FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 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 36-2642766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)
(312) 240-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
3,625,887 shares of Common Stock, without par value, outstanding at
January 31, 1997.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
(Thousands of Dollars)
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $46,593 $38,853 $156,311 $124,145
Transportation 4,227 4,118 14,321 13,735
Other 229 188 1,068 822
-------- -------- -------- --------
Total Operating Revenues 51,049 43,159 171,700 138,702
-------- -------- -------- --------
OPERATING EXPENSES:
Gas costs 27,948 21,758 92,494 71,412
Operation 5,739 5,387 26,245 21,940
Maintenance 740 763 3,212 3,049
Depreciation 2,043 1,791 7,881 7,296
Taxes - Income 3,623 3,205 8,823 5,855
- State & local revenue 3,395 2,981 11,164 9,527
- Other 515 492 2,171 2,189
-------- -------- -------- --------
Total Operating Expenses 44,003 36,377 151,990 121,268
-------- -------- -------- --------
OPERATING INCOME 7,046 6,782 19,710 17,434
-------- -------- -------- --------
OTHER INCOME AND (DEDUCTIONS):
Interest income 18 114 317 663
Interest on long-term debt (1,157) (1,394) (4,700) (5,801)
Other interest expense (189) (323) (670) (1,343)
Income taxes (9) (60) (1,699) (272)
Miscellaneous - net (10) 62 3,907 75
-------- -------- -------- --------
Total Other Income
and Deductions (1,347) (1,601) (2,845) (6,678)
-------- -------- -------- --------
NET INCOME APPLICABLE
TO COMMON STOCK $ 5,699 $ 5,181 $ 16,865 $ 10,756
-------- -------- -------- ---------
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1996 September30, 1995
(Unaudited) 1996 (Unaudited)
----------- ----------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
PROPERTIES AND OTHER ASSETS
- ---------------------------
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $286,525 $284,896 $275,402
Less - Accumulated depreciation 95,692 93,821 88,292
Net property, plant and equipment 190,833 191,075 187,110
Other investments 20 113 102
-------- -------- --------
TOTAL CAPITAL INVESTMENTS - NET 190,853 191,188 187,212
-------- -------- --------
CURRENT ASSETS:
Cash 936 389 615
Receivables -
Customers, net of allowance for
uncollectible accounts of $826,
$932, and $821, respectively 15,936 5,523 15,960
Other 1,315 3,421 1,335
Accrued unbilled revenues 10,775 3,780 8,339
Materials and supplies, at average cost 2,360 2,109 2,292
Gas in storage, at last-in, first-out cost 8,659 9,627 17,078
Gas costs recoverable through rate adjustments 7,996 2,500 3,914
Prepayments 184 371 143
-------- -------- --------
TOTAL CURRENT ASSETS 48,161 27,720 49,676
-------- -------- --------
OTHER ASSETS:
Regulatory assets 12,843 15,322 11,170
Deferred charges 2,644 3,270 2,672
-------- -------- --------
TOTAL OTHER ASSETS 15,487 18,592 13,842
-------- -------- --------
TOTAL PROPERTIES AND OTHER ASSETS $254,501 $237,500 $250,730
======== ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1996 September 30, 1995
(Unaudited) 1996 (Unaudited)
----------- ------------ -----------
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value
Authorized - 5,000,000 shares
Outstanding - 3,625,887 shares $ 24,757 $ 24,757 $ 24,757
Retained earnings 69,603 66,623 64,631
-------- -------- --------
Total Common Stockholder's Equity 94,360 91,380 89,388
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,639 64,664 64,704
-------- -------- --------
TOTAL CAPITALIZATION 158,999 156,044 154,092
-------- -------- --------
CURRENT LIABILITIES:
Interim loans 11,735 1,925 11,125
Accounts payable 26,732 26,929 18,399
Dividends payable on common stock 2,720 3,372 2,574
Customer gas service and credit deposits 5,176 5,269 6,015
Sinking fund payments and maturities,
due within one year -
Long-term debt -- -- 8,000
Accrued taxes 6,598 2,297 6,326
Gas sales revenue refundable through
rate adjustments 3,434 3,188 5,765
Accrued interest 886 2,038 1,032
Temporary LIFO liquidation credit 1,603 -- 1,389
-------- -------- --------
TOTAL CURRENT LIABILITIES 58,884 45,018 60,625
-------- -------- --------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily
accelerated depreciation 19,800 19,688 19,472
Investment tax credits being amortized
over the average lives of related property 3,704 3,743 3,865
Other 13,114 13,007 12,676
-------- -------- --------
TOTAL DEFERRED CREDITS AND
OTHER LIABILITIES 36,618 36,438 36,013
-------- -------- --------
TOTAL CAPITALIZATION AND LIABILITIES $254,501 $237,500 $250,730
======== ======== ========
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
December 31,
------------------
1996 1995
---- ----
(Thousands of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 5,699 $ 5,181
Adjustments to reconcile net income to net cash:
Depreciation 2,043 1,791
Deferred income taxes and investment tax credits - net (14) 249
