<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 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)
Registrant's telephone number, including area code: (312) 240-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 such 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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (#229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant:
None.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, without par value, 3,625,887 shares outstanding at November
30, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
CONTENTS
Page
Item No. No.
- -------- ----
PART I
1. Business 3
2. Properties 7
3. Legal Proceedings 8
4. Submission of Matters to a Vote of Security Holders 8
PART II
5. Market for the Company's Common Stock and Related
Stockholder Matters 8
6. Selected Financial Data 9
7. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
8. Financial Statements and Supplementary Data 16
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 35
PART III
10. Directors and Executive Officers of the Company 36
11. Executive Compensation 38
12. Security Ownership of Certain Beneficial Owners and
Management 41
13. Certain Relationships and Related Transactions 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 43
Signatures 45
Exhibit Index 46
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<PAGE>
NORTH SHORE GAS COMPANY
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED SEPTEMBER 30, 1996
PART I
ITEM 1. BUSINESS
GENERAL
North Shore Gas Company (Company), an operating public utility, is engaged
primarily in the purchase, storage, distribution, sale, and transportation of
natural gas. It has about 137,000 residential, commercial, and industrial
retail sales and transportation customers within its service area of
approximately 275 square miles, located in Northeastern Illinois. It serves 54
communities and adjacent areas, including those situated along Lake Michigan
from Winnetka, Illinois, to the Illinois-Wisconsin state line. This area, with
an estimated population of about 400,000, contains residential concentrations
and a diversity of industrial and commercial establishments, as well as some
farm lands. The Company had 245 employees at September 30, 1996.
At September 30, l996, the common stock of the Company and of its utility
affiliate, The Peoples Gas Light and Coke Company (Peoples Gas), was wholly
owned by Peoples Energy Corporation (Peoples Energy).
COMPETITION
The Company holds certificates of public convenience and necessity issued
by the Illinois Commerce Commission (Commission) for the conduct by the Company
of its operations in the territory that it serves. It holds a license agreement
from Lake County, Illinois, and, with minor exceptions, franchises from all of
the incorporated cities and villages in its service territory. The franchises
are of various terms and expiration dates and are generally subject to various
other conditions, restrictions, or limitations not deemed materially burdensome.
Absent extraordinary circumstances, potential competitors are barred from
constructing competing gas distribution systems in the Company's service
territory by a judicial doctrine known as the "first in the field" doctrine. In
addition, the high cost of installing duplicate distribution facilities would
render the construction of a competing system impractical.
Competition in varying degrees exists between natural gas and other fuels
or forms of energy available to consumers in the Company's service area.
State and federal regulators are currently evaluating ways in which the
generation and distribution of electricity may be deregulated so that end users
may purchase electricity from producers other than their local electric utility
and require such local utility to transport the electricity so purchased, a
concept commonly referred to as "retail wheeling." In the event retail wheeling
were permitted in the Company's service territory, the cost of electricity would
be expected to decline, thereby reducing the advantage of lower costs that
natural gas currently enjoys over electricity.
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A substantial portion of the gas that the Company delivers to its customers
consists of gas that the Company's customers purchase 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.
A pipeline may seek to provide transportation service directly to
end-users. Such direct service by a pipeline to an end-user would bypass the
local distributor's service and reduce the distributor's earnings. However, the
Company's pipeline supplier has not undertaken any service bypassing the
Company. The Company has a bypass rate approved by the Commission which allows
the Company to renegotiate rates with customers that are potential bypass
candidates.
SALES AND RATES
The Company sells natural gas having an average heating value of
approximately 1,000 British thermal units (Btu's) per cubic foot.* Sales are
made and service rendered by the Company pursuant to a rate schedule on file
with the Commission containing various service classifications largely
reflecting customers' different uses and levels of consumption. The Gas Charge
is determined in accordance with the provisions in Rider 2, Gas Charge and
Refund Adjustments, to recover the costs incurred by the Company to purchase,
transport, manufacture, and store gas supplies. The level of the Gas Charge
under the Company's rate schedules is adjusted monthly to reflect increases or
decreases in natural gas supplier charges, purchased storage service costs,
transportation charges, and liquefied petroleum gas costs. In addition, under
the tariffs of the Company, the difference for any month between costs
recoverable through the Gas Charge and the revenues billed to customers under
the Gas Charge is refunded to or recovered from customers. Consistent with
these tariff provisions, such difference for any month is recorded either as a
current liability or a current asset (with a contra entry to Gas Costs). The
Company also has been recovering, through its rates, pipeline charges billed for
transition costs resulting from the implementation of Federal Energy Regulatory
Commission (FERC) Order No. 636. (See Notes 1L, 2A, and 2B of the Notes to
Consolidated Financial Statements.)
The business of the Company is influenced by seasonal weather conditions
because a large element of the Company's customer load consists of space
heating. Weather-related deliveries can, therefore, have a significant positive
or negative impact on net income. (For discussion of the effect of the seasonal
nature of gas revenues on cash flow, see Liquidity in Item 7.)
The basic marketing plan of the Company is to maintain its existing share
in all market segments and develop opportunities emerging from changes in the
utility environment and technological equipment advances for new, expanded, or
current natural gas applications, including cogeneration, prime movers, natural
gas-fueled vehicles, and natural gas space conditioning.
- -------------------------------------------------------------------------------
* All volumes of natural gas set forth in this report are stated on a 1,000 Btu
(per cubic foot) billing basis. (100 cubic feet = 1 therm; 10 therms = 1
Dekatherm - Dth)
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<PAGE>
STATE LEGISLATION AND REGULATION
The Company is subject to the jurisdiction of and regulation by the
Commission, which has general supervisory and regulatory powers over practically
all phases of the public utility business in Illinois, including rates and
charges, issuance of securities, services and facilities, systems of accounts,
investments, safety standards, transactions with affiliated interests, as
defined in the Illinois Public Utilities Act, and other matters.
In 1994, the Commission entered orders providing for full recovery by the
Company of FERC Order 636 transition costs from the Company's gas service
customers. The Commission's orders have been appealed to the Illinois Supreme
Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial
Statements.)
On November 8, 1995, the Commission issued an order approving changes in
rates of the Company. (See Note 2A of the Notes to Consolidated Financial
Statements.)
On August 14, 1996, the Commission denied the Company's petition for
approval of a performance-based rate program for gas costs. (See Liquidity -
Regulatory Actions in Item 7.)
FEDERAL LEGISLATION AND REGULATION
By Order entered on December 6, 1968 (Holding Company Act Release No.
16233), the Securities and Exchange Commission, pursuant to Section 3(a)(1) of
the Public Utility Holding Company Act of 1935 (Act), exempted Peoples Energy
and its subsidiary companies as such (including the Company) from the provisions
of the Act, other than Section 9(a)(2) thereof.
All of the gas distributed by the Company is transported to the Company's
distribution system by Natural Gas Pipeline Company of America (Natural). In
its provision of gas sales services (gathering, transportation and storage
services, and gas supply) Natural is regulated by the FERC under the Natural Gas
Act and the Natural Gas Policy Act of 1978. (See "Sales and Rates" and "Current
Gas Supply" in Item 1.)
In 1992, the FERC issued Order No. 636 and successor orders that required
substantial restructuring of the service obligations of interstate pipelines.
(See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial Statements.)
ENVIRONMENTAL MATTERS
The Company is subject to federal and state environmental laws. The
Company is conducting environmental investigations and work at certain sites
that were the location of former manufactured gas plant operations. (See Note
3A of the Notes to Consolidated Financial Statements.) In addition, the Company
has received a demand for payment of environmental response costs at a former
mineral processing site in Denver, Colorado. (See Note 3B of the Notes to
Consolidated Financial Statements.) Also, the Company was informed by the
Illinois Environmental Protection Agency (IEPA) that it was not in compliance
with certain provisions of the Illinois Environmental Protection Act which
prohibit water pollution within the State of Illinois. (See Note 3C of the
Notes to Consolidated Financial Statements.)
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CURRENT GAS SUPPLY
The Company has entered into various long-term and short-term firm gas
supply contracts. When used in conjunction with contract storage and
company-owned peak-shaving facilities, such supply is deemed sufficient to meet
current and foreseeable peak and annual market requirements.
Although the Company believes North American supply to be sufficient to
meet U.S. market demands for the foreseeable future, it is unable to quantify or
otherwise make specific representations regarding national supply availability.
The following tabulation shows the Company's expected design peak-day
availability of gas in thousands of dekatherms (MDth) during the 1996-97 heating
season:
Design Peak-Day Year of
Availability Contract
Source (MDth) Expiration
------------------- --------------- -----------
Firm direct purchases (1) 96 1997-2000
Liquefied petroleum gas (2) 40
Storage gas
Leased (3) 165 1998-2000
Peoples Gas - Manlove (4) 63 (5)
Customer-owned gas (6) 45
Total expected design ---
peak-day availability 409
---
---
(1) Consists of firm gas purchases from non-pipeline suppliers delivered
utilizing firm pipeline transportation. The majority of the gas purchase
contracts are negotiated annually. The terms of the transportation
contracts vary with the longest term being 5 years.
(2) Reflects derating of capacity, as accepted by the Commission Staff in
Docket 91-0581.
(3) Consists of leased storage services required to meet design day
requirements with contract lengths varying from 3 to 5 years.
(4) Manlove Field, Peoples Gas' underground storage facility located near
Champaign, Illinois, has a seasonal top-gas capacity (excluding volumes
required to support late-season peaking requirements) of approximately
27,000 MDth, of which approximately 1,566 MDth is dedicated to the Company.
For the 1996-97 heating season, the Company has contracts for a maximum
daily deliverability of 63 MDth.
(5) The contract with Peoples Gas was for an initial term expiring May 1, 1990.
However, by its terms, the contract continues in effect unless canceled by
either party upon 120 days notice prior to April 30 of any year thereafter.
(6) Consists of gas supplies purchased directly from producers and marketers by
the Company's commercial, industrial, and larger residential customers.
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<PAGE>
The sources of gas supply (including gas transported for customers) in MDth
for the Company for the three fiscal years ended September 30, 1996, 1995, and
1994, were as follows:
1996 1995 1994
------ ------ ------
Source:
Natural Gas Pipeline Co. (a) -- -- 2,384
Other suppliers (b) 27,940 20,250 23,328
Liquefied petroleum gas produced 151 9 79
Customer-owned gas - received 12,777 12,379 12,017
Underground storage - net 468 3,103 (631)
Exchange gas - net (104) -- --
Company use, franchise requirements,
and unaccounted-for gas (983) (636) (339)
------ ------ ------
Total (c) 40,249 35,105 36,838
------ ------ ------
------ ------ ------
(a) The DMQ-1 supply contract terminated on November 30, 1993.
(b) The Company purchases significant quantities of gas directly from various
suppliers. Commencing December 1, 1993, Natural unbundled its rates and
all purchases are from non-pipeline suppliers.
(c) See "Gas Sold and Transported" in Item 6.
ITEM 2. PROPERTIES
All of the principal plants and properties of the Company have been
maintained in the ordinary course of business and are believed to be in
satisfactory operating condition. The following is a brief description of the
principal plants and operating units of the Company.
The distribution system of the Company, at September 30, 1996, consisted of
approximately 2,100 miles of distribution mains and necessary pressure
regulators, approximately 124,000 services (pipe connecting the mains with
piping on the customers' premises), and approximately 140,000 meters installed
on customers' premises. Also, the Company's transmission system consists of
approximately 15 miles of transmission pipeline. In addition, the Company has
liquefied petroleum gasification and storage facilities. It also owns and has a
substantial investment in office and service buildings, garages, repair shops,
and motor vehicles, together with the equipment, tools, and fixtures necessary
to conduct utility business.
Most of the principal plants and properties of the Company, other than
mains, services, meters, regulators, and cushion gas in underground storage, are
located on property owned in fee. Substantially all gas mains are located in
public streets, alleys, and highways, or under property owned by others under
grants of easements. Meters and house regulators in use and a portion of
services are located on premises being served.
Substantially all of the physical properties now owned or hereafter
acquired by the Company are subject to (a) the first-mortgage lien of the
Company's mortgage to First Trust of Illinois, National Association, as Trustee,
to secure the principal amount of the Company's outstanding first mortgage bonds
and (b) in certain cases, other exceptions and defects that do not interfere
with the use of the property.
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS
See Notes 2 and 3 of the Notes to Consolidated Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company is a wholly owned subsidiary of Peoples Energy.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (a)
<TABLE>
<CAPTION>
For fiscal years ended September 30, 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (thousands)
Operating Revenues:
Residential $125,502 $104,034 $130,654 $121,733 $100,673
Commercial 18,769 14,677 21,834 20,539 17,430
Industrial 4,299 3,321 6,392 5,161 3,610
Transportation of customer-owned gas (b) 14,212 13,188 11,185 11,751 10,419
Other 1,027 1,309 1,060 1,041 708
- -------------------------------------------------------------------------------------------------------
Total Operating Revenues 163,809 136,529 171,125 160,225 132,840
Less - Gas costs 86,304 72,815 105,042 93,800 71,418
- Revenue taxes 10,751 9,158 10,962 10,622 9,212
- -------------------------------------------------------------------------------------------------------
Net Operating Revenues $ 66,754 $ 54,556 $ 55,121 $ 55,803 $ 52,210
Net income applicable to common stock $ 16,347 $ 9,048 $ 10,378 $ 8,973 $ 12,527
Dividends declared on common stock $ 11,748 $ 5,947 $ 7,107 $ 6,672 $ 2,538
- -------------------------------------------------------------------------------------------------------
ASSETS AT YEAR-END (thousands)
Property, plant and equipment $284,896 $272,869 $259,375 $248,580 $227,557
Less - Accumulated depreciation 93,821 86,950 80,639 75,110 70,425
- -------------------------------------------------------------------------------------------------------
Net Property, Plant and Equipment $191,075 $185,919 $178,736 $173,470 $157,132
Total assets $237,500 $234,633 $234,364 $235,431 $208,297
Capital expenditures - construction $ 13,286 $ 14,901 $ 12,595 $ 22,824 $ 26,061
- -------------------------------------------------------------------------------------------------------
CAPITALIZATION AT YEAR-END (thousands)
Common equity $ 91,380 $ 86,781 $ 83,680 $ 80,409 $ 78,108
Long-term debt 64,664 72,724 76,925 80,925 56,053
- -------------------------------------------------------------------------------------------------------
Total Capitalization $156,044 $159,505 $160,605 $161,334 $134,161
- -------------------------------------------------------------------------------------------------------
CAPITALIZATION AT YEAR-END (per cent)
Common equity 59 54 52 50 58
Long-term debt 41 46 48 50 42
- -------------------------------------------------------------------------------------------------------
Total Capitalization 100 100 100 100 100
- -------------------------------------------------------------------------------------------------------
GAS SOLD AND TRANSPORTED (MDth)
Gas Sales:
Residential 22,789 19,062 20,228 20,009 19,202
Commercial 3,698 2,873 3,641 3,529 3,638
Industrial 930 702 1,005 953 825
Transportation of customer-owned gas (b) 12,832 12,468 11,964 11,655 11,657
- -------------------------------------------------------------------------------------------------------
Total Gas Sales and Transportation 40,249 35,105 36,838 36,146 35,322
Margin per Dth delivered $ 1.66 $ 1.55 $ 1.50 $ 1.54 $ 1.48
- -------------------------------------------------------------------------------------------------------
NUMBER OF CUSTOMERS (average)
Residential 126,454 122,591 119,190 116,644 114,357
Commercial 7,831 7,674 7,656 7,493 7,306
Industrial 857 820 802 809 695
Transportation (b) 1,677 1,626 1,479 1,399 1,471
- -------------------------------------------------------------------------------------------------------
Total Customers 136,819 132,711 129,127 126,345 123,829
- -------------------------------------------------------------------------------------------------------
DEGREE DAYS 7,080 5,897 6,701 6,679 6,320
Per cent of normal (6,536) 108 90 103 102 97
- -------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Company is a wholly owned subsidiary of Peoples Energy; therefore,
per-share data are omitted.
