FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 2-35965
NORTH SHORE GAS COMPANY
(Exact name of registrant as specified in its charter)
Illinois 36-1558720
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)
(312) 240-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
3,625,887 shares of Common Stock, without par value, outstanding at
July 31, 1998.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
(Thousands, except per-share amounts)
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OPERATING REVENUES:
Gas sales $ 21,798 $ 22,509 $ 119,412 $ 140,947 $ 131,546 $ 156,293
Transportation 2,258 2,850 10,027 12,582 12,245 15,078
Other 265 289 696 749 942 1,006
Total Operating Revenues 24,321 25,648 130,135 154,278 144,733 172,377
OPERATING EXPENSES:
Gas costs 10,490 10,774 68,782 87,391 73,698 95,184
Operation 5,509 5,017 16,411 16,309 24,233 23,591
Maintenance 748 654 2,159 2,127 2,965 3,008
Depreciation 2,038 1,934 6,055 5,845 8,073 7,801
Taxes - Income 759 1,451 8,532 10,538 7,040 9,397
- State and local revenue 1,350 1,686 8,347 9,971 9,170 10,966
- Other 872 517 2,327 1,581 2,879 2,140
Total Operating Expenses 21,766 22,033 112,613 133,762 128,058 152,087
OPERATING INCOME 2,555 3,615 17,522 20,516 16,675 20,290
OTHER INCOME
AND (DEDUCTIONS):
Interest income 163 150 224 305 366 429
Interest on long-term debt (1,156) (1,157) (3,469) (3,471) (4,625) (4,629)
Other interest expense (51) (39) (506) (400) (548) (462)
Income taxes (70) (53) (97) (123) (157) (498)
Miscellaneous - net 18 (26) 33 (38) 21 764
Total Other Income
and Deductions (1,096) (1,125) (3,815) (3,727) (4,943) (4,396)
NET INCOME APPLICABLE
TO COMMON STOCK $ 1,459 $ 2,490 $ 13,707 $ 16,789 $ 11,732 $ 15,894
The Notes to Consolidated Financial Statements are an integral part of these statements.
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<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
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CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $ 301,776 $ 295,631 $ 291,297
Less - Accumulated depreciation 105,866 100,957 99,336
Net property, plant and equipment 195,910 194,674 191,961
Other investments 21 21 20
Total Capital Investments - Net 195,931 194,695 191,981
CURRENT ASSETS:
Cash and cash equivalents 13,216 344 13,917
Receivables -
Customers, net of allowance for uncollectible accounts
of $792, $898, and $1,019, respectively 5,872 4,960 9,331
Other 826 1,707 2,463
Accrued unbilled revenues 2,634 2,634 2,145
Materials and supplies, at average cost 3,040 2,976 2,414
Gas in storage, at last-in, first-out cost 8,155 10,003 4,597
Gas costs recoverable through rate adjustments 103 1,836 353
Regulatory assets 791 2,320 3,298
Prepayments 356 246 301
Total Current Assets 34,993 27,026 38,819
OTHER ASSETS:
Non-current regulatory assets 14,852 6,204 6,262
Deferred charges 3,602 2,769 2,793
Total Other Assets 18,454 8,973 9,055
Total Properties and Other Assets $ 249,378 $ 230,694 $ 239,855
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
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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 73,171 67,912 75,399
Total Common Stockholder's Equity 97,928 92,669 100,156
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,604 64,604 64,639
Total Capitalization 162,532 157,273 164,795
CURRENT LIABILITIES:
Interim loans - 2,110 -
Accounts payable 24,244 18,884 17,597
Dividends payable on common stock 2,502 5,511 2,647
Customer gas service and credit deposits 3,157 5,634 2,548
Accrued taxes 7,392 1,952 5,411
Gas sales revenue refundable through rate adjustments 489 411 937
Accrued interest 900 2,037 903
Temporary LIFO liquidation credit 1,921 - 8,118
Total Current Liabilities 40,605 36,539 38,161
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 21,901 20,416 20,640
Investment tax credits being amortized over
the average lives of related property 3,472 3,592 3,631
Other 20,868 12,874 12,628
Total Deferred Credits and Other Liabilities 46,241 36,882 36,899
Total Capitalization and Liabilities $ 249,378 $ 230,694 $ 239,855
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
