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 December 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) (ZipCode)
(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, 1999.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Twelve Months Ended
December 31, December 31,
1998 1997 1998 1997
(Thousands, except per-share amounts)
OPERATING REVENUES $37,248 $50,099 $131,355 $167,925
OPERATING EXPENSES:
Gas costs 17,831 28,356 62,519 92,714
Operation and maintenance 6,581 6,094 25,315 26,680
Depreciation 2,099 2,032 8,120 7,852
Taxes, other than income taxes 3,344 3,703 12,036 12,721
Total Operating Expenses 29,855 40,185 107,990 139,967
OPERATING INCOME 7,393 9,914 23,365 27,958
OTHER INCOME AND (DEDUCTIONS) (1,253) (1,395) (4,634) (4,729)
EARNINGS BEFORE INCOME TAXES 6,140 8,519 18,731 23,229
INCOME TAXES 2,358 3,308 7,174 8,904
NET INCOME $ 3,782 $ 5,211 $ 11,557 $ 14,325
The Notes to Consolidated Financial Statements are an integral part
of these statements.
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North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 September 30, 1997
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
PROPERTIES AND OTHER ASSETS
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CAPITAL INVESTMENTS:
Property, plant and equipment, at original cost $ 308,333 $ 304,487 $ 298,383
Less - Accumulated depreciation 109,617 107,590 102,218
Net property, plant and equipment 198,716 196,897 196,165
Other investments 22 22 21
Total Capital Investments - Net 198,738 196,919 196,186
CURRENT ASSETS:
Cash and cash equivalents 2,741 4,666 1,086
Trust fund (See Note 4) 25,693 - -
Receivables -
Customers, net of allowance for uncollectible accounts
of $637, $705, and $729, respectively 9,199 3,811 14,306
Other 681 828 1,035
Accrued unbilled revenues 10,350 2,629 11,216
Materials and supplies, at average cost 2,526 2,729 2,922
Gas in storage, at last-in, first-out cost 5,998 9,917 8,163
Gas costs recoverable through rate adjustments 117 614 1,084
Regulatory assets 1,035 1,208 2,022
Prepayments 223 317 143
Total Current Assets 58,563 26,719 41,977
OTHER ASSETS:
Non-current regulatory assets 16,140 23,895 4,737
Deferred charges 4,090 3,730 3,237
Total Other Assets 20,230 27,625 7,974
Total Properties and Other Assets $ 277,531 $ 251,263 $ 246,137
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<TABLE>
North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 September 30, 1997
(Unaudited) 1998 (Unaudited)
(Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S> <C> <C> <C>
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 70,648 70,020 70,005
Total Common Stockholder's Equity 95,405 94,777 94,762
Long-term debt, exclusive of sinking fund
payments and maturities due within one year 69,734 64,604 64,604
Total Capitalization 165,139 159,381 159,366
CURRENT LIABILITIES:
Interim loans - - 15,095
Accounts payable 13,909 22,953 17,383
Dividends payable on common stock 3,155 2,429 3,118
Customer gas service and credit deposits 7,616 5,705 5,483
Sinking fund payments, maturites, and redemptions,
due within one year -
Long-term debt 24,905 - -
Accrued taxes 7,919 1,305 5,867
Gas sales revenue refundable through rate adjustments 771 1,163 -
Accrued interest 944 2,034 885
Temporary LIFO liquidation credit - - 1,856
Total Current Liabilities 59,219 35,589 49,687
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily accelerated depreciation 19,981 23,052 20,832
Investment tax credits being amortized over
the average lives of related property 3,400 3,437 3,557
Other 29,792 29,804 12,695
Total Deferred Credits and Other Liabilities 53,173 56,293 37,084
Total Capitalization and Liabilities $ 277,531 $ 251,263 $ 246,137
The Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1998 1997
(Thousands of Dollars)
Operating Activities:
Net Income $ 3,782 $5,211
Adjustments to reconcile net income to net cash:
Depreciation 2,099 2,032
Deferred income taxes and investment tax credits - net (3,180) 317
Change in deferred credits and other liabilities 61 (115)
Change in other assets 7,395 999
Change in current assets and liabilities:
Receivables - net (5,241) (8,674)
Accrued unbilled revenues (7,721) (8,583)
Materials and supplies 203 54
Gas in storage 3,919 1,840
Gas costs recoverable 498 752
Regulatory assets 173 299
Prepayments 94 103
Accounts payable (9,043) (1,501)
