FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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
April 30, 1998.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
1998 1997 1998 1997 1998 1997
(Thousands, except per-share amounts)
OPERATING REVENUES:
<S> <C> <C> <C> <C> <C> <C>
Gas sales $ 51,744 $ 71,839 $ 97,614 $ 118,437 $ 132,257 $ 162,991
Transportation 3,758 5,511 7,769 9,733 12,836 15,297
Other 213 231 431 460 966 1,026
Total Operating Revenues 55,715 77,581 105,814 128,630 146,059 179,314
OPERATING EXPENSES:
Gas costs 29,936 48,670 58,292 76,618 73,981 101,392
Operation 5,455 5,553 10,902 11,292 23,741 24,931
Maintenance 764 732 1,411 1,472 2,872 3,167
Depreciation 1,986 1,868 4,017 3,911 7,969 7,827
Taxes - Income 4,478 5,464 7,773 9,087 7,731 8,916
- State and local revenue 3,795 4,890 6,997 8,285 9,506 11,251
- Other 953 549 1,455 1,064 2,524 2,166
Total Operating Expenses 47,367 67,726 90,847 111,729 128,324 159,650
OPERATING INCOME 8,348 9,855 14,967 16,901 17,735 19,664
OTHER INCOME
AND (DEDUCTIONS):
Interest income 40 137 61 155 353 409
Interest on long-term debt (1,156) (1,157) (2,312) (2,314) (4,626) (4,631)
Other interest expense (188) (172) (456) (361) (537) (547)
Income taxes (14) (61) (27) (70) (140) (1,153)
Miscellaneous - net 7 (2) 15 (12) (22) 2,423
Total Other Income
and Deductions (1,311) (1,255) (2,719) (2,602) (4,972) (3,499)
NET INCOME APPLICABLE
TO COMMON STOCK $ 7,037 $ 8,600 $ 12,248 $ 14,299 $ 12,763 $ 16,165
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
CAPITAL INVESTMENTS:
<S> <C> <C> <C>
Property, plant and equipment, at original cost $ 300,249 $ 295,631 $ 288,784
Less - Accumulated depreciation 104,034 100,957 97,513
Net property, plant and equipment 196,215 194,674 191,271
Other investments 21 21 20
Total Capital Investments - Net 196,236 194,695 191,291
CURRENT ASSETS:
Cash and cash equivalents 6,621 344 5,138
Receivables -
Customers, net of allowance for uncollectible accounts
of $792, $898, and $1,002, respectively 13,086 4,960 23,210
Other 2,392 1,707 1,788
Accrued unbilled revenues 7,971 2,633 7,730
Materials and supplies, at average cost 2,910 2,976 2,573
Gas in storage, at last-in, first-out cost 2,956 10,003 2,546
Gas costs recoverable through rate adjustments 1,439 1,836 -
Regulatory assets 955 2,321 4,673
Prepayments 463 246 411
Total Current Assets 38,793 27,026 48,069
OTHER ASSETS:
Non-current regulatory assets 5,987 6,204 6,290
Deferred charges 3,418 2,769 2,866
Total Other Assets 9,405 8,973 9,156
Total Properties and Other Assets $ 244,434 $ 230,694 $ 248,516
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
March 31, March 31,
1998 September 30, 1997
(Unaudited) 1997 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
<S> <C> <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 $ 24,757
Retained earnings 74,214 67,912 75,556
Total Common Stockholder's Equity 98,971 92,669 100,313
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 64,604 64,604 64,639
Total Capitalization 163,575 157,273 164,952
CURRENT LIABILITIES:
Interim loans - 2,110 -
Accounts payable 19,723 18,884 17,618
Dividends payable on common stock 2,828 5,511 2,647
Customer gas service and credit deposits 3,046 5,634 2,138
Accrued taxes 7,198 1,952 8,219
Gas sales revenue refundable through rate adjustments 209 411 3,090
Accrued interest 2,024 2,037 2,026
Temporary LIFO liquidation credit 8,926 - 11,181
Total Current Liabilities 43,954 36,539 46,919
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 20,821 20,416 20,118
Investment tax credits being amortized over
the average lives of related property 3,522 3,592 3,668
Other 12,562 12,874 12,859
Total Deferred Credits and Other Liabilities 36,905 36,882 36,645
Total Capitalization and Liabilities $ 244,434 $ 230,694 $ 248,516
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
1998 1997
(Thousands of Dollars)
Operating Activities:
Net Income $ 12,248 $ 14,299
Adjustments to reconcile net income to net cash:
Depreciation 4,017 3,911
Deferred income taxes and investment tax credits - net 206 188
Change in other deferred credits and other liabilities (183) 19
Change in other assets (432) 1,899
Change in current assets and liabilities:
Receivables - net (8,811) (16,054)
Accrued unbilled revenues (5,338) (3,950)
Materials and supplies 66 (464)
Gas in storage 7,047 7,081
Gas costs recoverable 397 2,500
Regulatory assets 1,366 2,865
Prepayments (217) (40)
Accounts payable 839 (9,311)
Customer gas service and credit deposits (2,588) (3,131)
Accrued taxes 5,246 5,922
Gas sales revenue refundable (202) (98)
Accrued interest (13) (12)
Temporary LIFO liquidation credit 8,926 11,181
Net Cash Provided by (Used in) Operating Activities 22,574 16,805
Investing Activities:
Capital expenditures - construction (5,832) (4,403)
Other assets 275 388
Net Cash Used in Investing Activities (5,557) (4,015)
Financing Activities:
Interim loans - net (2,110) (1,925)
Retirement of long-term debt - (25)
Dividends paid on common stock (8,630) (6,091)
Net Cash Provided by (Used in) Financing Activities (10,740) (8,041)
Net Increase (Decrease) in Cash and Cash Equivalents 6,277 4,749
Cash and Cash Equivalents at Beginning of Period 344 389
Cash and Cash Equivalents at End of Period $ 6,621 $ 5,138
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 six months
ended March 31, 1998 1997
(Thousands)
Income taxes paid $3,544 $5,520
Interest paid 2,723 2,587
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.