1998 1997
(Thousands of Dollars)
Operating Activities:
Net Income $ 13,707 $ 16,789
Adjustments to reconcile net income to net cash:
Depreciation 6,055 5,845
Deferred income taxes and investment tax credits - net 578 593
Change in other deferred credits and other liabilities 8,781 (131)
Change in other assets (9,481) 1,999
Change in current assets and liabilities:
Receivables - net (31) (2,849)
Accrued unbilled revenues - 1,635
Materials and supplies (64) (305)
Gas in storage 1,848 5,030
Gas costs recoverable 1,733 (104)
Regulatory assets 1,529 4,240
Prepayments (110) 70
Accounts payable 5,360 (9,332)
Customer gas service and credit deposits (2,477) (2,721)
Accrued taxes 5,440 3,114
Gas sales revenue refundable 78 -
Accrued interest (1,137) (1,135)
Temporary LIFO liquidation credit 1,921 8,118
Net Cash Provided by Operating Activities 33,730 30,856
Investing Activities:
Capital expenditures - construction (7,690) (7,192)
Other assets 400 553
Net Cash Used in Investing Activities (7,290) (6,639)
Financing Activities:
Interim loans - net (2,110) (1,925)
Retirement of long-term debt - (25)
Dividends paid on common stock (11,458) (8,738)
Net Cash Used in Financing Activities (13,568) (10,688)
Net Increase in Cash and Cash Equivalents 12,872 13,529
Cash and Cash Equivalents at Beginning of Period 344 389
Cash and Cash Equivalents at End of Period $ 13,216 $ 13,918
The Notes to Consolidated Financial Statements are an integral part of these
statements.
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, 1997. 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 rates.
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.
Income taxes and interest paid (excluding capitalized
interest) were as follows:
For the nine months
ended June 30, 1998 1997
(Thousands)
Income taxes paid $2,101 $6,777
Interest paid 5,024 4,858
2F Recovery of Gas 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).
For each gas utility, the Commission conducts annual
proceedings regarding 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 a proceeding regarding the Company for fiscal
year 1997 is currently pending before the Commission.
2G Accounting Standards
The Company adopted Statement of Position (SOP) 96-1,
"Environmental Remediation Liabilities" in the first quarter of
fiscal 1998. The application of the statement did not have a
material effect on the Company's financial condition or results
of operations.
3. ENVIRONMENTAL MATTERS
3A 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
additional Manufactured Gas Sites. These investigations may
require the Company to perform additional investigation and
remediation. The investigations are in a preliminary stage and
are expected to occur over an extended period of time.
In 1990, the Company entered into an Administrative Order on
Consent (AOC) with the United States Environmental Protection
Agency (EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas
Site located in Waukegan, Illinois, where manufactured gas and
coking operations were formerly conducted (Waukegan Site). The
RI/FS is comprised of an investigation to determine the nature
and extent of contamination at the Waukegan Site and a
feasibility study to develop and evaluate possible remedial
actions. The Company entered into the AOC after being notified
by the EPA that the Company, General Motors Corporation (GMC) and
Outboard Marine Corporation were each a potentially responsible
party (PRP) under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (CERCLA), with
respect to the Waukegan Site. A PRP is potentially liable for
the cost of any investigative and/or remedial work that the EPA
determines is necessary. Other parties identified as PRPs did
not enter into the AOC. Under the terms of the AOC, the Company
is responsible for the cost of the RI/FS. The Company believes,
however, that it will recover a significant portion of the costs
of the RI/FS from other entities. GMC has agreed to share
equally with the Company in funding of the RI/FS cost, without
prejudice to GMC's or the Company's right to seek a lesser cost
responsibility at a later date.