Customer gas service and credit deposits 1,911 (151)
Accrued taxes 6,614 3,915
Gas sales revenue refundable (392) (411)
Accrued interest (1,090) (1,152)
Temporary LIFO liquidation credit - 1,856
Net Cash Provided by (Used in) Operating Activities 82 (3,209)
Investing Activities:
Capital expenditures - construction (2,547) (3,620)
Other assets (1,372) 97
Net Cash Used in Investing Activities (3,919) (3,523)
Financing Activities:
Interim loans - net - 12,985
Issuance of long-term debt 30,035 -
Dividends paid on common stock (2,429) (5,511)
Trust fund (25,694) -
Net Cash Provided by (Used in) Financing Activities 1,912 7,474
Net Increase (Decrease) in Cash and Cash Equivalents (1,925) 742
Cash and Cash Equivalents at Beginning of Period 4,666 344
Cash and Cash Equivalents at End of Period $ 2,741 $1,086
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, 1998. 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 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.
2B 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 were as follows:
For the three months
ended December 31, 1998 1997
(Thousands)
Income taxes paid $ 2 $ 2
Interest paid 2,850 2,557
2C Recovery of Gas Costs
Under the tariff 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 proceedings, regarding the Company for fiscal
years 1997 and 1998 are currently pending before the Commission.
3. ENVIRONMENTAL MATTERS
Former Manufactured Gas Plant Operations
The Company, its predecessors, and certain former affiliates
operated facilities in the past at multiple sites for the purpose
of manufacturing gas and storing manufactured gas (Manufactured
Gas Sites). The Company is accruing and deferring the costs it
incurs for environemntal activities 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, 1998, the total of the costs deferred by the Company
was $16.5 million. This amount includes the Company's best estimate
of the costs of investigating and remediating the Manufactured Gas
Sites. This estimate is based upon a comprehensive review by the
Company and its outside consultants of potential costs associated with
conducting investigative and remedial actions at the Manufactured
Gas Sites as well as the likelihood of whether such actions will
be necessary. While the Company intends to seek contribution from
other entities for the costs incurred at the sites, the full extent
of such contribution 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 the
Company's former manufactured gas operations. The suit asks the
court to declare, among other things, 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 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. In November 1998, the Company reached a
settlement agreement with one of the insurance carriers. The
costs deferred at December 31, 1998, have been reduce by the
proceeeds of the settlement. At this time, management cannot determine
the timing and extent of the Company's recovery of costs from the
other insurance carriers. Accordingly, the costs deferred at
December 31, 1998 have not been reduced to reflect recoveries
from other insurance carriers.
The Company believes that the costs incurred by it for
environmental activities relating to former manufactured gas
operations are recoverable 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, 1998, it had recovered $7.5 million
of such costs through rates.
4. LONG-TERM DEBT
Bonds Issued
On December 18, 1998, the Illinois Development Finance
Authority issued $30,035,000 aggregate principal amount of 5.00%
Gas Supply Revenue Bonds, Series 1998, which were collateralized
by an equal amount of the Company's 30-year first mortgage bonds,
Series M. On January 19, 1999, a portion of the proceeds were
used to redeem $24,905,000 of previously issued gas supply
revenue bonds. The remaining proceeds will be used for the
payment of issuance costs and to fund certain construction
expenditures.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
RESULTS OF OPERATIONS
Net Income
Net income decreased $1.4 million, to $3.8 million, and $2.8
million, to $11.6 million, for the three- and 12-month periods
ended December 31, 1998, respectively, primarily due to warmer
weather in the current periods. Partially offsetting the effects
of warmer weather in the current 12-month period were reduced
operation and maintenance expenses.