Change in deferred credits and other liabilities 195 69
Change in other assets 3,105 (1,215)
Other -- 2
Change in current assets and liabilities:
Receivables - net (8,306) (12,127)
Accrued unbilled revenues (6,995) (5,623)
Gas in storage 967 1,318
Gas costs recoverable (5,496) 159
Accounts payable (197) 4,110
Customer gas service and credit deposits (92) 451
Accrued taxes 4,300 5,057
Gas sales revenue refundable 246 (5,179)
Accrued interest (1,151) (740)
Temporary LIFO liquidation credit 1,603 1,389
Other (65) 111
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (4,158) (4,997)
------- -------
INVESTING ACTIVITIES:
Capital expenditures - construction (1,862) (3,187)
Other assets 154 205
------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,708) (2,982)
------- -------
FINANCING ACTIVITIES:
Interim loans - net 9,810 11,125
Retirement of long-term debt (25) (4,020)
Dividends paid on common stock (3,372) (1,595)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 6,413 5,510
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 547 (2,469)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 389 3,084
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 936 $ 615
======= =======
<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>
North Shore Gas Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared by North Shore Gas Company (Company) in conformity with
the rules and regulations of the Securities and Exchange
Commission (SEC) and reflect all adjustments that are, in the
opinion of management, necessary to present fairly the results
for the interim periods herein and to prevent the information
from being misleading.
Certain footnote disclosures and other information, normally
included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted from these interim financial statements, pursuant to SEC
rules and regulations. Therefore, the statements should be read
in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1996. Certain items
previously reported for the prior periods have been reclassified
to conform with the presentation in the current periods.
The business of the Company is influenced by seasonal weather
conditions because a large element of the Company's customer load
consists of gas used for space heating. Weather-related
deliveries can, therefore, have a significant positive or
negative impact on net income. Accordingly, the results of
operations for the interim periods presented are not indicative
of the results to be expected for all or any part of the balance
of the current fiscal year.
2. SIGNIFICANT ACCOUNTING POLICIES
2A 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.
2B 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.
2C Regulated Operations
The Company's utility operations are subject to regulation by
the Illinois Commerce Commission (Commission). Regulated
operations are accounted for in accordance with Statement of
Financial Accounting Standards (SFAS) No. 71, "Accounting for
the Effects of Certain Types of Regulation." This standard
controls the application of generally accepted accounting
principles for companies whose rates are determined by an
independent regulator such as the Commission. Regulatory assets
represent certain costs that are expected to be recovered from
customers through the ratemaking process. When incurred, such
costs are deferred as assets in the balance sheet and
subsequently recorded as expenses when those same amounts are
reflected in revenues.
2D Income Taxes
The Company follows the liability method of accounting for
deferred income taxes. Under the liability method, deferred
income taxes have been recorded using currently enacted tax
rates for the differences between the tax basis of assets and
liabilities and the basis reported in the financial statements.
Due to the effects of regulation on the Company, certain
adjustments made to deferred income taxes are, in turn, debited
or credited to regulatory assets or liabilities.
2E Statement of Cash Flows
For purposes of the balance sheet and the statement of cash
flows, the Company considers all short-term liquid investments
with maturities of three months or less to be cash equivalents.
<TABLE>
Income taxes and interest paid (excluding capitalized
interest) were as follows:
<CAPTION>
For the three months
ended December 31, 1996 1995
----------------------------------------------
(Thousands)
<S> <C> <C>
Income taxes paid $1,053 $ (547)
Interest paid 2,459 2,309
</TABLE>
2F 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 1995 and 1996 are currently pending before the Commission.
Pursuant to Federal Energy Regulatory Commission (FERC) Order
636 and successor orders, pipelines are allowed to recover from
their customers so-called transition costs. These costs arise
from the restructuring of pipeline service obligations required
by the 636 Orders. The Company is currently recovering pipeline
charges for transition costs through the Gas Charge. (See Notes
3A and 3B.)