The Company is accruing and deferring the costs it incurs in
connection with all of the Manufactured Gas Sites, including
related legal expenses, pending recovery through rates or from
insurance carriers or other entities. At June 30, 1998, the
total of the costs deferred by the Company, net of recoveries and
amounts billed to other entities, was $15.5 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 June 30, 1998 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 June 30, 1998, it had
recovered $7.1 million of such costs through rates.
3B 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 to the liability of a former entity that was
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 filed a declaratory judgment action against
Salomon in the District Court for the Northern District of
Illinois. The suit asked the court to declare that the Company
is not liable for response costs incurred or to be incurred at
the Denver site. Salomon filed a counterclaim for costs to be
incurred by Salomon and Shattuck with respect to the site. In
1997, the District Court granted the Company's motion for summary
judgment, declaring that the Company is not liable for any
response costs in connection with the Denver site.
On August 5, 1998, the U.S. Court of Appeals, Seventh Circuit,
reversed the District Court's decision and ruled that the Company
is a successor to the liability, if any, of the former entity
allegedly associated with the site. The Appellate Court remanded
the case to the District Court for determination of what liability,
if any, the former entity has, and therefore the Company has, for
activities at the site. At this time, the Company has not
determined whether to seek review of the Appellate Court's
decision.
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.
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 its first mortgage bonds
contains provisions and covenants restricting the payment of cash
dividends and the purchase or redemption of capital stock. At
June 30, 1998, such restrictions amounted to $11.6 million out of
the Company's total retained earnings of $73.2 million.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income applicable to common stock decreased $1.0 million,
to $1.5 million, and $3.1 million, to $13.7 million, for the
three- and nine-months ended June 30, 1998, respectively, due
mainly to weather that was 39 and 18 percent, respectively,
warmer than in comparable prior year periods.
Net income applicable to common stock decreased $4.2 million,
to $11.7 million, for the 12-months ended June 30, 1998,
reflecting lower gas deliveries due to weather that was 18
percent warmer than the prior period. Also contributing to the
decline was the previous period's one-time gain associated with
the expiration of natural gas storage contracts.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended Nine Months Ended 12 Months Ended
June 30, 1998 June 30, 1998 June 30, 1998
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
From Prior Period From Prior Period From Prior Period
(Thousands of dollars) Amount % Amount % Amount %
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Net operating revenues (a) $ (707) (5.4) $(3,910) (6.9) $(4,362) (6.6)
Operation and maintenance expenses 586 10.3 134 0.7 599 2.3
Depreciation expense 104 5.4 210 3.6 272 3.5
Other taxes 355 68.7 746 47.2 739 34.5
Income taxes (692) (47.7) (2,006) (19.0) (2,357) (25.1)
Other income and deductions (29) (2.6) 88 2.4 547 12.4
Net income applicable to common stock (1,031) (41.4) (3,082) (18.4) (4,162) (26.2)
(a) Operating revenues, net of gas costs and revenue taxes.
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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 declined $707,000, to $12.5 million,
for the current three-month period due primarily to the effect of
El Nino which caused weather to be 39 percent warmer than during
the same period a year-ago.
Net operating revenues declined $3.9 million, to $53.0
million, and $4.4 million, to $61.9 million, for the current nine-
and 12-month periods, respectively, due primarily to weather that
was 18 percent warmer, in both periods, than in the comparable
periods a year-ago.
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 $586,000, to $6.3
million, for the current three- month period, due mainly to an
increase in the cost of outside professional services of
$240,000, primarily attributable to increased billings from
Peoples Gas for the cost of contract programmers retained by that
company to maintain existing systems used by both companies.
Peoples Gas' staff programmers, who normally would maintain these
systems, are involved in the development and implementation of a
new customer information system for use by both companies. A
$143,000 increase in environmental costs recovered through rates
also contributed to the variation between periods. Partially
offsetting these effects were decreases in pension costs.
