FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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
April 30, 1996.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Six Twelve
Months Ended Months Ended Months Ended
March 31, March 31, March 31,
----------------- ------------------- -------------------
1996 1995 1996 1995 1996 1995
------- ------- -------- ------- -------- --------
(Thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $65,112 $51,969 $103,965 $88,709 $137,288 $125,000
Transportation of customer-
owned gas 4,581 4,584 8,699 8,155 13,732 12,593
Other 274 212 461 886 884 1,454
------- ------- -------- ------- -------- --------
Total Operating Revenues 69,967 56,765 113,125 97,750 151,904 139,047
------- ------- -------- ------- -------- --------
OPERATING EXPENSES:
Gas costs 39,772 32,741 61,530 55,902 78,443 76,647
Operation 6,867 4,884 12,254 9,927 23,923 21,747
Maintenance 777 765 1,541 1,480 3,062 3,137
Depreciation 1,922 1,810 3,713 3,542 7,409 7,094
Taxes - Income 5,311 3,903 8,575 5,887 7,323 4,105
- State & local revenue 4,803 3,908 7,785 6,520 10,422 9,117
- Other 554 584 1,045 1,110 2,158 1,964
------- ------- -------- ------- -------- --------
Total Operating Expenses 60,006 48,595 96,443 84,368 132,740 123,811
------- ------- -------- ------- -------- --------
OPERATING INCOME 9,961 8,170 16,682 13,382 19,164 15,236
------- ------- -------- ------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest income 45 53 160 68 656 414
Interest on long-term debt (1,227) (1,471) (2,621) (2,970) (5,556) (6,118)
Other interest expense (294) (338) (617) (609) (1,300) (667)
Income taxes (667) (16) (667) (29) (862) (260)
Miscellaneous - net 1,482 8 1,543 36 1,548 293
------- ------- -------- ------- -------- --------
Total Other Income
and Deductions (661) (1,764) (2,202) (3,504) (5,514) (6,338)
------- ------- -------- ------- -------- --------
NET INCOME APPLICABLE TO
COMMON STOCK $ 9,300 $ 6,406 $ 14,480 $ 9,878 $ 13,650 $ 8,898
======= ======= ======== ======= ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
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 $278,866 $272,869 $265,270
Less - Accumulated depreciation 90,326 86,950 83,957
-------- -------- --------
Net property, plant and equipment 188,540 185,919 181,313
Other investments 100 104 107
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 188,640 186,023 181,420
-------- -------- --------
CURRENT ASSETS:
Cash 1,017 239 7,311
Cash equivalents 4,490 2,845 8,275
Receivables -
Customers, net of allowance for
uncollectible accounts of $959,
$698, and $801, respectively 21,980 4,574 13,932
Other 8,803 594 523
Accrued unbilled revenues 8,570 2,716 5,466
Materials and supplies, at average cost 1,624 2,199 2,188
Gas in storage, at last-in, first-out cost 6,487 18,396 12,569
Gas costs recoverable through rate adjustments 2,246 4,073 408
Prepayments 634 347 678
-------- -------- --------
TOTAL CURRENT ASSETS 55,851 35,983 51,350
-------- -------- --------
OTHER ASSETS:
Regulatory assets 9,319 9,999 11,115
Deferred charges 2,872 2,628 2,892
-------- -------- --------
TOTAL OTHER ASSETS 12,191 12,627 14,007
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $256,682 $234,633 $246,777
======== ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, March 31,
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 71,175 62,024 65,828
-------- -------- --------
Total Common Stockholder's Equity 95,932 86,781 90,585
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,704 72,724 72,806
-------- -------- --------
TOTAL CAPITALIZATION 160,636 159,505 163,391
-------- -------- --------
CURRENT LIABILITIES:
Interim loans 8,000 -- --
Accounts payable 23,052 14,289 12,705
Dividends payable on common stock 2,755 1,595 1,450
Customer gas service and credit deposits 2,640 5,564 4,106
Sinking fund payments and maturities,
due within one year -
Long-term debt -- 4,000 4,000
Accrued taxes 8,164 1,269 6,213
Gas sales revenue refundable through
rate adjustments 1,790 10,944 14,666
Accrued interest 2,100 1,772 1,761
Temporary LIFO liquidation credit 11,600 -- 5,102
-------- -------- --------
TOTAL CURRENT LIABILITIES 60,101 39,433 50,003
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily
accelerated depreciation 19,589 19,094 15,209
Investment tax credits being amortized
over the average lives of related property 3,826 3,905 3,979
Other 12,530 12,696 14,195
-------- -------- --------