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:
Three Months Ended 12 Months Ended
December 31, 1998 December 31, 1998
Over the Prior Period Over the Prior Period
(Thousands of dollars) Amount Percent Amount Percent
Operating revenues $(12,851) (25.7) $(36,570) (21.8)
Gas costs (10,525) (37.1) (30,195) (32.6)
Operation and maintenance expenses 487 8.0 (1,365) (5.1)
Depreciation expense 67 3.3 268 3.4
Taxes, other than income taxes (359) (9.7) (685) (5.4)
Other income and deductions 142 (10.2) 95 (2.0)
Income taxes (950) (28.7) (1,730) (19.4)
Net income $ (1,429) (27.4) $ (2,768) (19.3)
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 tariff provides for dollar-for-dollar recovery
of gas costs. (See Note 2C of the Notes to Consolidated Financial
Statements.) The Company's tariff also provides for dollar-for-dollar
recovery of the cost of revenue taxes and certain other charges imposed by
the State of Illinois and various municipalities.
Operating revenues decreased $12.9 million, to $37.2 million, and $36.6
million, to $131.4 million, for the current three- and 12-month periods,
respectively, due to weather that was warmer in the current periods and to
lower unit costs of gas in the current periods.
Gas Costs
Gas costs decreased $10.5 million, to $17.8 million, and $30.2 million,
to $62.5 million, for the current three- and 12-month periods,
respectively, primarily due to reduced sales resulting from warmer weather
and to lower unit costs of gas in the current periods.
Operation and Maintenance Expenses
Operation and maintenance expenses increased $487,000, to $6.6 million,
for the current three-month period, due primarily to an increase in
environmental costs recovered through rates along with reductions in
pension credits. Also, contributing to the variation between periods was
an increase in the costs of continued enhancements to software systems.
Partially offsetting these effects were decreased costs of group insurance.
Operation and maintenance expenses decreased $1.4 million, to $25.3
million, for the current 12-month period, due mainly to an increase in
pension credits and to lower group insurance expenses. Reductions in the
costs of outside professional services and in the provision for
uncollectible accounts also contributed to the decline. These reductions
were offset, in part, by increased environmental costs recovered through
rates and higher labor costs.
Depreciation Expense
Depreciation expense increased $67,000, to $2.1 million, and $268,000,
to $8.1 million, for the current three- and 12-month periods, respectively,
due primarily to depreciable property additions.
Taxes, Other Than Income Taxes
Taxes, other than income taxes, decreased $359,000, to $3.3 million and
$685,000, to $12.0 million, for the current three- and 12-month periods,
respectively, primarily as a result of the decrease in revenue taxes
associated with the decline in operating revenues attributable to the
warmer weather and lower unit costs of gas experienced during the current
periods. Partially offsetting this decrease was the increase in other
taxes in the current periods due to the new Supplemental Low Income Energy
Assistance Charge and Renewable Energy Resource and Coal Technology
Assessment Charge which became effective on January 1, 1998.
Other Income and Deductions
Other income and deductions decreased $142,000 for the current three-
month period, due primarily to higher other income and lower interest
expense on commercial paper.
Other income and deductions decreased $95,000 for the current 12-month
period, due mainly to decreased interest expense on commercial paper.
Income Taxes
Income taxes declined $950,000, to $2.4 million, and $1.7 million, to
$7.2 million, for the current three- and 12-month periods, respectively,
due principally to lower pre-tax income.
Other Matters
Fixed Gas Charge Filing. On October 26, 1998, the Company made a filing
with the Commission under which the price for natural gas would be set at a
fixed level for at least the next five years. By eliminating the monthly
price fluctuations, the Company could shield customers from price
increases, although gas bills would still reflect customers' increased
usage during colder weather. As the Company would assume and manage this
risk, it would have an opportunity to earn a profit on this initiative.