(b) Includes commercial, industrial, and larger residential customers.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET INCOME
Net income applicable to common stock increased $7.3 million, to $16.3
million, in fiscal 1996 from 1995, due principally to weather that was 20 per
cent colder than in 1995 and to a rate increase that went into effect on
November 14, 1995 for the Company (see Note 2A of the Notes to Consolidated
Financial Statements). In addition, net income benefited from a one-time gain
associated with the expiration of certain natural gas storage contracts (see
Note 5 of the Notes to Consolidated Financial Statements). These increases were
partly offset by last year's recognition of the federal income tax settlement
(see Note 7D of the Notes to Consolidated Financial Statements) and the current
year's higher operating costs.
In 1995, net income applicable to common stock decreased $1.3 million, to
$9 million, due primarily to weather that was 12 per cent warmer than in 1994,
decreasing net income by about $1.6 million. Also contributing to the
year-to-year earnings decline were increases in interest expense together with a
lower amortization of deferred tax credits. Partially offsetting these items
was higher non-weather related gas deliveries. In addition, fiscal 1995
benefited from the sale of certain oil and gas rights.
A summary of variations affecting income between years is presented below,
with explanations of significant differences following:
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1995
over 1995 over 1994
-------------------- -----------------------
Amount Amount
(000's) Per Cent (000's) Per Cent
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues (a) $12,198 22.4 $ (564) (1.0)
Operation and maintenance expenses 4,533 18.4 (1,903) (7.2)
Depreciation expense 391 5.4 378 5.5
Income taxes 3,770 81.4 214 4.8
Other income and deductions 3,718 54.5 (1,805) (36.0)
Net income applicable to common stock 7,299 80.7 (1,330) (12.8)
- -----------------------------------------------------------------------------------------------
</TABLE>
(a) Operating revenues, net of gas costs and revenue taxes.
NET OPERATING REVENUES
Gross revenues of the Company are affected by changes in the unit cost of
the Company's gas purchases and do not include the cost of gas supplies for
customers who purchase gas directly from producers and marketers rather than
from the Company. The direct customer purchases have no effect on net income
because the Company provides transportation service for such gas volumes and
recovers margins similar to those applicable to conventional gas sales. Changes
in the unit cost of gas do not significantly affect net income because the
Company's tariffs provide for dollar-for-dollar recovery of gas costs. (See Note
1L 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.
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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 $12.2 million, to $66.8 million, in 1996.
Natural gas deliveries increased 5.1 Bcf, to 40.2 Bcf, due to weather that was
20 per cent colder than in 1995 and over 8 per cent colder than normal. Net
operating revenues increased approximately $4 million ($2.4 million after income
taxes) as a result of the colder weather. Also, the Company's aforementioned
rate increase improved net operating revenues by about $5 million ($3 million
after income taxes).
In 1995, net operating revenues decreased $564,000, to $54.6 million, due
primarily to a decline in natural gas deliveries of 1.7 Bcf, to 35.1 Bcf,
reflecting weather that was 12 per cent warmer than in 1994 and 10 per cent
warmer than normal. Partially offsetting the effect of the milder weather, was
higher gas deliveries reflecting an increase of about 3,600 customers over the
1994 level.
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 $4.5 million, to $29.1
million, in 1996, due chiefly to the reduction of expense from the prior year's
recognition of about $1.5 million for an IRS settlement. (See Note 7D of the
Notes to Consolidated Financial Statements.) In addition, increases between
years resulted from greater environmental costs recovered through rates
($1.4 million), charges to the reserve for injuries and damages ($562,000), and
distribution system expenses ($438,000).
In 1995, operation and maintenance expenses decreased $1.9 million, to
$24.6 million, due chiefly to recognizing approximately $1.5 million for the
fiscal 1995 portion of the IRS settlement (see Note 7D of the Notes to
Consolidated Financial Statements), together with lower environmental costs
recovered through rates. These decreases were partially offset by increased
reengineering costs.
DEPRECIATION EXPENSE
Depreciation expense increased $391,000, to $7.6 million, in 1996, and
$378,000, to $7.2 million, in 1995, due primarily to depreciable property
additions.
INCOME TAXES
Income taxes, exclusive of the $1.8 million included in other income and
deductions, increased $3.8 million, to $8.4 million, in 1996, due mainly to
higher pre-tax income.
In 1995, income taxes, exclusive of the $225,000 included in other income
and deductions, increased $214,000, to $4.6 million, due principally to the
recording of the deferred tax effects of the income tax settlement in operating
expenses in 1995 and reduced amortization of deferred taxes. These increases
were mostly offset by decreased income taxes due to lower pre-tax income.
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<PAGE>
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $3.7 million from the prior year, due
largely to the gain of $2.2 million, after income taxes, associated with the
expiration of certain natural gas storage contracts. (See Note 5 of the Notes
to Consolidated Financial Statements.) Additionally, the current year includes
lower interest on long-term debt resulting from the Company's early redemption
of first mortgage bonds. (See Note 12A of the Notes to Consolidated Financial
Statements.)
In 1995, other income and deductions increased $1.8 million, due
principally to the prior year's recognition in other income of $1.1 million,
after income taxes, for an IRS settlement. (See Notes 7D and 9 of the Notes to
Consolidated Financial Statements.) In addition, increased interest expense
resulted from interest on amounts refundable to customers, partially offset by
decreased interest on long-term debt.
OTHER MATTERS
EFFECT OF WEATHER. Weather variations affect the volumes of gas delivered for
heating purposes and, therefore, can have a significant positive or negative
impact on net income and coverage ratios.
ACCOUNTING STANDARDS. In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of ". This statement requires recognition of impairment losses on
long-lived assets when an asset's book value may not be recoverable. For
regulated companies, the statement requires that regulatory assets be probable
of recovery at every balance sheet date. This statement requires adoption no
later than the Company's 1997 fiscal year. The Company does not expect the
adoption of SFAS No. 121 to have a material effect on its financial position or
results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". This statement requires companies to either recognize
compensation costs measured at fair value attributable to employee stock options
or similar equity instruments at the grant date in net income, or, in the
alternative, provide pro forma footnote disclosure on net income and earnings
per share. This statement requires adoption no later than the Company's 1997
fiscal year. The Company anticipates electing the pro forma footnote disclosure
provisions of this statement in 1997. Implementation is not expected to have a
material effect on pro forma net income.
FERC ORDER 636 COSTS. In 1992, the FERC issued Order No. 636 and successor
orders that required substantial restructuring of the service obligations of
interstate pipelines. (See Notes 1L, 2A, and 2B of the Notes to Consolidated
Financial Statements.)
In 1994, the Commission entered orders providing for full recovery by the
Company of FERC Order 636 transition costs from the Company's gas service
customers. The Commission's orders have been appealed to the Illinois Supreme
Court. (See Notes 1L, 2A, and 2B of the Notes to Consolidated Financial
Statements.)
REENGINEERING PROJECT. The Company is reengineering its business processes with
the goal of increasing efficiency, responsiveness to customer needs, and cost
effectiveness.
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OPERATING STATISTICS. The following table represents gas distribution margin
components:
For fiscal years ended September 30,
--------------------------------------
1996 1995 1994
-------- -------- --------
Operating Revenues (thousands):
Gas sales
Residential $125,502 $104,034 $130,654
Commercial 18,769 14,677 21,834
Industrial 4,299 3,321 6,391
-------- -------- --------
148,570 122,032 158,879
-------- -------- --------
Transportation
Residential 1,852 1,233 1,150
Commercial 6,307 6,859 6,049
Industrial 5,683 5,096 3,986
Contract Pooling 370 -- --
-------- -------- --------
14,212 13,188 11,185
-------- -------- --------
Other 1,027 1,309 1,060
-------- -------- --------
Total Operating Revenues 163,809 136,529 171,124
Less - Gas Costs 86,304 72,815 105,042
- Revenues Taxes 10,751 9,158 10,962
-------- -------- --------
Net Operating Revenues $ 66,754 $ 54,556 $ 55,120
-------- -------- --------
-------- -------- --------
Deliveries (MDth):
Gas Sales
Residential 22,789 19,062 20,228
Commercial 3,698 2,873 3,641
Industrial 930 702 1,005
-------- -------- --------
27,417 22,637 24,874
-------- -------- --------
Transportation (a)
Residential 1,415 579 579
Commercial 5,145 5,518 5,263
Industrial 6,272 6,371 6,122
-------- -------- --------
12,832 12,468 11,964
-------- -------- --------
Total Gas Sales
and Transportation 40,249 35,105 36,838
-------- -------- --------
-------- -------- --------
Margin per Dth delivered $ 1.66 $ 1.55 $ 1.50
(a) Volumes associated with contract pooling service are included in the
respective customer classes.
LIQUIDITY
SOURCE OF FUNDS. The Company has access to outside capital markets and to
internal sources of funds that together provide sufficient resources to meet
capital requirements. It does not anticipate any changes that would materially
alter its current liquidity position.
-13-
<PAGE>
Due to the seasonal nature of gas usage, a major portion of cash
collections occurs between December and May. Because of timing differences in
the receipt and disbursement of cash and the level of construction requirements,
the Company may borrow on a short-term basis. Short-term borrowings are repaid
with cash from operations, other short-term borrowings, or refinanced on a
permanent basis with debt or equity, depending on capital market conditions and
capital structure considerations.
CREDIT LINES. Peoples Gas has lines of credit of $129.4 million of which the
Company may borrow up to $30 million. At September 30, 1996, Peoples Gas and
the Company had unused credit available from banks of $126.8 million. (See Note
11 of the Notes to Consolidated Financial Statements.)
CASH FLOW ACTIVITIES. Net cash provided by operating activities in 1996
increased by $4.8 million, due primarily to changes resulting from increased net
income, due mainly to colder weather and the rate increase, and from accounts
payable, partially offset by other assets and gas sales revenue refundable. In
1995, net cash provided by operating activities decreased by $800,000, due
primarily to changes related to gas costs recoverable, gas sales revenue
refundable, and net receivables, largely offset by increases associated with gas
in storage, deferred income taxes, and other assets. In 1994, net cash provided
by operating activities rose by $10.1 million, principally resulting from
increases relating to rate adjustments recoverable or refundable and accounts
receivable. These increases were partially offset by decreases associated with
accounts payable, deferred charges, and deferred taxes.
Net cash used in investing activities for 1996, 1995, and 1994 mainly
represents the level of capital expenditures in the respective years.
Net cash used in financing activities in 1996 reflects the redemption of
previously issued debt (see Note 12A of the Notes to Consolidated Financial
Statements) and higher dividends paid on common stock due to the increase in net
income. In 1995, net cash used in financing activities reflects lower dividends
paid on common stock resulting from the reduction in net income. Net cash used
in financing activities in 1994 includes the retirement of long-term debt and
interim loans.
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 September 30,
1996, such restrictions amounted to $11.6 million out of total retained earnings
of $66.6 million; accordingly, $55 million are available for dividends. (See
Note 4 of the Notes to Consolidated Financial Statements.)
INTEREST COVERAGE. The fixed charges coverage ratios for the Company for fiscal
1996, 1995, and 1994 were 5.62, 2.93, and 3.33, respectively. The increase in
the ratio for the current fiscal year reflects the redemption of long-term debt
and higher pre-tax income resulting from colder weather and the Commission
approved rate increase. (See Results of Operations - Net Income.) The ratios
for fiscal years 1995 and 1994 include the recording of an IRS settlement in
income. (See Note 7D of the Notes to Consolidated Financial Statements.)
DEBT RATINGS. The long-term debt of the Company is rated Aa3 by Moody's
Investors Service and AA- by Standard & Poor's Corporation. There has been no
change in these ratings since fiscal 1985. The commercial paper of the Company
has the top rating from the major rating agencies.
ENVIRONMENTAL MATTERS. The Company is conducting environmental investigations
and work at certain sites that were the location of former manufactured gas
operations. (See Note 3A of the Notes to Consolidated Financial Statements.)
-14-
<PAGE>
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. 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 3B 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 during June 1992 when a contractor who was
installing a pipeline for the Company accidentally struck a gasoline pipeline
owned by West Shore Pipeline Company. The Company is contesting this suit.
(See Note 3C 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 2A of the Notes to
Consolidated Financial Statements.)
In 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 were 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
proposed to share equally with gas sales customers the savings or costs from the
PBR Program. In August 1996, the Company's petition was denied by the
Commission. The Company is evaluating alternatives to the proposed PBR Program.
CAPITAL RESOURCES
CAPITAL SPENDING. Capital expenditures for additions, replacements, and
improvements to the utility plant were $13.3 million in 1996, $14.9 million in
1995, and $12.6 million in 1994.
Expenditures in fiscal 1996 decreased $1.6 million reflecting the
continuation of a cost containment program. In fiscal 1995, expenditures
increased $2.3 million, due primarily to higher expenditures for mains and
services for the distribution system.
While capital expenditures for fiscal 1997 are estimated to be
$14.7 million, an increase of $1.4 million from 1996, the 1997 amount reflects a
level that is consistent with the financial goals of the Company.