Operation and maintenance expenses increased $134,000, to
$18.6 million and $599,000 to $27.2 million, for the current nine-
and 12-month periods respectively, due principally to continued
enhancements for a new software systems of $306,000 and $870,000,
respectively and to increases in labor costs of $434,000 and
$717,000, respectively. Partially offsetting these effects were
decreases in other operation and maintenance expenses.
Depreciation Expense
Depreciation expense increased $104,000, to $2.0 million,
$210,000, to $6.1 million, and $272,000, to $8.1 million, for the
current three-, nine-, and 12-month periods, respectively, due
primarily to depreciable property additions.
Other Taxes
Other taxes increased $355,000, to $872,000, $746,000, to
$2.3 million, and $739,000, to $2.9 million, for the current
three-, nine-, and 12- month periods, respectively, due
primarily to the new Supplemental Low Income Energy
Assistance Charge. Since this charge was collected from
the customers, it had no impact on net income.
Income Taxes
Income taxes, exclusive of income taxes in other income and
deductions, declined $692,000, to $759,000, $2.0 million, to $8.5
million, and $2.4 million, to $7.0 million, for the current three-
, nine-, and 12-month periods, respectively, due principally to
lower pre-tax income.
Other Income and Deductions
Other income and deductions decreased $29,000, for the current
three-month period due primarily to higher other income and lower
interest expense.
Other income and deductions increased $88,000, for the current
nine-month period due principally to higher interest expense on
promissory notes and a decrease in miscellaneous interest
revenues.
Other income and deductions increased $547,000, for the
current 12-month period, due mainly to the prior period's gain of
$477,000, net of taxes, from the expiration of natural gas
storage contracts.
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 fiscal 1998, the Company adopted SOP 96-
1, "Environmental Remediation Liabilities". (See Note 2G of the
Notes to Consolidated Financial Statements.)
Large-Volume Gas Service Agreements. The Company has entered into
gas service contracts with certain large volume customers under a
specific rate schedule approved by the Commission. These
contracts were negotiated to overcome the potential threat of
bypassing the utility's distribution system. The impact on the
net income of the Company as a result of these contracts is not
material.
<TABLE>
Operating Statistics. The following table represents gas
distribution margin components:
Three Months Ended Nine Months Ended Twelve Months Ended
June 30, June 30, June 30,
1998 1997 1998 1997 1998 1997
Operating Revenues (Thousands):
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Gas sales
Residential $ 18,471 $ 19,139 $ 100,939 $ 118,793 $ 111,481 $ 132,038
Commercial 2,632 2,798 14,873 17,903 16,355 19,719
Industrial 695 572 3,600 4,251 3,710 4,536
21,798 22,509 119,412 140,947 131,546 156,293
Transportation
Residential 280 567 1,074 2,403 1,453 2,757
Commercial 1,094 972 5,080 4,379 5,718 5,033
Industrial 876 1,039 3,429 4,090 4,467 5,269
Contract Pooling 8 272 444 1,710 607 2,019
2,258 2,850 10,027 12,582 12,245 15,078
Other 265 289 696 749 942 1,006
Total Operating Revenues 24,321 25,648 130,135 154,278 144,733 172,377
Less- Gas Costs 10,490 10,774 68,782 87,391 73,698 95,184
- Revenue Taxes 1,350 1,686 8,347 9,971 9,170 10,966
Net Operating Revenues $ 12,481 $ 13,188 $ 53,006 $ 56,916 $ 61,865 $ 66,227
Deliveries (MDth):
Gas Sales
Residential 2,810 3,546 17,424 20,209 18,794 21,789
Commercial 440 596 2,759 3,289 3,001 3,550
Industrial 146 133 742 833 755 880
3,396 4,275 20,925 24,331 22,550 26,219
Transportation (a)
Residential 129 568 571 2,427 900 2,676
Commercial 1,007 693 5,062 3,589 5,409 3,917
Industrial 1,247 1,382 4,729 4,971 6,155 6,272
2,383 2,643 10,362 10,987 12,464 12,865
Total Gas Sales
and Transportation 5,779 6,918 31,287 35,318 35,014 39,084
Margin per Dth delivered $ 2.16 $ 1.91 $ 1.69 $ 1.61 $ 1.77 $ 1.69
(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 June 30, 1998, such restrictions
amounted to $11.6 million out of North Shore Gas' total retained
earnings of $73.2 million. (See Note 4 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 3A 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.