Operating Statistics. The following table represents margin components:
Three Months Ended Twelve Months Ended
December 31, December 31,
1998 1997 1998 1997
Operating Revenues: (thousands)
Gas Sales
Residential $28,841 $39,067 $101,151 $128,700
Commercial 4,218 5,579 15,044 19,376
Industrial 948 1,224 3,439 4,276
34,007 45,870 119,634 152,352
Transportation
Residential 369 334 1,317 2,446
Commercial 1,542 2,021 5,350 5,444
Industrial 949 1,402 3,727 4,962
Contract Pooling 164 254 416 1,736
3,024 4,011 10,810 14,588
Other 217 218 911 985
Total Operating Revenues 37,248 50,099 131,355 167,925
Less- Gas Costs 17,831 28,356 62,519 92,714
Gross Margin $19,417 $21,743 $ 68,836 $ 75,211
Deliveries (MDth):
Gas Sales
Residential 5,311 6,441 17,609 20,997
Commercial 841 982 2,851 3,454
Industrial 213 230 738 808
6,365 7,653 21,198 25,259
Transportation (a)
Residential 210 147 701 2,335
Commercial 1,535 1,958 5,212 4,630
Industrial 1,647 1,727 6,029 6,358
3,392 3,832 11,942 13,323
Total Gas Sales and Transportation 9,757 11,485 33,140 38,582
(a) Volumes associated with contract pooling revenues are included in
their respective customer classes.
LIQUIDITY AND CAPITAL RESOURCES
Bonds Issued. On December 18, 1998, the Illinois Development
Finance Authority issued $30,035,000 aggregate principal amount
of 5.00% Gas Supply Revenue Bonds, Series 1998, which were
collateralized by an equal amount of the Company's 30-year first
mortgage bonds, Series M. On January 19, 1999, a portion of the
proceeds was used to redeem $24,905,000 of previously issued gas
supply revenue bonds. The remaining proceeds will be used for
the payment of issuance costs and to fund certain construction
expenditures. (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 3 of the Notes
to Consolidated Financial Statements.)
Credit Lines. Peoples Gas has lines of credit totaling $119.0
million, of which the Company may borrow up to $30 million to
cover its projected short-term needs. At December 31, 1998,
Peoples Gas and the Company had unused credit available from
banks of $86.4 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 December 31, 1998, and for fiscal
1998 and 1997 were 4.68, 5.07, and 5.74, respectively.
Year 2000. The Company obtains its information technology
services from or through Peoples Gas. The Company began its
efforts to assess the Year 2000 compliance of its mainframe
computer systems in March 1996. The Company has since developed
a comprehensive Year 2000 readiness plan that incorporates all of
the information technology systems, including computer hardware
and software, and its embedded systems equipment, including
telecommunications equipment used by the Company. The plan also
includes a review of the Year 2000 compliance efforts of its key
suppliers and customers and Year 2000 contingency planning.
For all internal information technology systems developed for
the Company by Peoples Gas, Year 2000 compliance efforts proceed
through the following phases: inventory, assessment, remediation,
testing, and implementation. Rather than completing each phase
for all systems prior to proceeding to the next phase, the
Company progresses through all phases on a system-by-system
basis, gradually implementing each fully-compliant system.
The Year 2000 compliance phases utilize a combination of
consultants and employees of Peoples Gas. Once a fully-tested
application has been implemented, Peoples Gas employees follow
established procedures to maintain the compliance of the
implemented systems. Peoples Gas also has retained a quality
assurance expert to ensure that any subsequent modifications to
the application do not impact its compliant status.
As of December 31, 1998, 21 of the Company's 38 mainframe
applications have been fully remediated, tested and implemented,
one is in the testing phase, and eight have been (or are in the
process of being) eliminated. The eight remaining mainframe
applications are scheduled to be replaced by the Company's new
mainframe customer information system and are not expected to be
remediated. Additionally, all mainframe system modules have been
remediated and are now in the testing phase. Many of the non-
mainframe applications, spreadsheets and interfaces used by the
Company have also reached the implementation stage, and most
others are in the remediation phase. The Company expects to
implement all critical internal systems (other than the customer
information system to be used by Peoples Gas and the Company) and
all non-critical internal systems by April 30, 1999; and complete
installation and testing of the customer information system by
the end of fiscal year 1999.
As part of its Year 2000 Project, the Company has also
contacted the vendors of its licensed or purchased hardware and
software to determine the Year 2000 compliance status of their
products. As of December 31, 1998, the Company has received
responses from 88% of the vendors and is in the process of
replacing, upgrading or eliminating non-compliant vendor products
as appropriate. The Company also plans to have certain products,
such as its desktop computer inventory, compliant-tested in order
to minimize the risks associated with reliance on vendor
representations.