There are no sinking fund requirements for long-term debt in fiscal 1997.
(See Note 12B of the Notes to Consolidated Financial Statements.)
The Company anticipates that future cash needs for capital expenditures and
sinking fund requirements and maturities will be met through internally
generated funds, intercompany loans from Peoples Energy, borrowing arrangements
with banks and/or the issuance of commercial paper on an interim basis, and
periodic long-term financing involving first mortgage bonds or equity from
Peoples Energy.
BONDS REDEEMED. On February 1, 1996, the Company redeemed $8 million aggregate
principal amount of its Series I First Mortgage Bonds using the proceeds of a
short-term bank loan as well as other monies of the Company. (See Note 12A of
the Notes to Consolidated Financial Statements.)
-15-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Statement of Management's Responsibility 17
Report of Independent Public Accountants 18
Consolidated Statements of Income for fiscal years ended
September 30, 1996, 1995, and 1994 19
Consolidated Statements of Retained Earnings for fiscal
years ended September 30, 1996, 1995, and 1994 19
Consolidated Balance Sheets at September 30, 1996 and 1995 20
Consolidated Capitalization Statements at September 30, 1996
and 1995 21
Consolidated Statements of Cash Flows for fiscal years ended
September 30, 1996, 1995, and 1994 22
Notes to Consolidated Financial Statements 23
-16-
<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
The financial statements and other financial information included in this
report were prepared by management, who is responsible for the integrity and
objectivity of the presented data. The consolidated financial statements of the
Company and its subsidiaries were prepared in conformity with generally accepted
accounting principles and necessarily include some amounts that are based on the
best estimates and judgments of management.
The Company maintains internal accounting systems and related
administrative controls, along with internal audit programs, that are designed
to provide reasonable assurance that the accounting records are accurate and
assets are safeguarded from loss or unauthorized use. Consequently, management
believes that the accounting records and controls are adequate to produce
reliable financial statements.
Arthur Andersen LLP, the Company's independent public accountants approved
by Peoples Energy's shareholders, as a part of their audit of the financial
statements, selectively reviews and tests certain aspects of internal accounting
controls solely to determine the nature, timing, and extent of audit tests.
Management has made available to Arthur Andersen LLP all of the Company's
financial records and related data and believes that all representations made to
the independent public accountants during their audit were valid and
appropriate.
The Audit Committee of the Board of Directors of Peoples Energy, comprised
of six outside directors, meets periodically with management, the internal
auditors, and Arthur Andersen LLP, jointly and separately, to assure that
appropriate responsibilities are discharged. These meetings include discussion
and review of accounting principles and practices, internal accounting controls,
audit results, and the presentation of financial information in the annual
report of Peoples Energy.
-17-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To North Shore Gas Company:
We have audited the accompanying consolidated balance sheets and
consolidated capitalization statements of North Shore Gas Company (an Illinois
corporation, hereinafter referred to as the Company and a wholly owned
subsidiary of Peoples Energy Corporation) and subsidiary companies at
September 30, 1996 and 1995, and the related consolidated statements of income,
retained earnings, and cash flows for each of the three years in the period
ended September 30, 1996. These financial statements and the schedule referred
to below are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company and subsidiary
companies at September 30, 1996 and 1995, and the results of their operations
and cash flows for each of the three years in the period ended
September 30, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in Item 14(a)2 is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
The financial statement schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states, in all material respects, the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 1, 1996
-18-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
North Shore Gas Company
- --------------------------------------------------------------------------------
For fiscal years ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(Thousands)
Operating Revenues:
Gas sales $148,570 $122,032 $158,879
Transportation of customer-owned gas 14,212 13,188 11,185
Other 1,027 1,309 1,060
- --------------------------------------------------------------------------------
Total Operating Revenues 163,809 136,529 171,124
- --------------------------------------------------------------------------------
Operating Expenses:
Gas costs 86,304 72,815 105,042
Operation (see Note 7D) 25,893 21,595 23,434
Maintenance 3,235 3,000 3,064
Depreciation 7,629 7,238 6,860
Taxes - Income 8,404 4,634 4,420
- State and local revenue 10,751 9,158 10,962
- Other 2,147 2,224 1,952
- --------------------------------------------------------------------------------
Total Operating Expenses 144,363 120,664 155,734
- --------------------------------------------------------------------------------
Operating Income 19,446 15,865 15,390
- --------------------------------------------------------------------------------
Other Income and (Deductions):
Interest income 414 564 397
Interest on long-term debt (4,937) (5,905) (6,326)
Other interest expense (804) (1,291) (322)
Income taxes (1,750) (225) (667)
Miscellaneous - net (see Note 9) 3,978 40 1,906
- --------------------------------------------------------------------------------
Total Other Income and Deductions (3,099) (6,817) (5,012)
- --------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 16,347 $ 9,048 $ 10,378
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
North Shore Gas Company
- --------------------------------------------------------------------------------
For fiscal years ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(Thousands)
Balance at Beginning of Year $ 62,024 $ 58,923 $ 55,652
Add - Net Income 16,347 9,048 10,378
Deduct - Dividends declared on common stock 11,748 5,947 7,107
- --------------------------------------------------------------------------------
Balance at End of Year $ 66,623 $ 62,024 $ 58,923
- --------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-19-
<PAGE>
CONSOLIDATED BALANCE SHEETS
North Shore Gas Company
- --------------------------------------------------------------------------------
At September 30, 1996 1995
- --------------------------------------------------------------------------------
(Thousands)
PROPERTIES AND OTHER ASSETS
- --------------------------------------------------------------------------------
Capital Investments:
Property, plant and equipment, at original cost $284,896 $272,869
Less - Accumulated depreciation 93,821 86,950
- --------------------------------------------------------------------------------
Net property, plant and equipment 191,075 185,919
Other investments 113 104
- --------------------------------------------------------------------------------
Total Capital Investments - Net 191,188 186,023
- --------------------------------------------------------------------------------
Current Assets:
Cash 389 239
Cash equivalents -- 2,845
Receivables -
Customers, net of allowance for uncollectible
accounts of $932 and $698, respectively 5,523 4,574
Other 3,421 594
Accrued unbilled revenues 3,780 2,716
Materials and supplies, at average cost 2,109 2,199
Gas in storage, at last-in, first-out cost 9,627 18,396
Gas costs recoverable through rate adjustments 2,500 4,073
Prepayments 371 347
- --------------------------------------------------------------------------------
Total Current Assets 27,720 35,983
- --------------------------------------------------------------------------------
Other Assets:
Regulatory assets (see Note 1H) 15,322 9,999
Deferred charges 3,270 2,628
- --------------------------------------------------------------------------------
Total Other Assets 18,592 12,627
- --------------------------------------------------------------------------------
Total Properties and Other Assets $237,500 $234,633
- --------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES
- --------------------------------------------------------------------------------
Capitalization (see Consolidated Capitalization Statements) $156,044 $159,505
- --------------------------------------------------------------------------------
Current Liabilities:
Accounts payable 26,929 14,289
Interim loans 1,925 --
Dividends payable on common stock 3,372 1,595
Customer gas service and credit deposits 5,269 5,564
Sinking fund payments and maturities, due within one year -
Long-term debt -- 4,000
Accrued taxes 2,297 1,269
Gas sales revenue refundable through rate adjustments 3,188 10,944
Accrued interest 2,038 1,772
- --------------------------------------------------------------------------------
Total Current Liabilities 45,018 39,433
- --------------------------------------------------------------------------------
Deferred Credits and Other Liabilities:
Deferred income taxes - primarily accelerated depreciation
(see Note 7C) 19,688 19,094
Investment tax credits being amortized over
the average lives of related property 3,743 3,905
Other 13,007 12,696
- --------------------------------------------------------------------------------
Total Deferred Credits and Other Liabilities 36,438 35,695
- --------------------------------------------------------------------------------
Total Capitalization and Liabilities $237,500 $234,633
- --------------------------------------------------------------------------------
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-20-
<PAGE>
CONSOLIDATED CAPITALIZATION STATEMENTS
<TABLE>
<CAPTION>
North Shore Gas Company
- ----------------------------------------------------------------------------------------------
At September 30, 1996 1995
- ----------------------------------------------------------------------------------------------
(Thousands, except number of shares)
<S> <C> <C>
Common Stockholder's Equity:
Common stock, without par value -
Authorized 5,000,000 shares
Outstanding 3,625,887 shares $ 24,757 $ 24,757
Retained earnings (see Consolidated Statements
of Retained Earnings) 66,623 62,024
- ----------------------------------------------------------------------------------------------
Total Common Stockholder's Equity 91,380 86,781
- ----------------------------------------------------------------------------------------------
Long-Term Debt:
Exclusive of sinking fund payments and maturities
due within one year
First Mortgage Bonds -
10.20% Series I, due October 27, 1997 -- 8,000
(redeemed on February 1, 1996 - see Note 12A)
8% Series J, due November 1, 2020 24,734 24,774
6-3/8% Series K, due October 1, 2022 24,930 24,950
6.37% Series L, due May 1, 2003 15,000 15,000
- ----------------------------------------------------------------------------------------------
Total Long-Term Debt 64,664 72,724
- ----------------------------------------------------------------------------------------------
Total Capitalization $156,044 $159,505
- ----------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-21-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
North Shore Gas Company
- -------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1996 1995 1994
- -------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 16,347 $ 9,048 $ 10,378
Adjustments to reconcile net income to net cash:
Depreciation 7,629 7,238 6,860
Deferred income taxes and investment tax
credits - net (425) 3,339 (2,354)
Change in deferred credits and other liabilities 1,168 (1,146) (332)
Change in other assets (5,965) 573 (5,787)
Other 11 8 5
Change in current assets and liabilities:
Receivables - net (3,776) 131 4,372
Accrued unbilled revenues (1,064) (355) 1,478
Gas in storage 8,769 9,025 (2,070)
Gas costs recoverable 1,573 (1,671) 6,077
Payables 12,640 351 (2,358)
Customer gas service and credit deposits (295) (313) 1,294
Accrued taxes 1,028 (846) (898)
Gas sales revenue refundable (7,756) 1,168 8,818
Accrued interest 266 (966) 638
Other 65 (217) 46
- -------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 30,215 25,367 26,167
- -------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Capital expenditures - construction (13,286) (14,901) (12,595)
Other assets 482 480 469
- -------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (12,804) (14,421) (12,126)
- -------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Interim loans - net 1,925 -- (5,400)
Retirement of long-term debt (12,060) (4,201) (4,000)
Trust fund - utility construction -- -- 4,243
Dividends paid on common stock (9,971) (6,164) (6,853)
- -------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (20,106) (10,365) (12,010)
- -------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,695) 581 2,031
Cash and Cash Equivalents at Beginning of Year 3,084 2,503 472
- -------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 389 $ 3,084 $ 2,503
- -------------------------------------------------------------------------------------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
-22-
<PAGE>
NORTH SHORE GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1A Principles of Consolidation
All subsidiaries are included in the consolidated financial statements.
All significant intercompany transactions have been eliminated in consolidation.
Certain items previously reported for years prior to 1996 have been reclassified
to conform with the current-year presentation.
1B Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
1C Concentration of Credit Risk
The Company provides natural gas service to about 137,000 customers within
approximately 275 square miles in Northeastern Illinois. Credit risk for the
Company is spread over a diversified base of residential, commercial, and
industrial retail sales and transportation customers.
The Company encourages customers to participate in its long-standing budget
payment program that allows the cost of higher gas consumption levels,
associated with the heating season, to be spread over a 12-month billing cycle.
Customers' payment records are continually monitored and credit deposits are
required, when appropriate, to minimize uncollectible write-offs.
1D Revenue Recognition
Gas sales revenues 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.
1E Property, Plant and Equipment
Property, plant and equipment is stated at original cost and includes
appropriate amounts of payroll taxes, employee benefit costs, administrative
costs, and an allowance for funds used during construction.
1F Accounts Payable
The Company utilizes controlled disbursement banking arrangements under
which certain bank accounts have negative book balances due to checks in
transit. The negative balances are classified as Accounts Payable.
-23-
<PAGE>
1G Maintenance and Depreciation
The Company charges the cost of maintenance and repairs of property and
minor renewals and improvements of property to maintenance expense. When
depreciable property is retired, its original cost is charged to the accumulated
provision for depreciation.
The provision for depreciation substantially reflects the systematic
amortization of the original cost of depreciable property over estimated useful
lives on the straight-line method. Additionally, actual dismantling cost, net
of salvage, is included in the provision for depreciation in the month incurred.
The amounts provided are designed to cover not only losses due to wear and tear
that are not restored by maintenance, but also losses due to obsolescence and
inadequacy.
The provision for depreciation, expressed as an annual percentage of
original cost of depreciable property, is as follows:
For fiscal years ended September 30, 1996 1995 1994
------------------------------------ ---- ---- ----
Provision for depreciation 3.1% 3.1% 3.2%
1H Regulated Operations
The Company's utility operations are subject to regulation by the
Commission. Regulated operations are accounted for in accordance with 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.
The following regulatory assets were reflected in Other Assets in the
Consolidated Balance Sheets at September 30, 1996 and 1995:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(Thousands)
Environmental costs, net of recoveries (see Note 3A) $ 7,166 $ 7,689
Transition costs from pipeline supplier (see Note 2B) 7,746 1,600
Deferred interest on customer refunds -- 222
Rate case expenses 158 216
Energy conservation plan expenses -- 103
Discount, premium, expenses, and loss on reacquired bonds 236 147
Other 16 22
- --------------------------------------------------------------------------------
Total regulatory assets $15,322 $9,999
- --------------------------------------------------------------------------------
1I 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. (See Note 7C.)
-24-
<PAGE>
Each company within the consolidated group nets its income tax related
regulatory assets and liabilities. At September 30, 1996 and 1995, net
regulatory income tax liabilities recorded in Other Liabilities amounted to $5.5
million and $5.8 million, respectively.
Investment tax credits have been deferred and are being amortized through
credits to income over the book lives of related property.
The preceding deferred-tax and tax-credit accounting conforms with
regulations of the Commission.
1J Gas in Storage
Storage injections are priced at the fiscal-year average of costs of
natural gas purchased. Withdrawals from storage are priced on the last-in,
first-out (LIFO) cost method. The estimated current replacement cost of gas in
inventory, at September 30, 1996 and 1995, exceeded the LIFO cost by
approximately $13 million and $26 million, respectively.