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 March 31, 1998, the
total of the costs deferred by the Company, net of recoveries and
amounts billed to other entities, was $6.8 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 March 31, 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 March 31, 1998, it had
recovered $6.9 million of such costs through rates.
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 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. On
March 7, 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.
Salomon has appealed the ruling of the District Court to the
United States Court of Appeals, Seventh Circuit.
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
March 31, 1998, such restrictions amounted to $11.6 million out
of the Company's total retained earnings of $74.2 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 $1.6 million, to
$7.0 million, and $2.1 million, to $12.2 million, for the three-
and six-months ended March 31, 1998, respectively, due mainly to
weather that was 19 and 14 percent, respectively, warmer than in
comparable prior year periods.
Net income applicable to common stock decreased $3.4 million, to
$12.8 million, for the 12-months ended March 31, 1998, due to the
unusually mild winter caused by El-Nino and the prior period's gain
associated with the expiration of gas storage contracts. Partially
offsetting these effects were reductions in operation and
maintenance expenses.
<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
<CAPTION>
Three Months Ended Six Months Ended 12 Months Ended
March 31, 1998 March 31, 1998 March 31, 1998
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
From Prior Period From Prior Period From Prior Period
(Thousands of dollars) Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues (a) $(2,037) (8.5) $(3,202) (7.3) $(4,099) (6.1)
Operation and maintenance expenses (66) (1.1) (451) (3.5) (1,485) (5.3)
Depreciation expense 118 6.3 106 2.7 142 1.8
Income taxes (986) (18.0) (1,314) (14.5) (1,185) (13.3)
Other income and deductions 56 4.5 117 4.5 1,473 42.1
Net income applicable to common stock (1,563) (18.2) (2,051) (14.3) (3,402) (21.0)
(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 declined $2.0 million, to $22.0
million, for the current three-month period due primarily to El
Nino which caused weather to be 19 percent warmer than the same
period a year ago.
Net operating revenues declined $3.2 million, to $40.5
million, and $4.1 million, to $62.6 million, for the current six-
and 12-month periods, respectively, due primarily to El Nino
which caused weather to be 14 and 12 percent warmer,
respectively, than in the comparable period 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 decreased $66,000, to $6.2
million, and $451,000 to $12.3 million, for the current three-
and six-month periods, due principally to reductions in
environmental costs recovered through rates of $157,000 and
$806,000, respectively. Partially offsetting these effects were
increases in other operation and maintenance expenses.
Operation and maintenance expenses decreased $1.5 million, to
$26.6 million, for the current 12-month period due mainly to a
reduction in environmental costs recovered through rates ($1.4
million), reductions in costs associated with liability insurance
premiums and claim settlements ($925,000), and pension costs
($603,000). Increases in other operation and maintenance
expenses partially offset the effects of the reductions mentioned
above.
Depreciation Expense
Depreciation expense increased $118,000, to $2.0 million,
$106,000, to $4.0 million, and $142,000, to $8.0 million, for the
current three-, six-, and 12-month periods, respectively, due
primarily to depreciable property additions.
Income Taxes
Income taxes, exclusive of income taxes in other income and
deductions, declined $986,000, to $4.5 million, $1.3 million, to
$7.8 million, and $1.2 million, to $7.7 million, for the current
three-, six-, and 12-month periods, respectively, due principally
to lower pre-tax income.
Other Income and Deductions
Other income and deductions increased $56,000, and $117,000
for the current three- and six-month periods, respectively, due
chiefly to a decrease in interest income.
Other income and deductions increased $1.5 million, for the
current 12-month period, due primarily to the prior period's gain
of $1.4 million, 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.
Large-Volume Gas Service Agreements. The Company has entered
into a gas service contract with a large-volume customer under a
specific rate schedule approved by the Commission. This contract
was negotiated to overcome the potential threat of bypassing the
utility's distribution system. The contract will not have a
material adverse effect on the financial position or the results
of operations of the Company.