TOTAL DEFERRED CREDITS AND
OTHER LIABILITIES 35,945 35,695 33,383
-------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $256,682 $234,633 $246,777
======== ======== ========
<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>
Six Months Ended
March 31,
-------------------
1996 1995
------- -------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $14,480 $ 9,878
Adjustments to reconcile net income to net cash:
Depreciation 3,713 3,542
Deferred income taxes and investment tax credits - net 238 1,071
Change in deferred credits and other liabilities 13 (1,190)
Change in other assets 436 (806)
Other 4 5
Change in current assets and liabilities:
Receivables - net (25,615) (9,157)
Accrued unbilled revenues (5,854) (3,105)
Gas in storage 11,909 14,852
Gas costs recoverable 1,827 1,994
Accounts payable 8,763 (1,233)
Customer gas service and credit deposits (2,924) (1,771)
Accrued taxes 6,895 4,098
Gas sales revenue refundable (9,154) 4,890
Accrued interest 328 (977)
Temporary LIFO liquidation credit 11,600 5,102
Other 288 (537)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,947 26,656
------- -------
INVESTING ACTIVITIES:
Capital expenditures - construction (6,662) (6,406)
Other assets 328 288
------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,334) (6,118)
------- -------
FINANCING ACTIVITIES:
Interim loans - net 8,000 --
Retirement of long-term debt (12,020) (4,119)
Dividends paid on common stock (4,170) (3,336)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (8,190) (7,455)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,423 13,083
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,084 2,503
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,507 $15,586
======= =======
<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 six months
ended March 31, 1996 1995
--------------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $4,823 $2,063
Interest paid 2,640 3,362
</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 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
March 31, 1996, such restrictions amounted to $11.6 million out of
the Company's total retained earnings of $71.2 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
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 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 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 March 31,
1996, the Company has made payments of $14.1 million and has
accrued an additional $1.5 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, their predecessors, and certain former affiliates
operated facilities in the past at 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. At this time, except for the
Waukegan Site (discussed below), it is not known what, if any,
remedial action will be necessary at the Manufactured Gas Sites
or, if necessary, what the cost of any such action would be.
The Company, in cooperation with the Illinois Environmental
Protection Agency (IEPA), is conducting investigations of several
Manufactured Gas Sites to determine whether remedial action might
be necessary. The investigations were initiated pursuant to a
request by the IEPA. To the best of the Company's knowledge,
similar requests have been made by the IEPA to other major Illinois
gas and electric utilities.
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 March 31, 1996, the total
of the costs deferred by the Company, net of recoveries and amounts
billed to other entities, was $7.3 million. This amount includes
an estimate of the costs of completing the studies required by the
EPA at the Waukegan 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 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 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 March 31, 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 March 31, 1996, it had
recovered $4.8 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
taxes, of approximately $856,000 in the second quarter of fiscal
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 $2.9 million, to
$9.3 million, for the three months ended March 31, 1996, from the
results of last year's like quarter, due mainly to increased gas
deliveries largely resulting from weather that was 12 per cent
colder than last year's period. In addition, net income benefited
from a rate increase that went into effect on November 14, 1995.
(See Note 4A of the Notes to Consolidated Financial Statements.)