1K Statement of Cash Flows
For purposes of the balance sheet and the statement of cash flows, the
Company considers all short-term liquid investments with maturities of three
months or less to be cash equivalents.
Income taxes and interest paid (excluding capitalized interest) were as
follows:
For fiscal years ended September 30, 1996 1995 1994
----------------------------------- ---- ---- ----
(Thousands)
Income taxes paid $9,435 $ 839 $8,085
Interest paid 5,119 6,354 6,617
1L Recovery of Gas Costs, Including Charges for Transition Costs
Under the tariffs of the Company, the difference for any month between
costs recoverable through the Gas Charge and revenues billed to customers under
the Gas Charge is refunded to or recovered from customers. 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).
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 1993 through 1996 are currently pending before the Commission.
Pursuant to FERC Order No. 636 and successor orders, pipelines are allowed
to recover from their customers so-called transition costs. These costs arise
from the restructuring of pipeline service obligations required by the 636
Orders. The Company is currently recovering pipeline charges for transition
costs through the Gas Charge. (See Notes 2A and 2B.)
-25-
<PAGE>
2. RATES AND REGULATION
2A 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. In 1994, the Commission issued orders concluding
its investigation into the appropriate means of recovery by Illinois gas
utilities of pipeline charges for FERC Order 636 transition costs. The orders
provided for the full recovery of transition costs from the Company's gas
service customers. The Commission 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 1995, the Illinois Appellate Court affirmed the
Commission's order. A group of industrial transportation customers has filed a
petition with the Illinois Supreme Court for leave to appeal the Appellate
Court's decision. If the Illinois Supreme Court accepts the appeal, any changes
made by it to the Commission's orders would have a prospective effect only.
(See Notes 1L and 2B.)
2B 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. 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. At the
conclusion of the billing period under the Agreement (November 30, 1997),
Natural must reconcile amounts collected under the Agreement with GSR costs it
incurred. The Company is currently recovering transition costs through the Gas
Charge. At September 30, 1996, the Company has made payments of $17.3 million
and has accrued an additional $7.7 million, toward the cap.
The 636 Orders are not expected to have a material effect on financial
position or results of operations of the Company. (See Notes 1L and 2A.)
3. ENVIRONMENTAL MATTERS
3A Former Manufactured Gas Plant Operations
The Company, its predecessors, and certain former affiliates operated
facilities in the past at multiple 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
-26-
<PAGE>
Company, under the supervision of the IEPA, is conducting investigations of two
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 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
September 30, 1996, the total of the costs deferred by the Company, net of
recoveries and amounts billed to other entities, was $7.2 million. This amount
includes an estimate of the costs of completing the studies required by the EPA
at the Waukegan 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 its insurance
carriers. Accordingly, the costs deferred at September 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 a rate mechanism approved by the Commission. At September 30,
1996, it had recovered $5.4 million of such costs through rates.
-27-
<PAGE>
3B 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.
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.
3C 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
contesting this suit. Management does not believe the outcome of this suit will
have a material adverse effect on financial position or results of operations of
the Company.
4. COVENANTS REGARDING RETAINED EARNINGS
The Company's indenture relating to the first mortgage bonds contains
provisions and covenants restricting the payment of cash dividends and the
purchase or redemption of capital stock. At September 30, 1996, such
restrictions amounted to $11.6 million out of the Company's total retained
earnings of $66.6 million; accordingly, $55 million are available for dividends.
5. EXPIRATION OF GAS 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 in fiscal 1996, the Company realized a gain, after income taxes, of
approximately $2.2 million.
-28-
<PAGE>
6. RETIREMENT AND POSTEMPLOYMENT BENEFITS
6A Pension Benefits
The Company participates in two defined benefit pension plans covering
substantially all employees. These plans provide pension benefits that generally
are based on an employee's length of service, compensation during the five years
preceding retirement, and social security benefits. Annual contributions are
made to the plans based upon actuarial determinations and in consideration of
tax regulations and funding requirements under federal law.
The Company also has non-qualified pension plans that provide employees
with pension benefits in excess of qualified plan limits imposed by federal tax
law.
Net pension cost for all plans for fiscal 1996, 1995, and 1994 included the
following components:
1996 1995 1994
- --------------------------------------------------------------------------------
(Millions)
Service cost--benefits earned during year $ 1.0 $ 1.0 $ 1.1
Interest cost on projected benefit obligations 2.0 2.0 2.0
Actual return on plan assets (gain) loss (3.9) (4.5) (0.4)
Net amortization and deferral 1.7 2.3 (1.8)
Settlement accounting 0.1 -- --
- --------------------------------------------------------------------------------
Net pension cost $ 0.9 $ 0.8 $ 0.9
- --------------------------------------------------------------------------------
In 1996, the Company recognized a net loss of $100,000 from the settlement
of portions of pension plan obligations.
The calculation of pension cost assumed a long-term rate of return on
assets of 8.5 per cent for 1996 and 7.5 per cent for 1995 and 1994. The
settlement accounting cost was determined using a discount rate of 7.5 per cent
and assumed future compensation increases of 4.5 per cent per year.
The following table shows the estimated funded status of the Company's
pension plans at September 30, 1996 and 1995.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------
(Millions)
<S> <C> <C>
Plan assets at market value $30.1 $31.9
- --------------------------------------------------------------------------------------------
Actuarial present value of plan benefits:
Vested 18.6 18.9
Non-vested 2.3 2.9
- --------------------------------------------------------------------------------------------
Accumulated benefit obligation 20.9 21.8
Effect of projected future compensation increases 5.3 6.5
- --------------------------------------------------------------------------------------------
Projected benefit obligation 26.2 28.3
- --------------------------------------------------------------------------------------------
Excess (deficiency) of plan assets over projected benefit obligation 3.9 3.6
Less:
Unrecognized transition asset 0.4 0.4
Unrecognized prior service cost (0.1) (0.2)
Unrecognized net gain (loss) 4.5 3.4
- --------------------------------------------------------------------------------------------
Accrued pension liability $(0.9) $ --
- --------------------------------------------------------------------------------------------
</TABLE>
-29-
<PAGE>
The projected benefit obligation and plan assets at September 30, 1996 are
based on a July 1 measurement date using a discount rate of 7.5 per cent, and
assumed future compensation increases of 4.5 per cent per year. The projected
benefit obligation and plan assets at September 30, 1995 are based on an October
1 measurement date using a discount rate of 7 per cent, and assumed future
compensation increases of 5 per cent per year. Plan assets consist primarily of
marketable equity and fixed-income securities.
6B Other Postretirement Benefits
The Company also provides certain health care and life insurance benefits
for retired employees. Substantially all employees may become eligible for such
benefit coverage if they reach retirement age while working for the Company. The
plans are funded based upon actuarial determinations and in consideration of tax
regulations and funding requirements under federal law. The Company accrues the
expected costs of such benefits during the employees' years of service.
Net postretirement benefit cost for all plans for fiscal 1996, 1995, and
1994 included the following components:
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
(Millions)
Service cost - benefits earned during year $ 0.3 $ 0.2 $ 0.3
Interest cost on projected benefit obligations 0.7 0.7 0.6
Actual return on plan assets (gain) loss (0.2) (0.1) --
Amortization of transition obligation 0.4 0.4 0.4
Net amortization and deferral 0.1 0.1 --
- --------------------------------------------------------------------------------
Net postretirement benefit cost $ 1.3 $ 1.3 $ 1.3
- --------------------------------------------------------------------------------
The calculation of postretirement benefit cost assumed a long-term rate of
return on assets of 7.5 per cent for 1994 through 1996.
Of the above total postretirement costs recognized for fiscal years 1996,
1995, and 1994, $600,000, $700,000, and $777,000, respectively, was funded
through trust funds for future benefit payments.
The following table sets forth the estimated funded status for the
postretirement health care and life insurance plans at September 30, 1996 and
1995:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
(Millions)
Plan assets at market value $ 1.9 $ 1.5
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees 5.8 5.5
Fully eligible active plan participants 1.5 1.2
Other active plan participants 2.6 2.3
- --------------------------------------------------------------------------------
Total APBO 9.9 9.0
- --------------------------------------------------------------------------------
Excess (deficiency) of plan assets over the APBO (8.0) (7.5)
Less:
Unrecognized transition obligation (7.3) (7.7)
Unrecognized net gain 0.1 0.2
Contributions: 7-1-96 to 9-30-96 0.8 --
- --------------------------------------------------------------------------------
Accrued postretirement benefit liability $ -- $ --
- --------------------------------------------------------------------------------
-30-
<PAGE>
The total APBO and plan assets at September 30, 1996 are based on a July 1
measurement date using a discount rate of 7.5 per cent and assumed future
compensation increases of 4.5 per cent per year. The September 30, 1995 total
APBO and plan assets are based on an October 1 measurement date using a discount
rate of 6.5 per cent and assumed future compensation increases of 5 per cent per
year. Plan assets consist primarily of marketable equity and fixed-income
securities.
For measurement purposes, a health care cost trend rate of 9.6 per cent was
assumed for fiscal 1997, and that rate thereafter will decline to 4.75 per cent
in 2003 and subsequent years. The health care cost trend rate assumption has a
significant effect on the amounts reported. Increasing the assumed health care
cost trend rate by one percentage point for each future year would have
increased the APBO at September 30, 1996, by $800,000 and the aggregate of
service and interest cost components of the net periodic postretirement benefit
cost by $100,000 annually.
7. TAX MATTERS
7A Provision for Income Taxes
Total income tax expense as shown on the Consolidated Statements of Income
is composed of the following:
For fiscal years ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------
(Thousands)
Current:
Federal $ 8,715 $1,337 $6,152
State 1,864 183 1,290
- --------------------------------------------------------------------------------
Total current income taxes 10,579 1,520 7,442
- --------------------------------------------------------------------------------
Deferred:
Federal (278) 2,797 (1,863)
State 11 688 (333)
- --------------------------------------------------------------------------------
Total deferred income taxes (267) 3,485 (2,196)
- --------------------------------------------------------------------------------
Investment tax credits - net:
Federal (189) (191) (195)
State 31 45 36
- --------------------------------------------------------------------------------
Total investment tax credits - net (158) (146) (159)
- --------------------------------------------------------------------------------
Total provision for income taxes $10,154 $4,859 $5,087
- --------------------------------------------------------------------------------
7B Tax Rate Reconciliation
The following is a reconciliation between the computed federal income tax
expense (tax rate of 35 per cent times pre-tax book income) and the total
provision for federal income tax expenses:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
For fiscal years ended September 30, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per Cent Per Cent Per Cent
of of of
Amount Pre-tax Amount Pre-tax Amount Pre-tax
(000's) Income (000's) Income (000's) Income
- -----------------------------------------------------------------------------------------------------------
Computed federal income
tax expense $8,608 35.00 $4,547 35.00 $5,065 35.00
Amortization of deferred taxes (182) (0.74) (256) (1.97) (594) (4.10)
Other, net (178) (0.74) (348) (2.68) (377) (2.61)
- -----------------------------------------------------------------------------------------------------------
Total provision for federal
income taxes $8,248 33.52 $3,943 30.35 $4,094 28.29
- -----------------------------------------------------------------------------------------------------------
</TABLE>
-31-
<PAGE>
7C Deferred Income Taxes
Set forth in the table below are the temporary differences which gave rise
to the net deferred income tax liabilities (see Note 1I):
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At September 30, 1996 1995
- --------------------------------------------------------------------------------
(Thousands)
Deferred tax liabilities:
Property - accelerated depreciation
and other property related items $22,225 $20,718
Other 2,453 3,032
- --------------------------------------------------------------------------------
Total deferred income tax liabilities 24,678 23,750
- --------------------------------------------------------------------------------
Deferred tax assets:
Net regulatory liabilities - income
tax amounts (2,173) (2,304)
Unamortized investment credits (1,485) (1,549)
Other (1,332) (803)
- --------------------------------------------------------------------------------
Total deferred income tax assets (4,990) (4,656)
- --------------------------------------------------------------------------------
Net deferred income tax liabilities $19,688 $19,094
- --------------------------------------------------------------------------------
7D Income Tax Settlement
On September 30, 1993, the Company received notification from the IRS that
settlement of past income tax returns had been reached for fiscal years 1978
through 1990. The IRS settlement resulted in payments of principal and interest
to the Company in 1994 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.
8. ASSETS SUBJECT TO LIEN
The Indenture of Mortgage, dated April 1, 1955, as supplemented, securing
the first mortgage bonds issued by the Company, constitutes a direct,
first-mortgage lien on substantially all property owned by the Company.
-32-
<PAGE>
9. OTHER INCOME AND DEDUCTIONS - MISCELLANEOUS
<TABLE>
<CAPTION>
For fiscal years ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------
(Thousands)
<S> <C> <C> <C>
Interest on amounts recoverable from customers $ 224 $20 $ 412
Income tax settlement (see Note 7D) -- -- 1,454
Gain on expiration of gas storage contracts (see Note 5) 3,717 -- --
Other 37 24 40
- --------------------------------------------------------------------------------------------
Total other income and deductions - miscellaneous $3,978 $40 $1,906
- --------------------------------------------------------------------------------------------
</TABLE>
10. CAPITAL COMMITMENTS
Total contract and purchase order commitments of the Company at September
30, 1996, amounted to approximately $735,000.
11. SHORT-TERM BORROWINGS AND CREDIT LINES
At September 30, 1996 1995
- --------------------------------------------------------------------------------
(Thousands)
Bank Loans
Peoples Gas
8.75% due November 6, 1995 $ -- $ 900
8.25% due February 11, 1997 700 --
- --------------------------------------------------------------------------------
Commercial Paper
North Shore Gas
due October 1, 1996 $ 1,925 $ --
- --------------------------------------------------------------------------------
Available lines of credit
Unused bank lines $126,775 $130,150
- --------------------------------------------------------------------------------
Short-term cash needs of the Company and Peoples Gas are met through
intercompany loans from Peoples Energy, bank loans, and/or the issuance of
commercial paper. The outstanding total amount of bank loans and commercial
paper issuances cannot at any time exceed total bank credit then in effect.
At September 30, 1996 and 1995, Peoples Gas and the Company had combined
lines of credit totaling $129.4 million and $131.1 million, respectively. Of
these amounts, the Company could borrow up to $30 million. Agreements covering
$92 million of the total at September 30, 1996 will expire on June 25, 1997; the
agreement covering the remaining $37.4 million will expire on January 31, 1998.
Such lines of credit cover projected short-term credit needs of Peoples Gas and
the Company and support the long-term debt treatment of Peoples Gas'
adjustable-rate mortgage bonds. Payment for the lines of credit is by fee.