The Company has completed an inventory of all equipment
containing embedded systems, including telecommunications
equipment and facilities. It has also contracted with a
consultant that has significant utility and engineering expertise
to assist with the embedded systems efforts. The Company has
assessed the Year 2000 compliance status of its embedded systems,
and it is beginning to test, repair or replace any critical
equipment identified as not Year 2000 compliant. Its timetable
for implementing compliant equipment will depend on the
availability of compliant equipment.
The Company currently has a written conceptual contingency
plan to address risks to it created by its or third parties'
systems and embedded technology that are not Year 2000 compliant.
It has engaged the consultant referenced above to assist in
developing detailed and comprehensive business continuity and
contingency plans to address possible failures in the area of
embedded systems equipment. The Company expects to complete its
contingency plans for information technology and embedded
systems, including critical third party disruptions, by April
1999, and such plans will be maintained and adjusted as necessary
on an ongoing basis.
The Company has contacted its key suppliers to determine their
Year 2000 compliance efforts. It has received written assurances
from many key suppliers that they are making the necessary Year
2000 efforts, and it is in the process of following up with other
key suppliers that did not respond to written inquiries. The
Company is also contacting certain of its larger customers to
determine their year 2000 readiness.
Essential elements of the business of the Company are
dependent on certain key third parties (for example, pipeline
suppliers, banks, electric utilities and telecommunication
companies). A material failure by any such key third party could
significantly disrupt the Company's business. Peoples Gas is in
the process of detailing and finalizing contingency plans to
address potential disruptions that may be caused by third
parties.
Peoples Gas currently estimates that it will incur expenses of
approximately $1.0 million through fiscal Year 1999 to complete
its Year 2000 compliance efforts, in addition to the $4.6 million
already incurred through December 31, 1998 and an appropriate
portion of these expenses has been and/or will be billed to the
Company. This estimate does not include costs to repair or
replace critical embedded systems equipment that is non-
compliant, which has yet to be determined. Management does not
expect the cost of its Year 2000 compliance efforts to have a
material adverse impact on the financial position or results of
operations of Peoples Gas or the Company.
Market Risk Management. The Company utilizes long-term debt as a
primary source of capital. While both fixed and variable rate
debt may be utilized by the Company, all of the Company's
existing long-term debt instruments carry a fixed rate of
interest. Subject to certain restrictions on optional
redemptions, the fixed rate debt instruments can be refinanced at
lower interest rates if the Company deems it to be economical.
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. and Illinois.
" 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.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Quantitative and qualitative disclosures about market risk are
reported under "Management's Discussion and Analysis of Results
of Operations and Financial Condition - Market Risk Management."
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
10(a) Firm Gas Transportation Agreement
Under Rate Schedule FT-A or FT-G between
the Company and Midwestern Gas Transmission
Company, dated November 1, 1998.
27 Financial Data Schedule
b. Reports on Form 8-K filed during the quarter ended
December 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)
February 11, 1999 By: /s/ J. M. LUEBBERS
(Date) J. M. Luebbers
Vice President and Controller
(Same as above)
Principal Accounting
Officer
Exhibit 10(a)
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A on FT-G )
THIS AGREEMENT is made and entered into as of the 1st day of
November, 1998, by and between MIDWESTERN GAS TRANSMISSION
COMPANY, a Delaware Corporation, hereinafter referred to as
"Transporter" and NORTH SHORE GAS COMPANY, an Illinois
Corporation, hereinafter referred to as "Shipper." Transporter
and Shipper shall be collectively referred to as "Parties."
WITNESSETH:
That, in consideration of the premises and of the mutual
agreements herein contained, Transporter and Shipper agree as
follows:
ARTICLE I - DEFINITIONS
The definitions found in Article 1 of Transporter's General Terms
and Conditions are incorporated herein by reference.