3. RATES AND REGULATION
3A 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 providing for the full recovery of pipeline charges for
FERC Order 636 transition costs from the Company's gas service
customers. The Commission directed that 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. A group of industrial transportation
customers has filed a petition with the Illinois Supreme Court
appealing the Commission's orders. 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 2F and
3B.)
3B 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. The Company
is subject to charges for transition cost recovery by Natural Gas
Pipeline Company of America (Natural). Under a Stipulation and
Agreement filed by Natural and approved by FERC, Natural's
charges to the Company for GSR transition costs (the largest
category of such costs for the Company) are subject to a cap of
approximately $25 million. The Company is currently recovering
transition costs through the Gas Charge. At December 31, 1996,
the Company has made payments of $18.8 million, and has accrued
an additional $6.2 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 2F and 3A.)
4. ENVIRONMENTAL MATTERS
4A Former Manufactured Gas Plant Sites
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 Company, under the supervision of the
Illinois Environmental Protection Agency (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 the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (CERCLA) with
respect to the Waukegan Site. A PRP is potentially liable for
the cost of any investigative and/or remedial work that the EPA
determines is necessary. Other parties identified as PRPs did
not enter into the AOC.
Under the terms of the AOC, the Company is responsible for the
cost of the RI/FS. The Company believes, however, that it will
recover a significant portion of the costs of the RI/FS from
other entities. GMC has agreed to share equally with the Company
in funding of the RI/FS cost, without prejudice to GMC's or the
Company's right to seek a lesser cost responsibility at a later
date.
The Company is accruing and deferring the costs it incurs in
connection with all of the Manufactured Gas Sites, including
related legal expenses, pending recovery through rates or from
insurance carriers or other entities. At December 31, 1996, the
total of the costs deferred by the Company, net of recoveries and
amounts billed to other entities, was $6.3 million. This amount
includes an estimate of the costs of completing the studies
required by the EPA at the Waukegan Site and the investigations
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 two 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 December 31, 1996
have not been reduced to reflect recoveries from insurance
carriers.
Costs incurred by the Company for environmental activities
relating to former manufactured gas operations will be recovered
from insurance carriers or other entities or through rates for
utility service. Accordingly, management believes that the
costs incurred by the Company in connection with former
manufactured gas operations will not have a material adverse
effect on the financial position or results of operations of the
Company. The Company is recovering the costs of environmental
activities relating to its former manufactured gas operations,
including carrying charges on the unrecovered balances, under a
rate mechanism approved by the Commission. At December 31,
1996, it had recovered $6.2 million of such costs through rates.
4B Former Mineral Processing Site in Denver, Colorado
In 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.
4C 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.
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, the Company realized a
gain, after income taxes, of approximately $2.2 million for the
12 months ended December 31, 1996.
6. TAX MATTERS
On September 30, 1993, the Company received notification from
the Internal Revenue Service (IRS) that settlement of past
income tax returns had been reached for fiscal years 1978
through 1990. The IRS settlement resulted in 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 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.
As a result of the Commission's accounting authorization, the
Company amortized to operation expense approximately $1 million,
or $761,000 after income taxes, for the 12 months ended December
31, 1995. The effect was to offset increases in costs that the
Company would incur during the period.
7. 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.
8. COVENANTS REGARDING RETAINED EARNINGS
The Company's indenture relating to its first mortgage bonds
contains provisions and covenants restricting the payment of cash
dividends and the purchase or redemption of capital stock. At
December 31, 1996, such restrictions amounted to $11.6 million
out of the Company's total retained earnings of $69.6 million;
accordingly, $58 million are available for the payment of cash
dividends and the purchase or redemption of capital stock.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income increased $518,000, to $5.7 million, for the
current three-month period, due mainly to a rate increase that
went into effect on November 14, 1995 for the Company (see Note
3A of the Notes to Consolidated Financial Statements) and reduced
interest expense, partially offset by lower interest income.
Net income increased $6.1 million, to $16.9 million, for the
current 12-month period, due principally to the full calendar
year's impact of the aforementioned rate increase and to weather
that was 8 per cent colder than in the year-ago period. 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) and
reduced interst expense. These increases were partly offset by
the prior period's recognition of a federal income tax settlement
(see Note 6 of the Notes to Consolidated Financial Statements) and
lower interest income.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended 12 Months Ended
December 31, 1996 December 31,1996
Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period
------------------ ------------------
(Thousands of dollars) Amount Per Cent Amount Per Cent
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net operating revenues (a) $1,286 7.0 $10,278 17.8
Operation and maintenance expenses 329 5.3 4,468 17.9
Depreciation expense 252 14.1 585 8.0
Income taxes 418 13.0 2,968 50.7
Other income and deductions (254) (15.9) (3,833) (57.4)
Net income applicable to common stock 518 10.0 6,109 56.8
- ------------------------------------------------------------------------
<FN>
(a) Operating revenues, net of gas costs and revenue taxes.