-33-
<PAGE>
12. LONG-TERM DEBT
12A Bonds Redeemed
On February 1, 1996, the Company redeemed $8 million aggregate principal
amount of its Series I First Mortgage Bonds using the proceeds of a short-term
bank loan as well as other monies of the Company.
12B Sinking Fund Requirements and Maturities
At September 30, 1996, there are no long-term debt sinking fund
requirements and maturities for the next five years.
12C Fair Value of Financial Instruments
At September 30, 1996, the carrying amount of the Company's long-term debt
of $64.7 million had an estimated fair value of $67.4 million. At September 30,
1995, the carrying amount of the Company's long-term debt of $72.7 million had
an estimated fair value of $76.6 million. The estimated fair value of the
Company's long-term debt is based on quoted market prices or yields for issues
with similar terms and remaining maturities. Since the Company is subject to
regulation, any gains or losses related to the difference between the carrying
amount and the fair value of financial instruments would not be realized by the
Company's shareholder. The carrying amount of all other financial instruments
approximates fair value.
13. QUARTERLY FINANCIAL DATA (Unaudited)
The fluctuation in quarterly results is primarily due to the seasonal
nature of the gas distribution business. The first three quarters of fiscal 1996
include weather that was 34 per cent, 12 per cent, and 26 per cent colder than
the respective similar prior quarters. Also, results for all four quarters of
fiscal 1996 reflect the positive impact of a Commission approved rate order.
(See Note 2A.) The fiscal 1995 portion of an IRS settlement was amortized to
operation expense over that entire year. (See Note 7D.)
Net Income
Operating Operating Applicable to
Fiscal Quarters Revenues Income Common Stock
- --------------------------------------------------------------------------------
(Thousands)
1996
Fourth $18,099 $ (225) $ (895)
Third 32,584 2,988 2,761
Second 69,967 9,961 9,300
First 43,159 6,722 5,181
- --------------------------------------------------------------------------------
1995
Fourth $14,557 $ (110) $(1,758)
Third 24,222 2,592 928
Second 56,765 8,170 6,406
First 40,985 5,213 3,472
- --------------------------------------------------------------------------------
-34-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-35-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
IDENTIFICATION OF DIRECTORS
Company
Name, Principal Occupation, Age at Directorship
and Other Directorships 11-30-96 Since
- --------------------------------------------------------------------------------
Kenneth S. Balaskovits 54 1993
Vice President and Controller
of the Company, Peoples Energy,
and Peoples Gas; Director of Peoples Gas.
J. Bruce Hasch 58 1986
President and Chief Operating Officer of
the Company, Peoples Energy, and Peoples Gas;
Director of Peoples Energy and Peoples Gas.
James Hinchliff 56 1985
Senior Vice President and General Counsel
of the Company, Peoples Energy,
and Peoples Gas; Director of Peoples Gas.
Michael S. Reeves 61 1988
Executive Vice President of the Company,
Peoples Energy, and Peoples Gas;
Director of Peoples Energy and Peoples Gas.
Richard E. Terry 59 1982
Chairman of the Board and Chief Executive
Officer of the Company, Peoples Energy, and
Peoples Gas; Director of Peoples Energy
and Peoples Gas. Mr. Terry is also a
director of Harris Bankcorp, Inc., Harris Trust
and Savings Bank, Bankmont Financial Corp.,
and Amsted Industries.
-36-
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY (Continued)
IDENTIFICATION OF EXECUTIVE OFFICERS
Position at Age at Position
Name November 30, 1996 11-30-96 Held Since
- ---------------------- ---------------------------- -------- ----------
Kenneth S. Balaskovits Vice President and Controller 54 1993
Frank H. Blackmore Vice President 61 1989
Emmet P. Cassidy Secretary and Treasurer 63 1989
Donald M. Field Vice President 47 1996
Joan T. Gagen Vice President 45 1994
J. Bruce Hasch President and Chief Operating 58 1990
Officer
James Hinchliff Senior Vice President and 56 1989
General Counsel
John C. Ibach Vice President 49 1992
Donald H. Keller Vice President 63 1986
William E. Morrow Division Vice President 40 1996
Thomas J. O'Sullivan Division Vice President 54 1992
Thomas M. Patrick Executive Vice President 50 1996
Michael S. Reeves Executive Vice President 61 1987
Richard E. Terry Chairman of the Board and 59 1990
Chief Executive Officer
Directors and executive officers of the Company were elected to serve for a
term of one year or until their successors are duly elected and qualified,
except for Messrs. Keller, Morrow, and O'Sullivan, who were appointed.
There are no family relationships among directors and executive officers of
the Company.
All of the directors and executive officers of the Company have been
continuously employed by the Company and/or its affiliates in various capacities
for at least five years.
-37-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following tables set forth information concerning annual and long-term
compensation and grants of stock options, stock appreciation rights (SARs) and
restricted stock awards under Peoples Energy's Long-Term Incentive Compensation
Plan. Cash compensation for executive officers, except for Mr. Keller, is paid
by Peoples Gas with appropriate amounts billed to the Company for the time such
officers serve the Company. All compensation was paid by the Company and its
affiliates (Peoples Energy and Peoples Gas) for services in all capacities
during the three fiscal years set forth below, to (1) the Chief Executive
Officer and (2) the most highly compensated executive officer of the Company
other than the Chief Executive Officer. No executive officer's cash
compensation paid by the Company for service to the Company exceeded $100,000,
except for Mr. Keller's.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
------------------- -----------------------
Restricted All Other
Stock Options/ Compen-
Name and Awards(1)(2) SARs sation(3)
Principal Position Year Salary($) Bonus($) ($) (#) ($)
- ----------------------- ---- --------- -------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Terry 1996 $473,500 $191,600 $145,722 21,200 $14,205
Chairman and 1995 455,300 137,200 137,119 21,400 12,354
Chief Executive Officer 1994 421,250 117,100 113,281 14,400 12,638
Donald H. Keller 1996 147,400 13,900 -- 6,000 4,422
Vice President 1995 143,100 14,700 -- 6,000 4,293
1994 137,250 23,200 -- 4,800 4,118
</TABLE>
(1) The total number of restricted shares held by Mr. Terry and the aggregate
market value of such shares at September 30, 1996, was 14,055 shares valued
at $477,870. Dividends are paid on the restricted shares at the same time
and at the same rate as dividends paid to all shareholders of common stock.
Aggregate market value is based on a per share price of $34.00, the closing
price of Peoples Energy's stock on the New York Stock Exchange composite
transactions on September 30, 1996.
(2) Restricted stock awards granted to date vest in equal annual increments
over a five year period. If a recipient's employment with the Company
terminates, other than by reason of death, disability or retirement after
attaining age 65, the recipient forfeits all rights to the unvested portion
of the restricted stock award. In addition, the Compensation-Nominating
Committee (and with respect to the CEO, the Compensation-Nominating
Committee, subject to the approval of the non-employee directors) may, in
its sole discretion, accelerate the vesting of any restricted stock awards
granted under the Long-Term Incentive Compensation Plan. Total restricted
stock awarded to Mr. Terry for 1994 constitutes 3,625 shares of which 725
shares vested in 1995, 725 shares vested in 1996, 725 shares will vest in
1997, 725 shares will vest in 1998, and the remaining 725 shares will vest
in 1999. Total restricted stock awarded to Mr. Terry for 1995 constitutes
5,325 shares of which 1,065 shares vested in 1996, 1,065 shares will vest
in 1997, 1,065 shares will vest in 1998, 1,065 shares will vest in 1999,
and the remaining 1,065 shares will vest in 2000. Total restricted stock
awarded to Mr. Terry for 1996 constitutes 5,275 shares of which 1,055
shares will vest in 1997, 1,055 shares will vest in 1998, 1,055 shares will
vest in 1999, 1,055 shares will vest in 2000, and the remaining 1,055
shares will vest in 2001.
-38-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (Continued)
(3) Company contributions to the Capital Accumulation Plan accounts of the
named executive officers during the above fiscal years. Employee
contributions under the plan are subject to a maximum limitation under the
Internal Revenue Code of 1986. The Company pays an employee who is subject
to this limitation an additional 50 cents for each dollar that the employee
is prevented from contributing solely by reason of such limitation. The
amounts shown in the table above reflect, if applicable, this additional
Company payment.
OPTIONS/SAR GRANTS IN FISCAL 1996
INDIVIDUAL GRANTS
% of Total
Options/SARs
Options/ Granted to Exercise Grant
SARs Employees or Base Date
Granted in Fiscal Price Expiration Present
Name (#)(1) Year (2) ($/Share) Date Value($)(3)
- ---------------- ------- ------------ -------- ----------- -----------
Richard E. Terry 21,200 12% $27.50 04-Oct-05 $97,732
Chairman and
Chief Executive
Officer
Donald H. Keller 6,000 3 27.50 04-Oct-05 27,660
Vice President
(1) The grant of an Option enables the recipient to purchase Peoples Energy
common stock at a purchase price equal to the fair market value of the
shares on the date the Option is granted. The grant of an SAR enables the
recipient to receive, for each SAR granted, cash in an amount equal to the
excess of the fair market value of one share of Peoples Energy common stock
on the date the SAR is exercised over the fair market value of such common
stock on the date the SAR was granted. Options or SARs that expire
unexercised become available for future grants. Before an Option or SAR
may be exercised, the recipient must complete 12 months of continuous
employment subsequent to the grant of the Option or SAR. Options and SARs
may be exercised within 10 years from the date of grant, subject to earlier
termination in case of death, retirement, or termination of employment.
(2) Based on 90,200 Options and 90,200 SARs granted to all employees under
Peoples Energy's Long-Term Incentive Compensation Plan during
fiscal 1996.
(3) Present value is determined using a variation of the Black-Scholes Model.
The model assumes: a) that Options and SARs are exercised two years after
the date of grant -- the average time Options and SARs were held by
recipients under Peoples Energy's Long-Term Incentive Compensation Plan
over the past ten years; b) use of an interest rate equal to the interest
rate on a U.S. Treasury security with a maturity date corresponding to the
assumed exercise date; c) a level of volatility calculated using weekly
stock prices for the two years prior to the date of grant; d) that no
adjustments were made for an expected dividend yield; and e) that no
adjustments were made for non-transferability or risk of forfeiture. This
is a theoretical value for the Options and SARs. The amount realized from
an Option or SAR ultimately depends upon the excess of the market value of
Peoples Energy's stock over the exercise price on the date the option or
SAR is exercised.
-39-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (Continued)
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1996
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Shares Unexercised Options/SARs In-the-Money Options/SARs
Acquired On at Fiscal Year-End(#) at Fiscal Year-End ($)
(Option/SAR Value -------------------------- --------------------------
Name Exercise(#)(1) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------- -------------- ------------ ----------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Terry 21,400 $185,859 29,000 21,200 $97,780 $137,800
Chairman and
Chief Executive
Officer
Donald H. Keller 15,600 76,437 -- 6,000 -- 39,000
Vice President
</TABLE>
(1) Includes cash-only SAR's exercised by the named executive officers in the
following amounts: Mr. Terry, 10,700; and Mr. Keller, 7,800.
PENSION PLAN TABLE
Years of Service
Average Annual -------------------------------------------------------
Compensation 20 25 30 35 40
- -------------- ------- ------- ------- ------- --------
$150,000 $54,943 $68,679 $82,414 $91,789 $101,164
200,000 74,943 93,679 112,414 124,914 137,414
250,000 94,943 118,679 142,414 158,039 173,664
300,000 114,943 143,679 172,414 191,164 209,914
350,000 134,943 168,679 202,414 224,289 246,164
400,000 154,943 193,679 232,414 257,414 282,414
450,000 174,943 218,679 262,414 290,539 318,664
500,000 194,943 243,679 292,414 323,664 354,914
550,000 214,943 268,679 322,414 356,789 391,164
600,000 234,943 293,679 352,414 389,914 427,414
650,000 254,943 318,679 382,414 423,039 463,664
700,000 274,943 343,679 412,414 456,164 499,914
750,000 294,943 368,679 442,414 489,289 536,164
The above table illustrates various annual straight-life benefits at normal
retirement (age 65) for the indicated levels of average annual compensation and
various periods of service, assuming no future changes in Peoples Energy's
pension benefits. The compensation used in the computation of annual retirement
benefits is substantially equivalent to the salary and bonus reported in the
Summary Compensation Table. The benefit amounts shown reflect reduction for
applicable Social Security benefits.
Average annual compensation is the average 12-month compensation for the
highest 60 consecutive months of the last 120 months of service prior to
retirement. Compensation is total salary paid to an employee by the Company
and/or its affiliates, including bonuses under Peoples Energy's Short-Term
Incentive Compensation Plan, pre-tax contributions under Peoples Energy's
Capital Accumulation Plan, pre-tax contributions under Peoples Energy's Health
and Dependent Care Spending Accounts Plan, and pre-tax contributions for life
and health care insurance, but excluding moving allowances, exercise of stock
options and SARs, and other compensation that has been deferred.
-40-
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION (Continued)
At September 30, 1996, the credited years of retirement benefit service for
the individuals listed in the Summary Compensation Table were as follows: Mr.
Terry, 32 years; and Mr. Keller, 41 years. The benefits shown in the foregoing
table are subject to maximum limitations under the Employee Retirement Income
Security Act of 1974, as amended, and the Internal Revenue Code of 1986, as
amended. Should these benefits at the time of retirement exceed the
then-permissible limits of the applicable Act, the excess would be paid by the
Company as supplemental pensions pursuant to Peoples Energy's Supplemental
Retirement Benefit Plan. The benefits shown give effect to these supplemental
pension benefits.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
At November 30, 1996, voting securities of the Company were beneficially
owned as follows:
Title of Number of Per Cent of
Class Name and Address Shares Owned Class
- ------------ -------------------------- ------------ -----------
Common Stock Peoples Energy Corporation
without 130 East Randolph Drive
par value Chicago, Illinois 60601 3,625,887 100
--------- ---
--------- ---
SECURITY OWNERSHIP OF MANAGEMENT
No equity securities of the Company are beneficially owned directly or
indirectly by any director or officer of the Company.
Shares of common stock, without par value, of Peoples Energy beneficially
owned directly or indirectly by all directors and certain executive officers of
the Company and all directors and executive officers of the Company as a group
at November 30, 1996, are as follows:
Shares of Peoples Energy
Common Stock Beneficially
Name Owned at November 30, 1996 (1)
---------------------- ------------------------------
Kenneth S. Balaskovits* 15,768 (2)(3)
J. Bruce Hasch* 49,441 (2)(3)
James Hinchliff* 29,713 (2)(3)
Donald H. Keller 7,496 (2)
Michael S. Reeves* 28,960 (2)(3)
Richard E. Terry* 64,416 (2)(3)
All directors and officers of the Company
as a group, including those named above
(15 in number) 296,357 (1)(2)(3)
* Director of the Company.