ARTICLE II - TRANSPORTATION
Transportation Service - Transporter agrees to accept and receive
daily, on a firm basis, at Eligible Receipt Point(s), from
Shipper or for Shipper's account such quantity of gas as Shipper
makes available up to the Transportation Quantity and deliver to
or for the account of Shipper to authorized Delivery Point(s) an
equivalent quantity of gas.
ARTICLE III- POINTS OF RECEIPT AND DELIVERY
AND ASSOCIATED PRESSURES
3.1 The Primary Point(s) of Receipt and Delivery shall be those
points specified on Exhibit A attached hereto. Shipper shall
have access to secondary receipt and delivery points as
specified in the applicable rate schedule (FT-A or FT-G)
pursuant to which Shipper's volumes are being transported.
Priority of transportation to such secondary points shall be
determined in accord with Article III, Section 5 of the
General Terms and Conditions of Transporter's tariff.
3.2 Shipper may request a change to the Primary Points of
Receipt and/or Primary Points of Delivery provided in this
Agreement by submitting to Transporter a Service Request
Form in accord with Article XXV of the General Terms and
Conditions of Transporter's FERC Gas Tariff. Priority of
transportation service to such additional Points of Receipt
and/or Delivery shall be determined pursuant to Article III,
Section 5 of the General Terms and Conditions.
3.3 Shipper shall deliver, or cause to be delivered, to
Transporter the gas to be transported hereunder at pressures
sufficient to deliver such gas into Transporter's system at
the Receipt Point(s), provided such pressure shall not
exceed Transporter's maximum allowable operating pressure.
Transporter shall deliver the gas to be transported
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
hereunder to or for the account of Shipper at the pressures
existing in Transporter's system at the Delivery Point(s).
ARTICLE IV - FACILITIES
All facilities are in place to render the service provided for in
this Agreement.
or
(If facilities are contemplated to be constructed, a brief
description of the facilities will be included, as well as who is
to construct, own and/or operate such facilities.)
ARTICLE V - QUALITY SPECIFICATIONS AND STANDARDS FOR MEASUREMENTS
For all gas received, transported, and delivered hereunder, the
Parties agree to the quality specifications and standards for
measurement as provided for in the General Terms and Conditions
of Transporter's FERC Gas Tariff. Transporter shall be
responsible for the operation of measurement facilities at the
Delivery Point(s) and at the Receipt Point(s). In the event that
measurement facilities are not operated by Transporter, then the
responsibility for operations shall be deemed to be that of the
Balancing Party at such point. If measurement facilities are
not operated by Transporter and there is no Balancing Party at
such point, then the responsibility for operations shall be
deemed to be Shipper's.
ARTICLE VI - RATES FOR SERVICE
6.1 Transportation Charge - Commencing on the date of the rates,
charges and surcharges to be paid by Shipper to Transporter,
including compensation for system fuel and losses, shall be
in accordance with Transporter's applicable effective Rate
Schedule (FT-A or FT-G) and the General Terms and Conditions
of Transporter's Tariff.
6.2 Incidental Charges - Upon execution of this Agreement,
Shipper agrees to pay Transporter for all known and
anticipated filing fees, reporting fees or similar charges
required for the rendition of the transportation service
provided for herein. Further, Shipper agrees to reimburse
Transporter for all such fees within thirty (30) days after
receiving proof of payment from Transporter.
6.3 Changes in Rates and Charges - Shipper agrees that
TranspOrter shall have the unilateral right to file with the
appropriate regulatory authority and make changes effective
in (a) the rates, charges, terms and conditions applicable
to service pursuant to the Rate Schedule under which this
service is rendered, (b) the Rate Schedule(s) pursuant to
which service hereunder is rendered, and (c)any provisions
of the General Terms and Conditions in Transporter's FERC
Gas Tariff applicable to those Rate Schedules, as such
Tariff may be revised or replaced from time to time.
Transporter agrees that Shipper may protest or contest the
aforementioned filings, or may seek authorization from duly
constituted regulatory authorities for such adjustment of
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
Transporter's existing FERC Gas Tariff as may be found
necessary to assure Transporter just and reasonable rates.