</TABLE>
Net Operating Revenues
Gross revenues of the Company are affected by changes in the
unit cost of the Company's gas purchases and do not include the
cost of gas supplies for customers who purchase gas directly from
producers and marketers rather than from the Company. The direct
customer purchases have no effect on net income because the
Company provides transportation service for such gas volumes and
recovers margins similar to those applicable to conventional gas
sales. Changes in the unit cost of gas do not significantly
affect net income because the Company's tariffs provide for
dollar-for-dollar recovery of gas costs. (See Note 2F of the
Notes to Consolidated Financial Statements.) The Company's
tariffs also provide for dollar-for-dollar recovery of the cost
of revenue taxes imposed by the State and various municipalities.
Since income is not significantly affected by changes in
revenue from customers' gas purchases from producers or marketers
rather than from the Company, changes in gas costs, or changes in
revenue taxes, the discussion below pertains to "net operating
revenues" (operating revenues, net of gas costs and revenue
taxes). The Company considers net operating revenues to be a
more pertinent measure of operating results than gross revenues.
Net operating revenues increased $1.3 million, to $19.7
million, for the current three-month period, due primarily to an
increase of $665,000 for environmental costs recovered through
rates and the effect of the aforementioned rate increase which
improved net operating revenues by $645,000.
Net operating revenues increased $10.3 million, to $68
million, for the current 12-month period, due largely to the
impact of the rate increase that amounted to $5 million ($3 million
after income taxes). Also, weather that was 8 per cent colder than the
comparable prior period improved net operating revenues by about $1.8
million ($1.1 million after income taxes). Additionally, environmental
costs recovered through rates increased $2 million.
See Other Matters - Operating Statistics for details of
selected financial and operating information by gas service
classification.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $329,000, to $6.5
million, for the current three-month period, due mainly to
increased environmental costs of $665,000 recovered through
rates, partially offset by lower other operating expenses.
Operation and maintenance expenses increased $4.5 million, to
$29.5 million,, for the current 12-month period, due principally
to greater environmental costs of $2 million recovered through
rates, plus increased computer services ($553,000), and charges
to the reserve for injuries and damages ($488,000). In addition,
the prior period benefited from the recognition of $1 million for
an IRS settlement. (See Note 6 of the Notes to Consolidated
Financial Statements.)
Depreciation Expense
Depreciation expense increased $252,000, to $2 million, and
$585,000, to $7.9 million, for the current three- and 12-month
periods, respectively, due chiefly to depreciable property
additions.
Income Taxes
Income taxes, exclusive of income taxes in other income and
deductions, increased $418,000, to $3.6 million, and $3 million,
to $8.8 million, for the current three- and 12-month periods,
respectively, due primarily to higher pre-tax income.
Other Income and Deductions
Other income and deductions decreased $254,000 for the current
three-month period, due mainly to less interest on long-term debt
resulting from the Company's early redemption of first mortgage
bonds (see Note 7 of the Notes to Consolidated Financial
Statements) and decreased interest on amounts refundable to
customers, offset in part, by lower interest income.
Other income and deductions decreased $3.8 million for the
current 12-month period, due principally 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
period includes less interest on long-term debt due to the
aforementioned bond redemption and decreased interest on amounts
refundable to customers, partially offset by lower interest income.
Other Matters
Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income, cash
position, and coverage ratios.
Accounting Standards. In March 1995, the Financial Accounting
Standards Board (FASB) issued 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 636 and
successor orders that required substantial restructuring of the
service obligations of interstate pipelines. (See Notes 2F, 3A,
and 3B 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 2F,
3A, and 3B 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.