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 higher operating expenses and 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 $4.6 million, to
$14.5 million, and $4.8 million, to $13.6 million, for the current
six- 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 20 per cent and 19 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 higher
operating expenses plus the prior periods recognition of the
federal income tax settlement and 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 Six Months Ended 12 Months Ended
March 31, 1996 March 31, 1996 March 31, 1996
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) $ 5,276 26.2 $ 8,482 24.0 $ 9,756 18.3
Operation and
maintenance expenses 1,995 35.3 2,388 20.9 2,101 8.4
Depreciation expense 112 6.2 171 4.8 315 4.4
Income taxes 1,408 36.1 2,688 45.7 3,218 78.4
Other income and deductions (1,103) (62.5) (1,302) (37.2) (824) (13.0)
Net Income Applicable
to Common Stock 2,894 45.2 4,602 46.6 4,752 53.4
- ----------------------------------------------------------------------------------------------
<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 $5.3 million, to $25.4 million,
$8.5 million, to $43.8 million, and $9.8 million, to $63.0 million,
for the current three-, six-, 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 improved net operating revenues in the current
three-month period by about $2.0 million, or $1.2 million after
income taxes. The rate increase benefited net operating revenues
in both the current six- and 12-month periods by about $3.0
million, and net income by $1.8 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 $2.0 million, to
$7.6 million, and $2.4 million, to $13.8 million, for the current
three- and six-month periods, due mainly to an increase in the
amortization of environmental costs of $755,000 and $799,000, and
the prior year's recognition of $630,000 and $1.1 million for an
IRS settlement. (See Note 6 of the Notes to Consolidated Financial
Statements.) The six-month period also was impacted by the prior
year's benefit of $465,000 from the sale of interests in certain
oil and gas rights. Both periods were affected by increased group
insurance and reengineering expenses. These increases were
partially offset by reduced pension expenses primarily resulting
from a change in assumptions.
Operation and maintenance expenses increased $2.1 million, to
$27.0 million, for the current 12-month period, due principally to
the timing difference between periods of $693,000 in recognizing an
IRS settlement, and the prior year's benefit of $465,000 from the
sale of interests in certain oil and gas rights. Group insurance,
reengineering, and the amortization of environmental costs
($776,000) also increased over the prior period. These increases
were partially offset by decreases in outside services and pension
expenses.
Depreciation Expense
Depreciation expense increased $112,000, to $1.9 million,
$171,000, to $3.7 million, and $315,000, to $7.4 million, for the
current three-, six-, and 12-month periods, due chiefly to
depreciable property additions.
Income Taxes
Income taxes increased $1.4 million, to $5.3 million, $2.7
million, to $8.6 million, and $3.2 million, to $7.3 million, for
the current three-, six-, and 12-month periods, respectively, due
mainly to higher pre-tax income.
Other Income and Deductions
Other income and deductions decreased $1.1 million, $1.3
million, and $824,000, for the current three-, six-, and 12-month
periods, respectively, due primarily to the gain of $856,000, 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 less debt
outstanding.
The current 12-month period also includes increased other
interest expense on amounts refundable to customers.
Other Matters
Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income and coverage
ratios.