ARTICLE VII - RESPONSIBILITY DURING TRANSPORTATION
As between the Parties hereto, it is agreed that from the time
gas is delivered by Shipper to Transporter at the Receipt
Point(s) and prior to delivery of such gas to or for the account
of Shipper at the Delivery Point(s), Transporter shall have the
unqualified right to commingle such gas with other gas in its
system and shall have the unqualified right to handle and treat
such gas as its own.
ARTICLE VIII - BILLINGS AND PAYMENTS
Billings and payments under this Agreement shall be in accordance
with the terms and conditions of Transporter's FERC Gas Tariff as
such Tariff may be revised or replaced from time to time.
ARTICLE IX - RATE SCHEDULES AND GENERAL TERMS AND CONDITIONS
This Agreement and all terms and provisions contained or
incorporated herein are subject to the effective provisions of
Transporter's applicable Rate Schedule(s) as set forth on Exhibit
A and Transporter's General Terms and Conditions on file with the
FERC, or other duly constituted authorities having jurisdiction,
as the same may be changed or superseded from time to time in
accordance with the rules and regulations of the FERC, which Rate
Schedule(s) and General Terms and Conditions are incorporated by
reference. To the extent a term or condition set forth in this
Contract is inconsistent with the General Terms and Conditions,
the General Terms and Conditions shall govern. Furthermore, to
the extent a term or condition set forth in this Contract is
inconsistent with the applicable Rate Schedule, the Pate Schedule
shall govern unless the relevant provision is inconsistent with
General Terms and Conditions.
ARTICLE X - REGULATION
10.1 This Agreement shall be subject to all applicable and lawful
governmental statutes, orders, rules, and regulations and is
contingent upon the receipt and continuation of all
necessary regulatory approvals or authorizations upon terms
acceptable to Transporter. This Agreement shall be void and
of no force and effect if any necessary regulatory approval
or authorization is not so obtained or continued.
All Parties hereto shall cooperate to obtain or continue all
necessary approvals or authorizations, but no Party shall be
liable to any other Party for failure to obtain or continue
such approvals or authorizations.
10.2 The transportation service described herein shall be
provided subject to Part 284, Subpart G of the FERC
regulations
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
10.3 In the event the Parties are unable to obtain all necessary
and satisfactory regulatory approvals for service on
facilities prior to the expiration of two (2) years from the
effective date hereof, then, prior to receipt of such
regulatory approvals, either Party may terminate this
Agreement by giving the other Party at least thirty (30)
days prior written notice, and the respective obligations
hereunder, except for the provisions of Section 6.2 herein,
shall be of no force and effect from and after the effective
date of such termination.
ARTICLE XI - WARRANTIES
Shipper agrees to indemnify and hold Transporter harmless from
all suits, actions, debts, accounts, damages, costs, losses, and
expenses (including reasonable attorneys fees) arising from or
out of breach of any warranty, express or implied, by the Shipper
herein. Transporter shall not be obligated to provide or continue
service hereunder in the event of any breach of warranty.
ARTICLE XII - TERM OF AGREEMENT
12.1 This Agreement shall become effective on the date of its
execution, and shall be implemented no later than the first
day of the month following the later of the date of
execution or the completion of any necessary facilities on
Transporter's system and shall remain in full force and
effect until the 31st day of October, 2001, ("Primary
Term")and shall continue thereafter on a month to month
basis unless terminated by either Party upon at least thirty
(30) days written notice to the other Party; provided,
however, that if the Primary Term is one year or more, than
the Contract shall remain in force and effect and the
Contract term will automatically roll-over for additional
five year increments ("Secondary Terms") unless Shipper, one
year prior to the expiration of the Primary Term or a
Secondary Term, provides written notice to Transporter of
either (1) its intent to terminate the Contract in whole or
in part upon expiration of the then current term or (2) its
desire to exercise its right-of-first refusal with respect
to all or any part of the contract in accord with Article
XVI of Transporter's General Terms and Conditions. Provided
further, if the FERC or other governmental body having
jurisdiction over the service rendered pursuant to this
Agreement authorizes abandonment of such service, this
Agreement shall terminate on the abandonment date permitted
by the FERC or such other governmental body.