-41-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
(1) The total of 296,357 shares held by all directors and executive officers as
a group is less than one per cent of Peoples Energy's outstanding common
stock. Unless otherwise indicated, each individual has sole voting and
investment power with respect to the shares of common stock attributed to
him in the table.
(2) Includes shares that the following have a right to acquire within 60 days
following November 30, 1996, through the exercise of stock options granted
under the Long-Term Incentive Compensation Plan of Peoples Energy: Messrs.
Balaskovits, 5,500; Hasch, 15,400; Hinchliff, 6,200; Keller, 3,000; Terry,
14,500; and all executive officers of the Company, as a group, 92,900.
(3) Includes shares of restricted stock awarded under the Long-Term Incentive
Compensation Plan of Peoples Energy, the restrictions on which had not
lapsed at November 30, 1996, as follows: Messrs. Balaskovits, 3,455;
Hasch, 7,990; Hinchliff, 5,130; Reeves, 5,130; Terry, 14,020; and all
executive officers as a group, 43,545. Owners of shares of restricted
stock have the right to vote such shares and to receive dividends thereon
but have no investment power with respect to such shares until the
restrictions thereon lapse.
CHANGES IN CONTROL
None.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-42-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Page
----
See Part II, Item 8. 16
2. Financial Statement Schedules:
Schedule
Number
------
VIII Valuation and Qualifying Accounts 44
3. Exhibits:
See Exhibit Index on page 46.
(b) Reports on Form 8-K filed during the final quarter of fiscal year 1996:
None.
-43-
<PAGE>
SCHEDULE VIII
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
(Thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ------------------------------------------------ -------- --------- --------------------- --------
Additions Deductions
--------- ---------------------
Charged Charges for the
Balance to costs purpose for which the Balance
at beginning and reserves or deferred at end of
Description of period expenses credits were created period
- ------------------------------------------------ ------------ -------- --------------------- ---------
<S> <C> <C> <C> <C>
Fiscal Year Ended September 30, 1996
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $698 $801 $567 $932
Fiscal Year Ended September 30, 1995
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $889 $677 $868 $698
Fiscal Year Ended September 30, 1994
------------------------------------
RESERVES (deducted from assets in balance sheet):
Uncollectible items $855 $854 $820 $889
</TABLE>
-44-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: December 19, 1996 By: /s/ RICHARD E. TERRY
------------------ ------------------------------
Richard E. Terry
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on December 19, 1996.
/s/ RICHARD E. TERRY Chairman of the Board and Chief Executive
- ---------------------------- Officer and Director
Richard E. Terry (Principal Executive Officer)
/s/ KENNETH S. BALASKOVITS Vice President and Controller and Director
- ----------------------------- (Principal Financial and Accounting Officer)
Kenneth S. Balaskovits
/s/ J. BRUCE HASCH Director
- ------------------------------
J. Bruce Hasch
/s/ JAMES HINCHLIFF Director
- ------------------------------
James Hinchliff
/s/ MICHAEL S. REEVES Director
- ------------------------------
Michael S. Reeves
-45-
<PAGE>
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
EXHIBIT INDEX
(a) The exhibits listed below are filed herewith and made a part hereof:
Exhibit
Number Description of Document
------- ----------------------------------------------------------------
3(a) Amendment to the By-Laws of the Registrant, dated August 7, 1996.
3(b) By-Laws of the Registrant, as amended, dated August 7, 1996.
10(a) Firm Transportation Service Agreement under Rate Schedule FTS-1
between the Company and ANR Pipeline Company, dated as of October
25, 1995.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
23 Arthur Andersen LLP consent to incorporation by reference in
Registration Statement No. 33-60256
27 Financial Data Schedule
(b) Exhibits listed below have been filed heretofore with the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as amended,
and/or the Securities Exchange Act of 1934, as amended, and are
incorporated herein by reference. The file number and exhibit number of
each such exhibit are stated in the description of such exhibits.
3(c) Articles of Incorporation of the Registrant, as amended on April
24, 1995 (Registrant Form 10-K for the fiscal year ended
September 30, 1995, Exhibit 3(b)).
4(a) Indenture, dated as of April 1, 1955, from the Company to
Continental Bank, National Association, as Trustee; Third
Supplemental Indenture, dated as of December 20, 1963 (North
Shore - File No. 2-35965, Exhibit 4-1); Fifth Supplemental
Indenture, dated as of February 1, 1970 (File No. 2-35965,
Exhibit 4-2); Sixth Supplemental Indenture, dated as of October
1, 1973 (Form 10-K for the fiscal year ended September 30, 1980,
Exhibit 4-3; Seventh Supplemental Indenture, dated as of February
15, 1977 (Form 10-K for the fiscal year ended September 30, 1980,
Exhibit 4-4); Eighth Supplemental Indenture, dated as of
September 15, 1980 (Form 10-K for the fiscal year ended September
30, 1980, Exhibit 4-5); Ninth Supplemental Indenture, dated as of
December 1, 1987 (Form 10-K for the fiscal year ended September
30, 1987, Exhibit 4); and Tenth Supplemental Indenture, dated as
of November 1, 1990 (Form S-3 Registration Statement No.
33-37332, Exhibit 4b); Eleventh Supplemental Indenture, dated as
of October 1, 1992 (Form 10-K for the fiscal year ended September
30, 1992, Exhibit 4); and Twelfth Supplemental Indenture dated as
of April 1, 1993 (Form 8-K dated April 23, 1993, Exhibit 4).
-46-
<PAGE>
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
EXHIBIT INDEX (Continued)
10(b) ETS Service Agreement between the Company and ANR Pipeline
Company, dated September 21, 1994. (Registrant Form 10-K for
fiscal year ended September 30, 1995, Exhibit 10(a)); FSS Service
Agreement between the Company and ANR Pipeline Company, dated
September 21, 1994. (Registrant Form 10-K for fiscal year ended
September 30, 1995, Exhibit 10(b)); Transportation Rate Schedule
FTS Agreement between the Company and Natural Gas Pipeline
Company of America, dated September 22, 1995. (Registrant Form
10-K for fiscal year ended September 30, 1995, Exhibit 10(c));
Storage Rate Schedule NSS Agreement between the Company and
Natural Gas Pipeline Company of America, dated October 19, 1995.
(Registrant Form 10-K for fiscal year ended September 30, 1995,
Exhibit 10(d)); Transportation Rate Schedule FTS Agreement
between the Company and Natural Gas Pipeline Company of America,
dated October 19, 1995. (Registrant Form 10-K for fiscal year
ended September 30, 1995, Exhibit 10(e)); Storage Rate Schedule
DSS Agreement between the Company and Natural Gas Pipeline
Company of America, dated December 1, 1995. (Registrant Form
10-K for fiscal year ended September 30, 1995, Exhibit 10(f)).
-47-
<PAGE>
Exhibit 3(a)
NORTH SHORE GAS COMPANY
ACTION OF THE BOARD OF DIRECTORS
BY WRITTEN CONSENT IN LIEU OF MEETING
The Board of Directors of the Company has taken the following action by
unanimous Written Consent:
RESOLVED, That effective as of the close of
business on August 7, 1996, the By-Laws of the Company be,
and they hereby are, amended by replacing Section 7.1 of
Article VII of the By-Laws in its entirety with the
following:
SECTION 7.1. CONTRACTS AND OTHER INSTRUMENTS.
All contracts or obligations of the Company shall be in
writing and shall be signed either by the Chairman of the
Board, the President, any Executive Vice President, any Vice
President, the Treasurer, or any other officer of the
Company, agent, employee or attorney-in-fact as may be
designated by the Board, the Chairman of the Board or the
President pursuant to specific authorizations and, the seal
of the Company may be attached thereto, duly attested by the
Secretary or an Assistant Secretary, except contracts
entered into in the ordinary course of business where the
amount involved is less than Five Hundred Thousand Dollars
($500,000), and except contracts for the employment of
servants or agents, which contracts so excepted may be
entered into by the Chairman of the Board, the President,
any Executive Vice President, any Vice President, the
Treasurer, or by such officers, agents, employees or
attorneys-in-fact as the Chairman of the Board or the
President may designate and authorize. Unless the Board
shall otherwise determine and direct, all checks or drafts
and all promissory notes shall be signed by two officers of
the Company. When prescribed by the Board, bonds,
promissory notes, and other obligations of the Company may
bear the facsimile signature of the officer who is
authorized to sign such instruments and, likewise, may bear
the facsimile signature of the Secretary or an Assistant
Secretary.
RESOLVED FURTHER, That the Secretary of the
Company be, and he hereby is, directed to initial a copy of
the amended By-Laws presented at this meeting and place it
with the important papers of this meeting.
<PAGE>
IN WITNESS WHEREOF, the Board of Directors of NORTH SHORE GAS COMPANY
has executed this Written Consent as of August 6, 1996.
/s/ Richard E. Terry /s/ James Hinchliff
- ------------------------------ ------------------------------
/s/ J. Bruce Hasch /s/ Kenneth S. Balaskovits
- ------------------------------ ------------------------------
/s/ Michael S. Reeves
- ------------------------------
<PAGE>
Exhibit 3(b
BY-LAWS
OF
NORTH SHORE GAS COMPANY
AMENDED AUGUST 7, 1996
<PAGE>
NORTH SHORE GAS COMPANY
BY-LAWS
ARTICLE I - OFFICES
ARTICLE II - MEETINGS OF SHAREHOLDERS
ARTICLE III - DIRECTORS AND COMMITTEES
ARTICLE IV - OFFICERS
ARTICLE V - INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS
ARTICLE VI - CERTIFICATES OF STOCK AND THEIR
TRANSFER
ARTICLE VII - MISCELLANEOUS (CONTRACTS)
ARTICLE VIII - AMENDMENT OR REPEAL OF BY-LAWS
<PAGE>
NORTH SHORE GAS COMPANY
INDEX
PAGE
----
A
Amendment of By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . 15
Appointment of Officers . . . . . . . . . . . . . . . . . . . . . . . . 7
Assistant Controller, Duties of. . . . . . . . . . . . . . . . . . . . 10
Assistant General Counsel, Duties of . . . . . . . . . . . . . . . . . 10
Assistant Secretary, Duties of . . . . . . . . . . . . . . . . . . . . 10
Assistant Treasurer, Duties of . . . . . . . . . . . . . . . . . . . . 10
Assistant Vice President, Duties of. . . . . . . . . . . . . . . . . . 8
B
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 4
C
Certificates of Stock and Their Transfer . . . . . . . . . . . . . . . 12
Chairman of the Board, Duties of . . . . . . . . . . . . . . . . . . . 8
Committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Controller, Duties of. . . . . . . . . . . . . . . . . . . . . . . . . 9
Contracts, Execution of. . . . . . . . . . . . . . . . . . . . . . . . 14
D
Directors and Committees . . . . . . . . . . . . . . . . . . . . . . . 4
E
Election of Directors. . . . . . . . . . . . . . . . . . . . . . . . . 4
Election of Officers . . . . . . . . . . . . . . . . . . . . . . . . . 6
F
Fees and Compensation of Directors . . . . . . . . . . . . . . . . . . 6
G
General Counsel, Duties of . . . . . . . . . . . . . . . . . . . . . . 10
<PAGE>
NORTH SHORE GAS COMPANY
PAGE
----
I
Indemnification of Directors, Officers, Employees
and Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
M
Meetings
Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . 6
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
N
Notice of Meetings
Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
O
Officers
Appointed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Elected. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Offices, Two or More Held By One Person. . . . . . . . . . . . . . . . 7
P
President, Duties of . . . . . . . . . . . . . . . . . . . . . . . . . 8
Presiding Officer
Board Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders Meetings. . . . . . . . . . . . . . . . . . . . . . . . 3
Proxies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Q
Quorum
Board. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
<PAGE>
NORTH SHORE GAS COMPANY
PAGE
----
S
Secretary, Duties of . . . . . . . . . . . . . . . . . . . . . . . . . 9
Signatures to Checks, Drafts, etc. . . . . . . . . . . . . . . . . . . 14
Stock, Certificates of and their Transfer. . . . . . . . . . . . . . . 12
T
Treasurer, Duties of . . . . . . . . . . . . . . . . . . . . . . . . . 9
V
Vice President, Duties of. . . . . . . . . . . . . . . . . . . . . . . 8
Voting
Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Stock Owned by Company . . . . . . . . . . . . . . . . . . . . . . . 15
<PAGE>
BY-LAWS
OF
NORTH SHORE GAS COMPANY
ARTICLE I
OFFICES
SECTION 1.1. PRINCIPAL OFFICE. The principal office of the Company
shall be in the City of Chicago, County of Cook and State of Illinois.
SECTION 1.2. OTHER OFFICES. The Company may also have offices at
such other places both within and without the State of Illinois as the Board of
Directors may from time to time determine or the business of the Company may
require.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 2.1. ANNUAL MEETING. The annual meeting of the shareholders
shall be held on the last Thursday of the month of March in each year, if not a
legal holiday, or, if a legal holiday, then on the next preceding business day,
for the purpose of electing directors and for the transaction of such other
business as may come before the meeting. If the election of directors shall not
be held on the day herein designated for the annual meeting, or at any
adjournment thereof, the Board of Directors shall cause such election to be held
at a special meeting of the shareholders as soon thereafter as convenient.
SECTION 2.2. SPECIAL MEETINGS. Except as otherwise prescribed by
statute, special meetings of the shareholders for any purpose or purposes, may
be
<PAGE>
-2-
called by the Chairman of the Board, the President, a majority of the Board of
Directors or shareholders owning capital stock of the Company having not less
than 20% of the total voting power. Such request shall state the purpose or
purposes of the proposed meeting.
SECTION 2.3. PLACE OF MEETINGS. Each meeting of the shareholders
for the election of directors shall be held at the principal office of the
Company in the City of Chicago, Illinois, unless the Board of Directors shall by
resolution designate another place as the place of such meeting. Meetings of
shareholders for any other purpose may be held at such place, and at such time
as shall be determined by the Chairman of the Board, or the President, or in
their absence, by the Secretary, and stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
SECTION 2.4. NOTICE OF MEETINGS. Written or printed notice stating
the place, date and hour of each annual or special meeting of the shareholders,
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be given not less than 10 or more than 60 days before
the date of the meeting, except as otherwise provided by statute. Notice of any
meeting of the shareholders may be waived by any shareholder.