Salomon filed a counterclaim for costs to be incurred by Salomon
and Shattuck with respect to the site. In 1997, the District
Court granted the Company's motion for summary judgment,
declaring that the Company is not liable for any response costs
in connection with the Denver site. On August 5, 1998, the U. S.
Court of Appeals, Seventh Circuit, reversed the District Court's
decision. (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 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 3C of the
Notes to Consolidated Financial Statements.)
Credit Lines. Peoples Gas has lines of credit of totaling $129.4
million of which the Company may borrow up to $30 million to
cover its projected short-term needs. At June 30, 1998, Peoples
Gas and the Company had unused credit available from banks of
$91.2 million of which $30 million was available to the Company.
Interest Coverage. The fixed charges coverage ratios for the
Company for the 12 months ended June 30, 1998, and for fiscal
1997 and 1996 were 4.66, 5.74, and 5.62, respectively.
Year 2000. The Company is modifying all of its computer programs
to be year 2000 compliant. The Company does not believe that the
amount of expenditures it will incur in connection with its year
2000 modifications will have a material adverse effect on the
financial position or results of operations of the Company. The
Company's year 2000 modification program has achieved substantial
progress and the Company expects that the modifications will be
completed and fully tested prior to the year 2000. The Company
is also requiring that other parties, particularly vendors with
whom the Company electronically interacts, have year 2000
compatible computer systems. The Company, however, cannot
control the success of other parties' year 2000 modification
efforts.
Forward-Looking Information. Management's Discussion and
Analysis of Results of Operations and Financial Condition
("MD&A") contains statements that may be considered forward-
looking, such as the discussion of the effect of weather on net
income, cash position and coverage ratios, the insignificant
effect on income arising from changes in revenue from customers'
gas purchases from entities other than the Company, environmental
matters, and the discussion concerning year 2000 compliant
information systems. These statements speak of the Company's
plans, goals, beliefs, or expectations, refer to estimates or use
similar terms. Actual results could differ materially because
the realization of those results is subject to many
uncertainties, including:
" The future health of the U.S. and Illinois economies.
" The timing and extent of changes in energy commodity prices
and interest rates.
" Regulatory developments in the U.S., Illinois and other
states where the Company has investments.
" Litigation concerning the Company's liability for CERCLA
response costs relating to a former mineral processing site in
Denver, Colorado.
" Changes in the nature of the Company's competition resulting
from industry consolidation, legislative change, regulatory
change and other factors, as well as action taken by particular
competitors.
" The ability of various vendors and others with whom the
Company electronically interacts to complete year 2000 systems
modification efforts on a timely basis and in a manner that
allows them to continue normal business transactions with the
Company without disruption.
Some of these uncertainties that may affect future results are
discussed in more detail in the sections of "Item 1 - Business"
of the Annual Report on Form 10-K captioned "Competition", "Sales
and Rates", "State Legislation and Regulation", "Federal
Legislation and Regulation", "Environmental Matters", and
"Current Gas Supply". All forward-looking statements included in
this MD&A are based upon information presently available, and the
Company assumes no obligation to update any forward-looking
statements.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 3 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
June 30, 1998.
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
North Shore Gas Company
(Registrant)
August 12, 1998 By: /s/ K. S. BALASKOVITS
(Date) K. S. Balaskovits
Vice President and Controller
(Same as above)
Principal Accounting
Officer
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