12.2 Any portions of this Agreement necessary to resolve or cash-
out inbalances under this Agreement upon its termination, as
required by the General Terms and Conditions of
Transporter's FERC Gas Tariff, shall survive the other parts
of this Agreement until such time as such balancing has been
accomplished.
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
12.3 In addition to any other remedy Transporter may have, this
Agreement will terminate automatically in the event Shipper
fails to pay all of the amount of any bill for service
rendered by Transporter hereunder when that amount is due,
provided Transporter shall give Shipper thirty days notice
prior to any termination of service. Service may continue
hereunder if within the thirty day notice period
satisfactory assurance of payment is made in accord with the
terms and conditions of Article VI of the General Terms and
Conditions of Transporter's FERC Gas Tariff.
ARTICLE XIII - NOTICES
Except when notice is required through Transporter's Electronic
Bulletin Board, any notice, request, demand, statement, or bill
provided for in this Agreement or any notice that either Party
may desire to give to the other shall be in writing and mailed by
registered mail to the post office address of the Party intended
to receive the same as follows:
TRANSPORTER: MIDWESTERN GAS TRANSMISSION COMPANY
P.O. Box 2511
Houston, Texas 77252-2511
Attention: Transportation Marketing
SHIPPER:
NOTICES: NORTH SHORE GAS COMPANY
130 East Randolph Drive, 22nd Floor
Chicago, IL 60601-6207
Attention: Vice President - Gas Supply
BILLING: NORTH SHORE GAS COMPANY
130 East Randolph Drive, 22nd Floor
Chicago, IL 60601-6207
Attention: Gas Accounting
or to such other address as either Party may designate by written
notice to the other.
ARTICLE XIV - ASSIGNMENTS
14.1 Either Party may assign or pledge this Agreement and all
rights and obligations hereunder under the provisions of any
mortgage, deed of trust, indenture or other instrument that
it has executed or may execute hereafter as security for
indebtedness. Either Patsy, without relieving itself of its
obligations under this Agreement, may assign any of its
rights hereunder to a company with which it is affiliated.
Otherwise, Shipper shall not assign this Agreement or any of
its rights and obligations hereunder, except in accord with
Article XXI of the General Terms and Conditions of
Transporter's Tariff.
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
14.2 Any person or entity that succeeds by purchase, merger, or
consolidation to the properties, substantially or as an
entirety, of either Party hereto shall be entitled to the
rights and shall be subject to the obligations of its
predecessor in interest under this Agreement.
ARTICLE XV - MISCELLANEOUS
15.1 Except for changes specifically authorized pursuant to this
Agreement, no modification of or supplement to the terms and
conditions hereof shall be or become effective until Shipper
has submitted a request for change through Transporter's
Electronic Bulletin Board and Shipper has been notified
through Transporter's Electronic Bulletin Board of
Transporter's agreement to such change.
15.2 No waiver by any Party of any one or more defaults by the
other in the performance of any provision of this Agreement
shall operate or be construed as a waiver of any future
default or defaults, whether of a like or of a different
character.
15.3 The interpretation and performance of this agreement shall
be in accordance with and controlled by the laws of the
State of Texas, without regard to Choice of Law doctrine
that refers to the laws of another jurisdiction.
15.4 Exhibit A attached hereto is incorporated herein by
reference and made a part of this Agreement for all
purposes.
15.5 If any provision of this Agreement is declared null and
void, or voidable, by a court of competent jurisdiction,
then that provision will be considered severable at
Transporter's option; and if the severability option is
exercised, the remaining provisions of the Agreement shall
remain in full force and effect.
SERVICE PACKAGE NO. 25116
AMENDMENT NO. 0
FIRM GAS TRANSPORTATION AGREEMENT
(For Use Under Rate Schedule FT-A or FT-G )
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement
to be duly executed as of the date first hereinabove written.
MIDWESTERN GAS TRANSMISSION COMPANY
BY: /s/ J.P. Dickerson
J.P. Dickerson
Agent and Attorney-in-Fact
DATE : September 15, 1998
NORTH SHORE GAS COMPANY
BY: /s/ William E. Morrow
TITLE: Vice President
DATE: October 12, 1998
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