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
<CAPTION>
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues (thousands):
Gas Sales
Residential $39,699 $33,242 $131,960 $105,792
Commercial 5,586 4,536 19,819 14,812
Industrial 1,308 1,075 4,532 3,541
------- ------- -------- --------
46,593 38,853 156,311 124,145
Transportation
Residential 673 399 2,126 1,303
Commercial 1,594 2,198 5,703 7,128
Industrial 1,568 1,521 5,730 5,304
Contract Pooling 392 -- 762 --
------- ------- -------- -------
4,227 4,118 14,321 13,735
------- ------- -------- -------
Other Revenues 229 188 1,068 822
------- ------- -------- -------
Total Operating Revenues 51,049 43,159 171,700 138,702
Less _ Gas Costs 27,948 21,758 92,494 71,412
_ Revenues Taxes 3,395 2,981 11,165 9,527
------- ------- --------- --------
Net Operating Revenues $19,706 $18,420 $ 68,041 $ 57,763
======= ======= ========= ========
Deliveries (MDth):
Gas Sales
Residential 7,022 7,033 22,778 20,745
Commercial 1,059 1,027 3,730 3,125
Industrial 268 266 932 810
------ ------ ------- -------
8,349 8,326 27,440 24,680
------ ------ ------- -------
Transportation (a)
Residential 569 209 1,775 628
Commercial 1,264 1,929 4,480 5,854
Industrial 1,766 1,752 6,286 6,471
------- ------ ------- -------
3,599 3,890 12,541 12,953
------- ------ ------- -------
Total Gas Sales
and Transportation 11,948 12,216 39,981 37,633
======= ======= ======= =======
Margin per Dth delivered $ 1.65 $ 1.51 $ 1.70 $ 1.53
<FN>
(a) Volumes associated with contract pooling revenues are
included in their respective customer classes.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Indenture Restrictions. The Company's indenture relating to its
first mortgage bonds contains provisions and covenants
restricting the payment of cash dividends and the purchase or
redemption of capital stock. At December 31, 1996, such
restrictions amounted to $11.6 million out of North Shore Gas'
total retained earnings of $69.6 million; accordingly, $58
million are available for the payment of cash dividends and
the purchase or redemption of capital stock. (See Note 8 of
the Notes to Consolidated Financial Statements.)
Rate Order. On November 8, 1995, the Commission issued orders
approving changes in rates of the Company. (See Note 3A of the
Notes to Consolidated Financial Statements.)
Environmental Matters. The Company is conducting environmental
investigations and work at certain sites that were the location
of former manufactured gas operations. (See Note 4A of the Notes
to Consolidated Financial Statements.)
In 1994, the Company received a demand from a responsible
party under 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 4B of the Notes to Consolidated Financial Statements.)
On November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming the Company
and four other parties as defendants. The complaint alleges
violations arising out of a gasoline release that occurred in
Wheeling, Illinois in June 1992 when a contractor who was
installing a pipeline for the Company accidentally struck a
gasoline pipeline owned by West Shore Pipeline Company. The
Company is currently contesting this suit. (See Note 4C of the
Notes to Consolidated Financial Statements.)
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 7 of the Notes to
Consolidated Financial Statements.)
Credit Lines. Peoples Gas has lines of credit of approximately
$129.4 million of which the Company may borrow up to $30 million
to cover its projected short-term needs. At December 31, 1996,
the Company had unused credit available from banks of $18.3
million.
Interest Coverage. The fixed charges coverage ratios for the
Company for the 12 months ended December 31, 1996, and for fiscal
1996 and 1995 were 6.10, 5.62, and 2.93, respectively.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 4 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
------- -------------------------
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
December 31, 1996.
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
North Shore Gas Company
-----------------------
(Registrant)
February 12, 1997 By: /s/ K. S. BALASKOVITS
----------------- -----------------------------
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
------------------------------
Principal Accounting Officer
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED STATEMENTS
OF CASH FLOWS, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 190,833
<OTHER-PROPERTY-AND-INVEST> 20
<TOTAL-CURRENT-ASSETS> 48,161
<TOTAL-DEFERRED-CHARGES> 2,644
<OTHER-ASSETS> 12,843
<TOTAL-ASSETS> 254,501
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 69,603
<TOTAL-COMMON-STOCKHOLDERS-EQ> 94,360
0
0
<LONG-TERM-DEBT-NET> 64,639
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 11,735
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 83,767
<TOT-CAPITALIZATION-AND-LIAB> 254,501
<GROSS-OPERATING-REVENUE> 51,049
<INCOME-TAX-EXPENSE> 3,623
<OTHER-OPERATING-EXPENSES> 40,380
<TOTAL-OPERATING-EXPENSES> 44,003
<OPERATING-INCOME-LOSS> 7,046
<OTHER-INCOME-NET> (1)
<INCOME-BEFORE-INTEREST-EXPEN> 7,045
<TOTAL-INTEREST-EXPENSE> 1,346
<NET-INCOME> 5,699
0
<EARNINGS-AVAILABLE-FOR-COMM> 5,699
<COMMON-STOCK-DIVIDENDS> 3,372
<TOTAL-INTEREST-ON-BONDS> 1,157
<CASH-FLOW-OPERATIONS> (4,158)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
