDENDS> 1,595
<TOTAL-INTEREST-ON-BONDS> 1,365
<CASH-FLOW-OPERATIONS> (4,997)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