SECTION 2.5. QUORUM. The holders of a majority of the shares issued
and outstanding and entitled to vote thereat, present in person or represented
by proxy, shall be requisite for, and shall constitute, a quorum at all meetings
of the shareholders of the Company for the transaction of business, except as
otherwise provided by statute or these by-laws. If a quorum shall not be
present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present
<PAGE>
-3-
in person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting if the
adjournment is for thirty days or less or unless after the adjournment a new
record date is fixed, until a quorum shall be present or represented. At such
adjourned meeting, at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed.
SECTION 2.6. PROXIES. At every meeting of the shareholders, each
shareholder having the right to vote thereat shall be entitled to vote in person
or by proxy. Such proxy shall be appointed by an instrument in writing
subscribed by such shareholder and bearing a date not more than eleven months
prior to such meeting, unless such proxy provides for a longer period, and shall
be filed with the Secretary of the Company before, or at the time of, the
meeting.
SECTION 2.7. VOTING. At each meeting of the shareholders, each
shareholder shall be entitled to one vote for each share of stock entitled to
vote thereat which is registered in the name of such shareholder on the books of
the Company. At all elections of directors of the Company, the holders of
shares of stock of the Company shall be entitled to cumulative voting. When a
quorum is present at any meeting of the shareholders, the vote of the holders of
a majority of the shares present in person or represented by proxy and entitled
to vote at the meeting shall be sufficient for the transaction of any business,
unless otherwise provided by statute or these by-laws.
SECTION 2.8. PRESIDING OFFICER. The presiding officer of any
meeting of the shareholders shall be the Chairman of the Board or, in the case
of the absence of the Chairman of the Board, the President.
<PAGE>
-4-
ARTICLE III
DIRECTORS AND COMMITTEES
SECTION 3.1. NUMBER AND ELECTION. The business and affairs of the
Company shall be managed and controlled by a board of directors, five (5) in
number, none of whom needs to be a shareholder. The directors shall be elected
by the shareholders entitled to vote at the annual meeting of such shareholders
and each director shall be elected to serve for a term of one (1) year and
thereafter until his successor shall be elected and shall qualify. The Board of
Directors may fill one or more vacancies arising between meetings of
shareholders by reason of an increase in the number of directors or otherwise.
SECTION 3.2. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held immediately, or as soon as practicable, after the annual
meeting of the shareholders in each year for the purpose of electing officers
and for the transaction of such other business as may be deemed necessary, and
regular meetings of the Board shall be held at such date and time and at such
place as the Board of Directors may from time to time determine. Not less than
two days' notice of all regular meetings of the Board, except the meeting to be
held after the annual meeting of shareholders which shall be held without other
notice than this by-law, shall be given to each director personally or by mail
or telegram.
SECTION 3.3. SPECIAL MEETINGS. Special meetings of the Board may be
called at any time by the Chairman of the Board, the President, or by any two
directors, by causing the Secretary to mail to each director, not less than
three days before the
<PAGE>
-5-
time of such meeting, a written notice stating the time and place of such
meeting. Notice of any meeting of the Board may be waived by any director.
SECTION 3.4. QUORUM. At each meeting of the Board of Directors, the
presence of not less than a majority of the total number of directors specified
in Section 3.l hereof shall be necessary and sufficient to constitute a quorum
for the transaction of business, and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute. If a
quorum shall not be present at any meeting of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present. In determining
the presence of a quorum at a meeting of the directors or a committee thereof
for the purpose of authorizing a contract or transaction between the Company and
one or more of its directors, or between the Company and any other corporation,
partnership, association, or other organization in which one or more of the
directors of this Company are directors or officers, or have a financial
interest in such other organization, such interested directors may be counted in
determining a quorum.
SECTION 3.5. PRESIDING OFFICER. The presiding officer of any
meeting of the Board of Directors shall be the Chairman of the Board or, in his
absence, the President or, in his absence, any other director elected chairman
of the meeting by vote of a majority of the directors present at the meeting.
SECTION 3.6. COMMITTEES. The Board may appoint committees, standing
or special, from time to time from among its own members or otherwise, and
<PAGE>
-6-
may confer such powers on such committees as the Board may determine and may
revoke such powers and terminate the existence of such committees at its
pleasure.
SECTION 3.7. ACTION WITHOUT MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors, or any committee
thereof, may be taken without a meeting if all members of the Board or of such
committee, as the case may be, consent thereto in writing and such writing or
writings are filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.8. FEES AND COMPENSATION OF DIRECTORS. Directors shall
not receive any stated salary for their services as such; but, by resolution of
the Board of Directors, reasonable fees, with or without expenses of attendance,
may be allowed. Members of the Board shall be allowed their reasonable
traveling expenses when actually engaged in the business of the Company, to be
audited and allowed as in other cases of demands against the Company. Members
of standing or special committees may be allowed fees and expenses for attending
committee meetings. Nothing herein contained shall be construed to preclude any
director from serving the Company in any other capacity and receiving
compensation therefor.
ARTICLE IV
OFFICERS
SECTION 4.1. ELECTION OF OFFICERS. There shall be elected by the
Board of Directors in each year the following officers: a Chairman of the
Board; a President; such number of Senior Vice Presidents, such number of
Executive Vice Presidents, such number of Vice Presidents and such number of
Assistant Vice Presidents as the Board at the time may decide upon; a Secretary;
such number of Assistant Secretaries
<PAGE>
-7-
as the Board at the time may decide upon; a Treasurer; such number of Assistant
Treasurers as the Board at the time may decide upon; a Controller; and such
number of Assistant Controllers as the Board at the time may decide upon; and,
if the Board may decide, a General Counsel; and such number of Deputy General
Counsel and such number of Assistant General Counsel as the Board at the time
may decide upon. Any two or more offices may be held by one person, except that
the offices of President and Secretary may not be held by the same person. All
officers shall hold their respective offices during the pleasure of the Board.
SECTION 4.2. APPOINTMENT OF OFFICERS. The Board of Directors, the
Chairman of the Board, or the President may from time to time appoint such other
officers as may be deemed necessary, including one or more Vice Presidents, one
or more Assistant Vice Presidents, one or more Assistant Secretaries, one or
more Assistant Treasurers, one or more Assistant Controllers, one or more
Assistant General Counsel, and such other agents, employees and attorneys-in-
fact of the Company as may be deemed proper. Such officers, agents, employees
and attorneys-in-fact shall have such authority, (which may include the
authority to execute and deliver on behalf of the Company contracts and other
instruments in writing of any nature), perform such duties and receive such
compensation as the Board of Directors or, in the case of appointments made by
the Chairman of the Board or the President, as the Chairman of the Board or the
President, may from time to time prescribe and determine. The Board of
Directors may from time to time authorize any officer to appoint and remove
agents and employees, to prescribe their powers and duties and to fix their
compensation therefor.
<PAGE>
-8-
SECTION 4.3. DUTIES OF CHAIRMAN OF THE BOARD. The Chairman of the
Board shall be the chief executive officer of the Company and shall have control
and direction of the management and affairs of the Company and may execute all
contracts, deeds, assignments, certificates, bonds or other obligations for and
on behalf of the Company, and sign certificates of stock and records of
certificates required by law to be signed by the Chairman of the Board. When
present, the Chairman of the Board shall preside at all meetings of the Board
and of the shareholders.
SECTION 4.4. DUTIES OF PRESIDENT. Subject to the control and
direction of the Chairman of the Board, and to the control of the Board, the
President shall have general management of all the business of the Company, and
he shall have such other powers and perform such other duties as may be
prescribed for him by the Board or be delegated to him by the Chairman of the
Board. He shall possess the same power as the Chairman of the Board to sign all
certificates, contracts and other instruments of the Company. In case of the
absence or disability of the President, or in case of his death, resignation or
removal from office, the powers and duties of the President shall devolve upon
the Chairman of the Board during absence or disability, or until the vacancy in
the office of President shall be filled.
SECTION 4.5. DUTIES OF VICE PRESIDENT. Each of the Senior Vice
Presidents, Executive Vice Presidents, Vice Presidents and Assistant Vice
Presidents shall have such powers and duties as may be prescribed for him by the
Board, or be delegated to him by the Chairman of the Board or by the President.
Each of such officers shall possess the same power as the President to sign all
certificates, contracts and other instruments of the Company.
<PAGE>
-9-
SECTION 4.6. DUTIES OF SECRETARY. The Secretary shall have the
custody and care of the corporate seal, records and minute books of the
Company. He shall attend the meetings of the Board, and of the shareholders,
and duly record and keep the minutes of the proceedings, and file and take
charge of all papers and documents belonging to the general files of the
Company, and shall have such other powers and duties as are commonly incident
to the office of Secretary or as may be prescribed for him by the Board, or
be delegated to him by the Chairman of the Board or by the President.
SECTION 4.7. DUTIES OF TREASURER. The Treasurer shall have
charge of, and be responsible for, the collection, receipt, custody and
disbursement of the funds of the Company, and shall deposit its funds in the
name of the Company in such banks, trust companies or safety deposit vaults
as the Board may direct. He shall have the custody of the stock record books
and such other books and papers as in the practical business operations of
the Company shall naturally belong in the office or custody of the Treasurer,
or as shall be placed in his custody by the Board, the Chairman of the Board,
the President, or any Vice President, and shall have such other powers and
duties as are commonly incident to the office of Treasurer, or as may be
prescribed for him by the Board, or be delegated to him by the Chairman of
the Board or by the President.
SECTION 4.8. DUTIES OF CONTROLLER. The Controller shall have control
over all accounting records pertaining to moneys, properties, materials and
supplies of the Company. He shall have charge of the bookkeeping and accounting
records and functions, the related accounting information systems and reports
and executive
<PAGE>
-10-
supervision of the system of internal accounting controls, and such other powers
and duties as are commonly incident to the office of Controller or as may be
prescribed by the Board, or be delegated to him by the Chairman of the Board or
by the President.
SECTION 4.9. DUTIES OF GENERAL COUNSEL. The General Counsel shall
have full responsibility for all legal advice, counsel and services for the
Company and its subsidiaries including employment and retaining of attorneys and
law firms as shall in his discretion be necessary or desirable and shall have
such other powers and shall perform such other duties as from time to time may
be assigned to him by the Board, the Chairman of the Board or the President.
SECTION 4.10. DUTIES OF ASSISTANT SECRETARY, ASSISTANT TREASURER,
ASSISTANT CONTROLLER AND ASSISTANT GENERAL COUNSEL. The Assistant Secretary,
Assistant Treasurer, Assistant Controller and Assistant General Counsel shall
assist the Secretary, Treasurer, Controller and General Counsel, respectively,
in the performance of the duties assigned to each and shall for such purpose
have the same powers as his principal. He shall also have such other powers and
duties as may be prescribed for him by the Board, or be delegated to him by the
Chairman of the Board or by the President.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS
SECTION 5.1. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES.
The Company shall indemnify, to the fullest extent permitted under the laws of
the State of Illinois and any other applicable laws, as they now exist or as
they may be amended in the future, any person who was or is a party, or is
threatened to be made a party, to
<PAGE>
-11-
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (including, without limitation, an
action by or in the right of the Company), by reason of the fact that he or she
is or was a director, officer or employee of the Company, or is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding.
SECTION 5.2. ADVANCEMENT OF EXPENSES TO DIRECTORS, OFFICERS AND
EMPLOYEES. Expenses incurred by such a director, officer or employee in
defending a civil or criminal action, suit or proceeding shall be paid by the
Company in advance of the final disposition of such action, suit or proceeding
to the fullest extent permitted under the laws of the State of Illinois and any
other applicable laws, as they now exist or as they may be amended in the
future.
SECTION 5.3. INDEMNIFICATION AND ADVANCEMENT OF EXPENSES TO AGENTS.
The board of directors may, by resolution, extend the provisions of this Article
V regarding indemnification and the advancement of expenses to any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding by reason of the fact he or she is or
was an agent of the Company or is or was serving at the request of the Company
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise.
<PAGE>
-12-
SECTION 5.4. RIGHTS NOT EXCLUSIVE. The rights provided by or
granted under this Article V are not exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled.
SECTION 5.5. CONTINUING RIGHTS. The indemnification and advancement
of expenses provided by or granted under this Article V shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of that person.
ARTICLE VI
CERTIFICATES OF STOCK AND THEIR TRANSFER
SECTION 6.1. CERTIFICATES OF STOCK. The certificates of stock of the
Company shall be in such form as may be determined by the Board of Directors,
shall be numbered and shall be entered in the books of the Company as they are
issued. They shall exhibit the holder's name and number of shares and shall be
signed by the Chairman of the Board, the President or a Vice President and also
by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary and shall bear the corporate seal or a facsimile thereof. If a
certificate is countersigned by a transfer agent or registrar, other than the
Company itself or its employee, any other signature or countersignature on the
certificate may be facsimiles. In case any officer of the Company, or any
officer or employee of the transfer agent or registrar, who has signed or whose
facsimile signature has been placed upon such certificate ceases to be an
officer of the Company, or an officer or employee of the transfer agent or
registrar, before such certificate is issued, said certificate may be issued
with the same effect as
<PAGE>
-13-
if the officer of the Company, or the officer or employee of the transfer agent
or registrar, had not ceased to be such at the date of issue.
SECTION 6.2. TRANSFER OF STOCK. Upon surrender to the Company of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, and upon payment of applicable
taxes with respect to such transfer, it shall be the duty of the Company,
subject to such rules and regulations as the Board of Directors may from time to
time deem advisable concerning the transfer and registration of certificates for
shares of stock of the Company, to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
SECTION 6.3. SHAREHOLDERS OF RECORD. The Company shall be entitled
to treat the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except as
otherwise provided by statute.