FERC Order 636 Costs. In 1992, the FERC issued Order 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 Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------ ------------------- --------------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas sales
Residential $53,939 $43,593 $87,180 $75,078 $116,137 $106,093
Commercial 9,006 6,746 13,542 11,146 17,072 15,565
Industrial 2,167 1,630 3,243 2,485 4,079 3,342
------ ------ ------ ------ ------- -------
65,112 51,969 103,965 88,709 137,288 125,000
Transportation
Residential 492 446 892 775 1,349 1,190
Commercial 2,399 2,545 4,596 4,474 6,981 6,726
Industrial 1,690 1,593 3,211 2,906 5,402 4,677
------ ------ ------- ------ ------- -------
4,581 4,584 8,699 8,155 13,732 12,593
------ ------ ------- ------ ------- -------
Other 274 212 461 886 884 1,454
------ ------ ------- ------ ------- -------
Total Operating Revenues 69,967 56,765 113,125 97,750 151,904 139,047
Less - Gas Costs 39,772 32,741 61,350 55,902 78,443 76,647
- Revenues Taxes 4,803 3,908 7,785 6,520 10,422 9,117
------ ------ ------- ------ ------- -------
Net Operating Revenues $25,392 $20,116 $43,990 $35,328 $ 63,039 $ 53,283
====== ====== ====== ====== ======= =======
Deliveries (MDth):
Gas Sales
Residential 10,466 8,753 17,499 14,103 22,457 18,339
Commercial 1,853 1,402 2,880 2,177 3,577 2,876
Industrial 478 360 744 518 928 701
------ ------ ------ ------ ------- -------
12,797 10,515 21,123 16,798 26,962 21,916
------ ------ ------ ------ ------- -------
Transportation
Residential 431 247 640 408 811 564
Commercial 2,149 2,316 4,078 3,909 5,687 5,376
Industrial 1,837 2,008 3,589 3,659 6,300 6,450
------ ------ ------ ------ ------- -------
4,417 4,571 8,307 7,976 12,798 12,390
------ ------ ------ ------ ------- -------
Total Gas Sales
and Transportation 17,214 15,086 29,430 24,774 39,760 34,306
====== ====== ====== ====== ======= =======
Margin per Dth
delivered $1.48 $1.33 $1.49 $1.43 $1.59 $1.55
</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 March 31, 1996, such restrictions amounted to
$11.6 million out of total retained earnings of $71.2 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.)
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 April 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.
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 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
$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 March 31, 1996, and for fiscal 1995
and 1994 were 4.18, 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 4. Submission of Matters to a Vote of Security Holders
a. On March 28, 1996, the following persons were elected
Directors of the Company by written consent and
comprise the entire Board of Directors of the
Company: Kenneth S. Balaskovits, J. Bruce Hasch,
James Hinchliff, Michael S. Reeves, and Richard E.
Terry.
b. The following matter was voted upon by written consent
in lieu of an annual meeting of shareholders:
1. The election of nominees for directors who will
serve for a one-year term or until their
respective successors shall be duly elected. The
nominees, all of whom were elected, were as
follows: Kenneth S. Balaskovits, J. Bruce
Hasch, James Hinchliff, Michael S. Reeves, and
Richard E. Terry. The Secretary of the Company
certified the following vote tabulations:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ----------
<S> <C> <C>
Kenneth S. Balaskovits 3,625,887 0
J. Bruce Hasch 3,625,887 0
James Hinchliff 3,625,887 0
Michael S. Reeves 3,625,887 0
Richard E. Terry 3,625,887 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
--------- -----------------------------------
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
March 31, 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)
May 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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 188,540
<OTHER-PROPERTY-AND-INVEST> 100
<TOTAL-CURRENT-ASSETS> 55,851
<TOTAL-DEFERRED-CHARGES> 2,872
<OTHER-ASSETS> 9,319
<TOTAL-ASSETS> 256,682
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 71,175
<TOTAL-COMMON-STOCKHOLDERS-EQ> 95,932
0
0
<LONG-TERM-DEBT-NET> 64,704
<SHORT-TERM-NOTES> 8,000
<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> 88,046
<TOT-CAPITALIZATION-AND-LIAB> 256,682
<GROSS-OPERATING-REVENUE> 113,125
<INCOME-TAX-EXPENSE> 8,575
<OTHER-OPERATING-EXPENSES> 87,868
<TOTAL-OPERATING-EXPENSES> 96,443
<OPERATING-INCOME-LOSS> 16,682
<OTHER-INCOME-NET> 1,036
<INCOME-BEFORE-INTEREST-EXPEN> 17,718
<TOTAL-INTEREST-EXPENSE> 3,238
<NET-INCOME> 14,480
0
<EARNINGS-AVAILABLE-FOR-COMM> 14,480
<COMMON-STOCK-DIVIDENDS> 4,170
<TOTAL-INTEREST-ON-BONDS> 2,565
<CASH-FLOW-OPERATIONS> 16,947
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