<TABLE>
Operating Statistics. The following table represents gas distribution margin
components:
<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
1998 1997 1998 1997 1998 1997
Operating Revenues (Thousands):
<S> <C> <C> <C> <C> <C> <C>
Gas sales
Residential $ 43,402 $ 59,952 $ 82,468 $ 99,654 $ 112,150 $ 137,951
Commercial 6,662 9,517 12,241 15,105 16,520 20,342
Industrial 1,680 2,370 2,905 3,678 3,587 4,698
51,744 71,839 97,614 118,437 132,257 162,991
Transportation
Residential 461 1,166 794 1,836 1,740 2,820
Commercial 1,965 1,815 3,986 3,407 5,595 5,109
Industrial 1,151 1,483 2,553 3,051 4,630 5,559
Contract Pooling 181 1,047 436 1,439 871 1,809
3,758 5,511 7,769 9,733 12,836 15,297
Other 213 231 431 460 966 1,026
Total Operating Revenues 55,715 77,581 105,814 128,630 146,059 179,314
Less - Gas Costs 29,936 48,670 58,292 76,618 73,981 101,392
- Revenues Taxes 3,795 4,890 6,997 8,285 9,506 11,251
Net Operating Revenues $ 21,984 $ 24,021 $ 40,525 $ 43,727 $ 62,572 $ 66,671
Deliveries (MDth):
Gas Sales
Residential 8,173 9,641 14,614 16,663 19,529 21,949
Commercial 1,337 1,634 2,319 2,693 3,157 3,506
Industrial 366 432 596 700 742 879
9,876 11,707 17,529 20,056 23,428 26,334
Transportation (a)
Residential 295 1,291 442 1,859 1,339 2,639
Commercial 2,097 1,631 4,055 2,896 5,096 3,968
Industrial 1,755 1,823 3,482 3,589 6,290 6,278
4,147 4,745 7,979 8,344 12,725 12,885
Total Gas Sales
and Transportation 14,023 16,452 25,508 28,400 36,153 39,219
Margin per Dth delivered $ 1.57 $ 1.46 $ 1.59 $ 1.54 $ 1.73 $ 1.70
(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 March 31, 1998, such
restrictions amounted to $11.6 million out of North Shore Gas'
total retained earnings of $74.2 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. On March 7, 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. Salomon has appealed the
ruling of the District Court to the United States Court of
Appeals, Seventh Circuit. (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 March 31, 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 March 31, 1998, and for fiscal
1997 and 1996 were 5.00, 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.
" 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 4. Submission of Matters to a Vote of Security Holders
a. On March 26, 1998, the following persons were
elected Directors of the Company and comprise the
entire Board of Directors of the Company: Kenneth
S. Balaskovits, J. Bruce Hasch, James Hinchliff,
Thomas M. Patrick, and Richard E. Terry.
b. The following matter was voted upon at the
Annual Meeting of Shareholders.
There were no broker non-votes with respect to any
matters voted upon.
1. The election of nominees for directors who
will serve for a one-year term or until their
respective successors shall be duly elected.
The nominees, all of whom were elected, were as
follows: Kenneth S. Balaskovits, J. Bruce
Hasch, James Hinchliff, Thomas M. Patrick, and
Richard E. Terry. The Secretary of the Company
certified the following vote tabulations:
FOR WITHHELD
Kenneth S. Balaskovits . . 3,625,887 0
J. Bruce Hasch . . . . . . 3,625,887 0
James Hinchliff . . . . . . 3,625,887 0
Thomas M. Patrick . . . . 3,625,887 0
Richard E. Terry . . . . . 3,625,887 0
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit
Number Description of Document
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
March 31, 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)
May 13, 1998 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 INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF INCOME, CONSOLIDATED BALANCE SHEETS, AND CONSOLIDATED
STATEMENTS OF CASH FLOWS, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 196,215
<OTHER-PROPERTY-AND-INVEST> 21
<TOTAL-CURRENT-ASSETS> 38,793
<TOTAL-DEFERRED-CHARGES> 3,418
<OTHER-ASSETS> 5,987
<TOTAL-ASSETS> 244,434
<COMMON> 24,757
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 74,214
<TOTAL-COMMON-STOCKHOLDERS-EQ> 98,971
0
0
<LONG-TERM-DEBT-NET> 64,604
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 80,859
<TOT-CAPITALIZATION-AND-LIAB> 244,434
<GROSS-OPERATING-REVENUE> 105,814
<INCOME-TAX-EXPENSE> 7,773
<OTHER-OPERATING-EXPENSES> 83,074
<TOTAL-OPERATING-EXPENSES> 90,847
<OPERATING-INCOME-LOSS> 14,967
<OTHER-INCOME-NET> 49
<INCOME-BEFORE-INTEREST-EXPEN> 15,016
<TOTAL-INTEREST-EXPENSE> 2,768
<NET-INCOME> 12,248
0
<EARNINGS-AVAILABLE-FOR-COMM> 12,248
<COMMON-STOCK-DIVIDENDS> 8,630
<TOTAL-INTEREST-ON-BONDS> 2,312
<CASH-FLOW-OPERATIONS> 22,574
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