SECTION 6.4. LOST, DESTROYED OR STOLEN CERTIFICATES. The Board of
Directors, in individual cases or by general resolution, may direct a new
certificate or certificates to be issued by the Company as a replacement for a
certificate or certificates for a like number of shares alleged to have been
lost, destroyed or stolen, upon the making of an affidavit of that fact by the
person claiming the certificate or certificates of stock to be lost, destroyed
or stolen. When authorizing such issue of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, destroyed
<PAGE>
-14-
or stolen certificate or certificates, or his legal representative, to give the
Company a bond in such form and amount as it may direct as indemnity against any
claim that may be made against the Company with respect to the certificate or
certificates alleged to have been lost, destroyed or stolen.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. CONTRACTS AND OTHER INSTRUMENTS. All contracts or
obligations of the Company shall be in writing and shall be signed either by the
Chairman of the Board, the President, any Executive Vice President, any Vice
President, the Treasurer, or any other officer of the Company, agent, employee
or attorney-in-fact as may be designated by the Board, the Chairman of the Board
or the President pursuant to specific authorizations and, the seal of the
Company may be attached thereto, duly attested by the Secretary or an Assistant
Secretary, except contracts entered into in the ordinary course of business
where the amount involved is less than Five Hundred Thousand Dollars ($500,000),
and except contracts for the employment of servants or agents, which contracts
so excepted may be entered into by the Chairman of the Board, the President, any
Executive Vice President, any Vice President, the Treasurer, or by such
officers, agents, employees or attorneys-in-fact as the Chairman of the Board or
the President may designate and authorize. Unless the Board shall otherwise
determine and direct, all checks or drafts and all promissory notes shall be
signed by two officers of the Company. When prescribed by the Board, bonds,
promissory notes, and other obligations of the Company may bear the facsimile
<PAGE>
-15-
signature of the officer who is authorized to sign such instruments and,
likewise, may bear the facsimile signature of the Secretary or an Assistant
Secretary.
SECTION 7.2. VOTING STOCK OWNED BY COMPANY. Any or all shares of
stock owned by the Company in any other corporation, and any or all voting trust
certificates owned by the Company calling for or representing shares of stock of
any other corporation, may be voted by the Chairman of the Board, the President,
any Vice President, the Secretary or the Treasurer, either in person or by
written proxy given to any person in the name of the Company at any meeting of
the shareholders of such corporation, or at any meeting of voting trust
certificate holders, upon any question that may be presented at any such
meeting. Any such officer, or anyone so representing him by written proxy, may
on behalf of the Company waive any notice of any such meeting required by any
statute or by-law and consent to the holding of such meeting without notice.
ARTICLE VIII
AMENDMENT OR REPEAL OF BY-LAWS
These by-laws may be added to, amended or repealed at any regular or
special meeting of the Board by a vote of a majority of the membership of the
Board.
<PAGE>
Exhibit 10 (a)
DATE: October 25, 1995 Contract No. 24950
FTS - 1 SERVICE AGREEMENT
This AGREEMENT is entered into by ANR Pipeline Company
(Transporter) and North Shore Gas Company (Shipper)
WHEREAS, Shipper has requested Transporter to transport Gas on its behalf and
Transporter represents that it is willing to transport Gas under the terms and
conditions of this Agreement.
NOW, THEREFORE, Transporter and Shipper agree that the terms below, together
with the terms and conditions of Transporter's applicable Rate Schedule and
General Terms and Conditions of Transporter's FERC Gas Tariff constitute the
transportation service to be provided and the rights and obligations of Shipper
and Transporter.
1. AUTHORITY FOR TRANSPORTATION SERVICE:
284G - Blanket
2. RATE SCHEDULE: FIRM TRANSPORTATION SERVICE (FTS - 1)
3. CONTRACT QUANTITIES:
Primary Routes - see Exhibit attached hereto.
Such Contract Quantities shall be reduced for scheduling purposes, but not
for billing purposes, by the Contract Quantities that Shipper has released
through Transporter's capacity release program for the period of any
release.
4. TERM OF AGREEMENT:
11/01/1995 to
10/31/2000
5. RATES:
Maximum rates, charges, and fees shall be applicable for the entitlements
and quantities delivered pursuant to this Agreement unless Transporter has
advised Shipper in writing or by ANR Xpedite that it has agreed otherwise.
<PAGE>
DATE: OCTOBER 25, 1995 CONTRACT NO. 24950
It is further agreed that Transporter may seek authorization from the
Commission and/or other appropriate body at any time and from time to time
to change any rates, charges or other provisions in the applicable Rate
Schedule and General Terms and Conditions of Transporter's FERC Gas Tariff,
and Transporter shall have the right to place such changes in effect in
accordance with the Natural Gas Act. This Agreement shall be deemed to
include such changes and any changes which become effective by operation of
law and Commission order. Nothing contained herein shall be construed to
deny Shipper any rights it may have under the Natural Gas Act, including
the right to participate fully in rate or other proceedings by intervention
or otherwise to contest increased rates in whole or in part.
6. INCORPORATION BY REFERENCE
The provisions of Transporter's applicable Rate Schedule and the General
Terms and Conditions of Transporter's FERC Gas Tariff are specifically
incorporated herein by reference and made a part hereof.
7. NOTICES:
All notices can be given by telephone or other electronic means, however,
such notice shall be confirmed in writing at the addresses below or through
ANR Xpedite. Shipper or Transporter may change the addresses below by
written notice to the other without the necessity of amending this
agreement:
TRANSPORTER:
ANR PIPELINE COMPANY
500 Renaissance Center
Detroit, Michigan 48243
Attentions: Gas Control (Nominations)
Volume Management (Statements)
Cash Control (Payments)
Marketing Administration (All Other Matters)
SHIPPER:
NORTH SHORE GAS COMPANY (Shipper Name)
-------------------------------
130 East Randolph, 22nd Floor (Address)
-------------------------------
Chicago, IL 60601-6207 (City, State, Zip)
-------------------------------
Attention: Raulando C. deLara
-------------------
Telephone: (312) 240-7057
-------------------
Fax: (312) 240-4211
-------------------
2
<PAGE>
DATE: OCTOBER 25, 1995 CONTRACT NO. 24950
INVOICES AND STATEMENTS:
THE PEOPLES GAS LIGHT AND COKE CO. (Shipper Name)
-------------------------------
130 East Randolph, 22nd Floor (Address)
-------------------------------
Chicago, IL 60601-6207 (City, State, Zip)
-------------------------------
Attention: Raulando C. deLara
-------------------
Telephone: (312) 240-7057
-------------------
Fax: (312) 240-4211
-------------------
NOMINATIONS:
THE PEOPLES GAS LIGHT AND COKE CO. (Shipper Name)
-------------------------------
130 East Randolph, 22nd Floor (Address)
-------------------------------
Chicago, IL 60601-6207 (City, State, Zip)
-------------------------------
Attention: Jerome J. Slechta
-------------------
Telephone: (312) 240-7057
-------------------
Fax: (312) 240-4211
-------------------
Mechanical Dialing
Device No(s) _______________________________
ALL OTHER MATTERS:
THE PEOPLES GAS LIGHT AND COKE CO. (Shipper Name)
-------------------------------
130 East Randolph, 22nd Floor (Address)
-------------------------------
Chicago, IL 60601-6207 (City, State, Zip)
-------------------------------
Attention: Raulando C. deLara
-------------------
Telephone: (312) 240-7057
-------------------
Fax: (312) 240-4211
-------------------
3
<PAGE>
DATE: OCTOBER 25, 1995 CONTRACT NO. 24950
8. FURTHER AGREEMENT
A. The rate for all quantities of gas transported on the Primary Route(s)
up to the Primary Route MDQ(s) under this Agreement shall be the
current FERC Tariff Rates in effect not to exceed $0.15 per dth on a
100% load factor basis inclusive of Volumetric Buyout/Buydown, GRI,
Dakota and Transition Costs. In addition, Shipper will be charged
ACA, fuel and any other related fees or surcharges.
B. All quantities associated with Secondary Receipt Points, Secondary
Delivery Points, Secondary Routes and the releases of the capacity
under this Agreement will be at Maximum Tariff Rates plus all other
related fees, surcharges and fuel.
C. Shipper and any Agent of Shipper agree that the rates stated herein
shall be confidential and shall be maintained confidentially by
Shipper and any Agent of Shipper. Shipper may disclose such rates only
if such disclosure is required by law and Shipper requests
confidential or privileged treatment under applicable statutes, rules
and regulations, and provides reasonable notice to Transporter prior
to such disclosure. Any unauthorized disclosure of the rates stated
herein shall have the effect of terminating from the date the
discounted rate is disclosed any rate discounts reflected herein such
that, for the remaining term of this Agreement, Shipper shall be
required to pay Transporter the maximum applicable rate for service,
as well as all other charges, surcharges or direct bill applicable to
such service.
D. Shipper waives its right to segment its FTS-1 capacity during the term
of this Agreement.
E. If FTS-1 Agreement No. 24400 is terminated after one (1) year of
service, this Agreement shall be amended to change the Primary
Delivery Point to East Joliet only with a 100% load factor rate of
$0.12 per dth inclusive of Volumetric Buyout/Buydown, GRI, Dakota and
Transition Costs. In addition, Shipper will be charged ACA, fuel and
any other related fees or surcharges.
F. During the November 1, 1995 to April 30, 1996, October through April
(1996 - 2000) and October 1-31, 2000 periods, Shipper can nominate up
to 37,500 dth/day from Crystal Falls to either Monclova or East Joliet
as long as the total combined nomination does not exceed 37,500
dth/day.
4
<PAGE>
DATE: OCTOBER 25, 1995 CONTRACT NO. 24950
G. Consistent with provisions of its Tariff, Transporter is willing to
contract on Shipper's behalf for capacity required on third party
transporters, or for other services to effectuate Shipper's receipt of
gas on third party facilities and delivery of gas to Transporter's
facilities.
Shipper must advise Transporter prior to commencement of such third
party transportation of its desire to have Transporter act in such a
capacity.
Shipper agrees to pay all charges related to such third party
transportation arrangements pursuant to Transporter's Tariff.
H. To the extent Shipper desires to utilize receipt/delivery points
pursuant to Part 284 B (Section 311 of the NGPA and Section 284.102 of
the Commission's regulations), Shipper must execute a separate
agreement with Transporter and Shipper must also certify that the
transportation of gas will be on behalf of either an "intrastate
pipeline" or a "local distribution company."
9. OPERATIONAL FLOW ORDERS
Shipper hereby guarantees to Transporter that each contract it has entered
into in connection with the Gas to be transported under this Agreement
contains a provision that permits Transporter to issue an effective
Operational Flow Order pursuant to Section 8 of the General Terms and
Conditions. Shipper shall also guarantee for any supply contract for Gas
that is transported via Viking Gas Transmission Company, that Transporter
shall be designated a third party beneficiary.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their respective Officers or Representatives thereunto duly authorized to be
effective as of the date stated above.
North Shore
SHIPPER: Gas Company TRANSPORTER: ANR Pipeline Company
By: /s/ T. M. Patrick By: /s/ Linda M. Maiorana
----------------------- ------------------------------
Title: Vice President Title: Assistant Vice President
----------------------- ------------------------------
Date: 11/13/95 Date: 11/16/95
----------------------- ------------------------------
5
<PAGE>
<TABLE>
<CAPTION>
PRIMARY ROUTE EXHIBIT Contract No. 24950
To Agreement Between Contract Rate FTS-1
ANR Pipeline Company (Transporter) Contract Date October 25, 1995
and North Shore Gas Company (Shipper) Amendment Date -
RECEIPT RECEIPT DELIVERY DELIVERY MDQ
NUMBER NAME NUMBER NAME (DTH) EFFECTIVE PERIOD
- --------- ------------------------- --------- ------------ ----- ------------------------
<S> <C> <C> <C> <C> <C>
037000700 Crystal Falls/Fortune Lk 032110400 Monclova (1) 37500 11/01/95 to 04/30/96
032200100 East Joliet
037000700 Crystal Falls/Fortune Lk 032200100 East Joliet 37500 MAY - SEPTEMBER
(1996 - 2000)
037000700 Crystal Falls/Fortune Lk 032110400 Monclova (1) 37500 OCTOBER - APRIL
032200100 East Joliet (1996 - 2000)
037000700 Crystal Falls/Fortune Lk 032110400 Moncolva (1) 37500 10/01/2000 to 10/31/2000
032200100 East Joliet
(1) The Primary Delivery Point of Monclova can be used during the months of October through April only; the Primary Delivery Point
of East Joliet can be used through the term of the Agreement.
</TABLE>
<PAGE>
EXHIBIT 12
NORTH SHORE GAS COMPANY AND SUBSIDIARY COMPANIES
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal years ended September 30,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Income Before Preferred
Stock Dividends $16,347 $ 9,048 $10,378 $ 8,973 $12,527
Add - Income Taxes 10,154 4,859 5,087 4,788 7,257
Fixed Charges (see below) 5,741 7,196 6,648 7,198 6,175
- ------------------------------------------------------------------------------------------------------------------
Earnings $32,242 $21,103 $22,113 $20,959 $25,959
- ------------------------------------------------------------------------------------------------------------------
Fixed Charges:
Interest on Long-Term Debt $4,937 $ 5,905 $ 6,326 $ 6,718 $ 5,500
Other Interest 804 1,291 322 480 675
- ------------------------------------------------------------------------------------------------------------------
Total Fixed Charges $5,741 $ 7,196 $ 6,648 $ 7,198 $ 6,175
- ------------------------------------------------------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 5.62 2.93 3.33 2.91 4.20
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report, dated November 1, 1996, included in this Form 10-K,
into North Shore Gas Company's previously filed Registration Statement File No.
33-60256.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois,
December 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, CONSOLIDATED STATEMENTS OF
CASH FLOWS, CONSOLIDATED CAPITALIZATION STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 191,075
<OTHER-PROPERTY-AND-INVEST> 113
<TOTAL-CURRENT-ASSETS> 27,720
<TOTAL-DEFERRED-CHARGES> 3,270
<OTHER-ASSETS> 15,322
<TOTAL-ASSETS> 237,500
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 66,623
<TOTAL-COMMON-STOCKHOLDERS-EQ> 91,380
0
0
<LONG-TERM-DEBT-NET> 64,664
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 1,925
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 79,531
<TOT-CAPITALIZATION-AND-LIAB> 237,500
<GROSS-OPERATING-REVENUE> 163,809
<INCOME-TAX-EXPENSE> 8,404
<OTHER-OPERATING-EXPENSES> 135,959
<TOTAL-OPERATING-EXPENSES> 144,363
<OPERATING-INCOME-LOSS> 19,446
<OTHER-INCOME-NET> 2,642
<INCOME-BEFORE-INTEREST-EXPEN> 22,088
<TOTAL-INTEREST-EXPENSE> 5,741
<NET-INCOME> 16,347
0
<EARNINGS-AVAILABLE-FOR-COMM> 16,347
<COMMON-STOCK-DIVIDENDS> 9,971
<TOTAL-INTEREST-ON-BONDS> 4,937
<CASH-FLOW-OPERATIONS> 30,215
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
